- 4(a) of the Income Tax Act 1967 (“the Act”), charges to income tax, the gains or profits from a business. S. 4C of the Act,
which was inserted by way of the Finance Act 2014, stipulates that the gains or profits within the ambit of s. 4(a) includes an amount receivable arising from stock in trade, parted with by any element of compulsion, including on requisition or compulsory acquisition or in a similar manner.
Prior to the enactment of S. 4C of the Act, income tax was not payable on properties acquired by way of compulsion, as can be gleaned from the decision of Supreme Court in Lower Perak Co-operative Housing Society Bhd v Ketua Pengarah Hasil Dalam Negeri [1994] 2 MLJ 713, the Court of Appeal in Ketua Pengarah Hasil Dalam Negeri v Penang Realty Sdn Bhd and another appeal [2006] 3 MLJ 597, and the High Court in Metacorp Development v Ketua Pengarah Hasil Dalam Negeri [2011] 5 MLJ 447. The rationale applied by the Courts in these cases was that a compulsory acquisition could not constitute a sale because the element of compulsion vitiates the intention to trade.
The constitutionality of S. 4C of the Act was tested by a taxpayer, Wiramuda (M) Sdn Bhd. The taxpayer had received a notice of assessment from the Director-General of the Inland Revenue (“the DGIR”) charging to tax pursuant to s. 4C of the Act, compensation that the taxpayer had received from the government for the compulsory acquisition of its lands.
The taxpayer applied to quash the notice of assessment by way of a judicial review application, contending that s. 4C of the Act breaches Art. 13(2) of the Federal Constitution, which provides that, “No law shall provide for the compulsory acquisition or use of property without adequate compensation”. The basis of the taxpayer’s argument was that whilst Art. 13(2) of the Federal Constitution provided for adequate compensation to be paid for the compulsory acquisition of land, S. 4C impaired the right afforded by Art. 13(2) of the Federal Constitution, by subjecting the compensation to taxation.
The High Court dismissed the judicial review application, holding, amongst others, that the provisions of the Act did not contravene Art. 13(2) of the Federal Constitution.
The taxpayer appealed to the Court of Appeal which affirmed the High Court’s decision, finding that s. 4C of the Act was intra vires the Federal Constitution, specifically Art. 13(1) and Art 96 thereof. The taxpayer was not deprived of its right to adequate compensation for the compulsorily-acquired lands, having exercised its right under s. 37 of the Land Acquisition Act 1960 to object to the amount of compensation it was awarded by way of a land reference in the High Court. As such, there was no transgression of constitutional principles or any infringement of the Federal Constitution in the present case as contended by the taxpayer. The tax imposed on the taxpayer was in accordance with the law.
The taxpayer further appealed to the Federal Court. The Federal Court on 09.12.2022, allowed the taxpayer’s appeal, ruling that the compensation obtained for properties or land that are forcefully acquired by the government should not be subject to income tax. In coming to the decision, the Federal Court held that s. 4C of the Act is rendered unconstitutional as it contravenes Art. 13(2) of the Federal Constitution. We would highlight that, to date, the Grounds of Judgment of the Federal Court have yet to be released.
This is the first instance of Malaysian Courts striking down a provision of the Act for being in contravention of the Federal Constitution.
Author: Tania Kat-Lin Edward