GOOD MARK INDUSTRIAL LTD v. COMMISSIONER OF INLAND REVENUE

CACV 90/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 90 OF 2014

(ON APPEAL FROM HCAL 88 OF 2012)

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J U D G M E N T

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Hon Cheung JA :

Background

1.1  The applicant is a Hong Kong company and provides manufacturing/processing services for other plastic product manufacturers such as making, repairing and maintaining plastic injection moulds and making plastic product parts using plastic injection moulds supplied by its customers. The work has been carried out by the applicant through three factories located in Mainland China.

1.2  Pursuant to tax returns filed by the applicant for profits for the year 2003/04, the respondent, the Commissioner of Inland Revenue (‘the Commissioner’) issued a Notice of Assessment and Demand for Tax dated 17 September 2004 for the year 2003/04 in the sum of $3,903,764 (‘the September 2004 Assessment’).

1.3  On 28 January 2005 the respondent further issued to the applicant a Notice of Additional Assessment and Demand for Tax for 2003/04 for the sum of $238,556 (‘the January 2005 Assessment’).  The additional assessment is to add back bad debts arising from non-trading activities.

1.4  On 17 March 2010 the respondent issued to the applicant an Additional Assessment Demanding Final Tax for 2003/04 in the sum of $992,880 (‘the March 2010 Assessment’).  This further additional assessment was based on an additional assessable profits of $5,673,599 made as a result of the applicant’s failure to provide to the respondent further information relating to the applicant’s earlier claims for depreciation allowances and deductions for expenditures for fixed assets.

1.5  On 15 April 2010 the applicant’s representative lodged an objection to the March 2010 Assessment pursuant to section 64 of the Inland Revenue Ordinance (Cap. 112) (‘IRO’).   In the same document, the applicant’s representative sought a correction of, among other things, the errors or omission of the tax returns for the year 2003/04.  The correction covers both the September 2004 and January 2005 Assessments.  This application was made pursuant to section 70A of the IRO.

1.6  On 30 April 2010 the assessor informed the applicant that the 15 April 2010 application had been accepted as an application for correction of the 2003/04 assessment under section 70A of the IRO. However the assessor stated that he refused to correct the assessment because he considered that there was no error or omission in the assessment.

1.7  This was followed by further correspondence between the parties.  By a letter dated 14 August 2012 another assessor who took over the case informed the applicant’s representative that the applicant’s application for correction dated 15 April 2010 in respect of the September 2004 and January 2005 Assessments had exceeded the time period allowed under section 70A and because the application was invalid, the two assessments would not be included for the determination by the Commissioner.  No issue was taken by the assessor on the application to correct the March 2010 Assessment.

1.8  This stand was maintained by the assessor in letters dated 28 September and 8 November 2012.

1.9  The applicant applied for judicial review seeking an order of mandamus directing the Commissioner to accept its application to correct the September 2004 and January 2005 Assessments and a determination to be made on its application.

1.10  Chung J refused the application.  The applicant now appeals.

The issue

2.  The issue of this appeal falls on a narrow compass, namely, whether the terms of section 70A allow the applicant to lodge an application on 15 April 2010 for correction in respect of the September 2004 and January 2005 Assessments. 

The time frame

3.1  The relevant part of section 70A provides that :

‘ (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 the net assessable value (within the meaning of section 5(1A)), assessable income or profits assessed or in the amount of the tax charged, the assessor shall correct such assessment:

Provided that ……’

3.2  The conditions for invoking section 70A cover both time and substance.  In respect of time it must be made either

1)     within six years after the end of a year of assessment, or,

2)     within six months after the date on which the relative notice of assessment was served.

The later time period is clearly intended to cover a notice of assessment served near the tail end of the sixth year so that the taxpayer may have a period of six months from that notice to respond.

3.3  In terms of substance the taxpayer has to show the tax charged for that year of assessment is excessive by reason of either of these two matters :

1)     an error or omission in any return or statement submitted in respect thereof,

2)     any arithmetical error or omission in the calculation of the amount of the net assessable value, assessable income or profits assessed or in the amount of the tax charged.

3.4  In terms of substance, Kwan JA observed in Moulin Global Eyecare Trading Ltd (in liquidation) v Commissioner of Inland Revenue [2012] 2 HKLRD 911 [CA] at paragraph 49 that the meaning of ‘error’ in this context was considered in Extramoney Ltd v Commissioner of Inland Revenue [1997] HKLRD 387 at page 396 A–B where it was held that a deliberate act in the sense of a conscientious choice of one out of two or more courses which subsequently turns out to be less than advantageous or which does not give the desired effect as hoped for is not an error within the terms of section 70A.

3.5  In this case, we are concerned with the time condition.  The respondent contended in its letter of 28 September 2012, that the expiry date for the application for correction in respect of the September 2004 Assessment (by the Notice of Assessment dated 17 September 2004) and January 2005 Assessment (by the Notice of Assessment dated 28 January 2005) was 31 March 2010, namely, six years after the end of that year of assessment. 

3.6  On the other hand the applicant’s case is that the application for correction dated 15 April 2010 of these two assessments was properly made within six months of the Notice of Assessment dated 17 March 2010. In short the position taken by Mr Ronny Tong SC and Mr Lawrence Cheung on behalf of the applicant is that the applicant is entitled to apply to correct all the assessments made in respect of the year of assessment of 2003/04 and is not confined to the March 2010 Assessment, so long as the application was made within the period of six months after the date on which the March 2010 Assessment was served.

3.7  The Judge accepted the respondent’s contention.

Principle on statutory interpretation

4.1  The principle of statutory interpretation is succinctly summarised by Kwan JA in Moulin which I will respectfully adopt :

‘ 31. The principles for statutory interpretation are well established. The modern approach is to adopt a purposive approach interpretation and the context of a statutory provision should be taken in its widest sense (HKSAR v Cheung Kwun Yin (2009) 12 HKCFAR 568, paras.11-14). The statute shall receive such fair, large and liberal construction as will best ensure the attainment of its object (Interpretation and General Clauses Ordinance (Cap. l), s. 19). The relevant provisions of the legislation should be read together and in the context of the whole statute as a purposive unity in its appropriate legal and social setting; it is necessary to identify the interpretative considerations involved and, if they conflict, to weigh and balance them (Medical Council of Hong Kong v Chow Siu Shek (2000) 3 HKCFAR 144, 154B-C).

32. The use of extrinsic materials is for a limited purpose, it is to enable the court to understand the factual context in which the statute was enacted and the mischief at which the statute was aimed, and not for the purpose of construing the words of the statute (Director of Lands v Yin Shuen Enterprises Ltd (2003) 6 HKCFAR 1, paras.21 and 22).  The purpose of a statutory provision may be evident from the provision itself, the recommendation of a report, the explanatory memorandum to the bill, or a statement in the Legislative Council by the responsible government official relating to the bill (HKSAR v Cheung Kwun Yin, para.14).’

4.2  In addition it is necessary to point out that the underlying theme of the purposive approach is that the context and purpose should be considered in the first instance, especially in the case of general words, and not merely at some later stage when ambiguity may be thought to arise : per Sir Anthony Mason NPJ in HKSAR v Lam Kwong Wai (2006) 9 HKCFAR 574 paragraph 63 and reaffirmed in Vallejos Evangeline Banao v Commissioner of Registration & Another [2013] 2 HKLRD 533 at paragraph 77.

The statutory framework

5.1  In order to properly construe section 70A, one must look at Part 10 and Part 11 of the IRO.  Part 10 deals with assessments and Part 11 deals with objections and appeals.

5.2  In respect of Part 10, it is sufficient to state that there are provisions requiring prompt and accurate returns.  The purpose of these is to protect the public revenue.

A.  Objections and appeals : section 64

6.1  Section 64 is the first section in Part 11 relating to objections and appeals.  A notice of objection under section 64(1) is in effect the first step in the appeal process, in that it leads to a reconsideration by the Commissioner under sub-section (2), at which the Commissioner may ask for books and papers and examine witnesses.  If the reconsideration does not lead to agreement, the way is open for the taxpayer to appeal to the Board of Review under section 66, with the possibility of further appeals : Lord Walker of Gestingthorpe NPJ at paragraph 121 of the Court of Final Appeal’s judgment of Moulin (2014) 17 HKCFAR 218.

6.2  The refusal by the second assessor in the present case to consider the applicant’s application to correct the 2003/04 assessment for being out of time will prevent the Commissioner from determining the application with the consequence that the applicant will be precluded from relying on the appeal procedure.

B.  Finality provision : section 70

7.1  The next relevant provision under Part 11 is section 70. This is the finality provision because it provides that where no valid objection or appeal has been lodged within the time limited by Part 11, the assessment ‘shall be final and conclusive for all purposes of this Ordinance as regards the amount of such assessable… profits …’.

7.2  The importance of finality is emphasised by Lord Walker in Moulin :

‘ 119. For any government, faced with ever-increasing financial responsibilities and obligations, it is of the highest importance to have a fair and efficient tax system which can be expected, year on year, to produce public revenue to a more or less predictable level. Annual taxes should be levied so as to ensure prompt payment and so as to achieve finality within a reasonably short time.’

C.  Exception to the finality provision : section 70A

8.1  However, the finality provision may impose hardship on a taxpayer because section 70 is so universal in its prohibitions that even an obvious error cannot be adjusted after the statutory period for appeal has passed if the adjustment will reduce the income or profits assessed : paragraph 95 of the Report of the Inland Revenue Ordinance Committee (December 1954).  The Committee recommended that provision be made so that, despite section 70, an assessor may amend an assessment if it is proved to his satisfaction, within the time limit set forth in section 79, that the assessment is incorrect by reason of an error or mistake in any return or statement submitted or in the calculation of the assessed income or profits or of the tax charged thereon.

8.2  This recommendation was implemented by the enactment of section 70A in 1956.  The current version was introduced in 1964 with amendments made to the 1956 version.  The reason for the amendment was explained in the Inland Revenue (Amendment) Bill 1964, clause 11; Objects and Reasons paragraph 9 :

‘ 9. The second main object of this Bill is dealt with in clause 11. It is essential, under any tax system, that finality as regards assessments be achieved. In Hong Kong this is provided by section 70 of the Inland Revenue Ordinance, but to safeguard the position of taxpayers who for one reason or another disagree with their assessments, an assessment does not become final and conclusive under section 70, until the objections, if any, raised by the taxpayer have been disposed of on appeal in accordance with the successive rights of appeal granted to every taxpayer or agreement is reached between the taxpayer and the assessor, or, if no objection is raised, until the time limited for raising objections has expired. Section 70A, however, creates an exception to this finality and conclusiveness in permitting the correction of errors and omissions in assessments within six years or, in certain cases, within a longer period. This section, which was added to the Ordinance in 1956, was intended to cover only errors and omissions by the taxpayer in any return or statement made by him which, if they had not been made, would have resulted in a reduced original liability, or errors and mistakes purely of an arithmetical or similar nature, but doubt has arisen as to whether, on its present wording, it may not be capable of a wider application than that intended. If it were to have a wider application, it would not only make appeal provisions, referred to above, of little practical use; it would also, for practical purposes, negate that finality and conclusiveness, provided by section 70, which is essential. Clause 11 of this Bill, therefore, seeks to replace section 70A, with effect from the date when this section was originally enacted, by similar provisions more clearly stating the original intention.’

8.3  See also Hong Kong Hansard Session 1964 on the first reading of the Inland Revenue (Amendment) Bill 1964, page 239.

8.4  Lord Walker in Moulin, after summarising the legislative history of section 70A stated that the restrictions imposed by section 70A (in respect of the nature of the error and the time limit) ‘represent the legislature’s striking of the balance between finality and fairness.’ (my emphasis)

The interpretation

9.1  Once the rationale of section 70A is put in proper context, the interpretation placed upon by Mr Tong on the meaning of section 70A must be rejected for the following reasons :

9.1.1)  The application to correct is to correct an assessment which can be seen from the use of words such as ‘the assessor shall correct such assessment’ (section 70A(1)), ‘no correction shall be made to any assessment’ (proviso to section 70A(1)) and ‘where an assessor refuses to correct an assessment’ (section 70A(2)).  This means the right to apply for correction is restricted to that specific notice of assessment.  Hence section 70A(1) uses the phrase ‘the relative notice of assessment’.  In this case, this means the Additional Assessment of 17 March 2010 and not the earlier two assessments of 17 September 2004 and 28 January 2005.

9.1.2)  Although section 70A(1) contains also the words ‘year of assessment’ in the context of ‘the tax charged for that year of assessment is excessive’, it does not mean all the assessments made in that year of assessment are at large and susceptible to an application to correct despite the expiry of the six year restriction because the ‘year of assessment’ must refer back to that ‘relative notice of assessment’. Inevitably the relevant notice of assessment deals with an assessment of a particular year but if the rationale of section 70A is to strike a balance between finality and fairness, then the right of the applicant to correct an assessment must relate to the subject matter of the March 2010 Assessment and not other assessments for 2003/04 as well.  To construe otherwise will render the finality principle meaningless.

9.1.3)  Mr Tong stressed that fairness requires the applicant to be able to apply to correct the September 2004Assessment because in order to properly deal with the March 2010 Assessment, the original assessment contained in the September 2004 Assessment must be corrected as well because the tax returns of the applicant for the year 2003/04 was on the basis that its profits came from its business operation in Hong Kong, whereas in fact they came from its business operation in the Mainland.  In the same vein, Mr Tong refers to section 60 of the IRO which allows the Commissioner to impose additional tax but not to reduce it even though there is evidence showing the amount is excessive.  In my view these arguments do not advance the applicant’s case.  Section 70A was enacted to allow excessive assessments to be corrected if the conditions are met.  The applicant could well invoke section 70A earlier if it considers that a proper case for correction can be made of the September 2004 and January 2005 Assessments. 

9.1.4)  Although Mr Tong has raised matters such as the indication of acceptance of the application for correction by the first assessor on 30 April 2010 before the second assessor took a different view on the time limit and also the acceptance of the first assessor to the objection to the March 2010 Assessment, these are really irrelevant matters to the present appeal as the issue in question is one of statutory interpretation and also because estoppel is not being relied upon by the applicant. 

9.1.5)  The nature of the three assessments illustrates the absurdity of allowing the applicant to apply to correct the September 2004 and January 2005 Assessments on the basis of the March 2010 Assessment. Ms Yvonne Cheng SC and Mr Paul H M Leung on behalf of the respondent have further illustrated the absurdity point by two examples which I will adopt :

1)     A taxpayer X who runs a business and is assessed to profits tax in January 2002 for the year of assessment 2000/01.  On the applicant’s construction, it would normally not be possible to make a section 70A application after 30 March 2007, but if X happened to own a property and received an assessment to property tax on 1 March 2007, then the time for making the section 70A application in respect of the wholly unrelated profits tax assessment would be extended to 31 August 2007.

2)     And if that taxpayer has a colleague Y who runs a similar business and is assessed in a similar way to profits tax, but does not own a property and therefore does not receive any assessment to property tax, Y will not be able to apply for correction of a mistake beyond 31 March 2007, even though he might wish to make the same complaint as X under section 70A.

9.1.6)  In my view the Judge was correct in his interpretation of section 70A and in his refusal to grant judicial review.

Conclusion

10.  The appeal is accordingly dismissed with costs nisi in favour of the respondent.  Certificate for two counsel is granted.

Hon Yuen JA :

11.  I agree.

Hon Chu JA :

12.  I agree with the judgment of Cheung JA.