Kerajaan Malaysia v DREAMEDGE SDN. BHD. (BA-21NCvC-65-08/2022)

This was a straightforward case whereby the Plaintiff, the Government of Malaysia, sought to recover outstanding income tax owing to it by the Defendants amounting to RM3,292,579. The sum claimed, in the form of a debt, was for additional assessments payable under section 106(1) of the Income Tax Act 1967. 12/03/2024 14:35:43 BA-21NCvC-65-08/2022 Kand. 53

The First Defendant, Dreamedge Sdn Bhd, is a private limited company while the Second Defendant, Khairil Adri bin Adnan, was sued in his capacity as a director of Dreamedge Sdn Bhd.

This present matter involved two opposing interlocutory applications. The Plaintiff had sought to enter summary judgment against the Defendants pursuant to Order 14 of the Rules of Court 2012 while the Defendants prayed for the Plaintiff’s Writ and Amended Statement of Claim be struck out pursuant to Order 18 rule 19(1)(a), (b), and/or (d) and Order 92 rule 4 of the Rules of Court 2012

For reasons that were obvious, this Court first dealt with the striking out application in Enclosure 17 before proceeding to deal with the summary judgment application in Enclosure 15. This Court dismissed the Defendants’ application in Enclosure 17 and allowed the Plaintiff’s application in Enclosure 15. The following are the grounds of judgment in dismissing and in allowing Enclosures 17 and 15 respectively.

The main issue for determination in the striking out application was whether the Plaintiff’s claim against the First and Second Defendants was time barred pursuant to section 91(1) of the Income Tax Act 1967 and/or section 6(1)(d) of the Limitation Act 1953.

The Defendants argued that the answer to the question raised in the preceding paragraph is in the affirmative.

As the Plaintiff’s cause of action was premised solely on the Notices of Additional Assessment (Borang JAs) dated 31 May, 2021 for additional assessment of income tax for the Years of Assessment 2011, 2012, 2013, 2014 and 2015, the Defendants adopted the position that the claim by the Plaintiff was caught by section 6(1)(d) of the Limitation Act 1953.

The Defendants further drew this Court’s attention to the fact that the Plaintiff had also applied for Summary Judgment based on section 91(1) and (3) of the Income Tax Act 1967. The Defendants argued that the said Notices of Additional Assessment were raised and issued beyond the 5-year period as provided in section 91(1) of the Income Tax Act 1967 and there was nothing to suggest the provision in section 91(3) applied to the present case.

Section 91(3) shall apply where it appears to the Director General that (a) any form of fraud or wilful default has been committed by or on behalf of any person or (b) any person has been negligent, in connection with or in relation to tax. In any of these instances, the Director General may at any time make an assessment in respect of that person for any year of assessment for the purpose of making good any loss of tax attributable to the fraud, wilful default or negligence in question.

It was the Defendants’ contention that the Plaintiff had not pleaded “fraud or wilful default or negligence”.

Although the Defendants had made reference to the provisions in section 91(1) and (3) of the Income Tax Act 1967, their main defence was premised on section 6(1)(d) of the Limitation Act 1953 as opposed to section 91(1) and (3) of the Income Tax Act 1967.

This is understandable as the Plaintiff has rebutted the argument that section 91(3) of the Income Tax Act 1967 does not apply on the ground that the Lembaga Hasil Dalam Negeri is empowered to invoke the said provision without providing any particulars of such fraud, wilful default or negligence therein. According to the Plaintiff, the issue of fraud, wilful default or negligence is for determination by the Special Commissioner for Income Tax and the Federal Court in Government of Malaysia v Dato Haji Ghani Gilong [1995] 3 CLJ 161; [1995] 2 MLJ 119; [1995] 1 MLRA 360 has affirmed the principle that it is for the Special Commissioner of Income Tax to exercise his/her fact-finding function of whether there is fraud or wilful default. The Plaintiff also relied on a recent decision in Kerajaan Malaysia v Low Taek Jho [2022] 8 AMR 129; [2022] 10 CLJ 729]; [2023] 8 MLJ 650; [2022] MLRHU 2174.

Be that as it may, the Defendants underscored the point that “tax due and payable may be recovered by the Government by civil proceedings as a debt due to the Government”, as provided in section 106(1) of the Income Tax Act 1967 and although subsection (3) expressly states that “the court shall not entertain any plea that the amount of tax sought to be recovered is excessive, incorrectly assessed, under appeal or incorrectly increased under subsection 103(3), (5) or (7)”, the defence of limitation under the Limitation Act 1951 may be raised as a valid defence against actions for recovery of tax by the Lembaga Hasil Dalam Negeri.

The Defendants sought to clarify that the defence of limitation under the Limitation Act 1953 is distinct from the plea of limitation based on section 91(1) and (3) of the Income Tax Act 1967. While conceding that the latter cannot be entertained by this Court, they argued that they are 5 not precluded from raising the defence of limitation under section 6(1)(d) of the Limitation Act 1951 to resist the Plaintiff’s claim through the said Notices of Additional Assessment dated 31 May, 2021.

The authorities that the Defendants had cited and relied on in support of their contention that they were entitled to rely on the Limitation Act 1953 are Government of Malaysia v Ng Song Choon [1937-1978] AMTC 651; [1975] 1 MLJ 131; [1974] 1 MLRH 507 and Chong Woo Yit v Government of Malaysia [1979-1996] AMTC 1436; [ 1989] 1 CLJ (Rep) 9; [1989] 1 MLJ 473; [1989] 1 MLRA 189. The Defendants also relied on Government of Malaysia v Mahawira Sdn Bhd & Anor [2021] 4 AMR 883; [2021] 7 CLJ 34; [2021] 5 MLJ 283; [2021] 4 MLRA 194 where the Court of Appeal held that the limitation defence under the Limitation Act 1953 is available to a defendant contesting a claim based on section 106(1) of the Income Tax Act 1967.

The Second Defendant also raised point that the Notices of Assessment were not served on him. On this issue of non-service, the Second Defendant argued that failure to serve these Notices on him was fatal under section 96(1) read together with 103(2) of the Income Tax Act

The Second Defendant claimed that the Notice of Application for Summary Judgment which was emailed to him is not one of the modes for service under section 145(1) of the Income Tax Act 1967. Reliance was once again placed on Government of Malaysia v Mahawira Sdn Bhd & Anor. [17] Based on the above authorities and the defence of limitation, the Defendants argued that the action by the Plaintiff ought to be struck out. [18] In response to the limitation defence in section 6(1)(d) of the Limitation Act 1951, the Plaintiff referred this Court to the proviso in section 33 of the LA 1953, for the proposition that the Limitation Act 1951 “shall not apply to any proceedings by the Government for the recovery of any tax … ”. The authority cited by the Plaintiff was Chong Woo Yit v Government of Malaysia [19] On the issue raised by the Second Defendant pertaining to the issue of non-service of the Notices of Assessment, the Plaintiff sought to distinguish Government of Malaysia v Mahawira Sdn Bhd & Anor from the present case – in that the Second Respondent in that said case only became a director in 2004 when the tax imposed was for Years of Assessment 2001, 2002, 20023 and 2004 – unlike the present case where the Second Defendant has been a director of the First Defendant company since 2007 and the claim is for Years of Assessment 2011, 2012, 2013, 2014 and 2015. [20] More importantly, the Plaintiff averred to the fact the Notices of Assessment were served on the Second Defendant via email on 31 May, 2021 and personally on 25 May, 2022. The Applicable Law and Principle [21] It is apposite that the statutory provisions cited and relied by the parties be reproduced and examined. [22] In relation to the Limitation Act 1951, section 6(1)(d) reads as follows:

(1) Save as hereinafter provided the following actions shall not be brought after the expiration of six years from the date on which the cause of action accrued, that is to say-- …

actions to recover any sum recoverable by virtue of any written law other than a penalty or forfeiture or of a sum by way of penalty or forfeiture. while section 33 provides as follows:

(1) Save as in this Act otherwise provided and without prejudice to section 3 of this Act, this Act shall apply to proceedings by or against the Government in like manner as it applies to proceedings between subjects and for the purposes of this Act a proceeding by petition of right shall be deemed to be commenced on the date on which the petition is presented: Provided that this Act shall not apply to any proceedings by the Government for the recovery of any tax, duty or interest thereon or to any forfeiture proceeding under any written law in force in Malaysia relating to customs duties or excise or to any proceedings in respect of the forfeiture of a ship. [23] As for the pertinent provisions of the Income Tax 1967, section 91(1) and (3) expressly state that: Assessments and additional assessments in certain cases

(1) The Director General, where for any year of assessment it appears to him that no or no sufficient assessment has been made on a person chargeable to tax, may in that year or within five years after its expiration make an assessment or additional assessment, as the case may be, in respect of that person in the amount or additional amount of chargeable income and tax or in the additional amount of tax in which, according to the best of the Director General’s judgment, the assessment with respect to that person ought to have been made for that year. …

The Director General where it appears to him that— (a) any form of fraud or wilful default has been committed by or on behalf of any person; or (b) any person has been negligent, in connection with or in relation to tax, may at any time make an assessment in respect of that person for any year of assessment for the purpose of making good any loss of tax attributable to the fraud, wilful default or negligence in question. [24] Another provision of the Income Tax Act 1967 referred to is section

The said section provides as follows: Recovery by suit

(1) Tax due and payable may be recovered by the Government by civil proceedings as a debt due to the Government.

The Director General and all authorized officers shall be deemed to be public officers authorized by the Minister under subsection 25(1) of the Government Proceedings Act 1956 [Act 359], in respect of all proceedings under this section.

In any proceedings under this section the court shall not entertain any plea that the amount of tax sought to be recovered is excessive, incorrectly assessed, under appeal or incorrectly increased under subsection 103(3), (5) or (7). [25] The often-invoked Order 18 rule 19(1) of the Rules of Court 2012 provides as follows: Striking out pleadings and endorsements (O. 18, r. 19)

19.

The Court may at any stage of the proceedings order to be struck out or amended any pleading or the endorsement, of any writ in the action, or anything in any pleading or in the endorsement, on the ground that —

it discloses no reasonable cause of action or defence, as the case may be;

it is scandalous, frivolous or vexatious;

it may prejudice, embarrass or delay the fair trial of the action; or

it is otherwise an abuse of the process of the Court, and may order the action to be stayed or dismissed or judgment to be entered accordingly, as the case may be.

No evidence shall be admissible on an application under subparagraph (1)(a).

This rule shall, as far as applicable, apply to an originating summons as if it were a pleading. [26] The principles as discussed in the cases cited by the parties are manifest and need not be reproduced. The Decision of this Court [27] The Defendants had sought to invoked Order 18 rule 19(1)(a) of the Rules of Court 2012. Based on the Defendants’ contention, since limitation has set in, “the Plaintiffs' Statement of Claim dated 29.3.2023 does not disclose any reasonable cause of action”. [28] Such cannot be a correct proposition of the law. If limitation had indeed set in, it would simply mean that the cause of action had arisen or that there was a complete cause of action. If there were no reasonable nor complete cause of action, the issue of limitation would not arise. Time for purposes of limitation would only begin to run when a cause of action is complete. Hence, reliance on Order 18 rule 19(1)(a) of the Rules of Court 2012 was clearly misconceived. [29] Be that as it may, an action that is time-barred may still be struck out under Order 18 rule 19(1)(b) and/or (d). (See Ronex Properties Ltd v John Laing Construction Ltd [1982] EWCA Civ J0722-4.) [30] On the crucial question of whether limitation has set in, the starting point is that the Limitation Act 1953 is an Act of general application. In order words, if a period of limitation is prescribed in any specific statute or written law, the latter shall apply. This is expressly stated in section 3 of the Limitation Act 1953. Section 3 expressly provides as follows:

This Act shall not apply to any action or arbitration for which a period of limitation is prescribed by any other written law or to any action or arbitration to which the Government or the Government of any State is a party and for which if it were between subjects a period of limitation would have been prescribed by any other written law. [31] Thus, the issue for consideration was whether the Defendants may invoke section 6(1)(d) of LA 1953. The main authority in support of the Defendants’ contention is Government of Malaysia v Mahawira Sdn Bhd & Anor. [32] The argument advanced was that in this case, as in Mahawira, these were claims made under s 106(1) of the Income Tax Act and the question was whether these claims are subjected to limitation under s 6(1)(d) of the Limitation Act 1953. The Court of Appeal answered in the affirmative. At para [34], the Court of Appeal elaborated as follows: [34] The words ‘any written law’ above, should include the ITA (specifically s 106(1) of the ITA, as narrated). Therefore, the above provision reinforced our view that it does not lie in the mouth of the appellant that it could issue the notices in 2014 to claim for the tax in the years of assessment 2001, 2002, 2003 and 2004. Issuing the notices in 2014 to claim for tax due and payable in 2001 to 2004, simply would be too late as the claim is caught by the above statutory provision regarding limitation. The appellant could not escape the above provision as it had initiated the present proceeding in court. It is bound by the above provision and in fact, having perused the whole of the ITA, we could not find anything in the same that provides the appellant is exempted and should not be constrained by the above provision. [33] This Court is bound by a decision of the Court of Appeal. However, it is evident that the proviso to section 33 of the LA 1953 was not raised and considered by the Court of Appeal. [34] The legal effect of the proviso to section 33 of the LA 1953 has been examined and decided by the apex court in Chong Woo Yit v Government of Malaysia [1979-1996] AMTC 1436; [ 1989] 1 CLJ (Rep) 9; [1989] 1 MLJ 473; [1989] 1 MLRA 189in that limitation does not apply to an action by the Government for the recovery of tax. [35] The Defendants argued that Chong Woo Yit v Government of Malaysia had considered the position under section 91(1) of the Income Tax Act 1950. That is indeed the case and that relevant provision in fact now provides for a shorter limitation period of 5 years (from what was then a 12-year limitation period). However, sub-section (3), to all intents and purposes, has removed the limitation period if it appears to the Director General that—

any form of fraud or wilful default has been committed by or on behalf of any person; or

any person has been negligent. [36] As noted earlier, the Defendants had raised the point that elements of fraud, wilful default or negligence have not been pleaded and hence such issue(s) was/were not before the Court. [37] And as was also noted, the Plaintiff had countered the point by citing authorities such as Government of Malaysia v Dato Ghani Gilong that these are matters for consideration by the Special Commissioner of Income Tax and this Court is bound by these authorities. [38] With regards to the issue surrounding the service of the notices, the Second Defendant relied heavily on Mahawira. The Court of Appeal was correct in holding that service on the First Respondent in that case cannot be deemed as service on the Second Respondent. This was based on the facts and evidence before the court. [39] However, as pointed out by the Plaintiff, Mahawira can be distinguished on the grounds that the Second Respondent in Mahawira had yet to be appointed as a director of the First Respondent company and crucially, the Second Respondent was never served with the Notices. On the other hand, the Second Defendant in the present case has been a director of the First Defendant company since 2007 and the Second Defendant was served via email on 31 May, 2021 and personally on 25 May 2022. [40] In respect of this aspect of the law, the Plaintiff relied on section 75A and 96 of the Income Tax Act 1967 and the case of Kerajaan Malaysia v Takasima Industries (M) Sdn Bhd & Ors [2018] 10 MLJ 458. Section 75A of the Income Tax Act 1967 provides as follows: Director’s liability

(1) Notwithstanding anything contrary to this Act or any other written law —

where any tax is due and payable under this Act by a company, any person who is a director of that company during the period in which that tax is liable to be paid by that company; or

where any debt is due and payable from an employer under any rules made pursuant to section 107 and the employer is a company, any person who is a director of that company during the period in which the debt is liable to be paid by that company, shall be jointly and severally liable for such tax or debt, as the case may be, that is due and payable and shall be recoverable under section 106 from that person.

In this section, “director” means any person who —

is occupying the position of director (by whatever name called), including any person who is concerned in the management of the company’s business; and

is, either on his own or with one or more associates within the meaning of subsection 139(7), the owner of, or able directly or through the medium of other companies or by any other indirect means to control, not less than twenty per cent of the ordinary share capital of the company (“ordinary share capital” here having the same meaning as in the definition of “director” in section 2). while section 96 reads as follows: Notice of assessment

96.

As soon as may be after an assessment, other than an assessment under subsections 90(1) and 91A(1), has been made, the Director General shall cause a notice of assessment to be served on the person in respect of whom the assessment was made.

Where the tax charged under an assessment is increased on appeal to the Special Commissioners or a court, then, so soon as may be after the appeal has been decided there shall be served on the person in respect of whom the assessment was made a notice of increased assessment.

Where subsection 99(2) applies as regards an agent and another person, any notice to be served under subsection (1) or (2) shall be served both on the agent and on the other person.

A notice served under subsection (1) or (2) shall be in the prescribed form and shall indicate, in addition to any other material included therein —

in the case of a notice served under subsection (1), the year of assessment, the amount or additional amount of chargeable income and the tax charged thereon or the amount of the tax or additional tax, as the case may be;

in the case of a notice served under subsection (2), the year of assessment and the amount of the increase in the tax charged; and

in either case —

the place at which payment is to be made;

(ii) the increase for late payment imposed by subsection 103(5) or (7); and

(iii) any right of appeal which may exist under this Act. [41] The gist of section 75A of the Income Tax Act 1967 is to make directors of companies jointly and severally liable for any tax or debt, as the case may be, that is due and payable. It allows for the tax or debt to be recoverable under section 106 from such directors. That the Second Defendant as a director of the First Defendant company is jointly and severally liable is beyond question. However, this provision does not address the issue pertaining to the service of the Notices, which is mandatory and was in fact alluded to by the Plaintiff. The requirement for Notices of Assessment is found in section 96, as cited by the Plaintiff. [42] The immediate issue pertains the mode of service of the Notice of Assessment. Section 145 of the Income Tax Act 1967, which govern the service of Notices, provides as follows:

(1) Subject to any express provision of this Act, for the purposes of this Act notices may be served personally or by ordinary or registered post.

A notice relating to tax which is sent by ordinary or registered post shall be deemed to have been served on the person (including a partnership) to whom it is addressed on the day succeeding the day on which the notice would have been received in the ordinary course of post if it is addressed —

in the case of a company, partnership or body of persons having a registered office in Malaysia —

to that registered office;

(ii) to its last known address; or

(iii) to any person authorized by it to accept service of process;

in the case of a company, partnership or body of persons not having a registered office in Malaysia —

to any registered office of the company, partnership or body (wherever that office may be situated);

(ii) to the principal place of business or other activity of the company, partnership or body (wherever that place may be situated); or

(iii) to any individual authorized (by or under the law of any place where the company, partnership or body is incorporated, registered or established) to accept service of process; and

whether the Government of Malaysia was entitled to summary judgment for the sum that it is seeking to recover from the

whether there were defences that the Defendant may rely on to challenge the claim by the Plaintiff. [47] On the first of the above two issues, suffice that reference be made to the seminal decision of the Federal Court in Mohd Najib Hj Abd Razak v Government of Malaysia [2023] AMEJ 2078; [2023] 1 LNS 2063; [2023] MLJU 2283; [2024] 1 MLRA 69, where the question was answered in the affirmative. It should also be noted that in its exposition of the workings of summary judgment in the context of section 106 of the Income Tax Act 1967, the Federal Court affirmatively held that the “issue or question which ought to be tried or that there ought for some other reason to be a trial” rule as envisaged in Order 14 rule 3 has no application. [48] As for the second issue relating to this summary judgment application, the grounds relied by the Defendants in this application by the Plaintiff for summary judgment mirror those in Enclosure 17. [49] Since the application in Enclosure 17 by the First Defendant had been dismissed but the Second Defendant was successful, the application for summary judgment by the Plaintiff against the First Defendant is allowed but the application for summary judgment against the Second Defendant is dismissed. [50] The First Defendant to pay costs of RM5,000 to the Plaintiff and the Plaintiff to pay costs of RM5,000 to the Second Defendant. Dated: 12 March, 2024 sgd [CHOONG YEOW CHOY] Judicial Commissioner High Court of Malaya Shah Alam Counsel: Hanani binti Idris for the Plaintiff (Lembaga Hasil Dalam Negeri, Wilayah Persekutuan Kuala Lumpur) Wong Kar Fai for the Defendants (Messrs. Thillainathan & KF Wong)

in the case of an individual, to his last known address. [43] As noted by this Court in Kerajaan Malaysia v Kota Laksamana 2 Sdn Bhd [2023] CLJU 2348/[2023] 1 LNS 2348, Courts would come in aid of a defendant if it can be shown that, for example, the plaintiff has failed to serve the Notice of Assessment on a Defendant in accordance with section 145 of the Income Tax Act 1976. [44] Based on the pleadings and evidence before this Court, this Court finds that the Second Defendant has not been served the Notices of Additional Assessment in accordance with the mode as required by the Income Tax Act 1967. [45] On this ground alone, the application by the First Defendant in Enclosure 17 is dismissed and the application by the Second Defendant is allowed. The Overarching Issues in the Summary Judgment Application [46] The dual vital issues for consideration in Enclosure 15 were: