Planning Associates Ltd v Board of Inland Revenue
| Jurisdiction | Trinidad & Tobago |
| Judge | Koylass, C.,Burke, M.,Julumsingh, M. |
| Judgment Date | 09 November 1983 |
| Court | Tax Appeal Board (Trinidad and Tobago) |
| Docket Number | I 64 of 1979; I 65 of 1979 |
| Date | 09 November 1983 |
Tax Appeal Board
Koylass, C.; Burke, M.; Julumsingh, M.
I 64 of 1979; I 65 of 1979
J. Davis, S.C. and R. Nelson for appellant
Mrs. M. Robinson-Walters for respondent
Revenue Law - Corporation tax — Unemployment levy — Appellant appealed against additional assessments to corporation tax and unemployment levy for the year of income 1974, for which year the respondent had increased the chargeable income of the appellant in a sum of $112,927 — Respondent disallowed a sum of $100,000 as bonus to the managing director — Whether Section 52(3) of the Finance Act applied to the payment of the bonus to the managing director, and if so, whether the sum of $148,000 paid to K for 1974 comprising bonus and salary exceeded by $100,000 an amount which was fair and reasonable in view of the time provided by him to the affairs of the appellant — Whether the amount of $100,000 had been wholly and exclusively incurred in the production of income pursuant to Section 10 of the Income Tax Ordinance — Whether the payment of $130,000 as a bonus was an artificial transaction, which may be disregarded by the revenue under the provisions of Section 34(1) of the Ordinance — Appeal was dismissed.
These appeals are against additional assessments to corporation tax and unemployment levy for the year of income 1974, for which year the Respondent had increased the chargeable income of the appellant in a sum of $112,927, consequent on the disallowance of the following expenses:–
(a) Bonus to Managing Director
–
100,000
(b) Soil laboratory expenses
–
15,143
(c) Legal and professional fees
–
812
–
115,955
and the grant of a wear and tear allowance of $3,028. These appeals were consolidated by order of the Court dated 3rd July, 1980.
At the hearing, the appellant having conceded the disallowance in regard to soil laboratory expenses and legal and professional fees, the only issue for determination was whether the respondent was 3usti• fled in disallowing a sum of $100,000 as bonus to the Managing Director.
The grounds of appeal as they relate to this issue are
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(a) The appellant is a Company which carries on the business of providing engineering services in Trinidad and Tobago.
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(b) At all material times one Curtis Knight was the Managing Director of The Company.
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(c) In the year of income 1974 The Company paid to the said Curtis Knight by way of remuneration for his services to The Company the sum of $148,000.00.
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(d) The above amount was a revenue expense wholly and exclusively incurred by the appellant in the production of income.
The respondent's contentions relating thereto are set out in paragraph 15 of the consolidated statement of case as under –
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(a) The alleged remuneration amounting to $10,000, which includes a bonus of $130,000 by the appellant to the Managing Director, Curtis Lawrence Knight, exceeds the amount which in the opinion of the Respondent appears to be fair and reasonable.
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(b) The said remuneration was not an expense wholly and exclusively laid out or expended for the purpose of producing the income. The excessive remuneration of $100,000 is accordingly disallowed as an expense in computing the appellant's chargeable income for the year under review.
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(c) Alternatively, the payment by the appellant to the Managing Director, Curtis Lawrence Knight, of $130,000 as a bonus was an artificial transaction which reduced the amount of tax payable by the appellant. The Board is entitled to disregard such transaction in accordance with the provisions of S. 34 (1) of the Income Tax Ordinance.
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(d) Further, in the alternative, the payment by the appellant was a distribution within the provisions of S. 23(3) of the Income Tax Ordinance.
On 6th April, 1963, the appellant filed an answer, which reads as under –
“1. The appellant company admits so much of paragraph 1 of the amended Consolidated Statement of Case (hereinafter referred to as “the Statement of Case”) as refers to its registration under the Companies Ordinance Chapter 31 Number 1 and the situation of its registered office.
2. The business of the appellant company is contained in its Memorandum and Articles of Association, to which the appellant will refer at the hearing for their full terms meaning and effect.
3. Paragraphs 2, 3 and 4 of the Statement of Case are admitted. The appellant company further states that it paid corporation tax on an accruals basis.
(a) The alleged remuneration amounting to $148,000, which includes a bonus of $130,000 by the appellant to the Managing Director, Curtis Lawrence Knight, exceeds the amount which in the opinion of the Respondent appears to be fair and reasonable.
(b) The said remuneration was not an expense wholly and exclusively laid out or expended for the purpose of producing the income. The excessive remuneration of $100,000 is accordingly disallowed as an expense in computing the appellant's chargeable income for the year under review.
(c) Alternatively, the payment by the appellant to the Managing Director, Curtis Lawrence Knight, of $130,000 as a bonus was an artificial transaction which reduced the amount of tax payable by the appellant. The Board is entitled to disregard such transaction in accordance with the provisions of S. 34 (1) of the Income Tax Ordinance.
(d) Further, in the alternative, the payment by the appellant was a distribution within the provisions of S. 23(3) of the Income Tax Ordinance.
On 6th April, 1983, the appellant filed an answer, which reads as under –
“1. The appellant company admits so much of paragraph 1 of the amended Consolidated Statement of Case (hereinafter referred to as “the Statement of Case”) as refers to its registration under the Companies Ordinance Chapter 31 Number 1 and the situation of its registered office.
2. The business of the appellant company is contained in its Memorandum and Articles of Association, to which the appellant will refer at the hearing for their full terms meaning and effect.
3. Paragraphs 2, 3 and 4 of the Statement of Case are admitted. The appellant company further states that it paid corporation tax on an accruals basis.
4. The appellant company was never assessed on the basis of the said return. Accordingly it cannot be said that the appellant was assessed at a lesser amount than that on which it ought to have been assessed as alleged in paragraph 16 of the Statement of Case.
5. Subject to paragraph 4 hereof, paragraphs 5, 6, 7, 8, 9 and 10 are admitted.
6. In the year 1974 the appellant company paid Mr. Curtis Knight, its managing director, remuneration in the following sums:
(1) By way of salary
$ 18,000.00
(2) By way of bonus
$130,000.00
(3) By way of director's fees
$ 120.00
(4) By way of entertainment Allowance
$ 3,000.00
7. At all material times Mr. Knight was the main shareholder, keyman and sole employee with engineering qualifications in the appellant company. Mr. Knight also managed The Company and all tendering, planning, design and execution of work was done by him at The Company's office, at his home and at job sites.
8. Mr. Knight devoted his whole time to The Company. He worked on holidays, week-ends and on evenings. His hours of work were BOO a.m. to 5.30 p.m. and 7.30 p.m. to 1.00 daily. The list of projects undertaken in 1974 indicates the extent of work over which Mr. Knight devoted his time. This list is hereto annexed and marked “A”.
9. In 1974 Mr. Knight was 55 years of age and had the reputation of being one of the first local engineers. He is still regarded in this country as the founder of local engineering.
10. In 1974 he had acquired the status of and was regarded as an engineering consultant and as such would have been entitled to demand a substantial basic salary on the open market plus such usual perquisites as entertainment travelling and housing allowances.
11. As to salary, which for present purposes includes bonus, the salary and bonus paid to Mr. Knight was in accordance with the “charge out” rate approved by the Association of Professional Engineers of Trinidad and Tobago.
12. At all material times Mr. Knight underpaid himself so as to ensure sufficient cash flow to The Company to meet its expenses.
13. Mr. Knight in effect financed The Company, meeting substantial portions of its trade or business expenditure out of his pocket in the hope of eventual reimbursement when The Company's fortunes became clear at year end. The following facts emerge from a study of The Company's audited balance sheets from the years 1971 to 1975:
No. Year Income — Salaries & Bonuses — A/c Payable to Directors
Total Amount — % of Income — Director's Fees – Total — % of Income
1. 1971 – 88,645.91 – 32,701.92 – 36.8 — – 59,053.25 – 66.6
2. 1972 – 126,989.73 – 50,528.49 39.7 – 360 – 60,479.35 – 47.6
3. 1973 338,731.00 138,710.00 40.9 – 360 – 21,080.00 – 6.2
4. 1974 582,618.00 277,209.00 47.6 – 240 – 131,623.00 – 22.6
5. 1975 487,742.00 – 200,194.00 – 41.0 – 240 – 109,219.00 – 22.4
14. In the premises the appellant denies that the said remuneration by way of salary and bonus was not incurred wholly and exclusively in the production of its income. It further denies that the payment of the said bonus was or could be in the circumstances above recited an artificial transaction for reducing the tax payable by the appellant. Indeed Mr. Knight originally paid tax on the said bonus at a rate higher than the 45% rate applicable to companies. The Respondent is put strictly to the proof of the facts on which it relies as setting up the alleged artificial transaction.
15. The appellant company denies that the said bonus was a distribution within the meaning of section 23(3) of the Income Tax Ordinance or that consequently it is not allowable as a deduction by reason...
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