Recently, Evrol Mariette Peters JC of the
Introduction
In the case of Seaport, the
However, the
Background
The Applicant was appointed by the Johor State Government as the Master Developer of the Tanjung Bin Petrochemical and Maritime Industrial Centre and was the registered proprietor of five plots of 99-year leasehold land measuring a total of 912 hectares in Tanjung Bin Johor (“TBPMI Centre Lands”) which were alienated by the Johor State Government in 2005.
Pursuant to a Lease Agreement dated
The DGIR initially took the position that the sum of
After correspondences back and forth between both parties, the DGIR agreed to treat the proceeds from the disposal of the Johor Land as “business income” under Section 4(a) of the ITA but averred that the income from the disposal of the leasehold interest arose from the business of letting out and not a business of property development. Therefore, the DGIR disallowed the Applicant from deducting property development expenses incurred against the “rental” income from the disposal of the Johor Land.
Issues
The issues to be determined by the
- whether the DGIR had taken into account relevant considerations in concluding that the income from the disposal of the Johor Land arose from the business of letting out, as opposed to the business of property development; and
- whether the existence of an alternative remedy constitutes a bar to judicial review.
- In the event it is evidently clear that the DGIR has erroneously and/or improperly arrived at its decision whereby additional taxes and penalties are imposed, for example, by failing to take into account relevant matters and taking into account irrelevant matters, the Court would be inclined to allow a judicial review application filed by a taxpayer.
- The existence of the internal appeal procedure under Section 99 of the ITA does not constitute a bar to judicial review. Even if a taxpayer has engaged the internal appeal procedure, he or she is not precluded from resorting to judicial review.
Reasons for the Decision
Justice
Relevant Matters Not Considered by the DGIR
- The Object Clause of the Applicant's Memorandum of Association
It is clear from the first object clause of the Applicant's Memorandum of Association that the Applicant was incorporated to carry on the business of a property development company. The DGIR ought to have adverted to the first object clause in determining the nature of the Applicant's business, even though it is not conclusive.
- The Development Activities Undertaken by the Applicant
The DGIR ought to have considered the undisputed facts that the Applicant had carried out various developmental activities upon the TBPMI Centre Lands, such as applying for the TBPMI Centre Lands to be converted into “industrial land”, obtaining planning approval to develop the lands, obtaining the environmental impact assessment approval and installing basic facilities. Furthermore, the DGIR should also have had regard to the fact that the Applicant's status as a property developer has been acknowledged and confirmed by the relevant state authorities.
- Provisions of the ITA
The phrases “property developer” and “property development” are defined in Regulation 3 of the Income Tax (
“Property developer” means “a company, an individual, a partnership, a cooperative society, a body of persons, who or which engaged in or carries on or undertakes or causes to be undertaken a property development”; and
“Property development” means “the activity of acquiring land for the purposes of developing, constructing or causing to be constructed thereon and selling completed residential, commercial or industrial buildings, whether as a whole or by parcels therein, and development and sale of vacant lots for the construction of such buildings thereon including homesteads, hobby farms, orchards or for other similar purposes”.
The DGIR argued that the leasehold interest in the Johor Land did not fall under the purview of “sale of vacant lots” on the basis that the residual interest would eventually return to the Applicant. However, the Court took the view that the definition of “property development” does not limit the “sale of vacant lots” to the exclusion of “sale of leasehold interest in vacant lots”.
While it may be argued that there is ambiguity in the definition of “sale of vacant lots” as there is no express inclusion or exclusion of “sale of leasehold interest in vacant lots”, such ambiguity should be interpreted in the Applicant's favour as a matter of the principle of interpretation of taxation legislation, following
- Provisions of the National Land Code 1965
The DGIR's position that a sale or disposal of the Johor Land would only have occurred if
Given the restrictions imposed by Section 221(3) of the National Land Code, the Applicant would have been unable to dispose of the leasehold interest in the Johor Land (which forms part of an alienated land) for any duration longer than 30 years at any given time.
- Relevant Case Law
The DGIR had failed to consider and apply two crucial authorities namely
For example, in Strawberry Park, the taxpayer had built 63 condominium units on a piece of leasehold land that it held for 85 years. It then leased the condominium units for a duration of 30 years. The Court held that the income from the disposal of the leasehold interest in the land for 30 years was business income of the taxpayer under Section 4(a) of the ITA, claimable as property development expenditure.
Irrelevant Matters Considered by the DGIR
- Public Ruling No. 1/2009
The DGIR had relied on Public Ruling No. 1/2009 on
Public rulings are merely expressive of the views of the IRB and carry with them no force of law: see for example
Thus, by relying on Public Ruling No. 1/2009, the DGIR had clearly taken into account an irrelevant factor in arriving at its decision.
- Audited Accounts
The DGIR had placed much emphasis on the Applicant's audited accounts, particularly the phrases and terminology used therein, and tax computations. Importantly, the financial statements and audited accounts were prepared by the Applicant for the benefit of the company and its shareholders, and not for inspection by the DGIR. As such, the labels used in such documents could not have reflected the exact and true nature of the transaction between the
- The Form of the Agreement
The DGIR placed significant emphasis on the form of the Lease Agreement. In the Court's view, the DGIR should have focused on the substance of the Lease Agreement. Had it done so, it would have been clear to the DGIR that the Applicant was in fact carrying on property development activities.
Although the
Comments
This decision reaffirms that the trite principles of administrative law apply to the IRB in that the IRB must take into account relevant matters and exclude from its consideration irrelevant matters in its decision-making process, and that the existence of the internal appeal procedure under Section 99 of the ITA does not bar judicial review even when the taxpayer has filed Form Q (Notice of Appeal to the Special Commissioners of Income Tax).
Both the taxpayer and the IRB have appealed against the
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