KUALA LUMPUR (Oct 22): The appellate court has unanimously ruled that the Inland Revenue Board (IRB) has to return tax collected on compensation from properties or land that are forcefully acquired by the authorities.
A three-member Court of Appeal (COA) panel said this follows the landmark 2022 apex court decision declaring the particular section of the Income Tax Act 1967 (ITA) unconstitutional, which thus applies retrospectively.
The panel, consisting of COA judges Datuk Azizul Azmi Adnan, Datuk Ong Chee Kwan and Datuk Seri Mohd Radzi Harun, dismissed the IRB's appeal in part and upheld the lower court's decision for the agency to return the taxes collected for the RM22.5 million compensation that Lush Development Sdn Bhd had declared, along with the 5% interest per year from the date the company filed its court case.
Company successful at High Court; IRB appealed
This particular appeal concerns Lush Development's successful judicial review bid at the High Court.
In October 2016, the Selangor State Authority had compulsorily acquired seven parcels of land belonging to the company and gave RM22,470,845 as compensation.
As the compensation was still taxable at that material time, the company had filed its taxes accordingly.
Following the apex court's December 2022 decision, the company then wrote to the IRB in February 2023, among others, asking for a refund of the sum. The IRB did not respond to the company, which resulted in the subsequent judicial review application.
The Federal Court’s landmark decision on Dec 9, 2022 — in the matter of Wiramuda (M) Sdn Bhd v director general of the IRB — concerns Section 4C of the ITA, which reads: "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."
The Federal Court unanimously ruled Section 4C as being unconstitutional, as it contravened Article 13(2) of the Federal Constitution.
Article 13(2) stipulates: “No law shall provide for the compulsory acquisition or use of property without adequate compensation."
COA dismisses IRB's argument that this could open floodgates
In a 57-page grounds of judgement, COA judge Ong stressed that the Federal Court's landmark decision applied retrospectively "in the absence of any express direction of prospectivity" and that "no basis exists" for the COA "to impose such a limitation", where the apex court itself declined to do so.
In the judgement dated Oct 19 and uploaded onto the court’s website on Oct 21, Ong also dismissed the IRB's contention that the apex court’s decision should apply prospectively only as "to protect reliance interests and avoid administrative and fiscal chaos".
Among others, he also dismissed the IRB's argument that should the apex court decision apply retrospectively, it would "open the floodgates to unlimited claims for refund by other taxpayers".
Ong said that the IRB asserted that there are 13 refund claims with a broad estimation of approximately RM600 million.
But the judge noted that the number is not supported by any evidence.
"It appears only in the [IRB's] written submissions, not on affidavit. No party, claim amount, legal basis, or limitation date is identified," Ong noted.
Ong also noted that those who would benefit from a retrospective application of the apex court decision was not "unlimited" because any taxpayer seeking a refund and contesting it in court must adhere to the strict three-month limitation period from the date of the apex court decision, Dec 9, 2022.
Alternatively, the judge noted the taxpayer must also obtain an extension of time.
Generally in a judicial review process, parties who are contesting a government agency's decision must file their case within three months of the impugned decision. Alternatively, they could also file an application seeking more time to file their case.
Mechanisms already in place for refunds
Ong also noted that mechanisms are already in place to facilitate a refund.
"This is not a case in which the wider legal system is unequipped to process a claim for the repayment of tax that is not properly due.
"The [ITA] itself contains machinery for correcting overpayments and relieving taxpayers who have paid under an error or mistake, which confirms that Parliament itself regards the repayment of tax not properly due as an ordinary and administratively unremarkable feature of the system it has created," he said.
Ong also said that the government's revenue projections were approximately RM343.1 billion for 2026 and RM334.1 billion estimated for 2025.
"A contingent and unproven exposure in the region of RM600 million, spread across 13 identified claims, does not begin to approach the scale of systemic disruption," the judge said.
Ong also said that according to case law, the IRB was bound by the apex court’s decision following the delivery of the decision.
"Once the apex court has ruled on a tax-related issue, the [DG] as an arm of the Executive bound by the doctrine of stare decisis (precedents already set), must apply that ruling uniformly to all persons affected by it.
“That duty crystallised, and the revenue came under it, immediately upon the delivery [of the judgement]," he said.
Datuk Cyrus Das led the team of lawyers appearing for the IRB, while Lush Development's team of lawyers was led by Nitin Nadkarni of Messrs Lee Hishammuddin, Allen & Gledhill.
Malaysian Bar president Anand Raj led the team of lawyers from the Bar who acted as amicus curiae, or friend of the court.