THE COMMISSIONER OF INLAND REVENUE HONG KONG v. LAI YIN HA

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J U D G M E N T

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Fuad, V.-P.:

1. This is an appeal by the Commissioner of Inland Revenue against an interlocutory order dated 24 March 1988 made by Judge Wally Yeung in the District Court in favour of Madam Lai Yin Ha ("the Taxpayer") which he declined to review on 10 May 1988.  The judge himself gave leave to appeal to this Court.

2. The Commissioner filed a writ on 9 November 1987 against the Taxpayer claiming $63,000 profits' tax for the year 1986/1987.  She filed a Defence on 24 December 1987 in these terms:

"    I dispute the plaintiff's claim for the following reasons:-

1. During the 9 months' period between 1/4/1986 to 31/12/1986 when I carried the business known as China Skin Specialist Clinic at 513 Nathan Road, 2nd floor, Kowloon, the business was declined and was closed as a result thereof.

2. I have instructed my Accountants to audit the profits of that 9 months' period and was only $35,069.00 which the tax payable thereon should not exceed $5,000.00.  I have also written to the Plaintiff presenting the said informations and raised objection to provisional profits tax.  However, the Plaintiff urged me to pay the provisional tax in the sum of $63,000.00 for the reason that the Plaintiff had already issued the demand note of the same.

3. The Plaintiff has not considered and taken into account of my statements of account. The Plaintiff has not mentioned whether I have any other source of income or any profits for which the profit tax of $63,000.00 should be paid an how the profits of $450,000.00 arrived at.

4. I have never owned any assets exceeding $150,000.00.

5. The statements of account of my current accounts reveals that I have owed to the bank about $30,000.00 during the period from 1/4/1986 to 31/12/1986 when I carried on the said business.

6. I hereby annex copies of all my bank statements and audit record of my accounts for the Court's consideration and information."

3. On 23 February 1988 the Commissioner took out a summons against the Taxpayer seeking to have the Defence struck out on the grounds that it did not disclose "a reasonable or adequate defendant", and to have judgment entered against her.

4. When the matter came before the judge on 15 March 1988, the Commissioner was represented by Mr. Tam, one of his officers, as is permitted by s.75(5) of the Inland Revenue Ordinance, Cap 112 ("the Ordinance").  The record shows that Mr Tam drew the attention of the Court to s.75 of the Ordinance and submitted that the defendant was barred by that section.   He also invited the Court to look at s.71(2). He told the Court that the Department had no record of the cessation of business by the Taxpayer and that the tax was based upon a 12 months' period, the financial year 1 April 1986 to 31 March 1997.

5. The Taxpayer then told the judge that her business had ceased on 31 December 1986 and she had informed the Business Registration Office of this fact by a letter she had sent in January 1987.

6. The judge's note then shows that he adjourned the hearing "to enable Plaintiff to find out if notice of cessation of business bad been filed and for Defendant to file affirmation on notice of cessation she sent to the Commissioner."

7. Mr. Tam was right to pray in aid s.75 of the Ordinance for the relevant parts of that section are as follows:

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

    (2) Whenever any person makes default in payment of tax the Commissioner may recover the same by action in the District Court notwithstanding that the amount is in excess of the sum mentioned in section 33 of the District Court Ordinance.

    (3) In proceedings under this section for the recovery of tax the production of a certificate signed by the Commissioner stating the name and last known postal address of the defaulter and particulars of the tax due by him shall be sufficient evidence of the amount so due and sufficient authority for a District Court to give judgment for the said amount.

    (4) In proceedings under this section for the recovery of tax the court shall not entertain any plea that the tax is excessive, incorrect, subject to objection or under appeal, but nothing in this subsection shall be construed so as to derogate from the powers conferred by the proviso to section 51(4B)(a) to give judgment for a less sum in the case of proceedings for the penalty specified therein.

    (5) ....."

8. No doubt Mr. Tam's reference to s.71(2) (which provides that tax shall be paid notwithstanding any notice of objection or appeal unless the Commissioner otherwise orders) was prompted by what the Taxpayer had stated in the second and third sentences of paragraph 2 of her Defence.

9. On the day of the adjourned hearing, 24 March 1988, another of the Commissioner's officer's represented him. That officer informed the Court that the Department had received a letter from the Taxpayer, dated 7 November 1987, saying that her business had ceased on 10 January 1987.   He said that the assessment had in fact been based on a 9 months period - 1 April to 31 December 1986 - and that Mr. Tam had been "wrong" about the period covered by the assessment.  The judge thereupon dismissed the Commissioner's application.

10. In his written reasons for this decision the judge set out what had happened at the hearings and mentioned an affirmation which was then before him, made by an Assistant Assessor of the Department who had deposed that the tax bad been assessed in relation to the 9 months period beginning 1 April 1986 and that the cessation of business had been noted. The judge then said:

"The Court considers this to be an important point as an assessment based on a 12 month period would not be a proper assessment if the Commissioner knew or ought to have known that the Defendant's business ceased after 9 months in which event Section 75 cannot be relied upon."

11. Later, he said that there had been no explanation for what Mr. Tam had stated in Court, except that it had been suggested that he had made a mistake.  He felt that the Commissioner must prove that the original assessment had properly been made to the satisfaction of the Court.

12. At the review hearing on 10 May 1988 the Commissioner was represented by Crown Counsel. Fully reasoned written submissions were presented to the Court in support of Counsel's contention that s.75(4) of the Ordinance precluded reliance being placed upon any of the grounds which founded the Defendant.   The leading authorities were cited to the judge and he was invited to strike out the Defendant and enter judgment against the Taxpayer.  The judge adhered to his previous decision.

13. In the written reasons for his May decision, the judge mentioned the authorities which had been cited to him and said that he accepted that allegations by a defendant that the tax was excessive or wrongly assessed would not constitute a defendant to a claim by the Commissioner, but then went on to say:

" The present case however gives rise to a completely different situation.  The C.I.R. through his representative had openly and unequivocally made a certain admission to the Court, which admission, if correct, clearly suggests that the assessment by the C. I. R. had not been properly made.

    On the other hand there was never any explanation from Mr. Tam who made the admission or from any other person as to how Mr. Tam made such a mistake, if indeed he had made a mistake.

    It will be wrong for the Court to completely ignore the matters aforesaid and to give summary judgment for the C.I.R. without such matters resolved at the trial or by way of further evidence."

14. Section 75(4) of the ordinance is perfectly clear and all the material averments in the Defendant as well as the basis for the Taxpayer's submissions to the Court, are caught within the steely embrace of the prohibition: "... the court shall not entertain any plea that the tax is excessive, incorrect, subject to objection or under appeal ....".   Nothing that the Taxpayer has said today (she appears before us in person) takes the matter outside that express statutory proscription.

15. If authority were needed on the effect of s. 75(4) and that in such circumstances the proper course is to strike out the defence, it is to he found in two of the decisions cited to the judge, both of which bound him: Ng Chun Kwan v. Commissioner of Inland Revenue, [1976] HKLR 94; 1 HKTC 633 (Full Court, 16 January 1976) which was followed in Commissioner of Inland Revenue v. Choy Sau Kan and Another, 2 HKTC 10 (Court of Appeal, 9 November 1983).

16. Both those authorities point out that matters of the kind raised by the Taxpayer here can only he ventilated by the objection and appeal procedures for which the Ordinance makes provision. These are to be found in ss. 64, 66, 67, 68, 69 and 69A.

17. With every respect to the learned judge, his approach, both at the hearing proper and at the review, was wholly misconceived.  In view of the content of the Defendant and what is enacted by s.75(4) of the Ordinance, the judge's discretion could only properly have been exercised by striking out the Defendant as not disclosing "an adequate defence" under rule 38A(1)(b)(ii) of the District Court Civil Procedure (General) Rules.  He should then have gone on to enter judgment against the Taxpayer under rule 27(1)(b) of the same Rules because she had failed "to disclose any reasonable ground of defence."   There was, in the circumstances, no need for the production of the certificate provided for in s.75(3) of the Ordinance because that subsection is only relevant when, as a matter of evidence, it is necessary to prove that the tax is due and its amount.

18. I would, therefore, allow the appeal and make the orders I have indicated the judge should have made.

Cons, V.-P.:

19. I agree with all that my Lord has said and would make the same orders.

Clough, J.A.:

20. I also agree.