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| Sunday, 24 October 2004 |
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The burden of proof - exceptions to the general rule Observations by Cecil Aluthwela In a series of articles former Deputy Commissioner of (Appeals) Department of inland Revenue Cecil Aluthwela gives his observations on the article titled " On tax appeals - Some reflections" by Stanley Fernando (BA Ceylon) Attorney-at-Law Lecturer and Examiner in Tax Law, Council of Legal Education, Visiting lecturer in Tax Law, Faculty of Law, University of Colombo which appeared in the July 1993 issue (vol.1 No.1) of the Journal of the Institute of Taxation. These observations present different points of view which may be of benefit and interest to the tax paying public. The Inland Revenue Act (Sri Lanka) referred to is Act No 28 of 1979. The sections referred to are those in the Act. Under this caption Mr. Fernando states: "It is settled law that the burden of proving that an assessment is erroneous or excessive in an appeal is on the appellant. However there are other situations where the initial onus is on the revenue". In this regard Mr. Fernando identifies three situations which he says are exceptions to the general rule. (1) Where the assessor is "Of Opinion" that any transaction which reduces or would have the effect of reducing the amount of the tax payable by any person is artificial of fictitious or that any disposition is not in fact given effect to (Section 91). Mr. Fernando does not cite any authority to support this proposition of his. Unfortunately, for Mr. Fernando the case law is to a different effect. In accordance with the decides cases, it is for the appellant to establish that his transactions did not amount to an artificial contrivance designed to avoid tax. The leading case on the subject, in recent years is W. T. Ramsay Ltd. V IRC. Lord Wilverforce held, "that although the Duke of Westminster principle prevented a court from looking behind a genuine document or transaction to some supposed underlying substance, it did not compel the court to view a document or transaction in blinkers, isolated from its context". He went on to say while the techniques of tax avoidance progress the courts are not obliged to stand still. Hence, the onus was put on the company to establish that the transactions as a whole were not a contrivance to avoid tax. In CIR v Burmah Oil Co. Ltd., Lord Diplock observed that the case Duke of Westminster v CIR was about a simple transaction between two real persons, each with a mind of his own. "The kind of tax avoidance schemes that had occupied the courts in recent years, however involved inter-connected transactions between artificial persons, limited companies, without minds of their own but directed by a single "master mind". Lord Scarman stated that - "the business community and their advisers should appreciate that Ramsay's case marked a significant change in the approach adopted by the House in its judicial role towards tax avoidance schemes". In Philippi v CIR, the issue was whether the transfer of assets was with a view to avoiding liability to tax. The Court of Appeal (United Kingdom) held that the taxpayer had not discharged the burden of showing that avoidance was not one of the purposes of the transfer of assets. Similarly, in Sugarwhite v Budd the Court of Appeal (United Kingdom) held that the transactions in question relating to property were designed to avoid tax and the onus was on the taxpayer to prove that the assessment was excessive. Pilkington Brothers v IRC and Eilbeck v Rawling are two other cases where the onus was said to be on the appellant to establish that the transaction did not amount to an artificial scheme designed to avoid tax. Hence Mr. Fernando's contention that the initial onus is on the revenue in regard to tax avoidance schemes, is legally untenable The second situation according to Mr. Fernando where, the initial onus is on the revenue is "Where the assessor treats the undistributed profits of a company as distributed on the ground that the assessor is satisfied that the company had not distributed to its shareholders a reasonable part of its profits for any year of assessment (Section 39 (1))" Here too Mr. Fernando does not cite any authority for his contention. There is yet no Sri Lankan case where the issue (namely) on whom the onus is in respect of undistributed profits of a company has been decided. Hence, as the concept of the onus of proof in taxation is of British origin, it is necessary to refer to the position in the United Kingdom. Prior to 1965 the onus was on the crown to establish a prima facie case that the appellant company could have distributed or distributed a great amount without in anyway affecting its business requirements. However legislation in 1965 and 1972 put the onus on the appellant company. Thus the position today is that it is for the appellant company to establish that it could not distribute or make a larger distribution without affecting its business requirements. Hence Mr. Fernando's contention that the initial onus is on the revenue in respect of undistributed profits of companies is untenable. Of course it can be contended that we are not bound by legislation in the United Kingdom. But the point is that there is no Sri Lankan authority to the contrary. Are we then to stick to a position (unsupported by any authority), which the authorities in the United Kingdom have nullified by statute. The third situation according to Mr. Fernando, where the initial onus regarding the assessment made is on the revenue is: Where the assessor had made time barred assessment on the basis of his opinion that the taxpayer has committed fraud, evasion or wilful default in relation to income tax (proviso 2 to section 115 (5))" Under this caption, it appears that what Mr. Fernando is seeking to make out is that where assessments are made on grounds of fraud, evasion or wilful default the initial onus is on the revenue to establish the correctness of the assessment made. I reach this conclusion from two statements made by Mr. Fernando in his article. "It is settled law that the burden of proving that an assessment is erroneous or excessive in an appeal is on the appellant. However there are other situations where the initials onus is on the Revenue". One such situation is where assessments are issued on grounds of fraud, evasion or wilful default. "The burden of proof that an assessment is erroneous and excessive must be discharged by the appellant or by the Revenue when the burden is on the Revenue". This is not the position emerging from the case law. There is no initial onus on the part of the Revenue to justify the Assessment made by it under the proviso 2 of section 115(5) as Mr. Fernando would make us believe. There are two things which must be kept separate and distinct- a) The establishment of fraud, evasion or wilful default on the part of the taxpayer. b) The discharging of the onus in respect of the Assessment made on grounds of fraud, evasion or wilful default. Regarding (a) above the onus is on the Revenue. Regarding (b) the initial onus is fairly and squarely on the appellant. There is no initial onus on the part of the Revenue to justify the assessment made. In this connection I would like to refer Mr. Fernando to the Privy Council judgement in the case Arumugam Pillai v Director General of Inland Revenue (A Malaysian case). |
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