In 2006, the Court of Appeal on one occasion[1] ruled that the compensation received by the taxpayer was not subject to income tax as the element of compulsion vitiated the intention to trade. The said decision was subsequently applied in another case in 2013[2]. Thereafter, Section 4C of the Income Tax Act 1967 (“ITA”) was introduced through the Finance Act 2014, which reads:
“… gains or profits from a business shall include an amount receivable arising from stock in trade parted with by any element of compulsion including on requisition or compulsory acquisition or in a similar manner.”
In 2022, the Federal Court in Wiramuda (M) Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri [2023] 4 MLJ 753 unanimously held that Section 4C is unconstitutional as it contravenes Article 13(2) of the Federal Constitution, which guarantees adequate compensation for compulsory acquisition of property. Amongst others, the Federal Court held that taxing the said compensation diminishes the adequate compensation guaranteed to the landowner.
Our Co-head of Tax, Customs and Incentive Practice Group, Yap Wen Hui, successfully represented the taxpayer in Wiramuda. This was the first occasion where the Malaysian court ruled that the tax provision is unconstitutional.
The next question that arises is whether the tax paid on such compensation before the Federal Court’s decision in Wiramuda is refundable.
Recently, the Court of Appeal in Ketua Pengarah Hasil Dalam Negeri v Lush Development Sdn Bhd (Appeal No.: W-01(A)-392-08/2025) (heard together with Ketua Pengarah Hasil Dalam Negeri v Tanda Bestari Development Sdn Bhd (Appeal No.: W-01(A)-398-08/2025) held that the Federal Court’s decision in Wiramuda applies retrospectively. Thus, the tax previously paid under Section 4C must be refunded to the taxpayers together with interest.
This article analyses the key points of the Court of Appeal’s decision in Lush Development and Tanda Bestari.
Salient Facts
Both Lush Development and Tanda Bestari are principally engaged in property development. In 2016, the Selangor State Authority compulsorily acquired seven parcels of land belonging to Lush Development and awarded compensation of approximately RM22.47 million. The Selangor State Authority similarly acquired land belonging to Tanda Bestari in 2017 and awarded compensation of approximately RM8.4 million. At the material time, both taxpayers reported the compensation as taxable income in their tax returns and paid the tax accordingly.
In light of the Federal Court’s decision in Wiramuda, the taxpayers wrote to the Revenue requesting, amongst others, that the Revenue give effect to the Federal Court’s decision in Wiramuda and refund the tax paid under Section 4C (“taxpayers’ request letters”).
The Revenue did not respond to the taxpayers’ request letters, and such non-response was seen to be a rejection of the taxpayers’ requests. Being aggrieved by the non-response, the taxpayers filed leave applications to commence judicial review.
In 2024, the Revenue wrote to the panel of the Federal Court to seek clarification on whether the decision of Wiramuda is to be applied retrospectively or prospectively. The Federal Court responded that the Court was functus officio with no further authority to make an additional order.
High Court’s decision
The High Court allowed the taxpayers’ applications for judicial review at the substantive stage and held that:
- 1. In the absence of express direction, the decision in Wiramuda applies retrospectively;
- 2. The Revenue is bound by the Federal Court’s decision in Wiramuda; and
- 3. The Revenue’s non-response to the taxpayers’ request letters amounted to an unlawful failure to give effect to the Federal Court’s decision in Wiramuda; and
- 4. The Revenue is to refund the tax paid by the taxpayers under Section 4C together with interest at 5% per annum from the date of commencement of the judicial review.
Revenue’s contention
The crux of the Revenue’s contention is summarised as follows:
- 1. A decision ruling that a legislative provision is unconstitutional should operate prospectively as the default position to protect the interests and avoid administrative and fiscal chaos;
- 2. In the event the court rules that the Federal Court’s decision in Wiramuda applies retrospectively, the retrospective effect is confined to the following categories:
-
- a) Litigant in the case in which the ruling was made, i.e., Wiramuda;
- b) Cases already pending before the courts; and
- c) Does not extend generally to closed transactions or unfiled claims.
- 3. The taxpayers’ claim in the judicial review is time-barred as the deemed assessment for the relevant year of assessment is final and conclusive under Section 97 of the ITA. In any event, the claim is barred by the five-year limitation period for the repayment of overpaid tax under Section 111 of the ITA; and
- 4. No interest should be awarded as the tax was paid in good faith under a then-valid provision.
Court of Appeal’s decision
The Court of Appeal held that, amongst others:
- 1. The Federal Court’s decision in Wiramuda applies retrospectively without any confinement to the litigant in that case or to any pending cases;
- 2. Further, the Revenue’s contention for the retrospective effect to apply to the relevant category is a departure from the default rule laid down by the Federal Court’s decision in Public Prosecutor v Mohd Radzi bin Abu Bakar [2005] 6 MLJ 393, which held that:
“a court judgment is retrospective in effect… unless a specific direction of prospectivity is expressed…”
- 3. The Federal Court in Arumugam Pillai v Government of Malaysia [1980] 2 MLJ 283 held that once the apex court has ruled on a tax-related issue, the Revenue, as an arm of the Executive, is bound by the doctrine of stare decisis and must apply that ruling uniformly to all affected parties. It is a continuing public duty for the Revenue to give effect to binding court decisions;
- 4. The tax imposed and paid under Section 4C was collected without lawful authority contrary to Article 96 of the Federal Constitution. The taxpayers’ right to a refund (“restitutionary right”) therefore arose at the moment the tax was paid;
- 5. Section 97 makes an assessment final only “for the purposes of” the ITA. It cannot validate a provision that has been declared unconstitutional, or authorise the Revenue to impose tax contrary to Articles 13(2) and 96 of the Federal Constitution. The five-year limitation period under Section 111 of the ITA also does not apply, because that provision covers only overpayments under a valid tax, not tax collected under an unconstitutional provision; and
- 6. The Court of Appeal held that interest awarded on the restitution of unlawfully retained tax is compensatory in nature. The Revenue has in substance enjoyed an interest-free loan while the taxpayer has been deprived of the use of its own money. Thus, the Court of Appeal affirmed the High Court’s decision to award interest to the taxpayers at 5% per annum.
Commentary
This is a significant decision for the taxpayers as the Federal Court in Wiramuda applies retrospectively. In other words, the tax paid under Section 4C was without lawful authority and is now refundable.
Taxpayers who had previously paid tax on compensation arising from the compulsory acquisition of their land are recommended to:
- 1. To review the tax returns for previous years of assessment in which such compensation was taxed under Section 4C and to identify the amount of tax paid;
- 2. To gather the relevant supporting documents, including the land acquisition documents, tax computations, notices of assessment and proof of payment; and
- 3. To seek professional advice promptly on the appropriate course of action to claim a refund, as time limits may apply in certain circumstances.
Going forward, taxpayers should ensure that such compensation arising from compulsory acquisition is not reported as taxable business income under Section 4C, with proper documentation in place.
Should you have any enquiries, you may reach out to our Practice Group.
[1] Ketua Pengarah Hasil Dalam Negeri v Penang Realty Sdn Bhd and Another case [2006] 3 MLJ 597
[2] Metacorp Development v Ketua Pengarah Hasil Dalam Negeri [2011] 5 MLJ 447
About the author
Yap Wen Hui
Senior Associate
Tax, Customs and Incentives Practice Group
Halim Hong & Quek
wh.yap@hhq.com.my
