THE COMMISSIONER OF INLAND REVENUE, HONG KONG v. SAM KWONG WEAVING FTY. '1952' LTD

HEADNOTE

Application to strike out defence - Exercise by Commissioner of Inland Revenue of positive duty to assess tax and of discretion to impose surcharge provided by law - Doctrine of estoppel thus not available - Legal requirement on settlement of assessable tax on or before due date notwithstanding any notice of objection or appeal by the tax-payer, unless otherwise ordered by Commissioner of Inland Revenue, to prevent tax-payer's delay or excuse in making payment.

IN THE DISTRICT COURT OF HONG KONG

CIVIL JURISIDCTION

ACTION NO. 3203 OF 1986

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Hearing dates: 15th September, 1986, 6th November 1986, 16th January, 1987, 14th April, 1987 and 3rd July, 1987.

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JUDGMENT

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1. This is Plaintiff's application to strike out the defence and to have summary judgment for his claim of surcharge on a late payment of tax by Defendant.

2. It is not in dispute that on 13/1/86 Defendant's audited accounts on which tax for 1984/85 would be reckoned had not been filed and that situation gave rise to the assessor in charge of Defendant's case issuing to Defendant, under the provision of S.59(3) of Inland Revenue Ordinance, Cap. 112, a combined Notice:-

(a) of Assessment and Demand for Profits Tax for the year of assessment 1984/85, calculated at 18.5% of estimated profit of $2,800,000 = $518,000, less $433,173 already charged = $84,827

(b) For payment of Provisional Tax for the year of assessment 1985/86, based on 18.5% on the same assessable profit of $2,800.000 = $518,000

Total: ($84,827 + $518,000) = $602,827

3. In the same document Defendant was allowed to pay the above amount of $602,827 in 2 phases:-

(1) $473,327 to be paid on or before 17/3/86

(2) $129,500 to be paid on or before 17/6/86

4. This mode of payment by instalments is subject to the terms set out in the same Notice and reproduced below:-

"(a) If the full amount of the FIRST INSTALMENT is not paid as stipulated so much of the TOTAL TAX PAYABLE as is then unpaid will be deemed to be in default and will become immediately recoverable.

(b) If the full amount of the FIRST INSTALMENT is paid as stipulated but the full amount of the SECOND INSTALMENT is not so paid so much of the SECOND INSTALMENT as is then unpaid will be deemed to be in default and will become immediately recoverable.

(c) Where any tax is in default a sum not exceeding 5% thereof may be added to and recovered with the tax."

5. The chronology of events which formed the background and/or led to the present matter at issue can be summarized as follows:-

Item 1) 18/3/86 - Messrs. Thomas Le C. Kuen & Co., Defendant's tax representatives, lodged a Notice of Objection under S.64(1) of the Ordinance on the ground that the tax assessed by Plaintiff on 11/3/86 was excessive;

2) 11/4/86 - Defendant's application to have the said second instalment of $129,500 held over. (This was granted on 29/4/86);

3) 11/4/86 Plaintiff replied to Defendant's objection of 18/3/86 (Item 1) saying that that objection would be validated if a completed return of accounts was received by him not later than 25/4/86;

4) 24/4/86 - Defendant's audited accounts, Profits Tax Return etc. for 1984/85 were lodged to validate the objection;

5) 26/5/86 - Upon finalization of the objection Defendant's tax for 1984/85 was calculated as follows : -

	1st instalment	2nd instalment
Original assessment	$473,327	$129,500
Less : discharged	$306,098	$129,500
Due date for payment 17/3/86	$167,229	Nil
Less : paid on 18/3/86	$ 58,247
Balance	$108,982

6) 6/6/86 - Defendant paid the balance of tax of $108,982 (Item 5).

7) 10/6/86 - Revised assessment for 1984/85 and revised demand for Profits Tax 1985/86 shows

Net revised tax	$167,229
Less : Previously changed (Item 5)	$167,229
Tax payable	$ 0

6. Defendant avers that the ground for its failure to file its Tax Return with supporting audited accounts before the date of assessment of 13/1/86 was that on 6/12/85 Jones, J. ordered in High Court M.P. No. 2627 of 1985, inter alia, that all documents 6f Defendant or copies he placed and remain in the custody of a notary public until further order of the Court. Defendant further asserts that those documents were not released until 14/1/86 by order dated 9/1/86 of the same judge, so that information and explanations needed for the preparation of audited accounts and tax return were not ready until March 1986 and thus resulted in the delay.

7. There is no evidence that the order of Jones, J. of 6/12/85 was made known to Plaintiff or became the subject of an application for late submission of tax return. Consequently on 13/1/86 Plaintiff, in my view, rightly exercised his statutory right under S. 59(3) of the Ordinance by raising the said assessment of tax X. 59(3) says:

"where a person has not furnished a return and the assessor is of the opinion that such person is chargeable with tax, he may estimate the sum in respect of which such person is chargeable to tax and make an assessment accordingly ….."

8. Replying to the objection of 18/3/86 from Defendant's tax representative Plaintiff said on 11/4/86: -

"I regret that I cannot accept your representative's letter dated 18 March 1986 as a valid Notice of Objection under Section 64 of the Inland Revenue Ordinance because the assessment in question was made under Section 59(3) in the absence of a return and a return has still not been submitted. The objection will, however, be validated providing a properly completed return is received by me not later that 25 April 1986.

Should a return not be received by that date, the assessment will become final and conclusive in terms of Section 70 of the Inland Revenue Ordinance. The tax should in any event be paid on or before the due date." (emphasis added)

9. It can be said that the intention of the Legislature is that a tax-payer should not use an objection to an assessment as a means to delay or escape payment of tax and that such intention is found in the following S.71(2).

"Section 71(2): - TAX shall be paid notwithstanding any notice of objection or appeal, unless the Commissioner orders that payment of tax or any part thereof be held over pending the result of such objection or appeal."

10. As far as default in payment and surcharge arising there from are concerned Plaintiff invokes these provisions: -

"Section 71(1): - TAX charged under the provisions of this Ordinance shall be paid in the manner directed in the notice of assessment on or before a date specified in such notice. Any tax not so paid shall be deemed to be in default, and the person by whom such tax is payable, or where any tax is payable by more than one person or by a partnership then each of such persons or each partner in the partnership, shall be deemed to be a defaulter for the purpose of this Ordinance."

"Section 71(5): - Where any tax is in default, the Commissioner may in his discretion order that a sum or sums not exceeding 5 per cent in all of the amount in default shall be added to the tax and recovered therewith."

11. It is Plaintiff's case that since Defendant ought to pay the whole amount of tax of the year of assessment 1984/85 on 18/3/86,as stated in the original and amended Notices of 13/1/86 and 29/4/86 but was in default by making partial payment, i.e., a sum of $108,982 on 6/6/86, it was penalised with a surcharge stipulated in the Notice of Assessment (referred to in the early part of this judgment) of 5% of $108,982 = $5,449. This is the amount now claimed.

12. Counsel for both parties considered at great length the case "Commissioner of Inland Revenue v. CHENG Chi-yui" (1976) D.C.L.R. 1 in which Hooper, D.J. (as he then was) invoked a number of English legal decisions on the performance of a statutory duty and powers by Government Officers and public bodies.

13. Mr Edward Chan, for defendant, lays emphasis on estoppel and says that, as far as this case is concerned, estoppel consists of: (a) plaintiff's representation; (b) defendant's reliance on it and (c) the consequential act to the defendant's detriment.

14. On (a) he mentions paragraphs 14 and 15 of the Amended Defence whereby it is alleged that upon receipt of payment of $108,982 from defendant at 6/6/86 (Item 6) plaintiff issued the Notice specified in Item 7 and stated therein that tax payable by defendant for 1984/1985 and the provisional tax for 1985/1986 were "$0" or nil. As regards (b) and (c) Mr. Chan alludes to paragraph 16 of the Amended Defence in which defendant claims to rely on plaintiff's said representation and, from that understand1ng, contends that it had discharged its liability to tax and yet was forced to incur expenses by instructing legal advisers to resist plaintiff's claim.

15. Miss Fung, for plaintiff, maintains that since the "Nil", assessment of 10/6/86 (Item 7) was made out in consequence of, and bore reference to, the revised assessment of 26/5/86 (Item 5) which had remained in force, there was no valid reason to support the alleged representation by plaintiff to mislead defendant into believing that no more tax was payable by defendant. On this aspect I accept Miss Fung’s point and say that, as defendant had tax experts looking after its interest vis-a-vis plaintiff, it lay ill in its month to say that it was confused by various notices from plaintiff and, by relying on the so-called representation by plaintiff, had acted to its detriment.

16. There is no quarrel on Mr. Chan’s submission that the present action is somewhat distinguishable from CHENG Chi-yui’s case because the former deals with surcharge under S. 71(5) and the latter with payment by instalments under S. 71(6) and that if there is a statutory duty on plaintiff to do a certain act there could be no estoppel. However, there is also Mr. Chan's controversial argument that plaintiff was under no positive duty to impose the surcharge in question and, by so doing, plaintiff had brought the doctrine of estoppel into play. In this connection Miss Fung submits that plaintiff made that imposition in the exercise of his statutory, discretion and consequently the defence of estoppel should not be available to defendant. Between these two standpoints I prefer Miss Fung's and throw the dice in her favour.

17. As far as estoppel is concerned I hold that it cannot avail defendant, because of the established principle that estoppel cannot operate to prevent or hinder the performance of a positive statutory duty or the exercise of a statutory discretion.

"In the case of Society of Medical Officers of Health v. Hope* (Valuation Officer) Lord Keith of Avonholm giving the majority judgment of the House of Lords after pointing out the public duties performed by Valuation Officers went on to say at page 568:-

"I emphasise these aspects of the functions of a valuation officer under the statute, for they lead to what I regard as the true answer to the submission for the appellants, which is that a public officer in the position of the respondent cannot be estopped from carrying out his duties under the statute. The case is, I think, a fortiori of the judgment of a Board of the Privy Council in Maritime Electric Co. Ltd. v. General Dairies Ltd.[1], where it was held, in the circumstances of that case, that a public utility company could not be estopped from carrying out its duty under a statute. It has been said on other occasions that there is no estoppel against a statute. Lord Parker a Waddington applied this ratio in Inland Revenue Commissioners v. Brooks with reference to an assessment to income tax which was claimed to be final against the Commissioners for the Special Purposes of Income Tax in an assessment for super-tax. 'I do not dispute,' he said, 'these general principles [of law governing estoppels], 'but it seems to me that where there is a statutory provision requiring an estimate to be made for a statutory purpose and by a statutory authority, the principle of estoppel cannot be invoked to render the provision nugatory in cases where such principle might otherwise have applied … He may in my opinion seek to rectify the result of mistakes in fact or errors of law."

In Southend-On-Sea Corporation v. Rodgson (Wickford). Ltd.[2] Lord Parker C.J. giving the judgment of the Court of Appeal quoted from the judgment of Lord Maugham in the Maritime Electric Co. Ltd. v. General Dairies Ltd. case referred to above and went on to say at page 423:- "As I have said, I can see no logical distinction between a case, such as that, of an estoppel being sought to be raised to prevent the performance of a statutory duty and one where it is sought to be raised to hinder the exercise of a statutory discretion. After all, in a case of discretion there is a duty under the statute to exercise a free and unhindered discretion. There is a long line of cases to which we have not been specifically referred which lay down that a public authority cannot by contract fetter the exercise of its discretion. Similarly, as it seems to me, an estoppel cannot be raised to prevent or hinder the exercise of the discretion."."

18. The ratio decidendi enunciated by Lord Parker, C.J. in Maritime Electric Co.'s case was followed in “Customs and Excise v. Hebson Ltd."; "Same v. Blaiber & Co. Ltd.” 2 L1oyd's List Law Reports (1953) 382 in which Mr. Justice Pearson said in his judgment at page 396 "An officer having a public duty cannot be deprived of his duties and powers or cannot be prevented by any estoppel from performing those duties and powers which he has a statutory or other public obligation to exercise in the general public interest".

19. Miss Fung also makes reference to an interesting topic in that the Amended Defence raises, not the issue whether or not plaintiff is estopped from exercising its statutory discretion, but the question as to whether plaintiff is estopped from enforcing the payment of the surcharge. It thus seems that defendant has, by its pleading, admits plaintiff's imposition of the surcharge and simply challenges the enforcement of payment thereof. In this regard it is unquestionable that the surcharge in question has come within the definition of tax (S. 72) and it is mandatory upon plaintiff to recover it as a civil debt due to the Crown (S. 75(1)).

20. From the evidence I am of the view that plaintiff had never agreed to hold over the first instalment of the tax of $373,327 under the original assessment of 13/1/86 or in the adjusted assessment of 26/5/86 (Item 5). The fact that he had not abandoned that stance can be found(a) in the last sentence of his letter dated 11/4/86 to defendant which says “The tax should in any event be paid on or before the due date”, (that due date being 17/3/86) and (b) in the letter dated 11/4/86 (Item 2) from defendant's tax presentatives to plaintiff saying

"We refer to your letter dated 3rd April 1986 refusing our application for holding over of the provisional profits tax for the above Year of Assessment and should be much grateful if you would reconsider our application to have the second instalment payment of $129,500 held over since the due date for such payment is on 17th June 1986."

21. In the light of the foregoing I conclude that, by failing to pay on due date the original assessed tax of $473,327, in spite of its objection thereto and by the same token, by its late payment of the adjusted tax of $108,982, which was part of $473,327, defendant was in default in payment of tax within the meaning of S.71(1) and (2). In my judgment plaintiff is charged with the performance of a positive statutory duty to collect tax lawfully payable as and when it falls due and his exercise of discretion to impose a surcharge on late payment by defendant is therefore valid and proper.

22. On the role and limited jurisdiction of the: District Court I am mindful of S.75(4) which lays down:-

"Section 75( 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 but nothing in this subsection shall be construed so as to derogate from the powers conferred by the proviso to proceedings for the penalty specified therein."

23. Although I am alive to the effect of the draconian step underpinning the striking out of the defence, as chorused by counsel, yet I have come to the conclusion, from the above findings, that the Amended Defence discloses no reasonable ground and must be struck out. Judgment will therefore be entered in plaintiff's favour for the amount claimed of $5,449.00.