Is it taxing or inadequate compensation that is unconstitutional?

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Tun Abdul Hamid Mohamad

By Tun Abdul Hamid Mohamad

On 9 December 2022, a five-member bench of the Federal Court led by Chief Justice Tun Tengku Maimun Tuan Mat held that Section 4C of the Income Tax Act 1967 (ITA) is unconstitutional as it contravenes Article 13(2) of the Federal Constitution.

Article 13(2) of the Constitution provides that “No law shall provide for the compulsory acquisition or use of property without adequate compensation.” Note that the key word is “adequate”.

The effect of the judgment is that compensation awarded for compulsory acquisition of land which forms part of the stock in trade of a company should not be subject to income tax.

The ruling was made in Wiramuda Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri (Wiramuda). No written judgment had been issued by the Federal Court, so far. The court merely answered the question whether Section 4C of the ITA is in contravention of Article 13(2) of the Constitution as it deprives Wiramuda of adequate compensation granted in the Land Acquisition Act 1960 in the affirmative (“Yes”) and the effects follow.

The case arose from the acquisition by Selangor State Government of land belonging to Wiramuda for the construction of the Sungai Besi-Ulu Kelang Elevated Expressway (SUKE). Wiramuda was awarded compensation of RM202,552,569.50.

Subsequently, Wiramuda received a notice of assessment from Inland IRB Board (IRB) stating that the compensation was subject to income tax under Section 4C of the ITA. The tax assessed was in the amount of RM52,966,517.27.

Wiramuda did not appeal against the assessment to the Special Commissioners of Income Tax (SCIT) as provided by the ITA but chose to challenge the assessment by way of judicial review.

Leave having been given without any objection by the Attorney Genal, after hearing full arguments, the High Court dismissed the application by Wiramuda. The High Court gave a 19-page written judgment.

Wiramuda appealed to the Court of Appeal. In its judgment, the Court of Appeal summarised the grounds of High Court’s judgment under four points:

(i) IRB was correct in law to tax the compensation received by the appellant for the acquisition of the appellant’s land under section 4C and 24(1) (aa) of the ITA.

(ii) The provisions of sections 4C and 24(1) (aa) of the ITA are valid law and do not contravene the Federal Constitution.

(iii) Wiramuda’s compulsorily acquired land was stock in trade under sections 4C and 24(1) (aa) of the ITA and as such compensation received is taxable under the said sections.

(iv) Wiramuda’s challenge as to the Notice of Assessment for Year Assessment 2018 involves question of facts which is best to be dealt with by the SCIT. The remedy available under section 99(1) of the ITA for Wiramuda to appeal against the assessment to SCIT was not resorted to by Wiramuda, although in the absence of any special circumstances. Thus, the appellant could not bypass the available alternative remedy.

In its judgment, the Court of Appeal also reduced the four grounds to three core issues:

(i) Whether section 4C of the ITA is unconstitutional for contravention of Article 13(2) of the Federal Constitution.

(ii) Whether the appellant in the present case can bypass the alternative remedy of appeal to the SCIT under section 99(1) of the ITA.

(iii) Whether the appellant’s compulsorily acquired land is stock in trade as envisaged under section 4C and 24(1) (aa) of the ITA.

The court answered question (i) in the negative (“No”).

The court answered question (ii) in the negative (“No”).

The court answered question (iii) in the affirmative (“Yes”).

Take note that one of the grounds both the High Court and the Court of Appeal decided in favor of IRB is that Wiramuda should not bypass the alternative remedy of appeal to the SCIT under section 99(1) of the ITA (Ground (ii) of Court of Appeal’s Judgment.)

Wiramuda applied for leave of the Federal Court to appeal against the judgment of the Court of Appeal giving seven questions for the court to answer in the appeal, if leave is granted:

Question 1: Whether Section 4C and Section 24(1)(aa) of the Income Tax Act 1967 (“ITA”) which were enacted through the Finance Act 2014 are unconstitutional , null, void and of no legal effect on the ground that it contravenes Article 13(2) of the Federal Constitution?

Question 2: Whether Section 4C of the ITA is in contravention with Article 13(2) of the Federal Constitution as it deprives the Applicant of adequate compensation granted in accordance with the Land Acquisition Act 1960 (“LAA”)?

Question 3: Whether Article 4(1) of the Federal Constitution is applicable in light of Section 4C of the ITA being inconsistent with Article 13(2) of the Federal Constitution ?

Question 4: Whether the presumption of the constitutionality of Section 4C of the ITA is rebuttable presumption?

Question 5: Whether the Applicant’s land (which was compulsorily acquired under the LAA) was held as stock in trade or as fixed asset is an irrelevant fact to determine the constitutionality of Section 4C and Section 24(1)(aa) of the ITA?

Question 6: Whether by reason of the fact that the Applicant’s land had been consistently held and described as fixed asset in its audited accounts (with no other contrary evidence to suggest otherwise) proves this fact and discharges the burden of proof that the Applicant’s land is a fixed asset?

Question 7: Whether an award of compensation arising from compulsory land acquisition should be subject to real property gains tax under Real Property Gains Tax Act 1976, instead of income tax undersection 4C of the ITA?

Note that ground (ii) of Court of Appeal’s Judgment is lost.

Counsel for IRB gave a written submission on all questions. Federal Court granted leave and allowed all the seven questions to be argued by counsel for Wiramuda, in the appeal.
However, at the hearing of the appeal, counsel for Wiramuda informed the court they would only argue on the issue of constitutionality of Section 4C; They conceded that the land was their stock in trade and therefore would not pursue on questions 5,6 and 7.
Actually, the issue that counsel for Wiramuda chose to argue is a combination of questions 1,2,3 and 4. Wiramuda lost nothing by conceding questions 5,6 and 7 as questions 5 and 6 are questions of facts and question 7 is hypothetical.

Arguments by counsel for both parties were confined to the issue of constitutionality of Section 4C.

After counsel for both parties had submitted, the Federal Court stood down and after about 15 – 20 minutes, resumed sitting and delivered its judgment orally.

The Chief Justice, presiding the court, said that both Section 4C and Section 24(1)(aa) are contrary to Article 13(2) of the Constitution. By taxing the amount of compensation received by Wiramuda diminished the adequate compensation received by it and resulted in the compensation received to be inadequate under the Federal Constitution which guarantees the fundamental rights of an individual.

The court was also of the view that Section 4C of the ITA was enacted to overcome the judgment of the Supreme Court in the case of Lower Perak Housing Co-operative Society Bhd. v. KPHDN (1994) 2 MLJ 713 and the judgment of the Court of Appeal in KPHDN v. Penang Realty Sdn. Bhd and another appeal (2006) 2 CLJ 835.

It is clear that the court had thought that the case was a simple one, may be because counsel had argued only on one question and the answer is just “yes” or “no”. Hence, the court did not adjourn to prepare and deliver a written judgment of the court or, better still, individual judgments of the judges.

Thus, such an important constitutional issue with far-reaching consequences was decided in a matter of minutes. I am sure the judges merely decided “yes” based on the argument of counsel. Even if the court were to produce a written judgment subsequently, it will not be a judgment written with an open mind. It will be no more than giving reasons to justify what has been decided, what more if research officers are asked to draft it, I hope not.

Connected with this, of late, the apex court now comes out with a single judgment of the court. We do not see individual judgments, dissenting or concurring, anymore. Indeed, one judgment of the court, in terms of language, argument and style is no different from the other. They seem to be from the same template.

From the “oral judgment”, there appears to be only one ground on which the court decided the case: the Constitution guarantees adequate compensation for land acquisition; by taxing on compensation, even an adequate compensation becomes inadequate and, therefore, unconstitutional. As a result, section 4C contravenes Article 13(2) of the Constitution.

In other words, taxation is unconstitutional because it causes the adequate compensation to become inadequate. What if it does not? A very high amount may be awarded which, after taxation, may still be adequate. The remedy is appeal, not judicial review. It is a question of facts, not law, whether the compensation is adequate.

A global sum may be awarded in which the tax factor has been taken into account. Or, an award is made and a sum is added on top of it as tax. In the last two examples, can it not be argued that the award is adequate?

Even on that one question, the answer need not be just “yes” or “no”. It could also be “may be yes” or “may be no”. It depends on whether the taxing has caused the compensation to become inadequate. Article 13(2) of the Constitution does not prohibit taxing of the compensation. It merely requires the compensation to be adequate.

It may well be that counsel for IRB did not suggest this possible answer in his submission. That does not prevent the court from considering it. That is the disadvantage of deciding a case around the table. A Judge writing his individual judgment might have thought of this answer. Parties are bound by their pleadings, not Judges.

The “oral judgment” of the Federal Court commented that Section 4C of the ITA was enacted to overcome the decision of the Supreme Court and the Court of Appeal in two earlier cases. Actually, that comment is relevant only in respect of the Court of Appeal case of KPHDN v. Penang Realty Sdn. Bhd and another appeal (2006) 2 CLJ 835.

I see nothing legally wrong with that. Parliament was exercising its legislative powers given to it by the Constitution. Independence of the Judiciary does not extend to prohibiting Parliament from making law to overcome a judgment of the court. That is its function.

We have noted earlier that one of the grounds on which both the High Court and the Court of Appeal decided in favor of IRB was that Wiramuda should not bypass the alternative remedy of appeal to the SCIT under section 99(1) of the ITA (Ground (ii) of Court of Appeal’s Judgment.) That ground was lost along the way, when Wiramuda did not include it in its grounds/questions for appeal.

Both courts ruled that Wiramuda should not bypass the alternative remedy. That ground is in favor of IRB. In other words, on that ground alone, Wiramuda lost its application for Judicial Review. By not proceeding the appeal against that ground, Wiramuda is deemed to have conceded that it had lost its application for judicial review on that ground and should not have been allowed to proceed further.

By allowing Wiramuda to proceed, the Federal Court had disregarded the judgement of the two courts below without an appeal against it, without any argument and without overruling it. That finding of the two courts stands. Wiramuda had lost its application for judicial review on that ground and did not appeal against it. So, there is no appeal before the Federal Court and there is no need for the Federal Court to decide whether Section 4C is constitutional or not.

True that counsel for IRB should have raised the issue. But, failure to do so does not amount to a concession. The court has a greater responsibility to ensure that when a party has lost his application for judicial review on the ground that he should not bypass the appeal procedure specifically provided by law and that part of the judgment is not overruled, he should not be allowed to proceed with judicial review proceedings to set aside the assessment on other grounds. He should not be standing in the Federal Court to pray for the order.

There is another argument that could have been raised against Wiramuda, that is, the real issue is whether Wiramuda was awarded adequate compensation. What happens after that is irrelevant. Wiramuda may have to pay tax it on it. It may have to pay its valuer and lawyers and incur other expenses, over it. Those are subsequent events. What matters is the amount awarded by the acquisition authority, whether it is adequate. The remedy is appeal to the SCIT under section 99(1) of the ITA. The judgment of the High Court and the Court of Appeal do not mention it. The inference is that it was not raised in the High Court nor in the Court of Appeal. That argument was lost even earlier.

The judgment does not only affect this particular case. By saying “Yes”, the court removes forever the right of IRB to tax such compensation. It does not matter if the section inherently contravenes the provision of Article 13(2) the Constitution. But, where as I humbly submit, it may or may not, depending on the way the assessment is made, there is no necessity and no justification to strike down the section. That is besides the other grounds I have fowarded above.

Now, think of the consequences. I cannot think of a way of reversing it. IRB cannot issue a fresh assessment in another case even against a different landowner hoping to get a chance to reopen the issue, because the law enabling a similar assessment has been struck down as unconstitutional.

Is this another example of abuse of judicial review? See “Should the Industrial Court not be allowed to be what it was intended to be?” (04 03 2008). Is this another example of the Judiciary encroaching the powers of Parliament? – See “Not for Judges to rewrite the Constitution (12 06 2017), “No Judge is a Parliament” (30 03 2018); “Who is encroaching whose jurisdiction, Parliament or Courts?” (16 12 2019), “Bapa” juga bermaksud “Ibu”: Hakim mengambil alih kuasa Parlimen dan Mjlis Raja-Raja” (23 09 2021).

Another point I wish to make is that, in a case where the validity of a law is challenged on the ground that it is unconstitutional, the Attorney General should intervene. It should not be left to the party sued, to defend it. The effect is far reaching, not just between the two parties in that particular case. Valid grounds may be missed resulting in permanent consequences, as in this case.

This article was prepared or accomplished by Tun Abdul Hamid Mohamad, Former Chief Justice of Malaysia.

The views and opinions expressed in this article are those of the authors and do not necessarily reflect The Malaya Post

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