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I am to state that the Lords Commissioners of His Majesty's Treasury concur in the agreement which has been reached as regards the treatment of the items detailed in paragraphs 2, 3, 4, 5 and 6 of War Office letter of the 25th April, 1932*.

In connexion, however, with the general question of the rate of allowance, in respect of capital expenditure met from revenue, to be used in calculating the net receipts of recognized productive undertakings, raised on the item dealt with in paragraph 2 of the War Office letter referred to, the Army Council consider and the Treasury concur that in view of the fact that loans generally can now be raised at rates of interest not appreciably higher than those current prior to the outbreak of war in 1914, the increase from 4 per cent to 5 per cent in the allowance in respect of capital expenditure met from revenue would not be justified beyond 1932. The 54 per cent rate should, therefore, only apply to the allowance to be given for capital expenditure met from revenue during the period 1915 to 1932. For expenditure arising after 1933 the old rate should be used.

With regard to the question of the treatment of waterworks revenue Their Lordships concur in the Army Council's view that the proposal to treat the waterworks in the New Territories as a new productive undertaking, involving the assessment for military contribution of the revenue from those waterworks on a net receipts basis, would constitute a violation of the underlying principles on which the calculation of the military contribution is based and that therefore such a proposal cannot be accepted.

As regards the waterworks loan charges, Their Lordships infer that the Secretary of State for the Colonies apparently no longer desires to sustain the view that Section 15 of the Hong Kong Loan Ordinance No. 14 of 1927 can be supported by reference to the precedent of the river and harbour improvements in the Straits Settlements in 1906; they are in agreement with the Army Council's view that the concession made in Section 15 was erroneous, and consider that it should afford no precedent in any future case. They note, however, the representations of the Acting Governor, endorsed by your Department, as to the opposition and bitterness that would be aroused by any attempt to repeal this Section; and they accept the submission, made by the Army Council, that in all the circumstances it is not now practicable to repeal it.

As regards the proposed new loan of approximately $28,000,000 to be raised gradually for general development purposes, Their Lordships are prepared to agree with the Council that, as a special concession and without prejudice to the principles of the military contribution, the amounts raised by extra taxation and appropriated from revenue to meet the interest and sinking fund charges of the new public works loan should in this instance be exempted from assessment for military contribution, provided that the claim to treat waterworks revenue, wherever derived, on the basis of net receipts is abandoned.

I am also to refer to your letter of 14th October, 1932†, and previous correspondence on the subject of the assessment to contribution of realized profits arising from the appreciation of securities held by the Government of Hong Kong, and to state for the information of Secretary Sir Philip Cunliffe-Lister that the Council accept the statement -of the War Office views contained in paragraphs 2 and 3 of your letter under reference, on the understanding that the investments hitherto made from general revenue can only be small and their appreciation correspondingly negligible; and, with the concurrence of the Treasury, they accordingly agree to the exemption from assessment to military contribu- tion of realized profits on the appreciation of investments of the Hong Kong Government, subject to its being agreed that realized profits from investments of general revenue are in principle subject to assessment to military contribution.

I am to add that the Council will be glad to have an opportunity, in due course, of considering any draft amendments to the Military Contributions Ordinance which arise from the various points on which agreement has been expressed above, and also the terms of the draft Ordinance relating to the proposed new loan.

I am, &c.,

A. E. WIDDOWS.

129

C. 92622/32 [No. 18].

No. 82.

COLONIAL OFFICE

to

SIR,

WAR OFFICE,

Downing Street, 7th March, 1933.

I am directed by Secretary Sir Philip Cunliffe-Lister to acknowledge the receipt of your letter of the 25th February*, regarding the Hong Kong military contribution and to request you to convey to the Army Council an expression of his thanks for the concessions which they have agreed to make in connexion with the basis of assessment of the contribution.

The Secretary of State is prepared to accept the suggestion contained in the third paragraph of your letter under reply regarding the rate of allowance, in respect of capital expenditure met from revenue, to be used in calculating the net receipts of recognized productive undertakings. The principle that the realized profits from invest- ments of general revenue should be subject to assessment to military contribution, to which reference is made at the end of the seventh paragraph of your letter, is also accepted.

As regards the waterworks loan charges, I am to request you to inform the Army Council that the Secretary of State is willing to withdraw the claim that the waterworks in the New Territories should be regarded as a new productive enterprise.

I am to add that the Governor of Hong Kong will be requested to submit the draft

of any proposed legislation to amend the Military Contribution Ordinance and that the Army Council will be given the opportunity of considering any such draft legislation before its introduction. It is not anticipated that the Ordinance relating to the proposed new loan will be submitted to the Secretary of State in draft, but when the Ordinance is received for the signification of His Majesty's pleasure a copy will be sent to you to be laid before the Army Council for their consideration, before any decision is taken as to the tendering of advice to His Majesty regarding non-disallowance of the Ordinance.

I am, &c.,

C. 92622/32 [No. 20].

(Confidential.)

SIR,

No. 83.

HONG KONG.

THE SECRETARY OF STATE

to

THE GOVERNOR. [Answered by No. 84.]

H. R. COWELL.

Downing Street, 7th March, 1933. I have the honour to refer to my Confidential telegram No. 25 of the 4th March† of which a copy is enclosed and to previous correspondence regarding the basis of assess- ment of the Hong Kong military contribution and to transmit to you a copy of correspondence with the War Office embodying the agreement which has been reached with that Department.

I consider that this agreement should be accepted as a reasonable settlement of the outstanding matters in connexion with the military contribution.

I shall be glad if you will submit for my consideration the draft of any Bill which

it is proposed to introduce to amend the Military Contribution Ordinance.

* No. 76.

↑ No. 80.

I have, &c..

P. CUNLIFFE-LISTER.

* No. 81.

† C. 92622/32 [No. 17]: not printed.

Nos. 81 and 82.

F

PUBLIC RECORD OFFICE

Reference :-

TELLIC.O.882/11

PUBLIC RECORD OFFICE, LONDON | ALLY WITHOUT PERMISSION OF THE

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