Case law on whether the waiver of loans constitute gains that are taxable under Section 4(a) of the Income Tax Act 1967 (ITA)

Case law on whether the waiver of loans constitute gains that are taxable under Section 4(a) of the Income Tax Act 1967 (ITA)

In Multi-Purpose Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri (2024) MSTC 30-702, the High Court (HC) affirmed and upheld the decision of the Special Commissioners of Income Tax (SC), and delivered a judgment in favour of the Director General of Inland Revenue (DGIR).  The HC held that the SC had not erred in its finding of facts and inferences in regard to the nature of the waiver of the debt and was correct to subject the taxpayer’s income to tax under Section 4(a) of the ITA.

An overview of the case and discussion of the issues are set out below.

Overview

The taxpayer is a Malaysian-incorporated company which is in the business of credit and leasing, hire purchase and general loans financing. The taxpayer received loans from two related companies amounting to RM77,305,831 and RM1,157,306, respectively. The loans were subsequently waived by the related companies. The DGIR was of the view that the waiver of loans should be categorized as the taxpayer’s business income which is subject to tax under Section 4(a) of the ITA. The DGIR issued notices of assessment to the taxpayer. As the taxpayer did not agree with the assessments, the taxpayer filed an appeal to the SC. During the appeal before the SC, the taxpayer and DGIR agreed that Section 30(4) of the ITA did not apply. Section 30(4) reads:

Where—

(a)   a deduction has been made under section 33(1) in computing the adjusted income of the relevant person from a business for the basis period for a year of assessment (that basis period being prior to the relevant period) in respect of any outgoing or expense (including any sum payable, rent payable or expense incurred of the kind described in section 33(1)(a), (b) or (c)); or

(b)  any allowance or aggregate amount of allowances has been made under section 42 in computing the statutory income of the relevant person from a business for the basis period for a year of assessment (that basis period being prior to the relevant period) in respect of any expenditure incurred under Schedule 3,

and the whole or any part of a debt in respect of any such outgoing, expense, sum, rent or expenditure is released in the relevant period, the amount released shall be treated as gross income of the relevant person from that business for the relevant period.

The SC, in its grounds of judgment, had conducted an analysis focusing on whether the release of a loan liability constitutes gains under Section 4(a) of the ITA. The SC held in favour of the DGIR and affirmed the notices of assessment raised by the DGIR. The taxpayer then appealed the SC’s decision to the HC.

The issues for the HC’s determination were:

• whether the waiver of the taxpayer’s debt fell in any of the classes of income under Section 4 of ITA; and
•  whether the SC had made the right inferences of mixed fact and law drawn from the said primary facts that the release of loan liability (debt) had become the taxpayer’s gains or profit which are taxable under Section 4(a) of the ITA.

In the appeal, the taxpayer sought to apply Section 30(4) of the ITA. The phrase “release of debt” in Section 30(4) is unique and does not appear elsewhere in the ITA. The taxpayer submitted that a waiver of debt is typically not considered income for income tax purposes. Section 30(4) deems any amount of debt waived as gross business income from a business under two conditions: when a deduction has been claimed under Section 33(1) of the ITA or where capital allowances have been claimed.

The taxpayer contended that the SC made legal and factual errors by neglecting to acknowledge that the Malaysian Parliament had specifically enacted Section 30(4) of the ITA, despite the presence of Section 4(a) and Section 22(2) in the ITA. According to the taxpayer, such legislative provisions indicate that Section 30(4) of the ITA is the designated provision intended to address the waiver of debt when determining a taxpayer’s income tax position.

In the taxpayer’s circumstances, the taxpayer did not take any deduction under Section 33(1) of the ITA or claim any capital allowances in respect of the amounts waived. The debts owed to and subsequently waived by the related companies were utilized to settle the taxpayer’s bank borrowings, not for activities generating income. As such, the taxpayer was not subject to tax on the waiver of debts, under Section 30(4) of the ITA.

However, the HC held that Section 30(4) was not applicable to this appeal as the taxpayer did not take any deduction under Section 33(1) of the ITA. As such, the issue was to determine whether the debt released constituted “gains or profits” or otherwise, under Section 4 of the ITA.

As the word “gains” is not defined in the ITA, it is a rule of statutory interpretation that the ordinary meaning is given to the word. Black’s Law Dictionary, 10th Ed. defines “gains” as “An increase in amount, degree, or value”. In Words, Phrases & Maxims, Legally & Judicially, “gain” is defined as follows:

“Means acquisition. It is not limited to pecuniary gain or commercial profits… gain means ‘acquisition of gain, or profit in business concern, gain is something obtained or acquired…”

The release of the loan liability has essentially relieved the loan, which was the taxpayer’s stock in trade, from any obligation. The taxpayer had obtained funds without any encumbrance from its related companies in the course of its business.

Furthermore, the taxpayer was unable to present any evidence to support their claim that the amount waived was not used for income generating activities, but to repay the bank borrowings. The taxpayer was also unable to provide any documented evidence to demonstrate that the related companies had officially converted the loan into equity financing.

In conclusion, based on the facts of the case, the HC held that the taxpayer had failed to prove that the SC was wrong in determining the nature of the waiver of the debt. The appeal was dismissed, and the decision of the SC was upheld.