DR. THE HONOURABLE LEUNG KA-LAU v. THE COMMISSIONER OF INLAND REVENUE

CACV 278/2021

[2023] HKCA 232

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 278 OF 2021

(ON APPEAL FROM HCIA NO 3 OF 2020)

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J U D G M E N T

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Hon Kwan VP:

1.  This is an appeal by the Commissioner of Inland Revenue (“CIR”) against the judgment of A Chan J on 27 April 2021 (“HCIA Judgment”)[1], in which the judge granted leave to appeal to the taxpayer (“Taxpayer”) against the decision of the Board of Review on 24 June 2020 (“Decision”)[2] and allowed the Taxpayer’s appeal. By the Decision, the Board upheld the determination of the Deputy Commissioner of Inland Revenue dated 5 December 2018 which affirmed the salaries tax assessment for the year of assessment 2012/13 by which the sum of $1,765,821 (“Sum”) was held chargeable to salaries tax under section 8 of the Inland Revenue Ordinance, Cap 112 (“IRO”)[3].

Background

2.  The Sum was the principal in an award of damages granted to the Taxpayer pursuant to the judgment of Reyes J dated 20 June 2012. The Taxpayer was one of the lead plaintiffs in an action brought by 165 doctors employed by the Hospital Authority (“HA”) seeking to enforce, inter alia, their statutory and contractual rights to rest days, statutory and public holidays that they had been deprived of by operation of the on-call system and were not replaced. Their case went all the way to the Court of Final Appeal.

3.  By the judgment of the Court of Final Appeal on 20 October 2009 (“CFA Judgment”)[4], it was held that the doctors are entitled to rest days (in accordance with section 17 of the Employment Ordinance, Cap 57; “EO”), statutory and public holidays (in accordance with section 39 of the EO) and in default of being granted such rest days, statutory and public holidays, they are entitled to damages to be assessed in an amount equivalent to a full day’s wages in respect of each missed rest day or holiday at each doctor’s then salary. The assessment of damages took place before Reyes J and the Sum was awarded to the Taxpayer for his loss of rest days, statutory and public holidays from 17 March 1996 to 1 October 2005.

4.  These undisputed facts taken from CIR’s statement in response[5] were set out in §6 of the HCIA Judgment:

“(i) Since 1 December 1990, the HA has become a statutory body under the Hospital Authority Ordinance (Cap. 113) taking over management of public hospitals and public hospital doctors.

(ii) As a result, the Employment Ordinance (‘EO’) is applicable to the HA.

(iii) On 26 June 1995, the Taxpayer was employed as Senior Medical & Health Officer (‘SMO’) by the HA.

(iv) Up to January 2011, the Taxpayer was a SMO. From 3 February 2012, the Taxpayer was employed as part-time Consultant by the HA.

(v) The Taxpayer, like his peers, was required to operate on an ‘on call system’, whereby he would be rostered on call after normal working hours (including Sundays and public holidays).

(vi) The ‘on-call system’ included ‘resident call’ (i.e. to be on-call while remaining within the hospital’s precincts) and ‘non-resident call’ (i.e. to be on-call while away from the hospital).

(vii) It was one of the terms of employment that the Taxpayer’s hours of work would be over normal working hours of 44 hours per week on operational needs and he was not eligible for overtime allowance because of his seniority.

(viii) ‘Rest day’ (1 rest day in every period of 7 days) is a right conferred by s. 17 of the EO.

(ix) ‘Resident call’ was clearly ‘work’ required of the Taxpayer.

(x) ‘Non-resident call’ entailed the Taxpayer staying within 30-minute distance of the hospital; not drinking alcohol; remaining mentally ready to respond to calls for his services. In other words, he was not entitled to abstain from working for the HA. Thus, a day rostered on-call could not qualify as a ‘rest-day’ under the EO.

(xi) Such right takes effect as contractual terms implied into the Taxpayer’s contract of employment with the HA.

(xii) On the other hand, ‘public holidays’ are rights conferred under the Taxpayer’s contract of employment with the HA, read together with s. 39 of the EO.

(xiii) Deprival of ‘public holidays’ from the Taxpayer would be treated in the same way as deprival of ‘rest days’.

(xiv) Over the material periods, the Taxpayer was subject to ‘resident call’ and ‘non-resident call’ on rest days and public holidays[6].

(xv) As a result of the CFA Judgment, the Taxpayer’s compensation (i.e. the Sum awarded) was calculated by actual reference to his daily wages. In its quantification, the components of such daily wages included his basic salary, cash allowance, fixed allowance, flexi-allowance and monthly allowance (as the case may be), but excluded fixed rate honorarium, subsidy pursuant to the Home Loan Interest Subsidy Scheme or a payment in lieu, equivalent to 5% of basic salary (as the case may be). Moreover, the daily wage was calculated by dividing the monthly remuneration by the actual number of days for the month concerned.”

The question of law

5.  The question of law, as formulated by the judge[7], is whether the Board erred in law in finding that the Sum was income from employment within the meanings of section 8(1) of the IRO.

6.  As explained by Bokhary PJ in Kwong Mile Services Ltd v Commissioner of Inland Revenue (2004) 7 HKCFAR 275 at §31:

“Appeals from the Board of Review to the courts lie only on questions of law. But intervention in an appeal on law only is not confined to instances in which it is apparent on the face of the record that the determination appealed against resulted from a specifically identifiable error of law. Just because there is no appeal on facts, it does not mean that the appellate court is precluded from detecting and correcting errors of law buried beneath conclusions ostensibly of fact. Sometimes, as Lord Radcliffe put it in Edwards (Inspector of Taxes) v Bairstow [1956] AC 14 at p.36, ‘the true and only reasonable conclusion contradicts’ the determination appealed against. If so, the appellate court will assume that the determination resulted from an error of law. And that opens the way for the appellate court to intervene on the ground of an error of law.”

7.  In an appeal on law only, the duty of an appellate court is “no more than to examine those facts with a decent respect for the tribunal appealed from and if they think that the only reasonable conclusion on the facts is inconsistent with the determination come to, to say so without more ado.” (Edwards (Inspector of Taxes) v Bairstow at 39)

8.  These further statements of Bokhary PJ in Kwong Mile Services Ltd at §37 should also be borne in mind:

“In an appeal on law only the appellate court must bear in mind what scope the circumstances provide for reasonable minds to differ as to the conclusion to be drawn from the primary facts found. If the fact-finding tribunal’s conclusion is a reasonable one, the appellate court cannot disturb that conclusion even if its own preference is for a contrary conclusion. But if the appellate court regards the contrary conclusion as the true and only reasonable one, the appellate court is duty-bound to substitute the contrary conclusion for the one reached by the fact-finding tribunal. …”

The legal principles in Fuchs

9.  The guiding principles for determining whether income is from employment and assessable to tax were set out by Ribeiro PJ in Fuchs v Commissioner of Inland Revenue (2011) 14 HKCFAR 74 at §§16 to 18:

“16. The test which has evolved in that jurisprudence for determining whether income is ‘from the taxpayer’s employment’ and therefore assessable rests largely on the three House of Lords decisions just mentioned. It is clear that not every payment which an employee receives from his employer is necessarily income ‘from his employment’. It is not sufficient to qualify a payment as such income simply to say that the employee would not have received the sum in question if he had not been an employee. The test, formulated in positive terms as to when the sum is assessable, has been expressed as follows:

(a) In Hochstrasser (Inspector of Taxes) v Mayes[8] Lord Radcliffe stated:

‘The test to be applied is…contained in the statutory requirement that the payment, if it is to be the subject of assessment, must arise “from” the office or employment. … I think that their meaning is adequately conveyed by saying that, while it is not sufficient to render a payment assessable that an employee would not have received it unless he had been an employee, it is assessable if it has been paid to him in return for acting as or being an employee.’

(b) In the same case, Viscount Simonds approved Upjohn J’s statement in the lower court as follows:

‘… the authorities show that to be a profit arising from the employment the payment must be made in reference to the services the employee renders by virtue of his office, and it must be something in the nature of a reward for services past, present or future.’[9]

(c) In Shilton v Wilmshurst (Inspector of Taxes)[10], Lord Templeman expanded on the test:

‘Section 181 is not limited to emoluments provided in the course of employment; the section must therefore apply first to an emolument which is paid as a reward for past services and as an inducement to continue to perform services and, secondly, to an emolument which is paid as an inducement to enter into a contract of employment and to perform services in the future. The result is that an emolument “from employment” means an emolument “from being or becoming an employee.” The authorities are consistent with this analysis and are concerned to distinguish in each case between an emolument which is derived “from being or becoming an employee” on the one hand, and an emolument which is attributable to something else on the other hand, for example, to a desire on the part of the provider of the emolument to relieve distress or to provide assistance to a home buyer. If an emolument is not paid as a reward for past services or as an inducement to enter into employment and provide future service but is paid for some other reason, then the emolument is not received “from the employment”.’

(d) In Mairs (Inspector of Taxes) v Haughey[11], while stressing that each case ultimately involves applying the statutory language to the facts, Lord Woolf stated that general assistance is provided by the speeches in the two decisions cited above as to the applicable test.

(e) In the English Court of Appeal decision in EMI Group Electronics Ltd v Coldicott (Inspector of Taxes)[12], after an extensive review of the authorities, Chadwick LJ noted Lord Woolf ’s acknowledgment of the guidance provided by Hochstrasser (Inspector of Taxes) v Mayes and Shilton v Wilmshurst (Inspector of Taxes) and applied the test as formulated by Lord Radcliffe and Lord Templeman to conclude that a payment in lieu of notice, contractually agreed from the outset of the employment relationship, fell squarely within it.

17. In my view, the same approach should be adopted in the construction of s.8(1) of the Ordinance. Income chargeable under that section is likewise not confined to income earned in the course of employment but embraces payments made (in Lord Radcliffe’s terms) ‘in return for acting as or being an employee’, or (in Lord Templeman’s terms) ‘as a reward for past services or as an inducement to enter into employment and provide future services’. If a payment, viewed as a matter of substance and not merely of form and without being ‘blinded by some formulae which the parties may have used’, is found to be derived from the taxpayer’s employment in the abovementioned sense, it is assessable. This approach properly gives effect to the language of s.8(1).

18. It is worth emphasising that a payment which one concludes is ‘for something else’ and thus not assessable, must be a payment which does not come within the test. As Lord Templeman pointed out, it is only where ‘an emolument is not paid as a reward for past services or as an inducement to enter into employment and provide future services but is paid for some other reason, [that] the emolument is not received ‘from the employment’.’ (Emphasis supplied.)  Thus, where a payment falls within the test, it is assessable and the fact that, as a matter of language, it may also be possible to describe the purpose of that payment in some other terms, eg, as ‘compensation for loss of office’, does not displace liability to tax. The applicable test gives effect to the statutory language and other possible characterisations of the payment are beside the point if, applying the test, the payment is ‘from employment’.”

10.  See also the principles as summarised in Commissioner of Inland Revenue v Poon Cho Ming (2019) 22 HKCFAR 344 at §14.

11.  As the judge has recognised[13], whilst the principles in Fuchs provide guidance for reaching the correct decision on whether a payment received by an employee is assessable as “income from employment”, the application of the principles is not necessarily a straightforward exercise.

The Decision

12.  Before dealing with the arguments advanced by Mr John Brewer on behalf of the CIR in this appeal, it is instructive to consider the reasoning of the Board in the Decision which Mr Brewer seeks to uphold.

13.  The Board noted that the claims in respect of which the Sum was ultimately paid had been pursued for compensation for rest days and statutory/public holidays to which the Taxpayer was entitled pursuant to a contractual provision in the HA’s Human Resources Policy Manual (“HRPM”), and more importantly, on sections 2, 17(1), 19(1), 20(2), 39(1) and 40A(1) of the EO, all during a period of six years of the Taxpayer’s employment[14].

14.  It referred to the holding in the CFA Judgment that the Taxpayer’s rest days claim was based on rights conferred by the EO which took effect as contractual rights implied by law or by modifying existing terms in the relevant contract of employment, also that the statutory holidays claim was based in part on rights conferred by the EO and in part on explicit provisions of the HRPM forming part of the employment contract[15].

15.  The Board recognised that the Sum paid to the Taxpayer was damages paid by the HA to the Taxpayer for loss of the rest days and holidays that he was entitled to be granted by the HA in accordance with the EO[16]. It quoted from a decision of the Board of Review in D31/08[17] at §53:

“Even if they were paid as damages, their employment contracts were still the source of the payments. There is no grant of statutory holidays and rest days in the abstract. The statutory duty arose only in cases of employment within the meaning of the relevant sections in the Employment Ordinance and a breach occurred because the appellants worked. Approaching the matter on this basis, the payments arose from the employments and not from ‘something else’.”

16.  The Board agreed with the above and remarked[18]:

“Although this observation was made without the benefit of both [the CFA Judgment] and Fuchs, it did point out that the statutory grant to an employee and the statutory duty of the employer under the Employment Ordinance in respect of rest days and statutory holidays arose in the employment between the employer and the employee based on the employment contracts; and that the entitlement to the rest day or statutory day arose from the employee having been in employment, so that the denial of such an entitlement amounted to a breach of the relevant provision of the Employment Ordinance. In short, the employee’s entitlements to rest days and statutory holidays arose as a result of the employee having worked.”

17.  It considered that the Sum was income from the Taxpayer’s employment with the HA for these reasons[19]. As the Sum was paid to the Taxpayer as damages “to put him in the position he would have been had he not been deprived by the HA of the enjoyment of the rest days and holidays, such being entitlements that came with his employment, that became part of the terms of his employment by application or operation of law, and that he was entitled to enjoy because he had worked for his employer, the HA”, the Taxpayer cannot deny that the Sum, when viewed in substance, “comes … from his employment with the HA, or from him having worked for the HA under the employment contract (that is, having rendered the services he provided as employee under the contract he had with the HA pursuant to the employment contract).”

HCIA Judgment

18.  The judge considered that the Sum had “assumed dual characteristics: (a) compensation or damages for HA’s breach of contract; and (b) payment to the Taxpayer for having performed work under the employment contract”[20], as it is not open to dispute that the Sum was paid to the Taxpayer as compensation for the deprivation of rest days and public holidays to him and equally there can be no controversy that the Taxpayer was required to be on “resident call” or on “non-resident call” and that he had performed “work” under his contract of employment with the HA regardless of the type of call he was on[21].

19.  He then asked what is the substance of the payment. He tested this by putting to the parties the scenario whereby the Taxpayer was not asked by the HA to perform any duties contemplated under his contract but instead to attend a charity football match organised by the HA as a spectator. In that scenario, the Taxpayer would still be entitled to compensation for the deprivation of rest day but it would be wrong to characterise the compensation as payment for “work”[22]. He reasoned that it would not matter whether the Taxpayer had or had not worked[23]. The substance of the Sum was to compensate the Taxpayer for the loss of rest days and public holidays[24], quoting in support §85 of the CFA Judgment, which reads as follows:

“… The doctor’s loss in such a case is the loss of a rest day, that is, of a day when he should have been entitled to abstain from working for the HA over a continuous 24-hour period. His complaint is that he was not granted such a day, being placed on-call instead. The fact that he may or may not actually have been required to treat any patient during that on-call day is beside the point. Missing a rest day involves a real and substantial loss. Nominal damages, which are awarded where there has been a breach but no actual loss, are therefore quite inappropriate. The damages awarded should aim to place the doctor in the position he would have been in if the HA had duly granted him a rest day in accordance with its obligations under s. 17. He should therefore, if practicable, be granted an alternative day off. Where this is impracticable, he is entitled to damages designed to compensate him for the entire day lost.”

20.  The judge rejected the contention of the CIR that even if the Taxpayer was attending a football match as directed by the HA, the compensation was still chargeable as income from employment. His reasons were as follows. First, not every payment which an employee received from his employer was necessarily income “from his employment”. Second, the contention does not withstand scrutiny when the CIR accepts that if the HA had given the Taxpayer alternative days off as compensation, no tax would be payable for such entitlement. The substance of the compensation would not change whether it took the form of money or alternative days off. Third, the CIR accepts that under the contract of employment the Taxpayer had earned his day off entitlement and had paid tax on it indirectly because he was taxed on his remuneration package. That being the case, having been deprived of his rest days, there is no reason why the Taxpayer would have to pay tax again (or twice) on the compensation which was the substitution for his rest days[25].

21.  For the above reasons, the judge answered the question of law in favour of the Taxpayer and held that the Board erred in finding that the Sum was income from employment.

The main contentions of the CIR in this appeal

22.  Mr Brewer’s contentions in this appeal were an elaboration of the reasoning of the Board.

23.  He emphasised the principles in Fuchs, that income chargeable to tax embraces “payments made in return for acting as or being an employee”, or “as a reward for past services or as an inducement to enter into employment and provide future services”, and it is only where an emolument is “not paid as a reward for past services or as an inducement to enter into employment and provide future services but is paid for some other reason, [that] the emolument is not received ‘from the employment’.”

24.  He submitted that the judge had failed to consider whether the Sum was “from being or becoming an employee”[26], or “made in reference to the services the employee renders by virtue of his office”[27], or was “in return for acting as or being an employee”[28]. One should not simply fasten on whether an emolument is reward for past or future services, as this ignores the complete meaning of the judgments of Lord Radcliffe in Hochstrasser v Mayes and Lord Templeman in Shilton v Wilmshurst and, in turn, misunderstands the judgment of Ribeiro PJ in Fuchs. Chargeable income also embraces “payments made in return for acting as or being an employee”.

25.  He argued that the Taxpayer’s proposition founded on the statement of Chan PJ in the CFA Judgment is fallacious. In delivering a short concurring judgment, Chan PJ had said in §4:

“… rest day and statutory holiday are statutory entitlements. They are concerned with rest, not with work. The law provides for a day of rest for an employee on a rest day or a statutory holiday and what he does on that day is a matter entirely up to him. … In fact, the presence of a statutory prohibition, in the case of a statutory holiday, on payment of wages in substitution for a holiday underlines the legislative intention that like a rest day, it is meant to be a day of rest and absence from work. If an employee is deprived of a rest day or a statutory holiday, he loses a day of rest and should be compensated for such loss. …”

26.  The Taxpayer relied on the above and submitted as the Board had accepted that rest days and statutory/public holidays are concerned with rest and not work, having quoted from the above in the Decision at §38, the Board was wrong to conclude that the Sum was income from employment as for income to be assessable, that income must be received for past or future services rendered. In answer to this, Mr Brewer submitted that the statements of Chan PJ were obiter and merely general observations and did not form part of the ratio of the CFA Judgment. Further, as mentioned earlier, it was held in Fuchs that income chargeable “embraces payments made in return for acting as or being an employee”.

27.  He stressed that it is clear from the way in which the Taxpayer advanced his claims at the trial, from the findings at the trial and from the CFA Judgment, that the Taxpayer’s entitlement to remuneration for services rendered and his entitlement to rest days and statutory holidays both flowed from the same source, ie the contract of employment. The Taxpayer was entitled to enjoy rest days and statutory holidays because of his employment, there was no other reason for his entitlement to enjoy such benefits. It was held in the CFA Judgment that the rights to rest days took effect as terms implied into, or by modifying existing terms of the contract of employment, also that rights to statutory holidays were imposed by the EO and conferred by the employment contract. There is no dispute that entitlements conferred by such rights were not granted. Nor is there any dispute that the aim of damages awarded was to place the Taxpayer in as nearly a position he would have been in had the HC granted him rest days and statutory holidays, as it was found impracticable for the HA to grant alternative days off accumulated over the years to a large number of doctors. For all the above reasons, the Sum was payment to the Taxpayer “in return for acting as or being an employee”.

28.  For the purpose of his contention that the Sum was “in return for acting as or being an employee”, Mr Brewer would appear to agree with the judge that whether the Taxpayer was required to perform work on rest days and statutory holidays and, if so, whether he in fact performed work on such days is beside the point. It was the employment terms and the EO that entitled the Taxpayer to rest days and statutory holidays, and it was only where it was impracticable to grant alternative days off then he was entitled to damages in lieu as compensation. The fact that he received damages as a result of a court order changes nothing in respect of the character of his entitlement when addressing the tax consequences.

29.  Mr Brewer further submitted that the charitable football scenario introduced by the judge was unhelpful and a non-issue as far as §85 of the CFA Judgment was concerned. In positing this as a test for CIR’s contention that the Sum was payment for work performed under the employment contract[29], the judge failed to appreciate that “services rendered” in this context had nothing to do with what the Taxpayer did on those rest days and statutory holidays when he was on call. The expression “services rendered” concerned normal working days on which professional duties were performed and without which the Taxpayer’s statutory and contractual entitlement to rest days and statutory holidays could not have entered into consideration.

30.  In his oral submissions, Mr Brewer also contended that the Sum was payment made “as a reward for past services”. For this contention, on the undisputed facts, the Taxpayer was subject to “non-resident call” on rest days and statutory holidays over the material periods and had thereby rendered services to the HA regardless of whether any patient treatment was actually provided whilst on “non-resident call”. Hence, the Sum paid as damages could be regarded in substance as a reward for past services rendered. I will treat this as an alternative contention, as his submissions on “services rendered” under this limb do not seem to correlate with his earlier submissions for the contention of payment “in return for acting as or being an employee”.

My analysis

31.  It is not in dispute that the Sum was paid as compensation for his loss of rest days and statutory holidays that the Taxpayer was entitled to be granted by the HA in accordance with his rights conferred by the EO and his contract of employment. The question is notwithstanding the Sum may be described in such terms, viewed as a matter of substance, does the Sum nevertheless come within “income from employment” under the principles as explained in Fuchs[30], namely: Has it been paid to the Taxpayer “in return for acting as or being an employee”? Was it “made in reference to the services the employee renders by virtue of his office”? Was it “something in the nature of a reward for services past, present or future”? Or was it attributable to something else and paid for some other reason?

32.  I would apply the principles in Fuchs in this way:

(1)  It is important to have regard to the circumstance that brought about the Taxpayer’s entitlement to the Sum and to ask whether this was in respect of any services given by him[31].

(2)  Although the Taxpayer’s claims against the HA were based on rights conferred by the EO on an employee and his contract of employment, the payment of the Sum was not a matter provided for in the contract of employment[32]. As noted by Chan PJ in the CFA Judgment at §4[33], in the case of statutory holiday, there is statutory prohibition on payment of wages in substitution for statutory holiday[34] and this underlines the legislative intent it is meant to be a day of rest and absence from work. As for rest days, although there is statutory provision that an employee may work on a rest day at his own request or at the employer’s request[35], and may thereby receive payment in lieu of enjoyment of the rest day, this is entirely voluntary and subject to the agreement of both parties. There was no request and consent, and no agreement between the Taxpayer and the HA for relinquishing his rest days and rostering him on “non-resident call” instead, hence the claim for rest days was upheld by the courts[36]. The Sum was not for any paid leave under a mechanism provided for in the contract of employment. Had this been the case, the payment received would have been assessable to tax.

(3)  Rather, the Sum was consideration payable to the Taxpayer for depriving him of his right to a day of absence from work under the EO and the contract of employment. It was for abrogation of his right under the EO and the contract of employment.

(4)  The distinction between a payment made pursuant to a provision in the contract of employment (such as payment in lieu of notice contractually agreed from the outset of the employment relationship[37], a lump sum payment stipulated in the contract as payable in the event of early termination[38], a sum agreed to be paid to directors under the articles as compensation upon resignation in stated circumstances[39]) and a payment made as consideration for abrogating rights under the contract (such as payment made to obtain a release from a contingent liability under a contract of employment[40], payment made to the taxpayer for early termination of employment not provided for in the contract[41], payment to a taxpayer made redundant not pursuant to any term of his contract or any express termination agreement[42], payment received by the taxpayer upon privatisation for abrogation of his rights under a pre-existing enhanced redundancy scheme[43]) may be a fine one in some situations, but the distinction must be drawn. It is in the former situation that the payment is assessable as the sum is in substance “income from employment”. In the latter situation, the payment was not made in return for the taxpayer acting as or being an employee.

(5)  This is not preferring form over substance, as Mr Brewer has contended, even though the quantum of the payment made to the employee may amount to the same in both situations. In the former situation, the payment is made pursuant to a mechanism contractually agreed by the employer and employee and is immediately referable to the employment. The circumstance in which payment is made in the latter situation is unlike the former and is properly regarded as made for some other reason, such that the payment is not “from employment”. Examples are where the payment is made to recompense the employee for a contractual right he has relinquished or been deprived of, or to provide relief and assistance to the employee.

(6)  In the situation where the employment is brought to an end, it will often be plausible for an employee to assert that his employment rights have been abrogated and to attribute the payment received to such abrogation[44]. Although the employment contract of the Taxpayer was not discharged by breach in this instance, it was held by the courts there was breach by the HA and deprivation of his statutory and contractual rights to absence from work on rest days and public holidays, and the Sum received as damages was consideration for such deprivation. The fact that the Sum was calculated on the basis of a full day’s wages is not relevant. The payment of the Sum was not pursuant to any provision in the contract enabling the HA to make payment in lieu of absence from work on rest days and public holidays.

(7)  Nor could the Sum properly be regarded as reward for past services rendered by the Taxpayer, as it was not an entitlement earned as a result of past services, nor was it received from the contract of employment or made in respect of the Taxpayer’s employment. The fact that the Taxpayer was on “non-resident call” for his missed rest days and had provided services in that sense is irrelevant. As found in the CFI Judgment, there was no request and consent between the doctors and the HA for rostering them on-call on rest days, and there is statutory prohibition for paying employees in lieu of working on statutory holidays.

(8)  Where an employee has taken a day off on a rest day or given an alternative day off for having worked on a rest day, he would have paid tax on the salary earned for the rest day or alternative day. That appeared to be the point in §21 of the HCIA Judgment that as the employee has already paid tax on the salary earned for that day, he should not have to pay tax again on the compensation received for depriving him of the rest day where he has worked on the rest day.

33.  As for the Board’s reasoning in §§40 and 41 of the Decision, I recognise there is some causal connection between the Taxpayer’s entitlements (the denial of which amounted to breach of the EO and his contractual rights) for which he was ultimately awarded the Sum and that he had provided services under his employment contract. The question is whether such causal connection is sufficient to render the Sum as income from employment. Mr Godwin Ng for the Taxpayer drew the court’s attention to some of the speeches in Hochstrasser v Mayes which would suggest otherwise, see 389 (Viscount Simonds), 394 to 395 (Lord Cohen). On the facts of that case, it was held the fact of employment was the causa sine qua non but not the causa causans of the payment to the employee to indemnify him for his loss when he sold his house purchased under a housing scheme set up by his employer, and hence was not assessable to tax. It is not enough to establish that the employee would not have received the sum on which tax was claimed had he not been an employee. I am inclined to think that the fact of employment and the provision of services in the past were not the immediate cause for the payment of the Sum in this instance. For this reason as well, the Sum could not be regarded as “income from employment”.

34.  By different reasoning, I arrive at the same conclusion as the judge that the Sum was not income from employment within the meaning of section 8(1) of the IRO and thus not assessable to salaries tax. I am satisfied that this conclusion is the true and only reasonable conclusion on the facts found by the Board and hence the court is duty bound to substitute this conclusion for the one reached in the Decision.

35.  I would dismiss the appeal of the CIR. There is no dispute that costs should follow the event. I would order the CIR to pay the costs of the Taxpayer.

Hon Cheung JA:

36.  I agree with the judgment of Kwan VP. For the reasons given by her at [32], I agree that the award is not taxable as salaries under section 8 of the Inland Revenue Ordinance (Cap 112). The compensation is for ‘something else’ and not as a reward for past services. This is because the compensation is for the deprivation of the taxpayer’s entitlement to rest days and statutory holidays. Whereas the annual tax to be paid by the taxpayer is supposed to be based on 365 days less the rest days and statutory holidays, the reality is that the tax paid by him is based on the full 365 days without the rest days and statutory holidays. This can be demonstrated by the eventual quantification of the compensation. As the Judge stated, the compensation is actually calculated by reference to the daily wage which in turn is calculated by dividing the monthly remuneration by the actual number of days for the month concerned. If the Board is correct, it means that, notwithstanding the deprivation, the taxpayer is still required to pay tax on the compensation as if he had already fully taken the benefits of the rest days and statutory holidays annually under the contract of employment. The Judge’s reference to double taxation at [21] of the judgment below highlights the true nature of the compensation.

Hon G Lam JA:

37.  I have, with great respect, come to a different conclusion, and would explain my reasons briefly as follows, gratefully adopting the background set out in Kwan VP’s judgment.

38.  The question in this case is whether the payment by the HA of the Sum to the taxpayer should be assessed to salaries tax. The money was the principal amount paid, excluding interest, pursuant to the judgment of the Court of First Instance dated 20 June 2012, assessing damages payable by the HA to the taxpayer following the final resolution of the dispute on liability by the Court of Final Appeal. It is accepted by Mr Ng behalf of the taxpayer, rightly in my view, that the fact that the money was paid as damages does not in itself mean that it is not “income” as inclusively defined in section 9 of the IRO. To see the true character of a payment made in satisfaction of an award of damages, it is pertinent to examine the right or duty infringed, the nature of the breach, and the loss in respect of which the damages have been awarded.

39.  There are three components of the relevant claim: rest days, statutory holidays and other public holidays. Although the entitlement to rest days is created by statute[45], the taxpayer’s rest day claim, as held by the Court of Final Appeal, was a contractual claim based on rights taking effect as terms implied by law or by modifying existing terms in his contract of employment[46]. As for statutory holidays and other public holidays, both are gazetted pubic holidays (17 public holidays comprising 5 general holidays and 12 statutory holidays[47]) to which the taxpayer had an entitlement under his contract of employment[48]. The entitlement to statutory holidays has an additional, statutory source in section 39 of the EO, though by parity of reasoning such right would be statutorily incorporated into the contract of employment and enforced as such.

40.  “Rest day” is defined in section 2 of the EO as “a continuous period of not less than 24 hours during which an employee is entitled … to abstain from working for his employer”. Holidays are not defined but in Leung Ka Lau the Court of Final Appeal treated them as the same as rest days in this regard[49].

41.  In other words, the taxpayer had rights (and the HA correlative duties) based on terms which from the outset formed part of his contract of employment and which entitled him to abstain from work on rest days and holidays. These are terms on which the taxpayer was employed and by which, one may infer, he was induced to enter into employment.

42.  In terms of breach, it has been said that the taxpayer had been “deprived” of his rest days and holidays. What happened was that the taxpayer was rostered by the HA, by monthly “call-lists”, to be “on call” on days which should have been his rest days and holidays. These call-lists were found to be an instruction and not simply a request which the employee was free to decline.[50] The taxpayer’s seniority meant that when so rostered, he would be on what was known as “non-resident call”, which meant that he had to be within 30 minutes of the hospital, must not drink alcohol, and must remain mentally ready to respond to calls[51]. When called, he would first give advice to the more junior colleague present at the hospital, but might have to return to the hospital himself to attend to the patient if necessary[52]. It was held that a day on which the taxpayer was rostered on call could not qualify as a rest day or a holiday, because he was not entitled to abstain from working for the HA, regardless of whether or not he was actually called and whether or not he had to return to the hospital[53].

43.  Irrespective of whether the taxpayer was actually called and, if called, whether he needed to return to the hospital, which depended on the exigencies of the day, simply by being on call he was, in my view, rendering a service to the HA. Having doctors like the taxpayer on call enabled the HA to respond, as and when necessary, to patients’ needs outside normal working hours, an essential requirement for the hospital service run by the HA. By designating employees to be on call, the HA could rest assured that its own obligations to the public would be discharged.

44.  In short, the HA’s breach consisted in requiring the taxpayer to be on call and thereby render services to the HA, on days when he should have been entitled to abstain from work. In fact, it stems from the nature of the right in question that its infringement necessarily consists in essence in requiring the employee to work or to stand ready to work.

45.  As to the damages, the primary remedy sought by the taxpayer in the litigation with the HA was actually specific relief – the retrospective grant of time off with pay. That was refused at first instance by Stone J because, inter alia, damages would be an adequate remedy[54]. There was a dispute as to whether damages should be assessed on the basis of the hours actually worked (as opposed to standing by). It was eventually held by the Court of Final Appeal that a doctor rostered on call was entitled to be compensated for loss of a whole day whether or not he or she needed to provide any patient treatment on the day in question, assessed at a full day’s wages at the doctor’s then salary[55]. On the subsequent assessment, this was arrived at by dividing the doctor’s monthly salary (including all allowances but excluding any home loan interest subsidy and the fixed-rate honorarium) by the number of days in the month. The damages were therefore the monetary equivalent of what the taxpayer was promised but not given. We are not in this case concerned with any damages for other losses such as consequential loss of an opportunity to make a profit elsewhere, which may raise entirely different questions.

46.  On this analysis, it seems to me that the Sum was the taxpayer’s “income from employment” within the meaning of section 8(1) of the IRO. Following the principles set out in Fuchs v Commissioner of Inland Revenue, it was in my view a payment in return (albeit under compulsion of a court order) for the taxpayer acting as or being an employee – specifically for obeying the instruction to be on call on the days in question, resulting directly in the loss of rest days or holidays. In receiving the damages the taxpayer was relying on nothing other than terms which from the inception of his employment had been part of the contract. The payment was also something in the nature of a reward (although “recompense” would be a more apt description given that it was paid pursuant to a court order) for forgoing or relinquishing the entitlement to abstain from work on those days by being on call, which as explained above constituted service rendered to the HA even if not necessarily to any patient.

47.  It is true that the contractual terms (as implied or modified by the EO) provided days off rather than payment. But the contract of employment is just as much the source of the secondary obligation to pay compensation for breaches as it is of the primary obligations breached: Photo Production Ltd v Securicor Transport Ltd [1980] AC 827, 848-849. The damages were awarded for the loss of the days off and assessed by reference to a full day’s wages on the basis that they provided an adequate remedy, so far as money could achieve, to put the taxpayer in the position he would have been in had there been no breach. In my respectful opinion the payment was not made in abrogation of the taxpayer’s rights under his employment agreement. On the contrary it was made pursuant to and in enforcement of those rights[56]. The cases of Hunter v Dewhurst, Henley v Murray, Comptroller-General of Inland Revenue v Knight, and Mairs v Haughey, referred to in Fuchs at §21, are in my view to be distinguished as cases on the other side of the line, as each of them involved a subsequent arrangement entered into by the parties by which the contract of employment or certain right of the employee thereunder was abrogated, in consideration whereof he was given the payment the taxability of which was in issue.

48.  Nor is there, with respect, any question of “paying tax twice”, alluded to by the judge[57]. Take the example of an employee coming to the end of his employment, with 30 rest days and holidays cumulatively deprived. If the employer compensates him now by giving him a month off with pay before the employment ends, that month’s pay is clearly taxable, as accepted by Mr Ng on behalf of the taxpayer, even though his entitlement thereto had been earned over earlier periods in respect of which he had paid tax. If in lieu of days off the employer pays him 30 days’ wages, it seems to me that that payment is, in the hands of the employee, just as much income from his employment as the month’s pay in the former case. And it is not made any less so by the fact that it was paid pursuant to a court order rather than of the employer’s own volition.

49.  For these reasons, I do not think the Board erred in law in finding that the Sum was income from the taxpayer’s employment. I would respectfully allow the appeal and reinstate the Board’s decision affirming the assessment.

Hon Kwan VP:

50.  By a majority, the appeal of the CIR is dismissed with costs.