Lim Foo Yong Sdn. Bhd. v Comptroller-General of Inland Revenue (Malaysia)
| Jurisdiction | UK Non-devolved |
| Judgment Date | 20 March 1986 |
| Date | 20 March 1986 |
| Court | Privy Council |
Privy Council.
Mr. Stewart Bates Q.C., Mr. James Puthucheary (of the Malaysian Bar) and Mr. Stephen Allcock (instructed by Thomas Cooper & Stibbard) for the company.
Mr. D. C. Potter Q.C. and Mr. K. Prosser (instructed by Stephenson Harwood) for the Comptroller-General of Inland Revenue.
Before: Lord Bridge of Harwich, Lord Templeman, Lord Griffiths, Lord Ackner and Lord Oliver of Aylmerton.
The following cases were referred to in the judgment:
Craddock v. Zevo Finance Co. Ltd. TAX(1946) 27 T.C. 267
Edwards v. Bairstow & Anor. ELR[1956] A.C. 14
Simmons v. I.R. Commrs. WLR[1980] 1 W.L.R. 1196
The Royal Insurance Company Limited v. Stephen TAX(1928) 14 T.C. 22
Income tax - Malaysia - Commissioners - Sale of hotel - Whether profit capital or income - Whether Commissioners had sufficient evidence before them to conclude that proceeds of sale were profits and taxable - section 10 subsec-or-para (1)Income Tax Ordinance 1947 (Malaysia), sec. 10(1)(a).
L, the taxpayer, was a private limited company incorporated in Malaysia. It was set up to purchase property for investment and to buy and sell real and personal property. It also carried on the business of hotel, restaurant and café keepers.
In 1956, L acquired land on which it erected a hotel. In 1959 a wholly owned subsidiary was incorporated with the principal object of carrying on a hotel and restaurant business. L owned 90% of the issued share capital of the subsidiary. In 1962 L sold the hotel and land to the EPF, a statutory body. The agreement provided for a lease back of the hotel to L for ten years and for L to repurchase the property at the end of that period at the original purchase price. In 1963, in order to raise further capital, L sold its rights under the lease and repurchase agreement, sold some shares in the subsidiary company to a public company and sold further shares in that company to members of the public.
L appealed to the Special Commissioners against two notices of additional assessment to income tax dated 1 July 1967 in respect of the profits made on the sales. The Commissioners found that the sums in question represented profits of a trade which were taxable as income. Harun J. in the High Court of Malaysia allowed the taxpayer's appeal against that decision, but the Federal Court reversed that judgment and reinstated the notices of assessment. The taxpayer appealed to the Privy Council.
The question for the court was whether the Federal Court was right in holding that there was evidence before the Special Commissioners on which they could properly reach the conclusion that each of the four sums was a trading profit and taxable accordingly.
Held, allowing the taxpayer's appeal:
1. The Special Commissioners had found that the sums in question represented profits of a trade, so the burden lay on the taxpayer to show that that decision was wrong in law. Since the question whether a receipt was revenue or capital was one of fact and degree, the taxpayer had to demonstrate that the true and only reasonable conclusion was the opposite to that reached by the Commissioners.
2. By postulating as "the crux of the case" the nature of certain property dealings seven years before the relevant transactions, the Commissioners had overstated their importance to a degree which amounted to a misdirection and cast doubt upon their process of reasoning. They had both misdirected themselves by reaching conclusions inconsistent with primary facts found by them and drawn inferences from matters which had no probative value in supporting their conclusions.
3. It was clear from the transaction involving the sale of the hotel taken as a whole that it was designed to raise finance over a fixed period on a capital asset for the expansion of the hotel business. The whole tenor of the transaction indicated an intention by the taxpayer to retain the asset, i.e. the hotel and the profit element in it, as a capital asset. It did not follow from the fact that one of the company's objects was to deal in land, that the hotel Merlin and the land on which it was built were acquired and held as trading stock. Similarly, the sale of shares to the public, and to friends and associates of the proprietor, was for the purpose of raising capital to enable the hotel to expand, and could not be described as a "business of carrying out a profit making scheme."
4. The burden on the taxpayer of demonstrating that the assessments were erroneous and that there was no evidence to support the Commissioners' findings was no higher than that in other civil proceedings. The facts found in relation to the acquisition, development and holding of the hotel lands did not admit of any other reasonable conclusion than that they were acquired and held as capital.
Lord Oliver of Aylmerton: This is an appeal from a judgment dated 14 August 1982 of the Federal Court of Malaysia (RajaAzlan Shah C.J., Salleh Abas F.J. andAbdoolcader J.) allowing an appeal by the respondent, the Comptroller-General of Inland Revenue, from an order made byHarun J. in the High Court on 20 March 1979 which had allowed the appellant's appeal by way of Case Stated by the Special Commissioners of Income Tax who had dismissed the appellant's appeal against two notices of additional assessment dated 1 July 1967 in respect of the years 1963 and 1964 respectively.
As regards the year 1963, the appellant challenged the inclusion in its income tax assessment of a sum of $2,622,510 representing the profit on the sale by the appellant of certain land forming the site of a hotel, which profit the Revenue claimed to be of a revenue nature. As regards the year 1964, it challenged the inclusion of a sum of $4,201,000 representing the profit on the sale of the appellant's rights under a lease and a repurchase agreement, a sum of $494,000 representing its profit on the sale of shares in a subsidiary company to a public company, Merlin Hotels Malaysia Limited, and a sum of $288,332 representing the profit on the sale of shares in that company to members of the public.
section 10 subsec-or-para (1)Section 10(1)(a) of theIncome Tax Ordinance 1947, which was the provision in force at the time of the assessments challenged by the appellant, provided (so far as material) that:
Income tax shall…be payable…upon the income of any person…in respect of (a) gains or profits from any trade, business, profession or vocation, for whatever period of time such trade, business, profession or vocation may have been carried on or exercised.
It was the appellant's contention that the four sums in question were not trading receipts but the proceeds of the realisation of capital assets and the essential question raised on the appeal is whether the Federal Court was right in holding, as it did, that there was evidence before the Special Commissioners upon which they could properly reach the conclusion that each of the four sums was a trading profit and taxable accordingly.
The appellant, Lim Foo Yong Sendirian Berhad, is a private limited company incorporated on 8 April 1954 at the instance of Lim Foo Yong. It is a family company and its two directors are Lim Foo Yong and his wife. It is unnecessary to refer in terms to the appellant's objects as set out in its Memorandum of Association. It is sufficient for present purposes to say that they include purchasing property for investment and, equally, the trafficking in real or personal property. It is also worth mentioning that the objects include the carrying on of the business of hotel, restaurant and café keepers and other similar objects. At the date of the appellant's incorporation, Lim Foo Yong was the owner of a small hotel called the Harlequin Hotel and of a number of plots of land which he had purchased with a view to its expansion. These were acquired by the appellant in 1955 and 1956 but were subsequently sold in 1958, 1959 and 1964. It is not disputed that the profits on these sales were taxed as trading profits, as were the compensation received from the compulsory purchase of two plots acquired in 1957 and the profit on the sale by the appellant of a shophouse which it had acquired from Lim Foo Yong in 1955.
The relevant history for the purposes of this appeal starts with the acquisition by the appellant in 1956 of five vacant lots upon which, between 1957 and 1959, it caused to be erected a hotel known as the Hotel Merlin. These lots are conveniently referred to as "the Merlin land". In 1959 the appellant caused to be incorporated a wholly owned subsidiary, Hotel Merlin Limited, whose principal object was the carrying on of a hotel and restaurant business and in which it held 98,800 shares, being over 90% of the issued share capital. The hotel was leased to Hotel Merlin Limited which conducted the hotel business there for the next four years. The finance for construction of the hotel (the total cost of which, including the land, was $2,377,490) was initially found by raising a loan from a bank but subsequently met by a loan of $2,000,000 from Employees Provident Fund ("E.P.F.") on the security of a charge of the Merlin land.
Thus matters stood in 1962 when there took place the first transaction out of which this appeal arises. On 30 March 1962, three separate documents were executed, the parties in each case being the appellant and...
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