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[2000] Part 4 Case 10 [HCM] |
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www.ipsofactoJ.com/highcourt/index.htm
[2000] Part 4 Case 10 [HCM] |
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HIGH COURT OF MALAYA |
Daya Leasing Sdn Bhd
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vs -
The
Director
General of Inland Revenue
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Coram KC VOHRAH J |
17
JANUARY 2000 |
Judgment
KC
Vohrah, J
The
appellant is in the business of providing financing for business equipment
and the types of financing include leasing, hire purchase and factoring.
There are common expenses incurred in running the leasing, hire purchase and
factoring business. In 1986 the Income Tax (Leasing) Regulations were
introduced and from the year of assessment 1986 and subsequent years, income
derived from leasing business had to be separated from income derived from
non-leasing business.
There
is no specific provision in the Income Tax Act 1967 or the Regulations made
thereunder providing for the formula to be used for calculating what
proportion of common expenses incurred in a business of financing (which
comprises lease financing activity on the one hand and on the other hand
non-leasing financing activities) should be attributable to the lease
financing activity. The respondent resorted to a formula which the appellant
disputed. The appellant advanced its own formula. The majority of the
Special Commissioners ruled that the formula adopted by the respondent was
correct. The minority view was that neither formula was correct and opted
for a different formula. Thus this case stated.
With the coming into force of the Income Tax Leasing Regulations 1986 (the 1986 Regulations) made under s 36 of the Income Tax Act 1967 (the Act), the gross income, for income tax purposes, of a person from lease financing
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shall be deemed as a separate and distinct business source from other activities of that person. [Regulation 2] |
The
appellant is involved in the business of offering financing through hire
purchase financing, factoring financing and lease financing. In essence the
appellant carries on only one business and there are expenses incurred in
the running of the business which are common to all the three types of
business activities of the appellant. There is no dispute that it is not
possible for the appellant from the common expenses incurred to separate and
calculate the exact amount for each business activity.
Tax
has to be paid on the gross income after, inter alia, allowing
deductions on all outgoings and expenses wholly and exclusively incurred in
the production of gross income in accordance with s 33(1) of the Act.
With
the coming into force of the 1986 Regulations treating the gross income of a
person from lease financing as a separate and distinct source from other
activities of that person, such a person would need to know what the gross
income for lease financing for the year of assessment came to and he would
have to know what the outgoings and expenses were for lease financing in
order to adjust the gross income for tax purposes.
Thus the problem. The expenses that are common for the running of the appellant's business of lease financing and hire purchase financing and factoring financing cannot in reality be separated. Both the appellant and the respondent, however, agree that as between lease financing as one portfolio (the leasing portfolio) and hire purchase and factoring financing as the other portfolio (the non-leasing portfolio), there should be a formula for ascertaining what proportion of the common expenses goes to the leasing portfolio and what to the non-leasing portfolio. For our purposes we need only deal with the accepted formula for the leasing portfolio-
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There
is, however, disagreement as what the elements which make up the income from
the leasing portfolio should be.
It
is not disputed that apart from some incidental income which was included in
the gross income of the two portfolios, the gross income from the leasing
portfolio was essentially made up of lease rentals which comprised the
elements of principal and interest while the gross income from the
non-leasing portfolio comprised the element of interest.
The
appellant in urging its specific formula to be adopted argue that it is the
element of interest earned in the leasing portfolio that constitutes the
income of the leasing portfolio while the respondent takes the stand for his
specific formula that the elements of principal and interest make up such
income.
The
appellant was accordingly assessed with the respondent using his formula for
computing the proportion of the common expenses which should be attributable
to the leasing portfolio.
The
appellant in its appeal contended before the Special Commissioners that the
common expenses were erroneously apportioned by the respondent between the
two portfolios in a manner not specifically provided by law. The appellant
contended instead that the appellant's formula is a just and reasonable
method for the apportionment.
It
will be noted that both the appellant and the respondent and all the
Commissioners are mindful-there is no need for witnesses to come to testify
to it - that neither the Act nor any Regulation made thereunder has made a
specific provision for calculating the proportion of common expenses which
should be attributed to a leasing portfolio after the introduction of the
1986 Regulations.
THE
MAJORITY OPINION
While
the Special Commissioners agree on the general formula for calculating the
proportion of common expenses attributable to the leasing portfolio, the
majority disagree with the appellant's specific formula of only taking into
account the interest element (and not the principal element) when
calculating the gross income from the leasing portfolio.
The majority of the Special Commissioners first proceeded to examine what they termed general principles regarding the law of taxation. They stated that the provisions of the Act must be strictly applied in the computation of profits or gains of a person chargeable to tax and that the general scheme of the Act is that income tax is chargeable on the income earned in the relevant basis year. They went on to examine s 5 of the Act which is set out below -
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5. |
Subject to this Act, the chargeable income of a person upon which tax is chargeable for a year of assessment shall be ascertained in the following manner: |
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(a) |
first, the basis period for each of his sources for that year shall be ascertained in accordance with Chapter 2 of Part III; |
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(b) |
next, his gross income from each source for the basis period for that year shall be ascertained in accordance with Chapter 3 of that Part; |
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(c) |
next, his adjusted income from each source (or, in the case of a source consisting of a business, his adjusted income or adjusted loss from the source) for the basis period for that year shall be ascertained in accordance with Chapter 4 of that Part; |
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(d) |
next, his statutory income from each source for that year shall be ascertained in accordance with Chapter 5 of that Part; |
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(e) |
next, his aggregate income for that year and his total income for that year shall be ascertained in accordance with Chapter 6 of that Part; and |
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(f) |
next, his chargeable income for that year shall be ascertained in accordance with Chapter 7 of that Part: ... |
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The
view was that it was clear from s 5 of the Act that the adjusted income from
a business source (or any other source) is gross income less all allowable
deductions permitted by the Act.
They next stated that the deduction of expenses from gross income derived from a source is governed by the general provisions of s 33(1) of the Act which reads -
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33. |
(1) |
Subject to this Act, the adjusted income of a person from a source for the basis period for a year of assessment shall be an amount ascertained by deducting from the gross income of that person from that source for that period all outgoings and expenses wholly and exclusively incurred during that period by that person in the production of gross income from that source. [emphasis theirs] |
They
then observed that "in order to arrive at adjusted income one has to
deduct from the gross income all outgoings and expenses wholly and
exclusively incurred in the production of gross income" and
"emphasised" that therefore the gross income is the one that
matters.
They then made an inference thus, "since s 33(1) talks about gross income it is only natural that the common expenses must be apportioned between the leasing and the non-leasing portfolios using gross income." They went on to say to do otherwise would be against the provisions of s 33(1) of the Act. Turning to leasing portfolios, they pointed out that "gross income" is clearly defined in the 1986 Regulations and that Regulation 3 reads -
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3. |
Gross income of a lessor |
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The
total sum of rentals of a lease term receivable in respect of a
lease shall be deemed to accrue evenly throughout the period of
such lease term and the gross income of the lessor in respect of
that lease for the basis period for a year of assessment shall be a
portion of the total sum receivable for the lease term, being a
portion which bears the same proportion to that total sum receivable
as the number of days in the basis period for that year assessment
that falls within the lease term bears to the total number of days
of the lease term: Provided that the full rentals receivable in the basis period for a year of assessment may be treated as the gross income of the lessor for the basis period for that year of assessment where the Director General considers such treatment to be just and reasonable in the circumstances. [emphasis theirs] |
They were of the view that from this that it is clear that "gross income" of leasing portfolios comprises total rentals which is made up of principal plus interest and that on the other hand, gross income of non-leasing portfolios, it is only the interest as provided for under s 24(5)(a) of the Act which states -
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(a) |
The interest shall be treated as gross income of the relevant person from the business for the relevant period if the business is carried on at any time in the relevant period; and... |
They
were of the view that, therefore, a different interpretation cannot be given
for "gross income" when the law clearly provides what is gross
income for leasing activities and to do otherwise would be to violate the
law.
They
concluded that as such the respondent's method does have a legal basis i.e.
since s 33(1) talks about "gross income" then the apportionment of
common expenses between leasing and non-leasing portfolios must be related
to gross income for both and not gross income for non-leasing and
"interest income" only for leasing portfolios when the law gives a
clear definition of gross income for leasing portfolios. They noted that the
1986 Regulations were introduced later (the Act came into force in 1967).
They were of the view that the legislators must have had a basis for
distinguishing the income of leasing activities from the income of
non-leasing activities. They observed that but for Regulation 3 of the 1986
Regulations, only the interest element would have constituted the gross
income of Ieasing business and in that respect, when capital allowance is
given on the asset leased, it would appear that the cost of the asset would
be allowed twice. They were of the view that therefore that Regulation 3 was
drafted with the objective of rectifying this situation.
They
rejected the method of calculation used by the appellant on the ground it
has no legal basis and that it was advanced merely to serve the benefit of
the appellant and in view of what Lord Guest stated in Ostime (Inspector
of Taxes) v Duple Motors Bodies Ltd [1961] 1 All ER 167 that the
taxpayer cannot decide on what principle his income is to be assessed, the
appellant's method cannot be applicable.
They
were of the considered opinion that the method applied by the respondent is
not excessive and erroneous and is in line with the provisions of the tax
laws.
The
onus of proving that an assessment against which an appeal is made is
excessive or erroneous shall be on the appellant (see paragraph 13 of
Schedule 5 to the Act). The appellant contends that the respondent's formula
which the majority of the Commissioners had accepted has no basis in law as
it was not provided in the Act or Regulations made thereunder and that
reliance on s 33(1) which provides for determination of "adjusted
income" is misconceived as it provides for the determination of
adjusted income from a single source by deducting from the gross income all
outgoings and expenses wholly and exclusively incurred in the production of
that gross income and it does not provide the manner of apportioning
expenses between two or more sources of gross income.
One
does not need evidence from witnesses to prove the contention. It is clear
from a reading of that provision and I agree with the minority view of the
Special Commissioners that the contention of the appellant that s 33(1) of
the Act does not contain any provision for apportioning common expenses
between more than one source of income is correct.
The
majority view pointed out to the use of the expression "gross
income" in s 33(1) in the parent Act and turned to subsidiary
legislation, the 1986 Regulations, Regulation 3 thereof, which they say
defines what "gross income" is. And that clearly cannot be correct
when it has not been shown what the nexus between them is. There is no
nexus.
Before that is gone into further, it is necessary to point out that the 1986 Regulations were made by the Director-General under enabling provision s 36 which reads,
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36. |
Power to direct special treatment in the computation of business income in certain cases |
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(1) |
Notwithstanding any other provision of this Part, where the Director-General is satisfied that there is a need for some treatment in computing- |
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(a) |
the gross income from a business with respect to - |
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(i) |
a hire-purchase transaction; |
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(ii) |
a transaction under which a debt is payable by instalments; |
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(iii) |
a lease transaction in respect of moveable property, or |
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(iv) |
any other transaction involving a debt or stock in trade; and |
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(b) |
the
adjusted income from the business, he
may give directions and formulate regulations to be published in the
Gazette for special treatment with respect to any such
transaction, either in relation to a particular business or in
relation to any business having any such transaction: Provided that no such directions and regulations shall have effect in relation to a business for any year of assessment with respect to which an assessment wholly or partly relating to income from that business has become final and conclusive or is the subject of an appeal which has been sent forward to the Special Commissioners. |
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(2) |
Any direction given under subsection (1) with respect to the gross income and adjusted income from a business or businesses may- |
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(a) |
provide that the gross income to which it relates (or any part thereof) shall be taken to be gross income for such basis period or periods for such year or years of assessment with respect to that business or those businesses as may be specified in the direction; |
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(b) |
provide for special treatment with respect to the ascertainment of the adjusted income from that business or those businesses for the basis period or periods for any year or years of assessment. [emphasis added] |
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Section 36, it will be observed, makes clear reference to special treatment in computing both "the gross income ... and the adjusted income" because it is expected that any special treatment in computing the gross income has, perforce, to provide for some special treatment in computing the adjusted income as well. In fact, it was pointed out by the minority view that subsection (2)(b) specifically empowers the respondent to provide for special treatment with respect to the ascertainment of the adjusted income, envisaging the necessity for such special treatment to complement any special treatment in computing the corresponding gross income.
However, the 1986 Regulations, while requiring the gross income from leasing transactions to be treated as being derived from a separate business source, did not at the same time also provide for corresponding special treatment in ascertaining the adjusted income, particularly the manner of apportioning common expenses to the leasing activity now that it is deemed a separate business source.
Thus
there is neither a provision in the Act nor one in the 1986 Regulations (and
it has not been shown there is a provision in other Regulations) prescribing
the manner for the apportionment of common expenses in respect of different
income sources. Quite clearly therefore there is no legal basis for the
respondent to use his method to apportion the common expenses in this case.
The majority view had relied, as pointed out, in Ostime (Inspector of Taxes) to say that the taxpayer cannot decide on what principle his income is to be assessed and therefore the appellant's method of calculation should be rejected. But I think what was missed is that any assessments must be done in accordance with the provisions of the Income Tax Act whether the assessment is by the tax payer or by Inland Revenue. This was what Lord Guest said,
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It can never rest with the taxpayer to decide on what principle his income is to be assessed for tax purposes. The directors' decision can never be decisive of the matter for income tax purposes. The assessment in addition to being consistent with normal accounting practice must be made in accordance with the provisions of the Income Tax Act. [emphasis added] |
Having said that I must add that quite clearly and obviously that the appellant's formula must also be rejected for it not having been made in accordance with the provisions of the Income Tax Act.
The words of Rowlatt J in Cape Brandy Syndicate v IRC 12 TC 358 at 366,
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Now of course it is said and urged by Sir William Finlay that in a taxing Act clear words are necessary to tax the subject. But it is often endeavoured to give to that maxim a wide and fanciful construction. It does not mean that the words are to be unduly restricted against the Crown or that there is to be any discrimination against the Crown in such Acts. lt means this, l think: it means that in taxation you have to look simply at what is clearly said. There is no room for any intendment, there is no equity about a tax: there is no presumption as to a tax; you imply nothing, but you look fairly at what is said and what is said clearly and that is the tax. [emphasis added] |
The
conclusion is clear. There is nothing in the Act or the Regulations
made thereunder to authorise the use of the respondent's formula in
ascertaining the adjusted income from each of the appellant's sources of
income. The relevant tax assessments for the years 1987 to 1992 are
erroneous to the extent that the formula of the respondent was used to
determine the appellant's adjusted income.
As
was stated earlier the appellant's formula cannot also be resorted to.
What
then should be done in the absence of a prescribed procedure? The minority
view merits consideration. The view is that in the absence of any statutory
procedure, the just and reasonable solution is to rely on the accepted
principle that revenue expenditure is deductible only against income
revenue. Since there should not be allowed any deduction of expenses against
the element of principal of the lease rentals, which is capital in nature,
it follows that no portion of the deductible common expenses could have been
expended in the production of that part of the gross income represented by
the element of principal. Thus the element of principal should not be taken
into account for the purpose of apportioning the "non-capital"
common expenses, which should be apportioned between the appellant's two
business portfolios according to the ratio between only the
"non-capital" income from each of the two portfolios.
This view of Special Commissioner Toong Chooi Poh is elaborated in paragraph 8 of the minority judgment where a pertinent issue was underlined - what is the crux of the dispute? The view is this-
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(8) |
There is no dispute over the quantum of the common expenses or the quantum of the gross income from each of the appellant's two sources for the relevant years of assessment. It is also an irrefutable fact that the appellant was effectively taxed in full on the lease rentals comprising the principal element as well as the interest element... The dispute centred on the method of apportioning the common expenses. To my mind, the crux of the matter lies in the question whether any portion of the common expenses was expended in the production of that part of the gross income represented by the principal element of the lease rentals. The respondent contended that the common expenses were expended in the production of the entire gross income in the form of lease rentals, including that part represented by the principal element. On the other hand, the appellant contended that no portion of the common expenses was expended in the production of that part of the gross income represented by the principal element of the lease rentals. |
The minority view then touched on the underlying rationale for the deductibility of expenses under s 33(1) thus,
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It was submitted that the underlying rationale for deductibility of expenses under section 33(1) allowed for the deduction of revenue expenditure against only revenue income and thus precluded the deduction of any portion of the common expenses against the principal element of the lease rentals which is essentially capital in nature. |
The
minority view then set out what one of the respondent witness had said. RW1
had testified that the Inland Revenue had recognised the assets leased out
as fixed assets were due and that the same assets could be leased out to the
same lessee or to any other lessee on the expiry of the lease period.
The minority view then continued,
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It
is a fact that the appellant was given capital allowances in respect
of the leased assets and there should therefore not also be allowed
any deduction of expenses against the capital cost repayments of the
leased assets which made up the principal element of the lease
rentals. Since it is an agreed fact that the whole of the common
expenses is deductible under section 33(1), the only logical
conclusion to be drawn is that the common expenses could not have
included expenditure incurred in the production of gross income
represented by the principal element of the lease rentals because it
is obvious that any such expenditure of a capital nature would have
been expressly disallowed as a deduction by s 39(1) of the Act and
therefore could not be part of the deductible common expenses. In
other words, the common expenses were expended in the production of
gross income represented by only the interest element of the lease
rentals and incidental income in the case of the leasing portfolio,
and by the interest and incidental income in the case of the
non-leasing portfolio. Thus, in my considered opinion, the method of
apportionment which is just and reasonable under the circumstances
is neither the respondent's method nor the appellant's method, but
instead should be based on the ratio between:
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Although
there is no statutory provision for the method of apportioning the common
expenses between two or more sources of gross income, the formula advanced
by the minority view is not at cross purposes with provisions of the Act. A
tax has to be collected and although there is no express provision how it
should be calculated, one has to go back to First principles. The formula
rests on an accepted principle that revenue expenditure is deductible
against income revenue. It is also a just and reasonable solution to a
problem which has not been addressed by the respondent under powers which he
has under s 36 of the Act. In contrast it has not been shown that either the
respondent's or the appellant's formula is in accordance with accepted
principles of taxation.
The functions and powers of the court with regard to tax appeal cases was laid out in the case of Lower Perak Co-operative Housing Society v KPHDN [1994] 3 AMR 1735 where the Court adopted the principles in the case of Edwards v Bairstow & Harrison [1956] AC 14 -
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If the case contains anything ex facie which is bad in law and which bears upon the determination, it is, obviously, erroneous in point of law. But, without any such misconception appearing ex facie, it may be that the facts found are such that no person acting judicially and properly instructed as to the relevant law could have come to the determination under appeal. In those circumstances, too, the court must intervene. It has no option but to assume that there has been some misconception of the law and that this has been responsible for the determination has been error in point of law. I do not think it matters whether this state of affairs is described as one in which there is no evidence is inconsistent with and contradictory of the determination, or as one in which the true and only reasonable conclusion contradicts the determination. |
I
am satisfied the majority view on the matter is erroneous on a point of law.
I
allow the appeal. The assessments made by the respondent for the years of
assessment 1987 to 1992 are amended so that the formula for the
apportionment of the common expenses for lease financing shall not take into
account the element of principal and that what should be apportioned between
lease financing portfolio and non-leasing portfolio shall be in accordance
with the ratio between only the non-capital income from each of the two
portfolios. Half costs to the appellant.
Cases
Ostime (Inspector of Taxes) v Duple Motors Bodies Ltd [1961] All ER 167;
Cape Brandy Syndicate v IRC 12 TC 358; Edwards v Bairstow & Harrison [1956]
AC 14; Lower Perak Co-operative Housing Society v KPHDN [1994] 3 AMR 1735
Legislations
Income
Tax Act 1967: s.5, s.24(5)(a), s.33(1), s.36, para. 13 of Sch.5
Income
Tax (Leasing) Regulations 1986: Reg.2, Reg.3
Representation
Toy
Hong Huat and Ooi Huey Ling (Tay & Helen Wong) for Appellant
Abu
Tariq Jamaluddin, Legal Officer for Respondent
Notes:-
This decision is also reported at [2000] 3 AMR 2926
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