Is the exhaustion of domestic remedy a prerequisite to commence judicial review? Can court grant a stay order in tax cases? The recent Federal Court decision in Ketua Pengarah Hasil Dalam Negeri v MEB has shed some light on this contentious issue.
The firm’s Senior Partner, Datuk D.P. Naban and Tax, SST & Customs Partner, S. Saravana Kumar together with Associate, Dharshini Sharma successfully represented the taxpayer before the Federal Court.
Background
On 3.7.2019, the Director General of Inland Revenue (DGIR) disallowed the taxpayer’s deduction of the certain accrued expenses which the taxpayer had claimed for deduction under Section 33(1) of the Income Tax Act 1967 (ITA). The DGIR alleged that the expenses were provisional in nature and thus, not deductible under Section 33(1). As a result, the DGIR adjusted the amount of losses that the taxpayer was entitled to surrender for group relief under Section 44A(1) of the ITA and imposed an additional tax liability amounting to RM 11,993,408.46 under Section 44A(9)(a) of the ITA for the years of assessment (YAs) 2015 and 2016. The DGIR also sought to reduce the amount of losses and capital allowances that the taxpayer could carry forward in the YA 2017 respectively by RM 32,948,424.00 and RM 32,408,759.00.
Aggrieved by the DGIR’s decision, the taxpayer filed an application for judicial review on 29.1.2019 but the application was dismissed by the High Court. The taxpayer then appealed to the Court of Appeal which ruled in favour of the taxpayer. The Court of Appeal also granted a stay order to the taxpayer to maintain the status quo of the proceedings pending the substantive hearing.
Dissatisfied with the Court of Appeal’s findings, the DGIR appealed to the Federal Court, where leave was granted for the following questions:
1.Whether the issue of domestic remedy may only be canvassed and decided at the substantive stage?
2.Whether a stay order granted by the Court of Appeal after allowing the leave application contravenes the tax recovery scheme pursuant to Sections 103, 103B and 106 of the ITA?
Whether The Issue Of Domestic Remedy May Only Be Canvassed And Decided At The Substantive Stage?
The threshold for leave in a judicial review application is extremely low with the sole question of whether the application is frivolous and/or vexatious. This legal position has been widely adopted by the superior courts and remains operative to date, as affirmed by the Federal Court in the instant matter. Hence, the key question is whether the issue of domestic remedy may only be canvassed and decided at the substantive stage.
The Federal Court in the present matter agreed with the Court of Appeal’s decision that the issue of domestic remedy should only be canvassed at the substantive stage as the full merits of the case would certainly be revealed prematurely at the leave hearing if this issue is to be discussed in advance.
The DGIR in summary contended that there was no hard and fast rule as to which stage the issue of domestic remedy can be canvassed at. The crux of the issue in this case boils down to the issue of deductibility under Section 33 and the penalty imposed under Section 44A(9). The DGIR argued that the domestic remedy argument should be heard at the leave stage.
The taxpayer responded by highlight that at the leave stage the court was only required to inquire whether the relevant public authority had exceeded its jurisdiction in arriving at its decision and the claim made by the taxpayer was not frivolous and vexatious. The issue on the availability of domestic remedy may be canvassed at the substantive stage of the hearing. The taxpayer submitted that the question of when courts should deal with the availability of alternative remedy depends on the circumstances of the case. In view of the present facts and as a general rule, the court should canvas the question of availability of domestic remedy only at the substantive stage.
The taxpayer also submitted that a question of law cannot be decided in a vacuum and all facts of the case will first have to be laid down before the court. Various factors must be considered before determining whether a domestic remedy should be considered for a specific matter. This cannot be properly dealt with on an ex-parte basis where the court is only in possession of the taxpayer’s affidavit in support for leave, without the benefit of the Respondent’s reply affidavit. The taxpayer further highlighted that at the leave stage the application was generally ex-parte. The Attorney General’s representative only has a limited role to play.
The taxpayer made reference to the Federal Court’s decision in Majlis Perbandaran Pulau Pinang v Syarikat Berjerjasama-sama Serbaguna Sungai Gelugor Dengan Tanggungan [1993] 3 CLJ 65 where the Federal Court held that the alternative remedies argument should be considered at the inter partes stage, even if leave had been granted and not challenged. This ruling has also been applied by the courts in various landmark cases such as QSR Brands Bhd v Suruhanjaya Sekuriti & Anor [2006] 2 CLJ 532.
Whether A Stay Order Granted By The Court Of Appeal After Allowing The Leave Application Contravenes The Tax Recovery Scheme Pursuant To Section 103, Section 103B And Section 106 Of The ITA?
The DGIR’s contention in summary was that the stay order in this present case prevents the Government of Malaysia and the DGIR from exercising its statutory duty under Sections 103, 103B and 106 of the ITA. It is a well-established principle applicable to all taxpayers that upon being served with the notice of assessment, the tax becomes due and payable to the person assessed. The DGIR added that the recovery scheme, namely Sections 103, 103B and 106 under the ITA was not against the Federal Constitution’s basic structure as Parliament would not have enacted Section 103B in vain without any real significance.
The taxpayer highlighted that the superior courts have the inherent jurisdiction to grant a stay order to ensure the integrity of the appeal notwithstanding Sections 103, 103B and 106 of the ITA. This legal proposition was supported by the Supreme Court’s decision in Kerajaan Malaysia v Jasanusa Sdn Bhd [1995] 2 MLJ 105. The relevant excerpt is reproduced as follows:
“With respect, in our view, neither s 103(1) nor s 106(3) bars a court, in appropriate circumstances, from exercising its inherent powers of granting a stay, even in a tax case.”
The taxpayer also submitted that there was nothing in the ITA that restricted the courts from granting a stay. In fact, Sections 103, 103B and 106 make no reference on the court’s powers to grant a stay order in Section 103B. In absence of any express legislative words, the contention that Section 103B restricts the courts’ inherent jurisdiction cannot hold water. If the Parliament had intended to exculpate the court’s ability to grant a stay in tax cases, it would have been stated in clear and unequivocal terms. Section 103B was a repetition of Section 103. Both sections are identical and the insertion of the words “institution of any proceedings under any other written law” makes no difference to the current status quo. The tax recovery mechanism under Section 106 if interpreted too broadly will usurp the judicial powers of the courts in light of Article 121 of the Federal Constitution.
Furthermore, the possibility that the decision given by the Court of Appeal may be reversed on appeal justifies for our courts to grant a stay in order to preserve the status quo pending the appeal. Therefore, Section 44 of the Courts of Judicature Act 1964 grants the Court of Appeal the statutory power to grant any interim order to prevent prejudice to the claims of parties including a stay order. The same power is also afforded to the Federal Court under Section 97(2) of the Courts of Judicature Act 1964.Therefore, a stay order granted by the Court of Appeal after allowing the leave application does not contravene the tax recovery scheme pursuant to Sections 103, 103B and 106 of the ITA.
Conclusion
The Federal Court unanimously dismissed the DGIR’s appeal with a cost of RM 50,000. It is now settled that the availability of domestic remedy should no longer be canvassed, The house constitutes a valid ground to dismiss the leave application. On the other hand, Sections 103, 103B and 106 of the ITA do not bar the courts from granting a stay order. The courts have wide discretionary power coming to the granting of a stay order and this power is not curtailed under the ITA.
24 May 2023