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American Leaf Blending Co. SDN BHD v.

DGIR


Privy Council Tax Cases


Lord Diplock, Viscount Dilhorne, Lord Edmund-Davies, Lord Russell Of Killowen, Sir Robin Cooke

18 July 1978



JUDGMENT


Lord Diplock (delivering the Judgment of the Board):

[1] The appellant taxpayer ("the company") was incorporated in 1960.


The principal object for which it was established was to cut and blend tobacco and to manufacture cigarettes; but, as is usual, its Memorandum of Association incorporated a wide variety of objects including granting licences over and generally dealing with the land rights and other property of the Company.


[2] The Company purchased land in Petaling Jaya whereon it erected a building, which contained a factory in which cigarette-making machinery was installed and a bonded warehouse for storing tobacco and cigarettes.


The Company started to manufacture cigarettes there in February 1961; but this proved so unprofitable that the manufacturing business was abandoned in November of the same year and thereafter until 1964 its activities were confined to trading in tobacco.


This likewise proved unprofitable and was in turn abandoned in 1964, by which time the Company had accumulated adjusted losses for income tax purposes amounting to $399,303.


[3] With the abandonment of trading in tobacco the Company no longer needed to make use itself of the storage space provided by the bonded warehouse.


So in April 1964, it licensed Caxton Press (1957) Ltd to occupy and use the warehouse for storing paper on what was in effect a monthly tenancy.


It is convenient to refer to this and subsequent licences as "lettings" and payments made thereunder as "rents" since they fall within the definition of "rent" in the Income Tax Act 1967.


It does not appear when this first letting ended; but on January 18, 1965 there was fresh letting of the warehouse to a new licensee Zuellig Feedmills (Malaya) Ltd for storing maize.


This was a letting until May 31, 1965, terminable then or at any time thereafter on one month's notice.


This second letting of the warehouse was followed by a third on October 1, 1966 to Dunlop Malayan Industries Ltd to store its own goods.


This was a three months' letting; it does not appear whether this licensee in fact held over after the expiry of the three months.

[4] In the course of 1967 the cigarette-making machinery which had remained in the factory was sold and removed.Thus making the factory as well as the warehouse available for letting for storage purposes.


On January 30, 1967, the Company let the factory area to Tien Wah Press (Malaya) Ltd for three months terminable on April 30, 1967 or at any time thereafter on one month's notice.


[5] Finally on October 1, 1968 the factory and warehouse were let to Gammon South East Asia Berhad for storage purposes for twelve months terminable on September 30, 1969 or at the end of any subsequent month on six months' notice.


[6] In the years of assessment 1968 and 1970 the Company was assessed to income tax under s 4(d) of the Income Tax Act 1967, in respect of rents from these lettings.


There is no dispute about the figures which amount to $7,040 in 1968 and $33,234 in 1970.


The Company, however, claim to be entitled under s 43(1)(a) and (2) to set off against these and any subsequent assessments, the accumulated adjusted loss of $399,303 until it is exhausted.


[7] The claim was disallowed by the Director-General of Inland Revenue.


On appeal it was allowed by the Special Commissioners who, at the request of the Director-General, stated a Case for the opinion of the High Court.


The High Court (Hashim Yeop Sani J) upheld the Company's claim to be entitled to deduction of the unabsorbed adjusted loss; but Hashim Yeop Sani J's decision on this matter was reversed by the Federal Court (Gill CJ, Ong FJ, Suleiman FJ).


It is from the judgment of the Federal Court that this appeal is brought.


[8] Before the Special Commissioners and in both Courts below, the Company claimed that it was also entitled to set off against its income from the letting of its property the balance of unabsorbed capital allowances in respect of its tobacco manufacturing business.


This claim was rejected by the High Court and the Federal Court.


It has been abandoned before their Lordships, who are accordingly concerned only with the appellant's claim under s 43, to have deducted from the assessments on the Company to income tax for 1968 and 1970 the unexhausted balance of adjusted losses incurred in carrying on its tobacco business between 1961 and 1964.


[9]Section 43, under which adjusted losses from a business of the taxpayer for previous years of assessment (as ascertained under s 40) are to be deducted from the aggregate of the taxpayer's statutory income for any year for the purpose of ascertaining his chargeable income for that year, draws a distinction between income from "a source consisting of a business" and "income from any other source".


It is only against income from a source consisting of a business that adjusted losses from a business for previous years of assessment can be set off.


The taxpayer's business from which the previous loss was incurred, however, need not be the same business as that from which his statutory income for the year of assessment is derived.


So the only question in this appeal is:


Were the rents received by the Company for letting its premises or parts thereof to other persons for use for storage, income from "a source consisting of a business" for the purposes of s 43(1) (a) and (2) of the Act?


[10] In support of the contention that they were not, two arguments have been advanced on behalf of the Inland Revenue Board (IRB).


The first is general:

that as a matter of construction of the Income Tax Act 1967, income derived from the receipt of rents of premises is incapable of constituting income from a source consisting of a business.


The second is special to the instant case: that on the facts by the Special Commissioners, the Company in the years of assessment 1968 and 1970 was not carrying on a business of letting out its premises or, it would seem, any other business at all.


[11] The first and general argument on the construction of the Act failed in both Courts below.


It can be dealt with shortly by their Lordships.


It is based upon the charging sections, s 4, which reads as follows:-

"4. Subject to this Act, the income upon which tax is chargeable under this Act is income in respect of-


(a) gains or profits from a business, for whatever period of time carried on;


(b) gains or profits from an employment;


(c) dividends, interest or discounts;