Jamaica Mutual Life Assurance Society v The Board of Inland Revenue

• Jurisdiction: Trinidad & Tobago
• Judge: Koylass, C.,Burke, M.,Julumsingh, M.
• Judgment Date: 28 June 1983
• Court: Tax Appeal Board (Trinidad and Tobago)
• Docket Number: I 52 of 1981; I 53 of 1981
• Date: 28 June 1983

Tax Appeal Board

Koylass, C.; Burke, M.; Julumsingh, M.

I 52 of 1981; I 53 of 1981

JAmaica Mutual Life Assurance Society

and

The Board of Inland Revenue

Appearances:

M. de la Bastidel S.C. and R. Nelson for appellant

E. John — Charles and Miss S. Collymore for respondent

Revenue Law - Corporation tax — Following an examination of the appellant's return, the respondent had raised additional assessments by increasing chargeable income in an amount of $1,396,155 — Appellant appealed — Whether the deposit administration business carried on a part of the appellant's business was approved annuity business under paragraph 3(4) of Schedule VI of the Finance Act, 1966 — Whether the allocation of the appellant's income from investment to separate classes of business was correct — Whether some of the appellant's expenses should be attributed to the earning of income from tax exempt government bonds — Ruling that the profits from the deposit administration business of the appellant were not derived from long — term insurance or approved annuity business, and were taxable at normal corporation tax rates — Method of apportioning tax exempt income proportionately to the three classes of business, as done by the respondent was a proper one in circumstances — Expenses to be charged against tax exempt income were the total incurred in producing both interest from government bonds declared to be tax exempt by order of the President and dividends from shares in resident companies.

JUDGEMENT OF THE COURT:

1 On 23rd June, 19814 the appellant filed two-notices of appeal. In I 52 of 1981, the appeal relates to corporation tax for the year of income 1974. I 53 am in regard to unemployment levy for the same year.

2 Following an examination of the appellant's return, the respondent had raised additional assessments by increasing chargeable income in an amount of $1,396,155, representing –

• (a) $1,375,293 – additional profits of long term insurance business; and

• (b) $20,862 – profit from deposit administration business.

3 The notices of appeal are in similar terms and set out in detail the grounds of appeal. On 16th September, 1981, the respondent filed a consolidated statement of case which was amended on 27th November, 1981. At the hearing on 25th April, 1983, Mr. de la Bastide informed the Court that following discussions between the parties, agreement had been reached on several of the issues raised in the notices of appeal. He asked the Court to rule on three issues on which the parties had failed to agree. A ruling by the Court on these, he intimated, would provide a basis for agreeing the assessments.

4 The first issue referred to by Mr. de la Bastide, as the major one, relates to whether the deposit administration business carried on as a part of the appellant's business was approved annuity business under paragraph 3(4) of Schedule VI of the Finance Act, 1966, which reads –

“The profits of approved annuity business shall not be chargeable to tax except to the extent that such profit is distributed to the shareholders.”

5 We shall hereinafter refer to the Finance Act, 1966 as “the Act” and to Schedule VI thereof as “Schedule VI”.

6 Section 54 of the Act provides that the provisions of Schedule VI shall have effect for the purpose of ascertaining the chargeable profits and tax payable thereon of Insurance Companies, Shipping Companies and Air Navigation Companies.

7 Mr. de la Bastide pointed out that Schedule VI provided no definition of “approved annuity business”, but that in paragraph 5(1) thereof the following definition is given of “long-term insurance business”.

“Long-term insurance business” means ordinary life assurance business, general annuity business, industrial life insurance business, approved annuity business, on-cancellable sickness and accident insurance and bond investment business.”

8 Paragraph 5(2) of Schedule Vi he stated, made certain definitions as contained in the First Schedule of the Insurance Act, 1966 applicable to that Schedule. In the First Schedule “life insurance business” and “approved annuity business” are defined at paragraph 1(ii)(a) and 1(iii) respectively, as under –

• “1. (ii)(a) “Life Insurance Business” means insurance of human lives and insurance appertaining thereto or connected therewith and includes the granting of annuities, endowment benefits and benefits in the event of death or dismemberment by accident or accidental means and the granting of benefits in the event of total and permanent disability, provided that such insurance against disability caused by accident or sickness is included as an additional benefit in a life policy and that the additional benefit does not exceed the following:……………………………”

• “1. (iii) “Approved Annuity Business” includes any annuity business undertaken for the purpose of establishing and conducting a deferred annuity or approved fund or scheme under section 16 and an approved deferred annuity plan under sections 16A to 1GE of the Income Tax Ordinance.”

9 He asked the Court to find that the purpose of the whole plan was the provision of pensions for members of a pension scheme. This was done by purchase of an annuity by making withdrawals from the deposit administration fund into which had been deposited amounts contributed by an employer and on which interest accumulated. Such withdrawals were made to purchase pensions when a member of a pension scheme retired. He drew attention to several clauses of a specimen deposit administration policy on record (folios 19 to 23), which we shall refer to hereinafter as “the policy”.

10 The essential features of the policy and the fund, he submitted, were –

• (1) The appellant received money for investment from Trustees of a pension plan (hereinafter referred to as “the Trustees”).

• (2) Interest was earned on the investments from these earnings. The Trustees' account was credited at a rate of interest, which was guaranteed for the first five years and thereafter was at a rate declared in the Annual Report of the Directors of the appellant in respect of the preceding year. Depending on circumstances, the appellant could make a profit or incur a loss in operating the fund.

• (3) The appellant was remunerated in two ways –

  • (a) by charging a management fee for managing the investment portfolio; and

  • (b) by earning a profit when interest on investment exceeded what was credited to the Trustees' account.

11 Counsel submitted that the Trustees could not go elsewhere to purchase annuities when members retired, as clause (7) provided for pensions to be purchased from the appellant.

12 He argued that the respondent had artificially and arbitrarily divided the deposit administration business into two distinct compartments, one of investment and the other the provision of pensions, and contended that such a division of the investment business of an insurance company was contrary to recorded decisions on the point. He cited –

Sun Life Assurance Co. of Canada v. B.I.R., 194 of 1967 Appeal Board of T.T. General Reinsurance Co. Ltd. v. Tomlinson, 1970, 2 All E.R. 436.

13 In both of the above cases references had been made to two other cases on the point, viz. –

Punjab Co-operative Bank Ltd., Amritsar v. I.T.C., Lahore (1940), 4 All E.R. 87Colonial Mutual Life Assurance Society Ltd. v. F.C.T., 73 C.L.R. 604.

14 The passages referred to in Sun Life are –

• p. 14 “It was submitted by counsel for The Company that while interest derived from such investments was such income, the profit from the “switching” of investments was not. The Company was not trading in securities but, being a life insurance company, it was required to exercise prudence in respect of its investments and was required to change the makeup of its investments from time to time. The Company had to provide ready cash to meet claims against it by its policy holders. The sale and negotiation of securities was not the main or principal business of the insurance company. Since the sale was one of fixed assets, the profit there from was not income but was capital and therefore non-taxable.

  There are numerous authorities who establish the principle that profits from the changing or realisation of its investments by insurance Companies and banks are, according to ordinary concepts, just as much income as the interest derived from such investments, since they are a part of the normal activities in carrying on the ordinary business of such concerns.”

• p. 15 “The Privy Council in PUNJAB CO-OPERATIVE BANK LTD. AMRITSAR V. I.T.C. LAHORE (1940) 3 All E.R. 87, decided that the buying and selling of securities forms part of the normal business of banking and was taxable under section 10 of the Income Tax Act, 1922 of India as profits or gains of a business carried on by the bank.

• pp. 15 to 16 “In Australia an insurance company invested part of its funds in securities. The policy was to hold them as investments and not to traffic in them so as to make a profit from their realisation, but to increase the effective interest yield, irrespective of whether there was capital accretion. It was held that The Company was taxable on the surplus, being the difference between the average cost of the securities and the amount realised on disposal. The reason for the decision was that the gain was either a profit arising from the carrying on or carrying out of a profit-making scheme, or alternatively that it was a profit according to the ordinary usages and concepts of mankind. The case is COLONIAL MUTUAL LIFE ASSURANCE SOCIETY LTD. V. F. C. T. 73 C. L. R. 604. The Court deduced from the case law (at page 618) that –

  “the sounder view is that profits and losses on the realisation of investments of the funds of an insurance company should usually be taken into account in the determination of the profits and gains of the business.”

15 After noting that a life...