Commissioner for Inland Revenue v. Dr. Chang Liang-jen

HCIA000004/1977

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

APPELLATE JURISDICTION

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Coram: Mr. Commissioner Liu, Q.C. in Court

Date of Judgment: 3rd December, 1977.

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JUDGMENT

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1. This is an appeal by way of Case Stated from the decision of a Board of Review which reversed the confirmation of Profit Tax assessments made against the Respondent, Dr. CHANG Liang-jen, for each of the basic periods in the four years commencing from 1st April, 1968 to 31st of March, 1972. The Respondent's liability for Profit Tax was assessed on his purchases and sales of locally quoted shares during those four basic periods.

2. The Respondent if a Doctor of Economics and Politics, and in or about 1963 he commenced purchasing and selling shares quoted in the local Stock Exchange. By the 1st year of assessment 1969/70, the Respondent had built up a million-dollar portfolio. The activities of the Respondent were well documented for the Board of Review. From the Respondent came the only viva voce evidence at the hearing. He offered explanations for his shares transactions of which some were said to have been motivated by the turn of events. An objective review of these activities, so claimed the Respondent, led the Board to the conclusion that the shareholdings of the Respondent were varied within acceptable limits of portfolio management.

3. The Respondent's manoeuvres during the two years 1967/68 and 1968/69 before and a year 1973/74 after the four years of assessment on appeal were also brought under the limelight. At the commencement of the year of assessment 1967/68 (ending 31st March 1967), the Respondent had acquired a portfolio at a cost value of over $930,000 in 17 companies, and in that year of assessment shares in also some 17 companies were bought and/or sold yielding a profit on the sales of over $32,000. For the year of assessment 1968/69 (ending 31st March 1968), shares in some 10 companies were bought and/or sold. The sales resulted in a loss of over $30,000. We then have the intervening 4 years of assessment, 1969/70 to 1972/73 inclusive. For the following year of assessment 1973/74 (ending 31st March 1973) shares in some 17 companies were bought and/or sold. The sales brought in a profit of $460,000. It is to be borne in mind that what was retained by the Respondent was given a static value at cost.

4. As for the Respondent's shares activities in the 4 years of assessment under consideration, a "Summary" or "Visual Aid" was submitted by consent.

Summary of Share Transactions 1969-73

The "Summary" is designed to serve as a synopsis of the Respondent's shares activities in terms of cash flow, but in no way does it reflect the number, size, frequency and regularity of the transactions or the quantity, nature, price, and length of ownership of the shares acquired. It is really a segmental approach restricted to the value of the Respondent's shares activities. Even as a guide for cash flow, it should not be read without reservations. It is evident that whilst the value given for stock held at the commencement of the basic period is at cost, the value of the purchases or sales during that particular year of assessment is the market value of shares bought or sold at a later date. It is quite misleading to compare the values of shares acquired or disposed of at different times. Hence, a ratio between the sales proceeds at a subsequent market price of shares acquired at various stages and the value at cost of the stock held by the Respondent as at the commencement of that basic period would not give an accurate turnover. Any comparison between the value of purchases and proceeds of sales is artificial without the information as to what proportion of the sales came from shares previously held and how much there of represented newly-purchased stock. The difference between purchases and sales in the "Visual Aid" also fails to reflect the true reduction in the capital invested. A great proportion of the cash withdrawn was profit and not capital.

5. Having drawn the Court's attention to inter alia the frequency and volume of the transactions, the number of companies involved and the seizable profits, Mr. Edmonds, counsel for the Commissioner, proceeded to give the following analysis:-

6. It was contended on behalf of the Commissioner that these activities bear the stamp and mark of a dealer in shares and that from these activities trading is an irresistible inference. Counsel strongly urged the Court to take the view that the very structure and contents of these manoeuvres unfold sufficient indicia of trade to expose them as transactions completely different in kind from the activities of an investor. Mr. Edmonds also made great play of the highly speculative market at various times during some of these four years of assessment, the Respondent's sales of shares of and repurchases into the same companies, the length of ownership of part of the stock, the Respondent's knowledge, the use of his office and his habit in the years before and after these four years of assessment.

7. The Commissioner felt particularly aggrieved that the Board of Review discarded the professional qualifications of the Respondent as "a consideration not to be weighed either for or against him". Mr. Edmonds submitted that the evidence is inconsistent with and contradictory of the finding of the Board. Counsel further submitted that the Board of Review fell into error by taking into consideration irrelevant matter i.e. the general practice of the Inland Revenue in Hong Kong and the United Kingdom not to treat individuals buying and selling shares as traders and by failing to give sufficient weight to the Respondent's telling admission that the shares sold were "either for reinvestment purchase or a realization of his investments to provide income to meet his financial commitments in Hong Kong and overseas." Counsel suggested that this was a plain confession of the Respondent's dependence on realization of his locally quoted shares to provide an income for his livelihood and recurrent expenses. Counsel concluded that the error of the Board must have stemmed from its misunderstanding of the statutory definition of trade. This conclusion of counsel as submitted drew an immediate protest from the opposition with a demand that the Commissioner be confined to the question of law in the Stated Case.

8. By section 69(1) of the Inland Revenue Ordinance, a decision of the Board of Review is made final subject to the proviso that a question of law may be stated for the opinion of the High Court. The question of law for the opinion of this Court is:

"Whether on the facts as found was the Board entitled in law to reach a finding that the profits made by the Appellant from the sale of shares were not chargeable to tax under section 14 of the Inland Revenue Ordinance."

9. Questions of law on which the opinion of the Court is sought should be specifically included. The formulation of a case stated was commented upon by Roskill L.J. in Ransom v. Higgs ^(1):

"If it is desired to contend on the hearing of a special case that there was no evidence to justify a particular conclusion of fact, then a party must ask for the case to include the question whether there was any evidence to justify such a conclusion. If he does not do so then that question is not before the Court, because the Court does not know what evidence was called before the tribunal of fact, and if that question is not before the Court then the conclusion sought to be complained of can only be attacked if other findings in the case make it perverse or manifestly wrong in law. ..... In revenue cases the parties have the advantage, denied to parties in commercial arbitrations, of seeing a draft of the special case in advance. There should therefore be no practical difficulty in seeking the statement of the requisite question of law, if necessary as an additional question, whether there was any evidence to justify a particular conclusion at which the special Commissioners propose to arrive."

10. Misunderstanding of the statutory definition of "trade" may of course give rise to a legitimate ground of appeal on a point of law as envisaged by Lord Radcliffe in Edwards v. Bairstow and Harrison ^(2):

"If a determination cannot be shown to be erroneous in point of law, the statute does not admit of its being upset by the Court on appeal I except the occasions when the Commissioners, although dealing with a set of facts which would warrant a decision either way, show by some reason they give or statement they make in the body of the case that they have misunderstood the law in some relevant particular."

11. Errors in point of law pertinent to the issue on appeal have been neatly summarized by the authors of Whiteman and Wheatcroft on Income Tax 2nd edition in paragraph 25-30 at p.1017:

12. In Ransom v. Higgs ^(3), Lord Simon made some suggestions as to how such questions of law should be formulated:

"Whether the activities found were capable of being statutory 'trade' or whether the decision discloses a plain error indicative of misdirection as to the statutory meaning of 'trade'".

13. But Mr. Edmonds's approach to the alleged misconception of the statutory definition is somewhat indirect. It was claimed that as there was no evidence on which the Board could reasonably have drawn an inference of "trade", the Board must have misunderstood its statutory definition. That line of argument seems to derive some support from the logic propounded by Lord Radcliffe in the same case at p.229:

"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."

14. The vanguard of Mr. Edmonds' assault on the determination of the Board of Review charged it as being unsupported by the facts proved or admitted and perverse. Counsel's reference to the badges of trade ⁽⁴⁾ was sought to be reinforced by the Board's alleged failure to give any or any proper weight to the specialized knowledge of the Respondent and/or his device for producing an "income" as well as the Board's unwarranted cognizance of the Inland Revenue's practice of not taxing an individual trader in shares. Despite the non-inclusion of any further point of law in the Case Stated at bar, this Court is invited to intervene and to assume that the Board's misconception of the statutory definition of trade must have contributed to its erroneous decision.

15. The sanctity of a factual determination of a Board of Review is typified by the phrase of Asquith L.J., "the no-man's land", so readily embraced by Lord Simon in Ransom v. Higgs ^(5):

"Where an appeal lies only on a point of law, the appellate tribunal ought only to interfere with the decision falling within 'the no-man's land' of fact and degree if a plain error shows that the instance tribunal must have misdirected itself in law."

16. The function of an Appeal Court in revenue cases has been the subject of constant judicial reminder. In C.I.R. v. Livingston ^(6), Lord Sands observed:

"Had the question, within arguable limits, been one simply of degree, I certainly should not have been disposed to disturb the findings of the Commissioners."

In Pickford v. Quirke ^(7), Lord Hanworth, M.R. remarked as follows:

"That is what the Commissioners have done. They have stated the problem, and they have considered all the several elements which had to be considered in determining whether or not Mr. Pickford had carried on a trade. They go on: 'The question, as we have stated it, is we think a question of degree,' and they deal with the matter further. I think they are right. If it is a question of degree it is a question of fact, ...... It appears to me therefore that this case is one of fact, that the Commissioners were bound to exercise their judgment upon the materials rightly before them, that they have done so, and that the matter is determined by their conclusion on the facts."

Lord Clyde, the Lord President, had this to say of the duty of an appellate tribunal in C.I.R. v. Scottish Automobile and General Insurance Co. Ltd. ^(8):

"Whether a person is, or is not, engaged in a trade is not a question of law, but a question of fact. And the Commissioners, revealing the whole facts that were admitted and proved before them, come to the conclusion that the profit in question was not made by trading. That finding is only open for consideration if it is possible to say that there was no evidence before the Commissioners upon which they could reasonably arrive at their conclusion."

In Edwards v. Bairstow and Harrison ^(9), Viscount Simonds reiterated the well-settled rule in clear language:

"For it is universally conceded that, though it is a pure finding of fact, it may be set aside on grounds which have been stated in various ways but are, I think, fairly summarised by saying that the Court should take that course if it appears that the Commissioners have acted without any evidence or upon a view of the facts which could not reasonably be entertained."

Lord Radcliffe at pages 227 and 231 said:-

In Jenkinson v. Freedland ^(10), Harman, L.J. indorsed the universally accepted principle in the following passages:

Donovan, L.J. lent his support at p.647 as follows:

"This is one of those cases where some facts point in the direction of trade, or an adventure or concern in the nature of trade, and some point the other way. It is accordingly one of those cases where the decision of the general Commissioners ought not to be disturbed."

In J.P. Harrison (Watford) Ltd. v. Griffiths ^(11), Upjohn, L.J. followed the same test laid down by Lord Radcliffe in Edwards v. Bairstow as whether "the true and only reasonable conclusion contradicted the determination of the Commissioners that this was not an adventure in the nature of trade". On the case reaching the House of Lords, the same criterion surfaced in the judgment of Viscount Simonds at p.292. In his dissentient judgment, Lord Denning at p.p.298 & 299 also adhered to the same guideline:

"Now, the powers of the High Court on an appeal are very limited. The Judge cannot reverse the Commissioners on their findings of fact. He can only reverse their decision if it is 'erroneous in point of law'. Now here the primary facts were all found by the Commissioners. They were stated in the Case. They cannot be disputed. What is disputed is their conclusion from them. And it is now settled, as well as anything can be, that their conclusion cannot be challenged unless it was unreasonable, so unreasonable that it can be dismissed as one which could not reasonably be entertained by them. It is not sufficient that the Judge would himself have come to a different conclusion. Reasonable people on the same facts may reasonably come to different conclusions, and often do. Juries do. So do Judges. And are they not all reasonable men? But there comes a point when a Judge can say that no reasonable man could reasonably come to that conclusion. Then, but not till then, he is entitled to interfere."

Next comes the authority of Lewis Emanuel & Sons, Ltd. v. White ^(12). At page 377, Pennycuick, J. concluded:

"If the Commissioners could properly have come to either conclusion, then the Court must not interfere."

17. Judicial pronouncements in other cases seem, if read out of context, to be less inhibitory such as that fallen from the lips of Lord Young in Assets Co., Ltd., v. Forbes ^(13):

"There is no case upon which we can with safety sustain the conclusions at which the Commissioners have arrived."

18. It is not unknown that judges have been tempted to impose their own views in revenue cases whenever they disagree with the Commissioners.

In Cooper v. Stubbs ^(14), Warrington, L.J. warned against such temptation:

"The Commissioners are the judges of fact, and this Court, and every Court of Appeal from the Commissioners which has jurisdiction in questions of law only, is very much tempted, when it feels that it cannot agree with the Commissioners in the finding of fact, to find some reason in law by which that finding can be reversed. In my opinion the Court of Appeal ought to be careful not to yield to that temptation, except in very clear cases where either the Commissioners have come to their conclusion without evidence which would support it, that is to say, have come to a conclusion which on the evidence no reasonable person could arrive at, or have misdirected themselves in point of law."

The learned Lord Justice proceeded to emphasize the combined wisdom of the Commissioners equivalent to our Board of Review at pages 51 and 52:

"It must be borne in mind that the Commissioners are men of business who are for that reason selected to deal with these questions relating to income tax, and, as a tribunal, particularly well qualified to decide such questions of fact, and we ought not, nor ought the King's Bench, likely to set aside their findings on such subjects."

At page 55 Lord Justice Atkin cited with approval a passage to like effect in the judgment of Lord Sterndale in Currie v. C.I.R. ^(15):

"All these cases which involve questions of degree seem to me to be eminently questions of fact, which the Legislature has thought fit to entrust to the Commissioners, who have, at any rate, from their very varied experience, at least as much knowledge, if not considerably more, of the various modes of carrying on trade than any Judge on the Benoh."

19. The principle is deep-rooted and jealously guarded. The real test is: whether or not there was any evidence on which the conclusion of the Board of Review could reasonably be reached. Were this appeal not the first of its kind on alleged shares trading by an individual evoking some public interest, it would be quite unnecessary to repeat most of the above citations in a superfluity of authority.

20. There is no want of guidance from our local decisions. As long ago as 1951 in the case of C.I.R. v. Karsten Larssen & Co. (H.K.) Ltd. ⁽¹⁶⁾ Gould, J. commented:

"If the conclusion arrived at is a question of degree, then it is a question of pure fact, a test not always easy of application."

21. In C.I.R. v. International Wood Products Ltd. ^(17), Blair-Kerr, acting C.J., said of a finding by the Board of Review that certain operations were conducted outside the Colony:

"But this is a pure question of fact ..... But the mere fact that this court might have come to a different conclusion, does not give it jurisdiction to interfere with the decision of the Board."

22. The test, simply stated as it can be, has not been easy of application in the finding of "trade". There is a wealth of authorities falling on one side or the other as to whether a determination of "trade" or "no trade" is one of fact or one of law. However, in 1955 the House of Lords in Edwards v. Bairstow & Harrison ^(18), followed but not without comments by Lord Reid at p.296 in J.P. Harrison Ltd. v. Griffiths ⁽¹⁹⁾ and accepted as the unquestionable principle in C.I.R. v. Rolls-Royce, Ltd. ^(20), laid down fairly clear rules for application. The House of Lords reaffirmed the inference of "trade" or "no trade" as a mere question of fact and cleared the air by pin-pointing the question of law as being what the statute means by "trade". In this sense, there are invariably questions of law as well as fact in every revenue case for "trading". Of course, whether or not there is any or any sufficient evidence for the Board of Review to make a finding of fact also raises a question of law, and in the process of drawing an inference of "trade" from the facts found or admitted, the rules in Edwards v. Bairstow & Harrison would apply. In the same case, Viscount Simonds explained ^(21):

"To say that a transaction is or is not an adventure in the nature of trade is to say that it has or has not the characteristics which distinguish such an adventure. But it is a question of law, not of fact, what are those characteristics, or, in other words, what the statutory language means. It follows that the inference can only be regarded as an inference of fact if it is assumed that the tribunal which makes it is rightly directed in law what the characteristics are and that, I think, is the assumption that is made. It is a question of law what is murder: a jury finding as a fact that murder has been committed has been directed on the law and acts under that direction. The Commissioners making an inference of fact that a transaction is or is not an adventure in the nature of trade are assumed to be similarly directed, and their finding thus becomes an inference of fact."

23. With that limitation put on "question of law", the passage at page 250 paragraph 5-11 in Whiteman and Wheatcroft on Income Tax appears to be of interest:

"As the Commissioners are judges of fact, and the primary facts found by them and the inferences drawn from those facts. an to whether they constitute trading, are both treated as questions of fact for income tax purposes."

24. In fact, the possibility of a point of law arising from the determination of the Board of Review of "trade" or "no trade" was debated some five years before the House of Lords' case Edwards v. Bairstow & Harrison ⁽²²⁾ in the Appellate Division of the Supreme Court of South Africa in Morrison v. C.I.R. ^(23), and the Court had this to say of the English judicial inclination at p.389:

"It is not irrelevant to observe that the law of England on the subject (whether or not trading is a question of fact or a question of mixed fact and law and thus a matter of law) has undergone development in recent times, and that both in that country and in the United States of America the rule now appears to be established that findings that the taxpayer did or did not carry on a trade or business are to be treated as findings of fact, only assailable in a superior court if there was no evidence on which the findings could be properly reached."

25. In the case of Rico Internationale Ltd. v. C.I.R. ^(24), Blair-Kerr, J. cited with approval a passage at p.692 of 20 Halsbury Law of England, 3rd Edition (No material amendments appear in the 1977 Cumulative Supplement):

"In cases where Commissioners have to deduce a conclusion of fact from primary facts admitted or proved before them, the question of law is whether the primary facts found or admitted can support the further conclusions of fact and the point ought to be so stated."

26. That is precisely the only point of law stated. It is not the Commissioner's case that there is any plain error on the face of the record indicative of a misdirection in law. Thus, the appeal before me does not go beyond the question whether or not there was evidence on which the Board of Review, if properly directed as to the statutory meaning of "trade", could reasonably have come to its decision. If there was such evidence in the facts proved or admitted, it would be a matter of degree and therefore a matter of fact within the exclusive jurisdiction of the Board, and this Court should not interfere.

27. In this appeal, counsel for the Commissioner saw fit to assist the Court with the definition of "trade" and thereafter an extensive survey under a close scrutiny of the Respondent's activities.

28. Section 2 of the Inland Revenue Ordinance defines "trade" as including "every trade and manufacture, and every adventure and concern in the nature of trade". Mr. Edmonds drew attention to its circuitous use of language.

29. In Pearn v. Miller ^(25), Rowlatt J. put profit tax on trade in its proper perspective:

"If it is desired to tax the difference between what a man has bought goods for, or property for, and sold them for, you can only tax it, in my judgment, if you can say what he did was a trade or adventure or concern in the nature of trade."

30. The concept and scope of "trade" defy a perfect definition. Lord Denning expressed dismay in J.P. Harrison (Watford) Ltd. v. Griffiths ⁽²⁶⁾ in the following words.

"Try as you will, the word 'trade' is one of those common English words which do not lend themselves readily to definition but which all of us think we understand well enough. We can recognize a 'trade' when we see it, and also an 'adventure in the nature of trade'. But we are hard pressed to define it."

31. In Erichsen v. Last ^(27), Sir George Jessel, M.R. had this to say:-

"I do not think there is any principle of law which lays down what carrying on of trade is. There are a multitude of incidents which together make the carrying on a trade, but I know of no one distinguishing incident which makes a practice a carrying on of trade. If I may use the expression, it is a compound fact made up of a variety of incidents."

32. An attempt at the definition, acceptable to most, was made by Lord Justice Clerk in Californian Copper Syndicate (Limited and Reduced) v. Harris ^(28):-

"A gain made in an operation of business in carrying out a scheme for profit making."

33. Lord Reid offered the following definition of "trade" to Their Lordships House in Ransom v. Higgs ^(29):

"As an ordinary word in the English language 'trade' has or has 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."

In the same case, at p.88 Lord Wilberforce added his contribution:

"'Trade' cannot be precisely defined, but certain characteristics can be identified which trade normally has. Equally some indicia can be found which prevent a profit from being regarded as the profit of a trade. Sometimes the question whether an activity is to be found to be a trade becomes a matter of degree, of frequency, of organisation, even of intention, and in such cases it is for the fact-finding body to decide on the evidence whether a line is passed."

34. The word "trade" includes every adventure in the nature of trade. If a transaction is not on the face of it a trading transaction, one must then look at the operations involved in the transaction and see, in the words of Lord Clyde in C.I.R. v. Livingston ⁽³⁰⁾, if they were "of the same kind, and carried on in the same way, as those which are characteristic of ordinary trading in the line of business in which the venture was made." Lord Radcliffe in Edwards v. Bairstow ⁽³¹⁾ would ask himself:

"What detail does it lack that prevents it from being an adventure in the nature of trade, or what element is present in it that makes it capable of being aptly described as anything else?"

Pearce, L.J. summed up rhectorically in J.P. Harrison (Watford), Ltd. v. Griffiths ⁽³²⁾:

"If it is not trade, what is it?"

35. In the Final Report of the 1954 Royal Commission ⁽³³⁾, six badges of trade were listed as the subject matter of the realization, the length of period of ownership, the frequency or number of similar transaction by the same person, the supplementary work on or in connection with the property realised, the circumstances that were responsible for the realisation, and motive. That list was not intended to be exhaustive, and the badges of trade are by no means the only constituents to be taken into account.

36. Every true investor in the stock market may vary and re-arrange his portfolio within the principles of "Portfolio Management" as envisaged in Trent Investments Pty Ltd. v. Federal Commissioner of Taxation ^(34), that is:

"an investment system to take account of fluctuations in the market and includes the elimination from the share portfolio of shares in financially weak companies and the investment in 'growth stocks' or shares that would have a growth in earning There will have to be an ongoing review of stocks which involves the selling of over priced stock and investment in stock with greater potential."

37. In Californian Copper Syndicate (Limited and Reduced) v. Harris ^(35), Lord Justice Clerk offered guidance as to where the dividing line between shares investment and shares trading should be drawn:

"But it is equally well established that enhanced values obtained from realisation or conversion of securities may be so assessable (assessable to income tax), where what is done is not merely a realisation or change of investment, but an act done in what is truly the carrying on or carrying out, of a business. The simplest case is that of a person or association of persons buying and selling lands or securities speculatively, in order to make gain, dealing in such investments as a business, and thereby seeking to make profits."

38. Naturally, a profit is not per se an indicium of trade. A bird's-eye view of the entire activities must be taken. In Jenkinson v. Freedland ⁽³⁶⁾ Donovan, L.J. rationalized it in the following words:

"It cannot be right, therefore, to assert, as the Crown did before us, that whenever something is bought to resell at a profit an adventure or concern in the nature of trade necessarily results, and any finding of the Commissioners to the contrary must be perverse. Otherwise there would hardly be any need to introduce a capital gain tax. It would virtually be here already. The true position, in my opinion, is that all the facts in each case must be considered, not merely the motive of acquisition, and a conclusion arrived at from such a comprehensive review."

39. The same Lord Justice in his dissentient judgment in J.P. Harrison (Watford) Ltd. v. Griffiths ⁽³⁷⁾ reiterated the same principle in a more humorous tone:

"Everything which has a head, a body, two legs and two arms is not a human being. The Commissioners were bound to take a comprehensive view of the facts."

40. A little earlier in 1968, Megarry, J. said in Lupton v. F.A. & A.B. Ltd. ^(38):

"The question is whether, viewed as a whole, the transaction is one which can fairly be regarded as a trading transaction."

At p.601C, the learned judge laid great stress on the importance of deciding each case on its own merits.

"I do not think that the right approach is, after analysing each transaction meticulously, to compare the constituent elements with those present or absent in other cases, and then to decide the matter on the degree of correspondence or divergence. Instead, I consider that each arrangement should be regarded as a whole in the light of the principles which I have derived from the cases."

41. Neither a hedge against inflation or devaluation nor speculation is a decisive factor. Purchase and sale as a hedge against devaluation, a prima facie investment manoeuvre, was held in the case of Wisdom v. Chamberlain ⁽³⁹⁾ to be an adventure in the nature of trade. Therefore, one really must take into consideration all the facts and all the circumstances for a comprehensive review of the entire situation. Even speculation is inconclusive. Pennycuick, J. in Lewis Emanuel & Son, Ltd. v. White ⁽⁴⁰⁾ analysed "speculation" as follows:

"The word 'speculation' is not, I think, as a matter of language, an accurate antithesis either to the word 'trade' or to the word 'investment': either a trade or an investment may be speculative."

But an active engagement in speculative shares particularly when profits overshadowed dividends or an involvement in a "stag" operation is trading as were the activities of the taxpayers in Case 102 Volume 14 and Case 54 Volume 18 Commonwealth Taxation Board of Review (N.S.). I was also referred to Commonwealth cases such as Wellington Hotel Holdings Ltd. v. Minister of National Revenue ⁽⁴¹⁾ for the significance of the nature of the shares, length of ownership, amount of capital invested and the margin facilities.

42. Nor indeed can every organisation, by itself, lead to taxation. It would naturally depend on the nature of the organisation and the facts in each case. Lord Wilberforce in Ransom v. Higgs ⁽⁴²⁾ explained:

"It was argued, indeed, that there was some authority for taxing a man on 'organisation' - the cases cited were Smith Barry v. Cordy (1946) 28 T.C. 250 and Graham v. Green 9 T.C. 309. But the use of these cases is just an example of the familiar process of extracting a word or a phrase from particular decisions and converting it into a proposition of law. From the fact that a man was held to trade in insurance policies from having organised the buyer and surrender of them, from the fact that a man who organised a betting business might be thought to be in trade, it does not begin to follow that 'organisation' as such is a principle of taxation - or many estimable ladies throughout this country would be imperilled. All depends on what you organise."

43. As were passages in Simon's Taxes and Pinson on Revenue Law 6th Ed., the sweeping statement in Silke on South Africa Income Tax ⁽⁴³⁾ was also cited:

But obviously it is to be borne in mind that "the definition of the mere word 'trade' does not necessarily mean something by which a profit is made." ⁽⁴⁵⁾

44. All the matters will have to be considered in conjunction with the badges of trade, including whether the turning of investment to account was not to be merely incidental but was the essential feature of the transaction. In addition "the rapid and continuous turn-over" may also be relevant ⁽⁴⁶⁾ as is the fact whether the money available is spare cash not immediately required ⁽⁴⁷⁾.

45. However, habit or even a system is not necessarily associated with "trade". In Graham v. Green ⁽⁴⁸⁾, Rowlatt, J. observed:

"There is no tax on a habit. I do not think 'habitual' or even 'systematic' fully describes what is essential in the phrase 'trade, adventure, profession or vocation.'"

Pollock, M.R. made the same observation in Cooper v. Stubbs ⁽⁴⁹⁾:

"It does not appear to me that a habit or system were characteristics necessary to finding a trade in this case."

46. Of course even a single transaction can constitute an adventure in the nature of trade: A purchase of one consignment of German toilet paper in Rutledge v. C.I.R. ⁽⁵⁰⁾, the purchase of a lot of brandy in the case of Cape Brandy Syndicate v. C.I.R. ⁽⁵¹⁾, the acquisition of a quantity of linen in the Martin v. Lowry ⁽⁵²⁾, the acquisition of an option of two rubber estates in Leeming v. Jones. ⁽⁵³⁾ and an operation involving two transactions to hedge against devaluation in the purchase of silver bullions in the case of Wisdom v. Chamberlain ⁽⁵⁴⁾. The operations involved in each of these isolated transactions were of the same kind and carried on in the same way as those which were characteristic of ordinary trading in the business in which the single venture was made. In other words, the manoeuvres of each taxpayer in these cases of a single venture had all the attributes of a commercial undertaking.

47. Pearce, L.J. at 288 in J.P. Harrison (Watford) Ltd. v. Griffiths ⁽⁵⁵⁾ observed:

"Section 526, Income Tax Act, 1952, includes in the word 'trade' an adventure in the nature of trade in order that 'trade' may cover an isolated transaction that has not the continuity or repetition usually connoted by trade."

48. The distinguishing feature of a single transaction lies in its very nature. Lord Hanworth M.R. stated the obvious in Pickford v. Quirke ⁽⁵⁶⁾:

"But it appears to me that a system of trading is quite a different thing from a single act which may or may not be held to be an adventure in the nature of trade."

49. Counsel for the Commissioner emphasized that the Respondent's transactions bore the imprint of a course of action pursued with a view to exclusively making a profit and that the whole conduct of the Respondent led inevitably to the conclusion of trading. This case was contested on the basis of the taxpayer's activities as a whole. The arena was picked by the Commissioner. The selection is not unwise, as a thrust at individual transactions may be met with more impediments. Lord President, Lord Clyde, in C.I.R. v. Livingston ⁽⁵⁷⁾ resorted to fairly colourful language:

"If the venture was one consisting simply in an isolated purchase of some article against an expected rise in price and a subsequent sale it might be impossible to say that the venture was in the nature of 'trade'; because the only trade in the nature of which it could participate would be the trade of a dealer in such articles, and a single transaction falls as far short of constituting a dealer's trade, as the appearance of a single swallow does of making a summer."

In C.I.R. v. Fraser ^(58), Lord Normand added a rider:

"It would be extremely difficult to hold that a single transaction amounted to a trade but it may be much less difficult to hold that a single transaction is an adventure in the nature of trade."

50. I return now to some of the issues raised by Mr. Edmonds: The specialized knowledge of a person is certainly a factor not to be overlooked. I was referred to a passage in E.F. George on Taxation and Property Transactions ⁽⁵⁹⁾ for the proposition that specialized knowledge is a matter to be weighed against a person for taxation purposes. A taxpayer's degree of a Bachelor of Economics was given due consideration ⁽⁶⁰⁾. In West v. Phillips ⁽⁶¹⁾, a taxpayer's business experience was taken into account by Wynn-Parry, J. Similarly, in Cooper v. Stubbs ⁽⁶²⁾ Pollock, M.R. put the specialized knowledge of a taxpayer on the scales against him in cotton futures transactions. In Barry v. Cordy ⁽⁶³⁾, even the mathematical skill of a taxpayer in his manipulations with life policies was included in the final analysis.

51. However, there are always two sides to a coin. Without the aid of expertise or service of an investment counsel, a man's activities may equally be stigmatised as reckless speculation tantamount to an indicium of trade as in the case of Wellington Hotel Holdings Ltd. v. M.N.R. ⁽⁶⁴⁾.

52. The Board of Review has not lost sight of the qualification and specialized knowledge of the Respondent, and in fact at page 8 of the Case Stated the Board made specific reference to it:

"We think the professional qualification of a person is not a consideration to be weighed either for or against him. Similarly, if a person has inside information or knowledge in regard to textile industry that is his good fortune but it is a feature that could be common to either a trader or investor."

53. I turn next to consider the implications of activities designed to produce an income for a man's livelihood. In Barry v. Cordy ⁽⁶⁵⁾, Scott L.J. adjudged such an income as one assessable to tax:

"The case is conclusive that he made up his mind to utilise the commercial market in endowment life policies for the express purpose of getting a means of livelihood at the average rate of £7,000 a year over a long period of years."

54. In Graham v. Green ⁽⁶⁶⁾, for years a taxpayer's sole means of livelihood came from betting on horses at his private residence with bookmaker. Rowlatt J. decided against "trade":

55. It would appear that an activity for providing a regular income or gaining a livelihood is equally inconclusive.

56. Furthermore, the decision in Barry v. Cordy was doubted in Ransom v. Higgs ⁽⁶⁷⁾ by Lord Simon:

"Counsel for the Crown relied on Smith Barry v. Cordy (1946) 28 T.C. 250, as showing (at page 261) that mere organisation of commercial or mercantile activity can amount to trade. At page 259 Scott L.J., delivering the judgment of the Court of Appeal, said:

So it was held that profits arising from the sale of endowment insurance policies were the profits of trade within Case I of Schedule D. I think there is a logical flaw in the argument. It may well be true that Schedule D as a whole is an omnium gatherum Schedule; it by no means follows that all activities for gaining a livelihood not covered by other Schedules are 'trade' within Case I of that Schedule. I think that today the increment would be taxable as a capital gain, and not as the profit of a trade. In short, I doubt the correctness of the decision."

In the same case, at page 99H, Lord Cross also evinced doubt of the decision in Barry v. Cordy.

57. The significance attached to the difference between an individual and a corporation for the purposes of profit tax was also canvassed before the Court. The objects of a corporation are written in ink in the Object Clause of its Memorandum. Thus, the motive of a corporation can be more readily detected. The Board was not unaware of it.

58. In the judgment of their Lordships in the Privy Council in Commissioner of Taxes v. The British Australian Wool Realization Association, Ltd. (In Liquidation) ⁽⁶⁸⁾, it was observed:

"The distinction, where it exists, arises of course from the fact that whereas the capacities of a natural person have no limitation so that any particular transaction need not be referred to any of them, a company is so bounded by its memorandum that it may be both permissible and essential to consider its authorized objects in connection with the actual transaction in question and even to seek for the principal purpose of its formation."

59. The distinction between an individual and a corporation on this aspect was also discussed by Hogan C.J. in LAM Woo-shang v. C.I.R. ⁽⁶⁹⁾ in which the learned Chief Justice had this to say:

"The proof of the fact that it (a limited company) is engaged in the conduct of a trade or business is more readily apparent or available than in the case of an individual."

60. In Lewis Emanuel & Sons, Ltd. v. White ⁽⁷⁰⁾, Pennycuick, J. made the following observation:

"I wish to make it clear that I am not expressing any view one way or the other as to the position of an individual who carries out comparable transactions (as those by a limited company). As I have sought to point out, the position of an individual may be quite different, in this connection, from that of a trading company."

61. Mr. Litton led me through the Respondent's activities in the local stock market with a view to demonstrating the absence of any hallmark of trade. Cross-references were made to the appendices. Counsel was at pains to point out that the majority of the shares transacted by the Respondent were not of a speculative nature. Great importance was attached to the Board's unqualified acceptance of the Respondent's explanations in relation to Hutchison, San Miguel and South Sea Textile. Advantage was also sought to be taken of the fact that from time to time, after the Respondent disposed of his share-holdings in one company, odd shares were retained, and it was urged that such conduct was inconsistent with that of a trader. Some shares were held for lengthy periods, and all shares bought were duly registered in the name of the Respondent. Even at the peak of hysteria of the market in early 1973, the Respondent displayed no affinity inconsistent with the activities of an investor. The Respondent has not been shown to have reacted to the overheated market with excessive zeal. The number of sales and purchases could be misleading. One of the Respondent's explanations offered to and accepted by the Board was that it was not imprudent of him to sever an intended large transaction in respect to one company into a number of smaller transactions to be handled by, at times, more than one broker. Time and again, Mr. Litton drew the Court's attention to the prospective tempting profits brought about by an erratic market which few investors can to resist. The sales and repurchases into one company in rapid succession were explained by the Respondent, and his explanations were also accepted by the Board of Review.

62. Counsel for the Respondent advanced no less than twelve constituents for consideration:

(1) At all material times the Respondent was a full time manager of a company for importing textile machines and spare parts. (2) The Respondent is not in his profession a stock broker or even remotely connected with shares trading. (3) The Respondent commenced investing in shares in the early sixties. (4) Locally quoted shares are or have become so widely held as investments by persons in all walks of life in post-war Hong Kong. Counsel sought to fortify his submission with an emphasis on the peculiar nature of stocks and shares. Indeed, in C.I.R. v. Fraser ⁽⁷¹⁾, the Lord President contrasted shareholdings with hoarding of commodities:

"A man may purchase stocks and shares with a view to selling them at an early date at a profit, but, if he does so, he is purchasing something which is itself an investment, a potential source of revenue to him while he holds it."

The very nature of an asset may lend itself to commercial transactions. Viscount Simonds commented in Edwards v. Bairstow & Harrison ⁽⁷²⁾:

"A complete spinning plant is an asset which, unlike stocks or shares, by itself produces no income and, unlike a picture, does not serve to adorn the drawing room of its owner. It is a commercial asset and nothing else."

(5) The Respondent had adopted no commercial organization. (6) The Respondent had incurred no expenses chargeable to profit tax as a "trading expense". (7) The transactions were not conducted on a margin account. (8) The Respondent effected full registration of all the shares in his name thus rendering immediate disposition at least inconvenient. (9) Sizeable dividends were enjoyed. (10) The Respondent satisfactorily explained his reactions to an over-heated stock market in Hong Kong. (11) The length of ownership for which some shares were held. (12) The Appendices do not, in truth, reflect multiplicity of transactions.

63. It was criticised on behalf of the Commissioner that irrelevant matters had been taken into consideration and relevant matters omitted. This case is to be judged on a comprehensive review of the activities of the Respondent. The Courts have been known to ignore an oversight on the part of the Commissioners equivalent to our Board of Review. In Wisdom v. Chamberlain ⁽⁷³⁾, the comedian celebrity Norman Wisdom purchased a quantity of silver bullions to hedge against devaluation. A Judge of the High Court allowed his appeal against an assessment on his profit on the grounds that there was no evidence to support the erroneous finding of the General Commissioners of a change in his intention and that he should have been found to retain the same intention of preserving his capital from devaluation. The Court of Appeal overlooked that erroneous finding and decided on the general issue that a hedge against devaluation could be and was, in that case, a trading adventure.

64. For myself, I can see no real merit in the complaints of Mr. Edmonds one of which arose in connection with the evidence of the Respondent quoted in para.6 at p.4 of the Case Stated:

"He stated that he began acquiring shares in the early Sixties; that all the shares purchased by him were for investment purposes; that such shares sold by him were either for re-investment purchase or a realisation of his investments to provide income to meet his financial commitments in Hong Kong and overseas."

The Respondent asserted that "income" was provided by the sales of such shares as "purchased by him for investment purpose". In that context, the word "income" can hardly be tied to the provision for a livelihood for the Respondent or a source for meeting his routine expanses. There is no evidence to suggest that the Respondent's financial commitments in Hong Kong and overseas were usual, expected or recurrent. In any event, "income" is but one of a variety of elements for consideration.

65. It cannot fairly be said that the Board had allowed itself to be influenced by the practice hitherto in Hong Kong and the United Kingdom not to tax an individual buying and selling shares as a trader. Whilst the enforcement and other difficulties behind such a policy were appreciated, there is no evidence that the Board was distracted by it. The Board arrived at its decision on the evidence presented. Each of the submissions of counsel for the Commissioner was treated with respect but rejected as being inconclusive even in isolation, and the Board gave reasons for their rejection.

66. I have dealt with Mr. Edmonds' submissions on "specialized knowledge".

67. The scale and scope of the taxpayer's activities in the Hong Kong stock market were wholly placed before the Board of Review which was assisted by oral and documentary evidence. The Board was fed with information of the Respondent's activities some two years prior to the years of the assessment on appeal and one year thereafter. Failure to challenge the profit tax for the year of assessment 1973/74 remains a matter of controversy, and there is no evidence that the Board had not put that year in its proper perspective. The Respondent's means and resources were disclosed. The Board was greatly impressed by the facts that he had caused registration of all purchases to be duly completed and that no loan was secured to finance his transactions. The Board declined to take a coloured sectional view but preferred to evaluate all the facts proved or admitted comprehensively. The Board accepted the explanations of the Respondent in respect to the transactions in South Sea Textile, Hutchison International and San Miguel Brewery shares. The Board explicitly declared that the explanations for the apparently transient ownership of some of the shares were satisfactory. The Respondent was found to be a truthful witness, and his evidence was accepted. The Board dwelt on the Respondent's shares movements in the stock market but guarded itself against any possible illusion created by the tables of percentages in the following words:

"One cannot merely by looking at tables of percentages resolve the issue. We must look at all the facts and circumstances in coming to decision."

68. The extent of the Respondent's shares activities was a prominent issue and drew the following comment from the Board of Review:

"This is a material consideration which would obviously bear close examination and which will be dealt with more fully hereafter."

Indeed, the Board duly gave full consideration to the Respondent's shares activities, and the evidence adduced for and accepted by the Board cannot be described as "all one way" as the House of Lords considered it was in Edwards v. Bairstow ⁽⁷⁴⁾. There is nothing in the Case Stated which leaves me with the slightest impression that the Board ever misinterpreted section 14 of the Inland Revenue Ordinance.

69. The Board of Review consisted of two experienced local solicitors, a well respected banker and a seasoned accountant. The shares transactions of the Respondent so meticulously presented were received by the Board with comparable care. The facts found by the Board of Review, which comprise all the documentary evidence and oral evidence of the Respondent, are not challenged, and the only question of law under consideration is whether the facts admitted or proved could, if the Board properly directed itself as to the statutory meaning of trade, support its decision. Having been assisted by both counsel through the facts so established which incorporate virtually the whole of the evidence and after a perusal of the documents on my own unaided, I cannot say that on the facts admitted or proved there was no evidence upon which the Board could reasonably arrive at its decision. Occasionally, an isolated transaction may warrant a determination either way, but there is no evidence of trading all one way. In my judgment, it is impossible to say that the true and only reasonable conclusion from the facts admitted or proved contradicts the Board's finding of "no trade". In fact, on an cverall examination I would have myself arrived at the same conclusion if I had had the privilege to sit with members of that Board.

70. It is indeed a question of degree and a question of fact for the determination of the Board of Review to which the Legislature has exclusively delegated such functions. The conclusion reached by the Board cannot be vitiated in the light of the bulk of evidence accepted which, reviewed in its entirety, bears the imprint of a course of action pursued with a view to making an investment. The Board exhaustively examined and reviewed the Respondent's conduct, and its succintly reasoned decision can in no way be faulted. In the result, the appeal must be dismissed with costs.

Representation:

Mr. Edmonds, counsel for the Appellant.

Mr. Henry Litton, Q.C. and Mr. K.H. Woo instructed by Messrs. Johnson, Stokes & Master for Respondent.

(1) 50 T.C. 1 at p.45E

(2) 36 T.C. 207 at p.227

(3) 50 T.C. 1 at p.96H

(4) Vide Whiteman and Wheatcroft p.254 para.5-15

(5) 50 T.C. 1 at p.96C/D

(6) 11 T.C. 538 at p.545

(7) 13 T.C. 251 at p.p.269 & 270

(8) 16 T.C. 381 at p.388

(9) 36 T.C. 207 at p.p.224, 227 & 231

(10) 39 T.C. 636 at p.p.645 & 646

(11) 40 T.C. 281

(12) 42 T.C. 369

(13) 3 T.C. 542 at p.549

(14) 10 T.C. 29 at p.51

(15) [1921] 2 K.B. 332

(16) HKTC 11 at p.21

(17) HKTC 551 at p.568

(18) 36 T.C. 207

(19) 40 T.C. 281 at p.296

(20) 40 T.C. 443

(21) ibid. at p.225

(22) 36 T.C. 207

(23) (1950) 16 S.A.T.C. 377

(24) 1965 H.K.L.R. 493 at p.523

(25) 11 T.C. 610 at p.614

(26) 40 T.C. 281 at p.299

(27) 4 T.C. 422 at p.423

(28) 5 T.C. 159 at p.166

(29) 5 T.C. 159 at p.166

(30) 11 T.C. 538 at p.542

(31) 36 T.C. 207 at p.230

(32) 40 T.C. 281 at p.288

(33) Para.5-15 at p.254 Whiteman & Wheatcroft on Income Tax 2nd Ed.

(34) 6 ATR 201, Headnotes

(35) ibid at p.166

(36) 39 T.C. 636 at p.647

(37) 40 T.C. 281 at p.291

(38) 47 T.C. 580 at p.598B/C and p.601C

(39) [1969] 1 WLR 275

(40) Ibid 377

(41) 42 D.L.R. (3rd) 277

(42) 50 T.C. 1 at p.p.90I & 91A

(43) Silke on South Africa Income Tax para.65

(44) Per Lord Justice Clerk in Californian Copper Syndicate's case ibid p.166

(45) Per Lord Coleridge C.J. in I.R.C. v. Incorporated Council of Law Reporting 3 T.C. 105 at p.133

(46) Per Pennycuick, J. in Lewis Emanuel's case ibid at p.377

(47) The Scottish Automobile & General Insurance Co., Ltd. 16 T.C. 381 at p.389 per Lord President, Lord Clyde

(48) 9 T.C. 309 at p.314

(49) 10 T.C. 29 at p.47

(50) 14 T.C. 490

(51) 12 T.C. 358

(52) 11 T.C. 297

(53) 15 T.C. 333

(54) [1969] 1 W.L.R. 275

(55) 40 T.C. 281 at p.288

(56) 13 T.C. 251 at p.271

(57) Ibid at p.542

(58) E.F. George on Taxation and Property Transactions (3rd Ed.) p.15

(59) E.F. George on Taxation and Property Transactions (3rd Ed.) p.15

(60) Case 54 18 C.T.B.R. (N.S.)

(61) 38 T.C. 203 at p.214

(62) 10 T.C. 29 at p.47

(63) 28 T.C. 250

(64) 42 DLR (3rd Ed.) 277 at p.283

(65) 28 T.C. 250 at p.260

(66) 9 T.C. 309 at p.p.311 & 314

(67) 50 T.C. 1 at p.97

(68) [1931] A.C. 224 at p.251

(69) H.K.T.C. 123 at p.149

(70) 42 T.C. 369 at p.379

(71) 24 T.C. 498 at p.502

(72) 36 T.C. 207 at p.225

(73) [1969] 1 W.L.R. 275

(74) 36 T.C. 207

IN THE SUPREME COURT OF HONG KONG

APPELLATE JURISDICTION

IN LAND REVENUE APPEAL NO. 4 OF 1977

-----------------

Coram: Mr. Commissioner LIU, Q.C. in Court.;

Date of Judgment: 3rd December, 1977.

Order: Appeal dismissed with costs to be taxed on a common fund basis.

Cases cited in judgment:

Cases referred to by Mr. Edmonds, counsel for the Appellant, in his submissions but not cited in judgment:

Cases referred to by Mr. Litton in his submissions but not cited in judgment:-

Representation: