Written by Ng Shi Chen
A Federal Court case study on Ketua Pengarah Hasil Dalam Negeri v Tenaga Nasional Bhd
Brief Facts
This case concerned a dispute between the Ketua Pengarah Hasil Dalam Negeri (‘KPHN’) and Tenaga Nasional Berhad (‘TNB’) over TNB’s entitlement to claim Reinvestment Allowance (‘RA’) under Schedule 7A of the Income Tax Act 1967. TNB, whose principal business involves the generation, transmission and distribution of electricity, had claimed RA under Schedule 7A from the year of assessment (YA) 2003 to YA 2017 in respect of capital expenditure incurred on its electricity-related assets.
An internal audit conducted by the KPHN revealed that TNB had claimed for RA from the year of assessment YA 2003 until YA 2017. TNB’s claim for RA under Schedule 7A of the Income Tax Act 1967 (‘the Act’) was rejected in its tax return for YA 2018. The KPHN decided to impose an additional tax of RM1,812,506,384.64 on TNB (‘the Decision’), and the Decision was conveyed to TNB by way of a notice of additional assessment.
KPHN rejected TNB’s RA claim on the grounds that, firstly, the applicable provision under the Act was not Schedule 7A for the RA, but Schedule 7B for investment allowance, as KPHN’s principal activity of generating electricity did not constitute a manufacturing activity within the meaning of Schedule 7A; and secondly, TNB should have claimed for investment allowance for the service sector under Schedule 7B, as it was carrying out utility services. KPNH filed a judicial review application in the High Court to quash the Decision.
High Court
The High Court allowed the judicial review application. The High Court held that the respondent’s business of generating electricity is that of manufacturing it and is not excluded by para 7 of Schedule 7A which sets out the specific circumstances under which a taxpayer’s RA claim may be rejected.
Court of Appeal
The Court of Appeal affirmed the High Court’s decision.
Federal Court
Dissatisfied, the appellant appealed to the Federal Court, which allowed the appeal.
The question of law to be determined by the Federal Court is:
Whether the Court of Appeal was correct in its determination of the Respondent’s activities was that of manufacturing under Schedule 7A of the Act, without regard to the real intention of Parliament in enacting Schedule 7B of the Act, which applied to the utility sector?
The Federal Court delivered the judgment as follows:
- The Parliament enacted Schedule 7A of the Act with the intention to incentivise manufacturing companies to reinvest in their existing business in Malaysia. This was achieved by granting RA for capital expenditure incurred on plant, machinery or factory used for a qualifying project, as defined in para 8 of Schedule 7A. The qualifying projects included expanding, modernising, automating or diversifying the company’s existing manufacturing or processing activities.
- In contrast, Schedule 7B was enacted to provide investment allowance incentives, specifically for companies involved in the service sector, including transportation, communication, utilities and other sub-sectors approved by the Minister of Finance. Schedule 7B was enacted was to encourage investments in infrastructure and services that were essential for public welfare and economic development, by allowing incentive to service sector companies for their capital expenditures in approved service projects.
- Paragraph 1 of Schedule 7A of the Act must be read together with para 2 in that the RA claim must be on capital expenditure on a factory, plant or machinery used in Malaysia for the purpose of a qualifying project, as referred to under para 8(a). The term ‘qualifying project’ was defined in para 8. The respondent failed to establish that these items fell under the said definition as one of ‘expanding, modernising and automating its existing business’. Given that the respondent had already been granted capital allowance in respect of the said items, permitting an RA claim for the same items would result in double dipping, i.e., obtaining the same relief twice which was prohibited in tax law).
- The legal maxim of lex posterior derogat (legi) priori (the younger law overriding the older law), applies. The respondent could not be blamed for filing its RA claim under Schedule 7A, based on its stand that it qualified for it, because it manufactured electricity. However, the mere exercise of that choice did not oblige the appellant to accede it. It was for the approving authority to determine whether an approval should be granted for such a claim and, if not, the aggrieved party had the legal right, in an appropriate factual and legal circumstance, to question that decision in court.
Significance of the Decision
This decision is significant as it provides authoritative clarification on the tax treatment of electricity generators and utility companies under the Income Tax Act 1967. The Federal Court drew a clear distinction between manufacturing activities under Schedule 7A and service or utility activities under Schedule 7B, emphasising that tax incentives must be applied in accordance with the specific legislative framework intended by Parliament. In doing so, the Court rejected the notion that taxpayers have an unfettered choice between incentive regimes.
The case is also important for its emphasis on legislative intent and statutory interpretation in tax law. The Federal Court cautioned against relying on earlier decisions from different statutory contexts, such as cases decided under local government or valuation laws, to determine entitlement to tax incentives. Instead, the Court stressed that the purpose and structure of the Income Tax Act, particularly the introduction of Schedule 7B as a later and more specific provision for utilities, must prevail.
Finally, the decision reinforces the long-established principle that tax law does not permit double relief on the same expenditure. By affirming that a taxpayer cannot simultaneously enjoy capital allowance and reinvestment allowance for the same assets, the Federal Court strengthened the integrity of the tax incentive system. Given the scale of the additional assessment involved, the ruling carries substantial implications for the utility sector and for large-scale infrastructure projects in Malaysia.