Nett proceeds paid under a timber licence are allowable as deductions if they are wholly and exclusively incurred in producing income.

Mokhtar Sidin JCA:

We had given our decision in respect of this appeal earlier whereby we allowed the appeal by the appellants. We now give our reasons for doing so.

The appellants, being unhappy with the assessments raised by the respondent, appealed against those assessments to the Special Commissioners. Before the Special Commissioners there were two separate appeals but were heard together because the issue was the same in both appeals. The appeals continued to be heard together in the High Court. The first appeal was by Syarikat Jasa Bumi (Woods) Sdn. Bhd. while the second appeal was by Margaret Luping and two others. The appellant in the first appeal did not appeal to this court. As such the appeal before us is the one by Margaret Luping and two others.

As can be seen from the record of appeal, both the Special Commissioners and the High Court judge at Kota Kinabalu treated the facts of these two appeals as one. There were times in the case stated and in the judgment of the learned High Court judge when where reference to one appeal covered the other appeal as well.

The appeal by Margaret Luping and two others were against the following additional assessments raised by the respondent:

Year of Assessment Date of Assessment Tax Payable

1974 10.9.1977 RM15,580.00

1976 10.9.1977 19,599.00

As can be seen from the above the additional assessments for the Years of Assessment 1974 and 1976 were raised on 10 September 1977. The tax payable for those years was in respect of sums paid to the State Government of Sabah as nett proceeds. The appellants claimed that the amounts paid to the State Government should be allowable deductions under ss. 33(1) and 39(1) of the Income Tax Act 1967 (hereinafter referred to as "the Act"). The respondent disagreed, and added back the sums paid as nett proceeds to the State Government. As a result of the adding back, the tax payable on those sums are those stated above.

The Special Commissioners found that the timber licence granted to the appellants required the appellants to pay nett proceeds to the State Government on extraction of timber. The nett proceeds were calculated by taking into account extraction costs, royalty and other fees. The average FOB value of timber exported minus total cost was said to be the nett proceeds. The nett proceeds were levied and included in royalty bills as and when timber were extracted. Generally, it was based on the volume of timber removed. It was the policy of the State Government then in order to encourage development that a person paying the nett proceeds was entitled to get back the nett proceeds paid by him as subsidy for any agricultural or industrial development carried out by him on the land where the timber were extracted.

The issue before us is whether the nett proceeds paid are allowable as deductions under s. 33(1) of the Act and not caught by s. 39 of the Act. Section 33 (1) of the Act provides as follows:

33. ADJUSTED INCOME GENERALLY

(1) Subject to this Act, the adjusted income of a person from a source for the basis period for a year of assessment shall be an amount ascertained by deducting from the gross income of that person from that source for that period all outgoings and expenses wholly and exclusively incurred during that period by that person in the production of gross income from that source, ... (emphasis made).

The relevant provisions of s. 39(1) in respect of this appeal provide as follows:

39. DEDUCTIONS NOT ALLOWED

(1) Subject to any express provision of this Act, in ascertaining the adjusted income of any person from any source for the basis period for a year of assessment no deduction from the gross income from that source for that period shall be allowed in respect of -

(a) ...

(b) any disbursements or expenses not being money wholly and exclusively laid out or expended for the purpose of producing the gross income;

(c) any capital withdrawn or any sum employed or intended to be employed as capital;