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2024 MarsdenLR 1691
HIGH COURT MALAYA KUALA LUMPUR
DATUK OH CHONG PENG – Appellant
Versus
KETUA PENGARAH HASIL DALAM NEGERI – Respondent
[Civil Appeal No: WA-14-1-04-2022]
An independent non-executive director is not classified as an employee under the Income Tax Act, and thus, director's fees should not be taxed as employment income.
Headnote:(A) Income Tax Act 1967 – Sections 4(a), 4(b), 91(3), and 113(2) – Appeal against the decision of the Special Commissioners of Income Tax (SCIT) regarding the tax treatment of director's fees and consultancy income – The SCIT erroneously classified the Appellant as an employee, subjecting his income to employment tax under s 4(b) instead of business income under s 4(a) – The Court found that an independent non-executive director does not have a master-servant relationship with the companies and thus should not be taxed as an employee. (Paras 17-24, 41-46, 86.1)
Facts of the case: The Appellant, an independent non-executive director, received director's fees and consultancy fees from various companies, which were reported as income of his management companies. The SCIT assessed these as employment income, leading to additional tax assessments and penalties for the years 2002-2012.
Findings of Court: The Court ruled that the Appellant was not an employee and that the SCIT had erred in its interpretation of the law regarding the Appellant's status and the nature of his income.
Issues: The main issues were whether the Appellant was correctly classified as an employee and whether the SCIT had sufficient grounds for imposing penalties and time-barred assessments.
Ratio Decidendi: The Court emphasized that an independent director does not fall under the definition of an employee as per the Income Tax Act, and the SCIT's conclusions were not supported by the evidence or legal principles. (Paras 20-24, 86.1-86.3)
Result: The appeal was allowed, and the SCIT's decision was overturned.
JUDGMENT
Introduction
[1] This is an appeal by Datuk Oh Chong Peng (Appellant) by way of a Notice of Appeal dated 6 April 2022 (encl 1) against the decision of the Special Commissioners of Income Tax (SCIT).
[2] By the Deciding Order dated 31 March 2022, the SCIT disallowed the appeal by way of Form Q by the Appellant against the assessment raised by the Respondent.
[3] The SCIT in the Deciding Order dated 31 March 2022 had made the following findings:
"ADALAH DIPUTUSKAN bahawa Perayu telah gagal membuktikan rayuan Perayu selaras dengan perenggan 13 Jadual 5 Akta Cukai Pendapatan 1967;
DAN bahawa Perayu adalah seorang 'pekerja' bagi maksud di bawah ACP;
DAN bahawa saraan yang diterima oleh Perayu sebagai Pengarah Bebas / Independent Director daripada syarikat-syarikat di mana beliau menduduki Lembaga Pengarah bagi Tahun-tahun Taksiran 2002 sehingga 2012 adalah pendapatan Perayu dan dikenakan cukai di bawah subseksyen 4(b) ACP;
DAN bahawa Perayu telah cuai apabila gagal melaporkan saraan yang diterima dari yuran dan elaun pengarah di syarikat-syarikat yang beliau duduki sebagai Lembaga Pengarah dan juga fi konsultansi sebagai pendapatannya di bawah subseksyen 4(b) ACP sebaliknya memindahkan saraan yang diterima kepada dua syarikat pengurusannya iaitu, OCP Holding Sdn Bhd dan Garzania Sdn Bhd dan melaporkan sebagai pendapatan syarikat pengurusan di bawah subseksyen 4(b) ACP;
DAN bahawa Responden telah berjaya melepaskan beban bukti di bawah subseksyen 91(3) ACP berkaitan taksiran di luar had masa yang dibangkitkan terhadap Perayu bagi Tahun-tahun Taksiran 2002 sehingga 2009;
DAN bahawa Responden adalah betul dalam mengenakan penalti terhadap Perayu bagi Tahun-tahun Taksiran 2002 sehingga 2012 di bawah subseksyen 113(2) ACP;
DAN DENGAN ITU rayuan Perayu ditolak dan Notis Taksiran Tambahan bagi Tahun-tahun Taksiran 2002 sehingga 2012 yang berkaitan rayuan ini adalah dikekalkan."
(See: pp 50-52 of Rekod Rayuan Tambahan (RRT))
[4] The Appellant being aggrieved with the Decision of the SCIT filed an appeal and is now before this Honourable Court for the Court's opinion on whether the decision by the SCIT was correct based on the facts and law.
[5] After the hearing, I allowed the Appellant's appeal in encl 1. I now give my reasons for doing so.
Background Facts
[6] The narration of the background facts herein is adopted with and/or without modification from the established facts found by the SCIT and can be summarized as follows:
6.1 The Appellant is an individual with a residential address at 5, Laman Setiakasih Lapan, Off Jalan Setiakasih Lapan, Bukit Damansara 50490 Kuala Lumpur, Malaysia.
6.2 Two management companies were incorporated by the Appellant namely OCP Holding Sdn Bhd (Company No 131139-T) and Garzania Sdn Bhd (Company No 100795-T) (the Management Companies). Both the Management Companies have an office address at Suit 705, Block A, Kelana Business Centre, 97, Jalan SS7/2, 47301 Petaling Jaya, Malaysia.
6.3 After the Appellant retired from his professional practice, the Appellant continued to sit on the Board of Directors as an independent non-executive director of several public companies. He received director's fees and allowances from these companies. These companies, among others, include IJM Corporation Berhad, IJM Plantations Berhad and Dialog Group Berhad. During the Years of Assessment (YAs) 2002-2012, the Appellant, sometimes, sat on the Board of Directors of 7 or 8 unrelated companies at the same time. The Appellant also from time to time provided consultancy services to companies where he does not sit on the Board of Directors. He received consultancy fees from these companies for his services.
6.4 All the director fees, allowances and consultancy fees received from December 1997 to date were remitted to the Management Companies. These were treated as the income of the Management Companies and were subjected to income tax under s 4(a) of the Income Tax Act 1967 ( ITA ).
