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Nice Cheer Investment Ltd v Commissioner Of Inland Revenue

Judgment Cited authorities 14 Cited in Precedent Map Related
Vincent
Judgment Date12 November 2013
Citation(2013) 16 HKCFAR 813
Judgement NumberFACV23/2012
Subject MatterFinal Appeal (Civil)
CourtCourt of Final Appeal (Hong Kong)
FACV23/2012 NICE CHEER INVESTMENT LTD v. COMMISSIONER OF INLAND REVENUE

FACV No. 23 of 2012

IN THE COURT OF FINAL APPEAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

FINAL APPEAL NO. 23 OF 2012 (CIVIL)

(ON APPEAL FROM CACV NO. 135 OF 2011)

_____________________

Between :

NICE CHEER INVESTMENT LIMITED Respondent
- and -
COMMISSIONER OF INLAND REVENUE Appellant

_____________________

Court : Chief Justice Ma, Mr Justice Ribeiro PJ, Mr Justice Tang PJ, Mr Justice Litton NPJ and Lord Millett NPJ
Dates of Hearing : 16 – 17 October 2013
Date of Judgment : 12 November 2013

_______________________

J U D G M E N T

_______________________

Chief Justice Ma :

1. I agree with the judgment of Lord Millett NPJ.

Mr Justice Ribeiro PJ :

2. I agree with the judgment of Lord Millett NPJ.

Mr Justice Tang PJ :

3. I am in full and respectful agreement with the judgment of Lord Millett NPJ which I have read in draft. There is nothing I can usefully add.

Mr Justice Litton NPJ :

4. I agree with the judgment of Lord Millett NPJ.

Lord Millett NPJ :

5. The question for decision in this appeal is whether the introduction of new accounting standards in Hong Kong in 1998 had the effect of making unrealised increases in the value of the Respondent’s trading stock held at the end of its accounting period chargeable for the first time as taxable profits.

6. The appeal is brought by the Commissioner of Inland Revenue (“the Commissioner”) from a judgment dated 19 June 2012 of the Court of Appeal (Cheung, Hartmann and Fok JJA) dismissing its appeal from a judgment of To J dated 28 June 2011. By his judgment To J had held that the introduction of the new accounting standards did not have the effect for which the Commissioner contended and allowed the Respondent’s appeal from assessments to profits tax in each of the three years from 2003/04 to 2005/06.

The facts

7. The facts which are agreed are set out at length in the judgments below and it is not necessary to repeat them. They may be shortly stated as follows.

8. The Respondent is a private company incorporated in Hong Kong. Its principal business consists of trading in marketable securities quoted in Hong Kong. Prior to the introduction of new accounting standards for 1999 and subsequent years, its trading stock like that of other traders and in accordance with the conventional practice was shown in its financial statements at the lower of cost and net realisable value. This had the effect that unrealised increases in the value of its trading stock during the accounting period (in the Respondent’s case marketable securities held for sale) were not reflected in its profit and loss accounts or tax computations. Following the introduction of new accounting standards in 1998, however, the Respondent duly recorded in its profit and loss accounts not only profits and losses which it had realised by the sale or disposal of trading stock during the accounting period but also changes in the value of unrealised trading stock held at the end of the period.

9. There is no dispute that the Respondent’s financial statements for the relevant accounting periods were prepared in accordance with the prevailing albeit new accounting practice in Hong Kong. The Respondent accepts (and its auditors reported) that its financial statements were prepared in accordance with accounting principles generally accepted in Hong Kong and showed a true and fair view of its affairs and of its profits and losses for the relevant accounting periods. But it contends that its profit and loss accounts need to be adjusted for tax purposes by excluding unrealised profits from its tax computations since they are not assessable to profits tax. Accordingly in computing its assessable profits and allowable losses for tax purposes for each of the years from 2003/2004 to 2005/2006, the Respondent excluded unrealised profits (ie increases in value of its unrealised trading stock during the accounting period) but continued to claim to deduct unrealised losses which it described in its profit and loss accounts as provision for the diminution in value of listed investments held at the end of the accounting period.

10. The Commissioner considered that the unrealised gains and losses arising from revaluing the trading stock held at the end of the year should be included in the profits tax assessment for the year of assessment in which the unrealised gains were credited and unrealised losses were debited in the Respondent’s financial statements. Accordingly, he assessed the Respondent to profits tax on the basis of the realised and unrealised losses for the years of assessment 1999/2000 to 2002/03 and profits for the years of assessment 2003/04 to 2005/06. The difference between the amount of the profits tax assessed on this basis over the period and that calculated by the Respondent is of the order of $250 million.

11. The new accounting standards in accordance with which the Respondent’s financial statements were prepared are applicable only to persons who carry on the business of trading in marketable securities, whether listed or not, and while mandatory in other cases are optional in the case of small and medium sized businesses. As the Court of Appeal observed, the surprising effect of the Commissioner’s contentions is that, without any statutory support in the taxing statute, taxpayers who carry on the business of trading in securities are taxable on their unrealised profits while those who carry on other businesses are not; and unlike larger businesses carrying on the same trade small and medium sized businesses may choose whether or not to be taxed on their unrealised profits. In my judgment, as will shortly appear, this is not merely surprising; it is also contrary to the express charging provisions for profits tax in Hong Kong.

The statutory provisions

12. Section 14(1) of the Inland Revenue Ordinance, Cap 112 (“the Ordinance”), imposes a charge to profits tax

“… for each year of assessment … on every person carrying on a trade, profession or business in Hong Kong in respect of his assessable profits arising in or derived from Hong Kong for that year from such trade, profession or business … as ascertained in accordance with this Part.” (emphasis added)

Section 2 defines “assessable profits” to mean:

“… the profits in respect of which a person is chargeable to tax for the basis period for any year of assessment, calculated in accordance with the provisions of Part 4”

Section 18B(1) provides that, for the relevant years of assessment

“the assessable profits for any year of assessment … from any trade, profession or business carried on in Hong Kong shall be computed on the full amount of the profits therefrom arising in or derived from Hong Kong during the year of assessment.” (my emphasis)

13. The question for decision, therefore, is whether for the purpose of profits tax unrealised increases in the value of trading stock held at the end of the accounting period as a result of the revaluation should be included in the computation of “the full amount of the profits … arising in or derived from Hong Kong during the year[s] of assessment”. As the Courts below observed, this raises a matter of statutory construction[1], not accounting practice. The question is one of law: what does the statute mean by the words “the full amount of the profits therefrom during the year of assessment”? Whatever these words mean, the fact that they apply to “every person” means that in the absence of some statutory provision to the contrary they mean the same for every taxpayer to which the Ordinance applies whatever the nature or size of his business. Moreover, the word “therefrom” (meaning from any trade, profession or business) suggests that the profit must derive from some trade, professional or business activity and not merely be the result of a revaluation of assets held for the purpose of the trade, profession or business.

The Commissioner’s case

14. At the heart of the Commissioner’s case lay three propositions. First, the word “profits” is not defined in the Ordinance, and in the natural and ordinary meaning of the word unrealised profits are nonetheless profits. Secondly, the amount of the profits during the year of assessment is primarily a question of fact. And thirdly, the amount of any profits or losses during the year of assessment must be ascertained by reference to ordinary principles of commercial accounting unless these are contrary to an express statutory provision in the Ordinance. These principles are not static but so long as they remain current and generally accepted they provide the surest guide to the question that the legislation requires to be answered[2].

Profits

15. While it is true, as the Commissioner submitted, that the amount of any profits is a question of fact, what constitutes “profits” within the meaning of the Ordinance and whether any disputed amount represents an assessable profit are questions of law.

16. The word “profits” is an ordinary English word and as such is capable of a broad variety of meanings. In these circumstances its meaning in any particular case depends on the context in which it is used. It has been consistently held in a series of cases dealing with the prohibition against the payment of dividends by companies except out of profits that the concept of profits in the context of company law is sufficiently broad to embrace unrealised profits[3]. The question in the present case is raised in a very different context; whether for the purpose of profits tax the word “profits” in s 14(1) of the Ordinance includes unrealised profits.

17. In seeking to persuade us to answer this question in his favour the Commissioner has relied heavily on the judgment of Fletcher Moulton LJ...

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