Wharf Properties Ltd v Commissioner of Inland Revenue
| Jurisdiction | UK Non-devolved |
| Judgment Date | 27 January 1997 |
| Date | 27 January 1997 |
| Court | Privy Council |
Hong Kong - Revenue - Profits tax - Deduction of expenses - Taxpayer borrowing money to purchase tram depot for redevelopment - Whether interest on loans “expenditure of a capital nature” - Whether deductible in ascertaining taxpayer's chargeable profits -
Section 16(1) of the Inland Revenue OrdinanceF1 provided for the deduction from the profits in respect of which a person was chargeable to profits tax of expenses incurred during the basis period for that year of assessment, including sums payable by way of interest on money borrowed for the purpose of producing such profits. Section 17(1)(c) provided that no deduction would be allowed in respect of any expenditure of a capital nature. In 1987 the taxpayer agreed to buy a tram depot in order eventually to redevelop it to produce rental income. It paid part of the purchase price in 1987 and the balance in 1988, having taken short term loans from banks and financial institutions on which it paid interest. In its profits tax returns for the years of assessment 1987–1988 and 1988–1989 the taxpayer deducted the interest payments, but the commissioner disallowed the deductions. He rejected the taxpayer's objections to the assessments, and by consent the taxpayer's appeal against that determination was transferred to the High Court of Hong Kong. The judge dismissed the appeal holding that the interest payments made during the years in question were expenditure of a capital nature so that they were not deductible under section 17(1)(c). The Court of Appeal of Hong Kong upheld that decision.
On the taxpayer's appeal to the Judicial Committee: —
Held, dismissing the appeal, (1) that although the interest payments, having been made in respect of money borrowed for the purpose of producing taxable profits in future years, were prima facie within section 16(1)(a), no deduction would be permitted if they fell within one of the categories specified in section 17; that whether expenditure was of a capital nature within section 17(1)(c) was a question of law (post, pp. 336H–337A, D).
(2) That the payment of interest could be either a capital or revenue expense, depending upon the purpose for which it was paid, which could only be determined by examining the purpose of the loan during the period for which the interest was paid and, since in the two years of assessment the money had been borrowed by the taxpayer for the purpose of acquiring and creating a capital asset and not for holding it as an investment which produced income, the interest had been paid for a capital purpose; and that, accordingly, the interest payments were within section 17(1)(c) and did not fall to be deducted from the profits on which the taxpayer was chargeable to tax for those years (post, pp. 337H–338A, D–E, 339D–E).
Per curiam. Once a capital asset has been acquired or created and is producing income, the interest paid on a loan to acquire that asset is part of the cost of generating that income and is therefore a revenue expense (post, p. 340C).
The following cases are referred to in the judgment of their Lordships:
Beauchamp v. F. W. Woolworth Plc.[
Chancery Lane Safe Deposit and Offices Co. Ltd. v. Inland Revenue Commissioners[
Commissioner of Inland Revenue v. Mutual Investment Co. Ltd.[
Commissioner of Inland Revenue v. Swire Pacific Ltd.[
Commissioner of Taxes v. Nchanga Consolidated Copper Mines Ltd.[
European Investment Trust Co. Ltd. v. Jackson(
Farmer v. Scottish North American Trust Ltd.[
Hallstroms Pty. Ltd. v. Federal Commissioner of Taxation(
Tai On Machinery Works Ltd. v. Commissioner of Inland Revenue[
Travelodge Papua New Guinea Ltd. v. Chief Collector of Taxes(
The following additional cases were cited in argument:
B.P. Australia Ltd. v. Commissioner of Taxation of the Commonwealth of Australia[
Bennett v. Ogston(
Ben-Odeco Ltd. v. Powlson[
Sun Newspapers Ltd. v. Federal Commissioner of Taxation(
Appeal (No. 40 of 1996) with leave of the Court of Appeal of Hong Kong by the taxpayer, Wharf Properties Ltd., from the judgment of the Court of Appeal of Hong Kong (Litton V.-P., Godfrey and Ching JJ.A.) given on 13 December 1995 dismissing an appeal from the judgment of Patrick Chan J. of 30 September 1994 dismissing the taxpayer's appeal against the determination of the Commissioner of Inland Revenue dated 19 March 1994 in respect of profits tax assessments for the years of assessment 1987–1988 and 1988–1989 that the taxpayer was not entitled to deduct as an expense the interest payments made by it to banks and...
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