In December 2020, the Federal Court in the case of Wiramuda (M) Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri held that Section 4C of the Income Tax Act 1967 (“ITA”) was unconstitutional as it contravened Article 13(2) of the Federal Constitution (“Constitution”). The Federal Court’s written Grounds of Judgment (dated 31 May 2023) was recently published.
Section 4C of the ITA provides as follows:
Gains or profits from a business arising from stock in trade parted with by any element of compulsion
4C. For the purpose of paragraph 4(a), gains or profits from a business shall include 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.
Article 13(2) of the Constitution provides as follows:
No law shall provide for the compulsory acquisition or use of property without adequate compensation.
The facts of the case are straightforward.
The taxpayer owned 4 parcels of land (“Lands”).
The Lands were compulsorily acquired by the Selangor State Government for the SUKE Highway project. The taxpayer received compensation amounting to RM 202,552,569.50 for the compulsory acquisition (“Compensation”).
The Inland Revenue Board (“IRB”) took the view that the Compensation was subject to tax under Sections 4C and 24(1)(aa) of the ITA. Based on this, the IRB imposed tax amounting to RM 52,966,517.27 on the taxpayer.
The taxpayer challenged the IRB’s assessment by filing an application for judicial review at the High Court. The taxpayer was unsuccessful at the High Court.
The taxpayer appealed to the Court of Appeal but was unsuccessful again.
Finally, the taxpayer appealed against the Court’ of Appeal’s decision to the Federal Court.
Federal Court’s Decision
The Federal Court decided that Section 4C of the ITA contravened Article 13(2) of the Constitution as it deprived the taxpayer of adequate compensation granted in accordance with the Land Acquisition Act 1960 (“LAA”).
In this regard, the Federal Court held that:
- Section 4C of the ITA was introduced to subject the compensation received for the compulsory acquisition of land on the premise that the compensation is gain or profit from business. The section considers compensation from compulsory acquisition to be a form of profit or gain.
- Profit/gain and compensation have different meanings. Profit/gain mean that there is a pecuniary advantage. Adequate compensation means that there is no more or no less than the loss resulting from the compulsory acquisition; it places the landowner in the same financial position as he would have been if the land was not compulsorily acquired. The landowner does not make any profit from the adequate compensation.
- Section 4C of the ITA is fundamentally flawed in providing that a business’s profits or gains include compensation from compulsory acquisition because adequate compensation has no element of profit or gain, nor any pecuniary advantage.
- Since the landowner is being put back in his original position, and gains no earning or pecuniary advantage, taxing the compensation received will mean that the landowner has in fact not received adequate compensation. Section 4C of the ITA therefore infringes on the right to adequate compensation under Article 13(2) of the Constitution.
The Federal Court concluded that Section 4C of the ITA is unconstitutional and liable to be struck down.
As Section 4C of the ITA has been held to be unconstitutional, the IRB will not be able to rely on this provision anymore to impose income tax on compensation received by landowners from any compulsory acquisition. This is clear.
What may not be so clear at this point (as the Federal Court did not specifically deal with this) is what happens to taxes collected by the IRB using Section 4C of the ITA before the Federal Court’s decision. Some taxpayers would have paid such taxes without mounting any challenge in court. Some challenged them, also on the basis that Section 4C of the ITA is unconstitutional, but were unsuccessful. Can these taxpayers claim a refund now that the Federal Court has struck down Section 4C of the ITA? Is the Federal Court’s decision retrospective in effect or does it only apply going forward?
The general rule is that all court judgments (including any declaration of unconstitutionality) are retrospective in effect. However, in appropriate cases, the Court may decide to not give retrospective effect to its decision; this is called “prospective overruling”.
One example of our courts employing the doctrine of prospective overruling is the case of Aminah Ahmad v The Government of Malaysia & Anor, where the Court of Appeal held that the declarations granted in that case that certain provisions of the Pensions Adjustment Act 1980 are unconstitutional, are only to take effect prospectively from the date of decision.
As the Federal Court did not expressly invoke the doctrine of prospective overruling, it is therefore arguable that the decision in Wiramuda ought to have retrospective effect and therefore, taxpayers who previously paid taxes pursuant to Section 4C of the ITA ought to be entitled to a refund. Now that the Federal Court’s written Grounds of Judgment have been published, it will be interesting to see how many taxpayers will seek a refund. Some may even seek a refund together with interest but that would perhaps be a topic to be explored in another article…
Author: Nicholas Mark Pereira