ICCI BANK LTD
vs.
COMMISSIONER GENERAL OF INLAND REVENUE
(INCOME TAX STATED CASE)

COURT OF APPEAL
CHITHRASIRI, J.
DEHIDENIYA, J.
CA TAX 28/2013
MARCH 25, 2015
APRIL 28, 2015

In the matter of a case stated by the Tax Appeal Commission for the opinion of the Court of Appeal under Section 170 - Inland Revenue Act No. 10 of 2006

Cases referred to :

1. Rhodosia Metals Ltd Vs. Commissioner of Taxes -1940-3 All ER 422

2. Rodrigo Vs. Commissioner General of Inland Revenue - 2002 - 1 Sri LR 384

F.N. Gunawardane with Sheranka Madanayake for Appellant

Arjuna Obeysekara DSG for Respondent.

Opinion of Court, July 16, 2015

L.T.B.DEHIDENIYA.J.

This is a case stated for the opinion of the Court of Appeal by the Tax Appeals Commission under section 170 of the Inland Revenue Act No. 10 of 2006. Seven question of law have been raised seeking opinion of this Court. At the argument, the party requiring it to be stated (hereinafter referred to as the Appellant) agreed that the question nos. 1 and 7 need not be answered. The rest of the questions are as follows:

2. Does the Appellant carry on more than one trade, business, profession or vocation in terms of section 106 (11) of the Act?

3. Does the banking business which is carried on by the Appellant result in the Appellant having more than one source of income, as contemplated by the Act?

4. Was the interest incurred by the Appellant to the value of Rs. 42, 475,326 deductible in determining the profits from trade of the Appellant for the year of assessment 2006/2007 in terms of Section 25 of the Act?

5. In the alternative, was the aforesaid interest incurred by the Appellant to the value of Rs. 42,475,326 deductible in determining the assessable income of the Appellant for the year of assessment 2006/2007 in terms of section 32(5) of the Act?

6. Notwithstanding the above, was the basis used by the Commissioner General of Inland Revenue in arriving at the interest expenses attributable to the investment made by the Appellant in Sri Lanka Development Bonds erroneous in law?

Appellant in this case is a bank incorporated in India and having a branch in Sri Lanka. Its primary business is banking, which includes providing loans to retail and corporate customers, lending to other banks, borrowing from other banks, issuing fix deposits to individuals, investing in treasury bills, investing in development bonds issued by the Government in Sri Lanka etc.

The Appellant has invested money in Sri Lanka Development Bonds. Under Section 9(f) of the Inland Revenue Act No. 10 of 2006 (IRA), the interest accrued to any person on moneys invested in the development bonds denominated in United States Dollars issued by the Central Bank of Sri Lanka shall be exempt from Income Tax. The Appellant says that the money he invested in these bonds is the money that he borrowed from its depositors. Therefore the Appellant had to pay an interest to the said customers. The Appellant's argument is that the borrowing costs of the money invested in Sri Lanka Development Bonds shall be deducted from its Taxable Income. The state objects to this and argues that the Appellant cannot have dual benefit and he can deduct only the expenses which incurred to generate the Taxable Income.

Prior to considering the law, I'll consider whether the Appellant, as a reasonable person, can make such an application? The expenses that the Appellant wants to deduct from the Taxable Income are the expenses that he incurred to generate non Taxable Income. The Appellant was given the benefit of exempting the Income Tax on accrued interest in Sri Lanka Development Bonds. It is a kind of loan given to the Sri Lankan Government by the Appellant. In appreciation, the government has given tax benefit on the accrued interest. How the Appellant finds money to invest in Sri Lanka Development Bonds is a matter of the Appellant. He cannot deduct any borrowing cost, if