WESON INVESTMENT LTD v. THE COMMISSIONER OF INLAND REVENUE

HCA 272/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 272 OF 2004

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J U D G M E N T

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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:

“PAYMENT AND RECOVERY OF TAX
71.         Provisions regarding payment of tax
(1)	Tax charged under the provisions of this Ordinance shall be paid in the manner directed in the notice of assessment on or before a date specified in such notice.  Any tax not so paid shall be deemed to be in default, and the person by whom such tax is payable, … shall be deemed to be a defaulter for the purposes of this Ordinance.
(2)	Tax shall be paid notwithstanding any notice of objection or appeal unless the Commissioner orders that payment of tax or any part thereof be held over pending the result of such objection or appeal:
	Provided that where the Commissioner so orders he may do so conditionally upon the person who or on whose behalf the objection or appeal is made providing security for the payment of the amount of tax or any part thereof the payment of which is held over either –
	(a)	by purchasing a certificate issued under the Tax Reserve Certificates Ordinance (Cap. 289); or
	(b)	by furnishing a banker’s undertaking,
as the Commissioner may require.
… …
(7)	Where the Commissioner exercises his powers under the proviso to subsection (2) and a person is required to purchase a certificate under paragraph (a) of that proviso -
	(a)	a certificate in an amount equal to the tax or any part thereof the payment of which is held over shall be purchased within a period of 14 days from the date of the order of the Commissioner, or on or before the date for the payment of tax specified in the notice of the assessment, whichever is the later, failing which the provisions of subsection (2) shall apply as they would if there had been no order;
	(b)	the Commissioner shall, when he issues a certificate so purchased, note on it particulars sufficient to identify the objection or appeal to which it relates;
	(c)	upon the withdrawal or final determination of the objection or appeal a certificate or part of a certificate so purchased shall be accepted by the Commissioner in payment of so much of the tax held over as becomes or is found to become payable, and no interest shall be payable upon any certificate or part of a certificate so accepted;
	(d)	where, upon the final determination of the objection or appeal, and after all tax held over which becomes, or is found to be, payable has been paid in the manner specified in paragraph (c), any certificate or part of a certificate so purchased has not been accepted as payment by the Commissioner under paragraph (c), the holder thereof may surrender that certificate or part to the Commissioner and -
		(i)	if 36 months or less since the date of purchase of the certificate has elapsed, at his option require the Commissioner to -
			(A)	make an entry in an account in the name of the holder maintained under the Tax Reserve Certificates Ordinance (Cap. 289) for the principal value represented by the certificate or part together with the interest thereon calculated in accordance with the rules from the date of issue of the certificate to the date of the final determination of the objection or appeal; or
			(B)	repay the principal value represented by the certificate or part together with the interest thereon calculated in accordance with the rules from the date of issue of the certificate to the date of the final determination of the objection or appeal; or
		(ii)	if more than 36 months since the date of purchase of the certificate has elapsed, the Commissioner shall repay to the holder the principal value represented by the certificate or part together with interest thereon, calculated in accordance with the rules, from the date of issue of the certificate to the date of the final determination of the objection or appeal; and
	(e)	no certificate so purchased shall be valid for any purpose except as specified in the preceding paragraphs.”

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:

“… … we are further instructed that you have failed to return the interest appertaining to the Tax Reserve Certificate which our client paid to settle the aforesaid 1^st payment of tax in the sum of $7,620,671 … …”

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:

“… …
The facts are:-
(1)	A sum of HK$15,290.00 was paid on 14th August 2000 in relation to the alleged tax payable under the said Assessment Notice;
(2)	Another sum of HK$8,002,634.00 was paid on 30th August 2000 in relation to the said Assessment Notice; and
(3)	Before making the aforesaid 2 payments, our client received from you a demand note dated 14th January 2000 together with a Tax Reserve Certificate prepared by you for the sum of HK$7,620,671.00.  In the said demand note, it was expressly advised that “final tax is held over on condition that an equal amount of Tax Reserve Certificate is purchased not later than 28th January 2000”.
By the time when the aforesaid 2 payments were made, the tax liability was in excess of HK$7,620,671.00.  At the time when the payment was made on 30th August 2000, the payment was in the sum of HK$8,002,634.00 and the payment was in the form of a single cheque.  We are instructed that when the cheque was tendered to your collector, it was made by a staff of our client in person together with the said Tax Reserve Certificate.  However, your staff at the collection office stated that the amount on the said Tax Reserve Certificate did not tally with the one on the said Certificate and thus the Certificate could not be chopped and further your staff stated the cheque would be collected first and a fresh chopped Tax Reserve Certificate would be sent to our client subsequently.  It was under these circumstances the cheque was handed over to and accepted by your collection office.  Thereupon, 3 separate receipts were issued there and then by you in respect of this single cheque (copy of the receipts are enclosed herewith).  You appreciate the total amount appeared on the payment voucher in relation to charge No. 1-1147133-97-0 was HK$8,001,704.00.  This charge number is exactly the same serial number which appeared on the aforesaid demand note and the said Tax Reserve Certificate.
Under the circumstances it must be taken that the Tax Certificate had been purchased and therefore; our client is entitled to the interest appertaining to the said Tax Reserve Certificate. (my emphasis)
Based on the applicable interest rate at 5.1042% per annum, (See L.N. 246 of 2000; L.N. 258 of 2000) the total amount of interest accrued is HK$1,201,998.43 of which the breakdown is as follows :-

	Principal (HK$)	Period	Interest (HK$)
	15,290.00	From 14th August 2000 to	2,326.33
		7th August 2003
	7,620,671.00	From 30th August 2000 to	1,142,412.16
		7th August 2003
	381,033.00	From 30th August 2000 to	57,120.53
		7th August 2003
	930.00	From 30th August 2000 to	139.41
		7th August 2003
		TOTAL ;	1,201,998.43

We trust you will release the above HK$1,201,998.43 …….. to us within the next 5 days; failing which our client shall be advised to take recovery action against you without further notice….”

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:-

“Article 6

The Hong Kong Special Administrative Region shall protect the right of private ownership of property in accordance with law.

Article 105

The Hong Kong Special Administrative Region shall, in accordance with law, protect the right of individuals and legal persons to the acquisition, use, disposal and inheritance of property and their right to compensation for lawful deprivation of their property.

Such compensation shall correspond to the real value of the property concerned at the time and shall be freely convertible and paid without undue delay.

….”

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:

“… in fear of the probable consequences arising from the enforcement proceedings by the [Commissioner] to enforce the Judgment Sum, including but not limited to the accrual of interest on the Judgment Sum and an impending winding up proceedings against the plaintiff…”.

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:

“79. Tax paid in excess to be refunded
(1)	If it is proved to the satisfaction of the Commissioner by claim duly made in writing within 6 years of the end of a year of assessment or within 6 months after the date on which the relevant notice of assessment was served, whichever is the later, that any person has paid tax in excess of the amount with which he was properly chargeable for the year, such person shall be entitled to have refunded the amount so paid in excess…”

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(4^th) 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.

“As an underlying principle, taxing statutes are to be interpreted strictly.”

– 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:

“Tax is essentially a liability created by statute.  By nature, any tax statute is inequitable in the wide sense of the word.  It takes away what a person has earned by his sweat and labour and puts it in general revenue for purposes, many of which have no interest or concern to the taxpayer, such as making welfare payments to the unemployed, providing subsidized housing to a section of the general public and funding litigation for those who cannot afford it.  There could be an endless list of such purposes which are of no interest to the taxpayer.  Yet he has to provide funds for those purposes with the tax he pays.  Thus there is no equity about a tax, as by nature it is “inequitable” in that it takes away what one has earned by his sweat and labour.  It is therefore a contradiction in terms to say that a taxing statute should be construed “equitably”.  Since a taxing statute purports to deprive a person of what he has, it should be construed restrictively so that a person would only be taxed if he is caught within the letter of the law.  Apart from that, there is no room for giving any taxing statute an “equitable construction” as suggested by the Appellants.  Thus, in interpreting a taxing statute, one just look at what the statute clearly said.  Nothing is to be read in, nothing is to be implied.  One just look fairly at the language used. ……”

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:-

“The right conferred by the refund provisions is a statutory right which has no counterpart in the general law.  Being a right based wholly in statute, it can neither be cut down nor enlarged by resort to the general law or to restitutionary principles.  More precisely, those principles cannot convert a statutory right to obtain a refund of money into a right to obtain a refund with interest.  There is, thus, no substance in the claim that SCI and ACI were entitled to a judgment for interest by reason of restitutionary principles.”

In Lamesa Holdings BV v. Commissioner of Taxation [1999] 42 ATR 154, Sackville J said at P. 177:-

“If a taxpayer can rely on restitutionary remedies the statutory limitations on the recovery of interest might be circumvented by more generous provision for interest under the general law.”

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.