|
www.ipsofactoJ.com/highcourt/index.htm
[2000] Part 1 Case 5 [HCM] |
|
www.ipsofactoJ.com/highcourt/index.htm
[2000] Part 1 Case 5 [HCM] |
|
|
HIGH COURT OF MALAYA |
Sunrise (PG) Sdn Bhd
-
vs -
The Director General of Inland Revenue
|
Coram ABDUL HAMID MOHAMAD J |
8 DECEMBER 1999 |
Judgment
Abdul
Hamid Mohamad J
This
is an appeal against the decision of the Special Commissioners of Income Tax
confirming the assessment to income tax in the sum of RM112,339.60 in
respect of Year of Assessment 1983. The Special Commissioners decided that
the disposal of three pieces of land i.e. lot 729, 730 and 57(1), all in the
North East District of Penang ("subject land") by the appellant to
Primo Corporations Sdn Bhd ("Primo") was an adventure in the
nature of trade and therefore the profit arising therefrom was taxable under
s 4(a) of the Income Tax Act 1967. The total tax payable inclusive of excess
profits tax and development tax was RM130,424.50.
The
Special Commissioners gave their decisions on May 26, 1993. The appeal was
registered in this court in 1996. On May 29, 1996, I dismissed the appeal.
On March 4, 1999 the appellant obtained leave to appeal to the Court of
Appeal. Hence this ground of judgement.
To
give a clearer picture of the events, I shall state the facts, either as
agreed, found by the Special Commissioners or are undisputed, in
chronological order.
On December 31, 1969 Rekin Sdn Bhd ("Rekin") was incorporated with the following subscribers: Chew Kok Kin (grandfather of Peter Chew, the managing director of the appellant), Chew Meng Two (uncle of Peter Chew) and Madam Tung Yion Fong (mother of Peter Chew). Among the objects of the company were:
|
3. |
(a) |
To erect and construct houses, building or works of every description on any land of the Company ... |
|
|
.... |
|||
|
(c) |
To carry on business of capitalists ... and to undertake and execute all kinds of financial, commercial, trading and other operations. |
||
|
.... |
|||
|
(h) |
To carry on any other business which may in the opinion of the Directors be conveniently carried on by the Company, without in any way limiting any of the objects specified ... |
||
|
(i) |
To perform all or any of the following operation acts or things: |
||
|
.... |
|||
|
(2) |
To sell, let, dispose of or grant rights over all or any property of the Company. |
||
|
.... |
|||
|
(8) |
To enter into arrangements for joint working in business, or for sharing profits ..... |
||
On
January 9, 1970, the company acquired Holdings No 186(2), 282, 284, 286 and
part Holding No 172(2), TSI North East District, Pulau Pinang ("the
Kelawai Road land") from Disco Sdn Bhd ("Disco") for a
consideration of RM190,000. Disco was owned by Peter Chew's father and
mother.
On
the same day Rekin also bought Lot 494(2), Lot 494(3), Lot 674 (Mukim 14)
Seberang Perai Tengah for RM29,000 from Khoo Kay Peng.
In
1972, plans for a housing project of the Kelawai Road land were made.
RM3,200 was incurred for the preparation of the plans and was capitalised.
On
April 17, 1973 Rekin bought the subject lands from Disco for RM58,000. There
was an old bungalow on the land. According to the appellant, the intention
was to build a guest house for friends and business associates of the Chew
family. However, later the appellant decided to pull down the old bungalow
in order to build a "dream house" for the Chew children,
consisting of a three-storey semi-detached house where all the Chew children
could all stay under the same roof. Plans were submitted to the Majlis
Perbandaran Pulau Pinang (MPPP) to this effect and were approved. However,
the "dream house" was never built and the approval was allowed to
lapse. But the development cost totalling RM26,649 which includes RM10,000
architects fees was capitalised and appeared in the Directors' Report for
1973.
In the following year, 1974, Sunrise Towers Sdn Bhd ("Sunrise Towers") was incorporated. There appears to be some confusion on the part of the Special Commissioners whether Sunrise Towers was incorporated in 1974 or that Rekin changed its name to Sunrise Towers in 1974. According to paragraph (vi) of "Other Facts Found During the Trial" at p 9 of the case stated:
|
Rekin Sdn. Bhd. changed its name to Sunrise Towers Sdn. Bhd. in 1974. |
According to paragraph (iii) of the statement of agreed facts:
|
On 30th January 1980 Rekin Sdn Bhd changed its name to Sunrise (PG) Sdn. Bhd |
According
to the written submission of learned counsel for the respondent Sunrise
Towers Sdn Bhd was incorporated in 1974.
The gist of submission for the appellant states that Rekin changed its name to Sunrise (Penang) Sdn Bhd (the appellant) on January 30, 1980 but makes no mention about Rekin changing its name to Sunrise Towers in 1974 or that Sunrise Towers was incorporated in 1974.
So, we see that both learned counsel for the appellant and the respondent as well as the Special Commissioners are unanimous that Rekin changed its name to Sunrise (Pg) Sdn Bhd (the appellant's present name) in 1980. I am of the view that the Special Commissioners were mistaken when they said that Rekin changed its name to Sunrise Towers in 1974 and in 1980 Rekin again changed its name to Sunrise (Pg) Sdn Bhd. If Rekin had changed its name to Sunrise Towers in 1974, it would not be known as Rekin anymore but as Sunrise Towers since the date of such change.
It is also clear that Sunrise Towers and Rekin, later known as Sunrise (Pg) Sdn Bhd (the appellant) are two different companies. Otherwise, Rekin (or the appellant) could not have sold part of the Kelawei Road land to Sunrise Towers as it would, then, be selling to itself. In fact the Special Commissioners, in paragraph (xv), p 11 of the case stated correctly that part of the Kelawai Road land was transferred by Rekin to Sunrise Towers in 1975. Furthermore, the appellant could not be one of the shareholders of Sunrise Towers, as it cannot be a shareholder of itself.
So,
the correct fact is that Sunrise Towers was incorporated in 1974, as stated
in the respondent's submission. In 1975 Rekin transferred part of Kelawei
Roads land to Sunrise Towers in exchange for 44,000 shares of RM1 each fully
paid in Sunrise Towers. The shareholders of Sunrise Towers were the
appellant, Peter Chew, his father, his uncle and his mother. The directors
were the same as in Rekin.
For
that transfer, Rekin was assessed to income tax in the sum of RM101,620.40
which was paid.
On January 30, 1980, Rekin changed its name to Sunrise (Pg) Sdn Bhd, the present name of the appellant. On April 2, 1980, the appellant, by a board resolution changed the objects Clause 3(a) to state that the object of the company was to hold for investment shares, stocks etc - Exh P1. On July 1, 1981, the appellant, by a resolution changed objects Clause3(f) to read:
|
3. |
(f) |
To purchase or otherwise acquire for investment lands, houses, buildings, plantations and any other property of any tenure and any interest therein and any movable property of any description or any interest therein. |
This
change was not communicated to the Registrar of Companies. But eleven days
after it was passed, the respondent was informed of the change. It should
also be noted that the objects in Clause 3(c), (h) and (i) were not changed.
In
the following year, 1982, the appellant entered into a joint-venture
agreement with Beauticon Development Sdn Bhd ("Beauticon" ) to
develop the subject land. For that purpose the appellant and Beauticon
incorporated a company called Primo Sdn Bhd ("Primo"). The
appellant would transfer the subject land (6,633 sq ft) to Primo in exchange
for 380,000 shares of RM1 each in Primo, the same number of shares held by
Dato' Loy eventhough Dato' Loy's land was much bigger, i.e. 17,514 square
feet.
It
is the income from this transfer that becomes the issue in this case, i.e.
whether it is chargeable to income tax.
It
should also be noted that from 1971-1976 development tax was imposed on the
appellant and was paid. From 1971-1983, the appellant's computation of tax
forwarded to the respondent was based on the method adopted by housing
developers. The appellant had claimed that the adjusted loss from the
business be carried forward. The appellant also claimed that the capital
allowance for the car used in the business be carried forward, which was
allowed. The appellant had also declared its adjusted loss from a business
in its return forms from 1971 to 1983.
Something
should be said briefly, about the function of the court in an appeal from
the decision of the Special Commissioners by way of case stated.
The appeal is only on a question of law - paragraph 34, Schedule 5 of the Income Tax Act 1967. It follows that the findings of facts of the Special Commissioners are final unless such findings cannot be supported by evidence. The power of the High Court in an appeal by way of case stated is best described by Lord Denning in the House of Lord's case of Griffiths (Inspectors of Taxes) v Harrison (Watford) Ltd [1962] 1 All ER 909 @ 916:
|
Now the powers of the High Court on an appeal are very limited. The judge cannot reverse the Commissioners on their findings of fact. He can only reverse their decision if it is "erroneous in point of law". Now here the primary facts were all found by the commissioners. They were stated in the case. They cannot be disputed. What is disputed is their conclusion from them. It is now settled, as well as anything can be, that their conclusion cannot be challenged unless it was unreasonable, so unreasonable that it can be dismissed as one which could not reasonably be entertained by them. It is not sufficient that the judge would himself have come to a different conclusion. Reasonable people on the same facts may reasonably come to different conclusions: and often do. Juries do. So do judges. And are they not all reasonable men? But there comes a point when a judge can say that no reasonable man could reasonably come to that conclusion. Then, but not till then, he is entitled to interfere. |
The onus is on the appellant to show that the transaction is not an adventure in the nature of trade and therefore the amount is not taxable. This is clearly provided by paragraph 13 of Schedule 5 of the Income Tax Act 1967:
|
13. |
The onus of proving that an assessment against which an appeal is made is excessive or erroneous shall be in the appellant. |
See
also ABC v CIT [1959] MLJ 162.
There
is no point to try to define what "trade" or "an adventure in
the nature of trade" is. It is not possible of being defined
exhaustively. Statements to be found in CIR v Korean Syndicate 12 TC
196, Hesheth Estates v D Craddock 25 TC 7, Swith v Anderson 15 Ch D
258 and MNR v James Taylor 56 DTC 11125 (a Canadian case) and ALB
Co Sdn Bhd v DGIR [1979] 1 MLJ (PC) bear testimony to this.
Lord Bridge of Harwick in Waylee Investment Ltd v The Commissioner of Inland Revenue [1991] 1 CLJ 211 (PC) puts it very succinctly, when he says:
|
The law has never succeeded in establishing precise rules which can be applied to all situation to distinguish between trading stock and capital assets. |
Raja Azlan Shah FJ (as he then was) had this to say in Investment Ltd v Comptroller General of Inland Revenue [1975] 2 MLJ 208 (FC), at p 200:
|
The question to be asked and answered is whether the facts reveal a realisation of income from business of trafficking in immovable property carried on by the appellant company ... I think it right to emphasise what has already been treated judicially that cases on income tax depend so much on their facts that excessive reliance on precedents may be dangerous. Whether the appellant company was carrying on business of trafficking in immovable property must, in the last analysis, depend on all the surrounding circumstances, so that no single criterion can be formulated. |
The
case must be looked as a whole, to avoid seeing a distorted picture, as
learned counsel for the appellant said in his "gist of
submission".
Both
learned counsel as well as the Special Commissioners were aware of this.
However the learned Special Commissioners, just as both learned counsel have
done, did consider the issue under various headings of
"guidelines" or "tests", namely:
subject
matter of transaction;
period
of ownership;
frequency
of transactions;
alteration
of property to render it more saleable;
methods
employed in disposing the property; and
circumstances
responsible for sale.
Even
learned counsel for the appellant does not say that the
"guidelines" applied by the Special Commissioners are wrong.
Indeed they are not. All I wish to emphasize is that these guidelines are
not to be treated as "ingredients" of an offence as in a criminal
case, where, if one is not proved the offence is not proved. Again, it clear
that all parties are aware of this too.
The
complaint can be divided into two categories: first, the Special
Commissioners have made findings of facts, which are not supported by
evidence. Secondly, the Special Commissioners have placed too much emphasis
on certain facts but too little or no emphasis at all on other facts.
Example
of the first is that the Special Commissioners have said that the appellant
had, by applying for an obtaining approval to build a "dream
house" for all the Chew family to stay under the same roof, which was
not carried out, had changed the land from three small lots into one, thus
enhancing its value.
I
agree with the learned counsel for the appellant that there is no evidence
to that effect and that that finding of fact is wrong. But, as I have said a
tax appeal is not a criminal case where a wrong finding of fact may mean
that one ingredient of the offence is not proved and the case may fail. As
is agreed by all parties, the case must be looked at as a whole.
Examples of the second category of the complaints are,
First,
that the Special Commissioners are wrong in concluding that the prime
motive of the appellant in buying the land to turn the old bungalow into
a guest house for friends and business associates is a business
consideration. Learned counsel argued that the Special Commissioners did
not consider the fact that the subject land had to be transferred to
Rekin because Disco was to be liquidated.
Secondly,
the Special Commissioners placed too much importance on the fact that
the subject land was situated in one of the most prestigious areas in
Penang Island, i.e. Persiaran Gurney which has sea frontage and also the
fact that the land has a First Grade Title.
Thirdly,
the Special Commissioners failed to consider that even though the
appellant was given the same number of shares as Dato' Loy whose land
was nearly three times bigger, the joint venture was more favourable to
the Dato' Loy. That is because Dato' Loy's land alone is not big enough
for the building, due to setback.
Fourthly,
the Special Commissioners did not consider that the profit and loss
account for the relevant years show that the land was a "fixed
asset". Fifthly, the Special Commissioners did not consider that
the 3 80,000 shares obtained by the appellant were still held by the
appellant.
Lastly,
the Special Commissioners did not even consider the Supreme Court
decision in D.G.I.R. v Khoo Ewe Aik Realty Sdn Bhd [1990] 2 MLJ
415 "the facts of which are somewhat similar". Now, everybody
agrees that the case must be looked at as a whole and each case is to be
decided on its own facts. No two cases are the same. The guidelines are
mere guidelines, to assist the Special Commissioners to arrive at their
conclusions. When the Special Commissioners considered the case under
each heading of the guidelines, and I see nothing wrong with that, and
when a certain fact is repeated under more than one heading, it does
appear as if the Special Commissioners had placed too much importance on
that fact.
But,
we must bear in mind that the appeal is only on points of law. The first
question is whether the Special Commissioners have misdirected themselves in
law. Even learned counsel for the appellant's submission does not say so. I
am also of the view that the Special Commissioners have not misdirected
themselves in law.
So,
the other question is whether the Special Commissioners' conclusion is so
unreasonable that no reasonable man could come to that conclusion, to use
the expression of Lord Denning in Griffiths v Harrison (Watford) Ltd
[1962] 1 All ER 909. I think the easiest and the best way to consider the
case as a whole is to look at the activities of the appellant company in
chronological order. That is why I narrated the facts in chronological
order.
In
law, a company is a separate entity from its shareholders. But, behind every
company there must be people. The people behind the appellant company are
Peter Chew, his father, his mother and his uncle. They must be business
people. Otherwise they would not have a number of companies to their credit.
Even from the evidence in this case, it can be seen that they knew what they
were doing, in particular regarding the tax advantages that a company is
entitled to, unlike individuals. They had made full use of it. They claimed
capital allowance for the "company's car" even though no one would
ever suggest that they did not enjoy the use of the car for private purpose.
They had made other claims, which I have stated earlier, which need not be
repeated.
The
appellant is not the only company incorporated by them. When the appellant
company was incorporated, the purpose was no other than to trade. The
articles of association say so. Of course there is no specific article that
the company was to trade in land.
But, as Gill FJ (as he then was) said in E v Comptroller-General of Inland Revenue [1970] 2 MLJ 117 at p 127, quoting Lord President Clyde in Commissioners of Inland Revenue v Hyndland Investment Co Ltd 14 TC 694:
|
the question is not what business does the tax payer profess to carry on, but what business does he actually carry on. |
Even an isolated transaction may be trading, of course depending in the circumstances of the case. The High Court of Australia explains it very clearly in FC of The v Myer Emporium Ltd [1987] CLR 199:
|
Although it is well settled that a profit or gain made in the ordinary course of carrying on a business constitutes income, it does not follow that a profit or gain made in a transaction entered into otherwise than in the ordinary course of carrying on the taxpayer's business is not income. Because a business is carried on with a view to profit, a gain made in the ordinary course of carrying on the business is invested with the profit-making purpose, thereby stamping the profit with the character of income. But a gain made otherwise than in the ordinary course of carrying on the business which nevertheless arises from a transaction entered into by the taxpayer with the intention or purpose of making a profit or gain may well constitute income. Whether it does depends very much in the circumstances of the case. Generally speaking, however, it may be said that if the circumstances are such as to give rise to the inference that the taxpayer's intention or purpose in entering into the transaction was to make a profit or gain, the profit or gain will be income, notwithstanding that the transaction was extraordinary judged by reference to the ordinary course of the taxpayer's business. Nor does the fact that a profit or gain is made as the result of an isolated venture or a "one-off' transaction preclude it from being properly characterized as income: Federal Commissioner of Taxation v Whitfords Beach Pty Ltd (35). The authorities establish that a profit or gain so made will constitute income if the property generating the profit or gain was acquired in a business operation or commercial transaction for the purpose of profit-making by the means giving rise to the profit. |
In
this case, soon after it was incorporated, the appellant bought two pieces
of land. It was argued that the Kelawei Road land was transferred from
Disco, another company of the Chews because Disco was to be liquidated. But
we are not told why, what was the necessity and what was the real motive
behind it. Whatever it is, the purpose of the purchase was to develop it and
expenses amounting to RM3,200 was incurred for the preparation of plans and
was capitalised. When part of that land was transferred to Sunrise Towers,
another company of theirs, the profit was assessed to income tax and was
paid. That was in 1975.
In
1973, the subject land were bought by the appellant. It is said that the
purpose was to put up a guest house to entertain friends and business
associates of the Chew family - again there is a business element in it,
while the family will also enjoy it. Had it been purely for the members of
the family to enjoy it, it would not have been necessary to purchase them
under the company's name, in the first place. But there are advantages, tax
advantages, to purchase them under the company's name that was made full use
of. I need not repeat.
Then
it is said that they changed their mind. Now they wanted to build a dream
house for the children to stay under the same roof. That too, was not done.
Again, if that was the purpose throughout, why should the land be purchased
under the company's name. Again, the consideration, which is not difficult
to understand, is tax advantages, which was obtained and enjoyed.
Then,
on January 30, 1980, Rekin changed its name to Sunrise Towers. Why, we are
not told.
Four
months later, the articles of association was amended to state that the
company is an investment company. That was followed by another amendment, to
make the same even clearer.
Soon
thereafter, the joint-venture agreement was signed and the land were
transferred to a new company incorporated for the purpose of developing the
land.
Why
were these amendments which were not communicated to the Registrar of
Companies but communicated to the respondent made? The only inference is for
tax purposes. The appellant had to pay income tax when it transferred the
Kelawei Road lands. Changing the name of the company and amending the
articles of association might help. Surely, negotiation with Dato' Loy did
not take place in one day.
Of
course the joint-venture agreement may be advantageous to Dato' Loy,
otherwise he would not have embarked on the project. But it is also
advantageous to the appellant. The Chews must have realised the strategic
position of their company's land, in relation to Dato Loy's land. They must
have realised their bargaining strength and made full use if it. Otherwise
they would not have got such a good deal, which in terms of value per square
foot is almost three times more than Dato' Loys. That is a business deal. I
have no doubt about it.
It
was also argued that the land was listed or categorised as "fixed
asset" in the profit and loss account of the company, which shows that
it is a capital asset and profits from its sale is not taxable. Admittedly,
that is a factor to be considered. But, like other factors it is not
conclusive. Not all books kept by businessmen and companies are always 100%
reflective of the true position. Or, it may well be that, at the beginning,
it was really intended to be a fixed asset, but, when a good deal comes
along, why not grab it? After all, the company exists to make profits.
I
do not think I need to discuss every ground given by the Special
Commissioners in arriving at their conclusion, nor do I think I need to
discuss every point argued by both learned counsel.
The issue is whether the Special Commissioners have misdirected themselves in law or that their conclusion is so unreasonable that no reasonable man would have arrived at. I am of the view that they have not misdirected themselves in law. They have made a few mistakes in their findings of facts which actually are of no consequence to their decision, seen as a whole. Looking at the facts as a whole I am of the view that their conclusion cannot be said to be so unreasonable, considering the facts and the law, that justifies this court to reverse it. On these grounds I dismissed the appeal with costs.
Cases
E v Comptroller-General of Inland Revenue [1970] 2 MLJ 117;
Legislations
Income
Tax Act 1967: s.4(a), paras 13 & 34 of Sch.5
Representation
Nik
Saghir Mohd Noor (Nik Saghir & Ismail) for Applicant
Noradidah
and Rozali (Senior Federal Counsel and Federal Counsel) for Respondent
Notes:-
This decision is also reported at [2000] 1 AMR 277.
|
|
all rights reserved taiking.thing pte ltd |
|
|
