IN THE COURT OF REVIEW OF FIJI
AT SUVA

IN THE MATTER of an Appeal to the COURT OF REVIEW
(Appeal Nos: 06 and 07 of 2007)

BETWEEN:

SHIVAS SANTRAJ SINGH and MICHAEL SOLOMONE MAKASIALE
Appellants

AND:

THE COMMISSIONER OF INLAND REVENUE
Respondent

F.S. Lateef and Ms D. Prakash for Appellants
M. J. Scott and S. Vukica for Respondent

Dates of Hearing 13th and 14th November, 2008
Date of Final Submissions: 27th November, 2008
Date of Judgment 20th February, 2009

JUDGMENT

The taxpayers, via their Notices of Appeal dated 28th February, 2007, appeal against the decisions of the Commissioner of Inland Revenue disallowing their objections to their assessments for the year ended 31st December, 2006. By consent of the parties the hearing of both Appeals were consolidated. The assessments arose from the sale of the property owned by both Appellants, and the material facts were common to both Appeals. The Appellant Shivas Santraj Singh was assessed an amount of $174,206.71, and Michael Solomone Makasiale $85,340.36.

Both cases were first called before the Court on 25th April, 2007. The parties then proceeded to file an agreed set of facts and other relevant documents. The CIR filed a Statement of Position on 20th August, 2007. A Statement of Agreed Facts was filed in each case on 14th November, 2007. The hearing of the cases was delayed at the request of the parties who were awaiting the hearing and determination of another matter where similar issues were the subject of Appeal. That matter did not proceed to a hearing. The hearing was also delayed due to the engagement of overseas counsel. The hearings took place on 13th and 14th November, 2008. Submissions, as ordered, were filed by both parties on 24th November, 2008. A supplementary submission was filed by the Respondent on 25th November, 2008 to which the Appellant filed a response on 27th November, 2008.

The problems, in terms of writing judgment, then began. The files were sent to the Lautoka High Court in December 2008. However, on perusal of the files in early January, 2009, for the preparation of Judgment, I noticed that submissions by both the Appellant and Respondent were not on file. However, the supplementary submissions were. After much query and concern being raised, I was handed both submissions on 13th February, 2009, when in Suva for sittings of the Court. The Court regrets the delay in the delivering of Judgment in these Appeals, which were beyond its control.

Some Agreed Facts

There is not much dispute regarding the material facts relevant for the disposal of the Appeals. These are contained in the Statement of Agreed Facts filed, in each case, on 14th November, 2007. Further, comprehensive affidavits were filed by each Appellant prior to the hearing in November, 2008.

Sometime in early January, 2005, Mr. Shivas Santraj Singh acquired a shelf company from Parshotam and Company. This company was called Innovative Investment Ltd. By 28th September, 2005, there were three (3) shares allotted by the company. One $1 dollar ordinary share was acquired by Mr. Singh and one by. Michael Solomone Makasiale. The third share, held by Solo Hire Services, a family company of Mr. Makasiale, was transferred to Yatu Lau Company Ltd. of which Mr. Makasiale was the Chief Executive Officer. The purpose for which Innovative Investment Company Ltd. was formed was to purchase and develop a substantial property, located on NL14224, in Nadi, and formerly known as the Sunlover Hotel. The site was to be redeveloped, inter alia, into an apartment hotel/motel complex. On 30th September, 2005, the Sunlover Hotel lease was transferred to Innovative. The instrument of transfer was registered on 3rd October, 2005. About 17th March, 2006, the Appellants resolved to sell their shares to Wan Chai Finance investments Ltd., a company incorporated in Hong Kong. The share transfers were effected on 31st March, 2006. The shares were sold for $1.5 million. It was the "profits" accruing to the Appellants from this sale that became the subject of assessments by the C.I.R.

The Evidence

As stated earlier, affidavits were filed by each Appellant prior to the hearing. The affidavits contained voluminous documents. Other documentation was included in the Statement of Agreed Facts. The documents included transfer, allotments and other issues relating to shares in the company, various minutes, plans of the existing site or "as built" plan, future plans, applications for development proposals, projections on landowner benefits, various emails, correspondence etc. A "Supplementary List of Documents" and "Chronology of Events" were also filed prior to the hearing. Both Appellants were heavily cross-examined on their oral evidence and the affidavit materials. The Court does not see the need to repeat the details of the evidence tendered. It will only dwell on the material evidence relevant to its judgment, in particular on the reasons advanced for the sale of the property within six (6) months of purchase, or 11 months from the acquisition of shares in the shelf company by Mr. Singh. These will be grouped under 3 categories: NLTB issue, Funding, and Family Commitments. These are referred to in para. 57 of both Mr. Singh's and Mr. Makasiale's affidavits.

NLTB

As far as the Appellants' relationship with the NLTB was concerned, the Court realizes that Mr. Makasiale spent considerable time making customary presentations, meeting members of the landowning units, presentation of Innovative's plans for Sunlover and proposed benefits to them. In this context, the Court is not clear as to the role of Edge Consultancy Ltd. in this regard (see Affidavit of Shivas Santraj Singh para. 14. a.). Mr. Makasiale and the Yatu Lau Co. Ltd. were seen by Mr. Singh as able to deal amicably with the native landowning units in the area. According to Mr. Makasiale the Yatu Lau Co. Ltd. had traditional links to the Taukei Naua.

Given all this effort and Mr. Makasiale's knowledge of customary protocols etc. the Court is surprised that the letter from Mesake Mara, as suggested, was the straw that broke the camel's back. The letter concerned is dated 15th February, 2006, and was unsigned. It is referred to as a "draft" letter in the Appellants' submission though it doesn't say so. Both parties also refer to some alleged "threat" being made. The last paragraph appears to be the offending part. It states as follows:

"Please note this offer is valid for six (6) weeks from the above mentioned date and you are kindly requested to call in and pay the sum of $177,926:00 after which you shall be given a draft agreement for lease for further discussions. Further, you are also required to submit your development plans and other relevant papers necessary for your project within this time. Your failure to comply with these will leave us no alternative as we shall assume that you are no longer interested and do not wish to proceed further with the matter and we shall accordingly close your file and may give consideration to other interested parties."

Whatever gloss the parties have put to the relevant portions of the letter, the court does not see any threats. The letter suggests that NLTB "... may give consideration to other interested parties". Even if the Appellants saw this as a threat, as experienced businessmen, did they seek any legal advice?

Mr. Mesake Mara, whose name appears on the unsigned letter, was subpoenaed and was apparently available for the hearing. However, neither party called him as a witness. He would have been able to shed more light on the letter and also on the meeting from which Mr. Singh "walked out". Whatever transpired and was contained in the letter, the evidence suggests that discussions with NLTB were continuing until 14th March, 2006 (see paras. 41 and 42 of Mr. Makasiale's affidavit and cross-examination on the letters). Yet the decision to sell was made on 17th March, 2006, 3 days later. A more critical issue is that NLTB consent was vital for the proposed project to go ahead. This consent was not guaranteed when the Suniover property was purchased in September, 2005. How, then, does it become a critical reason for disposal? As experienced businessmen would the Appellants not consider "a commercially viable" decision to sell if the necessary consents were not obtained?

Funding

The other matter that concerns the Court was the evidence on funding. This was also put forward as a reason for the sale. This related to poor presales of apartments, increasing interest rates and the investment climate. These matters are dealt with in paras. 54, 55 and 57 of Mr. Singh's affidavit. At para. 54 he states:

"That on or about 1 March 2006 I held discussions with Mr. Kieron Ward, the Manager Business Financial Services, of ANZ Bank, Suva in relation to their lending prerequisites on proposals such as the Sunlover project."

Further, that he "was informed by Mr. Ward that they would consider an appropriate loan if we were able to pre-sell a reasonable number of units or lots." (para. 55)

It is clear from the email from Kieron (Pip) Ward that no proposals for funding had been prepared up till 1 March, 2006. (see Supplementary List of Documents Tab No. 1). This is quite unsatisfactory given that Mr. Singh estimated that "the costs of an integrated hotel development project could be more than $10 million". He had earlier stated: "Despite the fact that I could obtain loops from my own companies or my family companies, I was not prepared to take the risk..." (para. 40 of his Affidavit). In such a situation, how can the Court be convinced that the Appellants were in the project for the long haul, as they both claimed?

There are other matters raised in their affidavits which go to the intentions of the Appellants and their individual commitments to the project. In para. 42 of his affidavit Mr. Singh refers to a loan of $335,000:00 for the purchase of Sunlover. "The loans were from related companies." The annexure referred to does not shed any light on related companies or where the loans came from. Further, at para. 44 of his affidavit, he refers to his engagement of Shri Singh Ltd. for re-development projects such as Sunlover. He states: "The practice for such engagement was that costs will be discussed when the project is actually carried out. Shri Singh Ltd. did not charge any fee for the Sunlover re-development project. Shri Singh Ltd. was also to project manage the development as agreed under the Shareholders Agreement." Amongst his reasons to sell his shares he states: "other priority workloads of Shri Singh Ltd in other projects". (para. 57 (b)) He was a director of Shri Singh Ltd.

It is also not clear from Mr. Makasiale's evidence and affidavit what was the role of Yatu Lau Company Ltd in the Sunlover project. Mr. Makasiale was its Chief .Executive Officer. At para. 16 of his affidavit he states: "That in September 2005 the Board of Directors of Yatu Lau approved Yatu Lau as partner in the purchase and redevelopment of Sunlover". The resolution attached (MM13) indicates Yatu Lau's investment of $320,000 and that it borrow $160,000 over 15 years at 6% and provide the balance as cash equity. Was Yatu Lau in the project for the long haul? Was it a silent partner and the CEO, through his family company Solo Hire, the pro-active shareholder who made the critical decisions, for example, to sell? As a major property developer and investment company its active involvement would lend credibility to the Sunlover project being a long-term investment. Its views on the sale so shortly after purchase is not known. It is also evident that the proposal to sell to Wan Chai arose out of discussions Yatu Lau was having with the University of the South Pacific about constructing a student dormitory complex at its Laucala campus (see paras. 44 - 51). The Court is not clear on how there was a conflict of interest between Mr. Makasiale and Yatu Lau in the Wan Chai investment and not in the Sunlover project. It is evident that Mr. Singh and Mr. Makasiale were the prime movers in the Sunlover project and principal beneficiaries from the sale. It is also not clear how much risk they were taking given the support from related companies.

Family Matters

In his Affidavit para. 57 (a) Mr. Singh states the reason to sell was the knowledge that his "wife who is a New Zealand citizen was expecting a child and was to give birth in Christchurch." He then states: "As a result, I could not planning fulfil my role in the design, management, implementation and construction of the project because I was required to travel a lot between Fiji and New Zealand to visit my wife and the child". The copy of the birth certificate attached states that the child was born on 14 November 2006. If the decision to sell was made on 17 March, 2006, as claimed, then this was almost 8 months before the child was born. Mr Singh also refers to "other priority workloads of Shri Singh Ltd. in other projects" (para. 57 (b)). All these are not credible evidence since Mr. Singh, as a director of Shri Singh Ltd., which was apparently owned by his father, should have been aware of these workloads.

At para. 57 (e) of his Affidavit Mr. Makasiale states that: "... my wife was residing in Sydney at the time in question and as such I would have spent more time in commuting and which would not have provided with enough time to devote to a project of such magnitude". He also alluded earlier to the substantially increased workload at Yatu Lau Co. Ltd. The Court does not wish to dwell too much on all this. All it wishes to say is that since 1987 many businessmen and professionals in Fiji have kept their wives and families in Australia or New Zealand for a variety of reasons including giving birth, education etc. This has not precluded them from balancing work and family commitments. They commute and still run successful businesses in Fiji. The assertions by the two Appellants do not bear scrutiny.

The Law

The Appellants' submissions are rather lengthy. It begins with a recitation on "Summary of Facts" and repeats at length what is contained in the affidavits, documentation and evidence in Court. The Court is not clear, for example, what is the relevance of the incorporation of the shelf company by Parshotam and Company on 20 September, 2004, to the Appellants' case. The references to the mechanics of the transfer and allotment of shares are also not clear. It was conceded by the Respondent that the Appellant Mr. Singh was not in the business of share trading. As such, the issue of "dealing in property" on the basis of sale or disposition, or transfer of shares is not an issue to be determined. The attempts to distinguish the Respondent's authorities does not advance the Appellants' case. It is ultimately the version of facts that the Court accepts that will determine the outcome of the Appeals. To add to the length there is again another shot at the evidence. The Court is then provided "Comment on the Respondent's Position (Statement filed)" which does not enlighten it on the law nor facts. The position statement has been overtaken by the Respondent's submissions which are comprehensive enough to be dealt with. The Court was taken aback by the commentary on the National Distributors case. The view taken that it is "not authority for the proposition that a presumption of assessibility arises if there is sale, within a short period of time. Only an inference can be drawn which can be rebutted ..." This is quibbling with words and is not how the Court has read the case in its various judgments. The National Distributors case also has a succinct discussion on the question of 'purpose' in relation to the critical issue of '... for the purpose of selling or otherwise disposing of the ownership of..."'.

Ultimately both parties recognise that it is the second limb of Section 11(a) of the Income Tax Act that is the relevant section applicable for the disposal of these Appeals. This is: "... any profit or gain accrued or derived from the sale or other disposition of any real or personal property or any interest therein ... if the property was acquired for the purpose of selling or otherwise disposing of the ownership of it..."

The Court proposes to deal with the questions of law and the facts as simply as possible given the very substantive submissions made by the parties. It is not clear how the Appellants categorise the acquisition and disposal of shares in the "shelf, as they call it, and "shell" company, as Mr. Parshotam calls it in his affidavit. In this regard it finds the submissions by the learned Respondent counsel a succinct summary of the transactions involved. The case of IN Allina Pty v Federal Commissioner of Taxation (1991)) 21 ATR 1320 at p 1327 is on point: "A disposition of property connotes the transfer or disposition of something to somebody which was in existence before it was disposed ... the allotment of shares is an act of the company, its capital being the source of the allotment...". As far as the Court is concerned it does not matter whether the shares in question in Innovative Investments Ltd. were held for 6 months or 11. The Court, based on authorities, considers these as sufficiently short periods for the presumption of assessibility to apply. The shares were held in the names of the Appellants whatever other relationships they had with other related companies.

In all appeals before this Court the taxpayer has the onus of proof. Section 71 (2) of the Income Tax Act states: "On the hearing and determination of all objections to assessments under this Act, the onus of proof shall be on the taxpayer". This court has considered the question of onus in its various judgments. The cases of Warren Williams & Vanessa Williams v CIR (Appeal No. 10 of 2007, Judgment dated 6th June, 2008) and Glen Warren Vassie v CIR (Appeal No. 14 of 2006, Judgment dated 29 January, 2009) are on point. Some of the relevant principles that Courts consider in determining in determining assessibility or otherwise are contained in the N.Z. case of CIR v National Distributors Ltd (1989) 11, NZTC 6346, at p. 6351: it is the taxpayer who must establish, "on the balance of probabilities that the property in question was not acquired for the purpose of sale or other disposal. Where subjective purposes are in issue the statements of the taxpayer, or of someone who can speak for the taxpayer, are obviously important evidence. But for obvious reasons they must be assessed and tested in the totality of the circumstances which will include the nature of the asset, the vocation of the taxpayer, the circumstances of the purchase, the number of similar transactions, the length of time the property was held and the circumstances of the use and disposal of the asset. Actions may speak louder than words and the totality of the circumstances may negate the asserted purpose of the purchase" (emphasis added). It was also stated by Casey J that "Unless the taxpayer could show that the main or dominant purpose was not to sell or otherwise dispose of it then the profits or gains wall be taxable (at p.6355)

In the case of both taxpayers in this case the prompt resale of the shares and the special reasons advanced by them require particular care and scrutiny. The case of Gauci and Masi v FCT (5 ATR 672) is relevant. As Barwick CJ stated: "If ... the acquired property as resold within what may fairly be described as a time proximate to its acquisition, the requisite purpose may be inferred. Thereafter, the taxpayer must overcome the prima facie inference there drawn" (at p.675). Barwick CJ repeated the same in McCormack v FCT (1979) 9 ATR 610 at p. 614). The judgment of Richardson J in National Distributors, already referred to, is more to the point for our purposes. That case also involved the sale of shares and the Court states (at p. 6,352): "Ordinarily, too, the length of time the shares are held before being sold is regarded as of particular importance. If shares are held for a matter of months only, then in the absence of special reasons occasioning an earlier than contemplated sale, it is difficult to escape the conclusion that they were purchased with a view to the gain likely to arise on resale rather than with a view to reliance on the dividend income. If they are held for a period of years during which time the market has moved upwards and downwards, that is a factor tending to displace the proposition that the shares were acquired for the purpose of sale." As was stated, in the Australian case of Steinberg v FCT (1975) 5 ATR 565, at p. 570): "That inference is made because of evidentiary value of the voluntary act of sale".

In the Court's view neither the reasons for the early sale nor the special reasons advanced for such a decision bear scrutiny. Both Appellants in their affidavits put it thus: that they "were getting frustrated with the entire process in respect of the approval, the lease negotiations, presales and funding issues" (para. 57 (f) of Mr. Singh's affidavit and para. 57(g) of Mr. Makasiale's affidavit). These frustrations were explained in their oral evidence. It is quite evident from the evidence led that neither the NLTB consent, nor the estimated funding of approximately $10 million was secured prior to the purchase of the Sunlover property. If such consent or funding does not eventuate then the Courts assume that a collateral or contingent purpose of resale at acquisition does exist.

This Court had considered some of the authorities and the relevant principles in its decision in the Tokyu Corporation v Commissioner of Inland Revenue case (Appeal No. 12/2006, Judgment dated 1 December, 2008). That case was run on "the basis that there was only one dominant, sole purpose. The Appellants have argued in similar vein. This is stated in their submissions: "Shares were not acquired for sale, but for long term investment and dividend returns to the shareholders" (p. 15, Summary (1)). Further, "Evidence of the Appellants clearly indicates that the undertaking or scheme was not for the dominant purpose of sale and or profit, it was for development and long term investment" (p. 15, Summary (5)) .It is perhaps pertinent to point out that "sale and or profit" as the Appellant submission posits it, does not have to be the dominant purpose. It is sufficient if the shares acquired were for "the purpose of selling or disposing", as a contingent or collateral purpose.

In its decision in the Tokyu Corporation case, referred to earlier, this Court had considered and quoted from two (2) Canadian cases. The cases Bayridge Estates Ltd v Minister of National Revenue [1959] Canada Tax Cases 158 and Kourdi v R [1972] 3 CTC 2691) are in line with Australian and N.Z. cases and suggest a similar approach to the interpretation of taxation statutes within the Commonwealth. The case put forward by the Appellant in Bayridge may be summarized from page 160 of the Court's judgment: "... the land... was not purchased in the course of any business of dealing in real estate but was acquired for the sole purpose of constructing and operating a motel and service station thereon, that it was only when such purpose failed because of the appellant's inability to borrow the monies required to carry out that purpose that the appellant accepted an offer for the property and realized the profit in question, and that, in these circumstances, the profit was a capital gain and not income." The Court ruled that the profit was taxable despite the appellant's case that they did not contemplate any other purpose since they were "so sure" that their only purpose would be "successful".

In Kourdi the Appellants had purchased a vacant piece of land with the intention to build a shopping centre and earn rental income. No viability study was done before the undertaking of this adventure though the appellants were aware that they were buying in a good area. After construction the occupancy rate and rental income were unsatisfactory. The appellants then sold the company to an associated company. The Appellant's case was that at the time of purchase the possibility of selling was not a decisive factor, and, therefore, no secondary intention was required to characterize the transaction as a business transaction.

The Court relied on Bayridge as authority and quoted from it in the following terms:

"In purchasing the property, the directors relied on their own knowledge of real estate and acted without any independent appraisal of the property... I am far from satisfied that men of their ability and experience would have done this for the purpose of building a motel and service station without having arranged for the funds to finance this construction and without, at the same time, having in mind the most obvious alternative course open to them for turning the property to account for profit. Despite their optimism the possibility, if not the probability, of their not being able to obtain the necessary loan must, in my opinion, have been present in their minds... To my mind, it is not without significance that that course was the only alternative course considered and that it was decided upon as the only thing left to do. In my opinion, the sale of the property for profit was one of the several alternative purposes for which the property was acquired, and it was in the carrying out of that alternative purpose, when it became clear that the preferred purpose was unattainable, that the profit in question was made. It was, accordingly, a profit made in an operation of business in carrying out a. scheme for profit-making and was properly assessed. " (at p 2696)

The cases of Craddock v FCT (1969) 1 ATR 339 and Piper v FCT (1974) 4 ATR 359, are also on point and do not need to be discussed here. Whether it was NLTB consent or funding, both of which were vital, and were not guaranteed at the time of acquisition. As two sensible and seasoned businessmen, the Court cannot believe that the Appellants did not envisage selling as a contingent purpose. As both of them state in their affidavits, that the "offer to sell was a commercially viable one" and they "made a commercial decision to sell our shares" (see para 57 (g) of Mr. Singh's affidavit and para 57 (h) of Mr. Makasiale's affidavit).

The Court has considered the totality of the evidence of the Appellants, and the applicable law. The Appellants have not discharged the onus required.

Orders

The Appeals are dismissed. Each party is to bear its own costs.

JAYANT PrakASH
[Court of Review]
(20th February, 2009)