education about malaysian taxation principles and practice part 2

3.0 Income
The distinction between capital and income is crucial. The Act imposes income tax on 'income'. Capital gains are not chargeable to income tax. The Act does not define 'income' nor 'capital', thus one needs to research through the case laws for guidance.

Lord Macmillan observed in Van den Berghs Ltd v Clark (19 TC 390) at p. 428 :
"...The income Tax Acts nowhere define 'income' any more than they define 'capital'; they
describe sources of income and prescribe methods of computing income, but what constitutes
income they discreetly refrain from saying ... Consequently it is to the decided cases that one
must go in search of light..."

In practice, the distinction between 'capital' and 'income' is never an easy task. Greene MR commented in CIR v British Salmson Aero Engines Ltd [1938] 2 KB 482 at p. 498 :
"...in many cases it is almost true to say that the spin of a coin would decide the matter almost
as satisfactorily as an attempt to find reasons."

Generally, the issue of income determination would be resolved by examining the pertinent facts of a particular case using the standards of a reasonable man. Income has the characteristics of repetitive, flow from a source of income and received in the ordinary course of business. It must also be examined from the recipient's perspective. On the other hand, realisations from long term investment or personal assets are capital transactions. Such gains are capital receipts.

3.1 Commonwealth laws
Although judicial guidance does provide assistance on the meaning of 'income', it is however never exhaustive. The merits of each case must be considered. In CIT, Bengal v Shaw Wallace & Co (1932) 6 ITC 178, 'income' connotes a periodical monetary return 'coming in' with some sort of regularity, or expected regularity, from defined sources.

The source is not necessarily of one which is expected to be continuously productive, but it must be one whose object is the production of a definite return, excluding anything in the nature of a mere a windfall. Windfall, gambling or profits arising from speculative activities are capital gains and would not be subject to income tax.

Cost saving is not income and would not be taxed. In FCT v Cooke and Sherden (1980) 10 ATR 696 (Full FC), the court establish that 'If the receipt of an item saves a taxpayer from incurring expenditure, the saving is not income. Income is what comes in, it is not what is saved from going out.

3.2 Malaysian experience
In Mamor Sdn Bhd v Director General of Inland Revenue [1981] 1 MLJ 117 (HC), the company appealed to the High Court on the issue of whether a sum received from the extraction and sale of timber from State Government land, alienated to the company for the development of oil palm, would be 'income' in nature and be assessable to the income tax.

In the said case, Annuar J. laid down the following propositions of law :
(a) In order for transaction to be taxed as income, the nature of gains or profits has to fall into
any of the s 4(a) to (f).
(b) Not every gain, profit or earning of the taxpayer is 'income' for the purpose of tax.
(c) One has to resort to case laws to explore the scope of 'income'.
(d) A rigid / strict interpretation of the Act is required. Fairness or equity is never a
consideration for the interpretation of Income Tax Act.

The distinction between 'income' and 'capital' is a difficult one. Although the High Court in Mamor held that the extraction and sale of timber in the course of developing the said land into oil palm plantation is capital, the Federal Court nonetheless reversed the High Court's decision and held that the extraction and sale of timber fall into the ambit of s 4(a) - Business Income and subject to income tax.

Upon further appeal to Privy Council, Lord Keith of Kinkel at the Privy Council, however restored Anuar J's decision and held that the sale of timber in the course of oil palm plantation was a capital transaction. In the Lordship's view, the extraction of timber was inseparable from the process of developing the land as an oil palm plantation. Sale of the timber was a sound economic course to mitigate the cost of development, a capital expenditure.

Mamor's decision was one of the many cases illustrating the difficulty in distinguishing between 'income' and 'capital'. With the same facts, the High Court and Federal; Court could arrive at different conclusions. It is therefore concluded that the question of income or capital is a question of law for the courts to decide.

3.3 Offshore business
Section 3 sets the scope of income tax, that is, income accrued in or derived from Malaysia would be tax. However, s 3B of the Act specifically provides that income derived by an offshore company in respect of offshore business activity is not chargeable to income tax. The law governing the tax for such offshore business activity is the Labuan Offshore Business Activity Tax Act, 1990 and not the Income Tax Act 1967.