Lutchumun & Ors v. Director General of the Mauritius Revenue Authority (Mauritius) [2008] UKPC 53

Judicial Committee of the Privy Council

Venue FROM THE COURT OF APPEAL OF MAURITIUS - - - - - - - - - - - - - - - - -

Between

Lutchumun & OrsAppellant

Director General of the Mauritius Revenue Authority (Mauritius)Respondent

Before

Lord Hope of Craighead

Lord Rodger of Earlsferry

Lord Carswell

Lord Mance

Sir Paul Kennedy

Date 1 December 2008

[1]:- Lord Hope of Craighead Lord Rodger of Earlsferry Lord Carswell Lord Mance Sir Paul Kennedy - - - - - - - - - - - - - - - - [Delivered by Lord Hope of Craighead ] The parties to this case are Mr and Mrs Adhinath Singh Lutchumun and a number of other persons (to whom it will be convenient to refer collectively as "the taxpayers") on the one hand and the Director General of the Mauritius Revenue Authority, formerly the Commissioner of Income Tax (referred to hereinafter as "the Revenue") on the other. The central issue is whether a sum which the taxpayers received as compensation for the compulsory acquisition of land which they had acquired with a view to profit is taxable as part of their gross income or is a tax free capital sum because it was not obtained in the normal course of the taxpayers' business.

[2]In McClure v Petre

[1988] 1 WLR 1386

, 1389 Sir Nicolas Browne-Wilkinson V-C described the approach that is to be taken to problems of this kind:

"In my judgment it is equally established by authority that to decide whether a particular receipt is in the nature of income or in the nature of capital one has to look at all the circumstances of the particular case and apply judicial common sense in reaching a conclusion as to how the receipt is to be classified."

In Inland Revenue Commissioners v John Lewis Properties plc

[2003] Ch 513

, para 16 Arden LJ suggested a classification that might be adopted to discover whether there was a principle by which such cases might be organised. The present case, according to her classification, is a compensation case. In para 45 she set out a series of propositions which she derived from the reported cases as to how a sum received as compensation should be classified. For the purposes of the present case it is necessary to refer to only two of them. First, every case depends on a careful examination of the particular circumstances. Second, the underlying asset from which the sum is derived may have a large influence on whether the payment is capital or income. To these propositions their Lordships would add a third, which has a direct bearing on the way the receipt should be treated in this case. This is that close attention must also be paid to the terms of the taxing statute.

[3]The facts of this case are relatively simple. In 1991 the taxpayers obtained a provisional land conversion permit under Part IV of the Sugar Industry Efficiency Act 1988 to convert 50 arpents of agricultural land owned by Medine Sugar Estate at Coromandel to residential. On receipt of the permit they entered into an informal agreement to purchase the land. In 1993 they purchased it by authentic deed jointly and in undivided rights for Rs 50,000,000. At the beginning of October 1993 the parcelling of the land into 419 residential plots was approved by the authorities. But at the end of October 1993 the taxpayers were served with a notice under section 6 of the Land Acquisition Act 1973 ("the 1973 Act") that it was proposed to acquire two portions of the taxpayers' land extending in total to 12A52 on behalf of the government. This area was to be excised from the larger portion of 50A. The notice of compulsory acquisition which had been published in the Gazette under section 8 of the 1973 Act was transcribed in January 1994, thus vesting the excised portion of the land in the government.

[4]The taxpayers made a claim for compensation under Part III of the 1973 Act. Section 19(3) of that Act provides that the value of any interest in the land shall be the amount which the interest, if sold on the open market by a willing seller, might be expected to realise at the date of the first publication of the notice under section 8. Section 18(6) provides that the Board of Assessment, in awarding compensation, may allow interest at the legal rate, calculated from the date of vesting under section 11 until the date of the award. In August 1995 the Board awarded the taxpayers a sum of Rs 2,805,000 per arpent, to be apportioned among them according to their respective shares, together with interest from the date of vesting. The result of this award was that the taxpayers received Rs 1,805,000 more per arpent than they had paid for it. In February 2000 a morcellement permit under section 7 of the Morcellement Act 1990 for the parcelling of the rest of the land into 280 residential lots was issued by the Minister.

[5]The Revenue decided that the sum received as compensation was taxable in the hands of the taxpayers as part of their gross income within the meaning of section 11(1)(g) of the Income Tax Act 1974. Under that provision a person's gross income includes:

"any sum or benefit, in money or money's worth, derived from the sale of any property or interest in property, where the property was acquired in the course of a business the main purpose of which is the acquisition and sale of immoveable property."

The taxpayers were assessed to income tax in respect of their shares of the profit that resulted from the compulsory acquisition of the 12A52 of excised land on behalf of the government. The assessments were made on 30 June 1999 for the year of assessment 1994-95, based on the taxpayers' income for the preceding year 1993-94. Their shares of the profit were included under the description "trade, business, profession" as part of their total gross income for that year. Their shares of the interest on the principal award were included in the amount of their gross income under the description "dividends and interest".

[6]The taxpayers appealed against the assessments. Their notices of appeal stated that the ground of the appeal was that amounts received for compulsory acquisition were not taxable. On 25 June 2002 the Tax Appeal Tribunal issued its determination. It held that the compensation payment and the interest thereon were not taxable under section 11 of the 1974 Act. It said that it was established clearly by the evidence that the taxpayers had invested money in what could not be described otherwise than as a business venture with profit in mind. The original extent of 50A of land was described as trading stock, having regard to the land conversion permit and the approval that was subsequently obtained for the subdivision of the remainder into 419 plots for residential purposes. But the Tribunal held that the appropriation of the 12A52 by the government could not be called a normal business transaction and that the compulsory acquisition was not a transfer of property on which the vendor was liable for land transfer tax. The compensation could not constitute income within the meaning of section 11. It could not be regarded as anything other than the realisation of capital. The Tribunal also held that the interest on the principal sum was part and parcel of the compensation. It was in the nature of a hedge against inflation for the period between the date of vesting and the date of the award.

[7]The Revenue appealed against the determination of the Tax Appeal Tribunal to the Supreme Court. On 9 May 2005 the Supreme Court (Balgobin and Peeroo JJ) allowed the appeal. It took note of the facts that under section 19(3) of the Land Acquisition Act 1973 the compensation represented the amount which the interest in the land would have fetched if sold on the open market by a willing seller at the date of the first publication of the notice as provided in the Act, and that the object of the taxpayers was to parcel out the whole of the 50A as trading stock into lots to be sold to purchasers for a profit. It drew the following conclusion:

"The above factors show that the compensation received was in respect of the amount that they would have received with a profit had they sold part of their trading stock in accordance with their initial project and it cannot therefore be said that the respondents had been compensated for the loss of a capital asset. Hence, the receipt should be credited into the trading account of the respondents as it also includes the amount of profit received and is therefore of an income nature within the ambit of section 11."

Having found that the compensation had the same effect as a trading receipt, it held that the interest should also be considered as earned income. By the date of its decision, as the result of reforms since the date of its determination, the Tax Appeal Tribunal was no longer in existence. The Supreme Court could not remit the case to the Tribunal for the assessments to be adjusted. So it decided to make no order, trusting that its pronouncement would serve as guidance to the parties.

[8]Both parties have appealed against this decision to their Lordships' Board. The Revenue submits that the Supreme Court should have allowed its appeal and quashed the determination of the Tax Appeal Tribunal, thus maintaining the assessments. The taxpayers do not oppose this method of disposing of the case, assuming that the Revenue's arguments are otherwise sound. The issues raised by the taxpayers' grounds of appeal are more complicated. They may be summarised as follows: A(1) Whether the tax imposed on the compensation and interest was in breach of section 8 of the Constitution.

(2) Whether the compensation is a tax free capital sum because it was not obtained in the course of business, was not a voluntary sum and was not paid for loss of profit but for the compulsory acquisition of an asset.

(3) Whether the compensation is tax free as there was no "sale" within the meaning of section 11(1)(g) of the Income Tax Act 1974.

(4) Whether the interest awarded under the Land Acquisition Act 1973 is chargeable to income tax. B Whether the assessments were invalid because they could only have been made under section 11 of the Income Tax Act 1974 which was no longer in force when the assessments were made on 30 June 1999. C Whether the assessments are invalid because they were made for the year of assessment 1994-95 based on income for the income year 1993-94, whereas the compensation was paid in the income year 1995-96 and the correct year of assessment was 1996-97.

[9]The Revenue objected to the raising of issues B and C before the Board because they had not been raised before the Tax Appeal Tribunal or the Supreme Court or in the application for leave to appeal to the Privy Council. Mr Pursem for the taxpayers submitted that they should be allowed to raise these issues as they were purely issues of law, there was no unfairness as notice had been given to the Revenue of their intention to raise them and they were of importance in view of their effect on the taxpayers' tax liability. He said that they had been raised, albeit without success, during the course of the argument in the Tax Appeal Tribunal. But he accepted that no explanation could be given for the fact that they were not raised again when the case came before the Supreme Court and were not mentioned in the application for leave to appeal, other than they had been overlooked.

[10]Their Lordships' normal practice is not to allow issues of law to be raised before the Board which have not been argued before the Supreme Court. This practice may be departed from in exceptional circumstances, but their Lordships were not persuaded that they would be justified in departing from it in this case. The issues which Mr Pursem wished to argue do not depend on anything that was not known when the assessments were appealed against. They raise questions of taxing practice on which their Lordships would have wished in any event to have the views of the Supreme Court. In the absence of a sound reason for their not having been raised in that court, they refused leave for these two issues to be argued before the Board.

[11]As for the issues included under issue A, Mr Pursem did not pursue the argument that the imposition of tax on the compensation and interest was unconstitutional. Section 8 of the Constitution provides that property may not be compulsorily acquired without compensation, but he accepted that a law which subjects the compensation to tax lies outside the scope of that protection. He also conceded that he could not maintain that the interest on the award of compensation was anything other than part of the taxpayers' gross income. In their Lordships' opinion this concession too could not have been withheld in view of the terms of section 11(1)(d) of the 1974 Act. As Mr Pursem pointed out, it provides that the gross income of a person shall include, among other things, "any interest". Irrespective of the answer to the question how the principal sum should be treated for tax purposes, therefore, the interest awarded by the Board of Assessment falls to be treated as part of the taxpayers' gross income simply because it was awarded as interest. The fact that it was, in the Tribunal's view, at least in part a hedge against inflation is nothing to the point. It is nevertheless taxable as income.

[12]This leaves for the Board's consideration the issue which has always been at the centre of this case. Is the sum that was awarded as compensation for the compulsory acquisition of the land taxable as gross income or is it a tax free capital sum because it was not awarded in the normal course of the taxpayers' business?

[13]Mr Pursem submitted that, as the excised portions of land were taken before any development took place, it could not be said to have been disposed of by the taxpayers in the course of their business. They had been precluded from carrying out any development on that land because it was taken away from them before that stage had been reached. Moreover they had been precluded from selling the land in the open market as part of their trading stock. He said that the effect of the compulsory acquisition was to sterilise the land. The case was therefore on all fours with Glenboig Union Fireclay Co Ltd v Inland Revenue Commissioners , 1922 SC (HL) 112, 12 TC 427 , in which the House of Lords affirmed the decision of the Court of Session in Scotland that a payment which the company received from a railway company as compensation for fireclay in an area reserved for use by the railway company for support of its railway line was not profits within the meaning of the taxing statute because it was paid to the company as compensation for a capital asset that had been made unavailable for the purposes of its business.

[14]Mr Pursem summed up his case by saying that the Revenue were only entitled to charge compensation to tax under section 11(1)(g) of the 1974 Act to the extent that it was awarded specifically for loss of profits or that it could be shown to have constituted income or profit which had been earned in the course of the taxpayers' business. As that was not so here, because the land was taken away before the taxpayers could take any steps with a view to its morcellement, they were precluded from going ahead with its development as they had planned, so the sum awarded was not taxable.

[15]Mr Pursem's argument was thoughtful and well presented, but their Lordships are unable to accept it having regard to the facts found by the Tribunal and the terms of section 11(1)(g) of the 1974 Act. The Tribunal found as a fact that by purchasing the land the taxpayers had invested money in a business venture with profit in mind and that the land was their stock in trade. Mr Pursem did not dispute that it had been purchased for the purpose of its development by the taxpayers as a business enterprise. He accepted that if it had been developed and sold in the ordinary course of that business the sums received would have been assessable as income. He also accepted that the same would have been the case if, before it had been developed, the land had been sold off to another developer. So too if it had been developed before the acquisition took place. These concessions serve to reinforce the Tribunal's finding. The land in question formed part of the taxpayers' stock in trade as it was acquired with a view to its being sold for a profit. Judicial common sense would suggest that, as this was the nature of the asset, any sums received from any source in return for its disposal at any time would constitute income in the hands of the taxpayers.

[16]The matter is put beyond all doubt when regard is had to the terms of the taxing statute. As was pointed out by the Board in De Maroussem and others v Commissioner of Income Tax ,

[2004] UKPC 43

, 22 July 2004, para 1, section 11 of the 1974 Act requires that a number of types of pecuniary receipt, some of which might at least in part be regarded as having a capital receipt character, must be brought into account as gross income for tax purposes. Section 11(1)(g) treats as gross income, among other things, any sum derived from the sale of any property if it was acquired in the course of a business the main purpose of which is the acquisition and sale of immoveable property. The land that was taken compulsorily by the government was, on the findings already referred to, acquired by the taxpayers in the course of a business of the kind that para (g) of the subsection describes. The transaction was not of course voluntary. But it was nevertheless a sale within the meaning of the statute, albeit a compulsory one. The value of the taxpayers' interest was taken for the purposes of the award of compensation under section 19(3) of the 1973 Act to be the amount that it might have been expected to realise if sold on the open market by a willing seller. The paragraph does not limit its scope to sales that are entered into in the normal course of the taxpayer's business. It is the purpose for which the land was acquired in the first place, and that purpose alone, that determines whether sums derived from its sale are to be treated as gross income.

[17]This case cannot properly be described as one where the asset in question has been sterilised, as happened in Glenboig Union Fireclay Co Ltd v Inland Revenue Commissioners . In Inland Revenue Commissioners v Newcastle Breweries Ltd , (1927) 12 TC 927 , 936, Rowlatt J acknowledged that if the government were to take away all the raw materials of a man's trade and prevent him from carrying it on and pay him a sum of money, that would be taken not as profit on the sale of the raw materials, which he would never have sold, but as compensation for interfering with the trade altogether. As he pointed out, in Glenboig what was done stopped the trade without taking anything. Here the land was not even the raw material for the making of something else, like the barley used solely as raw material for the manufacture of stout in Arthur Guinness, Son & Co Ltd v Commissioners of Inland Revenue [1923] 2 IR 186: see Viscount Cave LC's observations in Inland Revenue Commissioners v Newcastle Breweries Ltd (1927) 12 TC 927, 953. It was the taxpayers' stock in trade which they purchased with a view to its being sold, and it was taken from them at its market value. This case is like Newcastle Breweries , where as Viscount Dunedin said at p 954, the payment for the rum that was requisitioned was simply a realisation of a portion of the stock in trade at a rather earlier stage in the process than was the case with ordinary sales. As Viscount Cave LC explained in the same case at p 953, the circumstance that the sale was compulsory makes no difference in principle.

[18]For these reasons their Lordships agree with the judges in the Supreme Court that both the compensation and the interest thereon are taxable as gross income and that the determination of the Tribunal to the contrary was wrong. But they do not agree that it follows from the fact that the Tribunal is no longer in existence that no effective order can be made. They propose to make an order giving effect to the decision which they have reached. They will allow the appeal by the Revenue, dismiss the appeal by the taxpayers, set aside the determination of the Tribunal and affirm the assessments. It was agreed that costs must follow the event. The taxpayers must pay the costs of the appeal to the Supreme Court and to their Lordships' Board.