Recently, the High Court in Courts (Malaysia) Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri [2026] MLJU 2194 ruled in favour of the taxpayer and held that the interest income derived from the instalment scheme is subject to tax under Section 4(a) of the Income Tax Act 1967 (“ITA”) as business income after the amendment of Section 24(5) through the Finance Act 2013.
Our Senior Associate in our Tax, Customs and Incentive practice group, Yap Wen Hui, previously advised and represented the taxpayer in the appeal.
Salient Facts
The taxpayer is principally engaged in activities involving the retailing of electrical goods and household furniture. For all credit sales, customers could opt for the instalment scheme (“the Scheme”). In the event there was a late payment on the instalment, the taxpayer would charge interest accordingly.
At all material times, the taxpayer recorded the said interest as business income under Section 4(a) of the ITA.
Following an audit, the Director-General of Inland Revenue (“DGIR”) contended that the interest arising from the Scheme should be classified as Section 4(c) sourced income instead of Section 4(a) sourced income. Notices of assessment amounting to RM 9.8 million were subsequently raised against the taxpayer.
Being dissatisfied with the Assessments, the taxpayer filed notices of appeal to the Special Commissioners of Income Tax (“SCIT”)
Legal Issue
The issue was whether the interest derived from the Scheme was subject to income tax under Section 4(a) or Section 4(c).
Under the Finance Act 2013, Section 4B was introduced whilst Section 24(5) was amended.
Section 4B stipulates that:
“For the purpose of section 4, gains or profit from a business shall not include any interest that first becomes receivable by a person in basis period for a year of assessment other than interest where subsection 24(5) applies.”
Section 24(5) is reproduced as follows:
“ Subject to section 3, where in the relevant period any gross interest first becomes receivable by the relevant person, then,
if the debenture, mortgage or other source to which the interest relates forms or has formed in or before the relevant period part of the stock in trade of a business carried on by or on behalf of the relevant person,
or
if the interest is in respect of a loan granted in or before the relevant period in the course of carrying on the business of lending of money and the business is one which is licensed under any written law –
a) the interest shall be treated as gross income of the relevant person from the business for the relevant period if the business is carried on at any time in the relevant period; …”
In other words, the two limbs under Section 24(5) are stated as follows:
a) The first limb: The debenture, mortgage or other source to which the interest relates forms or has formed part of the stock in trade; and
b) The second limb: The interest is in respect of a loan granted in the course of carrying on the business of lending money and such business is licensed under any written law.
The Revenue’s Contention
The crux of the Revenue’s argument was that the interest derived from the Scheme should be subject to Section 4(c) for the following reasons:
a) The taxpayer has never engaged in business involving debentures or mortgages;
b) The Scheme could not constitute “other source” under the first limb of Section 24(5) as the phrase “other source” should be of the same kind as “debenture and mortgage” based on the principle of ejusdem generis. The Revenue contended that such “other source” should refer to loan or debt instruments and not the Scheme; and
c) The taxpayer was not involved in the money-lending business.
The Taxpayer’s Position
The crux of the taxpayer’s position is that the interest derived from the Scheme should be subject to income tax under Section 4(a) on the following basis, amongst others:
a) The SCIT had erred in interpreting Section 24(5) by failing to consider that the amendment made to Section 24(5) merely applies to the second limb, i.e. interest income in respect of a loan granted in the course of licensed money-lending business.
|
Before amendment |
After amendment |
|
“…. or if the interest is in respect of a loan granted in or before the relevant period in the course of carrying on the business and the business is one which includes the regular lending of money – …” |
“… of if the interest is in respect of a loan granted in or before the relevant period in the course of carrying on the business of lending money and the business is one which is licensed under any written law – …” |
As such, the amendment does not alter the taxpayer’s position, which falls within the first limb of Section 24(5).
b) Be that as it may, the interest derived by the taxpayer from the Scheme shared the same characteristics as debentures and mortgages, which similarly yield interest, and thus qualified as an “other source” under Section 24(5);
c) The Scheme formed part of the taxpayer’s stock in trade in the course of its business. Based on the taxpayer’s witness testimony, 70% of the taxpayer’s stock in trade, comprising electronic and electrical appliances as well as household furniture, was sold on credit through the Scheme.
SCIT’s Decision
Having considered both parties’ arguments, the SCIT held that the said interest did not fall within the ambit of Section 24(5) for the following basis, amongst others:
a) The phrase “other sources” should be of the same type as debenture and mortgage by applying the principle of ejusdem generis;
b) The Scheme was neither a debenture nor a mortgage, which are debt instruments; and
c) The Scheme was not part of the taxpayer’s stock in trade.
Dissatisfied with the SCIT’s decision, the taxpayer filed an appeal to the High Court.
High Court’s Decision
The High Court allowed the taxpayer’s appeal and held that the interest derived from the Scheme constituted business income under Section 4(a) on the following grounds:
a) The High Court considered the plain meaning of debenture and mortgage. Based on the dictionary, a debenture is a long-term loan issued by a company at a fixed interest rate, while a mortgage is an agreement that allows one to borrow money from a bank or similar organisation by offering something of value.
As such, the Scheme shared common characteristics with debentures and mortgages. For completeness, the relevant excerpt from the High Court’s decision is stated as follows:
“The Appellant’s witnesses testified before the SCIT. The first witness stated that the Scheme allows the customers to pay the purchase price of the Products over a specified period. The second witness confirmed that the interest income comprises charges imposed under the Scheme in consideration for allowing customers to purchase the Products by instalments.
To my mind, this arrangement offered under the Appellant’s Scheme aligns with the meaning given to debenture and mortgage”
b) Furthermore, the High Court adopted a broader approach and held that the genus of debenture and mortgage extended to commercial arrangements involving deferred payment where interest accrued and formed part of the business income; and
c) The SCIT erred in ruling that the said interest constitutes debts arising from credit financing rather than stock. The High Court held that Section 24(5) only requires the Scheme to form part of stock in trade. In this case, the Scheme formed an integral part of the taxpayer’s products as the Scheme would be utilised by a customer when there was any credit purchase. The Scheme did not stand by itself, but it was interrelated with the Products.
At the time of writing, the Revenue appealed to the Court of Appeal against the High Court’s decision.
Commentary
This is the first decided case after the amendment of Section 24(5) and it therefore offers guidance on how this provision is to be construed.
The decision is significant for two main reasons. First, the High Court adopted a broad and commercially-grounded reading of “other source” in Section 24(5). Rather than confining the genus to debt instruments such as debentures and mortgages, it identified their common characteristic as a commercial arrangement involving deferred payment under which interest accrues, into which an instalment scheme falls comfortably. Secondly, the High Court clarified that Section 24(5) does not require the interest-bearing source to be stock in its own right; it is sufficient that the instalment scheme to form part of the taxpayer’s stock in trade.
The classification matters in practice. Section 4(a) treatment allows the taxpayer to set off business losses, claim capital allowances and deduct revenue expenses, none of which would have been available under Section 4(c).
About the authors
Yap Wen Hui
Senior Associate
Tax, Customs and Incentives Practice Group
Halim Hong & Quek
wh.yap@hhq.com.my
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