Panel:T J Gregory(Chairman), Raphael Chan Cheuk Yuenand Larry Kwok Lam Kwong

INLAND REVENUE BOARD OF REVIEW DECISIONS

Case No. D29/93

Penalty tax – late filing of return – requirement for audited accounts – jurisdiction of Board of Review – quantum of amount of penalty – section 82A of Inland Revenue Ordinance.

Panel:T J Gregory(chairman), Raphael Chan Cheuk Yuenand Larry Kwok Lam Kwong.

Dates of hearing: 17 September, 26 October 1992, 17, 18 and 19 February1993.

Date of decision:26October1993.

The taxpayer was late in filing its profits tax return. It was submitted to the Board that the reason for the late filing was because the Commissioner had wrongfully insisted that the tax return should be filed with the audited accounts of the taxpayer. It was further argued that the taxpayer was allowed a grace period for filing its tax return. Finally it was argued that the amount of the penalty was excessive.

Held:

It is not ultra vires for the Commissioner to require a profits tax return to be accompanied by audited accounts. The claim that the Board had no jurisdiction to hear the appeal was likewise dismissed. It was found as a fact that even if there were a grace period, the taxpayer had exceeded such period and accordingly this ground of appeal failed. Finally it was decided that the amount of the penalty was not excessive.

Appeal dismissed.

Cases referred to:

Preston v IRC [1985] STC 282

Aspin v Estill [1987] STC 723

Attorney General v Great Eastern Railway Co [1880] 5 Appeal Cases 473

Commissioners v National Federation of Self-employed Businesses Ltd [1982] AC

617

Gosling v Veley [1847] 12 QB 326

Cape Brandy Syndicate v IRC [1921] 1 KB 71

CIR v Mayland Woven Labels Factory Ltd [1975] HKTC 627

R v Richmond Upon Thames London Borough Council ex parte McCarthy & Stone

(Development) Limited [1990] 2 WLR 1294

Clinch v IRC [1974] 1 QB 76

Chief Adjudication Officer v Foster [1992] 1 QB 31

R v Oxford Crown Court ex p Smith [1990] COD 211

D2/88, IRBRD, vol 3, 125

D53/88, IRBRD, vol 4, 10

D65/90, IRBRD, vol 5, 455

D74/89, IRBRD, vol 6, 169

M Y Cheungfor the Commissioner of Inland Revenue.

Philip Dykes instructed by Messrs Ho & Chan for the taxpayer.

Decision:

1.THE SUBJECT MATTER OF THE APPLICATION

1.1The Taxpayer appealed against the penalty imposed pursuant to section 82A of the Ordinance arising out of the late filing of the Taxpayer’s accounts for the year of assessment 1990/91.

1.2Notice of appeal was lodged on behalf of the Taxpayer by its tax representative on 18 June 1992 the grounds of appeal being that:

1.2.1the company is not liable to additional tax; or alternatively

1.2.2the amount of additional tax assessed on the company exceeds the amount for which it is liable under section 82A; or alternatively

1.2.3the amount of additional tax, although not in excess for which it is liable under section 82A is grossly excessive having regard to the circumstances.

2.ADDITIONAL GROUNDS OF APPEAL

2.1When the Board sat to hear this appeal Counsel for the Taxpayer stated that he would be taking three additional grounds of appeal with respect to which the Revenue might need time to consider not only the points raised but also whether or not to call witnesses with respect to the points in question.

2.2The points in question were that:

2.2.1The requirement for audited accounts was ultra vires the Revenue. TheBoard was referred to section 51 of the Ordinance and was advised that theTaxpayer would be calling an expert on the interpretation of statutes on thispoint.

2.2.2The practice of the Revenue was to treat the block extensions normallyafforded to corporations with tax representatives as, effectively, extendingthe period by a further three months. The Board was referred to page 39of the January/February 1991 issue and pages 35 and 36 of the March/April1992 issue of the official publication of the Hong Kong Society ofAccountants, ‘The Hong Kong Accountant’.

2.3Although the request to add additional grounds of appeal was resisted by theRevenue, after a brief adjournment the Board felt that it was appropriate forthe three issues which had been raised to be considered. Accordingly, theTaxpayer was ordered to file the additional grounds of appeal within sevendays and the appeal was adjourned to dates to be fixed after an estimate ofthe duration of the hearing had been provided to the Clerk to the Board.

2.4The three additional grounds of appeal were:

(i)The requirement contained in Inland Revenue Form BIR 51 (‘Profits Tax Return – Corporations’) that a return must be accompanied by a certified balance sheet, auditor’s report and profit and loss account is ultra vires the provisions of section 51(1) of the Inland Revenue Ordinance and of no force and effect. To the extent that any alleged non-compliance with this said requirement provides the basis for action taken by the assessor under the provisions of sections 82A(l)(d) and 82A(l)(ii) of the said Ordinance, the assessor has misdirected himself in law and/or acted unlawfully and the taxpayer is by reason thereof not liable to the additional tax in the sum assessed or at all.

(ii)If (which is not admitted) the taxpayer failed to comply with the requirements of section 51(1) of the Inland Revenue Ordinance by submitting an inaccurate first return on 29 November 1991 which declared an assessable profit which was in excess of the actual assessable profit which was later declared in a second return on 19 February 1992 (see (iii) below) then on the date when thetaxpayer filed its second return, it was only four days outside the extended penalty free allowance period granted by concession of the Inland Revenue (see Commissioner’s Circular dated 25 March 1991 paragraph 2 (iii) and the stated practice of the Commissioner as evidenced by Item A13 of the Journal of the Hong Kong Society of Accountants January/February 1991) and such tax as may be due is not substantial. The amount of additional tax sought is, in the circumstances, grossly excessive.

(iii)There has been no undercharge which has been undetected within the meaning of section 82A of the Inland Revenue Ordinance. The Taxpayer in this case submitted an inaccurate first return on 29 November 1991 declaring an assessable profit of $34,522,830. The revised second return which was submitted on 19 February 1992 declared an assessable profit for the relevant period of $32,503,206.

3.THE FACTS

The facts, which were agreed between the Taxpayer and the Revenue and placed before the Board are set out below. The sole alteration to the statement placed before the Board relates to the need to protect the identity of the Taxpayer in this case and its tax representatives.

(1)The Taxpayer, [Taxpayer named] (the ‘Taxpayer’) is appealing against theimposition and quantum of the additional tax assessed upon it by way ofpenalty for the year of assessment 1990/91.

(2)The Taxpayer was incorporated in mid-1970 under the CompaniesOrdinance, Hong Kong. It drew up its accounts annually to 31 March eachyear.

(3)The Taxpayer was represented for taxation purposes, as declared in itsannual returns, by firm identified, Public Accountants for the years ofassessment 1985/86 to 1989/90. The tax return for the year of assessment1990/91 was submitted in the name of firm identified, Certified PublicAccountants upon the merger of firm identified with firm identified asindicated in the director’s report attached to the financial statementssubmitted to the Inland Revenue Department (the Department).

(4)Details of the tax return submission record of the Taxpayer for the fiveyears preceding the one under appeal, are as follows:

Year of
Assessment / Date of
Issue
of Return / Block
Extended
Due Date / Date of
Submission
of Return / Assessable
Profit
Involved
$
1985/86 / 1-4-1986 / 31-10-1986 / 13-1-1987 / 5,551,380
1986/87 / 1-4-1987 / 31-10-1987 / 17-11-1987 / 3,886,060
1987/88 / 6-4-1988 / 31-10-1988 / 31-10-1988 / 363,939
1988/89 / 3-4-1989 / 15-11-1989 / 1-12-1989 / *9,509,580
1989/90 / 2-4-1990 / 15-11-1990 / 29-12-1990 / *4,280,805

* Returns submitted after the issuing of estimated assessments.

(5)Details of the assessments, tax assessed and tax payments for the years of assessment 1985/86 to 1989/90 are extracted as follows:

1985/86
Estimated Assessment / Revised Assessment
Amount
$ / Date / Amount
$ / Date
Profit assessed / 2,000,000 / 14-1-87 / 5,551,380 / 13-2-87
Tax thereof / 370,000 / 1,027,005
Less: 1985/86
Provisional / 134,524
235,476 / 134,524
892,481
Add: 1986/87
Provisional / 370,000 / 1,027,005
605,476 / 1,919,486
Tax due and paid:
First Instalment / 512,976 / 6-3-87 / 1,662,735 / 16-3-87
Second Instalment / 92,500 / 27-5-87 / 256,751 / 5-6-87
605,476 / 1,919,486
1986/87
Assessment
Amount
$ / Date
Profit assessed / 3,886,060 / 9-12-87
Tax thereof / 718,921
Less: 1986/87
Provisional / 1,027,005
(308,084)
Add: 1987/88
Provisional / 699,490
391,406
Tax due and paid:
First Instalment / 216,534 / 9-2-88
Second Instalment / 174,872 / 28-4-88
391,406
198788
Assessment
Amount
$ / Date
363,939 / 9-12-88
Tax thereof / 65,509
Less: 1987/88
Provisional / 699,490
(633,981)
Add: 1988/89
Provisional / 61,869
Tax refunded / (572,112) / 9-12-88
1988/89
Estimated Assessment / Revised Assessment
Amount
$ / Date / Amount
$ / Date
Profit assessed / 480,000 / 22-11-89 / 9,509,580 / 22-12-89
Tax thereof / 81,600 / 1,616,628
Less: 1988/89
Provisional / 61,869
19,731 / 61,869
1,554,759
Add: 1989/90
Provisional / 79,200 / 1,569,080
3,123,839
Less: Previously
charged / 98,931
Tax due and paid: / 3,024,908
First Instalment / 79,131 / 17-1-90 / 2,632,638 / 22-2-90
Second Instalment / 19,800 / 17-4-90 / 392,270 / 8-5-90
98,931 / 3,024,908
1989/90
Estimated Assessment / Revised Assessment
Amount
$ / Date / Amount
$ / Date
Profit assessed / 11,700,000 / 30-11-90 / 4,280,805 / 11-2-91
Tax thereof / 1,930,500 / 706,332
Less: 1989/90
Provisional / 1,569,080 / 1,569,080
361,420 / (862,748)
Add: 1990/91
Provisional / 1,930,500 / 706,332
2,291,920 / (156,416)
Tax paid (Refunded)
First Instalment / 1,809,295 / 31-3-91 / (156,416) / 11-2-91
Second Instalment / 482,625 / 18-4-91 / / 11-2-91
2,291,920 / (156,416)
(Tax payable
completely
discharged)

(6)On 2 April 1991, a profits tax return (BIR 51) for the year of assessment 1990/91 (the return), was issued to the Taxpayer. One of the paragraphs appearing on the return reads ‘All sections of this form must be completed and returned to me within one month from the date of this notice, together with a certified copy of your balance sheet, auditor’s report, and profit and loss account in respect of the basis period, and a tax computation with supporting schedules, showing how the amount of assessable profits (or loss) has been arrived at.’

(7)Under paragraph 2 (iii) of the circular of 25 March 1991 from theCommissioner of Inland Revenue (the Commissioner) to all authorised taxrepresentatives, the compliance date specified on the 1990/91 profits taxreturn for the company having its accounts closed on 31 March 1991, wasautomatically extended under the existing block extension scheme to 15November 1991.

(8)Paragraph (3) of the same circular also stated ‘clients presently representedby you and their existing accounting codes are already recorded in thedepartment’s computer records. There is, therefore, no need to apply fora block extension in respect of these clients.’

(9)On 29 November 1991, the return as mentioned in fact (6) above declaringan assessable profit of $34,522,830 was submitted by the tax representativesin their new name firm identified by hand to the department, together witha detailed management profit and loss account.

(10)On 29 November 1991, an estimated assessment for the year of assessment1990/91 was issued to the company under section 59(3) of the InlandRevenue Ordinance. A copy of the notice of assessment and demand forprofits tax was also sent to earlier tax representative identified.

(11)Details of the 1990/91 profits tax assessment were as follows:

Year of Assessment 1990/91
Estimated assessable profit under section 59(3) in
the absence of return / $5,570,000
Profits Tax Payable / 919,050
Less:Provisional Tax Charged for the Year
of Assessment 1990/91 / 706,332
Balance Undercharged / 212,718
Year of Assessment 1991/92 Provisional Tax
$5,570,000 x 16.5% / 919,050
Total Tax Payable / 1,131,768
Due Dates of payment of tax:
Tax Demanded / Due Dates
First Instalment / $ 902,006 / 31-1-92
Second Instalment / 229,762 / 16-4-92
$1,131,768

(12)On 10 December 1991 a letter IR683 was sent by a senior assessor to theTaxpayer acknowledging receipt of the Taxpayer’s 1990/91 profits taxreturn stating ‘An estimated assessment was sent for the above year ofassessment before I received the profits tax return, I regret that I cannotaccept your return as a valid notice of objection under section 64 of theInland Revenue Ordinance because it was not accompanied by a writtennotice of objection.’, and ‘Should the notice not be received by the abovedeadline, the assessment will become final and conclusive’.

(13)No objection was lodged as specified in the above form letter to theestimated assessment.

(14)On 20 January 1992, a second estimated additional assessment detailed asfollows was issued:

Year of Assessment 1990/91 (Additional)
Estimated Additional Assessable Profit under
Section 60 and Section 59(3) of the
Inland Revenue Ordinance / $30,000,000
Tax thereon / 4,950,000
Add: Additional Provisional Tax 1991/92 / 4,950,000
Total Additional Tax payable / $9,900,000
Due Dates for Payment of Tax:
Tax Demanded / Due Dates
First Instalment / $8,662,500 / 10-3-92
Second Instalment / 1,237,500 / 18-5-92
$9,900,000

(15)Through its tax representatives, the Taxpayer submitted audited accountstogether with notice of objection on 19 February 1992, showing anassessable profit for the year of assessment 1990/91 as $32,503,206.

(16)On 2 March 1992, a notice was issued by the department advising theTaxpayer that the tax amount under objection had been held overunconditionally pending the result of the objection. Details of the amountso held over are as follows:

Tax Demanded / Due Dates
First Instalment / $7,776,962 / 10-3-92
Second Instalment / 1,110,994 / 18-5-92
$8,887,956

(17)Full amounts of the instalments on the notice mentioned in paragraph (16) above were paid by the Taxpayer duly on due dates.

(18)The additional estimated assessment was also revised on 2 March 1992 by the department to $26,933,206 as per the profit shown in the audited accounts less the amount already assessed under the first estimated assessment.

(19)Details of the assessments, tax assessed and tax payments for the year of assessment 1990/91 are extracted as follows:

1990/91
Estimated Assessment
Amount
$ / Date
Profit assessed / 5,570,000 / 29-11-91
Tax thereof / 919,050
Less: 1990/91
Provisional / 706,332
212,718
Add: 1991/92
Provisional / 919,050
1,131,768
Tax due and paid:
First Instalment / 902,006 / 31-1-92
Second Instalment / 229,762 / 16-4-92
1,131,768
Additional
Estimated Assessment / Revised Assessment
Amount
$ / Date / Amount
$ / Date
Profit assessed / 30,000,000 / 20-1-92 / 26,933,206 / 2-3-92
Tax thereof / 4,950,000 / 4,443,978
Add: 1991/92
Provisional / 4,950,000 / 4,443,978
9,900,000 / 8,887,956
Tax due and paid:
First Instalment / 8,662,500 / 10-3-92 / 7,776,962 / 10-3-92
Second Instalment / 1,237,500 / 18-5-92 / 1,110,994 / 18-5-92
9,900,000 / 8,887,956

(20)The amounts of tax assessed on the various assessments for the year ofassessment 1990/91 mentioned in paragraph (19) above have been duly paidon due dates.

(21)On 12 March 1992, the Commissioner of Inland Revenue issued a noticeto the Taxpayer under section 82A(4) of the Inland Revenue Ordinance,advising the Taxpayer of his intention to assess additional tax under section82A. The notice invited written representations from the Taxpayer not laterthan 10 April 1992.

(22)The Taxpayer, through its representatives, made representations to theCommissioner on 6 April 1992.

(23)The Commissioner on 19 May 1992, issued to the Taxpayer a notice ofassessment and demand for additional tax under section 82A for the year ofassessment 1990/91 in the amount of $400,000.

(24)The Taxpayer, through its representatives [firm identified] lodged anappeal to the Clerk to the Board of Review on 18 June 1992.

4.PRELIMINARY POINT OF THE TAXPAYER IN THE HEARING

4.1The Counsel for the Taxpayer who was instructed to argue the firstadditional ground of appeal, namely the power of the Commissioner to require audited accounts, handed in a bundle of authorities. He then drew the Board’s attention to the decision of the Court of Appeal in CIR v Mayland Woven Labels Factory Ltd [1975] HKTC 627 and stated that the basis of that case was that the demand for documents were not within the power of the Commissioner. The Taxpayer’s submission would be that the requirement to produce audited accounts puts a charge on a taxpayer, something which was not authorised by the Inland Revenue Ordinance (‘the Ordinance’). The Board were also advised that the representative of theRevenue would challenge the jurisdiction of the Board to deal with that question.

4.2The representative of the Revenue stated that the Revenue relied on twocases namely Preston v IRC [1985] STC 282 and Aspin v Estill [1987] STC723.

4.3The Board was referred to passages in both of these cases.

4.4Counsel for the Taxpayer stated that the challenge to the authority of theCommissioner would be supported by reference to the authorities whichrelated to illegal acts by taxing authorities. Neither was authority for theproposition that the taxpayer could not raise a defence on public law beforethe Board.

4.5In response to a question from the Board the representative to the Revenueprovided no answer as to why the Commissioner had not elected to seek ajudicial review save for the comment that the power conferred by theOrdinance related to routine cases, as opposed to cases of the nature beforethe Board.

The Board decided that it was not precluded from hearing the case and advised the parties that it would continue to hear the appeal.

5.SUBMISSION FOR THE TAXPAYER

5.1Counsel advised the Board that form BIR 51 is a form which the Board ofInland Revenue had caused to be published under the provisions of section51(1) of the Ordinance for the purpose of obtaining tax returns relating toprofits tax under part IV of the Ordinance.

5.2Counsel read section 51(1) to the Board and then referred the Board tosection 86 which gives the Board of Inland Revenue power to specify forms‘which may be necessary for carrying this Ordinance into effect’. It wasnoted that failure to comply with the requirements of the notice given to aperson under section 51(1) was a criminal offence under the provisions ofsection 80(2)[D] and that the penalty could be a fine of $5,000 and a furtherfine of treble the amount of tax undercharged.

5.3Section 18(2)(a) also made it an offence for a person, without reasonableexcuse, to make an incorrect return by omitting or understating anything inrespect of which he is required by the Ordinance to make a return.

5.4The submission to be made on behalf of the Taxpayer was that therequirement contained in the notice that a corporate taxpayer should providea certified balance sheet, auditor’s report and profits and loss account isultra vires the powers conferred upon the Board of Inland Revenue by thelegislature and such requirement cannot be said to be incidental to orconsequential upon the powers conferred upon the Board of Inland Revenueby the legislation. Additionally it is contended that ‘particulars’ could onlybe sought of the person to which a notice under section 51(1) is addressedthere is no power to require the involvement of third parties in completingthe return.

5.5The Ordinance does not expressly provide in section 51(1) that the Boardof Inland Revenue shall have the power to require taxpayers to submitreturns to an assessor accompanied with the documentation specified in thenotice the express provision contained in section 51(1) are:

(a)that an assessor may issue a notice in writing to any personrequiring him or her within a reasonable time [to be specified in thenotice] to furnish a return relating to property tax, salaries tax, orinterest tax [as defined in the relevant parts of the Ordinance],

(b)that the Board may specify the return which the assessor mayrequire and may specify the particulars to be provided by the personto whom a notice is given by the assessor and the form in which theparticulars must be returned.

5.6If the legislation does not expressly authorise the Board of Inland Revenueto require a person to whom a notice is given by the assessor to provide thedocumentation sought in the notice the power can only arise by legislativeimplication. When interpreting the express words of an enactment to seewhether there is a legislative implication the test to be applied, it wassubmitted, was that set out in section 174 of Bennion’s ‘StatutoryInterpretation’, second edition 1992 at page 366, which the Board wasadvised to read: