COMMISSIONER OF INLAND REVENUE v. ASIA SECURITIES INTERNATIONAL LTD

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HEADNOTE

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                    Case stated. A decision as to whether the business of money lending is being carried on is a question of fact and is therefore not subject to appeal by case stated.

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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BETWEEN

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JUDGMENT

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1. I have before me an appeal by way of case stated by the Commissioner of Inland Revenue (the Commissioner) from a decision of the Board of Review (the Board) dated the 5th September 1990 under s.69 of the Inland Revenue Ordinance (the Ordinance).

2. Mr Faulkner who appears today for the taxpayer, Asia Securities International Limited, has raised a preliminary point that the decision of the Board which is stated to be question of law is in reality a question of fact.

3. The issue before the Commissioner related to his refusal to allow the taxpayer to deduct certain fixed deposits that had been written off under s.16(1)(d) and s.16(1)(d)(i) of the Ordinance.

4. The facts as found by the Board reveal that the taxpayer's main sources of income were rental income for lettings and investment from fixed deposits. Some of the fixed deposits had been placed with Advance Finance Limited which company was compulsorily wound up by an order made on the 18th January 1984.  It was in respect of this company that the taxpayer sought to claim a deduction from its liabilities to profits tax in a sum of over $12m. for these fixed deposits. The assessor disagreed and assessed the taxpayer and his decision was upheld by the Commissioner on the grounds that the company was investing its funds and was not carrying on the business of money lending.

5. At the hearing of the taxpayer's appeal before the Board, the taxpayer submitted that the fixed deposits were in respect of money lent and were bad debts incurred in the ordinary course of business of money lending. For the Commissioner, it was contended that the activities of the taxpayer did not constitute the carrying on of the business of money lending but amounted to fixed capital of the taxpayer and that any loss arising was precluded from deduction under s.17(1)(c).

6. The Board disagreed with the Commissioner and held that it was the clear intention of the Ordinance to allow the deduction of bad debts where a person has lent money by placing it on deposit with a financial institution. The Board went on to find that the business of money lending was not restricted to lending money to the public and specifically that a person can carry on a business of money lending by making funds available to banks and other financial institutions by way of fixed deposit. They held, as a fact, that the nature of the taxpayer's business was to place money on deposit in various amounts, uplift the deposits and then roll them over for various periods of time so that it constituted the business of money lending.

7. Upon being requested by the Commissioner to state a case for the opinion of this court, the Board have posited the following question of law :-

"Did the Board err in law in finding, on the evidence before it, that to place money on deposit in various sums, uplift the same, and to rollover some of it for various periods constitutes the business of the lending of money by a person who carries on that business for the purpose of proviso (i) of section 16(1)(d) of the Inland Revenue Ordinance (Chapter 112)?

8. Mr Faulkner, in support of his submission that the question framed is on the basis of a finding on the evidence cited three authorities Litchfield v. Dreyfus (1906) KB 584 Kirkwood v. Gadd [1910] AC 422 and Shun Lee Investment Co. Ltd. v. Commissioner of Inland Revenue 1 HKTC 322, for the proposition that a decision as to whether the business of money lending is being carried on is a question of fact and so not subject to appeal by case stated.

9. Miss Au, on behalf of the Commissioner, submitted that the Commissioner disallowed the deduction of $12m. on the basis that the deposit of the money was an investment of capital, but the taxpayer claimed the deduction sought was for a debt in respect of money lent in the ordinary course of the business of lending money within Hong Kong by a person who carries on that business in the terms of s.15(1)(d)(i) of the Ordinance. She submitted that the appeal from the Board is upon a question of law as to whether on the facts the Board could in law have reached that conclusion so that no issue arises on the facts. Miss Au cited by analogy Beauchamp v. F.W. Woolworth PLC [1989]3 WLR l that the question whether a bad debt arising from a loan transaction is of a capital or revenue nature is a question of law. She contended that the Board misdirected itself in law in confining itself to the nature of the particular transactions without having regard to the nature of the business of the taxpayer as a whole. In the Woolworth case, she said that the Court of Appeal had held that the nature of the advantage sought was the furtherance of trade, but that the House of Lords on appeal said that the trade was furthered by an increase of capital. She therefore went on to submit that the Board correctly stated that depositing funds is lending money, but does not deal with the real issue whether the lending of money was by way of business or trade or by way of capital investment. Miss Au argued that the Board misdirected itself in law in failing to deal with the real issue, which, if it had done so, could only have resulted in the conclusion that the lending of money, like the investment in land, shares or debentures, was by way of investment and not by way of trade.

10. However, as was submitted by Mr Faulkner, this is not the case that has been referred to the High Court by the Board.  I agree that the question raised in the stated case, although purporting to be a question of law, is a question of fact as to whether the activities in placing monies on deposit amounted to the business of money lending. The Board in coming to their conclusion that it did constitute the business of money lending came to a finding of fact.

11. Nevertheless, as was adverted to by Mr Faulkner, the court is empowered under s.69(4) of the Ordinance to refer the stated case back to the Board for amendment, but no application has been made for this purpose.

12. As a result the appeal will be dismissed with costs.