The Unexpected Tax Dispute
A company known for its dealings in stationery and goods found itself in a peculiar tax dispute. Seeking to diversify its income, the business had invested in six shop houses, renting them out to hoteliers. While the rental income was declared as non-business income under Section 4(d) of the Income Tax Act 1967 (ITA), the taxpayer claimed Industrial Building Allowance (IBA) for these properties, treating them as industrial buildings under Paragraph 37F, Schedule 3 of the ITA.
The taxpayer not only claimed IBA for the relevant Years of Assessment (YAs) 2015, 2016, and 2017 but also attempted to carry forward the unabsorbed IBA to subsequent years under Paragraph 75 of Schedule 3. However, the Director General of Inland Revenue (DGIR) had a different interpretation.
The Disagreement
The DGIR raised additional assessments for the three years in dispute, disallowing the carry-forward of the unabsorbed IBA.
“The IBA can only be carried forward if the income qualifies as business income under Section 4(a) of the ITA,” the DGIR argued. “Rental income under Section 4(d) is non-business income, and thus, the carry-forward provision under Paragraph 75 does not apply.”
The taxpayer countered, “The Public Ruling No. 12/2018 is silent on this issue. Since the IBA for the current year was allowed, the unabsorbed IBA should logically follow. Paragraph 75 doesn’t restrict it to business income alone.”
But the DGIR stood firm. “The statute is clear. The conditions for carrying forward unabsorbed IBA are tied to business income, and your rental income does not meet this requirement.”
The SCIT Decision
The case reached the Special Commissioners of Income Tax (SCIT), where both sides presented their arguments. After deliberation, the SCIT ruled in favor of the DGIR.
“Under Schedule 3 ITA, the carry-forward of unabsorbed IBA is specifically tied to business income under Section 4(a). Since the taxpayer’s rental income falls under Section 4(d), the claim is invalid,” the commissioners declared.
On 22 January 2024, the taxpayer’s appeal was dismissed, and the additional assessments for YAs 2015, 2016, and 2017 were upheld.
The Lesson Learned
This case highlights a crucial principle in tax compliance: not all allowances are transferable across income types. The classification of income—business or non-business—directly impacts the treatment of deductions and allowances.
For taxpayers, it is a stark reminder to carefully examine the statutory requirements for claims and to seek clarity when relying on public rulings that may not explicitly address nuanced situations. For tax practitioners, it reinforces the importance of aligning claims with the exact wording of the law, especially when dealing with provisions like carry-forward allowances.
Ultimately, this case underscores the necessity of understanding the boundaries between different income types and the allowances they permit. Clarity in these distinctions can save taxpayers from unnecessary disputes and financial setbacks.
Perenggan 4(d) dan Jadual 3 Akta Cukai Pendapatan 1967
