DCTC 4335/2007
IN THE DISTRICT COURT OF THE
HONG KONG SPECIAL ADMINISTRATIVE REGION
TAX CLAIM NO. 4335 OF 2007
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BETWEEN
| | THE COMMISSIONER OF INLAND REVENUE | Plaintiff |
| | and | |
| | CARPE DIEM PUBLICATIONS LIMITED | Defendant |
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Coram: Deputy District Judge J. Ko in Chambers (Open to public)
Date of Hearing: 26th February 2008
Date of Handing Down Decision: 20th March 2008
Decision
1. In this action, the Commissioner claims against the Defendant for $33,835 being the tax due and payable for the year of assessment 2004/2005.
2. The Defendant, which is acting in person, filed a homemade Defence alleging that:
“The Inland Revenue Department is fully aware that during the year in question 2004/2005 [the Defendant] made a loss of approximately HK$337,000.”
3. The Commissioner took out a summons to strike out the Defence and to enter judgment on the ground that the Defence discloses no reasonable defence.
4. On the other hand, the Defendant took out a summons to dismiss the Commissioner’s claim.
5. After a few adjournments to enable the Defendant to adduce evidence in support of its summons, both summonses were argued before the Master on 30th January 2008. The learned Master dismissed the Defendant’s summons, struck out the Defence and entered judgment.
6. This is the Defendant’s appeal against the decision of the Master.
Preliminary matter
7. Before I turn to the substantive appeal, I should first record the Defendant’s application to adduce new evidence in the appeal.
8. On the day before the hearing of the appeal, the Defendant filed an affirmation in support of its appeal exhibiting some correspondences between the parties. Leave is required for parties to adduce new evidence on an appeal from a master to a judge in chambers: see Hong Kong Civil Procedure 2008, para.58/1/3. The Defendant’s director Mr. Durrant therefore applied for leave to adduce such new evidence.
9. The Commissioner did not object to the Defendant’s new evidence, but wished to adduce a chronology and a bundle of correspondences between the parties into evidence so as to put the Defendant’s new evidence in context.
10. Mr. Durrant did not really object to the chronology and correspondences sought to be adduced by the Commissioner. He, however, said that he had not seen the following documents before:
| | (a) | the Commissioner’s letter dated 8th February 2007 (a copy of which was included in the Commissioner’s bundle); and |
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| | (b) | the Commissioner’s letter dated 28th February 2007 (which was mentioned in the chronology but not included in the bundle). |
11. Mr. Durrant also said that the following categories of further documents should be adduced:
| | (a) | documents relating to the Defendant being fined for failing to file a tax return for 2004/05 within the prescribed time; |
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| | (b) | documents relating to the Defendant being prosecuted at the Eastern Magistracy for failing to file a tax return for 2004/05 within the prescribed time; and |
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| | (c) | a letter sent to the Commissioner in October 2005, enclosing the Defendant’s completed profits tax return for 2004/05 and its unaudited account. |
12. Mr. Durrant was unable to specify what the documents covered by the first two categories were. He intended to illustrate by these documents that the Defendant had been explaining to the Inland Revenue Department (“the IRD”) why it did not submit an audited account for 2004/05. I note that Mr. Durrant has already mentioned this fact in the affirmations filed.
13. As to the third category, Mr. Durrant said the Defendant did not keep a copy of the documents submitted. The Commissioner denied having received such documents. As such, there is nothing further to be adduced.
14. Both parties elected to press on with the hearing. In those circumstances, I allowed both parties to adduce new evidence and continued to hear the appeal.
The appeal
15. An appeal from a master to a judge in chambers is dealt with by way of an actual rehearing of the application which led to the order under appeal. I need to treat the applications as though it came before me for the first time: see Hong Kong Civil Procedure 2008, para.58/1/2.
16. The Commissioner’s application to strike out the Defence is made under Order 18, rule 19(1)(a) of the Rules of the District Court. The Defendant is not legally represented and does not specify the legal basis of its application to dismiss the Commissioner’s claim.
17. Both parties have filed affidavit evidence in relation to the Defendant’s application. It is apparent from the evidence filed and the submissions advanced by the Defendant that the Defendant is running essential the same argument in support of its application as well as in opposition to the Commissioner’s application. As a matter of logic, I will not need to consider the Commissioner’s application if the Defendant succeeds in dismissing the claim. I shall therefore consider the Defendant’s application first.
The Defendant’s application
18. The Defendant’s application is based on the following factual allegations:
| | (a) | The Defendant received a notice of assessment and demand for tax for 2003/04. The demand included a sum of $100,396 for provisional tax for 2004/05. |
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| | (b) | The Defendant objected to the provisional tax for 2004/05. It’s former tax representative submitted the Defendant’s unaudited management account to the Commissioner, which stated that the Defendant had made a loss for the year ended on 30th April 2004. |
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| | (c) | The Commissioner apparently accepted that the Defendant had made a loss for the year ended on 30th April 2004. By a notice dated 12th October 2004, the Commissioner cancelled the demand for provisional tax for 2004/05. |
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| | (d) | On 19th or 20th October 2005, the Defendant submitted its profits tax returns for 2004/05 together with its unaudited account. The Defendant was unable to submit an audited account because the Defendant’s former tax representative had made an error and the 2003/04 account did not balance. |
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| | (e) | The Commissioner issued a notice of assessment and demand for tax for 2004/05, estimating the Defendant’s profits for that year to be $184,139 and assessed the tax payable at $32,224. |
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| | (f) | By letters dated 1st February 2007 and 2nd April 2007, the Defendant objected to the assessment for 2004/05, as it had incurred a massive loss for that year. |
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| | (g) | The Defendant explained to the IRD why it had not been able to submit its audited account for 2004/05. |
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| | (h) | The Defendant was fined by the IRD and the Eastern Magistracy for failing to file tax returns for 2004/05. |
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| | (i) | The IRD offered no assistance to the Defendant. The Defendant was only informed recently that it could re-audit its 2003/04 account so as to prepare an audited account for 2004/05. The Defendant presented a timetable to the Commissioner to enable it to do so but the timetable was rejected. |
19. Based on the above, the Defendant submits the following arguments to dismiss the Commissioner’s claim:
| | (a) | the Commissioner has no evidence to support her claim in this action; |
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| | (b) | the Commissioner’s claim is in breach of Article 80 of the Basic Law; |
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| | (c) | the Defendant has been denied a fair hearing; |
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| | (d) | the assessment is in breach of the fundamental principle that a person is innocent until proven guilty; and |
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| | (e) | the assessor is guilty of negligence and misfeasance in handling the Defendant’s case. |
20. The Defendant’s sentiment is best summarized in the following statement in Mr. Durrant’s affirmation:
“The Assessor decides that [the Defendant] is guilty (has made a profit). The Assessor ‘guesses’ the level of guilt (guesses the level of profit) … The Assessor imposes the penalty. The same Assessor is the person who assess any objection to her previous decision … The Inland Revenue then uses the District Court to rubber stamp its Assessors’ guesses (citing Inland Revenue Ordinance section 75(4) … to confirm that there is no defence to their claim) – thus avoiding any form of hearing or trial where it has to offer evidence, because it has no evidence to support of its case. Here the Assessor is acting as prosecutor, judge and executioner. These actions are in direct breach of the letter and spirit of the basic law which says the courts are the exercisers of judicial power within the HKSAR. (Article 80). The Judiciary is independent of the rest of the government to act as the checks and balances to the other branches. The courts are to act as impartial arbitrators of the evidence presented to them and then make a judgment as how the laws of Hong Kong apply to the evidence presented. The Inland Revenue has no evidence to support its claim, therefore it is attempting to deny [the Defendant] any sort of hearing, seeking instead to have [the Defendant’s] guilt declared on the guesses of one person. The Inland Revenue actions here amount to extortion. The implied implications though run far deeper, undermining one of the core fundamentals of a free society that a person or company is innocent until proven guilty. The Inland Revenue here would have [the Defendant] guilty on their guesses.”
21. I shall now examine each of these arguments more closely.
(a) Whether the Commissioner has evidence to support her claim?
22. The Commissioner’s claim is made under section 75 of the Inland Revenue Ordinance (“the IRO”). That section provides that tax due and payable under the IRO shall be recoverable as a civil debt due to the Government, and the Commissioner may recover against any person in default of payment of tax by action in the District Court.
23. The Defendant is adamant that it has made a loss for 2004/05. At the hearing of the appeal, Mr. Durrant challenges the Commissioner to produce evidence to show that the Defendant has in fact made a profit so as to be chargeable for profits tax. He further submits that the Commissioner has been inconsistent, since she must have accepted that the Defendant had made a loss for the year ended on 30th April 2004 when she cancelled the demand for provisional tax for 2004/05.
24. To start with, it is incorrect for the Defendant to observe that the Commissioner has previously accepted that the Defendant made a loss. The Defendant’s former tax representative applied for holdover of the provisional tax for 2004/05. According to the notice dated 12th October 2004, the Commissioner ordered the provisional tax for 2004/05 previously demanded to be held over. There is nothing to indicate that the Commissioner has otherwise accepted that the Defendant made a loss for 2004/05.
25. It is the Commissioner’s case that the Defendant did not file any profits tax return for 2004/05, and the assessment was based on an estimation made under section 59(3) of the IRO. Section 59(3) provides that:
“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...”
26. The assessor in question filed an affirmation to confirm that she had adopted the established system of the IRD in making the estimation, and took into account various factors including “the profit trend of the taxpayer’s business, the likely trading result of the taxpayer’s business (with reference to, for instance, the last balance sheet of the taxpayer), whether the business is of a cyclical nature, the loss (if any) brought forward from the previous year, whether the loss brought forward relates to one single year or a succession of year, etc.”.
27. I find the Defendant’s allegation that it filed a profits tax return for 2004/05 on 19th or 20th October 2005 incredible. It is clearly stated in the assessor’s note printed at the back of the notice of assessment and demand for tax for 2004/05 that the assessment was based on estimation in the absence of a profits tax return. If the Defendant had in fact submitted a return as alleged, it would not have omitted to mention this crucial fact in its objections dated 1st February 2007 and 2nd April 2007. In any event, the Defendant’s allegation is inconsistent with its case that it was fined by the IRD and the Eastern Magistracy for failing to file profits tax return for 2004/05.
28. Moreover, section 59(2) of the IRO provides that:
“Where a person has furnished a return … the assessor may either:
| | (a) | …; or |
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| | (b) | if he does not accept the return, estimate the sum in respect of which such person is chargeable to tax and make an assessment accordingly.” |
29. At the appeal, the Commissioner’s representative Ms. Siu submits that the Commissioner does not accept unaudited account as a matter of policy. This policy has been made known to taxpayers in the preamble of profits tax returns. So, even if the Defendant had filed a return for 2004/05 accompanied by an unaudited account, the assessor would still have made an estimation under s.59(2) of the IRO. The factual dispute as to whether the Defendant in fact filed a profits tax return for 2004/05 is therefore of no consequence.
30. The Commissioner has issued a certificate under section 75(3) of the IROcertifying that the Defendant has defaulted in payment of tax amounting to $33,835. Section 75(3) provides that:
“… a certificate signed by the Commissioner stating the name and last known postal address of the defaulter and particulars of the tax due by him shall be sufficient evidence of the amount so due and sufficient authority for a District Court to give judgment for the said amount.” (my emphasis)
31. In Commissioner of Inland Revenue v. Au Yuk-Shuet (1996) HKTC 489 at 493, HH Judge Pickering held that the words “sufficient evidence” in section 75(3) meant “conclusive evidence”.
32. HH Judge Pickering’s interpretation was approved by the Court of Appeal in Ng Chun-kwan v. The Commissioner of Inland Revenue [1976] HKLR 94: see the judgment of Huggins J at p.101 and the judgment of Pickering J at p.103.
33. In the present case, I am satisfied that the Commissioner is entitled under the IRO to estimate the sum in respect of which the Defendant is chargeable with profits tax for 2004/05 and to claim against the Defendant in this action when the Defendant has defaulted payment of tax. Contrary to the Defendant’s contention, the Commissioner’s claim is supported by a s.75(3) certificate and such certificate constitutes “conclusive evidence” against the Defendant.
(b) Whether the Commissioner’s claim is in breach of Article 80 of the Basic Law?
34. Article 80 of the Basic Law provides that:
“The courts of the Hong Kong Special Administrative Region at all levels shall be the judiciary of the Region, exercising the judicial power of the Region.”
35. In my view, Article 80 must be read together with Article 84, which provides that:
“The courts of the Hong Kong Special Administrative Region shall adjudicate cases in accordance with the laws applicable in the region as prescribed in Article 18 of this Law and may refer to precedents of other common law jurisdictions.”
36. Section 75(4) of the IRO provides that:
“In proceedings under this section for the recovery of tax the court shall not entertain any plea that the tax is excessive, incorrect, subject to objection or under appeal…”
37. In Ng Chung-kwan, supra, the Court of Appeal held that the IRO distinguished between “assessment” and “tax”. In the words of Briggs CJ at p.98:
“The Ordinance … carefully differentiates between assessment and tax. Objections to the former are dealt with by a Board of Review and the Supreme Court [now the Court of First Instance] – objections to the tax are dealt with by the District Court. I do not see how it can be suggested that matters for which an avenue of appeal is provided can be raised by way of a defence in another court.”
38. The Court of Appeal revisited the distinction in Commissioner of Inland Revenuev. Choy Sau Kam [1983] 1 HKC 101 and concluded (at p.106) that:
“(a) the provisions of ss.64, 68 and 69 expressly give to the Commissioner or to the Board of Review or to the High Court [now the Court of First Instance] power to annul an assessment; and
(b) the ouster of the Court's jurisdiction by virtue of section 75(4) to entertain a plea that the tax is incorrect does not mean that the taxpayer has no means of redress. He has the procedure laid down by sections 64, 68 and 69, whereby he can raise all the matters which he would have wished to raise by way of Defence.”
39. In my view, the Defendant’s contention is misconceived because it has confused the distinction between “assessment” and “tax” in the IRO.
40. The Defendant should have challenged the assessment by means of an objection under s.64(1). On receipt of a valid notice of objection, the Commissioner may confirm, reduce, increase or annul the assessment objected to under s.64(2). Any person who has validly objected to an assessment but with whom the Commissioner has failed to agree may appeal to the Board of Review under s.66(1). The Board may confirm, reduce, increase or annul the assessment appealed against under s.68(8)(A). The decision of the Board shall be final but either party may make an application requiring the Board to state a case on a question of law for the opinion of the Court of First Instance under s.69(1). Under s.69(5), a judge of the Court of First Instance shall hear and determine any question of law arising on the stated case and may in accordance with the decision of the court upon such question confirm, reduce, increase or annul the assessment determined by the Board, or may remit the case to the Board with the opinion of the court thereon.
41. The above illustrates that there is a well-established procedure for the Defendant to challenge the assessment. The Defendant has in fact tried to object to the assessment for 2004/05 by its letter dated 1st February 2007. By a letter dated 8th February 2007, the Commissioner informed the Defendant that the letter dated 1st February 2007 could not be accepted as a valid notice of objection because no properly completed tax return together with audited account had been submitted. The Defendant said it has not received this letter. In my view, whether the Defendant has in fact received the Commissioner’s letter is immaterial given the Commissioner’s policy mentioned above and the Defendant’s admission that it has never submitted an audited account for 2004/05.
42. Ms. Siu has indicated at the hearing that the Defendant may still submit a valid notice of objection accompanied by audited account and the Commissioner will consider it under s.64(1)(a) of the IRO. However, Mr. Durrant says the Defendant has lost confidence in the Commissioner and declines to do so.
(c) Whether the Defendant has been denied a fair hearing?
43. Article 10 of the Hong Kong Bill of Rights Ordinance provides that:
“All persons shall be equal before the courts and tribunals. In the determination of any criminal charge against him, or of his rights and obligations in a suit at law, everyone shall be entitled to a fair and public hearing by a competent, independent and impartial tribunal established by law…”
44. However, Article 10 does not apply to assessment of tax by the Commissioner. This is because Article 10 (like Article 6(1) of the International Convention on Civil and Political Rights) does not apply to administrative matters and an assessment is an administrative act made pursuant to the provisions of the IRO. See Commissioner of Inland Revenue v. Lee Lai-ping, the administratix of the estate of the late Lui Kim-kei, formerly trading as Leung Lee Seafood Wholesale (1993) 3 HKPLR 141.
(d) Whether the assessment is in breach of the principle that a person is innocent until proven guilty?
45. In my view, the Defendant is over-generalizing the situation.
46. Article 11(1) of the Hong Kong Bill of Rights Ordinance provides that:
“Everyone charged with a criminal offence shall have the right to be presumed until proved guilty according to law.”
The Defendant has not been charged with any criminal offence.
(e) Whether the assessor is guilty of negligence and misfeasance?
47. The Defendant argues that the assessor is guilty of negligence and misfeasance by:
| | (a) | failing to inform the Defendant that it could re-audit the account for 2003/04; |
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| | (b) | failing to pay attention to the Defendant’s tax return for 2004/05 and accompanying documents submitted on 19th or 20th October 2005; |
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| | (c) | failing to respond to the letter of objection dated 1st February 2007; and |
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| | (d) | preventing the Defendant from having a trial to object to the assessment. |
48. This is just a derivative of the other arguments. I have already explained why these arguments must fail. The Defendant has failed to establish that the Commissioner owed it any duty of care. On the contrary, it is the Defendant’s responsibility under s.51 of the IRO to furnish a return as well as full information within the prescribed time.
(f) Conclusion on the Defendant’s application
49. There is no substance in the Defendant’s application to dismiss the Commissioner’s claim. I agree with the Master’s order that the Defendant’s summons should be dismissed.
The Commissioner’s application
50. No evidence is admissible on the Commissioner’s application to strike out the Defence: see O.18, r.19(2).
51. In Au Yuk-Shuet, supra, the District Court ruled that the argument that no liability whatever attached to the defendant was merely another way of saying that the tax was “excessive or incorrect”.
52. More recently, HH Judge Lok said in Commissioner of Inland Revenue v. EWIG Industries Co Ltd, DCTC 7883/2005 (at para.10) that:
“For any challenges relating to the assessment of tax, it is in effect a plea that the tax assessment is excessive or incorrect, and this is an objection which should be raised in the appeal proceedings.”
53. In my view, the Defendant’s contention that:
“The Inland Revenue Department is fully aware that during the year in question 2004/2005 [the Defendant] made a loss of approximately HK$337,000.”
amounts to a plea that the tax is “excessive or incorrect”. The District Court may not entertain such a plea under s.75(4) of the IRO.
54. The Master was therefore correct to strike out the Defence and to enter judgment.
Conclusion
55. The Defendant’s appeal is dismissed.
56. I make an order nisi as to costs that the Defendant do pay the Commissioner’s costs of the appeal, to be taxed if not agreed. Unless an application has been made to vary that order, that order shall become absolute 14 days after this decision is handed down.
| | (J. Ko)
Deputy District Judge |
Representation:
Ms. C. SIU of Department of Justice for Plaintiff.
Defendant in person.