DISTILLERIES COMPANY OF SRI LANKA PLC

DISTILLERIES COMPANY OF SRI LANKA PLC

VS.

COMMISSIONER GENERAL OF INLAND REVENUE

COURT OF APPEAL
SAMARAKOON, J.
KIRTISINGHE, J.
CA/TAX/13/13
MARCH 3, 2021

Inland Revenue Act, No. 10 of 2006, sections 25(1), 26(1)(g) and (h), 170-Case stated-Tax Appeals Commission-Turnover tax

There had been an increase in the turnover tax levied by some Provincial Councils from 01.01.2007, and retailers had requested that the appellant, the Distilleries Company of Sri Lanka PLC, absorb the said increase. Thereafter, the appellant adjusted the prices to the satisfaction of the retailers with effect from 01.02.2007 but not for the month of January 2007. The appellant reimbursed the retailers the increased tax paid by them for the month of January 2007, totalling a sum of Rs.93,997,709. The appellant claimed this reimbursement as an expenditure incurred in the production of its income under section 25(1) of the Inland Revenue Act, No. 10 of 2006. The case of the respondent, the Commissioner General of Inland Revenue, was that this sum cannot be deducted as an expense, as it is a capital expenditure under section 26(1)(h) of the Act. The Tax Appeal Commission accepted the respondent's position. Thereafter, on the application of the appellant, the Tax Appeal Commission sought the opinion of the Court of Appeal by way of a case stated in terms of section 170 of the Inland Revenue Act.

Held :

1. Section 25(1) of the Inland Revenue Act enacts that subject to the provisions of sections 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.

2. According to section 26(1)(h), for the purpose of ascertaining the profits or income of any person from any source, no deduction shall be allowed in respect of any expenditure of a capital nature

or any loss of capital incurred by such person. On the facts and circumstances of this case, the reimbursement is not an expenditure of a capital nature and therefore section 26(1)(h) of the Inland Revenue Act is not a bar to the appellant making the claim.

3. According to section 26(1)(g), for the purpose of ascertaining the profits or income of any person from any source, no deduction shall be allowed in respect of any disbursements or expenses of such person not being money expended for the purpose of producing such profits or income.

4. The Provincial Councils increased the turnover tax payable by retailers with effect from January 2007. The appellant had taken steps immediately to remedy the situation by reducing the wholesale price with effect from February 2007. Therefore, it was not essential to reimburse the taxes paid just for the month of January 2007. The reimbursement for that month was not a necessary expense and an expense incurred by the appellant in the production of profits and income. Hence it cannot be deducted under section 25(1) of the Inland Revenue Act, No. 10 of 2006, and both the Commissioner General of Inland Revenue and the Tax Appeals Commission have come to a correct conclusion in respect of this matter.

Cases referred to :

1. Atherton v. British Insulated Helby Cables Ltd 10 TC 155

2. Vallambrosa Rubber Company v. Farmer 1910 SC 519, 5 TC 529

3. Smith v. Incorporated Council of Law Reporting (1914) 3 KB 674

4. Commissioner of Taxes v. Nchanga Consolidated Copper Mines Ltd (1964) 1 All ER 208

5. B.P. Australia Ltd v. Commissioner of Taxation of the Commonwealth of Australia

6. Secret Hotels Ltd v. Revenue and Customs Commissioner (2014) 2 AII ER 685

7. Royal Insurance Company v. Watson (1897) AC 1

8. Usher's Wiltshire Brewery Ltd v. Bruce [1915] AC 433; Tax cases Vol 6 at 399

9. Smith Potato Estates v. Boland 30 TC 267

APPLICATION for an Opinion on a Case Stated by the Tax Appeals Commission.

Riad Ameen for the Appellant.

Manohara Jayasinghe,

Click Here to Read the rest of this document