By Christine Toh & Raymond Mah
In Malaysia, the burden of assessing tax liability is placed on the shoulders of the taxpayers, i.e. a self assessment tax system to encourage voluntary tax compliance and to reduce tax administration cost.
However, the Director General of Inland Revenue (“Director General”) has a wide discretion under the Income Tax Act 1967 to make an assessment or additional assessment if it appears to him that no assessment or insufficient assessment has been made on a person chargeable to tax for any year of assessment.
The assessment or additional assessment, as the case may be, can be made in the year of assessment or within 5 years after the expiration of that year of assessment. However, if it appears to the Director General that any form of fraud or wilful default has been committed or any person has been negligent in relation to tax, he may at any time make an assessment or additional assessment for any year of assessment.
The assessment or additional assessment may be made “according to the best of the Director General’s judgment”.
The Supreme Court in Government Of Malaysia & Anor v Jagdis Singh  2 MLJ 185 (referring to the judgment of the Privy Council in Commissioner of Income Tax, Central and United Provinces v Laxminarain Badridas  5 ITR 170) laid down the guideline for the “best judgment” assessment and stated that the Director General “must not act dishonestly, or vindictively or capriciously. He must make what he honestly believes to be a fair estimate of the proper figure of the assessment, and take into consideration all other matters which he thinks will assist him in arriving at a fair and proper estimate; and though there must necessarily be guesswork, it must be honest guesswork”. He has to exercise his judgment based on a fair estimate of the proper figure of assessment.
In Ketua Pengarah Hasil Dalam Negeri v KH Toh Tiling Sdn Bhd and another appeal  MLJU 1705, the High Court held, inter alia, that the assessment made by the Director General which was based on a written claim by a sub-contractor to a contractor for a construction project in the sum of RM1,543,970 could not be termed as “a fair estimate of the proper figure of assessment” or “an assessment to the best of his judgment” against the sub-contractor. The Court took into account that there was conflicting evidence as to the amount of income that the sub-contractor was supposed to receive from the contractor. The Court held that the Director General ought not take into consideration the written claim by the sub-contractor for assessment of the sub-contractor’s income. It was held that “To begin with, there was no amount which could be deem as fixed, valid and genuine income which could be used for the purpose of assessment of income for Year of Assessment 2001.”
Option 1: Appeal to the Special Commissioners for Income Tax
Pursuant to section 99 of the Income Tax Act 1967, a person who is aggrieved by an assessment which has been made on him by the Director General is entitled to appeal against that assessment to the Special Commissioners for Income Tax (“Special Commissioners”).
An appeal must be made no later than 30 days after the notice of assessment has been served on the taxpayer by submitting Form Q to the Director General. The 30 day period starts to run the following day. For example, if the notice of assessment was served on the taxpayer on 29.2.2018, the last day for the taxpayer to file Form Q would be on 28.3.2018. If the last day falls on a non-working day, the deadline is extended to the next working day.
However, payment of tax must be made before you can appeal against an assessment under section 99 of the Income Tax Act 1967.
Application for an Extension of Time
If a taxpayer did not submit his Form Q within the specified period, he may apply for an extension of time for appeal (“Application”) by submitting Form N to the Director General supported by valid reasons for the delay in filing Form Q.
Examples where an Application for extension of time may be allowed:
- The appellant has been hospitalized for a long period of time
- The appellant was absent from the country
- The appellant is a victim of a natural disaster
If the Application is allowed, the Inland Revenue Board of Malaysia (“IRB”) will inform the appellant of the extended date for the submission of Form Q.
If the Application is not allowed, Form N together with a statement of reasons for rejection by the Director General will be forwarded to the appellant. Thereafter, the appellant may make a written representation to the Special Commissioners in respect of his Application within 21 days.
The Special Commissioners will notify the appellant in respect of his decision whether the appellant’s ‘appeal’ in respect of the Director General’s refusal to grant extension of time should be allowed.
Hearings by the Special Commissioners
The Director General has 12 months from the date of receipt of the Notice of Appeal to review the assessments against which the appeals were made and may initiate negotiations with the view of finding an amicable solution to resolving the dispute at hand. If the Director General and the taxpayer are unable to resolve the matter amicably, the Director General will then forward the Notice of Appeal to the Special Commissioners.
The hearing of an appeal shall be in the presence of three Special Commissioners and at least one of whom shall be a person with judicial or other legal experience. At the hearing, the Director General may be represented by an authorized officer, a legal officer or an advocate whereas the appellant may be represented by an advocate or a tax agent of by both an advocate and a tax agent.
Further Appeal to the High Court
Pursuant to para 34, schedule 5 of the Income Tax Act 1967, either party to a proceeding before the Special Commissioners may appeal to the High Court on a question of law against a deciding order made by the Special Commissioner.
The intending appellant shall, within 21 days after service of the deciding order on him, request the Special Commissioners to state a case for the opinion of the High Court.
In Director-General Of Inland Revenue v Khoo Ewe Aik Realty Sdn. Bhd.  2 MLJ 415, the Supreme Court held that the decision of the Special Commissioners as to question of fact is conclusive and “a court would not therefore disturb findings of fact by the Special Commissioners unless it considers that the only reasonable conclusion on the evidence contradicts the determination of the Special Commissioners”.
The High Court is particularly slow in interfering with the findings of tribunals specializing in specific fields, unless it is demonstrated that the Special Commissioners had erred on a question of law, resulting in a manifest error in the deciding order.
Option 2: Application for Judicial Review to the High Court
In the alternative to the appeal procedure explained above, taxpayers may apply to the High Court to review the assessment made by the Director General by way of the judicial review proceedings.
In Malaysia, the High Court exercises supervisory jurisdiction over administrative or public bodies, including the IRB. A person aggrieved by an assessment may apply to the High Court for an order of certiorari to quash the assessment by the Director General, by way of judicial review.
A judicial review encompasses 2 stages.
First Stage: Application for Leave to Commence Judicial Review Proceedings
The first stage is the application for leave to commence judicial review proceedings.
If the taxpayer is a body corporate, it must be represented by solicitors. The taxpayer or its solicitors if represented will have to file its notice of application for leave to apply for judicial review, supported by a statement setting out the name and description of the applicant, the relief sought and the grounds on which it is sought (“Statement”), and by affidavits verifying the facts relied on.
The Federal Court in WRP Asia Pacific Sdn. Bhd. v Tenaga Nasional Bhd.  4 MLJ 296 held that the general test for deciding if leave should be granted to commence judicial review proceedings is: “…leave may be granted if the leave application is not thought of as frivolous, and if leave is granted, an arguable case in favour of granting the relief sought at the substantive hearing may be the resultant outcome.”
However, it is well-settled that if there is an appeal procedure provided under the relevant statute, the court will take a more stringent approach and leave will be granted only in very exceptional cases (Government Of Malaysia & Anor v Jagdis Singh  2 MLJ 185, Supreme Court).
Given that there is an appeal procedure provided for under the Income Tax Act 1967, an applicant seeking leave to judicially review an assessment will need to show that “there is shown a clear lack of jurisdiction or a blatant failure to perform some statutory duty or in appropriate cases a serious breach of the principles of natural justice.”
Second Stage: Merits of the Judicial Review Proceedings
Once leave to commence judicial review proceedings is allowed, the Court is empowered to look into the merits of the application for judicial review.
The taxpayer or its solicitors if represented, will then file the Notice of Hearing of application for Judicial Review in the High Court. The statement and affidavit verifying the facts stated therein will be served on the Director General. Thereafter, the Director General will have the opportunity to reply to the taxpayer’s affidavit. Parties will have to exhaust all affidavits before the hearing of the judicial review application.
The taxpayer or its solicitors if represented will have to file its notice of application for leave to apply for judicial review, supported by a statement setting out the name and description of the applicant, the relief sought and the grounds on which it is sought, and by affidavits verifying the facts relied on.
Cases where Judicial Review was successful
In the following cases, the applicant successfully obtained leave to commence judicial review proceedings, and subsequently succeeded at the hearing on the merits.
- Magnum Holdings Sdn. Bhd.v Ketua Pengarah Hasil Dalam Negeri  MLJU 101
In this case, the court held that the Director General had exceeded its jurisdiction by reason of its failure to apply the legal position inMulti-Purpose Holdings Bhd. v. Ketua Pengarah Hasil Dalam Negeri  8 CLJ 462.In Multi-Purpose Holdings Bhd., the Special Commissioners had decided (affirmed by the High Court later) that “in respect of share income, all counters of shares relating to the case whether income producing or non-income producing are a single source of income under s. 4(c) of the Act and that the same principle equally applied to interest income”. In Magnum Holdings Sdn. Bhd., the issue was whether the sources of income mentioned in section 4 of the Income Tax Act 1967 were indivisible and hence not open to further sub-division. The Court held that the Director General’s act of segregating the interest income premise of the basis that the taxpayer’s investment in one entity did not produce any income, was contrary to the legal principle in Multi-Purpose Holdings Bhd.As a consequence, the taxpayer’s application for leave to commence judicial review proceedings was allowed.
- Metacorp Development v Ketua Pengarah Hasil Dalam Negeri  5 MLJ 447
The court in the case ofMetacorp Development v Ketua Pengarah Hasil Dalam Negeri  5 MLJ 447 held that the availability of an alternative internal remedy in the form of an appeal process will not bar an application for judicial review. This is so especially where the complaint made to the court is one on error of law or abuse of power that goes to the legality of the conduct of the decision-making authority as in this case.In Metacorp Development, the Director General raised notices of additional assessment with penalty against the taxpayer on compensation that the taxpayer received as a consequence of compulsory land acquisition by the state government despite the Court of Appeal decision in Ketua Pengarah Hasil Dalam Negeri v Penang Realty Sdn. Bhd.  2 CLJ 835 which held that compensation received from compulsory acquisition is not trade and hence does not attract tax.The court held that the taxpayer had demonstrated illegality and unlawful treatment, thus it would be wrong to insist that it exhausts its statutory right of appeal, even if it is available. In fact a complaint that raises a question of law, would preferably be referred to the court, being a more appropriate forum, and leave for judicial review proceedings were allowed. At the hearing of the judicial review proceedings, the court held, inter alia, that Penang Realty Sdn. Bhd. was binding authorities on the Director General, being an arm of the executive. Thus the Director General’s decision in Metacorp Development, which was not based on the legal authorities of the superior courts in Penang Realty Sdn. Bhd., was in excess of its authority. Hence, the taxpayer’s application to quash the Director General’S decision of to raise notices of additional assessment against the taxpayer was allowed and the court held that the Director General had acted ultra vires and without any factual or legal basis in raising the said notices.
- IBM Malaysia Sdn. Bhd. v Ketua Pengarah Hasil Dalam Negeri  MLJU 162
The taxpayer intended to execute a software distribution agreement (“Agreement”) with one of the companies within the taxpayer’s group of companies, i.e. BM Ireland Product Distribution Limited (“PDL”).The Agreement would grant the taxpayer the right to distribute the software programs developed and owned by PDL in Malaysia. In exchange, the taxpayer would pay distribution fees to PDL. Before the execution of the Agreement, the taxpayer made an advance ruling application to the Director General on whether the payments to be made by the taxpayer to a non-resident, PDL, under the proposed software distribution agreement are royalties and subject to withholding tax under the Income Tax Act 1967.In its advance ruling, the Director General ruled that the distribution fee that the taxpayer would pay to PDL is royalty and thus, is subject to withholding tax.The Court is of the opinion that the payments to be made by the taxpayer are not for the right to reproduce the software programs but instead are for the cost of purchasing the PDL products, which the taxpayer will distribute and resell with marked-up prices in Malaysia. The court held that the definition of ‘royalty’ under the Malaysia-Netherlands Double Taxation Agreement (“DTA”) applies and not the Income Tax Act 1967 and applying the definition of royalty under the DTA, the distribution fee payable by the taxpayer to PDL does not fall under the definition of royalty under Article 13(6) of the DTA. Hence, the distribution fee shall be be subject to withholding tax.The court then allowed the taxpayer’s application to quash the advance ruling issued by the Director General. ConclusionThe Director General is empowered under the Income Tax Act 1967 to make an assessment and additional assessment in accordance with its best judgment. A taxpayer who is aggrieved by an assessment and additional assessment may appeal to the Special Commissioners. However, payment of tax must be made before the taxpayer may utilize the appeal procedure under the Income Tax Act 1967. Alternatively, the taxpayer may apply to the High Court for an order of certiorari to quash the assessment by the Director General, by way of judicial review proceedings.
By Christine Toh & Raymond Mah
Note: This article does not constitute legal advice to any specific case. The facts and circumstances of each and every case will differ and therefore will require specific legal advice. Feel free to contact us for complimentary legal consultation.