Judgment

M.T. Chang FJ

(delivering the judgment of the Court)

1. The question raised in this appeal is whether certain payments made by the taxpayer company (T) came within the deductible expenses as “expenses wholly and exclusively incurred during that period by such person in the production of the income” in s 14(1) of the Income Tax Ordinance 1947 (the Ordinance).

2. T is a plantation group working several rubber plantations throughout the country. It employs agents under contracts. The first agreement is made on 17 May 1961 with the Eastern Industries Ltd of London (the London Agents) for the entire secretarial work and general conduct and management of the affairs of T in England. The second made on 30 March 1966 is with Eastern Plantations Agency Ltd (the Malaysian Agents) for such duties as are usually undertaken and performed by sole agents in the East of plantation companies, in particular for the forwarding of all produce from the estates of T to the place of manufacture and the shipment of any produce as required. Remuneration in each case is calculated on so much per planted acre and a commission or commissions. It is apparent therefore that the attractiveness of the contracts of service is directly related to the total acreage of T’s rubber plantations. Any decrease in this acreage must inevitably result in a corresponding decrease in the remuneration. For this reason, provision is made for a suitable compensation for the agents for such decrease in acreage. That in the agreement with the London Agents — Clause 12 — reads as follows:

   If and whenever during the currency of this Agreement the Company shall in the ordinary course of conducting its business voluntarily sell or dispose of some part of its estates the Agents shall be entitled to be paid by way of compensation for loss of commission in respect of that part a sum equal to 2½% of the consideration for the sale or disposal or such higher percentage as may be agreed between the parties hereto.

3. The corresponding provision in the agreement with the Malaysian Agents is in cl 7 which is as follows:

   In the event of the sale by the Company of the whole or any part of its estates the Agents shall be paid by the Company by way of compensation for loss of earnings hereunder a sum equal to two and one-half per centum of the gross sale price.

4. It is stated by T and accepted by Revenue that, in 1961, having doubts of the long-term prospects for rubber, it decided to convert to oil palms to maintain, if not to increase, its profitability, and to find the necessary finance for this conversion by the sale of the more-outlying estates, particularly those with a large proportion of old rubber-trees which yielded only a marginal profit. In furtherance of this policy, T sold several rubber estates. The net proceeds of the sales were wholly expended on oil-palm development. In the process, the agents were paid their compensation in accordance with the provisions in cll 12 and 7 of the respective agreements.

5. The Director-General of Inland Revenue accepted these as agreed facts but disputed that these payments were deductible as expenses under s 14(1) of the Ordinance. T contended however that the compensations were not capital expenditure as to be caught by ss 15(c) and (d) of the Ordinance, but were expenses wholly and exclusively incurred in the production of income, arising out of contractual obligations and that the fact that the payments were not referable to the profits of any particular year was irrelevant.

6. Before the Special Commissioners, no evidence was led and the case was argued entirely on a statement of agreed facts. The Special Commissioners agreed with Revenue. Their decision was therefore not a finding of fact but one of law. On appeal by way of case stated, the High Court overruled the Special Commissioners and allowed the deductions of such payments. Hence this further appeal by Revenue.

7. The phrase “expenses wholly and exclusively incurred in the production of income” has received construction by the courts in this country but mainly in relation to expenses in connection with purchases or the costs of construction, to determine whether the expenses were capital or revenue payments. The former are not but the latter are deductible. So far as counsel can advise themselves and so far as we can advise ourselves, this is the first case with regard to payments of compensation by employers to agents or employees to come before the High Court and before us. There is therefore no local case citable to us. But there are numerous decisions of other countries, mainly Australia and New Zealand, England and Scotland. And that raises the prior question of the applicability of these decisions.

8. Several principles have been established. This court has laid down in Khalid Panjang v Public Prosecutor (No 2) [1964] MLJ 108 the principle that a Privy Council decision on appeal from another country is binding on it and the other courts of this country if the appeal is on a provision of law in pari materia with a provision of the local law. The decision in Lasala v Lasala [1979] 2 All ER 1146, that the Privy Council would consider itself bound by a decision of the House of Lords must extend this principle to judgments of the House of Lords. Insofar as the decisions of other courts in these and other countries are concerned, we have always treated these judgments as of only persuasive authority, but we have never lightly treated them or refused to follow them, unless we can successfully distinguish them or hold them as per incuriam. Other than for these reasons, we should as a matter of judicial comity and for the orderly development of law, pay due and proper attention to them. In this light we now propose to consider whether the relevant statutory provisions are similar and go on to consider the decisions in the Australian and New Zealand Courts and the Courts in the United Kingdom which have been canvassed before us and some others.

9. The relevant ss of the Australian Income Tax Assessment Act 1922–23 are as follows:

   23.	(1) In calculating the taxable income of a taxpayer the total assessable income derived by the taxpayer shall be taken as a basis, and from it shall be deducted— (a) all losses and outgoings (including ... expenses and not being in the nature of losses and outgoings of capital) actually incurred in gaining or producing the assessable income.
   25.	A deduction shall not, in any case, be made in respect of the following matters: .... (e) Money not wholly and exclusively laid out or expended for the production of assessable income.

10. Section 23(1) is the ordinary provision for arriving at the adjusted income and s 25 is the well-known double negative which states what may or may not be deducted in order to arrive at this adjusted income. The emphasis which is supplied shows that there is very little practical difference with our s 14(1) where the deduction to be allowable must be “wholly and exclusively incurred during that period by that person in the production of gross income from that source.”

11. Schedule D of the Land and Income Tax Act 1842 (16 & 17 Vict C 34), the Income Tax Act, 1918 (8 & 9 Geo 5, C40) and the Income Tax Act, 1952 (15 & 16 Geo 6 & 1 Eliz 2C 10) refers to “expenses, not being money wholly and exclusively laid out or expended for the purpose of the trade, profession (employment) or vocation.”

12. The weight of judicial opinion seems to be against any finding that there is much material difference between the statutory provisions of these three countries. We need to mention only a few cases. Rowntree & Co Ltd v Curtis, 8 TC 678 at page 696, held

    .... it is clear that in order to justify a deduction being made from what I will call gross profits, it has to be shown — and I think on this onus lies upon the subject — that what is sought to be deducted is money wholly and exclusively laid out or expended for the purposes of the trade — laid out, that is, for the purpose of earning the profits.

13. In Ronpibon Tin NL v Federal Commissioner of Taxation 78 CLR 47 at pages 56-7, the High Court of Australia ruled

    For expenditure to form an allowable deduction as an outgoing incurred in gaining or producing the assessable income it must be incidental and relevant to that end. The words ‘incurred in gaining or producing the assessable income’ mean in the course of gaining or producing such income.

14. To our mind, if one takes the first premise that the purpose of any trade is the profits reasonably to be derived therefrom, the conclusion is reached that “for the purpose of trade” is generally for “the production of the income”. Lord Davey in Strong & Co of Romsey Ltd v Woodifield 5 TC 215 said at page 220:

    ‘for the purpose of the trade’ appear to me to mean for the purpose of enabling a person to carry on and earn profits in the trade, etc.

15. For this reason, the High Court of Australia in construing the provisions of the Australian provisions called in aid English decisions on the application of the English provisions to various circumstances. In W Nevill & Co Ltd v Federal Commissioner of Taxation 56 CLR 290, the High Court of Australia, Latham CJ held at page 300:

    The payments in question were actually made bona fide in the course of business in the interests of the efficiency of the business. In my opinion, they fall within the terms of the proposition of Viscount Cave LC in British Insulated & Helsby Cables v Atherton [1926] AC 205 at page 212: ‘A sum of money expended, not of necessity and with a view to a direct and immediate benefit to the trade, but voluntarily and on the grounds of commercial expediency, and in order indirectly to facilitate the carrying on of the business, may not be expended wholly and exclusively for the purpose of the trade’. The words ‘for the purpose of the trade’ come from sch D of the English Income Tax Act, 1842. They do not appear in s 23(1)(a) of the Federal Act. The words in s 23(1)(a) are ‘in gaining or producing the assessable income’. The principle asserted in Viscount Cave’s statement is, however, equally applicable to a case arising under s 23(1)(a).

16. For ourselves, we would apply the same statement to a case under our s 14(1).

17. Our attention has however been drawn to Ward & Co Ltd v Commissioner of Taxes [1923] AC 145 on appeal from New Zealand where the Privy Council added the dictum that “the decision on the English Tax Acts, the language of which is different from that of the New Zealand Act, have no real bearing upon the question now under decision.” With respect, we would, following Lasala v Lasala, supra, follow the later case of Atherton, supra.

18. Lord MacMillan in Van Den Berghs Ltd v Clark 19 TC 390 was of the opinion that if the numerous decisions were examined and classified, they would be found to exhibit a satisfactory measure of consistency with Lord Cave’s principle of discrimination in Atherton, supra, which was formulated in these words at pages 213–4:

    .... When an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or advantage for the enduring benefit of a trade .... there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital.

19. We presume to add to Lord MacMillan’s list, particularly cases decided subsequently which have been canvassed before us.

    The following have been held to be capital disbursements and not deductible:

    • a sum provided to establish a pension fund for employees: British Insulated & Helsby Cables v Atherton, [1926] AC 205;

    • money paid for the cancellation of a contract to supply a ship which was to be used as one of the fleet in the business carried on:  The “Countess Warwick” Steamship Co v Ogg; 8 TC 652;

    • a lump sum paid to an employees’ benefit fund: Rowntree v Curtis, supra;

    • a sum paid by a coal merchant for the acquisition of the right to a number of current contracts to supply coal: John Smith & Son v Moore; [1921] 2 AC 13; 12 TC 266;

    • a payment by a colliery company as the price of being allowed to surrender unprofitable seams included in the leasehold: Mallett v Stavely Coal & Iron Co Ltd; [1928] 2 KB 405; 13 TC 772;

    • a sum paid for the release of its obligations under the licence: Dain v Auto Speedways Ltd; (1959) 38 TC 525;

    • damages for personal injuries to a visitor to an inn: Strong & Co of Romsey Ltd v Woodifield, supra; Godden v A Wilson’s Stores (Holdings) Ltd: 40 TC 161;

    • sums spent in an advertisement campaign against prohibition: Ward & Co Ltd v Commissioner of Taxes, supra.

    These other cases decide what are revenue expenses and deductible:

    • a sum paid by a company as the price of getting rid of a life director whose presence on the board was regarded as detrimental to the profitable conduct of the company’s business: Mitchell v BW Noble Ltd; [1927] 1 KB 719; 11 TC 372;

    • a payment made to disembarrass the company of an onerous agency agreement: Anglo-Persian Oil Co Ltd v Dale; 16 TC 253;

    • a sum paid to acquire a commanding interest in another company: John Moore v Stewarts & Lloyds Ltd; 6 TC 501;

    • arrangement for the abolition of the office of an additional managing director: W Nevill & Co Ltd v FCT; (1937) 56 CLR 290;

    • the annual subscription paid by the taxpayer to an association of persons and companies with mutual interests: FCT v Gordon (1929–30) 43 CLR 456;

    • a sum paid to agents redeeming further emoluments by arrangement: Anglo-Persian Oil Co Ltd v Dale, supra;

    • a sum paid to a director in consideration of the relinquishment of his rights under a service agreement: Wilson v Nicholson Sons & Daniels Ltd; 25 TC 473;

    • a sum paid to a managing director for the cancellation of their contracts: CIR v Patrick Thomson Ltd (in liquidation), 37 TC 145;

    • payment by a company to induce a director to withdraw a libel action against a third party: Scammell & Nephew Ltd v Rowles, 22 TC 479;

    • deductions for superintendence, weeding, etc. of a rubber estate: Vallambrosa Rubber Co Ltd v Farmer; 5 TC 529;

    • gratuity to a reporter on his retirement: Smith v Incorporated Council of Law Reporting; 6 TC 477;

    • a lump sum paid for the purchase, for the benefit of a former actuary and secretary, of an annuity because it merely anticipated payments which were or would have been in each year attributable to revenue: JP Hancock v General Reversionary & Investment Co 7 TC 358

20. We do not however propose to quote large extracts from these several cases which have been read to us as, in our opinion, it is sufficient to note what the cases decide in order to draw the line between the two types of payments.

21. The question whether a particular payment is capital or revenue is basically a question of fact and of course, every case must be considered on its own facts and no legal criterion for distinguishing between capital payments and income payments is readily available: Barr-Crombie & Co Ltd v Commissioner of Inland Revenue 26 TC 406 at page 411; but clearly where a company, in order to get rid of a contract which is of an onerous nature, or a servant whose continuance in service is undesirable in the company’s interest, makes a payment, in such circumstances it is properly to be treated as a revenue payment and a deductible expense. It seems to us that the case under appeal falls on the same side of the line as JP Hancock v General Reversionary & Investment Co, British Insulated and Anglo-Persian Oil Co Ltd v Dale, supra.

22. T is bound by contract to pay compensation for the loss in remuneration arising from the diminution in the total acreage of its holdings and has to pay this compensation in order to retain the services of the existing agents both in London and in Malaysia. The compensation can rightly be regarded as a sum paid to agents redeeming by arrangement their future emoluments which would have been, to repeat, in each year attributable to revenue.

23. We do not, with respect, agree with Revenue that the disappearance of the rubber estates that have been sold makes the compensation a capital payment. The true situation in our view is that there is no disappearance of any source of revenue; rather, the utilisation of the proceeds of sale for the conversion of the retained rubber lands into oil-palm estates results in the retention of the source of revenue from planting with, hopefully, increased revenue.

24. Godden v A Wilson’s Stores (Holdings) Ltd, supra, on which Revenue relied strongly, can be easily distinguished. In that case the estate was sold when the estate owner clearly wished to discontinue business entirely. The payment to the manager for the six months in lieu of the contractual notice to be given by either side, in the words of Upjohn LJ “cannot possibly be described as a payment for the purpose of trade. It was made because the company was not going on to trade, and they were left with the possibility of an action for damages against them for breaches of employment.”

25. Here, the taxpayer was continuing to trade and while the action for damages was always a possibility if it should refuse to abide with the terms of its agreements, the purpose was factually not to invite this action and to retain the services of the agents for the remaining acres of its estate holdings in the new role they had to play.

26. Revenue also suggested that within the limits of an appeal on a case stated, set out by Lord Radcliffe in Edwards v Bairstow & Harrison, [1956] AC 14 in a well-known passage at page 35 which has been considered in the judgments of this court, inter alia, in Comptroller-General of Inland Revenue, Malaysia v T [1970] 2 MLJ 35, 38 at page 24, we should not disturb a finding of fact by the Special Commissioners. The short answer is that the finding was not one of fact but as shown earlier, a conclusion of law upon admitted facts, as in Godden v A Wilson’s Stores (Holdings) Ltd itself and in such a situation, the High Court was correct in overruling the decision of the Special Commissioners if their conclusion was one that was wrong in law.

27. The appeal is dismissed with costs.

Cases

Khalid Panjang v Public Prosecutor (No 2) [1964] MLJ 108; Lasala v Lasala [1979] 2 All ER 1146; Rowntree & Co Ltd v Curtis 8 TC 678; Ronpibon Tin NL v Federal Commissioner of Taxation 78 CLR 47; Strong & Co of Romsey Ltd v Woodifield 5 TC 215; W Nevill & Co Ltd v Federal Commissioner of Taxation 56 CLR 290; Ward & Co Ltd v Commissioner of Taxes [1923] AC 145; Van Den Berghs v Clark 19 TC 390; British Insulated & Helsby Cables v Atherton [1926] AC 205; The Countess Warwick Steamship Co v Ogg 8 TC 652; John Smith & Son v Moore [1921] 2 AC 13; 12 TC 266; Mallett v Stavely Coal & Iron Co Ltd [1928] 2 KB 405; 13 TC 772; Dain v Auto Speedways Ltd (1959) 38 TC 525; Godden v A Wilson’s Stores (Holdings) Ltd 40 TC 161; Mitchell v BW Noble Ltd [1927] 1 KB 719; 11 TC 372; Anglo-Persian Oil Co v Dale 16 TC 253; John Moore v Stewarts & Lloyds Ltd 6 TC 501; W Nevill & Co Ltd v FCT (1937) 56 CLR 290; FCT v Gordon (1929-30) 43 CLR 456; Wilson v Nicholson Sons and Daniels Ltd 25 TC 473; CIR v Patrick Thomson Ltd (in liquidation) 37 TC 145; Seammell & Nephew Ltd v Rowles 22 TC 479; Vallambrosa Rubber Co Ltd v Farmer 5 TC 529; Smith v Incorporated Council of Law Reporting 6 TC 447; JP Hancock v General Reversionary & Investment Co 7 TC 358; Barr-Crombie & Co Ltd v Commissioners of Inland Revenue 26 TC 406; Edwards v Bairstow & Harrison [1956] AC 14; Comptroller-General of Inland Revenue v T [1970] 2 MLJ 35

Legislations

Income Tax Act 1964: s.14

Representations

Mokhtar Sidin (Senior Federal Counsel) (Zulkefli Ahmad Makinuddin, Federal Counsel with him) for the respondents.

Peter Mooney for the respondent.