The Wiramuda case – landmark Federal Court ruling in Malaysia that compensation is not taxable

International Tax Review is part of Legal Benchmarking Limited, 1-2 Paris Garden, London, SE1 8ND

Copyright © Legal Benchmarking Limited and its affiliated companies 2025

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

The Wiramuda case – landmark Federal Court ruling in Malaysia that compensation is not taxable

Sponsored by

sponsored-firm-rosli-dahlan-saravana-partnership.png
justice-2060093.jpg

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.

Key facts

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.”

Taxpayer’s submission

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.

IRB’s submission

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.

Conclusion

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.

more across site & shared bottom lb ros

More from across our site

Canadian Prime Minister Mark Carney and US President Donald Trump have agreed that the countries will look to conclude a deal by July 21, 2025
The firm’s lack of transparency regarding its tax leaks scandal should see the ban extended beyond June 30, senators Deborah O’Neill and Barbara Pocock tell ITR
Despite posing significant administrative hurdles, digital services taxes remain ‘the best way forward’ for emerging economies, says Neil Kelley, COO of Ascoria
A ‘joint understanding’ among G7 countries that ‘defends American interests’ is set to be announced, Scott Bessent claimed
The ‘big four’ firm’s inaugural annual report unveiled a sharp drop in profits for 2024; in other news, Baker McKenzie and Perkins Coie expanded their US tax benches
Representatives from the two countries focused on TP as they met this week to evaluate progress under a previously signed agreement – it is understood
The UK accountancy firm’s transfer pricing lead tells ITR about his expat lifestyle, taking risks, and what makes tax cool
Dolphin Drilling intends to discuss the final liability amount and manner of settlement with HM Revenue and Customs
Winning the case against the 20% VAT imposition was always going to be an uphill challenge for the claimants, UK tax advisers argue
A ‘paradigm shift’ in Chile’s tax enforcement requires compliance architecture built on proactive governance, strategic documentation and active monitoring of judicial developments
Gift this article