THE CEYLON INVESTMENTS CO., LTD. v. THE COMMISSIONER OF INCOME TAX

001-NLR-NLR-V-43-THE-CEYLON-INVESTMENTS-CO.,-LTD.-v.-THE-COMMISSIONER-OF-INCOME-TAX.pdf


THE
NEW LAW REPORTS OF CEYLON.VOLUME XL11I.1941 Present: Howard C.J., Soertsz, Keuneman, de Kretser and
Wijeyewardene JJ.
THE CEYLON INVESTMENTS CO., LTD. v. THECOMMISSIONER OF INCOME TAX.
S.C. No. 5—Income Tax Appeal.
Income Tax—Investment Company—Assessable income—Claim .to deduct
management expenses—Expenses incurred in production of income-
income Tax Ordinance (Cap. 188), ss. 6 (1) (a) and (e), 9 (I) and (3).
Where the income of an Investment company is derived from dividendsdeclared by companies in which it owns shares and from money lent outby the Company on interest,—
Held by Soertsz, Keuneman, de Kretser, and Wijeyewardene JJ.(Howard C.J. dissenting), that the management expenses of the Companyare deductable in ascertaining the assessable income of the Company.
The income of the Company falls within the words “ profits of abusiness” of section 6(1) (a) of the Income Tax Ordinance.
Per Howard C.J.—
Where the business of a Company consists of the receipts of dividendsand of interest alone or if such a business can be clearly separated from therest of the trade or business, the Commissioner of Income Tax has theright to charge the Company under section 6 (1) (e) in respect of thedividends and interest received from undertakings in which its capitalis invested. In such a case the management expenses are not deductablein ascertaining the assessable income of the Company.
T
HIS was a case stated for the opinion of the Supreme Court by theBoard of Review under the Income Tax Ordinance.
The appellant is an investment company whose income is derived fromdividends declared by companies in which it owns shares and interest onmoneys lent out by it. The company does not carry on any trade. Thequestion at issue is whether the company is entitled to deduct the manage-ment expenses (such as directors’ fees, secretaries’ and auditors’ fees) inascertaining the assessable income of the company.
H. V. Perera, K.C. (with him E. F. N. Gratiaen), for assessee, appel-lant.—The question for decision is whether the management expenses ofthe appellant company can be allowed to be * deducted from its income forthe purpose of taxation. The assessee is an investment company. Itsobject is to invest money in shares in other companies, and its income isderived from the dividends declared by the latter and also from intereston moneys lent out by it.
The deductions claimed by the appellant are “ outgoings and expensesincurred in the production ” of the profits or income within the meaningof section 9 (1) of the Income Tax Ordinance (Cap. 188). It is necessaryto ascertain what the source of income is in the present case. For that
IJ. N' . It 17D7I (fi '52)
2
. Ceylon Investments Co., Ltd. v. Com. of Income Tax.
purpose one has to examine sections 5 and 6 of Cap. 188. Our case fallsexclusively under section 6 (1) (a), and section 6 (1) (e) should be ex-cluded and has no application. There is a difference between investmentsof a private individual and investments by a company carrying on thebusiness of making investments. In the former case each investment is an-isolated source of income. On the other hand, where a company exists forthe purpose of making investments, the source of income is the business.The receipts of such a business must be taken as a whole—National Bankof India v. Commissioner of Income Tax'.
That the appellant should be treated as carrying on a business is clearfrom a consideration of the following cases: —The Commissioners ofInland Revenue v. The Korean Syndicate, Ltd.2; The Commissioners ofInland Revenue v?The Birmingham Theatre Royal Estate Co., Ltd.’; TheCommissioners of Inland Revenue v. The Tyre Investment Trust, Ltd.1;The Commissioners of Inland Revenue v. The South Behar Railway Co.,Ltd.2 (Lord Summer’s judgment) ; The Commissioners of Inland Revenuev. Dale Steamship Co.2; The Glamorgan Coal Co., Ltd. v. The Commissionersof Inland RevenueButler v. The Mortgage Co. of Egypt, Ltd’ See alsoSunderam’s Income Tax of India (3rd ed.), p. 431. For meaning of theterm “ business ”, see Smith v. Anderson ’.
Section 6 of Cap. 188 gives an enumeration of various sources of income.Those heads are mutually exclusive. See section 47. Further, it maybe observed that, in his argument in National Bank of India v. Com-missioner of Income Tax (supra) the Attorney-General conceded that 6 (1)(a) and section 6 (1) (e) are mutually exclusive. In England the law isdifferent, for sometimes the Crown is given an option to choose betweendifferent categories. The Commissioner’s reliance on section 6 (1) (e)read in conjunction with section 9 (3) cannot be justified. On the authorityof the English cases already cited the appellant is carrying on a business.The receipt of the dividends should not be separated from the rest of thebusiness. To do so would be to take the life out of the business. Simi-larly the items of interest received on moneys lent are “ embedded ” inthe business, and should not be separated off. See the cases referred toin Halsbury’s Laws of England (2nd ed.), vol. 17, p. 190, para. 391.
M.W. H. de Silva, Acting S.-G. (with him H. H. Basnayake, C.C.), forIncome Tax Commissioner.—The English cases cited on behalf of theappellant were based on the Excess Profits Duty Act and the CorporationProfits Tax Act. The term “ business ” in those Acts has a much moreextended meaning than in our Income Tax Ordinance. See section 39of the Finance Act, No. 2 of 1915 (5 & 6 Geo. V., c. 89) and section 53 ofFinance Act of 1920 (10 & 11 Geo. V., c. 18). In those Acts the holdingof investments is regarded as a business and is specially provided for.This point is brought out clearly in the case of Morning Post v. Georgereported at page 230 of the journal Taxation ”, vol. 26, No. 695 ofJanuary 18, 1941. Care, therefore, has to be taken to examine the actualActs under which the English cases were decided.
■« 12 T. r. isi.
» 12 T. C. SSft.i 12 T. c. Gin.
• (1930) 40 X. L. n. 193.
12 T. C. 657.
12 T. C. 712.
' 12 T. C. 1027.
8 13 T. C. 803.
(I860) 15 Vh. D. 258 at 260.
Ceylon Investments Co., Ltd. v. Com. of Income Tax.3
With regard to section 6 of the arrangement in our Ordinance is not thesame as in the English Acts where the schedules are more or less exclusive.The contention that the present case falls exclusively under section 6 (1)(a) is untenable. The company can earn profit in various ways. All theprofits accruing from various sources cannot be grouped together ascoming from a single source. Section 47 of our Ordinance is helpful onthis point. Tax on income from the various sources mentioned in section6 falls to be charged according to the source from which the income isderived. The fact that income from one of the sources mentioned in ssection 6 forms the whole or part of the receipts of a business does notalter the receipts from that source to receipts from business or trade.See Salisbury House Estate, Ltd. v. Fry1; and The Commercial Properties,Ltd. v. The Commissioner of Income Tax, Bengal ’. In the present casethe whole of the income should be taken into account without anydeductions for management expenses—The Commissioners of InlandRevenue v. Sneatha; Aikin v. The Trusts of C. M. Macdonald Bowersv. Harding *; Scottish Mortgage Co. of New Mexico v. McKelivie'.
It is important to note that, in England, under section 33 of the IncomeTax Act, 1918, the management expenses of an investment company arespecially made deductable.' There is no such section in our Ordinance.On the other hand, under our section 42 (1) deductions for managementexpenses are possible only in the case of life insurance companies.
The dividends and interest in this case fall exclusively under section 6(1) (e). Section 49 contains special provision regarding dividends. Nodeduction can be claimed under section 9 (1). The dividends are theresult of the activities of the companies which pay them, and all outgoingsand expenses incurred in the production of the profits from which thedividends were paid have been already alloyed to those companies iijwhich the appellant company holds shares; The appellant companydoes nothing to “ produce ” the dividends. As regards the interest, nodeduction can be allowed in respect of it. Section 9 (3) is explicit. Seealso The Commissioner of Income Tax' v. Arunachalam Chettiar''.
Even if the income falls under section 6 (1) (a), the taxing authorityhas the right of option to elect between section 6 (1) (a) and section (6) (e)when the two heads are equally applicable. For the law regardingCrown’s option see Scottish Mortgage Co. of New Mexico v. McKelvie{supra) ; Smiles v. Australasian Mortgage and Agency Co., Ltd."; The Liver-pool and London and Globe Insurance Go. v. Bennett Butler v. The Mort-gage Company of Egypt, Ltd.™; Konstam’s Law of Income Tax {7th ed.),p. 113; The Commissioner of Income Tax v. Arunachalam Chettiar {supra) .
H. V. Per era, K.C., in reply.—English cases can be relied on only so far:as they are applicable and so far as they are helpful to understand generalprinciples. The cases in respect of Crown’s option depend on the peculiar *
> 15 T. C. 2G6 at SSI.1 3 Indian T. G. 23.
3 17 T. C. 149.
* 3T.C. 306.
.» 3 T. C. 22.
8 2 V. C. 165.
(1935) 37 N L. R. 145.
2T.C. 367.
J 6 T.G. 327 at 371 and 376■o 13 T. C. 803.
4 HOWARD C.J.—Ceylon Investments Co., Ltd. v. Com. of Income Tax.
structure of the English Apt. The remarks of Akbar J. in The Com-missioner of Income Tax v. Arunachalam Chettiar' on the point of Crown’soption are only obiter.
In English cases it is necessary to see what the charging section is.The charging section of the Income Tax Act of 1918 (8 & 9 Geo. V., c. 40)refers not only to profits and income but also includes property as a subjectof charge. Property would include inter alia investments. Regardingtax on property as distinct from tax on profits and gains see The Com-missioners of Inland Revenue v. The Scottish Central Electric Power Co.’;]Salisbury House Estate, Ltd. v. Fry Konstam’s Law of Income Tax(4th ed.), p. 119. The only charging section in our Ordinance is section 5under which tax is payable only on profits and income. Section 6 (1) ispurely explanatory, and enacts only in section 6 (1) (c). Interest is nottaxable unless it is profits or income.
Section 42 makes special provisions for deduction for managementexpenses'in the case of life insurance companies not because no deductionsare permissible in the case of other companies but because of the specialnature of life insurance business. See Konstam’s Law of Income Tax(4th ed.)., p. 137.
Cur. adv. vult.
September 18, 1941. Howard C.J.—
This is an appeal by- way of case stated on a point of law under section71 of the Income Tax Ordinance from a decision of the Board of Reviewholding that the management expenses claimed as deductions from theincome of the appellant company were rightly disallowed by the Com-missioner. The decision of the Board of Review states that “ the wholecase turns on the construction to be placed on the words ‘ expensesincurred …. in the production of income ’ as used in section 9 ”,that “on the facts–it is evident that the Company’s activities, so far asthey are material, during the year of assessment, were limited to receivingdividends and interest and accounting for them ” and that “ in thesecircumstances we are not satisfied that the appellant has proved that it isentitled to the deduction which it claims on the ground that they wereexpenses incurred by the company in the production of its income ”.The appellant is an investment company, whose income in derived fromdividends declared by companies in which it owns shares and intereston moneys let out. by it. The assessor, whose assessment was confirmedby the Commissioner, in disallowing the management expenses (such asDirectors’, Secretaries’, and Auditors’ fees) drew a distinction between aninvestment company and a company which carried on a trade or com-mercial enterprise because, in the former case, no expense had to beincurred by the assessee company for the production of its income in theshape of dividends which it received from the companies or concerns inwhich it held shares. The Assessor further contended that whateverexpenditure was necessary for the production of the income (of whichthe dividend was a mere distribution) had already been deducted by thecompany in which the shares were held, that once an investment hadbeen made no further expenditure was necessary on the part of the> (1935) 37 X. L. R. 145.-13 T. C. 331 at 331.
– 15 T. C. 20G at 324.
HOWARD C.J.—Ceylon Investments Co., Ltd. v. Com. of Income Tax. 5
appellant for the production of its income from that investment and thatsection 10 (b) also precluded any such deduction as claimed.
On behalf of the appellant company Mr. H. V. Perera has contendedthat its income should have been assessed under section 6 (1) (a) of theOrdinance as a business. If so assessed, there would be allowable as adeduction from such income under section 9 (1) the management expensesas “ all outgoings and expenses incurred by such person in the productionthereof ”. If the appellant Company was assessed as a business, itstaxable income like that of any other business should be ascertained bydeducting its expenses from its receipts. Moreover the receipts mustbe taken as a whole. The receipt of each dividend was not to be consideredas an isolated transaction and assessed as such. In this connection heinvited our attention to National Bank of India v. Commissioner ofIncome Tax', where an attempt was made to treat as an isolated transac-tion for the purpose of the levy of income tax interest paid on over-drafts by a resident of Ceylon to a non-resident Bank in London as beingincome “ arising in or derived from Ceylon ”. It was held that suchinterest cannot be said “ to arise in or. be derived from Ceylon ”. Poyser J.in his judgment also stated that one difficulty in upholding the argumentof the Crown was that the Commissioner of Income Tax had assessedthe Bank on the interest due on the overdrafts without any deductionfor business expenses. It is interesting to note that in his argument theAttorney-General stated that, if investment is made by a bank as partof its banking business in Ceylon interest would not be taxed separatelyunder section 6 (1) '(e), but the profits of the business would be chargedunder section 6 (1) (a). In the case of the National Bank of India v.Commissioner of Income Tax (supra) it was, therefore, stated by Counselfor the Crown and assumed by the Court that, so far as Bank interest wasconcerned, the income would be ascertained as in the case of a businessunder section 6 (1) (a). In order to meet the contention of the Crownthat the appellant Company should be assessed under section 6 (1) (e)and not as a “ business ” under section 6 (1) (a), Counsel for the appellanthas referred us to numerous English authorities to establish the proposi-tion that, although the income of the Company was derived solely fromdividends declared by other companies in which it owed shares andinterest on moneys lent out by it and its operations included no othertrading enterprise, it was Carrying on business. In Commissioners ofInland Revenue v. The Korean Syndicate Limited “, it was held by the Courtof Appeal that,- although during the years material to the case theSyndicate’s activities were confined to receiving the bank interest androyalties (its only income) distributing the amount amongst its shareholders and paying the premiums on a sinking fund policy, the syndicatewas carrying on the business for which it was incorporated of acquiringconcessions and turning them to account and that the profits derivedtherefrom were liable to Excess Profits Duty. In Atkin L.J.’s judgmentit is stated as follows : —
“ For I see nothing to prevent a holding company, which is a verywell known method of carrying on business in-these days, from carryingon business.”
> 40 X. L. R. 193.
-12 T. C. 1SI.
6 HOWARD C.J.—Ceylon Investments Co., Ltd. v. Com. of Income Tax.
The following passages from Lord Stemdale M.R’s judgment are alsoin point: —
“ An individual comes into existence for many purposes, or perhapssometimes for none, whereas a limited Company comes into existencefor some particular purpose of carrying out a transaction by gettingpossession of concessions and turning them to account, then that is amatter to be considered when you come to decide whether doing that iscarrying on a business or not.”
So also in Commissioners of Inland Revenue v. Tyre Investment TrustLimited' it was held by Rowlatt J., that the principal business of therespondent company consisted in the making of investments and that itwas within the charge of Excess Profits Duty. The same principle wasformulated in the Commissioners of Inland Revenue v. The WestleighEstates Co., Ltd., The South Behar Railway Coi, Ltd., The Eccentric Club,Ltd. At pp. 688 and 689 Pollock M.R. stated as follows : —
“Its business may be quiescent, and to a large extent, a matter ofroutine. Its receipts may be derived, if not wholly, at least almostentirely from the annual payments made to it by the Secretary ofState; but it remains a Company alive, and still requiring, if only insmaller details, the direction of its directors and the duties carried outby its secretary. It is still concerned in the business of disposing ofand dividing the profits which it has become entitled to by reasonof its greater activity in the past, and that activity, as well as possiblyothers, may be awakened and quickened in the future. For thesereasons I am of opinion that the appeal must be allowed, with costshere and below.”
This decision of the Court of Appeal was affirmed by the House of Lordswhen Lord Sumner at p. 711 of the report stated'as follows: —
“ It is obvious that the Company’s objects have by no means beenaccomplished. It is obvious, too, that during its present period ofdormant life it has very little to do. I do not attach much importanceto the domestic operations of declaring and paying dividends,remunerating directors and presenting reports, but the operation ofreceiving and thus discharging the annuity payments goes on continu-ously, and however simple, it is not a mere passive acquiescence. It isthe transaction of business between debtor and creditor resultingperiodically in the discharge of a debt. The present is not the case ofa company existing to do one act only and once for all. Not onlydid the company make the agreement of 1906, but it plays its recurringpart in every payment and receipt of gains, and there is here, thereforethat ‘repetition of acts’, which Lord Justice Brett says (15 Ch. D. atp. 277) is implied in ‘ carrying on business ’. ”
The Acting Solicitor-General has contended that the interpretationgiven by the English Courts in the cases I have cited as to what activitiesconstituted carrying on “ business ” .turned on the special meaning ofthis term in the Acts imposing duties on excess profits and can have noapplication to the term as employed in the Ceylon Income Tax Ordinance.> 12 T. C. 646.112 T. C. 657.
HOWARD CJ.—Ceylon Investments Co., Ltd. v. Com. of Income Tax. 7
I am unable to accept this contention. The Finance Act, 1915 (5 & 6Geo. V, c. 89), does not contain any special definition of business. Thelanguage used by the Judges in the cases cited as to the meaning of theterm “ business ” is of general application. Moreover their interpretationis consistent with what was laid down by Jessel M.R., as to the meaningof the term in Smith v. Anderson', a case that did not involve the imposi-tion of taxation. In this connection I would also refer to the judgmentof the Judges of the House of Lords in The Liverpool and London and GlobeInsurance Co. v. Bennett ’. In that case the argument that investmentsof reserve funds were not part of the business of the company was rejected.
Applying the principles laid down in the English cases which, I havecited there can be no doubt that the appellant company, though function-ing as an Investment Company only for which purpose it came intoexistence, has not accomplished its purpose and was carrying onbusiness in the way a holding company does carry on business. I am,therefore, of opinion that the income derived by the appellant companyfrom dividends and interest fall within the words “ profits from anybusiness” under section 6 (1) (a).
The further question then arises as to whether the managementexpenses are deductable under section 9 (1). Can it be said that theyare outgoings and expenses incurred “ in the production of ” the profits ?The Acting Solicitor-General has embraced the argument of the Assessorand contended that the management expenses are not incurred in theproduction of the income. Section 6 (1) enumerates various sources of“ profits and income ” or “ profits ” or “ income ”. Section 9 (1) alsoemploys the word “ source ” which must be regarded as having referenceto section 6 (1). If “ source ” has reference to a trade or business, asspecified in section 6 (1)(a), I am of opinion that the management
expenses of the appellant company are deductable as incurred in “ theproduction of the profits ”. It has been argued as part of the case forthe Commissioner of Income Tax that once an investment had beenmade no further expenditure was necessary on the part of the appellantcompany for the production of its income from that investment. More-over the Chairman of the Board of Review in his judgment states thaton the facts il is evident that the company’s activities, so far as theyare material, during the year of assessment, were limited to receivingdividends and interest and accounting for them. I am of opinion thatso far as this aspect of the case is concerned the Commissioner and theBoard have regarded the matter from the wrong angle. In hiSi judgmentin The Naval Colliery Co., Ltd., The Glamorgan Coal Co., Ltd. v^The Com-missioners of Inland Revenue3 Rowlatt J. stated as follows : —
“ Now, one starts, of course, with the principle that has oftenbeen laid down in many other cases-—it was cited from Whimster’scase ‘, a Scotch case—that the profits for Income Tax purposes are thereceipts of the business less the expenditure incurred in earning thosereceipts. It is quite true and accurate to say, as Mr. Maughamsays, that receipts and expenditure require a little explanation.Receipts include debts due and they also include, at any rate in the
1 IS Ch. D. at -p. 2SS.2 12 T. C. at p. 1027.
*6T.C. 3271 12 T. C. 313.
8 HOWARD C.J.—Ceylon Investments Co., Ltd. v. Com. of Income Tax.
case of a trader, goods in stock. Expenditure includes debts payable ;and expenditure incurred in repairs, the running expenses of a businessand so on, cannot be allocated directly to corresponding items of receipts,and it cannot be restricted in its allowance in some way corresponding,or in an endeavour to make it correspond, to the actual receipts duringthe particular year. If running repairs are made, if lubricants arebought, of course no inquiry is instituted as to whether those repairswere partly owing to wear and tear that earned profits in the precedingyear or whether they will not help to make profits in the followingyear and so on. The way it is looked at, and must be looked at, is this,
3that that sort of expenditure is expenditure incurred on the runningof the business as a whole in each year, and the income is the incomeof the business as a whole for the year, without trying to trace itemsof expenditure as earning particular items of profit.”
It is, therefore,' wrong to decide the question as to whether a particularitem of expenditure is deductable by endeavouring to make it correspondwith a receipt item during a particular year. The item is deductableif it is that sort of expenditure which is incurred on the running of thebusiness as a whole in each year. Looked at from this angle there canbe no doubt that the management expenses of the appellant companywere deductable.
The Acting Solicitor-General has raised the further contention that,even if the appellant pompany was carrying on business and as suchentitled' to have the management expenses deducted' from its profits,the question is immaterial as the income derived by the appellantcompany from dividends and interest' falls within the term “ dividends,interest or discounts” as employed in paragraph (e) of section 6 (1).If the income of the appellant company falls within the ambit of bothparagraphs, he maintains that the Crown could elect under whichparagraph it would make its assessment. The Crown having elected toassess under paragraph (e) no deduction for management expenses asclaimed is permissible under the Ordinance. In connection with theCrown’s right of election the Acting Solicitor-General has cited the caseof Scottish Mortgage Co. of New Mexico v. McKelvie 1 where the moneyof the company was borrowed in Scotland and lent at a greater rate ofinterest in the United States of America. The question for decisionwas whether the duty ''had been properly charged as falling within thefourth case of Schedule D of the Income Tax Act as interest or whether,it should have been charged according to the rules applying to the firstcase under Schedule D as profits from trade. In his judgement the LordPresident stated as follows : —
“ Now, My Lords, this is undoubtedly a trading Company, and Ido not doubt that the duty might have been charged in this case asunder the first case in Schedule D ; but that is not the question. Thequestion is whether it may be lawfully charged under the fourth case.One can quite understand that in particular circumstances the dutymay be chargeable either under the one or the other. The income inrespect of which the duty is to be charged may fall under more thanone description in the Statute, and in that case it would of course
2 T. C. 105.
HOWARD C.J.—Ceylon Investments Co., Ltd. v. Com. of Income Tax. 9
be in the option of the Commissioners of Inland Revenue to takethe case that was most favourable to themselves. Now it appearsto me that although this might have been charged as a duty uponthe balance of profits and gains under the first case, it is equallychargeable as the interest accruing upon foreign securities under thefourth case.”
In Smiles v. Australian Mortgage and Agency Company, Ltd.' thecompany carried on a wool-broker’s business abroad and. in the courseof the wool broking business and to facilitate it, made loans to customersvarying in amount, sometimes covered by second mortgages on realestate. It was held that the interest on these loans could not be taxedas the interest on foreign securities, but must be brought into the receiptsand disbursements of the business. In his judgment the Lord Presidentstated as follows : —
“ The account between the Company and its customers is just ofthe nature of a current account as between banker and customer andnot- at all in the nature of investments of money. Also that it isproper trading and nothing else and not investments of money onsecurities.”
In Liverpool and London and Globe Insurance Co. v. Bennett ~ LordShaw of Dunfermline stated as follows : —
“ My Lords, it is not necessary to decide whether that case applies ’or not. The assessment had been laid on, not in respect of it, buthas been laid on in respect of the First Case in Schedule D, which isapplicable to the balance of profit of trade. The argument as to theFourth Case, therefore, drops out, because it is well settled that ifa sufficient warrant be found in the Statute for taxation under alter-native heads the alternative lies with the taxing authority. Theyhave selected case I. It appears to me that this selection is not onlyjustified in law, but is founded upon the soundest and most elementaryprinciples of business.”
In both of these cases the option vested in the Crown was to elect asbetween the different cases of Schedule D. In Fry v. Salisbury HouseEstate, Ltd.5 the Crown sought to extend this principle so that it gavethe right of election as between Schedules. The House of Lords heldthat rents were profits arising from the ownership of land in respect ofwhich the assessment under Schedule A was exhaustive, and that theytherefore could not be included in the assessment under Schedule D astrade receipts of the company. In his judgment, however, Lord Dunedinseemed to think that there might be a right of election as betweenSchedule C and Case III. of Schedule D inasmuch as such an option wouldnot in any way disturb the scheme of the Act. The operations from anincome tax point of view of a company carrying on a similar businessto that of the appellant company were also considered in the case ofButler v. The Mortgage Company of Egypt, Ltd. '. In this case the businessof the company consisted in lending the money borrowed from its share-holders upon mortgage in Egypt and the interest it obtained from those
• 2 T. C. 307.3 (1030) A. C. 432.
– f, T. C. 370.4 13 T. C. 803.
, 10 HOWARD C.J.—Ceylon investments Co., Ltd. v. Com. of Income Tax.
mortgages formed its income, with allowances for expenses and for baddebts before it could pay a dividend or find the profits. The Crownassessed the company under case IV., namely, on the foreign securitiesrepresented by the Egyptian mortgages. The company contendedthat the tax ought not to be charged under that case, but under case V.upon their business in Egypt, a foreign country. As in the case of theMexican Company the interest received and investments made weremade incidentally to their trade of borrowing the money and lending itabroad, they were embedded in the business of a company whosebusiness it was to conduct that sort of transaction. In these circumstancesit was held by Rowlatt J. whose decision was affirmed by the Courtof Appeal, that the income was income arising from foreign securities andassessable under case IV. of Schedule D. In his judgement Rowlatt J.in drawing a distinction between a case like the Mexican case and theAustralasian case stated as follows : —
“It is not that you can say one is an investment-company and theother is a trading company and there is a different rule for investmentcompanies and trading companies in this respect that when youhave a trading company you can transfer from case IV. to case I.,but when you have an investment company you cannot : I do notthink that is the distinction. The true ground is put in The Liverpooland London and Globe Insurance Company and in the Australasiancase : ‘ when you have words in a case which apply to the facts underdiscussion the tax applies under that case and the subject cannotescape from it ’. In the Australasian case the distinction taken wasthat when you have interest earned in this sort of way in the course of abusiness in which loans of this kind have to be made for the purposesof a business, you do not get the interest emerging as taxable underany case at all till you get to business—that is the point—as in theordinary case of a banker in this country. He receives no end ofinterest which is taxable matter under case III., but it is not taxedas interest because it is merely incidental ; it is only part of the businessto make this interest, not as interest, but as the income of the business.In the case of the Mexican Company the interest they received andthe investments they made were made incidentally to their trade ofborrowing the money at interest in England and lending it in America.It is exactly the same here. They are embedded in the trade. Howdoes the subject get out of the charge imposed by case IV. ? I cannotsee any way of getting out, because if you are once within case IV.you cannot get out of it.”
There is ho doubt that the business of the appellant company ap-proximated to that of the Mexican and Egyptian Companies to whichI have referred rather than to that of the undertaking of a banker whereloans have to be made for the purposes of the business. In these cir-cumstances if the “ sources” of income enumerated in section 6 (1)of the Income Tax Ordinance are to be treated as cases under Schedule Dof the Income fax Act, it would seem that the Crown can elect whetherit will charge under paragraph (a) or (e). That the Crown has such anelection was the view expressed by Akbar J., in The Commissioner of
HOWARD C.J.—Ceylon Investments Co., Ltd. v. Com. of Income Tax. 11
Income Tax v. R. M. A. R. A. R. R. M. Arunachalam Chettiar. ' Thiscase was concerned with the business of a money-lender and in hisjudgment Akbar J. stated as follows : —
“It makes no difference if the assessee carried on
solely the business of lending money,, for in that case the Crown hasthe choice of assessing him either under head 6 (1) (a) or 6 (1) (e).”
It was not necessary for the decision of the. case for the learned Judgeto have decided this point. His view is, therefore, merely obiter.
I have now to consider whether there is anything in the schemeformulated in the Income Tax Ordinance to indicate that the principlelaid down by the cases I have cited with regard to the interpretation ofthe English Income Tax Act is inapplicable. The interpretation sectionof the Ordinance defines“ profits ” or“ income ”tomean the net
profits or income from any source for any period calculated in accordancewith the provision of the Ordinance. Section 5 (1) of the Ordinanceimposes income tax in respect of the profits and income of every personfor the year preceding the year of assessment—
(a) wherever arising, in the case of a person resident in Ceylon, and<b) arising in or derived from Ceylon, inthe case of every other person.
Enumerated in paragraphs(a) to (h) ofsection 6(1)are the various
sources of “Profits andincome” or“profits”or“income”. In
section 1 of the Income Tax Act, 1918 (8 & 9 Geo. V. c. 4), it is providedthat income tax shall be charged for a particular year in respect of allproperty, profits or gains respectively described or comprised in theSchedules marked A, B, C, D and E contained in the First Scheduleto the Act and in accordance with the Rules respectively applicableto the Schedules. Whereas the charge in the English Act is on “ property,profits or gains or comprised as described in the schedule”, in Ceylonit is charged by virtue of section 5 (1) and the interpretation section onnet profits or income from any source. For the enumeration of sourceswe must turn to section 6 (1). Can it be said that these sources like theSchedules in England are mutually exclusive ? The wording of sources(a), (b) and (c) shows that these sources are mutually exclusive, (d) ex-cludes (a), (b) and (c), and (h) excludes all previous sources. But thereare no words in (e) to show that this source does not apply to dividends,interest or discounts arising from a trade or business. , If the businessof a company consists in the receipt of dividends, interest cr discountsalone or if such a business can be clearly separated from therest of the trade or business, then any special provisions applicableto dividends, interest or discounts must be applied. Applying the prin-ciple laid down in the Egyptian case, the appellant company is withinsource (e) and cannot get out of it. To take such a view does not inany way disturb the scheme of the Ordinance. I agree, therefore,with JCeuneman J. that the Commissioner was empowered to charge theappellant Company under section 6 (1) (e) in respect of the dividendsand interest received from. undertakings in – which its capital wasinvested.
■ 37 X. o. R. its.
12 SOERTSZ J.—Ceylon,Investments Co., Ltd. v. Com. of Income Tax.
The only remaining question for consideration is whether there areany provisions permitting the deduction of management expenses inarriving at the net income of a Company when such income is derivedfrom source (e). This involves the interpretations of sections 9 and 10.Subject to sub-sections (2) and (3), section 9 (1) permits the deductionof all outgoings and expenses incurred by a person in the production ofincome and applies to profits and income from any source and wouldtherefore prima facie apply to all the sources in section 6 (1) (a) to (h).Section 9 (3) provides that income from “ interest ” shall be the fullamount without any deductions for outgoings or expenses. Section10 (b) provides that no deduction shall be allowed for any disbursementsor expenses not being money expended for the purpose of producing theincome. Can it be said that the management expenses were disburse-ments expended for- producing the dividends received by the appellantCompany from investments in other Companies ? I do not think itcan be. In England by virtue of section 33 of the Income Tax Act,1918^ the '■ management expenses of any Company whose businessconsists mainly in the making of investments are deductable. No suchprovision exists in the Ceylon Ordinance and having regard to its absenceI am unable to say that management expenses can be deducted in orderto ascertain the assessable income.
Soertsz J.—
I have had the advantage of reading the judgments of My Lord theChief Justice and of my brother Keuneman, and I respectfully agreewith them both, that the appellant company though functioning asan investment company only—and that is the purpose for which itcame into existence—still continue in pursuit of that purpose to carryon business in the way a holding company does carry on business. Ialso agree that everything that accrued to the company, in the courseqf its business, by way of pecuniary gain—whatever the form of thatgain, whether dividends, interest, discounts or some other thing—'falls within the words “ profits from any business ”. I am quite unableto see my way to endorse the view expressed by the Taxing Authorities,and by the Board of Review, and advanced to us by the Acting Solicitor-General, that whatever expenditure was necessary for the productionof the income of this company had already been deducted by the companyin which the shares were held ; that once an investment had been made,no further expenditure was necessary on the part of the appellantcompany for the production of its income from that investment, andthat section 10 (b) precluded any such deduction as is here claimed on- account of Directors’ fees, Secretary’s remuneration, &c. As pointedout by Pollock M.R. in the case cited by the Chief Justice from’ 12 Ta,xCases 657, the business of a company
“ may be quiescent, and to a large extent, a matter of routine. Itsreceipts may-be derived if not wholly, at least almost entirely from theannual payments made to it by the Secretary of State ; but it remainsa company still alive, and still requiring, if only in smaller details,the directions of its directors and the duties carried out by its Secretary.It is still concerned with the business of disposing of and dividing
SOERTSZ J.—Ceylon Investments Co.,. Ltd. v. Com. of Income Tax. 13
profits which it has become entitled to by reason of its greater activityin the past, and that activity as well as possibly others may well beawakened and quickened in the future. ”
In regard to the next contention of the Acting Solicitor-General thateven if the appellant Company was carrying on a business and for thatreason, came under section 6 (1) (a) and was entitled to claim deductionon account of the management expenses of that business, under section9 (1) > yet as the gain derived by it from “ dividends and interest ” fallswithin the words “ dividends, interest or discounts ” of section 6 (1) (e)as well, the Crown is entitled to elect under which of these heads 6 (1) (a)or 6 (1) (e) it will make its assessment, I greatly regret that I cannotassent to the view taken by My Lord the Chief Justice in upholding thatcontention. On that point, while I agree with my brother Keunemanthat the Crown has no such option, and that “ it was the intention oithe Ordinance to regard dividends, interest or discounts as a separatesource ”. I venture to differ when he says that
“ If then the business of an individual or a company consists in thereceipt of dividends, interest or discounts alone, or if thd business ofreceiving dividends, interest or discounts can be clearly separatedfrom the rest of the trade or business, then any special provisionsapplicable to dividends, interests or discounts must be applied ”,
in so far as that statement, as I understand it, implies that section 9 (3)will uniformly apply if the “ interest ” part of the gains of a business isseparate or separable from the “ dividends ” part of it.
The view I have reached is that the categories enumerated in section6 (1) are mutually exclusive, and that the question whether 6 (1) (a) or6 (1) (e) applies in a particular case, depends on whether we are dealingwith the profits of a business or the income of an individual. If it is acase of dividends, interests, or discounts appertaining to a business,they fall within the words “ profits of any business ” and section (6) (1) (a)applies. If, however, it is a case of dividends, interest or discountsaccruing to an individual not, in the course of a business, but as a partof his income from simple investments, then section 6 (1) (e) is the relevantsection, and so far as interest is concerned, section (9) (3) modifies section
9 (1).
The word “ profits ” and the word “ income ” are, clearly, not synonymous,and an examination of the wording of the Ordinance shows that theyhave not been used interchangeably or indiscriminately but that theLegislature has employed them with great deliberation. The Ordinancespeaks of “ profits and income ”, indicating thereby that the taxablesubject-matter may consist, in one case, of both profits and income asunderstood in the Ordinance ; in a second case, of profits alone ; and in athird case of income alone.
In section 6, the Legislature has chosen to apply the word profits to.the.proceeds of “ any trade, business, profession or vocation” (a), or of“ any employment ” (b). On the other hand,- to describe the advantagecontemplated in (c), when that advantage is not connected with trade,business, &c., and to describe the advantage contemplated in (d) it uses43/5
14 KEUNEMAN J".—Ceylon Investments Co., Ltd. v. Com. of Income Tax.
the word income “ in each case In the case (e), (f) and (g) they are notspecified either as “ profits ” or as “ income ” for the reason—I infer—that it would depend on the circumstances of a particular case whetherthe things mentioned in those sub-sections are to be treated as profitsor as income. If they appertain to (a) and (b) they are profits ; if they donot, they constitute income. In the residium—catching clause (h) —yields from any other source are regarded as “ income ” with the oneexception of windfalls or accruals of “ a casual and non-recurring nature ”to which the word profits is applied. Section 6 (2) (a) enumerates manyclasses of “profits from employment” without claiming to exhaustthem. Section 7 (1) (a) to (d) deal with certain kinds of income. Section7 (1) (e) conformably with the description of the advantage contemplatedunder 6(1) (c)and(d)as income, puts the annual value of places of worshipas income entitled to exemption, and finally 7 (1)(n) deals with the
profits and income of a Co-operative Society.
The point I seek to emphasize is that two words “ profits ” and“ income ” are used with great discrimination, and that effect must begiven to that fact.
Chapter III. of the Ordinance deals with the mode of “ Ascertainmentof profits or income ”, and section 9 (1) provides that both, in regard toprofits and income, certain deductions shall be made " subject to theprovisions of sub-section (2) and (3) ”. Now in sub-section (2), it is statedthat “ in' ascertaining the profits or income arising from the rent or annualvalue of land and improvements thereon, no deduction shall be madefor outgoings and expenses except those authorised in section 6 ”. AsI have already pointed out the advantage accruing from annual valueof land under (c) and (d) of section (6) is income if the land is not occupiedfor the purpose of a trade, business, profession or vocation. If it is sooccupied the resulting advantage is regarded as part of the profits of thetrade, business, &c., and falls under 6 (1) (a). In sub-section (2) of section9 the Legislature states clearly that whether the advantage derived.from the rent or annual value falls to be described as profits or as income,the only permissible deductions are those stated in section 6. But insub-section (3) of section 9, the disallowance of deduction for outgoings orexpenses is restricted to income from interest. To my mind, thisrestriction is most significant. As held by My Lord the Chief Justice,the dividends and interests derived by the appellant company fall withinwords “ profits of any business As I have already submitted,dividends and interests may well be the income of an individual fromsimple investments, and sub-section (3) is careful to' enforce a disallowancein regard to interests that is part of income but not in regard to interestthat is part of profits.
For these reasons, I agree to make the order proposed by my brotherKeuneman.
Keuneman J.—
This appeal came before the Appeal Court on a case stated by theBoard of Review. It was originally heard by His Lordship the ChiefJustice and myself, and was referred to a Bench of five Judges.
KEUNEMAN J.—Ceylon Investments Co., Ltd, v. Com, of Income Tax. 15
The facts are as follows : —
The appellant is an Investment Company, whose income is derivedfrom dividends declared by companies in "which it owns shares, andinterest on moneys lent out by it. The company does not carry on anytrade. The point at issue is the disallowance by the Assessor of a sumof Rs. 1,270 which was claimed as a deduction from the income of thecompany, being the amount of management expenses (such as Directors’fees, Secretaries’ and Auditors’ fees, &c., incurred during the materialperiod). The amount of tax in dispute, in consequence of the disallowanceof this deduction, is Rs. 153.96.
This appellant then appealed to the Commissioner of Income Tax,who confirmed the assessment oftheAssessor. TheCommissioner in
his order depended on section 9(1)and 10 (b)ofthe Income Tax
Ordinance (Chapter 188) and heldthatthis was notanexpense incurred
in the production of the income.Hefurther heldthat the income of
the appellant company was from dividends and interest and not froma trade or business. He pointed out that in England section 33 of theFinance Act, 1918, gives by way of relief a deduction for managementexpenses in the case of life insurance companies and companies whosebusiness consists mainly in the making of investments, and that undersection 42 of our Ordinance management expenses are allowed in thecase of insurance companies, but there is no similar provision in the caseof companies holding investments.
An appeal was then taken to the Board of Review, but was dismissed,on the ground that the expenses in question were not incurred in theproduction of the income.
I think it will be -convenient at this stage to set out the principalsections which arise for consideration in this appeal.
Under section 3 the interpretation clause, “ ‘ Profits ’ or ‘ Income ’means the net profits or income from any source for any period calculatedin accordance with the provisions of this Ordinance. ”
We accordingly start our inquiry bearing in mind two points, viz. : —(1) that the profits or income are always net profits or income, and (2)that what are net' profits or income are to be calculated in accordancewith the provisions of the Ordinance.
Under section 5 (1), which is the charging section, “ Income Taxshall …. be charged at the rate or rates specified ….
in respect of the profits and income of every person for the year precedingthe year of assessment—
wherever arising, in the case of a person resident in Ceylon, and
arising in or derived from Ceylon, in the case of every other person
By section 5 (2) “ without in any way limiting the meaning of the term,* profits and income arising in or derived from Ceylon ’ includes allprofits and income derived from services rendered in Ceylon, or fromproperty in Ceylon or from business transacted in Ceylon, whetherdirectly or through an agent. ”
16 KEUNEMAN J.—Ceylon Investments Co., Ltd., v. Com. of Income Tax.
The effect of section 5 (1) is to charge the tax on “ profits and income ”,while section 5 (2) enumerates certain classes of profits and income whichproperly come under "the term “ profits and income arising in or derivedfrom Ceylon ”, but is careful not to limit the meaning of that term to thematters so enumerated.
Section 6 (1) says “ For the purposes of this Ordinance ‘ profits andincome ’ or ‘ profits ’ or ‘ income ’ means—
(a) the profits from any trade, business, profession, or vocation forhowever short a period carried on or exercised ;
(e) dividends, interests or discounts. ”
I quote only those portions of the section as are immediately material.But I may add, that in view of section 6 (1) (h), viz. :— “income fromany other source whatsoever not including profits of a casual and non-recurring nature ”, it seems clear that the object of section 6 (1) is toclassify the term “profits and income” under certain defined “sources”.I think that the term “ from any source ” in section 3 already cited, refersdefinitely to the classification under section 6 (1). Further the words“ from and source ” in section 9 (1) and section 10 to be cited later havereference to the same classification. It is further clear from section 47that section 6 (1) does divide up profits and income under “sources”.
Chapter 3, consisting of section 9 and 10, relates to the ascertainmentof profits and income. The immediately relevant portion in this case aresection 9 (1) “ Subject to the provisions of sub-sections (2) and (3)there shall be deducted, for the purpose of ascertaining the profits ofincome of any person from any source, all outgoings and expenses incurredby such person in the production thereof ….
Section 9 (2) is not immediately relevant, but section 9, (3) says“ Income arising from interest shall be the full amount of interest fallingdue whether paid or not, without any deduction for outgoings or expenses
Section 10 says : “ For the purpose of ascertaining the profits or incomeof any person from any source, no deduction shall be allowed in respect
of(b) any disbursements or expenses not being money
expended for the purpose of producing the income. ”
In my opinion Chapter 3 provides the principal means of ascertainingthe net income and profits of any person. It applies to all the “ sources ”of income set out in section 6 (1), but places “interest” bn a differentfooting. I am not taking into account for the moment the fact thatsection 6 (2) does also provide for the ascertainment of net income in thecase of the net annual value of land, and that there are special casesprovided for under Chapter 8, under which reference will be made later tosection 42.
The main points which were argued before us were as follows : —
(1) Mr. H. V. Perera argued that profits arid income in this case cameexclusively under section 6 (1) (a) of our Ordinance, as beingprofits and income of business, and that the managementexpenses incidental to the business must be deducted in orderto arrive at the net profits and income of the business. The
KEUNEMAN J.—Ceylon Investments Co., Ltd. v. Com. of Income Tax. 17
Acting Solicitor-General argued that the profits and incomecame exclusively under the heading “ dividends, interests anddiscounts” in section 6 (1) (e), and could not be regarded as theprofits and income of a business. Alternatively the ActingSolicitor-General argued that the profits and income in thiscase came both under section 6 (1) (a) and under section 6 (1)(e), and that the Crown had an option as to sub-section underwhich the tax could be charged.
(2) Mr. H. V. Perera argued that the management expenses wereexpenses incurred in the production of the income. This wasdisputed by the Acting Solicitor-General.
As regards the first matter argued, a number of cases were cited to us.In the case of The Commissioner of Inland Revenue v. The Korean Syndi-cate, Ltd.a syndicate was registered in 1905 as a company for thepurpose, inter alia, of acquiring and working concessions and turning themto account, and of investing and dealing with any moneys not imme-diately required. In 1905 the syndicate acquired a right to a concession inKorea, but in 1908 it assigned its rights to a development company underan agreement. During the years material to the case, the syndicateactivities were confined to receiving the bank interest and royalties, itsonly income, distributing the amount among its shareholders, and payingpremiums on a sinking fund policy. It was held, that the syndicate wascarrying on the business for which it was incorporated of acquiringconcessions and turning them into account, and that the profits derivedtherefrom were liable to Excess Profits Duty.
<4
In arriving at this result, Lord Sterndale M.R. said : “ It may very wellbe that that particular thing by itself (viz., having an agent in Korea)would not be carrying on business ; but if you couple that with whatthey were doing under the Memorandum and Articles, and under theagreement of March 25, 1908, then it seems to me that the only conclusionto arrive at is that this syndicate was carrying on a business of acquiringconcessions and turning them into account ”.
As regards the particular considerations which apply to a company, asdistinct from an individual, he said, “ An individual comes into existencefor many purposes, or perhaps sometimes for none, whereas a limitedcompany comes into existence for some particular purpose, and if it comesinto existence for the particular purpose of carrying out a transaction bygetting possession of concessions and turning them to account, then thatis a matter to be considered when you come to decide whether doing thatis carrying on a business or not ”.
The remarks of Atkin L.J. also are in point, “ I myself have no difficultyat all in coming to the conclusion that this company is in fact carrying onbusiness, and it carried on a business of receiving the profits from theconcession, in which it still retains an interest. It is true that it may becalled, if, you please, a passive carrying on of business as opposed to anactive carrying on of business …. Personally, if any emphasis isattached' to the word ‘ active ’, I think it would narrow, the meaning of
12 Reports of Tax Cases 181.
18 KEUNEMAN J.—Ceylon Investments Co., Ltd. v. Com. of Income Tax.
the word ; for I see nothing to prevent a holding company, which is avery well known method of carrying on business in these days, fromcarrying on business
No doubt this was a decision relating to Excess Profits Duty, but Ithink the language employed in this case has general application.
Again in The Commissioners of Inland Revenue v. The Tyre InvestmentTrust, Ltd.', Rowlatt J. said:“ It is contended by the respondent
company that it exercised no control over the companies in which it held
shares other than that of a shareholderIt is perfectly clear
that the Act regards a company that does business in the making ofinvestments as carrying on business …. I think quite clearly… this company is a company whose principal business is
making investments ”.
Further in The Commissioners of Inland Revenue v. The South BeharRailway Co. ~, decided in the House of Lords, Viscount Cave L.C. said :
“ It is true the company carries on no trade or manufacture, and that itsprincipal and only function at the present moment is to receive anddistribute the fruits of its undertaking but that is a part, and a materialpart of the purpose for which it came into existence. It was not intendedto be a trading but a financial company ;…. The company can
no longer be called upon to fulfil its first purpose, namely, to makeadvances for the construction of the line, because all the necessary fundshave already been advanced ; but it is still fulfilling its second purpose,which was to receive an income for its shareholders …. and to•distribute it among them …. I think, therefore, that thecompany still carries on a business or similar undertaking within themeaning of the section 52 of the Finance Act, 1920 ”.
The words of Lord Sumner are also of interest : “ It is obvious that thecompany’s objects have by no means been accomplished. It is obvious,too, that during its present period of dormant life it has very little to do
But the operation of receiving and thus discharging the
annuity payments goes on continuously, and however simple it is not amere passive acquiescence. It is the transaction of business betweendebtor and creditor resulting periodically in the discharge of a debt
…. The company …. plays its recurring part in every
payment and receipt of gains, and there is here, therefore, that ‘ repetitionof acts ’ which Lord Brett says is implied in ‘ carrying on business ’ ”.
With regard to the appellant company, it is clear that it is at present•functioning as an investment company, and obtains its income fromdividends and interest alone. It had come into existence for this partic-ular purpose as well as others, but it appears that for some time it hasnot varied its investments. But it is manifest that its objects have notbeen accomplished and although at present it carries on a “ passive ” or“dormant” life, it has not ceased to carry >on business. The operationof receiving and discharging the debts due to it is regularly repeated. Infact it carries on business in the way that a holding company carries onbusiness.
It has however been contended for the Commissioner that the inter-pretation of the word “ business ” in these cases has particular relation to the
1 12 Reports of Tax Cases G4G.-12 Reports of Tax Cases 657
KEUNEMAN J.—Ceylon Investments Co., Ltd. v. Com. of Income Tax. 19
meaning of that word in its special context. I do not think this iscorrect. The language which has been used is of general application.But in view of this, argument, I think it is only necessary to quote the caseof The Liverpool and London and Globe Insurance Company v. Bennett where it was held by the House of Lords under the Income Tax Act, 1842,that interest, earned on investments abroad by an English companycarrying on insurance business in England and abroad and not remittedto England, forms part of the “ profits and gains ” of the company assess-able under Case 1, Schedule D. In this connection Lord Shaw said :“ There can be no doubt whatsoever that these sums …. werein every sense of the term a business investment …. No account-ant, auditor or actuary could exclude the interest arising from suchinvestments from the category of the earnings and profits of the com-pany”. His Lordship held that the company did not carry out separatebusiness and that the matter of the investments of the company’s fundswas not separate from the business of fire and life insurance.
In the same case Lord Loreburn said :“ The only question here is
whether the interest and dividends before us are profits or gains of thiscompany’s trade, manufacture, adventure or concern in the nature oftrade within the meaning of the first case. I think they are, ….
whatever may have been the source from which the invested moneyswere originally derived, and whether the investments were compulsory ornot. They are, to use Lord Justice Buckley’s apt expression the ‘ fruitderived from a fund employed and risked ’ in a business coming within thestatutory description
No doubt this case went to the extent of holding that the investmentsor reserve funds were part of the trade or concern in the nature of trade offire and life insurance, but I think it is inherent in the decision, that theincome from the investments was income from business. In fact, LordMersey rejected the argument that these investments formed no part ofthe “ business ” of the company. I accordingly hold in the present casethat the income derived by the appellant company from dividends andinterest fall within the words “ profits from any business ” under section-5 (1) (a).
At the same time they clearly fall within the terms “ dividends, interestor discounts ” under section 6 (1) (e).
A large number of cases have been cited to us to show that the Crownhas an option to charge the tax in England on any of the cases in ScheduleD, which may be chosen by the Crown, although another of the cases mayalso be applicable. It is argued by the Acting Solicitor-General that theCommissioner in Ceylon also has an option to choose between the various“sources” under section 6 (1). This is by no means a simple question,and it is still further complicated by the decision in England of Salisbury- House Estate, Ltd. v. Fry", -where, as I understand the matter, the optionwas held not to apply as between schedules, but only as between cases.
For example Lord Dunedin says : “ It is very obvious to suggest thatif the Crown can opt as between cases why should it not opt as betweenschedules …. But I think the answer is that as option between
1 G Reports of Tax Cases 327.s 15 Reports of Tax Cases 2C6. ■~
20 KEUNEMAN J.—Ceylon Investments Co., Ltd. v. Com. of Income Tax.
cases does not in any way disturb the general scheme of the Act: anoption between schedules would. I think on a general survey of thehistory and policy of the Income Tax Acts one finds the great distinctionthat there is between Schedules A and B on the one hand and the otherthree schedules on the other ”.
Lord Atkin said: “ Nothing could be clearer to indicate that theschedules are mutually exclusive; that the specific income must beassessed under the specific schedule ; and that D is a residual schedule ”.
Lord Tomlin held :“ As between Schedule A and other schedules the
revenue authority has no option to select the schedule to be applied”.
All their Lordships disagreed with the case of Rosyth Building andEstate Company v. Inland Revenues’, where a contrary opinion wasexpressed, with the exception of Lord IV.arrington who expressed noopinion on that point.
If we examine section 6 (1) of our Ordinance we see that source (a)deals with the profits from any trade, business, profession or .vocation.Source (b) deals with a very distinct matter, viz., the profits from anyemployment. Source (c) deals with the net annual value of land occupiedby or on behalf of the owner, in so far as it is not occupied for the purposeof a trade, business, profession or vocation. There is a clear differentia-tion between source (c) and source (a) and I think the language showsthat it is distinct from source (b) also. Source (d) deals with the netannual value of land used rent-free by an occupier, &c., in so far as it isnot included in sources (a), (b) and (c). So far I think those sources aremutually exclusive.
The difficulty arises with regards to sources (e), (/) and (g). In thesecases there are no words employed to show that the earlier sources areexcluded. For example take source (e), viz., “ dividends, interest ordiscounts ”. There are no words to show that this source does not applyto dividends, interest or discounts arising from a trade or business. But“ dividends, interest or discounts ” are classified as a separate source.
Source (h) is a residual source, naturally excluding all the. previous sources (a) to (g).
How then are we to treat income which comes under source (e) butcan also be regarded as coming under source (a) ? In my opinion it wasthe intention of the Ordinance to regard dividends, interest or discountsas a separate source. If then the business of an individual or a companyconsists in the receipt of dividends, interest or discounts alone, or if thebusiness of receiving dividends, interest or discounts can be clearlyseparated from the rest of the trade or business, then any special provi-. sions applicable to dividends, interest or discounts must be applied. Ido not think any question of option arises.
In my opinion section 47 lends support to this view. .Section 47applies the provisions expressly relating to any particular source undersection 6 (/) to that source and to none other.
I think this opinion is further supported to some extent when weexamine Chapter 8, which deals with special cases. I do not think that
cf Reports of Tax Cases 11.
KEUNEMAN J.—Ceylon Investments Co., Ltd. v. Com. of Income Tax. 21
where the provisions relating to special cases apply it is open to the Crownor the assessee to seek some other form of assessment. I think I maytake as an example section 42 which has been much discussed in this case.
The profits of a company from life insurance are fixed as the invest-ment income of the life insurance fund less the management expensesattributable to that business.. This is a highly specialized form ofassessment, and must be applied in all cases. Specific provisions are alsolaid down for assessing the profits of non-resident companies from thebusiness of insurance, other than life insurance.
It is no doubt true that the divisions into “ sources ” under section 6(1)does not appear to be scientific^-and it is difficult to see on what groundsthe division is made. But we must take the Ordinance as we find it.
I am therefore of opinion in this case that the provisions, if any,applicable to “ dividends, interest or discounts ” have to be applied inestimating the net profits and income of this company.
This brings, me to the second matter which was discussed before us.The discussion turned mainly on the interpretation of sections (9) and (10).
Section 9 (1) deals with the case of deductions to be made in ascertainingnett profits and income. Subject to sub-section (2) and (3), section 9 (1)applies to profits and income from any source, and would therefore primafacie apply to all the sources in section 6 (1) (a) to (h). Sub-section (2)restricts the deductions in respect of rent or annual value of land to thoseauthorised in section 6, but we are not here concerned with these matters.Sub-section (3) provides for the assessment of income arising from“ interest ”, and provides that it should be the full amount of the interest
whether paid or not and (b) without any deductions for outgoings orexpenses. As far as we are concerned in this case, “ interest ” alonestands on a different footing, but subject to this, “ all outgoings andexpenses incurred …. in the production ” of the profits orincome must be deducted.
The argument of the Acting Solicitor-General on this point is that, as.far as the appellant company is concerned, nothing has been done by itto “ produce ”. the income or profits, and that all the activity which wentto produce, say, the dividends, was on the part of those companies, inwhich the appellant company held shares.
I think the language used in cases I have cited earlier throws some lightupon this matter. It is clear that this is not a trading but a financial!company, and its business is to make investments. No doubt if theinvestments turn unsatisfactory, they would be varied, but where thecompany is satisfied with the investments these would be continued andnot altered. The business of the company, to use Lord Justice Buckley’sexpression, was to “ employ and risk ” its funds, and thus obtain “ fruits ”.In the earlier stage where the funds were being employed and risked, andwhen the discretion of the company to make its investments was in activeoperation, I think there can be no question that this company was“ producing ” the profits or income. And the mere fact that the fundsavailable have been fully utilized does not change the nature of thebusiness. There can be no question that continued vigilance is neededto see that the funds already employed and risked are giving a satisfactoryreturn. If the returns are regarded _ as satisfactory, the company will
22 KEUNEMAN J.—Ceylon Investments Co. Ltd. v. Com. of Income Tax.
play a merely “ passive ” part, but that does not alter the fact that thecompany is still employing and risking its funds in order to producefruits.
In this connection I refer particularly to the South Behar RailwayCo., Ltd. case, and The Liverpool and London and Globe Insurance Co.v. Bennett case (vide supra) .
I think the meaning attached by the Acting Solicitor-General to the■word “ production ” is too narrow. I reject the argument, and holdthat the management expenses claimed in this case have been incurred inthe production of the income, and are necessary and reasonable expenses.
I think this argument applies wherever any person carries on a business ofthis nature, but it is all the more applicable in the case of a companywhich comes into being for this object, and can only carry out its functionsby the employment of directors, secretaries, Sec.
I come to the conclusion, therefore that the expenses in question can bededucted at any rate as far as they relate to the dividends which thecompany obtains. What is the position as regards the items of interestearned by the company ? Had the earning of interest been the sole orseparate business of the company, no doubt the special considerationsunder section 9 (3) would have been applicable. But it is clear in thiscase that the company carries on one business, which has two branches,viz., the earning of dividends and the earning of interest and it is clearon the_.figures available to us (see Document X) that interest is only asubsidiary part of the business, and is not separated from its ordinaryfinancial business. The interest is “ embedded ” in the business (in thewords of Rowlatt J.) or “ a mere incident ” in the business (in the wordsof Lord Hanworth M.R.)—, see Butler v. The Mortgage Company of Egypt,Ltd. '. I do not think it can be separated off or identified as distinctfrom the general business of the company. I do not think therefore thatthese itemjs of interest are assessable as such. The ordinary rule undersection 9 (1) therefore applies, and the deductions claimed can be allowedin their entirety.
I may now deal with certain other arguments which were advanced inthis appeal. The Acting Solicitor-General pointed to the fact that, undersection 42 (1), in the case of a company doing the business of life insurancemanagement expenses are expressly required to be deducted, and arguedthat by implication management expenses are not deductable in othercases. I do not think this, argument can be sustained. I have alreadypointed out that in this section a highly specialized form of assessment isprovided, viz., assessment based not on what would ordinarily be regardedas the profits of the company, but on the investment income of the LifeInsurance Fund. The section further says that a deduction must bemade of the management expenses of the business. As the “ profits ” ofthis kind of company were being defined, if no reference was made todeductions, the presumption would I think have been that no deductionswere allowed in this particular instance:It is also possible that in the
section it was being made clear that it was the management expenses ofthe business, and not merely those relating to the investment income whichwere to be deducted.
1 13 Reports of Tax Cases 803.
KEUNEMAN J.—Ceylon Investments Co., Ltd. v. Com. of Income Tax. 23.
Next, great stress had been laid by the Commissioner and in the argu-ment here on his behalf, on the existence in the English Income Tax Actof 1918 of section 33. Under that section any assurance companycarrying on life assurance business, or any company whose businessconsists mainly in the making of investments is entitled to repayment ofso much of the tax as is equal to the amount of the tax on any sums-disbursed as expenses of the management. It is urged that under ourOrdinance only life assurance companies are allowed to deduct manage-ment expenses, and that no provision to the like effect applies toinvestment companies. I think this argument is somewhat artificial.The necessity for making special provision in England for life insurancecompanies and investment companies would depend on the structure ofthe English Act, which makes provision for a large number of allowancesand deductions in a variety of cases. In this connection Konstam in hisLaw of Income Tax (7th ed., page 223) says, “ Companies carrying oncertain classes of business are liable to be taxed (at the option of theCrown) upon the interest and dividends derived from their investments,instead of being taxed upon the profits of their trade under cas.$ 1 ofSchedule D. Where there is no assessment of the kind last mentioned,provision is made for relief in respect of any sums disbursed as expenses ofmanagement (including commissions) …. But for this provisionthe companies to which it refers would be at a disadvantage as comparedwith other companies of the same class, who are assessed upon theirprofits, because expenses of management are deducted before the profitsof trade can be ascertained ”. Konstam adds that the relief is confinedto life assurance companies, investment companies and savings banks.
I think that under the English Act the incidence of taxation is not thesame as under our Ordinance. For example, no section from the EnglishAct has been cited to us, nor have I been able to discover any section inthat Act, which corresponds to section 9 of our Ordinance. I only repeatthat the deductions mentioned in section 9 (1) apply to all “sources” ofprofit and income, and I think the main question which arises in thisappeal is the interpretation of the words of that section. I am unabletherefore to draw any inference in favour of the Crown’s argument in thisrespect.
Our attention has also been directed to the dictum of Akbar J. in TheCommissioner of Income Tax v. Arunachalam Chettiar that “ the Crownhas the choice of assessing …. either under head 6 (1)(a) or
6 (1) (e) ”. If I may say so with respect, this appears to be an obiterdictum. Akbar J. refers to it as “ an additional reason ” for arriving athis decision. It is to be noted also that the Salisbury House Estate, Ltd.case (vide supra) was not cited or commented on in that appeal. In anyevent, we are entitled to review the reasons of the learned Judge in thisappeal.
In the result, the appeal is allowed, and the deduction claimed by theappellant company is held to be a proper deduction, and the amount oftax levied is reduced by Rs. 153.96. The appellant company is entitledto the costs of this appeal, and to the return of any amount deposited forthe purpose of the appeal.
■ 37 .V. L. R. 145.
24 WIJEYEWARDENE J.—Ceylon Investments Co., Lid. v. Com. of Income Tax.de Kretser J.—
I agree with my brother Soertsz.
WIJEYEWARDENE J.
I have had the advantage of perusing the judgments of My Lord theChief Justice and of my brothers Soertsz and Keuneman. I do notpropose to discuss and analyse the various arguments addressed to usat the hearing of this appeal and considered in the above judgments.I would state my views briefly as follows : —
the income of the Company is assessable under section 6 (1) (a)
as well as section 6 (1) (e) of the Income Tax Ordinance and,therefore, the Commissioner’s right to assess the income of theCompany under section 6 (1) (e) cannot be canvassed ;
the deductions to be made “ for the purpose of ascertaining the
profits or income ” of the Company should be determined. according to the provisions of section 9 (1) as modified bysection 9 (3) ;
the deductions claimed by the Company are “ outgoings and
expenses incurred in the production ” of the profits or incomewithin the meaning of section 9 (1) ;
no effect can be given to section 9 (3) in the present case, as the
activities of the Company in producing the relatively smallincome from interest are so “ embedded ” in its general activitiesin producing its aggregate income, that it is not possible toascertain what small portion of the company’s total expensesshould be regarded as its expenses in producing the incomefrom interest. •
I agree that the order proposed by my brother Keuneman should bemade in this case.