Commissioner of Inland Revenue v Singh [1964] FJLawRp 32; [1964] 10 FLR 89 (26 March 1964)

[1964] 10 FLR 89

SUPREME COURT OF FIJI

Appellate Jurisdiction

COMMISSIONER OF INLAND REVENUE

v

JASWANT SINGH

Knox-Mawer Ag. P.J.

February 14th, March 26th, 1964

Income tax — total income — includes profits accrued as well as those physically received — Income Tax Ordinance (Cap. 172) s.3(1) (2).

Interpretation — Ordinance—when income "received" — Income Tax Ordinance (Cap. 172) s.3(1) (2).

Under the "Terms of Settlement" of a Supreme Court action concluded on the 24th August, 1961, the respondent became entitled to the transfer of certain land on or before the 30th June, 1962, or failing such transfer to the payment of £5,000 by installments. This settlement was varied on the 23rd January, 1962, by a further agreement whereby the respondent acknowledged the receipt of £1,000 and became entitled to the assignment of certain contracts, valued at £2,875, and a cash payment of £1,125, on or before the 31st March, 1962.The Court of Review held that the word "received" in section 3 (1) of the Income Tax Ordinance means "actually received in a business or commercial sense", and could not be extended to include moneys accruing but not actually payable in the income year. It therefore allocated the sum of £1,000 to the respondent's income in the income year 1961 and £4,000 to the income year 1962.

Held –

The word "profit" in section 3 (1) of the Income Tax Ordinance must be given its plain grammatical meaning of "pecuniary gain in any transaction" and the whole consideration of £5000 accruing to the respondent under the settlement of the 24th August, 1961, formed part of his total income for the year 1961 within the meaning of the subsection.

Cases referred to: Trapp v Minister of National Revenue [1946] Canada Tax Cases 30; [1946] Ex. CR 245: Tanner Building Supplies Limited v Minister of National Revenue [1951] Canadian Tax Appeal Board Cases 218: Re Spanish Prospecting Co. [1910] UKLawRpCh 125; [1911] 1 Ch. 92; 103 LT 609.

Appeal from a decision of the Court of Review.

B. A. Palmer for the appellant.

K. C. Ramrakha for the respondent.

[Editorial note:— The case is reported only in relation to the interpretation of section 3 of the Income Tax Ordinance. Although in the operative part of the judgment the learned judge does not deal specifically with the meaning of the word "received" in section 3(1) the judgment necessarily imports that he accepted the decision in Tanner Building Supplies Limited v Minister of National Revenue (supra) .]

KNOX-MAWER Ag. P.J.: [26th March, 1964]—

The circumstances giving rise to this appeal are as follows. The taxpayer (the present Respondent) had failed to keep account books or records by which his returns of income could be checked for the years 1st January, 1956, to 31st December, 1961. The Commissioner of Inland Revenue (the present Appellant), after an investigation of the Respondent's affairs over these years, assessed him for income tax accordingly. The Respondent appealed to the Court of Review against the Appellant's assessment in respect of the Respondent's 1961 income. A bundle of documents setting out certain agreed figures were exhibited by consent before the Court of Review.

The judgment of the Court of Review was delivered on 9th August, 1963. The part of the judgment of the lower Court with which the Appellant is principally dissatisfied is that which concerns the consideration accruing to the Respondent under the "Terms of Settlement" of a Supreme Court action concluded between the Respondent and A. J. C. Patel Bros. on 24th August, 1961.

Under this Settlement, A. J. C. Patel Bros. agreed to transfer to the Respondent certain areas of land on or before 30th June, 1962, or failing such transfer to pay the Respondent £5,000 plus interest. This £5,000 was to be paid by annual installments of at least £1,000 (first payment on or before 24th August, 1965). This Settlement was varied, on 23rd January, 1962, by a further agreement, whereby the Respondent acknowledged receipt of a sum of £1,000 (plus interest), and it was agreed that the balance of £4,000 (plus interest) would be paid by an assignment, by A. J. C. Patel Bros., of the benefit of certain contracts (valued at £2,875) plus a cash payment of £1,125 on or before 31st March, 1962.

The Appellant contended that this asset amounting to £5,000 in value accruing to the Respondent under the Settlement of 24th August, 1961, formed part of the Respondent's "total income" "received" by him during 1961, within the meaning of section 3(1) of the Income Tax Ordinance (Laws of Fiji) 1955, Cap. 172. It was upon this basis that the Appellant had assessed the Respondent for income tax in 1961.

The Court of Review held upon the facts (and the Respondent has not appealed against this finding) that the sum in question was earned in 1959, ascertained in 1961, but paid to the Respondent as to £1,000, in the income year 1961, and as to the balance £4,000 (plus interest), in the income year 1962. In the judgment of the lower Court, the word "received" in section 3(1) of Cap. 172 means "actually received in a business or commercial sense" and cannot be extended to include moneys accruing but not actually payable in the income year of 1961.

It was further held by the Court of Review that although the Appellant had "endeavoured" to ascertain the assets and liabilities of the Respondent at the beginning and end of each of the income years in question, the Appellant had in fact found it possible only to ascertain the net assets at the beginning and end of the whole period (1st January, 1965, to 31st December, 1961) covered by the examination. Therefore, maintained the Court below, the correct method which the Appellant should have adopted was (after allocating items of income to specific years where that was possible) to divide the surplus by the number of years in the period under review and to attribute an equal portion to each income year (see Gunn's Commonwealth Income Tax, Law and Practice, 6th Edn. para. 3095) . It therefore fell, in the opinion of the lower Court, for the Court of Review to make such a calculation in accordance with this method. The Court of Review puported to do this and arrived at a figure of £342. For the Respondent's income year 1961, the Court of Review accordingly added to the sum of £1,000, (which the Court had held he had "received" within the meaning it gave to section 3(1), Cap. 172, in that year), this additional sum of £342.

The first two grounds of appeal read as follows:

"1. That the Court of Review erred in law in holding that the word 'received' in section 3 (1) of the Income Tax Ordinance (Chapter 172) means actually, physically, received, rather than net profit which has accrued to a taxpayer, during an income year.

2. That having regard to the findings of fact that the moneys owing to the taxpayer on the Bulldozing Contract with A.J.C. Patel Brothers were

(i) earned in 1959 when the contract was completed;

(ii) ascertained in 1961 when the compromise agreement was reached but in fact paid to the taxpayer by two instalments of £1,000 in 1961 and the balance with interest totalling £4,120 in 1962,

the Court of Review erred in law in holding that only £1,000 of the compromise agreed to, £5,000, was income of the respondent taxpayer for the income year ended 31st December, 1961."

The relevant words of section 3(1) read:

" 'total income' means the annual net profit or gain . . . whether ascertained and capable of computation . . ., or unascertained as being . . . profits from a trade or commercial or financial or other business or calling or otherwise howsoever, directly or indirectly received by a person from . . . any trade, manufacture or business or otherwise howsoever, as the case may be . . ."

Reference has been made in argument to four Canadian tax cases in which the Canadian Courts were concerned with a similar problem of interpretation. Only two of these reports are available to me. In Trapp v Minister of National Revenue, Canada Tax Cases [1946] p.30, the Court held that what is taxable "income" under the Canadian Statute is the income actually received during the income tax year, not the income receivable, whether accrued or accruing. In Tanner Building Supplies Limited v Minister of National Revenue, Canadian Tax Appeal Board cases [1951] p.218, on the other hand, the Court held as follows: that in determining the "net profits or gain . . . received" during the income tax year in question, account should be taken not only of moneys physically received but also of assets "accruing" during that year to the taxpayer; that the statement to the contrary in the Trapp case was "obiter"; that in enacting the relevant section in the Canadian Statute the Legislature "had in mind well established business and accounting practices including the calculation of profits on an accrual basis". It is the contention of the Appellant that this Court should follow the Tanner case.

It should first be noted that the Court of Review, in considering these two conflicting authorities, was critical (and in my view rightly critical) of the decision in Trapp, and approved the decision in Tanner. However the Court of Review considered that the construction put upon the relevant section of the Canadian Statute in Tanner could not be placed upon the equivalent section of the Fiji Ordinance (section 3(1)) because the construction adopted by the Canadian court in Tanner was supported by a specific section in the Canadian Statute providing for bad debts, which section, as the Court of Review observed, presupposed accounting on an accrual basis. It was the conclusion of the Court of Review that since the Fiji Ordinance contained no equivalent "bad debts" section, the word "received" in section 3(1) of Cap. 172 must be interpreted as "actually", i.e. physically, "received".

It has been pointed out to this Court, however, that the Fiji Ordinance does contain a section which is, in effect, equivalent to the "bad debts" provision of the Canadian Statute. Thus under section 3(2) of the Ordinance, Cap. 172, it is provided that "in determining total income, no deducting shall be allowed in respect of (c) any loss not connected with or arising out of the trade . . . of the tax payer". Since a bad debt is a loss connected with the trade of the taxpayer the taxpayer is allowed under this provision to make deductions in respect of bad debts.

Had this provision been pointed out to the Court of Review its decision might well have been the other way. Certainly I have no doubt that the consideration (of £5,000 value, money or money's worth) accruing to the Respondent under the Settlement of 24th August, 1961, formed part of his "total income" for the year 1961 within the meaning of section 3 (1) of Cap. 172. For the word "profit" in the subsection must be given its plain grammatical meaning (in Re Spanish Prospecting Co. [1911] 1 Ch. pp. 98 and 99) and the Oxford Dictionary definition of "profit" is "pecuniary gain in any transaction".

I therefore hold in favour of the Appellant in respect of grounds of appeal 1 and 2.

Grounds of Appeal 3 and 4 are as follows:

"3. That the Court of Review erred in fact in holding that of the agreed net assets increase of £7,283 for the income year ending the 31st December, 1961, the sum of £2,053 was an accumulation over the period 1st of January, 1956, to 31st of December, 1961.

4. That on the facts agreed to between the respondent tax payer and the appellant the Court of Review erred in law in allocating the sum of £342 to the respondent tax payer's income for each of the years 1956, 1957, 1958, 1959, 1960 and 1961."

Upon reviewing the agreed documents as presented to the Court of Review, it is clear to me that the lower Court misdirected itself as to the extent of the agreement already reached between the parties. Upon examination thereof it is clear to me that the Court of Review erred in holding that the sum of £2,053 was an "accumulation" over the period in question. The Court of Review, therefore, erred in law in adopting the method of calculation outlined in Gunn (supra) and thereby allocating the sum of £342 (which figure, in any event, would be arithmetically incorrect) to the Respondent's income for each of the years 1956 to 1961.

Ground of appeal 5 reads:

"5. That in the event the Court of Review erred in fact in computing the sum of £2,053 which it allocated in the manner described in the preceding ground of appeal."

It is not disputed by the Respondent that there is an arithmetical error in the computation of this figure of £2,053, and I hold that the Court of Review did err in fact in so computing it.

The Appellant, having succeeded in this appeal, is awarded costs against the Respondent.

Appeal allowed.