KOO MING KOWN MURAKAMI TADAO v. THE COMMISSIONER OF INLAND REVENUE

CACV 602/2018

[2021] HKCA 1833

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 602 OF 2018

(ON APPEAL FROM HCIA NO 1 OF 2017)

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D E C I S I O N

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Hon Barma JA (giving the Decision of the Court):

1.  On 20 July 2021 this court (then consisting of Lam VP, Chu JA and Barma JA)  handed down Reasons for Judgment in respect of this appeal, which was heard and dismissed on 11 October 2019. The appeal had been brought by the respondent, the Commissioner of Inland Revenue (“the CIR”), against the judgment of G Lam J (as he then was)  dated 23 November 2018, by which the judge allowed the applicants’ appeals against the decision of the Inland Revenue Board of Review (“the Board”)  confirming assessments to additional tax made against them for making incorrect statements that had been made in tax returns by a company of which they were directors, which had been signed by them.

2.  The CIR now seeks leave to appeal to the Court of Final Appeal, pursuant to an Amended Notice of Motion dated 16 September 2021.  In accordance with directions given earlier, the CIR and the applicants have filed written submissions in respect of the leave application, which is to be decided on paper in accordance with our usual practice.

3.  The background to this matter, the issues arising and our reasons for our judgment are set out in detail in our Reasons for Judgment of 20 July 2021, and need not be rehearsed here.  Briefly, the appeal concerned the potential liability for additional tax, and potential criminal liability under section 80 of the Inland Revenue Ordinance (Cap 112)  (“the IRO”), of officers of a company (secretaries, managers, directors and liquidators), who physically sign the tax return of a corporate taxpayer which proves to be incorrect.

4.  The appeal from the Board of Review to the judge and thereafter to this court raised three issues, which were set out in [13] of our Reasons for Judgment. The first issue concerned whether section 82A of the IRO permits the CIR to make a penalty assessment on an agent of a company taxpayer who assists the taxpayer to make a tax return which the taxpayer is required to provide.  The second issue raised the question of whether the agent was precluded by sections 70 and 82B(3)  of the IRO from reopening questions concerning the taxpayers’ liability to profits tax or challenging the CIR’s assertion (in assessing the penalty)  that the taxpayer’s return was incorrect.  The third question was whether the Board’s determination as to the deductibility of certain payments were tax benefits conclusively determine that the said returns were not incorrect.

5.  In our Reasons for Judgment, we dealt only with the first of these issues, on which we agreed with the judge in favour of the applicants and against the CIR.  We explained at [15] of our Reasons for Judgment why we did not go on to deal with the second and third issues (which had been considered by the judge in the judgment below).

6.  Section 22(1)(b)  of the Court of Final Appeal Ordinance provides that an appeal shall lie to the Court of Final Appeal at the discretion of the Court of Appeal or the Court of Final Appeal from any judgment of the Court of Appeal in any civil cause or matter, whether final or interlocutory, if, in the opinion of the Court of Appeal or the Court of Final Appeal, the question involved in the appeal is one which, by reason of its great general or public importance, or otherwise, ought to be submitted to the Court of Final Appeal for decision.

7.  By the Notice of Motion, the CIR proposes that the following questions should be submitted to the Court of Final Appeal for determination by reason of their great general or public importance, or otherwise:

“Does section 82A of the [IRO] permit the [CIR] to assess additional tax on a secretary, manager, director or liquidator (‘the Signer’)  who has physically signed an incorrect tax return (‘the Return’)  of a corporate taxpayer (‘the Taxpayer’)? In particular:

(1)  Whether, having regard to all the circumstances, including the actual words used in the Return, and the legislative context and purposes, the Signer is ‘making’ the Return in his personal capacity on behalf of the Taxpayer? and

(2)  Whether the Signer, being a secretary, manager, director or liquidator of the Taxpayer, is ‘required’ by the IRO to make the Return on behalf of the Taxpayer?”

8.  For the CIR, Mr Stewart Wong SC submitted that the questions formulated were of great general or public importance, and that they were at least arguable before the Court of Final Appeal, for the reasons elaborated in his written submissions.

9.  Mr Denis Chang SC, appearing for the applicants, did not dispute that the questions raised matters of great general public importance.  Nor did he suggest that the proposed appeal was not arguable.  However, he submitted that if leave to appeal to the Court of Final Appeal was to be granted, the Commissioners questions should be reformulated, and that two further questions should also be submitted to the Court of Final Appeal for decision.

10.  Mr Chang submitted that the following questions should be submitted to the Court of Final Appeal:

(1)  Question 1(a):  Where a company (“the Corporate Taxpayer”)  has been required by a notice issued to it under section 51(1)  of [the IRO] to make a Return, is it the Corporate Taxpayer (rather than the director who signed the said return)  that makes the Return pursuant to the notice and accordingly section 82A of the IRO does not permit the [CIR] to assess additional tax on the signing Director?

(2)  Question 1(b):  If Question 1(a)  is answered in the affirmative, then do sections 70 and 82B(3)  preclude the Director from: (i)  re-opening questions concerning the Corporate Taxpayer’s liability to all or part of the profits tax that was assessed upon the Corporate Taxpayer? (ii)  challenging the Commissioner’s assertion in the additional tax assessment upon the Director that the Return was “incorrect”?

(3)  Question 1(c):  If Question 1(b)  is answered in the affirmative, then does a determination of the [Board] that the deductibility of the Corporate Taxpayer’s payments of the management fees plus the legal and professional fees pursuant to the service agreements constituted “tax benefits” (which the IRO section 61A assessments were made to remove or counteract)  conclusively determine that the statements within the Return therein were not “incorrect”?

11.  With respect to Mr Chang, we are bound to say that we have had some difficulty in understanding how Question 1(b)  arises if Question 1(a)  is answered in the affirmative.  Be that as it may, we propose to deal with the matter by considering first, whether leave to appeal to the Court of Final Appeal should be given in relation to either the questions formulated by the CIR or Question 1(a)  as formulated by Mr Chang.  If we conclude that leave should be given, we will deal next with which version of the questions should be the subject of such leave.  Finally, we will consider whether, if leave is given for the first question (in whichever form), leave should also be given in respect of the second and third questions raised by Mr Chang’s Questions 1(b)  and 1(c).

12.  Dealing first with whether or not leave should be granted in respect of some version of the first question.  We would accept, as appears to be common ground between the parties that the questions raised are of great general or public importance, essentially for the reasons advanced by Mr Wong.  We would also accept that the questions are arguable before the Court of Final Appeal, particularly given that Mr Chang did not seek to suggest that they were not. We will therefore grant leave to the CIR to appeal to the Court of Final Appeal against our judgment.

13.  As to the version of the question to be put before the Court of Final Appeal, we are bound to say that the CIR’s formulation appears to us to be the more suitable formulation, as it raises the two central questions that were dealt with in relation to this aspect of the case before both this court and the court below: whether the applicants made the returns in their personal capacity and whether they were required by the IRO to do so.  Moreover, as Mr Wong pointed out, that formulation rightly focuses on the position and perspective of the applicants, who were the subject of the additional assessments, rather than on the position of the corporate taxpayer of which they were directors, which was not the subject of the additional assessments which it is sought to challenge. Finally, as Mr Wong also emphasised, the applicants have not suggested that the CIR’s question is wrong or objectionable.  Nor have they put forward any reasons why their formulation should be preferred.  We therefore give leave to appeal to the Court of Final Appeal on the basis of the questions as formulated by the CIR in the Amended Notice of Motion.

14.  That leaves the question of whether Questions 1(b)  and 1(c)  as formulated by Mr Chang for the applicants should also be the subject of our grant of leave to appeal.  The CIR’s initial position was that if the proposed appeal succeeded, an order would be sought for the second and third issues referred to in [4] above, which are reflected in Questions 1(b)  and 1(c), to be remitted back to this court for determination (as they had not yet been determined by us). Having appreciated the applicants’ wish to have these matters determined by the Court of Final Appeal as well without further ado, the CIR does not object to such a course being taken, but quite properly drew attention to the difficulties with doing so, pointing out that such a course did not appear to be procedurally sound or viable where this court had not yet considered or dealt with those questions, as this would bring into consideration the “not considered on intermediate appeal hurdle” identified in Flywin Co Ltd v Strong & Associates Ltd (2002)  5 HKCFAR 356 at [39], and might raise an issue as to whether or not the Court of Final Appeal had jurisdiction to deal with these matters at all, when they had not yet been considered in this court.

15.  We think it clear that whether or not the Court of Final Appeal should entertain an appeal on a question raised but not decided by this court (whether as a matter of jurisdiction or of discretion)  is something which should be decided by the Court of Final Appeal itself.  It would seem distinctly inappropriate for this court to give leave to appeal on a question that it has not itself dealt with and disposed of.  We therefore decline to give leave to appeal to the Court of Final Appeal on Questions 1(b)  and 1(c)  as formulated by the applicants.

16.  If the applicants wish to pursue their formulation of Question 1(a)  in preference to the questions formulated by the CIR, or wish to pursue the question of whether Questions 1(b)  and 1(c)  should be the subject of argument before the Court of Final Appeal, they may make the appropriate applications to that court.

17.  We therefore grant leave to the CIR to appeal against our judgment of 11 October 2019, reasons for which were given on 20 July 2021 on the basis of the questions identified in the CIR’s Amended Notice of Motion.  So far as costs are concerned, we shall order that the costs of this application are to be in the cause of the appeal to the Court of Final Appeal.