Gunn Chit Tuan SCJ:

This was an appeal by the Director-General of Inland Revenue (the appellant) against the judgment of the High Court given at Kuala Lumpur on 2 February 1989. The learned Judge had dismissed the appellant's appeal against the deciding order of the Special Commissioners of Income Tax who had decided that the disposal of a piece of land known as Lot No. 1, Section 1, Town of Batu Ferringhi (formerly known as Lot 132(2) Mk. 17, Batu Ferringhi, Penang and hereinafter referred to as "the subject land") with an area of approximately 37 acres owned by Khoo Ewe Aik Realty Sdn. Bhd. (the respondent) was not an adventure in the nature of trade and that the profit of the disposal was not assessable to income tax and development tax amounting to RM6,926,394.40 as it was the realisation of an investment.

The Special Commissioners of Income Tax in their Case Stated for the opinion of the High Court pursuant to paras. 34 and 35 of Schedule 5 to the Income Tax Act 1967, found, inter alia, that the following facts were proved or admitted:

Mr. Khoo Ewe Aik (deceased) and his wife, Ooi Jeu Yen (also deceased) were landed proprietors of real properties situated in the State of Pulau Pinang. Amongst the real properties owned by the late Mr. Khoo Ewe Aik (hereinafter referred to as "the grandfather") was the subject land. It was acquired by the grandfather in 1935 for RM4,100 and was zoned for agriculture. On 27 December 1975 the grandfather and his now deceased wife (hereinafter referred to as "the grandmother") formed and incorporated a family investment company, the respondent, the two subscribers of the respondent being the grandfather and the grandmother who were also the permanent directors of the respondent. The respondents, inter alia, were empowered - under the objects clause and other clauses of its Memorandum of Association - to engage in land investment, land development, land improvement etc. or to purchase and then to sell and turn to account land so purchased or land which comprised an investment.

On 13 February 1976, the respondent passed a Board resolution to accept the transfer of several landed properties from the grandfather and grandmother. On 14 February 1976, the grandfather as one of the two permanent directors authorised the respondent to transfer his beneficial entitlement in the share capital of the respondent to his children and grandchildren. The combined total of the shares of the grandfather and grandmother so allotted amounted to 1,450,000 shares at the par value of RM1 per share and consequently on 30 June 1976 the respondent by a board resolution resolved to allot a total of 1,449,998 shares which represents the consolidated allotments. The allotment exercises were a means by which the grandfather, and the grandmother divested themselves of their beneficial interests in the landed properties and share investments, and of distributing portions of them (in the form of shares) to the said children and grandchildren and to safeguard family control of the landed properties. The allotment of shares to the various shareholders by the respondent did not constitute an adventure in the nature of trade and the appreciation in value (if any) was of a capital nature.

For the basis year 1977 the respondent submitted a layout plan on 23 May 1977 to the George Town, Penang City Council for the construction of 130 housing units for a housing scheme in respect of the subject land e.g. the proposed conversion from agricultural land to housing land for residential purposes; this plan, however, was retracted in year 1981. There was no application for subdivision of the subject land or its adjoining lot, Lot 132(1). For the accounting year ended 31 January 1977, the respondent treated the subject land as a "current asset" in its Balance Sheet under "development account"; the other lands owned by it were treated as "fixed assets". For the accounting year ended 31 January 1980, the respondent treated the subjec