SOUTHERN POWER GENERATION SDN BHD v Ketua Pengarah Hasil Dalam Negeri (JA-25-15-06/2023)

This is an application for Judicial Review by Southern Power Generation Sdn Bhd (“the Applicant”) seeking an order of certiorari to quash the Notices of Assessment raised by the Respondent, the Director-General of Inland Revenue (“the Respondent”), for the Years of Assessment (“YA”) 2017, 2018, 2019, 2020, and 2021. The total sum assessed amounts to approximately RM78.5 million.

Leave has already been granted by Justice Nurulhuda on 14 September 2023. The Court also granted an Interim Stay Order until the complete determination of the Judicial Review Application. The matter is now before this Court for determination on the substantive issues.

Both parties have filed their written submissions and authorities and orally submitted to the Court on 8 September 2025. The decision was adjourned to 29 September 2025, and this is the Court’s decision.

The Applicant is an independent power producer, established to generate and supply electricity to Tenaga Nasional Berhad (“TNB”). In 2017, the Applicant commenced construction of a 1,440MW combined cycle gas-fired power plant in Pasir Gudang, Johor, financed through the issuance of RM3.665 billion in Sukuk. While the Sukuk proceeds were primarily channeled toward the development and operation of the power plant, part of the balance was invested in unit trust funds.

A tax audit concluded in May 2023, during which the Respondent disallowed various positions taken by the Applicant. Despite the Applicant’s representations, the Respondent proceeded to raise Notices of Assessment (Forms J) on 26 May 2023 for the Years of Assessment (YA) 2017 to 2021 in the amounts of RM1,852,205

(2017), RM36,056,116.54

(2018), RM15,157,718.59

(2019), RM24,474,220.10 (2020) and RM952,133.81 (2021) totaling approximately RM78.5 million.

The Applicant challenges these assessments as unlawful, unreasonable, and in breach of legitimate expectations, arguing that judicial review is available to quash the Respondent’s decision notwithstanding the existence of the SCIT appeal mechanism.

The Respondent maintains that the impugned Notices of Assessment dated 26 May 2023 for the Years of Assessment 2017 to 2021 were lawfully raised following a tax audit of the Applicant.

The issues raised by the Applicant, namely the classification of Energy Test Payments (ETP), the deductibility of Sukuk interest expenses, entitlement to tax credits on dividends and treatment of provisions for liquidated damages and restoration costs, are said to involve factual and technical determinations.

According to the Respondent, such issues fall squarely within the jurisdiction of the SCIT as judges of fact. At the same time, judicial review is confined to assessing the legality of decision-making processes. The Respondent, therefore, contends that the Applicant’s judicial review application is duplicative, premature, and an abuse of process, given the availability of the statutory appeal mechanism under subsection 99(1) of the Income Tax Act 1967 [Act 53].

The Applicant, in reply, submits that the existence of the statutory appeal mechanism under subsection 99(1) of Act 53 does not bar the Court from exercising its supervisory jurisdiction. Judicial review, it argues, is a constitutional safeguard that remains available in tax cases in circumstances where the impugned decision is tainted with illegality, irrationality, or a breach of legitimate expectation. The Applicant submitted that the present challenge is directed at errors of law that go to the legality, hence warranting intervention by way of judicial review, notwithstanding the pendency of its appeals before the SCIT.

In the present case, the Applicant alleges that the Respondent acted without a legal basis in classifying the ETP under subsection 4(f) of Act 53, in disallowing Sukuk interest deductions permitted by paragraph 33(1)(a) of Act 53, and in denying section 110 of Act 53 credits. These are allegations of legal misdirection falling within the Court’s supervisory jurisdiction.

This Court is guided by the decision of the Supreme Court in Government of Malaysia & Anor v. Jagdis Singh [1987] CLJ Rep 110, which explained that judicial review will not ordinarily be granted where a statutory appeal lies, save in exceptional circumstances such as jurisdictional error, breach of statutory duty, or violation of natural justice. Similarly, in Ketua Pengarah Hasil Dalam Negeri v Alcatel-Lucent Malaysia Sdn Bhd & Anor [2017] 1 MLJ 563, the Federal Court held that judicial review remains available where the complaint is of illegality, irrationality, or lack of jurisdiction, notwithstanding the existence of the SCIT appeal route.

This Court is mindful that judicial review does not displace the fact-finding function of the SCIT. However, in the present case, the underlying facts regarding the execution of the Power Purchase Agreement, the issuance of Sukuk, the receipt of unit trust dividends, and the accounting treatment of provisions are undisputed. The controversy lies in the legal characterization of these matters under the Act 53. Such classification is a question of law, properly within the supervisory jurisdiction of this Court. For avoidance of doubt, the material facts are common ground and the Court’s task is one of legal characterisation; no resolution of disputed primary facts is required.

Further, this Court notes that leave to commence judicial review was granted on 14 September 2023 pursuant to Order 53 rule 3(1) of the Rules of Court 2012 (“ROC 2012”). It follows that the learned Judge was satisfied that the application disclosed an arguable case fit for ventilation at a substantive hearing. Hence, the Respondent’s reliance on subsection 99(1) of Act 53, which provides for a statutory right of appeal to the SCIT, does not in itself preclude the supervisory jurisdiction of this Court under Order 53 ROC 2012.

For the foregoing reasons, this Court is satisfied that the forum objection is without merit. The High Court in Metacorp Development v Ketua Pengarah Hasil Dalam Negeri [2011] 5 MLJ 447 confirmed that judicial review remains available in tax disputes where the challenge is directed at the legality of the assessment rather than its merits. This Court is therefore satisfied that the present case falls squarely within the category of exceptional circumstances warranting judicial review notwithstanding the availability of the statutory appeal. The supervisory jurisdiction under Order 53 ROC 2012 is properly invoked, and the matter falls to be determined on the substantive issues. Alternatively, even if any aspect were properly characterized as mixed fact and-law, the Respondent misdirected itself in law on classification under section 4, the paragraph 33(1)(a) of Act 53 test, and the subsection 110(9A) of Act 53 mechanism; the assessments are thus vitiated for illegality.

It is trite that the jurisdiction of this Court in judicial review is supervisory, not appellate. The Court does not sit to decide afresh on the merits of an administrative or executive decision. Its role is to ensure that the decision-maker acted within the boundaries of its legal powers, adhered to the principles of fairness, and did not abuse its discretion.

This supervisory jurisdiction is sui generis and governed by the specific framework under Order 53 of the ROC 2012. The Federal Court in Majlis Agama Islam Selangor v. Bong Boon Chuen & Ors [2009] 6 CLJ 405 emphasized that judicial review proceedings are self-contained and the Court’s powers must be exercised within the procedural limits prescribed under Order 53, rather than by recourse to general rules.

The Federal Court in R Rama Chandran v. Industrial Court of Malaysia & Anor [1997] 1 CLJ 147 held as follows– "It is often said that judicial review is concerned not with the decision but the decision-making process. (See: e.g. Chief Constable of North Wales v. Evans [1982] 1 WLR 1155). This proposition, at full face value, may well convey the impression that the jurisdiction of the Courts in judicial review proceedings is confined to cases where the aggrieved party has not received fair treatment by the authority to which he has been subjected. Put differently, in the words of Lord Diplock in Council of Civil Service Unions v. Minister for the Civil Service [1985] AC 374, where the impugned decision is flawed on the ground of procedural impropriety. But, Lord Diplock's other grounds for impugning a decision susceptible to judicial review makes it abundantly clear that such a decision is also open to challenge on grounds of 'illegality' and irrationality' and, in practice, this permits the Courts to scrutinise such decisions not only for process, but also for substance."

The Federal Court in R Rama Chandran expanded the scope of judicial review in Malaysia beyond the traditional common law grounds of illegality, irrationality and procedural impropriety. The Court held that judicial review extends to examining the decision-making process and in appropriate cases, even the merits of the decision, where fairness and justice so require.

This approach has been reaffirmed and refined in subsequent cases. In Alcatel-Lucent Malaysia Sdn Bhd, the Federal Court reiterated that judicial review is a public law remedy concerned with legality, fairness, and rationality, and that the Court must not usurp the discretion vested in administrative authorities.

Accordingly, the duty of this Court in judicial review is to supervise the legality of administrative action, to safeguard individuals from arbitrary or unfair decisions, and to uphold constitutional and statutory limits on executive power, while refraining from trespassing into the merits of the case save in those exceptional circumstances recognised by law.

Based on the above background, the four issues for this Court to consider in this Judicial Review are:

whether the Respondent acted unlawfully in taxing the ETP under subsection 4(f) instead of subsection 4(a) of Act 53;

whether the Respondent lawfully disallowed the Applicant’s claim for the deduction of Sukuk interest expenses under paragraph 33(1)(a) of Act 53;

whether the Respondent acted unlawfully in disallowing the Applicant’s claim for a tax credit under section 110 of Act 53 in respect of unit trust dividends; and

whether the Respondent had any legal basis to disallow alleged deductions for provisions for liquidated damages and restoration costs under subsection 33(1) of Act 53. Issue (i): Energy Test Payments (ETP)

Section 4 of Act 53 sets out the classes of income chargeable to tax as follows– “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; (aa) gains or profits from the disposal of a capital asset;

gains or profits from employment;

dividends, interest, or discounts;

rents, royalties, or premiums;

pensions, annuities, or other periodical payments not falling under any of the foregoing paragraphs; and

gains or profits not falling under any of the foregoing paragraphs.

The Respondent assessed the ETP under subsection 4(f) of Act 53 as “other income.” The Applicant argues that the ETP, being payments received from TNB for electricity generated during testing, forms part of its trading receipts and falls within subsection 4(a) of Act 53.

The Applicant submits that its business commenced with the execution of the Power Purchase Agreement (“PPA”) in 2016, and that testing and commissioning are integral to its trade. Reliance was placed on Jones v Leeming [1930] AC 415 and T LTD v Comptroller of Income Tax [2005] 4 SLR 285, which clarifies that income arising from the same operations as the taxpayer’s established trade constitutes business income.

The Respondent contends that the ETP arose before the commencement of business and thus could only fall residually under subsection 4(f) of Act 53.

The Privy Council in Inland Revenue v ALB [1979] 1 MLJ 1 held that a company is presumed to carry on its activities in the course of business unless displaced. This principle has been applied in Ketua Pengarah Hasil Dalam Negeri v. Pan Century Edible Oils Sdn Bhd [2002] 3 CLJ 784 and Petronas Penapisan (Terengganu) Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri [2014] MSTC 30-078.

This Court observes from the audited financial statements exhibited at Enclosures 2 and 3, the “Principal Activities” note consistently records that the Applicant’s business is the generation and sale of electricity to Tenaga Nasional Berhad under the Power Purchase Agreement and that there was no change in such activities throughout the relevant years of assessment. The Applicant relies on this continuity of business activities to contend that the ETP forms part of its ordinary trading receipts and is therefore taxable under subsection 4(a) of Act 53, rather than as “other income” under subsection 4(f) Act 53.

Therefore, this Court agrees with the Applicant submission that the ETP was paid in respect of electricity generated and sold by the Applicant in the ordinary course of its business, albeit during the testing phase. The nature of the receipt is indistinguishable from its trading income in subsequent years. To treat such receipts as “other income” would be artificial and contrary to both statutory design and commercial reality.

This conclusion is reinforced by T LTD v Comptroller of Income Tax [2005] 4 SLR 285, where the Singapore High Court clarified that a business commences once a taxpayer has committed itself to an income-producing activity or made a final and definitive decision to do so, evidenced by steps beyond mere preparation. Similarly, the UK Tribunal in Wardle v Revenue and Customs Commissioners (No 2) [2025] SFTD 247, applying the three-stage test in Mansell v Revenue and Customs Comrs [2006] STC (SCD) 605, held that for the power generation industry, execution of a Power Purchase Agreement and financial close are sufficient to mark the commencement of business. The Applicant’s execution of the PPA with TNB on 5 September 2016 falls squarely within these principles.

This Court holds that the Respondent erred in treating the ETP under subsection 4(f) of Act 53. The ETP is properly taxable under subsection 4(a) of Act 53 as business income. Issue (ii): Sukuk Interest Deduction

Paragraph 33(1)(a) of Act 53 allows a deduction for outgoings “wholly and exclusively incurred in the production of gross income,” including interest on money borrowed and employed in the production of income.

The Applicant submits that it issued Sukuk in 2017 to finance the development of the Pasir Gudang power plant. It contends that the corresponding financing costs, being the profit/interest expenses payable on the Sukuk are deductible under paragraph 33(1)(a) of Act 53, as they were incurred wholly and exclusively in the production of gross income.

The Respondent contends that the interest was capital in nature and that the audited accounts disclosed a duplication amounting to a “double deduction.” This contention, however, was addressed by the Applicant who clarifies that the presentation in the audited accounts was misconstrued and that only a single deduction was ever claimed in the tax computation.

This Court does not accept the Respondent’s contention. The Sukuk proceeds were raised to finance the Applicant’s power-plant project and operations, and the corresponding borrowing costs fall squarely within paragraph 33(1)(a) of Act 53, which permits a deduction for interest on money borrowed and employed in producing gross income or laid out on assets used or held for that purpose. The allegation of a “double deduction” is without merit, as the evidence shows only a single claim was made, as contended by the Applicant and the Respondent has failed to identify otherwise.

On this point, this Court is guided by the Court of Appeal decision in Margaret Luping & Ors v. Ketua Pengarah Hasil Dalam Negeri [2000] 3 CLJ 409, that interest on loans taken for business purposes is deductible. This principle has been followed in Fernrite Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri [2004] 7 MLJ 600 and Rakyat Berjaya Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri [1998] 4 MLJ 666. The Hong Kong Court of Appeal in Zeta Estates Ltd v Commissioner of Inland Revenue [2007] 2 HKC 527 (on a pari materia provision) held likewise.

The Applicant has emphasised that even where borrowings are applied to acquire capital assets, the interest cost remains revenue in nature because it represents the financing expense, not the cost of the asset itself. The Respondent’s reliance on the “working capital” concept to deny deductibility is therefore misplaced.

This Court does not accept the Respondent’s allegation of a double deduction. As emphasised by the Applicant, the allegation is premised on the presentation in the audited accounts, which does not reflect the actual tax computation. Issue (iii): Tax Credit under Section 110 of Act 53

Subsection 110(9A) of Act 53 provides that a unit holder is entitled to a set-off against its own tax liability in respect of income distributed out of a unit trust fund, provided that such distribution has been included in the unit holder’s gross income for the relevant year of assessment and has already borne tax at the fund level. The provision is designed to prevent double taxation of the same income.

The Applicant included the dividends received from various unit trust funds in its gross income for the relevant years of assessment and produced dividend vouchers evidencing—

the gross dividend;

(ii) the tax suffered at the fund level, and

(iii) the Applicant as the recipient. On that basis, the Applicant contends that the requirements of section 110 of Act 53 were met and that the tax credits ought properly to have been allowed.

The Respondent nevertheless denied the set-off, contending that proof of “remittance” into the Applicant’s bank account was not produced and further arguing that the income had already been taxed at the fund level.

This Court considers this reasoning to be untenable. Subsection 110(9A) of Act 53 imposes only two statutory conditions—

that the distribution be included in the unit holder’s gross income; and

that tax has already been borne at the fund level. There is no additional requirement that the unit holder must prove physical remittance of the dividend into their bank account. Therefore, to import such a requirement would defeat the legislative intent of avoiding double taxation.

This Court further notes that section 44 of the Finance Act 2007 [Act 683] imposes an obligation on companies paying dividends to furnish shareholders with a dividend certificate specifying the gross dividend and the tax deducted or deemed deducted. In tandem, Public Ruling No. 5/2013 on “Unit Trust Funds” issued by the Inland Revenue Board clarifies the mechanism by which unit holders may claim credit under section 110 of Act 53. The statutory burden to prepare and furnish such dividend certificates lies with the Unit Trust, not with the taxpayer. Once the vouchers are tendered, the unit holder’s evidential burden is discharged.

In the present case, the Applicant had, in fact, tendered dividend vouchers setting out the necessary particulars. This satisfies the statutory framework, and no further proof of remittance into a bank account is required.

On the evidence before this Court, the Applicant has satisfied the statutory conditions of subsection 110(9A) of Act 53. The Respondent’s disallowance of the set-off is therefore erroneous in law and the Applicant is entitled to credit for the tax already paid at the fund level. Issue (iv): Provisions for Liquidated Damages and Restoration Cost

Subsection 33(1) of Act 53 permits a deduction only for expenses “incurred” in the production of gross income. It is settled law that a mere provision, being anticipatory or contingent, does not satisfy this statutory test (see: Rakyat Berjaya Sdn Bhd; and Majlis Perbandaran Pulau Pinang v Syarikat Bekerjasama-sama Serbaguna Sungai Gelugor dengan Tanggungan [1999] 3 MLJ 1).

The Respondent accordingly submitted that the provisions for liquidated damages and restoration costs were contingent in nature and therefore non-deductible.

The Applicant, however, clarified that no deduction had in fact been claimed in its tax computations. The provisions were merely accounting entries, which were duly added back in the tax reconciliation.

On the evidence, the Respondent’s adjustment was misconceived. By disallowing sums that were never deducted, the Respondent effectively taxed notional amounts. This accords with the principle that Inland Revenue adjustments must be grounded in the taxpayer’s actual tax computation and not merely in accounting entries.

As the Applicant did not in fact claim these provisions, the disallowance rests on a flawed premise. The Respondent’s decision is therefore unlawful.

It is further significant that despite extensive submissions by the Applicant, the Respondent has not anchored its position in any statutory provision or case authority. This failure to engage with the substantive arguments underscores that the assessments lack a legal foundation.

For the reasons stated above, and having considered the parties’ written submissions and authorities, this Court finds:

the ETP is taxable under subsection 4(a) of Act 53, and not subsection 4(f) of Act 53;

Sukuk interest expenses are deductible under paragraph 33(1)(a) of Act 53;

the Applicant is entitled to a set-off of tax credit under section 110 of Act 53 in respect of unit trust dividends; and

the Respondent acted on an error of law in disallowing deductions for provisions that were never claimed in the computation.

The Court orders –

The impugned Notices of Assessment for YAs 2017–2021 are accordingly quashed by certiorari;

that the ETP be recognised as business income under subsection 4(a) of Act 53 instead of subsection 4(f) of Act 53;

that the interest expense arising from the Sukuk issued is deductible under paragraph 33(1)(a) of Act 53;

that the Applicant’s tax credit claim under section 110 of Act 53 arising from the dividends received from the Unit Trust Fund is allowed;

that the Respondent has no basis in law to disallow the expenses of provision for liquidated damages to TNB and provision for interest on restoration costs, given that the Applicant did not take any tax deduction on the same; and

No cause for this application as confirmed by the Applicant. Dated : 1 October 2025 Dr. Noradura Binti Hamzah Judicial Commissioner High Court Civil 2 Johor Bahru Solicitor for the Applicant : S. Saravana Kumar together with Nur Amira Ahmad Azhar Messrs. Rosli Dahlan Saravana Partnership Solicitor for the Respondent : Ashrina Ramzan Ali together with