Wan Hamzah SCJ:

Hup Cheong Timber (Labis) Sdn. Bhd. ("the taxpayer") entered into an agreement dated 27 February 1973 with Persatuan Peladang Negeri Johor ("the Persatuan") whereby the Persatuan granted to the taxpayer the exclusive right to work out, fell, exploit and extract all timber found on a certain piece of land about 5,500 acres in area in the Mukim of Buloh Kasap, Johor, in consideration of the sum of RM1,400,00 to be paid by the taxpayer. For the purpose of assessment of income tax the taxpayer claimed a deduction of the sum of RM1,400,000 from its income but this was disallowed by the Director-General of Inland Revenue ("the Revenue") on the following grounds:

(a) that the sum was payable for the use of a licence or permit to extract timber from a forest in Malaysia and therefore under s. 39(1)(g) of the Income Tax Act deduction is not allowed; and

(b) that the sum was a capital expenditure and therefore deduction was also not allowed under s. 39(1)(c).

The taxpayer appealed to the Special Commissioners of Income Tax contending that it was neither a payment for the use of a licence or permit to extract timber nor a capital expenditure but an expenditure wholly