Horizon Hills Development Sdn Bhd v Ketua Pengarah Lembaga Hasil Dalam Negeri (WA-25-191-07/2020)

In this case, the Court of Appeal had dismissed the appeal by the Director General of Inland Revenue (“DGIR’) against the granting of leave. The DGIR’s position that the matter should proceed by way of an appeal before the Special Commissioners of Income Tax instead of judicial review was rejected. In other words, the applicant has satisfied the exception to the alternative remedy principle. The decision meant that this Court must proceed to the substantive stage of the application and determine the merit of the application. Therefore, the industry and time put in the submissions to pursue the alternative remedy principle was an exercise of futility.

With regard to the application for judicial review, the applicant, Horizon Hills Development Sdn Bhd, had primarily sought an order of certiorari to quash the additional notices of assessment for the years of assessment (“YAs”) 2015, 2016, 2 2017, and 2018, all dated 24.6.2020 issued by the DGIR.

The order was sought on the basis that the DGIR had committed an error of law in disallowing the applicant's claim for deduction of the contribution amount (“the contribution”) paid pursuant to a policy of the State Government of Johore to be released from the condition that certain percentage of housing units in the applicant's housing development project was to be sold only to Bumiputera purchasers. The claim for deduction was pursuant to section 33(1) of the Income Tax Act 1967.

On 18.3.2024, | held that the DGIR had wrongly disallowed the claim for the deduction and granted the order of certiorari sought. This judgment contains the reasons for my decision.

The applicant is a property developer in the State of Johor. It entered into agreements with the State of Johor whereby, the applicant must sell a certain percentage of the housing units in the applicant’s housing development project to 3 Bumiputera purchasers. The State Government had approved the development project subject to, among others, the applicant agreeing to sell units in the housing project to Bumiputera purchasers at a discount of 15% (“the condition’).

The sale of the Bumiputera lots to non-Bumiputera purchasers can only be made if the applicant applies and obtains permission to be released from the condition. The release can be obtained subject to the applicant making, amongst others, a contribution to Tabung Perumahan Bumiputera Negeri Johor in the amount of 7.5% of the purchase price to non-Bumiputera or any other amount stipulated by the State Government. The applicant had made applications for such release in the YAs 2015, 2016, 2017, and 2018.

The State Government had approved the applications from time to time and the applicant made the contribution payments to Tabung Perumahan Bumiputera Negeri Johor.

Subsequently, for income tax purposes, the applicant claimed the contribution payments as expenses under section 33(1) of the ITA to arrive at its adjusted income. 4

The DGIR conducted an audit on the applicant for the YAs 2015, 2016, 2017, and 2018 and arrived at a finding that the contribution made to Tabung Perumahan Bumiputera Negeri Johor is unallowable expenses. As a result, additional assessments via notices of additional assessments for the YAs 2015, 2016, 2017, and 2018 were issued against the applicant as follows: YA 2015 (RM2,676,947.25); YA 2016 (RM3,954,697.76); YA 2017 (RM441,831.20; and YA 2018 (RM1,506,867.96) (“the impugned assessments’).

The DGIR’s reason for the said finding was stated in a letter dated 12.6.2020. It was the DGIR’s opinion that the contribution was capital and not revenue expenses. The DGIR proceeded to issue the impugned assessments vide the notices of additional assessments which was met with the instant judicial review application. DECISION OF THE COURT

My reasons for holding that the contribution was revenue expenses and therefore came within the deduction 2 allowable under section 33(1) of the ITA was based on the recent decision of the Court of Appeal in Ketua Pengarah Hasil Dalam Negeri Malaysia v Mitraland Kota Damansara Sdn Bhd [2023] 6 CLJ 701. That case was on all fours with the instant judicial review proceedings. The issue for determination was exactly the same. Suffice it to say that the decision is binding on me. The following paragraphs of the case are instructive and contain the decision of the Court of Appeal:

... And it cannot be disputed that without the payments being made, the appellant would not have been able to sell the Bumiputera units to the non- Bumiputera purchasers and generate its income. By selling the Bumiputera lots to non-Bumiputera purchasers it directly generates the appellant's income as a property developer.

Why was there an option given to developers to seek the release of the Bumiputera units? The simple answer is that the units that the property developers build and complete are their stock-in-trade. Property developers receive income from the sale of these units. 6 If the units cannot be sold, there is no income. The option was provided by the Selangor State Government so that property developers can unlock and sell these units that could otherwise be not sold to the general public. The effect of the payment to LPHS was to achieve sales. The payment is exclusively related to business operations, in order to generate income. If not, there would be no income from these Bumiputera units. This would be a classic revenue expense, and is quite the opposite from being a capital expense as contended by the appellant, as the payment is directly related to the respondent's stock-in-trade. The payment to the LPHS recurs every time that a Bumiputera unit is sold to a non-Bumiputera purchaser and that is a clear indication that the expenditure is revenue, as opposed to capital in nature. These payments are incurred wholly and exclusively in the production of income. These payments do not bring about enrichment of or the improvement to an item of fixed capital for them to be construed as capital expenditure.

In Ampat Tin Dredging Ltd v Director General of 7 Inland Revenue [1982] 2 MLJ 46, the court held that the issue of whether an outgoing or expense is wholly and exclusively incurred in the production of gross income and therefore deductible in the calculation of adjusted income is a question of fact to be decided on the circumstance of each case. We agree with learned counsel for the respondent that in the present case, the 10% payments made to LPHS were made to secure sales thereby earning income. ...

It must be noted that the respondent had the right to sell these Bumiputera units all along, as they were the respondent's stock-in-trade. The payment to LPHS merely widens the group or class of people to whom these units can be sold. There is no asset or enduring benefit that has been acquired by virtue of the payment. Case authorities have recognised that a payment made to remove an obstacle to profitable trading is attributable to revenue. See: Director General of Inland Revenue v Kulim Rubber Plantations Ltd [1981] 1 MLJ 214. Conclusion

For the above reasons, the application for judicial review was allowed with costs. ~ Amarjeet Singh Serjit Singh Judge High Court Kuala Lumpur Dated: 23 September 2024 Counsel of the Applicant S. Saravana Kumar with Nur Hanina Binti Mohd Azham Messrs Rosli Dahlan Saravana Partnership Counsel of the Respondent Mohd Haris bin Hanapi (Senior Revenue Counsel), Mohammad Hafidz bin Ahmad (Revenue Counsel), Mohamad Asyraf bin Zakaria, (Revenue Counsel) dan Muhammad Danial Izzat Bin Zulbahari (Revenue Counsel). Revenue Attorney, Inland Revenue Board Cases referred to: 1) Ketua Pengarah Hasil Dalam Negeri Malaysia v Mitraland Kota Damansara Sdn Bhd [2023] 6 CLJ 701. 9