Tai Shun Investment Co Ltd v. Commissioner of Inland Revenue
Read the full judgment text of HCIA 2/1967 on BabelCite. This HCIA judgment was delivered on 29 January 1968.
2. The Board of Review confirmed the determination of the Commissioner of Inland Revenue that the appellant company (the tax-payers) did not cease to trade prior to the year of assessment 1965/6 for the purposes of computation of profits tax. The importance of this determination was, of course, that under s.18(5) of the Inland Revenue Ordinance the assessable profits are computed on the amount of profits made during periods which are related to the date of cessation of trade. It is manifest that
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HCIA000002/1967 IN THE SUPREME COURT OF HONG KONG ORIGINAL JURISDICTION INLAND REVENUE APPEAL NO.2 OF 1967 -----------------
Coram: Rigby, Briggs & Huggins, J.J. Date of Judgment: 29 January 1968 ----------------- JUDGMENT ----------------- Huggins, J.: This appeal from a decision of the Board of Review comes before the court by order of a single judge. We have, by consent of the parties, had regard not only to the case stated by the Board but also to the signed decision of the Board. 2. The Board of Review confirmed the determination of the Commissioner of Inland Revenue that the appellant company (the tax-payers) did not cease to trade prior to the year of assessment 1965/6 for the purposes of computation of profits tax. The importance of this determination was, of course, that under s.18(5) of the Inland Revenue Ordinance the assessable profits are computed on the amount of profits made during periods which are related to the date of cessation of trade. It is manifest that the tax-payers here deliberately so arranged their affairs that, if their view of the facts and of the law is correct, they would not be required in the computation of tax to bring in the profits made by them during the accounting year October 1962 to September 1963 and they doubtless had good reason for what they did. Rightly or wrongly, depending upon one's particular moral view-point, it is quite lawful to use such loopholes as the tax legislation may offer in order to avoid liability to tax and there are even some who regard the transfer of the burden of paying tax to other shoulders as a wholly meritorous exercise. There being no doubt as to the tax-payers' intention in this case, the Commissioner contends nevertheless that they have taken a wrong turning and that in the result they have not achieved their intention. The argument is of necessity a highly technical one. 3. The facts may be briefly stated. The tax-payers are a limited liability company which was created in order to purchase and develop land. In pursuance of its objects it bought land and then, having resold part of that land, built four blocks of flats on the remainder. Most of the flats were sold but the market having become depressed the company found itself unable to sell 16 of them. Eleven of these flats were the subjects of tenancies. At this stage it was decided by the directors that it would be desirable to wind up the company and an Extraordinary Meeting was called for that purpose. At that meeting it was resolved that the company should be wound up voluntarily and at a later meeting it was resolved that the 16 unsold flats should be distributed in specie to shareholders by ballot. By 31st March, 1965 all except 8 of the flats had been paid for in full, these 8 having been sold on terms which allowed payment by instalments, completion to be effected upon payment of the final instalment. No new rent fell due after 31st March, 1965 but after that date three things were done by the liquidator: (1) he collected some arrears of rent; (2) he collected some arrears of instalments and also some instalments which fell due after that date, together with interest; and (3) he conveyed the legal estates in the 8 flats which had not previously been paid for in full. 4. The question was whether the company ceased to trade on or before 31st March, 1965 (as the tax-payers contend) or at some time after that date. The Commissioner, as I have said, came to the conclusion that the company continued to trade into the new year of assessment and the Board of Review came to the same conclusion. Counsel for the Commissioner submits that the conclusion was correct but that, even if it was not, it was a finding of fact which we cannot properly disturb because, even if we might be disposed to take a different view of the evidence, there was evidence upon which the Commissioner and the Board could find as they did. If, of course, there was no evidence to justify the finding it cannot stand and counsel for the appellants argues, and in my judgment rightly argues, that the so-called "finding" is a decision of mixed law and fact and that if he can show the Board misdirected itself upon the law (and I take him to mean, in particular, upon the meaning of the words "cease to carry on a trade .... or business" in s.18(5) of the Ordinance) that nullifies the finding of fact. He goes on to say that it is questionable whether the Board fully appreciated what its functions were because in paragraph 14 of their written decision they observed that there was evidence before the Commissioner on which he could find as he did, a possible implication being that they regarded themselves as an appellate court rather than as a Board charged with a duty of making its own findings of fact. On a reading of the decision as a whole I am not satisfied that the Board so misconceived its functions. 5. The issue we have to decide is a difficult one. One might expect that it would be a simple matter to say whether a person was trading or not at a particular date but there are decisions which suggest that what the ordinary man may consider to be trading is not to be regarded as such for tax purposes when it is at the same time necessary work for the winding up of the business. 6. It is obvious that a trader cannot by the mere expedient of saying "I hereby cease to trade" escape the consequences of trading if in fact he goes on trading. Thus the resolution passed by the company here is evidence of its intentions but is no evidence to show whether or not its intentions have been carried out. Counsel for the Commissioner relied upon a passage in the judgment of Greer, L.J. in Hillerns & Fowler v. Murray(1) which I will cite in a moment and which appears to suggest that the winding up of a business will almost inevitably involve the carrying on of the business and consequently he draws a distinction between the case where a business of a company or of a partnership is wound up and a case where a personal representative winds up the business of a deceased person: in the latter case, he says, one has to find a separate activity carried on by a stranger who is launching out on his own, while a liquidator is merely the alter ego of the company. The argument of counsel for the tax-payers, as it seems to me, minimizes this distinction and concentrates more on the degree of activity that is found. 7. With these two different approaches in mind I turn to the cases. In Hillerns & Fowler v. Murray(1) a partnership was dissolved by lapse of time. At the date of dissolution there were unfulfilled contracts. The partnership had carried on the business of grain merchants and the outstanding contracts appear to have included contracts to supply grain and contracts to receive stocks of grain with which to fulfil the contracts to supply. The operations, which were on a very large scale, realised profits tax on which was assessed at £5,820 for the year 1927. Rowlatt, J. was of opinion that the partnership was merely working out its books and that this was not "trading". He did not suggest that there was any fundamental difference between winding up the estate of a deceased person and winding up the business of a company in liquidation. The Court of Appeal in reversing his decision held that there was evidence on which the Commissioner could properly have found that a trade was being carried on, it being unnecessary for them to say whether they agreed with the finding or not. Greer, L.J. used words which I think are heavily relied upon by the Commissioner here (at p.89):
It is the latter part of this passage which the Solicitor General says is decisive for he says that there was evidence here upon which the Commissioner could find that a trade was being carried on. The first part of the passage he cites as supporting his distinction between the personal representatives of a deceased person and those engaged in the winding up of the business of a company or partnership. The opposing view of this decision can be expressed in this way, that those responsible for winding up the grain business were doing something more than a mere mechanical act of disposing of assets and were interposing their own business acumen. Greer, L.J. said (idem):
It seems to me that the significant things about Hillerns & Fowler v. Murray(1) were the size and nature of the business. The Master of the Rolls pointed out that there were "certain items which unquestionably would fall to be dealt with after (the material date): the discharging, the lighterage and the storage of the grain, the carriage of the grain, arbitration fees which would arise on questions whether or not delivery had been made not in accordance with the terms of the contract." It was in relation to these matters that winding up went beyond the mere working out of the books. Greer, L.J. distinguished Cohan's Executors v. Commissioners of Inland Revenue(2) on the ground that there all that was done was reasonably necessary for the purpose of realising a contract which was in existence for the time being at the decease of the trader". In that case the executors had declined to accept release of the estate from a contract made with a shipbuilder to build a ship and they sold the ship upon its completion. The Court of Appeal did not consider that the refusal to accept release was an act which took the executors within the ambit of trading: they were merely realising an asset in one of two different ways. At page 615 Lord Pollock, M.R. said:
...(illegible), L.J. said at p.618:
...(illegible) me to me that looking at the present case solely upon the basis of these ...(illegible) it cannot be said that the company was "trading" after 31st March, ...(illegible) . All that the liquidators did was to receive moneys which fell due under ...(illegible) made before that date and to execute conveyances which the company ...(illegible) bound to execute by virtue of contracts made before that date. ...(illegible) it is not, I think, open to us to adopt the refreshingly robust ...(illegible) of Rowlatt, J. in Hillerns & Fowler v. Murray(1) I am persuaded that ...(illegible) before us comes nearer to Cohan's Executors v. The Commissioner of ......(illegible) Revenue(2) than it does to that case. 8. Is there anything in the other cases which makes that view untenable? In Tryka Ltd. v. Newall(3) a company was found by the Commissioners to have discontinued a trade formerly carried on and to have started a new trade. In the High Court it was argued as a new point that in line with a series of bankruptcy decisions so long as debts related to the old business remained undischarged the company must be treated as carrying on that business, but the argument was rejected and Wilberforce, J. (as he then was) reached the conclusion that the Commissioners could properly draw the inference that the trade carried on after the material date was a different kind of trade from that which had previously been carried on. It seems, therefore, that the mere collection of debts is not the continuation of a trade - at least not where there is evidence that the company has started a new trade. In Bennett v. Ogston(4) the court was concerned with the estate of a deceased moneylender. He left promissory notes upon which instalments were payable partly in liquidation of the principal and partly in payment of interest. The Inland Revenue claimed income tax on that part of each instalment paid after the death which was interest. The estate was held to be rightly taxed because, whatever may have been the position as to payment of income tax on interest falling due before the death, this was interest earned by the capital since the death. Before the death the interest had not been treated as chargeable to income tax qua interest but as part of the receipts of the business. However, the effect of the decision was that interest earned after the death was not to be regarded as part of the receipts of the business on the basis that the business was then being carried on by the administrator. Counsel for the tax-payers before us concedes that any interest "received" after 31st March, 1965 is liable to interest tax but submits that the liquidator was no more carrying on the business than was the administrator in that case. (By "received" I think he clearly meant "earned" and I ought to mention that interest at 1% per mensem was payable on the instalments of the purchase prices of flats which had not been paid for in full by 19th March, 1965, this totalling during the year of assessment 1965/6 $3,405.87). The Solicitor General, of course, relies here upon the broad distinction which he says exists between a liquidator of a company which is still in being and a personal representative of a deceased who is not. Unless on a review of the cases as a whole (and I shall return to this issue at the last) it appear that that distinction is a valid one there is nothing in Bennett v. Ogston(4) which is inconsistent with the preliminary view I have taken: indeed it begs the question we have to decide for the learned judge presupposes that the trade has stopped - "when a trader or a follower of a profession or vocation dies or goes out of business ......". That presupposition is the very matter which was in issue here. Counsel for the tax-payers merely observes that the fact that the presupposition was made is some indication that the mere receipt of the interest was not a continuation of the trade. 9. Parker v. Batty(5) bears a superficial affinity to the present ...(illegible) requires a careful analysis. This was a case where a dealer in musical ...(illegible) ments traded on hire-purchase terms. He sold the business to a limited liabilites company but under the agreement with the company he was to retain his rights to existing debts and to sums which would subsequently fall due under existing hire-purchase agreements. These moneys were to be collected on his behalf by the company and in the event, during the course of collection, the company repossessed and sold on his behalf some of the instruments which were the subject matters of the hire-purchase agreements. The Special Commissioners found that the dealer had started what was in its nature a trading activity - and a new trading activity because it was not carried on in the same way as the business he had been carrying on before, but was carried on through the agency of the new company. It was held that the decision was correct. As in Tryka Ltd. v. Newall(3) it will be seen that the question became not so much the simple one, whether there had been a cessation of trade, as whether there had been a change from one trade to another a distinction which makes these cases less helpful to us than they might otherwise have been. Nevertheless I think it may be assumed that if the arrangement had been that the dealer would himself collect the outstanding debts and further instalments Lawrence, J. would still have held that this was a trading activity but that it was the old activity, that is to say that it was a continuation of the former business. The important thing to ask is, what made it a trading activity? The judge clearly had no difficulty in deciding that it was a trading activity and the reason is that the nature of the activity was unchanged save that it was carried on through the agency of the new company. Previously the business was the business of hiring out pianos on hire-purchase and although no new contracts were to be entered into that is what the business substantially remained. What must not be overlooked is that, as in Bennett v. Ogston(4), the moneys which were payable after the material date were payable in respect of the use of the "capital" after the material date and that is a very different thing from collecting moneys which were themselves instalments of capital or else were payable in respect of the use of the capital before the material date. Moreover, the repossession and sale of some of the instruments (or the possibility that such repossession and sales might take place) would be an important factor in concluding that a trading activity was being carried on. In our case there were not rentings with options to purchase at the end of the terms, but binding contracts of sale which in equity passed the ownership of the land. Thus the only evidence which could, as it seems to me, point to the existence of any trading activity was that of the receipt of the $3,405.87 interest. Counsel for the company argues, as did counsel in Parker v. Batty(5), that the former business must have ceased because the substance of that business was entirely different from what has gone on since the material date. In Parker v. Batty(5) it was held that the substance of the business had not changed, since it was throughout a hiring out on hire-purchase terms and not a business of selling pianos, although the agency made it a new business. Here it is said that the substance of the business was the development of land and the sale of flats and that that business ceased before the material date: what has gone on since is merely a "tidying up" or, if the receipt of interest is a "trading activity" at all (and the submission is that it is not), it is an entirely different trading activity. 10. This brings me to Henry Briggs & Co. Ltd. v. The Commissioner of Inland Revenue(6) which arose out of the nationalisation of the coal industry. The appellant company was a parent company and by far the largest item of receipts in its profit and loss accounts were dividends from a colliery company. Moreover the two companies had 5 common directors, all being persons skilled in mining, and their activities were closely integrated. However, some years before it had carried on in addition activities which were clearly trading activities. Two points were discussed in the case but we are concerned with only one of them. Did the dividends received from the colliery company after the date on which the assets of the colliery company were transferred to the National Coal Board arise from any trade or business carried on by the parent company after that date? That in turn depended upon whether before the transfer the parent company was a company whose functions consisted "wholly or mainly in the holding of investments or other property". The Commissioners found that it was a holding company and the holding was thus under the statute deemed to be a business. The judge held that there was evidence upon which they could reach that conclusion and that they had not been shown to have misdirected themselves as to the meaning of the word "functions" in the statute. It is really that part of the judgments in the High Court and the Court of Appeal dealing with the word "functions" which are of interest to us. Upjohn, J. said at p.423:
In our case the Solicitor General contends that unlike the colliery company, which could not under the statute carry on its former colliery business after the material date and was therefore left with only the three alternatives mentioned by Upjohn, J., the appellant company was able to continue its former business and in fact did so, although it chose not to enter into any fresh development projects. He does not accept, as counsel for the appellants ...(illegible) I think if necessary be content to accept, that there was a new business ...(illegible) might be called (if not too happily) an investment trust business, which earned interest on its investments. There is little assistance to be gleaned from the judgments to help one to decide whether there is a change of business as distinct from deciding what is the new business (if any), given that the old business has ceased. On the other hand, if one accepts here (as I do) the argument that whatever else happened afterwards the business of land development and the selling of flats did come to an end there is no difficulty in holding that the third of Upjohn, J's alternatives was the only right one to adopt here. 11. In Commissioner of Inland Revenue v. South Behar Railway Co. Ltd.(7), the question was whether the company, which at the material time did nothing more than receive an annuity from the Secretary of State for India, was or was not carrying on any trade or business. The Court of Appeal reversed the single judge and held that it was. The House of Lords agreed with the Court of Appeal. Lord Sumner's opinion is largely summed up in the sentence "It is obvious that the company's objects have by no means been accomplished". Here it is submitted, and I agree, that the company's objects had been substantially if not entirely accomplished when the last flat was disposed of. In the Court of Appeal Lord Pollock, M.R. said at p.412:
It is clear that the closing sentence has no application to a company which is in liquidation because such a company remains a company alive. The direction, although no longer in the hands of the directors, is vested in the liquidator. With what is he concerned? He is to dispose of and divide up the assets and this must include whatever profits remain to be collected. When all this is said it seems to me that it is very much a matter of general impression whether what is being done can fairly be described as carrying on a business and if any form of analysis is to be adopted I think the only test is that which counsel for the appellants asks us to adopt, whether what is being done goes beyond what can reasonably be regarded as necessary for the winding up of the company. I deliberately do not say "necessary for the beneficial winding up of the company", for the Companies Ordinance allows a liquidator to carry on the trade or business so far as may be necessary for a beneficial winding up. The power conferred by the exception in s.231 of that Ordinance on a liquidator clearly implies that he may be able to wind up the business without carrying on the trade and I do not think it would have been thought necessary to insert such an exception merely to enable the liquidator to collect outstanding debts. If he does nothing more that did the executors in Cohan's Executors v. Commissioner of Inland Revenue(2) it seems to me that he cannot fairly be said to carry on the trade. The liquidator would be neglecting his duties if he failed to draw in all the moneys due to the company at the date of his appointment or falling due thereafter if they became due by virtue of contracts made before his appointment, subject always to this limitation, that his duty is to wind up company and that to delay the winding up by not disposing of a part of the assets merely in order to take advantage of a prior contract to pay interest at an advantageous rate would certainly result in his being found to have stepped from the dais of the liquidator into the arena of the trader or businessman. This aspect of the matter was succinctly expressed by Maloney, C.J. in J & R O'Kane Co. v. Commissioner of Inland Revenue(8). That was an excess profits duty case where the Court of King's Bench of the High Court of Justice of Ireland reverted the Commissioners' finding that the sums in question were chargeable as profits of the business. The Chief Justice said at p.322:
It is the word "unduly" which I emphasise and which in my view supports the submission of the appellants that it is not "trading" to do only what is reasonably necessary for the winding up. The judgment of the King's Bench was reversed in the Court of Appeal and the reversal was sustained in the House of Lords but on the ground that there was evidence upon which the Commissioners could find that the sums were profits of the business. At page 350 Lord Parmoor said:
In our case it seems to me that it would be an abuse of language to say that the evidence of receipt of interest on the outstanding instalments was evidence of "trading" as distinct from "winding up". What reasonable course was open to the liquidator other than to collect the instalments and interest as they fell due over a period of just over 9 months? I do not say the position would necessarily have been the same if the instalments had been payable over, say, a period of 5 years. 12. In Baker v. Cook(9) the company in liquidation retained the benefit of contracts made or to be made for exhibiting films on hand at the date of the liquidation. Arrangements for such exhibition were to be made on behalf of the company by a new company which was to receive a commission and thereafter pay the balance of the moneys received to the liquidator. Not surprisingly it was held that a trade was being carried on and that it was being carried on by the new company as agents for the liquidator. In that case, it seems to me, the new company was doing in relation to the films "on hand" precisely what the old company had been doing with its films prior to going into liquidation. This involved entering into contracts with exhibitors and exercising judgment in all those matters which are generally understood to constitute the running of a business. I do not think the case assists us here: as the Solicitor General said, it was well over the border line. 13. There is, however, a passage in the judgment of Lawrence, J. in Wilson Box (Foreign Rights) Ltd. v. Brice(10) which is significant for our purposes:
I stop there because what the learned judge went on to say was questioned by Romer, L.J. in the Court of Appeal, but the passage I have cited was in effect approved by that court and Slesser, L.J. said at p.747:
The facts of the case were, of course, very different from those here, since the Court of Appeal held that there was no evidence that the company carried on any trade even before it went into liquidation, but I think the question which the learned judges put to themselves is the question which we should put to ourselves. In my view there is no fundamental difference between the position of a liquidator and that of an executor and the conclusion which I have reached on a careful reading of the Case is that there was no evidence upon which it could reasonably be found that the liquidator here did carry on any trade or business after the 31st March, 1965. 14. I would attach no importance to the fact that the accounts were drawn up on the basis of accounts receivable. At best that could be only very slight indication that the company had ceased to trade and I doubt whether it is even that. 15. I would answer the question put to us in the negative and would allow the appeal with costs.
29 JAN 1968 Representation: H.H. Monroe, Q.C. & H. Litton (Deacons) for Appellant. Sneath, S.G., Q.C. & Sheratte, C.C. for Respondent. (1) (1932) 17 Tax Cases 77. (2) (1924) 12 T.C. 602. (3) (1963) 41 T.C. 146. (4) (1930) 15 T.C. 374. (5) (1941) 23 T.C. 739. (6) (1960) 39 T.C. 410. (7) (1924) 1 K.B. 390 and (1925) A.C. 476. (8) (1920) 12 T.C. 303. (9) (1937) 21 T.C. 337. (10) (1936) 20 T.C. 736, 741. IN THE SUPREME COURT OF HONG KONG ORIGINAL JURISDICTION INLAND REVENUE APPEAL NO. 2 OF 1967 -----------------
----------------- Coram: Rigby, Briggs & Huggins, JJ Date of Judgment: 29 January 1968 ----------------- JUDGMENT ----------------- President: I have had the advantage of reading the judgment of Huggins, J. in this appeal. I agree with the conclusions reached by him and, for the reasons he has given, I also would answer in the negative the question put to us, and would allow this appeal with costs.
29th January, 1968. |