WINFAT ENTERPRISE (HK) LTD v. COMMISSIONER OF INLAND REVENUE

[A case stated by a board of review under the Inland Revenue Ordinance, Cap. 112 must set out the facts found by the Board in order to satisfy the requirements of s.69(2)]

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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BETWEEN

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JUDGMENT

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1. This is an appeal, from a Board of Review constituted under the Inland Revenue Ordinance, Cap. 112 ("the Ordinance"), which comes to the Court by way of a case stated by the Board on 23rd July 1991. The appellant ("the taxpayer") appeals from the Board's decision, given on 28th November 1990 after a two-day hearing on 13th and 14th December 1989, in favour of the respondent ("the commissioner") on the question whether the taxpayer's purchase in or about 1975 for $1,716,142 of some agricultural land in the New Territories constituted (as the taxpayer contended) an investment or (as the commissioner contended) an adventure in the nature of trade.

2. The land was resumed by the Government for public purposes in 1981 and the compensation paid to the taxpayer ($16,428,010 together with interest amounting to $5,212,319) resulted in a substantial gain to the taxpayer.

3. This gain is assessable to profits tax under Part IV of the Ordinance if the taxpayer's purchase of and dealings with the land fall to be treated as an adventure, or part of an adventure, in the nature of trade. The conclusion of the Board was that this gain ought to be so treated.

4. This is a conclusion of law. However, the Board's findings of fact, on which the conclusion is based, are findings with which the Court cannot interfere. The Court can interfere with the Board's conclusion if (but only if) it finds that the true and only reasonable conclusion open to the Board, on the facts found by the Board, was that the taxpayer acquired and retained the land as an investment.

5. The facts as found by the Board should have been set out in the stated case: see section 69(2) of the Ordinance. In fact they are not.  The reader is left to discover what were the facts found by the Board from the Board's written decision, which the Board, in its statement of the case, incorporates by reference. This, in my opinion, does not satisfy the requirements of s.69(2) and I express the hope that in future the requirements of s.69(2) will be strictly observed. However, it is fortunately possible to glean from the Board's written decision what were the facts found by the Board; and in these circumstances (though with some hesitation) I propose to overlook the deficiencies in the form of the stated case and to proceed to recount the material facts found by the Board as if they had been properly set out in it.

6. The material facts found by the Board, as appears from its written decision incorporated into the stated case, are really very simple and may be very shortly stated.

7. At the date of its acquisition by the taxpayer the land was and was restricted for use as agricultural land. The intention of the taxpayer in acquiring it was to endeavour to obtain a change of user and redevelop the land. This was its intention all along. In 1977 the taxpayer applied to change the permitted use from agricultural to residential use, supporting its application by a report to which I shall refer later. But its application was rejected. Until 1978 the taxpayer continued to use the land for fruit and poultry farming but in 1978 the poultry farming activity ceased. In 1980 the taxpayer let the land for three years to a tenant who wanted to store vehicles on it. The tenant was given an option to renew for a further two years but either party was to be entitled to determine the tenancy during any renewal on three months' notice. The tenant had to form the land to make it suitable for its intended purpose. This involved the cessation of the fruit farming activity as well. In 1981 the Government determined to resume the land for public purposes. In 1982 the taxpayer instituted proceedings challenging the resumption but failed in this Court, in the Court of Appeal, and before the Privy Council. The land was resumed and the taxpayer compensated accordingly.

8. The finding of the Board that "all along" the intention of the taxpayer in acquiring the land was to endeavour to obtain a change of user and redevelop the land is a finding of fact but it is not in my judgment determinative of the question I have to consider. If it was the taxpayer's intention to develop the land but to retain and et the units of which the development was to be comprised then, in my judgment, the moneys laid out by the taxpayer in the acquisition of the land were moneys laid out in the purchase of an investment. If, on the other hand, it was the taxpayer's intention to develop the land and sell off the units, then, in my judgment, the moneys laid out by the taxpayer on the acquisition of the iand were moneys laid out as part of an adventure in the nature of trade. A property investment company, having acquired land as an investment, is perfectly entitled to take steps to develop and enhance the value of its investment without being held to have converted itself into a property trading company. But the same steps, taken by a property trading company which has acquired land as part of its trading stock, are simply a further part of the same adventure in the nature of trade as the initial acquisition.

9. In the present case, the steps taken by the taxpayer pursuant to its intention to develop the land included the submission of a report to the Government which it presented in support of its application for a change in the permitted use of the land. From this report it may be deduced that the intention of the taxpayer was to sell rather than to retain the units in the development when completed. The taxpayer's proposal was for the establishment of "a self-contained condominium housing development with responsibility for upkeep and maintenance being assumed by a management corporation in which owners of the home units will have a say." The taxpayer attempted to play this down before the Board.  It suggested that the report was merely an attempt to test the temperature of the water. It had not formed an intention to sell anything but was concerned simply with enhancing the value of its investment. It spent very little on the exercise.

10. None of this cut any ice with the Board. It did not accept the taxpayer's evidence, or its contentions. It concluded that the report did evince an intention on the part of the taxpayer, not merely to develop the land but to sell the units of which the development was to be comprised. This conclusion was a conclusion of fact. Apart from the matter of this report, there seems to me to have been no evidence before the Board pointing one way rather than the other. There was a mass of evidence before the Board: but all of it was neutral. So how does the matter stand?

11. The commissioner does not have to satisfy the Court that the true and only reasonable conclusion, on the facts found by the Board, was that the land was acquired by the taxpayer as part of an adventure in the nature of trade. The boot is on the other foot: see s.68(4) of the Ordinance. The taxpayer has to satisfy me that the true and only reasonable conclusion, on the facts found by the Board, would have been and is that the land was acquired by the taxpayer as an investment. I am not satisfied that, on the facts found by the Board, the true and only reasonable conclusion is that the land was acquired by the taxpayer as an investment. The Board's conclusion, in my judgment, was one to which on the facts found by the Board it could reasonably have come. It has in no way misdirected itself as to the relevant law. Unless it did so, or must have done so, I cannot disturb its conclusion.

12. In these circumstances, I propose to dismiss this appeal, and to hold that the Board's decision that the gain made by the taxpayer is chargeable to profits tax was correct. The commissioner must have his costs of this appeal.

13. Since preparing this judgment, my attention has been drawn to the "Aspiration" case, 28th November 1989, unreported, a decision of the local Court of Appeal (Fuad, V.-P., Penlington, J.A. and Bewley, J.) The judgment of the Court of Appeal contains the following passage : -

"Mr Chang also asked us expressly to approve the Board's practice of annexing a copy of their determination to the case stated to save setting out all the facts again in the case stated itself. While we think that it is right to allow a certain measure of flexibility and discretion to the Board as to the precise manner in which they state the case, we would stress that the case stated itself must set out the facts found by the Board if the Board's written determination has merely summarised the evidence led before it without saying whether particular evidence is accepted or rejected. The facts found by the Board must clearly appear. All that we feel it necessary to say is that there is no need to duplicate this essential duty on the part of the Board."

14. The Court of Appeal did hot accept the invitation, manifestly ill-founded, which had been made to it "expressly to approve the Board's practice of annexing a copy of their determination in the case stated to save setting out all the facts again in the case stated itself". On the contrary, the Court of Appeal stressed (correctly) that "a case stated must itself set out the facts found by the Board". This is, first, an express requirement of s.69(2); secondly, a requirement with which the court has no power to dispense; and thirdly, a requirement which will be recognised by anyone cognizant of the nature of an appeal by way of case stated as an essential feature of such an appeal.

15. But unfortunately, the remainder of the passage cited (which I do not find easy to construe) does suggest that, in the view of the Court of Appeal, if the Board in its written determination has set out its findings of fact then it need not set them out again in its stated case. I am not of course at liberty to dissent from anything which the Court of Appeal expresses as its considered view. But it seems to me that the Court of Appeal (which gave no reasons in support of the view expressed in the passage cited, if I have correctly construed it) must for the moment have overlooked s.69(2) to which it did not refer so that what it said on this point must be treated as having been expressed per incuriam. The alternative, that the Court of Appeal deliberately intended to dispense with or set aside the express provision of s.69(2) which imposes a statutory requirement upon the Board to set out the facts found by the Board in a stated case, is inconceivable, and I refuse to countenance it.

16. What has happened in practice as a result of the "Aspiration" case is, as I understand it, that Boards of Review are assuming that the invitation made to the Court of Appeal "expressly to approve the Board's practice of annexing a copy of their determination to the case stated to save setting out all the facts again" had in fact been accepted. That assumption is incorrect. The Court of Appeal did not accept that invitation and in any case it could not have done so without flying in the face of s.69(2). Insofar as the judgment of the Court of Appeal is to be read as purporting to set aside or dispense with the requirements of s.69(2) it must on constitutional grounds be disregarded.

17. The procedure by way of case stated is simple and straightforward. In the "Chinachem" case, 30th April 1987, unreported, Sir Alan Huggins, V.-P. (in the course of a most valuable judgment) said "it has never ceased to amaze me how much argument this simple and straightforward process engenders". The fact is however that in order to follow it you do have to understand its essential features. In particular you have to understand that it exists for the resolution of issues of law and is not designed to afford an aggrieved party a right of appeal on paper from a decision of the Board of Review on a question of fact. Its abuse for the latter purpose is the root cause of all these problems. The sooner boards of review can come to a proper understanding of the nature of the procedure by way of case stated, and their duties in relation to cases stated, the better.