Commissioner of Inland Revenue v. Swire Pacific Ltd

CACV000094/1978

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

Date of Judgment: 13 December 1979

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JUDGMENT

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Leonard, J.:

1. This is an appeal by the Crown from a judgment of Yang, J., dismissing an appeal, by the Commissioner of Inland Revenue by way of case stated, against a decision of the Board of Review.

Background

2. In 1972, the respondent company ("Taikoo") entered into an agreement with the Hong Kong and Whampoa Dock Company ("Whampoa") whereby the ship-building, ship-repairing and general engineering operations of each company were to be transferred to a new company, to be known as the Hong Kong United Dockyards Ltd. ("HUD") in which the two parent companies were each to hold 50 per cent of the shares.

3. HUD was to come into existence on 1st January, 1973, and the intended merger was announced on the 16th September, 1972.

4. Two days later, the majority of the Taikoo labour force went on strike, demanding cash payments, which were referred to as "retirement grants" and seem to have been the sums which stood to the credit of employees of Taikoo under the latter's retirement scheme.

5. Most of the workers who went on strike would not have been entitled to receive these retirement grants before the end of 1972, though some of them would.

6. Taikoo acceded to the strikers' demands and made to them payments totalling $22,416,202, which amount was debited to the staff retirement reserve in the accounts of Taikoo. Taikoo sought to deduct the whole of this amount for the purposes of the assessment of profits tax for Taikoo's financial year 1972 (which covered the same period as the calendar year 1972). The assessor allowed $4,259,454, as properly paid under the approved retirement scheme to workers entitled to receive such payments, but refused to allow the balance of the $22,416,202 (i.e. $18,156,748).

General approach

7. It is necessary for me to consider to what extent it is proper for an appellate body to form its own conclusions on findings of fact made by the Board of Inland Revenue. We were referred to several cases on the subject and are content to follow the passage from Smith v. The Incorporated Council of Law Reporting for England and Wales⁽¹⁾, quoted by Yang, J. -

"If the facts stated are such that it is not possible for them to come to a particular conclusion of fact found, the court is not bound by the conclusion of fact which the commissioners have found with no evidence to support it. But if the facts stated are such that you may come to one conclusion or the other the fact that the court itself would have come to a different conclusion to that which the commissioners have come to is no reason for disturbing the decision of the commissioners."

8. I shall adopt this approach when considering the findings of fact of the Board.

9. For the purposes of this appeal the sections of the Ordinance to which I must look are sections 16(1) and 17(1)(b) and considerable reference has been made in the course of argument, and in the judgment appealed against, to C.I.R. v. Mutual Investment Co. Ltd.⁽²⁾.

In any consideration of that case it must be borne in mind that it concerned itself with an earlier section 16 which read:

"For the purpose of ascertaining the assessable profits of any person there shall be deducted all outgoings and expenses wholly and exclusively incurred during the basis period for the year of assessment by such person in the production of profits in respect of which he is chargeable to tax under this Part ..."

10. The present wording of section 16 is as follows:

"In ascertaining the profits in respect of which a person is chargeable to tax under this Part for any year of assessment there shall be deducted all outgoings and expenses to the extent to which they are incurred during the basis period for that year of assessment by such person in the production of profits in respect of which he is chargeable to tax under this Part for any period."

11. Section 17(1)(b) and (c) read:

"17. (1) For the purpose of ascertaining profits in respect of which a person is chargeable to tax under this Part no deduction shall be allowed in respect of -

12. In interpreting these sections, we have been assisted by the following passages from the Mutual Investment Case⁽²⁾ -

The first and second grounds of appeal

13. The grounds of appeal suggest various errors in law by Yang J.

14. The first is that the judge erred in deciding that the expenditure was deductible because he decided that it was not incurred for the purpose of producing profits but to enable the business to carry on.

15. The second is that he should have decided that the expenditure could not have been incurred for the purpose of producing "chargeable profits an excess of anticipated receipts over anticipated expenditure in the 3 1/2 month trading period which remained in the current financial year at the time of the expenditure".

Reasons for payments

16. The issue described by the Board in paragraph 31 of the stated case as "fundamental" was "whether Taikoo made the payment of $18 million odd required to settle the strike in the production of its taxable profits under section 16(1)."

17. The judge decided that the payments were made for the following reasons which were set out in the stated case:

18. The Board also says Taikoo gave in to the strikers' demands for the following further reasons:

19. The Board finally found as a fact that the paramount purpose of Taikoo was to avoid damages, known to be very substantial which would be suffered by it if the strike continued, and that the expenditure was incurred in the production of Taikoo's profits for the year of assessment 1972/73.

20. The trial judge summarizes the Board's conclusion in the following words:

"In order to avoid damages ... Taikoo paid the 'retirement grants' so as to be able to continue their business and the purpose of the business was of course to earn money."

21. As I see it, the essential purpose of the making of the payments was to bring the strike to an end. The purpose of bringing the strike to an end was to continue Taikoo as a going concern. There were a number of reasons behind the decision. Among them a wish to avoid substantial damages (including damage to goodwill) and to give effect to the merger.

22. It is to be noted that giving effect to the merger could not be assured by settling the strike. Another might ensue in the remaining three months. The avoidance of damage would be achieved at once, although it might again arise. This is a factor possibly not present in the minds of a management acting in the turmoil of a strike but its existence illustrates a possible danger - that of confusion between the cause of the strike and the purpose of the payments made to end it. The announcement of the merger led to the demands for retirement grants and the subsequent strike; but it does not follow that the payment of the retirement grants was made to facilitate the merger or to enable the taxpayer to wind up its business.

The first and second grounds

23. The first ground of appeal asserts that the trial judge equated a payment to enable a business to carry on with one incurred "with the purpose of producing profits". [Had he said "Taikoo paid the 'retirement grants' so as to enable Taikoo to continue in business and the purpose of continuing the business was to produce profits" instead of "and the purpose of the business was, of course, to earn money", he could not be faulted unless the basic question "Was the purpose of continuing the business to produce profits" was susceptible only of a negative answer.]

24. Mr. Barlow pointed to a number of factors which, he claimed, indicated that the purpose of continuing the business could not have been to produce profits. He relies on Edward v. Bairstow & Harrison⁽³⁾ which sets out the duty of an appellate court as -

"No more than to examine those facts with a decent respect for the tribunal appealed from and, if (we) think that the only reasonable conclusion on the facts found is inconsistent with the determination come to, to say so without more ado." (ibid p. 231)

I do not think this is inconsistent with the passage from Smith v. The Incorporated Council of Law Reporting for England and Wales⁽¹⁾ quoted earlier. However, I do not accept the suggestion that the taxpayer could not have envisaged making a profit in the year of assessment 1972/73 once the payment of $18,156,748 was made. The taxpayer came close to "breaking even" in that year, even though the payment was made.

25. By section 14 profits tax

"shall be charged for each year of assessment on every person carrying on a trade ... in the Colony in respect of his assessable profits ..... for that year from such trade ... (excluding profits arising from the sale of capital assets) as ascertained in accordance with this Part."

Section 16(1) provides for the deduction of outgoings and expenses to the extent to which they are incurred "during the basis period for that year of assessment by such person in the production of profits in respect of which he is chargeable to tax under this Part for any period"; section 17 forbids deductions in respect of various disbursements and expenses "for the purpose of ascertaining profits in respect of which a person is chargeable to tax under this Part." From these provisions I infer that it is "the year of assessment 1972/73" that should engage our attention, not the expectancy of the taxpayer as to the last 3?months of 1972.

26. Nor do I accept that the payment was of the nature of that disallowed in Godden v. Wilson Stores Ltd.⁽⁴⁾. That payment was made by a company going out of business and it was made, partly because it was going out of business and partly to avoid a possible law suit after it had gone out of business. It was not made for the purpose of the trade. The possible alternative way in which (as was suggested by Lord Evershed M.R.) the taxpayer there might have arranged its affairs so as to avoid liability seems to me to be more in point on the facts found here

"It might have been put so that Mr. Paton could have been invited to say 'I accept six weeks' notice instead of six months provided that my salary for the six months now pending is doubled'; and that would have been reinforced, perhaps, because ... it was essential that the rubber plantation should be continued and handed over as a going concern."

27. In Amalgamated Zinc (De Bavay's) Ltd. v. The Federal Commissioner of Taxation⁽⁵⁾ a company discontinued its business, after which its income derived solely from its investments. It remained liable to make contributions to a Workmen's Compensation Fund for the benefit of its former employees and claimed to deduct these payments from its assessable income. The claim was disallowed basically because "the outgoings in question have no relation whatever to the assessable income of the years in question". There the outgoings were made after the business had been discontinued not, as in our case, in order that it might continue for a limited period. Dixon J. however made the following observations (at page 309)

"In a continuing business, items of expenditure are commonly treated, as belonging to the accounting period in which they are met. It is not the practice to institute an inquiry into the exact time at which it is hoped that expenditure made within the accounting period will have an effect upon the production of assessable income and to refuse to allow it as a deduction if that time is found to lie beyond the period. And, in the case of expenditure for which the taxpayer contracted a liability during an earlier accounting period than that in which it has matured, it is not the practice to consider whether its effect upon the production of income of a still continuing undertaking has already been exhausted. The terms of sec. 23(1)(a) have never been understood as requiring such a thing (see Ward & Co. v. Commissioner of Taxes (1923) A.C. at p. 148 and Herald and Weekly Times Ltd. v. Federal Commissioner of Taxation (1932) 48 C.L.R. at p. 118)"

Admittedly this passage deals with a 'continuing business' but nevertheless it appears to me to support the contention that the basis year of assessment in its entirety must be considered not only that portion of it which remains to run after the date of the payment. It would be wrong to limit chargeable profits to an excess of anticipated receipts over anticipated expenditure in the 3?month period. The entire year must be considered.

28. For these reasons I consider that the first and second grounds of appeal must fail.

The remaining grounds of appeal.

29. The third ground of appeal was that error occurred as to the "characteristics of items of expenditure" required by law if the expenditure is to be deductible. The fourth was that, if the expenditure was incurred for the purpose of avoiding possible losses from damage due to the strike, section 17(1)(b) forbade its deduction. The fifth was that Morgan v. Tate & Lvle Ltd.⁽⁶⁾ was wrongly relied on. The sixth was that error arose

"in failing to rule that the taxpayer incurred the expenditure for the purpose of facilitating the merger of the taxpayers business with that of Whampoa Company, by which means the taxpayer would divest itself of the business in question, so that the only reasonable conclusion on the facts found was that the expenditure was incurred .... for the purpose of going out of business."

30. These grounds of appeal require a consideration of two questions:

31. What was the purpose for which the payments were made? The Board found that the immediate purpose of the payment was to persuade the strikers to return to work (Para. 34 of the case stated). This is not disputed, but the Crown argues that the Board was wrong in concluding that the paramount purpose of these payments was the production of profits for the year of assessment 1972/73.

32. The Board found that, had these payments not been made, various forms of damage of a serious nature would have followed. These included the possibility of sabotage of equipment, the payment of damages for broken ship-repairing contracts, damage to plant and machinery by reason of insufficient maintenance, the loss of business in a competitive market. The company, so the Board found, was influenced by these matters when making payments to the strikers.

33. In addition, (para. 37), the Board finds that one of the elements which influenced Taikoo to settle was the need to have Taikoo operational at the end of 1972 to enable the merger to proceed as planned. The Crown relies on this passage in support of its contention that the Board should therefore have regarded these payments as made, not for the purpose of producing profits, but for the preservation of assets and to safeguard the merger. Alternatively, the Crown argues that, if there was a mixture of purposes, there should be an apportionment and the case should be referred back to the Board for this purpose.

Purpose

34. A factor creating difficulty in this case was that the purpose of the payment (getting the workers back to work) was clearly regarded by the taxpayers as fruitful of further advantages. Its achievement was necessary before those further advantages could be obtained. While there was only one immediate purpose - to get the workers back to work - the taxpayer was motivated by the further advantages but before those could be achieved the immediate objective had to be realised. The advantages were reasons behind the purpose rather than the purpose itself and the purpose itself could be effected only by payment of the sum and payment of it in its entirety.

35. Section 16 says the payment shall be deducted "to the extent to which it was incurred ... in the production of profits". Section 17(1)(b) says it shall not be deducted if it was not "money expended for the purpose of producing" profits in respect of which a person is chargeable.

36. In my view, the payment being one to get the business functioning again (albeit only for 3½ months in its then form) must necessarily have been for the purpose of producing profits chargeable to tax. That the size of the payment was such as to leave it unlikely that profits attracting tax would ultimately be made during that year of assessment is irrelevant. The commercial wisdom of the payment is immaterial. As the judge rightly said:

"expenditure which is unremunerative is none the less a proper deduction if made with a view to producing profit."

37. I therefore hold that section 17(1)(b) of the Ordinance does not forbid the deduction of the payment.

Capital payments

38. Its deduction is forbidden by section 17(1)(b) if it is "expenditure of a capital nature". Although this question has been described as "a question of law for the courts" there does not appear to be any certain test as to the distinction between capital and revenue payments.

"Indeed, in many cases it is almost true to say that the spin of a coin would decide the matter almost as satisfactorily as an attempt to find reasons." [per Lord Greene in I.R.C. v. British Salmson Aero Engines Ltd.⁽⁷⁾]

39. Here the payment, although substantial and not recurrent, was not "once and for all"; a further strike requiring settlement might have arisen. The payment was to workers and did not bring into existence an asset. It enabled the business to carry on. Admittedly it had the effect of safeguarding the capital and it contributed to goodwill but not all such payments can be said to be of a capital nature. A watchman's wages, which safeguard assets, and payments for advertisements, which enhance goodwill, are examples of expenditure clearly of a revenue nature.

40. Mr. Barlow relied on Ward & Co. Ltd. v. Taxes Commissioner⁽⁸⁾ commenting on which Viscount Radcliffe said (in I.R.C. v. Appuhamy⁽⁹⁾):

"The rule then in question was expressed in the form that no deduction was to be made in respect of expenditure 'not exclusively incurred in the production of the assessable income' .... emphasis is thrown on the criterion that it is the effect of the expenditure in contributing to the income of the designated source that is to be considered. The opinion of the Board, delivered by Viscount Cave, L.C., held that the disqualification imported by the rule required that allowable expenditure must have been incurred 'for the direct purpose of earning profits'. This requirement was evidently regarded by them as a highly restrictive one: for it was treated as having the effect of disallowing expenditure intended to influence public opinion against prohibition of intoxicants, a measure which, if introduced, would certainly have had a destructive effect on the profits of the business of the brewing company, the assessee concerned. Such expenditure, though disallowed, was related to the maintenance of the business itself, the value of its goodwill and the preservation of its profitability in, at any rate, a recognisable sense. (The expenditure in Appuhamy's Case had no such comparable claim to recognition for it was expenditure incurred by the appellant to assert his claim to his title to the business itself.)

I do not consider that Ward's Case or Lord Radcliffe's comment above help the appellant. I do not regard Viscount Radcliffe as saying that all expenditure related to the maintenance of the business, the value of its goodwill and the preservation of its profitability should be disallowed; only that the expenditure in Ward's Case was disallowed even though it related to those matters. I, therefore, do not consider that deduction of the expenditure is forbidden either by section 17(1)(b) or by section 17(1)(c).

41. The final question is whether the $18,156,748 should be apportioned. Ronpibon Tin No Liability v. The Federal Commissioner of Taxation⁽¹⁰⁾ was an example of a case where expenditure not wholly referable to the gaining of assessable income was ordered to be apportioned. That was very different on its facts from this case, in which the workforce could not have been persuaded to return to work by the payment of any lesser sum. In Ronpibon Tin Case the assessable income might have been secured by the payment of a lesser one. The fact that one of the motives for the payment in our case may have been to secure the merger does not affect the matter. The paramount purpose of the expenditure could only be served by payment of the entirety, so that no question of apportionment can arise.

42. I would dismiss this appeal with costs.

Representation:

Mr. Barrie Barlow, C.C. for appellant.

Mr. Horton (J.S.M.) for respondent.

(1) (1914) 3 K.B. 674.

(2) (1967) A.C. 587.

(3) 36 Tax Cases 207 at 229.

(4) 40 Tax Cases 161.

(5) 54 Commonwealth Law Reports 295.

(6) (1955) A.C. 21.

(7) (1938) 2 K.B. 482 at 498.

(8) (1923) A.C. 145.

(9) (1963) 1 All E.R. 69 at 71.

(10) 78 Commonwealth L.R. 47.

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

Date of Judgment: 13 December 1979

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JUDGMENT

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Li, J.:

43. The short question in this appeal is whether Mr. Justice Yang is correct in upholding the finding of the Board of Review that the sum of $18,156,748 paid by the respondent company (Taikoo) to its employees in settlement of the strike in the year 1972 is an allowable deduction in computing the profits of Taikoo for the year 1972/73. The facts are set out in the case stated by the Board of Review and have been clearly and fully considered by my brother Leonard in his judgment with which I respectfully concur. At the risk of repetition, however, and in deference to counsel's argument I shall give my own reasons for my concurrence. I propose therefore to refer only to some salient features of the facts upon which the Board and the learned judge in the Court below found their decisions.

44. Taikoo engaged, inter alia, in the business of shipbuilding and shiprepairing for which they employed a large number of workers. Subject to certain conditions retirement grants were payable to these workers on completion of a certain number of years of service upon retirement. The system had been established for years. Provisions for retirement grants were made by annual transfers from Taikoo's profits to a "Retirement Grant Reserve Account". Payments of retirement grant were made each year out of this reserve account or out of the profits of the year. The retirement schemes were appeared by the Commissioner of Inland Revenue under Section 87 A of the Inland Revenue Ordinance. Payments made from year to year were allowed deductions for profitstax purposes under Section 16(1) of the Ordinance provided they were paid to the persons who were qualified for payments on retirement in accordance with the terms of their approved schemes.

45. On the 13th September Taikoo entered into an agreement with the Hong Kong Whampoa Dock to form a new company namely, The Hong Kong United Dockyards Ltd., (HUD) to take over the two companies' shiprepairing and shipbuilding business as from the 1st January, 1973.

46. On the 16th September 1972 Taikoo announced to its workers that it would cease its shipbuilding and shiprepairing business on the 31st December, 1972 and transfer such business to HUD in accordance with its agreement with Whampoa. The workers of Taikoo were quite naturally suspicious that their rights to the retirement grant would be in jeopardy. They staged a strike on 18th September as a result of which work at Taikoo Dockyard came to a complete standstill. Negotiations took place between the management and the representatives of the workers' union.

47. On the 21st September, 1972 a circular was issued to the workers the important terms of which contain the following passages:-

The workers were not satisfied with this assurance. The strike continued. Further negotiations took place until 22nd September, 1972 when the management of Taikoo agreed to pay out such retirement grants to all workers irrespective of their years of service in a Circular No. 278/72 in the following terms:-

"In order to confirm the basis of the payment of accrued retirement benefits, as requested by representatives this afternoon, the following statement is given:

This statement is given on the clear understanding from representatives, that these are the only major points requiring clarification, which have prevented the resumption of work and it is trusted that agreement on these points will be confirmed to Management by not later than 4.30 p.m."

48. Thus satisfied with the terms of settlement the strikers resumed work as from 25th September, 1972. A sum total of $22,416,202 had been paid to the strikers in November, 1972. The company sought to deduct the said sum for profits tax purposes. The assessor allowed $4,259,454 as properly paid under the approved retirement schemes and disallowed any deduction of the balance of $18,156,748 (the disputed sum) for profits tax purposes. Taikoo objected to this disallowance; but the Commissioner rejected the objection. Taikoo appealed to the Board of Review which found for Taikoo. The Commissioner appealed against the Board's decision by way of case stated to Mr. Justice Yang who confirmed the Board's findings and decision. Hence the appeal to this Court.

49. The grounds of appeal are listed and filed before this Court. Basically they centred around three points of contention:-

50. In order to consider more fully the validity of the aforesaid contentions, it is necessary to relate further to the following facts put before the Board of Review:-

51. Having regard to the materials before the Board of Review I am of the opinion that their findings that the disputed sum was not of a capital nature is reasonable. Counsel for the Commissioner relies on the case of British Insulated & Helsby Cables, Ltd., v Atherton in 1926 A.C.205 in which it was held that a lump sum payment by the appellant Company to form the nucleus of a pension fund for its employees was capital expenditure. In his judgment Viscount Cave said at p.214:-

"The payment of ?1,784 which is the subject of dispute, was made, not merely as a gift or bonus to the older servants of the appellant company, but (as the deed shows) to "form a nucleus" of the pension fund which it was desired to create; and it is a fair inference from the terms of the deed and from the Commissioners' findings that without this contribution the fund might not have come into existence at all. The object and effect of the payment of this large sum was to enable the company to establish the pension fund and to offer to all its existing and future employees a sure provision for their old age, and so to obtain for the company the substantial and lasting advantage of being in a position throughout its business life to secure and retain the services of a contended and efficient staff. I am satisfied on full consideration that the payment was in the nature of capital expenditure, and accordingly that the deduction of the amount from profits, although not expressly prohibited by the Act, was rightly held by the Court of Appeal not to be admissible."

52. Earlier in the same judgment, however, Viscount Cave did not say that a lump sum of payment was incapable of being regarded as revenue expenses. Thus at p.213 he said:-

"But the criterion suggested is not, and was obviously not intended by Lord Dunedin to be, a decisive one in every case; for it is easy to imagine many cases in which a payment, though made "once and for all, "would be properly chargeable against the receipts for the year. Instances of such payments may be found in the gratuity of £1,500 paid to a reporter on his retirement, which was the subject of the decision in Smith v Incorporated Council of Law Reporting for England and Wales and in the expenditure of £4,994 in the purchase of an annuity for the benefit of an actuary who had retired, which, in Hancock v General Reversionary and Investment Co., was allowed, and I think rightly allowed, to be deducted from profits. But when an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, I think that there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital."

53. The case of British Insulated and Helsby Cables Ltd., is clearly distinguishable in that appellant's payment in that case was not only once and for all but with a view to bring into existence an asset or an advantage for the enduring benefit of its trade. Its reasoning is in line with the case of Sun Newspaper Ltd., v The Federal Commissioner of Taxation 1939 61 Commonwealth Law Report 337 in which it was held that the lump sum payment to prevent competition of a rival newspaper was capital expenditure in that it was a purchase of an enduring benefit for the paper's trade in future.

54. In the case before us Taikoo was paying for the workers to end the strike and to continue work. By virtue of the company's circular to the workers and by virtue of its agreement with the Whampoa Dock, Taikoo was to retain all those workers who would opt to remain working for Taikoo though they would, in that event, be seconded to HUD. They remain Taikoo's employees. What enduring benefit could there be by virtue of ending the strike and the continuance of work? One can imagine that so long as there are managements and employees, in this day and age, there may be strikes, albeit for other causes.

55. Looking at the case from another point of view, the company had not ceased its business. The Merger Agreement made provisions for HUD to discharge the contractual obligations on behalf of Taikoo in respect of any contract accepted prior to 1st January, 1973, the profits of such contract would, subject to certain deductions, be paid to Taikoo. On the other hand Taikoo would still be responsible for the retirement grants payable to the qualified members of the scheme who opt to remain with Taikoo. I cannot accept the argument of Counsel for the Commissioner that the discharge of recurrent liability by payment of a lump sum must, of necessity, be equivalent to an acquisition of a capital asset. By virtue of the Circular dated the 22nd September, 1972 to which I have referred, it is evident that Taikoo's payment to the workers were retirement benefits already earned by the workers up to the 31st December, 1972 only. It is a contingent liability accrued and not a future liability. The settlement merely removed the contingency and advanced the date of maturity. The payment is not a capital expenditure unless it is for the enduring benefit of the "profit-making subject" which is distinguishable from the "profit-making operation". Such are the terms used in the Sun Newspaper Ltd., Case. If the payments were for the preservation of the company's plants and machinery it would have been simple for Taikoo to close down the dockyard and dismiss all the workers on strike. I find that para. 38 of the case stated makes sense in that the Board finds as follows:-

"However, we find that, if the merger and interests of HUD were the paramount considerations of Taikoo, these could have been achieved without undue trouble by rejecting the strikers' demands, closing the dockyard and putting it on a care and maintenance basis. This would probably require the merger agreement to be renegotiated, but presumably as Whampoa would have been in a similar position there would be no serious difficulty. Taikoo would save $18 million odd by taking these steps, less overhead and loss of profit on work not accepted, which balance the Revenue alleges to be substantial."

56. Perhaps I may add that there was nothing to prevent Taikoo from negotiating with Whampoa and the ship-owners to transfer the eight vessels then lying in Taikoo's dock to Whampoa for repair and to sacrifice all the future contracts for the next few months unless the company had the purpose of earning profits in mind.

57. [*There is no doubt that Taikoo continued to exist,] There is yet another point which has not been considered by any one.* nor is there any doubt that a large number of workers would remain with Taikoo to be seconded to HUD. Taikoo would still be responsible for the retirement grant or benefit to such workers. In view of the approved scheme and the arrangement between the Commissioner and Taikoo I have serious doubt if the Commissioner could validly resist a claim by Taikoo to amortize the disputed sum in the future years of its existence. This goes to illustrate that the payment of the disputed sum and all the retirement grants were to discharge Taikoo's liability already incurred. The only question was that of advancing the date for calculation. For reasons aforesaid I am of the opinion that the payment of the disputed sum could not be said to be of a capital nature in this case. There is ample evidence to support the Board's findings as well as that of my brother Yang's conclusion that it is not capital expenditure. Once this question is answered the rest is comparatively simple.

58. Counsel for the Commissioner further contends that the expenditure is not deductible under Section 16(1) of the Inland Revenue Ordinance. That sub-section provides that:-

"In ascertaining the profits in respect of which a person is chargeable to tax under this Part for any year of assessment there shall be deducted all outgoings and expenses to the extent to which they are incurred during the basis period for that year of assessment by such person in the production of profits in respect of which he is chargeable to tax under this Part for any period, ......... "

Mr. Barlow bases his argument on the fact that the payment of over $18,000,000 with a view to earning some $17½ m. in a total of 9 months' period preceding the 31st December, 1972 as being entirely out of proportion and as proof that the expenditure was not for the production of profits. The fallacy in this argument is two-fold. By its nature this argument has confused the term "assessable profit" with the term "chargeable profit". The former is net profit and the latter is gross profit which is potentially assessable subject to deduction. The second fallacy is that learned counsel omits the chargeable profits Taikoo could have earned up to the 31st March, 1973 - the end of the tax year through its agent HUD. There is evidence before the Board that Taikoo had continued to accept repairing contracts and other ship building contracts up to the 31st December, 1972. Such contracts accepted and unfinished could have been performed by HUD as Taikoo's agent.

59. In the course of this argument, Counsel also conceded that had the profits in the trading year ending the 31st December, 1972 exceeded $18,000,000 he would not have been in a position to challenge the deduction. That is being wise after the event. The argument has been dealt with adequately in the Court below I am contend to leave it with these observations apart from expressing my agreement.

60. This leads me to consider the case of Godden v A. Wilson's Stores (Holdings), Ltd., in 1962 40 Tax Cases, 161. It was there held that the £1,900 paid to the manager of the taxpayer company as salary in lieu of notice was not expenses incurred to enable the company to carry on and earn profits in the trade. This again is distinguishable from the case before us. In that case the payment was made as salary in lieu of notice two days before the company ceased its business. It was paid to discharge an employee not to retain him as in the present case. The tax paying company ceased business two days thereafter and there was no business to carry on. Even so at page 174 of his judgment dismissing the taxpayer's appeal Lord Justice Upjohn, as he then was, said:-

61. I have come to the conclusion that the payment of the disputed sum is of a revenue nature. There is no dispute that the payment was made to end the strike and to enable the workers to continue work. On the primary facts as disclosed in oral and documentary evidence I find that Taikoo continued its business beyond the 31st December, 1972 of shipbuilding and shiprepairing in respect of contract received prior to the 31st December, 1972, albeit through the HUD as its agent. The only logical conclusion is that the purpose for ending the strike is to enable the company to continue its business for the production of chargeable profits. I am of the opinion that the whole disputed sum is deductible from the chargeable profits of the company under Section 16(1) of the Inland Revenue Ordinance.

62. Counsel for the Commissioner also suggests that, in view of the Board's finding in para. 42 of the case stated, the disputed sum should be apportioned so that only that portion of the expenses incurred for the production of chargeable profits would be deductible. I cannot accede to this request either. The Board's finding is clear. Counsel no doubt relies on the terms "to avoid damages" to mean loss of plant, machinery and goodwill. However, having regard to the Board's findings in para. 38 of the case stated the "damages" the Board had in mind could only be referable to damages arising from shiprepairing contracts and loss of business. The loss of goodwill, machinery or plant might be motives which influenced the decision to settle with the workers. There is no evidence that the workers would settle for anything less than the full payment of what were due to them in the form of retirement grants. The paramount purpose was to get the workers to resume work so as to continue business. This is different from the case of Ronpibon Tin No Liability v Federal Commissioner of Taxation, 78 Commonwealth Law Report 47 where there were two distinct lines of profits: that of investment and the other of trading.

63. In conclusion I only wish to mention that the circumstances under which the Court of Appeal may intervene and reverse the conclusion of the Court below and the Board of Review are that "the facts found are such that no person acting judicially and properly instructed as to the relevant law could have come to the determination under appeal" or "the state of affairs is such that the true and only reasonable conclusion contradicts the determination" - per Lord Radcliffe in Edwards v Bairstow Vol. 36 T.C. 207.

64. I am unable to say that such state of affairs exists in this case. For the reasons aforesaid the appeal must be dismissed.

Representation:

Mr. Barrie Barlow (Crown Counsel) for appellant

Mr. Horton (J.S.M.) for respondent