KINCO INVESTMENT HOLDING LTD v. COMMISSIONER OF INLAND REVENUE

HCAL91/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTITUTIONAL AND ADMINISTRATIVE LAW LIST

NO. 91 OF 2009

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J U D G M E N T

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Introduction

1.  In this judicial review, Kinco challenged two decisions of the Assistant Commissioner.  The first is dated 5 June 2009 whereby the Assistant Commissioner ordered that the tax of HK$12,452,888 raised on it by way of additional assessment be held over on the condition that an equal amount of Tax Reserve Certificates (“TRC”) be purchased by 19 June 2009 (“the 1^st Decision”).  The second decision is dated 30 June 2009 by which the Assistant Commissioner refused to reconsider holding over the tax in full unconditionally (“the 2^nd Decision”).

2.  Kinco sought an order of certiorari to quash the 1^st Decision; an order of mandamus directing the Commissioner to hold over unconditionally in full the tax of HK$12,452,888 pursuant to section 71(2) of the Inland Revenue Ordinance (Cap.112) (“IRO”) pending the final determination of the objection or appeal against the additional assessment; and an order directing that any recovery action of the tax arising from Kinco’s default in paying the same be stayed pending final determination of the objection or appeal against the additional assessment.

3.  The background leading to this application may be summarized as follows.

Background

4.  Incorporated in the BVI on 9 May 2001, Kinco is one of the companies of the Yu Ming Group.  According to its property tax return filed for 2005/06, Kinco’s principal business activities were property investment and letting.

5.  By a provisional sale and purchase agreement dated 6 May 2003, Kinco purchased the whole block of Workingston Centre at No.112 Chun Yeung Street, North Point, (“the Building”) for HK$26 million.  Completion of the sale took place on 15 October 2003.  Kinco then took steps to convert the Building into a guesthouse, which later started operation in April 2004 under the name “112 Apartments”.

6.  It is Kinco’s case that when the Building was acquired, the original intention was to operate it as a guesthouse as a long term investment to generate rental income. However, the Building was plagued with problems arising from the poor workmanship of the decorators which resulted in frequent water leakage and defects in the furniture and fixtures, wrong equipment in particular the air-conditioning system and pest.  In April 2005, its directors decided to sell the Building and start all over again by acquiring and converting another building into a guesthouse.  In June 2005, Kinco sold the Building to a third party for HK$110 million.  The sale was completed on 9 September 2005.

7.  Kinco made a profit of some HK$73 million from the sale of the Building.  It regarded the profit as a capital gain and did not offer it for assessment when submitting its profits tax return for 2005/06 on 28 April 2006.

8.  However, after enquiries, the assessor formed the view that the Building was acquired for trading purposes and the profit arising from its disposal was revenue in nature and thus chargeable to profit tax.  On 27 April 2009, the assessor issued an additional assessment against Kinco for HK$12,452,888 as additional profit tax.

9.  By letter dated 25 May 2009, Kinco objected to the additional assessment on the ground that the gain on the sale of the Building was capital in nature.  It also requested that “the tax charged under the additional assessment [be] fully and unconditionally held over pending settlement of the objection.”

10.  On 5 June 2009, the Assistant Commissioner, pursuant to section 71(2) of IRO, ordered that the tax of HK$12,452,888 be held over on the condition that Kinco should purchase an equal amount of TRC by 19 June 2009.

11.  At Kinco’s request, a meeting of its representatives and the assessor and the senior assessor took place on 17 June 2009.  At that meeting, Kinco’s representatives indicated that Kinco had no liquid cash and could not obtain credit line from its banks.  They repeated the request for an unconditional holding over.  The assessor responded that the 1^st Decision was made in accordance with the policy of the Inland Revenue Department as set out in its Departmental Interpretation and Practice Notes No.6 (“DIPN 6”).  The senior assessor suggested that Kinco could apply for payment by installments but surcharge would have to be imposed.  The assessor then indicated that Kinco could provide banker’s undertakings for their consideration.

12.  Taking up the last suggestion, Kinco’s solicitors wrote to the IRD on 18 June 2009 advising them that Kinco would like to consider the option of obtaining a bank guarantee and requesting for a draft form of such bank guarantee, which was provided on the following day.  However, the solicitors informed the IRD on 26 June 2009 that Kinco considered obtaining a bank guarantee in lieu of purchase of the TRC not viable.  The IRD reiterated in a letter dated 30 June 2009 that the conditional stand-over granted to Kinco upon the purchase of an equal amount of TRC was made in accordance with DIPN 6 and that Kinco’s request for granting an unconditional holdover of payment of tax could not be acceded to. The IRD further extended the time for purchasing the TRC to 3 July 2009, failing which no part of the tax would be held over and Kinco would be required to pay the tax of the charge immediately.  In the end, Kinco did not purchase any TRC.

13.  On 10 August 2009, Kinco applied for leave to commence the present application for judicial review.

14.  While the leave application was still pending, the IRD by a late payment surcharge notice dated 12 August 2009 informed Kinco that the total tax payable was in default and was immediately payable.  IRD also imposed a surcharge of 5% on the total outstanding tax and demanded payment within 10 days.

15.  On 1 September 2009, I granted Kinco leave to apply for judicial review.

16.  On 24 February 2010, the Commissioner confirmed the additional assessment. By letter dated 15 March 2010, Kinco’s solicitors lodged an appeal to the Board of Review against the Commissioner’s determination.  The appeal is yet to be set down for hearing.

The discretion for ordering a holdover

17.  At the crux of Kinco’s complaints lies the Commissioner’s discretion for ordering a holdover of payment of tax.  It is therefore useful, I believe, to preface the discussion on the grounds for judicial review by setting out the relevant statutory framework in IRO and the policy adopted by the Commissioner governing the exercise of that discretion.

18.  A taxpayer who is aggrieved by an assessment may raise objection in writing within one month after the date of the notice of assessment.  Upon receipt of a valid objection, the Commissioner shall consider the objection and issue a determination to confirm, reduce, increase or annul the assessment : section 64.  If the taxpayer fails in his objection before the Commissioner, he may appeal to the Board of Review : section 66.

19.  However, notwithstanding any notice of objection or appeal, the tax in question shall be paid unless the Commissioner orders that payment be held over pending the result of such objection or appeal : section 71(2).  Then significantly, the proviso to section 71(2) gives the Commissioner the power to impose condition when ordering a holdover thus :

“Provided that where the Commissioner so orders he may do so conditionally upon the person who or on whose behalf the objection or appeal is made providing security for the payment of the amount of tax or any part thereof the payment of which is held over either –

(a) by purchasing a [TRC]; or

(b) by furnishing a banker’s undertaking,

as the Commissioner may require.”

20.  The discretion conferred upon the Commissioner in deciding whether and if so on what basis to hold over tax is a wide one indeed.  Clearly with a view to promoting consistency, efficiency and transparency, which are all consistent with the public expectation for good governance, the IRD formulated a policy for the granting of stand-over to guide the exercise and implementation of the wide discretion. The policy was first published at the same time when the proviso was enacted on 30 March 1985 by amending the then DIPN 6.  It has since been applied up to date.

21.  The policy is now to be found in paras.8 to 15 of the current edition of DIPN 6.  For present purposes, para.9 is pertinent.  It reads :

“9. The policy with regard to the issue of stand-over orders is as follows :

(a) Unconditional stand-over – Where, upon receipt of a valid objection and request for holdover, it is immediately apparent to an Assistant Commissioner, or other officer authorized by the Commissioner, that the objection should be allowed forthwith an unconditional stand-over will be ordered pending revision of the assessment. However, interest will be payable if any tax so held-over is finally found payable [see paragraph 14 below].

(b) No stand-over – Where, upon receipt of a valid objection and request for holdover, it is the opinion of an Assistant Commissioner, or other officer authorized by the Commissioner, that the objection has little chance of success, no stand-over will be ordered and the tax will be payable on the due date(s) contained in the notice of assessment.

(c) Purchase of tax reserve certificates – Where, upon receipt of a valid objection and request for holdover, it is the opinion of an Assistant Commissioner or other officer authorized by the Commissioner that the objection has some merit but that the balance of probability, based on the facts known to exist at the date of the objection, does not weigh definitely in favour of the taxpayer, a stand-over will be ordered conditional upon the purchase of tax reserve certificates in the amount of the tax stood-over. It is emphasized that, in the generality of cases falling into this category, the purchase of certificates will be required.

(d) Banker’s undertakings – Consideration will, however, be given to applications received offering to provide a bank undertaking in lieu of the purchase of certificates, where it can be established to the satisfaction of the authorized officer that the purchase of tax reserve certificates would cause undue hardship to the taxpayer, having regard to his present financial resources. It is not possible to lay down hard and fast guidelines and it will be for the taxpayer who is seeking the alternative of a bank undertaking to demonstrate his inability to purchase certificates. Similar to unconditional stand-over, interest will be payable if any tax covered by a bank undertaking is finally found payable [see paragraph 14 below].

(e)   Section 59(3) assessments – Valid objections (i.e. validated by the submission of a full and proper return) against estimated assessments issued pursuant to section 59(3) will be dealt with on their respective merits.  In cases where a reduction of the assessment to the quantum of returned profits is envisaged, an unconditional stand-over will normally be ordered.  In cases where an Assistant Commissioner or other officer authorized by the Commissioner is of opinion that an adjustment to the returned profits is appropriate, the tax on the difference between the estimated assessment and the returned profits so adjusted will normally be stood-over unconditionally, whilst a purchase of tax reserve certificates in respect of tax on the adjustment will normally be required.  The decision whether or not to hold over the tax in these cases will be made having regard to the principles enunciated in sub-paragraphs (a) to (d) above.”

22.  It has been judicially observed that DIPN 6 sets out sensible criteria upon which the Commissioner can act in determining whether, and on what basis, to hold over tax in dispute in objection cases : see Nam Tai Trading Co. Ltd v CIR [2006] 4 HKLRD 51, per Rogers VP at para.5, p.54F.

23.  I now turn to examine the grounds of judicial review.

Abuse of discretion

24.  In the re-amended statement contained Form 86, Kinco alleged that the policy in para.9 of DIPN 6 is “wrong in law, oppressive, unreasonable and unfair” because it does not allow unconditional holdover where a taxpayer has substantial merit although it is not immediately apparent that it can be allowed forthwith.  It amounts to an abuse of process of the discretion granted by section 71(2) if the Commissioner adheres to the policy.  Kinco, who has a very meritorious case, has to borrow money to purchase the TRC which attract a very low interest and will be out of pocket for the higher interest on the money borrowed from the bank and cannot be compensated by the interest on the TRC.  The conditional holdover order is therefore an abuse of discretion, oppressive and unreasonable.

25.  Upon a closer analysis, Kinco’s contention is based on (a) a direct attack against the legality of the policy and (b) the assertion that it has a very meritorious objection.  Neither of them is sustainable.

26.  The direct attack on the legality of the policy files in the face of Rogers VP’s observation.  I can see no basis for such attack at all.  If an objection is substantially meritorious, then it should be immediately apparent that it can be allowed forthwith.  To suggest otherwise, as Kinco did, is inherently illogical.

27.  The assertion that its objection is very meritorious cannot be entertained.  For in a judicial review, the court plays a limited supervisory role.  It will not deal with the merits of its objection or appeal : Re Chia Tai Conti-Hong Kong Ltd [2006] 2 HKLRD 449, per Yam J at para.25, p454A-E; Kam Kiu (Hong Kong) Ltd v CIR, HCAL61/2009, unreported, per Reyes J at para.8.

28.  Faced with these insurmountable hurdles, Ms Chow, counsel for Kinco, who was not responsible for drafting the statement in Form 86, understandably made no submission to support Kinco’s contentions there.  Instead, she argued that the 1^st and 2^nd Decisions amounted to an abuse of the discretion conferred under section 71(2) of IRO because the Assistant Commissioner had rigidly followed the policy and had failed to consider the financial circumstances of and hardship suffered by Kinco in deciding whether to grant an unconditional holdover.

29.  Ms Chow’s submission is a new ground of challenge for which no leave has been granted. But she did not make any application to amend the statement in Form 86 to include this new ground.  She said it was not new because it was already covered by in the statement.  I disagree.  On a proper reading of the relevant paragraphs of the statement (paras.36 to 47), I can see no attack based on the alleged rigid application of the policy as now contended by her. That being the case, it is not open to Kinco to pursue this new ground : see Order 53, rule 6(1) of the Rules of the High Court.

30.  In any event, this complaint of rigid application of the policy is factually not supportable.

31.  It is trite that the lawfulness of a public authority’s decision can only be judged according to the facts known or available to the public authority at the time.  It cannot be judged by reference to information which only came into being or became available at some time thereafter : Interasia Bag Manufacturers Ltd v CIR [2004] 3 HKLRD 881, per Hartmann J (as he then was) at para.71, 897H-I; Kam Kiu, supra, per Reyes J at para.18.

32.  Here, when Kinco first requested an unconditional holdover by its letter dated 25 May 2009, it provided no information of its financial situation other than asserting that it had become on the industry leaders “with apartments valued over HK$800,000,000”.  In other words, it had placed no financial information before the Assistant Commissioner indicating that it might have financial difficulty in purchasing the TRC or would suffer hardship if it were to do so.  It cannot possibly complain now that when the Assistant Commissioner made the 1^st Decision, he had failed to consider those matters.

33.  It was only at the meeting on 17 June 2009 when Kinco first informed the IRD of its alleged financial difficulty.  To recap, Kinco’s representatives said that the company did not have liquid cash or cash reserve; that it was tied up by advances to associated companies, that due to the recent financial crisis, it could not obtain credit line from the banks; and that requiring it to purchase the TRC would create hardship to the company.  The senior assessor responded by saying that they understood the impact of the financial tsunami on the business sector but the IRD had to follow the policy on holdover.  She also suggested that Kinco could consider applying for installment payments.

34.  As already alluded to, Kinco wrote to the IRD on 18 June 2009 on the option of obtaining a bank guarantee.  They then went on to state :

“Concerning your request for our client’s updated bank statements, we are instructed that our client did maintain two bank accounts with the Bank of East Asia Limited and Wing Hang Bank Limited before, but they were all closed in 2004 and 2006 respectively. Furthermore, our client has become an inactive company since year 2006 (please refer to Note 1 on page 7 of the enclosed Audited Account of our client). As such, our client cannot provide updated bank statements for your perusal.”

According to this paragraph, the IRD did ask for further information on Kinco’s latest financial situation.  So quite contrary to Kinco’s contention, the IRD had not shut its eyes to its alleged financial difficulty.  But it wanted more information from Kinco in support, which its solicitors had provided.

35.  After Kinco had decided not to give a bank guarantee, the IRD responded in its letter dated 30 June 2009, in which the assessor stated :

“ Your client has alleged of having financial difficulties and has in your letter of 18 June 2009 offered to provide a banker’s undertakings in lieu of purchase of the TRC. Nevertheless, you informed in your letter of 26 June 2009 that your client considered it was not viable to provide a banker’s undertaking in lieu of purchase of TRC. In this regards, your client is required to purchase the amount of TRC according to the notice issued to it on 5 June 2009 (‘the notice’).

In light of the particular circumstances of the case, the Department has extended the time for purchasing the TRC as stated in the notice to 3 July 2009. In the event that no TRC was purchased by the extended time allowed, no part of the tax would be held over and your client is required to pay the tax of the captioned charge immediately.

If your client has financial difficulties in settling the tax, it may contact our officers at the Collection office for applying for payment of tax by instalments. Please note payment of tax by instalments will invariably include an element of surcharge.” (Emphasis supplied)

36.  Properly understood in context, what the assessor wrote clearly shows that the IRD must have duly considered Kinco’s circumstances, including the alleged financial difficulty with the further information provided by its solicitors on 18 June 2009 but had decided not to retract from the 1^st Decision and would only extend the time for purchasing the TRC to 3 July 2009.  The allegation that the Assistant Commissioner had not considered Kinco’s financial circumstances before he made the 2^nd Decision must accordingly fail.

37.  I turn to the other grounds of challenge.

Procedural unfairness and other related grounds

38.  In Form 86, Kinco relied on procedural unfairness and other related grounds.  Ms Chow has helpfully summarized them thus.  The 1^st and 2^nd Decisions were so unfair as to amount to an abuse of power and/or was Wednesbury unreasonable, in circumstances where the Commissioner refused/failed to consider Kinco’s financial situation (procedural unfairness) and where there was a real chance that Kinco’s objection to the additional assessment would succeed, Kinco would suffer an irrecoverable loss from the shortfall in interest in the purchase of the TRC or in bank charges by furnishing a bank guarantee to the IRD.  On the other hand, the IRD suffers no loss if the additional assessment was held over unconditionally as it was entitled to interest at judgment rate (substantial unfairness/oppressive) if Kinco’s objection failed.

39.  Ms Chow submissions boiled down to three main points.

40.  First, there was procedural unfairness when the Commissioner had failed to consider Kinco’s financial circumstances.  I have already rejected Kinco’s case based on the alleged failure to consider its financial circumstances.  No procedural unfairness can possibly arise.

41.  Second, Kinco has a real chance of success in its objection.  This is of course premised on the assumption that Kinco has a substantially meritorious case.  But as I have said, the court will not deal with the merits of its objection here.

42.  Third, there was substantial unfairness when Kinco would suffer irrecoverable loss on interest and the IRD would suffer no real prejudice.  In other words, the Commissioner ought to have balanced the parties’ convenience in deciding whether and on what terms a holdover should be granted.  But this approach has already been roundly rejected by the courts : Re Chia Tai Conti-Hong Kong Ltd, supra, per Yam J at para.35, p.456C-D, Kam Kiu, supra, per Reyes J at paras.31 and 32.

43.  All the other grounds for judicial review must fail.

Conclusion

44.  For the above reasons, I dismiss Kinco's application for judicial review.

45.  Costs should follow the event.  I accordingly order Kinco to pay the Commissioner the costs of the application including all costs reserved, to be taxed if not agreed.