Court of Appeal upholds IRB tax refund on compulsory land acquisition compensation

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The Court of Appeal upheld the High Court’s decision ordering the IRB to refund Lush Development Sdn Bhd the tax collected on RM22.5 million in compensation, together with interest at 5% per year.
Under this new ruling, the Federal Court’s decision on Dec 9, 2022, which declared Section 4C of the Income Tax Act 1967 unconstitutional, applies retrospectively.
The IRB claimed there were 13 refund claims estimated at around RM600 million, but the Court of Appeal stressed that this figure was unsupported by evidence and rejected a limit on retrospective application.

This article was translated from the original. Read the original version by our correspondent here.

Court ruling and scope of the refund

As reported by The Edge Malaysia, a three-judge Court of Appeal panel dismissed part of the Inland Revenue Board’s appeal and upheld the High Court’s decision ordering the agency to refund tax collected on the RM22.5 million in compensation declared by Lush Development Sdn Bhd, together with interest at 5% per year from the date the company filed its court action.

The panel, comprising Datuk Azizul Azmi Adnan, Datuk Ong Chee Kwan and Datuk Seri Mohd Radzi Harun, said the ruling followed a landmark Federal Court judgment on Dec 9, 2022, which declared the relevant section of the Income Tax Act 1967 unconstitutional. The appeal arose from Lush Development’s successful application for judicial review in the High Court.

In October 2016, the Selangor State Authority compulsorily acquired seven plots of land owned by the company and paid compensation of RM22,470,845. As the compensation was still subject to tax at the time, the company filed its taxes as required.

Following the Federal Court’s decision in December 2022, the company wrote to the IRB in February 2023 to claim a refund, but received no response. This led to a subsequent application for judicial review.

Constitutional implications and impact on other claims

In a 57-page judgment dated Oct 19 and uploaded to the court’s website on Oct 21, Justice Ong stressed that the Federal Court’s decision applied retrospectively because there was no express direction that it would take effect only prospectively. He said there was no basis for the Court of Appeal to impose such a limit when the highest court itself had declined to do so.

The Federal Court case, Wiramuda (M) Sdn Bhd v Director General of the IRB, concerned Section 4C of the Income Tax Act, which treats receivables from trading stock disposed of due to a compulsory element, including compulsory acquisition, as business income or profits. The Federal Court unanimously ruled that Section 4C was inconsistent with Article 13(2) of the Federal Constitution, which provides that no law may allow the compulsory acquisition or use of property without adequate compensation.

The Court of Appeal also rejected the IRB’s argument that the ruling should apply prospectively only to protect reliance interests and avoid administrative and fiscal disruption. Ong also dismissed the claim that retrospective application would open the door to unlimited refund claims from other taxpayers.

According to the judgment, the IRB claimed there were 13 refund claims with a gross estimated value of around RM600 million, but the judge said that figure was unsupported by any evidence. The ruling could influence how the revenue agency handles similar claims involving compensation for compulsory land acquisition in Malaysia.

In our earlier report on the government’s efforts to recover funds from the National Feedlot Project, the Ministry of Finance said RM33.74 million was still being claimed from National Feedlot Corporation Sdn Bhd, even though the High Court had previously ordered payment and affirmed the government’s rights to RM86.9 million and several properties. The article also explained that the recovery of assets and forfeiture of the remaining properties were still ongoing, subject to further legal action and negotiations with the parties involved.

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