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2022 MarsdenLR 589
HIGH COURT MALAYA KUALA LUMPUR
KETUA PENGARAH HASIL DALAM NEGERI – Appellant
Versus
TCY JAYA SDN BHD – Respondent
[Civil Appeal No: WA-14-36-07-2020]
Expenses claimed can be deemed 'incurred' without actual payment under Income Tax Act, affirming the need for discretion in imposing penalties for incorrect returns.
Headnote:(A) Income Tax Act 1967 – Sections 33(1) and 113(2) – Deductibility of expenses – Appeal against the Special Commissioners of Income Tax's decision allowing disputed expenses as fully incurred in the relevant assessment years – SCIT's decision was found to be supported by sufficient evidence and valid interpretation of 'incurred' under the Act. (Paras 8, 12, 18, 19, 48)
(B)
Penalty imposition – Requirement of careful consideration of circumstances surrounding incorrect tax returns before imposing penalties as per ITA – Consideration of the respondent's good faith in providing tax information. (Paras 34, 44, 46)
Facts of the case:
The appellant contested deductions claimed by the respondent relating to purchases from Keck Eng Timber, citing disagreements on the incurred status of the expenses and imposition of penalties for incorrect tax returns.
Findings of Court:
The SCIT's majority decision permitted the deductions and set aside the penalties, concluding that the expenses were incurred during the relevant years under section 33(1) of the ITA.
Issues
: Whether the expenses in question were incurred as defined in ITA and if the penalties were justified.
Ratio Decidendi:
The court affirmed that expenses need not be paid to be 'incurred' and addressed the necessity for revenue authorities to exercise discretion regarding penalties fairly.
Result:
Appeal dismissed with costs.
JUDGMENT
Introduction
[1] This is an appeal by the appellant by way of Case Stated against the Deciding Order of the Special Commissioners of Income Tax (SCIT) dated 22 August 2014 according to para 34 of Schedule 5 of the Income Tax Act 1967 ( ITA ).
[2] The SCIT by majority decision allowed the appeal by way of Form Q filed by the respondent against the following income tax assessments:
[3] The issue for the determination of the SCIT is essentially on the deductibility of the "provision for the purchase of the timber concession" as reflected in the Journal Voucher in the sum of RM1,148,000.00 for the year of assessment (YA) 2004 and RM896,000.00 in the YA 2005, respectively. In other words, whether the SCIT was wrong in law to determine that the disputed item/expenses claimed by the respondent as its cost of producing its gross income should be allowed under s 33(1) of the ITA .
[4] The appellant raised the assessment because the appellant disallowed the expenses as those expenses are provision not 'incurred' under s 33(1) of the ITA .
Background Facts
[5] The established facts found by the SCIT are as stated in para 8 on pp 4 and 5 of the Case Stated and are as follows:
i. The respondent had conducted the tax audit at the appellant's business premises in Segamat from 5 November 2007 to 7 November 2007.
ii. During the audit process, the respondent was informed by the appellant that there is no written agreement by the appellant to purchase timber logs from Keck Eng Timber.
iii. The appellant contended that the expenses of RM1,148,000.00 in the YA 2004 and RM896,000.00 in the YA 2005 are the buying cost to purchase timber from Keck Eng Timber.
iv. The appellant further contended that there is an oral agreement to purchase timber from Keck Eng Timber based on friendship in the business.
v. The appellant had turned an oral agreement to purchase timber from Keck Eng Timber to be in writing and was later stamped.
vi. Keck Eng Timber was given the rights to extract and remove the timber from the concession owned by KDYMM Sultan of Pahang.
vii. The appellant entered into an oral agreement to purchase timber from Keck Eng Timber.
viii. The appellant had appointed a contractor by the name of Kemajuan Sinar Trading Sdn Bhd to enter the concession lots to cut the timber.
ix. The appellant does not have any timber concession to sell timber and the appellant had purchased the timber concession from Keck Eng Timber.
x. The respondent's witness agreed that there is a cost to purchase the timber and contended that the value given of RM7,000 per- acre is too high.
xi. The respondent's counsel had dropped the issue of whether the payment are capital in nature and therefore was not allowed under s 39(1) of the ITA .
[6] The SCIT in its Deciding Order dated 22 August 2014 by majority decision allowed the appeal by the respondent. The Deciding Order reads as follows:
"Rayuan ini setelah ditetapkan untuk keputusan pada hari ini dalam kehadiran Encik Andrew Khoo, Peguam bela dan Peguam cara bagi pihak Perayu dan Puan Nur Farzana binti Mohamed Puat, Peguam Hasil, Lembaga Hasil Dalam Negeri bagi pihak responden;
Adalah diputuskan secara majoriti bahawa peruntukan belian untuk mendapatkan konsesi balak sebanyak RM1,148,000.00 bagi Tahun Taksiran 2004 dan berjumlah RM896,000.00 bagi Tahun Taksiran 2005 boleh dibenarkan sebagai perbelanjaan di bawah subseksyen 33(1) Akta Cukai Pendapatan 1967;
Adalah diputuskan juga secara majoriti bahawa penalti yang dikenakan di bawah s 113(2) Akta Cukai Pendapatan 1967 bagi Tahun-Tahun Taksiran 2004 dan 2005 berkaitan dengan rayuan ini diketepikan;
Maka dengan ini adalah diperintahkan secara majoriti bahawa rayuan ini dibenarkan;
Dan diperintahkan selanjutnya secara majoriti bahawa Notis-Notis Taksiran Tambahan yang berkaitan dengan rayuan ini dipinda sejajar dengan keputusan di atas."
[7] After the hearing, I dismissed the appellant's appeal (encl 1). This judgment contains the full reasons for the dismissal.
The Law
