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John Keells wins landmark judgment against Inland Revenue Dept.
View(s):The Court of Appeal (CoA) in a landmark judgment, has held that Capital Gains arising from the sale of Treasury Bills in the Secondary Market are exempt from Income Tax, in terms of Inland Revenue Act (IRA) No.28 of 1979, as amended by IRA No.35 of 1993.
Agreeing with submissions on behalf of the Appellant, John Keells Holdings (JKH) PLC, in an appeal (CA 8/2010) filed against the order of the Board of Review, the CoA Bench comprising Justices M.M.A Gaffoor and Deepali Wijesundera held that profit and sale of Treasury Bills in the Secondary Market, amounting to Rs 35,846,409, was exempt from Income Tax, in terms of section 14 (a) (xxii) of the IRA, as amended by IRA (Amendment) No.35 of 1993.
JKH PLC acquired and sold Treasury Bills during the year of assessment 1994-1995, and there was no dispute regarding its purchase and sale of Treasury Bills in the Secondary Market.
The senior assessor of the Inland Revenue Department rejected the return for the year of assessment 1994-1995, on the basis that, the claim for exemption as Capital Gain could not be accepted when Treasury Bills are sold in the Secondary Market before maturity, as the gain would consist of both interest and Capital Gain. The assessor determined that a Capital Gain in a sum of Rs 35,846,409.00 was interest, and therefore taxable.
The Appellant appealed to the Board of Review against the determination of the Commissioner General of Inland Revenue. However, the Board of Review, by its determination, held that the Capital Gain was interest attributable to the period during which the Treasury Bills were held by the Appellant before the sale, and that it was taxable.
The CoA analysed the provisions of Section 7 (2) and 7 (4) of the IRA No.28 of 1979 and stated, “In this case, the Appellant acquired and sold Treasury Bills in the Secondary Market, and the price difference was Rs 35,846,409, which is the questioned amount. According to the definition of the IRA, it is a Capital Gain. As I pointed out earlier, this amount is taxable under the general law, until the IRA (Amendment) No.35 of 1993 was enacted. By this amendment, the Legislature, in its wisdom, decided to exempt from Income Tax, the Capital Gains arising from the sale of Treasury Bills in the Secondary Market”.
The CoA held, “The Amendment Act has expressly provided that the Capital Gain arising out of the sale of Treasury Bills in the Secondary Market is exempted from Income Tax. If the words used in the statute are clear enough to express the intention of the Legislature, no restriction should be placed on such provisions by way of interpretation, so as to defeat the purpose of granting such exemption”.
In the circumstances, the CoA annulled the assessment and allowed the appeal.
Maithri Wickremesinghe P.C. with Attorney-at-Law Rakitha Jayatunga appeared for JKH PLC. Deputy Solicitor General Anusha Samaranayake appeared for the Commissioner General of Inland Revenue.