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So Kai Tong Stanley v The Commissioner Of Inland Revenue

Judgment Cited authorities 6 Cited in 1 Precedent Map Related
Vincent
Judgment Date20 January 2004
Year2004
Citation[2004] 2 HKLRD 416
Judgement NumberHCIA4/2002
Subject MatterInland Revenue Appeal
CourtHigh Court (Hong Kong)
HCIA000004/2002 SO KAI TONG STANLEY v. THE COMMISSIONER OF INLAND REVENUE

HCIA000004/2002

HCIA4/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

INLAND REVENUE APPEAL NO. 4 OF 2002

---------------------------

BETWEEN
SO KAI TONG STANLEY trading as
STANLEY SO & CO.		 Appellant
AND
THE COMMISSIONER OF INLAND REVENUE Respondent

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Coram: Hon Chu J in Court

Dates of Hearing: 10 and 11 February 2003

Date of Judgment: 20 January 2004

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J U D G M E N T

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1. This is an appeal under section 69 of the Inland Revenue Ordinance, cap.112 ("IRO"), by way of case stated by Mr So Kai-tong Stanley ("the appellant") against the decision of the Inland Revenue Board of Review ("the Board") in respect of two assessments of profits tax as determined by the Acting Deputy Commissioner of Inland Revenue ("the Commissioner").

The background

2. The appellant is a certified public accountant and commenced practice in the name of Stanley So & Co. ("the appellant's firm") on 7 October 1987. In the determination dated 18 July 2000, the Commissioner increased the Profits Tax Assessments on the appellant's firm for the years 1996/97 and 1997/98 after disallowing the following items of expenses claimed:

1996/97 (HK$) 1997/98 (HK$)
Equipment rental 600,00 780,000
Office facilities charges ----- 636,000
Entertainment 346,487 -----

3. The appellant appealed against the determination. By its decision dated 21 May 2001, the Board dismissed the appellant's appeal in respect of the equipment rental and office facilities charges assessments. The Board however allowed the appellant's appeal on the entertainment expenses in part. Of the amount of $145,536.90, which the Commissioner accepted that the appellant had proved its incurrence by reference to his credit card statements, the Board allowed a deduction of 80% of the amount. The Board was not satisfied that the balance of the deduction claimed, being the sum of $200,949 (i.e. $346,487 - $145,536.90) was truly incurred.

4. The appellant now appeals by way of case stated against the Board's decision. There is no appeal by the Commissioner against the Board's decision on the entertainment expenses deduction.

The facts

5. The salient facts as found by the Board can be summarized as follows:

(1) In about 1977, Mr Yam Kin Kwok commenced practice as certified public accountant in the name of KK Yam & Co. ("KK Yam").

(2) The appellant commenced his practice on 7 October 1987.

(3) Nominsec Ltd ("Nominsec") is a company incorporated in Hong Kong and commenced business on 9 July 1986 in providing secretarial service. Before 1992, it was beneficially owned by the appellant and his wife. According to its annual return made up to 29 November 1995, its shareholders are the appellant's wife, one Nominshare Ltd ("Nominshare"), each holding 1 share, and a Liberian company called Nominsec Inc. holding 7,998 shares. The appellant, his wife and one of his sisters were the directors. Another of his sisters, Elly Soo, and the appellant's daughter were appointed additional directors on 1 May and 18 December 1996. According to an employer's return dated 28 April 1997, the appellant was employed by Nominsec as director and was provided with a quarter at Kwong Fung Terrace, Third Street, Hong Kong, a property acquired by Nominshare in 1992.

(4) On 9 May 1987, Nominsec entered into an agreement for the hire purchase of one Ricoh plain copier. In about September 1988, the ownership of the copier passed to Nominsec.

(5) The accounts of Nominsec recorded the following equipment rental income for the years between 1994 and 1997:

Year ending
30/4/1994		 Year ending
30/4/1995		 Year ending
30/4/1996		 Year ending
30/4/1997
KK Yam 78,000 96,000 96,000 64,000
Appellant's firm 480.000 480,000 600,000 780,000

(6) Nominsec also received photocopying charges from 215 and 225 clients in the years 1995/96 and 1996/97 respectively.

(7) Yam & So Associates Ltd ("Yam & So") is a company incorporated in Hong Kong in 1986. Subsequently it changed its name to Golden Centre (188 Des Voeux Road) Ltd. Its principal activities at the material times were the provision of office facilities services. According to the annual return made up to 28 November 1995, the appellant and Nominsec were the shareholders, each holding one share. Its directors were the appellant, his sister, Elly Soo, and one Wong Fung Ling, who resigned on 10 December 1997. On 8 May 1998, the appellant resigned as director and Nominsec was appointed a director.

(8) At the material times in 1995 to 1997, the appellant's brother was employed by Yam & So as its maintenance officer

(9) Since about April 1991, Yam & So was the tenant of the office premises situated at Unit 3, 22nd Floor, Golden Centre, 170-188 Des Voeux Road Central ("Golden Centre office"). By a letter of confirmation dated 6 July 1994, Yam & So renewed its tenancy for 2 years at the monthly rental of $91,980. By a tenancy agreement dated 17 December 1996, Yam & So was granted a further 3 years' term, commencing 8 July 1986 at $62,301 per month.

(10) Between 1994 and 1997, Yam & So had received the following office management fees:

Year ending
30/4/1994		 Year ending
30/4/1995		 Year ending
30/4/1996		 Year ending
30/4/1997
KK Yam $788,000 $792,000 $792,000 $792,000
Appellant's firm $50,000 $630,000 $396,000 $1,098,000
Nominsec $230,000
Total $1,068,000 $1,422,000 $1,188,000 $1,890,000

(11) In the 6 years ending 30 April 1997, Yam & So incurred a total of $695,000 for decoration and acquisition of furniture, with no expenditure being incurred in the years 1994, 1995 and 1997.

(12) By a debit note dated 30 April 1996, Yam & So charged the appellant's firm $396,000 as "fee for granting licence to use" the Golden Centre office for the year ending 30 April 1996..

(13) By another debit note dated 30 April 1996, Yam & So charged the appellant's firm $1,128,000 as fee for granting licence for the use of the Golden Centre office for the year ending 30 April 1997.

(14) By a debit note dated 30 April 1997, Nominsec debited the appellant's firm $600,000 as rental charges for the use of computers, copier, printers and the like for the year ending 30 April 1997.

The parties' case and the Board's decision

6. Before the Board, the main issue was whether in ascertaining the assessable profits of the appellant's firm, the three items of expenses claimed for the years 1996/97 and 1997/98 should be allowed for deduction in full. The Board accepted the approach in Case no. D94/99 (1999) 14 IRBRD 603, paras. 24-25 at 612, and considered that each item of expense should be approached objectively to see to what extent, if any, it is incurred in the production of chargeable profits.

Equipment rental expenses

7. On the equipment rental expenses for the two years in question, the Commissioner contended it was commercially unrealistic for the appellant's firm to pay the sums, pointing out that Nominsec only incurred $178,676 on acquisition of office equipment for the 7 years ending 30 April 1997. The Board also referred to the small amounts of equipment rental paid by KK Yam to Nominsec. The Commissioner was not satisfied that the equipment rental was incurred for the production of assessable profits. The Commissioner further regarded the arrangement an artificial transaction within section 61 of the Inland Revenue Ordinance ("IRO"). At the hearing before the Board, the appellant produced a schedule containing justifications for the expenses: see p.17 of the Case Stated. The appellant however stated that he had no idea how the rental was charged and the schedule was merely his estimate.

8. The Board rejected the schedule for the reasons that the appellant had made no reference to it in his previous correspondence with the Commissioner, and that the schedule was his own estimate when he admittedly had no personal knowledge of how the rental was fixed. Additionally, the appellant had also indicated to the Commissioner that the amounts were fixed by reference to sums involved in previous years. The schedule of justifications contradicts such assertion. The Board held that there was no rational basis for the sums claimed, pointing out that Nominee's debit note did not show any breakdown or contractual arrangement for the payments, that there was no periodical billing and no regular entry in the books of Nominsec and the appellant's firm on the materials consumed. The Board did not accept that the amount of equipment rental claimed had been incurred, and did not find it necessary to deal with the Commissioner's arguments on section 61 of the IRO.

Office facilities charges

9. On the office facilities charges, the Commissioner considered that they were in fact payments of rent and rates, commenting that the arrangement was for Yam & So to rent the Golden Centre office and then sublet it to the appellant's firm and KK Yam. The Commissioner pointed out that in the year 1997/98, the rent paid by Yam & So was reduced, but the amount paid by the appellant's firm to it was drastically increased from $396,000 to $1,032,000, with the amount paid by KK Yam remained unchanged. The Commissioner found it commercially unrealistic for the appellant's firm to have agreed to such arrangement, and restricted the deduction to the same level as in previous year.

10. In his closing speech before the Board, the appellant justified the payment on the basis that Yam & So had undercharged the appellant's firm in the years ending 30 April 1996 and had a net liability of $615,286 as at 30 April 1996. The increased...

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    ...whether a particular outgoing or expense is incurred in the production of profits is to be examined objectively : So Kai Tong v. CIR [2004] 2 HKLRD 416, per Chu J at 427H-I and 111. Second, Mr Smith sought to distinguish the authorities cited by Mr Ho on the basis that the payments in those......

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