Recently, the Court of Appeal unanimously dismissed the appeal by the Director General of Inland Revenue (DGIR) and affirmed the decision of the High Court in ruling that the taxpayer is allowed to claim a deduction for the Bumiputera Discount Payment under Section 33(1) of the Income Tax Act 1967 (ITA).
This alert will discuss the key aspects of the case.
Brief Facts
The taxpayer, a property developer, was mainly involved property development business. The taxpayer applied to the Lembaga Perumahan dan Hartanah Selangor (LPHS) to release units listed to be sold to Bumiputera buyer lots to non-Bumiputera buyers. Property developers who were unable to sell their Bumiputera property units to Bumiputera purchasers, may seek the release of these units, subject to the conditions outlined in a guideline issued by LPHS.
Upon LPHS granting approval to the taxpayer under the condition that an amount equivalent to the Bumiputra discount of 7% (for commercial units) and 10% (for commercia units) be paid to the LPHS. The taxpayer duly made the Bumiputera Discount Payment to the LPHS in order to release the Bumiputera lots to the non-Bumiputera purchasers. The taxpayer deducted this payment as a business expense. The DGIR disagreed with the taxpayer that the Bumiputera Discount Payment was a deductible tax expense under Section 33(1) of the ITA on the basis that the expenses were capital expenditure. Being aggrieved by the DGIR’s decision, the taxpayer filed an appeal to the Special Commissioners of Income Tax (SCIT).
The SCIT’s Ruling
The main issue considered by the SCIT was whether the Bumiputera Discount Payment made to the LPHS to procure the approval of the LPHS to sell units of development reserved for Bumiputera buyers to non-Bumiputera buyers was deductible pursuant to Section 33(1) of the ITA. The SCIT disallowed the taxpayer’s appeal and held that the Bumiputera Discount Payment was capital in nature.
Being aggrieved by this, the taxpayer filed an appeal at the High Court against the SCIT’s decision.
The High Court’s Ruling
The High Court allowed the taxpayer’s appeal and held that the taxpayer was entitled to claim for deduction of the Bumiputera Discount Payment pursuant to Section 33(1) of the ITA. The High Court ruling was made based on the following reasons:
i.The LPHS granted approval to the taxpayer to release the Bumiputera units to be sold to non-Bumiputera buyers. The payment of 7% (commercial units) and 10% (residential units) to the LPHS was payment made for the approval to sell the Bumiputera units to the non-Bumiputera buyers. Such payment cannot be said to be a fine or penalty because there was no issue of the taxpayer violating the condition imposed after all.
ii.It was indisputable that the taxpayer could not have sold the Bumiputera units to the non-Bumiputera without making the required payments first. Therefore, the payment was necessary to facilitate the sale of Bumiputera units, which directly generated the taxpayer’s income as a property developer.
iii.The payment was in fact made in the course of operating the taxpayer’s business. The expenses or payments incurred by the taxpayer were not just ‘wholly and exclusively’ for the purpose of generating income but were closely related, incidental, and relevant to the taxpayer’s business.
iv.Additionally, the payments made by the taxpayer were not intended to enhance or improve the value of the fixed capital, as the taxpayer was returning the Bumiputera discount to avoid being in violation of the circular.
Being aggrieved by the High Court’s decision, the DGIR appealed to the Court of Appeal.
The Court Of Appeal’s Ruling
The Court of Appeal dismissed the DGIR’s appeal and affirmed the High Court’s decision. The Court of Appeal held that the payment made to the LPHS or which is better known as the Bumiputera discount, was a deductible business expense under Section 33(1) of the ITA.
However, the Court of Appeal held that additional penalty imposed on the taxpayer for selling the Bumiputra units to non-Bumiputra buyers without the approval of the LPHS to be not deductible under Section 33(1) of the ITA. This penalty referred to the additional sum that was imposed on top of the payment of 7% or 10% to the LPHS.
In coming to its decision, the Court of Appeal addressed the cases of Ketua Pengarah Hasil Dalam Negeri v Prima Nova Harta Development Sdn Bhd (Rayuan Sivil No.: W-01(A)-318-07/2020) and Ketua Pengarah Hasil Dalam Negeri v Taman Equine (Rayuan Sivil No. W-01(A)-337-06/2021) which were previously decided in favour of the DGIR. The Court of Appeal held that in the absence of the written grounds of judgment in those cases, the decisions in those cases were not binding. The relevant excerpt reads:
“(ii) Previous judicial decisions
[18] Learned Senior Revenue Counsel appearing for the Appellant also submitted that the issues in the present appeal are similar to that in the cases of Ketua Pengarah Hasil Dalam Negeri v Prima Nova Harta Development Sdn Bhd (Rayuan Sivil No.: W-01(A)-318-07/2020) and Taman Equine (M) Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri (Rayuan Sivil No. W-01(A)-337-06/2021) and that this Court had resolved the issues in both cases in favour of the Appellant. Hence, the learned Counsel for the Appellant is urging this Court to follow the decisions in those two cases.
[19] However, we do not have the benefit of the grounds of judgement for both these cases and in the premise it cannot be gainsaid that the doctrine of stare decisis applies to bind us to these earlier decisions. Though the applicable general principle are the same, each tax case would have to be decided on its peculiar contextual facts and circumstances as was stated by Raja Azlan Shah FCJ (as HRH then was) in I Investment Ltd v CGIR 2 [1975] MLJ 208:-
I think it right to emphasis what has already been treated judicially that cases on income tax depend so much on their peculiar facts that excessive reliance on precedents may be dangerous.”
Conclusion
This decision serves as a reminder that the appellate court has the power to set aside the decision of the SCIT should the latter misdirect themselves by reaching conclusions inconsistent with primary facts found by them or drew inferences from matters which were of no probative value in supporting their conclusions. This case is also considered as a landmark decision pertaining to cases on deductibility of Bumiputra discounts as the Court of Appeal has provided clarity by furnishing its written grounds of judgment.
This recent decision is encouraging as it recognises the position that Bumiputera Discount Payment incurred by property developers are indeed in the ordinary course of business and hence, tax deductible. It also shows that the DGIR cannot arbitrarily disallow an expense as a deduction if it is not prescribed under the law.
It is also worth noting that the firm’s Tax, SST & Customs partner, S. Saravana Kumar together with senior associate, Nur Amira Ahmad Azhar have successfully represented the taxpayer in a similar case before the High Court (Sovereign Teamwork (M) Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri [2022] 8 MLJ 215). Similar to the Mitraland case, the High Court ruled that the taxpayer was allowed to deduct the Bumiputera Discount Payment under Section 33(1) of the ITA.
21 June 2023