3 Things To Consider Before Challenging a Tax Assessment

The Malaysian economy was heavily impacted as the COVID-19 pandemic gripped the world last year. Nonetheless, the growth in revenue collection far exceeded the growth of the country’s gross domestic product (GDP). Tax collection remains the major contributor of the Federal Government’s revenue.

There is a projected increase of 5.9% in tax collection this year, due to the optimistic economic outlook post-pandemic and change of tax policy. The change in the tax code, particularly the elimination of tax exemptions or deductions, will eventually lead to more economic activities being subject to tax, which would inevitably increase disputes in respect of the Inland Revenue Board’s decision.

Pursuant to Section 91 of the Income Tax Act 1967 (“ITA”), if the Director General (DG) is of the opinion that there is insufficient assessment made on a taxpayer, he may in that year or within five years after its expiration make assessment or additional assessment in respect of the additional amount of chargeable income.

In this regard, the DG will issue a notice of assessment or additional assessment to the taxpayer. The notice spells out your taxable income and the amount of tax due after the IRB reviews your tax returns. When you receive such a notice, never disregard it, or sit on it. This is because time is of the utmost essence in tax appeals. This brings us to our first and utmost important point that you should take note of, before filing your tax appeal.
 

1. Timeline for Filing a Tax Appeal – How Much Time Do You Have?

Generally, when a taxpayer is aggrieved by the assessment of the IRB, he can make an appeal against the assessment within 30 days from service of the notice of assessment (Section 99 of the ITA). If a taxpayer misses the deadline specified in Section 99(1) of the ITA, he may write to the DG and apply for an extension of time to appeal against the IRB’s assessment. The DG may then allow an extension if he is satisfied that there is reasonable cause to do so, for instance, where there are prevailing circumstances that prevented a taxpayer from filing the tax appeals timely. In such cases, the DG will give written notice of the extension to the applicant. Having said so the IRB is very restrictive in granting extensions of time.

On the other hand, if the DG is dissatisfied with the reasons furnished by the applicant, he shall forward the application to the Clerk, together with a statement detailing the background facts and grounds for dismissal of the application. The applicant will then be informed that he has 21 days to make a written representation in respect of the DG’s decision on the dismissal of the extension application, to the Special Commissioners of Income Tax (SCIT) (Section 100(3) of the ITA). The decision of the SCIT in the matter of the extension should be final.

At this stage, the taxpayer may make an application to the High Court and ask the court to review the decision of the SCIT or the DG. The High Court hearing the judicial review application has the power to grant an order of certiorari to quash the decision of the SCIT or the Director General. Having said so, the High Court rarely interferes with decisions on extension of time, unless an error of law was made. The following recent High Court decisions illustrate this:

• Jurutera Teras Bistari Sdn Bhd v Pesuruhjaya Khas Cukai Pendapatan & Anor and another appeal [2022] MLJU 1001 – The Court rejected the company’s extension of time application which was premised upon the fact that they lacked accounting staff and that the company had recently changed its tax agent.
• Crane Port Systems Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri [2017] 7 MLJ 449 – The Court rejected the company’s excuse that it failed to attend before the SCIT for the tax appeal, due to a change of its registered address. The Court held that since Section 89 of the ITA imposes a duty on a taxpayer to notify the IRB of any changes of its address within 3 months, the failure of the taxpayer to do so cannot constitute a valid reason for its failure to attend.
• Sunway D’ Mont Kiara Sdn Bhd v Pesuruhjaya Khas Cukai Pendapatan and another application [2016] MLJU 1840 – The company stated that it did not seek an extension earlier as the tax assessment was subject to the judgment of a matter which was pending a decision of the appellate courts. The company then claimed that it did not have knowledge of the decision delivered by the Federal Court.

 The Court found no good reason for the delay as the applicant could have acted immediately after the decision was pronounced by the High Court. It did not need to wait for the Federal Court’s decision. The Court also stated that the applicant could not claim ignorance of law as an excuse as it was a big enterprise with resources to seek legal advice.

2. Tax becomes due and payable notwithstanding any appeal – Do You Need to Pay It in the Meantime?

It is an established principle that once a notice of assessment is served on a taxpayer, the tax payable immediately becomes due and payable to the government notwithstanding any appeal initiated by the taxpayer against the assessment (Section 103 of the ITA). This has been affirmed by the Federal Court in the case of Sun Man Tobacco Co Ltd v Government of Malaysia [1973] 2 MLJ 163.

As such, a taxpayer is required to make payment of the tax due within 30 days of service of the notice of assessment, failing which, the amount of taxes unpaid will be increased by 10% without any reference to the taxpayer (Section 103(3) of the ITA).

Choor Singh J in CIT v A Co Ltd [1966] 2 MLJ 284 summed up the law regarding the need to pay up the outstanding tax, on receipt of the notice of assessment, when he observed:

“A taxpayer has no right to by-pass the Board of Review (an entity equivalent to the Malaysian Special Commissioners) and take his complaint direct to court. And when the Comptroller of Income Tax sues a taxpayer to recover tax due under a notice of assessment, the taxpayer cannot be heard to say that the assessment on which the tax has been levied was not made in accordance with the provisions of the Ordinance. Such a complaint must in the first instance be laid before the Board of Review … If this is not done every unwilling taxpayer will refuse to pay tax and when sued in Court will challenge the merits of the assessment, thus causing considerable delay in the collection of tax. The proper course for every aggrieved taxpayer is to pay his tax and present his argument against the assessment made upon him before the Board of Review.”

(Affirmed by the Court of Appeal in Ta Wu Realty Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri & Anor [2009] 1 MLJ 555)

Unlike a Court decision, the SCIT has no discretion to grant a stay of the effect of tax assessments raised by IRB. In such circumstance, a taxpayer will need to apply for a stay of execution in court via separate proceedings pending the final disposal of the hearing before SCIT.

3. The Tax Appeal Process – Should You File Your Tax Appeal in Court?

There are generally two routes of tax appeals i.e., appealing the assessment raised by the IRB to the SCIT or filing an application for judicial review in court.

Taxpayers may opt to go through the internal process by appealing to the SCIT. In appeals to the SCIT, there may be opportunities for taxpayers to come to an agreement with the IRB in respect of the tax payable, which may result in the reduction, increase, confirmation, or discharge of the tax stated in the notice of assessment.

Appeals to the SCIT may also be more cost-effective in some cases as taxpayers can choose to be represented by a tax agent or a tax lawyer. After the conclusion of the hearing before SCIT, a decision will be made via a deciding order, which is appealable to the High Court and the Court of Appeal.

On the other hand, if a taxpayer files a tax appeal in court i.e., by way of judicial review, he must be represented by a lawyer. It is worth noting that the judicial review process could be generally faster compared to a SCIT appeal. This is because the IRB has up to 12 months to review an appeal to the SCIT pursuant to Section 101 of the ITA, which may be extended upon an application by the DG. The judicial review in the High Court would more likely take less time.

However, the procedure in a judicial review is slightly more complex compared to that of an SCIT appeal. Succeeding before the court is also much more difficult as there are stringent requirements that must be met. For instance, in order to challenge the IRB’s decision via judicial review proceedings, the taxpayer will need to first obtain the leave of court by showing the court that:

a) The subject matter raises an important question of law on the interpretation of provision(s) in the ITA;

b) The issue is a novel point of law which has not previously been considered by the Federal Court, as well as a point of public importance;

c) The subject matter gives rise to issues of law pertaining to a breach of the rules of natural justice and abuse of power, and such issues can only be decided by the court by way of judicial review and cannot be decided by the SCIT;

d) As the subject matter requires swift means of redress, judicial review would be the natural choice of remedy;

e) There is no substantial dispute of facts so this case on the interpretation of a statutory provision is more within the province of the courts than an internal appeal process to the SCIT where only one member out of a panel of three is required to be legally trained.

The above principle was established by the Federal Court in Majlis Perbandaran Pulau Pinang v Syarikat Bekerjasama-sama Serbaguna Sungai Gelugor dengan Tanggungan [1999] 3 MLJ 148.

To sum up, one could consider an SCIT appeal if the matter merely concerns the quantum of tax in the assessment raised by IRB. However, if the matter involves an interpretation of the tax code or an issue of public importance, judicial review would be the appropriate route to follow, as illustrated in the following cases.

• Inspirasi Elit Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri [2021] 12 MLJ 536 – The issue arising in this case is whether the contribution made by the taxpayer to the Penang Island City Council to facilitate the release of Bumiputera units was an allowable tax deduction. The IRB argued that the contribution was not tax deductible as they were capital expenditure for right to sell low-cost and Bumiputera units, whereas the taxpayer took the position that the contribution was a deductible expense.
  
  The High Court granted leave to commence judicial review proceedings on the basis that the errors of law committed by the IRB in not giving effect to the statutory provisions and the decision of a superior court i.e Court of Appeal in Sabah Berjaya Sdn Bhd v Ketua Pengarah Jabatan Hasil Dalam Negeri [1999] 3 MLJ 145 amounts to a clear lack of jurisdiction on the part of the IRB that can only be dealt with via judicial review.
   
• Muhibbah Engineering (M) Bhd v Ketua Pengarah Hasil Dalam Negeri [2022] 1 LNS 1096 – The matter involved the issue of whether the Project Accrued Expenses incurred by the taxpayer is deductible under Section 33(1) of the ITA. The IRB disallowed the deduction of Project Accrued Expenses, whilst the taxpayer provided supporting documents to explain that the said expenses are expenditure incurred by the taxpayer in relation to the works carried out by its subcontractor, thus shall be deductible.
  
  The Court of Appeal held that the question of law raised by the taxpayer pertaining to the erroneous application of the provisions in the ITA against the taxpayer and its related company, constitutes exceptional circumstances that warrant judicial review.

It is pertinent for a taxpayer to weigh the pros and cons before determining the method to challenge a tax assessment and his choice of representative at the appellate stages. The taxpayer is bound by his submission and documents at the first instance.