2 November, 2017
A CASE NOTE BY JESS NGO HUI ZHONG.
Facts
In 1995, 1996 and 2001, several parcels of land (“Lands”) owned by United Malacca Berhad (“Taxpayer”) were compulsorily acquired by the government and the Taxpayer was awarded compensation for the same. Dissatisfied with the amount of compensation, the Taxpayer referred the matter to court.
As a result of the litigation, the Taxpayer was awarded additional compensation together with late payment charges (“Late Payment Charges”). In 2009, the Taxpayer was reimbursed by the Land Administrator for retrenchment benefits paid to its then employees sometime in 1998 (“Reimbursements”). These employees were estate workers who had previously worked on the Lands which had since been compulsorily acquired.
On 6 January 2011, Ketua Pengarah Hasil Dalam Negeri (“KPHDN”) issued a notice of additional assessment for Y/A 2009 (“NOAA”) to charge the Reimbursements and Late Payment Charges to income tax and also imposed penalties under section 113(2) of the Income Tax Act 1967 (“ITA”) on the tax allegedly shortpaid on the Reimbursements.
Aggrieved by the NOAA, the Taxpayer appealed against it to the Special Commissioners of Income Tax (“SCIT”).
Issues
The central issues were whether the Late Payment Charges and the Reimbursements were subject to income tax under the ITA and if the imposition of penalties was valid.
Decision of the Special Commissioners of Income Tax
The SCIT held in favour of the Taxpayer.
Decision of the High Court
KPHDN appealed to the High Court and the High Court affirmed the decision of the SCIT for the following reasons.
Late Payment Charges were capital in nature and not chargeable to income tax
The character of the Late Payment Charges should follow the nature of the underlying asset which is the Lands in this case. As the Lands were capital in nature, it follows that the Late Payment Charges were also capital in nature. The Late Payment Charges were intended to compensate the Taxpayer for the accretion to the value of the Lands between the time the land was acquired and the time the compensation was paid and such a construction is supported by the change of the term “interest” in section 48 of the Land Acquisition Act 1960 (“LAA”) to the term “late payment charges”.
The Court also applied the decision of the SCIT in Sime UEP v KPHDN[2] (consent judgment filed in the High Court accepting this position) in which the SCIT held that any late payment interest received on property that is a capital asset of the taxpayer would be a capital receipt, not income.
Reimbursements were not subject to income tax
The learned High Court judge held that Reimbursements were payment for actual expenditure incurred as a result of the compulsory acquisition of the Lands and were not in the nature of income. Therefore, the Reimbursements were not subject to income tax.
Further, pursuant to section 22(2) of the ITA, a reimbursement would only be taxable as income if it had been deducted in ascertaining the adjusted income of a taxpayer. In this case, the Taxpayer did not deduct the payment of the retrenchment benefits under section 33(1) of the ITA when the Taxpayer’s employees were paid in 1998 and 1999. Accordingly, it would be wrong to tax the Taxpayer on the Reimbursements as it would constitute double taxation.
The learned High Court judge held that as the Reimbursements were not chargeable to income tax, it follows that the penalties had been wrongly imposed on the Taxpayer.
Conclusion
The High Court’s decision which is a final decision as the KPHDN did not lodge an appeal to the Court of Appeal confirms that late payment charges under section 48 of the LAA are capital in nature.
[1] (2002) MSTC 3480
[2] [2017] AMEJ 0249 / [2017] MLJU 243
For further information, please contact:
Jess Ngo Hui Zhong, Shearn Delamore & Co
jess.ngo@shearndelamore.com
