Training Program

Organised
By
Mauritius Revenue Authority Staff Association

Resource Person : Dhanee Seetloo (Union Member)

Venue : Level 8 Ehram Court
Date : 3 May 2011
What Is Income Tax?
“Income Tax, if I may be pardoned for saying so, is a tax
on income. It is not meant to be a tax on anything else”
(Lord Macnaghten in London Country Council v/s Att Cen.)
Types of Income
Employment Income
Business Income
Chargeable Income – “In the case of an individual
the amount remaining after deducting from the net
income the income exempt on threshold”
In any other case the net income
Net income means the aggregate amount remaining
after deducting from gross income all allowable
deductions
Gross Derived from Employment
Salary, wages, leave pay, fees, overtime, bonus, etc
Severance allowance or compensation for loss of
office
Relevant Mauritian Tax Case

(A) De Chazal & Couacaud v/s C.I.T (Supreme Court Case 1992)
Basic Principles
(i) Any person who receives severance allowance is exempt from income tax
only where that person has received what is due as severance allowance
under the labour Act. The commissioner may test the correctness of the
computation of severance allowance, whether it results from an agreement
of the parties or from a judgment.

(i) Any amount to which the appellants were entitled under their contracts of
employment and which were actually paid to them should be considered in
calculating their annual remuneration.
(B) Serret v/s C.I.T (Supreme Court Case 1983)
Lump sum paid to the appellant by his ex-employers by
virtue of a Court judgment was by way of compensation for
loss of office. This was held to be taxable.
(C) J. Valls & Others v/s MRA (Supreme Court Case 2010)
The employee claimed damages because her employment
was terminated. She claimed about 17m as a result of “faute”
committed by her employer. The MRA allowed 1.4m as
exempt income because the amount paid was considered as
severance allowance. The ARC commented that nothing
should have been allowed.
The Supreme Court confirmed that is was in fact a
compensation for loss of office and thus taxable.
(D) Michel Serge Cyril Domingue v/s MRA (ARC/IT/94-07)
This case related to the same issue as in Jane Valls.
Section 17- Deduction in connection with Employment

“Any expenditure which is wholly, exclusively and

necessarily incurred by a person in performing the duties
of an office or employment shall be deductible……..”
Relevant Mauritian Case
Paul Chong Leung v/s C.I.T (Supreme Court Case 1981)
Basic principle
An employee is not entitled to deduct from his gross income, expenses
incurred in travelling from his residence to his sole place of work as they
are not incurred “in performing the duties of his office”

Chief Justice Rault gave a dissenting judgment which is worthwhile

reading.
Fringe benefits
Section 10(2)(a) -“or sum by whatever name called”
Taxable Fringe benefits
 Car
 Housing
 Board & Lodging
 Interest on free loans
 Tips
 Writing all of debts by employer
 Domestic & private expenses borne by employer
 Tax paid by Employer
Case of L.E.J Duthil v/s C.I.T as compared to that of
Parmeswar Daby (T.A.T Cases)
The often spoken Jargon – “Deemed Interest”
No such term is found in Law.

Case of D.A Jugroo v/s TAT (Supreme Court Case 2000)

Mr. Jugroo received an interest free loan from his employer to
construct a bungalow. He was assessed to income tax on the
element of deemed interest calculated at the rate of 12% on the
interest-free loan. Taxpayer contended that the interest-free-loan
did not arise from his employment but from his personal
circumstances.
The supreme court confirmed that is was a benefit arising out of
his employment

Above case was decided on the basis of Laidler v/s Perry and
Tennant v/s Smith. Reference was also made to Mauritian case –
Razvi v/s C.I.T (Supreme Court Case 1987)
Business Profits
Concept – must arise from trade or business
- must include a monetary benefit
• The term “business” has been defined as follows in
section 2
“ business includes any trade profession vocation or
occupation, manufacture or undertaking or any other
income earning activity, carried on with a view to profit”
Section 10(1)(b) – Any gross income derived from any
business
Business Income
Key extracts of Section 10
Section 10- Income included in gross income
(3)a - any sum or benefit in money or money’s worth,
derived from the carrying on or carrying out any
undertaking, or scheme entered into or derived for
the purpose of making a profit, irrespective of the
time at which the undertaking or scheme was
entered or devised.
3(c)- any sum or benefit in money or money’s worth,
derived from the sale of any immovable property,
where the property was acquired in the course of a
business the main purpose of which is the
acquisition and sale of immovable property.
Section 10(3) a & c Illustrated
1. Adhinath Singh Lutchmun & Others v/s MRA (Privy Council Case-2006)
Compensation received due to compulsory acquisition by the
government was held to be business income.

2. Robert de Maroussem v/s CIT (Privy Council Case- 2003)

Robert de Maroussem acquired a 99 year lease from Medine
sugar estates for 1000 arpents. The land was used mainly for
agricultural purposes. In 1988, 75 arpents of the land was
developed and subdivided into 456 building plots. Each time
a sale was effected by Medine S.E a percentage of the sales
proceeds were paid to the lessee for relinquishing his rights
therein. Even if Mr. Maroussem was not the owner of the land.
It was held that the share of income was taxable because he
was participating in a morcellement scheme. The privy council
ordered the commissioner to allow as cost the market value of
the land just before the development.
What has judges said about trade?
I.T.A 1995 – “Trade means any trade adventure or concern in the
nature of trade”
Oliver J in Salt v/s Chamberlain (53 Tc 143)
“I doubt whether the question whether in any given case a person is or is
not carrying on a trade is capable of solution by the application of logical
progression of propositions culled from decided cases. The question is , I
think one of overall impression”
Lord President Clyde in I.R.C v/s Livingston (11TC 538)
“ I think the test which must be used to determine whether a venture such
as we are now considering is or is not “in the nature or a trade” is whether
the operations involved in it are of the same kind, and carried on in the
same way, as those which are characteristic of ordinary trading in the line
of business in which the venture was made”
Lord Wilberforce in Ransom v/s Higgs (5o TC 1)

“Trade involves, normally the exchange of goods or services, for reward, not of all
services, since some qualify as a profession or employment or vacation, but there
must be something which the trade offers to provide by way of business. Trade
moreover, presupposes a customer (to this too, there may be exceptions, but such
is the norm), or, as it may be expressed, trade must be bilateral – you must trade
with someone”

“Trade is infinitely varied, so we often find applied to it the cliché that its categories
are not closed. Of course they are not; but this does not mean that the concept of
trade is without limits so that any activity which yields an advantage, however
indirect can be brought within the net of tax”
Lord Brightman in Kowloon Stock Exchange Ltd v/s CIR
(P.c 1984 STC 602)

“The word trade is no doubt capable of bearing a variety of

meanings according to the context in which it is used. In its
most restricted sense it means the buying and selling of good;
in a slightly wider sense; it includes the buying and selling of
land; there is no reason to exclude, in an appropriate context,
the buying and selling of choses in action. It is commonly
used…. to denote operations of a commercial character by
which the trader provides the customer for reward some kind
of goods or services”
Lord Morison in the case of Lindsay Woodward & Hiscox v/s CIR (18 TC
43)

“It is quite immaterial that the particular method of carrying on the trade involved the
making of a false declaration to the Customs authorities or giving bribes to persons in
America. In my opinion, these are entirely irrelevant considerations. When it is
established that a trade has existed for a year, the question is whether it realised a profit
as ascertained under the rules of the statute. It is quite in vain for the person who has
realised the profit to prove that he made it by cheating of fraudulent trading, or to
attempt to contend that the profit he has earned ought to escape chargeability because
he might have been convicted of a breach of the law. During the discussion a question
was raised as to whether the profits or gains of a burglar were subject to tax. Obviously
not, because burglary is not a trade or business; but if a trader committed a
housebreaking and stole his rival’s order book and, from its information, was able to
increase the profits of his own business, I have no doubt that these profits are subject to
tax. It is, in my opinion, absurd to suppose that honest gains are charged to tax and
dishonest gains escape. To hold otherwise would involve a plain breach of the rules of
the statute, which require the full amount of the profits to be taxes and merely put a
premium on dishonest trading. The burglar and the swindler, who carry on a trade or
business for profit, are as liable to tax as an honest business man, and, in addition, they
get their deserts elsewhere”
Case of Robert Duverge v/s CIT (CN 5833/98 TAT case)
Employee of Medine S.E
Obtained funds unlawfully from his employer
Assessments were raised by the office
TAT confirmed that taxpayer is taxable on such
income
Allowable Deductions
Net Income = Gross Income – Allowable Deduction
For accounting purposes there are two steps on profit
computation
Sales – Cost of Sales = Gross profit
Gross Profit – Expenses = Net Profit

The term allowable deduction covers a wide range of

expenditure items.
For business purposes allowable deduction has been
defined as “any expenditure loss or allowance which is
deductible”
Conditions when expenditure or loss can
be allowed as a Deduction
 Section 18 – Expenditure incurred in the production of Income.
“Any expenditure or loss shall be deductible…… to the
extent to which it is exclusively incurred in the
production of gross income…..”
Common Problems
Whether a provision or an accrual
Treatment of bad debts – Guideline has been published
Meaning of Loss (Section 18)
Taxpayers deficit on year’s turnover and expenses

Loss can be B/F from last year

Item of expense or loss not intended (eg Property loss, stolen or

destroyed)

Losses through theft tort or negligence of employees are

deductible.

DEDUCTIBLE if incurred in producing income

Case Law Relating to Losses
Charles Moore & Co v/s F.C.T (6AITR379)
On the way to the deposit the previous day’s takings, two employees
were attacked and all money were stolen. The loss was one connected
with the normal course of the business and it was incurred “in the course
of gaining or producing the assessable income”. It was an allowable
deduction.

Curtis v/s Oldfield Ltd (9T.C 319)

 Company managing director in sole control
 He siphoned off funds
 Written off as bad debts in the accounts
 Not deductible as managing director had total control of the company
and it was not a trading loss.
 A misapplication of profit

Bamford v/s ATA Advertising Ltd (48TC359) is also a similar case where
misappropriation by a director is not an allowable
The wholly and Exclusively Rule
If an expenditure is to be deductible, it must not only be
incurred “for the purpose of earning profit” but must be
wholly and exclusively” incurred for the production of
Gross Income.
Case of Bentleys Stockes & Lowless v/s Beeson
 Lunch was provided during discussion with clients; while
computing the income of the solicitors business the court
allowed the expenditure as a deduction.
In Mauritius section 26(1)(e) prohibits such deduction.
Case of Mallalieu v/s Drummond (57TC330)
Extract of Lords Brightman from the House of Lords

“Miss Mallalieu thought only of the requirements of her profession when she first bought (as a
capital expense) her wardrobe of subdued clothing and, no doubt, as and when she replaced
items or sent them to the launderers or the cleaners she would, if asked, have repeated that
she was maintaining her wardrobe because of those requirements. It is the natural way that
anyone incurring such expenditure would think and speak. But she needed clothes to travel to
work and clothes to wear at work, and I think it is inescapable that one object, though not a
conscious motive, was the provision of the clothing that she needed as a human being. I reject
the notion that the object of a taxpayer is inevitably limited to the particular conscious
motive in mind at the moment of expenditure. Of course the motive of which the taxpayer is
conscious is of vital significance, but it is not inevitably the only object which the
Commissioners are entitled to find to exist. In my opinion the Commissioners were not only
entitled to reach the conclusion that the taxpayer’s object was both to serve the purposes of
her profession and also to serve her personal purposes, but I myself would have found it
impossible to reach any other conclusion.”
Treatment of Bad Debts
Local Tax Cases
Subash Uppiah v/s CI.T (Cno 40/99 TAT Case)
Mr. Uppiah a wholesaler failed to prove that the amount owed by the Debtors was
really bad. No legal action was taken against debtors. Bad debts not allowed by the
ARC.

Best Electronics Ltd v/s CIT (CN 5257/97 & s/court case 2002)
In this case the bad debts related to overseas customers who did not settle their
account. The company contended that to institute judicial proceedings against the
overseas customers amounts to “throwing good money after bad”. The claim for bad
debts was disallowed.

MWT paper processing v/s C.I.T

The company accepted a smaller amount in full settlement of a debt for a larger
amount. Thus voluntarily extinguishing its right to recover the balance. Bad debts not
allowed.

Score Marketing Co Ltd v/s C.I.T (ARC 32/04)

Legal action was taken after the bad debts were written off. Bad debts not allowed.
ARC comment – “it might have been sound business decision to write off the debts, it is
not so far tax purposes.”
Bentley Apparel Ltd v/s C.I.T (Supreme Court case)
Bad debts was proved after the year of assessment in which it was claimed.
Hence not allowed. The case addressed the issue of prudence concept but the
T.A.T ruled that tax laws prevails over accounting principle. This was confirmed
by the Supreme Court.

Guidelines issued by MRA in 2009 after representation from stakeholders.

Section 19 – Expenditure incurred on interest in the
production of Gross Income
Applicable both individual and companies

Just having a certificate of interest is not sufficient

Must be in respect of capital employed exclusively in the

production of gross income

Recent case of Robert Le Maire Intergraph Ltee v/s MRA

The company borrowed substantial amounts from the banks.
Major part of the borrowed funds were given interest free to
subsidiary companies. Part of the interest claimed the company
was disallowed. The assessment was confirmed both by the ARC
and the Supreme Court.
Section 20 - Losses
Losses cannot be set-off against emolument. This was
possible in the 1974 Income Tax Act.

Director General must be satisfied.

Losses may be carried forward and set-off against not

income derived in the 5 succeeding income years –
starting from 1 July 2006

Losses arising from annual allowances in respect of capital

expenditure incurred on or after 1/7/2006 can be carried
forward indefinitely.
An Illustration of the time limit to carry forward losses

Assume a company closing its account on 30th June and as

at 30/6/2006 the accumulated losses was 200000
Year ended Year of Assessment Profit / (Loss) Carried forward

30/6/2006 2006/2007 (200/000) (200000)

30/6/2007 2007/2008 25000 (175000)
30/6/2008 2008/2009 40000 (135000)
30/6/2009 2009/2010 30000 (105000)
30/6/2010 2010 15000 (90000)
30/6/2011 2011 20000 (70000)

Losses amounting to 70,000 will lapse.

Section 24 – Annual Allowance
 Item on which annual allowance is granted has been listed in the law

 Conditions – (i) Proper books and records should be kept

(ii) Expenditure should be incurred in the production of
Gross Income
(iii) In case of a motor car annual allowance cannot exceed
3m. This condition does not apply to tour operators

 Shops and shopping malls

 Office and showrooms

 No need to incur expenditure on both item

Section 26- Unauthorized Deduction
 Any expenditure , investment or loss to the extent to which it is capital or
of a capital nature

 Expenditure or loss to the extent it is in the production of Exempt Income

 Any reserve or provision of any kind

 Any expenditure or loss recoverable under a contract of insurance or of

indemnity

 Any expenditure incurred in providing business entertainment or any gift

 Income Tax or Foreign Tax

 Any expenditure or loss to the extent to which it is of a domestic or

private nature
Case of CIR v/s Alexander Von Glehn (12 TC 232)

It relates to the payment of a penalty

Not allowable as a deduction
A difference between a commercial loss in trading
and a penalty imposed on a taxpayer for infringement
of the law.
Not exclusively incurred for the production of Income
Case of Mauritius Shopping Paradise Co Ltd v/s CIT (TAT CN 179/00)

Provision for expenses claimed in respect of duties

and taxes
Contention of company – an accrual
The amount was payable because of an offence
Decision – Not allowable
When is an expenditure of a capital nature?

British Insulated & Helsby Cables v/s Atherton 10 TC 188

Principle
“Where an expenditure is made, not only once and for all,
but with a view to bringing into existence an asset or an
advantage for the enduring benefit of a trade…..there is a
very good reason (in the absence of special circumstances
leading to an opposite conclusion) for treating such an
expenditure as attributable not to revenue but to capital.”
(Lord Cave)
Section 26(3) – Expenditure or Loss attributable to both
Taxable and Exempt Income
Simple Illustration
A company has submitted its Income Tax computation for year of
assessment 2009/2010 and the figures are as follows:
Details Rs 000
Commissions & Dividends receivable 700
Profit on disposal of shares 1600
Total Income 2300
Deduct Expenses 100
Net Profit 2200
Less
Dividend from resident companies 450
Profits on Disposal of Shares 1600 2050
Chargeable Income 150
Tax 22500
Breakdown of expenses claimed

Expenses per Account

License 4000
Audit fees 5000
General Expenses 6000
Accounting Fees 15000
Management fee 60000
Investment Analyst Fees 10000
Total claim per account 100,000

Can we accept the expenses as a deduction or do we have to make

any adjustment?
Solution for Illustration in respect of Sec26(3)
Application of Regulation 8 – Unauthorized Deductions

Exempt Income
Expenditure or Loss
Total Gross Income (including Exempt Income)

Exempt Income
Dividend 450,000
Profit on disposal of shares 1,600,000
Total Exempt income 2,050,000

Total Gross Income 2,300,000

Expenditure or Loss 100,000

Amount of expenditure to be disallowed in accordance with regulation 8

2,050,000 100,000
89130
2,300,000 1
Chargeable Income (declared) 150,000
Add Expenditure attributable 89,130
to exempt Income
Revised Chargeable Income 239,130
Tax @ 15% 35,869
Illustration for AMT Section 44(A)(1)
Profit per accountant 2,777,500
Add unauthorized deduction
(i) Provision for bad debts 190,000
(ii) Gifts & Donations 50,000
(iii) Depreciation 222,500
(iv) Expenditure incurred in the production of Gross Income 38,734
501,234
Less
(i) Exempt Dividend 900,000
(ii) Annual allowances 765,000
1665,000
Chargeable Income 1,613,734
Tax @ 15% 242,060
Alternative minimum Tax (AMT)
Section 44A(1)
AMT will apply in cases where companies have not
paid any tax or enough tax but have paid dividend

AMT will not apply where the normal tax payable

exceeds 10% of dividend declared

Will AMT apply in the above example if the dividend

paid is Rs 800,000
Dividend Paid 800,000
10% 80,000
Tax Paid 242,060
HOW A.M.T WORKS?
Section 44A (1)

Case A Case B Case C Case D

Normal tax Payable 3000 3000 3000 3000

7.5% of book profit 2400 4500 4500 4500

10% of dividends 1500 3600 5400 1500

Tax payable 3000 3600 4500 3000

41
Questions?