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High Court Rules In Favour Of Taxpayer - Income Tax Assessment On Land Disposal Gains Set Aside

Gains from the disposal of land are not subject to income tax unless the taxpayer was engaged in a trade or an adventure in the nature of trade.

Recently, the High Court in KPHDN v SSBTSB has dismissed the Revenue’s appeal and upheld the decision of the Special Commissioners of Income Tax (SCIT) that the gains arising from the disposal of the taxpayer’s real property were subject to real property gains tax under the Real Property Gains Tax Act 1976 (RPGTA). The Revenue’s argument that the gains arising from the disposal should be subjected to income tax was rejected.

Background Facts

SSBTSB (the taxpayer) was a company principally engaged in lorry transport operation, wholesale of rice and paddy, rubber plantation and investment holding. The taxpayer purchased agricultural lands (Lots 1089 – 1092) in 1995 as a long-term investment and the said lots were always treated as the taxpayer’s fixed assets.

Between 2003 and 2014, the Government compulsorily acquired a few of the taxpayer’s land plots namely a part of Lot 1090 and Lot 1091 and paid the taxpayer a low compensation. In order to avoid further compulsory acquisition of other land plots and to avoid further losses resulting from such compulsory acquisition, the taxpayer decided to dispose of the remaining of Lot 1090 in 2011. The taxpayer subjected the gains to real property gains tax.

In 2017, the Revenue conducted a tax audit on the taxpayer and claimed that the taxpayer was in a trading activity by disposing of the remaining of Lot 1090. Accordingly, the Revenue subjected the gains arising from the said disposal to income tax under the Income Tax Act 1967 (ITA) and raised an income tax assessment against the taxpayer.

The issue before the SCIT was whether the gains from the disposal of the said remaining land were subject to income tax under Section 4(a) of the ITA as business income or were subject to real property gains tax under Section 3 of the RPGTA as capital gains.

Badges Of Trade

In determining whether the taxpayer was engaged in a trading activity when it acquired and disposed of the remaining plot of land in 2011, the badges of trade was considered by the SCIT. In summary, the SCIT found that:

(i)The taxpayer was involved in the business activity of rubber plantation and transport. The main business activity was not that of buying and selling land.

(ii)The taxpayer had held the said plot of land for 16 years, which remained as agricultural land. This supported the taxpayer’s claim that the land was acquired and retained for the purpose of long-term investment.

(iii)Although the taxpayer applied to develop Lots 1089 – 1092 into a mixed development project and a conditional approval was granted on the condition that the taxpayer seek approval of the State Authority to change the land use category, the taxpayer did not proceed with the intended development. The SCIT observed that an attempt to develop the land did not amount to an alteration.

(iv)The compulsory acquisition by the Government at a low compensation was one of the circumstances that prompted the taxpayer to dispose of the land.

Based on the above, the SCIT concluded that there was insufficient evidence of badges of trade to conclusively establish that the taxpayer was trading on the land in question. Further, the gains from the said disposal were due to the appreciation of land and not due to any act to mature or alter the land.

Aggrieved by the SCIT’s findings, the Revenue appealed to the High Court.

Appeal Before The High Court

The Revenue’s Arguments

On appeal, the gist of the Revenue’s argument was that the SCIT had erred in concluding that there was no intention or motive to trade on the part of the Taxpayer. The Revenue submitted that the taxpayer’s dealing in the land was clearly with a profit-making intention. The income received by the taxpayer was incidental to the ownership of the land and therefore, it cannot be said that the land was acquired for investment purposes. The long period of holding of the land (16 years) does not mean that the land was not acquired for trading purposes. Further, the SCIT did not consider the fact that there were 12 transactions in respect of the other land owned by the taxpayer and thereby, leading to the incorrect statement that the land was acquired for the purpose of reselling at a profit.

Lastly, the conditional approval granted to the taxpayer indirectly enhanced the value of the said land as it had the potential of being developed by the purchaser. The Revenue argued that it was immaterial whether the taxpayer materialised the condition and proceeded with the intended development.

The Taxpayer’s Arguments

On the contrary, the taxpayer argued that mere presence of profit or gains do not denote trading. The land was also not acquired in the ordinary course of the Taxpayer’s business. Moreover, the taxpayer had no intention to trade at the time when it acquired the said land. In fact, the Subject Land was held in the taxpayer’s fixed asset account at all times.

The taxpayer did not deny the other 12 transactions in respect of the other land. However, the taxpayer explained that the 12 transactions was done following the compulsory acquisition by the Government which the taxpayer believed to be undervalue. In addition, the taxpayer had never advertised for the sale of the Subject Land, nor had the Taxpayer sought out a purchaser.

The High Court’s Decision

The High Court dismissed the Revenue’s appeal and decided that the SCIT had asked itself the right questions. The High Court also ruled that the SCIT was correct in concluding that the taxpayer’s action did not amount to trading.

Amongst others, the High Court found the following:

(i)The taxpayer’s main activity was not in the buying and selling of properties.

(ii)The fact that the taxpayer had replanted the said land with rubber trees 10 years after the acquisition showed that it was meant to be a permanent investment at the time the taxpayer purchased the said land. If the taxpayer had intended to resell the land at the time it purchased the same, the taxpayer would not have spent money on the replantation of rubber trees. Hence, the land was acquired by the taxpayer for the purpose of a long-term investment.

(iii) Even if the taxpayer had a contemplation to develop the said land, such a contemplation was abandoned by the taxpayer. This can be seen from the fact that the taxpayer did not proceed to apply for the State Authority’s approval to change the category of use of the land. Hence, there was no alteration of the said land.

(iv)The directors of the taxpayer resolved to dispose of the subject land as they were worried that the said land may be acquired by the Government at a low compensation.


In conclusion, the SCIT and High Court have decided that the taxpayer’s gains from the disposal of the subject land amounted to capital gains and not income tax. The decisions of the SCIT and the High Court are in line with the established law as it is clear that the plots of land were held by the Taxpayer for a long-term investment. The said land was only disposed of when the other plots of land to be acquired by the Government with a low compensation sum and the taxpayer had to avoid further losses. As such, it is clear that the gains from the disposal of the said land do not amount to the taxpayer’s business income chargeable to tax under Section 4(a) of the ITA.

15 September 2023

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