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Payment for Exemption from Building Low-Cost Housing is NOT Tax-Deductible

posted 2 months ago

In the recent case of Ketua Pengarah Hasil Dalam Negeri Malaysia v Ehsan Armada Sdn Bhd [2023] MLJU 2906, the Court of Appeal held that payment made by Ehsan Armada Sdn Bhd, a developer (“Taxpayer“) to the Lembaga Perumahan dan Hartanah Selangor (“LPHS”) to exempt itself from building low-cost housing was not deductible under Section 33(1) of the Income Tax Act 1967 (“ITA”) as it is capital in nature.


The salient brief facts of this case are as follows:

1. The State Authority, acting under the Town and Country Planning Act 1976, imposed a low-cost housing policy on property developers, including the Taxpayer.

2. Upon approval of the alienation of Tanah Anugerah (84 acres of land) to the Taxpayer, a condition was set for the Taxpayer to construct low-cost, medium low-cost, and medium-cost housing, aiming to address social concerns (e.g. relocating squatters) and yielding lower profit margins.

3. The Taxpayer made a payment of RM6,226,981.00 (“Exemption Sum”) to the LPHS to exempt itself from the State’s policy and requirement to build low-cost apartments in its Mutiara Indah Housing Project (“Project”) and subsequently claimed a tax deduction on the same. This payment sought exemption from the State’s low-cost policy, allowing the construction of free-market housing with higher profit margins.

4. Following a tax audit conducted by the Inland Revenue Board of Malaysia (“IRB”), the IRB disallowed the tax deduction claim of the Exemption Sum and subsequently issued the Notice of Additional Assessment, Notices of Assessment, and Notification of Non-Chargeability against the Appellant for the years of assessment 2007, 2008, 2009, and 2010.

5. As a result, the Taxpayer filed appeals to the Special Commissioners of Income Tax (“SCIT”) and the SCIT dismissed the Taxpayer’s appeal.

6. The Taxpayer then appealed to the High Court which was then allowed by the High Court.

7. Dissatisfied with the High Court decision, the IRB appealed against the said decision to the Court of Appeal.

The Court of Appeal’s Decision

8. The Court of Appeal (“CoA”) held, amongst others:

I. Subjective Test for Deductibility under Section 33(1) of the ITA

(a) The High Court Judge erred as the test in determining the deductibility of an expenditure under Section 33(1) of the ITA shall not be an objective one.

(b) The test is subjective, and not objective one. Proper subjective questions as to the nature and the purpose of the expenditure need to be ascertained.

(c) Here, the finer nuances and technical nature of low-cost housing property development need to be ascertained. The full context of the nature of the business and the nature of the project in and of itself must be subjectively examined and considered to determine whether an expense is an ordinary business expense.

(d) The Exemption Sum was not an ‘ordinary expense’ in the ordinary course of the Taxpayer’s business of property construction and development. The nature of the Project was a mixed development with low-cost housing policy in place. Thus, it is ordinarily expected that a portion of the business would by design be less ‘for-profit’ and more for social responsibility. There would be an expected reduction in profit margin due to the low-cost policy as the Taxpayer would not be able to construct and sell free market housing.

(e) Being exempted from the low-cost policy is an extraordinary feature as it exempts the Taxpayer from the social responsibility element.

(f) Additionally, the Taxpayer apportioned a specific class 3 slope area within the Project which was unsuitable for the construction of low-cost housing. The Taxpayer could have (but intentionally have not) simply apportioned any other part of the Project Land that was more suitable for low-cost housing. Hence, the Exemption Sum incurred was self-induced, and the Taxpayer had always to divert the business away from any element of low-cost housing.

(g) By paying the Exemption Sum, the Taxpayer will attain an enduring advantage which pivots its business to be more lucrative (by allowing the Taxpayer to enjoy the extraordinary margin of free market housing as compared with low-cost housing), it cannot be construed as an ordinary recurring business expense. It is a capital outlay.

II. Time Bar Issue

(h) The CoA held that the DGIR was not time-barred under Section 91(3) of ITA 1967 to issue the Assessments and Notices as the Taxpayer had negligently deducted the Exemption Sum.

III. Good Faith Defence

(i) The defence of good faith was not available against a penalty imposed under Section 113(2) of the ITA as the conduct of the Taxpayer (albeit the Taxpayer had obtained professional tax advice) did not amount to good faith. A genuine good faith conduct would be – written into the IRB or at least communicated with the IRB to seek clarification as to the IRB’s stance regarding the Exemption Sum.

(j) Since the Taxpayer failed to do so, the Taxpayer fell short of an honest and straightforward enquiry communicated to the IRB.


Following the CoA’s decision, the deductibility test under Section 33(1) of the ITA appears to be involved further. In determining whether an expenditure is tax deductible, one needs to apply the subjective test. In other words, the expenditure is deductible under Section 33(1) of the ITA if it is so necessary to enable the business to carry on and earn profits and NOT to enlarge the profit margin. In differentiating whether the expenditure is capital in nature, an enduring advantage must be gained which pivots the business to be more lucrative (and not merely to enable business or trade).

Another notable development is the good faith defence under Section 113(2) of the ITA wherein the CoA appears to increase the threshold of such defence. It is no longer sufficient for taxpayers to obtain professional tax advice; taxpayers must write into and/or communicate with the IRB about the tax issues which appear to be vague. Now, the question arises – would the taxpayers able to raise the good faith defence if the IRB only responded after the taxpayers had filed its tax returns? Next, a practical question – whether the IRB has sufficient manpower to respond to taxpayers’ enquiries moving forward? Such high threshold imposed on the good faith defence under Section 113(2) of the ITA appears to be going against the very spirit of Malaysian tax regime which is self-assessment system in nature.

This article is intended to be informative and not intended to be nor should be relied upon as a substitute for legal or any other professional advice.

About the authors

Desmond Liew Zhi Hong
Halim Hong & Quek
[email protected]

Khew Gerjean
Halim Hong & Quek
[email protected]



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