BFC v Comptroller of Income Tax

Lai Siu Chiu J:

[1] This is an appeal by a taxpayer (“the Appellant”) against the decision of the Income Tax Board of Review (“the ITBR”) in Income Tax Appeals Nos 6 and 7 of 2011. The ITBR upheld the decision of the Comptroller of Income Tax (“the Comptroller”) that certain borrowing expenses incurred by the Appellant in respect of two bond issues were not deductible for the purposes of assessing income tax. Dissatisfied with the decision of the ITBR, the Appellant appealed to the High Court vide this Income Tax Appeal No 2 of 2013 (“TA 2/2013”).

[2] The Appellant carries on the business of hospitality, investment holding and property investment. The Appellant also owns and operates a hotel (“the Hotel”). In 1995 and 1996, the Appellant issued bonds (subsequently referred to as “the 1995 Bonds” and “the 1996 Bonds” respectively). Each bond issue was for a five year term with the 1995 Bonds maturing in 2000 and the 1996 Bonds maturing in 2001.

[3] The 1995 Bonds were secured bonds with a principal amount of $150,000,000. Interest was payable semi-annually in arrears on the principal amount at 5.625% per annum. In addition to interest, the Appellant also offered a discount and redemption premium to purchasers. The issue price of the 1995 Bonds was set at 99.5695% of the principal amount. This provided a discount of 0.4305% or $645,750 on the principal amount. The redemption premium, which was payable upon maturity and set at 1.5% of the principal amount, amounted to $2,250,000.

[4] It was the Appellant’s case that the proceeds of the 1995 Bonds were used for three purposes: (a) the financing of the renovation of the Hotel; (b) the refinancing of the existing borrowings of both the Appellant and its subsidiaries; and (c) as working capital for the day-to-day operations of the Appellant’s business.

[5] The 1996 Bonds were unsecured bonds with a principal amount of $165,000,000. Interest was payable annually in arrears on the principal amount at 5.75% per annum. As with the 1995 Bonds, the Appellant offered a discount on the 1996 Bonds. The issue price of the 1996 Bonds was thus set at 92.9197% of the principal amount, giving a discount of 7.0803% or $11,682,495. The Appellant did not offer a redemption premium for the 1996 Bonds.

[6] It was the Appellant’s case that the proceeds of the 1996 Bonds were used as working capital to finance the day-to-day operations of the Appellant’s business.

[7] In assessing the Appellant’s income that was chargeable with tax, the Comptroller allowed the deduction of interest paid on the 1995 Bonds and the 1996 Bonds. With regard to the 1995 Bonds, the Appellant was able to identify (and the Comptroller accepted) that part of the net proceeds, in the sum of $36,564,000, was used to finance the renovation of the Hotel. The Comptroller allowed a proportionate deduction for the interest paid on the 1995 Bonds. The Appellant sought a similar deduction relating to the discount and redemption premium incurred in respect of the 1995 Bonds.

[8] As for the balance of the proceeds of the 1995 Bonds and the 1996 Bonds, the Comptroller regarded this as forming a mixed pool of funds. Here, the Comptroller applied an interest adjustment method known as the Total Assets Method (“the TAM”). Applying the TAM, the Comptroller only allowed a deduction for interest expenses attributable to income-producing assets. The Appellant thus sought similar deductions based on the TAM for the discounts and redemption premium paid on the 1995 Bonds and the 1996 Bonds.

[9] Based on [7] and [8] above, the sums claimed by the Appellant as deductibles were as follows:

(a) $2,439,598 for Year of Assessment 2001 in relation to the discount and redemption incurred in respect of the 1995 Bonds; and

(b) $8,731,692 for Year of Assessment 2002 in relation to the discount incurred in respect of the 1996 Bonds.

[10] The Comptroller disallowed the Appellant’s claims for the above deductions on two grounds. First, the Comptroller found that the discounts and redemption premium were not “interest” and therefore not deductible under s 14(1)(a) of the Income Tax Act (Cap 134, 2001 Rev Ed)(“the ITA”). Second, the Comptroller found that the discounts and redemption premium were not outgoings and expenses wholly and exclusively incurred in the production of the Appellant’s income chargeable with tax and therefore not deductible under s 14(1) of the ITA.

[11] Dissatisfied with the Comptroller’s disallowance of its claims, the Appellant appealed to the ITBR.

[12] The appeal was heard by the ITBR on 25 July 2012. The ITBR dismissed the appeal in its grounds of decision (“the GD”) dated 14 December 2012. The ITBR held that the discounts and the redemption premium were not deductible for three primary reasons. (Henceforth the reference to paragraphs in the GD of the ITBR will be in parentheses.)

[13] First, the discounts were not deductible under s 14(1) of the ITA as they only related to the non-receipt of the amount of the discounts (at [17]–[18]). Therefore, they were not “outgoings or expenses” incurred by the Appellant.

[14] Second, the discounts and redemption premium were not deductible under s 14(1) of the ITA because part of the bond proceeds formed a mixed pool of funds, some of which were not used for income producing purposes. Accordingly, the discount and redemption premium were not wholly and exclusively incurred in the production of the income (at [24]).

[16] The Appellant appealed to the High Court against the whole of the ITBR’s decision.

[17] Income chargeable with income tax is arrived at after taking into account the various deductions allowed under the ITA. In this regard, s 14 prescribes a positive test of deductibility and provides for what is deductible. In these proceedings, the Appellant claims that the sums paid as discounts and redemption premium were deductible under ss 14(1) or 14(1)(a) of the ITA. The relevant provisions read:

I should add that it is common ground between the parties that the Appellant only needs to succeed on either s 14(1) or s 14(1)(a). The Comptroller accepts that the requirements for deductibility under s 14(1) and under the subparagraphs of s 14(1) are separate and independent.

[18] On the other hand, s 15 of the ITA prescribes a negative test of deductibility. It provides for what is not deductible notwithstanding the fact that the expenditure satisfies the positive test of deductibility under s 14. In these proceedings, s 15(1)(c) is pertinent. It reads:

The effect of s 15(1)(c) is that an expense will not rank for deduction if the expense is capital as opposed to revenue in nature.

[19] Based on the foregoing statutory provisions, the issues in this appeal are as follows:

(a) Whether the discounts and redemption premium were “interest” under s 14(1)(a) of the ITA.

(b) Whether the discounts and redemption premium were outgoings and expenses wholly and exclusively incurred in the production of the Appellant’s income under s 14(1) of the ITA.

(c) Whether the discounts and redemption premium were capital as opposed to revenue expenses and therefore prohibited from deduction under s 15(1)(c) of the ITA.

[20] Section 14(1)(a) of the ITA grants a deduction to sums payable as “interest” upon money borrowed by the taxpayer. The term “interest” however is not defined by the ITA. Rather, its meaning falls to be determined as a matter of statutory interpretation. Surprisingly, there has been little local authority interpreting the term. In this regard, the leading local authority is Chng Gim Huat v Public Prosecutor [2000] 2 SLR(R) 360 (“Chng Gim Huat”).

[21] The facts in Chng Gim Huat are straightforward. The taxpayer had extended a loan to a friend. The taxpayer later sought repayment of the loan and received several sums of money from the borrower. The taxpayer then argued that the repayments were capital in nature as opposed to interest income. The issue then was whether these sums were interest income and whether the taxpayer had wilfully omitted them from his income tax returns with the intention to evade tax. In discussing the meaning of “interest”, Yong Pung How CJ said (at [28]):

[22] The foregoing passage in Chng Gim Huat was cited by Andrew Ang J in ACC v Comptroller of Income Tax [2011] 1 SLR 1217 (“ACC”) at [25]. Based on Chng Gim Huat, interest can be described as the compensation paid to a lender for the use of his money. Put differently, from the perspective of the borrower, interest is the consideration paid for the use of the lender’s money.

[23] Furthermore, it is said that nomenclature, or the label attached to a payment, does not affect the legal question of whether that payment is or is not interest: see Chng Gim Huat at [36]; ACC at [25]; Nicholas Pike v The Commissioners for Her Majesty’s Revenue and Customs [2011] UKFTT 289 (TC); Federal Commissioner of Taxation v Broken Hill Pty Ltd (2000) 45 ATR 507 (“Broken Hill”) at [36]. In my view, this proposition is incontrovertible. The common law looks at the substance of a transaction and not at its label or form. As Hill J said vividly in Broken Hill (at [36]), “a licence does not become a lease because the parties choose to call it one, if it is in truth a licence”.

[24] This brings me to the crux of the Appellant’s contentions. Relying on Chng Gim Huat, the Appellant contended that interest is consideration paid by the borrower for the use of the lender’s money. Similarly, the discounts and redemption premium paid by the Appellant in respect of the 1995 and 1996 Bonds were paid as consideration for the use of the bondholders’ money. It followed therefore that the discounts and redemption were interest in nature and substance, notwithstanding the labels attached to those payments. In support of the contentions, the Appellant referred me to several cases which I shall deal with in turn.

[25] The first is the decision of the Ontario Court of Appeal in Re Unconscionable Transactions Relief Act: Re Sampson and Barfried Entreprises Ltd (1962) OR 1103 (“Re Unconscionable Transactions Relief Act”) where Schroeder JA said (at 1108):

[26] As to the meaning of “discount”, Lord M’Laren opined in R. Buchanan & Company v John Macdonald (1895) 23 R 264 (“R. Buchanan”) that discount was the payment of interest in advance. In this regard, Lord M’Laren held (at 267) that:

[27] Like a discount, the Appellant submitted that a redemption premium could be interest in nature and substance. The Appellant referred the court to the Scottish case of Commissioners of Inland Revenue v Thomas Nelson & Sons Ltd (1938) 22 TC 175 (“Thomas Nelson”), the facts of which were as follows. The taxpayer company lent a sum of money to its subsidiary. The loan was for 10 years. Under the terms of the loan, the borrower was to pay interest and a premium which varied according to the date of payment. In discussing the nature of the premium, Lord President Normand said (at 179):

[29] The issue then was whether the raising fees paid to the investment company formed part of the consideration paid by the taxpayer for the use of the loan proceeds. In this respect, Schreiner JA said (at 119) :

[30] In my judgment, the effect of the cases referred to at [25]–[29] is this. Those cases recognise that interest, discounts and redemption premiums may be incurred by a borrower as consideration for the use of the lender’s money. It does not however follow that the discounts and redemption premiums are necessarily interest. This is clear from the passages in Thomas Nelson and Genn & Co which I have cited at [27] and [28] above respectively. In this regard, the Comptroller also referred the court to Ditchfield (Inspector of Taxes) v Sharp and others [1983] STC 590 where Fox LJ remarked (at 595) that:

[32] In this regard, the Comptroller contends that it is a fundamental feature of interest that it accrues with time. I agree. In City Hardware Pte Ltd v Kenrich Electronics Pte Ltd [2005] 1 SLR(R) 733 at [39], it was held that interest “runs from day to day until repayment of the loan, its total depending on the length of the loan”. This feature of interest was also recognised in Nicholas Pike v The Commissioners for Her Majesty’s Revenue and Customs (“Nicholas Pike”) (supra [23]) where it was held (at [50]) that:

Nicholas Pike is also significant because it recognised (at [49]) that the question of whether a payment is interest is not determined by the label attached to it.

[33] For completeness, I also add that in cross-examination before the ITBR, the Appellant’s expert witness agreed that interest bears the feature of accrual with time.

[34] The question then is whether true discounts and redemption premiums bear the same features as interest. As to the ordinary meaning of these concepts, I find the following explanations in The Law and Practice of Singapore Income Tax (LexisNexis, 2011) to be instructive. The learned authors say (at [3.239] and [3.241]):

Although the foregoing passage establishes that the purpose of paying a discount is similar to that of paying interest, it does not go as far as to state that the terms are synonymous. In this regard, the Privy Council has described a discount as “a deduction from the price fixed once and for all at the time of payment” [emphasis added]: Chow Yoong Hong v Choong Fah Rubber Manufactory [1962] AC 209 at 217. A true discount therefore, is different from interest insofar as the former does not accrue with time.

[35] As to the meaning of a premium, the authors of The Law and Practice of Singapore Income Tax say (at [3.245]):

Therefore, unlike interest, a true premium does not bear the feature of accrual with time.

[36] The Appellant contended that interest need not bear the feature of accrual over time. The Appellant said that the timing of the payment was a commercial (as opposed to a legal) consideration which did not impact on the nature or substance of a discount or premium. In this respect, the Appellant referred me to Nicholas Pike where it was held (at [48]) that:

[37] In my judgment, the Appellant’s contention is misconceived. In particular it conflates the issue of how interest is paid with the issue of whether it accrues with time. Cases like Nicholas Pike clearly establish that while interest must bear the feature of accrual with time, it need not be paid periodically.

[38] Having considered the ordinary meaning of the terms “interest”, “discount” and “redemption”, I come to the more important issue – whether the discounts and redemption premium incurred by the Appellant in respect of the 1995 and 1996 Bonds were “interest” under s 14(1)(a) of the ITA. The meaning of “interest” therefore, is a question of statutory interpretation. Reference to the common law or ordinary meaning of “interest” alone would be wholly inadequate.

[39] In Singapore, any discussion on statutory interpretation necessarily takes place against the backdrop of s 9A of the Interpretation Act (Cap 1, 2002 Rev Ed). Section 9A(1) provides that:

Section 9A(1) therefore mandates that a purposive approach be taken in statutory interpretation.

[40] Taking such an approach in the present case, the question to be answered is whether “interest” under s 14(1)(a) of the ITA, when read harmoniously within the statutory context in which it is found as well as the objects and purposes underlying that statutory context, includes the discounts and redemption premium incurred by the Appellant in respect of the 1995 and 1996 Bonds: see generally Dorsey James Michael v World Sport Group Pte Ltd [2013] 3 SLR 354 at [21].

[41] At this juncture I need to first digress and explain the relevance of the 2008 amendments to the ITA to the present proceedings (as contained in the Income Tax Act (Cap 134, 2008 Rev Ed) (“the ITA 2008”)). In 2007, s 14(1)(a) of the ITA was amended by way of the Income Tax (Amendment No 2) Act 2008. Section 14(1)(a) of the ITA 2008 now reads:

The relevant regulations are the Income Tax (Deductible Borrowing Costs) Regulations 2008 (Cap 134, S115/2008) (“the 2008 Regulations”). Under Reg 2 of the 2008 Regulations, read with the Schedule, “[d]iscount on debt securities payable on maturity or early redemption of those securities” and “[p]remium on debt securities payable on the maturity or early redemption of those securities” are prescribed as deductible borrowing costs for the purposes of s 14(1)(a)(ii) of the ITA 2008.

[42] The legislative intent underlying the 2008 amendments to the ITA were explained by the Minister for Finance in the Annual Budget Statement 2007 delivered on 15 February 2007 as follows:

[44] Before me, the Appellant contended that subsequent legislation cannot be used to interpret earlier legislation. The Appellant relied on ACC at [42] where Andrew Ang J made the pertinent point that:

[45] Against this, the Comptroller contended that subsequent legislation can be used to interpret earlier legislation where the earlier legislation was ambiguous. In this regard, the Comptroller relied on the House of Lords case of Kirkness (Inspector of Taxes) v John Hudson & Co Ltd [1955] AC 696 (“Kirkness”) where Viscount Simonds said (at 711):

This approach was later applied by the Privy Council in Commissioner of Inland Revenue v Hang Seng Bank Ltd [1991] AC 306.

[46] Between the two opposing contentions, I prefer the Appellant’s arguments. Under s 9A of the Interpretation Act, the Court must give effect to the will of Parliament as expressed in the law. In my view however, legislative intent is to be determined at or around the time the law is passed. If Parliament enacts subsequent legislation having proceeded on a particular interpretation of earlier legislation, Parliament’s interpretation would be highly relevant to the interpretation of the subsequent legislation. Conversely, it is of no relevance to the interpretation of the earlier legislation. Similarly, ministerial statements uttered years after legislation is passed are unhelpful as interpretive instruments.

[47] Accordingly, I place no reliance on the 2008 amendments in the interpretation of s 14(1)(a) of the ITA. Be that as it may, it does not follow that discounts are “interest” under the ITA. In this regard, it is pertinent to note that the charging provision of the ITA, namely s 10(1)(d), provides:

If the concepts of “interest” and “discount” were synonymous, it is inconceivable that Parliament would have specified both under s 10(1)(d) of the ITA. It is a fundamental rule of statutory interpretation that Parliament shuns tautology and does not legislate in vain. Effect must be given to all the words of a statute: JD Ltd v Comptroller of Income Tax [2006] 1 SLR(R) 484 at [43] (“JD Ltd”). In my judgment, the ITBR was correct in finding that the ITA imported a difference between interest, discounts and redemption premiums, even if they were all examples of borrowing costs.

[48] The Appellant argued that the ITBR erred in its finding on this point as s 10(1)(d) of the ITA deals with the charging of income with tax as opposed to deductions. Citing Tasman Forestry Ltd v Commissioner of Inland Revenue [1999] 3 NZLR 129, the Appellant submitted that there is no symmetry between the charging and deductibility provisions of the ITA. In this regard, I accept that the policy considerations underlying the charging and deductibility provisions are different. In my view however, this does not detract from the principle that Parliament shuns tautology in legislation. Moreover, the cases cited by the Appellant as to the meaning of interest, viz, Chng Gim Huat and Thomas Nelson, were cases relating to the charging of income tax as opposed to deductibility. Therefore, the Appellant’s contentions as to the relevance of s 10(1)(d) of the ITA are misconceived.

[49] This brings me to the two cases which weigh most strongly in favour of the Appellant’s contention that the discounts and redemption premium incurred in respect of the 1995 and 1996 Bonds were “interest”. In considering the cases, I am mindful of the Court of Appeal’s caution in JD Ltd at [32] that as tax law is essentially a creature of statute, regard must be had to the statutory context. Therefore, foreign authorities will only be helpful if the corresponding tax statutes were identical to or very similar to the ITA in Singapore.

[50] In this regard, R. Buchanan (see [26] above) does not assist the Appellant’s case. R. Buchanan concerned the enforcement of payment for goods by a supplier under an agreement with a retailer. It did not arise under income tax legislation. Even if R. Buchanan does stand for the proposition that discount is “interest” in substance and nature, this is untenable in the light of the statutory scheme under the ITA. As I explained at [47] above, the ITA imports an express distinction between “interest” and “discount”.

[51] For the same reasons, I also find Re Unconscionable Transactions Relief Act (see [25] above) to be unpersuasive. That case involved points of Canadian constitutional law and the Unconscionable Transactions Relief Act, the statutory scheme of which is wholly different from the ITA. Moreover, if discounts and redemption premiums were all “interest”, s 10(1)(d) of the ITA would be rendered tautologous.

[52] At most, R. Buchanan and Re Unconscionable Transactions Relief Act show that the plain and ordinary meaning of “interest” is sufficiently wide to encompass discounts and redemption premiums. That, however, is not conclusive of the interpretation of the term. Under s 9A of the Interpretation Act, “interest” must be read in the light of its statutory purpose and context.

[53] As I explained at [47] above, the distinction between the concepts of interest, discounts and redemption premiums under the ITA must be given effect. In my judgment, the distinction, which flows from the ordinary and commercial meaning of “interest”, is this. To count as “interest”, a payment must be consideration paid by the borrower for the use of the lender’s money which bears the fundamental feature of accrual with time. Then and only then will the payment be interest, notwithstanding the label attached to it.

[54] The issue then is whether the discounts and redemption premium incurred by the Appellant in respect of the 1995 and 1996 Bonds bore this feature. In my judgment it is clear that they did not. Both the discounts and the redemption premium were one-off obligations, based on a fixed percentage of the principal loan amount. Their amounts did not accrue with time. Rather, they were ascertainable at the time the bonds were issued. Consequently, the discounts and redemption premium incurred by the Appellant in respect of the 1995 and 1996 Bonds were not “interest” under s 14(1)(a) of the ITA. It follows that the Appellant’s claim for their deduction under that provision must fail.

[55] For completeness, I shall briefly address the Comptroller’s contention that the discounts and redemption premium paid by the Appellant compensated the bondholders for capital risks and therefore, were not interest. In particular, the Comptroller contended that the discounts and redemption premiums were not paid as compensation to the bondholders for the use of their money during the period of the bonds. Rather, they served to compensate the bondholders for the risk that their money would never be repaid at all.

[56] The Comptroller referred the court to the UK decision in Lomax (H.M. Inspector of Taxes) v Peter Dixon & Son, Ltd [1943] 25 TC 353 (“Lomax”). The facts in Lomax are as follows. The taxpayer carried on the business of manufacturing newsprint. To obtain a source of supply of wood pulp, it made arrangements in 1930 for the formation of a foreign company to which it lent money. In 1933, an agreement was entered into for the repayment of the loan. The foreign company issued interest-bearing notes. The notes were unsecured. Rather, they were issued at a discount of 6% and to be redeemed at a premium of 20% above value if the foreign company’s profits permitted it.

[57] In Lomax, Lord Greene MR held that the discount and redemption premium compensated the taxpayer for capital risk. Accordingly, they were capital as opposed to income in nature and not chargeable with income tax. Lord Greene MR said (at 367):

[58] In this regard, the Comptroller first contended that all discounts and redemption premiums were invariably compensation for capital risk and therefore, not interest. Based on the passage in Lomax cited at [57] above, this contention is plainly untenable. It is clear from Lomax that the true nature of a discount or premium will depend on all the circumstances of the case. The Comptroller’s contention then was that the discounts and redemption incurred by the Appellant in respect of the 1995 and 1996 Bonds were compensation for capital risks. In my judgment, the Comptroller’s contention in this regard is of marginal, if any, relevance to the case before me.

[59] For one, it is important to confine Lord Greene MR’s dicta to its proper context. Here, it is pertinent to note that Lomax was a case concerning the charging of income tax as opposed to deductibility.

[60] Furthermore, I am not persuaded that Lomax stands as authority for the proposition that in some cases, discounts and redemption premiums can be “interest” on the basis that they compensate a lender for the use of his money. Rather, Lomax held in effect that based on the circumstances of a case, discounts and redemption premiums, like interest, can properly be said to be income in the hands of the lender. Then, they would be chargeable with income tax. If, on the other hand, the discounts and redemption premium were paid to compensate the lender for capital risk, they would represent an accretion to the lender’s capital and therefore not subject to income tax. This scheme of things is clearly reflected in s 10(1) of the ITA which only subjects “income” to tax.

[61] In the premises, I find Lomax to be of little assistance in determining whether the discounts and redemption premium incurred by the Appellant in respect of the 1995 and 1996 bonds were “interest” under the ITA.

Were the discounts and redemption premium outgoings and expenses wholly and exclusively incurred in the production of the Appellant’s income under s 14(1) of the ITA?

[62] I now turn to consider whether the discounts and redemption premium incurred by the Appellant were deductible under s 14(1) of the ITA. To recapitulate, that provision reads:

[63] The ITBR had disallowed the Appellant’s claim for deduction under this section of the ITA on the ground that discounts did not fall within the plain and ordinary meaning of “outgoings” or “expenses” under the provision (at [17]–[18]). In this regard, the ITBR accepted the Comptroller’s contention that those terms required there to have been actual disbursement made by the Appellant. The discounts, which the ITBR regarded as merely the non-receipt of the relevant amount, did not bear this feature.

[64] In support of its contentions, the Comptroller referred the Court to the following dictionary definitions. In The New Shorter Oxford English Dictionary on Historical Principles (Clarendon Press, 1993, Volume 2) at p 2038, “outgoing” is defined to be “expenditure, outlay”. As to an “expense”, Black’s Law Dictionary (West, 9 Ed, 2009) at 658 defines the term as “an expenditure of money, time, labor, or resources to accomplish a result; esp., a business expenditure chargeable against revenue for a specific period”. “Expenditure” in turn is defined by Black’s Law Dictionary as “1. The act or process of paying out; disbursement. 2. A sum paid out”.

[65] Conversely, the Appellant contended that a payment need not be an actual disbursement for it to be deductible under s 14(1) of the ITA. In this regard, the decision of the Australian High Court in Federal Commissioner of Taxation v James Flood Pty Ltd (1953) 88 CLR 492 (“James Flood”) is instructive. The Court there said (at 506):

Based on the reasoning in James Flood, a distinction is to be drawn between cases where there is a clear legal liability to incur the expenditure, notwithstanding the fact that actual payment only falls due in a later year, and cases where the liability to incur the expenditure is merely contingent or anticipatory. It is only in the former that the expenditure will be deductible under s 14(1) of the ITA even though no actual payment has been made. In my judgment, the reasoning in James Flood can be properly transposed to s 14(1) of the ITA. In this respect, the Comptroller’s contentions are unpersuasive because they give insufficient weight to the term “incurred” under s 14(1).

[66] In any event, the sums sought by the Appellant as deductions related to Years of Assessment 2001 and 2002. By then, it was not in dispute that the Appellant had redeemed the bonds at their full face value. In relation to the 1995 Bonds, which were for the principal sum of $150,000,000 and issued at a discount of 0.4305%, the Appellant only received the total sum of $149,354,250 at the time of issue. At maturity however, the Appellant paid the bondholders the total sum of $150,000,000 plus the redemption premium. In relation to the 1996 Bonds, which were for the principal sum of $165,000,000 and issued at a discount of 7.0803%, the Appellant only received the total sum of $153,317,505 at the time of issue. At maturity, the Appellant paid the bondholders the total sum of $165,000,000 plus the redemption premium.

[67] In my judgment, with regard to the discount in Years of Assessment 2001 and 2002, the Appellant had, by redeeming the bonds at their full face value, incurred actual outgoings in the sums of $645,750 and $11,682,495 respectively. Similarly, I find that the redemption premium paid to the bondholders in Year of Assessment 2001 was an actual outgoing incurred by the Appellant. Clearly then, discounts and redemption premium were “outgoings and expenses” under s 14(1) of the ITA.

[68] The issue then is whether the expenses were wholly and exclusively incurred in the production of the Appellant’s income. The effect of s 14(1) in this regard was explained by Yong CJ in Pinetree Resort Pte Ltd v Comptroller of Income Tax [2000] 3 SLR(R) 136 (“Pinetree Resort”) at [47] in the following terms:

[69] Therefore, for the discounts and redemption premium incurred by the Appellant in respect of the 1995 and 1996 Bonds to qualify for deduction under s 14(1) of the ITA, there must be a nexus between the incurring of the discounts and redemption premium and the production of the Appellant’s income.

[70] It is also clear from Yong CJ’s judgment in Pinetree Resort that s 14(1) of the ITA only grants a deduction to expenditure that is revenue as opposed to capital in nature. In this regard, there is a close nexus between ss 14(1) and 15(1)(c) of ITA. By prohibiting the deduction of capital (as opposed to revenue) expenses, s 15(1)(c) serves to reinforce the requirement under s 14(1) of the ITA that the expenses must be wholly and exclusively incurred in the production of the taxpayer’s income to qualify for deduction under that provision.

Were the discounts and redemption premium capital expenses and thus prohibited from deduction under s 15(1)(c) of the ITA?

[71] This brings me to the third issue, viz, whether the discounts and redemption premiums incurred by the Appellant in respect of the 1995 and 1996 Bonds were capital expenses and thus prohibited from deduction by s 15(1)(c) of the ITA.

[72] As I explained at [70] above, the distinction between the concepts of capital and revenue is a crucial one under the ITA. Unfortunately, as the Court of Appeal observed in Comptroller of Income Tax v IA [2006] 4 SLR(R) 161 (“IA”) at [1], the distinction is “often elusive and even illusory”. More pertinently however, the Court of Appeal held (at [16]) that in distinguishing capital from revenue, the concept of “purpose” is a principal legal tool.

[73] As regards the deductibility of interest expenses under s 14(1)(a) of the ITA, the position in Singapore was settled by the Court of Appeal in T Ltd v Comptroller of Income Tax [2006] 2 SLR(R) 618 (“T Ltd”). In T Ltd, the taxpayer company purchased a parcel of land on which a shopping centre was to be built and subsequently operated by the taxpayer. The taxpayer sought to deduct from its taxable income the interest incurred on a loan it had taken out, prior to the granting of the temporary occupation permit (“TOP”), to purchase the land on which the shopping centre was to be built.

[74] The Court of Appeal there held that in determining whether interest expenses were in the nature of capital or revenue, it was necessary to examine the nature of the underlying loan. The Court said [24]:

[75] The approach in T Ltd was later endorsed by the Court of Appeal in IA. The facts in IA can be stated as follows. The taxpayer was a property development company. The taxpayer purchased a parcel of land for development into a condominium project. This was funded in part by a loan from a syndicate of banks (“the Syndicated Loan”). To repay the same with the revenue it had received from progress payments made by purchasers in the condominium project, the taxpayer had to withdraw money held in a project account for the condominium project. To do this, the taxpayer had to furnish a banker’s guarantee to the Urban Redevelopment Authority and expenses were incurred in so doing (“the Guarantee Expenses”). In repaying the loan on a date earlier than the next interest payment date, the taxpayer incurred a pre-payment penalty (“the Pre-Payment Expenses). In addition, the taxpayer incurred borrowing expenses (“the Borrowing Expenses”). The taxpayer sought to deduct the Guarantee Expenses, the Pre-Payment Expenses, and the Borrowing Expenses from its taxable income (collectively, “the Relevant Expenses”).

Second, and as regards interest, the Court of Appeal in T Ltd rejected the proposition that interest was inherently revenue in nature and not caught by the prohibition under s 15(1)(c) of the ITA. In this regard, the Court of Appeal said at [20]–[21]:

The Court of Appeal (at [79]) then summarised this framework as follows:

[79] Two points bear further elaboration here. First, in determining the purpose of the borrowing, the Court engages in an objective inquiry. As the Court of Appeal in IA said (at [39]):

[80] Second, the relevant time for determining the purpose of a loan is generally the time at which the loan was taken. This rule however is not an absolute one and a different result may ensue if it is shown that there has been a clear change in the purpose of the loan from a revenue to capital one (and vice versa): see IA at [90]-[91].

[82] The gist of Appellant’s contention was this: As the proceeds for the 1995 and 1996 Bonds were used to: (a) finance the renovation of the Hotel; (b) finance the day-to-day operations of the Appellant’s business; and (c) provide loan and equity funding to the Appellant’s subsidiaries, the uses of the bonds proceeds resulted in the production of the Appellant’s income. Thus, the purpose of the 1995 and 1996 Bonds were to acquire income. It followed that discounts and redemption premium paid in respect of the 1995 and 1996 Bonds were revenue in nature.

[83] The Appellant’s contentions in my view are misconceived because they conflate the question of how the bond proceeds were used with the question of why the bonds were issued (ie, the purpose). The reasons underlying the Appellant’s contentions will become clear later in my judgment. At this juncture however, it suffices to say that I do not find the Appellant’s contentions to be persuasive. Under the principles enunciated in IA, the Court is entitled to, and often will, have regard to the use of the bond proceeds in determining the purpose of the bond issue. However, the uses to which the bond proceeds were put are not conclusive of the purpose of the bond issues: see Federal Commissioner of Taxation v Hunter Douglas Ltd (1983) 50 ALR 97 (“Hunter Douglas”). Put simply, the true focus of the Court’s enquiry remains the purpose of the borrowing as opposed to the use of the borrowed funds. If this was not so, the framework prescribed in IA to determine the purpose of a loan would be rendered wholly nugatory. In that case, the enquiry would simply be what the borrowed funds were used for.

[84] I now turn to apply the framework established by the Court of Appeal in IA to the facts of this case. The first issue that arises is whether there was a sufficient linkage or relationship between the 1995 and 1996 Bonds and the main transaction or projects for which the bond proceeds were intended to be used.

[85] The main documentary evidence pertaining to the purpose of the 1995 and 1996 Bonds is as follows:

(a) For the 1995 Bonds:

(i) The Subscription Agreement dated 27 November 1995;

(ii) The Trust Deed dated 6 December 1995;

(iii) The Board Resolution dated 24 November 1995; and

(iv) The Corporate Announcement made by the Appellant in December 1995.

(b) For the 1996 Bonds:

(i) The Subscription Agreement dated 18 September 1996;

(ii) The Board Resolution dated 1 April 1996; and

(iii) The Information Memorandum dated 20 September 1996.

[86] For the 1995 Bonds, the Subscription Agreement and Trust Deed were silent on the purpose of the bond issue. Moreover, the Board Resolution in respect of the 1995 Bonds did not state the intention of the Appellant’s directors in issuing the 1995 Bonds. On the other hand, the Corporate Announcement made by the Appellant in December 1995 stated that the “proceeds from the Bond Issue [would] be used to re-finance the existing borrowings of the Hotel, to finance the renovation work carried out or to be carried out on the Hotel and for working capital purposes”.

[87] For the 1996 Bonds, the Subscription Agreement was again silent on the purpose of the bond issue. However, the Board Resolution in respect of the 1996 Bonds stated that:

Furthermore, the Information Memorandum for the 1996 Bonds provided that:

[88] The Comptroller agreed that a sufficient linkage was made out between a portion of the proceeds of the 1995 Bonds and the hotel refurbishment project because $36,564,000 of the net bond proceeds of $148,579,175 could be traced to that specific project. This was also the view taken by the ITBR (at [7]).

[89] Conversely, as regards the balance of the proceeds of the 1995 Bonds and the whole of the proceeds of the 1996 Bonds, the Comptroller asserted that there was no linkage, or an insufficient linkage, between the bond issues and the uses to which the bond proceeds were intended to be put. According to the Comptroller, this is so as the 1995 and 1996 Bonds were issued without the stipulation of any specific purpose. Rather, they were issued for the general purpose of augmenting the Appellant’s capital structure. Applying the framework in IA, the Comptroller argued that the bond issues were capital in nature and disallowed from deduction under ss 14(1) and 15(1)(c) of the ITA.

[90] I disagree with the Comptroller’s contentions in this respect. In my judgment, the fact that the Subscription Agreements for the 1995 and 1996 Bonds were silent on the purpose of the bond issues is not fatal to the Appellant’s case. As the Court of Appeal explained in IA, the question of whether there is a sufficient linkage between the loan in question and the main transaction for which the loan has been taken is a question of fact and will depend on all the circumstances of the case.

[92] On my reading of the evidence, I am satisfied that the 1995 and 1996 Bonds were issued for the following purposes: (a) to finance the renovation of the Hotel; (b) to refinance the existing borrowings of the Appellant and its subsidiaries; and (c) to finance the day-to-day operations of the Appellant’s business. Accordingly, I find that a sufficient linkage is established between the 1995 and 1996 Bonds and each of these purposes.

[93] With regard to the 1996 Bonds, the purpose of the bond issue is clear from the Board Resolution and the Information Memorandum. With regard to the 1995 Bonds, I accept that the Corporate Announcement made by the Appellant evinces the purpose of the bond issue despite the fact that the Corporate Announcement was made after the 1995 Bonds were issued. The Comptroller contended that the Corporate Announcement merely reflected the uses to which the borrowed funds were put, as opposed to the purpose of the borrowing. I disagree. First, it is pertinent to note that the Corporate Announcement was made shortly after the 1995 Bonds were issued. Second, the Comptroller’s contention is at odds with its earlier concession (see [88] above) that there was a sufficient linkage between the 1995 Bonds and the hotel refurbishment project.

[94] This brings me to the second issue arising under the IA framework, viz, whether the uses to which the bond proceeds were intended to be put were themselves capital or revenue in nature. In Singapore, the test to be applied in distinguishing capital from revenue expenditure was settled in the seminal decision of ABD v Comptroller Income Tax [2010] 3 SLR 209 (“ABD”). In ABD at [75], Andrew Phang Boon Leong JA summarised the position as follows:

I now turn to apply the principles to the case before me.

[95] The Comptroller contended that based on the principles enunciated in ABD, the expenditure incurred by the Appellant in respect of the hotel refurbishment work was capital in nature. I agree. In this regard, the hotel premises were a permanent (as opposed to temporary) asset that the Appellant used to generate its business income. Put simply, they were the “tree” from which the Appellant derived its business income. The hotel refurbishment work then had the effect of strengthening the Appellant’s core business structure. In such circumstances, the expenditure incurred by the Appellant in respect of the hotel refurbishment loan was capital as opposed to revenue in nature.

[96] This brings me to the next issue of whether the Appellant’s refinancing of its existing borrowings and the borrowings of its subsidiaries was a transaction that was capital or revenue in nature. The Comptroller contended that refinancing was in effect the financial readjustment of borrowed capital and therefore, unconnected with the daily income-earning activities of a taxpayer who was not engaged in financial operations. As regards such a taxpayer, the Comptroller submitted that refinancing was a transaction that was capital as opposed to revenue in nature.

[98] In Montreal Coke, the issue was whether the refinancing expenses incurred by the taxpayer companies were deductible under s 6 of the Income War Tax Act 1927. The relevant statutory provision reads:

[99] The Privy Council held that the refinancing expenses were not deductible under s 6(a) of the Income War Tax Act 1927. In delivering the judgment of the Privy Council, Lord Macmillan said (at 133-134):

[100] Montreal Coke was considered by our Court of Appeal in IA. As I explained at [75] above, the taxpayer in IA had incurred the Guarantee Expenses and the Pre-Payment Expenses in repaying the Syndicated Loan at a date earlier than the next interest payment date. There, the Comptroller contended that while the Guarantee Expenses and the Pre-Payment Expenses incurred allowed the taxpayer to obtain substantial interest savings, this related to the taxpayer’s financial structure and therefore, the said expenses were capital as opposed to revenue in nature. The Comptroller in IA cited Montreal Coke as authority for this proposition.

[101] In IA at [97], the Court of Appeal distinguished Montreal Coke on the basis that the original loan in Montreal Coke was capital in nature. Therefore, the expenses incurred in connection with that loan were also capital in nature. In contrast, the Court in IA had earlier found (at [83]) that the Syndicate Loan was revenue in nature. Furthermore, with regard to the Guarantee Expenses, the Court held (at [108]) that it was established law that expenses incurred in connection with the refinancing of a revenue loan were also revenue in nature.

[102] Before me, the Comptroller contended that the principles enunciated in Montreal Coke remained good law in Singapore. The Comptroller said that the Court of Appeal in IA had not disagreed with the principles enunciated in Montreal Coke. Rather, the Court had only distinguished Montreal Coke on its facts. The Comptroller further contended that the decision in Montreal Coke was correct because the refinancing expenses in that case related to a capital loan. Therefore, the refinancing expenses would also have been capital in nature unless the taxpayer was engaged in the business of financial operations.

[103] In my judgment, where a later loan is taken out to refinance an earlier loan, the principles enunciated in Montreal Coke and IA are both easily and properly reconciled by adopting the following two-step methodology. First, one must ask whether the earlier loan was capital or revenue in nature. If the earlier loan was revenue in nature, it would follow that the later loan and the borrowing expenses incurred in connection therewith would also be revenue in nature. If on the other hand the earlier loan was capital in nature, one should move on to the second step. The enquiry here is whether the taxpayer was ordinarily engaged in the business of financial operations. If the taxpayer was not, then borrowing expenses incurred on the later loan are likely to be capital expenses and disallowed as a deduction under s 15(1)(c) of the ITA.

[104] It bears noting that under s 80(4) of the ITA, the Appellant has the burden of proving that the Comptroller’s assessment of its income tax was excessive. Therefore, in these proceedings, as with the proceedings before the ITBR below, it is incumbent upon the Appellant to adduce evidence revealing the nature of the loans to be refinanced by the 1995 and 1996 Bonds. The Appellant has not done so. In my judgment, the Appellant’s failure to do so is fatal to its case under the first step of the two-step methodology I have set out earlier at [103] above.

[105] The Appellant’s case thus turned on the second step, in particular, the application of the principles enunciated by the Privy Council in Montreal Coke. In this regard, the Appellant was plainly not engaged in the business of financial operations. It follows that the refinancing transactions for which the 1995 and 1996 Bonds were issued would have been capital as opposed to revenue in nature. To this extent, it also follows that the 1995 and 1996 Bonds were capital in nature.

[106] I now come to the third use to which the 1995 and 1996 Bonds were to be put, namely, the financing of the day-to-day operations of the Appellant’s business. In this regard, the Appellant contended that such use of the bond proceeds was clearly revenue as opposed to capital in nature.

[107] In my view, it is an incontrovertible proposition of law that a loan taken out for the purpose of acquiring trading stock is revenue as opposed to capital in nature. In this regard the following passage of Lockhart J’s judgment in Hunter Douglas is illuminating. There, Lockhart J said (at 116):

[108] It is also clear from IA that a loan taken out for the purpose of acquiring trading stock is revenue in nature. There, the taxpayer property development company had taken out the Syndicated Loan to purchase a parcel a land for development into a condominium project. Clearly then, the purpose of the Syndicated Loan was to enable the taxpayer to purchase trading stock. This was central to the Court’s finding (IA at [89]) that the Syndicated Loan was revenue in nature.

[109] In my judgment however, the facts in the case before me are clearly distinguishable from those in IA. In IA, the Syndicated Loan was taken out with the specific purpose of acquiring the taxpayer’s working capital, being land for development into a condominium project. In the present case, no such specific purpose exists. At best, the Appellant had issued the 1995 and 1996 Bonds for the general purpose of securing funds for the acquisition of working capital for the Appellant’s business.

[110] The evidence showed that apart from the bond proceeds attributable to the Appellant’s hotel refurbishment project, the remaining proceeds of the 1995 and 1996 Bonds went into a mixed pool of funds that contained proceeds of other bonds issued by the Appellant. This was acknowledged by the Appellant’s witness in cross-examination before the ITBR.

[111] I am mindful that in determining the purpose of the bond issues under the IA framework, the fact that the bond proceeds went into a mixed pool of funds is inconclusive as to whether the bonds were issued for capital or revenue purpose. I am also of the view that under the IA framework, the Appellant is not required to trace the exact uses to which the proceeds of the 1995 and 1996 Bonds were put. In my judgment however, the fact that the bond proceeds went into a mixed pool of funds supports the inference that while the Appellant may have intended to use the proceeds of the 1995 and 1996 Bonds to acquire its working capital, it did not have any specific projects or transactions in mind. This in turn supports the inference that the Appellant had issued the 1995 and 1996 Bonds for the general purpose of augmenting its capital structure.

[112] Applying the framework in IA, I find that there was no linkage or an insufficient linkage between the 1995 and 1996 Bonds and the specific uses (whether revenue or otherwise) to which the bond proceeds may have been put. Rather, the only linkage that can be established is between the 1995 and 1996 Bonds and the general purpose of securing funds for the acquisition of working capital for the Appellant’s business.

[113] Here, it is also apposite to note that the bond proceeds themselves did not constitute the Appellant’s working capital. Rather, the Appellant had to use the bond proceeds to acquire its working capital. It is therefore not surprising that in these proceedings, the Appellant purported to equate the purpose of the bond issues with how the bond proceeds were used. Only then could the Appellant even attempt to show some linkage between the bond issue and a purpose that was clearly revenue in nature. However, as explained earlier at [83], the Appellant’s contentions in this regard are misconceived. I reiterate that under the IA framework, the true enquiry relates to the purpose of the loan as opposed to how the borrowed funds were used.

[114] This is a convenient juncture to consider the cases cited by the Appellant in support of its contention that the discounts and the redemption premium incurred in respect of the 1995 and 1996 Bonds were expenses incurred in securing working capital, and therefore, revenue as opposed to capital in nature. The Appellant relied on the decision of the High Court of Australia in Coles Myer Finance Limited v Commissioner of Taxation of the Commonwealth of Australia (1993) 176 CLR 640 (“Coles Myer”). In that case, the taxpayer was a finance company. To raise finance for lending purposes, the taxpayer drew and sold bills of exchange and promissory notes at a discount. In holding that the discount incurred by the taxpayer was a revenue expense and therefore an allowable deduction, the majority said (at 664–665):

[115] The Appellant also referred to Federal Commissioner of Taxation v Energy Resources of Australia Ltd (1996) 185 CLR 66 (“Energy Resources”). In Energy Resources, the taxpayer was a mining company that had issued promissory notes to retire a finance facility from which funds had been obtained by the taxpayer for the purpose of financing the development and operation of a mine. The taxpayer incurred a discount in the issuance of those notes. The issue in Energy Resources concerned how the discounts were to be calculated. Pertinently, the Commissioner did not dispute that discount incurred by the taxpayer was a revenue expense and therefore an allowable deduction under the Australian income tax legislation. However, the Court remarked obiter (at 73–74) that:

[116] In my view, neither Coles Myer nor Energy Resources assist the Appellant’s case. For one, in neither case did the court expressly consider the question of whether a loan taken out for the general purpose of securing funds for the acquisition of working capital was capital or revenue in nature. As regards Energy Resources, the question of whether the loan was capital or revenue in nature was not even before the Court. Furthermore, although it ultimately did not decide the issue, the Court appeared to suggest (at 74) that based on the evidence before it, a large part of the loan was in fact capital in nature.

[117] As regards Coles Myer, the taxpayer there was a financial company. Therefore, the money it had received under the promissory notes was its stock and trade which it then on-lent to generate its business income. Quite clearly then, the discounts incurred by the taxpayer were expenses directly incurred in securing its working capital and therefore, revenue expenses. This is distinguishable from this case as the Appellant was plainly not a financial company. The same result ensues if Coles Myer is rationalised under the framework established in IA. In Coles Myer, the loan was taken out for the specific purpose of on-lending. From the point of view of a financial company, this was clearly a revenue purpose as lending was the very activity through which the taxpayer generated its trade income.

[118] This brings me to the case of Beauchamp (Inspector of Taxes) v F.W. Woolworth plc [1990] 1 AC 478 (“Beauchamp”). In Beauchamp, the taxpayer ran a number of retail shops in the United Kingdom. The taxpayer took out loans so as to have cash for general trading purposes. The taxpayer later incurred currency losses in respect of the loans. The issue in Beauchamp then was whether the currency losses were deductible for the purposes of assessing income tax. This in turn depended on whether the loans on which the currency losses were incurred were capital or revenue in nature.

[119] In Beauchamp, the taxpayer’s finance director gave evidence that the taxpayer had required increased working capital for various reasons. This included an extensive modernisation programme involving the repair, refurbishment and enlargement of the taxpayer’s premises. The loans were also taken out to overcome the taxpayer’s cash-flow problems. Therefore, it was obvious that the loans were taken out with no specific purpose as the taxpayer was free to use the loans for any one of several purposes.

[120] In Beauchamp, Hoffmann J held at first instance (see Beauchamp (HM Inspector of Taxes) v FW Woolworth plc [1987] STC 279) that the loans in question were a sufficiently permanent addition to the taxpayer’s funds so as to be regarded as capital in nature. Hoffmann J’s decision was reversed on appeal to the Court of Appeal. On appeal to the House of Lords, their Lordships upheld Hoffmann J’s decision that the loans were capital in nature.

[121] Beauchamp was given careful and thorough consideration by the Court of Appeal in IA. There is no need to repeat that exercise here. In these proceedings, it is more pertinent to have regard to the Court of Appeal’s treatment of Beauchamp in IA; it said at [37]:

The effect of the foregoing passage is that where a loan is taken for a general as opposed to a specific purpose, it is likely to be capital as opposed to revenue in nature.

[122] Turning then to apply the principles to this case, it is pertinent that there was no linkage between the 1995 and 1996 Bonds and any specific project or transaction that was clearly revenue in nature. Conversely, it is clear from the evidence that the bonds were issued for the more general purpose of raising funds for the acquisition of working capital. In my judgment, this was a transaction that was capital in nature. It follows that insofar as the 1995 and 1996 Bonds were to be put to use as working capital to finance the day-to-day operations of the Appellant’s business, they were capital as opposed to revenue in nature.

[123] From my findings at [95], [105] and [122], I conclude that the 1995 and 1996 Bonds bore the nature of capital. Accordingly, the discounts and redemption premium incurred by the Appellant in respect of the 1995 and 1996 Bonds were also capital in nature and therefore, disallowed from deduction under s 15(1)(c) of the ITA.

[124] My findings at [54] and [123] are sufficient to dispose of the entire appeal before me. For completeness however, I shall briefly address the other arguments raised by the Appellant in support of its contention that the discounts and redemption premium paid on the 1995 and 1996 Bonds were expenses that were revenue as opposed to capital in nature. Broadly speaking, the Appellant’s contentions were twofold.

[125] First, the Appellant contended that as the bond proceeds were used to produce the Appellant’s income, the 1995 and 1996 Bonds were revenue in nature. Being derivative in nature, the Appellant says that the discounts and redemption premium paid on those bonds were revenue expenses and not prohibited from deduction under s 15(1)(c) of the ITA.

[126] In my view, the Appellant’s contentions are misconceived. The test to be applied in distinguishing between capital and revenue expenditure, as set out in ABD and IA, looks to the purpose of the expenditure. The test is not whether the expenditure resulted in the production of the income. If this were otherwise, expenditure incurred to acquire a capital asset, such as machinery, would turn into revenue expenditure just because the use of the machinery led to the production of the taxpayer’s income. Similarly, the 1995 and 1996 Bonds, being issued for capital purposes, did not turn into a revenue loan merely because they resulted in the production of the Appellant’s income.

[127] Second, the Appellant contended that by allowing the deduction of interest paid on the 1995 Bonds and the 1996 Bonds, it was unreasonable for the Comptroller not to allow the deduction of the discounts and redemption premium paid on the same bonds. This was so as the discounts and redemption premium were also “interest” under s 14(1)(a) of the ITA. Moreover, by allowing the deduction of interest paid on the 1995 and 1996 Bonds, the Comptroller must have been satisfied that the bonds were in the nature of revenue as opposed to capital.

[128] I do not accept the Appellant’s contentions in this regard. For one, as I explained at [54] above, the discounts and redemption premium incurred by the Appellant were not “interest” under s 14(1)(a) of the ITA. I also found at [123] above that the 1995 and 1996 Bonds were capital in nature. In my views, the Comptroller’s treatment of the interest paid under the 1995 and 1996 Bonds is irrelevant in these proceedings. The issue of whether the interest paid on the bonds were capital or revenue expenses is not before me. Nor was it before the ITBR.

[129] I should also reiterate that under s 80(4) of the ITA, the Appellant bears the burden of proving that the Comptroller’s assessment of its income tax was excessive. In particular, the Appellant bears the burden of proving that the discounts and redemption premium incurred in respect of the 1995 and 1996 Bonds were revenue expenses. In effect, the Appellant’s contentions as regard the Comptroller’s treatment of the interest paid on the bonds amounted to no more than an attempt to shift the burden to the Comptroller to prove that the discounts and redemption premium incurred by the Appellant were capital in nature. In my view, the Appellant cannot, and should not, be permitted to do this.

[130] Finally, I wish to briefly address the Comptroller’s contentions with regard to the deductibility of interest under s 14(1)(a) of the ITA. The Comptroller contended that it was justified in allowing the deduction of the interest paid on the Bonds and not allowing the deduction of the discounts and redemption premiums as the requirements under s 14(1) and s 14(1)(a) of the ITA were different. According to the Comptroller, deductibility under s 14(1)(a) depended on whether the interest was payable on capital employed in acquiring the income. Therefore, the Comptroller said that under s 14(1)(a), the Comptroller need not be satisfied that the underlying loan was revenue in nature.

[131] I disagree. In my view it is clear from T Ltd and IA that the deductibility of interest expenses depends on the nature of the underlying loan. Interest expenses incurred on a capital loan would also be capital in nature and therefore disallowed as a deduction under s 15(1)(c) of the ITA. This is so even if the requirements for deductibility under s 14(1)(a) are satisfied. However, nothing turns on this issue in the present appeal and I need not say more on this issue.