LEE YEE SHING JACKY AND ANOTHER v. COMMISSIONER OF INLAND REVENUE

cacv 180/2006

in the high court of the

hong kong special administrative region

court of appeal

civil appeal no. 180 of 2006

(on appeal from HCIA NO. 11 of 2005)

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J U D G M E N T

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Hon Rogers VP:

1.  I agree with the judgment of Le Pichon JA.

Hon Le Pichon JA:

2.  This is an appeal from the order of Burrell J dated 29 March 2006 made in an appeal by way of Case Stated by the taxpayers from a decision of the Inland Revenue Board of Review (“the Board”).  The judge answered the second question of law posed in the Case Stated in the affirmative thereby upholding the Board’s decision dismissing the taxpayers’ appeal from the Commissioner’s determination that tax was payable.  At the conclusion of the appeal hearing, judgment was reserved which we now give.

Background

3.  In November 1998, Mr Lee, who together with his wife were the taxpayers, through Nelson Wheeler, submitted profits tax returns for the year of assessment 1992/93 and profits tax computations for the years of assessment 1992/93 to 1997/98.  Mr Lee’s principal business activity was described as “Trading of listed shares”.  The Assessor was not satisfied that a securities dealing business had been carried on by Mr Lee and issued to the taxpayers personal assessments for the years 1993/94 to 1997/98 (“the relevant years”).  The taxpayers claimed that the loss from Mr Lee’s share dealing business should be deducted from their total income.  They appealed to the Commissioner who determined that tax was payable by the taxpayers.  The taxpayers unsuccessfully appealed to the Board.

The Board’s decision

4.  The issue before the Board was whether or not, during each of the relevant years, “Mr Lee was carrying on the business of trading in listed shares in Hong Kong”.  The Board set out what it considered to be the relevant legal principles deduced from the authorities produced by the parties in paragraph 16 as follows:

“	(a)	The issue as to whether a person is carrying on a trade or business is a matter of fact and degree, to be decided on all the circumstances of each case.  For trading in securities or futures, there has to be a habitual and systematic course of dealing.
	(b)	The subject matter of the alleged trade or business is a factor to be considered.  A private individual would rarely be considered as carrying on a business of trading in shares unless there are other associated activities.  In relation to futures, by virtue of its short lifespan it would be difficult to claim that they are held as long term investment.
	(c)	Clear evidence is necessary to show that a person who does not habitually carry on a business or trade and who is a pure speculator is carrying on a trade or business.  Pure speculation is a factor which weighs against the finding that a person is carrying on a trade.
	(d)	The presence or absence of a business registration certificate is not determinative of whether or not a person is carrying on a trade or business but it would have been significant if the taxpayer had taken out a business registration certificate before he embarked upon the activities in question.
	(e)	Though it is not essential that a person who is carrying on a trade or business must have an office and staff and organization, where none of these attributes exists, there must be other clear evidence of carrying on a trade or business.”

5.  In brief, Mr Lee’s evidence was that he was a director of a number of family companies and his remuneration as a director was substantial.  From about 1992 he spent much time buying and selling shares and futures.  Most of these transactions were in his own name but a significant number were done through a wholly owned company called Y. S. Tide Ltd (“YST”).  Up to 1997, his losses were greater than his gains but in early 1997 very large profits were made, exceeding his previous losses by $15 million.  Then came the Asian financial crisis and by 1998, he was sustaining substantial overall losses.

6.  Mr Lee’s explanation of why he traded in stocks and shares in his own name and also through YST was that he could obtain more credit than YST which accounted for the large volume of share transactions in his own name.  Although he treated his own share dealings and those of YST as one and the same he did not register his share trading business until 1998.  His explanation was that he was not aware that a sole proprietary business required a business registration.  He maintained that he was not a speculator.

7.  The Board did not find Mr Lee to be a truthful witness.  They did not accept his explanation as to why a business registration certificate had not been taken out by him earlier and concluded that it was an afterthought.  They noted that a claim for deduction of losses was not intended before 1998 and the business registration was not taken out before then.  The Board rejected the reasons Mr Lee advanced for not solely using YST to trading shares.  Since YST was wholly owned by him there was no reason why it should not be able to operate on the same basis and enjoyed the same credit limits as Mr Lee.  The Board said at paragraph 39:

“… Mr. Lee’s shares and future index portfolio was perhaps substantial in monetary term, but he fails to convince us that he was truly a trader.  We are not impressed by the strategy he claimed to adopt for the purpose of trade.  His strategy of not cutting loss and not setting a cap on his stake lacks professionalism and is unconventional to a true trader.  As to his sub-underwriting activities, according to his own explanation as to how they were carried out, they were no more than activities undertaken by a valued customer when he was given the first right to subscribe for new shares by his share dealers.  As to Mr. Lee’s claim of attending share related courses, reading massive materials, engaging in vast preparation work for the purpose of his share dealings, these activities are not uncommon to and no more than those carried out by, some keen and sophisticated investors of this day.”

8.  The Board held that the taxpayers had failed to discharge the onus of proof and concluded that they were unable to come to the conclusion that Mr Lee was in fact carrying on a business in his share dealing activities.

The hearing below

9.  Four working days before the hearing of the appeal by way of Case Stated, the taxpayers took out a summons returnable on the date of the substantive appeal asking the court to remit the case to the Board directing it to find further facts relating to the following matters relevant to the taxpayers’ appeal before the Board:

“	(i)	The activities and circumstances of Mr. Lee Yee-shing Jacky in incurring the losses the subject matter of the appeal, including particulars of all of his securities and future index transactions in the tax years 1990/91 to 1997/98 inclusively;
	(ii)	The nature and circumstances of Mr. Lee Yee-shing Jacky’s relationship with Y.S. Tide Limited, particulars his beneficial ownership and control of that company;
	(iii)	Y.S. Tide Limited’s securities and future index transactions in the tax years 1990/91 to 1997/98 inclusively, and the tax treatment of those transactions.”

10.  What then happened is recorded in the judgment below:

“	5.	After hearing submissions from Mr John J.E. Swaine for the appellants and Ms Jennifer Tsui for the respondent it transpired that the extra ‘findings’ which Mr Swaine submitted were necessary for an intelligible hearing of the appeal could, in fact, be easily gleaned from the Board’s decision and were not, in any event, controversial or disputed.  Once this was established Mr Swaine agreed to withdraw the summons.  The order on the summons is ‘Summons withdrawn with costs in the cause of the appeal’.
	6.	As a result the further facts upon which this appeal proceeded (in addition to the Case Stated but not in any way amending it) were :
		(a)	that the buying and selling of shares and futures undertaken by Mr Lee and Y.S. Tide Ltd (‘YST’) during the years in question and which were considered by the Board did in fact take place;
		(b)	that Mr Lee was the 100% owner and controller of YST; and
		(c)	that YST’s trading was disclosed to the Revenue at all material times and was accepted.”

11.  Pausing here, I would observe that whilst the court does have power to remit a case stated to the Board for additional findings of fact prior to the hearing of the substantive appeal, certain criteria have to be satisfied.  The relevant principles are set out in the judgment of Scott J in Consolidated Goldfields PLC v Inland Revenue Commissioners [1990] STC 357 at 361 e-h.  It is clear from those principles that, inter alia, the findings of fact are for the Board.  They cannot be instructed to find facts nor as to the manner in which they express their findings.  It follows that if the case is not remitted, “extra findings” may not be made, by consent or otherwise.

12.  When I raised this point at the hearing, Mr Swaine did not appear to be taken by surprise.  He readily accepted the statement of principle.  After a short adjournment to enable Mr Swaine to reconsider his position, he made an application that the matter be remitted to the Board on the basis that the judge ought not to have made the order on the summons, viz “Summons withdrawn with costs in the cause of the appeal”.  This court did not accede to the application since it is difficult to see how there can be an appeal on a withdrawal of the summons itself which must be by the party concerned and not by reason of the order of the court.

13.  The original basis of Mr Swaine’s appeal gleaned from his skeleton was that the findings of the Board were perverse.  For that purpose, Mr Swaine had intended to refer this court to some of the underlying documentation.  But it was made plain to Mr Swaine that on an appeal by way of Case Stated the appellate court is confined to the findings of fact contained in the Decision of the Board.  An appellate court may not look at documentation that had been before the Board but which did not form part of the Case Stated.

14.  Mr Swaine decided to proceed with the appeal and to make his case within the confines of the Case Stated.  The thrust of his argument was twofold: (1) the Board had misdirected itself as to the law and had therefore come to the wrong conclusion; and (2) they had applied the law incorrectly to the facts they had found.  As the judge had upheld the Board, his decision was therefore impeachable.

Misdirection as to the law

15.  Mr Swaine criticised the Board for concentrating on “business” rather than “trade” when each of those is a source of profits tax under section 14(1).  He submitted that the Board never considered “trade” as an independent source for profits tax.  In the Inland Revenue Ordinance (“the Ordinance”) “trade” is defined as including “every trade and manufacture, and every adventure and concern in the nature of trade”.  He referred to Barry v Cordy [1946] 2 All ER 396 where the English Court of Appeal had to construe a similar provision under the English legislation and held that the word “adventure” was intended to enlarge the statutory scope to be given to the word “trade”.  Scott LJ referred to of the dictionary meaning of the word “adventure” and considered the most inappropriate being:

“	A pecuniary risk, a venture, a speculation, a commercial enterprise.”

16.  Mr Swaine suggested that that case was an authority for construing “adventure” as including speculation.  On the basis of Barry v Cordy, he submitted that a speculator is someone who has embarked on an adventure in the nature of a trade and that therefore speculation is part of “trade”.  It was said that the statement in paragraph 16 (c) of the Decision that “pure speculation is a factor which weighs against the finding that a person is carrying on a trade” was wrong inasmuch as it was tantamount to saying that a speculator is not a trader.  It was submitted that as the Board considered the taxpayers to be speculators, they wrongly concluded that the taxpayers were not trading.

17.  Mr Swaine also relied on Scott LJ’s observation in Barry v Cordy (at 400C) to make the further point that to bring a source of profits within the meaning of “trade”,

“it is not necessary to show presence of a regular business of buying and selling.”

It was therefore submitted that the Board was wrong when in paragraph 16 (a) of its Decision it stated that for trading in securities or futures, there has to be a habitual and systematic course of dealing.

18.  Dealing with the latter point first, the legal principle stated in paragraph 16 (a) was preceded by the general statement that the issue as to whether a person is carrying on a trade or business is a matter of fact and degree, to be decided on all the circumstances of each case.  The subject matter of the “trade” in Barry v Cordy was the purchase of endowment policies on other people’s lives made with the intention of providing ascertain the annual sums.  The observation of Scott LJ relied on was confined to the facts of that case and was not intended to be a general statement of principle applicable in every case regardless of the particular facts.  That statement cannot assist the taxpayers given that in the present case the “trade” in question is very different.  For my part, I can see no valid basis for challenging the correctness of the principle stated in paragraph 16 (a).

19.  Mr Swaine’s focus was on paragraph 16 (c) which, for convenience, I will set out again :

“

(c)

Clear evidence is necessary to show that a person who does not habitually carry on a business or trade and who is a pure speculator is carrying on a trade or business.  Pure speculation is a factor which weighs against the finding that a person is carrying on a trade.”

20.  He submitted that the Board was there stating that a person who engages in speculation is not carrying on a trade.  Such a reading takes the second sentence of that paragraph out of context.  Read as a whole and following on from the principles set out in paragraph 16 (a) of the Decision, for trading in securities and futures, where that person does not habitually and systematically carry on that trade or business and is a pure speculator, clear evidence is required to show that he is carrying on a trade or business.  In those circumstances, pure speculation would be a factor which would weigh against the finding that that person is carrying on a trade or business.  The Board was not saying that speculation is the antithesis of trading or business or that speculation can never be part of trade.  Indeed as Pennycuick J observed in Lewis Emanuel & Son, Ltd v White [1969] 1 WLR 275 at 377:

“The word ‘speculation’ is not, I think, as a matter of language, an accurate antithesis either to the word ‘trade’ or of the word ‘investment’: either a trade or and investment may be speculative.”

In my view, Mr Swaine’s reading of paragraph 16 (c) of the Decision is not sustainable.

Misapplication to the facts

21.  In paragraph 39 of the Decision, the Board said:

“Though Mr. Lee had an office and the necessary equipments and facilities for share dealings, and a secretary to keep those records and accounts, these amenities enjoyed by him were not those of his own.  He was able to use them because of his special relationship with Y. S. Tide and Kin Tak Fung.”

22.  Mr Swaine’s complaint was that the fact that Mr Lee did not own the facilities was immaterial and irrelevant.  He had the facilities and the organisation and the important fact was that he used those facilities for his business.  Further he operated 18 margin accounts at any one time, invested a quarter of his wealth in his share dealings and sub-underwrote share offerings.  All that, submitted Mr Swaine, was indicative of Mr Lee being in business; he seemed to be doing all the things that that traders normally do and the Board could have found that he was carrying on a trade in securities.  He submitted that in those circumstances the Board’ s refusal to find that Mr Lee was carrying on a trade in securities was perverse.

23.  In my view, on the evidence before the Board, this was a case that could have gone either way.  In those circumstances, it is not for this court to substitute its own views for those of the Board.  As Mr Swaine could not show that on the evidence, the only conclusion the Board could reasonably have come to was that Mr Lee was carrying on a trade, the appeal must fail.

24.  Accordingly, I would dismiss the appeal.  I would also order nisi that costs be to the respondent.

Hon Barma J:

25.  I agree.

Hon Rogers VP:

26.  There will therefore be an order in terms of paragraph 24.