KOO MING KOWN AND ANOTHER v. THE COMMISSIONER OF INLAND REVENUE

CACV 182/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 182 OF 2013

(ON APPEAL FROM HCAL NO. 112 OF 2013)

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REASONS FOR JUDGMENT

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Hon Lam VP (giving the Reasons for Judgment of the Court):

1.  On 26 April 2013, the Commissioner of Inland Revenue issued three notices of assessment for additional tax under Section 82A of the Inland Revenue Ordinance Cap 112 [“IRO”]. Two notices were issued to the 1^st Applicant demanding him to pay additional tax in the sums of $6,400,000 and $6,200,000 respectively. One notice was issued to the 2^nd applicant demanding him to pay additional tax in the sum of $5,400,000. All three notices were issued in respect of additional tax stemming from profits tax payable by a company, Nam Tai Trading Company Limited [“the Company”]. The Applicants are former directors of the Company and they had signed the tax returns of the Company in different tax years in such capacity. The tax years for which additional taxes are demanded are 1996/97, 1998/99 and 1999/2000. The Company is in liquidation pursuant to a winding-up order made on 4 June 2012.

2.  For present purposes, it is not necessary to go into all the details of the circumstances under which the Commissioner demanded additional tax from the Applicants.  In short, it stems from the determination by the Commissioner, upheld by the Board of Review in December 2008, that management fees paid by the Company to its ultimate holding company Nam Tai Electronics, Inc. and the legal and professional fees paid to that holding company and its PRC subsidiary were not deductible.

3.  Though the Company had applied to the Board to state a case to the Court of First Instance, that application was refused on 22 April 2009 on the basis that the questions put forward by the Company were unparticularised and did not identify clearly other questions of law.  The Company had sought to challenge that by way of judicial review in HCAL 40 of 2009.  Leave was refused by A Cheung J (as the Chief Judge then was) on 23 April 2009. 

4.  As a matter of chronology, there was an earlier round of challenge in respect of the notices of intention to assess additional tax issued by the Commissioner in 2011.  The Applicants had issued an application for judicial review in HCAL 24 of 2011.  That set of proceedings was discontinued by them on 27 June 2012 after a meeting between the Inland Revenue Department and the 1^st Applicant (together with his tax adviser). Subsequently, further representations were made to the Commissioner on behalf of the Applicants.

5.  After the April 2013 notices of assessment were issued, the Applicants, through their solicitors, lodged an appeal to the Board of Review on 24 May 2013.  Mr Coleman SC (together with Mr Maurellet appearing for the Applicants in this appeal) told us that that appeal is still ongoing and it is scheduled to be heard in January 2015.

6.  On 22 July 2013, the Applicants filed the application for leave to apply for judicial review in the present case.  Three grounds were advanced in the Form 86:

“(1) That the Commissioner erred in law in that he misunderstood the proper scope of section 82A of the IRO, namely that:

(a) Where the Company is liable to furnish tax returns and pay taxes, it is only the Company which is liable for any further assessments of tax (“Ground 1”); and

(b) Where a person has not been “required” to make tax returns under section 51 of the IRO, it cannot then be liable under section 82A (“Ground 2”); and

(2) The Commissioner failed to take into account a number of relevant considerations in issuing the Notices of Assessment and Demand (“Ground 3”), namely:

(a) The strong evidence of a “reasonable excuse” on the part of the Applicants; and

(b) The substantial period of time which has elapsed since the making of the tax Returns, the basis upon which the Notices are made.”

7.  That application was heard on 21 August 2013. On the same date, Anthony Chan J refused leave.  As set out in the written decision, the learned judge refused leave primarily on the ground that the matters relied upon by the Applicants could be canvassed in the Board of Review and there was no exceptional circumstance to permit a challenge by way of judicial review at this stage.  The judge also rejected the submission that there should be a stay of the Board of Review proceedings to achieve economy of resources whilst legal challenges are to be ventilated in a judicial review. 

8.  Further, the judge regarded Ground 3 as unarguable.

9.  This is the appeal by the Applicants against the decision of the judge.  Mr Coleman told us that for the purpose of the appeal the Applicants would confine to Grounds 1 and 2 in the Form 86.  The two grounds are essentially different ways of making the same point: whether Section 82A imposes personal liability on directors who signed tax returns on behalf of a company [“the director’s liability point”].  

10.  After hearing submissions, we dismissed the appeal.  We now give our reasons for our determination of the appeal.

11.  Mr Coleman referred us to several authorities on the approach of the court in considering whether leave should be given for application for judicial review in light of alternative remedy, in particular some cases in the context of availability of appeal to the Board of Review.  It is not necessary for us to discuss those cases at length in this judgment.  As the judge correctly identified, the relevant principles are set out in Canray International Ltd v Commissioner of Inland Revenue [2012] 4 HKLRD 792.  Mr Coleman accepted that the court should generally be circumspect in judicial review applications with regard to challenges to assessments by the Commissioner.  As Barma J (as he then was) put it at para 26, where the complaint is one that can be dealt with by way of the statutory appeals procedure, the court should generally decline to entertain any collateral challenges by way of judicial review.

12.  Mr Coleman contended that there were exceptional circumstances in the present case.  He submitted that the director’s liability point is a distinct point of law which the court can readily resolve independently from the other points raised in the appeal to the Board of Review.  He expressed concerns on the part of the Applicants that this point might not be open to them in the Board of Review.   Further, for the sake of procedural economy, he submitted, the point would have to be resolved by the court in any event and the Applicants should not be required to spend costs on the hearing before the Board of Review before they have the legal issue determined by a court.

13.  With respect, we do not find any exceptional circumstances here.   First of all, we do not agree with the suggestion that the Board of Review may not have the power to entertain the director’s liability point.  Section 82B(2) of the IRO sets out the bases on which an appellant may challenge an assessment to additional tax before the Board of Review.  These include the ground that the appellant “is not liable to additional tax”, see Section 82B(2)(a).  In our judgment, the Applicants may rely on the director’s liability point to contend that they were not liable to pay the additional taxes under the three notices of assessment in question.  Whether that contention succeeds on the merits is a matter to be decided by the Board.  But we have no doubt that the Board has jurisdiction to consider the point.

14.  Mr Coleman contended that as Section 82A only imposed liability for additional tax on a person without reasonable excuse, Section 82B(2)(a) is confined to a consideration of whether the person assessed has reasonable excuse.

15.  We have no hesitation in rejecting such narrow construction of Section 82B(2)(a).  In our view, in the proceedings before the Board of Review, an appellant can raise whatever grounds he can muster to support his argument that he is not liable in law for additional tax. Reasonable excuse is only one of those potential grounds.

16.  Though Mr Coleman is correct in characterising the director’s liability point as a legal point, this alone cannot constitute exceptional circumstances warranting the intervention by way of judicial review at this stage.  Many appeals to the Board of Review involve legal issues and the Board must determine them in the course of deciding the appeals.  If an appellant disagrees with the determination of the Board on a legal issue, he has the remedy by way of case stated.  The determination of a legal issue is not per se a ground for entertaining an application for judicial review which pre-empts proceedings before the Board.     

17.  It is plain from a reading of the notice of appeal of 24 May 2013 lodged with the Board that these Applicants have taken the director’s liability point in the proceedings before the Board. 

18.  On a final analysis, what the Applicants sought to achieve by this intended application for judicial review is to segregate the director’s liability point and to have it decided by the court by way of preliminary issue.  We do not see any good reason for permitting such course to be taken.  One must bear in mind the delay and the complication occasioned to the entire process of the final determination of the Applicants’ liabilities under the three notices if one embarks on the route suggested by Mr Coleman.  The proceedings before the Board would be postponed until the judicial review has been determined finally.  And that may involve not only a hearing in the Court of First Instance.  Avenues of appeal and further appeal must also be taken into account.  Thus, if leave is granted for judicial review for the determination of this preliminary point, substantial delay and costs will have to be incurred before one goes back to other issues raised in the appeal before the Board. 

19.  The judge is plainly correct in rejecting the submission based on procedural economy.

20.  For these reasons, we dismissed the appeal.