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 and exclusively incurred in the production of gross income and therefore deduction of the sum should be allowed under s. 33(1) in the computation of adjusted income. The Special Commissioners found that the payment was not made for the use of a licence or permit to extract timber, but they held that it was a capital expenditure and therefore they dismissed the appeal. Being aggrieved with the decision of the Special Commissioners the taxpayer appealed to the High Court. In the course of putting up the Case Stated for the opinion of the High Court the Special Commissioners changed their mind with regards to the question relating to s. 39(1)(g) and in the Case Stated they substituted their earlier decision with a finding that the payment was made for the use of a licence to extract timber, thus strengthening further their conclusion that the sum paid was not an allowable deduction. Wan Yahaya J in the High Court reversed the decision of the Special Commissioners and held that -

(a) the sum of RM1,400,000 was not paid for the use of a licence or permit to extract timber under s. 39(1)(g), and

(b) the said sum paid for the exclusive right to work out, exploit and extract timber was not a capital expenditure but a revenue expenditure which is deductible under s. 33(1).

Hence this appeal before us by the Revenue.

At the hearing before the Special Commissioners a Statement of Agreed Facts and an Agreed Bundle of Documents were placed before them. Two witnesses gave evidence for the taxpayer, and the Revenue did not call any witness. The following are the facts of the case gathered from the findings by the Special Commissioners, the Statement of Agreed Facts and the Agreed Bundle of Documents. The taxpayer is a company incorporated on 31 March 1970. The many objects of the taxpayer company listed in its memorandum of association include the following:

To carry on the business of general merchants in lumbering and to own, carry on and run the business of timber growers, timber merchants and sawmill and timber-yard proprietors, and to buy, sell, grow, manipulate, import, export, and deal in, timber and wood of all kinds and also the business of foresters, charcoal, and charcoal dealers.

The Persatuan is an association formed under the Farmers' Association Act 1967. Since before 1 February 1973 the Persatuan was granted by the State Government of Johore right to fell and extract all the timber found on a certain area of land of about 5,500 acres in Hutan Mergastua, Mukim of Buloh Kasap, District of Segamat, Johor. The Persatuan issued a notice inviting tenders to fell and extract timber from the said land and to develop it into an oil palm and pepper estate. In response to the invitation the taxpayer put in its tender dated 1 February 1973, and became the succe