YEUNG PING HUNG t/a ALFRED YEUNG & CO v. HA CHIU PING AND OTHERS

cacv 160/2006

in the high court of the

hong kong special administrative region

court of appeal

civil appeal no. 160 of 2006

(on appeal from HCA NO. 4370 of 2003)

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J U D G M E N T

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Hon Rogers VP:

1.  This is an appeal from a judgment of Deputy High Court Judge To given on 21 March 2006.  The appellant was the first defendant in the action and appealed against the decision dismissing his counterclaim.  At the conclusion of the hearing of this appeal, judgment was reserved which we now give.

Background

2.  The plaintiff is an accountant and brought this action against the defendants in respect of a claim for payment in respect of services rendered in giving the defendants advice as to their tax affairs.  The plaintiff failed in his claim, except for a very small part, and it is unnecessary to consider the reasons therefor.

3.  The first defendant had engaged the plaintiff to assist him in relation to tax assessments which had been raised in respect of the defendants.  Again it is unnecessary to recount the details, but it might be observed that the defendants have grounds for considering that they were harshly treated by the Inland Revenue Department (“the Department”).  During the course of negotiations between the first defendant, on behalf of the defendants, assisted by his previous tax adviser and the Department, it was agreed in November 1996 that the there would be a payment of some $10 million in advance as a deposit for any “additional Profits Tax and/or penalty for the 6 years of assessment 1990/91 to 1995/96”.  That $10 million was to be paid in three instalments: the first of $5 million on 29 November 1996, the second of $2.5 million on 6 December 1996 and the third instalment of $2.5 million on 20 December 1996.  It would appear that the first two instalments were indeed paid but the third was not.

4.  On 31 January 1997 additional tax assessments were issued by the Department to the defendants totalling some $15,107,374.  On 5 February 1997 the plaintiff, who had recently been engaged as the tax adviser, filed notices of opposition.  On 25 February 1997 the additional tax assessments were reduced to a sum of $14,711,374 with $3,221,374 being held over unconditionally.  That therefore left a balance of some $11.49 million of tax which was not held over.

5.  On 10 March 1997 there was an interview which was attended by the first defendant and the plaintiff with a Mrs Lai, a Senior Assessor of the Department and an Assistant Assessor, a Mr Cheung.  Notes of that interview were kept by the Department and were signed by the first defendant some six days later as being accurate.  Those notes show that the purpose of the interview was to discuss the objections to the assessment raised on the first defendant’s companies and to submit the Profits Tax Return of the fourth defendant for the year of assessment 1994/95.  For the purposes of this case what was stated in paragraphs 3, 6, 7, 8 and 9 of that note would appear to be highly relevant.  They read as follows:

“3. Mrs. Lai advised that the assessments issued to Mr. Ha, Haworth Trading Co., Kent Industrial Co. and Hah’s (Bros.) Metal Manufactory Ltd. were based on the documents obtained from the search of Mr. Ha’s office on 16.12.96.  She also asked Mr. Ha to consider to use the $7.5 million placed in the C.I.R. Deposit Account to settle the tax.  Mrs. Lai then explained that under the provisions of the Inland Revenue Ordinance, penal actions were to be decided by the Commissioner of Inland Revenue.  A person who was found to have committed offences under the Inland Revenue Ordinance might be prosecuted, or assessed to additional tax.  If the Commissioner chose to penalize the taxpayer by way of additional tax, the maximum penalty could be three times the amount of tax undercharged.  The callers indicated that they fully understood the explanations.

…

6. Mr. Ha explained that he agreed to place a deposit of $10 million during the visit by the officers of Field Audit Section because he got the impression that it included the tax on the profits earned by him in PRC.  In addition, he had sold his houses at the time of the visit, therefore, he had sufficient fund to place deposit at the C.I.R. Deposit Account.

7. Mr. Yeung asked if the tax amount could be completely held over or the payment due date of the tax demand notes could be deferred as Mr. Ha was trying to gather more documentary evidences to support the expenses incurred in PRC.  Mrs. Lai explained that as the receipts were not found from the search in Mr. Ha’s office and it was now told by Mr. Ha that he had kept receipts in PRC of the expenses incurred in PRC, she wanted to consider the deductibility of the expenses in one go.  She was not prepared to revise the amount held over at this stage because it was based on the documents obtained from the search.  She asked if Mr. Ha could submit all the documentary evidences of the expenses incurred in PRC within two weeks.  The callers promised.

8. Mrs. Lai further explained that she would consider the 15 sheets of receipts submitted by the callers in deciding the amount of tax of Haworth Trading Co. to be held over for the year of assessment 94/95.  She told the callers that even if such purchases were not allowed at this stage, the decision was not yet final if further information was revealed from the documents obtained.  The purpose of the additional assessments raised was to recover a fair and reasonable amount of tax.

9. Mrs. Lai promised to conduct a interview with Mr. Ha once the officers had finished checking the documents obtained from Mr. Ha office.  She repeated that the net tax now demanded for were all based on the documents obtained from Mr. Ha’s office.”

6.  From that it is clear that a request was made that not only the amount of $3.22 million should be held over but that the remaining amount should be held over as well.  That request was refused.  It is quite clear from paragraph 9 that the Department was demanding that tax should be paid in respect of the amount of $11.49 million.

7.  In paragraph 51 of the judgment the judge recorded that the plaintiff advised the first defendant to accept Mrs Lai’s suggestion.  After the meeting, however, the plaintiff went on to advise the first defendant to pay the balance of $3.99 million by tax reserve certificates.  That had the advantage of attracting interest.  It was thus on 13 March 1997 that the plaintiff wrote to the Assessor requesting that the deposit which had been paid should be utilised to settle part of the tax liabilities for the first defendant and his companies.  Then on 4 April 1997 the plaintiff wrote to the Assessor and referred to a telephone conversation which had taken place with the Assistant Assessor.  The contents of that telephone conversation are not known.  However in the first letter of 4 April 1997 reference is made to the purchase of tax reserve certificates in the sum of $3.99 million and there was reference to an undertaking to use those tax reserve certificates to pay tax, subject to the finalisation of the cases.  In the second letter of the same date copies of the tax reserve certificates were forwarded to the Assessor.  There appears to be no further correspondence in relation to this but it remains that, evidently, the tax reserve certificates were taken as being sufficient.

8.  There were then ongoing negotiations with the Department but in 1999 the Department instituted a criminal prosecution against the first defendant.  That, however, was short lived because the prosecution was permanently stayed in February 2000.

9.  There were further negotiations with the Department but in August 2002 the plaintiff and the first defendant fell out largely, it would seem, over the plaintiff’s refusal to send a letter to the Department which had been drafted by solicitors who had been engaged by the first defendant.  It would appear, however, that the letter was successful to the extent that the Department reduced the tax assessments by some $8 million.

10.  After the first defendant’s somewhat harsh treatment at the hands of the Department, which ultimately resulted in a very substantial reduction in the tax demanded, the first defendant, not surprisingly, felt aggrieved.  One of the matters which, doubtless, added to his grievances was that he had recouped no interest in respect of the amount which had been deposited with the Department and had been returned.

11.  At trial the defendants put the counterclaim for negligence against the plaintiff on 2 bases.  The first was that they had not been advised sufficiently to purchase tax reserve certificates and utilise those for compliance with the demands of the Department and the second was that the plaintiff had not pursued the possibility of converting the deposit which had been paid into tax reserve certificates and persuading the Commissioner through the Assessor to accept tax reserve certificates instead of the deposit.

12.  The judge came to the conclusion that the first defendant had been adequately advised by the plaintiff even though, in the judge’s words, that advice might have been more explicit.  The judge considered that the first defendant had been made aware of the possibility of using tax reserve certificates in respect of the $3.99 million.  The judge also made reference to the fact that it was considered that the first defendant was not willing to put up a further $7.5 million to purchase tax reserve certificates even though that might have resulted in his being able to obtain the return of the deposit of that amount.

13.  In respect of the course taken by the plaintiff the judge came to the conclusion that because the plaintiff had only been involved in the defendants’ tax affairs for a comparatively short time and since those involved substantial dealings over a period of six years, the plaintiff had not been in a position to put up more “vigorous or meaningful arguments”.  The judge came to the conclusion that the plaintiff had made “a reasonable endeavour”.  The judge discounted the possibility that the defendants would have any right to demand that the deposit with the Department could be converted to tax reserve certificates without the agreement of the Department.

This appeal

14.  On this appeal, Mr Chan, who appeared on behalf of the defendants relied upon the holding by the judge that it was the plaintiff’s duty to mitigate the effects of the tax liability and to advise the defendants as to the best way of their so mitigating any liability.  The argument was put on the basis that the plaintiff had failed to advise the defendants that if a further sum of $7.5 million had been utilised to purchase tax reserve certificates that might have been utilised in achieving a hold over of the total amount of tax demanded.  Whilst it was accepted that the plaintiff had given evidence that he had applied for the tax to be held over and some of the tax to be settled by way of tax reserve certificates at the meeting on 10 March 1997 it was said that he had not followed that up with any written application.

15.  In my view there is no ground for disturbing the judge’s conclusions in this matter.  When the notes of interview are taken together with the plaintiff’s evidence, which the judge was entitled to accept, it is clear that the plaintiff had sought a hold over of the tax.  That was refused.  It was refused 4 days before the tax was due to be paid.  In those circumstances the provisions of section 71(2) of the Inland Revenue Ordinance Cap. 112 were not relevant since the Commissioner’s discretion to accept tax reserve certificates under that subsection was only relevant when the tax was held over.  Otherwise when an assessment was disputed or appealed the tax remained payable.  In my view, therefore, the plaintiff had done, in the circumstances, what he could but in view of the intransigence of the Assessor there was nothing further that could be done.  Whilst the judge did consider that it might make no difference to the Commissioner if the tax due was paid in cash or held over conditionally by the defendants depositing tax reserve certificates, that would not appear to be the way in which the Department operates.  As already indicated, even if tax is held over the matter is still a matter of discretion as to whether the tax has to be paid, tax reserve certificates accepted or simply that the matter is left in abeyance.

16.  On the basis of the facts as found by the judge I do not consider that there are grounds for disturbing his findings and, indeed, reference to the evidence would appear to make that conclusion inevitable.  I would therefore dismiss this appeal with an order nisi of costs in favour of the plaintiff.

Hon Le Pichon JA:

17.  I agree.

Hon Burrell J:

18.  I agree.