JUDGMENT

Gopal Sri Ram JCA:

The Background

The appellant is a private limited company. It is one of several wholly owned subsidiaries of the Yayasan Sabah or the Sabah Foundation ("the Foundation"). The respondent is the Director General of Inland Revenue.

In 1966, the Foundation was approved as an institution of a public character under the provisions of the Sabah Income Tax Ordinance 1956 ("the Ordinance"). That meant that gifts of money made to the Foundation were tax deductible in the hands of the donor. Later, when Parliament enacted the Income Tax Act 1967 ("the Act"), it repealed the Ordinance. But the approval that the Foundation received under the Ordinance remained intact.

Between 1979 and 1985, the Chief Minister of the State of Sabah was the chairman of the Foundation as well as the chairman of the appellant. During that period, there was written a letter from the State Ministry of Finance to the managing director of the group of companies that were the subsidiaries of the Foundation. It is dated 28 December 1979. It is an important document from the respondent's point of view. The learned judge produced it in his judgment. I shall do likewise. In essence, this is what it says:

The Managing Director, Sabah Foundation Group of Companies Sabah Foundation Headquarters, Kota Kinabalu.

Tuan,

Donation to Sabah Foundation

I refer to discussion with the Chief Minister this morning and confirm that it is Government's wish that all surplus funds in the subsidiary companies of the Sabah Foundation be donated to the Sabah Foundation.

The tax position of the subsidiary companies was also discussed this morning, and I am to state that the Government will provide all necessary assistance in obtaining tax relief or exemption for the subsidiary companies and ensure that the subsidiary companies their Directors and Officers are adequately protected as a result of the companies making the donations in compliance with Government's wish.

Immediately upon receipt of this letter the appellant's board of directors held a meeting. It was chaired by the then Chief Minister of Sabah. The board having noted that the appellant's profit for the year was estimated at RM8 million resolved that the whole of that sum be donated to the Foundation. The practice of the appellant donating all its profits to the Foundation continued for the following eight years. For two of the eight years, the appellant donated sums that were slightly in excess of its declared profits. This was occasioned by the fact that the actual profit made for those two years fell somewhat short of the projected figure. But, as will appear later in this judgment, nothing turns upon the overpayment.

Later, the respondent raised tax assessments for the years 1980 through 1987, disallowing the sums donated by the appellant to the Foundation. The appellant being dissatisfied with these assessments appealed to the Special Commissioners. The Commissioners dismissed the appeal and upheld the assessments in question. Upon the appellant taking the matter further, the Special Commissioners stated a case to the High Court in which they set out their reasons for making their Deciding Order. Although the Special Commissioners found against the appellant on seven points, these may be quite safely be condensed into two broad grounds and may be summarised as follows.

First, that each of the donations made by the appellant to the Foundation were not deductible as a gift under s. 44(6) of the Act because they were involuntary as - (i) they were made under the direction of the State Government and not voluntarily by the appellant; (ii) they were made pursuant to a contractual obligation; and (iii) the appellant had in return obtained a material advantage in return for the gift. In coming to these findings, the Special Commissioners lent much weight to the fact that the appellant had, on those two occasions I spoke of a moment ago, given away more than it had. The second reason advanced by