Tax Case Study: Ketua Pengarah Hasil Dalam Negeri (KPHDN) v Kind Action (M) Sdn Bhd

The Respondent belonged to a corporate group, which took instructions from the ultimate holding company.

A Group decision required the Respondent to take over a plantation business previously carried out by its parent company and to acquire certain lands in 2004.

At all material times, the Respondent derived its income from the plantation business, for which the Respondent paid income tax. The lands were listed as fixed assets in the Respondent’s audited accounts.

In 2007, a Group decision to withdraw from the plantation business altogether required the Respondent to dispose of the lands. The Respondent subdivided the lands into smaller lots and sold the lands to various parties vide ten transactions between 2007 and 2017. The Respondent submitted Real Property Gains Tax (‘RPGT’) returns for the disposals, and the Inland Revenue Board (‘IRB’) issued Real Property Gains Tax Act 1976 (‘the RPGTA’) assessments and RPGT certificates from 2011 to 2018.

In 2019, after a tax investigation, the IRB took the position that the proceeds of the disposals were subject to income tax under s 4(a) of the Income Tax Act (‘the ITA’).

In 2020, the IRB, without first discharging or revoking the RPGTA certificates and assessments, raised Notices of Additional Assessment against the Respondent, imposing income tax and 60% penalties (more than RM81 million).

The Respondent argued that:

1. the RPGT assessments were final and conclusive by virtue of s 20 of the RPGTA;
2. the Notices amounted to double taxation and were illegal; and
3. the RPGT assessments and certificates had created a legitimate expectation that the disposals were to be assessed under the RPGTA.

The Respondent filed an appeal to the Special Commissioners of Income Tax (‘SCIT’) and also judicial review proceedings in the High Court.

The High Court decided in favour of the IRB on the following grounds:

1. the Notices were not statutorily barred, as there was negligence on the Respondent’s part;
2. the plea of limitation should be taken up before the SCIT;
3. there was no double taxation, as s 91 of the ITA empowers the IRB to make additional assessments, and the IRB had adjusted the RPGT payments made by the Respondent;
4. the IRB had not acted in bad faith or breached any rules of natural justice;
5. whether the gains from the disposal should be subject to the ITA requires a fact-finding exercise by the SCIT; and
6. as judges of fact, the SCIT would be the appropriate forum to decide on the correctness of the penalty.

The Respondent appealed to the Court of Appeal and succeeded. The IRB thus appealed to the Federal Court.

The Appellant presented seven questions of law before the Federal Court, which can be categorised under three broad headings:

1. the finality of assessment under s 20 of the RPGTA;
2. the applicability of the doctrine of legitimate expectation / estoppel to the IRB; and
3. whether the availability of a domestic / alternative remedy bars a judicial review application.

The Federal Court unanimously dismissed the appeal with costs.

1. The RPGTA assessment is final and conclusive under s 20 of the RPGTA

• The words “final and conclusive” in s 20(1) of the RPGTA are clear and should be interpreted literally.
• The RPGTA assessment is final and conclusive if:
  • there is no appeal against the assessment by a taxpayer within time; and
  • the circumstances under s 20(2) of the RPGTA do not arise.
• To allow the IRB to tax the Respondent under the ITA even if tax or assessment for capital under the RPGTA is final and conclusive would amount to double taxation.
• Under s 14(1) of the RPGTA, the IRB is to conduct an investigation before issuing an assessment. It is not allowed to take returns filed under the RPGTA “on the surface”.

2. The doctrine of legitimate expectation / estoppel applies to the IRB

• The decision in Teruntum Theatre as regards estoppel is no longer good law.
• The Respondent had relied on repeated assurances from the IRB (vide the RPGTA certificates and assessments) over seven years from 2011 to 2018 that the disposals were indeed capital in nature.
• This created a legitimate expectation on the Respondent’s part that RPGT was the correct tax treatment.
• Hence, the IRB is estopped from shifting its position.

3. Judicial review not precluded by domestic / alternative remedy

• The Federal Court affirmed the Court of Appeal’s finding that there is no acid test in judicial review applications.
• If there is clear illegality on the part of the decision-making authority, it is in the interests of justice that such application for judicial review be allowed.
• As the IRB’s decision was tainted with illegality, the matter was rightfully brought by judicial review.
• If the High Court had concluded that the SCIT was the proper forum, it should not have proceeded to decide on the merits of the case.

1. Teruntum Theatre view through the proper lens

• The IRB has historically relied on Teruntum Theatre to argue that there estoppel cannot be raised against the IRB to prevent it from shifting its position concerning the applicable tax basis in a transaction.
• The Federal Court held the law on estoppel and legitimate expectation in Malaysia and in other jurisdictions has evolved, and that the ruling in Teruntum Theatre on this point is no longer good law.
• The Federal Court affirmed the principle in Teruntum Theater that the correct procedure is to discharge the RPGTA assessment first and raise the taxes under the ITA thereafter, if the RPGT assessment has not become final and conclusive.
• Failure to do so amounts to double taxation and gives rise to illegality.

2. Legitimate expectation / estoppel in enforceable

• The IRB cannot take RPGT returns submitted by taxpayers “on the surface”, but is to apply its mind before accepting the returns.
• IRB, having created a legitimate expectation by its conduct, will be estopped from shifting its position if the taxpayer has acted upon the legitimate expectation.