CAC INTERNATIONAL LTD v. COMMISSIONER OF INLAND REVENUE

HCIA 4/2022

[2025] HKCFI 1366

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

INLAND REVENUE APPEAL NO 4 OF 2022

_____________

_____________

_______________

D E C I S I O N

_______________

A.  Introduction

1.  On 30 November 2020, the Respondent (the “Commissioner”) determined that the Appellant (the “Taxpayer”) were liable to pay profits tax in respect of the gain arising from its disposition of the Properties (defined below) during the period from March 2010 to February 2013.

2.  By the decision in B/R 44/20 dated 13 May 2022 (the “Decision”), the Inland Revenue Board of Review (the “Board”) upheld the determination of the Commissioner.

3.  The Taxpayer now appeals against the Board’s Decision in respect of two of the Properties, namely (i) House 166, Pak To Avenue, The Portofino, Clear Water Bay, Sai Kung (“Property 1”); and (ii) Shops A&B of G/F, 1/F to 3/F and the main roof, Universal Building, 5-13 New Street, Hong Kong (“Property 3”).

B.  Material Background

4.  The following facts are not in dispute.

5.  According to its audited financial statements, the Taxpayer carried on a business of investment holding and/or property investment.

6.  From 2007 to 2013, the Taxpayer was involved in the following property transactions:-

	Date of Purchase	Purchase Price	Date of Sale	Sale Price
1/F & 2/F, Man Shung Industrial Building, 7 Lai Yip Street	18 September 2007	HK$16,500,000	15 July 2011	HK$35,450,000
Property 1	8 May 2008	HK$42,000,000	3 March 2010	HK$53,000,000
House 122, Pak To Avenue, the Portofino, Clear Way Bay Sai Kung (“Property 2”)	15 March 2010	HK$41,800,000	6 December 2012	HK$53,000,000
Property 3	10 May 2010	HK$36,000,000	7 October 2011	HK$70,000,000
Units 1-3, 3/F, Wofoo Building, 204-210 Texaco Road, Tsuen Wan (“Property 4”)	28 July 2011	HK$26,000,000	18 February 2013	HK$42,700,000
Workshop 1, G/F, Wah Wai Centre, 38-40 Au Pui Wan Street, Shatin	18 October 2011	HK$30,380,000	N/A	N/A

7.  Insofar as Property 1 and Property 3 were concerned, the gain derived by the Taxpayer from the sales were respectively HK$11,965,296 and HK$33,637,227.

8.  The Commissioner took the view that the transactions in respect of Property 1 and 2 (as well as Property 3 and Property 4) (collectively the “Properties”) were in the nature of trade and thus the profits obtained by the Taxpayer should be chargeable to profits tax.

9.  The Taxpayer disagreed. It is the Taxpayer’s case that it had no intention to trade the Properties and its intention had changed. As such, the Commissioner should not have charged profits tax when it disposed of the Properties.

10.  By a notice of appeal dated 30 December 2020, the Taxpayer appealed against the Commissioner’s determination.

11.  By the Decision dated 13 May 2022, the Board affirmed the Commissioner’s determination. The details of the Board’s Decision will be examined in detail hereinbelow.

C.  The Tax Payer’s Complaints

12.  Under section 69(1) of the Inland Revenue Ordinance (Cap 112), an appeal against a decision of the Board may be brought on a ground involving a question of law.

13.  Mr Justin Lam (for the Taxpayer) took issue with paragraph 41 of the Decision. There, the Board stated:-

“ The Taxpayer bears the burden of proof in the Appeal. The Taxpayer would fail the Appeal unless it satisfies the Board that the true and only reasonable conclusion is that the Subject Properties were capital assets: see Real Estate (supra).” (emphasis added)

14.  Relying on Kwong Mile Services Ltd v Commissioner of Inland Revenue (2004) 7 HKCFAR 275 at para 31 (per Bokhary PJ) and Newfair Holdings Ltd v Commissioner of Inland Revenue [2022] HKCFI 1133 at para 24(5) (per Queeny Au-Yung J), Mr Lam submitted the said statement was wrong in law. He pointed out that the standard of “true and only reasonable conclusion” only applies to an appeal from the Board of Review to the Court and the rationale behind is that such an appeal is restricted to questions of law.

15.  Mr Lam further referred the court to paragraphs 72, 81, 95, 110 and 112 of the Decision. He submitted that the Board “consciously” adopted and applied the standard of “true and only reasonable conclusion”. Accordingly, the Board adopted an erroneous standard of proof, and the Decision was not tenable.

16.  As summarized in the Taxpayer’s ground of appeal[1], the complaint is as follows:-

“ The Board erred in law in holding that the Appellant would fail in the appeal unless it satisfies the Board that its contention is the true and only reasonable conclusion and applying this erroneous standard to reject the Appellant’s case.”

D.  The Decision

17.  Having set out the background of the dispute (see Decision, paras 1 to 17) and the respective stance of the parties (see Decision, paras 18 to 19), in paragraph 20 of the Decision, the Board set out the issue to be determined. The Board stated:-

“ …the questions to be determined in the Appeal are whether the Subject Properties were “capital assets” as contended by the Taxpayer and hence the profits obtained from the sale of them should be excluded and not chargeable to profits tax under IRO s.14.”

18.  When the Board set out the applicable legal principles (see Decision, para 21 to 28), the Board stated that it would consider the matter de novo. In paragraph 21 of the Decision, the Board stated:-

“ The function of the Board of Review, on hearing an appeal under IRO s.68, is to consider the matter de novo. A taxpayer appeals from a determination but the appeal is made against an assessment: see Shui On Credit Co Ltd v Commissioner of Inland Revenue (2009) 12 HKCFAR 392 at paras 29-30 per Lord Walker of Gestingthorpe NPJ.” (emphasis added)

19.  Applying Commissioner of Inland Revenue v Church Body of the Hong Kong Sheng Kung Hui & Anor (2016) 19 HKCFAR 54 at paras 43 to 46 (per Fok PJ) (see Decision, para 26), the Board acknowledged that the following legal principles were applicable:-

(1)  Profits arising from the sale of capital assets are excluded, and a land owner may sell his land at an enhanced price above his acquisition costs but not be subject to tax on the profits thereby generated unless in doing so he is embarking on a trade or business of selling land.

(2)  The question of whether an activity amounts to the carrying on of a trade or business is a question of fact and degree to be answered by the relevant fact-finding body on a consideration of all the circumstances.

(3)  An intention of trade is essential.

20.  In the premises, from paragraph 38 of the Decision onwards, the Board considered the “badges of trade” in respect of all the Properties. Although the Board suggested that the Taxpayer would fail unless it satisfied the Board that the true and only reasonable conclusion was that the Properties were capital assets (see Decision, para 41), in paragraphs 43 and 45 of the Decision the Board emphasized that:-

“43. …the Board has focused on the question of whether the Subject Properties were acquired by the Taxpayer with the intention of disposing of them at a profit or as permanent investment. It has been borne in mind by the Board that the Taxpayer’s intentions may change…”

“45. In the present case, the Taxpayer has made profits out of the sale of the Subject Properties but asserts that it had no intention to resell them for profits when they were acquired. The Board therefore has to determine the intention of the Taxpayer objectively, by examining all the circumstances, including whether or not the “badges of trade” were present…The Board has examined all the facts and matters holistically and further taken into account their interaction in order to determine whether or not the inference of an intention to trade by the Taxpayer is to be drawn…” (emphasis added)

21.  In this connection, the Board took into account the following matters:-

(1)  The Taxpayer acquired various properties within a relatively short period of time, and the level and intensity of the transactions were not infrequent: see Decision, paras 47 to 48.

(2)  The Taxpayer did not hold the Properties for a lengthy period: see Decision, para 49.

(3)  Real properties were a common subject of trading in Hong Kong: see Decision, para 50.

(4)  The Taxpayer held six properties over a period of four years, and this was not scanty or few: see Decision, para 51.

(5)  The Taxpayer derived substantial gains from the sale of all the Properties within a short period of time: see Decision 52.

(6)  The fact that the Taxpayer acquired the Properties with finance from banks so as to enable itself to dispose of them shortly afterwards was a factor supporting the conclusion that there was an intention to trade: see Decision, para 53.

22.  Insofar as Property 1 was concerned, the Board specifically considered the following matters:-

(1)  The evidence and records showed that Property 1 was open for sale immediately or shortly after the same was acquired by the Taxpayer: see Decision, para 59.

(2)  The fact that the rental income in respect of Property 1 was likely to be a negative yield supported the conclusion that the Taxpayer was waiting for a favourable opportunity to sell Property 1, and it was not treated as a long-term investment: see Decision, para 73.

(3)  The evidence did not show that the Taxpayer had any intention to change the character of Property 1 from a trading stock to a capital investment: see Decision, para 75.

(4)  As the Taxpayer was unable to secure any tenancy for Property 1, it decided to renovate the same and used it as a quarter for its director, pending a favourable opportunity to sell it: see Decision, para 80.

23.  Insofar as Property 3 was concerned, the Board also took into account the following matters:-

(1)  The Taxpayer sold Property 3 not long after it was acquired: see Decision, para 98.

(2)  The Taxpayer entered into a sole agent license agreement with an estate agent only after 6 months after the purchase took place, and there was still a subsisting tenancy: see Decision, paras 99 to 100.

(3)  Although the Taxpayer might be passive in the sale process, it did not mean that the Taxpayer had not acquired Property 3 with the intention of selling it for profit. The Board did not accept the Taxpayer’s contention that it sold Property 3 merely because there was suddenly an offer that was “too good to refuse”: see Decision, para 101.

E.  Deliberation

24.  In paragraph 21 of the Decision, the Board made it clear that the function of the Board was to consider the matter de novo.

25.  It is not entirely clear as to why in paragraph 41 of the Decision, the Board would refer to the phrase “true and only reasonable conclusion”. This is the applicable threshold for appeal from the Board of Review to the Court of First Instance.

26.  In this connection, Mr Lam referred to DPP Law Ltd v Paul Greenberg [2021] EWCA Civ 672 at para 58 where Popplwell LJ stated:-

“ …where a tribunal has correctly stated the legal principles to be applied, an appellate tribunal should, in my view, be slow to conclude that it has not applied those principles, and should generally do so only where it is clear from the language used that a different principle has been applied to the facts found.”

27.  Mr Lam submitted that the aforesaid proposition also applies in situations where the tribunal cited an incorrect legal principle.

28.  Whilst Mr Ernest Ng (for the Commissioner) did not seriously dispute Mr Lam’s submissions in this regard, he referred me to DPP Law Ltd v Greenberg (supra) at para 57(1). There, Popplwell LJ stated:-

“ The decision of an employment tribunal must be read fairly and as a whole, without focusing merely on individual phrases or passages in isolation, and without being hypercritical .In Brent v Fuller [2011] ICR 806, Mummery LJ said at p.813:

‘ The reading of an employment tribunal decision must now, however, be so fussy that it produces pernickety critiques. Over-analysis of the reasoning process; being hypercritical of the way in which a decision is written; focusing too much on particular passages or turns of phrase to the neglect of the decision read in round: those are all appellate weaknesses to avoid’.”

(emphasis added)

29.  In the premises, Mr Ng emphasized that the Board’s Decision must be read holistically.

30.  Mr Ng also emphasized that the Board did not apply an erroneous “standard of proof” as the phrase “only true and reasonable conclusion” referred to the threshold for disposing of an appeal as opposed to the standard for making findings.

31.  I accept Mr Ng’s submissions that the Taxpayer’s complaint concerns a question of threshold rather than a question of standard of proof.

32.  I also accept Mr Ng’s submissions that in order to ascertain whether the Board adopted an erroneous threshold, it would be necessary to consider the Decision as a whole. Instead of singling out the few passages in question, it would be necessary to scrutinize and examine the reasoning of the Board and understand why the Board did not accept the Taxpayer’s case.

33.  I am of the view that the issue before this court is whether:-

(1)  the Board rejected the Taxpayer’s case on the basis that it failed to satisfy the Board that the true and only reasonable conclusion was that the subject Properties were capital assets; or

(2)  having independently considered the parties’ evidence and contentions, the Board came to the conclusion that the subject Properties were not capital assets.

34.  In the first scenario, there was obviously a substantive error in regard to the applicable threshold for disposing of the Taxpayer’s appeal, and it follows that the Board’s conclusion was flawed. In the second scenario, despite the use of an incorrect label that caused confusion, it cannot be said that there was a substantive error in the decision-making process of the Board, and the conclusion reached by the Board was not flawed in substance.

35.  Having carefully examined the contents of the Decision and the reasons provided by the Board, I am of the view the Board had in fact considered the parties’ evidence and contentions de novo, and it did not decide the matter on the basis that the Taxpayer failed to show that its contention was the “true and only reasonable conclusion”.

36.  In this connection:-

(1)  In paragraph 45 of the Decision, the Board made it clear that it had to determine the Taxpayer’s intention objectively by examining all the circumstances (including whether or not the “badges of trade” were present). The Board emphasized that it had examined the facts holistically.

(2)  From paragraphs 47 onwards, the Board examined each of the relevant factors, including the level and intensity of the transactions (paras 47 to 48); the duration of holding the Properties (para 49); the context and the investment environment in Hong Kong (para 50); the number of properties held (para 51); the derivation of gain (para 52); and the financing (para 53).

(3)  Further, in paragraphs 54 to 82 and paragraphs 97 to 104, the Board specifically addressed the circumstances relating to Property 1 and Property 3. For the reasons elaborated there (see the summary in paragraphs 22 to 23 above), the Board rejected the Taxpayer’s suggestion that it had no intention to trade Property 1 and that its intention as to Property 3 had changed. The Board was of the view that these Properties were trading stocks of the Taxpayer.

37.  Upon independently analyzing and dealing with the available evidence and the objective circumstances, the Board:

(1)  affirmatively found that the Applicant acquired the Properties with the intention of disposing of them for profits; and

(2)  affirmatively rejected the Taxpayer’s case that the Properties were investments and that its intention had changed.

38.  In paragraph 46 of the Decision, the Board stated that its affirmative finding was as follows:-

“ All the factors identified below are criteria for an operation of trade by the Taxpayer. After viewing them together with the matters to be further set out in the next few sections in respect of the individual Subject Properties as a whole, the Board is of the view that the Taxpayer acquired the Subject Properties with the intention of disposing of them at a profit and not as permanent investment.” (emphasis added)

39.  When one scrutinizes the reasoning in the Decision, it is clear that the Board had considered the facts and evidence as well as the parties’ contentions afresh on a de novo basis. On this basis, the Board made the affirmative findings in favour of the Commissioner and against the Taxpayer.

40.  The Board did not indicate that the appeal was dismissed merely because the Commissioner had shown that its case and assertions were “plausible”. Likewise, the Board did not indicate that the Taxpayer’s case and assertions were plausible, but since the same were not the only “true and reasonable conclusion”, the Taxpayer’s appeal failed.

41.  In the premises, I am not of the view that the Board applied an erroneous threshold in disposing of the appeal.

42.  I do not lose sight of the passages in paragraphs 72, 81, 95 and 110 of the Decision. In these passages, the Board dealt with some individual points regarding the Properties. I am not inclined to the view that these passages undermine the Board’s comprehensive analysis of the case based on its own evaluation of the material facts and evidence:-

(1)  In paragraph 72, the Board merely pointed out the fact that the Taxpayer appointed an estate agent to lease out Property 1 was consistent with the suggestion that the Taxpayer put Property 1 into good account while waiting for a favourable opportunity to sell it. This fact did not ipso facto advance the Taxpayer’s case at all. The Board did not apply the standard of “true and only reasonable conclusion”.

(2)  Paragraph 81 concerned the “alternative case” that the use of Property 1 as a directors’ quarter was consistent with the Commissioner’s case that Property 1 was a trading stock. By definition, this was not part of the Board’s material reasoning. In any event, it appears to me that by using the phrase “in other words”, the Board merely sought to illustrate its observation that the Taxpayer’s suggestion was not the true and only reasonable conclusion. This was not part of the Board’s material reasoning.

(3)  In paragraph 94, the Board dealt with the alleged change of investment preference on the part of the Taxpayer. By adopting the phrase “in any event”, it appears to me that the passages in paragraph 95 were not the Board’s material reasoning. Anyhow, the Board simply made the point that even putting the Taxpayer’s suggestion regarding Property 2 to the highest, such suggestion was still consistent with the Commissioner’s case. As such, it would not avail the Taxpayer.

(4)  In paragraph 110, the Board dealt with the fact that Property 4 was leased out by the Taxpayer. The Board merely pointed out that this fact simply indicated that the Taxpayer put Property 4 to good use pending the sale. This fact was consistent with the Commissioner’s case and did not avail the Taxpayer.

43.  In any event, it is important to bear in mind that the Decision must be read as a whole, and the aforesaid passages must be understood in context.

44.  Having examined the Decision as a whole, I am of the view that based on the available evidence and objective circumstances, the Board independently and affirmatively arrived at the conclusion that the Commissioner’s case was preferable to the Taxpayer’s case and that the Taxpayer’s case and assertions should be rejected.

45.  In my view, the substantive approach adopted by the Board was correct, and its findings and conclusion were not flawed. I am not of the view that the Taxpayer has suffered an injustice.

F.  Conclusion and Disposition

46.  For the reasons set out above, I dismiss the Taxpayer’s appeal against the Board’s Decision.

47.  I make a costs order nisi that the Taxpayer should pay the Commissioner’s costs in respect of the appeal to be taxed if not agreed.

48.  I express my gratitude to Mr Justin Lam and Mr Ernest Ng for their very helpful assistance rendered to me.