S113 (2) of Income Tax 1967 has been under the limelight of SME Malaysia with the introduction of tax audit with effect from 2001. Inland Revenue Malaysia (IRB) has been imposing penalty under S113 (2) on taxpayers whom under declaring their tax liabilities.
S113 (2) reads as follow:
Where a person:
(a) makes an incorrect return by omitting or understating any income of which he is required by this Act to make a return on behalf of himself or another person; or
(b) gives any incorrect information in relation to any matter affecting his own chargeability to tax or the chargeability to tax of any other person.
then, if no prosecution under subsection (1) has been instituted in respect of the incorrect return or incorrect information, the Director General may require that person to pay a penalty equal to the amount of tax which has been undercharged in consequence of the incorrect return or incorrect information or which would have been undercharged if the return or information had been accepted as correct; and, if that person pays that penalty (or, where the penalty is abated or remitted under subsection 124(3), so much, if any, of the penalty as has not been abated or remitted), he shall not be liable to be charged on the same facts with an offence under subsection (1).
We noted that S113 (2) has been used on routine and mechanical basis by IRB officers for all cases of under declaring of income tax without exercising the judgement in considering the merit of tax audit cases.
However, the jurisdiction given under S113 (2) to the IRB to impose penalty has been under scrutinisation after the case law of OPD Sdn. Bhd. vs Ketua Pengarah Hasil Dalam Negeri.
(2) Salient features of the OPD Sdn. Bhd. vs Ketua Pengarah Hasil Dalam Negeri
(a) Discretionary provision
In Ketua Pengarah Hasil Dalam Negeri vs Kim Thye & Co case, the learned judge mentioned that S 113 (2) is a discretionary provision. His Lordship said that the IRB is given a discretion, a discretion which to his mind the IRB cannot exercise at whim or fancy but after due consideration of all relevant facts and circumstances.
(b) Good faith is a factor
The learned judge mentioned that the IRB shall exercise judgement in assessing whether the taxpayers have acted in good faith when submitting the tax returns. Thus, good faith should be the factor to be considered before imposing the tax penalty.
(c) Obtaining professional tax compliance services
If the taxpayers have engaged a qualified tax agent in submitting the tax return, this is an essential factor indicating whether the taxpayers are acting in good faith. In addition, if the taxpayers are acting in according to the professional advice of the tax agent, it should be clearly indicating that the taxpayers are acting in good faith.
However, taxpayers and tax agents are advised to maintain the written documentation i.e. correspondence or minutes of meeting to substantiate the tax submission is conducted in a professional manner.
(d) Taxpayers and tax agent are transparent
Taxpayers and tax agent must be transparent and open in the preparation and submission of tax return. Acting in good faith must be acting with transparency and openness.
(e) Taxpayers must be co-operatives
Taxpayers must be providing full co-operations to IRB officers during the tax audits exercise. This is important as the full co-operations are concrete evidence in proving the taxpayers’ confidence in the tax return prepared and submitted. It also proves that the tax returns are prepared in good faith.
(3) Conclusion
If the taxpayers encounter a forty five (45) per cent of tax penalty under S113 (2) of ITA during the tax audit cases, the taxpayers should consider whether the element of them acting in good faith has been considered by the IRB before imposing the penalty.
If the tax return has been submitted with GOOD FAITH and the penalty is believed to be imposed at whim or fancy, the taxpayers should liaise with the tax agent immediately in appealing the penalty.
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