COMMISSIONER OF INLAND REVENUE v. BOARD OF REVIEW AND ANOTHER

HCAL66/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTITUTIONAL AND ADMINISTRATIVE LAW LIST

NO.66 OF 2003

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REASONS FOR JUDGMENT

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1. This is an application for judicial review by the Commissioner of Inland Revenue against the Inland Revenue's Board of Review's decision to decline to state a case, as requested by the Commissioner, pursuant to section 69(1) of the Inland Revenue Ordinance, following a hearing by the Board in which it, inter alia, ruled that a certain sum of money in the 2nd respondent's tax return was not liable to salaries tax.

2. At the conclusion of the hearing on 7 September 2004, I ruled in the Commissioner's favour, quashed the Board's decisions declining to state a case and directed the Board to state its case as requested. I now give brief reasons.

Background

3. The Board of Review had elected not to be present at the hearing of this judicial review. In its letter to the court it stated that it would simply abide by the court's decision.

4. The taxpayer, however (the 2nd respondent, Mr Lam Chi Kwong) appeared in person and made certain representations. It became clear that his concern was solely related to his liability to pay tax or not on the sum in question and not to the discrete issue before this court, namely whether the Board was correct in its refusal to state a case explaining its decision not to levy tax on the sum in question or not.

5. On that discrete issue the law is uncontroversial. The Commissioner is entitled to a case stated from the Board on questions of law. If, however, the Board's decision is solely a question of fact it is under no duty or obligation to state a case.

6. For the purpose of deciding this issue the only relevant background facts are as follows. The 2nd respondent's employment with his employer was terminated through no fault of his own in 1999. His tax return included the following items :

Severance pay	$736,424
Additional severance pay	$376,200

7. Severance pay, if it properly so described, does not attract salaries tax. At the Board's hearing, the 2nd respondent made a concession concerning the "additional severance pay" which meant that it was liable to salaries tax. What remained in issue was the sum of $736,424. The Board decided that the whole sum was a severance payment and therefore not taxable.

8. The Commissioner's case was briefly this : the sum of $736,424 was made up of two elements. Element A was a sum calculated following the employer's first letter to the 2nd respondent (and many other employees) facing redundancy. Element B was an additional sum following a second such letter which had resulted from negotiations between management and staff about the terms of their redundancy. Element A was $273,687, Element B was $462,737. The Commissioner conceded that Element A was correctly labelled "severance pay" and therefore attracted no tax. Their case at the hearing before the Board was that Element B was not severance pay, in the correct legal sense of the word, and therefore did attract tax. At the judicial review hearing, Mr Johnny Mok, for the Commissioner, took the matter one stage further and submitted, correctly in my view, that Element B could itself be subdivided and apportioned by the Board to reflect the fact (if it be a fact) that it was paid partly as severance pay, in the correct meaning of the expression, and partly as a bonus for remaining an employee of the employer up until the final day and not resigning earlier. The latter portion would be taxable, the former portion would not. (relying on the decision of Tang J in Commissioner of Inland Revenue v. Yung Tse Kwong, HCIA5/2003, 30 July 2004).

9. The second letter from the employer had stated as follows :

"In recognition of your loyalty and support to LTCB, and also as a means to further smoothening our operations for the months to come, I have had a series of conversations with Head Office and it is my pleasure to announce here today that following incentive payments will be added to employees who satisfied our requirements as follows :

1. Special Retention Bonus

Subject to (2) below, in additional to the packages mentioned in our letters dated November 2, 1998 to respective employees, following payments will be added :

a. A sum equivalent to your monthly salary x length of service x 1/3, plus

b.	A further sum equivalent to employer's portion of your Provident Fund (as determined by your number of completed years of service according to Section 4b, Chapter 7C Provident Fund Plan of the Staff Handbook).

2. Conditions/Restrictions

In principle, the above payments applied to all employees of categories 2/2J/3 as classified in the above said letter dated 2/11/98. However, to be eligible to the additional payments, employees must also satisfy LTCB with the following points :

a.	Employees must continue to work for LTCB through the very last day until LTCB takes the initiative to terminate their services.
b.	Employees must continue to perform their duties to our satisfaction up to end of their services. Their performance will be evaluated by respective superiors, which will be taken into consideration when determining one's entitlement of bonus mentioned in (1) above, which may result in reduction of the above payments.
c.	Employees must continue to attend their duties punctually. As a measure to keep this morale, your special payment as determined in (1) above will be deducted by a sum derived from the following formula :
	(S + L÷2) x monthly salary x 1/20
	where S = no. of sick leave & L = no. of lateness, counted from 11/3/1999 until your last date of employment.
d.	This special retention bonus was approved separately by the Head Office taking into account of the unique situation of HK Branch. To ensure its smoothness, no information contained in this letter shall be divulged to unrelated parties including, but not limited to ex-LTCB staff and other overseas branches/subsidiaries of LTCB. Any breaches of that will not only lead to non-payment of the above, but may also affect other benefits they are entitled.
e.	For clarification purpose, LTCB HK Branch will not conduct annual review of the monthly salary and promotion of position due to the current closure situation."

10. The Commissioner complains that in their reasons for its decision that the entire sum of $736,424 constituted severance pay, no reference was made to the contents of this letter and thus no weight was attached to it. Had it been considered and weight been attached to it the Board's decision as to what came within the definition of "severance pay" and what did not may have been different. A "bonus" for remaining at work and performing one's duties satisfactorily would constitute a reward connected with one's work which would fall outside the definition of severance pay and would become liable to tax. The whole sum of $462,737 was, it is pointed out by the Commissioner, called as "Special Retention Bonus".

Letters of Request to state a case

11. On 7 February 2003 the Commissioner wrote to the Board to state a case on the following questions :

"	(1)	Whether, on the facts found by it, the Board was correct in concluding that the entire amount of $736,424 was a severance payment.
	(2)	Whether, as a matter of law, the Board was correct in concluding that the entire amount of $736,424 was not assessable to tax under IRO ss.8 and 9."

12. The Board declined, in short, on the basis that all the Board's decisions have been on questions of fact and the questions put forward were not "proper questions of law".

13. A second letter was sent dated 20 May 2003 which elaborated upon and clarified the questions which was being asked of the Board. It stated :

"	(1)	Whether the Board was entitled to infer that the payment of $462,737 ('Sum A') under the 2nd letter was non-taxable, notwithstanding that the 2nd letter expressly made payment of Sum A conditional on the continued, satisfactory and punctual performance by the employees of LTCB-HK (including the Taxpayer) of their respective duties.
	(2)	Whether there was any sufficient evidence from which the Board could infer that Sum A was : -
		(a)	paid purely by way of compensation for the Taxpayer's redundancy; and,
		(b)	not referable at all to the Taxpayer's continued employment at LTCB-HK.
	(3)	In light of the answers to Questions (1) and (2), whether the Board was correct in law : -
		(a)	to characterise Sum A as a severance payment made by way of compensation for redundancy and not otherwise; and,
		(b)	to conclude that Sum A was not assessable to salaries tax under IRO ss.8 and 9."

14. The Board maintained its refusal to state a case and so the Commissioner instituted these judicial review proceedings.

The law

15. The law on this question can conveniently be set out by reference to an extract from the judgment of Barnett J in Commissioner of Inland Revenue v. Board of Review and Aspiration Land Investment Limited, 2 HKTC 575 at p.595 :

" The final conclusion may be attacked in three principal ways. First, it can be impugned upon the basis that the Board has misdirected itself, for example, upon the burden of proof, or by misinterpretation of a statute. Second, an inference or inferences or the final conclusion may be attacked upon the basis that the primary facts do not admit of an inference drawn from them, or that the primary facts or inferences, or a combination, do not admit of the final conclusion. Third, one or more findings of primary fact may be attacked upon the basis that there was no evidence upon which they could be found. Alternatively, it may be contended that the Board should have made findings of other relevant facts. If the applicant is successful in displacing any of the blocks below the final conclusion or is successful in inserting additional blocks of fact, the structure may be so distorted that the final conclusion must topple and will be set aside by the court."

16. It is contended by the Commission that the first and second grounds, above, apply in the present case.

17. Barnett J continued :

" After reviewing the authorities and carefully considering the arguments which have been addressed to me, I am satisfied of the following matters:-

1.	An applicant for a Case Stated must identify a question of law which it is proper for the High Court to consider.
2.	The Board of Review is under a statutory duty to state a case in respect of that question of law.
3.	The Board has a power to scrutinize the question of law to ensure that it is one which it is proper for the court to consider.
4.	If the Board is of the view that the point of law is not proper, it may decline to state a case.
5.	..."

18. The only question to be answered therefore is - do the applicant's two letters of 7 February and 20 May 2004 contain proper questions of law? Common sense dictates that the two letters should be taken and read together as a single request. The second one merely enlarging on the first one. There is nothing new in the second one.

19. In my judgment they plainly raise a proper question of law. Even if, as suggested in the Board's written reasons for its decision, the Board was only asked to decide questions of fact, that does not preclude a question of law arising. Put simply, whether or not the $462,737 has been correctly labelled "severance pay" (as a matter of law), is a proper question of law. A parallel question is whether the employer's label of "Special Retention Bonus" accurately reflects the legal status of the sum as well. The Commissioner is entitle to know on what legal basis the sum was categorized as "severance pay" before deciding whether to appeal the ruling.

20. For the above reasons the judicial review was granted in the terms of the Notice of Application under RHC Order 53, rule 3. I also heard the parties on costs. I decided it was not appropriate to award costs against the 1st respondent as it had agreed to abide by the court's decision and had not attended. I also decided it was not appropriate to award costs against the 2nd respondent who had appeared in person but who was in reality concerned with his liability to tax rather than the issue before the court. I ordered no order as to costs.