GOOD MARK INDUSTRIAL LTD v. COMMISSIONER OF INLAND REVENUE

HCAL 88/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTITUTIONAL AND ADMINISTRATIVE LAW PROCEEDINGS

NO 88 OF 2012

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J U D G M E N T

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Introduction

1. This is an application for judicial review. Leave to apply to do so has been given on 16 July 2013 (on the grounds set out in the amended Form 86).

2. The applicant is aggrieved by the respondent’s decisions embodied in the following letters:

(a) dated 14 August 2012;

(b) dated 28 September 2012;

(c) dated 8 November 2012,

and seeks to have them quashed.  A few words have to be spent on the background in order to understand the reasons for this application.

Background

3. The applicant was established in Hong Kong in 1992 and commenced business in late 1994.  Its main business has been the provision of manufacturing/processing services for other plastic product manufacturers (such as making, repairing and maintaining plastic injection moulds, or making plastic product parts using plastic injection moulds supplied by its customers).

4. A profits tax return has been filed by the applicant resulting in various tax assessments.  Those relevant to this application were related to the profits tax return for the 2003/2004 year of assessment (dated 16 August 2004) (“the Aug 2004 tax return”).

5. Specifically, the following assessments by the respondent are relevant to this application:

(1) the (original) assessment dated 17 September 2004 (“the Sep 2004 assessment”).  The amount of assessable profits was based on the amount declared in the Aug 2004 tax return;

(2) the additional assessment dated 28 January 2005 (“the Jan 2005 assessment”).  In short, tax deductions were claimed based on bad debts arising from non-trading activities were added back and assessed in the Jan 2005 assessment;

(3) the additional assessment dated 17 March 2010 (“the Mar 2010 assessment”).  This was made as a result of the applicant’s failure to provide to the respondent further information relating to the applicant’s earlier claims for depreciation allowances and deductions for expenditures for fixed assets (the respondent’s request for further information was made in the letter dated 29 January 2008).

The so-called “finality” provisions (ss 60(1), 64 and 70) will be mentioned below.  Because the Mar 2010 assessment was related to the 2003/2004 year of assessment, the additional assessment should be within the time prescribed by s 60(1) (and no issue arises out of this) (see also para 31 below).

6. No objection was raised in relation to the Sep 2004 assessment or the Jan 2005 assessment.  The applicant says that the failure to object to the Jan 2005 assessment was due to internal mal-management.

7. Objection was however raised in relation to the Mar 2010 assessment by a letter dated 15 April 2010 (“the Apr 2010 objection”) (pursuant to s 64(1), Inland Revenue Ordinance (Cap 112).  After protracted correspondence between the applicant and the respondent, a determination was made on 15 October 2012 confirming the Mar 2010 assessment (“the Oct 2012 determination”).  The applicant appealed in November 2012 against the Oct 2012 determination (the appeal is still progressing).

8. What brought about this application is the disagreement between the applicant and the respondent as to whether, by:

(a) making the Mar 2010 assessment;

(b) raising the Apr 2010 objection,

the applicant can seek to also object to earlier assessments, such as (in the present context) the Sep 2004 assessment and/or Jan 2005 assessment.

9. The applicant contends that it can, and that the respondent is obliged to determine the same; the respondent contends otherwise.  The disagreement primarily centres around the proper interpretation of s 70A(1), Cap 112.

Relevant provisions of Cap 112

10. Before looking at s 70A(1), it is useful to note the statutory framework for tax assessment, objection and appeal.  For this purpose, one has to look at some of the provisions in Parts 10 and 11, Cap 112: ss 59, 60, 64 and 66.  Unless otherwise stated below, all references below to statutory provisions refer to those in Cap 112.

11. A perusal of these provisions shows that:

(a) where the respondent opines that a person is chargeable with tax, the respondent should assess the tax chargeable: s 59(1) (section heading “Assessor to make assessments”);

(b) where it appears to the respondent a person chargeable with tax has not been assessed, or assessed at less than the proper amount, the respondent should within the prescribed time period assess that person at what he ought to have been assessed: s 60(1) (section heading “Additional Assessments”) (see also para 31 below);

(c) anyone aggrieved by an assessment should give a written notice of objection to the respondent within 1 month from the date of the assessment: s 64(1) (section heading “Objections”);

(d) anyone who has given a valid notice of objection and who disagrees with the respondent’s written determination against his objection may appeal to the board of review within 1 month from the transmission of the said determination: s 66(1) (section heading “Right to appeal to the Board of Review”).

12. Further, the proviso to s 64(1) specifies several exceptions to the right to give, and/or time period for giving, notice of objection.  Proviso (c) is relevant to this application (for the reasons set out below); it reads:

“… where the assessment is a reassessment of the tax due from a person having the effect of either increasing or reducing that person’s liability to tax, the person so reassessed shall have no further right of objection than he would have had if the reassessment had not been made except to the extent to which, by reason of the reassessment, a fresh liability in respect of any particular is imposed on him or an existing liability in respect of any particular is increased or reduced.” (emphasis supplied)

13. The above scheme is subject to the “finality” provision (s 70 (section heading “Assessments or amended assessments to be final”)): Moulin Global Eyecare Trading Ltd (in liquidation) v CIR [2012] HLRD 911, para 53, 54:

“The statutory scheme described above is designed to meet the need for finality in fiscal transactions. … The legislature has therefore enacted time limits for objections, correction of errors or omissions, and repayments …

… if late applicable for objections and revision of assessments are to be permitted, this would undermine the statutory regime, expose the government to claims and increase the risk of disruption to public finances and the burden of taxation on other groups … ”.

14. In the context of the above scheme described in the Moulin Global Eyecare decision, and:

“… to avoid hardship to taxpayers … ” (the Moulin Global Eyecare decision, para 53),

s 70A(1) (section heading “Powers of assessor to correct errors”) provides for a mechanism for correcting an assessment.  It stipulates:

“Notwithstanding the provisions of section 70, if, upon application made within 6 years after the end of a year of assessment or within 6 months after the date on which the relative notice of assessment was served, whichever is the later, it is established to the satisfaction of an assessor that the tax charged for that year of assessment is excessive by reason of an error or omission in any return or statement submitted in respect thereof, or by reason of any arithmetical error or omission in the calculation of the amount of the net assessable value (within the meaning of section 5(1A)), assessable income or profits assessed or in the amount of the tax charged, the assessor shall correct such assessment” (emphasis supplied).

There is a proviso to s 70A(1) which is irrelevant to this application.

Issues in this application

15. The gist of the applicant’s case is that s 70A(1) mandates the respondent to correct not only the Mar 2010 assessment, but also errors (or omissions) in the Sep 2004 assessment and Jan 2005 assessment. It is the last part of the earlier sentence that the respondent disagrees with.

16. The original s 70A(1) already appears above.  So as to make the applicant’s argument clearer, the relevant parts of s 70A(1) (with modifications to bring out the important points) are set out below:

“… if, upon application made … within 6 months after the date on which the relative notice of assessment was served, … it is established to the satisfaction of an assessor that the tax charged for that year of assessment is excessive

· by reason of an error or omission in any return or statement submitted in respect thereof, or

· by reason of any arithmetical error or omission in the calculation of the amount of the net assessable value (within the meaning of section 5(1A)), assessable income or profits assessed or in the amount of the tax charged,

the assessor shall correct such assessment” (emphasis supplied).

Thus, two kinds of error or omission can trigger the operation of s 70A(1): those in any return or statement (“the 1^st limb of s 70A(1)”) and those in tax calculation (“the 2^nd limb of s 70A(1)”).

17. The applicant accepts that, had the respondent not made the Mar 2010 assessment, it would have been prevented by the “finality” provisions from objecting to the Sep 2004 assessment and the Jan 2005 assessment (because the prescribed time period for objecting has long expired).

18. However, once the Mar 2010 assessment was made, s 70A(1) is engaged.  Consequently, the respondent was entitled, within 6 months after the Mar 2010 assessment, to apply to the assessor for him to act in accordance with that provision.  From that time onwards, s 70A(1) imposes on the assessor an obligation to correct any:

(1)   “error or omission in any return or statement submitted in respect thereof”; or

(2)   “arithmetical error or omission in the calculation of the amount of the net assessable value (within the meaning of section 5(1A)), assessable income or profits assessed or in the amount of the tax charged”,

for any excessive “tax charged for that year of assessment”.

19. In relation to para 18(2) above, the applicant accepts that there was no “arithmetical error” in the context of this application, but argues that the word “omission” in para 18(2) above means any omission (and not limited to “arithmetical omission”).  For this reason, (so the applicant contends) any omission in the Sep 2004 assessment and/or the Jan 2005 assessment should also be corrected by the assessor.  I understand this to be an argument related to the 2^nd limb of s 70A(1).

20. When asked about the legislative intention for imposing such a statutory duty, the applicant submits that this will encourage the respondent to exercise his powers conferred by, for example, s 60(1), more carefully.  This is because, on such construction, once s 70A(1) is engaged, the correction can cover excessive assessment arising from “errors or omissions” going beyond the “relative notice of assessment” to any other assessment(s) for the whole of the related year of assessment.

21. Further, in the applicant’s supplemental submissions (see also para 45 and 46 below), the applicant argues that the “judgment error” in the Aug 2004 tax return (in including offshore income which ought not be chargeable to profits tax in Hong Kong (para 18(b)(iv), applicant’s supplemental submissions)) is a type of error which falls within the meaning of s 70A(1).  This is based on the 1^st limb of s 70A(1).

22. The applicant argues that a narrow construction of s 70A(1) (which restricts the right to object to the “relative notice of assessment” only) is unfair to taxpayers like the applicant; there should be parity between the Commissioner and the taxpayers.

23. The respondent naturally disagrees with the applicant’s above contentions.  Several matters are relied upon in support of the respondent’s case:

(a) Cap 112 is an “assessment-based” statutory regime (which is undisputed) (see also para 27 below);

(b) the ambit of s 70.

24. The ambit of s 70 can be gathered from its language:

“Where no valid objection or appeal has been lodged within the time limited by this Part against an assessment as regards the amount of the assessable income or profits or net assessable value assessed thereby, or where an appeal against an assessment has been withdrawn under section 68(1A)(a) or dismissed under subsection (2B) of that section, or where the amount of the assessable income or profits or net assessable value has been agreed to under section 64(3), or where the amount of such assessable income or profits or net assessable value has been determined on objection or appeal, the assessment as made or agreed to or determined on objection or appeal, as the case may be, shall be final and conclusive for all purposes of this Ordinance as regards the amount of such assessable income or profits or net assessable value:

Provided that nothing in this Part shall prevent an assessor from making an assessment or additional assessment for any year of assessment which does not involve re-opening any matter which has been determined on objection or appeal for the year.” (emphasis supplied)

25. Thus, except where the situations expressly provided for by s 70 are applicable (such as pending objections or appeals), an assessment is “final and conclusive for all purposes” of Cap 112; it is “final and conclusive” for both the respondent and the taxpayers.

26. The only exception to the “finality” principle laid down by s 70 is limited to cases involving the respondent’s right to assess or further assess tax where there is no re-opening of any matter which has been determined on objection or appeal (subject perhaps to s 60(1)).

27. By “assessment-based” statutory regime, the respondent refers to:

“… a process of ascertaining or computing … the assessable profits of a person ... and the application of the appropriate rate of tax to the amount assessed to yield a positive amount of tax … ”: CIR v Common Empire Ltd [2006] 1 HKLRD 942, para 39.

The product of the said process is a “notice of assessment”:

“… an official written notification of the amount of tax arrived at by that process … ”: Shui On Credit Co Ltd v CIR (2009) 12 HKCFAR 392, para 24.

28. Approaching s 70A(1) from the said perspective, (so the respondent argues) it cannot be the legislative intent that, even if s 70A(1) is engaged by the respondent giving of a fresh notice of assessment, the whole year of assessment (including any previous notice(s) of assessment) can somehow be objected to, and “re-assessed”, again (even after the expiry of the time period prescribed by s 64(1)).

29. Thus, the parties’ disagreement seems to come down to this: where a notice of assessment was served more than 6 years after the end of a year of assessment, and where there has been excessive tax liability by reason of “an error or omission” (or, as the case may be, “an arithmetical error or omission”), is the assessor obliged to correct:

(a)   only the “error or omission” (or, as the case may be, “arithmetical error or omission”) in the latest notice of assessment (the respondent’s case);

(b)   any “error or omission” (or, as the case may be, “arithmetical error or omission”) provided the same appeared in the year of assessment related to the latest notice of assessment (and irrespective of whether the same was contained in the latest notice of assess) (the applicant’s case).

30. It may be useful to consider proviso (c) to s 64(1) before considering the above.  Using the assessments involved in this application as examples, the statutory scheme should work like this.  Pursuant to s 64(1):

(1)   the prescribed time period for objection to the Sep 2004 assessment expired 1 month after the date of the Sep 2004 assessment (17 September 2004) (see para 11(c) above);

(2)   the prescribed time period for objection to the Jan 2005 assessment expired 1 month after the date of the Jan 2008 assessment (28 January 2005) (see para 11(c) above).

31. But, compared to the above, the respondent is given a more liberal prescribed time period for making additional assessment(s): the respondent may further assess a taxpayer’s tax liability at any time within 6 years after the expiry of the year of assessment concerned: s 60(1) (where no fraud or wilful evasion was involved (cf s 60(1)(b)).

32. Thus, insofar as the applicant relies on parity of treatment as an aid to the construction of s 70A(1) (see para 22 above), at least so far the above prescribed time periods are concerned, there is no parity between the respondent and a taxpayer (such as the applicant).

33. Proviso (c) to s 64(1) is only engaged where an assessment is a “reassessment” (for example, an additional assessment made pursuant to s 60(1) (see also para 11(b) above).  But even with a “reassessment”, the taxpayer’s right to object is limited only to any “fresh [tax] liability” brought about by the reassessment (see also para 12 above).

34. It is apparent from the parties’ supplemental submissions that they agree the Mar 2010 assessment was a “reassessment” within the meaning of s 64(1) (see, for example, 13, applicant’s supplemental submissions).  Such being the case, any right of objection on the applicant’s part would be defined by proviso (c) to s 64(1) (this is also (correctly) accepted by the applicant: para 14, applicant’s supplemental submissions).

35. But the applicant contends that somehow s 70A(1) can also apply, with the result that, as long as the applicant asserts that there has been an “error or omission” in the return or statement for the related year of assessment (in this instance, the 2003/2004 year of assessment, and the Aug 2004 return), it is incumbent on the respondent to act according to s 70A(1), with the result that the Aug 2004 return is also reviewable/appealable (para 15, applicant’s supplemental submissions) despite the expiry of the time period prescribed by s 64(1).

36. As a corollary to the last-mentioned contention, the applicant argues that an application based on s 70A(1) has been made by the Apr 2010 objection (para 7 above).  Further, the respondent’s letter dated 30 April 2010 constitutes the written notice of refusal within the meaning of s 70A(2), with the result that the respondent’s assessment in the Aug 2004 tax return is also open to objection and appeal.

37. I do not accept the argument.

38. In view of the restrictions imposed by the provisos to s 64(1) (especially proviso (c) thereof in the present context), I agree with the respondent’s construction that s 70A(1) was not intended to confer on the taxpayer a right to seek a general correction of assessment(s) for the same year of assessment.  Such a construction will effectively render proviso (c) to s 64(1) otiose.  It is quite apparently s 64(1) was intended to restrict a taxpayer’s right to object to tax assessment to where there is a fresh liability brought about by the reassessments.

39. I therefore conclude s 70A(1) must have been intended to have a narrow coverage (and should not be construed in the way contended for by the applicant).  With this in mind, I also disagree that the word “omission” in the phrase “arithmetical error or omission” (the 2^nd limb of s 70A(1)) to mean any omission, and not “arithmetical omission” only (cf para 19 above).

40. In relation to the applicant’s argument set out in para 36 above, in the light of the proper construction of s 70A(1) (set out above), s 70A(1) has not conferred power upon the respondent to “correct” the Aug 2004 tax return.  Whatever might have been the purport of the respondent’s letter dated 30 April 2010 is thus irrelevant because the respondent cannot somehow confer power where Cap 112 has not done so.

41. The part of this application based on legitimate expectation, estoppel and the like suffers from the same defect: the executive cannot by its own acts (which acts have no proper legal basis) somehow confer itself power (or at least an appearance of having the power) to so act (those acts will remain as acts ultra vires).

42. The applicant also argues that the time periods prescribed by s 70A(1) are only “prescriptive”, and not “mandatory” (with which the respondent disagrees).  In view that s 70A(1) should be read in the context of a tax regime in which “finality” is an important feature, I agree with the respondent (and disagree with the respondent) concerning this point as well.

Conclusion

43. Accordingly, there is no valid reason for the court to review the respondent’s decisions.

44. This application is refused.

Other matters

45. Subsequent to the hearing on 25 February 2014, the parties have been invited to address the court in writing on the inter-relationship (if any) between proviso (c) to s 64(1) and s 70A(1) (respectively quoted in para 12 and 14 above).

46. The parties did so in their supplemental submissions (parts of which have been expressly referred to above).  For reasons not immediately apparent, the applicant decided to “revisit” the other issues already canvassed during the 25 February 2014 hearing (alleging them to be “related issues” to the topic in para 45 above).  That part spans over some 7-8 pages out of a 13-14-page written submission, and covers matters such as s 40, Evidence Ordinance (Cap 8) (conclusive evidence in civil proceedings) and alleged criminal conduct on the respondent’s part (matters not raised at the 25 February 2014 hearing).  This is unnecessary, inappropriate and unfair to the respondent (who was not given a proper opportunity to respond).

47. The parties’ written submissions also mentioned various other points.  These have not been expressly set out or dealt with above.  This is so only because of the need to balance between the length of the judgment and its comprehension.  It does not mean those other points are thought to be irrelevant (or have been overlooked).  To avoid doubt, those other points have also been considered.

Costs

48. As requested by the parties, costs will only be dealt with after the parties have an opportunity to consider their positions after having sight of this judgment.

49. Further to the above costs, which are the costs of the judicial review application based on the amended Form 86, there is also a pending dispute as regards the costs of the judicial review application based on the original Form 86 (for which written submissions have already been lodged with court).

50. I leave it to the parties to discuss whether the above two sets of costs should be dealt with together.  There will be liberty to apply for such purpose (especially if they should fail to agree on the manner in which costs should be dealt with).