Kerajaan Malaysia v 1. ) Pembinaan Kota Laksamana (Melaka) Sdn. Bhd. (BA-21NCvC-29-03/2021)

It has been said that “the hardest thing in the world to understand is the income tax”. The Defendants in the present action will probably add that the income tax sum the Plaintiff is seeking to recover from them is also the most unjust thing in the world. 16/11/2023 12:46:01 BA-21NCvC-29-03/2021 Kand. 32

In the matter before this Court, the Defendants have to confront the reality of not just having to resist a claim for recovery of tax by the Government of Malaysia for a sum of RM56,337,780.27 but with a claim for summary judgment to boot.

Many taxpayers have found themselves in the same predicament as the Defendants.

The twin vital issues for consideration in this case are:

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

whether there are defences that the Defendants may rely on to challenge the claim by the Plaintiff. The Case for the Plaintiff [5] The case for the Plaintiff is simply that it is entitled under the law to claim, as in this case, for income tax assessed for the Years of Assessment 2007, 2009, 2010, 2011, 2013 and 2016 including increases under the Income Tax Act, 1967. [6] The position of the Plaintiff is that not only is it entitled to claim for the amount of tax claimed, it is entitled to summary judgment, that is, without a plenary trial of the action. [7] The Plaintiff is relying on the various provisions of the Income Tax Act 1967. [8] The starting point for the Plaintiff is section 90(3) of the Income Tax Act 1967. It provides as follows:

Where a person for a year of assessment has not furnished a return in accordance with section 77 or 77A, the Director General may according to the best of his judgment determine the amount of the chargeable income of that person for that year and make an assessment accordingly: Provided that the making of an assessment in respect of a person under this subsection shall not affect any liability otherwise incurred by that person by reason of his failure to deliver the return. [9] It was contended on behalf of the Plaintiff that assessments for Year of Assessments 2007, 2009, 2010, 2011, 2013 and 2016 have been made pursuant to section 90(3) of the Income Tax Act 1967. [10] The Plaintiff further averred that the relevant Notice of Assessment has been sent to the First Defendant in accordance with the provisions of section 145(1) and (2)(a) of the Income Tax Act 1967. Section 145, 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

in the case of an individual, to his last known address. [11] Accordingly, following service of the Notices of Assessment, it is the Plaintiff’s assertion that the tax as assessed became due and payable by the Defendants, regardless of any appeal from the Defendants against the assessments. On this point, the Plaintiff relied on the provisions of sections 103(2), 103(5) and 107C(10) of the Income Tax Act 1967. [12] For brevity, the relevant provisions relied on by the Plaintiff read as follows:

(1) …

Where an assessment is made under section 90(3), 91, 92 or 96A, or where an assessment is increased under section 101(2), the tax payable under the assessment or increased assessment shall, on the service of the notice of assessment or composite assessment or increased assessment, as the case may be, be due and payable on the person assessed at the place specified in that notice whether or not that person appeals against the assessment or increased assessment. …

Subject to subsection (7), where any tax due and payable under subsection (2) has not been paid within thirty days after the service of the notice, so much of the tax as is unpaid upon the expiration of that period shall without any further notice being served be increased by a sum equal to ten per cent of the tax so unpaid, and that sum shall be recoverable as if it were tax due and payable under this Act. Estimate of tax payable and payment by instalments for companies

(1) … …

Where the tax payable under an assessment for a year of assessment exceeds the revised estimate under subsection (7) or deemed revised estimate under subsection (8), whichever is later, or if no such revised estimate is furnished or there is no such deemed revised estimate, the estimate of tax payable for that year of assessment, by an amount of more than thirty per cent of the tax payable under the assessment, then, without any further notice being served, the difference between that amount and thirty per cent of the tax payable under the assessment shall be increased by a sum equal to ten per cent of the amount of that difference, and that sum shall be recoverable as if it were tax due and payable under this Act. [13] Crucially, the Plaintiff alluded to section 106(1) of the Income Tax Act 1967, which in no uncertain terms states that “Tax due and payable may be recovered by the Government by civil proceedings as a debt due to the Government.”. [14] Further in section 106(3) of the same Act, it is expressly provided that:

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). [15] The above, according to the Plaintiff, is the position of the law vis-à- vis the rights accorded to the Government of Malaysia. [16] This is not to say that the Defendants are left without any recourse. As conceded by the Plaintiff, the remedy available to the Defendant is under section 99 of the Income Tax Act 1967, where an appeal may be made to the Special Commissioner of Income Tax. Section 99 plainly preserves the right of appeal of “a person aggrieved by an assessment made in respect of him”. The Case for the Defendants [17] In response to the Plaintiff’s submissions, the Defendants argued, inter alia, that the amount taxable for Years of Assessment 2007, 2009, 2010, 2011, 2013 and 2016 based on Borang C that the First Defendant had submitted was RM0.00. [18] The Defendants further contended that they had filed Notices of Appeal pursuant to section 152 of the Income Tax Act 1967 (in Borang Q) on 16 October, 2020 for Years of Assessment 2007, 2009, 2010, 2011 and 2013 and the Notice of Appeal on 23 September, 2020 for Year of Assessment 2016 and are awaiting response from the Plaintiff. In addition, the Defendants submitted that are able and willing to furnish evidence if required. [19] Therefore, the Defendants’ position is that the Plaintiff’s assessment (in Borang J) is inaccurate and without basis and the Defendants should be permitted to prove that their assessments are correct (and not be denied that right). The Law and the Legal Principles [20] As the Plaintiff has invoked the summary procedure under Order 14 of the Rules of Court 2012, a question for determination is whether the conventional rule which requires a defendant resisting an application for summary judgment to raise “an issue or question in dispute which ought to be tried or that there ought for some other reason to be a trial” as provided in Order 14 rule 3 of the Rules of Court 2012 has any application pursuant to a claim made under the Income Tax Act 1967. [21] In Mohd Najib Hj Abd Razak v Government of Malaysia [2023] AMEJ 2078; [2023] 1 LNS 2063; [2023] MLJU 2283; [2024] 1 MLRA 69, the Federal Court had considered the following three questions of law: [18] …

Question 3 Whether, by reason of Sections 103 and 106(3) of the Income Tax Act 1967, this Court is wholly prevented from considering whether or not there are triable issues and/or some other reason warranting a trial (within the meaning of Order 14 Rule 1 and Order 14 Rule 3 of the Rules of Court 2012 ), before deciding whether or not to give judgment in favour of the Plaintiff, despite the fundamental liberties, rights and powers enshrined in, inter alia, Articles 5, 8 and 121 of the Federal Constitution. …

Question 5 Whether Order 14 Rule 3 of the Rules of Court 2012, which provides that a Summary Judgment application may be dismissed if a Defendant can show "some other reason" for a trial to be held, applies in civil recovery proceedings in tax matters.

Question 6 Whether in instances of manifest and obvious errors in calculation of a tax assessment, a court is entitled by virtue of its inherent and judicial powers to consider a Defendant's defence of merit to dismiss or set aside an application for Summary Judgment by a Plaintiff and order full trial on the matter. [22] As noted by the Federal Court, “Questions 3, 5 and 6 all of which deal with the workings of summary judgment in the context of section 106 ITA” (see para [19]). [23] The workings of summary judgment in the context of section 106 of the Income Tax Act 1967 were adeptly articulated by Nallini Pathmanathan FCJ as follows: [149] The ITA has a specific series of statutory provisions for the collection and recovery of the tax assessed to be due by the DGIR. These provisions are contained, as stated above, under sections 103 - 110 of Part VII of the ITA entitled 'Collection and Recovery of Tax'. It is not in dispute that this jurisdiction, like many others, operates on a 'Pay First, dispute later' design of tax imposition as established by Parliament under the ITA. [150] It is noteworthy that the questions posed by the Appellants relate solely to Part VII on recovery and collection. These questions focus on the rules of civil procedure relating to the recovery of debts in general, rather than the recovery of tax imposed under the specific provisions of the ITA read as a whole. [151] There is a presumption made, both by the Inland Revenue and the Appellants that the only means of enforcement available is under Order 14 of the Rules of Court 2012. However, Order 14 envisages the Court undertaking a final determination as to whether an amount is payable or due. This means that the Court considers and ascertains whether a debt exists. [152] But under the ITA, sections 103 and 106 specify statutorily, for purposes of collection and recovery only, that upon assessment, the sum assessed is due and payable upon the lapse of a specified period of time. It becomes a statutory debt or a debt created by statute. [153] Section 103(1) provides: "Except as provided in sub-section (2) tax payable under an assessment for a year of assessment shall be due and payable on the due date whether or not that person appeals against the assessment." [154] The section provides for two separate matters:

That by statute the sum becomes due and payable on the due date;

That notwithstanding the taxpayer's right of appeal, the sum becomes due and payable. [155] In other words, while the process of appeal is pending the tax becomes due, putting into effect the 'Pay first, dispute later' system that defers the dispute but requires immediate payment. This is an essential aspect of expeditious and efficient collection of tax which is required to enable the nation to function effectively. Therefore, notwithstanding the taxpayer's right to challenge the tax assessed through the SCIT and subsequently the hierarchy of the courts, payment is not deferred. Any seeming 'inequity' is met by the guaranteed right of repayment under the Act. [156] The deferral of the challenge or dispute as to the tax assessed is further borne out by section 103B which provides: 'The institution of any proceedings under any other written law against the Government or the Director General shall not relieve any person from liability for the payment of any tax, debt or other sum for which he is or may be liable to pay under this Part.' [157] The Hansard in relation to section 103B states that the Government aims to ensure fair treatment between those who pay their taxes on time and those who do not. The latter group while seeking to challenge the tax assessed, are nonetheless required to make payment first while the challenge is deferred, because it would be unfair to those who pay their taxes on time if the latter category of taxpayers were accorded a longer time to meet their tax responsibilities simply by reason of their challenge (see: Penyata Rasmi Parlimen, Dewan Rakyat, (Parliamen Keempat Belas, Penggal Ketiga, Mesyuarat Ketiga, 16 December 2020), Vol. 54, at 26). [158] As stated earlier, the tax assessed is, by way of statute, a debt due from the taxpayer to the Government. The section statutorily deems the sum assessed to amount to a debt recoverable in civil proceedings. The purpose, again is to facilitate recovery of the sum assessed. [159] And to facilitate recovery section 106(3) limits the type of challenge that can be made at this juncture, i.e. temporarily. The right to raise those challenges and have them adjudicated upon is neither ousted or prohibited, as the ITA provides for such challenges to be taken vide the prescribed mode of appeal under Part V. [160] What this all means in relation to recovery is that the ITA does not envisage a full-blown ventilation of all possible challenges to be determined at this stage of the tax process. It serves to ensure timely recovery and collection of tax due, while deferring the challenge to a later date. And this is where the utilisation of Order 14 of the Rules of Court 2012 (ROC 2012) gives rise to confusion. [161] Order 14 provides a summary basis for the collection of a debt in dispute. It provides a comprehensive mode of shortening the full litigation procedure by allowing, in suitable cases, for matters to be adjudicated upon fully, without the necessity for a full trial and witnesses. If the defendant to the summary judgment application however raises a 'triable' issue the matter then proceeds to trial. Whether judgment is granted summarily or judgment is granted after a full trial, the full merits and rights of the parties are litigated and the judgment handed down, is final in nature. [162] If a tax recovery 'debt' as statutorily provided for under section 106 is subjected to the procedure under Order 14 ROC 2012, then the entire purpose and object of the ITA, which provides for a deferral of the full dispute to a later date under the adjudicatory process prescribed under the Act, is not met. [163] Even where there is no 'triable issue' found, it must be remembered that the character and effect of the judgment granted under Order 14 is final. However, under sections 103 and 106 the nature of the relief sought for purposes of recovery is plainly interim in character. [164] The use of the Order 14 procedure gives rise to a situation where, if the recovery process is found to give rise to 'triable issues', it will result in a full-blown trial which examines the veracity of the statutory debt under section 106. Bearing in mind that the section provides for this statutory debt to be due and owing for the purposes of recovery only, and not with finality, the use of a summary process which seeks to allow for a full determination of whether the sum is due and payable, is not ideal given the purpose and object of the ITA. [165] Once the statutory section 106 debt is subject to a full-blown trial, there cannot be another or second attempt at litigation under section 99(1) ITA as that would give rise to res judicata and/or issue estoppel. Therefore the entire purport and effect of the ITA would be thwarted by a full trial under the Order 14 civil procedure under the Rules of Court 2012. This is in accord with the older case-law which stipulates that such defences are to be remitted to the equivalent of the then SCIT and not considered by the Courts. To that extent there was appreciation of the fact that judgment under section 106 ITA was for purposes of ensuring payment of taxes first while disputes were adjudicated later. [166] This then warrants the question whether Order 14 is indeed the ideal mode to adopt in the course of recovery proceedings under section 106 ITA. It would seem from a perusal and construction of the Act in toto, that the procedure set out in section 106 ITA itself provides sufficient basis for recovery to be initiated in the civil courts by way of originating summons. The Court is then able to ascertain whether:

An assessment has in fact been made in the form prescribed under the Act;

Whether the tax assessed is due as the relevant time accorded for payment has lapsed;

Whether the DGIR has accorded an exemption or provision for payment by instalments or reached some other agreement with the taxpayer which would warrant the Court refusing to grant judgment. [167] This means that section 106 ITA is given its full effect for the purpose of recovery while simultaneously allowing the taxpayer to proceed with his challenge vide section 99(1) of the ITA. [168] The ITA allows for full judicial intervention and adjudication vide

To reiterate, the enforcement provisions in section 103 and 106 are themselves premised on the exercise of judicial power, so it cannot be said that judicial power is in any way ousted. There is merely a temporary restriction of the taxpayer's rights of challenge, which are deferred while allowing for payment first. The Courts' powers remain unaffected. So when section 106(3) provides that the Court shall not consider certain defences relating solely to the tax assessed, it is the taxpayer's right to raise these issues at that juncture that is deferred, NOT curtailed. The Court's powers remain untouched as explained above.

It is worth reiterating paragraph 38 of Capstone Pty Ltd (supra) where Binns Ward J stated: "Once it is accepted that the filing of a statement in terms of section 91(1)(b) is nothing more than an enforcement mechanism, as distinct from a means of determining liability, there is no basis for distinguishing it from any of the other recovery mechanisms... ... It seems to me that the learned judge went awry in Mokoena by apparently regarding the filing of a statement in terms of s. 91(1)(b) as having the rights-determining character of a judicially delivered judgment. It plainly does not..."

In like manner the judgment obtained under section 106 using the summary judgment procedure, does not have a rights-determining or liability-determining character, as it merely allows for recovery first for the purposes of enforcement or execution. It serves to give effect to the 'Pay first, dispute later' scheme in the ITA.

Even if a summary judgment procedure is adopted, the curtailing of the defences available as provided for in section 106(3) ITA and arguably, section 103(1) ITA and 103B ITA, means that the issues there remain unavailable for adjudication by the Court. This is because those matters would still comprise the subject matter of any appeal under section 99(1) ITA. Alternatively judicial review in exceptional cases is also available.

Based on the above exposition relating to 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 16 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.

At para [173], Her Ladyship clarified that: … Pursuant to the 'Pay first, dispute later' scheme under the ITA, it follows that the recovery of the sum assessed at this stage is not final and the dispute will be heard by the SCIT and subsequently the Court under the 'Pay first, dispute later' system.

Her Ladyship went on to explicate the legal position as follows:

As we have reasoned, the claim for judgment by the Inland Revenue is premised on the characterisation of the sum assessed to be due as tax, under section 106(1) as a statutory 'debt'. This is for the purposes of recovery and execution only. The judgment obtained under section 106 is not a rights-determining judgment of finality. The taxpayer's right of challenge is not abrogated, as that right is preserved under as well as judicial review.

Therefore the 'some other reason' for a trial to be held under Order 14 does not apply as section 99(1) ITA a basis on which to enforce this statutory debt created by the taxing statute to enable payment to be made first, pending any challenge or dispute as to the sum assessed, which is effectively deferred under the statute. If it is found under the Order 14 procedure that the matter should go to trial it would render the method prescribed under the Act for adjudication, nugatory. The Act should be construed such that the various sections are harmonious and provide a coherent structure for income tax collection.

Therefore the use of other 'some other reason for trial' should not be invoked. It is not tenable for a section 106 debt to be determined finally at trial, if the taxing statute also prescribes a specific manner of challenging the tax assessed, as is the case under the ITA. We have explained above in the body of the judgment that such a judgment does not enjoy the characteristics of a judgment issued after a full exercise of the Court's dispute resolution powers. It is a judgment handed down for the purposes of collection, i.e. to enable recovery first, while the dispute is deferred. It does not enjoy the rights-determining character of finality which is to be found in a judgment delivered after full adjudication in a court of law.

All challenges pertaining to those matters set out in section 106(3) or otherwise may be fully dealt with under the appeals portion of the ITA in Part VI, Section 2 which allows the taxpayer to ventilate all these issues. Further the remedy of judicial review in an appropriate case is also available. All this ensures that the taxpayer is accorded his 'fundamental liberties rights and powers in Article 5 and Article 121 '.

In short, a judgment granted under section 106 is treated as a civil judgment lawfully given in favour of the Inland Revenue for the purposes of collection and recovery only.

Enforcement may involve a writ of seizure and sale or garnishment of any amount due, and if the sum assessed is found to be erroneous after the merits of a dispute have been dealt with in full under the section 99(1) challenge, the over-assessed portion will be refunded to the taxpayer. With the latest amendments to the ITA, such a refund will carry interest (see: section 111D ITA). To that extent, the filing of civil proceedings in terms of section 106(1) is nothing more than an 18 enforcement mechanism and is distinct from a means of determining liability.

To this end, the DGIR and all authorised officers are designated as public officers to undertake proceedings under the section. This section provides support for the position that any proceedings instituted should be under section 106.

It should be borne in mind that the statute that allows for recovery of tax is the ITA, and not the Rules of Court 2012, more particularly Order

The latter provides a means of recovery of a disputed debt and envisages the determination of liability in full, either summarily or after a full trial if there is a 'triable' issue. Consequentially, it allows for a final judgment after determining liability between the parties. [182] The section 106 ITA recovery mechanism under the ITA does not require such a final judgment, as we have explained at length. [183] Accordingly, it is the remedy prescribed by statute that must prevail, not the procedure to recover a debt under the Rules of Court

Therefore the statute should be accorded effect by allowing for the recovery or enforcement process under section 106 ITA to be followed. [27] It is evident that the law heavily favours the Plaintiff and the reason is due primarily to policy considerations that are beyond the powers of this Court. [28] The contentions raised by the Defendants in paragraphs [17] to [19] above are of no assistance to them in the present application. [29] Nonetheless, this Court would come in aid of the Defendant if it can be shown that, for example, the Plaintiff had failed to serve the Notice of Assessment on the Defendant in accordance with section 145 of the Income Tax Act 1976. [30] In this regard, one question which was of concern to this Court was whether the defendant had been served with a Notice of Assessment? [31] The answer is in the affirmative as this has been admitted by the defendant. [32] As noted, the Defendants are not without recourse. For the Defendants, they should look to the Special Commissioner of Income Tax. [33] On the point raised by the First Defendant in paragraph [18] above that it had filed appeals in Borang Q on 23 September, 2020 and 16 October, 2020, the Plaintiff’s records show that the appeal has been withdrawn by the First Defendant on 21 May, 2021. [34] As pertinently decided and explained by the Federal Court in Mohd Najib Hj Abd Razak v Government of Malaysia, section 106(3) of the Income Tax Act 1967 is constitutional and does not have the effect of usurping judicial power. [35] The Federal Court made clear that any defences, if raised, are to be the subject matter of full ventilation before the Special Commissioner of Income Tax and after that, the High Court on points of law. [36] The Federal Court further notes that as a judgment such as the one here does not finally dispose of or determine the rights and entitlements of a taxpayer, the taxpayer is not prejudiced. [37] Be that as it may, the taxpayer is required to make the payment, or arrange for payment to be made in instalments or to reach an agreement with the Director General of Inland Revenue on the settlement of the tax due, pending a full adjudication of the matter. [38] The application by the Plaintiff in Enclosure 12 is allowed with costs of RM10,000. Dated: 11 November, 2023 sgd [CHOONG YEOW CHOY] Judicial Commissioner High Court of Malaya Shah Alam Counsel: Rohaizan Jumat with Nurul Aznelia Abu Bakar for the Plaintiff (Lembaga Hasil Dalam Negeri (LHDN) Malaysia) Mohamad Izwan Abd Rahman for the Defendant (Messrs. Faizan & Co.)