Asamera Oil (Indonesia) Limited (Plaintiff)
v.
The Queen (Defendant)
Trial Division, Heald J.—Toronto, April 26, 27,
30 and May 1; Ottawa, May 18, 1973.
Income tax—Oil exploration company—Expenses of find
ing oil, deductibility—Company only entitled to portion of oil
found.
In 1961 an oil company entered into an agreement with a
state owned company in Indonesia under which the oil
company undertook to carry on an exploration and develop
ment programme for crude oil for a period of years and was
to receive 40% of net production. The oil company dis
covered oil. By 1969 it had expended some $13,900,000 to
find oil and had received some $5,600,000 from oil produc
tion. In assessing the oil company to income tax the Minister
disallowed the expenses claimed on the ground that although
they were necessary expenses to earn the company's income
they were made to acquire the right to receive income under
the contract and were thus of a capital nature.
Held, the disallowed expenses were properly chargeable
against income.
Evans v. M.N.R. [1960] C.T.C. 69; Denison Mines Ltd.
v. M.N.R. [1972] F.C. 1324; Algoma Central Ry v.
M.N.R. 67 DTC 5091; Canada Starch Co. Ltd. v.
M.N.R. 68 DTC 5320; Elias Rogers Co. Ltd. v. M.N.R.
[1972] F.C. 1303, considered.
APPEAL.
COUNSEL:
Donald G. Bowman and W. E. Shaw for
plaintiff.
John A. Scollin, Q.C., and A. P. Gauthier
for defendant.
SOLICITORS:
Stikeman, Elliott, Robarts and Bowman,
Toronto, for plaintiff.
Deputy Attorney General of Canada for
defendant.
HEALD J.—This is an appeal by the plaintiff
from income tax assessments for the taxation
years 1963 to 1971 inclusive. The aggregate
amount so assessed was $6,177,968.00.
The plaintiff is a company duly incorporated
on May 19, 1962 under the laws of Bermuda by
virtue of the Asamera Oil (Indonesia) Company
Act 1962 enacted by the Governor, Legislative
Council and Assembly of the Bermudas or
Somers Islands and pursuant thereto, by virtue
of the filing on June 1, 1962 of a memorandum
of association with the Registrar General of
Bermuda and the holding thereafter of its incor
porating meetings.
The plaintiff has never filed income tax
returns with the Minister of National Revenue
taking the position that it is not and never has
been a resident of Canada and has never been
subject to the Income Tax Act. The question of
residence thus forms one of the two basic issues
in this appeal. The other basic issue is the
propriety of the disallowance by the Income
Tax Department of expenses incurred by the
plaintiff in its oil operations in Indonesia. The
Minister has disallowed expenses incurred by
the plaintiff in a sum in excess of $13,900,-
000.00 on the basis that they are capital
expenses and has taxed the plaintiff on its gross
receipts which total some $12,200,000.00.
It is common ground that if the expenses are
properly chargeable against revenue and are not
of a capital nature, then the plaintiff had no
taxable revenue in any of the years under
review. If there were any of said years in which
revenues exceeded expenditures, in the first
instance, section 27(1)(e) of the Income Tax Act
has the effect of allowing the prior years' losses
to reduce the taxable income to nil.
Accordingly, I propose to deal with the
deductibility of said expenses first because if
the plaintiff had no taxable income during the
period under review, the question of residence
becomes academic so far as this appeal is
concerned.
The impugned expenses, in the documents
filed, were broken down into the following
categories:
(a) Geological and Geophysical Costs;
(b) Intangible Drilling Costs;
(c) Production and Operating Costs;
(d) General and Administrative Expenses;
(e) Equipment; and
(f) Expendable Supplies and Parts.
The parties agree that said expenses were all
of the same nature. The defendant does not
contend that some are of a capital nature and
some of a revenue nature. The defendant's posi
tion is that all of said expenditures are capital
expenditures.
The plaintiff corporation is a wholly owned
subsidiary of Asamera Oil Corporation, Ltd., a
Dominion Corporation with Head Office at Cal-
gary, Alberta (hereafter referred to as the parent
company). Mr. Thomas L. Brook of Calgary has
been the President and Chief Executive Officer
of the parent company at all relevant times. He
was also the President of the plaintiff corpor
ation until 1969. The parent company is a fairly
large public Canadian oil company and is listed
on the New York Stock Exchange.
In the late 1950's, Mr. Brook, through associ
ates and acquaintances in the oil business
became interested in the potential for oil
exploration on the Island of Sumatra', Indonesia.
As a result of many discussions with various
people, Mr. Brook went to Indonesia in 1960 to
continue his negotiations. He described the
political situation in Indonesia at that time as
rather unstable and turbulent. Indonesia had
been a Dutch Colony (the Dutch East Indies).
Mr. Brook said that from 1945 on, the country
had received what he described as a sort of
"staggered independence" or independence by
stages. When he arrived in 1960, he said that
there was prevalent in the country an intense
anti-colonial feeling, a spirit of nationalism, a
strong belief that foreign ownership of the coun-
try's natural resources should no longer be per
mitted. This seeming consensus of opinion in
the country was reflected in legislation passed
by the Government of Indonesia in 1960 which
provided that a state-owned corporation (origi-
nally Permina, after 1969 Pertomina) was to do
all of the exploration and development of the oil
resources of the country. In recognition of the
fact that the Indonesians themselves did not
have the technical knowledge and experience
necessary to explore for and develop said
resources, the legislation permitted Permina to
hire foreign contractors to assist them. As a
result of all of his discussions and negotiations,
Mr. Brook was able, on behalf of the parent
company, to have executed an agreement in
writing dated September 1, 1961 between Per-
mina and the parent company.
Mr. Brook, in his oral evidence at the trial and
in correspondence, has said that, in his view, the
parent company was, under said agreement,
merely a contractor for Permina. In a letter
which he wrote in October of 1962 (Exhibit P-5)
he said:
I wish to make it quite clear that Asamera actually owns
nothing nor has it title to anything in the Republic of
Indonesia but is merely a contractor or a "hired hand" for
Permina.
Turning now to the agreement itself, the perti
nent portions thereof are as follows:
WHEREAS Permina is an Indonesian Corporation, duly
authorized by the Republic of Indonesia to explore for,
exploit, develop, produce, transport and refine crude oil,
natural gas and other hydrocarbons which might be found in
certain areas in Sumatra which areas are more particularly
described in Exhibit A attached hereto; and
WHEREAS Permina is desirous of expending its activities
for exploration of these areas in order to increase as rapidly
as possible the production of crude petroleum and other
hydrocarbons; and
WHEREAS Asamera desires to join with and assist Permina
in the further expansion and acceleration of the exploration
and development of potential petroleum resources of Per-
mina; and
WHEREAS Asamera has the requisite experience and is
otherwise qualified to contribute the finances, as well as the
recommended programmes, for exploration and develop
ment of these areas;
NOW, THEREFORE, Permina and Asamera mutually agree as
follows:—
Article 1
Area
(a) The area within which Permina will operate with the
co-operation, aid, and assistance of Asamera subject to
the terms of this Agreement, shall be the areas as desig
nated in Exhibit A attached hereto.
Article 2
Obligations of Asamera
(a) Asamera will supply all financial requirements of
exploration and development programmes recommended
by Asamera in the areas subject to this Agreement.
(b) Asamera will purchase and supply all equipment
required to carry out the work contemplated in Article
2(a) above.
(c) Asamera will supply all technical personnel reason
ably required to help Permina carry out the recommended
programmes.
(d) Within three months of the date of signing of this
Agreement Asamera will submit to Permina a recommend
ed programme for exploration of at least one geological
prospect in the area subject to this Agreement. Asamera
further agrees to submit to Permina a recommended pro
gramme for the drilling of an exploratory well not later
than 12 months from the date this Agreement is signed.
(e) Asamera will assist Permina in the marketing of any
crude oil produced from operations in the areas subject to
this Agreement.
(f) After the start of commercial production, Asamera
will submit to Permina an estimate of the oil to be
produced in the ensuing 12 months and a budget of costs
for the recommended programmes.
Article 3
Obligation of Permina
(a) Permina agrees to carry out the recommended pro
grammes presented by Asamera with all diligence and in
accordance with good oilfield practice.
(b) Permina agrees to supply all personnel (except as set
out in Article 2(c) above) required to carry out the recom
mended programmes.
(c) Permina agrees to obtain whatever other approvals
and documents which may be required to give this Agree
ment the full force and effect of law.
(d) Permina shall provide facilities owned by Permina
which would reasonably be required to facilitate opera
tions under this contract, including transportation and
housing and Permina shall further provide facilities for all
foreign personnel and supply all Indonesian personnel
necessary for the orderly performance of this contract in
accordance with good oilfield practices.
Article 4
Financial Terms
(a) Oil produced under any development programme shall
be sold and the sales proceeds shall be divided as follows:
Permina 60% and Asamera 40%. Sales proceeds shall,
however, to the extent of the initial 40% thereof, be paid
to Asamera for materials, services, equipment and other
costs incurred or supplied and invoiced to Permina by
Asamera. The balance of such sales proceeds shall there
upon be divided as first set forth above.
(b) All Indonesian taxes and charges assessed against
either Permina or Asamera will be paid by Permina out of
its 60% of net profits, and Asamera's 40% share of net
profits shall not be subject to any Indonesian taxes or
charges.
(c) All permits, licenses and authorizations which may be
required by governmental agencies or authorities in con
nection with the operations hereunder will be obtained
and provided by Permina.
Article 5
Term
(a) The exploration term of this Agreement shall be for a
period of six (6) years. It is further agreed that two
extensions of two years each will be granted if conditions
and circumstances justify such a renewal.
(b) In the event that commercial production is found
during the exploration period, then this Agreement shall
remain in full force and effect for a term of twenty (20)
years commencing from the end of the exploration period.
Article 6
Associates of Asamera
(a) Asamera has the right to associate with it under this
Agreement Plymouth Oil Company of Pittsburgh, Penn-
sylvania and/or Benedum-Trees Oil Company and/or
Hiawatha Oil & Gas Company and/or any subsidiary (or
successor of said companies acceptable to Asamera).
(b) Asamera shall have the right to associate any other
parties under this Agreement only with the express
approval of Permina.
(c) Notwithstanding any such association of other parties
under this article, Asamera shall remain solely responsible
to Permina for all of Asamera's obligations under this
Agreement.
In my view, the agreement reinforces Mr.
Brook's opinion that the parent company's func
tion was that of a contractor. It owned no
interest in any resources or assets and acquired
none. The parent company was obliged to pay
for the cost of performing the services, includ
ing the cost of all necessary equipment but the
parent company was to own none of the equip-
ment—it was all to be owned by Permina. The
parent company was to provide all technical
personnel. I think it is clear from the agreement
that the parent company was essentially provid
ing services and the necessary technical exper
tise to Permina. Those services were to be paid
for only out of oil produced from the explora
tion area. I agree with plaintiff's counsel when
he says that the venture, was therefore, of a
highly risky nature.
Article 4(a) provides the basis upon which the
revenue from any oil recovered was to be divid
ed. Under that Article, until the parent compa-
ny's expenses were recovered, it received 64¢
out of every dollar of oil proceeds. When the
parent company's costs were recovered, its
remuneration became 40% of the proceeds of
oil produced. Thus, in effect, the parent compa-
ny's remuneration was totally dependent on the
sale of oil and was proportionately increased in
the early stages of oil production to enable it to
recover the expenses incurred by it in the per
formance of its obligations as contractor.
On July 9, 1962, the parent company assigned
all its right title and interest in and to the said
Permina agreement to the plaintiff, its wholly
owned subsidiary. Thereafter, the plaintiff
assumed all the obligations under said agree
ment and carried on the business of performing
services as a contractor for Permina under the
agreement.
Other participants were brought into the ven
ture both before and after the assignment by the
parent company to the plaintiff. On the date of
the original agreement, September 1, 1961, the
parent company owned a 45% interest; on July
9, 1962, the date of assignment to the plaintiff,
the interest assigned was also 45%. Over the
years from 1962 to 1967, plaintiff's interest
fluctuated from a low of 40% to a high of 80%
and has not changed since November 30, 1967
when plaintiff's interest became a 60% interest.
During the early stages of the Indonesian opera
tion, plaintiff's staff was quite small. Mr. Brook
was in Indonesia a good deal of the time, a
geologist had been hired, along with three or
four other staff members. Because of subse
quent successes in finding oil, plaintiff now has
about 1,100 employees working in the oil fields
in Indonesia, about 800 of these are local
Indonesians, some 65 or 70 are North Ameri-
cans. They are the specialists, the drillers, the
mechanics, the geologists and the warehouse-
men.
In the spring of 1965, plaintiff's extensive
exploration activity in Indonesia was rewarded
with an oil discovery. The discovery well pro
duced 2,800 barrels a day of 54 gravity crude
oil. By 1969, their continuing drilling activity
had resulted in ten producing oil wells in the
Guedondong field producing 3,000 barrels per
day and six additional wells in another field
capable of producing 6,000 barrels per day.
Subsequent drilling has been successful and at
the present time it is fair to say that plaintiff's
60% interest in the Permina agreement has
become very valuable indeed. However, while
plaintiff's potential for future profit looks
favourable, the position at the end of the period
under review was that while it had expended
some $13,900,000.00 to find oil in Indonesia, it
had received up to that time only some $5,600,-
000.00 in revenues from oil production.
A perusal of a breakdown of the impugned
expenses satisfies me that said expenses were
incurred year after year by the plaintiff in ful
filling its obligations under the Permina agree
ment, and were directly and immediately neces
sary to earn the income which the Minister has
taxed, expenses which one would normally
expect and find in the operation of a large scale
oil field exploration and drilling venture—cost
of renting or purchasing drilling rigs, trucks,
caterpillars (perhaps peculiar to Indonesia
because of the difficult tropical terrain); drilling
mud and chemicals; bits; fuel; cement;
employees' wages; geological and geophysical
costs, etc.
I said earlier that the Minister is taxing the
plaintiff on some $12,200,000.00 of income in
the period under review. This consists of 5.6
million dollars in revenues from oil production;
some 4.6 million dollars from the sale of a part
of its interests in the Permina agreement to
other oil companies' and the balance being
interest and other charges. And yet, to earn a
total of $12,200,000.00 in income in the period
under review, the Minister only allows total
expenses of approximately one million dollars,
disallowing all the other expenses. Looking at
the figures for some of the years individually we
see that in 1969, for example, plaintiff's reve
nue from oil production was 1.1 million, yet the
Minister allowed slightly less than $100,000.00
in expenses. Plaintiff's total income in 1967 for
example was 1.2 million. The total expenses
allowed by the Minister were $68,000.00. This
pattern repeats itself in each of the years under
review. One does not really have to go much
further than a perfunctory look at these total
figures to conclude that the Minister's position
is patently untenable.
However, the defendant's position is that
although that position may produce an offensive
or unreasonable result, because of the nature of
the agreement of September 1, 1961, all the
revenue derived thereunder by the plaintiff is
income but that most of its expenditures there-
under are not deductible within the provisions
of the Income Tax Act because they were of a
capital nature, they were expended to acquire
for the plaintiff a capital asset, the capital asset
being the right to receive income under said
agreement.
The Minister does not dispute that said
expenses were necessary to earn the plaintiff's
income or that they were intended for business
purposes but says that they brought into being a
capital asset (the right to receive income) and
were thus a capital outlay or payment on
account of capital within the meaning of section
12(1)(b) of the Income Tax Act and are there
fore not deductible from income.
Dealing with the Minister's submission that
the "right to receive income" is a capital asset,
the case of Gladys Evans v. M.N.R. [1960]
C.T.C. 69 at p. 76 is relevant. Mr. Justice Cart-
wright (as he then was) in delivering the majori
ty judgment of the Supreme Court said:
... I cannot agree that the fact that a bare right to be paid
income can be sold or valued on an actuarial basis at a lump
sum requires or permits that right, while retained by the
appellant, to be regarded as a capital asset. I do not think
that in ordinary language a right to receive income such as
that enjoyed by the appellant would be described as a
capital asset.
This is not the case of an oil company owning
mineral rights or mineral permits to explore
which are exploited and developed by said com-
pany. The plaintiff owned nothing in Indonesia;
it had no rights in the minerals; it had no prop
erty rights in the wells or the equipment; it had
been hired to perform services and even its right
to receive payment therefor was dependent on
the oil production on the subject lands.
I cannot agree that, in these circumstances,
the right to receive income can be regarded as a
capital asset. I suppose it can be said that every
business expense is laid out to acquire a right to
income. Any time one person performs a ser
vice for another and incurs expense in so doing,
there arises a right to income when the service
is performed. If such expenses are not deduct
ible from income, it is hard to think of a case
where the expense would be deductible.
A situation in some respect similar to the case
at bar prevailed in Denison Mines Ltd. v.
M.N.R. [1972] F.C. 1324 where the appellant
owned a producing uranium mine. In extracting
the uranium ore from the mine, the appellant
removed only part of the ore from the areas
encountered as the miners moved out from the
mine shaft so that the ore that was left would be
support for the "ceiling" of rock above the ore
body. The part of the ore body that was so left
was in the form of walls or pillars arranged so
as to leave throughways through which the ore
could be transported back to the shaft. During
the years 1958 to 1960, appellant spent some
$21,000,000.00 in constructing said through
ways within the orebody itself but the revenue
from the ore contained in the passageways
exceeded that amount. The said revenue was
treated as income and this was not in issue in
the action. What was in issue was the appel
lant's claim for capital cost allowance based on
its claim that, as a result of the way in which the
ore was extracted during the first stage of oper
ations, these throughways or passageways had
been created for a use during subsequent opera
tions that was intended to continue long into the
future, thus creating a capital asset. According
ly, the appellant contended further that the
expense of removing the ore from the space
where the passageways are, was the "capital
cost" of such assets. In discussing this position
of the appellant, Chief Justice Jackett makes the
following comments at page 1328 of the report:
In our view, the correctness of the appellant's position
must be determined by sound business or commercial princi
ples and not by what would be of greatest advantage to the
taxpayer having regard to the idiosyncrasies of the Income
Tax Act.
In considering the question, it must be emphasized that, as
far as appears from the pleadings or the evidence, no more
money was spent on extracting the ore the extraction of
which resulted in the haulageways than would have been
spent if no long term continuing use had been planned for
them.
One business or commercial principle that has been estab
lished for so long that it is almost a rule of law is that "The
profits ... of any transaction in the nature of a sale, must,
in the ordinary sense, consist of the excess of the price
which the vendor obtains on sale over what it cost him to
procure and sell, or produce and sell, the article vended ..."
(See The Scottish North American Trust, Ltd. v. Farmer
(1910) 5 T.C. 693 per Lord Atkinson at page 705).
In the case at bar likewise, no long term
continuing asset was acquired by the impugned
expenses nor was there any evidence of any
extra or additional money being spent to acquire
a long term or continuing asset. The impugned
expenses were all expended to live up to the
plaintiff's covenants and obligations in the Per-
mina agreement. They were day by day, month
by month expenditures necessary for the
exploration and development of an oil field.
They were current expenses necessary to earn
current income and, as such, are surely
deductible.
President Jackett (as he then was) expressed a
similar view in the case of Algoma Central
Railway v. M.N.R. 67 DTC 5091. In that case,
the appellant operated a railway and steamship
company in the unpopulated area of Northern
Ontario. In 1960, the appellant commenced a
five year mining and geological survey of the
area to assess mineral possibilities at an average
cost of $100,000.00 per year. Appellant's objec
tive was to make the resultant information
obtained from the surveys available to interest
ed members of the public in the hope and
expectation that it would lead to development of
the area that would produce traffic for the com-
pany's transportation system. The learned Presi
dent allowed the appellant to deduct said geo
logical and survey costs as current expenses. At
page 5095 of the report he said:
... once it is accepted that the expenditures in dispute were
made for the purpose of gaining income, on the view, as I
understand it, that they were part of a. programme for
increasing the number of persons who would offer traffic to
the appellant's transportation systems, I have great difficul
ty in distinguishing them in principle from expenditures,
made by a businessman whose business is lagging, on a
mammoth advertising campaign designed to attract substan
tial amounts of new custom by some spectacular appeal to
the public. Such an advertising campaign is designed to
create a dramatic increase in the volume of business. In a
very real sense, it is designed to benefit the business in an
enduring way. According to my understanding of commer
cial principles, however, advertising expenses paid out while
a business is operating, and directed to attracting customers
to a business, are current expenses.
The learned President expressed similar views
in the case of Canada Starch Co. Ltd. v.
M.N.R. 68 DTC 5320 where he allowed as a
business expense, a lump sum payment of
$15,000.00 which the appellant had paid to
another company to drop its opposition to the
use of the appellant's proposed trade name.
Associate Chief Justice Noël also expressed
similar views in the case of Bowater Power Co.
Ltd. v. M.N.R. [1971] F.C. 421.
The latest expression of opinion on this ques
tion is the decision of the Federal Court of
Appeal in the case of Elias Rogers Co. Ltd. v.
M.N.R. [1972] F.C. 1303.
In that case, the appellant was in the business
of selling fuel oil, in the course of which it
acquired and leased water heaters to fuel oil
customers, mainly for the purpose of increasing
its sale of fuel oil. The leases contained a clause
by which the customer agreed to buy fuel oil
exclusively from the appellant. The question at
issue was whether the cost of installing the
heaters in the customers' premises was a
deductible expense. The Minister contended
that said expense was capital in nature. The
Federal Court of Appeal ruled in favour of the
appellant taxpayer, holding that said expense
was deductible from current income.
At pages 1308-09 of the report, Chief Justice
Jackett said:
The significant prohibition in section 12(1)(b) is the prohi
bition of the deduction, in computing income, of a "payment
on account of capital". These words clearly apply, in the
ordinary case, to the cost of installing heavy plant and
equipment acquired and installed by a business man in his
factory or other work place so as to become a part of the
realty. In such a case the cost of the plant and the cost of
installation is a part of the cost of the factory or other work
place as improved by the plant or equipment. Clearly this is
cost of creation of the plant to be used for the earning of
profit and not an expenditure in the process of operating the
profit making structure. Such an expenditure is a classic
example of a payment on account of capital.
What we are faced with here is, however, quite different.
The appellant has not used the water heaters to improve or
create a profit making structure. Quite the contrary, the
appellant has parted with possession of the heaters in con
sideration of a monthly rental and it has no capital asset that
has been improved or created by the expenditure of the
installation costs. I think it must be kept clearly in mind that,
while the installation costs are exactly the same as a busi
ness man would have incurred if he had bought a water
heater and installed it in his own factory, from the point of
view of the question as to whether there is a payment on
account of capital, there is no similarity between such an
expenditure and an expenditure made by a lessor of a water
heater to carry out an obligation that he has undertaken as
part of the consideration for the rent that he charges for the
lease of the water heater.
With great respect to the learned trial judge, as it seems to
me, once the matter is regarded as an expenditure by a
renter of equipment to carry out one of the covenants in his
leasing arrangement, it becomes quite clear that it is not an
expenditure to bring into existence a capital asset for the
enduring benefit of the appellant's business. It does not
bring into existence any asset belonging to the appellant. On
the contrary, as I view it, there is no difference between the
installation costs and any other expenditure, such as those
for repairs or removal of the heaters, that the appellant has
to make in the course of its rental business.
I should have thought that, in any equipment rental busi
ness, while the cost of the equipment and money spent to
improve the equipment is payment on account of capital,
because the thing rented is the capital asset of such a
business, money spent in order to carry out the lessor's
obligations under the rental agreements is cost of earning
the income just as rents received under such agreements is
the revenue of such a business.
In the instant case, as in the Elias Rogers case
(supra), no portion of the impugned expenses
resulted in the acquisition of any capital assets
for the plaintiff. Capital assets were acquired
certainly with some of the money: trucks, drill
ing rigs, permanent oil wells, etc., but they all
became the property of Permina, many of said
assets becoming permanently affixed to realty
owned by Permina. As in the Elias Rogers case
(supra), the expenditures here made by the
plaintiff were made to carry out obligations
undertaken by it as the consideration for the
income which it would receive from oil produc
tion on Permina's oil properties. These expendi
tures are expenditures by a provider of services
to carry out the covenants in his contract for
services and do not bring into existence any
asset belonging to the plaintiff. The defendant
also took the position that the impugned expen
ditures were not really the plaintiff's expendi
tures because under the 1961 agreement, the
plaintiff was entitled to recoup most of the
impugned expenditures from Permina. It is true
that the plaintiff is entitled to recoup most of
the impugned expenditures from the proceeds
of oil production under the provisions of Article
4(a) of the 1961 agreement referred to supra by
virtue of the provision that the first 40% of
production revenue be earmarked for reim
bursement of plaintiff's expense. However, in
computing plaintiff's revenue for the period
under review, the defendant has taken the total
amount received by the plaintiff from oil reve
nues including the 40% received by it for reim
bursement of expenses. That is to say, the
defendant, in its assessment of the plaintiff,
wants it "both ways".
In computing income, the defendant treats the
"expense reimbursement" as income while at
the same time refusing to allow those same
expenses as a deduction from income. The
plaintiff accepts the defendant's decision to
include in income the "expense reimbursement"
portion of the total oil production revenue
received thus far but, quite rightly in my view,
seeks to deduct those expenses from total reve
nue received.
I have accordingly concluded that the said
disallowed expenses in the sum of $13,901,-
224.00 are properly chargeable against revenue.
I said earlier that in computing plaintiff's total
income at some $12,200,000.00 for the period
under review, the Minister included as income
some 4.6 million dollars profit made by the
plaintiff on the resale of a portion of its interest
in the Permina agreement to other oil compa
nies. Specifically, the defendant sought to
include in income, the plaintiff's profit on a sale
of a portion of its interest to The Union Texas
Oil Co. and on the sale of a further portion to
the Mobil Oil Co. The plaintiff challenged this
position. Plaintiff submitted that the defendant
could not, on the one hand, say that nearly all of
its expenses were expenses incurred in the
acquisition of a capital asset and then contend,
on the other hand, that when that asset or a
portion of it was sold, the proceeds therefrom
were not a return of capital but rather income.
Even if the said profits on resale are taken
into income, the plaintiff is not taxable in any of
the years under review when it is allowed to
deduct the disallowed expenses (total income of
$12,200,000.00 (approximately) against total
expenses of $13,900,000.00 (approximately)).
Therefore, it is not necessary for the purposes
of this appeal to decide the question as to whe
ther the said resale profits were properly taken
into income.
Since I have decided in favour of the deducti-
bility of the impugned expenses, it also becomes
unnecessary to decide the question of residence.
The appeal is allowed with costs. Plaintiff's
assessments for the taxation years 1963-1971
inclusive are referred back to the Minister for
re-assessment not inconsistent with these
reasons.
' The Minister treated the profit made by plaintiff on the
sale of shares of its interest in the Permina agreement as
trading transactions and subject to income.
You are being directed to the most recent version of the statute which may not be the version considered at the time of the judgment.