The new Taxation Commission and settling tax appeals

C. Gaston Perera

The recent press notice announcing still another Taxation Commission could be a reason for raised eyebrows The Board of Review of the Inland Revenue Department is foremost in the need for change. It is the zenith of the Department's internal appellate structure. It has been in existence since the Income Tax was first introduced in 1932, more than 75 years ago.

Original purpose

About the original purpose for which it was established there is no doubt or ambiguity. H. J. Huxham, the Income Tax Adviser appointed to the Government of Ceylon in September 1929, "to frame a scheme which in his opinion would be best suited to the Colony" (as it was then) has in his Report clearly indicated the thinking on which a Board of Review was conceived and formulated. That thinking has as its underpinning three basic concepts.

The first concept relates to the composition of the Board. It is to "correspond more closely to the General Commissioners of the Income Tax in the UK." The second and most fundamental concept relates to the function of the Board. As expressed by Huxham in his Report - "Its principal duty will be to determine the amount of an appellant's income ... ." The third concept relates to its manner of functioning. Its atmosphere should not be "that of a Court of Law."

In the formulation of the provisions relating to the Board of Review in the original Income Tax Ordinance that arose from Huxham's inquiries specific expression was not given to these concepts, except the last.

Instead it conferred on the Minister the powers to constitute the Board. Probably the thinking of the legislature at that time was that the proper composition of the Board by the Minister would suffice to give practical expression to the concepts embodied in Huxham's Report and they accordingly did not require specific spelling out.

Looking back after 75 years one of the remarkable facts that strikes anyone is that while the rest of the original Income Tax Ordinance has been changed beyond recognition, even discarding some of its original basic principles, the provisions relating to the composition of the Board has remained substantially unchanged other than for some routine amendments relating to numbers.

Absence of amendments

From the absence, therefore, of any amendments to the original legislation the conclusion that emerges is that there has been no fresh thinking on the objects and composition of the Board and accordingly Huxham's thinking has been accepted without question for three-quarters of a century.

Such a lapse of time at least is sufficient reason to make a re-appraisal and examine whether Huxham's observations and conclusions are still valid. Is the conceptual underpinning that he postulated for the Board still relevant? Can the objects he set for the Board be realized?

To begin with Huxham's third concept first, namely that the Board should not function like a 'Court of Law', certainly this object has been achieved in the operation of the Board. Quite apart from the fact that its proceedings may be described as informal or at best quasi-formal, provisions have been formulated in the legislation itself that make it clear its proceedings are far removed from that of a Court of Law. The onus of proof, for instance, is unequivocally placed on the appellant. Similarly there is a specific provision that stipulates the Evidence Ordinance is inapplicable to tax appeals. Further its functions have been the subject of judicial review and in a landmark decision in the Ranaweera case the Supreme Court held that its functions are administrative in nature and not judicial.

Huxham's first concept, however, related to the composition of the Board. Its membership, he proposed, "will correspond more closely to the General Commissioners of Income Tax in the UK."

Body of laymen

Those General Commissioners are a body of laymen without any specialized knowledge of tax or accounts. Huxham elaborated later on what he had in mind when he said that the members of the Board would act like "a group of business men" considering a business problem.

What he envisaged, therefore, was a group of hard-headed men of the world and not tax experts who would consider in a pragmatic sort of way whether the quantum of income of an appellant was adequate.

How do the appointments made to the Board today conform to that requirement? Certainly no one could charge most of the present appointees with being tax experts! Most of those appointed to the Board today can boast of an almost cherubic and blissful innocence of tax and accounts. Whether they are the Minister's own appointments or the recommendations of Ministry or Departmental officials one does not know.

But they are in the main retired CAS officers and similar such laymen. In this sense as well, it could be said that the requirement of Huxham's first concept has also been implemented.

Second concept

It is when one considers what Huxham postulated in his second concept that the shortcomings of his whole thinking about the Board of Review become apparent. What he contemplated in this second concept was the function of the Board. It is here that he stipulates what "the principal duty" of the Board of Review is. He says it "will be to determine the amount of an appellant's income". Of course, the function of any appellate tribunal just as much as that of an assessor is ultimately to determine a taxpayer's income.

But here taken together with what Huxham has said of the need for laymen on the Board rather than tax experts and that they should look at the appeal as a kind of 'business problem', what he has in mind is clear.

He obviously envisages that the kind of appeal that would come before the Board would only or chiefly relate to the quantum of income from a source and what the Board would therefore have to decide is whether it is sufficient. That is the relevance of a group of hard-headed men of the world looking into the question.

They would consider the question like practical, experienced "business men" and decide on a reasonable "amount".

Whether the appeals that came before the Board in its youth were of this type it is difficult to say. But judging by the Cases Stated by it for hearing before the Supreme Court and the landmark judgments they later resulted in, it would seem that even then there were appeals that did not merely involve the quantum of income.

The fact of the matter today, however - again judging by the Cases Stated by current Boards as reported in the three volumes of Ceylon Income Tax Cases - is that the kind of appeal that does come before a Board is a very far cry from being a mere dispute on the quantum of income.

Judicial precedents

They involve complicated questions of income tax law or accounts and are argued by Counsel for days with extensive reference to judicial precedents and other authorities.

What kind of suitability or competence can a man who is blissfully ignorant of tax and judicial precedents as well as accounts have for adjudicating on issues as intricate and complex as -

1. The nature of amalgamation of companies.

2. Whether the interest received by a company is trade income.

3. Whether interest paid by a company on long term loans is deductible under Section 23(1) or 29(2).

4. Whether exchange losses incurred on foreign currency borrowings by a company are deductible under Section 23

5. The proper material on which an Assessor can form an opinion on the commission of fraud, evasion and wilful default.

6. Whether the management expenses deductible in ascertaining the income of Life Insurance businesses include capital allowances.

7. Whether rents received form part of the turnover of a business.

8. The proper tax treatment of fees received in foreign currency.

9. The nature of deemed dividends.

10. Whether retrospectivity is applicable in the case of tax legislation.

It will be seen from the above sample that not a single such issue would come within the ambit of what was contemplated by Huxham as the type of appeals the Board would have to determine.

What in fact is apparent is that the appeals that have now to be determined by a Board require the interpretation of legal provisions or statements of accounts.

It is in consideration of this aspect that the policy relating to the composition of the Board also becomes relevant. Huxham postulated "business men".

present policy

The present policy mans the Board with retired public servants and similar laymen. When in actual fact the issues to be determined by a Board consist of intricate questions of tax law or complex sets of accounts, involving a study of judicial precedents and other authorities as well as requiring expert knowledge in these fields, one has to question seriously the suitability of both Huxham's "business men" and retired public servants and similar laymen to adjudicate on these.

To be continued ...