FAN KIN NANG AND ANOTHER v. COMMISSIONER OF INLAND REVENUE

HCIA 9/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

INLAND REVENUE APPEAL NO. 9 OF 2009

(transferred from the Board of Review Hearing No. B/R 60/09)

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J U D G M E N T

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I.   INTRODUCTION

1.  Mr. Fan and Ms. Yau (the Taxpayers) are husband and wife.  The Taxpayers object to the Commissioner’s Determination of 28 August 2009.

2.  On 16 April 1999 the Commissioner issued a Notice of Personal Assessment (the 1^st PA) in relation to the Taxpayers’ joint profits and incomes for 1997/98.  The 1^st PA was premised on a loss of $241,200 which Ms. Yau claimed she had incurred in her business (L. M. Yau & Company).

3.  On 19 January 2001, upon review, the Commissioner issued a Notice assessing Ms. Yau’s taxable profit for 1997/98 at $20,318 and assessing profits tax of $2,742 as payable thereon.  The Commissioner arrived at this result by disallowing the loss of $241,200 claimed by Ms. Yau.  Profits tax was assessed on Ms. Yau because, from the Commissioner’s point-of-view, with the disallowance of the $241,200, there was no advantage to the Taxpayers in having a Personal Assessment.  On the contrary, the Taxpayers would be paying more under a Personal Assessment than if they were separately assessed for their respective incomes or profits.

4.  The Taxpayers challenged the Commissioner’s disallowance of the claimed loss.  But their challenge, although initially successful before the Board of Review, was ultimately rejected by Yam J in CIR v. Yau Lai Man, Agnes t/a as L. M. Yau & Company HCIA No. 3 of 2004, 24 June 2005.  The Taxpayers did not appeal against that judgment.

5.  On 15 February 2006 the Commissioner issued Notices to the Taxpayers individually.  These demanded the additional amounts payable by the Taxpayers on the basis that the $241,200 originally claimed had been disallowed and they were being separately assessed on their respective salaries or profits for 1997/98.  The Commissioner so acted on the assumption that the Taxpayers would prefer to pay less tax under separate assessments, as opposed to more tax under a Personal Assessment.

6.  The Taxpayers, however, insisted on Personal Assessment.  Consequently, after much correspondence, the Commissioner issued Notices of Personal Assessment dated 23 June 2006 (the 2^nd PA).  This resulted in additional tax of $9,230 being levied in relation to Mr. Fan and $1,406 in relation to Ms. Yau.

7.  By the Determination of 28 August 2009 the Commissioner upheld the validity of the 2^nd PA, despite the Taxpayers’ objecting to its validity.  It is the Taxpayers’ contention that the Commissioner is bound by the 1^st PA.

II.  DISCUSSION

8.  The Taxpayers object to the 2^nd PA on 3 grounds.  They submit the following:-

(1) The 1^st PA became “final and conclusive” by operation of Inland Revenue Ordinance (Cap.112) (IRO) s.70 and so the later 2^nd PA must be null and void.

(2) The 2^nd PA, not having been made within the year of assessment or 6 years thereafter, must be null and void by reason of IRO s.60.

(3) The withdrawal of the 1^st PA and the substitution of the 2^nd PA in its place amounted to a collateral attack on the decision of Yam J.

A.  Ground 1: “Final and conclusive” by IRO s.70

9.  IRO s.70 states:-

“Where no valid objection or appeal has been lodged within the time limited by this Part against an assessment as regards the amount of the assessable income or profits or net assessable value assessed thereby, or where an appeal against an assessment has been withdrawn under section 68(1A)(a) or dismissed under subsection (2B) of that section, or where the amount of assessable income or profits or net assessable value has been agreed to under section 64(3), or where the amount of such assessable income or profits or net assessable value has been determined on objection or on appeal, the assessment as made or agreed to or determined on objection or appeal, as the case may be, shall be final and conclusive for all purposes of this Ordinance as regards the amount of such assessable income or profits or net assessable value:

Provided that nothing in this Part shall prevent an assessor from making an assessment or additional assessment for any year of assessment which does not involve re-opening any matter which has been determined on objection or appeal for the year.”

10.  The “time limited” referred to in s.70 will generally be 1 month after the date of notice of assessment or 1 month after the transmission to the taxpayer of the Commissioner’s determination on an objection.  See IRO s.64.

11.  The Taxpayers argue that, where it speaks of an “assessment” becoming “final and conclusive,” s.70 must include a Personal Assessment made pursuant to IRO s.42A(1)(b) (which requires an assessor to make “a single assessment” when spouses elect to have a joint Personal Assessment).  In particular, the Taxpayers point out that IRO s.43(1) states that tax “will be charged on the amount of the assessment referred to in s.42A(1) at the rates specified...”.  It follows (the Taxpayers suggest) that, there having been no valid objection or appeal to the 1^st PA within the “time limited,” the 1^st PA must have become “final and conclusive” as an “assessment” within the meaning of s.70.

12.  In response, Mr. Paul Leung (appearing for the Commissioner) notes that s.70 does not say that the whole of an assessment will become “final and conclusive” if the same is not queried within a relevant time limit.  All s.70 provides is that an assessment will become final and conclusive “as regards the amount of such assessable income or profits or net assessable value...”

13.  Here, the Taxpayers’ total income stated in PA1 consisted solely of assessable income from their respective salaries.  There having been no objection or appeal against that, Mr. Leung accepts that the amount of such assessable income (that is, the amounts of the Taxpayers’ respective salaries) has become final and conclusive.  But that is all that has become final and conclusive.  It does not mean (Mr. Leung stresses) that anything else (for example, Ms. Yau’s profits which were not assessed by PA1) has become final and conclusive.

14.  PA2 did not (Mr. Leung contends) alter the amounts of assessable income which had become final and conclusive under PA1.  What PA2 did (Mr. Leung submits) was merely to increase the Taxpayers’ total income by bringing in Ms. Yau’s assessable profits in consequence of Yam J’s decision.

15.  Mr. Leung supports his submission by reference to the proviso to s.70.  By the proviso, the Commissioner was not prevented (Mr. Leung says) from including Ms. Yau’s assessable profits (as confirmed by the decision of Yam J) in a subsequent assessment (such as PA2).  This is because, by including Ms. Yau’s assessable profits in PA2, the Commissioner did not re-open any matter (in particular, the amount of assessable salary stated in PA1) which had become final and conclusive.

16.  In my view, Mr. Leung’s analysis is plainly correct.

17.  The Taxpayers acknowledge that Mr. Leung’s reading of s.70 is “a literal approach”.  They say that “such approach may be accepted if personal assessment is not a levy of tax and/or it is a form of computation of tax”.  More specifically, the Taxpayers suggest that Mr. Leung’s reading is contradicted by s.43(1).  They argue that a personal assessment is some sort of indivisible charge to tax which, once it has become final and conclusive, cannot be altered in the way Mr. Leung suggests.

18.  But I am unable to agree with the Taxpayers.  In particular, there is nothing in the IRO (least of all s.43(1)) which falsifies Mr. Leung’s reading.

19.  The Taxpayers suggest that representatives of the Commissioner have previously accepted before the Board of Review or Yam J that PA1 had become “final and conclusive”.  The Commissioner is now estopped (the Taxpayers say) from arguing otherwise.

20.  I do not think that the submission is right.

21.  Assume that in the course of argument at some time the Commissioner’s representatives (including its lawyers) said that PA1 was “final and conclusive” as an assessment.  Such statement begs the question.  The true question is, given that PA1 is an “assessment” within the meaning of s.70, what is it about PA1 that has become “final and conclusive” as a result?  What aspect of the “assessment” (whether the whole or any part of it) has become “final and conclusive” is a question of law.  In determining that question, the Court construes s.70 and is not bound by what counsel or an assessor may or may not have said at some point about the meaning of that section.

B.  Ground 2: Out of time by IRO s.60

22.  IRO s.60(1) states:-

“Where it appears to an assessor that for any year of assessment any person chargeable with tax has not been assessed or has been assessed at less than the proper amount, the assessor may, within the year of assessment or within 6 years after the expiration thereof, assess such person at the amount or additional amount at which according to his judgment such person ought to have been assessed, and the provisions of this Ordinance as to notice of assessment, appeal and other proceedings shall apply to such assessment or additional assessment and to the tax charged thereunder:-

Provided that:- ....”

23.  The Taxpayers argue that, having been made in June 2006, the 2^nd PA was issued more than 6 years after the 1997/98 year of assessment.  The Taxpayers say that, in consequence, the 2^nd PA must be time-barred and invalid.

24.  In response, Mr. Leung notes the words “Where it appears to an assessor” at the beginning of s.60(1). The section (Mr. Leung says) applies where an assessor seeks to make an assessment or additional assessment.  It does not (Mr. Leung reasons) preclude an assessment made to reflect the outcome of Yam J’s decision.  It would be absurd (Mr. Leung submits), if s.60(1) precluded the issuing of an assessment to reflect the outcome of protracted Court proceedings and appeals in a tax case lasting beyond 6 years.  In such case, there is nothing in the wording of s.60(1) which prevents the Commissioner (Mr. Leung concludes) from issuing an assessment to reflect the Court’s ultimate ruling on the amount of tax chargeable.

25.  I agree with Mr. Leung.

26.  In my view, the wording of s.60(1) is inapplicable to the present situation as Mr. Leung points out.  If the Taxpayers are right, it would not be possible to give effect to Yam J’s ruling.  PA1 would stand, despite the fact that (contrary to Yam J’s decision) PA1 allows Ms. Yau’s claimed loss of $241,200.

27.  Obviously, the Commissioner must be allowed to issue a revised joint Personal Assessment (PA2) reflecting Yam J’s decision, even where such decision has been handed down more than 6 years after the 1997/98 year of assessment.  If s.60(1) had actually been intended by the Legislature to have the perverse effect of precluding an assessment from reflecting a Court decision, it seems to me that far clearer words would have been inserted in the section.

C.  Ground 3: Collateral attack on Yam J’s decision

28.  The Taxpayers suggest that there has been an attempt by the Commissioner to resile or withdraw from PA1.  Such attempt constitutes (the Taxpayers say) a collateral attack on Yam J’s decision.

29.  There is nothing in this point.

30.  It is true that in Notices demanding payment from the Taxpayers of additional tax the relevant assessor explained that “[PA1 was] withdrawn as Personal Assessment was not advantageous”.  But all that plainly meant was that, as far as the Inland Revenue was concerned, it was assumed that the Taxpayers would prefer separate assessment with a lower tax than PA1 with a higher tax.  The Inland Revenue was simply saying that it would not insist on tax being paid on a Personal Assessment basis in such circumstance.  The Inland Revenue’s assumption having proved to be wrong, it therefore issued PA2 (which revised PA1 to take account of Yam J’s decision).

31.  There is no collateral attack on Yam J’s decision.  On the contrary, PA2 upholds and enforces that decision.  As Mr. Leung observes, if one were frank about the matter, in reality it is the Taxpayers who are acting contrary to Yam J’s decision by seeking in effect to exclude Ms. Yau’s assessable profits from any tax charge.

III. CONCLUSION

32.  The Taxpayers’ grounds have all failed.  The Taxpayers’ appeal against the August 2009 Determination is therefore dismissed.  The Commissioner’s decision in that Determination to affirm the validity of PA2 is upheld.

33.  There will be an Order Nisi that the Taxpayers pay the Commissioner’s costs of this appeal, such costs to be taxed if not agreed.