The Commissioner of Inland Revenue v. Tam, Kin Chung

DCTC 8279/2007

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

TAX CLAIM NO. 8279 OF 2007

____________

BETWEEN

____________

Coram: H.H. Judge Chow

Date of hearing: 14^th July, 2007

Date of handing down Decision : 19^th September 2008

DECISION

1.Pursuant to Order 14A rule 1 of the Rules of the District Court, the Plaintiff applies for the following questions of law to be determined:-

(a)         whether the debt as per paragraph 1 of the Statement of Claim, namely, a surcharge under subsection 71(5) and 71(5A) of the Inland Revenue Ordinance is a debt provable at bankruptcy;

(b)        whether the Defendant’s discharge from bankruptcy releases the Defendant from the liability of paying the said surcharge under section 32(7) of the Bankruptcy Ordinance; and

(c)         whether recovery action for the said surcharge against the Defendant, being a discharged bankrupt, violates section 12 of the Bankruptcy Ordinance.

2.On 11 September 2000, a notice of assessment and demand for salaries tax was sent to the defendant.  The tax assessed is $84,422.00, which is due on 2^nd January, 2001.  The Defendant failed to settle it.  Under s.71(5) and 71(5A) of the Inland Revenue Ordinance (“IRO”) surcharges (“the surcharge”) in the total sum of $10,271.00 were imposed.  The Defendant was declared bankrupt on 25 April 2002.  No legal proceeding was taken out by the Plaintiff to recover the tax due or the surcharge.  The Defendant was discharged from bankruptcy on 25 April 2006. A writ of summons was taken out on 3 October 2007 to recover the said surcharge.  In his defence the Defendant asserts that the said surcharge is provable in his bankruptcy and the recovery of then after his discharge violates s.12 of Bankruptcy Ordinance (“the Ordinance”) and therefore the Plaintiff is not entitled to recover it.

3.Section 12 of the Ordinance reads:-

“(1) On the making of a bankruptcy order ….. no creditor to whom the bankrupt is indebted in respect of any debt provable in bankruptcy shall have any remedy against the property or person of the bankrupt in respect of the debt, nor shall proceed with or commence any action or other legal proceedings, unless with the leave of the court…….”

4.Section 32(2) of the Ordinance provides that “Subject to subsections (1) and (3) to (8), where a bankrupt is discharged, the discharge releases him from all the bankruptcy debts, ………”Section 32(7) of the Ordinance stipulates that “Discharge does not release the bankrupt from such other bankruptcy debts, not being debts provable in his bankruptcy, as may be prescribed.”  The Defendant argues that the surcharge is a debt provable in his bankruptcy.  The key issue in this case is therefore whether the surcharge is a debt provable in the Defendant’s bankruptcy. 

5.Section 34(3) of the Ordinance reades:-

“….all debts and liability present or future, certain on contingent, to which the bankrupt is subject at the date of the bankruptcy order…… shall be deemed to be debts provable in bankruptcy.”

6.Section 34(3A) of the Ordinance provides an exception to this.  It reads:-

“3(A)  Notwithstanding subsection (3), a debt owing to the government in respect of a fine or monetary penalty imposed under an Ordinance shall not be provable in bankruptcy.”

(Underline provided)

7.The Defendant argues that the phrase “a fine or monetary penalty” is confined to a fine or monetary penalty for a criminal offence only.  As a result the surcharge is not caught by section 34(3A).  He agrees to the Plaintiff’s submission that the word “fine” means a monetary penalty in respect of a criminal offence.  He argues that ‘……Obviously, criminal nature is common to both “fine” and “monetary penalty” and could accurately be described by “….. a fine or monetary penalty…..”.  Therefore, by using “fine or monetary penalty”, s.34 (3A) clearly means to include only the monetary punishment imposed for a criminal offence in the subsection’.

8.He submits that the term “surcharge”, referring to “a sum or sums not exceeding 5% in all of the amount in default” under section 71(5) of the IRO and “a sum or sums not exceeding 10% in all of the unpaid amount” under s.71(5A) of the IRO, is by itself the neutral description of dollar amount and does not carry the implication of a punishment nature……”。

9.He submits that by using “fine or monetary penalty”, s.34 (3A) clearly means to include only the monetary punishment imposed for a criminal offence in the subsection.  In my judgment, this is clearly wrong.  The test to be adopted is not to apply what is common to both “fine” or “monetary penalty”.  The test is to determine whether the surcharge is covered either by the term “fine” or the term “monetary penalty”. What is then the meaning of “penalty”?  The Shorter Oxford English Dictionary defines “penalty” as “a punishment imposed for breach of a law, rule, or contract; a loss or disadvantage of some kind, either prescribed by law for some offence, or agreement on in case of breach of contract; spec. a fine.”  A monetary penalty is a penalty in the form of payment of money.  According to the above definition, it is clear that “monetary penalty” covers not only penalties in criminal matters; it also covers penalties in civil matters.

10.One example of monetary penalty for breach of a law or rule can be found in the Builders’ Lifts and Tower Working Platform (Safety) Ordinance, Cap. 470.  Section 30(1) of this Ordinance provides:-

“(1)  When the Director considers that there is evidence that a registered contractor or a registered examiner has failed to comply with this Ordinance:-

(a)          he may refer the matter to the Secretary for hearing by a disciplinary tribunal; or

(b)          in accordance with section 31, he may do either or both of the following:-

(i)        reprimand the registered contractor or registered examiner;

(ii)       impose a penalty up to $10,000 on a registered contractor or up to $1,000 on a registered examiner.

(2)         ……..

(3)         When a person without reasonable excuse fails to pay a monetary penalty imposed on him under subsection (1) or section 35 or on before the time stipulated, the Director may, in accordance with section 39, suspend his registration until the monetary penalty is paid.

(4)         A monetary penalty imposed under this section is recoverable as a civil debt.”

(Underlines provided)

It is clear that the monetary penalty referred to in this Ordinance is of civil nature because the monetary penalty imposed for breach of section 30(1) is civil in nature.  The phrase “monetary penalty” under this Ordinance and under section 34(3A) of the Ordinance must bear the same meaning.  The term “monetary penalty” referred to in section 34(3A) is therefore not confined to monetary penalty imposed for a criminal offence; it must also cover monetary penalty imposed for breach of a law or rule of civil nature.

11.The Defendant argues that the additional payment imposed under section 71(5) of the IRO is not a monetary penalty.  He submits that “s. 71(5) and s.71(5A) of the IRD mean to authorize the Commissioner of IRD to charge additional tax (surcharge) at his discretion when tax payment is in default.  However, giving the Commissioner authorization to charge additional tax is not equivalent to imposing a penalty or monetary punishment onto the tax payer.”  I do not accept this submission.  Section 71(5) of the IRO provides:

“When any tax is in default, the Commissioner may in his discretion order that a sum or sums not exceeding 5% in all of the amount in default shall be added to the tax and recovered therewith.”

When the Commissioner orders that an additional sum to be added to the tax, the taxpayer has to pay, apart from the tax, the additional sum imposed by the Commissioner.  The additional sum is imposed by the Commissioner because the Defendant’s payment of tax is in default.  This is a penalty for default in his payment of tax.  This is clearly a monetary penalty because the penalty is in the form of payment of money, namely, the additional sum.  The surcharge is not an additional tax, because it was imposed on him not because of an income or profit made by the Defendant, but because of the default in making payment of his tax.

12.Since the additional payment (the surcharge) is covered by section 34(3A) of the Ordinance, it is not a debt provable in bankruptcy.  Under section 32(7) of the IRO, the Defendant’s discharge does not release him from other bankruptcy debts, namely, the surcharge, because it is not a debt provable in his bankruptcy.

13.The answers to all the three questions set out in the summons are all in the negative.  I therefore enter judgment in favour of the Plaintiff in the sum of $10,271, with interest on the sum of $4,221,, at judgment rate, commencing on 25.1.2001 until satisfaction, and on the sum of $6,050, at judgment rate, commencing on 21.7.2001, until satisfaction.

Costs

14.I make an order nisi, to be made absolute in 14 days’ time, that the Defendant do pay costs of this Action (including this application) to the Plaintiff, to be taxed, if not agreed.

The Plaintiff : represented by Mr. H.S. Li, Department of Justice.

The Defendant: in person, unrepresented.