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Landmark Ruling: Compulsory Acquisition Compensation Exempt from Income Tax


Introduction:

In a historic decision, the Federal Court of Malaysia has ruled that compensation received for properties or land forcefully acquired by the government should not be subject to income tax.


This landmark ruling marks the first time a provision of the Income Tax Act has been struck down for violating the Federal Constitution.


Let's delve into the details of this significant legal development.


Background:

Section 4C of the Income Tax Act 1967, introduced in the Finance Act 2014, extended the scope of income tax to cover amounts receivable arising from stock in trade that had been parted with under compulsion, including through requisition or compulsory acquisition.


Before this amendment, income tax did not apply to properties acquired under such circumstances.


The Legal Challenge:

A taxpayer, Wiramuda (M) Sdn Bhd, challenged the constitutionality of Section 4C after receiving a notice of assessment from the Director-General of the Inland Revenue.


Wiramuda argued that Section 4C violated Article 13(2) of the Federal Constitution, which ensures that no law shall provide for the compulsory acquisition or use of property without adequate compensation.


The crux of the argument was that Section 4C subjected the compensation for compulsory acquisitions to taxation, thus undermining the right to adequate compensation guaranteed by the Federal Constitution.


The High Court and Court of Appeal:

The High Court initially dismissed Wiramuda's judicial review application, holding that the Income Tax Act did not contravene Article 13(2) of the Federal Constitution.


This decision was subsequently upheld by the Court of Appeal, which found Section 4C to be in line with constitutional principles.


The Federal Court's Landmark Decision:

The case ultimately reached the Federal Court, which, in a groundbreaking decision on December 9, 2022, ruled in favour of Wiramuda.


The Federal Court declared Section 4C of the Income Tax Act unconstitutional, contending that it violated Article 13(2) of the Federal Constitution.


The court held that compensation received for properties or land acquired by the government under compulsion should not be subject to income tax.


This ruling marks a significant shift in the interpretation of tax laws and property rights in Malaysia.


It underscores the principle that individuals forced to part with their properties under compulsion, whether through requisition or compulsory acquisition, should not be further burdened by income tax on the compensation received.


Conclusion:

The Federal Court's decision to strike down Section 4C of the Income Tax Act sets an important precedent in protecting property owners' rights and upholding the principles of the Federal Constitution.


This landmark ruling ensures that individuals who have their properties taken by the government receive just compensation without the additional income tax burden.


It is a testament to the judiciary's commitment to safeguarding constitutional principles in tax matters. It clarifies an issue that has long been a subject of legal debate in Malaysia.


References:-

High Court in Metacorp Development v Ketua Pengarah Hasil Dalam Negeri [2011] 5 MLJ 447

234.3 Metacorp Development v Ketua Pengarah Hasil Dalam Negeri [2011]
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234.4 Wiramuda M Sdn Bhd v. Ketua Pengarah Hasil Dalam Negeri
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