HKSAR v. LAM CHUN SUM, SAMUEL

IN THE HIGH COURT OF THE
HONG KONG SPECIAL ADMINISTRATIVE REGION
COURT OF APPEAL

1997, No.188
(Criminal)

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J U D G M E N T

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Power, V.-P. (giving the judgment of the Court):

The Prosecution Case

1. The applicant faced three charges which alleged that he wilfully with intent to assist another person to evade tax signed a return furnished under the Inland Revenue Ordinance without reasonable grounds for believing the same to be true, contrary to s.82(1)(d) of that Ordinance. He was convicted of the first and second of those charges and was acquitted of the third charge. We need not concern ourselves further with that charge.

2. The first of the charges read that he, on 24th June 1992, in Hong Kong, wilfully with intent to assist Massillon Limited to evade tax, signed a Profits Tax Return and accompanying statements of account for the Year of Assessment 1990/91 furnished under the Inland Revenue Ordinance, in which commission expenses of Massillon Limited in the amount of $600,000 were recorded without reasonable grounds for believing the same to be true. The second charge differed only in the period, 1991/92 and amount involved, $900,000. He now seeks leave to appeal against those convictions.

3. It was the prosecution case that the applicant was a solicitor and the sole proprietor of Samuel Lam & Co. He was also a 50% shareholder and a director of Massillon Ltd. ("Massillon"). His wife held the other 50% of the shares and his father and mother were the other directors. Massillon provided a management consultancy service to Lam & Co. The auditors of Massillon were K.W. Leung & Co., the principal of which was a Mr. K.W. Leung. In the years of assessment 1990/91 (first charge) and 1991/92 (second charge), Massillon filed tax returns signed by the applicant. In the return for 1990/91, Massillon declared a management consultancy income of $3.6m and an income from rental properties of $290,000. After deductions, however, it suffered a loss of $43,383. One of the deductions was a commission payment of $600,000 to Chiang Lung Trading Ltd. ("CLT") for "the introduction of business, maintaining of a business relationship between customers and the company". In the return for 1991/92, Massillon declared a management consultancy income of $5.4m and a rental income of $252,000. It claimed deductions of $5,376,152, which included a commission payment of $900,000 to CLT on the same basis as was claimed in the previous year.

4. On 22nd June 1992, the applicant signed the two Profits Tax Returns and the two Reports of Directors and Financial Statements but he did not sign the four schedules. In each case Schedule 4 detailed the commission payments.

5. It was the prosecution case that CLT was a defunct company, which had ceased business in 1988, and that the payments claimed to have been made to it were bogus.

6. The prosecution relied upon the admitted facts and upon the evidence of two witnesses. The first of these was a Mr. Lui Siu-on, who said that he was an alternate director of CLT, which had originally run a restaurant. He said that it closed some time in 1989 and that CLT conducted no business thereafter. He said "for convenience sake" K.W. Leung was also given all the documents relating to that company. It was his evidence that nothing more was done until 1994 when K.W. Leung asked him to sign various documents such as a resignation form and share transfer forms. He said that after 1988, the two directors of the company, it will be remembered that he was an alternate director, immigrated to Canada and that CLT was inactive thereafter. Its account at the Hongkong & Shanghai Bank was handled by him and he signed annual tax returns for CLT between 1988 and 1994 at K.W. Leung's request.

7. The other witness, an employee of K.W. Leung, who the judge felt was economical with the truth, had helped prepare Massillon's return but he was not of great assistance when questioned about specific matters.

The Defence at Trial and the Judge's Reasons

8. It was the defence contention at trial that s.51(5) of the Inland Revenue Ordinance did not deem knowledge on the part of the applicant as to the full contents of the Massillon's return. The section states:

"A return statement or form purporting to be furnished under this Ordinance by or on behalf of any person shall for all purposes be deemed to have been furnished by that person or by his authority as the case may be, unless the contrary is proved, and any person signing any such return statement or form shall be deemed to be cognizant of all matters therein."

9. In each year the applicant signed the declaration on the return form and the accompanying report of directors and balance sheet. He did not sign the schedules or the profit and loss account attached to the report of the directors, nor the profit and loss account for management purposes. It was argued that as the document signed by the applicant did not mention the commission payments, s.51(5) did not bite so as to deem knowledge of those payments on his part. Judge McMahon rejected this submission. He was satisfied that the applicant was deemed to be aware of the contents of the returns as presented to the Commissioner.

10. The judge went on to state that even apart from s.51(5), he was satisfied that there was evidence sufficient to establish that the applicant was aware of Massillon's claimed deduction for commission paid to CLT. He relied upon the following matters when coming to that finding - the applicant signed the balance sheets based on the profit and loss accounts; he signed the director's report and the declaration on the return form that all statements therein were true and correct; he had in his possession it was seized from his residence) a letter from K.W. Leung to Massillon acknowledging the receipt of fees of $61,750 for taxation services, particularly in respect of $1.4m commission and agreeing to reimburse the $61,750 if the commission claim was disallowed. This letter was also in K.W. Leung's files as were two similar ones dealing with commissions of $600,000 and $900,000.

11. The judge rejected a suggestion that K.W. Leung might have taken it upon himself to make these claims to impress his client. He was satisfied, relying upon Mayland Woven Labels Factory Ltd., (1975) Hong Kong Tax Cases 627, that a return included the attached documentation. Mayland was, it is true, an action between the Commissioner against a taxpayer but the definition of the word "any return" adopted therein seems to us to be equally applicable in criminal prosecutions.

12. The judge rejected a defence contention that for the prosecution to succeed it had to establish by evidence that the commissions were not paid and that the applicant knew that this was so. The judge was satisfied that what had to be proved was that the signing was done without reasonable grounds for believing that the commission payments had been made. He was satisfied that CLT was dormant and that there could be no reasonable grounds for believing commission payments would have been made to it. He rejected a suggestion that K.L. Leung might have been operating CLT without the knowledge of its directors and pointed out that nowhere in the Massillon current accounts was there anything to indicate that commission payments had ever been made. He asked what CLT, a defunct restaurant business, might have done to earn such fees.

13. He went on to say:

"More importantly, it is difficult to understand how CLT, a company which once operated a restaurant and whose primary directors had apparently left Hong Kong, according to PW1, whose evidence I accept in this regard, and who had apparently decided to rid themselves of the company by giving it to K.W. Leung, and whose shareholders had divided its assets in P56 to zero in lieu of winding it up, and which had ceased to file profits' tax returns with the Inland Revenue Department on the basis it was a dormant company, could have been instrumental in any reasonable way in introducing Massillon to any real business relationships, whether in respect of real estate or otherwise.

So far as the returns the subject of charges 1, 2 and 3 are concerned, I am satisfied that CLT was a dormant company at all relevant times. Taking into account its business history as given in evidence by PW1, who I accept also as a witness of truth in this regard, I am satisfied that it effectively ceased business in about 1988.

Further, taking into account the documentation detailing its relationship with the Inland Revenue Department commencing with the tax year ending 1990 up to the letter issued by the Inland Revenue Department to it excusing it from filing any further profits' tax returns until it recommenced business or earned profits, I am satisfied it did not recommence business."

14. The judge later went on to way:

"Accordingly, I am satisfied beyond reasonable doubt that CLT had both become dormant and remained dormant throughout the tax years the subject of P10 and P11. I am sure it had no role in the receipt of any of the commission payments in issue nor had it any role as particularised in the two number 4 schedules attached to P10 and P11 as to the introduction of customers to Massillon and the maintaining of business relationships. I cannot see any reasonable basis on the evidence in this case for believing that Massillon had paid commission to CLT on the reasons set out in the schedules in P10 and P11, which, as I have found, the defendant must have been aware of.

I am satisfied that on the evidence in this case, the defendant could have had no reasonable grounds to believe these commission payments in P10 and P11 took place. I am sure that the defendant, as chairman of his service company would have been well aware of the details of any such commission payments in such amounts in fact made by such a company, and I am sure, in the circumstances of this case, the defendant was aware that there had been no such payments to CLT, a dormant Company, as claimed in P10 and P11. I am sure, on the evidence in this case, there was nothing to lead the defendant to reasonably believe such commission payments had been made.

So far as both Charges 1 and 2 are concerned, I am satisfied beyond reasonable doubt that the defendant signed both returns and did so knowing he had no reasonable grounds to believe the commission payments referred to there and in schedule 4 to each return, were truly made. I am sure that at the time he signed P10 and P11, he wilfully signed them in the sense that he intended to so sign them while knowing he had no reasonable grounds for believing the schedulised commission payments were truly made.

Further, I am satisfied that in so signing P10 and P11, he did so with the intent to assist Massillon to evade tax. In that regard, he must have been aware that the inclusion of these commission payments in the computations of assessable profits tax would effectively reduce Massillon's assessed tax and he must have been aware that if they were not true commission payments. This would have the effect of allowing Massillon to evade paying tax it was otherwise liable to pay. I am satisfied from P59, paragraphs 16 and 20, that the effect of incorporating the purported commission payments into Massillon's profit tax returns for the years relevant to charges 1 and 2 was in fact to reduce its tax assessment by $99,000 and $148,500 respectively for those years. The defendant must have known that the returns (P10 and P11) that he signed would be furnished and would be the basis for the Inland Revenue Department assessment of Massillon's profits tax.

I have considered each of charges 1 and 2 separately so far as the evidence is concerned, although that evidence in great part is common to both charges. The evidence against the defendant is in large part circumstantial, and I have, drawing inferences against him done so only where that inference was the only reasonable inference to be drawn.

I am satisfied that so far as the 1st charge is concerned, the Crown had proven each element of the charge beyond reasonable doubt, and the defendant is convicted of that offence. Equally, so far as the 2nd charge is concerned, I am sure that the Crown have proven each element of that charge beyond reasonable doubt, and the defendant is convicted of that offence."

15. The approach of the judge, shortly put, was that the defendant, by virtue of s.51(5), was deemed to be cognizant of all the matters in the return. That he was also satisfied that this was established by the evidence is not a matter with which we need concern ourselves further as long as we are satisfied that he correctly applied s.51(5). He held pursuant to s.82(1)(d) that the onus of establishing reasonable grounds for that belief rested upon the defendant and that he had failed to satisfy that onus.

The Grounds of Appeal

16. We turn now to the matters that have been canvassed before us in this appeal.

The Background

17. When arguing this appeal, Mr. Egan, for the applicant, first submits that the applicant was doing no more than "countless of his colleagues as well as other professionals" which was to conduct his professional affairs through a service company and that he, like them, left it to his accountants to administer that company and prepare the tax returns. This rolled up submission cries out for dissection. The accountants undoubtedly prepared the returns. Whether the applicant left it to his accountants to administer his service company, as submitted, we simply do not know as the applicant gave no evidence. There was no evidence as to the nature of his relationship with his accountants. The applicant, who is, to use Mr. Egan's words, "an officer of the court of previous good character" in circumstances that were redolent of the gravest suspicion saw fit to give no explanation but rather to rely upon the shield of silence. That was his right but it leaves the evidence against him unchallenged.

The Failure to call K.W. Leung

18. Mr. Egan then turned to deal with the failure to call K.W. Leung. He submits that what he described as "the highest degree of mens rea" was required to establish an offence under s.82, and that this could not be established without proving:

(1) the nature of the instructions given to the accountants and their advice thereon;

(2) that the schedules, which were unsigned, were brought to the attention of the applicant.

He submitted that neither of these matters could be proved without the evidence of K.W. Leung and that the prosecution therefore failed in limine. If the judge was right in his application of s.51(5), to which we will later turn, the failure to call K.W. Leung was in no way fatal to the prosecution as the defendant was deemed to be cognizant of all of the matters in the return.

The Status of the Schedules

19. Mr. Egan then turned to the status of the schedules. He suggested that an examination of the exhibits indicates that the schedules were not initially part of the return. We will, later, return to this submission.

20. Mr. Egan then went on to argue the appeal by reference to a written submission of "No case" which he handed up to the judge below. We will deal with the appeal by reference to the points raised therein but not in the order in which they were raised.

The Application of s.51(5)

21. We think it proper to come first to s.51(5) which is of crucial importance to this prosecution. We have already set out that section. We paraphrase it to apply it to the present case as follows: "A return purporting to have been furnished by Massillon shall for all purposes be deemed to have been furnished by Massillon unless the contrary is proved, and any person signing (i.e. the applicant) such a return, shall be deemed to be cognizant of all matters therein."

22. Mr. Egan submits that the words "any person signing" refers not to the actual signatory but to the person whose tax return is being furnished. We have no hesitation in rejecting that submission. The words mean what they say. The person signing could, we are satisfied, be no one other than the person who actually signs.

23. Mr. Egan goes on to submit, in the alternative, that "if any person signing" means the actual signatory, then the deeming provision can do no more than impute to the signatory knowledge of what is in the document which he actually signs.

24. He argues that as there is no proof that the schedules were in the return at the time of signing, the applicant cannot be deemed to have known their contents. We reject this submission. The return, as the judge found, comprises the documents returned to the Commissioner which, of course, contained the schedules. As we have indicated we are satisfied that the judge was correct in that finding and in his reliance upon the Mayland case and further that there is nothing in R. v. Ng Wing-keung, [1997] H.K.L.R.D. 142, to which we were referred, which suggests to the contrary.

25. Mr. Egan goes on to submit that whatever knowledge is imputed it could not assist in any way to prove wilful intention to assist in the evasion of the payment of tax. We agree that the imputed knowledge does not prove such a wilful intention but it does establish knowledge of the contents of the return and if that presumption of knowledge is not rebutted then, by virtue of s.82(1)(d), the onus on him is to establish that he had reasonable grounds for believing the facts of which he had knowledge was true.

26. Mr. Egan goes on to submit that it would be inappropriate for the prosecution to "infer guilt from the deeming provision". We are not sure what is meant by this submission. There is certainly no inference of guilt from the deeming provision. It, unless rebutted, establishes knowledge no more. Knowledge throws an onus onto the defendant . The failure to satisfy that onus, if there be wilful intent, establishes guilt.

The Application of s.82(1)(d)

27. We now turn to Mr. Egan's arguments in relation to s.82(1)(d). This section reads:

"(1) Any person who wilfully with intent to evade or to assist any other person to evade tax -

(d) signs any statement or return furnished under this Ordinance without reasonable grounds for believing the same to be true, shall be guilty of an offence."

"Wilfully"

28. Mr. Egan first dealt with the word "wilfully". He argued that there was no evidence to establish this element of the offence. He argued that the prosecution must, to prove wilfulness, establish that the applicant knew that he was assisting Massillon to evade tax and that this required proof "that Massillon would not have had to pay the tax otherwise, but also that he intended that state of affairs". Whatever this submission may mean, we are satisfied that the word "wilfully" simply means "deliberately", (we rely upon the judgment of Lord Keith in R. v. Sheppard, (1981) A.C. 394, when so holding) and further that wilful intent can be established, as the judge was satisfied it was, by inference. It being established by s.51(5) that the applicant had knowledge of the contents of the returns, and he not having rebutted that presumption of knowledge, the onus lay upon him to establish reasonable grounds for believing that Massillon did pay the commission to CLT. The judge was, we are satisfied, correct in finding that there was nothing in the evidence to establish such a belief and was further correct when he held that the only possible inference was that the signing was done with a deliberate intent to evade tax.

"With intent to assist any other person to evade tax"

29. Mr. Egan turns next to the words "with intent to assist any other person to evade tax" submitting that the prosecution had to prove that the applicant "deliberately intended to assist Massillon in not paying tax in the relevant year". He submits that this would involve positive proof that commissions were not paid to CLT and that this could never be proved in the absence of K.W. Leung. What we have said above applies equally to this submission. Once knowledge of the contents of the return was deemed, the onus was thrown upon the applicant. It was not necessary for the prosecution to establish what actually happened. The applicant was required to establish that he had reasonable grounds for believing that what was set out in the return was true. The onus having come to rest on him the prosecution was not required, as Mr. Egan contends, positively to prove that commissions were not paid.

The Status of the Schedules

30. We turn again to the status of the schedules. Mr. Egan submits that there was no evidence that the schedules were ever seen by the applicant. He seeks to establish this by an examination of the documents themselves. He suggests that they were deliberately tampered with to make it appear that the schedules were part of the return when it was signed when, in fact, that was not the case. These submissions rest upon little more than conjecture. However that may be the applicant is not assisted by them. We are satisfied, as we have already said, that the return referred to in s.51(5), is the return that is presented to the Commissioner. This return did contain the schedules. The applicant was deemed to know their contents. This was a rebuttable presumption of knowledge but there was no evidence to rebut it. There is, therefore, no merit in this submission.

The Onus of Proof

31. There was criticism of the judge suggesting that he did not apply the proper onus of proof. It is submitted that "there was no evidence on the papers that the defendant would not have had reasonable grounds for believing that the claim of Massillon to commission payments was not justified and there was no evidence that the payment itself is false in any way or at all."

32. We take the above to refer to Massillon's claim that it paid commission to CLT. Again this submission sets the true position on its head. What the court was concerned with was not whether there was "no evidence that the defendant would not have had reasonable grounds", but whether it had been established, upon the balance of probabilities, by the evidence that he did have reasonable grounds.

Speculation by the Judge

33. We turn next to the complaint that there was speculation by the judge.

34. It is suggested that he filled in the gaps which the applicant contends were left in the prosecution case by the absence of evidence from K.W. Leung by speculating. We find no merit in the submission. Indeed, the "speculation" of which complaint is made consisted, for the most part, in a justifiable scepticism as to the evidence which it was suggested by counsel indicated that there was a real business relationship between Massillon and CLT.

35. We are satisfied that the judge dealt properly with this matter and that there is no merit in this application which must be dismissed.