TH Ltd

- vs -

Comptroller of Income Tax

Judgment

F.A. Chua J

1. This appeal arises from a Notice of Assessment dated 30 June 1976, for Year of Assessment 1975, against which assessment the appellant company (the company) appealed to the Income Tax Board of Review (the Board) which dismissed the appeal with costs. The company now appeals to this court.

2. The company was incorporated on 15 April 1970, as a public company, and carries on business as a housing developer. Since its incorporation the company purchased various parcels of land, some of which were developed while the others were held in its ‘land bank’. As a consequence of a slump in the property market prevailing in Singapore around 1974, several development projects were halted in mid-stream and were delayed for about five years.

3. In its accounts pertaining to its various development projects the company has adopted the ‘completed contract’ cost accounting system, whereby profit is recognised only when the contract or project is completed. Under this system, expenditure incurred in a development together with receipts from booking fees and progress payments are accumulated during the course of the project and profit is not reported until the project is substantially completed.

4. Each project is treated separately and individual cost records are kept for each project. Development expenses are then capitalised in the balance sheet and are accumulated and carried forward from year to year until the project is completed. Upon completion all the expenses attributable to a particular project are deducted from proceeds of sale, with net profits assessed to tax.

5. For the accounting years 1970 to 1973 property tax incurred annually in respect of properties held by the company was ‘capitalised’ in the balance sheet as part of the overall development expenditure and did not appear in the profit and loss accounts.

6. However, for the financial year 1974, payments of property tax were for the first time treated as an item of expenditure and charged into the debit side of the profit and loss account. Property tax amounting to $253,980 was claimed as an item of allowable expenditure under s 14 of the Income Tax Act (Cap 141) (the Act) against income of the company.

7. This change of treatment of property tax payment was not allowed by the Comptroller of Income Tax (the Comptroller) on the grounds that:

   1. the property tax paid was not in the production of income assessable to tax for Year of Assessment, 1975;

   2. the property tax had been paid in respect of properties that were being developed and should therefore form part of the costs of development;

   3. as the development projects were dealt with on a project basis, all direct expenses incurred in connection with each particular project had to be capitalised and allowed against the sale proceeds received on the completion of the project.

   The main point of issue is ground C of the Comptroller.

8. The dispute in this appeal is concerned not with the question whether the property tax is an allowable deduction per se but rather with the question of when the property tax should be allowed as a deduction.

9. The company contends that the property tax of $253,980 paid in 1974 in respect of its properties is deductible in the Year of Assessment, 1975. The Comptroller, on the other hand, does not dispute that property tax is a revenue expense that is deductible under the Act. He is disputing only the time when the property tax should be deducted. It is the Comptroller’s contention that on the basis of the ‘completed contract’ method of accounting adopted by the taxpayer, the property tax in respect of each development project is deductible only upon the completion of that development project.

10. The company is charged to tax under s 10(1)(a) of the Act, which provides, inter alia, that ‘income tax shall be payable for each year of assessment upon the income of any person in respect of — gains or profits from any trade, business, profession or vocation ....' The resolution of the dispute in the present appeal necessitates an examination of the proper method of computing the company’s profits or gains for the Year of Assessment, 1975. The Act is silent as to the proper methods of computation.

11. Let us look at the reasons why the company changed its previous treatment of property tax.

    REASONS FOR CHANGE

12. Various reasons were given for the change. The main one was that because of the slump in the property market in 1974 doubts were cast about market conditions and the future viability of various projects which were halted. Development costs would thus be increased by the addition of property tax although no development work was being carried out. The value of the stock-in-trade would thus be overstated.

13. Another reason was that the company was advised by its tax advisers that it did not have to ‘capitalise’ property tax because such tax is in no way related to the acquisition of a capital asset, nor did it enhance the value of the properties. Furthermore, since property tax was a revenue expense incurred in the maintenance of the company’s stock-in-trade, it should not be capitalised.

14. Mr. Anthony John Coomber, a practising chartered accountant with a well-established firm of accountants in Singapore, said in evidence that he had seen the accounts of the company for 1974; that from his perusal, although it did not show any accounting policy used, it appeared to have used completed contracts accounting basis; that it was the most conservative method of computing contracts covering more than one year; and that revenue was recognised when contract was completed or substantially completed.

15. He further said that from the perusal of the profit & loss account it would appear the property tax had been expensed under profit and loss account. He stressed that such a treatment of property tax was not inconsistent with commercial accounting practice and that it was not inconsistent with completed contract accounting basis. He said that property tax should never be capitalised as it did nothing to enhance the value of the property concerned and was paid solely in the period it became payable and certainly produced no benefit lasting beyond such period.

16. He further said that comparing the accounts for 1974 with previous years, the change in the treatment was not wrong, not by itself but there should have been a correction shown of previous years wrong. This had not been done.

17. He said that the ‘Statement of Standard Accounting Practice No 9’ (SSAP 9) (exh 1) and ‘Exposure Draft No 12 of the International Accounting Standard’ (exh 2) supported his views that the properties of the company should be treated as trading stocks.

18. SSAP 9 was issued by the Institute of Chartered Accountants in England and Wales in May 1975, and exh 2 was issued in December 1977. He expressed the view that in view of the standards set out therein, it would now be incorrect to defer property tax, but however, he said in cross-examination that the only instance where he would allow a client to defer property tax was where it was formed only to develop one property.

19. Mr. Yip Thin Peng gave evidence on behalf of the Comptroller. He is qualified as a certified accountant and is the Senior Assessment Officer in the Inland Revenue department. He has been in the department for 16 years and in the course of his work he had had experience in dealing with files of property developers.

20. He testified that two methods were normally used to reflect profits —

    1. by completed contracts method and

    2. by the percentage of completion method.

21. Under the first method costs of development were accumulated in respect of each project. When completed, profits would be brought into the Profit & Loss Account and assessed for tax. Expenses should be deferred for matching revenue with expenses.

22. Under the second method a company would take account of the progress of development. It would bring in part of the profits earned over the years during which the contracts run. Part of the profits would be assessed to tax.

23. He said that most property development companies in Singapore adopted the completed contracts method. In so doing, they have treated property tax as part of the costs of development so as to be able to arrive at the true profits of that project and that the company has adopted the completed contracts method.

24. Since property tax was suffered by the company in maintaining its stock-in-trade, a developer who developed land would take into account the amount of property tax paid in arriving at the cost of each unit sold. In his view the ‘practice of capitalising property tax is in accordance with normal accounting practice.’

25. He added that a development company was assessed ‘on a project to project basis as it is completed, not as a whole’, although it was taxed from its whole business.

26. He said that there was nothing in the accounts of the company to explain the change in the accounting policy. He expressed the view that the change was made to gain a tax savings of over $100,000, and said that 1974 was the first year the company reported profits.

27. He expressed the view that the practice of housing developers in ‘capitalising’ property tax was not inconsistent with standards set out in SSAP 9 and Exposure Draft 12 (exh 2) and that it was not wrong for a company to change its practice to mitigate tax loss if it conformed to current accounting practice.

28. The Board in their grounds of decision said:

    Considering the evidence before us and the submission of counsel, we are of the view that the accumulation of property tax payments by the company pending the completion of the projects in respect of which they are paid, is not inconsistent with ordinary principles of commercial accounting where the ‘completed contract cost’ method of accounting is adopted. We do not accept Mr. Coomber’s opinion that such a treatment would only be proper in respect of the accounts of single-development companies.

29. The company contends that the Board erred in law and on the facts in holding that the onus was upon the company to satisfy the Board that the company’s former treatment of property tax was wrong and had to be changed. It says that the real test was whether its new treatment of property tax payments was in accordance with ‘ordinary principles of commercial accountancy.’

30. The Board was of the view that of primary importance was the question whether the company was wrong in its previous treatment of property tax payments. The Board found that

    it had been clearly established that if a particular method of accounting has been applied consistently in the past it should not be changed, unless good reason is shown for that change (see Duple Motor Bodies Ltd v Ostime, cited with approval in BSC Footwear Ltd v Ridgway). The onus of proving that there was good reason for the change falls on the person seeking it.

31. Counsel for the company contends that the Board has applied the wrong test. He submits that there are two tests applicable —

    1. whether the profits of the company in the year in question were arrived at in accordance with the ordinary principles of commercial accountancy and

    2. whether the deduction of property tax violates any tax statute.

    Counsel says that he does not discard entirely this so-called ‘consistency principle’ but what he submits is that in the present case the consistency principle is inapplicable for the reasons that there was no change in the company’s method of accounting but merely a change in the treatment of one item namely property tax. He concedes that where there is a change in method the consistency principle is applicable and argues that when it becomes applicable it is not a third test, it is merely part and parcel of the first test namely whether the deduction is in accordance with the ordinary principles of commercial accountancy and that consistency is one of the principles to be observed in commercial accountancy. Counsel says that if it is found that there is a change in method then the company says that it has good reasons.

32. Under s 80(3) of the Act a taxpayer who disputes the Comptroller’s assessment must prove that the assessment is excessive. The law as regards the taxpayer’s onus of proof in an income tax appeal was summarised succinctly by the Privy Council in Minister of National Revenue v Anaconda American Brass Ltd [1956] 1 All ER 20 wherein Viscount Simonds stated (p 22):

    The question, then, is whether the Minister correctly assessed the annual net profit or gain of the company for 1947 or, to state the question more accurately, whether the company has established that his assessment was incorrect.

33. The onus is therefore on the company to prove that the Comptroller’s assessment is wrong. In a dispute where the ascertainment of the taxpayer’s income for any year involves the application of computing methods or practices of accounting, the taxpayer can only discharge his onus under s 80(3) by proving that the accounting practice on which the Comptroller has based his assessment is wrong. In my view it is not sufficient for the taxpayer merely to prove that the taxpayer’s practice is also correct. In this case the company must go further and prove that its former method of accumulating property tax in respect of each project until the completion of the particular housing project was wrong and should be changed.

34. The Board is quite correct that if a particular method of accounting has been applied consistently in the past it should not be changed unless good reason is shown for that change. The principle of consistency established by Lord Reid in Duple Motor Bodies Ltd v Ostime should be observed. Lord Reid said (p 572):

    One thing clearly emerges as approved by the accountancy profession — whatever method is followed, it must be applied consistently. I accept that. So the real question is what method best fits the circumstances of a particular business. And if a method has been applied consistently in the past, then it seems to follow that it should not be changed unless there is good reason for the change sufficient to outweigh any difficulties in the transitional year.

35. The principle of consistency was approved and applied in the later House of Lords case of BSC Footwear Ltd v Ridgway. In that case the taxpayer had applied a particular method of valuing stock-in- trade consistently over a number of years. The Crown with appreciation of it had accepted it, but in the year of assessment under dispute the Crown sought to substitute a new method of valuation. It was held that the onus was on the party seeking the change in the accountancy method to justify the change on the ground that the old method was wrong. It was conceded by counsel for the Crown that in such a situation the Crown could only succeed if it could be proved that the method that had been consistently applied was wrong.

36. In the present case the method of accumulating property tax in the balance sheet had been applied consistently by the company since its incorporation in 1970. It is the company who is seeking a change in the accounting treatment of property tax, and, therefore, it is the company which must prove that the former method was wrong. The Board had directed itself correctly in law in holding that the question of primary importance was whether the company was wrong in its previous treatment of property tax payments. The company’s contention that the real test was whether its new treatment of property tax payments in the year in question was in accordance with ordinary principles of commercial accountancy is misconceived.

37. The Board also held that

    while we agree with the appellants that what they seek is not a change in method of accounting but merely a change in treatment of an item of expense, they must nevertheless show good reason for this change, unless of course the former treatment is wrong.

38. The company contends that this ruling of the Board is wrong in that the principle of consistency is applicable only where there has been a change in method and once the Board has found that there had been no change in method but merely in the treatment of an item of expense the company was not required to show good reason for the change.

39. In the Duple Motor Bodies case Lord Reid was using the word ‘method’ to describe the process by which the cost of work-in-progress was to be valued. That process involved the determination of whether items of overhead expenditure could be included in the cost. The taxpayer was not changing from one method of valuation to another entirely different method, such as from the ‘cost or market value method’ to the ‘Base Stock Method’. The taxpayer had all along used the cost or market value method. What was in dispute in that case was whether certain items of overhead expenditure should be included in the cost of work-in-progress. Similarly in the present case we are dealing with the determination of the cost of work-in-progress and stock-in-trade to be accumulated in the balance sheet. The issue here is whether an expense such as property tax should be included in the cost of the work-in-progress and stock-in-trade. The problem in these two cases is similar and the dictum of Lord Reid is applicable to the present case.

40. The company says that the Board erred in law and fact in failing to find that the company had shown good reasons for the change and that the Board’s finding and decision were against the weight of evidence.

41. The main ground of objection is that the Board was wrong in that it failed to give reasons for the rejection of the evidence of its expert witness, Mr. Coomber, in preference for the evidence of the Comptroller’s expert witness, Mr. Yip.

42. The Board was entitled in law to reject the accountancy evidence given by Mr. Coomber. It is an established principle that the ascertainment of a taxpayer’s income for tax purposes is primarily a question of law for the sole decision of the court. In determining the proper tax treatment of a transaction the court may have recourse to the evidence of accountants. But the evidence of accountants, in itself, can never be conclusive on a question of law. (See Heather v P-E Consulting Group Ltd 48 TC 293 at pp 322 and 323.)

43. To succeed in this appeal the company must prove that the Comptroller’s assessment is incorrect. The Comptroller’s assessment is based on the company’s previous treatment of accumulating the property tax payments. So to establish that the Comptroller’s assessment is incorrect the company has to prove that its previous method of accumulating property tax was wrong. The primary issue is, therefore, as correctly stated by the Board, whether the company was wrong in its previous treatment of property tax payments.

44. The primary issue is a question of law for the Board alone to decide. In determining this question of law the Board has to look at all the facts, and consider the accountancy evidence. Lord Denning in Heather v P-E Consulting Group Ltd said (p 322):

    The courts have always been advised greatly by the evidence of accountants. Their practice should be given due weight; but the courts have never regarded themselves as being bound by it. It would be wrong to do so.

    And Lord Buckley in the same case stated (p 323):

    Skilled accountants may well be much better qualified than most judges to formulate and explain such principle; but nevertheless in every case of this kind it is the judge and not the witness who must decide whether a witness’s evidence in fact exemplifies sound accountancy principles. A judge may, as Lord Wilberforce did in Strick v Regent Oil Co Ltd 43 TC 1, reject the accountant’s evidence, or he may accept it.

45. Having heard and seen the witnesses the Board was entitled to accept the evidence of one accountant in preference to the evidence of the others. I am unable to say that the Board was wrong in preferring the evidence of Mr. Yip to that of Mr. Coomber and the other witnesses for the company.

46. In my view the Board was justified in deciding that ‘considering the evidence before us and the submissions of counsel, we are of the view that the accumulation of property tax payments by the company pending the completion of the projects in respect of which they are paid, is not inconsistent with ordinary principles of commercial accounting where the ‘completed contract cost’ method of accounting is adopted.’

47. The company contends that the Board erred in law and fact in failing to find that the company had shown good reasons for the change in its treatment of property tax.

48. The reasons brought forward by the company before the Board did not justify a change in its treatment of property tax and the Board was correct in holding that the company had failed to discharge the onus that its former treatment of property tax was wrong and must be changed.

49. In the result this appeal fails and is dismissed with costs.

Cases

BSC Footwear v Ridgway (1971) 47 TC 495; Duple Motor Bodies v Ostime [1961] 2 All ER 167; 39 TC 537; Heather v PE Consulting Group 48 TC 293; Minister of National Revenue v Anaconda American Brass [1956] 1 All ER 20.

Legislations

Income Tax Act (Cap 141): s.10, s..14, s.80

Authors and other references

Statement of Standard Accounting Practice No 9

Exposure Draft No 12 of the International Accounting Standard

Representations

Andrew Ang (Lee & Lee) for the appellant.

L.E. Loo (Inland Revenue) for respondent.