ATTORNEY GENERAL v. CHINO INDUSTRIES LTD (IN VOLUNTARY LIQUIDATION)

1996, No. MP3662

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

MISCELLANEOUS PROCEEDINGS

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J U D G M E N T

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1. This is an appeal against the liquidator's rejection of part of the proof of debt submitted by the Commissioner of Inland Revenue on 22 May 1996 in the liquidation of Chino Industries Limited (In Liquidation) ("the Company").

2. The proof of debt submitted by the Revenue comprised the following items :

The items rejected were those relating to provisional profits tax charged for 1989/90 (including a surcharge) totaling $1,477,238.

3. The 1989/90 provisional profits tax was assessed by reference to the Company's profits tax for 1988/89. The Company went into liquidation in March 1989 and shortly thereafter, the provisional liquidators became aware of irregularities in the Company's books and so informed the Revenue on 29 May 1990. The investigation took several years. Whilst the Revenue does not accept the liquidators' findings regarding fictitious sales transactions and fraud perpetrated on the Company by its managing director, a Mr Koon, or the extent of the Company's losses on liquidation which the liquidators estimated in May 1989 to be approximately $144 million and which after an extensive investigation they have now put at $142 million, it did agree, on 24 October 1994, that the Company "earned no assessable profits and suffered no loss for that year". Pursuant thereto, profits tax paid for 1988/89 was accordingly refunded. It was in these circumstances that the liquidators rejected the proof of debt relating to the 1989/90 provisional profits tax. It should be mentioned that whilst no profits tax return was filed for 1989/90, the Revenue were aware prior to the assessment made of potentially significant losses sustained by the Company for 1988/89. In fact there were no assessable profits in 1989/90.

4. A detailed chronology of events is set out below.

Chronology

The issues

5. The rival contentions may be summarized as follows. Mr Fitzpatrick on fiat for the Attorney General submitted that the proof of debt which has been rejected relates to the final profits tax assessment for 1989/90 albeit made by reference to the provisional profits tax charged by the November Assessment. It is the liability under the final assessment issued on 19 July 1990 that is sought to be recovered, a liability which, it was submitted, flowed from the provisions of ss.59 and 64 of the Inland Revenue Ordinance, Cap.112 ("the IRO") and crystallized by s.70. It was open to the liquidators to file an objection or alternatively appeal from the assessment. By not invoking the statutory procedure by choosing not to file an objection under s.64 of the IRO, the liquidators lost the right to make a correction under s.70A. The basis of assessment may not be challenged outside the framework of the IRO which provides the necessary mechanism for objection and appeal. Accordingly, the liquidators may not challenge the assessments directly by putting forward evidence demonstrating losses nor can they so indirectly by alleging inequity or unfairness, by asserting matters which might have been the subject of judicial review, or by seeking an order from the court that the Company be allowed to file a tax return out of time. Further, s.75(3) of the IRO applies to the recovery of civil debt generally and is not limited to proceedings in the District Court. Accordingly the provisions of s.75 extend to the present proceedings and section 75(4) operates to bar any challenge to the assessment.

6. Mr Bunting, Counsel for the Company, submitted that the tax which the Commissioner seeks to recover under that part of the proof of debt which was rejected is a nullity : it is nothing more and nothing less than provisional profits tax for 1989/90 and therefore ultra vires as being beyond the Revenue's jurisdiction. As it is common ground that there were no assessable profits for the preceding year (1988/89), the Revenue has no power at all to demand payment of any provisional profits tax for 1989/90. There is no principle of law or statutory provision that precludes the liquidators from taking the jurisdictional point. Further, as the Revenue's original assessment of profits tax for the year 1988/89 was made on a wholly false basis, the provisional profits tax for 1989/90 was thus also assessed on a wholly false basis. The Revenue should therefore not be allowed to utilize the consequences of Koon's frauds in proving in the liquidation of the Company when in fact the Company made no profits for the year 1989/90.

7. The issues which arise are considered below.

(a) The jurisdictional issue

8. This is the key issue in the case. Stripped to its essentials, the short point is whether any liability to provisional profits tax can arise where there are no assessable profits for the year preceding the year of assessment. The relevant provisions are to be found in Part XB of the IRO :

63G. Liability for provisional profits tax

Every person who is chargeable to profits tax under Part IV in respect of the year of assessment commencing on 1 April 1975 or any succeeding year of assessment shall be liable to pay provisional profits tax in respect of that year of assessment in accordance with this Part.

63H. Amount of provisional profits tax

(1) Subject to subsections (1A), (2), (3) and (4), provisional profits tax in respect of any year of assessment shall be payable at the standard rate by reference to the amount of assessable profits for the year preceding the year of assessment, but after the set off of any loss available for set off in the year of assessment under section 19 or 19C.

9. The assessment to tax for any year has two components : (1) profits tax on assessable profits for that year (year 1) and (2) provisional profits tax for year 2 which is based on assessable profits for year 1. But the liability, if any, to provisional profits tax for year 2 arises in year 1 and forms part of the charge to tax payable in year 1.

10. Reading the provisions in 63G and H together, it is clear that liability for provisional profits tax in respect of a year of assessment is contingent or predicated on that person being chargeable to profits tax in respect of that year of assessment. So if in year 1 a person is not chargeable to profits tax because there are no assessable profits arising for that year, there can be no liability for provisional profits tax in respect of year 2 since the amount of provisional profits tax is calculated by reference to the amount of assessable profits for the year preceding the year of assessment i.e. year 1. It must follow as night follows day that if the assessable profits for year 1 is zero, there can be no liability to pay any provisional profits tax in year 1 for year 2.

11. Mr Fitzpatrick attempted to get round this difficulty by characterizing the recovery of the tax sought as a liability arising under the assessment issued on 19 July 1990 to profits tax for the year 1989/90 ("the July Assessment") rather than as a liability under the November Assessment. But the tax due under the July Assessment is nil. That is because the assessment treated the provisional tax charged for 1989/90 as having been paid.

12. I have no doubt that the operative charge upon which payment is sought is in fact the provisional profits tax component of the November Assessment. When one looks at all the underlying documentation, they all refer to provisional profits tax. See, for example, the first affidavit of Fong Ka Tsun at paras.11, 13, 14(p), the second affidavit of Fong Ka Tsun at paras.4 and 11; the certificate issued under s.75(3) of the IRO and the statement of account in support of the proof of debt.

13. It is to be noted that the November Assessment has not been revised. But that fact does not and cannot impinge on or affect the validity or otherwise of the assessment in question : the Revenue cannot by refusing to issue a revised assessment keep alive a liability to tax that has been extinguished or rendered a nullity by subsequent events. In my judgment, the Company's liability to pay provisional profits tax for 1989/90 was rendered a nullity upon the Revenue's acceptance that there were no assessable profits for 1988/89. That acceptance effectively nullified the entire November Assessment including the provisional profits tax component.

(b) Whether the liquidators may reject proofs of tax assessments

14. Having reached the conclusion in (a) above, I now turn to consider whether the liquidators are precluded by any principle of law or statutory provision from rejecting the Revenue's proof of debt so far as the same relates to provisional profits tax for 1989/90.

(i) The IRO framework

Are the liquidators barred or precluded from rejecting any part of the proof of debt as being an impermissible challenge to a tax assessment when they had failed to invoke the statutory procedures? Mr Fitzpatrick contended that an assessment may not be challenged outside the framework of the IRO so that the Court may not now entertain a jurisdictional complaint. He referred to Sun Yau Investment Co. Ltd v. CIR (1984) Vol.2 HK Tax Cases 17 which concerned a late objection to an assessment.

It is to be noted that the statutory procedures for objections and appeals contained in ss.64 and 66 of the IRO have strict in-built time limits which may only be extended at the discretion of the Revenue. In the present case, it has taken the liquidators several years to unravel the frauds that have been perpetrated on the Company. It is therefore questionable whether the statutory procedures are really appropriate to address such situations. Whilst the Revenue does not accept that frauds have been perpetrated as such or the extent of such frauds, it did accept, some five years after the issuance of the November Assessment, that no assessable profits were realized for 1988/89. That acceptance rendered the November Assessment based on assessable profits for 1988/89 of $13.33 million a nullity in its entirety. Therefore the question here is not whether the November Assessment was properly raised at the time (which it undoubtedly was) but whether it was within the Revenue's power, in the jurisdictional sense, to seek to recover payment after that assessment had been rendered a nullity by subsequent events, namely the Revenue's acceptance on 24 October 1994 of nil profits for 1988/89.

In my judgment, nothing in the IRO precludes the court from entertaining a jurisdictional complaint, namely, that in seeking recovery under an assessment that had been rendered nugatory the Revenue had exceeded its powers. See South East Asia Fire Bricks Sdn. BHD v. Non-Metallic Mineral Products Manufacturing Employees Union [1981] AC 363 at 370D-G and Lord Advocate v. Shanks [1992] STC 928 where jurisdictional issues were allowed to be raised in defence despite statutory provisions expressed to be "final and conclusive" as in s.70. If the jurisdictional complaint is found to be valid, it cannot seriously be suggested that the court would nonetheless be powerless to afford appropriate relief, for example, by dismissing this appeal.

(ii) The Calvert principle

In re Calvert [1899] 2 QB 145 stands for the proposition that, in general, liquidators may not go behind a proof for assessed taxes. But I do not see that In re Calvert is applicable to a case where the assessment to provisional profits tax has been rendered a nullity by subsequent events, namely, the Revenue's acceptance that no assessable profits arose in 1988/89. That is wholly different from the re-opening of assessments which Wright J. had in mind in In re Calvert.

(iii) Section 75 of the IRO

The submission that s.75 applies generally to the recovery of civil debt by the Revenue and is not limited to proceedings in the District Court is unsustainable. There is nothing ambiguous about the wording in s.75 : it is in terms limited to proceedings in the District Court. It lays down a special procedure designed to expedite and facilitate the recovery of tax as a civil debt from any person who makes default. Subsection (3) relating to the finality of a certificate signed by the Commissioner and subsection (4) which has the effect of barring any plea that the tax is excessive, incorrect, subject to objection or under appeal are in terms confined to proceedings under s.75, i.e. proceedings in the District Court by the Commissioner for the recovery of tax. There is simply no basis for reading the section as applying to any claim by the Commissioner for the recovery of tax not only in any court but also where no court proceedings are involved. The statute would have to be rewritten to warrant such a construction of s.75.

(iv) Judicial review

Mr Fitzpatrick also submitted that the liquidator's rejection of part of the proof of debt was nothing but judicial review in disguise where, in a case such as the present, judicial review would not be available citing Chun Yuet Bun v. Commissioner of Inland Revenue Vol.2 Hong Kong Tax Cases 325 where an application for judicial review arising out of a decision of the Commissioner refusing to accept a late objection to an assessment was refused. But as Mr Bunting pointed out, the position here is that the liquidators are merely seeking to resist the Revenue's claims against the Company. It is distinguishable from the situation where a liquidator seeks to initiate judicial review proceedings : see Wandsworth London Borough Council v. Winder [1985] 1 AC 461 at 509E to 510C.

Mr Fitzpatrick placed considerable reliance on Harley Development Inc. v. Commissioner of Inland Revenue [1996] 1 HKC 703. In that case the appellants who were assessed to tax on lease premiums chose not to appeal but sought judicial review of the assessments on the ground that they were ultra vires. The Privy Council held that the objection and appeals procedures were competent to deal with the decisions to assess property tax mounted in that case. However Harley is distinguishable on the facts because in that case it had not been shown that the decision to raise the assessments was so flawed in law as to amount to a nullity. Moreover, it was held that in exceptional circumstances, typically an abuse of power, the courts would entertain an application for judicial review of a decision which had not been appealed. In the context of the present case, the Revenue is seeking payment after that assessment had been rendered a nullity by reason of the Revenue's acceptance of nil profits arising in 1988/89. That was not the situation in Harley.

Set-off

15. In their adjudication, the liquidators set off the liability of the Revenue to refund to the Company the amount of $740,194 being part payment of the charge to the provisional profits tax for 1989/90 against the admitted portions of the proof. However it is now common ground that such a set-off is unavailable in proceedings for the recovery of tax by reason of O.77, r.6(1) which applies to winding up by virtue of rule 210 of the Company's (Winding Up) Rules.

Order

16. This appeal is dismissed. The sum of $740,194 is to be repaid to the Company and the proof of debt admitted to the extent of $882,000 without set-off. I also make an order nisi for costs in favour of the Respondent.