AF308 2006/9

Fiji Income Tax Cases

Chargeable income
Ela Ben v CIR 2
Chaudhary v CIR 5

Income from employment

Khanna v CIR 7
Abrahams v CIR 10

Capital/income cases
CIG Fiji Ltd v CIR 12
CIR v C. (Roose) Fiji Limited 14

Section 11(a)
CIR v Ah Koy 21
Kelton Investments Limited v CIR 23
CIR v Pacific Mercantile Limited 27

Deductions in calculating total income

Fiji Sugar Corporation v CIR 30
Sweetman v CIR 38
Jamnadas v CIR 47
Reddy Construction Company v CIR 57
Marine Management Limited v CIR 61
K.R. Latchan v CIR 64
CIR v Pacific Mercantile Limited (see above)

Tax accounting
CIR v Singh 70
Southern Pacific Insurance Co (Fiji) Ltd v CIR 73
Rooney v CIR 76

Trusts
Trustees of Estate of Evelyn Barker v CIR 80
CIR v Bhanabhai & Co Ltd 86

International
Maganlal v CIR 93
CIR v United Touring Fiji Ltd 96
CIR v Commonwealth Development Corporation 107

Anti-avoidance
J.M. Ah Chong & Co Ltd v CIR 116

1
Ela Ben v CIR Appeal No. 1 of 1970
Ct of Review

Marsack J. 24/4/70
This is an appeal against the rejection by the respondent of the appellants claim for
dependents allowance under the Income Tax Ordinance in respect of the maintenance of a
brother and a sister, both being under 18 years of age.

Some of the basis facts are not in dispute. Prior to the death of the appellants father,
Sundarji Kalidas, the appellants mother and all children of the family under 18 years of age
were maintained by their father who, for income tax purposes, received the appropriate
deduction for such child under 18.

After the death of Sundarji Kalidas on the 25th November 1967, his widow and the six
children, four of whom are under 18, continued to live in the same house. The widow
inherited her late husbands estate, and from that she derives an income of less than the
personal allowance under the Income Tax Ordinance. The appellant and one sister are
remuneratively employed. Each of them in her income tax return is claiming a deduction
under s.36(4) of the Income Tax Ordinance in respect of the maintenance of two of the
children under 18 years of age.

The Court has been placed in a position of some difficulty in ascertaining the exact facts
upon which the claim for such deduction is based. No evidence was given at the hearing of
the appeal. The statement of agreed facts does not cover one point which appears to be
vital, how are the children maintained. The only statement of the position in this regard to
which the representatives of the parties at the hearing were prepared to agree was expressed
in these terms:
It is agreed that the four dependent children are wholly maintained by either
(a) the two taxpayers, or
(b) the two taxpayers and their mother.

It is clear that the appellant is contributing towards the maintenance of the younger
children; but it is not possible to say, from the facts placed before the Court, what is the
extent of this contribution, or whether it applies to any particular child or children, or to all
four.

Section 36(4) of the Income Tax Ordinance reads as follows:

In respect of each brother or sister of the taxpayer or his wife who is
dependent on and wholly maintained by the taxpayer an allowance of $65
shall be deducted.

Under s.36(4)(c) the total deduction so allowed shall not be in respect of more than two
dependents.

The question for determination by this Court is a narrow one: are two children, in respect of
whom the allowance is claimed, dependent on and wholly maintained by the taxpayer.

It was contended by the respondent that the children cannot be described as dependent on
the appellant; that they are dependent on their mother even though not wholly maintained
2
by her. In my view, however, the test of dependency, in this context, is whether or not, to
quote the judgment in Fenton and Battan [1948] VLR 422, cited in Burrows Words and
Phrases 1969 ed. p.46, the alleged dependent relies on another as to the sources, wholly or
in part, of his or her means of subsistence. It is agreed that the appellant makes a material
contribution to the maintenance of the four younger children. That being so, they can in my
opinion properly be described as dependents of the appellant.

The crucial phrase in s.36(4) is, however, as I see it, wholly maintained by the taxpayer.
It is clear that Income Tax Acts throughout the Commonwealth all make provision for
deduction from the taxpayers taxable income, by way of allowance in respect of the
maintenance of children or other dependents of the taxpayer. To ascertain the cases to
which this provision applies it is however necessary to look to the precise wording of the
taxing statute. These provisions vary considerably from country to country; and many of
the judgments quoted before me are not strictly applicable to the present proceedings, in
that they are based upon taxing Acts differently worded from the Fiji Ordinance.

What I have to determine is whether, on the facts of this case as agreed, it can be said that
two of the children, in respect of whom the deduction is claimed, are wholly maintained
by the appellant. It may well be, as was submitted on behalf of the appellant, that the word
wholly was intended to eliminate the possibility of claims being made by two separate
taxpayers in respect of the maintenance of the one dependent person. But at the same time
the Court has to determine what the Ordinance actually says. As was stated by Lord Watson
in Salomon v Salomon & Co [1897] AC 22 at p.38:
what the legislature intended to be done or not to be done can only be legitimately
ascertained from that which it has chosen to enact, either in express words or by
reasonable and necessary implication.

Dr Rashik Lal invites me to hold that a reasonable and necessary implication from the
words employed in s.36(4) would lead to the interpretation of wholly maintained as
meaning that no other taxpayer would be entitled to claim a deduction in respect of the
maintenance of the dependent person concerned. I cannot however agree that such an
interpretation is necessarily to be implied from the wording of this section. In my view the
phrase wholly maintained covers cases only in which the taxpayer has or has assumed
sole responsibility for the maintenance and upkeep of the dependent person and discharges
that responsibility. The taxpayers right to claim a dependents allowance in such a case
would not be affected by the fact that other persons made occasional contributions in the
form of gifts of clothing and the like.

In the present case it would perhaps have been possible for the two older sisters to agree
between themselves that, as their mother was in no position to maintain the younger
children, each of them would make herself responsible for the maintenance and education
of two of the children, identified by name. There is however no evidence that any such
arrangement was made, and it is therefore not necessary for the Court to determine whether,
if it had been made, it would have entitled each of the two taxpayers to dependents
allowances in respect of the two children whom she had agreed to maintain.

In my view it has not been established that the two children in respect of whom the
appellant is claiming the deduction can be said to be wholly maintained by the taxpayer.
The agreed facts certainly show that the appellant makes a substantial contribution to the
3
maintenance of the four younger children. It might well be considered just and reasonable
that she should be entitled to some allowance in respect of that contribution, when her
income tax is assessed. Be that as it may, I find myself compelled to hold that the wording
of the Ordinance is not open to the construction which the appellant seeks to put upon it;
and that in the circumstances of this case it is impossible to say, on the basis of the agreed
facts, that the children in question are wholly maintained by the taxpayer. Accordingly
the conditions under which she would be entitled to an allowance under s.36(4) have not
been fulfilled.

For these reasons the appeal will be dismissed. There will be no order as to costs.

4
Vijedra Chaudhary v CIR Appeal No. 4 of 1976
Court of Review

Dunckley J.
The appellant and his wife Sumitra Chaudhary were at all material times joint owners of
residential properties situated at Delainavesi and Caubati. The properties were bought
undeveloped in 1964 and 1967 respectively. After houses were constructed thereon, they
were occupied in the first instance by the appellant and his wife and were subsequently let
to tenants.

The income derived from the two properties in 1974 was assessed by the respondent as
income of the appellant. The appellant appealed against this on the grounds that the income
from the two properties should for income tax purposes have been evenly divided between
the appellant and his wife. The appellant further claimed that $600 rent paid for a flat at 28
Augustus Street, Toorak occupied by him and his family should be treated. as a tax
deductible expense in 1974 and offset against the rental income received in 1974 from the
other two properties.

Section 42(1) of the Income Tax Act, 1974 states that for the purposes of the Act, the
income of a married woman shall be deemed to be income accrued to her husband and shall
be assessed and be liable to taxation accordingly.

Paragraph (a) of the proviso to s.42(1) provides that where a married woman is in receipt of
income exceeding $750 in any year, she and her husband may jointly elect to be assessed
separately, and that such election shall state which spouse is to be the person to whom any
allowances may be made.

Section 42(10) states that where an election for, separate assessment has been made, the tax
assessed separately shall not be less than the tax which would have been assessed on the
spouses' joint incomes if no election had been made. There is a proviso to s.42(10) which
applies only where a wife is in receipt of earnings or profits relating to personal exertion
income. The term "personal exertion income" is not defined in the Act. The appellant
submitted that the rental income was "personal exertion income" of his wife as well as
himself because she took an active part in finding tenants and managing the properties. He
submitted that the term "personal exertion income" should be given a liberal interpretation.

The term "income from personal exertion" is considered in Volume 1 of Australian Income
Tax Law and Practice (Mannix and Harris) at page 1093 et. seq. Here the authors say;
"Income is divided into two classes, income from personal exertion and income
from property. These are the equivalents of the terms "earned" and "unearned" used
in England. The definition states positively what classes of income are income from
personal exertion. All assessable income which is not specifically included in this
definition falls into income from property."
Although these observations do not necessarily apply in Fiji, there is nothing in Fiji law to
refute the propositions that in the case of Mrs Chaudhary, her personal exertion income in
1974 was what her employers paid her and that the income from the two properties owned
by Mr and Mrs Chaudhary was not personal exertion income, notwithstanding her active
involvement in the management of the properties. The proviso to s.42(10) of the Act
therefore does not apply to the two rented properties.
5
The rental income from the two properties owned by the taxpayer and his wife has
therefore been correctly taxed under s.42(1) as income of the appellant. The first ground of
appeal is accordingly disallowed.

In his second ground of appeal, the appellant claimed that rent of $600 paid by him as
lessee of the Toorak flat occupied by him and his family as a residence should be deductible
from taxable income for 1974.

Mr. Scott submitted and I agree, that s.19(a) of the Income Tax Ordinance, 1974, which
states that in determining total income, no deduction shall be allowed in respect of personal
and living expenses, prevents the claim of the appellant from succeeding. Personal and
living expenses" must include rent on the property in which a taxpayer lives with his
family. This submission is reinforced by case law.

[The Court made brief reference to some case law supporting this fairly obvious point
concerning the non-deductibility of the rent for the family home.]

6
Pramesh Narain Khanna v CIR Appeal No. 10 of 1981
Court of Review

Stuart J. 6/3/82
The appellant is an employee of Asian Paints (South Pacific) Ltd having been lent to that
company (which I will call the Fiji company) by its parent company in India, which I will
call the Indian Company to work in an executive position in the Fiji company. As an
employee of the Indian company he is entitled to a gratuity after his working career is
finished, and the basis upon which he was lent to the Fiji company was that the latter was to
keep the gratuity on foot by sending to the Indian company 15 days salary of the appellant
at the end of every financial year for the credit of Asian Paints (India) Ltd Employees
Gratuity Fund. I think that the intention is that an amount equal to fifteen days salary is to
be paid for there is nothing anywhere requiring an employee to make contributions to the
Gratuity Fund. The respondent claims that the amount of that payment is assessable to
income tax. The appellant objects.

The main ground of objection is that the amount of that payment is not part of the
appellants Fiji income, but arises from a condition made by the Indian company lending
the appellant for service to the Fiji company, and the appellant turns for support to the Trust
Deed set up by the Indian company, dated 23rd December 1975, to a collaboration
agreement made between the Indian company and the Fiji company dated 15 th November
1976, and to a contract of service made by him with the Fiji company dated 1st May 1978.

I should perhaps explain that there are actually two Trust Deeds among the agreed
documents. The one relates to the Indian companys provident fund and need not be further
mentioned. The other which was produced in Court after the agreed documents had been
put in, and was subsequently marked as the last of the agreed documents, is the Trust Deed
of the gratuity fund. It is not always easy to read, but it recites that the Indian company is
setting up a fund for the purpose of providing gratuity to those employees of the company
employed in India who shall be eligible for membership of the fund on the terms and
conditions set out. The objects of the fund are thus described in clause 3.
The sole object of the fund is to provide gratuity to employees of the company
employed in India eligible in this behalf in accordance with the rates on the
retirement, at or after a specified date or on their becoming incapacitated prior to
such retirement or on termination by resignation or otherwise of their employment
after a minimum period of service or to the widows children or dependants of such
employees on their death.
The company that is the Indian company agrees to make contributions to the trustees
according to the rules and the rules provide that the quantum of contributions is to be
determined on the basis of the gratuity liability that would be ascertained through an
actuarial valuation effected by an actuary or other reasonable basis having regard to the
length of service of each member, provided that the aggregate of the contributions payable
by the company in respect of every member shall not exceed 8% of the aggregate salary
of the member for each year of service. Then Rule 5(e) provides that if a members services
are lent by the company to any other company, the members services are deemed to
continue and the contributions payable by the company in respect of such service shall
continue to be paid to the Trustees provided that the company recovers such contributions
from the company to which the members services are lent. This point is covered in the
applicants contract of service with the Fiji company. The amount of gratuity would appear
7
to be covered by an Indian Act called the Payment of Gratuity Act 1972. Then it is provided
that gratuity need not be paid to an employee dismissed for misconduct and the benefits are
declared to be strictly personal to the employee and cannot be assigned charged or
alienated. Gratuity can be paid to an employee who retires on medical grounds. Then a
member is entitled to nominate a beneficiary or beneficiaries to receive the gratuity in the
event of his death. The company is entitled to discontinue contributions but has no power
over contributions once they get into the hands of the Trustees, and on winding-up the
Trustees have to distribute the fund among the employees who are entitled.

The collaboration agreement recites that the Fiji company has been promoted by the Indian
company inter alia, and has asked the Indian company to provide know-how and technical
advice and provides inter alia for staff of the Fiji company to go to India for training and for
not more than six employees of the Indian company to be sent to Fiji at the cost and
expenses of the Fiji company. Any dispute under the Trust Deed or under the collaboration
agreement is to be arbitrated under Indian law.

The contract of service recites that the appellant has been lent by the Indian company to the
Fiji company in pursuance of the collaboration agreement, but shall always be an employee
of the Indian company but subject to the regulations of the Fiji company and provides that
appellant is to serve as Chief Executive and will carry out the orders of the Board of
Directors of the Fiji company. In addition to his salary the appellant is to receive
accommodation and amenities, health insurance, provident fund, resident insurance,
entertainment and other amenities, and also gratuity at the rate of 15 days salary at the end
of every financial year to the Indian company for the credit of Asian Paints (India) Ltd
Employees Gratuity Fund. The final clause is a curious one, for although the agreement is
deemed to be made in Fiji any difference is to be arbitrated in Bombay and subject to the
Indian Arbitration Act.

However the difference in this appeal is between the appellant and the Fiji Revenue
Authority and is subject to Fiji Law. Mr Benefield for the appellant reminded me that the
money went not to the appellant but to the Indian company, but he did not cite any authority
for the money not being part of the appellants income. The Income Tax Act, Cap. 201
would appear to be against him. The definition of total income in section 11 includes any
other allowance or benefit provided by his employer or granted in respect of employment
whether money or otherwise. Mr Benefield submits that in view of the documents
produced and the arrangements made for this Indian national to work in Fiji, and in
particular the fact that the amount of the gratuity is forwarded to India without passing into
or through the appellants hands, it does not form part of the appellants Fiji income. I
would have thought it almost too plain for argument that the gratuity is a benefit provided
by the appellants employer or granted in respect of his employment. His contract of service
is with the Fiji Company, he is subject to the control of the Board of Directors of the Fiji
company, his salary is paid by the Fiji company. The gratuity is either deducted from his
salary or paid in addition to his salary by the Fiji company. Then Mr Benefield refers me to
proviso (c) to section 11 which provides that total income shall include,
remuneration becoming due and payable in respect of or in relation to
services rendered by any person during any year in any office or
employment, and such remuneration shall be the total income of that person
for that year but shall not include the amount of inducement allowance,

8
 education allowance or the proportion of the gratuity payable to any
designated officer by the Government of the United Kingdom.

I understand Mr Benefields contention to be that his gratuity is not in respect of or in

relation to services rendered. What is in respect of or in relation to services rendered has
been discussed in a number of cases. Mr Benefield cited Hochstrasser v Mayes [1958] 2
WLR 982. The facts in that case are not at all like the present case. There the employer
operated a housing scheme whereby it helped the employee to buy a house, and if he were
moved in the course of his employment, the employer had first option to buy the house and
if the employee had to sell it elsewhere the employer would make good any loss. The
taxpayer was in due course shifted and after he had offered his house to the employer he
had to sell it in the open market and sustained a loss of 350 pounds which his employer
duly paid to him. The revenue claimed that this 350 pounds was income. The claim was
rejected at first instance, by a majority in the Court of Appeal and unanimously in the
House of Lords. Viscount Simonds L.C. in the House of Lords said;
Upjohn J. before whom the matter first came, after a review of the relevant case
law, expressed himself thus, in a passage which appears to me to sum up the law in
a manner which cannot be improved upon. In my judgment, he said the
authorities show this, that it is a question to be answered in the light of the
particular facts of every case whether or not a particular payment is or is not a profit
arising from the employment. Disregarding entirely contracts for full consideration
in money or moneys worth and personal presents, in my judgment not every
payment made to an employee is necessarily made to him as a profit arising from
his employment. Indeed, in my judgment the authorities show that to be a profit
arising from the employment the payment must be made with reference to the
services the employee renders by virtue of his office and it must be something in the
nature of a reward for services past present or future.

I would with respect of Mr Benefields argument say that I find not the slightest doubt in
concluding that the gratuity in this case is a reward for services and nothing else. It seems
to me that the Trust Deed is redolent with the idea that the gratuity is given for services
rendered, whether in the past, the present or the future. I do not know what the position is in
India as to income tax, but the Trust Deed appears to envisage income tax being paid on the
amount of the gratuity. Whatever the position in India however, I have no doubt that he
payments made by the Fiji company to the Indian company form part of the reward paid for
services rendered by the appellant. Mr Scott referred to several cases which deal with the
liability either of non-residents or of residents serving out of the jurisdiction of the Courts
in which action was being taken. But here, although the appellant is an Indian national, the
employment is in Fiji and the payment is made from Fiji.

The appeal will be dismissed with the result that costs will be paid by the appellant to be
agreed or taxed in default of agreement.

9
Abrahams v CIR Review No. 4 of 1983
Ct of Review

Stuart J. 25/11/83
In this appeal the taxpayer was a director of Fiji Industries Limited. He was one of the
signatories to the memorandum and articles of association and had been a director from
1960 to the time of his retirement in 1981. There appear to have been nine directors of Fiji
Industries Limited in 1981 and the articles provide for one third of the directors, excluding
the chairman, to retire every year. The taxpayer retired in 1980 but was re-elected. In 1981
he gave notice of his intention to retire as he had reached retiring age. At the annual
general meeting in November 1979 it was resolved that non-executive directors who retire
after five years service shall be paid a retirement benefit equal to three times their annual
directors fees at the date of retirement. The taxpayer was the proponent of this resolution,
but I do not consider that disentitles him to the retirement benefit. The amount of taxpayer's
directors' fees for 1981 amounted to $3,938 and the retirement benefit to which he thus
became entitled amounted to $11,812.50. The taxpayer's accountants duly prepared a tax
return showing this amount but claiming an allowance of $5,000 under s.17(13)(ii) of the
Income Tax Act. Cap. 201 and I set out this particular section so far as it is material to this
appeal. [The court set out s.17(13)(ii).]

The Commissioner disallowed the taxpayer's claim to the allowance of $5,000 and the
taxpayer through his accountants lodged an objection and when that was disallowed filed
an appeal. The grounds of appeal, put shortly are:
(a) the lump sum was not a contractual sum;
(b) the lump sum was received by the taxpayer (who was employed as a director of
the company) because of his relinquishment of the office of the director of the
company.

I would add that by the lump sum is here meant the sum of $11,8l2.50.

The Commissioner does not dispute the allegation that the taxpayer was a director of the
company or that be received the lump sum of $11,812.50 because of his relinquishment of
office, so, that the question at issue is whether the sum is a contractual sum within the
meaning of the statute.

Now, a contractual sum surely is a sum which the taxpayer receives by virtue of a contract.
In my view there is a contract which comes into operation as soon as a director is elected.
In consideration of his election he agrees to serve the company in the office of a director
and the company may or may not agree to pay him for his services. In the taxpayer's case
he knew when he was elected that under article 84 he would receive remuneration for his
services and he did in fact receive $3,938 for his services in 1981. He knew, too, that in
pursuance of the resolution passed at the annual meeting in 1979 that a sum of $24,000
would be divided among the directors. That again is a matter of contract. Furthermore, he
knew after the annual general meeting in 1979 be would receive a retirement benefit
consisting of a fixed amount, namely three times the amount of his directors' fees at the
date of his retirement. It seems to me that this is clearly a matter of contract. The company
contracted to give a benefit not only to the taxpayer but to any director who retired after
five years service.

10
Mr Benefield for the taxpayer relied chiefly upon Henley v Murray [1950] 1 All ER 908 in
which the director received what was in effect damages for anticipating termination of his
contract. Jenkins L.J. put the matter in a nutshell when he said the question in each case
is whether on the facts of the case the lump sum paid is in the nature of remuneration or
profits in respect of the office or is in the nature of a sum paid in consideration of the
surrender by the recipient of his rights in respect of the office. In Henley's case the
recipient surrendered his right in consideration of the payment; in this case, he received
additional remuneration for services he had performed. It is to be noted, however, that
although Henley may not have been taxable under ordinary concepts he may well have
been taxable in Fiji under this very section, as on a contractual sum. [His Honour is being
imprecise here. It is s.11(j) which brings compensation payments like that in Henley into
total income. Section 17(13)(ii) provides a (partial) exemption or limitation to s.11(j)]

I think that a closer analogy may be found by comparing the two cases of the cricket
professionals. In Seymour v Reed 11 TC 625 Seymour had been playing for Kent for years
and was granted a benefit. Benefits were at the discretion of the County Committee and
were usually granted once in a player's career. In the House or Lords, Viscount Cave L.C.
said Is it in the end a personal gift or is it remuneration? If the latter it is subject to tax, if
the former it is not." The money was held to be a personal gift. Contrasted with that is
Moorhouse v Dooland [1955] 2 WLR 96. Dooland's contract with East Lancashire Club
provided that he was entitled to have a collection taken up round the ground for a
meritorious performance. It was held that this was a right capable of enforcement and
therefore it was remuneration. Likewise I think that taxpayer's entitlement to his retirement
benefit was a right which could have been enforced, and is taxable.

That in effect concludes the matter. But the question was raised, and the correspondence
suggests that four matters may have been put forward, either by the Commissioner or the
taxpayer's accountants - I am not sure which - as matters upon which the Commissioner
might form an opinion as to the sum which was reasonable to be allowed under s.l7(13)(ii)
of the Act. These were;
(a) that the taxpayer was holding a part-time position
(b) that he was a non-resident;
(c) that he has income from other sources;
(d) that the loss of this directorship was not the loss of a major source of income.

With respect, I should have thought those considerations quite irrelevant. The main thing is
that the Commissioner is to allow so much of the lump sum as is reasonable. Here the
decision of one of the Australian Boards of Review in 27 CTBR (N.S.) Case might be
helpful. I think that is all I need say in the matter. The appeal will be dismissed, and the
appellant will pay the Commissioner's costs.

11
C.I.G. Fiji Ltd v CIR Appeal No. 1 of 1982
Court of Review

Stuart J. 11/8/82
This is an appeal by C.I.G. Fiji Ltd against an assessment to income tax in respect of the
price of gas cylinders not returned by customers during 1980. The appellant was formed in
1965 under the name of Industrial Gases Limited and it became C.I.G. Fiji Ltd in January
1970. It deals in industrial gases, and these gases are sold to its customers in cylinders, for
which a deposit is charged in addition to the price of the gas, which deposit is refunded
when the cylinder is returned. The appellant has customers both in Fiji and throughout the
Pacific, and a higher deposit charge is made to its customers outside Fiji than to those in
Fiji. It appears that although deposit charges are made against all overseas or ex-Fiji
customers, a deposit is required from only cash customers in Fiji. The Court was told that
16.9% of the appellants customers paid deposits and in 1980 that figure numbered 336. In
1980 240 cylinders were not returned and the charges were then forfeited, the value of
those cylinders being set at $6,399. This figure was what the appellants accountant called
the historical cost of the cylinders, although their gross value in a valuation made in 1975
was $5,919. This is rather curious for although the deposit was refunded at the rate at which
it was charged, the deposits are charged out at current replacement cost if the cylinders are
lost or not returned. It was conceded that moneys received as deposits on cylinders were
paid into the ordinary company accounts although separate receipts were made out for them
and the accounts entered in the appellants books in such a way that they could be
identified. The appellant contends that those cylinders represent capital in the form of fixed
assets while the Commissioner contends that they are trading stock and thus income.

The appellant says that in as much as there is any profit realised through the loss of its
cylinders, that is profit obtained from the realisation of a capital asset. It is not denied that
deductions were claimed and allowed in income tax returns in previous years in respect of
these cylinders. It is true that if these cylinders are fixed assets their sale will represent a
capital profit. There do, however, appear to be major obstacles in the way of the appellant.
In the first place if deductions have been allowed in respect of these deposits, I cannot see
why those deductions should not be added back if the cylinders are lost or destroyed. [The
court here is referring to a balancing charge that arises when the asset is lost (not returned)
and the deposit is forfeited. The deposit exceeding the assets written down value for tax
purposes a balancing charge results.] Secondly assuming these cylinders to be capital I
would have thought they would be of the nature of circulating rather than fixed capital
difficult as that distinction may be. They seem to me to be assets of the kind dealt with in
the course of the appellants trade and hence in the nature of stock in trade, and any dealing
with them would be in the nature of a trading operation and any resulting profit would be a
profit of the trade; see Reynolds & Gibson v Crompton [1950] 2 All ER 502, 511. Thirdly,
two of the South African cases cited by Mr Scott appear very relevant, for the facts
approximate very closely to the facts in this appeal. In Brookes Lamos Limited v South
African CIR (1947) 14 SATC 295 the taxpayer was the manufacturer of fruit squashes and
other food-stuffs packed in glass containers which always remained the property of the
manufacturer. They required customers to make a deposit on containers supplied, subject to
an undertaking that if a similar container was returned by the customer the amount of the
deposit would be returned. The units received were credited to a separate bottle deposit
account, but were not deposited in any trust account and were utilised for the general
purposes of the business. It was held that the deposits became the absolute property of the
12
manufacturer and constituted receipts which fell within the item gross income and they
were not to be excluded as receipts of a capital nature inasmuch as they were ordinary
trade receipts produced by an operation undertaken to earn profits. In Greases (South
Africa) Limited v CIR (1951) SATC 358 the appellant carried on the business of selling
grease which was supplied to customers in drums. Prior to 1942 no charge was made for
the drums, but for that year the appellant required its customers to return the drums when
empty, and also required a deposit to be paid in respect of each drum supplied. It further
issued a notice to customers that supplies of grease would not be given unless drums
previously issued were returned in good condition. The price fixed in 1942 was 1, but in
1943 this was increased to 2. The actual controlled price of the drums was five shillings.
The money received by the appellant by way of deposits for drums was shown in its books
as held in suspense, but was used by the appellant in its general business and was not
placed in any trust account. It was held that as the appellant had received the deposits for its
own benefit in that it was entitled to make use of them in its business and not required to
deposit them to any trust account, the amounts had been rightly included in the appellants
gross income, notwithstanding that it had agreed to pay out to its customers an amount
equivalent to their deposits should the drums supplied to them be returned. These two cases
were very similar to the appeal under consideration. Mr Scott also referred to Elson v
Prices Tailors Ltd [1963] 1 All ER 231. That was a case where deposits were accepted on
the sale of suits and although it was the appellants policy to return the deposit on demand
even as late as six years after it had been paid, there were some cases where the customer
did not return, and the deposits were retained. These payments were after a period
transferred to a separate account but could be used in the taxpayers business. It was held
that they became the taxpayers property on receipt and fell to be included as income.

Miss Prasad submitted that the payments for these cylinders were fixed capital and referred
to the case of Abbott v Albion Greyhounds Ltd [1945] 1 All ER 308. In that case the
greyhounds which produced the companys income were held to be fixed capital, and
Wrottesley J. made comparison with a dairy herd which produced milk which was sold. If
the proceeds of these cylinders were capital at all, which I doubt, then they are circulating
capital. In Ammonia Soda Company Limited v Chamberlain (1878) 1 Ch 266 Swinfen Eady
L.J. compares the two expressions. Fixed capital is that which a company retains in the
shape of assets upon which the subscribed capital has been expended, and which assets
either themselves produce income, independent of any further action by the company or
being retained by the company, are made use of to produce income or gain profits.
Circulating capital is a portion of the subscribed capital of the company intended to be
used by being temporarily parted with and circulated in business, in the form of money,
goods or other assets and which, or the proceeds of which, are intended to return to the
company with an increment and are intended to be used again and again, and to always
return with some accretion.

It seems to me that since these cylinder deposits could be used in the appellants business,
they cannot be regarded as fixed capital, but must be regarded as circulating capital and any
excess of receipts over expenditure treated as income. The appeal is dismissed and the
Commissioner is entitled to his costs, to be taxed in default of agreement.

13
CIR v C. Roose (Fiji) Ltd 8 FLR 94
Fiji High Court Appellate Jurisdiction

Hammett P.J. 4/5/62

This is an appeal by the CIR from the decision of the Court of Review sitting at Suva.

The Respondent is a private limited liability company which was incorporated in Fiji in
1949.

In 1960 it disclosed a net profit of 3,531 in its Profit & Loss Account upon which it is
agreed it is liable to tax. In addition there was a surplus disclosed in its balance sheet of
4,297 resulting from the sale of shares it held in two companies, namely:

South Pacific Shipping Company 3,675.19.10

Huddart Parker Ltd 621.11. 0
Total 4,297.10.10

The Respondent contended that this surplus was a capital gain and so not liable to tax. The
CIR did not accept this view. He considered this was a part of the profits made by the
Respondent company in the course of its normal business operations and so liable to tax.
He assessed the Respondent for tax on this surplus and against that assessment the
Respondent appealed to the Court of Review.

Before the Court of Review there was no dispute on the facts which were reduced to the
form of a statement of agreed facts upon which argument was heard. The decision of the
Court of Review which was given in a carefully prepared and very clear judgment allowed
the appeal of the taxpayer and set aside the assessment.

The CIR has now appealed against that decision on the following grounds:
1. That having regard to all the relevant circumstances in relation to the respondent
company, and in particular to
(i) its memorandum of association;
(ii) the findings of fact that the sole business carried on by the company since 23 rd
May, 1953, was as investors, and that at the time of the sale of the shareholdings
in South Pacific Shipping Co Ltd and Huddart Parker Ltd the ordinary business of
the company was investment;
the Court of Review erred in holding that the realization of these two share
investments was not a normal nor a necessary step in the investment business
carried out by the respondent company.
2. That the Court of Review erred in holding that the sale of these shares was not
an act done in carrying on or carrying out a business.
3. That the net profit on the sale of these two shareholdings was profit or gain
derived from the sale of personal property and the business of the taxpayer
comprised dealing in such property, and accordingly such net profit was properly
assessed by the Commissioner as part of the total income of the respondent
company.

The first object for which the Respondent company was incorporated in 1949 is set out in
its Memorandum of Association in clause 3(1) which reads:
14
 3.(1) To purchase or otherwise acquire the motor vessel Rawhiti (commissioned
U.S.S. LST283) together with all its equipment and stores.

There are however a total of 28 sub-clauses to this clause in which the many and varied
objects of the company are set out at the end of which appear the words:
And it is declared that the intention is that the objects specified in each
paragraph of this clause shall except where otherwise expressed in such paragraph
be in no wise limited or restricted by reference to or inference from the terms of any
other paragraph and each object shall be and be deemed an independent object.

Amongst the other 28 sub-clauses in clause 3 is the following, of which I quote merely the
relevant parts:
3.(2) To purchase shares of companies interested in ships and to
sell any shares as aforesaid.
I would add that it is conceded that both the companies, in respect of whose shares this
appeal is concerned, did possess or were interested in ships.

The Respondent companys objects clearly include the purchase and sale of shares as is
shown by a reference also to sub-clauses (9), (10) and (24).

The objects clauses of the Memorandum of Association of a company are not, however,
decisive. The mere fact that a company is given in its memorandum power to buy and sell
shares is by no means conclusive when considering whether if it exercises those powers it
is trading in shares or selling them as part of its trading activity. The question is whether or
not the company was in fact buying and selling shares as a part of its normal trading
activity. (see CIR v The Scottish Automobile & General Insurance Co Ltd 16 TC 381 at
389)

In 1951 the Respondent sold its only ship the Rawhiti and began to invest the proceeds of
sale and its capital in mortgages and shares. On 8 th June, 1951, the company resolved in
Annual General Meeting to invest up to 10,000 on securities approved by its Directors and
Solicitors. On 23rd May, 1953, a further resolution was passed in the following terms:
It was resolved henceforth the available funds of the company should be invested
at the discretion of the Directors in sound securities.

From the Statement of Agreed Facts, there was ample material upon which the Court of
Review held, and, in my view, properly held, that since 1953 the company has ceased to
carry on business as a shipping company and has carried on business solely on investors.

The Judgment of the learned trial Magistrate in the Court of Review went on to say:
The only business carried on by the company since that date has been the
investment of its capital in share and loan securities and the income of the company
has been derived from interest and dividend returns on these investments. There is
no evidence that the policy of the company has been to obtain profits from dealing
in shares for profit. In fact the agreed facts show a clear policy of investment in
sound share and loan securities and interest return.

It is the contention of the company that it is only its income, profits or gains received by
way of dividends and interest on its investments, that are liable to tax. It contends that the
15
gains which were derived when it changed one capital asset into another capital asset were
capital gains and not income, or trading gains and profit. It maintains that it is not a
company that is trading or dealing in shares and does not make its income by buying and
selling shares but by the dividends it recovers from such shares and the interest it receives
on its mortgages. It contends that the fact that it has changed two of the capital assets it held
by selling them and buying others does not alter the fact that it is not a company whose
object is to make a profit by buying and selling shares or by dealing in or trading in shares.

For the CIR, the learned Attorney-General has pointed out that if it was the companys
intention to hold its shares in perpetuity there might be some force in this argument. He
contends that this is obviously not the intention of the company as is borne out by the fact
that it has already sold two large holdings of shares. Once it is conceded that in order to
carry out its scheme of profit making by the receipt of dividends on shares or sound
securities, it must, in the very nature of things, become necessary from time to time to sell
some of the securities held and re-invest in others, then any profits realised on the sale of
such investments is a profit made in an operation of business in carrying out a scheme for
profit making.

The material part of the definition of total income in s.3 of the Income Tax Ordinance
reads:
profits from a trade or commercial or financial or other business
directly or indirectly received by a person from any trade, manufacture or
business
Provided that without in any way affecting the generality of this subsection
total income for the purpose of this Ordinance shall include
(a) all profits or gains derived from the sale or other disposition of any real
or personal property or any interest therein, if the business of the taxpayer
comprises dealing in such property, or if the property was acquired for the
purpose of selling or otherwise disposing of the ownership of it and all
profits or gains derived from the carrying on or carrying out of any
undertaking or scheme entered into or derived for that purpose of making a
profit.
Provided that the profit or gain derived from a transaction of purchase and
sale which does not form part of a series of transactions and which is not in
itself in the nature of a trade or business shall be excluded.

It is the contention of the learned Attorney-General that it is not possible for an investment
company to sell any of its holding of shares which it had acquired in the course of its
business for the purpose of earning income from its dividends, with the intention of re-
investing the proceeds of sale in other shares from which it presumably hopes to obtain a
better or more secure source of dividend income, without any profit made on the
transaction becoming, in the words of Lord Justice clerk in Californian Copper Syndicate v
Harris (1904) 5 TC 159:
a gain made in the operation of business in carrying out a scheme for profit
making.

The Court below carefully reviewed the authorities cited before it, all of which were among
the many also cited to me by both Counsel, and then went on to say, having considered
these authorities:
16
 I am satisfied that the true distinction to be drawn in cases of this nature is between
cases where the realization of investments is an essential feature of a business and
cases in which the realization of investment is merely incidental to a business.

With this statement both sides in this present case agree.

The learned Magistrate did, however, go on to say:

I am satisfied that in this case the realization of the two share investments in
question was not a normal nor a necessary step in the investment business carried
out by the company. I accordingly hold that the sale of these shares was not an act
done in carrying on or carrying out a business but merely a realization of
investments.

It is with this conclusion that the Appellant disagrees.

I fully appreciate the object of the point made by the learned Attorney-General that since in
fact the sole business of the Respondent company is that of investment, to re-invest its
assets so as to safeguard its income or the soundness of the sources of income or to better
its return on its investments generally, is an integral part of the carrying on of its business.
On the other hand this argument leads to the conclusion that where an investment company
is concerned there cannot be any distinction for tax purposes between one that ostensibly
and deliberately sets out to make profits by the repeated sale and purchase of shares and is
in fact a trader in shares, and one that quite clearly does not in fact trade in shares and does
not wish or intend to trade in shares but expressly wishes to invest its assets in shares and to
derive its entire income from the dividends and interest paid on those shares. This argument
leads to the conclusion that it is never possible for an investment company of this latter sort
to change an investment without any profit or loss on any such isolated transactions having
to be brought into its profit and loss account for tax purposes. In other words that such a
company cannot make either a capital gain or a capital loss on the sale of any of its assets.

I find it difficult to accept this reasoning fully in view of the well known test formulated by
Lord Justice Clerk in Californian Copper Syndicate v Harris in the following words:
It is quite a well settled principle in dealing with questions of assessment of
income tax, that where the owner of an ordinary investment chooses to realize it,
and obtains a greater price for it than he originally acquired it at, the enhanced price
is not profit in the sense of Schedule D of the Income Tax Act of 1842 assessable to
income tax. But it is equally well established that enhanced values obtained from
realization or conversion of securities may be so assessable, where what is done is
not merely a realization or change of investment, but an act done in what is truly the
carrying on, or carrying out, of a business what is the line which separates the
two classes of cases maybe difficult to define, and each case must be considered
according to its facts; the question to be determined being Is the sum of gain that
has been made a mere enhancement of value by realizing a security, or is it a gain
made in an operation of business in carrying out a scheme for profit making.

It appears to me that I am being invited to hold that this test cannot be applied to the case of
the sale of shares by an investment company and that investment companies must be treated
as persons to whom this test is inapplicable.

17
The only case I have been able to find in which this problem, as applied to investment
companies, has arisen and has been dealt with is the case of Danmark Pty Ltd and
Forestwood Pty Ltd v FCT 2 AITR 517. In that case a private investment company whose
assets were all invested in shares sold a comparatively minor part of its shares which were
earning a low rate of interest in order to pay off a bank overdraft on which a higher rate of
interest was being paid. The profit on the sale of these shares was assessed for income tax
and the company appealed against that assessment. The total value of shares held by the
company was about $55,000 and shares to the value of $1,800 were sold in one year and
shares to the value of $7,000 were sold in the next year. The facts of the sale were
consistent both with a mere realization of investment or with the undertaking of the
business of trading in shares. The company concerned, although it admittedly had as its
principal business the buying and selling of shares, contended that these particular sales
were not for this purpose at all but were for the express purpose of paying off an overdraft.

A full Court of the Commonwealth High Court allowed the appeal and held that the profit
on these particular sales of shares in these particular circumstances were not liable to tax. In
the judgment of Williams J. appears the following passage:
Having regard to the nature of the companys assets which have always consisted
entirely of shares, to the length of time these shares have been held, and to the
circumstances which gave rise to the sales, it appears to me that the proper
conclusion on the facts is that in selling the shares in the relevant year the company
was not trading in shares of carrying out any profit-making scheme but was
engaged in realizing investments from which it was obtaining a lower rate of
interest than it was paying on its bank overdraft with a view to reducing the
overdraft and changing into investments carrying a higher rate of interest.

This decision in respect of an investment company whose avowed principal object and
business was the buying and selling of shares appears to me to support the view that the
question of whether an investment company is liable to tax on the profits made on the sale
of its shares should be determined by the same test which applies to sales of such assets by
other persons as was formulated by Lord Justice Clerk in the Californian Copper Syndicate
case to which I have already referred. It appears to me that the method of applying this test
to the case of an investment company is to ascertain whether the particular shares, when
sold were treated as investments of the company, or whether they were treated as part of its
stock in trade at the time they were sold. In other words the circumstances giving rise to
each sale must be considered individually and on their merits before it can be determined
whether the sale is a normal trading transaction the profit from which is liable to tax or is
in fact a genuine change of investment made for a specific purpose other than a sale with a
view to a profit in the normal course of the companys trading activities.

In applying that test to the facts of the present case it seems to me that the following
factors, amongst others, must be considered:
1) The objects of the company as set out in its Memorandum of Association;
2) The purposes and intentions of the company as seen from its actual trading practices and
the manner in which it has in fact carried on its business in general;
3) The evidence of what was in fact the object and purpose of the company in carrying out
the transactions under consideration in particular.

18
Considering these factors in respect of the present case the position appears to be as
follows. Nearly all companies nowadays have power to invest funds in stocks and shares.
The objects set out in the Memorandum of Association are, in my view, equivocal and are
equally consistent with the Respondent company operating either as a bare investment
company, by which I mean a company that derives its income solely from the dividends and
interest received on its investments, or as a trading investment company, by which I mean a
company that derives its income not only from the dividends and interest it receives on its
investment but also from the profits it makes in its business of buying and selling shares.

The history of this companys activities shows that it first began to operate as an investment
company after selling its only ship in 1951. In 1953 the company passed a resolution in the
following terms:
It was resolved henceforth the available funds of the company should be invested
at the discretion of the Directors in sound securities.

In the period of nine years from 1951 to 1960 only two sales of shares have taken place.
The reasons given by the governing director for these two sales by the company are as
follows:
Huddart Parker Co Ltd shares The Wanganella is a losing proposition and coal
being won by the company is costing more than it is sold for so, I considered that
this investment would eventually be a bad one for the company.

South Pacific Shipping Co Ltd shares Some friends asked me to join them in this
venture and become a Director. I agreed to do so if they would register the company
and the ship in Fiji. They duly registered them in Fiji. The ship Babinda was
purchased in Australia, but arrived in New Zealand with a New Zealand crew, much
against my wishes. They ran her for about six months and she lost heavily and they
could not continue running her. I then found the money for them to get a crew from
Fiji, and she was a paying proposition from then on. My reason for selling the
shares was that the bulk of the shares, and also the control of the ship, were
transferred to Australia. I did not consider this set up satisfactory, and, as the
Australian shareholders wished to buy my shares, I sold them and resigned as a
director of the company.

The avowed intention of the company in 1953 appears to have been carried out and from
the history of its own activities it seems to have implemented its own avowed object of
becoming what I have termed a bare investment company.

Under these circumstances I would apply the reasoning of the Lord President in CIR v The
Scottish Automobile & General Insurance Co Ltd 16 TC 381:
The question is not whether the Company might possibly have traded as an
investment company, but whether it was in fact trading as such, and whether this
particular transaction was part of that trading. Nothing could be imagined less like
the record of an investment company than the record of this Companys transactions
in government securities in connection with its reserve fund as set out on pages 5
and 6 of the Case. It does not necessarily follow from the circumstance that the
Company sees fit to sell a block of its government securities, whether the purpose
be to get a better return, or whether the purpose be to increase the reserve fund by
taking profit from the realisation of a particular block, that therefore the Company
19
 is trading in the purchase and sale of the securities forming its reserve fund.
Occasional transactions of that kind are not necessarily trading at all, whether in the
case of a private individual, a trust or an insurance company.

In that case the Court of Session held that the taxpayer was not liable to tax on the gain
realised on the sale of an investment and supported the inferences drawn by the
Commissioners from the facts that the profit made on the sale of that investment was not
made by trading. Lord Blackburn said:
In my opinion where the inference drawn by the Commissioners is one of fact their
finding should be left undisturbed unless it is apparent that they have completely
misdirected themselves, or that there is no evidence in the facts which they find are
admitted or proved which would justify a reasonable man in drawing the inference
which they have drawn.

For these reasons, on the particular facts of this particular case, concerning the sale of these
particular shares in these particular circumstances, I see no reason why this Court should
interfere with the decision of the Court of Review that the sale of these shares was merely
the realisation of investments. This particular resulting gain was not made in an operation
of business in carrying out a scheme for profit making and was not therefore a profit liable
to assessment for income tax.
The appeal is therefore dismissed with costs.

20
CIR v Ah Koy Civil Appeal No 3/1972
Fiji High Court Appellate Jurisdiction

Tuivaga J. 5/10/82
On 2nd October, 1967 a Prospecting Licence (No. 1004) was granted pursuant to the
provisions of the Mining Ordinance to the respondent and five other persons in equal shares
to prospect for copper, zinc, gold, silver and associated minerals on the land therein
described for a term of one year. At the expiration of that term the licence was extended for
a further term of one year and at the expiration of that further term it was extended again
for another year. During the currency of the third term the respondent on 1 st April, 1970,
sold his one-sixth share in the licence for $12,500. During each of the terms in which the
respondent owned his one-sixth share in the licence expenditure was incurred in connection
with prospecting operations carried out under the licence. In his return of income for the
year ended 31st December, 1970, the respondent disclosed the sale of his one-sixth share in
the licence but claimed that the proceeds therefrom represented a capital gain and were
therefore non-taxable.

The appellant rejected the respondents claim and assessed him on the basis that the
proceeds formed part of the total income derived by him during the said year of income.
The respondent objected to the appellants assessment. The appellant decided to disallow
the respondents objection whereupon the respondent appealed against his decision to the
Court of Review.

On 28th February, 1972, the Court of Review upheld the appeal holding that the proceeds of
the sale of the respondents one-sixth share were not total income within the meaning of
the Income Tax Ordinance and were therefore not taxable.

Dissatisfied with the decision of the Court of Review, the appellant, pursuant to the
provisions of s.74 of the Ordinance, referred the matter to this Court for hearing and
determination. He stated the reasons for his dissatisfaction as follows:-
(1) The Court of Review erred in finding that money received by the appellant, in
the circumstances of this case, was capital and not income within the definition
of total income as set out in the Income Tax Ordinance, Cap. 176.
(2) The Court of Review failed to consider inter alia, on the facts of this case
whether the appellant entered into a profit making scheme which in itself was in
the nature of a business or trade.

Before me it was contended on behalf of the appellant that the sum in question came either
within the general definition of total income at the beginning of s.15 of the Ordinance or
within the extended definition given to that expression in paragraph (a) of the first proviso
thereto. The relevant provisions of s.15 read as follows:
For the purpose of this Ordinance total income means the annual net
profit or gain or gratuity, whether ascertained and capable of computation as
being wages, salary or other fixed amount, or unascertained as being fees or
emoluments or as being profits from a trade or commercial or financial or
other business or calling or otherwise howsoever, directly or indirectly
received by a person from any office or employment or from any profession
or calling or from any trade, manufacture or business or otherwise
howsoever
21
 Provided that, without in any way affecting the generality of this section,
total income, for the purpose of this Ordinance, shall include:
(a) all profits or gains derived from the sale or other disposition of any real
or personal property or any interest therein, if the business of the taxpayer
comprises dealing in such property, or if the property was acquired for the
purpose of selling or otherwise disposing of the ownership of it, and all
profits or gains derived from the carrying on or carrying out of any
undertaking or scheme entered into or devised for the purpose of making a
profit. ...

I am satisfied that the sum in question does not fall within the general definition of total
income. That definition appears to me to be confined to income in the ordinary sense of
the word regardless of its source. If the sum concerned is to be treated as income it is
because paragraph (a) of the proviso classes it as income for the purposes of the Ordinance.
In other words it brings it within the expression total income by definition.

Paragraph (a) of the proviso classes as income profits and gains derived from the following
sources
(1) The sale or other disposition of any real or personal property or any interest therein, if
the business of the taxpayer comprises dealing in such property or if the property was
acquired for the purpose of selling or otherwise disposing of the ownership of it;
(2) The carrying on or carrying out of any undertaking or scheme entered into or devised
for the purpose of making a profit;
The paragraph then goes on to provide that nevertheless the profit or gain derived from a
transaction of purchase and sale which does not form part of a series of transactions and
which is not in itself in the nature of trade or business shall be excluded;

There is nothing in the evidence before me to support a contention that the business of the
respondent comprises dealing in real or personal property or any interest therein or that he
acquired his interest in prospecting licence No. 1004 for the purpose of selling or otherwise
disposing of the ownership of it. I am satisfied that the predominant purpose for which the
respondent and his fellow shareholders acquired interests in the licence was to prospect for
minerals pursuant to its provisions and that I am satisfied he first thought of selling his
interest only when he received an offer for it which he considered was too good to refuse.

I am also satisfied that, although the respondent and his colleagues entered into an
undertaking or scheme to prospect for minerals for the purpose of making a profit if they
were fortunate enough to discover any, the profit derived by the respondent was not derived
by him from the carrying on or carrying out of that undertaking or scheme but from the sale
of his share in the licence under which the undertaking or scheme was being carried out. In
any case the profit or gain from the sale of his share was not, in my opinion, derived from a
transaction of purchase and sale which formed part of a series of transactions and which
was in itself in the nature of trade or business. On the contrary the sale of his share in the
licence was nothing more than the realisation of a particular asset he owned for a
consideration which he was pleased to accept. For the foregoing reasons I think the Court
of Review was correct in holding that the sum in question represented a capital gain and
was not total income within the meaning of the Ordinance.

The appeal is dismissed with costs.

22
Kelton Investments Ltd v CIR Ct Rev No.1 of 1979
Court of Review

Stuart J. 9/3/81
This is an appeal from the disallowance by the Commissioner of Inland Revenue of the
taxpayers objection to an assessment of $29,774 as income rather than treating it as a
capital accretion. The assessment arises out of the purchase by the taxpayer Kelton
Investment Ltd of a block of 20,000 shares in Desbro Steel Rolling Mills Ltd from Burns
Philp (South Sea) Co Ltd at $2.25 a share and the sale of those shares less than two months
later at $3.75 a share.

Kelton Investments Ltd is a private company in which James Michael Ah Koy, his wife and
children are the shareholders. James Michael Ah Koy although not the principal
shareholder is the governing Director, with the powers which go with that position. He may,
I think, be described as a highly successful businessman and in 1976 or thereabouts he
became interested in Desbro Steel Rolling Mills Ltd in which the majority interest was held
by the Sennik family, who one way or another held 62.5% of the capital of the Company.
W.R. Carpenter (South Pacific) Ltd and Burns Philp (South Sea) Co Ltd each held 20,000
shares amounting in each case to 7.23% of the total number of shares issued. Mr Ah Koy
held no shares. Desbro Steel Rolling Mills Ltd, which I shall call Desbro had fallen upon
evil days, the nature of which need not be particularised here, and begun to look round for
assistance, the Sennik family being willing, if necessary, to sell out their shareholding. Mr
Ah Koy though to take central of Desbro and put out feelers not only to the Senniks but
also to Burns Philp (South Sea) Co Ltd, with whose Manager at the time he appears to have
been on very friendly terms. He became very friendly also with the Senniks and on 16 th
June 1976 became an alternate director to Desraj Sennik, becoming a substantive director
on 31st August 1976. He had not yet became a shareholder but a director did not need to be
a shareholder. He made an offer to the Senniks to buy their shares at $2.25 a share, but
without success, and in 1976 and 1977 made various offers going as high as $3.25 a share
for the Senniks shares but none were acceptable to the Senniks. He then brought Desraj
Sennik and his son Subbas Chandra Sennik who were managing the business, to Mr Lyle
Cupit, the Managing Director of W.R. Carpenter Ltd (South Pacific). That was on 10 th
March 1977.

There Mr Cupit, on behalf of his company offered to buy the Sennik shares for $3.75 a
share. He made a holograph memorandum of what was agreed upon at that meeting, and
because it seems to be the most material fact in the case, I set it out in full.

DESBRO STEEL ROLLING MILLS 10/3/77

Closing offer accepted
F$3.75 per share
For 173,050 shares = F$648,937 = 62.57%

Carpenters already hold 20,000 or 7.23%

Offer subject to Fiji Government permitting

(a) Takeover and engineering inspection of plant.
(b) 1. Ah Koi to make and get acceptance of his offer to purchase BB 20,000 shares before
any further negotiations; 2. Ah Koi also tendering for 3,500 shares BP Trustees Co.

Meeting Sennik (Senior) Subbas Sennik and J. Ah Koi.

23
Mr Ah Koy had talked to Burns Philp (South Sea) Co Ltd about their shares in Desbro and
on 10th March 1977, after his meeting with Mr Cupit they were offered to him at $2.25 a
share. He accepted the offer and paid a sum of $45,000 the following day and the relevant
instrument of transfer was signed on 5th April 1977 and approved by the Desbro Board of
Directors on 5th May. On 25th April 1977 Carpenters made a formal offer for the Sennik
shares which was accepted on the 27th idem and on the latter day made a formal offer to
Kelton Investments Ltd offering to buy the shares which Kelton Investments Ltd had
bought from Burns Philp (South Sea) Co Ltd six weeks before. That offer was accepted the
same day. On 26th June 1977 the Central Monetary Authority approved the transfer of the
Senniks shares to W.R. Carpenter (South Pacific) Ltd. In due course Kelton Investments
Ltd made their tax return representing a sum of $29,774 the proceeds of the sale of the
Desbro shares as a capital accretion. The CIR demurred.

The matter falls to be determined under proviso (a) to s.11 of the Income Tax Act. Section
11 is a section giving a very comprehensive definition of total income and is followed by
twenty-two provisos, of which the first is relevant to these proceedings. The provisos start
off:
Provided that, without in any way affecting the generality of this section,
total income, for the purpose of this Act, shall include
(a) any profit or gain accrued or derived from the sale or other disposition
of any real or personal property or any interest therein, if the business of the
taxpayer comprises dealing in such property, or if the property was acquired
for the purpose of selling or otherwise disposing of the ownership of it, and
any profit or gain derived from the carrying on or carrying out of any
undertaking or scheme entered into or devised for the purpose of making a
profit; but nevertheless, the profit or gain derived from a transaction of
purchase and sale which does not form part of a series of transactions and
which is not in itself in the nature of trade or business shall be excluded.

The CIR contends that the profit is caught as being property acquired for the purpose of
selling or otherwise disposing of it and he says that first it has not been shown that the
shares were not acquired for the purpose of resale and secondly that it is not shown that a
commission business is not established, an instance of which is the purchase and sale of
these particular shares. I begin by observing that the onus is fairly described by Hunt J. in
FCT v Nixon (1979) 10 ATR 62, 66
Juries in civil cases every day are directed by reference to a pair of scales in which
the evidence and the arguments of the plaintiff are placed on the one side and on the
other are placed the evidence and arguments of the defendant. The juries are told
that if the plaintiff succeeds, in their estimation in weighing down these scales ever
so slightly he has discharged the onus of proving to their reasonable satisfaction that
whatever he asserts is more probably correct than not. I do not see why a similar
degree of proof is not applicable where the taxpayer is obliged to establish the
absence of a particular intention in purchasing shares.

I accept that statement as correct.

Mr Ah Koy was the principal witness for the taxpayer, and he was cross-examined at some
length. He admitted the contents of the memorandum made by Mr Cupit to be substantially

24
accurate, although he cavils at the use of the term intermediary which Mr Cupit used to
describe him in a telex to his Chairman of Directors a term which Mr Cupit agrees to
have been used somewhat loosely. Mr Ah Koy apparently rang Mr Rowland, the Manager
of Burns Philp (South Sea) Co Ltd on the evening of the day he spoke to Mr Cupit and the
Senniks and arranged to buy Burns Philp's shares at $2.25 a share, and the following day he
paid $45,000, although the relevant share transfer was not signed until 5 April 1977. There
is a provision in Desbros Articles (Article 25) which confers certain rights of pre-emption
in favour of existing members of the company, and which have to be exhausted before
shares can be transferred to non-members. Mr Ah Koy said that when he purchased the
shares from Burns Philp he still intended to try to obtain either a controlling interest or a
substantial minority interest in the Desbro Company, and that he only relinquished that idea
when he found that Carpenters had bought the Sennik shares and were in a position to shut
him out. He therefore sold his shares to Carpenters. Mr Ah Koys evidence as to his purpose
or object or his state of mind must, of course be scrutinised most closely see Pascoe v CT
(1956) 30 ALJ 402.

There is no doubt in my mind that Mr Ah Koys original intention was to obtain control of
Desbro because he thought he could operate it at a profit and his offers to the Senniks and
his approach to the Bank were all conducive to that end. But it is significant that he did not
buy Burns Philps shares until after Carpenters through Mr Cupit had agreed to buy the
Senniks shares. The fact that the agreement was merely oral is not, I think, to the point. In
my view Mr Ah Koy bought Burns Philps shares at $2.25 a share at a time when he knew
that Carpenters had bought the Sennik shares at $3.75 a share and would buy his shares for
the same price. Mr Ah Koy admitted that he learned of Carpenters interest in Desbro on
10th March 1977, and knowing that, he paid out $45,000 in buying Burns Philps shares. It
is significant that he paid Burns Philp immediately, although a form of transfer was not
signed until 5th April 1977. I think that it must be borne in mind that Carpenters were not
prepared to approach Burns Philp direct, and were not prepared to complete the purchase of
the Sennik shares unless Burns Philp could be bought out. Hence Mr Cupit required an
intermediary. Mr Ah Koy was that intermediary. He was not Mr Cupits agent. He was
being allowed to take his profit. Mr Cupit anticipated that he would have to pay $3.00 a
share. In the event he bought for $2.25. I do not believe that Mr Ah Koy still intended after
the meeting of 10th March to obtain control of Desbro. In his own words, he did not believe,
either, that at that stage he expected that there would be any obstacle either from Desbros
directors or from the Central Monetary Authority to the transfer of the Senniks shares to
Carpenters or that the condition of the plant would stand in the way. There may have been
the hope that Carpenters engineering inspection would induce Mr Cupit to go back on the
transaction, but I think it was a hope rather than an expectation. I am not sure whether he
realised that Desbros directors could not stop the transfer to Carpenters under the pre-
emptive clauses. It will be noted that he sold Keltons shares to Carpenters while the
transfer of Senniks shares was still under consideration by the Central Monetary Authority.
It would appear that Carpenters applied for consent to the purchase of the Sennik shares on
25th April 1977. It was granted on 28th April. Mr Ah Koy accepted Carpenters offer to
purchase his shares on 27th April.

But the question which has to be answered in cases of this kind, it has been said, is what
was the dominant motive of the taxpayer when he acquired the interest which is challenged:
see CIR v Thompson in the Fiji Court of Appeal (Civil Appeal No. 8 of 1979). So here the
question to be answered is what was the dominant motive of the taxpayer when it bought
25
Burns Philps shares in Desbro Steel Rolling Mills Ltd was it with a view to resale at a
profit. It has been pointed out that it is a question of fact as to whether the taxpayer had that
motive.

I do not attach a great deal of importance to the lack of a feasibility study. Mr Cupit
probably obtained that to satisfy his directors: Mr Ah Koy had merely to satisfy himself.
Nor to his approaches to the Bank for a sum which, if Mr Cupits evidence is accepted, was
quite inadequate to make Desbro a viable concern. Mr Ah Koy was satisfied that he could
make Desbro profitable with the money he was able to raise from the Bank together with
what he had on deposit with Burns Philp. Nor do I attach much importance to the fact that
the taxpayers memorandum of association permits it to deal in commissions and to sell,
dispose of and deal in its property. Its main object is to deal in merchandise and in
particular typewriter, accounting, adding, calculating, dictating duplicating, addressograph
machines and such like. The objects upon which the Commissioner lays stress are usual
provisions which are found in the memorandum of association of most companies and they
are included so that the company will not be restricted in carrying out its normal operations.
But I am interested in, and do attach importance to the fact that the taxpayer retained these
shares for only approximately seven weeks, as it seems to me that the fact that the taxpayer
held the shares for such a short time is strong evidence that he acquired them for purposes
of profit making. Mr Ah Koys evidence on this point is that when he realised that
Carpenters proposed to buy the Sennik shares he changed his mind about trying to acquire
control of Desbro and decided to sell. He said in cross-examination that he reclined that
unless he got the Sennik shares he could not control Desbro, and I do not accept that when
he purchased Burns Philps shares, he still intended to try to control Desbro. He said that
after 11 March 1977 he discovered he could not compete with Carpenters. I do not accept
either of those statements. I am satisfied that he bought Burns Philps shares with the
intention of selling them to Carpenters at a profit.

But purpose is not necessarily the same as intention: see Plimmer v CIR (No. 2) [1958]
NZLR 147, 150. Here Mr Ah Koy knew that Carpenters were taking over Desbro. He had
agreed with Mr Cupit that he would buy Burns Philps shares. He had a pretty good idea
that he could acquire them for considerably less than $3.75 a share. He had received from
Mr Cupit a promise that Carpenters would buy those shares at $3.75 if he wanted to sell
them. In these circumstances I draw the inference that Mr Ah Koys purpose and indeed I
think his only purpose was to make a profit by buying those shares cheaply from Burns
Philp and selling them to Carpenters. The fact that he accepted Carpenters offer promptly
when it was made seems to me confirmation of my estimate of his purpose.

The Commissioner also contends that the taxpayer was carrying out a scheme devised for
the purpose of making a profit. In the light of my finding above I do not consider it
necessary to enter into a discussion of this aspect of the matter. The appeal will be
dismissed and the applicant will pay the Commissioners posts to be agreed or taxed.

26
CIR v Pacific Mercantile Ltd Civil Appeal No. 72 of 1985
Fiji Court of Appeal

Tuivaga P.,Tikiram, Palmer J.A. 26/11/82

The actual history of the matter which is not in dispute may be conveniently summarised as
follows. The taxpayer was at all material times a subsidiary of Stinson Pearce Holdings. In
1978 there was a transaction between Soqulu Plantation Limited, which we shall called
Soqulu and a Hong Kong Company called Trois Investment Limited, which we shall
called Trois. The transaction was that Soqulu who were in some financial difficulties
arranged to sell certain lands at Taveuni to Trois, the purchase price to be paid over a period
of six years. Soqulu having need of the money immediately however, Trois borrowed
money from Barclays Bank International for the purpose of paying Soqulu forthwith. The
result of various [later transactions giving rise to the present case] was that Stinson Pearce
Holdings Limited borrowed money from the National Bank of Fiji which they utilised by
passing it over to the taxpayer who in turn paid out Barclays Bank. Thereupon the Trois
receivables became vested in the taxpayer. As the result of the various transactions Trois
receivables in the hands of the taxpayer had experienced an increase in value of F$602,231.
That increase in value was designated by the CIR as a profit and accordingly tax was
assessed thereon.

As already mentioned, following an unsuccessful objection the Commissioner, the taxpayer

took that part of the assessment to the Court of Review which held that the amount of the
value increase was not assessable for tax. The CIR appealed to the High Court against the
allowance of the taxpayers appeal to the Court of Review.

The proviso to s.11(a) of the Income Tax Act Cap. 201 is relevant to this appeal and reads
as follows:
Provided that, without in any way affecting the generality of this section,
total income, for the purpose of this Act, shall include
(a) any profit or gain accrued or derived from sale or other disposition of
any real or personal property or any interest therein, if the business of the
taxpayer comprises dealing in such property, or if the property was acquired
for the purpose of selling or otherwise disposing of the ownership of it, and
any profit or gain derived from the carrying on or carrying out of any
undertaking or scheme entered into or devised for the purpose of making a
profit; but nevertheless, the profit or gain derived from a transaction of
purchase and sale which does not form part of a series of transactions and
which is not in itself in the nature of trade or business shall be excluded:

In the High Court the CIR contended that the Court of Review had erred in holding that the
profit was not assessable as a profit or gain from sale of property acquired for the purpose
of selling or otherwise disposing of it. Kermode J., in the High Court held that the Court of
Review had not erred in so holding and dismissed the CIRs appeal on that ground.

There is no contest as to the findings of fact in the present case, nor can there be in view of
the provisions of the Fiji Court of Appeal Act s.12(1)(c). It is common ground that the Trois
receivables constitute a book debt and that the transaction of purchase and sale of the same
did not form part of a series of transactions but was an isolated transaction. Kermode J.,

27
also found that the transaction was not in the nature of trade or business. As pointed out by
the Trial Judge Kermode, J., the proviso in s.11(a) contains three limbs which are;
(1) that it was a business profit or gain from a dealing in property.
(2) that it was a profit or gain from sale of property acquired for the purpose of
selling or otherwise disposing of it.
(3) that it was a profit or gain derived from the carrying out of any undertaking or
scheme entered into or devised for the purpose of making a profit.

In his appeal to the High Court the CIR confined himself to the submission that the amount
in question was assessable under no. 2 above. It is common ground that it was intended to
sell the debt to Stinson Pearce after its acquisition from Barclays bank. However that is not
the end of the matter; it is necessary to look at the proviso contained in the last part of
s.11(a). Kermode J. found that it was common ground that the transaction did not form part
of the series of transaction, so the alleged profit is nevertheless to be excluded unless the
transaction is in itself in the nature of trade or business, see the last words of s.11(a).

We have been referred to McClelland v FCT 120 CLR 487 in which the Privy Council
considered an appeal from the High Court of Australia. It there considered s.26(a) of the
Australian Income Tax Acts and it has been submitted that that section is similar to the
Fijian s.11(a). In point of fact it is not on all fours with s.11(a) because it does not contain
the proviso at the end of s.11(a). However on pages 494, 495 ibid the Privy Council
expresses the view that an undertaking or scheme as mentioned in the section, to produce
the result of rendering a single transaction as producing assessable income must exhibit
features which give it the character of a business deal, although the word business does
not appear in the Australian s.26(a). As already noticed that notion is in Fiji incorporated in
the section itself. It is clear that in the present case if profit making was a purpose in the
acquisition and sale of the Trois receivables at all it was not the dominant purpose, see FCT
v Whitfords Beach Pty Limited, 150 CLR 355 at 381.

Kermode J. referred to Petrotim Securities Ltd v Ayres [1964] 1 WLR 190. In the second
ground of appeal the CIR submits that Kermode J. erred in law in applying Petrotim
Securities to the facts of the present case on the grounds that the realisable market value of
the relevant debt is unascertainable. Lord Denning M.R. on page 193 ibid said:
It seems to me that when there is a sale at a gross under value by one associated
company to another the Commissioners are entitled to find that it is not a
transaction made in the course of trade. Whoever would suppose that any trader in
his right senses would enter into transactions of this kind? That he would sell at a
gross under value were it not that he had in mind some benefit out of making a
loss? Such a transaction is so outside the ordinary course of business of any
trader that the Commissioners were entitled to find that it was not done in the
course of trade.

And further on page 194 his Lordship said;

I would suggest, however; that if it was not in the nature of trade for one of these
associated companies to sell at an undervalue, it is not in the nature of trade for the
other to buy at an overvalue. In each case the sale ought to be brought in at the
realisable market value at the time."

28
And earlier on page 194 his Lordship had referred to the case of Sharkey v Werner [1956]
AC 58 where it had been said;
the figures are to be regarded as struck out for tax purposes: and in their place you
must put in the market realisable value at the time.

The CIR in the present case submits that the realisable market value is unascertainable and
therefore Sharkey v Werner should not have been applied.

As to this, Kermode J., after holding that the debt was sold at overvalue, found that the
nature of the debt did not permit of any accretion in value. We are not satisfied that
Kermode J. was wrong in coming to that conclusion. The book debts arose in the
circumstances already described and constituting a loan of a fixed amount would not be
affected by any future fluctuations in value of the real property for the acquisition of which
the loan was raised in the first place. In our view the book debt would never increase
beyond the value paid for it.

In our view the reality of the situation is that this was purely a paper transaction for the
internal purposes of the Stinson Pearce Group. A key to it may be found in the reference to
the fact that the money borrowed by the Stinson Group from the National Bank of Fiji for
the purpose of paying out Barclays Bank was passed on, as the record frequently states,
to the Respondent who used it to pay off the debt. Stinson Pearce Holdings having raised
the loan with NBF could quite easily have purchased the Trois receivables themselves
without the intermediary of the taxpayer and thereby avoided the notional profit. It seems
clear that the taxpayer was merely a cog in the wheel of these arrangements. It may be
argued that notwithstanding the taxpayer being part of large commercial group, having filed
its own tax return it was rightly assessed upon the same. As to that the primary Judge,
Ungoed Thomas J. in the Petrotim case said;
This company trading normally for profit, as it did, never sold such assets at such
prices except at such dictation. It is only the intrusion of another body into its affairs
that produces such an odd operation. As I have already said, what I am concerned
with in this case is whether this company, as a separate entity, is conducting its own
trade in respect of which it is assessed for its own income tax liability. In this
transaction the company was not acting in the course of its own trade, which is the
subject of taxation, but out of that course. These transactions, when seen in their
context of the companys trading operations, cry aloud for an explanation.

This statement was made after his Lordship had referred to what had been said in Sharkey v
Werner that a sale in that case was a dictated sale at a prescribed price.

Our view therefore the present transaction falls within the quotation contained in the
proviso at the end of s.11(a). We find that it did not form part of a series of transactions and
was not in itself in the nature of trade or business. That being so the appeal on the first two
grounds fails.

29
Fiji Sugar Corporation Ltd v CIR Action No. 9 of 1982
Court of Review

Stuart J. 18/5/83
In 1879 the first group of labourers from India indentured to the Colonia1 Sugar Refining
Company Limited of Sydney in the state of New South Wales had arrived in Fiji and in
1882 that company began operations as sugar millers in Fiji. In 1961 it set up a subsidiary
company called South Pacific Sugar Mills Limited in which it held 82% of the shares. In
1971 the Fiji Government purchased all the shares of the Colonia1 Sugar Refining
Company Limited in South Pacific Sugar Mills Limited, and in October, 1972 South Pacific
Sugar Mills Limited by virtue of the Fiji Sugar Corporation Limited Act Cap. 209 became
known as the Fiji Sugar Corporation Limited. Under that Act it was given the sole and
exclusive right to manufacture sugar of merchantab1e qua1ity from sugar cane. The
memorandum and articles of association of South Pacific Sugar Mills Limited by that same
statute became the memorandum and articles of the appellant. The indenture system under
which the Colonial Sugar Refining Company Limited recruited labour for its plantations
continued unti1 1916 when Indian migration to Fiji ceased. The Colonial Sugar Refining
Company Limited experimented with various alternatives to the old estate system and
eventually the large plantations or estates were split up into small holdings of ten to fifteen
acres each and leased out to farmers, and this system still operates today except that the
land previously owned by the Colonial Sugar Refining Company Limited is now owned by
the Government. But sugar cane formerly grown only on the sugar plantations or estates
owned by the appellant's predecessors began to be grown on land leased from the Fijians -
formerly through the Government and since 1940 through the Native Land Trust Board and
that system operates today. Each farmer who wants to grow sugar cane is given a contract
by the appellant and he de1ivers his cane either to the railway owned by the appellant for
transport to the mill, or by sending it by motor lorry to the mill. That contract enures for ten
years. Two arbitrations have taken place in connection with new contracts. There was the
Eve contract of 1960 and the Denning contract of 1970 which was followed by the
retirement of the Colonial Sugar Refining Company Limited from the industry and the sale
of its assets to the Fiji Government.

In 1978 some among the descendants of the origional Indian indentured labourers who have
been called Gurmiteers from the Hindustani word gurmit agreement decided that the
centenary of the arrival of the Gurmiteers should be celebrated and to that intent these
people began to gather subscriptions. The appellant's auditor - or perhaps I should say, a
member of the firm of accountants which audits the appellant's accounts, gave evidence. He
told the court that he was a member of the committee which was formed to make
arrangements for this centenary, and he and his members considered that since the
Gurmiteers and their descendants had contributed very largely by their labours to the
growth of the sugar industry and the appellant had succeeded to that growth, the appellant
should make a handsome contribution to the centenary funds. The figure of $250,000 was
hoped for. The appellants success or failure in the manufacture of sugar depends first upon
the growers and after that upon the various categories of mill-workers and employees and
finally management so the appellants board of directors decided to contribute $100,000.
The witness said that this was regarded as satisfactory for the moment, although he did not
preclude the possibility of a demand for a further contribution. The appellant paid this
$100,000 out of revenue and sought to deduct it from profits to 31st March 1981. The
respondent demurred. He thought it should be regarded as a donation, but was willing to
30
allow part of it. The taxpayer would not have that so the respondent added back the amount.
The appellant objected and when its objection was disallowed filed this appeal.

Mr Sweetman for the appellant submitted that this was a disbursement laid out under
s.19(b) of the Income Tax Act Cap. 201 wholly and exclusively for the purpose of the
appellants business. Mr Scott for the respondent cited authority purporting to show that
such a payment did not fall within s.19(b). He submitted also that it would fall under s.19(j)
as an expenditure of a capital nature, and therefore not deductible.

It is first desirable to say that the sugar industry is a protected industry to the extent that
s.15 of the Sugar Industry Act, Cap. 206 provides that unless there is a dispute notified by
the independent chairman any person who hinders orderly planting, growing or harvesting,
transport or crushing of cane or making or storing sugar is guilty of an offence and liable to
imprisonment for up to two years. Of course that is all very well, but the appellant does not
want any of its activities to reach that stage, and the appellants Chief Executive
emphasised this in his evidence. Mr Sweetman referred to clause 50 of the appellants
memorandum of association as authorising a payment such as that under consideration but
the chief executive said the directors did not look at any particular power and there are in
fact three clauses which might be cited in support of such a payment. I set them out.
(45) to take all such steps as the Directors think fit to prevent or settle strikes or
industrial disputes or matters by conciliation, arbitration or otherwise
(50) To expend money in any way which the Company may think fit with the view
of improving the value of any business or property of the Company and to make
donations to such persons and in such cases as the Company may think expedient.
(53) To do all such other things as the Company may think incidental or conducive
to the attainment of the above-mentioned objects or any of them this general
statement of objects being deemed as enabling and not in any way restrictive of the
foregoing objects.

It is then necessary to ascertain the purpose of this payment. I think that the critical
statements by the appellants chief executive were that he agreed that the appellant had
greater responsibility than others for aiding the Gurmit scheme, that the appellant was at the
time engaged in negotiating a new contract with growers, and that if the contribution had
not been made the appellant might have lost goodwill, resulting in difficult relations with
the growers leaders and that in fact the contribution had helped the appellants relations
with the growers leaders and generally with the growers.

The appellants second witness told the court that the Gurmit committee had it in mind that
the appellant had not long previously given $100,000 to dockworkers at Lautoka who had
been made redundant by the appellants introduction of mechanised bulk loading of sugar at
that port. He said that there was pressure on the appellant to make a very substantial
contribution, that his committee were aware of preparations for the new sugar contract. He
said that if the appellant had not given what his committee considered a reasonable sum,
they would have exerted numbers of pressures, even up to industrial action. It struck me
that the appellant was being subjected to a polite form of blackmail, very polite, but
blackmail none the less.

Having considered the evidence I have come to the conclusion that the purpose of the
appellants contribution was to fester goodwill not only among the growers, but also among
31
the various grades of employees, a large majority of whom are descended from the
Gurmiteers. By so doing the appellant hoped that its activities would proceed without
hinderance, and in particular that its endeavours to have a new contract signed by the
growers would be conducted in an atmosphere of harmony. In so finding I have borne in
mind that from the point of view of the Gurmit centenary committee, their only interest was
to obtain a substantial donation, and I have borne in mind too the statements by the
appellants chief executive that the appellant had a greater responsibility than many others
to support the Gurmit centenary. Nevertheless, I am satisfied that this expenditure was
money laid out for the purpose of the appellants business rather than a donation to assist
the Gurmit centenary, and the question which has to be answered is whether it can be said
that this expenditure was wholly and exclusively laid out for the purposes of the appellants
business.

The Fiji Income Tax Act (Cap. 201) provides for tax upon net income and the scheme of it
is that a very wide definition of total income is followed by a section describing certain
things which may be deducted. This is then followed by s.19 which specifies a number of
matters which are not allowed to be taken into account in calculating total income. Among
these are:
(b) any disbursement or expense not being money wholly and exclusively
laid out or expended for the purpose of the trade, business, profession,
employment or vocation of the taxpayer.
(c) any loss not connected with or arising out of the trade, profession,
business, employment or vocation of the taxpayer.
(j) any expenditure or loss of capital nature.

I do not think that in this instance subsection (c) need be considered apart from subsection
(b). They are each different sides of the same coin, as it were. However I will at this stage
dispose of subsection (j) which was mentioned by Mr Scott, although he did not develop it.
I expect that when such a large sum as $100,000 is expended it is almost inevitable that the
suggestion should be made that it is capital expenditure. The position is thus set out in
British Insulated and Helsby Cables v Atherton [1926] AC 205.
Now, in Vallambrosa Rubber Company v Farmer, 5 TC 529, Lord Dunedin, as
Lord President of the Court of Session, expressed the opinion that in a rough way
it was not a bad criterion of what is capital expenditure as against what is income
expenditure to say that capital expenditure is a thing that is going to be spent once
and for all and income expenditure is a thing which is going to recur every year;
and no doubt this is often a material consideration. But the criterion suggested is
not, and was obviously not intended by Lord Dunedin to be, a decisive one in every
case; for it is easy to imagine many cases in which a payment, though made once
and for all, would be properly chargeable against the receipts for the year. Instances
of such payments be found in the gratuity of 1,500 paid to a reporter on his
retirement which was the subject of the decision in Smith v Incorporated Council of
Law Reporting, [1914] 3 KB 674, and in the expenditure of 4,9994 in the purchase
of an annuity for the benefit of an actuary who had retired which, in Hancock v
General Reversionary Interest and Investment Company, Ltd, [1919] 1 KB 25, was
allowed, and I think rightly allowed, to be deducted from profits. But when an
expenditure is made, not only once and for all, but with a view to bringing into
existence an asset or an advantage for the enduring benefit of a trade, I think that
there is very good reason (in the absence of special circumstances leading to an
32
 opposite conclusion) for treating such an expenditure as properly attributable not to
revenue but to capital.

In IRC v Granite City Steamship Company (1927) 13 TC 1 Lord Sands said at p.14;
Broadly speaking outlay is deemed to be capital when it is made for the initiation
of a business, or for a substantial replacement of equipment.

These principles were recently applied in Sargent v Eayrs [1973] 1 WLR 236 where the
taxpayer failed in an attempt to deduct travelling expenses to Australia to investigate
farming conditions with a view to migration. He intended to extend his business to
Australia.

Most of the cases following British Insulated & Helsby Cables v Atherton appear to
envisage the bringing into existence of an asset or an advantage for the enduring benefit of
the trade. See Strick v Regent Inc Company [1966] AC 295: IRC v Europa Oil (N.Z.) Ltd
[1971] AC 760: Walker v Cater Securities [1974] 1 WLR 1363. Here I can see no asset
brought into existence or enduring advantage created by this large sum of expenditure and I
am accordingly of the view that this was not capital expenditure.

I pass, then, to a consideration of subsection (b) in the context of this expenditure. Both
counsel relied to some extent upon Australian cases. Generally speaking, however, I doubt
if the Australian cases are relevant in that the subsections (b), (c) and (j) in s.19 of the Fiji
Act parallel s.130 of the Income and Corporation Tax Act 1970 which reproduces English
sections which have been in existence since 1842. These sections have been discussed in
cases such as Strong v Woodifield [1906] AC 448 and in many cases since then and I will
mention it more fully in a moment. The Australian legislation since 1936 exemplified by
such cases as Ronpibon Tin. N.L. v FCT (1949) 78 CLR 47 and FCT v Magna Alloys
Research Pty Ltd (1980) ATR 276, to take but two, deals with expenditure incurred in
gaining or producing the assessable income and necessarily incurred in carrying on a
business for the purpose of gaining or producing such income. I will begin with Strong v
Woodifield which was a case where a person staying in an inn was injured by the fall of a
chimney which the brewers who owned the inn had neglected to keep in repair. The
brewers sought to deduct the damages paid to the injured person from their revenue.

Lord Loreburn L.C. said

In my opinion, however, it does not follow that if a loss is in any sense connected
with the trade, it must always be allowed as a deduction; for it may be only
remotely connected with the trade, or it may be connected with something else quite
as much as or even more than with the trade. I think only such losses can be
deducted as are connected with in the sense that they are really incidental to the
trade itself. They cannot be deducted if they are mainly incidental to some other
vocation or fall on the trader in some character other than that of trader In the
present case I think that the loss sustained by the appellants was not really
incidental to their trade as innkeepers, and fell upon them in their character not of
traders, but of householders."

Lord Davey said, referring to the words for the purpose of trade,
I think that the payment of these damages was not money expended for the
purpose of the trade. These words are used in other rules, and appear to me to
33
 mean for the purpose of enabling a person to carry on and earn profits in the trade,
etc. I think the disbursements permitted are such as are made for that purpose. It is
not enough that the disbursement is made in the course of, or arises out of, or is
connected with, the trade, or is made out of the profits of the trade. It must be made
for the purpose of earning the profits.

I pass on to two cases, one an English case Mitchell v B.W. Noble Ltd (1927) 11 TC 372
421and the other an Australian, W. Nevill & Company v FCT (1937) 56 CLR 290. The
former was a case where money paid to a director to secure his retirement was held to be
deductible and Sargant L.J. said
Now, first, as to the question whether this was a disbursement wholly and
exclusively laid out or expended for the purposes of the trade, it seems to me that
there is nothing at all to show that it was not so exclusively laid out. The object, as
disclosed by paragraph 9 of the Case, was that of preserving the status and
reputation of the company, which the directors felt would be somewhat imperiled
by the other director remaining in the business or by a dismissal of him against his
will, involving proceedings by way of action in which the good name of the
company might suffer. To avoid that and to preserve the status and dividend earning
power of the company seems to me a purpose which is well within the ordinary
purposes of the trade, profession or vocation of the company.

W. Nevills was a similar case but decided prior to 1936 at a time s.25(a) of the Income Tax
Assessment Act 1922-32 required money to be wholly and exclusively laid out or
expended for the production of assessable income, and it was decided in favour of the
taxpayer.

Mr Scott referred to Hutchinson v Turner (1950) 31 TC 495, and pointed out that there the
taxpayer was concerned for his reputation but to no avail for the deduction of the amount
expended. There the taxpayer published for the benefit of a charity a certain publication
without any agreement in writing or anything except an oral promise to give the proceeds to
the charity. That having been done the taxpayer then sought to deduct the proceeds from his
taxable income. He failed.

Vaisey J. says in his judgment The payment of the 31,469 to the charity is alleged to have
been a necessary outgoing of the taxpayers business, because had it not been made, the
taxpayers would, or at least might, have been so ruined in reputation as to affect to a serious
degree their financial position and standing. In the present case, however, the matter goes
deeper. The court was told that had the appellant not made this payment, pressures of
various kinds would have been put upon the appellant even up to industrial action. I think
that the object of this payment was much more than to preserve the status and reputation of
the appellant, it was to preserve its very being, surely much more. The words of Jenkins
L.J. in the Court of Appeal in Morgan v Tate & Lyle (1953) 35 TC 367, are relevant. He
said
It is clear on the authorities that Lord Daveys formula (in Strong v Woodifield)
includes expenditure for the purpose of preventing a person from carrying on and
earning profits in the trade.

Next, Mr Scott submits that the words wholly and exclusively must be very strictly
construed, and refers to Bentleys Stokes and Lowless v Beeson (1952) TC 491. This was a
34
case dealing with solicitors lunches, and the taxpayer succeeded. However the matter was
illustrated by Romer L.J. in the course of his judgment in the Court of Appeal by two
simple examples. He said
A London solicitor may hear that an old friend and client whom he has not seen for
a long time has arrived in London. He says to himself, I would like to see my
friend again, and I know he may wish to talk business with me. I will ask him to
have lunch with me and then we can discuss any business he has at the same time. I
can kill two birds with one stone.

A London solicitor may hear from the representative of a foreign firm, old clients of
his own, that the representative is in London and urgently desires to see him on
some matter of business, but that his time is very short he cannot come to the
solicitors office and is only free at lunch time. The solicitor to enable his client to
get his advice, asks him to lunch at his club or a restaurant.

In the first case it appears to us clear that the expenditure could not be justified
under the paragraph even though it turned out that the friend spent the whole of the
lunch time seeking the solicitors advice on his private affairs. On the other hand it
would appear to us reasonably clear that in the second case (so far, at any rate, as
reasonable) must be allowable. The difficulty, of course, arises in the large area
between the two examples when it is a question of fact in each case to determine
what was the real motive or purpose of the entertaining. But in both examples we
have given there is present inevitably the motive or purpose of hospitality that is
the solicitor in inviting the friend or the foreign representative to lunch does so with
the purpose of giving him lunch. That motive is unavoidably involved in the activity
itself. A man to oblige a friend who is a Roman Catholic priest, may agree to
participate in a church bazaar organised for the purpose of promoting the interests
of the Roman Catholic church, though he has himself no desire whatever to support
that church to which he may be religiously opposed. In such a case the subsidiary
purpose is no part of the conscious or deliberate motive of the actor.

So much indeed, counsel for the Crown concedes, for otherwise it would follow that
all entertaining expenses, all charitable donations would be necessarily excluded.
Counsel admits, as we understand him, that in such a case as the present, there must
be deliberate and independent wish or motive, that is, independent of the business
purpose to be served, to entertain the guest, and for simplicity counsel has described
this independent motive as private hospitality.

Thus, we return to the question: In the case before us, was this element of private
hospitality in some degree present? Many cases were properly cited to us, but in
such a matter we cannot think, that by and large, they are of such assistance. It is
not relevant to the present matter that the present purpose must be related to its
profit earning capacity: Strong v Woodifield. Nor are we assisted by cases in which
there is involved, not so much quality of purpose as quality of capacity cases for
example where the question has been, whether the activity is at least in part
attributable to the doers character not as proprietor of, or partner in a business, but
to his character as an ordinary citizen cases relating to the costs of litigation like
Smiths Potato Estates v Bolland [1948] 2 All ER 367: or Spofforth & Prince v
Colder [1945] 1 All ER 363: and cases of particular charitable donations such as
35
 Bourne & Hollingsworth v Ogoen (1929) 14 TC 349. If we have correctly analysed
the problem then the present question remains one of fact to be determined in the
light of its.. own circumstances and we agree with the Crowns contention that it
is for the taxpayer to satisfy the tribunal of fact on his claim.

I should perhaps add that the Crown succeeded in all three of the cases abovementioned.
Smiths Potato Estates v Bolland was a case where the taxpayer sought to deduct the costs
of defending a claim for supertax, Spofforth & Prince v Colder was a case where a firm of
accountants sought to deduct the costs of a criminal prosecution against one of the partners,
and in Bourne & Hollingworth v Ogden the taxpayer had been in the habit of contributing
$100 to a charity and one year increased the contribution to $1000. The increased
contribution was disallowed. It will be seen from the above citation from the judgment of
the Court of Appeal that there can be a subsidiary purpose, but it must be very definitely
subordinate to the main purpose and this is exemplified in the judgment of Lord Summer to
Ushers Wiltshire Brewery v Bruce [1915] AC 399. He said
Where the whole and exclusive purpose of the expenditure is the purpose of the
expenders trade, and the object which the expenditure serves is the same, the mere
fact that to some extent the expenditure ensures to a third partys benefit, say that of
the publican, or that the brewer incidentally obtains some advantage, say in his
character of landlord, cannot in law defeat the effect of the finding as to the whole
and exclusive purpose.

In that case the taxpayers were held entitled to deduct sums which they had expended in aid
of their tenants in their tied houses, and which although made voluntarily and for the
benefit also of the tenants, was made for their own benefit because it promoted the sale of
their beer. There is a statement to much the same affect in the judgment of Viscount Cave
L.C. in the case of British Insulated & Helsby Cables v Atherton [1926] AC 205.
It was made clear in the cases of Ushers Wiltshire Brewery v Bruce and Smith v
Incorporated Council of Law Reporting for England and Wales (1915) 6 TC that a
sum of money expended, not of necessity and with a view to a direct and
immediately benefit to the trade, but voluntarily and on the grounds of commercial
expediency and in order indirectly to facilitate the carrying on of the business, may
yet be expended wholly and exclusively for the purposes of the trade.

Mr Sweetman emphasises that the payment in this case was made voluntarily. With all
respect to Mr Sweetman it seems to me that the payment was made under pressure, that if it
were not made there would have been all sorts of pressures even up to industrial action.
Indeed the fact that it was made not under pressure, but under threat of pressure, makes it
all the more likely that it was wholly and exclusively laid out for the purpose of the trade
for pressure or no pressure it was made so that the appellants business would not be subject
to any sort of stoppage. Mr Scott also referred to a South African tax case No. 621 in South
African Tax cases. That involved an advertising expenditure of $500 which the taxpayer
paid, allegedly for advertising, but which the taxpayers managing director did not give
evidence to support. I regard that as a claim which the taxpayer could not adequately prove,
and that, together with the fact that it was in 1946, leads me to regard it of little value in the
present circumstances. Mr Scott also referred to the case of the Kenya Meat Commission v
CIT (1968) EA LR 281 in which the Commission was allowed to deduct a donation of
$200,000 to the Kenya National Fund on condition that the money should be used for
research and other work which would be of benefit to the Kenya beef and mutton industry. I
36
do not find that case helpful. The only other case which I consider of relevance is Morgan v
Tate & Lyle [1954] 2 WLR 85.

I have already referred to the judgment of Jenkins L.J. in this case in the Court of Appeal. It
then went to the House of Lords. In that case Tate & Lyle Limited who are the largest sugar
refiners in the United Kingdom considered that they faced a threat of nationalisation by a
Labour Government and spent a considerable amount of money about $30,000 on a
campaign to resist prospective nationalisation which in fact never eventuated. They claimed
to deduct this amount from their taxable profits a claim which was resisted by the
Revenue on the ground that the expenditure was not wholly and exclusively laid out for the
purposes of the taxpayers business. It must be remembered in this case that the
Commissioners at first instance had found the taxpayers claims admissible, and the Courts
were all concerned to consider whether there was any reason in law which prevented them
from so finding. The Revenue appealed from the Commissioners to the High Court, and
then to the Court of Appeal and finally to the House of Lords, in each case unsuccessfully.
Towards the end of his judgment Lord Reid puts the same question as was put earlier by the
Court of Appeal in Bentleys case. He said
A general test is whether the money was spent by the person assessed in his
capacity of trader or in some other capacity: whether on the one hand the
expenditure was really incidental to the trade itself or on the other hand it was
mainly incidental to some other vocation or was made by the trader in some other
capacity than that of trader.

For this I must go back to the evidence, and I have to be satisfied, remembering that the
burden of proof is on the appellant, that the purpose of the expenditure was to protect the
appellants trade. I have to weigh the chief executive's admission that the appellant had
some responsibility to support the Gurmit appeal, against his concern to get ahead with the
signing of a new contract and the accountant's statement that if his committee did not
receive a satisfactory donation, they would put pressures on the appellant, even up to
industrial action. Bearing in mind the appellant's negotiations leading up to a new contract I
have come to the conclusion that the evidence has satisfied the court that this expenditure
was laid out wholly and exclusively for the purpose of the appellants trade and business.

The appeal will be allowed, and the appellant will be entitled to its costs to be taxed in
default of agreement.

37
Sweetman v CIR 42 FLR 221
Fiji Supreme Court

Lord Cooke, Sir Anthony Mason, Sir Maurice Casey 23/10/1996

These applications for special leave to appeal seek to raise for determination the question
whether amounts expended by the taxpayers and their partners by way of reimbursement of
clients of the partnership for moneys misappropriated from two trust accounts of the
partnership were allowable deductions from the assessable income of the partnership. The
parties in the second matter, the application by Mr Williams, have agreed to be bound by
the decision in the first matter. So we shall confine our discussion to that matter on the
understanding that the facts which are common to both cases raise identical issues for
decision.

The circumstances in which the misappropriations and the reimbursement took place are
briefly set out in a statement of agreed facts lodged by the parties in the Court of Review
and in oral evidence given by Mr Sweetman in that court. The two taxpayers are barristers
and solicitors who practice with another partner under the name Munro Leys and
Company. The three partners had practised in partnership with one Michael Desmond
Benefield from 1975 until 31 May 1984. The statement of facts recites:
Throughout this period, the usual responsibilities of partnership were accorded
to each and every member of the firm. Mr Benefield was then dismissed from the
firm, subsequently struck off the roll of solicitors and was convicted by the High
Court of Fiji for the offence of fraudulent conversion of a sum in excess of $13,000
from two trust accounts of the afore-mentioned firm.

3. The taxpayer [Mr Sweetman] and his remaining partners decided to reimburse
their clients for the misappropriated funds. In 1984, the payments were shown as a
deduction from assessable income in the firms profit and loss account on the basis
that the reimbursement payments had been made wholly and exclusively for the
purpose of their profession in terms of s.19(b) of the Income Tax Act Cap. 201.

According to the Court of Reviews summary of Mr Sweetmans oral evidence, the

misappropriation took place over a considerable period a number of years and the
moneys held in the firms trust accounts, though under the absolute control of the partners,
were held on the instructions of the various clients who were able to withdraw funds as and
when they wished. The Court of Review judgment stated:
After it was ascertained what had been stolen, the money was repaid from the
firms income, and the partners sought to set the amount repaid off as a loss of
revenue.

The Commissioner disallowed the deduction claimed and subsequently disallowed the
taxpayers objection to the assessment. The taxpayer then appealed to the Court of Review
pursuant to s.62(6) of the Income Tax Act (the Fiji Act). That Court upheld the
assessment and dismissed the appeal.

The Court of Review held that the money was not expenditure of a capital nature within
the meaning of s.19(i) of the Act. That conclusion was not challenged by either party on
appeal. That conclusion was based, at least in part, on the Courts view that in;

38
 the circumstances in which this partnership was carried on where each partner
could draw on the firms account, the risk of defalcations was inherent in their
operators.

However, in concluding that the expenditure was not wholly and exclusively laid out or
expended for the purpose of the taxpayers profession, in terms of s.19(b), the Court held;
his (Mr Benefields) thefts arose altogether outside his professional activities
and had no connection with them.

The taxpayers appeal to the High Court of Fiji (Fatiaki J.) from the Court of Review was
successful. In reaching the conclusion that the expenditure fell within s.19(b), Fatiaki J.
relied upon the following evidence given by the taxpayer before the Court of Review:
Moneys taken from clients trust accounts and used by him. We accepted that we
had to pay that money and we have done so.

Firm held in respect at that time, I think. We never sought to escape liability for any
of those moneys and could not have done so. I accept that I might have been liable
myself.

There were a number of incidents of theft by Benefield, spread over a period of
time, probably over several years, involving a number of different clients. The
money represented funds held in our trust account on behalf of various clients and
used on their instructions. The funds which were stolen were held in trust for clients
and had to be repaid on demand.

In the light of this evidence, Fatiaki J. considered that the purpose of the expenditure was to
meet the liability of the firm to make good the loss occasioned by the misappropriation
and that this purpose was within s.19(b).

The Commissioner then appealed from this decision to the Court of Appeal (Sir Mari Kapi,
Ward and Thompson J.J.). The Court of Appeal allowed the Commissioners appeal, set
aside the judgment of the High Court and reinstated the decision of the Court of Review.
The taxpayer was ordered to pay the Commissioners costs of the appeal and of the
proceedings in the High Court and the Court of Review.

The Court of Appeal concluded that there was no error on the part of Fatiaki J. in making a
finding that the expenditure of the money by the taxpayer through the partnership was
incurred for the purpose of his profession. Their Lordships considered that inferences
could properly be drawn to justify that conclusion. However, their Lordships also
concluded that the expenditure was not made wholly and exclusively for the purpose
mentioned. They pointed out that several other purposes were possible, the most obvious
being a desire not to be sued personally and not to lose his own personal (as distinct from
his professional) reputation. The taxpayer, apart from stating that the payment was made to
satisfy the liability of the partners, that being a personal liability which arose under s.13 of
the Partnership Act, did not give evidence of the purpose or purposes to be served by the
making of the payment. The absence of that evidence means that the ascertainment of those
purposes is a matter of inference. The absence of evidence of that kind may also have
contributed to the Court of Reviews approach to the taxpayers claim. The Courts

39
findings, as quoted above, suggest that it was looking at the claim as if the deduction was
for a loss rather an expenditure falling within s.19(b).

The taxpayers proposed appeal attacks the correctness of the Court of Appeals conclusion
that the expenditure was not made wholly and exclusively for the purpose mentioned in
s.19(b). The taxpayers attack on the Court of Appeals decision on this point involves a
challenge to the way in which the Court of Appeal reached that conclusion. The law on the
point, as it has been enunciated in authorities in other jurisdictions, is by no means clear
and, for that reason, we consider that the case raises an important question of principle
which this Court should resolve. We therefore grant special leave to appeal. We also grant
special leave to appeal to the respondent to enable the respondent to challenge the
conclusion that the purpose of the expenditure was for the purpose of the taxpayers
profession within s.19(b). The two conclusions are inter-related and it makes little sense to
deal with one to the exclusion of the other.

We repeat that, as the Court of Review held that the payment was not expenditure of a
capital nature this is no longer an issue between the parties. That conclusion and the
finding on which it was based, namely that there was an inherent risk of defalcations arising
from the circumstances where each partner could draw on the firms account, requires
consideration of the reasons of the High Court of Australia in CIR v Ash (1938) 61 CLR
263 to which we refer later in these reasons.

The statutory provisions relevant to the questions of law

It is convenient to begin by referring to the relevant statutory provisions. Section 19 of the
Act relevantly provides:
In determining total income, no deductions shall be allowed in respect of
(b) any disbursement or expense not being money wholly and exclusively
laid out or expended for the purpose of the trade, business, profession,
employment or vocation of the taxpayer.

Section 61(2) of the Act casts on the taxpayer the onus of proving that the assessment was
incorrect.

By virtue of s.51 of the Act, a partnership is required to make a joint return in respect of its
income, but no assessment issues in respect of the partnership return. The income of each
individual partner is assessed, each partner being required to make an individual return
apart from the partnership return.

Sections 12 and 13 of the Partnership Act (Cap. 248) provide as follows:

12.Where
(a) one partner acting within the scope of his apparent authority receives the
money or property of a third person and misapplies it; and
(b) a firm in the course of its business receives money or property of a third
person and the money or property so received is misapplied by one or more
of the partners while it is in the custody of the firm, the firm is liable to
make good the loss.

40
 13. Every partner is liable jointly with co-partners and also severally for
everything for which the firm while he is a partner therein becomes liable
under either of sections 11 or 12.

By virtue of s.12(1)(c) of the Court of Appeal Act (Cap. 12), where the High Court has
exercised its jurisdiction under an enactment, a ground of appeal to the Court of Appeal is
limited to a question of law. It was accepted by the Court of Appeal that whether the agreed
facts and the evidence permitted or did not permit a finding to be made that the expenditure
was money laid out or expended for the purposes of the taxpayers profession was a
question of law and likewise whether the agreed facts and the evidence permitted or did not
permit a further finding to be made that the money was laid out or expended wholly and
exclusively for that purpose.

The interpretation of s.19(b)

Section 19(b) is identical to all intents and purposes with Rule 1 of Schedule D of s.100 of
the Income Tax Act 1842 (Eng.). There is a body of English authority which throws light on
the meaning of this provision and its successors. It is convenient to begin with Strong & Co
Ltd v Woodifield [1906] AC 448. There the House of Lords held that the taxpayer, which
carried on business as a brewer and innkeeper, could not deduct under Rule 3 of Schedule
D damages and costs recovered by a customer who was injured by the fall of a chimney
while sleeping in the taxpayers inn. Their Lordships apparently held that the payment of
the damages and costs was not a loss for the purpose of the [taxpayers] trade within the
meaning of Rule 1. That rule, which deals with the deduction of a loss, corresponds with
s.19(c) of the Fiji Act, though it is expressed in different terms.

Lord Davey, who considered that the question fell to be decided by reference to Rule 1
rather than Rule 3, said, with reference to the words for the purposes of the trade (at p.
453):
These words appear to me to mean for the purpose of enabling a person to carry
on and earn profits in the trade, etc. I think the disbursements permitted are such as
are made for that purpose. It is not enough that the disbursement is made in the
course of, or arises out of or is connected with the trade, or is made out of the
profits of the trade. It must be made for the purpose of earning the profits.

Lord Davey was unquestionably correct in regarding Rule 1 as the applicable provision.
There is a distinction between a loss and an expenditure or a disbursement. Thus money
stolen or misappropriated from a business is a loss not an expenditure, whereas legal
expenses or costs are an expenditure or disbursement (Allen v Farquharson Bros & Co
(1932) TC 59 at 64 per Finlay J.; Bamford v A.T.A. Advertising Ltd (1972) 48 TC 359 at 357
per Brightman J.). In the present case, the misappropriation of funds by Mr Benefield was a
loss sustained by the old partnership. On the other hand, the reimbursement of the
defrauded clients by the taxpayer and his continuing partners was a disbursement or an
expenditure by them. Whether it was a disbursement which falls within s.19(b) is, of
course, the critical question. But the distinction between a loss and a disbursement or
expense is important because it fixes the focus of attention on the purpose of the actual
expenditure rather than on the circumstances in which the misappropriation took place,
though those circumstances will be relevant in characterising the expenditure.

41
To return to the passage which we have quoted from the speech of Lord Davey. The last
sentence in the passage does not qualify the first sentence (Morgan v Tate & Lyle Ltd
[1955] AC 21 at 39-40 per Lord Morton of Henryton; at 53-54 per Lord Reid). Morgan v
Tate & Lyle Ltd was a decision on Rule 3(a) applicable to Cases I and II of Schedule D to
the Income Tax Act 1918 (Eng.), that rule being identical with s.19(b). In that case,
expenditure on an anti-nationalisation campaign by a sugar refining company to prevent
seizure of the business and assets of the taxpayer was held to be deductible under Rule 3(a).

In order to ascertain whether the amount in question was expended to serve the purposes of
the taxpayers profession, it is necessary to discover the purpose or object of the
disbursement. There is a well-recognised difference between motive and purpose. Here we
are concerned with characterising the purpose of the expenditure in order to determine
whether the expenditure was to serve the purpose of the taxpayers profession. In the case
of involuntary expenditure pursuant to a contractual or other legal liability, the purpose of
the expenditure usually will be evident from the subject matter of the payment, i.e. the
nature of the liability which it satisfies and the advantage which it procures, without the
need to resort to evidence of the individual taxpayers motives or intentions. (see Fletcher v
FCT (1991) 173 CLR 1 at 17-18 per curiam; Magna Alloys v FCT (1980) 33 ALR 213 at
233-235). In the case of voluntary expenditure, evidence of an individual taxpayers
motives or intentions, with respect to the advantage that he had in view, may be relevant
and influential in ascertaining the purpose of the expenditure (see Morgan v Tate & Lyle
Ltd at 37, 47; Mallalieu v Drummond [1983] 2 AC 861 at 870; Magna Alloys v FCT supra).

The evidence was that the payment was made to satisfy the clients loss, that is to meet the
liability of the old partnership to make good the loss occasioned by the misappropriation,
in the words of Fatiaki J. That was the finding of fact made by the Court of Review. In
deciding the case against the taxpayer, the Court of Review appears to have thought that the
fact Mr Benefields thefts arose outside his professional activities and had no connection
with them was the decisive consideration. Whether or not that comment would have been
relevant, had the claim been a claim for deduction of a loss, the comment provides no
assistance in resolving the taxpayers claim for a deduction under s.19(b).

The discharge by the continuing partners of the liability of the members of the old
partnership to the clients of that partnership in respect of the misappropriation of the trust
moneys is plainly an act calculated to enhance the earning capacity of the continuing
partnership. The payment was calculated to induce the clients whose moneys had been
misappropriated to remain with the firm. It protected the firm against the adverse reputation
it would have suffered had the partners refused to meet their liabilities. And it enabled the
continuing partners to continue to practise as members of the firm, that being a possibility
fraught with risk, had they been unwilling to meet their liabilities under s.13 of the
Partnership Act. The moneys misappropriated were not moneys belonging to the
partnership; they were trust funds which did not constitute capital of the partnership. In the
light of these considerations, we consider that the Court of Appeal was entitled to hold, as it
did, in view of the parties acceptance of the Court of Reviews finding that the
disbursement was not in the nature of capital, that the disbursement was made for the
purpose of the taxpayers profession. That inference was clearly justified by the
circumstances disclosed by the evidence, even though the taxpayer did not, in his oral
evidence, relate the making of the payment to the continuation of the firms professional
practice. To give oral evidence of that matter would be merely to state the obvious.
42
The contrary argument rests upon the reasoning in CT v Ash to which we referred earlier.
There the taxpayer sought to deduct an installment paid under a covenant entered into by
way of compromise of an action. The action was brought to recover moneys
misappropriated by his former partner, the moneys belonging to clients of the firm. It was
held that the payment was in the nature of an outgoing of capital. The Court acknowledged
that theft of moneys by shop employees should, prima facie, be allowed as deductions on
the footing that they are risks inherent in, or incidental to, the conduct of a business (supra
at 273-274, 277, 281). As Rich J. observed (at 277):
There is no difficulty in understanding the view that involuntary outgoings and
unforeseen and unavoidable losses should be allowed as deductions when they
represent that kind of casualty, mischance or misfortune which is a natural or
recognized incident of a particular trade or business the profits of which are in
question. These are characteristic incidents of the systematic exercise of a trade or
the pursuit of a vocation.

See also Charles Moore & Co (W.A.) Pty Ltd v FCT (1956) 95 CLR 344 at 350-351 per
curiam; W.G. Evans & Co Ltd v CIR [1976] NZLR 425 at 430-432 per Casey J.

However, in CT v Ash the Court distinguished misappropriation by a partner in a firm of

solicitors from theft by an employee of a business on the ground that the formation of a
partnership was essentially different from the employment of staff in a business (at 274 per
Latham C.J.; at 278 per Rich J.). Dixon J. considered that this was so and the loss was a
capital loss as a result of the taxpayer undertaking the risk of such a liability when, by
entering into the partnership, each partner armed the other with an authority under which he
might impose liabilities upon him (at 283).

Implicit in the other judgments is the ground of the decision as expressed by Dixon J. (at
280-281) in these terms:
In my opinion the deduction is not allowable because of its nature. In the first
place, it is evident that the actual payment of $500 was made only because of the
antecedent liability. Once the compromise was made the amount agreed upon
became a personal liability of the taxpayer and its discharge became a matter
quite independent of his continuing to practice and quite unconnected with the
earning of future income. It was simply a liability sustained and fixed in an earlier
year.

We make the following comments about the reasoning in CT v Ash. The risk of
misappropriation by a partner in a business or a profession is these days a natural incident
of the carrying on of a business or profession and, in that respect, is not to be distinguished
from the risk of theft by an employee in a business. That risk of loss is inherent in the
income-earning process of a business or a professional practice, in the words of Casey J in
W.G. Evans & Co Ltd v CIR (supra at 433, referring to Gold Band Services Ltd v CIR
[1961] NZLR 467). Likewise, the conduct of a professional practice by a partnership in a
systematic and organised way with a view to the earning of fees and the making of profits
is today not to be distinguished in a relevant respect from the carrying on of a business in
such a way with a view to making profits.

43
In the context of capital and revenue, we see no persuasive reason to treat misappropriation
by a partner as different from theft by an employee. The fact that a partner confers authority
on a co-partner to subject the partner to liability is not a sufficient reason for saying that a
liability arising from what is a natural incident of conducting a professional practice is
necessarily a loss of a capital nature. Although the liability which arises in such a case is a
personal liability under s.13 of the Partnership Act, it is liability which arose here in the
conduct of the partnership practice, the keeping and management of trust moneys being an
incident of such a practice. Indeed, it is evident that neither a partner nor an employee has
authority to misappropriate trust funds.

Moreover, the professional practice conducted by the old and the new partnership was a
continuous practice, marked only by a change in the composition of the partners as Mr
Benefield retired from the partnership. To treat the loss as a loss of the old partnership to
the exclusion of the new partnership is, in our view, to ignore the circumstance that the
practice was a continuing practice despite the departure of Mr Benefield.

Accordingly, we consider that the Court of Appeal was entitled to proceed, as it did, on the
footing that the liability to the client was not a loss or outgoing in the nature of capital.
Once that conclusion was reached, it was correct to characterise the payment in satisfaction
of that liability as not being a disbursement in the nature of capital.

That conclusion, which disposes of the cross-appeal, brings us to the more difficult
question: was the disbursement or expense money wholly and exclusively laid out or
expended for the purpose of the profession of the taxpayer? The word wholly refers to
the quantum of money expended and the word exclusively requires that the money be
expended solely for the relevant purpose, i.e. for the purpose of the taxpayers profession
(Bentley v Stokes and Lowless v Beeson (1952) 33 TC 491 at 503-504 per Romer L.J.), that
being essentially a question of fact. So, in this case, the answer to the difficult question
turns on whether the moneys expended were exclusively laid out or expended for the
purpose of the taxpayers profession.

There has been some discussion as to whether it is to be resolved by reference to the

motives of the taxpayer. In Mallalieu v Drummond, the taxpayer, who was a practising
barrister, claimed a deduction for the cost of replacing and laundering black clothes which
she wore in order to comply with professional dress standards set by the Bar Council. The
Commissioners found as a fact that she would not have bought them but for those standards
and that the preservation of warmth and decency was not a consideration which entered her
mind. The House of Lords (by a majority of four to one, Lord Elwyn Jones dissenting) held
that the expenditure was not exclusively incurred for the purposes of the taxpayers
profession.

Lord Brightman, with whom the other Law Lords in the majority agreed, stated ([1983] AC
at 383) that, if the object of the taxpayer was to serve a business purpose and a non-
business purpose, the fact that the business purpose is pre-dominant is immaterial. His
Lordship went on (at 387) to reject the notion that the object of the taxpayer is inevitably
limited to the particular conscious motive in mind at the moment of expenditure. His
Lordship continued:
Of course the motive of which the taxpayer is conscious is of vital significance,
but it is not inevitably the only object of which the Commissioners are entitled to
44
 find to exist. In my opinion, the Commissioners were not only entitled to reach the
conclusion that the taxpayers object was both to serve the purpose of her
profession and also to serve her personal purposes, but I myself would have found it
impossible to reach any other conclusion.

Although the passage just quoted acknowledges that there is a distinction between motive
(what actuates the mind of the actor) and purpose (the character to be attributed to the act),
the passage tends to blur that distinction. Motive may assist in the ascertainment of the
purposive character of the relevant act, particularly when the expenditure is voluntary, but it
does not by any means dictate an answer to the question.

In our view, the key to the question which arises in the present case lies in the words
wholly and exclusively in s.19(b). The word wholly is designed to exclude a
disbursement which, as to part, is for a purpose other than those mentioned, while the word
exclusively excludes a disbursement which serves another purpose as well as a purpose
mentioned. So an expenditure which serves the purpose of the taxpayers profession but
another purpose as well is not an allowable deduction.

It may be said that an expenditure which serves the purpose of the taxpayers business or
profession also serves the taxpayers personal purposes on the basis that what is good for
his business or profession will be good for him personally. However, it is scarcely to be
supposed that the legislature intends to disqualify an expenditure for that reason. In other
words, the non-business or non-professional purpose to be excluded by s.19(b) is a purpose
distinct from the business or professional purpose which justifies the deduction of the
expenditure. And this supports the view that motive, though it may be a relevant factor, is
by no means a decisive factor. If the purpose of the expenditure is truly for the purpose of
the taxpayers business or profession, it matters not that the taxpayer has in mind some
personal advantage which is a consequence of that purpose.

Here the immediate purpose of the expenditure was to discharge the personal liability of the
partners arising under s.13 of the Partnership Act. Lying beyond that immediate purpose
was unquestionably another purpose, namely the purpose of restoring and maintaining
client confidence in the firm, thereby maintaining or enhancing its profit-earning capacity.
In these circumstances, is it possible to conclude that the moneys were laid out or expended
exclusively for the purpose of the taxpayers profession? In our view, the answer is in the
affirmative. Although the immediate purpose of the payment was to discharge what was a
personal liability, it was a partnership liability and was incurred in the capacity of a partner.
The fact that the liability was personal does not give the disbursement a character or
purpose which is independent of the conduct of the professional practice of the taxpayer
and his partners. The personal purpose served by the disbursement was an integral element
in the professional purpose which the disbursement served.

The Court of Appeal was therefore in error in concluding that the moneys were not
exclusively expended for the purpose of the taxpayers profession and the appeal must be
allowed.

The orders of the Court in the two matters are

45
Grant special leave to appeal. Appeal allowed with costs. Set aside the orders of the Court
of Appeal and order that the respondent pay the costs of the appellant of the appeal to the
Court of Appeal. Restore the orders made by Fatiaki J. in the High Court.

46
Jamnadas v CIR Civil App No. CBV0006/2002S
Fiji Supreme Court

Fatiake P., French, Handley J.J. 24/10/03

This appeal, by leave granted by the Court of Appeal (Sheppard, Tompkins, Smellie, J.J.A.,
31 May 2002) from the decision of that Court (Reddy P., Barker and Davies, J.J.A., 1
March 2002) raises two questions of importance under the Income Tax Act 1985. The first
relates to the travelling and associated expenses incurred by the appellants in connection
with travel by Mr Jamnadas from Adelaide where he lived, to Suva. The second relates to
penalty tax assessed on the second appellant, Michelle Apartments Limited (Michelle)
under ss.94 and 100(2) for late lodgement of its returns, and the powers of the Court of
Review and High Court on appeal to review the assessments in this respect.

The First Issue

The facts as found by the Court of Review and the High Court were that Mr Jamnadas
practised as a barrister and solicitor in Suva until 1988 when he moved with his family to
Adelaide for the purpose of educating his children. Thereafter he progressively wound
down his legal practice until it ceased at the end of 1990. In 1982 he had acquired control
of Michelle and in 1987 he acquired control of the third appellant Primetime Properties
Limited (Primetime). Both companies owned valuable real estate and carried on associated
business activities in Suva. Mr Jamnadas also had an interest in a deceased estate which
received income from sources in Fiji.

Following his move to Adelaide Mr Jamnadas began to travel regularly to Suva and to
remain there for considerable periods to look after his various business interests and the
interests of Michelle and Primetime. He had no business interests in Australia. When he
came to Fiji he travelled by air to Nadi and by bus to Suva where he stayed at the then
Travelodge Hotel. While at the Travelodge he incurred expenses for accommodation,
meals, laundry, dry cleaning, faxes, and telephone calls (associated expenses). He stayed at
the Travelodge because of its central location and its telephone and facsimile transmission
facilities. After his business in Suva had been completed he returned to Nadi by bus, stayed
overnight and then flew back to Australia.

The actual travelling and associated expenses incurred in connection with these business
trips to Suva were agreed during the proceedings in the Court of Review as was the
apportionment of those expenses between the three appellants. In this Court, although not
below, the proceedings have been conducted on the basis that no separate question arises in
relation to the associated expenses so that these will be deductible if the travelling expenses
are deductible but not otherwise.

The first issue turns on s.19(a) and (b) of the Act which are relevantly as follows:-
In determining total income, no deductions shall be allowed in respect of
(a) personal and living expenses ...;
(b) any disbursement or expense not being money wholly and exclusively
laid out or expended for the purpose of the trade, business, profession,
employment or vocation of the taxpayer;

As this Court said in Sweetman v CIR (23 October 1996) at page 9:-

47
 Section 19(b) is identical to all intents and purposes with Rule 1 of Schedule D of
section 100 of the Income Tax Act 1842 (UK). There is a body of English authority
which throws light on the meaning of this provision and its successors.

The Court of Review (The Hon. M.J.C. Saunders) in his decision (6 October 1997) held
that the travelling expenses incurred in and after 1989 should be disallowed under s.19(b)
in accordance with the decision in Newsom v Robertson [1953] Ch 7 (CA) on the
comparable provision in schedule D. The Court of Review also followed the decision of the
House of Lords in Ricketts v Colquhoun [1926] AC 1 which rejected a claim to deduct
travelling expenses under the provisions of Schedule E governing the taxation of the
emoluments of an office or employment.

The taxpayers appealed to the High Court from the disallowance of the travelling expenses
and their appeals were allowed by Byrne J. (24 August 1999). His Lordship characterised
the travelling expenses in issue as expenses incurred on business trips which, as such, were
deductible. He distinguished Newsom v Robertson on the ground that that case was
concerned with the cost of daily commuting which he characterised as an expense of daily
living. Byrne J. also distinguished Ricketts v Colquhoun on the ground that it was decided
under the stricter provisions of Schedule E which were not incorporated in the Fiji Act.

The Commissioner appealed to the Court of Appeal. Appeals to that Court in tax cases,
unlike the general appeals to the Court of Review and the High Court are limited to
questions of law (Court of Appeal Act s.12(1)(c)). The Court allowed the Commissioners
appeals (1 March 2002). Their Lordships, (Reddy P., Barker and Davies J.J.A.) commenced
their legal analysis by considering decisions of the High Court of Australia on s.51(1) of the
Income Tax Assessment Act 1936 (Australia) which is in different language, and does not
incorporate s.19(a) and (b) although there is some overlap. After considering the leading
Australian case on the deductibility of travelling expenses, Lunney v FCT (1957) 100 CLR
478 and quoting extensively from the majority judgment, the Court of Appeal said:-
These views accord with approach taken in the United Kingdom where legislative
provisions similar to s.19(b) of the Act apply.

They then quoted extensively from the judgment of Denning L.J. in Newsom v Robertson.
They referred to five decisions of the High Court of Australia but in our judgment their
focus on these decisions was, with respect, misdirected. The relevant sections of the Fiji
Act were based on United Kingdom legislation and there are long standing decisions of the
Courts of that country dealing with the deductibility of travelling expenses which are
directly relevant to the Fiji Act. The Australian cases dealt with a different section.

The primary task of a Court construing revenue legislation is to address itself to the
statutory text. The consideration of decisions on comparable but differing legislation in
other countries diverts attention from the relevant text in the Fiji legislation. In some cases
taxation decisions in other jurisdictions on similar facts but different legislation may be of
limited assistance by way of analogy where there are no authoritative decisions on the text
in the Fiji legislation. Such references will seldom be helpful where authoritative decisions
are available.

For similar reasons Ricketts v Colquhoun (above) and other decisions rejecting claims to
deductions for travelling expenses under Schedule E are of little assistance. However since
48
the deductions allowable under Schedule E are more limited than those allowable under
Schedule D decisions such as Pook v Owen [1970] AC 244 and Taylor v Provan [1975] AC
194 allowing deductions for travelling expenses are relevant because such deductions
would have been allowable under Schedule D.

In a number of respects these proceedings have been conducted by the parties on a

conventional basis. In Sweetman (above) this Court said (p.17) with reference to section
19(b):-
The word wholly refers to the quantum of money expended and the word
exclusively requires that the money be expended solely for the relevant purpose,
i.e. for the purpose of the taxpayers profession that being essentially a question
of fact.

Mr Sweetman was a member of a partnership which carried on a legal practice in Fiji and
the deduction allowed by this Court in that case related to his share of payments made by
the partnership to clients whose funds had been misappropriated by a former partner. Under
s.51(1) of the Fiji Act a partnership must file a joint tax return but a joint assessment is not
issued. Instead each partner is assessed on his or her share of the net income of the
partnership.

Thus to some extent the Act treats a partnership as if it were a legal entity distinct from its
members and s.19(b) must be applied accordingly. The same view has been taken in the
United Kingdom. See Bentley Stokes & Lowless v Beeson [1952] 2 All ER 82(CA). In the
present case the expenses were incurred for the benefit of all three taxpayers but they were
not partners and could not be assessed jointly. The parties dealt with the matter by agreeing
to an apportionment of the expenses between the taxpayers.

The requirement in s.19(b) that a disbursement or expense be wholly and exclusively laid
out for the purpose of the trade, business, profession, employment or vocation of the
taxpayer might appear at first glance to disallow entirely payments for a single service
such as air fares made for the benefit of 2 or more taxpayers which cannot be dissected into
separate payments for the purposes of different taxpayers. The Act does not appear to
authorise taxpayers or the Commissioner to apportion such payments. This problem has
arisen in the United Kingdom in respect of payments made partly for business and partly
for private purposes. Inland Revenue Commissioners v Korner [1969] 1 WLR 554 (HL)
concerned a claim by a university professor, who carried on a farming business and lived in
a house on the farm, to deduct under Schedule D the cost of rates, repairs, maintenance and
insurance on that house. Under a special provision dealing with farmers the taxpayer was
held entitled to deduct the whole of those costs but the parties had agreed that if the general
provisions of Schedule D had been applicable, the taxpayer could deduct one tenth of those
payments as being the proportion referable to his business use of the farm house. At 558
Lord Upjohn said:-
The result of ... Schedule D was that, apart altogether from s.526, the farmer
occupying a house (no doubt with his wife and children) for the purpose of his
farming activities would be entitled to claim a proportion of the reasonable and
necessary expenditure upon the maintenance of his house as a deduction from his
assessment to tax for the purposes of Schedule D. This practice is very old, works
great justice between the Crown and the subject and I trust will never be disturbed.
Thus speaking generally the grocer living above his shop, the doctor who has a
49
 surgery in his house and the barrister who works in his house where he keeps or
brings his law books and works on his briefs in the evenings and at weekends is
allowed by the Crown a reasonable sum in respect of the necessary upkeep of his
dwelling as being properly attributable to his trading or professional activities.

So that in the present case there is no doubt, and indeed it is not disputed, for I did
not understand the Solicitor-General for Scotland to challenge this proposition in
his reply, that, apart from s.526, the respondents are, in any event, entitled to a
proportion of the expenses, and it is agreed between the parties that this proportion
should be one tenth.

The practice of the United Kingdom revenue referred to by Lord Upjohn may be the basis
for the Commissioners practice here in allowing apportionments such as those agreed upon
in the present case notwithstanding the language of s.19(b). This Court likewise would not
wish this practice to be disturbed. In fact Ms Tagicaki, who argued this part of the case for
the Commissioner, said that the Commissioner did not challenge the apportionment of the
expenses as between the taxpayers and did not rely on the fact that those expenses were
incurred for the purposes of more than one taxpayer.

The directly relevant cases on s.19(b) for present purposes are the decisions of the English
Court of Appeal in Newsom v Robertson [1953] Ch 7 and Horton v Young [1972] Ch 157.
The first case involved a claim by a barrister who practised at the Chancery Bar in London,
but lived in the country, to deduct the cost of travelling regularly to London in term time,
and intermittently in vacation. The special Commissioners allowed the costs of travel to
London during vacation but disallowed the costs incurred during term time. The High Court
disallowed the whole of the expenditure and the taxpayers appeal to the Court of Appeal
failed. Somervell L.J. said that the taxpayers home in the country had nothing to do with
his practice because if he lived anywhere else in the country nothing would really be
changed (p.14). He doubted if the journeys into and out of London were for the purposes of
the taxpayers profession and said that the fact that the taxpayer intended to and did
professional work in his own home did not mean that his homeward journeys were for the
purpose of his profession. He added that even if the journeys had a dual purpose the
expenditure would still have to be disallowed. He held also that the expenditure on the
intermittent journeys during vacation should be disallowed as the taxpayers chambers in
London remained his professional base.

Denning L.J. agreed, and in respect of the travelling costs incurred by the taxpayer during
vacation he said that the taxpayers professional base remained in London throughout and
did not cease to be so simply because he rarely went there during vacation. He said
(p.16):-
A distinction must be drawn between living expenses and business expenses. In
order to decide into which category to put the cost of travelling, you must look to
see what is the base from which the trade, profession, or occupation is carried on. In
the case of a tradesman, the base of his trading operation is his shop. In the case of a
barrister, it is his chambers. Once he gets to his chambers the cost of travelling to
the various courts is incurred wholly and exclusively for the purposes of his
profession. But it is different with the cost of travelling from his home to his
chambers and back. That is incurred because he lives at a distance from his base. It
is incurred for the purposes of his living there and not for the purposes of his
50
 profession, or any rate not wholly or exclusively; and this is so, whether he has a
choice in the matter or not. It is a living expense as distinct from a business
expense.

Romer L.J. acknowledged that when the taxpayer was due to appear in court he had to
travel to London to practice his profession in the sense that if he did not do so he would not
earn his fee but continued (p.17):-
it cannot be said even of the morning journey to work that it is undertaken in
order to enable the traveller to exercise his profession; it is undertaken for the
purpose of neutralising the effect of his departure from his place of business, for
private purposes, on the previous evening. In other words the object of the journeys,
both morning and evening is not to enable a man to do his work but to live away
from it.

He too agreed that no distinction could be drawn between the cost of the taxpayers regular
travel during term time and the cost of his intermittent travel during vacation.

In Newsom v Robertson their Lordships considered that the cost of travel between places at
which the taxpayer carried on business was wholly and exclusively laid out for the purposes
of the business (see Somervell L.J. at 13 -14, Denning L.J. at 16, and Romer L.J. at 18).

Horton v Young [1972] Ch 157 concerned a claim by a sub-contract brick layer to deduct
the cost of travelling from his home to the building sites where he did his work. The
taxpayers claim was allowed. The Court held that the taxpayers home was his base of
operation and place of business where he negotiated his sub-contracts, kept his tools of
trade, and wrote up his books of account. The Court rejected an argument for the Revenue
that the taxpayer carried on his business at each building site so that his expenses of
travelling from his home to each building site were covered by the decision in Newsom v
Robertson.

In Lunney v FCT (1958) 100 CLR 478 the High Court held, by majority, that the cost of
travelling between ones home and ones place of work was not deductible under the
Australian Act, but the Court also considered the English decisions on travelling expenses.
After referring to Newsom v Robertson the majority (Williams, Kitto and Taylor J.J.) said at
499.
a taxpayers daily journeys between his home and place of work are rendered
necessary as much by his choice of a locality for his residence as by his choice of
employment or occupation. And indeed the purpose of such journeys is, at least, as
much to enable him to reside at his home as to attend his place of work or
business.

At page 501 the majority referred to other English cases decided between 1887 and 1955
other than Newsom v Robertson, and said that those cases accept the view that the cost of
travelling between home and work is properly characterised as a personal or living
expense. This of course was the view of Denning and Romer L.JJ. in Newsom v
Robertson.

In Lunney both the majority (at p.498) and Dixon C.J. (at pp.485-6) referred with approval
to dicta of the majority Judges in In re the Income Tax Acts (1903) 29 VLR 298. ABeckett
51
J. (at 305-6) and Hodges J. (306-7), while allowing the cost of travel between places where
the taxpayer carried on business, said that if the taxpayer had not carried on business from
his home on his grazing property, the cost of travelling from his home to Melbourne to
attend board meetings would not have been allowable. The relevant legislation contained a
provision in much the same terms as s.19(b), and the dicta support the case for the
Commissioner here.

Mr Greenwood Q.C. for the taxpayers sought to distinguish Newsom v Robertson on the
ground that that case concerned the cost of daily commuting to London so that the
travelling expenses were part of the taxpayers daily living expenses. This submission must
be rejected because the case also rejected the taxpayers claim to deduct the cost of his
intermittent travel to London during vacation which could not be characterised as a daily
expense. Such expenses were still living or personal expenses which were not deductible
under the equivalent of s.19(b).

His other submission which must be noted was that Mr Jamnadas trips were business trips
and the expenses were deductible in the usual way like the cost of any other business trip.
This submission must also be rejected. A typical business trip is one which involves
travelling for business purposes from one place where a taxpayer or his employer carries on
business (even if his trip actually starts from his home) to another place where business
activities are carried on. Thus in In re the Income Tax Acts the cost incurred by the taxpayer
in travelling from his grazing property to Melbourne to attend board meetings and earn
directors fees was allowed and in Taylor v Provan [1975] AC 194 the expenses incurred by
the taxpayer in travelling from Canada to the United Kingdom were deductible under the
stringent provisions of Schedule E because he carried on business activities in both
countries.

Mr Jamnadas did not conduct business activities in Adelaide and his trips to Fiji lacked the
essential requirement of a business trip. His trips did not involve travel from one place
where business activities were carried on to another place where business activities were
carried on. These trips were for business purposes in the sense that Mr Jamnadas intended
to conduct business activities in Suva after he arrived. However they were really incurred,
like the travelling expenses of the barrister in Newsom v Robertson, because he chose to
live away from the place where his business activities were carried on.

The fact was that Mr Jamnadas had a home in Adelaide and a place of business in Suva.
When in Suva he made the Travelodge Hotel the base of his business operations. It follows
therefore the travelling expenses incurred by Mr Jamnadas and the companies were not
deductible, and the appeal in this respect must fail.

We should however draw attention to the artificial basis on which the appeals by the
taxpayer companies have been conducted. Their case focussed on the position of Mr
Jamnadas and his need to travel to Suva for business purposes. Companies on the other
hand do not have personal or living expenses, and do not live in homes. The taxpayer
companies have not conducted these proceedings on the basis that they paid the travelling
expenses of Mr Jamnadas because they wanted him to come to Suva. There may be good
reasons why the proceedings have been conducted as they have been, and it may be that
under the Act the companies could not have deducted the cost of bringing Mr Jamnadas to
Suva or if they could do so the cost may have been taxable in the hands of Mr Jamnadas.
52
See s.19(a) and compare Taylor v Provan [1975] AC 194. These matters were not argued
before us, and we express no opinion about them.

The Second Issue: Penalties

As the result of the proceedings in the Court of Review and High Court this issue is now
limited to the penalty of $11,621.00 for which the Commissioner has assessed Michelle for
the late lodgement of its returns, under his amended assessments, made following the
decision of the Court of Review. Byrne J. reduced the penalty to $1,160.00 but the Court of
Appeal re-instated the amended assessments. In this Court Michelle has sought the re-
instatement of the penalty fixed by Byrne J.

Section 94 provides that a person who fails to make a return within the time limited shall be
subject to a penalty of 50 per cent of the amount of tax payable, and the section further
provides that all such penalties shall be assessed and collected from the person liable to
make a return in the same manner in which taxes are assessed and collected.

Michelle lodged its returns for the years 1981 to 1994 inclusive on 3 August 1995, and was
thus automatically liable under s.94 to a 50 per cent penalty. However, s.100(2) provides
that the Commissioner may, in his discretion, mitigate or remit any penalty which may be
assessed, recovered or imposed under this Act. The taxpayers appealed to the Court of
Review from the Commissioners assessments of primary tax and penalties. It seems that
the Commissioner initially assessed Michelle for the full statutory penalties, but when the
case was before the Court of Review he stated through his counsel that he was prepared to
remit 80 per cent of the penalties and only sought to support penalties on Michelle totalling
$26,313.00.

The Court of Review held that it had no jurisdiction to review the exercise of the
Commissioners discretion to remit the penalties but said that the Commissioner was bound
to exercise his discretion in respect of penalties to a greater extent than the 80 percent
remission he had indicated through his counsel.

In their appeal to the High Court the taxpayers challenged the decision of the Court of
Review that it had no jurisdiction to review the penalties assessed by the Commissioner and
sought further reductions. Following the decision of the Court of Review the Commissioner
amended all assessments and reduced the penalties on Michelle to $11,621.00. The penalty
imposed on Mr Jamnadas is no longer in issue.

Byrne J. held, with respect correctly, that s.94 which provides for penalties to be assessed
and collected in the same manner as the primary tax, brought assessments of penalty within
the jurisdiction of the Court of Review. In our judgment this conclusion flowed inexorably
from the provisions of s.94, the provisions of s.62 dealing with objections to assessments
and appeals to the Court of Review from the decisions of the Commissioner on such
objections, and the powers of that Court under ss.62(6), 63(1), 66(1) and (2). Byrne J.
exercised the discretion under s.100(2) and reduced the penalty on Michelle to $1,162.00.

The Court of Appeal upheld the decision of Byrne J. that there was no sound basis for
limiting, as the Court of Review had done, the right to object to and appeal from an
assessment of penalty, but it held that the jurisdiction of the Court of Review and the High

53
Court was confined to reviewing the Commissioners decision under s.100(2) for error. We
are unable to accept this limitation on the jurisdiction of those Courts.

Section 62(6) gives the Court of Review power to hear and determine appeals from the
Commissioner. Section 63(1) provides that the Court of Review has powers and authority
similar to those vested in the High Court as if the appeal were an action between the
taxpayer and the Commissioner. Finally s.66(1) provides that the Court of Review shall
determine the matter and confirm or amend the assessment accordingly and s.66(2)
provides that it has power to increase an assessment.

Although the Act does not explicitly identify the nature of the appeal to the Court of
Review, the effect of the provisions we have referred to is reasonably clear. The problem of
identifying the nature of an appeal from an administrative authority to a Court, where this
has not been clearly spelled out in the statute, is a familiar one. The relevant principles were
conveniently summarised by Sir Anthony Mason in Builders Licensing Board v Sperway
Constructions (Syd) Pty Ltd (1976) 135 CLR, 616, 621:
Where a right of appeal is given to a court from a decision of an administrative
authority, a provision that the appeal is to be by way of rehearing generally means
that the court will undertake a hearing de novo, although there is no absolute rule to
this effect There are, of course, sound reasons for thinking that in many cases an
appeal to a court from an administrative authority will necessarily entail a hearing
de novo The nature of the proceeding before the administrative authority may be
of such a character as to lead to the conclusion that it was not intended that the court
was to be confined to the materials before the authority. There may be no provision
for a hearing at first instance or for a record to be made of what takes place there.
The authority may not be bound to apply the rules of evidence Again the
authority may not be required to furnish reasons for its decision. In all these cases
there may be ground for saying that an appeal calls for an exercise of original
jurisdiction or for a hearing de novo.

Each of the matters identified by Sir Anthony Mason in this passage was applicable to the
proceedings before the Commissioner and to the appeal to the Court of Review. The Act
does not state, in terms, that the appeal shall be a complete rehearing on the evidence in the
Court of Review but that is the necessary result of its provisions.

Moreover the reference in s.63(1) to the Court of Review having the powers and authority
of the High Court, as if the appeal were an action, strongly suggests that this class of appeal
involves the exercise of original jurisdiction since an action in the High Court involves an
exercise of such jurisdiction. In the normal case the Court of Review is likely to have
before it, as it did in this case, a substantial body of oral and documentary evidence which
was not before the Commissioner. The duty of the court, in accordance with s.66(1) after
hearing any evidence adduced and upon such other enquiry as it considers advisable is to
determine the matter and confirm or amend the assessment accordingly.

In our judgment this makes it clear that the duty of the Court of Review is to determine the
taxpayers taxable income on the evidence before it. The court was therefore entitled and
bound to re-exercise the discretion conferred by s.100(2) and to fix the appropriate penalty
in the light of the evidence and argument before it.

54
The Court of Appeal therefore erred in limiting the appeal to the Court of Review in penalty
cases to the correction of error by the Commissioner and in reversing this part of the
decision of Byrne J. Byrne J. having held correctly that the Court of Review made a
jurisdictional error and wrongly refused to re-exercise the discretion under s.100(2) was
entitled and bound to re-exercise that discretion himself on the material before the High
Court. This included additional materials which had not been before the Court of Review.

The appeal from the Court of Review to the High Court is governed by s.69 which provides
that the High Court shall hear and consider the appeal upon the papers and evidence
referred and upon any further evidence which the appellant or the Commissioner produces
under the direction of the said court.

Although the section does not spell out the principles which the High Court should follow
in giving directions for the reception of further evidence, these are governed by the
structure of the Act. The appeal to the Court of Review is to be conducted as if it were an
action in the High Court and both parties therefore will be entitled to adduce relevant and
admissible evidence as of right. On appeal to the High Court further evidence is only
admissible under the direction of that court. This necessarily involves a power to refuse to
admit further evidence.

The Act thus contemplates that both parties will adduce all their evidence during the
hearing in the Court of Review and that some good reason will have to be shown before
further evidence will be admitted in the High Court. It can be expected that the High Court
will readily admit fresh evidence discovered since the hearing in the Court of Review
which meets the common law requirements for the reception of such evidence. See Ladd v
Marshall [1954] 1 WLR 1489 CA. It can also be expected that evidence of events which
have occurred since the hearing in the Court of Review will also be admitted in a proper
case. Compare Mulholland v Mitchell [1971] AC 666. However the High Court should bear
in mind the statement of Lord Pearson in the latter case at 681:-
an appeal normally involves only a review of a judges decision on the evidence
given on the trial. A partial retrial with further evidence added is not a normal
function of the Court of Appeal.

Michelle therefore succeeds on the issue of penalties and to that extent its appeal must be
allowed and the judgment of Byrne J. restored.

It was not suggested by counsel for the Commissioner that the re-exercise of the discretion
by Byrne J. miscarried because he failed to take into account, as a relevant consideration,
the substantial deferment obtained by Michelle for the payment of its taxes. It was not
suggested and it does not appear to us that the Act contains any other provision which
would entitle the Commissioner to recover interest on taxes which could not be assessed
because the taxpayer failed to file his returns on time.

The case has been conducted on the basis that the purpose of the penalty imposed by s.94
for failure to file returns is to punish the dilatory taxpayer and the power to mitigate or
remit that penalty must be exercised with this purpose in mind. It is common ground that
counsel for the Commissioner did not submit to Byrne J. that the power in s.100(2) could
be exercised to recover interest at a non-penal rate for the period of delay caused by the
default.
55
The proper scope of this discretion was not the subject of argument in this Court, and we
express no opinion on that matter.

Costs
The Commissioner has succeeded on the issue of the travelling expenses, and in this respect
the appeal by the taxpayers fails. However Michelle has succeeded on the issue of
penalties, and to that extent its appeal has succeeded. The amounts in dispute in respect of
travelling expenses were substantially greater than the amount in dispute on the penalties,
and the argument on the former issue took up the greater part of the hearing time in this
Court. In those circumstances the appellants should be ordered to pay one half of the
Commissioners costs of and incident to the appeal.

The following orders should be made:

1.Appeals by Chimanlal Jamnadas and Primetime Properties Limited dismissed.
2.Appeal by Michelle Apartments Limited allowed in part.
3.Set aside so much of the orders of the Court of Appeal of 1/3/2002 as set aside the order
of Byrne J. of 24/8/1999 imposing a penalty of $1,160.00 on Michelle Apartments Limited
under s.94 and s.100(2) of the Income Tax Act.
4.Order of Byrne J. imposing a penalty of $1,160.00 restored with effect from 24/8/99.
5.Orders of the Court of Appeal of 1/3/2002 otherwise confirmed.
6.The appellants jointly and severally are to pay one half of the Commissioners costs of
and incident to the appeal to in the Supreme Court.

56
Reddy Construction Company v CIR Civil App No. 32/1985
Fiji Court of Appeal

Roper J.A. 20/6/85

This is an appeal against the judgment of Rooney J. in which he dismissed an appeal
against the decision of the Court of Review.

The basic facts are not in dispute. In 1970 two construction companies, the taxpayer and an
English company, Sir Lindsay Parkinson & Co Ltd (Lindsay Parkinson) were interested
in tendering to build the new Lautoka Hospital, and to that end entered into what was called
a pre-bidding agreement. The scheme was that Lindsay Parkinson should tender for the
contract and if successful the work would be carried out as a joint venture by the taxpayer
and Lindsay Parkinson with each contributing a maximum of $50,000 as working capital.
Lindsay Parkinsons tender was accepted, and a new company, Parkinson Reddy Ltd
(Parkinson Reddy) was then incorporated although the formation of such a company was
not envisaged by the pre-bidding agreement. There were only two shareholders, the
taxpayer and Lindsay Parkinson, and each held one $1 share. The main contract was then
subcontracted to Parkinson Reddy and the taxpayer and Lindsay Parkinson each paid
$50,000 to the new company. It was a further term of the pre-bidding agreement that the
taxpayer would supply on hire to Parkinson Reddy the necessary plant and equipment. The
new companys operation of the subcontract was not a financial success and the taxpayers
$50,000 loan was irrecoverable.

In its return of income for the year ended 31 December 1982 the taxpayer sought to deduct
the $50,000 from its taxable income as a loan written off. The Commissioner disallowed
the deduction and both the Court of Review and Rooney J. held that he was right in so
doing.

Section 19 of the Income Tax Act (Cap. 201), so far as is relevant provides:
19. In determining total income, no deductions shall be allowed in respect
of
(b) any disbursement or expense not being money wholly and exclusively
laid out or expended for the purpose of the trade, business, profession,
employment or vocation of the taxpayer;
(c) any loss not connected with or arising out of the trade, profession,
business, employment or vocation of the taxpayer;
(i) any expenditure or loss of a capital nature;

In the Court below and before the Court of Review the primary enquiry was whether the
loss was of a capital nature (s.19(i)), with some passing consideration being given to the
question of whether the $50,000 was a disbursement wholly and exclusively laid out
(s.19(b)). The taxpayer has never claimed the $50,000 as a deduction as a disbursement laid
out and in our opinion the first step is to enquire whether the loss can be claimed as a
deduction under s.19(c). If it cannot then no enquiry as to whether it was of a capital nature
is called for.

In Strong v Woodifield [1906] AC 448 the House of Lords considered a provision which is
for all practical purposes identical with s.19(c), and at page 452 Lord Loreburn L.C. said:

57
 In my opinion, however, it does not follow that if a loss is in any sense connected
with the trade, it must always be allowed as a deduction; for it may be only
remotely connected with the trade, or it may be connected with something else quite
as much as or even more than with the trade. I think only such losses can be
deducted as are connected with in the sense that they are really incidental to the
trade itself. They cannot be deducted if they are mainly incidental to some other
vocation or fall on the trader in some character other than that of trader. The nature
of the trade is to be considered. To give an illustration, losses sustained by a railway
company in compensating passengers for accidents in travelling might be deducted.
On the other hand, if a man kept a grocers shop, for keeping which a house is
necessary, and one of the window shutters fell upon and injured a man walking in
the street, the loss arising thereby to the grocer ought not to be deducted. Many
cases might be put near the line, and no degree of ingenuity can frame a formula so
precise and comprehensive as to solve at sight all the cases that may arise. In the
present case I think that the loss sustained by the appellants was not really
incidental to their trade as innkeepers, and fell upon them in their character not of
traders, but of householders.
(our emphasis)

It was central to Mr Kalyans argument, and indeed he described it as the most important
single fact, that the taxpayer was in the construction business and the loss with which we
are concerned arose from construction work by a company in which the taxpayer was a
shareholder. In our opinion the fact that both companies were in the construction business is
beside the point. The taxpayer made what was in effect a loan to enable another
construction company to carry out a contract. In our opinion the resulting loss was in no
way connected with the taxpayers own trading. It was a loss which fell on the Appellant
in some character other than that of trader to use Lord Loreburns words.

That conclusion is enough to dispose of this appeal but in deference to Counsels

submissions we propose to deal briefly with the capital loss issue (s.19(i)). Before doing so
it is worth repeating Lord Pearces comments on this subject in B.P. Australia Ltd v FCT
(1965) 112 C.L.R. 386 at p.387:
The solution to the problem is not to be found by any rigid test or description. It
has to be derived from many aspects of the whole set of circumstances some of
which may point in one direction, some in the other. One consideration may point
so clearly that it dominates other and vaguer indications in the contrary direction. It
is a commonsense appreciation of all the guiding features which must provide the
ultimate answer. Although the categories of capital and income expenditure are
distinct and easily ascertainable in obvious cases that is for from the boundary, the
line of distinction is often hard to draw in border line cases; and conflicting
considerations may produce a situation where the answer turns on questions of
emphasis and degree. That answer depends on what the expenditure is calculated to
effect from a practical and business point of view, rather than upon the juristic
classification of the legal rights, if any, secured, employed or exhausted in the
process (per Dixon J. in Hallstroms case). As each new case comes to be argued
felicitous phrases from earlier judgments are used in argument by one side and the
other. But those phrases are not the deciding factor, nor are they of unlimited
application. They merely crystallize particular factors which may incline the scale
in a particular case after a balance of all the considerations has been taken.
58
Rooney J. based his decision on three cases which he described as being conclusive against
the taxpayer, and they were Odhams Press Ltd v Cook [1940] 2 All ER 15; English Crown
Spelter Co Ltd v Baker 99 LTR 353; and CIR v Shipbuilders [1968] NZLR 885. Mr Kalyan
submitted that these cases were distinguishable on their facts and that in the Shipbuilders
case the passage from the judgment of Turner J. relied on was obiter. Mr Kalyans argument
was in essence a negative one in that he submitted that the cases relied on did not support
Rooney J.s conclusion, while being unable to refer to any convincing authority that would
support the taxpayers case. We are inclined to agree that the Odhams Press case was not
particularly helpful to either side on the capital question except that it makes it clear that
where there is a relationship between two companies and the question of capital payment is
in issue each must stand on its own feet from a tax liability point of view.

The English Crown Spelter case was one of the class of case where advances are made to
another company in order to secure a fixed source of supply or other enduring benefit; and
what is regarded as one of the more important tests on determining what is expenditure of a
capital nature was that proposed by Viscount Cave L.C. in Atherton v British Insulated &
Helsby Cables Ltd [1926] AC 205 at p.213:
But when an expenditure is made, not only once and for all, but with a view to
bringing into existence on asset or an advantage for the enduring benefit of a trade,
I think that there is very good reason (in the absence of special circumstances
leading to an opposite conclusion) for treating such an expenditure as properly
attributable not to revenue but to capital. For this view there is already considerable
authority.

There is support for the view in the circumstances of the present case that an enduring
benefit come into existence by a once and for all payment, because although the original
intention of the taxpayer and Lindsay Parkinson, as gleaned from the pre-bidding
agreement, was that their association would be limited to the Lautoka Hospital job, the later
formation of the company may well have meant a much longer business association had the
hospital contract been profitable.

The Shipbuilders case must be regarded as the most important and relevant of those cited.
At p.905 Turner J. said:
All the reported cases in which one company has been allowed, as deductions,
losses incurred in writing off advances made to another, be that other a subsidiary or
not, fall without exception into two groups those in which the original advances
are shown to have been made by banker to customer in the course of an established
mercantile banking or money lending business, and those in which the transaction,
though in form a loan, has in substance been pre-payment for goods to be delivered.
A payment for the purchase price of trading goods may be a trading expenditure;
and a mere loan may be a trading expenditure if the lender is a banker or
moneylender. Consequently in each of these two classes of case the expenditure
may be a legitimate deduction.

In the same case North P. and McGregor J. expressed similar views. It is quite inappropriate
to classify Turner J.s comments as obiter as Mr Kalyan submitted. All the learned Judge
was saying was that having examined the reported cases he could find none in which

59
advances written off had been allowed as a deduction except in the two classes of case he
referred to. If there is an exception Mr Kalyan has not referred us to it.

The appeal is therefore dismissed with costs to the Commissioner to be taxed by the
Registrar if Counsel cannot agree.

60
Marine Management Ltd v DCIR 32 FLR 67
Privy Council

Lords Templeman, Ackner, Oliver, Goff and Sir John Stephenson 5/3/85
This appeal concerns a claim to a tax deduction in respect of the payment of interest
incurred during the year ended 31st May 1980 on monies borrowed by the appellant, Marine
Management Limited, (the taxpayer) to finance the purchase of certain shares. The facts
out of which the claim arises can be shortly stated.

The taxpayer is a limited liability company incorporated in Fiji. On 23 rd February 1981 it

filed its Return of Income for the year ended 31st May 1980. In this Return the taxpayer
claimed as an expense the sum of $57,778 in respect of interest which it had paid. The basis
of this claim was as follows. Blue Lagoon Cruises Limited (Blue Lagoon) is a company
operating out of Lautoka and conducts tours throughout the Yasawa Islands off Western Viti
Levu. It is a public company, but 53.3% of its shares were held by a company called
Fairmile Enterprises Limited (Fairmile). The company was wholly owned by Mr Miller
and his family, who had founded Blue Lagoon. In 1978 Mr. Miller wanted to retire and Mr
Wilson and Mr Quigg became interested in buying his interest in Blue Lagoon. They
negotiated with Mr Miller and eventually they agreed to buy Fairmile for $800,000, thus
giving them control of Blue Lagoon. For this purpose they formed the taxpayer with a
capital of $500,000 in $1 shares. They arranged for the taxpayer to borrow $600,000 from
the Bank of New South Wales which sum, together with $200,000 put up by the
shareholders of the taxpayer, entitled the taxpayer to complete the purchase of Fairmile. It
was the intention of Mr. Wilson, who was a tour and marketing agent, and of Mr Quigg,
who was an engineer, that Blue Lagoon should pay a substantial management fee to the
taxpayer. Of the 210,000 shares issued, one each was issued to Mr Wilson and Mr Quigg,
and 125,999 to New Zealand Pacific Marketing Limited, in which Mr. Wilson held all but
one of the issued shares, and 83,999 to a concern called Cantabrian Trust which was
controlled by Mr Quigg.

In due course, a management agreement was entered into between the taxpayer and Blue
Lagoon, the management fee being agreed at 7% of the gross receipts of Blue Lagoon
with a ceiling of $130,000. That sum has now been paid for two years, although for the first
year, since Blue Lagoons financial year runs from 1 st June to 31st May, and the
management fee only became payable from 9th August 1978, the proportion from 9th August
to 31st May 1979 only was paid.

When the taxpayer caused its accounts to be prepared, it showed among its expenses a sum
of $57,778 which had been paid as interest to the Bank of New South Wales in respect of its
loan of $600,000 referred to above. This deduction was disallowed by the CIR. The
taxpayer entered an objection which the Commissioner disallowed and the taxpayer
appealed to the Court of Review. On 17 th December 1981 the Court of Review held that the
taxpayers appeal succeeded as to one half of the interest claimed. In essence the reasons
given for that decision were as follows:-
Now, here, the expenditure of interest is related to the production of two matters of
income, the management fee and the dividends, in the sense that if there had been
no loan and consequently no expenditure for interest there would have been no
management fee and no dividends. In my view the expense, viz. the expenditure for
interest was partly incurred in relation either to an amount received, or to income
61
 from property either of which, will be exempted under s.17(37) of the Act and
hence not deductible

The Deputy Commissioner of Inland Revenue, the respondent to this appeal, appealed to
the High Court of Fiji, which on 16 th August 1982 allowed the appeal, holding that the
entirety of interest claimed was incurred in purchasing the shares in Fairmile, the income
from which was exempt. It resulted in the company being able to obtain a management fee,
but it was not incurred in the production of that fee.

The taxpayer appealed to the Fiji Court of Appeal. On 28 th July 1983 the Fiji Court of
Appeal dismissed the taxpayers appeal, holding that the only possible investment by the
taxpayer in respect of which the interest was incurred was the investment in the capital of
Fairmile, and the only possible property was the parcel of shares in that company. The
Court of Appeal concurred with the view expressed by Kermode J. in the High Court that
the investment played no direct or relevant part in earning the management fee and that the
fee was solely derived from the management activities of the company.

The taxpayers case in substance is that the interest, the subject matter of this appeal, was
incurred both in earning taxable income that is, the income derived from the management
agreement, and in holding shares for the purpose of earning non-taxable income that is, the
dividend paid by the company, and that it was entitled to a deduction for such part of that
interest as was related to the production of taxable income (the income derived from the
management agreement).

The statutory provisions relevant to this appeal are to be found in s.19 of the Income Tax
Act (Cap. 201). As at 1st June 1979, s.19, so far as it is material to this appeal, read as
follows:-
19. In determining total income, no deductions shall be allowed in respect
of
(b) any disbursement or expense not being money wholly and exclusively
laid out or expended for the purpose of the trade, business, profession,
employment or vocation of the taxpayer;
(f) any expense incurred in respect of
(i) any amount received, receivable, or accrued which is not included
in total income or, if so included, is exempted under section 16 or 17,
or is not included in chargeable income under any of the provisions of
this Act;
(ii) any investment or property the income arising from which will not
be included in total income or, if so included, will be exempted under
section 16 or 17, or will not be included in chargeable income under
any of the provisions of this Act;
(h) interest, other than interest actually incurred in the production of income
or interest in respect of a loan obtained by a taxpayer to purchase his own
residence in Fiji:

The taxpayer conceded that paragraph 19(h) barred any claim while it remained in force. It
was removed from the Act as from 1st January 1980 and therefore it is accepted that the
taxpayer could have no claim from 1st June 1979 to 31st December 1979, a period of seven
months.
62
At all levels it has been held, and in their Lordships view rightly held, that the interest
incurred was an expense wholly and exclusively laid out or expended for the purpose of the
taxpayers business. Accordingly the deduction was not prohibited by s.19(b). The essential
question was whether the expense was prohibited by s.19(f). Section 19(f)(i) was not
relevant because no dividend was received during the year. The vital sub-section is
therefore s.19(f)(ii).

The taxpayers case is that it raised a loan from the Bank to buy Fairmile, and thus to get
control of Blue Lagoon. Having acquired control, its intention was to obtain for itself a
management fee. Having obtained the management agreement, it achieved two sources of
income, firstly, the dividend paid on the shares which it had acquired and secondly, the
management fee paid under the management agreement. Thus, the expenditure of interest
related to the production of two sources of income. In so far as it related to the dividend, the
expenditure of interest was caught by s.19(f)(ii) and by s.17(37) being dividend from a
company incorporated in Fiji received by or accrued to a resident company and hence not
deductible. However, so far as the expenditure for interest was incurred in relation to
achieving the income obtained from the management agreement, this was not caught by
s.19(f)(ii). Accordingly the total sum of interest expended should be apportioned. The Court
of Review had adopted the equitable approach of attributing one half of the interest as an
expense incurred in achieving the income from the management agreement and this was the
correct decision.

Mr Handley, on behalf of the taxpayer, accepted that, in considering the application of

s.19(f)(ii), there must first be identified the investment or property. He further accepted
that the Court of Appeal had rightly concluded that the only investment by the taxpayer in
respect of which the interest was incurred was the investment in the capital of Fairmile, and
the only property was the parcel of shares in that company. At the time of the purchase
there was, of course, no management agreement in existence and accordingly, by its
purchase, the taxpayer obtained no such asset. True enough the purchase gave the taxpayer
the opportunity to achieve a management agreement and the income arising there-from and
no doubt this was its sole or predominant motive for the purchase. This does not however
result in the expenditure of the $800,000 being a dual purpose expenditure. The money was
paid for the acquisition of one and only one asset, no part of the consideration being
attributable to the acquisition of a management agreement which, indeed, was not then in
existence. Thus the management agreement income did not arise from the investment by
the taxpayer and accordingly the claim for deduction of the interest is totally barred by
virtue of s.19(f)(ii).

Their Lordships will humbly advise Her Majesty that this appeal should be dismissed. The
appellant must pay the respondents costs.

63
K R Latchan v CIR Ct Review No.6 of 1986
Court of Review

Stuart J. 30/10/87
Ram Latchan, fathers name Khurbur also known as Khurbur Ram Latchan and K.R.
Latchan (whom I will call the appellant) was in partnership with one Leslie Martin from
November 1971 until 30th September 1978 in a business of motor transport operators under
the name of Brunswick Motors. In January 1979 he began litigation against his erstwhile
partner by way of originating summons out of the High Court wherein he claimed the
following declarations:
1) That he had formed the firm of Brunswick Motors and was at all times the
sole proprietor of it;
2) That by reason of a confidential relationship existing between him and
Martin and of a false representation made by Martin he was induced to
accept Martin as a partner;
3) That Martin exercised undue influence over him in order to obtain a one half
interest in the firm;
4) That the partnership was dissolved on 30th September 1978 and that accounts
should be settled;
5) That in the settlement of accounts certain items should be debited against
Martin;
6) That Martin had used for his own purposes money deposited with him by
Latchan on behalf of the firm.

He also sought orders that the partnership he set aside and that Martin account to him, and
also that Martin pay damages or compensation for his use of the firms money. Martin
counterclaimed for money he alleged to be owing by Latchan. He also issued a statement of
claim claiming like remedies.

The trial took ten days and the Court rejected all the taxpayers claims but allowed a claim
by Martin that the partnership was dissolved as at 30 th September 1978. It settled the
accounts on the basis of accounts prepared by accountants for the parties, and gave
judgment for Martin on his counterclaim for $257,387.73. The appellant appealed to the
Fiji Court of Appeal and later to the Judicial Committee of the Privy Council without
success.

The agreed statement of facts prepared for this Court includes the following:
9. The appellant incurred an accounting fee during the year 1982 when he engaged
a firm of accountants for the purpose of analysing and reconstructing the accounts
kept by Leslie Martin, such accounts being prepared for the purposes of litigation ...
10. During the year 1983 the appellant incurred legal fees in relation to the
abovementioned litigation.

The appellant claimed $3,500 in respect of the accounting fees abovementioned of which
the CIR allowed $500 and disallowed $3000. It should perhaps be mentioned that $500
appears to have been the usual accounting fee allowed Brunswick Motors, so that the
Commissioner would appear to have disallowed the whole of the extraordinary expenditure.

64
The legal fees claimed and disallowed amounted to $26,592. Mr Jamnadas for the taxpayer
submitted that both the accounting fees and the legal fees were incurred to enable the
taxpayer to derive income from the business. He submitted that the taxpayer began the
action against Martin to enable him to obtain the share of profit to which he was entitled.
Bentleys Stokes and Lowless v Beeson [1952] 2 All ER 82 was referred to as illustrating that
the taxpayers motive is concerned, in that both accountancy and legal expenses were to
protect the taxpayers profit and income. Mr Scott for the Commissioner submitted that
insofar as s.19(b) applied, neither accountancy nor legal expenditure could be said to be
wholly and exclusively expended for the purpose of the taxpayers business, but that the
section properly applicable is s.19(i) and that both accountancy and legal expenses formed
expenditure of a capital nature. It is well to bear in mind that if the sum claimed to be
deducted is prohibited by any one or more of the heads comprised in s.19 the deduction
cannot be made: see Hagart and Burn-Murdoch v IRC [1929] AC 386, 399. It is submitted
that the deductions which the taxpayer seeks to make fall under two subsections of s.19 of
the Income Tax Act Cap. 201. They are subsections (b) and (i) which read;
19. In determining total income no deductions shall be allowed in respect
of:
(b) Any disbursement or expense not being money wholly and exclusively
laid out or expended for the purpose of the trade, business, profession,
employment or vacation of the taxpayer;
(i) Any expenditure or lose of capital nature.

One might have expected to find the preposition a before the word capital, but perhaps
the meaning of the subsection is not altered by its omission. Mr Jamnadas rested his case
upon s.19(b) contending that these matters of legal and accountancy fees were not matters
of capital expenditure but of income. The taxpayers evidence is short and since it bears
upon his objects or motives I will set it out. He said
I started proceedings against Martin. We were partners in business of motor
transport operators and then there was a dispute. The business had no bank
accounts and Martin deposited all funds in his own account. He kept the
accounts but he refused to show me the books, so I had to ask the Court to
have him release the books. I wanted to find out the proper income. That
was in 1977. I wanted the Court to make sure what my profit should be. In
1977 he refused to give me any accounts at all, and did not give me any at
all until after the Court orders.

He was cross-examined by Mr Scott and said

He did give me accounts from November 1971 until 30th September 1978. I
understood them. Sometime in 1978 I asked Martin to show me books of
account. I had a good idea at all times how the business was going. I
collected all takings apart from what people paid direct to him. He gave me
an annual account, but I did not know how the accounts of various buses
were shown. I am familiar with findings of fact made by Court and those
findings of fact cover the whole area of my dealings with Martin.

Then in re-examination by Mr Jamnadas he said;

When I took this matter to Court I believed Martin had not given me full
particulars. I was running whole business in 1971 and in 1972 I entered into
a partnership with Martin. The Court dissolved the partnership in 1982.
65
 From 1972 to 1978 I was in partnership with Martin. From 1978 to 1982
moneys from business were paid into Court.

In this type of case it is first necessary to find for what purpose the sums in question were
laid out, and then to decide whether expenditure for that purpose is or is not deductible for
income tax purposes. In approaching this question it is necessary to bear in mind that the
court in the taxpayers evidence and in the agreed facts has been given several explanations
of that purpose or object, and for the moment both items of expenditure can be taken
together. They were both laid out in the course of litigation, the objects of which are set out
above in the declarations which the taxpayer originally sought in his originating summons.
Then the taxpayer said in his evidence in this court that the object of his litigation was to
obtain full and proper particulars of what his profit should be because Martin would not
release the books although he agreed that Martin had provided him with accounts from
November 1971 until 30th September 1978.

In his evidence in the action the taxpayer said inter alia (and I copy the passage from the
trial judges judgment), giving his reasons for breaking up the partnership.
In 1977 when I entered Parliament and got some courage I broke up the
partnership. I had learned and had trusted the defendant (Martin). I had no
bank account. I did know Bruswick Motors was making a lot of money
towards the end of 1977. I did not bother about what money the firm had at
the time. I did want to do business the way I wanted to. It was difficult with
the defendant an old man as a partner. He was a nuisance and I had to get rid
of him. It did take me ten months to write a letter dissolving the partnership.
I did send in Peat Marwick and Mitchell to check the books. I thought
defendant would cheat me. I did not know what was going on. I did send in
auditors before giving notice.

Mr Jamnadas referred to Bentleys Stokes and Lowless v Beeson [1952] All ER 82, and in
particular the motive of the appellant. But there the Court of Appeal uses also the words
object and purpose. In Mallalieu v Drummond in the Court of Appeal [1983] 1 WLR
252 the Master of the Rolls distinguishes between motive the reason why and purpose,
the end in view. When that case reached the House of Lords, Lord Brightman, who
delivered the majority opinion of their Lordships (Lord Elwyn-Jones dissenting) [1983] 2
AC 861 suggested that the phrase expended for the purposes, [or in Fiji purpose] of the
trade, business etc means expended, to serve the purpose of the trade business etc. He
goes on to point out that the words do not refer to the purposes or purpose of the taxpayer,
but the purposes or purpose of the trade or business which is a different concept, and says
that 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, business etc. of the taxpayer,
but also to serve some other purpose. Lord Brightman proceeds; To ascertain whether the
money was expended to serve the purposes of the taxpayers business it is necessary to
discover the taxpayers object in making the expenditure: see Morgan v Tate and Lyle
[1935] AC 21, 37, 47. As the taxpayers object in making the expenditure has to be
found, it inevitably follows that the commissioners [in England, in Fiji the Court of
Review] need to look into the taxpayers mind at the moment when the expenditure is
made.

66
We are not without guidance in Fiji in respect of appeals under s.19(b). In 1985 the Fiji
Court of Appeal dealt with the appeal of Flour Mills of Fiji (No. 6 of 1985) in which the
company sought to deduct as an expense the moneys it had paid in defending its managing
director from prosecution. The Court of Appeal held that the moneys paid out were paid for
a dual purpose, and so far as the managing director was concerned, was not for business
purposes, and Mallalieu v Drummond was applied. Mr Jamnadas also referred to Strong v
Woodifield [1906] AC 448 which is usually taken as the starting point in considering cases
under s.19(b) and its English equivalent. That was a case in which the taxpayer which was a
brewer and innkeeper, sought to deduct from its profits a sum which it had been obliged to
pay as damages to a guest who had been injured by a chimney which had fallen upon him
during a gale. That sum had been awarded against the taxpayer because of its negligence in
allowing the chimney to become dangerous by reason of its non-repair. That case was
followed in both Mallalieus case and the Flour Mills case and does not help Mr Jamnadas.
He cited Lord Daveys well known dictum It is not enough that the disbursement is made
in the course of, or arises out of, or is connected with, the trade, or is made out of the profits
of the trade. It must be made for the purpose of earning the profits. If I employ Lord
Brightmans gloss in Mallalieu v Drummond It must be made to serve the purpose of the
trade in earning the profits.

I return to the present case, taking first the expenditure on legal expenses. Some suggestion
was made by Mr Jamnadas that the expenses of a civil case stand on a different footing
from those of a criminal case. I can see no warrant for such a suggestion and none of the
cases to which I have been referred support it. Indeed the only case in which such expenses
have been claimed and to which Mr Jamnadas referred the Court is Smiths Potato Estates v
Bolland (1948) 30 TC 284 where a sum of 622.10.11 had been spent by way of solicitors
and accountancy fees in prosecuting a successful appeal from the CIR to the Board of
Referees, and it was sought to deduct that sum from the companys profits. The attempt was
rejected, on the ground that the outlay was made to get a reduction of tax. This is
admittedly not the same; it has still to be shown however, that the expenditure here was
exclusively for the purpose of the taxpayers business.

The question is how can these legal expenses be said to be expenditure made to serve the
purpose of the trade or business in earning the profits? The taxpayers business is that of a
transport operator. He said in his evidence in this court that he began the action in the High
Court to get the books of account, but there is nothing in his prayers in either his originating
summons or his statement of claim to support that notion. They are framed with two ideas
in mind, first that taxpayer was the sole member of his business, and secondly that Martin
had misled him and deceived him. I do not believe the taxpayer. I have also set out his
statement to the trial judge in his action, and that seems to me to be far more likely to be the
truth, and that the main purpose of the action was to get rid of Martin. Even if I were to
accept the taxpayers evidence in this Court, his prayers in his originating summons and his
statement of claim show that he had several objects in commencing his action, and that they
were predominantly his own, and only secondarily those of the business. Consequently, so
far as the legal expenses are concerned, I hold that the appellant has failed to convince me,
as a matter of belief, that they were laid out exclusively for the purpose of his business as a
transport operator.

I turn then to the accountancy expenses. The same position applies here that taxpayer must
show that they were exclusively laid out for the purpose of his trade or business. I would
67
mention that Mr Jamnadas undertook to obtain and produce to the Court statements of
account of Brunswick Motors from 1969 to 1978 (inclusive), but has failed to do so. Both
the High Court and the Court of Appeal were disposed to allow the appellant something for
his accountancy expenses, but no proof was adduced as to what they were. Counsel in the
High Court seems to have mentioned vaguely a sum of $15,000, but the figure claimed in
the appellants income tax return is $3,500, of which a sum of $3000 was disallowed. This
Court is entitled to expect that if the sum of $3,500 was to be justified, some evidence
would be offered as to how it was made up. It seems that the $500 allowed by the
Commissioner was the usual accountancy fee allowed to the taxpayers business. It is true
that the sum claimed is said in the agreed statement of facts to have been expended in
preparing and restructuring Martins accounts for the purposes of litigation. The emphasis
is mine to indicate that it is not claimed that these accounts are wholly and exclusively for
the purpose of the taxpayers business. For I do not accept that the litigation was
exclusively for the purpose of his business. However, in view of the admittedly chaotic
condition of Martins accounts he admitted that he paid all the business receipts into his
own private account some expense, and this both the High Court and the Court of Appeal
allow, would have been justified in sorting them out. I would not however, regard that as a
revenue expense. It would be a payment, once and for all, to ensure for the future and for
the permanent benefit of the business, and would hence be a capital expense: see British
Insulated and Helsby Cables v Atherton [1926] AC 205. Nor, indeed, with the evidence in
its present state, am I prepared to say that it can be regarded as a payment made for the
purpose of earning profits. Mr Jamnadas mentioned, in this connection Worsley Brewery v
IRC (1932) 17 TC 349, but I cannot see that that case can help him at all.

It was a case where the taxpayers accounts for several years previous had been re-opened
and revised whereby the taxpayer received a substantial refund of tax and sought to appeal
against the previous assessments and claim payment of its accountants expenses (who were
not the same accountants as normally prepared its accounts). It was held that these expenses
did not fall within Strong v Woodifield (1906) 5 TC 215 but were incurred as a means of
settling a tax dispute.

Mr Scott submitted that both the items in dispute are matters of capital expenditure. I have
already indicated my agreement with this view in respect of the accountancy expenses.
John Fairfax v FCT (1958) 101 CLR 30, is a case in which legal expenses incurred in
defending a suit arising out of allotments to the taxpayer company of ordinary shares in a
second newspaper company were held to be capital expenses. At p.52 Menzies J. said:

[The court quoted from the judgment of Menzies J. concerning the business entity test]

I would add that these principles have also received acceptance in the Judicial Committee
of the Privy Council: see B.P. Australia v FCT [1965] 3 WLR 608 and also in the House of
Lords, see Regent Oil Co. v Strick [1966] AC 295. Menzies J. continued a little later at p.
53;
In my judgment the application of the principles stated in the cases shows the
outgoing here to be of a capital nature. The advantage sought to be obtained by the
defence of the acquisition of shares was the same as that sought by the acquisition
itself, that is to prevent Consolidated Press from obtaining control of Associated
Newspapers and to make possible the merger of the operations of Associated

68
 Newspapers with those of the Appellant: these were affairs of capital relating as
they did to the profit-bearing subject rather than its operation.

Here the advantage sought to be obtained by action against Martin was that the taxpayer
would be left in sole control of the business, and it was further hoped to obtain money from
Martin after accounts were taken. The fact that taxpayer had to pay money to Martin is not
to the point. The taxpayer was left in sole control of the business, that is to say, the entity or
structure set up for the earning of profits, and the advantage sought to be gained by the
expenditure of legal expenses was the same as that sought to be obtained by the action
itself.

The appeal will be dismissed and the appellant will pay costs.

69
Jaswant Singh v CIR 10 FLR 89
Fiji High Court Appellate Jurisdiction

Knox-Mawer P.J. 26/3/64

The circumstances giving rise to this appeal are as follows. The taxpayer (the present
Respondent) had failed to keep account books or records by which his returns of income
could be checked for the years 1st January, 1956, to 31st December, 1961. The CIR (the
present Appellant), after an investigation of the Respondents affairs over these years,
assessed him for income tax accordingly. The Respondent appealed to the Court of Review
against the Appellants assessment in respect of the Respondents 1961 income. A bundle of
documents setting out certain agreed figures were exhibited by consent before the Court of
Review.

The judgment of the Court of Review was delivered on 9 th August, 1963. The part of the
judgment of the lower Court with which the Appellant is principally dissatisfied is that
which concerns the consideration accruing to the Respondent under the Terms of
Settlement of a Supreme Court action concluded between the Respondent and A.J.C. Patel
Bros. on 24th August, 1961.

Under this Settlement, A.J.C. Patel Bros. agreed to transfer to the Respondent certain areas
of land on or before 30th June, 1962, or failing such transfer to pay the Respondent $5,000
plus interest. This $5,000 was to be paid by annual installments of at least $1,000 (first
payment on or before 24th August, 1965). This Settlement was varied, on 23rd January, 1962,
by a further agreement, whereby the Respondent acknowledged receipt of a sum of $1,000
(plus interest), and it was agreed that the balance of $4,000 (plus interest) would be paid by
an assignment, by A.J.C. Patel Bros., of the benefit of certain contracts (valued at $2,875)
plus a cash payment of $1,125 on or before 31st March, 1962.

The Appellant contended that this asset amounting to $5,000 in value accruing to the
Respondent under the Settlement of 24th August, 1961, formed part of the Respondents
total income received by him during 1961, within the meaning of s.3(1) of the Income
Tax Ordinance (Laws of Fiji) 1955, Cap. 172. It was upon this basis that the Appellant had
assessed the Respondent for income tax in 1961.

The Court of Review held upon the facts (and the Respondent has not appealed against this
finding) that the sum in question was earned in 1959, ascertained in 1961, but paid to the
Respondent as to $1,000, in the income year 1961, and as to the balance $4,000 (plus
interest), in the income year 1962. In the judgment of the lower Court, the word received
in s.3(1) of Cap. 172 means actually received in a business or commercial sense and
cannot be extended to include moneys accruing but not actually payable in the income year
of 1961.

It was further held by the Court of Review that although the Appellant had endeavoured
to ascertain the assets and liabilities of the Respondent at the beginning and end of each of
the income years in question, the Appellant had in fact found it possible only to ascertain
the net assets at the beginning and end of the whole period (1 st January, 1961, to 31st
December, 1965) covered by the examination. Therefore, maintained the Court below, the
correct method which the Appellant should have adopted was (after allocating items of
income to specific years where that was possible) to divide the surplus by the number of
70
years in the period under review and to attribute an equal portion to each income year (see
Gunns Commonwealth Income Tax, Law and Practice, 6th Edn. para. 3095). It therefore
fell, in the opinion of the lower Court, for the Court of Review to make such a calculation
in accordance with this method. The Court of Review purported to do this and arrived at a
figure of $342. For the Respondents income year 1961, the Court of Review accordingly
added to the sum of $1,000, (which the Court had held he had received within the
meaning it gave to s.3(1), Cap. 172, in that year), this additional sum of $342.

The first two grounds of appeal read as follows:

"1. That the Court of Review erred in law in holding that the word 'received' in
s.3(1) of the Income Tax Ordinance (Chapter 172) means actually, physically,
received, rather than net profit which has accrued to a taxpayer, during an income
year.

2. That having regard to the findings of fact that the moneys owing to the taxpayer
on the Bulldozing Contract with A.J.C. Patel Brothers were
(i) earned in 1959 when the contract was completed;
(ii) ascertained in 1961 when the compromise agreement was reached but in
fact paid to the taxpayer by two installments of $1,000 in 1961 and the balance
with interest totaling $4,120 in 1962;
the Court of Review erred in law in holding that only $1,000 of the compromise
agreed to, $5,000, was income of the respondent taxpayer for the income year
ended 31st December, 1961."

The relevant words of s.3(1) read:

"'total income means the annual net profit or gain whether ascertained
and capable of computation or unascertained as being profits from a
trade or commercial or financial or other business or calling or otherwise
howsoever, directly or indirectly received by a person from any trade,
manufacture or business or otherwise howsoever as the case may be "

Reference has been made in argument to four Canadian tax cases in which the Canadian
Courts were concerned with a similar problem of interpretation. Only two of these reports
are available to me. In Trapp v Minister of National Revenue, [1946] Canada Tax Cases 30,
the Court held that what is taxable income under the Canadian Statute is the income
actually received during the income tax year, not the income receivable, whether accrued or
accruing. In Tanner Building Supplies Limited v Minister of National Revenue, [1951]
Canadian Tax Appeal Board Cases 218, on the other hand, the Court held as follows: that in
determining the net profits or gain received during the income tax year in question,
account should be taken not only of moneys physically received but also of assets
accruing during that year to the taxpayer; that the statement to the contrary in the Trapp
case was obiter; that in enacting the relevant section in the Canadian Statute the
Legislature had in mind well established business and accounting practices including the
calculation of profits on an accrual basis. It is the contention of the Appellant that this
Court should follow the Tanner case.

It should first be noted that the Court of Review, in considering these two conflicting
authorities, was critical (and in my view rightly critical) of the decision in Trapp, and
approved the decision in Tanner. However the Court of Review considered that the
71
construction put upon the relevant section of the Canadian Statute in Tanner could not be
placed upon the equivalent section of the Fiji Ordinance s.3(1) because the construction
adopted by the Canadian court in Tanner was supported by a specific section in the
Canadian Statute providing for bad debts, which section, as the Court of Review observed
presupposed accounting on an accrual basis. It was the conclusion of the Court of Review
that since the Fiji Ordinance contained no equivalent bad debts section, the word
received in s.3(1) must be interpreted as actually:, i.e. physically, received.

It has been pointed out to this court, however, that the Fiji Ordinance does contain a section
which is, in effect, equivalent to the bad debts provision of the Canadian Statute. Thus
under s.3(2) of the Ordinance, it is provided that in determining total income, no
deductions shall be allowed in respect of (c) any loss not connected with or arising out of
the trade of the taxpayer. Since a bad debt is a loss connected with the trade of the
taxpayer the taxpayer is allowed under this provision to make deductions in respect of bad
debts.

Had this provision been pointed out to the Court of Review its decision might well have
been the other way. Certainly I have no doubt that the consideration (of $5,000 value,
money or moneys worth) accruing to the Respondent under the Settlement of 24 th August,
1961, formed part of his total income for the year 1961 within the meaning of s.3(1). For
the word profit in the subsection must be given its plain grammatical meaning (In re
Spanish Prospecting Co [1911] 1 Ch pp.98 & 99) and the Oxford Dictionary definition of
profit is pecuniary gain in any transaction.

I therefore hold in favour of the Appellant in respect of grounds of appeal 1 and 2.

[The court then went on to consider several further appeal points.]

72
Southern Pacific Insurance Co (Fiji) Ltd v CIR P.C. Appeal No. 41 of 1985
Privy Council

Lords Templeman,Ackner, Oliver, Goff and Sir John Stephenson

The appellant company, Southern Pacific Insurance Company (Fiji) Ltd, was incorporated
in Fiji and since 1st July 1974 has been engaged in the business of underwriting general
insurance, including the provision of compulsory third party motor insurance policies. The
accounts of the company run from 1st July to 30th June in every year.

Their Lordships agree with the Court of Appeal of Fiji that the company was entitled in
calculating its profits for the purposes of the Income Tax Act, Cap. 201 of the Laws of Fiji,
to deduct from the aggregate premiums attributable to the risks insured in each year, the
aggregate liability of the company for insured accidents and events which occurred during
that year. By the end of each year of account, the company will only receive notice of some
claims for accidents which have occurred in that year. There will be a large number of
accidents which are not reported to the company until after the end of the year of the
accident. Their Lordships also agree with the Court of Appeal that the principles enunciated
in Southern Railway of Peru Limited v Owen [1957] AC 334 are applicable to the Laws of
Fiji. In relation to accidents which occur in an accounting year, but are not reported to the
company during that year, so that the company is for the time being ignorant of the
obligations which will or may arise as a result of those accidents then, in the words of Lord
Radcliffe at page 357:
their proper treatment in annual statements of profit depends not upon the legal
form but upon the traders answers to two separate questions. The first is Have I
adequately stated my profits for the year if I do not include some figure in respect
of these obligations? The second is Do the circumstances of the case, which
include the techniques of established accounting practice, make it possible to supply
a figure reliable enough for the purpose?

In its accounts and tax returns for the year ended 30th June 1979 the company deducted
$85,000 for claims incurred but not reported, known as IBNR claims, of that year. The
Commissioner disallowed the deduction. The Court of Review dismissed an appeal by the
company on the grounds that on the evidence 17.94% of claims were unsuccessful because
the third party claimants could not prove negligence on the part of the insured driver. The
company appealed to the High Court and Madhoji J. allowed the deduction to the extent of
82.06% of $85,000, the company accepting the reduction of 17.94% for unsuccessful
claims. The respondent CIR appealed to the Court of Appeal which disallowed the
deduction on the grounds that the company's calculations lacked reliability and did not meet
the requirements of the second limb of Lord Radcliffe's formulation in the Southern
Railway of Peru case at page 357. The Court of Appeal would also have disallowed the
deduction on the alternative ground that the sum of $85,000 claimed as a deduction
constituted income carried to a reserve fund which was not deductible by virtue of the
express provisions of s.19(g) of the Income Tax Act. The company appeals with leave to
Her Majesty in Council.

The only evidence was given before the Court of Review on behalf of the company by a
chartered accountant of the firm of Price Waterhouse, the auditors of the company, and by
the companys insurance general manager. The evidence was that in 1974, in the absence of
relevant experience, IBNR provision could not be accurately assessed. But by 30 th June
73
1979, examination of claims made since 1974 indicated that about 50% of claims were
unreported at the end of the relevant year of accident. Experience of claims paid indicated
that IBNR claims over a four-year period amounted to 43% of known claims outstanding.
From these figures and from detailed calculation made in the light of claims experienced
during the four-year period, the witnesses deposed that by 30th June 1979 an IBNR
provision was necessary and that past experience provided a satisfactory basis for the
calculation of the required provision. The amount of $85,000 claimed as a deduction was
supported by written calculations and analyses which were produced by the witnesses and
were the subject of examination and cross-examination.

The criticisms of the Court of Appeal were threefold. First they commented on the initial
failure of the company to allow 17.94% for unsuccessful claims. But this failure did not
cast any doubt on the calculation of the original claim of $85,000 based on the experience
of the company with regard to claims since it began business. Secondly, the Court of
Appeal suspected that provision for an IBNR claim in one year would be duplicated by
providing for an outstanding claim once the IBNR claim was reported. This suspicion is ill-
founded. A claim, when reported, disappears from the next valuation of IBNR and becomes
part of the next valuation of outstanding claims unless it has been settled in the meantime.
IBNR and outstanding claims are adjusted each year by reference to the provision made at
the beginning of the year. There is thus no double provision. Thirdly, the Court of Appeal
considered that the IBNR claim should have been discounted because the claims would not
fall to be paid until some time in the future. But, as the companys cogent case to the Board
points out, discounting was unnecessary and undesirable. Experience showed that the bulk
of IBNR claims are notified in the following twelve months. The amounts of the claims are
liable to be inflated until payment by general increases in the assessments of damages and
by interest. It was never suggested to the witnesses and there is no evidence that
discounting is necessary to prevent over-provision for IBNR.

The Court of Review and the High Court, the sole judges of fact, accepted the evidence of
the companys witnesses and the reliability of the companys calculations and forecasts.
They accepted IBNR of $85,000 for the year ended 30 th June 1979 subject to a deduction of
17.94% to allow for claims which would prove to be unsuccessful. An appeal to the Court
of Appeal and to the Board only lies on a question of law so that the findings of the Court
of Review and the High Court cannot be disturbed unless they were findings which no
reasonable tribunal, properly instructed as to the law, could reach; see Edwards v Bairstow
[1956] AC 14. Their Lordships have carefully considered the criticisms made by the Court
of Appeal and the further criticisms made by counsel for the respondent of the evidence of
the witnesses and the calculations of the company. Those criticisms are not sufficiently
cogent to warrant rejection of the evidence or of the reliance by the Court of Review and
the High Court on that evidence.

The second ground relied upon by the Court of Appeal is based on s.19 of the Income Tax
Act. That Act provides for income tax to be paid on the total income of a taxpayer and by
s.19:
In determining total income, no deductions shall be allowed in respect of
(g) income carried to any reserve fund or capitalised in any way;

In the Southern Railway of Peru cases where the company deducted from its annual profits
lump sums payable on the future retirement, death or termination of service of an
74
employee, the House of Lords approved in principle of the deductions and Lord Radcliffe
at page 358 said:
annual profits properly determined are not to be treated as reduced by the
circumstance that some part of them may be prudently reserved from distribution
to take care of an apprehended loss from future trading, (but) the accountants
who have given evidence would say that they were not advocating the making of
a reserve, but seeking to evaluate a current cost of working.

In the present case, the amount of the liability of the company for accidents which occurred
but were not reported in a particular year, is part of the expense of the company in carrying
on its insurance business during that year and must be deducted in arriving at the total
income of the company for that year. Section 19(g) only provides that profits once
calculated cannot be carried to reserve and then further deducted. Section 19(g) forbids a
company to appropriate or capitalise profit but does not affect the calculation of profit.

Their Lordships will therefore humbly advise Her Majesty that the appeal should be
allowed, that the order of Madhoji J. should be restored and that the respondent should pay
the costs of the appellant before the Court of Appeal. The appellant is also entitled to its
costs before the Board.

75
Rooney v CIR Action No 1/86.
Court of Review

Stuart J. 14/11/86
In 1984 the Government of Fiji found itself obligated to increase the salaries of some of its
more highly paid officers, among them the High Court Judges, of whom the taxpayer was
one. In the case of the judges the increases were brought into effect by an Act passed on
24th April, 1984 and the increases were back dated to 1st July 1982. The taxpayer was
appointed in March 1983,and in his case the increases were back dated to the date of his
appointment. Unfortunately, the Government was facing a period of financial stringency,
and it was unable to make these fairly large payments of arrears in cash, and it decided to
pay part of the arrears in cash and to pay the balance by giving the officer a promissory
note payable in November 1986. In the case of the taxpayer he received a payment by
cheque for $332.50 representing $700 less amounts deducted for basic tax and PAYE. This
cheque was cashed on 3rd May 1985. He was also given a promissory note for $1901.54
representing arrears of salary $4003.00 less deductions for basic tax and PAYE amounting
to $2501.46. This promissory note was expressed to be payable on 30th November 1986
and to bear interest at 8.4%. That promissory note was redeemed on 14th June 1985 as the
taxpayer was about to go on leave and was therefore given his money. The taxpayer
considers himself aggrieved because he has had to pay income tax before it was due and
also has, as it were, been short-changed to the extent of the interest which he would have
earned had he been given a promissory note for the full amount owing to him, NZ$4003.00
instead of $1901.54. The amount of this-interest is agreed at $93.35.

Some correspondence took place between the taxpayer and the Commissioner culminating
in a request from the taxpayer for the Commissioner to decide under the proviso to s.80 of
the Income Tax Act whether or not the promissory note issued to him was or was not an
emolument under s.79 of the Act. The Commissioner's reply is contained in his letter of
19th February, 1985 the material portions of which are as follows:
"Your letter appears to raise two issues:
(a) As to your arrears of salary not being paid in full;
(b) as to this department's power to deduct tax from a promissory note
issued to you.

With regard to issue (a) so far as same relates to a decision to pay you by
promissory note rather than in cash. - this department has no involvement.
Such decision is not its, and it cannot assist with regard to the medium
adopted for discharge of Government's obligations. So far as issue (a)
related to the actual assessibility of tax of your salary, as you are aware,
only your allowances are exempted from tax by relevant legislation, salary
being taxable in full.
With regard to issue (b), I am satisfied that the promissory note issued to
you does represent emoluments from which tax can be deducted. I
appreciate that such a note is not an actual payment, but same represents
money's worth in that it can be turned to pecuniary account."

The Notice of Appeal contained two grounds alleging breaches of the Constitution, but
these were not argued before me. Of the others one averred that no actual payment had
been made to the appellant, one alleged that if the promissory note were negotiated or
76
discounted, a sum less than the face value would be received, one alleged that the payments
of tax were made without authority, because they could be made only when actual payment
was made, and one averred that the payment made was not paid or credited for the benefit
of the appellant within the meaning of the terms of regulation 6(2) of the Income Tax
Employment Regulations.

There was a statement of agreed facts filed, but Mr Lateef told the Court that the real issue
to be decided arose from the loss of interest which the taxpayer sustained by reason of
deduction of tax before it was due, although he later said that he was also instructed to
challenge the decision of the Commissioner under s.80 that the taxpayer had received an
emolument.

At this stage I set out the sections of the Act which are involved in this matter. In s.79 the
definition of emoluments is as follows:
s.79 For the purposes of section 80 & 81, 'emoluments' means all salary,
wages, overtime, bonus, remuneration, gratuities, including the estimated
annual value of any quarters or board of residence or of any other allowance
granted in respect of employment, whether in money or otherwise, stipend
commission or other amount for services, director's fees, retiring allowances
or pension accruing in, derived from or received in Fiji, and which are
assessable to tax but shall not include any salary or share of profits arising
from a trade, business, profession or vocation carried on by any person
either by himself or in partnership with any other person.

s.80 Notwithstanding, any other provisions of this Act, in the making of any
payment of or on account or any emoluments tax shall, subject to and in
accordance with the regulations made by the Minister under the provisions
of section 81, be deducted by the person making the payment
notwithstanding that when the payment is made no assessment has been
made in respect of those emoluments and notwithstanding that such
emoluments may be wholly or in part emoluments of some year other than
the year during which the payment is made.

Provided that if any question arises as to whether any emoluments are or are
not emoluments within the meaning of section 79 such question shall be
determined by the Commissioner, and the provisions of this Act relating to
objections and appeals shall apply to any determinations of the
Commissioner under this section."

Then s.81(1) empowers the Commissioner to make regulations and concludes:

"and any such regulations shall have effect notwithstanding anything in this
Act contained."
thus placing the regulation about the statute.
Then Regulation 6(2) of the Income Tax (Employments) Regulation reads:
Every employer shall be deemed to make payment of emoluments to an
employee not only when an amount of emoluments is actually paid but also
when emoluments are credited for the benefit of an employee to an account
in which the employee can draw or over which he has control or are
otherwise applied for his benefit or at his direction or are applied in
77
 reduction of a debt due by him to the employer unless such indebtness arose
from a payment in advance of or an account of remuneration from which tax
was deducted at the time of payment.

It is perfectly true that the Commissioner's reply to the question as to whether the
promissory note was an emolument might be regarded in the same light as a
pronouncement of the Oracle at Delphi, yet it certainly stated the Commissioner's position
if it did not answer the taxpayer's question. Almost a century ago in Tennant v Smith [1892]
AC 150 the then Lord Chancellor (Lord Halsbury) said: " ... the Act (Income Tax Act 1876)
refers to money payments made to the person who receives them: though if "substantial
things of money value were capable of being turned into money they might for that purpose
represent moneys worth and be therefore taxable." That case was applied in relatively
recent times in Heaton v Bell [1969] 2 All ER 70 where the question arose over the
deduction by his employer of a garage employee's payments for a motor car. It is however,
clear that tax is not chargeable upon moneys not yet payable and Mr Lateef cited St Lucia
Usines and Estates Co v Colonial Treasurer [1924] HC 508: CIR v Lebus [1946] 1 All ER
476 and IRC v Blots [1921] 2 AC 171.

The first thing to be noted is that no notice of assessment was issued to the taxpayer. Such a
notice is usually a prelude to an appeal under s.62 of the Act. Mr. Scott for the
Commissioner makes his first point in submitting that s.80 and its proviso mean precisely
what they say. And the only appeal against a finding by the Commissioner as to whether
this promissory note is an emolument. He has said that although it is not money it is
money's worth. Mr Lateef says that here there was nothing accrued, derived or received
although he concedes that a debt had accrued. In my view the words 'in money or
otherwise' in the fourth line of s.79 qualify all the foregoing words - salary, wages,
overtime, bonus, remuneration, gratuities. This is salary payable otherwise than in money. I
refer also to s.15(1) of the Act which begins:
"Income shall be deemed to have accrued to a person, notwithstanding that
such income has been invested, accumulated or otherwise capitalised by him
or that such income has actually not been paid over to him"

The High Court judgment in CIR v Sahay refers also at p.3 to the words 'derive' and
'receive' used in s.15.
"'Derive' means 'arising out of' or 'originating from' and another meaning is 'obtain.'
It will be noticed that in s.15 of the Income Tax Act both words 'derive' and 'receive'
are used, the latter no doubt following the decision in St Lucia Usines & Estates Co
v St. Lucia (Colonial Treasurer) [1924] AC 508. That case shows also that the two
words are by no means synonymous. I think that Lord Donovan in Mangin v Inland
Revenue Commissioner [1971] 1 All ER 179: uses the word 'derive' in
contradistinction to the word 'receive' for he held that there the taxpayer did derive
the income though he did not receive it since he paid it immediately to the trustees
whom he had created."

The amount of this promissory note must be income within this section and it seems to me
that it must therefore be an emolument within the meaning of that term in s.79.

Then Mr Scott says that if there was no payment there cannot be a deduction. I cannot
accept that. I think it is common ground that there was no payment here certainly not in the
78
sense that the taxpayer could immediately enjoy his money. But there is no doubt in my
mind that this money accrued to him payable on 30th November, 1986. Likewise, in my
view, he derived this income.

Then Mr Scott refers to the promissory note in a South African case Income Tax Case No.
398. That case shows that in South Africa a promissory note given in payment for stock and
due two years later was held to be income for the year in which taxpayer sold the stock.
That is all very well, for that particular statute provides that income from the sale arises
when the sale takes place. In my view this case does not assist either party.

Finally, Mr Scott says that Regulation 6(2) applies in that this payment by way of
promissory note was applied for the taxpayer's benefit. Mr Lateef counters that by saying
that the promissory note was not applied for his benefit, it was given to him, payable in two
years time. In Williams v Papworth [1900] AC 563 an appeal from New South Wales, Lord
MacNaghten, delivering the judgment of the Privy Council said at p.567 "But the word
'applied' does not import a power of selection; it simply means 'devoted to' or 'employed-for
the special purpose of.'" This use of the word has recently been discussed in Helen Slater v
IRC [1980] 3 WLR 157, approved on appeal at [1981] WLR 377.

In my view, then, this promissory note, by being given to the taxpayer may be said to have
been employed by him for his own special purposes, in other words, applied for his benefit.
The promissory note therefore, is an emolument and it has been applied to the benefit of the
taxpayer.

But that is not quite the whole story. What is to be done about this interest of which the
taxpayer has been deprived by his being given a promissory note bearing interest and upon
which tax has been collected two years before it is due? I do not think that this Court can do
anything about that matter. I think that the court's duty under the proviso to s.80 is confined
to deciding whether or not the promissory note is an emolument. The taxpayer must take
his own action as he may be advised.

For the rest the appeal must be dismissed. As agreed between the parties there will be no
order as to costs.

79
The Trustees of the Estate of Evelyn Barker v CIR No. 4 of 1988
Court of Review

Stuart J. 28/11/88
Evelyn May Barker, the wife of Sir Thomas William Alport Barker, died in Suva on 27 th
November, 1951. Probate of her last will and testament was duly granted to her husband
and her daughter Muriel Agnes Ryan the executors and trustees named therein. They were
to receive the income from her estate provided that if her husband remarried (as in due time
he did) his share of the income from his wifes estate was to pass to his daughter, so that at
all times material to this appeal Muriel Agnes Ryan (who subsequently married a man
named Gell, and after his death a man named Burrows) was entitled to the whole of the
income from her mothers estate. Particulars of that income appear in the accounts annexed
to the income tax returns for 1976 and 1977 exhibited among the agreed documents. At the
time of her death Lady Barker was registered as proprietor of extensive lands in Suva,
among them the land in Rodwell Road presently containing one rood 2.5 perches upon
which the Phoenix Theatre complex and its mini-theatre are now erected. On 18 th
November 1957 the trustees of Lady Barkers estate leased that land and buildings (the
mini-theatre had not yet been built) to James Gibson Barron Crawford and Thomas Patrick
Mulelly for a term of twenty years from 1 st November, 1957 at an annual rent of $2,800.
That lease was transferred, with the consent of the lessors, to Sharan Brothers Ltd on 22 nd
October 1964. Sharan Brothers Ltd desired to build an air-conditioned mini-theatre
underneath the Phoenix Theatre, and on 1st March 1976 entered into an agreement with
Lady Barkers trustees whereby the company agreed to build the mini-theatre, which was,
upon completion to become the property of the Estate, and the trustees agreed to grant the
company a new lease of the land, together with the two theatres, for 23 years from 1 st
January 1976. It will be noted that the former lease had not yet expired. The rent of the
whole was to be $800 a month or $9,600 a year, and a draft copy of the proposed lease was
annexed to that agreement of 1st March 1976. That draft agreement subsequently became
the agreement to lease dated 5th October 1977, which provided that the lease envisaged by
the agreement of 1st March 1976 was to enure for 20 years from 1 st November 1977.
Presumably in pursuance of the draft lease, articles of agreement were signed on 6 th
October 1976, between Sharan Brothers Ltd and Raghwan Construction Co Ltd for the
construction of the mini-theatre for a price or sum of $104,000. The Commissioner claims
to assess upon the Trustees, first under s.11(t) of the Income Tax Act (Cap 201) and also
under s.14(b), the amount of the cost of the building of the mini-theatre, but the claim under
s.11(t) was first raised in a letter to the trustees accountants on 3 rd March 1982. By that
time the Commissioner had obtained from the lessees (Sharan Bros Ltd) figures which
enabled him to value the improvements at $156,212 and he issued an amended assessment
for 1977, but against the estate of Mrs. M.A. Burrows, the daughter of Lady Barker, who
was at once the life tenant and a trustee of her mothers estate, not against the estate of
Lady Barker. Mrs. Burrows accountants objected, upon the ground, inter alia, that the
construction of the Phoenix mini-theatre was a right which accrued to the estate of Lady
Barker under the terms of the agreement of 1 st March 1976 and as such the right did not
accrue to Mrs. Burrows who was the life tenant or to any of the beneficiaries. That
objection was allowed, and an assessment was later issued against the estate of Lady Barker
for that same amount of $156,212. That was on 16 th May 1983, and the estates solicitors
duly filed an objection. The objection then raised was wholly disallowed. By that time the
Commissioner had stated that he was also claiming tax under s.14(b) of the Act. The year of
claim was 1977. An appeal was lodged against the assessment. On 18 th April 1986 the
80
Commissioner advised the solicitors for the estate that the assessment for 1977 was being
withdrawn, and that a fresh assessment for 1976 would be issued, and the appeal was
accordingly allowed, the appellants being awarded costs. A new assessment was then issued
for $156,212 against the estate of Lady Barker. Objection was lodged, and disallowed, and
this appeal set in train. The appellants sent to the Commissioner, by letter dated 26 th
September 1986 what was, in effect a set of interrogatories and the Commissioners
answers thereto are set forth as exhibits among the agreed documents.

I now set out the appellants objections as stated in the agreed facts at paragraph 31 thereof:
1. The amount of $156,212 is not either in whole or in part income according to
ordinary concepts and is not in whole or in part made total income by any provision
of the Income Tax Act.
2. In particular the said amount is not in whole or in part made total income by
s.11(t) of the Act.
3. Alternatively if (which is denied) some amount is by s.11(t) of the Act made total
income of the appellants then that amount (if any) is not the said amount but some
other and lesser amount.
4. Further in the alternative if (which is denied) the said amount or some other
amount is in whole or in part income or made total income of some person then
(a) the same was not wholly derived in year ended 31st December 1976; or
(b) alternatively the sum was not derived by the appellants and in particular was
not derived by them in their capacity as the trustees of Evelyn May Barker
deceased.
5. Section 14(b) of the Act did not entitle the Commissioner to assess the appellants
whether as Trustees of the estate of Evelyn May Barker deceased or otherwise on all
or any part of the said amount or any other amount.
6. Further, and in the alternative, the Act did not empower the Commissioner to
issue an amended and/or a fresh assessment subsequent to the appeal by the
Trustees of the estate of Evelyn May Barker deceased as appellants in Appeal No.
13 of 1984 being allowed with costs by the Court of Review.
7. Further, and in the alternative, the Act did not empower the Commissioner to
issue an assessment after the expiry of six years from 31st December 1976, the year
of assessment.

I cannot refrain from observing, at this stage that, while in a statement of defence the points
made by the appellants no doubt, have their relevance, they do not bear the same weight
when the onus of proof lies upon the appellants, vide s.71(2) of the Act.

It is now probably desirable to set out s.s.11(t) and 14(b) of the Act. They are:
"s.11 For the purposes of this Act total income means [and then
follows a very full definition followed by a proviso] Provided that without
in any way affecting the generality of this section total income, for the
purposes of this Act, shall include;
(t) in the case of any person to whom, in accordance with the terms of any
agreement relating to the grant, licence, concession or permission in favour
of any other person of the right to use or occupy, or over any land or
buildings, or by virtue of the cession to him of any such rights, there has
accrued in any year or period the right to have improvements effected on the
land or to the buildings
81
 (i) the amount stipulated in the agreement as to the value of the
improvements or the amount to be expended on the improvements: or
(ii) if neither amount is stipulated, the amount representing in the opinion
of the Commissioner the fair and reasonable value of the improvements:"

"s.14 Subject to the provisions of this Act the following classes of income
shall be deemed to have been derived from Fiji
(a) [is not relevant to this appeal.]
Income of beneficiaries and estates of deceased persons.
(b) any income received by, or accrued or in favour of, any person in his
capacity as the personal representative of the estate of a deceased person,
and any amount so received or accrued which would have been income in
the hands of the deceased person had it been received by or accrued to him
or in his favour during his life time. Such income or amount shall, to the
extent that the Commissioner is satisfied that it has been derived for the
immediate or future benefit of an beneficiary under the estate of such
deceased person, be deemed to be income received by or accrued to or in
favour of such beneficiary, and to the extent that the Commissioner is not so
satisfied, shall be deemed to be income of such estate."
The subsection goes on to deal with expenditure but since it has not been suggested that any
expenditure is relevant to this appeal, I propose to disregard the remainder of the
subsection.

[edited]

Then Mr Arjun submits that the improvements have to be valued in the absence of their
cost being stipulated in the agreement, and that the word period as an alternative to year
in the section means the period of the lease. With respect to Mr Arjun I find myself unable
to accept either of those submissions. The section does not require the improvements to be
valued. It merely requires the Commissioner to set upon them, as a matter of opinion, a fair
and reasonable value. Here the Commissioner obtained the cost of the building works as
paid by the lessees. It is true that this figure was not given in evidence but tendered from
the Bar. However as I understand the matter, Mr Arjun, while disputing the way by which
the Commissioner arrived at his opinion, did not demur to the manner of its production to
the Court. He did, however, complain that the Commissioner had given the appellants no
opportunity to be heard, and submitted that here there was denial of natural justice. In my
view that could have been cured by the appellants calling evidence. Again, Mr Arjun
submitted that the criterion was not the value of the building, but the value of the right to
build, but he produced no authority on the subject, nor did he call evidence. I cannot accept
that submission in view of the words the amount stipulated in the agreement as the value of
the improvements or the amount expended on the improvements. Those words seem to me
to indicate clearly the criterion to be applied.
[edited]
As to the word period whatever else it may mean, I do not think it can possibly mean the
period of the lease I would think that the word period must be equated with the word
year and is probably a period of taxation.

Mr Arjun submitted that s.14(b) is inapplicable because the administration of the estate of
Evelyn May Barker was completed, as is agreed by paragraph 13 of the statement of agreed

82
facts. I am not happy about this allegation because I do not think that paragraph 13 contains
an explicit statement that administration has been completed. It is a statement introduced,
as it were, by a side-wind. No attempt has been made since the death of Mrs Burrows, Lady
Barkers daughter and the life tenant, to amend the papers before the Commissioner. Mr
Banuve submits that the assessment is presumed to have been made in 1976, and it is true
that the 1977 assessment was withdrawn in 1983 and the Court was told then that a fresh
assessment would be issued. Yet the fresh assessment was allowed to be issued in the name
of the Barker estate. The agreed statement of facts says that Mrs Burrows death occurred
long after administration had been completed and, the assessment should then have been
issued in the names of the beneficiaries. But, here again, Mrs Burrows was still alive in
1976 and 1977, and her accountants had already had an assessment against her withdrawn,
and that same assessment issued against the estate. I am not able to accept Mr Arjuns
submission that administration of Lady Barkers estate had been completed, or that it is so
agreed in the agreed facts. In any event, quite irrespective of whether or not administration
was completed, it seems to me clear that this sum of $156,212, if s.11(t) is applicable to it,
would have been income in the hands of Lady Barker had it accrued to her during her
lifetime.

Then Mr Arjun says that the income was not wholly derived in 1976 and alternatively that it
was not derived by the appellants, but by the beneficiary, who so far as the land upon which
the Phoenix Theatre buildings are constructed, is Frank Alport Ryan. But, Frank Alport
Ryan was not entitled to the income until after the death of his mother, who was still alive
in 1976 and 1977, and according to the statements annexed to the returns in 1976 and 1977
received the income of Lady Barkers estate. Both these contentions appear to involve
putting the Commissioner to the proof, contrary to s.71(2) of the Act. So far as this Court
can see, the only documents available are the agreement of 1 st March 1976 and the building
agreement dated 6th October 1976. The former contains a provision that the Mini-Theatre
was to become the property of the lessors, that is the appellants, on completion, although,
of course it might be argued that it was the property of the appellants from the moment the
building works were begun, because the work was being done on the appellants land, and
by that very fact, became the property of the appellants. If the appellants assert that the
income was not wholly derived in 1976, it behoves them to prove it.

The alternative submission is in much the same position. Here the appellants are saying that
the income was not derived by them, but, presumably, by the beneficiary. As I have shown,
in 1976 and 1977 Mrs Burrows was still alive, and in receipt of the income. The ultimate
beneficiarys right did not accrue until after her death.

Mr Arjun dealt with his sixth and seventh grounds of appeal together. They both arise out of
the allowance of his clients first appeal in 1986. The facts in connection with that first
appeal are, briefly, that Mrs Burrows filed an income tax return for 1977 showing the
income arising from her mothers estate and accruing to her as life tenant, but not including
the cost of the building of the Phoenix Mini-Theatre. Tax was assessed upon that return and
duly paid. In March 1982 it appears that the Commissioner became aware of the cost of the
Phoenix Mini-Theatre, and issued an amended assessment against Mrs Burrows for 1977,
to which her accountants, who were also the estate accountants, objected, upon the ground,
inter alia, that if the construction of the Mini-Theatre was a right, it was a right which
accrued to the estate of Lady Barker and not to the estate of Mrs Burrows. I should add that
Mrs Burrows had died in 1979, but there was no evidence that the Commissioner was
83
aware of her death. The Commissioner allowed the objection filed by the accountants, and
issued an amended assessment against Lady Barkers estate for 1977, such amended
assessment claiming only the cost of the Phoenix Mini-Theatre. No one on behalf of Lady
Barkers estate, it would seem, informed the Commissioner of Mrs Burrows death.
Objection was made to the new assessment, it was disallowed and an appeal lodged. That
appeal actually got as far as this Court, when the Commissioner decided that he should
have raised an assessment for 1976 and not 1977. The appeal was accordingly allowed by
consent, and costs were awarded to the appellants. That was April 1986 and on 5 th May
1986 an assessment was issued against Lady Barkers estate for 1976 for the amount of the
cost of the Mini-Theatre. Objection was lodged and disallowed, and this appeal has
resulted.

Mr Arjun submits that the Commissioner cannot chop and change like this, ten years after
the year of assessment, and relies upon s.59(2) of the Act. He concedes that there is no
estoppel against the Crown. Mr Banuve submitted that the Commissioner did not re-open or
review the assessment here. He said that what the Commissioner did was to withdraw one
assessment and issue a fresh one for a different year. I think in this connection the
comments of Isaacs, J. in the Australian case of the King v DFCT ex-parte Hooper (1926)
CLR 368 at p.374 are pertinent. He said; There is one main or basic assessment for each
year, which is amendable. If any amendment increases the liability, that is separately open
to objection and appeal. The English cases of Aramayo Franke Mines Ltd v Eccott:
Aveline Aramayo & Co v Ogston [1925] 1 KB 86 and on appeal [1925] AC 634 are not
dissimilar from the present. There an assessment, against the firm, was held bad, but the
second, against the company while litigation was pending against the first assessment, was
held good. It seems to me that the second assessment issued after the first had been
withdrawn, even though it had been appealed against successfully, is good, since, although
it is for the same amount, it is for a different year.

Although Mr Arjun relies only upon s.59(2), in my view the whole section may be relevant,
and I set it out:
"s.59(1) Any person liable to pay tax shall continue to be liable and where
any person so liable has failed to make a return as required by this Act or
has made an incorrect or false return, the Commissioner may at any time
assess such person for the additional tax which such person may be liable to
pay, and the provisions of this Act as to notices of assessment, payment and
objection shall apply to such assessment or additional assessment and to the
tax charged thereunder.
(2) In addition to any powers conferred upon the Commissioner under
subsection (1) the Commissioner may reopen any assessment within six
years of the end of the year of assessment and may be the amount of tax
assessed under such assessment is less than the amount which ought
properly to have been assessed, amend such assessment. Where the
Commissioner amends assessment under the provisions of this subsection,
he shall fix the date of payment of any tax outstanding thereunder. An
objection shall lie from the amended assessment in the same manner as if it
were an original assessment but subject to the proviso to subsection (1) of
section 62."

84
That proviso restricts the right of objection on an amended assessment to fresh liability to
respect of the amended assessment or the increase of an existing liability.

It appears to me that omitted income, and if the Commissioner is correct in taxing these
improvements at all, this must be omitted income, is taxed under an additional assessment
under s.59(1), whereas an assessment may be reopened under s.59(2) if the Commissioner
finds that some item therein, for example, has been wrongly stated. There is no limitation of
time under s.59(1) and I think that is the section applicable. In my view s.59(2) does not
apply at all. The appeal must therefore be dismissed, with the result that the appellants will
have to pay the costs of the appeal, to be taxed in default of agreement.

85
CIR v Bhanabhai & Co Ltd 18 FLR 187
Fiji Court of Appeal

Spring J.A. Marsack J.A. and Gould V.P. concurring 3/11/72

The circumstances giving rise to this appeal are briefly stated. The respondent, a limited
liability company, was appointed trustee under a certain deed of trust bearing date 3rd
October 1968. The CIR, the appellant, issued an assessment of income for the year ending
31st December 1969, on the basis that the income of the trust for that year was taxable in
the hands of the respondent as trustee. The Commissioner claimed that the beneficiaries
under the trust deed had contingent interests in accordance with s.11(3)(b) of the Income
Tax Ordinance (Cap.176) and accordingly the whole income was assessable against the
trustee. The respondent served a notice of objection on the Commissioner objecting to the
said assessment which he disallowed. The respondent appealed to the Court of Review
which upheld the assessment. The respondent appealed to the High Court against the
determination by the Court of Review and the learned judge in the Court below allowed the
appeal and set aside the decision of the Court of Review. It is against that decision of the
High Court dated 4th August 1972, that the CIR now appeals to this Court. By virtue of
s.12(1)(d) Court of Appeal Ordinance (Cap.8) the present appeal is limited to questions of
law alone. It will be convenient to set out here s.11(3)(a) and (b) of the Income Tax
Ordinance.
"(3) Income accumulating for the benefit of unascertained persons or of
persons with contingent interests shall be taxable in the hands of the trustees
or other like persons acting in a fiduciary capacity as if such income were -
(a) in the case of an unascertained person, the chargeable income; and
(b) in the case of a person with contingent interests, the total income as for
an unmarried person."

The essential facts may be shortly stated. On 3rd October 1968, a Deed of Settlement (or
Trust) was executed by eight settlors setting up a Settlement or Trust for the maintenance,
education and benefit of Vijay Manilal, Dharmesh Manilal (sons of Manilal Bhanabhai) and
Chandra Mohan, Ramesh Chandra and Dalip Kumar (sons of Maneklal Maganlal). The
trustee appointed under the said Deed was Bhanabhai & Co Ltd. There is no evidence on
the record whether the said company is empowered under its memorandum of association
to act as trustee but as the case was run before the Court of Review and in the Court below,
this Court must, in my view, proceed on the basis that the Company was so empowered; it
is a question of fact and on this appeal we are concerned only with matters of law.

It will be convenient to set out the relevant portions of the deed.

"1. THE trustee shall hold the said leasehold property in trust for the beneficiaries
during the joint lives of the said MANILAL BHANABHAI and MANEKLAL
MAGANLAL, PROVIDED HOWEVER the trustee shall have the absolute
discretion .to sell the trust property and buy in substitution therefore or in addition
thereto any property and hold the same in trust for the said beneficiaries.

2. THE said investment so acquired by the trustee as aforesaid and the investment
money or property for the time being representing the same or which may be or
become subject to the trusts hereby declared are hereinafter called the Trust Fund
which expression is intended to mean the constituents for the time being of the said
fund.
86
 3. UNTIL the trust fund is vested in the beneficiaries the trustee shall apply the
whole or such part as it in its discretion thinks fit of the income of the trust fund for
or towards the maintenance and education or otherwise for the benefit of the
beneficiaries and may either itself so apply the same or may pay the same to the
guardian or guardians for the time being of the said beneficiaries to any son mother
daughter or any persons selected by it for that purpose without seeing to the
application thereof.

5. UPON the death of MANILAL BHANABHAI and MANEKLAL MAGANLAL

whichever last occurs the said trust fund shall be distributed to the said beneficiaries
as follows namely:
(a) 55% thereof to the said sons of MANILAL BHANABHAI in equal shares share
and share alike; and
(b) 45% thereof to the said sons of MANEKLAL MAGANLAL in equal shares
share and share alike."

At the hearing before the Court of Review a statement of agreed facts was signed by both
counsel for the appellant and the respondent and the relevant details are extracted
therefrom.
"(a) The names and dates of birth of the beneficiaries named in the deed are:
Chandra Mohan (s/o Maneklal Maganlal) - 13th November 1948;
Ramesh Chandra (s/o Maneklal Maganlal) - 30th May 1950;
Dalip Kumar (s/o Maneklal Maganlal) - 29th February 1952;
Vijay Manilal (s/o Manilal Bhanabhai) - 12th September 1960;
Dharmesh Manilal (s/o Manilal Bhanabhai) - 25th November 1965.

(b) On 6th August 1970, the appellant lodged with the Department of Inland
Revenue a set of accounts for the trust in respect of the year ending 31st December
1969 showing the net income as divisible among the beneficiaries.

(c) On the 20th October 1970, the Commissioner sent a letter to the appellant,
stating that it would appear that no part of the income of the trust had been applied
for the benefit of the beneficiaries during the year ending 31st December 1969 in
accordance with clause 3 of the trust.

(d) On the 8th November 1970, a reply was sent to the Commissioner from the
Legal Advisers to the appellant to the effect that the Commissioner's contention was
true.

Counsel for the respondent stated at the hearing before the Court of Review that the letter
was wrong. Nothing further was said about this and we are not aware whether any
resolution of the trustee company pursuant to clause 3 of the deed was passed authorizing
the trustee company to apply income to the beneficiaries in the proportions shown in the
balance sheet and accounts appearing in the record. However again this is a question of fact
and the Court must proceed on the basis that the respondent trustee had taken all the
necessary steps which culminated in the production of the balance sheet and figures.

(e) On 10th February 1971, an assessment was issued by the Department of Inland
87
 Revenue assessing the whole income from the trust to the trustee company."

The only viva voce evidence called by the appellant was from Harold John Powell,
Accountant of Lami who had submitted the returns of the trust to the Department of Inland
Revenue. The relevant portions of his evidence are repeated.
"Harold John Powell Accountant of Lami. Employed by S. G. Gould & Co. I
submitted income tax returns (Ex. B). Mr P. K. Bhindi was keeping the books of the
company. We did a partial audit, but we did not render a certificate. Because we
were not asked to do so. The sums shown as divisible were for the beneficiaries. So
far as the amounts were concerned they were credited to the beneficiaries but the
sums were actually applied to reduce the loan from Bhanabhai & Co Ltd to the
same company as Trustee. Bhanabhai & Co Ltd also did other trading and a return
went in for that. Building cost $69,700 in 1968. The loan was to pay for the
building. Interest on loan was 5% for this year.

XXD. Jones I do not have an accountancy qualification. I have seen the books of
Bhanabhai & Co Ltd as Trustee. There are two sets of books. I have the trustee set
here. One is a ledger and one is a journal. They relate to financial transactions of the
Trust. There are no separate bank accounts between the Trustee Funds and trading
funds. All the money is retained in the one account whether it is trust money or
trading money. There is no actual receipt from any beneficiary. All income has gone
to pay off the debt. Nothing spent for benefit of any beneficiary, clothing, education
etc. No beneficiary can draw on the one bank account. The directors draw on it."

The Commissioner argued that the beneficiaries under the trust deed had a contingent
interest only in the income and that it would not become vested in the beneficiaries until
after the death of the survivor of Manilal Bhanabhai and Maneklal Maganlal and
accordingly assessed the whole of the income from the trust as taxable in the hands of the
trustee Company. The trustee appealed to the High Court and the learned Judge reversed the
decision of the Court of Review and said:
"Whether or not the beneficiaries have a contingent or vested interest in the income
of the Trust can only be determined by correctly construing the provisions of the
Deed.

Before proceeding to an examination of those provisions it is necessary to bear in

mind the distinction between the vesting in interest and the vesting in possession of
trust property and income derived therefrom.

I am satisfied that on their true construction clauses 3 and 5 of the Deed in

combination operate to give the beneficiaries a vested interest in both the corpus
and income of the Trust Fund. Under clause 5 the gift of corpus is to take effect in
possession on the happening of an event which is certain to happen; and clause 3
provides that until that event does occur the income of the Trust Fund is to be
applied for the benefit of the beneficiaries or if not so applied the clear result is that
it must be accumulated for their benefit and paid over to them at the same time as
the corpus becomes distributable."

The Commissioner appealed to this Court on three grounds but at the hearing of this appeal
he abandoned his third ground of appeal: we are concerned with the remaining two grounds
88
of appeal.
"1. The Learned Judge erred in law in finding that on the facts and evidence in this
case there was no contingent interest.
2. That the Learned Judge erred in law in failing to consider the findings of fact by
the Court of Review, based on the evidence led."

Learned Counsel for the appellant argued both grounds together and I shall endeavour to
summarise them. He claimed that the deed of trust did not have the effect of vesting either
the corpus or the income of the trust fund in the beneficiaries until the death of the survivor
of Manilal Bhanabhai and Maneklal Maganlal; he submitted that the cases relied on by the
learned Judge were not applicable as they were concerned with a gift of income to a
beneficiary whereas in the instant case there was no gift of any specific share or portion of
the income of the trust fund to the beneficiaries; that the power of .the trustee to pay the
income to the beneficiaries did not arise until the trust fund was vested which in his
submission was the date of death of the last survivor of the persons named in clause 5 of the
deed; until such date the income would be accumulated by the trustee and be taxable in his
hands; that as none of the beneficiaries had any right to call for payment of income the
income was not vested in the beneficiaries and they merely had a contingent interest therein
until the date mentioned in clause 5 as being the date of vesting; that the direction to pay
interest in clause 3 was to a "class" and accordingly the income did not vest until the corpus
vested under clause 5 of the deed; that the trust deed had the effect of accumulating the
income of the trust fund for the benefit of unascertained persons as vesting would not take
place until the date specified in clause 5 of the deed.

Mr Sahay for the respondent submitted that there was no uncertainty as to the persons who
were to benefit under the deed as they were named and described therein; they had a vested
interest in the corpus of the trust fund from the date of the deed; that the beneficiaries had a
vested interest not only in the corpus but also in the income of the trust fund as from the
date of the deed; that in line 1 of clause 3 the word "vested" should be interpreted as
meaning "vested in possession"; that the income was accumulating under the trust for the
beneficiaries by the appellant who had vested interests and not merely contingent interests
as claimed.

The principal question to be answered on this appeal is whether the beneficiaries under the
trust deed or settlement have a contingent or vested interest in the income of the trust fund.

Clause 3 of the deed states; "Until the trust fund is vested in the beneficiaries the trustee
shall apply the whole or such part as it in its discretion thinks fit of the income of the trust
fund for or towards the maintenance etc" Counsel for the respondent submitted that the
word vested should be construed as meaning "vested in possession". It will be as well to
pause here and consider the meaning of the word vested. A future interest in land may be
either vested or contingent and vested interests may be either "vested in interest" or "vested
in possession". An interest is "vested in possession" when it gives the right of present
enjoyment; if it is vested in interest, but not in possession, it is a future interest since the
right of enjoyment is postponed yet it is also an already subsisting right in property vested
in its owner; it is a present right to future enjoyment. By contrast with a vested interest a
contingent interest is one which will give no right at all unless or until some future event
happens.
[edited]
89
Clause 3 says that "Until the trust fund is vested in the beneficiaries the trustee shall" etc.
and it is to be noted that the word "shall" is imperative. In my view here is a clear direction,
as I read clause 3, of a duty imposed on the trustee to apply the income in the manner
directed until the date of distribution which is determined in clause 5. The draftsman of the
deed could have been more explicit in the language which he used but in my view it is clear
that he used the word "vested" in the sense of vested in possession or "fall into possession".
Therefore applying the maxim ut res magis valeat quam pereat the word "vested" in clause
3 I would construe as meaning "vested in possession."

Turning now to the argument that the persons who will take under the deed cannot be
ascertained.

A perusal of clause 5 and the preamble to the deed clearly shows, in my view, that it will be
the named children of Manilal Bhanabhai and Maneklal Maganlal and the death of the
survivor of the last named persons has been fixed as the date of distribution. As from the
date of the deed the beneficiaries named thereunder have in respect of the corpus of the
trust fund an interest "vested in interest" and at the date of distribution it will become an
interest "vested in possession". The date of distribution is a date certain and accordingly the
persons who will take the corpus of the trust fund will be the said named children, or, if any
of them predecease the date of distribution then their personal representative will succeed
to the share of the person or persons so dying.
[edited]

Therefore I reject the argument of the appellant that the trust fund when it is distributed
under clause 5 of the deed will be enjoyed by unascertained persons because the persons
who will take are the named beneficiaries or their personal representatives - a group of
people who in my view are clearly capable of definition. I turn now to a consideration of
the question whether the direction to apply the income in the manner indicated in clause 3
to the beneficiaries is a vested or contingent interest. As I read clause 3 the trustee has a
discretion whether to apply the whole income or only part thereof for the beneficiaries, and
the question is does this discretion have any effect on the issue whether the beneficiaries
have a vested or contingent interest?

A consideration of certain authorities although admittedly dealing with trusts created by

wills is apposite.

It has been decided that if the interest upon a legacy or share of residue is given to the
legatee in the meantime until the time of payment arrives the gift is vested.

In Re Gossling [1903] 1 Ch 448 at p.450 Romer L.J. said:

"Beyond question, if a share of a residuary estate is given to a person, to be paid or
transferred to that person on attaining a particular age, and there is a maintenance
clause providing for maintenance in the meantime out of the income of that share,
then the share is vested."

The rule also applies in my view even if a trustee has power to apply the whole, or such
part as he thinks fit of the income of a share in maintenance.
[edited]

90
Further it was argued that the beneficiaries had no claim upon the income and were not
entitled to any share thereof until the corpus vested in them. In my view when the trustee
allocated the income to the beneficiaries in the manner shown in the accounts which were
produced in evidence the beneficiaries became entitled to the monies so allocated and had a
vested interest therein.

In re Vestey's Settlement [1950] 2 All ER 891 which was a case where the beneficiaries had
a contingent interest only in the corpus, the trustees in the exercise of their discretion
decided "to divide" certain income among the infant beneficiaries and it was held that the
infant beneficiaries became absolutely entitled to such allocations of income. Jenkins L.J. at
p.902 said:
"In this case, however, it is plain that no infant has, under the terms of the trust, any
share or interest whatever in the income, unless and until the trustees, in the
exercise of their discretion, decide to pay or apply to or for the support or benefit of
that infant some part of the income from time to time in hand. When that event
happens, when the trustees decide to apply some part of the income in hand for the
benefit of an infant, or to pay it to an infant, if the wider interpretation of that
expression to which I have referred is admissible, then it seems to me that the infant
becomes absolutely entitled to the amount in question by a new title consisting of
the exercise of the trustees' discretion in the infant's favour, the infant having
previously been merely a person eligible to benefit under the discretion. The infant
becoming entitled to the sum of income allocated to him or her under the trustees'
discretion, in my judgment, must become, in accordance with the terms of the
allocation, absolutely entitled to that sum."

Therefore construing the word "vested" in clause 3 as I have stated and on the authorities
quoted I am driven to the inescapable conclusion that the direction in the trust deed to the
trustee that it shall apply the whole or such part of the income as it in its discretion think fit
towards the maintenance education or otherwise for the benefit of the beneficiaries vests in
the beneficiaries a vested interest in the income from the trust fund.

There were other matters urged upon the Court which I should discuss. It was argued that
on the evidence adduced before the Court of Review that no receipt was given by any
beneficiary in respect of income so allocated; further nothing was actually spent on
clothing, education or for the benefit of any beneficiary and that the trustee had not dealt
with the income for the benefit of the beneficiaries.

According to the evidence the trustee received in "its hands" income from the trust fund
and the direction in clause 3 in my view imposed a duty on the trustee to apply the whole or
part of income to the beneficiaries in the manner indicated. The trustee utilised the whole
income for the year ending 1969 by reducing in part the debt owing by the trust and this
was I believe an application of the income "for the benefit" of the beneficiaries. The
accounts submitted to the Court of Review show that income for the year 1969 was credited
to the beneficiaries in accordance with the terms of the trust. Admittedly no receipts were
obtained, but four of the beneficiaries at the material time were infants.

In re Vestey's Settlement (supra) at p.901 Jenkins L.J. said:

"I agree that in a strict and literal sense there can be no payment unless there is not
only a hand to pay but also a hand to receive and a recipient capable of giving a
91
 receipt. Thus, in the strict and literal sense, there can be no payment to an infant.
Words such as these, however, must be construed in their context, and, inasmuch as
this is a discretionary trust in favour of a class of persons which, ex necessitate,
includes infant beneficiaries, I would be disposed, if it were necessary to do so, to
put a wider interpretation on the expression "pay", and include in it the transaction
consisting of the allocation of a share of any year's income to an infant absolutely,
although, owing to his infancy, no receipt is possible,"

In my view the transaction carried out by the trustee in allocating moneys to them was an
application of income for the benefit of the beneficiaries and had the effect of entitling
them to the amounts allocated notwithstanding that no receipts were obtained from them.
[edited]
For the reasons which I have endeavoured to give I am of the opinion that the beneficiaries
named in the deed have a vested interest in the income of the trust fund and not a
contingent interest as claimed by the appellant.

Accordingly I would agree with the decision of the Court below and would dismiss this
appeal with costs to the respondent.

92
Maneklal Maganlal v CIR No. 3 of 1982
Court of Review

Stuart J. 18/8/82
The appellant in this case was in 1979 a partner in Bhanabhai & Company a firm of
merchants in Suva, and a director of three companies associated with the firm, Bhanabhai
& Co Ltd, Suva Building Ltd and Viti Investors Ltd. He was born in India, although the
evidence did not disclose whether he had a domicil of origin in India, and came to Fiji in
1948. His father was already in Fiji, but went back to India in 1974. That phrase 'went back'
is the appellants own, and from that I infer that his father came from India. Appellant came
to Fiji with his wife, and he and his wife became Fiji citizens and hold Fiji passports, as do
his family. He decided to go back to India in 1979 and said that he intended to live there
permanently. He obtained a certificate from the Monetary Authority entitling him to be
designated as a non-resident. When he and his wife left Fiji in April 1979, he went by a
roundabout route to India, arriving about September. After nine months or so, his cousin
came to him in India, requesting him to return to Fiji and train his daughter-in-law in the
administration of the firms business as the firm wanted to send his son who was attending
to that part of the business to open up in Taiwan. The appellant agreed and came back to
Fiji with his wife via Hong Kong and Taiwan, arriving about September 1980. After his
departure for India he said he had disposed of his assets in Fiji except for his house in
Knolly Street, Suva, in which he had resided before he left Fiji and he resided there again
when he returned in September 1980. While he was in India he and his wife lived in his
fathers house in Surat. He would appear to have received substantial sums as income in
1979 and claims to be liable only to withholding tax on these sums, on the basis that he was
not resident in Fiji.

The respondent on the other hand, contends that appellant was a resident. Perhaps I should
add that appellant made an income tax return in Fiji for 1980. He also said that he made no
return and paid no tax in India, but on consideration I do not think that is relevant.

Fiji, in common with the United Kingdom, Australia and New Zealand assesses income tax,
primarily, against residents. The United Kingdom has no statutory definition of resident,
but Australia, New Zealand and Fiji each have statutory definitions. The New Zealand
definition is not material to this appeal, but in Australia and Fiji the definition is almost
identical. In Fiji the definition appears in s.2 of the Income Tax Act Cap. 201, which so far
as it is material to this appeal reads:
'resident means
(a) a person, other than a company who resides in Fiji, and includes a
person
(i) whose domicile is in Fiji, unless the Commissioner is satisfied that
his permanent place of abode is outside Fiji;
(ii) who has actually been in Fiji, continually or intermittently, during
more than one-half of the income year unless the Commissioner is
satisfied that his usual place of abode is outside Fiji and that he does
not intend to take up residence in Fiji;.

I pause here to say that the word continually would appear to be a misprint, for the
Income Tax Act 1974 has the word continuously which would seem to be more correct
grammatically.
93
Since in Fiji a resident is primarily a person residing in Fiji, I am of the view that the proper
construction of the definition is to be ascertained first by considering the meaning of the
term by ordinary concepts of interpretation, and if that fails to yield a result, by resorting to
the extended meaning of the term as given in sub-paragraphs (i) and (ii) of paragraph (a) of
the definition. At least, that is the method suggested in the Australian case of FCT v
Applegate (1979) 9 ATR 899, and I am prepared to accept it.

In the United Kingdom the definition of the term resident has been left to judicial
interpretation and the two leading cases on the subject, which were heard in the House of
Lords within days of one another, are Levene v IRC [1928] AC 217 and IRC v Lysaght
[1928] AC 234. In the former case Viscount Cave L.C. discussing the meaning of the word
said:
My Lords, the word reside is a familiar English word and is defined in the
Oxford English dictionary as meaning to dwell permanently or for a considerable
time, to have ones settled or usual abode, to live in or at a particular place In
most cases there is no difficulty in determining where a man has his settled or usual
abode, and if that is ascertained he is not the less resident there because from time
to time he leaves it for the purpose of business or pleasure ... But a man may reside
in more than one place. Just as a man may have two homes one in London and the
other in the country, so he may have a home abroad and a home in the United
Kingdom and in that case he is held to reside in both places and to be chargeable
with tax in this country. Thus in Cooper v Cadwalader 5 TC 101 an American
resident in New York who had taken a house in Scotland which was at any time
available for his occupation, was held to be resident there, although in fact he had
only occupied the house for two months during the year; and to the same effect is
Loewenstein v De Salis 10 TC 424."

The last mentioned case concerned a Belgian gentleman who to all intents and purposes
owned a property in Leicestershire which he kept available for purposes of fox-hunting and
to which he could come at any time. Levene was a British subject who had formerly lived
in England, but gave up his house in London and spent seven or eight months in each year
abroad and four or five months in England. When he returned to England he lived in hotels
and eventually took a lease of a flat in Monaco. Nevertheless he still came back to England
for some time every year. Lysaght was a man who had formerly resided in England, but had
given up his house there and had his home with his wife and family in Southern Ireland,
returning to England from time to time, however, for business purposes. He always spent
less than four months in each year in England over a period of four years, and in one year
less than seven weeks. Nevertheless he was held to be resident in England. So in the
Australian case of Gregory v FCT (1937) 1 AITR 201 where a man was held to be resident
both in Western Australia and in the Northern Territory. It seems clear that the
determination of a persons residence must be made for the relevant year of assessment, but
the Court may consider a persons conduct both in years previous or in years subsequent to
the year of assessment: see Levenes case per Viscount Summer supra 226-227. In
Geothermal Energy Commissioner of New Zealand v CIR (1979) 10 ATR 279, a New
Zealand case, the Commission sought exemption from tax for its employees employed out
of New Zealand and Beattie J. held that the employees ownership of a house which was
leased in his absence did not weigh against him. Of course that is not quite the same thing

94
as in Cadwaladers and Loewenstein's cases which depended upon the taxpayers having a
house available to which he could come at any time.

Mr Benefield relied upon the appellants domicile, but that is not relevant, at the initial
stage, in the consideration of residence. There is no doubt that he had a Fiji domicile of
choice. There is no doubt, further, that he was a Fiji citizen. I am not altogether happy about
his declaration of intention, but if I were considering appellants domicile I think I should
accept it, and on balance of probabilities, supported as it is by the Monetary Authority
Certificate of emigration. Counsel also relied upon Luswell v IRC 49 TC 334, but that is
rather a case on domicile than of residence. He also submitted if I have him correctly that
when the appellant left Fiji he disposed of his assets, went on a holiday, and then on to his
fathers house in Surat. I do not think this is quite correct. The appellants return of income
for 1979 shows several items of substantial income, from which I assume that he must have
disposed of his assets (except for his house) in 1980. I would add that if he really intended
not to return, I would have expected the appellant to have transferred his house property to
one of his sons.

In 1979 it would appear clear that he derived the whole of his income from Fiji. There
remains to be considered the case of Applegate v FCT to which I have already referred. In
that case the taxpayer was a Sydney solicitor, sent by his firm to open a business in Vila.
From November 1971 to 30th June 1972 he remained at Vila save for two short periods in
Australia, and the whole of his income was derived from sources outside Australia. Before
leaving Australia he had given up the lease of his flat in Sydney. In evidence he said that he
intended to remain at Vila for an indefinite period. Later, however, he became ill and on
medical advice returned to Australia in July 1973. It was held that he was not a resident of
Australia during the 1971-1972 tax year and that consequently resort had to be had to the
extension of the definition, and that while he was domiciled in Australia, his permanent
place of abode during the year under consideration was outside Australia.

After considering all the evidence I have come to the conclusion, albeit with some
hesitation, that the appellant must be regarded as resident in Fiji during 1979, bearing in
mind that he and his wife were Fiji citizens and held Fiji passports. He derived the whole of
his income from Fiji and even after he had disposed of his property, it would appear that he
retained a directorship in at least one Fiji company. He retained his house in Knolly Street,
which was available for him when he wanted it. I might describe his position by saying that
he was master in his Fiji house whereas he was merely a son in his fathers house in India.
In my view the ordinary concepts of interpretation give me the answer that appellant was
resident in Fiji in 1979 and I do not need to enter upon consideration of the extended
meaning of the definition. The appeal will therefore be dismissed and the appellant will pay
the respondents costs, to be taxed in default of agreement.

95
CIR v United Touring Fiji Limited CBV0004/2003S
Fiji Supreme Court

petition for special leave to appeal

Fatiake P., French, Mason J.J. 21/5/04

Introduction
This case concerns the disallowance by the CIR of deductions claimed by a Fiji-based
travel agency for a portion of agency payments made by it to a related company in Japan.
The Commissioner having disallowed the deductions in part, the taxpayer appealed
successfully to the Court of Review. The Commissioner appealed to the High Court, which
allowed the appeal, set aside the decision of the Court of Review and restored the
Commissioners assessments. The taxpayer then appealed to the Court of Appeal, which
allowed the appeal and set aside the decision of the High Court. The Court of Appeal also
refused an application for leave to appeal from its decision to this Court. The
Commissioner now petitions this Court for an extension of time within which to bring an
application for special leave to appeal against the decision of the Court of Appeal. For the
reasons that follow, we are of the view that no issue warranting the grant of special leave is
disclosed and that the petition to extend time should be dismissed.

Outline of Factual History

United Touring Fiji Limited (UTC) is a travel agent which arranges and conducts tours
for overseas visitors coming to Fiji. Up until 1994 it was a subsidiary of a company based
in Australia called Tourism International (South Pacific) Pty Ltd (Tourism International)
which in turn was a subsidiary of British Electric Tradition International (BET) based in
the United Kingdom.
Another subsidiary of BET, called UTIJ, operated as UTCs representative in Japan. It
would book clients for UTC in Japan and provide representative services including the
negotiation of tour packages with other agents, the management of debtors and other
administrative matters. UTC paid UTIJ representation fees which, in essence, were agency
fees. Amounts remitted by UTC to UTIJ from 1984 to 1990 ranged from 1.9 million yen
per month in 1984 to 3 million yen per month in 1990. On 12 November 1990, UTCs
immediate holding company, Tourism International, advised that as from 1 January 1991 its
contribution to the Japanese office was to increase from 3 million yen to 4 million yen per
month. The following amounts were overseas representation fees for the financial years
1990 to 1993:
Financial Year Amount
1990 $579,344
1991 $619,582
1992 $812,137
1993 $895,533

UTC was acquired by a Fijian company, Manzoa Limited (Manzoa), in 1994. UTIJ was
also sold at about the same time. The companies therefore ceased to be related companies
for tax purposes. The new controller of UTC, an experienced New Zealand travel
businessman, continued to use the same method in relation to payment of representation
fees as had been used prior to his acquisition of the company.

96
A dispute arose between UTC and the CIR as to the deductibility of the representation fees
paid to UTIJ in the financial years 1990 to 1993. On 3 December 1996, the Commissioner
issued tax assessments in which he disallowed, in each of the four years, certain elements
of the representation fee and in particular a 6% commission. The disallowance was
explained in a letter dated 16 October 1996, which preceded the issue of the assessments. In
that letter he said:
The main area of concern however is with respect to representation fees
claimed when UTC and UTIJ were related parties. It has been stressed by
UTC that amounts remitted to Japan for the periods 1990 to 1994 represent
an arms length price because the same basis (4m yen per month) had
initially been adopted for the 1995 year when parties were unrelated. This
represents a reimbursement of costs plus a small profit margin consistent
with a mark-up for travel agents. It is therefore agreed that the tax clearance
requests granted to remit 36m yen for 1990, 39m yen in 1991, and 48m yen
for 1992 to 1994 would be considered arms length and thus allowable. Any
additional claim (eg accrued marketing and/or representation fees to Japan)
is deemed excessive and will be disallowed as an income tax deduction.
After converting Japanese yen to Fijian currency, this will result in an
overclaim of representation fees of $194,800; $196,586; $301,970 and
$253,548 for the 1990 to 1993 years respectively. No adjustment is required
for the 1994 year because the claim for 48m yen has been correctly
converted to Fijian currency and there were no further claims (eg. Accrued
marketing expenses) that would be considered non-arms length.

UTC objected to the assessments. The objection was disallowed and UTC appealed to the
Court of Review.

Statutory Framework
Before considering the way in which this case was presented in the Court of Review and
the findings of that Court, it is convenient to refer to the relevant provisions of the Income
Tax Act and provisions of the Fiji/Japan Double Taxation Agreement apparently also
known as the Fiji/Japan Double Taxation Relief Arrangements.

Section 19(b) of the Income Tax Act provides:

In determining total income, no deductions shall be allowed in respect of
(b) any disbursement or expense not being money wholly and exclusively
laid out or expended for the purpose of the trade, business, profession,
employment or vocation of the taxpayer; ...

Section 106 of the Income Tax Act authorises the Minister to enter into agreements with the
governments of other countries relating to the prevention or mitigation of double taxation.
Section 106(4) provides that when such an agreement is made and notified in the Gazette:
... the arrangements notified therein shall, so far as they relate to immunity,
exemption or relief in respect of income tax in Fiji, have effect as if enacted
in this Act ...
Certain of the provisions of the Fiji/Japan Double Taxation Agreement, which was made in
October 1990, were also relied upon by the Commissioner. The record of the proceedings
reproduced a copy of the United Kingdom/Japan Double Taxation Agreement made in 1962
but it seems to have been assumed in the course of the proceedings that the relevant
97
provisions, whether by adoption or otherwise, reflect the terms of the Arrangements
presently in force between Fiji and Japan.

Reference was made in argument to Articles III and IV of the Agreement. Article III relates,
inter alia, to the attribution of profits to the permanent establishment of the enterprise in the
Contracting State in which it is situated. Deductions allowable in respect of the permanent
enterprise include expenses which would be deducted if it were an independent enterprise
in so far as they are reasonably allocable to the permanent establishment. Article IV
authorises the Contracting States to tax as profits sums accrued to one of two related
enterprises as the result of non arms-length conditions made or imposed between the
enterprises.

The Case Before the Court of Review

The written closing submissions dated 25 September 1997 to the Court of Review made on
behalf of UTC identified two issues to be determined:
1. What price did UTC pay for the representation services provided to it by UTIJ?
2. Was that price deductible under s.19 of the Income Tax Act?

In the Commissioners written closing submissions of the same date, the appeal was
characterised as one which involved the deductibility of expenses incurred by [UTC] for
representation fees paid to a related entity in Japan between 1990 and 1993. It was
submitted that to be deductible fees must not fall within the exclusion of s.19(b). In other
words they must have been incurred wholly and exclusively for the purpose of the
business of the taxpayer.

Reference was made to the onus of proof on the taxpayer and the necessity to determine
which portion of the expenses was incurred wholly and exclusively for the purpose of the
business of UTC. In the determination of that question, the arms length principle was
applicable. The source of the principle was said to be Article IV of the Fiji/Japan Double
Taxation Agreement. Article IV is based on Article 9 of the OECD Model Convention and
its application was said to be the subject of very complex and detailed guidelines agreed
upon at an international level. Reference was made to the OECD Commentary on Article
9. The submissions did not expand upon the application of the Guidelines in Fiji but
referred to the evidence of the Commissioners only witness, Mr Norris. The Guidelines, it
was said, had been translated into a Draft Rule of Practice issued by the Commissioner.

The Commissioners submissions then turned to the absence of adequate documentation

upon which UTC could demonstrate how the transfer prices were established and the lack
of information and documentation generally. Detailed commentary was offered upon
particular aspects of the evidence. The last two paragraphs of the submissions encapsulated
their central propositions thus:
28. In order to succeed UTC must show it has paid the fees claimed and the
amounts claimed are attributable to UTC on some proper basis i.e. the arms length
principle.
29. UTC has failed to establish either of the above. Further, no evidence of the
nature required by the OECD Guidelines and the Fiji Ruling has been produced
which could satisfy the Commissioner or this Court that the fees claimed were
incurred wholly and exclusively for the purpose of UTCs business.

98
The Judgment of the Court of Review
The Court of Review found, after hearing evidence from witnesses for UTC and from Mr
Norris of the Commissioners office:
(a) UTC and UTIJ were associated companies.
(b) Originally BET fixed the amount to be paid by its Fiji subsidiary to its Japanese
subsidiary.
(c) The payments did not accord with the more usual arrangement in the world-wide travel
industry by which a principal in one country, of an agent in another, deducts all the
expenses and commission and then remits the balance to the principal. This would have
been the easiest way to move capital to Japan.
(d) All the payments had required and received the approval of both the Reserve Bank of
Fiji and the Commissioner.
The Court observed that the Commissioners witness failed to press the grounds that the
payments were not for exclusive expenditure but questioned whether they were at arms
length. The Court referred to the OECD Transfer Pricing Guidelines, which had been
received in evidence. It described them as an authority on how [UTC] should prove that
the arrangement was at arms-length. This was consistent with the way in which the written
submissions for the Commissioner had sought to make use of those Guidelines. They were
said not to be an authority but to make instructive reading. The Court also referred to
Article 9 of the OECD Model Convention and then posed the question raised by that
Article:
Were the conditions made between [UTC] and [UTIJ], that is the payment of all
moneys gross to Fiji and the repayment of fee and commission to the agent, as
opposed to the retention by the agent of operating costs and commission, different
from those which independent enterprises would have made? The question was
whether so much of the sum paid as exceeded 4 million yen was really profit liable
to tax in Fiji.

The Court of Review pointed out, correctly, that the OECD Guidelines are not the law of
the land. It nevertheless made reference to their provisions relating to burden of proof.

The Court was obviously not impressed by the evidence of the Commissioners witness,
which it seems to have regarded as largely argumentative. The Court referred to the firm
view formed by the Commissioners witness that the large quantum of the amounts
transferred by UTC to UTIJ was indicative of fraud. The Court held that he really had no
definite evidence upon which to disallow the deductions. It referred to his expressed last
hope that the transaction was not arms length.

In considering UTCs evidence the Court said:

Evidence has been adduced by [UTC] before this Court that no exceptional
industry profit was being made, that expenses have been detailed, that if the
intention was to transfer capital, it would have been easier to have deducted it under
the cover of expenses and commission at source, in Japan. There is no evidence that
these conditions that had been made between [UTC] and UTIJ resulted in profits
not accruing to the Appellant when, but for those conditions, they would have
accrued.
I do not consider the evidence, on its own and in the face of [UTCs] evidence, that
[UTC] and UTIJ were associated companies at the relevant times, is sufficient to

99
 say that they were not at arms-length when the agreement for payment of fees and
commission was reached.
Association by itself is not enough. It is too easy to believe that international
conglomerates cheat the tax system of each country in which they operate. I fully
understand the frustration which Mr Norris no doubt feels on occasion while
carrying out his duties to the best of his ability, but in this case, there is only
suspicion.

It is to be noted that in the first of the preceding paragraphs quoted there is a clear reference
by the Court of Review to the criteria for determining an arms length transaction set out in
Article IV of the Double Taxation Agreement.

The Court of Review allowed the appeal with costs. The disallowed deductions were to be
allowed.

The Case in the High Court

The Commissioner appealed against the decision of the Court of Review to the High Court.
The grounds of appeal in a Reference dated 25 February 1998 were as follows:
1. The learned Court of Review erred in law in failing to hold that amounts paid by
the Respondent for representation fees in 1990, 1991, 1992 and 1993 were prohibited
from deductibility by s.19(b) of the Income Tax Act;
2. The learned Court of Review erred in law in failing to apply the onus of proof as
required by s.71(2) of the Income Tax Act;
3. The learned Court of Review erred in law in applying the provisions of the Double
Taxation Relief Arrangements with Japan made by order dated 7 October 1990.

The errors asserted were all said to be errors of law although appeals to the High Court
from the Court of Review are not so limited. It may be noted that the High Court also has
power to direct further evidence be adduced.

The submissions on behalf of the Commissioner in the High Court attacked the absence of
evidence of any breakdown of the amounts paid by UTC to UTIJ in the relevant years. He
explained the basis of the disallowance thus:
30. The department ... via a letter dated 16/10/96 agreed that the tax clearance
requests for 1990 to 1994 for 4m Yen per month would be considered arms length
(sic) and thus allowable.
31. However, any additional claim was deemed excessive and would be disallowed.

The arms length principle was at the forefront of the Commissioners submissions which
considered the various methods of determining whether a payment is at arms length.
Methods identified were the Comparable Uncontrolled Price (CUP) Method, the Cost Plus
Method and the Resale Price Method. The Fiji/Japan Double Taxation Agreement was
referred to. It was said not to deal specifically with transfer pricing. Article IV was cited
however no submission was made as to its application to this case as a matter of domestic
law. Rather reference was made directly to the OECD Guidelines relating to Article 9 of the
Model Convention. The Guidelines were said to provides (sic) a useful base for
determining the issue of arms length (sic). The submissions then turned to the second
ground relating to the issue of burden of proof and the requirement that the taxpayer satisfy
the Court that the disputed assessment was wrong.
100
In relation to the third ground of appeal, the Commissioner invoked the OECD Guidelines
and the proposition in those Guidelines that both taxpayers and administrations use restraint
in relying upon burden of proof in transfer pricing cases. The assessments raised for 1990
to 1993 were said to be soundly based given that UTC and UTIJ were related at the relevant
times and given the absence of documentation to verify the claimed deductions. The
submission gave some emphasis to the inadequacy of UTCs documentation. It is plain that
despite the reference to Article IV of the Double Taxation Agreement and the OECD
Guidelines in relation to Article 9 of the Model Convention, the issue was from beginning
to end one of the deductibility of the expenses under s.19(b) and whether the taxpayer had
proved that the amounts disallowed were wholly and exclusively laid out for the purposes
of its business.

The High Court Judgment

Pathik J. in the High Court attached critical importance to the failure of UTC to provide
information to the Commissioner to substantiate its claims for deduction and its failure to
discharge the onus of showing that the assessments were wrong.

In relation to the first ground of appeal in the High Court he contrasted the detailed
breakdown of expenses raised by UTIJ on UTCs account in the years 1984-1987 with the
absence of any such breakdown in the years 1990 to 1993. He had regard to the fact that
UTIJ represented, in Japan, agents from other countries including Australia and New
Zealand. His Lordship referred to the Commissioners request for the breakdown and the
failure by UTC to provide it. There was still no detailed analysis of the representation fee
especially the 6% component which had been disallowed. This failure his Lordship
described as the crux of the case. He also referred to record keeping obligations imposed
on taxpayers by s.109 of the Income Tax Act. He found for the Commissioner on the first
ground of appeal. On the second ground relating to onus of proof, he held that UTC had to
show that it had paid the fees claimed on an arms length basis which could be assessed by
reference to one of the three methods mentioned earlier. He found that UTC had failed to
show, on the balance of probabilities, the true amount of expenses reimbursed and that the
whole of those expenses were incurred exclusively for the purpose of its business as
opposed to the businesses of the Japan office.... He found for the Commissioner on the
second ground of appeal.

The third ground related to the applicability of the Double Taxation Agreement in Japan.
His Lordship also found that the Commissioner succeeded on this ground. His reasons, with
respect, did not reflect any consideration of the application of the agreement or any parts of
it as a matter of domestic law. Rather, he had regard to the OECD Guidelines. That
consideration seems to have reduced to a consideration of the inadequacy of the
information supplied by UTC to the Commissioner. In the event, the appeal was allowed.

The Court of Appeal Judgment

UTC then appealed to the Court of Appeal. It is not necessary to set out the grounds of
appeal in detail. It suffices to say that they raised the following issues:
1. The correctness of the finding that UTC was obliged to provide more detailed
information about representation payments.
2. The relevance of the obligation to keep records.

101
 3. The unreasonableness of the High Courts findings having regard to the
unchallenged evidence in the Court of Review.
4. The absence of any application by the Fiji Court of Review of the Fiji/Japan
Double Taxation Agreement.

The Court of Appeal held that the learned judge in the High Court had misdirected himself
and that the appeal against his decision must be allowed. The Court observed that the
amounts paid in representation fees in the years under review were not in dispute. The sole
issue before the Court of Review had been whether UTC had proved on the balance of
probabilities that the representation fees were deductible as expenses wholly and
exclusively incurred for the purposes of UTCs business. The issue was not whether UTC
had complied with the Commissioners demands or requests for information. The Court of
Appeal accepted that requests for information had been made and were answered, although
not to the satisfaction of the Commissioner. That evidence was before the Court of Review
and was able to be considered along with other evidence. UTC had contended in the Court
of Review that the fees fell within normal market criteria because they were within
universally accepted parameters relevant to sales volume. UTC had called evidence in the
Court of Appeal in support of its broad-based approach. There was unequivocal evidence to
the effect that it could not have obtained the services of UTIJ any more cheaply than Japan.
It was accepted that for tax purposes, UTC and UTIJ were related companies. The Court of
Appeal said:
We have summarised the evidence earlier in this judgment. It was to the clear
effect that the arrangement between UTIJ and the appellant could have not been
bettered at that time in Japan. (sic) Significantly as we have already noted the
evidence for the appellant on this point was not the subject of cross-examination or
challenging evidence on the behalf of the Commissioner, and the Judge did not deal
with it or the submissions made thereon.

Their Lordships said:

As the appellant had not supplied the Commissioner with sufficient information,
which was sufficient in the view of the Commissioner; in response to justify the
whole of the representation fees the Judge concluded that the appellant could not
succeed. Here we think that the learned Judge fell into error. In our view the
satisfaction of the onus incumbent on the appellant did not stand or fall on the
Commissioners view of the sufficiency of the information supplied to the
Commissioner.

The Court of Appeal referred to the advantage that the Court of Review had in seeing and
hearing witnesses from both sides. Counsel for the Commissioner acknowledged in the
Court of Appeal that it had been open to the Court of Review to accept the critical
unchallenged evidence, adduced by UTC, that the services of UTIJ could not have been
obtained more cheaply and that being accepted the Court of Review could find in UTCs
favour.
The Court of Appeal found that this was clearly what the Court of Review did.

Other matters referred to in the judgment of the Court of Appeal, and which were pointed to
by counsel for UTC, were as follows:
(a) The new owner chose to continue on the same basis.
(b) The overall cost of UTIJs services was extremely moderate.
102
(c) The appellant could have conducted its business in such a way as to make the whole
question redundant ie by arranging for UTIJ to deduct its costs before remitting the
proceeds of sales in Japan to UTC.
(d) The accounts were properly audited and had made a full disclosure of UTCs expenses.

The Court of Appeal said in conclusion:

We do not consider that the learned Judge in the High Court had regard to the way
the case was run in the Court of Review in that the final position of the
Commissioner was that deductibility had to be tested against the arms-length
principle. That is exactly what the appellant did. It advanced its case on a basis that
did not commend itself to the Commissioner, but the latter did not challenge the
critical evidence led by the appellant. The Court of Review however clearly
accepted the approach put forward by the appellant. Had the learned Judge in the
High Court considered the appeal in relation to the correct issue, the evidence
adduced and the findings of the Court of Review he would have found no basis for
allowing the appeal against the finding that the appellant had established the
deductibility of the representation fees.

The Court of Appeal allowed the appeal against the judgment of the High Court and
restored the decision of the Court of Review.

The decision of the Court of Appeal was given on 29 November 2002. On 16 May 2003,
the Court of Appeal, differently constituted, refused an application by the Commissioner for
leave to appeal to this Court. The Commissioner now applies, out of time, for an extension
of time to file a petition for special leave to appeal against the decision of the Court of
Appeal.

Constitutional and Statutory Framework for the Grant of Special Leave

Section 122(2) of the Constitution provides:
An appeal may not be brought from a final judgment of the Court of
Appeal unless:
(a) the Court of Appeal gives leave to appeal on a question certified by it to
be of significant public importance; or
(b) the Supreme Court gives special leave to appeal.

Section 7 of the Supreme Court Act 1998 provides:

(1) In exercising its jurisdiction under section 122 of the Constitution with
respect to special leave to appeal in any civil or criminal matter, the
Supreme Court may, having regard to the circumstances of the case
(a) refuse to grant special leave to appeal;
(b) grant special leave and dismiss the appeal or instead of dismissing the
appeal make such orders as the circumstances of the case require; or
(c) grant special leave and allow the appeal and make such other orders as
the circumstances of the case require.
...
(3) In relation to a civil matter (including a matter involving a constitutional
question), the Supreme Court must not grant special leave to appeal unless
the case raises
(a) a far-reaching question of law;
103
 (b) a matter of great general or public importance;
(c) a matter that is otherwise of substantial general interest to the
administration of civil justice.

The Grounds of the Petition

The petition does not in terms identify the far-reaching questions of law or matters of great
general or public importance or otherwise of substantial general interest to the
administration of civil justice that might warrant the grant of special leave. Rather, it asserts
that the Court of Appeal erred in law in various respects which it is convenient to quote:
(a) The Fiji Court of Appeal erred in law in holding that expenditure the subject of
the Petitioners assessment to tax was wholly and exclusively incurred by the
Respondent in terms of s.19(b) of the Income Tax Act, proved and admitted
evidence showing same to have been incurred for a multiplicity of purposes for the
benefit not only of the Respondent but also that of other related overseas entities;
(b) The Fiji Court of Appeal erred in law in holding that expenditure under
consideration by it was correctly allocated by the Respondent in terms of relevant
articles of the Fiji/Japan Double Tax Treaty whose application ought properly to
have involved consideration of OECD model articles whereon such were founded,
same comprising at all times part of the laws of Fiji.
(c) The Fiji Court of Appeal erred in law in holding that, as to any Ground of
Appeal brought before it, the Respondent had discharged the burden of proof
imposed by s.71(2) of the Income Tax Act, not only by reason of the Respondents
failure to comply with information demands made pursuant to s.50(1) of said Act,
but by reason of the very nature of the case presented by the Respondent to the
Court of Review.
(d) The Fiji Court of Appeal erred in law in erroneously considering the
submissions presented to it by the Petitioner to be limited to the issue of failure to
comply with information requests.

The petition also asserts error in law by the Court of Appeal in declining the application of
your Petitioner for Special Leave to appeal. The grounds were not felicitously worded. As
counsel for the Commissioner made clear at the hearing of the petition, grounds (a) to (c)
were intended to refer to the restoration by the Court of Appeal of the decision of the Court
of Review and thereby of the findings that underpinned that decision.

Whether the Time Limited for Applying for Special Leave should be Extended and
Whether Special Leave Should be Granted
Counsel for the Commissioner identified as the two principal issues relevant to the grant of
special leave the following:
(a) The failure by the Court of Appeal to have due regard to the restrictive scope of s.19(b)
and in particular the preclusion by that provision of dissection or apportionment of
expenditure and the impact of dual purpose.
(b) The failure by the Court of Appeal to take into account the provisions of the Fiji/Japan
Double Taxation Agreement, the due consideration of which requires application of the
relevant principles of transfer pricing developed by the OECD.

The Court of Appeal in its judgment referred to the evidence given by a number of
witnesses called by UTC which were relevant to the character of the payments made by it
to UTIJ. It reviewed the submissions and the judgments in the Court of Review and the
104
High Court. It was accepted by the Court of Appeal that the sole issue for decision before
the Court of Review was whether UTC had established that the representation fees were
deductible as expenditure wholly or exclusively expended for the purpose of UTCs
business.

The Court of Appeal did not enter upon the question of the dissection of expenses for the
purposes of s.19(b) as it was of the opinion that the Court of Review had enough evidence
to support its conclusion that the expenses were wholly and exclusively incurred for the
relevant purpose. The expenses had been tested against the arms-length principle.
Counsel for the Commissioner suggested that the arms-length principle did not address
the question whether the expenses were wholly and exclusively for the requisite purpose.

In our opinion, however, while the judgment of the Court of Review may be open to
criticism in respect of its conclusions about the character of the payments as a factual
matter, those criticisms do not raise any point going to the interpretation of s.19(b). There is
no apparent error of law in the construction of that provision which, in the circumstances of
this case, would warrant the grant of special leave. The construction of s.19(b) was
considered recently by this Court in Jamnadas v CIR Civil Appeal No CBV0006 of 2002S,
judgment in which was delivered on 24 October 2003.

The second issue, relating to the application of the Fiji/Japan Double Taxation Agreement,
as attractively presented by counsel for the Commission, may well raise some important
questions about whether and how various provisions of that Agreement operate in the
context of the domestic law of Fiji having regard to s.106 of the Income Tax Act. The issue
was however never raised in the Court of Review, nor indeed in the High Court, nor
considered by them other than by reference to the OECD Guidelines as a helpful guide to
determine whether an arms length transaction has occurred and how onus of proof should
be applied. Article IV, embodying the arms-length principle, was cited in the Court of
Review in support of the Commissioners contention that s.19(b) was not satisfied because
the expense was not wholly and exclusively for UTCs business purposes. Reference to
s.106 seems to have been in the context of justifying the reference to Article IV for these
purposes. Section 106 does not give domestic effect to Article IV which authorises taxing
action by the Contracting State but does not mandate it nor in terms impose any liability,
immunity, relief, or exemption.

In its appeal to the High Court the Commissioner focused upon s.19(b). Interestingly, he
contended that the Court of Review had erred in law in applying the Double Taxation
Agreement with Japan. Presumably, this was intended to be read as a complaint about the
method by which the arrangements were applied. But although there was reference in
submissions before this Court to Article III, there was no reference to Article III in the
Courts below.

Article III deals with an entirely different subject matter. It concerns the profits of
enterprises where a Japanese enterprise carries on business in Fiji through a permanent
establishment situated in this country. The concept of permanent establishment is
defined in great detail. It does not appear, however, that any issue was raised in the
litigation about whether UTC was part of the UTIJ enterprise during the time they were
related through a common holding company. Whatever Article III means, such operation as
it has in Fiji is by virtue of s.106 of the Income Tax Act. It would be quite unjust to allow
105
the question of the independent application of Articles III and IV to be ventilated at this
stage in the Supreme Court. A fortiori, to allow the Commissioner to attempt to reconstruct
a novel basis for the original assessment would also be unjust.

The Refusal of Leave by the Court of Appeal

As to the complaint that the Court of Appeal erred in refusing leave to appeal to this Court,
the grant or refusal of leave is not a matter which can be appealed to the Supreme Court.
Appeals to this Court lie only against final judgments of the Court of Appeal. The
appropriate mode of approaching this Court, absent the grant of leave by the Court of
Appeal, is by seeking special leave to appeal. This aspect of the petition was, quite
properly, not pressed by counsel.

Conclusion
For the preceding reasons the petition does not disclose a case fit for the grant of special
leave. There is no point in extending time. The petition is dismissed with costs.

Order
1. The petition for an extension of time to petition for special leave is dismissed.
2. The petitioner pay the respondents costs.

106
CIR v Commonwealth Development Corporation 41 FLR 108
Fiji Court of Appeal

Kapi, Thompson, Hillyer JJ.A. 22/5/1995

This appeal concerns the liability of an enterprise of the United Kingdom to pay income tax
in Fiji in respect of its profits derived in Fiji. Article 8.1 of a Convention entered into
between the governments of Fiji and the United Kingdom, entitled the Double Taxation
Relief Arrangements with the United Kingdom, provides for the profits of such an
enterprise to be taxable only in the United Kingdom unless it carries on business in Fiji
through a permanent establishment situated in Fiji. The appellant issued an assessment in
respect of the profits of the respondent for the 1989 tax year on the basis that it was
carrying on business in Fiji through a permanent establishment situated in Fiji. The
respondent objected to the assessment but the appellant disallowed it wholly. The first
ground of the objection was that the respondent was not carrying on business in Fiji
through a permanent establishment situated in Fiji. The second ground of the objection was
that the taxation was more burdensome than the taxation levied on an enterprise of Fiji
carrying on the same activities. The respondent appealed to the Court of Review,
established by s.63 of the Income Tax Act (Cap 201), against the disallowance of its
objection. The Court of Review decided that the Respondent had not carried on business in
Fiji through a permanent establishment situated in Fiji and expressed the view also that the
respondent would be entitled to succeed with its appeal also on the basis that the taxation
was discriminatory. The appellant in these proceedings was not satisfied with that decision
and referred the matter to the High Court for hearing and determination. In the High Court
Scott J. dismissed the appeal, although his reasons for reaching the same conclusions as the
Court of Review were somewhat different.

The respondent is a statutory corporation. It was established by an Act of the United

Kingdom Parliament. Provision is made in s.1 of the Commonwealth Development
Corporation Act 1978 (UK) for it to continue to be a body corporate. Section 2(1) of that
Act provides that the purpose of the respondent is to "assist overseas countries, in
accordance with the provisions of this Act, in the development of their economies". Section
2(2) confers a number of powers on the respondent for the purpose mentioned in subsection
(1). Those powers are as follows:
"(a) to investigate and formulate projects for the promotion or expansion in overseas
countries of new or existing enterprises falling within s.3(1) below, and to carry out
any such projects;
(b) to carry on undertakings in overseas countries which appear to the Corporation
to be needed for or in connection with the promotion or expansion in those and
other overseas countries of new or existing enterprises falling within s.3(1) below;
(c) to carry on any activities incidental to a project falling within paragraph (a)
above or to an undertaking falling within paragraph (b) above which appear to the
Corporation to be requisite, advantageous or convenient for or in connection with
that project or undertaking;
(d) to assist other bodies or persons, either financially or in any other way, to
perform any functions which the Corporation is empowered to perform by virtue of
any of paragraphs (a) to (c) above; and
(e) to establish or expand, or promote the establishment or expansion of, other
bodies to carry on (either under the control or partial control of the Corporation or
independently) any functions which the Corporation is empowered to perform by
107
 virtue of any of paragraphs (a) to (d) above or to assist the Corporation to perform
any of those functions."

Section 3 of the United Kingdom Act explains what are the enterprises referred to in s.2(2).
T'hey are specified as follows:
"(a) agricultural enterprises, including any enterprise concerned with the livestock
industry, with horticulture, or with forestry;
(b) enterprises concerned with fisheries, including any enterprise relating to the
taking of marine mammals;
(c) enterprises for the working or getting of minerals;
(d) industrial enterprises;
(e) enterprises for providing, maintaining or improving the supply of water,
electricity or gas;
(f) enterprises for providing, maintaining or improving transport facilities or
transport services, or for providing, maintaining or improving telegraph or
telephone services, including wireless services other than broadcasting, but not
including broadcast relay services;
(g) enterprises for the provision or improvement of houses or other dwellings;
(h) enterprises for the keeping of hotels;
(i) enterprises for processing, storing or marketing any products of one or more
enterprises failing within and of paragraphs (a) to (h) above;
(j) enterprises for the carrying out of building, engineering or other operations in,
on, over or under land."

Section 9 of the United Kingdom Act confers borrowing powers on the respondent. Section
10 authorises the Minister responsible for the Act to make advances of money to the
respondent. Section 11 authorises the United Kingdom Treasury to guarantee borrowings of
the respondent. Section 12 requires the respondent to pay to the relevant Minister of the
United Kingdom government amounts required to repay advances made to it and amounts
in respect of interest on any outstanding balance of advances. Section 15 requires the
respondent to exercise and perform its functions in such a manner as to secure that its
revenues are not less than sufficient to meet all sums properly chargeable to its revenue
account. Any excess is to be applied by the respondent for such purposes as it may
determine with the approval of the Minister.

In 1960 the respondent established in Fiji a wholly owned subsidiary, the Fiji Development
Company Limited; that company still exists and operates from its own building in Victoria
Parade, Suva. It is incorporated in Fiji; its directors are appointed by the respondent. That
subsidiary, of course, is liable to taxation in Fiji. In 1973 the respondent was registered in
Fiji as an overseas company; thereafter it had its own separate office in Fiji. In 1989 the
respondent had an employee resident in Fiji, Mr C.H.C. Seller. In an affidavit which was
part of the evidence in the proceedings in the Court of Review, he described himself as the
respondent's "Area Representative". He said that he had represented the respondent in the
Solomon Islands and Vanuatu as well as in Fiji. We shall discuss later in this judgment the
functions he performed in Fiji.

Article 5 of the Convention is concerned with the meaning of the expression "permanent
establishment" for the purposes of the convention. Paragraphs 1, 2 and 3 of Article 5 are as
follow:
108
 1. For the purposes of this Convention, the term "permanent establishment"
means a fixed place of business in which the business of the enterprise is
wholly or partly carried on.

2. The term "permanent establishment" shall include especially:

(a) a place of management;
(b) a branch;
(c) an office;
(d) a factory;
(e) a workshop;
(f) a mine, oil well, quarry or other place of extraction of natural resources;
(g) a building site or construction or assembly project which exists for more
than six months;
(h) an agricultural, pastoral or forestry property.

3. The term "permanent establishment" shall not be deemed to include:

(a) the use of facilities solely for the purpose of storage, display or delivery
of goods or merchandise belonging to the enterprise;
(b) the maintenance of a stock of goods or merchandise belonging to the
enterprise solely for the purpose of storage, display or delivery;
(c) the maintenance of a stock of goods or merchandise belonging to the
enterprise solely for the purpose of processing by another enterprise;
(d) the maintenance of a fixed place of business solely for the purpose of
purchasing goods or merchandise, or for collecting information, for the
enterprise;
(e) the maintenance of a fixed place of business, solely for the purpose of
advertising, for the supply of information, for scientific research or for
similar activities which have a preparatory or auxiliary character, for the
enterprise."

It should be mentioned that paragraph 5 of Article 5 has the effect that, if a person acts in
Fiji on behalf of an enterprise of the United Kingdom (otherwise than as an agent with an
independent status) and if he has, and habitually exercises in Fiji, an authority to conclude
contracts in the name of the enterprise, he is to be deemed to be a permanent establishment
of the enterprise in Fiji, unless his activities are limited to the purchase of goods or
merchandise for the enterprise. It is not in dispute that in 1989 neither Mr. Seller nor any
other person acting on behalf of the respondent in Fiji had authority to conclude contracts
in its name other than for the purchase of and merchandise for its Fiji office.

Article 24 of the Convention contains provisions to prohibit taxation discrimination against

nationals and corporations of the United Kingdom in respect of their activities in Fiji.
Paragraph 2 is as follows:
"2. The taxation on a permanent establishment which an enterprise of a
Contracting State has in the other Contracting State shall not be less
favourably levied in that other State than the taxation levied on enterprises
of that other State carrying on the same activities:
Provided that this paragraph shall not prevent the Government of a
Contracting State from imposing on the profits attributable to a permanent
establishment in that Contracting State of a company which is a resident of
109
 the other Contracting State an additional tax not exceeding 15 per cent of
two-thirds of the profits of the permanent establishment after payment of the
company or corporation tax on those profits.

[edited]

Essentially the issues which this Court is required to address are three. The first concerns
the interpretation of the prefatory words in Article 3 of the Convention. The second
concerns the interpretation of sub-paragraphs (d) and (e) of that Article, consideration of the
facts of which Mr. Seller gave evidence in his affidavit and the application of sub-
paragraphs (e) of Article 3 to those facts. The third issue concerns the interpretation of
Clause 2 of Article 24. It is not in dispute that the rate of tax imposed on the respondent by
the appellant in making the assessment was higher than the rate of tax which would have
been imposed on a company incorporated in Fiji and carrying on the same activities.

The Convention is based on a model treaty drafted in 1963 for the OECD ("the 1963 OECD
draft model"). The OECD subsequently developed that draft and in 1977 adopted a revised
draft ("the 1977 OECD model"). A commentary on the 1963 OECD draft model was
prepared by those who had drafted it ("the 1963 commentary"). Another commentary on the
1977 model was similarly prepared ("the 1977 commentary"). For the sake of completeness
we mention that the 1977 OECD model was revised in 1992 and the revised model was
adopted by the OECD ("the 1992 OECD model"). As previously a commentary on that
model was published ("the 1992 commentary).

We turn now to consider ground 1 of the appeal. It concerns the meaning of the prefatory
words of Article 5.3 of the convention and in particular the phrase shall not be deemed to
include. Those prefatory words are identical with the words in an Article in the 1963
OECD draft model in respect of the subject matter. However, in the 1977 OECD model
they are different. The words shall not be deemed to include have been replaced by the
words "shall be deemed not to include."

The Court of Review, somewhat elliptically, observed:

"... although I agree that "shall be deemed not to include" has a different, meaning
from "shall not be deemed to include", I cannot see any difference in meaning in the
present content."

In the High Court Scott J. observed that the ascription of a literal meaning to Article 5.3
would not be appropriate unless some purpose, negatived by the paragraph, could be served
by "deeming", that is to say presuming, permanent establishments to include the activities
specified in sub-paragraphs (a) to (e) of the paragraph. He could not discover any such
purpose; so he found that the words had the same effect as those used in the OECD model.

In coming to that conclusion his Lordship adopted the approach taken in the 1963
commentary, noting that it had received the approval of the majority of commentators who
had considered the provision. Reference to travaux preparatoires is accepted in
international law as one of the tools which can, in certain circumstances, be used to
interpret treaties between countries. As Scott J. pointed out, it is expressly provided for in
the Vienna Convention on the Interpretation of International Conventions (Article 32).
However, as he noted, the Vienna Convention also requires a treaty to be interpreted in
110
accordance with the ordinary meaning to be given to its terms in their context and in the
light of its object and purpose (Article 31 (1)). Recourse to supplementary means of
interpretation, including reference to travaux preparatoires, is permitted by Article 32 only
to confirm the meaning resulting from applying Article 31 or to determine the meaning
when interpretation according to Article 31 either produces a meaning which is ambiguous
or obscure or leads to a manifestly absurd or unreasonable result. Article 31, of course,
reflects the manner in which at common law the Courts have interpreted domestic
legislation.

In this Court Mr Scott submitted that there was no need to resort to any travaux
preparatoires because the result of applying the normal common law principles of
interpretation was not an ambiguity, obscurity or absurdity. The correct interpretation of the
words in issue was that a fixed place of business was not to be conclusively presumed to be
a permanent establishment merely because of the existence of any of the factual situations
specified in sub- paragraphs (a) to (e). By contrast the words used in the 1977 model would
require that to be conclusively presumed.

We accept - as apparently Scott J. did - that the meaning for which Mr Scott argued is one
which could result from the application of the common law principles of interpretation.
However, we agree with his Lordship that, in their context, that is to say in combination
with Article 5.1, ascribing such a meaning to Article 5.3 would result in its serving no
purpose. Each of the factual situations described in sub-paragraphs (a) to (e) is an example
of carrying on in Fiji part of the business of the overseas enterprise. Prima facie it brings
the fixed place of business where it is carried on within the terms of Article 5.1. There is no
need for any presumption that it does so.

We are satisfied that his Lordship correctly proceeded to make reference to the 1963
commentary because to have accorded to the word in issue the meaning resulting from the
application of the usual common law principles of interpretation would have led to an
unreasonable result, that is to say that Article 5.3 was completely otiose. It was proper for
him to refer to the commentary because, even though the Convention must be regarded as
incorporated into the domestic law of Fiji by virtue of the Statutory basis by which the
Minister was authorised to enter into it (Income Tax Act s.106), the international law
obligations of comity require that, so far as is possible, its provisions be construed in the
manner in which the other party to it might reasonably expect, in this instance that regard
be had to the fact that it was based on OECD draft model. This approach is consistent with
that approved by the House of Lords in James Buchanan & Co Ltd v Babco Forwarding
and Shipping (U.K.) Ltd [1978] AC 141, per Lord Wilberforce at 153 and per Lord Salmon
at 161.

Paragraph 10 of the 1963 commentary reads:-

"Paragraph 3
This paragraph contains, first, a number of examples of forms of business activity
which should not be treated as constituting permanent establishments even though
the activity is carried on in a fixed place of business and, secondly, 'in the last few
words of sub-paragraph (e), a generalised exception to the rule laid down in
paragraph 1 that a "fixed place of business in I which the business of the enterprise
is wholly or partly carried on" shall be regarded a priori as a permanent
establishment."
111
We are satisfied that the words in issue in respect of the first ground of appeal are capable
of bearing the meaning which the 1963 commentary indicates the draftsman intended them
to bear. That such had been the draftsman's intention was confirmed by the 1977
commentary. We have come to the conclusion, that Scott J. was correct in his decision as to
the meaning of the prefatory words of Article 5.3. The first ground of appeal cannot,
therefore, be upheld.

T'he second ground is concerned with the purpose for which the respondent maintained its
fixed place of business in Fiji. The Court of Review and the High Court ascertained that
purpose by reference to the activities which were carried on at and from that fixed place of
business. As the appeal in these proceedings is from a decision of the High Court in the
exercise of its appellate jurisdiction, any ground must be one 'involving only a question of
law (Court of Appeal Act (Cap.12) s.12(l)(c)). The nature, extent and details of the
activities carried on by the respondent at and from its Fiji office have never been in dispute.
What has been in dispute, and what is put in issue in the second ground of appeal, is the
categorisation of those activities in terms of the words used in sub-paragraphs (d) and (e) of
Article 5.3, as well as the interpretation of those sub- paragraphs. Such categorisation is a
question of law, just as much as the interpretation of the sub-paragraphs (see e.g. Hayes v
FCT (1956) 96 CLR 47).

The activities carried on at and from the respondent's Fiji Office were those of its Area
Representative and his staff. They were described by Mr C.H.C. Seller, who was the Area
Representative in 1989, in an affidavit on which he was cross-examined in the Court of
Review. He also gave an account of the respondent's management structure; he said that
authority to make decisions of any consequence was not delegated outside the head office
of the respondent in the United Kingdom. He enumerated the Area Representative's duties
under six heads. They were:
(a) generally the representation of the respondent's interests in the area, i.e. in Fiji, the
Solomon Islands and Vanuatu;
(b) promotion of the respondent's services and facilities in the area;
(c) identification and development of new business opportunities for the respondent in the
area.
(d) monitoring the respondent 's investments in the area;
(e) establishment and maintenance of relations with the British government's
representatives, Fiji ministers and officials and commercial and political contacts,
including international agencies.

He described how the Area Representative looked for investment opportunities for the
respondent and then passed information about them to the respondent's head office in the
United Kingdom. If it was interested in following the matter up, it sent employees from the
United Kingdom to investigate the situation in depth. It was only after those employees had
made their report that a decision was made whether or not to invest; the decision was made
in the respondent's head office in the United Kingdom and the investment, if decided upon,
made from there. Mr Seller said that, although his duties included monitoring investments
once they had been made, he had no authority to take any action in the light of the
information he obtained. He simply passed it on the head office in the United Kingdom
where any decision to take action was made and any action decided upon was taken. Cross-
examined, Mr Seller acknowledged that, when he gathered information about investment
112
opportunities or the performance of an investment, he analysed it and sent comments and
recommendations with it to the head office. He also agreed that he actively looked for
investment opportunities.

It is not entirely clear whether the Court of Review considered that some of the activities
performed at and from the respondent's Fiji office fell within sub-paragraph (d) of Article
5.3 and others within sub-paragraph (e) or that they all fell within sub-paragraph (e). In the
High Court Scott J. expressly found that all of them fell within sub-paragraph (e). If they
can all be properly categorised as having a preparatory or auxiliary character, we are
satisfied that his Lordship was correct.

However, it is necessary to consider what is meant by the words "have a preparatory or

auxiliary character" mean in sub-paragraph (e). Further, to what is it that the character of
the particular activities must be preparatory or auxiliary? In deciding those questions it is
necessary, we consider, because the words are in a treaty, to give them a purposive, rather
than a literal, interpretation. notwithstanding that the treaty has been incorporated into the
domestic law of Fiji (Fothergill v Monarch Airlines Ltd [1981] AC 215 ). That approach is
required also by the fact that the legislation related to taxation (W.T. Ramsay Ltd v IRC
[1982] AC 300, per Lord Wilberforce at 323).

The natural meaning of the words appears to us to be that the activities must either be
engaged in preparation for the main business, or core activity, of the enterprise or be
engaged in to assist in that main business or core activity without itself constituting that
main business or core activity. The terms of Article 5.1 make it necessary, in our opinion, to
view the activities carried on by reference to their relationship to the business of the
enterprise. The requirement that they be similar to the specific activities referred to in sub-
paragraph (e) means that they must be preparatory or auxiliary in the same sense that those
specific activities are preparatory or auxilliary. Of course, the specific activities would not
be regarded as preparatory or auxiliary if they were themselves a core activity of the
enterprise. In the 1963 commentary one example was given of advertising being carried on
by an advertising agency.

When reference is made to paragraphs 12 and 13 of the 1963 commentary, it confirms that
as the meaning which the words were intended to have. Those paragraphs read: -
12. It is recognised that a place of business the function of which is solely that of
advertising, or the supply of information, or of scientific research may well
contribute to the productivity of its parent enterprise. To assume so is once more
axiomatic. But the services it performs for its parent enterprise are so far antecedent
to the actual realisation of profits by its parent body that no profits can properly be
allocated to it; accordingly it does not constitute a taxable unit ...
13. The last words of sub-paragraph (e), or for similar activities which have a
preparatory or auxiliary character for the enterprise, require a special explanation of
their own. The purpose of these words is twofold. In the first place, since it would
be unreasonable to seek to claim that the list of examples quoted in paragraph 3 is,
or in the nature of things could hope to be, exhaustive, the last words of sub-
paragraph (e) are intended , to cover any further examples (such as the organisation
maintained solely for the purposes of servicing a patent or 'know-how' contract)
which are not listed among the exceptions in paragraph 3 but are nevertheless
within the spirit of them ... In the second place, the words extend the principle
113
 underlying the examples in sub-paragraph (e) to provide a generalised exception to
the general definition in paragraph 1. To a considerable degree they delimit that
definition and exclude from its rather wide scope a number of forms of business
organisation which, although they are carried on in a fixed place of business, should
not be treated as taxable units. It will of course be the responsibility of the
enterprise to prove that the activities in question are of a preparatory or auxiliary
character within the framework of the whole activities of the enterprise. If, for
example, the results of the research carried on in a laboratory are not only used by
the enterprise but are also sold to a third party, the paragraph would cease to apply.

In an article on Permanent Establishment published in a Series on International Taxation

(1991, Kluwer Law and Taxation - Publishers, Deventer, Boston, USA ) Arvid A. Skaar
gives the following description of a tax-treaty case decided by the German Supreme Court:
"... the Court dealt with a US bank that was preparing to open a branch in Germany.
Office space was rented, staff were lured, and capital transferred to Germany. An
application to be allowed to engage in banking business in Germany was submitted,
and later approved, and the branch was registered in Germany as a bank. The
question was whether the sum of these activities amounted to a core business
activity, even if each activitv itself was merely of a preparatory nature. The Court
held that the combination of' these activities transcended the preparatory level, and
thus constituted a "business activity." The US bank thus had a PE in Germany.

We would agree that subparagraph (e) should be construed so that it is the totality of the
activities that are carried on that must be preparatory auxiliary.

We turn then to consider whether his Lordship erred in law in categorising the activities of
the Area Representative, which the sole purpose for which the respondent maintained its
Fiji office, as preparatory or auxiliary to the main business, or activity, carried on by the
respondent. Mr Scott submitted that because under the provision of s.2(l) of the
Commonwealth Development Act the purpose of the respondent is to assist overseas
countries in the development of their economics, and because s.2(2) includes among the
powers conferred on it for that purpose the power to investigate and formulate projects for
the promotion or expansion in overseas countries of new or existing enterprises, such
investigation is a core activity. We are unable to agree with that. The respondent's annual
report for 1989 shows that the manner in which it seeks to achieve its statutory purpose is
mainly by the investment of money in enterprises in overseas countries. It also assists in the
management of a number of enterprises in several countries. Those are the activities which
comprise its main business, its core activity, and by reference to which the activities carried
on in and from its Fiji office must be categorised.

Scott J. observed that "the line between auxiliary and preparatory activities and activities
forming part of the core activity of an enterprise is not one that is easy to draw". We should
have preferred to use "may be" instead of "is" but otherwise agree with that observation.
His Lordship also observed that many different tests and approaches had been devised by
learned commentators. Mr Scott criticised his Lordship's failure to explain why he
concluded that the Court of Review had been right to draw the line where he did. We do not
consider that the criticism is justified. However, even if it were, we should have upheld his
decision because, when the method of categorisation of activities as preparatory or
auxiliary which described above is applied to the factual situation of what the activities
114
carried on in and from the Fiji office were, both individually and in their totality, there is no
doubt that he categorised them correctly. Accordingly, the appellant does not succeed on the
second ground of his appeal.

It is not necessary for us to deal with the third ground, the appeal having failed on the first
and second grounds, no tax was payable. The matter was addressed very briefly by the
Court of Review but rather more fully by Scott J. It would, we believe not be helpful for us
to deal with it except by a full discussion of the arguments advanced to us by the parties.
However, whatever views we expressed would necessarily be obiter dicta. The obiter dicta
of Scott J. will serve as a starting point for argument should the issue have to be decided in
future. We think it best, therefore, not to express any views on the merits of the third
ground.

For the reasons given above, the appeal is dismissed. The appellant is to pay the
respondent's costs of the appeal.

115
J.M. Ah Chong & Co Ltd v CIR (1960-69) Western Samoa LR

Powles S.M. (Chairman)

The appellant company was incorporated in 1957 as a limited liability company with a fully
paid up capital of 20,000 $2 shares. On 25 th March 1964, the authorised capital was
doubled by the issue of 20,000 $2 shares which are partially paid up. As this appeal relates
to the two years ending 31st March 1963 and 31st March 1964, we are concerned only with
those who were the five shareholders before the increase of capital, namely:

J.M. Ah Chong 7,000 shares

Mrs H. Adams 3,250
S. Ah Chong 3,250
Mrs S. Macfarland 3,250
Mrs M. Ah Ching 3,250
20,000

The company business during the relevant years largely comprised two wholesale and retail
stores situated close to each other in Vaea Street. The principal store is known as Saleufi,
and the other, Taufusi. The company handled all lines of goods with an emphasis on
drapery.

Figures declared by the company for the four years 1961-1964 (ending 31st March) are:-

1961 1962 1963 1964

Sales 62,756 66,464 145,071 203,062
Gross profit 13,520 11,687 22,818 26,538
Net profit (Assessable income) 1,157 1,154 4,049 4,334

No dividend was declared. All shareholders were employees, and the company remunerated
them as follows:-

1961 1962 1963 1964

J.M. Ah Chong 1,790 1,790 3,965 3,960
Mrs Adams 870 825 1,906 1,805
S. Ah Chong 780 705 1,676 2,130
Mrs Macfarland 780 705 1,816 2,270
Mrs Ah Ching 420 345 1,286 1,500

As owner of the Saleufi building, J.M. Ah Chong was paid rent by the company at $250
p.a. until 1962 when it was increased to $500. Then, as from 16th January 1963, the
company decided to pay $1,500 p.a.

On 14th January 1965 the Commissioner requested details of the remuneration and rent
received by shareholders and of the nature of their services and the time spent by each on
the companys business. The company complied with the request by letter dated 7th May
1965, although the reply contained little information and omitted any details of time
worked. In July 1965, the Commissioner advised that he considered the remuneration and

116
rent excessive for the two years 1963 and 1964 (ending 31st March) and he fixed them as
follows for both years:-

J.M. Ah Chong 2,300

Rent 750
Mrs Adams 950
S. Ah Chong 1,000
Mrs Macfarland 1,100
Mrs Ah Ching 500

The effect of the Commissioners action upon the companys assessable income is that it
and income tax assessed (in round figures) rose as follows:-

1963 1964
Income as returned 4,049 4,334
Increased income 8,509 11,500
Tax on income as returned 885 1,000
Tax on increased income 3,400 4,600

In accordance with s.79 of the Income Tax Ordinance 1955 the Commissioner advised that
the remuneration considered excessive would be treated as dividends. The company
objected to the assessment; the Commissioner disallowed the objection; and the present
appeal was instituted pursuant to s.36 of the Ordinance as amended by the Income Tax
Amendment Act 1965.

Before examining the principal questions for determination, the Board should mention
certain preliminary matters. The Boards jurisdiction in respect of appeals under s.36 is
limited to the consideration of one ground of appeal only, namely that set out in s.36(2)(a)
of the Ordinance:
that an assessment of income ... whereby the Commissioner is required
or empowered to exercise his discretion or his own judgment in such
assessment, is unreasonable in the circumstances, and that the
Commissioner on receiving an objection to such assessment has declined to
allow the objection.

[edited]

The first question is whether the company has established that deductions for the
remuneration of all or any of the five shareholder-employees for one or both of the two
years in question should be allowed in excess of the Commissioners figures, and, if so,
what the deductions should be. Section 79 of the Ordinance applies:-
Where any sum paid or credited by a company, being or purporting to be
remuneration for services rendered by any person who is a shareholder or
director of the company, exceeds such amount as in the opinion of the
Commissioner is reasonable, the amount of the excess shall not be an
allowable deduction in computing the assessable income of the company,
and shall, for the purposes of this Ordinance, be deemed to be a dividend
paid by the company to that person and received by him as a shareholder of
the company.
117
In considering what is reasonable remuneration, one must go back to first principles and
note that a company must pay income tax on its net profit, that employees wages are a
proper deduction, but that in the case of shareholder-employees a company may not (under
s.79) pay excessive wages, thereby distributing profits of the business to shareholders under
the name of wages and evading tax. I am sure that in the present case the companys
accountant wished to save tax, and, of course, every man is entitled to endeavour to do that,
but I believe he did not pay proper attention to what was reasonable remuneration in the
circumstances. There is only one way by which shareholders may receive their share of the
profits of a business, and that is by the payment of dividends.

The Board has been invited to have regard to a number of considerations. I shall deal with
what seem to be the more important ones, bearing in mind that, as this is the first appeal of
its kind, the Boards comments may prove helpful.
[edited]

(b) The appellant argues that the increase in turnover which undoubtedly occurred after 31 st
March 1962 justifies higher salaries, and that the percentage increase in turnover is a
dependable guideline for the amount of increase in remuneration of shareholder-employees
in subsequent years. This argument was urged upon the Board and supported by details of
turnover and gross and net profit for each year since 1958. However, I am satisfied that this
approach is inconsistent with a further contention of the appellant that each of the
shareholder-employees should be paid according to his real worth. How can the worth from
year to year of any employee to an employer be assessed by having regard to the fluctuating
fortunes of the employer? The services of a particular employee may prove to be more
valuable in a lean year. I say any employee because the only difference between the
worth of a shareholder-employee and that of a non-shareholder-employee can surely be that
a shareholder is assumed to contribute somewhat more than an average employee to a
business in which he has invested his capital. The success or failure of the business may,
however, be due to totally unrelated factors. For instance, in the present case, it seems on
the evidence that the increase in turnover was due primarily to changes in the companys
system of operations, including a change in emphasis from retail to wholesale. In short,
although evidence of the improved results of a trading concern in a given year may possibly
indicate the improved worth of its employees (which I shall consider later in reference to
this case), this is by no means necessarily so, and, as the New Zealand Board has already
done, I think that this Board should reject the turnover guideline argument. (Refer 1
NZTBR Case 1 para. 24, Case 3 para. 21, and Case 4 para. 12.)

(c) A closely related argument is that the shareholder-employees are entitled to share in
the growth of the company. This is an attractive sounding phrase which overlooks the fact
that shareholders can share through the dividends they receive representing the return on
their investment. Section 79 of the Ordinance clearly refers to remuneration for services
rendered, and there is no place for a consideration of a share in the profits when one is
determining reasonable remuneration, which, after all, merely comprises what is normally
understood by salary and/or directors fee.

(d) From a study of the figures produced by the appellant, it is apparent that the
shareholder-employees were underpaid in the earlier years of the companys growth.
However, the Ordinance does not permit them to be compensated in more recent years. Of
118
course, their remuneration may be brought up to a figure reflecting their fair worth in any
given year, but ss.56 and 79 together prevent the company from compensating them for
earlier inadequate reward. It is only fair to point out, however, that if a shareholder-
employee is prepared to accept inadequate reward at a certain period of the companys
growth, that fact should not operate against him when payment of a higher figure is
warranted during better times.
[edited]

In determining what is reasonable remuneration under s.79, I am satisfied that, having

regard to the meaning of the section, the clear intention of the legislature as expressed in
the Ordinance, and the principles of taxation embodied therein, there is only one question to
be answered What is a reasonable figure to be placed on the value of the services
rendered by a particular person to a particular company in the year under review? The
factors which may be taken into account in deciding the value of services cannot be defined
once and for all, as every case will be different, but it is possible to mention certain factors
which are generally of assistance, and which have been considered by the Board in the
present case. These factors have been generally accepted by the New Zealand Board (1
NZTBR Case 1). They are:-
(i) The scope and nature of the services rendered. Under this head the degree of
responsibility carried by the employee would be relevant.
(ii) Special qualifications of the employee.
(iii) The quality of the work performed. It may be mentioned that, if the evidence
warranted it, the circumstance that a shareholder-employee had a stake in the
business and therefore more incentive would be relevant to the question of the
quality of his work.
(iv) The time spent in performing the services for which payment is made.
(v) Statistics and other evidence as to salaries currently paid for similar services.
(vi) The economic climate generally prevailing in the community.

As I have said, this does not in any way purport to be a complete list.

It is now necessary to consider the evidence submitted by the appellant company. It is

impossible to mention here all the aspects of the appellants case which I have taken into
account. However as the burden of proof is on the appellant, I wish to make the preliminary
observation that it will always be difficult for a company to discharge that burden of proof
in this type of case unless records are kept of hours worked by the shareholder-employees.
After all, while it is relatively easy to assess a person's worth in a rate per hour, or per
normal working week, it is an impossible task to assess an annual salary if the time worked
cannot be determined with some degree of certainty. Another serious deficiency in the
appellants case is that three of the shareholders over whom there was considerable
controversy were not called to substantiate the claims made in the Answer and to be
available for cross-examination. This was particularly unfortunate in view of the lack of
records, and in view of the fact that much of the detailed information contained in the
Answer had not been available to the Commissioner when he made his assessment.

With regard to the remuneration of all the shareholder-employees, and subject to what I
have said in paragraph (b) above, I am prepared to agree that the improved turnover and
profit figures were due to, in part, the skill, hard work and enthusiasm of these persons. On
the other hand, can the non-shareholder-employees be so lacking in these qualities as to
119
justify the wide margin between the salary level of shareholder and non-shareholder
employees? The Board must consider what is a reasonable remuneration in Apia during the
years under review for employees possessing these qualities. With regard to directors fees,
no formal directors meetings were held and it is not possible for the Board to assess
separate figures for these duties, although of course, a directors responsibilities are taken
into account.

As to J.M. Ah Chong, it is accepted that his contribution to the companys success far
exceeded that of the rest of the staff. There is no reason to doubt his competence in the
management of this quite substantial business, and his devotion to it. Having regard to these
considerations and to all the circumstances before the Board, I am of the opinion that a
deduction in excess of the Commissioners figure of $2,300 is justified in the case of J.M.
Ah Chong. I think that reasonable remuneration for the year ended 31 March 1963 would
be $2,850, and, for the year ended 31 March 1964, $2,950. It seems logical that the figure
for the second year should be a little higher than the first, not only because of gradual
increases in the cost-of-living index, but also because the increased turnover figures for the
second year, with the same number on the staff, does indicate some increase in the work
load. I believe that this would be so, in spite of the fact that the change in emphasis from
retail to wholesale was also occurring.

With regard to Mrs Adams, I have read the decision of Mr Wilson and entirely agree with
his reasoning and comments. I agree that there should be an increased deduction of $1,300
for the first of the two years, and a lower figure of $750 for the second year. There is
nothing in the Ordinance requiring the Board, once it is satisfied that the Commissioners
assessment of the deduction is unreasonable, to allow an increase. If the evidence justifies a
reduced figure for deduction, then the Board is obliged to determine the matter accordingly.

S. Ah Chong and Mrs Macfarland can conveniently be considered together. Mr Wilson has
commented upon the evidence in relation to them, and I agree with his comments. I would
add that while the Board does not accept that the turnover of a business is a proper
yardstick for measuring remuneration, when one considers the proportion of turnover of the
Taufusi branch as compared with the figure for the total enterprise, one can see that the
amount of work done in the branch was necessarily very much less than in the Saleufi store.
Furthermore, there was no evidence upon which the Board could accept the contention that
these two shareholders possessed special qualities. For the year ended 31 March 1963, I
would allow no increase on the Commissioners figures, but for the second year, for the
reasons stated by Mr Wilson with which I agree, the remuneration for S. Ah Chong should
be $1,250, and, for Mrs Macfarland, $1,300.

In my view, the appellant company has not satisfied the Board that the Commissioners
assessment of $500 for each year in the case of Mrs Ah Ching is unreasonable.
[The Chairman then went on to consider the deductability of the sum paid as rent.]

Mr Wilson (Appointed Member)

The Commissioner of Inland Revenue, by letter dated 14 th January 1965, asked the
appellant company, through its financial adviser, to submit certain information in respect of
the shareholder-employees of the company. Details requested were:
- Business qualifications and experience.
- Nature of services rendered.
120
- Approximate amount of time spent by him (or her) in the companys business.

These were reasonable questions and the appellant company, in its own interests, should
have given the fullest possible reply. Such statements as works full time for the company
and is on hand for any overtime work, is competent and works much longer than normal
hours, does not work regular hours but over the year puts in a considerable amount of
time were very vague answers to the Commissioners letter and could be regarded as
falling short of the term reasonable assistance required of the taxpayer in accordance with
s.144(2) of the Ordinance.

The Commissioner was obliged to act on the information before him.

No hours of work were placed before the Commissioner by the appellant company, except
by way of example referring to one shareholder-employee in a letter dated 2nd August, 1965,
in reply to the Commissioners written decision dated 15th July, 1965.

At the hearing the appellant company made lengthy written and verbal submissions in
respect of the hours worked by the various shareholder-employees and this was of course
an attempted recapitulation of the events over two years and commencing from a period
over three years prior to the presenting of the first information to the Commissioner.
Because of the time involved and the nature of the business this was undoubtedly difficult
to compile with accuracy but in fact it was deficient and inconsistent in several important
respects and cross-examination brought out further relevant and vital facts not previously
disclosed.

The witnesses called by Counsel for the appellant company, which included the companys
financial adviser, were unable to substantiate with certainty the hours of work claimed for
the various shareholder-employees, although there was evidence that certain of these had
worked hours considerably in excess of the usual salaried employee. No attempt was made
to show the productiveness of the hours worked by the individual shareholder-employees.

Much of the weight of the appellant companys submissions relied on the evidence
produced showing the turnover, gross profit and net profit figures during the years under
review and including the years prior to and after such period. Submissions showed that for
the financial year ended 31st March 1963 the turnover increased by 117% on the previous
year and further increased by 40% in the year ended 31 st March 1964. It was submitted that
between the years 1962 and 1963, net profit rose by 239%.

It is noted, however, that the years 1963 and 1964 showed only an improvement in net
profit of approximately 27% and 34% on the year 1960 and that total remuneration to all
shareholder-employees during the same period increased by 142% and 164% respectively.
The appellant company submitted that the salaries paid in the formative years had been
lower and that this should not be taken as the present worth of such employees. Attention
must therefore be drawn to s.56 of the Income Tax Ordinance 1955 in respect of such a
submission.

The appellant company also submitted that the increased turnover was a dependable guide
for assessment of reasonable remuneration. If proper regard is to be had to s.79 of the

121
Ordinance the reasonable remuneration to be paid to shareholder-employees cannot be
determined in such an arbitrary manner.

The salaries received by all the employees of the appellant company during the financial
years 1959 to 1962 showed a reasonably consistent pattern. Total remuneration of the
shareholder-employees was influenced by the bonuses paid although the gross total for the
four years varied by no more than $700. No dividends were paid from the date of
incorporation up to the year ended 31st March 1965. However, in the year ended 31st March
1963, salaries were increased by over 93% and bonuses and directors fees by 1000%
making the total remuneration for shareholder-employees more than 143% higher than the
previous year. Total remuneration to the same shareholder-employees was further increased
in the following year.
[edited]

Before proceeding to state my conclusions I wish to say that I have read the Chairmans
decision and I agree with his conclusions as to those matters which are relevant for the
consideration of the Board and those matters which should not be taken into consideration.

Upon the evidence now available I am satisfied that a reasonable remuneration for the
services of some of the shareholder-employees of the appellant company would be a sum
higher than that allowed by the respondent.

I accept the submission made by the appellant company that Mr J.M. Ah Chong was the
person most responsible for the success of the company. Matters affecting the welfare of
the company no doubt occupied much more of his time and skill than that required or given
by other shareholder-employees and the progress of the company is undoubtedly a
reflection of his business ability. I agree with the Chairmans decision with regard to this
shareholder.

Mrs H. Adams is apparently a competent employee and a director who has accepted
responsibility for certain sections of the business plus the formal duties required of her as a
director. Considering her duties and responsibilities she was not required to work excessive
hours. It was noted with serious concern that important relevant information relating to the
service of Mrs Adams under cross-examination disclosed that she did not perform any of
her duties for six months of the year ended 31st March 1964 but conducted a business of her
own for most of that period and for a considerable period thereafter. Under the
circumstances and having regard to her duties and responsibilities I would fix a reasonable
remuneration for the year ended 31st March 1963 at a higher sum than that assessed by the
respondent and for the year ended 31st March 1964 at a much lower sum. I am therefore of
the opinion that $1,300 is that reasonable sum for the year ended 31 st March 1963 and fix
the sum of $750 for the year ended 31 st March 1964 during which year she was absent for a
period of six months.

Because of the close association of the work and working condition of Mr S. Ah Chong and
Mrs S. Macfarland it is necessary to consider them together. Mr S. Ah Chong is described
as the assistant manager in charge of the grocery section of a branch store, supervising
two employees. Mrs S. Macfarland is described as the "Manageress" at the branch store and
"controlled a small staff."

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There was no evidence before the Board to show or suggest that either of these shareholder-
employees took any part in the conduct or management of the main store which functioned
as the major part of the companys business. It is necessary therefore to consider, according
to the information available, the activities of the branch store as a separate unit. This
requires a close examination of the major grounds for the appeal submitted by the appellant
company and in particular (1) the long hours spent on the affairs of the company; and (2)
the quality of the work.

By the very nature of the trading operations at the branch store long hours were essential to
attain a reasonable turnover but this does not necessarily mean longer hours than those put
in by any similar trader or that the hours were more strenuous. There was no evidence
before the Board to show that either of the shareholders now under consideration required
or displayed any unusual business ability. The hours were shared by the two shareholders
and several other staff and, considering the turnover, were not arduous. The quality of the
work can often be judged by its productiveness. If the percentage of gross profit for the
whole business was applied to the estimated turnover of the branch store taken from the
quarterly figures supplied (and there was no reason given to suggest that it would be much
greater) the respondent has fixed a remuneration for both these shareholders (in total) at a
sum not less than the approximate gross profit of the branch store. The remuneration fixed
was still nearly 50% more than the actual amount received in the year ended 31 st March
1962. Evidence as to time spent on the private business interests of these shareholders was
vague and neither of them was called as a witness.

I am accordingly of the opinion that the appellant company has failed to show where or to
what extent the respondent was in error in making the assessments objected to in respect of
these two shareholder-employees for the year ended 31 st March 1963 and has therefore
failed to discharge the burden of proof imposed on it. Evidence showed that the year ended
31st March 1964 was a record for the company. During the same year Mrs S. Macfarland
was transferred to the main store to relieve the strain and pressure on Mr J.M.Ah Chong,
and Mr S. Ah Chong took charge of the branch store. Having regard to their activities
during the year ended 31st March 1964, and the extra responsibilities assumed during part
of the year, I am of the opinion that sums higher than that allowed by the respondent would
be reasonable remuneration for that particular year. I would fix such remuneration at $1,250
for Mr S. Ah Chong and the sum of $1,300 for Mrs S. Macfarland, for the year ended 31 st
March 1964.

The information placed before the Board, although more comprehensive than that placed
before the respondent, in respect of Mrs M. Ah Ching did not discharge the burden of proof
imposed upon the appellant company and I have no hesitation in agreeing that the
respondent acted correctly in disallowing a deduction in excess of $500 in respect of the
remuneration for this shareholder-employee.

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