Braitrim (Far East) Ltd v Commissioner of Inland Revenue
Court of Appeal
Civil Appeal No 45 of 2012
Kwan, Fok and Barma JJA
Taxation
30 November, 6 December 2012

Profits tax — allowable deductions — statutory definition

The taxpayer (“T”) supplied plastic, custom-made garment hangers, which were manufactured by two mainland Chinese factories. The moulds used in the manufacturing process, while situated in the premises of the factories, remained the property of T which authorised them to be used on a no-cost basis by the factories exclusively to manufacture the hangers to be supplied to its customers.

The combined effect of the relevant provisions of the Inland Revenue Ordinance (Cap.112) (“IRO”) meant that T’s expenditure on the moulds, being capital expenditure, would not qualify for deduction unless they were a “prescribed fixed asset” within Section 16G(6). The issue in dispute was whether T’s arrangement with the factories came within the statutory definition of “lease” within Section 2(1). If the moulds were the subject of a lease, they would be an “excluded fixed asset” and no deduction could be allowed. Both the Board of Review and Court of First Instance rejected T’s argument that the definition of “lease” should not apply to its arrangement with the factories. T appealed.

Held, dismissing the appeal, that:

The definition in Section 2(1) of the IRO gave an extended meaning to the word “lease” so that it was wider than the concept as commonly understood under the general law. On its face, the language of the definition did catch T’s arrangement with the mainland factories.

The extended meaning must be applied to T’s arrangement with the mainland factories unless T could show that the context of the IRO required the contrary. Since the word “lease” contained in the definition of “excluded fixed asset” in Section 16G(6) must be understood in accordance with its defined meaning in Section 2(1), the moulds were not a “prescribed fixed asset”. Thus, T’s expenditure thereon did not qualify for deduction under Section 16G.

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