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PUBLIC RECORD OFFICE

Reference :--

TRELEC.O. 882/11

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PUBLIC RECORD OFFICE, LONDON

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120.

G. Waterworks.

7. The Council are unable to support the suggestion, based on a distinction of geographical location, that the waterworks in the New Territories can be regarded as a entirely distinct from the waterworks existing in Hong new productive undertaking Kong Island and Kowloon prior to 1896, and so qualified for consideration for treatment on the basis of net receipts. It appears to be clear from the terms of all the past corres- new productive pondence on the treatment of productive undertakings that the term undertaking "' is intended to mean a productive undertaking of a character or kind which did not exist in a Colony and contribute to the revenue when the contribution was fixed on a percentage of revenue basis, e.g., railways in the Straits Settlements and Hong Kong, telephones, tramways, etc. The question of the treatment of the revenue of an extension of any undertaking whose assessment to contribution has always been treated on the basis of gross receipts, e.g., Post Offices, has, like the treatment of increases of other sources of revenue, never been in dispute. This is natural in view of the principle that any sources of revenue included in the total revenue when the percentage for the contri- bution was fixed remain subject to assessment, despite their expansion, so long as the percentage remains unaltered. The Council would point out that the principle, which you seek to establish, of differentiating between old and new territories cuts across the accepted principles of assessment and might, if accepted, open the door to fresh differences of opinion with the Colonies.

8. As regards the claim for an allowance in respect of all capital expenditure on waterworks met from revenue, I am to state that the Army Council do not find themselves able to agree with the advice which has been given to your Department, that the assess- ments 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.

I am to observe that the Council consider. that this view 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.

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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 in 1897 and 1898, when railway receipts were first treated on the basis of net receipts in those Colonies. It was introduced into the Straits Settlements Military Contribution Ordinance in 1899, 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 pro- vision will ... remove the inconvenience of having to introduce an amending Ordinance and new productive undertaking in each case of the establishment of a "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 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)† to enable capital expenditure met from revenue to be treated as if the expenditure had been met by a loan, deductions 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

purposes. ductive undertakings" in the Colony recognized for military contribution 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 1889 and 1904 was approved.

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It was, however, expressly laid down (Treasury letter No. 15072/11 to the Colonial as in the similar case of the Straits Settlements Office of 12th August, 1911)‡ that

in the event of any reproductive (Colonial Office letter of the 5th July, 1899*) 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

No. 16 in Eastern No. 123.

↑ No. 14248/04.

No. 197 in Eastern No. 123.

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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, without the prior authority of His Majesty's Government. There has thus, in the opinion of the Army Council, been no error in law in the past treatment of waterworks receipts in Hong Kong.

In brief, it is considered that the above statement shows that there is no evidence to support the suggestion that the allowance was intended to be permitted in all cases of capital expenditure met from revenue, and indicates that it is only made in respect of productive undertakings which it has been agreed should be assessable on net receipts. As the Council are not prepared to ecognize that the waterworks revenue should be assess- able on a net receipts basis, it follows that they cannot agree that an allowance is permissible in this case.

9. With regard to the remaining point in connexion with the waterworks revenue, i.e., the deductions made from revenue under Section 15 of Ordinance No. 14 of 1927 in respect of the service of that part of the Public Works Loan of 1927 which was used for expenditure on waterworks, I am to explain that exemption from assessment for military contribution of revenue used for the service of loans raised for public works or such purposes has never been generally sanctioned.

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In the case to which reference is made, the River and Harbour Improvements in the Straits Settlements in 1906, the exemption which was agreed to as a special case (see penultimate sentence of War Office letter to the Treasury No. 10/962 F.1, of 20th April, 1908)†, was, moreover, in respect of special taxation, some of it local in incidence, created for the service of the loan and to cease when the loan had been repaid. The Lords Commissioners of the Treasury subsequently emphasized (Treasury letter No. 7673/08 of 8th August, 1908, to the Colonial Office) that they must demur to the suggestion that revenue raised for the purpose of paying interest on loans for certain purposes would be exempt from assessment to military contribution. If in isolated cases My Lords have agreed to such exemption, they have never felt able to assent to any general depar~ ture from the principles which have, with the full agreement of the Colony, regulated the Colonial Military Contribution." The Public Works Loan of 1927 appears to have been raised for the normal purposes for which such loans are raised, viz., the improvement and expansion of activities required for the development and well-being of the whole Colony. No special taxation was imposed and the service of the loan, like other loans raised by the Colony, has been met from the general revenue of the Colony. The Council are unable to agree that a case has been established for the exemption from assessment of the revenue required for the service of this loan and they must, accordingly, press their request for the early repeal of Section 15 of Ordinance No. 14 of 1927.

H. Treatment of Profits on Sales of Securities.

10. It appears from the comments which are now made in connexion with this question that there is some misunderstanding as to the nature of this claim which has been previously considered by the Council on the basis of the Governor of Hong Kong's despatch No. 400 of 10th September, 1929§.

I am to observe that, with reference to the remarks in your letter on the treatment of the annual valuation of securities, the Council, following the query raised in War Office letter of 11th August, 1923||, have accepted the view that any appreciation in value which might be included in the revenues as a result of the accounting arrangements connected with the annual valuation of investment securities, should be excluded from the revenue assessable for military contribution.

11. As regards the subject of the despatch in question, which is not dealt with in your letter, viz., the treatment of the profits arising from the sale of investment securities, I am to say that the Council think it desirable to set out in some detail the relation of these

• No. 198 in Eastern No. 123. No. 140 in Eastern No. 123.

(C 38051)

† See Enclosure in No. 133 in Eastern No. 123.

§ C. 62916/29 [No. 1]: not printed. || 40350/23: not printed.

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