COMMISSIONER OF INLAND REVENUE v. CARLINGFORD INSURANCE CO LTD

IN THE SUPREME COURT OF HONG KONG

CIVIL JURISDICTION

INLAND REVENUE APPEAL NO. 5 OF 1989

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J U D G M E N T

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1. These are appeals from a decision of a Board of Review, by way of case stated by the Board under section 69 of the Inland Revenue Ordinance ("the Ordinance"). The material facts are identical in each case. They are as follows : The taxpayer was incorporated in Hong Kong. At all relevant times, it has carried on in Hong Kong a general insurance business; i.e. not a life insurance business. It has earned interest on moneys placed on deposit outside Hong Kong ("the overseas interest income"). In filing profits tax returns, it has claimed that the overseas interest income was not subject to Hong Kong profits tax because it did not arise in, nor was it derived from, Hong Kong. But the Commissioner of Inland Revenue ("the Commissioner") decided that the overseas interest income received by the taxpayer, in the period from 1st April 1984 to 31st March 1986, was subject to Hong Kong profits tax.

2. The question for the decision of the Board was whether the Commissioner erred; the question for me is whether the Board erred, in reversing as it did the decision of the Commissioner.

3. The question of law framed by the Board for the opinion of the court is as follows:-

"Whether on the true construction of the [Ordinance], and in particular sections 14, 15(1)(f) and 23A thereof, sums received by or accrued to a corporation by way of interest arising through or from the carrying on by the corporation of its non-life insurance business in Hong Kong shall be chargeable to profits tax notwithstanding that the moneys in respect of which the interest is received or accrued are made available outside Hong Kong."

4. I should make it plain that these appeals are concerned only with the particular period mentioned above; because before 1st April 1984, and after 31st March 1986, the position was different. I shall refer in this judgment to the period with which these appeals are concerned as "the relevant period".

5. Before attempting to consider the question whether the Board came to the right decision or not, I must set out the relevant statutory povisions. I shall start with section 14. This is the charging section in Part IN of the Ordinance (which is concerned with profits tax). It reads (I omit the provisos, which are irrelevant) as follows:-

"14. 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 [the Colony] in respect of his assessable profits arising in or derived in [the Colony] 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."

I refer next to section 15. This is a deeming section, pursuant to the provisions of which certain amounts are to be deemed to be trading receipts for the purposes of the charge to profits tax imposed by section 14. Those amounts which are to be deemed to be trading receipts are set out in the various paragraphs of section 15(1). Section 15(1) begins as follows:-

"For the purposes of this Ordinance, the sums described in the following paragraphs shall be deemed to be receipts arising in or derived from [the Colony] from a trade, profession or, business carried on in [the Colony]."

I must now refer to one particular paragraph, paragraph (f). Paragraph (f) read, in the 1983 edition of the Ordinance:-

"(f) Sums received by or accrued to a corporation carrying on a trade, profession or business in the Colony by way of interest derived from the Colony.

I propose now to read paragraph (i), which, although it does not feature in the stated case, appears to me to have some bearing upon the point which I have to decide:-

"(i) Sums, not otherwise chargeable to tax under this Part, received by or accrued to a financial institution by way of interest which arises through or from the carrying on by the financial institution of its business in the Colony, notwithstanding that the moneys in respect of which the interest is received or accrues are made available outside the Colony."

I pause there. The deeming provision contained in paragraph (f) is generous to the taxpayer, in that interest which is not derived "from the Colony" is not brought into the charge to tax. Paragraph (i) is less generous to the taxpayer, because in the case of a "financial institution", such interest is brought into the charge to tax.

6. "Financial institutions" are, speaking broadly, banks and deposit taking companies associated with banks. For this purpose, insurance companies, whether life or general, are not "financial institutions".

7. The next section to which I must refer is section 23A of the Ordinance. This, so far as material, reads as follows:-

"23A The assessable profits of a corporation, whether mutual or proprietary, from the business of insurance other than life insurance, shall be ascertained by taking the gross premiums from such insurance business in Hong Kong less any such premiums returned to the insured and any premiums paid on corresponding reinsurance and adding thereto any interest or other income arising in or derived from Hong Kong......."

8. Section 23A prescribes, for insurance corporations other than life insurance corporations, a sort of mini regime for the calculation of the assessable profits of a taxpayer belonging to the class with which the section is dealing. There are other provisions of the Ordinance constituting similar mini regimes for other classes of taxpayer, e.g. resident ship-owners, and non-resident ship-owners. The charge to the profits tax remains that imposed by section 14; so that the mini-regimes to which I have referred are not independent of the ordinary charge to profits tax; but insofar as the provisions which are enacted for the regulation of a mini-regime differ from those which apply to the general body of taxpayers, it is obvious that the provisions regulating the mini-regime must prevail in the case of a taxpayer subject to it. That is the purpose of creating such mini-regimes.

9. I return to the Ordinance. I have read paragraph (f) in the form in which it appeared in the 1983 edition of the Ordinance. But for the relevant period its form was amended. In 1984, paragraph (f) was amended so as to read as follows:-

"(f) Sums received by or accrued to a corporation by way of interest arising through or from the carrying on by the corporation of its business in the Colony, notwithstanding that the moneys in respect of which the interest is received or accrues are made available outside the Colony."

It will be seen at once that this language follows the language of paragrpah (i), to which I have already referred; and it will be remembered that this in effect imposed a charge upon interest worldwide.

10. By yet another amendment to paragraph (f), made in 1986, the original form of paragraph (f), with one euphemistic alteration, was restored; but this is not relevant to anything I have to decide and I say no more about it. For present purposes, I am concerned only with paragraph (f) in the form it took after the amendment introduced in 1984.

11. The argument for the Commissioner relies heavily on the introductory words of section 15(1). The Commissioner points to the words by which the paragraphs of that sub-section are introduced. "For the purposes of this Ordinance" means, as he says, for all the purposes of the Ordinance. But this is no more than good drafting, so as to make the point that the deeming provisions apply only for the purposes of the Ordinance and not for any other purposes.

12. The Commissioner seeks to put upon the phrase a burden which it really cannot bear. He says that, since section 15(l) applies for all the purposes of the Ordinance, it has a sort of governing effect; so that any provision in the Ordinance which may appear to be in conflict with any provision of section l5(1) has to give way to it (although that is not precisely the way the Commissioner put it, that is, in my judgment, the effect of his submission). Basing himself on this approach, the Commissioner says that, once paragraph (f) was redefined so as to include overseas interest income, it applied, across the board, to all corporations (of which the taxpayer is one). Section 23A, once that amendment was made, has to be read subject to it. The effect of this submission, as Counsel for the Commissioner accepted when I put it to him, was that, after the amendment to paragraph 15(1) (f) was made, the words of section 23A had thereafter to be read as if what now had to be added to premium income was "any interest or other income wheresoever arising or whencesoever derived." That was a perfectly possible course for the legislature to have prescribed by way of amendment to section 23A. It would not have been illogical, absurd or unfair.

13. But the question for me is simply whether or not that is what the legislature did. There is no question but that it did not make any such amendment to the provisions of section 23A expressly, and therefore the only question left is whether it did so impliedly. If that is the right approach, the question is whether the effect of the amendment to section 15 (1) (f) was impliedly to amend the provisions of section 23A. In my judgment the answer must be no.

"Where there are general words in a later Act capable of reasonable and sensible application without extending them to subjects specially dealt with by earlier legislation, you are not to hold that earlier and special legislation indirectly repealed, altered, or derogated from merely by force of such general words, without any indication of a particular intention to do so."

(See The Vera Cruz (1884) L.R. l0 App. cas. 59, per the Earl of Selborne, L.C. at p.68.)

14. What the Commissioner invites the court to do flies in the face of this principle. Since the legislature did not choose, when amending paragraph (f) of section 15(1), expressey to amend section 23A, I do not think I should hold that it did so by implication.. The provisions governing the mini-regime constituted by, section 23A continued to apply, notwithstanding the amendment made to paragraph (f) of section 15(l). It is by no means clear from the language used that the legislature must be taken to have intended to make an alteration to the rules governing that mini-regime. The fact that section 15(1) is and always has been introduced by the words "for the purposes of this Ordinance" come, in my judgment, nowhere near enabling the court so to hold.

15. For the reasons I have endeavoured to state, I am o?the opinion that the Board of Review came to a correct conclusion, and I must accordingly dismiss these appeals.