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  • Comptroller of Income Tax v HY[2006] 2 SLR 405; [2006] SGCA 7
    because tax laws are territorial in the judge s view the scope of s 10 5 had to be restricted to Singapore In particular the judge seemed to have thought that the phrase by reason of any employment under s 10 5 had to therefore refer to employment in Singapore He went on to hold that an essential requirement for stock option gains to amount to income caught by s 10 5 was that the person exercising the option had to be employed in Singapore at the time the stock option was granted to him As such since the taxpayer was not employed in Singapore when the stock options were granted to him the gains that he derived from exercising the options were not liable to be taxed in Singapore 9 Given the judge s conclusion that the taxpayer s gains did not qualify as income under s 10 5 of the Act he did not strictly speaking have to go further to consider whether those gains had accrued in or were derived from Singapore under s 10 1 or as the judge put it whether there was a material connection between the gains and Singapore Nonetheless in the course of his judgment the judge still dealt with this issue by considering the location where the stock options were exercised by the taxpayer 10 The judge was of the view that the place of exercise of the options had to be London and not Singapore This was because the mere signing of the notices in Singapore was an incomplete act and it was the act of delivering the notices together with payment to the Standard Chartered office in London which constituted the exercise of the options As such according to the judge the gains in question had no material connection with Singapore and fell outside s 10 1 g The appeal 11 Before us counsel for the Comptroller made two main submissions First he submitted that the judge had erred in finding that the gains derived by the taxpayer from the exercise of the stock options did not constitute income falling under s 10 5 of the Act Second he submitted that those gains of the taxpayer were derived from or had accrued in Singapore and were therefore liable to be taxed under s 10 1 g Each submission will be dealt with in turn Whether gains amounted to income under section 10 5 of the Act 12 Both parties presented arguments in respect of s 10 5 It is convenient at the outset to dispose of some of these arguments which clearly lack merit Counsel for the Comptroller argued that the judge had erroneously relied on the majority ruling in the House of Lords decision of Abbott v Philbin H M Inspector of Taxes 1961 AC 352 the Abbott case which determined that stock options were taxable at the point of grant as opposed to the point of exercise and that the tax imposed would be based on the value of the options at the point of grant This argument is obviously flawed It is evident that the judge had appreciated that tax is not to be imposed at the point of grant and instead should be imposed on the gains that are obtained from the exercise of the options In fact the judge explicitly accepted this as a consequence of the enactment of s 10 5 He stated at 6 of his judgment Consequent to the Abbott case the English parliament amended their tax laws and our Legislature did likewise in 1973 when it introduced the s 10 5 provision relied upon by the Comptroller in this case Hence as at 30 April 1997 a share option would be taxed at the time it was exercised Thus for income to be taxable under s 10 1 g it would be necessary to establish a connection between the appellant s exercise of his stock options and Singapore emphasis added It further appears to be common ground in this appeal that the minority holding in the Abbott case represents the correct position under s 10 5 and the Comptroller s arguments in this regard are hence of little relevance 13 Turning to the arguments of the taxpayer his counsel contends that the scope of s 10 5 was limited to stock option gains in Singapore It is not exactly clear what is meant by such a contention Counsel for the taxpayer referred to the following comment made by the then Minister of Finance Mr Hon Sui Sen during the Second Reading of the Income Tax Amendment Bill 1973 Singapore Parliamentary Debates Official Report 26 July 1973 vol 32 at cols 1244 1245 The Stock Exchange which witnessed a lot of speculative activity last year also saw the emergence of share option schemes Such share option schemes allow directors and employees to take an option to buy shares in the company at often a nominal price Clause 3 of the Income Tax Act which led to the insertion of s 10 5 will make it clear beyond doubt that gains or profits from share option schemes are liable to income tax The argument appears to be that s 10 5 was created only to deal with stock option schemes relating to shares that are traded on the Singapore Stock Exchange In addition throughout the hearing before us and in his written submissions counsel for the taxpayer maintains that this is a case involving stock options that were granted in the UK and that were exercised in the UK in respect of shares traded on the UK stock exchange Hence it is argued the option gains derived clearly fell outside the territorial limits of s 10 5 14 The above arguments by counsel for the taxpayer are untenable Firstly the arguments assume that the stock options were exercised in the UK when that is precisely a matter that is being disputed by the Comptroller As for the contention that s 10 5 concerned only stock options in respect of shares traded on the Singapore Stock Exchange it will suffice to refer to the following passages from the decision of the Income Tax Board of Review HY v Comptroller of Income Tax 2004 SGITBR 4 at 28 and 29 which rejected such a contention T he words benefit to acquire shares in a company when read in its grammatical and ordinary sense would include share options in any company wherever it is incorporated This is in view of the statutory definition of company in s 2 of the Income Tax Act which reads that company means any company incorporated or registered under any law in force in Singapore or elsewhere Thus section 10 5 wou ld apply to share options for all companies whether incorporated locally or outside Singapore Hence this would include share option schemes on any Stock Exchange be it the Singapore Stock Exchange or on a Stock Exchange outside Singapore such as the London Stock Exchange There is nothing in the Minister s speech that categorically states that the scope of s 10 5 of the Income Tax Act was to be limited to address only those share options schemes that are on the Stock Exchange of Singapore or those similar schemes in Singapore If it were so the draftsman would have use sic much clearer language by inserting the words listed on the Stock Exchange of Singapore after the word company in subsection 10 5 15 In our view the real issue in relation to s 10 5 is whether on a proper interpretation of the section there was a requirement as the judge had found that the taxpayer had to be employed in Singapore at the point of grant of the options before what he earned from the exercise of those options could be regarded as income under the section To this question counsel for the taxpayer has unfortunately not made any submissions at all Counsel for the Comptroller on the other hand contended that there could not have been such requirement as it was not expressly provided for under s 10 5 In support of this contention he makes reference to the 2002 Budget Statement made by the Minister of Finance Deputy Prime Minister Lee Hsien Long as he then was see Singapore Parliamentary Debates Official Report 3 May 2002 vol 74 at col 702 the salient extracts of which are I have studied the proposals and decided to make the following changes i To exempt from tax stock options granted for non Singapore employment even if they are exercised in Singapore ANNEX 8 Changes to Tax Treatment of Stock Options Exempting from tax stock options granted for non Singaporean employment 1 Currently if an employee exercises his stock options while he is in Singapore or holding Singapore employment he would be taxed on the gain from the exercise of his stock options even if the options were granted for employment elsewhere emphasis added Counsel for the Comptroller also refers to the Minister s speech during the Second Reading of the Income Tax Amendment Bill in Parliament on 25 November 2002 Singapore Parliamentary Debates Official Report 25 November 2002 vol 75 at col 1531 o To further enhance our share option incentive scheme I announced the following changes to the tax treatment of stock option s i Gains from stock options granted in respect of overseas employment will not be taxed Correspondingly gains from stock options granted in respect of Singapore employment will be taxed no matter where the stock options are exercised emphasis added 16 The above ministerial statements are relied upon by the Comptroller to imply that the position before the amendments in Act No 37 of 2002 had to be that gains from stock options were subject to tax in Singapore no matter where they were granted as long as they were exercised in Singapore The Comptroller s argument is that if the position had been that the person exercising the options had to be employed in Singapore at the point of grant the legislative amendments would have been redundant 17 It is true that s 9A 2 of the Interpretation Act Cap 1 2002 Rev Ed allows us to have recourse to parliamentary speeches in interpreting statutory provisions It must also be noted that s 9A 3 specifically provides that the speeches made by a Minister during the Second Reading of a Bill can be relied on in the interpretation of a provision contained in that Bill In the present case the Comptroller is seeking to rely on a Minister s speech delivered during the Second Reading of an Amendment Bill made some 30 years after the enactment of the previous Bill in which the provision in question is to be found to imply what the position ought to have been under the previous Bill 18 In relation to the Budget Statement as pointed out by counsel for the taxpayer the Minister could merely be describing the then existing practice that was being adopted by the tax authorities the legality of which is precisely being challenged and which falls to be determined in this appeal 19 We think that the proper approach to decide whether s 10 5 was restricted to cases where the option holder had been employed in Singapore at the point of grant should be to examine the framework of our tax legislation and the basis for taxation in Singapore Income is only taxable in a country if it falls within its tax jurisdiction While each country is free to decide how wide its tax net should be limits are usually placed because the country must be able to enforce the tax within its net In Singapore such restrictions come in two forms First income will only be liable to tax if it is derived from or accruing in Singapore This is known as the territorial basis of taxation Second income is taxable if it is received in Singapore from outside Singapore This is known as the remittance basis Both bases of taxation are found under s 10 1 As such s 10 1 is the charging provision that sets the limits of Singapore s tax jurisdiction On the other hand s 10 5 was merely a deeming provision which included gains from the exercise of stock options as income With respect the judge therefore erred in thinking that there was a separate or additional jurisdictional hurdle to be crossed under s 10 5 Any question of the territorial or geographical scope of Singapore s tax jurisdiction is only to be found in the test under s 10 1 Section 10 5 being in its nature just a deeming or definitional provision simply told us that a particular type of gain ie gains from exercise of stock options qualified as income under our tax laws without necessarily saying whether or not such an income in any particular case in fact fell to be taxed in Singapore Accordingly by reason of employment under s 10 5 did not refer to employment in Singapore or in any particular country 20 Therefore it matters not that the taxpayer was employed in the UK and not Singapore when the stock options were granted to him Given that there is no dispute that the gains in question were clearly obtained by the taxpayer from his exercise of the stock options which were granted to him by reason of his employment the gains are caught as income under s 10 5 We move on to consider whether such income was derived from or accruing in Singapore Whether income derived from or accruing in Singapore 21 It has been held by the Privy Council that the word derived bears no special meaning and can be treated as synonymous with arising or accruing Commissioner of Taxation v Kirk 1900 AC 588 at 592 In Chandos Pte Ltd v Comptroller of Income Tax 1987 SLR 287 L P Thean J held that the words derived from connoted the concept of the source of the income He explained at 295 296 24 that S ource is not a legal concept but something which a practical man would regard as a real source of income and the ascertaining of the actual source is a practical hard matter of fact emphasis added Thean J further adopted the following elaboration on the notion of source in Commissioner for Inland Revenue v Lever Brothers Unilever Ltd 1946 14 SATC 1 at 8 T he source of receipts received as income is not the quarter whence they come but the originating cause of their being received as income and that this originating cause is the work which the taxpayer does to earn them emphasis added 22 In Commissioner of Inland Revenue v Hang Seng Bank Ltd 1991 1 AC 306 the Privy Council at 322 323 explained that the general approach in determining the originating source of the profit that is sought to be taxed is to examine what the taxpayer had done to earn that profit T he question whether the gross profit resulting from a particular transaction arose in or derived from one place or another is always in the last analysis a question of fact depending on the nature of the transaction It is impossible to lay down precise rules of law by which the answer to that question is to be determined The broad guiding principle attested by many authorities is that one looks to see what the taxpayer has done to earn the profit in question If he has rendered a service or engaged in an activity such as the manufacture of goods the profit will have arisen or derived from the place where the service was rendered or the profit making activity carried on emphasis added 23 In Commissioner of Inland Revenue v HK TVB International Ltd 1992 2 AC 397 the taxpayer company acquired certain films and their rights of exhibition and exploited those rights to make profits by granting sub licences to overseas customers In deciding whether those profits accrued in or were derived from Hong Kong the Privy Council held that the proper approach was to ascertain what the operations which produced the profits were and where those operations took place Since the acquisition and exploitation of those film rights by the taxpayer company took place in Hong Kong even though the rights were only exercisable by the sub licensees overseas the profits that the taxpayer company made were still regarded as having accrued in or been derived from Hong Kong 24 As is clear from the above authorities in deciding whether income was derived from or accruing in Singapore one must look to the originating source of those gains or profits This is essentially a question of fact to be determined based on a scrutiny of the circumstances in each individual case It is impossible to lay down fixed legal rules or tests and a practical approach based on what a practical man would regard as the real source of income is to be adopted The broad guiding principle is to focus on what the taxpayer had done which earned him the gains or profits in question and then to identify the location where those activities that he had engaged in or the work he had done took place This may be a difficult inquiry bearing in mind that the gains or profits may typically be derived from a series of activities which may take place in more than one country 25 Reverting to the present case the parties realising that the income in question constituted gains that resulted from an exercise of stock options seek to answer the question of whether that income originated from Singapore by trying to ascribe a locality to the exercise of those options The Comptroller places emphasis on the fact that the notices of exercise of the stock options were signed by the taxpayer in Singapore and that the taxpayer had done all that he was legally and procedurally required to do in the Option Scheme to exercise the options while he was in Singapore On the other hand the taxpayer contends that it was the act of delivering the notices accompanied with payment to the registered office of Standard Chartered PLC in London that constituted the act of exercising the options The judge appears to have agreed with the taxpayer s analysis and held that the options were hence exercised in the UK and not in Singapore 26 However it seems to us that none of the above factors relied upon by the respective parties should be determinative of the place of accrual or derivation of income After all the exact procedure to exercise the stock options such as where the option certificates and payment are to be delivered to will very much depend on the terms of the particular option in question which may be different in each case As for the place where the notices of exercise are signed it could be purely fortuitous as well Indeed it seems difficult to come up with a test to ascertain the place of exercise of stock options We would hesitate to follow the lead of our learned colleague Chao Hick Tin JA who in his dissenting judgment appears to adopt a general rule that the place of exercise is determined by the prescribed location where the notice of exercise and payment are delivered To our minds the answer if it can be found will have to turn on the particular terms and conditions of the option scheme in each individual case 27 We can however put aside these difficulties in deciding the place of exercise of the options In our view the proper approach to ascertaining the place of accrual of the gains should be to examine the activities or work that the taxpayer had engaged in which earned him the right to exercise the stock options The location where those activities were carried out will give us the true source or origin of the gains that he obtained from the exercise of those options 28 It will be recalled that the taxpayer was employed at the Standard Chartered office in the UK when he had acquired the seven stock options in question Following that the taxpayer worked in the Singapore office of Standard Chartered for three years before he exercised the options It is important to bear in mind that the taxpayer s continued employment with Standard Chartered PLC was a prerequisite for the exercise of the options 29 The question to be decided is whether it was a the taxpayer s initial employment in the UK at the point of grant of the options or b his subsequent employment in Singapore leading up to the exercise of the options which earned him the right of exercise Applying a practical approach and bearing in mind that we are concerned with the exercise of the options and not their initial grant the real source of the stock option gains was in Singapore and not the UK Even though the taxpayer was employed in the UK at the point of the grant this does not necessarily mean that the subsequent gains that he obtained from the exercise of those options some years later when he was already based in some other country can be said to have originated from the UK A practical man would regard the taxpayer s continued employment in Singapore in the three years leading up to the exercise of the stock options as the real source of the gains It was the work that the taxpayer had done during the three years in Singapore which enabled him to exercise the stock options Singapore and not the UK should be regarded as the country that contributed to the accrual of the gains 30 On the other hand our learned colleague Chao JA chooses to focus on the point of crystallisation of the stock options in deciding the place of accrual or derivation of the gains Each of the seven options was granted to the taxpayer at different dates As noted earlier it was a term in the Option Scheme that the options could only be exercised three years after they were granted ie effectively the options had a maturity period of three years Five out of the seven stock options had only matured or crystallised after the taxpayer was posted to work in the Singapore office of Standard Chartered PLC In comparison for the first two stock options these had already matured when the taxpayer was still being employed in the UK and before his posting to Singapore Since the first two options had crystallised when the taxpayer was still working in the UK Chao JA takes the view that the gains derived from the subsequent exercise of these two options must accordingly also be regarded as having been derived from the UK As for the other five options that crystallised in Singapore Chao JA is prepared to hold that the gains derived from their exercise are taxable in Singapore 31 We find ourselves unable to agree with such an approach that draws a distinction in tax treatment based on where the taxpayer happened to be employed at the time when the respective stock options matured The place of employment at the point of crystallisation of each stock option does not necessarily reflect the location where the taxpayer had earned the right to exercise it It follows that where the taxpayer was employed when the stock option crystallised cannot be determinative of where the gains from a subsequent exercise of that option are derived from Furthermore Chao JA s approach ignores the fact that the taxpayer was working in the Standard Chartered office in Singapore for three years before he exercised the two stock options in question The taxpayer s continued employment with Standard Chartered PLC which had taken place in Singapore was a prerequisite for the exercise of the stock options even in respect of these first two of the seven options There is nothing fortuitous about the result we have arrived at The taxpayer s gains are taxed in Singapore precisely because he had spent a substantial period of time working in Singapore earning him the right to exercise the seven stock options 32 As a result we find that the gains obtained from the exercise of all the seven options had accrued in or were derived from Singapore and were liable to be taxed in Singapore 33 For the above reasons we allow this appeal with costs The security deposit will be released to the appellant Chao Hick Tin JA delivering the dissenting judgment 34 This appeal raises the question as to whether certain gains made by an individual pursuant to the exercise of stock options are liable to tax The respondent in this appeal is the taxpayer The Comptroller of Income Tax the Comptroller assessed the gains to tax under s 10 1 g read with s 10 5 of the Income Tax Act Cap 134 1996 Rev Ed the Act The taxpayer s appeal against the assessment failed before the Income Tax Board of Review but succeeded in the High Court This is the Comptroller s appeal 35 The following are the agreed facts On 26 April 1990 the taxpayer was engaged by the Standard Chartered PLC SCB or the employer as may be appropriate in the UK as its chief financial officer of the Treasury Department Between June 1990 and October 1994 when he was so employed he was granted seven options to acquire shares of SCB as follows Date option granted Quantity 17 August 1990 72 000 12 September 1991 64 000 21 April 1992 32 000 11 September 1992 28 000 7 April 1993 20 000 22 October 1993 20 000 11 March 1994 20 380 36 In October 1994 the taxpayer was posted to serve at the Singapore branch of SCB He has to date been so employed in Singapore On 30 April 1997 while so employed in Singapore the taxpayer exercised the seven options by delivering to Standard Chartered PLC at its registered office in London a prescribed form of notice accompanied by the option certificates and payment in full of the subscription price of the shares Relevant statutory provisions 37 The relevant parts of s 10 5 of the Act as it stood at the material time s 10 5 which rendered gains obtained through the exercise of share options to be gains of an income nature read Any gains or profits directly or indirectly derived by any person by the exercise of a right to acquire shares in a company shall where the right is obtained by that person by reason of any employment held by him be deemed to be income The subsection then proceeded to provide how the gains were to be determined 38 Section 10 1 of the Act s 10 1 which is the charging provision reads Income tax shall be payable at the rate or rates specified upon the income of any person accruing in or derived from Singapore or received in Singapore from outside Singapore in respect of b gains or profits from any employment g any gains or profits of an income nature not falling within any of the preceding paragraphs emphasis added It was common ground that the gains derived by the taxpayer from the exercise of the share options did not fall within s 10 1 b but s 10 1 g 39 It is also not disputed that for the gains of the taxpayer to be taxable they must fall within the scope of both ss 10 5 and 10 1 Section 10 5 40 From the arguments of the taxpayer the first issue that requires determination is the construction of the expression right is obtained by reason of any employment in s 10 5 Following from the basic premise that tax laws and I would say of any other law shall prima facie only have territorial effect the judge below Choo Han Teck J came to the view that the term any employment in the provision had therefore to mean employment in Singapore and that for a stock option to fall within the provision the option must have been granted to an employee by his employer when the former is employed in Singapore He explained at 7 of his judgment reported at 2005 4 SLR 315 Section 10 5 imposed a tax liability in respect of gains derived from the exercise of a right obtained by reason of an employment held by him No country or place was specified or excluded and thus the only country of relevance is Singapore because tax laws are territorial 41 During the Second Reading of the Income Tax Amendment Bill 1973 and when commenting on the provision which later became s 10 5 the Minister for Finance said Singapore Parliamentary Debates Official Report 26 July 1973 vol 32 at cols 1244 1245 The Stock Exchange which witnessed a lot of speculative activity last year also saw the emergence of share option schemes Such share option schemes allow directors and employees to take an option to buy shares in the company at often a nominal price Clause 3 of the Income Tax Act which led to the insertion of s 10 5 will make it clear beyond doubt that gains or profits from share option schemes are liable to income tax 42 While s 10 5 did not expressly provide that the share option must relate to shares traded on the Stock Exchange of Singapore SES the rationale for the provision clearly had shares traded on the SES in mind Nevertheless it is important to note that the term company is defined in the Act to mean a company incorporated in Singapore or elsewhere So the question is was Choo J correct in holding that for a stock option to fall within s 10 5 it must have been granted to the employee while he was in employment in Singapore 43 The taxpayer supported the view of Choo J relying on the principle that the Act is territorial in scope However the Comptroller contended otherwise and argued that there was no such restriction in s 10 5 In this regard the Comptroller relied on two statements made by the Minister for Finance in Parliament First in the 2002 Budget Statement the Minister for Finance said Singapore Parliamentary Debates Official Report 3 May 2002 vol 74 at col 702 I have studied the proposals and decided to make the following changes i To exempt from tax stock options granted for non Singapore employment even if they are exercised in Singapore In Annex 8 to the Minister s speech was the following statement Exempting from tax stock options granted for non Singaporean employment 1 Currently if an employee exercises his stock options while he is in Singapore or holding Singapore employment he would be taxed on the gain from the exercise of his stock options even if the options were granted for employment elsewhere 44 The second statement was on the occasion when the Minister made the Second Reading speech on 25 November 2002 on the Income Tax Amendment Bill Singapore Parliamentary Debates Official Report 25 November 2002 vol 75 at col 1531 o To further enhance our share option incentive scheme I announced the following changes to the tax treatment of stock option s i Gains from stock options granted in respect of overseas employment will not be taxed Correspondingly gains from stock options granted in respect of Singapore employment will be taxed no matter where the stock options are exercised 45 These speeches of the Minister for Finance made in 2002 are clearly irrelevant to determining the intention of Parliament in enacting s 10 5 in 1973 My learned brethren have in their majority judgment pointed out why those speeches could not have assisted us in determining the intention of Parliament in enacting s 10 5 in 1973 A practice of the Comptroller could hardly constitute a proper basis to determine how a statutory provision should be construed Of course if it is treated purely as a view of the Comptroller for the consideration of the court that is another matter altogether 46 I agree that as a general rule a statutory provision should be construed to have only territorial effect However this is not to say that Parliament may not enact laws which will have extra territorial effect Parliament may express such an intention either explicitly or by necessary implications Parliament has indeed in s 10 1 provided expressly that incomes earned abroad are chargeable to tax if those incomes are received in Singapore In this regard a useful comparison would be to refer to the source of income described as gains or profits from any employment in s 10 1 b Like in s 10 5 the word employment in s 10 1 b is not qualified or restricted to employment in Singapore If it is correct to say that employment incomes under s 10 b should be confined to Singapore employment then it must also follow that the other sources of income specified in ss 10 1 a d e and f should be similarly qualified If foreign incomes of whatever sources do not come within s 10 1 why would Parliament in the same provision enact that foreign incomes if received in Singapore are liable to tax The court should not construe that Parliament intended to enact in vain Quite clearly the reason why Parliament had provided that foreign incomes if remitted to Singapore would be taxable would be because the foreign incomes would fall within one of the sub paras of s 10 1 If the foreign incomes do not fall within any of the sub paras of s 10 1 they would remain non taxable even if remitted to Singapore Therefore incomes from employment abroad if remitted back to Singapore are taxable in the hands of a resident 47 In the result I agree with my learned brethren that the term employment in s 10 5 should not be construed to mean only employment in Singapore Section 10 1 48 I now turn to consider the charging provision Under s 10 1 for income under any of the sources specified in sub paras a to g to be liable to tax the income must be accruing in or derived from Singapore or received in Singapore There is a distinction between income earned in Singapore and those earned abroad For the latter income it must be remitted here to be liable to tax 49 In an affidavit which the taxpayer filed in these proceedings he deposed that in the last week of March 1999 he and his wife a Mauritian bought a property in Mauritius It was in early April 1999 while vacationing in Phuket that they decided to exercise the options sell the shares and use the net proceeds to pay for the house they were designing and building in Mauritius On 28 April 1999 he signed the notices of exercise on the option certificates in Singapore He made arrangement with DHL to have the notices delivered to the Mayfair and Regent Street branch of SCB at Park Lane London He also made arrangements with the same branch to give him an overdraft to pay for the shares which he would be purchasing on exercising the options 50 On 30 April 1997 the taxpayer exercised the options by having his agent in England deliver the certificates notices of exercise and payment in full of the subscription price for the shares to SCB at its registered office at 1 Aldermanbury Square London Subsequently between that date and 29 May 1997 the taxpayer sold all the shares he purchased on the London Stock Exchange repaid the overdraft extended to him by the Mayfair and

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  • Pinetree Resort Pte Ltd v Comptroller of Income Tax
    appeal In those circumstances too the court must intervene It has no option but to assume that there has been some misconception of the law and that this has been responsible for the determination 17 We were of the view that the appellants criticism of the learned judge s comments was misconceived It was apparent from his comments that he did not base his decision on an error in his perceived role as an appellate judge His reference to the cases above showed that he was well aware of the principles governing appeals to the Board Were the initiation deposits interest free loans 18 The crux of the matter in the appeal before us was whether the initiation deposits were interest free loans made by the members to the club and the appellants In this respect the appellants highlighted several issues to show that the learned judge was wrong in approving the Board s decision that the initiation deposits amounted to income accruing to the appellants 19 First the appellants contended that the judge had placed an inaccurate and incorrect emphasis on the conditions which would have to be complied with before a member could obtain a refund of his initiation deposit In particular the judge had considered the clause requiring a member of the club to resign before being entitled to obtain a refund The judge also noted the circumstances whereby a member of the club would lose his membership and viewed these as forfeitures of the initiation deposits 20 The appellants on the other hand argued that the initiation deposits were loans as the club did not receive such deposits free of any persisting legal obligations The initiation deposits could not be said to have come home to the appellants when first paid upon joining the club and had to be free of any persisting obligations before they became taxable The money collected had to be repaid to the member after 30 years The reasons behind the creation of this scheme were to finance the borrowing for capital investment in the club and the notion that an overall reduction of the entrance fees through the subsequent return of the deposits would make club membership more attractive and marketable At the same time the moneys represented by the loan could still be applied by the appellants to the running of the club and the maintenance of its facilities 21 The appellants further submitted that a proper interpretation of rr 20A and B in the Constitution which were freely agreed to by the members of the club clearly indicated to a reasonable person that the club was under an obligation and liability to return the deposits should members choose to ask for them The operation of r 20B which states that a member will cease to be a member of the club after he claims his deposit did not militate against classifying the initiation deposit as a loan from the member to the club as if the member chooses not to reclaim the deposit this would then serve as consideration for continued membership in the club 22 Section 10 of the Income Tax Act Cap 134 provides that income tax is payable upon the income of the appellants accruing in or derived from Singapore In deciding that this provision was satisfied the learned judge considered the conditions imposed on the reclaiming of the deposits and the circumstances under which the deposits would be forfeited He also considered the accounting treatment given to the deposits and compared this scheme to the similar arrangements made by Raffles Marina Club and Laguna National Golf and Country Club 23 Now according to the cases of Lategan v CIR 1926 2 SATC 16 and CIR v People s Stores Walvis Bay Pty Ltd 1990 52 SATC 9 Supreme Court of South Africa the word accrue has been interpreted to mean to which any person has become entitled Although some other cases have ascribed the meaning of due and payable to the term accrue we were of the view that entitlement was a more suitable meaning in the context of transactions in this day and age In any event the parties did not seriously contest the meaning of the term 24 With this in mind we turned to the substantive arguments raised The appellants claimed that the initiation deposits were not taxable income at the time they were paid as the payments were not free of persisting legal obligations as they were loans from the members of the club In support of this the appellants cited C v Commissioner of Taxes 46 SATC 57 a Zimbabwean case and an English case Exeter Golf Country Club v Customs Excise Commissioners 1980 STC 162 In the former case the appellant who carried on a business of fuel selling and a service station arranged for a scheme whereby regular customers could opt for a monthly payment for fuel upon the payment of a deposit The appellant was not required to return the deposit at a later date but a customer who terminated the credit arrangement was entitled at any time to demand repayment of the deposit The Supreme Court of Zimbabwe held that the deposits were loans for consumption and were of a capital nature not attracting tax 25 It was noted by Gubbay JA who delivered the leading judgment that the appellant s accountant had testified that in making the proposal to its customers the appellant s intention was that any money so advanced to it would be in the nature of a loan As such it was apparent that prior thought had been given to whether the appellant should borrow the sums required from a bank or to raise the cash by way of loans from customers Furthermore the learned judge felt that the manner in which the appellant dealt with the moneys provided confirmation of this intention He said at p 61 Although deposited into the appellant s banking account together with the other receipts of the business the appellant entered a credit into its books of account against the name of each customer in the amount of the deposit payment made the level of that credit remaining unaltered by the subsequent purchases of fuel from the appellant The deposit payment was not shown as an ongoing credit These features accord far more with the moneys being treated by the appellant as loans rather than in the nature of payments received in advance for fuel to be supplied Nor did the customers treat their payments any differently They regarded the appellant as indebted to them for the full amount of the money provided which would become due for repayment immediately upon the termination of the credit facility The judge dismissed the arguments raised in support of the tax authorities position First the customers who made the payments did not really do so in order to secure the facility of purchasing fuel on credit but did it so that the convenient facility of obtaining their fuel on credit would continue to be available Secondly although the appellant was not obliged to return the money at a specified future date a customer who terminated the credit arrangement was entitled at any time to demand repayment of the deposit Finally even though there was no liability to pay interest the customers secured the benefit of not paying any interest in the value of their purchases for fuel for a period of 30 days 26 The appellants also relied on Exeter Golf Country Club v Customs Excise Commissioners which dealt with the question of whether certain payments made by members of a golf and country club to finance the development of the club were exigible to value added tax These payments were expressed by the club to be interest free Members Loans These loans were only repayable when a member died or reached the age of 65 or ceased to be a full member The commissioners felt that the value of the interest free loans provided by the members of the club was part of the consideration for the facilities supplied by the company running the club As such this amount was taken into consideration when assessing the open market value of the facilities and the value added tax to be imposed The court held that the loan formed part of the consideration paid by members for the supply of facilities by the club and was part of the open market value of the facilities for the purposes of assessing value added tax The appellants in the present case said that the decision was useful for the purposes of determining the different types of consideration received by a club In particular the appellants argued that in respect of an interest free loan the consideration given by the members of the club lies in the use of the money not the amount per se The appellants therefore submitted that the initiation deposits while amounting as part of the consideration given to the appellants by members of the club for use of the facilities remained interest free loans and did not constitute income for the purposes of income tax assessment 27 The appellants added that the scheme of initiation deposits was very similar to the arrangements at Raffles Marina Club and Laguna National Golf and Country Club and that the learned judge was wrong to place emphasis on the differences between the schemes operated by the appellants and by the other two clubs These two clubs took loans from their members which were repayable at a fixed date The date for repayment was fixed as a consequence of the fact that they were both situated on leasehold land as compared to the appellants club which was situated on freehold land A trust deed was made between these two clubs and a trustee corporation which agreed to act for the benefit of the holders of unsecured notes issued in respect of the loans The trust deed contained clauses relating to the ranking of the holders of the unsecured notes vis à vis holders of secured notes issued by the respective companies as well as stringent safeguards that ensured that members would be repaid their loans 28 The problem with the appellants arguments was that in the two cases cited as well as the arrangements set up by Raffles Marina Club and Laguna National Golf and Country Club there was evidence that the moneys paid were intended to be loans to the taxpaying entities In C v Commissioner of Taxes the judge noted the intentions of the appellant that the payments were intended to be loans This was borne out by the structure of the scheme As for Exeter Golf Country Club v Customs Excise Commissioners it was stated at the outset by the club that these were Members Loans There were also many differences between the schemes at Raffles Marina Club and Laguna National Golf and Country Club and at the appellants club Apart from the factors mentioned above we also noted that the members of the other two clubs had up to six years after the fixed date of repayment to reclaim their money whereas the club s members had only six months to do so 29 The appellants had additionally submitted that the learned judge erred in interpreting the club s rules to mean that the initiation deposits were unlikely to be paid back to the members Moreover the rules had been freely agreed to by the members In our view these assertions were erroneous and irrelevant respectively The learned judge had at no time interpreted the rules to mean this He made it clear that as long as rr 20A and B were fulfilled a member could reclaim the initiation deposit after 30 years of membership The judge also correctly noted that once a claim for the refund was made a member would lose his membership in the club Whether the rules were freely agreed to by the members or not was irrelevant to the issue of whether the initiation deposits were taxable at the time of payment The judge was entitled to look at the rules as factors to determine the character of the initiation deposits Clearly the court would not rely simply on a labelling exercise to determine whether the payments made were for the purposes of a loan or not but in all the circumstances of the case and the effect of the rules on the forfeiture a term used by the appellants themselves in the agreed statement of facts of the initiation deposits which made the initiation deposits incompatible with the concept of a loan Accounting treatment of the initiation deposits 30 A related issue to the question of whether the initiation deposits were loans from the members was the treatment given to the deposits by the appellants accountants The accountants had classified the initiation deposits in the appellants accounts as deferred liabilities as compared to the entrance fees which were classified as income The appellants were free to use the initiation deposits in any way they pleased The judge felt that the classification of the initiation deposits was without more inconclusive of the matter of whether the initiation deposits were loans 31 Both the appellants and respondents highlighted the dictum of Lord Denning MR in Heather Inspector of Taxes v PE Consulting Group Ltd 1973 Ch 189 1973 1 All ER 8 where he made the following remark in relation to the evidence of accountants in tax cases The learned Master of the Rolls said at 1973 Ch 189 217 1973 1 All ER 8 13 I have no doubt that the commissioners were influenced considerably by the evidence of a distinguished accountant Mr Bailey of Messrs Price Waterhouse The commissioners were entitled to give weight to that evidence of Mr Bailey but the judge went further He seems to have thought that as a result of the decision of this court in Odeon Associated Theatres Ltd v Jones Inspector of Taxes the evidence of accountants should be treated as conclusive and that all the commissioners or the court would have to do would be to evaluate their evidence And counsel for the taxpayer company submitted to us that the Odeon case had upgraded the evidence of accountants so that the commissioners and the courts were bound by their evidence to a greater degree than they had been in the past I cannot agree with that for a moment It seems to me that that case does not add to or detract from the value of accountancy evidence The courts have always been assisted greatly by the evidence of accountants Their practice should be given due weight but the courts have never regarded themselves as being bound by it It would be wrong to do so The question of what is capital and what is revenue is a question of law for the courts They are not to be deflected from their true course by the evidence of accountants however eminent On the basis of the general principle set out above both the learned judge and the respondents took the view that the courts are not bound by the evidence of accountants 32 The appellants pointed out however that in Heather Inspector of Taxes v PE Consulting Group Ltd the issue was whether to accept accounting evidence for the purpose of deciding whether a particular entry should be classified as capital or revenue In other situations the appellants submitted that the courts have placed considerable weight on the practice of accountants in so far as they do not conflict with any positive rule of law Where there is only one treatment by the accountants this should be given due weight and should not be disregarded in the absence of any positive rule of tax law or accountancy to the contrary As such they said that the principle in Heather Inspector of Taxes v PE Consulting Group Ltd was not applicable to the present case 33 We disagreed with the appellants view of the matter The editors of Whiteman on Income Tax 3rd Ed 1988 point out that in general if accounts are prepared in a normal commercial manner and in accordance with current accountancy practice the profit shown by those accounts will be taken as the taxable profit subject to any specific statutory provisions and to the overriding power of the court to disregard accountancy practice where that practice appears to be based on a mistaken view of the law This spells out the fact that regardless of how persuasive accounting evidence is the prerogative still lies with the court to decide whether a particular item should be regarded as income that has accrued for the purposes of liability to tax Lord Denning s dictum in Heather Inspector of Taxes v PE Consulting Group Ltd was a particular instance where accountancy evidence was of even more limited relevance in determining whether receipts or expenditure were of a capital or revenue nature However this does not detract from the general principle that a court has an overriding power to form its own conclusions This is so particularly when the issue at hand has been accepted by the appellants to be a question of law as the facts are not in dispute The court is entitled to look at the undisputed facts most of which have been dealt with above and then make a decision as to the character of the initiation deposits at the time of payment The evidence of the accountants while relevant is not overwhelmingly persuasive as the appellants have strenuously argued 34 Finally the appellants argument based on Minister of National Revenue v Anaconda American Brass Ltd 1956 AC 85 that the court only has a choice where there are two alternative accounting methods and it has to choose between the two is misconceived It does not make sense for the courts to be free to disregard an accounting method only when there

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  • Comptroller of Income Tax v IA[2006] 4 SLR 161; [2006] SGCA 24
    of the taxpayer being able to obtain permission to pay off the loans earlier Its summary is instructive 26 supra at 292 To summarise we find the loans to have been loans arranged to tide the taxpayer company over a short term problem namely the failure of the taxpayer company s trading activities to generate a sufficient cash flow to cover the taxpayer company s commitments and day to day needs We find that more efficient stock control and better trading results were expected within a short time to solve the problem emphasis added 33 This last mentioned point is also confirmed by Hoffmann J himself where the learned judge states thus 26 supra at 293 The money was raised because the taxpayer company needed additional cash for its business The purposes for which cash was required included both revenue items like financing stock and capital items like enlarging shops emphasis added 34 However Hoffmann J disagreed with the decision of the Special Commissioners The learned judge was of the view that n o one can describe a loan for a fixed term of five years as a mere temporary accommodation and that t he amount and the term were fixed and the loan was for a substantial period see ibid What then about the possibility of early repayment In this regard Hoffmann J was of the view see ibid that I do not think it matters that the taxpayer company was entitled to make earlier repayment if it was willing to pay a capital premium In practice it was not contemplated that the Bank of England would allow payment to be made much earlier than the five year term of the loan emphasis added 35 With respect the learned judge was not really addressing the important issue of the possibility of early repayment This is because the factor centring on a fixed term would be undermined And this is not an unimportant point simply because as we shall see the House of Lords also focused on the importance of the loan being for a fixed term 36 The following crucial passages from Hoffmann J s judgment also bear quoting 26 supra at 295 296 The terms of the loans in the case are in my judgment sufficient to make it clear that they constitute additions to the capital employed by the taxpayer company and it does not matter whether they were intended to be employed in the making of payments of a revenue or of a capital nature In this case evidence on that question would be of little help because it is clear from the evidence before the commissioners and the documents to which I have referred that the money was not intended to be used and nor was it actually used specifically for purposes of one character or the other It was simply an addition to the taxpayer company s general funds It follows that there are in my judgment no relevant factors pointing to the borrowing being a revenue receipt which can displace the inference to be drawn from the terms upon which the money was actually borrowed In deciding whether a loan is on revenue or capital account there can be no question of examining the nature of the asset or advantage gained by the company it is always the same namely money The only question is whether the terms of repayment or the circumstances in which it is likely to be repaid or the use to which it is put may throw some light make it appropriate to treat the money as a sufficiently permanent addition to the company s funds to be regarded as capital and both the authorities and the practice of the accountants seem to me to show that the loans in this case unquestionably came within that description emphasis added 37 It is clear and this is a point we have already stressed in this judgment that unlike the present case the loans in Beauchamp s case were intended for general use Indeed there was ample evidence that part of the loans was intended for a capital use That the loans were intended for general use did weigh heavily with Hoffmann J is evidenced in the passage from his judgment which we have just quoted Indeed if the funds from a loan can be utilised for any purpose then the concept of purpose in our view does become immaterial or irrelevant This is because something that can be used for anything is not only uninformative but is also and more importantly clearly marked out for one purpose only it is part of the general capital funding or structure of the taxpayer At this point it is true that there is literally speaking a purpose However in the nature of things there is no need for the court to ascertain the specific purpose as such The court can simply assume what is already obvious that there is no real specific purpose with the funds from the loan concerned being available for any purpose and as such constituting part of the capital structure of the company This we reiterate is clearly not the situation on the facts of the present appeal 38 It is also clear that even if we accept that a loan for a fixed term is an accretion to the capital structure of the taxpayer company without more this was not the situation here The respondent in the present proceedings desired to and did repay the Syndicated Loan earlier once sufficient funds had come in from purchasers of the units in the Condo Project In contrast in Beauchamp s case it was clear that although the loans could have been repaid earlier early repayment was owing to the existing circumstances unlikely 39 It is also important to note that Hoffmann J did not eschew the context and more importantly the purpose of the loans in Beauchamp s case This is particularly evident from the second paragraph quoted at 36 above We are of the view that Hoffmann J went no further than emphasising that the inquiry is in the final analysis an objective one In other words whilst the avowed purpose for the taking of a loan will be accorded due consideration by the court the purely subjective assertions by the taxpayer are not conclusive If in other words the objective facts tell a different story the court is then free to disregard such assertions reference may be made in this regard to the Privy Council decision on appeal from the Supreme Court of Ceylon of Lily Harriet Ram Iswera v Commissioner of Inland Revenue 1965 1 WLR 663 at 668 But does this mean that at this point the court no longer has regard to the purpose behind the loan concerned We are of the view that nothing could be further from the truth What would have transpired at this point is simply the fact that the purpose of the loan has been ascertained by the court having regard to the objective facts that in the circumstances differ and contradict the purely subjective intentions which have been raised by the taxpayer concerned 40 However in fairness to Mr Liu our analysis of Beauchamp s case cannot stop simply at Hoffmann J s decision although Mr Liu himself also relied heavily upon it Put simply is there anything in the decision of the House of Lords that contradicts the analysis that we have just set out 41 Turning then to the House of Lords decision in Beauchamp s case only one substantive judgment was in fact delivered and in which the remaining law lords concurred This was the judgment by Lord Templeman In the interests of clarity including clarity of analysis we set out first a key passage in the judgment of the learned law lord as follows 25 supra at 514 The temporary and fluctuating borrowings incurred in transacting business are revenue transactions On the other hand a trading company which borrows unconditionally a fixed amount for a definite period may use the money generally for the purposes of its business or for any other purpose authorised by its constitution and even when the money is employed in the business the money may be laid out on income expenditure or capital expenditure The taxpayer company could do as it pleased with 100m borrowed Swiss francs provided that the application of the money was intra vires the objects of the taxpayer company The commissioners found as a fact that the taxpayer company intended to use the 100m Swiss francs to overcome a difficulty which was hoped to be of short duration and which was caused by the fact that stocks were high and trade depressed But there was nothing to stop the taxpayer company spending the whole or part of the money on capital items and indeed part was spent on capital items For my part I do not attach any importance in the present circumstances to the intentions of the taxpayer company or to the actual use made of the money in the present circumstances The 100m Swiss francs worth some 10m were available to the taxpayer company as additional capital emphasis added 42 The passage just quoted speaks for itself It is even more explicit than the corresponding parts of Hoffmann J s judgment parts of which are also cited by Lord Templeman at 518 519 More importantly it supports the analysis we have set out above in no uncertain terms We reiterate that the situation which obtains in the present appeal is wholly distinguishable from that which existed in Beauchamp s case Put simply Beauchamp s case has no relevance to the present proceedings This is not to state that we reject without qualification the holdings in Beauchamp s case That would be beyond our present remit We will decide that issue when an appropriate case arises for the decision of this court 43 It is true that the last portion of Lord Templeman s judgment quoted above appears to support Mr Liu s argument that the purpose of the loan is immaterial Indeed the following passage from a later part of the law lord s judgment also appears to support Mr Liu s argument 25 supra at 515 The authorities do not support the proposition that a borrowing of a definite sum for a fixed term of five years can be an income transaction emphasis added 44 There is another similar passage 25 supra at 517 Counsel for the taxpayer company submitted that an asset or advantage which only endured for five years was not enduring although a loan which endured for 10 years would be sufficiently enduring But when a taxpayer borrows money for five years he obtains an asset or advantage which endures for five years and the authorities show that such a loan increases the capital of the taxpayer for that period A loan is only a revenue transaction if it is part of the ordinary day to day incidence of carrying on the business emphasis added 45 However it is our view that these isolated passages cannot be wrenched from the context of both the judgment as well as the factual matrix concerned When these passages are viewed in their proper context in the manner which we have sought to explicate above it will be seen that Beauchamp s case does not stand for the inflexible and blanket proposition advanced by Mr Liu in the present appeal to the effect that purpose is never relevant in ascertaining whether or not a loan is a revenue or a capital transaction Indeed the last mentioned passage quoted at 44 above is itself ambiguous On one reading it could be argued that the passage does refer to the purpose of the loan and that if the funds are borrowed for the purpose of the day to day running of the business it is a revenue transaction That is in fact the case in the present proceedings In this regard one might also note the following observations by Lord Templeman 25 supra at 518 are in fact consistent with the point just made A loan is not an ordinary incident of marketing unless as the authorities show the loan is temporary and fluctuating and is incurred in meeting the ordinary running expenses of the business In their stated case the Special Commissioners said the issue we have to decide is whether the borrowing took place in such circumstances that the borrowed monies are to be regarded as an addition to the taxpayer company s capital resources or whether the borrowing formed part of the day to day activities in the earning of profits in the business In my opinion that question only permitted one answer the borrowing itself did not form part of the day to day activities of the taxpayer in earning profits emphasis added 46 We also note that Lord Templeman referred to the various authorities In our view it is unnecessary to delve into these decisions in any detail simply because the focus ought to be and indeed has been on the facts and holdings in Beauchamp s case itself It will therefore suffice for the purposes of the present proceedings to mention in the briefest of fashions some of the more significant decisions 47 In the House of Lords decision of Farmer Surveyor of Taxes v Scottish North American Trust Limited 1912 AC 118 for example although the House of Lords did refer to the temporary and fluctuating manner in which the moneys concerned were borrowed the focus was really on the fact that the purpose of the loans was centred on revenue as opposed to capital purposes Again the purpose for which the loans concerned were taken was in our view the focus of the English High Court decision of Ascot Gas Water Heaters Ltd v Duff HM Inspector of Taxes 1942 24 TC 171 And in the English Court of Appeal decision of The European Investment Trust Company Limited v Jackson HM Inspector of Taxes 1932 18 TC 1 Finlay J at first instance and whose decision was affirmed on appeal did refer to the concept of temporary accommodation However the learned judge also referred at 12 to the contrasting situation where there is an accretion to the capital structure of the company inasmuch as the taxpayer obtains sums which are used as capital and nothing else emphasis added In short there is nothing in these and other decisions cited in Beauchamp s case that detracts from the fundamental proposition that the purpose of the loan concerned is of paramount importance 48 It is clear therefore that the facts in Beauchamp s case are not only distinguishable from those which obtain in the present proceedings but also that a close analysis of that case demonstrates that it does not stand for the inflexible and blanket proposition advanced by the appellant in the present proceedings to the effect that the purpose of the loan is immaterial when ascertaining whether or not the loan concerned is a revenue or a capital transaction 49 We turn now to the other main decision that figured prominently in the arguments of both counsel in the present proceedings the Wharf Properties case 16 supra That decision by the Judicial Committee of the Privy Council hearing an appeal from the Hong Kong Court of Appeal decided that the purpose of the loan was important Interestingly the decision of the Privy Council was delivered by Lord Hoffmann now a member of the House of Lords 50 In the Wharf Properties case the taxpayer was a Hong Kong property development company which entered into a contract to purchase an old tramway depot at Causeway Bay with a view to redeveloping it The depot was in fact ultimately redeveloped into a commercial complex known as Times Square In order to finance this project the taxpayer borrowed the necessary funds from various banks and financial institutions The various loans were for short periods ranging from a week to a month but were always renewed The issue before the Privy Council was whether or not the taxpayer was entitled to deduct the interest payments made in relation to these loans 51 The Privy Council held that the acquisition of the tramway depot and holding it pending its conversion by redevelopment into an income earning capital asset was made for a capital purpose and that the payments of interest were therefore also made for a capital purpose The key concept in the Wharf Properties case was that relating to purpose Indeed the reference to the concept of purpose is both repeated and more importantly central Agreeing with Litton VP s view which was laid down at the Hong Kong Court of Appeal stage the Privy Council stated at 11 028 that T here is no other way in which the nature of the interest payment can be discovered The immediate consideration for each payment of interest is of course the use of money during the period in respect of which the interest has been paid but since money is no more than a medium of exchange which may be expended for either capital or revenue purposes the question can be answered only by ascertaining the purpose for which the loan was required during the relevant period emphasis added Reference may also be made in this regard to the Transvaal Provisional Division decision of Commissioner for Inland Revenue v General Motors SA Pty Ltd 1981 43 SATC 249 at 254 per McCreath J with whom Irving Steyn and Le Grange JJ concurred 52 Lord Hoffmann in the Wharf Properties case at 11 028 11 029 did in fact also deal with Beauchamp s case He did not consider the case to be relevant because It Beauchamp s case is directed to a different question namely whether the sum borrowed constitutes an addition to the company s capital or is a revenue receipt In other words it looks at the nature of the loan in the hands of the recipient rather than the question of whether a payment of interest is a capital or revenue expense It is unusual for a loan of money to constitute a revenue receipt but this can be the case if borrowing money is part of the ordinary day to day incidence of carrying on the business Lord Templeman in Beauchamp which may be the case in businesses of banking financing or otherwise dealing in money Ordinarily however a loan to a trading company whatever the purpose for which it is intended to be used will be an addition to that company s capital Mr Gardiner counsel for the taxpayer company did submit that the shortness of the successive terms of the loans in this case was enough to make them revenue receipts but their Lordships do not agree The borrowing did not form part of the company s trading activities While it or a replacement loan remained in place it was an addition to Wharf s viz the taxpayer company s capital Thus while the question of whether money is intended to be used for a capital or revenue purpose is inconclusive as to whether its receipt is a revenue receipt or an addition to the company s capital the purpose of the loan during the period for which the interest payment was made is critical to whether it counts as a capital or revenue expense In the present case during the whole of the two years in question the loan was clearly being applied for the purpose of acquiring and creating a capital asset rather than holding it as an income producing investment It follows that the interest was being expended for a capital purpose emphasis added in bold italics 53 With respect the distinction just drawn between receipt and expenditure is somewhat artificial As we have already argued the stronger distinction lies in the precise purpose for which the loan was taken and that in itself furnishes the requisite criterion as well as justification for drawing the line between a transaction in the nature of capital on the one hand and one in the nature of revenue on the other There is in fact a hint that such an approach ought to be adopted in the very judgment of Lord Hoffmann himself in the Wharf Properties case where the learned law lord observed thus 16 supra at 11 029 In cases like Beauchamp v FW Woolworth plc where the borrowings are for the general purposes of the company and are spent on both capital and revenue account it will be much more difficult to say whether a given interest payment is an expenditure of a capital or revenue nature emphasis added 54 Unfortunately however Lord Hoffmann then immediately proceeded to observe further as follows see ibid But this question did not arise in the Beauchamp case and there is no such difficulty in this one Their Lordships think that in the present case a true and fair view of the taxpayer s transactions required the interest to be treated as an expense of the development 55 With respect it is unfortunate that the Privy Council in the Wharf Properties case did not distinguish Beauchamp s case in a more satisfactory fashion To the extent however that we are constrained to choose between both decisions without more we would respectfully decline to follow Beauchamp s case However as we have emphasised we do not think that we need to go so far In our view an application of the purpose test to the facts of Beauchamp s case would have yielded the same result as that arrived at by both Hoffmann J as well as the House of Lords Further the decision in the Wharf Properties case does in fact support our view expressed below that the purpose test is not only relevant but is also to be accorded primacy 56 We note further that support for our view is to be found in the Eleventh Cumulative Supplement by Michael Sherry of one of the foremost treatises in the field Peter G Whiteman et al Whiteman on Income Tax Sweet Maxwell 3rd Ed 2001 as follows at para 7 58 Whether or not a facility is in a given case fluctuating and temporary is surely a question of fact However Lord Templeman went further The authorities do not support the proposition that a borrowing of a definite sum for a fixed term of five years can be an income transaction While it may very well be the case that a five year facility will be revenue in nature only in the rarest of circumstances and that the loans under consideration could not be so described by any reasonable body of Commissioners it is submitted that these last dicta go too far Surely the question of whether or not a transaction is on income or capital account depends upon its circumstances and it must be possible that in the myriad of complex transactions that take place in the commercial world one will arise where as a matter of commercial reality a five year term loan is on revenue account To hold as Lord Templeman has effectively done that as a matter of law such a loan is always on capital account is it is submitted to burden our jurisprudence with an unnecessary rule emphasis added 57 Finally it must also be reiterated that the taxpayer in the present proceedings entered into the Syndicated Loan in order to acquire trading stock 58 The principle that loans used to acquire trading stock are regarded as revenue in nature is derived from the Australian Federal Court decision of Federal Commissioner of Taxation v Hunter Douglas Limited 1983 83 ATC 4 562 Lockhart J explained as follows at 4 576 Borrowing money to carry on business must prima facie be treated as augmenting the capital employed in the business Borrowings by finance companies to then lend to their customers and borrowings by trading companies to finance the purchase of trading stock are exceptions to this general rule Such borrowings are an integral part of the ordinary conduct of the company s business and are thus revenue not capital items Moneys borrowed by a trading company for the purpose of financing the purchase of trading stock are borrowed with a view to disposal of the stock at a profit They are in each case part of the company s circulating capital 59 Mr Liu submitted that the trading stock exception is unique to the Australian tax regime which has a distinct statutory regime for trading stock However we note that the Singapore Master Tax Guide Manual CCH Tax eds 1989 2001 release also refers to expenditure on trading stock as being deductible and an English case is cited for this proposition This particular work states at p 2803 para 1010 d Expenditure relating to fixed capital if the expenditure relates to circulating capital ie stock in trade it will rank for deduction It will not if it relates to fixed capital ie fixed assets The distinction between fixed and circulating capital is that fixed capital is what the owner turns to profit by keeping it in his possession circulating capital is capital which is turned over and in the process of being turned over yields profit or loss John Smith Sons v Moore 12 TC 266 Our decision the primacy of the purpose test and the concept of complementarity 60 Looking closely at the abovementioned decisions both parties had with respect therefore missed the point in presenting a picture of irreconcilable difference between these two tests viz the purpose test and the temporary and fluctuating test respectively The present proceedings raised in our view not the question as to which test was to be preferred but rather how the tests can be reconciled with each other and which was to have primacy especially in a situation of direct conflict We hasten to add that on our analysis of the leading cases above especially Beauchamp s case we find nothing in those cases that detracts from such an approach 61 Admittedly both these tests are not the same However they are not incompatible with each other Indeed in our view they complement each other although primacy must be given to the purpose test This would be a fortiori the case in situations of conflict between the purpose test and the temporary and fluctuating test As we shall see the temporary and fluctuating test is arguably itself ambiguous Let us elaborate 62 It is our view that the purpose test is of the first importance inasmuch as given the significant difficulties in distinguishing revenue from capital transactions as stated at the outset of this judgment this particular test provides an eminently appropriate starting point for any inquiry of this nature In other words the purpose of the taxpayer in entering into the transaction here loan concerned must surely be of vital importance Put simply did the taxpayer intend to enter into a transaction having the character of revenue or did it instead intend to enter into a transaction having the character of capital As alluded to in 39 above however the purely subjective assertions by the taxpayers are not conclusive and the court will not be oblivious to the objective facts if they tell a different story 63 Notwithstanding this it remains the case that without taking into account the purpose of the taxpayer in entering into the transaction in question a position argued for forcefully by Mr Liu we would necessarily enter into the rarefied and abstract sphere which wholly disables us from ascertaining whether or not the transaction has the character of revenue or of capital 64 The corollary of any approach that disregards the purpose of the loan is that in the specific context of loans all loans and the accompanying expenses would almost never be considered to be revenue transactions for the very simple reason that without taking into account the purpose of the taxpayer in entering into the transaction concerned any and all funds from any loan would clearly amount to an addition or accretion to the capital structure of the taxpayer However such an approach advocated by Mr Liu is both excessively literal as well as too blunt and sweeping More importantly it is inconsistent with legal principle which looks not merely at a factual approach but rather one which can be justified on a normative level as well 65 However might it not be argued that the purpose test is in a sense circular We suggest that such an argument is misconceived inasmuch as the purpose of the transaction concerned here the Syndicated Loan cannot be divorced from its context in particular its factual context This is why the distinction between capital and revenue has often been described as being a factual inquiry However it will not do in our view to simply leave it at that It is an abdication of judicial responsibility to merely state that it all depends on the facts when it is possible to furnish some further if only rough guidelines As Choo Han Teck J put it in the Singapore High Court decision of Ngee Ann Development Pte Ltd v Nova Leisure Pte Ltd 2003 SGHC 168 at 6 7 In construing a contractual document the only immutable principle is that the court should extract such meaning from the words that the parties had chosen to reflect their intention at the time of the contract It is wrong to give to the words a meaning that counsel thinks the words ought to mean or even what the court thinks they ought to mean Semantic interpretation is very often a very difficult exercise What the words say and what the parties mean by the words they say may not be the same thing One great fundamental in the application of the law is consistency because consistency is the alloy of predictability In this regard the courts ought to consistently adopt the approach that the meaning to be given to written words must first be that as appears from the text The context becomes an aide in interpretation only if the words are vague or ambiguous and only to the extent that a reasonable application of the context would easily bring out the meaning intended by both sides For the above reason the phrase it all depends on the facts of the case can so easily become the anthem of inconsistency The phrase has such a magical ring to it It seems that whenever this incantation is made the court is at liberty to do as it pleases because there is no case like the present That is the temptation we must all resist emphasis added 66 Although the words italicised in the above quotation were espoused in a slightly different context the general principle contained therein is germane to the point we have made in the preceding paragraph In the circumstances we proceed to attempt to furnish a couple of rough guidelines that are not only of assistance to the present court but which may also be of some assistance to courts in future cases relating to a similar type of transaction and or set of facts And we hope to demonstrate in the process that the temporary and fluctuating test does on occasion at least have a role to play in complementing the all important purpose test 67 One guideline in so far as the present and specific context of loans are concerned is to ascertain whether or not there is a sufficient relationship or linkage between the loan in question and the main transaction or project for which the loan has ostensibly at least been taken If there is no or an insufficient linkage then it must be assumed that the sole purpose of the loan is to augment or add to the capital structure of the taxpayer If so then the loan itself must be of a capital nature A clear illustration of a situation where there is no linkage to the main transaction is where the taxpayer takes out the loan without stipulating what it is to be used for 68 On the other hand if there is a linkage such linkage must nevertheless be sufficient This is undoubtedly a question of fact and we might add commonsense For the avoidance of doubt however we are of the view that a sufficient linkage would clearly be present if the evidence demonstrates that the loan was taken in order to finance the main transaction or project Indeed this would be the position in the standard situation 69 If it is ascertained that there is a sufficient relationship or linkage in the manner set out in the preceding two paragraphs then the next question to ask is whether or not the main transaction or project itself is of a capital nature or of a revenue nature This constitutes in effect the second and closely related guideline If the project itself is of a capital nature then it must follow given the satisfaction of the requirement of linkage that the loan linked to it cannot possibly be of a revenue nature This is because the funds from the loan would ex hypothesi be intended to augment or add to the capital structure of the taxpayer given the capital nature of the project itself Put simply these funds would be sunk into the taxpayer s capital structure when viewed from the long term perspective If on the other hand the loan is linked to a project which is of a revenue nature the converse result would ensue inasmuch as the loan would be of a revenue nature as well 70 We are of the view that at this particular juncture the temporary and fluctuating test could be usefully introduced or employed We have in mind in particular the use of this test in demonstrating the absence of a link between the loan and the main transaction For example in the present proceedings the broadbrush approach which we alluded to above at 22 might as we have mentioned have been substituted with a more nuanced examination of the precise elements and purposes of the Syndicated Loan itself Certain of these elements or parts might for instance have been proved through inter alia an interpretation of the material terms of the loan concerned to have been intended for some other purpose unrelated to the main transaction and which actually adds to the capital structure of the taxpayer itself in which case those elements or parts would not be temporary and fluctuating and therefore would be of the character of capital In contrast where the elements or parts of the loan have been proved to have been intended for a purpose related to the main transaction the latter of which is revenue in nature then those elements or parts would conversely be of the character of revenue It therefore follows that where as here the appellant has admitted that the purpose of the Syndicated Loan itself was to acquire trading stock it follows a fortiori that it the loan is revenue in nature If so the temporary and fluctuating test is in effect redundant because by virtue of the appellant s admission the linkage between the Syndicated Loan and the main transaction centring here on the Condo Project has ex hypothesi been established If however there had been no such admission the temporary and fluctuating test might well have been significant in enabling the parties such as the appellant in the present proceedings to demonstrate that at least part of the loan might not have a linkage to the main transaction in the first instance In particular if it could be proved that part of or even the entire loan was intended to be a long term one then either that part of or the entire

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  • Comptroller of Income Tax v VJ[2009] 2 SLR 91; [2008] SGHC 224
    business In the well known Singapore Court of Appeal case of DEF v The Comptroller of Income Tax 1961 MLJ 55 Buttrose J at 58 held that business implies or connotes a series or repetition of acts in carrying on or carrying out a scheme for profit making He also said at 59 T he word business in section 10 1 a of the Ordinance is used in association with trade profession or vocation all of which connote habitual and systematic operations a continuity or repetition of acts or similar operations 14 In that same case Ambrose J said at 61 T he fundamental idea underlying the three words trade profession or vocation in section 10 1 a of the Singapore Income Tax Ordinance is the continuous exercise of an activity Considering the context it seems to me that the same fundamental idea underlies the word business which appears between the word trade and the words profession or vocation and that the word business must therefore be given its ordinary meaning namely an occupation habitually engaged in especially for livelihood or gain 15 Thus the carrying on of a business is to be distinguished from passive derivation of income Examples of the latter to bring out the distinction are set out below 16 First where a company merely holds shares in other companies carries out minimal activities and derives little income apart from dividends it will not be treated as carrying on a business The dividends will be assessed to tax under s 10 1 d which applies to income derived passively from dividends interest or discounts instead of s 10 1 a Deductions under s 14 in the ascertainment of the income are limited to those incurred in the production of that income in the year of assessment Given that the company is a passive investor the deductions allowable would be principally interest incurred on moneys borrowed to purchase the shares To the extent that the expenses in the year of assessment exceed the income the excess may not be carried over into the next year of assessment Although that is strictly the position at law in practice as was observed by the Court of Appeal in JD Ltd v Comptroller of Income Tax 2006 1 SLR 484 at 51 the Comptroller has made some concessions as regards the deductibility of expenses in the ascertainment of income not falling under s 10 1 a 17 Secondly if a company that owns properties merely lets them out but carries out minimal or no other activities it will not be treated as carrying on a business either Such a company will be assessed on its rental income under s 10 1 f which applies to income derived passively from rents royalties premiums and any other profits arising from property Here again any excess of expenses and outgoings over the income in any year of assessment may not be carried forward to the next year of assessment Moreover capital allowances which might otherwise be available to a company carrying on such a business are denied to the taxpayer company because it does not carry on a business in undertaking such activities Making of investments 18 In my view the phrase simply means investing It does not mean the turning over of investments for profit by the purchase and resale of investments Indeed if the business of the company was in the purchase and resale of investments for profit it would be treated as an investment dealing company In that event any gains made in the purchase and resale would be taxable as profits rather than be accorded treatment as a capital gain Rowlatt J gives useful guidance on this point in The Commissioners of Inland Revenue v The Tyre Investment Trust Ltd 1924 12 TC 646 where he held at 656 Mr Grant suggests that the making of investments means that the Company s principal business is the turning over of investments and making profits by the purchase and re sale of investments I do not think so Making investments here does not mean that making investments means investing making is nothing it means investing and before you can hold an investment you have to acquire it in other words to make it 19 That s 10E was intended to apply to an investment holding company was recognised by the Court of Appeal in JD Ltd v Comptroller of Income Tax 2006 1 SLR 484 20 Hence the emphasis is on the acquisition holding or retention of an investment as opposed to the purchase for resale of the investment By way of clarification this is not to say that an investment holding company may not realise its investment or switch one investment for another in the course of its business as such If such transaction truly was undertaken in the course of its business as an investment holding company any gains derived therefrom would be capital in nature and not exigible to tax The corollary to that is that losses incurred would be capital in nature and not be available for set off against income 21 It follows from the above that I cannot agree with the Respondent s definition of investment making activities set out in para 7 of the Respondent s case which reads as follows as a matter of first principles investment activities must comprise the following a acquisition of investments b any preparation of the investment to a desired state For example in the case of land the development of the same into a lettable building c the holding of investment in its desired state d the receiving or earning of income from the holding of the investment and e the eventual disposal of the investment upon maturity of investment time horizon emphasis added 22 Neither do I find tenable the Respondent s Submissions at para 12 thereof which I quote below It is submitted that on any reasonable consideration of its activities the Respondent s main business cannot be characterised as the making of investments A company whose main business is property investment would consider the following a It would take a view of the periodic returns it can expect to receive from holding the property b It would determine its desired investment time horizon c It would also consider the expected disposal value of the investment d Usually in the interim period between the purchase of the land and disposal of the same the company may decide to develop land for purpose of letting to derive rental income In doing so it may render some services to its tenants However such services would be restricted to the basic usual maintenance services which is an integral and necessary part of company s investment in property which gives rise not to a business profit but to rental income The principal part of the company s income remains to be derived from the rent charged by the company to the tenant for leasing the tenanted premises emphasis added 23 Quite apart from the fact that the Respondent s counsel gratuitously introduced the concept of a main business my other criticism of the submission is that there is no basis for foisting sub paras b and c as requirements for a company in the business of letting immovable properties Respondent s imposition of sub paras b and c in its definition of investment making activities likewise is unwarranted So far as sub para b is concerned it is obvious that the preparation of the investment to a desired state is not essential An investment company could well purchase a completed building Moreover where the investment consists of securities such as stocks and shares no preparation of any kind is involved 24 Similarly the requirement in sub para e for eventual disposal of the investment upon maturity of investment time horizon surely cannot be a pre requisite There may be no time horizon set The investment might never be disposed of 25 The Respondent s attempt to elevate these characteristics as sometimes they are of investment making companies into absolute essentials and thereby to argue that the Respondent does not qualify as an investment making company must fail Business of the making of investments 26 The above expression involves both the concept of business and that of the making of investments Given that in the making of investments it is not essential that there be the turning over of investments that which makes it a business rather than a passive investment may come from activities the company undertakes habitually or continually with a view to profit 27 Where the activities relate to or are connected with the generation of income from the investment it is not difficult to conclude that they form part of the business of the making of investments Where the activities cannot be said to be in any way related to or connected with the generation of income from the investments it is possible that the activities constitute part of a discrete business separate and distinct from that of the making of investments Conceptually I see no difficulty in a company in the business of making investments having another separate and distinct business at the same time But where the activities can be said to be ancillary or incidental to the business of the making of investments they form part of that business Business of letting immovable properties 28 Section 10E 2 defines the business of the making of investments to include the business of letting immovable properties Here again the word business is juxtaposed against the letting of immovable properties Once again therefore there is a requirement for activities consistent with the carrying on of a business If a company merely lets out the properties without carrying out other activities it would be merely a passive investor in immovable properties 29 In order for a company to be carrying on a business of letting immovable properties it must not only rent out properties but also carry out activities that are systematic habitual or repetitive with respect to the letting of the properties A paradigm example would be where a company lets immovable properties for rent and additionally provides services and facilities to the tenants making it more attractive for tenants to want to rent the properties as the Respondent in the instant case does The Board s interpretation of the business of letting immovable properties 30 The Board did not expressly state what in their view was meant by the expression the business of letting immovable properties They said VJ v The Comptroller of Income Tax 2007 SGITBR 3 at 13 that T he fact that a business includes the letting of immovable property does not automatically make the business one of the making of investments This we believe is also the import of the UK case of IRC v George and Another 2003 EWCA Civ 1763 The Board then said at 19 that whilst George concerned a different statute nevertheless it concerned the very same issue of what may or may not be said to be investments and making or holding investments 31 With respect to the Board in following the approach in Inland Revenue Commissioners v George 2004 STC 147 IRC v George they made an error of law The decision in that case related to a different factual and statutory context Indeed in IRC v George itself Carnwath LJ at 12 endorsed the view that cases relating to different taxes and different subject matter were unlikely to be helpful The key question there was whether the business in question consisted wholly or mainly of making or holding investments within the meaning of s 105 3 of the UK Inheritance Tax Act 1984 32 On the facts it was undisputed that the business did not consist of or include making investments but that it did include holding investments although it did not consist of that alone That being the case the question was whether the business was mainly that of holding investments For this purpose as observed by Carnwath LJ at 11 T he principal areas of debate have been first the correct allocation between investment and non investment of the various activities involved in operating the site including in particular the services provided for the residential park and secondly in the light of that allocation whether the investment element of the business was predominant Comparing that case to ours the critical difference is that in s 10E there is no requirement that the business of letting immovable properties must be the whole or main business of the company 33 This is not to say that once the business of the company includes that of the letting of immovable properties s 10E is to apply regardless of whether the income of the company was entirely from the business of the making of investments As formulated s 10E applies only in determining the company s income derived from any business of the making of investments but not otherwise It appears this was where the Revenue fell into error in its submissions before the Board although in the present appeal the Revenue moderated its stand submitting as follows in paras 41 and 43 to 46 of the Appellant s Case Amended 41 By necessary implication the income that is subject to s 10E must be circumscribed by the ambit of business of the making of investments and business of the letting of immovable properties On a literal reading the expression income of a company derived from any business of the making of investments in s 10E 1 and the substituted expression income of a company derived from any business of letting immovable properties is not restricted to rent income alone 43 If it is determined that any income in question is not from a business of the letting of immovable properties s 10E can only be invoked provided the income arises from the business of the making of investments This must logically be so for otherwise income from investments in the form of securities will not come within the scope of s 10E The Respondent s concern that the definition in s 10E will be given an expansionary view is unfounded 44 The following examples may serve to illustrate more clearly the circumstances when s 10E may be applied 45 Company A owns and manages 3 shopping centres which it lets out to tenants It also provides services to tenants and carries out promotion activities that will draw custom to the shopping centres The Revenue will apply s 10E to the rent and service charge income derived by the Company A from the 3 shopping centres as they constitute immovable properties that are held as investments 46 Company B owns an office building that is leased to tenants with the usual services of cleaning power supplies security etc In addition it also holds a restaurant franchise and operates 2 restaurants from premises it does not own The Revenue will apply s 10E only to the income from the office building but not the income from the restaurants as the operation of restaurants is not a business of the making of investments 34 As can be seen from the above the Revenue no longer takes the approach that once the business of the company includes that of the letting of immovable properties the entire income of the company is to be determined in accordance with s 10E Para 46 in particular clearly admits of the possibility that the company may have income from a business other than that of the making of investments Such income clearly ought not to be subject to s 10E In other words the business of the taxpayer may be a composite business of which only part is that of the making of investments That was implicit in the decision of the Board in IE v Comptroller of Income Tax 2005 SGITBR 1 35 In that case the taxpayer company was the developer and owner of a major integrated complex comprising five office towers a large retail podium and a convention centre Three of the office towers were for sale and the gains therefrom were treated as trading profits for tax purposes under s 10 1 a of the Act The appellant company derived rental income from the remaining two office towers and the retail podium and there was no dispute that the rental income was derived from a business of the making of investments under s 10E of the Act What was in issue was whether the income from the operation of the convention centre was similarly to be treated as having been derived from the business of the making of investments under s 10E 36 The appellant company received fees from organising exhibitions conventions and seminars at the convention centre It granted licences to exhibitors to use allocated space for a limited time It also provided technical audio and visual services to the customers and carried advertisements on large electronic information screens The appellant company also provided catering services for the various functions at the convention centre In addition it operated outlets such as restaurants and speciality food outlets within the centre From the outset the appellant company had created a separate operating business division with its own management team led by a general manager The centre also had its own accounting administration marketing building management food and beverages and housekeeping departments 37 On the above facts the Board held that the appellant company s income from the operation of the convention centre ought to be assessed under s 10 1 a of the Act without applying s 10E leaving only the income from the rental of the two tower blocks and the retail podium to be subject to s 10E I do not think the decision of the Board in that case was one which on a proper construction of s 10E the Board could not have arrived at What the

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  • Comptroller of Income Tax v GE Pacific Pte Ltd[1994] 2 SLR 690; [1994] SGCA 73
    plant in use at the end of that basis period 8 In 1966 another set of capital expenditure allowances was introduced in s 19A which provides inter alia 1 Notwithstanding section 19 where a person carrying on a trade profession or business incurs capital expenditure during or after the basis period for the year of assessment 1985 on the provision of machinery or plant for the purposes of that trade profession or business he shall in lieu of the allowances provided by section 19 be entitled for a period of 3 years to an annual allowance of 331 3 in respect of the capital expenditure incurred 1A Notwithstanding section 19 where a person proves to the satisfaction of the Comptroller that he has installed a computer or other prescribed automation equipment for the purposes of a trade business or profession carried on by him he shall in lieu of the allowances provided by subsection 1 or in section 19 be entitled if he so elects to an allowance of 100 in respect of the capital expenditure incurred during or after the basis period for the year of assessment 1985 on the provision of that computer or automation equipment 9 Section 19A 1 allows the cost of plant and machinery to be written off in three years and s 19A 1A provides for the cost of computers and automation to be written off in one year These provisions of s 19A only expressly state the requirement that capital expenditure must have been incurred on the machinery for the purposes of the business However both ss 19A 1 and 19A 1A are stated to be in lieu of s 19 and that necessarily means that a taxpayer only qualifies for s 19A allowances if the requirements for s 19 allowances are fulfilled see Re Boddington Boddington v Clairat for this interpretation of the phrase in lieu of This means that the additional requirement in s 19 2 that the machinery be in use at the end of the basis period must also be satisfied for a successful claim under s 19A to be made 10 Thus if a taxpayer 1 incurred capital expenditure on plant or machinery for the purposes of his business and 2 has the machinery in use at the end of the basis period for a particular year of assessment that taxpayer would be entitled to choose between s 19 allowances and s 19A allowances In the present case the respondent elected for the accelerated allowances under s 19A 11 However entitlement to capital expenditure allowances was complicated in this case because the equipment in question was subsequently sold Ordinarily s 20 deals with this situation It provides 1 Except as provided in this section where at any time after the setting up and on or before the permanent discontinuance of a trade profession or business any event occurs whereby machinery or plant in respect of which allowances under section 19 or 19A have been made to a person carrying on a trade profession or business ceases to belong to that person whether on a sale of the machinery or plant or in any other circumstances of any description an allowance or charge to be known as a balancing allowance or a balancing charge shall in the circumstances mentioned in this section be made to or as the case may be on that person for the year of assessment in the basis period for which that event occurs Provided that where the property in machinery or plant passes at less than the open market price then for the purpose of determining the amount of any balancing allowance or balancing charge the event shall be treated as if it had given rise to sale moneys of an amount equal to the open market price of the machinery or plant 2 Where there are no sale moneys or where the amount of the capital expenditure of the person in question on the provision of the plant or machinery still unallowed as at the time of the event exceeds those moneys a balancing allowance shall be made and the amount thereof shall be the amount of the expenditure still unallowed as aforesaid or as the case may be the excess thereof over those moneys 3 If the sale moneys exceed the amount if any of the said expenditure still unallowed as at the time of the event a balancing charge shall be made and the amount on which it is made shall be an amount equal to the excess or where the said amount still unallowed is nil to those moneys 12 In any given year of assessment the ss 19 or 19A allowances already granted are deducted from the purchase price of an asset to determine its written down tax value If the asset is subsequently sold for less than the last written down tax value s 20 2 clearly provides for a balancing allowance equal to the difference between the written down tax value and the sale price Presumably this additional allowance is a recognition that the asset has depreciated faster than anticipated by the scheme of capital allowances in ss 19 and 19A Conversely where the sale was for a price above the written down tax value s 20 3 imposes a balancing charge for the difference 13 We come now to s 24 This section provides for a special situation where the buyer and seller of plant and machinery are related In so far as material s 24 provides 1 This section shall have effect in relation to any sale of any property where the buyer is a body of persons over whom the seller has control and the sale is not one to which section 33 applies 2 Where the parties to the sale by notice in writing to the Comptroller so elect a the like consequences shall ensue for the purposes of sections 16 to 21 as would have ensued if the property had been sold i ii in the case of machinery or plant for a sum equal to the amount of the expenditure on the provision thereof still unallowed immediately before the sale computed in accordance with section 20 Provided that no such election may be made unless before the sale in the case of the seller and after the sale in the case of the buyer the property is used in the production of income chargeable under the provisions of this Act and unless the machinery or plant was not leased by the seller to the buyer before the sale b notwithstanding anything in section 19 where the sale is a sale of machinery or plant no initial allowance shall be made to the buyer c notwithstanding anything in section 19A where the sale is a sale of machinery or plant the special allowances provided under that section shall continue to be available as if no sale had taken place and d notwithstanding anything in the preceding provisions of this section or in sections 17 and 20 such balancing charge if any shall be made on the buyer on any event occurring after the date of the sale as would have fallen to be made on the seller if the seller had continued to own the property and had done all such things and been allowed all such allowances and deductions in connection therewith as were done by or allowed to the buyer 14 In defining the ambit of s 24 sub s 1 says that the section should have effect inter alia where the buyer is under the seller s control In the present case s 24 clearly applies as HS the buyer was a wholly owned subsidiary of the respondent the seller This entitled the respondent and HS to jointly elect for the special tax treatment under s 24 In the event they did so elect The principal effect of such an election is set out in sub s 2 a ii which provides that the consequences of ss 16 to 21 would have effect between related buyers and sellers as if the machinery had been sold at a price equal to the last written down tax value of the seller In the present case this means first that the buyer would be entitled under s 19A to allowances as if the purchase price was the last written down tax value of the seller and secondly under s 20 the seller would have no balancing allowance or charge to contend with 15 Up to this point the parties are not in dispute They agree that this is the way the Act operates vis à vis capital expenditure allowances However they part company when we come to s 24 2 c and the question of who in the light of this provision is entitled to the remaining capital expenditure allowances on sale of the plant and machinery between related parties The issue 16 The dispute between the Comptroller and the respondent is a result of differing interpretations of s 24 2 c On the one hand the Comptroller is of the view that the effect of this provision is to allow the related buyer in a s 24 election situation to step into the shoes of the related seller as far as entitlement to capital expenditure allowances is concerned It is their submission that when s 24 2 c says that the special allowances provided for by s 19A shall continue to be available as if no sale had taken place it means that the balance of the s 19A allowances that would have been claimed by the seller may now be claimed by the buyer at the same rate as would have been available to the seller if there had been no sale For example if the seller had purchased the machinery in the basis period 1990 he would enjoy 331 3 capital expenditure allowance for the year of assessment 1991 If he then sells it in 1991 the buyer would be entitled to the remaining two 331 3 capital expenditure allowances ie for the years of assessment 1992 and 1993 17 On the other hand the respondent s submission is that s 24 2 c provides for the remaining s 19A allowances to continue to be available to the seller as if no sale had taken place Thus using the same example as above a seller who purchased machinery in the basis period 1990 would be entitled to claim capital expenditure allowances for the years of assessment 1991 1992 and 1993 regardless of any sale within this period 18 In essence the parties dispute is over the question of who is entitled to any remaining capital expenditure allowances on the sale of plant and machinery between a related buyer and a related seller The Comptroller contends that s 24 2 c provides for the remaining capital expenditure allowances to continue to be available to the related buyer whilst the respondent argues that these allowances are to continue to be available to the related seller The Income Tax Board of Review 19 As already stated the Board held in favour of the Comptroller In their judgment they said that s 24 2 c did not deal with the question of who was entitled to claim the capital expenditure allowances To their mind the entitlement to such allowances was dealt with by s 19A and not by s 24 They said that s 24 2 c only dealt with the quantum of special allowances which may be claimed They ascribed this interpretation of the provisions to the clear and unambiguous words of s 24 refusing to construe s 24 2 c in the manner contended for by the respondents as they said that would be tantamount to reading the words to the seller immediately after the words continue to be available in s 24 2 c The High Court 20 On appeal to the High Court the learned judicial commissioner held in favour of the respondents In his judgment he agreed with the Income Tax Board of Review that it was s 19A and not s 24 which governed a taxpayer s entitlement to capital allowances But looking specifically at s 24 2 c he felt bound to apply the legal fiction therein that there had been no sale to its logical conclusion He said that under s 19A the taxpayer would not be entitled to the special allowances if he sold the qualifying machinery or plant If no sale had taken place then there would have been no event occurring whereby the machinery or plant would have ceased to be used for the purpose of the seller s trade profession or business In other words the plant or machinery was deemed not to have been sold and therefore to be still in use by the related seller thus preserving his entitlement under s 19A This he felt was the only possible construction of the words in s 24 2 c 21 The learned judicial commissioner felt unable to agree with the Board when they said that s 24 2 c only dealt with the quantum of the allowance to be claimed He felt that this provision had in fact nothing to do with the question of quantum at all He also said that if it was the buyer who was to be entitled to the allowances there would have been no need for s 24 2 c at all as the buyer was already entitled under s 19A Finally he pointed out that the Comptroller s interpretation would in practical terms have caused a break in the period of three years stipulated by s 19A and would also allow the buyer to write off his own deemed expenditure in less than three years These consequences he felt were contrary to the scheme of the Act Thus he held that the respondent s interpretation of s 24 2 c was correct The appeal 22 This case then came before us when the Comptroller appealed against the decision of the High Court We agree with the learned judicial commissioner below and with the Board that the dispute between the parties revolves around the singular question of the proper construction to be afforded s 24 2 c 23 In any question of statutory interpretation the first and most important factor is the literal meaning of the words of the provision Before us it was the respondent who argued more forcefully that the literal interpretation of s 24 2 c was in its favour The respondent argued that the words shall continue to be available contemplated an existing state of affairs that was to be perpetuated Thus the respondent said since the s 19A allowances were available to the seller before the sale they should continue to be available to the seller after sale Of course the respondent is correct to say that the words of s 24 2 c contemplate the continuance of an existing state of affairs However this does not necessarily mean that each and every circumstance that existed before a sale should be continued The word continue might envisage the continuance of the entitlement to s 19A allowances ie that the seller continues to be entitled to the allowances or it could equally refer merely to the continued availability of the allowances whilst saying nothing about the question of entitlement Looking only at the words of the provision itself it seems unclear to us which circumstance entitlement or availability s 24 2 c seeks to perpetuate 24 The Comptroller also sought to argue that the literal interpretation of s 24 2 c was in his favour He said that the natural construction of the words clearly indicated that the capital allowances were to continue to be available to the buyer He said that to hold otherwise would be to read the words to the seller into s 24 2 c after the word available in contravention of the rule that words which are not present should not be too readily read into a statutory provision It is interesting to note that the respondent argued similarly saying that the Comptroller s interpretation required the court to read the words to the buyer into s 24 2 c Neither of these arguments seem particularly strong to us To our mind the actual words of s 24 2 c clearly stipulate the continued availability of s 19A allowances but are ambiguous as to who is to be entitled to these allowances The provision itself would be clearer if it said whether the allowances should continue to be available to the buyer or to the seller But it does not The learned judicial commissioner felt that the words as if no sale had taken place created a legal fiction which had to be carried to its logical end However it is our opinion that s 24 2 c does not specify which circumstance the legal fiction is in respect of ie which state of affairs is to continue as if no sale had taken place 25 Since the words of the provision itself are equivocal as to who should be entitled to the capital expenditure allowances it is necessary to search elsewhere for the intention of Parliament Section 9A 1 of the Interpretation Act Cap 1 says In the interpretation of a provision of a written law an interpretation that would promote the purpose or object underlying the written law whether that purpose or object is expressly stated in the written law or not shall be preferred to an interpretation that would not promote that purpose or object 26 Although s 9A of the Interpretation Act only came into effect after the commencement of these proceedings in the High Court we feel justified in having recourse to it as it is a declaratory enactment which thus has retrospective effect as an exception to the general rule against retrospective legislation In this we are in complete

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  • Ch.29 Land Law
    all land ultimately belongs to the state and other persons can only own an estate or some lesser interest in the land Basically 5 types of grants of land may be made by the state under the State Lands Act estates in fee simple estates in perpetuity leases temporary occupation licences and tenancy agreements 29 3 2 New grants of estates in fee simple the largest possible English estate of indefinite duration are only made in the limited circumstances allowed e g as a regrant after the surrender of an existing estate in fee simple for subdivision purposes An estate in perpetuity a statutory rather than a common law estate is of unlimited duration like the estate in fee simple However such estates are subject to a number of covenants and conditions e g the payment of any applicable rent The leases created under the State Lands Act are also subject to various terms and conditions many of which are similar to those that apply to estates in perpetuity Temporary occupation licences and tenancy agreements are subject to many similar conditions under the State Lands Rules e g the Collector of Land Revenue may revoke a temporary occupation licence or determine a tenancy agreement at any time However the temporary occupation licence does not create a tenancy or give exclusive right to possession The main differences between a tenancy agreement with the state and a state lease appears to be the term limit of 3 years and the fact that a tenancy agreement is not considered a disposal of land that requires the President s approval 29 3 3 In general smaller estates or interests may be carved out of larger estates e g the owner of an estate in fee simple may grant a lease of 99 years to a lessee However the creation of some estates or interests may require prior written approval from the relevant authority e g subdivision approval under the Planning Act is required for the creation of certain leases 29 3 4 A further point to note is that if the interest created is not registrable e g an equitable mortgage or does not comply with the applicable prescribed form to enable its registration e g a lease that is not in the form prescribed under the Land Titles Rules it may then only be notified on the land register through the registration of a caveat 1 Strata Title 29 3 5 The Land Titles Strata Act facilitates the ownership of flats and communal living Basically a development or building may be subdivided into strata units that are capable of being separately owned by subsidiary proprietors as well as common areas called common property that are used together with other subsidiary proprietors A strata unit is in effect a defined space that may be below on or above the surface of the land that is marked out on a strata title plan A legal entity called a management corporation is constituted to control as well as maintain the common property The management corporation is funded through contributions made by the subsidiary proprietors who hold the common property as tenants in common in proportion to the share value stated in their subsidiary strata certificates of title 29 3 6 The Land Titles Strata Act facilitates the ownership of flats and communal living Basically a development or building may be subdivided into strata units that are capable of being separately owned by subsidiary proprietors as well as common areas called common property that are used together with other subsidiary proprietors A strata unit is in effect a defined space that may be below on or above the surface of the land that is marked out on a strata title plan A legal entity called a management corporation is constituted to control as well as maintain the common property The management corporation is funded through contributions made by the subsidiary proprietors who hold the common property as tenants in common in proportion to the share value stated in their subsidiary strata certificates of title 1 Abolition of Adverse Possession 29 3 7 The acquisition of title to land through adverse possession was abolished with effect from 1 March 1994 and section 50 of the Land Titles Act provides that no title may be acquired by adverse possession except for the limited cases saved by the transitional provisions of the Act Return to the top SECTION 4 SOME INTERESTS IN LAND A Leases Licences Easements and Restrictions 29 4 1 A lease is basically an estate in land whereby a landowner usually called the lessor or the landlord grants another person usually called the lessee or the tenant the right to exclusive possession and use of his land in return for a monetary consideration called rent The rights and duties of the two parties would be determined by the agreement between them and would usually be reflected in a document called a lease or tenancy agreement 29 4 2 If the term of the lease exceeds 7 years including the extended term allowed by an option to renew it needs be registered under the Land Titles Act in the prescribed form to be effectual see section 45 of the Land Titles Act 29 4 3 If the lease does not exceed 7 years including the extended term allowed by an option to renew it cannot be registered but it may be notified through the registration of a caveat This kind of lease will bind a purchaser of the land provided the lessee is in occupation at the time the purchaser is registered as the proprietor see section 46 1 c vi of the Land Titles Act 29 4 4 A lease that exceeds 7 years not in the prescribed form may also be notified through the registration of a caveat but such a lease can only considered an equitable lease based on an enforceable agreement There are implied powers in favour of lessors in registered leases e g

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  • Ch.29 Land Law
    SECTION 3 ESTATES INTERESTS IN LAND 29 3 1 Due to the feudal origins of land law that applies in Singapore all land ultimately belongs to the state and other persons can only own an estate or some lesser interest in the land Basically 5 types of grants of land may be made by the state under the State Lands Act estates in fee simple estates in perpetuity leases temporary occupation licences and tenancy agreements 29 3 2 New grants of estates in fee simple the largest possible English estate of indefinite duration are only made in the limited circumstances allowed e g as a regrant after the surrender of an existing estate in fee simple for subdivision purposes An estate in perpetuity a statutory rather than a common law estate is of unlimited duration like the estate in fee simple However such estates are subject to a number of covenants and conditions e g the payment of any applicable rent The leases created under the State Lands Act are also subject to various terms and conditions many of which are similar to those that apply to estates in perpetuity Temporary occupation licences and tenancy agreements are subject to many similar conditions under the State Lands Rules e g the Collector of Land Revenue may revoke a temporary occupation licence or determine a tenancy agreement at any time However the temporary occupation licence does not create a tenancy or give exclusive right to possession The main differences between a tenancy agreement with the state and a state lease appears to be the term limit of 3 years and the fact that a tenancy agreement is not considered a disposal of land that requires the President s approval 29 3 3 In general smaller estates or interests may be carved out of larger estates e g the owner of an estate in fee simple may grant a lease of 99 years to a lessee However the creation of some estates or interests may require prior written approval from the relevant authority e g subdivision approval under the Planning Act is required for the creation of certain leases 29 3 4 A further point to note is that if the interest created is not registrable e g an equitable mortgage or does not comply with the applicable prescribed form to enable its registration e g a lease that is not in the form prescribed under the Land Titles Rules it may then only be notified on the land register through the registration of a caveat 1 Strata Title 29 3 5 The Land Titles Strata Act facilitates the ownership of flats and communal living Basically a development or building may be subdivided into strata units that are capable of being separately owned by subsidiary proprietors as well as common areas called common property that are used together with other subsidiary proprietors A strata unit is in effect a defined space that may be below on or above the surface of the land that is marked out on a strata title plan A legal entity called a management corporation is constituted to control as well as maintain the common property The management corporation is funded through contributions made by the subsidiary proprietors who hold the common property as tenants in common in proportion to the share value stated in their subsidiary strata certificates of title 29 3 6 The Land Titles Strata Act facilitates the ownership of flats and communal living Basically a development or building may be subdivided into strata units that are capable of being separately owned by subsidiary proprietors as well as common areas called common property that are used together with other subsidiary proprietors A strata unit is in effect a defined space that may be below on or above the surface of the land that is marked out on a strata title plan A legal entity called a management corporation is constituted to control as well as maintain the common property The management corporation is funded through contributions made by the subsidiary proprietors who hold the common property as tenants in common in proportion to the share value stated in their subsidiary strata certificates of title 1 Abolition of Adverse Possession 29 3 7 The acquisition of title to land through adverse possession was abolished with effect from 1 March 1994 and section 50 of the Land Titles Act provides that no title may be acquired by adverse possession except for the limited cases saved by the transitional provisions of the Act Return to the top SECTION 4 SOME INTERESTS IN LAND A Leases Licences Easements and Restrictions 29 4 1 A lease is basically an estate in land whereby a landowner usually called the lessor or the landlord grants another person usually called the lessee or the tenant the right to exclusive possession and use of his land in return for a monetary consideration called rent The rights and duties of the two parties would be determined by the agreement between them and would usually be reflected in a document called a lease or tenancy agreement 29 4 2 If the term of the lease exceeds 7 years including the extended term allowed by an option to renew it needs be registered under the Land Titles Act in the prescribed form to be effectual see section 45 of the Land Titles Act 29 4 3 If the lease does not exceed 7 years including the extended term allowed by an option to renew it cannot be registered but it may be notified through the registration of a caveat This kind of lease will bind a purchaser of the land provided the lessee is in occupation at the time the purchaser is registered as the proprietor see section 46 1 c vi of the Land Titles Act 29 4 4 A lease that exceeds 7 years not in the prescribed form may also be notified through the registration of a caveat but such a lease can only considered

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  • SM Integrated Transware Pte Ltd v Schenker Singapore (Pte) Ltd[2005] 2 SLR 651; [2005] SGHC 58
    to do renovation work had he wanted to Mr Tan must have been aware of how long his fitting out works would take If he had then expected to be given a one month rent free period he would have insisted that the lease commencement date be changed to 6 March 2003 He did not do so He would have known that if Schenker took over the warehouse on 6 March 2003 and the lease commenced on 1 March 2003 it would have been given only three weeks rent free occupation He did not protest against that position nor ask for any change In my view he kept quiet because he had asked for four weeks had originally been given two and had been willing to accept those two weeks if SMI in turn was willing to be flexible and give a short extension in the event that the fitting out works could not be completed within that period The slightly extended period of three weeks was acceptable to him I therefore find that when Mr Tan agreed to the commercial terms of the draft LSA he knew he was agreeing to a rent free period of approximately three weeks and he was happy to do so As such the duration of the rent free period as agreed was entirely consistent with the lease proper starting on 1 March 2003 53 The fourth argument made by Schenker was that the rent free period would have involved Schenker taking exclusive possession of the warehouse as otherwise even if it occupied the warehouse such period of occupation could not be termed rent free Schenker submitted that SMI had to adduce sufficient evidence to show that as at 7 February 2003 it was willing and able to give exclusive possession of the warehouse to Schenker It further submitted that SMI was not able to discharge that burden because it had to do extensive rectification works in the warehouse before handing the same over to Schenker It relied on evidence by Mr Heng to the effect that Schenker had not taken possession of the premises at the joint inspection on 6 February because there were some rectification works to be done and Schenker wanted all these works to be completed before it took over the premises Mr Heng also confirmed that the rectification works were in the event only completed on 21 March 2003 54 SMI submitted that on this point Schenker s arguments were misconceived SMI s case was that a valid and binding agreement for the lease had been reached by 4 February 2003 at the latest with the agreed commencement date being 1 March 2003 It was not SMI s case that the lease itself had commenced on or by 7 February 2003 As such SMI did not have to prove that it was willing and able to give exclusive possession of the warehouse to Schenker on 7 February I agree Since 7 February was not the commencement date of the lease SMI did not have to show it was in a position to give exclusive possession of the warehouse to Schenker as of that date On the evidence Richland had vacated the warehouse on 6 February and as from noon on that date Schenker was free to enter the warehouse and start its fitting out operations In fact its contractors could have started work on the location codes and distribution points two days earlier had Schenker wanted to send them in then In early January when Mr Tan had pressed for an early handover Mr Lim had accepted albeit reluctantly 6 February as that date It was contemplated then that the premises would be taken over by Schenker immediately upon Richland s vacating them It was also agreed that there would be a joint inspection on that same day to identify the defects that SMI would have to rectify It was therefore anticipated that Schenker s fitting out operations would take place contemporaneously with SMI s rectification works This was not the usual sort of arrangement but the circumstances were not usual since Schenker was extremely anxious to move into the warehouse and start operations as early as possible 55 In court Mr Tan denied that it was expected from the start that Schenker would take over the warehouse with those defects identified on 6 February 2003 subject to the same being subsequently rectified by SMI At one point of his cross examination he asserted that the defects noted on 6 February were critical to the operation For example some of the walls were cracked and had to be repaired and the rolling dock area had some defects The plaster was peeling off due to having been damaged by containers More than 20 defects were identified and in Mr Tan s view collectively these defects were critical Later in the cross examination however Mr Tan contradicted himself He admitted that despite these defects the warehouse was ready to receive and store Merck s dangerous goods When it was put to him that the rectification of the defects was not critical to Schenker s operation of the warehouse his answer was I would say with certain operational constraints that would have to be overcome This was a grudging concession that the warehouse was usable Thus Mr Tan was not a consistent witness in relation to the issue of the handover and I do not believe that he was telling me the truth when he maintained that Schenker could not move into the warehouse on 7 February because of the work that SMI had to do to rectify the defects seen during the joint inspection the previous day On the evidence as a whole I find that Schenker was prepared to take over the warehouse on 6 February 2003 with the defects that were identified that day Thus there was no issue of exclusive possession having to be available on that day Were there any other terms that had to be agreed and were not agreed as of 4 February 2003 56 It would be recalled that in the extract from Halsbury s quoted in 39 above the learned editors state that even if the essential terms of an agreement for lease have been offered and accepted as long as any other terms are mentioned by one party these must also be unconditionally accepted by the other party for there to be a concluded contract Schenker s submission was that even if the essential terms here had been agreed to there were various other additional terms that had not been unconditionally accepted by both parties This submission covered two types of terms The first type comprised comments made by Schenker s solicitors and the second related to the nature of the goods to be stored in the warehouse 57 On the first area Schenker s stand was that the parties had not agreed on any of the following matters that had been raised during the negotiations a whether it was SMI or Schenker who would have to pay the stamp duty on the lease agreement b that Schenker had to pay interest to SMI on late payments at the rate of 10 per annum c that the 86 000 security deposit payable by Schenker was to be refunded by SMI to Schenker within seven days of the expiry or early termination of the lease agreement d Schenker s proposal that SMI pay interest on the security deposit of 86 000 at 6 per annum from the due date to the date of full payment if the same was not refunded to Schenker within seven days of the expiry or earlier termination of the lease and e whether SMI should seek the approval of JTC and UOB before SMI leased the whole of the warehouse to Schenker The matters set out above came from points raised by Schenker s solicitors in their letters of advice dated 13 January 2003 and 17 January 2003 Schenker sent copies of these letters to SMI and on 27 January 2003 the parties had a meeting to discuss the points raised According to Schenker no agreement was reached on those points at that meeting 58 Schenker s evidence is equivocal Mr Tan said in his Affidavit of Evidence in Chief that during the meeting he asked Mr Heng whether the latter had received copies of Schenker s solicitors letters Mr Heng confirmed that he had received those letters Mr Tan also requested Mr Heng to seek JTC s approval so that SMI could lease the entire warehouse to Schenker Mr Heng replied that there was no necessity to obtain JTC s approval since the draft agreement was only a service agreement and not a tenancy agreement Mr Tan then said that he had reservations about that and that he would leave it to Schenker s solicitors to look at this point again Later that afternoon Ms Yong sent an e mail to Mr Tan Mr Heng and Ms Chai together with the draft LSA and asked all the parties to please seek your legal advice accordingly and have them vet amended 59 Mr Heng s evidence was that at that meeting Mr Tan was very eager to proceed with the commencement of the lease and did not appear to be too concerned with his solicitors comments on the handling agreement He agreed with Mr Heng that the provisions of other logistics services should be separated from the main agreement and said that he himself would deal with the solicitors on their comments Also Mr Tan was not too concerned with the issue of JTC s consent and it was understood that SMI would make the necessary application if required Mr Heng thereafter instructed Ms Yong to revise the draft agreement in accordance with what had been discussed at the meeting 60 All that Mr Tan said about the meeting of 27 January in his evidence in chief has been paraphrased in 58 above He did not say that he had insisted that SMI accept the various comments made by his solicitors The draft LSA which Ms Yong subsequently sent him a document that Mr Heng said had been revised to cover what had been said at the meeting did not take up any of the six points which Mr Tan said his lawyers had raised it did not provide for the payment of stamp duty the interest for late payment payable by Schenker remained at 10 per annum there was no provision that Schenker s security deposit was to be refunded within seven days at the end of the lease and no provision for SMI to pay interest on this deposit in the case of a late refund and there were no stipulations that SMI had to seek the approval of JTC and UOB for the lease SMI s position from the document appeared to be therefore that it did not agree to any of Mr Tan s suggestions and saw no need to specify who would have to pay the stamp duty on the lease Mr Tan went through the draft LSA On 4 February he confirmed that with one exception the contents were all right with him He did not raise any of the six points again It appears to me that he was not insisting on any of these points and that he accepted SMI s position on the same In any case even if he had reservations on the points they were not important enough for him to even ask that they be included in the draft LSA In the circumstances I hold that as at 4 February 2003 these matters did not prevent the conclusion of an agreement for lease 61 I now turn to the second contention in this area Schenker submitted that a vital term had not been agreed on to wit there was no agreement on the classes or types of dangerous goods which Schenker was not allowed to bring into or store in the warehouse Schenker s argument went as follows The draft LSA sent out on 27 January 2003 included an Appendix 1 containing the Rules and Regulations to be observed by Schenker Paragraph A of this appendix stated Not to store or bring upon the Service Area any article that are listed in the Fire Safety Bureau FSB list of licensed products Refer to Attachment A In fact however there was no Attachment A Further there was according to the evidence given by Mr Tan no Government Department statutory body corporation or other organisation known as the Fire Safety Bureau In court Mr Heng adduced a list of chemicals that he stated was the Attachment A mentioned in the draft LSA This document marked P1 did not appear to have been issued by a government agency or by a statutory body or any other organisation Accordingly the parties could not have agreed on the classes or types of dangerous cargo that were not to be kept in the warehouse 62 Schenker s case on this point is not convincing Firstly it was Mr Heng s evidence that there was a government body known as the Fire Safety Bureau In the closing submissions counsel for SMI drew my attention to the entity known as the Fire Safety Shelter Bureau that is part of the Singapore Civil Defence Force That bureau formulates and implements fire safety policies It also regulates fire safety standards in buildings as stipulated under the Fire Safety Act Cap 109A 2000 Rev Ed As this bureau is a part of a public organisation I can take judicial notice of its existence and I also accept that when he was referring to the Fire Safety Bureau Mr Heng meant the Fire Safety Shelter Bureau 63 Secondly Mr Tan conceded during cross examination that there was no disagreement between the parties on the classes of dangerous goods that could be stored in the warehouse He said however that there was a condition that Schenker needed the approval of the authorities in order to store dangerous cargo in the warehouse Mr Tan agreed that it was Schenker s responsibility to make the necessary application for approval His evidence was in fact that this application had been put in much earlier than 10 February 2003 and that Schenker had received in principle approval from the authorities subject to its submitting a list of classes of cargo that were to be stored in the warehouse Mr Tan maintained however that until the list was submitted and actual approval had been granted the condition was not satisfied It was put to him that he had no reason to believe that the approval would not be forthcoming His reply was evasive he said I would not know It s up to the authority Mr Tan s evidence therefore did not support the submission that the parties had not agreed on the items that could not be stored in the warehouse Instead his testimony established that SMI was quite happy for anything to be stored in the warehouse for which Schenker could get approval from the authorities and that obtaining the approval was entirely within Schenker s domain If Schenker could not get approval from the authorities for any particular item then that item could not be put in the warehouse I am satisfied on the facts that there was no disagreement on the types of goods that could or could not be stored in the warehouse Were parties still negotiating on the basis of subject to contract 64 The final submission made by Schenker in respect of the first main issue was that if the court was to find that Schenker and SMI had reached an agreement on the proposed lease before 11 February 2003 then Schenker s case was that the parties were negotiating on a subject to contract basis Accordingly any agreement reached was only conditional and not binding on the parties as the contract contemplated by such an agreement had not been signed by the parties and exchanged between them 65 Schenker pointed out that the letter of intent forwarded by SMI to Schenker on 5 November 2002 was marked with the words Subject to Contract It was clear therefore that both parties had started negotiations or the proposed lease on a subject to contract basis Schenker submitted that they continued negotiations on the same basis right up to 10 February 2003 because the evidence showed the following a Schenker s standard procedure was to send all final drafts of proposed contractual wording to its solicitors for vetting comment and recommendation before it agreed to any contractual terms b This procedure was followed in the case of the draft handling agreement and the solicitors duly advised on it c Mr Tan had informed Mr Heng that Schenker wanted to follow the advice of the solicitors on the draft handling agreement and this conversation led to the meeting of 27 January 2003 d When the draft LSA was sent out to Mr Tan Ms Yong s covering letter mentioned that Schenker should obtain legal advice and Mr Tan replied on 4 February 2003 to say that he would clear the document with Schenker s lawyer e On 10 February 2003 Ms Yong asked Mr Tan to get the lawyers comments quickly Schenker also submitted that as SMI had a lease from the JTC and had also let out the warehouse previously it had experience in transactions involving immovable property and therefore must have known about ordinary conveyancing practice Thus SMI knew the exact legal implications of using the phrase subject to contract Whilst the phrase was only used once in the draft letter of intent that draft letter was referred to on two subsequent occasions Schenker pointed out that in the English High Court case of Cohen v Nessdale Ltd 1981 3 All ER 118 the term subject to contract which appeared in correspondence dealing with earlier negotiations which had been broken off but not irretrievably was held by the court to have continued to apply to negotiations when they resumed 66 As SMI submitted however the only document that was marked subject to contract was the letter of intent This was sent out at a very early stage of the negotiations It went under cover of an e mail that was not itself marked subject to contract and was not signed by SMI The letter contained few terms Only the address of the premises date of commencement and a general range of services were stated The rental rate and the duration of the lease were not mentioned That document even if signed could never have constituted a binding agreement for lease since essential terms were missing It was more in the nature of a letter of comfort required by SMI so that it had some evidence that Schenker was serious about the negotiations The letter of intent was never signed by either party and the two subsequent references to it were in e mails sent in November 2002 Those e mails were not marked subject to contract either These references by Mr Heng were in the nature of prodding Schenker to at least show some sign of seriously wanting to take a lease of the premises Schenker however refused to bite Until it had a firm commitment from Merck it was not willing to sign even such an innocuous document as the letter of intent with the heading subject to contract 67 By the end of November 2002 nothing had crystallised not even the intention of Schenker to take the warehouse on lease Matters only came to some shape in mid December 2002 when Merck gave Schenker the go ahead and from then on parties exchanged e mails and detailed draft documents None of the e mails or the detailed drafts were marked subject to contract Schenker gave no sign to SMI that it was negotiating on a subject to contract basis though it was concerned to follow its normal procedure of obtaining lawyers advice on the wording of legal documents Schenker s attitude vis à vis its lawyers was however clear on the evidence Whilst such advice had to be taken Mr Tan was able to confirm commercial terms without referring to his lawyers There was no evidence that Schenker could not have contractual dealings without its lawyers consent The situation here was quite different from that which obtained in Cohen v Nessdale Ltd In that case both parties had during the first part of their negotiations used and relied on the phrase subject to contract in their letters Here the phrase subject to contract was used in a document at an early stage which document was signed by neither party and totally ignored by them once negotiations really became serious 68 It is interesting given its current reliance on the existence of the phrase subject to contract in the letter of offer that instead of signing that letter in November 2002 Schenker repeatedly asked SMI for an extension of time to execute it Mr Tan was asked why if he thought that the letter of intent was not a binding document he did not sign it in order to secure a holding period for conclusion of the lease instead of asking for extensions of time He did not give a direct reply to that question He said that Mr Heng was kept informed of negotiations between Schenker and Merck and that Schenker wanted to be on this understanding that we are pending Merck s agreement to the contract and we asked them to hold on to the warehouse Mr Luth testified that the letter of intent was not a contract He was then asked the same question as to why it was necessary to ask for an extension of time instead of simply signing the letter He replied that he was not aware if there was any procedure in Schenker allowing it to simply sign a letter of intent Secondly to continue negotiating with Merck he wanted to have proof that the warehouse was still available if Schenker confirmed the contract with Merck and that was why he had asked for an extension of time Finally it was suggested to Mr Luth that he had asked for an extension of time on 18 November 2002 because he did not want to commit Schenker to an agreement for the use of the warehouse This time he gave a direct answer and it was I think yes 69 On the evidence it appears to me that Schenker did not place any reliance on the words subject to contract in the letter of intent I find that its view was that if it had signed the letter of intent it would have been bound in some way in respect of the lease and that was why it never signed that document It did not use the words subject to contract in the later negotiations or rely on them in any way Thus I find that when Mr Tan accepted the terms of the draft LSA on 4 February 2003 his acceptance was not subject to contract Mr Tan s frame of mind can also be gleaned from his statement in his messages sent after Merck shocked Schenker by pulling out of the agreement In the e mail of 11 February 2003 he referred to Schenker having acquired the DG warehouse on the assumption that Merck would be its main customer Obviously at that time Mr Tan thought that Schenker already had rights to the warehouse Second main issue Were the requirements of s 6 d of the Civil Law Act complied with 70 The second main line of defence put forward by Schenker was that even if there was a concluded contract this was not enforceable because of the effect of two pieces of legislation the CLA 35 supra and the Electronic Transactions Act Cap 88 1999 Rev Ed the ETA Section 6 d of the CLA the modern re enactment of the UK Statute of Frauds 1677 c 3 requires among other things that for a lease of land to be enforceable there must exist some written memorandum or note evidencing the terms of the agreement and this document must be signed by the person against whom the contract is to be enforced As for the ETA Schenker made reference to ss 6 to 9 of this Act which give recognition to and regulate electronic records generally and to ss 11 to 15 of the CLA which give recognition to and regulate electronic contracts In particular ss 7 and 8 of the ETA provide that an electronic record or signature satisfies any rule of law requiring writing or signature It submitted however that these sections by virtue of s 4 1 d of the ETA do not apply to any rule of law requiring writing or signatures for various matters including any contract for the sale or other disposition of immovable property or any interest in such property 71 In Schenker s submission the requirements of the CLA had not been satisfied It pointed to para 7 of the Amended Statement of Claim which had averred that this lease was contained in or evidenced by the ten documents listed in that paragraph see 31 above It asserted that those documents did not qualify as notes or memoranda in writing as required by the CLA All of them were e mail correspondence exchanged between Schenker and SMI Further all written communication between the parties was made via electronic means No hard copy of any letter or document was ever sent by either one to the other Schenker contended that the e mail correspondence was not capable of constituting the written evidence of the lease as required by s 6 d of the CLA Whilst s 7 of the ETA provided that where a rule of law required information to be in writing an electronic record would satisfy that rule of law as long as the information contained therein was accessible so as to be usable for subsequent reference and s 8 provided for electronic signatures to satisfy a rule of law requiring a signature those sections did not apply to the lease because of the operation of s 4 1 of the ETA 72 In order to meet these arguments SMI had to establish two things first that there was a sufficient note or memorandum to satisfy s 6 d of the CLA and second that such note or memorandum could be considered to be in writing and signed by Schenker or its representative even though it was in an electronic form SMI made only cursory submissions on the first point probably because Schenker did not emphasise it either The court however has to be concerned with it because it is established law that for a memorandum evidencing a lease to satisfy s 6 of the CLA that memorandum must contend all the material terms of the contract including the identities of the parties the description of the subject matter and the nature of the consideration Was there a sufficient memorandum 73 Paragraph 7 of the Amended Statement of Claim specifies ten documents as being the written evidence of the lease That is a very broad pleading as even a cursory perusal of the list shows that seven of the documents emanated from SMI or Ms Yong and therefore could not on their own constitute a memorandum signed by Schenker Further the contents of most of the documents specified reflected on going negotiations rather than a concluded agreement The list even includes Mr Heng s e mail of 5 November 2002 forwarding the form of the letter of intent to Schenker Considering that that document was marked Subject to Contract there is no way that even if it had been signed it could have served as a memorandum of agreement for the purpose of s 6 of the CLA When it came to submissions SMI was not more specific It submitted that all the e mail correspondence and the attachments to the same including the draft LSA when read together constituted the memorandum I cannot accept this submission for the reasons given Luckily for SMI however despite their failure to properly identify the documents constituting the memorandum having looked through all the correspondence I consider that Ms Yong s e mail of 27 January 2003 together with its attachment the draft LSA and Mr Tan s reply to Ms Yong dated 4 February 2003 accepting the terms of the draft LSA would together constitute the necessary memorandum This is because all the agreed terms are reflected in those documents when read together and these include the essential terms for a lease and also one of the e mails is a specific acceptance by Mr Tan on behalf of Schenker of the proposed terms It is established law that the plaintiff may rely on two or more documents to constitute the necessary memorandum see Halsbury s Laws of Singapore vol 7 Butterworths Asia 2000 at para 80 133 Can e mail correspondence be considered to be in writing 74 On this second point Schenker s argument is founded on s 4 1 d of the ETA That section provides Parts II and IV shall not apply to any rule of law requiring writing or signatures in any of the following matters d any contract for the sale or other disposition of immovable property or any interest in such property Schenker submitted that since the sections which provide that an electronic record or signature satisfied any rule of law requiring writing or a signature appeared in Parts II and IV of the ETA the intention of the ETA was that it would not permit such electronic record or signature to satisfy the rule requiring a contract for the disposition of an interest in property to be in writing 75 In response SMI submitted that the effect of s 4 1 d of the ETA is that in respect of a contract for the sale or other disposition of immovable property or any interest in such property one cannot rely on the provisions of the ETA namely the provisions under Parts II and IV thereof that enable electronic records and signatures to satisfy legal requirements for writing and signature This is however it contended different from saying as Schenker did that by virtue of s 4 1 d of the ETA the e mails do not satisfy the requirements for writing and signature under s 6 d of the CLA As prescribed by s 3 of the ETA the ETA should be construed consistently with what is commercially reasonable under the circumstances and to give effect to its main purpose of facilitating electronic commerce As the ETA was passed to enable reliance on electronic communication in commerce this statute should not be construed as disabling such reliance 76 Having looked at the provisions of the ETA I agree with the submissions made by SMI Whilst the statute does make it plain that electronic records will be adequate to satisfy legal rules relating to writing and signature in most commercial matters its conservative approach in not extending these provisions to contractual matters falling within s 6 of the CLA does not mean that as a matter of law electronic means of communication cannot satisfy the requirements of s 6 The ETA does not change the common law position in relation to s 6 of the CLA Whether an e mail can satisfy the requirements for writing and signature found in that provision will be decided by construing s 6 d of the CLA itself and not by blindly relying on s 4 1 d of the ETA This is a view that has supporters As part of their review of the ETA on 25 June 2004 the Infocomm Development Authority of Singapore and the Attorney General s Chambers released a public consultation paper dealing with the exclusions under s 4 of the ETA Paragraphs 2 1 3 and 2 1 5 of the consultation paper state 2 1 3 The effect of section 4 is that in such excluded transactions one cannot rely on the provisions in the ETA that enable electronic records and signatures to satisfy legal requirements for writing and signature For example sections 6 and 7 of the Civil Law Act impose legal requirements for writing and signature in the case of certain land transactions and for trusts respectively 2 1 5 Even where legal form requirements apply exclusion under section 4 of the ETA may not necessarily prevent such transactions from being done electronically Electronic records or signatures could still possibly satisfy the legal requirements without reliance on the provisions of the ETA It would be a matter for legal interpretation whether an electronic form satisfies a particular legal requirement for writing or signature Some legislative provisions by reason of their detailed specifications would clearly exclude the use of electronic means even if the ETA were applicable 77 I now turn to the provisions of s 6 d of the CLA In respect of the requirements for writing and signature this subsection simply states that the promise or agreement or a memorandum or note thereof must be in writing and signed by the party to be charged therewith SMI submitted that this language did not mean that the use of electronic forms was excluded By way of contrast it pointed to other legislative provisions where the requirements for writing or signature come with certain specifications For example in s 6 2 of the Wills Act Cap 352 1996 Rev Ed it is provided that every will has to be signed at the foot or end thereof by the testator who has to sign the will in the presence of two or more witnesses who are present at the same time Secondly para 17 of the Third Schedule of the Land Titles Strata Act Cap 158 1999 Rev Ed specifies that an instrument appointing a proxy has to be in writing under the hand of the appointer or his attorney and in the case of a company the instrument has to be under seal or under the hand of an officer of the company The third example cited was the requirement in s 40 2 b of the Companies Act Cap 50 1994 Rev Ed that an alteration made in the memorandum or articles of association of the company has to be indicated in ink on a printed copy of the memorandum or articles In these three cases and others like them the use of electronic forms would necessarily be precluded That argued SMI was not the case with s 6 d of the CLA It did not require handwriting or a signature in a certain place in the presence of certain people or the writing to be in ink All it required was for the document concerned to be in writing 78 Section 2 of the Interpretation Act Cap 1 2002 Rev Ed provides the following definition of writing writing and expressions referring to writing include printing lithography typewriting photography and other modes of representing or reproducing words or figures in visible form Referring to this definition SMI submitted that it included not only the specific forms of writing mentioned but also the natural meaning of that term It argued that the natural meaning should be construed to reflect technological developments since one of the canons of statutory construction is that there is a presumption that Parliament intends the court to apply to an ongoing Act a construction that continuously updates its wording to allow for changes since the Act in this case the CLA was initially framed an updating construction While it remains law it is to be treated as always speaking see Bennion Statutory Interpretation Butterworths 4th Ed 2002 at p 762 Thus the definition of writing can

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