The Wiramuda case – landmark Federal Court ruling in Malaysia that compensation is not taxable
S Saravana Kumar and Wen Hui Yap of RDS Partnership analyse the crucial income tax ruling and its implications for the supremacy of Malaysia’s Federal Constitution.
Recently, the Federal Court led by the Chief Justice unanimously ruled that Section 4C of the Income Tax Act 1967 (ITA) is unconstitutional.
The taxpayer was successfully represented by D P Naban, S. Saravana Kumar and Yap Wen Hui together with its instructing solicitors.
In 1987, the Selangor State Government handed out parcels of land (the Land) to the taxpayer (Wiramuda). In the early 1990s, the taxpayer commenced quarry activities which continued until 2011. From 2011, the taxpayer remained a dormant company. In 2016, the state government compulsorily acquired the Land for the construction of a highway. The taxpayer was awarded compensation for the compulsory acquisition.
The Inland Revenue Board (IRB) imposed additional taxes of about RM 52 million against the taxpayer by subjecting the compensation to income tax under Section 4C.
Feeling aggrieved, the taxpayer commenced judicial review proceedings against the IRB. Amongst other things, the taxpayer argued that Section 4C was unconstitutional as it deprives the taxpayer’s right to receive adequate compensation for compulsory acquisition of the Land under Article 13(2) of the Federal Constitution.
History of Section 4C
Prior to the introduction of Section 4C, the Court of Appeal in Penang Realty held that compensation received by the taxpayer for the compulsory acquisition of land is not subject to income tax. The Court of Appeal adopted the principle proclaimed by the Supreme Court in Lower Perak which held that the element of compulsion nullified the intention to trade. The decision in Penang Realty was subsequently followed by the High Court in Metacorp Development. The Federal Court subsequently affirmed the High Court’s ruling in the Metacorp case.
Consequent to these rulings, Section 4C was enacted through the Finance Act 2014, and it reads:
“For the purpose of paragraph 4(a), gains or profits from a business shall include an amount receiveable arising from stock in trade parted with by any element of compulsion including on requisition or compulsory acquisition or in a similar manner.”
The crux of the taxpayer’s submission was as follows:
The concept of “adequate compensation" as envisaged under Article 13(2) is the sum that would place the taxpayer in the same financial position as he would have been if there was no compulsory acquisition of the land. This is known as the principle of equivalence, which was applied by the Federal Court in Semenyih Jaya;
Section 4C was enacted to subject the compensation received for the compulsory acquisition of land to income tax. It took away and reduced the amount of compensation received by a person whose land is compulsorily acquired; and
Section 4C eroded the fundamental right to “adequate compensation” under Article 13(2), thus making the protection guaranteed by the Federal Constitution illusory.
The IRB argued that:
The judicial power to award adequate compensation for the compulsory acquisition of land lies solely with the High Court judge under the Land Acquisition Act (1960). Thus, the taxpayer was estopped from raising any contention on the adequacy of compensation in the Federal Constitution;
Section 4C was consistent with the Federal Constitution as Article 13(2) did not restrict the legislative powers of Parliament but merely requires adequate compensation to be awarded for the compulsory acquisition of land; and
Section 4C does not conflict with Article 13(2) as the provision was duly legislated by Parliament.
High Court’s decision
The High Court dismissed the judicial review application and held that Section 4C was duly inserted by Parliament into the ITA. Thus, it cannot be said to be in contravention of the Federal Constitution. Article 96 of the Federal Constitution gives the power to the Director General of Inland Revenue to impose taxes on the taxpayer in accordance with the law.
Court of Appeal’s decision
The Court of Appeal also unanimously dismissed the taxpayer’s appeal on the grounds that there was a strong presumption of constitutionality in relation to Section 4C. As Section 4C was enacted via the Finance Act 2014 and was passed by Parliament, the Court of Appeal held that Section 4C conformed to Article 13(2) and Article 96.
Federal Court’s decision
In a unanimous decision, the Federal Court held that Section 4C of the ITA was unconstitutional as it contravened Article 13(2) by depriving the taxpayer of adequate compensation arising from the compulsory acquisition of the land.
This is a landmark ruling as this is the first time where the apex court ruled that the tax provision in the ITA is unconstitutional. It is a welcome move to uphold the supremacy of the Federal Constitution over legislation passed by Parliament. This ruling serves as a good reminder that Parliament does not have the power to enact law, including tax law, that erodes the fundamental rights guaranteed by the Federal Constitution.