LAM KAM WING v KETUA PENGARAH HASIL DALAM NEGERI

Case Significance

Illustrates how "control" is assessed under section 139 of the Income Tax Act 1967 for an allowance exemption — a substantial minority shareholding can amount to control and defeat the exemption — and the distinction between a merely incorrect return and a fraudulent or dishonest one when a tax penalty is challenged.

This Court of Appeal decision concerns an income-tax dispute over the taxability of employee allowances and the imposition of a penalty. The appellant taxpayer had challenged the High Court's decision which, on a case stated, had affirmed the Special Commissioners of Income Tax in dismissing his appeal against Notices of Additional Assessment for the years of assessment 2011 and 2012. Two issues fell for decision. The first was whether the allowances the appellant received as an employee were exempt from tax under the Income Tax (Exemption) Order 2009. The appellant held 30% of the company's shares — the largest holding among nine shareholders — and the Special Commissioners had found, and the Court of Appeal agreed, that this gave him "control" within the meaning of section 139 of the Income Tax Act 1967, which disqualified him from the exemption; the appeal on this ground was accordingly dismissed. The second issue concerned the penalty imposed under section 113(2) of the Income Tax Act 1967. Here the court took a different view: although the appellant's return was incorrect, it was not fraudulent or dishonest, and the court held that the penalty imposed under the relevant provision should be set aside. The result was that the appeal was allowed in part — the appeal against the additional assessments for 2011 and 2012 was dismissed, but the penalty was set aside — with no order as to costs. The judgment is a useful illustration of how "control" is assessed under section 139 for the purpose of an allowance exemption, so that a substantial minority shareholding can amount to control and defeat the exemption, and of the distinction the courts draw between an incorrect return and a fraudulent or dishonest one when deciding whether a tax penalty should stand. The split outcome — the assessments upheld but the penalty struck down — shows the two questions being kept analytically distinct, so that a taxpayer may fail on liability yet succeed in resisting a penalty where the revenue cannot show that an incorrect return was fraudulent or dishonest.