Speldewinde V. Savundaranayagam

[IN THE PRIVY COUNCIL]

1957 Present : Lord Tucker, Lord Cohen, Lord Somervell of Harrow,
                    Lord Denning and Mr, L. M. D. de Silva

C. A. SPELDEWINDE (Commissioner of Income Tax),
Appellant, and EMIL SAVUNDARANAYAGAM,
Respondent

PRIVY COUNCIL APPEAL NO. 16 OF 1956

S. C. 323-In the Matter of a Case stated for the opinion of the
Supreme Court under Section 74 of the Income Tax
Ordinance

Income tax-Money paid under a mistake of fact-Liability to be assessed as profit of a trade-Artificial or fictitious transactions--Income Tax Ordinance (Cap. 188), ss. 6, 52 (2).

Money paid under a mistake of fact (e. g., on the assumption that certain forged documents of title to goods are genuine) to the credit of a person in his trading account is liable to be assessed to income tax as his profit from a trade, unless the assessee shows that the money has been or will be extinguished or diminished by a claim made by the person who is entitled to receive it. Money paid under a mistake of fact cannot be said to be the" property" of, or to " belong " to, the payer while it is still in the hands of the payee, although the payee is liable to pay the sum to the payer.

It is open to an Assessor to hold, if the facts warrant it, that a company or a partnership should be considered, for income tax purposes, as artificial or fictitious and falling within the operation of section 52 (2) of the Income Tax Ordinance although, as far as third parties are concerned, there is a legal basis for such company or partnership.

APPEAL from a judgment of the Supreme Court reported in 56 N. L. R. 457.

John Senter, Q.C., with Reginald Hills and R. K. Handoo, for the Appellant.

R. Heyworth Talbot, Q.G., with S. Nadesan, Q.C., H. H. Munroe and Sirimevan Amerasinghe, for the Respondent.

Cur. adv. vult.

June 24, 1957. [Delivered by LORD SOMERVELL OF HARROW]-

This is an appeal from a judgment of the Supreme Court of Ceylon on a Case Stated under the Income Tax Ordinance by the Board of Review. The respondent had applied for the case in respect of a determination of the Board dismissing his appeal against an assessment to income tax by the Commissioner. The assessment was confirmed  subject to a reduction in amount which is not in dispute in the appeal,

The decision of the Board of Review is final subject to questions of law (section 74). The Supreme Court reduced the assessment by the sums which are in issue in this appeal, and the Commissioner of Income Tax appeals.

The question is whether certain sums received by the respondent are profits of a trade. Under the Income Tax Ordinance the tax is imposed" on profits or income. Those words mean inter alia the profits from any trade for however short a period carried on or exercised (section 6). Trade includes every trade and manufacture, and every adventure and concern in the nature of trade (section 2). Section 52 (2) is as follows :

Where an Assessor is of opinion that any transaction which reduces or would reduce the amount of tax payable by any person is artificial or fictitious or that any disposition is not in fact given effect to, he may disregard any such transaction or disposition and the persons concerned shall be assessable accordingly.

In October, 1949, the respondent formed a private company called the Transworld Enterprises Ltd. (hereinafter called T. W. E.) with an issued capital of Rs. 100 of which he and his wife held 6/10ths. In May, 1950, the respondent formed a company called Eastern Traders Ltd. (hereinafter called E. T.) with a capital of Rs. 1,000. T. W. E. controlled 93 per cent, of the shares.

The Commissioner said that it was not possible to accept as true anything the respondent said or even to accept at its face value what appears in most of the documents produced.

In October, 1950, letters passed between T. W. E. and one Renfro as representative of the Hwa Shih Co., Tientsin. The

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