SOUTHERN POWER GENERATION SDN BHD v Ketua Pengarah Hasil Dalam Negeri

Case Significance

A substantial illustration of judicial review of income tax assessments, addressing the characterisation of energy-project receipts under subsection 4(a), the deductibility of Sukuk financing costs under paragraph 33(1)(a), and section 110 tax credits under the Income Tax Act 1967.

This High Court decision at Johor Bahru is a judicial review by an independent power producer challenging tax assessments raised against it by the Director-General of Inland Revenue. The applicant, Southern Power Generation Sdn Bhd, was established to generate and supply electricity to Tenaga Nasional Berhad and had built a combined-cycle gas-fired power plant in Pasir Gudang, financed through the issuance of Sukuk, part of the proceeds of which were invested in unit trust funds pending deployment. Following a tax audit, the Director-General disallowed several positions taken by the applicant and raised Notices of Assessment for the years of assessment 2017 to 2021 totalling approximately RM78.5 million, which the applicant sought to quash by certiorari under Order 53 of the Rules of Court 2012, leave and an interim stay having earlier been granted. The applicant contended that the assessments were unlawful and tainted by errors of law. The court, per Dr Noradura binti Hamzah JC, examined the substantive tax issues and found in the applicant's favour on each. It held that the Energy Test Payments were taxable as business income under subsection 4(a) of the Income Tax Act 1967, and not under subsection 4(f); that the interest expense arising from the Sukuk was deductible under paragraph 33(1)(a); that the applicant was entitled to a set-off of tax credit under section 110 in respect of the unit trust dividends; and that the Director-General had acted on an error of law in disallowing deductions for provisions that the applicant had never in fact claimed in its computation. Holding that the assessments lacked a legal foundation, the court quashed the impugned Notices of Assessment for the years 2017 to 2021 by certiorari and made consequential declarations reflecting each of those findings on the characterisation and deductibility of the items. The judgment is a substantial illustration of judicial review of income tax assessments and of the characterisation of energy-project receipts, Sukuk financing costs and tax credits under the Income Tax Act 1967.