TrainingProgramSeetloo[1]

Training ProgramOrganised

ByMauritius Revenue Authority Staff Association

Resource Person : Dhanee Seetloo (Union Member)

Venue : Level 8 Ehram CourtDate : 3 May 2011

What Is Income Tax?

“Income Tax, if I may be pardoned for saying so, is a tax on income. It is not meant to be a tax on anything else”

(Lord Macnaghten in London Country Council v/s Att Cen.)

Types of IncomeTypes of IncomeEmployment IncomeBusiness IncomeChargeable Income – “In the case of an

individual the amount remaining after deducting from the net income the income exempt on threshold”

In any other case the net incomeNet income means the aggregate amount

remaining after deducting from gross income all allowable deductions

Gross Derived from Employment

Salary, wages, leave pay, fees, overtime, bonus, etc

Severance allowance or compensation for loss of office

Relevant Mauritian Tax Case

(A)De Chazal & Couacaud v/s C.I.T (Supreme Court Case 1992)

Basic Principles(i) Any person who receives severance allowance is exempt from

income tax only where that person has received what is due as severance allowance under the labour Act. The commissioner may test the correctness of the computation of severance allowance, whether it results from an agreement of the parties or from a judgment.

(i) Any amount to which the appellants were entitled under their contracts of employment and which were actually paid to them should be considered in calculating their annual remuneration.

(B) Serret v/s C.I.T (Supreme Court Case 1983)

Lump sum paid to the appellant by his ex-employers by virtue of a Court judgment was by way of compensation for loss of office. This was held to be taxable.(C) J. Valls & Others v/s MRA (Supreme Court Case 2010)

The employee claimed damages because her employment was terminated. She claimed about 17m as a result of “faute” committed by her employer. The MRA allowed 1.4m as exempt income because the amount paid was considered as severance allowance. The ARC commented that nothing should have been allowed.The Supreme Court confirmed that is was in fact a compensation for loss of office and thus taxable.(D) Michel Serge Cyril Domingue v/s MRA (ARC/IT/94-07)

This case related to the same issue as in Jane Valls.

Section 17- Deduction in connection with Employment

“Any expenditure which is wholly, exclusively and necessarily incurred by a person in performing the duties of an office or employment shall be deductible……..”

Relevant Mauritian CasePaul Chong Leung v/s C.I.T (Supreme Court Case 1981)

Basic principle

An employee is not entitled to deduct from his gross income, expenses incurred in travelling from his residence to his sole place of work as they are not incurred “in performing the duties of his office”

Chief Justice Rault gave a dissenting judgment which is worthwhile reading.

Fringe benefits

Section 10(2)(a) -“or sum by whatever name called”

Taxable Fringe benefitsCarHousingBoard & LodgingInterest on free loansTipsWriting all of debts by employerDomestic & private expenses borne by employerTax paid by Employer

Case of L.E.J Duthil v/s C.I.T as compared to that of Parmeswar Daby (T.A.T Cases)

The often spoken Jargon – “Deemed Interest”No such term is found in Law.

Case of D.A Jugroo v/s TAT (Supreme Court Case 2000)

Mr. Jugroo received an interest free loan from his employer to construct a bungalow. He was assessed to income tax on the element of deemed interest calculated at the rate of 12% on the interest-free loan. Taxpayer contended that the interest-free-loan did not arise from his employment but from his personal circumstances.The supreme court confirmed that is was a benefit arising out of his employment

Above case was decided on the basis of Laidler v/s Perry and Tennant v/s Smith. Reference was also made to Mauritian case – Razvi v/s C.I.T (Supreme Court Case 1987)

Business ProfitsConcept – must arise from trade or business

- must include a monetary benefit

• The term “business” has been defined as follows in section 2

“ business includes any trade profession vocation or occupation, manufacture or undertaking or any other income earning activity, carried on with a view to profit”

Section 10(1)(b) – Any gross income derived from any business

Business IncomeKey extracts of Section 10Section 10- Income included in gross income(3)a - any sum or benefit in money or money’s worth,

derived from the carrying on or carrying out any undertaking, or scheme entered into or derived for the purpose of making a profit, irrespective of the time at which the undertaking or scheme was entered or devised.

3(c)- any sum or benefit in money or money’s worth, derived from the sale of any immovable property, where the property was acquired in the course of a business the main purpose of which is the acquisition and sale of immovable property.

1. Adhinath Singh Lutchmun & Others v/s MRA (Privy Council Case-2006)

Compensation received due to compulsory acquisition by the government was held to be business income.

2. Robert de Maroussem v/s CIT (Privy Council Case- 2003)

Robert de Maroussem acquired a 99 year lease from Medine sugar estates for 1000 arpents. The land was used mainly for agricultural purposes. In 1988, 75 arpents of the land was developed and subdivided into 456 building plots. Each time a sale was effected by Medine S.E a percentage of the sales proceeds were paid to the lessee for relinquishing his rights therein. Even if Mr. Maroussem was not the owner of the land. It was held that the share of income was taxable because he was participating in a morcellement scheme. The privy council ordered the commissioner to allow as cost the market value of the land just before the development.

Section 10(3) a & c Illustrated

What has judges said about trade?

I.T.A 1995 – “Trade means any trade adventure or concern in the nature of trade”Oliver J in Salt v/s Chamberlain (53 Tc 143)

“I doubt whether the question whether in any given case a person is or is not carrying on a trade is capable of solution by the application of logical progression of propositions culled from decided cases. The question is , I think one of overall impression”Lord President Clyde in I.R.C v/s Livingston (11TC 538)

“ I think the test which must be used to determine whether a venture such as we are now considering is or is not “in the nature or a trade” is whether the operations involved in it are of the same kind, and carried on in the same way, as those which are characteristic of ordinary trading in the line of business in which the venture was made”

Lord Wilberforce in Ransom v/s Higgs (5o TC 1)

“Trade involves, normally the exchange of goods or services, for reward, not of all services, since some qualify as a profession or employment or vacation, but there must be something which the trade offers to provide by way of business. Trade moreover, presupposes a customer (to this too, there may be exceptions, but such is the norm), or, as it may be expressed, trade must be bilateral – you must trade with someone”

“Trade is infinitely varied, so we often find applied to it the cliché that its categories are not closed. Of course they are not; but this does not mean that the concept of trade is without limits so that any activity which yields an advantage, however indirect can be brought within the net of tax”

Lord Brightman in Kowloon Stock Exchange Ltd v/s CIR (P.c 1984 STC 602)

“The word trade is no doubt capable of bearing a variety of meanings according to the context in which it is used. In its most restricted sense it means the buying and selling of good; in a slightly wider sense; it includes the buying and selling of land; there is no reason to exclude, in an appropriate context, the buying and selling of choses in action. It is commonly used…. to denote operations of a commercial character by which the trader provides the customer for reward some kind of goods or services”

Lord Morison in the case of Lindsay Woodward & Hiscox v/s CIR (18 TC 43)

“It is quite immaterial that the particular method of carrying on the trade involved the making of a false declaration to the Customs authorities or giving bribes to persons in America. In my opinion, these are entirely irrelevant considerations. When it is established that a trade has existed for a year, the question is whether it realised a profit as ascertained under the rules of the statute. It is quite in vain for the person who has realised the profit to prove that he made it by cheating of fraudulent trading, or to attempt to contend that the profit he has earned ought to escape chargeability because he might have been convicted of a breach of the law. During the discussion a question was raised as to whether the profits or gains of a burglar were subject to tax. Obviously not, because burglary is not a trade or business; but if a trader committed a housebreaking and stole his rival’s order book and, from its information, was able to increase the profits of his own business, I have no doubt that these profits are subject to tax. It is, in my opinion, absurd to suppose that honest gains are charged to tax and dishonest gains escape. To hold otherwise would involve a plain breach of the rules of the statute, which require the full amount of the profits to be taxes and merely put a premium on dishonest trading. The burglar and the swindler, who carry on a trade or business for profit, are as liable to tax as an honest business man, and, in addition, they get their deserts elsewhere”

Case of Robert Duverge v/s CIT (CN 5833/98 TAT case)

Employee of Medine S.EObtained funds unlawfully from his employerAssessments were raised by the officeTAT confirmed that taxpayer is taxable on

such income

Allowable Deductions

Net Income = Gross Income – Allowable Deduction

For accounting purposes there are two steps on profit computation

Sales – Cost of Sales = Gross profitGross Profit – Expenses = Net Profit

The term allowable deduction covers a wide range of expenditure items.

For business purposes allowable deduction has been defined as “any expenditure loss or allowance which is deductible”

Conditions when expenditure or loss can be allowed as a Deduction

Section 18 – Expenditure incurred in the production of Income.

“Any expenditure or loss shall be deductible…… to the extent to which it is exclusively incurred in the production of gross income…..”

Common ProblemsWhether a provision or an accrualTreatment of bad debts – Guideline has been

published

Meaning of Loss (Section 18)

Taxpayers deficit on year’s turnover and expenses

Loss can be B/F from last year

Item of expense or loss not intended (eg Property loss, stolen or destroyed)

Losses through theft tort or negligence of employees are deductible.

DEDUCTIBLE if incurred in producing income

Case Law Relating to LossesCharles Moore & Co v/s F.C.T (6AITR379)

On the way to the deposit the previous day’s takings, two employees were attacked and all money were stolen. The loss was one connected with the normal course of the business and it was incurred “in the course of gaining or producing the assessable income”. It was an allowable deduction.

Curtis v/s Oldfield Ltd (9T.C 319) Company managing director in sole control He siphoned off funds Written off as bad debts in the accounts Not deductible as managing director had total control of the

company and it was not a trading loss. A misapplication of profit

Bamford v/s ATA Advertising Ltd (48TC359) is also a similar case where misappropriation by a director is not an allowable

The wholly and Exclusively RuleIf an expenditure is to be deductible, it must not

only be incurred “for the purpose of earning profit” but must be wholly and exclusively” incurred for the production of Gross Income.

Case of Bentleys Stockes & Lowless v/s BeesonLunch was provided during discussion with clients;

while computing the income of the solicitors business the court allowed the expenditure as a deduction.

In Mauritius section 26(1)(e) prohibits such deduction.

Case of Mallalieu v/s Drummond (57TC330)

Extract of Lords Brightman from the House of Lords

“Miss Mallalieu thought only of the requirements of her profession when she first bought (as a capital expense) her wardrobe of subdued clothing and, no doubt, as and when she replaced items or sent them to the launderers or the cleaners she would, if asked, have repeated that she was maintaining her wardrobe because of those requirements. It is the natural way that anyone incurring such expenditure would think and speak. But she needed clothes to travel to work and clothes to wear at work, and I think it is inescapable that one object, though not a conscious motive, was the provision of the clothing that she needed as a human being. I reject the notion that the object of a taxpayer is inevitably limited to the particular conscious motive in mind at the moment of expenditure. Of course the motive of which the taxpayer is conscious is of vital significance, but it is not inevitably the only object which the Commissioners are entitled to find to exist. In my opinion the Commissioners were not only entitled to reach the conclusion that the taxpayer’s object was both to serve the purposes of her profession and also to serve her personal purposes, but I myself would have found it impossible to reach any other conclusion.”

Treatment of Bad DebtsLocal Tax CasesSubash Uppiah v/s CI.T (Cno 40/99 TAT Case)Mr. Uppiah a wholesaler failed to prove that the amount owed by the Debtors was really bad. No legal action was taken against debtors. Bad debts not allowed by the ARC.

Best Electronics Ltd v/s CIT (CN 5257/97 & s/court case 2002)In this case the bad debts related to overseas customers who did not settle their account. The company contended that to institute judicial proceedings against the overseas customers amounts to “throwing good money after bad”. The claim for bad debts was disallowed.

MWT paper processing v/s C.I.TThe company accepted a smaller amount in full settlement of a debt for a larger amount. Thus voluntarily extinguishing its right to recover the balance. Bad debts not allowed.

Score Marketing Co Ltd v/s C.I.T (ARC 32/04)Legal action was taken after the bad debts were written off. Bad debts not allowed.ARC comment – “it might have been sound business decision to write off the debts, it is not so far tax purposes.”

Bentley Apparel Ltd v/s C.I.T (Supreme Court case)

Bad debts was proved after the year of assessment in which it was claimed. Hence not allowed. The case addressed the issue of prudence concept but the T.A.T ruled that tax laws prevails over accounting principle. This was confirmed by the Supreme Court.

Guidelines issued by MRA in 2009 after representation from stakeholders.

Section 19 – Expenditure incurred on interest in the production of Gross Income

Applicable both individual and companies

Just having a certificate of interest is not sufficient

Must be in respect of capital employed exclusively in the production of gross income

Recent case of Robert Le Maire Intergraph Ltee v/s MRAThe company borrowed substantial amounts from the banks. Major part of the borrowed funds were given interest free to subsidiary companies. Part of the interest claimed the company was disallowed. The assessment was confirmed both by the ARC and the Supreme Court.

Section 20 - LossesLosses cannot be set-off against emolument. This

was possible in the 1974 Income Tax Act.

Director General must be satisfied.

Losses may be carried forward and set-off against not income derived in the 5 succeeding income years – starting from 1 July 2006

Losses arising from annual allowances in respect of capital expenditure incurred on or after 1/7/2006 can be carried forward indefinitely.

An Illustration of the time limit to carry forward losses

Assume a company closing its account on 30th June and as at 30/6/2006 the accumulated losses was 200000

Losses amounting to 70,000 will lapse.

Year ended

Year of Assessment

Profit / (Loss)

Carried forward

30/6/2006

2006/2007 (200/000) (200000)

30/6/2007

2007/2008 25000 (175000)

30/6/2008

2008/2009 40000 (135000)

30/6/2009

2009/2010 30000 (105000)

30/6/2010

2010 15000 (90000)

30/6/2011

2011 20000 (70000)

Section 24 – Annual Allowance

Item on which annual allowance is granted has been listed in the law

Conditions – (i) Proper books and records should be kept(ii) Expenditure should be incurred in the

production of Gross Income(iii) In case of a motor car annual allowance

cannot exceed 3m. This condition does not apply to tour operators

Shops and shopping malls

Office and showrooms

No need to incur expenditure on both item

Section 26- Unauthorized Deduction

Any expenditure , investment or loss to the extent to which it is capital or of a capital nature

Expenditure or loss to the extent it is in the production of Exempt Income

Any reserve or provision of any kind

Any expenditure or loss recoverable under a contract of insurance or of indemnity

Any expenditure incurred in providing business entertainment or any gift

Income Tax or Foreign Tax

Any expenditure or loss to the extent to which it is of a domestic or private nature

Case of CIR v/s Alexander Von Glehn (12 TC 232)

It relates to the payment of a penaltyNot allowable as a deductionA difference between a commercial loss in

trading and a penalty imposed on a taxpayer for infringement of the law.

Not exclusively incurred for the production of Income

Case of Mauritius Shopping Paradise Co Ltd v/s CIT (TAT CN 179/00)

Provision for expenses claimed in respect of duties and taxes

Contention of company – an accrualThe amount was payable because of an

offenceDecision – Not allowable

When is an expenditure of a capital nature?

British Insulated & Helsby Cables v/s Atherton 10 TC 188

Principle

“Where 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…..there is a very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as attributable not to revenue but to capital.”

(Lord Cave)

Section 26(3) – Expenditure or Loss attributable to both Taxable and Exempt Income

Simple IllustrationA company has submitted its Income Tax computation for year of assessment 2009/2010 and the figures are as follows:Details Rs 000

Commissions & Dividends receivable 700

Profit on disposal of shares 1600

Total Income 2300

Deduct Expenses 100

Net Profit 2200

Less

Dividend from resident companies 450

Profits on Disposal of Shares 1600 2050

Chargeable Income 150

Tax 22500

Expenses per Account

License 4000

Audit fees 5000

General Expenses 6000

Accounting Fees 15000

Management fee 60000

Investment Analyst Fees

10000

Total claim per account

100,000

Breakdown of expenses claimed

Can we accept the expenses as a deduction or do we have to make any adjustment?

Solution for Illustration in respect of Sec26(3)

Application of Regulation 8 – Unauthorized Deductions

Exempt Income Expenditure or LossTotal Gross Income (including Exempt Income)

Exempt IncomeDividend 450,000Profit on disposal of shares 1,600,000Total Exempt income 2,050,000

Total Gross Income 2,300,000Expenditure or Loss 100,000

Amount of expenditure to be disallowed in accordance with regulation 8

2,050,000 100,000 89130

2,300,000 1

Chargeable Income (declared) 150,000Add Expenditure attributable 89,130

to exempt Income Revised Chargeable Income 239,130Tax @ 15% 35,869

Illustration for AMT Section 44(A)(1)Profit per accountant 2,777,5

00

Add unauthorized deduction

(i) Provision for bad debts 190,000

(ii) Gifts & Donations 50,000

(iii) Depreciation 222,500

(iv) Expenditure incurred in the production of Gross Income

38,734

501,234

Less

(i) Exempt Dividend 900,000

(ii) Annual allowances 765,000

1665,000

Chargeable Income 1,613,734

Tax @ 15% 242,060

Alternative minimum Tax (AMT)Section 44A(1)

AMT will apply in cases where companies have not paid any tax or enough tax but have paid dividend

AMT will not apply where the normal tax payable exceeds 10% of dividend declared

Will AMT apply in the above example if the dividend paid is Rs 800,000Dividend Paid 800,000

10% 80,000

Tax Paid 242,060

41

HOW HOW A.M.TA.M.T WORKS? WORKS?Section 44A (1)

Case A Case B Case C Case D

Normal tax Payable 3000 3000 3000 3000

7.5% of book profit 2400 4500 4500 4500

10% of dividends 1500 3600 5400 1500

Tax payable 3000 3600 4500 3000

Questions?