Chinachem Investment Co Ltd v. Commissioner of Iniand Revenue
Read the full judgment text of CACV 116/1986 on BabelCite. This Court of Appeal judgment.
1. A dispute has arisen as to the liability of the appellant Company to pay profits tax assessed on gains accruing upon the disposal of eighteen parcels of real estate. Such liability would exist only if the property constituted trading stock and not, as the Company contends, capital, assets. The Commissioner having decided that the properties were trading assets, the Company appealed to the Board of Review, which upheld his decision. The Company then appealed by way of Case Stated to the High C
Cited by 1 case
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IN THE COURT OF APPEAL 1986, No. 116 BETWEEN
_________________ Coram: Sir Alan Huggins, V.-P., Fuad & Clough, JJ.A _________________ JUDGMENT _________________ Sir Alan Huggins, V.-P.: 1. A dispute has arisen as to the liability of the appellant Company to pay profits tax assessed on gains accruing upon the disposal of eighteen parcels of real estate. Such liability would exist only if the property constituted trading stock and not, as the Company contends, capital, assets. The Commissioner having decided that the properties were trading assets, the Company appealed to the Board of Review, which upheld his decision. The Company then appealed by way of Case Stated to the High Court, and Macdougall, J. dismissed the appeal. The Company now appeals to this court. 2. There was much discussion before us and before the judge as to the form of the Case Stated and the procedure for settling it. It has, never ceased to amaze me how much argument this simple and straightforward process engenders. A properly drafted Case Stated is the most satisfactory process of all for deciding a question of law, for it concentrates attention on the essentials of the case, but it does require those concerned to marshall and State with precision the issues, the facts (and, where necessary, the evidence), the arguments and, finally, the conclusions attacked. Criticism was directed at the Board of Review for failing to produce an acceptable case. In my view that criticism was almost entirely misdirected. Whatever may be the present practice in England, the established practice in Hong Kong is that where parties are professionally represented they shall draft the Case Stated and submit it to the tribunal. The reason is obvious: the parties know better than anyone else what points they wish to take on the appeal, what findings of fact they wish to contend are relevant to those points and what arguments they advanced. The tribunal has the final responsibility for stating the Case and is not bound by the draft submitted to it. It can, therefore, after consulting the parties, alter the draft if it is inaccurate or incomplete. Even if the drafting were to be done by the tribunal itself, it would be the duty of the parties to apply for any necessary amendment. As I have often said before, there may be cases where it is impossible adequately to state the Case without annexing one or more documents, but such cases are few and far between. The documents may even include a transcript of evidence, but that is to be avoided if possible, because such a transcript inevitably contains unessential matter which it is the object of the process to exclude. Thus, where the issue on appeal is whether there was any evidence to support a finding of fact, a transcript of all the evidence may be a necessary annexure, but a transcript is not to be annexed where what is required is a statement of the facts found or assumed or where with proper diligence a precis of the material evidence can be included in the Case Stated itself. I appreciate that in the present case it is urged that the facts should have been found and not assumed, but that is a different matter (which I shall deal with in an appropriate part of the judgment) involving a criticism of the Board's Determination and not of the Case Stated. 3. The Case as ultimately stated included no less than 513 pages, amongst which were the Commissioner's Determination and copies of some law reports. On any view those were not documents which it was proper to annex. In the event, as was to be anticipated, only about a score of the pages of exhibits were even referred to on the appeal. 4. All too often the Case Stated process is adopted in an attempt to raise as an issue of law what is in truth an issue of fact. Some of the questions posed for the consideration of the High Court show this to have been such a case. It is one thing to allege that a tribunal has found a fact which was unsupported by any evidence: that raises an issue of law. It is quite another thing to allege that a tribunal of fact has disregarded evidence or that the evidence “did not substantiate” a finding. 5. There is another aspect of the matter which calls for mention. It was argued that some of the matters raised before the High Court were such that they should have been made the subject of an application for judicial review and not of an appeal by way of case stated. Whilst there may be some logic in the argument, I am satisfied that convenience and the avoidance of a multiplicity of proceedings may justify the taking by way of case stated of some points for which the process was not designed. Thus it is contended here that the Chairman of the Board of Review entered into the arena so as flagrantly to breach the rules of natural justice. There is English authority for saying that some matters which are strictly appropriate for consideration on judicial review may be raised along with matters appropriate to appeal if the appellate court has power to grant t he relief which would be available on a review: see Ex parte Watson 1987 The Times, March 18. The difficulty here is that upon an appeal by way of case stated under s.69 of the Inland Revenue Ordinance the High Court of Hong Kong does not have power to order a re-hearing, a power which is available to the Chancery Division in England under s.56(6) of the Taxes Management Act 1970: see Rose v Humbles (1971) 48 T.C. 103. Strictly, therefore, the complaint that there had been a breach of the rules of natural justice ought not to have been entertained on the appeal. However, no point was taken before the judge or before us that the matter ought not to be argued, it was argued at length and we think there is no substance in it. Accordingly I think that it is right we should give our reasons for so thinking. 6. Another of the complaints in the present case is that the record kept by t he Board was unsatisfactory. It would appear that the Board did not keep its own record but engaged the services of shorthand writers with no legal experience, whose transcripts were alleged to contain such serious errors and omissions that they were in places unintelligible. We can do no more than impress upon tribunals that it is their duty to ensure that an accurate record of their proceedings is kept and made available to anyone with a legitimate interest in the proceedings. The official record is the responsibility of the tribunal, which may, if it is satisfied that it is right so to do, amend the record, even to the extent of substituting someone else's transcript, but there can be only one official record. The judge rightly decided that he ought not to proceed upon a Case Stated to which a disputed transcript was annexed. 7. The Company is a family organization which has been engaged in (inter alia) land development. In the past it has bought and sold land which, it is conceded, did form part of its trading stock. There is no dispute that the test is what was the subjective intention of the tax-payer at the time each parcel was acquired, that intention being viewed in the light of the objective circumstances. Although it is possible for there to be an effective change of intention, no such change of intention is alleged here. 8. The only oral evidence of the Company's intention in relation to the parcels of land in question was that of Mrs. Wang, a director of the Company. She said that the Company adopted a policy of retaining 10% of residential and commercial land and 33 1/3% of industrial land as income-earning capital. Where land was being redeveloped all the units would be offered for sale prior to completion, and when the building was completed she would decide which of the unsold units should then be retained as capital in pursuance of the overall policy. She said that the eighteen parcels to which the action relates were so designated. 9. That much is clear, but the witness also said that the Company sought to ensure the fulfilment of its retention policy by doubling the prices of some of the properties, thereby directing would-be purchasers away from them. It seems to me that the precise nature of this inherently strange device is of little importance, but counsel for the Appellant has made so much of an alleged error by the Board in relation to it that I must go into some detail. Complaint is made of this passage in the Board's decision:
It is argued that the witness did not say she doubled the price of all the units, but there seems to have been some ambiguity in counsel's argument as to what she did in fact say, for we did not all understand him in the same sense. The doubt is whether the witness is alleged to have said that she doubled the price of all the units she wished to retain and that those units were in fact some of the shops or whether she is alleged to have said she doubled the price of all the shops (whether she wished to retain them or not). The former version would be bizarre: the second would make no commercial sense at all. The fact is that it was by no means clear what the witness's story was. In examination-in-chief her evidence was:
In cross-examination she answered as follows:
The judge understood the Board to have interpreted this obscure evidence to mean what I have referred to as “the former version”. I understood the Decision in the same way, but counsel seems to have read out of context the passage I have cited as meaning that the witness had said the prices of all the shops would be doubled. I am not persuaded that the Board and the judge were in error in this respect, but, even if they were wrong, it seems to me that the evidence was such that no reasonable tribunal of fact would have believed it. 10. It is complained before us that the judge attached insufficient weight to the alleged absence of any express finding by the Board as to the intention of the Company in relation to each of the eighteen properties. The Appellant relies on Simmons v The Inland Revenue Commissioners 1980 S.T.C. 350 for the proposition that precise findings are required in such cases. I think that case was decided upon its peculiar facts and is distinguishable, for it was a case where the contention was that the primary intention had been changed. There was an express finding as to the primary intention but none to support the change of intention. No particular form of words is necessary, and a finding of fact may be implict. Here the Board set out the issue of fact very clearly, said the burden of proof was on the tax-payer and concluded that "the Appellant has come nowhere near to discharging this burden of proof”. In my judgment that leaves no room for doubt: there was an implicit finding that the Company did not at the time of acquisition intend to hold the properties as capital assets. 11. The Board of Review did not believe Mrs. Wang: it said:
It was the reasons given for disbelieving her that formed the initial plank in the Appellant's argument. Although the opinion of the Board was expressed in the first person singular, it was signed by all the members of the Board and must be construed accordingly. The circumstance which the Board mentioned as being of special significance was that the accounts of the Company over many years showed the relevant, assets as trading assets. Mrs. Wang said this was a mistake made by the Company's accountant which passed unnoticed until July 1980. The Commissioner's representative before the Board expressly refrained from suggesting that the fact that, with effect from 10th July 1980,"the law had been changed in a way which would make it more beneficial to the Company that the eighteen parcels should be capital assets had made the directors aware of the importance of the status of these parcels, although they had been aware of that status all along. 12. It is accepted by the Commissioner that thee accounts are not conclusive evidence of the matter in issue, and obviously that is rightly accepted. Nevertheless the accounts must remain important and call for credible explanation, because they are contemporaneous evidence of the Company's intention. Yet no other member of its staff - not even the accountant - was called to explain how the “mistake” came to be made. It was unfortunate that the Board appears to have been itself confused when it said that the explanations given by Mrs. Wang and by counsel regarding the failure of the accountant to give evidence were confusing. The witness and counsel were in truth speaking about different persons. However, the point is a very minor one. The main contention on behalf of the Company is that the Board attached undue weight to the accounts and, in effect, did regard them as conclusive. I agree with the judge that “the way in which the properties have been treated in the accounts is by no means an insignificant factor” and I am not persuaded that the Board regarded them as conclusive. 13. A related complaint, which may have some force, is that the Board attached undue weight to the fact that the Company did not make any claim for depreciation in respect of the eighteen properties, but that would not be an error of law. The argument on behalf of the Commissioner proceeded on the assumption that any claim was so likely to be successful that the Company would undoubtedly have made a claim. That may be right. However, the matter was not investigated before the Board and there was no evidence to justify such an assumption. Mr. Whiteman submits with, some justification that the auditors would not have questioned the absence of a claim for depreciation because t hey had no reason to believe that the properties were capita1. In my judgment both the Board and the judge did attach too much weight to the absence of a claim, but that of itself is not enough to throw doubt upon their conclusions. 14. Another reason for disbelieving Mrs. Wang was that
It is submitted that the Board there misunderstood what had been said, for counsel had in fact relied upon some documents which he contended did support Mrs. Wang's evidence that the intention of the Company in relation to two of the properties in question was to hold them as capital. These documents were some drafts of a prospectus intended to be issued when the Company offered its shares to the public and a copy of a newspaper article. With respect there is a great deal of difference between supporting and substantiating a witness's evidence. "Substantiate" means "to prove the truth of", and it is putting the matter far too high to suggest that these documents prove the truth of Mrs. Wang's evidence. The newspaper article was hearsay of a most unreliable kind. The prospectus was not hearsay, but it was equivocal and merely listed the properties under the heading “History and Business”, indicating the parts of the two buildings which had been let and that other parts would be let. Such evidence was not of material weight. On the other hand, what clearly, (and justifiably) weighed very heavily with the Board was the complete absence of documentary evidence in the form of minutes recording decisions of the directors in relation to the status of these properties were being dealt with differently from the other properties owned by the Company. Without such evidence the heavy burden on the tax-payer became a difficult one to discharge. 15. Much reliance is placed on the fact that the Board said:
It is conceded that what she in fact said was that this was one of the reasons. The judge rejected the contention that this was a fundamental error which was fatal to the Board's decision, although he accepted that prima facie there might appear to be force in it. However, the reason, - and the only reason suggested - for the adoption of the alleged policy was “to build up an investment port folio of properties”. Those properties would in fact produce income which might “enable the Company to be floated as a public company” and that was an aspect of the matter which was undoubtedly emphasized both by the witness and by counsel, although it was not the only aspect. The judge took the view that what appeared to be an error in the Board's reasons was not an error at all. I am not disposed to go as far as that, but I am satisfied that the error was nothing like as serious as has been contended for by the Company and that it does not sufficiently undermine the Board' decision to require our intervention. 16. The main attack upon the Board's conclusions is based upon eight factors which, it is said, were inconsistent with an intention to treat the properties as trading stock and which were given insufficient weight. In the first place it is submitted that the Board failed to make necessary findings of fact in relation to these eight factors. It is true that the Board did not make specific findings, although we are told that it was expressly invited to do so. The omission is explained by the fact that the Board was disposed to assume the relevant facts in favour of the tax payer, on whom lay the onus of proof, and, having assumed them, found that the eight' factors did 'not outweigh the factors indicating an intention to treat the properties as trading assets. That, Mr. Whiteman submits, was a misdirection. I agree that it would have been better if the Board had made findings of fact rather than making assumptions, but the approach it adopted was not fatal. It was, if anything, beneficial to the Company, for the Board said:
That statement is attacked, but there is no rule that unchallenged and uncontradicted evidence must be believed without reservation, and again one must note the use of the word “substantiated”. It was for the Board to decide what weight should be accorded to the evidence. Moreover, I am not persuaded that there was a misdirection as to the importance of these eight factors. I think the Board's conclusion was not only a reasonable one: it was the conclusion which I should myself have reached. 17. In so saying I am anticipating what I have to say about the individual factors. The first of these is that the properties were acquired without the use of borrowed money. It is suggested that the normal property trader would finance his developments with borrowed money, and there was evidence to that effect. In my view the point carries no weight. There was no evidence that this Company always borrowed money when it acquired property as trading stock. Indeed, its own alleged policy involved deciding after acquisition which properties should be used as capital and which as trading assets. 18. The Board found that four properties were acquired by the Company not by purchase but by transfer in specie on the liquidation of companies in the same group. For my part I am unable to see how that would necessarily affect the intention of the Company as to how to deal with them after acquisition. 19. Of possibly more significance are the facts that some of the properties were in the ownership of the Company for substantial periods of time - in some cases as long as fifteen years - and that - they were generally let throughout. These facts are certainly consistent with the Company's case, but are they inconsistent with the Commissioner's case? They are not - particularly having regard to the economic climate of Hong Kong during the relevant periods: the Company may have been waiting for a favourable opportunity to sell and merely have been turning the properties to good account in the mean time. Equally, the fact that the properties were let at full economic rents is consistent with the case of both sides, although if the lettings had been at rents below the economic rents that would clearly have supported the Commissioner's contention. Again, the renewal of the leases was equivocal and it is immaterial that the initiative was taken by the Company: these facts may indicate nothing more than that the “favourable opportunity to sell” had not arrived and that it was expected that lettings would be more beneficial than sales within the period of the new leases. It is not surprising that, once the decision had been made to let, the Company would not take further steps to sell the properties: sales with sitting tenants were unlikely to be profitable. 20. As it seems to me the circumstances of the disposals of the properties were little more indicative of the intention of the Company as to their status than were the circumstance of the acquisitions. It is argued that the fact that the disposals were effected in the course of a group re-organization is more consistent with the properties' being capital than with there being trading assets, an inference further supported by the fact that the properties are still retained by the group. At the highest, I think, it can be said that the circumstances are no more indicative of an intention to treat the properties as trading assets than if they had still been owned by the Company itself. The argument that the “gain” sought to be brought into charge is wholly notional carries no weight, because those who manipulate limited liability companies are necessarily bound by the conceptual nature of such companies, whilst it was entirely the choice of the Company that it allowed the consideration for the transfer to remain outstanding as an inter-company loan. 21. Both before the judge and before us counsel for the Company accepted that if the Board was “justified in making a finding that they rejected Mrs. Wang's evidence, the Appellant could not succeed on this appeal”. I think the judge was right to hold that the Board was so justified. 22. It only remains to deal briefly with the allegation that the findings of the Board were in any event vitiated by the Chairman's descending into the arena and cross-examining the Company's main witness. Counsel before us have agreed that the Chairman did descend into the arena, but it is obvious that counsel for the Commissioner does not use that phrase in the sense in which it is normally used, for he still submits that what the Chairman did not amount to a breach of the rules of natural justice. Macdougall, J. considered the allegation and was unable to detect any hostility in the questions asked. There were very many questions. The Board was having difficulties in rationalizing what the witness was saying with the documents produced and thought it right to point out those difficulties so that the witness could deal with them. Unfortunately it seems that the witness concluded that the Chairman was adverse, because at one stage she said that she found some of the points put to her as "not agreeable". The Chairman's reply was that he would like to get the facts right and that it was very important that he understood correctly. He then put a question in the form “I put it to you”, which could hardly have altered the witness's impression. The Chairman continued stating his difficulties by addressing himself to counsel for the Company and ended by saying:
This related to the prospectus and the newspaper article to which I have already referred and, in so saying, far from indicating bias the Chairman was seeking to assist the Company by suggesting how it might dispel the doubts he had expressed. Accordingly I am satisfied that the judge was right to conclude that this was not a case where there was a breach of the rules of natural justice. I confess that I did not understand the argument that the Chairman's “entering into the arena” in some way contributed to the alleged deficiencies in the tribunal's record. 23. The judge summed up the case as follows:
I entirely agree and would dismiss this appeal. We are agreed that there should be an order nisi that the Appellant pay the Respondent's costs. Fuad, J. A.: 24. In my judgment Macdougall, J.’s decision upon the Case Stated has not been successfully impugned and, for the reasons given by my Lord the Vice-President, the appeal should be dismissed. Clough, J.A 25. I agree. 16 April 1987 |
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