GP SAHA V THE COMMISSIONER OF INLAND REVENUE HC WN 2007-485-701

GP SAHA V THE COMMISSIONER OF INLAND REVENUE HC WN 2007-485-701 15 October 2007IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY 2007-485-701UNDER the Tax Administration Act 1994 and the Income Tax Act 1994 BETWEEN GOVIND PRASAD SAHA Plaintiff AND THE COMMISSIONER OF INLAND REVENUE Defendant Hearing: 11 October 2007 Appearances: G J Harley & R P Harley - Plaintiff M T Lennard & R R Vickery - Defendants Judgment: 15 October 2007 at 3.30 pmJUDGMENT OF ASSOCIATE JUDGE D.I. GENDALLThis judgment was delivered by Associate Judge Gendall on 15 October 2007 at 3.30 p.m. pursuant to r 540(4) of the High Court Rules 1985.Solicitors: Plaintiffs: G J Harley/RP Harley, Solicitors, PO Box 5241, Wellington Defendant: Cathryn Curran-Tietjens, Solicitor, Crown Law Office, PO Box 2858, Wellington Central Mike Lennard, Barrister, PO Box 5616, Lambton Quay, WellingtonINTRODUCTION[1] On 20 July 2007, the Defendant filed an Application for Orders as to the admissibility of certain evidence provided by the Plaintiffs in these proceedings. [2] On 5 October 2007 The Plaintiff filed a Notice of Opposition to that application.BACKGROUND FACTS[3] Until 7 April 2000 the Plaintiff was a partner in the New Zealand based firm of Ernst & Young in what was then its Consultancy Services Practice. [4] On 7 April 2000 Ernst & Young's Worldwide Consultancy Services Practice was sold to a French public company, Cap Gemini Ernst & Young NZ Ltd ("Cap Gemini"). [5] In March 2000 immediately before the sale of the Ernst & Young Consultancy Services Practice, consulting services were about 40% of the Ernst & Young New Zealand total business. [6] In February 2000 Ernst & Young International and Cap Gemini concluded their negotiations on the value of the Worldwide Consulting Practice. A price was agreed to be received by Ernst & Young as Vendors amounting to 43,000,000 Cap Gemini shares valued at 220 euros each plus US$375 million dollars in cash. Negotiations were also concluded then to include in the transaction restraint of trade clauses, penalties for non-completion of the deal and representations and warranties. [7] For the New Zealand interests in Ernst & Young, Cap Gemini paid a consideration amounting to 191,495 Cap Gemini shares. The Plaintiff's allocated share of the sale proceeds was 7,566 Cap Gemini shares (having a value I understand of about NZ$3.5 million dollars). [8] This transaction was unprecedented for Ernst & Young New Zealand. The sale was basically a sale of goodwill and the preservation of this value for CapGemini, which was acquiring the New Zealand Consulting Business at a price considerably in excess of its physical asset value, was fundamental. This price apparently reflected more than 90% goodwill and it was based upon expected earnings in the future. Those earnings obviously depended substantially on the reputations and relationships of the New Zealand Consulting Partners including the Plaintiff. [9] While the parties understood that Cap Gemini as Purchaser required a lengthy personal commitment from each of the New Zealand Consulting Partners to support the growth of the New Zealand business, it was clear that Cap Gemini wanted to protect for itself that goodwill and to prevent any of the consulting partners from simply taking the sale price, based as it was on expected future earnings, and then departing either to commence a competing consultancy business or to retire early. [10] As a result collateral supporting agreements were entered into at the time to give Cap Gemini the protections and safeguards required. These agreements included: a) An Employment Contract (I understand for 5 year terms) with the Plaintiff and with other consulting partners. b) A Deed of Covenant in Restraint of Trade entered into by the Plaintiff and other consulting partners. c) An Escrow Agreement, with respect to Cap Gemini Transaction Shares. d) A "Master Agreement" setting out the various arrangements. e) A Collateral Joining Agreement. f) A Deed of Covenant, with respect to Cap Gemini Transaction Shares. [11] Following settlement in April 2000 differences soon arose concerning the Plaintiff's role in the newly purchased Cap Gemini consultancy business. This led tothe Plaintiff indicating an intention to resign from the company. This would have constituted a breach of the Deed of Covenant he had entered into. [12] On 31 May 2001 the Plaintiff settled his employment dispute with Cap Gemini by executing a Deed of Settlement which provided for: a) Termination of his Employment Contract with effect from 30 June 2001. b) Forfeiting of 2,095 (of the Plaintiff's total 7,566) Transaction Shares in Cap Gemini pursuant to the provisions of the Deed of Covenant. (As I understand it those 2,095 shares were worth approximately NZ$600,000.00 at the time). [13] Pursuant to these arrangements in the income tax year ending 31 March 2002 the Plaintiff transferred these 2,095 shares to Cap Gemini pursuant to his forfeiture obligations under the Deed of Covenant. [14] In his income tax return for that 31 March 2002 year, the Plaintiff claimed a deductible tax loss totalling $894,950.00 which included an amount in respect of his forfeited Transaction Shares in Cap Gemini. This claim was subject to the disputes resolution process in Part IVA Tax Administration Act and Reassessment. [15] The dispute had a flow-on effect into the 2003 income tax year in that the amount of losses available for the Plaintiff to carry forward from the 2002 income tax year had been consequentially reduced. [16] In the Plaintiff's return for the income year ended 31 March 2002, his position was that the forfeiture of the 2,095 Transaction Shares was payment of liquidated damages and consideration for the Plaintiff's breach of the Deed of Covenant in respect of his terms of employment and, as such, gave rise to an adjustment to the purchase price concerning his receipt of the Transaction Shares.[17] With regard to his assessment for the 31 March 2002 tax year, the Defendant accepted that the Plaintiff had forfeited the 2,095 Transaction Shares in payment of liquidated damages but he maintained that there was no consideration. [18] Whilst the Defendant purports to accept that the Plaintiff did forfeit his 2,095 shares in Cap Gemini he does not accept that the parties' commercial purpose was to reflect what is asserted by the Plaintiff as a purchase price adjustment in terms of the arrangements. The documents themselves entered into between the parties appear to be silent on this point. [19] It is the Plaintiff's contention therefore that the evidence which is disputed by the Defendant is needed to assist a proper consideration of this. It contends this evidence is all directed towards providing the factual matrix against which the documents themselves are to be construed. The Defendant disputes these contentions. [20] The evidence to which the Defendant objects is contained in draft witness statements from the Plaintiff himself, from John Frederick Judge who was the Chief Executive Officer at the time of Ernst & Young New Zealand and from Sarah Mary Roberts who was a lawyer in private practice involved at the time in drafting the contractual documentation between the parties. [21] The present application maintains that the draft witness statements contain large volumes of admissible material, details of which are outlined in Schedules 1-3 of the application itself. [22] It is the Defendant's contention that these parts of the evidence provided by the Plaintiff, Mr Judge and Ms Roberts amount effectively to submissions, argument and opinion evidence as to the legal effect of the written contractual documentation between the parties. Mr Lennard argued that this was not truly factual evidence designed to ascertain what was the true and complete bargain reached between the parties here. Instead he maintained that the evidence in reality did no more than address the legal question as to what is the legal effect and categorisation of thecontractual documentation and the tax consequences of this, all of which are matters simply for submission and for ultimate determination by the Court. [23] From the Defendant's present application, it is clear that objection is taken to parts of the evidence of each of these three witnesses upon the grounds that the evidence is either not relevant in terms of Section 7 of Evidence Act 2006, is hearsay in terms of Section 17 of Evidence Act 2006, would needlessly prolong the proceeding in terms of Section 8 Evidence Act 2006 or is simply inadmissible opinion evidence in terms of Section 23 Evidence Act 2006.[24] In response Mr Harley acknowledged that the Plaintiff had the onus of proving that the disputed evidence was admissible. [25] At the outset Mr Harley noted that the Trial Judge will be better placed to deal with questions of admissibility where the witnesses read their written statements of proposed evidence. Mr Lennard for the Defendant before me did accept that objections to admissibility are usually dealt with in the context of a trial. Notwithstanding that, he submitted that the present case is different from the general rule because the factual disputes here are minimal, (though this is strongly disputed by the Plaintiff) the objections taken to the Plaintiff's evidence cover almost all of that proposed evidence, and finally the Defendant needs to know what evidence will or will not be lead for the Plaintiff in order to sensibly plan his response, both as to evidence to be called and as to cross-examination. [26] As to these aspects at the outset I need to say that applications to determine the admissibility of evidence pre-trial are generally to be discouraged – Hay v Commissioner of Inland Revenue [1997] 3NZLR 607. The reason why applications of this sort are discouraged is generally because they often add to complexity and may require resolution of issues in somewhat of a vacuum. In addition Doogue J. noted in Hay, applications of this type can tend to extend the time that the parties will be involved in the case and extend the time that the Court is required also to be involved – see page 610 Line 38.[27] "Parking" these comments for a moment, however, I turn now to consider the substantive application before the Court.COUNSELS' ARGUMENTS AND MY DECISION[28] The present application relies in part on Rule 441D High Court Rules which sets out the requirements in relation to written witness statements. [29] As to this rule, McGechan on Procedure at Para HR441D.03 states:"HR441D.03 – Timing of Objection to Inadmissible EvidenceThe prior practice generally did not extend beyond raising objection to inadmissible evidence in witness statements at the outset of the trial, or when the witness was called. With these more detailed rules, and the earlier exchange of statements, interlocutory application to have inadmissible evidence on important aspects of the case struck out may be justified, for example where that evidence has a material impact on the scope of preparation for trial for other parties. However, questions of admissibility are difficult for the Court to determine outside the trial context, and the Court is unlikely to entertain applications requiring extensive review of evidence or issues. These rules are intended to streamline and shorten litigation, not expand it."[30] In the present case, Mr Harley for the Plaintiff contended that there is a significant factual dispute between the parties which is demonstrable on the face of the pleadings. Although, the Defendant, however, submits that the disputes are confined to legal issues, the Plaintiff says that this is simply incorrect. The Plaintiff's position is that the entire foundation of its income tax returns, being that the 2,095 shares were forfeited as a purchase price adjustment, is the subject of the dispute here. [31] Without wishing to embark upon a detailed analysis of the disputed evidence in question, it does seem to me that the Plaintiff's written statement of proposed evidence and that of Mr Judge record, at least in part, their respective personal knowledge of the relevant transaction and its terms, and their personal knowledge ofthe dispute with the Defendant Commissioner and his adjudication report. Similarly, in my view, Ms Robert's written statement of proposed evidence does not generally provide detailed expert opinion evidence. It also appears to deal with Ms Roberts own direct personal knowledge of the transaction as a solicitor involved in it and the commercial purposes of that transaction. The evidence appears to be directed at the commercial question as to what the forfeiture was calculated to effect from a practical and business point of view. [32] I accept the contention from the Plaintiff that there is a fundamental dispute between the Plaintiff and the Defendant Commissioner about the commercial purpose of the forfeiture. I accept too that there is a reasonable argument that each of the three witnesses in question does have a personal direct and factual knowledge of many aspects of the genesis of the transaction and of the parties' commercial purpose/s. [33] As to these aspects, Mr Harley also referred me to the decision inCommissioner of Inland Revenue v Wattie [1999] 1NZLR529 (J.C.). There, Lord Nolan in delivering the decision of the Judicial Committee of the Privy Council in not an entirely dissimilar tax case to the present stated (at p.536):"It is well settled that in considering whether a particular item of receipt or expenditure is of a capital or revenue nature, the approach to be adopted should be that described by Dixon J. in Hallstroms Pty Ltd v Federal Commissioner of Taxation (1946) 72CLR634 at p.648 where he said that the answer to the question: '. depends on what the expenditure is calculated to effect from a practical and business point of view, rather than upon the juristic classification of the legal rights, if any, secured, employed or exhausted in the process.'"And, at p.537, Lord Nolan noted:"Mr McKay submitted, however, that the requisite study of what the payment was calculated to effect from a practical and business point of view inevitably involved a review of the factual context in which the payment was made This appears to their Lordships to be the crux of the matter."[34] In similar vein are the words of Richardson J in the Court of Appeal inBuckley & Young Limited v Commissioner of Inland Revenue [1978] 2NZLR485 at p.490:"And, as already noted, oral evidence is admissible for the purpose of ascertaining the surrounding circumstances. However, that does not mean that oral evidence may be given for the purpose of varying the written agreement or for the purpose of ascertaining the actual intention of the parties. It means that, before you construe the agreement, you are entitled to understand the setting in which it was made .."[35] All, these comments, relating generally to what has been described as the factual matrix surrounding a transaction, and which in my view must include issues as to its commercial purpose, are of relevance here. [36] At this early stage of these proceedings, I tend to the view that there is little in the argument advanced for the Defendant that the disputed evidence is clearly inadmissible. I do not accept the contention that the evidence is largely expert opinion evidence rather than details of the witnesses' own personal and direct knowledge of the transaction and its commercial purpose. And in the content of the present case, as I see it, matters regarding allegations of hearsay and absence of relevance, are for the Trial Judge here. [37] In my view it is difficult to distinguish the situation in the present proceeding from that which prevailed in Hay v Commissioner of Inland Revenue. In Hay, the Judge held that the evidence in question could be let in at trial subject to objection, with any objections to be determined at trial if they proved to be relevant to the issues. I take the view that a similar process should be followed here.CONCLUSION[38] For these reasons the Defendant's present application fails. I am satisfied that the written statements of proposed evidence by the Plaintiff, Mr Judge and Ms Roberts should be left in at trial, subject to objection, with any objections to be determined by the Trial Judge. [39] As to costs, as the Defendant's present application has failed, I see no reason why costs should not follow the event in the normal manner. [40] Costs are therefore awarded to the Plaintiff on this application on a 2B basis together with disbursements as fixed by the Registrar.'Associate Judge D.I. Gendall'