IN THE COURT OF APPEAL OF THE DEMOCRATIC SOCIALIST REPUBLIC OF SRI LANKA In the matter of a Case Stated under Section 170 of the Inland Revenue Act No. 10 of 2006.

Samson Sportswear (Pvt) Ltd, No. 110, Kumaran Ratnam Road, P.

O. Box 778, Colombo 02.

Appellant C.A./ Tax/1/2013 Vs.

1. The Commissioner General of Inland Revenue, Sir Chiththampalam A. Gardiner Mawatha, Colombo 02.

Respondent Before : Hon. D.N. Samarakoon, Hon. Sasi Mahendran Counsel : Riad Ameen, with S. Abeygunewardene, instructed by D. L. F. de Saram for the Appellant.

Chaya Sri Nammuni, D. S. G. for the Respondent.

Written Submissions: 08th November 2017 by Appellant 30th November 2017 and 29th June 2022 by Respondent Date : 26th May 2023 D.N. Samarakoon, J.

Introduction:-

Basically, the question is about the interplay between the following sections of Inland Revenue Act No. 10 of 2006, (i) “CHAPTER IV ASCERTAINMENT OF PROFITS OR INCOME

25. (1) Subject to the provisions of subsections (2) and (4), there shall be deducted for the purpose of ascertaining the profits or income of any person from any source, all outgoings and expenses incurred by such person in the production thereof, including…..

(f) interest paid or payable by such person;

(ii) 26. (1) For the purpose of ascertaining the profits or income of any person from any source, no deduction shall be allowed in respect of–

(g) any disbursements or expenses of such person, not being money expended for the purpose of producing such profits or income (h) any expenditure of a capital nature or any loss of capital incurred by such person;

(iii) 32 (5) There shall be deducted from the total statutory income of a person for any year of assessment– (a) sums paid by such person for any year of assessment by way of annuity, ground rent, royalty or interest not deductible under section 25. For the purposes of this paragraph interest does not include the excess referred to in paragraph (x) of subsection (1) of section 26 :

(iv) where any sum is paid by such person by way of interest, no deduction shall be allowed in respect of such interest, unless such interest is paid under any legal or contractual obligation (B) to any other person recognized by the Commissioner-General for the purposes of this paragraph What the appellant attempts to deduct or to ask for an exemption of tax is what it paid as “interests” of a loan. The assessor, the Deputy Commissioner and the Tax Appeals Commission referred the Tax Payer to section 26(1)(g), which says, “For the purpose of ascertaining the profits or income of any person from any source, no deduction shall be allowed in respect of–

(g) any disbursements or expenses of such person, not being money expended for the purpose of producing such profits or income”

The TAC in addition cited, section 26(1)(h) which is, “26. (1) For the purpose of ascertaining the profits or income of any person from any source, no deduction shall be allowed in respect of–

(h) any expenditure of a capital nature or any loss of capital incurred by such person;..”

The appellant argues this as a violation of the rule of Audi Alteram Partem, that it was not given an opportunity to explain its stance in respect of that position. The antecedent circumstances as to why the appellant had to pay interests is as follows, The appellant “Samson Sportswear (Pvt.) Ltd.” is a subsidiary of “D. S. I. Holdings Ltd”. In 2005/2006 and 2006/2007 the appellant gave 9 interest free loans to another company of the same Group, “Samson Rajarata Tiles (Pvt.) Ltd”. These loans were subsequently taken over by another company of the same Group “D.

S. I. Samson Group Ltd”., which thus became the “debtor”.

The appellant has also taken loans from 3 Banks which were paid. In 2007 the appellant obtained an interest bearing loan of Rs. 85,000,000/- from the main company “D. S. I. Holdings Ltd”. It is the interest of this loan, the appellant wanted to deduct under section 25(1). As already referred to section 25(1) says, “CHAPTER IV ASCERTAINMENT OF PROFITS OR I