Gopal Sri Ram JCA:

The appellant taxpayer constituted a benefit plan for its employees. This is how the plan works. An employee will receive a lump sum payment when he or she retires or resigns or on his or her termination from service other than a termination for cause. So if an employee is dismissed for misconduct he or she will not receive anything from the benefit plan. The fund for this benefit plan is financed and administered entirely by the appellant. The employees make no financial contribution to that fund and there is no separate fund to which the employees make contributions. But there are conditions to be satisfied for an employee to receive this benefit. He or she must have served the appellant for at least 11 years. Once that condition is satisfied, the employee is regarded as having an accrued or vested right to receive the benefit. However, an employee who has served 11 years will not receive any benefit if he or she is terminated for cause. But the appellant as employer has a discretion whether to make any payment to such an employee. So much for the plan.

Now, the appellant sought to deduct the monies set aside for this plan from its income. Revenue did not agree. It said that the money for the plan was a chargeable gain. It refused to allow the deduction from the assessments raised against the appellant. The appellant appealed to the Special Commissioners. They held against the appellant. The appellant then appealed to the High Court which also found against it. And so the appellant has come before us.

This case turns on the interpretation to be given to the opening words of s. 33(1) of the Income Tax Act 1967 ('the Act'). These are the words of that provision: and I have placed emphasis on the relevant phrase:

Subject to this Act, the adjusted income of a person from a source for the basis period for a year of assessment shall be an amount ascertained by deducting from the gross income of that person from that source for that period all outgoings and expenses wholly and exclusively incurred during that period by that person in the production of gross income from that source...

Revenue's argument is simple enough. It says that the important words in s. 33(1) are 'expenses wholly and exclusively incurred'. In other words, it must be money actually spent. The benefit plan is in respect of monies that are never 'incurred'. They are there to meet a mere contingency. So they form part of the adjusted income and attract tax.

The appellant relies on Commissioner for Inland Revenue v. Lo & Lo [1984] 1 WLR 986. It is a decision of the Privy Council. It turned on the interpretation of s. 16(1) of the Inland Revenue Ordinance of Hong Kong. The relevant part of that section reads:

(1) In ascertaining the profits in respect of which a person is chargeable to tax under this Part for any year of assessment there shall be deducted all outgoings and expenses to the extent to which they are incurred during the basis period for that year of assessment by such person in the production of profits in respect of which he is chargeable to tax under this Part for any period, including ... (emphasis added.)

The facts in Lo & Lo were these. Lo & Lo were a long established firm of solicitors and notaries practising in Hong Kong. In 1977 the firm introduced a condition of employment whereby a retiring member of its staff, who had completed 10 years of service, would become entitled to a lump sum payment roughly equivalent to 1/24 of his annual salary as at the date of retirement for each year of service. The Commissioner of Inland Revenue contended that the accrued liability of the firm to pay its staff was not an expense 'incurred' within the meaning of section 16 of the Hong Kong Ordinance. The Board of Review (the equivalent of our Special Commissioners) held for the Commissioner. The High Court reversed and the Court of Appeal upheld the reversal. The Commissioner then appealed to the Privy Council which affirmed the court