BOC Gases Solomon Islands Ltd v Commissioner of Inland Revenue [1998] SBHC 9; HC-CC 314 of 1996 (4 February 1998)

HIGH COURT OF SOLOMON ISLANDS

Civil Case No. 314 of 1996

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BOC GASES SOLOMON ISLANDS LIMITED

v

THE COMMISSIONER OF INLAND REVENUE

Before: Palmer, J

Hearing: 25th November, 1997

Judgment: 4th February, 1998

Counsel: J. Sullivan for the Appellant;

B. Titiulu for the Respondent

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PALMER J.:

There are two parts to this appeal. The first relates to the powers of the Commissioner of Inland Revenue to reject investment incentives granted to the Appellant under the Investment Act, 1990. The second relates to the disallowance of expenditure for 1994 in an amount of $1,328,420.00 which the Appellant claims has no basis in law.

It is not in dispute that the incentives granted fall within the incentives which the Board is empowered to grant under the Tenth and Eleventh Schedules to the Income Tax (Amendment) (No. 2) Act 1990. The issue under the first part therefore is not whether those incentives were valid but whether the Commissioner is bound to apply those exemptions in law.

By letter dated 26 August, 1996 (see record 23 of Appeal Records filed by the Appellant on 24th November, 1997), the Commissioner had ruled that the investment incentives granted to the Appellant by the Foreign Investment Board ("Board") in the letter dated 5 June, 1991 (see record 20/Vol.1) were invalid and do not apply to the claims of the Appellant under the Income Tax Act. He argues that unless he had given approval for the tax incentive or made a recommendation to the Foreign Investment Board, any incentives granted by that Board under the Income Tax Act were invalid.

The Appellants on the other hand argue that the incentives granted by the Board apply to the Income Tax Act as well and the Commissioner had no discretion in the circumstances of this case to refuse them.

No particular section of the. Income Tax Act was relied on by the Commissioner for his view, but it is possible he had been influenced a lot by the provisions of Part IIA of The Income Tax (Amendment) Act 1990.

In broad terms, the view held by the Commissioner is quite correct. He is quite right to hold that any tax exemptions granted under the Income Tax Act, should either have been given his approval or a recommendation made to that effect to the Board, for the simple reason that the administration of that legislation is vested in him by section 91 of the Income Tax Act.

When section 7 of the Investment Act is considered in that light, it should be apparent that it does not in any way seek to detract from this view. Subsection 7(2) for instance requires the Board to give notice of such an application to appropriate Ministries and Government Agencies for the purpose of seeking their approval in respect of the incentives or exemptions applied for under subsection 7(1).

"Where the Board receives an application referred to in subsection (1), the Board shall give notice of the application to the appropriate Ministries and Government Agencies and seek their approval in respect of the investment or enterprise."

In this particular case, the Commissioner would have been given notice of the incentives sought by the Appellant and be given opportunity to approve or reject them.

Only where approval had been given by the appropriate Ministries and Government Agencies should the Board consider granting the incentives sought [see subsection 7(3)]. On the other hand, where approval has not been granted by any of those Ministries or Government Agencies, the Board would have been obliged to reject the application [see subsection 7(4)].

"Where the investment or enterprise does not qualify for incentives in terms of any relevant or qualifying Acts, the Board shall inform the applicant accordingly."

By the time therefore an approval is granted by the Board [subsection 7(5)], it implies that the appropriate Ministries and Government Agencies have given their approvals to the incentives sought. This would explain the mandatory tone set by subsection (5); that " . . . the approved enterprise shall be entitled to the agreed incentives provided for under the Income Tax, the Customs and Excise Act and other relevant or qualifying Acts." Note also the use of the words "agreed incentives" implying that those incentives had been agreed to by the appropriate Ministries and Government Agencies.

The facts in this case show that the Board had granted incentives to the Appellant. as noted in the Certificate of Approval dated 5th May, 1992 at paragraph (8). The said paragraph in turn referred to the letter dated 5th June, 1991, which contained the various incentives granted. The Appellant relies on that letter and section 7(5) of the Investment Act. By implication therefore, the Commissioner should have been notified of this application and his approval sought and given.

It appears nevertheless, from the correspondences between the Commissioner and the Accountants (Coopers & Lybrand) of the Appellants, that the Commissioner was not aware of the incentives granted by the Board and that he had not granted his approval or made recommendations to that effect. This appears to be the reason why the Commissioner had refused to accept the incentives granted by the Board and to rule that they were invalid.

The issue therefore is whether he had the discretion to reject those incentives, or he was bound by subsection 7(5) to apply them. To answer this, it is important to examine subsection (5) more closely. It reads:

"On receipt of approval from the Board, the approved enterprise shall be entitled to the agreed incentives provided for under the Income Tax, the Customs and Excise Act and other relevant or qualifying Acts."

The first point to note about subsection (5) is that it is couched in mandatory terms. It expressly provides that the approval of the Board shall entitle the approved enterprise to rely on the incentives granted whether under the Income Tax Act, the Customs and Excise Act, or other relevant or qualifying Acts. In other words, the Appellant can rely on such an approval as authority for the incentives to be implemented even under the Income Tax Act, and the learned Commissioner with respect does not have any choice about that.

The point nevertheless raised by the learned commissioner that he may not have been aware or notified of the application of the Appellant at the initial stages, a valid point for the Board to take note of for future purposes. That is a relevant matter between the Commissioner and the Board to sort out. If there had been any failures in the way the provisions of the Investment Act had been applied, the Board must take responsibility for it. It is incumbent on the Board in my respectful view to ensure that it does comply with and fulfil its statutory duties, rather than simply taking them for granted and giving incentives without prior notice and approvals from the appropriate Ministries and Government Agencies.

It is not for the Appellant to chase up on the Board to find out whether it had obtained the approvals of the various Ministries and other Government Agencies. All the Appellant has to worry about is whether his application has been approved or not. The requirements set out in subsection 7(2)-(4) are matters entirely for the Board to attend to. Any failures on its part must lie where it has fallen. Any doubts must be construed in favour of the Appellant (see IR Commrs v. Westminster (Duke) [1936] AC 1 at 24-25). The Board must understand the role it performs within the frame-work of other Ministries and Government Agencies. For instance, whilst it may have the power to grant incentives under the Income Tax Act, this power should only be exercised after consultation and approvals had been obtained from appropriate Ministries and Government Agencies [sub.7(2)-(4) of the Investment Act].

There is no conflict therefore in the provisions of section 11B of the Income Tax Act and section 7 of the Investment Act. Under section 11B, it is the Commissioner who makes the decision whether to exempt from income tax or not at the recommendation of the Board. Under section 7 of the Investment Act, it is the Board who makes the final approval but after prior approvals had been obtained from relevant authorities. In this case, the Commissioner should also have already granted his approval to the tax incentives sought.

There is also another important point which should be noted against the stand taken by the Commissioner in this case. In the letter of approval to the Appellant's Accountant, dated 5 June, 1991 (record 20), at the bottom of page 2, it is recorded that a copy of the said letter containing the incentives was sent to the attention of the Commissioner. Whilst it is appreciated that this does not prove conclusively that the Commissioner was notified of the incentives granted by the Board, it does raise a presumption that that was the case and that it is for the Commissioner to show otherwise. This he has not done. It is open therefore to this Court to conclude that the learned Commissioner did have notice and opportunity at a very early stage (going by the date of the letter - June/July 1991) to raise an objection and have the matter sorted out early. In the circumstances it is open to this Court to take the view that he had acquiesced in that decision.

Also it should be noted that the Board has not been joined as one of the parties in this case. The allegations raised by the Commissioner are matters which directly affect the Board and not necessarily against the Appellant in this case.

The view held by the Commissioner therefore in my respectful view was wrong in the circumstances and should be overturned. The effect of this ruling must mean a reduction in the assessment of the Commissioner; in particular, the Appellant is entitled to exclude from its chargeable income its profits from the gas plant, and to have the correct accelerated depreciation figures for 1991 and 1992 applied.

This brings me to deal with the second part of the appeal which relates to the letter dated 9th October, 1995 (record 23/Vol.1), in which a number of items were disallowed by the Commissioner for deduction, as expenditure incurred wholly and exclusively in the production of such income, under section 14 of the Income Tax Act. By letter dated 26th August, 1996, the Commissioner confirmed his assessment for 1994. The Appellant therefore comes to this Court seeking relief against the determination of the Commissioner.

One of the preliminary issues raised by learned Counsel, Mr Titiulu for the Respondent is that no notice confirming assessment had been issued by the Commissioner under section 65(3)(b) of the Income Tax Act and therefore this Court has no jurisdiction to entertain this appeal. With respect, this point can shortly be disposed of. In the letter to the Accountants of the Appellant dated 26th August, 1996, at page 2, under the sub-heading "1994 Notice of Assessment", the Commissioner expressly confirmed his original tax assessment. In my respectful view and I note this was the view taken by the Appellants, this had the same effect of a notice confirming assessment under section 65(3)(b) of the Income Tax Act. The Appellant did the right thing therefore and advised the Commissioner by letter dated 15th October, 1996 (Exhibit "E"), that he was treating that letter as a notice under the said provision. If the Commissioner had not intended that letter to be so interpreted, then it would have been a simple matter for him to have said so by way of reply to the Appellant. This he has not done and so the Appellant is entitled to take the view that the assessment is a notice issued under section 65(3)(b) of the Income Tax Act. In the circumstances I fail to see how the Commissioner could still argue that no notice of confirmation had been given when he had already been clearly informed of the view of the Appellant and given ample opportunity to indicate otherwise. I do bear this point in mind because it would be relevant in how this court deals with some of the items listed below.

I now turn to the items queried and disallowed by the Commissioner.

(1) Education Incentive Deduction - $17,087.00.

Detail breakdowns and proof were requested by the Commissioner. At page 29 of the records to page 52, details and copies of relevant documentation were set out. I have perused those documents and satisfied that those expenses were incurred towards educational incentive grounds. I note the amount of $2,670.56 admitted by the Appellants had been incorrectly included and therefore should be deducted and. charged to the head under telephones and faxes.

(2) Accounting Profit on disposal of assets - $1,645.00.

At pages 53 -55 of the records compiled and marked Vol. 1, the computation for this figure and how it was arrived at is set out. The Commissioner however has not had the opportunity to rule on this and therefore it would simply not be proper for this court to presume that this computation is in order. He would be in a better position than this Court to decide whether the computation is correct or not. In the circumstances, I direct that the Commissioner make a decision on this within 14 days of this judgment, failing which the amount claimed should be allowed. If the Commissioner should make a ruling which the Appellant further disagrees upon, then the matter can be further adjourned to chambers for determination.

(3) Dividend Paid - $700,000.00.

This comprises two amounts; $300,000.00 and $400,000.00. The relevant amount is $400,000.00. The Commissioner queries whether 35% non-resident withholding tax had been deducted from that amount of $400,000.00. At page 65 of the records, volume 1, a copy of the receipt for the sum of $140,000.00, being 35% of $400,000.00, has been exhibited. I am satisfied this amount has been duly paid. However, part of the exemption package (paragraph 3(a)) given to the Appellant by the Board exempted the payment of withholding tax. This amount accordingly has been wrongly paid and should be refunded forthwith. Order made to that effect.

(4) Accounts paid to related Corporations - $12,757.00.

It is still not clear on the evidence how this amount has been arrived at. At page 66 of the records it states that this amount referred to movements between amounts owing to related corporations from 1/10/93 to 30/9/94. Those corporations were identified as (1) BOC Gases Australia - Head Office; (2) BOC Gases Australia -Parramatta; (3) BOC Gases - Fiji; (4) CIG PNG & CIG Gas Cylinders. At page 67, various figures were recorded as reflecting the amounts paid to other corporations and some indication that the 7.5% withholding tax might have been paid. Unfortunately, it is not shown how the above figure of $12,757.00 might have been derived. Also no receipt had been provided for the alleged payment of withholding tax. In the circumstances, I cannot be satisfied this amount has been proven to the required standard and must be disallowed.

(5) Addition at Cost per IR 23 - $97.648.00.

I am satisfied. sufficient explanation has been provided in pages 68 to 71 of the records to properly account for this amount.

(6) Accommodation - $19,364.00.

The amount of $2,631.71 paid to Honiara Hotel with respect cannot be allowed in its entirety. According to the receipts filed, accommodation costs total only $1,870.00 and not $2,631.71. These were made up as follows: (1) Receipt No. 27387- accommodation costs were $510.00 plus $51.00 tax; (2) Receipt No. 26995-accommodation costs were $680.00 plus $68.00 tax; (3) Receipt No. 26994-accom. costs were $510.00 plus $51.00.

Also the amount of $159.90 sought to be included under accommodation with respect cannot be allowed. They do not relate in any way to any accommodation expenses.

In the claim for $702.50 sought to be included, only $480.00 plus tax of $48.00 should be allowed.

The amount in the accommodation head accordingly should be adjusted in accordance with the ruling above together with the $10,000.00 conceded to have been wrongly coded to the amount of $37,338.00.

(7) Data Processing - $28,423.00.

I am satisfied this amount has been properly accounted for.

(8) Entertainment - $13,422.00.

I am satisfied for purposes of this return the explanations provided do show that the amount alleged to have been used under the said head was so used. For future purposes though, the requirements of the Commissioner for proper details should be adhered to.

(9) Exchange rate loss - $4,961.00

The explanations provided are satisfactory.

(10) Resettlement - $45,685.00.

The expense has been well substantiated by the documents filed.

(11) Staff Welfare - $10,849.00.

The explanation provided at page 117 of the Records should be examined and ruled upon by the Commissioner. He would be in a better position than this Court to determine whether those items listed fall within the Staff Welfare head or not. The same orders as in item No. (2) above apply.

(12) Sundry Expense - $20,371.00.

Again the details provided in pages 120 to 140 of the records should be examined and ruled upon by the Commissioner, who would be in a better position than this Court to make a ruling on the items listed.

(13) Travel - $8,885.00.

I am satisfied sufficient detail has been provided.

(14) Management Fees - $124,526.00.

The total amount of withholding tax payable at 7.5% is $9,339.50. Receipts provided add up to only $6,239.07. It appears there is a shortfall of $3,100.43. I note though in the explanation provided at page 141, that some withholding tax was paid in August, 1995. If that was the case, then receipts in respect of those payments should be provided. Otherwise the amount of $3,100.43 must be paid to the Commissioner within 14 days.

(15) Overseas Visitors - $10,644.00.

Income detail is provided in page 161 of the records, volume (2). The Commissioner should be given opportunity to comment on these before any final orders are made. He should do this within 14 days, failing which the appeal on this item should be allowed. Any disagreements, should be adjourned to chambers for determination.

(16) Depreciation - $189,443.00.

I am satisfied sufficient details have been provided which explain and account for the above figure. See pages 5, 8, 68 - 71 of the records, volume 1.

>="3">ORDERS OF THE COURT.

1. Uphold first part ofal that the investment incentives granted by the Investment Board containntained in letter dated 5th June, 1991 to the Appellant, are valid and apply to the Income Tax Act.

2. Annul the assessment of the Commissioner and direct that he makes a fresh assessment taking into account the investment incentives of the Appellant.

3. Uphold second part of appeal and annul assessment of the Commissioner totalling $1,328,420.00, on all items listed in the letter dated 9th October, 1995 (record 23/vol.1), save as follows:

• item (4)- appeal on this item disallowed;

• item (11) - refer to Commissioner to rule upon within 14 days, in default allow appeal on this item; any other matters arising to be adjourned to chambers for determination;
• item (12) - refer to Commissioner to rule upon within 14 days, in default allow appeal on this item; any other matters arising to be adjourned to chambers for determination;
• item (15) - refer to Commissioner to rule upon within 14 days, in default allow appeal, any matters arising should he adjourned to chambers for determination;
• items (6) and (14) - partial allowance as indicated in the judgment.

4. Order that amount of $140,000.00 withholding tax paid in respect of item (3), to be refunded to the Appellant.

5. Costs to be borne in any event by the Respondent.

ALBERT R. PALMER
THE COURT