IN THE COURT OF APPEAL OF THE DEMOCRATIC SOCIALIST REPUBLIC OF SRI LANKA In the matter of a Stated Case on question of law for the opinion of the Court of Appeal under and in terms of section 122 (2) of the Inland Revenue Act, No. 28 of

1979.

SriLankan Airlines Limited, Airline Centre, Bandaranaike International Airport, Katunayake.

Appellant Case No. CA/TAX/0002/2010 Tax Appeals Commission No. BRA-523/SCA-226 Vs.

The Commissioner General of Inland Revenue, Department of Inland Revenue, Sir Chittampalam A.Gardiner Mawatha, Colombo 02. Respondent Before : Dr. Ruwan Fernando J. &

M. Sampath K.B. Wijeratne J.

Counsel : : Dr. Shivaji Felix with Nivantha Satharasinghe for the Appellant Manohara Jayasinghe, D.S.G. for the Respondent.

Argued on : 10.09.2023 & 19.10.2022 :

Written Submissions filed on : 06.02.2023& 01.11.2019 (by the Appellant)

06.02.2023 & 11.03.2016 (bythe Respondent)

Decided on : 28.02.2023 Dr. Ruwan Fernando, J.

Introduction [1] This is an appeal by way of a case stated against the determination of the Board of Review dated 22.10.2009 confirming the assessment made by the assessor subject to variation with regard to the interest received from the Bank of Ceylon as exempt interest under and in terms of section 10(g) of the Inland Revenue Act, No. 28 of 1979 (as amended). The years of assessments related to the appeal are 1994/1995 and 1995/1996.

Factual Background [2] The Appellant is a limited liability and is operating its business as a commercial airline providing international air transportation and all other related services thereto. The Appellant entered into an Agreement with the Board of Greater Colombo Economic Commission (hereinafter referred to as the GCEC) under the Greater Colombo Economic Commission law, No. 4 of 1978 and Supplementary Agreements under its successor, the Board of Investment of Sri Lanka under the Board of Investment of Sri Lanka Law, No. 4 of 1978 as amended (hereinafter referred to as the BOI). In terms of clause 8 of the Agreement No. 972 dated 28.01.1982 with the GCEC, the provisions of the Inland Revenue Act, No. 28 of 1979 relating to the imposition and collection of income tax in respect of profits and income of the Enterprise shall not apply for a period of 7 years reckoned from the date of commencement of commercial operations of the said business as may be determined by the BOI. In terms of the Supplementary Agreement No. 25 with the BOI, the tax exemption was extended to ten years from the date of which the enterprise is deemed to have commenced commercial operations. In terms of the Supplementary Agreement, No. 184 with the BOI, the said period was extended to fifteen years reckoned from the year of assessment 1983/1984. During the said tax exemption period, the said Agreements provided that the provisions of the Inland Revenue Act, No. 28 of 1979 relating to the imposition, payment and recovery of income tax in respect of profits and income of the Enterprise shall not apply to the profits and income of the Enterprise.

[3] The Appellant filed the return of income with the Department of Inland Revenue for the years of assessment 1994/95 and 1995/96 claiming (i) the exemptions from interest income of Rs. 97,662,847/- for the year of assessment 1994/1995 and Rs. 67,498,917 for the year of assessment 1995/1996; (ii) the deduction of losses from the previous years amounting to Rs. 192,464,632/- for the year of assessment 1994/95 and Rs. 88,236,047/- for the year of assessment 1995/96; and (iii) exemption of interest accrued to deposits made in foreign currency accounts under section 10(g) of the Inland revenue Act, No. 28 of 1979. The assessor by his letters rejected the returns furnished by the Appellant for the following reasons:

1. Business profits fall under section 3(a) and interest income and rental income falls under section 3(e) and 3(g) of the Inland Revenue Act respectively;

2. The exemption from income tax has been granted to the Appellant under clause 8 of the agreement for its bu