Federal Court upheld solicitor-client privilege pertaining to clients’ accounts by law firms.

A 7-member Federal Court bench held on 20 July 2022 that law firms’ clients’ account are protected by solicitor-client privilege under Section 126 of the Evidence Act 1950 (“EA”) and that Section 142(5) of the Income Tax Act 1967 (“ITA”) does not permit disclosure of the same. The Federal Court upheld the decision of the Court of Appeal and High Court (analysis of the Court of Appeal Judgment can be read here).

Without regurgitating my earlier blog post, the Director General of Inland Revenue (“DGIR”) requested for law firms to disclose details of their clients’ accounts circa 2016. The Malaysia Bar had protested, expressing its objections as they were protected by solicitor-client privilege. The DGIR’s reason for requiring disclosure of the clients’ accounts were to ensure tax compliance by law firms to determine quantum of taxes to be imposed on the respective law firms.

Chief Justice Tengku Maimun Tuan Mat held that “the content of the client’s accounts belongs to the clients of the solicitor and not the solicitor” and that Section 142(5) of the ITA does not oust Section 126 EA. The only person who can waive that privilege is the client.

This is a landmark ruling by the Federal Court on solicitor-client privilege in Malaysia. This decision entails that unlike New Zealand, there is no provision in the ITA or the EA which accords the tax authority to audit the clients account and such authority cannot be implied vide the rule of strict interpretation. The sanctity of client solicitor privilege can only be divulged through waiver by the client and no one else.  


High Court allows judicial review for misapplication of Section 140A of the ITA

The High Court had recently, in the case of Petronas Trading Corporation Sdn Bhd v KPHDN (Civil Appeal WA-25-17-01/2021), allowed leave for judicial review by finding that questions of illegality, unlawful treatment, error of law and failure to adhere to legal principles warrant intervention by way of judicial review. The grounds of judgment are accessible here.

This was one of the first few cases I handled as counsel whilst in RDS, where the taxpayer challenged the novel question of the application of Section 140A to a reassignment of income and expenses. 


The taxpayer was principally engaged in marketing and trading natural resources, i.e. crude oil. Vide an Undisclosed Agency Agreement, the taxpayer was appointed as an agent by its subsidiary, PETCO Trading Labuan Company Ltd (“PTLCL”). 

(Read: Undisclosed Agency Agreement is where an agent negotiates with a third party who does not know that the agent is acting on behalf of a principal.)

In 2011, PTLCL was invited to join the Global Incentive for Trading (“GIFT”) Programme. Subsequently, the taxpayer’s board of directors approved the reassignment of business activities and human resources from the taxpayer to PTLCL progressively. 

The DGIR disallowed the reassignment by invoking Section 140A of the ITA by stating that the income and expenses belonged to the taxpayer instead of PTLCL. The DGIR then raised notices of assessment amounting to RM 33 million to the taxpayer. 


Counsels for the taxpayer argued that leave for judicial review should be allowed given the following reasons: 

    – Judicial review remains available as long as the taxpayer shows that it has an arguable case and that the application is not frivolous; 
    – Availability of domestic remedy is a matter to be raised at the substantive stage;
    – The DGIR disregarded the assignment without taking into account the commercial structure and activities of the companies;
    – As a Labuan company, PTLCL is governed by the Labuan Business Activity Tax Act 1990 (“LBATA”) where Section 17D of the LBATA did not come into force before 1.1.2020; and
    – Section 140A of the ITA does not empower the Respondent to disregard and re-characterise the transactions, especially when there was no related party transaction between the parties.

As for the Respondent, the Attorney General Chambers and the DGIR argued as follows: 

    – Section 140A of the ITA does not empower the Respondent to disregard and re-characterise the transactions, especially when there was no related party transaction between the parties.

    – The taxpayer cannot bypass the SCIT and the correct avenue is to file a notice of appeal under Section 99 of the ITA; and

    – The basis for invoking Section 140A of the ITA was that the income derived and expenses incurred belonged to the taxpayer, not PTLCL.

Decision of the Court

In allowing leave for judicial review, the Learned High Court Judge was conscious of the fact that the DGIR’s powers under Section 140A of the ITA are limited in that it only allows the DGIR to adjust the arm’s length price:

    “It is therefore clear that section 140A ITA only permits the Respondent to substitute the price in respect of the transaction to reflect an arm’s length price for the transaction. It does not permit the Respondent to disregard and re-characterise the UAA in this matter.”

Secondly, whether the DGIR’s failure to invoke Section 140 of the ITA is a question of law to be answered in the judicial review action. As alluded by the Supreme Court in National Land Finance Co-operative Society Ltd v Director General Inland Revenue [1993] 4 CLJ 339, both Section 140 and 140A of the ITA must be subject to the principle of strict interpretation, and every exercise of statutory power must conform with the express words of the statute and implied legal requirements. 

Finally, the Learned High Court Judge was categorical in finding that the threshold for leave to commence judicial review is low and that nowhere within Order 53 of the Rules of Court 2012 held that the existence of domestic remedy is a bar to judicial review. 

The DGIR had appealed to the Court of Appeal and the matter is now pending hearing.