JUDGMENT

Lee Hun Hoe CJ:

This is an appeal by the Revenue against the decision of the learned Judge in reversing the determination of the Special Commissioners in respect of the deduction of interest. The question arose on the assessments to income tax made on the Taxpayer for the years of assessment 1972, 1973 and 1974. The Taxpayer was assessed on 16th November, 1974 as follows:-

Year of Original or Income Timber Development

Assessment Additional Tax Tax Tax

1972 Additional RM1,613,701 RM 391,311 RM 192,377

1973 Additional RM1,637,074 RM 344,728 RM 204,104

1974 Original RM9,434,895 RM3,270,544 RM1,172,041

The Taxpayer claimed the following deductions:-

Year of Forest Interest

Assessment Allowance

1972 RM20,832 RM12,273,971

1973 RM18,759 RM17,560,000

1974 RM31,812 RM24,253,426

The Special Commissioners allowed the deductions for forest allowance and there was no appeal on this. However, they rejected the deduction for interest and each gave his own reason. The learned Judge disagreed with them and gave his reasons for doing so. He allowed the appeal and ordered the assessments to be adjusted accordingly.

Mr. Mokhtar bin Haji Sidin appeared with Mr. Nor Azman and Mr. Edward Chia for the Revenue. Mr. Andrew Park Q.C. appeared with Mr. John Kah and Mr. Alex Decena for the Taxpayer.

The Facts

As to the facts we need only to recapitulate some of the main features. The Sabah Foundation ("the Foundation") was established in 1966 under the Sabah Foundation Enactment 1966 with the laudable object of promoting education amongst and encouraging the various cultures of the people of Sabah. It was managed by a chairman and eight trustees. By the Sabah Foundation (Amendment) Enactment 1971, which came into operation on 16 February 1970 "the Foundation" was empowered to carry on commercial and industrial activities and to establish from time to time a corporation to carry out such activities. The amendment also gave "the Foundation" the right to apply and to acquire timber concessions and to work the same either directly or through contracting out. On 28 December 1970 the Chief Minister granted "the Foundation a large timber concession of approximately 3,000 square miles by entering into a Licence Agreement ("principal agreement") with "the Foundation" pursuant to s. 15 of the Forests Enactment 1968. By an order made on 7 July 1969 under s. 123(3)(b) of the Income Tax 1967 the Federal Minister of Finance granted "the Foundation" tax exemption for six years effective from year of assessment 1968. The Taxpayer is one of the companies incorporated by "the Foundation" as a wholly-owned subsidiary to carry on the timber trade.

Before the Special Commissioners the parties submitted the following Agreed Statement of Facts:-

1) Rakyat Berjaya Sdn Bhd. (hereinafter referred to as "the company") was incorporated on 8 September 1970.

2) The registered office of the company is at Blok K, Sinsuran Shopping Centre, Kota Kinabalu Sabah.

3) On 18 January 1971, the company entered into an agreement with the Sabah Foundation for the assignment to the company all its rights and liabilities under a Licence Agreement dated 28 December 1970 between the Government of Sabah and the Sabah Foundation.

4) The consideration payable by the company to the Sabah Foundation for the assignment was RM250,000,000 payable by fifty biennial instalments, commencing from 31 December 1972, the first two of which was to be in the sum of RM35,000,000 each and the remainder in the sum of RM3,750,000 each

5) The company was also required to pay interest at the rate of 7% per annum from the date of the agreement of the sum of RM250,000,000 or such part thereof as was outstanding from time to time, but if default was made in paying any instalment, the rate was to be increased to 8% per annum.

6) In computing the income liable to tax for the years of assessment 1972 to 1974, the Director of Inland Revenue, Sabah has not allowed deduction for-

1) Interest paid in accordance with the as