The Loan and Waiver Controversy
It began with a massive loan agreement: a Redeemable Subordinate Loan of up to RM875 million, accruing a hefty RM222,062,659 in interest. The taxpayer, relying on this loan to fuel operations, claimed the interest expenses under Section 33(1) of the Income Tax Act 1967 (ITA) against both business and non-business income.
However, in 2006, a twist emerged when the lender waived RM181,863,826 in accrued interest. The taxpayer treated this as a release of debt, asserting that it should not be taxed as interest income under Section 22(2)(a)(i) of the ITA. The Director General of Inland Revenue (DGIR), however, disagreed. After a tax audit, the DGIR issued a Notice of Additional Assessment (Form JA) for YA 2006, asserting that the waived interest was taxable under Section 4(c) of the ITA.
The Legal Battle
The taxpayer contested the assessment through a Judicial Review (JR) application, arguing that Section 22(2)(a)(i) did not apply to debt releases, which should fall under Section 30(4) ITA instead. The High Court and Court of Appeal initially sided with the taxpayer. However, the Federal Court overturned these decisions, prompting the taxpayer to appeal to the Special Commissioners of Income Tax (SCIT).
During the SCIT hearing, the taxpayer’s counsel presented their arguments: “The release of debt was misclassified. Section 22(2)(a) does not cover such scenarios. Additionally, the Federal Court’s decision lacked finality as no grounds of judgment were issued.”
In contrast, the DGIR maintained their stance: “The Federal Court’s decision must be respected. The principle of res judicata applies—this matter has been settled. The taxpayer deducted the interest under Section 33(1), and once the expense was waived, it became taxable under both Section 22(2)(a)(i) and Section 4(c) of the ITA. To argue otherwise is to misinterpret the law.”
The SCIT Decision
On 28 June 2024, the SCIT delivered its verdict. The commissioners dismissed the taxpayer’s appeal, affirming the DGIR’s assessment and penalty under Section 113(2) ITA. “The taxpayer failed to meet the burden of proof required under Paragraph 13, Schedule 5 of the ITA. The Federal Court’s decision binds this tribunal, and thus, the Form JA and penalties are upheld,” the lead commissioner stated. The taxpayer now faces the option to appeal further, but must do so within 21 days.
The Lesson Learned
This case illustrates the complex interaction between tax law provisions and judicial principles. The waiver of previously deducted expenses can lead to tax liabilities if those deductions are deemed inappropriate upon release.
For taxpayers, it emphasizes the importance of understanding how debt waivers and expense treatments interact within the ITA framework. For tax practitioners, it highlights the significance of respecting judicial precedents and presenting strong documentation to support claims.
Ultimately, this case serves as a cautionary tale: in taxation, clarity in classification and adherence to legal interpretations are vital to avoid costly disputes.
