Can a business have two sources of income?

Can a Company have two sources of income?

Whether there are two separate entities? In the case of River Estates Sdn Bhd (1981) [Federal Court], the taxpayer company is trying to claim for capital allowance to be deducted from its adjusted income.

The issue arose was can the taxpayer company claimed for the deduction for the capital allowance when the appellant’s income comes from two distinct sources or businesses.

Fact

The taxpayer company was a palm oil plantation business. They also involved in clearing of the forest of the plantation and then sold the timber as another revenue source.

The Federal Court had held that the two main categories of business sources constituted two separate businesses – timber lodging and also plantations operations that comes from give estates or sources.

In this case the taxpayer company logged the forest within its owned plantations at Litang Estate, Tomanggong Estate and Malubok Estate.

There was another Estate at Dagat, whereby the taxpayer company did not owned the land, but they entered into a commercial agreement with the land owner to log the forest on that piece of plantation. The Federal Court had held that under Scheduel 3 which provides for deduction on capital allowance, Schdule 3 had distinguished the capital allowances for forest expenditure from the capital allowances for plantation expenditure.

Holding of Judgment

The Court held that the problem arose when the taxpayer company carried out partly timber operations and partly other activities and any timber from the former is first used in the latter during a basis period the lower of the cost or market value of such timber so used shall be treated as gross income derived from timber operations of that person from that business source for that period.

The Court had also held that capital allowances, plantations allowances in respect of one business cannot be given as deductions in computing the income of another business. The allowances given are deducted in ascertaining his statutory income from each business source. He must make a claim for capital allowances due at the time on filling his return.

The taxpayer can only claim for capital allowances only under any one of the above headings in respect of the same qualifying expenditure. For instance, if industrial building allowance has been claimed, no plantation allowance or any other allowance can be claimed in respect of the same expenditure.

The Federal Court also clarified that capital allowances are given in respect of each business which has incurred qualifying expenditure, for instance, in running a plantation a person would have to incur capital expenditure in:

 * clearing land for planting of approved crops;
 * painting approved crops on the land cleared;
 * constructing roads on the estate; and
 * constructing buildings in the estate for the welfare and the accommodation of those working in the estate.

Not only that, their lordships also held that “estate” not only plantation for growing approved crops only but land adjacent to or in the vicinity of that plantation which is occupied for the purpose of a business which consists wholly or partly of the working of that plantation.

His lordship BTH Lee J (Lee Hun Hoe CJ Borneo) said that:

A person, engaged in carrying on a business which consists wholly or partly of the extraction of timber under a concession or license, is entitled to claim a capital allowance called “forest allowance”. This allowance is given as he would incur capital expenditure in extracting timber in a forest by constructing: -

 * roads; or
 * buildings in the forest for the welfare and accommodation of persons employed in the extraction of timber.

The FC held that since they agreed with the finding of fact by the SCIT that there were two separate businesses, the deciding order of the SCIT should be varied with the estate in Dagat and Tenggara to be merged into one item.

The taxpayer company had appealed to the Privy Council (1984) but the appeal was dismissed.