Taxpayer Granted Leave To Challenge Capital Gains Tax Assessment

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Recently, the High Court granted leave to taxpayer to commence judicial review proceedings against the Director-General of Inland Revenue (DGIR) in which is probably the first tax dispute concerning the newly introduced capital gains tax (CGT). The taxpayer challenged the legality of a RM 20.3 million CGT assessment issued by the DGIR against the taxpayer.

Th High Court also granted an interim stay order against the payment of the disputed assessment.

The High Court dismissed the objection by the Attorney General Chambers (AGC) to the taxpayer’s leave and stay order applications.

Consequent to the taxpayer obtaining leave from the High Court, the DGIR reviewed its decision and set aside the RM 20.3 million CGT assessment in full.

The taxpayer in this matter was successfully represented by the firm’s Tax, SST & Customs Partner, S. Saravana Kumar and Associate, Dharshini Sharma.

Background Facts

Somewhere in July 2023, the taxpayer entered into a share sale agreement (SSA) with N Sdn Bhd for the disposal of 100% of its shares in B Sdn Bhd. The sales consideration for this transaction was RM 700 million. Between September 2023 and February 2024, all conditions precedent in the SSA were fulfilled as required.

On 29 November 2024, the DGIR issued a CGT assessment amounting to RM 20.3 million for the year of assessment (YA) 2024.

This CGT assessment raised several key legal questions. At the centre of the dispute was the DGIR’s use of the CGT provisions retrospectively on the taxpayer’s share disposal. The taxpayer contended that the CGT provisions which only came to effect on 1 January 2024, should not apply to the share disposal transaction as it predated this date.

Alternatively, the taxpayer argued that the gains from the share disposal were exempted under the Income Tax (Exemption) (No. 7) Order 2023, which was applicable to the disposal of assets within the Exemption Order.

High Court’s Decision

The taxpayer argued that the judicial review application has a low threshold with the sole question being whether or not the application was frivolous and/or vexatious. In this matter, the taxpayer submitted that it had satisfied the requirement by presenting an arguable case on the basis that:

1. The DGIR’s actions constituted an error of law and lacked jurisdiction, justifying judicial review despite alternative remedies under Section 99 of the Income Tax Act 1967 (ITA).

2. The statutory appeal process was inapplicable because it was the DGIR’s position that statutory appeal pursuant to Section 99(1) of the ITA does not apply to CGT assessments.

3. The CGT law was not to be applied retroactively.

   
   

The counsel representing the Attorney General’s Chambers argued that the taxpayer’s application is frivolous and vexatious as the taxpayer had failed to exhaust the alternative remedy readily available under Section 99(1) of the ITA.

The High Court accepted the taxpayer’s submission and granted leave for judicial review, where the court emphasised that the taxpayer had raised significant issues of law that required careful consideration. The court also recognised that the issues at hand, concerning the jurisdiction of the DGIR, the retrospective application of the CGT law and legitimate expectation were substantial enough to warrant judicial scrutiny.

The taxpayer’s application was not regarded frivolous or vexatious and the taxpayer had demonstrated the necessity of judicial intervention due to the potential harm from the substantial tax imposed.

Case Analysis

The core dispute in this case revolves around the legality and jurisdiction of the DGIR in imposing CGT on the taxpayer for gains derived from disposal of its assets which predated the effective date of the CGT regime coming into force. The case raises significant concerns about the limits of the DGIR’s power and the principles surrounding retrospective taxation.

On this point, it was the taxpayer’s contention that CGT should not apply to transactions executed prior to the implementation of the new law. This challenge raised fundamental questions about the legal limits of the DGIR’s powers, particularly when it comes to applying laws retroactively. Alternatively, it was also the taxpayer’s contention that although if the transaction is captured by CGT, the taxpayer was entitled to the exemption.

The judicial review application challenged the decision of the DGIR, particularly regarding the following points:

•Whether the DGIR had the jurisdiction to impose CGT on a transaction that occurred before the effective date of the capital gains tax regime.

•The taxpayer challenged the retrospective application of the CGT law under Section 12 of the Finance (No. 2) Act 2023, which only came into effect on 1 January 2024, and questions whether it can be applied to transactions that occurred prior to this date.

•The taxpayer asserted that the DGIR’s actions violated the

legitimate expectation that law would not be applied retroactively.

•The disputed CGT assessment was issued arbitrarily, lacking transparency and fairness, particularly in the absence of a proper engagement with the taxpayer prior to the imposition of the tax. The taxpayer highlighted that the DGIR failed to adhere to procedural requirements set forth in the Tax Audit Framework 2022 and the ITA.

Conclusion

In conclusion, the High Court’s decision to grant leave for judicial review underscores the importance of fairness and transparency in tax administration. The case raises critical issues concerning the jurisdiction of tax authorities, the permissibility of retrospective taxation, and the protection of taxpayers’ legitimate expectations. By granting leave and an interim stay order, the Court acknowledged the complexity of the legal questions involved and the potential for irreparable harm to the taxpayer.

7 May 2025