Commissioner of Inland Revenue v. Hang Seng Bank Ltd
|
IN THE SUPREME COURT OF HONG KONG (APPELLATE JURISDICTION) INLAND REVENUE APPEAL NO. 1 OF 1972 ________________________
________________________ Coram: Huggins, J. ________________________ JUDGMENT ________________________ 1. This is an appeal by the Commissioner of Inland Revenue by way of Case Stated from a decision of a Board of Review on an appeal against the confirmation by the Commissioner of an assessment of corporation profits tax. The facts found were that the respondent bank carried on business in the Colony. It was not an authorised exchange bank and it had no branch or office outside the Colony. There was a “necessity for the bank to acquire foreign currency in the operation of its business”. For what reasons it was necessary was no doubt clear to the Board because they heard the evidence, but the Case gives no further details. I at first assumed that it was because, and only because, the bank itself required foreign currency to enable it to transact exchange operations abroad, but from what was said in argument it seems that I ought not to make such an assumption. Perhaps the necessity sometimes arose only from the desire of the bank’s customers to dispose of the foreign currency. In any event counsel have in no way based their arguments upon the purpose for which the foreign currency was initially purchased. What is clear is that all foreign currency in question was purchased in Hong Kong, although for convenience it was held abroad. Not all the foreign currency held by the bank was kept in the form of ready cash at a foreign bank: some of it was invested on a short term basis. The foreign currency invested earned interest and such interest was not income which arose within the Colony and was not taxable here, although if capitalised it would presumably be reflected in the assessment for the following year. 2. In November 1967 the bank held quantities of sterling and U.S. dollars. In the same month the United Kingdom Government devalued the pound sterling. The Hong Kong Government at first followed suit by devaluing the Hong Kong dollar to the same extent, but subsequently revalued the Hong Kong dollar upwards, though not back to the former relationship with other foreign currencies. The over all result was still a devaluation, but it was a smaller devaluation than was effected by the United Kingdom Government. As a result of the devaluation the sterling currency then held by the bank was, in terms of Hong Kong dollars, worth less than it had been before, while the United States dollars held were worth more. 3. It is common ground that subject to one consideration the increase or decrease in value thus produced should be taken into account as a profit or loss respectively for the purpose of assessing profits tax under the Inland Revenue Ordinance. The one consideration is this: the Commissioner contends that the whole decrease in the value of the sterling held should be taken into account only if the whole amount of sterling held was actually being used to earn profits taxable in Hong Kong or was being held immediately available for such purpose and was not being used for any other purpose. It is common ground that some of the sterling held by the bank on the material date had been invested and the Commissioner says that when any part of those funds began to generate interest outside Hong Kong that part was no longer capable of producing assessable profits and should therefore be disregarded for the purpose of assessing the devaluation loss in the assessment of Hong Kong profits tax. Counsel for the appellant conceded, however, that the mere fact that interest was paid on some of the foreign currency which was held on current account (and which was therefore clearly “available”) did not disentitle the taxpayer from claiming devaluation loss in respect of that currency. He further concedes that even currency which was invested might be used as cover for some kinds of exchange transaction but he says that “generally speaking these deposits would not be available for ordinary exchange dealings”. 4. The material year of assessment is 1967/68. The edition of the Ordinance then in force was that of 1965. The section then read:
It is conceded that in assessing the profits arising in or derived from the Colony a corporation must have regard to devaluation of its stock-in-trade and that foreign currency purchased by a bank is, at least initially, part of its stock-in-trade. That is because such foreign currency is available for transactions which are capable of earning profits taxable in Hong Kong. It is said, however, that if any part of this foreign exchange which is purchased is invested at interest, it is then available only for earning interest, which is not taxable in Hong Kong, and ceases to be available for transactions capable of earning profits in Hong Kong: it therefore plays no part in the activities of the bank which may result in a profit or loss arising in Hong Kong. The test which counsel for the Appellant suggests for distinguishing between stock-in-trade which is “available” and that which is not is to ask whether some operation was required by the bank before the currency could be used for exchange dealings, so that even deposits “at call” would be excluded from the assessment. 5. The first point to be decided is whether this appeal lies at all. Counsel for the taxpayer submits that it does not. The basis of that submission is that the decision of the Board of Review involved a finding that the money remained stock-in-trade in the full sense and was capable of earning profits in Hong Kong. I think the answer to that is that it is a question of law whether there was any evidence upon which the Board could so find and that that question of law depends entirely upon the second point which has been argued on the appeal. Therefore I turn without further ado to the second point. 6. It seems to me that to all intents and purposes the contention on behalf of the Commissioner is that the foreign exchange which is invested ceases to be stock-in-trade altogether, although I do not think Mr. Somerville put it in that way: he regarded it as still being stock-in-trade but not as “stock-in-trade of a Hong Kong profit making activity”. He agrees that this is something of an artificial distinction but submits that it must be drawn in order to reach a fair and sensible result. By that I take him to mean that the taxpayer might otherwise be getting a double advantage from having his stock-in-trade outside the Colony – he might be able to use it to earn interest which, although not taxable, would have been taxable had it been earned in Hong Kong, while not running the risk of devaluation associated with sending money abroad. Indeed, if I understand him aright, it would not matter where the foreign currency was held: assuming it was purchased in Hong Kong and invested in Hong Kong, interest earned on that money in Hong Kong would be taxable but it would still not be immediately available and devaluation of the capital would have to be excluded from the assessment. Thus it is really the right claimed to be able to invest money without running the risk of devaluation of the capital which is said to be unfair, the suggested unfairness presumably being that it would give banks an advantage which corporations carrying on other kinds of business would not enjoy. 7. With respect it seems to me not only artificial but unnecessary to draw this distinction. Either the foreign currency is stock-in-trade or it is not, and once it has become stock-in-trade it cannot, chameleon-like, change its colour to match its background. Both sides appear to accept the dictum of Croom-Johnson, J. in Commissioners of Inland Revenue v. Cock Russell & Co., Ltd. (1949) 29 T.C. 387, 392 to the effect that
In the present case that involves taking into account the value of the foreign currency at the beginning of the year and the value of the foreign currency at the end of the year. Counsel for the Appellant points to the terms of s.14 and submits that the Board has overlooked the fact that the assessment is concerned only with “profits ... arising in or derived from the Colony”. I see no reason to believe that the Board was not fully aware of this fundamental point: the Board’s view was that the value of all the stock-in-trade ought to be taken into account in assessing those profits, because it could not fairly be said that foreign currency which before investment was admitted to have been stock-in-trade of the corporation ceased, upon investment, to be part of the stock-in-trade of a corporation making profits from a business carried on within the Colony. It is true that it is possible with currency to make an additional profit by lending it until it is required for “sale”, but I do not see why that should make it any the less “stock-in-trade” and stock-in-trade of the business of which the profits are to be assessed. The corporation’s business is not to be regarded for taxation purposes as though it were a number of separate businesses. Suppose art dealers in Hong Kong were able to make a profit in Japan by hiring some of their stock of pictures for an exhibition: could it be said that during the exhibition those pictures were not part of their stock-in-trade for the purpose of taxation in Hong Kong and that any sudden revaluation, whether up or down, would have to be ignored when assessing corporation profits tax? I think not. It seems to me that a temporary use of stock-in-trade to earn profits not taxable in Hong Kong cannot change the full status of the goods, whetever they be currency or anything else, as stock-in-trade of the business. Nor do I think that either logic or any principle of fair dealing requires such a distinction. I think Mr. Rees was not prepared to contend that if the bank had purchased foreign currency in Hong Kong for the express purpose of investment overseas it could still properly be regarded as stock-in-trade, but that question does not arise here and, as I have said, neither side has asked me to base my decision upon the purpose for which the foreign currency was purchased: the argument was confined to the use made of the currency. As I see it, the profit which is being taxed takes into account the notional increase or decrease in the value in Hong Kong of the foreign currency held. This itself is an artificial view of the true state of affairs because while the currency remains abroad it cannot in one sense increase in value “in Hong Kong”. However, such assets could be disposed of in Hong Kong and it is both sensible and normal commercial practice to value them in this way. If one did not do so the bank might increase its stock-in-trade outside the Colony and never be taxable on the increase until, possibly many years later, the currency was brought back to Hong Kong and disposed of. That would be convenient neither to the Revenue nor to the taxpayer. I can certainly understand the argument on behalf of the Commissioner and I hope I do not under-estimate the force of it, but it seems to me that his emphasis on the second of the two elements, (i) purchase of the foreign currency and (ii) the investment of that currency at interest, is to introduce a fiction upon an artificiality. The only justification for including in the assessment of profits arising in or derived from the Colony the value of that part of the stock-in-trade which consists of foreign currency abraod is that one has regard to a notional transfer of the currency back to Hong Kong for valuation at the end of the year. It might have been logical to argue that the notional transfer at the end of the year should include only currency which was not then invested and which therefore could in fact be transferred on the last day of the year. That is not the way the case was put and the emphasis was throughout on the question whether the currency was invested at the date of devaluation. Since the transfer for valuation is in any event only a notional transfer I see no difficulty in deeming all the stock-in-trade to have been transferred rather than merely that part which has not been invested. The invested currency would still be stock-in-trade even if the Appellant’s contention that it was not available to support the bank’s foreign exchange dealings were right. If the date of devaluation is to be material at all the contention must be that the foreign currency has to be available throughout the year before it can qualify for inclusion in the assessment of profits arising in or derived from the Colony. Again, that is not the way in which the case was put to me. In truth there is no suggestion that the foreign currency changed its value at any time other than on the date of devaluation, but that is fortuitous, although it may account for the emphasis placed on that particular date. Be that as it may, I do not see the logic of an argument that the currency must be available throughout the year: other kinds of stock-in-trade need not be. The short answer to all this in my view is that “availability” is no more relevant to the assessment than is the purpose for which the “stock-in-trade” was originally purchased. If that be wrong, I am further of opinion that the foreign currency is “available” if, as has been conceded, it can be used in any way to cover foreign exchange transactions. 8. The matter is not capable of profitable elaboration and it is a question of what one thinks fits with the least offence into the general picture of commercial practice and legislative intention. Neither the taxpayer nor the Board of Review has succeeded in persuading the Commissioner that the view I favour is correct, nor do I have any hope that any words of mine could persuade him: either one thinks that Senor Picasso’s depictions of the world have some connection with reality or one does not! 9. I have deliberately refrained from referring until now to the question of law as posed for the decision of the Court because it has been submitted that it was drafted in unnecessarily wide terms. It reads:
The reason for the form of that question is no doubt that the Board said in its decision:
It is not necessary for the taxpayer to persuade me that any revenue loss sustained in the course of its business should be taken into consideration and Mr. Rees has expressly confined himself to the more limited question whether the particular loss in dispute should be taken into consideration. I shall therefore confine my judgment to answering this more limited question. 10. While referring to the terms of the Case Stated I must add that I can see no reason why the directions of the Full Court in CHAN Nan-fong v. CHAN Tak-wah Civ. App. No.13 of 1971 as to the stating of a case have not been observed in the present case: it was wrong to annex the Decision of the Board of Review as an exhibit, although the schedules of figures were reasonably so annexed. 11. Subject to what I said in the last paragraph but one the answer to the Case Stated is “No”. The appeal is dismissed with costs. 13th December, 1972. |