THE COMISSIONER OF INLAND REVENUE v. EWIG INDUSTRIES CO LTD

DCTC7883/2005

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

TAX CLAIM NO. 7883 OF 2005 

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REASONS FOR DECISION

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1.  This is an application by the Commissioner of Inland Revenue (“the Commissioner”), who is the Plaintiff in this action, to strike out the Defence filed by the Defendant.  In the hearing on 7 December 2006, I allowed the Commissioner’s application and struck out the Defence.  These are my reasons.

2.  In this action, the Commissioner claims against the Defendant for unpaid tax in the amount of $4,535,832.  S. 75 of the Inland Revenue Ordinance, Cap. 112 (“IRO”), allows the Commissioner to recover unpaid tax as a civil debt through the District Court which has unlimited jurisdiction in this regard.  In the Defence filed by the Defendant, it is pleaded, inter alia, that:

(i)    the Defendant was a company incorporated in Hong Kong for the trading of electronics products but it has ceased active trading in or about December 2004;

(ii)    on 14 October 1991, a company known as Universal Manufacturing Co. Ltd. (“UM”) was incorporated in the British Virgin Islands and carried on the business of manufacturing electronics products;

(iii)    UM did not carry on any business in Hong Kong and only operated a factory in the Mainland;

(iv)    as the Defendant and UM were two separate entities, the Commissioner had wrongfully taken into account the profits of UM in assessing the tax liability of the Defendant;

(v)    the income relating to the manufacturing business of UM was offshore in nature and was therefore not liable to be taxed; and

(vi)    the assessments made by the Commissioner, which are raised under s. 61A of the IRO, are erroneous and without reasonable grounds.

3.  The Commissioner took out a summons to strike out the Defence on the ground that it discloses no reasonable cause of action, or it is scandalous, frivolous or vexatious, or it is otherwise an abuse of the process of the court.  The Commissioner also filed a supporting affirmation exhibiting a certificate certifying the amount of the unpaid tax pursuant to s. 75(3) of the IRO.  The said subsection provides that in proceedings for recovery of tax, the production of a certificate signed by the Commissioner stating the name and last known postal address of the defaulter and particulars of the tax due by him shall be sufficient evidence of the amount so due and sufficient authority for the District Court to give judgment for the amount of the unpaid tax.

4.  The Commissioner’s application is based on s. 75(4) of the IRO, which reads,

“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 provisio to section 51(4B)(a) to give judgment for a less sum in the case of proceedings for the penalty specified therein.”

It is the Commissioner’s contention that this provision bars the Defendant from raising the pleaded defence in the present tax recovery action, and the District Court is not the proper forum to decide whether the Defendant’s objections to the tax assessments are valid or not.

5.  The ambit of this provision was discussed in the case of Ng Chun-kwan v The Commissioner of Inland Revenue [1976] HKLR 94.  That was also a tax recovery case commenced in the District Court, and the defence raised was that the assessments made by the Commissioner were nullities, in that there was no lawful foundation for the making of the assessments, and that there were not arrived at by the exercise of the assessor’s judgment and were arbitrary or capricious.  The Full Court held that the defence was in effect a plea that the tax assessed was incorrect, a plea which could not be entertained under s. 75(4).  In reaching the decision, Brigg CJ made a clear and careful distinction between assessment and recovery of tax, as the learned judge said the following in his judgment:

“Section 75 of the [IRO] is quite another matter.  It deals with the recovery of the tax and not with the assessments at all.  The wording of subsection (4) of the section wraps up all the objections which can be made to the assessment.  This is not to say that there is no defence to a claim for tax brought by the Commissioner.  There may be question as to the identity of the tax-payer for example.  As I see it section 75 of the Ordinance confers a limited, in fact very limited, jurisdiction on the District Court rather than limits the jurisdiction of the courts as a whole.

The [IRO] therefore carefully differentiates between assessment and tax.  Objections to the former are dealt with by a Board of Review and the Supreme Court – objections to the tax are dealt with by the District Court.  I do not see how it can be suggested that matters for which an avenue of appeal is provided can be raised by way of a defence in another court.” (at p. 98)

6.  This dicta was adopted by Barker JA in Commissioner of Inland Revenue v Choy Sau-kam [1983] 2 HKTC 10 at p. 16 and by HH Judge Lam, as he then was, in Commissioner of Inland Revenue v. Lau Chi-sing, unreported, DCCJ No. 12121 of 2000 (decision on 26 April 2001).  Hence, if a taxpayer wants to challenge the assessment, he or she can only do so by invoking the appeal procedures in Part XI of the IRO. 

7.  One of the main issues in the tax assessments of the present case is the application of s. 61A of the IRO.  This is a provision which enables the Commissioner, for tax assessment purposes, to disregard any transactions designed to avoid tax liability.  In adopting this provision, the Commissioner took into account the profits of UM in assessing the tax liability of the Defendant, to which the Defendant objects.

8.  This approach has been adopted by the Commissioner in assessing tax liabilities in some other cases.  In the recent decision of Asia Master Ltd. v Commissioner of Inland Revenue, unreported, HCAL No. 114 of 2005 (decision on 30 November 2006), Chu J. held that the Commissioner was entitled to apply s. 61A and to take into account the profits of a company incorporated in the British Virgin Islands in assessing the tax liability of a local limited company.  Mr. Chua, senior counsel for the Defendant, argues that this dicta is not applicable in present case as it was made in the context of a judicial review application.  Further, the authority of the dicta is questionable as there is no legal basis to support the proposition involved.  Mr. Chua also refers me to a number of cases which seek to show that for tax purposes, the trade and business of one company, although they may closely affect those of another, are not the same as the other’s trade and business, and that the profits of two separate and independent entities cannot be equated for tax purposes.  However, under the statutory regime as laid down in the IRO, it is not for me to decide whether such objections are valid or not.  What the Defendant is in substance saying is that the Commissioner has wrongfully invoked s. 61A in assessing its tax liability, and the tax assessments are incorrect.  It is clear that such plea is caught by s. 75(4), and the Defendant cannot rely on it as a defence in the present tax recovery action.

9.  In Ng Chun-kwan, Briggs CJ mentioned that “mistaken identity of the taxpayer” may be a possible defence to a tax recovery action, and Mr. Chua therefore seeks to rely on such dicta to support that the District Court can entertain the plea of the Defendant which, he submits, is a defence of the this nature.  In fact, the scope of this possible defence has been canvassed in the case of Lau Chi-sing.  In that case, tax was imposed of 3 property transactions involving the defendant.  The defence put forward was basically that the defendant was not involved in the transactions, as he either allowed his name to be used for the transaction or that his name was used in the transaction without his consent.  However, HH Judge Lam applied s. 75(4) of the IRO and struck out the defence.  In dealing with the argument on “mistaken identity”, the learned judge said the following:

“In my judgment, the question as to the identity referred to by Briggs CJ is a different question from the one that is being raised by the defendant in this action.  The question as to the identity of the taxpayer mentioned by the Chief Justice was in fact an echo of a concession by counsel for the Commissioner in the case of Ng Chun-kwan at page 99-100.  In that case it was conceded by counsel for the Commissioner that the court may enquire into the identity of the taxpayer to ascertain that the defendant was actually the person who has been assessed.  In other words, what is envisaged by the Chief Justice was a scenario where there were two persons having perhaps the same name and the defendant being sued was not actually the person who was being assessed.  Of course, in that sort of situation the attack is not made against the assessment but rather it is a question of whether the defendant was the person being assessed.” (at para. 12)

10.  In my judgment, there is no real difference between the present case and the one before HH Judge Lam in Lau Chi-sing.  In both cases, there is no issue that the defendant was the taxpayer being assessed, and the challenges are in substance made against the assessments themselves.  In such case, the proper forum for the Defendant to raise the objections is the appeal proceedings as provided for in Part XI of the IRO.  To me, the intention of the legislature and the wordings of s. 75(4) are clear.  For any challenges relating to the assessment of tax, it is in effect a plea that the tax assessment is excessive or incorrect, and this is an objection which should be raised in the appeal proceedings.  On the other hand, in cases where the issue only relates to recovery of tax, for example, whether the defendant being sued is in fact the person being assessed or whether the defendant has received the notice of assessment, the District Court can entertain such pleas and inquires as to the factual matters involved.  It was not intended for the District Court to deal with various principles relating to assessment of tax, and that was the reason why s. 75(4) was worded in such manner.

11.  Based on the aforesaid reasoning, I strike out the Defence and grant judgment in favour of the Commissioner for the amount of unpaid tax as specified in the s. 75(3) certificate.