ETIQA FAMILY TAKAFUL BERHAD (DAHULUNYA DIKENALI SEBAGAI ETIQA TAKAFUL BERHAD) Ketua Pengarah Hasil Dalam Negeri

WA-14-9-04/2021 Kand. 39 21/11/2022 14:38:57 DALAM MAHKAMAH TINGGI MALAYA DI KUALA LUMPUR (BAHAGIAN KUASA-KUASA KHAS) PERMOHONAN BAGI SEMAKAN KEHAKIMAN NO: WA-14-9-04/2021 ANTARA ETIQA FAMILY TAKAFUL BERHAD ( DAHULUNYA DIKENALI SEBAGAI ETIQA TAKAFUL BERHAD ) …PERAYU DAN KETUA PENGARAH HASIL DALAM NEGERI …RESPONDEN (Dalam Perkara Pesuruhjaya Khas Cukai Pendapatan Rayuan No. PKCP(R) 278/2017, 392-393/2017 & 406/2017 ANTARA ETIQA TAKAFUL BERHAD …PERAYU DAN KETUA PENGARAH HASIL DALAM NEGERI …RESPONDEN S/N mHgOAs0/XUqjvpCjxFNmbw 1 **Note : Serial number will be used to verify the originality of this document via eFILING portal DAN Dalam Perkara Pesuruhjaya Khas Cukai Pendapatan Rayuan No. PKCP(R) 392/2018 & MOF.PKCP. 700/1/526 ANTARA ETIQA FAMILY TAKAFUL BERHAD …PERAYU DAN KETUA PENGARAH HASIL DALAM NEGERI ….RESPONDEN) JUDGMENT [1] Before me is an appeal by the appellant against the decision of the Special Commissioners of Income Tax (“SCIT”) dated 4.6.2021. [2] The appellant is in the principal business of managing the general and family takaful business. From 1.12.2007, the appellant also commenced managing Takaful investment-linked business upon the transfer of the Takaful assets, liabilities and business of Mayban Takaful Berhad to the appellant. [3] Since its inception, the appellant changed its name several times, and it is now known as Etiqa Family Takaful Berhad. S/N mHgOAs0/XUqjvpCjxFNmbw 2 **Note : Serial number will be used to verify the originality of this document via eFILING portal [4] The respondent raised notices of additional assessment (“NAA”) in Form JA for the years of assessment (“YAs”) 2008 to 2013 with additional tax payable and penalties as follows: Additional assessment including Date YA penalties 18.7.2016 2008 RM2,624,936.97 30.12.2016 2009 RM3,589,065.87 30.12.2016 2010 RM6,279,723.89 27.12.2016 2011 RM10,383,369.25 28.12.2017 2012 RM26,007,964.73 28.12.2018 2013 RM26,810,914.96 [5] Aggrieved by the respondent’s decision, the applicant filed separate notices of appeal in Form Q. At the SCIT [6] There are three (3) Issues for the determination before the SCIT. They are as follows: (a) Whether the respondent has successfully discharged its burden of proof under s 91(3) of the Income Tax Act 1967 (“ITA”) in relation to the NAA for YAs 2008 to 2010; S/N mHgOAs0/XUqjvpCjxFNmbw 3 **Note : Serial number will be used to verify the originality of this document via eFILING portal (b) Whether the commission expenses incurred by the appellant in the Shareholders’ Fund for the YAs 2008 to 2013 to earn the Wakalah Fee from the General Takaful Fund are deductible as the expenses of the Shareholders’ Fund under s 33 of the ITA; and (c) Whether there is any factual or legal basis for the respondent to impose a penalty against the appellant under s 113(2) of the ITA for the YAs 2008 to 2013. [7] The details and amount of commission expenses incurred by the appellant are not in dispute. As alluded to earlier, the dispute evolves on the deductibility of the commission expense to earn the Wakalah Fee under s 33(1) of the ITA. [8] At the SCIT, the appellant asserted that the Wakalah Fee from the General Takaful Fund is the gross income for the appellant’s Takaful business. Secondly, the Wakalah Fee is used by the appellant to cover the management expenses, including commission expenses paid to the independent Takaful agents and other intermediaries for marketing the appellant’s Takaful schemes. Finally, it is the appellant’s position that no Takaful scheme could be marketed without incurring commission expenses. The attendant consequences would be no participation in the appellant’s Takaful schemes. Hence, there would not be any Wakalah Fee income generated. S/N mHgOAs0/XUqjvpCjxFNmbw 4 **Note : Serial number will be used to verify the originality of this document via eFILING portal [9] On the issue of (b), the SCIT, in its deciding order, held that s 60AA(9)(b) of the ITA prevails over s 33(1) of the ITA. In its ground of judgment at para [86], the SCIT states as follows: Sehubungan dengan itu, perbelanjaan komisen yang ditanggung oleh Dana Pemegang Saham bagi TT 2008 hingga TT 2013 bagi mendapatkan fi Wakalah daripada Dana Takaful Am tidak boleh dipotong sebagai perbelanjaan Dana Pemegang Saham di bawah subseksyen 33(1) ACP kerana terdapat subperenggan 60AA(9)(b) ACP yang memperuntukkan secara khusus potongan- potongan yang dibenarkan bagi Dana Pemegang Saham. Perbelanjaan komisen tidak tersenarai sebagai potongan yang dibenarkan bagi TT 2008 hingga TT 2013. [10] In short, the SCIT was of the view that the commission expenses on the Wakalah Fee could not be deducted as the expenses of the Shareholders’ Fund under s 33 of the ITA. The reason, according to the SCIT, is the commission expenses are not listed as “deductible” under s 60AA(9)(b) of the ITA. According to the SCIT, the maxim of generalia specialibus non derogant applies since s 60AA(9)(b) is a specific provision compared to the general provision of s 33. The SCIT relied on Idaman Pelita Sdn Bhd v KPHDN [2016] 8 CLJ 503. [11] The SCIT further held that Forms JA from the YAs 2008 to 2013 raised by the respondent in 2016 were not time-barred under s 91(3) of the ITA. According to the SCIT, the DGIR had S/N mHgOAs0/XUqjvpCjxFNmbw 5 **Note : Serial number will be used to verify the originality of this document via eFILING portal successfully discharged the burden of proof that the Appellant was negligent under s 91(3)(b) of the ITA. In para [106] its grounds of judgment, the SCIT held that the applicant was negligent in claiming for the commission expenses knowing that they were not provided for under s 60AA of the ITA: Oleh yang demikian, PKCP berpandangan fakta bahawa Perayu menuntut potongan bagi perbelanjaan komisen yang jelas tidak diperuntukkan oleh seksyen 60AA ACP seperti yang ada pada tahun 2008 hingga 2010 walaupun telah melantik perunding cukai profesional menunjukkan terdapat kecuaian yang dilakukan oleh Perayu. [12] As to the imposition of penalties under s 113(2), the SCIT held that the appellant had filed the incorrect return for YAs 2008 to 2013 in claiming the commission expenses which were not provided for under s 60AA(9)(b) of the ITA. [13] The SCIT then referred to the case of Ketua Pengarah Hasil Dalam Negeri v Dr Zanariah binti Ramli Civil Appeal No: W- 01-711-12/2011, which was quoted with approval in Ship Vet Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri [2021] 1 LNS 822. The two cases carry the proposition that when a taxpayer had filed an incorrect or inaccurate tax return for the years under review, it is only fair that the penalty imposed by the Revenue be reinstated. [14] The SCIT then held that the imposition of penalties under s 113(2) of the ITA for YAs 2008 to 2013 was correct in law. S/N mHgOAs0/XUqjvpCjxFNmbw 6 **Note : Serial number will be used to verify the originality of this document via eFILING portal [15] For the aforesaid reasons, the appellant’s appeal was dismissed and the NAAs: (a) Dated 18.7.2016 for YA 2008; (b) Dated 30.12.2016 for YAs 2009 and 2010; (c) Dated 27.12.2016 for YA 2011; and (d) Dated 28.12.2017 for YAs 2012 and 2013 together with the penalties imposed, were affirmed by the SCIT. At the High Court [16] Aggrieved, the appellant appealed to the High Court. Whether the commission expenses deductible [17] Learned counsel for the appellant highlighted that at the hearing before the SCIT, the respondent did not dispute that commission expenses were incurred by the appellant to earn the Wakalah Fee. During cross-examination, RW1 conceded as follows: RW1: Dan itu isu komisyen saya tidak pernah menafikan ia adalah, ya, incurred, memang incurred. Saya tak pernah menafikan isu incurred. The remaining question to be determined is whether the SCIT had erred in holding that commission expenses on the Wakalah Fee could not be deducted as the expenses of the Shareholders’ Fund under s 33 of the ITA. S/N mHgOAs0/XUqjvpCjxFNmbw 7 **Note : Serial number will be used to verify the originality of this document via eFILING portal [18] AW1, in his testimony, asserted that the commission expenses are direct expenses to be paid to the Takaful agents who assist the Takaful operator in earning the Wakalah Fee income. It is also not in dispute that the Wakalah Fee by the Shareholders’ Fund from the General Takaful Fund is used to cover management expenses paid to the Takaful agents for marketing Takaful products. According to AW1 in his witness statement, the commission expenses “make up 50% of the Wakalah Fee”. [19] Learned counsel for the appellant submitted that the SCIT had erred in failing to consider the expenses incurred by the appellant in the production of gross income in earning the Wakalah Fee under the Takaful Scheme. [20] The line of argument of learned counsel is this. First, there are no express words in s 60AA(9)(b) that exclude the application of s 33(1) for the deduction of commission expenses under the Shareholders’ Fund. Secondly, s 33(1) does not expressly preclude such deduction. Was the appellant negligent for s 91(3) to be invoked? [21] The next issue is whether the SCIT had erred in holding that the DGIR had discharged the burden of proof that the Appellant was negligent under s 91(3)(b) of the ITA. S 91(3)(b) of the ITA provides as follows: The Director General where it appears to him that— S/N mHgOAs0/XUqjvpCjxFNmbw 8 **Note : Serial number will be used to verify the originality of this document via eFILING portal (a) any form of fraud or wilful default has been committed by or on behalf of any person; or (b) any person has been negligent, in connection with or in relation to tax, may at any time make an assessment in respect of that person for any year of assessment for the purpose of making good any loss of tax attributable to the fraud, wilful default or negligence in question. [22] According to learned counsel, the fact that the appellant adopts a different approach in respect of the deductibility of commission expenses incurred for the Wakalah Fee does not warrant the DGIR to impose the penalty against the appellant under s 113(2) of the ITA. In short, learned counsel contended that the technical adjustments due to differing interpretations do not give the liberty for the DGIR to allege negligence; Piramid Intan Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri [2015] 10 MLJ 436. Penalty [23] Learned counsel for the appellant submitted that in imposing penalties upon the appellant under s 113(2) of the ITA, the DGIR is required to prove the existence of some form of intentional wrongdoing on the appellant’s part. In any event, according to learned counsel, s 113(2) is discretionary in nature and should not be exercised at whim and fancy but after due consideration of all relevant facts and circumstances; Kim Thye Co v Ketua Pengarah Hasil Dalam Negeri [1992] 4 CLJ 2079 SC. S/N mHgOAs0/XUqjvpCjxFNmbw 9 **Note : Serial number will be used to verify the originality of this document via eFILING portal [24] According to learned counsel, it has been established at the hearing before the SCIT that the appellant had acted in good faith, took professional advice and made full disclosure at all material times and that the matter in dispute arose as a result of a technical adjustment. Analysis [25] Let me begin by addressing the issue of whether the SCIT was right in holding that the commission expenses on the Wakalah Fee could not be deducted as the expenses of the Shareholders’ Fund under s 33 of the ITA. [26] First, 60AA(9)(b)(iv) of the ITA 1967 was inserted vide Finance Act 2014 and came into effect in 2014 to allow for a deduction of commission expenses under the Shareholders’ Fund. Learned counsel for the appellant highlighted the evidence of AW1 that the commission expenses are direct expenses to be paid to the Takaful agents. According to the learned counsel, this part of the evidence was not challenged by the DGIR during cross- examination. [27] I accept that the appellant must have incurred the commission expenses paid to the Takaful agents. But does that mean s 33(1) is automatically applicable? S 33(1) provides that 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 S/N mHgOAs0/XUqjvpCjxFNmbw 10 **Note : Serial number will be used to verify the originality of this document via eFILING portal all outgoings and expenses wholly and exclusively incurred during that period. [28] Learned counsel for the appellant submitted that s 33(1) of the ITA is a basket provision where all outgoings and expenses exclusively incurred in the production of gross income are tax deductible. I do not think I have any problem accepting this proposition. If any authority is needed, it can be seen in the judgment of the Court of Appeal in Aspac Lubricants (M) Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri [2007] 6 MLJ 65 CA. Gopal Sri Ram JCA (later FCJ), in delivering the judgment of the Court, referred to s 33(1) of the ITA and held that: Viewed from any perspective, the transactions in respect of the customers' items were plainly bargains made by the appellant for the sole purpose of business promotion and hence fall within the basket provision. [29] In short, according to learned counsel, the appellant expended the monies in question, in the form of commission expenses, to promote its Takaful business. At the end of the day, the dominant, if not the sole object or purpose of the commission expenses, is to promote the appellant's business. [30] In Aspac Lubricant, the appellant, inter alia, blended and sold lubricants for motorised vehicles and gave away certain promotional items to its customers and dealers during revenue assessments in 1989, 1990, 1991 and 1992. The promotional S/N mHgOAs0/XUqjvpCjxFNmbw 11 **Note : Serial number will be used to verify the originality of this document via eFILING portal items consisted of items such as mugs, "T" shirts and umbrellas carrying the appellant's logo given away to customers who purchased the appellant's products. The appellant deducted the expenses incurred on all those promotional items from its gross income for each year of assessment because it took the view that those were expenses wholly and exclusively incurred in the production of gross income. [31] The Court of Appeal agreed with the appellant’s approach and held that the promotional items come within the ambit of “all outgoings and expenses wholly and exclusively incurred during that period by that person in the production of gross income” as provided for under s 33(1) of the ITA. [32] As I alluded to earlier, I have no problem accepting the proposition that s 33(1) is a basket provision. But the real question is, will this basket provision cover the commission expenses in the context of a Takaful business? With respect, I do not think so. [33] The learned SRC submitted that the ITA treats the Takaful business as a separate and distinct business. It is for this reason, according to the learned SRC, that Parliament inserted section 60AA of the ITA to deal with the specific business of a Takaful operator. Thus, the issue of the allowable expense of a takaful operator must be construed in light of the purpose and intention behind the specific provisions contained in section 60AA of the ITA that governs the takaful business. S/N mHgOAs0/XUqjvpCjxFNmbw 12 **Note : Serial number will be used to verify the originality of this document via eFILING portal [34] I find merits in this line of argument. If indeed s 33(1), the so- called basket provision, is sufficient to cover the commission expenses incurred by the appellant, why is the necessity for Parliament to enact s 60AA of the ITA in the first place? It is trite that Parliament is assumed to know the law that it enacts. Parliament does not act in vain by legislating for the sake of legislating. [35] I find support in the said proposition in the judgment of Abdoolcader SCJ in Foo Loke Ying & Anor v Television Broadcasts Ltd & Ors [1985] 2 MLJ 35 SC, who held that: The court however is not at liberty to treat words in a statute as mere tautology or surplusage unless they are wholly meaningless. On the presumption that Parliament does nothing in vain, the court must endeavour to give significance to every word of an enactment, and it is presumed that if a word or phrase appears in a statute, it was put there for a purpose and must not be disregarded. [36] I therefore respectfully agree with the finding of the SCIT that s 60AA prevails over s 33(1) of the ITA in the context of Takaful business based on the maxim of generalia specialibus non derogant. [37] Having said that, the next question to be determined is whether the SCIT had correctly concluded that the appellant was negligent within the meaning of s 91(3) of the ITA. As alluded to earlier, the conclusion of the SCIT was solely premised on the S/N mHgOAs0/XUqjvpCjxFNmbw 13 **Note : Serial number will be used to verify the originality of this document via eFILING portal ground that the appellant claimed for commission expenses incurred by the appellant in the course of its Takaful business. [38] It is not in dispute that the Appellant's tax returns were filed within the statutorily prescribed time frame. It is also equally not in dispute that the appellant duly provided the documents requested by the DGIR despite the fact that the tax audit was conducted six years upon the expiration of YAs 2008 to 2010. [39] The only fault of the applicant, if at all, is in the different interpretation of the relevant provision of the law. The appellant engaged and took professional advice from an independent tax firm. At all material times, the appellant was under the impression that the commission expenses were covered by the basket provision of s 33(1) of the ITA. It is an erroneous impression and but a reasonable one nevertheless. [40] In Piramid Intan, Mairin Idang JC (now J) held that: The differing interpretation of whether the payments made are capital or revenue expenditure is very much an issue in this case. And here the appellant had interpreted that they were entitled to treat the payments they made to STIDC as revenue expenditure which if their interpretation was correct would be allowable as deduction and I may also add that the appellant in this case had relied on professional tax consultant. S/N mHgOAs0/XUqjvpCjxFNmbw 14 **Note : Serial number will be used to verify the originality of this document via eFILING portal In any event, there was no finding of any deliberate submission of incorrect returns on the part of the appellant by the SCIT. [41] With respect, a reasonably different interpretation of the relevant provisions in the ITA can hardly be held as negligence within the meaning of s 91(3) of the ITA. There is nothing in the notes of proceedings that shows that there was a breach of the duty of care on the part of the appellant. [42] For the aforesaid reasons, I hold that the SCIT had erred in concluding that the appellant was negligent. The DGIR had not successfully discharged its burden of proof under s 91(3) of the ITA in relation to the NAAs for YAs 2008 to 2010. [43] For the same reason under s 113(2) of the ITA, the SCIT had also erred in concluding the DGIR was right in imposing the penalties under s 113(2) of the ITA. [44] There was no proof of the existence of some form of intentional wrongdoing on the appellant’s part. Findings [45] For the reasons aforesaid, the finding of this Court is as follows: (a) The commission expenses incurred by the appellant in the Shareholders’ Fund for the YAs 2008 to 2013 to earn the Wakalah Fee from the General Takaful Fund are not deductible as the S/N mHgOAs0/XUqjvpCjxFNmbw 15 **Note : Serial number will be used to verify the originality of this document via eFILING portal expenses of the Shareholders’ Fund under s 33 of the ITA. (b) In the absence of any proof of intentional wrongdoing on the appellant’s part the DGIR had not successfully discharged its burden of proof under s 91(3) of the ITA. There was no legal basis for the DGIR to exercise his discretion in imposing a penalty against the appellant under s 113(2) of the ITA for the YAs 2008 to 2013. [46] The appeal is allowed to that extent. [47] I am making no order as to costs. Tarikh: 15TH NOVEMBER 2022 (WAN AHMAD FARID BIN WAN SALLEH) Hakim Mahkamah Tinggi Kuala Lumpur S/N mHgOAs0/XUqjvpCjxFNmbw 16 **Note : Serial number will be used to verify the originality of this document via eFILING portal Pihak-pihak: Bagi Pihak Pemohon: S. Saravana Ms. Yap Wen Hui ROSLAN DAHLAN SARAVANA PARTNERSHIP (KUALA LUMPUR) Bagi Pihak Responden: Ms. Noor Kamaliah Mohamad Japeri (SRC) Ms. Nur Aina Mohd Jaffar (RC) LEMBAGA HASIL DALAM NEGERI (LHDN) S/N mHgOAs0/XUqjvpCjxFNmbw 17 **Note : Serial number will be used to verify the originality of this document via eFILING portal