Recently, the High Court ruled in favour of the taxpayer in dismissing the tax authority’s application for a summary judgment under Order 14 of the Rules of Court (ROC) 2012. The High Court held that Order 14 of the ROC 2012 is not the appropriate avenue for a tax recovery suit.
The taxpayer was successfully represented by the firm’s Tax, SST & Customs Partner, S. Saravana Kumar and associate, Nur Hanina Mohd Azham.
This alert summarises the arguments advanced by both parties in this matter.
Brief Facts
The taxpayer is a company incorporated in Malaysia and its principal activities are property development and property investment. The taxpayer had entered into agreements with the Johor State Government, whereby the taxpayer must sell a certain number of units of their development to Bumiputera purchasers. However, in the event the taxpayer is unable to do so, the taxpayer may apply to the Johor State Government for a release. The release is subject to a cash contribution from the taxpayer to the Johor State Government (Bumiputera Release Fee).
In the present matter, the taxpayer made the Bumiputera Release Fee to the Johor State Government to obtain the release and deducted the cash contribution as a tax deductible expense. Consequent to a tax audit, the Director General of Inland Revenue (DGIR) disagreed with the taxpayer’s tax treatment and claimed that the cash contributions were capital in nature. The DGIR then proceeded to raise tax assessments dated 12.6.2020 against the taxpayer.
On 1.12.2021, the DGIR commenced a civil suit against the taxpayer to recover the taxes that were raised by the DGIR against the taxpayer. Subsequently, the DGIR filed an application to enter a Summary Judgment against the taxpayer pursuant to Order 14 of the ROC 2012.
The main issue considered by the High Court was whether there are triable issues arising from the present matter which warrant further determination by way of trial as opposed to a summary determination.
The Taxpayer’s Submission
In Doshi v Yeoh Tiong Lay [1975] 1 MLJ 85, the Federal Court held that Order 14 of the ROC 2012 should only be invoked in a clear-cut case where the Defendant had failed to establish bona fide defence or at least triable issues.
The taxpayer submitted that there were three triable issues in the present matter based on the following reasons:
(a) Firstly, the applicability of Order 14 to enforce tax recovery action in light of the recent Federal Court’s decision in Mohd Najib bin Hj Abd Razak v Government of Malaysia & Another Appeal [2023] 10 CLJ 329.
The Federal Court held that Order 14 should not be applied in a tax recovery suit based on the following reasons:
If a tax recovery ‘debt’ under Section 106 of the Income Tax Act (ITA) 1967 was subjected to the procedure under Order 14, then the entire purpose and object of the ITA, was not met. This was because a judgment given under Order 14 is held to be final in nature whereas the ITA provides for a deferral of the full dispute to a later date. The nature of the relief sought for purposes of recovery under Sections 103 and 106 of the ITA was interim in character;
The use of Order 14 in tax recovery cases was not ideal given the purpose and object of the ITA;
Section 106 of the ITA provides sufficient basis for recovery to be initiated in the civil courts by way of originating summons and thus, should be given its full effect for the purpose of tax recovery;
The suitability of Order 14 in the older tax recovery cases was not considered at all;
A judgment given under Section 106 will not abrogate the taxpayer’s right to challenge the tax assessment unlike a judgment obtained under Order 14; and
Order 14 should not override or supersede the process outlined in Sections 103 and 106.
(b) Secondly, the decision of the recent Court of Appeal (COA) in Ketua Pengarah Hasil Dalam Negeri v Mitraland Kota Damansara Sdn Bhd [2023] 4 MLJ 846 where it was ruled that Bumiputera Release Payment is a deductible expense. This COA decision was recently affirmed by the COA in Ketua Pengarah Hasil Dalam Negeri v Sovereign Teamwork (M) Sdn Bhd (W-01(A)-568-10/2020).
The relevant excerpt from Mitraland is reproduced below:
“[34] We are of the view that the payment or refund of the sum of RM4,468,090 to the LPHS, which is equivalent to the Bumiputera discount, is a revenue expense that is deductible under s 33(1) of the ITA. As illustrated above, the net sales income to the developer when a bumiputera unit is sold to a bumiputera purchaser or to a non-Bumiputera purchaser after LPHS approval is the same. There is no additional gain to respondent, and contrary to the SCIT’s finding, the respondent in this case has not profited by selling any bumiputera unit to a non-Bumiputera purchaser.”
In the present matter, the question of law is whether the payment made to the Johor State Government for the release of the Bumiputera quota was a deductible expense under Section 33(1) of the ITA which is akin to the Court of Appeal’s ruling in Mitraland and Sovereign Teamwork .
(c) Thirdly, the taxpayer in the present matter has a stay order granted by another division of the High Court on 30.6.2022 which was binding on the DGIR as held in the Federal Court in Ann Joo Steel Bhd v Pengarah Tanah dan Galian Negeri Pulau Pinang & Anor and another appeal [2020] 1 MLJ 689.
In the present matter, the taxpayer had filed a Judicial Review Application before another division of the High Court in order to challenge the tax assessment raised against them. On 30.6.2022, the High Court granted leave for the taxpayer’s Judicial Review Application.
(d) A stay order upon the enforcement of the tax assessments issued by the DGIR was granted until the full and final determination of the taxpayer’s Judicial Review Application.
(e) This order is binding on the DGIR as a court order remains good and valid until it is set aside. This was held by the Federal Court in Ann Joo Steel Bhd v Pengarah Tanah dan Galian Negeri Pulau Pinang & Anor and another appeal [2020] 1 MLJ 689.
The DGIR’s Contention
The arguments advanced by the DGIR can be summarised below:
(a) The tax assessments raised by the DGIR were deemed due and payable upon being served upon the taxpayer;
(b) The High Court should not entertain any plea of excess or incorrect assessment under Section 106(1) of the ITA;
(c) An appeal before the Special Commissioners of Income Tax (SCIT) does not prevent the DGIR from recovering any outstanding taxes from the taxpayer;
(d) A certificate signed by the DGIR under Section 142(1) of the ITA shall be conclusive evidence of the amount of taxes due and payable by the taxpayer;
(f) There were no triable issues to warrant the disposal of the present civil proceedings by way of full trial;
(g) Mode of recovery of tax by way of originating summons was merely an alternative route suggested by the Federal Court; and
(h) The rule that SCIT is the judge of facts and the only corum to hear and decide on tax matters remains regardless the modes of commencement.
Conclusion
Upon hearing the submissions by both parties, the High Court agreed with the taxpayer’s contention that there were triable issues in the present matter that necessitate a full trial rather than a summary judgment. Thus, the DGIR’s application for summary judgment under Order 14 was dismissed.
The High Court's ruling signifies a precedent that Order 14 is not the appropriate mechanism for tax recovery suits. This follows the Federal Court’s judgment in Mohd Najib bin Hj Abd Razak:
“[166] This then warrants the question whether O. 14 is indeed the ideal mode to adopt in the course of recovery proceedings under s. 106 of the ITA. It would seem from a perusal and construction of the Act in toto, that the procedure set out in s. 106 of the ITA itself provides sufficient basis for recovery to be initiated in the civil courts by way of originating summons...
[190] As such, the O. 14 process should not override or supersede the statute-created process outlined in ss. 103 and 106 of the ITA, which is for purposes of recovery and enforcement only.”
The DGIR did not appeal against this ruling by the High Court.
24 June 2024