Federal Court's Ruling On Section 4C Of The Income Tax Act ' What's Next?

• Published date: 05 March 2024
• Subject Matter: Tax, Income Tax
• Law Firm: Juen, Jeat, Nic & Nair
• Author: Nicholas Mark Pereira

In December 2020, the Federal Court in the case of Wiramuda (M) Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri held that Section 4C of the Income Tax Act 1967 ("ITA") was unconstitutional as it contravened Article 13(2) of the Federal Constitution ("Constitution"). The Federal Court's written Grounds of Judgment (dated 31 May 2023) was recently published.

Section 4C of the ITA provides as follows:

Gains or profits from a business arising from stock in trade parted with by any element of compulsion

4C. 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.

Article 13(2) of the Constitution provides as follows:

No law shall provide for the compulsory acquisition or use of property without adequate compensation.

Facts

The facts of the case are straightforward.

The taxpayer owned 4 parcels of land ("Lands").

The Lands were compulsorily acquired by the Selangor State Government for the SUKE Highway project. The taxpayer received compensation amounting to RM 202,552,569.50 for the compulsory acquisition ("Compensation").

The Inland Revenue Board ("IRB") took the view that the Compensation was subject to tax under Sections 4C and 24(1)(aa) of the ITA. Based on this, the IRB imposed tax amounting to RM 52,966,517.27 on the taxpayer.

The taxpayer challenged the IRB's assessment by filing an application for judicial review at the High Court. The taxpayer was unsuccessful at the High Court.

The taxpayer appealed to the Court of Appeal but was unsuccessful again.

Finally, the taxpayer appealed against the Court' of Appeal's decision to the Federal Court.

Federal Court's Decision

The Federal Court decided that Section 4C of the ITA contravened Article 13(2) of the Constitution as it deprived the taxpayer of adequate compensation granted in accordance with the Land Acquisition Act 1960 ("LAA").

In this regard, the Federal Court held that:

• Section 4C of the ITA was introduced to subject the compensation received for the compulsory acquisition of land on the premise that the compensation is gain or profit from business. The section considers compensation from compulsory acquisition to be a form of profit or gain.

• Profit/gain and compensation have different meanings Profit/gain mean that there is a pecuniary advantage. Adequate compensation means that there is no more or no less...