Wing Tai Development Co Ltd v. Commissioner of Inland Revenue

CACV000036/1979

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Coram: Roberts, C.J., Leonard and Li, JJ.

Date of Judgment: 13 December 1979

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JUDGMENT

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Roberts, C.J, :

1. This is an appeal by the Wing Tai Development Company against a decision of Yang, J., in which he dismissed that Company's appeal against a decision of the Board of Review, upholding an assessment levied by the Commissioner of in land Revenue on the appellant company.

Facts

2. On the 1st October, 1972, the appellant acquired the whole issued capital of the Yiu Nin Development Co. Ltd. (Yiu Nin) for $6,208,502.

3. On the 23rd February, 1973, the appellant entered an agreement to sell the whole issued capital of Yiu Nin, consisting of 75,000 fully paid shares of $100 each, to Mr. Cecil Chao, one of the promoters of Wah Kwong Properties Ltd. (Wah Kwong). This agreement provided that the consideration payable by Mr. Chao for the Yiu Nin shares should be $7.5 million, to be satisfied as to $3 million in cash on the signing of the agreement; and as to $4.5 million by the allotment or transfer of 4.5 million fully paid up one dollar shares in Wah Kwong.

4. After its incorporation on the 28th February, 1973, Wah Kwong adopted the agreement and allotted 4.5 million $1 fully paid Wah Kwong shares to the appellant. The agreement contained no provision which bound the appellant to retain the shares for any period. The certificates for the shares were delivered to the appellant by Wah Kwong on the 1st April, 1973.

5. The Wah Kwong shares were first quoted on the Stock Exchange on the 2nd April, 1973. The appellant sold its Wah Kwong shares on the Hong Kong Stock Exchange on the 4th and 6th April, 1973 at a price of approximately $17.266 million, an average of $3.84 per share.

6. The tax return submitted on behalf of the appellant omitted, from the amounts included as the surplus from the disposal of investments, the difference between $4.5 million and the proceeds of the sale of its Wah Kwong shares by the appellant. The assessor rejected this approach and assessed the amount of such difference as profit assessable to tax.

Board of Review

7. The appellant appealed to the Board of Review on the grounds that -

8. In its case stated for the opinion of the High Court, the Board of Review set out three questions of law -

9. At the hearing before us, counsel for the appellant conceded that he could not appeal against Yang, J's finding that the answer to the first question posed in the case stated was Yes.

10. He therefore confined himself to submissions on questions (b) and (c).

Relevant passages in case stated

11. The argument before us centred, in effect, upon the following two paragraphs of the case stated.

Arguments for the appellant

12. The arguments put forward by the appellant can be summarized as follows -

"We are satisfied that ....... the Appellant's entitlement under the Agreement to Wah Kwong shares was worth more than the par value of $1 on 23rd February, 1973.";

The onus of Proof

13. It is necessary to consider the burdens of proof which arise at different stages of taxation proceedings.

14. The first burden is that which lies upon the revenue to show that payments or receipts of the kind in question fall within the sphere of taxation and are properly exigible.

15. This might perhaps be usefully described as the preliminary burden. If it is not satisfied, no other issues arise.

16. As to this it is useful to cite the following passage from the judgment of Lord Simonds in Hochstrasser v. Mayers⁽¹⁾ -

"It is for the Crown, seeking to tax the subject, to prove that the tax is exigible, not for the subject to prove that his case falls within exceptions which are not expressed in the Statute but arbitrarily inferred from it."

17. It is conceded by the appellant that it cannot be argued that the profit on the sale of the shares would not be taxable as profits incurred in the nature of trade. Thus the Crown has discharged the preliminary burden which lay upon it.

18. The second burden is that which lies upon the taxpayer, under section 68(4) of the Inland Revenue Ordinance, to show that the assessment made was incorrect or excessive.

19. The appellant argues that he did discharge this burden since the Board found that the appellant's entitlement was worth more than $1 per share. Thus, he submits, the assessment must have been higher than was justified, that is to say, incorrect and excessive.

20. The Crown, in reply, argues that a taxpayer must not merely show that an assessment was too high, but also satisfy the Board of Review as to the extent of the excess - in other words, he must show how the assessment is wrong, since there is no burden on the revenue to show that its assessment is reasonable.

21. In support of his submission, counsel for the respondent drew our attention to the Hong Kong case of the Commissioner of Inland Revenue v. The Board of Review ex parte Herald International Ltd.⁽²⁾. The following passage appears in the judgment of Mills-Owens, J. at p.242 -

"If, on the other hand, the Board were to disagree with a finding made by the Commissioner which is adverse to the taxpayer, then the Board may be going a long way to relieve the taxpayer of the onus which the law has expressly laid upon him of proving that the assessment is excessive. That onus in not one of proving that the Commissioner was wrong, whether it be in a matter of procedure, evidence or point of law. It is an onus of proving that the assessment was excessive and it necessarily involves a finding by the Board of what the correct assessment should be (including a 'nil' assessment if need be) (see section 68(8)). No doubt where the facts are admitted the Board may make a decision based simply on the ground of appeal that the assessment is excessive as a matter of law; in such a case the Board is enabled to discharge its duty of stating a case, if called upon to do so. Otherwise, as it appears to me, it is implicit in the legislation that the Board should hear and weigh the whole of the evidence forming its own conclusions on the facts and thereby equipping itself to determine whether the onus has been discharged and to state a case if need be."

22. As we interpret this passage from Mills-Owens, J's judgment, it means no more than that, in order to discharge the burden imposed upon him by section 68(4) of the Ordinance, the taxpayer must put before the Board evidence upon which it could reach a finding of fact that a particular figure, lower than the assessment imposed by the assessor, is the proper one.

23. The appellant argues that he did discharge this burden of proof. Although the evidence of his two witnesses, as to the value of the entitlement to shares on the 23rd February was rejected, other evidence to the effect that it was over $1, and thus that the assessment was excessive, was accepted by the Board, since they found that the value of the entitlement did exceed $1 per share on that date.

24. It is not possible for the appellant to point to the item or items of evidence which did so satisfy the Board, since the Board itself gives no reason for its conclusion that the entitlement to Wah Kwong shares was worth more than their par value of $1 on the 23rd February.

25. Yang, J. comments in his judgment as follows -

"Coming now to the Board's second question, it is clear law that not only must the appellant company discharge the burden of proving that the respondent's assessments were wrong, they must also show what the correct assessments should have been."

26. There can be no doubt as to the first part of this passage, namely, that the appellant company must discharge the burden of proving that the respondent's assessments were wrong.

27. It seems to us that the phrase "they must also show what the correct assessments should have been" means only that the taxpayer's burden is sufficiently discharged if there is evidence accepted by the Board which enables it to substitute an alternative figure.

28. Some reference has been made to a shifting of the onus of proof from the taxpayer to the Crown. In this connection, our attention was drawn to the following passage from Eke v. Knight⁽³⁾ at page 127 where Fox, J. comments as follows -

"There is, in my view no obligation upon the Inspector to make out a prima facie case: the burden is upon the taxpayer to satisfy the Commissioners. Although it may be that the burden of proof can change after the prima facie evidence has been produced by the taxpayer that the assessment is excessive, the general burden is on the taxpayer to satisfy the Commissioners that the assessments should be discharged."

29. We can only interpret this passage in a satisfactory way if the reference to "the burden of proof", means the evidential burden, and not the general burden to satisfy the Board of Review that the assessments were excessive and should be discharged, which remains on the taxpayer.

30. When the taxpayer has discharged the general burden, by producing evidence on which the board could reasonably decide that the assessment was excessive, as a matter of common sense an evidential burden would shift to the Crown to rebut the evidence put forward by the taxpayer in support of his claim that the assessment was excessive.

31. In this instance, the taxpayer put forward evidence, by a director of the Yiu Nin Company and by a witness who was said to be an expert in the Hong Kong Stock Exchange, to the effect that the entitlement to Wah Kwong shares on the relevant date was substantially in excess of $1 per share. It would therefore have been open to the Board had they accepted this evidence, to have found against the Revenue, in the absence of evidence to the contrary.

Duty of Board of Review

32. The Board of Review, in essence, -

33. We are satisfied that the Board was entitled to reject the evidence put before it by the appellant, if it felt that such evidence was not worthy of credence. However, objection was taken by the appellant as to the manner in which the Board did so.

34. The Board, when rejecting this evidence, expressed the opinion that "their estimates are more valuations than were the speculative hopes of the persons who caused the Wah Kwong offer to be 77 times oversubscribed."

35. We do not regard this as more than colourful language; it does not derogate from the finding of fact, which the Board was entitled to reach, that the evidence given by Mr. Lee and Mr. Bokhary was of such an unreliable nature with regard to their estimates that the Board was not prepared to act upon it. Although the Board did accept Mr. Lee's evidence that he expected the Wah Kwong's shares to be quoted at a premium when they were listed and that he would not have sold the Yiu Nin shares for $7.5 million.

36. If the Board having rejected the evidence of these witnesses had found that the shares were worth $1 each, as contended for by the assessor, that would have been an end to the matter. But the Board went on to find that the value did exceed $1 and that, by inference, the appellant had established that the assessment was excessive without saying by how much.

37. Having reached that conclusion, it seems to us that a clear duty lay on the Board to reach a finding as to the true value of the entitlement to a Wah Kwong share on the 23rd February, 1973, however difficult it might be to do so and however much it would be a matter of guesswork.

38. The correct approach to a valuation can be derived from the following passage in the judgment of Danckwerts J. In re Holt. decd. Holt. v. Inland Revenue Commissioners⁽⁴⁾ which was concerned with the valuation of shares in a private company for the purpose of estate duty.

"Having carefully considered the evidence which has been given, including such assistance as may be gained from the various tables which have been put in and the various comparisons with the prices of shares of other companies quoted on the Stock Exchange (so far as any useful deductions can be made from these), and making the most intelligent guess that I can, I have come to the conclusion that these shares of John Holt & Company, if sold on the hypothetical open market which the authorities and section 7 of the Act require me to assume, would fetch a price of 19s. Od. a share."

39. This is the course which the Board should have followed. However difficult the task may be, and however unsatisfactory the result, we consider that the Board should have attempted it.

40. It therefore follows that the Board was wrong in declining, having found that the entitlement to shares was worth more than $1 per share on the 23rd February 1973, to attempt to attribute a particular value to the entitlement.

Course to be followed

41. It was submitted that there were three courses open to us -

42. We do not think it would be proper to adopt the first course.

43. Unless the appellant can show that the price at which he sold the Wah Kwong shares was less than the value of the entitlement to them on the 23rd February, he will be liable to pay some tax. Although the Board has found that a figure of $1 was too law it has certainly not accepted any figure which would relieve the taxpayer of liability to some tax on this transaction.

44. We do not consider that we are an appropriate body to find facts of this nature. We are clearly less suited to this task than the Board, since we do not even have before us a transcript of the evidence which was put to it.

45. We therefore think that the correct course is to remit this matter to the Board.

Remission to Board

46. There was some discussion before us as to whether or not the remit should include a direction to the Board to receive further evidence.

47. Counsel for the respondent asserted that to allow further evidence would be to permit the appellant, who lost on the first occasion, to have a second chance to call evidence in support of his contention.

48. In Murphy v. Australian Machinery Investment Company Limited⁽⁵⁾ the Court of Appeal decided that the judge was correct in returning a matter for reconsideration to the Commissioners of Income Tax in England, who perform a similar function to that of our Board of Review.

49. Tucker and Somervell, L.JJ. were both of the opinion that, although the case should be sent back to the Commissioners, in order that they should apply their minds to the real issue, there was no reason why either side in the dispute should be permitted to adduce any further evidence. However, as we read their judgments, they were not attempting to prescribe any general rule that additional evidence should never be allowed.

50. At page 265, Lord Justice Cohen says -

"The only remaining point to which I must refer is the question of whether the parties should be allowed to call further evidence. On this I find myself at variance with my brethren. I do not know what view I should have taken if the matter had come before me as a Judge in the first instance, but it seems to me that, although the circumstances must be rare in which fresh evidence should be allowed, it is a matter in essence for the discretion of the learned Judge before whom the matter comes. This case came before a Judge of great experience in Revenue matters, and I feel this Court should hesitate long before it interferes with the discretion of the Judge in the Court below."

51. We would prefer to follow this dictum of Cohen, L.J., to the effect that additional evidence is permissible in exceptional cases, where a matter is remitted for a particular issue to be determined.

52. We think that we should, when remitting the matter to the Board of Review, leave it to the discretion of the Board as to whether or not to permit either or both parties to adduce further evidence.

53. We therefore order that the case be remitted to the Board of Review [with a discretion in the Board to allow either party to call additional evidence] in order that the Board shall determine the true value on 23rd February 1973, of the entitlement to Wah Kwong shares.

Costs

54. The appellant did not ask Yang J. to remit the matter to the Board, as he has asked us to do, although counsel for the respondent did make such a request before Yang, J. who rejected it.

55. Against this background, we feel that there should be no order as to the costs of this appeal.

56. The costs of the proceedings before Yang J. should be reserved for him to consider after the Board of Review has dealt with the remit.

Representation:

Gardiner & Kotewall (Woo, Kwan, Lee & Lo) for Appellant

Nolan, Q.C. & Major (Legal Dept.) for Respondent

(1) [38 Tax Cases 673 at 706]

(2) [1964] H.K.L.R. 255

(3) 51 TC 121

(4) [1953] 1 W.L.R. 1488

(5) 30 T.C. 244