Written by Lim Tse Hwei and Ashley Yip.
MEDAN PRESTASI SDN BHD v. KETUA PENGARAH HASIL DALAM NEGERI [S-01(A)-554-09/2021]
Held in the Court of Appeal (“COA”).
Are the gains received by the Taxpayer from the disposal of 12 parcels of land are trading receipts and taxable as business income under Section 4(a) of the Income Tax Act 1967 (“ITA) or capital receipts taxable under the Real Property Gains Tax Act 1976 (“RPGTA”)?
This is an appeal by the Taxpayer against the decision of the High Court dated 16.03.2023, which dismissed its appeal against the decision of the Special Commissioners of Income Tax (“SCIT”) on 10.05.2019.
The Taxpayer is a wholly owned subsidiary of MK Land Holdings Berhad (“MK Land”), and was previously a subsidiary of MKN Holdings Sdn Bhd (“MKN Holdings”).
On 21.4.1995, the Selangor State Government entered into a Privatisation Agreement (“PA”) with MKN Holdings to construct 50,000 low-cost homes in 9 districts of Selangor with all basic and external infrastructures. Under the PA, the State would provide the land and finance and undertake the sales of the houses. MKN Holdings would provide technical expertise in designing, drawing and completing the construction of the units.
MKN Holdings’ subsequent application for the alienation of 400 acres of land for this purpose was approved by the State. The State specified via a Supplemental Agreement that 75% of the land was to be developed for low cost, low-medium cost and medium cost housing at MKN Holdings’ cost and expense, and MKN Holdings was to undertake the allocation, sale and collection of proceeds. The parcels were alienated to the Taxpayer as a nominee to MKN Holdings.
Upon the disposal of 12 parcels of land, the Taxpayer reported the disposals under the RPGTA. After a field audit, the IRB assessed the disposals as business income under Section 4(a) of the ITA and issued notices of assessment to that effect.
1. The parcels were investments and intended to be rented out, and a part of it would be used to build a showroom.
2. The Taxpayer had been forced to dispose of the parcels due to financial difficulties in MKL.
In dismissing the Taxpayer’s appeal, the SCIT found the following, inter alia:
- There was no documentary evidence of the intention to rent out the parcels. No rental agreement was made.
- The building plan for the showroom was not signed by a certified architect, and was never raised during the field audit. The alleged architect was not called to testify at trial.
- There was no corroboration of AW1’s allegation that the Taxpayer intended for the parcels to be an investment.
- Vide the PA, it was clear that the alienation of the parcels were for their “development into pre-approved commercial and industrial use”.
The High Court had dismissed the Taxpayer’s appeal on the following grounds:
- The assertion by the Taxpayer’s witness that the parcels were intended for investment was a bare assertion.
- There was no documentary evidence that the sale of the parcels was caused by a sudden emergency or unanticipated need for funds.
- The assertion on the proposed office buildings and showroom is an afterthought, unsupported by authenticated evidence and only surfacing during the hearing.
- The PA showed that the parcels were meant for development, not investment.
The Court of Appeal then unanimously agreed with the facts found by the SCIT and affirmed the decision of the High Court. There being no circumstances to warrant the Court of Appeal’s interference, the Taxpayer’s appeal was dismissed with costs of RM10,000.
This summary is based on the judgment of the High Court, read with the Case Summary by the IRB here, as the Court of Appeal’s grounds of judgment have not been made available at the time of publication.
The High Court’s decision and reasoning can be found using this citation: [S-01(A)-554-09/2021]