Court of Appeal upholds tax refund for IOI Properties subsidiary on land compensation

The Court of Appeal has upheld a tax refund for Lush Development Sdn Bhd, an IOI Properties Group subsidiary, confirming that the Federal Court's ruling against taxing compulsory land acquisition compensation applies retrospectively. The decision dismisses the Inland Revenue Board's appeal and award

PETALING JAYA (Oct 22): The Court of Appeal has upheld a tax refund for an IOI Properties Group Bhd subsidiary, confirming that the Federal Court’s ruling against taxing compulsory land acquisition compensation applies retrospectively, according to its written judgment dated Oct 19.

The decision benefits Lush Development Sdn Bhd, which paid tax on compensation received before the Federal Court struck down Section 4C of the Income Tax Act 1967 in December 2022. IOI Properties’ website identifies Lush Development as a subsidiary of the property group.

The appellate court held that the benefit of the Federal Court’s decision in Wiramuda (M) Sdn Bhd v Director-General of Inland Revenue was not confined to the company that brought that challenge. However, individual refund claims remain subject to the limitation periods and other requirements applicable to the legal route used. Retrospective application does not create an unrestricted entitlement to recover past payments.

A three-member bench comprising Justices Azizul Azmi Adnan, Ong Chee Kwan and Mohd Radzi Harun dismissed the Inland Revenue Board’s (LHDN) appeal against the High Court’s refund order. It upheld interest of 5% a year from March 8, 2023, when Lush Development filed its judicial review application, and awarded RM50,000 in appeal costs. Corresponding orders were made in the related appeal involving Tanda Bestari Development Sdn Bhd.

Lush Development received RM22.47 million in compensation after the Selangor State Authority compulsorily acquired seven parcels of its land in October 2016. It declared the compensation as taxable income for the 2017 assessment year and subsequently sought repayment following the Wiramuda ruling.

Section 4C had treated compensation from the compulsory acquisition of land held as stock-in-trade as taxable business income. In Wiramuda, the Federal Court held that taxing such compensation diminished the adequate compensation guaranteed to landowners under Article 13(2) of the Federal Constitution. The apex court reasoned that adequate compensation places a landowner in the financial position they would have occupied had the land not been compulsorily acquired, rather than conferring a business profit.

Delivering the Court of Appeal’s judgment, Ong said Section 4C was void from the outset, with no direction from the Federal Court restricting its decision to future cases. LHDN could not rely on the finality of Lush Development’s assessment or the five-year limit governing repayment of overpaid tax to defeat the claim. The court distinguished an ordinary overpayment under a valid assessment from recovery of money collected under an unconstitutional provision.

Nevertheless, the bench did not accept every aspect of the High Court’s reasoning. It agreed with LHDN that failing to answer a letter within a deadline set unilaterally by a taxpayer did not, by itself, create a decision that could be challenged through judicial review. The refund order was nevertheless upheld on a separate basis: LHDN’s continuing public duty to apply the Federal Court’s ruling uniformly to affected taxpayers. The court therefore upheld relief compelling LHDN to perform that duty and refund the tax, rather than quashing a deemed rejection of the company’s request.

The bench also rejected LHDN’s argument that the prospect of further refund claims justified restricting the ruling’s retrospective effect. It found that the claimed financial exposure lacked evidential support.