CHINACHEM INVESTMENT CO LTD v. COMMISSIONER OF INLAND REVENUE

IN THE SUPREME COURT OF HONG KONG

(Appellate Jurisdiction)

INLAND REVENUE APPEAL NO. 2 OF 1985

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JUDGHGNT

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                This is an appeal from a determination of the Board of Review which confirmed an assessment of the Commissioner of Inland Revenue for profits tax payable by the appellant in respect of the year of assessment 1979/80.

                The appellant, Chinachem Investment Co. Ltd, is a family concern operated by a Mr. and Mrs. T H. Wang. Originally it was solely engaged in the chemical trade but in 1961 the Wang's became involved in the field of property development. It is not in dispute that the appellant either purchased vacant sites and developed them or purchased properties which had already been developed. They traded in a large number of these properties and duly submitted tax returns in respect of the profits made and paid tax assessed thereon.

                There were, however, 23 buildings which the appellant initially contended it had not acquired for trading but for retention with a view to earning rental income from them. At the hearing before the Board, it conceded that 5 of these 23 buildings were in fact trading stock and that the gains arising on their solo were therefore subject to profits tax. As to the remaining 18 buildings, however, the appellant maintained its contention that these were capital assets and not trading stock.

                Of these 13 buildings, which included residential, commercial and industrial properties; the appellant had retained 2 for 15 years and 13 for over 8 years. All properties had been leased and the length of the leases varied; some were 2 or 3 year lettings and others were of periods from 5 to 7 years. One property, however, had been retained for three years before it was leased.

                In order to put matters in context, it would perhaps be helpful to set out the Commissioner's determination from which the appellant appealed to the Board of Review. It is as follows:-

"Profits Tax Assessment for the year of assessment 1979/80 under Charge Number 1K 160112, dated 1st August 1980, showing Assessable Profits of $80,207,579 with Tax Payable thereon of $13,635,238 is hereby confirmed.

 

REASONS THEREFOR

                I have omitted the fourth reason because it relates to an ancillary matter which was resolved by the Board in favour of the taxpayer and therefore is not relevant to this appeal.

                Because of the way in which the case has been stated for the opinion of this court and the nature of the questions of law that have been posed, it is necessary to set out the somewhat lengthy decision of the Board insofar as it is relevant to this appeal.

"

Decision

 

1. '3. REASONS THEREFOR

                         The Commissioner's Representative did not seek to substantiate or uphold the final sentence quoted above and accordingly thin Board places no weight on this suggestion by the Commissioner.

                        Counsel for the Company stressed, rightly in the opinion of the Board, that, what was crucially important was the subjective intention of the Company at the time when the assets were acquired by the Company and that this subjective intention should be tested against objective facts and circumstances. He stated that it was not the Company's case that there had been any change of intention and that therefore the Board need only concern itself with the original intention of the Company.

                         Two witnesses gave evidence for the Company. The first was a Director of the Company who said that her function was to manage and control the Sales and Letting Department. The Company was a family concern with the witness and her husband were actively involved in the development of the properties under appeal. She said that it was the policy of the Company to retain one tenth in value of domestic and commercial premises for investment purposes and one third in value of industrial premises for investment purposes. She said that in each case this decision war taken prior to or simultaneously with the Company's decision to acquire and develop properties. She said that the reason for the adoption of this policy was to build up all investment portfolio of properties which would produce income to enable the Company to be floated as a public company.

                         The evidence give by this first witness was far from satisfactory and left much to be desired. The Board was told that the Company had no documentary evidence to substantiate what the witness said. The witness and Counsel for the Company placed great emphasis on the claim that it was the intention of the Company to retain these units as long term rental producing investments so as to create a portfolio of properties to enable a public floatation to take place. We were told that in 1972 an attempt was made to float the Company as a public company and six drafts of a prospectus was prepared and a stock exchange listing date obtained. We were told that certain properties were listed in the sixth draft prospectus as investment assets for rental and that these included units is two buildings which were the subject matter of this appeal.

                         The witness further said that the attempt to go public was abandoned when a bid was planned by the Company to take over an already existing public company. She said that the intention was to transfer the Company's investment properties to that existing public company.

                         Copies of the draft prospectus and a newspaper article outlining the details of the proposed take-over bid were produced during the hearing of the appeal. These do not substantiate the proposition that the Company had a portfolio of investment units which had been created with a view to going public. In the prospectus document only 2 out of the then portfolio of units in 11 or 12 buildings were included. In the newspaper article reference was made to the Company contributing a number of complete buildings and entire uncompleted projects which were different from the prospectus properties and the claimed portfolio of investment units. These documents do not give credence to the "one third industrial - 10% commercial residential" policy which was so frequently referred to in the oral evidence, nor to the creation of a portfolio of investment properties.

                         To substantiate the Company's alleged policy, the witness said that when deciding the sales prices for all the units in a building she would double the price of those units which she would like to retain for investment purposes. However, some contemporary price lists were produced by the Commissioner's representative and these did not show any such price doubling. There was only the substantial price difference which one would expect between shops and residential units and small differences to reflect better locations in buildings.

                         The witness said that the Company's policy was known to its staff but no one else was called to substantiate the alleged policy.

                         With regard to the accounts of the Company and it own tax computations the situation is even less satisfactory. The Company stated in its audited financial statements and in its tax returns that all of its properties, including all of the units under appeal, were carried in its books as trading stock. This situation had continued year after year right up to the re-organisation in 1979 which gave rise to this appeal. The Company had over the years, without exception, offered and paid profits tax on the profits arising on the sale of any units in any of the buildings in question and there had never been any previous suggestion by the Company that any of the units previously sold had been capital assets. Furthermore the Company claimed none of the depreciation allowances which one would expect to find in the case of capital investments. The units to which this appeal related were treated in every way in the accounts as trading assets.

                         Counsel for the Company asked the Board to accept that a mistake had been made in the preparation of the audited accounts and tax returns. This the Board cannot accept. There had been a change of auditors and tax representative and one firm of public accountants had handled the tax matters and audited accounts up to the period ended 31st March 1975. New auditors took over and handled the Company's audited accounts and tax matters from then onwards. Both firms of auditors certified the audited accounts and they were signed in some cases by one and in some cases by two directors. The declaration on the tax return was signed by a Director of the Company in each year. No representatives from either of the two firms of auditors were called to give evidence. The Director who made the declarations accompanying the tax returns also failed to give evidence. No explanations were given for this.

                         The principal witness was asked a number of questions in cross examination with regard to the audited accounts and tax declarations. Her answers were to the effect that she had no knowledge regarding the accounts or accounting matters. She said that she left it to the Company's accountant who was a company employee. This employee was not called to give evidence. The explanations given by the witness and Counsel for the Company regarding the failure for this employee to give evidence were confusing.

                         If a tax payer wishes to challenge the accuracy of its own audited statements and tax declarations made by a director it is not sufficient merely to say that either a mistake was made or that the accounts were kept in a particular form which was incorrect "for convenience''. Evidence to substantiate the mistake must be given in the strongest terms. In this case no such evidence was given.

                         The second witness called to give evidence on behalf of the Company was a chartered surveyor who gave evidence to the effect that it would not be usual practice for a property company holding trading property assets to grant leases of unsold units at full economic rents and to retain many properties for periods in excess of 5 years and in some cases in excess of 15 years. This witness did not give any direct testimony relating to the units the subject matter of this appeal nor indeed with regard to the Company itself or the Company's policy.

                         Counsel for the Company referred the Board to a number of features which he said supported the contention of long term investment. These included the facts that the Company largely self financed its developments, owned the units in question for long periods of time, granted leases of the units at full economic rents, granted leases even though they would fetter subsequent sales of units, invariably renewed leases, took no initiative to sell units once the units had been let, disposed of all of the units the subject matter of this appeal as part of a plan of corporate re-organisation and not on the open market and, in the case of four properties, did not originally acquire the units in a manner indicative of a trader because the units were distributed in specie on liquidation of other companies. There is some doubt as to whether the evidence of the witnesses fully substantiated all of these features. However, even assuming that they were all fully substantiated this Board considers that they are far from sufficient to substantiate the claim that these were investment assets. The Inland Revenue Ordinance clearly places the onus of proof on the tax payer who disputes the Commissioner's determination. Where the tax payer is also disputing its own documentary evidence in the form of audited accounts, tax declarations, tax computations and contemporary sales brochures the onus of proof is heavy. In this case the Appellant has come no where near to discharging this burden of proof. This Board has no hesitation in finding as a fact that the units in question formed part of the trading stock of the Company and accordingly that the profits which arose on the disposal of the units when the corporate re-organisation took place are assessable profits so far as the Company is concerned."

2. The questions of law framed by the appellant and posed by the Board for the opinion of this court are as follows:-

"

1.      Whether the finding of fact of the Board of Review that the units under appeal formed part of the trading stock of the Appellant was perverse and contrary to the weight of the evidence and accordingly wrong in law in that:-

	(a)	The Board of Review disregarded the important and substantial evidence of Mrs. Wang given at the hearing which was unchallenged and uncontradicted in every respect relevant to the appeal.
	(b)	The Board of Review treated other important and substantial evidence which did corroborate the evidence of Mrs. Wang in a cavalier and summary fashion, and accordingly failed to attach due weight to such ocher evidence.
	(c)	The Board of Review unreasonably disregarded the evidence of Mrs. Wang on the basis that it was not corroborated by particular oral evidence when there was no requirement for such evidence to be so corroborated and that evidence was corroborated by the important and substantial evidence referred to above.
	(d)	The evidence of Mrs. Wang remained uncontradicted despite numerous and determined attempts by the Chairman of the Board of Review to fundamentally discredit her evidence, and who by such conduct assumed the role of the representative of the Inland Revenue Department, thereby clearly and flagrantly breaching the rules of natural justice (all of which will be apparent from a reading of the transcript).

2 .    Whether, the Board of Review (having set out at page 5 of the Decision a number of facts that clearly and unequivocally pointed to the units being held as investments) was wrong in law in holding that:-

 

	(a)	The evidence of the witnesses called before the Board of Review did not substantiate the above facts and
	(b)	That even if such facts were all fully substantiated, they would not justify the contention that the said units were held as investment assets."

3. I pause here to observe that both leading counsel for the appellant and counsel for the Commissioner have strongly criticised the manner in which the case has been stated by the Board. In particular, they complain that the facts on which the determination is based have not been clearly and separately stated in numerical fashion but have to be extracted from the narrative of the decision. There is substance in this complaint.

4. Moreover they complain that the transcript of evidence was so corrupt and unintelligible in certain places that it became necessary for the appellant to submit to the Board for inclusion in the case stated a revised record of evidence and submissions based on both the original transcript and notes of the proceedings kept by the appellant's legal advisers.

5. Initially the appellant's solicitors wrote to the Board and requested that they be supplied with a copy of the transcript of the notes of proceedings. The secretary to the Board replied that they would do so on the strict understanding that, as the shorthand writers were net court reporters but writers with no legal experience, the transcript should be referred to the Commissioner's representative first, and that, failing agreement between the parties as to the accuracy of the record, any dispute should be resolved by the Board by reference to their own notes.

6. The appellant's solicitors later wrote to the Board and stated that leading counsel for the appellant was of the view that it was essential to make the transcript part of the record. They contended that the original transcript contained errors and omissions and requested that their amended version form part of the record. To this, the Board replied that they had no objection if the amended transcript were filed for the hearing in the High Court.

7. Counsel for the Commissioner then informed the appellant's solicitors that the appeal would be heard on the case stated by the Board and queried the validity of the procedure by which it was proposed to place the amended transcript before this court. In response, the appellant's solicitors issued a summons returnable on the first day of the hearing of the appeal seeking an order that the amended transcript be incorporated as a formal part of the case stated to be heard by the court.

8. On the first day of the hearing of the appeal, the parties made no attempt to deal with the summons but indicated that they wished to proceed with the hearing of the appeal on the basis of the amended transcript and would request the court to hear argument on the summons later if it became necessary to do so.

9. Subsequently, at the insistence of the court, the parties agreed to resolve the matter arising on the summons and soon thereafter Counsel for the Commissioner agreed that the amended transcript was correct in all material respects. With the consent of both counsel, I then ordered that it formally be placed before the court for the purpose of the appeal. This order was made under the ancillary prayer in the summons for "further or other relief" as Counsel for the Commissioner took the view, which counsel for the appellant did not seek to dispute, that the court had no power to order that the amended transcript be made part of the case stated.

10. I should not like to allow this opportunity to pass without observing that in the rare cases in which it is necessary to make the transcript part of the record, it is the responsibility of the appellant within time to inform the Board accordingly so that this may be done. If there is any dispute as to the accuracy of the transcript, such should be resolved by the parties with the Board before the case is finally stated. It is, of course, highly desirable that the parties agree the transcript, but in the event they are unable to do so, it is for the Board themselves to resolve the matter.

11. I now turn to a consideration of the appeal. Leading counsel for the appellant, Professor Whiteman, who also appeared at the hearing before the Board, advanced a number of arguments which can conveniently be summarised as follows:-

12. In essence, counsel's complaint is that the Board fell into grave error by misconceiving Mrs. Wang's testimony and then rejecting it on that erroneous basis. He submitted that it is therefore open to this court to allow the appeal and to review the matter on the basis of the evidence before the board. In so doing the court should find

13. The starting point from which counsel's argument proceeded is that the Board, having found that the evidence given by Mrs. Wang was "far from satisfactory and left much to be desired", proceeded to embark on an analysis of her evidence in the course of which they wrongly stated that she had said that the reason for the adoption of the policy of retaining for investment purposes one tenth in value of domestic and commercial premises and one third in value of industrial premises, was to build up an investment portfolio of properties which would produce income to enable the appellant to be floated as a public company. This, it is contended, is an error so grave that it goes to the very heart of the case.

14. Counsel submitted that Mrs. Wang had actually testified that this reason was one of the reasons for adopting the policy. That being so, the Board's approach to her testimony and any conclusion that they had drawn as a consequence of their misunderstanding of it were fatally flawed.

15. In seeking to substantiate his claim, Counsel for the appellant referred me to two questions and answers on page 373 of the transcript.

16. Standing alone these questions and answers seem to bear out Counsel's contention. However, one must consider them in the light of (a) the immediately preceding question and answer, (b) what the Board said shortly after the passage to which counsel takes exception, and (c) what counsel himself had said to the Board. As to (a), the question and answer which provide a setting within which the two questions and answers must be viewed are:

As to (b), the Board said:-

"

The witness and Counsel for the Company placed great emphasis on the claim that it was the intention of the company to retain these units as long term rental producing investments so as to create a portfolio of properties to enable a public floatation to take place." (emphasis supplied)

As to (c), the following passages from counsel's submissions to the Board are relevant:

(i) In his opening address to the Board, he said at pages 329 and 330 of the transcript:-

"

The leases were on fully commercial terms and they were invariably renewed. The units let in this way were retained by the Company, and thereafter the Company never took the initiative in trying to sell them let alone undertake anything as organized as a sales campaign. Once the properties were let they were invariably retained. The reason for this will be given in evidence at length namely that the Company wished to build up a large portfolio of good duality investment properties which Would form the solid foundation for a public floatation in the future. That the Company did intend to retain units for the purpose of a public floatation is also demonstrated by the period of ownership of the buildings." (emphasis supplied)

(ii) At page 331, he said:-

"

The transfer to those subsidiary companies (more than 1) was with a view to a public floatation of the Company and the directors of the Appellant Company wished to keep control of all the properties through subsidiaries. The reason for that was that the Company was to become an investment holding company preparatory to that public floatation." (emphasis supplied)

Again at page 348:

"

What we see is the case where the Company decides at the outset it will sell some units and retain some units, it sells in the case of residential and industrial properties, and retains for the purpose of building a good quality investment portfolio which car be the subject matter of the floatation in the future. The others are sold as trading transactions (with the inclusion of 5 properties) and tax is paid on this. Other properties are retained. It's a deliberate policy with that intention from the outset." (emphasis supplied)

Again at pages 351-52:

"Of all the 83 units, 21 were retained until the corporate reorganization in 1979. Most of them were sold fairly soon after a year or so and then after that one sees occasional sales in the years as one goes on. Evidence will show that the Company never takes the initiative in relation to sales, once it decides on the properties to sell and the properties are sold, it doesn't thereafter seek to sell or take the initiative to sell. It simply owns the properties but if somebody approaches them, they might sell, so when the appropriate moment comes to buy and sell the property, the opportunity will be taken. The investor owns the properties and if an opportune moment occurs, they will sell. This is wholly consistent with investment, and it does not make it a trading transaction. I also refer to Property 14, the long list of lettings, leases and rentals, these support my argument. When it comes to offers of this nature, what the Company has in mind is the floatation of the Company. When there is an available opportunity, it is used to build up a portfolio of high class investments, the funds are put into the Company's coffers thereafter to be used for building up the portfolio."

Again at pages 355-56:

17. It is plain from this passage that in observing to the Board that "in the case of a property company if it has a portfolio of investment properties producing a steady stream of rental income", counsel was not stating a second reason for the appellant's acquisition of the properties, but was merely explaining why the portfolio of properties would be attractive to investors when the decision was ultimately made to float the appellant Company as a public company.

18. Furthermore "the other aspect to retention of the properties for letting" to which he referred is not a separate reason for retention but, as he said, "all ties in with the deliberate and consistent policy of retaining units for letting so as to produce a steady stream of rental income."

19. In my view, the matters that counsel for the appellant now seeks to present as separate and distinct reasons for the policy of retention are no more than features of that policy. The object of the appellant was to acquire a portfolio of income producing properties in order to attract potential investors at the public floatation stage. If the properties were not income producing, they would lose their attraction. The aspect of greater control over the units was directed to enhancing their production of income.

20. Even if one were to take the view that the income from the properties also constituted a source of income for the appellant prior to floatation it seems unrealistic to regard this as a separate purpose. It is an advantage that has been brought about by a side wind.

21. I am satisfied on a consideration of the testimony of Mrs. Wang and of what counsel for the appellant had submitted to the Hoard as being the appellant's case, whether these matters are viewed individually or collectively, that the Board were entirely justified in finding that the reason given for the adoption of the policy of acquiring the properties for retention was to build up an investment folio of properties which would produce income to enable the appellant to be floated as a public company. In my mind, this disposes of the alleged grave error which counsel contends goes to the heart of the case.

22. Counsel also contended that the Board fell into error in stating "The Board was told that the company had no documentary evidence to substantiate what the witness had said". To support this contention, he pointed to the transcript at pages 503-5, where in response to a question by the Chairman of the Board as to whether there was any evidence that 10% in value of the residential properties and 30% in value of the industrial properties had been retained, counsel, in a lengthy reply, referred to documentary exhibits I, II and III.

23. Counsel explained to the Board that the first two exhibits showed that the properties had been retained over a period of time and that the third related to the prospectus which contained some of the properties in dispute.

24. Counsel for the Commissioner agreed that counsel for the appellant had drawn these matters to the attention of the Board and that therefore the passage under criticism was incorrect. I think it is relevant to observe that counsel for the Crown did not appear at the hearing before the Board. I therefore view his concession as one based on the assumption that the Board had been referring to the same matter as that to which counsel for the appellant contended they had.

25. It seems tolerably clear to me, however, that the Board were directing their minds to the absence of documentary evidence in the nature of company minutes or resolutions. This appears at pages 418-19 of the transcript as follows:-

and again at pages 422-24:

26. I find it inconceivable that all three members of the Board would have forgotten the matters referred to them by counsel for the Appellant and on which he relies to establish his argument, particularly as these matters had been brought to their attention as a consequence of a request from the Chairman at page 503 of the transcript. For the appellant to succeed on this submission, it must establish that in the passage complained of, the Board must have been referring to these matters and these matters alone. It has failed to do so.

27. Counsel for the appellant further contended that in saying "In the newspaper article reference an made to the Company contributing a number of complete buildings and entire uncompleted projects which were different from the prospectus properties and the claimed portfolio of investment units", the Board had again fallen into error.

28. I do not accept this contention it seems to me from the paragraph in which this passage appears that the Board were concerned with whether the copies of the draft prospectus and the newspaper article lend credence to the "one third industrial - 10% commercial" policy to which Mrs. Wang had testified or to the creation of a portfolio of investment properties. I am unable to see where they have misunderstood the evidence and have arrived at a fallacious conclusion as a consequence.

29. Lastly, counsel for the appellant referred to the passage in the Board's decision "To substantiate the company's alleged policy, the witness said that when deciding the sales prices for all the units in a building, she would double the price of these units which she would like to retain for investment purposes", and complained that Mr. Wang did not say she doublet the price of all the units.

30. It is apparent from what the Board had said that they were not asserting that Mrs. Wang had testified that she had doubled the price of all the units. The Board were clearly not impressed with Mrs. Wang's evidence that the reason why she had doubled the price of the units she wished to retain was to deter prospective purchasers. An observation made by the Chairman to counsel for the appellant at page 436 of the transcript reveals that this is so. I must say that I find it difficult to understand why it would have been necessary or desirable to double the prices of the units which the appellant sought to retain when it could easily have achieved its objective by indicating that they were not for sale. This is a matter on which the Board were entitled to doubt Mrs. Wang's credibility.

31. Counsel for the appellant accepted that if the Board had been justified in making the finding that they rejected Mrs. Wang's evidence, the appellant could not succeed on this appeal. Although during the development of his arguments, he certainly appeared to accept that the Board had rejected her evidence, counsel nevertheless contended that it was incumbent on the Board to make a separate and positive finding that they had done so and that it was net enough for them to say that "her evidence was far from satisfactory and left much to be desired."

32. I find myself unable to agree. I do not consider that it was incumbent on the Board to recite a sacrosanct form of words to make it clear that they disbelieved Mrs. Wang. It is plain to me that they did disbelieve her. The words they used and the result of the hearing both bear this out. Moreover, the onus lay on the appellant to demonstrate that the Commissioner's assessment was wrong. If the Board find that the evidence given by the only witness as to the appellant's intention at the relevant times was "far from satisfactory and left much to be desired", it seems to me to be entering the realm of pedantry to require them to couch their finding in a specific formula of words.

33. In support of his contention that a tribunal must make its findings with precision, counsel for the appellant cited a passage from the speech of Lord Wilberforce in Simmons v Inland Revenue Commissioners [1980] S T C 350 at 352. The actual words used by His Lordship were:

"

If findings of this kind are to be made precision is required..." (emphasis supplied)

 

34. What Lord Wilberforce said must be looked at in the context both of the issue before the House and the matter to which His Lordship was there referring.

35. The entire paragraph in which this passage appears is as follows: -

"

One must ask, first, what the commissioners were required or entitled to find. Trading requires an intention to trade; normally the question to be asked is whether this intention existed at the time of the acquisition of the asset. Vas it acquired with the intention of disposing of it at a profit, or was it acquired as a permanent investment? Often it is necessary to ask further questions: a permanent investment may be sold in order to acquire another investment thought to beemore satisfactory; that does not involve an operation of trade, whether the first investment is sold at a profit or at a loss. Intentions may be chanced. What was first an investment may be put into the trading stock, and, I suppose, vice versa. If findings of this kind are to be made precision is required, since a shift of an asset from one category to another will involve changes in the company's accounts, and, possibly, a liability to tax (of Sharkey (Inspector of Taxes) v Wernher). What I think is not possible is for an asset to be both trading stock and permanent investment at the same time, nor for it to possess an indeterminate status, neither trading stock nor permanent asset. It must be one or the other, even though, and this seems to me legitimate and intelligible, the company, in whatever character it acquires the asset, may reserve an intention to change its character. To do so would, in fact, amount to little more than making explicit what is necessarily implicit in all commercial operations, namely that situations are open to review."

I do not think that the passage upon which counsel for the appellant places reliance is capable of bearing the meaning that unless a Tribunal uses a particular formula of words, it cannot be said to have made a finding.

36. As the case has been stated the first question of law on which the opinion of this court is sought is whether the Board's finding of fact that the units under appeal formed part of the trading stock of the appellant was perverse and contrary to the weight of the evidence. I have already set forth the four matters upon which the appellant relics and now propose to deal with them in turn.

37. What the Board had to determine in this connexion was whether Mrs. Wang's evidence concerning the intention of the appellant at the time of acquiring each of the properties that are the subject of this appeal, coupled with the evidence adduced in support of her testimony, were sufficient to discharge the burden borne by the appellant at the hearing before the Board.

38. It is apparent from the very nature of the proceedings and the way in which they were conducted on behalf of the Commissioner that on all essential matters Mrs. Wang's evidence was under challenge. I do not accept, as counsel seems to suggest, that it is obligatory for a party to proceedings to go so far as to put it formally to a witness for the other party whose evidence it does not accept that he or she has not told the truth.

39. On an examination of the record, I am satisfied that the Board did not disregard any important or substantial evidence given by Mrs. Wang. In my view, they applied their minds to the essential features of her testimony and were perfectly entitled to come to the conclusion that it was "far from satisfactory and left much to be desired".

40. I am bound to say, however, that there is nothing in the record which persuades me that the Board did treat any evidence in a cavalier and summary fashion.

41. In my view, the Board concentrated on the essential features of the evidence. Simply because they did not make a finding on each and every piece of evidence does not mean that they did not consider it or treated it in a cavalier fashion. If the Board disbelieves a witness, it is not incumbent on them to refer specifically to the matters upon which the party calling the witness relies as being confirmatory of the evidence of that witness.

42. Indeed the Board did take into account the objective features and circumstances so heavily relied upon by the appellant as being confirmatory of Mrs. Wang's evidence. Although they did not deal with each feature separately, they observed that they entertained, as they were entitled to entertain, some doubt as to whether the evidence of Mrs. Wang fully substantiated all of those features.

43. More important, however, the Board stated that "... even assuming that they were all fully substantiated, this Board considers that they were far from sufficient to substantiate the claim that these were investment assets." This was an entirely justifiable approach by the Board. The features are no more than indicators or guides to the important matter of intention. The mere fact that all of these indicators point to an intention to retain for long term investment does not resolve the matter in favour of the appellant. All might well be present and yet the taxpayer still have formed the intention at the time of acquisition of the property in question to use it as trading stock. If the Board disbelieved Mrs. Wang's evidence as to intention, the existence of indicators favourable to her contention is neither here nor there.

44. I accept that the Board did state that although Mrs. wang had testified that the appellant's "one third industrial - 10% commercial residential" retention policy was known to its staff, no one else had been called to substantiate this policy. However, the factual content of this statement was not challenged. Indeed Mrs. Wang testified that this policy was known to all staff members of the appellant. In my view, the Board were entitled to observe that no other witnesses from within the company had been called by the appellant to substantiate the policy. This does not indicate that the Board had taken the view that, as a matter of law or otherwise, it was incumbent on the appellant to call any such witness. The Board were simply stating, first, that they had no evidence before them concerning this policy other than that of Mrs. Wang which they considered to be far from satisfactory, and secondly, that bearing in mind that the burden of proof rested on the appellant, it was surprising that no other witness had been called to testify on this important aspect of the case.

45. It is one thing to say that the evidence of the witness offered by the taxpayer as to the vital matter of intention must always be substantiated, but entirely another to say that the testimony of this particular witness, Mrs. Wang, was so vague or unsatisfactory that the Board required the appellant to substantiate it. Clearly the Board were saying the latter, not the former.

46. It is in this context that one must consider the following observation made by the Board in their decision:-

"

If a taxpayer wishes to challenge the accuracy of its own audited statements and tax declarations made by a director, it is not sufficient merely to say that either a mistake was made or that the accounts were kept in a particular form which was incorrect "for convenience". Evidence to substantiate the mistake must be given in the strongest terms. In this case, no such evidence was given."

47. I am unable to fault this line of reasoning and will have more to say about the audited statements later.

48. The following passage appears at page 404 of the transcript:

49. In my view, the Board were here doing no more than expressing their concern that the appellant did not intend to call Mr. Wang and the accountant to give evidence. Professor Willoughby was clearly disturbed that the testimony given by Mrs. Wang seemed to establish no more than that the relevant intention was vague and imprecise and that the appellant's case sight be prejudiced unless further evidence was called. The appellant cannot be heard to complain that the Board were signalling to it that it would be greatly to its advantage if it were to call such evidence that might be available to substantiate and clarify Mrs. Wang's testimony.

50. Counsel for the appellant conceded that he could not succeed in setting aside the determination of the Board on the basis of the alleged conduct of the Chairman since the proceedings before this court are not by way of a judicial review. He submitted, however, that such conduct would explain how the Board came to its finding of fact that the properties in question formed part of the appellant's trading stock.

51. I really do not see that this can be of any assistance to the appellant. If the appellant is to succeed on this appeal, it must show that the Board's decision was wrong in law.

52. Notwithstanding that, however, I have considered the complaint and have come to the conclusion that there is no foundation to it.

53. It is true that at one stage during the cross-examination of Mrs. Wang by the representative of the Commissioner the Chairman intervened and asked thirteen successive questions. He stated that his reason for so doing was that the questions asked by the Commissioner's representative had been unclear. I do not detect any hostility in the questions asked by the Chairman. Indeed he adjourned the hearing when it became apparent to him that Mrs. Wang was unfamiliar with the calculation of the accounts.

54. On the following day after the mid morning adjournment, and at the conclusion of further cross-examination of Mrs. Wang by the Commissioner's representative, the Chairman asked Mrs. Wang 28 questions and then, at page 433 of the transcript, put to Mrs. Wang a summary of what he understood her evidence to be, and asked for her to confirm whether such was correct. Mrs. Wang then asked the Chairman "whether you want me to comment on the points you made which I find not agreeable". The Chairman responded that he wanted her to do so because he did not wish to get the facts wrong and it was very important that he understood her evidence correctly.

55. Mrs. Wang then indicated that the Chairman had mentioned many matters in his summary and requested him to comment on such aspects of her evidence that he did not find correct. In response to the invitation, the Chairman then said: -

"

I put it to you that it is not true that you decided on a 10% for one lot of buildings and 30% for another set of buildings, namely, residential and commercial on the one hand and industrial on the other hand?"

56. At his own initiative, the Chairman then entered into a dialogue with counsel for the appellant and explained to him the difficulties the Board had, in seeing a consistency between Mrs. Wang's evidence and the documents that had been tendered in evidence. He observed that this worried him and then proceeded to inform counsel as to the matters which caused him concern. There was then an adjournment immediately after which counsel for the appellant, no doubt all the better equipped to clarify the matters that were troubling the board, embarked on his re-examination of Mrs. Wang. During the course of their re-examination, there was further dialogue between the Chairman and counsel for the appellant, the purpose of which was again to let counsel know what matters were worrying the Board. The Chairman also asked 8 innocuous questions of Mrs. Wang.

57. It appears to me that far from making numerous and determined attempts to fundamentally discredit [Mrs. Wang's] evidence" the Chairman was putting both her and counsel on notice as to the matters on which he sought clarification or further evidence.

58. Although it was unfortunate that the Chairman had prefaced the question to which I have already referred with the words "I put it to you", it is only right to look at the question in the context in which it had been asked.

59. The Chairman had just summarised to Mrs. Wang what he thought to be the substance of her evidence and was inviting her in effect to confirm, deny or clarify that understanding. In response to that invitation, Mrs. Wang requested the Chairman to refer her to those aspects of her evidence which he did not consider to be correct.

60. Thus, in proceeding to do so, the Chairman was not putting the Commissioner's case to her but merely complying with her request to inform her as to the testimony that he did not accept so that she could deal with it.

61. On a consideration of all relevant parts of the transcript, I have come to the conclusion that there is no substance in the allegation that the Chairman's conduct caused the relevant finding of fact to be perverse and contrary to the weight of the evidence. I have already commented on Mrs. Wang's evidence and whether the Board were entitled to disbelieve her.

62. The second question of law on which the opinion of this court is sought is whether the Board was wrong in holding that

63. The facts concerned are as stated by the Board in the following passage in their decision:-

"

... that the company largely self-financed its developments, owned the units in question for long periods of time, granted leases of the units at full economic rents, granted leases even though they would fetter subsequent sales of units, invariably renewed leases, took no initiative to sell units once the units had been let, disposed of all the units the subject matter of this appeal as part of a plan of corporate re-organization and did not on the open market and, in the case of four properties, did not acquire the units in a manner indicative of a trader because the units were distributed in specie or liquidation of the other companies."

64. Contrary to what is alleged, the Board did not hold that the evidence of the two witnesses of the appellant did not substantiate these facts. What the Board actually said is that "there is some doubt as to whether the evidence of the witnesses fully substantiated all these features" (my emphasis).

65. There is plainly a great deal of difference between what it is that the Board are alleged to have held and what they actually said. On the evidence before them, I am unable to say that they were wrong in expressing the doubt which they did.

66. I have already referred, in a different context, to the matter raised under para. (b) of the second question of law that has been posed. The more fact, that all of these features exist in favour of a taxpayer, does not automatically conclude the matter in his favour. In the absence of any other factors pointing in a different direction, they may well be potent indicia in support of his claimed intention. However, where the Board do not believe the evidence of the witness on whose testimony the taxpayer relies to establish the vital matter of intention, or where there are matters which point to a conclusion different from that indicated by the features relied on by the taxpayer, the Board are clearly entitled to find that the relevant intention was that the properties were acquired for the purpose of trading.

67. In the present case, there were two factors that did not support the appellant's claim that the relevant properties had been acquired for investment purposes and not for trading. First, the properties were not characterised in the appellant's accounts as capital assets but were stated to be current assets. Secondly, the appellant had made no attempt to claim depreciation in respect of them.

68. When it came to the matter of the preparation of the accounts and the identity of the person who had made the decision to classify these properties as current assets, Mrs. Slang's evidence was extremely vague and unsatisfactory. She claimed to know nothing about the accounts and was unable to give any real explanation as to why the appellant had not made any claims in respect of depreciation.

69. Although the appellant had engaged two different firms of accountants over the relevant period, she was unable to explain how they had both come to classify the properties as current assets. She was unable to say whether the second firm of accountants who had taken over from the first firm had raised any questions on this subject. Her explanation was that it had been the appellant's book-keeper who had been responsible for handling the accounts and for contacting the two outside firms of accountants. How or why the book-keeper or the two firms of auditors had decided that the properties should be described as current assets was left completely unexplained.

70. Neither Mr. Wang, with whom Mrs. Wang had run the affair of the appellant company for 20 years, nor the internal book-keeper was called to testify as to how and by whom that decision had been made and why depreciation had not been claimed. Nor indeed was anyone from either of the two firms of auditors called to cast any light on the appellant's failure to claim depreciation.

71. Since Mrs. Wang had testified that the appellant's policy as to the retention of certain properties for investment purposes was well known to all its staff, the book-keeper's alleged mistake in classification of the properties and the consequent failure to claim depreciation called for a clear and cogent explanation. None was forthcoming.

72. Counsel for the appellant sought to dismiss the wrong classification of the properties in the accounts as being of no consequence.

73. He cited a passage in the judgment of Lord Clyde in the Court of Session of Scotland in the case of The Commissioner of inland Revenue v The Scottish Automobile and General insurance Co. Ltd (1931) 16 T.C. 381 at 390 where His Lordship said:-

"

The way in which a particular trader keeps his books does not determine, or help much in determining, what is a capital profit and what is a revenue profit."

74. Counsel then referred to the judgment of Orr LJ in the Court of Appeal in Simmons v Inland Revenue Commissioners (1979) STC 471 at 475 where His Lordship observed: -

"

The question, moreover, whether an item is held as capital or as stock in trade is not concluded by the way in which it has been treated in the owner's books of accounts: see Inland Revenue Commissioners v Scottish Automobile and General Insurance Co. or by the Crown in past years Rellim Ltd v Vise (inspector of Taxes)."

75. Although the decision of the Court of Appeal was reversed by the House of Lords in Simmons, Lord Wilberforce said: -

"

Finally as to the decision of the Court of Appeal, the judgment, delivered by Orr LJ contains a clear account of the facts, and, in my respectful opinion, a generally correct statement of the law. "

76. Thus counsel contends that the House of Lords had indicated that it approved of what Lord Clyde had said. I very much doubt that the matter can be put as high as that for it is significant that Orr LJ had merely said that the matter is not concluded by the way in which it has been treated in the owner's books of account."(emphasis supplied)

77. I venture to suggest respectfully that this is no more than a statement of the obvious. It is easy to imagine cases in which the wrong classification of the property in question can readily and reasonably be explained.

78. I entirely accept that the matter is not concluded by the way in which it has been treated in the taxpayer's books of account, but it seems to me that the way in which the properties have been treated in the accounts is by no means an insignificant factor to be taken into consideration, particularly where there has also been no attempt to claim depreciation in respect of those properties.

79. Not only did the English Courts not go as far as Lord Clyde had gone in the passage I have cited from his judgment, but one must also have regard to his observations in the light of the circumstances in which they were uttered.

80. However, if Lord Clyde had meant his words to be of universal application then I must say that I most respectfully suggest that he went too far. But as I say, it was not just simply a case of a misclassification of the properties in the accounts. There was also a failure to make claims for depreciation; and no evidence was called to explain either of these matters.

81. When during the course of argument I raised the question of depreciation with counsel for the appellant, he could offer a no more persuasive explanation than that the Wang's could not have been expected to have hag readily available a copy of the inland Revenue Ordinance to apprise themselves of such a matter nor would they necessarily have come to learn of it from general discussion with other people.

82. The notion that two such highly successful business people who had been dealing in the property market for some twenty years, had not been aware of this matter strike me as being more than faintly absurd.

83. The Board, therefore, had before them a witness in Mrs. Wang whom they did not believe, no evidence in the form of company minutes or resolutions to support her evidence, accounts which classified the properties as current assets, no claims for depreciation, no real explanation from Mrs. Wang as to the misclassification of the properties or the failure to claim depreciation, and finally, no evidence from any of the persons who could reasonably be shed light on these matters. Bearing in mind that the burden lay on the taxpayer to establish that the Commissioner's assessment was wrong, it is hardly surprising that the Board came to the decision to which they did. They were entitled to disbelieve Mrs. Wang and had ample reason to do so.

84. The answers to the questions of law on which my opinion is sought are

1. No

2. No

85. The appeal is accordingly dismissed with costs to the respondent.

86. Finally I would like to draw to the attention of the Board the criticism of both counsel as to the manner in which the case was stated. In this connexion, I think it would be helpful if in future cases the Board adopted the procedures outlined in volume 34 of Atkins Court Forms 2nd edition at paragraphs 42 to 44 and forms 9 to 11 at pages 180 to 186 insofar as they are relevant to Hong Kong, and to para. A3.707 of Simons Taxes. The decision of the Full Court in The Attorney General v Leung Chi-kin [1974] HKLR 269, although it relates to cases stated under the Magistrates Ordinance, also contains helpful procedural guidance, some of which is equally applicable to cases stated by the Board of Review.