Fan Kin Nang and Another v. Commissioner of Inland Revenue

HCAL112/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTITUTIONAL AND ADMINISTRATIVE LAW LIST

NO. 112 OF 2008

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BETWEEN

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Before : Hon Poon J in Court

Date of Hearing : 19 November 2009

Date of Judgment : 19 November 2009

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JUDGMENT

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Applications

1.This is an application for judicial review by the applicants against the decision of the Commissioner of Inland Revenue dated 26 June 2008 (“the 1^st Decision”) refusing to issue determination for objections lodged by them against their personal assessments.

2.The applicants also applied to amend the Form 86A to challenge a purported decision by the Commissioner on 28 August 2009 that a determination is not necessary (“the 2^nd Decision”).

Background

3.The background leading up to these proceedings, which is most unique, goes all the way back to 1999.

4.On 16 April 1999, IRD issued an assessment to the applicants, including a loss of HK$241,200 from Ms Yau’s business against their aggregated salaries income. However, upon review, IRD considered that the loss should be disallowed. The applicants took the case to the Board of Review, which by decision dated 24 October 2003 ruled in their favour. The Commissioner then appealed (HCIA3/2004). By judgment dated 7 September 2004, Yam J allowed the appeal : see the written judgment handed down on 24 June 2005. His Lordship confirmed the assessment on Ms Yau by disallowing her deductions for management fees of her sole proprietorship which were commercially unrealistic.

5.Yam J’s decision impacted on the applicants’ tax liabilities. They had opted for personal assessment under section 42A of the Inland Revenue Ordinance (Cap.112) (“IRO”). However, as a result of Yam J’s judgment, if they were to be assessed on the personal assessment basis, they would have to pay more tax than the case where they were to be assessed under separate heads charge basis. In short, personal assessments would not be advantageous to them any more.

6.It is the long established practice of IRD that it will not issue a personal assessment to a couple if it is not to their advantage. Following that practice, IRD on 15 February 2006 called for tax from the applicants for those salaries tax and personal assessments which were previously discharged or refunded on 16 April 1999.

7.The applicants did not dispute the fact that they would have to pay more tax under personal assessment. However, for some reasons best known to them, they insisted to be assessed by way of personal assessment. What followed was further exchange of correspondence, in which the applicants stood firm on their election to be assessed by personal assessment. On 23 June 2006, IRD issued assessments to the applicants, based on personal assessment, which effectively raised additional tax by including assessable profits of HK$20,318 from Ms Yau’s business. The additional tax to be levied was HK$9,230 for Mr Fan and HK$1,406 for Ms Yau. These assessments now form the subject matter of these proceedings. I will call them “the Assessments” below.

8.On 18 July 2006, the applicants raised objections to the Assessments. Following another round of correspondence, IRD by letter dated 26 June 2008, informed the applicants that it would not entertain their objections by issuing a determination.

9.The applicants then took the matter to the court.

Determination issued

10.By letter dated 17 August 2009, the Department of Justice offered to the applicants to settle these proceedings. They invited the applicants to withdraw the application for judicial review and agreed to pay the costs to them. They also indicated that the Commissioner would issue a determination on the applicants’ objections to the Assessments even if they did not agree to settle.

11.What DOJ had offered seemed to be very reasonable and indeed the most practicable solution to resolve the dispute. But again for some reasons best known to the applicants, they refused to accept the offer and settle the case.

12.On 28 August 2009, the Commissioner issued a determination (“the Determination”). For the reasons stated in the Determination, the Commissioner ruled that the applicants’ objections to the Assessments all failed. The applicants then appealed. Pursuant to section 67 of IRO, the appeal has been transferred to be heard by the Court of First Instance directly. The hearing is scheduled to take place on 3 December 2009.

An academic exercise

13.For present purposes, the court is not concerned with the merits of the applicants’ objections or the reasons given by the Commissioner in the Determination. They will be explored in the tax appeal.

14.In this application for judicial review, the court is concerned with the legality of the 1^st Decision. By that decision, the Commissioner refused to issue a determination to the applicants’ objections to the Assessments. The applicants complained that absent such a determination, they had been unlawfully deprived of the right to appeal to the Board of Review and the court by invoking the appeal procedure laid down in the IRO.

15.However, this application for judicial review has now been rendered an academic exercise by the Determination. The applicants can and have in fact exercised their right to appeal under the IRO.

16.The question before me is should I still entertain the application.

17.The applicable principles are well summarized by Ma CJHC in Chit Fai Motors Co. Ltd v Commissioner for Transport [2004] 1 HKC 465, at paragraph 20 at pp. 472B-473H :

“20.  Where it is contended, as the Commissioner has maintained in the present appeal, that the question before the court is academic or hypothetical, the following factors will feature in the court’s approach (they are by no means exhaustive since this question can arise in a number of different contexts):

(1)  Where a question is purely hypothetical or academic in the sense that there are simply no events that have occurred that form the basis for the question to be answered, a court will not entertain it.  However relevant or even important the question may be, the court will not give an advisory opinion on hypothetical facts.  There are principally two reasons for this: first, the court’s function is to adjudicate on real disputes, not imaginary ones and secondly, to decide on points of law or principle when there are no facts before the court is not only undesirable, it can have unfortunate or even dangerous consequences.  In this situation, the court will not have any jurisdiction to determine the question.

(2)  Sometimes, however, and the present case is one, the question before the court is said to be hypothetical or academic only because the real dispute that drove the parties to litigation (sometimes called the lis) happens no longer to be in existence at the time of the hearing, even though the relevant facts giving rise to the dispute were real and had actually taken place.  For example, in a civil dispute, where the defendant has openly made an offer to a claimant giving him all he is entitled to and this has been accepted, the dispute no longer exists even though it once did.  The learned judge thought the question for determination to be academic in the present case since the permission granted to Kwoon Chung to operate the free bus services had expired on 12 September 2002.

(3)  In the type of situation referred to in the previous paragraph, the court does have jurisdiction to hear and determine the question in issue.  However, in deciding whether or not to do so (and this can be said to be a matter of discretion), the court will closely examine the relevance or utility of any decision.  In the public law sphere, this may be easier to demonstrate than in relation to private rights.  This is because very often in public or administrative law cases, the duties of public bodies fall to be exercised on a continuing basis not only in relation to the parties before the court but also perhaps to others in the future.  In R v Secretary of State for the Home Department, ex parte Salem [1999] 1 AC 450, the House of Lords reviewed the relevant authorities and stated that the court had a discretion whether or not to determine the question before it even though there was no longer a lis: see 456 G-H.  However, the discretion was to be exercised with caution and the court should only do so where there was good reason in the public interest.  At 457 A-B, Lord Slynn of Hadley said this:

‘The discretion to hear disputes, even in the area of public law, must, however, be exercised with caution and appeals which are academic between the parties should not be heard unless there is a good reason in the public interest for doing so, as for example (but only by way of example) when a discrete point of statutory construction arises which does not involve detailed consideration of facts and where a large number of similar cases exist or are anticipated so that the issue will most likely need to be resolved in the near future.’

To Lord Slynn’s words, I would add this.  Where the same point is likely or may well arise as between the same parties, this is, if anything, an a fortiori situation for the court to proceed to determine the question in controversy.  In Eastham v Newcastle United Football Club Ltd [1964] Ch 413 (in many respects a public law case although it appears to have been a private litigation), Wilberforce J determined a question involving the use of restraint of trade clauses in the English Football League, even though the player in question (the famous player, George Eastham) had already moved from his former club Newcastle United (whom he sued) to Arsenal.  The footballer’s complaint against the transfer system was one that was likely to arise again, if not to him, then in relation to other players.  A similar situation arose in R v Canons Park Mental Health Review Tribunal, ex parte A [1995] QB 60, where the Court of Appeal held that the issue there should be determined even though the lis had disappeared since there was a real possibility that the same issue could arise again in relation to the applicant in that case: see 68B-F.

(4)  In other public law contexts, the court may consider determining issues where, for example, there are conflicting decisions: see R v Birmingham City Juvenile Court, ex parte Birmingham City Council [1988] 1 WLR 337.”

18.How to exercise the discretion must of course depend on the facts of the case. And applying the principles to the extremely special circumstances of this case, I decline to exercise the discretion to hear the application.

19.As noted, the background giving rise to these proceedings is most unique. It is most unlikely to repeat again even to the applicants, let alone any other taxpayers. The possibility of the same issue could arise again in relation to the applicants or any other taxpayers is extremely remote. In short, this is really a stand-alone application involving no general principle or public importance. Now that the applicants got what they wanted to achieve by way of this application, there is simply no point or utility for the court to determine the academic question if the 1^st Decision is amenable to judicial review.

20.For these reasons, I dismiss the application for judicial review.

Amendment refused

21.The applicants based the application for amendment on a sentence in the Determination. In paragraph (1) under the section headed “Reasons Therefor”, the Deputy Commissioner stated :

“Strictly, a determination is not necessary since ‘the Assessments’ [were] not raised to assess tax on any new sources of salaries income or profits.” (“the Statement”)

22.The applicants contended that the Statement amounted to a decision by the Commissioner that a determination is not necessary. The 2^nd Decision is therefore liable to be reviewed judicially for the reasons stated in the proposed amended Form 86A.

23.The proposed amendment sought to challenge a new purported decision, where leave to apply for judicial review must first be obtained under Order 53, rule 3, Rules of the High Court. I would therefore approach the amendment application as if it had been an application for leave to apply for judicial review : see R v Institute of Chartered Accountants, ex p Bruce, 22 October 1986, unreported, the English Court of Appeal, at pp. 5–6 of the Lexis transcript of judgment.

24.The appropriate test for leave had been authoritatively stated by Li CJ in Po Fun Chan v Winnie Cheung (2007) 10 HKCFAR 676, at paragraphs 14 to 16 at pp. 685E–686B thus :

“The appropriate test

14.  The requirement for leave to apply for judicial review is an important filter introduced by statute.  Section 21K(3) of the High Court Ordinance, Cap.4 and Order 53 rule 3(1) of the Rules of the High Court.  Its purpose is to prevent public authorities from being unduly vexed with unarguable challenges.  Whilst in a society governed by the rule of law, it is of fundamental importance for citizens to have access to the courts to challenge decisions made by public authorities on judicial review, the public interest in good public administration requires that public authorities should not have to face uncertainty as to the validity of their decisions as a result of unarguable claims.  Nor should third parties affected by their decisions face such uncertainty.

15.  The purpose of the leave requirement would be better served by the adoption of the arguability test instead of the potential arguability test.  The granting of leave to apply for judicial review is a matter for the court’s discretion to be exercised judicially.  The test which should be applied is the arguability test.  Under this test, arguability must mean reasonable arguability.  A claim for relief which is not reasonably arguable could not be regarded as arguable.  A reasonably arguable case is one which enjoys realistic prospects of success.  Whilst the test adopted represents a higher threshold than the potential arguability test, claims which are reasonably arguable would be given leave to go forward under it.  It is in the public interest that challenges which are not reasonably arguable should not be given leave to proceed.

16.  In Wong Chung Ki, Keith JA (at para.22) raised the possibility of a flexible test so that the test is one of arguability where the issue is one of statutory construction but is one of potential arguability where the issue is say, one of procedural fairness involving the investigation of facts4.  Such an approach should be rejected.  The same test should be applicable whether the issue is one of law or fact.  Further, intractable difficulties may arise in distinguishing issues of law from issues of fact and in dealing with grounds which involve both issues of law and fact or which raise questions of mixed law and fact.”

25.The Statement is not a decision or an act. It is merely a statement giving the Commissioner’s view why a determination was strictly not necessary in the very special circumstances of the case. Whether the Commissioner’s view is correct is neither here nor there. For she did issue the Determination. The Statement did not give rise to any substantive legal consequences between the parties at all.

26.The applicants argued that their future right would be affected by the Statement and wanted to avoid disputes and the need to apply for judicial review in the future. I disagree. The Statement is just an expression of view not binding on the applicants. It is not a policy statement or indication as to how the Commissioner will decide if and when a determination will be issued in the future, which must be based on the facts of individual cases. Here, the background giving rise to the present proceedings is most unique. The applicants have failed to demonstrate that such special facts giving rise to the disputes or any events similar to those would happen again. I fail to see how their right to appeal under the IRO in the future would be affected at all.

27.The applicants have failed to pass the threshold in showing a reasonably arguable case to enable them to mount a judicial review against the 2^nd Decision. I therefore refuse leave to amend.

Costs

[Submission on costs]

28.The applicants ought to have accepted DOJ’s offer on 17 August 2009. It is wholly unreasonable and indeed unnecessary for them to continue with these proceedings after the Determination had been issued. In the circumstances, they are only entitled to costs up to and inclusive of the date of the Determination, that is, 28 August 2009. They are liable for all the costs thereafter. I therefore order the Commissioner to pay the applicants costs of these proceedings up to and inclusive of 28 August 2009 and the applicants to pay the Commissioner costs thereafter, all costs to be taxed if not agreed.

The Applicants, in person, present

Mr Stewart K.M. Wong, instructed by the Department of Justice, for the Respondent