THE COMMISSIONER OF INLAND REVENUE v. TAI ON MACHINERY WORKS LTD

HCIA000002/1968

IN THE SUPREME COURT OF HONG KONG

ORIGINAL JURISDICTION

INLAND REVENUE APPEAL NO. 2 OF 1968

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BETWEEN
The Commissioner of Inland Revenue Appellant

AND

Tai On Machinery Works Ltd. Respondent

Tai On Machinery Works Ltd. Appellant

AND

The Commissioner of Inland Revenue Respondent

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Coram: McMullin, J.

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JUDGMENT

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1. This appeal, in effect, comprises cross appeals by the Tai On Machinery Works Ltd. and the Commissioner of Inland Revenue and isbrought under the provision of s.69 of the Inland Revenue Ordinance Cap.112 against the decision of the Board of Review given upon the 23rd of October, 1968 under the provisions of s.68 of that Ordinance.

2. The facts leading up to this appeal, in so far as they are relevant, are as follows: The Tai On Machinery Works Ltd., a company incorporatedin Hong Kong in 1962, carried on the business of manufacturing machinery, principally fire extinguishing equipment and electric fans.The Company erected an eight-floor building in Kowloon which was completed on the 10th of December, 1964 and became ready for occupationon the 1st of March 1965. The cost of construction of the building was met by overdrafts with the Company’s banks. Interest uponthese overdrafts was paid by the Company amounting to $42,504 in the year ending March, the 31st 1965. The Company began to use theground floor, first, second and third floors of the building for the purpose of its own manufacture on the 1st of March, 1965. Theremaining four floors were 1st out at separate dates to the China Leather Shoe Co. Ltd. between the 16th of June, 1965 and the 1stof November, 1965. It was part of the agreed facts in the case that the Company had sought and had been in a position to receivetenants with effect from the 1st of March, 1965.

3. The Company was assessed to Corporation profits tax for the years 1964/65, 1965/66 and 1966/67. No question now arises as to theassessment for the year 1964/65 but it is to be noted that the year ending 31st March, 1965 figured in the assessments and the objectionsthereto in virtue of its being, under s.18(1) the basis period for the year of assessment 1965/66. Another of objection against the ’65/’66 and ’66/’67 assessments was given bythe appellant on the 31st of October, 1967. This objection was heard by the Commissioner of Inland Revenue and was disposed of onthe 27th of May, 1968 by a written determination of the issues put before him. In this determination the assessor’s additional figureof $38,189 Corporation Profits Tax for the year 1966/67 was confirmed and his figure of $13,541 Corporation Profits Tax for the year1965/66 was likewise confirmed subject to a small upward adjustment arising from a mistake in the figures of the assessor relatingto the computation of captalised interest. The effect of this was to raise the figure of assessable profits in 1965/66 from the sumof $108,330 to $108,952. The tax on this latter figure amounted to $13,619 instead of the $13,496 computed by the assessor.

4. In the original proceedings before the Commissioner, four grounds of objection were put forward. On the appeal to the Board of Reviewfrom the Commissioner’s confirmation of the assessment, the same four points were put forward on behalf of the taxpayer. They areas follows: firstly, that the assessments were invalid because objections previously lodged in respect of the years 1965/66 and 1966/67had not been dealt with; secondly, that interest incurred upon the overdrafts should be allowed in full under s.16(1)(a) of the Inland Revenue Ordinance; thirdly, that the letting of a portion of the factory building was not a new business or an extension of the existing business andthat therefore s.18(3)(4) of the Inland Revenue Ordinance could not come into operation in the computation of the company’s profit from rent; and forthly, that the four floors which had beenlet were used for the storage of goods and therefore ranked as an Industrial Building under the definition of “industrial buildingor structure” in s.40 sub-section (1) of the Ordinance.

5. Of these four heads of objection the Board dismissed the first and third, upholding the findings of the Commissioner under thoseheads and allowed the taxpayers appeal on the second and fourth heads. The case was then remitted by the Board to the Commissionerfor re-assessment in accordance with this opinion of the Board on the second and fourth heads of objection. It is from this decisionof the Board of Review that the present cross appeals arise. The Company, however, abandoned its ground of objection under the firsthead and it accordingly does not appear among the matters to be decided on the case stated. Likewise, on the course of the hearingof the appeal in this court, the Commissioner abandoned his ground of appeal under head four, and this court is therefore left withthe determination of the issues raised upon the second and third heads of appeal as they appear in the decision of the Board andwhich are covered by the questions posed to this court in para.7(1) and para.7(2) of the case stated. It will be observed that thethird head of appeal before the Board originally appeared as the fourth head of objection before the Commissioner, but in the courseof the appeal from his decision to the Board of Review they appear to have become transposed.

6. I will deal with the issues in the order in which they were argued, and accordingly I turn first to consider the appeal by the Companyon the ground set forth in sub-paragraph 2 of paragraph 7 of the case stated. The net issue here is whether the assessor was rightin regarding only the first four floors of the building which were actually used by the appellant company for its manufacturing purposesas being an industrial building or structure within the meaning of s.40, and in regarding the four upper floors which were occupied by the China Leather Shoe Co. Ltd. for the purpose of storing its goodsas a commercial building or structure within the meaning of s.36. The practical import of this dist…(illegibl), of course, that an industrial building attracts a much higher rate of relief by wayof an allowance for depreciation than does a commercial building. In the assessor’s opinion, the first four floors as an industrialbuilding attract the higher rate of relief, while the upper four floors being, in his opinion, a commercial building attract thelower rate. This opinion of the assessor was confirmed by the Commissioner and by the Board of Review.

7. It is agreed that these four floors were used by the China Leather Shoe Co. Ltd. for the storage of leather goods such as shoes,suitcase, jackets, gloves etc. which are manufactured in the Chinese mainland and which the company imports into Hong Kong and distributesthrough twelve shops owned by it in Kowloon and Hong Kong in connection with its business both wholesale and retail. The ChineseLeather Shoe Company Ltd. does not manufacture any goods of its own nor does it carry on the business of a godown keeper. It is agreed,however, that these goods were not merely stored upon the premises but that they were sorted according to size, quality, colour andstyle prior to distribution. They were also packed upon the premises prior to distribution and certain repairs to the goods werecarried out upon the premises to remedy defects discovered in the course of these operations.

8. Mr. Sanguinetti for the appellant argues that this building qualifies for the relief accorded to industrial buildings since it comeswithin the definition of an industrial building or structure of the sort described in paragraph (c), alternatively of the sort describedin sub-paragraphs (ii) or (iii) of paragraph (d) of sub-section one of s.40. The material parts of the definition, therefore, are as follows: “Industrial building or structure” means any building or structureor any part of any building or structure used –

“(a) ………………..
(b) ………………..
(c) for the purposes of a trade which consists of the manufacture of goods or materials or the subjection of goods or materials to anyprocess; or
(d) for the purposes of a trade which consists in the storage –
(i) ………………..
(ii) of goods or materials which are to be subjected in the course of a trade to any process;
(iii) of goods or materials on their arrival into the colony.”

To take the latter provision first, counsel says that this building should be regarded as being in use for the purposes of a tradewhich consists in the storage of goods or materials which are to be subjected in the course of a trade to a process or, alternatively,for the purposes of a trade which consists in the storage of goods or materials on their arrival into the Colony.

9. In dismissing this contention on the appeal before them the Board relied upon the decision in Dale (H.M. Inspector of Takes) v. Johnson Brothers(1). They relied upon that decision as establishing the proposition that to qualify under para. (d) the building in question must beused for a trade which is in the nature of warehousing or godown keeping for reward and that a building would not qualify under thatparagraph which was merely used for the storage by a trader of his own goods in the course of his trade. Mr. Sanguinetti points outthat that case was decided under a provision in the English legislation which has no exact parallel in the local legislation. Section8(1)(d)(iii) of the Income Tax Act 1945 provides that a building is qualified as an industrial building or structure if it is used:”(d) for the purposes of a trade which consists in the storage – (iii) of goods or materials, which having been manufactured or producedor subjected, in the course of a trade, to any process, have not yet been delivered to any purchaser ……..” Mr. Thistlethwaitefollows the Board in maintaining that Dale’s(1) case although decided under a provision for which there is no exact parallel in Hong Kong, nevertheless, establishes the generalprinciple that the user of a building which qualifies it to be regarded as an industrial building must be a user restricted solelyto the keeping or custody of the goods in question by way of trade.

10. I confess I find the decision in Dale’s(1) case somewhat puzzling. In that case, the respondents were the sole selling agents in Northern Ireland for commodities of variousmanufacturers and were obliged by agreements to receive, store and dispose of the goods of these manufacturers. They erected a warehouseto receive goods consigned to them by the manufacturers and in particular the goods of the principal supplier Messrs. Chiswick Products,Ltd. with whom they were under agreement to keep sufficient stocks of the goods in question. Two thirds of the available accommodationin their warehouse was used for keeping stocks of goods – the largest proportion of which consisted of stocks manufactured by ChiswickProducts Ltd. In effect, the learned judge found that by this agreement with the manufacturers, the respondents were purchasers ofthe goods consigned to them and were under obligation to dispose of the goods rapidly to customers and to see that a lively turnoverof stock in the warehouse was maintained. The passage in the judgment of Sheil J. upon which the Commissioner relied is as follows:-

“I do not see that those distinctions are of any moment, but, however that may be, it is unnecessary further to consider this sincein my view s.8(1)(b)(iii) is conclusive as to all four agreements. That section, so far as it is invoked here, contemplates thatthe use of the building must be for a trade and that trade, so far as the use is concerned, must be a storage trade. It will notdo that the trade is storage plus something else or something else plus storage. It must be simply a keeping or custody. When oneconsiders the use of the two-thirds of this building it cannot be said that there was simply a keeping or custody in that part ofit. The agreements require a constant active movement of the goods by the respondent, a disposal of them by the respondent.”

Concerning this passage Mr. Sanguinetti says that it is not the ratio decidendi; that it is obiter; that it concerns a provision whichdoes not exist in the local legislation; and lastly that it is not in any event binding upon this court. He maintains that the trueratio is contained in the immediately subsequent paragraph in which the learned judge finds that the respondents were in fact thepurchasers of the goods within the meaning of the sub-section. The goods therefore, on this finding, did not conform to the statutorydescription of goods which had “not yet been delivered to any purchaser.” I incline to the view that Mr. Sanguinetti is correct inseeing the ratio of the decision in this passage, but oddly enough I find myself nevertheless forced to the view that this conclusiondoes not sustain his argument in respect of the facts in the present case. Quite apart from the difference in the legislative provisionsto which Mr. Sanguinetti has drawn my attention there is a further major difference between s.40 of the Ordinance and s.8 of theEnglish Act. Sub-section 2 of Section 8 states that the provisions of sub-section 1 are to apply in relation to a part of a tradeor undertaking in the same way as they apply to a trade or undertaking. The effect of this would be to include within the definitionof “industrial building or structure” not only a building used for the purpose of a trade which consisted in the storage of the specifiedgoods but also a building which was used for the purpose of a trade which consisted in part in the storage of such goods. There isno equivalent provision in our legislation. The curious result of this difference is, to my mind, that a Scottish judge pronouncingupon the Income Tax Act in 1951 expressed a view which was doubtful or at least arguable in relation to the legislation then beforehim but which would seem to be very difficult to answer in relation to the provisions under scrutiny in Hong Kong in 1969. One wouldhave thought that the answer to the observations of Sheil, J. in Dale’s(1) case was that, while the respondent’s trade did not consist solely in the storage of the specified goods but also included the disposalof them as the agents for the manufacturers, that, nevertheless, the part of their trade which did consist in the storage of thegoods would be, by virtue of sub-section 2 of s.8 of the English Act, sufficient to draw the building within the definition. This,at any rate, seems to have been the view of the court of Session in 1966 in the case of Saxene, Lilley and Skinner (Holdings) Ltd. v. Commissioner of Inland Revenue(2) a decision upon which Mr. Sanguinetti strongly relies. There again the point at issue turned upon the interpretation of provisionsidentical with those before the court in Dale’s(1) case, s.8 of the Act of 1945 having been incorporated into the Income Tax Act of 1952 as s.271(1)(b)(iii) thereof. In that case theappellant company had erected a building and let it to Jackson’s Ltd. which was one of its subsidiaries and which carried on thebusiness of warehousing shoes. The appellant had erected the building to provide a central warehouse for all the companies in theappellant’s group. The shoes stored in the warehouse fell into two categories: (1) those manufactured by a member of the group butnot yet delivered to a purchaser; (2) those bought by a member of the group from a manufacturer (whether inside or outside the group).The appellant company admitted that the trade of Jackson’s Ltd. did not consist solely in the storage of goods manufactured but notyet delivered to any purchaser i.e. goods within the description covered in paragraph (iii) of sub-paragraph (b). In other wordsthe admission was that the trade, although a trade of storage, included not only goods of the type specified but also goods of atype not covered by the section. The Inland Revenue submitted that the trade consisted in the storage of shoes, both these deliveredto a purchaser and those yet undelivered and on their behalf it was argued that although part of the goods was within scope of paragraph(d)(iii) that did not mean that a part of the trade consisted in the storage of such goods. The court held, however, that the factthat only part of the goods stored conformed to the statutory description did not matter and that sub-section 2 of s.271 of the 1952Act operated to bring the building within the definition since the storage trade carried on therein consisted in part of the storageof the specified goods.

11. Although the point there turned upon the splitting of the trade between storage of specified and storage of unspecified goods I cansee no reason why this argument should not apply with equal effect to cases where the trade is split between the storage of specifiedgoods and the doing of some other act in relation to them which does not involve the storage of them. However that may be, I am satisfiedthat the law as it exists in Hong Kong affords the benefit of the definition of an industrial building or structure only to suchstructures as are in use for the purposes of a trade the essential feature of which is the simple storage and custody of goods ormaterials. Because of this legislative difference the decision in Saxone’s(2) case is clearly of no assistance to the appellant company and I agree with Mr. Thistlethwaite that the fact that the paragraph underdiscussion in both Dale’s(1) and Saxone’s(2) case is not paralleled by any similar provision in s.40 of the Ordinance is immaterial and that the court does not have to look beyondthe wording of the first line in paragraph (b). The succeeding three subparagraphs merely prescribe the categories of goods coveredby the section and such goods are not covered unless the storage of them is essentially the trade of the person who uses the buildingfor that purpose. The trade of the appellant company is not the storage of such goods but the buying of them in China and the disposalof them by wholesale or retail sale to its shops in the Colony. The storage of the goods is a mere ancillary part of that trade.

12. By parity of reasoning it seems to me that the argument advanced on behalf of the appellant company under paragraph (c) of section40(1) must likewise fail. In this regard Mr. Sanguinetti relied upon the decision in Kilmarnock Equitable Co-operative Society Limited v. Commissioner of Inland Revenue(3). Of all the cases cited this certainly comes closest to covering the circumstances of the present case. Section 271(1)(c) of theIncome Tax Act 1952 is in terms identical with s.40(1)(c) of the Ordinance. The appellant society in that case, carried on the businessof selling coal. It erected a separate building to house machinery for screening coal and packing it in paper bags. The purpose wasto develop a trade in packaged coal and also to provide such coal for sale in the Society’s own shops of which it had about thirty.It was contended for the Society that the building was an industrial building because it was in use for the purpose of a trade consistingin the subjection of coal to a process which involved its being cleaned and then packed in small paper bags. The statement of factsdoes not make it clear whether the actual storage of the coal so treated formed any part of the operation going on in this buildingbut at any rate the parallel with the present case is clear enough in both cases the wider circumstances of a trade included as partof it the temporary housing and handling in a given building of the goods which constituted the subject matter of the trade. Mr.Sanguinetti argues that the goods stored in the upper four floors of the building by the China Leather Shoe Co.Ltd. are subjectedto a process in that they are sorted, packed and repaired upon the premises and he asks me to follow the decision in Kilmarnock’s(3) case. The court in that case held that the building in question was used for the purposes of a trade which consisted in the subjectionof the goods or materials to a process notwithstanding that this processing of the goods formed a small part only of the company’stotal trade as coal merchant. In discussing this case the arguments of Mr. Thistlethwaite and Mr. Sanguinetti were directed principlyto a comparison of the facts with those in the present case Mr. Sanguinetti seeking to identify the two sets of facts and Mr. Thistlethwaiteto distinguish them. I find it difficult to say that there is any outstanding feature to distinguish them conclusively and if thematter were to be concluded on this ground the court would find itself manoeuvreing uneasily at some indeterminate point on the slipperyslope that leads from common sense to absurdity.

13. Although the facts in Kilmarnock’s(1) case seem considerably stronger in favour of the existence of a process, it is difficult to distinguish the process to which thecoal was there subjected from the operation carried out in relation to the shoes of the China Leather Co. Ltd. by the applicationof any principle capable clearly of affirming the existence of a process in the one case and denying it in the other. Once againI think the true distinguishing feature is to be found in the difference to which I have already alluded viz: the absence of anyprovision in the Inland Revenue Ordinance similar to subsection 2 of section 271 of the Income Tax Act 1952. In the Kilmarnock(3) case, dealing with the respondent’s argument that the building in question was not in use for trade or part of a trade which consistedin the subjecting of goods to a process, Lord Clyde at p.186 says as follows:

“The argument was that if the Society’s only trade was cleaning and packing of coal in paper bags, then the situation might be different,but that this Society operated a trade of a general merchant, and only a small part of the total operations involved paper-packagingof screened coal. But the relative proportion of the Society’s various activities appear to me to be quite irrelevant. The buildingin question houses a definitely identifiable part of the Society’s industrial operation and a quite separate activity and that separateactivity alone. This is in my view enough to satisfy the requirement of sub-section (2)”.

Whether it can be said that the leather goods in the present case were subjected to any process or not, it is clear that the upperfour floors were not used for the purposes of a trade which consisted of the subjection of these goods to any process, and even ifits trade be said to consist in part of subjecting to goods to a process we have no provision similar to subsection 2 of the EnglishAct. If there were a similar provision in the Ordinance Mr. Sanguinetti’s argument must have succeeded if not under paragraph (c)or (d)(ii) then certainly under paragraph (d)(iii), Since the acts clearly disclose that the appellant company’s trade consistedat least in part in the storage “of goods or materials on their arrival into the Colony”. For the reasons given the appellant company’sappeal fails.

14. I turn now to the cross appeal by the Commissioner. The relevant provisions of the Ordinance are as follows:

“16(1) In ascertaining the profits in respect of which a person chargeable to tax under this part for any year of assessment there shallbe deducted all outgoings and expenses to the extent to which they are incurred during the basis period for that year of assessmentby such person in the production of profits in respect of which he is chargeable to tax under this part for any period, including-
(a) sums payable by such person by way of interest upon any money borrowed by him, if such money was borrowed for the purpose of producingsuch profits; ……..”
“s.17(1) for the purpose of ascertaining profits in respect of which a person is chargeable to tax under this part no deduction shall be allowedin respect of –
(a) …………………………
(b) …………………………
(c) any expenditure of a capital nature or any loss or withdrawal of capital, ……..”

It is agreed that the building in question was financed upon overdrafts with the company’s banks. The appellant company complainsthat in the corporation profits tax assessment directed to the company for the year 1965/66 no allowance was made by way of deductionfrom chargeable profits of the money spent in paying the interest upon the overdrafts in the year ending 31st March, 1965 which wasthe basis period for the year of assessment. The building was ready for occupation on the 1st March, 1965 and the interest paid bythe company for the year ending 31st March, 1965 upon the overdrafts amounted to $42,504. The amount chargeable against the periodup to the 1st of March was $39,670. The point for decision is whether or not the Board was correct in holding that the money spentin paying the interest for that period was not an expenditure of a capital nature and was therefore deductible under s.16. The findingof the Board on this issue is in the following terms:

“the Board’s view is that the vital words are ‘for any period’, and its opinion is that those words are wide enough to cover the presentcase (“facts” Item(3)) particularly as the interest was incurred in the construction of a building to house the manufacturing businessof the appellant.”

Of this Mr. Thistlethwaite complains that it gives an illogical prominence to the words ‘for any period’ and in doing so that theBoard has ignored the distinction between capital expenditure and revenue and consequently has deprived s.17(1)(c) of significance.Up to the 1st March, 1965, he says, money spent upon interest on the overdraft is to be regarded as a capital expenditure and isnot therefore an outgoing incurred in the production of profit in that period. He concedes that money paid by way of interest afterthe 1st March when the building was ready for occupation and capable immediately of producing revenue may, under section 16(1), bededucted as an expenditure for the production of profit and he says that in fact an allowance has been made on this basis for theperiod from 1st March to 31st March 1965. It is to be observed that the case stated by the Board on this particular question especiallyasks whether or not the Board failed to apply the test of s.17(1)(c) to see if this expenditure was an expenditure of a capital nature.In the decision of the Board there is no discussion nor indeed any mention of section 17 and its exclusion of capital expenditurefrom deductible items. Mr. Sanguinetti maintains, however, that it is implicit in the Board’s decision that they have consideredsection 17 and they have come to the conclusion that the payment of interest in this case was to be considered as an item of revenueexpenditure made in the ordinary course of the company’s trade. He drew my attention to a passage in Halsbury(4) in which various authorities are quoted in support of the proposition that a decision of the Commissioner as to whether a particularexpenditure is deductible must stand if there was evidence on which a person properly instructed in the law could come to the conclusionat which they arrived. This passage however deals with the question (arising from the wording of s.137(a) of the Act of 1952) ofwhat is “expenditure wholly and exclusively for purposes of trade” and is said by the learned authors to be a question of law. Atpage 161 of the same volume para.280 under the heading: “capital expenditure not deductible”, the following statement appears:

“…..and the question whether the particular payments are of a capital or revenue nature is comparable to the like question regardingreceipts. One test is whether the expenditure produces an asset or at least an advantage to the permanent and enduring benefit ofthe trade; if so, it is not an item affecting the revenue account (q).”

In footnote (q), the leading cases to which both sides here have referred viz: British Insulated and Helsby Cables, Ltd., and Atherton,(5) and Vallambrosa Rubber Company, Ltd. v. Farmer (Serveyor of Taxes),(6) are cited and the note continues:

“This question is, it is thought, quite distinct from the question whether the expenditure was wholly and exclusively incurred forthe trade so as to be within the requirements of s.137(a) of the Income Tax Act, 1952 (15-16 Geo.6 and 1 eliz 2,3,10) for allowanceas a trade expense; ……..”

The passage to which counsel referred me does not therefore seem to support his contention that a finding of the Board, whether impliedor explicit, should not be disturbed if there was evidence to sustain it. It remains, however, to scrutinize that finding in accordancewith the tests relevant to establish whether or not the expenditure was one of a capital or a revenue nature. Mr. Sanguinetti alsoreferred me to the case of The Lothian Chemical Co.Ltd. v. Rogers, and The Lothian Chemical Co.Ltd. v. Commissioner of Inland Revenue(7), in support of his contentions firstly, that the question whether a particular expenditure is a revenue or capital expenditure, isa question of fact and that ordinary commercial principles should be allowed prevail in deciding it and secondly, that if there wasevidence before the Board to support the implicit finding that this expenditure was of a revenue nature that this court could notinterfre with that finding. In the opinion of Lord Clyde on page 522, however, I find the following:-

“Our attention was directed to a recent case decided in the House of Lords, the case of the British Insulated and Helsby Cables, 1926A.C.205, in which it is apparently laid down that a finding by the commissioners in proceedings of this kind that a certain expenditureis capital expenditure is conclusive and apparently indicates that the question as to the true character of the particular itemsof expenditure with regard to which such a finding has been made is removed from the jurisdiction of the Court of Appeal to the Commissioners.My Lords, if I correctly understand the view to be as I have stated it, then all I can say is this, that in this case there was veryample evidence to justify the judgment of the Commissioners. I should like to guard myself from being supposed to infer from theOpinions to which I have referred, that a finding in fact that a particular expenditure is a capital expenditure necessarily foreclosesa consideration by the Court of Appeal of a particular piece of expenditure in the light of the terms of the Income Tax Acts themselves.I quite understand that in so far as the question is a mere question of fact it is probably removed from us except in so far as theevidence might be regarded as not sufficient to justify it.”

15. In the speech of the Lord Chancellor in the British Insulated and Helsby Cables case(5), at page 192, the following passage occurs:

“But there remains the question, which I have found more difficult, whether apart from the expressed prohibitions, the sum in questionis (in the words used by Lord Sumner in Usher’s case) a proper debit item to be charged against incomings of the trade when computingthe profits of it; or, in other words, whether it is in substance a revenue or a capital expenditure. This appears to me to be aquestion of fact which is proper to be decided by the Commissioners upon the evidence brought before them in each case; but whereas in the present case, there is no express finding by the Commissioner upon the point, it must be determined by the courts uponthe materials which are available and with due regard to the principles which have been laid down in the authorities.”

The proposition put to me, therefore, seems doubtful on the authorities cited. But even if it be correct to say that a finding offact by the Board should not be disturbed, if there is evidence to support it, it must be obvious that in the present case, as inthe British Insulated and Helsby Cables case(5) there was no express finding by the Board upon the point.

16. Mr. Sanguinetti has urged me to have regard to the fact that the wording of s.16(1)(a) is not the same as that of similar legislationelsewhere. I have been referred to a number of decisions in the East African, South African and English courts, and to the speciallegislation under which each case was brought. It is quite true that all these legislative provisions share a like intendment withthe local Ordinance and that all differ from each other widely in the actual expressions used. I am satisfied however that on thisquestion of deductible expenses the courts of all four jurisdictions have found the key to the distinction between deductible andnon-deductible outgoings in the further distinction between what constitutes a capital and what a revenue expenditure. In none ofthe English decisions and in one only of the East African decisions to which I have been referred (Overland’s case(8)) was the court concerned with interest upon money borrowed to produce an income earning asset. On the other hand in the passage fromSilke on South African Income Tax upon which the Commissioner at first instance relied it is clear that the principle suggested is supported by certain South Africanauthorities which were directly concerned with the payment of such interest. Since the wording of the legislation in each case issubstantially different none of these authorities can be of more than persuasive force except in so far as this vital question asto the distinction between revenue and capital expenditure is dealt with and decided. For this reason I cannot agree that the Englishdecisions should be considered of superior relevance to our present circumstances as Mr. Sanguinetti suggests. But in any event,the British Insulated and Helsby Cables Limited(5) decided in 1925, does put forward a test of the distinction between these two types of expenditure which has been followed consistentlyin subsequent English cases and in courts in East Africa. It is a principle which is quite clearly not in conflict with the suggesteddistinction to be found at page 199 in Silke and upon which the Commissioner relied. At a point on the same page subsequent to the passage already cited at page 192, in the judgmentof Viscount Cave in the British Insulated and Helsby Cables Ltd.(5) the following appears:

“Now, in Vallambrosa Rubber Company of Farmer 1910 S.C.519, 5 Tax Case 528, Lord Dunedin as Lord President of the Court of Session, expressed the opinion that ‘in a rough way’it was ‘not a bad criterion of what is capital expenditure and what is income expenditure to say that capital expenditure is a thingthat is going to be spent once and for all and income expenditure is a thing which is going to recur every year’; and no doubt thisis often a material consideration. But the criterian suggested is not, and was obviously not intended by Lord Dunedin to be, a decisiveone in every case; for it is easy to imagine many cases in which a payment though made once and for all, would be properly chargeableagainst the receipts for the year. ………… But when an expenditure is made not only once and for all, but with a view to bringinginto existence an asset or an advantage for the enduring benefit of a trade, I think that there is a very good reason (in the absenceof special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenuebut to capital. For this view there is already considerable authority.”

It is upon this very passage that Forbes, Vice President, relied in the case of the Commissioner of Income Tax v. Overland Company Limited(6) reported at page 307 of the East African Tax Cases Vol. 3. Mr. Sanguinetti alleges that the Inland Revenue have relied upon one testonly in deciding this question viz: whether or not the building in question was immediately capable of yielding revenue at the timethe interest was being paid out on the overdraft which was used in eredting it. Mr. Thistlethwaite seeks to adopt the principle suggestedby Silke which refers to this test and it is true that he did not suggest any other test. But in the authority upon which the respondent himselfrelies namely the British Insulated and Helsby Cables Ltd. case.(5) LoViscount ca…(illegibl) roush and ready test suggested by Lord Dunedin in Vallambrosa by an additional test which in substancediffers not at all from the test suggested in Silke viz: that a payment is to be considered a capital item if it has been made to create an asset for the enduring benefit of the business.Up to the date at which the asset comes into existence as an earner of revenue every payment of interest which is made may fairlybe regarded as an item paid once and for all towards the bringing of that asset into existence. Once it has achieved existence theasset is one which endures for the benefit of the business.

17. The difficulty is-that the Board does not appear to have made any express finding concerning the vital question as to whether thisexpenditure is to be regarded as of a revenue or a capital nature. Had they directed their minds specifically to that point, it isdifficult, on the authorities available, to believe that the members could have come to the conclusion which they did. They purportedto ground their decision on the words “for any period” occurring in the last line of the first paragraph of s.16: They would seemto have come to their conclusion upon the basis that subsection (1)(a) permitted the deduction of interest paid upon money borrowedduring the year of assessment provided that the intention in borrowing such money was the intention of producing profits at any periodeven in the future beyond the basis heriod for the year of assessment. No doubt the wording of the sub-section is wide enough inmere logic to include such a notion. But that is not the only question to which they should have turned their minds. They shouldalso have considered the question of the nature of such payments of interest and had they done so it must have become apparent thatsection 17 held matter which was directly relevant to that question and that the effect of the section was to limit the scope ofthe words on which they relied. The fact that they have not expressly referred to the distinction between capital and revenue issome indication that they may have overlooked the significance of section 17 in relation to the payment of interest on borrowed money.But even if this is not the case and if section 17 was considered by them, I take the view that they were mistaken in their interpretationof section 16(a) in relation to the circumstances under which the interest was paid in this case. Assuming that they did attend tothese two facets of the question before them and taking their conclusion as it stands, one would have expected that their findingwould have been firstly that the wording “for any period” was wide enough to catch such an expenditure, and, secondly, that the expenditureitself was not of a capital but was of a revenue nature.

18. Mr. Sanguinetti also urged upon me a subsidiary argument apparently at the suggestion of his client and not, be it added, with anygreat appearance of confidence. This argument was based on certain passages from manuals relating to Income Tax and Accountancy procedures.A passage which is fairly representative of the argument at its strongest appears in Spicer and Pegler on Income Tax and Profits Tax 20th edition at p.179 where the learned authors say:

“Interest other than annual interest e.g. interest on short loans from bankers and others, is payable without deduction of tax andis allowed as an expense, the assessment being made upon the recipient …….. Interest paid on temporary loans is allowable as an expenditure by means of which the company procure the use of the thing by which they make a profit (ScottishNorth American Trust Limited v. Farmer (1912), A.C.118).”

That was a case in which the respondent company carried on an investment business and had under its Memorandum of Association powerto borrow and raise money by way of loan, discount, cash, credit, overdraft, etc. and, further, to grant security for any sums ofmoney so borrowed. In the course of its business the company purchases in New York bonds, stocks, and other securities of Americanrailroad and other companies. The value of the purchases exceeded the amount of the respondent’s available cash, and certain of thesecurities which were lying in New York they pledged to their bankers in New York, in consideration of which the bankers allowedthe respondent’s banking account in New York to be overdrawn. The amount of the overdraft fluctuated from time to time as the respondent’sbought and sold securities, and they were charged periodic interest at current rate from day to day. In 1906 they opened a loan account,in addition to the overdraft, with their bankers, on which the bankers granted a loan not exceeding $200,000 for the period of sixmonths at 6%. The respondents in stating their profits for assessment for income tax deducted the amount of interest paid to thebankers, but their deduction was disallowed by the Commissioner on the ground that the interest in question was interest on capital.It was held by the House of Lords that the Commissioner was wrong in that decision because the money borrowed by the respondentscould not be treated as capital and that the interest paid for the use of the money was an outgoing by means of which the respondentsprocurred the use of the thing by which they made a profit.

19. It is clear that no such large principle as the respondent would like to deduce from this case can be drawn from it. The differencebetween interest paid over years upon overdraft employed to produce a building and interest on short term loans paid by a companywhose business was the business of dealing in investments and securities of all classes is very obvious. Presumably the bonds, stocks,etc. which they purchased fell immediately subject to the Company’s ordinary process of trade by investment, sale, exchange or otherwise.In the present case interest was paid upon the overdraft for a considerable period before the asset to which it relates became anearner of income for the company.

20. In any event it is of interest that in the passage immediately subsequent to that already quoted from Spicer and Pegler it is said that:

“Interest on large advances to finance business transaction, was held in the circumst…(illegibl) to be in the nature of intereston fixed capital, as distinct from temporary accommodation, and, whether short or annual interest, was expenditure in respect ofcapital and consequently not an admissible expense for purposes of Income Tax (The European Investment Trust Company Limited v. Jackson (1932), 18 P.C.1).”

21. For these reasons I have come to the conclusion that the payment of interest on the overdraft in the period up to the 1st of March1965 was not a deductible expenditure.

22. The answers to the questions in paragraph 7 of the case stated in respect of the second head of appeal are

(a)No;
(b)Yes.

On the third head of appeal “no”.

23. The findings of the Board as recorded in paragraphs 7 to 9 of the Decision are varied accordingly and the findings of the Commissionerthereon are reinstated. The finding of the Board as recorded in its decision in paragraphs 11 to 15 is upheld and so accordinglyis the determination of the Commissioner under this head. The appellant company’s appeal fails and the cross appeal by the Commissionersucceeds and the costs of the appeal and cross appeal will therefore go to the Commissioner.

(A.M. McMullin)
Puisne Judge.

:

(1) 1950 52 V. 32 Tax Cases. part 10,p.487.

(2) 1966 Tax Report p.195.

(3) 1966 Taxation Reports p.185.

(4) Vol.20 at p.166 para.286, 3rd ed.

(5) (1926) A.C.205 H.L.

(6) (1910) S.C.519.

(7) Vol. 11 Tax Case p.509

(5) 1926 A.C. p.205

(8) 3 South African Tax Cases 307.