THE COMMISSIONER OF INLAND REVENUE v. WAYLEE INVESTMENT LTD

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J U D G M E N T

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Kempster, JA:

1. The genesis of these proceedings is to be found in a successful rescue operation mounted by the Hong Kong & Shanghai Banking Corporation in about August 1975 by which the liquidation of one of their customers, Hutchison International Ltd, then owing money to them and to others, was averted. In order to be seen fully to stand behind Hutchison the principal means employed were to procure changes in the management of the customer, to provide additional capital and banking facilities and to cause a company now called Waylee Investment Ltd, the respondents, timeously incorporated in Vanuatu, to subscribe for a new issue of 150 million ordinary HK$1 shares in Hutchison at par; an interest free loan, without a date for repayment, of HK$150,025,000 being provided for the purpose. The Bank stated that it derived from "venture capital".

2. After its fortunes had improved Hutchison paid dividends to the respondents who in turn declared dividends payable to the Bank as the holding company. In its directors reports the principal activity of the respondents was described as "investment in shares of companies listed on the Hong Kong Stock Exchange" and the shares as "non-current assets". In truth the Hutchison shares or their equivalent constituted the respondents' only investment and asset while their purchase and sale and the receipt and declaration of dividends was their only activity. Thus by about 1977 and subject to the respondents expenses income deriving from the shares was received by the Bank from its wholly owned subsidiary and shown in the group accounts.

3. In December 1977 and with the sanction of the Court Hutchison was involved in a merger as a result of which the respondents' holding in its shares was replaced by 19 million ordinary and 19 million preference shares in Hutchison Whampoa Ltd.

4. Some four years after the rescue operation had been mounted Cheung Kong (Holdings) Ltd made an offer to the Bank for the purchase of the respondents' 19 million ordinary shares in Hutchison Whampoa in circumstances which involved no disturbance to the market and at a time when the Bank's aims had been achieved. On 24 September 1979 the respondents' Board resolved to sell them to Continental Realty Ltd for HK$639 million, guaranteed by Cheung Kong, and thus to "realise a capital profit" of HK$517,059,587 on "part disposal of investment". The Bank received dividends, including interest earned, of HK$538,025,000 for the year ending 31 December.

5. For the Hong Kong Tax Year 1979-80 an assessment was raised on the respondents in the sum of HK$87,981,743 in respect of the profit made on the sale of the ordinary shares in Hutchison Whampoa after setting off a loss of HK$40,978 carried forward. This assessment was confirmed by the Commissioner of Inland Revenue on 19 April 1984. Meanwhile in November 1983 the preference shares had been sold to a different buyer. Not surprisingly they were by then "held as part of the company's fixed assets in its books of account" and the proceeds credited to capital account. Albeit the loan of HK$150,025,000 remained outstanding the rescue operation had brought the respondents and in turn the Bank considerable reward.

6. The respondents appealed to the Board of Review who, by their decision dated 11 March 1988 made in the light of viva voce and affidavit evidence put before them, annulled the assessment on the footing that the profit derived from the disposal of a capital asset and was not therefore chargeable under s.14 of the Inland Revenue Ordinance (Cap. 112) of which the Act of 1842 (5 and 6 Victoriae Cap 35) was a precursor. Section 14 reads

"Subject to the provisions of this Ordinance, profits tax shall be charged for each year of assessment at the standard rate on every person carrying on a trade, profession or business in Hong Kong in respect of his assessable profits arising in or derived from Hong Kong for that year from such trade, profession or business (excluding profits arising from the sale of capital assets) as ascertained in accordance with this part ..."

7. We are now seized with an appeal from a judgment of Barnett J. given on 21 November 1988 pursuant to s. 69(5) of the Inland Revenue Ordinance whereby he dismissed the appeal, brought by way of Case Stated, of the Commissioner from the decision of the Board of Review which, "in the interests of the efficient administration of justice ... can only be upset ... if they have been positively wrong in law" per Lord Radcliffe in Edwards v Bairstow [1956] AC 14 at p 38. I shall seek shortly to explain what is meant by "wrong in law".

8. Since it is no longer contended that the profit arose elsewhere than in Hong Kong the question posed by the Board and now falling for our determination is whether there was, as Barnett J found, evidence from which it could properly have concluded that the respondents' profit on the sale of the Hutchison Whampoa ordinary shares arose from the realisation of a capital asset rather than from "trade", described by Lord Reid in Ransom v Higgs [1974] 1 WLR 1594 at p 1600 as "operations of a commercial character by which the trader provides to customers for reward some kind of goods or services" or, more to the point since it was the respondents, carrying on no continuing activity, and not the Bank who were assessed to tax, from "an adventure and concern in the nature of trade" within the meaning of s.2(1) of the Ordinance.

9. As Barnett J rightly directed himself he was not entitled to exercise an original jurisdiction on matters of fact, which were for the Board of Review, and no more are we. But even if the finding that the profit derived from the sale of a capital asset was one of fact it may, in the absence of evidence permitting such an inference or conclusion or, if having regard to the primary facts, it could not reasonably be entertained, disclose that the Board erred in law. An error of law appearing in its Decision would also vitiate the conclusion reached. Edwards v Bairstow at p 29 per Viscount Simonds. In the final analysis, as Lord Templeman stated in Beauchamp v Woolworth PlC [1989] 3 WLR 1 at p 4: -

"...the weight of authority supports the view that the question of whether the transactions in the present case were of a revenue or a capital nature is a question of law to be determined in the light of the facts found by the commissioners ... "

10. Albeit the treatment of monies in accounts is in no way conclusive a heavy onus rests on the appellant because: -

"...- there are many combinations of circumstances in which it could not be said to be wrong to arrive at a conclusion one way or the other. If the facts of any particular case are fairly capable of being so described, it seems to me that it necessarily follows that the determination of the Commissioners, special or General, to the effect that a trade does or does not exist is not 'erroneous in point of law'; and, if determination cannot be shown to be erroneous in point of law, the statute does not admit of its being upset by the court on appeal. I except the occasions when the commissioners, although dealing with a set of facts which would warrant a decision either way, show by some reason they give or statement they make in the body of the case that they have misunderstood the law in some relevant particular."

per Lord Radcliffe in Edwards v Bairstow at p 33.

11. In determining the nature of the material, transaction no definite rule or criterion can be applied. To quote from the speech of Lord Reid in Fraser (Glasgow) Bank Ltd v CIR (1963) 40 TC 698 at p 712: -

"The answer must depend on a consideration and evaluation of all the relevant facts".

Among facts which may be relevant here were the absence of any resources of their own when the respondents bought the shares, their concern to assist the Bank and the absence of further need to exercise a controlling interest in Hutchison by the time the shares were sold. Honouring that approach it is, in my view, helpful to look at the time when and the purpose for which the Hutchison shares were acquired by the respondents since, if fulfilled as it was, it may explain what they really did. As Lord Wilberforce said in Simmons v IRC [1980] 1 WLR 1196 at p 1199: -

"Trading requires an intention to trade: normally the question to be asked is whether the intention existed at the time of the acquisition of the asset".

Likewise with regard to an adventure and concern in the nature of trade.

12. Where are we to look in order to ascertain the relevant intention and purpose? I think that in Coates v Arndale Properties Ltd [1984] 1 WLR 1328 the House of Lords, followed by the English Court of Appeal in overseas Containers (Finance) Ltd v Stoker [1989] 1 WLR 606, provided the answer. When a transaction is carried out by a company (the taxpayer company) being one of a group the relevant purpose is that of the group and not of the particular company viewed, in isolation. Further, due attention must be paid to the context in which the acts of the particular subsidiary were performed. The respondents to this appeal played the part ordained by and for the benefit of the Group, of which the Bank provided the governing mind, within the overall rescue operation. It is common ground that while directors meetings were held in Vanuatu from time to time they gave effect to group policy. As Gibbs CJ put it in FCT v Whitfords Beach Pty Ltd (1982) ATR 692 at p 761

"... in deciding whether what was done was an operation of business, it is relevant to consider the purpose with which the taxpayer acted, and, since the taxpayer is a company, the purposes of those who control it are its purposes ... their state of mind was the state of mind of the taxpayer".

13. Taking into account the evidence of Mr Sayer, of Mr Sandberg and of Mr Hammond and all the surrounding circumstances appearing in the Case it is clear beyond a peradventure that the purpose of the Hong Kong & Shanghai Bank Group in taking the steps it did in the continuance of its trading or business relationship with Hutchison, including negotiations for the unwilling purchase of 150 million shares, was to safeguard such part of its HK$1 billion loan to Hutchison as was not secured by that company's assets, to ensure that Hutchison remained a profitable customer and to make a profit when the shares or the majority of them were sold as was to be done "as soon as conditions permit"; to quote from the public statement made by Mr Sayer, the Chairman of the Bank, on 5 September 1975 and repeated by him at the Hilton Hotel on 26 March 1976. It was not known whether the shares would be held long or short term. There is no evidence that receipt of income entered into the Group's calculations

14. It is instructive to compare the sum owing by Hutchison with the consolidated profit of HK$333m earned by the Group during 1975 as well as with the figure of HK$18,139,611,460 for all "advances to customers and other accounts". Even to the Bank this was a "pretty substantial sum" as Mr Sayer observed.

15. While the predominant business of the Group, though not of the respondents, was and is banking in general the particular aspect with which we are concerned was the Bank's relationship with Hutchison. It is really common ground that assistance to customers is a feature of banking business and it matters not that the degree of assistance afforded in the instant case was exceptional.

"... it was part of their business which, though not of necessity the line on which they desired their business most extensively to develop,...one which they were prepared to undertake".

Per Lord Buckmaster in Ducker v Rees Roturbo Development Syndicate [1928] AC 132 at p 142. Looked at in the light of other authority "... it is legitimate to consider the scheme as a whole where there is evidence, as there is here, that each separate step is dependent on others being carried out". Per Lord Wilberforce in Ransom v Higgs at p 1612. The Bank may also be regarded as having established an unusual form of security for the monies owed to it by introducing its own management team to run Hutchison. To achieve this end it required the control arising from the shareholding held by the respondents.

16. Although eschewed by Mr Pinson on their behalf tacit acceptance by the respondents of Group purpose is apparent in that reliance is placed on the public pronouncements and oral testimony of Mr Sayer to the effect that when the Hutchison shares were acquired the rescue operation was not a transaction falling within the normal business of banking and on the facts that the shares were allocated to a subsidiary company as were its capital holdings in, for example, Cathay Pacific and Worldwide Shipping and that they could profitably have been sold earlier than they were. The primary motive of the Bank, as perhaps on other occasions, was to preserve the credibility of the Hong Kong financial system. Whether or not the Bank's earlier holding of 3.75 per cent in Hutchison was properly recorded in the accounts as a capital asset appears questionable having regard to Mr Sayer's evidence which tended to treat those shares as trading stock. "We did not" he stated "acquire the shareholding in Hutchison for the purpose of selling the shares at a profit". That the Group's self-interest_. was thought, quite genuinely, to coincide with the wider interests of the Hong Kong economy, is understandable and probably no, more or less than the truth. The respondents also made the point that the profit earned, when it reached the Bank, was treated as "extraordinary" and transferred to inner reserves. Certainly it is the respondents and not the Bank who have been assessed to tax and the same trade cannot be located in two different places as Lord Wilberforce also pointed out in Ransom v Higgs at p 1612. No more may the same profit in respect of the same activity be taxed twice.

17. Even if the entire Group intentions were not attributable to the respondents, whose separate legal identity must as a matter of law be recognised, and assuming for purposes of argument that they could have a purpose distinct from that of the Group the transaction which they carried out within the context of the rescue scheme, on the success of which the value of the Hutchison shares depended, was to use an interest free loan in order to buy such shares not because of their intrinsic value or prospects but in order to support and control the management of a customer of the Bank, their holding company, in the hope and expectation of capital appreciation and with the firm intention of selling them when such hope and expectation, entirely dependent on the management installed by the Bank, had been realised and the time was opportune for putting so many shares on the market. All these limited intentions accorded with the wider purposes of the Bank.

18. On either view the profit realised by the respondents can only be construed as the result of an adventure and concern in the nature of trade rather than of capital investment. The shares were trading stock and not capital assets. No reasonable investor looks to the stock of a failing company affording little prospect of dividends for long term investment. By the same token had the shares directly been acquired by the Bank the scheme would have been an aspect both of its business in general and with Hutchison in particular and the shares have formed part of its trading stock along with other monies and financial instruments available to meet the demands of depositors. This conclusion is the antithesis of the Board's finding that the respondents were making a long term investment.

19. In the premises I am left satisfied, as suggested by Sir JHA Macdonald, the Lord Justice Clerk, in Californian Copper Syndicate v Harris (1904) 5 TC 159 at p 166, that the gain was made in what was "truly the carrying on or carrying out of a business" and not merely on the "realisation or change of investment", that the Board was positively wrong in law and that the appellant has discharged the heavy onus resting upon him.

20. In any event the Board erred in law in isolating as the relevant facts the incorporation of the respondents in August 1975, the fact that they were a wholly owned subsidiary, the Bank's offer to subscribe for 150 million ordinary HK$1 shares in Hutchison and the allocation of those shares to the respondents who financed the acquisition by a loan made to them by the Bank. Such findings ignore the considerations which led the Bank to set the rescue operation in train and reveal its true nature. They also ignore the fact that it was part of the Bank's business to help customers in trouble, if it could, as well as the attribution of its intentions to the respondents. In particular it ignores the Bank's achieved intention of selling the majority of the shares as soon as possible once the rescue operation had proved a success and the time was opportune and the fact that the Group acquired the shares unwillingly. It follows that the judge, who did not specify what facts warranted the Board's finding, erred in stating that it had taken all material facts into account.

21. I do not agree with Barnett J that examination of the facts discloses a grey area in which the Board was as entitled to come to the conclusion it did as to another. To adopt and to adapt the words of Viscount Simonds in Edwards v Bairstow at p 29: -

"The primary facts ... do not, in my opinion, justify the inference or conclusion which the Board has drawn; not only do they not justify it but they lead irresistibly to the opposite inference or conclusion ..."

22. I would allow the appeal, answer the question posed by the Board in the negative and restore the Profits Tax Assessment for the year 1979-1980 under Charge No. 1-0708035-80-7 dated 6 July 1983.

Clough, JA:

23. I agree that the appeal should be allowed for the reasons given by my Lord Kempster.

Power, JA:

24. I also agree.