top of page

DGIR v RH Sdn Bhd:The Application Of Section 140 Of The Income Tax Act 1967

The Director General of Inland Revenue has a tendency to invoke Section 140(1) of the ITA to vary taxpayers' transactions on the basis that the transactions are not at arm's length, without providing any reason or particulars. This alert by the firm’s Tax, SST & Customs associate, Amira Azhar, examines a recent decision by the Court of Appeal in the RH Sdn Bhd the DGIR’s tax assessment issued pursuant to Section 140(1) was set aside.

Section 140(1) of the Income Tax Act 1967 (ITA) accords the Director General of Inland Revenue (DGIR) the power to vary a taxpayer’s transaction if he is of the view that the transaction entered by the taxpayer amounts to a tax avoidance scheme. However, the DGIR can only vary the transaction of the taxpayer in accordance with the laws provided in the ITA.

Based on the latest trend, it seems that DGIR has a tendency to invoke Section 140(1) of the ITA arbitrarily to vary a taxpayer’s transaction on the ground that the transaction is not at arm’s length without providing any reason or particulars. Many taxpayers are not fully aware that the DGIR cannot simply invoke Section 140(1) to vary a taxpayer’s transaction.

This alert will discuss the requirements needed to be fulfilled by the DGIR in varying a taxpayer’s transaction under Section 140(1) by examining a recent decision by the Court of Appeal in the RH Sdn Bhd case. The taxpayer was successfully represented by the firm’s Senior Partner, Datuk D.P. Naban and Tax, SST & Customs Partner, S. Saravana Kumar. They were assisted by associate, Amira Azhar.

Director General Of Inland Revenue v RH Sdn Bhd

In this case,the Court of Appeal unanimously dismissed the DGIR’s appeal and affirmed the decisions of the High Court and the Special Commissioner of Income Tax (SCIT) in setting aside the tax assessment raised by the DGIR.

In early 2000, 2 different families formed a syndicate and undertook to develop a project known as M Residence. In furtherance of the intention to develop the project, the 2 groups entered into a Shareholders Agreement in 2002. The terms of the agreement are as follows:

(i) A new company (RH) will be formed to acquire and develop the land.

(ii) 3 out of the 8 partners will be appointed as directors.

(iii) Each partner will purchase a unit in the M Residence’s project at the price of RM 380 psf.

(iv) The remaining units will be sold on a first come first serve basis.

Any one of the partners could purchase an additional unit at a price which will be determined at the time such unit is purchased and the price would reflect the prevailing market price.

Each partner had agreed to buy a unit of the project to ensure that the partnership has sufficient purchase commitment. Thereafter, as agreed in the Shareholders Agreement, 8 units of the said project were sold to each of the partners at the price of about RM 380 psf. The balance of 13 units were sold to third parties except 1 unit was purchased jointly by two partners. The price was about 10% less than the market price at the time, which is approximately RM 420 psf, according to a valuation report obtained by RH, to reflect the pricing for early commitments.

The DGIR conducted a tax audit on RH and claimed that the sale of the 8 condominium units to the shareholders were not at market value. The DGIR invoked Section 140(1) and varied the purchase price of the 8 units sold to the partners from RM380.00 psf to RM 550.00 psf. The DGIR alleged the following:

(i) The selling price of the units sold to the directors/shareholders were not in accordance with the market price as buyers who had an interest in the RH were given a lower price compared to a third party.

(ii) The selling price to be adjusted for the sale to the directors/shareholders equivalent to the lowest price sold to a third party. 

(iii) The difference in price will be added back to the RH’s tax computation as under-reported sales.

The Court of Appeal’s Decision

The Court of Appeal in upholding the High Court and the SCIT’s decision accepted the following arguments:

Argument 1:

The failure to specify the subparagraph of Section140(1) renders the assessment null and void

It is trite law that the DGIR, in invoking Section 140 must specify which sub-paragraph of the provision that the DGIR is relying on. The DGIR in this case had failed to state which sub-paragraph he was relying on when issuing the disputed tax assessment. The High Court in its ground of judgment was correct to state that by specifying the sub-paragraph Section 140 specifically would give the taxpayer the information as to the reason for the invocation of the provision. The contention that the DGIR must particularise the sub-paragraph of Section 140(1) was also supported by the earlier ruling of the High Court in Port Dickson Power Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri [2012] MSTC 30-045.

Argument 2:

The failure to specify ‘reason to believe’ as required by the law renders the assessment null and void

In invoking Section 140(1), the DGIR must have reason to believe that the transaction is a tax avoidance scheme. Parliament did not act in vain when it chose the phrase “reason to believe” and included the same in the opening of Section 140(1). Parliamentary Debate during the tabling of the Income Tax Act 1967 clearly establishes that the phrase “he has reason to believe” was inserted with the view that the DGIR should not exercise his jurisdiction arbitrarily. The original phrase of Clause 140 which reads as “where he is of the opinion” was consequently amended to “where he has reason to believe”.

Hence, as the DGIR had failed to state which subparagraph of Section 140(1) it was relying upon when invoking the said provision and failed to state its reason to believe in issuing the disputed tax assessment against the taxpayer, the DGIR’s decision became null and void.

Argument 3:

The DGIR’s failure to issue the particulars of the adjustment together with the notice of additional assessment in accordance with Section 140(5) of the ITA renders the assessment null and void

The word “shall” in Section 140(5) means that it is mandatory for the DGIR to furnish the particulars together with the notice of the additional assessment to the Taxpayer. The Courts have generally accepted that the word “shall” is prima facie mandatory.

Section 140(5) speaks on an instance where an adjustment is made to a taxpayer’s return. The word ‘shall’ in Section 140(5) deems it mandatory for the DGIR to provide the particular of adjustments along with the notice of assessment. It is only fair and just that the DGIR provides the taxpayer with the particulars of adjustment. The failure to provide particulars of adjustment will definitely cause great injustice to the taxpayer, as the taxpayer will not be made aware of the adjustments made. A taxpayer will not be able to respond and provide justification to the DGIR’s allegation as the adjustment remains unknown.

Further, the issue of a requirement to furnish particulars of adjustment together with the notice of assessment has also been decided by the Federal Court in DGIR v Rakyat Berjaya Sdn Bhd [1984] 1 MLJ 248, where the Federal Court held Section 140(5) requires that particulars of the adjustment shall be given with the notice of assessment. 

It must be highlighted that the provision of Section 140(5) is plain and clear, hence the provision should be given a literal meaning especially when it involves a taxing statute.

Argument 4:

Section 140(6) of the ITA is not applicable

The DGIR submitted that Section 140(6) has outlined circumstances where the DGIR can vary a taxpayer’s transaction hence, there is no need for the DGIR to specify the sub-paragraph of Section 140(1). It was submitted that Section 140(6) is a deeming provision that can only be applied if the DGIR is satisfied that there were transactions which have not been made on terms which might fairly be expected to have been made by independent persons engaged in the same or similar activities dealing with one another at arm’s length.

The Court of Appeal accepted the taxpayer’s argument that Section 140(6) does not absolve the DGIR of its obligation to demonstrate “reason to believe” as required under Section 140(1) merely because Section 140(6) is a “deeming” provision. As Section 140(6) deems the operation of Section 140(1), the elements of Section 140(1) must be satisfied and established by the DGIR. This is because Section 140(6) alone does not empower the DGIR to make any adjustment to the transaction. It is Section 140(1) that empowers the DGIR to make adjustment in the circumstances described in the four subparagraphs of Section 140(1).

Further, the DGIR has not adduced any evidence to show that the original transaction price of RM 380 psf was not at arm’s length and disregarded the information provided by the taxpayer to show that the transactions are in fact at arm’s length.


There is a clear need for the DGIR to specify the subparagraph of Section 140(1) when it intends to vary a taxpayer’s transaction. The rationale behind this is purely on the basis of equity and justice as a taxpayer must be accorded reasons as to the DGIR’s action to allow a taxpayer to effectively respond to the allegations of the DGIR.

This decision by the Court of Appeal is significant as it fortifies the position that the DGIR cannot act arbitrarily and that the courts are prepared to protect taxpayers against such abuse of power.This case further demonstrates that public authority cannot act arbitrarily by committing an error of law or acting beyond its legislative authority by not giving effect to a prescribed law.

Authored by Amira Azhar, an Associate with the firm’s Tax, SST & Customs practice.

26 JANUARY 2022


bottom of page