FEDERAL INLAND REVENUE SERVICE v. CITIBANK NIGERIA LIMITED
COURT OF APPEAL
(LAGOS DIVISION)
(YAKUBU; OGAKWU; TOBI, JJ.CA)
FACTS
The Federal Inland Revenue Service (Appellant), is a Federal Government agency charged with the duty of collecting taxes imposed by and accruing to the Federal Government of Nigeria. Citibank Nigeria Ltd. (the Respondent) is a company carrying on business in Nigeria. The Respondent had invested in Federal Government bonds which are a long term money instrument and are exempted, by the provisions of the law, from taxes. However, the Respondent sold the bonds before the maturity date and derived a profit from the sale. Following this transaction, the appellant assessed the respondent and raised tax liabilities amounting to ₦728,788,304.91, being Companies Income Tax and Education Tax, on the profit derived from the sale of the bonds. The respondent, dissatisfied with the assessment, challenged the propriety of the appellant’s action before the Tax Tribunal. After hearing both parties, the Tribunal upheld the assessment in favour of the Appellant.
Still dissatisfied, the respondent appealed to the Tax Appeal Tribunal, which again upheld the decision of the lower Tribunal. The respondent thereafter approached the Federal High Court, Lagos Division, for relief. After a full hearing, the Federal High Court found in favour of the respondent and held that the Federal Government bonds in question remained long-term instruments exempted from taxation, and that the profit derived therefrom could not be subjected to tax merely because they had been sold before maturity.
The Appellant, aggrieved by this decision, filed a notice of appeal before the Court of Appeal, Lagos Division, urging the Court to set aside the judgment of the Federal High Court and to affirm the decisions of the Tribunals. One of the issues submitted for determination was: whether Federal Government bonds with a tenor of three to twenty years, duly acquired by the respondent, became converted into taxable short-term instruments by reason only of their disposal before maturity.
ARGUMENTS
In addressing the first issue, counsel for the Appellant argued that the lower court erred by failing to consider the intention behind the acquisition and subsequent disposal of the bond. According to him, whether a money instrument should be regarded as long-term or short-term is not determined by the title given to it but by the purpose for which it is used. He maintained that a long term instrument could assume the character of a short term instrument when it is deployed for purposes that fall within the definition of short-term transactions. Thus, the classification of an instrument as either long-term or short-term is, in his view, a question of fact rather than one of strict legal definition.
Counsel further submitted that, in determining the true nature of an instrument, the court must look at both its tenor and its usage. While the tenor of the bond in question may ordinarily qualify it as long-term, its use to manage short-term interests strips it of the privileges associated with long-term instruments. On this basis, he contended that the bond should not be exempt from tax. He added that the substance of the transaction must take precedence over its form, and urged the court not to be swayed by the title of the bond but to focus instead on its actual use and the intention behind its disposal. He concluded that the transaction in this matter was artificial and contrived to avoid tax, and therefore Respondent should not be permitted to benefit from the exemption accorded to genuine long-term instruments.
In response, counsel for the Respondent argued that the bonds remained long-term instruments and any gains derived from their disposal were not liable to tax. He submitted that by expressly identifying only short-term instruments as taxable, the lawmakers intended to exclude long-term instruments from tax liability. He explained that the tenor and maturity of a bond do not change simply because the original holder decides to transfer it and that what defines the nature of a bond is the period fixed for its maturity, and this remains constant regardless of whether or not the bond changes hands. He submitted that the original holder’s decision to sell the bond, therefore, does not alter its tenor or maturity, nor does it affect the obligations of the Federal Government to honour the bond at its original maturity date.
Respondent’s counsel also refuted the argument that the transaction was artificial or fictitious. He emphasized that there was no evidence before the court to show that the transaction was a sham or lacking in genuineness. In his view, the Appellant had failed to prove that the disposal of the bond was a contrived arrangement to evade tax. On the strength of these submissions, he urged the court to dismiss the appeal and affirm the decision of the lower court.
DECISION OF THE COURT
In resolving this issue, the Court of Appeal held that:
A company becomes liable to tax on profits derived from the premature disposal of a long-term money instrument when it elects to assign or sell such an instrument before its maturity date. The court explained that while the bond itself may retain its long-term character, any profit arising from its early disposal takes on the nature of a short-term gain and is therefore taxable. What the law targets, the court emphasised, is not the label attached to the instrument but the character of the profit derived from the transaction. Courts are therefore entitled to look beyond the form of a transaction and disregard arrangements that are designed to evade tax.
Applying this principle, the Court of Appeal found that the respondent, having sold the Federal Government bonds before their maturity and realized profit, could not rely on the exemption accorded to genuine long-term instruments. The profit earned from the sale was properly taxable, and to exempt it would amount to encouraging tax avoidance and depriving the government of legitimate revenue.
Issue resolved in favour of the Appellant.
Olakanmi Arowosegbe Esq. with Abidemi Ogunjimi Esq. for the Appellant
C. Ikwuazom Esq. with O. Ogunrinde (Mrs.) and C. G. Nwokocha (Miss) for the
Respondent
This summary is fully reported at (2019) 8 CLRN in association with ALP NG & Co.
See www.clrndirect.com ; www.alp.company.
