2. Datuk Yap Pak Leong v. Ketua Pengarah Hasil Dalam Negeri - BKI-14-1/2-2013

Introduction

The case between Datuk Yap Pak Leong, the appellant and Ketua Pengarah Hasal Dalam

Negeri, the respondent was held in the high court in Sabah and Sarawak at Kota Kinabalu with

the case number BKI-14-1/2-2013. It is known to be an appeal case stated against the decision of

the Special Commissioners of Income Tax (SCIT) under Paragraph 34 of the 5th schedule of the

Income Tax Act 1967.

According to the grounds of decision, the reason for determination of this case before SCIT

was whether certain expenses incurred by the appellant, such as staff quarters upkeep, maid

expenses, and purchases of gadgets and furniture qualify for deduction under Section 33(1) and

Schedule 3 of the Income Tax Act 1967 in computing the adjusted income of the appellant for

the Years of Assessment 2004 to 2006. Referring to Section 33(1), it stated that ‘the adjusted

income of a person from a source for the basis period for a year of assessment shall be an amount

ascertained by deducting from the gross income of that person from that source for that period all

outgoings and expenses wholly and exclusively incurred during that period by that person in the

production of gross income from that source’. Business expense has to fulfil some requirements

or conditions in order to secure a deduction from the gross income of a business source. Each

business source has to be accounted separately, it must be incurred, it must be in the production

of the gross income from that business source, and the expenses must be ‘wholly and

exclusively’, and lastly it must be the scope of expense that are referring to the ‘outgoings and

expenses’.

The case was also raised to determine whether the penalty that had been imposed on the

appellant under Section 113(2) of the Act is correct. This can be related to the Section of 113(2)

of Income Tax Act 1967 ‘where a person-

(a) makes an incorrect return by omitting or understating any income of which he is required by

this Act to make a return on behalf of himself or another person; or

(b) gives any incorrect information in relation to any matter affecting his own chargeability to

tax or the chargeability to tax of any other person’.

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Facts of case

Based on the case between Datuk Yap Pak Leong against Ketua Pengarah Hasil Dalam

Negeri, the appellant works as a qualified public accountant. He owns a business entity known as

PLY Plantation. The business runs a 900 acre oil palm plantation in the Sandakan area which is

about five to six hours away from Kota Kinabalu. PLY Plantation is not an incorporated

company, but it is a sole proprietorship owned by the appellant. Hence the appellant considers

the income received from PLY Plantation as his personal income, chargeable under income tax.

Yap Fook Chin who is the son of the appellant is also the general manager of PLY

Plantation. The general manager was not paid any remuneration out of his contribution for the

company as a general manager due to the appellant’s case. He was, however, provided with

employment perquisites in the form of staff quarters and two maids. Due to the fact of the

appellant’s case as well, the general manager had declared these perquisites in his tax returns.

The facts mentioned thus far are known to be largely undisputed.

Besides, in 2008, the respondent carried out an audit on the financial records of the

appellant for the years 2004, 2005, and 2006. During the audit period, there was an indication

that the respondent was furnished with various invoices and receipts in respect of the Staff

Quarters upkeep expenses and the purchase of furniture and gadgets. Also, the respondent

discovered that the Staff Quarters to which the invoices and receipts related to was No. 88 Jalan

Bukit Bendera in Kota Kinabalu. Subsequently, a search with the Lands and Survey Department

revealed that the premises were owned by the appellant.

The final result of the audit exercise showed that the respondent disallowed the

appellant’s claim for deductions for staff quarters upkeep, maid expenses, purchase of furniture

and gadget expenses for the years 2004, 2005, and 2006. These deductions were claimed by the

appellant under the self-assessment regime when filing his tax returns for the period 2004 to

2006. The said deductions are neatly set out in Grounds of Decision ruled by the SCIT as

follows:

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Appellant’s claim YA 2004 (RM)

YA 2005 (RM)

YA 2006 (RM)

Staff quarters’ upkeep 22,234 - -

Sanitation maids’ expenses

12,910 12,000 15,000

Labour quarters’ upkeep

- 30,356 10,365

Total 35,144 42,356 93,089

Moreover, the appellant’s claim for capital allowances on gadgets, such as MP3 player and iPod Nano

and furniture were disallowed by the respondent. The following table illustrates the appellant’s claim for

capital allowance deductions:

Appellant’s claim YA 2004 (RM)

YA 2005 (RM)

YA 2006 (RM)

Gadget expenses 470 405 1,511

Furniture 900 10,261 6,846

Total 1,370 10,666 8,357

The respondent issued a letter to the appellant on 24th October 2008 together with income and tax

computation and three Notices of Additional Assessment subsequent to the disallowance of

above deductions.

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Issues

Referring to the case of Datuk Yap Pak Leong v. Ketua Pengarah Hasil Dalam Negeri,

the issue that was discussed is whether certain expenses incurred by the appellant, 25 namely,

staff quarters upkeep, maid expenses, and purchases of gadgets and furniture qualify for

deduction under section 33(1) and Schedule 3 of the Income Tax Act 1967, in computing the

adjusted income of the appellant for the Years of Assessment 2004, 2005 and 2006. The next

issue is whether the penalty imposed on the 30 appellant under section 113(2) of the Act is

appropriate. The final issue is whether the capital allowance claimed by the appellant on the

expenditure incurred on modern gadgets and house furniture are allowed.

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Decision and Discussion

There are few discussions that had been discussed in the case. One of it is that Special

Commissioners of Income Tax had found that all the expenses incurred by Datuk Yap Pak Leong

for the ‘upkeep’ of the ‘staff quarters’ and the luxury home in Kota Kinabalu is owned and

occupied by the appellant. Actually there is no reason why SCIT wants to interfere because they

already accept the evidence of the assessment officer who have been carried out the audit. The

assessment officer found the invoices and also the receipt that supported to renovate the private

residence of the appellant. The other reason why it should not interfere is because the appellant

has not argued with the evidence that found by assessment officer. Datuk Yap even did not call

any witnesses at the hearing before the SCIT and he only tender the documents and made a

submission.

Under the appellant’s claim, there is ‘sanitation maid expenses’ in which the expenses are

related to the two maids who worked at the appellant’s private residence was also not disputed. It

was being question whether the expenses are deductible under Section 33(1) as outgoings in the

production of income. Although the luxury home can be considered as ‘staff quarters’ for the

general manager, it already stated in the evidence that the assessment officer was accepted by the

tribunal that the ‘repairs’ to the house is more in the nature if renovation or renewal. Therefore, it

cannot be considered as the maintenance expenditure. This situation can also be applied in the

situation where the two maids worked for the general manager. It is clear that the two maids

worked in the private residence of the appellant so it is sure that the general manager and his

family also lived in the house and the general manager was entitled two maids under his contract

of employment. However, the appellant admit that he and his wife also lived in the same house

with the general manager. Therefore, the maid expenses cannot be considered as wholly and

exclusively incurred in the production of income.

The word ‘wholly and exclusively’ is not defined in the Act. In order to rank for the

deduction, the outgoings and expenses must be satisfied with the ‘wholly and exclusively’ test as

provided in the Section 33 of Income Tax Act. ‘Wholly’ refers to the quantum of money have

been expended whereas, ‘exclusively’ it refers to the motive or object in the mind of incurrence

and the purpose must be the sole purpose. Therefore, in the case it is discussed that it is

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impractical for the appellant to take the position that he did not obtain any benefit of the services

of the maids. Under Section 39(1), the deductions from the gross income for domestic or private

expenses are disallowed.

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Conclusion

It is concluded that although Datuk Yap Pak Leong did not agree with the decision made

by the Special Commissioners of Income Tax (SCIT), it is proven that after going through the

case, SCIT did not commit any error with regards to the law, affirming the decision of the

respondent in imposing the penalty under Section 113(2) of the Act. Hence, the appeal was

wholly dismissed with the cost of RM 5,000.

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