Extract
In the two recent cases of Ketua Pengarah Hasil Dalam Negeri Malaysia (“KPHDN”) v. Prima Nova Harta Development (“the Prima Nova case”) and KPHDN v. Taman Equine (“the Taman Equine case”), the Court of Appeal allowed KPHDN’s appeals against the decisions of the High Court and disallowed the taxpayers’ deductions of Bumiputra discounts pursuant to S.33(1) ITA 1967. However, no grounds of judgment were released by the Court of Appeal for these decisions.
On 3 April 2023, in the case of KPHDN v. Mitraland Kota Damansara Sdn Bhd, the Court of Appeal revisited the issue of the deductibility of Bumiputra Discounts and did not follow the earlier Court of Appeal decisions as there were no grounds of decision released. The Court of Appeal held that Bumiputra discounts paid to a State Authority in return for releasing Bumiputra units to Non-Bumiputras was not a capital expenditure nor a penalty and was incurred wholly and exclusively in the production of income and was therefore deductible for the purposes of income tax under S.33(1) of the Income Tax Act 1967 (“ITA 1967”).
The taxpayer was represented by Datuk Francis Tan, together with Brandon Shen, from the firm’s Tax Practice.
Background to the Mitraland Case
Mitraland Kota Damansara, the taxpayer, is a property developer and builds and sells residential and commercial properties. Mitraland sought to sell unsold Bumiputra lots to Non-Bumiputras and applied to Lembaga Perumahan Dan Hartanah Selangor (“LPHS”) for permission to sell the Bumiputra quota units to non-Bumiputra. This permission was granted on conditions that:
(i) an amount equivalent to the Bumiputra discount of 7% or 10% be paid or refunded to LPHS;
(ii) additionally, for sales made before the receipt of approval for the sale of the Bumiputra quota units to non-Bumiputra, 5% of the selling price should be paid to LPHS for breach of the Bumiputra release mechanism.
The taxpayer paid these amounts and made a corresponding deduction in its income tax filing for the year of assessment 2014. However, the KPHDN determined that the payment made by the taxpayer for the Bumiputra discount was not deductible pursuant to S.33(1) of ITA 1967 and issued a Notice of Additional Assessment.
Being dissatisfied with the Notice of Additional Assessment, the taxpayer filed an appeal against this Notice of Additional Assessment to the Special Commissioners of Income Tax (“SCIT”) to determine whether the sum paid to the State Authority of Selangor to procure the approval of the State Authority to sell units of development reserved from Bumiputra to Non-Bumiputra are deductible pursuant to S. 33(1) of the ITA 1967.
Decision of the SCIT, High Court and Court of Appeal
Following trial of the matter, the SCIT determined that the Bumiputra discount paid to LPHS was not deductible. However, this decision was overturned in the High Court in favour of the taxpayer.
On 3 April 2023, the Court of Appeal delivered its decision on this issue of the deductibility of Bumiputra Discounts. Despite the earlier Court of Appeal decisions in the Prima Nova and Taman Equine cases, the Court of Appeal held that it was not bound by these decisions as no grounds of judgments were issued for those appeals, and the reasoning of the earlier Court of Appeal could not be discerned.
On the facts of the present case, the Court of Appeal held that the Bumiputra discounts paid to a State Authority was:
(a) not in the nature of capital expenditure;
(b) not a penalty imposed on the developer;
(c) incurred wholly and exclusively in the production of income; and
(d) deductible for the purposes of income tax under S.33(1) of the ITA 1967.
However, the Court of Appeal did allow KPHDN’s appeal in part and held that the amount paid to the State Authority imposed for penalty for breaching of the Bumiputra release mechanism was not deductible for the purposes of income tax under S.33(1) of the ITA 1967.
Implications
This case is the latest development in the line of cases on deductibility of Bumiputra discounts, including the Prima Nova and Taman Equine cases.
The Court of Appeal has stated that it will release grounds of judgment for this case, and this will form the authoritative decision which will finally lay this issue to rest.