Court of Appeal Dismisses The Revenue’s Appeal On Group Relief Tax Claim

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Recently, the Court of Appeal delivered a landmark judgment in Ketua Pengarah Hasil Dalam Negeri v Berjaya Golf & Resort Berhad [2025] 2 MLJ 878, clarifying the interpretation of "irrevocable election" under Section 44A of the Income Tax Act 1967 (ITA) and the application of relief for error or mistake under Section 131(1) of the ITA.

This decision carries significant implications for companies utilising group relief provisions, particularly in instances where tax audits lead to adjustments in taxable income. The Court of Appeal also clarified the scope of irrevocable election under Section 44A and reinforced the availability of Section 131(1) relief for error or mistake arising from group relief claims.

The taxpayer in this matter was successfully represented by the firm’s Tax, SST & Customs Partner, S. Saravana Kumar, together with senior associate, Nur Hanina Mohd Azham.

Brief Facts

This case concerned the application of group relief under Section 44A of the ITA. Under this relief, a company (the surrendering company) could surrender not more than 70% of its adjusted loss in a year of assessment to one or more related companies (the claimant company).

The dispute involved three related companies: Berjaya Air Sdn Bhd (Berjaya Air), the surrendering company, Berjaya Land Sdn Bhd (Berjaya Land), the first claimant company; and Berjaya Golf & Resort Berhad (Berjaya Golf), the second claimant company.

In the year of assessment 2013, Berjaya Air surrendered a total of RM16,300,200 in losses, with RM14,615,512 allocated to Berjaya Land and RM1,684,688 to Berjaya Golf. However, following a tax audit by the Director General of Inland Revenue (DGIR), Berjaya Land’s taxable income was substantially reduced from RM14,628,484 to RM3,939,862.

As a result, Berjaya Air revised the group relief allocation to reflect the DGIR’s findings. Under the revised apportionment, Berjaya Land’s claim was adjusted to RM3,939,862, while Berjaya Golf’s claim increased to RM12,360,338—keeping the total surrendered losses unchanged at RM16,300,200.

Berjaya Golf then sought to amend its tax return under Section 131(1) of the ITA to account for the revised claim. However, the DGIR rejected the application, arguing that the initial allocation under Section 44A(2)(a)(iv) was irrevocable and could not be altered after submission.

Aggrieved by the DGIR’s decision, Berjaya Golf appealed to the Special Commissioners of Income Tax, who dismissed its appeal. On further appeal, the High Court ruled in favour of the Taxpayer, and this decision was subsequently affirmed by the Court of Appeal.

Court of Appeal Decision

Scope of Irrevocable Election

The DGIR’s rejection of Berjaya Golf’s application under Section 131(1) primarily stemmed from a restrictive interpretation of the term “irrevocable election” as prescribed under Section 44A(2)(iv).

This provision stipulates that a claimant company must make an irrevocable election to surrender or claim an amount of adjusted loss in its tax return. The DGIR contended that this provision prohibited any reallocation of surrendered losses once an initial claim had been made.

Section 44A(2)(iv) provides that:

“(2) Subsection (1) shall apply if for any year of assessment –

…

(iv) make an irrevocable election to surrender or claim an amount of adjusted loss in the return furnished for that year of assessment under section 77A;

…”

The Court of Appeal, however, rejected this narrow interpretation. It ruled that the irrevocable election applies strictly to the identification of the surrendering and claimant companies and the total amount of losses surrendered, but not to the apportionment of losses between claimant companies.

Consequently, the revisions made by Berjaya Golf and Berjaya Land to the respective amounts they claimed did not contravene the irrevocable election requirement, as the overall amount of surrendered and claimed losses remained unchanged.

The Court of Appeal stressed that the legislative intent behind Section 44A is to facilitate loss utilisation within a group of companies, allowing them to structure claims in a way that maximises tax efficiency. While the principle of finality is relevant in tax administration, the notion of “irrevocability” must not be interpreted so narrowly as to eliminate the flexibility that Section 44A(6) was designed to provide.

The Court of Appeal observed that the DGIR’s interpretation, if upheld, would render Section 44A(6) redundant and frustrate the very objective of the group relief framework. Instead, the DGIR ought to support taxpayers in utilising Section 44A in good faith, so long as all substantive conditions are met and the core requirement of making an irrevocable election is not undermined. It was held that

“In applying the various strands of statutory interpretation as referred to above, we find that the correction, amendment or revision made to the amount of adjusted loss claimed by the First Claimant Company and the Second Claimant Company does not violate the requirement of an “irrevocable election” under s 44A(2)(a)(iv) of the ITA and that the clear words of s 44A do not prohibit the Taxpayer here in Berjaya Golf from claiming what is now a higher loss when overall the amount of adjusted loss surrendered and claimed remain the same and constant.”

Relief For Error Or Mistake Under Section 131(1)

Having determined that the irrevocable election under Section 44A does not preclude the reallocation of surrendered losses, the Court of Appeal proceeded to consider the rejection by the DGIR of Berjaya Golf’s application for relief under Section 131(1).

Section 131(1) provides a statutory avenue for taxpayers to seek relief where an error or mistake in a tax return has led to an overassessment of tax. In the present case, the error arose following a tax audit conducted by the DGIR, which significantly reduced the taxable income of Berjaya Land. This necessitated a corresponding reallocation of group relief losses.

The requirement for reallocation was attributed to the operation of Section 44A(5)(a), which mandates that a first claimant company must fully utilise the amount of adjusted loss allocated to it before a second claimant company may claim the excess. Consequently, the initial apportionment of surrendered losses had to be revisited to reflect the revised tax position.

In this case, the Court of Appeal acknowledged that the mistake was genuine and that there was no evidence of bad faith or opportunism on the part of the taxpayer. The Court of Appeal remarked:

“[69] It was a genuine mistake for ordinarily one would conduct one’s business to pay less rather than paying more tax without running foul of evading tax but arranging one’s financial affairs so as to avoid paying tax. Here there was no element of an afterthought or of mala fide or manipulation or an abuse of relevant provisions of the ITA in particular s 44A.”

In dismissing the DGIR’s contention that the irrevocable election precluded any subsequent revision, the Court of Appeal affirmed that Section 131(1) operates independently and is not inconsistent with Section 44A. The group relief mechanism does not override a taxpayer’s statutory right to seek correction of a genuine mistake under Section 131(1). Penalising the taxpayer for such an adjustment, the Court of Appeal held, would be unjust and contrary to the ITA’s intent.

Harmonious Interpretation Of The ITA

The DGIR contended that since both Section 44A and Section 131(1) provide tax relief, a taxpayer must strictly comply with the conditions of each provision, and any ambiguity must be resolved in the DGIR’s favour.

The Court of Appeal rejected this argument. First, it found no ambiguity regarding the taxpayer's compliance with Section 44A's requirements. The conditions for group relief had been satisfied, making the question of ambiguity irrelevant.

Second, the Court of Appeal adopted a harmonious interpretation of the ITA, holding that Sections 44A and 131(1) must be read together, not in isolation. Parliament did not intend to exclude the application of Section 131(1) to group relief cases, and the two provisions can operate together without contradiction.

Finally, the Court of Appeal stressed that the DGIR should facilitate rather than hinder the use of group relief provisions, as they are designed to benefit companies within a group. A rigid interpretation of the "irrevocable election" requirement, as advocated by the DGIR, would undermine Section 131(1)'s purpose in this context.

As the Court of Appeal aptly stated:

“Finally, we would add that an amending provision like s 44A of the ITA should be read generously to remove unnecessary obstacles to companies harnessing its beneficial provision in their tax planning for so long as the explicit requirements as set out have been complied with. It would be both just and reasonable for the Respondent Taxpayer to be granted the relief under s 131(1) of the ITA.”

Conclusion

This decision provides significant clarity regarding the scope of the "irrevocable election" under Section 44A and the availability of relief for error or mistake under Section 131(1). The key takeaways from this ruling include:

a)Companies are allowed to revise the apportionment of losses between claimant companies under group relief, provided the total amount of losses surrendered remains unchanged.

b)Relief under Section 131(1) is available for genuine error or mistake that arises from tax audits, including in cases involving group relief.

c)The DGIR should adopt a facilitative approach to group relief provisions to ensure that companies can optimise the use of losses within a group.

This ruling reinforces the principle that tax laws must be interpreted in a manner that aligns with legislative intent and commercial reality. It also serves as a reminder that the DGIR’s role in supporting the effective and fair application of tax relief mechanisms, rather than obstructing them.

28 APRIL 2025