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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 the Appellant's Notes of Submission, the appellants argued that their intention to hold the subject land as an investment, as indicated by their revaluation of the land, "continued and was substantiated" by a statement made by the Chairman of Hoklian Holdings Berhad.


That is the appellants' second ground in their written Appellant's Brief Submission.


It is necessary to state the facts concerning this aspect of the case.


On 20 August 1982, the Kuala Lumpur Planning Authority granted the appellants planning permission to build a 31-storey office block on the subject land.


On 1 April 1983, three agreements were entered into for sale by the three shareholders of the appellant company of the entire issued 6,000,000 shares in the appellant company to Hoklian Development Sdn Bhd and Koperasi Jayadiri Malaysia Berhad ("KOJADI") for RM41,250,000.


Hoklian Development was a wholly-owned subsidiary of Hoklian Holdings Bhd In the Annual Report of Hoklian Holdings dated 4 June 1983, the Chairman of that company, which wholly-owned Hoklian Development, said this:

The Company has also, through its wholly-owned subsidiary, Hoklian Development Sdn. Bhd., entered into a joint venture with Koperasi Jaya Diri Malaysia Bhd. on a 50:50 basis to acquire the entire issued capital of ALF Properties Sdn. Bhd. for $41.25 million.


The Agreement for the said acquisition has been signed with the shareholders of ALF Properties Sdn. Bhd. recently. ALF Properties Sdn. Bhd. owns a piece of land exceeding 190,000 sq. ft. at the junction of Jalan Ampang and Jalan Yap Kwan Seng, Kuala Lumpur.


Plans are being made to develop the said land into an office complex for rental.


The Board foresees the prevailing good demand for office space in Kuala Lumpur will enable the Company to enjoy a very good rental income. 9. That was the statement that the appellants relied on.

According to the Case Stated, at p. 8, among the facts proved was that "The new management on taking over applied for the original development to be amended to build a 30-storey office building and approval was granted vide development order dated 24 April 1985".


The new management must refer to the appellants' management that came into being after Hoklian Development and KOJADI bought the appellant company.


The development order was a planning permission and was related to the subject land.


The land mentioned in the statement by the Chairman of Hoklian Holdings was the entire land, that is, the seven lots, including the subject land.


What the appellants relied on as indicating their intention to hold the subject land as an investment was the statement that plans were being made to develop the entire land into an office complex for rental.


It was the intention of renting the office complex, as opposed to selling it, that was important to the appellants' case.


That would be an indication of an intention to hold the land as an investment.



That plans were being made to develop the land into an office complex could not be seriously disputed because it was a fact that planning permission had been granted twice for the purpose, once before and once after the making of the statement.


What could be disputed was the statement that the appellants intended to keep the office complex for rental.

10. On p. 21 of the Case Stated, the Special Commissioners listed five reasons for finding that the Chairman's statement "loses its value and efficacy".


As reason (iv), the Special Commissioners said: "The three valuation reports in the agreed bundle of documents (exh. B) indicate, contrary to what is contained in the Chairman's Statement, that not all the land was approved for commercial use".


It seems to be directed against the Chairman's statement regarding the appellants' intention to develop "the said land", which referred to the entire land, into an office complex.


It seems to suggest that the statement is questionable because it spoke of the entire land being developed into an office complex, whereas planning permission for the purpose had been given only for the subject land.


Viewed strictly in that manner, the Chairman's statement was, of course, not correct, but when applied to the subject land, it was correct because it is a fact that before the making of the statement, the appellants had applied for and obtained planning permission to build an office complex on the subject land.


It was, I think, merely a matter of the Chairman not being particular to express himself with absolute precision.


11. The Special Commissioners' reasons (i) to (iii) may be reduced to one reason and applied to the Chairman's statement that the plan for the office complex that was to be built was to earn rental from it.


The reason is that the Chairman's statement was not the appellants' statement but was only one emanating from a party which, while anticipating the acquisition of 50% interest in the appellant company, had not yet acquired it, so the intention mentioned by the Chairman cannot be accepted as proof of the appellant company's intention. 12. The appellants' basic argument before the High Court, which was in paras. 20 and 21 of the Appellant's Notes of Submission and which, by adoption, was their argument in this appeal, was essential that since Hoklian Development and KOJADI were equal shareholders in the appellant company, they must have been in agreement on their plans as to the running of the company, as otherwise, it would not be possible to run the company.

That argument implies that, for that reason, the intention of the Hoklian side must have been the intention of KOJADI as well. I think that it is a naive and simplistic argument.


In the ordinary course of nature, two independent people cannot always agree on everything.


They are bound at some point to disagree over a particular matter, although in the end, for the common benefit, one may concede to the other.


It cannot be assumed that when the Chairman of Hoklian Holdings made the statement on 4 June 1983, KOJADI had agreed that the planned office complex should be let out for rental.


KOJADI might have wished that it be sold.


In the end, so that, as the appellants' line of reasoning went, it would be possible to run the company, they might have reached an agreement. Still, it does not necessarily mean that KOJADI agreed with Hoklian Holdings and not the other way around.


In the Appellant's Brief Submission in this appeal, the appellants point out that a director of Hoklian Developments was also a director of the appellant company. Still, that fact can in no way render the Chairman's statement proof of the appellant's intention to rent.

13. In the Appellant's Brief Submission, the appellants also cite a passage from Waylee Investment Ltd v Commissioner of Inland Revenue [1990] STC 780, in which the taxpayer company was a wholly-owned subsidiary of a bank. The passage reads: Counsel for the taxpayer rightly insists, and counsel for the commissioner accepts, that the issue is whether the acquisition of the shares in question in 1975 and their disposal in 1979 was an adventure or concern like trade on the part of the taxpayer, which was a separate legal entity from the bank and which, it is accepted, was not acting as a mere agent for the bank.


At the same time, it is common ground that the taxpayer's purpose concerning the transaction cannot be distinguished from the purposes of those who effectively controlled its activities.


This means, in effect, that the taxpayer's purpose reflected the bank's purpose. The point is in the second and third sentences. It is to be noted that it was a matter of common ground and not a ruling. It may be reduced to the proposition that the intention of a wholly-owned subsidiary company in respect of a particular transaction may be judged from the intention of the holding company because the holding company effectively controls the subsidiary company's activities.


Even assuming that that is the law, it cannot be applied to this case because the appellant company was not under the exclusive control of Hoklian Developments or Hoklian Holdings and was not their wholly-owned subsidiary.


14. The appellants have, therefore, not succeeded in showing that the Special Commissioners erred in his finding about the statement of the Chairman of Hoklian Holdings. 15. The appellants' third ground is that they had to sell the subject land because KOJADI needed funds.


This ground is based on the following statement by Sharma J in N.Y.F. Realty Sdn Bhd v Comptroller of Inland Revenue [1974] 1 MLJ 182 at p. 183 C (right): If the sale of the property is occasioned by a sudden emergency or unanticipated need for funds, such facts will tend to indicate that the property was not acquired for the purpose of resale at a profit and that the sale was not under a profit-making undertaking or scheme. This ground, as it was presented to the Special Commissioners, is set out as follows on p. 38 of the Case Stated. KOJADI, which owns the other 50% equity in the Appellants, was adversely affected by the Co-operatives Crisis in 1986.


It was one of the 24 Co-operatives under investigation by Bank Negara, which imposed a total freeze on all the assets and operations of the Co-operatives under investigation.


To avoid receivership, KOJADI had to obtain a RM7 million term loan and RM5.5 million overdraft facilities to make a full refund to all its depositors.


As a result, KOJADI was in urgent need of funds as the loan and overdraft were repayable within 3 years. The Special Commissioners said that they were unable to consider the matters in the passage quoted because there was no evidence to prove those matters. They went on to say on p. 38 of the Case Stated: "Neither was evidence adduced to show that payments were made by the Appellants to KOJADI to enable them to discharge their liability after the sale of the subject land".

16. In paras. 71 to 73 of the Appellant's Notes of Submission in the High Court, the appellants said that the Special Commissioners misdirected themselves in their said decision because evidence in support of their submission was tendered in "exh. E at folios number D5, D6 and D7" which "show that KOJADI was under investigation by Bank Negara, with its assets frozen by Bank and KOJADI had obtained a term loan of RM7 million and overdraft facilities of RM5.5 million which had to be repaid within three (3) years".


It would appear that those letters do show the existence of the matters claimed by the appellants, which are actually KOJADI's financial problems and needs.


To that extent, the Special Commissioners might have misdirected themselves.


But while KOJADI might have financial needs, it does not follow that it was the appellants who were to come and did come to their rescue. It is the rescue that is important because it was contended that the subject land was sold to rescue KOJADI.


The Special Commissioners were right in saying there was no evidence of the rescue.


There was, therefore, no evidence that the subject land was sold because of the need to obtain money to rescue KOJADI.

17. The appellants' fourth and last ground in the Appellant's Brief Submission in this appeal relies on the fact that the subject land was held for ten years before it was sold.


This ground is based primarily on the following statement by Sharma J in N.Y.F. Realty Sdn Bhd v Comptroller of Inland Revenue, supra, at p. 183 H left: The fact that property is held but a short time after its acquisition may tend to indicate that the purpose of the acquisition was resale at a profit. The appellants, in para. 55 of the Appellant's Notes of Submission in the High Court, drew from that statement the corollary that "the fact that the said Land was held for as long as ten (10) years may tend to indicate that the purpose of the acquisition was for investment".


I do not think that such a corollary necessarily follows from Sharma J's statement. While the shortness of the holding period may be a positive indication of a trading purpose, it does not necessarily follow that a long holding period is a positive indication of an intention to invest.

18. As an actual case of land held for a long time between acquisition and sale, the appellants, before the Special Commissioners, cited Bukit Yew Sdn Bhd v Director-General of Inland Revenue [1987] 2 CLJ 134; [1987] CLJ (Rep) 492, where Harun J (as he then was), in a list of nine reasons why he found that the decision of the Special Commissioners could not be upheld, included the following reason: The fact that the land was held for more than 14 years undeveloped and earning no income should have tilted the scales in favour of the appellants. 19. The Special Commissioners held that that statement was inapplicable to the facts of the case before them. This is what they said on pp. 35, and 36 of their Case stated: Thus in Bukit Yew Sdn Bhd v DGIR [1987] 2 MLJ 379, Harun J (as he then was) held that the fact that the land was held for more than 14 years undeveloped and earning no income should have tilted the scales in favour of the appellant.


That is not the position in the case of the appeal before us.


The subject land was not undeveloped. It was ripe for development.


As a result, the value of the land had greatly enhanced. As the valuation report dated 6 April 1983 discloses no development was carried out at that stage as the approved building plans were found uneconomical and unsuitable.


That explains the delay in dealing with the land. The original development plans were then amended.


From 1987 to 1990, a part of the subject land was rented out. In the event the decision of Harun J (as he then was) in the Bukit Yew Sdn. Bhd.'s case is inapplicable to the facts of this case as the subject land was ready for development and earning income coupled with the other features of the case.


20. The appellants made only a weak attempt to show that the Special Commissioners' decision about Bukit Yew was wrong.


In the High Court and, by adoption, in this court, this was all that they said in the Appellant's Notes of Submission: The Special Commissioners, on page 35 of the Case Stated, also proceeded to distinguish the case of Bukit Yew Sdn Bhd v DGIR [1987] 2 MLJ 379 ... However, the facts of the Bukit Yew case are closer to the facts in this appeal. In the Bukit Yew case, ... the said property in question was the sole asset of the appellant and was sold after 14 years. Similarly, in this case, the said Land was part of the sole property acquisition by the Appellant and was held for 10 years before it was sold. Those paragraphs fail to address the Special Commissioners' reasons for holding that Bukit Yew was inapplicable to the present case.


I am therefore unable to find that the Special Commissioners were wrong in declining to find in favour of the appellants on the fact that the subject land was held for ten years by the appellants.

21. So of the four grounds that the appellants rely on in this appeal for contending that the seven lots, which included the subject land, were acquired as an investment, there is in their favour only one ground, the first ground in the Appellant's Brief Submission, namely the ground that relies on the fact that the appellants revalued the land after purchasing it, when seen in the light of the first sentence of para. 5 of Technical Bulletin 2.


Given that sentence, the fact that the appellants revalued the land comprised in the seven lots may be taken as an indication that they bought the land intending to hold it as an investment. Still, it is only an indication, and it is not conclusive proof of such intention. 22. Against that factor has to be weighed other factors that the Special Commissioners found to be positive indications to the contrary.

The Special Commissioners saw several such factors, but I wish to mention only on because I do not think that the others, such as the finding that the proceeds of the sale of the land were not shown separately from the operating fund and the fact that steps had been taken to make the land ripe for development, are clearly or necessarily positive indications to the contrary.


The one factor that I wish to mention is the fact that in the appellants' balance sheet as of 31 December 1991, a sum of RM13,082,923 is shown as a provision for taxation as a current liability for 1991.


It has to be borne in mind that the subject land was sold in 1990. Concerning this provision for taxation, the Notes to the Accounts explain: "Taxation is provided for based on amount estimated to be currently payable based on computed taxable income."


The Special Commissioners viewed this as "A matter of significant concern."


They said: "Is there a need to compute the amount of tax payable and include it in the accounts if no such tax is payable?


If the tax computation is to be regarded as, say, an act of prudence on the part of the appellants, they ought to have led evidence to explain the rationale behind it, which they did not." 23. In the High Court and, by adoption, in this court, the appellants said as follows in the Appellant's Notes of Submission:

88. The Special Commissioners believed that by having such an item in the 1991 audited accounts, the Appellant acknowledged that there is an income tax payable on the profits from the sale of the said Land.
  
89. However, what should also have been considered is the fact that no such provision was made in the 1990 audited account when the profits were realised was consistent with the Appellant's contention that the profits were the realisation of an investment. That was why no provision was made for income tax in 1990.

 90. In 1992, while finalising the 1991 audited accounts, the income tax assessment of RM13,185,916.09 for the year of assessment 1991 was received and accordingly, based on the accounting concept of prudence, provision was made for the tax in the 1991 audited accounts by the Appellant despite disagreeing with the tax charged.

The appellants, in para. 88, perceived that the Special Commissioners believed that the provision for taxation was an acknowledgement by the appellants that income tax was payable on the profits from the sale of the subject land.


To show that that view was erroneous, in para. 90 the appellants explained that after receiving the income tax assessment of RM13,185,916.09 they considered it prudent to include the amount assessed in the balance sheet as a current liability, obviously because, although maintaining that they were not liable to the tax, they might ultimately be held liable. 24. That explanation, however, is demonstrably untrue, although the judge did not deal with it. The 1991 accounts, which included the balance sheet, were certified on 3 April 1992, but the Notice of Assessment of the sum of RM13,185.916.09 was dated 9 July 1992, well after the 1991 accounts were prepared and certified.

The appellants had already provided for tax in the sum of RM13,082,923 in their accounts even before they received the assessment in the sum of RM13,185,916.09.


The explanation given is untrue; there is no explanation to show as erroneous the Special Commissioners' view that there was an acknowledgement by the appellants that income tax was payable on the profits from the sale of the subject land.


The acknowledgement implies an admission that the subject land was purchased and held for trade and neutralised or nullified the sole indication that it was purchased for investment.


The appellants have therefore failed in this appeal to show that the Special Commissioners erred in finding that the appellants failed to show that the subject land was held as an investment. Accordingly, they have failed to show that the judge was wrong in dismissing their appeal. 25. This appeal was allowed by a majority decision on 14 May 2005, when I was as yet not ready with a decision on my part. With the benefit of the views I have now formed, I would have decided that the appeal be dismissed. Judgment delivered: 18 August 2005.


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