30 September, 2019
Background
The taxpayer in this matter is a shareholder and contributory of a company (the “Company”) that was solely engaged in the business of plantation. In 1989, the Company was ordered to be wound-up at the behest of the then Inland Revenue Department (“IRD”) by way of a court order because the Company had not paid income tax on its plantation business income. The Company therefore went into liquidation.
In 1994, the other contributories of the Company sought to bring the Company out of liquidation and stay the winding-up proceedings; however, this was opposed by the taxpayer and, in 1995, the Federal Court ruled that the winding-up proceedings could not be stayed and that the Company was to proceed to liquidation (“1995 Federal Court decision”).
Accordingly, from 2012 to 2014, the Liquidator(s) of the Company disposed of certain assets (“Assets”) of the Company as part of the liquidation process. The proceeds from these Assets were accordingly distributed to the contributories of the Company (including the taxpayer).
Notices of Assessment against the taxpayer
In 2017 the Director General of Inland Revenue (“DGIR”) issued Notices of Assessment for income tax and penalties (“NOAs”) against the taxpayer on the purported grounds that:
The taxpayer in this matter is a shareholder and contributory of a company (the “Company”) that was solely engaged in the business of plantation. In 1989, the Company was ordered to be wound-up at the behest of the then Inland Revenue Department (“IRD”) by way of a court order because the Company had not paid income tax on its plantation business income. The Company therefore went into liquidation.
In 1994, the other contributories of the Company sought to bring the Company out of liquidation and stay the winding-up proceedings; however, this was opposed by the taxpayer and, in 1995, the Federal Court ruled that the winding-up proceedings could not be stayed and that the Company was to proceed to liquidation (“1995 Federal Court decision”).
Accordingly, from 2012 to 2014, the Liquidator(s) of the Company disposed of certain assets (“Assets”) of the Company as part of the liquidation process. The proceeds from these Assets were accordingly distributed to the contributories of the Company (including the taxpayer).
Notices of Assessment against the taxpayer
In 2017 the Director General of Inland Revenue (“DGIR”) issued Notices of Assessment for income tax and penalties (“NOAs”) against the taxpayer on the purported grounds that:
- no attempt was made by the Liquidator(s) or the contributories to obtain a tax exemption certificate for the Company from the Inland Revenue Board (“IRB”);
- no step was taken to “reactivate” the Company and bring it out of liquidation before the disposal of the Assets; and
- although the Company had clearly not been “reactivated”, had the Company been “reactivated”, the Assets would constitute “stock in trade” and thus the proceeds from their disposal would be subject to income tax.
The taxpayer challenged the Revenue’s position on the basis that, amongst others:
- the 1995 Federal Court decision is binding upon the Revenue in rem as an order made in liquidation is binding upon the world at large. Therefore, the 1995 Federal Court decision prohibited the “reactivation” of the Company and the IRB had no power to override this and any direct or indirect attempt to do so would constitute contempt of court; and
- even if the Company had been reactivated, the Company would only have been reactivated as a plantation company (as it always was) and all lands would be fixed assets and no assessments to income tax would be sustainable.
Taxpayer’s Judicial Review proceedings
The taxpayer commenced Judicial Review proceedings against the decision of the DGIR in the High Court and was granted leave for Judicial Review. The High Court further ordered a stay of proceedings, preventing the DGIR from collecting the purported disputed taxes and penalties in regard to the above NOAs (“the Stay Order”).
Notices of Additional Assessment against the Company
Following the orders of the High Court, the DGIR discharged the disputed NOAs previously raised against the taxpayer. However, the DGIR issued Notices of Additional Assessment for income tax and penalties against the Company in liquidation (“NOAAs against the Company”) on the same grounds as the above NOAs.
Committal proceedings undertaken by the taxpayer
The taxpayer made an application to the High Court for leave to apply for an order for committal against the DGIR, the IRB and the assistant branch director who issued the NOAAs against the Company, on the ground that the issuance of the NOAAs against the Company was in contempt of court for the following reasons:
The taxpayer commenced Judicial Review proceedings against the decision of the DGIR in the High Court and was granted leave for Judicial Review. The High Court further ordered a stay of proceedings, preventing the DGIR from collecting the purported disputed taxes and penalties in regard to the above NOAs (“the Stay Order”).
Notices of Additional Assessment against the Company
Following the orders of the High Court, the DGIR discharged the disputed NOAs previously raised against the taxpayer. However, the DGIR issued Notices of Additional Assessment for income tax and penalties against the Company in liquidation (“NOAAs against the Company”) on the same grounds as the above NOAs.
Committal proceedings undertaken by the taxpayer
The taxpayer made an application to the High Court for leave to apply for an order for committal against the DGIR, the IRB and the assistant branch director who issued the NOAAs against the Company, on the ground that the issuance of the NOAAs against the Company was in contempt of court for the following reasons:
- the issuance of the NOAAs against the Company was just a means to achieve a similar finding or decision as the DGIR’s earlier decision, in the NOAs raised against the taxpayer and subsequently discharged. This was the very matter which was explicitly prohibited by the Stay Order; and
- the DGIR’s conduct in raising the NOAAs against the Company constituted an illegal attempt to question the 1995 Federal Court decision which made clear that the Company could not be brought out of liquidation.
In 2018, the High Court granted the taxpayer leave to apply for an order for committal against the DGIR, the IRB and the assistant branch director.
The taxpayer and the DGIR subsequently reached an agreement in this matter and a Consent Order was recorded before the High Court whereby the DGIR agreed to discharge the NOAAs against the Company and, in turn, the taxpayer agreed to withdraw its Judicial Review Application as well as its Application for Committal against the DGIR, the IRB and the assistant branch director.
Landmark case for taxpayers
This is a landmark case in which the IRB acknowledged their error in raising assessments against a contributory of a company in liquidation and proceeded to rectify the same by discharging all assessments raised both against the taxpayer and the Company in liquidation.
It is also the first known case where leave was granted by the High Court to a taxpayer to apply for an order for committal against the DGIR, the IRB and an assistant branch director.
The taxpayer and the DGIR subsequently reached an agreement in this matter and a Consent Order was recorded before the High Court whereby the DGIR agreed to discharge the NOAAs against the Company and, in turn, the taxpayer agreed to withdraw its Judicial Review Application as well as its Application for Committal against the DGIR, the IRB and the assistant branch director.
Landmark case for taxpayers
This is a landmark case in which the IRB acknowledged their error in raising assessments against a contributory of a company in liquidation and proceeded to rectify the same by discharging all assessments raised both against the taxpayer and the Company in liquidation.
It is also the first known case where leave was granted by the High Court to a taxpayer to apply for an order for committal against the DGIR, the IRB and an assistant branch director.
For further information, please contact:
Abhilaash Subramaniam, Shearn Delamore & Co
abhi@shearndelamore.com
