Weson Investment Ltd v. The Commissioner of Inland Revenue
Read the full judgment text of HCA 272/2004 on BabelCite. This High Court CFI judgment was delivered on 1 August 2005.
1. This is a claim by a taxpayer from the Revenue.
Cites 1 case
|
HCA 272/2004 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE ACTION NO. 272 OF 2004 ____________ BETWEEN
____________ Before: Deputy High Court Judge Gill in Court Dates of Hearing: 11-14 July 2005 Date of Judgment: 1 August 2005 _______________ J U D G M E N T _______________ Introduction 1.This is a claim by a taxpayer from the Revenue. 2.The plaintiff was assessed for profits tax but raised an objection upon the grounds that the profit was a capital gain and not liable. An assessor pressed for payment pending final determination. In the end the plaintiff did pay but not before the Commissioner had added the 5% surcharge and obtained a default judgment from the District Court. The Commissioner’s determination was to uphold the assessment. The plaintiff appealed to the Board of Review and won; the assessment was wholly set aside. The plaintiff claimed a refund of the tax paid together with the attendant extras because it was paid late; the Commissioner obliged. But the plaintiff also made a demand for interest on the amount paid for the period it was out of pocket. This was declined because statutorily interest is recoverable only by those who, at the Commissioner’s discretion, are permitted to purchase a Tax Reserve Certificate (TRC) matching the assessed tax in lieu of paying the tax subject to determination. If that falls to be in their favour they get to keep the interest on redemption of the TRC. The plaintiff was given the opportunity to purchase a TRC as a condition for holding over the tax due but declined to do so. So no interest was payable. 3.Aggrieved by this refusal, the plaintiff by this action sues to recover the interest it claims is due. History 4.The plaintiff is one of a number of companies wholly-owned and controlled by a well-established businessman called Yeung Sai Hong. It was incorporated in November 1992 and the next year it purchased a parcel of land registered in Tsuen Wan District, New Territories. In early 1995 it subdivided the land into two for the purpose of building on one part a service station. It sold the redeveloped part which sale was completed in June 1996. Audited financial returns reveal it made a profit of more than $46 million. The Revenue was interested in that profit and sought reasons to justify why it should not be subject to income tax. The plaintiff engaged Ting Ho Kwan & Chan (THKC), Certified Accountants, to argue the gain was capital, and there was correspondence between THKC and the Commissioner on the topic. The upshot was that an assessor formed the view that the profit was taxable, and under a notice of 10 December 1999 (the December Notice) assessed and demanded tax of $7,620,671. The December Notice was issued under section 60(1) of the Inland Revenue Ordinance (IRO). 5.By letter of 7 January 2000, THKC wrote objecting to the assessment and demand. The Commissioner was invited to hold over the amount payable pending the outcome of the objection. This was in effect a request made to invoke the discretionary powers of the Commissioner to hold over tax under section 71 IRO. Section 71 states on the point:
6.The response from the Commissioner of 14 January 2000 was favourable; to order that the payment of the tax as assessed be held over pending the result of the objection, on condition that the plaintiff purchase a TRC having the same value, no later than 28 January 2000. For the purpose a partially completed certificate was enclosed giving the value at $7,620,671. 7.The plaintiff did not purchase a TRC for this or any value by the due date nor did it pay the tax and was thereafter in default. How and why there was no TRC purchase was the subject of correspondence a few years later; I shall return to this topic. Because of the default, the Commissioner in exercise of his powers under section 71(5) IRO added 5% surcharge to the debt and by writ of 22 May 2000 sued to recover the enhanced amount of $8,001,704. 8.The plaintiff took no steps and on 22 June 2000 a District Court Registrar entered judgment by default for such amount together with interest to judgment and beyond and costs. The interest asked for and ordered was, as authorized by section 71(9)(e)(ii) and (11) IRO, the Judgment Rate as determined by the Chief Justice. 9.On 9 August 2000 the Commissioner issued a final notice (the Final Notice) for $8,001,704 demanding payment on or by 21 August 2000, failing which a further surcharge of 10% would be added. On the next day the Commissioner exercised his powers under section 76 IRO to recover, on account of the debt, the sum of $15,290 from the plaintiff’s account with the National Commercial Bank. 10.By letter of 19 August 2000 THKC wrote seeking an indulgence of a few days, stating that its client was negotiating a loan to meet the outstanding tax. Then, on 30 August 2000, the tax was paid by cheque from Petersen Holdings Company Limited, a company also wholly owned and controlled by Yeung Sai Hong. 11.By letter of 23 December 2000, THKC gave detailed reasons for the plaintiff’s objection to paying the tax. There followed correspondence between the parties, but the upshot was a determination from the Commissioner of 12 March 2002 (the March Determination) which gave notice that the plaintiff’s objection had failed. 12.On 26 March 2002 the plaintiff’s solicitors gave notice of appeal to the Board of Review under section 66 of the IRO. The matter came to be heard and, on 7 August 2003, the Board’s decision was forthcoming: it allowed the appeal and set aside the Commissioner’s assessment of the profits tax in total. 13.By letter of 11 August 2003, the plaintiff wrote to the Commissioner asking for reimbursement of “all our related tax and charges together with interest paid thereon at your early convenience”. 14.By order of 3 September 2003, a Registrar of the District Court set aside the judgment and consequential charging orders were discharged. 15.By cheques paid on 5 and 25 September, the Commissioner refunded to the plaintiff the tax, the surcharge, the interest it had charged and costs equating with what the plaintiff had paid or otherwise that the Revenue had recovered from it. But it declined to pay any interest on those sums. 16.This matter was amongst others raised by the plaintiff’s solicitors in a letter to the Commissioner of 10 September 2003. On the point they wrote:
17.There is a mistake of fact in this letter, because the plaintiff did not in fact purchase a TRC. The plaintiff’s position is perhaps more clearly put in a subsequent letter of 15 September 2003, which states in part:
18.The response from the Commissioner was simply to the effect that the plaintiff failed to comply with the condition for hold over of tax by the due date and thus that the right to hold over had lapsed. There was no record of any promise of a subsequent purchase of a TRC; in any event, by 30 August 2000 the right to do so in lieu of paying tax no longer existed. Without a TRC there was nothing to redeem and no interest earned. 19.Dissatisfied with this response, the Plaintiff filed this writ in February 2004. The Pleadings 20.The plaintiff claims in the Statement of Claim that the assessments of tax as set out in the December Notice of $7,620,671 and in the Final Notice of $8,001,704 were unlawful and were outside the powers conferred on the Commissioner by the IRO. Thus the Revenue was unjustly enriched to the extent of the amounts paid at the expense of the plaintiff who was thus entitled (at Common Law) to restitution and interest calculated to the date of the writ at $2,426,234 under section 48 of the High Court Ordinance. 21.It is to be noted that there is no claim that it bought a TRC or is entitled to interest at the TRC rate as if it had purchased a TRC, notwithstanding the demand made in the letter I have reproduced at paragraph 17 herein. 22.Mr Mok representing the plaintiff stated that whilst the claim for interest, payable under Common Law, is unequivocal, the plaintiff leaves it to the Court to determinate the rate. The “best case” is that it be paid the Judgment Rate (this being the rate the Commissioner collects for late payment of tax, for “equality of arms”); further, relying on authority, with quarterly or other periodic rests, hence at compound rate. Otherwise, that it be at the “best lending rate” as fixed, or at a rate equivalent to the TRC rate, whether simple or compound. 23.The Defence filed denies the plaintiff’s right to any further relief above that which is the reimbursement of the tax and penalties paid; in particular, in the absence of any authority under the IRO, to interest howsoever calculated on the tax paid and then refunded. 24.In a Reply, the plaintiff pleaded that the provisions of the IRO relied upon by the Commissioner should be consistent with the plaintiff’s rights under Articles 6 and 105 of the Basic Law; to the extent that they are not, they are null and void and of no effect. 25.Articles 6 and 105 read as follows:-
Evidence 26.For the plaintiff, one Cheung Kai Hoo was called to confirm his witness statement and to be cross-examined. At all material times he was the plaintiff’s in-house accountant and had knowledge of events. Most of what he recorded in his statement was incontrovertible and I have already recited it. When it came to the plaintiff paying the tax, he stated that it did so:
From the witness box he explained that a partner of the accountants THKC had explained the enforcement options available to the Commissioner as Judgment Creditor, and accepted that in fact no steps had been taken to wind up the plaintiff. It was he who had calculated the interest which the plaintiff was claiming at the Judgment Rate; up to 30 June 2004 this was $2,497,419.45. 27.Miss Yuen Siu Chi was also called to give evidence for the plaintiff. She is a staff solicitor employed by the plaintiff’s solicitors and has conduct of the case. She had calculated the interest claimed to be due based on the Hong Kong Monetary Authority’s determination of the best lending rates in the event that I find for the plaintiff and rule that rate as being appropriate for restitution. By this means, to 13 February 2004, she arrived at a figure of $1,536,218.13. 28.For the Commissioner an assessor with knowledge of the file called Raymond Lee confirmed his witness statement and was cross-examined. He said that the refund of tax and related payments to the plaintiff were made under section 79(1) IRO, the only section in part XXIII of the IRO marked “Repayment”, in contrast with the plaintiff’s case that the amounts it was paid amounted to restitution. He produced a chart showing the amount of interest the plaintiff would have been entitled to had it purchased a TRC; this amounted to $373,352.60. 29.On the issue of a “claim in writing” as referred to in section 79(1) IRO, this being the necessary prerequisite for a refund paid under section 79, he stated that the Revenue treats an objection raised as a claim, for that is the purpose of an objection; to recover tax paid or to resist paying tax assessed but not paid. Discussion 30.Section 79 in part states as follows:
31.Mr Mok submitted that the plaintiff was in the circumstances of this case entitled to claim restitution of the principal sum and, as a consequence, interest thereon at Common Law, because its entitlement was not catered for under section 79 or elsewhere in the IRO. As he put it, section 79 provides for payment when the Commissioner professes to be satisfied that excess tax has been paid, and not where the determination is at the conclusion of the appeal process; moreover, where through lapse of time the claim which followed the successful end result was perforce made after the conclusion of the 6 years time limit. 32.He also took issue with the defendant’s case that payment of interest is catered for, where payment of tax is disputed, by the taxpayer purchasing a TRC. As he put it, that option is at the Commissioner’s whim, and may be permitted in one situation but not in another. And a taxpayer might not at the given time be in a position to purchase a TRC. That leaves only a claim for restitution under the Common Law. Furthermore, the interest payable is that earned on the TRC, not for interest following a successful appeal. And as seen, the Revenue is entitled to interest at Judgment Rate if it wins the appeal but there is no like provision if it loses. Where is the justice, if not by restitution under the Common Law, and at the same rate? 33.Mr Mok cited the House of Lords case of Woolwich Equitable Building Society v. Inland Revenue Commissioners [1993] AC 70 in support of the proposition that where tax has been levied pursuant to an ultra vires demand and paid under protest, the tax paid together with interest accrued thereon is recoverable under the principles of unjust enrichment. Lord Goff said in his judgment that the principle should extend to cases where the tax was wrongly extracted for other reasons; for instance, where the authority had misconstrued a relevant statute or regulation. 34.He also cited the Canadian case of Air Canada v. British Columbia 59 DLR(4th) 161 where it was said that there should be no distinction where a tax assessment is based on a misapprehension of the facts which attract the tax or where an error in calculation has been made, or where the taxing statute is misconstrued. 35.Mr Mok submitted that the plaintiff had, as the Board of Review found, been wrongly assessed because of the Commissioner’s misapprehension of the facts. Having paid the tax under protest and coercion (see Mr Cheung’s version of events) it was entitled to recover that and to interest to deprive the Revenue of the unjust enrichment it had earned on the taxpayer’s money. In the absence of machinery within the IRO to provide for this, the Court was entitled to exercise its powers under the Common Law to achieve justice. Furthermore, to adopt a contrary position would be to deprive the plaintiff of its right to compensation corresponding to the real value of the property it is deprived of, as provided for by Article 105 of the Basic Law. Findings 36.Was the claim out of time? I believe, and so find, that within the context of section 79(1) a claim is made when notice of objection is delivered to the Commissioner, for why is an objection made if not to seek a refund of tax assessed? The six years time limit is a generous one, but not so if the claim is not regarded as being capable of being made until the appeal process had been exhausted. 37.Does section 79(1) apply to those cases where the Commissioner’s determination has been overturned? In my view it would be a nonsense if the law makers had made provision for a refund based only on a concession made by the Commissioner but not where the ruling is made on appeal. Section 79(1) does not by its ordinary meaning make such a differentiation. That the Commissioner in this case did not appeal the Board of Review’s decision is tantamount to his being satisfied with the result. As I find, there is no gap in the process of recovery of tax that is subsequently found not to be due. 38.Was the demand for tax unlawful? My view is that it was not. The Commissioner before sending out the December Notice made enquiry, examined documents and correspondence before deciding that the profit was a trading profit and therefore taxable. The Board of Review conducted a hearing at which witnesses were called and cross-examined. In the strict sense this was not an appeal but a first time hearing. That the Commissioner’s determination on the documents was reversed does not amount to a mistaken view of the legal effect of the tax code or a mistaken view of the facts. The Commissioner did not misapply the law; his determination was not unlawful. 39.Did the plaintiff pay the tax under protest? I say it did not. It was late, without cause, and stood to be liable for the surcharge and to be sued for it as a debt. And the consequences of failing to pay a judgment debt are common knowledge. Moreover, just prior to paying the tax it sought a few days grace to avoid the second surcharge of 10%. The plaintiff, or rather its sister company, paid the tax because it recognized there was a statutory obligation to do so. The principle of “unjust enrichment” was not engaged. 40.Is there a gap in the IRO when it comes to the question of interest on tax that has subsequently been refunded? I say no. The provision for withholding tax by purchase of TRCs or bank guarantee effectively provides for that. Whilst implementation is dependant on the Commissioner, he cannot behave arbitrarily; and his decision to refuse this course may be the subject of Judicial Review. In any event, the Commissioner did give the plaintiff the opportunity to purchase a TRC. Were he not to have done so because of a perceived weakness in the plaintiff’s case or other factors not favourable, it would be fatuous if the plaintiff were then to have been entitled to a higher rate of return at Common Law. 41.And I see no injustice in the differing rates payable by a taxpayer in default and that paid to him upon redemption of a tax certificate. The Judgement Rate is, inter alia, a penalty. The TRC Rate is for return on money invested. 42.Does Article 105 of the Basic Law require compensation at real value; that is, with commercial interest included? 43.The answer lies in section 75(1) of IRO, which states that tax due and payable under the IRO shall be recoverable as a civil debt due to the Government. It goes on to deal with the right to sue to recover. Specifically is included, as can be seen at section 71(2), tax that is the subject of an objection or appeal. Thus the “property” being the tax assessed becomes the Government’s, and until payment is a debt due to it. So, Article 105 has no application. 44.Is there room for a liberal interpretation of the IRO, as may entitle relief not spelt out? The answer is no.
– per Hartmann J in Hong Kong Flour Mills Limited v. Commissioner of Inland Revenue unreported HCAC 707 of 2001, at paragraph 22. 45.And I adopt the viewpoint of Deputy Judge To when he said in Wong Tai Wai David and Another v. Commissioner of Inland Revenue unreported, HCIA 2 of 2003 at paragraph 8:
46.In The Commonwealth of Australia v. SCI Operations [1998] 192 CLR 285, a case decided in the High Court of Australia, Benson CJ said at p. 306:-
In Lamesa Holdings BV v. Commissioner of Taxation [1999] 42 ATR 154, Sackville J said at P. 177:-
47.This is precisely the anomaly that the plaintiff seeks to pursue in its application; that cannot be right. 48.The plaintiff’s claim for interest is dismissed. Costs, nisi at first instance, are to the defendant taxed if not agreed.
Mr J Mok and Miss C Lam instructed by Messrs Tsang, Chau & Shuen, for the Plaintiff Mr A Ismail instructed by the Department of Justice, for the Defendant Appeal dismissed: see CACV261/2005 dated 25 January 2007 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cases cited in this judgment