[2010] UKPC
11
Privy Council Appeal No 0050 of 2009
JUDGMENT
Société Royal Gardens et
Compagnie & 138 Others
v
The
Mauritius Revenue Authority
From the
Supreme Court of Mauritius
before
Lord Phillips
Lord Rodger
Lord Walker
Lord Brown
Lord Clarke
JUDGMENT
DELIVERED BY
Lord Brown
ON
ON
29 June 2010
Heard
on 29 April 2010
Appellant
Mr Ivan Collendavelloo,, SC
Michael
King Fat
(Instructed by MA Law LLP)
Respondent
Philip
Baker QC
Rajeshsharma
Ramloll
Marika Lemos
(Instructed by Royds
Solicitors LLP)
LORD BROWN :
1.
This
is a most unusual case. In a nutshell the facts are these. The appellant taxpayers, consequent on
certain transactions and arrangements, claimed various capital allowances
whereby they showed tax losses for the year 1994/1995. The Commissioner of Income Tax (since
replaced by the respondent Revenue Authority) thought the purpose of these
arrangements to have been tax avoidance and by letter dated 24 June 1999
determined accordingly that they were void pursuant to section 44 of the Income
Tax Act 1974 (the Commissioner’s first determination). By the same letter the Commissioner also
adjusted the losses in any event from Rs196,111,885 to Rs111,361,885 pursuant
to sections 28A and 32A of the 1974 Act (the Commissioner’s second
determination). The taxpayers appealed
against both these determinations to the Tax Appeal Tribunal (since replaced by
the Assessment Review Committee) which on 20 December 2002 upheld their appeal
with regard to the first determination.
By letter dated 24 January 2003 the Commissioner maintained his second
determination and stated that the appellants’ tax liability would be adjusted
accordingly. The appellants sought
judicial review of that decision on the ground that it contravened the final
and binding effect of the Tribunal’s unappealed determination of 20 December
2002. By judgment dated 30 April 2008
the Supreme Court (Matadeen SPJ and Balgobin J) dismissed that application,
holding that the Tribunal’s determination was binding on the parties only to
the extent that there had been a determination on the issue in question and
that there had been no such determination on the second issue.
2.
The
taxpayers now appeal to the Board by leave of the Supreme Court granted on 15
January 2009. It may at once be noted
that before their Lordships the appellants speedily disavowed any contention
that the second issue had in fact been determined by the Tribunal so as to be chose jugée (their essential argument
before the Supreme Court). Rather they
contended that at some stage before the Tribunal’s determination (which
followed a series of written and, finally, oral submissions) the Commissioner
was to be regarded as having abandoned his second determination so as to become
estopped from subsequently reasserting it after the Tribunal failed to deal
with it. The respondent Revenue
Authority for its part submitted to the contrary that it was rather the
taxpayers who should be regarded as having abandoned their appeal against the
Commissioner’s second determination and, since it had been for them to make
good their appeal, the second determination was accordingly conclusive against
them.
3.
With
that brief introduction, their Lordships must now return to the facts albeit
with no need to recount these in any great detail. There were in all 139 appellants before the
Tribunal although, as the Board will later explain, the appeals of the last
four came to be adjourned. The first
appellant was constituted as a limited partnership on 20 January 1994, with the
second to ninth appellants (the third to ninth also being limited partnerships)
as associates. The tenth to one hundred
and thirty-ninth appellants were the associates of the third to ninth
appellants. Thus the first appellant was
largely a partnership of partnerships.
4.
On
27 April 1994 the first appellant purchased from Blue Sun (Mauritius) Ltd (in
compulsory winding up) the leasehold interest in, and uncompleted buildings and
structures of, a proposed hotel (The Mariya Hotel) for the sum of Rs110m. By 30
June 1994 the first appellants had spent a further Rs150,123,363 towards the
completion of the hotel (which was finally completed in December 1994) and for
the purchase of plant, equipment, furniture and fittings.
5.
On
3 August 1994 the third to ninth appellants exchanged their interests in the
first appellant for shares in the second appellant so that the first appellant
became a wholly-owned subsidiary of the second appellant.
6.
In
its income tax return for the year of assessment 1994/1995 the first appellant
claimed investment and initial allowances of the total capital expenditure
incurred, Rs260,123,363, its tax computation for that year showing in the
result a tax loss of Rs196,111,885.
7.
Since
partnerships in Mauritius are transparent for tax purposes, this loss was
apportioned to the remaining appellants and the individual and corporate
appellants duly made claims in their tax returns to set off their respective
shares in this loss against their taxable incomes.
8.
As
already stated, the Commissioner decided that through these various transactions
the appellants had entered into an arrangement one of the purposes of which was
the avoidance of tax whereby it was considered void pursuant to the provisions
of section 44 of the 1974 Act. The
Commissioner concluded that the proper person to whom the relevant losses for
the year were attributable was the second appellant so that the losses showing
in the returns of the other appellants would be disregarded and their
chargeable income recomputed and made subject to notices of assessment. The
letter then concluded:
“You
will also note that the losses as at 30 June 1994 transferrable from Ste Royal
Gardens to Royal Gardens Ltd have been adjusted to Rs111,361,885 in accordance
with sections 28A and 32A of the Income Tax Act 1974 ie initial and investment
allowances claimed on the purchase consideration of the leasehold rights and
uncompleted buildings and structures have been disallowed. Moreover, the ‘ski lane’ has not been taken
into consideration for computing capital allowances as it does not qualify for
such allowances.”
9.
Notices
of assessment followed dated 28 June 1999.
On 12 July 1999 the appellants objected to these on the ground that they
wrongly disregarded the claimed losses.
On 11 October 1999 the Commissioner rejected these objections, maintained
his assessments and reminded the appellants of their right to appeal to the
Tribunal under section 4 of the Tax Appeal Tribunal Act 1984.
10.
The
appellants duly did appeal and there followed a succession of written cases,
written submissions and, on various dates between 21 March 2000 and 30 May
2002, oral submissions by the respective parties. The great majority of these submissions
plainly went to the first issue – as to whether the arrangements were designed
essentially or at least partly for tax avoidance – the issue on which the
appellants succeeded. But some at least
went to the second issue, the extent of any claimable allowances. Their Lordships think it unnecessary to refer
to the detailed cross-fire of submissions in order to demonstrate this. Rather it seems to the Board quite apparent
from passages in the Tribunal’s (40 page) determination itself. For example, on the very first page of the
determination, having noted that “[t]he Commissioner felt that the main purpose
or one of the purposes behind that course of conduct was tax avoidance and
should therefore be considered null and void”, the Tribunal continued:
“The Commissioner further felt that,
consequently:
(i)
The
losses for assessment year 1994/95 are attributable to Royal Gardens Ltd and
not Appellants and consequently, the losses shown in the return of the Société
Royal Gardens have to be disregarded and the share of losses of the associates
have to be considered to be nil.
(ii)
The
capital expenditure allowance for hotel construction (section 28A) and the
investment allowance (section 32A) on the purchase consideration of the
leasehold rights and uncompleted buildings and structures claimed by Société
Royal Gardens should also be disallowed.”
The use of the word “consequently”
at the start of that quotation is somewhat puzzling: paragraph (ii) necessarily
assumed the failure of the Commissioner’s case under paragraph (i). But the reference to paragraph (ii) clearly
showed that issue (ii) was still in play.
11.
Later
in their determination the Tribunal set out extracts from the competing
submissions including the following from the appellants’ written submissions:
“Contention of the respondent
. . .
The
initial allowance of 50% and the investment allowance of 25% should not be
allowed on the purchase consideration of the leasehold rights and the costs of
the uncompleted buildings and structures.
. . .
In answer thereto, it is submitted that
. . .
(ii)
Capital
expenditure was incurred by Société Royal Gardens et Compagnie for the
acquisition of physical assets (ie the uncompleted building of what was to have
become Mariya Hotel) and completion of the hotel building. As at 30 June 1994 there was no income
produced.
(iii)
The
Société is, according to the provisions of the Income Tax Act 1974 (ie sections
2, 9(2), 9(4), 28A, 32A(1) and 28A(8), duly entitled to investment and initial
allowances on the whole cost of the construction of the hotel building (ie the
sum of Rs110m incurred for the acquisition of the uncompleted hotel building
and the completion costs).”
12.
It is
equally apparent to the Board, however, that the Tribunal never decided this
second issue. Their determination
ends as follows:
“Finally
we wish to conclude by perhaps stating the obvious: we accept the evidence led
by appellants as true and we are satisfied that they have discharged the burden
of proving that the transactions, considered by the Commissioner as an
antiavoidance scheme under section 44, were genuine commercial transactions and
that the tax benefits were only incidental and not the result of any scheme. .
. .
Last
but not least the respondent in spite of the efforts, has not been able to
establish that the documents were a ‘mere façade or cloak’ for some other
transaction and therefore a sham.
We
therefore determine all the above appeals in favour of appellants.
Appeal allowed.”
13.
Following
the Tribunal’s determination of 20 December 2002, the Commissioner, as already
stated, by letter dated 24 January 2003 maintained his decision on the second
issue and stated that the appellants’ tax liability would be adjusted
accordingly. It was that decision which
the appellants unsuccessfully challenged by a judicial review application to
the Supreme Court, whose decision dated 30 April 2008 is in turn now under
appeal to the Board.
14.
The
Supreme Court correctly recognised that the Tribunal had not decided the second
issue and that the appellants could not, therefore, “invoke before [them] the
principle of ‘res judicata’ or ‘autorité de la chose jugeé’.” Their no less critical but altogether more
doubtful conclusion, however, was that the appellants had in effect abandoned
their case on the second issue. That
conclusion emerges clearly from the following passages in the Supreme Court’s
judgment:
(i)
“The
Tribunal found that it could do no better than reproduce verbatim some of those
documents . . . which . . . set out the case for the applicants but not before
making this statement: ‘It is worth mentioning that the other issues relating
to the relevant Income Tax Act, time barred assessments, ski land, etc, have
neither been pressed nor submitted upon by Appellants. We are therefore relieved from
determining these issues’.”
(ii)
“[T]he
issue of disallowance of capital allowances was neither pressed nor decided
upon by the Tribunal.”
(iii)
“No
evidence was adduced by the only witness for the applicants before the Tribunal
on the issue of capital allowances; nor was that issue of capital allowances
pressed before the Tribunal. And
accordingly there was no finding from the Tribunal on that issue.”
15.
The
suggestion in the third of those passages that no evidence had been adduced by
the appellants on the issue of capital allowances is a surprising one. Mr Masson, himself an appellant, the
appellants’ only witness (indeed the only witness before the Tribunal since the
respondent called none) gave all the evidence necessary for a decision on the
second issue. That issue fell to be decided
on the undisputed facts as a pure question of law, in particular by reference
to sections 28A and 32A of the 1974 Act, so far as material as follows:
“28A Allowances for Hotels
. . . (3) In computing the capital expenditure
incurred on the erection of any building, no account shall be taken of
expenditure incurred on the acquisition of, or of rights in or over, any land,
. .
.”
“32A Investment Allowances
. . .
(2)
No deduction shall be allowed under subsection (1) [a deduction by way of
investment allowance of 25% of the capital expenditure incurred on the
acquisition of new machinery and plant] in respect of expenditure incurred in
the acquisition of any machinery or plant which is - (a) used or second-hand at
the date of its acquisition; . . . ”
Was the
Supreme Court right to have understood the Tribunal to be saying, in the
extract from their determination quoted in the first of the above three
passages, that the issue of capital allowances had “neither been pressed nor
submitted upon by Appellants”? This
is the critical question.
16.
Although
their Lordships can readily see how the Supreme Court came to their
understanding – indeed the very fact that the Tribunal never did determine the
issue of capital allowances may tend to suggest that they thought the
appellants had abandoned their case upon it – we are not in the end persuaded
that this was correct. It is apparent from
careful examination of the various written and oral submissions that the issue
relating to capital allowances was not an issue “relating to the relevant
Income Tax Act” (that concerned rather a point raised by the appellants as to which Income Tax Act should apply), nor
an issue as to whether the assessments were time-barred (another point raised
by the appellants), nor, obviously, as to the ski lane (the construction of
which, as the appellants’ written submissions expressly accepted, had not even
been started in the relevant year).
Unless, therefore, this important second issue in the appeal was
encompassed within the word “etc”, it was not to be regarded as an issue
“neither ... pressed nor submitted upon” by the appellants which the Tribunal
were therefore relieved from determining.
Given that this issue was itself worth, we are told, some Rs5.6m in net
tax liability and given, as shown above, that the appellants had already
outlined their case upon it in writing, their Lordships do not think the word
“etc” capable of bearing so heavy a weight in the present context.
17.
What,
then, of the appellants’ contention that it is rather the respondent who must
be regarded as having abandoned his case on the second issue, ie his fall-back
position that if the claimed losses are not to be totally disregarded, they are
at any rate to be reduced? In support of
this argument the appellants pray in aid two passages in particular in the
Tribunal’s determination. First
this:
“The
respondent took the perilous decision of raising assessments on the sole ground that what was done amounted
to antiavoidance and therefore contravened section 44 of the Income Tax Act
1974. No alternative ground was given
and this, at his risk and peril.
Therefore, although the issues may have been raised in the Statements of
Case or address of Counsel, we cannot, in fairness, go into issues not raised
by the assessment letter issued by the Commissioner, as they are irrelevant.”
Secondly,
the appellants rely upon the concluding words of the determinations already
quoted, particularly the final line: “We therefore determine all the above
appeals in favour of Appellants.”
18.
Again,
however, the Board is not persuaded that the respondent is properly to be
regarded as having abandoned his case on the second issue. The reference to antiavoidance in section 44
being “the sole ground” of the
assessments can be seen on examination to relate to the respondent’s decision
to confine his anti-avoidance case to
section 44, leaving no room for any other attack on the validity of the
underlying transactions. And the Tribunal’s concluding sentence about
determining all the appeals in favour
of the appellants is simply a reflection of the fact that by an earlier
direction the Tribunal had consolidated the appeals of all the appellants.
Besides these considerations, in the respondent’s case too it would have been
odd for him to have abandoned his case on the second issue: a large sum of
money was at stake and he clearly had a properly arguable case upon it.
19.
In
the result, the Board concludes that neither party abandoned their case on
issue 2, that the issue was accordingly live before the Tribunal and properly
therefore should have been decided. It appears that each party read the
determination through rose-tinted spectacles, interpreting it in its own favour
with regard to the second issue.
Plainly, in hindsight, once it emerged that the parties were in dispute
about the outcome of the appeal, they should sensibly have returned to the
Tribunal and asked for their decision upon this outstanding issue.
20.
What,
then, should now be done? As it seems to
their Lordships, this second issue remains outstanding to this day and ought
now finally to be resolved. In their
judgment of 30 April 2008 the Supreme Court noted that the Tribunal had
“excluded the appeals by the last four applicants as they had raised other
issues in addition to those canvassed in the appeals by the first 135
applicants” and that, as for these four, “their appeals are still pending
before the Assessment Review Committee which has now taken over from the
Tribunal.” Written submissions invited
from the parties subsequent to the oral hearing of this appeal in Mauritius on
29 April as to which tribunal should now hear and determine any outstanding
issue (submissions, incidentally, noting that two of the four last appellants
have now reached agreement with the respondent regarding the other issues)
suggest that there is some doubt whether the outstanding issue as to capital
allowances should be remitted to the Assessment Review Committee or the Supreme
Court. Having considered these submissions the Board concludes that the
appropriate course here is to allow this appeal to the extent of setting aside
the Supreme Court’s order and substituting for it an order on the judicial
review application that the issue as to capital allowances be now remitted to
the Assessment Review Committee for final determination (to be heard, as that
Committee may direct, before, with or following the appeals of any of the last
four of the original appellants whose appeals remain outstanding); and further
that, if that Committee decide that after all they have no jurisdiction to
determine this issue (a question to be decided primarily by reference to the
further submissions now before the Board and without prolonged further
argument), the issue be instead decided by the Supreme Court of Mauritius. Their Lordships further conclude that,
neither party having succeeded fully on this appeal (or on the judicial review
challenge), subject to written submissions to the contrary by either party
within 28 days, there should be no order as to costs either before the Supreme
Court or before the Board.
21.
Essentially
by way of footnote the Board think it salutary to invite the attention of the
profession to paragraph 6-11 of Chapter 6 of Potter and Prosser on Tax Appeals
(1991):
“Given
that the Commissioners’ determination is binding on the parties only in
relation to the issues raised on the appeal, it will sometimes be important in
connection with a dispute between the taxpayer and the Inland Revenue to
identify the issues which were raised and resolved in a previous appeal. The starting-point is the taxpayers’ notice
of appeal which is supposed to specify the grounds of appeal; but it is unfortunately
common practice for a notice to omit to specify the issues and instead to state
baldly that the assessment is ‘excessive and estimate.’ Even where the notice of appeal is more
explicit, further issues may have emerged in the course of the hearing. It is clearly in the parties’ interests to
ensure that a note is made before the end of the hearing of all those issues,
not only those which the Commissioners are being asked to resolve, but also
those which have been raised but conceded by one side or the other. A copy of the notice should be given to the
Commissioners to incorporate in some form in their decision. Then there should be no difficulty in
identifying the issues raised on the appeal.
Where, as in most appeals, particularly those heard by General
Commissioners, this has not been done, it may be necessary to consider the
pre-hearing correspondence between the parties and the parties’ notes of the
hearing in order to find out what the Commissioners actually decided.”
The importance of that paragraph
hardly requires emphasis in the circumstances of the present case. Had its wise words been observed, a great
deal of dispute, delay and expense would surely have been avoided.
