The year 2022 was a noteworthy one for tax law, characterized by three pivotal cases resolved by the Federal Court, as well as the briefest budget announcement that lasted only one day prior to the dissolution of Parliament. This post aims to shed light on the three cases that presented the Federal Court with the chance to render decisions on intriguing and unprecedented legal matters.
- Ketua Pengarah Hasil Dalam Negeri v Bar Malaysia
The highly anticipated legal case involving the Federal Court’s evaluation of Section 142(5) of the Income Tax Act 1967 (ITA) and its potential abrogation of Section 126 of the Evidence Act 1950 (EA) has reached its final verdict. The Inland Revenue Board (IRB) attempted to utilize the ITA to scrutinize potential tax evasion by law firms through the examination of client accounts. Nevertheless, the High Court and Court of Appeal both upheld the sacrosanct nature of client accounts, with the distinction made between “practitioners” and “advocates and solicitors” in the ITA indicating that Section 142(5) did not encompass the latter.
On July 20, 2022, the Federal Court rejected the IRB’s appeal and upheld the sanctity of client accounts. The Chief Justice declared that the contents of a client’s account are the property of the client, not the solicitor, and as such, the solicitor cannot divulge the information without the client’s consent. The IRB was also proscribed from utilizing the ITA for a “fishing expedition” to determine potential tax evasion. In summation, client accounts in Malaysia are considered sacrosanct and are protected from disclosure without the client’s consent, in contrast to the laws in New Zealand. In summary, unlike the law in New Zealand, client accounts are privileged and cannot be divulged without consent by the clients.
* No reported decision has been made on the matter in question. Additional details regarding the case can be obtained at the following link: www.theedgemarkets.com/article/apex-court-denies-irb-access-client-accounts-law-firm.
2. WSB v KPHDN
In a seminal ruling, the Federal Court declared that Section 4C of the ITA, which purports to impose taxation on income received from compulsory acquisitions, is unconstitutional and in contravention of Article 13(2) of the Federal Constitution, which enshrines the principle of “adequate compensation” for properties compulsorily acquired. In a departure from the decision reached by the Court of Appeal, the Federal Court asserted that the Parliament must not enact legislation that infringes upon fundamental rights, as evidenced by the provisions of Section 4C of the ITA. Prior to the inclusion of this section, compensation received from compulsory acquisitions was exempt from taxation under Paragraph 3(1) Schedule 2 of the Real Property Gains Tax Act 1976 (RPGTA), as established in judicial precedent such as the 2006 case of Ketua Pengarah Hasil Dalam Negeri vs Penang Realty Sdn Bhd and Metacorp Development Sdn Bhd vs Ketua Pengarah Hasil Dalam Negeri.
The judicial review application, which was initially dismissed by the High Court and Court of Appeal, held that Section 4C of the ITA was properly enacted and that any grievances should be addressed through the appropriate channels, such as the Special Commissioners of Income Tax route.
* No reported decision has been made on the matter in question. Additional details regarding the case can be obtained at the following link:https://www.theedgemarkets.com/article/compensation-forcefully-acquired-properties-should-not-be-subject-income-tax-rules-apex
3. KPHDN v MEMB
The IRB previously disallowed expenses totaling RM190 million claimed by MEMB on the grounds that the expenses had been accrued but not disbursed. MEMB subsequently launched a judicial review, which was initially denied by the High Court but later overturned on appeal by the Court of Appeal.
The IRB’s subsequent appeal to the Federal Court prompted the examination of two key legal questions:
- Whether the argument of an alternate remedy is to be considered only during the substantive stage of judicial review, rather than at the leave stage.
- Whether Section 103B of the Income Tax Act 1967 (ITA) precludes a court from granting a stay order.
The taxpayer argued that judicial review was appropriate in cases where tax assessments were raised in an erroneous and arbitrary manner, and that nothing in the ITA prevented the granting of a stay order. The case was ultimately remitted back to the High Court for further proceedings to address the substantive issues at hand. Thus, despite the existence of an alternate remedy, taxpayers are still entitled to use judicial review as a means of seeking resolution for their grievances.
* No reported decision has been made on the matter in question. Additional details regarding the case can be obtained at the following link: https://www.theedgemarkets.com/article/muhibbah-engineering-gets-nod-challenge-tax-assessments-imposed-irb