LHDN must refund tax on land acquisition compensation, court rules

The Inland Revenue Board (LHDN) must refund tax collected on compensation paid for the compulsory acquisition of private land, after the Court of Appeal rejected its attempt to limit the effect of a landmark Federal Court ruling.

A three-member bench chaired by Justice Azizul Azmi Adnan, who sat with Justices Ong Chee Kwan and Radzi Harun, dismissed LHDN’s appeal against an order directing it to refund tax paid by Lush Development Sdn Bhd.

Ong, who delivered the judgment, said the Federal Court’s 2022 ruling declaring Section 4C of the Income Tax Act 1967 unconstitutional applied retrospectively and was not confined to the company that brought the case.

The provision treats gains from compulsory land acquisition as income for tax purposes.

Lush Development received RM22.47 million in compensation for the compulsory acquisition of seven parcels of land in Selangor in 2016. It reported the sum as taxable income for the 2017 assessment year and paid the tax.

The company subsequently sought a refund following the Federal Court’s decision in Wiramuda (M) Sdn Bhd v Director-General of the Inland Revenue Board on Dec 9, 2022.

In upholding the High Court’s order, Ong said Section 4C of the Act had been declared unconstitutional and was therefore void from the outset.

The court rejected LHDN’s argument that statutory provisions governing tax assessments and refunds prevented the company from obtaining relief through judicial review.

It also held that the five-year time limit for claiming overpaid tax did not bar restitution of tax collected under a provision subsequently declared unconstitutional.

The bench upheld the order requiring LHDN to refund the tax with 5% annual interest from March 8, 2023, and ordered the board to pay RM50,000 in appeal costs.

The court made corresponding orders in another appeal involving Tanda Bestari Development Sdn Bhd.

LHDN had warned that allowing such claims could trigger substantial refunds.

However, the court found that LHDN’s unsupported estimate of a RM600 million exposure did not justify restricting the Federal Court ruling to future cases.