N7781

PAPUA NEW GUINEA
[IN THE NATIONAL COURT OF JUSTICE]

CIA NO. 133 OF 2017

IN A MATTER OF AN APPEAL PURSUANT TO SECTION 247(b) OF THE INCOME TAX ACT 1959 & ORDER 18, DIVISION 2 – TAXATION APPEALS OF THE NATIONAL COURT RULES

BETWEEN:
FU GUI VILLAGE LIMITED
Appellant

AND:
BETTY PALASO in her capacity as COMMISSIONER GENERAL OF INTERNAL REVENUE COMMISSION
First Respondent

AND:
INTERNAL REVENUE COMMISSION
Second Respondent

Waigani: Nablu, J
2019:15th February, 8th March

Cases Cited:

Chief Collector of Taxes v. Bougainville Copper Ltd (2007) SC853
Internal Revenue Commission v. Dr Pirouz Hamindian-Rad (2002) SC692

Counsel:

R. Mulina, for the Appellant
S. Sinen and J. John, for the Respondent

8th March, 2019

1.	NABLU J:	This is an appeal against the decision of the Internal Revenue Commission (IRC) to disallow the appellant’s objection and confirm the assessment of K71,623.20 as company income tax for the year ending 31st December 2013. The appellant seeks to quash the decision and an order that the IRC vary its assessment and reinstate the disallowed losses incurred for years of income ended 31st December 1999 and 31st December 2000.

2.	The appellant relied on the affidavit of Mark Gatdula. In response, the respondents relied on the affidavit of Elijah Titus and Emily Loko. All the evidentiary material can be found in the Appeal Book which was filed on 18th September 2018.The facts of this matter are not in great dispute. The appellant was assessed for income tax for the sum of over Seventy-one thousand kina for the year of income ending 31st December 2013.

3.	Upon receipt of this tax assessment, the appellant lodged an objection against the assessment on the ground that the Commissioner General had not carried over the appellant’s losses which were incurred in the years of income 1999 and 2000 as required by Section 101(3) of the Income Tax Act 1959 (as amended).

4.	The primary argument by the appellant is that the losses incurred in 1999 and 2000 were still available to be carried forward for a period of 20 years.

5.	The Commissioner General on the other hand, considered the objection and decided that the losses incurred by the appellant were allowed to be carried over and off set against the taxpayers taxable income for a period of 7 years. That allowable period expired on or about 2008. The allowable deduction period of twenty (20) years was not applicable to the appellant for the reason that Section 101(4A) of the Income Tax Act was a statutory bar to the claiming of or recouping of losses which were incurred prior to the income year ended 31st December 2002.

6.	The issue before the Court for determination is a very narrow one. The crux of the appeal relates to the interpretation of Section 101(4A) of the Income Tax Act. Another ancillary issue is whether the respondent is bound by its statement in the Tax Agents Circular’s and the CPA PNG training booklet. 

7.	The pertinent issue before the Court is whether the Commissioner General erred when interpreting Section 101(4A) of the Income Tax Act in the manner that she did. The relevant provisions of Section 101 are in the following terms:

Section 101 Losses of Previous Years
101(1) [“Net exempt income”; “year of loss”] In this Section – 
“net exempt income” means – 
a)	where the taxpayer is a resident the amount by which his exempt income derived from all sources, except income exempt under Part III.1A, exceeds the sum of the expenses (not being expenses of a capital nature) incurred in deriving that income; and
b)	where he is a non-resident – the amount by which his exempt income derived from sources in Papua New Guinea (other than income, if any, to which Section 189D of this Act applied) exceeds the sum of the expenses (not being expenses of a capital nature) incurred in deriving the income;
“year of loss”, in relation to a taxpayer, means a year in which the taxpayer incurred a loss.

101(2) [Occurrence of loss] For the purpose of this section, and subject to Section 66A, a loss shall be deemed to be incurred in any year when the allowable deductions (other than deductions under the section or Section 101A), from assessable income (other than income derived by way of salary or wages or deemed by this Act to be salary or wages), exceed the sum of that income and the net exempt income of that year, and the amount of the loss, subject to subsections (8) shall be deemed to be the amount of the excess.

101(3) [Losses in previous seven year period] Subject to Section 66A(3), so much of the losses incurred by a taxpayer in any of the 20 years immediately preceding the year of income or, for taxpayers carrying on resource operations as defined in Section 155(1), in any year preceding the year of income as has not been allowed as a deduction from his income of any of those years is allowable as a deduction in accordance with the following provisions: - 
a)	 Where he has not in the year of income derived exempt income, the deduction shall be made from the assessable income.
b)	Where he has in that year derived exempt income, the deduction shall made successively from the net exempt income and from the assessable income.
c)	Where a deduction is allowable under this section in respect of two or more losses, the losses shall be taken into account in the order in which they were incurred.
d)	Where a deduction is allowable under this section, it shall be taken into account after the allowance of all allowable deductions.

101(4) [Loss in primary production] Where a taxpayer has incurred a loss in any of the 20 years immediately preceding the year of income or, for taxpayer carrying on resource operations as defined in Section 155(1), in any year preceding the year of income and, for the purposes of Section 101A of this Act, a loss in engaging in primary production is to be deemed to have been incurred by him in that preceding year, so much only of the first-mentioned loss as exceeds the second-mentioned loss shall be taken into account for the purposes of Subsection (3) of this section.

101(4A) [Deductable loss] Notwithstanding any other provision of this section, no loss incurred on or before 31 December 2002 shall be deductible, that, under the provisions in force prior to 1 January 2003, would not have been deductible from income derived in the year ended 31 December 2002 or in a later year.

101(5) [Bankruptcy] Notwithstanding any other provisions of this section, where, before the year of income, a taxpayer has become a bankrupt or been adjudicated insolvent, or, not having become a bankrupt or been adjudicated insolvent, has been released from any debts by the operation of the law of Papua New Guinea relating to bankruptcy or insolvency, no loss to which this section applies that was incurred by him before the date on which he became a bankrupt or was adjudicated insolvent, or the date on which he was so released, as the case may be, is an allowable deduction.
101(6) [Debt prior to bankruptcy] Where in the year of income, a taxpayer pays an amount in respect of a debt incurred by him in one of the 20 years immediately preceding the year of income or, for taxpayers carrying on resources operations as defined in Section 155(1), in any year preceding the year of income, being a year in which the taxpayer incurred a loss to which the last preceding subsection applies but not being a year before the first year of income to which this Act applies, the amount payed by the taxpayer in respect of the debt is, subject to the next succeeding subsection, an allowable deduction to the extent that it does not exceed so much of the debt as the Chief Collector is satisfied was taken into account in ascertaining the amount of the loss (underlining mine).

8.	In my view, the grounds of appeal are summarized as follows:

a)	whether the Commissioner General erred in law when she applied the carry over losses for a period of 7 years against the appellant’s loss;
b)	whether Section 101(3) is applicable to the losses incurred by the appellant in the year of income 1999 and 2000; and
c)	whether the Commissioner General is bound by its Tax Agents Circular and the Charter of Practising Accountants (CPA) training manual?

9.	The parties agree that the appellant is a registered company with the Tax Identification Number (TIN) 5000 34447. The respondents issued to the appellant a Notice of Assessment for Corporate Income Tax for the period ending 31 December 2013 for the amount of K71, 623.20 on 19 October 2016. It is also agreed that the appellant incurred the loss in the years of income 1999 and 2000.

10.	The Supreme Court in the case of Internal Revenue Commission v. Dr Pirouz Hamindian-Rad (2002) SC692 held that tax legislation must be given  their plain and ordinary meaning. There must be a clear and unambiguous intention demonstrated in the Statute, otherwise an interpretation favourable to the taxpayer is preferred. 

11.	The proper construction of tax legislation is that there is no equity in tax legislation (see also Chief Collector of Taxes v. Bougainville Copper Ltd (2007) SC853).

12.	It is clear that, Section 101(3) allows losses to be carried forward or recouped for a 20 year period. Section 101(4A) states that any loss incurred prior to 2002 is not allowed to be deducted against the taxpayer’s taxable income for a period of 20 years.

13.	Upon a close reading of Section 101(4A) it is clear that the provision does prohibit the carrying over of losses incurred prior to 2002. This in my view is consistent with Section 101(3) which states that “so much of the losses incurred by a taxpayer in any of the 20 years immediately preceding the year of income.” Clearly the change in the number of years that a loss can be carried over was intended to have a prospective effect. The words “immediately preceding the year of income…” are significant. When Section 101(3) is read together with Section 101(4A), it is clear that Parliament’s intention is for the 20 years carry over losses period to apply prospectively. Therefore, Parliament’s intent is clearly demonstrated in Section 101(4A) where it is stated that losses incurred prior to 31st December 2002 are not allowable deductions pursuant to Section 101(3). This in my view is consistent with public policy, the national tax policy and would ensure that there is certainty in the administration of tax legislation.

14.	In the present case, I am of the view that a taxpayer’s loss was incurred on or before 31st December 2002 therefore, they are subject to deduction of seven (7) years, not for a period of 20 years. The losses were incurred prior to 2002, therefore, the applicable law is the 7 years carry forward loss allowance period. The appellant’s right to carry forward losses expired in the years of income ended 31 December 2007 and 2008.

15.	Therefore, I am not persuaded that the respondent misinterpreted the law. Section 101(4A) is clear that the loss available for deduction is a period of 7 years. The appellant’s loss was allowed to be deducted up to the years 2007 and 2008. This was because it was a loss which was incurred before 2002 and was therefore recouped in full. The appellant’s ground of appeal is without merit and is dismissed.

16.	The next issue is whether the respondent is bound by the Tax Agents Circular and the CPA training manual. The primary documents they rely on is the Tax Agents circular No. 55-2001 and No. 56-2002. The appellant also relied on the Continuing Professional Development (CPA) Corporate Tax Administration handout dated 22 September 2016.

17.	At the outset, the law is clear, any provisions in regard to the imposition of tax must be expressly provided in an Act of Parliament (Section 209(1) of the Constitution). An Act of Parliament is the only source of the law that regulates the imposition of tax. Whilst, I agree the IRC has the duty of care to ensure that the correct information is circulated to tax agents and tax payers, I am not persuaded that it is bound by their previous statements or application of the law, whether legitimate or not. With respect, I have difficulty accepting the submissions of counsel for the appellant that IRC is bound to follow the Tax Agent Circular or the Charter of Practising Accountants (CPA) training manual. For certainty, the tax legislation must be referred to and applied. Therefore, for the foregoing reasons, the appeal lacks merit. The appeal is dismissed forthwith.

18.	In regard to costs, I will exercise my discretion to order that each party bear their own costs.

Orders accordingly,

Mordelei Lawyers: Lawyers for the Appellant 
IRC In-house Legal Division :  Lawyers for the Respondent