AQP v Comptroller of Income Tax: Income Tax Deductibility & Director Fraud

In AQP v Comptroller of Income Tax, the Singapore High Court addressed whether losses caused by a fraudulent director are deductible for income tax purposes under section 14(1) of the Income Tax Act. AQP, the appellant, sought relief for a loss of $12,272,917 due to the Ex-MD's misappropriation of funds, which was rejected by the Comptroller. Tay Yong Kwang J dismissed the appeal, holding that the loss was not deductible because the Ex-MD possessed overriding power and control within the company, and the defalcation was committed in the exercise of that power.

1. Case Overview

1.1 Court

High Court

1.2 Outcome

Appeal Dismissed

1.3 Case Type

Tax

1.4 Judgment Type

Grounds of Decision

1.5 Jurisdiction

Singapore

1.6 Description

Singapore High Court case concerning income tax deductibility of losses from director's fraud. Appeal dismissed, loss not deductible under s14(1) ITA.

1.7 Decision Date

16 October 2011

2. Parties and Outcomes

Party Name	Role	Type	Outcome	Outcome Type	Counsels
Comptroller of Income Tax	Respondent	Government Agency	Appeal Dismissed	Won	Julia Mohammed of Inland Revenue Authority of Singapore
AQP	Appellant	Corporation	Appeal Dismissed	Lost	Nand Singh Gandhi of Allen & Gledhill LLP

3. Judges

Judge Name	Title	Delivered Judgment
Tay Yong Kwang	Judge	Yes

4. Counsels

Counsel Name	Organization
Julia Mohammed	Inland Revenue Authority of Singapore
Nand Singh Gandhi	Allen & Gledhill LLP

4. Facts

The Ex-MD misappropriated $12,272,917 from the appellant.
The Ex-MD made out false purchase orders to the appellant’s suppliers.
The Ex-MD used misappropriated funds to pay for gambling debts and personal use.
The appellant made provisions for doubtful debts of $12,410,141 inclusive of the Loss.
The Ex-MD was convicted of 24 charges of criminal breach of trust.
The appellant lodged an “error or mistake” claim for the Loss under section 93A of the Act.
The Ex-MD had complete control over the usage of the appellant’s funds.

5. Formal Citations

AQP v Comptroller of Income Tax, Income Tax Appeal No 1 of 2010/Y, [2011] SGHC 229

6. Timeline

Date	Event
1956-01-01	Sole proprietorship established by Mr B
1973-01-01	Sole proprietorship incorporated as a company
1995-10-20	Ex-MD entered into a service agreement with the appellant
1995-11-10	Appellant listed on SESDAQ
1998-02-02	Appellant upgraded to the SGX Main Board
1998-10-20	Service agreement renewed for a further term of three years
1999-12-01	Ex-MD dismissed as both Director and Managing Director
1999-12-31	Appellant made provisions for doubtful debts of $12,410,141 inclusive of the Loss in its statutory accounts
2000-01-01	No claim for deduction for the Loss was made for the Year of Assessment 2000
2003-01-01	Appellant instituted legal proceedings against the Ex-MD
2005-12-15	Appellant lodged an “error or mistake” claim for the Loss under section 93A of the Act with the respondent
2008-12-01	Respondent determined that relief could not be granted
2008-12-05	Appellant filed a Notice of Appeal to the Income Tax Board of Review
2008-12-30	Appellant filed the Petition of Appeal
2011-10-17	Judgment reserved
2011-10-17	Decision Date

7. Legal Issues

Deductibility of Losses
- Outcome: The court held that the loss was not deductible under section 14(1) of the Income Tax Act.
- Category: Substantive
- Sub-Issues:
  - Misappropriation of company funds
  - Fraudulent activities of director
Definition of Error or Mistake
- Outcome: The court agreed with the Board that a genuine mistake of law is still a mistake falling within section 93A of the Act.
- Category: Substantive
- Sub-Issues:
  - Mistake of law
  - Ignorance or inadvertence

8. Remedies Sought

Deduction of Losses for Income Tax Purposes
Relief under section 93A of the Income Tax Act

9. Cause of Actions

Breach of Trust
Misappropriation of Funds

10. Practice Areas

Tax Litigation
Corporate Governance

11. Industries

No industries specified

12. Cited Cases

Case Name	Court	Affirmed	Citation	Jurisdiction	Significance
Pinetree Resort Pte Ltd v Comptroller of Income Tax	Court of Appeal	Yes	[2000] 3 SLR(R) 136	Singapore	Cited for the principle that section 14(1) of the Income Tax Act requires a nexus between the incurrence of the expense and the production of income.
Curtis (HM Inspector of Taxes) v J & G Oldfield, Limited	High Court	Yes	(1925) 9 TC 319	United Kingdom	Seminal case establishing the Curtis test for deductibility of losses due to employee defalcation; distinguished in this case.
The Roebank Printing Company Limited v The Commissioners of Inland Revenue	Court of Sessions	Yes	(1928) SC 701, 13 TC 864	United Kingdom	Applied the Curtis test; distinguished in this case.
Bamford (HM Inspector of Taxes) v ATA Advertising Ltd	High Court	Yes	(1972) 48 TC 359	United Kingdom	Applied the Curtis test; distinguished in this case.
The Commissioner of Taxation (New South Wales) v Ash	High Court of Australia	Yes	(1938) 61 CLR 263	Australia	Applied Curtis test in the context of a fraudulent partner; distinguished in this case.
DR & P v Comptroller of Income Tax	Singapore Income Tax Board of Review	Yes	(2001) 5 MSTC 293	Singapore	Cited Ash with approval and applied the principle that no deduction is allowed for fraud perpetrated by a partner as a partner.
Commissioner of Taxes v Webber	New Zealand court	Yes	[1956] NZLR 552	New Zealand	Distinguished Ash and allowed deduction for misappropriation by a book-keeper.
W G Evans & Co Ltd v Commissioner of Inland Revenue	New Zealand court	Yes	[1976] 1 NZLR 425	New Zealand	Distinguished Curtis and allowed deduction for defalcation by a company secretary who was also a director.
Cassidy’s Ltd v MNR	Tax Court of Canada	Yes	89 DTC 686	Canada	Distinguished Curtis and allowed deduction for defalcation by a senior employee.
Parkland Operations Limited v The Queen	Federal Court of Canada	Yes	90 DTC 6676	Canada	Applied Cassidy and allowed deduction for misappropriation by minority shareholders.
Badridas Daga v The Commissioner of Income-Tax	Supreme Court of India	Yes	(1958) 45 AIR 783	India	Distinguished Curtis and allowed deduction for defalcation by an agent with extensive powers.
Sassoon J David & Co (P) Ltd v Commissioner of Income-tax	High Court of Bombay	Yes	[1978] 98 ITR 50	India	Reversed the Tribunal's decision and held that losses were deductible, distinguishing Curtis.
Lockie Bros Ltd v Commissioner for Inland Revenue	South African courts	Yes	(1922) 32 SATC 150	South Africa	Held that embezzlement losses are not deductible, differing from the Curtis test.
Income Tax Case No. 298	South African courts	Yes	(1934) 8 SATC 58	South Africa	Held that embezzlement losses are not deductible, differing from the Curtis test.
Extramoney Ltd v Commissioner of Inland Revenue	Hong Kong court	Yes	[1997] 2 HKC 38	Hong Kong	Distinguished; held that a deliberate act that turns out to be less advantageous is not an error under the Hong Kong equivalent of section 93A(1).
Public Prosecutor v Kwek Chee Tong	District Court	Yes	DAC 48461/99	Singapore	Conviction of the Ex-MD for criminal breach of trust, providing factual basis for the misappropriation.

13. Applicable Rules

Rule Name
No applicable rules

14. Applicable Statutes

Statute Name	Jurisdiction
Income Tax Act (Cap 134, 2008 Rev Ed)	Singapore
Income Tax Act (Cap 134, 2008 Rev Ed)	Singapore
Penal Code (Cap 224, 1985 Rev Ed)	Singapore

15. Key Terms and Keywords

15.1 Key Terms

Defalcation
Misappropriation
Income Tax Deductibility
Error or Mistake Claim
Overriding Power or Control
Curtis Test
Managing Director
Criminal Breach of Trust

15.2 Keywords

Income Tax
Deductibility
Fraud
Director
Misappropriation
Singapore
High Court

17. Areas of Law

Area Name	Relevance Score
Income taxation	90
Taxation	80
Director's Misappropriation	70
Fraud and Deceit	40
Administrative Law	30
Company Law	30
Contract Law	20

16. Subjects

Taxation
Corporate Governance
Fraud