The Special Commissioner of Income Tax (SCIT) recently published a judgment on the case of R v KPHDN (unreported) which pertains to three time bar provisions in the Malaysian Income Tax Act 1967 (MITA), namely Section 91(2), Section 91(3), and Section 111(2). The SCIT dismissed the appeal and concluded that the taxpayer was not entitled to a tax refund due to the operation of Section 111(2) MITA, and the Inland Revenue Board (IRB) was authorized to issue the 2nd Notice of Assessment beyond the time bar limitation under Section 91(3) MITA.
The taxpayer is an investment holding company that failed to file their tax returns for the Years of Assessment (YAs) 1994 – 2000 due to negligence on the part of the previous management. However, the company rectified the situation by filing the missed tax returns, including the returns for YA 1994 to 2000, in January 2007. As a result, the IRB issued a CP.63 Notice of Computation of Repayment dated 24.3.2008 (“1st Notice of Assessment”), which granted tax credits of RM842k from dividend income received by the taxpayer under Section 110 of the MITA for YA 1996. The IRB later issued a computation table to the taxpayer, indicating that the tax credit had been utilized against tax payable for other years of assessment.
In February 2015, the IRB claimed that the taxpayer should not be allowed to claim the tax credit due to failure to submit the original dividend voucher and other reasons. After a series of correspondences, the IRB revoked the dividend credit by issuing another Notice of Assessment dated 27.2.2015 (“2nd Notice of Assessment”) and citing non-compliance with Section 111(2) of the Income Tax Act 1967. This provision requires that dividend credits be claimed within 6 years from the year of assessment.
Questions to the SCIT
- Whether there is any basis in law for the DGIR to invoke Section 91(3) MITA and issue the 2nd Notice of Assessment to withdraw the tax credit issued under the 1st Notice of Assessment
- Whether the DGIR is precluded under Section 91(2)(b) MITA from reclaiming the income tax credit approved under the 1st Notice of Assessment
- Whether the Appellant had the right to claim the repayment of tax 6 years after the end of YA 1996 under Section 111(2) MITA
Both parties called a witness to testify on the matter, and after hearing their testimony and reviewing written submissions, the SCIT made the following decision:
Issue 1: Section 91(3) and Section 91(2)(b)
The SCIT determined that the taxpayer was negligent because they failed to file their tax returns on time, which was seven months after the end of the financial year for the relevant year of assessment. The use of the word “shall” in Section 77A made it mandatory for the taxpayer to file their tax returns on time, and this negligence was admitted during cross-examination. As a result, the IRB was legally authorised to raise the assessment despite the time bar provision under Section 91(3).
The Court acknowledged that Section 91(2) is a separate provision from Section 91(3). However, it does not specify the application in circumstances of the taxpayer’s negligence in the current appeal.
Issue 2: Section 111(2)
Section 111(2) states that a taxpayer cannot claim a tax refund more than six years after the relevant year of assessment or six years after an assessment if charged. When the taxpayer filed their tax returns for YA 1996 in January 2007, they essentially made a “claim” under Section 111(2). The delay of 11 years violated Section 111(2) of the MITA because it was much longer than the statutory six years.
With all due respect, the SCIT had flawed in its judgment on numerous points.
Firstly, the SCIT included provisions of the MITA that were not applicable to the current matter, such as Section 111(1A) and Section 111(1B) of the ITA, which only applied from YA 2003 onwards.
Secondly, it is possible that the DGIR’s attempt to retrieve the tax credit by issuing the Second Notice of Appeal may be invalid due to lack of jurisdiction under Section 91(1). The Singapore Court of Appeal has previously ruled on the matter in the case of Comptroller of Income Tax v AQQ and another appeal  SGCA 15  2 SLR 847, where such actions were beyond powers conferred under the Singapore Income Tax Act 1947 (“SITA”):
“ In the light of the consistently narrow meaning assigned to the word “assess” to refer to the determination of the amount of liability to tax under the Act, we do not think that the Comptroller has the implied power under s 74 to assess for tax a sum that had previously been refunded or repaid to a taxpayer. We recognise that this leaves an asymmetry in the positions of the Comptroller and the taxpayer – under ss 93 and 93A, a taxpayer may recover tax in excess of the amount payable under the Act or overpaid tax by reason of an error or mistake in a return filed.”
Note : Section 74 SITA bears similar wordings to Section 91 of the MITA.
Section 74 SITA may only be invoked where “the amount of tax assessed under the Additional Assessments was less than the amount of income tax assessed under the corresponding Original Assessments for each year.” The Comptroller therefore acted ultra vires s 74(1) as AQQ had not been previously “’assessed at a less amount than that which ought to have been charged’ and the trigger event for enabling the Comptroller to issue an additional assessment had not occurred.” The reason being that under the “tax assessed” line below, the amount under the additional assessment is actually less than the original assessment:
Therefore, the Additional Assessment was issued without any authority since there was no tax undercharged.
In the current appeal, the tax assessed and chargeable income in the 2nd Notice of Assessment is the same as in the 1st Notice of Assessment (see below). As a result, the power of the DGIR to “make an assessment or additional assessment … in respect of that person in the amount or additional amount of chargeable income and tax” under Section 91(1) MITA is not applicable.
Finally, the Judge did not provide any explanation as to why Section 91(2) of the MITA does not apply. It is a well-established principle that the court or executive should not add any additional requirements or conditions where they do not exist in the statute (as stated in Multi-Purpose Holdings Berhad and Success Electronics). While it is not disputed that the taxpayer was negligent in their tax affairs by failing to file the tax returns on time, they promptly took action to rectify the situation upon discovering the omission by the previous management. However, there is nothing in Section 91(2) that indicates that if the taxpayer was negligent, the time limit for the DGIR to reclaim tax refunds does not apply. It is regrettable that the SCIT did not address this issue in greater detail.
In relation to the Comptroller’s options for recovering the tax, the Singapore Court of Appeal briefly discussed the possibility of the Government of Singapore initiating a civil action to recover the refunded tax. The taxpayer in this appeal raised this point, but the SCIT did not address it. As the time limit set out in Section 91(2) MITA was not met and no common law civil action was commenced, the IRB was not entitled to reclaim the taxes.
A point not ventured by neither parties nor the court was the application of the second limb of Section 111(2) which allows for a claim to be made where there is a repayment of tax charged by an assessment within 6 years. Following the Court’s line of reasoning and if we consider the tax returns filed as a claim which was granted by virtue of the 1st Notice of Assessment, the taxpayer could still benefit from “repayment of tax charged by an assessment”. As the tax refund was immediately used to set off against other years’ tax payable, there was no unclaimed tax refund.
Note: the case is currently pending appeal before the High Court.