Hashim Yeop Sani SCJ:

The appeal before the learned Judge (Harun J) was by way of case stated against the majority decision of the Special Commissioners of Income Tax. The question before the Commissioners was whether the payment of the additional remuneration (AR) under the additional remuneration scheme of the respondent company was bonus for the purposes of s. 39(1)(h) of the Income Tax Act. The Special Commissioners by majority decided in favour of revenue. Harun J however disagreed and allowed the appeal. Hence the appeal before us.

The senior executives and managerial staff of the respondent company were paid a monthly salary which included the AR in question. By virtue of s. 33 of the Income Tax Act all outgoings and expenses wholly and exclusively incurred in the production of gross income is deductible. However by virtue of s. 39(1)(h) of the Act ("deductions not allowed") if the sum paid to the employees in bonus, then not all such payment is deductible even though the amount is wholly and exclusively incurred for the production of income. As a result of the amendment to s. 39(1)(h) of the Act in 1975 (Act A237 of 1975) no deduction from the gross income would be allowed in respect of any sum paid as bonus in excess of 2/12 of the employee's wages or salary.

In this case revenue had disallowed deduction in excess of 2/12 of the employee's wages and salaries in respect of the AR. It is thus important for revenue to be certain whether to classify the AR as "bonus", or as contended by the respondent company as "commission" or "deferred salary" for the purpose of applying s. 39(1)(h) of the Income Tax Act.

The respondent company is a company incorporated in Malaysia. According to the primary facts as found by the Special Commissioners the AR paid to the senior executives and managerial staff of the company was paid under the Additional Remuneration Scheme formulated in 1935 which rules were revised in 1962. When the senior executive was first employed he would receive a "fixed salary" and the AR under the scheme and this is so stated in his letter of appointment. According to the procedure followed by the respondent company when the senior executive's tour of service was extended his level of the AR would be negotiated between him and the company. The amount agreed would be added to his increased "fixed salary" and the total would be shown in his contract of employment. It was also agreed that the "market value" of each senior executive would comprise his basic salary and in addition his AR. The AR was based upon a percentage of the combined audited profits of the respondent company. Negotiation as to the rate under the additional remuneration scheme with each expatriate senior executive was done in London during his leave after his tour of service and as regard the local senior executive negotiation was done by correspondence with the London office of the company. For the year of assessment in question (1975) there were out of 450 executives of the company only 21 (20 expatriates and 1 local) senior executives who were paid under the Additional Remuneration Scheme.

In respect of the junior executives of the respondent company instead of receiving payment under the Additional Remuneration Scheme referred to they together with the non-managerial staff were paid bonus at the discretion of the respondent company. However after four years of service the expatriates who had served as junior executives for four years would be entitled to participate in the Additional Remuneration Scheme. It was the practice of the company to pay the junior executives and the non-managerial staff an annual bonus of two months salary.

The senior executives participating under the Additional Remuneration Scheme were not eligible to receive bonus paid to the junior executives and the non-managerial staff. They were not allowed to opt for the said bonus instead of the AR and neither were they allowed to receive a higher basic salary withou