The income received by the appellant from non-members for operating slot machines is liable for taxation, as the mutuality principle under Section 53A(2) does not apply.

JUDGMENT

Ahmad Kamal Md Shahid J:

Introduction

[1] This is an appeal by the appellant vide a Notice of Appeal dated 18 April 2019 against the decision of the Special Commissioners of the Income Tax (SCIT) dated 29 March 2019.

[2] The appellant appealed to the SCIT against the following Notices of Additional Assessment for Year of Assessments (YAs) 2006 to 2010.

[3] The SCIT had unanimously disallowed the appellant's appeal against the respondent's decision to subject the income received from the monies collected from the slot machines to income tax for the YAs 2006 to 2010.

[4] The appellant contends that the SCIT had erred in their decision and hence, the present appeal.

Background Facts

[5] The established facts found by the SCIT are as stated in paras 7(a) to 7(m) on pp 4 to 6 of the Case Stated and are as follows:

a. The appellant is a recreational club registered in Malaysia with the Register of Societies. Its registered office is at No 1, Jalan New Club. 34000 Taiping, Perak.

b. The appellant's principal objects are to foster mutual goodwill, understanding and friendship by providing opportunities for members to share in social and recreational activities. Further, the appellant provides members with facilities for entertainment, sports, food, and drink for the sole benefit of its members only.

c. The appellant also provides the facility of 8 slot machines within the premises of the club. The slot machines are solely accessible by the appellant's members. The appellant has obtained a licence from the Ministry of Finance (MOF) to operate the slot machines.

d. The appellant entered into an agreement with TT Digital Sdn Bhd (TTD) on 1 December 2001 (Agreement), where it was agreed that TTD will be granted the right to operate and manage the appellant's slot machines. TTD will subsequently collect the monies received from members on behalf of the appellant.

e. A sum of RM18,000.00, which forms the bulk of the monies collected from the members, will subsequently be deposited by TTD into the appellant's bank account each month. The appellant then pays TTD the excess monies after deducting a sum of RM18,000.00 a month.

f. These excess monies will be in consideration for the services rendered by TTD. In essence, the scheme of business is that the appellant will obtain a first bite of the cherry and only excess monies will be collected by TTD.

g. Further, the appellant and TTD entered into a Supplementary Agreement to the Agreement on 4 August 2003. This Supplementary Agreement was entered into pursuant to the grant by the MOF for the appellant to operate 2 additional slot machines. It was agreed that TTD shall operate the machines for the appellant for the sole benefit of the appellant's members.

h. Vide a letter dated 9 February 2012, the respondent informed the appellant that it had failed to subject the monies it received from the operation of the slot machines to income tax. The respondent's stance was that the monies received by the appellant from TTD are in the form of rental income and that TTD is not a member of the appellant. On this premise, the respondent had proposed to subject the payments received from TTD to income tax.

i. Vide a letter dated 15 March 2012, the appellant sent a letter of objection to the respondent. The appellant is of the view that the said income was not taxable because:

I. The appellant has used the service of TTD to manage the slot machines;

II. The appellant will first collect the monies from the slot machines and the excess will be given to TTD as a management fee;

III. The machines or the permit are not rented to TTD by the appellant;

IV. All the monies collected from the slot machines will be deposited into the appellant's account;

V. The appellant did not regard the collection of the monies from the slot machines as an income because the slot machines are controlled by the appellant and access to the machines are only for the club members; and

VI. The contributions from the members are not taxable and should no