Case update: IRB’s right to apportion expenses

The general rule governing the deductibility of expenses is encapsulated under section 33(1) of the Income Tax Act 1967 (“the Act”) which reads (emphasis as highlighted):

Therefore, the below conditions must be fulfilled (unless otherwise provided in the Act) to allow a deduction for an expense:

  1. The expenses must be wholly and exclusively incurred in the basis year
  2. It must be wholly and exclusively incurred in the production of gross income

The contention arises where there is more than one motive for the purpose of the said expense i.e. an incidental benefit or ulterior purpose. The question is then for the trier of fact to decide that whethe the expense should be (1) wholly disallowed or (2) apportioned or (3) wholly allowed.

In DGIR v Kok Fai Yin Co Sdn Bhd, the amount was wholly allowed.

Background facts:

The DGIR was of the view that the directors’ fees paid to 3 directors of the company were unreasonably excessive and proceeded to only allow a portion of the directors’ fees expense and added back the remaining in the computation of gross income.

DGIR’s stance was that the directors’ fees were not “wholly and exclusively” incurred in the production of gross income hence the apportionment. (it’s a shame the facts did not provide how much was added back and the evidence and basis  by the IRB to prove what was they think ‘reasonable’ because there is a wide spectrum of the amount a directors’ can be paid.)

The question before the High court was whether this apportionment was justified.


Upholding the decision of the SCIT and dismissing the DGIR appeal, the court held that DGIR had no power to Section 33 of the Act did not empower the DGIR to consider and determine what reasonable fees should have been paid to the directors by the Taxpayer and to disallow the excess from deduction under that section.

Comparing local laws to that of the UK, Section 33 does not encapsulate the word “wholly, exclusively and necessarily incurred”. The latter would empower the tax authorities to have authority and determine whether the said expense was necessarily incurred.


However, in the recent case of KPHDN v Kompleks Tanjung Malim Sdn Bhd, the High Court held that the tax authorities were justified in apportioning the quit rent expense.

Background facts:

The company was at all material times solely involve in the business of oil plantation only. Their only source of income was from the sale of fresh fruit bunches harvested from their land.

The Company applied to convert the said land from “agriculture land” to “commercial land” in 1993. As a result of the approval, the quit rent for the land where the oil palms were planted increased from RM200k in YA 2005 to RM1 mil in YA 2006, 2007 and 2011.

The IRB conducted a tax audit and disallowed a portion (around RM800k) on the basis that the whole amount of RM1mil was not incurred in the production of gross income of the company because, being an oil palm plantation company, there was no reason why the company should apply to convert the land from “agricultural” status to “commercial” status.

The SCIT followed Kok Fai Yin and agreed that the IRB had no power to apportion the single expense into allowable and non-allowable portions, hence this appeal to the High Court.


Deciding Order by the SCIT was set aside and appeal allowed. The High Court held that the IRB was right in the apportionment. The reasonings are as follows:

1/ The SCIT made a finding of fact that the reason for conversion was solely to enhance the capital value of the land. Therefore, it had nothing to do with the company’s oil palm production business. The court said that this was akin to the payment of franchising fees where the expense was incurred for the right to commence business instead of production of gross income.

2/ This case can be distinguished from Kok Fai Yin on the basis that there is no disagreement directors fees are wholly and exclusively incurred in the production of gross income of the company. The only contention that they had was that it was unreasonably high. The question for the court here was whether the additional RM800k in quit rent expense should be allowed for a deduction where it had nothing to do with the company’s business. The question on point of law is different.

3/ The Company can still continue its oil palm business without the conversion hence it could not be said to be “wholly and exclusively” incurred in the production of gross income.


UPDATE: the Court of Appeal reverses the decision of the High Court in July 2019 and hence upholding the position of Kok Fai Yin where the IRB has no power to dictate how parties are to conduct their business. Therefore, although the conversion of the land from agriculture to commercial has no relevance to the taxpayer’s business of oil plantation, such expense is still deductible because the land on where the oil palm are planted is used in the production of gross income of the company.


When determining whether an expense is wholly and exclusively incurred in the production of gross income, one must look at not only whether it is relevant to the company’s business but also the relationship with section 33.

Personally, I think that the decision in Kok Fai Yin is correct because directors’ fees is an arbitrary topic, mainly decided by contract between the director and the company and therefore not a matter that the IRB should interfere. I am curious as to how IRB could allow million ringgit directors’ fees in listed companies and why instead conducted this additional assessment on a private company.

Either way, IRB doesn’t lose out on tax received because the directors’ fees would be taxable at the director’s end under individual tax.

In Tanjung Malim case, I do think that there is some rationale behind the apportionment but I am interested to know how this plays on if there are other factors into play ie inflation and government intervention. Would the quit rent payment still be capped at Rm200k?

Another point I can think of which supports the High Court decision is that due to the fact that land is not part of the company’s trading stock, there really is no real purpose in increasing the value of the land. Compared to CP Sdn Bhd v KPHDN, valuation fees incurred for the purpose of (in addition to comply with MFRS) determining how much the land could be sold in the future form part of the company’s trading stock, as it was a property development company, is deductible. A highly valued land could fetch a higher price and when sold, higher gross income. In Tanjung Malim case, this does not seem to be the case as it’s trading stock is not the land, which would be subjected to Real Property Gains tax instead of income tax when sold hence not incurred in the production of gross income.

However, since it was held in Kok Fai Yin that section 33 does not give the IRB power to determine directors’ expenses but the same section allowed IRB to determine quit rent payment, which one prevails? As said in Kok Fai Yin, only where there is a word “necessarily” thereafter then the tax authorities could determine the apportionment of expenses. In absence of past records, can it be wholly deductible i.e. if someone purchased Tanjung Malim’s “commercial land” but continued the business of oil palm plantation, is that company also only allowed to claim RM200k tax deduction? Some clarification would be needed in order to have a clear conclusion of the limits of authority of IRB and powers given under section 33.