Exposition of Income Tax in Sri Lanka

Reviewed by Joe Muttupulle

'Outside of a dog a book is a man's best friend. Inside of a dog it's too dark to read'. Groucho Marx

And on a slightly different note -

'The Inland Revenue is not slow - and quite rightly - to take every advantage which is available to it under the taxing statute for the purpose of depleting the tax payer's pocket and the tax payer in like manner entitled to be astute to prevent so far as he honestly can the depletion of his means by the Revenue'. Lord Clyde in the Ayrshire Pullmans

Income Tax in Sri Lanka by E. Gooneratne is now in its second edition revised by O.M. Weerasooriya, former Commissioner of Inland Revenue. The late Gooneratne, Barrister-at-Law, was a member of the Ceylon Civil Service and Legal Advisor to the Board of Review, Inland Revenue, all of which made him eminently suited to write this very comprehensive and readable book on a difficult subject.

The entire book makes for good reading but, in the interest of brevity, I would like to limit my comments and observations to just two chapters, namely, those on Revenue Expenditure and Profits from Employment.

The Chapter on Revenue Expenditure, which is the longest one in the book, is the topic that most interests businessmen and accountants, as well as tax practitioners. It addresses the very vital question as to which outgoings and expenses are deductible for tax purposes. From the plethora of tax cases that have come up before the courts for decision the, author has arrived at a rather simple formula for sifting out those expenses which are deductible from those which are not. The formula, as I understand him, is this.

Question 1: Is the expense incurred for the purpose of this particular business?

If 'yes', proceed to question 2.

Question 2: Is the outgoing or expense incurred for the purpose of producing income?

If 'yes'. proceed to question 3.

Question 3: Is the outgoing or expense revenue expenditure or capital expenditure? The author asserts that revenue expenditure is not referable to specific receipts of income whereas there is in general a quid pro quo for capital expenditure and that this difference is the basis for the test laid out by Lord Cave in Atherton's case to distinguish between revenue and capital expenditure. According to the test, where the expenditure brings into existence an asset or an advantage for the enduring benefit of a trade there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating the expenditure as capital expenditure.

If the expenditure is not capital expenditure, proceed to the next question.

Question 4: Is the expenditure necessary in producing the income?

According to the author, commercial expediency and not legal liability is the proper test for determining whether the expense is necessary.

If 'yes', proceed to the final question.

Question 5: Is the expense genuine, i.e. it is not 'artificial' or 'fictitious'?

If finally, the answer to question 5 is 'yes', the outgoing or expense is an allowable deduction. The outgoing or expense would have fulfilled all the requirements of being one 'incurred in the production of income'.

The strength of the Chapter on Profits from Employment lies in the author's precision in assigning meanings to terms in general usage such as 'course of employment', 'benefit', 'value of a benefit', 'emoluments', perquisite', 'contract of service', etc.

The whole Chapter is interesting reading and there seems to be something useful in it for everyone including sportsmen (who are usually the recipients of gifts), parents of children who have won scholarships awarded by their employers, and even the clergy. The Author's depth of knowledge and scholarship is evident in this Chapter.

A work of this nature will, by making tax law more understandable and enabling the taxpayer to appreciate the tax consequences of his transactions, makes him a compliant taxpayer. If so, the work has served a valuable purpose.

The book will be a useful annexation to the library of any accountant or lawyer, particularly a tax practitioner.

Students preparing for their accountancy or law examinations will also benefit immensely from reading this masterly exposition of income tax law.