Courts (Malaysia) Sdn Bhd (Dahulunya Dikenali Sebagai Courts Mammoth Sdn Bhd) v Ketua Pengarah Hasil dalam Negeri (WA-14-9-01/2024)

The Appellant offers a credit payment scheme known as the FlexiCredit Plan (“the Scheme”) to its customers for Products purchased. Under the Scheme, its customers are required to pay the purchase price of the Products together with a service charge. The service charge is akin to interest.

By way of Form Q dated 19.12.2017, the Appellant was issued Notices of Additional Assessment dated 30.9.2017 for the Years of Assessment 2013, 2014 and 2016 and imposed additional tax payable amounting to RM 9,894,911.10. The Respondent treated the interest and late payment charges received on the Scheme as income under section 4(c) of the Income Tax Act 1967 (“ITA”).

The Appellant appealed against the assessment to the Special Commissioners for Income Tax (“SCIT”). The SCIT agreed with the treatment of the interest income under section 4(c) of the ITA. Hence, the present appeal against the decision of the SCIT. Salient facts

The Appellant is a locally incorporated company, and is a household name in furniture and fittings as well as electronic and electrical appliances.

As part of its business strategy, apart from cash purchases, it allows customers to purchase its Products on credit. In respect of the latter, the Appellant offers its customers the Scheme where its customers are allowed to pay by monthly instalments. The instalments will encompass the principal sum i.e the price of the Products and the service charge which is principally the interest charged for purchasing the product on instalment.

A substantial portion of the Appellant’s sales was conducted on a credit basis through the Scheme.

The customer who opts for the Scheme is required to execute a Chattel Agreement which stipulates the terms and conditions applicable. Issue in contention

Prior to YA 2013, the Respondent had accepted the Appellant’s treatment of interest received as business income under section 4(a). Under section 4 of the ITA, interest can also be considered income under section 4(c). The relevant provision is as follows: Classes of income on which tax is chargeable

Subject to this Act, the income upon which tax is chargeable under this Act is income in respect of—

gains or profits from a business, for whatever period of time carried on;

gains or profits from an employment;

dividends, interest or discounts; ….

The distinction becomes critical as income falling under section 4(a) allows for deductibility of expenses incurred in earning such income.

However, in 2013, section 4B was introduced and section 25(4) was amended by amendments to the ITA.

Section 4B provides as follows: Non-business income.

For the purpose of section 4, gains or profit from a business shall not include any interest that first becomes receivable by a person in the basis period for a year of assessment other than interest where subsection 24(5) applies.

Section 24(5) provides: Basis period to which gross income from a business is related

(1) Where in the relevant period a debt owing to the relevant person arises in respect of— ….

Subject to section 3, where in the relevant period any gross interest first becomes receivable by the relevant person, then, if the debenture, mortgage or other source to which the interest relates forms or has S/N Vn1MkQanaUSb3uEo7OpMqg formed in or before the relevant period part of the stock in trade of a business carried on by or on behalf of the relevant person, or if the interest is in respect of a loan granted in or before the relevant period in the course of carrying on the business of lending of money and the business is one which is licensed under any written law—

the interest shall be treated as gross income of the relevant person from the business for the relevant period if the business is carried on at any time in the relevant period; and

subsection (1) shall not apply to a debt owing to the relevant person in respect of any such interest.

Reading both sections together, the effect is that only interest income falling under the scope of section 24(5) qualifies as business income under section 4(a).

Both the Appellant and Respondent are on common ground on the effect of section 4B and section 25(4).

However, they differ on the application of section 25(4) to the factual matrix. The Appellant contends that the interest on the Scheme falls under the 1st limb of section 25(4). The Respondent contends otherwise. I should also add here that the 2nd limb is not relevant as the Appellant is not involved in the business of moneylending. On the non-application of the 2nd limb, there is no dispute.

On 4.3.2021, having considered the 1st limb, the SCIT found that it had no application to the interest received from the Scheme. The SCIT construed the phrase “debenture, mortgage or other sources” by applying the ejusdem generis principle and concluded that the ‘other sources’ must be of the same genus as debenture and mortgage. The relevant portions of the judgment are as follows: [72] Maka ciri debenture dan gadai janji di dalam subseksyen 24(5) ACP perlu dikaji bagi mengaplikasikan ciri yang serupa kepada ‘sumber lain’ di bawah subseksyen 24(5) tersebut. [77] Panel melihat kepada prinsip ejusdem generis dalam mendefinisikan perkataan sumber lain di bawah subseksyen 24(5) hendaklah ditafsirkan dari jenis atau kelas yang sama dengan ‘debentur’ dan ‘gadai janji’ sepertimana diputuskan di dalam kes Mahkamah Persekutuan Affin Bank Bhd v Jamaluddin Jaafar. [79] Maka merujuk kepada perkataan ‘debentur’ dan ‘gadai janji’ yang mempunyai ciri dan genus yang serupa iaitu sejenis instrumen hutang, oleh itu perkataan ‘sumber lain’ perlu dibaca dalam konteks atau genus yang sama iaitu instrument hutang. [80] Dalam mentafsirkan instrumen hutang atau pemberian pinjaman Panel bersetuju dengan hujahan Responden S/N Vn1MkQanaUSb3uEo7OpMqg bahawa pemakaian subseksyen 25(4) ACP hanya terhad kepada pendapatan faedah yang diperolehi daripada aktiviti pemberian pinjaman. Daripada fakta yang dikemukakan di dalam rayuan ini Perayu tidak pernah dan tidak terlibat dalam kegiatan atau transaksi pemberian pinjaman. Sebaliknya, pendapatan faedah dalam bentuk caj perkhidmatan yang dikenakan kepada pelanggan Perayu dan juga faedah pembayaran lewat tidak berasal daripada sebarang aktiviti pemberian pinjaman.

The SCIT found that the Scheme did not fall under ‘other sources’ as the Scheme was unlike debenture and mortgage which are debt instruments issued as security for loans advanced by a lender to a borrower.

In addition, the SCIT also found that the Scheme did not constitute the stock in trade of the Appellant, in order to fulfill the other requirement of the 1st limb of section 24(5). It held as follows: [82] Merujuk juga kepada keterangan SR-1 Perayu telah mengasingkan jualan barangan secara tunai (total Products cash price) dan caj perkhidmatan dari penjualan secara ansuran di dalam akaun berauditnya. SR-1 di dalam keterangannya lagi telah merujuk kepada akaun beraudit Perayu bagi Tahun Berakhir 31.03.2013… yang menunjukkan Akaun Berhutang Perayu diletakkan secara berasingan daripada stok dagangan Perayu. SR-1 selanjutnya mengatakan Perayu bukanlah suatu syarikat yang menjalankan perniagaan penjualan Akaun Penghutang bagi S/N Vn1MkQanaUSb3uEo7OpMqg mendapatkan keuntungan kerana Akaun Penghutang bukan merupakan stok dagangan Perayu. [83] Panel melihat pendapatan Perayu berkenaan faedah-faedah tersebut sebagai hutang yang terbit daripada pembiayaan kredit yang dijalankan oleh Perayu dan bukannya merupakan stok perdagangan Perayu. Stok perdagangan Perayu adalah barangan jualan seperti barangan elektrik dan perabot dan pembiayaan kredit hanyalah merupakan satu Skim pembayaran mudah yang ditawarkan oleh Perayu kepada pelanggan-pelanggannya.

In short, the SCIT was not convinced that the Scheme and the interest from the Scheme was part of the Appellant’s stock in trade. It was of the view that the Appellant’s stock in trade was the Products instead.

Consequent upon this finding that section 25(4) had no application to the interest income received from the Scheme, the SCIT was of the view that it cannot be considered business income under section 4(a). It was therefore correctly taxed under section 4(c). Issue for determination

In the light of the SCIT’s decision, the issue in this appeal is a narrow one. It is whether the interest derived from the Scheme should be taxed under section 4(a) or section 4(c) of the ITA.

However, the question is to be answered by considering a more specific question; whether the Scheme fulfills the requirements of the 1st limb of section 25(4). Analysis and findings

I consider the legal principles of appellate intervention are well-settled. An appellate court can interfere with a decision of a trial court where it is demonstrated that:

The trial court was plainly wrong in arriving at its decision;

(ii) There was no or insufficient judicial appreciation of the evidence;

(iii) No reasonable judge, similarly circumstanced, would have decided in the manner that he did;

(iv) There were wrong inferences of fact drawn; and

There was error in law or principle in arriving at a decision in the case. (See: Gan Yook Chin (P) Anor v Lee Ing Chin @ Lee Teck Seng & ors [2005] 2 MLJ 1; He-Con Sdn Bhd v Bulyah binti Ishak & Ors (as administrators for the estate of Nor Zainir bin Rahmat, the deceased) and another appeal [2020] 4 MLJ 662)

I am of the view the SCIT was right to apply the ejusdem generis principle in construing the phrase ‘debenture, mortgage or other sources’. However, having correctly stated the applicable principle, it failed to find the Scheme, to be of the same genus as debenture or mortgage for it to fall under ‘other sources’.

As debenture and mortgage are not defined in the ITA, other sources can be referred to for its meaning.

The Cambridge Advanced Learner’s Dictionary and Thesaurus defines debenture as a type of loan, often used by companies to raise money, that is paid back over a long period of time at a fixed rate of interest. Mortgage is defined as an agreement that allows one to borrow money from a bank or similar organization by offering something of value.

The Appellant’s witnesses testified before the SCIT. The first witness stated that the Scheme allows the customers to pay the purchase price of the Products over a specified period. The second witness confirmed that the interest income comprises charges imposed under the Scheme in consideration for allowing customers to purchase the Products by instalments.

To my mind, this arrangement offered under the Appellant’s Scheme aligns with the meaning given to debenture and mortgage.

The Appellant submits that the genus of debenture and mortgage is not confined to debt instruments issued as security for loans advanced by a lender or borrower. It extends to commercial S/N Vn1MkQanaUSb3uEo7OpMqg arrangements involving deferred payment, where interest accrues as consideration for the time value of money and forms part of the Appellant’s business income. Further, the Scheme allows customers to acquire Products on instalment terms in exchange for interest-bearing charges.

I find much merit in the submission advanced. To my mind, the Scheme share common characteristics with a debenture or mortgage as there is an obligation to repay money over a specified period and of which, interest accrues. The similarity shared cannot be denied.

In determining the application of and construing section 24(5), I find the SCIT to have adopted a narrow construction. According to the SCIT, in order to constitute business income, the interest must arise from the issuance of debenture or mortgage which are essentially loan activities. This construction ignores other material aspects of debenture and mortgage such as an existence of an obligation to repay money over a specified period with interest accruing over time. I find that the Scheme has common characteristics to a debenture and mortgage.

To further fortify its contention that the Scheme comes under the ambit of section 24(5), the Appellant also contends that the interest income arising from the Scheme forms part of its stock-in-trade. The SCIT however, rejected this contention. Instead the SCIT held that the interest received constitutes debts arising from the credit financing rather than trading stock. The interest was also S/N Vn1MkQanaUSb3uEo7OpMqg accounted for separately from stock, and the Appellant does not trade in debts.

To determine this issue, it is necessary to see the actual wordings employed in section 24(5). As I have found the Scheme to fall within the parameters of ‘other source’, it must also be established that this source ‘forms or has formed…part of the stock in trade of a business carried on by or on behalf of the relevant person.’

My reading of the provision is that it does not say that the Scheme must constitute the stock in trade. Rather, it provides that the Scheme must form part of the stock in trade. There is a distinction between the two.

It is obvious that the Scheme arises only if there is a purchase of the Appellant’s Products. The Scheme therefore forms an integral part of the Appellant’s Products as the Scheme would be utilized by a customer when there is a credit purchase. The Appellant’s witness stated that Scheme does not stand by itself, it is interrelated with the Products. The Appellant’s witness also confirmed that 70% of the Products are sold on credit basis through the Scheme. Therefore, there is validity in the Appellant’s contention that the Scheme is a substantial element to the Appellant’s stock in trade.

In the circumstances, I am of view that the other condition in the 1st limb of section 24(5) has been satisfied in that the Scheme formed part of the stock in trade.

Premised on the foregoing, the conclusion arrived at is that the SCIT erred when it found that the interest income did not satisfy section 24(5) when it decided that firstly, the Scheme was not in the same genus as debenture and mortgage and secondly, that the Scheme did not form part of the stock in trade of the Appellant’s business.

Consequently, the decision of the SCIT of 4.3.2021 is set aside. I make no order as to costs. Dated: 30th May 2026 -sgd-Alice Loke Yee Ching Judge High Court Kuala Lumpur S/N Vn1MkQanaUSb3uEo7OpMqg Counsel for Appellant: En. S. Saravana Kumar (En. Tan Jass Key and Darshini Sharma with him) Messrs. Rosli Dahlan Saravana Partnership Counsel for Respondent: Senior Revenue Counsel En. Ridzuan bin Othman (Revenue Counsel Ariffudin bin Shahrulzaini with him)