The Court of Appeal in Ketua Pengarah Hasil Dalam Negeri v Mitraland Kota Damansara Sdn Bhd (W-01(A)-359-06/2021) held that (a) payment paid to procure the approval of Lembaga Perumahan dan Hartanah Selangor (“LPHS”) to sell units of development reserved for bumiputera buyers to non-bumiputera buyers is tax deductible pursuant to section 33(1) of the Income Tax Act 1967 (“ITA”), and (b) penalty payment paid to LPHS for releasing and selling unsold bumiputera units to non-bumiputera buyers before obtaining LPHS’s approval is not tax deductible under section 33(1) of the ITA.

The salient facts of Mitraland (supra) are as follows:

a) The Taxpayer is a property developer and had made payments of (a) RM4,468,900 to LPHS to procure its approval to sell units of development reserved for bumiputera buyers to non-bumiputera buyers (“Release Payment”), and (b) penalty payment of RM1,050,497 to LPHS for releasing and selling unsold bumiputera units to non-bumiputera buyers before obtaining LPHS’s approval (“Penalty Payment”) pursuant to administrative circulars issued by the relevant authorities, namely, Pekeliling PTGS Bil 3/2007 and Pekeliling LPHS Bil 1/2011.

b) Pursuant to a tax audit, the Inland Revenue Board (“IRB”) disallowed both the Release Payment and Penalty Payment and proceeded to raise a notice of additional assessment and imposed a penalty of RM344,912.31 under section 113(2) of the ITA.

c) Being unsatisfied, the Taxpayer appealed to the Special Commissioners of Income Tax (“SCIT”) – the SCIT ruled in favour of the IRB.

d) The Taxpayer appealed against the SCIT’s decision to High Court and the High Court set aside the SCIT’s decision and ruled in favour of the Taxpayer.

e) The IRB subsequently appealed to the Court of Appeal and the parties thereby exhausted their rights of appeal.

The Court of Appeal held that, amongst others:

a) The SCIT’s conclusions of this case can be reviewed by the Court of Appeal to ascertain whether these conclusions are borne out by facts and evidence.

b) The SCIT’s finding that the Taxpayer will make at least double the profit through the sale of the bumiputera units to non-bumiputera purchasers is plainly wrong as the Taxpayer will not make any additional profit from such sale as:

i) the Taxpayer will give a discount of 7% or 10% to bumiputera buyers, should the bumiputera untis could not be sold after a specified period of time despite all the marketing and sales effort made, the Taxpayer could apply to LPHS for an approval to lift the restriction to sell the reserved bumiputera units to non-bumiputera purchasers.

ii) if the approval is granted, then the Taxpayer is required to refund or pay to LPHS an amount equivalent to the bumiputera discount of 7% or 10% for each sale of a bumiputera unit to a non-bumiputera purchaser.

c) There is no basis for SCIT to come to the conclusion that should the Release Payment and Penalty Payment are tax deductible under section 33(1) of the ITA, it would encourage property developers not to sell the bumiputera units as the circulars clearly provide the mechanism of when the bumiputera reserved units can be released.

d) The Release Payment is tax deductible under section 33(1) of the ITA as it is revenue in nature and not capital in nature as:

i) The option was provided by the Selangor State Government so that the property developers can sell the unsold bumiputera reserved units to the general public.

ii) The Release Payment is a classic revenue expenditure as it is directly related to the Taxpayer’s stock-in-trade and thus exclusively related to business operation.

iii) The Release Payment recurs every time that a bumiputera unit is sold to a non-bumiputera purchaser.

iv) The Release Payment merely widens the group or class of purchasers.

v) There is no enduring benefit that has been acquired by the Taxpayer by virtue of that payment.

vi) A payment made to remove an obstacle to profitable trading is attributable to revenue (see Director General of Inland Revenue v Kulim Rubber Plantations Ltd [1981] 1 MLJ 214).

e) The Penalty Payment is not a tax-deductible expenditure under section 33(1) of the ITA because it is imposed upon the property developer personally for breaching the requirement of obtaining the LPHS’s approval before selling bumiputera reserved units to non-bumiputera buyers. Breaking a law cannot be considered to be a trading transaction (see CIR v E.C. Warnes & Co Ltd (12 TC 227)).

f) The penalty of RM344,912.31 under section 113(2) of the ITA shall not be imposed as:

i) This case concerns a genuine difference of opinion on the interpretation of law.

ii) The Taxpayer has taken a reasonable and considered legal position in submitting its tax returns and took the view that all payments made to LPHS were deductible under section 33(1) of the ITA.

iii) The Taxpayer had acted in good faith and had made full disclosure.

Comments

This case is not the first case where the Court of Appeal discussed the tax treatment in relation to both the Release Payment and Penalty Payment under section 33(1) of the ITA. However, this is the first case where the Court of Appeal, being the apex court, had issued their written grounds of judgement on the same.

As pointed out by the Court of Appeal in their written grounds of judgement, there are two cases (i.e. Ketua Pengarah Hasil Dalam Negeri v Prima Nova Development Sdn Bhd (Rayuan Sivil No.: W-01(A)-318-07/2020) and Taman Equine (M) Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri (Rayuan Sivil No.: W-01(A)-337-06/2021))  having the similar issues which the Court of Appeal had ruled in favour of the IRB.

Fortunately, the Court of Appeal in this case rightly pointed out that they are not bound by the doctrine of stare decisis to follow the previous decision of the Court of Appeal in those cases as no written grounds of judgement were issued.

Thus, taxpayers are reminded to take advice carefully when the tax advice is premised upon the written grounds of judgement. Now, the written grounds of judgement of Mitraland (supra) have set the precedent, the courts below, the SCIT, the IRB as well as the taxpayers are required to follow the Court of Appeal’s decision in Mitraland (supra).

About the author

Desmond Liew Zhi Hong
Partner
Tax
Halim Hong & Quek
[email protected]