SUPREME COURT OF MAURITIUS | Mauritius Revenue Authority Act | Mauritius Company | capital gains | exempt income | Relevant Cases in the field of international taxation
***
Contact us and speak with an international tax lawyer: https://yourinternationaltaxlawyers.net
Discover our courses
COURSE 1 TAX HAVENS COURSE - GLOBAL CITIZEN COURSE - BUSINESS INTERNATIONALIZATION COURSE
https://yourinternationaltaxlawyers.net/index.php/course-1
COURSE 2 Learn 10 hidden strategies used by elites and multimillionaires to reduce their taxes, and start saving taxes right NOW, even without moving abroad
https://yourinternationaltaxlawyers.net/index.php/course-2
***
SUPREME COURT OF MAURITIUS
JP Morgan Sicav Investment Co. (Mauritius) Ltd.
v.
Assessment Review Committee
A. F. CHUI YEW CHEONG AND I. MAGHOOA, JJ.
SCR NO. 110920
JANUARY 24, 2017
Attorney P.D. Lallah and M.R.C. Uteem for the Appellant. R. Ramloll and A. Rohomally for the Respondent.
JUDGMENT
1. This is an appeal by way of case stated from a determination of the Assessment Review Committee (ARC) pursuant to section 21 of the Mauritius Revenue Authority Act.
2. The case stated by the ARC discloses the following undisputed facts:
| (1) | The appellant company was incorporated on 9 August 1995 and holds a Category 1 Global Business Licence. Its activities are those of an investment company investing primarily in equity and equity related securities of Indian companies. It derives income from dividends paid by the Indian investee companies and from interest from bank. Such income is taxable under the Income Tax Act (ITA) (see sections 10 (1) (d) and 51). It also realises gains or losses on disposal of its investment. The net profit on the disposal of investment is accounted as capital gain and no tax is imposed upon capital gain under the ITA. | |
| (2) | In connection with its business, the company incurs expenditure. The main expenses of the company are fees paid to custodians and sub custodians for the holding of the investment and are incurred in relation to the production of the dividend income and of the profit, if any, on the disposal of the investment. The fees are incurred irrespective of whether the company makes a capital gain or loss and even if it does not dispose of its investments in any year. | |
| (3) | Prior to the year of assessment 2004/2005, in computing the taxable income, the company claimed deduction of the total expenditure incurred in relation to fees paid to custodians and sub custodians. The Mauritius Revenue Authority (MRA) did not disallow such expenses. | |
| (4) | For the years of assessment 2004/2005, 2006/2007 and 2007/2008, in computing the taxable income, the company again claimed deduction from the gross income, its total expenditure on sundry expenses and custodian and sub custodian fees. The claim for deduction of such total expenditure was disallowed. Invoking section 18 of the ITA, the MRA disallowed the expenditure to the extent that it was not exclusively incurred in the production of gross income and raised assessments accordingly. In its assessments, the MRA proceeded to an apportionment of the expenses incurred and disallowed the portion of expenses incurred in the production of capital gain. The apportionment of the expenses incurred in the production of capital gain was done according to the following formula: |
| Capital Gains | × | allowable expenses | |
| Income + Capital Gains |
| (5) | The formula resorted to by the MRA is not provided for under section 18 of the ITA. However, a similar formula for apportionment of expenses attributable to exempt income is set down in section 26(3) of the ITA. |
It is appropriate at this juncture that we set down, for ease of reference, sections 18 and 26(1)(a)(b) and (3) of the ITA.
18. Expenditure incurred in production of income.
(1) Any expenditure or loss shall be deductible from the gross income, other than gross income specified in section 10(1) (a), of a person in the income year in which it is incurred to the extent to which it is exclusively incurred in the production of his gross income, other than gross income specified in section 10 (1) (a), for that income year.
26. Unauthorised deductions
(1) Notwithstanding sections 18 and 19 but subject to this section, no deduction shall be made in respect of –
| (a) | any investment, expenditure or loss to the extent to which it is capital or of a capital nature; | |
| (b) | any expenditure or loss to the extent to which it is incurred in the production of income which is exempt income; |
| ** | ** | ** |
(3) Where any expenditure or loss incurred by a person in the production of his gross income and exempt income is not directly attributable to the production of such income, that part of the expenditure or loss attributable to the production of the exempt income shall be disallowed in such proportion and as may be prescribed. (Now spelt out in GN 78 of 1996)."
Regulation 8 of the Income Tax Regulations 1996 as it then read, sets down the prescribed formula and is as follows:
The amount of expenditure or loss for the purposes of section 26 (3) of the Act, attributable to the production of gross income shall be determined in accordance with the following formula:
Gross income (excluding exempt income) X Expenditure or loss Total income (Including exempt income)
Before the ARC, the appellant company objected to the assessments on the two following grounds:
| (1) | All the gains derived by the Company on disposal of its investments are of a capital nature. The MRA is using section 18 of the Income Tax Act 1995 to attribute a portion of the common expenses to the gains derived on the disposal of investments. Given that there are no provisions under the Income Tax Act 1995 to apportion common expenses to capital gains, treating USD 6,773,239 as unallowable expenses is incorrect. | |
| (2) | The loss of foreign exchange amounting to USD 641,627 is revenue in nature and should not be treated as unallowable expenses. |
The ARC rejected the objections and maintained the assessments raised by the MRA. Its findings are in a gist as follows:
| (1) | Under section 18, expenses are allowed as deductions to the extent that they are incurred exclusively in the production of gross income. Therefore, if expenditure produces both gross income and other income which does not amount to gross income, then as rightly viewed by the MRA, only the part which produces gross income, is an allowable deduction. | |
| (2) | Having rightly found that the expenditure incurred by the appellant company did not exclusively produce gross income (i.e it also produced exempt income or gain of a capital nature), the MRA was fully entitled to raise an assessment and decide to disallow that part of the expenditure which did not produce the gross income but produced the capital gain. If the taxpayer could produce evidence of the exact amount of expenditure that was attributable to capital gain, this would have been the amount disallowed. In the absence of evidence as to this amount of expenditure, the MRA was fully entitled to make a best of judgment assessment under section 129(1)(a) of the ITA. | |
| (3) | Since no evidence was adduced as regards the loss of foreign exchange and no submission was made thereon, the decision of the MRA to disallow same is maintained. |
The grounds of appeal of the appellant company are as follows:
Ground No. 1
1. The Assessment Review Committee erred in law in failing to determine that the assessments were raised by the Director General of the Mauritius Revenue Authority under section 18 of the Income Tax Act and, therefore, section 26 of the Income Tax Act was not applicable.
Ground No. 2
2. The Assessment Review Committee erred in law in holding that the issue to be decided was not whether the expenses disallowed are of a capital nature or are related to exempt income in as much as different principles are applicable for disallowing expenditure depending on whether the expenses are capital in nature or relate to exempt income.
Ground No. 3
3. The Assessment Review Committee erred in law by failing to determine that expenditure which were incurred to produce both income and capital gains were allowable under section 18 of the Income Tax Act as long as they were exclusively incurred in the production of income even if not wholly incurred as such.
Ground No. 4
4. The Assessment Review Committee erred in law by finding that the Director General of the Mauritius Revenue Authority could rely on the formula that it adopted to apportion the expenses in as much as:-
| (a) | the said formula is arbitrary; | |
| (b) | the said formula is not provided for under the law; and | |
| (c) | the use of the said formula fails to cater for the apportionment in any year in which there is no income or there is a loss. |
Ground No. 5
5. The Assessment Review Committee erred in law by holding that the Director General of the Mauritius Revenue Authority was entitled under section 129 of the Income Tax Act to rely on the formula it adopted to disallow the expenses.
Ground No. 6
6. The Assessment Review Committee erred in law by holding that the expenditure that was disallowed was not "revenue" in nature as opposed to capital in nature and therefore, could not be disallowed under section 26(1) of the Income Tax Act.
3. In relation to ground 1, the main point made on behalf of the appellant company is that the ARC failed to appreciate that whereas in raising the assessments, the MRA always purported to invoke section 18 which does not provide a formula for the apportionment of deductible expenditure, yet it resorted to section 26 and adopted a formula similar to the one prescribed under section 26(3). It is also urged on behalf of the appellant company that the latter has suffered thereby a measure of unfairness as it was not prepared to meet a case under section 26.
4. In its case stated, the ARC confirms that the assessments were indeed raised under section 18 but is of the view that "the fact that the assessments were raised under section 18 does not mean that the remaining Income Tax Act (sic) is inapplicable." It was also contended by the MRA before the ARC that section 18 must be read together with section 26.
5. As rightly submitted on behalf of the Director General of the MRA i.e respondent no 2, sections 18 and 26 are not mutually exclusive sections. Indeed sections 18 and 26 form part of Sub - Part B of the ITA which has as heading "Allowable Deductions". Sub - Part B must be read as a whole. Section18 provides that expenditure is allowable to the extent that it is incurred in the production of gross income. Exempt income is not chargeable and capital gain is not income for tax purposes. Accordingly, both exempt income and capital gain are excluded from gross income. Section 26 deals with unauthorized deductions. It provides for cases where an expenditure or loss should not be allowed. Among the cases are (1) where expenditure or loss is capital or of a capital nature (see sub section (1)(a)), and (2) where expenditure or loss is to the extent to which it is incurred in the production of income which is exempt income (see subsection (1)(b)). Section 26(1)(a) and (b) therefore are in conformity with section 18 and affirm that expenditure which is capital or capital in nature and which is attributable to exempt income are not allowable although capital gain and exempt income may be income albeit not chargeable as gross income under section 10. It is significant that section 26(1) states "Notwithstanding sections 18 and 19 but subject to this section, no deduction shall be made in respect of………"
6. The ARC in determining that section 26 is not inapplicable by the mere fact that the assessments were raised under section18, did not err. In our view, the appellant company has suffered no unfairness or prejudice. As regards the submission that the MRA had recourse to the formula prescribed under section 26(3), it is the case of the MRA that the apportionment formula was made in the best judgment of the Director General pursuant to section 129(1) and not under section 26 (3).
Ground 1 therefore fails.
7. Under ground 2, it is submitted firstly that the ARC failed to distinguish that expenses of a capital nature are on a footing different to that of expenses related to exempt income and therefore erred in holding that the MRA could resort to the apportionment formula prescribed for expenditure related to exempt income under section 26(3). In the submission of Counsel for the appellant company, the ARC should have distinguished capital gain from exempt income as different principles apply for capital gain and exempt income.
8. It is submitted secondly that whereas expenses directly attributable to capital gain are not allowable, yet expenses indirectly attributable to capital gain and gross income should be allowed in their totality. This is because, it is submitted, the expenses – mainly custodian fees - are invariable whether capital gain is realized or not.
9. Support for such submission is also sought from a tax ruling TR 50 made by the MRA in May 2006. The facts underlying the Ruling are as follows:
"A Company holding a Category Global Business Licence (GBLI) invests in securities or other vehicles abroad which provide for capital appreciation in the stock markets. There is an investment agreement between the Company and the investment manager for the provision of investment management services in line with investment policies/restrictions approved by the board of the Company. The income of the Company consists of dividend income and gains on disposal of securities."
On the question "whether the expenses incurred in the production of dividend income or gains on disposal of securities would not be disallowed", the MRA ruled that "(a) expenses incurred in the production of foreign dividend income are allowable for income tax purposes; and (b) expenses attributable directly to the sale of shares held as capital assets, being of a capital nature, are not allowable in accordance with section 26(1)(a) of the Income Tax Act."
10. It is submitted that TR 50 is correct and that only expenses directly attributable to the sale of shares such as commission payable to brokers, are not allowable. However, administrative expenses, custodian fees and sub custodian fees of the appellant company do not relate to the sale of shares and therefore are allowable.
11. The ARC states that no evidence was adduced to show that different principles are applicable for disallowing expenditure depending on whether the expenses are capital in nature or related to exempt income and that at any event, at issue is not whether expenses of a capital nature and expenses attributable to exempt income are governed by different principles. Therefore it did not decide on this question. At issue is whether the expenses claimed satisfy the criteria set down under section 18 i.e they were incurred exclusively in the production of gross income. To the extent that capital gain and exempt income are not taxable, expenditure incurred in the production of capital gain and exempt income share the same characteristic of being unallowable.
12. To our minds, it is clear that for determining the issue before it, the ARC rightly took the view that capital gain and exempt income are both excluded from the definition of gross income under section 10 and therefore expenses capital in nature and expenses attributable to exempt income, although different in the nature of the income they achieve, share the same characteristic of being not allowable under sections 18 and 26.
13. The issue whether the custodian and sub custodian fees are directly or indirectly attributable to the production of capital gain taken up by learned Counsel under ground 2 does not fall strictly under ground 2 and is also raised under ground 3 and we shall consider it when dealing with the latter ground.
Ground 2 as formulated also fails
14. With regard to ground 3, Mr Uteem for the appellant company submits that the only requirement imposed under section 18 is that the expenditure should be "exclusively" attributable to the production of gross income. Contrary to the requirements set down under section 17 for deductions incurred in the performance of the duties of an office or employment, the expenditure needs not be "wholly" attributable. Mr Uteem further submits that if the expenditure incurred is exclusively but not wholly for the production of gross income but that it incidentally generates capital gain, then the total expenditure should be allowed. In the submission of Mr Uteem, the legislator intends a greater flexibility in allowing expenses which incidentally generate capital gain.
15. In connection with the above submission, Mr Uteem refers us to the decision of the House of the Lords in Mallalieu v Drummond (HM Inspector of Taxes) [1983 2 AC 861], [1983] STC 665 HL. In Mallalieu, the taxpayer was a lady barrister. To comply with the obligations of her profession, the taxpayer had to wear black dresses, suits, tights and shoes and white shirts and blouses for appearance in Court. However, she was similarly dressed on her way to Court or Chambers and while she was thereafter engaged in her professional activity and in certain other circumstances. The taxpayer claimed deduction for expenditure on, and the laundry expenses of, such clothes.
16. Section 130(a) of the English Income and Corporation Taxes Act 1970 provides that "in computing the amount of the profits or gains to be charged…………, no sum shall be deducted in respect of (a) any disbursements or expenses, not being money wholly and exclusively laid out or expended for the purposes of the trade, profession or vocation…………….". On the question whether the expenditure was allowable under section 130(a), the House of Lords held that "(1) the object of a taxpayer in incurring expenditure is not inevitably limited to the particular conscious motive in mind at the moment of such expenditure; (2) it was inescapable that one object of the taxpayer was the provision of clothes that she needed as a human being; (3) accordingly the only proper conclusion was that her object was both to serve the purposes of her profession and also to serve her personal purposes." The expenditure was held not to be allowable.
17. Admittedly, under section 130(a), the expenses must be "wholly and exclusively" incurred for purposes of the profession whereas under section 18 of the ITA, the expenses are required to be only "exclusively" incurred. However, in Mallalieu, of the effect of the word "exclusively", Lord Brightman has the following to say:
"The effect of the word "exclusively" is to preclude a deduction if it appears that the expenditure was not only to serve the purposes of the trade, profession or vocation of the taxpayer but also to serve other purposes. Such purposes, if found to exist, will usually be the private purposes of the taxpayer."
"If it appears that the object of the taxpayer at the time of the expenditure was to serve two purposes, the purposes of his business and other purposes, it is immaterial to the application of S 130(a) that the business purposes are the predominant purposes intended to be served."
18. On the authority of Mallalieu, it is evident that "exclusively" means "only" and "solely" i.e its plain dictionary meaning. It is also clear that the expenses allowable are not determined by the intention of the taxpayer but by the objective results achieved by such expenses.
19. Turning to the present case, the activities of the appellant company are those of an investment company. It can be safely deduced that securities held are in the normal course of things disposed of at the opportune moment with the objective of realizing a profit. The expenditure sought to be deducted i.e custodian and sub custodian fees, therefore produces two types of income, revenue income during such time when the company holds the securities and capital gain when the company decides that the time is right for disposal of the securities. The total custodian and sub custodian fees cannot therefore be "exclusively" or solely incurred for the production of gross income and are not allowable under section 18. Furthermore, section 18 requires that the expenditure is "exclusively" and not predominantly incurred for the production of gross income. It is also immaterial that the custodian and sub custodian fees remain the same whether capital gain is realized or not.
20. Similarly, the submission made under ground 2 that the expenses are incurred with the intention of producing revenue income and that the capital gain is only an indirect outcome and on that basis should be totally deductible, cannot on the reasoning in Mallalieu, hold.
21. We may also add that the ruling of the MRA in TR 50 was given on expenditure incurred in the production of dividend income or gains on disposal of securities and not on expenses in the production of both dividend income and capital gain.
22. On the other hand, as submitted on behalf of the ARC, under section 26(1) (a) and (b), no deduction is to be made in respect of any expenditure to the extent to which it is capital or of a capital nature or is incurred in the production of exempt income. It is submitted on behalf of respondent no 2 that underlying section 26(1)(a) and (b), is the concept of apportionment in cases where the expenditure has also produced capital gain and exempt income.
23. We also take the view that by the combined effect of section 18 and section 26(1)(a) and (b), apportionment of expenses attributable to gross income is permissible.
24. Furthermore, if the submission made on behalf of the appellant company to the effect that the total expenditure incurred in the production of dividend income and capital gain should be allowed, is retained, then as submitted by Mr Ramloll on behalf of respondent no 2, the appellant company would not only have benefitted from non taxable capital gain but also from deduction of the expenditure which has produced such capital gain i.e "a double benefit."
Ground 3 cannot succeed.
25. In relation to grounds 4 and 5, we agree with the finding of the ARC that there being no evidence regarding the amount to be disallowed, pursuant to section 129 (1), the Director General of the MRA was entitled to have recourse to the formula which indicates the fraction of the total income which is not gross income. The MRA then disallowed the same fraction of the expenditure. In the result, it cannot be said that the formula is unlawful and arbitrary.
Grounds 4 and 5 also cannot succeed.
26.In relation to ground 6, the ARC found that the ground is ambiguous. At issue before it was the nature of the income produced by the expenditure i.e whether it was capital gain or exempt income and not whether the expenditure was recurrent or made once and for all. We note that no submissions were made before the ARC in respect of issues raised in this ground of appeal. Nor did the appellant request the ARC to submit a further and better case. Accordingly we are of the view that this ground falls outside the purview of this appeal.
27. For the reasons given above, the present appeal is dismissed. With costs.
***
Contact us and speak with an international tax lawyer: https://yourinternationaltaxlawyers.net
Discover our courses
COURSE 1 TAX HAVENS COURSE - GLOBAL CITIZEN COURSE - BUSINESS INTERNATIONALIZATION COURSE
https://yourinternationaltaxlawyers.net/index.php/course-1
COURSE 2 Learn 10 hidden strategies used by elites and multimillionaires to reduce their taxes, and start saving taxes right NOW, even without moving abroad
https://yourinternationaltaxlawyers.net/index.php/course-2
***