SUNWAY REIT HOLDINGS SDN BHD v KETUA PENGARAH HASIL DALAM NEGERI

Case Significance

Holds that section 33(1) of the Income Tax Act 1967 does not permit apportionment of interest expenditure: qualifying interest laid out to produce gross income is deductible in full, and Public Ruling No. 2/2011, in purporting to authorise apportionment, is ultra vires — leading the Court of Appeal to allow a full deduction of RM18,188,537.62 and set aside the decision below.

This Court of Appeal decision at Putrajaya (sitting with a coram of Supang Lian, Lim Chong Fong and Alwi bin Hj Abdul Wahab JJCA) is a tax appeal concerning the deductibility of interest expenditure under the Income Tax Act 1967. The appellant, Sunway REIT Holdings Sdn Bhd, a member of the Sunway group, had incurred interest expenditure and claimed it as a deduction against its income; the respondent, the Ketua Pengarah Hasil Dalam Negeri (the Director General of Inland Revenue), had disallowed part of it. The dispute engaged two connected questions: the character of the return of capital received by the appellant from Sunway REIT, and whether the Director General could apportion the interest expenditure so as to allow only part of it as a deduction, in reliance on Public Ruling No. 2/2011.

The court decided both issues in the appellant's favour. It held that the return of capital received from Sunway REIT was in the nature of taxable income in the appellant's hands. More significantly for the deduction claimed, it held that section 33(1) of the Income Tax Act 1967 does not permit the apportionment of interest expenditure, so that the interest, having been laid out to produce gross income, fell to be deducted in full rather than being pro-rated. On that reasoning the court held that Public Ruling No. 2/2011, in purporting to authorise an apportionment, was ultra vires section 33(1). It accordingly allowed the full deduction of RM18,188,537.62 in interest expenditure against the appellant's taxable income for the relevant year, set aside the decision of the High Court, and awarded costs to the appellant. The court's reasoning turned on the primacy of the statute over a public ruling: a ruling issued by the revenue authority is an administrative interpretation that cannot enlarge or contract the deduction that the words of section 33(1) themselves confer, and to the extent it does so it must yield. The judgment is an important statement that section 33(1) of the Income Tax Act 1967 confers a full deduction for qualifying interest laid out in the production of gross income and does not sanction apportionment by administrative ruling.