Tax, Trade & Customs Update: Unlawful Taxation of Compulsory Acquisitions Must be Reversed and Refunded

Recent Superior Court decisions continue to affirm taxpayers’ rights in relation to compensation received from compulsory acquisitions of land. The Courts in all these cases have consistently held that the proceeds from such acquisitions are not subject to income tax, received on capital account and exempt from real property gains tax. 

In Wiramuda (M) Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri [2023] 4 MLJ 753 (“Wiramuda”), the Federal Court held that section 4C of the Income Tax Act 1967 (“ITA”) is unconstitutional as it infringed the landowner’s constitutional right to adequate compensation. As such, proceeds from compulsory acquisition of land are not subject to income tax and the Revenue should refund any income tax paid on the same.This is consistent with the earlier binding decisions in Ketua Pengarah Hasil Dalam Negeri v Penang Realty Sdn Bhd and another appeal [2006] 3 MLJ 597 and Ketua Pengarah Hasil Dalam Negeri v Metacorp Development Sdn Bhd [Civil Appeal No. W-01-239-2011], which held that such gains are not taxable.

Further, in Ketua Pengarah Hasil Dalam Negeri v Sime Darby Ara Damansara Development Sdn Bhd [Civil Appeal No. W-01(A)-551-08/2022] (“SDAD”), the Court of Appeal in 2025 affirmed the High Court’s decision in favour of the taxpayer1 on the same issue as above and confirmed that, among others:

  • The 2007 Decision Impact Statement (“DIS”) relied upon by the Revenue has no legal basis under the ITA (which only provides for Public Rulings under section 138A);
  • There is no “generally prevailing practice” capable of overriding binding judicial precedent; and
  • The taxpayer was entitled to a tax refund under section 131 of the ITA.

The effect of SDAD is clear. The Revenue has no right to retain taxes that were paid under an error or mistake. If income tax was erroneously or mistakenly paid on compulsory acquisition compensations, taxpayers are entitled to seek refunds of the same. 

While section 131 of the ITA prescribes a five-year time frame, it is arguable under general principles of Malaysian law that monies collected without lawful authority should not be retained by a public authority and ought to be refunded.

Following Wiramuda, a point of contention that has arisen in several recent High Court cases is whether the declaration of the Federal Court that section 4C is unconstitutional applies retrospectively or prospectively. As the decisions of the High Court on this point appears to be divided, further clarification and guidance from the appellate courts is awaited.

Taxpayers who have paid income tax on compulsory acquisition proceeds at any time should review their position and consider applying for refunds as soon as possible.

Footnote:

  1. Sime Darby Ara Damansara Development Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri [2023] 8 MLJ 294

For more information about the above or tax matters in general, please contact:

Anand Raj – anand@shearndelamore.com
Irene Yong – irene.yong@shearndelamore.com
Foong Pui Chi – foongpuichi@shearndelamore.com

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THIS UPDATE IS ISSUED FOR THE INFORMATION OF THE CLIENTS OF THE FIRM AND COVERS LEGAL ISSUES IN A GENERAL WAY. 
THE CONTENTS ARE NOT INTENDED TO CONSTITUTE ANY ADVICE ON ANY SPECIFIC MATTER AND SHOULD NOT BE RELIED UPON AS A SUBSTITUTE FOR DETAILED LEGAL ADVICE ON SPECIFIC MATTERS OR TRANSACTIONS.
 

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