Kowloon Stock Exchange Ltd v. Commissioner of Inland Revenue

Case No.HCIA 1/1980[1985] 2 HKC 461

Court

HCIA

Date—

Judge—

Case Document

100%Judiciary

HCIA000001/1980

Headnote

1.	Secs. 24(1) & (2) of the Inland Revenue Ordinance Cap. 112 make special provision for the recovery of Profits Tax with respect to a "club or similar institution" and a "trade association".
2.	The Kowloon Stock Exchange Ltd. is not a "club or similar institution" but is a "trade association".
3.	Founders contributions and entrance fees payable on being elected to membership are not "subscriptions" within Sec. 24(2).

Dates of hearing : 28th & 30th June, 1983.

Date of delivery of judgment : 13th July, 1983.

IN THE COURT OF APPEAL	Inland Revenue Appeal
	No. 1 of 1980

BETWEEN

	Kowloon Stock Exchange Ltd.	Appellant
	and
	Commissioner of Inland Revenue	Respondent

___________________________

Coram: Hon. Leonard, V.-P., Cons & Barker, JJ.A.

Date: 13th July, 1983.

___________

JUDGMENT

___________

Cons, J.A :

1. The Kowloon Stock Exchange Ltd. ("the exchange") is a company limited by guarantee, incorporated on the 10th of March 1970. Its objects are set out in the Memorandum of Association, the principal ones being:-

"	(a)	To furnish, purchase, take on lease, hire or otherwise acquire, exchange rooms, security market places, meeting places and other facilities for the convenient transaction of business by stock brokers, share brokers, exchange brokers and brokers in gold and silver and other precious metals, commodities, foreign exchange and money of all kinds and to obtain licences in that behalf for members where required.
	(b)	To maintain high standards of commercial honour and integrity among its members and to promote and maintain just and equable principles of trade and business.
	(c)	To protect the interests of such brokers, and to promote honourable practices.
	(d)	To record transactions between such broker and to furnish reliable quotations of the price of shares and stocks, gold and silver and other precious metals, commodities and foreign exchange and money of all kinds.
	(e)	To occupy and take up a role with similar organisations and associations in the vital delicate and rapidly changing aspect of the Hong Kong economy - the finance of Hong Kong industry and the provision of necessary safeguards of the investors who directly and indirectly entrust their savings to the stock and shares markets.
	(f)	To act as arbitrators in the settlement of all disputes and differences between member brokers or between member brokers and their clients arising in the course of business and of those between any parties."

2. In pursuance of the first object the exchange obtained premises, curiously enough on Hong Kong Island, and opened its doors for business in January 1972.

3. By the Articles of Association the management and control of the exchange is in the hands of a committee consisting of the 14 Founder Members and 10 others elected by the general membership. Election of members, restricted to 150, is in the hands of the same committee. On election each new member is required to pay an entrance fee of $20,000 and a monthly subscription not exceeding $500. (In September 1973 the Articles were amended to provide that no subscription should be paid to the exchange but that instead members should be liable to reimburse the exchange for expenses incurred by the exchange on their behalf, as might a from time to time be decided by the committee. But nothing turns on that amendment in this appeal.) Non-payment of dues renders the member liable to expulsion and the committee has disciplinary powers should there be a breach of the exchange rules or conduct "injurious to the character or interests, or prejudicial to the objects, of the exchange".

4. It can be seen from this brief summary that both the constitution and the organisation of the exchange are much the same as in many sporting, political or other clubs. From this it is said to follow that for tax purposes it is "a club or similar institution". The relevant section is Section 24(1) of the Inland Revenue Ordinance Cap. 112 :-

"Where a person carries on a club or similar institution which receives from its members not less than half of its gross receipts on revenue account (including entrance fees and subscriptions), such person shall be deemed not to carry on a business; but where less than half of its gross receipts are received from members, the whole of the income from transactions both with members and others (including entrance fees and subscriptions) shall be deemed to be receipts from a business, and such person-shall be chargeable in respect of the profits therefrom."

5. The Ordinance itself contains no definition of a club. 6 Halsbury 4th Ed. para. 201 gives this : -

"	A club, except a proprietary club or an investment club, may be defined as a society of persons associated together, not for the purposes of trade, but for social reasons, the promotion of politics, sport, art, science or literature, or for any other lawful purpose; but trading activities will not destroy the nature of a club if they are merely incidental to the club's purposes. The association must be private and have some element of permanence."
	Daly's Club Law, 7th Ed. puts it this way :- .........................................................................................

The word 'club' means essentially an association of individuals in away that involves to some degree the factors of free choice (which connotes a power of exclusion), permanence, corporate identity and the pursuit as a common aim of some joint interest other than the acquistion of gain (or some mutual advantage directly connected with the acquisition of gain, such as those provided by membership of a professional society or trade union). It is the last-named qualification that distinguishes clubs from business or professional partnerships, and from trade unions and the like. Nevertheless, the mere fact that the acquisition of gain may be incidental to the true activities of an association does not appear to prevent the association from having the character of a club."

6. In Bennett v. Cooper ⁽¹⁾ Dixon J., sitting in the High Court of Australia gave this summary :-

"In most attempts to state the characteristics of a club prominence is given (a) to the nature of the objects for which the members are associated in a body, (b) to the contribution of members to a common fund to meet the expenses, and (c) to the existence of rules governing the mode in which persons may be chosen for admission to membership. The objects may be social or sporting or they may be for the pursuit or promotion of some branch of knowledge or of art, but the purpose must not be gain; for that would mean a partnership or trading company. It is not necessary that gain to the institution should be rigidly excluded from its every activity or operation; it is the purpose for which the body is established that must not include the pursuit of gain to the body or its members if it is to be a club. In short the association may be formed for any object that is neither gainful nor unlawful see Wertheimer on Clubs, 5th ed. (1935), Ch. I., and Halsbury, Laws of England, 2nd ed. vol. 4, par. 877."

7. He went on to refer to the description given by Griffiths C.J. in The Bohemians Club v. The Acting Federal Commissioner of Taxation⁽²⁾: -

"A voluntary association of persons who agree to maintain for their common personal benefit, and not for profit an establishment the expenses of which are to be defrayed by equal contributions of an amount estimated to be sufficient to defray those expenses, and the management of which is entrusted to a committee chosen by themselves."

This description was accepted by their Lordships of the Privy Council in Fletcher v. The Income Tax Commissioner⁽³⁾.

8. We have set out these references at length to show that what we take to be the common understanding of the word "club", namely, an association formed for other than business purposes, is supported by good authority. We note that in each emphasis is placed on the absence of financial advantage to the members, other than as merely incidental to the general purpose. In our view this feature is of crucial importance. A predominant intention to benefit members in that way is by itself sufficient to prevent an association having otherwise common characteristics from being ranked as a club.

9. Now there can be no doubt that those who join the exchange do so with the object of personal financial gain. Counsel however has sought to distinguish the object of the members from that of the exchange itself. He observes that while the exchange does provide facilities for members to make money on their own account, and by their own individual efforts, the exchange by itself does not make a profit; and at the same time it serves the community in general by providing both a forum wherein limited companies may raise finance for their business activities together with a well ordered and regulated market in which the public may buy and sell shares by way of investment.

10. With respect to counsel we do not think that the exchange can be thus divorced frog its members. Without them it would be no more than an empty and useless shell. It was for them that it was originally created and through them that in reality it exists. They are an integral part of its operation. No doubt some advantage does also accrue to the community as a whole, but the primary object of the exchange is the financial benefit of those who belong. For this reason it cannot be classified as a club.

11. When we pass on to the words "or similar institution" we find it difficult to envisage what kind of institution the Legislature may have had in mind. But we do not propose to speculate. As we have already observed, the dominant exclusionary feature of a club is gain or profit to its members. In our view whatever other similarities there may be, that feature remains of paramount importance in answering the question of whether anything is or is not "a similar institution". We thus conclude that any association which has as its primary object the financial benefit of its members likewise cannot fall within that further phrase.

12. The Board of Review has posed three questions for our consideration. To that which asks:-

"	Whether on a proper construction of the provisions of Section 24(1), having regard to the evidence adduced before the Board of Review, the appellant was carrying on a 'club or similar institution'."
	Our answer is "No".

13. Having come to the conclusion that the exchange is not a club for the purposes of Section 24(1), it then becomes necessary to decide whether it is caught by the provisions of sub-section (2) which, at the time we are concerned with applied only to a person carrying on a "trade association".

14. Trade as such is not defined in the Ordinance, which merely provides in Section 2(1) that it shall, include "every trade and manufacture, and every adventure and concern in the nature of trade".

15. This is very similar to the definition in the United Kingdom Income Tax Acts so that the Board of Review felt themselves able to rely upon the view adopted in Barry v. Cordy⁽⁴⁾ that "'trade' is ....... in legal usage, a term of the widest scope". The Board also referred to the comments of Dixon J. in the High Court of Australia :-

"It has been said that 'trade' strictly means the buying and selling of goods. That, however, is a specialized meaning of the word. The present primary meaning is much wider, covering as it does the pursuit of a calling or handicraft, and its history emphasizes rather use, regularity and course of conduct, than concern with commodities."(5)

16. Similar views have been expressed in the House of Lords, e.g. Lord Reid in Ransom v. Higgs⁽⁶⁾ :-

"	The Income Tax Acts have never defined trade or trading farther than to provide that trade includes every trade, manufacture, adventure or concern in the nature of trade. As an ordinary word in the English language 'trade' has or has had a variety of meanings or shades of meaning. Leaving aside obsolete or rare usage it is sometimes used to denote any mercantile operation but it is commonly used to denote operations of a commercial character by which the trader provides to customers for reward some kind of goods or services.
	The contexts in which the word 'trade' has been used in the Income Tax Acts appear to me to indicate that operations of that kind are what the legislature had primarily in mind. If I go back to the Act of 1842 I find that Schedule D covered inter alia the annual profits or gains arising from any profession, trade, employment or vocation and that Rule 1 of Case I provided that the tax was to he charged on the balance of the profits and gains of such trade, manufacture, adventure or concern in the nature of trade. And I find nothing in later legislation to alter the fundamental conception of trade in that old Act."

17. However we are with respect able to draw little if any assistance from these authorities, for the structure of the United Kingdom Tax Laws is not the same as that provided by the Inland Revenue Ordinance. In particular the Legislature there has drawn no express distinction between trade and business as it has done in this jurisdiction. Profits Tax is recoverable in accordance with Part IV of our statute. The actual charging section is Section 14 which reads, in part, as follows :-

"Subject to the provisions of this 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 the Colony in respect of his assessable profits arising in or derived from the Colony 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."

18. The threefold expression "trade, profession or business" is repeated in most of the succeeding sections of the part, being occasionally restricted to "trade or business" as e.g. in Sections 16B and 16C. Some of the instances may perhaps result from later amendments, like Section 24(2) itself, which now refers to persons carrying on a "trade, professional or business association". Counsel for the exchange however does not rely on that amendment. The important feature which he stresses is that even at the relevant time Section 14 did include the threefold expression. He submits, and we think correctly, that the Legislature must therefore have intended to draw some distinction between the three, otherwise only the word "trade" would have been used, or perhaps "business", either of which would have been construed in the same way as in the United Kingdom.

19. What then is the distinction between a trade and a business? We have come to the conclusion that it must be as suggested in the Bank of New South Wales, and indeed as it was accepted in the ancient case of Doe d. Wetherell v. Bird ⁽⁷⁾, i.e. trade is restricted to the buying and selling of goods.

20. It is submitted however that even so stock brokers cannot be said to be traders for, as a general rule, they do not buy and sell shares for themselves but do so only as agents for others against commission. We do not think that is sufficient distinction. Apart perhaps from the occasional giving of advice the whole compass of a stack broker's occupation is contained in the buying and selling of shares. The precise manner in which he makes his profit therefrom appears to us to be immaterial. Our view that a stock broker is thus a trader finds support from Hannen J. in Mollett v. Robinson ⁽⁸⁾ :-

"The definition of a broker given by my Brother Blackburn in his work on the Contract of Sale,p. 81, is as follows :- 'A broker for sale is a person making it a trade to find purchasers for those who wish to sell, and vendors for those who wish to buy, and to negotiate and superintend the making of the bargain between them.' This is the proper description of a broker for sale throughout the whole commercial world."

21. 23 Halsbury (4th Ed.) para. 314 and Simons Taxes para. B1.1216 divide trade association into three main classes, namely (1) those which exist to watch the general interest of members, (2) those which provide a specific service, and (3) those which exist for the purpose of maintaining prices. For the reasons we have just given, we are satisfied that the exchange falls within classes (1) and (2). To the question which asks -

"Whether on a proper construction of the provisions of Section 242(2), having regard to the evidence adduced before the Board of Review, the appellant could be said to have been carrying on a trade association."

Our answer is "Yes".

22. The third and final question is the true construction of the word "subscriptions" as it appears in the phrase "receipts by way of subscriptions" in the same sub-section. The importance of this will be seen when the sub-section is set out (as it was) in full:-

24(2).

Where a person carries on a trade, association in such circumstances that more than half its receipts by way of subscriptions are from persons who claim or would be entitled to claim that such sums were allowable deductions for the purposes of section 16, such person shall be deemed to carry on a business, and the whole of the income of such association from transactions both with members and others (including entrance fees and subscriptions) shall be deemed to be receipts from business, and such person shall be chargeable in respect of the profits therefrom."

The receipts of the exchange over the relevant period include the following amounts :-

"Members' subscriptions $130,660.

Entrance fees $5,745,000.

Founders contributions $350,000."

23. The 14 Founder Members were not required to pay entrance fees but each contributed instead the sum of $40,000. It is common ground that these contributions and the other members' entrance fees are not allowable deductions for the purposes of Section 16, so that if they may properly be said to be "subscriptions" the exchange will, in the circumstances, escape the clutches of the sub-section.

24. We have been referred to the Shorter Oxford English Dictionary for the meaning of the word "subscription", in particular the meanings given at Nos. 7 and 8 :-

"	7.	The action or an act of subscribing money to a fund or for stock; the raising of a sum of money for a certain object by collecting contributions from a number of people; a scheme for raising money in this way. Also, an undertaking or agreement to subscribe so much.
	8.	A contribution of money for a specified object; spec the fixed sum promised or required as a periodical contribution by a member of a society etc. to its funds, or for the purchase of a periodical publication, or in payment for a book published 'by subscription'."

25. These two references alone show that the word does not always carry a single specific meaning. We have therefore to look at the context in which it is used and when we do this we have no hesitation in concluding that the Legislature did not intend entrance fees to fall within the word "subscriptions". This is apparent from the express reference to such fees later in this sub-section. We are confirmed in our view by the history of the legislation. Until 1972 the sub-section read "receipt by way of entrance fees and subscriptions". The words "entrance fees and" were deleted by Ordinance 40 of that year.

26. The position as to Founders contributions is not quite so clear, but we think on balance that by the similarity of their nature to that of entrance fees, they too must be excluded. In any event the amount received by the exchange under this head would have made no material difference.

27. The final question asks "whether the words 'receipts by way of subscriptions' in Section 24(2) exclude the sum subscribed by members of the Kowloon Stock Exchange by way of founder's contributions and entrance e fees". Our answer to that question is "Yes"'.

28. We should mention for the sake of completeness that these questions have been brought direct to this court with leave granted in accordance with Sec. 69A of the Ordinance. For the reasons weave given the appeal must be dismissed.

(P.F.X. Leonard)

Vice-President

(D. Cons)

Justice of Appeal

(Dennis Barker)

Justice of Appeal

(1) (1948) 76 C.L.R. at 570

(2) (1918) 24 C.L.R. at 334

(3) (1972) A.C. 414 at 422

(4) (1946) 2 All E.R. 396 at 399

(5) Bank of New South Wales v. The Commonwealth (1948) 76 C.L.R. 1 at 381

(6) (1974) 1 W.L.R. 1594 at 1601