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The Badges of Trade: Motive/Intention of Taxpayer - Bukit Yew

Updated: Nov 3, 2022


High Court Malaya, Kuala Lumpur Harun Hashim J [Tax Appeal No. A3/83] 6 February 1987


JUDGMENT

Harun J: This is an appeal from the Special Commissioners of Income Tax against their decision to confirm the additional assessment raised by the Revenue in respect of income tax for the year of assessment 1980.


The agreed statement of facts before the Special Commissioners were

  1. The appellant company was incorporated on 29 November 1963.

  2. On 26 February 1964, the appellant acquired a piece of land ("the said property") comprising 19a. 3r. 38p. known as Lot No. 1305 in the mukim of Setapak in the state of Selangor under C.T. No. 12361 from the estate of Loke Yew (residency) trust.

  3. The said property was the sole asset of the appellant since its acquisition.

  4. On 17 November 1978, the appellant sold the said property to Messrs. Low Keng Huat and Wong Bin Chen for the sum of RM591,697.

  5. The appellant was assessed to real property gains tax on the gain, which assessment was paid to the respondent.

  6. The respondent subsequently, on the 5th day of July 1980, raised an assessment in the sum of RM179,925.60 in respect of the gains arising from the said property in respect of income tax.

  7. The gain from the asset's sale is in the sum of RM403,287.

  8. The appellant contends that the said gain is a capital receipt and is not assessable to income tax but to real property gains tax under s. 3 of the Real Property Gains Tax Act 1976 as originally assessed by the respondent.

  9. The respondent contends that the said gain is income assessable to tax under s. 4 of the Income Tax Act 1967.

  10. The question for the determination of the Special Commissioners of Income Tax is whether:

  11. The said gain is a capital receipt, not assessable to tax under the Income Tax Act 1967, as is contended by the appellant; or

  12. An income assessable to tax under the Income Tax Act 1967, as is contended by the respondent.

Loke Yew was a land owner.


On his death in 1917, the Loke Yew residency trust (the trust) was established.


In 1926 part of the trust lands of 1905 acres of rubber and 458 acres of mining land were vested in Hawthornden Rubber Estate Ltd. (Hawthornden).


The trust retained the land on which the family mansion stood (lot 1305) and the family burial ground.


Access to Lot 1305 was through Hawthornden.


When Hawthornden considered the possibility of converting part of their property into a housing estate, it mistakenly included Lot 1305.

When the error was discovered in 1963, the descendants of Loke Yew formed the appellant company, and the trust was transferred to the appellant Lot 1305 for a consideration of RM162,752.80 in 1964.

What weighed heavily with the Special Commissioners was the fact that at the time of the sale of Lot 1305 in 1978, the directors of the appellant and Hawthornden were the same persons.


Hence the inference of the Special Commissioners from these facts was as follows:-

The formation of the appellant (as a limited company) was a more advantageous means of developing the land as a housing estate (and later on, of hoarding it) as it was a limited company and, furthermore, it shared a common board of directors with Hawthornden.

The Special Commissioners found as a fact (erroneously) on p. 26 of the case stated that "the appellant was a wholly owned subsidiary of Hawthornden".


The result was that in determining whether Lot 1305 was an investment or stock-in-trade, the Special Commissioners were greatly influenced by what Hawthornden was thinking and doing, which were wholly imputed to the appellant.

It is trite law that these two companies are separate legal entities.


At the commencement of the hearing, the learned Federal Counsel who appeared for the Collector indicated (quite properly) that he was not supporting the finding of the Special Commissioners that the appellant was connected to or related with Hawthornden.


Shorn off Hawthornden, the primary facts as found by the Special Commissioners are-

  1. The nature of the land, i.e., 19 acres, "crowned by a hill on which stood the ruins of the former Loke Yew family mansion which still remain" adjacent to the Loke Yew family burial ground.

  2. The incorporation of the appellant in November 1963 and the acquisition of the land in February 1964.

  3. The land was the only asset of the appellant, and its subsequent sale in November 1978 was an isolated transaction and, in fact, the only transaction by the appellant.

  4. The appellant was assessed to Real Property Gains Tax which was paid to the respondent.

  5. The proceeds of the sale of the land were entered and recorded in the appellant's balance sheets for 1979 and 1980 as being capital reserves and also described as an extraordinary item in the profit and loss account for the same years.

  6. The appellant did no business, contemplated but took no step to develop the land or enhance its value.

Memorandum of Association The Special Commissioners appear to have placed undue reliance on Clause 3 of the memorandum of association of the appellant viz:

3 (1) To purchase, take on lease or in exchange or otherwise acquire any lands and buildings in the states of Malaya or elsewhere and any estate or interest in and any rights connected with any such lands and buildings.

(2) To develop and turn to account land acquired by the company or in which the company is interested and in particular by laying out and preparing the same for building purposes, constructing, altering, pulling down decorating, maintaining furnishing fitting up and improving buildings and by planning paving draining farming cultivating letting on building lease or building agreement and by advancing money to and entering into contracts and arrangements of all kinds with builders tenants purchasers and others.

The proposed objects of a company are relevant when considering the transactions in which the company is found to have been engaged.


It does not, however, follow that just because the company has powers to do certain things, anything done by the company must necessarily be carrying on the business of the professed objects of the company: see the Land Revenue Commissioners v. West-leigh Estates Co. [1924] 1 AC 681.


Indeed, a company actively engaged in trade is also entitled to hold investments, so one must distinguish investment from stock-in-trade: Simmons v. IRC [1980] 1 WLR 1197.


A good illustration of the distinction between investment and trading is to be found in Phillips v. West 38 TC 203, where it was held that whilst the 287 properties that the appellant built to sell ultimately were the stock-in-trade of the builder, the 2,208 houses built to let were investments and any surplus arising from their sale was therefore not liable to tax; and that the appellant was not carrying on the business of property dealing.

Intention

A good test to determine whether the property held is an investment or stock-in-trade is to establish the appellant's intention at the time of acquisition of the property.


Why did they buy it, and for what purpose?


Here the Special Commissioners inferred from the facts before them that:

  1. before World War II, the object of the trust was to retain Bukit Yew (Lot 1305) as part of the family inheritance and for sentimental reasons.

  2. in August 1963, it was discovered that Bukit Yew was not part of Hawthornden but was owned by the trust, and Hawthornden decided to approach the trust to purchase Bukit Yew.

The facts, however, show that the trustees, rather than selling the land to Hawthornden, sold it to the appellant, who in turn considered arranging for a survey, valuation and prospective conversion.


In June 1965, the Government gave notice of the intended acquisition of the land but, in March 1966, withdrew the notice.


Nothing was done on the land subsequently until its sale in 1978 following an offer for its purchase. These are facts as found by the Special Commissioners.

What, then, is the appellant's intention in acquiring the land?


True, they considered the possibility of developing it, but the fact remains that they did not pursue that possibility.

The Special Commissioners, however, found that the reason they did not develop it was because of the threat of acquisition by the Government.


That threat was very short-lived and occurred soon after the appellant purchased the land. Nothing could stop them from pursuing the professed objectives from 1966 onwards.


The Special Commissioners found that the other reason why they did not pursue the objective was that the development of the land was to be made jointly with Hawthornden.


This, of course, ignores their earlier finding that Hawthornden had attempted to acquire the land from the trustees but was turned down. If the land were to be developed jointly, it would have been simpler for the trustees to sell the land to Hawthornden.


A fair inference is that on discovering that the land did not belong to Hawthornden, the appellant decided to keep it to themselves. If there was going to be any development, it was going to be independent of Hawthornden.