Section 16(1) : In the production of chargeable profits
In the case re
Stanley So & Company, it was held that certain entertainment expenses, equipment
rental and office facilities charges are disallowed because they are regarded as
excessive and not in the production of chargeable profits. In such cases, the
IRD can make appropriate adjustments when computing the assessable profits.
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The UK income tax law
allow expenditure incurred “for the purpose of the trade”, vide Section 130 of ICTA 1970. Australia and South Africa tax law adopt “in the production of (or
producing) the income”, similar to Hong Kong.
From the Hong Kong
court cases, it appears that there is no clear distinction between the UK's “for
the purpose of the trade” and the Hong Kong's “in the production of profits”.
This can been seen in the case CIR versus
Swire Pacific Ltd. HKTC 1145 in which
similar criteria to UK have been adopted to decide the issue.
carried on a shipyard business. In early seventies, its workers went on strike
when the company decided to merge with another company. In order to end the
strike, the company paid to the workers “retirement grants” of $22,000,000. The
Revenue disallowed $18,000,000 as deduction on the grounds that such payment had
not made in the production of profits of the business that had just three more
months to last; but rather, it was to preserve of the company's assets and to
safeguard the merger. The court rejected the Revenue's contention and ruled that
there was ample evidence to support that the payment was to get the workers back
to work, so that the company could continue to earn profits for the remaining
months and to avoid damages had the strike continued; and hence, it was for the
production of profits. It follows from this case that if a payment is incurred
in the ordinary course of business with
“a purpose of earning profits”, it is deductible even though the payment turns
out to be unprofitable.
In the Board of Review case D46/02, 80%
of the sauna, gymnasium and physical-fitness expenses incurred by a jockey was
held to be deductible. Press here for details.
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