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1. Rules of Natural Justice
In Bandar Utama City Corporation Sdn Bhd v Director
General of Inland Revenue (DGIR) [(1999) MSTC 3725], the DGIR had raised ordinary
and additional assessmentsfor several years of assessment. The taxpayer applied for
an order of mandamus directed to the Revenue to provide reason and the basis for
the tax computations. In this case, there had been allegations of tax evasion by
the taxpayer. The taxpayer submitted that they have filed Forms Q to appeal against
the abovesaid assessments. Further, the taxpayer contended that under Section 140(5)
of the Income Tax Act, 1967, and pursuant to the rules of natural justice, the DGIR
had a duty to provide such particulars to the taxpayer to enable him to discharge
the burden of proof placed upon the taxpayer.
The High Court held that Revenue's failure to provide the particulars would not only
be a breach of its statutory duty under Section 140(5) but also of the rules of natural
justice. Section 140(5) clearly imposes a duty on the Revenue to give particulars
of the assessments together with the notice. The rules of natural justice must be
observed and the taxpayer ought to know particulars of the case made against him
so as to provide an answer to the case.
It was stated that where there is an abuse of power by the DGIR, then an order can
be made against the DGIR. The order does not determine the case once and for all
but merely requires the Revenue to give particulars of the assessments to facilitate
an appeal by the taxpayer to the Special Commissioners.
2. Provisions for Accrued Vesting Benefits Not Tax
Deductible
In Exxon Chemical (M) Sdn Bhd v KPHDN [(1999) 1 MLJ
534], the taxpayer set up a retirement and resignation benefits fund for its
employees in accordance with an employees retirement and resignation benefits scheme.
The taxpayer set aside an amount of RM881,270 for years of assessment 1986 to 1991
to the fund and claimed the amount set aside as a deduction under Section 33(1) of
the Income Tax Act, 1967.
The issue was whether the amount which was a provision for accrued vesting benefits
is an allowable deduction. The Special Commissioners dismissed the appeal. On appeal
by the taxpayer, the High Court in dismissing the appeal stated that the provision
of the benefit was an amount which could not be accurately determined or fairly estimated
and related to future expenses. The liability was contingent until the employee retired
or become entitled to the retirement benefits. Until such time, the taxpayer was
under no obligation to pay.
The court held that 4 elements of Section 33(1) must be satisfied, namely :
- outgoings and expenses
- wholly and exclusively
- incurred during that period
- in the production of income
In order to qualify for a deduction, outgoing and expenses must
be incurred during the relevant period wholly and exclusively in the production of
income. Hence, 2 conditions must be satisfied in order to qualify for a deduction,
namely:
- the liability must be certain and not contingent
- the liability must be an obligation incurred in that year exclusively
in respect of payments rendered during the year.
The taxpayer's reliance of the Hong Kong's case of Commissioners
of Inland Revenue v Lo & Lo was rejected by the Court.
3. Interest Payments on Loan Tax Deductible
In Rakyat Berjaya Sdn Bhd v KPHDN [(1999) MSTC 3731],
the taxpayer was in the business of extraction and sale of timber logs. In December
1981, it borrowed a specific sum to pay for royalty payments for timber rights in
its business.
In June 1992, it obtained a second loan to finance working capital requirements and
investment in projects for which it used to settle the first loan. There was no dispute
that the second loan was utilised to pay off the first loan, so instead of paying
interest on the first loan, the taxpayer paid interest on the second loan. The issue
which arose was whether the interest paid by the taxpayer in respect of the second
loan was tax deductible.
The Revenue argued that the second loan was used to settle a debt and could not be
regarded as being employed in the production of income. The taxpayer argued that
repayment of business debt was an essential part of the business. The court held
that since interest payments on the first loan were deductible because they fall
within the provisions of Section 33(1), the second loan should be considered as a
replacement loan or refinancing. Hence, interest payments on the second loan would
also be deductible for income tax purposes.
4. Expenditure Incurred to Increase Efficiency and
Reduced Cost Deductible
In IF Sdn Bhd v DGIR [(1999) MSTC 3061], the taxpayer,
a subsidiary of N (M) Sdn Bhd, incurred costs to conduct an efficiency study of its
subsidiaries. The study was aimed at increasing productivity and reducing business
costs and on the basis of the study, certain staff were retrenched. The taxpayer
incurred RM590,825 for efficiency study and RM393,369 for gratuity and retrenchment
benefits. The Inland Revenue Board disallowed the deduction. The issue was whether
these sums were wholly and exclusively incurred in the production of income under
Section 33(1) of the Income Tax Act, 1967. The taxpayer argued that the expenses
were incurred to improve efficiency and cost savings and not for winding up of the
company.
The Inland Revenue Board argued that the efficiency study was carried out after the
decision to wind up the company was taken even if the study was for cost saving.
The Special Commissioners held that the expenditure incurred in increasing efficiency
and reducing operating costs were wholly and exclusively incurred in the production
of income and the principle of dual purpose as submitted by the Revenue did not apply.
Secondly, the retrenchment expenditure incurred was also allowed by the Special Commissioners
as it arose from the efficiency study.
5. Write-off of Obsolete Stock Deductible
In North Borneo Timbers Bhd v KPHDN Appeal No. KO2 of
1997 (Kota Kinabalu), the taxpayer's activities were logging and export of logs,
manufacturing and plantation. In the course of carrying on timber logging activities
it had to maintain a large fleet of heavy mobile equipment, three factories with
machinery, quarters for workers and to stock spare parts for the machinery and equipment.
The taxpayer claimed a write-off for the amount of RM96,732 in respect of the obsolete
stock for consumable stores and spare parts used by the company.
The High Court allowed the appeal and reversed the Special Commissioners decision.
The High Court held that Section 33(1)(c) of the Income Tax Act, 1967 only allowed
deductions in respect of repairs actually incurred and is not meant to cover the
write-off of obsolete stock for consumable stores and spare parts.
However, it was necessary for the taxpayer to maintain a stock of spare parts for
the maintenance and repair of its machinery and mobile equipment. There was no evidence
that the quantity of spare parts maintained by the taxpayer was unnecessarily large
and more than what was intended to be used for the maintenance of machinery for timber
operations. Hence, Section 33(1) applied as the write-off was an expense wholly and
exclusively incurred by the taxpayer in the production of income.
6. Source of Taxable Profits Determined
The Hong Kong case of Commissioner of Inland Revenue
v Orion Caribbean Ltd (involuntary liquidation) [(1999) MSTC 11,031], looked
at the question of whether profits arose in or were derived from Hong Kong. The taxpayer
was incorporated in the Cayman Islands. It was wholly owned by Orion Royal Pacific
Ltd (ëORPL'), a company incorporated in Hong Kong. The taxpayer borrowed money in
foreign currencies from ORPL and on lent money (in foreign currencies) to borrowers
outside Hong Kong. It derived profits from the interest differential between the
borrowings and the lendings. The Revenue assessed the taxpayer to profits tax from
borrowing and lending activities. The taxpayers appealed to the Board of Review.
The Board looked to the place where the money was lent as the test to determine the
source of the profits. Since the money was lent outside Hong Kong, the Board said
that the profits did not arise in or were not derived from Hong Kong. (Hong Kong
basis of taxation is on a territorial basis).
The Board's decision was upheld by the Court of Appeal. The Commissioners appealed.
The issue before the Privy Council was whether the profits of the taxpayer were profits
arising in or derived from Hong Kong as defined in Section 2 of the Inland Revenue
Ordinance as including "all profits from business transacted in Hong Kong, whether
directly or indirectly through an agent".
The court ruled in favour of the Commissioners and highlighted the following :-
- Regard should not be had solely to the place of lending to the
exclusion of the place of borrowing.
- Ascertaining an actual source of income is a "practical hard
matter of fact".
- The taxpayer was used as a channel for loans provided by ORPL
in Hong Kong and passed through the taxpayer to the ultimate borrowers under loan
agreements negotiated, approved and serviced by ORPL. As such, it was held the profits
of the taxpayer arose from business transacted in Hong Kong by ORPL on the taxpayer's
behalf.
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