The Etiqa Family Takaful Case: Analysis Of “Negligence” In Time Barred Tax Assessments

RDS Project
4 days ago
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Time barred assessments are a perpetual issue in Malaysia’s income tax regime. Section 91(1) of the Income Tax Act 1967 (ITA) provides that an assessment or additional assessment may be made by the Director General of Inland Revenue (DGIR) in that year or within five years. However, Section 91(3) carves out exceptions by allowing assessments at any time when the following circumstances exist on the part of the taxpayer - fraud, wilful default or negligence.

In Etiqa Family Takaful Berhad v Ketua Pengarah Hasil Dalam Negeri (2024) MSTC 30-768, the Court of Appeal had the occasion to determine what constitutes negligence under Section 91(3) and the considerations which are relevant in making such determination.

Our Tax, SST & Customs partner, S. Saravana Kumar represented the taxpayer in this matter.

Background

The DGIR issued notices of additional assessment (Forms JA) against the taxpayer for the YAs 2008 to 2013, which were raised on varying dates between July and December 2016. This arose from a disagreement between the taxpayer and DGIR regarding the interpretation and application of Section 60AA(9)(b) of the ITA, namely whether Section 60AA(9)(b) excludes the application of Section 33(1) of the ITA in determining the deduction of commission expenses incurred by the taxpayer.

Being aggrieved by the DGIR’s decision, the taxpayer appealed to the Special Commissioners of Income Tax (SCIT) and argued that, among others, the Forms JA for the YAs 2008 to 2010 were time barred.

The SCIT dismissed the taxpayer’s appeal. On the time bar issue, the SCIT held that the taxpayer was negligent in preparing its tax returns for the YAs 2008 to 2010 as the taxpayer claimed its commission expenses as deductible under Section 33(1) when it ought not to have done so.

The taxpayer subsequently appealed to the High Court, where its appeal was allowed in part. Among the issues determined in favour of the taxpayer was whether the SCIT had correctly concluded that the taxpayer was negligent within the meaning of Section 91(3).

The High Court’s Decision

The High Court acknowledged that the taxpayer had filed its tax returns within the statutory time frame and had duly provided all documents requested by the DGIR during the tax audit, even though the tax audit was conducted six years after the expiration of the YAs 2008 to 2010.

According to the High Court, had there been any fault at all, it would be the taxpayer’s differing interpretation of Section 60AA(9)(b), i.e. the commission expenses were deductible under Section 33(1). It was held that a reasonably different interpretation of a provision of the ITA cannot amount to negligence for the purposes of Section 91(3). At the material time, the taxpayer’s tax treatment on the commission expenses was based on the professional advice that it obtained from an independent and reputable firm of tax agents.

The High Court ruled that the DGIR failed to discharge its burden of proof under Section 91(3) and the time barred Forms JA for the YAs 2008 to 2010 were set aside. The DGIR appealed on the Court of Appeal on this ruling.

Appeal Before The Court Of Appeal

The taxpayer relied on the Court of Appeal’s decision in Keysight Technologies Malaysia Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri [2024] 5 MLJ 276, which held that a taxpayer cannot be said to be negligent when it had relied on professional advice. The relevant excerpt from Keysight Technologies is as follows:

“[180] The Appellant thus had not willy nilly classified the sum received as capital without the benefit of the relevant advice from specialists in the field.

[181] We do not see how therefore the Appellant can be said to be negligent for making a return on a tax position by relying upon professional advice.”

On the other hand, the DGIR relied on another High Court’s decision, i.e. Opus International (M) Berhad v Ketua Pengarah Hasil Dalam Negeri [2019] MLJU 598, which essentially held that reliance on professional advice would not absolve a taxpayer’s negligence or technical adjustment.

At the outset, the Court of Appeal noted that the ITA does not define the term ‘negligence’ and referred to the definition of ‘neglect’ in Whiteman on Income Tax (3rd Edition):

“ ‘neglect’ means negligence or a failure to give any notice, make any return, statement or declaration or to produce or furnish any list, document or other information required by the Income Tax Act, but a person is not deemed to have failed to do anything required in a limited time if he does it within such extended time as the Commissioner or officer concerned may allow, where a person has a reasonable excuse for not doing anything required he is deemed not to have failed do it if he does it without any reasonable delay. It should be noted that even though an incorrect return was not made fraudulently or negligently originally, a subsequent failure to remedy it without reasonable delay may result in the return being treated as having been made negligently ab initio.”

The Court of Appeal agreed with the reasoning in Keysight Technologies and ruled that the taxpayer could not be said to be negligent for relying on professional advice as the taxpayer did not act willy nilly in claiming deduction for the commission expenses.

The following cases, which align with the above proposition, were also cited with approval by the Court of Appeal:

(a) Piramid Intan Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri [2015] 10 MLJ 436:

“…Surely these views constitute differing interpretation because it was the appellant’s interpretation that the payments they had made could be considered as deductions believing that the payments were revenue expenditure. Certainly such differing interpretation cannot be view as escaping from paying tax…”

(b) Ketua Pengarah Hasil Dalam Negeri v CIMB Group Holdings Berhad (2024) MSTC 20-727:

“The facts of the instant case do not come within the Whiteman instances of being negligent. The instant case is also not a case where the respondent has acted against the ordinary dictionary meaning of being negligent. Having a different view from the DGIR does not tantamount to being negligent – something more required…”

“…Where there is scope for different views about a provision, there is no guarantee that another advisor’s opinion will be the ‘correct’ interpretation. We are, by definition, considering a situation where there is uncertainty which may ultimately need to be resolved by the tribunals or the courts; different people may well take different view, all of which are tenable.”

The Court of Appeal recognised that a taxpayer is entitled to adopt a more favourable interpretation where differing views exist as long as reasonable care is taken by the taxpayer such as seeking professional advice from a competent tax agent. In the present case, the taxpayer relied on Section 33(1) as opposed to Section 60AA(9)(b) in seeking deduction for the commission expenses based on the professional advice obtained.

The Court of Appeal affirmed the decision of the High Court that there was no element of negligence on the part of the taxpayer and ruled that the DGIR failed to discharge its burden of proof under Section 91(3) to justify the time barred assessments.

23 June 2025