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· PUBLIC RECORD OFFICE

Reference --

PERNIC.O.882/11

PUBLIC RECORD OFFICE, LONDON

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been the custom in the past not to credit such sums to revenue, but for accounting reasons it has now been decided to do so, and therefore it is desired to secure that military contri- bution is not charged. No estimate of the amount of money involved is given, but presumably it cannot be large, and as the revenue repaid has already been subject to contribution there would appear to be a case for consideration of exemption. It would be well perhaps to ascertain exactly what the Colony is referring to before any final decision is given.

17. G. Water Works.-It is stated that $12,000,000 has been expended by the Colony out of revenue over a period of 20 to 30 years up to 1923, on waterworks, and no deduction in respect of interest and sinking fund has been made. The waterworks are now financed from loan, but small items of a capital nature are still being financed from

revenue.

The Colony claim that by law a 4 per cent deduction from the waterworks receipts in respect of the capital expenditure financed from revenue should have been made in the past under the general ordinance admitting such a deduction in the case of productive undertakings, and should be allowed in the future, but they do not propose to claim arrears if the other claims referred to above are admitted. Presumably, however, they would expect the deduction to run for 50 years from the date of the various expenditures and to be applied in future to the whole body of prior expenditure. The amount involved is £4,800 in 1930 (which would be increased to £7,200 if the claim at A (3) is admitted), and a similar reduction in the contribution in subsequent years.

A rebate in respect of capital expenditure from revenue has in the past only been allowed in respect of productive undertakings assessable on net receipts (see paragraph 5 above), but the Colony, apparently make no claim for the waterworks to be so assessed. The case for the deductions claimed obviously hinges on a case for treatment on net receipts and it is necessary therefore to examine the latter case first. In paragraph 17 the case for the deductions is examined on general principles and in paragraph 18 the Colonial statement that the deductions should have been made by law is criticized.

The question of the waterworks is not now: A reference to the correspondence in 1895 and 1896 immediately preceding the institution of a percentage of revenue as the basis of the military contributions, shows that attempts were then made to secure the exemption of the waterworks revenue, amongst other items, from assessment for military contribution.

It is true that the basis of the claim for exemption was that such revenue was in the nature of municipal, as in the case of the Straits Settlements, rather than general revenue, but in a despatch to the Colonial Office dated 28th August, 1895, the Governor in support of the claim for exemption from assessment said: In this connexion it should be remembered as the unofficial members point out, that loans have been raised by this Government for the purpose of carrying out works of a purely municipal nature, such as waterworks, markets, etc., and it appears equitable that the revenue derived from such works, instead of being subjected to a charge of 17 per cent., should be applied to their upkeep, to defraying the interest on the monies raised by loan to construct them and to forming a sinking fund with a view to the ultimate liquidation of the debt incurred on their account."

The Colonial Office reply, which was despatched on 1st November, 1895, after consultation with the War Office and the Treasury, refused to entertain the proposal to exclude the so-called municipal receipts from assessment. In April, 1896, the Governor forwarded a memorandum on the military contribution by the unofficial members of the Legislative Council in which it was urged that the fixing of 171 per cent. of the general revenue as the military contribution imposed an udue burden on the Colony as compared with the Straits Settlements in view of the fact that municipal revenue was not included in the general revenue of the Straits Settlements, whereas, owing to there being no municipality in Hong Kong, the like revenues was included in general revenue. It was pointed out in the memorandum that the assessed taxes which were distinctly municipal rather than general revenue and were levied as a percentage of the annual value of the houses included 2 per cent. in respect of water.

The Colonial Office, however, again refused to agree to the suggestions and pointed out that the 17 per cent. was fixed on the basis of the gross revenue less land sales, including all the items which had hitherto been accounted as revenue and that if any exemption were agreed to it would be necessary to reconsider the 174 per cent.

The gross revenue derived from the waterworks as expressed in the water rate has always been included in the revenue of the Colony without deduction, and the views expressed in 1895 and 1896 would appear to apply equally now.

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The waterworks revenue should not therefore be treated on the basis of receipts unless the percentage paid for the contribution is varied to allow of the change. It follows that deductions for a rebate on capital expenditure met from revenue which would represent a partial netting of receipts cannot be permitted.

18. The Deputy Treasurer of the Colony in his memorandum of 9th December, 1930, suggests that the assessments made on the gross revenue of the waterworks in past years were contrary to the terms of Section 3 of the Defence Contribution Ordinance No. 1 of 1901, and that, by law, annual deductions of 4 per cent. of the capital expenditure met from revenue should be made for 50 years from the gross receipts. This suggestion, which is apparently accepted by Colonial Office letter of 27th February, 1931, covering the Governor's despatch, is unsupported by the historical circumstances associated with the section and ignores the correspondence between the Colonial Office and the Hong Kong Governments when the section was introduced into the Ordinance.

A section on the lines of Section 3 of the Hong Kong Defence Contribution Ordinance No. 1 of 1901 is common to all the Military Contribution Ordinances of the Eastern Colonies. The first portion of the section follows the lines of the sections drafted for the Ceylon and Mauritius Ordinances of 1897 and 1898 when railway receipts were first treated on the basis of net receipts in those Colonies. It was introduced in the Straits Settlements Military Contribution Ordinance in 1899 (see paragraph 4, Class I, above) when it was desired to treat a public telephone system on the basis of net receipts, and the Colonial Office (Colonial Office letter of 5th July, 1899, to the Treasury) stated that "the insertion of this provision will . . . remove the inconvenience of having to introduce an amending Ordinance in each case of the establishment of a new productive under- taking and" Mr. Chamberlain will instruct the Governor of the Straits Settlements that no new undertaking is to be deemed of a similar character' to railways or telephones without previous reference to the Secretary of State, who will then submit the proposal to Their Lordships and to the Secretary of State for War." The second portion of the section follows the lines of a provision (see paragraph 5 above) introduced in Ceylon, Mauritius, and the Straits Settlements in 1904 (Treasury letter No. 6103/04 to the War Office of 19th April, 1904, and Colonial Office letter to the War Office of 17th May, 1904) 4 enable capital expenditure met from revenue to be treated as if the expenditure had been met by a loan deduction for the service of which were provided for in the first portion of the section.

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No such provisions were required in Hong Kong until the construction of the British section of the Kowloon-Canton Railway in 1911 as until that date there were no " produc- On tive undertakings "in the Colony recognized for military contributions purposes. the opening of the railway it was agreed that the principle of net receipts should be extended to it and an amending Ordinance on the lines of the Straits Settlements Ordinances of 1899 and 1904 was approved.

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It was, however, expressly laid down (Treasury letter No. 15072/11 to the Colonial Office of 12th August, 1911) that ". as in the similar case of the Straits Settlements (Colonial Office letter of the 5th July)... in the event of any reproductive undertakings other than railways or telephones being established by the Colonial Government, the principle of net receipts to military contribution shall not be extended to such undertakings without previous reference to himself (the Secretary of State for the Colonies), in order that the question may first be submitted to this Board and the Army Council." This condition was definitely reported to the Colony in Colonial Office despatch of 19th August, 1911, to the Governor of Hong Kong. The second portion of the section can obviously not be applied unless it has been previously agreed that an undertaking should be treated under the first portion of the section as a productive undertaking.

The fact is that the section of the Hong Kong Ordinance quoted by the Deputy Treasurer is only of a permissive nature made wide in its terms to obviate the necessity of amending ordinances. It is not general in its application to all productive undertakings in a Colony and neither the whole of the section, nor a portion of it, can be extended to any particular undertaking, not previously approved for treatment on net receipts, "thout the prior authority of His Majesty's Government. There has thus been no error in law in the past treatment of waterworks receipts in Hong Kong-

War Office,

August, 1931.