THE RULE OF INTERPRETATION ON TAX STATUTE

A MALAYSIAN PERSPECTIVE

DR CHOONG KWAI FATT¹

Advocate and Solicitor

High Court of Malaya

INTRODUCTION

The government has through its constant manner via the Finance Acts and Income Tax Amendment Acts annually revised the Income Tax Act 1967 ('the Act') with the intention to simplify the Act to facilitate the administration of the self-assessment system. As the Act substantially remains as its original form as in 1967, the structure of the Act remains very technical not only to legal counsels but also to tax professionals. Therefore, judicial attitudes on the rules of interpretation of tar statute remain the sole guiding principle. Judges in Malaysia will be the ones who adjudicate the grievances between the taxpayer and the government which includes the tax authorities, defending the law of tax statute and interpret the sections of the Act giving effect to the intention of the Parliament. Natural justice is thus beheld.

This article aims to explore the judicial principles on the interpretation of the tax statute by examining the various leading tax cases decided by the High Court, Court of Appeal and Federal Court. It is the writer’s hope that these judicial principles propounded by the superior courts in Malaysia remain as the guiding principles to the tax authorities and taxpayers, to ease the administration in the self-assessment system and to minimise unnecessary tax disputes in future, which is time consuming and costly. Under the existing self-assessment regime, a taxpayer who fails in interpreting the section of the Act would be exposed to a penalty of 45% ─ 100% on tax undercharged for submitting an incorrect return under s 1 13(2) of the Act.

THE OPERATION OF THE ACT

Section 3 read with s 5 of the Act imposes income tax on gains or profits that are 'income' in nature, which refer, to the net gains or profit. Revenue expenses are allowed to be deducted against the gross income of each source, provided that it satisfies the deduction test as provided in s 33 of the Act which read as follows:

Subject to this Act, the adjusted income of a person, from a source for the basis period for a year of assessment shall be an amount ascertained by deducting from the gross income of that Person from that source for that period all outgoings and expenses wholly and exclusively incurred during that period by that person in the production of gross income from that source, …

The deduction of revenue expense is against each source of income in a year of assessment ('YA'), Section 33 of the Act requires the object of the expense to be a single purpose ie wholly and exclusively in the production of such income source, to be allowed as deduction from the gross income.

In 2000' the court of Appear² in Margaret Luping and 2 Ors u Katua Pengarah Hasil Dalam Negeri³ was asked to interpret s 33, particularly as to the meaning and scope of ‘wholly and exclusively’ as to whether ‘net proceeds’ payable to the State Government of Sabah upon extraction of timber was deductible against the timber business of the company. The Inland Revenue Board ('IRB') contended that the net proceeds are not deductible in the timber business because the government in return would provide the taxpayer a grant in later YAs. Thus it cannot be said that expenses have been 'incurred’ taking into such grant received. The Lordships rejected such argument and held that s 33 spells in clear terms, ‘wholly and exclusively' and refers to a particular YA for deduction; one is not allowed to import the last year receipts to determine the current year's deduction.

The Count of Appeal found that as the payment of net proceeds is an annual payment which is required to be paid by the licensee to the State Government, failure of which would result in the company’s license being withdrawn. The amount paid though describe as 'net proceeds’, it is akin to royalty expense as this expense does not yield any enduring benefit asset to the company, thus it satisfy the ‘wholly and exclusively' test and further not prohibited by s 39 of the Act. The amount is thus deductible in such a YA.

Mokhtar Sidin JCA in delivering the leading judgment of the Court of Appeal applies a strict interpretation principle on tax statue when interpreting s 33. His Lordship relied on Lord Cairn’s proposition in the House of Lords' case of Partington v Attorney General,⁴ where His Lordship opined as follows:⁵

a fiscal case-form is not amply sufficient, because, as I understand the principle of all fiscal legislation, it is this: If the person sought to be taxed comes within the letter of the law he must be taxed, however great the hardship may appear to the judicial mind to be. On the other hand, if the Crown, seeking to recover the tax, cannot bring the subject within the letter of the law, the subject is free, however apparently within the spirit of the law the case might otherwise appear to be. In other words, if there be admissible, in any statute, which is called an equitable construction, certainly such a construction is not admissible in a taxing statute, where you can simply adhere to the words of the statue.

As tax is a penal statute with penalties, the charging section must be spelt in clear terms to impose tax. Mokhtar Sidin JCA also relied on the well often quoted statement by the eminent tax judge, Rowlatt J as found in Cape Brandy Syndicate v Inland Revenue Commissioner⁶ where Rowlatt J said⁷ that:

... in a taxing Act clear words are necessary to tax the subject. But it is often endeavoured to give to that maxim a wide and fanciful construction. It does not mean that words are to be unduly restricted against the Crown or that there is to be any discrimination against the Crown in such Acts. It means this, I think; it means that in taxation you have to look simply at what is clearly said. There is no room for any intendment, there is no equity about a tax; there is no presumption as to a tax; you read nothing in; you imply nothing; but you look fairly at what is said and what is said clearly and that is the tax.

In short, the interpretation of tax statute must give effect to its clear term, without any presumption as to its equity to either the IRB or taxpayer. Applying a strict interpretation of s 33, the Court of Appeal held that the clear words of the said s 33 requires the outgoings and expenses to be wholly and exclusively incurred in the production of income in that particular YA to be deducted. The issue of the possibility of the expense may be refunded byway of grant to the taxpayer in later years is not relevant. The crucial timing to determine the deduction is at the time when the gross income was produced, whether the net proceeds were expenditure wholly and exclusively incurred in the production of that income and not any later period. The current period is sufficed to determine the deductibility of revenue expense.

One would need to place emphasis on income generation and the incurring of expenditure by reference to one YA, which is the basis period for a YA. Any expenses incurred during the year, which is wholly and exclusively in the production of gross income is deductible against the gross income. In any event that the expenses may be subsequently refunded by way of grant, the amount refunded would thus be treated as income in the year received. The possibility of a refund in the later year should not debarred the deduction of expenses in the current year as s 33 only requires revenue expenses to satisfy the ‘wholly and exclusively' test and nothing else.

Mokhtar Sidin ICA laid down the principle of law in relation to the deductibility test as provided in s 33. His Lordship opined⁸ as follows:

Applying the above principles of construction of fiscal legislation to the present case, there should be no room of doubt as to what s 33(1) of the Income tax Act 1967 requires, as regards deduction that can be made in ascertaining a taxpayer adjusted income from a source for a particular taxing year. From the clear words of s 33(1), in order for outgoings and expenses to be allowed as deductions they must be wholly and exclusively incurred in the production of gross income ...

STRICT INTERPRETATION

It is a trite principle that the strict interpretation applies where the section of the tax statue is clear and unambiguous. It has to be given to its effect. The Court of Appeal had another occasion in 2002 to reaffirm the strict interpretation principle in relation to the interpretation of tax statue as seen in

Premium Vegetables Oils Sdn Bhd v Palm Oil Research and Development Board Malaysia & Anor.⁹

The company was engaged in the extraction of crude palm oil from oil palm fruits and also the kernel of oil palm fruits. The company contended that the Palm Oil Research and Development Board Malaysia was not authorised under the Palm Oil Research and Development Act 1979 ('1979 Palm Oil Act') to collect cess from the kernel of oil palm fruits. The issue of the case lies on the interpretation of ‘palm oil' as defined in the said, 1979 Palm Oil Act.

Section 14 of the said 1979 Palm Oil Act empowers the Minister to make orders for the imposition, variation or cancellation of a research cess on palm oil. Section 2 of the 1979 Palm Oil Act defines 'palm oil' as to mean palm oil, whether in crude or further processed form, extracted from oil palm fruits and seeds.

The Palm Oil (Research Cess) Order 1979 was thus gazetted to impose a cess of RM4 per every metric ton of crude palm oil produced by the palm oil miller. The meaning of crude palm oil was not defined in the 1979 order. An amendment order, the Palm Oil (Research Cess) (Amendment) Order 1982 was passed and shall have effect retrospectively on 1 January 1980. It amended the 1979 order by imposing cess as follows:

crude palm oil extracted from oil palm fruits - with effect from 1 January 1980; and
crude palm oil extracted from oil palm seeds - with effect from 1 July 1980.

The 1982 order makes a distinction between the oil palm fruits and seeds. The phrase ‘oil palm kernel’ is silent in both the 1979 Palm Oil Act and also the 1979 and 1982 Orders. Counsel for the company argued that as s 2 of the 1979 Palm Oi[ Act specifically empowered the Minister to impose cess of palm oil, which is oil palm fruits and seeds, which is the crude palm oil ('CPO') and not crude palm kernel oil ('CPKO'). CPKO is made only from oil palm seeds. It should also be noted that there is a clear distinction between oil palm fruit on the one hand and oil palm seed which, contains within itself the oil palm kernel.

KC Vohrah JCA at the Court of Appeal held that the employment of the words 'fruits and seeds' in s 2 of the 1979 Palm Oil Act are linked by the conjunctive 'and' and it seems more probable that the Legislature intended the definition to mean to cover CPO. It never intended to cover CPKO. A strict interpretation approach towards the tax statue was employed. His Lordship relied on Lord Buckmaster's proposition of law in Greenword (Surveyor of Taxes) v F L Smidth & Co¹⁰ that the courts cannot assent to the view that if a section in a taxing statue is of doubtful and ambiguous meaning, it is possible out of that ambiguity to extract a new and added obligation not formerly cast upon the taxpayer.

KC Vohrah JCA has also taken time and effort to reinforce the principle of strict interpretation of tax statute by correcting the High Court judge who had tried to harmonise the interpretation of the Act and the various ambiguities found in the 1979 and 1982 Orders. His lordship reiterates the well-celebrated principle of strict interpretation:¹¹

Words cannot be used loosely in a taxing provision. They must be clear and unambiguous to impose liability on the subject ....

This case reiterates an important principle that a subsidiary legislation such as the gazettes order cannot enlarge the mother Act. The 7979 Order did enlarge the meaning of the 'palm oil miler' to mean a Person who carries on the business of extracting oil from oil palm fruits and/or seeds and further requires every palm oil miller to pay cess on the crude Palm oil produced by him. In relation to this, His Lordship held that the 1979 Order is a subsidiary legislation and cannot enlarge what is circumscribed by the enabling provision of the mother Act. As the Act merely allows the Minister to collect cess on

CPO, the enlargement of the 1979 Order to collect cess from CPKO would be ultra virus the 1979 Palm Oil Act.

Mokhtar Sidin JCA who presided in this case laid down two fundamental principles in relation to the strict interpretation on the tax statute. First, in terms of the construction of any revenue law, the subject is not to be taxed unless there are clear words in the Act imposing such a tax. Secondly, one may read into a later similar tax statute in order to ascertain the meaning of the current ambiguous tax statute. ¹² In relation to the first principle, His Lordship referred to the leading decision of the Supreme Court in National Land Finance Co-operative Society Ltd v Director General of Inland Revenue,¹³ where the Supreme Court held that where there was a doubt, the ambiguity must be construed in favour of the taxpayer. This principle is applied in the current case. The learned judge, Mokhtar Sidin JCA opined that: ¹⁴

... Where there is any ambiguity then it should be decided in favour of the taxpayer viz the appellant in the present appeal ...

The Court of Appeal acknowledged that there exists some ambiguity as to the scope of the cess on whether it is applicable to CPKO after examining the 1979 Palm Oil Act and the 1979 and 1982 Orders. Despite the legal counsel for the Palm Oil Board urging the Court of Appeal to give a liberal interpretation and see into the purpose of the Act, which was done at the High Court, Mokhtar Sidin JCA upheld the principle of strict interpretation on tax statute as His Lordship did in Margaret Luping’s case in 2000. Mokhtar Sidin JCA held¹⁵ as follows:

With the greatest respect to the learned counsel for the respondents, I am bound by the established principles in that in taxing statute, one has to look what is clearly said in the statute. There is no room to look into the purpose, the object or the intent the Act was legislated.

The Court of Appeal’s decisions in both cases enshrine the strict interpretation principle in tax statute which certainly assists many taxpayers in the self-assessment system. The strict interpretation principle upholds a fair taxation system, ensuring certainty as to the scope of charge as found in the Income Tax Act, which is of great importance as to the administration and computing of the income tax payable. A charging section to collect tax must be spelled in clear terms for such imposition.

Mokhtar Sidin JCA also applied the principle approved by Gill FJ in the Federal Court decision of Comptroller General of Inland Revenue, Malaysia v T¹⁶ where one may refer to the similar later statute in order to ascertain the true meaning of current statute. He went on to examine the later Malaysian Palm oil Board Act 1998, which replaced the 1979 Palm oil Act. The new Act specifically provides in s 2 the meaning of 'palm oil' to mean oil, whether in crude or processed form, originating or extracted from the pericarp of the oil palm fruit, and includes oil, whether in crude or processed form, originating or extracted from the kernel of the oil palm fruit. His Lordship then concluded that CPKO is only imposed by the 1998 Act and not the 1979 Palm oil Act. Therefore, all cess collected by the Board had to be refunded to the taxpayer under the operation of the 1979 Palm Oil Act.

Being dissatisfied, the Palm Oil Board went up for further adjudication at the Federal Court. In Palm Oil Research and Development Board Malaysia & Anor v Premium Vegetable Oils Sdn Bhd & Another Appeal,¹⁷ Gopal Sri Ram JCA delivered the landmark decision at the Federal Court which upheld the decision of the Court of Appeal. His Lordship propounded the following at p 130 (MLJ); p 117 (AMTC):

[T]he correct approach to be adopted by a court when interpreting a taxing statute is that set out in the advice of the Privy Council delivered by Lord Donovan in Mangin v Inland Revenue Commissioner.¹⁸

First, the words are to be given their ordinary meaning. They are not to be given some other meaning simply because their object is to frustrate legitimate tax avoidance devices. As Turner J said in his (albeit dissenting) judgment in Marx v Inland Revenue Commissioner¹⁹ at 208, moral precepts are not applicable to the interpretation of revenue statutes.

Secondly, ‘... one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption so to a tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used' per Rowlatt J in Cape Brandy Syndicate v Inland Revenue Commisioner²⁰ at 71, approved by Viscount Simons LC in Canadian Eagle Oil Co Ltd u Regime.²¹

Thirdly, the object of the construction of a statute being to ascertain the will of the Legislature, it may be presumed that neither injustice nor absurdity was intended. If therefore a literal interpretation would produce such a result, and the language admits of an interpretation which would avoid it, then such an interpretation may be adopted.

Fourthly, the history of an enactment and the reasons which led to its being passed may be used as an aid to its construction.

The Federal Court then concluded that strict interpretation on the tax statue applies when the term of charging section is clear and unambiguous. However, when such a word produces absurdity then the object of the Act is to be examined.

In Peram Ranum Bhd v Ketua Pengarah Hail Dalam Negeri,²² Lau Bee Lan J followed the approach enunciated in Palm Oil Research and Development Board Malaysia & Anor v Premium Vegetable Oils Sdn Bhd and lucidly summarised the legal principle on the interpretation of the Tax Act as follows at p 242:

words are to be given their ordinary meaning;

one has to look at what is clearly said as there is no room for intendment;

the object of the construction of a statute being to ascertain the will of the Legislature, it may be presumed that neither injustice nor absurdity was intended; and

the history of the enactment and the reasons which led to its being passed may be used as an aid to its construction.

Ramli Ali JCA in the recent Court of Appeal case of Federal Express Brokerage Sdn Bhd & Ors v Malaysia Airports (Sepang) Sdn Bhd & Anor²³ affirmed the settled principle of strict interpretation. His Lordship held on pp 201-202 as follows:

It is well settled principle of law that imposition of any form of tax, duty, charge, levy, fee or other forms of financial obligations on any Person must be expressly provided for in a statute passed by the Parliament or the relevant legislative body.

Such imposition must be expressed in plain and unambiguous language in the particular statute.

…

The intention of the Parliament to impose tax, duty or charge must strictly be construed from the wordings of the statute. It is a well settled principle of law that the wordings of a statute imposing a tax, duty or charge must receive a strict construction in the sense that there is no room for any intendment, and regard must be had to the clear meaning of the words (see Lembaga Pembangunan Industri Pembinaan Malaysia v Konsortium JGC Corp & Ors [2010] MLJU 1524; [2011] 7 CLJ 46).

In the absence of a clear intention in the law that tax, duty or charge should be imposed, the appellants (in the present case) are not liable to pay the charge imposed on them. The decision of Gill FJ in Comptroller-General of Inland Revenue, Malaysia v T (1970) 2 MLJ 35 cleanly supports the above proposition. In that case, it was held that:

It is important canon in the construction of revenue Acts that the subject is not to be taxed unless there are clear words in the Act imposing such a tax. In this connection, Lord Blackburn said in the House of Lords in Coltness lron Company v Black (1880 ─ 81) 6 App Cas 315 art p 330:

No tax can be imposed on the subject without words in an Act of Parliament clearly showing an intention to lay a burden on him..... and I think the only safe rule is to look at the words of the enactment and see what is the intention expressed by those words.

Lord Simonds in Russell v Scott [1948] 2 All ER 15 reasserted the same rule of construction when he addressed the House of Lords in the following words:

My Lords, there is a maxim of income tax law which, though it may sometimes be over-stressed, yet ought not to be forgotten. It is that the subject is not to be taxed unless the taxing statutes unambiguously impose the tax on him. It is necessary that this maxim should on occasion be reasserted and this is such an occasion.

In conclusion, it is a settle law that in taxing statutes especially income tax, real property gains tax, sales tax and service tax operated in a similar way of penal statures, tax should only be imposed with the very clear word stated in such taxing statutes.

AIDS OF INTERPRETATION

The court is to give effect of Parliament's intention and purpose. The duty of the judge is to clarify the law, giving certainty in its application thus promoting the intention of Parliament. Therefore, where the Act is ambiguous or where literal interpretation leads to absurdity the court may resort to parliamentary material as an aid to the construction.

Lord Griffiths in Pepper (Inspector of Texes) v Hart²⁴ opined that:

The days have long passed when the courts adopted a strict constructionist view of interpretation which required them to adopt the literal meaning of the language. The courts now adopt a purposive approach which seeks to give effect to the true purpose of legislation and are prepared to look at much extraneous material that bears upon the background against which the legislation was enacted.

The purposive approach has long been recognised by the Malaysian laws as part of the rule in interpreting legislation. Section 77A of the Interpretation Acts 1948 and 1967 expressly provides that:

In the interpretation of a provision of an Act, a construction that would promote the purpose or object underlying the Act (whether that purpose or object is expressly stated in the Act or not) shall be preferred to a construction that would not promote that purpose of object.

Section 17A of the Interpretation Acts quoted above is in line with the statement made by Tindal CJ when advising the House of Lords in the case of Sussex Peerage Case.²⁵

The only rule for the construction of Acts of Parliament is that they should be construed according to the intent of the Parliament which passed the Act. If the words of the statute are in themselves precise and unambiguous, then no more can be necessary than to expound those words in their natural and ordinary sense. The words themselves alone do, in such case, best declare the intention of the lawgiver But if any doubt arises from the terms employed by the Legislature, it has always been held a safe means of collecting the intention, to call in aid the ground and cause of making the statute, and to have recourse to the preamble, which according to Chief Justice Dyer, 'is a key to open the minds of the makers of the Act, and the mischief's which they intent to redress'.

Lord Denning in a similar view in Nothman v London Borough of Banetheld²⁶ that:

Whenever the strict interpretation of a statue gives rise to an absurd and unjust situation, the judges can and should use their good senses to remedy it – by reading words in, if necessary - so as to do what Parliament would have done, had they had the situation in mind.

In Kenny Vale Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri,²⁷ the IRB opposed to the taxpayer contention that the meaning of 'disposal' in s 14 of the Income Tax Amendment Act [Act A1055] applies to the disposer only and not the acquirer.

Section 14 of the Amendment Act A1055 is in relation to the disposal of stock in trade in the YA 1999 (preceding year basis) (which was commonly known as the tax waiver year). Section 14 provides as follows:

Transactions between companies in the same group

Disposal of stock in trade between companies in the same group shall be treated at cost unless it can be proven to the satisfaction of the director general that the disposal was made in the ordinary course of its trade.

At the Special Commissioners (SCIT) hearing, the SCIT adopted two approaches in interpreting s 14 of the Amendment Act A1055. Firstly, the SCIT adopted the strict interpretation of the said section. The SCIT opined that the provision of s 14 of the Amendment Act A1055 was clear and unambiguous. According to the SCIT the word 'disposal' means 'an act of disposing’ ie, a verb which refers to an action and not a 'noun'. Therefore, the disposal of stock in trade 'between companies in the same group’ refers to both companies ie, the company as disposer and the other company as acquirer.

Secondly, the SCIT also adopted a purposive approach. The SCIT was of the opinion that the purpose of Parliament in enacting s 14 of the Amendment Act A1055 is to seal the loophole during the transitional period of waivers year in order to prevent companies from taking advantage of the transitional period by disposing its assets to its related companies. Therefore, s 14 is an anti-avoidance provision to prevent disposal stock within the group of companies to take advantage of the income tax waived. It applies to both the disposer and acquirer company, as it was the intention of the legislators.

The High Court when asked to determine the scope of 'disposal' whether apply to the acquirer company apply the purposive approach, taken in the purpose of s 14 of the Amendment Act A1055 and the context of the words concluded that the 'disposal' should not be interpreted literally to cover disposer company only, but rather encompasses acquirer company too. Mohd Zawawi Salleh J at p 323 held:

The court is of the considered opinion that what interpretation is to be given the words should depend upon the court perception of the purpose of the provision and the context of the words, rather than on the dictionary meaning. The plain meaning approach to judicial interpretation is not necessarily the most apposite. The words hardly ever have a meaning in vacuo (in a vacuum). Words take on a meaning in association with other words in whose context they are used. Therefore, the interpretation of words almost invariably means doing more than finding mere dictionary or literal or plain meaning.

In conclusion, the court may resort to parliamentary reports of proceedings as an aid of statutory interpretation where the sections of the tax statute is ambiguous or obscure, or which if literally construed, might lead to absurdity.

THE APPLICATION OF THE STRICT RULE OF INTERPRETATION

With the Federal Court decision of Palm Oil Research and Development Board Malaysia & Anor v Premium Vegetable Oils Sdn Bhd & Another Appeal,²⁸ it is a settled rule that literal interpretation is to be applied when the words employed in the Act is spelt in clear terms. The court must give its effect to it whatever may be the consequences, as the words of the statute speak the intention of the Legislature.

The judge must act as a referee, given the interpretation in an unbiased manner, not taking sides on either party. ‘You look simply at what it is clearly said,' per Rowlatt J. Rowlatt J being an eminent judge in deciding many leading tax cases propounded the corner stone of strict interpretation principle in Cape Brandy Syndicate v IRB²⁹ at p 366:

Lord President Hope shared the same opinion as Rowlatt J in Glenrothes Development Corp v IRB.³⁰ His Lordship held on p 80 as follows:

It is also well settled that if the meaning of a provision in a taxing act is clear the court has no jurisdiction to alter its meaning in order to avoid what might be thought to be a harsh result.

In the same decision, Lord Morison held that the issue of fairness has no play in interpreting a taxing statute. His Lordship held on p 81 as follows:

If there be admissible, in any statue, which is called an equitable construction, certainly such a construction is not admissible in a taxing statue, where you can simply adhere to the words of the statue.

In Hamdan bin Abdul Hamid @ Hamid bin Abdul Rahman v Ketua Pengarah Hasil Dalam Negeri,³¹ the High Court was asked to interpret whether proviso to para 12, Schedule 2 of the Real Property Gains Tax Act 1975 applies to a disposal that exceeded five years.

Paragraph 12 of Schedule 2 provides as follows:

Where an asset is disposed of by way of a gift, the disposal shall be deemed to be a disposal at the market value of the asset:

Provided that, where the donor and recipient are husband and wife, parent and child or grandparent and grandchild, and the gift is made within five years after the date of acquisition of the asset by the donor, the donor shall be deemed to have received no gain and suffered no loss on the disposal and the recipient shall be deemed to have acquired the asset at an acquisition price equal to the acquisition price paid by the donor plus the permitted expenses incurred by the donor.

Counsel for the appellant argued that the proviso to para 12 Schedule 2 exemption applies even if the disposal is after five years. Lau Bee Lan J rejected such contention, and affirmed the Special Commissioners' decision that para 12 exemption accorded in proviso 12 clearly applies for disposal within five years. As there is no doubt and ambiguity as to the language used in para 12 Schedule 2, the provision has to be construed in their nature and ordinary sense.

Lau Bee Lan J held on p 564 as follows:

In my view, the SCIT has not erred when it held there is no doubt and ambiguity as to the language used in para 12 Schedule 2 and Part III Schedule 5 of the RPGT Act, the provisions have to be construed in their natural and ordinary sense following the cases cited in para 11 above.

The judge further held on p 565 that:

Even without reference to the Hansard, upon a literal construction of the provision, I am of the view that the 'tax exemption' referred to by learned counsel for the appellant in para 12 Sch 2 can only arise if the asset disposed of by way of a gift:

where the donor and recipient are husband and wife, parent and child or grandparent and grandchild; and
the gift is made within 6ve years after the date of acquisition of the asset by the donor.

THE INTERPRETATION RULE ON THE AMENDMENT ACT

The government legislate Income Tax Amendment Acts or Finance Act every year to incorporate changes to the Act with the intention to collect revenue for nation building. Some of these amendment acts take effect retrospectively. The Supreme Court has the opportunity to lay down the rule as to the interpretation of these amendment Acts as found in National Land Finance Co-operative v Director General of Inland Reaenue.³² In this case, the Malaysian Government passed an Income Tax Amendment Act in 1980³³ which expressly provides withdrawal of income tax exemption status of the taxpayer, a co- operative society retrospectively to the YA 1965. The revenue authorities rely on this amendment act raised back years assessment on the taxpayer for the YAs 1977 to 1981. The taxpayer however contended that the wording of the Amendment Act was not sufficiently clear to withdraw its exempt status as the exemption right is protected by the Interpretation Acts 1948 and 1967. The taxpayer successfully won the case at the Special Commissioners' stage but lost at the High Court. Now the taxpayer seeks the final redress at the Supreme Court as to the rule of interpreting the Amendment Act.

The Supreme court³⁴ acknowledged the provision of s 1(5) of the Amendment Act of its clear term to have a retrospective effect to 1968, but the court held that such a retrospective operation should not be given to a statute to impair an existing right. In addition, the Court also found that s 1(5) of the Amendment Act did not expressly provided the Part I of the Interpretation Acts 1948 and 1957 shall not apply and this creates some form of ambiguity. Section 30 of the Interpretation Acts 1948 and 1967 provides that the existing or acquired right of a taxpayer shall not be affected by any retrospective Act.

The court followed the principle of law as found in House of Lords case in Floor v Davies³⁵ in which Viscount Dilhorne, Lord Diplock and Lord Edmund Davies all held that in construing of the UK Finance Act, one must have regard to the Interpretation Act. Since there is a doubt on whether the Legislature had intended to impair the existing right of the taxpayer and inflict a detriment to it as it takes away a vested right under the existing law to exemption from tax, the doubt of the ambiguity must be construed in favour of the taxpayer. As the Amendment Act does not have the sufficient clear words to-remove the exemption of the taxpayer, the Supreme Court decided in favour of the taxpayer to maintain its exemption status.

In the writer's opinion, even if s 1(5) of the Amendment Act does make reference to the Interpretation Acts 1948 and 1967 as to remove the ambiguity, the court should upheld the principle of natural justice that a retrospective operation should not be given to a statute to impose liability or impair an existing right enjoyed then. In the UK, Staughton LJ held in the Court of Appeal decision of EWP Limited v Moore³⁶ as follows:³⁷

... one requirement of justice is that those who have arranged their affairs, as the saying is, in reliance on a decision of these courts which has stood for many years should not find that their plans have been retrospectively upset...

The legislative enactment may withdraw the exemption enjoyed by a cooperative but it must apply prospectively. Gunn Chit Tuan CJ laid down an important principle to guide the taxpayer, which is that one should avoid the construction of the Tax Act that inflicts detriment. The learned judge said³⁸ as follows:

Moreover, one should avoid a construction that inflicts a detriment and as Lord Brightman has said in Yew Bon Tew v Kenderaan Bas Mara³⁹ on p 2:

A statue is retrospective if it takes away or impairs a vested right acquired under existing laws, or create a new obligation, or imposes a new duty, or attaches a new disability, in regard to events already past.

The Supreme Court in this case acknowledged the pertinent role of revenue collection for the government to administer the country and the court should help in the collection of taxes; but the court' also owes a duty to Protect the taxpayer and that cannot be neglected. A fairness must also be strike on them. The Court upheld the principle of strict interpretation in relation to tax statute. Gunn Chit Tuan CJ held⁴⁰ as follows:

There are ample authorities to show that courts have refused to adopt a construction of a taxing Act which imposes liability when doubt exists. In Re Micklewait,⁴¹ it was held that a subject was not to be taxed without clear words. We realise that revenue from taxation is essential to enable the government to administer the country and that the courts should help in the collection of taxes whilst remaining fair to taxpayers. Nevertheless, we should remind ourselves of the principle of strict interpretation as stated by Rowlatt J in Cape Brandy Syndicate v Inland Revenue Commissioner⁴² where Rowlatt J said:⁴³

... in a taxing Act one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used ...

Six years later, the tax authorities have another opportunity to test the application of the principle of strict interpretation in relation to the Amendment Act which applies retrospectively in the Court of Appeal case of Ketua Pengarah Hasil Dalam Negeri v Malaysian Co-operative Insurance Society Ltd.⁴⁴ The case was identical to National Land Finance Co-operative as to whether the Amendment Act A471 of 1980 can apply retrospectively to withdraw the income tax exemption of the taxpayer from 1968. The High Court judge found himself bound by the decision of National Land Finance Co-operative and gave the decision for the taxpayer. The Court of Appeal⁴⁵ upheld the High Court decision, affirming the principle of strict interpretation of tax statute. The court was of the opinion that since the proviso as found in the Amendment Act A471 withdrawing the exemption is hazy without referencing to the interpretation Act and creates doubt, such doubt should be construed in favour of the taxpayer. A statutory proviso intending to withdraw an exemption should be stated clearly, leaving no room for doubt as to its meaning.

The Court of Appeal affirmed four settled principles as decide din National Land Finance Co-operative. These are: (a) the courts refused to adopt a construction of a taxing Act which imposes liability when doubt exists; any ambiguity must be construed in favour of the taxpayer; (b) a subject can only be taxed with clear and unambiguous language; (c) there is no room for intendment or presumption as to tax; and (d) one should avoid a construction that inflicts detriment.

RULE TO INTERPRET TAX EXEMPTION OR TAX RELIEF

Although the Act sets out the subject to be taxed in various manners in accordance with its source, the Act also contains tax exemption in Schedule 6 of the Act and also the income tax exemption ord.er gazetted under s 127 of the Act. The issue is on whether the provisions granting tax exemption must be strictly construed in favour of taxation, or if the benefit of doubt should be given to the taxpayer.

Lord Russell of Killowen held in Ben Odeco Ltd v Powlson (Inspector of Taxes)⁴⁶ at p 471 as follows:

I start, my Lords, with the fact that this is a provision affording relief from tax. The taxpayer must persuade me that he is within it. If the reasons pro and con were in precise balance, the taxpayer on the basis would lose. But in upholding the view of the Special Commissioners and of Brightman J, as I do, I find the balance is in fact against the taxpayer company.

The income tax is collected by the clear word of the Act. In order to qualify for the exemption or tax relief, which happens to be the exception to the Act, the interpretation is to strictly construe against the taxpayer.

In Syarikat Pendidikan Staffield Bhd v Ketua Pengarah Hasil Dalam Negeri,⁴⁷ the High Court held that the taxpayer bear the heavy burden establishing its entitlement to a tax exemption. The party claiming an exemption must prove by clear and convincing evidence that the profit in question falls within the terms of the statue within the exemption is claimed. A basis for exemption may not be inferred when none has been demonstrated.

ln Hamdan bin Abdul Hamid @ Hamid bin Abdul Rahman v Ketua Pengarah Hasil Dalam Negeri,⁴⁸ the High Court approved the proposition of law that in the case of tax relief or exemption, it should be construed in favour of the IRB where there is doubt. Lau Bee Lan J held on p 565 that:

In the event I err and there is doubt and ambiguity in construing para 12 Schedule 2 and Part III of Schedule 5 of the RPGT Act, I am inclined to agree with the submission of learned revenue counsel that with respect to the gift of relief, it is not on imposing tax, where if there is doubt, it should not be construed in favour of the taxpayer, but it should be construed in favour of the Crown.

The Evidence Act 1950 spells out the burden of proof is on the person who asserts the truth. Thus in order to be qualified for the exemption or relief, the taxpayer must persuade the IRB that he is within such exemption or relief. In conclusion, in interpreting a taxing statute that giving taxpayer relief which is exception to the Act, it is strictly construed against the taxpayer.

Interpretation of commercial term

The Act would define the word used in the general s 2 of the Act, otherwise as and when necessary throughout the sections of the Act. In the absence of statutory definition, then the word used in the Act has to be understood in their ordinary commercial sense.

In Peram Ranum Bhd a Kaua Pengarah Hasil Dalam Negeri,⁴⁹ the High Court was asked to determine whether uplift or upon maturity of a fixed deposit by an insurance company, constitutes 'realisation of investment' within the meaning of s 60(3) of the Act. This would have impact on the deduction of management fees. The lordship concurred with the SCIT’s decision and held that although fixed deposit is an investment, its maturity or uplift cannot be tantamount to realization of investment.

Interpretation of ordinary meaning

It is a trite principle that in the absence of any definition of the intended meaning of words or terms used in a legislative Act, then in the interpretation of the Act, such words should be given their common, ordinary and accepted meaning in the connection in which they are used. The court would resort to the dictionary in particularly Black’s law dictionary, Jowitt's dictionary on English law as an aid in arriving to the ordinary meaning of a word.

In Director General of land Revenue v Highlands Malaya Plantations Ltd,⁵⁰ the Supreme Court resorted to Jowitts Dictionary on English law to the meaning of bonus for the business deduction purposes. The law then was to restrict the deduction of bonus to two months of remuneration of each employee.

In Ketua Pengarah Hasil Dalam Negeri v Shiuh Dong Industries Sdn Bhd,⁵¹ the High Court was asked to determine the meaning of importer' of the purpose of double deduction. The High Court judge held that as there is no definition provided in the gazette order, this would mean that the Parliament intended that the ordinary meaning of the word is to apply. Therefore, a taxpayer company who imports trade goods using an agent would equally be regarded as an importer and qualify for double deduction, notwithstanding the fact that the agent has made the payment directly to the insurance company and be reimbursed by the taxpayer company in a later period.

Basis of apportionment

The rule on strict interpretation applies to the charging section employed in the Act. In cases where the provisions of the Act covers on tax administration, procedures on tax collection, then the construction should be construe using ordinary rule of construction. It should be construe to make the procedure effective and operative. In Peram Ranum Bhd v Ketua Pengarah Hasil Dalam Negeri,⁵² the High Court held that if one is to accept uplifting/maturity of fixed deposits to be treated as realisation of investment, then the numerous frequency of such uplifting of fixed deposits would grossly inflate the numerator in determining the deductible of management expenses and rendered the machinery provision of s 60(3)(b) of the Act unworkable. Thus, uplifting of fixed deposits is not tantamount to realisation of investments.

CONCLUSION

With the amendment to the Courts of Judicature Act 196453 in 1995, the highest court to appeal for income tax cases is at the Court of Appeal. The decisions discussed above are the highest binding authorities on all courts. It is therefore concluded that the Malaysian courts have in all tax cases unanimously upheld the application of the principle of strict interpretation on tax statute and it is now a settled principle of law in Malaysia. This will definitely form the corner stone in self-assessment as certainty of the Act is somewhat assured.

1. LLB (Hons)(london), CLB Master of C,omparative l,aws (IIUM), PhD (Rwenue law) (IIUM), B Acc (HonsXMalaya), Charered Accountant, Crrtified Public Accounant (Malaysia), Certified Practicing Accountant (Australia), Fellow Chartered Certified Accounant (ACCA, UK), Chartered Accountant of England and 'Wales (ICAE\Q, Certified General Accountant (Canada). [email protected]. See www.kwaifatt.com

2. Comprises of Gopal Sri Ram, Siti Norma Yaakob and Mokhtar Sidin JJCA.

3. [2000] 2 AMR 1363.

4. (1869) LR 4 HL 100.

5. Ibid at p 122.

6. [191] 2 KB 403;12 TC 358.

7. Ibid at p 366.

8. Ibid at p 1381.

9. [2002] 4 MLJ 552; [2002] 3 CLJ 818. The judges comprise of Mokhtar Sidin, KC Vohrah JJCA and FaizaTamby Chik J.

10. [1922] 1 AC 417.

11. lbid, p 572 (MLJ); p 839 (CLJ).

12. lbid,p 564 (MLJ); p 831 (CLJ).

13. [1994] 1 MLJ 99; [1994] 4 CLJ 339.

14. lbid,p 565 (MLJ); p 832 (CLJ).

15. Ibid, p 565 (MLJ); p 831 (CLJ).

16. [1970] 2MLJ 35.

17. [2005] 3 MLJ 97; [2003 ─ 2005] AMTC 85.

18. [1971] AC 739.

19. [1970]NZLR 182.

20. [1921] I KB 64.

21. [1945] 1 All ER 499; [1946] AC 119.

22. [2012] 8 CLJ 231.

23. [2012] 6 MLJ 190.

24. [1993] AC 593.

25. [1843-1860] All ER Rep 55.

26. [1978] 1 All ER 1243.

27. [2011] ANTC 312.

28. [2005] 3 MLJ 97; [2003 ─ 2005] AMTC 85.

29. [1992] 2 KB 403; 12 TC 358.

30. [1994] STC 74.

31. [2010] 4 MLJ 556.

32. [1994] 1 MLJ 99.

33. Act A471 of 1980.

34. Comprises of Gunn Chir Tuan CJ, Mohd Azmi SCJ and LC Vohrah J.

35. [1980] AC 695.

36. [1992] 1 All ER 880.

37. Ibid, at p 891.

38. Ibid, n 3l at p 106.

39. [1983] 1 MLJ 1.

40. Ibid, n 3l at p 106.

41. (1855) 11 Exch 452.

42. 12 TC 358.

43. Ibid, at p 366.

44. [2000] 1 MLJ 561.

45. Comprises of NH Chan, Abdul Malek Ahmad and Dennis Ong JJCA.

46. [1978] STC 460.

47. [2011] AMTC 416.

48. [2010] 4 MLJ 556.

49. [2012] 8 CLJ 231.

50. [1979-1996] AMTC 1382.

51. [2012] 6 MLJ 292; [2012]7 CLJ 257.

52. [2012] 8 CLJ 231.

53. See s 96(a) of the Courts of Judicature Act 1964.