Messrs. Louis Kan-nang Kwong and Another v. Commissioner of Inland Revenue

HCIA000005/1988

Inland Revenue Appeal No. 5 of 1988

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

MISCELLANEOUS PROCEEDINGS

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Between

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Coram: The Hon. Mr. Justice Mayo in Court

Date of Hearing: 28th - 30th November,1988

Date of Delivery of Judgment: 12th December, 1988

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JUDGMENT

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1. The most convenient way of dealing with this judgment is to include in its entirety the case which has been stated by the Board of Review:

"l.    We being the Board of Review appointed under the said Inland Revenue Ordinance to hear the appeal by Messrs. Louis Kwan-nang KWONG and Carlos Kwok-nang KWONG (hereinafter called "the taxpayers") gave a decision dismissing the said appeal for the reasons hereinafter set out.

2.    The questions for our consideration were :-

3.    We heard the said appeal on divers dates in the summer of 1986 and gave our decision on the 26th September 1986.

FACTS AGREED OR FOUND

4.    The following facts were not in dispute :-

5.    Although basically the said agreement was a Tenancy Agreement we consider the clauses therein most relevant to the issues before us are as follows:-

We also considered that the provision for the rent as set out in clause 1 did not differentiate between the building and any of its contents. For the first 18 months the rental was to be $15,000.00 per month, for the next six months $20,000.00 per month and for the last year $25,000.00 per month. Clause 8(1) gave the tenant an option to renew for a further two years at $30,000.00 per month for the first year and $35,000.00 per month for the second. We heard evidence, which we accept that the option was exercised and that thereafter there were three further renewals being (1) 01-06-80 to 31-05-82 at $70,000.00 per month, (2) 01-06-82 to 31-05-85 and (3) 01-06-85 to 31-05-92. We were not told the rentals for the periods in (2) and (3). The rentals which we were told about all exceeded the rateable or assessable value from time to time and to a greater or lesser degree.

6.    We also found the following facts:-

7.    We made no exact findings as to how much the Tenant has spent. Evidence was given that there was no sound-proofing, the projectors worked but were in need of repair, the sound was distorted and some seats needed to be replaced. Also the Tenant gave evidence that it took about a month to put matters right including the installation of a new screen. He said he had spent about $300,000.00 in doing so but he could give no details as it was all so long ago. His accounts submitted for the year ended 31st December 1975 showed that he spent $4,589.90 on repairing the projectors, $8,038.00 for repairs to the air-conditioners, their maintenance fees, $20,816.70 for general repairs and renewals, and $211, 400.00 for decorations. Further, Louis KWONG gave evidence that he was employed by the Tenant, presently at $5,000.00 per month. However, we did not think that it mattered whether or not he is strictly an employee of the Tenant.

SUBMISSIONS OF THE REVENUE

8.    The Commissioner's representative:-

SUBMISSIONS OF THE APPELLANTS

9.    Counsel in contending the two points (cited in paragraph 2 above) on behalf of the taxpayers cited cases and such authorities as Alfred Leney & Co. Ltd. v. Whelan [1934] 2 K.B. 511, Whelan v. Alfred Leney & Co. and Loughnan v. Marston’s Dolphin Brewery, Ltd. [1936] A.C. 393; Shop investment Ltd. v. Sweet [1940] 1 A.E.R. 533 also, particularly on a restrictive use of the word "business", Ormond Investment Co. Ltd. v. Betts (Inspector of Taxes) 1928 A. C. 143. Counsel also himself referred to Salisbury House Estate Ltd v. Fry (Inspector o Taxes) Vol. 15 Tax Cases 266; American Leaf Blending Co. v. Director-General of Inland Revenue in [1979] A. C. 676 and Lam Woo Shang v. C.I.R. 1 H.K.T.C. 123. Further, he drew our attention to the amendment of the word "business" in the definition, Section 2 of the Inland Revenue Ordinance and suggisted that this was because of the decision in the Lam Woo Shang case. In reply to the Commissioner's contention, Counsel for the taxpayers, endeavoured to distinguish the facts here from those in Case No. D3/81. He asserted that in this earlier case the taxpayer and his wife had formed a limited company carry on the business of a ballroom, then rented the premises for that purpose, with the taxpayer and his wife being the directors. Later the taxpayer and his wife bought the premises. Further the Board there had found that the taxpayer's wife, who had carried the licence for many years, was acting, not on behalf of the tenant, but on behalf of taxpayer and that the wife had carried out these and other services for the benefit of the taxpayer. Also, there were other differences between the facts there as compared with the facts here Counsel argued that protection of the goodwill is a clause found in many lettings of business premises, and is not in itself inconsistent with an ordinary letting. He further pointed out that when the rateable value was raised in 1976/77 there was only a mere $20,000.00 above the rateable value or just over 10% and that it was usual with premises in Hong Kong to find that the actual rental exceeding the rateable value. Counsel also argued that Case No. D3/81 was probably wrong in law (unless a tenancy agreement was a sham), and certainly should not be followed on the facts here. He again pointed to the change in the definition of the word "business". Counsel finally argued that it was anyhow clear in law from the cases he had cited, that only the rents attributable to the plant apparatus and equipment are taxable.  In his contention this would amount to about 15%, but if we did not hold that view, then we should proceed to estimate the amount ourselves on what evidence was available.

CONCLUSIONS

10.    We were of the opinion that the facts here were on all fours with those in Case No. D3/81, the only difference is that in the present case the taxpayers acquired the cinema by inheritance rather than by purchase, but we were of the opinion that the taxpayers could have and indeed may have already assented to the legacy of the cinema in their favour (i.e. by 1st July 1975), for which proposition we have cited in our decision Proud v. Janssens [1964] HKLR 863. Although we agreed we were not bound by the decision in Case No. D3/81 we could see no good reason to depart from it. We thought that Counsel for the taxpayers was probably right in his speculation as to why the definition of "business" has been changed, but we also thought that the Board of Review in Case No. D3/81 was right when they held that it could still include sub-letting by the Crown lessee if the circumstances are such as to justify such a finding. As we had found that the cinema was let as a going concern at rentals in excess of the rateable or assessable value, as it was also let on the basis that the name would continue to be used under the licence held by Louis KWONG and the goodwill was to be protected and nothing was to be done to affect Louis KWONG's right to operate a cinema, we must conclude that the taxpayers were in fact engaged in the business or adventure in a nature of a trade of letting out a cinema. We decline to apportion the rental attributable to the furniture fitting and equipment both because there was no evidence and also we could see no basis for holding that only the proportion of the rent attributable to them should be taxable.

QUESTIONS

The questions of law for determination by the Court are:-

Ref. B/R 68/83; D 28/86; SC 3/88

IRA/2/700; IRA/3/92"

2. I also consider that the most satisfactory treatment of the case is to attempt to answer question 4 first as the answer to this question provides the key to all the other questions.

3. Did the Board err in law in holding that on the facts and evidence presented the Taxpayer's letting of the international theatre constituted a business or trade or adventure in the nature of trade?

4. Mr. Bernacchi for the Taxpayers made a lengthy submission which placed heavy reliance upon a number of pre 1952 English cases. In particular he referred to Alfred Leney & Co. Ltd. v. Whelan (Inspector of Taxes) [1934] 2 K.B. 511, Whelan v. Alfred Leney & Co. Ltd. and Loughnan v. Marston's Dolphin Brewery Ltd. [1936] A.C. 393, Salisbury House Estate Ltd. v. Fry (Inspector of Taxes) Vol. 15 (1931) T.C. 266, Coman v. Governors of The Rotunda Hospital, Dublin [1921] A.C. 1 and Shop Investment Ltd. v. Sweet [1940] 1 AER 533 in support of his contention that all the Taxpayers had done was to lease the cinema premises in question to the tenant Mr.Yuen and that the Taxpayers were not in any way conducting a cinema business in such a way as to lay themselves open to a charge of profits tax.

5. I am satisfied that Mr Hinchin for the crown was correct in his contention that all of these cases are of very little, if any, assistance to me in determining whether the letting of the cinema constituted a business. His authority for this proposition was referred to in the speech of Lord Guest in Commissioner of Inland Revenue v. Hanover Agencies 1967 AC 681 at p. 687:

"The appellant, however, submitted that in order to ascertain whether the respondents were carrying on business the terms of section 5 of the Income Tax Law must be looked at in order to see whether they were carrying on a business on the profits of which they were taxed. This, it was said, was the proper question which arose. The scheme of the Income Tax Law as a whole must be looked at. Section 5 defines chargeable incomes. The classes of income profits or gains are respectively described as income profits or gains arising or accruing(a)(i) from any kind of property, (ii) from any trade, business, profession, employment or vocation and (b)(ii) rents, royalties, premiums and any other profits arising from property. It was submitted that the charge to income tax on the respondents was in respect of the rent arising from the "Bank Building." Thus, it was argued, they were not carrying on business on the profits of which they were taxed, but the profits on which they were taxed arose from the rent. Counsel attempted to draw an analogy from Fry v. Salisbury House Estate Ltd. This company, formed to acquire and manage a block of buildings, let out the rooms as unfurnished offices to tenants. The company also provided services at an additional charge. They were assessed under Schedule A to income tax on the gross annual value of the building. The Revenue claimed, in making an assessment under Schedule A, to include the rents of the offices as part of the receipts of the trade, making allowance for tax assessed under Schedule A. This claim failed, the House of Lords holding that the assessment under Schedule A was exhaustive. There are expressions of opinion in some of the speeches that the company were not carrying on a trade, but these expressions must be taken in the context of the British Income Tax Law and particularly in the context of Schedule D. The real ratio decidendi is contained in the speech of Lord Atkin, when he says that annual income from the ownership of land can only be assessed under Schedule A and that the option of the Revenue to assess under whatever Schedule they prefer does not exist. The Schedules are mutually exclusive. In their Lordships' opinion the decision in the Salisbury House case has no bearing on the construction of the provisions of the Income Tax Law of Jamaica where there is no parallel to the division of the charge to income tax into various separate and distinct Schedules. Section 5 already referred to is an omnibus section which treats all profits and gains together whether arising from property or from a trade, business, employment or profession, or in respect of rent or emoluments, salaries or wages. These are all treated as profits or gains. There is no heading corresponding to Schedule A and there is no provision for income tax in respect of the ownership of lands and hereditaments, it is only the rent of leased property which is charged. There is in fact in Jamaica a separate property tax on the capital value of all property shown in the Valuation Roll and imposed on the person in possession of the property (Property Tax Law, c.212). The question, therefore, reverts to whether the respondents were carrying on a business. "

6. The observations made by Lord Guest have equal application to Hong Kong. The scheme of taxation in Hong Kong is entirely different to that of the United Kingdom. There is no overall income tax in Hong Kong. Under the Inland Revenue Ordinance, cap. 112, there are various separate heads of tax. The principles applying to each of these heads are separate and distinct and accordingly the principles propounded in the cases cited by Mr. Bernacchi are of very little assistance to me in attempting to answer the questions which have been posed. For this reason I do not propose commenting upon the detailed submissions made to me by Mr. Bernacchi in this connection.

7. The first matter I must decide is what criteria I should adopt in deciding whether the Taxpayers were conducting a business.

8. I accept Mr. Hinchen submission that I must have regard to the agreed facts and the facts found by the Board. I must not attempt to subsitiute my own interpretation of the facts unless it is demonstrably the case that no reasonable Tribunnal could have reached the conclusion it did upon the basis of the evidence before it. Subject to this my function is limited to determining whether the Board has erred in law. There is a helpful summary of these principles in Lord Radeliffe's speech at p. 36 of Edwards v. Bairstow 1956 AC 14 :

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 misreading 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. "

9. The question therefore which I have to decide is whether on the said facts any reasonable Tribunnal could find that the Taxpayers were conducting a business.

10. Various attempts have been made by the courts to determine whether any particular activity amounts to conducting a business. As early as 1884 Lindley L. J. said in Rolls v. Miller vol. 27 ch. 71 at p. 87 :

"Can it be said to be carrying on, or allowing to be carried on a business, on these premises? When we look into the dictionaries as to the meaning of the word "business," I do not think they throw much light upon it. The word means almost anything which is an occupation, as distinguished from a pleasure-anything which is an occupation or duty which requires attention is a business-I do not think we can get much aid from the dictionary. We must look at the object of the covenant; and, looking at both, I have no hesitation in saying that this is clearly within the words and within the object of the covenant. I think the view of Mr. Justice Pearson was correct, and that the appeal ought to be dismissed with costs. "

11. This is a very wide interpretation of the word "business" and could cover a large range of activity. What I think is clear is that each and every situation has to be viewed on its own merits and it is necessary to adopt a broad view and take cognisance of all the surrounding circumstances.

12. It may even be the case that the mere letting of premises may amount to running a business. This can be seen from a passage in the speech of Lord Diplock at p. 565 of American leaf Blending v. Director-General 1978 STC. 561.

"On the question special to the instant case, viz whether the company in 1968 and 1970 was carrying on a business of letting out its premises for rents, the Special Commissioners were of opinion that it was. The question is one of fact, and in the High Court Sani J. treated this expression of opinion as a finding of fact by the commissioners which he should not disturb. Closer analysis of the stated case, however, discloses that the opinion expressed by the Special Commissioners was not a finding of fact but a conclusion of law. They accepted the company's submission that because the letting of its property was one of the objects set out in its memorandum of association this was in law conclusive that in making any letting of its premises it was carrying on a business.

So stated this is, in their Lordships' view, too broad a proposition. It derives apparent support from an observation of Pollock MR in Inland Revenue Comrs v Westleigh Estates Co. Ltd where he said : '....... if [a comapny's objects are business objects and are in fact carried out, it .... carries on business.'  This, however, was said in the context of a company which was carrying out one of the principal objects stated in its memorandum. Their Lordships would not endorse the view that every isolated act of a kind that is authorised by its memorandum if done by a company necessarily constitutes the carrying on of a business.

On the other hand their Lordships do not think that the dicta to be found in some of the speeches in the Salisbury House case, and in particular those of Lord Warrington of Clyffe and Lord Macmillan on which the Federal Court relied and which suggest that the letting of land does not constitute a 'trade', have any relevance to the question whether the letting of land by the company in the instant case amounted to the carrying on of a 'business' within the meaning of the 1967 Act. 'Business' is a wider concept than 'trade'; and in the Hanover Agencies case the Board uttered a warning against seeking to apply these dicta outside the narrow context of British income tax law and in particular that of Sch D.

In the case of a private individual it may well be that the mere receipt of rents from property that he owns raises no presumption that he is carrying on a business. In contrast, in their Lordships' view, in the case of a company incorporated for the purpose of making profits for its shareholders any gainful use to which it puts any of its assets prima facie amounts to the carrying on of a business. Where the gainful use to which a company's property is put is letting it out for rent, their Lordships do not find it easy to envisage circumstances that are likely to arise in practice which would displace the prima facie inference that in doing so it was carrying on a business.

The carrying on of 'business', no doubt, usually calls for some activity on the part of whoever carries it on, though, depending on the nature of the business, the activity may be intermittent with long intervals of quiescence in between. In the instant case, however, there was evidence before the Special Commissioners of activity in and about the letting of its premises by the company during each of the five years that had elapsed since it closed down its former tobacco business. There were three successive lettings of the warehouse negotiated with different tenants; there was the removal of the machinery from the factory area which made it available for use for storage and separate letting of that area to a flesh tenant; and as recently as October 1968 there was the negotiation of a letting to a single tenant of both the factory area and the warehouse. "

13. That case involved a company. It may however be the case that the situation would be no different for an individual or individuals. I refer to part of the judgment of Lord Sterndale M.R. at p. 273 of of Inland Revenue Commissioners v. Korean Syndicate 1921 3KB 258:

"A great deal of argument was addressed to us to this effect. If in this case the Syndicate was an individual, he would not be carrying on a business, and there can be no difference for this purpose between an individual and a limited company. I do not assent to either of those two propositions. I do not think it would have been at all clear, if the Syndicate were an individual, that he was not carrying on a business; and for this reason. You would have to see what he was doing and why he was doing it and if he was doing it under the circumstances in which the Syndicate was doing it namely, trying to attain the object of acquiring a concession and turning the same to account then I think be might very well be carrying on a business. I do not admit, either, that there can be no difference for this purpose between an individual and a company. If once you get the individual and the company spending money on exactly the same basis, then there would be no difference between them at all. But the fact that the limited company comes into existence in a different way from that in which an individual comes into existence is a matter to be considered. An individual comes into existence for many purposes, or perhaps sometimes for none, whereas a limited company comes into existence for some particular purpose, and if it comes into existence for the particular purpose of carrying out a transaction by obtaining concessions and turning them to account, then that is a matter to be considered when you come to decide whether doing that is carrying on a business or not. "

14. What is clear from the facts of this case is that the transaction between the Taxpayers and Mr. Yuen amounted to more than a simple tenancy of a cinema.

15. Prior to the granting of the tenancy to Mr. Yuen they ran the cinema as a business as Executors of their father. The licence for running the cinema was in Louis Kwong's name and continued to be in his name after the granting of the tenancy in 1975.

16. It is clear from the covenants which the tenant was required to enter into that it was contemplated that the cinema would continue to be operated as a business.

17. There was a requirement to insure the premises including "all plant equipment and furniture and fittings" in the sum of $1.3M together with 24 months rent.

18. There was also an: obligation to maintain the plant and equipment and not to do anything to detrimentally affect the goodwill of the business or to bring its name into disrepute.

19. These provisions were obviously intended to protect the Taxpayers interests in the cinema business.

20. In my view there was ample material available to the Board for them to come to a conclusion that the letting of the cinema consituted to a business for the purposes of Section 14 of the Inland Revenue Ordinance, cap. 112. I would go further and state that even if I was permitted to make a judgment of the situation myself I would have come to the same conclusion as the Board did.

21. The consquence of this is that the answer to question 4 is no. The Board did not err in holding as they did.

Question 1.

22. Was the Board correct in law in holding that even after the 1965 amendment to the definition of "business" in Section 2 of cap. 112 letting (as applied to a cinema building by persons not being a corporation) can still constitute a "business" in certain circumstances for the purpose of the Inland Revenue Ordinance?

23. There is nothing in either the original definition or the 1965 amendment to lead me to a conclusion that the passages I have above cited are in any way invalidated or inapplicable to Hong Kong. For the same reasons as I have given in my reply to question 4 I would answer this question in the affirmative. Question 2.

24. Further or alternatively did the Board err in law in failing to separate and estimate the proportion of the rental attributable to furniture fittings and equipment (and/or goodwill) on the basis of such evidence as available and hold that only that proportion should be subject to profits tax?

25. I have already indicated that the pre 1952 English cases have little or no relevance to the present situation. This being the case I am satisfied that it would not be appropriate or right to embark upon the type of exercise which was ordered by the House of Lords in Loughnan v. Marston's Dolphin Brewery Ltd. 1936 AC 393 where it was held the lessors were liable to tax only on the surplus tax in respect of profits representing personal goodwill, user of trade marks, trade labels and advertisements and other property not being corporeal heriditaments.

26. The rational of this is that the scheme of taxation applicable at that time in England was quite different to the situation here in Hong Kong.

27. In so far as it is applicable I would imagine that the Taxpayers would be given credit for any Property Tax they may already have paid by virture of the provisions contained in Section 25 of the Ordinance. That however would seem to indicate to me nothing more than a simple accounting exercise. In summary the answer to the question is No.

Question 3.

28. Did the Board on the primary facts as agreed or found, fail to appreciate that the case with the Taxpayer was different from decision in case D3 of 81 which was founded on its own particular facts and, therefore, err in law in holding that the Board saw no good reason to the part from the said decision?

29. Again the answer must be - No. I agree that for all relevant purposes the present case was indeed on all fours with the decision in case D3/81. There was no good reason for the Board to depart from the decision in that case.

30. That seems to deal with all of the questions which have been posed. I will hear the parties on costs.

Representation:

Mr. Brook Bernacchi, Q.C. & Mr. Patrick Woo (Kwong & Lam) for Appellant

Mr. David Hinchen & Miss A. Au (Attorney General's Chambers) for Respondent