MALAYSIAN INSTITUTE OF TAXATION

SEMINAR: TAX CASES AND CRITICIAL ISSUES

31^st MAY, 2006, PAN PACIFIC HOTEL, KUALA LUMPUR

 

RECOVERY OF TAXES

THE AUTHORITIES ENFORCEMENT
STRATEGY

by

W.S.W. DAVIDSON

 

L.L.B (Hons) Belfast, FCIArb, FMIArb Barrister at law,
Grays Inn Advocate and Solicitors Azman Davidson & Co, Kuala Lumpur

 

The Right of Appeal

1.         When an assessment is issued against a taxpayer, the tax payer is afforded a right of appeal to the Special Commissioners of income tax by s. 99 of the Income Tax Act (ITA).

2.         From the Special Commissioners, he can take the matter to the High Court by way of appeal and from the High Court to the Court of Appeal. However there is currently no further right of appeal to the Federal Court.

                  See:     Ketua Pengarah Hasil Dalam Negeri v. Sabah Berjaya Sdn Bhd (unreported judgment in Federal Court Civil Appeal No. 08-43-1999(S) dated 06.06.2000).

3.         This all sounds to be good, but there is a catch. The rule is 'pay first and appeal later', except in the event that the Director General agrees in the exercise of his discretion to a stand over of the tax.

The Collection mechanism

4.         The Director General is armed with powerful weapons in the form of the trilogy of sections 103, 106 and 142. In short summary, these provisions state as follows:-

S. 103(1)

"… tax payable under an assessment for a year of assessment shall be due and payable on the due date, whether or not that person appeals against the assessment."

S. 106

"(1)      Tax due and payable may be recovered by the Government by civil proceedings as a debt due to the Government'.

"(3)      In any proceedings under this section the Court shall not entertain any plea that the amount of tax sought to be recovered is excessive, incorrectly assessed, under appeal or incorrectly increased …".

S. 142(1)

"In a suit under section 106 the production of a certificate signed by the Director General giving the name and address of the defendant and the amount of tax due from him shall be significant evidence of the amount due and sufficient authority for the Court to give judgment for that amount."

�.5.        By using these three sections, the DG can:-

�.(a) launch a civil action for recovery of the tax as soon as the 30 day period for payment of the assessment has expired;

�.(b) file an application for summary judgment for the amount stated in the assessment;

�.(c) produce a certificate to the Court certifying the amount of tax due under the hand of the Director General, pursuant to s. 142(1) of the ITA;

�.(d)      take judgment for the amount of tax.

6.         The taxpayer is debarred by s. 106(3) from arguing the case on its merits since he is statutorily forbidden from claiming that the assessment is excessive incorrectly assessed or increased or under appeal.

7.         Over the years, aggrieved taxpayers have made ingenious attempts to defeat the apparently clear but draconian wording of these sections. These cases include:-

Government of Malaysia v. DC [1973] 1 MLJ 161 (High Court).

Sun Man Tobacco Co. Ltd v. Government of Malaysia [1973] 2 MLJ 163 (Federal Court).

Arumugam Pillai v. Government of Malaysia [1975] 2 MLJ 29 (Federal Court).

Government of the Federation of Malaysia v. Lee Tain Tshung [1992] 1 MLJ 629 (High Court).

8.         In all these cases the taxpayer was unsuccessful. The words meant what they said, however much sympathy the Judge may have had for the taxpayer. The position was graphically summarized by Gill CJ in the Arumugam Pillai case at p. 29 when he said "the court to put it bluntly, had only one function to perform ,and that was to give judgment in favour of the Government": or in other words to act as a rubber stamp.

9.         In the DC case, Chang J was clearly greatly troubled by the argument raised by the taxpayer as to the arbitrary nature of the assessment, the ruinous effect of the judgment on the defendant and the slow process of the appeals procedure to the Special Commissioners; he nevertheless held he had no choice but to reject the defendants application for striking out. However, in the course of his judgment, Chang J opened up one possible avenue for redress which was later to bear fruit in the following passage of his judgment at p. 164:

 

"But my attention was draw in another case to an Australian decision that would appear to decide that the High Court has certain powers of supervision and I readily admit that it is this case that had caused so much concern. It was the case of D.F.C. of T.(W.A.) V. Australian Machinery and Investment Co. Ltd where the court held it had powers to grant a stay of proceedings if it saw fit. Lathan C.J. said –

"My brothers Rich, Dixon and Williams and myself are of opinion that the contention that there is no jurisdiction to grant a stay in these proceedings by reason of the provisions of the Income Tax Assessment Act section 201 and the associated sections should not be accepted. We are of the opinion that there is jurisdiction to grant a stay of proceedings but that in considering any application for a stay the policy of the Act as stated in section 201 is a matter to which great weight should be attached."

Now the Australian Tax and Social Services Contribution Assessment Act 1936 – 1963 contains in section 201 provisions almost identical with section 82 of the 1947 Ordinance or section 103(1) of the 1967 Act, and for a time, I considered that the present case might well be a case in which there would be justification in acceding to the application."

The Stay provision

10.       The suggestion that the hardship to the taxpayer could be alleviated by the use of a stay first bore fruit in the Supreme Court case of Chong Woo Yit v. Government of Malaysia [1989] 1 MLJ 473. In that case summary judgment was entered against the taxpayer under the trilogy of sections and the taxpayers appeal to the High Court Judge in chambers and to the Court of Appeal. However the Court of Appeal took note of the fact that after four years, the taxpayer's appeal to the Special Commissioners of Income Tax had still not been heard, and ordered a stay of execution until determination by the Special Commissioners of the tax payers appeal against the assessments raised by him, exercising the Court's inherent jurisdiction.

11.       The same issue came up again before the Supreme Court in Kerajaan Malaysia v. Jasanusa Sdn Bhd [1995] 2 AMR 1477. In that case the Government had obtained summary judgment on the usual basis, but the taxpayer succeeded in obtaining a six months stay to enable it to provide the voluminous information which the Government sought. Later the taxpayer applied for an extension of the stay, one of the grounds being that the Director General had still not referred the taxpayers appeal to the Special Commissioners. The High Court Judge then granted an extension of the stay for the purpose of facilitating the taxpayers appeal to the Special Commissioners. In dismissing the Government's appeal, Edgar Joseph Jnr, FCJ at p. 1493 held that:-

"… in our view neither 103(1) nor 106(3) bars a Court in appropriate circumstances from exercising its inherent powers of granting a stay, even in a tax case",

and he cited with approval the decision in the Chong Woo Yit case referred to above. In the course of his judgment, Edgar Joseph Jnr said this about the exercise of the discretion to stay:-

"Matters of this nature involve, inter alia, balancing the need of the government to realise the taxes and the need of the taxpayer to be protected against arbitrary or incorrect assessments. The court should be ever vigilant against taxpayers who may use the procedure of the court, like applying for a stay of execution, to defer or postpone payment of his just dues or to abscond by migration or to dissipate the assets to defeat the judgment. The court should also bear in mind the possibility of arbitrary or incorrect assessments, brought about by fallible officers who have to fulfil the collection of a certain publicly declared targeted amount of taxes and whose assessments, as a result, may be influenced by the target to be achieved rather than the correctness of the assessment. It should not be much of a difficulty for the court to see the genuineness of an appeal or the willingness of the taxpayer to comply with all reasonable requests of the director, if they exist, and thus move the court to stay the execution. Having so apprised myself of the legal principles, I will now apply them to the facts and deliver my decisions."

12.       It can therefore be said that it is now firmly established in Malaysian law that, while a taxpayer may not be able to prevent the rubber stamping effect of s. 103 and 106 and the granting of a judgment he does have a chance of obtaining a stay of execution of the judgment, particularly if he is vigorously pursuing his appeal to the Special Commissioners with a view to getting the assessment quashed. Other factors may also be taken into account including the arbitrary nature of the assessment.

Judicial Review Remedy

13.       There is another potential remedy which is open to the taxpayer in suitable cases, that is through the ancient prerogative writ of Certiorari which is part of Malaysian law through the Civil Law Act, Courts of Judicature Act and Order 53 of the High Court Rules. Under Order 53 the Court has power to set aside assessments where they have been raised in an arbitrary manner or where there has been unfairness or abuse of power. In recent years the doctrine of legitimate expectation has been invoked to provide an effective remedy against public authorities. The remedy is not of course confined to actions of the Inland Revenue Board, but clearly the IRB comes within its purview.

14.       The doctrine was explained by Bingham LJ in R v. Inland Revenue Commissioners ex parte MFK Underwriting agents Ltd [1991] 1 WLR 1545 in the following passage:-

"In so stating these requirements I do not, I hope, diminish or emasculate the valuable, developing doctrine of legitimate expectation. If a public authority so conducts itself as to create a legitimate expectation that a certain course will be followed it would often be unfair if the authority were permitted to follow a different course to the detriment of one who entertained the expectation, particularly if he acted on it. If in private law a body would be in breach of contract in so acting or estopped from so acting a public authority should generally be in no better position. The doctrine of legitimate expectation is rooted in fairness. But fairness is not a one-way street. it imports the notion of equitableness, of fair and open dealing, to which the authority is as much entitled as the citizen. The revenue's discretion, while it exists, is limited. Fairness requires that its exercise should be on a basis of full disclosure. "

15.       The words 'fairness is not a one-way street' are important. This is not a suitable remedy for a taxpayer who has been 'cooking the books' for years and finally being caught. While the taxpayer has a legitimate expectation that the Revenue Authorities will act fairly, the Revenue Authorities equally have a legitimate expectation that the taxpayer will be candid and make full disclosure. If he fails to do so, he should expect no relief from the Court.

16.       The doctrine of legitimate expectation in the tax field reached its high water mark in the English Court of Appeal of R v. Inland Revenue Commissioners ex parte Unilever [1996] STC 681, where the tide finally turned in favour of the taxpayer and there was no hint of non disclosure or misleading statements by them. In short, they had put all their cards on the table. The facts of this case are set out in the headnote to the report which reads as follows:-

 

"The first applicant was the parent company of a large group of companies worldwide. In recognition of the complexity of its tax affairs, an administrative procedure was adopted whereby the Revenue sent a schedule to the applicant seeking an estimate of its likely taxable profits. The schedule was laid out in four columns headed (1) company tax reference; (2) company name; (3) date of year end and (4) amount/notes. The first three columns were completed by the Revenue and in column (4) the applicant would record either 'nil profits', 'loss' or the amount of the profit. It was the group's practice to deduct trading losses from profits of the current year.

 

However, while the schedule was amended in 1987 to incorporate columns headed group relief, double tax relief and advance corporation tax, at no time was there a column headed loss relief. Hence in giving its estimate of taxable profits for column (4) the applicant deducted from estimated total profits the amount of expected trading losses. However, it did not state explicitly that such losses had been so deducted nor did it make an express claim to loss relief pursuant to s. 393 of the Income and Corporation Taxes Act 1988. An assessment based on the information contained in the schedule would be raised and then appealed to keep the position open. Tax was paid in accordance with the estimated assessment and after the applicant's accounts had been finalised, tax computations containing express indications that loss relief was to be claimed, would be prepared and sent to the Revenue. The appeals would be determined by agreement by reference to the finalised tax computations and any outstanding tax paid (or repaid). On thirty occasions over a period of more than 20 years (which represented a quarter of all loss relief claims) the tax computations had been submitted more than two years after the end of the accounting period to which they related but the Revenue had not refused the applicant's claims to loss relief against profits of the current year on those occasions. However, for the three accounting periods ended 31 December 1986, 1987 and 1988 the Revenue did so refuse to allow the applicant loss relief against profits of the current year on the ground that its claims were not made within the statutory time limit required by s. 393(11) since the tax computations for those accounting periods had been submitted more than two years after the end of each respective accounting period. The applicant sought judicial review of the Revenue's decision to refuse its claims on the grounds, inter alia: (i) that, as the applicant had submitted the schedules timeously, valid claims had been made within the two-year time limit; alternatively, (ii) that the Revenue could not in fairness, having regard to its conduct in the past, treat the claim as time-barred; or (iii) that the Revenue ought to have exercised their discretion to allow late claims in the applicant's favour. Macpherson of Cluny J held that the applicant had not made a valid claim within the time limit but granted the relief sought on the grounds that the Revenue could not in fairness, having regard to their past conduct, treat the claim as time-barred and that the Revenue should have exercised their discretion in the applicant's favour. The Crown appealed and by a respondent's notice the applicants cross-appealed against the judge's decision on the first point. (The facts and issues of the second application relating to a subsidiary company of the first applicant were not materially different.)"

On the facts it was held on the second issue that:-

"While, in the instant case, there had been no clear unambiguous and unqualified representation by the Revenue, such as had been held previously to be necessary before it could be decided that it would be unfair to permit the Revenue to discharge their duty of collecting taxes, the following points led cumulatively to the conclusion that on the unique facts of the instant case to reject the applicant's claims in reliance on the time limit, without clear and general advance notice, was so unfair as to amount to an abuse of power. (i) The categories of unfairness were not closed, and precedent should act as a guide not a cage. Each case had to be judged on its own facts, bearing in mind the Revenue's unqualified acceptance of a duty to act fairly and in accordance with the highest public standards. (ii) The taxpayer's entitlement to deduct trading losses from other profits in the same year, although provided by statute, gave effect to a very basic principle. A tax regime which did not provide such an entitlement could scarcely be regarded as equitable. (iii) While a statutory provision was not to be overridden or disregarded simply because it was regulatory, it was not irrelevant in considering the overall picture that the time limit provision under consideration in the instant case was regulatory. (iv) While the Revenue had not formally exercised their power to determine the form in which a claim for loss relief had to be made, they had (by sending the applicant blank profit estimate schedules over the 20-year period) indicated the basic information they required at the first stage. Moreover, when amended in 1987, information was thenceforth sought on other reliefs but not on loss relief. (v) Had the Revenue indicated a wish to be told when trading losses were being deducted from profit in the estimated profit schedules the applicant could have complied without difficulty, cost or inconvenience. Giving that information would have involved no disadvantage to the applicant and no advantage to the Revenue. (vi)The consensual procedure adopted by the Revenue and the applicant operated harmoniously for years, to the benefit of both the applicant and the public. (vii) The applicant's almost invariable practice was to set off trading losses against other profits in the same year and therefore would not have been unexpected to the Revenue. (viii) The evidence did not suggest that either the applicant or the Revenue consciously disregarded the time limit rather that there had been a mutual oversight. (ix) If the Revenue's argument was correct, the applicant was seriously prejudiced by the fact that the point was taken now and not before. (x) On an objective but untechnical view, it would be hard to regard the applicant as owing £17m additional tax to the Crown. If that tax was due it could fairly be regarded as an adventitious windfall, accruing to the Crown through the understandable error of an honest and compliant taxpayer, shared over many years by the Revenue. The judge's conclusion had therefore been correct and the appeal would be dismissed. R v IRC, ex p MFK Underwriting Agencies Ltd [1989] STC 873 and Preston v IRC [1985] STC 282 considered.

The threshold of public law irrationality was notoriously high. Moreover, what might seem fair treatment of one taxpayer might be unfair if other taxpayers similarly placed had been treated differently. And in all save exceptional circumstances the Revenue were the best judge of what was fair. It had not, however, been suggested that the detailed history of the instant case had any parallel. The circumstances were, literally, exceptional. It was inconceivable that any decision-maker fully and fairly applying his mind to that history could have concluded that the legitimate interests of the public were advanced, or that the Revenue's acknowledged duty to act fairly and in accordance with the highest public standards was vindicated, by a refusal to exercise discretion in favour of the applicant. That refusal, if fully informed, was so unreasonable as to be, in public law terms, irrational. Council of Civil Service Unions v Minister for the Civil Service [1985] 1 AC 374 applied. Preston v IRC [1985] STC 282 considered."

17.       The importance of this case lies in the fact that the taxpayer was granted judicial review notwithstanding that there was no unqualified representation but only a course of conduct consensually adopted over a course of many years. In this sense the doctrine of legitimate expectation may be considered as even wider than the sister doctrine of estoppel.

18.       In Malaysia an unsuccessful attempt to sue judicial review to quash a tax assessment was made in the case of Government of Malaysia v. Jagdis Singh [1987] 2 MLJ 185. But the remedy of legitimate expectation was given a full stamp of approval by the Federal Court case of Majlis Perbandaran Pulau Pinang v. Sy Bekerjasama-sama Serbaguna Sungai Gelugor dengan Tanggungan [1999] 3 MLJ 1 which applied legitimate expectation principles to grant judicial review in a planning case. The principles are widely stated and there is no logical reason why the English precedents should not be followed by the Malaysian Courts against the Revenue in tax cases where the circumstances justify. In fact the tax case of MFK is referred to in the judgment.

19.       This case is also of importance in clarifying the applicants right to opt for judicial review in lieu of statutory appeal procedures, in appropriate circumstances particularly where generalized principles of public law are involved. In tax cases, this means that the taxpayer is unlikely to be penalized, as he was in the Jagdis Singh case, for choosing to take the issue direct to the High Court rather than to take the issue to the Special Commissioners. In answer to the submission that the Respondent should first have exhausted its domestic statutory remedies, Edgar Joseph FC.J gave guidelines which are summarized in the headnote as follows:-

"There are certain classes of cases such as planning, employment and tax cases whereby a statute provides for a specialised appeal procedure, and so the courts understandably may not grant judicial review. However, this is always subject to the grant of review in certain cases, for example, where an applicant is able to demonstrate excess or abuse of power, or breach of the rules of natural justice. Though planning cases come under an extensive appellate structure provided for by the Town and Country Planning Act 1976, this does not prevent the Court in appropriate cases from entertaining an application for judicial review in a planning case where the statutory scheme provides no equally convenient remedy (see pp 40B-F).

In the present case, main grounds on which the Society sought judicial review were based on distinct principles of public law or general issues of law, in particular, the Society had clearly raised an arguable case that the Council, a public body, had acted unfairly, abused its powers and had raised the general question of the extent to which representations can bind public bodies. These grounds involve a consideration of generalised principles of public law developed by the Courts to control the exercise of power by public authorities, and as such, judicial review would be the appropriate route to follow rather than appeal. Judicial review in this case, rather than appeal, would be the appropriate route to follow, because by their application, the Society had raised issues of law of public importance, going beyond the significance of the case itself (see pp 40H-41B).

The issues which arose for decision were based substantially, if not wholly, on established or admitted facts, and so the only question was their legal significance. The greater speed of judicial review as compared to appellate procedures is a factor which can rightly be put in the balance and weighed and tip the balance in favour of judicial review. The Court is concerned here with a planning case involving a housing project, the object of which, was to provide homes for members of a cooperative society belonging to the less affluent section of society. It was not disputed that many of the flats to be erected had been sold. In such a situation, a swift means of redress was indicated and judicial review would be the natural choice of remedy rather than appeal (see pp 41E-G)."

20.       The conclusion is clear. The way is now open for tax practitioners to consider in appropriate cases advising clients to take the judicial review option to quash an assessment on the grounds that the Revenue has acted in a manner which is so unfair as to amount to an abuse of power. The circumstances which may give rise to this remedy are many and various and cannot be straight jacketed into fixed categories. At least since the Unilever case, there is no absolute requirement to rely on a representation and a course of conduct acquiesced in over a period of years may be sufficient.

21.       One area where the judicial review remedy is particularly appropriate is where additional assessments have been raised retrospectively. Typically a provision of the ITA has been interpreted and applied in a particular way or as in the Unilever case a regular practice has developed within the managerial discretion of the IRB. Then a new officer comes along and is of a different opinion on the interpretation of the section of the Act, so disapproves of the past practice. He therefore seeks to change it. This is an acceptable practice if applied prospectively for the future, but an unfair practice if it is applied retrospectively by raising additional assessments to collect tax for past years.

22.       One unreported case in which we have been recently involved illustrates this point. The tax payer carried on business both in Malaysia and Singapore and had assessable income in both jurisdictions. Under the double taxation agreement between Malaysia and Singapore, the tax authorities in both jurisdictions had agreed on a formula for apportionment of the income which had been applied without objection for many years. Then the Malaysian IRB decided that the formula unduly favoured Singapore, and acted unilaterally to abrogate the formula and back tax the taxpayer for several years under a new unilateral formula. The proper course would have been to take up the matter with the Singapore Authorities for renegotiation of the formula, or at least only apply their new unilateral formula prospectively. As it was, the taxpayer became subject to double tax, because there was no way he would be able to recover any part of the tax paid to Singapore for the past years under the previously agreed formula.

23.       The taxpayer applied for judicial review and was granted leave to apply for certiorari at an ex parte hearing under Order 53 and at the same time the Court granted a stay on enforcement of the assessments. After this the case was quickly settled. This case illustrated the effective use of judicial review in appropriate circumstances.

 

Extension of Judicial Review Remedy to Errors of Law

24.       It was open to seek a judicial review on the ground that the decision making authority lacked jurisdiction. However in the case of Syarikat Kenderaan Melayu Kelantan Bhd v. Transport Workers Union [1995] 2 CLJ 748, a landmark ruling was made by the Court of Appeal in an Industrial Court case, the principle of which would also undoubtedly apply to tax cases. In that case the Court of Appeal upheld the decision of the High Court which had quashed a decision of the Industrial Court on the basis of a pure error of law on the interpretation of a statutory provision. The Court of Appeal held that, if there is an error of law upon which the award was based, such error whether of interpretation or otherwise must necessarily be without jurisdiction or in excess of jurisdiction since no authority has jurisdiction to commit an error of law.

25.       This decision has opened up the possibility of applying for judicial review to quash an assessment in cases where there is no suggestion of unfair treatment or abuse of power, but purely based on the contention that the assessment has been raised on the basis of an error of law.

26.       The attraction of the judicial review remedy is its speed. Procedural wise, the taxpayer, who feels that an assessment has been raised against him, which is unfair, without jurisdiction or based on a clear error of law, may pre-empt any attempt by the Revenue to rely on the trilogy of sections 103, 106 and 142 to collect payment by applying swiftly for judicial review. It is therefore in the nature of a pre-emptive strike.

27.       In the year 2000, amendments were made to Order 53 which have also greatly extended the use of the judicial remedy. The scope of the relief available was extended to the seeking of declarations. The remedy of seeking a Court declaration is an old remedy most commonly used in the Chancery division of the High Court in private law for example to determine the meaning of a disputed will where different possible interpretations can be canvassed. Traditionally declarations have been sought through originating summons in many and varied circumstances. One rigid rule is that the issue of law on which the declaration is sought must be a real live issue and not an academic one. Under the amended rule 53, a declaration can now be sought as a separate or alternate remedy in judicial review proceedings to obtain a ruling on an issue of law which has crystallized in correspondence but not yet into a formal decision.

28.       The procedure laid down by Order 53 of the High Court Rules provides for a two tiered application:-

(a) the first tier is an ex parte application to the High Court for leave to issue the writ of certiorari or other judicial review remedy. At this stge the Court has three concerns:-

�.(i) whether the application has been made promptly i.e. within 40 days from the date when the grounds arose or if not whether there is good reason for an extension of time;

�.(ii)      whether a prima facie case is shown for the granting of leave;

(iii)      if leave is given, whether a stay should be granted.

The major attraction of this route is that it affords a quicker and easier way of obtaining a stay on the assessment complained of as well as the opportunity for an early disposal of the case.

29.       What are the limits of the judicial review remedy and to what extent can it be used to by-pass the statutory appeal procedure to the Special Commissioners?

30.       First it must be emphasized that judicial review is always a discretionary remedy, and a taxpayer will have to have a good reason for failing to exhaust domestic appeal procedure provided by the ITA before coming to Court. Nevertheless it is by no means an absolute rule that the taxpayer must exhaust his domestic remedies. The passage from the judgment of Edgar Joseph Jnr FCJ in Majlis Perbandaran Pulau Pinang quoted above gives valuable guidelines and shows a more liberal approach; it is considered that Jagdis Singh's case, where there was a clear abuse of power, would most likely be decided differently today.

31.       Generally, as indicated by Edgar Joseph Jnr. FCJ, the judicial review remedy is the most appropriate one where the complaint is the unfair exercise of power or other legitimate expectation argument. It may also be the most appropriate remedy where there is a jurisdictional issue and where the whole issue can be disposed of by an interpretation of a point of law central to the dispute over of the assessment. But the judicial review remedy is no substitute for the appeal to the Special Commissioners, where issues of fact are involved. It is inappropriate to apply for judicial review where the case will turn on factual findings or where the point of law will not be determinative on the question of whether the assessment shall stand.

Collection of Penalties

�.32.      We need to differentiate between:-

�.(i) penalties imposed for late payment of assessments under s. 103 of the ITA;

�.(ii) penalties imposed by the Director General upon conviction of an offence, e.g. s. 112(1), which deals with failure to file returns and 113(1), which deals with the filing of incorrect returns;

�.(iii) the imposition of penalties under s. 112(3) and 113(2) when the Director General imposes a penalty for failure to file a return or filing of an incorrect return without initiating a prosecution in the Courts.

�.33.      In the case of penalties for late payment under s. 103, the position is quite clear. Under s. 103 (3), (4), (5) or (6), it is specifically provided that the penalties shall be recoverable as if they were tax due and payable under the Act. It therefore follows that the Director General can recover the amount of the penalties in the same way as the amount of the initial assessment using the trilogy of sections 103, 106 and 142.

34.       As to (ii) and (iii) it will be noted that both in the case of s. 112 (1) and s. 113 (1), where a prosecution is initiated, the offence is not an offence of strict liability. In the case of:-

-s. 112(1), the taxpayer has a good defence if he can show a reasonable excuse for his default in filing a return;

-s. 113(1), the taxpayer has a good defence if he can show the incorrect return or information was made or given in good faith,

but in both cases the burden of proving this defence lies on the taxpayer.

35.       However in both cases, the Director General has an alternative to prosecution, which may be more practical and acceptable to both parties, in that the DG is spared the burden and cost of prosecution, and the taxpayer the stigma of a criminal conviction. Under s. 112(3) and s. 113(2), the DG may in lieu of prosecution require the taxpayer to pay a penalty up to a stipulated amount.

36.       It should be noted however that in s. 113(3), 'the reasonable excuse' defence and in s. 113(2), the 'good faith' defence have been omitted. Several questions arise from this.

37.       Firstly, can the taxpayer when faced with the imposition of a penalty under s. 112(3) or s. 113(2), and who feels strongly that he has a 'reasonable excuse' or good faith argument, refuse to pay the penalty and insist on prosecution? In my view the discretion whether to go for s. 112(1) or s. 112(3) or the equivalent provisions of s. 113(1) or s. 113(2) lies with the Director General and the taxpayer has no such right.

38.       Secondly, how is the penalty imposed under s. 112(3) or 113(2) enforced? This issue was discussed and decided in the High Court case of Government of Malaysia v. Preston Corporation (M) Sdn Bhd [1982] 1 MLJ 293. In that case it was pointed out that penalties imposed under these two subsections are to be collected as if they were part of the tax payable by that person for the purposes of s. 103 and s. 106 of the ITA, and that therefore s. 106(3) applied to debar the taxpayer from raising any plea in Court proceedings filed to collect the penalty that the penalty was incorrectly imposed. Hence the Revenue was entitled to judgment as if the claim was for the tax itself.

39.       Thirdly, what remedies are available to a taxpayer who wishes to contest the imposition of a penalty under s. 112(3) or s. 113(2)? This question rose in the case of Kim Thye v. Ketua Pengarah Hasil Dalam Negeri reported in the High Court in [1992] 1 MSTC 3259 and, on appeal to the Supreme Court under the name Ketua Pengarah Hasil Dalam Negeri v. Kim Thye [1992] 4 CLR 2078. The background to this case is instructive.

40.       The taxpayer Kim Thye moved to appeal against the imposition of a penalty under s. 113(2) by lodging an appeal under s. 99 of the ITA, but the Director General rejected the appeal to the Special Commissioners on the ground that the penalty was not 'an assessment' to which s. 99 applied. The taxpayer frustrated by this, then moved by way of judicial review to the High Court Muar for the prerogative write of Mandamus for an order directing the Director General to reefer the taxpayer's appeal to the Special Commissioners. The case was decided on a pure point of law, namely whether the imposition of a penalty imposed by s. 113(2) was appealable to the Special Commissioners under s. 99 of the ITA. The Director General rather overplayed his hand by arguing that the penalty was not an 'assessment' under s. 99 and therefore there was no right of appeal, and further that s. 113(2) contained an unfettered discretion in the DG and that the question of good faith was irrelevant. At both levels, the Court found for the taxpayer on the grounds that the imposition of the penalty should be construed as an assessment and therefore appealable to the Special Commissioners.

41.       Both Courts reacted strongly to the DG's contention that the discretion was absolute under s. 113(2). At the High Court, Richard Talalla J expressed the following view:-

"As I see it subsection 1 of sec. 113 is couched in mandatory terms but conditioned whereas subsec. 2 is expressed in terms which are discretionary. The director General may require payment of the penalty. He is not bound to require such payment. He is given a discretion, a discretion which to my mind he cannot exercise at whim or fancy but after due consideration of all relevant facts and circumstances. It seems to me that the Director General would have to consider whether the incorrect return or incorrect information was respectively made or given dishonestly with intention to evade payment of tax or possibly even negligently and then, and only then, mete out the punishment which under subsection 2 is a penalty equal to the amount of tax which has been undercharged in consequence of the incorrect return or incorrect information and so on. But that is not all. Under sec. 124(3) the Director General is again clothed with a discretion to abate or remit the penalty and again in this respect he must likewise act. It can therefore be said, and I do so hold, that the Director General in considering all the said facts and circumstances and thereafter determining a sum which he considers fair and proper to impose, by way of penalty, is in truth and effect making an assessment."

42        The Supreme Court confirmed the decision of the High Court, decisively rejecting the Revenue's argument that there was an unfettered discretion quoting from Raja Azlan Shah J in Pengarah Tanah dan Galian, Wilayah Persekutuan v. Sri Lempah Enterprise Sdn Bhd [1979] 1 MLJ 147 to the effect that there is a stringent requirement that a discretion should be exercised for a proper purpose and that it should not be exercised unreasonably.

43.       It can therefore safely be said that a taxpayer faced with a penalty under s. 113(2) or the analogous s. 112(3), has a right to argue his case before the 21 Special Commissioners and from there up to the High Court and Court of Appeal and that the Special Commissioners are bound to critically examine the circumstances to determine whether the Director General has exercised his discretion properly.

44.       The Supreme Court decision does not however express any view on the question which Talalla J left open, i.e. whether a finding of negligence without dishonesty is sufficient ground to impose a penalty. My own view is that our higher courts would be likely to uphold the view that negligence would be a sufficient basis for imposition of a penalty under s. 113(2); otherwise if a finding of dishonesty was required, the threshold under s. 113(1) and s. 113(2) would be virtually the same.

Recovery of Debts due to the Government other than Tax and Penalty

45.       It is clear from the recent case of Mui Berhad v. Ketua v. KPHDN & Kerajaan Malaysia [2005] MSTC 4, 192 that not all statutory claims under the ITA are in the same privileged position as claims under assessments and penalties. That case applies the earlier case of KPHDN v. Rheem (Far East) Pte Ltd, the facts of which are fully set out in the judgment in the latter case. Both these case concern requisitions for payment under s. 108(9) of the ITA, which applies where a company has distributed by way of dividends to its shareholders an amount in excess of the company's tax credit. In that situation the DG may serve a written requisition on the company to pay the excess, which shall be a debt due from the company to the Government payable forthwith to the DG upon service of the requisition. In Rheem's case, the Company sought to appeal against the requisition to the Special Commissioners under s. 99. The DG contended that the Special Commissioners had no jurisdiction to hear the appeal, but the Special Commissioners overruled the objection and issued a Deciding Order that they had jurisdiction. The DG then applied to quash the decision of the Special Commissioners by judicial review under the prerogative writ of Certiorari.

�.46.      Amel J held in favour of the DG holding that:-

�.(i) the amount of the requisition is not a tax but a 'debt due and payable' on service of the requisition;

�.(ii) a requisition is not an assessment because it is not in respect of tax, but a debt due and payable.

�.(iii) the Special Commissioners erred in law in holding that they had jurisdiction and quashed the Deciding Order.

47.       It is not clear what transpired in Rheem's case after the Court ruling, and whether the DG finally recovered the requisition, but the recent case of Mui Berhad v. KPHDN & Kerajaan Malaysia [2005] MSTC 4192, provides a neat twist. In this case the DG took eleven years to raise the requisition from the time when it could have done so. The taxpayer claimed that the debt was statute barred and filed for judicial review. The DG contended that there was no tax bar to the claim because, under the provisions to s. 33 of the Limitation Act, the Act does not apply to proceedings by the Government for recovery of tax. The taxpayer on the other hand contended that the proviso did not apply since the claim under s. 108 was not a claim for a tax and further that the appropriate tax bar was contained in s6(1)(d) of the Limitation Act which applies to actions to recover any sum recoverable by virtue of any written law other than a penalty or forfeiture. Dato' Md Raus Sharif J ruled in favour of the taxpayer holding the debts were time barred under s. 6(1)(d) of the Limitation Act.

48.       Assuming no time bar, how does the DG recover the amount of the requisition? It is presumably by way of Civil Action, but, as it has been judicially held that it is not a tax, s. 106 does not apply and hence the DG cannot take advantage of s. 106(3) to debar a plea that the amount is incorrectly assessed etc. Also the DG has no power to issue a certificate under s. 142(1). Hence the taxpayer is in a stronger position to defend the claim on its merits, quite apart from having the right to rely on the Limitation Act.

49.       Although I have not come across any cases on this, it seems that it could well be argued that the same position will apply by analogy to cases where a resident payor has failed to make payment to the Government of any withholding tax due under s. 107A(1), s. 109(1), s. 109B (1) and other such provisions. In all these cases it is provided by s. 107A(2), s. 109(2) and s. 109B(2) that the amount increased by 10% shall be a debt due from him to the Government. Can an aggrieved resident payor appeal under s. 99? It would seem not as it would not be an assessment following the argument in s. 108. Would the proviso to s. 33 apply to overrule any time bar, and would any proceedings brought be proceeding for recovery of tax due so that the DG could claim the benefit of s. 106(3) and s. 142(1)? Here the argument is less clear because the unpaid withholding tax claimed from the resident payor is in fact a tax, although it is a tax on the overseas service provider which is payable only by the resident payor as a collecting agent.