THE COMMISSIONER OF INLAND REVENUE v. TAM KIN CHUNG

CACV 363/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 363 OF 2008

(ON APPEAL FROM DCTC NO. 8279 OF 2007)

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BETWEEN

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REASONS FOR JUDGMENT

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Hon Rogers VP:

1.  I agree with the reasons for judgment of Le Pichon JA.

Hon Le Pichon JA:

2.  This was an appeal by the taxpayer from an order of His Honour Judge Chow dated 19 September 2008 whereby the taxpayer was ordered to pay the Commissioner the sum of $10,271 with interest. At the conclusion of the hearing the appeal was dismissed. My reasons appear below.

Background

3.  The taxpayer failed to pay his salaries tax due on 2 January 2001 (“the due date”). On 15 January 2001, the Commissioner issued a subsequent demand and, pursuant to section 71(5) of the Inland Revenue Ordinance (“the Ordinance”), imposed a 5% ‘surcharge’. When the taxpayer failed to make payment within six months of the due date, the Commissioner imposed a 10% ‘surcharge’ on the unpaid tax, pursuant to section 71(5A) of the Ordinance.

4.  The taxpayer was made bankrupt on 25 April 2002. He was discharged from bankruptcy four years later, on 25 April 2006.

5.  On 3 October 2007, the Commissioner filed a writ in the District Court for the recovery of the sums imposed under section 71(5) and (5A).

6.  The key question of law below, raised under Order 14A, was whether a ‘surcharge’ is a debt provable in bankruptcy. The judge’s conclusion is that it is not. He further held that the taxpayer’s discharge from bankruptcy did not release him from the liability to pay the surcharge.

This appeal

7.  Mr Tibbo raised two issues. The first relates to the correctness of the judge’s conclusion that a ‘surcharge’ is not a debt provable in bankruptcy. The second is a limitation issue which had not been argued below.

Whether surcharge provable in bankruptcy

8.  In pertinent part, the Ordinance provides as follows:

“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…

(5)  Where 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.

(5A)  Where on the expiry of a period of 6 months from the date when any tax is deemed to be in default, whether such date was before or after 1 August 1984, there remains unpaid any amount of the aggregate of-

(a)  the tax deemed to be in default; and

(b)  any sum added thereto under subsection (5),

the Commissioner may order that a sum or sums not exceeding 10% in all of the unpaid amount shall be added to the unpaid amount and recovered therewith.

…

72.  Tax to include fines, etc.

In the succeeding sections of this Part, “tax” (稅款) includes any sum or sums added under section 71(5) or (5A) by reason of default, together with any fines, penalties, fees, or costs incurred, and any interest payable under section 71(9)(e)(ii) or (10).

…

75.  Tax recoverable as a civil debt through the District Court

(1)  Tax due and payable under this Ordinance shall be recoverable as a civil debt due to the Government.”

9.  As Mr Tibbo accepted, whether the sum imposed under subsections (5) and (5A) of section 71 (which, for convenience, has been referred to as a ‘surcharge’) is a penalty is a matter of statutory construction. Mr Tibbo submitted that the tax legislation should be seen as a social contract between the state and the individual, offering the individual a choice to delay paying his taxes in the knowledge that a delay that is short of six months from the due date, at most, would attract a sum that is 5% or less of the amount in default and that a delay of six months or more would attract a sum that is 10% or less of the amount in default and any sum payable under subsection (5). It was suggested that the Ordinance thus allowed a taxpayer to pay at a date later than the due date and a taxpayer may have good commercial reasons to take advantage of such time extensions. It was further said that the additional sum was not a penalty but a tax since, in contrast to other provisions of the Ordinance (e.g. sections 80, 81 and 82) that specifically imposed penalties, subsections (5) and (5A) of section 71 make no mention of penalties. Moreover, it is described as a tax in section 72.

10.  I do not agree. Fairly read, the obligation to pay tax under section 71 on or before the specified date is a fundamental obligation to be strictly observed. Non-observance gives rise to a risk of having to pay more than a taxpayer who has a similar taxable income but who pays on time. The Commissioner’s discretion to order that an additional sum be added to the tax and recovered therewith is triggered only when any tax is in default and not otherwise. To my mind, the additional sum payable by the defaulter is clearly in the nature of a penalty. Whether it is described as a penalty matters little. It is the nature of the sum so payable that matters.

11.  Tax revenue is an important source of the administration’s revenue. Part XII of the Ordinance deals with the payment and recovery of tax. The Ordinance contains provisions for payment on or before the date specified in the notice of assessment i.e. the due date. Those in default and only they may be required to pay more under subsections (5) and (5A) of section 71. Such additional payment cannot be characterised as anything other than a penalty because a taxpayer who is not in default can never be required to pay the extra amount. The issue, being one of statutory interpretation, does not really admit of further elaboration.

12.  I would only add that section 72 does not assist the taxpayer because its definition of “tax” has no application to section 71. It is applicable only to the regime for the recovery of tax contained in the provisions following section 72.

13.  Section 34 of the Bankruptcy Ordinance addresses the question of what debts are provable in bankruptcy. The relevant provisions are:

“  (3)  … all debts and liabilities, present or future, certain or contingent, to which the bankrupt is subject at the date of the bankruptcy order, or to which he may become subject before his discharge by reason of any obligation incurred before the date of the bankruptcy order… shall be deemed to be debts provable in bankruptcy.

(3A)  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.”

14.  The effect of subsection (3A) is that fines and monetary penalties owing to the Government are not provable in bankruptcy. Since the additional sum payable under subsections (5) and (5 A) of the Ordinance, properly construed, is a penalty, the judge’s conclusion that it is not provable in bankruptcy is unassailable.

Limitation

15.  Mr Tibbo’s case is that the limitation period of two years prescribed by section 4(5) of the Limitation Ordinance applies and that time for the recovery of a surcharge expired on the second anniversary of the imposition of the relevant surcharge.

16.  Section 4(5) reads:

“4.  Limitation of actions of contract and tort, and certain other actions

…

(5)  An action to recover any penalty … or sum by way of penalty … recoverable by virtue of any Ordinance … shall not be brought after the expiration of 2 years from the date on which the cause of action accrued:

…”

17.  But section 4(5) is not the only relevant provision. Section 37 of the Limitation Ordinance reads:

“37.  Application to the Crown

… this Ordinance shall not apply to any proceedings by the Crown for the recovery of any tax …”

18.  The separate regime for the recovery of “tax” is to be found in Part XII of the Ordinance. For that purpose, “tax” is given an extended meaning by section 72 but that meaning only applies to the provisions following section 72. Section 75 provides that tax due and payable shall be recoverable as a civil debt due to the Government through the District Court.

19.  When section 37 of the Limitation Ordinance is read with the provisions in Part XII of the Ordinance, it is plain beyond peradventure that any action by the Government to recover a sum imposed under section 71(5) or (5A) is precluded from becoming statute barred under the Limitation Ordinance.

20.  As I understand it, Mr Tibbo’s argument is that “tax” must have the same meaning throughout and that the Government cannot have it both ways. If a surcharge is “tax” for the purposes of the regime for the recovery of tax, it must also mean “tax” for the purposes of determining what is provable in bankruptcy.

21.  I find no merit in that argument. Given the clear terms of section 72 of the Ordinance, the special meaning ascribed to “tax” is only relevant in the context of the regime for the recovery of “tax” in Part XII. It has no relevance or application to other parts of the Ordinance, much less to other ordinances such as the Bankruptcy Ordinance.

Hon Stone J:

22.  I agree with the reasons for judgment of Le Pichon JA.