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INTRODUCTION
It is a fundamental principle of our legal system that the Federal Constitution is the supreme law of the land and any pre or post-Merdeka law that violates the Constitution is void to the extent of its inconsistency with the basic law.
A law that violates the Constitution may be invalidated by the courts in its entirety or the courts may adopt the doctrine of severability to sever the illegal parts and save the rest of the statute: PP v Pung Chen Choon [1994] 1 MLJ 566.
When the courts invalidate a law, they can order their decision to apply retrospectively
or prospectively: PP v Dato Yap Peng [1987] 2 MLJ 311 S.C.; Semenyih Jaya v Pentadbir Tanah Daerah Hulu Langat [2017] 3 MLJ 561 F.C.; Indira Gandhi Mutho v Pengarah Jab. Agama Islam Perak [2018] 3 CLJ 145.
Regrettably, it must be noted that despite the existence of constitutional supremacy, and the power of judicial review, our courts were up to now rather reluctant to enforce the limits on legislative powers. The very unsatisfactory High Court and the Court of Appeal decisions in Wiramuda are a good illustration of this reticence. Lately, however, a judicial renaissance is in the offing. In many superior court decisions, the Constitution is moving from the peripheries to the centre. Some commentators commend this judicial activism as part of our maturing process; others condemn it as a violation of the doctrine of separation of powers.
FACTS OF THE CASE
Wiramuda (M) Sdn Bhd is a company engaged in the business of property development. In 2015, the Selangor government compulsorily acquired four plots of land owned by Wiramuda and in accordance with the Land Acquisition Act 1960 paid compensation of approximately RM202 million.
In February 2019, the Inland Revenue Board (“IRB”) gave notice to Wiramuda that the compensation of 202 million was liable to income tax of approximately 53 million pursuant to Sections 4C of the Income Tax Act 1967. Section 4C of the Income Tax Act 1967 (“ITA”) provides as follows:
“For the purpose of paragraph 4(a), gains or profits from a business shall include an amount receivable arising from stock in trade parted with by any element of compulsion including on requisition or compulsory acquisition or in a similar manner.”
Section 4C of the ITA was legislated by way of the Finance Act 2014 in response to the government’s loss in the income tax case of Ketua Pengarah Hasil Dalam Negeri v Metacorp Development Sdn Bhd (2013) (Federal Court). In Metacorp the Federal Court had ruled that compensation obtained due to a compulsory acquisition of land cannot be regarded as profit arising from the taxpayer’s business activity and therefore was not a taxable income pursuant to S 4(a) of the Income Tax Act. Dissatisfied with the court’s ruling and unwilling to take its loss, the government in Parliament amended the law to win back in Parliament what it lost in the courts. The new S 4C purported to overrule the Metacorp ruling and empower the IRB to tax the gains received by a taxpayer on any compulsory acquisition of its “stock in trade”.
In response to the income tax assessment, Wiramuda filed for judicial review at the High Court to challenge the constitutionality of S 4C and S 24(1)(aa) of the ITA 1967 as the provisions conflict with Article 13(2) of the Federal Constitution. It lost its case. It then appealed to the Court of Appeal but was unsuccessful. Hence the appeal to the Federal Court.
CRITIQUE OF THE HIGH COURT AND COURT OF APPEAL RULINGS
The High Court and the Court of Appeal were in agreement that adequate compensation was paid by the Selangor government under s 37 of the Land Acquisition Act 1960. According to them, that having been done, the constitutional requirement of Art 13(2) was fully satisfied. Most amazingly, to the learned judges of these two courts, what happens after the Land Acquisition Act 1960 is satisfied is a separate (and irrelevant) issue. To them, subjecting the compensation to taxation was a separate matter covered by the ITA. Regrettably, they failed to examine the constitutional review issue of whether the impugned provisions of ITA were unconstitutional under Art 13(2).
The High Court and the Court of Appeal were also in agreement that the actions of the Department of Inland Revenue in this case were fully in accordance with the ITA. The ITA was in turn authorised by Art 96 and therefore constitutional. With all due respect, the words “no law shall provide for the compulsory acquisition … without adequate compensation” in Art 13(2) refer to all relevant laws and not just the Land Acquisition Act. Laws must be read holistically and not in isolation.
Further, the word “law” in Art 13(2) means a valid law and not any law whatsoever. Questions of constitutionality cannot be ousted just because a law (the ITA) was purportedly passed under Art 96. From a constitutional law point of view, it is unacceptable that just because the tax was in full accord with s 4C of the ITA, and s 4C was a law enacted by Parliament under Art 96 but in disregard of Art 13(2), therefore, section 4C was intra vires the Federal Constitution (paras 35-36 of the C.A. judgment). This is not a satisfactory way of discussing constitutional law.
What cannot be denied is that the ITA permits the Government to take away portions of the adequate compensation – in this case the assessment was RM52.96 million or 26.4% of the compensation! For this reason, I am inclined to agree with the Federal Court that Sections 4C and 24(1)(aa) of the ITA impair the right under Art 13(2) by subjecting the compensation to tax. The consequence is that adequate compensation becomes inadequate. This functional as opposed to a formal approach is not unknown to our jurisprudence. Refer to the decision in Nordin Salleh v Dewan Undangan Negeri Kelantan [1992] 1 MLJ 343. The provisions of the ITA are contrary to the spirit of Articles 13(2) and 4(1) and their consequence is that Art 13(2) is infringed.
Did the compulsorily acquired land constitute Wiramuda’s ‘stock in trade’? This is a highly technical issue of interpretation and requires mastery of the language of tax laws. Was the land a capital asset or a stock in trade? There is considerable judicial authority that a forced sale means that there was no trading since the element of compulsion vitiates the intention to trade: Lower Perak Cooperative Housing Society v Ketua Pengarah Hasil Dalam Negeri [1994] 2 MLJ 713; Ketua Pengarah Hasil Dalam Negeri v Penang Realty [2006] 3 MLJ 597; Metacorp Development v Ketua Pengarah Hasil Dalam Negeri [2011] 5 MLJ 447. Relying on earlier decisions, it can be submitted that a compulsory acquisition could not constitute a sale the proceeds of which could be taxable. In 2006 in Penang Realty and again in 2011 in Metacorp the judiciary ruled that compensation from compulsory acquisition was not liable to tax. It is surprising, therefore, that in the eyes of the High Court and the Court of Appeal, the issue still seemed unsettled.
In any case, the constitutional issue is that the appellant had property in the land. The term ‘property’ must be construed in the widest sense as connoting a bundle of proprietary rights – both corporeal and incorporeal. In Adong Kuwau v Kerajaan Johor [1997] 1 MLJ 418, the word property means not only the thing but also the rights in the physical and corporeal thing. Whether the property constituted “stock in trade” or a “fixed asset” – it was property. It was compulsorily acquired and adequate compensation was paid. But 52.96 million (or 26.14%) of the compensation was then charged by way of tax. What one hand bequeathed, another hand took away partly.
Most respectfully, I also disagree with the Court of Appeal in Wiramuda that the issue of whether compulsorily acquired land constitutes a ‘stock in trade’ is a question of fact. Surely, this is a mixed question of fact and law and it is sheer sophistry to reduce it to a mere question of fact.
THE FEDERAL COURT DECISION
The Federal Court’s landmark ruling clarifies a number of important constitutional issues, foremost of which is that in a country like the UK with a supreme Parliament, as long as the executive complies with the substantive and procedural requirements of the law, the executive’s actions have legal authority.
In a country like Malaysia, with a supreme Constitution, there is an additional dimension. Along with the executive complying with the law, the law of Parliament must also comply with the Constitution. This additional constitutional dimension is what seems to have been ignored by the High Court and the Court of Appeal in Wiramuda.
The Federal Court examined the issue whether Art 4(1) of the Federal Constitution is applicable to test the validity of s 4C of the ITA 1967? The apex court’s answer was in the affirmative. Sections 4C and S 24(1)(aa) of the ITA 1967 were inconsistent with Art 13(2) of the Federal Constitution in that they violated the constitutional promise of adequate compensation in Art 13(2).
For the above reason the apex court held that compensation from compulsory acquisition of property cannot be subject to income tax.
It must also be noted that as early as 2006, the Court of Appeal in Penang Realty and in 2011 the High Court in Metacorp had ruled that compensation for compulsory acquisition was not liable to tax. These cases censured the executive but left the law of Parliament untouched. What the Federal Court in Wiramuda has done is to go one step ahead and rule against the constitutionality of the legal provisions in the ITA.
Should the statutory remedy (appeal to the Special Commissioners of Income Tax under s 99(1)) be exhausted before the filing of the application for judicial review? The law on judicial review is very clear that an applicant must exhaust all adequate, available remedies before knocking on the doors of the judiciary for judicial review. In this case, an appeal to the SCIT was clearly available. Therefore, the High Court refused leave. An appeal to the Court of Appeal was also unsuccessful. However, the apex court admirably set aside many technicalities and heard the constitutional arguments fully.
Judges and lawyers, learned in court procedures, may argue for or against the Federal Court’s willingness to exercise jurisdiction. As a student of administrative law, what I can emphasise is that in an application for judicial review, the grant or refusal of leave involves wide discretion. The existence of an alternative remedy does NOT necessarily bar judicial review. See Metacorp Development [2011] 5 MLJ 447. The court may grant leave if the existing remedy is not adequate or appropriate. In this case, the SCIT, with all its competence, is NOT a suitable body to examine the issue of unconstitutionality. That function belongs to the High Court. See Ah Thian v Govt [1976] 2 MLJ 112. The High Court has wide powers, in special circumstances, to entertain an application for review. See M P Jain, Administrative Law of Malaysia, 2020, pp. 738-749. In this case, the question of the constitutionality of Sections 4C and 24(1)(aa) of the ITA was involved. It is submitted that this was a special circumstance for the court to give leave for the judicial review application.
Is the Federal Court ruling retrospective or prospective? There is no clear rule of thumb about whether a ruling should be declared prospective or retrospective. Judges around the world are guided, not by strict theory, but by practical considerations. Malaysian courts are divided in their approach. There seem to be several approaches. The doctrine of prospective overruling is a judicial tool fashioned to mitigate adverse consequences. It is submitted that the reopening of cases involving the levying of taxes, duties, cess etc is so harmful to the public interest that any retrospective application of the judicial ruling should be avoided: (UK) Practice Statement Judicial Precedent [1966] 1WLR 1234.
However, the court must expressly declare its intention to apply its decision prospectively. The court may do so in any exceptional circumstances (like taxation cases) where the judicial decision would affect the public interest or have gravely unfair and disruptive consequences for past transactions or happenings. It is submitted that the Wiramuda taxation case is an eminently suitable for a prospective ruling.