THE QUEEN v. MA LAI WU AND OTHERS

IN THE COURT OF APPEAL

Application for Review
1986, No. 23

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JUDGMENT

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Headnote: Custodial sentences the norm in frauds upon the Inland Revenue

Silke, J.A.:

1. On the 18th February when the decision of the Court was announced we stated that we would give our reasons later. This we now do.

2. This is an Application for Review of Sentence made by the Attorney General under the provisions of section 81A of the Criminal Procedure Ordinance. The basis for the application is that sentences imposed were manifestly inadequate.

3. Ma Lai Wu – “D1” - and Ma Yee Keung – “D2” - were the major shareholders and directors of Homer Industrial Company Limited – “D3”. That firm commenced business in 1975 and its business was to manufacture and distribute plastic products and briefcases. All three Defendants pleaded guilty to a multiplicity of charges brought under the provisions of section 82 of the Inland Revenue Ordinance, Cap. 112. They totalled 24. They arose from the deliberate defrauding of Inland Revenue by the omission of sales in the books and accounts of the company and the submission to the Commissioner of Profits Tax Returns for the assessment years 1977/78 to 1982/83 which understated sales and profits. D1 signed the company's Profits Tax Returns for those assessment years. Audited accounts filed in support of the Returns were signed by both D1 and D2.

4. The method used was to keep back sales invoices which should have been given to the bookkeeper of the company for accounting purposes. When sales proceeds were received from customers D1 and D2 indicated to the book-keeper that those payments were directors advances to the company or were advances to the company from a ficitious entity, Thai Kee. Dl and D2 kept secret books. The company's auditor was unaware of the false system being used. Separate accounts were opened in the company's name into which the unrecorded sales proceeds were deposited by both D1 and D2. The auditor was not informed of the existence of those accounts.

5. In November 1983, the company's Profits Tax Returns were reviewed by the Inland Revenue Department. In March of 1984, D1 was interviewed by Assessors. He confirmed that the Profits Tax Returns for the assessment years to which we have referred were correct. Also in March, D2 gave the Assessor a similar confirmation. The company's auditor was informed soon after March 1984 that some credit entries in the directors' current account were actually sales. He recommended that the Inland Revenue be informed but D1 and D2 decided not co Rive that information until December of 1984.

6. The full sum omitted from the Returns was $2,593,439. The total tax unpaid was $432,706.

7. After investigation, D1 and D2, in 1986, made confessions admitting the offences. They repaid to the Inland Revenue the full tax due before summons were issued.

8. The penalties after conviction upon indictment under section 82 are (1) a fine of $20,000; (2) a further fine of trip1e the amount of the tax undercharged and imprisonment for 3 years. The Commissioner has power to compound offences.

9. We would interpolate here that the $20,000 fine is as a result of an amendment to the section and made after the date of these offences. The fine at the time of the offences was $10,000.

10. The sentences imposed by the trial judge in respect of D1 on each of the charges 1, 5, 9, 13, 17 and 21 was 18 months' imprisonment suspended for 2 years and a fine of $15,000. On the same charges, D3 was fined $5,000 on each. On each of the charges 3, 7, 11, 15, 19 and. 23, D2 was sentenced to 18 months' imprisonment suspended for 2 years and a fine of $15,000. On each of charges 4, 8, 12, 16, 20 and 24, D1 was sentenced to 6 months' imprisonment suspended for 2 years and a fine of $5,000. On those same charges, D2 was also sentenced to 6 months' imprisonment suspended for 2 years and fined $5,000. Also on each of chose charges, D3 was convicted and fined $5,000. No additional penalty fines were imposed in respect of the tax undercharged.

11. It is the main contention of the Attorney General that, first, the sentences of imprisonment should not have been suspended and, second, that penalty fines in relation to the undercharged tax should have been imposed.

12. Our attention was drawn to the fines imposed without jurisdiction.

13. Sir Oswald Cheung, with him Mr. R. Mayne, emphasize that in the District Court, since 1978, there have been no immediate custodial sentences imposed for offences of this nature. Without, we hope, doing his submissions any injustice we would summarize them as being if this Court thought immediate custodial to be correct, then leave that for the future and do not visit upon the heads of these Defendants such a punishment. They had pleaded guilty and had done so on the basis of the known nature of the sentences previously imposed.

14. It is correct that the general tariff in the District Court has stopped short of the imposition of custodial sentences. A helpful schedule of previous sentences was before the trial judge and we have taken note of it. The omission seems a little strange given that which was said in two cases, one reported the other not, relating to offences of this nature which were decided in 1978, though it may be explained by the power given to the Commissioner to compound offence under s.82, Yu Pang Nin v. The Queen[1] clearly approved a sentence of immediate imprisonment in a case such as this as being "amply justified”. There the appellant had been convicted of 31 charges of wilfully, with intent to evade tax, omitting profits from returns made by him under the Inland Revenue Ordinance. He had been sentenced to 12 months' imprisonment concurrent on each charge and that sentence remained unaltered.

15. In Applications for Review Nos. 2 and 3 of 1978 The Attorney General v. Peter Tsai[2] and Stuart[3], unfortunately unreported, another Division of this Court had for consideration the single penalty of fines imposed for offences under section 82 of the Inland Revenue Ordinance. The Court there substituted sentences of imprisonment of one year on each count suspended for two years. A penalty fine of one and a half times the tax evaded was also imposed. Pickering J.A. in the judgment involving Stuart³ said:

"That the term which we have imposed is suspended is no more than a reflection of the fact that these are Applications for Review and that the respondents have suffered that anxiety of double jeopardy which is not a normal feature or our law. In circumstances such as these the principle of a custodial sentence is one with which this Court would be unlikely to interfere even if we were to review its length. The Applications should serve as a warning to those reluctant to pay even the modest rates of tax applicable in Hong Kong."

16. Our attention has been further directed to a series of cases reported in Volume 3,1981 Criminal Appeal Reports (Sentencing). These are Dolan, at page 139; Ford, at page 15; Hayes, at page 205; and Beale, at page 289. While sentences imposed in other jurisdictions with differing social and economic structures and the reasons for them are not necessarily applicable to Hong Kong, each of those bases emphasized the principle that the course which should be taken by a Court where there is deliberate and fraudulent evasion of tax is one of immediate imprisonment which may be coupled with a fine and a penalty. We think that, in Hong Kong, and accepting that which was said in Yu Pang Nin¹ and Applications for Review Nos. 2 and 3 of 1978, sentences of immediate custodial imprisonment should in future be imposed in the appropriate case.

17. It is necessary for a Court to take into consideration when assessing the quantum of such sentence and this list is not intended to be exhaustive - the time span of the offences, the systems and methods used to evade tax, whether or not there was re-payment of the tax evaded, the amount of that tax, the individual culpability of one or more defendants and the circumstances of each defendant.

18. Lenient sentences, where detection is not certain, may encourage persons to take a risk. Persons who commit offences such as these are favoured by the possibility of non-detection and favoured yet again if upon detection they can look forward to leniency.

19. The deliberate defrauding of the Inland Revenue is a serious matter which affects the community as a whole.

20. We do not accept, by itself, the “clang of the prison gates" argument in relation to such offences. This, if given too great weight, might mean that the whiter the collar the less the time spent behind bars and that, as a general proposition, cannot be right. This is not, however, to detract from the salutary effect which a prison sentence of even short duration may have on the individual defendant and its affect upon the public at large. A balance has to be maintained as between the appearance of leniency to an individual and the effect a prison sentence may have on a defendant of hitherto unblemished character and who is of standing in the community.

21. In our judgment, these sentences were manifestly inadequate. For the future, we would re-emphasize the words we have quoted of Pickering J.A. in Stuart³. This case should give warning to all those reluctant to pay their tax and who deliberately evade it that lenient sentences are no longer the norm.

22. As the previous sentencing tariff in the District Court did not go so far as to include immediate custodial imprisonment, and as this is a Review, we intend to leave the suspension of the sentence untouched, though an immediate custodial sentences of 18 months, which is half tile maximum permissible might well have been considered to be too high.

23. In relation to the charges where fines beyond the jurisdiction of the Court were imposed, we would reduce those fines to $5,000; that is L Dl; charges 1, 5, 9, 13, 17 and 21; D2: charges 3, 7, 11, 15, 19 and 23.

24. We would impose a penalty tax of 200% on the charges in the indictment numbers 4, 8, 12, 16, 20 and 24, the sum involved to be paid equally by the three Defendants as to one-third each. We select these charges as &hey concern each Defendant and are an accumulation of the sets of charges immediately preceeding them and reflect the total amount of unpaid tax. The quantum of the penalty fine is $865,412.

25. The Application for Review is granted and the order is made on the basis of that which we have just said.

[1]  [1978] H.K.L.R. p.58

[2]  Application for Review No.2 of 1978 (unreported)

[3]  Application for Review No.3 of 1978 (unreported)