INTERASIA BAG MANUFACTURERS LTD v. COMMISSIONER OF INLAND REVENUE

HCAL 98/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTITUTIONAL AND ADMINISTRATIVE LAW LIST

NO.98 OF 2003

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J U D G M E N T

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Introduction

1. The applicant in this matter, a company incorporated in Hong Kong, seeks orders of certiorari to bring up and quash two decisions of the respondent (‘the Commissioner’) made respectively on 23 and 25 June 2003.

2. Both decisions of the Commissioner arise out of an original notice of assessment of profits tax for the 2001/2002 tax year in terms of which the applicant was assessed as being liable for tax in a sum of $6,329,012.  The applicant objected to payment of that assessment.  It did so pursuant to s.64 of the Inland Revenue Ordinance, Cap.112 (‘the Ordinance’), its contention being that either all or the greater part of its profits for that tax year had been earned off shore and were not liable to assessment.

3. In terms of s.14 of the Ordinance, companies which carry on business in Hong Kong are subject to profits tax.  The tax, however, may only be levied on ‘assessable profits arising in or derived from Hong Kong’.  In short, profits earned as a result of doing business outside of Hong Kong; that is, off shore, are not subject to profits tax.

4. At all material times the principle business of the applicant has been the manufacture of leisure bags and accessories.  To this end, it has engaged itself largely in the business of arranging the manufacture of bags and accessories in the Mainland and shipping the goods to merchants in the United States.

5. Even though the applicant objected to the Commissioner’s assessment for the 2001/2002 tax year, it remained liable to pay the tax pending determination of the objection unless the Commissioner, in the exercise of his discretion, directed that the tax, or any part of it, be held over.  If the Commissioner decided that payment, or any part of it, may be held over, he was entitled to impose conditions by way of the provision of security.  In this regard, s.71(2) of the Ordinance reads :

“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.”

6. In a letter dated 6 May 2003, the applicant, acting through its Hong Kong accountants, requested the Commissioner to hold over the disputed tax for the 2001/2002 tax year ‘unconditionally’ until its objection had been determined.  One of the reasons it made this request, so it has been argued, is because it had already been the subject of review by the Commissioner pursuant to s.60(1) of the Ordinance in respect of a number of previous tax years.  S.60(1) reads :

“Where it appears to an assessor that for any year of assessment any person chargeable with tax has not been assessed or has been assessed at less than the proper amount, the assessor may, within the year of assessment or within 6 years after the expiration thereof, assess such person at the amount or additional amount at which according to his judgment such person ought to have been assessed, and the provisions of this Ordinance as to notice of assessment, appeal and other proceedings shall apply to such assessment or additional assessment and to the tax charged thereunder.”

Although in the original assessments the applicant’s profits had been accepted by the Commissioner as being earned off shore, the reviews made pursuant to s.60(1) had resulted in a reversal of that finding.  In the result, although the applicant had objected to each and every new assessment, it had nevertheless been forced by the Commissioner to provide security in respect of the new tax demands in a sum in excess of $30,000,000.  This has resulted in a severe strain on the applicant’s finances, so much so, it has been argued, that the Commissioner had been informed that the applicant was in danger of being forced out of business.

7. Despite this, so it has been contended, the Commissioner declined to exercise his discretion to unconditionally hold over his new demand for $6,329,012 in respect of the 2001/2002 tax year.  In a notice dated 23 May 2003, the Commissioner agreed only to hold over unconditionally a relatively small sum of $363,000.  However, a sum of $5,500,000 would have to be secured by way of purchasing a tax reserve certificate (‘a TRC’) on or before 10 June 2003 while the balance of some $465,000 would have to be paid as tax on or before the date just stated.

8. At the core of this application for judicial review is the contention that, although the applicant had duly paid or provided security for more than 80% of the disputed tax assessments, the Commissioner nevertheless insisted, despite the company’s difficulties, in demanding his full ‘pound of flesh’.  In doing so, the Commissioner closed his eyes to the applicant’s difficulties, stating plainly in correspondence that they were not relevant to the exercise of his discretion.  This, it has been argued, has amounted to an abuse of the Commissioner’s discretion in that it has manifestly constituted a failure to act fairly towards the applicant.

9. As I have said, the Commissioner communicated his refusal to unconditionally hold over payment of the sum of $6,329,012 for the 2001/2002 tax year in terms of a notice dated 23 May 2003.  That notice also bore the warning that any default in the payments demanded would result in a surcharge not exceeding 5% being levied.  The power to impose a surcharge is contained within s.71(5) of the Ordinance which reads :

“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.”

10. Although the applicant paid the sum of $465,000 within the time stipulated, in a letter dated 10 June 2003 — the last day for compliance with the Commissioner’s demands — the applicant’s accountants informed the Commissioner that, in light of the earlier heavy financial demands made upon it by the Commissioner, there was simply ‘no practical way’ that the applicant could now raise sufficient funds to purchase a TRC in the required sum of $5,500,000 and that, for various reasons detailed in the letter, it would be unfair and oppressive to insist upon the provision of that security.  The letter from the applicant’s accountants concluded :

“In view of the above unfair situation, we would be grateful if you could unconditionally hold over the profits tax of HKD5,500,000 demanded pending the outcome of our objection lodged.”

11. In his reply of 23 June 2003, the Commissioner refused the request to unconditionally hold over the sum of $5,500,000 pending determination of the applicant’s objection.  The applicant was informed in the letter that, as it had failed to purchase a TRC by the required date; that is, by 10 June 2003, legal proceedings would now be instituted to recover the full amount of tax outstanding.

12. This decision of the Commissioner contained in his notice 23 June 2003 is the first decision challenged by the applicant.

13. Two days later, on 25 June 2003, the Commissioner issued a notice informing the applicant that, as it was in default in not purchasing a TRC for $5,500,000 by the required date, a surcharge of 5% had been added to that amount, the surcharge being authorised in terms of s.71(5) of the Ordinance.  The 5% surcharge came to $275,000.  This is the second decision challenged.

The grounds of challenge

14. The lawfulness of the Commissioners two decisions are challenged on three separate grounds.  There were originally four grounds but Mr Kwok, leading counsel for the applicant, accepted during the course of submissions that two of the grounds were subsumed into each other.

15. As I have earlier indicated, the first ground - indeed the core complaint - is that, in making his two decisions, the Commissioner acted in a way that was unfair towards the applicant, that unfairness constituting an abuse of his discretion and thereby an abuse of his power under the Ordinance.  As authority for this proposition, Mr Kwok Siu Hay, leading counsel for the applicant, relied on Harley Development Inc and Another v. Commissioner of Inland Revenue (unreported) Civil Appeal 26 of 1993.  In giving the leading judgment in that case, having studied earlier English authorities, Penlington JA said that, in his opinion, “it is settled that judicial review is available only if the taxpayer can show that the authorities have acted outside their powers or have abused them.  Abuse of power may however be shown if the taxpayer has not been treated fairly”.

16. The applicant’s second ground of challenge does not, as I see it, relate directly to the two decisions of the Commissioner which are stated in the applicant’s form 86A as being the decisions challenged.  It appears to me that the second ground of challenge relates instead to the decision of the Commissioner contained in his notice of 29 April 2003 to assess the applicant as being liable for profits tax for the 2001/2002 tax year in a sum of $6,329,012.  I say that because this ground of challenge is to the effect that, as the Commissioner had previously determined that the applicant’s profits had been derived off shore and were not therefore subject to tax, this had given rise to a legitimate expectation on the part of the applicant that, in the absence of a change in law or a duly notified change in the Commissioner’s policy, profits earned by the applicant in the same manner in the future would also be exempt from tax or, to express it another way, that the Commissioner would not act inconsistently with his earlier determinations.  In this regard, in the form 86A, the second ground of challenge is described in the following manner :

“The 1992-94 assessments constituted representations on the [Commissioner’s] part that profits attributable to the overseas sales [of the applicant] arise or are derived outside Hong Kong.

The applicant was and is entitled to a legitimate expectation that, unless there is a change in the [Commissioner’s] policy or a change in law, similar profits in subsequent years would likewise be considered by the [Commissioner] as arising or derived outside Hong Kong.”

17. The applicant’s third ground of challenge is to the effect that, in financial terms, the two decisions of the Commissioner - coming, as they did, on top of earlier demands - were so onerous that, if they were to be met by the applicant, they would so enfeeble it financially that the applicant would, for all practical purposes, be thereby prevented from obtaining the necessary legal representation to prosecute its objection to the 2001/2002 assessment.  By so denuding the applicant of funds, submitted Mr Kwok, the Commissioner has effectively denied the applicant the ability to instruct legal representatives in respect of its objection and thereby denied the applicant its constitutional right of access to the courts and tribunals of Hong Kong, the relevant tribunal in this instance being the Board of Review constituted in terms of s.65 of the Ordinance.  The Board of Review is the body which determines objections made by tax payers when those objections are not accepted by the Commissioner.

18. As authority for the proposition that the Commissioner’s decisions have infringed the applicant’s constitutional right of access to Hong Kong courts and tribunals, Mr Kwok relied on a number of authorities.  Reliance was placed on a decision of the European Court of Human Rights, Airey v. Ireland 2 E.H.R.R. 305, in which it was held that the constitutional right of access to the courts guaranteed by the European Convention (a right also constitutionally guaranteed in Hong Kong) was not theoretical or illusory but practical and effective.  Mr Kwok also relied on a recent decision of the Hong Kong Court of Appeal, that of A Solicitor v. The Law Society of Hong Kong (unreported) CACV 302/2002.  In this second judgment, Woo VP held that the exercise by a statutory tribunal of its power to make costs orders should not ‘unnecessarily, unreasonably and disproportionately restrict or impair’ the right of a litigant to access to the tribunal or to defend himself before it.  This right, it was said, was a common law right as well as a right protected by art.35 of the Basic Law and art.10 of the Bill of Rights.

Background

19. Understanding the history of this matter is of central importance.  It is the applicant’s contention that an understanding of the history will support its complaints of unlawful conduct by the Commissioner.  It is also the Commissioner’s contention that the understanding of the history will effectively determine the issues in this matter but in his favour.  I agree that an objective study of the history is critical in this matter and in many respects provides a complete answer to the applicant’s complaints.  In the result, it is necessary to recite the history and to make certain comments on it in considerable detail.

20. The applicant was incorporated in Hong Kong in 1991.  For the first ten years; that is, until about the end of 2001, all the issued shares in the applicant were held by two persons; namely, Mr Victor Ozeri and Ms Polita Lai.  Mr Ozeri, a citizen of the United States of America, has at all material times held his shares in one or more British Virgin Island (‘BVI’) corporations.

21. On 16 May 1995, some four years after the applicant had commenced its business of managing the manufacture of bags and accessories in the Mainland, the Commissioner served a notice on it pursuant to s.51(3) of the Ordinance seeking information concerning the applicant’s tax returns made for its first two years of business; namely, the 1992/1993 and 1993/1994 tax years.  In respect of both those tax years the applicant had claimed that its profits had been earned off shore and were not therefore subject to assessment.

22. In a letter dated 16 June 1995, the applicant’s accountants (who have throughout represented the applicant in its dealings with the Commissioner) said the following :

“The sales profits were derived from services rendered outside Hong Kong by our client’s overseas representatives.  Such services included soliciting orders in the United States and production control in China.  We take the view that the profits derived therefore would be outside the scope of charge to Hong Kong Profits Tax.”

23. At about the same time, in respect of the 1994/1995 tax year, the applicant submitted a tax return in which it was also claimed that there were no assessable profits.  Off shore profits in that year, however, had amounted to some HK$16,000,000.

24. In light of the information contained in the letter of 16 June 1995, in July of that same year the Commissioner sent notices to the applicant for the two tax years of 1992/1993 and 1993/1994.  Both these notices were in standard form.  Both said the following :

“According to the Return and information submitted, there are no profits chargeable to Profits Tax for the above mentioned year of assessment.”

25. The notices were not accompanied by any explanatory letter.  Nor were any other communications made in terms of which the Commissioner gave promises or undertakings to the applicant concerning profits earned in future tax years.

26. Matters appeared to have rested there with no further enquiry from the Commissioner until some five years later.

27. As I understand his submissions, Mr Kwok, for the applicant, has contended that this exchange between the Commissioner and the applicant, coupled with the Commissioner’s acceptance of the status quo for a number of years, created a legitimate expectation on the part of the applicant that, in the absence of a change in law or a duly notified change in policy, profits earned in the manner they had been earned in 1992/1993 and 1993/1994 tax years would also be considered off shore profits.

28. The Commissioner of course had at all material times the discretionary responsibility in terms of s.60(1) of the Ordinance (cited in para.6) to conduct fresh assessments if it appeared to him that tax had not originally been assessed in the ‘proper amount’.

29. Pursuant to his powers under s.60(1) of the Ordinance, in October 2000 the Commissioner sent a letter to the applicant saying that he intended to conduct a review of the applicant’s claim for off shore profits for all the tax years from 1994/1995 to 1999/2000.  The letter commenced as follows :

“In order for me to review your client’s offshore claim of profits, please provide information/documents as follows in relation to its financial statements for the years ended 31 December 1994, 1995, 1996, 1997, 1998 and 1999 respectively …”

30. Early the following year, in a letter dated 16 February 2001, the applicant responded to the Commissioner’s request for information.  In that letter no suggestion was made that the Commissioner, in seeking a review pursuant s.61 of the Ordinance, was breaching any prior agreement reached with the applicant.

31. In the course of his submissions, Mr Cooney, leading counsel for the Commissioner, contended that, if the applicant had found itself in financial difficulties in respect of tax demanded, those difficulties were not created by the tax demands themselves but rather by the actions of the applicant’s directors, these being actions carried out in the knowledge that the Commissioner was conducting a review pursuant to his powers under s.60(1) of the Ordinance and that accordingly there had to be a risk that tax demands extending over a number of years may be made.  The actions to which Mr Cooney has referred were, first, a decision to declare a series of dividends and, second, with the applicant’s finances thus depleted, a decision to cease business entirely; in short, to let the applicant become dormant.  In light of these contentions, something must be said of what transpired in respect of the applicant’s finances and the decision to cease trading.

32. On 1 March 2001, the applicant declared an interim dividend of US$2.10 per share.  This made for a total dividend pay out in excess of $32,500,000.

33. This dividend was declared some four to five months after the applicant had been informed that the director was conducting a review in respect of a number of tax years pursuant to s.60(1) of the Ordinance and at a time when the applicant’s accountants were collecting information to assist the Commissioner in his review.

34. On 14 March 2001, just two weeks after the interim dividend had been declared by the applicant, the Commissioner, having reviewed the applicant’s business for the 1994/1995 tax year, raised an assessment of profits tax which accorded with the exact sum that the applicant had claimed constituted its off shore profits for the year.

35. In respect of the 1994/1995 tax year, Mr Cooney has said, it was plain therefore that the Commissioner had determined that the full amount of the off shore profits claimed by the applicant for that year should be classified as on shore.  If that was the case, Mr Cooney has said, surely it must have been appreciated by the applicant that in respect of other tax years what had previously been accepted as off shore profits may now also be classified as on shore and subject to tax.  As Mr Cooney has expressed it during the course of his submissions, the alarm bells must have been sounding.  However, the applicant appears to have been deaf to their sound.

36. The tax demanded by the Commissioner in terms of his assessment of 16 March 2001 for the 1994/1995 tax year was a sum of approximately $2,600,000.  A note accompanying the demand made it clear that this was what is called a ‘protective assessment’ made by the Commissioner to guard against the risk of a demand for tax becoming time-barred pursuant to s.60(1) of the Ordinance.  The note read :

“The Department is currently reviewing your offshore claim.  As the year of assessment 1994/95 will become time-barred soon and there are certain information not yet supplied, hence a protective assessment for the year is raised to disallow the offshore claim.  Should you disagree to the assessment, you should lodge an objection within one month statutory objection period in accordance will Section 64 of the Inland Revenue Ordinance.”

37. On 22 March 2001, the applicant lodged an objection, its accountants saying that their earlier response in February 2001 had not been exhaustive and that further information on the matter would be submitted shortly.  The following was also said :

“In view of foregoing, please … holdover the tax in dispute of HKD2,668,957 completely and unconditionally.”

38. On this first occasion, the Commissioner agreed to hold over the full amount of assessed tax unconditionally pending a final determination of the applicant’s objection.  That the Commissioner had exercised his discretion in this manner was conveyed to the applicant in a notice dated 20 April 2001.

39. Shortly thereafter, on 18 June 2001, the directors of the applicant — Mr Ozeri and Ms Lai — resolved that a final dividend for the year should be paid to shareholders, this dividend being in excess of $30,000,000.  In round terms, this meant that in 2001 (the applicant’s financial year ending on 31 December) the two shareholders had received a total dividend of some $65,000,000.

40. It needs to be stressed that at about this time the applicant appeared to be conducting business in a substantial way.  Mr Cooney has described it as being ‘cash rich’.  By way of illustration, for the year ended 31 December 2001 the applicant’s accounts show a turnover in excess of $294,000,000 giving rise to profits (after the limited amount of tax that had to be paid) of some $31,900,000.  The year earlier, the year ended 31 December 2000, had been even better for the applicant.  In that year the applicant’s turnover had been in excess of $310,000,000 resulting in profits (after tax) in excess of $41,000,000.

41. On 6 August 2001, the Commissioner served a notice of audit on the applicant for the year 1999/2000.  This notice, Mr Cooney has said, could not have failed to set off further alarm bells.  The Commissioner’s audit included what is called a ‘field audit’ which took place at the officers of the applicant on 3 October 2001.

42. At about this time, although the Commissioner was not informed of it, it appears that a profound disagreement arose between the directors of the applicant, Mr Ozeri and Ms Lai.  This disagreement resulted in Ms Lai agreeing to leave the applicant and to receive compensation for loss of office in a sum of $10,500,000.  On the same day that this agreement was reached; that is, on 6 December 2001, a second agreement was concluded in terms of which one of Mr Ozeri’s BVI corporations (Vencourt Ltd) agreed to purchase Ms Lai’s shares in the applicant for $10,500,000.  In the result, therefore, in December 2001 Ms Lai received $21,000,000, half of that sum by way of compensation for loss of office and half paid for the purchase of her shares by Mr Ozeri’s BVI corporation.

43. In January 2002 — approximately one month after Ms Lai’s departure — the applicant declared a further dividend, this time in a sum of approximately $39,900,000.  In his affirmation dated 13 April 2004, Joseph Lam, a member of the applicant’s accounting firm, has explained why the January 2002 dividend had been declared :

“… Mr Ozeri had insufficient financial resources to purchase Ms. Lai’s shares in the Applicant.  Therefore, Mr. Ozeri had caused the Applicant to declare dividends of HK$39.9M in January 2002.  The amount, net of provision for U.S. individual income tax, was roughly HK$20.3M.

A further sum of HK$10.15M was provided for Mr. Ozeri’s ex-wife as a result of the divorce.  The residual balance of HK$10.15M which Mr. Ozeri obtained on hand was used to partly satisfy the consideration of HK$10.5M for the said 20% shareholdings of Ms. Lai.  The last payment of HK$5.25M comprising the HK$10.5M was made in June 2002 to Ms. Lai.”

44. At the time when the Commissioner made the two decisions which have been challenged; that is, in June 2003, it is not disputed that the Commissioner had not been informed of the reasons why such a substantial dividend had been declared by the applicant.  Of greater importance, in my view, is the fact that the Commissioner was not informed that at the end of January 2002, a matter of days after the dividend had been declared, the applicant ceased trading.  This is confirmed in the Director’s Report of 11 June 2003 which states that the applicant had ‘become dormant’ from 1 February 2002.

45. As to why the decision was made that the applicant should cease trading, no reasons have been forthcoming.  However, one of the reasons appears to have been the dispute that arose between Mr Ozeri and Ms Lai which resulted in Ms Lai’s departure.  In this regard, in his affirmation of 13 April 2004, Mr Lam said the following :

“As a result of the shareholder’s dispute, the business of the Applicant was scaled down and the original business was split and partly transferred to Interasian Resources (Hong Kong) Limited in or about March 2002.”

46. On 28 February 2002, the Commissioner raised a second assessment on the applicant.  This second assessment was for 1995/1996.  On this occasion the Commissioner demanded tax in a sum of approximately $3,500,000.

47. On 5 March 2002, the applicant lodged an objection to this second assessment.  In their letter, the applicant’s accountants said that they had (so far) only submitted a partial reply to the information requested in the Commissioner’s letter of October 2000 and that they would be submitting further information shortly.  The accountants then made the following request :

“In view of foregoing, please allow our objection under Section 64(1) of Inland Revenue Ordinance and holdover the tax in dispute of HKD3,465,000 completely and unconditionally.”

48. In their letter of 5 March 2002, the applicant’s accountants said nothing of the fact that the applicant was now dormant, having ceased trading.

49. In response to the request made in the letter of 5 March 2002 to hold over the disputed tax unconditionally, the Commissioner said that it could be held over if the applicant gave security by way of purchasing a TRC in the sum of $3,250,000, the balance being held over unconditionally.  The applicant duly purchased a TRC in the required sum.

50. On 26 July 2002, the Commissioner raised the following further assessments :

                      Year                                       Tax payable

                      1996/1997                              5,527,000

                      1997/1998                              5,940,000

                      1998/1999                              5,280,020

                      1999/2000                              5,790,387

                      2000/2001                              6,167,245

                                                           HK$28,705,132

51. Again, objections were lodged and a request was made for the tax to be ‘unconditionally’ held over.

52. In response, the Commissioner agreed to hold over only a modest sum in respect of each tax year unconditionally.  The Commissioner requested purchase of TRCs as follows :

                      Year                                       Amount of TRC

                      1996/1997                              5,505,000

                      1997/1998                              5,840,000

                      1998/1999                              5,252,000

                      1999/2000                              5,785,000

                      2000/2001                              6,137,000

                                                            HK$28,519,000

53. The applicant’s accountants, in a letter dated 4 September 2002, made a counter-proposal to purchase TRCs to the value of some $3,750,000 with the balance held over unconditionally.  To emphasise what they considered to be the strength of the applicant’s objection that its profits had been earned off shore, the accountants enclosed a legal opinion for the Commissioner’s consideration.

54. The accountants concluded their letter by making reference to the financial vunerability of the applicant :

“Please be advised that if your department insist on the Company to purchase Tax Reserve Certificates for over HKD27M, it will substantially interrupt with the business of the company and possibly compel the company to go out of business due to liquidity problem.  Moreover, the company has just paid over HKD10M recently to remove an unsatisfactory director.”

55. By the date of this letter, the applicant had been dormant for some seven months.  However, the accountants did not see fit to share this with the Commissioner.  The letter, speaks instead of the Commissioner’s demands substantially interrupting the business of the company and perhaps compelling the company to go out of business due to liquidity problems.  It should also be said that no details were given to explain the applicant’s liquidity problems other than the need to make a payment of $10,000,000 to remove an unsatisfactory director.  The full reasons only came in the affirmation of Joseph Lam filed in April 2004, a day or so before the commencement of the judicial review hearing itself.  Further negotiations took place until about November 2002 when the applicant was able to offer a series of bankers’ guarantees to cover the sum of $28,519,000.  This was acceptable to the Commissioner and in the result the applicant was not obliged to purchase TRCs.

56. The terms upon which the applicant was able to secure a guarantee from its bankers and the extent to which it burdened the applicant financially were not revealed to the Commissioner (directly or indirectly) nor to this Court.

57. In September 2002, the Commissioner requested further information from the applicant so that the applicant’s objections could be considered.

58. In the following year, on 29 April 2003, the Commissioner issued a notice of assessment of profits tax for the 2001/2002 tax year, the tax thereon being $6,329,012.  The due date for payment being 10 June 2003.

59. By letter dated 6 May 2003, the applicant’s accountants lodged an objection to that assessment too.  In that letter, the Commissioner was requested to hold over the disputed tax ‘completely and unconditionally’ until final determination of the applicant’s objection.

60. By notice dated 23 May 2003, the Commissioner agreed only to hold over a relatively small sum of approximately HK$350,000.  A sum of HK$5,500,000, he said, would be held over subject to the purchase of a TRC in that sum by no later than 10 June 2003 while the balance, a relatively modest amount of about $450,000 would have to be paid as tax by that same date.  In short, the applicant found itself obliged to pay a sum of just under $6,000,000.

61. The notice from the Commissioner bore the following endorsement in respect of the purchase of the TRC :

“3.    If Tax Reserve Certificate is not purchased by the date shown above, a surcharge not exceeding 5% thereof shall initially be added to the tax at the discretion of the Commissioner and recovered therewith.”

The notice also bore the general endorsement :

“IF ANY INSTALMENT is not fully paid by specified date, balance of TOTAL TAX PAYABLE remaining unpaid will be deemed to be in default.  Where any tax is in default, a surcharge not exceeding 5% thereof shall initially be added to the tax at the discretion of the Commissioner and recovered therewith.”

62. It was only on 10 June 2003 - the last day for compliance with the Commissioner’s demands - that the applicant’s accountants wrote to the Commissioner, the letter apparently being delivered by hand.  The contents of this letter require detailed consideration.  The letter began as follows :

“We refer to your letter dated 23rd May 2003 regarding a conditional hold over of certain tax in dispute by purchase of Tax Reserve Certificate on or before 10th June 2003. Kindly note that our client is having cash flow problem at the moment and is unable to purchase Tax Reserve Certificate for the amount of HKD5,500,000 demanded by your department.”  [my emphasis]

63. On behalf of the Commissioner, Mr Wong, the tax assessor dealing directly with the applicant’s case, said he understood this to mean that the applicant was undergoing temporary cash flow problems, problems that, given time, in light of the history of profitability, would be overcome.  As such, a temporary cash flow problem could no doubt be met by an agreement reached with the Collector of Taxes, allowing for payment by instalments.

64. The letter of 10 June 2003 from the applicant’s accountants continued :

“We must draw your attention to the fact that the offshore claims lodged by our above named client since the year of assessment 1992/93 had been reviewed and agreed by your department in July 1995 and the operations of the company has remained the same throughout the years.  Pursuant to the agreement on the offshore claims granted by your department, dividends had been declared by IBM and paid to a trust of which Mr. Victor Ozeri is the beneficiary.  U.S. federal and state tax totalling 50% had been duly paid on the dividends received by Mr. Ozeri who is a U.S. resident.  Had your department represented to IBM that its offshore claim cannot be acceded to in the past, IBM would only have declared dividends net of all relevant Hong Kong Profits Tax.  Because of the Unilateral Tax Credit system in the U.S., Mr. Ozeri would have paid reduced amount of tax in the U.S.”  [my emphasis]

65. Mr Cooney for the Commissioner submitted that there had never been any ‘agreement’ as suggested in the letter; certainly no agreement nor any understanding of any kind that would estop the Commissioner for pursuing a review in terms of s.60(1) of the Ordinance and demanding any tax found due and payable as result of such review.  Indeed, this was the first time since the Commissioner’s review process had commenced in late 2000, said Mr Cooney, that any suggestion was made of any form of ‘agreement’.

66. Mr Cooney also pointed out that the dividends declared by the applicant in 2001 had been declared in full knowledge of the fact that the Commissioner had instituted a review as had the dividends declared in early 2002.  It could not therefore be legitimately said that dividends had only been paid out as a consequence of some form of agreement and in ignorance of any review.

67. The letter of 10 June 2003 continued :

“Our client is strongly of the view that your department has created a situation whereby there would be potentially a double tax payment by IBM and Mr. Ozeri, first in the U.S. (when dividends were declared by IBM in the past) and then here in Hong Kong under Profits Tax should your department revoke your previous agreement to the offshore claims.

We must emphasise that the dividend payments have been done in good faith by our client on the basis of your department’s previous agreement to the offshore claims and the whole situation involved no fault on our client’s part.

…

If any profits tax needs to be paid in Hong Kong, the fact that the tax was not previously charged must be due to the administrative fault on the part of your department.  It would be so unfair that due to your department’s fault, our client and its beneficial owner, Mr. Ozeri is now facing double tax payment – firstly in the form of U.S. federal and state tax totaling 50% on the dividends distributed from the profits of our client to the trust of which Mr. Ozeri is a beneficiary and eventually at the Hong Kong Profits Tax of 16%.”  [my emphasis]

68. The accountants then proceeded to state in unequivocal terms that the applicant was not able to meet the latest financial demands placed on it by the Commissioner :

“As U.S. tax has been duly paid on the dividends distributed by our above named client and bank guarantee of HKD28.8M has been arranged by IBM and Mr. Ozeri (out of personal assets of Mr. Ozeri) previously, our client indicated that there is no practical way our client nor Mr. Ozeri would have sufficient assets to raise a further HKD5,500,000 to purchase the Tax Reserve Certificate or arrange additional bank guarantee now requested by your department.”

69. On the evidence, it appears that in June 2003, the applicant remained dormant.  No mention was made of this in the letter of 10 June 2003.

70. Nor, said Mr Cooney, did the letter give any of the details that the applicant now relies on to argue that the Commissioner acted in abuse of his discretion.  For example, no details were placed before the Commissioner as to why Mr Ozeri had to receive such substantial dividend payments.

71. Mr Cooney emphasised that the lawfulness of a decision made by a public authority (such as the Commissioner) could only be judged according to the facts known or available to the public authority at the time.  The lawfulness of the decision could not be judged by having regard to information not before the decision-maker at the time and only coming into being or becoming available at some time thereafter.  That, of course, is an accepted public law principle.

72. The Commissioner replied by letter dated 23 June 2003.  Having rejected the suggestion that there had been any ‘administrative fault’ on the part of Department, the Commissioner said :

“I now turn to your request for unconditional holdover for the year of assessment 2001/02.  Tax is charged on Interasia Bag Manufactures Limited [the applicant] in respect of the assessable profits arising in or derived from Hong Kong from the trade or business.  The payment of tax on dividend by Mr. Ozeri in U.S. is a separate matter.  I regret that it is not relevant to the assessment on IBM.  As to the ground of financial difficulty, I have to advise that it is not a valid reason.  Accordingly your request for unconditional holdover cannot be acceded to.”  [my emphasis]

73. The Commissioner’s letter ended by saying :

“The Assistant Commissioner has ordered the sum of $5,500,000 be held over on condition that an equal amount of Tax Reserve Certificate is purchased not later than 10 June 2003.  I regret that no revised or further hold over order is made.  As your client has failed to purchase Tax Reserve Certificate in the amount of $5,500,000 on 10 June 2003, the conditional hold over order has been cancelled and action has been taken against your client for the recovery of the whole amount then outstanding together with any surcharge that may have been imposed.

If your client has financial difficulty to pay the outstanding amount, you or your client may contact our Collector directly for assistance.”  [my emphasis]

74. The Collector has the responsibility of enforcing decisions made by the Commissioner.  He has no power to change any such decision but he may, pursuant to s.71(6) of the Ordinance, acting under this delegated authority, agree to accept payment of tax by way of instalments.  In this regard, the section reads :

“Notwithstanding anything contained in the previous subsections of this section the Commissioner may agree to accept payment of tax by instalments.”

75. In an affirmation dated 19 April 2004, the Commissioner’s officer who wrote the letter of 23 June 2003 explained why, on the information available to him at the time, he did not believe that the applicant’s protestation of financial difficulty amounted to a ‘valid reason’ for holding over the tax unconditionally :

“The reason why I did not consider them to be valid reasons to grant an unconditional hold-over were that, from studying the applicant’s financial statements and accounts made available to me as at 23rd June 2003 (which covered the period up to 31.12.01), I formed the view that the applicant had been a profitable, case-rich business and, therefore, if it was suffering financial difficulty, it would be temporary in nature, and the applicant would be able to satisfy the condition using cash generated through on-going trading during the course of 2003.”

76. Two days later, in terms of a notice dated 25 June 2003, the applicant was advised that a 5% surcharge had been added to the sum of $5,500,000 pursuant to s.71(5) of the Ordinance, that section giving the Commissioner the discretion to impose such a charge.

77. Although, in the letter of 23 June 2003, the Commissioner advised the applicant that it could, if it was facing financial difficulties, contact the Collector to seek assistance; that assistance clearly being in the form of payment by instalments, the applicant did not choose to take that path.  Instead, on 20 September 2003, it instituted the present proceedings for judicial review.

78. On 1 September 2003, a copy of the applicant’s Directors Report and Audited Financial Statements for the year ended 31 December 2002 was filed with the Commissioner.  The papers were not accompanied by any letter of explanation or request.  Quite why they were sent has never been explained.  The papers stated that the applicant had been dormant since February 2002.

79. I conclude this lengthy history by recording that the applicant’s objections to the Commissioner’s assessments were determined in April of this year.  Although there were some slight variations in the amounts assessed, the objections were not allowed.  The applicant has now appealed to the Board of Review in terms of s.66 of the Ordinance.  Nothing has been said of whether the applicant has a source of funds available to it to pay for legal representation in the appeal.  I am told that the appeal remains outstanding.

The first challenge : abuse of power

80. It has been accepted since R v. Inland Revenue Commissioners, ex parte National Federation of Self-Employed and Small Business Ltd [1982] AC 617 that public bodies charged with the duty to collect revenue, in Hong Kong that public body being the Commissioner, are subject to a legal duty to use their discretionary powers in a way that is fair to the general body of taxpayers and, if to the general body then, of course, to each individual taxpayer.  However, as Lord Templeman said in R v. Inland Revenue Commissioners, ex parte Preston [1985] 1 AC 835, at 865 :

“… a taxpayer cannot complain of unfairness, merely because the commissioners decide to perform their statutory duties … to make an assessment and to enforce a liability to tax.  The commissioners may decide to abstain from exercising their powers and performing their duties on grounds of unfairness, but the commissioners themselves must bear in mind that their primary duty is to collect, not to forgive, taxes.  And if the commissioners decide to proceed, the court cannot in the absence of exceptional circumstances decide to be unfair that which the commissioners by taking action against the taxpayer have determined to be fair.  The commissioners possess unique knowledge of fiscal practices and policy.”

In light of these observations, Lord Templeman continued :

“The court can only intervene by judicial review to direct the commissioners to abstain from performing their statutory duties or from exercising their statutory powers if the court is satisfied that ‘the unfairness’ of which the applicant complains renders the insistence by the commissioners on performing their duties or exercising their powers an abuse of power by the commissioners.”

‘Unfairness’, therefore, if it is to be found to be such, must be of such a nature and degree as to constitute an abuse of power.

81. Lord Templeman’s dictum was cited with approval by the Hong Kong Court of Appeal in Harley Development Inc and Another v. Commissioner of Inland Revenue (cited in para.15 supra).

82. An abuse of power, while it may be manifested by an improper motive or over zealousness that constitutes oppressiveness, may equally be the result of an honest misunderstanding of the nature and extent of powers conferred upon a public authority.  As Sir Derek Cons VP said in Lee Ma Loi v. Commissioner of Inland Revenue and Another (unreported) Civil Appeal 8 of 1992 :

“It has been long established that where a person or authority is entrusted with statutory powers those powers are to be used ‘bona fide for the statutory purposes, and for none other’ : per Buckley J in Denman v. The Westminster Corporation [1906] 1 Ch 464 at 476.  Sometimes it is said that the powers must not be used for an ‘ulterior purpose’.  The judge below used the term ‘collateral purpose’.  But the wording is not of any great importance.  Both phrases are, as Philips J observed in Congreve v. Home Office [1976] 1 QB 629 at 637, ‘merely ways of saying that the court is satisfied that there has been an abuse of power’, which is after all the ultimate criterion for judicial review in this kind of case.  In this context abuse does not connote behaviour to which opprobrium should necessarily attach.  Indeed most of the cases are probably, as I think was the present, instances of an honest misunderstanding of the extent of the powers conferred.  Thus the concession below that the officers of the Inland Revenue Department ‘acted honestly and without malice’ takes the matter no further.”

83. Mr Kwok has not suggested that the Commissioner was guilty of any improper motive.  His contention may be expressed as follows.  In the beginning the Commissioner had found that the applicant’s business did not attract tax.  Several years were allowed to pass before the Commissioner instituted a review and reversed his earlier determination.  But by then, fortified by professional advice, dividends had been awarded to shareholders.  In addition, there had been a conflict between the directors.  Those two things had materially charged the prospects of the applicant.  The applicant, however, acting in good faith, had still paid or secured more than 80% of the money demanded by the Commissioner.  But despite this the Commissioner had still pressed for full payment, declaring that the applicant’s financial difficulties were irrelevant to the exercise of his discretion when, quite clearly, although not the only issue to be taken into account, it was far from irrelevant; indeed, it was of central materiality.  In the circumstances, in making his decisions contained in the letters of 23 and 25 June 2003, the Director abused the powers reposing in him in terms of the Ordinance not only by dismissing a material matter but, in a more general sense, by acting in a way that was oppressive and unfair.

84. Any alleged abuse of power, of course, may only be assessed in the context of what was known to the Commissioner at the time he made the decisions under challenge.  In this regard, see, for example, Minister of National Revenue v. Wrights’ Canadian Ropes Ltd [1947] AC 109 in which the Privy council said :

“The court is, in their Lordship’s opinion, always entitled to examine the facts which are shown by evidence to have been before the Minister when he made his determination.  If those facts are in the opinion of the court insufficient in law to support it, the determination cannot stand.  In such a case the determination can only have been an arbitrary one.”

85. What facts then were before the Commissioner in June 2003?

86. First, it is important, in my view, to recognise that, on the objective evidence available to him at the relevant time; that is, the evidence of the applicant’s accounts, the Commissioner was entitled to come to the conclusion that the applicant had been and was continuing to operate a profitable business.  As Mr Cooney has said, the applicant had an enviable history of being ‘cash rich’.  By way of illustration, as I have outlined in para.36 of this judgment, the applicant’s profits for the tax years ending December 2000 and 2001, as reflected in the accounts placed before the Commissioner, had been substantial : $41,000,000 for 2000 and $31,000,000 for 2001.  It was also known to the Commissioner that substantial dividends had been paid out by the applicant; for example, a sum in excess of $32,500,000 in early 2002.  That single dividend was close to the full amount of ‘security’, if I may call it that, demanded by the Commissioner from the applicant.

87. On behalf of the applicant, Mr Kwok has submitted that the objective evidence placed before the court showed that the applicant was in fact being strangled by the additional assessments and the demands for ‘security’ made by the Commissioner pursuant to those assessments.  The proof, he has submitted, lay in the accounts for the tax year ending December 2002.  But, as Mr Cooney has pointed out, the accounts for that year - which were not before the Commissioner when he made his decisions in June 2003 - reveal that the principal reason why the applicant’s finances were in a reduced state was not the demands of the Commissioner but was instead the simple fact that the applicant had not been conducting business since February of that year.  In short, the accounts for the year ending December 2002 show only one month of trading.  However, that one month reveals, Mr Cooney has said, that up until the time when the applicant was made dormant, it was enjoying a turnover as good as it had enjoyed in the past two years.

88. This brings me to a second point of importance.  In my view, it must be recognised that the applicant, through its accountants, saw fit to withhold important information reflecting the financial welfare of the applicant from the Commissioner.  Most importantly, the Commissioner was not advised that the applicant had been dormant since February 2002.  If the Commissioner had been informed of this fact, in my judgment, it is manifest that it would have had a material bearing on his decision making.  The applicant has not given a reason why it withheld this information from the Commissioner.  However, in my view, even if only indirectly, it has attempted to incorporate into the fabric of its complaint of unfair treatment the fact that its finances were in such poor shape when, on the evidence, it is apparent that perhaps the principal reason for this fact is that it was no longer in business, a state of affairs purposefully withheld from the Commissioner.

89. It is true that in September 2002, the applicant’s accountants complained that continued demands for money would ‘substantially interrupt’ the business of the company and ‘possibly’ compel it to go out of business.  But, as I have said in para.55, by this time the applicant had been dormant for some seven months.  That being the case, there was therefore no business to ‘interrupt’.  The language used by the applicant’s accountants did not therefore paint a true picture.  I am satisfied, on what was divulged to the Commissioner at the time, that the Commissioner could only reasonably infer that the applicant was continuing to conduct business and, on the objective evidence before him, with no assertion to the contrary, that it was continuing to do so on the same profitable basis that it had done in the past.  The letter from the applicant’s accountants did not speak of business difficulties, of a reduction in turnover or of profit margins.  It spoke only of the continued demands of the Commissioner substantially interrupting the business of the applicant.

90. As I commented in para.55 of this judgment, although an assertion of liquidity problems was made by the applicant’s accountants, the accountants did not see fit to condescend to details.  Only one matter was mentioned; that is, the need to pay compensation to remove ‘an unsatisfactory direction’ in a sum of $10,000,000 : hardly an insubstantial sum and hardly evidence of a company devoid of funds and close to going out of business.

91. It was only in its letter of 10 June 2003 - written some two weeks before the decisions under challenge - that the applicant’s accountants saw fit to give more details.  Even then, however, the Commissioner was not informed of the principal reason why the applicant was in financial difficulties; namely, the fact that it was no longer conducting business.  Indeed, in my judgment, the Commissioner could only have continued to assume that the applicant was still very much in business.  In this regard, see the portion of the accountants letter cited in para.62 in which the complaint is made that the applicant “is having cash flow problem at the moment”.

92. As Mr Cooney has submitted, and I agree with him, the phrase ‘is having cash flow problem at the moment’ can only be read in context to mean that the applicant is still in business, that being why it has a cash flow, but that it is encountering temporary problems in respect of that cash flow.

93. The letter of 10 June 2003 went on to state in unequivocal terms that the applicant would not be able to meet the latest financial demands made by the Commissioner.  In this regard, see the portion of the letter cited in para.68.  In this portion of the letter it was said that there was no ‘practical way’ in which the further funds demanded could be raised.  But that begs the question : if the applicant was continuing in business and earning the sort of profits that it had enjoyed in 2000 and 2001 - averaging more than $3,000,000 per month - why was there no practical way to raise the funds?  If the problem, as indicated in the letter from the accountants, was a temporary one, surely a practical solution would be payment by way of affordable installments, the amount and frequency of those installments being negotiated with the Collector.

94. The complaint has been made on behalf of the applicant that in the Commissioner’s letter of reply dated 23 June 2003, the protestations of financial difficulty were dismissed as not constituting ‘a valid reason’ to unconditionally holdover further tax demanded.  It has been submitted that the Commissioner did not therefore in any way turn his intention to the protestations, his omission in this regard being a material omission and one which goes to the fairness of the manner in which the applicant was treated.  I am unable to agree.  In my judgment, the evidence does not show that the Commissioner failed to consider the assertion of financial difficulty.  To the contrary, the evidence shows that the Commissioner did consider the question and came to a solution.  The solution was that, if the problems were temporary, then payments could be made by way of installments.  What must be recognised is that the letter of 23 June, while it did say that financial difficulty was not ‘a valid reason’ to unconditionally holdover further tax demanded, went on to say the following (cited in para.72) : ‘if your client has financial difficulty to pay the outstanding amount, you or your client may contact our Collector directly for assistance.’

95. In my judgment, therefore, it is not tenable to say that the Commissioner dismissed the applicant’s financial difficulties as being irrelevant.  On the basis of facts known to the Commissioner at the time, as I have said earlier, it is apparent that he reached the view that the problem of any temporary cash flow could best be resolved by way of discussion with the Collector.  Whether that was perhaps a stern decision is not to the point.  The issue is abuse of power and I do not see how, in the factual context, it can be said to be so unfair as to constitute such an abuse.

96. If the Commissioner had been informed that the applicant had been dormant for many months and was not therefore generating any revenue in order to meet instalment payments then his decision may have been different.  But, on the face of it, as I have said earlier, it appears that the applicant deliberately kept this information from the Commissioner.

97. On behalf of the applicant, Mr Kwok has submitted that the applicant did not seek to put further information before the Commissioner, such as the fact that it was no longer in business, because it has been told that its financial difficulties were irrelevant.  But, as I have indicated, in my view, the Commissioner did not say that at all.

98. Throughout this long and complex set of proceedings, I have been puzzled why the applicant did not see fit simply to ‘put all its cards’ before the Commissioner so that its difficulties could be discussed in an open manner.  If it had done so, and if the Commissioner had been made aware that the applicant no longer enjoyed an income stream, the entire basis upon which the Commissioner came to his decisions under challenge would have been altered.  Now, however, having set its terms as to what was to be divulged to the Commissioner and what was not to be divulged, it has asserted that the Commissioner has treated it unfairly.  In doing so, it has attempted to use material which it chose not to place before the Commissioner but which it has now chosen to place before the court in order to demonstrate the ‘objective’ fact of its financial distress.  But, as I have said, I can only judge the fairness of the Commissioner’s two decisions by having regard to the material before him at the relevant time.

99. Mr Kwok, with considerable ingenuity, has put forward numerous arguments in support of his contention that the applicant has been treated unfairly.  He has suggested, for example, that the onus was on the Commissioner to make further enquiries of the applicant in order to ascertain its true financial position.  I disagree.  The applicant was seeking the exercise of the Commissioner’s discretion pursuant to s.71(2) of the Ordinance.  It was for the applicant to demonstrate why the requirement of s.71(2); namely, that tax shall be paid notwithstanding any notice of objection, should not be fully applied.  The applicant was represented by professional accountants.  The Commissioner surely could work on the basis that the accountants would know what to put forward and what not to put forward.

100. Mr Kwok has also made much of the fact that the applicant paid more than 80% of the sums demanded by the Commissioner.  Put bluntly, it has been his submission that surely, with just some 17% outstanding, fairness dictated that the Commissioner not press for that amount.  Again, I cannot agree.  It is not a matter of percentages.  As I have indicated, s.71(2) of the Ordinance places a responsibility on the Commissioner to collect tax not to forgive it.  If he is of the view that a tax payer can afford to pay the full amount, either in one go or in installments, then he is under no obligation to forgive a portion of what is due simply because it is a small portion.

101. In all the circumstances, I am satisfied that the applicant has not been able to demonstrate that the decisions of the Commissioner contained in his two letters in June 2003 were so unfair as to constitute an abuse of power.

The second challenge : legitimate expectation

102. I have spoken of this challenge in para.16 of this judgment, citing from the applicant’s form 86A.  To repeat it, that citation reads :

“The 1992-94 assessments constituted representations on the [Commissioner’s] part that profits attributable to the overseas sales [of the applicant] arise or are derived outside Hong Kong.

The applicant was and is entitled to a legitimate expectation that, unless there is a change in the [Commissioner’s] policy or a change in law, similar profits in subsequent years would likewise be considered by the [Commissioner] as arising or derived outside Hong Kong.”

103. The legitimate expectation that is asserted is not procedural, it is substantive.  It is the applicant’s case that, absent a change in law or policy, having had earlier profits assessed as earned offshore, it will also have similar future profits assessed as being earned offshore and therefore free of tax.

104. It is for the applicant, of course, to establish the existence of a legitimate expectation.  In this regard, in Ng Siu Tung & Others v. Director of Immigration [2002] 1 HKLRD 561, the Court of Final Appeal said that, as a general rule, any promise or undertaking, if it is to support a legitimate expectation, must be clear and unambiguous.  This was subject only to the following limited qualification stated (para.104, page 605) :

“While we accept that, generally speaking, a representation relied upon to support a legitimate expectation must be clear and unambiguous, we recognise that there will be cases where a representation is reasonably susceptible of competing constructions.  In such a case, far from adopting the construction which is most favourable to the person asserting the legitimate expectation, the correct approach is to accept the interpretation applied by the public authority, subject to the application of the Wednesbury unreasonableness test.

…

Generally speaking, no unfairness can arise when the government acts on a rational view of its policy statements.  Policy statements are often expressed in broad terms, leaving the details to be worked out.  To say that, because they are broadly and imprecisely expressed, such statements can never generate a legitimate expectation would be too restrictive an approach.  But in cases where the details of a broad policy are subsequently identified or ascertained and they reflect a rational development of the broad policy earlier announced, the court should have regard to them.”

105. While a promise or undertaking may give rise to an expectation, for that expectation to be legitimate, it must be a reasonable one.  In this regard, in Ng Siu Tung, the Court of Final Appeal said (para.101, page 602) :

“Though the concept of ‘legitimate expectation’ is somewhat lacking in precision, it is now firmly established that to be legitimate, the expectation must be reasonable (A-G of Hong Kong v Ng Yuen Shiu [1983] 2 AC 629 at p.636, per Lord Fraser of Tullybelton), that is, reasonable in the light of the official conduct which is said to have given rise to the expectation.  Whether an expectation is legitimate in this sense depends, at least in part, upon the conduct of the relevant public authority and what it has committed itself to.  Whether an expectation is legitimate, and to what extent, must also depend upon what the applicants are entitled to expect.  The requirement of legitimacy means that judicial decisions ‘must be founded not only on what the claimant factually expected, but also on what the claimant, bearing in mind any relevant considerations of policy and principle, was entitled to expect’.”

106. Importantly, the courts will not give effect to a legitimate expectation when to do so will mean that the decision-maker must act contrary to his statutory duties.  In this regard, in Ng Siu Tung the Court of Final Appeal said (para.112, page 606) :

“The principle that the court will not give effect to a legitimate expectation where to do so would involve the decision-maker acting contrary to law is fundamental (A-G of Hong Kong v Ng Yuen Shiu [1983] 2 AC 629 at p.638; R v North and East Devon Health Authority, ex p Coughlan [2000] 2 WLR 622 at pp.647, 651, 656; R v Secretary of State for Education and Employment, ex p B (A Minor) [2000] 1 WLR 1115 at pp.1125, 1132).  Consistently with this principle , the decision-maker cannot give effect to an expectation by exercising his statutory discretion ‘in a way which undermines the statutory purpose’ (R v Secretary of State for Education and Employment, ex p B (A Minor) at p.1132, per Sedley LJ).”

107. On the basis of these principles, what representations of the Commissioner are said to have given rise to the legitimate expectation that is asserted?  As I understand it, the representations are said to have been contained in the notices of assessment originally issued by the Commissioner for the 1992/1993 and 1993/1994 tax years.  But both those notices were in a standard form.  I have cited that form in para.24.  The form is to the following effect :

“According to the Return and information submitted, there are no profits chargeable to Profits Tax for the above mentioned year of assessment.”

As I have said in para.25, the notices were not accompanied by any explanatory letter nor were there any communications in respect of the notices between the Commissioner and the applicant in terms of which the Commissioner gave any promises, assurances or undertakings.

108. If Mr Kwok has been correct in his submissions, it must follow that all potential tax payers who have received a standard form notice of the kind I have just cited will benefit from the same legitimate expectation asserted by the applicant.  Is that reasonable?  Patently, in my view, it is not.

109. In my judgment, there can be no basis for saying that the notices have constituted any form of representation binding the Commissioner to future conduct.  First, the notices clearly state that they concern only the stated year of assessment, not any future year or years.  Second, the notices clearly state that the Commissioner’s decision contained in each notice is based only on the information supplied by the applicant in its return.  The notices pretend to no form of representation as to the future nor, in my view, can they be read as such.

110. In my judgment, Mr Cooney has expressed the matter succinctly in saying the following : “Bearing in mind that the Commissioner has a duty to collect taxes and the power to issue additional assessments under s.60, the applicant was only entitled to expect that the assessments were for their own particular year and were subject to the power of the Commissioner to review and issue additional assessments.”

111. In its letter of 10 June 2003, cited in para.64 of this judgment, the applicant’s accountants, spoke of an ‘agreement’ reached with the Commissioner.  But there was no agreement, that is clear, certainly no form of agreement that would prevent the Commissioner pursuing a review in terms of s.60(1) of the Ordinance.

112. In my judgment, there is no merit whatsoever in the claim that the applicant was entitled to rely on the form of legitimate expectation it has asserted.

The third challenge : denial of access to the courts

113. The nature of this challenge is described in para.17 of this judgment in which I have said : “The applicant’s third ground of challenge is to the effect that, in financial terms, the two decisions of the Commissioner - coming, as they did, on top of earlier demands - were so onerous that, if they were to be met by the applicant, they would so enfeeble it financially that the applicant would, for all practical purposes, be thereby prevented from obtaining the necessary legal representation to prosecute its objection to the 2001/2002 assessment.  By so denuding the applicant of funds, submitted Mr Kwok, the Commissioner has effectively denied the applicant the ability to instruct legal representatives in respect of its objection and thereby denied the applicant its constitutional right of access to the courts and tribunals of Hong Kong …”

114. In the process of hearing this matter, I was led through a labrynth of public law submissions.  In my opinion, a day or more of the court’s time was taken up with arguments of some considerable complexity going to the nature and extent of relevant principles.  I do not intend to be enticed into that labrynth.  In my opinion, it is simply not necessary.  The matter can be decided on the facts.

115. In October 2000, the Commissioner advised the applicant that, pursuant to s.60(1) of the Ordinance, he intended to conduct a review of the applicant’s returns for the tax years from 1994/1995 to 1999/2000.  Without any form of protest as to an existing agreement to the contrary or some legitimate expectation vested in the applicant that prohibited any such review, the applicant’s accountants set about supplying the information required by the Commissioner in order to conduct his review.

116. Despite notice of this far-ranging review, in March of the following year; that is, March 2001, the directors of the applicant declared a dividend of $32,500,000 : see para.32.

117. In the same month; that is, March 2001, the Commissioner raised an assessment in terms of which the applicant’s profits were declared to have been earned on shore and therefore subject to tax : see para.34.  However, despite what Mr Cooney has described as the ringing of alarm bells, the directors of the applicant nevertheless declared a further dividend of $30,000,000 : see para.39.  Seemingly, this dividend was declared without making any provision for a ‘war chest’ to fund legal costs in the event of litigation over the Commissioner’s assessments.

118. In December 2001, when a disagreement between the directors was resolved by one of them being paid out, seemingly no provision was made then to stock a ‘war chest’.

119. In January 2002, Mr Ozeri declared a dividend of some $39,900,000 : see para.43.  Although he had stated reasons for so doing, again it seems that no provision was made for a legal ‘war chest’.

120. During the course of submissions, no figures were given to me as to what would be required to represent the applicant in opposing the Commissioner’s assessments.  But I find it difficult to accept that - with a counsel’s opinion already to hand (para.53) - legal representation of some ability could not be acquired for a relatively modest sum in comparison to the dividends declared.

121. In my judgment, if the directors of a company are aware that the company is subject to review under the Ordinance and thereby at real risk of being held liable for tax, and if the directors then proceed to declare substantial dividends, they cannot be heard to complain, when assessments are made requiring payment of tax and that tax has to be paid, that the company has been denied access to the courts because it is no longer able to finance legal representation.

122. In addition to the applicant divesting itself of very substantial assets by way of dividends, it then ceased trading.  As I have said earlier, when the Commissioner was seeking provision of security in respect of his assessments pursuant to s.71(2) of the Ordinance this fact - one of utmost importance - was not divulged to him.  The Commissioner sought his payments on the basis that the applicant was continuing in business and, on the evidence available, still doing so profitably.  He sought his payments therefore in ignorance of the true position, one that the applicant, for whatever reason, chose to keep from him.  In light of this misrepresentation - for deliberate or not, that is what it is - I do not see how the applicant, the author of its own woes, can now complain that it has been so denuded of funds that it cannot defend itself in the courts.

123. There is no merit in this challenge.

Conclusion

124. For the reasons given in the body of this judgment, the application for judicial review is dismissed.  Costs will follow the event and are awarded to the Commissioner.  As I indicated earlier in this judgment, the history of this matter, on a close and objective study, has really provided the answer to each of the challenges.  In R v. Independent Television Commissioner, ex parte TSW Broadcasting Limited [1996] JR 185 (HL) Lord Templeman said the following at page 195 :

“Of course in judicial review proceedings, as in any other proceedings, everything depends on the facts.  But judicial review should not be allowed to run riot.  The practice of delving through documents in conversations and extracting a few sentences which enable a skilled advocate to produce doubt and confusion where none exists should not be repeated.”

I regret to say that, in my view, these observations have some relevance in the present matter.  I do not in any way suggest that there has been any intentional abuse.  Counsel for the applicant argued the various grounds of challenge with quite obvious conviction.  But there may perhaps have been excess of zeal.  Put simply, the facts of this case have not supported the often esoteric arguments of law that have been put forward.