Harley Development Inc and Another v. Commissioner of Inland Revenue

CACV000026/1993

IN THE COURT OF APPEAL

1993, No. 26
(Civil)

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Coram: Hon. Penlington, Nazareth and Mortimer, JJ.A.

Dates of hearing: 4, 5, 6, 7, 10, 11, 12 and 13 January 1994

Date of handing down of judgment: 29 April 1994

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J U D G M E N T

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Penlington, J.A.:

Background

1. This is an appeal from an Order dated the 19th January 1993 of Mayo J. in which he refused an application by the 1st appellant (Harley) and the 2nd appellant (Trillium) for judicial review of a decision by the Commissioner of Inland Revenue (the Commissioner) to raise property tax assessments on them dated 5 March 1992. Harley and Trillium (the appellants) sought an Order quashing the decision of the Commissioner to raise the said property tax assessments and the assessments themselves together with a declaration that the decision to raise the assessments was ultra vires the Commissioner and therefore of no effect.

2. Harley and Trillium are both companies in the Hutchison Whampoa Group. In 1985 following negotiations it was agreed between the Hutchison Whampoa Group and the Hong Kong and Shanghai Banking Corporation (the Bank) that the Hutchison Whampoa Group would acquire certain interests in the China Building at 29 Queen's Road, Central, which were then and have continued to be used as a branch of the Bank. As a result of this Harley acquired the balance of the Crown Lease in part of the premises which had some 87 years to run and then granted the Bank a sub-lease for 30 years commencing on the 2nd October 1985. The transfer of the lease was for a consideration of $137 million and the sub-lease to the Bank was for a lump sum premium of $119,875,000, the difference therefore being $17,125,000. There is dispute between the parties as to whether that transaction was the purchase of an interest in land and a lease back of part of that interest or whether it was simply a payment by Harley for the reversion of the long term lease.

3. Trillium is a company incorporated in Panama which owned the Crown lease of premises let to the bank. The Hutchison Whampoa Group purchased all the shares in that company from the bank for $63 million and then the company granted the Bank a 30 year lease from 2nd October 1985 at a lump sum premium of $55,125,000. Again there is a dispute whether the transaction involving the net payment of $7,875,000 to the Bank was - the purchase of another interest in land with the grant of a 30 year lease to the bank or whether it was in reality the purchase of the reversion of the Crown lease by Trillium.

4. Although in several aspects the position of Harley and Trillium is the same regarding their liability to property tax, there are some different considerations in each case, principally due to the fact that Trillium was, at the time of its acquisition by the Hutchison Whampoa Group, the landlord of the premises and was in receipt of rent which was subject to profits tax. It was also not in dispute that in 1983 Trillium had been granted exemption from property tax, pursuant to Section 5(2) of the Inland Revenue Ordinance Cap. 112 (the Ordinance). It was however in dispute as to whether that exemption remained in force after the sale of the shares to the Hutchison Whampoa Group and the payment by the bank for its 30 year lease.

5. Both the appellants and the respondent have tendered very helpful skeleton arguments and also detailed chronologies setting out the relevant events.

6. It is essentially the case for both appellants that, although they are land owners, they are both liable to pay profits tax, and in the case of Trillium in fact did so for the year 1985-86. They are therefore exempt from paying property tax pursuant to Section 5(2) of the Ordinance. The relevant parts of that section read as follows:

"Property Tax

5. Charge of property tax

(1) Property tax shall, subject to the provisions of this Ordinance, be charged for each year of assessment on every person being the owner of any land or buildings or land and buildings wherever situate in Hong Kong and shall be computed at the standard rate on the net assessable value of such land or buildings or land and buildings for each such year.

(1A) In subsection (1), "net assessable value" means the assessable value of land or buildings or land and buildings, ascertained in accordance with section 5A or 5B, as the case may be -

(a) less, in a case under section 5A, an allowance for repairs and outgoings of 20% of that assessable value; or

(b) less, in a case under section 5B -

(i) where the owner agrees to pay the rates in respect of the lbuildings or land and buildings, those rates paid by him; andand or

(ii) an allowance for repairs and outgoings of 20% of that assessable value after deduction of any rates under subparagraph (i).

(1B) The percentage allowance specified in subsection (1A) may be amended by resolution of the Legislative Council.

(2) (a) Notwithstanding subsection (1), any corporation carrying on a trade, profession or business in Hong Kong shall, on application made in writing to the Commissioner and on proof of the facts to the satisfaction of the Commissioner, be entitled to exemption from the property tax for any year of assessment in respect of any land or buildings or land and buildings owned by the corporation where the corporation would be entitled under section 25 to a set-off of the property tax which, if exemption were not granted under this subsection, would be paid by the corporation; and the property shall be and remain exempted from property tax for each year of assessment in which the circumstances, throughout the whole of that year, are such as to qualify the property for such exemption for the whole of that year.

(b) Where the circumstances are such that the property does not qualify for exemption under this subsection for the whole of any year of assessment, then the property tax chargeable in respect thereof shall be reduced in the proportion which the number of days in such year during which the property was so qualified bears to the whole of that year, and any excess tax paid shall be refunded.

(c) Every corporation exempted from property tax under this subsection in respect of any land or buildings or land and buildings shall, within 30 days after the event, notify the Commissioner in writing of any change in the ownership or use thereof or in any other circumstances affecting such exemption.

(A) Except for the purposes of section 5B(5) -

(a) the word "throughout the whole of that year" and "the whole of" in subsection (2)(a);

(b) subsection 2(b); and

(c) subsections (3), (4) and (5), not apply to any year of assessment commencing on or after 1 April 1983."

7. It is not in dispute that the relevant section for the calculation of the "net assessable value" in the case of the appellants is Section 5(B). That sections reads:

"5B.Ascertainment of assessable value on or after 1 April 1983

(1) Subject to subsection (5), this section shall apply to any year of assessment commencing on or after 1 April 1983.

(2) The assessable value of land or buildings or land and buildings for each year of assessment shall be the consideration, in money or money's worth, payable in that year to, to the order of, or for the benefit of, the owner in respect of the right of use of that land or buildings or land and buildings.

(3) Any consideration payable before the year of assessment commencing on 1 April 1983 in respect of a period of the right of use which starts after, or extends beyond, 1 April 1983 shall, for the purposes of this section, be deemed to be payable in equal monthly instalments during the period of the right of use or during a period of 3 years ending on 31 March 1986, whichever is the shorter.

(4) Any consideration payable in respect of a period of the right of use which is not contained within any one year of assessment shall, for the purposes of this section, be deemed to be payable in equal monthly instalments during the period of the right of use or during a period of 3 years commencing at the start of the period of the right of use to which the consideration relates, whichever is the shorter.

(5) When a person ceases to be liable to property tax in respect of land or buildings or land and buildings during the year of assessment commencing on 1 April 1983, the assessable value of that land or buildings or land and buildings shall be ascertained in accordance with section 5A.

(6) In this section, "consideration" includes any consideration payable in respect of the provision of any services or benefits connected with or related to the right of use."

8. Harley has never made a profit and Trillium has not done so since 1985-86.

9. The section of the Ordinance under which profits tax is levied is Section 14. The relevant parts of it read as follows:

"14. Charge of profits tax

Subject to the provisions of this Ordinance, profits tax shall be charged for each year of assessment at the standard rate on every person carrying on a trade, profession or business in Hong Kong in respect of his assessable profits arising in or derived from Hong Kong for that year from such trade, profession or business (excluding profits arising from the sale of capital assets) as ascertained in accordance with this Part."

10. Harley submitted profits tax returns for the 1985/86 and for subsequent years and by a letter of 14th March 1987 it applied for exemption from property tax pursuant to Section 5(2)(a). It never received any reply to that request but was eventually assessed for profits tax on the premium which it had received from the Bank in respect of the 30 year lease. It objected to the assessment on the 14th February 1989 and eventually on the 21st November 1989 that assessment was cancelled and profits were assessed as nil. That was on the basis that the premium was a payment in respect of "the sale of a capital asset".

11. Trillium made a profits tax return for 1984/85 and by a letter of 4th November 1985 was assessed as having nil profits. In subsequent years it made a profits tax return showing in each year a small loss and described itself as "dormant". It had been granted exemption from property tax on the 16th February 1983 on the basis that it was earning profits but did not notify the Commissioner of any "change of circumstance" resulting from the granting of the 30 year lease to the Bank, pursuant to Section 5(2)(c) of the Ordinance. In its profits tax return for 1986/87 it said "the company has remained dormant after it sold the 30 year lease rights".

12. Having assessed both appellants as having no profits which were subject to profits tax the Commissioner, by assessments dated 5 March 1992, claimed property tax from both appellants in respect of the premia paid to each by the Bank. Pursuant to Section 5B(4) this payment was to be spread over a period of three years in each case.

13. The relief sought before Mayo J. was as follows:

"1. An order of Certiorari quashing the decision of the Commissioner of Inland Revenue ("Decision") to raise property tax assessments on Harley and Trillium dated 5th March, 1992 and the assessment themselves.

2. A Declaration that the Decision is ultra vires the Commissioner of Inland Revenue and is null and void and of no effect whatsoever.

3. Costs.

4. Further and/or other reliefs."

14. The Grounds on which Relief is sought are :

"The Commissioner of Inland Revenue is subject to judicial review. Harley Development Inc. ("Harley") and Trillium Investment Limited ("Trillium"), having sufficient interest in the Decision, are entitled to the reliefs sought, on the following grounds:-

1. On 14th March, 1987, 20th October, 1988 and 7th December 1989, Harley claimed exemption from Property Tax under Section 5(2)(a) of the Inland Revenue Ordinance Cap. 112, Laws of Hong Kong in respect of its interests in the Basement, Ground Floor, Entrance and Mezzanine Floor of China Building, 29 Queen's Road Central, Hong Kong (together called "Harley's properties") for the years of assessment 1985/86, 1986/87, 1987/88 and 1988/89 inclusive.

2. For a number of years prior to 1985, Trillium in accordance with general practice, had been granted exemption from Property Tax and, again in accordance with general practice, the same was continued 1985. In particular on 30th January, 1986, 20th October, 1988, 23rd October, 1989, and 7th December, 1989 Trillium's continuing exemption from Property Tax under Section 5(2)(a) of the Inland Revenue Ordinance was accepted and recognised in respect of its long leasehold interest in the First Floor and Second Floor Room 201, Second Floor Room 202, Second Floor Room 203 and Second Floor Room 204 of China Building, 29 Queen's Road Central, Hong Kong (together called "Trillium's properties" and collectively, with Harley's properties, together "the Properties") for the years of assessment 1985/86, 1986/87, 1987/88 and 1988/89 inclusive.

3. Harley is a subsidiary of Hutchison Whampoa Limited. It acquired its interests in China Building pursuant to terms which had been concluded between the Hutchison Whampoa Group and the Hong Kong And Shanghai Banking Corporation ("HSBC"). The nature of the transaction was that Harley effectively acquired a reversionary interest in Harley's properties at an effective cost of $17,125,000 (plus costs and stamp duty) reversionary on a leasehold interest of HSBC and implemented (as a matter of conveyancing) by the following assignment and lease :-

(1) Harley acquired its long leasehold interests in Harley's properties from Wayhong (Bahamas) Limited, a subsidiary of HSBC, for a recorded consideration of $137,000,000 by an assignment dated 1st October, 1985 and

(2) immediately by a lease dated 2nd October, 1985, Harley granted a 30 year lease out of Harley's properties to HSBC for a recorded consideration of $119,875,000.

The true nature and effect of the transactions and Harley's purpose and intention was to acquire and hold as an investment the reversionary interest in Harley's properties (i.e. reversionary on the 30 year lease to HSBC) at an effective cost of $17,125,000.

4. Trillium was until October 1985 a subsidiary of HSBC and the owner of Trillium's properties. On 1st October, 1985 Walcoh Finance Inc., a company in the Hutchison Whampoa Group, again pursuant to the same overall agreement between HSBC and Hutchison Whampoa Group purchased from the group of HSBC the issued share capital of Trillium and the amount due by Trillium to a company of the group of HSBC for a total recorded consideration of $63,000,000. Thereupon, by a lease dated 2nd October, 1985 Trillium granted a 30 year lease but of Trillium's properties to HSBC for a recorded consideration of $55,125,000 Trillium's purpose and intention was to retain as an investment the reversionary interest in Trillium's properties at an effective cost to the Hutchison Whampoa Group of $7,875,000 - that is, the purchase price for the shares in and the loan to Trillium less the recorded consideration for the lease.

5. For the years of assessment 1985/86 to 1988/89 inclusive Harley and Trillium completed and filed Profits Tax returns on the basis that they were both exempt from Property Tax as set out at 1. and 2. above. The Inland Revenue Department had originally requested Property Tax returns to be made, but upon accepting Harley and Trillium's claims for exemption therefrom (with acceptance of liability to Profits Tax) had accepted that they were not liable to make such returns. That exemption from Property Tax was granted, accepted and acted upon by the Inland Revenue Department in full knowledge of the companies and the relevant transactions. Those Profits Tax returns were accepted by the Commissioner of Inland Revenue who raised assessments to Profits Tax on the companies which were determined on 21st November, 1989 (Harley) and 23rd March, 1987, 27th August, 1987, 8th September, 1988 and 23rd February, 1990 (Trillium). For the years 1985/86 to 1988/89 inclusive both Harley and Trillium prepared and filed statutory accounts on the basis that they were exempt from Property Tax. These accounts were, on consolidation, taken in so as to form a constituent part of the consolidated statutory and published accounts of the Hutchison Whampoa Limited Group.

6. By letters dated 16th March, 1988, 19th July, 1988 and 13th December, 1988 the Inland Revenue Department contended that the recorded consideration for the lease received by Harley was liable to Profits Tax and on 10th January, 1989 raised an assessment in respect of the same for 1985/86. These contentions were rejected on behalf of Harley which objected to the assessment under Section 64 of the Inland Revenue Ordinance on 4th February, 1989 on the basis that there was, in fact, no "profit" and thus no liability to Profits Tax. Further enquiries were made by the Inland Revenue Department on 17th February, 1989 and 10th July, 1989, Detailed responses were given on behalf of Harley on 25th February, 1989, 20th July, 1989, 25th August, 1989 and 4th September, 1989. After due consideration of the matter, on 21st November, 1989 the Commissioner of Inland Revenue determined the objection under Section 70 of the Inland Revenue Ordinance and adjusted the assessment on Harley for the year of assessment 1985/86 to nil. Assessments or computations to Profits Tax on Harley and Trillium for the years 1986/87 to 1988/89 inclusive were also either raised at or reduced to nil (see 5 above).

7. Despite the above, by letters dated 12th March, 1991 the Assessor, Property Tax claimed that Harley and Trillium were not entitled to exemption from Property Tax in respect of the Properties and further that both Harley and Trillium were liable to Property Tax in respect of the transaction entered into 1985.

8. The contention of the Inland Revenue Department referred to in paragraph 7 above was rejected on behalf of Harley and Trillium by letters dated 3rd April, 1991 and 3rd May, 1991. Without further communication, by letters dated 21st February and assessments dated 5th March, 1992, the Assessor, Property Tax, acting on behalf of the Inland Revenue Department purported to issue assessments to Property Tax to Harley and Trillium in respect of the Properties notwithstanding the grant of exemption to both companies (see 1. and 2. above), the completion and acceptance of Profits Tax returns (see 5. and 6. above), the determination of Harley's objection in respect of the assessment of 10th January, 1989 on the self same profits (see 6. above), the preparation by Harley and Trillium of their statutory accounts on the basis of an exemption from Property Tax and the fact that liability to tax had been finally determined accordingly.

9. Such purported assessments are ultra vires the Inland Revenue Department in that they seek to reopen matters clearly and unambiguously determined in 1989 on objection in consequence of Sections 64 and 70 of the Inland Revenue Ordinance and by the acceptance by the Inland Revenue Department, in full knowledge of the transactions concerned, of the exemption from Property Tax of Harley and Trillium for each of the relevant years and of their Profits Tax returns and by the assessment and computations to Profits Tax made by the Inland Revenue Department on Harley and Trillium, determined for each of the relevant years. Further or in the alternative, for the Inland Revenue Department to purport to raise such assessments is an unreasonable exercise of the powers conferred upon the Commissioner."

15. There was a considerable volume of evidence filed before the matter came before Mayo J. and indeed on the first day of the hearing leave was sought by Mr. David Goldberg, Q.C., Leading Counsel for the Commissioner here and below, to file further affidavits, which leave was granted. Before this Court a similar application was made by Mr. John Gardiner Q.C., Leading Counsel for the appellants here and below. This was not opposed, provided the Commissioner also had leave to file an additional affidavit in reply. Leave was granted on that basis.

16. These affidavits set out in considerable detail the history of this matter, the evidence coming from one of the appellants directors Mr. William Shurniak and Mr. Raymond Nai-Man Luk, a chief assessor of the Inland Revenue Department (the IRD). There were in addition affidavits filed for the appellants from several senior chartered accountants with extensive knowledge of tax practice in Hong Kong relevant to the question of whether Harley should be considered to have been granted exemption from property tax and Trillium's 1983 exemption should have been continued even when the 30 year lease was given to the Bank.

17. Mayo J. first of all considered the question of what was meant by the word "profits" in proviso (a) to Section 25 of the Ordinance. That section reads as follows:

"25. Deduction of property tax from profits tax

18. Where property tax is payable for any year of assessment under Part II in respect of any land or buildings owned by a person carrying on a trade, profession or business, any profits tax payable by such person in respect of that year of assessment shall be reduced by a sum not exceeding the amount of such property tax paid by him:

Provided that

(a) no reduction shall be allowed unless either the profits derived from such property are part of the profits of the trade, profession or business carried on by such person or the property is occupied or used by him for the purposes of producing profits in respect of which he is chargeable to tax under this Part; (Replaced 11 of 1961 s.5 Amended 35 of 1965 s.14)

(b) if the amount of property tax paid for a year of assessment exceeds the profits tax payable, the amount so paid in excess shall be refunded in accordance with the provisions of section 79; (Replaced 11 of 1961 s.5)

(c) where property tax for the year of assessment commencing on 1 April 1960, or earlier years, exceeded the profits tax payable for such years the amount of the excess shall be set off against the profits tax payable for the year of assessment commencing on 1 April 1961, after deduction of the property tax paid for that year and any balance left over shall be carried forward and set off in like manner against the profits tax payable for the next succeeding years."

19. He came to the view that it must mean "commercial profits" and not "assessable profits". He considered that if it was the later the second reference to profits would be otiose. The assessable profits derived from the property must be part of the profits of the business. I have no doubt that he was correct in that view. He went on to find that it was at least arguable that the premiums paid for the leases were capital payments and not subject to profits tax, and that therefore no relief was available from property tax. Again as the Commissioner has assessed the profits tax of each appellant following the granting of the leases at nil I would also agree with the first part of that conclusion.

20. Mayo J. then went on to consider the question of whether the appellants had been granted exemptions from property tax, and, in the case of Trillium, whether it remained in force after 1985. He considered the argument for the appellants that the Commissioner had required profit tax returns to be filed and he had made assessments. Even if no profits tax was payable in any particular year, the Commissioner had accepted the forms and was precluded from now seeking to assess property tax. The question of whether or not either property tax or profits tax was payable (the whole scheme of the Ordinance clearly showed it could not be both) were interlinked. By issuing the "nil" assessments to profits tax the Commissioner had made a determination also that the appellants were exempt from property tax and pursuant to Section 70 of the Ordinance was precluded from going back on that determination. Section 70 reads as follows:

"70. Assessments or amended assessments to be final

Where no valid objection or appeal has been lodged within the time limited by this Part against an assessment as regards the amount of the assessable income or profits or net assessable value assessed thereby, or where an appeal against an assessment has been withdrawn under section 68(2A) or dismissed under subsection 2(B) of that section, or where the amount of the assessable income or profits or net assessable value has been agreed to under section 64(3), or where the amount of such assessable income or profits or net assessable value has been determined on objection or appeal, the assessment as made or agreed to or determined on objection or appeal, as the case may be, shall be final and conclusive for all purposes of this Ordinance as regards the amount of such assessable income or profits or net assessable value:

Provided that nothing in this Part shall prevent an assessor from making an assessment or additional assessment for any year of assessment which does not involve re-opening any matter which has been determined on objection or appeal for the year."

21. Mayo J. did not accept that argument. He referred to a letter dated 25th February 1989 from the appellants solicitors to the Commissioner concerning profits tax and objecting very strenuously to being assessed for such tax. No reference however is made to property tax. He came to the conclusion that notwithstanding the earlier exemption granted to Trillium after the long leases were granted to the Bank neither appellant could have been entitled to believe that it was exempt from property tax to the extent that it was a "legitimate expectation" which could be protected by judicial review. He also accepted the case for the Commissioner that under Sections 59(3) and 60 of the Ordinance the Commissioner could make an assessment for any year within 6 years of that particular year. Those sections in turn are as follows:

"59(3) Where a person has not furnished a return and the assessor is of the opinion that such person is chargeable with tax, he may estimate the sum in respect of which such person is chargeable to tax and make an assessment accordingly, but such assessment shall not affect the liability of such person to a penalty by reason of his failure or neglect to deliver a return.

60. Additional assessments

(1) Where it appears to an assessor that for any year of assessment any person chargeable with tax has not been assessed or has been assessed at less than the proper amount, the assessor may, within the year of assessment or within 6 years after the expiration thereof, assess such person at the amount or additional amount at which according to his judgment such person ought to have been assessed, and the provisions of this Ordinance as to notice of assessment, appeal and other proceedings shall apply to such assessment or additional assessment and to the tax charged thereunder;

Provided that-

(a) (Repealed 2 of 1971 s.39)

(b) where the non-assessment or under-assessment of any person for any year of assessment is due to fraud or wilful evasion, such assessment or additional assessment may be made at any time within 10 years after the expiration of that year of assessment.

(2) Where it appears to an assessor that the whole

or part of any tax repaid to a person (otherwise than in consequence of an assessment having been determined on objection or appeal) has been repaid by mistake, whether of fact or law, the assessor may, within the year of assessment to which the repayment relates or within 6 years after the expiration thereof, assess such person in the amount of tax so repaid by mistake, and the provisions of this Ordinance as to notice of assessment, objection, appeal and other proceedings shall apply to such assessment and to the tax charged thereunder,

(3) No assessment shall be made under subsection

(2) if the repayment was in fact made on the basis of, or in accordance with, the practice generally prevailing at the time when the repayment was made."

22. Having considered authorities such as Parkin v Cattell 48 T.C. 462. and Hossack v CIR 49 T.C. 483, Mayo J. came to the conclusion that the Commissioner had not acted ultra vires in assessing the appellants as liable to property tax and had not been guilty of maladministration. He refused the application to apply for judicial review.

Judicial Review

23. This is an unusual application and as far as I am aware the first time any party has sought in Hong Kong to challenge an assessment of tax by the Commissioner by seeking judicial review rather than applying to the Board of Review established by Part XI of the Ordinance. Mr Gardiner contends that the appellants can do so if the Commissioner has acted ultra vires or has acted in a way which was so unreasonable that his decision cannot stand. He cites authority for that view such as R v IRC ex parte Preston (1985) A.C. 835, R v Special Commissioners ex parte Stipplechoice Ltd. (1985) S.T.C.248 R v IRC ex parte National Federation of Self-employed and Small Business Ltd. (1982) A.C. 617 and R v Inland Revenue Commissioners ex parte Norwich Equitable Building Society (1990) 1 W.L.R.1400.

24. It is the case for the appellants that in Hong Kong the whole scheme for the assessment of property tax and profits tax is based on the premise that if a company earns profits from a building it should not pay property tax and that principle remains good even if for any particular year the company does not in fact earn a profit. It is still within the profits tax net. It would be an absurd situation if a company earns $1 in a year and is exempt from tax but if it lost $1, or broke even, it is liable to tax. Proviso (b) of Section 25 provides that if the property tax paid exceeds the profits tax, the excess shall be repaid, clearly showing that the basis of assessment is that for profits tax. As Mr. Gardiner succinctly put it in his skeleton argument "businesses should pay tax on their profits: no more, no less". The ownership of land is carrying on a business. Property tax is aimed at individuals or non-profit making bodies such as clubs. Proviso (a) of Section 25 requires that the commercial profits derived from the property should be part of the company's business profits and is be chargeable to profits tax.

25. The Commissioner contends that not only does the property owner have to be chargeable to profits tax before being entitled to exemption, but there must be such profits in any particular year, albeit only $1. This leads to the position that such a company would not pay property tax whereas if it lost $1 it would be liable, but, in a low-tax structure, that is an acceptable position. There is no dispute that a company cannot be liable for both profits tax and property tax but here the appellants, as a result of their own strenuous efforts, have been assessed as having made no profit on which they are liable to pay tax and the Commissioner not only was entitled to assess them for property tax, but it was his duty to do so, pursuant to Section 59(3) of the Ordinance, if it was his opinion that the appellants were liable. He may be wrong in that opinion but that is not a matter for judicial review unless he is so clearly wrong that his action is "unreasonable" in accordance with the principles set out in Associated Provincial Pictures Houses v Wednesbury Corporation (1948) 1 K.B. 223.

Have the appellants been given exemption?

26. There is no dispute that Trillium, as it was receiving normal rent from the Bank before October 1985 which was assessed for profits tax, was granted exemption from property tax in 1983. Harley applied for exemption by a letter of 14th March 1987 no reply was ever received to that letter and it is contended that Harley was then entitled to assume that exemption had been granted. It was the evidence of most of the accountancy experts that when exemption was applied for by a land owner who was also liable to profits tax, which would be the position in the overwhelming majority of cases, no formal letter was ever received from the Commissioner saying that exemption had been granted. Trillium did receive such a letter, on a printed form, but it would seem that was exceptional.

27. Subsequently only profits tax returns were sent to Harley, which were duly completed on the basis that exemption from property tax had been granted. Harley submits that by taking no further action to assess property tax the Commissioner has given Harley the legitimate expectation that it was not to be held liable to property tax and no provision has ever been made in its accounts for such tax. It would be a serious matter to now go back and do so, Harley being a subsidiary of a very large publicly listed company. This is an abuse of power by the Commissioner and judicial review is an appropriate remedy to correct it.

28. Trillium's position was stronger. An exemption had been given and the question was whether the Commissioner, having accepted profits tax returns which showed that normal rent was no longer payable after October 1985 on the grant of the 30 year lease to the Bank, was precluded from saying that the circumstances under which it let out its parts of China Building had changed so that the exemption no longer applied.

29. Both appellants contend that by forwarding profits tax assessment forms to the appellants and, until March 1991 not claiming that they were liable to property tax the Commissioner must be taken to have exempted Harley and to have continued the exemption of Trillium. It is ultra vires and an abuse of power now to raise the property tax assessments.

30. For the Commissioner Mr. Goldberg contends that he has done nothing to give the appellants grounds for believing they were exempt from property tax so as to raise a legitimate expectation which would found a case for judicial review. The Commissioner has certainly made a determination that the appellants were not liable to profits tax but that does not constitute a determination that the premiums received, while not assessable for profits tax, are not assessable to property tax. A letter from the Commissioner's solicitors, Messrs Herbert Smith, to the appellant's solicitors, Messrs Woo, Kwan Lee and Lo, said:

"the Commissioner will grant exemption from property tax if the property owner:

(a) included rental income from property in its profits tax computation; and

(b) such income constitutes all the consideration payable to the company in respect of the right to use the property; and

(c) all such income is assessable income for the purposes of profits tax."

31. It was open to the Commissioner to determine that while the premiums were capital receipts for the sale of an asset and therefore exempt from profits tax they were also payments which constituted consideration in respect of the right of use of the property within the meaning of Section 5B(2) of the Ordinance. The Commissioner had done nothing to give the appellants any legitimate expectation that they were exempt from property tax following the grant of the 30 year leases.

Are the appellants carrying on business in Hong Kong?

32. Harley is a Panamanian company which registered as an overseas company in Hong Kong on the 16th April 1987, following receipt of a property tax return. It owns valuable property for which it would be entitled to receive normal monthly rent. It has however, in return for a single lump sum premium, assigned the use of that land for 30 years. During that time it would receive no income but it will have to pay fees for preparation of its annual report etc. Trillium is a Hong Kong registered company which, before October 1985 was undoubtedly carrying on the business in Hong Kong of owning and renting out property. It also in October 1985 sold the right to use that property for 30 years in return for a capital sum payment. It has stated in its profits tax returns that it is now dormant. The appellants' case is that they are either a Hong Kong company or a foreign company having a registered office in Hong Kong, they own property which will eventually revert back to them and while not receiving regular rental payments, have expenses which are paid in order to keep the companies in existence. They both filed annual reports and made profits tax returns. The Commissioner says that such activity falls short of carrying on a "trade profession or business" and in the case of Trillium the company itself says it is dormant. He is entitled to take Trillium at its word.

What was the nature of the transactions of October 1985?

33. The appellants' case is that all they did was to purchase a long-term reversionary interest in parts of China Building from the Bank on the basis that they would immediately lease back the premises to the Bank for 30 years. The purchase of the property by Harley and the purchase of the Bank's shares in Trillium are dated the 1st October 1985. The leases back to the Bank are dated the 2nd October but there is evidence that this was purely a matter of a minor mistake being made in the way the leases were prepared, which had to be corrected. This meant they were not executed until the day after the purchase agreements. The appellants contend that the difference in the dates is of no consequence and this court should look at the actual effect of the transactions. All that happened was that Harley became liable to pay the Bank $137,000,000 but the Bank was to return $119,875,000. The only actual payment was $17,125,000 to the Bank. Trillium was purchased for $63,000,000 from the Bank but $55,125,000 was to be deducted from that for the 30 year lease. Again the only payment was $7,875,000 to the Bank. Neither of the appellants has ever actually received the premium payments and if held to be liable to property tax would have to call in capital to pay it.

34. For the Commissioner Mr. Goldberg submits that you can not go behind what is clearly recorded in the documents which set out that the purchase of the land in the case of Harley and the shares in the case of Trillium were effected for full consideration received on the 1st of October and the leases-back, again for full consideration received, were a day later. However the question is not relevant.

35. The appellants obtained an 86 year lease of the premises and granted a sub-lease of the first 30 years of that period. The payment for granting that sub-lease was a payment in consideration of a use of the land. Support for that is sought in the decision of the East African Court of Appeal in A.C. et al v The Commissioner of Income Tax E.A.T.C. Vol.2 case no. 37, p. 148 where payments for the purchase of 10 year leases were held to be taxable. That case depends on its own facts and relevant law but Mr. Goldberg cites the final paragraph of the judgment of Sinclair. VP. at 161:

" It frequently happens in income tax cases that the same result in a business sense can be secured by two different legal transactions, one of which may attract tax and the other not. This is no justification for saying that a taxpayer who has adopted the method which attracts tax is to be treated as though he had chosen the method which does not or vice versa".

36. Here it may be that the appellants could have achieved the same result by going about the transactions in a different way but they have not done so. The appellants are bound by the form of their transaction.IRC v Fleming and Co. 33 T.C.57.

Is this a case for judicial review?

37. There is clear authority that the Inland Revenue Commissioners in England are subject to judicial review. R v IRC ex parte National Federation of Self-employed and Small Business (per Lord Wilberforce at 632), but only if the Commissioners have done something which was ultra vires or unlawful (per Lord Diplock at 637). That decision was discussed in R v IRC ex parte Preston and at P.851 Lord Scarman sets out very helpfully the propositions he regarded as correct in relation to a taxpayer's right to apply for judicial review. From that I think it is settled that judicial review is available only if the taxpayer can show that the authorities have acted outside their powers or have abused them. Abuse of power may however be shown if the taxpayer has not be treated fairly, and Lord Scarman does not consider what Lord Templeman said in Ex parte Small Business and Self-Employed to be contrary to that view. His final proposition however is that judicial review is only very rarely available if there is some other effective remedy. At 852 he says:

"judicial review is not an appeal. Where Parliament has provided by statute appeal procedures, as in the taxing statutes, it will only be very rarely that the courts will allow the collateral process of judicial review to be used to attack an appealable decision".

38. That last proposition is no doubt based on the fact that the normal appeal procedure would not allow for consideration to be given to the question of unfairness. The only question to be decided was whether or not the tax was payable. That would be the position in Hong Kong in proceedings before the Board of Review, and any appeal on law from its decision.

39. Lord Scarman however does go on to say that:

"even if there are other avenues open to appeal judicial review may be available if special circumstances exist which make the Commissioner's decision unfair and unjust."

40. In In re Preston Lord Templeman, delivering the opinion with which the other members of the House of Lords agreed, at pp.862-3 considered various dicta in the previous cases. He concluded at 864:

" Mr Brodie, on behalf of the appellant, submitted that if, as Lord Scarman announced in the Self-Employed Case (1982) A.C. 617, the commissioners owe a duty of fairness to the general body of taxpayers, the commissioners must equally owe a duty of fairness to each individual taxpayer. I agree, but a taxpayer cannot complain of unfairness, merely because the commissioners decide to perform their statutory duties including their duties under section 460 to make an assessment and to enforce a liability to tax. The commissioners may decide to abstain from exercising their powers and performing their duties on grounds of unfairness, but the commissioners themselves must bear in mind that their primary duty is to collect, not to forgive, taxes. And if the commissioners decide to proceed, the court cannot in the absence of exceptional circumstances decide to be unfair that which the commissioners by taking action against the taxpayer have determined to be fair. The commissioners possess unique knowledge of fiscal practices and policy. The commissioners are inhibited from presenting full reasons to the court for their decisions because of the duty of confidentiality owed by the commissioners to each and every taxpayer.

The court can only intervene by judicial review to direct the commissioners to abstain from performing their statutory duties or from exercising their statutory powers if the court is satisfied that "the unfairness" of which the applicant complains renders the insistence by the commissioners on performing their duties or exercising their powers an abuse of power by the commissioners."

41. In Hong Kong there is a very different tax structure to that in the United Kingdom. It consists of three parts, property tax, profits tax and salaries tax. While I have no doubt that the Ordinance provides that no property owner should be liable for both property tax and profits tax I do not accept that if a company is not liable for profits tax it cannot be liable for property tax, which is the main thrust of Mr. Gardiner's argument for the appellants. No doubt in the vast majority of cases that would be right but the background facts here are very uncommon. There is some conflict in the evidence as to whether the assignment of a long-term lease in exchange for one large premium is rare. It is the case for the Commissioner that it is and affidavits have been filed to that effect to rebut the evidence for the appellants that the Commissioner's practice is such as to give the appellant's reason to believe they are exempt from property tax. It is, in my view, clearly arguable that the receipt of a lump sum premium payment in exchange for a long lease is a consideration for the use of land. It then is a question of whether or not the appellants are entitled to exemption under Section 25(2) proviso (a) and as to what is meant by the word "profits" as used in that section.

42. On the evidence here I do not consider that the Commissioner has acting in an unfair way so as to deprive the appellants of their legitimate expectations and that judicial review should be granted on that basis.

43. I am satisfied that the actions of the Commissioner in assessing the appellants as liable to property tax are not clearly ultra vires. Whether he granted Harley exemption or continued the exemption already granted to Trillium are matters of considerable doubt. In R v Hillingdon London Borough Council [1974] QB. 720 at p. 729. Lord Widgery C.J., when considering the question of a local authority's power to impose certain conditions in granting planning permission for a development, said in considering the advantages of an statutory application by way of appeal to the Secretary of State or applying for an order of certiorari "an application for certiorari has, however, this advantage: that it is speedier and cheaper than the other methods and is a proper case, therefore, it may well be right to allow it to be used in preference to them. I would however define a proper case as being one where the decision in question is clearly made without jurisdiction or in consequence of an error of law." In my opinion neither is the case here.

44. There is also doubt as to whether the appellants were carrying on business in Hong Kong, though the appellants may be on stronger ground there. There is the question of what was the true nature of the transactions. Then there is the central question of whether the appellants are entitled to exemption under Section 25(a) of the Ordinance. We have heard long, detailed and very able argument on all these matters and a considerable volume of authority, some of which I do not consider it necessary to refer to here. There are disputes as to facts and practice in the affidavits which have been sworn and filed on each side. This lends support, in my view, to the conclusion reached by Mayo J. that this was not a matter for judicial review in that it has not been clearly shown that the Commissioner acted ultra vires or in such an unreasonable or unfair way as is necessary to found judicial review. The Commissioner may be wrong but he is not obviously wrong.

45. The appellants have an effective alternative remedy under Part XI of the Ordinance and I consider that the court should be reluctant to permit a party to avoid the procedure set out therein. Section 65 of the Ordinance provides for the constitution of a Board of Review. Each panel shall have a legally qualified chairman but the other members can, and are, appointed from professional persons with wide experience in tax matters. The Board's decision is, by Section 69 (1), final except on a point of law which must be set out in a stated case. These provisions enable decisions of fact in tax cases to be settled by a panel of experts on tax matters while providing a right of appeal on any question of law. I am of the view that on the disputed facts here the procedure set out in Part XI should be followed. It may well be that the matter will finish in this court but it would be on the basis of findings of fact and a stated case as to the legal consequences of those facts. We have heard careful and able argument on the matters which are here in dispute between the parties, principally as to matters of law but also questions of fact. I do not consider that the Commissioner has acted in such a way as to constitute unfair conduct so as to call for judicial review, which is the only ground of complaint where the Board of Review could not give relief, and the disputes as to both fact and law which have arisen should be decided in the manner allowed for in the Ordinance.

46. I would dismiss this appeal.

Nazareth, J.A.:

I agree that the appeals must be dismissed.

The appellants' case for judicial review was founded upon two grounds: First, that the assessments for property tax were ultra vires upon the not uncomplicated basis which has been outlined by Penlington J.A. Second, that the assessments were in the circumstances so unfair as to be an abuse of power. This involved, in addition to the question of law posed by the disputed construction of s.25 proviso (a), factual matters, particularly the exemptions and legitimate expectation contended for by the appellants, which my Lord has detailed.

47. As to the first ground, i.e. that the assessments were ultra vires, I agree with my Lord, for the reasons he has given, that the Commissioner had jurisdiction under s.59 (3) of the Inland Revenue Ordinance (Cap.112) to make the assessments, even if they prove to be wrong in law. So far as that question of vires has to be addressed in terms of a mistake of law, as I understood the respondent's position, he did not dispute that such a mistake enables the Court to grant judicial review. It is accordingly neither necessary nor profitable to address the apparently contentious question of the requisite nature of an error in law and whether, since the Anisminic case [1969] 2AC 147 (H.L.), it need not be of a jurisdictional nature. It suffices therefore to say that the existence of such a mistake (i.e. that the respondent misconstrued s.25 proviso (a) as empowering and requiring him to make the assessment) cannot be seen to be clear as is required before judicial review can be granted (see R v Hillingdon London Borough Council [1974] QB 720 at p.729C).

48. Furthermore, the respondent contended that since there was a prescribed appeal procedure (that also was more suitable), judicial review should not be granted. There is a wealth of authority to that general effect. I content myself with merely citing the following from the judgment of Lord Scarman in R v IRC, ex p. Preston [1985] AC 835 at 852D:

"My fourth proposition is that a remedy by way of judicial review is not to be made available where an alternative remedy exists. This is a proposition of great importance. Judicial review is a collateral challenge: it is not an appeal. Where Parliament has provided by statute appeal procedures, as in the taxing statutes, it will only be very rarely that the courts will allow the collateral process of judicial review to be used to attack an appealable decision."

Is this then one of those rare cases in which judicial review should be allowed? I am not persuaded that it is. The real remedy the appellants seek is final determination of the validity of the assessments for property tax, which they contend are contrary to law. Resort to the prescribed appeal procedure will produce that final result whereas judicial review may well end in the matter being remitted to the Board, the time and resources absorbed in reaching that result, including those of the courts, being wasted. Moreover the Board would seem to be better placed to deal with such an appeal with their specialised knowledge. At the same time, the final determination of legal questions by the courts if required, including the construction of the relevant statutory provisions, is catered for. For my part therefore, I also would not allow the appeals on the ground that the assessments were ultra vires.

49. Turning to the second ground, i.e. that of unfairness amounting to abuse of power, again this, it is not disputed, affords a legal basis for allowing judicial review; but its factual basis is disputed. Its effective legal basis is clear e.g. from the following dictum of Lord Scarman in ex p. Preston:

"... I must make clear my view that the principle of fairness has an important place in the law of judicial review: and that in an appropriate case it is a ground upon which the court can intervene to quash a decision made by a public officer or authority in purported exercise of a power conferred by law. ... (at p.851E)

But cases for judicial review can arise even where appeal procedures are provided by Parliament. The present case illustrates the circumstances in which it would be appropriate to subject a decision of the commissioners to judicial review. I accept that the court cannot in the absence of special circumstances decide by way of judicial review to be unfair that which the commissioners by taking action against the taxpayer have determined to be fair. But circumstances can arise when it would be unjust, because it would be unfair to the taxpayer, even to initiate action under Part KVII of the Act of 1970. For instance, as my noble and learned friend points out, judicial review should in principle be available where the conduct of the commissioners in initiating such action would have been equivalent, had they not been a public authority, to a breach of contract or a breach of a representation giving rise to an estoppel. Such a decision could be an abuse of power ... (at p.852F)"

50. The appellants attach particular importance to the second ground of unfairness because, they contend, it is not one that would be determined by the prescribed process of appeal to the Board. In that respect, it seems to me that unfairness must, in the particular context of this case, be addressed as an exception to the general principle that judicial review should not ordinarily be granted where there is a prescribed statutory remedy. The appellants' submission of unfairness depends upon two essential matters. First, the question of law posed by the disputed construction of s.25 proviso (a) to which I have already referred. That the respondent's construction is wrong is, I repeat, far from clear and for the reason already given cannot support the grant of judicial review. The second matter upon which the submission depends, is its factual foundation in particular the exemptions from profits tax and the legitimate expectation. In rejecting the factual existence of such exemptions or legitimate expectation, as he must be presumed to have done in the process of making the assessments to property tax, plainly the respondent's decision cannot be said to be perverse or such that no reasonable authority properly instructed in the law could have arrived at (see e.g. Halsbury's Laws 4th ed. Vol. 1(1) para.70 p.123, footnote 21). For those reasons, in my judgment, the second ground also fails and the appeals must be dismissed.

51. In rejecting the appeals, I would record my regret that it did not become sufficiently clear before or during the very lengthy submissions upon construction of the relevant statutory provisions, that such did not have to be determined for purposes of disposing of these appeals. It seems to me now that any obiter views in this judgment upon those construction points are likely to serve only to complicate rather than facilitate their ultimate determination, and should therefore be avoided.

Mortimer, J.A.:

52. I have had an opportunity of reading the judgments of Penlington J.A. and Nazareth J.A. I agree with their conclusions but would add a few remarks of my own on two main issues.

53. In assessing the taxpayers to property tax the assessor exercised his powers under s.59(3) of the Inland Revenue Ordinance, Cap.112 (The Ordinance). He may make an assessment only

(a) when the taxpayer has not furnished a return (about which there is no dispute), and

(b) when the assessor is "of the opinion that the taxpayer is chargeable with (property) tax."

54. The assessments are challenged here and below on two broad grounds:

(a) that each taxpayer had a legitimate expectation that it would not be assessed to property tax. And, in the circumstances, the decisions were so unfair and unreasonable that they amounted to an abuse of power;

(b) that the Commissioner acted 'ultra vires' in making the assessments on the basis that it was not open to him to be of such an opinion because the taxpayers were not chargeable to property tax in law. He therefore exceeded his jurisdiction in making the decisions to assess.

55. These grounds were the subject of closely argued submissions which dealt with the nature of the transactions; the history of the assessments; the question whether the taxpayers were carrying on business in Hong Kong; the nature of the payments in dispute; the construction of the Ordinance; the jurisdiction of the Commissioner to assess; the practice of the Commissioner; and the practice of the Court. Some were on law, some on fact, and some on mixed law and fact.

56. For the Commissioner Mr Goldberg Q.C. submitted (inter alia) that the decision whether the taxpayers were chargeable to property tax - even if wrong in law - was one which the assessor had jurisdiction to make under s.59(3) of the Ordinance.

57. For my part, I accept this submission. No return having been furnished the assessor formed the bona fide opinion on the facts as he knew them that the taxpayers were each chargeable with property tax. He was entitled to make the assessments even if later they are shown to be wrong in law or on the facts or even if after paying the property tax they are entitled to a refund under s.25 proviso (b) and s.79. In my judgment the assessor neither asked himself the wrong question nor did anything in reaching his decision which demonstrates that he exceeded his jurisdiction on the principles considered by Lord Reid in Anisminic Ltd v Foreign Compensation Commission [1969] AC 147 at 171C-E. See also In re Racal Communications Ltd [1981] AC 374, 383 E-G per Lord Diplock and 390 D-F per Lord Edmund Davies.

58. In the result, however, this appeal turns on more formidable grounds.

59. The main justification for seeking judicial review is the contention that the assessments were unfair and unreasonable because this is not a ground open to the taxpayers on appeal. Once this ground fails - as it does - the taxpayers must establish good reasons why they should be granted judicial review when they have not exhausted their available remedy.

60. The usual course for an aggrieved taxpayer is to appeal. Apart from unfairness the Board of Review is a suitable tribunal to decide the very matters urged before the judge and this Court. It has additional and considerable advantages. It is a fact finding tribunal with specialist knowledge of Hong Kong tax law and practice. In these circumstances the Court will not grant leave for judicial review unless there is some clear advantage in so doing. Here there is none. The Board of Review will resolve the issues fully and effectively not only on law but most importantly in this case on the relevant facts and practice. The Court has no advantage by way of speed, convenience or expense and the disadvantage that factual issues cannot be resolved.

61. Hong Kong prides itself upon its simple, low tax system. Absent mala fides or an abuse of power, the Courts should be slow to intervene and review an assessor's decision in these circumstances. He should be left to carry out his administrative tasks and his duty without interference of the Court, and the aggrieved taxpayers - if so advised - should pursue their appeals to the Board of Review.

62. In different circumstances the point is made by Lord Widgery C.J. in R v Special Commissioners of Income Tax ex p. Morey (1972) 49 Tax Cas. 71 at 72 (cited by Lord Donaldson M.R. in R v I.R.C. ex P. Emery [1980] S.T.C. 549):

"The ground upon which it is said that this Court should interfere with special Commissioners' decision is that it was reached without jurisdiction or in breach of the principles of natural justice. It is valuable, I think, therefore, to start with a brief reminder of the circumstances and principles upon which this Court interferes in this type of case by its exercise of the prerogative orders. There can be no doubt but that the Special Commissioners, when acting judicially, are a subordinate tribunal amenable to control by this Court through the exercise of prerogative orders. There is equally in my judgment no doubt that, where an applicant complains of want of jurisdiction or breach of the rules of natural justice, and there is no other, or no other convenient, way in which his grievance can be heard, he should be welcome as it were in this Court, and that his application should be considered here when it cannot be considered elsewhere. On the other hand, when there is an alternative and convenient form of appeal, it is not normally the practice of this Court to interfere unless the allegation of want of jurisdiction or breach of the rules of natural justice is a clear and simple case in which it is evident that to come here rather than pursue the more traditional lines of appeal is going to result in a saving of time or expense. The Income Tax Acts are a highly technical structure. There is a qualified and expert system of appellate Courts to deal with questions arising under those Acts, and it is not in the national interest, or anybody else's interest, that we should interfere in this Court in that structure, and in those procedures, more than to the minimum to which I have briefly referred."

These words have equal force in the context of this appeal and this has long been the proper approach to applications of this kind.

63. I would also dismiss this appeal.

Penlington, J.A.:

64. The appeal is dismissed. We make an order nisi that the respondent is to have his costs of this appeal.

Representation:

Mr John Gardiner, Q.C. and John J.E. Swaine (M/s Woo, Kwan, Lee & Lo) for Appellants

Mr David Goldberg, Q.C. and Russell Coleman (M/s Herbert Smith) for Respondent