The better way to understand taxation’s meaning is by examining taxation’s characteristics.
1. An Obligatory Payment
The payment of taxes is voluntary for certain people.
Before any individual is obligated to make tax payments, they must satisfy various prerequisite conditions.
Only those individuals who are considered to be “taxable persons” are required to make tax payments.
Taxpayers who fail to pay taxes are liable to fines since they are breaking the income tax law.
义务性支付
缴税对某些人来说是自愿的。
在任何个人有义务缴税之前，他们必须满足各种先决条件。
只有那些被认为是 “应纳税人士” 的个人才需要缴税。
没有缴纳应付税款的纳税人会被罚款，因为他们违反了所得税法。
2. Money Raised for Government Purposes
The requirements that must be met by the government to properly serve the public are met using the funds provided by taxpayers.
It is the responsibility of the government to invest money in any industry or any part of the country so long as it is doing what is in the public’s best interest.
为政府施政目的而筹集的资金
政府为妥善服务公众，并满足他们的需求，是通过利用纳税人所提供的资金（税款）来实现。
政府有责任将资金投入到任何行业或国家的任何地方，只要它所做的事情符合公众的最佳利益。
3. It is Not Constitute Payment for Service Rendered
Taxation is not a payment in exchange for government-provided services.
To put it another way, this is not like a typical commercial transaction in which one party offers services to the buyer, who then must pay for the privilege of receiving those services.
The fact that we are not receiving the level of services from the government that we anticipated does not mean that we can simply avoid paying our taxes.
它不构成对所提供服务的支付
税收不是对政府提供的服务的交换付款。
换句话说，这不像典型的商业交易，其中一方向买方提供服务，然后买方必须为接受这些服务而付费。
我们没有从政府那里得到我们预期的服务标准，这并不意味着我们就可以逃避纳税。
4. Not a Punishments/Penalties
Taxes should not be considered penalties.
Consequently, we cannot claim to be good citizens, and the government should not tax us.
不属于惩罚/刑罚
税收不应该被认为是惩罚。
因此，我们不能声称自己是好公民，政府就不应该向我们征税。
5. The Assessments Are Not Arbitrary
Tax liability is not determined by luck or at random.
It is decided by the Inland Revenue Board (IRB) precise procedural algorithms.
评估并非任意的
应纳税额的确定不是靠运气或随机的。
它是由内陆税收局（IRB）使用精确的程序演算所决定的。
6. The Assessment can be Contestable
The fact that it is possible to contest the amount of tax that is being charged is something that taxpayers need to be aware of.
However, this must be done through the appropriate channels.
An appeal can be made within 30 days from the date that a Notice of Assessment is received from IRB by submitting Form Q.
If the responsible government authorities are satisfied with the explanation and proof provided by the taxpayer, then the total amount of taxes will be decreased.
评估是可以被提出异议的
纳税人需要知道的是，对被评估的税额，是可以提出异议的。
然而，这必须通过适当的渠道进行。
在收到内陆税收局（IRB）发出的评估通知之日起30天内，纳税人是可以通过提交Q表格进行上诉。
如果负责的政府当局对纳税人提供的解释和证明感到满意，那么税款总额就会减少。
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Even if a single transaction could be considered a trade, the idea of trading is more likely to be implied when a lot of transactions are done in a planned way.
When different sets of actions, none of which are traded on their own, are done on various occasions that aren’t too far apart, the series of actions may be considered a trade.
You need to consider not only the total number of transactions but also the rate at which they are carried out repeatedly.
So, 10 transactions a year are more likely to be trading than, say, two transactions a year, as long as everything else stays the same.
In 1919 there was a boom in the Lancashire cotton spinning trade.
Many mills were changing ownership, and many transactions took the place of a kind known locally as “turning over a mill“.
The transaction commonly involved the purchase by a syndicate of the shares of a mill-owning company, the liquidation of the company, and the formation of a new company to purchase the old company’s assets at a profit to the syndicate.
The Appellant, who was at the time a manager of one spinning company and director of another, was approached by certain interested parties to form a syndicate for the purpose described above.
The transaction was successfully carried through and resulted in a profit to the Appellant, who was appointed a director of the new company.
The success of the Appellant and his associates in this venture became common knowledge in the district, and proposals for similar transactions were made to him in some twenty other cases.
Still, after enquiry, he rejected all but three.
In these three cases, syndicates were formed, not always consisting of the same persons.
In each case, the transaction resulted in a profit to the Appellant and his appointment as a director of the new company.
The Appellant was assessed to Income Tax and Excess Profits Duty in respect of the profits resulting from these four transactions, and on appeal, the Special Commissioners confirmed the assessments.
They found that the Appellant’s main object was to establish himself in a position of power as a director of new companies;
that it was necessary for this purpose that the transactions should be financially profitable;
that the transactions considered separately were capital transactions, and that anyone by itself would not have constituted a trade, but that considered together they did constitute a trade.
The Special Commissioners further held that the Income Tax assessment for the year 1919-20, which had been signed by the Additional Commissioners on the 24th March 1923, had been made in due time.
Held: that the Appellant’s participation in the four transactions constituted a trade and that he was assessable to Income Tax and Excess Profits Duty in respect of his share of the profits; and that the additional assessment to Income Tax had been made within the time allowed by Section 125 of the Income Tax Act, 1918.
What It Means
When more than one transaction is involved, the case for trading will be much stronger if the pattern looks like a series of related transactions happening not too far apart and giving the impression of regular and continuous activity.
On the other hand, the case will be less strong if the appearance is of several irregular transactions spread over several years.
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ALF Properties Sdn Bhd v Ketua Pengarah Jabatan Hasil Dalam Negeri
Civil Appeal No W-01-203-97. Appeal from the High Court, Kuala Lumpur – Income Tax Appeal No R1-14-13-95. Court of Appeal, Putrajaya. Judgment was delivered on 14 May 2005 and 18 August 2005
1. The appellants, a private limited company, were incorporated on 8 August 1979. Their principal object was to carry on “the business of property developers and building contractors”.
On 28 March 1980, they purchased seven lots of land at a public auction ordered under s. 259 of the National Land Code for RM6,100,000.
The seven lots had a total area of 190,248.30 square feet.
Ten or eleven years later, they entered into a sale and purchased agreement with another company to sell to that company four of the lots, which had a total area of 101,004.75 square feet (“the subject land”), for RM42,500,000.
On the gains from the sale, the appellants were assessed to income tax of RM13,185,916.09.
The appellants appealed to the Special Commissioners on the ground that the gains were derived not from the carrying on of their business but from the sale of an investment and were therefore not assessable to income tax.
The Special Commissioners found that the appellants failed to show that the subject land was held by them as an investment and dismissed their appeal.
Their appeal to the High Court was also dismissed. 2. The question in this appeal is whether, contrary to the findings of the Special Commissioners and the High Court, there is evidence that the appellants held the subject land as an investment.
It is common ground that the question depends on the intention of the appellants when they purchased the seven lots, provided the intention remained the same.
If the intention was to trade, that is, to dispose of the seven lots at a profit, then the gains would be assessable to income tax.
If the intention was to keep them as an investment, then the gains were not assessable to income tax.
There was no direct evidence of intention at the time of purchase.
So the appellants relied on evidence of circumstances after the purchase as indicating the intention of investment at the time of purchase. 3. In this appeal, the appellants, while falling back on the Appellant’s Notes of Submission in the High Court, stated in their written Appellant’s Brief Submission that they relied on four grounds for contending that the seven lots were acquired as an investment.
In the Appellant’s Notes of Submission, the circumstance that the appellants relied on firstly was how they treated the seven lots in their first set of audited accounts, which were for the period from 8 August 1979 until 31 December 1980, the period in which the seven lots were acquired.
The submission on this is in paras. 10 to 17 of the Appellant’s Notes of Submission.
The balance sheet as of 31 December 1980 has an item described as Land and Development Expenditure of RM19,177,786.
Although that item appears immediately after Fixed Assets, it stands on its own and not as an item of Fixed Assets.
The sum of RM19,177,786 comprises freehold land valued at RM17,977,000, which is the seven lots the appellants purchased on 28 March 1980, four of which are the subject land, and RM1,200,786 development expenditure.
Since the seven lots had been purchased for RM6,100,000, the value of RM17,977,000 means that the appellants had revalued them and given them an increase in value of RM11,877,000.
From that amount, the appellants deducted a sum of RM5,999,997, the value of shares at RM1.00 each that had been issued to members as fully paid.
The balance of RM5,877,003 is shown in the balance sheet as Capital Reserve. 4. The appellants acknowledged that if the seven lots had been shown as part of Fixed Assets, it would be a point in their favour as indicating that the lots were held as an investment, but that as it was not so shown, there was no point in their favour in that respect.
They further acknowledged that if the lots had been shown as part of Current Assets, it would have been a point against them as indicating an intention to trade, but as they were not so shown, the appellants submitted that there was no point against them in that respect.
The appellants’ point was that the fact that the seven lots had been revalued with an appropriate provision for capital reserve from the increase in value reflected their intention to hold the land as an investment.
In fact, in para. 11 of the Appellant’s Notes of Submission, the appellants asserted that the factor of revaluation was “The factor which supports the appellants’ intention of holding the said land as an investment”, the definite article “The” giving the impression that it was the only or the most important factor.
For their argument that the fact of revaluation bore the significance of indicating the intention of investment, the appellants relied on the first sentence of para. 5 of Technical Bulletin 2, issued by the Accounting and Auditing Standards Committee of The Malaysian Association of Certified Public Accountants, says: “Generally accepted accounting principles dictate that it is appropriate to consider revaluation only for those assets which are intended to be held for the long term”.
This means that if the appellants had followed generally accepted accounting principles, they would not have revalued the land unless they intended to hold it “for the long term”.
5. I do not find that the Special Commissioners did deal specifically with this argument that relies on the fact of revaluation and the first sentence of para. 5 of Technical Bulletin 2. What the Special Commissioners did was to conclude, on p. 26 of the Case Stated, that there was doubt as to the actual classification of the land because, in para. 11 of Technical Bulletin 2, the Accounting and Auditing Standards Committee recommended that:
land held for development and resale should be classified under current assets, and
land held for long-term investment should be classified as a long-term asset, which I take to mean a fixed asset.
Still, in the appellants’ balance sheet, the land was neither classified as a fixed nor current asset but as, according to the Special Commissioners, “Development Properties”.
I did wonder whether, before the Special Commissioners, the appellants did raise this argument which before the High Court, as I said, they seem to treat as their fundamental argument.
Still, when I examined the Respondent’s Notes of Submission in the High Court, which were in reply to the appellants’, I did not find the respondent saying that the argument had not been raised before the Special Commissioners.
I assume that the argument was raised before the Special Commissioners.
6. The respondent replied to the argument in paras. 14 and 15 of the Respondent’s Notes of Submission.
He did not dispute that in the light of the first sentence of para. 5 of Technical Bulletin 2, the fact of revaluation could indicate an intention of investment, but he raised two factors as factors that militated against such an indication.
One factor, in para. 14, is the fact that the land was not classified as a long-term or fixed asset; the argument is that if the land, as contended by the appellants, were intended for investment, it would have been so classified.
I think the fact that the land was not classified as a fixed asset is a neutral factor that ought not to be set up against a positive factor to neutralise it.
If the land had been classified as a fixed asset, the controversy would probably not have arisen at all.
It requires a negative factor, that is, a factor that positively shows otherwise, to negate a positive factor.
The other factor raised by the respondent in paragraph 15 is the fact that “the appellants who declare themselves to be property developers” purchased “land described as development properties by the appellants”, the point being that “Development properties are not an investment in such circumstances”.
The argument in para. 15 can be developed into a proposition that a property developer who buys land that he intends to develop cannot be heard to say or be allowed to show, that he bought the land intending it as an investment.
But I do not see why it cannot be that a property developer buys land to develop and yet keeps as an investment and does not sell it.
The learned judge, like the Special Commissioners, did not deal with this specific argument of the appellants that relies on the fact of revaluation and para. 5 of Technical Bulletin 2.
Neither did the respondent, in his written submission in this appeal, the Respondent’s Brief Submission, deal with it.
7. Incidentally, the term “development property” by which the Special Commissioners and the respondent referred to the land is, I think, their own term. It is not a term used in the balance sheet.
As I said, in the balance sheet, the relevant entry is Land and Development Expenditure.
They probably concluded that since, concerning the land, development expenditure was provided, the land was intended for development, and they, therefore, decided to refer to it as “development property”. 8. In para. 18 of the Appellant’s Notes of Submission, the appellants argued that their intention to hold the subject land as an investment, as indicated by their revaluation of the land, “continued and was substantiated” by a statement made by the Chairman of Hoklian Holdings Berhad.
That is the appellants’ second ground in their written Appellant’s Brief Submission.
It is necessary to state the facts concerning this aspect of the case.
On 20 August 1982, the Kuala Lumpur Planning Authority granted the appellants planning permission to build a 31-storey office block on the subject land.
On 1 April 1983, three agreements were entered into for sale by the three shareholders of the appellant company of the entire issued 6,000,000 shares in the appellant company to Hoklian Development Sdn Bhd and Koperasi Jayadiri Malaysia Berhad (“KOJADI”) for RM41,250,000.
Hoklian Development was a wholly-owned subsidiary of Hoklian Holdings Bhd In the Annual Report of Hoklian Holdings dated 4 June 1983, the Chairman of that company, which wholly-owned Hoklian Development, said this:
The Company has also, through its wholly-owned subsidiary, Hoklian Development Sdn. Bhd., entered into a joint venture with Koperasi Jaya Diri Malaysia Bhd. on a 50:50 basis to acquire the entire issued capital of ALF Properties Sdn. Bhd. for $41.25 million.
The Agreement for the said acquisition has been signed with the shareholders of ALF Properties Sdn. Bhd. recently. ALF Properties Sdn. Bhd. owns a piece of land exceeding 190,000 sq. ft. at the junction of Jalan Ampang and Jalan Yap Kwan Seng, Kuala Lumpur.
Plans are being made to develop the said land into an office complex for rental.
The Board foresees the prevailing good demand for office space in Kuala Lumpur will enable the Company to enjoy a very good rental income. 9. That was the statement that the appellants relied on.
According to the Case Stated, at p. 8, among the facts proved was that “The new management on taking over applied for the original development to be amended to build a 30-storey office building and approval was granted vide development order dated 24 April 1985“.
The new management must refer to the appellants’ management that came into being after Hoklian Development and KOJADI bought the appellant company.
The development order was a planning permission and was related to the subject land.
The land mentioned in the statement by the Chairman of Hoklian Holdings was the entire land, that is, the seven lots, including the subject land.
What the appellants relied on as indicating their intention to hold the subject land as an investment was the statement that plans were being made to develop the entire land into an office complex for rental.
It was the intention of renting the office complex, as opposed to selling it, that was important to the appellants’ case.
That would be an indication of an intention to hold the land as an investment.
That plans were being made to develop the land into an office complex could not be seriously disputed because it was a fact that planning permission had been granted twice for the purpose, once before and once after the making of the statement.
What could be disputed was the statement that the appellants intended to keep the office complex for rental.
10. On p. 21 of the Case Stated, the Special Commissioners listed five reasons for finding that the Chairman’s statement “loses its value and efficacy”.
As reason (iv), the Special Commissioners said: “The three valuation reports in the agreed bundle of documents (exh. B) indicate, contrary to what is contained in the Chairman’s Statement, that not all the land was approved for commercial use”.
It seems to be directed against the Chairman’s statement regarding the appellants’ intention to develop “the said land“, which referred to the entire land, into an office complex.
It seems to suggest that the statement is questionable because it spoke of the entire land being developed into an office complex, whereas planning permission for the purpose had been given only for the subject land.
Viewed strictly in that manner, the Chairman’s statement was, of course, not correct, but when applied to the subject land, it was correct because it is a fact that before the making of the statement, the appellants had applied for and obtained planning permission to build an office complex on the subject land.
It was, I think, merely a matter of the Chairman not being particular to express himself with absolute precision.
11. The Special Commissioners’ reasons (i) to (iii) may be reduced to one reason and applied to the Chairman’s statement that the plan for the office complex that was to be built was to earn rental from it.
The reason is that the Chairman’s statement was not the appellants’ statement but was only one emanating from a party which, while anticipating the acquisition of 50% interest in the appellant company, had not yet acquired it, so the intention mentioned by the Chairman cannot be accepted as proof of the appellant company’s intention. 12. The appellants’ basic argument before the High Court, which was in paras. 20 and 21 of the Appellant’s Notes of Submission and which, by adoption, was their argument in this appeal, was essential that since Hoklian Development and KOJADI were equal shareholders in the appellant company, they must have been in agreement on their plans as to the running of the company, as otherwise, it would not be possible to run the company.
That argument implies that, for that reason, the intention of the Hoklian side must have been the intention of KOJADI as well. I think that it is a naive and simplistic argument.
In the ordinary course of nature, two independent people cannot always agree on everything.
They are bound at some point to disagree over a particular matter, although in the end, for the common benefit, one may concede to the other.
It cannot be assumed that when the Chairman of Hoklian Holdings made the statement on 4 June 1983, KOJADI had agreed that the planned office complex should be let out for rental.
KOJADI might have wished that it be sold.
In the end, so that, as the appellants’ line of reasoning went, it would be possible to run the company, they might have reached an agreement. Still, it does not necessarily mean that KOJADI agreed with Hoklian Holdings and not the other way around.
In the Appellant’s Brief Submission in this appeal, the appellants point out that a director of Hoklian Developments was also a director of the appellant company. Still, that fact can in no way render the Chairman’s statement proof of the appellant’s intention to rent.
13. In the Appellant’s Brief Submission, the appellants also cite a passage from Waylee Investment Ltd v Commissioner of Inland Revenue [1990] STC 780, in which the taxpayer company was a wholly-owned subsidiary of a bank. The passage reads: Counsel for the taxpayer rightly insists, and counsel for the commissioner accepts, that the issue is whether the acquisition of the shares in question in 1975 and their disposal in 1979 was an adventure or concern like trade on the part of the taxpayer, which was a separate legal entity from the bank and which, it is accepted, was not acting as a mere agent for the bank.
At the same time, it is common ground that the taxpayer’s purpose concerning the transaction cannot be distinguished from the purposes of those who effectively controlled its activities.
This means, in effect, that the taxpayer’s purpose reflected the bank’s purpose. The point is in the second and third sentences. It is to be noted that it was a matter of common ground and not a ruling. It may be reduced to the proposition that the intention of a wholly-owned subsidiary company in respect of a particular transaction may be judged from the intention of the holding company because the holding company effectively controls the subsidiary company’s activities.
Even assuming that that is the law, it cannot be applied to this case because the appellant company was not under the exclusive control of Hoklian Developments or Hoklian Holdings and was not their wholly-owned subsidiary.
14. The appellants have, therefore, not succeeded in showing that the Special Commissioners erred in his finding about the statement of the Chairman of Hoklian Holdings. 15. The appellants’ third ground is that they had to sell the subject land because KOJADI needed funds.
This ground is based on the following statement by Sharma J in N.Y.F. Realty Sdn Bhd v Comptroller of Inland Revenue [1974] 1 MLJ 182 at p. 183 C (right): If the sale of the property is occasioned by a sudden emergency or unanticipated need for funds, such facts will tend to indicate that the property was not acquired for the purpose of resale at a profit and that the sale was not under a profit-making undertaking or scheme. This ground, as it was presented to the Special Commissioners, is set out as follows on p. 38 of the Case Stated. KOJADI, which owns the other 50% equity in the Appellants, was adversely affected by the Co-operatives Crisis in 1986.
It was one of the 24 Co-operatives under investigation by Bank Negara, which imposed a total freeze on all the assets and operations of the Co-operatives under investigation.
To avoid receivership, KOJADI had to obtain a RM7 million term loan and RM5.5 million overdraft facilities to make a full refund to all its depositors.
As a result, KOJADI was in urgent need of funds as the loan and overdraft were repayable within 3 years. The Special Commissioners said that they were unable to consider the matters in the passage quoted because there was no evidence to prove those matters. They went on to say on p. 38 of the Case Stated: “Neither was evidence adduced to show that payments were made by the Appellants to KOJADI to enable them to discharge their liability after the sale of the subject land“.
16. In paras. 71 to 73 of the Appellant’s Notes of Submission in the High Court, the appellants said that the Special Commissioners misdirected themselves in their said decision because evidence in support of their submission was tendered in “exh. E at folios number D5, D6 and D7” which “show that KOJADI was under investigation by Bank Negara, with its assets frozen by Bank and KOJADI had obtained a term loan of RM7 million and overdraft facilities of RM5.5 million which had to be repaid within three (3) years”.
It would appear that those letters do show the existence of the matters claimed by the appellants, which are actually KOJADI’s financial problems and needs.
To that extent, the Special Commissioners might have misdirected themselves.
But while KOJADI might have financial needs, it does not follow that it was the appellants who were to come and did come to their rescue. It is the rescue that is important because it was contended that the subject land was sold to rescue KOJADI.
The Special Commissioners were right in saying there was no evidence of the rescue.
There was, therefore, no evidence that the subject land was sold because of the need to obtain money to rescue KOJADI.
17. The appellants’ fourth and last ground in the Appellant’s Brief Submission in this appeal relies on the fact that the subject land was held for ten years before it was sold.
This ground is based primarily on the following statement by Sharma J in N.Y.F. Realty Sdn Bhd v Comptroller of Inland Revenue, supra, at p. 183 H left: The fact that property is held but a short time after its acquisition may tend to indicate that the purpose of the acquisition was resale at a profit. The appellants, in para. 55 of the Appellant’s Notes of Submission in the High Court, drew from that statement the corollary that “the fact that the said Land was held for as long as ten (10) years may tend to indicate that the purpose of the acquisition was for investment”.
I do not think that such a corollary necessarily follows from Sharma J’s statement. While the shortness of the holding period may be a positive indication of a trading purpose, it does not necessarily follow that a long holding period is a positive indication of an intention to invest.
18. As an actual case of land held for a long time between acquisition and sale, the appellants, before the Special Commissioners, cited Bukit Yew Sdn Bhd v Director-General of Inland Revenue [1987] 2 CLJ 134; [1987] CLJ (Rep) 492, where Harun J (as he then was), in a list of nine reasons why he found that the decision of the Special Commissioners could not be upheld, included the following reason: The fact that the land was held for more than 14 years undeveloped and earning no income should have tilted the scales in favour of the appellants. 19. The Special Commissioners held that that statement was inapplicable to the facts of the case before them. This is what they said on pp. 35, and 36 of their Case stated: Thus in Bukit Yew Sdn Bhd v DGIR [1987] 2 MLJ 379, Harun J (as he then was) held that the fact that the land was held for more than 14 years undeveloped and earning no income should have tilted the scales in favour of the appellant.
That is not the position in the case of the appeal before us.
The subject land was not undeveloped. It was ripe for development.
As a result, the value of the land had greatly enhanced. As the valuation report dated 6 April 1983 discloses no development was carried out at that stage as the approved building plans were found uneconomical and unsuitable.
That explains the delay in dealing with the land. The original development plans were then amended.
From 1987 to 1990, a part of the subject land was rented out. In the event the decision of Harun J (as he then was) in the Bukit Yew Sdn. Bhd.’s case is inapplicable to the facts of this case as the subject land was ready for development and earning income coupled with the other features of the case.
20. The appellants made only a weak attempt to show that the Special Commissioners’ decision about Bukit Yew was wrong.
In the High Court and, by adoption, in this court, this was all that they said in the Appellant’s Notes of Submission: The Special Commissioners, on page 35 of the Case Stated, also proceeded to distinguish the case of Bukit Yew Sdn Bhd v DGIR [1987] 2 MLJ 379 … However, the facts of the Bukit Yew case are closer to the facts in this appeal.In the Bukit Yew case, … the said property in question was the sole asset of the appellant and was sold after 14 years. Similarly, in this case, the said Land was part of the sole property acquisition by the Appellant and was held for 10 years before it was sold. Those paragraphs fail to address the Special Commissioners’ reasons for holding that Bukit Yew was inapplicable to the present case.
I am therefore unable to find that the Special Commissioners were wrong in declining to find in favour of the appellants on the fact that the subject land was held for ten years by the appellants.
21. So of the four grounds that the appellants rely on in this appeal for contending that the seven lots, which included the subject land, were acquired as an investment, there is in their favour only one ground, the first ground in the Appellant’s Brief Submission, namely the ground that relies on the fact that the appellants revalued the land after purchasing it, when seen in the light of the first sentence of para. 5 of Technical Bulletin 2.
Given that sentence, the fact that the appellants revalued the land comprised in the seven lots may be taken as an indication that they bought the land intending to hold it as an investment. Still, it is only an indication, and it is not conclusive proof of such intention. 22. Against that factor has to be weighed other factors that the Special Commissioners found to be positive indications to the contrary.
The Special Commissioners saw several such factors, but I wish to mention only on because I do not think that the others, such as the finding that the proceeds of the sale of the land were not shown separately from the operating fund and the fact that steps had been taken to make the land ripe for development, are clearly or necessarily positive indications to the contrary.
The one factor that I wish to mention is the fact that in the appellants’ balance sheet as of 31 December 1991, a sum of RM13,082,923 is shown as a provision for taxation as a current liability for 1991.
It has to be borne in mind that the subject land was sold in 1990. Concerning this provision for taxation, the Notes to the Accounts explain: “Taxation is provided for based on amount estimated to be currently payable based on computed taxable income.”
The Special Commissioners viewed this as “A matter of significant concern.”
They said: “Is there a need to compute the amount of tax payable and include it in the accounts if no such tax is payable?
If the tax computation is to be regarded as, say, an act of prudence on the part of the appellants, they ought to have led evidence to explain the rationale behind it, which they did not.” 23. In the High Court and, by adoption, in this court, the appellants said as follows in the Appellant’s Notes of Submission:
88. The Special Commissioners believed that by having such an item in the 1991 audited accounts, the Appellant acknowledged that there is an income tax payable on the profits from the sale of the said Land.
89. However, what should also have been considered is the fact that no such provision was made in the 1990 audited account when the profits were realised was consistent with the Appellant's contention that the profits were the realisation of an investment. That was why no provision was made for income tax in 1990.
90. In 1992, while finalising the 1991 audited accounts, the income tax assessment of RM13,185,916.09 for the year of assessment 1991 was received and accordingly, based on the accounting concept of prudence, provision was made for the tax in the 1991 audited accounts by the Appellant despite disagreeing with the tax charged.
The appellants, in para. 88, perceived that the Special Commissioners believed that the provision for taxation was an acknowledgement by the appellants that income tax was payable on the profits from the sale of the subject land.
To show that that view was erroneous, in para. 90 the appellants explained that after receiving the income tax assessment of RM13,185,916.09 they considered it prudent to include the amount assessed in the balance sheet as a current liability, obviously because, although maintaining that they were not liable to the tax, they might ultimately be held liable. 24. That explanation, however, is demonstrably untrue, although the judge did not deal with it. The 1991 accounts, which included the balance sheet, were certified on 3 April 1992, but the Notice of Assessment of the sum of RM13,185.916.09 was dated 9 July 1992, well after the 1991 accounts were prepared and certified.
The appellants had already provided for tax in the sum of RM13,082,923 in their accounts even before they received the assessment in the sum of RM13,185,916.09.
The explanation given is untrue; there is no explanation to show as erroneous the Special Commissioners’ view that there was an acknowledgement by the appellants that income tax was payable on the profits from the sale of the subject land.
The acknowledgement implies an admission that the subject land was purchased and held for trade and neutralised or nullified the sole indication that it was purchased for investment.
The appellants have therefore failed in this appeal to show that the Special Commissioners erred in finding that the appellants failed to show that the subject land was held as an investment. Accordingly, they have failed to show that the judge was wrong in dismissing their appeal. 25. This appeal was allowed by a majority decision on 14 May 2005, when I was as yet not ready with a decision on my part. With the benefit of the views I have now formed, I would have decided that the appeal be dismissed. Judgment delivered: 18 August 2005.
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High Court Malaya, Kuala LumpurHarun Hashim J[Tax Appeal No. A3/83]6 February 1987
JUDGMENT
Harun J: This is an appeal from the Special Commissioners of Income Tax against their decision to confirm the additional assessment raised by the Revenue in respect of income tax for the year of assessment 1980.
The agreed statement of facts before the Special Commissioners were
The appellant company was incorporated on 29 November 1963.
On 26 February 1964, the appellant acquired a piece of land (“the said property”) comprising 19a. 3r. 38p. known as Lot No. 1305 in the mukim of Setapak in the state of Selangor under C.T. No. 12361 from the estate of Loke Yew (residency) trust.
The said property was the sole asset of the appellant since its acquisition.
On 17 November 1978, the appellant sold the said property to Messrs. Low Keng Huat and Wong Bin Chen for the sum of RM591,697.
The appellant was assessed to real property gains tax on the gain, which assessment was paid to the respondent.
The respondent subsequently, on the 5th day of July 1980, raised an assessment in the sum of RM179,925.60 in respect of the gains arising from the said property in respect of income tax.
The gain from the asset’s sale is in the sum of RM403,287.
The appellant contends that the said gain is a capital receipt and is not assessable to income tax but to real property gains tax under s. 3 of the Real Property Gains Tax Act 1976 as originally assessed by the respondent.
The respondent contends that the said gain is income assessable to tax under s. 4 of the Income Tax Act 1967.
The question for the determination of the Special Commissioners of Income Tax is whether:
The said gain is a capital receipt, not assessable to tax under the Income Tax Act 1967, as is contended by the appellant; or
An income assessable to tax under the Income Tax Act 1967, as is contended by the respondent.
Loke Yew was a land owner.
On his death in 1917, the Loke Yew residency trust (the trust) was established.
In 1926 part of the trust lands of 1905 acres of rubber and 458 acres of mining land were vested in Hawthornden Rubber Estate Ltd. (Hawthornden).
The trust retained the land on which the family mansion stood (lot 1305) and the family burial ground.
Access to Lot 1305 was through Hawthornden.
When Hawthornden considered the possibility of converting part of their property into a housing estate, it mistakenly included Lot 1305.
When the error was discovered in 1963, the descendants of Loke Yew formed the appellant company, and the trust was transferred to the appellant Lot 1305 for a consideration of RM162,752.80 in 1964.
What weighed heavily with the Special Commissioners was the fact that at the time of the sale of Lot 1305 in 1978, the directors of the appellant and Hawthornden were the same persons.
Hence the inference of the Special Commissioners from these facts was as follows:-
The formation of the appellant (as a limited company) was a more advantageous means of developing the land as a housing estate (and later on, of hoarding it) as it was a limited company and, furthermore, it shared a common board of directors with Hawthornden.
The Special Commissioners found as a fact (erroneously) on p. 26 of the case stated that “the appellant was a wholly owned subsidiary of Hawthornden”.
The result was that in determining whether Lot 1305 was an investment or stock-in-trade, the Special Commissioners were greatly influenced by what Hawthornden was thinking and doing, which were wholly imputed to the appellant.
It is trite law that these two companies are separate legal entities.
At the commencement of the hearing, the learned Federal Counsel who appeared for the Collector indicated (quite properly) that he was not supporting the finding of the Special Commissioners that the appellant was connected to or related with Hawthornden.
Shorn off Hawthornden, the primary facts as found by the Special Commissioners are-
The nature of the land, i.e., 19 acres, “crowned by a hill on which stood the ruins of the former Loke Yew family mansion which still remain” adjacent to the Loke Yew family burial ground.
The incorporation of the appellant in November 1963 and the acquisition of the land in February 1964.
The land was the only asset of the appellant, and its subsequent sale in November 1978 was an isolated transaction and, in fact, the only transaction by the appellant.
The appellant was assessed to Real Property Gains Tax which was paid to the respondent.
The proceeds of the sale of the land were entered and recorded in the appellant’s balance sheets for 1979 and 1980 as being capital reserves and also described as an extraordinary item in the profit and loss account for the same years.
The appellant did no business, contemplated but took no step to develop the land or enhance its value.
Memorandum of Association The Special Commissioners appear to have placed undue reliance on Clause 3 of the memorandum of association of the appellant viz:
3 (1) To purchase, take on lease or in exchange or otherwise acquire any lands and buildings in the states of Malaya or elsewhere and any estate or interest in and any rights connected with any such lands and buildings.
(2) To develop and turn to account land acquired by the company or in which the company is interested and in particular by laying out and preparing the same for building purposes, constructing, altering, pulling down decorating, maintaining furnishing fitting up and improving buildings and by planning paving draining farming cultivating letting on building lease or building agreement and by advancing money to and entering into contracts and arrangements of all kinds with builders tenants purchasers and others.
The proposed objects of a company are relevant when considering the transactions in which the company is found to have been engaged.
It does not, however, follow that just because the company has powers to do certain things, anything done by the company must necessarily be carrying on the business of the professed objects of the company: see the Land Revenue Commissioners v. West-leigh Estates Co. [1924] 1 AC 681.
Indeed, a company actively engaged in trade is also entitled to hold investments, so one must distinguish investment from stock-in-trade: Simmons v. IRC [1980] 1 WLR 1197.
A good illustration of the distinction between investment and trading is to be found in Phillips v. West 38 TC 203, where it was held that whilst the 287 properties that the appellant built to sell ultimately were the stock-in-trade of the builder, the 2,208 houses built to let were investments and any surplus arising from their sale was therefore not liable to tax; and that the appellant was not carrying on the business of property dealing.
Intention
A good test to determine whether the property held is an investment or stock-in-trade is to establish the appellant’s intention at the time of acquisition of the property.
Why did they buy it, and for what purpose?
Here the Special Commissioners inferred from the facts before them that:
before World War II, the object of the trust was to retain Bukit Yew (Lot 1305) as part of the family inheritance and for sentimental reasons.
in August 1963, it was discovered that Bukit Yew was not part of Hawthornden but was owned by the trust, and Hawthornden decided to approach the trust to purchase Bukit Yew.
The facts, however, show that the trustees, rather than selling the land to Hawthornden, sold it to the appellant, who in turn considered arranging for a survey, valuation and prospective conversion.
In June 1965, the Government gave notice of the intended acquisition of the land but, in March 1966, withdrew the notice.
Nothing was done on the land subsequently until its sale in 1978 following an offer for its purchase. These are facts as found by the Special Commissioners.
What, then, is the appellant’s intention in acquiring the land?
True, they considered the possibility of developing it, but the fact remains that they did not pursue that possibility.
The Special Commissioners, however, found that the reason they did not develop it was because of the threat of acquisition by the Government.
That threat was very short-lived and occurred soon after the appellant purchased the land. Nothing could stop them from pursuing the professed objectives from 1966 onwards.
The Special Commissioners found that the other reason why they did not pursue the objective was that the development of the land was to be made jointly with Hawthornden.
This, of course, ignores their earlier finding that Hawthornden had attempted to acquire the land from the trustees but was turned down. If the land were to be developed jointly, it would have been simpler for the trustees to sell the land to Hawthornden.
A fair inference is that on discovering that the land did not belong to Hawthornden, the appellant decided to keep it to themselves. If there was going to be any development, it was going to be independent of Hawthornden.
Another finding of the Special Commissioners was that the land was not developed because Hawthornden had difficulty obtaining piped water supply and road access.
These were difficulties of Hawthornden, not the appellant.
It is clear that the Special Commissioners, in determining the appellant’s intention, did not treat the appellant as a separate legal entity, and its findings of facts and inferences, therefore, were based on the motives and actions of Hawthornden.
Without Hawthornden, the facts are that the appellant bought the land, did nothing and eventually sold it 14 years later.
If there was any change of intention at all, the descendants of Loke Yew finally decided after 14 years that it was no longer worthy of keeping the land as a heritage from their ancestors.
It is, however, not fair to conclude from this, as the Special Commissioners did, that “the appellant retained the land to hoard it up in anticipation of a rise in value”.
True, the sale realised a price difference of RM428,944, but this amount must be balanced with a purchase price of RM162,752.80, which they had paid for 14 years previously and during which time the land brought them no income at all.
The amount realised, in fact, represents no more than the recovery of capital with compound interest at 9% over a period of more than 14 years between purchase and sale.
Throughout the statement of the case, the Special Commissioners appear to have overemphasised this price difference and labelled it as profit to support their conviction of land dealing admitting of no other inference.
Accounting
Finally, the Special Commissioners laid much stress on the manner the Taxpayers’ accounts were kept.
How a Company keeps its accounts may be evidence of the Company’s intention.
Still, such evidence must be weighed against other evidence to decide the nature of the transaction: Shadford (H.M. Inspector of Taxes) v. H. Fairweather[1966] 43 TC 291. Here during each year from 1966 to 1977, the directors’ report stated:
The Company has not yet commenced trading, and no contingent liabilities were undertaken by the Company in the period covered by the Profit and Loss Account.
And for 1978, the directors’ report stated: Negotiations for the sale of Lot 1305 in the Mukim of Setapak at a price of RM591,697 continue, and it is anticipated that these should be satisfactorily concluded very soon.
In the 1979 accounts, the proceeds of this sale were placed on `capital reverse‘.
However, in the same report, the directors stated that the principal activity of the Company consists of land development and transactions involving land.
The Special Commissioners held that this statement is an admission by the taxpayer of the true nature of the transaction. That was why the accountants did not describe the land as a “fixed asset” but as “land and development at cost“.
They were also not impressed by the provision for capital gains tax instead of income tax.
However, their finding contrasts with their other finding on p. 11 para xlii- the only business carried on by the appellant was the acquisition and sale of Bukit Yew.
The Special Commissioners found that the auditors of the appellant “reflected their uncertainty as to the nature of the asset by describing it not as a fixed asset but as “land & development at cost” and the appellant’s own uncertainty as to the nature of the asset, the proceeds of the sale were placed by the appellant in a fixed deposit account with the bank and as a result, interest was earned for years ending 31 December 1979 and 31 December 1980.”
The Special Commissioners made no mention of the fact that the auditors were complying with the accounting practice of the Malaysian association of certified public accountants, in respect of accounting description of land matters, in particular, to differentiate between lands held for long-term investment and lands held for development and resale.
The fact that the sale proceeds were placed on fixed bank deposits (which naturally earn interest) does not necessarily mean uncertainty of the nature of the asset.
The Issue The question before the Special Commissioners was whether the transaction, viz. the purchase of sale of Lot 1305 by the appellant, constituted an adventure in the nature of trade, the proceeds of which are subject to payment of income tax under the Income Tax Act 1967, or whether the transaction was the realisation of a capital asset the proceeds of which are subject to payment of real property gains tax under the Real Property Gains Tax Act 1976.
The Special Commissioners held that the transaction was an adventure in trade, dismissed the appeal and confirmed the assessment.
On the facts as found by the Special Commissioners, the decision cannot be upheld for the following reasons-
The Special Commissioners have mixed findings of facts with inferences.
The finding that the appellant company is a subsidiary of Hawthorden is clearly erroneous.
The deliberations of the board of directors of Hawthornden before the establishment of the appellant company were wrongly imputed to the appellant.
In deciding the appellant’s intention concerning the nature of the transaction, the Special Commissioners relied heavily and erroneously on the intentions of Hawthornden.
If the evidence concerning Hawthornden was deleted from the record, there was little or no evidence to support the finding.
There was no evidence that the appellant was engaged in trading as professed in its memorandum of association.
The fact that the appellant merely considered but did not proceed with developing the land should not have been held to be a change of intention. Not should the fact of the intended land acquisition by the Government (which was in any event short-lived) be taken as a relevant factor ascribed to change of intention.
The fact that the land was held for more than 14 years undeveloped and earning no income should have tilted the scales in favour of the appellant.
The circumstances of the purchase of the land, its subsequent sale and the accounts do not show conclusively that this sale transaction of the appellant was in the nature of an adventure in trade.
Concerning the Special Commissioners, their exposition of the law on the issues before them is correct. Still, their application of the law and the authorities to the facts are erroneous due to their wrong findings of facts.
Indeed if the Special Commissioners had not deviated from the agreed statement of facts, they would not have concluded that they did.
I would accordingly allow the appeal and set aside the deciding order of the Special Commissioners, with costs here and below.
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