Malaysia’s highest court wrestles with income tax legislation in landmark ruling


Judicial review is a litigation route available to taxpayers in Malaysia to challenge unlawful taxes raised by the Inland Revenue Board (IRB). Should the question of whether a taxpayer can bypass the tax tribunal be heard before the merits of the appeal are held? Malaysia’s highest court, The Federal Court of Malaysia (FCM), recently delivered an important ruling on this contentious issue, favouring the taxpayer. 

The taxpayer was successfully represented by DP Naban, S Saravana Kumar and Dharshini Sharma from the law firm Rosli Dahlan Saravana Partnership.

The IRB disallowed the taxpayer’s deduction of project accrued expenses under Section 33(1) of the Income Tax Act 1967 (ITA) and imposed additional taxes and penalties for the years of assessment – 2015 and 2016. 

Aggrieved by this decision, the taxpayer filed for a judicial review application before the High Court. However, the taxpayer was not granted leave by the court on the basis that the taxpayer should have exhausted the appeal before the tax tribunal. The taxpayer appealed to the Court of Appeal (COA) which ruled in favour of the taxpayer. The COA also granted a stay order to the taxpayer against the payment of the disputed taxes. The stay order was sought by the taxpayer to maintain the status quo of the parties pending the completion of the judicial review hearing – the substantive stage.

Dissatisfied with the COA’s findings, the IRB appealed to the FCM and obtained leave for the following questions of law:

Whether the issue of domestic remedy may only be canvassed and decided at the substantive stage?

The threshold for leave in a judicial review application is extremely low. This legal position has been widely adopted by the superior courts and remains operative to date. 

The IRB contended that there is no hard and fast rule as to which stage the issue of domestic remedy can be canvassed at. The crux of the issue is the deductibility of the expenses incurred. Hence, the IRB claimed that this was a factual issue which ought to be heard by the tribunal. According to the IRB, the taxpayer failed to establish exceptional circumstances in this case to justify the passing off the domestic remedy. 

The taxpayer argued that the question of when courts should deal with the availability of domestic remedy depends on the circumstances of the case. The taxpayer also submitted that a question of law cannot be decided in a vacuum and all facts of the case will first have to be laid down before the court. Various factors must be considered before determining whether a domestic remedy should be considered, and this cannot be properly dealt with at first stage where the court is only in possession of the taxpayer’s affidavit.

Whether a stay order granted by the COA after allowing the leave application contravenes the tax recovery scheme pursuant to the ITA?

The IRB argued that the stay order in this present case prevents the government of Malaysia from exercising its statutory duty under Sections 103, 103b and 106 of the ITA to collect the disputed taxes. Upon being served with the notice of assessment, taxes become due and payable to the person assessed even if the matter was under appeal. According to the IRB, the courts have no jurisdiction to exercise discretion and grant a stay order in tax disputes. 

The taxpayer highlighted that courts have the inherent jurisdiction to grant a stay order to ensure the integrity of the appeal notwithstanding the relevant sections of the ITA. There are no provisions in the ITA which prevent the courts from granting a stay. In absence of any express legislation, the contention that the ITA restricts the courts’ inherent jurisdiction cannot hold water. 

If the tax recovery mechanism is interpreted too broadly, then the ITA will usurp the powers of the courts to exercise its judicial discretion to grant a stay order. Such a restriction would be unconstitutional as judicial powers are inherent rights guaranteed under the Federal Constitution and cannot be restricted by legislative process. 

Further, the possibility that the courts’ decisions may be reversed on appeal justifies the courts’ jurisdiction to grant a stay to preserve the status quo.

The FCM unanimously accepted taxpayer’s submission and dismissed the IRB’s appeal with cost. This ruling affirmed the COA’s decision that issues of domestic remedy should be canvassed at the later stage of judicial review and that the ITA does not bar the courts from granting a stay order even in tax matters.

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