BEAUTILAND CO LTD. v. COMMISSIONER OF INLAND REVENUE

IN THE SUPREME COURT OF HONG KONG

INLAND REVENUE APPEAL NO. 1 OF 1989

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D E C I S I O N

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1. Ten years ago, Wheelock Marden & Co. Ltd. (WM) was approached by Cheung Kong (Holdings) Ltd. (CKH) with a proposal for the joint redevelopment of two properties owned by WM, namely Wheelock House and Marden House. Following discussion, the proposal crystal1ized in a letter dated 12th March 1979 from CKH to WM.

2. That letter set out detailed proposals for the redevelopment of the two properties and then added:

"In consideration of you agreeing to the above proposal, we are prepared to offer you participation in some other development projects in the New Territories or elsewhere, details of which will be submitted to you separately."

3. WM urgently considered the proposal. By letter dated 15th March, it agreed in principle, subject to certain amendments, and asked CKH for a draft agreement for approval. By another letter of even date, WM asked for "details of the proposed participation in other development projects". CKH accepted WM's amendments by letter of the same day.

4. By letter of 22nd March, CKH provided a list of properties held by its subsidiaries or associated companies which, or a part of which, it offered to the joint venture at prices indicated. In turn, CKH sought details of properties which WM would offer. The letter continued:

"It is proposed that once we have mutually agreed on the properties, a joint venture company be formed to acquire these properties or to enter into appropriate contracts for development. We are prepared to go into further details with you in due course.

Further, if there are possibilities of acquisition of properties from third parties, both of us will jointly consider the advisability of including these in the scheme."

5. The schedule to that letter contained a number of columns which were headed Property, Owner, Area (sq. ft.), Valuation, Percentage and Price. Three further columns provided for payment, the third payment of 90% to be within 4 years. The Property column contained details of 8 pieces of land, and Letter B Entitlements. However, it was clear that the joint venture was not to be offered the land or Letters B, but all or part of the share capital of the companies which owned the respective properties. There was a number of remarks at the end of the schedule. Remark 4 reads:

"The 3rd or last payments are payable within four years, on profit taking sales or on completion of the respective developments, whichever the later."

My emphasis.

6. The final item on the schedule is important, because it is to that which this appeal relates. The final item constituted certain land at Tin Shui Wai. A company call Rostock Enterprises Ltd. owned 52.36% of 50 million sq. ft. The land was valued at $200 m. The joint venture was being offered 30% of Rostock at a price of $60 m.

7. By letter dated 23rd March, WM submitted a list of properties for the joint venture. A schedule to that letter contained details of 8 properties. It is clear that the land itself was being offered to the joint venture. In the event, one of those properties was not acquired by the joint venture, and in respect of another, Thorpe Manor, shares in the company which owned it were acquired rather than the land itself.

8. By letter dated 26th March, CKH returned WM's list, omitting one property, with prices for consideration. It also asked WM to consider making part of the tram depot at Canal Roan available. CKH was advised orally that WM did not own any part of the depot.

9. On 27th March, the Appellant was incorporated. It became the vehicle for the joint venture.

10. On 6th April, CKH wrote to WM. The letter commenced:

    "Re: Joint Venture in Real Estate Projects

Further to our letter dated 22nd March, 1979, we now propose, subject to contract, a long term scheme for our mutual co-operation in real estate acquisitions and developments by way of forming a joint venture company (JV) to operate the acquisition and development of properties on the following basic terms."

11. The terms included a proposal for a deadlocked company to be owned equally by WM and CKH, each having an equal number of nominated Directors, with the Chairman having no casting vote. Mr. Li Ka-shing would be Managing Director.

12. Paragraph 4 of the letter headed "Financing Arrangements" contained the following clause:

"(e) If outside finance is not available under paragraph (c) above, and if the shareholders other than CK are not prepared to advance the remaining 50%, funds to be obtained by realisation of parts of the properties to make up any financing deficiency, and to repay CK its advance to JV with interest thereon at the aforesaid rate."

13. Paragraph 6 entitled "Acquisition of Properties" contained the following two paragraphs:

"(c) All properties will be for redevelopment purposes, except as otherwise stated or agreed.

(d) Time for disposal of the assets. A schedule with projected times for sales will be decided by mutual agreement."

14. Paragraph 7 headed "Remuneration of Management" contained provisions for payment of the Project Manager, the Project Supervisor and Sales Agents.

15. Paragraphs 8 and 9 are entitled respectively "Architect and Consultant Architect" and "Solicitors for Unit Sales".

16. On 19th April, CKH sent WM an initial draft agreement for consideration. The draft contained the following recitals:

"1. Each of the parties hereto is desirous of participating in the developments of the several properties owned by the other of them or the subsidiary or associate companies thereof hereinafter more particularly described, and

2. The parties hereto have agreed to form a consortium for the aforesaid joint participation upon the terms and conditions hereinafter appearing."

17. Clause 1 contained a number of definitions including:

"'the Development' The development of the Land as hereinafter defined by the erection thereon of new buildings in accordance with the terms hereinafter contained.

'the Properties' The Land owned by each of the parties hereto and the shares in the subsidiary or associate companies of each party which are to be sold to the Company as hereinafter provided, particulars of the Land and the shares to be sold by wheelock are set out in Schedule I hereto and particulars of the Land and the shares to be solo by Cheung Kong are set out in Schedule hereto."

My emphasis.

18. Clause 7.1 provided for sale of the properties to the company i.e. the Appellant in the following terms:

"At such time or times after the signing hereof as the Managing Director, subject to the directions of the Board of Directors, shall decide, the parties hereto shall procure the Company to purchase from each of the parties hereto and each of the parties hereto shall sell and assign to the Company the Land owned by it and the shares in its related companies as set out in the relevant Schedule hereto at such purchase prices in such manner of payment thereof and upon terms and conditions as are respectively set out in such Schedule: Provided that if before any of the due dates for payment of the instalments of the purchase price payable by the Company in respect of any of the Land or the shares in any of the related companies so sold by any of the parties hereto as aforesaid, the Company (i) shall have completed the Development of such of the Land of that party or the Land owned by such related company of that party, or (ii) shall have by sale disposed of the Land of that party or the shares in such related company of that party, or (iii) shall have cause (sic) the land owned by such related company of that party to be disposed of by sale, then the entire purchase price or such part thereof as shall for the time being remain outstanding in respect of the Land or the shares in such related company of that party shall become due and payable by the Company to the party at the expiration of 60 days after the issuance of the Occupation Permit in respect of the New Buildings erected on the aforesaid Land or after the aforesaid disposed by sale, as the case may be."

My emphasis.

19. Clause 11.1 headed "Development" read:

"The Land sold by the parties hereto to the Company or owned by their respective subsidiary companies the entire issued share capitals thereof having been sold to the Company in pursuance of this Agreement as respectively set out in the Schedules hereto, shall be developed or otherwise turned to account by the Company at such time and in such manner as the Managing Director shall decide ..."

My emphasis.

20. Clause 16 provided for Finance. Paragraph 1(iv) specified one source of finance and reads:

"Proceeds of sale of any of the assets of the Company, whether before or after the development thereof."

21. Otherwise, the draft refers repeatedly to land, the development of land, new buildings to be erected on the land; and provides for the appointment of architects, a project manager and consultant; for the sale of new buildings, for sales agents and sale prices, and for solicitors for the sale of new buildings or units erected on the land.

22. The draft agreement was then considered by the parties and worked upon by their lawyers. In the mean-time, Mr. Li advised WM in May that he had had an approach from parties who had expressed interest in acquiring Rostock's interest in the Tin Shui Wai land for some $300 m.

23. On 8th June 1979, the parties executed the joint venture agreement (the Agreement). CKH were one party, and Cranmore Land Company Limited, owned by WM, the other. The first recital to the Agreement read:

"The parties hereto are desirous of participating in the development and/or sale of the properties described in the Schedules hereto ..."

My emphasis.

24. Clause 1 again contained a number of definitions including:

"'the Properties' All the assets and shares and proportions thereof referred to in Schedules I and II of this Agreement and which are to be acquired from the sellers by the Company.

'Sale Proceeds' All monies received or receivable in respect of or attributable to the sale of any assets of the Company, whether the same be owned by the Company itself or through its subsidiary or associated companies, including all deposits or portions thereof received in respect thereof and forfeited under the terms of any agreement for sale."

My emphasis.

25. Clause 7.1 again provides for the acquisition by the appellant of the Properties which, by virtue of the definition, includes assets and shares.

26. Clause 10 relates to Development Policy and reads:

"10.1. All the land owned by the Company and/or by the subsidiary companies of the Company shall be developed by erecting thereon New Buildings at such time and in such manner as the Managing Director shall decide: Provided that the building plans, specifications and the budgetted costs for each New Building shall be subject to the approval of the Board of Directors.

10.2. Notwithstanding Clause 10.1. hereof, the existing buildings on any land owned by the Company or the subsidiary companies of the Company may be turned to account otherwise than by the Development thereof if the Board of Directors shall so resolve.

10.3. The rights of exchange for land under Letters of Exchange and the right (legal or equitable) to any land held by the subsidiary companies of the Company shall be utilized or otherwise turned to account at such time and in such manner as the Managing director shall, subject to the approval from time to time of the Board of Directors, decide.

10.4. Any land to be developed by the Company or the subsidiary companies of the Company shall be developed as expeditiously as possible and to the best and fullest extent as shall for the time being be permitted by the relevant Government authorities.

10.5. Each of the parties hereto shall l use its best endeavours to procure the board of directors of such of its related companies, of which issued share capitals less than 50% have been sold to the Company, to have the land and the existing buildings thereon owned by such related companies, or the right to exchange for land held by such related companies, to be developed or otherwise turned to account as the Board of Directors shall decide."

My emphasis.

27. Clause 14 provided for "Finance for Development Costs", the finance to come from inter alia:

"Proceeds of sale of assets of the Company, whether before or after the development thereof."

Clause to provided:

"Prices for sale of other assets of the Company

The price for the sale of assets of the Company other than the existing buildings or the New Buildings or the Units therein as provided in Clause 17 hereof, shall be decided by the Managing Director subject to the approval of the Board of Directors."

28. Otherwise, the Agreement again talks about land, development of land, submitting plans to government, appointment of architects, project manager and consultant, sale of new buildings or existing buildings.

29. On the same day, Cranmore gave CKH a letter which contained inter alia the following:

"We hereby confirm our agreement that your Mr. Li Ka Shing shall have the full authority and power for and on behalf of Beautiland:-

(1) To negotiate and agree with prospective purchaser or purchasers, at such prices and on such terms and conditions as would in his absolute opinion generate a reasonable profit, for the sale or disposal of either the interest held by Rostock Enterprises Limited of and in the pieces of land registered in the District Office Yuen Long respectively as Subsection I and The Remaining Portion of Section B of Lot No. 165 in Demarcation District No. 126 or the shares in Rostock Enterprises Limited to be acquired by Beautiland."

Following execution of the Agreement, the Appellant obtained the land and shares set out in the Schedule to the Agreement. The Rostock shares were acquired by way of formal Sale and Purchase Agreement dated 28th June 1979.

30. Almost immediately Mr. Li received overtures from another party, via a broker, for the sale to that party of the Rostock shares as opposed to Rostock's interest in the land. On 21st August, the Appellant joined with CKH, which still held 53% of the Rostock shares, and certain other small shareholders in offering 81% of the Rostock shares to Commotra Co. Ltd. The Appellant itself was to sell 25% out of the 30% which it had acquired. The offer was accepted and the sale was concluded on 6th November 1979. Rostock received $103,750,000, thus making a profit of just over $43,000,000.

31. The Appellant was assessed for tax on this profit. Upon a notice of objection, the Commissioner of Inland Revenue confirmed the assessment, taking the view that the profit arose from a trade or an adventure in the nature of trade. The Appellant appealed to the Board of Review. The Board dismissed the Appellant's appeal. At the request of the Appellant, the Board stated a case for the determination by this Court of the following questions:

"(1) Whether, as a matter of law, and on the facts found by the Board, it was open to the Board of Review to hold that the Rostock shares were acquired and disposed of by way of trace or adventure in tire nature of trade;

(2) whether, as a matter of law, the Board was correct in considering the question of intention by reference not only to facts as at 19 April 1979 (the date on which an initial draft agreement was sent to wheelock Marden by Cheung Kong following acceptance of basic terms in principle subject to contract) but also by reference to the facts as at 8th June 1979 (the date of the final joint venture agreement) or 28th June 1979 (the date of the individual acquisitions);

(3) whether the Board was correct in law in rejecting the application of the principle in Sharkey v. Wernner 1956 AC 56 to the facts of the present case,

(4) whether there was evidence to support the following findings made by us:

(i) 'We also find such profit-taking sales were intended to form part of the venture and that the intention was sufficiently broad to encompass trading in shares or trading in land via shares in relation to specific assets owned.' (page 34 of our Decision)

(ii) 'There was, as we see it, nothing in the manner in which the joint venture went about acquiring and disposing of the Rostock shares which was not in line with an intention to trade in the shares, an intention which we find existed in Beautiland.' (page 42 of our Decision)

(iii) 'We find that the intention to turn the said assets to profitable account by sale was present at acquisition and remained unchanged throughout up to their disposition.' (page 45 of our Decision)

(iv) 'The sale of the Rostock shares was not just a mere possibility. It was a genuine prospect intended to be brought about.' (page 47 of our Decision)"

Annexed to the Case is the Board's Decision. This is a somewhat lengthy document for two reasons. First, it recites a large number of agreed facts. These facts encompass the documents to which I have already referred, as well as the acquisition and disposal of various pieces of lane and shares. The Board, however, did not rely on the latter facts. No complaint is made of that. I need not, therefore, dilate further. Second, it deals with another appeal by the Appellant in relation to the sale of shares in another company, Hoi Tuen, which in turn owned the Letters B. That appeal was allowed by the board, the profit from the sale of those shares not being found to be by way of trade or an adventure in the nature of trade. As I understand it, the Commissioner of Inland Revenue accepts that decision by the Board.

32. The Board's finding that the Rostock shares were acquired and disposed of by way of trade, or that the operation was an adventure in the nature of trade, was essentially based upon the findings which are challenged in Question 4, and which are themselves all findings relating to intention.

33. By Question 1, however, the Appellant takes the Board head on. Accepting all the inferences of fact drawn by the Board, the Appellant contends that the Board's conclusion was wrong in law on the basis of the facts found by them. The Appellant first complains of the following passage in the Board's decision:

"We agree with the Revenue that it is not the law that profits derived from the sale of unquoted shares could never be trading profits; a land dealing trade can indeed be carried on by dealing in shares of a landed company. 'A profit-making scheme in respect of land dealing can just as effectively be carried out by means of dealing in shares in a land-owning company as it can by means of dealing in the land itself' : Margo J. in Income Tax Case No. 1187 South African Tax Cases 141 at 144. The business reality of the transaction has to be looked at: see Associated London Properties Ltd. v. Henniksen (1944) 26 T.C. 40 distinguished in Fundfarms Developments Ltd. (in liquidation) v. Parsons (H.M. Inspector of Taxes) 45 T.C. 707. However, it is necessary in each case to ascertain from the totality of the facts whether there was indeed such a trading scheme or an adventure in the nature of trade in relation to the relevant shares. It is perfectly possible, for example, for a land development company to hold shares in other land development companies as investments. Each case turns on its own facts. Among the matters to be considered are the well-known six 'badges of trade' referred to in the Final Report of the Royal Commission in 1955, namely the subject matter of the realisation, the length of period of ownership, the frequency or number of similar transactions, supplementary work on or in connection with the property realised, the circumstances responsible for the realisation and motive. The test as to whether there is an adventure in the nature of trade in each case is whether the operations involved in it are of the same kind and carried on in same way as those which are characteristic of ordinary trading in the line of business in which the venture was made: IRC v. Livingston 11 T.C. 538 at 542."

34. The Appellant argues that there is no concept in law of indirect dealing in land, a concept which permeates and therefore vitiates the Board's decision. The Appellant says that the Board continually fails to distinguish between the shares in a company, and the underlying assets thereof, namely land.

35. As far as the South African case is concerned, the Commissioner accepts this as being simply a statement of common sense rather than some firm proposition of law. The Commissioner, does, however, seek to extract the principle from Henriksen.

36. In Henriksen, a property dealer and developer found itself unable to dispose of a piece of land. It formed, in effect, a joint venture with another party, and the piece of land in question was acquired by the joint venture company. The Court of Appeal agreed with the Commissioners that the profit made by the sale of shares in the company was properly treated as a profit made in the ordinary course of the taxpayers' business. Lord Greene MR said at p. 52:

"It ... adopted a special method of dealing with that piece of real property ..."

Later, he went on:

"The facts sere very special and they chose this particular method of dealing with their land as being in the circumstances the most convenient and practical one from the business point of view."

37. In Fundfarms, the appellant carried on the trade of buying and developing land and selling it off in plots. It wished to acquire a certain site. It was unable to do so, so it acquired the company which owned it. The appellant took no part in the development of that site. It received dividends as a result of its shareholding. Subsequently, the company which had owned the land was liquidated after a distribution had been made, and the appellant made a loss in relation to the original cost of the shares. It was held that the appellant's acquisition of the shares was not a transaction forming part of its trade. Buckley J. distinguished Henriksen on the basis that the land in Henriksen had previously belonged to the appellant company, and had formed part of its stock in trade. At p. 721, Buckley J. said:

"I can see a strong argument for saying that the transaction in these shares has many characteristics which indicate that it was a transaction of a commercial nature, that it was a scheme embarked upon by the directors of the Appellant Company with a view to obtaining profit, and that it did not possess the ordinary characteristics of an investment. But to reach the conclusion that it was a transaction of a trading or commercial character does not answer the question whether it was a transaction which can be regarded as forming part of the normal business of the Company by any legitimate extension of that business.

    In my judgment, it does not partake of that character. I cannot, I think, ignore the fact that the land never became the property of the Company. I cannot ignore the fact, I think, that the Company never took any part in the development of the land or in the sale of the land. The fact of the matter is that the advantage that the Company derived from this transaction was an advantage resulting from exploiting the value in the shares of Grangeyorks, not, I think, an advantage derived from exploiting the site at Cherry Hinton. To regard it in the latter sense is to ignore the independent existence of Grangeyorks and to look behind the reality of the transaction, searching for what I think is not really a true appreciation of the nature of this business but a picture which the facts are really inappropriate to support."

38. In my judgment, these cases are not authority for any principle other than the well-known one that each case must depend upon its facts. There may be cases where, as in Henriksen, the reality of the situation is that the taxpayer is, by the purchase and sale of shares, carrying on his normal business. In others, the reality may show that there is simply an isolates investment not constituting part of the taxpayers' normal business affairs. And that, I think, is the way in which the Board approached the problem rather than by trying to apply some non-existent principle of law. The question, therefore, is whether the Board correctly assessed the situation.

39. Although he made  it with great care and precision, for the Appellant, Mr. Gardiner had one simple point. He said that the Board found the purchase and sale of the Rostock shares to be a one-off or isolated transaction. This is implicit from the following statement by the Board:

"We have not, incidentally, placed reliance on other dispositions of shares by Beautiland which appear on their face to be transfers at cost, for nominal consideration or by way of sale to one or other of the joint venture parties or related companies in circumstances which are not entirely clear to us but which suggest re-structuring or other technical purposes [Agreed Facts 27(a), (d), (e), (f)]. We also note the reference in Agreed Fact 34 to what was retained ant the fact that Rostock went into voluntary liquidation some time after the disposition of Rostock shares; apparently 4.95% of the remaining 5% of the Rostock shares were put into Mightycity with Beautiland at some stage obtaining a 5% stake in Mightycity. It is not necessary for us, and we do not know enough of the circumstances of the last mentioned events to draw inferences therefrom one way or the other or to say whether or not there was any change of intention subsequent to the sales with which we are directly concerned."

40. In the circumstances, I think that argument must be accepted.

41. Therefore, said Mr. Gardiner, a one-off transaction in relation to something which is normally the subject of investment i.e shares could not, in the circumstances, be found to be trading or dealing or an adventure and concern in the nature of trade, if the principles laid down and illustrated in a number of well-known cases are properly applied:

Ransom v Higgs 56 TC 1

IRC v Livingston 11 TC 538

IRC v Fraser 24 TC 498

Leeming v Jones 15 TC 333

IRC v Reinhold 34 TC 389

McLellan Rawson v Newall 36 TC 117

Jenkinson v Freedland 39 TC 389

Cooper v C.J. Clark Ltd. 54 TC 670

IRC v Chang HKTC 975

Tebrau v Farmer TC 5 658

42. Mr. Gardiner also pointed out that, although the board referrer to the "badges of trade", the Board made no attempt to relate them to the facts. Had they done so, he said, the only conclusion which they could have reached would have been that the transaction was not trade or an adventure in the nature of trade.

43. Looking at the badges in brief, Mr. Gardiner commented:

(a) The Subject Matter

Shares are the subject matter of ordinary investment. The Board found that the Rostock shares were marketable and more marketable than the Rostock interest in the land. But shares are necessarily marketable and public shares even more so. A true investor is unlikely to purchase an investment that cannot ultimately be sold.

(b) Period of Ownership

Although the period of ownership was short, it is ex explicable by the very large increase in value of the shares. Any prudent investor would reconsider his investment in the light of such circumstances.

(c) Frequency or Number of Similar Transactions

Only one. The Appellant had no course or multiplicity of dealing in shares.

(d)    Supplementary work

None.

(e) Circumstances Responsible for the Realisation

An extraordinary rise in value arising from unsolicited offers.

(f) Motive

The Board examined motive in detail, put failed to put it in context, namely as one of several factors to be weighted.

44. The Board apparently relied upon two other matters. First, that there was an intention to sell the Rostock shares, even before the formal acquisition thereof on 28th June. This intention, which is evidenced at least in the letter of authority given to Mr. Li when the joint venture agreement was executed, was brought about because of the interest which had been shown by another party, and by problems which had emerged in connection with the acquisition of the whole of the Tin Shui Wai land and the development thereof. In my view, however, that overlooks the fact that the Rostock shares were put forward by CKH at the outset before any approach had been received, or any difficulties canvassed.

45. Second, the Board adverted to the two approaches which were received by Mr. Li for the Rostock interests or shares and the fact that a broker was involved in the second and successful approach. I can see no relevance in this whatsoever. If anything it militates against any intention to sell, because it was not the Appellant which was actively hawking its shares.

46. For the Commissioner, Mr. Feenstra took a broad approach in support of the Board's decision. He adopted the words of Donovan LJ in Jenkinson v. Freedland 39 TC 389, who said at p. 647:

"The true position, in my opinion, is that all the facts in each case must be considered, not merely the motive of acquisition, and a conclusion arrived at from such a comprehensive review."

47. That, said Mr. Feenstra, is what the Board have done, and upon a review of the facts have not found that the Appellant discharged the onus of showing that, on the balance of probabilities, the Rostock transaction was not trade or an adventure in the nature of trace.

48. Mr. Feenstra contended that the Board was right is the construction which it placed upon the documents and other agreed facts. He said that it is plain that the Appellant was interested in land, and did not distinguish between acquisition of lane itself, and acquisition of shares through which land could be developed or otherwise turned to account. The shares were therefore part and parcel of the Appellant's business in dealing with land and constituted stock in trade. The documents, to which I have already referred, demonstrated a clear intention to sell and, as the Board found, that encompassed a specific intention to sell shares. Mr. Feenstra pointed out how the recital in the draft agreement had referred to "developments", but that this had been replaced in the Agreement by "development and/or sale of the properties". He pointed also to the repeated use of "shares" and turning to account", and to the reference to "profit taking sales" in Remark 4 of the schedule of property to CKH's letter of 22 March.

49. The definition in the Agreement of "Properties" includes assets and shares. Clause 18 of the Agreement refers to the sale of assets. Rightly, said Mr. Feenstra, the Board refused to accept that this was, as it were, a sweeping up clause to cover assets which might be acquired in the future, and which might not be ordinary interests in land, and rightly found that it could cover the sale of shares.

50. I find myself unable to accept the latter argument. As the Agreement itself demonstrates, assets and shares are regarded differently. Further, in the context of the Agreement, I can see no warrant for the construction put on this clause.

51. Mr. Feenstra referred to James Hobson & Sons Ltd. v. Newall (1957) 67 TC 609. The objects of the taxpayer included carrying on the business of building and acquiring real property for business purposes or for investment and resale. The taxpayer built and sold several thousand houses but had been unable to sell 21 which it let. It built and let another 22 to keep its labour force together. Several years later, after World War II, it sold these houses. The Commissioners found the houses to be trading stock. Harman J., dismissing the taxpayers appeal said at p. 617:

"In this case the memorandum would entitle the Company to buy houses as an investment, but I do not think it would entitle it to build houses as an investment. It entitled the Company to build houses in order to turn them to account, and that is what it did. It would be a misuse of language to suggest that, simply because it did not intend to sell houses when it built them, therefore they were any different from any other houses which the Company built. They were all treated in the same way in the accounts, and although this is not decisive it is a straw in the wind. They show what the intention of the Company was. These were part of the stock-in-trade of the Company, and no less its stock-in-trade because it was not intended to turn them to account by selling them. A lot of other cases have been cites to me, but they are really only illustrations of the same sort of idea, and so far as these two categories of houses are concerned I cannot see myself now the Commissioners could have come to any other conclusion than the one they did. Although it is not necessary for me to go so far, that is my opinion about it."

52. Mr. Feenstra contended that the situation is analogous to the instant case. He said the Appellant, as part of its business, acquired land and shares. The land was to be developed or sold. Both land and shares were acquired for business purposes and hot for investment.

53. I was also reminded of California Copper Syndicate v. Harris (1904) 6 TC 159. Mr. Feenstra argued that the joint venture here is no less an operation of business in carrying out a scheme for profit making, and the gains, by selling shares or otherwise, no less gains made in the operation of that business.

54. I do not find these cases to assist the Appellant. Certainly the Appellant had a profit making scheme but, in my view, the gain made on the sale of the Rostock shares was "a mere enhancement of value by realising a security". It was the land that the Appellant intended to, and did, turn to account, not the shares.

55. I can see no warrant, as Mr. Gardiner submitted as part of his address, for the construction which the Board appears to have put on the Agreement and other documents. The whole thrust of the preliminary correspondence, the draft and the Agreement, is the acquisition of land, and the obtaining of profit therefrom by development or by sale. Profits would accrue to the Appellant by the direct development or sale of land which it acquired, or by way of dividend from shares acquired in companies owning land. Those companies, pursuant to obligations contained in the Agreement, the parties would procure to deal appropriately with their land. Nothing, in my view, gives any hint of an intention to buy and sell shares other than for the purpose of ultimately obtaining dividends from those shares as a result of the working of the land by the subsidiary or associated companies which owned the land.

56. If there was any real intention to dispose of shares, it is difficult to understand why no express provision was included in the Agreement. Furthermore, it is also difficult to understand why it was necessary to provide Mr. Li with authority to dispose of the Rostock shares if, as it is contended, the documents and particularly the Agreement in Clause 18 provide not only an intention but also the necessary authority to sell shares.

57. In my judgment, there is simply not available the material upon which the Board could properly come to the conclusion that the sale and purchase of shares was an intergral part of its business in dealing with land.

58. In Ducker v. Rees Roturbo Development Syndicate [1928] AC 132, the company's business was the general purpose of purchasing and acquiring patents, licences and concessions, improving them, using them and turning them to account. It sold a patent. The profit therefrom was held to be taxable. At page 141, Lord Buckmaster said:

"Turning to the findings of the Commissioners, I find that they set out in detail the circumstances connected with the working of this company, and, in particular, the reports, which begin in 1907 and continue down to 1918. These reports show that the directors were contemplating from the beginning the possibility of the sale of some of these patents. It is quite true that they preferred not to sell them if a sale could be avoided, but the statement in para. 11 of the case is quite plain, that 'the possibility of the sale of the foreign patents or rights has always been contemplates by the appellant company in respect of such interest as it possessed in the foreign patents.' It is one of the foreign patents with which this appeal has to do, and the agreements, which are set out, showing the way in which the foreign patents in the case of France and of Canada have also been dealt with, show that that statement was not a statement of a mere accidental dealing with a particular class of property, but that it was part of their business which, though not of necessity the line on which they desired their business most extensively to develop, was one which they were prepared to undertake."

59. In my view, precisely the converse position applies here. The sale of the Rostock shares was a mere accidental dealing. It was not a particular method of dealing with land which special circumstances required.

60. Accordingly, the Rostock transaction should have been analysed in accordance with the principles laid down in the cases to which I referred earlier, and by an application of the badges of trade. Mr. Feenstra, relying principally upon his argument in relation to the documents and the reality of the situation, did not address me on Ransom v. Higgs and the allied cases. He did, however, deal with the badges of trade and made the following points:

(a) Subject latter

The Rostock shares were not ordinary shares from which an owner was likely to obtain income. They were only capable of yielding a profit by sale or by the development of the underlying land, but either way would yield only a one-off profit, rather than recurrent income. Accordingly, the badge should apply.

    I do not accept that. True investments are not infrequently made in order to generate a capital appreciation rather than income.

(b)    Length of Ownership

This should apply.

I accept that this is a short period, and therefore indicative of trade rather than investment.

(c) Frequency or Number of Similar Transactions

It was suggested there was one other transaction, but that in any event an adventure is itself usually a one-off exercise.

    I do not find this badge applies.

(d) Supplementary Work

It was faintly suggested that some effort was put into the shares, because of the negotiations with two prospective buyers.

    I find this totally inapplicable.

(e) Circumstances Responsible for Realisation

There was nothing, it was argued, to negative the idea of a plan of dealing which prompted the original purpose. This is inherent in the approach of the Board, particularly the finding which is challenged by question 4(ii). The plan was to dispose of the Rostock shares at a profit. It was the business of the Appellant to turn shares held by it to account, and to make its profits by whichever method might be appropriate.

As I have already found, the true construction of the documents does not envisage any such plan.

I should mention that this is one of several examples of the Board stating a negative, as Mr. Gardiner put it, and moving to a positive. In effect, the Board were saying there is nothing to show that there was no intention, therefore, there must have been.

    I do not accept that that was the way in which the Board approached the matter. In my judgment, they had independently found evidence from which they felt they could infer intention, and were simply saying that that intention was not displaced by the matters to which they adverted.

(f) Motive

The Board rightly found that there was an intention to sell the shares.

    Accepting that to be so, no attempt was made to attach weight to it in the light of the other factors to be considered.

61. The Board focussed, as Question 4 indicates, almost exclusively on intention. Their findings appear based on 5 facts. First, Remark 4 to the schedule of property accompanying CKH letter of 22nd March referred to "profit taking sales". Such sales must have encompassed the sale of shares because shares were what were acquired.

62. Second, the Agreement referred to sales and shares. Third, the offer in May to buy Rostock's interest in the land. Fourth, the problems in acquiring and developing the whole of the land at Tin Shui Wai. Fifth, the authority given to Mr. Li.

63. Apart from the documents and agreed facts, 2 witnesses gave evidence before the Board, partly by statement, partly orally. I need only refer to one, Mr. Henry Leung, who had been a director of WM and the Appellant at the material time. It was Mr. Leung's evidence that the Appellant, initially, had no intention of selling the Rostock shares. Ultimately, he agrees that the Appellant was canvassing 3 options, to press on with developing the land, to sell the Rostock interest or to sell the shares. He did not agree that the last option was particularly favoured.

64. The Board rejected Mr. Leung's evidence on this. They found there had been an intention to sell throughout and that this became a "genuine prospect intended to be brought about".

65. The Board were, of course, entitled to reject Mr. Leung's evidence, provided there was a proper basis for so doing. The first factor in such rejection was their construction of the documents which revealed an intention to sell shares if appropriate from the contest. I have already found this to be wrong.

66. With that support, at least, removed, in my view the only proper conclusion that can be reached on the facts is that the sale of the Rostock shares was brought about by a substantial increase in their value and emerging difficulties in developing the land. Even then the Appellant retained 5% of the shares so that it remained involved in the subsequent development of the land. That appears more consistent with investment than trading.

67. I am unable to see any legitimate grounds on which the Board could justifiably find that this one-off share transaction constituted trade or an adventure in the nature of trade.

68. Accordingly, the answer to Question 1 is "No", and on that ground alone, the appeal must be allowed.

69. Although it is not necessary for me to deal with the other questions, I can perhaps venture an opinion.

70. Intention, of course, played an important part in this matter. The Board took the view that it should ascertain intention by reference at the earliest to the 8th June, when the Appellant by virtue of the Agreement could enforce acquisition of the Rostock shares. Before that, the venture had remained "subject to contract".

71. The Appellant contended that by April at the latest, there had been a meeting of the principals' minds and a commercial contract had been concluded. It only remained for the lawyers to reduce it into written terms.

72. "Subject to Contract" has recently been debated, to the particular interest of Hong Kong, in AG and others v. Humphreys Estate (Queen's Gardens) Ltd. [1987] HKLR 427. In my view, the possibility of a change of mind had not been conclusively ruled out. The Board were therefore right to ascertain intention as at 8th June. The answer to the question would be "yes".

73. Question 3, Mr. Gardiner acknowledged that this is a fall back position for the Appellant which would have the effect of reducing, but not eliminating, the amount of tax paid. The principle is that, where a taxpayer transfers an item from a taxable to a non-taxable activity, or vice versa, the taxable activity is credited with the market value then obtaining to the item. Mr. Gardiner contended that, even if the Board was right in finding that the Rostock transaction was trade or an adventure, the shares only came into that category in May when the first approach was made to Mr. Li, and the possibility of a sale rather than redevelopment arose. The Appellant should be credited with the market value of the shares as at that date which would have the effect of considerably reducing the taxable profit.

74. I do not think this question can be answered. If the Board's findings of fact are correct then the application of the principle does not arise. Nor does it arise if my view is correct.

75. It is implicit from what I have said already that the answer to Question 4 must be "no".