CENTRAL ENTERPRISES LTD v. COMMISSIONER OF INLAND REVENUE

IN THE COURT OF APPEAL

1986, No. 169
(Civil)

BEWEEN

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JUDGMENT

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Sir Alan Huggins, V.-P.:

1. This was an appeal by way of Case Stated against an assessment to profits tax in relation to portions of several buildings. The substantial issue was whether the properties were, as the Commissioner had asserted, trading stock. The Board of Review found that they were, and Jones, J. dismissed an appeal against that decision. The tax-payer now appeals to this court.

2. The tax-payer is a private company which formerly owned a large fleet of taxis but which the Board found also to have “been engaged in both large and small property transactions, as developers, investors and traders” At one stage it was contemplating offering its shares to the public, but that idea was abandoned in late 1973. In about 1962 it acquired for redevelopment the main site with which we are concerned, and that redevelopment was completed in January 1964. It was called “Central Mansion”. The tax-payer immediately sold off 116 domestic fats and there is no dispute but that they were trading stock. Twenty-six domestic flats were allocated as living quarters for persons employed by the fax-payer as taxi drivers, whilst the ground floor and basement were used mainly as a garage and workshop for its own taxis and those of two associated companies. As a result of the riots in 1967 the tax-payer disposed of most of its taxi business by selling off its taxis to the drivers. Some of the twenty-six flats were sold to the drivers and the ground floor and basement were let to the occupants, of the building. Subsequently the ground floor was converted first into a ballroom and then into a shopping centre.

3. Prior to the completion of Central Mansion the tax-payer claimed a tax allowance in respect of interest paid on money borrowed to finance the redevelopment. In the course of correspondence the firm of accountants representing the tax-payer in tax matters sought to justify the claim by asserting that "the land and buildings to be erected thereon are intended for trading purposes”. There are in evidence no minutes of the Board of Directors either to support that assertion or to show that there was a change of intention at the time when the building was completed. However, there is no reason to suspect that at any material time the Company saw any prospect of its ceasing the taxi business.

4. It is common ground that the onus was on the tax-payer to upset the assessment. Mr. John Wu, a director of the Company, testified that the Accountant's letter and the Company's accounts (which throughout showed the entire building as current assets) were in error in relation to the parts which were in fact used in connection with the taxi business. He explained that the accounts were prepared by "book-keepers" and not by “proper accountants”.

5. The first complaint is that the judge was wrong in agreeing with the Board that the burden on a tax-payer who is a land dealer when seeking to show that a particular sale was a sale of a fixed asset and not of a current asset was “a heavy one”. It is argued that the judge cited in support of that proposition the case of Harvey v Caulcott (1952) 33 T.C. 159 and that that case was one where the tax-payer had no history of investment in property. No doubt the burden on the Appellant was not as heavy as it would have been if it had had no history of investment in property, but I think it was nevertheless a heavy one and that the judge was right to hold that the Board of Review had not misdirected itself. I do not accept that the Board approached the burden of proof on the basis of a company with a history solely of trading.

6. Next it is said that the Board erred in failing to consider the evidence as a whole and that the judge was wrong in saying that it did not so err: he thought it was clear from a reading of the Case Stated that the Board considered the evidence as a whole. The point turns principally upon the following passages, the second of which appears in the sect ion dealing with another building:

I find that part of sub-para.(e) which is cited in the first passage somewhat obscure. The Board suggested what it thought to be a possible interpretation of Mr. Wu's explanation and then made an assumption on the basis of that interpretation. The “explanation” referred to was his explanation why the Company's tax representative allowed the Company to show these properties in its accounts as current assets. The assumption seems to have been that, if on the facts known to them the tax representatives would have reached a particular conclusion as to the status of the properties, that must have been a reasonable conclusion and, therefore, the Board would have reached the same conclusion: it was a conclusion which was inconsistent with Mr. Wu's evidence that the intention was to keep the properties as fixed assets, and therefore his explanation as to the reason for their appearing as current assets must be false. With respect I do not think that was a sound line or reasoning, although it is clear that the Board did not think Mr. Wu' s plea of ignorance to be true. At the same time I am, like the judge, not persuaded that the Board failed to consider the evidence as a whole before forming its final view as to the intention of the Company in relation to each property. A tribunal of fact is bound to start its consideration of the evidence somewhere and to throw the first and each succeeding piece of evidence into the balance, giving it the weight it then seems to deserve. As it does this the balance may swing first one way and then the other, until all the evidence has been considered. At each stage the tribunal may be said to have formed a view - but not a concluded view. Here the Board quite reasonably started with Mr. Wu's evidence and went on to see how that appeared in the light of the tax representative's letter and the Company's own representation of the status of the properties appearing in the accounts. It reasonably formed a view on the strength of that evidence, and nothing which it came to consider afterwards "diluted" that tentative view. I see nothing wrong in its general approach and am not persuaded that its conclusion was wrong.

7. However, the ground floor and basement of Central Mansion were not specifically mentioned in the accounts and it is submitted that there was no evidence at all that they there trading assets. This is not strictly accurate, because there is the tax representative's letter stating that the entire building was intended for trading. Certainly the rejection of Mr. Wu's evidence that they were fixed assets does not establish the contrary. On the other hand, it is argued, the facts that these two floors were used for the purpose of the taxi business and were not immediately sold when the taxi business came to an end is evidence that the intention was that they should be fixed assets, since the rest of the building was in fact sold and there is no reason to believe that these floors could not have been sold profitably also. In my view those facts are no more than consistent with the tax-payer's case: they do not lend any weight to it, because they are also consistent with the Commissioner's case. Without Mr. Wu's' evidence (which was disbelieved) the tax-payer failed to discharge the burden which was upon it.

8. The second building with which we are concerned is Monticello Mansion which was developed in two phases. The evidence was that flat phase 2 was built at least in part with the aid of advance rents received from the Ministry of Defence, which agreed to take leases of a large number of flats upon completion of the development. The contention is that this evidence pointed towards the flats' having been erected as an investment. Again, I think the evidence is consistent with that intention but not inconsistent with an intention to treat them as current assets. The conclusion of the Board was

“that the Taxpayer was never firmly committed to long term investment. We believe that so long as the Navy were prepared to maintain leasing (by exercising its option for a further 2 years) at a satisfactory rent the flats would be retained, thereafter however the Taxpayer would feel free to sell them with vacant possession.”

As I understand it that conclusion was reached because the tax-payer had failed to discharge the onus of proving the contrary. It is contended by the tax-payer that this finding supported Mr. Wu's evidence by showing an intention to employ the property as income producing capital at least until the Ministry of Defence was no longer willing to rent it. Moreover, the draft prospectus prepared in 1973 listed this property as a capital asset. It is true that this “was predicated on the flotation going through”, but, if it was once accepted that the original intention was to hold the flats as capital, the onus would shift to the Commissioner to show a change of intention when the flotation was abandoned. The fact that these flats were shown in the accounts as “stock of completed flats at cost” would lend support to the Commissioner's contention and it was for the Board to decide, if it could, where the truth lay. The judge thought that the fact that “when the flotation did not proceed, all the units were sold to a company in which some but not all of the tax-payers shareholders were interested” supported the Board's conclusion. I do not think that the identity of the purchaser has any bearing on the intention of the company during the period it owned the property, but the rejection of Mr. Wu's evidence made it inevitable that the tax-payer's objection should be rejected.

9. The six properties comprehensively described as “the Sai Wan Ho property” were shown in the accounts as fixed assets. In the prospectus they were classified as “properties held for development in the future” and Mr. Wu said they were both “for rental not for development”. Mr. Wu's evidence on this would not have assisted, even if it had been accepted as credible, because land can be “for rental” and “for development” and yet be either a fixed asset or a current asset. The sale of the property after the abandonment of the proposed flotation was equivocal in relation to the issue to be decided. In my judgment the judge was entitled in all the circumstances to conclude that the Board's decision was not open to objection.

10. The judge declined to answer two of the questions put to him and it is submitted that he was wrong to do so. I entirely agree with the view which he took. The second question was a hypothetical one the Board did not assert the view which is the fundamental premise upon which the question was based and rightly did not do so, because there can be no inflexible rule that a taxi operator's garage and workshop for taxis is trading stock or that they are a capital asset: this must depend in each case upon all the circumstances. Equally was the third question hypothetical, for the status of an asset is not necessarily changed by reason of a change in the physical use made of it.

11. I would dismiss the appeal.

Fuad, J.A.:

12. I, too, would dismiss the appeal, for the reasons given by my Lord.

Penlington, J.:

13. I have read in draft the judgment of Huggins, V.-P. with which I entirely agree.