top of page

Court Of Appeal Rules That Low-Cost Exemption Payment Is Not Tax Deductible

Recently, the Court of Appeal in Ketua Pengarah Hasil Dalam Negeri Malaysia v Ehsan Armada Sdn Bhd [2024] 2 MLJ 494 disallowed the deduction of low-cost exemption under Section 33(1) of the Income Tax Act 1967 (ITA).




In Ehsan Armada, the Selangor State Government allocated 84 acres of land to the taxpayer for a mixed development project. This allocation was on the condition that squatters in the area were to be relocated and housed in low-cost, medium-low-cost, and medium-cost units which were to be built by the taxpayer on the said land. In the development plans submitted to the relevant authority, the taxpayer designated a ‘Class 3 slope area’ for the construction of the low-cost housing.


Consequently, the taxpayer applied for an exemption from the low-cost policy, arguing that building on the slope was economically challenging and unfeasible. To obtain this exemption, the taxpayer paid RM6,226,981.00 to the Lembaga Perumahan dan Hartanah Selangor (LPHS). The taxpayer claimed this amount as a deductible expense under Section 33(1) of the ITA 1967. By paying this sum, the taxpayer would be relieved from complying with the low-cost policy and would be free to construct free-market housing instead.


The Revenue disallowed the deduction on the basis that the exemption sum paid to the LPHS to be a capital outlay and issued additional tax assessments.  


Aggrieved by the Revenue’s decision, the taxpayer appealed to the Special Commissioner of Income Tax (SCIT), who dismissed the taxpayer’s appeal based on the following grounds:


(a)      The taxpayer's inability to comply with the low-cost policy was intentional and self-inflicted. If the taxpayer had allocated another suitable area within the project land for low-cost housing, there would have been no need to seek an exemption or pay the exemption sum.


(b)      The payment of the exemption sum was not a regular business expense but a one-time capital outlay made to avoid building low-cost houses and instead build more profitable free-market houses.


(c)         The exemption granted to the taxpayer undermined the state authority’s original purpose of allocating the land, which was to provide more affordable housing for the less fortunate, displaced individuals and registered squatters within the state’s jurisdiction.


However, the SCIT’s decision was subsequently reversed by the High Court. This led to the Revenue appealing to the Court of Appeal, which recently ruled in favour of the Revenue and restored the decision of the SCIT.


The Taxpayer’s Argument At The Court of Appeal


The taxpayer submitted that:

(a)    The exemption sum was in the nature of contribution, not penalty. 


(b)    The contribution was an integral part of the business expenditure that the taxpayer had to incur to generate income from the project. As the proposed site for the low-cost houses is situated on a Class 3 slope, the taxpayer would not yield a commensurate return if low-cost houses were built in that specific area. An expenditure cannot be disqualified from deduction simply because it involved the attainment of profit.


(c)       The exemption sum was not of a capital nature since it did not yield any enduring benefit or enrichment to the taxpayer's business. Such sums do not contribute to the enhancement or improvement of fixed capital items, thus precluding them from being categorised as capital expenditure. Instead, it represented a normal business payment enabling the taxpayer to expand the target demographic it can sell to.

The Revenue’s Argument At The Court of Appeal


The Revenue argued that:


(a)      From the outset, the taxpayer never intended to undertake the construction of low-cost housing, recognising the unsuitability of the site for such units economically and in terms of profitability. By making the exemption payment, the taxpayer benefited by avoiding the construction of low-cost houses and securing approval to build more lucrative units.


(b)      The payment was not to remove obstacles or any impediments but to alter the conditions imposed by the state. It was a one-off capital payment or injection to pivot the taxpayer’s business to be more advantageous well beyond the ordinary nature and expectation of a mixed development with low-cost housing elements. Thus, it was not something made wholly and exclusively incurred in the production of gross income from that source under Section 33(1) of the ITA.


(c)       The payment made to LPHS was aimed at evading the social responsibility of providing affordable housing.

The Court of Appeal’s Ruling


The Court of Appeal reversed the decision made by the High Court and held that the exemption sum paid to the LPHS was not deductible under Section 33(1) of the ITA. The reasonings are as follows:


(a)    The High Court erred in taking the simplistic approach that any sum paid (notwithstanding context, purpose and object of the payment) was a deductible expense if that payment had the effect of aiding the business to earn more profits. Instead, the proper, subjective, question that should have been asked was what the nature and purpose of the payment was.


(b)      For a payment to be a necessary business expense, the object of the payment must be so ordinary and necessary that it must be paid to remove an obstacle that would have obstructed the business itself from being carried out. But if it was paid to remove an obstacle to the business making a greater profit, then it was a capital outlay.


(c)       The exemption sought by the taxpayer was entirely voluntary, pre-empted and planned even before the project had an approved development plan. The taxpayer could still carry on its business in construction if not for the exemption. Anything that was injected to insulate the taxpayer from the affordable housing margin was not an ordinary expense and instead, a one-off capital injection to maximise profits at the detriment and expense of the low-cost policy in place.


(d)      In the ordinary course of a mixed development with low-cost policy in place, ordinary expense would refer to expenses to realise the state’s mission to aid and help its constituents to be able to afford housing. Any one-off payment that exempted the taxpayer from this social responsibility element was certainly not an ordinary expense and was instead a capital outlay.




Overall, this decision sets a precedent that may deter developers from seeking exemptions from low-cost housing requirements in future projects. While the court's ruling may have been intended to ensure equitable treatment across industries, it might have also deprived the practical necessity for developers to seek exemptions from low-cost housing requirements in certain situations, such as when faced with economically unfeasible construction sites. With this decision standing, developers are expected to face more challenges when it comes to claiming tax deductions for this kind of expenditure.

11 June 2024


bottom of page