Can a taxpayer object to the original assessment for the year of assessment concerned after the IRD has proposed an increase in tax without validly objecting to the original assessment for the year of assessment within the time limit?

The Court held that it had no reason to review the Commissioner of Inland Revenue’s decision. An application for rectification under section 70A of the Inland Revenue Ordinance is for the purpose of rectifying an assessment. Therefore, the right to apply for rectification is limited to the particular notice of assessment. The Court of Appeal dismissed the taxpayer’s appeal.

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Background

Good Mark Industrial Ltd V Commissioner Of Inland Revenue

On August 16, 2004, a taxpayer filed a Profits Tax Return for the year of assessment 2003/2004, and on September 17, 2004, the Inland Revenue Department (“IRD”) filed a Profits Tax Return under the Inland Revenue Ordinance. The Inland Revenue Department (“IRD”) issued an assessment based on the taxpayer’s return on September 17 of the same year. At that time, the taxpayer did not raise any valid objection to the relevant initial assessment.

On 28 January 2005, the IRD issued an additional tax credit to the taxpayer to prohibit the taxpayer from claiming tax relief for some bad debts arising from non-trading activities. The taxpayer did not raise any valid objection to the relevant additions. Up to March 17, 2010, IRD issued a protective top-up tax credit to taxpayers to prohibit tax allowances for capital reduction and depreciation of fixed assets. In April 2010, taxpayers eventually filed objections to the second incremental credit for 2010 within the six-month objection period for the second incremental credit. The taxpayer also requested a re-assessment of the initial assessment for the year of assessment 2003/2004 and the first additional tax for 2005 under section 70A of the IRO.

The taxpayer considers that section 70A of the IRO will be engaged once the IRD proposes the second incremental tax. Correction of an assessment may cover over-assessment beyond the scope of the “relevant notice of assessment” (i.e. the assessment of the additional amount of tax) and include any other over-assessment due to “errors and omissions” throughout the relevant year of assessment (i.e. the year of assessment 2003/2004). The taxpayer also claimed that the taxpayer had been over-assessed for the whole year of assessment (i.e. 2003/2004 year of assessment) due to “errors and omissions”.

The taxpayers also claimed that the restriction on revision of relevant notices of assessment was unfair to the taxpayers under the literal interpretation of section 70A of the IRO. The restriction does not maintain equality between IRD and taxpayers. Under section 60 of the IRO, the IRD has the power to make further assessments within six years after the end of the year of assessment. If the taxpayer’s right to object was restricted to the “notice of relevant assessment”, the taxpayer could not re-open other tax assessments for the same year of assessment.

The IRD does not share the taxpayer’s view. The IRD is of the view that if the taxpayer has not filed a valid objection within the time limit, the assessment made at that time should be final and irrevocable under section 70 of the IRO.

The taxpayer eventually lodged an appeal against the second increment and applied for judicial review of the IRD’s decision not to re-assess the two earlier tax assessments (i.e. the initial assessment and the first increment in 2005).

The Dispute

Section 70 of the Inland Revenue Ordinance declares that an assessment issued or agreed to shall be final and conclusive if no valid objection is filed within the time limit set by the Inland Revenue Department, or if the objection has been assessed, or if the application of the Board of Review has been withdrawn.

Section 70A of the Inland Revenue Ordinance allows a fresh assessment to be made within six years after the relevant year of assessment; or within six months after the notice of assessment, whichever is the later. This is provided that the Assessor agrees that the taxpayer has paid too much tax for the relevant year of assessment due to an error or omission.

Judgment of the Court of Appeal

The Court of Appeal handed down its judgment in 2015.

The Court of Appeal held that the six-month period for “relevant notices of assessment” was clearly intended to cover notices of assessment that were not served after the sixth year. This period was to allow taxpayers a period within which to respond to an assessment made by IRD.

The Court also pointed out that an application for rectification under section 70A of the Inland Revenue Ordinance is for the purpose of rectifying a particular assessment. Therefore, the right to apply for rectification should be confined to a specific notice of assessment. The term “relevant notice of assessment” is used in section 70A of the IRO. In the present tax case, the relevant notice of assessment should only refer to the second increment proposed by IRD in March 2010, instead of the previous initial assessment and the first increment in 2005.

The Court of Appeal therefore ruled against the taxpayer and dismissed the appeal.

Conclusion

In this case, it should be noted that when the taxpayer filed his objection in April 2010, it was already six years (i.e. March 31, 2010) after the time limit for making the initial assessment.

Therefore, a request for re-assessment under section 70A of the IRO can only be made within six months of the notice of assessment. Re-assessment will only cover the specific notice of assessment therein. However, tax assessed earlier for the same year of assessment cannot be reassessed after the statutory time limit of six years under section 70 of the Inland Revenue Ordinance. If you are in any doubt, please consult a tax or legal professional.