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2014 MarsdenLR 2231
COURT OF APPEAL PUTRAJAYA
SYARIKAT IBRACO-PEREMBA SDN BHD – Appellant
Versus
KETUA PENGARAH HASIL DALAM NEGERI – Respondent
[Civil Appeal No: W-01-177-04-2013]
A restructuring of transactions for tax avoidance under Income Tax Act that alters tax liabilities is impermissible, leading to liability and penalties for incorrect returns.
Headnote:(A) Income Tax Act 1967 - Section 140(1)(a) - Section 113(2) - Appeal against tax assessment - Special Commissioners of Income Tax upheld the respondent's decision to invoke provisions under Income Tax Act for tax avoidance via restructuring transactions - Taxpayer's assertion of legitimate business practices found unconvincing - Court emphasized that avoidance schemes constructed to minimize tax liability must comply with laws and not conflict with tax regulations. (Paras 23, 26, 28)
(B) Tax Avoidance and Mitigation - Distinction between permissible tax mitigation and impermissible tax avoidance, which can lead to penalties - The court held that the uncontrolled restructuring aimed at altering tax liabilities is unlawful under the Act, thus warranting penalties under Section 113(2). (Paras 24, 36)
Facts of the case:
An appellant company engaged in property development contested the income tax imposed following restructuring advice from a tax consultant, which led to the sale of properties through subsidiaries resulting in substantial profits deemed taxable. The High Court upheld the Special Commissioners' decision that the transactions constituted tax avoidance under Section 140 and not legitimate tax mitigation.
Findings of Court:
The court affirmed the finding that the appellant employed a tax avoidance scheme that misrepresented the nature of transactions leading to liability under the Income Tax Act.
Issues: The main issues were the applicability of Section 140(1)(a) to the appellant's transactions and the imposition of a penalty under Section 113(2) of the Act.
Ratio Decidendi: The court reasoned that any attempt to structure transactions primarily for tax advantage, lacking genuine commercial purpose, can lead to disregarding such transactions under tax law, validating the imposition of penalties for incorrect returns due to tax avoidance schemes.
Result: Appeal dismissed, with costs awarded to the respondent.
| Table of Content |
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| 1. factual basis of the appellant's property development activities. (Para 2) |
| 2. overview of contentions presented by the appellant and the respondent. (Para 3 , 4 , 5) |
[1] This is an appeal to this Court by the appellant against the decision of the High Court dated 5 April 2013 in respect of the appellant's requisition against the Deciding Order by the Special Commissioners of Income Tax ("SCIT").
Facts
[2] The brief facts of the case as found by the SCIT (para 6(a)-(r), Case Stated, pp 32-35, RR Bahagian A & B) are as follows:
2.1 the appellant is a property development company. The appellant buys land, develops the land and sells them. Any profits arising therefrom are regarded as business income and are subjected to income tax under the Income Tax Act 1967 ("the Act");
2.2 sometime in 1992, the appellant identified the properties held under Lots 8874 to 8918, Muara Tebas Land District, Bandar Kuching (hereinafter referred to as "the Lands") as being suitable for long term investment. It intended to build shophouses and complex on the Lands in its entirety or in units. The appellant also planned to build shophouses on another lot of land with the objective of leasing out the shophouses for a period of time prior to sale (the Lands together with the completed commercial buildings hereinafter referred to as "the Properties");
2.3 the appellant sought advice from Arthur Andersen HRM (Tax Services) Sdn Bhd ("Arthur Andersen"). The advice received was to the effect that the appellant should set up a subsidiary and thereafter sell the Lands to the subsidiary;
2.4 based on the advice, the appellant formed a realty company Ibraco-Peremba Holdings Sdn Bhd ("IPH"). IPH was a wholly owned subsidiary of the appellant and it was incorporated on 5 January 1994. The principal activity of IPH was investment holding and property developer;
2.5 Ibraco Bhd ("Ibraco") held 60.5% shares in Vendu Sdn Bhd ("Vendu") while another 39.5% was held by Peremba Holdings Sdn Bhd ("Peremba");
2.6 after the sale of the Lands by the appellant to IPH, IPH entered into the Turnkey Construction Contract on 27 August 1994 with the appellant to develop the Lands;
2.7 the project was completed around the year 1996. It comprised 23 shophouses, one shopping complex known as Wisma Wan and one office building known as Ibraco House. Apart from that, based on IPH Audited Account for year ending 31 January 1997, IPH fixed asset was valued at RM13,422,700.00;
2.8 after the completion of the said project, it was rented out and rental income was declared as IPH business income;
2.9 pursuant to a corporate restructuring exercise, the appellant sold the shares in IPH to Vendu on 11 June 2003. The shareholders of Vendu were Ibraco, a related company of the appellant, and Peremba. The ratio of shareholding was 60.5% and 39.5% respectively;
2.10 from the respondent's database system, the directors of Vendu were:-
i) Ravidranatham KP Kasavapillai (employee of Peremba Development Sdn Bhd) and holds 39.5% of shareholding;
ii) Vijayalingam Vythilingam, and
iii) Angela Liew Siaw Fan (employee of Ibraco) and holds 60.5% of share holding;
2.11 on 11 June 2003, the appellant disposed its shares in IPH to Vendu for the consideration of RM22.5 million;
2.12 after the change in shareholdings in IPH, IPH sold "the properties" in 2003 and 2004 realising a gain of RM16,900,000.00;
2.13 initially, the profit from the said disposal was determined based on the value of the transfer of the appellant's share in IPH to Vendu, that is, RM22.5 million by deducting the investment cost incurred by the appellant in IPH, that is, RM5.6 million. Hence, the net income was RM16.9 million;
2.14 after reviewing the abovesaid basis, the respondent reviewed the method in determining the profit, which was based on the total value of the said disposal, that is, RM29,140,000.00 by deducting the development cost incurred on the project, that is, RM15,621,380.00. By applying the new method, the net profit of the appel
