V.W.S. Ltd v Board of Inland Revenue
| Jurisdiction | Trinidad & Tobago |
| Judge | Barnes, J.,Burke, J.,Knights, J. |
| Judgment Date | 16 July 1987 |
| Court | Tax Appeal Board (Trinidad and Tobago) |
| Docket Number | No. I 80 of 1983 |
| Date | 16 July 1987 |
Tax Appeal Board
Barnes, J.; Burke, J.; Knights, J.
No. I 80 of 1983
Mr. B. H. Procope & Mrs. V. Alcala for the appellant
Mrs. Robinson Walters and Miss S, Collymore for respondent
Revenue law - Income tax assessment — Withholding tax — On the facts certain transactions were excluded from charge of withholding tax as being payments that arose outside of Trinidad and Tobago.
This is an appeal against additional assessments to corporation tax and unemployment levy for the year of income 1973, made under the Income Tax Ordinance Ch. 33 No.1 (hereinafter referred to as “The Ordinance”).
For that year, the appellant had submitted a Corporation Tax return on 4th April, 1974 and had been assessed on a chargeable income of $351,031.41. Following a tax audit undertaken by the respondent during 1975, new assessments were raised on the appellant by notices of 19th July, 1974 on an adjusted chargeable income of $663,3622.00, involving adjustments to six (6) items of disallowed expenses.
Following determination of the appellant's objection, by Notice of Appeal of 13 th April, 1983, the appellant disputed two items. The grounds of appeal as stated in the Notice of Appeal filed on 13th April 1983 (on record) are as under
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(1) The sum of $79,554,00 disallowed by the Respondent under the item, Interest paid to-non-residents, is part of the cost price of goods purchased. The sum, was shown separately in the appellant's books for convenience in accounting but in fact represents finance charges on payments for goods added to the cost of goods since in foreign trade it is not possible to pay for goods on sight.
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(ii) The sum of $182,000.00 disallowed under the item, wages paid to directors, represents remuneration to the appellant's directors for full-time service and is not a distribution within the provisions of section 52(5) of the Ordinance.
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(iii) 1. All directors referred to devote their full tine to the Company in the capacity of tap Manager, V.W.S. is the Governing and Managing Director. Mr. V.R.S. is the Sales Manager, and Mr. M. S.-is the Financial. Comptroller of the Company.
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2. The volume of the business handled during the year in question was in the region of $6,000,000.00.
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3. All the directors involved are adequately qualified and experienced, and besides being shareholders take a more than ordinary interest in the affairs of the company. The type of business is' extremely complex arid competitive, and requires a great amount of skill and devotion.
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(iv)the remuneration paid to the said directors was reasonable having regard to the level of remuneration paid in enterprises of a similar size.”
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The respondent's contentions regarding the above, appear in paragraph 20 of the statement of Case filed on 21st March 13–36 (on record) as under
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“(ii) that the interest payments made to the non-resident creditors are subject to withholding tax under the provisions of section 23A of the e Income Tax Ordinance (now S. 50 of the Income Tax Act).
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(iii) that since withholding tax has not been paid in respect of the interest payments
to non-residents creditors, the appellant cannot by virtue of section 12(i)of the Ordinance (now 12(i) of the Act) claim these sums as allowable deductions.
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(iv) that the amounts paid by the appellant to certain directors by way of salaries exceed what the respondent considers to be a fair and reasonable remuneration for services rendered by these. The respondent acting under section 52(3) of the Finance Act 1966 (now s. 12(3) of the Corporation Tax Act. Ch. 75:02) deemed the excess to be distributions made by the appellant to the directors. that the Respondent is of opinion that the appellant was assessed at a lesser amount than that which ought to have been charged for the year of income 1973 and the respondent therefore raised an assessment at an additional amount which, according to its judgment, the appellant ought to have been charged.”
For the appellant, three witnesses were called — V.R.S., M.S. and C.M.M. The first two named were Directors of the appellant. They are both sons of the Managing Director and Chairman, V.W.S. C.M.M. was the secretary/accountant.
For the respondent, Mrs. Michael Christian, a certified accountant and an assistant Commissioner of the Board of Inland Revenue testified. She had carried out the audit in 1973 when she had held the position of a Field Auditor II on the staff of the respondent.
From the evidence of the witnesses as it relates to the remuneration, and responsibilities of the Directors, the picture that emerges is of a family company under the absolute control and direct supervision of the Managing Director, who was involved in all aspects of the company's operations — routine matters as well as administration. He worked long hours and had been involved as a director of several other companies. He allocated routine and supervisory duties to other Directors.
M.S. testified that his father (the Managing Director) took up his daily duties at all hours but was always in touch with business so as to be in a position to make “Financial wizard” of the appellant and the heart of the organisation, being responsible for negotiating business loans and providing guarantees.
Both witnesses stated that there was no discernible formula for the award of bonuses to directors and employees, as this was a matter for decision of the Managing Director.
C.M.M. testified that as secretary accountant, he was directly responsible to the Managing Director as well as to M.S.
M.S. stated that he was employed full time as the Financial Director of the appellant and performed long hours of work. He was a Certified Accountant having qualified in England in 1970 after spending four (4) years there. He performed a number of supervisory and routine duties not all normally associated with a Financial Director or Controller. Among these were the signing of cheques, opening and closing the store and holding the keys. His special responsibility included the keeping of the Wages Book and he made decisions relating to purchases and sales. He supervised clerical employees and dealt with customs matters.
Over the years 1961 to 1962, he had been a trainee in the office of chartered Accountants in the U.K., and on his return from England had joined the Company in 1970 or 1971, having requested his father to take him into the business. He was made a Branch and assisted in the setting up of an internal audit system and gradually becoming involved in management.
V. R. S. had joined the appellant in 1969 and had been made a Director after three months of his employment. He held a Diploma in Business Administration, had worked as a trainee in Ireland and had worked as a Supervisor and an Assistant Manager in another company associated with the appellant, where he had six years service being involved in purchasing and labour relations. He was the Director principally involved with sales but also did sundry supervisory and routine tasks, being responsible for overlooking the agency lines carried on by the firm. One of his specialities related to supervision of roofing construction work pertaining to an agency in regard to roofing materials. He was principally responsible for machinery and equipment. He worked long hours and was involved with the other directors in security checks or the company's premises.
C. M. M. had been the secretary /accountant of the appellant since 1960. In addition to the usual duties of a company secretary, he supervised the accounts staff, wrote up the main ledger, and prepared the corporation tax return. He testified that in addition to full time Directors, there had been three senior employees (including himself). In 1973, his salary had been $800 per month. He could not recall what his bonus had been in that year but in cross examination he said that he may have informed the tax auditor that it had been $10, 500. He said that he did not normally work over time.
In the course of her audit, Christian had discovered that in addition to a sum of $74,700, entered in the appellant's return as Director's remuneration a total of $394,000. Had been paid as bonuses to Directors for the year under the item of wages and salaries. The three Directors concerned with this adjustment were remunerated as under –:
| Director's | |||
| Remuneration | Salaries | Total | |
| $ | $ | $ | |
| V.W.S. | 24,000 | 150,000 | 174,000 |
| U.R.S. | 12,000 | 100,000 | 112,000 |
| M.S. | 12,000 | 100,000 | 112,000. |
She had fixed $72,000 as a reasonable bonus for V.W. and $48,000 each for the other two. The difference of $182,000 ($350,000 1ess $168,000) was treated as a, distribution.
Other Director's remuneration paid as disclosed in the return were $11,700 and $7,800 to whole time Directors A.B.S. and A.L.S. respectively and $7,200 to part time director A.M.S. additionally, bonuses had been paid to these Directors in amounts of $15,000, $11,400 and $9,800 respectively.
She testified that the non disclosure in the return of the $350,000 paid to the three Directors as bonuses, was attributed by M.S. to the fact that he did not consider bonus to be remuneration. That official had also stated that he did not know what basis had been used in determining the bonuses paid but that his father had fixed all bonuses to staff as well as Directors.
The witness had ascertained that there were no recorded minutes relating to bonuses awarded to Directors. She also testified that she had ascertained that the three Directors concerned had been shareholders of the company and that no dividends had ever been paid during the existence of the company.
Christian had considered the remuneration earned by the three concerned directors to be...
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