Commissioner of Inland Revenue v. Far East Exchange Ltd
Read the full judgment text of CACV 1/1975 on BabelCite. This Court of Appeal judgment.
1. I have read the judgments of the other two judges in this case, with which I am in complete agreement.
Cited by 1 case
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CACV000001/1975
Coram: Briggs, C.J., McMullin & Leonard, JJ. Date of Judgment: 5th October 1976. ----------------- JUDGMENT ----------------- Leonard, J.: The respondent, The Far East Exchange Ltd., as appears from the case stated, is a limited company incorporated under the Hong Kong Companies Ordinance (Cap.32) as a company limited by guarantee and not having a share capital. It has as its objects inter alia: (a) to provide a securities market place; (e) to establish an exchange or place of meeting for stock and share brokers; (g) to acquire suitable premises for a stock exchange; (h) to carry on in the premises so acquired the business of a stock exchange. By its Articles of Association its members are members of "the Exchange". They are limited in number to 150. Subject to this and to certain immaterial restrictions any person of the age of 21 years and upwards being of good repute and standing who desires to carry on the businesses of a stock-broker is eligible for membership. Candidates for membership are elected by the committee of the Exchange. Once elected they become liable to pay entrance fees and subscriptions. The article relating to entrance fees in force at the relevant time reads:
The subscription is payable monthly in advance on the 1st day of each month, and a member elected after the first day in any month "shall not be liable to pay his monthly subscription for any month prior to the one in which his election takes place." The Articles of Association deal specifically with "seats" in the exchange providing that all seats shall belong to the exchange but every member shall be entitled to the benefit of a seat to be allocated by the committee. In the very article which so stipulates it is also laid down that "upon expulsion of any member, the seat and all benefits appertaining thereto shall revert to the exchange and the expelled member shall have no claim thereon ..." Article 14 forbids the assignment of any rights, benefits or privileges of membership "other than the right of disposal upon resignation." Article 15 provides for resignation by the giving of one calendar month's notice. Article 16 empowers a resigning member to "nominate or cause to be nominated and put up for election as a member such person desirous of becoming a member to fill the vacancy. The nominee if approved will not be required to pay any entrance fee." There are similar provisions in Articles 17 to cater for death or bankruptcy; the nominee of the personal representative or trustee in bankruptcy is again not required to pay any entrance fee if elected. It is then only by expulsion from membership, by the failure of a resigning member or of his personal representative or trustee in bankruptcy as the case may be to nominate a successful candidate for election that the "chain of membership", if I may use the expression, is broken. Article 18 is of importance to my considerations. It reads:
The articles then, albeit in a somewhat tortuous manner, recognise the ownership of the benefit of a seat as a saleable asset which, as is common ground, is in the hands of the member, a capital asset. The respondent differs radically from the London Stock Exchange or other stock exchanges following the customs and usages on the London Stock Exchange. Its members, restricted in number to 150, become entitled "to the benefit of a seat and all benefits appertaining thereto". This entitlement is defeasible or terminable only by expulsion or by resignation, death or bankruptcy without the appointment of an acceptable nominee but it is only in the event of expulsion that the seat and all benefits appertaining thereto revert to the respondent to be used as the respondent shall think fit. If a resigning member or the personal representative or trustee of a deceased or bankrupt member fails to make an acceptable nomination a vacancy in the membership occurs but any moneys received from the person ultimately elected pass to the resigning member or to the personal representative or trustee of the deceased or bankrupt member, as the case may be. A candidate for membership becomes entitled to this indefeasible right only upon election and payment of both entrance fee and subscriptions for Article 5 requires that "on the election of a member the fact shall forthwith be notified to him in writing by the secretary, and a copy of the Memorandum and Rules of the Exchange shall be sent to him together with the current scale of brokerages in force, and a request for the payment of his entrance fee and his subscription for the current accounts. As from the date of his election and payment of the prescribed fees, the candidate shall become a member of the Exchange and shall be entitled to the benefit of a seat on the Exchange." The contrasting position of the London Stock Exchange is set out by Lord Atkinson in Weinberger v. Inglis(1) at page 622:
From that he goes on to say at page 623:
The successful candidate for election to the respondent buys by the payment of his prescribed fees i.e. his "entrance fee and his subscription for the current accounts" membership of the exchange and entitlement to the benefit of a seat on the exchange. This later entitlement is for an indefinite period, is not defeasible by the action of the respondent and can be sold. At the outset of its dealings with members the respondent had for disposal the benefit of 150 seats and once 150 have been allotted unless and until its articles are changed it could have no more. The consideration for which the respondent allotted the benefit of a seat was not the entrance fee but the entrance fee and the subscription for the current month ("the prescribed fees"). I note that in the passage which I have quoted Lord Atkinson spelled out the consideration payable by the member of the London Stock Exchange in similar fashion but do not however consider that the fact that the entrance fee is only part of the consideration is of significance. The entrance fee is part of the consideration paid for the allotment of the benefit of a seat and it is the character of the entrance fee that is to be determined. It is capital viewed from the stand-point of the member, is it also capital when viewed from the stand-point of the respondent? 2. The long title of the Inland Revenue Ordinance is "to impose a tax on property, earnings, profits and interest". It is fundamental to it that it is not an income tax ordinance nor is it a capital tax ordinance. Its general tendency or "scheme" appears to be to impose tax on "yield" (to use a neutral term). Thus property tax is based on the rateable value of land or buildings or land and buildings as assessed for rating purposes under the Rating Ordinance less an allowance for repairs and outgoings and is payable by the person who pays the rates or by the owner; that the Ordinance looks to the yielding capacity of the land or buildings as the subject of its taxation, seems clear from section 7 which provides for reduction of property tax for unoccupied land or buildings. The salaries tax and interest tax I need not comment upon. I turn then to Part 4 of the Ordinance which deals with profits tax. It is to be noted that the term "profits" is not defined. By section 14 this tax is charged "for each year of assessment at the standard rate on every person carrying on a trade, profession or business in the Colony in respect of his assessable profits ... for that year from such trade, profession or business (excluding profits arising from the sale of capital assets) as ascertained in accordance with Part 4 of the Ordinance." The definition of the term "assessable profits" is of no assistance to us in the interpretation of this section for it reads:
It is argued on behalf of the Commissioner on the basis of the expressio unius rule that section 14 imposes a charge or all profits whether they be of a capital or a revenue nature. In other words that the correct method of arriving at assessable profits is to compute the total receipts for the year in question arising out of the trade, profession or business deduct from that total any receipts from the sale of capital assets and deduct from the resulting figure all allowable deductions and regard the balance as profits. 3. The dicta of Rowlatt, J. in Cape Brandy Syndicate v. I.R.C.(2) at page 71 that in a taxing Act "one has to look merely at what is clearly said; there is no room for any intendment. There is no equity about the tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied one can only look fairly at the language used." have been brought to our attention by counsel for the appellant. They are so often quoted with approval that I consider there to be some danger when considering a tax Ordinance that other canons of construction may be forgotten. Rowlatt, J. clearly intended no such thing. The sentences quoted are used to combat "wide and fanciful constructions" often sought to be given to the maxim that in a taxing Act clear words are necessary in order to tax the subject and the notion that words are to be unduly restricted against the Crown or there has been any discrimination against the Crown in the Acts. Such cardinal rules as the rule that words should be construed according to the intention expressed in the Act without speculating of the intention of the Legislature are not to be forgotten. It is to the intention expressed one looks having regard to the ordinance as a whole. As Lord Russell of Killowen C.J. said in Attorney-General v. Carlton Bank(3) at page 164:
All this is impliedly accepted by the appellant in his seeking to rely on the expressio unius rule, a rule which Lopes L.J. has stigmatized as:
It is pointed out by counsel for the respondent that here the reference to sale of a capital asset may have been inserted ex abundantia capital and that to suggest that capital profits arise from a trade, profession or business is to strain the language. I agree and find it difficult to say that profits arising from the sale of capital assets can be said to arise from a trade, profession or business. They arise rather from its cessation in part or in whole or from a reduction of its nature or the manner in which it is carried on. Had it been intended to impose by section 14 a charge on capital profits it would scarcely have been appropriate in section 15(1)(c) to except from "sums received by or accrued to a person by way of grant, subsidy or similar financial assistance in connexion with the carrying on of a trade, profession or business in the Colony" "sums in connection with capital expenditure made or to be made by the person" when deciding what sums should be deemed to be receipts arising from a trade profession or business. It is noteworthy that no other of the sums mentioned in section 15 as "deemed to be receipts arising in or derived from the Colony from a trade, profession or business" is of a capital nature. Again if one follows the computations suggested by counsel for the appellant section 17(1)(c) could give rise to an anomaly. That section provides that:
Let us take the case of a trader who receives insurance moneys payable on the destruction of his premises, premises which he has improved during the year in question by expenditure of a capital nature. If the insurance moneys (a capital receipt) are to attract taxation it would be anomalous if he was not permitted to deduct from them the expenditure of a capital nature he had incurred in the improvement of the premises before their destruetion. It is however because profits of a capital nature cannot in my view truly be said to arise from a trade, profession or business as distinct from its cessation or reduction that I would hold that Legislature did not intend to impose and did not impose a charge on profits of a capital nature by section 14 of the Ordinance. 4. Are these entrance fees then to be regarded as capital receipts? I am persuaded that they are. The factors which contribute to persuade me that on balance these entrance fees should be regarded as capital as they come to the hands of respondent are (1) they are unquestionably capital in the hands of candidates for membership. This I regard as the slightest of guides to their character as they come to the hands of the Far East Exchange Ltd. but it is some indication. (2) the articles of association "deem" them to be capital receipts. The use of the word "deem" here in the articles is rather a strange one for frequently that word is used in legal documents and particularly in the definition section of Ordinance with a nuance somewhat different from indeed contradictory of the ordinary dictionary meaning of "tell", "say" or "declare". A draftsman frequently deems a thing to be what in ordinary parlance it is not so that this factor does not take me much further towards a decision. Again this particular article may well have been framed with one eye cast over the shoulder at the Collector of Inland Revenue. The same consideration applies to (3) the fact that they are treated as capital in the accounts of the respondent. These two factors can weigh no more than a scruple in the balance. Not so however with (4) the fact found by the Board that so to deal with them "accords with standard accounting practice". That the Board, on what evidence we know not, finds as a fact, by which I am bound, that professional accountants have a standard practice to treat them as capital I must regard as of considerable weight. (5) their non-recurrent nature. It is quite true that the articles envisage that the respondent will receive 150 such payments. On receipt of anyone payment and the first subscription, it parts in exchange, with the benefit of one seat. Let us suppose it has parted with 149. No one, I opine, would contend that in receiving the 150th payment it received a payment which had any meansure of recurrence or periodicity. It would be a final payment received "once and for all". Any further demand for membership and the benefit of a seat cannot be met unless and until some one is expelled or the articles are altered. Once one determines the character of one entrance fee one determines the character of all for that a number may be paid does not of itself confer on any one payment a recurrent or periodic quality. Mr. Somerville has argued trenchantly that there is a degree of recurrence and that in any event it or its absence is not a crucial factor and among the cases he cited to us were two which appear to me to require detailed consideration. I refer to Liverpool Corn Trade Association Ltd. v. Monks(4) and C.I.R. v. Transvaal Bookmakers Association (Co-op.) Ltd.(5) 5. The association in Monk's Case(4) was a limited company having a share capital of & 60,000 divided into 400 shares of &150 each of which 375 were issued. Members were elected and any person becoming elected was required to pay an entrance fee and an annual subscription and to acquire one share of the association within one month of his election unless the directors by resolution agreed to extend his time. No member could hold more than one share in addition to that which he was required to acquire. Non-members might become subscribers to the association. On the hearing of the appeal it was contended (a contention not raised in the instant case) that the association was a mutual one and that surplus from any transactions with its members was not a profit assessable to income tax but it was held that it was not a mutual association that profit arising from its transaction with members was assessable and that in the computation of profits the entrance fees must be included. The question for decision in that case in no way turned on whether entrance fees were or were not capital but rather on "the effect of the decision of the House of Lords in the well-known and much-discussed case of The New York Life Insurance Co. v. Styles(6). The passage in which Rowlatt, J. distinguishes Monk's Case(4)from Styles(6) (on one phrase of which much emphasis was placed by counsel for the appellant) reads:
It is clear to me that in using the phrase I have underlined Rowlatt, J. was not in any way adverting to the question as to whether entrance fees could bear a character distinct from subscriptions particularly in a case where there was no share capital and members are not shareholders. Furthermore in Monk's Case(4) membership was not, by reason of the power of the directors to extend indefinitely the time within which a member was obliged to acquire his qualifying share, limited in number and membership could not be sold as it can in the instant case. In the instant case again there is no share capital. 6. In the Transvaal Case(5) it was expressly held that entrance fees were not of a capital nature. The taxpayer in that case was that is described as a "closed co-operative traaing society with 'limited liability'". This description itself does not imply that its rules contained any limitation on the number of its members although that there was a limitation of some kind is clear because we are told by De Villiers, J. that there was a waiting list. It derived what is referred to in the facts set out in the judgment of De Villiers, J. as its "income" in part from entrance fees payable by its members. Under its rules and on resignation each member became entitled to nothing of what he paid but to 2/3rds of the basic fee paid by the new member - something different to what is paid in. So far as I can determine it is this fact that made De Villiers, J. form the view that the entrance fee is non-recurrent as far as the member is concerned but recurrent as far as the association is concerned rather than the fact that the association failed to show that the entrance fee was not gross income under section 7 of the Income Tax Act of 1941. Unfortunately we were not referred to the wording of this section for its terms were clearly of importance to Price, J. who mentions that the onus was on the association to show that the entrance fees were accruals of a capital nature "and also that they were not received for services to be rendered". Price, J. 's judgment turns on his conclusion that services were rendered and that "the money that buys the services is that provided by the basic entrance fees and the subscriptions". 7. There appear to me to be at least two distinguishing factors between the Transvaal Case(5) and the instant case. Firstly there was a measure of recurrence in the Transvaal Case(5) as De Villiers, J. acknowledges at page 26. He does not say how it arose but that the association would get the entirety of a new member's entrance fee and be obliged to give the retiring member 2/3rds of it is something to which he must have adverted. In the instant case a new member as distinct from an original member pays no entrance fee, he pays the retiring member (admittedly through the respondent) such sum as they agree the "benefit of the seat" and any concomitant advantages to be worth. There can be no doubt as to the nature of the transaction which takes place between a resigning member on the personal representative or trustee of a deceased or bankrupt member and the nominated successor. It is a sale and purchase. Secondly, it is in our Ordinance nowhere laid down that a person assessed must show, of payments which he contends are capital, that they were not received for services to be rendered. A third distinction may lie in the manner in which membership is limited as to number. All we know as to this in the Transvaal Case(5) is that there was a waiting list. 8. I am of the opinion then on balance that entrance fees are of a capital nature. I do not consider that the fact that an entrance fee is not refundable on expulsion alters this for it does not lie in the power of the Far East Exchange to create the circumstances under which a member may be expelled. It might possibly be argued, although it was not so argued before us, that the first subscription bears the same character as the entrance fee since both must be paid before the benefit of a seat is allotted and that since it has been conceded that subscriptions are receipts on revenue account entrance fees must also be. This however seems to me entirely too facile. In making the concession that subscriptions are receipts on revenue account counsel for the respondent did not advert to the possibility of the first subscription being of a different character to those succeeding. 9. Having held entrance fees to be capital receipts and having accepted that section 14 does not impose a charge on capital profits I now ask if section 24(2) obliges me to treat entrance fees as receipts from business. The section reads:
It will be noted that subsection I which refers to a club or similar institution contains the phrases "gross receipts on revenue account (including entrance fees and subscriptions)" and deems to be receipts from business "the whole of the income from transactions with members and others (including entrance fees and subscriptions)" Subsection 2 - the subsection which requires cur construction - does not use the expression "receipts on revenue account." It does not equate entrance fees with subscriptions in its opening phrases but it does, as does subsection 1, deem to be receipts from business "the whole of the income of such association from transactions both with members and others (including entrance fees and subscriptions)". 10. I do not consider that the word "income" is used in the section as a term of art or in contradistinction to "capital" or as having a meaning different from "receipts" (a word used earlier in subsection 2) I say this because, while in general one would seek to give different meanings to different words in the same section the word "income" must and is clearly intended to have the same meaning in both subsections and if I were to regard it as distinct in meaning from "receipts" in subsection 2 I could see no reason for not regarding it as distinct from "receipts on revenue account" in subsection 1. It must, then mean "receipts" or "incomings". To the inevitable question "why then not repeat the use of the word 'receipts'?" I can only answer that constant repetition of the word "receipts" would be tiresome and that even a law draftsman must be allowed some of the spice of life. This is not an Income Tax Ordinance so that there is no reason for regarding the word "income" as having a specialised meaning. I therefore do not regard the expression in brackets "(including entrance fees and subscriptions)" as being governed by the word "income" and consider that on a true interpretation of the section the word "including" operates to extend the word "income" as in Reynolds v. C.I.T.(7) 11. I nevertheless consider that by the acceptance of the entrance fees and initial subscription the respondent secured the purchase price of the benefit of a seat on the Exchange. What the members wanted when they joined the Exchange was the benefit of a seat - that is what they were "buying". To my mind it would be quite unrealistic to hold otherwise especially in the conditions which appertained in Hong Kong during those years. If that was what the members were "buying" it was what the respondent was "selling", As I have indicated the respondent's position was in sharp contrast to that of London Stock Exchange. Lord Atkinson did not hesitate to use the word "buying" in relation to the acquisition of annual membership in that body. The respondent's Articles of Association read in their entirety bearing in mind the emphasis which they give to "seats" and the manner in which the benefit of them may be transferred or disposed of on death or bankruptcy make it clear that the provision of the benefit of seats to members is the manner in which some of the essential objects of the respondent are to be realised. To confer on members ownership of the benefit of the seats and to limit the number of seats was the manner in which the respondent elected to attract membership and so attain its objects. Once the benefit of a seat was allotted it passed irrevocably from the control of the respondent. The respondent could never, of its own motion, allot that benefit again. It could not expel a member without cause and expulsion apart could not regain control of the seat. In accepting the entrance fee and the first subscription from successful candidates for membership the respondent was therefore in effect selling a capital asset. 12. It was conceded by counsel for the appellant, and, I consider, rightly conceded, that if the entrance fees be regarded as the consideration for the sale of a capital asset profits arising from them do not attract taxation. I say "rightly conceded" because section 14 is the charging section. It lays down when profits tax shall be charged and excludes profits arising from the sale of capital assets. Its opening words are: "subject to the provisions of this Ordinance" (one of which provisions is section 24(2)) and its closing ones "as ascertained in accordance with this part". It might be argued that section 24(2) by providing that the person carrying on an assocation should be chargeable in respect of the profits from "the whole of the income of such association ... (including entrance fees and subscriptions)" operated so as to oblige one to read the words in brakcets in section 14 as "(excluding profits arising from the sale of capital assets but not excluding profits arising from the sale of capital assets where the consideration for such sale is an entrance fee)". Such an argument, if advanced, might be met in a number of ways. Firstly by the answer that the phrase "subject to the provisions of the Ordinance" qualifies 'shall be charged" and not the exclusion so that it operates only to subject section 14 to other provisions granting relief. This answer is strengthened by the suggestion implicit in the words "as ascertained in accordance with this part." that section 24 does no more than indicate how profits are to be ascertained while section 14 charges them. Secondly it might be mat by construing the word "chargeable" in section 24(2) as meaning "chargeable under section 14"; and thirdly by the argument that the phrase "entrance fee" in section 24(2) is not apt to describe the payments labelled "entrance fees" in the respondent's Articles of Association. None of these answers in itself may be conclusive but I am satisfied that the two sections read together do not clearly evince an intention to tax the subject on profits from entrance fees that are the consideration for the sale of a capital asset. 13. For these reasons I would answer the questions posed by the case stated as follows:
14. The respondent should have the costs of this case stated. Representation: Mr. Somerville, C.C. for Crown/Appellant. Mr. Beattie, Q.C., & Andrew Li (Woo & Woo) for respondent. (1) (1919) A.C. 606. (2) (1921) 1 K.B. 64. (3) (1899) 2 Q.B. 158. (4) 10 T.C. 442. (5) (1953) S.A. Tax Cases 14. (6) 2 T.C. 460. (7) (1967) 1 A.C. 1.
Coram: Briggs, C.J., McMullin & Leonard, JJ. Date of Judgment: 5th October 1976. ----------------- JUDGMENT ----------------- McMullin, J.: The Far East Exchange Ltd. is a company limited by guarantee, incorporated on the 31st of October 1969 under the Companies Ordinance. Its principal objects, as provided by Paragraph 3 of the Memorandum of Association, cover such matters as the providing of a securities market place where high standards of honour and integrity shall prevail; to promote honourable practices amongst its member brokers; to discourage and suppress malpractices and to settle disputes and differences between stock and share brokers or between stock or share brokers and their clients. The final one of these principal objects is in these terms :
By Article 2 the number of members is limited to 150. By Article 9 members are to pay a monthly subscription of $500 to the Exchange and by Article 11 an aspiring member is to pay an entrance fee the amount of which is to be decided by the committee. There were 11 founder members of the Exchange. We have not been informed how many members there were at the time of the assessment with which we are now concerned nor do we know what amount was paid by each individual by way of entrance fee. It can be assumed however that the fee was a very have one since the sum standing against that time in the company's books on the 31st of December 1970 was no less than $7,680,000. 2. It is contended for the Crown that these fees are chargeable to corporation profits tax under Part 4 of the Inland Revenue Ordinance. The dispute between the taxpayer and the Crown arose in January 1973 when the assessor had examined the company's corporation profits tax return on its accounts for the year 1972/73. Prior to that apparently no question had been raised as to the possible liability of these fees to taxation. The company was then, however, informed that upon a review of the situation it was the assessor's opinion that such fees must be brought into computations under section 24(2) of the Ordinance for the purpose of assessing the tax due. Revised computations for the years 1969/70, 1970/71 and 1971/72 were presented to the company which in due course lodged objections to the additional assessments. For reasons which do not appear in the case stated, the additional profits tax assessment for the years 1969/70 and 1970/71 were, by consent of the parties, annulled but it was agreed that the sum of $4,880,000 the subject of the additional assessment for the year 1971/72 was composed entirely of entrance fees paid to the taxpayer by its members. If chargeable to tax the sum to be paid by the taxpayer in respect thereof would be $732,000. 3. At the hearing of the appeal against this assessment before the Board of Review it was conceded by the taxpayer that it was a trade association within the description contained in section 24(2) and, further, that the whole of its income was to be deemed receipts from business within the terms of that section. It was however argued for the taxpayer that these fees, being of the nature of capital payments from the members of the Exchange, were so held in the hands of the taxpayer and were therefore not to be brought into computation as part of the company's income chargeable to tax under section 14. 4. For the Commissioner it was argued that the entrance fees were of the nature of income and not of capital in the hands of the taxpayer; secondly, that even if they were of the nature of capital payments, and even if they formed part of the capitals assets of the taxpayer, they were, in any event, caught by the provisions of section 24(2) and were chargeable to tax. 5. The Board of Review came to the conclusion that the entrance fees were to be regarded as capital assets and were therefore not chargeable and they allowed the appeal. Against that decision the Commissioner now appeals. 6. Mr. Beattie, who appeared in this court for the respondent (the taxpayer) conceded that the finding of the Board was in error upon two matters, which however he regarded as being peripheral and immaterial to that finding. In arriving at their conclusion the members of the Board emphasized the fact that in the audited accounts of the respondent company the entrance fees are shown as a capital item. They regarded this as being in accordance with standard practice and they therefore considered that the Commissioner "had an onus upon him to prove that the entrance fees are of an income nature and thus exigible to tax..." They went on to find that he had not discharged that onus. Clearly that was wrong. It was for the respondent company to show that these funds were not subject to tax. The book entries are some evidence that the taxpayer did regard these sums as being part of its capital assets, but the principle is well established that nomenclature is no safe guide to the intrinsic quality of such items in denoting whether in fact they are of a capital or revenue nature. (See Simon's Taxes Third Edition Vo1. A at page 149 Para. A1.205.) With Mr. Beattie however, I prefer to regard the reference to onus as nothing more than a somewhat unfortunate way of describing the effect which the evidence placed before them generally had upon the minds of the members of the Board in coming to their conclusion. In any event, upon the hearing of this appeal it is immaterial how the Board arrived at its conclusions. We are asked to say whether or not those conclusions are supportable upon the evidence showing how the sums accrued and were dealt with by the taxpayer and no material part of that evidence is presently in dispute. I think Mr. Beattie was right to say that there are but two issues before us, viz. : (a) are these fees of a capital nature ? and, (b), if they are does the relevant part of the Inland Revenue Ordinance require them to be included as receipts of the company in computing the extent of the company's liability to profits tax? In the course of his argument Mr. Somerville for the Crown, perhaps by way of meeting an objection which did not materialise raised the question whether the Far East Exchange was to be considered as being of the nature of a mutual association such as was (in part at least) the insurance company in Municipal Mutual Insurance, Ltd. v. Hills (H.N. Inspector of Taxes)(1). In that case the revenue authorities conceded that the fire insurance business carried on by the company was a business of mutual insurance which did not attract liability to assessment to income tax. The reason for that would seem to have been that the fire policy holders constituted a body all the members of which contributed to a fund for the insurance of themselves against fire hazards and any surplus assets in that fund over and above the calls made upon it by contributors to the scheme would be returned to the contributors by way of bonus or premium reduction etc. The dispute concerned the other part of the company's business which was that of employer's liability and miscellaneous insurance. The court found that the surplus funds arising from the carrying on of that business, which was conducted not only with the members of the company but also with outsiders, were chargeable to tax as they did not arise from mutual insurance. Mr. Somerville felt constrained to argue that the Far East Exchange was not such a mutual association. I will not deal with the points of distinction which he sought to make in setting off the situation of the present respondent from that of the insurance company in Hills' Case(1) (although I incline to the view that no adequate distinction exists) for the point appears to me to be entirely immaterial. It is common ground that the wording of section 24 of the Ordinance applies to such mutual associations provided the given association comes within the presoription of its opening clause. If, that is to say not less than half of its revenue comes from members' subscriptions the association will not escape the tax solely because its business is conducted only with its own members and its income derives wholly or substantially from them. Therefore even if the Far East Exchange is to be regarded as a mutual association with a total identity between the contributories and the participators coupled with a scheme of distribution of its asset in a manner which would not accord with the ordinary idea of trading profits it would not on that account escape taxation upon that surplus because section 24 appears to be specifically designed to extend the assessor's not to such funds. I pass to what appear to be the two basic issues before us. 7. The first of these issues is whether the fees in question are to be considered part of the company's capital assets as distinct from income derived from its activities as a company. I used the word "activities" advisedly because the part of the Ordinance which we are considering, Part 4, relates to the charging of trading profits to tax and it is difficult to regard this company as being in any ordinary sense a trading company. If it is, however, by virtue of the provisions of section 24 of the Ordinance, deemed to be carrying on a business and if it has profits which are taxable under this part of the Ordinance they must presumably be deemed to be trading profits. For a start, then, I think it is clear that, as Mr. Beattie contends, section 14 - the section creating profits tax - has no bearing upon any increment in the value of assets which are of a capital nature. I confess I am by no means sure of the nature of the boundary which sets off all things of a capital nature from those of the nature of income but I think it is clear at any rate that any increase in the value of a company's share capital or in the value of land or other such assets held by it cannot fall subject to any levy under this part of the Ordinance. I think Mr. Beattie's illustration of the anomalous results of holding capital profits to be within the section was convincing. He points out that it would be strange if profits realised from the sale of a building are not to be takin in computation of taxable profits - as they are not, since they are expressly excluded by section 14 - whereas moneys recovered under an insurance policy after the building had been destroyed by fire would fall subject to computation if it be held that the express exclusion from computation of one sort of capital profits leaves included profits derived in any other way from a capital source. I think counsel rightly regarded as conclusive against this view the fact that by section 17(1)(c) no loss of a capital nature is permitted to be deducted for the purpose of ascertaining chargeable profits. It can scarcely have been the intention of the Legislature that a company should be charged upon insurance moneys so recovered, as upon trading profits, without being permitted to offset against such "profits" the value of the building - the capital asset lost by fire - when the insurance moneys represent merely the replacement in cash of the value of that capital asset. But in any event Mr. Somerville did not seriously dispute - and I think in the end he really admitted - that section 14 is restricted to profits of the nature of revenue deriving from trading. But he maintains (a) that these fees are in any event to be regarded as revenue derived from trading and, alternatively, (b), if they are not of that nature but are of a capital nature they are nevertheless by virtue of the provisions of section 24(2) deemed to be part of the whole of the income of the company chargeable to profits under that section. 8. I have found it very difficult to derive from the decided cases to which we were referred by counsel any clear endorsement in principle for the opposing views of counsel in the present case. In every case there are marked differences upon the facts and in none of the cases was the court considering legislative provisions substantially the same as those with which we are here concerned. Thus in Commissioner for Inland Revenue v. Transvaal Bockmakers Association (Co-operative) Ltd.(2) under the particular legislation (section 7 and 7b of the South African Income Tax Act No. 31 of 1941) the onus was cast upon the taxpayer to show that certain entrance fees were (a) acoruals of a capital nature and (b) that they were not received for services to be rendered. We do not know the precise wording of that provision and the decision of both the judges concerned with the appeal appear, so far as these fees are concerned, to turn upon the conclusion that the fees together with certain subscriptions were to be regarded as paid by the members of the association for services and facilities afforded to them by the association. The question whether they were capital or income seems to have been resolved wholly by reference to that conclusion. Unlike the fees in the present case which are not, under the Articles, refundable to members under any circumstances and which do not fall to be paid again by an incoming new member (with the possible exception of a vacancy occurring upon the expulsion of an existing member) there was provision in the Articles of the Association in the Transvaal Case(2) for the payment of a fee by an incoming member in place of a member who had resigned, two-thirds of that fee going to the resigning member. The recurrent nature of those fees is, as Mr. Beattie points out, a factor setting off the Transvaal Case(2) from the present case and tending to show that the fees were in truth of the nature of income deriving from transactions between the South African Association and its members. A further difference is that the Transvaal Co. was limited by share and not by guarantee as is the Far East Exchange. It is a point to keep in mind, because, although in the end the matter turns upon the precise interpretation of the legislative provisions involved, yet in considering the length to which the law is intended to extend it must not be forgotten that profits from trading in the ordinary commercial sense is a kind of yard-stick whereby the intention of the Legislature may be gathered. A company limited by guarantee (and not by share capital, giving its members the chance of a right to dividends if declared) is one which is, to quote the words of Palmer's company Law (21st Edition page 23) :
9. In the Liverpool Corn Trade Association, Ltd. v. Monks (H.N. Inspector of Taxes)(3) the association was, once again, one of a mutual character but limited by shares upon which, at some stage in its history, dividends had been declared. The main purpose of the orgainsation was to provide a clearing house, a market, an exchange and arbitration and other facilities for the persons engaged in that trade. Non-members might however become subscribers and would be charged for the use of its facilities. For members and non-members alike these charges were proportionate to the use they made of the buildings and facilities of the association. Members paid entrance fees on becoming shareholders and there were also annual subscriptions. The point in issue was whether the amount by which the subscriptions and fees paid by the members over and above the cost of keeping up the building in affording the facilities was to be regarded as taxable profits of the company. Rowlatt, J. held that profits arising from the association's transactions with its own members, including entrance fees and subscriptions were to be regarded as profits for the purpose of Case 1 of Schedule D of the Income Tax Act 1918. In deciding that such an association can have profits the learned judge seems to have relied heavily on the fact that it was a company with share capital capable of yielding dividends to the shareholders and also on the fact that the assets of the company could be used for the purpose of getting payment for their use from members. The case is obviously of no great assistance here, but Mr. Somerville relies upon the judgment because in the course of it the learned judge referred to the entrance fees as a "sort of overriding subscription" and counsel enlists that somewhat adventitious support for his view that since it is not denied in the present case that subscriptions are of the nature of income so also must be the entrance fees. For my own part I cannot regard a glancing blow of that kind as possessing even the strength of obiter. Since there was at that date an express provision in the English Income Tax Act exempting from income tax the profits made by a society for dealing with its members one can only assume that the circumstances outlined above, special to that particular association, were such as to persuade the learned judge that the manner of the association's carrying on its business put it outside the protection thus afforded. Once again the facts and the legislative provisions involved seem to me to be too dissimilar to those concerned in the present case to enable me to extract anything by way of principle in the resolution of our present problem. 10. In the Commissioner of Inland Revenue v. Cornish Mutual Assurance Co. Ltd.(4) we do indeed have a company, like the present, limited not by share but by guarantee. The business of the association was that of mutual fire insurance for the benefit of its members. Membership was, however, not limited but any person might become a member simply by taking out a policy from the association. Scoutton, L.J. (at page 860) says:
Two questions fell to be resolved: firstly, whether the association could be said to carry on a trade or business within the meaning of section 52(2) of the Act 1920; secondly, whether the surplus funds arising from transactions with members were to be treated as profits of trading notwithstanding that the association was a mutual trading concern. So far as the second question was concerned the matter was directly covered by Paragraph H of section 53 which previded that:
The real point to be decided therefore was whether or not the association did carry on a business. On appeal from the decision of Rowlatt, J. the several learned judges in the Court of Appeal unanimously dissented from the view - which had been accepted by the judge of first instance - that the decision in Styles v. New York Life Insurance Co.(5) had established that such mutual associations do not carry on a trade at all. All of those learned judges, and later, in the House of Lords on appeal, Viscount Cave, L.C. affirming this decision, took the view that this opinion of the learned judge at first instance was a misunderstanding of certain expressions used by Lord Watson in the Styles' Case(5). Both the Court of Appeal and the House of Lords came to the conclusion that such associations do carry on a trade. Again, the facts and the points at issue and the relevant legislation differ widely from those with which we are concerned. Insofar as they are relevant however I am in full agreement with the analysis of certain of those decisions which appears in the judgment of Leonard J. which I have had the advantage of reading prior to forming my own mind upon the matter. 11. I am satisfied that the fees paid by the members in this case are of the nature of capital and not of income both in the hands of the members and of the taxpayer. I think Mr. Beattie is right when he says that the entrance fee is to be regarded as the purchase price of a seat upon the Exchange. No doubt that expression is to some extent metaphorical and it is true that the articles refer to the benefit of the seat rather than the seat itself. But the framers of the articles themselves seem to be in two minds about how the metaphor is related to the reality for although in Article 13 it is provided that all seats in the Exchange shall belong to the Exchange and that every member shall be entitled to the benefit of a seat allocated by the Committee, the same Article goes on to say that upon the expulsion of a member:
I stress the following factors. (1) This is an association limited in membership to 150 persons. Every member as he is elected and when he pays his fee acquires his seat (or the benefit of it) for a period of unlimited duration which may extend to the end of his life. When he resigns he can nominate a successor to whom be can sell his seat (subject always of course to the approval of the appointed successor by the Committee and to the right of the association to recover from the moneys in its hands, realized from the sale of the seat, of anything owed to it by the resigning member). What the member acquires, by election and payment of his fee, and what the Exchange gives in return for the fee is analogous to the sale of a partnership in a firm or to the sale of a business together with its goodwill. What is given on one side and received on the other is, in the case of each member, as simple and as final a transaction as any such sale. (2) The payment of this fee secures to the member the benefit of one seat out of that 150. The disposable seats are successively reduced in number by such sales. (3) The seat is permanently parted with subject to a possible re-allocation upon expulsion. (4) The seat can be sold by a member to anyone - subject only to the successor's being approved by the Committee. (5) The entrance fees are not refundable. (6) The fees are of a once-and-for-all, non-recurrent nature. I would like to say something further on this last matter. Unlike Mr. Somerville I regard the element of non-recurrence in the payment of these fees as a matter of considerable importance in denoting the nature of these funds. I regard as wholly unreal the suggestion that because all of the potential 150 members do not pay their fees at one and the same time this piecemeal fee payment must be regarded as having in itself an element of recurrence in the payment of fees. The question of recurrence falls to be considered in relation to the individual member and the individual seat. As to that, with the possible exception of a vacancy which occurs upon the expulsion of a member, there is no element of recurrence at all. Insofar as such an element does arise upon the expulsion of a member I would regard that feature of the situation, as Mr. Beattie asks us to regard it, as a factor de minimis. 12. As to section 24(2) itself, it is to be noted that it makes the percentage of "subscriptions" the qualifying mark whereby an association of this kind is to be deemed to be carrying on a business. It is easy enough to see that regular monthly or other subscriptions can be regarded as income on the same footing as periodic receipts from any commercial enterprise. But where the Legislature extends that notion of business receipts to membership fees one would expect that it would do so in the same basis, viz. : that such fees were also a recurrent periodic incoming revenue from members of the association. In some of the decided cases the fees were of that nature, either because there was an element of recurrence deriving from the departure of an existing member or else because, membership being unlimited, the association could look forward to indefinite future accruals of revenue from that source. But where from the outset the number of fees recoverable is limited to a certain figure and where there is nothing truly recurrent in their incidence, the notion of this being a receipt from trade is more than artificial - it is quite unrealistic. The Far East Exchange is not in the business of selling seats on a stock exchange - not even on this particular Exchange. If it were, the money received from each such sale would indeed be an item of its income. Rather, it is in the business of managing premises and providing facilities on behalf of a limited number of stockbrokers whose patronage it enlists by selling its principal assets - the seats upon the exchange - plus their appurtenant benefits - to those stockbrokers at a stated price. 13. My conclusion therefore is that these fees are to be regarded as profits of a company arising from the sale of capital assets and therefore expressly excluded from charge under section 14 and that they are correspondingly excluded from the words in brackets in subsection 2 of section 24 - "(including entrance fees and subscriptions)". It may be that a case would arise in which fees were shown to be of the nature of capital and yet not deriving from the sale of a capital asset and in such a case it may well be that it would be right to say that the words just now quoted within the brackets operate either to extend the ordinary technical meaning of the word "income" which occurs earlier in the section or else that that word is to be understood in a wider and non-technical sense as "all incomings" in which case entrance fees of a capital nature, but not deriving from sale of a capital asset would be caught by the subsection. I am aware that section 14 commences with the words "subject to the provisions of this Ordinance ..." but I cannot think that they operate to expel these funds from their refuge between the brackets in section 14 on the ground that the words bracketed in section 24(2) extend to capture any funds which may be labelled "fees". I cannot believe that the Legislature intended to strike with one hand at resources which it sought to protect with the other or that in extending the notion of trading profits to members' subscriptions it wished further to extend it to entrance fees, unless these were of the nature of subscriptions. It may be that the opening words of section 14 are intended to save later previsions, such as section 87 which gives the Governor power to exempt from taxation any person or body but as to that I would prefer not to express a decided opinion. For the reasons given however the appeal must fail and I would answer the questions posed by the Board in the same way as my brother Leonard. Representation: Mr. Somerville, C.C. for Crown/Appellant. Mr. Beattie, Q.C., & Andrew Li (Woo & Woo) for respondent. (1) (1932) 16 Tax Cases 430. (2) (1953) 19 South African Tax Cases 14. (3) (1926) 10 Tax Cases 442. (4) (1926) 12 Tax Cases 841. (5) 2 Tax Cases 460.
Coram: Briggs, C.J., McMullin & Leonard, JJ. Date of Judgment: 5th October, 1976. ----------------- JUDGMENT ----------------- 1. I have read the judgments of the other two judges in this case, with which I am in complete agreement.
Representation: |
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