GRACEFUL MARK LTD v. COMMISSIONER OF ESTATE DUTY

                 HCMP 854/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 854 OF 2004

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J U D G M E N T

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1.  By the Originating Summons the plaintiff seeks a declaration that the plaintiff is not entitled to pay estate duty on the purchase of two properties, namely 4/8 part or share of Lot No. 498RP (“Lot 498RP”) in Sai Kung Demarcation District 215 and Lot No. 500RP (“Lot 500RP”) in Sai Kung Demarcation District 215 from the deceased in 1994 and interest in respect thereof.

2.  Alternatively, the plaintiff seeks a declaration that for the purpose of ascertaining the estate duty in respect of the two properties, the plaintiff is entitled to deduct a sum of HK$10,580,000 against the assessed value of HK$15,300,000 as assessed by the Commissioner for Estate Duty (“the Commissioner”) and that the plaintiff is only liable to pay estate duty on the balance of HK$4,720,000 as deemed inter vivos gift after deduction has been made.

Background

3.  Prior to 25 April 1994 Tsang Kwok Chiu (“the deceased”) was the registered owner of 5/8 part or share of Lot 498RP.  The other 3/8 part or share were held by his brothers.  The deceased was also the registered owner of Lot 500RP.

4.  The landed property at Lot 498RP was a single storey building and leased to outsiders who operated a restaurant there.  The landed property at Lot 500RP was a two-storey building and was let out for domestic purposes.

5.  As stated by the deceased’s son Albert Tsang Chun Man (“Albert”) in his 1^st affirmation, in or about 1993 there had been approaches made to the deceased for the sale of the entire storey building.  The deceased was tempted to sell the two properties but his brothers were reluctant.

6.  The plaintiff was advised of a number of things by an architect.  These were :

(a)    the two Lots had a good potential for redevelopment;  

(b)    For the future re-development of the entire storey building situate at the two Lots, modification of the conditions in the New Grants had to be obtained and payment of land premium for such modification would be required;

(c)    It would be disadvantageous to put the properties on the market as the intending purchasers were uncertain about the development potential and the amount of land premium payable; and

(d)    It would be advisable to start negotiating with the District Land Office for terms of redevelopment and the land premium involved.

7.  As stated by Albert at para. 9 of his 1^st affirmation, the plaintiff knew that the deceased was tempted to sell the property.  The plaintiff discussed with him for the sale of a substantial portion of his interest in the property in the two Lots so that the plaintiff might proceed to start negotiations for modification of the Government Grant and the land premium payable and that the plaintiff and the deceased’s brothers might consider to redevelop the property themselves, or jointly with developers, or sell at a better price after redevelopment potential had been explored.  Albert did not say when these discussions took place with the deceased but it must have been after the incorporation of the plaintiff which was on 1 February 1994. 

8.  On or about 21 April 1994 Albert and his then fiancée Grace Leung Wai Yue (“Grace”), who later became his wife, became directors of the plaintiff and they have been occupying that position ever since.  Since 27 April 1994 Albert has been holding 9 shares or 90% of the share capital of the plaintiff and Grace has been holding the remaining 1 share or 10% of the share capital of the plaintiff.  Albert and Grace are and were at all material times the only two shareholders and directors of the plaintiff.

9.  In view of the fact that Albert only became a director on 21 April 1994 I infer that the discussions he speaks of with the deceased took place with him on or after 21 April 1994.  Albert said that it was agreed that the plaintiff would acquire from the deceased his 4/8 share of Lot 498RP and Lot 500RP.  The deceased would retain 1/8 share of Lot 498RP.  The consideration agreed for the two properties was HK$10,580,000.

10.  I have no hesitation in finding that the plaintiff has proven the background facts as set out above.  Mr. Chow SC, for the Commissioner, criticised the background facts as being bare assertions of Albert without documentary evidence in support thereof.  I observe that there was no challenge to the assertions until Mr. Chow made his submissions.  There was no request for documentary evidence to be supplied nor was there any attempt made to cross-examine Albert on his affirmations.  I have no hesitation in accepting the evidence of Albert and in finding the background facts as set out above proved.

11.  I find that as a result of approaches to the deceased made in or about 1993 the deceased was tempted to sell the two properties but his brothers were reluctant.  I also find that the plaintiff was advised of the matters set out in paragraph 6 above.  I find that on or after 21 April 1994 Albert, on behalf of the plaintiff, discussed with the deceased for the sale of a substantial portion of his interest in the two properties so that the plaintiff might start negotiations for modification of the Government Grant and land premium payable.  As a result of the discussions between the deceased and Albert it was agreed that the plaintiff would purchase the deceased’s 4/8 share of Lot 498RP and Lot 500RP for HK$10,580,000.

12.  As is shown in the two provisional agreements for sale and purchase executed between the deceased as vendor and the plaintiff as purchaser and dated 25 April 1994, the purchase price for the 4/8 share of Lot 498RP was HK$9,600,000 and the purchase price for Lot 500RP was HK$980,000 making a total of HK$10,580,000 for the two properties.  The deceased retained 1/8 share of Lot 498RP.

The transfer of funds

13.  To finance the acquisition of the two properties the plaintiff obtained financing from Wing Hang Bank Ltd. (“Wing Hang Bank”).  Wing Hang Bank agreed to grant banking facilities by way of overdraft to the plaintiff as set out in the letter from Wing Hang Bank to the plaintiff dated 27 April 1994.  This was to be secured by a negative pledge by the plaintiff as well as a personal guarantee by Albert both of which were executed on 28 April 1994.

14.  With the credit facilities granted by Wing Hang Bank the plaintiff paid the consideration of HK$10,580,000 to the deceased for the two properties by means of two cashier’s orders dated 28 April 1994 payable to the deceased, one for HK$9,600,000 and the other for HK$980,000.  The cashier’s orders were paid into the current account of the deceased with the Wing Hang Bank on the same day.

15.  Also on the same day, 28 April 1994, the deceased remitted the sum of HK$10,580,000 by telegraph transfer to his bank account with Banco Weng Hang SARL in Macau (“the Macau Bank”).  The Macau Bank is a wholly owned subsidiary of Wing Hang Bank.

16.  Albert said that the deceased then by way of gift transferred his money with the Macau Bank to Albert’s bank account with the Macau Bank.  This was done also on 28 April 1994.  

17.  As stated by Albert, the plaintiff then borrowed the sum of HK$10,580,000 from him in Macau.  The debit and credit advice shows clearly that Albert’s account in the Macau Bank was debited with the said sum and the plaintiff’s account in the Macau Bank was credited with the same also on 28 April 1994. 

18.  What happened next was that the said sum was remitted by telegraphic transfer from the plaintiff’s account in the Macau Bank to its account in Wing Hang Bank also on 28 April 1994.  Albert said that the plaintiff owes him the said sum.  This has been reflected in the accounts of the plaintiff as a liability of the plaintiff being an amount due to a director.

19.  The evidence also shows that the overdraft facilities of the plaintiff was repaid to Wing Hang Bank by an inward remittance from the Macau Bank by order of the plaintiff on 28 April 1994.  Thus Wing Hang Bank was also repaid on the same day.

20.  Albert also said that after the acquisition of the properties by the plaintiff, the plaintiff retained architects to prepare the general plan for the proposed redevelopment and surveyors were then instructed to negotiate with the Planning Department and District Lands Office for modification of the Government Grant for redevelopment of the property in accordance with the general plans.  However, such redevelopment plans did not materialize ultimately because of changes in the market conditions subsequently and the two properties are still let out for rental income.  I also find these facts proved.  These were unchallenged until Mr. Chow made his submissions and there was no prior request for documentary evidence in support of the assertions nor was there any attempt to cross-examine Albert on these matters.

21.  The evidence also shows that the deceased led a normal life until February 1994 when he fractured his leg and had to be hospitalized and then went to stay in a nursing home thereafter.  He passed away on 1 May 1994 in Canada.

The plaintiff’s case

22.  According to the plaintiff, the purchase consideration of HK$10,580,000 reflected a fair market vale of the two properties and there was no element of bounty.

23.  The plaintiff’s case is that the disposition of the two properties by the deceased to the plaintiff were genuine sale and purchase transactions.  It was not a gift from the deceased.  Having obtained the proceeds of sale in Hong Kong, the deceased transferred the same out of the jurisdiction to Macau.  There he made a gift of the money to his son Albert as he was free to do.  That was a gift made overseas.  His son then lent the money to the plaintiff.  The plaintiff sent the money back to Hong Kong and Wing Hang Bank was repaid for the facilities granted to the plaintiff.  The plaintiff’s case is that the end result is that the plaintiff bought the properties from the deceased and the deceased transferred his money out of the jurisdiction.  He then made a gift of foreign assets as he was free to do and such gift of foreign assets is not subject to estate duty.  Hence no estate duty is payable. 

24.  The plaintiff’s alternative case is that if the Court were to find against the plaintiff on the element of bounty, then the plaintiff would only be liable for estate duty on the sum of HK$4,720,000 being the balance left after deducting the sum of HK$10,580,000 from the value of HK$15,300,000 for the two properties as assessed by the Commissioner.

25.  The plaintiff also complains of interest being charged on the estate duty levied for part of the period since the death of the deceased on 1 May 1994. 

The Commissioner’s case

26.  Mr. Chow submitted that the disposal of the two properties in favour of the plaintiff on 28 April 1994, four days before his death was plainly a scheme designed solely for avoiding estate duty.  There was a circular movement of funds starting with the overdraft facilities of HK$10,580,000 granted by Wing Hang Bank to the plaintiff and ending with the same amount being remitted by the plaintiff from Macau to its account with Wing Hang Bank and with Wing Hang Bank being repaid all on the same day, 28 April 1994.  It was submitted that the whole transaction was an artificial one designed solely to avoid estate duty.  He submitted that the end result was that on 28 April 1994 the deceased had transferred the two properties to the plaintiff but effectively did not receive any consideration in return.  He submitted that the dispositions of the properties by the deceased should be treated as gifts and as they were made less than three years before the death of the deceased they are liable to estate duty under s. 6(1)(c) of the Estate Duty Ordinance (Cap. 111) (“the Ordinance”).

27.  The Commissioner’s alternative case is that both (i) the balance of HK$4,720,000 and (ii) the stated consideration of HK$10,580,000, making a total of HK$15,300,000, represented properties passing or deemed to pass on the death of the deceased.  Hence, estate duty is payable on the total sum of HK$15,300,000.

28.  The Commissioner also disputes that the plaintiff can properly appeal against the amount of interest levied.

The Ramsay principle

29.  The Ramsay principle is, of course, the principle set out in WT Ramsay Ltd. v. IRC [1982] AC 300.  This has been held to apply to estate duty cases (Shiu Wing Ltd.& others v. Commissioner of Estate Duty [2000] 3 HKLRD 77).  As Sir Anthony Mason NPJ said at page 99 :

“The principle, according to the House of Lords, is both a rule of statutory construction applicable to revenue statutes and an approach to the analysis of the facts.” 

And he also said at page 100 :

“The classic statement of the Ramsay principle is to be found in Furniss v Dawson [1984] AC 474.  There Lord Brightman said at p.527 :

First, there must be a pre-ordained series of transactions, or, if one likes, one single composite transaction.  This composite transaction may or may not include the achievement of a legitimate commercial (ie business) end ... Secondly, there must be steps inserted which have no commercial (business) purposes apart from the avoidance of a liability to tax.  If those two ingredients exist, the inserted steps are to be disregarded for fiscal purposes.  The court must then look at the end result.  Precisely how the end result will be taxed will depend on the terms of the taxing statute sought to be applied.”

30.  It was recognized by the Court of Final Appeal in Shiu Wing that the Ramsay principle was capable of further development (per Bokhary PJ at page 91 E).  Sir Anthony Mason NPJ also said at page 100 :

“It would be a mistake to regard the present formulation of the Ramsay principle as set in stone.  Sufficient warning has been given that the existing formulation may not mark the end of the road (see Furniss v Dawson [1984] AC 474 at p. 513, per Lord Scarman and pp.516-517, per Lord Bridge of Harwich; IRC v McGukian [1997] STC 908 at pp. 920-921, per Lord Cooke of Thorndon).”

31.  Mr. Chow submitted that the present formulation of the Ramsay principle is to be found in Collector of Stamp Revenue v Arrowtown Assets Ltd [2004] 1 HKLRD 77.  He submitted that the driving principle behind Ramsay is the orthodox method of purposive interpretation to the facts viewed realistically.  It requires the Court to adopt an unblinkered approach to the analysis of the facts.  The ultimate question is whether the statutory provisions, construed purposively, were intended to apply to the transaction, viewed realistically.

32.  This was not disputed by Mr. Leung, for the plaintiff.  I accept Mr. Chow’s submission as to the driving principle in Ramsay.

33.  This is also clear from the judgment of Ribeiro PJ in Arrowtown.  At para. 31 he said :

“The……………….preferable, view is that the Ramsay principle does not espouse any specialised principle of statutory construction applicable to tax legislation, whatever its language, but continues to assert the need to apply orthodox methods of purposive interpretation to the facts viewed realistically.  In common with Lord Hoffman in MacNiven (Inspector of Taxes) v Westmoreland Investments Ltd [2003] 1 AC 311 at para. 49, I am of the view that Lord Brightman’s formulation in not a principle of construction, but, as stated above, a decision that the Court is entitled, for fiscal purposes, to disregard intermediate steps having no commercial purpose as a consequence of an orthodox exercise of purposive statutory construction.”

And at para. 35 Ribeiro PJ said :

“Accordingly, the driving principle in the Ramsay line of cases continues to involve a general rule of statutory construction and an unblinkered approach to the analysis of the facts.  The ultimate question is whether the relevant statutory provisions, construed purposively, were intended to apply to the transaction, viewed realistically.”

34.  What Ribeiro PJ said as set out above was cited with approval in the recent decision of the House of Lords in Barclays Mercantile Business Finance Limited v Mawson [2004] UKHL 51 at para. 36.

The statutory provisions

35.  It is necessary to consider the relevant statutory provisions.  Before doing so, however, it is important to bear in mind that the Court is dealing with estate duty legislation.  There are no anti-avoidance provisions in the Ordinance. 

36.  I also bear in mind what Sir Anthony Mason NPJ said in Shiu Wing at page 100 :

“  There are to be found statements of high authority which acknowledge that Parliament intends that a taxpayer shall be free to place an asset out of the reach of the taxing provisions (Craven v White [1989] AC 398 at p.489, per Lord Templeman; IRC v Willoughby [1997] STC 995 at p.1004, per Lord Nolan).  ………………………………………In any event, these statements must be read as being subject to the Ramsay principle.”]

37.  S. 10(b) of the Ordinance provides that estate duty shall not be payable in respect of “property situate outside Hong Kong”.  A useful starting point is to bear in mind what Litton PJ succinctly said in Shiu Wing at page 87 F :

“… one starts with s.10(b) which exempts from estate duty property situate outside Hong Kong.  If a deceased manages to arrange his affairs so that, at his death, he (or she) has no property situate within Hong Kong then — s.6(1)(c) apart — his estate is not chargeable to estate duty.  There is no principle of law which requires the court to unravel his affairs upon his death in order to notionally bring property, otherwise outside the scope of estate duty, within the net.” 

38.  The primary charging provision in the Ordinance is s. 5.  All property passing on the death of a deceased person shall be liable to estate duty.  S. 6 sets out what property is deemed to pass on death.  By s. 6(1)(c) this includes property taken under a disposition made by him as an immediate gift inter vivos which shall not have been bona fide made three years before the death.

39.  S. 7 deals with dispositions in favour of relatives.  This provides as follows :

“(1)  For the purposes of section 6(1)(c), any disposition made by the deceased in favour of a relative of his shall be treated as a gift unless —

(a)    the disposition was made on the part of the deceased for full consideration in money or money’s worth paid to him for his own use or benefit; or

(b)    the deceased was concerned in a fiduciary capacity imposed on him otherwise than by a disposition made by him and in such a capacity only :

Provided that where the disposition was made on the part of the deceased for partial consideration in money or money’s worth paid to him for his own use or benefit, the value of the consideration shall be allowed as a deduction from the value of the property for the purpose of estate duty.”

40.  Mr. Chow submitted that the statutory scheme is to deem that any disposition made by the deceased in favour of a relative shall be treated as a gift unless the taxpayer can bring himself with the exemption in s. 7(1)(a) which is the relevant exemption in this case, namely, that the disposition was made by the deceased for “full consideration in money or money’s worth paid to him for his own use or benefit”. 

41.  I accept that the statutory scheme is to deem that any disposition made by the deceased in favour of a relative shall be treated as a gift unless the taxpayer can bring himself within the exemption in s. 7(1)(a) in this case.  It seems to me, however, that the proviso to s. 7 is important.  It is important to construe the section as a whole including the proviso.  The proviso makes it plain that where the disposition was made by the deceased for partial consideration, instead of full consideration, in money or money’s worth paid to him for his own use or benefit, the value of the consideration shall be allowed as a deduction from the value of the property for the purpose of estate duty.

42.  There is a definition of “relative” in s. 7 which includes a child but, as one would expect, it does not include a limited company.

43.  Mr. Chow relies on s. 34 dealing with controlled companies.  This provides in sub section (1) that other sections, including s. 45, apply to any company which is deemed to be under the control of not more than 5 persons “not being a company which, at any such time, is deemed to have been either a subsidiary company or a company in which the public were substantially interested”.

44.  S. 34(2) sets out the circumstances under which a company is deemed to be under the control of not more than 5 persons. 

45.  Having considered the provisions of s. 34 and the submissions of Counsel, I have no hesitation in coming to the view, as submitted by Mr. Chow, that as the plaintiff only had two shareholders the plaintiff is a controlled company for the purpose of s. 34.  By s. 34(1) the provisions of s. 45 would apply to the plaintiff. 

46.  S. 45 deals with limitations on dispositions through a controlled company in favour of relatives.  The relevant provision is s. 45(3) which provides that :

“If the deceased has made in favour of a company to which, by virtue of section 34, this section applies, a disposition which, if it had been made in favour of a relative of his, would have fallen within section 7(1), this section shall have effect in like manner as if the disposition had been made in favour of a relative of his, unless it is shown to the satisfaction of the Commissioner that no relative of the deceased was, at the time of the disposition or subsequently during the life of the deceased, a member of the company and for the purposes of this subsection a person who is, or is deemed by virtue of this provision to be, a member of a company to which this section applies and which is a member of another such company shall be deemed to be a member of that other company.”

47.  I accept Mr. Chow’s submissions on the effect of ss. 34 and 45.

48.  It seems to me that s. 45(3) clearly provides that if a person disposes of his property in favour of a controlled company then it is to be treated as if the disposition had been made to a relative of his unless it can be shown that no relative was a member of the company to which the section applied.  That is the clear intention of the legislature.  In this case, Albert, the 90% holder of the shares in the plaintiff, was the son of the deceased.  The plaintiff was a controlled company within the meaning of s. 34.  Thus by s. 45(3) the disposition by the deceased is treated as if the disposition had been made to a relative of his.

49.  As Mr. Chow submitted, this case centres on the construction of s. 7(1).  As I have said, this subsection must be construed as a whole including the proviso which is important.  Mr. Chow submitted that applying a purposive construction and viewing the facts realistically, there was no consideration paid, whether full or partial, to the deceased in money or money’s worth paid to him for his own use or benefit.  It is for the plaintiff to show this.  He has failed to do so.  He submitted that the disposition should be treated as a gift and deemed to pass on the death of the deceased under s. 6(1)(c).  Estate duty is, therefore, payable.

50.  Mr. Chow submitted that the fact that there were circular movement of funds on the same day, 28 April 1994, starting from Wing Hang Bank and ending back with Wing Hang Bank shows the artificiality of the scheme and that the same was designed with the sole purpose of avoiding estate duty.  He also submitted that the plaintiff had no trading history with Wing Hang Bank and the banking facility was not secured any mortgage or charge on the two properties but by a negative pledge of the plaintiff and a personal guarantee of Albert.  He submitted that construed purposively, s. 7(1)(a) was never intended to apply to such a transaction as in the present case viewed realistically.

51.  As Mr. Leung submitted, a person is free to arrange his affairs so that he does not fall within the conditions prescribed by the taxing statute.  He is not prohibited from selling his landed properties in Hong Kong and of sending the proceeds of sale out of Hong Kong.  He is also not prohibited from making a gift of the proceeds of sale outside Hong Kong.  As was said in Shiu Wing, there is no principle of law which requires a court to unravel his affairs upon his death in order to notionally bring property, otherwise outside the scope of estate duty, within the net (per Litton PJ at page 87).

52.  One cannot ignore the underlying background facts.  To do that would be to take a blinkered approach to the facts.  I have found that in 1993 the deceased wished to sell the two properties but his brothers were reluctant.  I have also found that on or about 21 April 1994 the deceased and Albert, on behalf of the plaintiff, discussed the sale by the deceased of a substantial portion of his interest in the two properties and that it was agreed that the plaintiff would purchase the deceased’s 4/8 share of Lot 498RP and Lot 500RP for HK$10,580,000.

53.  Although there were clearly fiscal reasons for doing what the deceased did on 28 April 1994 in my view these were not the sole reasons.  The underlying facts show that the deceased had wanted to dispose of the two properties in 1993.  He was tempted to sell them but his brothers were reluctant.  This was for a commercial purpose.  The facts also show that he wanted to retain 1/8 share of Lot 498RP for himself which he did.  This was disposed of in his will by giving it to one of his brothers.

54.  It must be remembered that the plaintiff obtained banking facilities by way of overdraft from the Wing Hang Bank.  The facility letter dated 27 April 1994 stipulated the interest to be paid which was agreed at 4% per annum over prime lending rate subject to fluctuation.  The bank also charged a commitment fee of HK$52,900 which it was paid.

55.  The banking facilities were secured, not by a mortgage or charge on the two properties, but by a negative pledge from the plaintiff and a personal guarantee from Albert.  Albert is a professional man.  He is a dentist.  It cannot be said that the securities taken by Wing Hang Bank were not valuable securities. 

56.  It must also be remembered that real money was paid by Wing Hang Bank by the two cashier’s orders which were payable to the deceased.  These were paid into the deceased’s bank account with Wing Hang Bank.  

57.  Real money was also remitted by telegraphic transfer to the deceased’s bank account in Macau.  

58.  These were genuine transactions and the Commissioner does not dispute this.

59.  In my view, the deceased was certainly free to dispose of his landed properties in Hong Kong and convert these to cash and send it out of Hong Kong.  Once the funds were in Macau they were foreign assets.  He made a gift in Macau of the foreign assets to his son as he was perfectly entitled to do.

60.  I am unable to accept the submission that money or money’s worth was not paid to the deceased for his own use or benefit.  It may not have been for his benefit but it was in my view certainly for his own use.   He used it by making a gift of the same to his son.  It is plain that he himself gave instructions to the Macau bank.  The debit advice issued to the deceased from the Macau Bank records that :

“amount transferred to c/a no. 098167-001 in the name of Tsang Chung Man Albert with us as per your letter instructed on 28 Apr 1994” 

61.  I am satisfied that money or money’s worth was given to the deceased for his own use.  I am unable to accept Mr. Chow’s submission that the end result on 28 April 1994 was that the deceased transferred the two properties to the plaintiff but did not receive any consideration in return.

62.  The end result it seems to me is that there was a transfer of landed properties by the deceased to the plaintiff.  The landed properties were replaced by the proceeds of sale which the deceased received and which were remitted to Macau.  This became offshore property.  There was a disposition of the offshore property, namely, the sale proceeds in Macau by the deceased to Albert.  That was a gift of foreign assets by the deceased to his son.

63.  Although I am satisfied that money or money’s worth was given to the deceased for his own use, I am not satisfied that he received full consideration.  In my view he received only partial consideration.

64.  It is clear on the evidence that the stated consideration of HK$10,580,000 paid for the two properties was below the true value of the properties. 

65.  As the evidence shows, the initial valuation of the two properties at the time of transfer obtained from the Rating and Valuation Department (“RVD”) was HK$14,900,000 for the 4/8 share of Lot 498RP and HK$3,400,000 for Lot 500RP.  The stated consideration was HK$9,600,000 for the 4/8 share of Lot 498RP and HK$980,000 for Lot 500RP.  As a result of objections, the RVD revised the valuations to HK$13,000,000 and HK$2,300,000, respectively.  The revised valuation of HK$13,000,000 for the 4/8 share of Lot 498RP was accepted by surveyors appointed by the plaintiff.

66.  Although Albert in the gift account filed on 28 December 1999 accepted the valuations of HK$13,000,000 for the 4/8 share of Lot 498RP and $2,300,000 for Lot 500RP, this was subsequently withdrawn by the solicitors on his behalf.  However, it appears that the two properties were valued at even higher figures for stamp duty purposes.  Stamp duty on these higher figures were paid by the plaintiff.  The higher figures were HK$14,500,000 for the 4/8 share of Lot 498RP and HK$3,400,000 for Lot 500RP.  This lends considerable support for the view that the stated consideration in the assignments was an undervalue.

67.  The plaintiff has not provided any evidence to show that the revised valuation of the RVD HK$13,000,000 for the 4/8 share of Lot 498RP and HK$2,300,000 for Lot 500RP is wrong.  

68.  I am satisfied that there has been an undervalue of the properties in the stated consideration for the two properties and that only partial consideration of the value has been paid to the deceased. 

69.  As stated in the proviso to s. 7(1), the value of the consideration shall be allowed as a deduction from the value of the property for the purpose of estate duty.  In my judgment, the plaintiff is entitled to deduct the sum of HK$10,580,000 paid for the two properties from the revised valuation of HK$15,300,000 for the two properties.  The plaintiff is only liable to pay estate duty on the balance of $4,720,000 which is treated as a gift.  As is stated in Willoughby and Halkyard, Encyclopaedia of Hong Kong Taxation, Vol. 2, Estate Duty para. I [503] :

“If the consideration is only partial there is a statutory right to deduction from the full value of the gifted property and duty is only payable on the balance (proviso to section 7(1)).”

70.  Under s. 6(1)(c), the difference can also be treated as a gift if an element of bounty is shown.  It seems to me this can also be shown.  There is a substantial difference between the stated consideration and the value of the two properties, the difference being HK$4,720,000.  There is the relationship between the deceased and Albert who holds 90% of the shares in the plaintiff.  The plaintiff has not adduced any evidence to show that the stated consideration was the full value of the properties at the time of the dispositions.  Instead it has accepted the revised valuations of the RVD.  In my view an element of bounty can be inferred and is clearly shown.

The Commissioner’s alternative case

71.  The Commissioner’s alternative case is that both

(i)    the difference between the true value of the properties and the stated consideration, i.e. the balance of HK$4,720,000; and

(ii)   the stated consideration of HK$10,580,000

represented properties which passed or deemed to pass on the death of the deceased and liable to estate duty.  On the Commissioner’s alternative case, estate duty is payable on HK$15,300,000 (HK$4,720,000 + HK$10,580,000) as assessed by the Commissioner.

72.  It was submitted by Mr. Chow that the plaintiff did not in reality pay the deceased the consideration for the purchase of the two properties and that it was still indebted to the deceased for the stated consideration of $10,580,000.  This debt or chose in action was an asset of the deceased which passed on his death and was liable to estate duty.  

73.  I am unable to accept the submission that the plaintiff did not in reality pay the deceased the stated consideration.  As I have said, Wing Hang Bank lent real money to the plaintiff.  The deceased also received real money in the form of the two cashier’s orders paid to the deceased.  He remitted the proceeds to his bank account in the Macau Bank.  He made a gift of the same to his son Albert in Macau.  That represented a gift of foreign assets.  That was real money given to Albert.  Albert lent that money to the plaintiff in Macau.  The plaintiff remitted that back to its account with Wing Hang Bank.  All of that was real money.  In the accounts of the plaintiff the loan from Albert has all along been treated as a loan from a director which in fact it was.  That is the reality of the situation.  There is no merit in the submission that the plaintiff did not in reality pay the deceased the stated consideration of HK$10,580,000. 

74.  I am unable to accept the submission that the stated consideration of HK$10,580,000 is liable for estate duty. I reject the Commissioner’s alternative case.

Interest accrued

75.  A substantial portion of the assessment is for interest levied.  Interest is payable under s. 12(6) which provides that in addition to any estate duty payable, interest shall accrue and be payable on such duty while it remains unpaid at the rate of 4% p.a. from the date of the death of the deceased until the expiration of six months from the death and at the rate of 8% p.a. thereafter.  The rate of interest is clearly provided for in the Ordinance.

76.  Estate duty was assessed at HK$2,754,000 with interest at HK$2,121,259.10 making a total assessment of HK$4,875,259.10.

77.  The plaintiff complains of interest being charged on the estate duty levied since the death of the deceased on 1 May 1994.  The gist of the complaint is that between the years 2001 to 2003 for about 2½ years the Commissioner delayed in dealing with the matter of the estate duty payable.

78.  Mr. Chow submitted that there were a number of reasons why the Court should reject the appeal against the amount of interest levied.  It is not necessary to deal with all the reasons put forward.  Suffice it to say that I am satisfied, as submitted by Mr. Chow, that s. 22 of the Ordinance does not provide for any appeal against the amount of interest levied.  S. 22 clearly provides for an appeal to the Court of First Instance by any person aggrieved by a decision of the Commissioner “....... as to the amount of estate duty payable”.  This does not include interest payable.  I accept Mr. Chow’s submission that s. 22 does not provide for any appeal against the amount of interest levied.

Conclusion

79.  The plaintiff fails on its primary case.  However, I find for the plaintiff on its alternative case.  The Commissioner has failed in its primary case and its alternative case.   In my judgment the plaintiff is not entitled to the declaration sought under para. (1) of the Originating Summons but it is entitled to the declaration sought under para. (2).  I give judgment to the plaintiff in the terms of the declaration under para. (2) of the Originating Summons.

80.  I also make an order nisi that the plaintiff should be paid 50% of its costs of the proceedings to be paid by the Commissioner as it has succeeded only on its alternative case.