The Court of Appeal had the opportunity of determining whether Section 4C of the Income Tax Act 1967 (“the Act”) (and the corresponding Section 24(1)(aa) of the Act) is constitutional in the recent case of Wiramuda (M) Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri (Civil Appeal W-01(A)-513-10/2020).
In short, the Court of Appeal held that Section 4C was rightly enacted by Parliament and was hence, constitutional. The appellate court further held that the matter was something to be determined by the Special Commissioners of Income Tax and ought not to have been ventilated via judicial review. The taxpayer has appealed and the matter is now pending before the Federal Court.
Facts:
In 1987, Selangor State Government alienated 5 parcels of land (‘the Land”) for development projects to the taxpayer. From 1993 to 1994, the taxpayer had carried out quarry activities on certain parts of the land. From 1996 to 2011, the quarry activities were continued by a third-party company and the taxpayer received income from the sale of the quarry rocks. The quarry activities ended in 2011 and the taxpayer remained dormant since then.
In 2015, the State Government of Selangor compulsorily acquired certain parcels of the Land. The taxpayer was offered compensation pursuant to the compulsory acquisition. Vide a tax audit, the Inland Revenue Board (“IRB”) subjected the compensation received from acquisition taxable under Section 4C and Section 24(1)(aa) of the Act and a notice of assessment amounting to the arrears of RM52 million was raised against the taxpayer.
The taxpayer applied for judicial review and leave was granted. However, the Learned High Court Judge dismissed the substantive judicial review application. The taxpayer then appealed to the Court of Appeal and posed the following questions:
- Whether Section 4C of the Act is unconstitutional for contravention of Article 13(2) of the Federal Constitution;
- Whether the taxpayer in the present case can bypass the alternative remedy of appeal to the SCIT under Section 99(1) of the Act; and
- Whether the taxpayer’s compulsorily acquired land is stock in trade as envisaged under Sections 4C and 24(1)(aa) of the Act.
Constitutionality of Section 4C of the Act
It was argued that Section 4C of the Act is unconstitutional by reason of contravention with Article 13(2) of the Federal Constitution which reads:
“No law shall provide for the compulsory acquisition or use of property without adequate compensation.”
The reason for such is that Section 4C violates the cardinal principle regarding “adequate compensation” as held by Federal Court in the case of Semenyih Jaya Sdn Bhd v Pentadbir Daerah Hulu Langat and Another [2017] 3 MLJ 561:
“[198] But what is adequate compensation for a person who has been deprived of his or her property? The term ‘adequate compensation’ is not defined in the Act. In Pentadbir Tanah Daerah Gombak lwn Huat Heng (Lim Low & Sons) Sdn Bhd [1990] 3 MLJ 282, the Supreme Court held that ‘the basic principle governing compensation is that the sum awarded should, as far as practicable, place the person in the same financial position as he would have been in had there been no question of his land being compulsorily acquired’ (see Compulsory Acquisition and Compensation by Sir Frederick Corfield QC and RJA Carnwath).”
Section 4C, which reads as below, taxes any compensation pursuant to compulsory acquisition:
“For the purpose of paragraph 4(a), gains or profits from a business shall include an amount receivable arising from stock in trade parted with by any element of compulsion including on requisition or compulsory acquisition or in a similar manner.”
Section 24(1)(aa) of the Act taxes the compensation receivable in the relevant basis period:
“24. (1) Where in the relevant period a debt owing to the relevant person arises in respect of—
(a)…
(aa) any stock in trade parted with by any element of compulsion including on requisition or compulsory acquisition or in a similar manner, in or before the relevant period;”
By subjecting the compensation payment to tax under the Act, it is therefore not placing the taxpayer in the same position as if the land was not compulsorily acquired as a portion of the compensation would be taxed.
The Court of Appeal first held that there is presumption that laws are constitutional. This was similarly held in Semenyih Jaya (supra.).
The Federal Court in Arumugam Pillai v Government of Malaysia [1975] 2 MLJ 29 which held that as long as method of recovery is prescribed, the constitutionality of the matter cannot be challenged:
“…Taxation is an independent power of the State. The result is that whenever a competent Legislature enacts a law in the exercise of any of its legislative powers, destroying or otherwise depriving of a man of his property, the latter is precluded from questioning its reasonableness by invoking Article 13(1) of the Constitution, however arbitrary the law might palpably be … So long as the method of recovery is laid down by the law, I do not see how it can be challenged.”
Section 4C was correctly legislated by Parliament by reason that the taxpayer was not deprived of his right to adequate compensation by way of land reference to the High Court under Section 37 of the Land Acquisition Act 1960.
Issue of Alternate Remedy
Where a taxpayer is aggrieved by the decision of the Director General of Inland Revenue (“DGIR”), the law prescribes a remedy vide Section 99 of the Act to appeal to the Special Commissioners of Income Tax (“SCIT”).
It is trite that judicial review can be allowed where there is an alternative remedy but such judicial review should only be allowed in “exceptional circumstances”.
The Court of Appeal held that since Section 4C of the Act does not contravene the Federal Constitution, there is no special or exceptional circumstance that entitled the taxpayer to bypass the SCIT under Section 99(1) of the Act. The notice of assessment was validly issued pursuant to the DGIR’s powers under Sections 91(1), 91(3), and 96 of the Act.
Whether the land compulsorily acquired falls under Section 4C of the Act
It was contended that land compulsorily acquired does not fall under the Act as the land was not the taxpayer’s stock in trade. Therefore, even if the compensation was to be taxed, it should be taxed under the Real Property Gains Tax Act 1976.
The Court of Appeal held that the determination of whether an asset is a stock in trade or investment is a question of fact that is to be determined by a court of law.
Comments:
This is the first reported case by an appellate court that determines the question of whether Section 4C of the Act is constitutional or otherwise. Article 13(2) of the constitution canvassed the right of the taxpayer to receive adequate compensation but the same was held to not preclude the Parliament from enacting Section 4C of the Act.
If the Court of Appeal’s decision is upheld by the Federal Court, the question of whether taxes imposed under Section 4C of the Act ought to be taken into consideration when determining the amount of compensation awarded comes into the picture under Section 37 of the Land Acquisition Act 1960. The decision, whether right or wrong, would be determined by the Federal Court in the near future.
Legally Malaysians 