| 4/2/2012 |
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| Court of Appeal - Decisions in Income Tax Cases |
| Case No: 76 |
Decided on: 9 June 1973 |
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Profit Making Undertking Or Scheme. Lifting The Corporate Veil
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In a complex case, an entrepreneur set up a company which took on long lease a large tract of land. Development work started on the land, an extensive advertising campaign was undertaken, and selling agents were appointed. Soon afterwards, however, the shares in the company were sold at a substantial profit over the total outlay. The profit made by taxpayer was brought to charge to tax, although the taxpayer claimed that he was making a capital profit on the sale of shares, which in the absence of a capital gains tax, was exempt. The Court upheld the assessment, thus tearing aside the corporate veil, for the following reasons
- The company was set up under the old Commercial Code and at a certain moment in time all the shares were held by the taxpayer. Although the company was subsequently accepted for registration under the new Commercial Partnership Ordinance, the true legal position was probably that the company had no longer existed at the time of the sale
- The taxpayer had claimed before the Board that the purpose of the project was to create a long term family income. The Board however showed that the total net increase in ground rent would have only been some Lm200 per annum
- The imposition of a substantial premium on all plots that were granted showed that the entire project was intended to generate large volumes of cash as soon as possible. The Board felt that achieving this aim by disposing of the entire project at an immediate substantial profit made little difference to the basic scheme
- The entrepreneur was a developer and contractor by profession and not an investor in property or in shares. He had also actually set up a second company to which all the lessees were obliged by the terms of their grant to give building contracts
- He did not appear to have sufficient means to fund the entire project. The capital of the company was only Lm50,000, which the initial development had nearly absorbed. The taxpayer had also to put in an extra Lm24,750 from his own funds: a loan which he waived on the transfer of the shares
- All along the taxpayer had shown by his own conduct that he considered the company's business as his own: signing deeds, issuing further shares etc without or before formal authorization
- The taxpayer was held to have clearly been personally involved all along in a 'profit making undertaking or scheme' which is specifically brought to charge by the Income Tax Act. This was essentially a speculative transaction in land development
The taxpayer was also brought to charge on the profits accruing to his children on shares which he had donated to them after becoming sole owner. The specific provisions of the law in this respect were also held to apply.
BSC Case: 16/67
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