The distribution termed as 'Return of Capital' is taxable income under the Income Tax Act 1967, requiring proof of investment contribution for tax exemption.

Introduction

[1] This is an appeal (encl 1) by Sunway Reit Holdings Sdn Bhd (Appellant) against the Deciding Order of the learned Special Commissioner of Income Tax (SCIT) dated 1 December 2020 whereby the SCIT had unanimously dismissed the Appellant's appeal.

[2] After the hearing, I dismissed the Appellant's appeal in encl 1. This judgment contains the full reasons for my decision.

Background Facts

[3] The Statement of Agreed Facts and Additional Statement of Agreed Facts agreed by both parties can be found in para 7 on pp 4 to 15 of the Case Stated and are as follows:

i. The Appellant is a company incorporated in Malaysia with an office address at Level 16, Menara Sunway, Jalan Lagoon Timur, Bandar Sunway, 46150 Petaling Jaya, Selangor.

ii. Previously, the Appellant was known as Sunway Gamma Knife Centre (Malaysia) Sdn Bhd and Network Array Sdn Bhd.

iii. The Appellant is an investment holding company and its sole source of investment is the 986,634,185 units in Sunway Real Estate Investment Trust (Sunway REIT).

iv. In the year of assessment 2011 (YA 2011), the Appellant received distributions amounting to RM33,249,572.00, which included distributions of income and distributions for the return of capital from Sunway REIT. The details of the distributions are as follows:

v. The Appellant subjected the distributions of income amounting to RM24,468,528.00 to income tax under ss 3 and 4(f) of the Income Tax Act 1967 ( ITA ). The distributions for the return of capital amounting to RM8,781,044.00 were not subjected to income tax as they were the return of capital from Sunway REIT.

vi. On 5 July 2012, the Respondent informed the Appellant that pursuant to Public Ruling No 2/2011, the interest expenditure must be apportioned between its distributions of total income and distributions for the return of capital.

vii. Given the Respondent's position and on a without prejudice basis, on 15 August 2012, the Appellant took a prudent approach when filing its tax return (Form C) and tax computation for the year of assessment 2011. As per the Respondent's stance, the Appellant apportioned the interest expenditure incurred amounting to RM18,316,912.00 between the distributions of total income and distributions for the return of capital from Sunway REIT.

viii. By virtue of s 90(1) and s 90(2) of the ITA , the said Form C is deemed to be a notice of assessment served on the Appellant on 15 August 2012.

ix. On 29 August 2012, the Appellant aggrieved by the said notice of assessment filed a Notice of Appeal dated 24 August 2012 to SCIT (Form Q).

x. On 21 January 2013, the Respondent forwarded Form Q to SCIT; and

xi. On 29 January 2013, the SCIT registered the above matter as Rayuan No PKCP(R) 12/2013.

[4] The additional agreed facts are as follows:

i. The Appellant's principal activity is investment holding and its sole investment is the holding of 986,634,185 units in Sunway REIT. Sunway REIT is a real estate investment trust approved by the Securities Commission and the said 986,634,185 units represent 36.65% of the total units of Sunway REIT as of 31 December 2011.

ii. Pursuant to the Sale and Purchase Agreement dated 18 August 2011 executed between Sunway Berhad and the Appellant (Agreement), the acquisition of the 986,634,185 units in Sunway REIT by the Appellant was financed by the Appellant partly by assuming Sunway Berhad's loan from external banks (amounting to RM989,753,502.00) and the balance by an interest-bearing loan from a related company, namely Sunway Treasury Sdn Bhd (amounting to RM105,410,443.35).

The Agreement was entered during the merger exercise