The Court of First Instance (CFI) handed down its judgement in Commissioner of Inland Revenue v Perfekta Enterprises Limited on 27 April 2017. The case concerned whether an initial payment received by the taxpayer pursuant to a redevelopment agreement entered into between the taxpayer and a land developer to co-redevelop a land lot originally acquired by the taxpayer as a capital asset (the subject land) is capital or revenue in nature before the subject land was transferred to the taxpayer’s subsidiary, which then entered into a joint venture with the land developer to co-redevelop the original property into a composite industrial/office complex. The Board (by majority decision) held that the initial payment was capital in nature and not taxable.
The CFI overturned the Board’s decision and upheld the decision of the Chairman of the Board as it found that the Board’s “re-investment” finding was not supported by proper evidence. The CFI found that there was a change of the taxpayer’s intention from capital holding to trading when the taxpayer entered into the redevelopment agreement with the land developer and before the transfer of the subject land to its subsidiary for it to enter into the redevelopment joint venture and therefore, the initial payment is revenue in nature and taxable.
Whether there is a change of intention and whether a receipt is with a capital or revenue nature are often a contentious issue and being fact specific. In this case, the CFI has heavily relied on the content of the relevant documents (i.e. the board minutes and the redevelopment agreement) as well as its interpretation of the language used in those documents (taking into account the context of the case) in reaching its judgment. The court’s rejection of the Board’s “re-investment” finding also illustrates that whatever conclusion reached in a hearing must be supported by sufficient evidence and cannot merely be a finding based on assumptions.