The Taxpayer’s Dilemma
In the world of construction, precision isn’t just a goal—it’s a necessity. Yet, for one developer, a discrepancy in their financial records opened the door to a tax dispute that would become a cautionary tale. At the center of the storm was a gap of RM3,634,918.92, a figure uncovered during a tax audit. The taxpayer had reported RM48,633,077.81 as revenue for the Year of Assessment (YA) 2015. However, the developer’s own accounts showed payments amounting to RM52,267,996.90.
The taxpayer’s explanation? Silence. They didn’t dispute the difference, leaving the authorities to conclude that this was a deliberate understatement of income.
The drama didn’t end there. The taxpayer also claimed RM5,067,434.04 in subcontractor expenses, which, according to the tax authorities, didn’t align with progress claims or variation orders provided by the subcontractor. What followed was a legal battle to determine whether these expenses, along with other claims, were allowable under Section 33(1) of the Income Tax Act 1967.
The Subcontractor Saga
The taxpayer’s defense hinged on Settlement Agreements entered into by a previous management team to resolve unpaid bills. They argued that payments of RM8,000,000 to a former director and RM2,100,000 to a subcontractor were legitimate construction costs. These adjustments, they claimed, were reflected in amended ledgers and audited accounts.
But the tax authorities weren’t buying it. “The Settlement Agreements lack any connection to the issues raised in the audit,” they argued. They dismissed the taxpayer’s attempts at out-of-court settlements as mere afterthoughts and pointed to a lack of evidence proving that the claimed expenses were incurred wholly and exclusively for the production of income.
As the investigation deepened, the tax authorities accused the taxpayer of intentionally understating income and inflating subcontractor expenses to the tune of millions.
The Verdict
The Special Commissioners of Income Tax (SCIT) weighed the evidence carefully. On 10 May 2024, they ruled against the taxpayer. “The taxpayer failed to meet the burden of proof required under Paragraph 13 of Schedule 5,” the commissioners declared.
The SCIT upheld the Notice of Additional Assessment for YA 2015, as well as the penalties under Section 113(2) of the Income Tax Act. The taxpayer’s appeal was dismissed, leaving them with just 21 days to decide whether to challenge the decision further.
The Lesson
This case serves as a stark reminder of the importance of transparency and accuracy in tax reporting. The lessons are clear:
- Document Every Transaction: Revenue and expenses must align with verifiable records. Any discrepancies can trigger audits and penalties.
- Prepare for Scrutiny: Claims for deductions, especially those involving large sums, must be supported by robust evidence.
- Timeliness Matters: Attempts to amend records after an audit begins may be seen as an afterthought, undermining credibility.
In the end, the taxpayer’s inability to provide clear and convincing evidence turned a routine audit into a costly legal battle. For businesses, the message is unmistakable: precision isn’t just a necessity in construction—it’s a cornerstone of tax compliance.
