Appeal Procedures Under Malaysia Self Assessment Regime

Appeal Procedures Under Malaysia Self Assessment Regime
Appeal Procedures under       Malaysia   Self Assessment Regime

Dr Choong Kwai Fatt           Tax Consultant, Associate Professor           Faculty of   Business and Accountancy           University of Malaya

Introduction
Malaysia began to implement a self assessment system on companies from the year 2001. Other taxpayers such as employees, sole proprietors, partnerships and trusts will join in from the year 2004.[2] Under a self assessment system, taxpayers have the legal burden to estimate their own income tax payable for the current year of assessment, inform the tax authorities of their estimated taxes, pay their taxes monthly, and to submit their tax returns within the prescribed time limit.
Notice of assessment (Form J) will not be issued to taxpayers under a self assessment system. The final tax payable (the difference between the actual income tax payable and the estimate) must be paid upon submission of tax return. No tax computation, receipts or other documents are to be submitted to the tax authorities except the tax return. All computations, supporting schedules and relevant receipts, are to be maintained by taxpayers, and will be subject to tax audit in future years.
The tax authorities are released from the responsibilities of computing the estimates of tax for monthly installment scheme, examining every tax computation submitted (for errors) by taxpayers and issuing notices of assessment. They are now, however, given the new responsibilities to educate taxpayers on knowledge of income taxation, encourage voluntary tax compliance, widen the tax net, and lastly tighten up on tax compliance through tax audits and tax investigations.
The tax authorities will carry out an external tax audit at the taxpayer’s office at regular intervals. The primary function of the tax audit is to ensure that taxpayers prepare their tax computations in accordance with the tax laws and public rulings. The amount of income tax reported must be in line with the business activity, substantiated by primary evidence (receipts, vouchers, invoices, credit notes), and secondary evidence (accounting books, minutes and bank statements, creditors). There must be a full disclosure of income. Any omission of income due to human errors and/or incomplete records will then be communicated to the taxpayer, and followed by an additional assessment being issued. Penalties may or may not be imposed, depending on the merits of each circumstance, sufficiency of explanations made by the taxpayer, and the taxpayer’s co-operations during tax audit.
When notice of additional assessments are raised, taxpayers have the onus to adduce evidence to explain to the tax authorities to reduce such additional tax or penalty. Appeal to the Special Commissioners is the first step to enter the door of justice if a taxpayer failed to convince the tax authorities to his favour. The onus is on him to discharge the burden of proof. As the winning of an appeal lies on the evidence adduced and the compliance to appeal procedures, this article aims to set out the pertinent features and the rules of law as to the appeal procedures as stated in the Malaysian Income Tax Act 1967[3] and established by leading case precedents.
Appeal   procedures
Appeal procedures to the Special Commissioners is set out in Schedule 5 of the Act. It should be noted that the Special Commissioners have wide powers to regulate their own appeal procedure. This is expressly provided in para 22 of Sch 5:

“Subject to this Act and any rules make under s 154(1)(d), the Special Commissioners may regulate the procedure at the hearing of an appeal and their own procedure.”

It is important to allow the Special Commissioners to regulate its procedures in order to ensure justice and fairness to all parties.
In Regina v   Special Commissioners (ex parte Martin), Lord Chief Justice Widgery   held:

“It is very important that the procedure before the Commissioners should be kept flexible to deal with widely varying types of cases which come before them.”

The Privy Council   had an opportunity to consider para 22 of Sch 5 in Arumugam Pillai v Director   General of Inland Revenue.
Their Lordships agreed with the High Court’s opinion that the Special Commissioners may regulate their own procedure at an appeal but subject to the important consideration that the taxpayer must be given a full and adequate hearing or reasonable opportunity to be heard.
In an appeal on back duty investigation, a taxpayer cannot rely on the principle of natural justice and complain that he was given a heavy burden as the memory of past events is turned off. This is inevitable as back duty investigation on fraud and wilful default covers a long period of time. The taxpayer had no choice but to refresh his memory and prepare his evidence. Lord Fraser of Tulleybelton laid down the principle:

“No doubt the hearing before the Special Commissioners imposed a considerable burden on the appellant’s memory. That was inevitable in such an extensive investigation involving such large sums and covering such a long period of time, but he had been aware since his books and papers were seized in August 1972 that his affairs were being investigated and he had plenty of time to refresh his memory and prepare his evidence. Their Lordships are unable to see that the rules of natural justice were broken or that the procedure was in any way improper. They agree with the opinion of the Federal Court and the High Court that there is no ground for interfering with the decision of the Special Commissioners.”

In NTS Arumugam   Pillai v Director General of Inland Revenue, the Special Commissioners laid   down the rules of procedures in relation to the onus of proof as   follows:

“We therefore ruled that as the substantive onus of proving that the assessments for the years of assessments 1960 to 1972 were either excessive or erroneous was on the Appellant, he should begin and lead evidence first. When Revenue adduced evidence in reply it should then in the circumstances also discharge its onus of proving fraud or wilful default in respect of the statute-barred years of assessment, i.e. for years of assessment 1953, 1957, 1958 and 1959 before the Appellant could be called upon to discharge the onus of proving that those statute-barred assessments were excessive or erroneous. However, when the Appellant began, he adduced evidence not only in respect of the years of assessment 1960 to 1972, but he also gave evidence in respect of the statute barred assessments.”

The High Court was asked whether the Special Commissioners procedures laid down were correct. Justice Chang Min Tat at the High Court held that it was within the Special Commissioners jurisdiction that they could regulate the procedure at the hearing of appeal before them subject always to the important consideration that the taxpayer must be given a full and adequate hearing or reasonable opportunity to be heard. The judge accepted in total the Special Commissioners’ approaches as to the procedure.
Justice Chang   held:

“On this, it is apparent that the Special Commissioners may largely regulate the procedure at the hearing before them, subject always to the important consideration that the Appellant must be given a full and adequate hearing or reasonable opportunity to be heard. The Special Commissioners were aware of their right to regulate procedure and also of the great advantage in not being hide-bound to a rigid code of procedure.”

The Special Commissioners’ approach was approved by the Federal Court and Privy Council in the further appeals. In this case, Justice Chang Min Tat also proposed an alternative way to conduct an appeal in relation to non statute barred years and statute barred years. He opined:

“The Special Commissioners have of course the alternative of deciding to hear the appeal to them in two parts. On the issue of fraud and wilful default, Revenue could open and the appellant reply. On the non statute-barred years where the onus lies on the appellant, he should open and Revenue could challenge his evidence either under cross-examination or by adducing its own evidence. Perhaps in hindsight, the Special Commissioners should have adopted this course.”

However, the learned judge confessed that his suggested approach may create confusion at some stages. His Lordship then concluded and accepted that it was within the province of the Special Commissioners to regulate the appeal process. He held:

“I would repeat is well within their province to adopt. To split the hearing into two sessions when the financial affairs of the appellant are continuous and closely inter-woven would, on the other hand, appear to lead to more confusion. Neither can I, with respect, see any advantage over another course which is for Revenue to begin on the statute-barred years. If the course adopted by Revenue had been strictly followed, this course would have been the result, the evidence of the appellant in rebuttal would be his defence to the charges of fraud and wilful default.”

Special   Commissioners’ power
In any tax appeal, the Special Commissioners have the power to admit or reject admissible or inadmissible evidence. They are entitled to exercise their discretion judicially to ensure a fair trial to all parties, i.e. both taxpayer and tax authorities. In Director General of Inland Revenue v Ee Sim Sai, the Special Commissioners rejected the documentary evidence Form 14A as adduced by the tax authorities as to the value of the land at RM126,472. Instead they accepted the taxpayer’s contention that it should be RM65,000. The taxpayer called several witnesses, and produced several documents to establish his argument while the tax authorities merely relied on Form 14A and did not call any witness. The use of the value of the property was in conjunction to a tax investigation on back duty of 2 years. A lower value of property would result in a lower amount of undisclosed income. The tax authorities appealed to the High Court.
The tax authorities argued that in the event the court allowed admission of other evidence to contradict Form 14A, it would cause mischief to the Inland Revenue Department as it would be difficult for the tax officers to complete the capital worth of a taxpayer. This contention was rejected by Justice Ibrahim on the ground of justice. His Lordship held:

“In my view not only greater mischief but also injustice would be caused if the consideration stated in Form 14A is irrebuttable and the amount of the taxpayer’s capital worth is thereby deemed to be that amount when, for instance, he has raised part if not all of the amount by a loan from a bank.

As to the facts I am satisfied that there is overwhelming evidence adduced by respondent to justify the Special Commissioners in coming to their decision that the sum of $43,500 was in fact respondent’s purchase price of his 2/3 share in the 14 lots.”

The Special Commissioners are the judges of fact. The finding of fact is one that is absolutely within the competence of the Special Commissioners. The court has no jurisdiction to disturb such finding of facts but to accept it as being firmly established. Upon the closing of an appeal, the Special Commissioners will adjourn to consider their decision. The decision of the Special Commissioners is in the form of deciding order. It will either:
  1. confirm the   assessment (the taxpayer lost the appeal); or
  2. discharge the   assessment (the taxpayer win the appeal); or
  3. direct the   Director General to adjust or amend the assessment (mixed victory).
The deciding order is final on the question of fact. The losing party may request the Special Commissioners to state the case for an onward appeal to the High Court, which can only decide on the issue of laws or mixed fact of law. The High Court will then decide whether the Special Commissioners’ conclusion is correct in law based on the finding of facts
Conclusion of   facts finding
In a case stated, the Special Commissioners have to include all the facts of a case to be forwarded to the High Court for consideration. The High Court will rely on the facts to evaluate whether the decision of law is in accordance with the facts finding. The decision of the Special Commissioners can only be reversed if they found the Special Commissioners have misdirected themselves on the question of laws.
In E v   Comptroller General of Inland Revenue,the Federal Court made a direction that the Special Commissioners are required to, before finalizing the case stated, seek the views of both the taxpayer and Revenue as to the sufficiency of the facts, and include all evidence adduced by both parties. Amendments can be made on the case stated to make it a “final form”. Once both parties have consented to the final form of the case stated, both parties are debarred from objection of the case stated or any alleged insufficiency of the statement.
In an appeal to the High Court, the judge is bound by the facts found by Special Commissioners, as stated in the case stated. He will decide whether the decisions of Special Commissioners are based on the facts as found by them, and reasonable inferences are drawn from the facts found. In this regard, the principle of law laid down by Lord Radcliffe in Edwards (H.M. Inspector of Taxes) v Bairstow and   Harrison have been in many occasions quoted in the Malaysian tax appeal   cases:

“I think that the true position of the court in all these cases can be shortly stated. If a party to a hearing before Commissioners expresses dissatisfaction with their determination as being erroneous in point of law, it is for them to state a case and in the body of it to set out the facts that they have found as well as their determination. I do not think that inferences drawn from other facts are incapable of being themselves findings of fact, although there is value in the distinction between primary facts and inferences drawn from them. When the case comes before the court, it is its duty to examine the determination having regard to its knowledge of the relevant law. If the case contains anything ex facie which is bad law and which bears upon the determination, it is, obviously, erroneous in point of law. But, without any such misconception appearing ex facie, it may be that the facts found are such that no person acting judicially and properly instructed as to the relevant law could come to the determination under appeal. In those circumstances, too, the court must intervene. It has no option but to assume that there has been some misconception of the law and that this has been responsible for the determination. So, there, too, there has been error in point of law. I do not think that it much matters whether this state of affairs is described as one in which there is no evidence to support the determination or as one in which the evidence is inconsistent with and contradictory of the determination or as one in which the true and only reasonable conclusion contradicts the determination. Rightly understood, each phrase propounds the same test. For my part, I prefer the last of the three, since I think that it is rather misleading to speak of there being no evidence to support a conclusion when in cases such as these many of the facts are likely to be neutral in themselves and only to take their colour from the combination of circumstances in which they are found to occur.”

The Special Commissioners are the judges of fact. Upon examining all the evidence admissible to them, the Special Commissioners would form an opinion on the primary facts found and draw conclusions from those facts. The court will only reverse the decision if no reasonable man could have reached such conclusion based on the primary facts. In the event two possible conclusions can be reached, it is within the domain of the Special Commissioners to choose one. In this regard, Lord Radcliffe in Edwards v Bairstow said:

“One should approach the finding of the Commissioners by distinguishing between the primary facts found and the conclusion drawn from those facts. In cases under the Income Tax Act all the facts are before the court, which is entitled to form its own opinion. Looking at the conclusion reached by the Commissioners on the stated facts, the court may find that their conclusion is such that no reasonable person could have reached it. Then the conclusion can be reversed. But if on a consideration of the facts stated a reasonable man can choose one of two conclusions, that is a middle field in which the Commissioners are masters.”

Justice Raja Azlan   in deciding the Federal Court decision of UHG v Director General of Inland   Revenue held that it is a statutory duty of the Special Commissioners to set out the facts found by them and the deciding order on which the findings are based. The courts are not concerned with the evidence given in the case stated. The question for the court is therefore whether given the facts as stated, the Special Commissioners were justified in law in reaching their conclusion.
Power of   Special Commissioners to increase assessment
It is common that the Special Commissioners will either reduce, discharge or confirm the assessment notices upon finalization of an appeal. The issue whether the Special Commissioners can increase the amount assessed in the notice was raised in UHG v Director General of Inland Revenue.The taxpayer complained to the court that the Special Commissioners have no power to direct the tax authorities to amend the notices of additional assessment for the 11 years which would have the effect of increasing the assessment. The Federal Court held that it is within the jurisdiction of Special Commissioners to increase such assessment if circumstances justify so, as provided in para 26 of Sch 5 and s 96(2) of the Act.
Paragraph 26,   Schedule 5 states:

“A deciding order shall either confirm or discharge the assessment to which the appeal relates or shall direct the Director General to amend the assessment; and, where it directs amendment, the order shall:

  1. specify the   appropriate amendments;
  2. require the appropriate amendments to be determined by agreement between the parties or, failing agreement, by the Special Commissioners; or
  3. specify some of   the appropriate amendments and require the others to be so determined.
Section 96(2)   provides:

“Where the tax charged under an assessment is increased on appeal to the Special Commissioners or a court, then, as soon as may be after the appeal has been decided there shall be served on the person in respect of whom the assessment was made a notice of increased assessment.”

The above two provisions clearly set up the Special Commissioners’ jurisdiction. In this regard, Federal Court Judge Raja Azlan Shah held:

“Reference was made to the powers of the Special Commissioners to direct the respondent to amend a notice of assessment which would have the effect of increasing the assessment beyond that specified in the notice. On this point it was suggested to us that this was nothing more than a matter of academic interest because the Special Commissioners are equipped with power to do so under para 26 of the Fifth Schedule to the Income Tax Act, 1967 read with s 96(2) of the Act. Nothing of practical interest turns on this ground of appeal.”

Current   limitation
The law works on the basis of “pay first, appeal later”. The taxpayer will be at loss if an appeal is not timely heard by the Special Commissioners. An appeal to the Special Commissioners is the right that has to be exercised by a taxpayer to ensure justice is given to him to redress any tax dispute. It is, however, a slow and stressful process. In practice, it will take about 2 years for the case to reach the Special Commissioners.
An appeal of a taxpayer must first be dealt with by the tax authorities. The Director General of Inland Revenue will call evidence to review the case and try to reach an agreement with the taxpayer on the assessments. It would be reviewed by the Director General for 12 months or for any other extended time as approved by the Minister of Finance if the Director General wished to continue to discuss with the taxpayer. The tax authorities may extend for another 6 months from the expiry of the 12 months upon an application made to the Minister of Finance. If still no agreement is reached, it would then be submitted to the Special Commissioners to decide. The Special Commissioners upon receiving the appeal will fix a date for hearing, and the timing for the hearing of the case will depend on the back log cases at that time.
Conclusion
Taxpayers have to adhere to the appeal procedures as prescribed by the Special Commissioners to ensure the evidence adduced can be admitted for consideration in an appeal. This is crucial to secure the chance of winning an appeal. As they are the final judges on the question of fact, the losing taxpayer must ensure all pertinent facts have been included in a case stated before approving it for onward appeals to the higher courts.

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