All Best Wishes Ltd v. Commissioner of Inland Revenue

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

INLAND REVENUE APPEAL NO. 1 OF 1992

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Coram: Mortimer, J.

Date of hearing: 22 July 1992

Date of judgment: 31 July 1992

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Mortimer, J.

1.This is an appeal by way of Case Stated under Section 69(1) of the Inland Revenue Ordinance from a Decision of the Board of Review dismissing an appeal by the Taxpayer against an assessment to profits tax for the years 1983/4, 84/ 5 and 85/6, the assessments were thereby confirmed. The facts appear in the Case Stated and I annex a copy to this Judgment. Briefly, for the purposes of this appeal, they are as follows:

2.The four LI brothers owned Letters B land exchange entitlements which originated wholly, or in part, from the resumption of family land in the New Territories. Between 1962 and 1978, some of these were used for acquisition and development of properties. In 1976/77 Shatin Lot 15 became available for development and developers approached the LI family to purchase their Letters B but they would not sell unless they were involved in any development which arose.

3.The enterprise, which is the background to these proceedings, was then undertaken. The Taxpayer was incorporated with a one million capital, and the land exchange entitlements of the four LI brothers and Madam CHENG were transferred to it, initially, at a provisional valuation, but later at full value in respect of which the Taxpayer was indebted to them.

4.Madame CHENG was a friend of the LI brothers and was brought in to increase the Letters B of the right vintage for this enterprise and this also had the effect of increasing the percentage of the Taxpayer’s participation in the enterprise. Madame CHENG had a six percent interest in the Taxpayer. The valuation of the Letters B was provisionally at about 15 million dollars but later was increased to their proper valuation of just less than 50 million dollars.

5.On 31 January 1977, the Taxpayer resolved, inter alia, to join with three other companies to pool their Letters B and to tender for the exchange and development of the land concerned. Further, it was resolved, that after the development and sale of the properties, to repay the building mortgage, and that the portion of the properties allotted to the company, (I quote) "Be maintained for long term investment”.

6.The four companies (the co-owners) entered into a heads of agreement on 12 February 1977 to carry out the enterprise-it was not a partnership. Their tender was, in due course, accepted at about 3 million dollars’ premium and on 7 January 1979 work began.

7.It was a huge enterprise, consisting of a four level podium of carparks and shops with eight, 22-storey, residential blocks.

8.On 5 June 1980, the co-owners applied for consent to sell the units, including pre-selling them, and that was granted in August 1981. The original estimate-it was a rough one made, as I understand it, by the developers-was 125 million. It proved to be a vast under-estimate and actually the costs amounted to about 245 million dollars of which the Taxpayer's share was 61 million.

9.The funding for the project was first by a bank overdraft, which some of the shareholders and the Taxpayer had to personally secure by the deposit of time deposit certificates. Later, in April 1981, a building mortgage for 75 million dollars was taken and the latest date of repayment, after variation, was 30 June 1983.

10.There was a further agreement between the co-owners dated 7 May 1982, to allocate the flats which were available between them pro-rata. This was done. However, the Taxpayer was allocated, at its request, the whole of Block C1 and in return, gave up its entitlement in Blocks A1 and A2. Also the co-owners agreed to pre-sell units in Blocks B1 and B2 to repay the mortgage and defray building costs.

11.The agreement was carried out by an offer of sale the next day and also one was sold in that financial year, that is by 31 March of 1983. It followed from that, that there must have been an earlier agreement between them for the sale.

12.On 28 April 1983, the occupation permit for the whole of the development was issued, and one month later, 27 May 1983, all the residential units owned by the Taxpayer were put on the market. Those unsold, appeared in the Taxpayer's accounts for the financial years ending 1984, 85 and 86 as fixed assets. Profits from sales appeared as extraordinary items-sale from the disposal of investment properties ­ but assessments were raised, and later revised; for the year 1983/84 to profits of $29,493,102; for the year 1984/85 to $3,277,908; and for the year 1985/86 to $5,263,747.

13.The Board's reasoning appears on pages [757 to 762 in this print] and their finding appears on page [761 in this print]. I read it: and their finding appears on page [761 in this print]. I read it:

"On the whole of the evidence, however, we find as a fact that right from the outset the company not only had every intention of embarking on a scheme of sales but also intended to and did embark on such a scheme in a manner essentially no different from developers developing land for the purpose of sale by way of trade.

The company did entertain a desire that it would not need to sell all the units which would be allotted to it but we find that the company's desire amounted to no more than a mere contingent hope that some units could be retained (in addition to those units which were unsaleable because of restrictions in the conditions of grant).

We find as a fact that there was present right from the beginning the intention to turn into account by way of trade and that this intention was at no time displaced by any desire or hope that, if possible, some units could be retained for investment."

And later [at p.763 in this print],

"We find that the badges of trade were present; that the company's operations in the present case which gave rise to the profit with which we are concerned had all the characteristics of a trade or an adventure in the nature of trade. Accordingly we confirm the assessments and dismiss the appeal."

14.The reasons given by the Board of Review appear in extenso in the case. It is to be noted that the Board of Review had specifically in mind certain matters.

15.First, the resolution of the taxpayer on 31 January 1977. I quote:

"That on fulfilment and compliance of the covenants terms and conditions and after part of the properties sold for repayment of building mortgage, the portion of properties so allotted to the company be maintained by the company for long term investment."

16.Secondly. That the Taxpayer has persuaded the co-owners to allocate the whole of Block C1 in return for it relinquishing it’s entitlement to Blocks A1 and A2 and that was related to tax.

17.Thirdly. The resolution of the Taxpayer dated 23 July 1982. It reads as follows:

1.   "The Chairman is recorded to have reported that the majority of the shareholders had emigrated or had decided to emigrate shortly and that they had suggested to sell or to make distribution to the beneficiary of the properties allotted or to be allotted to the company which were originally intended for long-term investment. And,

2.   That it was unanimously resolved that the proposal to sell the residential units and shops, level 1, allotted or to be allotted to the company, be approved."

18.Fourthly. That in the Director's Report and Statements of Accounts for the year ended 1984, there appeared the following statement, “That it was because of the then worrying political uncertainty over the future of Hong Kong, that the shareholders/directors decided to sell the properties and emigrate from Hong Kong.”

19.Fifthly. The oral testimony of Mr. LI Chung-yee, which had been given and the Board's comments and reasoning about that testimony.

20.And, sixthly. The statutory declaration of the Honourable CHEUNG yan-lung which is referred to on page [757 of this print (second paragraph)].

21.With those matters, and indeed the whole of the evidence in mind, the Board found that the Taxpayer had embarked on an enterprise in the nature of trade with the intention of doing so from the outset.

22.The expressions of intention to create, at the end of this complicated enterprise, an investment, properly regarded against the background of a joint enterprise with others who were admittedly trading, it found were no more than a contingent desire, or hope, that some units would be retained as an investment. In other words, that what had been from the start, a current asset or stock in trade, should possibly be retained as a fixed asset, but this was never achieved.

23.The relevant provision in the Inland Revenue Ordinance appears in Section 14 which reads:

“Subject to the provisions of the Ordinance, profits tax shall be charged for each year of assessment at the standard rate on every person carrying on a trade, profession or business in Hong Kong in respect of his assessable profits arising in or derived from Hong Kong for that year from such trade, profession or business, (excluding profits arising from the sale of capital assets) as ascertained in accordance with this part."

24.'Trade' is defined in Section 2 of the Ordinance as follows:

"Trade includes every trade and manufacture, and every adventure and concern in the nature of trade."

25.The Appeal arises, as I have indicated, under Section 69(1) which is limited as follows:

"The decision of the Board shall be final provided that either the Appellant or the Commissioner may make an application requiring the Board to state a case on a question of Law for the opinion of the High Court."

26.The questions of law to be determined in this case, appear in the statement of case. There are two.

27.The questions of law to be determined by the Court are as follows:

1.   Whether, as a matter of law, and on the facts found, it was open to us to conclude that the profits, which are set out, were properly assessable against the taxpayer to profits tax for the years concerned respectively.

2.   Whether there was any evidence to support findings of fact which are set out in sub-paragraphs a-g, which I do not propose to reiterate.

28.The decision of the Board of Review as to whether the profits made by the Taxpayer arose from the sale of fixed assets or current assets, whether they were, in other words, made out of trading or an adventure in the nature of trade, is a question of fact. Yet it is a question that has given rise to much legal consideration and pronouncement over the years. Reference to cases where analogous facts are decided, is of limited value unless the principle behind those analogous facts can be clearly identified

29.For the Taxpayer, it is submitted, that the Board's decision that profits were trading profits from the sale of current assets and not capital gains from the sale of fixed assets, was wrong in law. Either on the facts found, or, alternatively, that there was no evidence upon which the relevant facts listed in the case could be found. Also, it is submitted, that the decision was itself unreasonable and perverse in the sense that no reasonable tribunal could have reached this conclusion on the facts found and the evidence before it.

30.It was submitted, by Mr. Barlow, for the Commissioner of Inland Revenue, that an appeal as wide as that is not open on the Case Stated. On this matter I am against Mr. Barlow. It seems to me that it is open to the court to consider the question whether the decision was unreasonable or perverse, even though those words do not appear in the Case Stated. I have heard submissions on the matter which I do not propose to rehearse.

31.It seems to me, that the distinction between a submission that the Decision was unreasonable or perverse and whether there was no evidence upon which certain decisions could be reached, may come to the same thing. See Lord Radcliffe in Edwards v. Bairstow [1965] AC 14 at 36:

"So there, too, there has been error in point of law. I do not think that it much matters whether this state of affairs is described as one in which there is no evidence to support the determination or as one in which the evidence is inconsistent with and contradictory of the determination, or as one in which the true and only reasonable conclusion contradicts the determination. Rightly understood, each phrase propounds the same test."

32.The main thrust of the argument is that the nature of the asset is entirely determined by the intention of the taxpayer at the time when the asset is acquired, assuming that that intention is not unrealistic or impracticable. And that the finding that the taxpayer's intention, from the beginning, had been to undertake an adventure, in the nature of trade, was one upon which there was no evidence. On the evidence, the only decision properly open, was that the intention from the outset was to acquire and create an asset for investment. Reliance is placed upon a passage in the speech of Lord Wilberforce in Lionel Simmons Properites Limited v. The Commissioner of Inland Revenue 53 TC 461 at 491. It is well known, and it was cited in the Case Stated. The nub of it reads:

"Trading requires an intention to trade. Normally the question to be asked is whether this intention existed at the time of the acquisition of the asset."

33.The Taxpayer submits that this intention, once established, is determinative of the issue. That there has been no finding of a change of intention, so a finding that the intention at the time of the acquisition of the land that it was for development is conclusive.

34.I am unable to accept that submission quite in its entirety. I am, of course, bound by the Decision in the Simmons case, but it does not go quite as far as is submitted. This is a decision of fact and the fact to be decided is defined by the Statute-was this an adventure and concern in the nature of trade? The intention of the taxpayer, at the time of acquisition, and at the time when he is holding the asset is undoubtedly of very great weight. And if the intention is on the evidence, genuinely held, realistic and realisable, and if all the circumstances show that at the time of the acquisition of the asset, the taxpayer was investing in it, then I agree. But as it is a question of fact, no single test can produce the answer. In particular, the stated intention of the taxpayer cannot be decisive and the actual intention can only be determined upon the whole of the evidence. Indeed, decisions upon a person's intention are commonplace in the law. It is probably the most litigated issue of all. It is trite to say that intention can only be judged by considering the whole of the surrounding circumstances, including things said and things done. Things said at the time, before and after, and things done at the time, before and after. Often it is rightly said that actions speak louder than words. Having said that, I do not intend in any way to minimize the difficulties which sometimes arise in drawing the line in cases such as this, between trading and investment.

35.A number of matters have been urged which it is suggested show that the Board was in error. Most of them are self-evident, and, therefore, powerful in themselves. They include, for example, that real property can equally be acquired as an investment or for trade so that the nature of the asset is equivocal or neutral.

36.Also that the redevelopment of property is not per se, or necessarily, an adventure in the nature of trade. This is so even if the intention is to sell part to cover the development costs provided that the remainder is for investment. Also, an investment, of course, does not become trading stock because it is sold. There is, however, no indication that the Board viewed any of these matters as conclusive. They are matters relevant for its consideration. They were urged upon me to demonstrate that the Decision of the Board was unreasonable or perverse, or that there was no evidence by which it could properly have reached its conclusions.

37.The main points inevitably, are the same as would have been urged upon the tribunal tasked to find the facts. I do not mean that in a derogative way, for there has not been attempt-as sometimes happens-to re-open the facts of the case by means of this type of appeal.

38.Other points made, include the stated intention of the Taxpayer in the resolution to which I have referred; the fact that the Taxpayer did not join in with others in pre-selling flats to recover costs or profits; the fact that the whole of Block C1 was allocated to the Taxpayer and the reference to the Taxpayer's taxation position at the time; the statutory declaration to which I have referred; and the fact that the decision to sell was sometime after the allocation. Also, it was urged that some of Mr. LI Chung-Yee's evidence was unchallenged in cross-examination, and no evidence to the contrary was called.

39.So it is submitted that although the three co-owners were undeniabily and admittedly trading, the Taxpayer had demonstrated that its position was wholly different from the others, and was, at all times, investing or seeking to invest. That it had the intention to invest in the property, and that when the decision to sell was made it was simply realising the asset, which was not current but fixed. It is also said that the Board wrongly relied upon the redevelopment and the intent of the co-owners (when those facts were neutral) as an indication of the Taxpayer's intent.

40.It must be remembered that the burden of disturbing the assessment, rests upon the taxpayer.

41.The Court's approach to this type of case, about which there is no dispute, and the approach to decisions of fact by the Board of Review' are usefully set out by Wilkinson V-C as he then was, in Marson v. Morton [1986] STC 463. He rehearses some of the badges of trading; they are not exhaustive. Each case depends upon its own facts. Here, the Board found they were present. Obviously they were. That is exactly what the other three co-owners were doing. The Board, in making its Decision, did not stop there for it had to consider, and did consider, the matters which have been urged upon me.

42.More particularly, the then Vice Chancellor, sets out the court' approach to decisions on fact, at page 470 at (c). He says:

"I will deal first with the submission that the true and only reasonable conclusion in this case was that the taxpayers were entering into an adventure in the nature of trade. It is well established in dealing with appeals of this nature that there is a band of cases, sometimes referred to as 'no-man's-land’, in which different minds come to different conclusions in the circumstances on the question of whether or not there was an adventure in the nature of trade. There are some cases where the position is so clear, one way or the other, that there is only one true and reasonable conclusion. If so, then if the commissioners reached something other than that conclusion, an error of law was disclosed. But if the case falls within the band where more than one conclusion is possible on the basis of the facts found, then in the absence of misdirection on the face of the decision the court has no jurisdiction or right to intervene."

43.The Board considered the whole of the evidence, including the oral evidence of Mr. LI, the written evidence and the documents. They considered the whole picture, from beginning to end. It may not have been completely straightforward. It is a fact that other tribunals could have reached a different conclusion. I am not saying that I would have done so, for it is not my task to even consider that. My task is simply to decide whether there was evidence upon which the Board could properly reach the findings which are challenged. The answer I do not find difficult. Looking at the whole of the evidence, there is no question in my mind but that the Board were entitled to find, or infer, those matters.

44.A tribunal, which hears oral evidence and considers documents, is not in the position (as is submitted) that it has to find what the witness says is the fact, even if he is not cross-examined, and even if he is not contradicted by other evidence. A tribunal, in those circumstances, may look at the whole of the circumstances presented to it and may find that the oral evidence is not acceptable on particular matters. Or, may find certain facts contrary to the evidence that has been given and, indeed, contrary to what appears in the documents and other material before it.

45.The Board's approach to the whole of the evidence including the oral evidence, is set out on pages [757 to 762 in this print] in detail. I do not propose to rehearse it. Was the conclusion that this was trading, unreasonable or perverse? As I have said, even if other tribunals may have reached a different conclusion, on the whole of the evidence of what was done and said and the whole nature of this enterprise as presented to the Board, I cannot say that the Decision was either unreasonable or perverse. In my judgment it was a conclusion which was plainly open both on the evidence and on facts found.

46.Finally, it is submitted that the finding of the Board is in itself inconsistent. It is said, that the finding that the company did entertain the desire that it would not need to sell all the units which would be allotted to it, and the finding that the company's desire amounted to no more than a mere contingent hope that some units could be retained, amounted to a finding that the Taxpayer intended to invest. With that I cannot agree. It seems to me that is not inconsistent. It is a plain decision of the Board dealing with all the matters before it. It takes into account the evidence and it is an evaluation of the evidence which it heard.

47.The Decision amounts to this; that the Taxpayer's intention, from the beginning, was to trade, in spite of what it said and what resolutions were passed. It intended to trade but it entertained a hope, a contingent hope, that after the trading had been completed, it might be able to retain some of the units. This would be to turn what up to then had been trading stock, into an investment, and not vice versa, but of course, things never got that far.

48.When the Taxpayer would not join in the selling programme with the others and had Block C1 allocated to itself the question arose whether it would guarantee not to sell. It did not give any such guarantee. When the occupation permit was granted and issued on 28 April 1983, the units were sold within one month. Those were matters, as well as many other circumstances, which were before the Board. These properties were never put up for rental because of the Taxpayer's decisions and intentions dealt with in the evidence. Those were matters which fell for the consideration of the fact-finding tribunal. They were significantly within the province of such tribunal and not within the province of this tribunal, save in the limited way that I have described. In all those circumstances, this appeal fails.

Mr. John Swaine, Q.C. and Mr. J. J. E. Swaine (instructed by Messrs Philip K.H. Wong , Kennedy Y.H. Wong & Co.) for the appellant.

Mr. Barrie Barlow on a fiat for the Commissioner.