Read the full judgment text of CACV 64/2011 on BabelCite. This Court of Appeal judgment was delivered on 21 March 2012 before Kwan JA, Fok JA and Lam J.
Revenue law – profits tax – assessment – objection under s.64 of the Inland Revenue Ordinance (Cap 112) – revision under s.70A – whether fraudulent directors' knowledge of falsified accounts should be attributed to a company whose tax returns were tainted by the fraud – whether the Hampshire Land principle applies – whether 'reasonable cause' under s.64(1)(a) and 'error' under s.70A are established – rules of attribution (primary, general/agency and special) under Meridian Global Funds Management Asia Ltd v Securities Commission [1995] 2 AC 500 – finality and protection of public revenue in fiscal legislation. The Moulin group was controlled by the Ma family; MGET, its largest operating subsidiary, was wound up after the Ma Directors (Ma Bo Kee, Michelle Lam and Cary Ma) were found to have created fictitious sales to inflate MGET's profits to deceive its bankers and other creditors, in conduct described on sentencing by Line J as 'commercial crime of the worst kind' resulting in losses of $2.7 billion to creditor banks and $1.75 billion to investors. Profits tax returns based on the falsified accounts led to assessments totalling $88,972,757 for 1998/99 to 2003/04. The liquidators, on discovering the fraud, sought to reopen the assessments; the Commissioner refused to extend time to object under s.64 or to revise under s.70A, and the liquidators brought judicial review. Reyes J allowed the judicial review, holding that the Hampshire Land principle meant the Ma Directors' knowledge should not be attributed to MGET, so MGET had 'reasonable cause' not to object within one month and the filing of incorrect returns was not a deliberate act. The Commissioner appealed. Held, allowing the appeal. (1) Primary rules of attribution: the Ma Directors were the directing mind and will of MGET in preparing the accounts and returns, so their fraudulent knowledge was attributed to MGET under the primary rules of attribution. The Hampshire Land principle is an exception to the agency rules and does not apply where attribution rests on the primary rules (Tesco Supermarkets Ltd v Nattrass; Moore v I Bresler Ltd; El Ajou v Dollar Land Holdings; Safeway Stores Ltd v Twigger); the 'primary/secondary victim' distinction drawn in Stone & Rolls Ltd (in liquidation) v Moore Stephens was not endorsed. (2) Special rules of attribution: even if the primary rules did not apply, the language, content and policy of s.64 required attribution so that the company could not rely on its own fraud to claim it was 'prevented' from objecting, lest the statutory regime of finality be undermined. The Ordinance should be construed consistently with the penal provisions in ss.80 and 82, and the presumption qui facit per alium facit per se supported attribution. (3) Section 70A: following Extramoney Ltd v Commissioner of Inland Revenue, a deliberate act is not an 'error or omission' for s.70A purposes; the liquidators' reliance on the obiter dictum of P Chan J was misplaced. (4) Res judicata: the Commissioner did not pursue her appeal on the declaration that the liquidators were not barred from challenging the assessments underlying the proof of debt. (Per Fok JA: the attribution of fraudulent directors' knowledge does not leave creditors without remedy, since they may sue the directors for breach of fiduciary duty or the auditors for negligence. Per Lam J: reservations expressed as to whether, where the Commissioner accepts a return's calculation in full, the taxpayer can be a person 'aggrieved by an assessment' under s.64; the point was left open.) Orders: appeal allowed; Reyes J's quashing orders and remittal directions set aside; MGET to pay the Commissioner's costs of the judicial review and an order nisi that MGET pay the Commissioner's costs of the appeal.
Legal issues: Attribution of fraudulent directors' knowledge under primary rules of attribution for s.64 Inland Revenue Ordinance · Attribution of fraudulent directors' knowledge under special rules of attribution · Whether s.70A can correct a deliberate overstatement of profit due to directors' fraud
Outcome: Commissioner's appeal allowed; Reyes J's orders quashing the Commissioner's decisions of 4 December 2009 and 4 February 2010 set aside, as were the consequential directions remitting the s.64 and s.70A applications to the Commissioner.
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