Peh Swee Chin SCJ:

In Government of Malaysia v. Preston Corpn. (M) Sdn. Bhd. [1981] Wan Hamzah J (as he then was), held that a penalty imposed by the Director General of Inland Revenue under s. 113(2) of Income Tax Act 1967, was an assessment within the meaning of the word, and was therefore appealable to the Special Commissioners under s. 99(1).

Apparently, this did not find acceptance from all quarters so that the same issue was re-litigated in the instant appeal, when Tallala J in Muar High Court again came to the same conclusion upholding what Hamzah J (as he then was) decided. We feel it imperative to re-examine the same point in order to crystalize the position one way or another.

To recapitulate the salient facts, the respondents, (hereinafter called the taxpayers), using a heading entitled "Purchase of Logs" in their income tax returns, inter alia, apparently caused the Ketua Pengarah Hasil Dalam Negeri (hereinafter called the Revenue) to miss charging the taxpayers with timber profits tax. When the Revenue realized it they assessed and charged the timber profits tax which the taxpayers duly paid without protest apparently and there has been no appeal from this assessment.

The Revenue however subsequently and further imposed a penalty under s. 113(2) of the Income Tax Act 1967, (hereinafter called the Act) on the ground of the incorrect return or information, the penalty being in effect 100% of the timber profits tax collected earlier that is, the amount of tax undercharged. The taxpayers did not agree with this penalty.

Sections 113(1) and (2) of the Act are set out below for ease of reference and comparison:

Section 113 - Incorrect returns:

(1) Any person who:

(a) makes an incorrect return by omitting or understating any income of which he is required by this Act to make a return on behalf of himself or another person; or

(b) gives any incorrect information in relation to any matter affecting his own chargeability to tax or the chargeability to tax of any other person

shall, unless he satisfies the Court that the incorrect information was made or given in good faith, be guilty of an offence and shall, on conviction, be liable to a fine not exceeding five thousand ringgit and shall pay a special penalty of double the amount of tax which has been undercharged in consequence of the incorrect return would have been undercharged if the return or information had been accepted as correct.

(2) Where a person:

(a) makes any incorrect return by omitting or understating any income of which he is required by this Act to make a return on behalf of himself or another person; or

(b) gives an incorrect information in relation to any matter affecting his own chargeability to tax or the chargeability to tax of any other person, then, if no prosecution under subsection (1) has been instituted in respect of the incorrect return or incorrect information, the Director General may require that person to pay a penalty equal to the amount of tax which has been undercharged in consequence of the incorrect return or incorrect information or which would have been undercharged if the return or information had been accepted as correct; and, if that person pays that penalty (or, where the penalty is abated or remitted under s. 124(3), so much, if any, of the penalty as has not been abated or remitted), he shall not be liable to be charged on the same facts with an offence under subsection (1).

Aggrieved by such imposition of such penalty, the taxpayers sent to the Revenue a letter dated 13 August 1984, together with a notice of appeal to the Special Commissioners with various grounds stated therein. The amount of timber profits tax was RM62,173.90 which was the amount also of the penalty and the latter was objected to.

The Revenue in reply asked for certain particulars and information to be furnished to the Revenue no later than 30 days from the date of their letter dated 20 August 1984, and stated that this was, to quote: "in order to e