TAK WING INVESTMENT CO. LTD. v. THE COMMISSIONER OF INLAND REVENUE

CACV 167/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 167 OF 2001

(ON APPEAL FROM HCAL NO. 189 OF 2001)

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J U D G M E N T

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Keith JA (giving the first judgment at the invitation of Mayo V-P):

Introduction

1. Payment of tax can be enforced in the District Court. In this case, the taxpayer wishes to have such proceedings stayed. It has applied for leave to apply for judicial review of the decisions of the Commissioner of Inland Revenue ("the Commissioner") to issue and prosecute those proceedings. Leave was refused, and the taxpayer now appeals to the Court of Appeal.

The facts

2. The facts can be shortly stated. The taxpayer's business is that of property development and investment. It filed returns relating to its liability for profits tax for, inter alia, the years 1994/95 and 1995/96. On the basis of those returns and other information, the Commissioner assessed the taxpayer's liability for profits tax for those years as nil. In due course, the Commissioner requested further information from the taxpayer. That information was provided to him, and on the basis of it, the Commissioner re-assessed the taxpayer's liability at $15,155,412.00 for 1994/95 and $69,965,502.00 for 1995/96. The taxpayer was notified of those assessments by notices dated 10 March 2000 and 10 June 1999 respectively.

3. The taxpayer objected to these assessments in the manner and within the one month's time limit prescribed by section 64(1) of the Inland Revenue Ordinance (Cap. 112) ("the Ordinance"). The Commissioner was obliged to determine those objections "within a reasonable time" (section 64(2)). However, he has not yet determined those objections, even though (a) over 11 months have elapsed since the taxpayer objected to the assessment for 1994/95 and (b) over 20 months have elapsed since the taxpayer objected to the assessment for 1995/96. In the meantime, the taxpayer did not pay the tax assessed, and surcharges have been levied in respect of the taxpayer's default.

4. In due course, the Commissioner issued enforcement proceedings in the District Court. He did so pursuant to section 75 of the Ordinance, which provides (so far as is material):

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

(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 (Cap. 336)."

The writ was issued on 25 August 2000. A Defence was filed on 8 November 2000. The defence to the Commissioner's claim is that the nil assessments were correct, and that in any event the Commissioner is now estopped from asserting that the nil assessments were incorrect. On 24 November 2000, the Commissioner filed a summons seeking to strike out the Defence under Ord. 18 r. 19 of the Rules of the District Court and the inherent jurisdiction of the court. What is to be argued is that the matters relied on in the Defence are not a defence to the enforcement of the assessments, because section 75(4) of the Ordinance provides (so far as is material):

"(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 ..."

I shall return to section 75(4) later, but for the moment it is right to observe that section 75(4) prevents the taxpayer from arguing in any enforcement proceedings in the District Court that the assessments were excessive or incorrect.

5. The taxpayer responded by filing a summons dated 31 January 2001 seeking either the stay or the dismissal of the proceedings under the inherent jurisdiction of the court or the striking out of the writ under Ord. 18 r. 19 or the inherent jurisdiction of the court. What was originally intended to be argued was that it was an abuse of the court's process, or at the very least inappropriate, for the Commissioner to commence enforcement proceedings when he had not determined the objections to the assessments.

6. Those summonses were due to be heard on 7 February 2001. But in the meantime, the taxpayer applied on 2 February 2001 for leave to apply for judicial review of (a) the decision of the Commissioner to commence the enforcement proceedings and (b) the decision of the Commissioner to apply to strike out the taxpayer's Defence in those proceedings. The relief sought included an order of prohibition prohibiting the District Court from considering the Commissioner's summons and from making any further orders in the enforcement proceedings. After a hearing inter partes on 6 February 2001, Seagroatt J refused the application for leave. The taxpayer now appeals to the Court of Appeal.

7. Seagroatt J's refusal to grant the taxpayer leave meant that the summonses came before Judge Carlson in the District Court on 7 February 2001. On that occasion, the taxpayer applied for an adjournment of the hearing of the summonses pending the determination of the appeal. Judge Carlson acceded to that application, and accordingly the summonses have not yet been heard.

The taxpayer's concern

8. The taxpayer accepts that the enforcement of the assessments will not prevent its objections to the assessments from eventually being determined by the Commissioner. Nor will the enforcement of the assessments prevent it from taking the further steps prescribed by the Ordinance for challenging the assessments, namely appealing against the Commissioner's determination of the objections to the Board of Review, and appealing against the decision of the Board of Review on a point of law to the Court of First Instance or the Court of Appeal. That process of objecting to the assessments will continue whether the enforcement proceedings in the District Court continue or not. What the taxpayer wishes to avoid is having to pay the sums assessed before this process is completed. That is what lies at the heart of the taxpayer's objection to the enforcement proceedings in the District Court. Its case is that the enforcement proceedings are premature.

9. However, the taxpayer also accepts that the statutory regime for challenging the assessments should not hold up the enforcement proceedings in the District Court. The two processes are intended to run in tandem. Two provisions make that clear:

(i) Section 71(2) of the Ordinance provides that tax has to be paid "notwithstanding any notice of objection or appeal", unless the Commissioner permits the payment of tax to be deferred pending the result of any objection or appeal.

(ii) Section 75(4) of the Ordinance, the material terms of which I have already cited, not only prevents the taxpayer from arguing in any enforcement proceedings in the District Court that the assessments were excessive or incorrect. Mr John Scott SC for the taxpayer also accepts that the words "subject to objection" in section 75(4) prevent the taxpayer from arguing in any enforcement proceedings in the District Court that

(a) the lodging of an objection with the Commissioner, or

(b) an appeal to the Board of Review against the Commissioner's determination of the objection, or

(c) an appeal to the Court of First Instance or the Court of Appeal against the Board of Review's decision,

can justify the stay of the enforcement proceedings.

10. Since the enforcement proceedings in the District Court and the statutory regime for challenging the assessments are intended to be parallel processes, on what basis can it be said that the enforcement proceedings in the District Court should nevertheless be stayed? The taxpayer's case is that different considerations apply when there has been delay on the part of the Commissioner to determine an objection to an assessment. The principle of "pay now, argue later" embodied in the statutory recognition of the principle that a challenge to an assessment should not defer its enforcement does not apply when the determination of the objection to the assessment has been delayed. Otherwise, the Commissioner is getting both the advantage of relatively speedy payment of the tax and the benefit of being able to delay the time when he might have to repay the tax if his assessments are subsequently revoked or set aside.

11. I cannot go along with this argument. The statutory scheme is clear. Neither section 71(2) (which deals with when the liability to pay the tax assessed arises) nor section 75(4) (which deals with whether proceedings to enforce that liability can be deferred) can be read as not applying if there is delay on the Commissioner's part in determining an objection of the assessment. Indeed, Mr Scott accepted - and Ms Nancy Kwok for the Commissioner agreed - that the language of section 75(4) prevented the taxpayer from arguing in the enforcement proceedings in the District Court that delay on the part of the Commissioner in determining an objection to an assessment could be taken into account on the application for a stay of the proceedings.

12. That is not to say that the taxpayer is without a remedy if the Commissioner delays in determining an objection to an assessment. It is always open to a taxpayer to apply to the court for an order that the Commissioner carries out his statutory duty. Thus, instead of seeking to obtain by judicial review a stay of the District Court proceedings, the proper course for the taxpayer to have taken when faced with the Commissioner's failure to determine its objections to the assessments within a reasonable time was to seek an order of mandamus requiring the Commissioner to determine the objections.

13. It follows that, in my view, this appeal should be dismissed for two reasons. First, if the taxpayer's present application for leave to apply for judicial review was allowed to proceed, it would have the effect of giving to the taxpayer the relief which it could not obtain in the District Court, namely the stay of the enforcement proceedings. The taxpayer would be getting by the back door what it could not get by the front. Secondly, there is a far more appropriate remedy available to the taxpayer, namely an application for leave to apply for judicial review of the Commissioner's failure to determine the objections within a reasonable time. It was, I think, the first of these reasons which caused Seagroatt J to dismiss the present application for leave to apply for judicial review. In his judgment, he said:

"Judicial Review does not lie as a remedy for the [taxpayer] in these circumstances. [It] cannot oust the District Court's jurisdiction in this respect and in this way. It is inappropriate."

Seagroatt J added that the taxpayer was still entitled to challenge the assessments by the process prescribed by the Ordinance. Although it had been submitted to him that the Commissioner's failure to do that by then had amounted to a failure on his part to determine the objections to the assessments within a reasonable time, that failure had not been made the target of the application for judicial review nor had the remedy of mandamus been sought.

Amendment

14. That omission has now been put right. In the course of the hearing of the appeal, the taxpayer applied for leave to amend the notice of application by

(a) adding to the decisions challenged the failure of the Commissioner to determine the objections to the assessments,

(b) adding to the relief sought an order for mandamus compelling the Commissioner to determine the objections to the assessments, and

(c) adding the grounds for that relief.

I see no reason why that application should not be allowed (the alternative, after all, would simply be to force the taxpayer to file a new application for leave to apply for judicial review) or why leave to apply for judicial review on the basis of the amended application should not be granted, though I would limit the grounds on which the taxpayer could rely to those set out in paras. 1-4. The grounds set out in paras. 5-7 are not arguable since there is no sound basis for asserting that the enforcement proceedings in the District Court should not take their course. The taxpayer's application for judicial review should therefore proceed, but only with a view to an order compelling the Commissioner to determine the objections to the assessments, and not with a view to a stay of the enforcement proceedings in the District Court.

15. Since the court has only been addressing the question of leave, no evidence has been filed on behalf of the Commissioner. For all we know, there may be very good reasons why the Commissioner has not yet determined the objections to the assessments. For example, we were told that the taxpayer's advisors have been negotiating with the Commissioner, and the Commissioner may not have thought it appropriate to determine the objections until the negotiations had been concluded. I simply make the point that the grant of leave to enable the taxpayer to apply for an order of mandamus compelling the Commissioner to determine the objections to the assessments implies no criticism of the Commissioner since his version of the events which have caused the determination of the objections to be delayed is not yet before the court. In any event, if the Commissioner determines the objections before the substantive hearing, there would be nothing left for the court to decide, save (perhaps) for issues relating to costs.

16. In the interests of completeness, I should add that in concluding that leave should be granted to apply for an order of mandamus, I have not overlooked Ord. 53 r. 4(1) of the Rules of the High Court which requires applications for leave to apply for judicial review to be brought promptly and in any event within three months "from the date when the grounds for the application first arose". I do not know by when, in the circumstances, a reasonable time for the determination of the objections would have elapsed, and there is thus no basis at present for saying that the time limit has not been complied with.

Conclusion

17. For these reasons, I would dismiss the appeal from Seagroatt J's order dismissing the application for leave to apply for judicial review of (a) the decision of the Commissioner to commence the enforcement proceedings and (b) the decision of the Commissioner to apply to strike out the taxpayer's Defence in those proceedings. However, I would allow the application for leave to amend the notice of application in the terms which I have identified. I would require the taxpayer's solicitors to file the amended notice of application in court, and to serve it on the Department of Justice, within 7 days of the handing down of this judgment. I would also grant the taxpayer leave to apply for judicial review of the Commissioner's failure to determine the objections to the assessments. As for costs, I see no reason why costs should not follow the event of the appeal, and the order nisi which I would make as to costs is that the taxpayer must pay to the Commissioner his costs of the appeal to be taxed if not agreed.

Mayo V-P:

18. In fairness to the Judge who heard this application it should be appreciated that as a result of amendment proposed by the applicant the nature of the application before us was materially different from the one which was before him.

19. At the commencement of the hearing Mr Scott, SC applied to amend the application by including the additional relief of an order of mandamus compelling the Commissioner of Inland Revenue ("the Commissioner") to make decisions on the objections which had been filed on 7 April 2000 and 5 July 1999. Although Miss Kwok opposed this application in my view leave should be granted for the amendment. It needs to be borne in mind that initially applications for leave are made ex parte and this being the case considerable latitude should be granted to an applicant seeking leave to make amendment.

20. There is no doubt in my mind that on the application which was before the Judge he was right in declining to grant leave to the applicant. My main reason for coming to this conclusion is that it is quite clear from the legislative scheme that it contemplates that where an objection has been lodged it is open to the Commissioner by virtue of section 71(2) of the Inland Revenue Ordinance, Cap. 112 ("the Ordinance") to require the taxpayer to pay the tax payable and then proceed to consider the objection in accordance with the provisions contained in sections 64 to 69A of the Ordinance.

21. The applicant could not judicially review the Commissioner's decision to institute proceedings in the District Court for the recovery of the tax prior to the determination of any objections which may have been lodged with the Commissioner. It also perhaps should be added that the scope for the District Court to go into the merits of the claim being made by the Commissioner are severely circumscribed by virtue of section 75(4) of the Ordinance.

22. However as a result of the amendment which is now being sought by the applicant the main complaint which it is making is the delay it alleges on the part of the Commissioner in dealing with the objections which were lodged on 7 April 2000 and 5 July 1999. At this point of time the Commissioner has had no opportunity of taking issue with the complaint which is made although Miss Kwok informed us that the Commissioner does not accept that there has been unreasonable delay. In this connection it will be noted that in section 64(2) of the Ordinance the Commissioner must consider the objection "within a reasonable time". Clearly what is a reasonable time will be dependent upon all of the surrounding circumstances. At this stage it is not possible to say that the Commissioner has complied with this requirement.

23. If indeed it be the case that he has not then it might well be the case that it would be appropriate for the court to issue an order of mandamus along the lines sought in the amendment proposed.

24. Having regard to the stringent requirement to pay tax prior to the determination of an objection it is particularly important that the Commissioner should comply with the requirements contained in the Ordinance and if it can be established that he has not dealt with the matter with enough dispatch this might constitute sufficient cause to justify intervention by the court.

25. So far as the Judge's other ground for declining to grant leave is concerned namely the delay the amendment also had a bearing on this. The focus of the relief by way of mandamus is the alleged failure of the Commissioner to consider the objections within a reasonable time. The commencement of the District Court proceedings would not necessarily be the time when time began to run against the applicant. It is accordingly not clear to me that so far as the relief by way of mandamus is concerned the applicant is out of time.

26. All that the applicant has to establish when applying for leave to proceed by way of judicial review is that it has an arguable case. In the present circumstances I agree that leave to apply for an order of mandamus ought to be granted.

27. Accordingly the appeal against Seagroatt J's order is dismissed, and the applicant is granted leave on the terms outlined in the conclusion of Keith JA's judgment. An order nisi is made that the applicant must pay the Commissioner's costs.