The Supreme Court overturns the ARC in the Alteo case

On 31 January 2025, the Supreme Court (SC) allowed the appeal made by Alteo Energy Ltd (“Alteo” or the “Company”) and confirmed that the Company is entitled to claim 80% exemption on interest income (2025 SCJ 47). 

The main business activity of Alteo is the production and sale of electricity. During the year ended 30 June 2019, it derived income from the sale of electricity as well as interest income out of excess cash deposited with a sister company.

Alteo claimed 80% exemption on interest income in accordance with item 7 of Sub-Part B of Part II of the Second Schedule to the Income Tax Act (ITA). According to Regulation 23D(2) of the Income Tax Regulations 1996 (ITR), in order to qualify for 80% exemption, the Company should:

• carry out its core income generating activities (CIGA) in Mauritius.
• employ directly or indirectly an adequate number of suitably qualified persons to conduct its CIGA; and
•  incur a minimum expenditure proportionate to its activities.

The term CIGA is defined in the ITR and includes ‘agreeing funding terms, setting the terms and duration of any financing, monitoring and revising any agreements, and managing any risks’.

The Company’s claim for 80% exemption on interest income was denied by the MRA on the ground that the interest income represents about 0.25% of the total income of the Company and was therefore not derived from the CIGA of the Company.

The Assessment Review Committee (ARC) ruled in favour of the MRA and took the view that to benefit from the exemption, what needs to be considered first is the substance of the activities of Alteo. As such, Alteo had to satisfy all three conditions laid down in Regulation 23D of the ITR. In this case, the ARC determined that since the interest income only represented 0.25% of the total income for the year, it cannot be said that the interest income was derived from the CIGA of the Company.

At the SC level, Alteo argued that:

1.  The ARC misunderstood the term ‘substance’ in its interpretation of Regulation 23D (2) and erroneously concluded that the claim for 80% exemption requires that the interest income be derived from the main business activity of the company;

2. Item 7 and Regulation 23D do not require that the interest income be derived from the CIGA of the company;

3.  The use of word ‘includes’ confirm that the CIGA listed in Regulation 23D(2) is not exhaustive; and

4.  The interpretation given by the ARC has led to an absurd result of the legislation which could not have been intended by the legislator. 

The SC held that:

1. Based on item 7, any company (other than excluded financial institutions) may claim the exemption and there is no restriction such as the nature of business activities;

2. The only requirement to be met in order to claim partial exemption is that the company satisfies the conditions relating to the substance of its activities as prescribed;

3. The term ‘includes’ cannot have an exhaustive and restrictive meaning. It has been used in the present context so as to encompass both its ordinary and natural meaning as well as the enlarged statutory meaning to therefore include also companies making funding agreements, monitoring and managing risks etc.;

4. The intention of the legislator is to avoid all doubts that the partial exemption applies to companies (other than excluded financial Institutions) making funding agreements monitoring and managing risks etc. , whether local or GBL companies, provided the three conditions are duly complied with; and

5.  CIGA should be given its natural meaning, i.e., any business activities which generate the main income of the company as well as the extended statutory meaning given to CIGA for the purposes of item 7 to claim the partial exemption.

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