This involves two court cases where property development companies claimed a tax deduction on payments made to the state housing authority to obtain the release of unsold Bumiputera quota units to be sold to non-Bumiputera buyers.
Case No 1: Ketua Pengarah Hasil Dalam Negeri v Taman Equine (M) Sdn Bhd
Case No 2: Ketua Pengarah Hasil Dalam Negeri Malaysia v. Mitraland Kota Damansara Sdn Bhd
Background Facts
The taxpayers were required to allocate a certain percentage of units in their developments for sale to Bumiputera buyers at a discounted price.
The state housing authority allowed the release of unsold Bumiputera units to non-Bumiputera buyers upon payment of the Bumiputera discount amount.
The taxpayers made these payments and claimed them as deductible expenses.
Issues in Dispute
Whether the payments made to obtain the release of the Bumiputera quota units are deductible expenses under Section 33(1) of the Income Tax Act 1967.
Taxpayer’s Contention
The payments are wholly and exclusively incurred in the production of income as they allowed the sale of the units to non-Bumiputera buyers and the generation of business income.
Inland Revenue Board’s Contention
The payments are capital in nature as they were made to obtain the release of the Bumiputera quota condition and permission to sell to non-Bumiputera buyers.
Hence, they are not deductible under Section 33(1).
Revenue Law
Section 33(1) allows the deduction of expenses wholly and exclusively incurred in the production of income.
Section 39(1) disallows certain expenses like those of a capital nature.
Court’s Finding and Conclusion
In Taman Equine, the High Court allowed the deduction as the payment was directly related to enabling sales and income generation. The IRB then appealed to the Court of Appeal.
The Court of Appeal reversed the High Court’s decision and disallowed the deduction on the portion equivalent to the Bumiputera discount.
In Mitraland, 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 Lembaga Perumahan dan Hartanah Selangor (LPHS), better known as the Bumiputera Discount, was a deductible business expense under Section 33(1) of the ITA.
However, the Court of Appeal disallowed the 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.
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 the decisions above were not binding in the absence of the written grounds of judgment in those cases.
The Difference in Judgements
The High Court in Taman Equine took a broader view and allowed full deduction. The Court of Appeal in Mitraland examined the components separately and disallowed the penalty portion.
Advice to Businesses and Tax Practitioners
There are good arguments on both sides here. Claims should be carefully assessed based on facts and commercial substance, not just legal form. Penalty payments would face incredible difficulty in getting deductions. References:
COA: Ketua Pengarah Hasil Dalam Negeri v Taman Equine (M) Sdn Bhd
HC: Taman Equine (M) Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri
COA: Ketua Pengarah Hasil Dalam Negeri Malaysia v. Mitraland Kota Damansara Sdn Bhd
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