Can The IRB Disregard The Judicial

Pronouncement In The Penang Realty Case?

A Legal Perspective on the Decision Impact
Statement
Datuk D.P. Naban & S.Saravana Kumar
Mohd Suhairi Bin Suhaimin 022562
Simson Bin Singawah 022873
Shamsul Affendi Bin Yusoff 022718
Summary of Article
Ø In February 2007, the Director General of
Inland Revenue (DGIR) released three
issues of the Decision Impact
Statement(DIS) over the Inland Revenue
Board homepage.
Ø The DIS outline the DGIR position in relation
to three recent Court of Appeal decision.
Ø Although the DGIR acknowledge the DIS is
not a public rulling, the DIS is treated as
the DGIR explanatory statement on how
the law will be administered by IRB as a
result of these case.
Ø
Cont..
Ø This DIS which is issues for the first time in
Malaysia, is modelled after the DIS issued by
Australian Commissioner of Taxation.This
article looks at the DIS impact on the court of
Appeals decision in Ketua Pengarah Hasil
Dalam Negeri v Penang Realty Sdn Bhd.
Ø The DGIR has firmly reiterated the IRB stand
that the proceeds from compensation for
compulsory acquisition of land and taxable.
Ø The question arise whether the DGIR will apply
the DIS, which not in tandem with the judicial
pronouncement in the Penang Realty Case
Ø The article analyse the court reasoning in
Penang Realty before discussing the DIS legal
impact
Ø
Ø
Brief Summary of Case Ketua Pengarah
Hasil Dalam Negeri v Penang Realty Sdn
Bhd
Ø This case is a decision of the Court of Appeal, an appeal from
the decision of the Kuala Lumpur High Court registered as
Tax Appeal No. R1-14-10-95.
Ø The Appellant bought two pieces of land namely, Heintz Estate
in Penang and Heintz Estate in Perak.
Ø The evidence shows that a portion of the subject land, Lot
2833, Bandar
Tanjong Bongah was compulsorily acquired by the Government in

August
1980 and the area acquired was 121,204.61 sq. ft.

Ø In May 1982, the Appellant was paid the sum of RM1,

035,762.91 as
compensation where IRB sought to tax the said compensation

and
accordingly assessed that sum.

Ø The Appellant was unhappy with the assessment imposed and

appealed
to the Special Commissioners of Income Tax and it was

dismissed. The
Appellant took up the appeal to the High Court and again it was

dismissed
and now, the appeal was heard before the Court of Appeal.
Decision By The Court
Ø The Court of Appeal on 20 April 2006 had decided that the
proceeds of
 which the Appellant, Penang Realty Sdn. Bhd. received
were not subject
 to income tax.
Ø The Court of Appeal had allowed the appeal where it was
decided that the compulsory acquisition by the Government
of the Appellant’s land could not constitute a sale, the
proceeds of which were subject to tax as the element of
compulsion vitiated the intention to trade.
Ø The Court had heavily relied upon the case of Lower Perak Co-
Operative
 Housing Society Berhad v. Ketua Pengarah Hasil Dalam
Negeri (1994) 3
 CLJ 540 as opposed to the case of F. Housing Sdn. Bhd. v.
Director
 General of Inland Revenue (1976) 2 MLJ 183 which was
relied by the
 Special Commissioners of Income Tax in which the Court of
Appeal had
 ruled out that case since facts of both cases are different,
so it can be
 easily distinguished and therefore, the Special
Commissioners of Income
 The Element of Trading
 Section 4 of Income Tax Act 1967 list classes of income subject to
income tax.Insolar as a business is concern, it is the gain and
profit from the business that are chargeable to income tax
 Thus under section 4, which outline the type of income chargeable,
not all income is chargeable to income tax
 Our courts have on more than one occasion held that where a
property is compulsorily acquired, the element of trading is
vitiated
 The proceeds from the compensation should not be subjected to
income tax as such proceeds do not fall within the ambit section
4.
 The fact that a taxpayers land was compulsorily acquire vitiates
the element of trading.
 This was clearly established by court of appeal in Penang Realty
Cont..
 The court of appeal in Penang Realty was influenced and guided by
the supreme court decision in Lower Perak Co-operative Housing
Society Berhad V Ketua Pengarah Hasil Dalam Negeri
 Justice Moktar Sidin endorsed the principle that a force sale cannot
constitute a sale. His Lordship rightly observed that the element
of compulsion vitiates the intention to trade
 In Lower Perak, justice Edgar Joseph Jr. referred to English cases
and provided a thorough analysis of the concept of intention to
trade
Cont..
 His Lordship came to the conclusion that there cannot be a
sale or intention to sell where there is an element of
“force” sale and articulated the following principle:
a)The paramount object of the transaction must have a
commercial purpose
b)A transaction that has all the attributes of trade must still
have a commercial purpose
c) The sale must be based on a profit-making operation
d)The relevant transaction entered into by the parties had a
commercial or object from the taxpayer point of view
e)Non-commercial motivation may effect the nature of trading
transaction that they cease to be normal trading
f) A mere sale at a profit is not a trading activities
g)A sale must be consensual and one own free will before the
proceeds can be chargeable to income tax
h)The circumstances necessitating the realisation of an assets
may afford an explanation for the realisation that negates
the idea that any plan of dealing motivated the original
purchased
i)
The Decision Impact
Statement
 The DIS states the decision enunciated in Penang Realty was
heavily relied upon by the Lower Perak case and did not consider
section 24(1)(a) of the ITA 1967
 The DIS is effectively treating the court of appeal decision in
Penang Realty as per incuriam
 Per incuriam is the legal term used by lawyers to describe an
instance where a statute which would have affected the decision
was not brought to attention of the court
 It must be appreciated that section 24(1)(a) deals with
circumstance when a debt owed by a relevant person constitutes
gross income for a relevant period
 In Penang Realty Case , there was no direct relevance to this issues



Cont..
 Furthermore, the high court in Perak Construction came to
the same conclusion as in Lower Perak and Penang Realty
despite being well aware of section 24(1)(a)
 Section 24 (1) (a) of the ITA provides as follows -
“24. (1) Where in the relevant period a debt owing to the

relevant person arises in respect of -

(a) any stock in trade sold (or parted with on requisition or

compulsory acquisition or in a similar manner) in or before

the relevant period in the course of carrying on a business;

(b) -not applicable-

(c) -not applicable-

The amount of the debt shall be treated as gross income of the

relevant person from the business for the relevant period”

Cont.
 The classes of income chargeable to income tax are
outline in section 4 of the ITA 1967
 As such, if the proceeds are to be taxed, it must fall
within the ambit of section 4 and not section 24(1)(a)
 This mean, only gains or profit from a business are
chargeable to income tax
 Case like Lower Perak, Penang Realty and Perak
Construction clearly establish that the element of
trading is vitiated in cases of compulsory acquisition
and does not fall within the ambit of a trading activity
 Section 24(1)(a) , on which the DIS is based has no direct
relevance to the taxation of proceeds from compulsory
acquisition
 In this regard, it is clearly arguable that the IRB
contention is misconceived and open to challenge
Cont..
 Furthermore, the special commission of
income tax would be certainly inclined to
conform to Appeal decision in Penang
Realty.
 Based on the doctrine of judicial precedent ,
the High Court is bound by the decision of
the court of appeal
 If the special commissioners decide
otherwise, the taxpayer may appeal to the
High Court.

Conclusion
 A compulsory acquisition is not a sale in the true sense of
trade. If the element of compulsion is the reason for the land
disposal, then the intention to trade is vitiated
 This mean the land was not disposed in the course of trading
 The author stress that the mere fact the taxpayers made a
profit does not make the compulsory acquisition a trading
activity and the proceeds as trading income.
 As such, the proceeds cannot be subjected to income tax
 The author opine the DIS cannot overrule a judicial
pronouncement and thus, it lack legal effect
 It is not a legal document and does not bind the taxpayer
 The DIS merely serves as a guideline issues by the DRIG to the
state the IRB stand
 Since the legal position is in favors of taxpayer , the author
urge the IRB to reconsider its position and the DIS. If the
objective behind the DIS is to educate taxpayers, then the
DIS on Penang Realty confuses and creates uncertainly
among the taxpayer
Cont..
 Under the self-assessment system, taxpayers are
require to determine their taxable
income,compute their tax liability and submit their
tax return
 In principle, this system has shifted a substantial
burden of responsibility from the IRB to the
taxpayer
 However, the DIS has place the taxpayer in a
dilemma when it comes to determining whether
proceeds from compulsory acquistion are taxable
income
 Such confusion and uncertainty are undesirable in
light of the assessment system
 Hence, it only appropriate that the DGIR withdraw
the DIS and accept the Penang Realty as good law
Reference
 Accountants Today. Datuk D.P. Naban &
S.Saravana Kumar, page 30-33.February
2008.
 www.hasilnet.org/english/pdf/PREALTYvsKPHDN.
 Lower Perak Co-Operative Housing Society
Bhd. v. Ketua Pengarah Hasil Dalam Negeri
(1994) 3 CLJ 540
