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The Determination of the Special Commissioners is not open to Criticism

Updated: Dec 10, 2022

International Investment Ltd v. Comptroller-General of Inland Revenue Malaysia

Privy Council

Diplock J, Viscount Dilhorne J, Fraser J, Keith J, Sir Robin Cooke J

[Appeal No. 20 Of 1976]

19 June 1978

Viscount Dilhorne J: (delivering the judgement of the Board)

The issue raised in this appeal is whether the Special Commissioners of Income Tax in Malaysia were entitled on the facts before them to find, as they did, that a profit made by the appellant company on the realisation of immovable property was chargeable to income tax under the Income Tax Ordinance, 1947.

The appellant company appealed by way of a Case Stated against the determination of the Special Commissioners, and their appeal was dismissed by the High Court of Malaya (H S Ong J).

An appeal from his judgment was dismissed by the Federal Court of Malaysia (Gill CJ Malaya, Raja Azlan Shah FJ and Wan Suleiman FJ).

The present appeal is against the judgment of the Federal Court.

The appellant company was incorporated in 1962 with the objects inter alia of trafficking and otherwise dealing in or turning to account lands, buildings and immovable property of any description.

Its Memorandum of Association also included a wide variety of other objects, including developing land and investing in shares and securities.

Its authorised share capital was originally $500,000 in shares of $100 each, which increased in 1963 to $5 million.

On 31 December 1962, its issued share capital was $300,000 fully paid.

By 31 December 1963, this had been increased to $500,000, and application and allotment money of a further $500,000 had been received for shares which had not then been allotted.

In 1962 and 1963, it purchased several pieces of land in Penang Road, Penang, which together formed a block for a total price of $337,273.71.

After paying compensation to occupiers of some old houses on the part of the land, it demolished the existing houses.

It entered into contracts for the erection of a six-storey shopping arcade and hotel known as the International Building.

In 1962 it entered into negotiations for letting the proposed hotel, but the negotiations proved abortive.

In 1963 it received rent of $7,044.00 from the arcade.

On 16 October 1963, at an Extraordinary General Meeting of the members of the appellant company, the following Special Resolutions were passed:

1. That the business and undertaking of the Company be reconstructed and, after such reconstruction, to expand its business of investments in and the holdings of securities.

2. That the Company do convey its property known as Lots Nos 14(1), 14(2), 15(2), 16(1), 30, 31 and 32 TS 16 NED Penang together with the building erected thereon to Island Hotels' & Properties (Malaysia) Limited in consideration of the issue of 2,846,300 shares of $1 each in the said Island Hotels & Properties (Malaysia) Limited all credited as being fully paid.

3. That the Company execute a Deed of Guarantee with Island Hotels & Properties (Malaysia) Limited whereby the Company undertake to complete the erection of the building now under construction on Lots [numbered as above] to construct a driveway and car park and to undertake the fittings, fixtures, escalators, lifts, furniture, telephone with PABX equipment and all other things according to all the detailed plans and specifications a copy of which will be annexed to the Deed of Guarantee in consideration of the issue of 903,700 shares of $1 each in the said Island Hotels & Properties (Malaysia) Limited as being fully paid.

4. ..."

Under these Resolutions, the appellant company transferred the International Building and the land on which it stood to Island Hotels & Properties (Malaysia) Limited ("Island Hotels") and undertook to complete the building.

In exchange, it received 3,750,000 shares of $1 each in that company.

This transfer to Island Hotels gave rise to the profit on which income tax has been assessed and is disputed.

The fact that the consideration was received in shares and not in cash is immaterial, as the Special Commissioners rightly held.

The profit is the difference between the cost of the property (including the expenditure on erecting the International Building) and the value of the shares in Island Hotels received in exchange for it at the time of the exchange.

The Comptroller of Income Tax assessed the profit at $1,704,061, which was included in a Notice of Amended Assessment dated 25 May 1967 for the year of assessment 1964. (The year of assessment is the calendar year.)

The appellant company appealed against the inclusion of that amount in the assessment.

No question is raised concerning the amount of the profit.

To complete this part of the narrative, it is convenient to set out here the following passage from the Findings of Fact by the Special Commissioners, the significance of which will appear later:

Subsequently, all of these shares in the Island Hotels and Properties (Malaysia) Limited were transferred by the Appellant Company as follows:

  • 1,000,000 shares to Disco Limited on 2 December 1963;

  • 1,500,000 shares to TST on 4 January 1964;

  • 1,250,000 shares to Disco Limited on 4 January 1964.

No resolution was made by the Appellant Company that these shares held by Disco Limited or by TST on trust for the Appellant Company."

At all relevant times, the shares in the appellant company were held 50% by TST and his wife and 50% by CMT and his wife. CMT was a principal shareholder in Disco Ltd.

In 1962 the appellant company held shares to a total nominal value of $175,000 in four other companies, but these holdings were all "transferred away" during 1963.

The appellant company has not constructed any other building similar to the International Building. So far as it appears, they have not constructed any other building of any kind.

The statutory provision under which the income tax was charged is the Income Tax Ordinance, 1947, s. 10(1)(a), which is in the following terms:

10(1) Income tax shall, subject to the provisions of this Ordinance, be payable at the rate or rates specified hereinafter for each year of assessment upon the income of any person accruing in or derived from the Federation or received in the Federation from outside the Federation in respect of -

(a) gains or profits from any trade, business, profession or vocation, for whatever period of time such trade, business, profession or vocation may have been carried on or exercised;...

At the relevant date, there was no provision in Malaysian legislation corresponding to the definition of "trade" in what is now s. 526(5) of the United Kingdom Income and Corporation Taxes Act 1970, which provides that "`trade' includes every trade, manufacture, adventure or concern in the nature of trade".

Their Lordships were informed that the law of Malaysia had now been amended in this respect but that the amendment does not apply to the year of assessment with which this appeal is concerned.

The argument for the appellant company had two main branches.

First, it was said that the profit with which this appeal is concerned was not, and could not be, taxable as income under s. 10(1)(a) because the transaction from which it was received was an isolated transaction which did not constitute the carrying on of a trade or business.

It might have been an adventure in the nature of trade. Still, it could not have been trading because trading necessarily involves some repetition or continuity of operation, and that element was lacking here.