Judicial Committee of the Privy Council reverses Mauritius Supreme Court judgment on the interpretation of "with a view to profit" in significant tax judgment.
Johanne Hague and Medina Torabally of CMS Prism (in association with CMS), together with Bilshan Nirsumulu, appeared for the appellant, Mr MHD Galea. Counsels were instructed by Etude Guy Rivalland.
SUMMARY
In a judgment dated 8 April 2025, the Judicial Committee of the Privy Council (the "Board") allowed the appeal of the taxpayer, Marie Henri Dominique Galea ("Mr Galea") against the decision of the Supreme Court of Mauritius which had maintained the ruling of the Assessment Review Committee ("ARC") to disallow the losses claimed by Mr Galea in relation to the offset of the losses from Société Agricole Mont Sur Mont ("SAMM") against his personal gross income earned from other sources.
Mr Galea is an associé of SAMM. SAMM owns and uses two plots of land for breeding deer and monkeys as well as for hunting deer and has constantly been making losses since 1996. SAMM also incurs costs such as wages, allowances for its employees, repairs and maintenance of the land, as well as other costs.
As a fiscally transparent entity, each associé bears the losses on a prorated basis. Mr Galea applied his share of the losses of SAMM to be set off against his personal income tax.
The Mauritius Revenue Authority (the "MRA") took the view that the activities carried out by SAMM did not represent a business within the meaning of section 2 of the Income Tax Act 1995 (the "ITA") but was rather a hobby due to the alleged absence of profit-making motive. It consequently disallowed the share of losses claimed by Mr Galea in his income tax returns for two consecutive years.
Upon appeal by the taxpayer, the ARC concluded that although 'with a view to profit' did not necessarily entail making immediate profits, it meant that an activity had to be carried out "with a reasonable expectation of making a profit in the near future". The Supreme Court upheld the ARC's finding wholesale and Mr Galea appealed to the Board.
In allowing its appeal, the Board found that both the ARC and the Supreme Court erred in their construction of the words "with a view to profit" as they appear in the ITA, that their error was material, and found, based on the facts on record, that SAMM operated with a view to make profits considering its endeavours to remedy the loss making position.
The appeal was allowed and was finally determined by the Board. Both parties had agreed during the hearing that the matter need not be remitted to the Supreme Court or the ARC and had invited the Board to make a finding based on the evidence on record.
The judgment now stands as the authority on the meaning of "business" and "view to profit" within the meaning section 2 of the ITA.
- The ARC's ruling
The dispute was initially tried, and evidence was adduced before the ARC by Mr Galea and officers of the MRA in 2011. The evidence adduced comprised mainly of the nature of the activities of SAMM, the costs it incurred in carrying out such activities, the proposed projects to remedy the loss-making situation and the object and intention of SAMM as a société. The credibility of Mr Galea's stated intention was not challenged in cross-examination before the ARC. The MRA's position since the outset was that SAMM's activities were more akin to a hunting club and that no reasonable businessman would have sustained such high losses and still stayed in business.
Based on the facts, the ARC ruled in favour of the MRA in 2013, finding that since SAMM had continuously incurred losses to the tune of about Rs 8 million for about 10 years and had acquired the land for Rs 4 million (and made losses of Rs 8 million over 10 years), it hence had no reasonable expectation of making a profit in [the] near future and therefore did not operate with a "view to profit".
The ARC did not rely on any case law to support the objective test of "reasonable expectation of near future". The subjective intention of SAMM or its associates as being the relevant legal test was not considered.
- The Supreme Court's decision
The taxpayer appealed to the Supreme Court. The appeal was heard in 2016. The Supreme Court gave its judgment in 2023, upholding the ARC's test and reasoning wholesale, succinctly concluding that it endorsed the findings of the ARC and that it could not find that the inferences or conclusions made from those facts by the ARC were unsupported by, or contradictory to the evidence.
The judgment of the Supreme Court did not evaluate nor challenge the objective test applied by the ARC. It concluded that the ARC's conclusion was correct.
- The Appeal to the Board
Mr Galea appealed to the Board on 6 grounds (two of which were later dropped). The main issue centred around whether the lower instances had erred in law when reaching the conclusion that "with a view to profit" as defined in section 2 of the ITA meant an activity carried on with a reasonable expectation of making a profit in the near future.
The taxpayer argued that the correct test to be applied was in fact a subjective test of intention (rather than an objective one) relying on New Zealand, English and Canadian authorities on the issue. This point was not considered nor argued by any of the parties in the lower instances.
The main case relied on by the taxpayer was the New Zealand case of Grieve v Commissioner of Inland Revenue (1984) 6 NZTC 61,682 (CA), [1984] 1 NZLR 101. The New Zealand authority related to a definition of "business" which was materially similar to the definition under the ITA. The taxpayer also contended that there was no legal basis for imposing a time requirement for profits to be made in order for an activity to constitute a business.
Prior to the hearing, the MRA agreed that the applicable test was that of subjective intention.
Referring to the case law relied on by the appellant, the Board confirmed that the correct legal test was a subjective test rather than the objective test applied by the ARC and Supreme Court. The Board further confirmed that the timing of any profit which might be anticipated does not form part of the applicable legal test.
On the basis of the correct test, the Board concluded that based on the evidence on record SAMM carried out a business within the meaning of section 2 of the ITA since it had demonstrated an intention to make profits through its various endeavours to generate income. The Board referred to the framework used by the taxpayer's counsel during the hearing, being the six factors as listed in Grieve. The Board also commented on the two findings of fact of the ARC (and in particular the finding that the amount of losses constituted twice the cost of the land), giving its view as to why they were irrelevant to the existence of a subjective intention to make profit, in the absence of any challenge of the taxpayer's credibility in cross-examination. The Board further clarified that a current intention as to future activities may be taken into account in considering whether a subjective intention to make profits exists.
COMMENTARY
This case is material since it is the first tax case on the meaning of "with a view to profit" for the purposes of the definition of "business" under the ITA. It will be pertinent to activities which are in a loss-making position, although it may also have some relevance to profit-making activities.
Although few Mauritian authorities exist on the interpretation of badges of trade, those are typically in the context of whether an item constitutes "income" or "capital" for tax purposes. Prior to this judgment, there was no Mauritius case law available on the statutory interpretation of the term "business" pursuant to section 2 of the ITA.
The judgment also demonstrates the relevance of comparable legislation in foreign jurisdictions in tax matters. The judgment reinforces the distinction between general appeals on points of law and those by way of case stated. In this case, the Board relied solely on the case stated by the ARC. This highlights an important aspect of appeals in tax cases and the care to be exercised in appeal procedures as well as the limits of the evidence stated before the appellate courts.
On the same score, the Board also commented on the alleged challenge to Mr Galea's credibility. It rejected the MRA's contention that Mr Galea's evidence about his intention lacked credibility when weighed against the other evidence in the appeal, since as a matter of "basic fairness", Mr Galea was not cross examined on the genuineness of his stated intention during the ARC hearing.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
