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Commissioner Of Inland Revenue v Waylee Investments Ltd

Judgment Cited authorities 15 Cited in Precedent Map Related
Vincent
Judgment Date21 November 1988
Year1988
Judgement NumberHCIA3/1988
Subject MatterInland Revenue Appeal
CourtHigh Court (Hong Kong)
HCIA000003/1988 COMMISSIONER OF INLAND REVENUE v. WAYLEE INVESTMENTS LTD

HCIA000003/1988

Inland Revenue Appeal No. 3/88

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

___________

BETWEEN

COMMISSIONER OF INLAND REVENUE Plaintiff
AND
WAYLEE INVESTMENTS LIMITED Defendant

_______________

Coram: Hon. Barnett J. in Court

Date of hearing: 7 - 10 November 1988

Date of delivery of judgment: 21 November 1988

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DECISION

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1. Anyone who was living in Hong Kong in the middle of the last decade will remember the economic recession and the financial difficulties in which many people found themselves, and in particular the difficulties in which one of Hong Kong's leading hongs, Hutchison International Limited (Hutchison), found itself. In 1975, it was feared that Hutchison was on the verge of collapse. At that time, the Hong Kong and Shanghai Banking Corporation (the Bank) was a major creditor of Hutchison, having made to it loans or advances worth some HK$1 billion. The Bank was concerned that if Hutchison failed, not only would the Bank and its shareholders suffer a substantial loss, but there might be a catastrophic effect upon Hong Kong's economy and reputation. It proposed, therefore, that Hutchison should raise additional capital by way of a rights issue of shares. For reasons into which I need not go, this proposal was abandoned.

2. The Bank formed the view that the real problem underlying Hutchison's difficulties was inadequate management. It felt that the fortunes of Hutchison could be turned round. Accordingly, the Bank offered to take a substantial equity holding in Hutchison. It offered to purchase 150,000,000 shares at par and to make available further facilities if necessary. This offer was conditional upon the Bank having the right to appoint a Chief Executive of Hutchison and pending that appointment, the right to appoint two members to an Executive Committee which would have full executive powers. The Bank would also have the right to nominate two members to join the Board of Hutchison. If that offer was accepted, Hutchison would be provided with free capital to relieve its cash difficulties, and with the Bank and its resources being seen to be behind Hutchison and effectively guaranteeing its debts, Hutchison's credit would be re-established.

3. That offer was made on 7th August 1975. On 20th August 1975, there was incorporated in the New Hebrides a company called Carlingford (NH) Limited. Its two initial directors were officers of the Bank and the Bank held 98 of the 100 issued shares, each of one Australian dollar. The Bank was the ultimate holding company. This company subsequently changed its name to Waylee Investment Limited (Waylee). At the beginning of September, Hutchison accepted the Bank's offer. On 5th September Waylee purchased 150 million Hutchison shares with money provided by the Bank; no interest was payable upon that money by Waylee nor was there any provision for repayment. However, dividends, indeed substantial dividends, subsequently received by Waylee on the Hutchison shares were immediately paid to the Bank.

4. At the time when the Bank's offer was made, the then Chairman, Mr G.M. Sayer, publicly explained the terms of the offer, made it plain that the Bank was not entering into general trading business and stated that the Bank would reduce its shareholding when the affairs of Hutchison improved to a point where support was no longer necessary.

5. The fortunes of Hutchison improved rather more rapidly than anticipated. In December 1977, Hutchison merged with Hong Kong & Whampoa Dock Company Limited to form Hutchison Whampoa Limited. In the course of the merger, Waylee received in exchange for its 150,000,000 shares, 90,000,000 ordinary shares in Hutchison Whampoa and 90,000,000 preference shares.

6. In September 1979, Mr Li Ka Shing of Cheung Kong Holdings Limited approached Mr M.G.R. Sandberg, the then Chairman of the Bank, and offered to purchase the 90,000,000 ordinary shares. Mr Sandberg accepted Mr Li's offer and, hardly surprisingly, Waylee resolved to sell the shares. The proceeds of the subsequent sale were remitted to the Bank. According to its accounts for the year ending 31st December, 1979, Waylee declared that it had derived a profit on part disposal of quoted investment, of $517,595,847. The preference shares were disposed of some years later, again at a profit, but that profit is not the subject of these proceedings.

7. An Assessor of the Inland Revenue Department charged to Profits Tax under Section 14 of the Inland Revenue Ordinance the profit made by Waylee upon the sale of the 90,000,000 shares, and raised an assessment for tax of $87,981,743 for the year 1979/80. Waylee objected to the assessment on two grounds : first, that it had not carried on any trade or business in Hong Kong; secondly, that the shares formed part of its capital assets and the profit on the sale of the shares was a capital profit.

8. The Commissioner of Inland Revenue (The Commissioner) formed the view that Waylee's activities, such as they were, constituted an integral part of the Bank's rescue operation for Hutchison and that that operation was an adventure in the nature of trade. Even if Waylee should be regarded independently, the Commissioner took the view that the activities of Waylee were themselves of a trading nature. Accordingly, the Commissioner confirmed the assessment upon Waylee.

9. Waylee appealed to the Board of Review. The Board ordered that the assessment against Waylee be annulled. In accordance with section 69 of the Inland Revenue Ordinance, the Commissioner applied to the Board requiring them to state a case on a question of law. The Board duly stated a case in which they posed the question whether there was evidence on which they could properly arrive at their decision that the profit accruing to Waylee arose from the sale of a capital asset and was not derived from an adventure or concern in the nature of trade.

10. There is no dispute about the power of this court. On hearing a case stated, the court can set aside the decision of the Board only if it is clear that the Board have misunderstood the law and consequently misdirected themselves; or because their findings are perverse, that is to say, where the only true and reasonable conclusion contradicts the Board's findings, see Edwards v. Bairstow (1956) AC 14. Assuming that the Board did not misdirect themselves in law, the court may not substitute its own opinion on the facts found if the facts found are reasonably capable of supporting the Board's own opinion or determination.

11. The Commissioner contends that the Board misdirected themselves and reached a decision which cannot be supported by the facts. The principal complaints are that the Board failed to discuss the character of an adventure in the nature of trade; failed to consider many relevant facts which appeared in the evidence and which failure is, in itself, a mis-direction; and that if they had properly directed themselves, the only possible conclusion which could have been reached on the facts is that Waylee was involved in an adventure in the nature of trade.

12. There was a number of other complaints of which I think only three to be of any substance. The first is that the Board failed to advert to the fact that on appeal to the Board, the onus is upon the taxpayer. Like Mr Pinson who appeared for Waylee, I think it may safely be assumed that a board which had, as its chairman, a man experienced both in the law and in revenue appeals, and as one of its members, an experienced lawyer and authority upon Hong Kong taxation law, had in mind where the onus lay.

13. Secondly, in setting out the grounds of appeal in its decision, the Board omitted the ground that the transaction and trade did not take place in Hong Kong. The Commissioner submits that that indicates a carelessness on the part of the Board which is compounded when later in its decision the Board said :

"A subsidiary point arises ...... whether or not the profit was a profit which arose from the appellant carrying on a trade or business in Hong Kong .... "

14. The Commissioner argues that this was not a subsidiary point but one of the substantive grounds of the appeal.

15. The Board's approach to this point must be looked at against the background of its complete decision. Very properly in my view, the Board decided to grasp the nettle and determine whether or not Waylee's activities constituted an adventure. Only if they determined that issue in favour of the Commissioner, would it be necessary to go on to consider the further point of whether the profit arose in Hong Kong or not. In the event, it did not become necessary to consider this point, although the Board did say that had it been necessary, they would have found that the profit did arise in Hong Kong. It is not now, I think, contended otherwise. Whilst a more appropriate epithet than "subsidiary" might have been employed, I do not think its use demonstrates any neglect, carelessness or misdirection on the part of the Board.

16. Thirdly, the Commissioner complains that the Board focused upon Waylee's intention. In its decision, the Board said :

"To ascertain whether or not this was a venture in the nature of trade, it is necessary to look" at all of the relevant surrounding circumstances and to ascertain what was the true intention of the Appellant when it acquired the shares in question".

17. It is not disputed that while a person may express an intention to do a certain thing, his acts may constitute a different thing. The Commissioner rightly contended that whilst intention expressed by a person might be relevant, it is necessary to look at...

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