430 Case No. D41187 Board of Review: Andrew K. N. Li, Chairman ...

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INLAND REVENUE BOARD OF REVIEW DECISIONS 437 their evidence that as policy makers of the AF Ltd. group including LHE, their intention at the time of the acquisition of the 30% was to hold it as a long term investment. So LHE's intention at the time of acquisition was to hold for long-term investment. That this was the intention at the time of acquisition is supported by a number of matters. First, as at the end of 1979 the acquisition appeared to be a good investment yielding a good return. Even accepting that the estimate of about $20 per sq. ft. with a gross return of 14.86% was on the optimistic side, the likcly return was still a good one. Secondly, the evidence before us establish that looking at the position in late 1979, the AF Ltd. group could finance the 30% acquisition without much difficulty. The group had substantial liquid resources, both cash and quotcd investments. The amount of its liabilities was low. Significant recurrent surpluses were estimated for the coming years. As at the end of 1979 the capital expenditure on the H Road project was nearly completed and apart from this project the group did not have any heavy commitments. At that time the Sha Tin site had not been acquired. It was only acquired in July 1980. At worst, the AF Ltd. would have to borrow some $2 million for a year or realize some quoted investments to pay its share amounting to $6,223,550 on completion of U Centre. Thirdly, at the time of acquisition, there appeared to be no problem in holding it as a long term investment although LHE was a 30% minority in M Ltd. When PR approached Mr. L, he explained that the property would be held as a long term investment and Mr. L agreed. So they were ad idem. PR reasonably relied on that having regard to their good and long standing relationship. Mr. L changed his mind subsequently. But PR and OR could not have foreseen that. The time between acquisition and disposal was short, only 10 months. That by itself would tend to be a pointer to trading. But it P- cannot be considered in isolation. The reason for the change from holding to realization "colours and colours heavily the whole matter". See West v. Phillips (l 958) 38 TC 203 at 21 3. Here the reason for the sale was that Mr. L changed his mind and Messrs, PR and OR in a 30% minority position had no practical alternative but to go along. As we have said, they could not have foreseen this. So in view of the particular circumstances here, the short time is explicable and does not support a trading intention.
438 INLAND REVENUE BOARD OF REVIEW DECISIONS Having regard to the above, we hold that the 30% in M Limited held by LHE was a capital investment and not an adventure in the nature of trade. The gain on sale is therefore not chargeable to profits tax. Accordingly, we allow the appeal and annul the assessment in question. Board of Review. Case No. D44187 Henry Litton, Chairman, Della P. H. Chan and Charles Yeung Siu-cho. Members. 22 October 1987. Profits Tax-whether "loss on exchange" and "loss on disposal of landed properties" allowable deductions. The Appellant company's business for the period 1980 to 1983 was property dealing and money lending. The source of funds for the money lending business was derived partly from an associated company based in Singaporc and partly from banks in Hong Kong. The profit margin derived by the Appellant company was in differential in interest rates charged, the Appellant company lending at higher rates of interest than the rates at which it borrowed. The Appellant company and the borrowers had strong connections. The major shareholder in all those companies was the same person. The Appellant company lent to no one except the affiliated companies. The Appellant company was used as a conduit pipe to fund the business of the affiliated companies. The Appellant contended that the exchange loss from Singapore dollars to Hong Kong dollars as at 31 March 1983 together with the outstanding interest were deductible from the assessable profits. In August 1980 the Appellant company purchased a number of shop units. They were let to tenants and rental income was derived. For the year ending 31 March 1981 it was reflected in the accounts as fixed assets and in two subsequent years this position was maintained. In the year ending 31 March 1983 the Appellant company disposed of a number of units and in that process incurred a loss. The Appellant company contended that the loss was deductible against the chargeable profits. Held: The loss incurred on the difference in exchange rates between the Hong Kong dollar and Singapore dollar as at 31 March 1983 was not a loss incurred in the carrying on of the Appellant company's business, but merely a charge in the accounts reflecting the difference between the rate of exchange at the time when the funds were borrowed and the 31 March 1983 when the line was drawn on the Appellant company's accounts. The loss on sale of the landed properties was a capital loss and was not therefore deductible against the chargeable profits.
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430 Case No. D41187 Board of Review: Andrew K. N. Li, Chairman ...

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