COMMISSIONER OF INLAND REVENUE v. DEAN WITTER REYNOLDS (HONG KONG) LTD

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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JUDGMENT

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1. This is an appeal from a decision of a Board of Review, by way of case stated by  the Board under the provisions of section 69 of the Inland Revenue ordinance, Cap.112 ("the Ordinance").

2. The section of the Ordinance with which the dispute between the Commissioner and the taxpayer is connected is section 28, contained in Part V of the Ordinance, which relates to interest tax. Section 28 of the Ordinance is now repealed, but when in force it read, so far as is material, as follows: -

"28(1)     Interest tax shall, subject to the provisions of this Ordinance, be charged for each year of assessment on the recipient of any sum paid or credited to him in that year being-

 

(Paragraphs (b) and (c) not material and I will not read them.) The proviso to section 28 reads as follows:-

"Provided that there shall be exempt from interest tax-

 

3. The scheme of section 28 appears to be to create a charge to interest tax in relation to the specified matters referred to at (a), (b) and (c), of which, as I have said, only (a) is material. The proviso exempts from the charge to interest tax the types of interest therein mentioned.

4. Section 28(1)(a), in subjecting to the charge to interest tax: "interest arising in, or derived from Hong Kong on any debenture, mortgage, bill of sale, deposit, loan, advance or other indebtedness whether evidenced in writing or not" is apt to tax interest arising from a wide variety of financial transactions.

5. In the present case the word of crucial importance, in section 28(1)(a) is the word "deposit", and it is in connection with the use of this word in section 28(1)(a) that the Commissioner and the taxpayer have been in disagreement. Before explaining the nature of that disagreement, I draw particular attention to the reference in (a) in the proviso to interest: "paid or payable by Government, a bank licensed under the Banking Ordinance, or a public utility company ........" This shows that the intention of the legislature was to exempt from interest tax interest on those sums paid by a consumer who has to pay a deposit to a public utility for the purposes of obtaining the service offered, so that, at the end of the provision of the service, a sum will be available to the public utility to discharge, the liability of the consumer (if it is not otherwise met by the consumer on the termination of the service). It does not show an intention to exempt interest on other, similar, deposits paid to bodies other than public utilities. Quite the contrary.

6. In the present case, the deposits in question are not deposits made by the taxpayer with a public utility, but deposits made by the taxpayer pursuant to provisions of the Securities Ordinance and the Commodities Trading Ordinance. These provisions required the taxpayer to place such deposits with the Commissioner for Securities and the Commissioner for Commodities Trading respectively, in order to be allowed to deal in securities and commodities in Hong Kong. (The relevant provisions are section 52(1) of the Securities Ordinance and section 31(l) of the Commodities Trading Ordinance.) Such deposits are to be released to the taxpayer when it ceases to be registered as a dealer in securities and commodities.

7. Under sections 52(7) and (8) of the Securities Ordinance, and sections 33(6) and (7) of the Commodities Trading Ordinance, such deposits are to be placed on an account with a licensed bank, or invested in such manner as directed by the Financial Secretary. Section 52(9) of the Securities Ordinance, and section 33(8) of the Commodities Trading Ordinance, further provide that the Financial Secretary shall, after the end of each financial year, declare a rate of interest to be paid for that financial year in respect of each sum deposited. In the present case, for some seven years' of assessment, interest was received by the taxpayer on the deposits it had made.

8. The contention for the taxpayer is that the- word "deposit" used in section 28(1)(a) is not apt to subject to interest tax interest on the deposits made by it pursuant to these provisions of the Securities Ordinance and the Commodities Trading Ordinance. I have no hesitation in rejecting this submission. I see no reason whatever to put a construction on the word "deposit" which narrows its ordinary and natural meaning; and the deposits for which provision is made by the Securities Ordinance and the Commodities Trading Ordinance appear to me to, be as much deposits as any other form of deposit. Moreover, as it seems to me, there is an indication, in favour of construing the word in its ordinary and natural meaning, to be found in the part of the proviso to which I have referred dealing with deposits made with public utility companies to which the sort of deposit with which the present case is concerned is akin. It is plain, from the consideration given by the legislature to deposits made with public utility companies, that deposits made to secure the performance of an obligation are among the sort of deposits with which the section is concerned, whether brought into, or taken out of, the charge to interest tax.

9. The Board of Review took a different view. The Board of Review agreed with the submission made on behalf of the taxpayer that the word "deposit" should be construed ejusdem generis with the other words in subsection (1)(a) of section 28. This submission, however, ignores two features of the ejusdem generis rule and, indeed, the only two features which characterise it. It ignores the fact that before you can consider the application of the ejusdem generis rule you have to find a relevant genus. Here we have a collocation of words from which no such genus can be derived.

10. Furthermore, the rule is intended to give a restricted meaning to general words, which follow a class of particular ones (being a class from which a genus can be discerned). In section 28(1)(a) there are no such general words anyway. The reliance, therefore, on the ejustem generis rule seems to me to be totally misplaced.

11. The Board considered that the word "deposit" must have a meaning associated with, a financial transaction. This, however, carries the matter no further. It states the obvious but does not resolve the problem. The deposit in this case is as much connected with a financial transation as any other deposit. The fact that the deposits are, as the Board rightly thought, in a nature of a performance bond, does not assist in coming to the conclusion at which the Board arrived. No doubt, the deposits were not made by the taxpayer with a view to earning interest or to secure any directly associated financial benefit; the deposits were made, as the Board said, as a pre-condition of the carrying on of its business. But I see no reason, in any of that, to conclude that the deposits were not deposits within the meaning of that word as used in section 28(1)(a).

12. The Board's attempt to separate one type of deposit from another based on speculations as to the intention of the legislature seems to me to be impermissible; in my judgment, the result is that the word "deposit" in section 28(1)(a) must be given its usual and ordinary meaning and one which is to apt to comprehend the deposits here. For the reasons I have endeavoured to state, I am satisfied that the Board came to a wrong conclusion in taking the view it did that the interest on the deposits here were not subject to the charge to interest tax imposed by section 28(1)(a).

13. The question of law posed in the stated case for the opinion of the Court is: "Did the Board err in law in holding that the interest in question was not chargeable to interest tax in terms of section 28(1)(a) of the Inland Revenue Ordinance?" That question falls to be answered in the affirmative; that is to say, the Board did err in law in so holding.

14. The Commissioner, who has succeeded in this appeal, was represented before me by Counsel. The taxpayer did not appear. I was handed by Counsel for the Commissioner a letter, addressed to the Attorney General's Chambers, which says:-

"Referring to your memo to us dated November 7, 1989, we decided not to attend the hearing on

Friday, February 2, 1990 at 10:00 am."

And it goes onto say:-

15. "We will not defend the case."

16. In those circumstances, I have not had the benefit of any adversary argument. The taxpayer has made it clear that it is not seeking to defend the decision of the Board of Review.

17. However, counsel for the Commissioner satisfied me that the proper course to take was to hear the argument for the Commissioner and to decide the point on its merits. I am indebted to Counsel for the Commissioner in this connection for drawing my attention to the provisions of section 69 of the Ordinance which is contained in that part of the ordinance concerned with appeals, including appeals to the Board of Review, and which states, in section 69(l): "The decision of the Board shall be final". (There is, of course, a proviso for the statement of a case on a question of law for the opinion of the High Court.) Since, unless the stated case is dealt with, the decision of the Board will stand, there seems to me to be good reason for entertaining this appeal, although, in a sense, there is no longer any dispute between the parties. There is the further difficulty that decisions of Boards of Review are sometimes published. The Commissioner appears to be concerned that a decision which could be shown to be wrong should, nevertheless, be published and accordingly cause uncertainty and confusion amongst taxpayers and their advisers. For myself I see no real reason to be concerned about this, since I have no doubt that decisions of the Board of Review do not have to be published if the Attorney-General does not think it appropriate to publish them. In this connection I refer to section 68(5), which provides:-

"(5)    All appeals shall be heard in camera, but any appeal may be reported in such publications as may be approved by the Attorney General in such a manner that the identity of the appellant is not disclosed."

However, it seems to me that it is undesirable that a formal decision of a Board of Review should be allowed to stand even when the taxpayer (or, for that matter, the Commissioner) throws in his hand on an appeal to the High Court, when section 69(l) provides that the decision of the Board should be final and there is some possibility that the decision of the Board might be published. It is to be noted, I think, that although it is possible at any time before the hearing of an appeal to the Board of Review for an appellant to withdraw his appeal (see section 68(2A) of the Ordinance) there does not seem to be any similar provision for the withdrawal of the appeal after the hearing has started before the Board, or, for that matter, after a case has been stated for the opinion of the Court. For all these reasons it seemed to me right to entertain this appeal and to give judgment on it accordingly.

18. No attempt has been made by the taxpayer to defend the decision of the Board of Review and the Commissioner thinks it appropriate not to ask for any order for costs. That seems a responsible course and accordingly I shall make no order for costs.