City Centre Ltd v Attorney-General [2003] SBHC 117; HC-CC 153 of 2002 (6 August 2003)

HIGH COURT OF SOLOMON ISLANDS

Civil Case No. 153 of 2002

CITY CENTRE LTD

–V-

ATTORNEY GENERAL

High Court of Solomon Islands
(Muria, CJ)

Date of Hearing: 1^st August 2003
Date of Judgment: 6^th August 2003

A. Radclyffe for the Plaintiff
F. Waleanisia [not present] for the Defendant

MURIA, CJ: The Plaintiff has sued the Defendant in this case claiming arrears of rent for the use of its premises by two Government bodies, the Trade Disputes Panel and the Meteorological Services for the period April 2000 to June 2002. The sum owing to and claimed by the Plaintiff in his Statement of Claim is $574,290.00. On 7^th August 2002, following the Plaintiff's summons for leave to enter judgment in default of defence, the Defendant appeared in Court and admitted liability. Leave to enter judgment in default of defence was accordingly granted by Kabui J. The formal order on the default judgment was signed on the same day whereby the defendant was ordered to pay the sum of $574,290.00 together with interest at the rate of 5 percent per annum until payment and costs fixed at $1,250.00. Interest of 5 percent per annum on the said costs was also ordered until payment. No payment has been made by the Government since then.

In an attempt to settle the judgment the Plaintiff proposed to the Government that the income tax owed by the Plaintiff to the Government be off-set against the judgment debt. The Plaintiff admitted it owed the Government $97,754.86 income tax for the years 2000 and 2001, although the Commissioner of Inland Revenue has insisted that the Plaintiff owed the Government $127,200.48 in income tax. The Plaintiff's proposal for set-off has been rejected by the Commissioner. The Plaintiff now seeks and to have the Court ordered the proposed set-off effected.

Issues

It is not in issue that the Defendant owes the Plaintiff the sum of $574,290.00 in rentals nor is it in issue that the Plaintiff owes the Defendant 97,754.86 income tax. There is, however, the question of the difference between the $97,754.86 which the Plaintiff says it owes the Government, and $127,200.48 which the Government says is owing to it by the Plaintiff in income tax. But the question of whether it is $97,754.00 or $127,200.48 is not a matter, which I am asked to decide upon in this case. The issue now before the Court is whether the Plaintiff's proposal to off-set the income tax it owes to the Government against the judgment debt should be allowed or not. This is particularly so, in view of the refusal by the Commissioner of Inland Revenue to off-set the income tax due to the Government against the judgment debt.

Argument

Counsel for the Defendant had not attended the hearing and so the Court is left to decide this matter after having heard Mr Radclyffe of Counsel for the Plaintiff. Mr Waleanisia, indicated by a note to the Court, that as he would not be attending the hearing because he was ill, he had no objection to the Plaintiff proceeding with the matter in his absence. Mr Radclyffe contended that in view of the inability of the Government to pay the debt, the only practical means to settle the judgment debt or part thereof, was to off-set it against the income tax owing to the Government. Counsel submitted that there was no legal reason to prevent the proposed set-off. Provisions preventing arrangement could have been made under section 33 of the Crown Proceedings Act (Cap. 8), but Counsel contended that there was none in place at the present.

Whether Income Tax set-off allowed

Under the contract entered into between the Government and the Plaintiff in this case, the Government has owed the Plaintiff $574,290.00 together with interests and costs. The principles of general law on contract as applied by the Courts equally applies to contracts entered into between any person and Government, subject to certain statutory provisions, which may render such contract void, although not illegal. In such a case, emphasis will be placed on the terms of the applicable statute. In the present case, I do not think section 33(2)(f) of the Crown Proceedings Act (Cap. 8) referred to by Mr Radclyffe, is relevant for our present purpose. That provision, however, envisages a situation whereby a person sued by the Crown for recovery of taxes, would seek to claim set-ff against the Crown, for rights or claims to repayment. No provision has been made in this respect yet, although it is understood that Parliament has passed an amendment to the Crown Proceedings Act to this effect but has not yet been put to effect.

The relevant statutory provision is section 25(1) of the Income Tax Act (Cap. 123) which deals with situation where arrangements are made purporting to avoid payment of income tax. Section 25(1) states:

"25(1) Every arrangement made or entered into, whether before or after the commencement of this Act, shall be absolutely void as against the Commissioner, for income tax purposes, if and to the extent that, directly or indirectly –

(a) its purpose or effect is tax avoidance; or

(b) where it has two or more purposes or effects, one of its purposes or effects (not being merely an incidental purpose or effect) is tax avoidance, whether or not any other or others of its purposes or effects relates to, or are referable to, ordinary business or family dealings,

where or not any person affected by that arrangement is a party thereto."

Subsection (5) of the section then goes on to define what "arrangement" and "tax avoidance" mean. It provides:

"(5) For the purpose of this section –

"arrangement" means any contract, scheme, disposition, agreement, plan, or understanding (whether enforceable or unenforceable) including all steps and transactions by which it is carried into effect;

"liability" includes a potential or prospective liability in respect of future income;

"tax avoidance" includes -

(a) directly or indirectly altering the incidence of any income tax;

(b) directly or indirectly relieving any person from liability to pay income tax;

(c) directly or indirectly avoiding, reducing, or postponing any liability to income tax."

Under this provision every 'arrangement' made or entered into, so far as it has or purports to have the purpose or effect, in anyway, directly or indirectly of (a) altering the incidence of any income tax, (b) relieving any person from liability to pay income tax, or (c) avoiding, reducing, or postponing any liability to income tax, shall "be absolutely void as against the Commissioner" of Inland Revenue. The purpose or effect of the arrangement which the Plaintiff proposes and seeks the Court's blessing upon in this case will enable the Plaintiff to avoid or at least relieve him of the liability to pay the income tax owing to the Government. That is what section 25(1) of the Income Tax Act prohibits. The Court cannot sanction such a statutorily prohibited arrangement.

It must be noted, however, that what section 25 does is to ensure that in so far as income tax is concerned, any arrangement that has the effect of avoiding tax is "absolutely void" as against the Commissioner, without prejudice to the validity of the contractual relationship between the parties, that is, the Plaintiff and the Government in this case. In other words, nothing is avoided between the Plaintiff and Government in any other respect or for any other purpose, but only as against the Commissioner so far as it has the purpose of avoiding liability to tax. The words "absolutely void" in the section do not mean that the proposed transaction is void against the whole world but rather it is only against the Commissioner who can completely disregard any arrangement between the parties here. The leading case on this matter is Newton –v- Federal Commissioner of Taxation [1958] 2 ALL ER 759 a 765 where Lord Denning, referring to s.260 of the Australian Commonwealth Income Tax and Social Services Contribution Assessment Act, 1936-1951, and referring to the expression "absolutely void" said:

"What is the effect of s.260 on that arrangement? It is quite clear that nothing is avoided as between the parties but only as against the Commissioner. As against him the arrangement is "absolutely void" so far as it has the purpose or effect of avoiding tax. This is not a very precise use of the words "absolutely void". Ordinarily, if a transaction is absolutely void, it is void as against all the world. In this case, what is meant is that the Commissioner is entitled completely to disregard the arrangement – and the ensuing transactions – so far as they have the purpose or effect of avoiding tax. In the words of the courts of Australia, it is an "annihilating" provision – the Commissioner can use the section so as to ignore" the transactions which are caught by it."

Section 25 of our Income Tax Act have, expresses the same principles as those found in s.260 of the Australian tax legislation referred to. The Commissioner of Inland Revenue in this case refused to agree to the set-off arrangement and he was entitled to so refuse to endorse such an arrangement which clearly has the effect of avoiding or relieving the Plaintiff of the liability to pay income tax. Such an arrangement would clearly be void as against the Commissioner.

The Plaintiff's right to enforce the judgment debt against the defendant in any other way, other than through set-off against income tax, remains unaffected by this judgment.

For these reasons, the Plaintiff's application is refused.

(Sir John B. Muria)
Chief Justice