Whether the gains from the disposal of land were trading receipts
or capital receipts?
Ketua Pengarah Hasil Dalam Negeri v Gracom Sdn Bhd (2013) (High Court)
Facts:
The taxpayer was incorporated on 11.7.1988. Under its
Memorandum and Articles of Association, the principal activity of the taxpayer,
amongst others, was an investment holding company. On 23.10.1989, the taxpayer
purchased 2 parcels of land registered as H.S.(D) 86910 (No. PT 97) and H.S.(D)
86911 (No. PT 98) from S Resort (M) Bhd. The 2 parcels of land were part of
Master Title G 28578, Lot 13567, Mukim Damansara, Selangor. On 15 December
1995, the taxpayer had sold the land held under No. PT 97 to H Dinamis Sdn.
Bhd. and the land held under No. PT 98 to S Sdn. Bhd. On 11.4.2000, the Revenue
raised a notice of additional assessment for income tax (“Borang JA”) for the
year of assessment 1997 for the sum of RM8,540,810.70 against the taxpayer for
the gains made from the disposal of the two parcels of land. On 21.9.2007, the
taxpayer’s tax consultants filed a notice of appeal to the Special
Commissioners Of Income Tax (“Form Q”) against the notice of additional
assessment for income tax dated 11 April 2000 on behalf of the taxpayer.
The taxpayer’s witness (AW1) said in evidence that he
had retired from S Consolidated Berhad as its Director of Business Development
in 2010. He said the taxpayer was part
of P (Malaysia) Sdn Bhd which was the ultimate holding company of S
Consolidated Berhad. Between 1997 and
2003, AW1 was a Director of the taxpayer.
Between 1989 and 1999, AW1 was also the Senior Finance Manager in charge
of OPD Sdn Bhd, one of the Master Title owners.
By virtue of this, he was involved directly in the application for
sub-division and development of the Master Title. The relevant testimony of AW1 pertaining to
this case was as follows:
(a) The
taxpayer did not purchase any other parcels of land except for the two parcels
of land [namely H.S.(D) 86910 (No. PT 97) and H.S.(D) 86911 (No. PT 98)] (“the Two Parcels”), which the Taxpayer
purchased as an investment.
(b) The
taxpayer had consistently held the Two Parcels as “property development
expenditure” items, i.e. non-current assets, in its audited accounts from the
time the Two Parcels were purchased and sold. Other than holding the Two
Parcels and some shares for the purposes of investment, the taxpayer did not
have any other business. The taxpayer was then a dormant company.
(c) Although
the audited accounts state that one of the taxpayer’s principal activities was
property development, the taxpayer never undertook any such activity. In fact,
even after the Two Parcels had been disposed of, the principal activity was
continued to be stated to be of property development although the taxpayer
owned no land.
(d) From
AW1’s experience having been involved at the time the taxpayer purchased the
Two Parcels and managing the various applications and AW1’s interaction with
the taxpayer’s directors then, it was apparent and clear to AW1 that the
taxpayer purchased the Two Parcels for investment. It must be noted that at the
time the taxpayer purchased the Two Parcels:
(i) The
value of the Two Parcels was projected to increase substantially in the future
due to the up and coming infrastructure improvements in the surrounding areas;
(ii) The S
Golf and C Club, which was located in the same area, was a Government
initiative to set up a golf club in Kuala Lumpur to attract investors and
industrialists. Given that this was a Government initiative with huge potential
for success, the taxpayer was of the view that the Two Parcels were lucrative
investments; and
(iii) The Two
Parcels were strategically located near the then international airport, Lapangan
Terbang Subang.
For the reasons above, the taxpayer purchased the Two
Parcels for the purposes of investment.
(e) The
taxpayer took no steps to develop the Two Parcels. In fact, nothing was done by
the taxpayer to exhibit such intention. The taxpayer was only interested in
capital appreciation. This was evident from the fact that the taxpayer had
consistently held the Two Parcels as “property development expenditure” items,
i.e. non-current assets, in its audited accounts from the time the Two Parcels
were purchased and until it was sold. If the taxpayer had intended to develop
the Two Parcels, it would have held the Two Parcels as current assets.
(f) AW1 was
clear about the taxpayer’s intention and purpose, which was to hold the Two
Parcels as investment, as besides being the taxpayer’s director between 1997
and 2003, AW1 was also the officer in charge of the taxpayer’s financial
affairs for the years 1994 and 1995. Further, AW1 was also employed by the
vendor’s then ultimate holding company at the time the Taxpayer purchased the
Two Parcels. The taxpayer’s intention to hold the Two Parcels as an investment
was present from the time it was purchased up until the time the Two Parcels
were sold off. There was no change of intention and the taxpayer took no steps
to develop the Two Parcels.
(g) The
taxpayer did not hold a developer’s licence. Undertaking such development
activities without a developer’s license amounts to an offence and one would be
subjected to various civil and criminal sanctions. The taxpayer had no
experience in property development. From corporate and financial perspectives,
it would have been much easier and efficient to use an existing subsidiary that
was in property development to purchase the Two Parcels if the intention was to
develop the Two Parcels. This was because the existing subsidiary would have
the necessary licenses and permits from the local authorities and professional
bodies to undertake the development on the Two Parcels. Prior to the disposal
of the Two Parcels, the taxpayer was a loss-making company and with a record
like this, the taxpayer could not undertake property development. The taxpayer
also had no income whatsoever. With such financial record, it was impossible
for the taxpayer to obtain the necessary approvals from the authorities and
gain public confidence to undertake property development. No one would take the
taxpayer seriously.
(h) At the
time of purchase, the Two Parcels were classified as agriculture land and it
remained so until the Two Parcels were sold. The taxpayer did not make any
application to convert the status of the Two Parcels or to subdivide the Two
Parcels. The taxpayer did not engage a surveyor to survey the Two Parcels.
Further, the taxpayer did not make any plan for irrigation and draining on the
Two Parcels. The taxpayer did not take any effort to level or clear the Two
Parcels and did not employ any engineer, architect or contractor. The taxpayer
was not a property developer as the Taxpayer did not do anything to the Two
Parcels and did not even submit any plan to the authorities or engage
consultants to exhibit intention to develop the land.
(i) The
taxpayer sold the Two Parcels on 15 December 1995. At the time the Two Parcels
were sold, the Taxpayer was owned by D Sdn Bhd, which was owned by P (Malaysia)
Sdn Bhd. Sometime in 1995, P conducted a group restructuring exercise in view
of strengthening S Consolidated Berhad’s position for public listing purposes.
In giving effect to this exercise, the taxpayer was required to sell the Two
Parcels to S Sdn Bhd’s subsidiaries, namely H Dinamis Sdn Bhd and Se Sdn Bhd.
Further, since the Two Parcels had appreciated in value, the taxpayer thought
it would be a good time to realise the investment. The Two Parcels remained
agriculture land in terms of status and remained untouched since it was first
purchased by the taxpayer. The nature and character of the Two Parcels at the
time of the sale remained the same as how it was at the time the taxpayer
purchased it. The taxpayer did not pay the premium as it never intended to
change the nature of the land. But for the group restructuring activity, the
taxpayer would not have sold the Two Parcels.
(j) The
taxpayer did not appoint any broker or agent to sell the Two Parcels as the
taxpayer was not trading in land. The taxpayer kept the Two Parcels for six
years. The Two Parcels were meant as an investment and thus, the taxpayer did
not do anything to mature the Two Parcels. The taxpayer wanted the Two Parcels
to be an investment only. The taxpayer took no steps at all to develop the Two
Parcels or commence the business of property development.
Accordingly, the taxpayer contended that the Two
Parcels were held as investment and thus, the gains arising from the disposal
of the Two Parcels were not subject to income tax. Meanwhile, the Revenue
argued that the taxpayer was a property development company, which therefore
meant that the gains from the disposal of the two parcels were business income.
According to the Revenue, there was profit seeking motive by the taxpayer at
the time of the acquisition of the said land since it was foreseeable that
various development steps would be undertaken by the Government to develop the
area.
Issue:
Whether
the gains from the disposal of the 2 parcels of land were trading receipts and
taxable under Section 4(a) of the Income Tax Act 1967 as business income or
capital receipts and taxable under the Real Property Gains Tax Act 1976?
Decision:
In order
to resolve this issue, The Special Commissioners of Income Tax (“Special
Commissioners”) held that it was necessary to determine the intention with
which the taxpayer acquired the subject land. The intention of the taxpayer
must be judged against the background of its acts and conduct and the
circumstances of the case. The question whether a profit realised on the sale
of real estate is a realisation or change of investment or an act done in the
carrying on of a business is to be determined in the light of the facts in each
case. The intention must be shown to have existed at the time of the
acquisition of the asset. It was also of critical importance to note that the
intention must amount to an intention in law. Based on this and the facts
highlighted above, the Special Commissioners found that when the taxpayer
acquired the subject land, its intention was for investment.
According
to the Special Commissioners, the intention
must be shown to have existed at the time
of the acquisition of the asset. In this
respect reference may be made to Lower Perak Co-operative Housing Society
Bhd. v. DGIR (994) 2 MLJ 713 where Edger Joseph Jr S.C.J.
referred to the judgment of Lord Wilberforce in Simmon v. IRC
(1980) STC 350 as follows:
“One
must ask, first what the Commissioners were required or entitled to find.
Trading requires an intention to trade; normally the question to be asked is
whether this intention existed at the time of the acquisition of the asset. Was
it acquired with the intention of disposing of it at a profit, or was it
acquired as a permanent investment? Often it is necessary to ask further
question: a permanent investment may be sold in order to acquire another
investment thought to be more satisfactory; that does not involve an operation
of trade, whether the first investment is sold at a profit or at a loss.
Intention may be changed. What was first an investment may be put into the
trading stock, and, I suppose, vice versa. If finding of this kind are to be
made precision is required, since a shift of an asset from one category to
another will involve changes in the company’s accounts, and, possibly, a
liability to tax (of Sharkey (Inspector of Taxes) v. Wernher (1955) 2 All ER
493; (1956) AC 58). What I think is not possible is for an asset to be both
trading stock and permanent investment at the same time, nor for it to possess
an indeterminate status, neither trading stock nor permanent asset. It must be
one or the other, even though, and this seems to be legitimate and
intelligible, the company, in whatever character it acquires the asset, may
reserve an intention to change its character. To do so would, in fact, amount
to little more than making explicit what is necessarily implicit in all
commercial operations, namely, that situations are open to review.”
The
Special Commissioners added that it is also of critical importance to note that
the intention must amount to an intention in law. On the proper meaning of an
intention in law reference may be made to Cunliffe v. Goodman
(1950) 1 All ER 720 referred to by Edger
Joseph Jr S.C.J. in the Lower Perak case where Asquith
L.J. said at p. 724:
“An ‘intention’ to my mind connotes a state of
affairs which the party ‘intending’ - I will call him X - does more than merely
contemplate. It connotes a state of affairs which, on the contrary, he decided,
so far as in him lies, to bring about, and which, in point of possibility, he
has a reasonable prospect of being able to bring about by his own act of
volition. X cannot, with any due regard to the English Language, be said to
‘intend’ a result which is wholly beyond the control of his will. He cannot
‘intend’ that it shall be a fine day tomorrow. At most he can hope or desire or
pray that it will. Nor, short of this, can X be said to ‘intend’ a particular
result if its occurrence, though it may not be wholly uninfluenced by X’s will,
is dependent on so many other influences, accidents, and cross currents of
circumstances that not merely is it likely not to be achieved at all, but if it
is achieved, X’s volition will have been no more than a minor agency
collaborating, with, or not thwarted by, the factors which predominately
determine its occurrence.
... This
leads me to the second point bearing on the existence in this of ‘intention’ as
opposed to mere contemplation. Not merely is the term ‘intention’ unsatisfied
if the person professing it has too many hurdles to overcome or too little
control of events; it is equally inappropriate if at the material date the person
is in effect not deciding to proceed but feeling his way and reserving his
decision until he shall be in possession of financial data sufficient to enable
him to determine whether the project will be commercially worthwhile. A purpose
so qualified and suspended does not, in my view, amount to an ‘intention’ of
‘decision’ within the principle. It is mere contemplation until the materials
necessary to a decision on the commercial merits are available and have
resulted in such a decision.”
Accordingly,
the Special Commissioners unanimously held that when the taxpayer acquired the
Two Parcels, its intention was for investment based on the following:
(a) The taxpayer acquired the Two Parcels due to its
strategic location i.e. near the international airport, Lapangan Terbang Subang
and the S Golf and C Club. The value of the land was also projected to increase
substantially in the future due to the up and coming infrastructure, and
improvement in the surrounding areas.
(b) As testified by AWl, the taxpayer’s ultimate holding
company P Group had intended, amongst other, that the taxpayer hold the Two
Parcels as investment, which is consistent with the taxpayer’s principal
activity as an investment holding company, as per the Memorandum and Articles
of Association.
(c) The Two
Parcels were consistently held as non-current assets item in the taxpayer’s
audited accounts and the taxpayer’s auditors agreed to this treatment after
making their due inquiry.
(d) The taxpayer held the Two Parcels for almost 6 years
before disposal. This was further evidence of its intention to hold the subject
land for investment.
(e) As testified by AW1, the taxpayer did not have the
finance, relevant experience and expertise, necessary licenses such as a
developer’s licence for example to undertake property development activities.
Apart from acquiring the Two Parcels and after their disposal, the taxpayer did
not acquire any other land way before as well as after their acquisitions and
sale, nor dealt in the business of real estate. This was further evidence of
the taxpayer’s intention to hold the Two Parcels as investment before their
disposal.
(f) The disposal of the Two Parcels was triggered by the
taxpayer’s ultimate holding company’s group restructuring exercise, otherwise
the taxpayer would have retained the land, as per AWl’s testimony that was not
challenged or contradicted.
(g) The taxpayer did not make any alteration or
improvement to the Two Parcels to enhance their marketability. In fact the
character or quality of the land had never been changed. For instances, the Two
Parcels remained as “agricultural land” on the day it was purchased and later
sold; the Taxpayer did not level or clear the land; the Taxpayer did not make
any application to convert the status of the land nor made any application to
sub-divide the land; no surveyor was engaged to survey the land; nor did the
taxpayer submit any development plans or proposal in respect of the land. The
land remained in their pristine, untouched state from the date of purchase till
the date of their disposals. This was strong evidence of the taxpayer’s
intention of holding them for investment purposes, as AWl’s testimony
pertaining to the above was not challenged or contradicted.
(h) The Revenue’s contention regarding the accounting
treatment can best be answered as follows. In the light of the facts and
circumstances of this case, given that there was no frequency of transactions,
no physical enhancement to the land, no organised effort to promote sale, the
plansible but unchallenged reason stated by AW1 to smooth the way for the
public listing of S Consolidated Bhd. etc, the accounting treatment did not
alter the nature of the transactions.
The High Court upheld the Special Commissioners’
decision and ordered the notice of additional assessment for income tax to be
discharged. The Revenue did not appeal to the Court of Appeal against the High
Court’s decision.
Acknowledgement:
The Institute
would like to thank the legal firm, Lee
Hishammuddin Allen & Gledhill for the permission to reproduce this case
analysis in e-CTIM for the benefit of the members. We would also like to thank the Editiorial
team of Tax Practice e-LawAlert of Lee Hishammuddin Allen & Gledhill for their
invaluable contribution.
The views and
opinions attributable to the authors or editors of this case analysis are not
to be imputed to be the firm, Lee Hishammuddin Allen & Gledhill, or
CTIM. Members are reminded that this
case analysis is intended for purposes of general information and academic
discussion only. It should not be
construed as legal advice or legal opinion on any fact or circumstances.
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