Moulin Global Eyecare Trading Ltd (In Liquidation) (Formerly Known As Moulin Optical Manufactory Ltd) v The Commissioner Of Inland Revenue

FACV No. 5 of 2013

IN THE COURT OF FINAL APPEAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

FINAL APPEAL NO. 5 OF 2013 (CIVIL)

(ON APPEAL FROM CACV No. 64 of 2011)

_____________________

__________________

JUDGMENT

__________________

Chief Justice Ma:

1. I agree with the judgment of Lord Walker of Gestingthorpe NPJ.

Mr Justice Ribeiro PJ:

2. I agree with the judgment of Lord Walker of Gestingthorpe NPJ.

Mr JusticeTangPJ:

3. The appellant, MGET was the principal operating subsidiary of Moulin Global Eyecare Holdings Ltd (Holdings), a listed company in Hong Kong since 1993, which had a majority of public shareholders. MGET’s case is that its profits had been fraudulently inflated over the tax years 1998/1999 to 2003/2004 by its then management.^[1] MGET’s tax returns were prepared based on balance sheets which had included such inflated profits. Assessments were made based on such returns and the tax^[2] paid as a result were excessive. Two directors of MGET and other members of its management have been convicted of a number of fraud charges involving false accounting in respect of Holdings accounts. I do not believe it is seriously challenged that some of the directors of MGET were innocent. But it does not matter, because for the present purpose, I shall proceed on the basis that there were innocent directors.

4. MGET was ordered to be wound up on 5 June 2006. This appeal arose out of the liquidators’ applications under s 64(1)(a) and s 70A of the Inland Revenue Ordinance Cap 112.

5. Under s 64(1), a taxpayer has one month after the date of the assessment to give notice of objection to the assessment with the possibility of an extension:

“(a) if the Commissioner is satisfied that owing to absence from Hong Kong, sickness or other reasonable cause, the person objecting to the assessment was prevented from giving such notice within such period …”

6. The Liquidators applied under s 64(1)(a) for extensions of time to object to the assessments made during those tax years … on the ground that the fraud of its previous management (which was not discovered until after the provisional liquidators were appointed in June 2005) had prevented MGET from giving notice of objection within the statutory time limit of one month.

7. The application under s 70A, which has a relevant time limit of 6 years, is confined to the tax year 2003/2004. Under s 70A, a taxpayer may obtain repayment “if, upon application made within 6 years after the end of a year of assessment … 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…”. In respect of the tax year 2003/2004, MGET’s case is that the tax^[3] paid was excessive by reason of errors in the return or statement submitted in respect thereof, because MGET’s profits had been deliberately and fraudulently inflated by the management of MGET.

8. The Commissioner rejected these applications. On the liquidators’ application for judicial review, on 15 February 2011, Reyes J decided in favour of the liquidators and ordered the Commissioner to reconsider her decisions. On 21 March 2012, the Court of Appeal allowed the Commissioner’s appeal and set aside Reyes J’s orders. Essentially, the Court of Appeal decided that the fraudulent knowledge of MGET’s management that the profits had been inflated should be attributed to MGET such that MGET had not been prevented from giving notice of objection within time nor was there any error within the meaning of s 70A. This court granted leave to appeal so that the law relating to attribution could be considered.

9. I have had the advantage of reading the judgment of Lord Walker of Gestingthorpe in draft. I am grateful to Lord Walker for his analysis of the concept of attribution and the fraud exception. Lord Walker has summarized (at para 106) his conclusion on the general effect of the leading authorities on attribution and the fraud exception. I shall use Lord Walker’s summary as my guide.

Section 64(1)(a)

10. I am of the view that MGET’s reliance on s 64(1)(a) is misplaced. Like Lord Walker, I am inclined to accept Mr Brennan’s submission for the Commissioner, that s 64(1)(a) contemplates some temporary impediment of an external and physical nature, rather than something internal and psychological. Thus, if a taxpayer failed to object within the statutory time limit because of wrong advice from his accountants, the taxpayer could not be said to have been prevented from giving timely notice of objection. Nor when the “cause” is said to be the undiscovered fraud of its management. This is so, even when the fraud is not attributed to the corporate taxpayer. For the purpose of s 64(1)(a) I do not think it necessary to decide whether the fraud of MGET’s previous management should be attributed to it. Should it be necessary to do so, I would for the reasons I give below in respect of s 70A, hold that the guilty knowledge of MGET’s management should not be attributed to it.

Section 70A

11. So far as the appellant’s application under s 70A is concerned I am also in respectful agreement with Lord Walker that “a deliberate lie cannot be an error for the purpose of s 70A” (para 128). However, with respect, I do not agree that the fraud exception is not applicable.

12. Lord Walker says, and I respectfully agree, questions of attribution are always sensitive to the factual situation in which they arise, and the language and legislative purposes of any relevant statutory provisions. The specific context here is s 70A. An application under s 70A does not fall within the well known categories of liability cases or redress cases. Nor is it truly comparable to cases where redress is sought from an auditor or an insurance company. In Stone and RollsLtd v Moore Stephens (HL(E)) [2009] 1AC 1391, in the context of a claim against an allegedly negligent auditor, Lord Walker said where there are innocent shareholders:

“… the court would have to inquire quite closely into the facts in order to see (as Saville LJ put it in Group Josi) whether it would be contrary to justice and common sense to treat the company as complicit ...”

13. I believe justice and common sense is the reason for the fraud exception. The robust language of Lords Halsbury and Macnaghten in Gluckstein v Barnes[1900] AC 240 quoted by Lord Walker at para 81 of his judgment reflected their views on the justice and common sense in that case.

14. It may be helpful to consider what are or may be “errors” under s 70A. The scope of s 70A may assist in deciding what justice and common sense require in the present case.

15. In ExtramoneyLtd v Commissioner of Inland Revenue [1997] HKLRD 387, Patrick Chan J (as he then was) would regard “something incorrectly done through ignorance or inadvertence; a mistake” as errors for the purpose of s 70A. I respectfully agree.

16.Radio Picture Ltd v Commissioners of Inland Revenue[1937] 22 TC 106, a case mentioned by Patrick Chan J, was concerned with s 24 of the Finance Act 1923, on which s 70A was based. There, the question was whether the taxpayer’s liability under an agreement between it, an English company, and its parent company, an American company, constituted a dollar debt or a sterling debt. It paid tax on the basis that the liability was a sterling debt although it had paid the parent company on the basis that it was a dollar debt. The difference was substantial and against the taxpayer after the United Kingdom went off the gold standard in 1931. How the taxpayer came to pay tax on the less advantageous basis was...