HONG WAH INVESTMENT CO. LTD. v. COMMISSIONER OF INLAND REVENUE

IN THE SUPREME COURT OF HONG KONG

(Appellate Jurisdiction)

INLAND REVENUE APPEAL NO. 1 OF 1986

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JUDGMENT

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1. This is an appeal by way of case stated from the Board of Review by the Taxpayer in respect of an assessment for six years between 1971 and 1977 in respect of profits said to have been made by the Taxpayer in a business of letting property.

2. It is said by the Commissioner of Inland Revenue that the Taxpayer Company was a person carrying on business making profits arising in and derived from his business (the company's business that is) of letting. If one turns to the definition section of the Ordinance, business includes, so far as this case is concerned by a corporation, the letting of premises or any portion.

3. The facts are broadly these. The Company Taxpayer, acquired a property in Sai Kung at public auction. That was in 1962. The Company having been incorporated on 10th October, 1962 and having been successful in acquiring the property at public auction.

4. In fact, the shareholders of that Company were not the present shareholders but included a Mr. WONG. After the public auction, Mr. LAM, the present Managing Director of the Company, and his wife succeeded in purchasing the shares and so control (through the Company) of the land.

5. There were certain conditions attached to the sale of that land. First of all, the purchaser, that is the Taxpayer Company, should develop the Lot and there was a prohibition against assigning the Lot until that condition had been satisfied. Those conditions of sale can be found in condition 10(a).

6. There was also condition 10(b); to maintain any property that had been built on the Lot. There were detailed conditions about the purchaser not parting with any interest in the land.

7. The building was duly complete. There were our flats in the building and it is not in dispute that the monies for the construction of that building were paid by Mr. LAM personally.

8. It is clear from correspondence that has been submitted, and which was in front of the Board of Review, that the Lot was the Company's only asset, that the Company was doing the construction and was asking for an extention of time for the building. This was in a letter of 18th November 1966 signed by Mr. LAM on behalf of the Company. There is further letter of 15th December 1971 saying that the conditions had been fulfilled, signed by Mr. LAM as Managing Director. Following that letter there was an occupation permit (a permanent one) on 29th December to the Company and that followed on earlier temporary one.

9. The facts upon which the Board of Review based their Determination are set out in the Case Stated and I am not going to repeat them. When dealing with the facts, in particular in paragraph 7 there is a letter dated 2nd September 1976 from Mr. LAM to the Assessor, in which he sets out a number of facts; in case there should be any doubt, it is clear that the board of Review, although it accepted some of those facts, did not, having heard Mr. LAM give evidence, accept the implication of all of them.

10. In the course of giving evidence to the Board of Review, Mr. LAM explained his attitude. It was that he was the Company and the Company was him; in other words, that he and the Company were one and the same.

11. In due course the flats were let. It was Mr. LAM's contention that he was the landlord for all the lettings as he had put up the money and the Company served no Purpose.

12. As I have said, it is not disputed that he had personally provided the money. It is not disputed that he at all times represented himself as the landlord, and it was claimed that he leased the flats out in that personal capacity, on his own account, not on the Company Taxpayer's account at all. It fellows from what he said that he had not accounted to the Company in any way for the rent that he received.

13. Apart from the interest of the Company, there are no other registered interest in the land. In the course of his evidence he did not at any time suggest that there was any arrangement whereby he had taken from the Company an interest in the land, but he said, "By reason of the fact that I have put up the money, I have a beneficial interest to that extent."

14. The Board of Review made a number of findings and the first finding now relevant was that the Company was the legal owner of the parts of that building which were let.

15. Secondly, the Board found that when Mr. LAM was letting that property, he let as the Company's agent.The Board made no finding on the question whether he had some beneficial interest in the property saying that that was not necessary for their decision.

16. The finding that Mr. LAM was the agent was expressed on page 12 of the Case these words. "In our opinion the only reasonable interpretation is that Mr. LAM was acting as agent for the legal owner of the apartments, namely the Taxpayer."

17. The result expressed at paragraph 10.1 and 10.2 of the case was one; that "The Taxpayer, not Mr. LAM, was the legal owner of the Buildings;" and two, "The lettings of the apartments in the Building was done by Mr. LAM as agent for the Taxpayer, particularly as there was no contractual nexus between Mr. LAM in his personal capacity and the Taxpayer upon which Mr. LAM could found his right to deprive the Taxpayer of the fruits of its investment; indeed to hold otherwise would strip the Taxpayer corporation of any reason to exist."

18. Now the Board having dismissed the Taxpayer's appeal against the assessment, the Taxpayer appealed by way of Case Stated. There are ten separate grounds set out in the Case, but Mr. YU, with his usual realism, relies only upon four of them. It is only necessary, therefore, for me to deal with those four.

19. There were many grounds that were raised in front of the Board of Review, but I now deal with those four. First, it is said that the Board of Review erred in law in holding or concluding that Mr. LAM was acting as an agent for the Taxpayer in the letting of the flats.

20. Second, it is alleged that the Board erred in law in confirming the assessment of the Commissioner in that there was no evidence before the Board that the Taxpayer had derived any rental or profit in any of the years of assessment in question, nor was there any evidence that the lettings were made by the Taxpayer or on its behalf.

21. Then it said thirdly that the Board ought to have held that the Commissioner had the onus of showing and had failed to show that the Taxpayer was the landlord and derived rental or profits from the letting.

22. Finally it is said that it was necessary for the Board to make a finding upon the question as to whether Mr. LAM was a beneficial owner if the flats or of the building.

23. There is, of course, no doubt whatsoever in my judgment that the Company and Mr. LAM are separate legal personalities. There is no ether possible finding in law. The Company, therefore, being one legal personality and Mr. LAM being another and the shareholders in the Company being Mr. LAM and his wife, the finding by the Board that the Company was the legal owner of the building was undoubtedly a finding which was open to the Board and not one which is open to challenge.

24. The Company owned the building and was the only person entitled to develop. It was not entitled (by the conditions) to divest itself of the Lot or hand over the construction to anyone else and no one else was registered as having any interest in the land. When Kr. LAM gave evidence, there was no suggestion by him that he had taken from the company any formal interest in the land or any lease or anything of that kind. He simply relied upon the payment of money for the construction. Arguing that there followed a resulting or implied trust which gave him personally the right to do what he was purporting to do; to let the property on his own behalf and take the rent.

25. As to the finding in these circumstances that Mr. LAM when letting the property was acting as agent for the Company; it was open to the Board to take the view that the company (on what they had heard) was the only person entitled to let the property, there being no evidence, save what was accepted about Mr. LAM having expended money, of him having any other interest.

26. It was open, therefore, in my judgment for the Board to hold that in reality he was letting the property on behalf of the Company; that he was letting the property as the company's agent. Of course, it would have been open to the Board to hold that being a director he was the company doing the letting. It was put that ho was the agent and in my judgment it was a finding on all the evidence which was open to the Board. The inding considering the separate legal personalities and the proper legal position of the parties, was that in reality he was letting on behalf of the company.

27. In those circumstances, it is in my judgment unnecessary, and was unnecessary, for the Board to make a finding about the beneficial ownership. That would, of course, chiefly affect the rights between Mr. LAM and the company.

28. The first ground, therefore, fails.

29. It was further submitted by Mr. YU that if the Taxpayer did not receive rent and the agent did not account to the Taxpayer for the rent that he received, that it followed that there was no assessable profit. He is turning to the second ground of appeal in making that submission, saying that there was no evidence before the Board of Review that the Taxpayer had derived any rental or profit during the years in question nor that the lettings were made by the Taxpayer or on its behalf.

30. Again I find myself against the Appellant. The Company cannot avoid profit simply because that which would otherwise be due to the Company has not been paid over but has been received by its agent and director. This is in my view trite accounting. The fact that Mr. LAM may have pocketed the money from the letting, if the finding that he was the agent of the Company is open to the Board, cannot protect the Company Taxpayer from being assessed on its profit from the rental.

31. So far - the second ground, therefore, fails.

32. So far as the onus is concerned, then if it be of importance in these findings, which I doubt, then that matter seems to me to be answered by a consideration of Section 68(4) of the Ordinance.

33. It follows that it is my judgment that the findings that were made by the Board were those which were open to it. They did not err in law in making those findings. Nor was it necessary, in order to make those findings or to decide the appeal, for them to make any findings about such beneficial interest as there may have been following any implied or resulting trust in Mr. LAM's favour following his putting up the money to construct the building. This, of course, would have been equally consistent with the facts that are known that Mr. LAM was lending the money to the Company or paying the money on the Company's behalf. However, as I say, it's not necessary to make any finding about that. The result is that the appeal fails.