Recently, the Court of Appeal in KPHDN v PSB upheld the High Court’s decision in allowing the taxpayer to claim Investment Tax Allowance (ITA) and Industrial Building Allowance (IBA) in respect of the capital expenditure incurred in constructing an integrated multi-storey car park.
The taxpayer was successfully represented by the firm’s Tax, SST Partner, S. Saravana Kumar and Senior Associate, Nur Amira Azhar.
Brief Facts
The taxpayer was in the business of providing healthcare and medical services. In the year of assessment (YA) 2012, the taxpayer constructed an extension to its existing hospital building by adding an integrated multi-storey car park. The taxpayer claimed ITA and IBA in respect of the capital expenditure incurred for the construction of the car park.
In 2014, the Malaysian Investment Development Authority (MIDA) granted the taxpayer an income tax exemption pursuant to Income Tax (Exemption) (No.12) Order 2006 (Exemption Order 2006) on the capital expenditure incurred by the taxpayer for its hospital.
It was also stated in the MIDA’s letter that the Exemption Order 2006 shall adopt the Income Tax (Exemption) Order 2012 (Exemption Order 2012) where the taxpayer needs only to satisfy the following requirements in order to claim the ITA:
(a)The new building must be of an approved standard which has been licensed by the Ministry of Health and registered with the Malaysian Healthcare Travel Council.
(b)The claim does not include capital expenditure incurred for the construction of living accommodation.
(c)The project undertaken must be for the expansion, modernisation, or refurbishment of an existing private healthcare facility business.
Subsequent to an audit, the Inland Revenue Board (Revenue) disallowed the taxpayer’s ITA and IBA claims for the capital expenditure incurred in relation to the multi-storey car park. Aggrieved by the Revenue’s decision, the taxpayer appealed to the Special Commissioners of Income Tax (SCIT).
The SCIT’s Decision
The SCIT had allowed the taxpayer’s ITA and IBA claims on the following key grounds:
(a)The taxpayer was entitled to claim ITA for the car park as they satisfied all the conditions under Exemption Order 2012.
(b)In relation to the IBA claim, the taxpayer had fulfilled the ‘entirety test’ and ‘functionality test’. Looking at the hospital and the car park as a whole, both structures functioned together in the operations of the hospital.
(c)Paragraph 66 of Schedule 3 of the Income Tax Act 1967 (ITA 1067) was not applicable as the car park was at all times used as an industrial building. Hence, the capital expenditure incurred by the taxpayer to construct the car park was a qualifying expenditure eligible for IBA under paragraph 37A of Schedule 3 of the ITA 1967.
Being dissatisfied with the SCIT’s decision, the Revenue appealed to the High Court.
The High Court’s Decision
The High Court upheld the SCIT’s decision and dismissed the Revenue’s appeal based on the following grounds:
ITA
The applicable Exemption Order pertaining to the taxpayer’s ITA claim was the Exemption Order 2012, and not the Exemption Order 2006. The taxpayer had fulfilled all the requirements under the Exemption Order 2012. In addition, the Exemption Order 2012 did not specifically exclude car parks, and hence, the expenditure incurred on the car park was a qualifying capital expenditure under the Exemption Order 2012.
IBA
The taxpayer may claim IBA on the car park as it met the ‘entirety test’ and ‘functionality test’. The Revenue did not dispute the taxpayer’s evidence that the car park was necessary for the expansion of its hospital building. Further, the car park was essential and integral to the taxpayer’s business, forming part and parcel of the hospital building.
Besides, paragraph 66 of Schedule 3 was not applicable as the car park was used as an industrial building. This paragraph only applies to any part of a building that was not used as an industrial building.
Being dissatisfied with the High Court’s decision, the Revenue further lodged an appeal to the Court of Appeal.
Appeal To The Court Of Appeal
The two issues before the Court of Appeal, were namely:
(1)Whether the High Court was igh Court correct in deciding that the capital expenditure incurred by the taxpayer to construct the car park as part of the taxpayer was eligible for ITA pursuant to the Exemption Order 2006 and the Exemption Order 2012?
(2)Whether the High Court was correct in deciding that the capital expenditure incurred by the taxpayer to construct the car park as part of the taxpayer was eligible for IBA pursuant to paragraph 37A of Schedule 3 of the ITA 1967?
The Revenue’s Contentions
The Revenue submitted that the taxpayer was not eligible for the ITA claim on the ground that the High Court failed to take into account the applicability of the Exemption Order 2006 which subjected the taxpayer to Schedule 3 of the ITA 1967.
By virtue of paragraph 66 of Schedule 3, the Revenue claimed that it has the power to apportion the building expenditure by reference to the respective floor areas of the respective parts if the capital expenditure incurred on the construction of a not-so-used part in an industrial building was more than 10%.
Hence, the Revenue was correct to apportion the expenditure incurred on the construction of the car park as the car park, which was alleged to be “not used” for the taxpayer’s healthcare business, constituted 36.07% of the total built-up area of the new building.
Besides, the Revenue’s view was that the car park was not used for the taxpayer’s business as the car park was leased to a third-party car park operator, and hence, creates another source of income for the taxpayer.
The IBA was granted under paragraph 37A of Schedule 3, and thus, by relying on paragraph 66 of Schedule 3, the Revenue had rightfully apportioned the qualifying expenditure incurred on the construction of the car park which was not used for the purpose of the taxpayer’s business.
The Taxpayer’s Contentions
The taxpayer contended that the High Court had correctly allowed the taxpayer’s ITA claim pursuant to the Exemption Order 2012, which was the proper exemption order to be looked at. Furthermore, the taxpayer had fulfilled all the requirements of “qualifying capital expenditure” under paragraph 2 of the Exemption Order 2012.
The Revenue should look at the taxpayer’s business as a whole and not in isolation. The car park is necessary for the expansion of its hospital building, and it was essential and integral to the taxpayer’s healthcare business. The car park also fulfilled the entirety and functionality tests in claiming IBA.
Commentary
Upon both parties’ submissions, the Court of Appeal dismissed the Revenue’s appeal and affirmed the High Court’s decision in allowing the taxpayer’s ITA and IBA claims in respect of the capital expenditure incurred in constructing the car park as part of its hospital building.
This Court of Appeal’s ruling is a significant ruling and also a great news for taxpayers who are running businesses in Malaysia. Whilst the Revenue has the power to collect taxes from taxpayers, such power should not be exercised arbitrarily. It must be borne in mind that the Revenue has no authority to dictate how a taxpayer should conduct its business. On the contrary, taxpayers are at all times at their own liberty to conduct their business with all available means to make good profits, and also, to mitigate their incidences of tax.
19 May 2023