High Court · Decided 8 April 2010

ABD Pte Ltd v Comptroller of Income Tax

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[2010] SGHC 107Case no. Income Tax Appeal No 2 of 2009

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Income Tax Act 1947

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Andrew Phang Boon Leong JA:
Introduction
[1] Tax raises – not surprisingly, perhaps – contrasting responses. On the one hand, – and particularly from the taxpayer’s perspective – it is often viewed negatively. As Hubert Monroe QC put it at the commencement of his 1981 Hamlyn Lectures (Intolerable Inquisition? Reflections on the Law of Tax (Stevens & Sons, 1981)) (“Intolerable Inquisition?”) at p 1 (see also at p 15):
[2] But there is, as alluded to above, another side to the coin, which is (in my view) reflected in the question mark placed after the main title of the lectures just referred to. In other words, whilst, on one view, tax may be viewed as an “intolerable inquisition”, there is another view that can be adopted; in the learned author’s words (Intolerable Inquisition? at p 1):
[3] Indeed, one cannot gainsay the well-established public necessity for tax in general and tax law in particular which centres on, inter alia, the raising of revenue for the financing of public infrastructure and redistribution (see also, for example, John Tiley, Revenue Law (Hart Publishing, 6th Ed, 2008) (“Revenue Law”) at pp 7-10). In this respect, the legal regime is statutory in nature. The modern income tax regime in the local context dates back more than five decades. The traditional starting-point is located in R B Heasman, Income Tax: A Report to Their Excellencies the Governors of the Malayan Union and Singapore, with Recommendations, including a Draft Bill and Proposals for Administration and Staffing (Kuala Lumpur, Malayan Union Government Press, 1947) (popularly known as “the Heasman Report”, and hereafter referred to as such) as well as the Report of the Joint Committee appointed by Their Excellencies the Governors of the Malayan Union and Singapore to consider Mr. Heasman’s recommendations for the institution of an Income Tax and to report whether, if the policy of Income Tax were adopted, the principles of the legislation, a draft of which is annexed to Mr. Heasman’s Report, would, in their opinion, be suitable for the purpose (Kuala Lumpur, Malayan Union Government Press, 1947). Much has, of course, happened since but the present Income Tax Act (Cap 134, 2008 Rev Ed) (“the Act”) finds its roots in this historical setting (see also generally Halsbury’s Laws of Singapore – Revenue and Taxation vol 16(2) (LexisNexis, 2008 Reissue) (“Halsbury’s Laws of Singapore”) at paras 205.004–205.009 as well as Andrew Halkyard and Stephen Phua Lye Huat, “Common Law Heritage and Statutory Diversion – Taxation of Income in Singapore and Hong Kong” [2007] SJLS 1 at 1-3 (which, as the title itself suggests, contains comparative aspects as well)).
[4] Interestingly, perhaps, when income tax legislation was first being considered in the local context, it was noted thus (see the Heasman Report at para 15):
[5] Apart from the historical context, the Act itself embodies a coherent system that seeks to balance the contrasting views as well as expectations referred to briefly above. For example, whilst income tax is levied (see generally s 10 of the Act), deductions are also permitted (see generally s 14 of the Act as well as below at [39]–[40] in so far as the various categories of deductions within that particular section are concerned). However, deductions of a capital nature are generally not permitted (see, in particular, s 15(1)(c) of the Act, a provision that will, in fact, figure prominently in this appeal, and which was accorded a broad scope by the Singapore Court of Appeal in T Ltd v Comptroller of Income Tax [2006] 2 SLR(R) 618). In order, however, to meet any unfairness to the taxpayer concerned in this last-mentioned regard (in particular, where the capital asset concerned is a depreciating one), the Act permits – in specific situations – capital allowances in favour of the taxpayer (see generally Pt VI of the Act). However, as already mentioned, the entire income tax regime is embodied wholly within a statutory framework. Hence, where the situation concerned is not provided for by the Act, just as no tax can be levied, by the same token, no tax concession operates in favour of the taxpayer (a clear instance of this in the context of capital allowances can be found in the Singapore Court of Appeal decision of In re A B Ltd [1957] MLJ 143 (“A B Ltd”) (affirming the Singapore High Court decision in In re A B Ltd [1956] MLJ 197), which we will, in fact, have occasion to consider in more detail below; see also the Heasman Report at para 32, where proposed provisions in respect of capital allowances were said to “[modify] to some extent one of the cardinal principles of Income Tax Law, namely, that outlay of a capital nature, however desirable from the point of view of the trade or business, is not deductible in computing the amount of income to be taxed”). Monroe echoes the same sentiments made at the outset of the present paragraph. Although referring to the UK context, the following observations by the learned author are, it is suggested, equally applicable to the Singapore context (see Intolerable Inquisition? at pp 35-36):
[6] To be sure, the very nature of tax legislation entails some measure of legal technicality, although it should also be pointed out that the presence of legal technicality does not necessarily mean that justice and fairness cannot therefore be achieved. In this regard, the following candid observations by Mr Heasman (commenting on what was to become, historically, the first piece of income tax legislation in the local context) are apposite (see the Heasman Report at para 39):
[7] Before proceeding to consider the specific issues that arise in the present appeal, one final general observation is appropriate. Of all areas of the law, perhaps the law relating to tax in general and income tax in particular are heavily fact-specific. It is true that facts are always important in every area of the law. However, because (as we shall see) it is difficult to formulate general principles in the context of income tax law, the factual matrix takes on an even greater importance. This is (as we shall also see) especially the case in relation to the fundamental distinction that has to be drawn between capital and revenue. Nevertheless, even here, the court must be careful not to slide down the slippery slope to the other extreme by subscribing to the (substantively meaningless) mantra embodied in the declaration that “It all depends on the facts”. In order for a particular decision to be legally justified, legal rules and principles (which contain normative force) must be both formulated as well as applied. Put simply, a court cannot – and must not – justify a particular decision based solely on the facts (which, in and of themselves, are purely descriptive in nature and, hence do not contain the normative force required to justify the decision arrived at by the court). Any recourse to the aforesaid mantra would, in substance, be a case of circular argument that seeks to justify decision that is based, in the final analysis, on a purely arbitrary decision on the part of the court. Such an approach must be assiduously avoided, not least because it is the very antithesis of the mission of the law itself (which is to aid the court in arriving at a just and fair decision in accordance with the objective application of the objective (and, of course, relevant) rules and principles of law). Hence, whilst the facts of any given case are of fundamental importance (particularly in the context of the law relating to income tax), they do not operate alone. A decision by the court is the product of an integrated process in which the relevant legal rules and principles are applied to the relevant factual matrix.
[8] With these preliminary observations in mind, let us now turn to the facts as well as issues in the present appeal.
The factual background
The issues
[11] The issues to be decided in the present appeal are as follows:
(a) Whether the profit from the entrance fees should be taxed in the year that the fees were levied on each member or whether such profit should be taxed equally over the period of club membership (ie, 30 years);
(b) Whether the costs of acquiring the land and constructing the Club building thereon, as well as the geomancy fees, are deductible from the gross entrance fees received; and
(c) Whether the sum of $53,283,000, which the Appellant was obliged to pay to the Club’s members following the civil action against it, is deductible in the Year of Assessment 2001.
[12] It should also be noted that the Appellant did not pursue the question as to whether the Appellant is entitled to capital allowances pursuant to ss 19 and 19A of the Act and I therefore need say no more about it. Indeed, as counsel for the Appellant, Mr Nand Singh Gandhi, admitted, pursuing this question would have been an uphill task of the steepest order for the Appellant; this is probably (if I may say so) an understatement of sorts.
The decision of the Board
[13] The Board held that the entrance fees accrued as income and were thus taxable under s 10(1) of the Act once each member was admitted to the Club (see ABD v Comptroller of Income Tax [2009] SGIBTR 3 (“the GD”) at [15]–[17]). The Board referred to the decision of the Court of Appeal in Pinetree Resort Pte Ltd v Comptroller of Income Tax [2000] 4 SLR(R) 1 (“Pinetree”) where the word “accrue” was interpreted (at [23]) to mean “to which any person has become entitled” and observed that, in the present case, the constitution of the Club with respect to fees was similar to that of the club in Pinetree; hence, as a matter of law, the Appellant was legally entitled to the entrance fees once the members were admitted to the Club.
[15] The Board held (see the GD at [34]) that, at the inception of the Club, it could not be seriously contended that there was already an accrued liability to the members who had yet to institute civil action against the Appellant. The liability of the Appellant to pay damages to the Club’s members was not absolute and could not be said to have accrued at the very inception of the Club and its quantum ascertained subsequently, in the sense referred to in the English Court of Appeal decision of Bernhard v Gahan (1928) 13 TC 723 (“Bernhard”), a case relied upon by the Appellant. The Board held (see the GD at [37]) that to state that the Appellant’s liability to pay the sums of money to the members had arisen from the inception of the Club would be a significant stretch of logic and contrary to law.
Analysis and decision
The date of assessment of the entrance fees
Introduction
[16] It is a well-established principle of tax law that neither profit nor loss may be anticipated. Income accrues when a taxpayer becomes entitled to it (see also above at [13]). It is also clear from the Rules and Regulations of the Club (“Rules and Regulations”) that the Appellant has two streams of income from its sale of memberships: (1) the entrance fees and (2) monthly subscription fees, respectively. The issue in the present case is whether the Appellant earned the entrance fees at the time the members were admitted to membership or whether the entrance fees are earned, instead, over the course of 30 years.
[17] The Appellant submits that the profits from the entrance fees received should be taxed over a period of 30 years, ie, the duration of the membership. It is the Appellant’s position that, being contractually bound to deliver and maintain a premier club for the duration of its lease of 30 years, the Appellant earned the entrance fees for the sale of its memberships over the course of the term of the memberships. On the other hand, the Respondent points to the fact that the memberships are transferable and argues that the memberships sold are choses in action. The Respondent submits that the entrance fees are therefore taxable in full in the years in which the members were admitted to membership.
The relevant provision
[18] Section 10(1)(a) of the Act states as follows:
The relevant case law
[20] MPD is clearly distinguishable from the present case. In the present case, the Appellant became legally entitled to the entrance fees once a member was admitted to membership. This is apparent from the fact that, should the Appellant allow a member to pay the entrance fees by monthly instalments, any unpaid balance of the monthly instalments becomes immediately due and payable if a member transfers his membership (see Rule 8.2 of the Rules and Regulations), resigns his membership (see Rule 23 of the Rules and Regulations), or if he is expelled from the Club (see Rule 25.2 of the Rules and Regulations). Moreover, there appears to have been no restriction on the right of the Appellant to deal with the entrance fees as it wished once they were received.
[21] The Appellant also refers to the decisions of Arthur Murray (NSW) Pty Ltd v Federal Commissioner of Taxation (1965) 114 CLR 314 (“Arthur Murray”), Eckel v Board of Inland Revenue [1989] STC 305 (“Eckel”), CIR v Montana Lands Ltd (1968) HKTC 334 (“Montana Lands”) and J P Hall & Co Ltd v Inland Revenue Commissioners [1921] 3 KB 152 (“J P Hall”) to support its case. These cases all hold that income will only be taxed when the taxpayer has earned it. However, the facts of these cases can be distinguished from these in the present proceedings such that it cannot be said that the Appellant in the present proceedings earned the entrance fees over a period of 30 years. Let me elaborate.
[22] The High Court of Australia decision of Arthur Murray concerned the taxation of income earned through contracts for the provision of services. In Arthur Murray, it was held that fees received in advance for a course of dancing lessons were not assessable income in the year of receipt. Although there was no contractual right to refunds, the Judge referred (at 319) to the “contingency that the whole or some part of [the fees] may have in effect to be paid back, even if only as damages, should the agreed quid pro quo not be rendered in due course.” The court described (at 318) profits which constitute income as:
[23] Counsel for the Appellant, relying on that case, argued that the Appellant had not earned the entrance fees in the years it became legally entitled to receive such fees because the Appellant was contractually obliged to provide the members with a premier club for 30 years. Arthur Murray, however, can be distinguished from the present case. Whilst Arthur Murray involved the taxation of fees received for a specified number of dancing lessons given over a period of time such that the fees for each dance lesson were not taxed as income until the lesson was actually given, the present case involves the taxation of entrance fees received for the grant of membership to the Club. Once membership is granted, the taxpayer has earned the entrance fees. The monthly subscription fees are separately taxed upon receipt, throughout the period of 30 years, as the income of the Appellant earned through its management of the Club.
[24] The cases of Eckel, Montana Lands and J P Hall concern income earned through contracts for the sale of goods. It is clear from the decisions in those cases, as will be discussed below, that a taxpayer will only be deemed, for tax purposes, to have earned his income when the goods which he has contracted to sell are delivered to the buyer.
[25] In the Privy Council decision (on appeal from the Court of Appeal of Trinidad and Tobago) of Eckel, the taxpayer had contracted to sell land in 1970 but was not assessed to tax in respect of any trading profit until 1973 and 1974 when she conveyed the land to the buyer. The Board, having examined the cases of J P Hall, Johnson (Inspector of Taxes v W S Try Ltd (1946) 27 TC 167, and IRC v Gardner Mountain and D’Ambrumenil Ltd (1947) 29 TC 69, concluded (at 310) that:
The Board held that the fact that the taxpayer had no legal title to the land and could not convey it in 1970, combined with the fact that her right to receive payment of the purchase price was contingent on the company requesting her to execute a prior conveyance, indicated that she had not done all that was required of her to reap the profit of her venture when she executed the contract in 1970.
[26] In the Supreme Court of Hong Kong decision of Montana Lands, the taxpayer carried on the trade of constructing and selling flats on an instalment basis. Completion did not take place until the final instalment was paid although the purchaser was allowed to occupy the flat before completion. The taxpayer was assessed to tax on unpaid instalments. The court held that the unpaid instalments were not taxable as the profit on the transaction was merely in the course of realisation until actual completion. The court noted (at 188–189) that the purchaser of a flat does not contract for mere possession or occupation but “for a title, in the form of a registrable deed of assignment of the property agreed to be bought and sold”.
[27] In the English Court of Appeal decision of J P Hall, the company entered into a contract to supply motor and motor gears over a period of time. The Court of Appeal held that the profits were taxable as and when the goods were delivered, and not when the contract was entered into.
[28] From a review of the above cases, it appears that the stage at which a taxpayer will be deemed to have done all that is required of it to earn the income depends on the particular trade it is engaged in. Where it has contracted to sell property (as in MPD, Eckel and Montana Lands), the taxpayer will have earned the income when: it is able to convey the property (Eckel); the purchaser of the property gets what he has contracted to buy from the taxpayer (Montana Lands); and the taxpayer has control over the purchase moneys received (MPD). Where the taxpayer has contracted to perform services, it will have earned the income when it has performed the service (Arthur Murray). When the taxpayer has contracted to supply goods, it will have earned the income when he supplies the goods (J P Hall).
The time of accrual of the entrance fees
[29] In the present case, the obligation of the Appellant, upon receipt of the entrance fees, was merely to admit the payer of the entrance fees to membership. The Appellant fulfilled this obligation when the liability of the member to pay the entrance fees accrued. The entrance fees paid to the Appellant can fairly be said to have “come home” to the Appellant upon the grant of membership since the Appellant was legally entitled to the whole of the entrance fees once the application for membership was approved.
[30] The Respondent relied on the decision in Pinetree to support its argument that entrance fees are taxable in full at the time the taxpayer receives them. In Pinetree, the Court of Appeal (at [23]), when considering what was labelled as an “initiation deposit” paid by a member of Pinetree Club upon being admitted to membership, interpreted the word “accrue” in s 10(1) of the Act to mean “to which any person has become entitled” (see also above at [13]). Although the issue in Pinetree was whether the initiation deposit was a loan or income rather than whether the initiation deposit could be regarded as income at the time of receipt, the court did consider the taxpayers’ argument that the initiation deposits should not be regarded as having accrued to the taxpayer as they were subject to legal impediments. The taxpayers in Pinetree cited the case of Arthur Murray in support of this proposition. The court observed (at [43]) that, in the court below, Tan Lee Meng J had distinguished Arthur Murray from Pinetree on the grounds that Arthur Murray concerned advance payments, which was unlike the circumstances in Pinetree. The court proceeded to observe as follows (at [43]):
The court dismissed (at [45]) the appellants’ claim that they had not “received” the moneys in a true sense of the word as the members were free to reclaim the initiation deposits on the ground that the appellants in Pinetree had been at liberty to use the moneys representing the initiation deposits as they pleased. It is clear from the reasoning of the court that the fact that the initiation deposits may have been forfeited at a later date did not prevent them from constituting income at the time of receipt. Similarly, in the present case, the fact that the Appellant might be liable to its members in an action for breach of contract if the Appellant fails to provide them with the use of a premier club for a duration of 30 years should not prevent the entrance fees (received in consideration for the grant of membership to the Club) from constituting income of the Appellant at the time of receipt.
[31] By way of a coda, it might be noted that the views of learned scholars add further support to the conclusion that an entrance fee comprises only the consideration for the ability to join a club and should be taxable at the time it is incurred.
[32] Ashton and Reid have commented as follows (see Ashton and Reid on Club Law (David Ashton and Paul Reid, Jordan Publishing Limited, 2005) (“Ashton and Reid”) at para 4-38):
Although Ashton and Reid recognised, by reference to the decision of Lawrence J in the English High Court decision of Re Curzon Syndicate Ltd [1920] LT Jo 232, that the point may not be free from doubt, they sought to distinguish this decision on its facts. In Re Curzon Syndicate Ltd, one of the plaintiffs successfully claimed back her entrance fee in the liquidation when the proprietary club closed down. The learned authors comment that special circumstances may have applied in the said case. In particular, they observed as follows (at para 4-38):
[33] J F Josling and Lionel Alexander, in Law of Clubs (Longman, 6th Ed, 1987) referred (at p 34) to the decision of Hawkins J in Re Duty on the Estate of the New University Club (1887) 18 QBD 720 where the nature of members’ subscriptions and entry fees to a members’ club was considered. Hawkins J stated (at 727) that:
Josling and Alexander comment (at pp 34–35) that:
[34] In the present case, the entrance fees were paid in exchange for admittance into membership of the Club. Although it is a term of the contract for the grant of membership that the membership would last for 30 years, this merely affects the characteristic of the membership granted. Just like those of the proprietary club taxpayer in HU v Comptroller of Income Tax [1999] SGITBR 1, the memberships of the Club in the present case are transferable (see Rules 8.1 and 9.1 of the Rules and Regulations). In HU v CIT, the Income Tax Board of Review held (at [65]) that:
I accept the Respondent’s submission that a membership of the Club is a chose in action (although it does not confer any rights on the members to the assets of the Club as such (see the analysis below at [83]–[87])). This chose in action was granted to the members on the date that liability to pay the entrance fees accrued. As such, the Appellant earned the full amount of the entrance fees at that particular point in time.
[35] The Appellant argues that if it is found, as the Respondent submits, that the entrance fees accrued as income once the members were admitted to membership, it must follow that the entire entrance fees received by the Appellant was income of a certain Year of Assessment (1998) and not income of the other years of assessment under appeal (ie, 1999–2003) whenever the instalment payments of the entrance fees were received. The Respondent contends that this is a concessionary tax treatment that was eventually granted to the Appellant. I find that the Respondent is entitled to allow this concessionary tax treatment and this should not detract from the Respondent’s legal right to tax the income once it accrues.
The deductibility of the expenses incurred
Introduction
[37] However, although this issue may appear to be a simple one, nothing could be further from the truth. As I observed in the Court of Appeal decision of Comptroller of Income Tax v IA [2006] 4 SLR(R) 161 (at [1]-[2] and [65]-[66]):
[38] The observations just quoted emphasise a point made in the Introduction to this judgment (at [7]) – that whilst the particular factual matrix in the case is of special importance in the context of income tax, one cannot (and must not) rely merely on the trite mantra that “It all depends on the facts”. The applicable legal rules and principles (which possess the requisite normative force that justifies the decision arrived at by the court) must be applied to the facts at hand. That having been said, the applicable legal rules and principles are – unfortunately – not a model of precision, to say the least. Indeed, the courts have – over many years – mooted several tests which are supposed to aid the court in ascertaining whether or not a specific item (or items) of expenditure are either capital or revenue in nature. However, there is no clear guidance as to which test ought to prevail; indeed, as we shall see, some tests also appear to overlap with each other. Further, the very application of these principles in the actual cases themselves demonstrates that the tests concerned do not – except in the clearest fact situations – yield close to determinate results; more specifically, the presence of dissenting judgments is a clear indication in this particular regard. All this generates, with respect, more legal heat than light. Hence, it is important to review the various tests postulated before applying one of them (or a combination thereof) to the facts of the present appeal. However, before proceeding to do so, it would be apposite to set out the relevant provisions of the Act itself.
The relevant provisions
[39] Section 14 of the Act provides for deductions against income. The provision itself comprises, in fact, a number of categories of deductions (viz, general, specific, special as well as further deductions, respectively; see also generally Halsbury’s Laws of Singapore at paras 205.089–205.092). For the purposes of the present appeal, the relevant provision relates to general deductions under s 14(1), the material part of which reads as follows:
[40] However, s 15 of the Act lists the types of deductions which are not allowed (see also Halsbury’s Laws of Singapore at para 205.089). In particular, s 15(1)(c) (referred to above at [36]) is of crucial relevance in the present appeal, and reads as follows:
Section 14(1)(h) of the Act allows for the deduction of capital expenditure:
In other words, the Act clearly prohibits the deduction of capital expenditure except where s 14(1)(h) of the Act applies or where the deduction of such expenditure is specifically provided for in the Act (see, in particular, s 14A–Q of the Act). In this regard, and as a matter of general principle, the following observations by Sir Wilfrid Greene MR in the English Court of Appeal decision of Commissioners of Inland Revenue v British Salmson Aero Engines, Limited [1938] 2 KB 482 (“British Salmson Aero Engines”) (at 498) might be usefully noted (see also the reference to the Heasman Report above (at [5])):
[42] This is an appropriate juncture to consider the various tests which are supposed to aid the court in ascertaining whether or not a specific item (or specific items) of expenditure are either capital or revenue in nature.
The tests considered
[43] As already mentioned, there are a number of tests on offer, so to speak (and for general overviews, see, for example, Halsbury’s Laws of Singapore at paras 205.095–205.096; Pok Soy Yoong & Damian Hong Chin Fock, Singapore Taxation (2nd Ed, Butterworths, 1989) (“Singapore Taxation”) at pp 88–91; Peter G Whiteman, David Goy, Francis Sandison & Michael Sherry, Whiteman on Income Tax (Sweet & Maxwell, 3rd Ed, 1988) (“Whiteman”) at paras 6-08-6.23 and (especially) 7-02-7-10 and Michael Sherry and Louise Rippon, Eighteenth Cumulative Supplement to the Third Edition of Whiteman on Income Tax (Sweet & Maxwell, 2008) at paras 7-02–7-11; as well as Revenue Law at pp 444–446).
(1) The “once and for all” test
[44] At this juncture, it should be noted that there was, first, an early test (popularly referred to as the “once and for all” test, which is contained in the observations of Lord Dunedin in the Scottish Court of Session (First Division) decision of Vallambrosa Rubber Co Ltd v Farmer (1910) 5 TC 529 (“Vallambrosa”), where it was observed (at 536) that “capital expenditure is a thing that is going to be spent once for all, and income expenditure is a thing that is going to recur every year”. However, this is a very broad test and is (as we shall see) subsumed within a more comprehensive test (which is considered next). Indeed, Lord Dunedin himself sounded a note of caution on this particular test by way of the following prefatory remark, as follows (at 536):
More importantly, in a case which embodies the next – and more comprehensive – test, viz, the House of Lords decision of British Insulated and Helsby Cables, Limited v Atherton [1926] AC 205 (“Atherton”), Viscount Cave LC expressed the view (at 213) that the test enunciated by Lord Dunedin in Vallambrosa “is not, and was obviously not intended by Lord Dunedin to be, a decisive one in every case; for it is easy to imagine many cases in which a payment, though made “once and for all”, would be properly chargeable against the receipts for the year”. The learned law lord then proceeded to observe thus (at 213):
Most importantly, Viscount Cave LC then proceeded to enunciate what constitutes the next test – to which our attention must now turn.
(2) The “enduring benefit of the trade” test
[45] The second – and, arguably, most well-known as well as well-cited – test is to be found in the judgment of Viscount Cave LC in Atherton. In that decision, the learned law lord observed thus (at 213-214):
[46] It is interesting to note that the actual decision in Atherton itself was not a unanimous one (the House holding that the relevant expenditure was capital in nature by a bare majority of three to two). In this case, the appellant taxpayer (who was a manufacturer of insulated cables) had a substantial complement of clerical and technical staff. In order to enhance its business and stem the loss of experienced staff, it established a pension fund for its clerical and technical staff. A sum was paid by the appellant into this fund and the issue was whether or not such payment was an admissible deduction in computing its profits for the purpose of assessment to income tax in that particular financial year. The majority (comprising Viscount Cave LC, Lord Atkinson and Lord Buckmaster) held that the payment was in the nature of capital expenditure and was thus not an admissible deduction. Lord Carson and Lord Blanesburgh disagreed. In particular, Viscount Cave LC was of the view that, without the said payment, the pension fund might not have come into existence at all. The learned law lord concluded (at 214) that:
However, Lord Carson expressed a different view altogether; the learned law lord opined thus (at 225 and 226):
And Lord Blanesburgh was of the view, inter alia, that the payment concerned was similar to an increased remuneration to the employees concerned. The difference in result is, at bottom, a difference in the characterisation of the facts. The majority of the House in this case viewed the payment concerned as strengthening the core structure and business of the company, so to speak, and was (looked at in that light) a capital expenditure, whereas the minority was of the view that the payment concerned was merely a revenue expense in relation to the payment of salaries. It cannot, in my view, be said that one view is clearly and definitively superior to the other, although the majority view is helpful in so far as it accords some flexibility to the manner in which a particular expenditure is analysed as being capital (as opposed to being revenue) in nature.
[47] Further, although Atherton is considered a leading decision, it is by no means a panacea. Not surprisingly, therefore, Lord Macmillan proffered the following cautionary remarks in the House of Lords decision in Van den Berghs, Limited v Clark (Inspector of Taxes) [1935] AC 431 (“Van den Berghs”) (at 439):
[48] Indeed, that part of Viscount Cave LC’s judgment referring to the requirement of an “enduring benefit” (which is the key addition to the “once and for all” test enunciated in Vallambrosa) gives rise to particular difficulties as many types of expenditure may have an enduring effect but nevertheless not be of a capital nature (see, for example, per Lord Reid in the House of Lords decision of Commissioner of Inland Revenue v Carron Company (1968) 45 TC 18, where the learned law lord observed (at 68) that “money spent on income account, for example on durable repairs, may often yield an enduring advantage” and that “[i]n a case of this kind what matters is the nature of the advantage for which the money was spent”).
(3) The “fixed and circulating capital” test
[49] The third test centres on the distinction between fixed and circulating capital. As Prof Tiley helpfully observes (Revenue Law at p 445):
[50] However, as the learned author then proceeded to – both pithily as well as perceptively – observe (Revenue Law at p 445):
[51] I would tend to agree with the view just expressed (see also Singapore Taxation at p 90 (where the test is stated by the learned authors to be “of limited usefulness only”) as well as Whiteman at para 6-09 (where the learned authors observe that “[t]his distinction however has its own problems, as it is not possible to draw an exact line of demarcation between fixed and circulating capital)). The distinction between fixed and circulating capital does not, with respect, represent an advance – in substance at least – over the test in Atherton and may even be said, in some cases at least, to (as Prof Tiley has observed) assume the very thing (viz, the distinction between capital and revenue) that has to be proved. Indeed, in Van den Berghs, Lord Macmillan observed thus (at 443):
[52] This unfortunate result is, perhaps, not surprising. Absent the elaboration that is to be found in cases such as Atherton, there appears to be no real guidance in this particular test. Indeed, it is suggested that the application of the test might – on occasion at least – compound the problem, especially if the fact situation is a borderline or marginal one. That having been said, there is nevertheless case law which has applied this test, the seminal decision being that of the House of Lords in John Smith and Son v Moore [1921] 2 AC 13. In that case, Viscount Haldane observed thus (at 19–20):
[53] The test was also applied in the Australian Privy Council decision of BP Australia Ltd v Commissioner of Taxation of the Commonwealth of Australia [1966] 1 AC 224 (“BP Australia”), where Lord Pearce, delivering the judgment of the court, observed thus (at 265–266):
Reference may also be made to Atherton (at 234 and 236); the Privy Council decision (on appeal from the Rhodesian Court of Appeal) of British South Africa Company v Commissioner of Income Tax [1946] AC 62 (“British South Africa”) at 80; and the Privy Council decision (on appeal from the Federal Supreme Court of the Federation of Rhodesia and Nyasaland) of Commissioner of Taxes v Nchanga Consolidated Copper Mines Ltd [1964] AC 948 (“Nchanga”) at 960.
[54] Interestingly, though, Rowlatt J did, in the English High Court decision of Anglo-Persian Oil Company, Limited v Dale (HM Inspector of Taxes) (1931) 16 TC 253 (affirmed by the Court of Appeal and reported in the same citation as well at [1932] 1 KB 124), when referring to the “enduring benefit of the trade” test embodied within the judgment of Viscount Cave LC in Atherton (above at [45]), observe (at 262) that “[w]hat Lord Cave is quite clearly speaking of is a benefit which endures, in the way that fixed capital endures; not a benefit that endures in the sense that for a good number of years it relieves you of a revenue payment” [emphasis added]. Although the learned judge did not expressly equate the “enduring benefit of the trade” test with the present test (which draws a distinction between fixed and circulating capital), it is suggested that there is clearly an overlap and, having regard to the analysis I have proffered above, perhaps even a complete overlap (viz, equivalence) between both tests.
(4) The “identifiable asset” test
[55] The fourth test is the “identifiable asset” test, which was described by Lord Wilberforce in the leading House of Lords decision of Tucker (Inspector of Taxes) v Granada Motorway Services Ltd [1979] 1 WLR 683 (“Tucker”) as follows (at 686):
[56] However, this particular test may not be as useful as it appears at first blush – save for the assumption that money spent on the acquisition of an asset should be regarded (in the first instance at least) as capital expenditure. However, even this assumption does not do away with the need for the court concerned to scrutinise the relevant factual matrix closely in any event. Further, this particular test appears simply to be another way of expressing the “enduring benefit of the trade” test in Atherton (see above at [45]) inasmuch as Lord Wilberforce proceeds, in Tucker, immediately to refer to the proposition laid down by Viscount Cave LC in Atherton (see at 686). Finally, the learned law lord himself, whilst arguing that the test should be maintained, nevertheless introduced the following qualification (at 687):
As an interesting coda of sorts, it should be noted that Lord Salmon dissented on the facts of Tucker itself.
(5) What is the present position?
(a) Commonsense and Uncertainty
[57] What are we to make of the various tests? Unfortunately, the legal prognosis – as demonstrated in the case law – is far from “healthy”. For example, that very experienced tax judge, Rowlatt J, observed, in the English High Court decision of Countess Warwick Steamship Company, Limited v Ogg (Inspector of Taxes) [1924] 2 KB 292 at 298, as follows:
[58] And, not many years later, Sir Wilfrid Greene MR observed, in British Salmson Aero Engines, thus (at 498):
[59] This somewhat nebulous position has – unfortunately – not improved with the passage of time. In BP Australia, for example, Lord Pearce observed thus (at 264–265):
It may be worthy to note that another decision (of the House of Lords) was also handed down the same day as the decision in BP Australia, viz, Regent Oil Co Ltd v Strick (HM Inspector of Taxes) [1966] AC 295 (“Strick”). They were – in Brightman J’s words in the English High Court decision of ECC Quarries Ltd v Watkis (HM Inspector of Taxes) [1977] 1 WLR 1386 (at 1396) – “comparable cases of petrol station ties”. However, the actual results arrived at in both decisions were quite different inasmuch as the court in BP Australia held that the expenditure concerned was revenue in nature, whereas the court in Strick held that the expenditure in that particular case was capital in nature (see also Whiteman at paras 7-07-7-09). Indeed, as we have seen, there can be differing views even within the same case (see, for example, the decision in Atherton, referred to above (at [46])). It is true that one can explain such differences in result by referring to the different fact situations. However, the dangers of unnecessary uncertainty can, it is suggested, be at least reduced if more specific legal rules and principles are formulated – as opposed to relying merely on commonsense. In fairness, Lord Pearce may be said (in BP Australia) to have been concerned more with the use of commonsense in the application of the legal rules and principles to the facts of the case rather than relying on commonsense per se as the guiding normative principle. Indeed, in Strick itself, Lord Reid also observed thus (at 313):
[60] And, in Tucker, Lord Wilberforce was (at 686) of the view that:
[61] Turning to an even more recent decision, that of the English High Court in Vodafone Cellular Ltd v Shaw (HM Inspector of Taxes) (1997) 69 TC 376, the overall situation appears to be the same. In that case, Jacob J (citing observations made by Lord Reid in Strick and by Lord Wilberforce in Tucker (see also above at [59] and [60], respectively)) observed (at 425) that:
And, at the Court of Appeal stage (reported under the same citation), Millett LJ observed thus (at 433):
All this is reminiscent of Lord Denning MR’s own observations in the earlier English Court of Appeal decision of Heather (HM Inspector of Taxes) v P-E Consulting Group Ltd [1973] Ch 189 (“Heather”), where the learned Master of the Rolls observed thus (at 216):
[62] At this juncture, we are, I would suggest, dangerously close to moving (or even careening dangerously) down that slippery slope which I cautioned that we should avoid, viz, that “It all depends on the facts” (see also above at [7] and [38]). Is it possible, in the circumstances, to arrive at a composite (albeit integrated) test of sorts? In this regard, I am fortified by the optimism demonstrated in the following observations of Dixon J in the High Court of Australia decision of Hallstroms Proprietary Limited v The Federal Commissioner of Taxation (1946) 72 CLR 634 (“Hallstroms”) (at 646):
[63] All this is not to state that commonsense ought to be avoided. Far from it. However, a balanced approach is required. As Megarry J observed in the English High Court decision of Simpson v Jones (Inspector of Taxes) [1968] 1 WLR 1066 (“Simpson”) (at 1074–1075):
[64] I should also observe that I am unable to endorse fully the following observations by Viscount Radcliffe, delivering the judgment of the court in the Privy Council decision in Nchanga, where the learned law lord was (at 959) of the following view:
Whilst I agree – to a large extent – with the learned law lord’s observations, to the extent that he views the various legal criteria as having merely descriptive (as opposed to normative) force, I must beg to differ. By definition and inherent nature, every legal rule or principle must necessarily have normative force if it is to be a “legal” rule or principle that is, by definition, potentially applicable in a general manner to all future fact situations as well. However, I do agree with Viscount Radcliffe that the various formulations in the various tests are by no means “definitive”. Nevertheless, consistent with the positive spirit expressed by Dixon J in Hallstroms (above at [62]), I shall endeavour to lay down what appear to me to be helpful legal principles that can aid the court in ascertaining whether a particular expenditure is either capital or revenue in nature. Whilst they should obviously be viewed as mere guidelines, I have endeavoured to state them as a related series of propositions, proceeding from the first (which is general) to the second (which comprises particular guidelines). The more particular or specific guidelines in the latter are intended to elaborate upon the general proposition (which comprises the former). It is also important to view the various guidelines in the various tests as the “bridge” or “link” between theory and practice. In particular, the guidelines – being more specific and particular by nature – assist courts in focusing on the precise facts in the case at hand. It is important to note that they do possess normative force (see above at [38]), although they are more specific than the (general) proposition embodied in the first proposition (below at [71]).
[65] However, I should add that there is nothing new in so far as content is concerned. It is, rather, an attempt to consolidate the various tests into a composite and integrated whole. That such consolidation is necessary is evident, it is suggested, from the very relationships amongst the various tests themselves. Let me elaborate.
[66] First, as we have already seen above (at [44]), the “once and for all” test has been subsumed within the “enduring benefit of the trade” test.
[67] Secondly, as we have also seen above (at [54]), there is an overlap (or even complete coincidence or equivalence) between the “enduring benefit of the trade” test and the “fixed capital and circulating capital” test.
[68] Thirdly, we have also seen above (at [56]) that there is a possible overlap (or even complete coincidence or equivalence) between the “enduring benefit of the trade” test and the “identifiable asset” test.
[69] In the circumstances, it would appear that the “enduring benefit of the trade” test (enunciated by Viscount Cave LC in Atherton (see above at [45])) is, despite its weaknesses (see above at [48]), probably still – in substance at least – the main test.
[70] With these preliminary observations in mind, let us gather the various threads together and attempt to set out a composite and integrated approach (comprising the two related propositions – one general, the other specific – which I have already alluded to above).
(b) Gathering The Threads Together – A Proposed Composite And Integrated Approach
(I) The First Principle (General)
[71] First, the court must, as a matter of general principle, look closely at the purpose of the expenditure and ascertain whether or not such expenditure either created a new asset or opened new fields of trading not hitherto available to the taxpayer (and see per Lord Reid in Carron (at 68)) – in which case the expenditure concerned would be capital (and not revenue) in nature. In the former respect, I would think that an expenditure which strengthens an existing asset would also be one that is capital in nature. The latter aspect (viz, the opening of new fields of trading not hitherto available to the taxpayer) may – on one view at least – be viewed as a more specific example of the former in so far as a new field of trading may be viewed (in substance, if not also form) as a new asset which inures to the benefit of the taxpayer. A similar – and helpful - idea as well as approach is contained within the following passages from Whiteman (at para 6-09 (although dealing with the distinction between revenue and capital receipts, the general principles apply equally (as the authors themselves quite correctly acknowledge) to the distinction between revenue and capital expenditure as well (see Whiteman at para 7-02)):
[72] It is, I would observe, at this particular juncture, that we find the (albeit general) confluence between law and fact, between general rule (as well as principle) and the particular facts. However, how, it might be asked, is one to ascertain whether or not an expenditure has created a new asset (or strengthened) an existing asset, or opened new fields of trading not hitherto available? This is a highly relevant (as well as significant) question, and brings us to a second (and more specific, albeit closely related) proposition (which effects, as we shall see, a specific and complete (or bridging) confluence) between the general rule (as well as principle) and the particular facts in the case concerned.
(II) The Second Principle (Comprising Specific Guidelines)
[73] Secondly, whether or not an expenditure has created (or strengthened an existing asset), or created a new field of trading not hitherto available to the taxpayer, would lead us back to the various tests. In this regard, we have seen that we are, in the main, brought back (see above at [66]-[69]) to the “enduring benefit of the trade” test embodied in the proposition by Viscount Cave LC in Atherton (above at [45]). In addition to that test, the following observations by Viscount Radcliffe in Nchanga (at 960) seem to me to constitute a cogent as well as practical approach (see also the endorsement by Lord Upjohn in Strick (at 343)):
One other set of observations which are, in my view, also of cogent as well as practical assistance is to be found in the judgment of Dixon J in the High Court of Australia decision of Sun Newspapers Limited v The Federal Commissioner of Taxation (1938) 61 CLR 337 (“Sun Newspapers”), as follows (at 636):
The guidelines set out in the preceding quotation are of particular significance as well as utility because Dixon J attempts to consolidate as well as integrate the tests and guidelines that had been set out in the prior precedents. This is precisely the ideal which I have already referred to above (at [64]). Indeed, Lord Upjohn referred to the judgment of Dixon J in Sun Newspapers as containing “very useful observations” (see Strick (at 343)) and Lord Wilberforce referred to it a “classic judgment” (see Strick (at 347)). Further, the learned authors of Whiteman were “of the opinion that as valuable a guide as any in distinguishing between capital and revenue expenditure is to be found in the classic judgment of Dixon J. in Sun Newspapers Ltd. v. Federal Commissioner of Taxation” (see Whiteman at para 7-06). Finally, in his very comprehensive and erudite biography, Prof Philip Ayres observed that “the most important common-law judgment [Dixon J] wrote in the late 1930s was that for a revenue case, Sun Newspapers Ltd, the first of several in which he analysed in a fresh way the concepts of capital and revenue in relation to deductible outgoings, the analysis extending to capital and income in relation to assessable income” (see Philip Ayres, Owen Dixon (The Miegunyah Press, 2003) at p 93). The learned author also observed (at p 94) that “in writing his judgment, Dixon, unlike his brother judges, had developed the law”.
[74] More specifically, the authors of a leading textbook have proffered – in the context of receipts (which would, in my view, be applicable as a matter of general principle to expenditure as well) – “five basic propositions which they consider emerge from the cases on the capital/revenue receipt question”, as follows (see Whiteman at para 6-11):
[75] Taking into account the various propositions as well as observations set out in the preceding two paragraphs, the position (vis-à-vis the second proposition) may (at least tentatively) be summarised as follows:
(a) In ascertaining whether or not the expenditure relates to the creation of a new asset or new field of trading (or the strengthening thereof), the purpose of the expenditure must be ascertained; in particular, the court should have regard to the following guidelines (bearing in mind that the categories of guidelines are not closed):
(i) The manner of the expenditure, in particular, whether the expenditure was a one-time expenditure or a recurrent expenditure. Although this is not conclusive in and of itself, a one-time expenditure would tend to suggest that that expenditure is capital in nature.
(ii) The consequence or result of the expenditure. In particular, if the expenditure results in either the strengthening of the existing core business structure of the taxpayer or adds to that structure, it is more likely to be capital in nature. In this regard, the concept of a “core business structure” may be seen as comprising the permanent (albeit not necessarily perpetual) structure of the taxpayer’s business which is utilised for the generation of profits and is (to that extent) to be viewed as constituting the (permanent) assets of the business itself (an oft-used analogy in this regard is the distinction between the tree (which is the source of the fruit) and the fruit itself). However, where the “assets” are themselves the stock-in-trade of the business, expenditure in relation to such “assets” is more likely to be revenue in nature.
(b) In applying the various guidelines set out above (as well as any other specific (and applicable) guidelines to be found in the case law generally), the specific facts are obviously of the first importance. However, the facts – in and of themselves – have no normative force and therefore cannot be the justification (in and of themselves) for the decision arrived at by the court because to do so would be, in effect, to hoist oneself by one’s own legal petard. As noted in the introduction (above at [7]), the categorisation of an expenditure as being of capital or income nature cannot rest simply on the court’s appraisal of the facts. Whilst different factors may be relevant in each case to the determination of the nature of the expenditure in light of all the circumstances of that case, the underlying principle is that for the expenditure to be of a capital nature, the first principle (as detailed above at [71]-[72]), viz, that the expenditure must have either created a new asset or opened new fields of trading not hitherto available to the taxpayer, must be complied with. The guidelines laid down at (a) above are useful factors to be considered in the analysis of whether the expenditure in a particular case complies with this principle although the weight of each factor depends upon the nature of the expenditure. Moreover, previous decisions of the courts provide guidance as to the factors which may point towards an income or capital expenditure in each unique set of circumstances, particularly where the facts of the case at hand are analogous to those in a previous decision.
[76] Let us turn now to apply the various tests in general and the approach just proposed in particular to the facts of the present appeal.
Application of the tests and proposed approach to the facts of the present appeal
(1) The deductibility of the costs of acquiring the land and constructing the building
[77] It is important, first, to set out the precise factual matrix. As already mentioned, the Appellant was incorporated in order to build and operate the Club. Hence, it was imperative that the Appellant acquire the land as well as construct the requisite building in order to furnish the basic (and permanent) infrastructure without which the Club could not even begin to operate in the first instance. Indeed, the raison d’être of the Club was to provide its members with the promised facilities and such facilities required a land and a building to begin with. The land and building themselves represent assets as well as (as just mentioned) basic (and permanent) infrastructure which belonged to the Appellant and did not comprise stock-in-trade which the Appellant dealt with in the course of its business (which was, as also just mentioned, to provide the promised facilities to its members instead).
[78] It is also important to note, at this juncture, that it would appear that the acquisition of land or any interest in land would point very strongly to a capital – as opposed to a revenue – expenditure (see also Strick at 336, per Lord Pearce). Indeed, in Strick itself, Lord Upjohn opined thus (at 341):
[79] The underlying rationale for the view expressed in the preceding paragraph is both logical as well as commonsensical. It stems not simply from an irrational fixation with real property. In other words, it is not rooted in the concept of physicality but is, rather, related to the concept of the acquisition of a real asset (to which the physical attributes merely serve to drive home the point).
[80] Turning to the various guidelines (particularly those contained in the second principle set out above (see especially at [75]), it is clear that the purchase of the land as well as the construction of the building by the Appellant is a one-time expenditure. More importantly, as already pointed out, the result of such expenditure is the acquisition of an asset which simultaneously constitutes the permanent (albeit not perpetual) structure of the Appellant’s business of furnishing facilities to its members. That the asset is not perpetual is clear since the lease is for 30 years, although that is not (as we have just noted) a critical factor since permanence is not to be equated with perpetuity. Moreover, the asset is lasting insofar as it lasts throughout the duration of the trade and is not extinguished or diminished by each trading transaction.
[81] Indeed, despite potential difficulties that arise with regard to fact situations (especially in the context of tax), this is (as I have detailed above) a very clear case.
[82] However, perhaps recognising this, counsel for the Appellant, Mr Gandhi, sought to argue along a completely different tack, commencing from the fact that the lease was in fact for a fixed term of 30 years. In this regard, the sheet anchor of his case in terms of the case law was the Privy Council decision in British South Africa. In particular, Mr Gandhi argued that the Appellant had, in economic substance, “sold” the entire assets of the Club (including the land and the building) to its members, especially if one has regard to the fact that the lease is for a fixed period of 30 years. The argument is an ingenious one but is – to put it mildly - rather radical in the light of the conventional view that has been adopted vis-à-vis land and buildings (as briefly set out above). More importantly, it is an argument which does not, with respect, comport with what was the true bargain between the Appellant on the one hand and each of its members on the other. Let me elaborate.
[83] The essence of the transaction between the Appellant and each of its members was clear right from the outset. In the application form for membership, each applicant had, in the section entitled “Applicant’s Declaration”, to declare, inter alia, the following:
[84] The declaration set out in the preceding paragraph did not comprise mere formal words devoid of substance or meaning. That this is the case is confirmed in no uncertain terms by the salient Rules and Regulations of the Club (“Rules and Regulations”) themselves. Indeed, it is clear beyond peradventure that the Rules and Regulations comprise a binding legal contract between the Appellant on the one hand and each of its members on the other. In particular, Rule 21.2 and (especially) Rule 34 of the Rules and Regulations ought to be noted, and read as follows:
[85] Rule 1 as well as Rule 3.1 and Rule 3.2 of the Rules and Regulations may also be usefully noted and read as follows:
[86] More importantly, for the purposes of the present issue, Rule 3.5, Rule 3.6, Rule 4 as well as Rule 5.1, Rule 5.5 and Rule 24.1 (in particular the first three Rules) are relevant, and read as follows:
[87] It is clear beyond any doubt whatsoever, from the rules reproduced in the preceding paragraphs, that every member of the Club was only furnished with a licence to use the facilities of the Club and that all the assets of the Club (which included the land and the building) belonged to the Appellant. This could not, in my view, have been expressed in clearer language than that contained in the aforementioned Rules. As already noted, however, the Appellant nevertheless continued to argue that all the assets of the Club had, in economic substance, been conveyed by the Appellant to the members. Since legal title to, inter alia, the land and the building continued to reside in the Appellant, if the Appellant is correct in its argument, this must mean that it holds, inter alia, the land and the building on trust for its members. With respect, this is an argument that is a last-ditch attempt to avoid what is clear from the facts and the case law – which is that the land and the building constitute capital (and not revenue) expenditure (see the analysis above at [77]-[81]). When pressed during oral submissions, even Mr Gandhi (quite correctly and candidly, in my view) conceded that the argument from a trust was difficult to maintain, to say the least. Indeed, it is clear, from the contract between the Appellant on the one hand and each of its members on the other, that only a licence was granted to the latter by the former. Nothing could be plainer and this is wholly consistent with the context of the business of the Appellant, viz, the operation of a club for the benefit of its members. Indeed, if the Appellant’s argument holds good, then every member of every club which is operated from land belonging to a club that is of a fixed duration would be able to claim pro rata ownership of the assets of the club concerned. A moment’s reflection will reveal that this is, with respect, completely untenable. There was no evidence whatsoever of an underlying (and alternative) arrangement between the Appellant and its members. Indeed, the Appellant’s argument creates interpretive contortions where none is present and distorts, in the process, the clear and unambiguous language as well as intention underlying the contractual relationship between the parties themselves.
[88] However, relying on the Privy Council decision in British South Africa, Mr Gandhi nevertheless persevered during oral submissions with this line of argument. With respect, however, a close reading of that decision will reveal a very different context as well as fact situation altogether. Let me elaborate.
[89] The fact situation in British South Africa was a straightforward one. Simplifying the facts somewhat, the appellant taxpayer, which was incorporated by Royal Charter, had acquired numerous concessions with regard to minerals and mining rights. It subsequently granted concessions conferring prospecting as well as other rights in respect of the minerals it owned to third parties and the issue arose as to whether or not the receipts in money and shares from the third parties was to be included as income for the purposes of income tax. The Privy Council held, first, that whilst the receipts did not fall within s 5(f) of the Income Tax Ordinance of Northern Rhodesia (relating to “rents, royalties, premiums and any other profits arising from property”), they fell, instead, with s 5(a) of the same Ordinance (relating to “gains or profits from any trade, business, profession or vocation”). However, the further issue arose as to whether or not there could be a deduction in favour of the appellant taxpayer against these receipts. In this regard, Viscount Simon, who delivered the judgment of the court, observed thus (at 80–81):
The licences were exclusive, conditional, non-transferable, for a period of years only and subject to forfeiture. However, in their Lordships’ view, it was immaterial that in dealing with its mineral rights, the company retained an interest either by way of a possible reverter of the property or by a shareholding in a company to which it made a special grant. Whilst Viscount Simon acknowledged the general rule to the effect that where the income of a taxpayer is derived from the exhaustion of a capital asset, no deduction can be allowed for the cost of that asset, he was of the view that an exception to that rule existed, as follows (at 82):
In the circumstances, the court was of the view that, as some deduction ought to be allowed, the judgment of the Rhodesian Court of Appeal to the contrary was set aside, and the matter was referred back to the Commissioner of Income Tax for re-assessment “to the best of its judgment” pursuant to s 40(2)(b) of the Ordinance.
[90] It can be seen immediately that the fact situation in British South Africa was completely different from that which obtained in the present proceedings. Put simply, the very pith and marrow of the business of the taxpayer in British South Africa centred on not only the acquisition, but also the sale, of its mineral concessions and mining rights. In other words, these concessions and rights constituted the stock-in-trade of the taxpayer and were therefore deductible against the income it received. In the present proceedings, however, the pith and marrow of the business of the Appellant is not the acquisition and sale of the land or the building – or, indeed, any of the assets of the Club for that matter. On the contrary, the Appellant’s business centred on the operation of the Club for the benefit of its members. Indeed, the members did not possess any rights to the assets of the Club. As I have demonstrated above, they merely obtained a licence to use the facilities of the Club in accordance with the terms contained in the Rules and Regulations.

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ABD Pte Ltd v Comptroller of Income Tax

Laws this judgment relies on

Grounds of decision

Introduction

The factual background

The issues

The decision of the Board

Analysis and decision

The date of assessment of the entrance fees

Introduction

The relevant provision

The relevant case law

The time of accrual of the entrance fees

The deductibility of the expenses incurred

Introduction

The relevant provisions

The tests considered

(1) The “once and for all” test

(2) The “enduring benefit of the trade” test

(3) The “fixed and circulating capital” test

(4) The “identifiable asset” test

(5) What is the present position?

(a) Commonsense and Uncertainty

(b) Gathering The Threads Together – A Proposed Composite And Integrated Approach

(I) The First Principle (General)

(II) The Second Principle (Comprising Specific Guidelines)

Application of the tests and proposed approach to the facts of the present appeal

(1) The deductibility of the costs of acquiring the land and constructing the building