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SPBS v Ketua Pengarah Hasil Dalam Negeri: Gains From The Disposal Of Agricultural Land Held To Be Capital Receipt

Recently, the Special Commissioners of Income Tax (SCIT) ruled in favour of the taxpayer in ruling that the gains arising from the disposal of plots of agricultural land in Bandar Gurun, Kedah (the Land) were subject to real property gains tax (RPGT). The SCIT held that there was no basis for the Revenue to subject the gains to income  tax under Section 4(a) of the Income Tax Act 1967 (ITA).


The taxpayer was successfully represented by the firm’s Tax, SST & Customs Partner, S. Saravana Kumar and associate, Nur Hanina Mohd Azham.


Brief Facts

The taxpayer was a company incorporated in Malaysia and its principal activity was investment holding. In 2001, the taxpayer acquired the Land from Pengurusan Danaharta Nasional Berhad. The taxpayer’s ultimate intention in acquiring the Land was for long-term investment purpose. The Land was consistently treated as the taxpayer’s fixed asset in its audited accounts. Subsequently, the taxpayer disposed of the Land to in late 2014.

Following a tax audit conducted by the Director General of Inland Revenue (Revenue),  the taxpayer was informed that the gains arising from the disposal of the Land would be subjected to income tax under the ITA. The Revenue raised notices of additional assessment for the year of assessment (YA) 2015 and 2017 amounting to RM2,854,890.44 and RM15,407.42 respectively on the taxpayer. Aggrieved by the Revenue’s decision, the taxpayer appealed to the SCIT by fling the notices of appeal (Form Q).


The main issue considered by the SCIT was whether the gains arising from the disposal of the Land were trading receipt taxable under Section 4(a) of the ITA or capital receipt taxable under the Real Property Gains Tax 1976 (RPGTA).

Taxpayer’s Contention


In NYF Realty Sdn Bhd v Comptroller of Inland Revenue [1974] 1 MLJ 182, the High Court set out the badges of trade as encompassing the following elements: subject matter of transaction, period of ownership, frequency of transaction, alteration of property to render it more saleable, methods employed in disposing the property and circumstances responsible for the sale.


Pursuant to the examination of the badges of trade test, the taxpayer argued that the gains were capital receipt for the following reasons:

  1. The taxpayer did not have the intention to trade as the sole intention was to keep the Land was as a long-term investment. This was evident from the fact that the taxpayer’s principal activity has consistently been investment holding and the taxpayer has never undertaken any property development business.

  2. The Land was consistently held as the taxpayer’s non-current assets in the taxpayer’s audited accounts. The High Court in Perak Construction Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri [2001] 8 CLJ 498 held that due regard must be given to the manner in which the taxpayer treated the land in its audited accounts. Had the taxpayer intended to use the Land for development purposes, it would have been treated as the taxpayer’s current assets. Furthermore, the taxpayer was deriving rental income from November 2005 to February 2009.

  3. Prior to its disposal in 2014, the Land was owned by the taxpayer for 13 years. In Alf Properties Sdn Bhd v Ketua Pengarah Jabatan Hasil Dalam Negeri [2005] 3 CLJ 936, the Court of Appeal held that the taxpayer had kept the land for more than 10 years and this indicated that the taxpayer, when purchasing the land, did it for investment.

  4. The taxpayer had previously acquired 7 lots from a related party which were then sold back to the same related party. The Revenue contended that the repeated sale of transactions of 7 lots over a short period of time was indicative of trade. The 7 lots were acquired as the related party was not able to develop the 7 lots. The 7 lots had not been developed by the taxpayer throughout the 10 years and was sold back to related party once it was able to obtain a release of the access road by making payment to the land office. Thus, the Land was the only main asset owned and disposed by the taxpayer at the material time.

  5. The taxpayer did not alter the Land in any manner which would render the Land more saleable. When the Land was acquired, it was an agricultural land covered with rubber trees. The status of the Land was changed from the category of rubber cultivation to oil palm, clearly indicating the taxpayer’s intention for the land to remain in agriculture. Furthermore, the character or quality of the Land had never been changed so as to render it more merchantable. The taxpayer has always been principally engaged in oil palm cultivation and investment holding.

  6. The Revenue contended that the Land was in a ready for sale condition and that the taxpayer was only waiting for a buyer with a high offer. This was allegedly due to the fact that the taxpayer had advertised the sale of the Land and had appointed agents for the sale of the Land and paid broker fee. In Ketua Pengarah Hasil Dalam Negeri v Ng Huan Tong [2023] 1 LNS 296 , the High Court held that the appointment of a broker or an agent has become the norm and it was necessary to refer to all the relevant facts to ascertain the other badges of trade.

  7. The reason the taxpayer disposed of the Land was due to the financial distress of other related companies in the oil palm plantation business in Kelantan. As the taxpayer could not find a buyer for the Land and the taxpayer was still facing tight cash flow for operating needs, the Land was charged to OCBC Bank for a bank facility of RM4.5 million each granted to Oscar Palm Sdn Bhd and Best Harmony Sdn Bhd in July 2014 as working capital and to finance the plantation cost.

The Revenue’s Contention


The Revenue’s main contention was that the taxpayer held the land as its trading stock instead of investment asset based on the following reasons:


  1. The taxpayer did not retain the Land for long-term investment purposes but rather to wait for the value of the Land to escalate.

  2. The taxpayer did not truly intend to yield income from the Land.

  3. The taxpayer had the intention to gain profit from the disposal of the Land.

  4. The transaction was a repetition of similar transactions.

  5. The location of the Land was close to accessible roads and also close to development lots.

  6. The taxpayer advertised and engaged brokers to sell the Land.

  7. The taxpayer and other subsidiaries share common directors and knowledge on property development.



The SCIT allowed the taxpayer’s appeal and accordingly, the disputed notices of additional assessments for the YAs 2015 and 2017 were set aside.


In respect of property transactions, a frequent issue that arises is whether the disposal of the property would be subject to RPGT or income tax. In this regard, it is imperative to determine whether the land transaction has elements of badges of trade. This is because the mere realisation of capital appreciation is not income under the ordinary concepts and usages of civilisation.


In the present matter, since the true and proper examination of the badges of trade test clearly illustrates that the taxpayer was not in the act of trading, the disposal of the Land cannot be subject to income tax.

19 February 2024


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