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posted 1 year ago
Recently, the Federal Court in Wiramuda (M) Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri (Civil Appeal No: 01(f)-38-08/2022(W)) held that Section 4C of the Income Tax Act 1967 (“ITA”) is in contravention of Article 13(2) of the Federal Constitution. Thus, Section 4C of the ITA is unconstitutional and liable to be struck down as it deprives taxpayer of the adequate compensation awarded in accordance with the Land Acquisition Act 1960.
The salient facts of Wiramuda (supra) are as follows:
a) Taxpayer owned four parcels of lands and had carried out quarrying activities on certain parts of the lands until 2011, the lands remained dormant since then.
b) In 2017, the State Government of Selangor compulsorily acquired the lands for the project of SUKE Highway.
c) Taxpayer received the compulsory land acquisition compensation in 2018.
d) Pursuant to a tax audit in 2019, the Inland Revenue Board of Malaysia (“IRB”) took the position that the compulsory land acquisition compensation is subject to tax under Section 4C and Section 24(1)(aa) of the ITA and thereafter issued a notice of assessment for the year of assessment 2018 amounting to RM52,966,517.27.
e) Being aggrieved, the Taxpayer filed a judicial review application to challenge the notice of assessment.
f) However, both the High Court and the Court of Appeal ruled in favour of the IRB.
The Federal Court held that Section 4C of the ITA is in contravention of Article 13(2) of the Federal Constitution and thus unconstitutional and liable to be struck down for the following reasons:
a) Adequate compensation awarded to a landowner for a land compulsorily acquired has no element of profit or gain.
b) By taxing the landowner under Section 4C of the ITA, it has effectively resulted in the landowner getting less of the compensation and this amounts to an infringement of Article 13(2) of the Federal Constitution.
c) Section 4C of the ITA has taken away the safeguard of adequate compensation as guaranteed under Article 13(2) of the Federal Constitution.
d) Reference was made to Paragraph 3 of Schedule 2 of the Real Property Gains Tax Act 1976 – the provision provides that where the disposal price of an asset as a result of compulsory acquisition, the disposal price is deemed the same as the acquisition price.
e) Paragraph 3 of Schedule 2 of the Real Property Gains Tax Act 1976 yields a nil-tax effect and support the proposition that in a situation of a land being compulsorily acquired, it is a no gain no loss transaction and there is no profit that has been earned.
Comments
Wiramuda (supra) is indeed the landmark case concerning Section 4C of the ITA. Now, it is clear that Section 4C of the ITA is null and void.
However, what left unaddressed is the effect of Federal Court’s decision in Wiramuda (supra). How should Wiramuda (supra) be applied? Retrospectively or prospectively? Unfortunately, the Federal Court in Wiramuda (supra) is silent on how their decision should be applied.
By applying the doctrine of prospective overruling – Wiramuda (supra) would have an effect on any pending proceedings, whether pending at first instance or pending appeal, in respect of issues relating to the declarations made (see Aminah Ahmad v The Government of Malaysia & Anor [2022] 2 CLJ 726). In other words, moving forward, taxpayers can rely on Wiramuda (supra) – compulsory land acquisition compensation is not taxable.
If Wiramuda (supra) can be applied retrospectively, it may allow all the taxpayers which had paid tax on the compulsory land acquisition compensation received by them to apply for a tax refund from the IRB.
Since the Federal Court in Wiramuda (supra) is silent on this, it is interesting to see how our courts would apply Federal Court’s decision in Wiramuda (supra). Interesting time ahead!
About to pay or paid tax for the compulsory land acquisition compensation received? Talk to our tax team now to understand the legal position and your rights as a taxpayer.
About the author
Desmond Liew Zhi Hong
Partner
Tax
Halim Hong & Quek
[email protected]
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