NO v Comptroller of Income Tax [2006] SGITBR 5

Case Number: Decision Date: Tribunal: Coram: Counsel Names: Reference Trace: Decisions Cases, Legislation and References ITBR Appeal 24/2002 30 Oct 2006 Income Tax Board of Review Laurence Chan, S Rajendran, Tan Teck Meng

30th day of October 2006

1. The Appellants, NO are a family company whose shareholders and directors at all material times were: A, his wife, B - together referred to as the [xxx] - and his brother, C. NO was incorporated on 01/10/1985 as D. A few years later, the name was changed to E and on 08/02/1996 changed to NO. NO was in the furniture retail business and since 19/05/1986 has carried on its business at [xxx] (the Property) which NO rented from the HDB initially as a monthly tenant. 2. The Property was spacious: the first floor had 20,000 sq ft while the second floor had 10,000 sq ft. At all material times, NO occupied part of the first floor and rented the remainder to an electrical goods trader. On the second floor, NO - from the early nineties - managed a billiards saloon in conjunction with the F. Prior to that, the second floor had been used as a furniture mart by different retailers. 3. In July 1993, under HDBs Sale of Tenanted Shops Scheme, NO, as the sitting tenant, became eligible to buy the remainder of the lease on the property (some 86 years) from HDB at a discounted price. HDB, however, informed NO on 14/07/1993 that HDB had decided that shops used as billiard saloons would not be sold under the Scheme but that if NO ceased operating the billiard saloon and changed the trade to one acceptable to HDB, HDB would review the matter. 4. NO was, because of its contractual obligations to F, unable to comply immediately with that requirement. NO therefore wrote to HDB to say that if HDB sells the Property to it, NO will not renew its contract with F (when the contract ends in July 1994. HDB responded that it will review the decision not to sell only after the billiards operations at the Premises ceased. 5. On 28/10/1993 NO wrote to HDB seeking permission to operate a fitness centre at the second level alter the billiards saloon closed in July 1994. HDB, on 18/01/1994, responded that it had no objections. NO then applied to HDB for approval for the construction of male and female washrooms at the second level for use by the fitness centre. HDB refused the application as the construction works will involve extensive hacking of the floor-slab. With this refusal, NO had to abandon its plans for a fitness centre. 6. In July 1994 NO applied to convert the second floor into a Family Fun and Leisure Park. This application was also rejected. 7. In May 1994, NO applied for the extension of the existing tenancy (due to expire on 30/06/1994) and was told that HDB would grant a one year extension only if NO gave a written

undertaking that the use of the Property as a billiards saloon will cease by 30/06/1995 failing which there will be no further extensions. NO gave that undertaking and HDB granted the one year extension. HDB, however, increased the monthly rental by almost $5,000/- to $20,461: an increase of 35% over the rental paid in the previous year. When NO protested, HDB responded that the rental of $20,461 was still below the market rent of $55,000. NO accepted the revised rental and was granted a one year extension of the tenancy with effect from 01/07/1994. 8. On 15/07/1994 HDB informed NO that unless all the billiards tables were removed from the Property by 31/07/1994, NO will not qualify to buy the Property: this date was about one year earlier than the date of 30.06.1995 imposed by HDB just two months earlier. NO requested an extension of time to 15/08/1994 for it to comply with this requirement. This request was granted. By 03/08/1994 all the billiard tables were removed and HDB notified of this fact. 9. The [xxx], besides exploring the possibility of running a fitness centre and a family fun park had also tried, without success, to secure a retail franchise to operate on the second level: there was, in their view, too much competition in the surrounding neighbourhood for the usual hardware or general provision shop to be set up on the second floor. As all efforts to start their own business on the second floor had, to-date, come to nought, the [xxx] decided that it would be best, until they identified a suitable business, to rent out the second floor. 10. The space on the second floor was large (10,000 sq ft) and was not partitioned. The directors knew that it would be difficult to rent out such a large amount of unpartitioned space and, in the circumstances, decided that their best bet, would be to target retailers looking for space for short-term sales promotions. A, when challenged in cross-examination that short-term sales promotions would be an irregular source of income, responded: but the price would be good - our company has experience in organising (sales) exhibitions. And when it was suggested to A that he wanted to let out the second floor on a short term basis because he intended to sell the property, A responded that as NO had, at that stage, only a one year tenancy, it could not sublet the premises for a longer period. 11. Consequent upon the decision to let out the second floor, A, in end July 1994 instructed the Classified Advertisement section of Singapore Press Holdings to place a series of small advertisements in the English and Chinese press advertising the availability of space: these advertisements (copies of which were produced) began to appear from late July 1994 and continued to early November 1994. Some of these advertisements described the space as temporary exhibition centre, and others as suitable for retail businesses and commercial schools. Yet others stated area 10,000 sq ft and suitable for warehouse sales, short or long term exhibition. 12. By letter dated 20/08/94 HDB invited NO to purchase the Property. In that letter HDB gave the market value of the Property as $10.05 million. NO was required, if it wanted to purchase the Property, to complete an Application Form and send it to HDB on or before 31/08/1994 together with the documents stipulated in the form and an administrative fee of $500 (which was to be treated as part of the purchase price if the sale was completed). NO complied with these requirements and the application was submitted by 31.08.1994. 13. On 02/09/1994 HDB approved NOs application to purchase the Property. The purchase price, as stated in the approval letter, was $9,899,595 of which 92% had to be paid (together with GST and various other charges) on or before 01/12/1994. It was specified that once this 92% was paid, the buyer may resell the Property. The balance of 8% was payable on or before 01/07/2003.

14. By this time the directors were getting somewhat concerned at the lack of any satisfactory response to the advertisements being run in the newspapers on the availability of the second floor for rental. The reason for this lack of response was the size of the space: it would be easier to let the space if it were partitioned into smaller areas. A told the Tribunal that he approached the HDB for permission to divide the space but permission was refused. He then instructed NOs solicitors to write to HDB for such permission. 15. On 08.09.1984, NOs solicitors wrote to HDB enquiring whether NO could, after it bought the property, subdivide the property in view of the area involved. HDBs prompt response was that subdivision was not permitted. G told the Tribunal that he took the word subdivide in the solicitors letter as meaning partition. When the meanings of the two words were explained to him, he stated that there was a miscommunication. 16. NO was a company with a paid-up capital of $3/- and needed 100% financing to purchase the property. It applied to all three of its bankers - Development Bank of Singapore (DBS), United Overseas Bank (UOB) and Kwangtung Provincial Bank (KPB) for the necessary financing. Of the three, only KPB - its principal banker - responded favourably. KPBs formal offer, dated 11/11/1994 offered NO two loans: a) a secured term loan of $8.8 million which carried interest of 6.75% and which was to be repaid in 114 instalments of $107,063-31 per month commencing 6 months after the loan was disbursed, and b) a secured overdraft of $1.2 million with interest at 2.125% over prime lending rate repayable on demand. It was part of the loan conditions that the paid-up capital of NO be raised to $100,000. 17. A told the Tribunal that he wanted to buy the Property despite the high monthly instalments that had to be paid because HDB could increase the rental at each renewal and he suspected that after a while the rental payable to HDB would be more than the interest payable to the Bank. He was also afraid that if he did not own the property he would not have security of tenure as HDB could, by giving him notice, ask him to leave. As the business had been established in that Property for the last eight years, A wanted NO to remain at that Property. Also, in its letter of 20.08.1994 inviting NO to buy the Property, HDB had stated: please note that we are not obliged to make future offers if you decide not to buy the shop now and this caused A to be concerned that if NO did not immediately buy the Property, NO will lose the opportunity of ever buying it. 18. The [xxx] were cross-examined extensively by the Respondents on how they would be able to re-pay the KPB loans. It was suggested to them that, on NOs earnings as shown in its accounts, it was untenable for NO to buy such an expensive property and that the real reason that NO undertook the purchase was to make a profit on the re-sale of the Property. Both the [xxx] denied this suggestion. B pointed out that in the years prior to the closing of the billiard saloon, NO had been earning hundreds of thousands of dollars per year and that the profits, as reflected in the accounts ending 31st August 1995 fell only because the billiard saloon at the second floor had to be closed and NO had, as yet, not commenced an alternative business. 19. Asked how NO was going to pay the instalments per month of over $100,000 to KPB, B explained that:

*the electric and electronic store at the first floor was wanting more floor space and they intended to let out 7,000 sq ft of the first floor to that store for $40,000 per month (the store was currently paying about $20,000 p.m. for 3,000 sq ft of space). *she would open a branch or re-locate a niche furniture business of a company called H located at World Trade Centre (of which she was Managing Director and principal shareholder) to the first floor of the Property at a rental of up to $50,000 p.m. (depending on the space H took). H was a successful business dealing in classical European design furniture and she expected a branch of the company at a HDB area to be successful as it would cater to a rising trend among HDB flat owners for more expensive furniture and fittings in their homes. Any remaining space, she said, would be available for NO (trading as J) to sell its cheaper type of furniture. *NO would no longer have to pay rental to HDB and the rental amount (of $20,000+ per month) would be available to pay the instalments. *In addition, whatever income NO obtained from the second floor would be a further source of funds for the repayment of the loan. B admitted, in cross-examination, that shifting H to the Property was just one of the possibilities that she was exploring: that possibility included shifting the entire business of H to the Property or opening a branch at the Property. We would note, in passing, that NO did not finalise its repayment strategy because, as we shall see later, NO, in November 1994 - well before the loans were disbursed sub-sold the Property. 20. One G, an employee of a property agency called K, testified before this tribunal as a witness called by the Respondent. He told us that it was his practice, as part of his job, to scan entries in computer data bases which collate information relating to the property market. Whilst doing so, he came across some of the advertisements that NO had put out. G confirmed that he had not, in any of these entries, seen any reference to the Property being for sale. 21. Sometime in August 1994, G called up the number listed on the data base and offered B, who answered the call, his services in renting out the Property. With Bs consent he proceeded to make cold calls to businesses - like supermarkets, gaming clubs and book shops - that may be interested in renting the space. No one he called expressed interest but one of them - L - expressed an interest in buying the Property. 22. G immediately rang up B and told her that there was an interested buyer for the Property. There were some variations between the testimonies of G and B about the contents of the conversation they had but these were not critical. B, in her affidavit evidence-in-chief, accepted that the facts given by G were essentially correct with some minor discrepancies. 23. Bs evidence was that she had absolutely no intention of selling the Property and told G so but G - perhaps because of the very high commission he would earn on a sale - was keen to effect a sale and pressed her to state an asking price. B said that she quoted a very high price of $17.5 million. She told the Tribunal that that price, by itself, would indicate that she did not want to sell. G, too, agreed that $17.5 million was an excessive price. L lost interest and that was the end of the matter. 24. With L fading out, G continued to make cold calls but this time he concentrated on looking for buyers. G did not claim in his evidence that he did so on the instructions of NO. In one of these calls made in early October 1994 - he struck a chord. M expressed interest in purchasing the Property and asked G to get a written offer. G contacted B, told her of the buying interest in the Property and asked her to state the asking price in writing.

25. By early October 1984, the mood at NO was undergoing a change. Given the numerous HDB restrictions that prevented NO from carrying out its own businesses at the second floor, the failure to obtain permission for partitioning, and the failure of the intensive advertising in the newspapers to achieve results, NO had to face the possibility that the returns from the second floor would not be as high as expected and this would affect its cash flow. The [xxx] therefore began to feel that if M offered a sufficiently high price, they might consider selling the property. They, therefore, agreed to state in writing their asking price. 26. There was a condominium near the Property which was being advertised for sale and based on the price per square foot of that condominium the [xxx], on 07/10/1994, faxed the following note to G: As requested we are pleased to inform you of the following floor areas and selling price of the above unit 1st storey floor area 19,119 sq ft @$600.00 psf = $11,471,400 2nd storey floor area 10,000 sq ft @$500.00 psf = $ 5.000,000 $16.471,400 G forwarded the note to M. 27. On 26/10/94 G received a fax from N of M which stated

Subject to the approval of our board of Directors and the board of directors of [xxx], we offer to purchase the above-captioned 1st and 2nd storey from the owners at a price of $14,500,000 (which is $1,000,000 above the valuation price). A testified that the directors of NO were surprised at the size of the offer. The HDB had, in its letter inviting NO to purchase the Property, stated the market value of the Property to be $10.05 million and M was upping that value by $4.5 million. However, inspite of the attractiveness of the offer, NO was not prepared to sell. 28. With NO refusing to sell, G continued to work on M. On 4/11/1994 he sent the following fax to NO: With regards to the above-mentioned property, I have had a long discussion with M on the 31st October 94... ..Now their offer is $14.8 million subject to approval from their board of directors. If you accept this offer (which I think you should), I will arrange for a meeting between your goodself and M for a final discussion... Inspite of the offer being increased by $300,000 and Gs recommendation to accept, NO was still not prepared to accept the offer. G then arranged a meeting between the directors of NO and O, the Deputy Group Managing Director of [xxx], the holding company of M. This meeting was held on 21.11.1994. 29. It was at this meeting with O that NO finally agreed to sell the Property. At this meeting, O again upped the offer: this time to $15.5 Million. NO found it difficult to refuse this offer. In the words of A: He (O) offered $15.5 million. I respected him. He had given me a very good price. Before that, I could not imagine I could sell the premises. So, on 21.11.1994, I agreed to sell.

The same day, NO gave M an option, subject to HDB approval, to purchase the Property. HDB gave it approval and on 27.2.1985 (the date fixed for completion by NO and HDB) NO assigned all its interests in the Property to M. From this sale, NO, after deduction for solicitors fees and other charges incurred in the aborted purchase from HDB, made an extraordinary profit of $4.6 million. 30. The Respondents took the view that this profit was not of a capital nature and issued a Notice of Additional Assessment for the year of Assessment 1996 in respect of that profit. In a letter dated 03.03.2000, to the solicitors of NO, Respondent stated: Please be informed that the facts of the case show that your client has no intention to hold the HDB leasehold property at [xxx] for long-term purpose. Therefore the profit made in the sale of this property of $4,601,490 is subject to tax... NO appealed against that assessment. The Issues and the Law 31. It is not in dispute that under S.80(4) of the Income Tax Act (Act) the onus of proving that an assessment is excessive is on the Appellant. Counsel for the Respondent further submitted that the onus was particularly heavy on NO as NO was authorised - under Clause 3 of its Memorandum and Articles of Association - to carry on all kinds of business for acquisition of gain for its members including the acquisition and sale of land, buildings and hereditaments. We have examined Clause 3 of the said Memorandum and Articles but have not been able to find any such provision. 32. The parties were agreed that the only issue in this case is whether the gain of $4,601,490 derived by NO from the sale of the Property is liable to tax under S.10(l)(a) of the Act. Section 10(1)(a) provides as follows: Income Tax shall.. .be payable... upon the income of any person accruing in or derived from Singapore... in respect of: (a) gains or profits from any trade, business, profession or vocation, for whatever period of time such trade, business, profession or vocation may have been carried on or exercised. The parties also agreed that the test whether the activities of a taxpayer constitute the carrying on of a trade or the realisation of an investment is an objective one to be arrived at after having considered the activities of the taxpayer and the circumstances relating to the purchase and sale of the assets in question. 33. The question of what constitutes a trade was considered by Lord Wilberforce in Simmons (as liquidator of Lionel Sim Properties Ltd) v Inland Revenue Commissioners (1980) STC 350 where he said: Trading requires an intention to trade; normally the question to be asked is whether this intention existed at the time of the acquisition of the asset. Was it acquired with the intention of disposing of it at a profit, or was it acquired as a permanent investment? Often it is necessary to ask further questions: a permanent investment may be sold in order to acquire another investment thought to be more satisfactory; that does not involve an operation of trade, whether the first investment is sold at a profit or at a loss

We will bear these words of Lord Wilberforce in mind in ascertaining whether the transaction in this case amounted to a trade or business. 34. In its 1954 Report, the Royal Commission in the United Kingdom listed six badges of trade as being relevant considerations in determining whether a transaction of purchase and sale is, or is not, to be treated as a trading transaction. These six badges have been frequently applied in Singapore to resolve that issue and both the parties before us have urged us to decide this case by reference to these badges. We will do so. 35. We list below the six badges with the comments of the Royal Commission in relation to each badge and consider the submissions made by the parties under each badge. 36. The Subject Matter of the Realisation

Whilst almost any form of property can be acquired to be dealt with, those forms of property, such as commodities or manufactured articles which are normally the subject of trading, are only very exceptionally the subject of investment. Again, property which does not yield to its owner an income or personal enjoyment merely by virtue of its ownership is more likely to have been acquired with the object of a deal than property that dies. 37. Counsel for the Respondent submitted that the fact that the Property in this case was 30,000 sq ft of leasehold property in an HDB estate does not detract from the fact that it is a tradeable asset. He urged the Tribunal to take judicial notice of the fact that it is common in Singapore for leasehold properties to be bought and sold. We do not disagree with the Respondents submission but we would point out that although such properties are traded, they are not properties such as commodities or quoted shares that are normally the subject matter of trade. Also this was property that had yielded considerable income to NO over the last 8 years and NO was still carrying on business thereat. It is therefore less likely to have been acquired with the object of a deal (to follow the language of the Royal Commission) and more likely to have been acquired as a long-term asset. 38. The Length of Period of Ownership

Generally speaking, property meant to be dealt with is realised within a short period of time after acquisition. But there are many exceptions from this as a universal rule. 39. The Respondent highlighted the fact that the Property was sold to M on a back-to-back basis on the same day that completion of the sale to NO was to take place. NO, it was submitted, did not even get to the position of acquiring the property and this, it was submitted, goes to show that NO intended to trade. 40. Whilst it is true that NO did not get to the stage of acquiring the Property, NO nevertheless had an option to buy the property and, with the consent of HDB, had assigned the benefit of that option to M. NO therefore can be said to have held the Property from the date (02/09/1994) when HDB agreed to sell the Property to it to the date (21/11/1994) when it granted an option to M: a period of about 2 months. Considering the nature of the property, this is, undoubtedly, a short period of ownership. 41. Short though the period of holding was, we see merit in Respondents submission that the price offered by M was so exceptionally high that it made sense for NO to dispose of the asset and take the profit, the more so since the anticipated useages of the second floor were not materialising. The short period of ownership did not, it was submitted, negative the fact that NO, in buying the Property from HDB, was buying it for its own long-term use.

42. The Respondent drew the attention of the Tribunal to the fact that paragraph 3 of the letter of acceptance from HDB provided categorically that there shall be no binding contract for the sale of this shop until the Agreement for Lease is executed by you and HDB and submitted that in view of that provision the date that NO acquired an interest in the Property that it could dispose of was not 02/09/1994 but 27/02/1995 when the Agreement for Lease was signed. It was therefore submitted that the intention to sell for a quick profit was, in this case, formed even before NO acquired any interest in the Property. 43. Clause 3 does contain that provision. However, at the time HDB approved the application to purchase, NO had complied with all the requirements set by HDB including the requirement that an administrative fee of $500 be paid. That being so, NO had, in effect, an option to purchase the Property. There was, in our view, nothing unusual about that provision in Clause 3: if NO failed to comply with the terms in the acceptance letter (e.g. by failing to pay the 92% as required), HDB will obviously not sign the Agreement for Lease. In quoting that provision, Counsel appears to have overlooked the very next sentence - if you wish to resell your shop, you may do so only after you have compiled with conditions l(a) to (j): a provision that clearly envisages that the property may be on-sold. 44. The Frequency of Similar Transactions

If realisations of the same sort of property occur in succession over a period of years or there are several such realisations at about the same date a presumption arises that there has been a dealing in respect of each. This badge is clearly in NOs favour. This was the only occasion when NO has bought and sold a property. 45. Supplementary Work on or in connection with the Property Realised

If the property is worked up in any way during the ownership so as to bring it into a more marketable condition, or is any special exertions are made to find or attract purchasers, such as the opening of an office or large-scale advertising, there is some evidence of dealing. For when there is an organised effort to obtain profit there is a source of taxable income. But if nothing at all is done, the suggestion tends the other way. 46. No supplemental works of any significance was carried out on the Property. NO had plans for the construction of toilets in connection with the proposal to set up a fitness centre on the second floor but those plans and the proposal for a fitness centre were abandoned when HDB refused permission for the toilets. In our view, those plans, if anything, indicates a desire on the part of NO to carry on a business at the second floor and detracts from the proposition that NO was buying the Property in order to trade it. 47. Counsel for the Respondent submitted that the fact that NO, through its solicitors applied to sub-divide the premises was indicative of a desire to obtain separate titles as a prelude to marketing the Property. As noted earlier, the [xxx], when questioned on this, had said that their intention in making the application was to partition the property (particularly on the second floor) into smaller areas so as to make the Property easier to rent. Counsel for NO submitted that the phrase subdivision in view of the area involved in the solicitors letter to HDB prima facie meant dividing the space with walls in order to create smaller areas so as to facilitate rental and cannot mean sub-dividing with a view to getting separate title.

We give the benefit of the doubt to the [xxx] and accept their evidence that all that they were seeking was permission to partition the space to facilitate rental. 48 The Circumstances that were responsible for the Realisation

There may be some explanation, such as a sudden emergency or opportunity calling for ready money, that negatives the idea that any plan of dealing prompted the original purchase. 49. In the context of this badge, Counsel for the Respondent, on the strength of a number of authorities she quoted, submitted that the failure by NO to have a feasibility study carried out indicated that NO was not buying the Property with the intention of keeping it as a long-term investment. Whilst we agree that the absence of a feasibility study may, in certain cases, be evidence of such intention, we are satisfied that the present case does not fall within that category. This is a case of a sitting tenant who has been doing business at the Property for about 8 years. The tenant is therefore fully apprised of the commercial viability of the Property for the purposes of his business and, in our view, no adverse conclusion can be drawn from the fact that no feasibility study was done. 50. Bearing in mind the unexpected difficulties NO was facing in respect of the second floor and bearing in mind that the offer made by M was exceptionally attractive it was, in our view, not surprising that the directors - even if they had bought the Property as a long-term investment of NO changed their minds in order to make the staggering profit of $4.6 million. 51. Motive

There are cases in which the purpose of the transaction and sale is clearly discernable. Motive is never irrelevant in any of these cases. What is desirable is that it should be realised clearly that it can be inferred from surrounding circumstances in the absence of direct evidence of the sellers intentions, and even, if necessary, in the face of his own evidence. 52. It was the submission of the Respondent that the surrounding circumstances of the purchase and sale of the Property is indicative of a desire to trade. Amongst the circumstances she highlighted were: the advertisements were for short-term lets the use of short-term financing arrangements such as overdrafts and 100% bank borrowing the fact that NO incurred a loss of $500,000 for the year ended August 1995 the way the loan was structured enabled NO to make early repayment of the loan the haphazard way in which the [xxx] were planning to repay the bank loans

The fact that the advertisements in this case were for short-term lets does not, in our view, derogate from any intention NO may have had to buy the property as a long-term investment. At the time the advertisements were placed HDB had not agreed to sell the Property to NO and all NO had was a one year lease. NO could therefore only grant short-term lets. In any event such short-term lets are consistent with NOs claim that its long-term plan was to run its own business at the second floor. 53. The use of overdrafts and 100% bank loans does show an absence of financial strength and does enhance the possibility that the acquisition was only to be for a short duration. The same,

however, cannot be said of the $500,000 loss. That loss arose because of the closure of the billiard business and, while such closure was on the cards at the time NO obtained the option to purchase, all the difficulties subsequently encountered in respect of the second floor could not reasonably have been expected at the time it obtained the option. 54. We accept the submission that the way the loan was structured enabled NO to get out of the loan obligations by making early repayment: but to conclude from that that it was so structured because NO intended at the time of purchase to sell the Property for a profit is somewhat unfair. All we can do is take the loan structure into account in arriving at our decision. 55. The plans for the payment of the interest and monthly instalments described above as haphazard, were, as B readily admitted when she testified before this Tribunal, just plans: there was, at that stage, nothing concrete: nothing had been finalised. This is again understandable since, as noted in paragraph 29 above, the decision to own the Property was aborted in November 1994 when NO decided to accept Ms offer of $15.5 million. Thenceforth, the plans for the repayment became redundant. If the evidence given by the [xxx] relating to repayment was sketchy or contradictory, it was because of this factor. 56 Findings

The [xxx] were entrepreneurs who, through NO, have been doing business from the Property for a considerable number of years. They were, therefore, fully aware at the business potential of that Property and we accept their evidence that they wished to continue doing business therefrom and wanted to purchase the Property m order to insulate NO from periodic increases in the rental payable and from other uncertainties associated with doing business from rented premises. NOs finances were on the tight side and NO needed a 100% loan to purchase the Property but we are satisfied that the optimism of the directors, at the time they agreed to purchase the Property, that sufficient returns would be generated from the Property to make the interest and instalment payments to the Bank, was not misplaced. We are satisfied, viewing the circumstances objectively, that there was, at that time, basis for the directors to be confident that NO would be able to meet its financial obligations. 57. We are also satisfied that serious thoughts of selling the Property only surfaced in early October 1994 when M made the very attractive offer of $14.5 million. That offer and the unexpected difficulties that NO was encountering in putting the second floor to productive use were the catalysts for the [xxx] to start thinking about selling the Property. But even the offer of $14.5 million and the increased offer of $14.8 million were not sufficient to induce the [xxx] to abandon their desire that NO should own the Property. It was only the very exceptional offer of $15.5 million that finally made them decide that it would be better for NO to sell. 58. For the above reasons, we conclude that when NO agreed to buy the Property, it was as a longterm investment. The profit arising from the sale to M was therefore of a capital nature and is not subject to income tax. We therefore make the following orders: a) the appeal is allowed

b) the Notice of Additional Assessment for the year 1996 on the surplus arising from the sale of NOs interest in the Property is set aside b) costs of this appeal are awarded to NO which costs are to be taxed if not agreed between the parties