nun Ali J:

This is an appeal by way of case stated by the appellant against the decision of the special commissioners of the income tax (hereinafter referred to as "SCIT") made on 5 July 1997, that the provision made for retirement benefits that had been taken into account in the sale of the appellant's dyeing and printing mill was not an allowable deduction under s. 33(1) of the Income Tax Act 1967 (hereinafter referred to as "the Act").

Briefly the facts of this case is that prior to 1 November 1989, the appellant owned and operated three types of mills namely a spinning mill, two weaving mills and a dyeing and printing mill. The appellant subsequently sold the dyeing and printing mill to Textile Corporation (Malaysia) Sdn Bhd (hereinafter referred to as "TCM") in order to rationalise the business and to qualify for pioneer status under the Promotion of Investment Act 1987 whereby it is exempted from payment of income and development taxes.

The appellant then transferred all its employees working in the said dyeing and printing mill to TCM. The provisions for retirement benefits for these employees was adjusted and finalised at a figure of RM1,885,529 which was set-off as against the actual sale price to TCM. The respondent disallowed the appellant's claim that the provision for retirement benefits were tax deductible as an expense wholly and exclusively incurred in the production of the appellant's gross income.

It needs to be emphasised that the appellant is one of the three textile factories in the same groups, the other two being TCM and MWM Enterprise Sdn Bhd. At the time of the sale both MWM and TCM were owned by the same three shareholders. Also no employee was due to retire or due to get the benefits on account of retirement at the time of sale.

This court acknowledges that in an appeal by a taxpayer to the SCIT against an assessment made under the Act, the assessment stands unless the taxpayer is able to satisfy the SCIT that the assessment is overcharged. It follows, that in such an appeal the onus is on the taxpayer to demonstrate that the assessment should not have been made, and so, the assessment stands unless and until the taxpayer satisfies the SCIT that the assessment made by it is wrong. The taxpayer, therefore, undertakes the same onus when he brings a further appeal to the High Court.

The SCIT had dismissed the appellant's appeal by holding that provisions made by the appellant for retirement benefits (which were later transferred by the appellant to the purchaser (TCM) of the appellant's dyeing and printing mill) could not be deducted as a revenue expense of the appellant under s. 33(1) of the Act.

Needless to say, if the retirement benefits are allowed as a deduction under s. 33(1) of the Act, the amount of the appellant's income chargeable to tax would be reduced. It is the appellant's argument therefore, that the SCIT wrongfully disallowed the deduction of what, in law, amounted to an actual payment of revenue expenses (the retirement benefits) in the computation of the appellant's income tax in dispute.

Thus in order for the appellant to qualify for such deduction, the expense must constitute an expense which is a revenue expense or 'business' expense as opposed to a capital expense.

The general rule remains that no deduction may be claimed in respect of expenditure which is capital rather than revenue in nature.

The distinction between the two categories of expenditure is one, however, that is difficult to ascertain in many cases. While the determination of the various factors on the basis of which a court will reach its balanced opinion is a question of fact, whether the item is on the basis of those factors, a revenue or a capital item is a question of law. The nature of the payment made is not to be judged by the subjective test of the intentions of those who actually made the payments but by the nature and effect of the payment made and the benefits which are obtained in return