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The Badges of Trade: Motive/Intention of Taxpayer

ALF Properties Sdn Bhd v Ketua Pengarah Jabatan Hasil Dalam Negeri

Civil Appeal No W-01-203-97. Appeal from the High Court, Kuala Lumpur - Income Tax Appeal No R1-14-13-95. Court of Appeal, Putrajaya. Judgment was delivered on 14 May 2005 and 18 August 2005

1. The appellants, a private limited company, were incorporated on 8 August 1979. Their principal object was to carry on "the business of property developers and building contractors".

On 28 March 1980, they purchased seven lots of land at a public auction ordered under s. 259 of the National Land Code for RM6,100,000.

The seven lots had a total area of 190,248.30 square feet.

Ten or eleven years later, they entered into a sale and purchased agreement with another company to sell to that company four of the lots, which had a total area of 101,004.75 square feet ("the subject land"), for RM42,500,000.

On the gains from the sale, the appellants were assessed to income tax of RM13,185,916.09.

The appellants appealed to the Special Commissioners on the ground that the gains were derived not from the carrying on of their business but from the sale of an investment and were therefore not assessable to income tax.

The Special Commissioners found that the appellants failed to show that the subject land was held by them as an investment and dismissed their appeal.

Their appeal to the High Court was also dismissed. 2. The question in this appeal is whether, contrary to the findings of the Special Commissioners and the High Court, there is evidence that the appellants held the subject land as an investment.

It is common ground that the question depends on the intention of the appellants when they purchased the seven lots, provided the intention remained the same.

If the intention was to trade, that is, to dispose of the seven lots at a profit, then the gains would be assessable to income tax.

If the intention was to keep them as an investment, then the gains were not assessable to income tax.

There was no direct evidence of intention at the time of purchase.

So the appellants relied on evidence of circumstances after the purchase as indicating the intention of investment at the time of purchase. 3. In this appeal, the appellants, while falling back on the Appellant's Notes of Submission in the High Court, stated in their written Appellant's Brief Submission that they relied on four grounds for contending that the seven lots were acquired as an investment.

In the Appellant's Notes of Submission, the circumstance that the appellants relied on firstly was how they treated the seven lots in their first set of audited accounts, which were for the period from 8 August 1979 until 31 December 1980, the period in which the seven lots were acquired.

The submission on this is in paras. 10 to 17 of the Appellant's Notes of Submission.

The balance sheet as of 31 December 1980 has an item described as Land and Development Expenditure of RM19,177,786.

Although that item appears immediately after Fixed Assets, it stands on its own and not as an item of Fixed Assets.

The sum of RM19,177,786 comprises freehold land valued at RM17,977,000, which is the seven lots the appellants purchased on 28 March 1980, four of which are the subject land, and RM1,200,786 development expenditure.

Since the seven lots had been purchased for RM6,100,000, the value of RM17,977,000 means that the appellants had revalued them and given them an increase in value of RM11,877,000.

From that amount, the appellants deducted a sum of RM5,999,997, the value of shares at RM1.00 each that had been issued to members as fully paid.

The balance of RM5,877,003 is shown in the balance sheet as Capital Reserve. 4. The appellants acknowledged that if the seven lots had been shown as part of Fixed Assets, it would be a point in their favour as indicating that the lots were held as an investment, but that as it was not so shown, there was no point in their favour in that respect.

They further acknowledged that if the lots had been shown as part of Current Assets, it would have been a point against them as indicating an intention to trade, but as they were not so shown, the appellants submitted that there was no point against them in that respect.

The appellants' point was that the fact that the seven lots had been revalued with an appropriate provision for capital reserve from the increase in value reflected their intention to hold the land as an investment.

In fact, in para. 11 of the Appellant's Notes of Submission, the appellants asserted that the factor of revaluation was "The factor which supports the appellants' intention of holding the said land as an investment", the definite article "The" giving the impression that it was the only or the most important factor.

For their argument that the fact of revaluation bore the significance of indicating the intention of investment, the appellants relied on the first sentence of para. 5 of Technical Bulletin 2, issued by the Accounting and Auditing Standards Committee of The Malaysian Association of Certified Public Accountants, says: "Generally accepted accounting principles dictate that it is appropriate to consider revaluation only for those assets which are intended to be held for the long term".

This means that if the appellants had followed generally accepted accounting principles, they would not have revalued the land unless they intended to hold it "for the long term".

5. I do not find that the Special Commissioners did deal specifically with this argument that relies on the fact of revaluation and the first sentence of para. 5 of Technical Bulletin 2. What the Special Commissioners did was to conclude, on p. 26 of the Case Stated, that there was doubt as to the actual classification of the land because, in para. 11 of Technical Bulletin 2, the Accounting and Auditing Standards Committee recommended that:

  • land held for development and resale should be classified under current assets, and

  • land held for long-term investment should be classified as a long-term asset, which I take to mean a fixed asset.

Still, in the appellants' balance sheet, the land was neither classified as a fixed nor current asset but as, according to the Special Commissioners, "Development Properties".

I did wonder whether, before the Special Commissioners, the appellants did raise this argument which before the High Court, as I said, they seem to treat as their fundamental argument.

Still, when I examined the Respondent's Notes of Submission in the High Court, which were in reply to the appellants', I did not find the respondent saying that the argument had not been raised before the Special Commissioners.

I assume that the argument was raised before the Special Commissioners.

6. The respondent replied to the argument in paras. 14 and 15 of the Respondent's Notes of Submission.

He did not dispute that in the light of the first sentence of para. 5 of Technical Bulletin 2, the fact of revaluation could indicate an intention of investment, but he raised two factors as factors that militated against such an indication.

One factor, in para. 14, is the fact that the land was not classified as a long-term or fixed asset; the argument is that if the land, as contended by the appellants, were intended for investment, it would have been so classified.

I think the fact that the land was not classified as a fixed asset is a neutral factor that ought not to be set up against a positive factor to neutralise it.

If the land had been classified as a fixed asset, the controversy would probably not have arisen at all.

It requires a negative factor, that is, a factor that positively shows otherwise, to negate a positive factor.

The other factor raised by the respondent in paragraph 15 is the fact that "the appellants who declare themselves to be property developers" purchased "land described as development properties by the appellants", the point being that "Development properties are not an investment in such circumstances".

The argument in para. 15 can be developed into a proposition that a property developer who buys land that he intends to develop cannot be heard to say or be allowed to show, that he bought the land intending it as an investment.

But I do not see why it cannot be that a property developer buys land to develop and yet keeps as an investment and does not sell it.

The learned judge, like the Special Commissioners, did not deal with this specific argument of the appellants that relies on the fact of revaluation and para. 5 of Technical Bulletin 2.

Neither did the respondent, in his written submission in this appeal, the Respondent's Brief Submission, deal with it.

7. Incidentally, the term "development property" by which the Special Commissioners and the respondent referred to the land is, I think, their own term. It is not a term used in the balance sheet.

As I said, in the balance sheet, the relevant entry is Land and Development Expenditure.

They probably concluded that since, concerning the land, development expenditure was provided, the land was intended for development, and they, therefore, decided to refer to it as "development property". 8. In para. 18 of