Lord Diplock (delivering the judgment of the Board):

The appellant taxpayer ("the Company") was incorporated in 1960. The principal object for which it was established was to cut and blend tobacco and to manufacture cigarettes; but, as is usual, its Memorandum of Association incorporated a wide variety of objects including granting licences over and generally dealing with the land rights and other property of the Company.

The Company purchased land in Petaling Jaya whereon it erected a building, which contained a factory in which cigarette-making machinery was installed and a bonded warehouse for storing tobacco and cigarettes. The Company started to manufacture cigarettes there in February 1961; but this proved so unprofitable that the manufacturing business was abandoned in November of the same year and thereafter until 1964 its activities were confined to trading in tobacco. This likewise proved unprofitable and was in turn abandoned in 1964, by which time the Company had accumulated adjusted losses for income tax purposes amounting to $399,303.

With the abandonment of trading in tobacco the Company no longer needed to make use itself of the storage space provided by