Law updates - Revenue law (Malaysian law unless otherwise stated)

*Abbreviations 
HC = high court 
COA = court of appeal 
FC = federal court
 
Steruda Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri [HC]  

A contract payment may, depending on the circumstances, be a bonus payment. However, it did not follow that every contractual payment that was not derived of a fixed lump sum was a bonus. The sum of RM3,000 per month did not commensurate with the consultant's position as a senior obstetrician and gynecologist. The sum of RM3,000 per month was part of a single package of the consultant's total remuneration. The part of the consultant's remuneration package providing for the payment of 25% of the appellant's profits was a method of calculating the rest of his salary, the payment of which was deferred until after the profits were ascertained. The payment of the sum representing 25% of the appellant's profits was not discretionary and not subject to review, nor did it apply to any of the appellant's other employees. 
 
Suasana Indah Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri [COA] 

The definition of partnership in s 2 of the Income Tax Act 1967 (the Act) is not applicable for determining at large whether an arrangement between parties is a partnership, but is intended only for the interpretation of that word where it is used in the Act. The appellant's contention that the sum of RM6,400,000 was capital withdrawn upon the dissolution of a partnership and therefore not chargeable to tax, does not provide occasion or justification for calling in aid the definition of the word "partnership" in the Act. The said definition cannot be used to determine whether the JVA constituted or created a partnership between the appellant and SPSSB. Article 11.7 of the JVA must therefore prevail and be given effect to. Consequently there was no dissolution of partnership as such and the sum of RM6,400,000 was therefore not capital withdrawn upon any such dissolution of partnership. In any event, there could not have been any withdrawal capital when there was never injection of such capital in this instance. In order to determine if the sum of RM6,400,000 was capital, the vital test to be satisfied as laid down in Van den Berghs, is, whether the JVA was one that was "related to the whole structure of the appellant's profit making apparatus". The said test is one which looks to the nature of the agreement in relation to the profit making apparatus of the company, and which agreement can be said to be related to the whole structure of the profit making apparatus of the company. It certainly does not look primarily to the consequences on the profit making apparatus as a result of the cancellation or termination of the agreement. The appellant was not incorporated for the purpose of implementing the JVA nor did the JVA regulate its activities. Based on what the appellant was required to do under the JVA, the JVA was merely an ordinary commercial contract for the provision of services, made in the course of carrying out of the appellant's business. There was no evidence that the JVA was related to the whole structure of the profit making apparatus of the appellant. In the absence of such evidence to that effect, the appellant therefore failed to prove that the RM6,400,000 was neither capital withdrawn from a partnership nor compensation for loss of all rights under the JVA. The JVA constituted or represented the interest of the appellant and SPSSB and the services rendered by the appellant were, whilst the joint venture lasted, a contribution to their common interest and had benefited SPSSB in that it increased the value of SPSSB's lands. Upon termination of the JVA, the said lands remained with SPSSB and the services rendered by the appellant, which had increased the value of the said lands, were as good as having been rendered to SPSSB. Whether or not the appellant was an independent contractor in the sense intended, and whether or not the JVA was in the circumstances, an agency agreement, the fact remains that pursuant to the JVA, the appellant had contracted with SPSSB to perform services, and did in fact perform such services. 
 
Ketua Pengarah Hasil Dalam Negeri v Malaysian Bar [HC] 

On the facts, there was no justification to reverse the determination of the Special Commissioners of Income Tax (SCIT) on this issue. In essence: (a) Section 142(1) and 142(2) of the LPA is to be read separately; (b) It was correct for the SCIT to have gone through the historical basis; (c) There was clearly a drafting error due to the oversight of the drafter of the legal profession bill and any ambiguity if at all, in the said bill, must be construed in favour of the taxpayer; (d) A purposive approach should be taken in the interpretation of the ITA and the LPA instead of a literal approach so as to ensure there is no surplusage and absurdity. In the context of income tax legislation, for an organization to be deemed a "trade association", the following conditions must be satisfied i.e.: (a) it must be formed by two or more persons for a common cause; (b) the members must have voluntarily gotten together to form the association; (c) the object of the association is to produce income, profits or gains. The organization cannot be recognized as an "association of persons" for tax purposes if any of the above conditions are not satisfied. In the instant case none of the above conditions befits on the respondent and as such the respondent cannot be deemed to be a trade association. The objects of the respondent as set out in s 42(1) of the LPA, clearly, is not to produce income, profit or gain, but rather, to uphold the cause of justice and to improve the standards of conduct of the legal profession, etc. Nowhere is it stated therein that the "safeguarding or promoting the business of its members", is its main object. Undoubtedly therefore s 53 of the ITA is not applicable to the respondent. Section 80(13) of the LPA clearly stipulates that the respondent is exempted from tax on the compensation fund and it is evident that the said provision is constituted under Article 96 of the Federal Constitution which provides that "No tax or rate shall be levied by or for the purposes of the Federation except by or under the authority of federal law". The LPA is obviously a specific legislation whilst the ITA is a general legislation and therefore where there is a conflict between the LPA and the ITA, it is the LPA which prevails. The respondent, being a statutory body, is entitled to claim deductions for capital allowances in accordance with s 78 of the LPA. 
 
Mount Pleasure Corporation Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri [COA] 

There was no evidence to support the appellant's contention that the property was bought for investment purposes. There was also no admissible oral evidence to establish that the property was acquired as an investment. From the facts proved, the said property was not the only property that the appellant dealt with at the material time, where it had dealings with 5 other properties. The special commissioners were therefore right to conclude that its frequent dealings raised a prima facie inference that it was carrying on the business of land dealing, either as a developer or as real estate merchant, which inference the appellant failed to rebut. The presumption against the appellant was further strengthened by the fact that its memorandum and articles of association did not authorise the purchase of land for investment purposes except if there were surplus funds, which it did not have. In fact, the evidence showed that the purchase of the said property was financed by family funds. The special commissioners further found that although the appellant claimed that the property was classified as stock-in-trade in 1978, it remained a fixed asset in its accounts until 1982, with no explanation offered for the discrepancy. The appellant failed to discharge the onus of proving that the assessments raised against it were erroneous.

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