Multi-Purpose Credit Sdn Bhd v Ketua Pengarah Lembaga Hasil dalam Negeri (BA-14-4-10/2022)

The respondent has subjected the amount of RM77,305,831.00 of loan debt owing to and waived by MP Capital as gains or profits from the business of the appellant for YA 2011 under section 4(a) of the ITA.

(ii) The respondent has subjected the amount of RM1,157,036.00 of loan debt owing to and waived by MP Venture as gains or profits from the business of the appellant for YA 2012 under section 4(a) of the ITA.

(iii) As a result of the tax adjustments by the respondent on the appellant for YAs 2011 and 2012, the amount of carried forward losses available for the appellant in YAs 2013 and 2014 were reduced. This resulted in additional taxes amounting to RM239,767.25 and RM329,146.50 respectively for each of YAs 2013 and 2014 (not inclusive of penalties). S/N aKo0iGO1AEueQf8scG/liw

(iv) As a result of the tax adjustments by the respondent on the appellant for YAs 2011 and 2012, the amount of carried forward losses available for the appellant in YAs 2015 were reduced. This resulted in additional taxes amounting to RM263,121.00 for YA 2015 (exclusive of penalties).

Penalty under subsection 113(2) of the ITA (YAs 2011-2014). Consequent to the adjustments above, the respondent has also imposed penalties amounting to RM5,149,140.16 for YA 2011, 2012, 2013 and 2014 respectively as follows: YA 2011 RM4,616,544.83 YA 2012 RM288,572.50 YA 2013 RM95,906.90 YA 2014 RM148,115.93

(vi) Penalty under subsection 113(2) of the ITA (YAs Appendix A2). The respondent has also imposed penalty amounting to RM1,18,404.45 for YA 2015. [14] On 30.9.2016. the notices of additional assessment (“Forms JA”) was raised by the respondent against the appellant for each of YAs 2011 to 2014 as follows: YA 2011 RM14,875,533.33 YA 2012 RM1,010,003.75 YA 2013 RM335,674.15 YA 2014 RM477,262.43 S/N aKo0iGO1AEueQf8scG/liw [15] On 19.10.2016 and 20.1.2021, the appellant appealed under Section 99 of the ITA against the respondent’s decision by filing its Notice of Appeal (Forms Q”) against the Forms JA raised for YAs 2011 and 2012. [16] On 4.12.2017, the appellant filed Forms Q dated 21.11.2017 against the Form JA raised for YAs 2013 and 2015. [17] On 30.12.2020, the notice of additional assessment (“Forms JA”) was raised by the respondent against the appellant for YA 2015 amounting to RM381,525.45. Jurisdiction of the High Court in SCIT appeals [18] It is a well-established legal principle that the Special Commissioners of Income Tax (SCIT) hold the authority to make determinations based on primary facts and inferences, and these decisions are considered final and cannot be overturned or replaced by a higher court. This principle was thoroughly examined and upheld by the Privy Council. in Chua Lip Kong v. Director General of Inland Revenue (1982) 1 MLJ 235 as follows: “Findings of primary facts by the Special Commissioners are unassailable. They can be neither overruled nor supplanted by the High Court itself-occasionally they may be insufficient to enable the High Court to decide the question of law sought to be raised by the Case Stated, but in that event it will be necessary for the Case to be remitted to the Commissioners themselves for further findings.” S/N aKo0iGO1AEueQf8scG/liw [19] In Edwards v. Bairstow (1956) AC 14. The court stated: “For it is universally conceded that, though it is a pure finding of fact, it may be set aside on grounds which have been stated in various ways but are, I think, fairly summarised by saying that the court should take that course if it appears that the Commissioners have acted without evidence or upon a view of the facts which could not reasonably be entertained.” [20] The powers and functions of the High Court, as outlined in the aforementioned cases, imply that a challenge to the SCIT’s decision can only be invalidated if the High Court is convinced:

the SCIT had erred in law;

(ii) the decision of the SCIT is not consistent with their finding of facts; or

(iii) there is no evidence to support the decision of the SCIT. [21] Founded on these principles, this court will proceed to consider this appeal. Analysis and Findings [22] In this appeal, there are two questions for this court’s determination. They are: S/N aKo0iGO1AEueQf8scG/liw

whether the waiver of the appellant’s debt by MP Capital and MP Venture fall in any of the classes of income under subsection 4 of ITA; and

(ii) whether the SCIT has made the right inferences of mixed fact and law drawn from the said primary facts that the released of loan liability (debt) by MP Capital and MP Venture had become the appellant’s gains or profit which is taxable under section 4(a) of the ITA. [23] As both these questions deal with section 4(a) of the ITA, this court will be consider both questions together. [24] The appellant asserted that the SCIT committed legal and factual errors by taxing the debt waiver under section 4(a) of the ITA for the following grounds:

that the intention of Parliament is that only a waiver of debt in respect of a debt that had been deducted against a business source income is subject to income tax. This clarification elucidates the constrained wording and application of subsection 30(4) of the ITA. If indeed Parliament had aimed to tax all debt releases, there would be no need for the provision to be drafted in such restrictive terms.

if a waiver of debt is encompassed within paragraph 22(2)(a) of the ITA, it raises questions about the rationale behind Parliament enacting a dedicated provision like subsection 30(4) for the forgiveness of debt. S/N aKo0iGO1AEueQf8scG/liw

the enactment of subsection 30(4) underscores Parliament's awareness of the necessity for this provision. This awareness arises from the acknowledgment that paragraph 22(2)(a) alone does not adequately accommodate the inclusion of debt waivers in the assessment of a taxpayer's income.

Had Parliament intended for all debt waivers to be subject to income tax, regardless of whether they were deducted against a business source or otherwise, it would have explicitly specified this in subsection 30(4) of the ITA.

the principle encapsulated in the legal maxim “generalibus specialia derogant” is applicable. This rule of construction asserts that when there are two provisions in a written law— one general and the other specific—whether they are within the same or distinct statutes, the specific provision prevails and overrides the general one. In this context, the appellant contends that subsection 30(4) of the Income Tax Act (ITA) is the particular provision established by Parliament, while paragraph 22(2)(a) of the ITA serves as a general provision (which, incidentally, does not apply in the current case). The argument asserts that the respondent is not authorized to utilize a general provision to subject an item to income tax if it is not already chargeable under the specific provision. [25] The appellant contends that the SCIT may have misconstrued the intent of subsection 4(a) of the ITA by including the waiver of debts within the purview of income taxation under that particular provision. S/N aKo0iGO1AEueQf8scG/liw It is asserted that section 4(a) of the ITA does not grant the respondent the authority to subject debt waivers to taxation. [26] It was contended that while the term “income” lacks a specific definition, it typically denotes money received, encompassing gains or profits derived from business or employment activities. To assess whether the debts owed by MP Capital and MP Venture qualify as income under the ITA, reference is made to section 22 of the ITA. This section outlines the determination of gross income from a source, encompassing the inclusion of sums deemed as gross income. These sums may be receivable through avenues such as insurance, indemnity, recoupment, recovery, reimbursement, or other means. Additionally, if such sums relate to the type of outgoings and expenses deductible in calculating adjusted income, or are received under a contract or indemnity, they are considered part of the gross income. Furthermore, compensation for loss of income is also considered. [27] The appellant argued that according to subsection 22(2) of the ITA, the waiver of debt does not constitute gross income which is taxable. This is in line with the decision of the Court of Appeal in Ketua Pengarah Hasil Dalam Negeri v. Bandar Nusajaya Development Sdn Bhd (2016) MSTC 30- 117 and the decision of the House of Lords in The British Mexican Petroleum Company Limited v Jackson (H.M. Inspector of Taxes) & Anor 16 TC 570. [28] In the British Mexican (supra), the court stated as reproduced below: “(a) What is chargeable to Income Tax under either the First or Second Case of Schedule D, I forget which it is - the trading case is the profit which is made by comparing the S/N aKo0iGO1AEueQf8scG/liw amount which you receive from selling goods or rendering services, or whatever it is, with the amount which you pay out in putting yourself in a position to do that by buying goods and equipping yourself, finding the expenses for rendering the services or whatever it is - with the necessary adjustments in the account to allow for the stock which is carried over from year to year in the way Mr. Hills drew my attention to that is what it is, the difference which you enjoy between what you receive and what you have to pay out in the year's trading. How on earth the forgiveness in that year of a past indebtedness can add to those profits I cannot understand. It is not a matter depending upon the form in which the accounts are kept. It is a matter of substance, looking at the thing as it happened, as a man who knows nothing of scientific accountancy might look at it-it is the receipts against payments in trading.

The Appellant’s alternative contention, which was not seriously pressed by the Attorney General, is equally unsound, in my opinion. I am unable to see how the release from a liability, which liability has been finally dealt with in the preceding account can form a trading receipt in the account for the year in which it is granted.” [Emphasis added] [29] Learned counsel for the appellant submitted that the case of The British Mexican (supra) was cited the case of in Bandar Nusajaya Development Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri

MSTC 30-058, where it was also decided that waiver of debt S/N aKo0iGO1AEueQf8scG/liw is not an income. This position was subsequently affirmed by the Court of Appeal in Bandar Nusajaya Development (supra). [30] In response to the applicant’s submission that the decision of the Court of Appeal in Bandar Nusajaya Development (supra) should be applied to this appeal, the respondent submitted that the appellant’s reference to section 22 of the ITA and Bandar Nusajaya Development (supra) can be distinguished. It was contended that the facts in Bandar Nusajaya Development (supra) is different from the appeal before this court. [31] Section 22 of the ITA reads:

“Gross income generally

Subject to this Act, the gross income of a person from a source of his for the basis period for a year of assessment shall be the gross income from that source for that period ascertained in accordance with the following provisions of this Chapter (that person and that period being referred to in those provisions as the relevant person and the relevant period respectively).

Subject to this Act, the gross income of a person from a source of his for the basis period for a year of assessment shall include any sums receivable or deemed to have been received for that basis period in relation to that source by way of—

insurance, indemnity, recoupment, recovery, reimbursement or otherwise—

where such sums are in respect of the kind of outgoings and expenses deductible in ascertaining the adjusted income of that person from that source; or S/N aKo0iGO1AEueQf8scG/liw

(ii) under a contract of indemnity;

compensation for loss of income from that source; and

a rebate under section 6B.” [32] The provision of section 22 of the ITA pertains to gross income. In this appeal, the finding by the respondent during the audit was on ‘gains’ pursuant to section 4 of the ITA, not gross income under section 22 of the ITA. [33] In the case of Bandar Nusajaya Development (supra), the application was a judicial review application relating to the waiver of interest debt. This appeal before this court is not an application for judicial review. In this appeal before this court, the issue at hand pertains to the waiver of a loan. Hence, for these reasons this court is satisfied the case of Bandar Nusajaya Development (supra) can be distinguished from this instant appeal. [34] The respondent argued that Section 4 of the ITA is applicable in this appeal. Section 4 of the ITA outlines the categories of income subject to taxation. One of these categories, as per section 4(a) of the ITA, specifies that taxable income includes gains or profits generated from a business, regardless of the duration of its operation. Nevertheless, section 4(a) does not explicitly define the nature of the business or what constitutes gross income. [35] At the appeal before the SCIT, both parties agreed that subsection 30(4) of the ITA does not apply. The SCIT, in its grounds of judgment, had conducted an analysis focusing on whether the S/N aKo0iGO1AEueQf8scG/liw release of a loan liability constitutes gains under subsection 4(a) of the ITA. [36] The appellant, in their appeal before this court, seeks to apply subsection 30(4) of the ITA to the respondent. This is based on the argument that the phrase “release of debt” in this provision is unique and does not appear elsewhere in the ITA. In response, the respondent asserts that it is crucial to carefully examine the nature and effect of the transaction rather than relying solely on its label. [37] Subsection 30(4) of ITA provides: “(a) Where a deduction has been made under Section 33(1) in computing the adjusted income of the relevant person from a business for a basis period for a year of assessment (that basis period being prior to the relevant period) in respect of any outgoings or expense (including any sum payable, rent payable or expense incurred of the kind described in Section 33(1)(a), (b) or (c); or (b)

…

(ii) And the whole or any part of a debt in respect of any such outgoings, expense, sum, rent or expenditure is released in the relevant period, the amount released shall be treated as gross income of the relevant person from that business for the relevant period.” [38] The appellant submitted that a waiver of debt is typically not considered income for income tax purposes, and the British Parliament addressed this by introducing section 36 of the UK S/N aKo0iGO1AEueQf8scG/liw Finance Act 1960. This provision brings under income tax a debt that has been allowed as a deduction and subsequently forgiven. In Malaysia, a parallel provision exists in subsection 30(4) of the ITA. This section deems any amount of debt waived as gross business income from a business under two conditions: when a deduction has been claimed under subsection 33(1) of the ITA or when an allowance has been granted under section 42 of the ITA. [39] The appellant contends that the learned SCIT made legal and factual errors by neglecting to acknowledge that the Malaysian Parliament specifically enacted subsection 30(4) of the ITA. This legislative action occurred despite the presence of section 4(a) and subsection 22(2) in the ITA. According to the appellant, such legislative provisions indicate that subsection 30(4) of the ITA is the designated provision intended to address the waiver of debt when determining a taxpayer's income. [40] In the current case, the appellant did not avail themselves of a deduction under subsection 33(1) of the ITA or assert any allowance under section 42 of the ITA. The debts owed to and subsequently waived by both MP Capital and MP Venture were utilized to settle the appellant's bank borrowings, not for activities generating income. Consequently, the appellant did not bring the amount of debts owed to and waived by both MP Capital and MP Venture under the purview of taxation as per subsection 30(4) of the ITA. [41] Subsection 30(4) of the ITA is a special provision on the determination of gross income from a business, i.e. the formulae of tax computation in determining the adjusted income. A reading of subsection 30(4) of the ITA indicates that for subsection 30(4) of the S/N aKo0iGO1AEueQf8scG/liw ITA to apply, there must have been a deduction made under subsection 33 (1) of the ITA. [42] Subsection 30(4) of the ITA is applied to ascertain the taxpayer's adjusted income concerning deductions previously claimed in their tax computation, which were subsequently affected by the occurrence of a release of debt. This release of debt is considered the taxpayer’s gross income for adjustment purposes. The utilization of the release of debt provision in subsection 30(4) of the ITA serves as a means of determining adjusted income in cases where deductions were initially made under subsection 33(1) of the ITA by the taxpayer. [43] In this appeal, it is evident before this court there was no deduction made pursuant to subsection 33(1) of the ITA. The evidence unmistakably indicates, and the appellant’s own witness has acknowledged, that no deductions were taken that could impact any tax adjustments in this appeal. For this reason, this court of the considered view that subsection 30(4) of the ITA is not applicable in this appeal. [44] If subsection 30(4) of the ITA does not apply to this appeal, does the waiver of the appellant’s debt by MP Capital and MP Venture fall in any of the classes of income under Section 4 of ITA? [45] Section 4 of the ITA relates to Classes of Income on Which Tax is Chargeable. The issue therefore is whether the debt released by MP Venture and MP Capital, constitutes ‘gains or profits’ or otherwise. The ITA does not define “Gains”. In such a circumstance, it is a rule of statutory interpretation that the ordinary meaning is given to the word. S/N aKo0iGO1AEueQf8scG/liw [46] Black’s Law Dictionary, 10th Ed. defined “gains” as - “An increase in amount, degree, or value”. [47] In Words, Phrases & Maxims, Legally & Judicially, “gain” is defined as follows: “Means acquisition. It is not limited to pecuniary gain or commercial profits… gain means ‘acquisition of gain, or profit in business concern, gain is something obtained or acquired…” [48] In this current appeal, the release of the loan liability by MP Ventures and MP Capital has essentially relieved the loan, constituting the appellant’s stock in trade, from any obligation. In simpler terms, the appellant has essentially obtained funds without any encumbrance from MP Ventures and MP Capital in the course of its business. [49] The appellant’s argued that the learned SCIT had made an erroneous finding that the appellant obtains its source of funds to carry out its business activity from MP Capital and MP Venture as the appellant does not have any other source of funds. It was contended that the source of the appellant’s income is the interest arising from the loans given to third party borrowers. [50] It was further submitted the learned SCIT had erred in law and fact by failing to recognise that the mere fact that the appellant had obtained the benefit by virtue of the loans being waived does not mean that it is taxable income. S/N aKo0iGO1AEueQf8scG/liw [51] The appellant submitted that the waiver of debt is a capital contribution in the form of equity financing and the mere fact that there is a waiver of debt does not mean that there must be an increase in the share capital. [52] The facts of this appeal before this court indicate that during cross-examination, the appellant’s witness conceded that prior to designating the RM77 million debt as a ‘reserve’, the debt constituted the appellant's obligation to MP Capital and MP Venture. Since there is no longer a liability to repay the debt to MP Capital and MP Venture, the funds received from related companies should be categorized under “other income” in the assessment year 2011. The appellant’s witness concurred with the respondent, affirming that “in accounting treatment, it will be reflected as other income”. [53] Moreover, this court had sought clarification from the appellant whether there was any evidence to support the appellant’s contention that the amount waived was not used for income generating activities. The appellant did not present any evidence to substantiate their claim that the amount owed to and waived by both MP Capital and MP Venture was utilized to repay the appellant’s bank borrowings. [54] The appellant did not provide any specific information. The appellant’s response claiming a lack of documents related to the purported loan repayment seemed irrational. As a corporation, would the appellant not have these waivers documented to show that monies from the waiver was used to repay the appellant’s borrowings. No evidence was presented by the appellant regarding the bank borrowings or repayments. S/N aKo0iGO1AEueQf8scG/liw [55] Similarly, this court had sought clarification from the appellant on the issue of equity financing. This court had sought to clarify if the waiver of the debt became equity financing and invited the appellant to show where was this reflected in the accounts. Nonetheless, learned counsel for the appellant was unable to furnish this court with such information. [56] In the view of this court, where the release of debt by MP Capital and MP Venture is considered as equity financing, there should be documented evidence demonstrating that MP Capital and MP Venture officially converted the loan into equity financing. The responsibility of proving that the loan underwent such a transformation into equity financing remains with the appellant. [57] The appellant was however, unable to furnish this court with documentation to show that the waived loan by MP Capital and MP Venture had been converted into equity financing. This court therefore was not satisfied with the appellant’s contention that the waived loan had become equity financing. Hence, this court cannot accept this argument by learned counsel for the appellant. Conclusion [58] Founded on the above mentioned, this court is satisfied the SCIT was had not erred in their finding of facts and inferences in regards to the nature of the waiver of the debt by MP Capital and MP Venture and whether the waiver constitutes gains or profits of the appellant. S/N aKo0iGO1AEueQf8scG/liw [59] This court finds this appeal without merit. This court therefore dismisses this appeal. The decision of the SCIT is hereby upheld and affirmed. Costs of RM4,000.00 to be paid subject to allocator. Date: 23 January 2024 (SHAHNAZ BINTI SULAIMAN) Judge High Court of Malaya, Shah Alam S/N aKo0iGO1AEueQf8scG/liw Counsel: For The appellant S. Saravana Kumar, Grace Lim Yin Meng TETUAN ROSLI DAHLAN SARAVANA PARTNERSHIP Advocates & Solicitors Aras 16, Menara 1 Dutamas, Solaris Dutamas, No. 1, Jalan Dutamas 1, 50480 Kuala Lumpur. +6 03 6209 5400 sara@rdslawpartners.com For the Respondents: Abdul Aziz Harun, Elina Abdul Rashid Bahagian Rayuan Khas, Jabatan Undang-Undang, Lembaga Hasil Dalam Negeri Malaysia, Menara Hasil Aras 16, Persiaran Rimba Permai, Cyber 8, 63000 Cyberjaya, Selangor. +6 03 8313 8865 S/N aKo0iGO1AEueQf8scG/liw