Schedule
Schedule 2; (ii) qualifying expenditure, qualifying agriculture expenditure or qualifying forest expenditure for the purposes of Schedule 3; or (iii) qualifying prospecting expenditure for the purposes of Schedule 4, and which but for this paragraph would be deductible in ascertaining the adjusted income from the business; (f) interest or royalty derived from Malaysia from which tax is deductible under section 109, if tax has not been deducted therefrom and paid to the Director General in accordance with subsection (1) of that section: Provided that this paragraph shall not apply if the payer has paid the amount referred to in subsection (g) any sum, by whatever name called, payable (otherwise than to a State Government or with the approval of the Minister, a statutory authority, or other body the capital or fund of which is wholly or substantially owned by a State Government or a statutory authority) for the use of a licence or permit to extract timber from a forest in Malaysia; (h) (Deleted by Act 619); (i) any contract payment from which tax is deductible under section 107A, if tax has not been deducted therefrom and paid to the Director General in accordance with subsection Provided that this paragraph shall not apply if the payer has paid the amount referred to in subsection (j) any payments from which tax is deductible under section 109B, if tax has not been deducted therefrom and paid to the Director General in accordance with subsection (1) of that section: Provided that this paragraph shall not apply if the payer has paid the amount referred to in subsection (k) any sum paid by way of rentals in respect of a motor vehicle, other than a motor vehicle licensed by the appropriate authority for commercial transportation of goods or passengers, in excess of fifty thousand ringgit: Provided that if the motor vehicle has not been used by any person for any purpose prior to the rental and the total cost of the motor vehicle does not exceed one hundred and fifty thousand ringgit, any sum paid by way of rental in excess of one hundred thousand ringgit: Provided further that the maximum amount of deduction in respect of the rentals of such motor vehicle in the year of assessment and subsequent years of assessment shall not in the aggregate exceed fifty thousand ringgit or one hundred thousand ringgit, as the case may be, in respect of that motor vehicle; (l) a sum equal to fifty percent of any expenses incurred in the provision of entertainment including any sums paid to an employee of that person for the purpose of defraying expenses incurred by that employee in the provision of entertainment: Provided that this paragraph shall not apply to the following expenses: (i) the provision of entertainment to his employees except where such provision is incidental to the provision of entertainment for others; (ii) the provision of entertainment by a person who carries on a business which consists of or includes the provision for payment of entertainment to clients or customers of that business and that entertainment is provided for payment by the clients or customers in the ordinary course of that business; (iii) the provision of promotional gifts at trade fairs or trade or industrial exhibitions held outside Malaysia for the promotion of exports from Malaysia; (iv) the provision of promotional samples of products of the business of that person; (v) the provision of entertainment for cultural or sporting events open to members of the public, wholly to promote the business of that person; (vi) the provision of promotional gifts within Malaysia consisting of articles incorporating a conspicuous advertisement or logo of the business; or (vii) the provision of entertainment which is related wholly to sales arising from the business of that person; or (m) notwithstanding subparagraph (l)(i), any expenditure incurred in the provision of a benefit or amenity to an employee consisting of a leave passage within or outside Malaysia. (2) It is hereby declared that section 33, except in so far as it relates to expenses of the kind specified in paragraphs (1)(a) to (d) thereof, is not an express provision of this Act within the meaning of this section.” [28] For an expense to be eligible for deduction under the ITA, the appellant must demonstrate that such expenditure conforms to the allowances stipulated in section 33 of the ITA. If the expenditure does not meet the criteria outlined in section 33 of the ITA, it would not qualify for deduction. [29] In this present case, the facts reveal that the primary activity of the appellant involves the generation, transmission, distribution, and sale of electricity. The FS was conducted to explore, identify, and develop new hydroelectric sites and dams. However, this activity does not align wholly and exclusively with the production of gross income. The appellant’s gross income primarily stems from the sale of electricity. [30] However, for the expenditure to be eligible for a deduction under section 33 of the ITA, then the expenditure must further not be prohibited under section 39 of the ITA. [31] To be eligible for deduction, a taxpayer must confirm that the expenditure is allowable under section 33 of the ITA. If the expenditure is allowable under section 33 of the ITA, the subsequent step to be eligible for deduction is to ensure the deduction is not prohibited by section 39 of the ITA. [See: Margaret Luping & Ors v. Ketua Pengarah Hasil Dalam Negeri [2000] 3 CLJ 409] [32] In this regard, paragraph 39(1)(c) of the ITA states that no deduction can be made from the gross income of any source during the basis period for a year of assessments for any sum intended or utilized as capital. [33] Therefore, to consider whether the FS is applicable for deduction, the FS must not only fulfill the requirement of wholly and exclusively incurred in the production of gross income under subsection 33(1) of the ITA but must also not be prohibited under section 39 of the ITA. [34] In this appeal, the FS was carried out for the purpose of exploring, identifying and developing the hydroelectric sites and dams. The FS relates to the expenditure for the purpose of exploring and developing hydroelectric sites and dams which in the view of this court is capital in nature. [35] The expenses related to the FS are considered capital in nature and are prohibited from deduction under paragraph 39(1)(c) of the ITA. Therefore, these expenses are not eligible for deduction under section 33 of the ITA. [36] The appellant argued that FS expenses was incurred for the purpose of exploring and developing hydroelectric sites and dams, and not capital in nature. The principal activities of the appellant are the generation, transmission, distribution and sale of electricity. [37] The respondent contended that the hydroelectric sites or dams are not part of the appellant’s stock-in-trade. Since the payment for the FS pertains to the construction, exploration, and development of hydroelectric sites and dams (assets) rather than the appellant’s stock-in-trade, it is not deductible under paragraph 39(1)(c) of the ITA. According to the respondent, this is because it is considered an expenditure or intended expenditure as capital, rather than capital withdrawn, as argued by the appellant. [38] The documents describe that the payment for the FS encompasses the design of dams, engineering works for the upgrade of a mini hydro project, construction of a thermal plant, as well as works for site and river access. [39] The Feasibility Study relates to the hydroelectric projects which are all physical: (a) The Technical Feasibility Study for the Baram Hydroelectric Project; (b) The Initiation Phase Report for Trusan 2 Hydroelectric Project; (c) The Light Detection and Ranging (“LiDAR”) Mapping and Aerial Photography for the Proposed Hydropower Development Projects; (d) The Concept Phase Report for the Baleh Hydroelectric Project; and (e) The Initiation Phase Study Report for the Pelagus Hydroelectric Project. [40] Paragraph 39(1)(c) of the ITA provides “any capital withdrawn or any sum employed or intended to be employed as capital;”. The concept of “incurred in the production of income” was clarified by the Malaysian court in the case of Director-General of Inland Revenue v. L.T.S (supra). The court determined that the nature of an expenditure is determined by examining the purpose of the payment. [41] It is observed that the appellant is not a party to the agreements. The agreements involve Sarawak Energy Berhad and the respective consultants. The responsibilities and liabilities outlined in the agreements rest with Sarawak Energy Berhad. The appellant is not a party to these agreements. [42] In this sense, this court agrees with the contention by the respondent that the expenditure on the FS is not wholly and exclusively incurred in the production of the appellant’s gross income. [43] The appellant further contended that the appellant was the “legal successor” and “permitted assignee” of Sarawak Energy Berhad. [44] In relation to this contention, the agreement between Sarawak Energy Berhad and the relevant consultants does not mention or suggest that the appellant is a party to the agreement. Additionally, there are no clauses in the agreement that make any reference to the appellant. [45] See: Woolley Development Sdn Bhd v. Tiara Contours Construction Sdn Bhd [2016] 2 MLJ 861. [46] Moreover, it is further observed that the agreement does not state that the appellant has an obligation to pay the consultant. Instead, Sarawak Energy Berhad is to pay the consultant [47] In short, there is nothing before this court to substantiate the appellant’s contention that the appellant is the legal successor or permitted assignee in the FS agreement. [48] For the abovementioned reasons this court is satisfied the SCIT had not erred in law or facts in dismissing the appeal. Whether the Director General is correct in law to impose penalties for YA 2011 and 2012 under subsection 113(2) of the ITA. [49] To consider this issue, this court perused subsection 113(2) of the ITA. Subsection 113(2) of the ITA provides a penalty for a person who makes an incorrect return or gives any incorrect information in relation to the liability to tax. The section is reproduced below: “(2) Where a person – (a) makes an incorrect return by omitting or understating any income of which he is required by this Act to make a return on behalf of himself or another person; or (b) gives any incorrect information in relation to any matter affecting his own chargeability to tax or the chargeability to tax of any other person, then, ... the Director General may require that person to pay a penalty equal to the amount of tax which has been undercharged in consequence of the incorrect return or incorrect information or which would have been undercharged if the return or information had been accepted as correct ...” [50] A perusal of subsection 113(2) of the ITA indicates that subsection 113(2) of the ITA allows the respondent to impose penalty on the appellant. The respondent is granted such power to impose penalty equal to amount of tax which has been undercharged under subsection 113(2) of the ITA. In this appeal the respondent imposed a penalty of 35%. [51] See: KT Co. v. Ketua Pengarah Jabatan Hasil Dalam Negeri, Kuala Lumpur (1992) 1 MSTC 3255. [52] The Court of Appeal in the case of Ketua Pengarah Hasil Dalam Negeri v. Classic Japan (M) Sdn Bhd [2022] MLRAU 44 stated: “It is without doubt that section 113(2) of the Act gives a discretion to the Respondent to impose a penalty on a person who has failed to observe the requirements of the law as provided in paragraph 2(a) or (b) of section 113. Hence, the use of the phrase the “Director General may require that person to pay a penalty...” [Emphasis added] [53] Founded on subsection 113(2) of the ITA and the cases cited, it is clear to this court that the respondent has the discretion to impose a penalty. It is well within the ambit of the provisions of the law for the respondent to impose the penalty of 35%. This court is satisfied the penalty imposed by the respondent under subsection 113(2) of the ITA is correct and in accordance with law. [54] The appellant argued that the appellant had acted in good faith. According to the appellant, subsection 113(2) of the ITA allows good faith as a valid defence. In support of this contention the appellant cited the case of Pasdec Corp Sdn Bhd v. Ketua Pengarah Hasil Dalam Negeri [2016] 12 MLJ 555 and Office Park Development Sdn Bhd v. Ketua Pengarah Hasil Dalam Negeri [2011] 9 MLJ 479. [55] The respondent disagreed with the appellant’s contention. The respondent cited the case of Syahkat Pukin Ladang Kelapa Sawit Sdn Bhd v. Ketua Pengarah Hasil Dalam Negeri [2012] 6 MLJ 411. [56] In the case of Sri Binaraya Sdn Bhd v. Ketua Pengarah Hasil Dalam Negeri, Civil Appeal No. R1-14-16-2001, Abang Iskandar bin Abang Hashim J (as His Lordship then was) had elaborated on good faith as reproduced below: “14. With respect, this Court is with the KPHDN on this score. Pertaining to this matter on the imposition of a penalty by the DGIR under section 113(2) of the ITA of 1967, 2 issues have emerged. One is concerned with the exercise of the discretion by the DGIR that the said section of the ITA of 1967 has conferred on him. Secondly is whether a plea of good faith by the taxpayer would constitute a valid defence that would be open to the defaulting taxpayer. From the facts of the case, the taxpayer in this case had submitted inaccurate tax return after an audit exercise was conducted on its account for the year 2003, and once that fact has been established as in this case, the DGIR was within his discretion to impose the penalty on the taxpayer. It is to be noted that there was no prosecution mounted against the taxpayer relatin g to the tax matter pertaining to this case.” [57] This court is of the view, the argument that the appellant had filed the tax return in good faith is not applicable under subsection 112(3) of the ITA. [See: Syarikat Ibraco-Peremba Sdn Bhd, Civil Appeal No. W-01-117-04/2013] [58] In short, the appellant in this appeal cannot rely on the defence of good faith. Conclusion [59] For the aforesaid reasons, this appeal is dismissed. The decision of the SCIT is upheld and affirmed. Costs of RM 2,000.00 to be paid subject to allocator. Date: 5 May 2024 (SHAHNAZ BINTI SULAIMAN) Judge High Court of Malaya, Shah Alam Counsel: For the appellant S. Saravana Kumar, Tan Jass Key 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 respondent: Wan Hamdanie binti Wan Mohamad, Syed Mohd Salim bin Syed Abdul Halim, Bahagian Litigasi Cukai, Jabatan Undang-Undang, Ibu Pejabat Lembaga Hasil Dalam Negeri Malaysia, Menara Hasil, Aras 11, Persiaran Rimba Permai, Cyber 8, 63000 Cyberjaya, Selangor. +6 03 8313 8888