126-NLR-NLR-V-74-THE-COMMISSIONER-OF-INLAND-REVENUE-Appellant-and-J.-M.-RAJARATNAM.-Respondent.pdf
LORD CROSS of CHELSEA—
Commissioner of Inland Revenue v. Hajaratnam
529
[Privy Council]
1971 Present:Lord Cross of Chelsea, Lord Hedson, Lord Kilfcrandon,
Sir Frederic Sellers, and Sir Benjamin Ormerod
THE COMMISSIONER OF INLAND REVENUE, Appellant, and
J.MI. R AJAR ATNAMI, Respondent
Privy Council Appeal No. 7 of 1971S. C. 3/67—Case Staled Income Tax BBAj339
Income lax—Voluntary deeds oj covenant to -pay annuities—Payments madethereunder—Ttighl oj covenanter to deduct then from his assessable incon c—Meaning oj word “ annuity ”—Income Tux Ordinance (Cap. 212), ss. 5 (1),6 (1), 11 (11 (g), 12 (») (j), 1-3 (1), 13 (!) (a)—Stomps Ordinance, 1000, s. 20 (o).
Tho ossessoo-respondent voluntarily nncl without-any pecuniary considerationexecuted two deeds of covenant whereby lie covenanted to pay each of histwo brothers annually a sum of Rs. 1,500. Acccrdinclv two payments totallingRa. 3,000 wero made by him to tho brothers in the fiscal year 1057/1958.
Held, that tho two payments under tho deeds of covenant wero permissibledeductions in the calculations of tho respondent’s assessable income) for thofiscal year 195S/1959. The two sums could fairly be described ns “ annuities ”within the meaning of section 15 (I) (oj of tho Income Tax On.tii.nnco. Thoword “ annuity ” docs not moan only a purchased annuity. This view receivessupport from the wording of section 26 of tho Stamps Ordinance.
.A.PPEAL from a judgment of the Supreme Court reported in(1969) 73 N. L. B. 12S.
C. Potter, with O. P. S. de Silva, for the assessor-appellant.
S. Ambalavanar, with Cuda Tiltaiuella, for the assessee-respondent.
Cur. adv. vult.
December 8, 1971. [Delivered by Lord Cross of Chelsea]—
This is an appeal by the Commissioner of Inland Revenue of Colombowith the leave of the Supreme Court of Ceylon from an order of thatCourt made on 10th December 1969 holding in answer to questions ina case stated by the Board of Review that two payments totalling 3,000rupees, made by tho respondent Jesuthasan Mylraganam Rajaratnamin the fiscalj^ear 1957/195S were permissible deductions in the calculationsof his assessable income for the fiscal jear 195S/1959.
LXXXV—23!•—K10718(2/72)
530
LORD CROSS of CHELSEA—
Commissioner of Inland Revenue v. llajaralnam
The payments in question were made under two deeds of covenanteach made on 1st February 195S by the respondent in favour of one ofhia brothers. That in favour of iiis brother Mylvaganam Paramananthanran as follows :
" DEED OF COVENANTCovexant to Pay ax Axxuity
“ I, Jesuthasan Mylvaganam Rajaratnam of No. 30, Boswell Place,Colombo 6, in consideration of the natural love and affection I havefor my brother Mylvaganam Paramananthan hereby covenant thatfor a period of seven years from the year ending 3lst March, 1958(being treated as the 1st year) or during tlie residue of my life,whichever period shall be shorter, I will pay annually to the saidMylvaganam Paramananthan during his life the sum of its. 1,500 (onethousand and five hundred rupees).
In witness whereof I have hereunto set my hand and seal this1st day of February, 195S. ”
The other deed was in the same terms with the substitution of the nameof the other brother Mylvaganam Sathananthan for that of MylvaganamParamananthan.
The relevant provisions of the Income Tax Ordinance 1932 (asamended) are as follows :
" CHAPTER IIImposition of Income Tax
5.(1) Income tax shall, subject to the provisions of this Ordinance
and notwithstanding anything contained in any other written law or inany convention, grant, or agreement, be charged at the rate or ratesspecified hereinafter or fixed by resolution under section 23, for the yearof assessment commencing on the 1st day of April, 1932, and for eachsubsequent year of assessment in respect of the profits and ineomo ofevery porson for the year preceding the year of assessment-
fa) wherever arising, in t he case of a person resident in Ceylon, and
(6) arising in or derived, from Ceylon, in the case of every otherperson.
LOUD CROSS of CHELSEA—
Commissioner of Inland Revenue t>. Rajaratnam
631
6.(1) For t ho purposes of t-lus Ordinance, ‘ profits and incomo ' or
' profits ’ or ‘ income ’ means—
dividends, interest, or discounts ;
any charge or annuity ;
(17) rents, royalties, and premiums ; and
income from any oilier source whatsoever, not including profitsof a casual and non-recurring nature.
CHAPTER m
AscEHTAINM EXT OF PROFITS OR InCOMB
II. (I) Subject to the provisions of subsections (3), (6) and (7),thero sj,all be deducted, for ttic purpose of ascertaining the profitsor income of any person from any source, all outgoings endexpenses incurred by such person in tlao production thereof,including—
interest paid or payable to ft banker ;
Por tho purpose of ascertaining the profits or incomo of anyerson from any source no deduction shall bo allowed in respect of—
any interest paid or payable other than that allowed under
section 11 (1) {</);
any annuity, ground rent, or royalty ;
CHAPTER IV
Ascertainment of Statutory Income
(1) Save as provided in this section, the statutory income
of overy person for each year of assessment from each r.ourco ofhis profits and income in respect of which tax is charged by thisOrdinance shall be the full amount of tho profi‘3 or income whichwas derived by him or arose or accrued to his benefit from suchsource during the year preceding the year of assessment,notwithstanding that he may have ceased to possess such sourceor that such sourco may have ceased to produce income.
532
XORD CROSS of CHELSEA—
Commissioner of Inland Heucnue V. Uajaratnam
CHAPTER V
Ascertainment of Assessable Income
15.(1) The assessable income of a person for any year of assessment
shall be his total statutory income for that jear subject to the followingdeductions :—
(a) sums payable by him for the year preceding the year ofassessment by way of interest not allowable undersection 11 (1) (j), annuity, ground rent, or royalty :
Provided that—
(i) where under section 13 the statutory income arising from anysource lias been computed by reference to the profits orincome of any period other than the year preceding the- yearof assessment, the interest, annuity, ground rent, or royalty'payable in respect of such source shall be computed on thelike basis ;
(ii) no deduction shall be allowed in respect of any sum payableby way of interest, annuity, ground rent, or royalty by aperson out of Ceylon to another person out of Ceylon
It will be convenient at this stage to refer to some provisions in theUnited Kingdom Income Tax legislation which may be said to correspondin a general way to those in the Ceylon Ordinance set out above sincereliance has been placed on certain differences between them.Section 123 (1) of the Income Tax Act 1952 says {inter alia)—
“ Tax under Schedule I) shall be charged under the following Casesrespectively, that is to say—
Case III—tax in respect of—
(a) any interest of money, whether yearly or otherwise, or anyannuity, or other aamual payment-, whether such payment ispayable within or out of the United Kingdom, either as acharge on. any property of the person paying the same byvirtue of any deed or will or otherwise, or as a reservationout of it, or as a personal debt or obligation by virtue of anycontract, or whether the same is received and payable half-yearly or at any shorter or more distant periods ; ”
Section 169 (1) of the Act provides that where any yearly interest ofmoney annuity or annual payment is payable wholly out of profits orgains brought into charge to tax no assessment shall be made on the
LORD CROSS of CHELSEA—
Commissioner of Inland Revenue v. liajaratnam
533
person entitled to the interest., annuity or annual payment but that theperson liable to make the payment in question though not entitled todeduct it from his profits or gains assessed to tax is entilled to deductand retain out of it a sum representing tax at the standard rate on it.
The notable differences between the Ceylon Ordinance and the UnitedKingdom Act.are, of course, first that in the Act the word “ annuity ”is not used by itself but is followed both in section 123 and in section 1G9by the words “or other annua! payment” and secondly that theOrdinance—unlike the Act—does not provide for deduction of tax atsource. The recipient of the “annuity” is taxed directly in respect ofit and the payer pa3-s it " gross ” to the annuitant and is entitled to adeduction from his assessable income in respect of it.
The respondent paid the two sums of 1,500 rupees to his brothers inthe fiscal year 1957/195S and they Mere assessed to and paid income taxon the payments—though whether the payments were treated as annuitiesfalling under sectidn G (1) (/) or as income from any other source fallingunder section 6 (1) (h) does not appear. It is also to be observed thatthe two deeds of covenant were charged to Stamp Duty under section 26of the Stamps Ordinance 1909 (as amended) which so far as relevant rimsas follows :
" Section 26. Any instrument for the creation or sale of anyannuity or other right to a periodical payment not before in existence,whether created by actual grant or conveyance or only secured bybond, warrant of attorney, covenant, agreement or otherwise, shallbe chargeable with the same duty as on a conveyance of movableproperty for the consideration set forth in such instrument. If noconsideration is so set forth, the consideration shall be deemed to ■be—
(a) where the annuity or periodical payment is for a definite periodnot exceeding twenty 3-ears so that the total amount to be paidcan be previously ascertained, such total amount; . : . . ”
The respondent in his tax return for the 3'ear 195S/1959 claimed that incomputing his assessable income lie was entitled under section 15 (1)of the ordinance to deduct the two sums paid under the deeds of covenantas “ annuities ”. The deduction having been disallowed the respondentappealed to the Commissioner under section 73 (1) of the Ordinanceand b37 order dated 1st December 19GG the Deput3' Commissioner whoheard the appeal confirmed the assessment. The reasons given b3r theDeputy Commissioner for his decision were that the eases showed thatin the United Kingdom Act the word “ annuit3' ” onty covered a rightto receive annual pa3?ments which the annuitant had purchased b3' theexpenditure of a capital sum—thus converting his capital into income ;that payments under deeds of covenant such as those in the instant casewould not be regarded in the United Kingdom for tax purposes as“annuities” but ' as “ annual payments ” ; and that as the Ceylon
!*•—K 1071S (2/72)‘
03dLORD CROSS of CHELSEA—
Commissioner of Inland Revenue v. Rajaralnam
Ordinance did not contain the words “ or other annual payments ” thepayments in question were not deductible. The respondent appealedfrom the decision of the Deputy Commissioner to the Board of Beviewwhich dismissed hi3 appeal on 23rd June 1967. The reasons given bythe Board for holding that the payments were not deductible were,however, quite different from those given by the Deputy Commissioner—namely that they were not attributable to any source of income and werenot therefore expenditure or of an income character. At the request ofthe respondent the Board stated a case for the opinion of the SupremeCourt which on 10th December 1969 held that the two payments weredeductible as annuities. The judgment of the Court, given bySamerawickrame J. and concurred in by Weeramantry J., does not dealat all with the reasons given by the Board of Review for disallowingthe deductions ; but counsel for the appellant told their Lordships thathe could not advance any argument in support of those reasons andplaced no reliance'on them. The reasons given by the Supreme Courtfor disagreeing with the conclusion of the Deputy Commissioner were—briefly stated—that a right to receive recurring annual payments whichare income in the hands of the payee can properly be described as an“annuity” even though the payee has not acquired the right bypurchasing it for a capital sum but in some other ■way—(as for exampleby testamentary bequest or under a voluntary covenant) and that thereis no warrant for putting on the word as used in the ordinanco thelimited meaning which the Deputy Commissioner put on it.
Their Lordships agree with this conclusion. The argument that in theUnited Kingdom income tax legislation the word “ annuity ” means onlya purchased annuity rests on a passage in the judgment of Baron Watsonin the case of Foley v. Fletcher h In that case the plaintiff had soldcertain property to the defendants for a capital sum to be paid by halfyearly instalments over a period of years. The defendants claimed theright to deduct income tax from each instalment under section 40 ofthe Income Tax Act 1853 which was in similar terms to section 169 (1)of the Act of 1952 but the plaintiffs claimed that the. instalments werecapital receipts and not liable to tax. The Court was not in any wayconcerned to consider in that case what types of annual payment werocomprehended under the word “ annuity ” as opposed to the words“or other annual payment ”. The question before them was whetherinstalments of purchase price could bo regarded as “ an annuity orother annual payment ” within the meaning of the Act. It was inrelation to that problem that Baron Watson used the words which arorelied on by the appellant in this case—namely “ this payment is saidto fall within the description of an annuity. But an annuity meanswhere an incomo is purchased with a sum of money, and the capital hasgone and has ceased to exist, the principal having been converted into anannuity. Annuities are mado chargeable by express words. The words
1 (1S5S) 3 H. and N. 760.
LORD CROSS of CHELSEA—535
Commisvioner of Inland Revenue v. Rajaratnam
* other annual payments in the same section, mean payments ejusdemgeneris, viz. as profits In their Lordships’ view these words read intheir context mean no moro than that there is a distinction to be drawnbetween the purchase of an annuity for a sum of money and the sale ofproperty for a stated prico with a provision for the payment of the priceby instalments. The words in question have been quoted with approvalin several later cases but always in the same context as that in whichBaron Watson used them—namely where the question at issue waswhether the payment was received as capital or as income. TheirLordships do not think that either Baron Watson or the judges who havequoted his words with approval were considering what distinction is to bedrawn between the word " annuity ” and the words “ or other annualpayments ” as used in the income tax legislation or were suggesting thatthe word “ annuity ” should bo given a more limited meaning in thatlegislation than it normally bears. In the United Kingdom as the Actcontains the words “ or other annual payment ” tho question whether anygiven payment which admittedly falls under ono or other head should bedescribed as “ an annuity ” or not is only of academic interest. Butpayments under deeds of covenant such as those executed by therespondent can, their Lordsldps think, fairly bo described as “annuities”and they observe that in the case of the I. R. G. v. Duke of Westminster1where the Duke had executed covenants of tins typo in favour of someof his employees and claimed to deduct the payments under them fortax purposes Lord Tomlin in his speech in fact referred to them as“ annuities Counsel for the appellant did not himself go so faras to accept Baron Watson’s words as a completely accurate definitionof what is meant by the word “ annuity ” in the ordinance since heconceded that where a testator bequeaths an annuity to A and his estatesubject to the annuity to B, B must be entitled to deduct the annuityunder section 15 (1) even though A did not purchase it but acquired it byan exercise of the testator’s bounty. The definition of the word" annuity ” as used in the ordinance which counsel advanced was“ periodical payunents of the same or similar amounts payable for adefinite or indefinite period being pure incomo of tho recipient andderived from the surrender or extinction of capital or from a donationof capital ”. But their Lordships see no reason for excluding an annuitysecured by covenant from the scope of the word “ annuity ” as used in thoordinance—especially' as the acceptance of counsel’s definition might, asho admitted, lead to a distinction being drawn between a case where thocreator of the annuity had transferred a fund to trustees upon trust to paythe annuity out of tho incomo or if necessary tho capital and subjectthereto to hold tho fund upon trust for liimsclfand a case where he hadcovenanted to make tho payunents in question but had vested a fund intrustees as security for his performance of his obligations under thecovenant and to bo held subject thereto upon trust for himself. i
i (1930) A. C. I.
636
Gunalilake Appuhamy v. The Queen
The fact that tho ordinance refers only to " annuities ” and not alsoto " other annual payments " may possibly have the result—whetherintended or unintended—that .some payments from which tax could bededucted under the United Kingdom Act as “ aimual payments ” butwhich cannot fairly be described as <c ajmuitics ” arc not deductible underthe ordinance ; but their Lordships agree with tho Supreme Court thatthe payments under these deeds of covenant can fairly bo described asannuities. They would add that this view receives support from thewording of section 26 of the Stamps Ordinance 1909 sot out above.
Their Lordships wilt therefore humbly adviso Her Majesty that theappeal bo dismissed. The appellant must pay the respondent’s costsof tho appeal to the Board.
Appeal dismissed.