2018.09.25

2017 (Gyo-Hi) 209

Minshu Vol. 72, No.4

Judgment concerning whether it is allowed to challenge legality of a notice of payment of withholding tax on salary income by arguing that an act constituting the grounds for payment which establishes liability to pay the withholding tax is invalid on the basis of its mistake after the expiry of a statutory due date for tax payment

Case claiming revocation of a notice of tax payment etc.

Judgment of the Third Petty bench, dismissed

Hiroshima High Court, Judgment of February 8, 2017

It cannot be said that it is not allowed to challenge legality of a notice of payment of withholding tax on salary income by arguing invalidity of an act constituting the grounds for payment which establishes liability to pay the withholding tax on the basis of its mistake, only because a statutory due date for tax payment expires.

Article 183, paragraph (1) of the Income Tax Act, Article 36, paragraph (1) of the Act on General Rules for National Taxes, and Article 95 of the Civil Code


Income Tax Act

(Withholding Liability)

Article 183, paragraph (1)

(1) A person who pays a salary, etc. prescribed in Article 28, paragraph (1) (Employment Income) (hereinafter referred to as a "salary, etc." in this Chapter) to a resident in Japan must, at the time of payment, withhold income tax on the salary, etc. and pay it to the State by the tenth day of the month following the month in which the day of withholding falls.


Act on General Rules for National Taxes

(Notice of Tax Payment)

Article 36, paragraph (1)

(1) When the district director of the tax office collects the following national taxes (excluding their expenses for the delinquent tax collection procedure; hereinafter the same applies in the following Article) pursuant to the provisions of the national tax laws, the district director shall issue a notice of tax payment:
(i) A national tax subject to the official assessment system (excluding an additional tax for understatement, an additional tax for failure to file and a substantial additional tax prescribed in paragraph (3) of the preceding Article);
(ii) A national withholding tax which is not paid by its statutory due date for payment;
(iii) A motor vehicle tonnage tax which is not paid by its statutory due date for payment; and
(iv) A registration and license tax which is not paid by its statutory due date for payment.


Civil Code

(Mistake)

Article 95 Manifestation of intention has no effect when there is a mistake in any element of the juristic act in question; provided, however, that the person who made the manifestation of intention may not assert such nullity by himself/herself if he/she was grossly negligent.

The final appeal is dismissed.

The cost of the final appeal shall be borne by the appellant.

Concerning the reasons for the petition for acceptance of final appeal argued by the counsels for the appellant (excluding the part excluded):

1. When the appellant released A who was a president of the appellant from A’s debt loans due to the appellant, the appellant received from a district director of a competent tax office a notice of payment of withholding tax on salary income and that of assessment and determination of an additional tax for non-payment on the grounds that economic benefits pertaining to the aforementioned debt release fell under the category of bonuses for A. In this case, the appellant makes a claim for revocation of each of the aforementioned notices (however, concerning the aforementioned notice of tax payment, a notice after partially revoked by an administrative determination upon a request for review) against the appellee.

2. The outline of facts etc. related to the case which duly became final and binding in the judgment in prior instance is as described below:

(1) The appellant is an association without legal capacity whose principal business is buying fruit and vegetables and other agricultural products and their processed goods.
A became an executive director of the appellant in 1981 and held its presidential position from March 17, 1994 to June 17, 2010.

(2) From around 1981, A repeatedly borrowed money from the appellant and financial institutions and applied it to securities transactions, etc. However, along with the so-called collapse of the asset-inflated bubble economy, A asked the appellant for debt reduction or release on the grounds of difficulties in paying off the debt loans. In response to this request, after December 1990, the appellant repeatedly reduced or released A from their interests, but did not release A from their principals.

(3) a. On July 23, 2004, A agreed with B Corporation to the effect that, if A paid off 65 million Japanese yen out of the debt loans in installments, A would be released from liability to pay off the rest of the debt loans. A paid off 65 million Japanese yen to the corporation in installments. On July 31, 2005, A was released by the corporation from 43,821,143 Japanese yen etc., which was the rest of principals of the debt loans (hereinafter, economic benefits gained from this debt release shall be referred to as the “Income from the Debt Release in 2005”). After that, A’s assets did not increase until December 2007 when A was released from the debts as described below in (4).
b. A filed an objection against a reassessment disposition etc. pertaining to A’s income tax of 2005. On August 6, 2007, the district director of the competent tax office made a decision on the aforementioned objection and, in its reasons, determined to the effect that the Basic Instruction on Income Taxes 36-17 prior to revision by the Basic Instruction on Income Taxes 2-9 as of June 27, 2014 issued by the Individual Taxation Division of the Taxation Department of the National Tax Agency etc. (hereinafter referred to as the “Former Basic Instruction”) was applicable to the Income from the Debt Release in 2005. The Former Basic Instruction provided in its main clause that, when a debtor gains an income from debt release because it is found that the debtor exhausts his/her money and has severe difficulty in paying off the debts, that income should not be included in the amount of income or the total amount of income in calculating the amount of various incomes.

(4) The amount of A’s debt loans due to the appellant was 5,563,230,934 Japanese yen as of December 10, 2007. The appellant purchased from A and A’s ex-wife real property they possessed or jointly possessed for the total amount of 726,409,699 Japanese yen and set off liability to pay that price against the aforementioned debt loans for an equal amount. At the same time, the appellant released A from 4,836,821,235 Japanese yen, which was the aforementioned debt loans after the aforementioned offset (hereinafter, this debt release shall be referred to as the “Debt Release” and economic benefits A gained from this debt release shall be referred to as the “Income from the Debt Release”).

(5) On July 20, 2010, the district director of the competent tax office issued against the appellant a notice of tax payment which stated that the amount of tax due as withholding tax for December 2007 pertaining to the Debt Release etc. was 1,835,506,244 Japanese yen and a notice of assessment and determination of an additional tax for non-payment which stated the amount of the additional tax due was 183,550,000 Japanese yen, on the grounds that the Income from the Debt Release fell under the category of bonuses for A.

(6) At the time of the decision on the objection as described above in (3) b., the appellant argued that the appellant thought that, because the situation that A was placed in fell under a case in which “it is found that the debtor exhausts his/her money and has severe difficulty in paying off the debts,” the Former Basic Instruction was applicable to A and the Income from the Debt Release was not subject to taxation pursuant to the Former Basic Instruction and that the appellant confirmed with A to that effect and implemented the Debt Release. Thus, according to the appellant’s argument, if the Income from the Debt Release was subject to a notice of tax payment, there was a mistake in a precondition the appellant and A confirmed and the Debt Release was invalid on the grounds that it was a mistake of a material element.

3. The court of prior instance determined that, under the aforementioned facts etc., the Income from the Debt Release fell under the category of bonuses or salary of a similar nature referred to in Article 28, paragraph (1) of the Income Tax Act and that, in light of A’s financial conditions, economic benefits A gained from the Debt Release was 1,284,791,053 Japanese yen and the amount of A’s withholding tax for December 2007 was 485,734,304 Japanese yen. Then, it made the following determination with regard to the appellant’s arguments as described above in 2. (6), and determined that a portion not exceeding the amount of the aforementioned withholding tax out of the amount included in the notice of tax payment and a portion pertaining to the same portion out of the amount included in the notice of assessment and determination of the additional tax for non-payment (hereinafter referred to as “Each of the Portions”) out of each notice as described in 2. (5) (however, concerning the notice of tax payment, a notice after partially revoked by an administrative determination upon a request for review) are legal.

Under the tax payment system by self-assessment, it harms fairness among tax payers and makes legal relationships in tax unstable to easily acknowledge invalidity of a juridical act constituting the grounds for establishment of liability to pay tax on the basis of its mistake so as to release one from the liability to pay tax after the liability to pay tax is established under that system. Taking that into consideration, it should be construed that it is not allowed to argue invalidity of the juridical act on the basis of its mistake after the expiry of a statutory tax return due date. The withholding tax system has no difference from the tax payment system by self-assessment in that withholding tax payers should voluntarily pay withholding taxes by a statutory due date for tax payment. Moreover, the withholding tax system is a system for which an earlier stabilization is expected compared to other credit and debt relationships in tax. Judging from this, it should be construed that it is not allowed to argue invalidity of a juridical act constituting the grounds for establishment of liability to pay withholding tax on the basis of its mistake after the expiry of a statutory due date for tax payment.

4. However, the aforementioned determination of the court of prior instance is not acceptable. The reasons are as follows:

It should be construed that, when an act constituting the grounds for payment which establishes liability to pay withholding tax on salary income is invalid and the invalidity of the act leads to a loss of economic benefits arising as a result of the act, a district director of a tax office should not issue, after that, a notice of tax payment on the premise of existence of the payment. In addition, there is no legal provision which provides that one may argue invalidity of the act on the basis of its mistake only within a certain period. Furthermore, it cannot be said that liability to pay withholding tax is fixed after the expiry of a statutory due date for tax payment. Therefore, it should be said that there is no reason to consider that it is not allowed to challenge legality of a notice of payment of withholding tax on salary income by arguing invalidity of the act on the basis of its mistake, only because the statutory due date for tax payment expires.

5. It should be said that the determination of the court of prior instance, which concluded that the appellant was not allowed to argue invalidity of the Debt Release on the basis of its mistake after the expiry of the statutory due date for tax payment based on a view which is inconsistent with the above opinion, is illegal in that it erred in interpretation and application of laws and regulations. However, although the appellant argues that the Debt Release is invalid on the basis of its mistake, the appellant does not argue that the invalidity of the Debt Release leads to a loss of economic benefits arising as a result of the Debt Release by the time of issuance of the notice of tax payment as described above in 2. (5). Therefore, it cannot be said that Each of the Portions is illegal based on the appellant’s argument. Consequently, the determination of the court of prior instance, which concluded that Each of the Portions was legal, is acceptable at its conclusion. Eventually, the appellant's argument is not acceptable.

Accordingly, the Court unanimously decides as set forth in the main text. However, there is a concurring opinion of the justice, YAMASAKI Toshimitsu.
The concurring opinion of the justice, YAMASAKI Toshimitsu, is as follows:
I agree with the Court opinion. In this case, the appellant challenges legality of the notice of tax payment by arguing that the Former Basic Instruction is applicable to the Income from the Debt Release so that it should not be included in the amount of income, such as salary. At the same time, the appellant simply states that, if the above argument is not acceptable, the Debt Release is invalid on the basis of its mistake. The appellant does not argue at all that the invalidity of the Debt Release leads to a loss of economic benefits arising as a result of the Debt Release by the time of issuance of the notice of tax payment. Therefore, I have the same opinion as the Court opinion in that the appellant’s argument cannot be considered as that of arguing illegality of the notice of tax payment. Nevertheless, because I am rather skeptical about if it is possible to acknowledge existence of the mistake the appellant argues in the first place, I would like to present a concurring opinion on how to determine whether it is possible to acknowledge existence of a mistake when there is an argument of the same kind which argues invalidity of an act on the basis of its mistake.

Each of the Portions is determined as legal since it is possible to include 1,284,791,053 Japanese yen out of 4,836,821,235 Japanese yen, which was the total amount of the debt loans released by the Debt Release, in the amount of income, such as salary, in light of A’s financial conditions. The appellant argues that there exists a mistake in the Debt Release, stating that the appellant thought that the entire Income from the Debt Release was not subject to taxation pursuant to the Former Basic Instruction. This argument only means that, while the appellant recognized a general possibility of taxation, the appellant thought that the entire Income from the Debt Release was not subject to taxation because the appellant expected the appraised value of A’s assets lower than the actual one. Therefore, it is nothing more than showing that the appellant had a wrong recognition on A’s financial conditions and their appraisal.

However, considering that A was a president of the appellant at the time of the Debt Release, it is reasonable to understand that one cannot say that the appellant had difficulty in correctly recognizing the conditions of the assets A had. Also, it is hardly surprising that the appellant recognizes or should recognize that there may be a case in which a method of appraisal of assets, which is different from one the appellant expects, is taken as a reasonable one. Judging from this, with regard to the Debt Release, various questions should be raised about if it is possible to acknowledge existence of a mistake of a material element. It can be said that it is required to carefully make a determination on this point based on sufficient deliberations.

I would like to point out that, generally speaking, when a party to a lawsuit, in which legality of taxation etc. is challenged, argues invalidity of a juridical act constituting the grounds for the taxation etc. on the basis of its mistake and a court makes a determination on whether it is possible to acknowledge the object of the mistake, the court should carefully examine the act for which the party argues existence of a mistake, a recognition of a person who makes manifestation of his/her intention when performing the act, presence or absence of gross negligence, etc. based on concrete facts found by the court according to a case.

Justice YAMASAKI Toshimitsu

Justice OKABE Kiyoko

Justice TOKURA Saburo

Justice HAYASHI Keiichi

Justice MIYAZAKI Yuko