A.P. FAHY & CO. v. COMMISSIONER OF INLAND REVENUE

Inland Revenue Appeal No.4 of 1991

IN THE SUPREME COURT OF HONG KONG

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J U D G M E N T

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1. This is a taxpayer's appeal against a decision of the Board of Review upholding a determination of the Commissioner of Inland Revenue, disallowing a claim by the taxpayer for certain deductions to be made in the computation of his assessable profits for profits tax purposes.

2. The facts found by the Board of Review and set out in the stated case may be briefly summarised as follows.

3. The taxpayer carries on business as an accountant. During the year of assessment 1988/1989, he suffered an accident which injured his leg. As a result, he had to spend time in hospital, undergo surgery, and receive other medical treatment. The total expenses incurred by the taxpayer in relation to these medical expenses amounted to $103,710.

4. It is important, having regard to the contentions advanced on behalf of the taxpayer (who appeared before me in person), to note that the expenses included the cost of the insertion into the taxpayer's leg of metal rods required for the purpose, no doubt, of strengthening that limb in order to enable the taxpayer to continue to lead an active life including, of course, attending his office.

5. There is no mention of that fact in the stated case but I do not understand the point to be disputed.

6. The Commissioner was not satisfied that the claim made by the taxpayer, for deduction of these medical expenses in computing his assessible profits, was a proper one. The Commissioner considered that the medical expenses were not deductible because they were not incurred for the purpose of producing the profits of the taxpayer's business. Alternatively, he considered the medical expenses were private or domestic expenses of the taxpayer. These considerations reflect the relevant provisions of the Inland Revenue Ordinance, Cap.112 to which I shall now briefly refer. Section 16(1) of the Ordinance provides that outgoings and expenses can be deducted from assessable profits "to the extent to which they are incurred .... in the production of profits." Section 17(1) disallows "domestic or private" expenses and expenses not being expended "for the purpose of producing such profits." The Board of Review agreed with the Commissioner.

7. The taxpayer accepted before me that if the injury which he had suffered had been caused not by an accident but by some inherent or inherited medical defect, he would not be entitled to claim the deduction which he does claim. His claim for the deduction was as I understood him based on the installation of the metal rods in his leg. This, he said, distinguished his case from the sort of case in which the medical treatment does not involve any physical improvement in the body of the person subjected to the treatment. In the ordinary case, he accepts, a deduction could not be claimed. He likens the metal rods, I think, to the supply of machinery or plant for the purposes of carrying on a business; and he asks why there should be any difference when that machinery or plant (if I may so call it) is installed not in his office but in his body, which equally he needs to use for the purpose of carrying on his profession.

8. In some cases (which must be very rare) medical expenses can be considered a proper deduction. Take the case, for example, of a professional musician who plays the guitar for a living and suffers an injury to an important finger. If he would have chosen not to have any operation to that finger, had he not required to use it in order to earn profits, and only purpose for which he did have the operation to his finger was for that business purpose, then the medical expenses might well be recoverable: see Prince v. Mapp [1970] 1 All ER 519.

9. But where the expenditure has a dual purpose, partly of a domestic or private nature, and partly for the purposes of the preservation of the taxpayer of his own person as an asset to his business, to the extent that the expenditure is a domestic or private character, in my judgment it is not allowable.

10. It seems to me that the appeal of the taxpayer here must fail at this hurdle.

11. In my judgment, the requirement for this operation was as much for domestic or private as it was for business purposes. I cannot believe (although I think at one stage the taxpayer was inclined to suggest it) that the taxpayer would not have had this operation at all but for the purpose of earning or continuing to earn the profits of his profession. Nor can I see any way of distinguishing between those elements of the purpose which are domestic and private and those which are business. It seems to me to be one indivisible matter; there cannot be any sensible apportionment.

12. Further, I am afraid I do not find it possible to accept the taxpayer's suggestions that his case is to be distinguished from the ordinary case on the two grounds he mentions, that is to say, that the Court must look at the cause of his injury and at the nature of the treatment. It does not seem to me that these distinctions matter. They are distinctions without a difference. It does not seem to me to matter whether the taxpayer suffered injuries by reason of an accident or any other cause nor how they were treated. The cause of the injury and the nature of the treatment seem to me to be entirely irrelevant for tax purposes.

13. I cannot treat the rods inserted in the taxpayer's body as if they were pictures which he chose to hang on the wall of his office. It seems to me they are all part and partial of his medical treatment and medical treatment of whatever character must (except in the very rare sort of case which I have instanced) be a domestic or private purpose. Expenses incurred in this connection are not expenses incurred in the production of profits.

14. For these reasons, I find it impossible to hold that the Board's conclusion that the medical expenses of the taxpayer were not allowable deductions in computing his assessable profits was an erroneous conclusion in law. Accordingly, I find myself bound to dismiss this appeal, with costs.