Friday, May 26, 2017

Mauritius Apex Court disallows common expenditure on exempt capital gains


a) The Mauritius Company derives income from dividends paid by the Indian investee companies. It had disposed off certain investment and earned capital gains, which is not an income as per Mauritius Income Tax Act (MITA).

b) It paid fees to custodians and sub custodians for the holding of the investment and same was claimed as deduction from gross total income.

c) Mauritius Revenue Authority (MRA) disallowed the expenditure to the extent that it was not exclusively incurred in the production of gross income by invoking section 18 of the MITA. However apportionment was done as per the following formula given under section 26 of the MITA:

Capital Gains x Allowable expenditure

Income + Capital Gains

d) Appellant contended that revenue authority could not resort section 26 which applies to ‘exempt income’ having characteristics different than capital gain.

e) It was also contended that only expenses directly attributable to capital gain such as commission payable to brokers were not allowable. However, custodian fees and sub-custodian fees which did not relate to the capital gains, were capital in nature and, therefore, to be allowed.

The Mauritius Supreme Court held as under: 

1) Section 26 of the MITA provides for disallowance of any expenditure to the extent to which it is incurred in the production of income which is ‘exempt income’. It also provides formula to calculate such disallowance.

2) Section 18 of the MITA provides that expenditure is allowable to the extent that it is exclusively incurred in the production of gross income. Exempt income is not chargeable to tax and capital gains on the other hand is not an income for tax purposes. Accordingly, both exempt income and capital gain are excluded from gross income.

3) If an expenditure produces both gross income and other income (which does not amount to gross income) then as rightly viewed by the MRA, only the part which produces gross income, is an allowable deduction.

4) Since both capital gains and exempt income are excluded from the definition of gross income. Therefore, capital expenditure and expenditure attributable to exempt income, although different in the nature, share the same characteristic of being not allowable under sections 18 and 26.

5) The activities of Mauritius Company are those of any investment company. The expenditure sought to be deducted, i.e., custodian and sub-custodian fees, therefore produced two types of income, revenue income during such time the company holds the securities and capital gain when the company decides that the time is right for disposal of securities. The total custodian and sub-custodian fees cannot therefore be exclusively or
solely incurred for the production of gross income and are not allowable under Section 18. Thus, we could not accept the submission that the expenses were incurred with the intention of producing revenue income and that the capital gain was only an indirect outcome and on that basis expenses should be totally deductible.

6) Further, section 18 and 26 are not mutually exclusive sections and, hence, recourse can be made to section 26 if section 18 is silent on any issue. Therefore, MRA had rightly disallowed expenditure incurred to earn capital gains. - [2017] 81 386 (SCM)

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