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2010 MarsdenLR 3073
HIGH COURT MALAYA KUALA LUMPUR
KETUA PENGARAH HASIL DALAM NEGERI – Appellant
Versus
NV ALLIANCE SDN BHD – Respondent
[Civil Appeal No: R1-14-04-2009]
The court affirmed that business incentives paid to sales agents are allowable deductions under section 33(1) of the Income Tax Act 1967, distinguishing them from 'entertainment' under section 18.
Headnote:(A) Income Tax Act 1967 - Sections 18, 33(1), and 39(1)(?) - Appeal by taxpayer regarding expenses classified as deductible income tax deductions - The SCIT allowed expenses incurred for agent incentives as they promote sales, aligning the finding with income production guidelines under the Act's sections - The appellate body found SCIT's rationale for disallowing incentives based on entertainment definitions to be contradictory and erroneous, affirming the taxpayer's position regarding expense classifications. (Paras 26, 27)
(B) Penalty under Section 113(2) - The imposition of a penalty for incorrect expense claims was viewed as unmerited, given good faith submissions by the taxpayer, thus allowing its appeal. (Para 27)
Facts of the case:
The Respondent contested tax assessments disallowing cash incentives as deductions, claiming these expenses were for business promotion and should not be classed as non-deductible entertainment. The Appellant argued these incentives fell under entertainment expenses, thus restricted under section 39(1)(?).
Findings of Court:
The SCIT initially permitted deductions but also noted incentives as entertainment. Ultimately, the higher court resolved the inconsistencies, prioritizing the foundational revenue nature of expenses incurred for producing income.
Issues: Whether expenses were allowable deductions under section 33(1) and if the imposed penalty under section 113(2) was appropriate.
Ratio Decidendi: The court established that expenses related to sales incentive schemes are primarily for business promotion and thus meet deductible criteria under section 33(1) while clarifying any dual-purpose elements of claimed expenses should not negate their allowance as deductions.
Result: Appeal allowed with costs awarded to the Appellant.
| Table of Content |
|---|
| 1. appeal against tax assessments. (Para 1) |
| 2. issues for determination by the scit. (Para 2) |
| 3. parties’ arguments regarding incentive expenses. (Para 3 , 4) |
| 4. scit's findings on appellant's operations. (Para 5) |
| 5. expenses to promote business and generate income. (Para 8) |
| 6. appellant's interpretation of entertainment expenses. (Para 9 , 10 , 11) |
| 7. analysis of the purpose behind expenses. (Para 17 , 18 , 19) |
| 8. determining scope of 'entertainment' under the act. (Para 22 , 23) |
| 9. scit's contradictory findings regarding expenses. (Para 24 , 25 , 26) |
| 10. ruling on penalty imposed by director general. (Para 27) |
The Respondent herein filed an appeal to the Special Commissioners of Income Tax ("SCIT") against the following tax assessments made by the Appellant under the Income Tax Act 1967 ("the Act") as follows:
The Appellant contends that the expenses/incentives paid by the Respondent to their marketing agents to motivate them to increase sales constitute entertainment within the meaning of "entertainment" under s. 18 of the Act and are therefore not allowable as a deduction against the Respondent's income pursuant to s. 39(1)(?) of the Act . The SCIT disagreed with the Appellant's contention. The SCIT is of the opinion that the expenses incurred by the Respondent in the form of incentives are incurred solely with the object of promoting the business of the Respondent and are thus revenue in nature and are not prohibited from deduction against the Respondent's income. By a Deciding Order dated 22.7.2008 the SCIT unanimously allowed the Respondent's appeal.
2. Background
The issues for determination by the SCIT as set out in paragraph 2 of the Case Stated is as follows:
(a) whether the following expenses:
(hereinafter referred to as "the expenses") were wholly and exclusively incurred in the production of gross income of the Respondent within the meaning of section 33 of the Act and not restricted under paragraph 39(1) (?) of the Act ;
(b) whether the Respondent (the Appellant herein) is right in law to impose a penalty of 60% on the amount of tax undercharged under subsection 113(2) of the Act .
3 . Before the SCIT the Respondent contends as follows:
(i) the Respondent argued that the cash incentives paid to the agents were wholly and exclusively incurred in the production of their gross income and should be allowed as a deduction under section 33(1) of the Act and not restricted under section 39(1)(?) of the Act ;
(ii) the Respondent is also aggrieved with the penalty imposed by the Appellant pursuant to section 113(2) of the Act for the reason that the Respondent gave incorrect information or omitting or understating income by claiming the expenses in their Return Form submitted to the Appellant.
4 . The Appellant contends as follows:
(i) the Appellant did not dispute the fact that the expenses claimed as "incentive" do fall under section 33(1) of the Act . However the Appellant argued the expenses were in the form of entertainment as defined under section 18 of the Act . Therefore the expenses were not allowable as a deduction against the Respondent's income pursuant to section 39(1)(?) of the Act ;
(ii) the Appellant argued that the Director General is granted power to impose penalty under section 113(2) of the Act upon a person who makes an incorrect return or gives any incorrect information in relation to the liability to tax. In this case the Appellant is entitled to impose such penalty because the Respondent had claimed certain expenses under section 33(1) of the Act which in the opinion of the Appellant is disallowed from deduction by virtue of section 39(1)(?) of the Act . It means the Respondent has made incorrect return in their Return Form submitted to the Appellant;
(iii) the expenses claimed are not "additional commission" or even "commission";
(iv) a close examination of the circulars or notices set out will show that in nature they are all competitions or contests organized by the Appellant and as such the ex
