In Wiramuda (M) Sdn Bhd v Director-General of Inland Revenue [2022] 5 MLJ 414, the Federal Court held that Section 4C of the Income Tax Act 1967 (ITA) was unconstitutional as it contravened Article 13(2) of the Federal Constitution. It was held that Section 4B deprived the taxpayer of adequate compensation arising from the compulsory acquisition of the land. Our Tax, SST & Customs partners, Datuk D.P. Naban and S. Saravana Kumar successfully represented the taxpayer in this matter.
The Federal Court’s ruling in Wiramuda raises the question as to what happens to the taxes paid under Section 4C in the past years by taxpayers? Is there any legal redress to taxpayers in such situation?
Recently, our partner, S. Saravana Kumar together with associate Dharshini Sharma, successfully represented the taxpayer in UBSB v Director-General of Inland Revenue where the taxpayer obtained leave from the High Court to challenge the decision of the Revenue to process their tax refund application.
Background Facts
UBSB, the applicant in this matter was a property development company whose land was compulsory acquired by the Government of Malaysia in 2018. The land at all times was held as the taxpayer’s stock in trade. The taxpayer received compensation for the compulsory land acquisition and the compensation amount was subjected to income tax under Section 4C by the taxpayer.
Subsequent to the Federal Court’s ruling in Wiramuda, the taxpayer wrote to the Revenue requesting for a refund on the tax paid pursuant to Section 4C. Upon not receiving a reply from the Revenue, the taxpayer commenced a judicial review application against the Revenue.
Taxpayer’s Contention
The taxpayer’s arguments are as follows:
(a) The Revenue has no legal and factual basis to disallow the taxpayer’s application for return of illegally paid tax under Section 4C as it contravenes the taxpayer’s fundamental right to receiving adequate compensation for the compulsory acquisition of land guaranteed by Article 13(2) of the Federal Constitution (FC).
(b) Section 4C has been held to unconstitutional by the Federal Court and consequently, has been struck down by the apex court of Malaysia.
(c) Section 4C was inapplicable as it contravened the taxpayer’s fundamental right to receive adequate compensation for the compulsory acquisition of land guaranteed to the taxpayer by Article 13(2);
(d) Parliament cannot legislate to take away the fundamental right of an individual unless it is on a subject on which the FC has made an exception by giving Parliament the power to do so.
(e) The Revenue was bound to give effect to the clear words of the Federal Court and as an arm of the executive, the Revenue cannot act in excess of its jurisdiction.
(f) The Revenue cannot retain taxes that were collected illegally pursuant to Section 4C. In disallowing the taxpayer’s application for a refund, the Revenue has been unjustly enriched from the illegally collected taxes.
The Revenue’s Contention
The Revenue’s arguments in objecting to the taxpayer’s application are summarised as follows:
(a) There was no action, decision or omission by the Revenue that was susceptible for a judicial review application.
(b) The non-response to the taxpayer’s letter does not amount to an action, decision or omission that was amenable to judicial review.
(c) There was alternative remedy readily available.
The High Court’s Decision
The High Court held that Order 53 Rule 2(4) of the Rules of Court 2012 (ROC) expressly allows persons who are “adversely affected” by the decision made by a public authority to initiate judicial review applications. The court also held that it is trite that failure or refusal by a public authority to make a decision, on its own is amendable to judicial review. Order 53 allows for a broader scope of reviewable decisions as compared to the previous provisions under the Rules of the High Court 1980. A decision deemed made by the Revenue was sufficient to initiate an application for judicial review.
The High Court added that the Revenue’s failure to follow the Federal Court's decision in Wiramuda prima facie renders its decision flawed. Moreover, the court highlighted that the Revenue may not the right to retain the taxes paid by the taxpayer for gains from the compulsory acquisition of the land. Additionally, the Revenue has also unjustly enriched from both the collection and retaining of such taxes.
The learned High Court judge in allowing leave to the taxpayer held that the application filed by the taxpayer raises important questions of law as follows:
(i) Whether the Revenue can refuse to recognise and give effect to the decision of the Federal Court in Wiramuda which held that Section 4C is unconstitutional as it contravenes Article 13(2) of the FC?
(ii) Whether the Revenue can refuse to refund the taxpayer the amount of taxes arising from and paid on the compensation received for the compulsory acquisition of the land notwithstanding the decision in Wiramuda?
Case Analysis
This case presents significant issues concerning the rule of law, constitutional guarantees and the role of public authorities in respecting judicial pronouncements. The Federal Court's ruling in Wiramuda declared Section 4C unconstitutional, reinforcing the notion that laws cannot undermine fundamental rights enshrined in the Constitution. This decision is crucial as it establishes the boundaries of legislative power, emphasising that Parliament cannot legislate away fundamental rights unless expressly allowed by the Constitution.
The court's ruling that the Revenue was bound by the Federal Court’s decision in Wiramuda reinforces the doctrine of the separation of powers. The Revenue, as an arm of the executive, cannot ignore or refuse to apply judicial decisions. This principle is essential for upholding the of the judiciary and ensuring that executive bodies do not act beyond their authority.
The High Court's emphasis on the Revenue’s unjust enrichment by retaining taxes collected under an unconstitutional provision is significant. This aligns with the principle that the government cannot benefit from the application of invalid laws, particularly when such application infringes on constitutional rights.
The decision is also important for upholding the principle of restitution, whereby illegally collected taxes should be returned to the taxpayer. This ensures fairness and equity in the taxation system, providing a mechanism for taxpayers to recover amounts wrongfully taken by the state. The court reaffirmed that public authorities must follow judicial decisions, particularly those from the Federal Court. This decision reinforces judicial supremacy and ensures that lower courts and public bodies are aligned with higher court rulings.
The case highlights the importance of protecting constitutional rights from overreach by legislation. The striking down of Section 4C sets a precedent that any legislation infringing on constitutional rights can be declared void. This decision helps safeguard citizens’ rights against unconstitutional legislation.
Conclusion
The High Court's decision in this case is pivotal as it reaffirms key principles of constitutional law, the rule of law, and administrative accountability. The court’s ruling not only protects the taxpayer's right to compensation under Article 13(2) of the Federal Constitution but also ensures that public authorities, like the DGIR, are held accountable for their actions (or inactions) in light of constitutional and judicial mandates.
This decision thus contributes to a stronger legal framework where constitutional rights are protected, public bodies are kept in check, and unjust enrichment by the government is curtailed in cases of tax disputes.
26 August 2024