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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
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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)
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IN THE MATTER OF Section 69(3)(a)(ii) of the Inland Revenue Ordinance (Cap 112)
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BETWEEN
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THE COMMISSIONER OF INLAND REVENUE |
Applicant |
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and
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RIGHT MARGIN LIMITED |
Respondent |
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Before: Hon G Lam J in Chambers
Date of Hearing: 26 September 2017
Date of Judgment: 12 October 2017
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J U D G M E N T
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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 deducted all outgoings and expenses to the extent to which they are incurred during the basis period for that year of assessment by such person in the production of profits in respect of which he is chargeable to tax under this Part for any period, including —
…
(d) bad debts incurred in any trade, business or profession, proved to the satisfaction of the assessor to have become bad during the basis period for the year of assessment, and doubtful debts to the extent that they are respectively estimated to the satisfaction of the assessor to have become bad during the said basis period notwithstanding that such bad or doubtful debts were due and payable prior to the commencement of the said basis period:
Provided that —
(i) deductions under this paragraph shall be limited to debts which were included as a trading receipt in ascertaining the profits, in respect of which the person claiming the deduction is chargeable to tax under this Part, of the period within which they arose, and debts in respect of money lent, in the ordinary course of the business of the lending of money within Hong Kong, by a person who carries on that business;
(ii) all sums recovered during the said basis period on account of amounts previously allowed in respect of bad or doubtful debts shall for the purposes of this Ordinance be treated as part of the profits of the trade, business or profession for that basis period;”
8. It is common ground that the test of whether a debt is bad or irrecoverable is whether a reasonable and prudent businessperson would have concluded that, on the balance of probabilities, the debt was unlikely to be recovered: Graham v Commissioner of Inland Revenue (1995) 17 NZTC 12,107 at 12,110.
9. S 69 of the Ordinance provides for appeal from the Board’s decision to the Court of First Instance “on a ground involving only a question of law”. It does not provide for an appeal by way of rehearing. S 69(3)(e) provides that leave to appeal “must not be granted” unless the court is satisfied:
“(i) that a question of law is involved in the proposed appeal; and
(ii) that —
(A) the proposed appeal has a reasonable prospect of success; or
(B) there is some other reason in the interests of justice why the proposed appeal should be heard.”
It is therefore crucial to focus on the question of law involved in any proposed ground of appeal. Further, Practice Direction 34 paragraph 2(2) requires the Applicant in his statement to “identify and state precisely the question of law involved in each ground”.
10. It is well-established that attacks on findings of fact only raise questions of law in very limited circumstances, such as where it is said there is no evidence at all to support the finding. The extent to which a particular piece of evidence should be accepted or rejected, and the weight to be given to it, are matters for the Board and not the court: Aust-Key Co Ltd v Commissioner of Inland Revenue [2001] 2 HKLRD 275, 281H; Runa Begum v Tower Hamlets London Borough Council [2003] 2 AC 430, §99. In this context, the cautionary notes sounded by Evans LJ in Georgiou v Customs and Excise Commissioners [1996]...
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