Revenue’s Position

The Revenue contended that:

1. The Disputed Sum was excluded under Section 39(1)(b) of the ITA, which prohibits the deduction of “disbursements or expenses not being money wholly and exclusively laid out or expended for the purpose of producing the gross income”.

2. Payments made to non-customers, such as the Sub-Contractor, do not qualify for deduction.

3. Following the FC’s decision, the payment involved “trust monies” and a “breach of trust”.

4. The principles established in the case of CKB Ltd v Ketua Pengarah Hasil Dalam Negeri (1996) MSTC 2695 (The CKB Case) precluded the deduction.

Taxpayer’s Contentions

The Taxpayer contended that:

1. The Disputed Sum was deductible under Section 33(1) of the ITA, as it was “necessary for”, “attached to”, and “clearly connected to” the Taxpayer’s banking The payment arose from obligations integral to the Taxpayer’s business.

A holistic approach should be applied to assess the deductibility of business expenditures, rather than isolating specific facts.

2. Consistent with the above, courts across the Commonwealth have held similar expenditures to be deductible, including in Australia, England, India, British Guiana (now Guyana), Canada, and Singapore.

3. The Revenue’s four reasons for disallowing the deduction were flawed:

a. Section 39(1)(b) of the ITA merely states the opposite of Section 33(1) of the ITA, which the Taxpayer contends has been fulfilled.

b. Section 33(1) of the ITA does not require expenses to be paid to customers or income-generating entities. Many deductible expenses (e.g., salaries, utilities) are not paid to such parties. The Revenue has taken an artificial, narrow, and impossible view of how business is conducted. The Revenue’s Position would also result in manifest absurdity; the courts are duty-bound to avoid this in interpreting statutes.

c. The Revenue has repeatedly alleged that the FC held that the monies received by the Taxpayer were “trust money” and that there was an element of breach of trust in the case.

There is no evidence whatsoever to show that the FC made such a decision. The FC did not issue grounds for its decision. The letter by the Taxpayer’s solicitors in the legal claim referred to by the Revenue made no mention of “trust monies” or “breach of trust”. Neither did the FC’s order for the Disputed Sum to be paid.

d. The Revenue’s witness admitted in cross-examination that the facts of the CKB Case differ.

i. The CKB Case dealt with bad debt deductions under Section 34(2) of the ITA and an illegal loan given by the taxpayer, which contravened the Companies Act 1965 (“CA 1965”).

ii. The Taxpayer’s case concerns the deductibility of the Disputed Sum under Section 33(1) of the ITA. It does not relate to bad debt or Section 34(2) of the ITA. There is no issue of illegality, nor is there any contravention of the CA 1965 or other legal provisions.

SCIT’s Decision

The SCIT ruled in favour of the Taxpayer, holding that:

1. The FC’s decision for the Taxpayer to pay the Disputed Sum to the Customer was linked to the Sub-Contractor’s Letter of Instructions, which was issued as part of the Taxpayer’s banking business.

2. Based on the evidence and circumstances, this Disputed Sum was clearly incurred by the Taxpayer in running of its banking business for the production of income.

Concluding Thoughts

This decision reaffirms that expenses related to legal disputes can qualify for deduction if they are directly tied to the taxpayer’s business operations. Taxpayers should note that deductions are not restricted to payments made to customers or income-producing entities but can extend to legitimate legal obligations arising as part of their operational activities.

The Taxpayer was successfully represented by Chris Toh Pei Roo (tpr@lh-ag.com) and Soon Jia Ying (jys@lh-ag.com) from Lee Hishammuddin Allen & Gledhill’s Tax, Customs & Trade Practice.

If you have any queries regarding the tax deductibility of expenses or assessments issued by the Revenue, please contact Partner Chris Toh Pei Roo (tpr@lh-ag.com) or Associate Soon Jia Ying (jys@lh-ag.com).