(a) Establish the rule of law that new legislation overrides previous case laws precedents

once being legislated with the support of ratio decidendi decided in 2 Malaysian Federal
Court’s decision (non-tax cases)

INTRODUCTION

Section 4C was inserted into the Income Tax 1967 (ITA 1967) via section 5 of the Finance
Act 2014 (Act 761)1. It provides that:

5. New section 4C

The principal Act is amended by inserting after section 4B the following section:

"Gains or profits from a business arising from stock in trade parted with by any
element of compulsion

4C. For the purpose of paragraph 4(a), 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.".

Section 4C was supplementary to section 4(a) of the Income Tax 1967 which provides2

Classes of income on which tax is chargeable

4. Subject to this Act, the income upon which tax is chargeable

under this Act is income in respect of—

(a) gains or profits from a business, for whatever period

of time carried on;...

1 Finance Act 2014 (Act 761)

2 Income Tax Act 1967 (Act 53)

 Section 4C was introduced from the amalgamation of previous lost court cases in
which the court granted the appeal of the taxpayer. The breaking point was after the Inland
Revenue Board (IRB) lost in the case of Metacorp Development Sdn Bhd v Ketua Pengarah
Hasil Dalam Negeri3. This case was appealed up until the Federal Court, which affirmed the
decision of the High Court and Court of Appeal. The case of Metacorp held that
compensation from compulsory acquisition was not liable to tax as the element of compulsion
vitiated the intention to trade. The case cited both landmark cases of Lower Perak Co-
operative Housing Society Bhd v Ketua Pengarah Hasil Dalam Negeri [1994] 2 MLJ 713
and Ketua Pengarah Hasil Dalam Negeri v Penang Realty Sdn Bhd & Anor [2006] 3 MLJ
597. We will discuss both of these landmark cases later.
It is in the opinion of the writer that previously, before the introduction of section 4C,
the IRB cannot decisively tax the taxpayer on any compulsory acquisition due to the
ambiguous nature of the ITA 1967 particularly section 4(a) of the ITA 1967, from which most
of the power to tax relied on. The progressive nature of development and the increasing rate
in compulsory acquisition of land by government over the past decades for the purpose of
modernisation and development of public infrastructures in our country, section 4C had
greatly impacted the property developers and corporate bodies that are trading with land and
properties which are assets that form part of their stock in trade because it had given the
power to tax income made from any compulsory acquisition.

PREVIOUS PRECEDENTS

As stated previously, before the introduction of section 4C, section 4(a) of the ITA
1967 was extensively used authority to tax, and still used even today. However, the court then
had created precedents that limited the usage of section 4(a) of the ITA 1967. The Federal
court case of Lower Perak Co-operative Housing Society Bhd v Ketua Pengarah Hasil
Dalam Negeri4 had become a landmark case that put restrictions on taxing when there are
elements of compulsion in trading. This case is important as not only the court in this case
had exhaustively discussed the relevant reasoning behind such decision, but it also became the
relied reference by many courts well after. Thus, it is pertinent that the writer also laid it down
for better context for current discussed topics.

3 [2011] 5 MLJ 447

4 [1994] 2 MLJ 71
 Without going into the nitty-gritty long justification of the court, the principle laid
down by Lower Perak Case are as follows:-
a) The taxpayer must show why the tax assessment should have not been made.
b) The nature of the transaction is important and must be looked upon from the taxpayer
perspective.
c) Any acts that improve the value of the land does not fully signify trade and as such the
land does not automatically become stock in trade.
d) Any element of compulsion vitiates the intention of trade since trading requires both
parties to have the intention to trade in the first place.
e) If there is a clash of motives, the dominant motive of the taxpayer is the most
important.
The most famous of these rulings was the element of compulsion that negates the intention to
trade. This ruling was then expanded upon by the case of Ketua Pengarah Hasil Dalam
Negeri v Penang Realty Sdn Bhd5 which then added the issue regarding government
compulsory acquisition. Basically, the court in the Penang Realty Case stated that the
compulsory acquisition also included under the meaning of element of compulsion and thus
such a transaction cannot be tax.

NEW RULE OF LAW AFTER SECTION 4C

Prior to the enactment of Section 4C of the ITA, the Court of Appeal concluded in
Ketua Pengarah Hasil Dalam Negeri v Penang Realty Sdn Bhd 6 that compensation paid by
the taxpayer for compulsory acquisition of land is not taxable. The Court of Appeal followed
the Supreme Court's decision in Lower Perak Cooperative Housing Society Berhad v Ketua
Pengarah Hasil Dalam Negeri7, which concluded that the element of compulsion tainted the
purpose to trade. The Penang Realty ruling was later adopted by the High Court in Metacorp
Development Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri 8. The Federal Court later

5 [2006] 3 MLJ 597

6 Ibid, [2006] 3 MLJ 597

7 Ibid, [1994] 2 MLJ 713

8 [2011] MSTC 30-024

upheld the High Court's decision in the Metacorp Development case. As a result of these
court decisions, the DGIR enacted Section 4C of the Finance Act of 2014. 9
Section 4C states:
“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”

In 2021, the Court of Appeal (“COA”) ruled that Section 4C ITA 1967 does not
contravene Article 13(2) of the Federal Constitution in the case of Wiramuda (M) Sdn. Bhd.
v Director General of Inland Revenue10. Wiramuda (M) Sdn Bhd filed this appeal against the
High Court's decision dated 29 September 2020, which dismissed the taxpayer's application
for judicial review, inter alia, to quash the Notice of Assessment for the YA 2018 issued by
the Director General of the Inland Revenue Board of Malaysia (DGIR). However, the COA
dismissed the appeal on six (6) grounds being;
a) That the Appellant has been taxed in conformity with the law. Sections 4C and 24(1)
(aa) ITA 1967 were enacted by Finance Act 2014 and approved by Parliament, and
they are in accordance with Federal Court (FC) Articles 13 and 96. Section 4C of the
Internal Revenue Code of 1967 is a Federal legislation established by the Legislature.
As a result, the taxation could not be considered unconstitutional.
b) That Article 13(2) FC does not limit Parliament's legislative ability, but only requires
that adequate compensation be paid.
c) That according to the facts of the case, the Appellant was not denied adequate
compensation for the acquired land. The Appellant has the right to protest to the
amount of compensation awarded by way of land reference to the High Court under
Section 37 of the LAA 1960. According to the facts, the Appellant's suit was sent to
the Shah Alam High Court for resolution. In the circumstances, the Court finds no
violation of constitutional principles or infringement of the constitution in the instance
of the Appellant. As a result, the court determined that section 4C of the ITA 1967 is
in violation of the FC.

9 Datuk D P Naban, S Saravana Kumar, Rosli Dahlan Saravana Partnership, (22 March 2023), “The
Wiramuda Case – Landmark Federal Court Ruling That Compensation Is Not Taxable”, https://eec7fb4d-eebf-
4806-83d6-a536d1e451d5.usrfiles.com/ugd/eec7fb_1aa7c772e2264409a74923115ae78671.pdf (17 September
2023).

10 [2023] CLJ JT (17)

 d) On the question of whether the Appellant can avoid the alternative remedy given by
section 99 ITA 1967, the Court decided that it is a trite principle of law that when an
alternative remedy exists, judicial review can be performed only in extremely rare
circumstances.
e) The Appellant claimed that there is a particular or exceptional circumstance since
provision 4C ITA 1967 violates Article 13 FC. As a result, it is argued that the DGIR
lacks clear competence to invoke section 4C ITA 1967 and levy tax on the Appellant.
f) The Appellant's argument is without merit because it has been determined that section
4C does not violate the FC. As a result, there are no special circumstances that allow
the Appellant to avoid the alternative remedy of the domestic appeal process under
section 99 of the ITA 1967.

Basically the COA ruled that the issue of stock in trade is a factual matter that must be
decided by a judge of facts. It is applicable in a judicial review application, whereby evidence
submitted by witnesses and documents are examined, and the judge of facts is the Special
Commissioners of Income Tax (“SCIT”) rather than the High Court Judge.11

The taxpayer's judicial review application was denied by the High Court on the
grounds that the DGIR was authorized to tax the compensation. Among other things, the High
Court concluded that Section 4C was a provision legitimately placed into the ITA by
Parliament and hence could not be considered to be in violation of the Federal Constitution.
The DGIR has the authority under Article 96 of the Federal Constitution to levy taxes on
taxpayers in conformity with the law. Nevertheless, The taxpayer filed an appeal with the
Court of Appeal after being dissatisfied with the decision of the High Court. The Court of
challenge unanimously dismissed the taxpayer's challenge, citing a strong presumption of
validity in connection to Section 4C. Because Section 4C was implemented through the
Finance Act 2014 and was approved by Parliament, the Court of Appeal determined that it
complied with Articles 13(2) and 96 of the Federal Constitution. Following that, the taxpayer
filed a notice of motion to appeal to the Federal Court under Section 96 of the Court of
Judicature Act of 1964. The Federal Court granted the taxpayer's motion in August 2022,
citing the need to resolve issues of public concern. The Federal Court ruled unanimously in
December 2022 that Section 4C of the ITA was illegal because it violated Article 13(2) of the

11 LHDN, Revenews by Legal, “Court of Appeal ruled section 4C Income Tax Act 1967 does not
contravene the Federal Constitution”,
https://phl.hasil.gov.my/pdf/pdfam/WIRAMUDA_v_KPHDN_01032021.pdf (16 September 2023).
Federal Constitution by denying the taxpayer of adequate compensation stemming from the
involuntary purchase of the land.12

To sum up, this is the first time the Supreme Court has found that a tax provision in
the ITA is unlawful. The Federal Court made an excellent judgement in upholding the
supremacy of the Federal Constitution above legislation passed by Parliament. This decision
serves as a valuable reminder that Parliament does not have the authority to adopt legislation,
including tax legislation, that erodes the fundamental liberties provided by the Federal
Constitution.

In another case, Ketua Pengarah Hasil Dalam Negeri v Classic Japan (M) Sdn Bhd
(COA)13, the Court of Appeal (COA) has allowed the appeal by the DGIR in part, with the
following grounds of judgement. Firstly, taking the dictionary definition into account, the
word "engaged in agriculture" under Rule 3 of the 1999 Rules obviously implies involvement
in the planting or growing of fresh flowers. This means that just purchasing flowers from
contract flower farmers is not an activity within the meaning of the phrase "engaged in
agriculture" as defined in Rule 3. The taxpayer was not engaged in agriculture, which would
have qualified the taxpayer for the enhanced exports allowance under the 1999 Rules.
Furthermore, the Special Commissioners of Income Tax (SCIT) determined that the taxpayer
was not involved in agriculture as contemplated by Rule 3 of the 1999 Rules. The High Court
erred in meddling with the SCIT's fact-finding process.

Secondly, To qualify as an industrial building under Section 63 of Schedule 3 of the

ITA, the taxpayer's factory must be used for business operations as well as containing
machinery or plant of any sort for the subjecting of commodities to any process. Inspection,
trimming, grading, bunching and cutting, hydration, packaging, and shipping are all processes
that take place in the plant. As a result, the COA concurred with both the SCIT and the HC
that the taxpayer's factory is an industrial facility that qualifies for IBA. Lastly, Section
113(2) of the ITA empowers the DGIR to levy a penalty equal to the amount of tax on anyone
who files an inaccurate tax return or provides incorrect information on the tax return. The

12 Datuk D P Naban, S Saravana Kumar, Rosli Dahlan Saravana Partnership, (22 March 2023), “The
Wiramuda Case – Landmark Federal Court Ruling That Compensation Is Not Taxable”, https://eec7fb4d-eebf-
4806-83d6-a536d1e451d5.usrfiles.com/ugd/eec7fb_1aa7c772e2264409a74923115ae78671.pdf (17 September
2023).

13 [2022] MSTC 30-476

"good faith" defense provided in Section 113(1) of the ITA does not apply to the DGIR's
discretion provided in Section 113(2) of the ITA. The taxpayer had incorrectly declared
income on its tax return and provided false information to the DGIR. This is enough for the
DGIR to use his discretion and levy the penalty on the taxpayer.

This ruling follows a previous decision in the Lavender Confectionery & Bakery Sdn
Bhd case14, in which the High Court granted the taxpayer's IBA claim for capital expenditures
made for the construction of a border surrounding the manufacturing complex, guardhouse,
and concrete road. The High Court ruled that the functionality test should be used to
determine whether the claimed components are necessary and integral to the factory's
operation. The verdict of the High Court in the Lavender Confectionery & Bakery Sdn Bhd
case was later upheld by the Court of Appeal. According to the preceding, the determining
criterion between capital allowance and industrial building allowance is whether it is a "tool"
used to create money or a "building" utilized for industrial business objectives. Qualified
expenditure can include both the assets themselves and the incidental costs associated with
the assets.

CURRENT STANDING OF SECTION 4C

Section 4C and Section 24(1)(aa) of the Income Tax Act of 1967 (“ITA”) have the net
consequence that compensation for compulsory acquisition of land that is stock in trade of a
firm is taxable. Following the case of Wiramuda, the Federal Court then ruled that Sections
4C and 24(1)(aa) of the Constitution both violate Article 13(2). By taxing the amount of
compensation obtained by Wiramuda, the adequate compensation received was reduced,
making the compensation insufficient under the Federal Constitution, which safeguards an
individual's fundamental rights. Article 13(2) of the Constitution ensures adequate
compensation for land acquisition; by taxing adequate compensation, the adequate
compensation is reduced to become inadequate; thus, Sections 4C and 24(1)(aa) violate and
are unconstitutional.15

14 [2015] MSTC 10. 00

15 Tun Abdul Hamid Mohamad, (23 April 2023), “Constitutionality of Sections 4c And 24(1) (Aa),
Income Tax Act 1967”, https://tunabdulhamid.me/2023/04/constitutionality-of-sections-4c-and-241-aa-income-
tax-act-1967/ (16 September 2023).
 There are basically two parts to the argument. Firstly, the amount of compensation
awarded by the Land Administrator. The case is being appealed to the High Court. The
question is whether the compensation is adequate. Taxation is not an issue. If the tax is
assessed by the Director General of Inland Revenue (DGIR), the taxpayer may appeal to the
SCIT. The question is whether the tax is correctly assessed. It is to note that whether or not a
compensation is taxed, it may be enough or insufficient. The amount of compensation
awarded in a particular case determines whether it is sufficient or the opposite. That is a
factual issue that will be decided in a High Court appeal. Section 4C and Section 24(1)(aa)
shall not be faulted if it is insufficient even before or after taxation. Secondly, if Wiramuda
was adequately compensated. What happens after that is unimportant. Wiramuda may be
required to pay tax on it. Over it, it may have to pay its land valuers and lawyers, as well as
incur other fees. Those are following occurrences. What matters is whether the acquisition
authority's award is sufficient. The remedy is to file an appeal with the High Court. It is not
mentioned in the judgments of the High Court or the Court of Appeal. The implication is that
it was not raised in either the High Court or the Court of Appeal.If this ground was submitted,
or if the court considered it and agreed with it, there was no need to assess the legality of
Sections 4C and 24(1)(aa). Only as a last resort could the court consider declaring a statute
unconstitutional.16

Therefore, there are three grounds of why leave should be given for judicial review to
review this judgment. One, the Federal Court had exceeded its jurisdiction by allowing
Wiramuda to challenge the constitutionality of Section 4C ITA and Section 24(1)(aa) through
judicial review when the Court of Appeal's decision prohibiting Wiramuda from using
judicial review in the case had not been heard and set aside by the Federal Court. The Federal
Court should have first heard and overturned that order before going to consider the judicial
review proceeding. Two, when it determined that Sections 4C and 24(1)(aa) of the ITA
violated Article 13(2) of the Federal Constitution, the Federal Court made a constitutional
error. Art. 13(2) forbids insufficient compensation, not taxation. If taxation makes adequate
compensation insufficient, then the assessment, not the legislation, should be repealed. Lastly,
when it decided that Sections 4C and 24(1)(aa) of the ITA necessarily violated Article 13(2)
of the Federal Constitution, the Federal Court made a jurisdictional error. The truth is that

16 Ibid
taxation on compensation can be levied under the two sections without violating Article 13(2)
of the Federal Constitution.17

The writer is of the opinion that the issue in the case of Wiramuda was only regarding
the assessment tax and not on the compensation received. Tax is one thing and compensation
received is another entirely. The Apex Court must review this case and make such a
distinction as if the precedent keeps standing, the consequences would be severe. Stating that
taxing compensation is unconstitutional is like stating that taxing lively wages is also
unconstitutional under Article 5 of the Federal Constitution just because taxing it will make it
inadequate.

In conclusion, when the constitutionality of a statute is called into question, the

Attorney General should step in. It should not be left to the party being sued to defend
themselves. After all, the Executive suggested the bill, the Attorney General prepared it,
Parliament enacted it and the Yang di-Pertuan Agong signed it, and the Attorney General
counseled all of the aforementioned government agencies on its constitutionality throughout.
The ruling has far-reaching consequences, not simply between the two parties in this case. As
in this example, valid reasons may be overlooked, resulting in irreversible harm.

17 Tun Abdul Hamid, (24 April 2023), “Constitutionality of Sections 4c and 24(1) (aa), Income
Tax Act 1967”, https://bebasnews.my/2023/04/24/constitutionality-of-sections-4c-and-241-aa-income-
tax-act-1967/ (16 September 2023).