CORPORA ENTERPRISES LTD v. COMMISSIONER OF INLAND REVENUE

Inland Revenue Appeal No. 9 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. This is an appeal from the determination of the Board of Review on a case stated.

2. The appellant, Corpora Enterprises Limited commenced business in June 1981. I shall call it "Corpora". For the three years of assessment under consideration, the company was not concerned with more than one business. No statement or return for its profits tax was submitted in time by Corpora for its first year's operation. In February 1983, being of the opinion that Corpora was chargeable with profits tax, the assessor estimated its assessable profits and accordingly made an assessment of its profits tax for 1981/82. It was an estimate attempted by the assessor without a return under section 59(3) of the Inland Revenue Ordinance. The amount of assessable profits was estimated at $20,000. Profits tax as calculated, presumably at the standard rate, yielded a sum of $3,300. Corpora did not object to such profits tax within the one month precribed or at all, and it was duly paid.

3. Time for challenging the 1981/82 assessment, including its estimated amount of assessable profits and the profits tax charged thereon, has long elapsed. It was not until November 1983 that Corpora furnished a return for profits tax for the 1981/82 year of assessment, claiming tentatively a loss of some $1.6 million, subject to further allowances. The amount of loss for Corpora's first year of assessment, i.e 1981/82, was finally settled at over $1.8 million. In the two following years of assessment 1982/83 and 1983/84, profits were returned. Corpora claimed to set off its 1981/82 $1.8 million loss against the profits returned for these two subsequent years of assessment, but the assessor proceeded to make an assessment of profits tax for each of those two years in complete disregard of Corpora's 1981/82 actual loss. From those assessments, Corpora appealed to the Commissioner. The Commissioner made a determination unfavourable to Corpora. An appeal was lodged with the Board of Review which dismissed the appeal, and from such a dismissal, Corpora now appeals to this Court on a case stated.

4. The question of law posed in the case stated for my consideration is as follows:-

'"Whether on the true construction of the Inland Revenue Ordinance, Cap. 112, and, in particular, Section 19C (4) thereof, a loss incurred but not claimed (and therefore not taken into account) in an earlier year of assessment, the profits tax assessment on which has become final and conclusive by reason of Section 70, can nonetheless be offset against profits made in subsequent years of assessment."

5. It would be more convenient to set out the material parts of the relevant sections in Part IV of the Inland Revenue Ordinance :-

14. Subject to the provisions of this Ordinance, Profits tax shall be charged ....... at the standard rate ........ in respect of ...... assessable profits ......... as ascertained in accordance with this Part:

59. (1) Every person who is in the opinion of an assessor chargeable with tax under this Ordinance shall be assessed by him as soon as may be after the expiration of the time limited by the notice reqiring him to furnish a return under section 51(1):

    (3) Where a person has not furnished a return and the assessor is of the opinion that such person is chargeable with tax, he may estimate the sum in respect of which such person is chargeable to tax and make an assessment accordingly,........

71. (1) Tax charged under the provisions of this Ordinance shall be paid in the manner directed in the notice of assessment .................

70. Where no valid objection or appeal has been 1odged within the time limited by this Part against an assessment as regards the amount of the assessable .........profits ........... assessed thereby, ........ the assessment as made ........... shall be final and conclusive for all purposes of this Ordinance as regards the amount of such assessable ......... profits ..........

70A. (1) Notwithstanding the provisions of section 70, if, upon application made within 6 years after the end of a year of assessment or within 6 months after the date on which the relative notice of assessment was served, whichever is the later, it is established to the satisfaction of an assessor that the tax charged for that year of assessment is excessive by reason of an error or omission in any return or statement submitted in respect thereof, or by reason of any arithmetical error or omission in the calculation of the amount of thee assessable income or profits assessed or in the amount of the tax charged, the assessor shall correct such assessment:

19C (4) Where in any year of assessment a corporation ......... sustains a loss :........, the amount of that loss shall be set off against the assessable profits of the corporation ............(including its share of the assessable profits of a partnership in which it is a partner) for that year of assessment and to the extent not so set off, shall be carried forward and set off against the corporation's ............... assessable profits and its share of assessable profits of such a partnership for subsequent years of assessment.

6. The actual loss in Corpora's first tax year's operation was not claimed within time and Corpora was estimated for that first year as having made taxable profits of $20,000. Under the Inland Revenue Ordinance, that $20,000 assessable profits of Corpora for its first year's operation is now final and conclusive. Since that amount of assessable profits is not open to challenge in law, it is elementary that the sum of $20,000 cannot be diminished or erased by a set off or at all. Corpora is not in fact seeking to do so.

7. The point is a short one. This Court is called upon to determine whether under section 19C(4), Corpora may carry forward and set off the actual loss suffered in its first tax year's operation against the profits made in its subsequent tax years.

8. The other marginal issues canvassed before the Board of Review were not re-ventilated in the instant appeal. Therefore the perimeter of the controversy and the range of disagreement between the Commissioner and Corpora is narrow.

9. Generally, not all the trading profits of a company are taxable. A company is only chargeable to profits tax in respect of an amount from its profits, calculated in accordance with the provisions of the Ordinance. Trading profits will thus be diluted by, inter alia, adjustments in the form of permissible deductions and allowances. So adjusted, the amount in respect of which a company is chargeable to profits tax is known as the assessable profits. That is precisely how the term "assessable profits" is statutorily defined in section 2 of the Ordinance: "the profits in respect of which a person is chargeable to tax for the basis period for any year of assessment, calculated in accordance with the provisions of Part IV" of the Ordinance.

10. The enabling section for charging profits tax is Section 14. The duty to calculate the assessable profits of a company for levying a charge falls on an assessor. He is enjoined by section 59 to make an assessment. For that purpose, he is to ascertain the amount of assessable profits on the information furnished in a return or otherwise supplied or in its absence, make an estimate of that amount. On the amount so ascertained or estimated, he makes an assessment of profits tax at the standard rate. See section 51(2) and section 59(1) and (3). Thereupon, the company will be served with a notice of assessment which creates tax liability. See section 71(1). Unless the Commissioner sees fit to suspend the demand pending a challenge made to the assessment, profits tax must be instantly paid. See section 71(2). If the taxpayer company does not question or has exhausted all his remedies in challenging or has agreed to an assessment, the assessment shall be final and conclusive under section 70. But what is it that shall be final and conclusive? It is expressly provided that it is the amount of the assessable profits which shall be forever binding. In what way shall the amount be so binding? It shall be irreversible "for all purposes of [the] Ordinance". If a taxpayer company made an error or omission in its return or statement, then the assessment would be liable to be re-opened but not beyond a fixed limitation period. See section 70A. All this has virtually become common knowledge, but a recapitulation may prepare one to be more receptive to the analysis I am about to attempt.

11. Corpora did not question the estimated amount of assessable profits on which profits tax in the assessment for 1981/82 was charged. It paid that profits tax on the said $20,000 for its first tax year's operation as directed in the notice of assessment. Therefore, the assessment for Corpora's first tax year's operation is "final and conclusive for all purposes of [the] Ordinance as regards the amounts of such assessable profits". Corpora did not file a return for its first tax year's operation in time, hence it cannot invoke section 70A with a view to correcting any error in the notice of assessment. It is agreed on all hands that the $1.8 million loss, had it been claimed in time, would have been allowed by the Inland Revenue and could have been carried forward and set off against Corpora's profits in its subsequent years of trading.

12. The notice of assessment for 1981/82 is, so Mr Kotewall conceded, final and conclusive as is the amount of $20,000 estimated assessable profits for that year. Counsel also acknowledged the reality that for a company involved in a single business, such as that in the case of Corpora, trading figures in any year of assessment may be read as leaving either a credit balance or a deficit but never both. The assessor could arrive at either an amount of assessable profits or an amount of losses, ignoring the remote possibility of an evenly balanced account. Evidently, for such a company assessable profits and losses are concepts mutually exclusive. The obvious seems to be reflected also in section 18E (3) and (4) where adjustments may be made "in order to arrive at the assessable profits or the losses for any year of assessment".

13. In essence, counsel for the appellant advanced a blunt test of what he believed to be combined common sense and logic. It was conceded that the assessment of the first tax year's operation of Corpora could not be overturned. Counsel accepted the whole exercise as one calculated to ascertain Corpora's chargeability or non-chargeability to tax in terms of either assessable profits or losses. Mr Kotewall's contention was : in the absence of any known element of losses, the assessor must have throughout focused on profits to the exclusion of losses; since profits and losses were mutually exclusive for Corpora, in concluding that Corpora had assessable profits, the assessor must have ruled out any question of losses in his final analysis; moreover in a usual calculation process, merely trade receipts are expected to pit against expenditure, including deductions and allowances; profits and losses are the end results, and as such neither would be known until a conclusion is reached; therefore it stands to reason why these concluding results could not have themselves been available in the interim and were not proper matters for deliberation. Put differently : it would be illogical to maintain that the end results, profits or losses, which an assessor in his computation strives so hard to arrive at, could themselves be prematurely or properly taken into consideration during that process of computation. Thus, so counsel submitted, the object of the exercise, the mental process and the final conclusion had all been dissociated from the question of losses. In short, the assessment for 1981/82 was said to have been steered towards assessing profits, leaving the question of losses as res integra.

14. Mr Kotewall also leaned heavily on the plain language of section 70, which, like the 1981/82 assessment, makes no specific reference to the question of losses. Counsel therefore pressed upon me that the finality provided for in section 70 of the Inland Revenue Ordinance must be confined to the amount of the 1981/82 assessable profits and could have no application to any losses fort that year of assessment. Hence, the amount of actual losses for 1981/82 remains virgin territory for the purposes of the Inland Revenue Ordinance and that amount shall be, so Mr Kotearall urged upon me, in the words of section 19C(4), carried forward and set off against profits in Corpora's subsequent years of assessments.

15. Whether or not anything may be gained out of the $1.8 million loss for 1981/82 under the Inland Revenue Ordinance, that loss is a real deficit that no amount of legislation could obliterate. But reality could offer Corpora no comfort. A loss will bring no fiscal benefit. In order to achieve a statutory set off for profits tax purposes, section 19C(4) will have to be set in motion. Only under the Inland Revenue Ordinance would a loss enure to Corpora's benefit. It is not enough merely to come armed with an actual loss, but Corpora must also be able to bring itself within sub-section (4) of section 19C of the Ordinance. Corpora must be able to show that for the purpose of the tax saving device under section 19C(4), the $1.8 million loss for 1981/82 is still being recognised as a loss for the purpose of that sub-section.

16. In a return furnished in response to an assessor's notice or in the information supplied to the Commissioner of a taxpayer company's chargeability to profits tax, trade losses may be claimed. Without any return or information, in his attempted estimate, an assessor need be equally alive to both the possibility of profits as well as that of losses. It matters not that he is unaware of the actual loss and therefore cannot take it into account. Granted that he has no information of any loss, but he is also given no information of profits. Section 59(3) enables an assessor to estimate, unaided, the assessable profits and make an assessment accordingly but he may do so only if he "is of the opinion that [the company] is chargeable with [profits] tax", otherwise the making of an estimate would be ultra vises and consequently, no assessment can be properly made. Therefore, it would be incorrect to suggest that in making an estimated assessment, the assessor here was wholly pre-occupied with profits, paying no regard to losses. The opinion that he was to form must be a fair one. The question of losses must also have been in the forefront of his mind from start to finish. The assessor was not sought to be impugned in his modus operandi of implementing section 59(3). Profits and losses were the only realistic options open to him in the exercise of his power under that sub-section. In forming his opinion as to whether Corpora was chargeable with profit tax for 1981/82, the assessor must have had regard to these options. He could not have properly proceeded with his estimate of assessable profits if he had ever entertained any residual doubt as to the correctness of his opinion. In making the 1981/82 assessment he must have affirmatively eliminated all possibility of losses.

17. The estimated assessment in respect to the year of assessment 1981/82 for Corpora has now become final and conclusive under section 70 of the Inland Revenue Ordinance. It is not merely the estimated assessment which is to be regarded as final and conclusive, but in the words of section 70, the amount of the assessable profits assessed by the assessment shall be "final and conclusive for all purposes" of the Ordinance. Conversely, the factual premise of there being no loss shall likewise be final and conclusive.

18. Section 19C(4) in a tax saving device whereby Corpora's l.8 million loss for 1981/82 might be put to profitable use. But has Corpora brought itself within that sub-section? As a corollary to the fact that Corpora's assessable profits for 1981/82 are final and conclusive, it must be also final and conclusive that Corpora had incurred no losses in the same year of assessment. Hence, for the purposes of the Ordinance, there is no loss capable of being set off or carried forward for setting off in subsequent years under section 19C(4). Corpora's 1981/82 $1.8m. loss could not, therefore, be resorted to for the purpose of section 19C(4) in the instant appeal.

19. The 1981/82 assessment was made by reason, inter alia, that there was no claim made in time for the actual $1.8 million loss. In my view, it would be futile to consider what other legal repercussions a failure to lodge a timely claim for the 1981/82 loss would entail. Such a failure had already resulted in the making of an assessment. In terms of cause and effect, that assessment had overtaken Corpora's failure to lodge in time a loss claim for 1981/82 together with all its incidental legal implications.

20. However, Mr Kotewall invited the Court to shift emphasis on to Corpora's dilatory claim for the 1981/82 $1.8 million loss. It is true that section 19C(4) makes no reference to the lodging of a claim of losses within the same year of assessment in which they were incurred. Much was sought to be made of this silence in the sub-section. Counsel argued that since a prior claim for losses within time was not a pre-requisite for any set off under section 19C(4), the $1.8m. loss for 1981/82, though previously unclaimed, might now be set off against Corpora's subsequent annual assessable profits. Once a loss has been suffered, naturally a company cannot start afresh with a clean slate. The loss will stay as a deficit entry in the books of Corpora. That is a reality. Counsel submitted that there was every reason for giving effect to such a reality and that therefore section 19C(4) should not preclude actual losses, whether or not they had been claimed in time, from enjoying a statutory set off. Counsel further submitted that any attempt to introduce a pre-condition for a timely claim of losses within the year of assessment in which they were incurred would be tantamount to "a naked usurpation of the legislative function under the thin disguise of interpretation". The Court was reminded that ithas no power to fill in any gap in the subsection. See Magor & St. Mellons Rural District Council v. Milloort Corporation [1952] A.C. 189 at p.191 per Lord Simonds.

21. Mr Kotewall also acknowledged the difficulty in seeking to set off Corpora's actual loss against the assessable profits estimated in its 1981/82 assessment. On Counsel's concession that the $20,000 estimated as assessable profits for that year was final and conclusive, that amount cannot be reviewed for any purposes of the Ordinance, including the purpose of a statutory set off. Moreover, the estimated amount of assessable profits for that year in the sum of $20,000 is, to Corpora, a nominal sum, one which it does not support, and it would be unreal and irrational to try to set off an actual loss against such a nominal profit.

22. To sum up the opinion I have expressed on section 19C(4) : the Inland Revenue Ordinance allows a taxpayer company to set off its past losses against its current or future profits for reducing its tax liability. It is a benefit provided for by the revenue legislation and it is a set off for the purposes of the Ordinance. I have come to the conclusion that the actual 1981/82 loss is not an amount allowable for the purpose of section 19C(4). Turning to Mr Kotewall's converging argument on the impact of Corpora's failure to lodge a timely claim : what is at issue is the legal effect of the 1981/82 assessment brought about by an estimate made under section 59(3). It would be unprofitable to claw back the intermediate steps, taken or omitted, which must have been overtaken by the assessment. Despits Mr Kotewall's invitation to me to determine, as an independent issue, whether a claim for losses must be lodged within the relevant period to qualify them to be carried forward and set off against profits in the same or subsequent years, I should really address myself to the very question posed in the case stated, which focuses on the legal effect of the superseding assessment. This Court is not called upon to consider what a failure to claim losses in time entails but to decide what effect a final and conclusive assessment has with reference to any untimely claimed losses. Indeed, failure to lodge a timely claim for losses has clearly been overtaken by the events, in particular the making of an estimated assessment.

23. On the views I have taken, I hope the matter may now be finally laid to rest. The 198l/82 actual loss cannot be called, in aid for the purposes of the ordinance, including its section 19C(4).

24. I share the conclusion reached by the Board of Review. The same is hereby confirmed, and the question of law for the opinion of this Court is answered in the negative.

25. The appeal do, in effect, stand dismissed with an order nisi for costs against the appellant.