China Map Ltd v. Commissioner of Inland Revenue

cacv 341/2006, CACV 342/2006, CACV 343/2006 AND CACV 344/2006

CACV 341/2006

in the high court of the

hong kong special administrative region

court of appeal

civil appeal no. 341 of 2006

(on appeal from HCIA NO. 4 of 2005)

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BETWEEN

CACV 342/2006

in the high court of the

hong kong special administrative region

court of appeal

civil appeal no. 342 of 2006

(on appeal from HCIA NO. 5 of 2005)

______________________

BETWEEN

CACV 343/2006

in the high court of the

hong kong special administrative region

court of appeal

civil appeal no. 343 of 2006

(on appeal from HCIA NO. 6 of 2005)

______________________

BETWEEN

CACV 344/2006

in the high court of the

hong kong special administrative region

court of appeal

civil appeal no. 344 of 2006

(on appeal from HCIA NO. 7 of 2005)

______________________

BETWEEN

______________________

Before: Hon Rogers VP, Suffiad and Saunders JJ in Court

Date of Hearing: 26 June 2007

Date of Handing Down Judgment: 4 July 2007

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J U D G M E N T

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Hon Rogers VP:

1.These were appeals from a judgment of Chung J given on 4 August 2006.  The matters before the judge were appeals by way of case stated from a decision of the Board of Review dated 26 September 2003.  The judge answered the first question in the case stated in the negative and in relation to paragraph (i) of the second question in the affirmative and paragraph (ii) of the second question in the negative.  In the light of that the judge affirmed the decision of the Board of Review and ordered that the costs of the case stated should be paid by the appellant.  At the conclusion of the hearing of this appeal, judgment was reserved which we now give.

Background

2.The four appellant companies are all subsidiary companies of one holding company.  In the period between July 1988 and April 1993 a number of properties located on Lockhart Road and Jaffe Road were acquired in the names of those companies, or at least in the names of trustees who held the properties for those companies.  Apart from one lot, all the lots were either contiguous or separated by a service/scavenging lane.

3.The appellant companies were assessed for profits on the sale of the properties and they gave notice of objection to the Commissioner.  On 26 February 1999 the Commissioner transmitted his determination to the companies.  The relevant part of his determination was that the profits tax assessment for the year of assessment 1994/1995 was confirmed.  In doing so the Commissioner stated that he understood the issue for his determination was whether the profit derived by the companies was of a capital nature not chargeable to profits tax.

4.On 19 March 1999 the appellant companies gave notice of appeal against the above assessments.  Their letters stated that the grounds of the appeal were that the profits referred to in the determinations were capital in nature and not assessable to profits tax or alternatively that the assessment was excessive.

5.The terms of the appeal letters were specifically noted in paragraph 30 of the case stated.  Indeed the position taken before the Commissioner and in the appeal letters was reflected in the way counsel for the four appellant companies opened the appeal before the Board of Review.  On page 15 of the transcript the following is recorded:

“MR CHAIN:  (Counsel for the Appellants): Indeed, Chairman, you must be right to say you are not concerned with the reasons, but I suppose especially the issue in this case, of course, is one very simple and short issue and straightforward: capital or income, if I may call it that way.  But of course in order to come to a conclusion of the Board will have to look into the facts, both the primary facts in whatever inference that can be drawn, hear the evidence and come to a conclusion on itself.  But at the same time...

CHAIRMAN:  But just to sum up the position is so succinctly, it is a question of fact: trading versus capital.  And the evidence, the appellant will have to give evidence on what his intention is, the stated intention.  The question of fact at the end of the day is whether the stated intention was genuinely held, realistic or realisable.

MR CHAIN:    Yes, if that is the view of the Chairman and Members of the Board.

CHAIRMAN:  Is that the correct approach?

MR CHAIN:    Yes, certainly.

MR REYES:    (Counsel for the Commissioner): I am happy with that approach, Mr Chairman.”

6.After the evidence had been heard, the closing submissions were put in a slightly different way and are summarised, apparently correctly on my reading of those parts of the transcript which were drawn to this court’s attention, in paragraph 35 of the case stated:

“35.	The Board hoped that the Board would not be doing Mr Benjamin CHAIN an injustice to summarise his closing submission on the last day of the hearing as follows:
	(a)	the burden was on the respondent;
	(b)	the Burton cast on the appellants by section 68(4) was no more than to provide sufficient evidence to show that the respondent’s conclusion that the appellants were trading was wrong;
	(c)	there was no evidence that the appellants were trading; and
	(d)	there was no or no sufficient evidence that the appellants’ activities were caught by section 14.”

The Board of Review’s decision

7.As set out in the case stated, the Board considered the evidence of the sole surviving shareholder of the four appellant companies and judged it against what it said were three different versions of the intention of those running the companies which had been expressed over the years.  Those were gleaned from statements made to the auditors which were reflected in the notes to the accounts in particular one of the companies, statements made to the assessors and, finally, statements made in the supplemental witness statement.  The Board also had the benefit of hearing the oral evidence of the sole surviving shareholder.

8.The Board also considered the practicalities involved in any redevelopment and, in particular, as to what the intention was at the time when the companies had taken necessary steps towards a potential redevelopment of six of the properties.  It was said in the case stated that there were questions which were raised and unanswered about the practicalities of the matter and as to the financial capacity of the appellant companies to undertake the redevelopment.  The conclusion to which the Board arrived was set out in paragraphs 66-8 of the case stated as follows

“66.	For the reasons given, the appellants had not proved any of the following:
	(a)	that at the time of the respective acquisitions of Blocks 1, 2a, 2b, 4, 5, 6, 7, 8 or 9, the intention of any of the appellants was to hold any of them or any proposed new building(s) on a long-term basis, whether for rental income or at all;
	(b)	the appellants’ financial ability, with or without their shareholders and directors and ultimate beneficial owners of their shares, to demolish the old buildings, construct the proposed new building(s), and to keep the proposed new building(s) indefinitely.
67.	The appellants had not proved that the “stated intention” was in fact, not to mention genuinely held, realistic or realisable.
68.	The appellants had not discharged the onus under section 68(4) of proving that any of the assessments appealed against was excessive or incorrect.  All 4 appeals would therefore be dismissed.”

The case stated

9.The first attempts to persuade the Board to state a case fell on stony ground.  The first question of law which the Board was asked to incorporate in a case stated was:

“Whether the Board of Review was correct in law in holding the Appellants were, in acquiring and disposing of the relevant properties, carrying on a trade or, in the alternative, an adventure or concern in the nature of trade, within the meaning of the Inland Revenue Ordinance (Cap. 112).”

10.In respect of that the Board said:

“Nowhere in the Decision did we find that the appellants “were, in acquiring and disposing of the relevant properties, carrying on a trade or, in the alternative, an adventure or concern in the nature of trade”, whether within the meaning of the Ordinance or at all.”

11.Likewise the fourth and fifth questions which were put to the Board were:

“(4)      Whether there was evidence on which the Board of Review could properly conclude, in so far as it was a question of fact, that the Appellants realised the profits in question from the carrying on of a trade or an adventure or concern in the nature of the trade.

(5)        Whether the conclusion of the Board of Review that the Appellants realised the profits in question from the carrying on of a trade or an adventure or concern in the nature of the trade was, in so far as it was a question of fact, one which no reasonable tribunal, properly instructed in the law, could have reached on the evidence before it.”

12.In answer to those the Board said:

“Nowhere in the Decision did we find that the appellants “realised the profits in question from the carrying on of a trade or an adventure or concern in the nature of the trade.”

Question (5) also misrepresents the Decision and does not arise from the Decision.  Nowhere in the Decision did we find that the appellants realised the profits in question from the carrying on of a trade or an adventure or concern in the nature of the trade.”

13.The four appellant companies then commenced judicial review proceedings as a result of which there was an order directing the Board to state four cases incorporating two questions of law.  It was in those circumstances that, eventually, a case was stated.  The questions in the case stated were:

“(1)	In the light of all the evidence before the Board and the findings made by the Board, whether the Board’s conclusions in paragraphs 66 and 67 of the Decision, namely, that the [appellants] had not proved any of the following:-
	(i)	that at the time of the respective acquisitions of Blocks 1, 2a, 2b, 4, 5, 6, 7, 8 or 9, the intention of any of the [appellants] was to hold any of them or any proposed new building(s) on a long term basis, whether for rental income or at all;
	(ii)	that the appellants’ financial ability, with or without their shareholders and directors and ultimate beneficial owners of their shares, to demolish the old buildings, construct the proposed new building(s), and to keep the proposed new building(s) indefinitely,
		and that the appellants had not proved that the “stated intention” was in fact held, not to mention genuinely held, realistic or realisable; was contrary to the true and only reasonably conclusion.
(2)	Upon the proper construction of section 68(4) of the Inland Revenue Ordinance, Cap. 112, and given that the stated ground of appeal before the Board was that ‘the profits referred to in the determination were capital in nature and were not assessable to Profits Tax or alternatively that the assessment was excessive’
	(a)	whether in the light of the Board’s conclusions as set out in question (1) above the Board was correct in law in dismissing the appeal on the basis that the appellants had not discharged the onus under section 68(4) of the Inland Revenue Ordinance, Cap. 112 of proving that any of the assessments appealed against was excessive or incorrect;
	(b)	whether the Board had erred in law in dismissing the appeal without making a finding that the appellants were, in acquiring and disposing of the relevant properties, carrying on a trade or, in the alternative, an adventure or concern in the nature of trade, within the meaning of the Inland Revenue Ordinance, Cap. 112”.

The judgment below

14.As already noted the judge answered the questions in the case stated in a manner which was unfavourable to the appellant companies.  However, in reaching his conclusion that the Board had not been led so far astray as to reach a conclusion contrary to the true and only reasonable conclusion the judge nevertheless made the following observations in paragraphs 37 and 38 of his judgment:

“37.      First, the way in which the Commissioner opposed the taxpayers’ case (which remains the same in the case-stated) gives the impression that the taxpayers’ purpose of acquiring the subject lots (for property redevelopment) was undisputed.  Such being the case, purely from a procedural fairness point of view, the Board ought not have taken upon itself the task of examining matters which essentially were related to the feasibility of the property redevelopment plan (not at least without giving adequate notice to the taxpayers).

38.       Secondly, it can be inferred that the Board examined the last-mentioned matters having taken into account the observations in All Best Wishes Ltd.:-

“The intention of the taxpayer, at the time of acquisition, and at the time when he is holding the asset is undoubtedly of very great weight.  And if the intention is on the evidence, genuinely held, realistic and realisable, and if all the circumstances show that at the time of the acquisition of the asset, the taxpayer was investing in it, then I agree [with the submission that the taxpayer’s intention at the time of acquisition is determinative] … ” (emphasis supplied) (p. 771).”

This appeal

15.On this appeal Mr Kotewall SC, who appeared in this court on behalf of the appellants, argued that it was not sufficient for the Board simply to hold that the profits referred to in the determination were not of a capital nature.  Whilst he accepted that on an appeal to the Board the onus of proving that the assessment appealed against was excessive or incorrect lay on the appellant as provided by section 68(4) of the Inland Revenue Ordinance (“the Ordinance”), he , nevertheless, relied on such cases as Leeming v Jones (H.M. Inspector of Taxes) 15 TC 333 Hillerns and Fowler v Murray (H.M. Inspector of Taxes) 17 TC 77 for the proposition that it was incumbent on the Board, in holding that tax was payable, to make a finding that the appellants were carrying on a trade or an adventure or concern in the nature of trade within the meaning of section 14 of the Ordinance.  Quite patently, as the Board itself made clear when first requested to state a case, the Board made no such finding.

16.In my view this is not simply a case of the Board having decided the matter on the basis of where the onus lay on an appeal to the Board.  As is clear from the determination of the Commissioner, the formal notice of appeal to the Board and the opening statement by counsel for the appellant companies before the Board, the point argued before the Board was whether the profits were capital in nature.  It was on the basis of the appellant companies’ argument that they were of a capital nature that it was said in closing submissions that the profits were not trading profits.  It is clear from the opening that one was treated as the reverse of the other.  It was thus that in closing submissions counsel put the matter that the burden cast on the appellant companies was to provide sufficient evidence to show that the conclusion that the appellant companies were trading was wrong.  Nevertheless, the evidence to that effect was evidence that the profits were capital in nature.  That was the only evidence and the only basis upon which the appellant companies relied before the Board.  That having failed.  It appears to me that the appeal must fail.

17.There are two further observations I would make.  In both the cases of Leeming v Jones (H.M. Inspector of Taxes) and Hillerns and Fowler v Murray (H.M. Inspector of Taxes) the point specifically taken was that the relevant taxpayers were not trading.  In these cases although that was the argument put in the closing submissions before the Board, it was put on the basis of being the logical conclusion that the only profits made by the appellant companies were capital in nature, thus falling within the exception in section 14 of the Ordinance.

18.The other matter which I would observe is that I consider that the judge’s conclusion that the Board’s conclusion as to whether the profit was capital was not subject to judicial interference despite his reservations, was correct.  Although the Board may have treated the words “realistic and realisable” which appear in the All Best Wishes Ltd v CIR 3 HKTC 750 decision as entailing some extra requirement, as opposed to being what I consider they were intended to convey namely a rough test of the validity of a professed intention, I do not consider that the Board’s conclusion was wrong.

19.I might add that it might have been of greater assistance had the Board simply said that the appellants’ point in the appeal before it had been that there was no trade because it was a capital profit and hence there was no call on the Board to make a specific finding of trading as that was not otherwise disputed or in issue.  Instead a rather more cryptic approach was adopted by the Board.

20.I would agree that it would be unsatisfactory for a court to reach a determination simply on the question of onus of proof and that one particular party had not established its case.  On occasions courts and tribunals have to do that.  In this case, however, I do not consider that that was the position.  The appellants chose to rely upon evidence which was rejected as their ground of appeal.

21.In those circumstances I consider that the judge came to the correct conclusion in answering the questions posed in the case stated.   That being the result, questions, which were raised and discussed in the course of the hearing of this appeal, as to what the proper course would be if the case were remitted to the Board for further consideration do not arise.  In those circumstances, it would be a counsel of prudence for this court not to say anything further than is necessary in deciding the case.

22.I would, therefore, dismiss this appeal with an order nisi of costs in favour of the Commissioner.

Hon Suffiad J:

23.I fully agree with the judgment of the Vice President given above and have nothing to add.

Hon Saunders J:

24.I agree.

Mr Robert G Kotewall SC & Ms Catrina Lam, instructed by Messrs Tsang, Chau & Shuen, for the Appellants

Mr Ambrose Ho SC & Mr Michael Yin, instructed by Department of Justice, for the Respondent

Appeals to Court of Final Appeal dismissed: see FACV28/2007 dated 16 April 2008