M v Ketua Pengarah Hasil Dalam Negeri (High Court)
23 Oct 2023
From Demand Letters to Court Actions: Debt Recovery in Malaysia
25 Jun 2024M v Ketua Pengarah Hasil Dalam Negeri (High Court)
23 Oct 2023From Demand Letters to Court Actions: Debt Recovery in Malaysia
25 Jun 2024
The DGIR’s power to raise assessments / additional assessment under the ITA has been one of the most important provisions in tax law. In particular, Section 91(1) of the ITA has prescribed a 5-year limitation period for the DGIR to raise assessment / additional assessment for underpayment of taxes. Assessments made outside the limitation period are considered time-barred. The exception to the usual limitation period only applies where it appears to the DGIR that there has been any form of fraud or willful default, or negligence.
In this case, the High Court clari ed, amongst others, that the burden of proof is on the DGIR to establish a positive act of negligence in order for a time-barred assessment to be raised. While the taxpayer’s appeal was initially dismissed by the Special Commissioners of Income Tax (“SCIT”) in the rst instance, the taxpayer’s appeal was subsequently allowed by the High Court on 18 October 2023.
Brief Facts
The Taxpayer is a company that manufactures high-quality engineering spare parts & products, which are typically used in the automobile, electrical, and oil & gas industries. For YAs 2006 to 2008, the taxpayer incurred capital expenditure in expanding its manufacturing business and had accordingly claimed for Reinvestment Allowance (“RA”) for the following activities: -
- In YA 2006, the taxpayer relocated its manufacturing activities from its previous factory (“Previous Factory”) to a larger factory (“New Factory”); and,
- From YAs 2006 to 2008, the taxpayer purchased new machinery & equipment such as computers, software, and tooling equipment (“Disputed Items”).
Additionally, the taxpayer utilised the carried-forward RA from YAs 2006 to 2008 in YAs 2011 and 2012.
Upon an audit conducted in 2015, the DGIR disallowed the taxpayer’s RA claim for the portion of the oor area of the New Factory equivalent to the floor area of the Previous Factory (“Factory Floor Area”) and the RA claims for the Disputed Items vide the Notice of Non-Chargeability (“NONC”) issued in 2016 (10 years after 2006). The DGIR had also issued additional assessments and had imposed penalties on the taxpayer for YAs 2010 to 2012.
The IRB’s Position
The DGIR’s decision to disallow the RA claims was based on the reason that the Previous Factory was no longer in use and that the Disputed Items are not directly involved in the Taxpayer’s manufacturing process. In this regard, the DGIR contended that the limitation period to raise time-barred assessments under Section 91(1) could be lifted as the taxpayer had been negligent in inaccurately claiming RA and had supplied false information.
The Taxpayer’s Position
- The Taxpayer was not negligent in filing an incorrect return for claiming RA.
- The exception to the usual limitation period only applies where it appears to the DGIR that there has been any form of fraud or willful default, or negligence. The time bar was attributable to the DGIR’s delay by only conducting audit and issuing assessments after 10 years.
- Further, an error in a tax claim or filing an inaccurate tax return does not equate to negligence. It must be noted that the taxpayer has submitted its taxes based on professional advice, a principle affirmed by our Courts in Seiwa-Podoyo and Infra Quest.
- The assessments and penalties imposed for YAs 2011 & 2012 are also time-barred, as they arose from the DGIR’s disallowance of the RA claimed by the taxpayer in YAs 2006 to 2008. Our Courts have held that the time-bar period should be calculated from the years where the capital allowance was disallowed, not the year in which it was utilised.
- The DGIR relied on its internal ruling rather than Schedule 7(A) of the ITA in interpreting the RA provisions.
- The wordings of Paragraphs 1 and 8, Schedule 7(A) of the ITA (provisions for RA claims) unambiguously state that the taxpayer is entitled to RA as long as it has incurred capital expenditure for a qualifying project. Qualifying project means: - “A project undertaken in … Expanding its existing business in respect of manufacturing of a product or any related product within the same industry …”
- Schedule 7(A) of the ITA does not confer power to the DGIR to restrict the meaning of “factory” to the size difference of new and old factory. The SCIT’s decision based solely on whether the old factory was still in use is an erroneous consideration that is not stipulated in the law. The law states that RA claims shall be allowed as long as a company incurred expenditure on a factory and satisfies the definition of a qualifying project under Paragraph 8, Schedule 7(A) (i.e., expansion).
- The DGIR is also not entitled to disallow RA claims for the Disputed Items based on its internal ruling not stipulated under the law, by alleging that the Disputed Items were located outside the production area and/or not directly involved in the manufacturing process. Our courts have ruled that the fact that certain RA disputed items are not located at the production area does not necessarily mean that they fall outside the ambit of Paragraphs 1, 8 and 9, Schedule 7(A) of the ITA. Therefore, the DGIR’s decision is ultra vires, and its interpretation is akin to rewriting the ITA and usurping the function of legislature.
The Court’s Decision
The High Court allowed the Taxpayer’s appeal and quashed the DGIR’s three assessments along with the SCIT’s decision, holding that:
- The limitation period for tax assessments must be calculated from the year in which the capital expenditure was incurred and when RA was claimed, rather than the years in which RA was utilised. In this regard, the assessments for YAs 2011 and 2012, which arose from the disallowance of RA claimed in Yas 2006 to 2008, are also time-barred.
- Differing tax treatment and filing of alleged incorrect / inaccurate tax returns cannot ipso facto amount to negligence. Instead, the IRB is required to prove more than an inaccurate / incorrect return by establishing a positive act of negligence in order to lift the limitation period for issuing time-barred assessment.