Malaysia Taxation

TITLE: A REVIEW OF JOURNAL AND CASES [Investment Holding Company]

[Ketua Pengarah Hasil Dalam Negeri v. Multi-Purpose Holdings Bhd (2002) 1 MLJ 22 ]
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Malaysia Taxation

TABLE OF CONTENT

Tittle Page
1. Introduction 3

2. Text or body matter - Summary of Case:

a. Introduction 4-6

b. The Fact of the Case 7-9

c. Issue of case 10-11

d. Decision and Discussion: 12-16

3. Conclusion 17

Reference 18

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Malaysia Taxation

1. Introduction

In order to understand the Advanced Malaysia Taxation, all the student are
requiring to study a journal or a case from one of the specialized industries for learning
purpose. There are few specialized industries in the lecture plan which included unit trust,
investment holding companies, property development, shipping and airline operations,
insurance companies, leasing companies, bank and financial institutes.

After doing research and discussing among the group members, we decided to
choose the investment holding industry and the case, Ketua Pengarah Hasil Dalam Negeri
v. Multi-Purpose Holdings Bhd [2002] 1 MLJ 22 is chosen as our case to discuss in this
assignment. The reason why this case and industry are selected is because we wanted to
learn more information about the investment holding industry and we found this case is
the most interesting among others. We would further to discuss and explain this case in
detail in the following part.

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2. Text or body matter - Summary of Case

Ketua Pengarah Hasil Dalam Negeri v Multi-Purpose Holdings Bhd [2002]

a. Introduction

An Investment Holding Company (IHC) is a company that owns investments such

as properties and shares for long term investment and derives investment income such as
dividend, interest or rental income. Generally, for income tax purposes, there are two tests
to determine whether a company is an investment holding company. First, the main
activity of an IHC is the holding of investments. Second, the companys gross income
(whether exempt or not.) is not less than 80% income derived from the holding of those
investments. The investment income could include dividend, interest or rental income
derived from properties and shares. Those incomes should be assessed on a financial year
basis.

Under Section 60F (2) of the Income Tax Act from the year of assessment 2006
defined that an investment holding company (IHC) refers to a company whose activities
consist mainly in the holding of investments and not less than 80% of its gross income
(whether exempt or not) other than gross income from a source consisting of a business
of holding of an investment is derived from the holding of those investments.

A business of holding of an investment is the business of letting of real property

where a company provides any maintenance services or support services for the real
property in any YA. The letting of real property is deemed as a business source income
and which is received and charged to tax under paragraph 4(a) of the Income Tax Act if
maintenance services or support services are provided in relation to the real property.
However, when a person lets out the real property without providing maintenance
services or support services comprehensively and actively, the letting of real property will
be treated as a non-business source income and which is received and charged to tax
under paragraph 4(d) of the ITA.

There is an additional criterion to determine whether a company is an investment

holding company is that any amount of gross income from a business of holding of an

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investment is not computed as gross income from the holding of investments. Therefore
only income from interest, dividend and rental under paragraph 4(c) and 4(d) of the
Income Tax Act are computed as gross income from the holding of investments.

The following are the income which tax is subject to chargeable under Section 4
of the Income Tax Act 1967:

(a) gains or profits from a business, for whatever period of time carried on;
(b) gains or profits from an employment;
(c) dividends; interest or discounts;
(d) rents, royalties or premium;
(e) pensions, annuities or other periodical payments not falling under any of the
foregoing paragraphs;
(f) any gains or profits not falling under any of the foregoing paragraphs.

The Investment Holding Company is or is not listed on the Bursa Malaysia will
affect the income tax treatment for an IHC. Section 60F of the Income Tax Act is the tax
treatment for an IHC not listed on the Bursa Malaysia; while Section 60FA of the Income
Tax Act is for an IHC listed on the Bursa Malaysia.

According to Section 60F of the Income Tax Act, the tax treatment for IHC not
listed on the Bursa Malaysia is any income derived from the holding of investments such
as interest, dividend and rental is treated as a non-business source and income other than
income from the holding of investments is treated as a source of income under section
4(f) of Income Tax Act.

Under Section 60FA of the act that once a company is determined to be an IHC
and that company is a listed company on the Bursa Malaysia. Any income derived from
the holding of investment such as interest, dividend and rental income shall treat as a
single business source under section 4(a) of the income tax act. For the present purpose,
the word business is defined in Section 2 of the ITA as any adventure or concern in the
nature of trade. In addition, all expenses related to that source will be deducted against
the gross income in arriving at adjusted income. Overhead expenses such as directors
fees, wages, salaries and allowances, management fees, secretarial, audit and accounting

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fees, telephone charges, printing and stationery, postage, and rent are fully deductible
against gross income.

Furthermore, if there was no gross income, the deductible expenses should be

disregarded. Also any excess of deductible expenses against gross income from business
source should be disregarded too. The section 43(2) and 44 current year loss and
unabsorbed loss are not applied to listed IHC.

Since the listed IHC has limitation of carrying forward any unutilized business
loss and unutilized capital allowances. For tax efficiency, listed company should avoid
being an IHC by actively providing corporate and management services to its
subsidiaries. The fees derived would therefore be a business source assessed under s 4(a)
of the ITA. The company should control and monitor its dividends received (whether
taxable or not) annually to avoid the ratio of total investment income exceeds 80% of the
total income (A/B 80%).

IHC has the assumption that its investment would be for long term. Therefore, the
gain from realization of such investment would be capital gain and not subject to income
tax. Likewise, loss on realization of investment would not be deductible. However this
gain is used to ascertain the deduction of permitted expenses. This assumption is not
legislated or valid for an indefinite period. When the frequency of disposal of investment
is too high or the holding period of the investment is short, the tax authorities can treat
the company as an investment dealing company. As such, the gain or loss will be assessed
as business income or allowable as business loss.

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b. Fact of Case

The taxpayer Multi Purpose Holdings Berhad is a holding and investment

company. It was incorporated in the year of 1975 and has its registered corporate
headquarters located in Kuala Lumpur, Malaysia. The company listed on the Bursa
Malaysia Securities Berhad in 1982. They are using holding of the shares in various
companies to received dividend income. They also were giving the loans to related
companies and placing the funds on short-term deposits to earning interest income. In
addition, they also received the rental income and plantation income.

The principal activities of the Multi Purpose Holdings Berhad are investment
holding, provision of share registration and management services. They are involved in
the core businesses of financial services (Multi-Purpose Insurances Bhd), stock broking
(AA Anthony Securities Sdn Bhd), gaming (Magnum Corporation Sdn Bhd), hospitality
(Flamingo Hotels and Management Services), and the property business division.

The products and services of the company are including leasing, hire purchase,
factoring, and general loan financing services, and underwriting of various classes of
general insurance business, such as property, pecuniary, liability, employees, and
fiduciary. Not only that, they are also involved in the management of a licensed four digit
numbers forecast betting game, and operation of hotels and a golf clubs. In addition, their
company services provided also includes securities broking and dealing, share
registration and management services, designs and construction of railways, printing
services, and computer software and information technology related services.

Multi Purpose Holdings Berhad is an investment holding company that derived

the income from rentals, dividends and interests. In this case, the taxpayer received
interest income from the giving of interest bearing loans to related companies. The rental
income, interest, and dividend are treated as a single source of income under Section 4 (c)
and (d) of the Income Tax Act 1967. The both interest bearing loans, deposit and counter
of investment share constitute a single source of income.

The same principle that applied to dividend income is equally applicable to

interest income. The Section 4(c) of Income Tax Act 1967 provides that dividends,

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interest or discounts are to be grouped under one category. The dividends income from
all counters of shares whether income producing or otherwise are classified as a single
source of income. All interest income should be treated as a single source of income
whether the loans are income producing or non-income producing.

In the year 1990, the respondent which is Inland Revenue Board made an
evaluation of the chargeability of taxpayer to income tax for the year 1982 to 1988. In
evaluation of the chargeability of taxpayer to income tax, the respondent treated each
counter of share investments of taxpayer and each deposit placed by the taxpayer as a
separate source of income. The respondent also treated each loan given by the taxpayer as
a separate source of income of the taxpayer. Moreover, Inland Revenue Board treated
each deposit placed by the taxpayer as a separate source of income of the taxpayer. The
separate source of income will increase the liability to tax of the taxpayer.

The computation method of the respondent was according to the Section 4 of the
Income Tax Act 1967 and Section 33(1). But as a matter of fact, even though the
chargeable income are categorized into six groups and have sub-division of the group
Section 4 of the Income Tax Act 1967, upon the proper explanation of the word "sources"
in Section 33(1) and it is allowed.

According on 2 July 1990, Inland Revenue Board using its computation method
to assessed by way of notice of assessment for the years 1982, 1983, 1984, 1985. The
following taxes chargeable:
Year 1982 - RM3, 553,747.60
Year 1983 - RM6, 590,434.80
Year 1984 - RM3, 553,460.80
Year 1985 - RM10, 998,096
Inland Revenue Board issued computations for the years 1986, 1987 and 1988. The
following taxes chargeable:
Year 1986 - RM15, 239,192.75
Year 1987 - RM3, 676,567.62
Year 1988 - RM1, 016,784.55

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The taxpayer Multi Purpose Holdings Berhad appealed the case and has an
argument with the Special Commissioners of Income Tax. They argue with them that the
assessment were being misunderstanding and misconceived as sub-division of the groups
of income and were unauthorized by law. The Special Commissioners of Income Tax
judged that the sources of income of taxpayer as classified in Section 4 of the Act and it
were not open to further fragmentation. Thus, Inland Revenue Board had made a mistake
in evaluation of its assessments. Hence, Inland Revenue Board appealed the same case
and it was submitted to the present court by way of a case stated.

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Malaysia Taxation

c. Issue of Case

According to the Income Tax Act 1967, the chargeable income of taxpayer should
be ascertained by Section 5 (1) sub (c). The Section 5 (1) sub (c) listed that the taxpayer
adjusted income from each source (or, in the case of a source consisting of a business, his
adjusted income or adjusted loss from that source) for the basis period for that year shall
be ascertained in accordance with Section 4 of that Part. While, subject to Section 4, 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;(b) gains or profits from
an employment;(c) dividends; interest or discounts;(d) rents, royalties or premium;(e)
pensions, annuities or other periodical payments not falling under any of the foregoing
paragraphs and (f) gains or profits not falling under any of the foregoing paragraphs to
make more clear income distribution.

In this case, Ketua Pengarah Hasil Dalam Negeri (Inland Revenue Board)
segregated the chargeable income such as interest income and dividend income and
categorizing them under single income source or separate source of income. Inland
Revenue Board recognized the source of incomes under Section 33(1). Section 33(1)
refers to 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 all outgoings. The word source referred to the
activity which produces income, the originating cause of the income. Therefore, Inland
Revenue Board assumed that the word source referred to each loan, deposit and counter
of investment shares. Hence, Inland Revenue Board treated all counter of shares
investment (dividend source) and each deposit and loan (investment source) as distinct
and singular sources of income then increasing Multi-Purpose Holdings Berhad (the
Taxpayer)s tax liability. However, the treatment of the income by Inland Revenue
Board was conflicting with Section 4(c), Section 4(c) referred to gains or profits from
dividends, interest or discounts. So, the dividend incomes and interest incomes can be
sub-division into different source of income?

Concisely, the main issue in this case is the determination whether the dividend
income and interest income by investment holding company should separate and sub-

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divide each source by treating each counter of share investment as a separate source or
apportion the dividend between income producing and non-income producing or the
dividend income and interest income just classed into Section 4(c)? Next, the second
issue is whether Inland Revenue Board can assess the chargeable income into singular
sources and sub-division of each source of income by an unauthorized manner?

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d. Decision and Discussion

i. Discussion

Multi-Purpose Holdings Bhd (The Taxpayer)s perspective

The major income of Multi Purpose Holdings Bhd received from interest income,
which is giving of interest bearing loans to other subsidiaries and dividend income from
the various counter of holdings of shares. The Multi Purpose Holdings Bhd argued that
Inland Revenue Board treated the received incomes as distinct and singular sources of
income and increased its liability to tax. Inland Revenue Board could not further
subdivide each source by treating each loan as a separate source, and treat each
investment shares as a separate source is to breakdown the groupings or categories further
than what is authorized by the Income Tax Act (ITA). Taxpayer contends that incomes are
chargeable to tax is categorized under six groups by Section 4 of the Act not like the
Inland Revenue Board had ignored the scheme of the Act, it had disintegrate the rules of
Section 4 and further sub-divisions which are in an illegitimate way. Furthermore, in the
case of share investment, it is not permissible to treat each counter of share investment as
a separate source or apportion the dividend between income producing and non-income
producing.

Ketua Pengarah Hasil Dalam Negeri (Inland Revenue Board) s perspective

According to the practice on the years of assessment 1982 till 1988, the Inland
Revenue Board segregated the income producing sources from the non-income producing
sources by treating each counter of share investment, each loan or advance and deposit as
a separate source of income. IRB had treated each loan given by the Multi Purpose
Holdings Bhd as one sources of income under Section 33 with the word source referred
to the activity that produces the income which means the originating cause of the income.
In this case, the word source referred to each loan. Inland Revenue Board further argues

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that the words used under Section 4 including interest were not a source by itself,
which is not the originate cause of the income, thus, all the source of dividend income
and interest income should be treat as separate source of income. Inland Revenue Board
further argue that the same principle as applied to dividend is equally applicable to
interest income, since Section 4(c) of the Act grouped dividends, interest and discounts
under one category.

(SCIT) Special Commissioners of Income Taxs perspective

According to the section 5(1)(c) of Income Tax Act makes reference to a source
consisting of a business, as well as other sources must relate the type of income that
categorize in section 4, which include dividend income and interest income under section
4(c) of Income Tax Act. SCIT switched with the Multi-Purpose Holdings that if
Parliament intended that each loan and short-term deposit should be regarded as 2 sources
of income, Section 4(c) would be differently worded to reflect that.

On the other hands, the Income Tax Act adopts a comprehensive description of
sources in section 4 and imposes tax upon gains and profits of a taxpayer as classified
under section 4 and there is no sub-division of these classes given. Thus all the
investment share that make by the investment holding company should be treated as one
source of income and could not be separate regardless of whether these are income or
non-income producing. The sources of income as classified in Section 4 of the Act were
not open to further fragmentation was mentioned by SCIT. Moreover, Inland Revenue
Board had adopted the method of tax computation which was misconceiving in law and it
was challenged by the Taxpayer.

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ii. Decisions

Arguement1

The assessment of Inland Revenue Board was using the concept of the provisions
of Section 4 of the Income Tax Act 1967 with Section 33(1) thereof as the method
of tax computation.

Decision 1

Subject to Section 5(1) sub(c), chargeable income of the Taxpayer was

ascertaining and the section referred to a source consisting of business. In addition, the
source of income should classify by Section 4, which is the six stipulated classes of
income should be given their ordinary meaning. Furthermore, Income Tax Act (ITA)
listed a comprehensive description to sources in Section 4, which is no any sub-division
to the type of income in Section 4 (b) to (f).

Malaysian courts decided and held that all share investments should be treated as
one source of income irrespective of whether these are income or non-income producing.
Hence, Inland Revenue Board could not further subdivide each source by treating each
loan as a separate source, and treat each loan as a separate source is to disintegrate the
groupings or categories further than what is authorized by the ITA. On the other hand,
whether the interest income is coming from income producing or non-income producing
are treated as single source of income under Section 4(c) of ITA and it is same principle equally
applied to dividend income.

The assessments raised by Inland Revenue Board were incorrect and it was misconceived
in law.

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Argument 2

Did Inland Revenue Board ignore the scheme of Income Tax Act?
Whether IRB proposed the method of tax computation with
unauthorized way?

Decision 2

Yes, Inland Revenue Board ignored the scheme of Income Tax Act. It just
classified the income should be separate source of income, and the manner of tax
computation in relating Section 4 of ITA to Section 33(1) of ITA, the words dividend,
interest are not sources of themselves, it should be following the Section 33 (1), which
is the word source referred to the activity or property which produces the income and it
refers to each counter of shares and each loan & short-term deposit.

Subject to Section 4 of ITA, the groupings of profits and gains cannot be

disintegrated, which is authorized by law. Apart from that, Inland Revenue Board did not
obtain the right or authority to further sub-divide the Section 4 of ITA or fall apart to
pieces in grouping of profits and gains.

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iii. Judgment

In 12 September 1998, Special Commissioner of Income Tax (SCIT) decided to

arise this appeal to court because of the Appellant (Multi-Purposed Holdings Berhad) and
the Respondent (Ketua Pengarah Hasil Dalam Negeri) were requiring SCIT submit this
appeal into High Court. The Judge is KC Vohrah J.
I fail to see any error of law in the decision of the SCIT on the facts stated by
them. The appeal is dismissed with costs. said KC Vohrah J. The SCIT had observed
some cases for this case, for example, SCIT used the case of Pernas Securities, Merrifield
and Diggines (on 4 February 1997) and Inland Revenue Boards appeal was dismissed.
This is because the appeal is to treat each counter of share investment as a separate source
is without doubt to disintegrate the grouping further. The source of income (each counter
of share investment) should not be treated as separate source. In addition, the case of
Supreme Court, National Land Finance Co-operative v DGIR [1993], it showed clearly
that the Inland Revenue Board is no authority to disintegrate the groupings of the profits
and gains according to sources.
The Inland Revenue Boards appeal was dismissed by failing to recognize the
income with Section 33(1) and it was conflicting Section 4 (c). Apart from that, Inland
Revenue Board fails to recognize the incomes from all resource have to be aggregated
pursuant to Section 43 of ITA, subject to Section 43 of ITA, it expresses restrictions and
disallowances as authorized under the Act. In addition, there was no justification to
further sub-divide the sources of income. It is not required to further divide it into income
producing shares and non-income producing shares to constitute two separate sources.
In conclusion, each source of income would not be further divided according to
usage (for rental), income producing or non-income producing source (for interest), while
this same principles applied to dividend income equally.

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3. Conclusion

From the case of Ketua Pengarah Hasil Dalam Negeri v Multi-Purpose Holdings
Bhd, the taxpayer treated the dividend income and interest income as an investment
income under Section 4(c). At the first, the Taxpayer executed the tax planning and then
decreasing the liability of tax. Inland Revenue Board was misconceiving the law and
using the concept of the provisions of Section 4 of the Income Tax Act 1967 with Section
33(1) thereof to classify the sources of income. With the misunderstanding, Ketua
Pengarah Hasil Dalam Negeri used illegal manner to calculate the tax computation of
Multi -Purpose Holdings Bhd, then was increasing tax liability of the Taxpayer.

Subject to Section 5 (1) sub (c) listed that the taxpayer adjusted income from each
source (or, in the case of a source consisting of a business, his adjusted income or
adjusted loss from that source) for the basis period for that year shall be ascertained in
accordance with Section 4 of that Part. Hence, Inland Revenue Board should not get the
right to further sub-division to Section 4 of ITA. The Taxpayer should compute their tax
payable should treat all dividend income as one source and interest income as one source
and rental income as one source.

In conclude, this case is correctly treated the dividend income as one source and
interest income as one source and rental income as one source under the section 5(1) sub
(c) and 4(c) & (d).

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References

1. In the Name of Interest

http://www.taxand.com.my/In%20The%20Name%20of
%20Interest-Part%202%20-Malaysian%20Business-November.pdf

2. The Taxpayer Involved In Oil Palm Cultivation Law Equity Essay

https://www.uniassignment.com/essay-samples/law/the-taxpayer-
involved-in-oil-palm-cultivation-law-equity-essay.php

3. Summary of tax case

http://www.micpa.com.my/micpamember/CPA_Review/04.pdf

4. RAYUAN SIVlL NO: R1-14-17-2009

http://lampiran.hasil.gov.my/pdf/pdfam/Federal_Furniture_High_Court.pdf

5. Austax. (2013, November 18). Retrieved

https://austaxpbr.com.au/document/PBR_1012520710494#section_9

6. Law of Malaysia
http://www.federalgazette.agc.gov.my/outputaktap/20141230_76
4_BI_WJW003795%20BI.pdf

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