The Federal Court in Ketua Pengarah Hasil Dalam Negeri v Kind Action (M) Sdn Bhd upheld the Court of Appeal’s decision that the availability of a domestic remedy in the form of the Special Commissioners of Income Tax (SCIT) does not preclude taxpayers from seeking judicial review.
Brief Facts
The taxpayer acquired three plots of land from its immediate parent company, which were later subdivided into smaller lots and disposed of between 2007 and 2017. The taxpayer subjected the gains from the disposals to real property gains tax (RPGT) by filing RPGT returns, which in turn resulted in RPGT assessments. Upon paying the RPGT due, the taxpayer received certificates of clearance from the Revenue.
However, in 2019, the Revenue suddenly took the position that the taxpayer’s gains from the said disposal of land are business income as per Section 4 of the Income Tax Act 1967 (ITA). The Revenue raised notices of additional assessment for income tax for the years of assessment (YAs) 2010, 2015, and 2018 (the Disputed Assessments) without first discharging the RPGT assessments and/or RPGT certificate of clearance.
Aggrieved by the Revenue’s decision, the taxpayer filed a judicial review application at the High Court, which was dismissed, resulting in an appeal to the Court of Appeal.
The High Court’s Decision
At the outset, the taxpayer argued that the Revenue was time-barred from raising the Disputed Assessments as they were raised after the five-year limitation period under Section 91 of the ITA. On the other hand, the Revenue contended that it was not time-barred as the taxpayer had been negligent for failing to report the profits gained from the disposals of the plots of land.
In this regard, the High Court agreed that the Revenue was not time-barred from raising the Disputed Assessments since the taxpayer had negligently failed to furnish proper information and to make proper declaration. The High Court also rejected the taxpayer’s argument that negligence had not been established as this amounts to a plea of limitation which should be heard before the SCIT and not the courts.
The High Court also found that the taxpayer’s argument on double taxation was untenable as, among others, the Revenue had accounted for the taxpayer’s RPGT payments and made necessary adjustments. The High Court also noted that the Revenue had accepted the taxpayer’s RPGT form without any form of audit, in which after a tax investigation was conducted, it took the view that the reporting by the taxpayer was incorrect as the transactions bore badges of trade. As a result, the High Court found no evidence of bad faith or improper conduct in the issuance of the Disputed Assessments, given that the Revenue had acted within its authority.
On the issue of bypassing the SCIT as an alternative remedy, the High Court held that resolving the issue at hand would require the court to embark on a fact-finding exercise. This would involve examining the taxpayer’s activities, the dynamics of its relationship with its related companies, its accounting process, activities on the plots of land, the determination of the badges of trade and the overall intention of the transactions. Given the nature of these inquiries, the SCIT was seen as the proper forum to hear the matter.
Domestic Remedy Issue
The Revenue contended that the taxpayer could not bypass the avenue to appeal to the SCIT as provided in the ITA as the present case requires further scrutiny to the facts of the case. The Revenue reiterated the High Court’s findings and argued that in determining whether the gains from the taxpayer’s disposal should be subjected to the ITA, the court is required to embark on a fact-finding exercise of the taxpayer’s activities, the relationship between the taxpayer and its immediate parent company as well as its group of company, the badges of trade, and the overall intention of the transactions.
In response, the taxpayer contended that the existence of a domestic remedy is not a bar to judicial review as held in a long line of authorities including the Supreme Court case of Government of Malaysia & Anor v Jagdis Singh [1987] 2 MLJ 185 and the Federal Court case of Majlis Perbandaran Pulau Pinang v Syarikat Bekerjasama-Sama Serbaguna Sungai Gelugor Dengan Tanggungan [1999] 3 MLJ 1.
Double Taxation Issue
The taxpayer’s main argument lies in the fact that the Revenue did not discharge the assessments issued under the RPGT Act 1976 (RPGTA) before issuing the notices of additional assessment under the ITA. The Court of Appeal in Teruntum Theatre Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri [2006] 4 MLJ 685 held that the taxpayer cannot be subjected to taxes under the ITA and RPGTA simultaneously. Should the Revenue wished to raise an assessment under the ITA, the Revenue must first revise and discharge the assessment under the RPGTA. Accordingly, the taxpayer argued that the Revenue’s conduct was illegal as it had contradicted the decision in Teruntum Theatre.
Meanwhile, the Revenue, also in reliance of Teruntum Theatre, contended that the Revenue is allowed under the law to make necessary adjustments in consideration of the taxpayer’s payment under the RPGTA. In other words, it is the Revenue’s position that they do not have to discharge the assessments under the RPGTA before issuing the assessments under the ITA.
The Court of Appeal’s Decision
Domestic Remedy Issue
The Court of Appeal held that the existence of a domestic remedy under the ITA does not bar the taxpayer’s application for judicial review. The court observed that it was nowhere stated in Order 53 of the Rules of Court 2012 that the existence of a domestic remedy would bar an application for judicial review. Instead, superior courts have consistently held that an application for judicial review is not barred by the availability of any alternative internal remedies in the form of an appeal process.
The Court of Appeal, in coming to this decision, relied on the following cases:
i. Jagdis Singh, where the Supreme Court held:
“A clear principle is reiterated here i.e. it is not a rigid rule that whenever there is an appeal procedure available to the applicant he should be denied judicial review…”
ii. Syarikat Bekerjasama-Sama Serbaguna Sungai Gelugor, where it was held:
“…Speaking generally, it is right to say that if an applicant in judicial review proceedings can demonstrate illegality, that is to say, unlawful treatment, it would be wrong to insist that he exhausts his statutory right of appeal where one is available…”
The Court of Appeal further emphasised that judicial review is always at the discretion of the courts and in cases where there is clear illegality on the part of the decision-making authority, the application for judicial review should be allowed in the interest of justice.
Double Taxation Issue
The Court of Appeal disagreed with the Revenue’s argument that the Teruntum Theatre case permitted issuing assessments under the ITA without first discharging the RPGT assessment. It emphasised that the Court of Appeal in Teruntum Theatre had clearly established that the same receipt cannot be taxed under both the ITA and RPGTA simultaneously – instead, it must be subject to one or the other.
The court further distinguished the facts of this case from Teruntum Theatre, noting that in Teruntum Theatre, there was evidence showing the Revenue had notified the taxpayer that the RPGT paid would be transferred to the taxpayer’s account upon determining the gains subject to income tax. In contrast, it was undisputed that the initial assessment under the RPGTA had not been discharged.
The Court of Appeal held that the correct procedure under the law is for the Revenue to first revise and discharge the assessment under the RPGTA, before proceeding to raise the taxes under the ITA. On this, the Court of Appeal agreed with the decision in MR Properties Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri [2005] 7 MLJ 260:
“…The respondent is not precluded from raising the assessment under ITA after reviewing the earlier assessment made under the RPGT.
…Thus, where an assessment for RPGT was made and subsequently it was discovered that there was no chargeable gain within the meaning of the RPGT and thus no real property gain tax is payable, the respondent can and must discharge the assessment…”
As per Section 20 of the RPGTA, the Court of Appeal held that the assessments and certificate of clearance issued by the Revenue were final and conclusive. Therefore, the Revenue was estopped from raising the assessment under the ITA. Since the Revenue failed to follow the correct course of action in the present case, its decision to raise the assessment under the ITA was clearly illegal and contradicted the principle against double taxation.
Conclusion
The decision in Kind Action has joined the growing line of case laws affirming that the existence of a domestic remedy does not preclude judicial review. It also reinforces the principle against double taxation whereby taxpayers should not be taxed twice under two separate statutes— in this instance, the ITA and the RPGTA. The Federal Court’s recent affirmation of the Court of Appeal decision further marks a significant victory for taxpayers against the unjust and arbitrary imposition of taxes by the Revenue.
26 February 2025