LEE MA LOI v. COMMISSIONER OF INLAND REVENUE AND ANOTHER

[A statutory power must be exercised only for the purpose for which it is conferred and not for some collateral purpose]

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

MISCELLANEOUS PROCEEDINGS

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JUDGMENT

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1. When, in a case in 1925, Counsel told the judge that he accepted that the demand made on his client in that case had been made in good faith, the judge (Mr Justice Rowlatt) interjected "Oh, yes, but you never can beat into the heads of people exercising bureaucratic authority that they must exercise their power singly, and not for collateral purposes": see Marshall Shipping Company v. The King (1925) 41 TLR 255. The judge (who, incidentally, had an unrivalled experience of revenue matters), was, of course, right. You never can.

2. The applicant in the present proceedings has been relieved of $1.2 million as the result of an exercise carried out by the Commissioner of Inland Revenue (one of the respondents) with the help of the Commissioner of Police (the other respondent). The powers conferred on the Commissioner of Inland Revenue in connection with the assessment and collection of taxes must be used only for those purposes. If a power given to him for those purposes is exercised for different purposes, that power has not been validly exercised. Is that what has happened here?

3. It will be convenient if, before I recount the facts, I state something of the statutory background.

4. The Inland Revenue Ordinance, Cap. 112 ("the ordinance") constitutes the office of the Commissioner of Inland Revenue ("the Commissioner") and imposes a number of taxes, among them a profits tax: see Part IV. Profits tax is chargeable for each year of assessment on every person carrying on a trade, profession or business in Hong Kong in respect of his assessable profits arising in or derived from Hong Kong for that year from such trade, profession or business: see section 14. The statutory scheme contemplates the making of returns by the person chargeable to tax so that his assessable profits may be properly calculated: see Part IX. But even in the absence of such a return, the assessor (a public officer appointed under the provisions of s.3(2) of the ordinance) may assess any person at any time if he is of opinion that such person is about to leave Hong Kong, or that for any other reason it is expedient to do so: see s.59(1), proviso. Where a person has not furnished the return and the assessor of the opinion that such person is chargeable to tax, he may estimate the sum in respect of which such person is chargeable to tax and make an assessment accordingly: see s.51(3). The Commissioner has to give a notice of assessment to the person who has been assessed stating the amount assessed, the amount of the tax charged, and such date for payment thereof as may be fixed by the Commissioner: see s.62(1). Such a notice must be served personally or by registered post: see. s.58(2) proviso. Where a person charged to tax is in the opinion of the Commissioner likely to quit Hong Kong without paying all the tax charged to him, and it appears to the Commissioner probable that a third party is about to pay money to that person, the Commissioner may give the third party notice in writing requiring him to pay such money not exceeding the amount of the tax charged, to the Commissioner: see s.76(1). Where the Commissioner is of the opinion that any person is about to or likely to leave Hong Kong without paying all tax assessed upon him, that person may be prevented from leaving Hong Kong without paying the tax: see s.77(1). (It is not clear, at any rate to me, whether there is a significant distinction between the use of the word "quit" in s.76 and the word "leave" in s.77 or between the words "tax charged to him" in s.76 and the words "tax assessed upon him" in s.77.) A person charged to tax on the basis of an estimated assessment may give the commissioner notice of his objection to the assessment: see s. 64.

5. The ordinance contains provisions creating offences and prescribing penalties for failure to make returns: see s.80. It contains further penal provisions directed at persons who do some act wilfully with intent to evade tax: see s.82. But it contains no provisions enabling money to be confiscated from a person found guilty (let alone suspected to be guilty) of evading tax (compare for example the Prevention of Bribery Ordinance, Cap.210, s.12A(a), enabling a court to order confiscation of "pecuniary resources" of a public servant found guilty of corruption; and the Drug Trafficking (Recovery of Proceeds Ordinance, Cap. 405, s.3, enabling the court to make a confiscation order in relation to the proceeds of drug trafficking). Whether, as a matter of policy, legislation ought to be introduced enabling a court to make an order for the confiscation of the "pecuniary resources" of a person found guilty of tax evasion, or a confiscation order in relation to the proceeds of any unlawful trading activity other than drug trafficking, is a matter which the legislature may wish to consider. (The passage of the Organized Crime Bill, published on 9th August 1991, might give it an opportunity to do this in relation to, say, smuggling.) Certainly, there is no such legislation presently in place; and, equally certainly, if the Commissioner has used, for the purpose of confiscating money from a person whom he suspects to be guilty of tax evasion, the powers which the ordinance confers upon him and his officers for the purposes of the assessment and collection of profits tax, that would be an abuse of his powers, however closely he may have kept to the letter of the law.

6. The material facts are as follows. The applicant is a Hoklo fisherman aged 21. He lives with his father, mother, two brothers and a sister (aged 13) on a fishing boat usually kept at Sai Kung. The income of the applicant and his family from fishing and fish-farming is not large; but smuggling activities are rampant in the area, and Hoklo fishing boats are quite often used for smuggling purposes. This family's boat is one of them. In 1989 the applicant and his father were caught at it.

7. On 19th September 1991 the marine police, in the course of a routine (and justified) check, found a plastic shopping bag containing $1.2 million in large denomination bank notes under the pillow of the mother's bed. The applicant told the police it was his money. In his evidence in support of his application he says "We are old fashioned. We do not trust banks. Hoklo people literally keep their moneys under their bed." In fact, the applicant and others of his family have for years maintained active bank accounts through which very substantial sums of money have passed. This fact cannot by any degree of casuistry be reconciled with his evidence.

8. The applicant is plainly a liar. The respondents allege that he is also a crook. They point out, correctly, that the applicant has at all times refused to tell anybody (including, presumably, his own lawyers) what was the source of the money. The respondents contend that the true conclusion on the facts must be that the money represents the proceeds of the trade, profession or business of smuggling; an unlawful trade, profession or business, but nevertheless one the assessable profits of which are liable to be charged to tax. I entirely agree. This is the only reasonable conclusion.

9. But to return to the narrative. Having found the money (and a mobile telephone) and having got no explanation from the applicant as to how he came by the money, the police arrested the applicant with a view to charging him with unlawful possession of the money. The police took charge of the money.

10. The next day, 20th September 1991, at 8:30 a.m., the police called the revenue. The police told the revenue of the circumstances in which the money had been seized and asked the revenue if the revenue would be interested in pursuing the case for "possible offences" under the ordinance (under the Police Ordinance, Cap. 232, s.10(h), it is the duty of the police to assist in carrying out, among other things, any law relating to the revenue.)

11. During the course of the morning, the police took two statements from the applicant. The applicant had been asked how he came by the money but had again refused to answer; he was asked if it was earned through fishing and again he refused to answer. He said the money was to be used to buy fish fry.

12. After considering the applicant's two statements and also the statement of the arresting officer, the police officer who had the conduct of the matter was unsure if it was appropriate to charge the applicant with unlawful possession of the money, and obviously realised that if: the applicant was not so charged the police would have to give the money back to the applicant. However, he suspected that the money was collected with illegal activities such as smuggling or robbery. In the last 12 months he had referred two similar cases involving large sums of money to officers of the revenue and the owners of the money were subsequently charged to tax. With all that in mind he returned to his office and gave instructions that the two statements made by the applicant should be sent to the revenue. Having received this information, an assessor took the view that the applicant was chargeable with profits tax because (or so he says in his evidence) "It appeared to me that the $1.2 million was profit the applicant had derived from fishing and selling fish or other activities assessable to tax, such as smuggling". The suggestion that the $1.2 million had been derived from "fishing or selling fish" is bizarre. Immediately I indicated my view to that effect during the course of the argument, counsel for the respondents abandoned the suggestion. He was quite right to do so; but the suggestion does ring alarm bells concerning the assessor's approach to the matter. These sound louder when his suggested conclusion that the $1.2 million was "profit" comes to be examined. The proceeds of smuggling, certainly; what else? But "profit"? If he thought the $1.2 million to be "profit" from smuggling he would have been bound to assess the applicant on that "profit" at the "standard rate" for a particular year of assessment: see s.14 of the ordinance.

13. In fact this is not what he thought at all.

14. It is abundantly clear that what he really thought was this:

"We have power, under s.76(1) of the ordinance, if we say we are of the opinion that this chap is likely to quit Hong Kong without paying all the tax charged to him, to give the police, who are about to give him back the money, notice to pay the money to us instead. Of course, in order to do so we must first charge him to tax. He is now 21; so we can't go back more than three years. What we will do is to gross up the $1.2 million so that it represents roughly the tax that would be due over three years and slap on him estimated assessments, using our powers under s.51 (3) and 59 (1) of the ordinance, demanding payment today. As soon as the assessments have been signed, we will exercise the powers conferred by s.76(1) to get the police to hand the money over to us. He can always object later, if he dares."

15. And this is exactly what happened. The assessor prepared the assessments. These were for 1988/89; 1989/90; and 1990/91. They were purportedly based on estimated net assessable profits of (respectively) $2,550,000; $2,650,000 and $2,750,000, although the assessor had no information before him at all on the basis of which he could properly have arrived at these or any other figures. The tax for the first year came to $395,250; for the second year, $397,520; and for the third year, $412,500; a total of (conveniently) $1,205,250, beating by a short head the $1.2 million. The assessor arranged for the assessments to be issued. He Sent a memo to revenue enforcement officers telling them that demand notes had been issued dated 20th September 1991 with payments due the same day. He told them that he had been informed that a cash sum of $1.2 million was being held by the Commissioner of Police and was going to be released "to the taxpayer today". He asked them therefore to "issue a garnishee order to the Commissioner of Police immediately". Apparently as an afterthought, he added in manuscript at the foot of the memo a note stating that in his opinion "the target" was likely to quit Hong Kong.

16. The s.76(1) notice was ready at about 2:15 p.m. The assessor faxed a copy of it to the police and took it personally to Sai Kung. By the time he arrived with the original, at 3:30 p.m., the police, relying on the fax, had already sent the money to the revenue.

17. In the evening of the same day, at about 6 p.m., the notices of assessment and demand for profits tax were served, not personally, nor by registered post, but by thrusting them upon the applicant's 13-year-old sister.

18. This is, according to the evidence, the third time in the last 12 months that the police and the revenue have found people with large sums of money, and no reasonable explanation of what were suspected (probably quite rightly) to be ill-gotten gains, and so have got together to relieve them of the money so found. I say nothing of the other two cases; but so far as this case is concerned, I have not the least doubt that what was done here had really no connnection with the assessment and collection of tax. It is quite plain that the exercise, although dressed up in that way, was a colourable device, employed in order to get round the difficulty the police are in when they would wish to charge a suspect with unlawful possession of money but have not enough evidence on which to do so. The use for this purpose of the powers conferred on the revenue for the assessment and collection of tax is the use of such powers for a collateral purpose. The confiscation of the "pecuniary resources" of the "target" is not authorized by the ordinance. The officers responsible for what happened here acted, it is conceded, honestly and without malice. I am sure they believed they were acting in the public interest. But an abuse of power is an abuse of power, even when perpetrated by public officers against whom the worst that can be said is that they were over-zealous. The use, in the manner which this case exemplifies, of the powers which are conferred on the revenue for the purposes of assessment and collection of tax for the purpose of confiscating the "pecuniary resources" of a person suspected of being guilty of tax evasion (or worse) cannot be tolerated. For these reasons, I propose to quash the three notices of assessment and demands for profits tax made on the applicant and also the s.76(1) notice, based as it was upon the validity of those assessments.

19. Counsel for the respondents submitted that the applicant had been guilty of material misrepresentation and non-disclosure in failing (as he obviously did fail) to tell the court the whole truth and nothing but the truth when applying for leave to institute these proceedings; he also submitted that the proceedings are an abuse of the process of the court.

20. I do not accept these submissions. When application is made for leave to apply for a judicial review, the only issue which the judge has to consider is whether the case against the respondents has a chance of success. The facts which were misrepresented to or concealed from the judge were not material to anything which he had to consider in deciding whether to grant or refuse leave to prosecute these proceedings. And even if the applicant is a liar (and, as the respondents contend, a crook) he is entitled to bring before the court a complaint of abuse of power on the part of a public officer. This is a public law case. Whatever may be the position of a sinner in ordinary litigation, he is entitled in this area to the same consideration as a saint. I have considered whether, having regard to the very unfavourable view which I have formed of the applicant, it would be legitimate to find him in the right but to refuse him any relief. But it seems to me that, although I do have a discretion whether or not to grant the applicant relief, I ought not to exercise it in that way. If the applicant has succeeded (and he has succeeded) in exposing the acts of the executive in his case as an abuse of power, he ought not, in my judgment, to be denied relief on the grounds of the egregious lack of frankness (and indeed mendacity) he has displayed in the prosecution of his application.

21. I must add that the applicant has made complaints against the Commissioner of Police as well as the Commissioner of Inland Revenue. I have found nothing in any of the complaints made by the applicant against the Commissioner of Police which would, in my judgment, warrant the grant of any relief against him.

22. I understand that the Commissioner of Inland Revenue has already returned $200,000 to the applicant. As a result of my decision to quash the notices of assessment and demand for profits tax he must now repay to the applicant the balance of the money. It may be that more needs to be done here to teach the criminal classes that crime does not pay. But it is not for the Commissioner of Inland Revenue to take it upon himself to do it.