The Commissioner Of Inland Revenue v Right Margin Ltd

CourtHigh Court (Hong Kong)
Judgment Date12 Oct 2017
Citation[2017] 5 HKLRD 398
Judgement NumberHCIA4/2016
SubjectInland Revenue Appeal
HCIA4/2016 THE COMMISSIONER OF INLAND REVENUE v. RIGHT MARGIN LTD

HCIA 4/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

INLAND REVENUE APPEAL NO 4 OF 2016

____________

IN THE MATTER OF an application for leave to appeal against the Decision of the Board of Review (Revenue) in B/R 28/13 dated 8 July 2016 (Case No. D15/16)
IN THE MATTER OF Section 69(3)(a)(ii) of the Inland Revenue Ordinance (Cap 112)

____________

BETWEEN
THE COMMISSIONER OF INLAND REVENUE Applicant
and
RIGHT MARGIN LIMITED Respondent

____________

Before: Hon G Lam J in Chambers

Date of Hearing: 26 September 2017

Date of Judgment: 12 October 2017

________________

J U D G M E N T

________________


Introduction

1. This is an application by the Commissioner of Inland Revenue under s 69 of the Inland Revenue Ordinance (Cap 112) for leave to appeal from the decision of the Board of Review dated 8 July 2016, whereby the Board allowed the appeal of the taxpayer against the profits tax assessments for 1999/00 and 2002/03 to 2006/07. The underlying dispute is whether the taxpayer should be allowed to deduct a sum of approximately HK$156.6 million from its assessable profits as a provision for bad debt in the assessment year 1999/00. If the deduction was upheld, as was the Board’s conclusion, the taxpayer would have made a net loss for that year and, with the tax loss carried forward, would have no assessible profits for the years in dispute.

2. The facts of the case may be summarised as follows. The taxpayer is a wholly‑owned subsidiary of Chime Corporation Limited, both of them being members of the Chinachem group of companies. The taxpayer’s principal business activity was money-lending, earning interest as income. In around 1993, five developers including Chinachem entered into a joint venture for a residential development in Kowloon. The corporate vehicle for the joint venture was Victory World Limited (“VWL”), incorporated in 1993, in which Chime became a 10% shareholder and the other four developers 50%, 20%, 10% and 10% shareholders respectively. The terms of the joint venture were subsequently formally drawn up in a joint venture agreement dated 7 May 1996 between the five shareholders and VWL (“JVA”). The terms of the JVA included the following:

“6.1 It is the intention of the Shareholders that the Company shall, to the extent possible, raise funds from banks or similar sources to finance the Development Costs of the Property on the most favourable terms reasonably obtainable … If bank or external finance as aforesaid is not available or sufficient, then all or further Development Costs shall be financed by advances by way of Shareholders’ loans by … Chime and … respectively in the Agreed Proportions within seven (7) days upon request by the Board of Directors. Such loans shall

(a) be unsecured;

(b) bear interest at a flat rate to be determined by the Board;

(c) except as expressly provided in Clause 10.3, not subject to repayment as to principal or interest (if any) in whole or in part unless otherwise resolved by the Board except in the event of liquidation of the Company at which time all outstanding principal and accrued interest (if any) shall be and become immediately due and payable.

10.3 In the event that the Completed Development or any part thereof is sold, the Shareholders shall procure that all sale proceeds received by the Company shall be applied:-

Firstly: subject to Clause 10.1 and Clause 10.2, in discharge of all rent, taxes, rates and other outgoings whether governmental, municipal, contractual or otherwise, due and affecting the Property and/or the Company;

Secondly: in discharge of all outstanding indebtedness (including principal, accrued interest and other monies) due to other banks or financial institutions;

Thirdly: in settlement of all outstanding liabilities or outgoings due and payable to all other person(s) firm(s) or company(ies) (other than the Shareholders);

Fourthly: in repayment of the advances from the Shareholders in proportion to the respective amounts of advances;

Fifthly: in payment of the accrued interests on the Shareholders’ advances in proportion to the respective amounts of advances; and

Sixthly: in payment of dividends which shall be distributed to the Shareholders in accordance with Clause 10.2 as soon as reasonably practicable.”

3. Shareholders’ financing was duly provided by the developers to VWL, in the proportion of their shareholdings and, in the case of Chime, in the form of loans from the taxpayer (a subsidiary of Chime) to VWL. Interest was charged by the taxpayer which was reported as income on an accruals basis, as a result of which profits tax was paid on this interest income even though, as noted below, interest had not actually been received by the taxpayer. Up to June 1999, VWL had made certain repayments to the taxpayer which, as found by the Board, were all for repayment of principal only and not for interest.

4. As at June 1999, VWL owed the taxpayer approximately HK$399 million. By then, VWL had already sold the bulk of the units in the development at a very substantial loss. It had no other business apart from the development. The value of VWL’s remaining assets was less than the amount outstanding to the taxpayer and the four other lenders of shareholder’s loans. In these circumstances, the taxpayer claimed a provision for bad debt in respect of the anticipated inability to recover the outstanding principal and interest from VWL.

5. Based on a value of VWL’s net assets as at 30 June 1999 (excluding shareholders’ loans) in the sum of about HK$1.79 billion, the taxpayer accepted that it could expect to receive 10% thereof, ie HK$179 million, which would leave it with a shortfall of approximately HK$220 million. The taxpayer accordingly made a provision for doubtful debt in the amount of HK$220 million for the year ending 30 June 1999. On the Board’s finding, approximately HK$156.6 million of this amount was in the nature of accrued outstanding interest.

6. In his determination, the Deputy Commissioner disallowed the claim for doubtful debt of HK$220 million in its entirety. The taxpayer appealed but at the hearing before the Board, the appeal was narrowed down to focus on the provision to the extent of the unpaid accrued interest of HK$156.6 million.

7. The governing statutory provision is s 16(1)(d) of the Inland Revenue Ordinance (Cap 112), which provides as follows:

“(1) In ascertaining the profits in respect of which a person is chargeable to tax under this Part for any year of assessment there shall be...

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6 cases
  • Francois Ngo v Commissioner Of Inland Revenue
    • Hong Kong
    • High Court (Hong Kong)
    • 19 November 2018
    ...the conclusion is contrary to the true and only reasonable one: Kwong Mile, §37 per Bokhary PJ. (6) See also CIR v Right Margin Ltd [2017] 5 HKLRD 398, §10 per G Lam “It is well-established that attacks on findings of fact only raise questions of law in very limited circumstances, such as w......
  • Heath Brian Zarin v The Commissioner Of Inland Revenue
    • Hong Kong
    • High Court (Hong Kong)
    • 24 December 2019
    ...in the decisions of Chow J in China Mobile Hong Kong Co Ltd v CIR [2018] 2 HKLRD 146 at §30, and of G Lam J in CIR v Right Margin Ltd [2017] 5 HKLRD 398 at §§12-13. That guidance includes that: (a) The right to appeal is not unqualified and absolute. Any proposed question of law must be pro......
  • Heath Brian Zarin v The Commissioner Of Inland Revenue
    • Hong Kong
    • High Court (Hong Kong)
    • 24 December 2019
    ...in the decisions of Chow J in China Mobile Hong Kong Co Ltd v CIR [2018] 2 HKLRD 146 at §30, and of G Lam J in CIR v Right Margin Ltd [2017] 5 HKLRD 398 at §§12-13. That guidance includes that: (a) The right to appeal is not unqualified and absolute. Any proposed question of law must be pro......
  • Richard Paul Forlee, M. A. v Commissioner Of Inland Revenue
    • Hong Kong
    • High Court (Hong Kong)
    • 27 May 2020
    ...Kwong Mile Services Ltd v CIR (2004) 7 HKCFAR 275 §§31–33 (Bokhary PJ). 27. The observations of G Lam J in CIR v Right Margin Ltd [2017] 5 HKLRD 398 at §10 are also “It is well-established that attacks on findings of fact only raise questions of law in very limited circumstances, such as wh......
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