HKSAR v. CHANG KIN MAN IVAN

CACC 74/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CRIMINAL APPEAL NO. 74 OF 2001

(ON APPEAL FROM DCCC 844 OF 2000)

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REASONS FOR JUDGMENT

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Hon Mayo VP (giving the reasons for judgment of the Court):

1. The applicant was convicted of two charges of wilfully intending to assist a company evade tax by omitting certain sales proceeds from Profits Tax Returns, contrary to section 82(1)(a) of the Inland Revenue Ordinance Cap. 112 (the Ordinance) and three charges of wilfully intending to assist the company evade tax by making use of a fraud, art or contrivance contrary to section 82(1)(g) of the Ordinance.

2. This was after a trial in the District Court before Her Honour Judge Poon.

3. Particulars of the first section 82(1)(a) charge were as follows:

"Chang Kin-man, Ivan, between on the 1st day of August, 1994 and on the 31st day of March, 1995, in Hong Kong being a director of Kam Tong Kee Engineering Plastics Co. Ltd., wilfully with intent to assist the said Kam Tong Kee Engineering Plastics Co. Ltd. to evade tax, omitted from the Profits Tax Return for the year of assessment 1994/95 made under the Inland Revenue Ordinance, Chapter 112 of Kam Tong Kee Engineering Plastics Co. Ltd. the proceeds from the sales in respect of those cash memos with serial numbers bearing no alphabetic prefix which amounted to $796,027."

4. The second charge was framed in a similar manner. It however related to the 1995/96 year for assessment of profits tax and the proceeds of the sales in that year were $2,787,472.

5. The third charge which was the first of the section 82(1)(g) charges read:

"Chang Kin-man, Ivan, between on the 1st day of August, 1994 and on the 31st day of March, 1995, in Hong Kong being a director of Kam Tong Kee Engineering Plastics Co. Ltd., wilfully with intent to assist the said Kam Tong Kee Engineering Plastics Co. Ltd. to evade profits tax for the year of assessment 1994/95, made use of a fraud, art, or contrivance, whatsoever, to omit the proceeds from the sales in respect of those cash memos with serial numbers bearing no alphabetic prefix which amounted to $796,027."

6. The 4th and 5th charges related to the subsequent tax years.

7. The applicant owned 25% of the shares in Kam Tong Kee Engineering Plastic Ltd. (Kam Tong) the company referred to in the five charges.

8. The other shareholders were Mr and Mrs Kam who owned 50% of the shares and a Mr Cho who was Mr Kam's brother-in-law who owned the remaining 25% of the shares.

9. Prior to its incorporation on 16 August 1994 Kam Tong had been a sole proprietorship business which had been operated by Mr Kam.

10. Mr and Mrs Kam emigrated to Canada and the company was essentially run by the applicant, although the Kams did from time to time make visits to Hong Kong and generally supervise the activities of the company.

11. Ms Siu (PW1) was the bookkeeper for the company and the main prosecution witness who gave evidence concerning the scheme which it was alleged was undertaken by the applicant to evade payment of profits tax.

12. The scheme was in fact a very simple one.

13. Kam Tong used three different types of documents to record sales. "A" invoices were used to record credit sales.

14. Yellow "C" cash memos and pink cash memos with serial numbers but no prefix were used for cash sales. The pink memos have been described as the "no prefix" cash memos and it is these memos which are referred to in the charges.

15. Payments which were received in respect of the A and C memos were credited in the company's accounts. Payments relating to the no prefix memos were not. Instead payments were made to a joint account. Ms Siu and the applicant were signatories to this account. There was evidence which was not disputed that moneys in this joint account were paid out to the applicant and Mr Kam in the ratio of six parts to Mr Kam and four parts to the applicant.

16. It will be appreciated from this that as the money received from the no prefix memos did not pass through the company accounts this money was not declared for tax purposes, though the prosecution case was that the goods represented by these memos belonged to the company and profits tax was payable in respect of their sale.

17. Ms Siu gave evidence that the applicant and the Kams were fully aware of the position and indeed she had been instructed by the applicant in respect of some of the no prefix memos. She also gave evidence to the effect that it was the applicant and the Kams who determined whether no prefix memos should be issued in respect of goods sold.

18. It is also of significance to observe that there would not appear on the face of it to be any distinguishing feature so far as the goods were concerned to determine what memo would be used. Goods answering to a similar description and at the same price are referred to in the memos.

19. The second witness to give evidence was Mr Chang Kwong-wah an accountant with Wilfred Wan & Co. who audited Kam Tong's accounts. He gave evidence that he had no knowledge of the no prefix memos or of the goods referred to in them. There is one aspect of his evidence which will be dealt with later in this judgment and concerns evidence which he gave which was at variance with a previous statement which had been made by him to the Inland Revenue. This will be commented upon when considering the first perfected ground of appeal.

20. The third witness to give evidence was a Senior Assessor with the Inland Revenue Department. She gave evidence of the investigation which had been conducted by her Department and referred to the documentation which was relevant to these charges.

21. The remaining evidence consisted of a number of agreed facts and a cautioned statement which had been given by the applicant.

22. In this statement the applicant admitted having knowledge of the no prefix memos. He maintained however that these memos related to "private business" which was independent of the company's business. They related to goods which had belonged to Mr Kam's sole proprietorship prior to the incorporation of the company. There was also reference to some of the goods belonging to an unnamed Taiwanese associate of Mr Kam. According to the applicant these goods were sold off on behalf of the Taiwanese associate and were the subject matter of the no prefix memos.

23. The applicant gave evidence at his trial. He described his background. He had been educated in Canada as an engineer. He did not have any knowledge or experience of accounting matters.

24. He had known Mr Cho in Canada. He heard that the Kams intended immigrating to Canada and decided to invest HK$500,000 in their business. It was also agreed that he would run the company in the absence of the Kams. For this he initially received a salary of $15,000 per month which was later increased to $20,000 per month.

25. During the time he was running the company he did not receive any dividends from his shares. He claimed not to have any accurate idea whether the company was trading at a profit or a loss. He said that when he signed forms or documents he had done so on Mr Kam's instructions. He had not acquainted himself with the contents of these prior to signing them.

26. So far as the no prefix memos were concerned his evidence approximately accorded with the evidence he gave in his cautioned statement.

27. There was however one aspect of his evidence which he did enlarge upon. This related to the moneys which had been paid to him from the joint account into which the no prefix payments had been credited.

28. The applicant said that he had acted upon Mr Kam's instructions in relation to these moneys. Mr Kam had said that some of the goods belonged to a Taiwanese friend of his. He was told that he could use the moneys as a loan. He did not know when the moneys would have to be repaid or how he could repay the substantial amount from his comparatively modest salary.

29. The Judge in large part rejected the applicant's testimony. She was satisfied that the prosecution had proved its case against the applicant on all the charges.

30. There were altogether three perfected grounds of appeal.

31. The first related to the matter already alluded to in relation to Mr Chang's testimony.

32. In a statement Mr Chang had made to the Inland Revenue Department he had stated that when he had undertaken the 1996/7 audit he had noted when doing a stock check that there were some goods which had not been accounted for. When he had taxed the applicant with this he had said that the goods were left overs from the sole proprietorship and were of no value.

33. However when giving evidence in court he gave a different version of this. He said that he had been told that the goods did not belong to the company. At this stage an application was made by counsel for the prosecution for Mr Chang to be treated as a hostile witness. The Judge did not make a formal adjudication on this. What she did was to order that Mr Chang be referred to the statement which he had made to the Inland Revenue. However counsel was permitted to continue cross-examining Mr Chang notwithstanding the fact that the Judge had not made an order that he be treated as a hostile witness.

34. The first point made by Mr Cheng Huan SC for the applicant was that the Judge should not have permitted this having regard to the provisions contained in section 12 of the Evidence Ordinance Cap. 8:

"12. Discrediting a witness

A party producing a witness in any proceedings shall not be allowed to impeach his credit by general evidence of bad character, but he may, in case the witness, in the opinion of the court, proves adverse, contradict him by other evidence or, by leave of the court, prove that he has made at other times a statement inconsistent with his present testimony, but, before such last-mentioned proof can be given, the circumstances of the supposed statement, sufficient to designate the particular occasion, must be mentioned to the witness, and he must be asked whether or not he has made such statement."

35. Perhaps even more serious than this the Judge appeared to have given weight to the statement made to the Inland Revenue although this was at variance with the witness' evidence in court.

36. The Court of Appeal Criminal Division considered how this problem should be dealt with in R v Maw [1994] Crim LR 841 at 842:

"If a witness had been treated as hostile, and thereafter given evidence, it was necessary for the jury to consider whether he was a witness who should be treated as creditworthy at all, and they should be clearly directed on that point. The judge did not direct their attention to that question, nor did it appear he considered it himself. It was of fundamental importance for any tribunal to consider whether a witness who had given conflicting evidence was of any creditworthiness at all. It was not proper to go straight to the stage of considering which parts of the evidence were worthy of acceptance and which were to be rejected. If the judge considered the witness was of sufficient creditworthiness, he should give the jury a clear warning about the dangers involved in a witness who contradicted himself and that they must consider whether they could give any credence to such a witness. Only if they considered that they could, to go on to consider what part of his evidence they could accept. It should be the task of the prosecution or any other party inviting the jury to rely on the evidence of such a witness to explore the inconsistencies and the reluctance to testify. If there was no explanation the evidence was less satisfactory. If the witness could give an explanation that might set at rest any anxieties there might be about his evidence and enable him to be treated as fully creditworthy."

37. From the way in which this matter was dealt with it would appear that although the Judge made no formal ruling that Mr Chang was to be treated as a hostile witness he was in fact treated as if he was hostile. This being the case the observations made by the Court of Appeal would be applicable and the Judge should have exercised extreme caution before attaching any weight to any of Mr Chang's evidence. From the way in which the Judge dealt with this matter in her Reasons for Verdict it would appear that she failed to sufficiently have regard to the observations made by the Court of Appeal in R v Maw. This is what she had to say:

"PW2, the accountant's evidence in relation to the stock check at the premises of the company in 1996/97, is dubious. He said that he saw some goods lying at a corner of the shop when doing stock check and was told such did not belong to the company, under cross-examination. It is revealed that such was contrary to a statement given by him earlier to the Inland Revenue Department stating that he was told by the defendant that these were leftovers from the sole proprietorship and were of no value.

Judging from the varying versions given by him in his subsequent clarification and his demeanour, I find that his evidence relating to the stock check visit was tailored to fit in with the evidence of the defendant that there were other goods on the premises not belonging to the company. I find that PW2 was not truthful in this part of his evidence and so I attach no weight to it. I am, however, satisfied that what he said in his statement to the Inland Revenue reflected the truth of the matter.

Having made that finding, such evidence is obviously contrary to what the defendant said in his cautioned statement and his evidence, namely, the leftovers instead of being valueless were sold with the 'no prefix' invoices."

38. It will be appreciated from this that there are two problems in relation to this ground. The first is that the Judge permitted counsel for the prosecution to continue cross-examining Mr Chang even though she had not formally made a ruling that he be treated as a hostile witness. In this regard, Mr Chang made it plain in the course of argument that if the Judge had made such a ruling he could not have complained. Nevertheless, in the absence of a formal ruling, and in the light of what was said in Maw (above), insofar as it affects the second aspect of this ground to which we shall now turn, the complaint is made out. The second aspect is that it is apparent that the Judge was prepared to attach weight to Mr Chang's statement to the Inland Revenue in spite of the conflicting and unsatisfactory evidence he gave in court. However, if this witness was effectively being treated as hostile, as it appears he was, we are not satisfied that the Judge addressed the question whether his evidence deserved any credence in the light of the contradictions in his evidence. There is, therefore, some validity in this complaint also.

39. The complaint made in the second ground of appeal is that counsel for the applicant at the trial below was flagrantly incompetent in that he failed to make the point that prior to these proceedings the applicant was a person of good character. In an affidavit counsel (who does not appear on this appeal) accepted that he had through inadvertence not done this. This clearly was a material omission.

40. It is however necessary to consider the consequences of this failure in the overall context of this case.

41. What is clear from the Reasons for Verdict is that the applicant faced an overwhelmingly strong case against him. There was the evidence of Ms Siu of his complicity in the scheme. There was also evidence that the goods which were the subject of the no prefix memos could not realistically be differentiated from other goods of Kam Tong either in quality or price.

42. Perhaps even more important than this was the evidence relating to the joint account into which the proceeds of sale of the goods the subject matter of the no prefix memos were paid and then subsequently paid out to the applicant and Mr Kam on the ratio of 4 to 6.

43. The applicant's evidence concerning the "loan" was patently untrue. It should be added that there were other thoroughly unsatisfactory aspects of the defence which was being run. It was common ground that no moneys were ever paid to the Taiwanese party. It was also the case that the no prefix memos were on Kam Tong's notepaper and this would indicate to anyone having an interest in the memos that the goods the subject matter of them belonged to the company.

44. In the third ground complaint is made that Messrs T.C. Foo & Co. the solicitors previously representing the applicant had continued to act for the applicant and Mr Kam notwithstanding the obvious conflict of interest between the two of them.

45. It is evident from the background of this case that initially both the applicant and Mr Kam were attempting to resolve the matter in an informal way with the Inland Revenue. For such an approach to have any realistic prospect of success it was imperative that the applicant and Mr Kam should adopt a common front. Initially this is what they did.

46. At the time when the applicant was charged Mr Kam left for Canada and no charge was proceeded with against him. It would undoubtedly have been the case that if Mr Kam had been proceeded against it would have been necessary for both men to be separately represented.

47. This was largely a question for the judgment of the solicitor in question. It has not been demonstrated that there was in fact any conflict of interest.

48. Over and above this there is no evidence whatever that the applicant was in any way prejudiced. He has never attempted to make this out. All that has been suggested is that at some stage, prior to charge, that was a conflict, and that had the applicant been separately represented "matters may well have been very different". There is no assertion that the advice tendered was wrong, or that the applicant would in fact have conducted himself at all differently in relation to the conduct of the inquiries.

49. Having regard to the wealth of cogent evidence in support of those charges we are of the view that the problems which are referred to in the first and second grounds of appeal did not render these convictions unsafe or unsatisfactory. This was a clear case for the application of the proviso in section 83 of the Criminal Procedure Ordinance Cap. 221.

50. At the conclusion of the hearing we informed the parties that the application was successful and that on the substantive appeal we proposed applying the proviso and dismissing the appeal. These are our reasons for so doing.