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Case law on whether there was wilful default or negligence under Section 91(3) of the Income Tax Act 1967 (ITA)
In Idaman Harmoni Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri (2022) MSTC 30-489, the High Court (HC) overturned the decision of the Special Commissioners of Income Tax (SC) and delivered a judgment in favour of the taxpayer. Following the precedent in Chong Woo Yit v Government of Malaysia [1989] 1 MLJ 473, the HC held that the burden lies on the Director General of Inland Revenue (DGIR) to prove wilful default or negligence under Section 91(3) of the ITA. The HC found that based on the facts of the case, as the DGIR had failed to prove that there was wilful default or negligence by the taxpayer, the notices of assessments made outside the time-bar period were to be discharged.
An overview of the case and discussion of the issues are set out below.
Overview
The chronology of events are as follows:
|
3 June 2003 |
The taxpayer purchased three plots of land. |
|---|---|
|
23 April 2004 |
The taxpayer entered into a Development Agreement (DA) with IJM Properties Sdn Bhd for the construction and development of commercial and residential units on the lands. Subsequent to entering the DA, the taxpayer submitted a real property gains tax (RPGT) return (CKHT 1 Form) along with a copy of the DA to the DGIR in respect of the joint venture (JV) transaction in 2004. |
|
30 June 2006 |
The parties to the DA entered into a Supplementary Agreement. Under the agreements, it was agreed that the taxpayer would be entitled to certain units from the development. |
|
2009 |
The development on the lands was completed, and the taxpayer received his units. The taxpayer rented out his units and brought the rental income to tax under Section 4(a) of the ITA for the years of assessment (YAs) 2009 and 2010. |
|
3 December 2015 |
Pursuant to an audit conducted in 2014, the DGIR informed the taxpayer’s tax agent that the DA was a trading transaction which was taxable under the ITA. Based on the circumstances, the DGIR was of the view that they were not barred from pursuing the matter under Section 91(1) of the ITA by invoking Section 91(3), as there was at the very least the element of negligence, if not wilful default, on the taxpayer’s part. |
|
2016 |
The DGIR issued notices of assessment for YAs 2009 and 2010 to the taxpayer. |
As the taxpayer did not agree with the assessments, the taxpayer filed an appeal to the SC. The SC held in favour of the DGIR and affirmed the notices of assessment raised by the DGIR. The taxpayer appealed the SC’s decision to the HC.
The issues for the HC’s determination were whether the DGIR could invoke Section 91(3) to issue the notices of assessment to the taxpayer for YAs 2009 and 2010, and whether there was any wilful default or negligence on the taxpayer’s part.
The HC held that based on Chong Woo Yit v Government of Malaysia [1989] 1 MLJ 473, the burden lies on the DGIR to prove wilful default or negligence under Section 91(3). In terms of wilful default, the DGIR had to prove that the taxpayer had failed to exercise care in completing the CKHT 1 Form and that the taxpayer had known that he was committing and intended to commit a breach of his duty. Alternatively, the DGIR had to prove that the taxpayer was recklessly careless in the sense of not caring whether his act or omission was a breach of his duty. In terms of negligence, the DGIR would have to prove that the taxpayer had failed to exercise the degree of care that someone of ordinary prudence would have exercised under the same circumstances.
In this case, the HC found that the taxpayer could only be said to have committed wilful default if he did not furnish the DA to the DGIR, or if it could be established that the declared value of RM31 million in the CKHT 1 Form was not reflective of the actual market value of the lands at the material time. The HC also found that the taxpayer could not be said to have been negligent as the DGIR could not prove that there was any failure to provide any other information required by the CKHT 1 Form. In addition, the failure of the DGIR to challenge the CKHT 1 Form submitted (if they were of the view that the taxpayer was not entitled to the RPGT exemption granted under P.U.(A) 170/2003) further diluted the DGIR’s argument that the taxpayer had committed wilful default or negligence within the meaning of Section 91(3).
The HC also disagreed with the SC’s position that the taxpayer together with some of its shareholders (i.e., Mega First Corporation Berhad (MFCB) and Gombak Land Sdn Bhd (Gombak Land))1 had entered into a scheme to avoid tax under the ITA, and that a wilful default existed since it was always the intention of the taxpayer to dispose of the lands for profit. The HC held that unless one of the exceptions to the Salomon doctrine applies, it cannot be assumed that the taxpayer is a property developer for the purpose of the ITA by virtue of its holding companies being developers. In view that they are separate and distinct entities, the fact that Gombak Land owns 65% of the taxpayer company does not make the taxpayer a developer too.
In conclusion, based on the facts of the case, the HC held that as the DGIR had failed to prove that there was wilful default or negligence by the taxpayer, the notices of assessment made outside the time-bar period were to be discharged.