Richfield International Land and Investment Company Limited v. Commissioner of Inland Revenue

HCIA000006/1987

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Headnote

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Inland Revenue - Profits Tax - Sale of capital asset - Evidence required to justify a change of intention - Approach of the court on appeal from the Board.

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

INLAND REVENUE APPEAL NO. 6 OF 1987

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BETWEEN

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Coram: Hon. Sears J. in Court

Date of Hearing: 10th March 1988

Date of Delivery of Judgment: 10th march 1988

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JUDGMNT

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1. This is an appeal by way of case stated under Section 69 of the Inland Revenue Ordinance. The Appellant, company is Richfield International Land and Investment Company Limited and they were incorporated in September 1972 as a private limited company, they became a public company later that year. The precise factual position with regard to this company can be found from the Statement of Fact's which was agreed between the company and the Commissioner and are found as part of the case stated. Essentially the company has a portfolio of properties. The one in issue in this case is Gardena Court in Kennedy Road, which is a block of some 15 apartments. This property was acquired in 1972 by the Appellant Company by an exchange of shares, and was sold in 1980. On the sale of that property the Inland Revenue assessed under the Ordinance the profits as assessable to profits tax. The tax which would have to be paid by this company in respect of this property is K$3,348,537.

2. The statutory provisions are found in Part IV of the Ordinance; by Section 14 "...profits tax shall be charged ... in respect of his assessable profits ... (excluding profits arising from the sale of capital assets)".

3. An appeal can be made against the assessment under S66 and by virtue of S68(4) the onus of proving that the assessment appealed against is excessive or incorrect lies on the taxpayer.

4. The Company appealed against the assessment raised on the profits attributable on the Sale of Gardena Court. The Company contended that this was a disposal of a capital asset and therefore exempt from tax.

5. It has been difficult to discover from the case stated what are the facts which were found and what are the opinions the Board came to on those facts. I have been given many hundreds of pages of exhibits which appear to have nothing to do with this appeal and have not been referred to. I note that in Chinachem Investment Ltd. v. Commissioner of Inland Revenue 1986 No. 116 Sir Alan Huggins V-P made similar comments in an appeal before the Court of Appeal.

6. The Court's role is to decide as a matter of law whether the Board's decision is right. It should not interfere with findings of fact.

7. It is important, therefore, for the case stated to state the facts which are fount. If this is not done, the task facing the Court becomes more difficult and on this appeal the only clear finding of fact is that Gardena court was acquired as a capital asset.

8. The law on this topic is now clear and should not cause the Board or the Commissioner any problems.

9. The leading case is Simmonds v. IRC (1980) 1 WLR 1196 I do not set out the speech of Lord Wilberforce and Lord Salmon in full but I commend their close reading by those involved in making assessments on profits tax arising from the disposal of assets which might be capital or trading assets.

10. It is not possible for an asset to be both trading stock and permanent investment at the same time. If it is a capital asset it can change if there is clear evidence of an intention to change, but Lord Salmon neatly encapsulates the proposition when he said "An investment does not turn into trading stock because it is sold".

11. The Court's role is to examine this Case and uphold any factual decision of the Board if it can. In Evans v. Bairstow (1956) AC14, Lord Radcliffe lucidly set the position at p35-36:

"If a party to a hearing before commissioners expresses dissatisfaction with their determination as being erroneous in point of law, it is for them to state a case and in the body of it to set out the facts that they have found as well as their determination. I do not think that inferences drawn from other facts are incapable of being themselves findings of fact, although there is value in the distinction between primary facts and inferences drawn from them. When the case comes before the court it is its duty to examine the determination having regard to its knowledge of the relevant law. If the case contains anything ex facie which is bad law and which bears upon the determination, it is, obviously, erroneous in point of law. But, without any such misconception appearing ex facie, it may be 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.  In those circumstances, too, the court must intervene. It has no option but to assume that there has been some misconception of the law and that this has been responsible for the determination. 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. For my part, I prefer the last of the three, since I think that it is rather misleading to speak of there being no evidence to support a conclusion when in cases such as these many of the facts are likely to be neutral in themselves, and only to take their colour from the combination of circumstances in which they are found to occur."

12. As far as the facts of this case are concerned, the Board accepts that this company was an investment company and therefore this asset was a capital asset. At page 8, they examine a minute of the company's board of directors of 15th December 1976 which figured prominently in their reasoning. In my judgment, it was this minute which caused them to consider that this company was in reality a trading company. The minute of 15th December 1976 recorded that authority was given to handle certain matters of sale and purchases in Hong Kong and America.

13. Now that appears to be the initial matter which caused the Board to then go on to say "This led us to believe ... that at some time during the passage of time culminating in the minute of 18th April 1978 (which clearly indicated a willingness to sell other flats in Kellett Heights) Mr. Wong lost his resolve...".

14. The Board then posed itself a question "Was he merely procuring the Company to realize its investments or had he embarked the Company into trading".

15. In my judgment, the reasoning of the Board is illogical. The minute provides no evidence for a conclusion that the Company had embarked into trading. Further the Board then appear to conclude that as there had been sales of other assets it followed that any sale would be trading.

16. The other illogical conclusion of the Board is that as the Company had submitted to profits tax on earlier sales, then any subsequent sale must involve trading.

17. The Board do not appear to have addressed their minds to what the real issue was. As I have said before they came to a primary conclusion of fact that Gardena Court was acquired as an investment and so held. They conclude that by April 1978 the company's properties formed its stock-in-trade - I cannot understand how they arrived at that conclusion, but they then assert that the conversion from general investment to trading occurred in 1973 when there was a sale of a property. After stringing together a number of illogical propositions, the Board then say "Hence it followed, in our view, that the profits on sale of Gardena Court properties should be brought into charge to profits tax".

18. I find the reasoning of the Board obscure - the decision is unreasonable and falls into the category of decision set out by Lord Radcliffe, which amounts to an error of law.

19. When the Commissioner is considering the sale of an asset originally acquired for investment purposes, he should find clear and cogent evidence to justify an assessment that the asset has changed its character - the mere sale is not evidence of trading. Although on an appeal, the onus is on the taxpayer, in my judgment the Commissioner should seek to justify an assessment for profits tax if the primary evidence discloses that the asset is a capital one.

20. Mr. Hinchen urges me strongly not to interfere with the Commissioner's approach to the assessment. This is not one of those cases when the Court is reluctant to examine a discretionary power; I should in no way he intimidated in giving a decision against the Crown. If the conclusion I reach is that the decision of the Board and inferentially the approach of the Commissioner is wrong in law, I should so state. Although the amount of tax is high, a Court should not be timid about quashing a decision which amounts to an error of law. I do not remit this case. The decision in my judgment is insupportable.

21. Two questions are posed - I do not consider these appropriate. The question I should answer is whether as a matter of law there was any evidence upon which the Board of Review could properly conclude that the Company had altered its original intention to hold Gardena Court as an investment; I answer that by saying there was no evidence from which they could so properly conclude. On the second question, I hold that Gardena Court has not been converted into the Company's stock-in-trade. I further find that the Board was incorrect in law in concluding that the profits on sale are chargeable to profits tax. In my judgment this is simply the realization of a capital asset and no tax is payable by the taxpayer.

22. The decision I come to therefore is that this appeal is allowed and I vacate the assessment.

Representation:

Mr. David Hinchen for Crown Solicitors/Respondent (Commissioner of Inland Revenue)

Mr. Denis Chang, Q.C. & Mr. Denis Yu instructed by M/s Kao, Lee & Yip for the Appellant