The High Court in Transocean Drilling Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri (2022) MSTC 30-496 held that the penalty under Section 112(3) of the Income Tax Act 1967 (ITA) can only be imposed for late submission of tax return under Section 77(1) or Section 77A(1) or where there is a failure to give notice as required under Section 77(3) of the ITA.
Background Facts
The taxpayer was a Malaysian-incorporated company involved in providing contract drilling services within the petroleum industry. The taxpayer, represented by its tax agent, PricewaterhouseCoopers Taxation Services Sdn Bhd (PwC), initially filed its tax returns based on management accounts on 15 August 2012 for the year of assessment (YA) 2011 and on 15 August 2013 for the YA 2012. The audited accounts for these years, however, were not finalised until after the tax returns had been submitted. Specifically, the audited accounts for the YA 2011 were signed on 13 September 2012, and those for the YA 2012 were signed on 28 June 2013. Due to this timing, the tax agent was unable to file the original tax returns based on audited accounts.
In August 2014, the taxpayer revised its tax returns for the YAs 2011 and 2012 to reflect the figures stated in the audited accounts. This revision revealed a shortfall in tax liability for the YA 2011 and an overpayment for the YA 2012, resulting in a net overpayment of RM 324,942.00. Despite the overall net overpayment, the Director General of Inland Revenue (the Revenue) issued notices of additional assessment in August 2015, rejecting the original returns filed based on the taxpayer’s management accounts and imposed penalties under Section 112(3) of the ITA. The additional assessments amounted to RM 2,489,133.21.
Aggrieved by the Revenue’s decision, the taxpayer appealed to the Special Commissioner of Income Tax (SCIT). The SCIT dismissed the taxpayer’s appeal, reasoning that, despite the absence of an explicit statutory requirement at the time to file returns based on audited accounts for the YAs 2011 and 2012, the guidance notes and reminders in the company tax return forms (Form C) effectively created an obligation for the taxpayer to do so. Consequently, the failure to comply with this implied obligation constituted a breach of the ITA, thereby justifying the penalties imposed by the Revenue under Section 112(3) of the ITA.
Dissatisfied with the SCIT’s decision, the taxpayer appealed to the High Court, which ultimately ruled in favour of the taxpayer.
The Taxpayer’s Argument Before The High Court
The taxpayer submitted that:
(a) At the time of filing the tax returns for the YAs 2011 and 2012, there was no statutory requirement under the ITA to file tax returns based on audited accounts. This requirement was only introduced later with the insertion of Section 77A(4) into the ITA, which became applicable starting from the YA 2014.
(b) The penalties imposed under Section 112(3) were invalid because this provision applied only to defaults related to the late submission of tax returns under Sections 77(1) and 77A(1), or failure to give notice in accordance with Section 77(3). As the taxpayer had fully complied with Section 77A(1) of the ITA, the imposition of penalties under Section 112(3) was not justified.
(c) The guidance notes and reminders in Form C, such as the "Nota Iringan" and "Peringatan", were merely advisory and did not have the force of law. Hence, these notes could not create a legal obligation to file tax returns based on audited accounts, and therefore, failure to follow them should not result in penalties.
(d) The penalties imposed were excessive and disproportionate. The taxpayer pointed out that there was a net overpayment of taxes for the YAs 2011 and 2012 when considered together, and therefore, the penalties were not warranted, especially in light of the taxpayer's voluntary disclosure.
(e) The revised tax returns for the YAs 2011 and 2012 were filed in good faith and based on audited accounts as soon as they were available.
The Revenue’s Argument
The Revenue argued that:
(a) Even though the statutory requirement to file tax returns based on audited accounts was formally introduced in the YA 2014 with the insertion of Section 77A(4), the practice of submitting returns based on audited accounts was implied and expected before this amendment. The Revenue maintained that the guidance notes and reminders in Form C effectively created an obligation for taxpayers to file returns based on audited accounts.
(b) The taxpayer’s failure to submit Form C based on audited accounts for the YAs 2011 and 2012 constituted a breach of the expected filing requirements, and therefore, the late submission penalties under Section 112(3) were appropriate.
(c) The guidance notes and reminders in Form C were part of the legal framework within which the taxpayer was expected to operate. They were not merely advisory but were indicative of the Revenue's interpretation of the ITA's requirements.
(d) The original tax returns submitted by the taxpayer, which were based on management accounts, were invalid. Therefore, the revised returns submitted later in 2014 should be considered as the actual returns. Since these revised returns were submitted late, the Revenue justified the imposition of penalties for late submission under Section 112(3).
(e) There was no legal basis to impose lower penalties simply because the taxpayer had overpaid taxes in one year.
The High Court’s Ruling
On appeal, the High Court reversed the decision made by the SCIT and ruled in favour of the taxpayer based on the reasonings below:
(a) The SCIT erred in holding that the enactment of Section 77A(4) was merely intended to clarify a pre-existing legal requirement to file tax returns based on audited accounts. In fact, Section 77A(4), which mandates that returns furnished by a company under Section 77A must be based on audited accounts, was introduced by Section 21(b) of the Finance Act 2014, with effect only from the YA 2014 and subsequent the YAs.
(b) In line with the decision in All Malayan Estates Staff Union v Rajasegaran & Ors [2006] 5 AMR 585, it is evident that Parliament did not act in vain when enacting Section 77A(4). Therefore, Section 77A did not require tax returns to be filed based on audited accounts prior to the insertion of Section 77A(4). Therefore, the taxpayer's submission of returns based on management accounts for the YAs 2011 and 2012 did not constitute a breach of the ITA.
(c) Any requirement for the use of audited accounts in the preparation of tax returns, bearing criminal consequences, should be specified in the legislation, not under the accompanying notes and reminder in Form C. Therefore, the guidance notes and reminders in Form C were merely best practices or a guide from the Revenue which had not been made mandatory by the ITA at the material time and was not legally binding, as seen in Ketua Pengarah Hasil Dalam Negeri v Success Electronics & Transformers Manufacturer Sdn Bhd (2012) MSTC 30-039.
(d) The SCIT also erred in extending the meaning of "particulars" required under Section 77A(3)(b) to include conditions set out in the Form C guidance notes as it only refers to the “details” required to be declared by a taxpayer when filing a tax return and was a separate matter from the requirement that the tax return should be filed and computed based on audited accounts.
(e) The SCIT had erred in holding that Section 112(3) applied to any non-compliance with Section 77A(3)(b) of the ITA. Non-compliance with Section 77A(3)(b) of the ITA was only penalised with effect from December 2015 under Section 120(1)(h) of the ITA.
(f) A penal statute should be strictly construed in favour of the subject. Therefore, Section 112(3), which imposed penalties, should be strictly interpreted, as per Liew Sai Wah v PP [1968] 2 MLJ 1.
(g) Based on the scheme of the ITA and language of Sections 112(3), 113, 114 and 120(1)(h), it was clear that the DGIR could only impose a penalty under Section 112(3) for breach of Section 77A(1) and not Section 77A(3) or Sections 77B(1) and (2). Since the evidence produced before the court showed that the taxpayer had fully complied with Section 77A(1) of the ITA, the penalties should not be imposed.
(h) The SCIT’s decision was not premised upon finding a default in complying with Section 77A(1) but was based entirely upon finding a default regarding Sections 77A(3)(b) and 77B(1) and (2). Hence, the SCIT had considered irrelevant factors and this did not warrant the imposition of penalties under Section 112(3), which only penalised a default under Section 77A(1).
Conclusion
This decision provides clarification on the applicability of Section 112(3) by confirming that penalties under this provision are applicable only when a taxpayer breaches Sections 77(1), 77A(1) or 77(3). The requirements stated in Form C are not legally binding and serve as guidelines rather than mandatory obligations. The High Court also affirmed that Section 77A(4), which requires tax returns to be filed based on audited accounts, does not have retrospective effect and is only applicable from the YA 2014 onwards.
6 September 2024