Tax Deductibility of Valuation Fee

This article is written by Lee Hishamuddin and Gledhill (LHAG) and was first published in their Tax e-Alert in October 2019. Reproduced with permission from LHAG.

In the case of  CP Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri, the high court  allowed a taxpayer to deduct the valuation fee incurred by them to value their properties, including their investment property in the form of a shopping mall. The taxpayer was successfully represented by our Tax, SST & Customs partner, S Saravana Kumar. 

Background facts

The taxpayer is a property developer, property investor and a lessor of properties. The taxpayer accredited a valuation report to prepare their financial statement in accordance with the Financial Reporting Standard 140 (FRS 140). The valuation report contained the taxpayer's property value at the end of the financial year end. 

In order to be certain of the market value of the taxpayer's investment properties, CP Sdn. Bhd had to incur a valuation fee in the year 2012.The valuation report The valuation report guided the taxpayer in ensuring its transactions would be made at the prevailing market price and that its properties were sold for the best prices. The taxpayer deducted the valuation fee incurred as a business expenditure under Section 33(1) of the Income Tax Act 1967 (ITA). 

However, the DGIR raised a notice of additional assessment with penalty against the tax payer on the grounds that the valuation fee was not a mandatory expenditure for the tax payer. The taxpayer appealed to the Special Commissioners of Income Tax (SCIT), who agreed with the DGIR and concluded that the valuation fee was not a mandatory expenditure in the ordinary course of business and that the expenditure did not lead to the production or increase of profit.

The taxpayer's case

The taxpayer’s arguments were as follows: 

The preparation of the FRS 140 is part of the taxpayer’s statutory audit fees expenditure. This is specifically allowed as a deduction under Paragraph 2 of the Income Tax (Deduction for Audit Expenditure) Rules 2006 (the Rules) which states that “ for the purpose of ascertaining the adjusted income, there shall be allowed a deduction of an amount equivalent to the amount of statutory audit fees expenditure incurred in that basis period”. The Rules were made by the Minister of Finance pursuant to Section 154(1)(b) of the ITA .

The DGIR’s Public Ruling at paragraph 5.8 of Public Ruling (PR) No 6/2006, which is titled “Tax Treatment of Legal and Profession Expenses”, states that professional expenses incurred by a developer or dealer in property for valuation in land is a deductible expense. This PR specifically allows deduction for the valuation fee.

DGIR'S Argument

The DGIR stated that the taxpayer was just complying with the FRS 140 and the valuation fee incurred was not wholly and exclusively incurred in the production of income. The DGIR also argued that it is not mandatory to engage a professional valuer under the law.

High Court's Decision

Necessity not an ingredient for deduction

The SCIT had misdirected themselves in law by imposing an additional requirement that an expenditure needs to be mandatory or necessary to be deductible. The High Court made reference to the Kok Fai Yin case, which held that one should not read the word “necessarily” into Section 33(1) as it was not inserted by Parliament. Additionally, it was held in Kulim Rubber Plantations’ case that as long as an expense was made bona fide in the course of the business, in the interest of the efficiency of the business or indirectly to facilitate the carrying on of the business, such an expense is incurred wholly and exclusively for the production of income. This is despite the expense being incurred not out of necessity or due to a legal requirement. Hence the valuation fee was incurred by the taxpayer to obtain the market value of its assets for the purpose of complying with the arm’s length principle.

Production of actual profit is not required 

The High Court relied on Ryoshindoh Manufacturing in ruling that the SCIT had erred in reading the phrase “in the production of gross income” to mean that the valuation fee had to result in an actual production or increase of profit before it is deductible. If an expense was incurred in the operation of the taxpayer’s business as a whole, then the expense should be deductible.Under Section 33(1) it is not relevant whether the expenditure produces or increases profit.The High Court arrived at the conclusion that the expense fell squarely under Section 33(1) in light of the taxpayer’s principal activities. It was recognised that the valuation of the taxpayer’s properties was important to the taxpayer’s business.

Conclusion

Upon considering the arguments and ITA under Section 33(1) which governs the deductibility of a taxpayer's business expenses. If an expense incurred is wholly and exclusively for the business purpose, then it can be deducted against the company's gross income. The High Court in this case has made it clear that the laws are to be read as intended by Parliament, and not by the DGIR’s own interpretation of the law.

Our Tax, SST & Customs senior partner Datuk D P Naban and partner S Saravana Kumar successfully represented the taxpayer in the Power Root case at the Court of Appeal.

For any questions in relation to tariff classification in respect of sales tax, please contact our Tax, SST & Customs partners at tax@lh-ag.com