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2. Datuk Yap Pak Leong v.

Ketua Pengarah Hasil Dalam Negeri - BKI-14-1/2-2013

Introduction
The case between Datuk Yap Pak Leong, the appellant and Ketua Pengarah Hasal Dalam
Negeri, the respondent was held in the high court in Sabah and Sarawak at Kota Kinabalu with
the case number BKI-14-1/2-2013. It is known to be an appeal case stated against the decision of
the Special Commissioners of Income Tax (SCIT) under Paragraph 34 of the 5th schedule of the
Income Tax Act 1967.
According to the grounds of decision, the reason for determination of this case before SCIT
was whether certain expenses incurred by the appellant, such as staff quarters upkeep, maid
expenses, and purchases of gadgets and furniture qualify for deduction under Section 33(1) and
Schedule 3 of the Income Tax Act 1967 in computing the adjusted income of the appellant for the
Years of Assessment 2004 to 2006. Referring to Section 33(1), it stated that the adjusted income
of a person from a source for the basis period for a year of assessment shall be an amount
ascertained by deducting from the gross income of that person from that source for that period all
outgoings and expenses wholly and exclusively incurred during that period by that person in the
production of gross income from that source. Business expense has to fulfil some requirements
or conditions in order to secure a deduction from the gross income of a business source. Each
business source has to be accounted separately, it must be incurred, it must be in the production
of the gross income from that business source, and the expenses must be wholly and
exclusively, and lastly it must be the scope of expense that are referring to the outgoings and
expenses.
The case was also raised to determine whether the penalty that had been imposed on the
appellant under Section 113(2) of the Act is correct. This can be related to the Section of 113(2)
of Income Tax Act 1967 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.
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Facts of case
Based on the case between Datuk Yap Pak Leong against Ketua Pengarah Hasil Dalam
Negeri, the appellant works as a qualified public accountant. He owns a business entity known as
PLY Plantation. The business runs a 900 acre oil palm plantation in the Sandakan area which is
about five to six hours away from Kota Kinabalu. PLY Plantation is not an incorporated
company, but it is a sole proprietorship owned by the appellant. Hence the appellant considers
the income received from PLY Plantation as his personal income, chargeable under income tax.
Yap Fook Chin who is the son of the appellant is also the general manager of PLY
Plantation. The general manager was not paid any remuneration out of his contribution for the
company as a general manager due to the appellants case. He was, however, provided with
employment perquisites in the form of staff quarters and two maids. Due to the fact of the
appellants case as well, the general manager had declared these perquisites in his tax returns.
The facts mentioned thus far are known to be largely undisputed.
Besides, in 2008, the respondent carried out an audit on the financial records of the
appellant for the years 2004, 2005, and 2006. During the audit period, there was an indication
that the respondent was furnished with various invoices and receipts in respect of the Staff
Quarters upkeep expenses and the purchase of furniture and gadgets. Also, the respondent
discovered that the Staff Quarters to which the invoices and receipts related to was No. 88 Jalan
Bukit Bendera in Kota Kinabalu. Subsequently, a search with the Lands and Survey Department
revealed that the premises were owned by the appellant.
The final result of the audit exercise showed that the respondent disallowed the
appellants claim for deductions for staff quarters upkeep, maid expenses, purchase of furniture
and gadget expenses for the years 2004, 2005, and 2006. These deductions were claimed by the
appellant under the self-assessment regime when filing his tax returns for the period 2004 to
2006. The said deductions are neatly set out in Grounds of Decision ruled by the SCIT as
follows:

Appellants claim

YA 2004
(RM)

YA 2005 (RM)

YA 2006 (RM)

Staff quarters upkeep

22,234

Sanitation maids
expenses

12,910

12,000

15,000

Labour quarters
upkeep

30,356

10,365

35,144

42,356

93,089

Total

Moreover, the appellants claim for capital allowances on gadgets, such as MP3 player and iPod
Nano and furniture were disallowed by the respondent. The following table illustrates the
appellants claim for capital allowance deductions:
Appellants claim

YA 2004
(RM)

YA 2005 (RM)

YA 2006 (RM)

Gadget expenses

470

405

1,511

Furniture

900

10,261

6,846

1,370

10,666

8,357

Total

The respondent issued a letter to the appellant on 24th October 2008 together with income and tax
computation and three Notices of Additional Assessment subsequent to the disallowance of
above deductions.

Issues
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Referring to the case of Datuk Yap Pak Leong v. Ketua Pengarah Hasil Dalam Negeri, the
issue that was discussed is whether certain expenses incurred by the appellant, 25 namely, staff
quarters upkeep, maid expenses, and purchases of gadgets and furniture qualify for deduction
under section 33(1) and Schedule 3 of the Income Tax Act 1967, in computing the adjusted
income of the appellant for the Years of Assessment 2004, 2005 and 2006. The next issue is
whether the penalty imposed on the 30 appellant under section 113(2) of the Act is appropriate.
The final issue is whether the capital allowance claimed by the appellant on the expenditure
incurred on modern gadgets and house furniture are allowed.

Decision and Discussion


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There are few discussions that had been discussed in the case. One of it is that Special
Commissioners of Income Tax had found that all the expenses incurred by Datuk Yap Pak Leong
for the upkeep of the staff quarters and the luxury home in Kota Kinabalu is owned and
occupied by the appellant. Actually there is no reason why SCIT wants to interfere because they
already accept the evidence of the assessment officer who have been carried out the audit. The
assessment officer found the invoices and also the receipt that supported to renovate the private
residence of the appellant. The other reason why it should not interfere is because the appellant
has not argued with the evidence that found by assessment officer. Datuk Yap even did not call
any witnesses at the hearing before the SCIT and he only tender the documents and made a
submission.
Under the appellants claim, there is sanitation maid expenses in which the expenses are
related to the two maids who worked at the appellants private residence was also not disputed. It
was being question whether the expenses are deductible under Section 33(1) as outgoings in the
production of income. Although the luxury home can be considered as staff quarters for the
general manager, it already stated in the evidence that the assessment officer was accepted by the
tribunal that the repairs to the house is more in the nature if renovation or renewal. Therefore, it
cannot be considered as the maintenance expenditure. This situation can also be applied in the
situation where the two maids worked for the general manager. It is clear that the two maids
worked in the private residence of the appellant so it is sure that the general manager and his
family also lived in the house and the general manager was entitled two maids under his contract
of employment. However, the appellant admit that he and his wife also lived in the same house
with the general manager. Therefore, the maid expenses cannot be considered as wholly and
exclusively incurred in the production of income.
The word wholly and exclusively is not defined in the Act. In order to rank for the
deduction, the outgoings and expenses must be satisfied with the wholly and exclusively test as
provided in the Section 33 of Income Tax Act. Wholly refers to the quantum of money have
been expended whereas, exclusively it refers to the motive or object in the mind of incurrence
and the purpose must be the sole purpose. Therefore, in the case it is discussed that it is
impractical for the appellant to take the position that he did not obtain any benefit of the services

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of the maids. Under Section 39(1), the deductions from the gross income for domestic or private
expenses are disallowed.

Conclusion
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It is concluded that although Datuk Yap Pak Leong did not agree with the decision made
by the Special Commissioners of Income Tax (SCIT), it is proven that after going through the
case, SCIT did not commit any error with regards to the law, affirming the decision of the
respondent in imposing the penalty under Section 113(2) of the Act. Hence, the appeal was
wholly dismissed with the cost of RM 5,000.

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