OASB vs. Director General of Inland Revenue

Overview compensation from the compulsory acquisition of land

Taxation can become a complex matter, especially when it involves components like compensation from the compulsory acquisition of land. In Malaysia, the tax treatment for compensation received from compulsory land acquisition can be scrutinized under various legal and regulatory frameworks. Below is a general outline of the tax treatment.

Tax Treatment of Compensation Received:

1. Determination of the Nature of Receipt:

Capital Receipt: Generally, if the land was used for investment purposes or was a capital asset, the compensation might be considered a capital receipt.

Revenue Receipt: If the land was utilized in a business, or the act of acquiring and selling lands was a business in itself, the compensation might be treated as revenue receipt.

2. Applicable Legislation:

Income Tax Act (ITA) 1967: Compensation is scrutinized under various sections of ITA to determine its taxability.

Section 4(a): Concerns the taxability of gains or profits from a business.

Section 4(f): Often pertains to other sources of income not categorized under sections 4(a) to 4(e).

3. Calculating Taxable Gain:

Real Property Gains Tax (RPGT) Act 1976: If compensation is considered a capital receipt, it may be subject to RPGT which is imposed on gains from the disposal of real property.

Compensation may need to be adjusted for enhancements and modifications made to the land to calculate the precise taxable amount.

Case Overview:

Join us in dissecting a compelling tax case involving OASB and the Director General of Inland Revenue (DGIR), revealing the trending tax, legal, and financial impact on compensation received from the compulsory acquisition of land.

Background

OASB, utilizing a rented shop lot for its audio-video business from 2004 to 2017, received RM2,341,817 as compensation due to government acquisition under Section 16 of the Land Acquisition Act 1960. However, the waters muddied when the DGIR issued a Notice of Additional Assessment along with a penalty, pursuant to Section 113(2) of the Income Tax Act (ITA) 1967.

Taxpayer's Argument

OASB fervently argued that the compensation should be categorized as a capital receipt, with a two-pronged rationale:

The compensation intended to restore the taxpayer’s position, based on the replacement cost at the time of compulsory acquisition.

The involuntary suspension of business activities during the acquisition resulted in a consequential loss of sales and profits.

DGIR’s Perspective

In opposition, the DGIR insisted it was a revenue receipt, taxable under Section 4(f) of ITA 1967, justifying that:

OASB lacked ownership rights over the land and building being compensated.

Section 4(f) of ITA 1967 broadly encompasses gains or profits outside the scope of Sections 4(a) to 4(e) for tax purposes.

Verdict from the Special Commissioners

Ultimately, the Special Commissioners of Income Tax sided with the DGIR, rejecting OASB's appeal and upholding the Notice of Additional Assessment along with its penalty.

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