DODGE KNITTING CO LTD AND ANOTHER v. COMMISSIONER OF INLAND REVENUE

Inland Revenue Appeal No. 8 of 1988

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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J U D G M E N T

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1. Those who profit from this territory beyond a set margin are, by law, to make a contribution in tax. Every person chargeable to tax for any tax year must disclose that fact to the Commissioner of Inland Revenue. He must do so in writing within four months after the end of the tax year unless he has been, in the meantime, asked by the Commissioner to deliver a tax return. These legal obligations are embodied in section 51(1) and section 51(2) of the Inland Revenue Ordinance. The relevant part of these subsections are set out below :

"51.(1) An assessor may give notice in writing to any person requiring him within a reasonable time stated in such notice to furnish any return ......"

"51.(2) Every person chargeable to tax for any year of assessment shall inform the Commissioner in writing that he is so chargeable not later than four months after the end of the basic period for that year of assessment unless he has already been required to furnish a return under the provisions of subsection (1)."

2. When a person chargeable under the Inland Revenue Ordinance has furnished a return as requested, an assessment of tax liability is made under section 59(2). If no return is furnished, an assessment of a potential tax-payer may be estimated under section 59(3). In fact, after the expiration of his notice for a return, the assessor is required by section 59(1) to proceed forthwith to assess. Whatever the circumstances and at any time, a potential tax-payer may be assessed for tax if ''it is expedient''. See proviso to section 59(1).

3. Any failure, without reasonable excuse, to furnish a return as required by the assessor's notice under section 51(1) or to notify the Commissioner of the potential tax-payer's chargeability to tax under section 51(2) may lead to the levy of additional tax by way of penalty. Such a penalty may not be exacted from the tax-payer unless he has not been prosecuted for the same failure under other provisions elsewhere in the Inland Revenue Ordinance. The maximum penalty shall not exceed treble ''the amount of tax which has been undercharged in consequence of the failure to comply with the notice under section 51(1) or a failure to comply with section 51(2), or which would have been undercharged if such failure had not been detected." That, in effect, is section 82A(1)(ii).

4. Both appellant companies have been so penalised under section 82A(1)(ii) by the Commissioner. Their appeals to the Board of Review were dismissed. This is an appeal by way of a case stated under section 69 of the Ordinance.

5. The facts found are not disputed : The 1st appellant failed, without reasonable excuse, to deliver a return as required of him under section 51(1) for 1983/84 and 1984/85. The 1st appellant further failed, without reasonable excuse, to notify the Commissioner of his chargeability to tax under section 51(2) for 1977/78, 1978/79, 1979/80, 1980/81 and 1981/82. The 2nd appellant failed, without reasonable excuse, to deliver a return as required of him by section 51(1) for 1983/84. The 2nd appellant further failed, without reasonable excuse, to notify the Commissioner of his chargeability to tax under section 51(2) for 1978/79, 1979/80, 1980/81 and 1981/82.

6. The penalty imposed on these appellants by way of additional tax is not challenged in quantum. The core issue is whether section 82A(1)(ii) applies to these appellants.

7. In the case, two questions are stated for the opinion of this court. The scope of the substantive question (i) is unduly narrow because of its link to time bar. These questions are :

"(i) Whether the 2nd limb of sub-paragraph (ii) of s. 82A(1) of the Inland Revenue Ordinance Cap. 112 only applies to situations where the failure to comply with s. 51(1) and (2) were only detected after the expiration of the limitation period under s.60 of the Ordinance?"

"(ii) Whether the issuance of a Profits Tax Return excuses a taxpayer from complying with the requirement of s.51(2) of the Ordinance?''

8. As for the year of assessment 1982/83, the 1st appellant was penalised under section 82A for $29,900 by way of additional tax. The Board of Review made no finding of any default on the part of the 1st appellant in respect to that year of assessment. For 1982/83, a Profits Tax Return had been issued by the assessor. A notice under section 51(1) clearly relieved the 1st appellant of its statutory duty under section 51(2) to notify the Commissioner of its chargeability to tax. The Board of Review found no such failure. It is common ground that the second question posed for my consideration should be answered in the affirmative and that the decision of the Board of Review should be accordingly rectified by lifting the sum of $29,900 for 1982/83. However, the decision of the Board of Review, cannot be said to be truly erroneous except in its computation of the 1st appellant's total assessed additional tax, which is out of tune with its own findings of fact.

9. The additional tax assessed for 1982/83 under section 82A against the 1st appellant in the sum of $29,900 be, therefore, annuled and the total liability in additional tax of the 1st appellant is consequently revised by the reduction of $29,900.

10. I pass then to consider question (i) which envisages the recovery of tax penalty after the right accrued from non-compliances with section 51(1) or section 51(2) is statute-barred. That the statutory limitation so rigidly pronounced in the all-embracing section 60 could be inferentially enlarged by section 82A(1)(ii) is not a concept one can readily accept. Question (i) should not be resolved favourably to the appellants without any clear necessity for an oblique extension of the time bar. No sufficient grounds were shown to justify that interpretation. Question (i) calls for an answer in the negative.

11. However, in deference to the endeavours of counsel for the appellants, I shall proceed to deal with his submissions and with what I regard as the true purport of section 82A(1)(ii). A subsidiary aim is to examine the case so as to ascertain whether any useful purpose may be served by focusing on the construction of sub-paragraph (ii) with a suitably refined question (i).

12. Counsel provided an exhaustive list of four situations to which section 82A(1)(ii) could apply. They are, as edited, the following :

A. has been undercharged in consequence of a detected failure to furnish a return as requested by an assessor's notice under section 51(1);

B.    has been undercharged in consequence of a detected failure to notify the Commissioner of his chargeability to tax under section 51(2);

C.     would have been undercharged if such failure to furnish a return under section 51(1) had not been detected;

D.     would have been undercharged if such failure to notify by a potential tax-payer of his chargeability to tax under section 51(2) had not been detected.

13. A failure to deliver a return or a failure to notify of a potential tax-payer's chargeability to tax is not the reason or cause for making an assessment. The assessor proceeds to assess as required by law, but he does not act as result of such failure which merely sets the law in motion. However, when an assessment is made, the amount of tax payable would instantly produce a resultant shortfall when compared with the nil return implicit from such failure. Put another way : the consequence of pitting the assessed amount of tax payable against the nil return implicity given rise to by such failure is that tax has been undercharged. Hence, the resultant undercharge is in consequence of the failure. If the failure was, for any reason, not detected, nevertheless the potential tax-payer would not be expected to be free from any penalty; in that event, justice dictates that the undetected failure should also bring about the same maximum additional tax equivalent to treble the amount of tax which would have been undercharged if the failure had been detected. This logical sequence would seem to be reflected in A and C or B and D in the analysis of Mr Chain, counsel for the appellants. I should hasten to add that Mr Chain's contended construction of sub-paragraph (ii) is in stark contrast with this common sense approach to policing a potential tax-payer's activities, whether or not his non-compliance was known at the time of the making of an assessment.

14. The nil return arising, by necessary implication, from such a failure would throughout be in subsistence, detected or undetected. In the case of non-detection, upon discovery the object of the exercise is to pit the assessed amount against the nil return implicit from the failure. The difference represents what would have been undercharged, viewed at the time when the assessment was originally attempted, as if the assessor had been aware of the contravention.

15. Mr Chain advanced the following submissions : under situation A in his analysis, when the potential tax-payer fails to deliver a return as required by the assessor's notice served under section 51(1), the assessor would be enjoined by section 59(1) to process to assess him for tax after the expiration of the time prescribed by the notice. The assessment will be by way of an estimate under section 59(3). If (which Mr Chain did not concede) a failure to deliver a return could be taken as having the effect of making a nil return, the nil return so implicit in such a failure (and therefore the failure itself) would provide the casual link for the result that tax has been undercharged to the full extent of the estimated amount. But Mr Chain argued that no part of such an amount estimated under section 59(3) could be treated as a shortfall unless the estimated tax had become irrecoverable. Tax must be paid and if it is not, it is invariably claimable. Consequently, so counsel elaborated, no shortfall or undercharge in tax liability could, in theory, arise so long as the amount remains enforceable. Mr Chain submitted that as a general rule, an assessment, however made, would only become tax undercharged when it was statute-barred. Evidently, in the first place counsel seemed to have drawn little distinction between tax liability and computation of tax penalty on the somewhat artifical basis of an undercharge calculated on an inferred nil return. What should also be remembered is that it is not the failure to deliver a return, which causes the loss of unpaid tax. A tax claim is irrecoverable as a consequence of the time bar. Hence, even in Mr Chain's contended meaning of an undercharge, unenforceability cannot be in consequence of a failure to comply with a notice under section 51(1) or to comply with section 51(2). The fundamental error lies in arbitrarily fusing the concepts of recoverability and consequential undercharge. Moreover, tax would not fall to be statute-barred unless the Commissioner has been dilatory. Why then should a tax-payer be punished for the neglect of the Commissioner up to three times his tax liability in the form of an uncharge, which is said to leap into being after time bar?

16. As for situation C in Mr Chain's analysis, Counsel contended that it was non-existent. Counsel's logic is that as the assessor must make an assessment under section 59(1) "as soon as may be after the expiration of the time limited by the notice requiring [the potential tax-payer] to furnish a return under section 51(1)", with his notice and statutory duty to assess, in no case could an assessor have failed to detect a non-compliance. Thus, counsel concluded that the situation in C could not be a reality. Mr Chain seemed to have overlooked the proviso to section 59(l) which enpowers an assessor to make an assessment at any time for any reason expedient. The second limb in sub paragraph (ii) is not concerned with what the assessor should have known or could not have been unaware of. It devices a formula for reaching the same penalty target for such non-compliance, calculated on what would have been the tax undercharged if, for any reason, failure had not been detected.

17. Mr Chain further submitted that if an assessor had been unable to detect any failure in section 51(1), he would have been under no statutory compulsion to assess under section 59(3) because of his unawareness; hence no estimate would have been made and no undercharge could have resulted. I hardly need to repeat that no proper regard seemed to have been paid to the proviso to section 59(1) whereby the assessor may, at any time, for any expedient reason proceed to assess.

18. Mr Chain, therefore, urged this Court to wholly ignore situation C.

19. As for situation B, Mr Chain maintained his stance that the potential tax-payer's failure to notify the Commissioner of his chargeability to tax could not be taken as, in effect, the making of a nil return. Furthermore, Counsel pressed upon me that whilst assessment of tax might follow more closely upon a delivery of a return or failure to do so, there was no law requiring an assessment to be made for failure to notify the Commissioner of the potential tax-payer's chargeability to tax. Counsel concluded that as such failure would not cause tax to be assessed, there could be no undercharge in consequence of it and that situation B was also not, therefore, a reality. The power of an assessor to make an assessment at any time for any reason expedient in the proviso to section 59(1) was again overlooked.

20. Counsel was prepared to acknowledge only situation D which would not be activated until, for the same parity of reasoning, the expiration of the 6 years' limitation period.

21. Thus, only two situations were recognised by Mr Chain as real. They are A & D. Counsel maintained that both situations would only become operative after the expiration of the statutory period.

22. I need not take the above criticisms to their ultimate. Enough has been said in passing to demonstrate the fallacies in all Mr Chain's contentions. Mr Hinchen is perfectly right that it would be unprofitable to continue with the debate.

23. Section 82A(1)(ii) reads :

''Any person who without reasonable excuse shall, if no prosecution ...... has been instituted in respect of the same facts, be liable to be assessed under this section to additional tax of an amount not exceeding treble the amount of tax which has been undercharged in consequence of the failure to comply with a notice under section 51(1) or a failure to comply with section 51(2), or which would have been undercharged if such failure had not been detected."

 

24. Section 82A(1)(ii) has 2 limbs. The former deals with a factual undercharge when a failure under section 51(1) or section 51(2) is detected and the latter deals with what would have been undercharged when a failure was left undetected. Mr Chain's contentions would involve the introduction of time bar to the first limb in section 51(1) and the second limb in section 51(2). These limbs would otherwise be dormant. Counsel's submitted construction would have the effect of extending the limitation period in section 60 via a most tortuous route. If it had been the intention of the Legislature so to enlarge the limitation period, that object could have been easily achieved in plain language and in the same section. The suggested interpretation would lead to a tax-payer being heavily penalised for the Commissioner's neglect. Such interpretation would also lead to the second limb in section 51(1) and the first limb in section 51(2) being treated as wholly superfluous. It would further involve unwarranted cross-fertilization of basic concepts.

25. Section 82A(1)(ii) is, as Mr Hinchen submitted, reasonably free from ambiguity. The phrase "if such failure had not been detected" could perhaps suffer from some syntactic imperfection. A de-emphasis of that phrase, in particular the word "not", may not be undesirable. On the supposition that the ''failure had not been detected", what was arguably to follow could only have been a total void incapable of providing a basis for assessment to reflect an undercharge. But the intention of the sub-paragraph is unobscure and its meaning is clear.

26. Sub-paragraph (i) of S. 82A(1) is divided into two limbs : the first for an actual undercharge upon the acceptance of an incorrect return, etc. and the second for a hypothetical undercharge upon the rejection of an incorrect return, etc. The second limb deals with an inferred figure, in the sense of what would have been undercharged if the return, etc. was, in fact, not accepted. The two limbs are mutually exclusively - one caters for the situation when the incorrect return was accepted and the other for the situation when it is rejected. The quantum of undercharge is expected to remain constant for both the actual situation and hypothetical situation.

27. Sub-paragraph (ii) follows the same legislative pattern. The criterion here is detection as opposed to non-detection. The sub-paragraph divides also into two limbs : the first deals with an actual undercharge in the case of a detected failure under section 51(1) or section 51(2); the second limb deals with a hypothetical undercharge if such failure ''had not been detected'' in a case where failure was in fact detected. The two limbs are again mutually exclusive for the diagonally opposite occurrences but devised to provide the same sanction for both eventualities.

28. The first limb of sub-paragraph (ii) will present little difficulty. A failure to deliver a return in compliance with the notice under 51(1) or a failure to notify the Commissioner of a potential tax-payer's chargeability to tax under section 51(2) would have, I agree with the Board of Review, the effect of the making of a nil return in principle and on fact. It is an irresistible factual inference and sound in taxation principle. Any assessment made by the assessor subsequent to such a failure would have the consequence that tax has been undercharged.

29. As for the second limb in sub-paragraph (ii), I have, produced below two versions of the second limb in sub-paragraph (i) and two versions in sub-paragraph (ii) for comparison. The first version adheres to the text of the second limb with annotations and the second version with amendments to assimulate the same sentence construction as in the other sub-paragraph.

"s. 82A(1)(i), 2nd limb :

Version 1 :

''the amount of tax which has been undercharged in consequence of such [an accepted] incorrect return .........., or [in the case of a rejected incorrect return] would have been so undercharged if the return ....... had been accepted''

Version 2 :

"the amount of tax which has been undercharged in consequence of such [an accepted] incorrect return .........., or [which] would have been undercharged if the return ....... had [not] been accented [in a case where it was in fact accepted];

S. 82A(1)(ii), 2nd limb :

Version 1 :

''the amount of tax which has been undercharged in consequence of the [detected] failure to comply ........, or which would have been undercharge if such failure had not been detected [in a case where it was in fact detected];

Version 2 :

"the amount of tax which has been undercharged in consequence of the [detected] failure to comply ..........., or would have been [so] undercharged if such failure had been detected''

30. Save for a minor syntax problem in the second limb of sub-paragraph (ii), the intention of the Legislature cries out for the meaning I have assigned to it. The four versions attempted will hopefully dispel any residual anxiety. Whilst limb one deals with an actual undercharge, limb two deals with an hypothetical undercharge - a hypothetical situation in a case where the failure was in fact detected - thus enabling the same penalty to he computed on a hypothetical sum of what would have been undercharged if such failure had not been detected. This is the view taken by the Board of Review, though differently expressed.

31. The remaining substantive question (i) posed for my opinion in the case stated is, therefore, answered in the negative. For the discussions I have embarked upon, there seems to be no warrant for the case to be remitted back to the Board of Review for a more comprehensive question to be framed. In the circumstances, apart from what is virtually a matter under the slip rule, the decision of the Board of Review is confirmed.

32. The appellants' appeal is therefore dismissed with costs to the respondent.