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Commissioner of Inland Revenue v National Pacific Insurance [2000] TOLawRp 35; [2000] Tonga LR 392 (31 October 2000)

IN THE SUPREME COURT OF TONGA

Commissioner of Inland Revenue

v

National Pacific Insurance

Supreme Court, Nuku'alofa
Ward CJ
C 121/2000

27 October 2000; 31 October 2000

Income tax — notice of assessment — should contain time within which to object

On 18 January 1999 the plaintiff prepared and issued notices of assessment for the five tax years starting in July 1993. The total amount stated in those notices was $196,602.14 and they were sent to the managing director of the defendant in Apia with a covering letter explaining that "the company had been re-assessed as required by section 34 of the Income Tax Act". On 8 April 1999, the defendant's agent sent a notice in writing on Form 2 of the Second Schedule to the Act objecting to the amount of tax assessed on the basis that the defendant had been taxed at the wrong rate following incorrect classification as a non-resident insurance company. The plaintiff disallowed the objection on the basis that it was out of time. The plaintiff submitted that the time given for payment in the notice of assessment was the time determined for objection.

Held:

1. The right to object in section 77 was not a provision that directly imposed a financial burden but, as it gave a unilateral power to the authorities to limit the right of the person taxed to challenge the assessment, the Court considered that it should similarly be strictly interpreted.

2. The terms of section 77 gave the authorities the power to determine the time within which objection must be made and the Court found that the wording of section 77(1) made it mandatory that such time should be specified by being stated on the notice of assessment. Such a restriction on the taxpayer must be clearly stated. The notices of assessment issued on 18 January 1999 did not contain any such time period. Therefore there was no time limit determined by the notice of assessment and the time within which the defendant could give notice of objection was unrestricted. As a result, the notice of 8 April 1999 was not out of time and the Commissioner had a duty under section 77(2) to consider it.

3. The Court adjourned without further order so counsel could decide how the case should proceed.

Cases considered:

David v Da Silva [1934] AC 106

Hough v Windus [1884] UKLawRpKQB 307; (1884) 12 QBD 224 (CA)

Statute considered:

Income Tax Act 1976

Counsel for plaintiff: Mr Tapueluelu
Counsel for defendant: Mr Ring and Mr Garrett

Judgment

The Plaintiff brings this action for the recovery of tax due from the defendant on assessments for tax year 1993/4 and the following four tax years. The liability of the defendant depends on the interpretation of the terms of the Income Tax Act and the answer to that may effectively conclude the case. An agreed statement of facts has been filed and this hearing has been to determine the true meaning and effect of the relevant part of the Act.

The defendant is registered as a company incorporated abroad trading as a business in Tonga

On 18 January 1999, the plaintiff prepared and issued notices of assessment for the five tax years starting in July 1993. The total amount stated in those notices was $196,602.14 and they were sent to the managing director of the defendant in Apia with a covering letter explaining that "the company had been re-assessed as required by section 34 of the Income Tax Act". There was a separate notice of assessment for each tax year but, apart from the figures, they were in identical form. They were headed "Notice of Assessment (Companies)" and cited the year of assessment and an assessment number. They continued:

"I have to inform you in accordance with the Income Tax Act 1976, I have assessed the Income Tax payable by your company in respect of the Income derived by it during the year ended ..." the various calculations were then set out with the total tax payable. Beneath that was stated:

"A penalty of $2 or 25% of the tax payable, whichever is the greater is chargeable on any amount remaining unpaid after 18 February 1999".

It is then signed and dated 18 January 1998 (which is clearly an error and should be 1999).

The defendant did not pay the tax demanded or any part of it. On 24 February 1999, the: Deputy Commissioner issued a Notice (on form IR 102) stating that $237,058.84 (the total together with the penalty for unpaid tax) was outstanding. It continued:

"Action may be taken to recover the amount outstanding unless the tax is paid or you have contacted this office ... within 30 days from the date of this notice. Of course, consideration for payment by installments can be made for reasons of hardship if direct contact is made to the above address.

Payment will avoid the issue of a summons ..."

On 8 April 1999, the defendant's agent sent a notice in writing on Form 2 of the Second Schedule to the Act objecting to the amount of tax assessed on the basis that the defendant had been taxed at the wrong rate following incorrect classification as a non-resident insurance company. There followed correspondence questioning the agent's authorisation to act for the defendant but which is irrelevant for the purposes of this hearing. However, in the first reply by the acting Deputy Commissioner dated 12 April 1999, it was stated:

"In reply we disallow the objection [the agent] made on 8th April 1999. Your firm's right of objection ended on the 18th February 1999 and the Department received no objection by then.

Furthermore, the issue of the appropriate tax rate is out of the question. The certificate of registration clearly stated this firm "as a company incorporated outside Tonga but establishing a place of business at Nuku'alofa, Tonga". There is no question as the non-resident status of this company.

The 25% penalties have now been imposed (refer to copy of IR 102 attached).

Thus the tax arrears and penalties stand to be paid. Failure to do so by the 19th April 1999 would give us no choice but to proceed with legal action to recover the arrears.

Trust the above clarifies the current status of your company's tax arrears."

The right to object to an assessment of tax is contained in section 77 of the Act. I set it out in full:

"77. (1) Any person objecting to the amount at which he is assessed or considering that he has been wrongfully assessed may, personally or by his agent, within the time determined in the notice of assessment give notice in writing to the Commissioner in Form 2 of the Second Schedule to this Act that he considers himself aggrieved for the cause aforesaid: otherwise such person's right of appeal shall cease and the assessment made shall stand and be valid and binding notwithstanding any defect, error or omission that may have been made therein or in any proceeding required by this Act or any regulation hereunder:

Provided that the Commissioner, either before or after the expiry of the time so determined, may in his discretion give a taxpayer further time in which to appeal.

(2) The Commissioner shall consider such objection and may either allow or disallow it either wholly or in part.

(3) The Commissioner shall give a written notice to the person objecting of his decisions upon any objection and shall state in such notice the time within which such person may exercise the right of further appeal as provided in subsection (4) of this section.

(4) Any person objecting to the decision of the Commissioner under subsection (3) of this section may, within the time determined under such subsection (3), give notice to the Commissioner in Form 3 of the Second Schedule hereto that he desires to appeal from such decision to the Court of Review, and such appeal shall be heard and determined as hereinafter provided."

The plaintiff's case is simply that the time given for payment in the notice of assessment is the time determined for objection. Mr Tapueluelu for the Commissioner suggests that it is plain the Commissioner has determined the date and made it the date for payment also. Any taxpayer would appreciate that he must object before the date for payment.

He seeks further support from section 41(1) which imposes the duty on the Commissioner to make assessments in respect of every taxpayer and continues:

"... and shall send a notice of assessment to every taxpayer stating therein the amount upon which tax is payable, the amount of the tax and the date by which the amount of such tax is to be paid."

It imposes no obligation to state a time within which objection must be lodged and the date of payment is, therefore, he suggests, intended to be that date also. In section 77(1), the words following the colon provide that, if the taxpayer fails to object, he loses the right of appeal and the assessment stands. That, Mr Tapueluelu submits, is then the date of payment.

Mr Ring, for the defendant, asks the court to take the plain meaning of the words in the section. The phrase "within the time determined in the notice of assessment" requires a specific time to be stated. The Act does not define the word "determined" and he points to the definition in the Shorter Oxford English dictionary which includes:

"Settle or fix beforehand (now especially a date); ordain, decree"

It is a word that clearly requires some specificity and precision.

It is relevant to note that, if the Commissioner disallows the objection, there are rights of further appeal under section 77. The first is to the Court of Review and subsection (3) requires the Commissioner to state, in the notice of his decision, the time within which the right of appeal may be exercised. Subsection (4) refers to that time as "the time determined under subsection (3)". There is no doubt that the word is being used there as a reference to a specific time.

Mr Ring points to section 41(1) in support of his argument also. That section places a duty on the Commissioner to state three things in the notice of assessment, one of which is the date by which the tax is to be paid. The right created by section 77 is an additional matter which brings with it the imposition of a further duty on the authorities to determine the time within which any objection is to be lodged. The separate nature of the two sections and the duties imposed makes it clear, he suggests, that the date to be determined in the notice is additional to the date for payment.

I am satisfied that the Act imposes a requirement in section 77 separate from and additional to those under section 41. It clearly requires the notice of assessment to include a determinate time within which any objection must be lodged. That may be the same as the time allowed for payment but will not necessarily be the case and each must be separately decided.

The notices of assessment sent on 18 January 1999 included all the requirements of section 41(1). What they plainly did not include was any extra determination to satisfy the requirements of section 77.

The powers given to the Commissioner and the tax authorities under the Act are considerable. The Commissioner must under section 41, for example, state the date by which the tax assessed is to be paid but there is no other restriction on his discretion to allow a short or a long time to pay or, indeed, to allow any time at all. Similarly unrestricted is the power of the authorities to limit the time for lodging an objection.

It has long been a principle of statutory interpretation that statutes which encroach on the rights of the subject are to be interpreted strictly so as to respect those rights (referred to as the "recognised rule" by Bowen LJ in Hough v Windus [1884] UKLawRpKQB 307; (1884) 12 QBD 224 (CA) at 237). In David v Da Silva [1934] AC 106 at 114, it was further held that, where there is any ambiguity, the construction which favours freedom of the individual should be adopted. So it is with statutes which impose financial burdens and, where a subject is to be taxed, the language of the statute must clearly impose the obligation. The distinction between such strict interpretation and a more liberal approach has become less clear in recent cases but the requirement of an equitable interpretation still means that such provisions should be clearly stated.

The right to object in section 77 is not a provision that directly imposes a financial burden but, as it gives a unilateral power to the authorities to limit the right of the person taxed to challenge the assessment, I consider it should similarly be strictly interpreted.

The terms of section 77 give the authorities the power to determine the time within which objection must be made and I find that the wording of section 77(1) makes it mandatory that such time should be specified by being stated on the notice of assessment. Such a restriction on the taxpayer must be clearly stated and it would be a simple matter to do so but, in the present case, it was omitted from the notice of assessment entirely. There was, therefore, no time limit determined by the notice of assessment and the time within which the defendant could give notice of objection was unrestricted. As a result, the notice of 8 April 1999 was not out of time and the Commissioner has a duty under section 77(2) to consider it.

I shall adjourn without further order so counsel can decide how the case should now proceed.