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High Court Grants Stay Of Proceedings To Taxpayer

Section 106(3) Income Tax Act 1967 reads:

In any proceedings under this section, the court shall not entertain any plea that the amount of tax sought to be recovered in excessive, incorrectly assessed, under appeal or incorrectly increased under section 103(4), (5) or (5A)”

In a civil proceeding against a taxpayer for unpaid taxes, the Government relies on Section 106(3) of the ITA to support its application for summary judgment against the taxpayer. By removing the power of the judiciary to entertain any pleas by the taxpayer, the court is essentially required to grant an order for summary judgment in a civil proceeding against the taxpayer.

Recently, the High Court has allowed a taxpayer’s application to stay all further proceedings commenced by the Government pending the outcome of the Federal Court’s decision in the appeal filed by Datuk Seri Najib Tun Razak and the outcome of the taxpayer’s hearing before the Special Commissioner of Income Tax (SCIT).

The taxpayer was successfully represented by the firm’s Penang resident partner, Chia Loong Thye together with senior associate, Khoo Jia Hui.

Brief Facts

During a tax audit conducted on the taxpayer, the Inland Revenue Board (IRB) alleged that the taxpayer had underdeclared income. As a result, the IRB issued a notice of additional assessment against the taxpayer, which the taxpayer is challenging before the SCIT. However, the taxpayer did not pay the disputed amount of tax. This resulted in the Government through the IRB commencing a civil action against the taxpayer. The Government invoked Section 106(1) of the ITA read together with Section 106(3) to demand for the unpaid tax and applied for a summary judgment against the taxpayer.

The taxpayer made an application before the High Court to stay the summary judgment proceeding pending the outcome of the Federal Court decision in the tax appeal filed by Datuk Seri Najib Tun Razak (Najib) and the taxpayer’s pending appeal before the SCIT.

The Government’s Submission

The crux of the Government’s submission in objecting the taxpayer’s application for stay of proceedings was that there are no special circumstances in the case to warrant a stay. The Government also argued that Section 106(3) prohibits the merits of the case to be heard and that the court has no jurisdiction to consider the merits of the case.

Further, such merits should only be raised before the SCIT in the view that the SCIT is the avenue for the taxpayer to raise its dissatisfaction on the IRB’s decision to issue the notice of additional assessment.

On the constitutionality of Section 106(3), the Government relied on Arumugam Pillai v Government of Malaysia [1975] 2 MLJ 29 to support its position that the Federal Constitution does not recognise fundamental right to immunity from taxation.

The Taxpayer’s Submission

Counsel for the taxpayer submitted that despite Section 106(3) of the ITA, the court has the jurisdiction to grant a stay even in tax matters. Section 106(3) is unconstitutional as it amounts to an ouster clause by ousting the jurisdiction of the Courts’ power to hear matters and it further violates the Federal Constitution, in particular Articles 8 and 121.

Section 106(3) Of The ITA Is Unconstitutional

The taxpayer submitted that Section 106(3) is unconstitutional as it goes against the Articles 8 and 121 of the Federal Constitution.

Article 8 states that everyone is “equal before the law and entitled to the equal protection of the law”. Therefore, it was argued that the taxpayer, like any other defendant in a court proceeding, should be allowed to exercise his legal right to raise the argument of a triable issue and a good defence in a summary judgment application. By virtue of Section 106(3), the taxpayer is treated differently in law and is deprived of his constitutional right to be treated as an “equal before the law” and to receive his entitlement to “the equal protection of the law”. In short, the taxpayer is being discriminated.

It was further submitted by Section 106(3) usurps the court’s judicial powers under Article 121. Under Section 106(3), the court has no choice but to validate the assessment raised by the IRB without any means of considering whether the assessment is justifiable or not. This has the effect of ousting the jurisdiction of the court and such ouster clauses has been consistently held by the Federal Court as being illegal and unconstitutional.

In reply to the Government’s submission based on the Arumugam Pillai case, the taxpayer submitted that the Arumugam Pillai case can be distinguished as only Article 13 of the Federal Constitution was raised in that case. Articles 8 and 121 of the Federal Constitution were not raised in the Arumugam Pillai case.

Stay Pending The Federal Court’s Decision

The argument on the constitutional of Section 106(3) is currently being raised before the Federal Court in the tax appeal filed by Najib. In Najib’s case, the High Court had granted summary judgment against him in relation to the taxes demanded by the IRB. The High Court’s decision was affirmed by the Court of Appeal. This led Najib to seek leave from the Federal Court where the issue in relation to the constitutionality of Section 106(3) was raised. In May 2022, the Federal Court had granted leave to Najib to challenge the legality of Section 106(3) based on this point.

In light of the upcoming Federal Court’s hearing on a similar issue in Najib’s case, the taxpayer submitted that the Federal Court’s decision would have a bearing on the outcome of the Government’s summary judgment application in the present matter. Hence the taxpayer’s application for a stay of the Government’s summary judgment proceeding pending the outcome of the Federal Court’s decision.

The High Court’s Decision

Upon hearing the submission of both parties, the High Court allowed the taxpayer’s application to stay the proceedings pending the decision of the Federal Court’s decision in the Najib case and the taxpayer’s SCIT hearing.


In summary, the question on the constitutionality of Section 106(3) which is pending before the Federal Court raises a key constitutional point, where a ruling favouring the taxpayer will change the procedural landscape on how the Government through the IRB may go after taxpayers with outstanding taxes.

Indeed, the review of Section 106(3) by the Federal Court is timely as it has been long acknowledged that it is “one of the harshest and prima facie oppressive measures taken to collect taxes” (Kerajaan Malaysia v Margaret Au Nyat Fah [2008] 3 CLJ 424). Whilst the Government is entitled to recover outstanding taxes from delinquent taxpayers, due protection must be made available to taxpayers who are disputing taxes raised arbitrarily against them. The tax recovery process must be done in accordance with the law and without usurping the powers of the judiciary to consider each matter based on its own facts and merits.

Authored by Khoo Jia Hui, a Senior Associate with the firm’s Tax, SST and Customs practice.

 5 April 2023


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