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T A X & A C C O U N T I N G tax compliance

Fraud, Wilful Default


and Negligence

S
By Dr. Choong Kwai Fatt ection 91(1) of the Income Tax
Act 1967 permits the tax authori-
ties to raise assessment or addi-
tional assessments within six
years after the end of a year of assessment
if it appears to the Director-General that
no or insuf ficient assessment has been
made on the taxpayer. The tax authorities
however, are empowered to re-open any as-
sessment beyond the statutory limit of six
years if the tax authorities can establish:
1 fraud;
2 wilful default; or
3 if negligence has been committed by
the taxpayer in making his income tax
returns.
The three terms of fraud, wilful default,
and negligence are, however, not defined
in the Act. This article aims to lay down the
scope of these terms by analysing the lead-
ing case precedents. It is hoped that taxpay-
ers who are now placed in the new self-as-
sessment regime with effect from year of
assessment 2004 are able to familiarise
themselves with the boundaries thus being
able to minimise the risk of being pros-
ecuted and/having to pay penalties.

Rules of Penal Provisions


The High Court in the case of Government
of Malaysia vs. Chong Woo Yit1 held that neg-
ligence and fraud are two separate and dis-
tinct terms. Fraud may contain some ele-
ments of negligence but negligence does
not arise from fraud. Fraud or wilful default
is a serious offence and it carries a maxi-
mum penalty of 300 per cent of the tax due
and possible imprisonment of up to three
years. As such, it is important to understand
the general rule on the interpretation of
penal provisions as found in Part VIII of the
Act (Offences and Penalties).
The following are some pertinent prin-
ciples of tax in relation to the imposition of

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tax penalty: it. The prosecution must satisfy the court duty argued that he innocently believed
1 Penal provisions are to be strictly con- on the guilt of a taxpayer. In Kee Kim Chooi that it was undutiable as he was illiterate.
strued and should not be given a wider & Ors vs. Public Prosecutor, 9 Justice Chief Justice Thomas held:14 “Now, where
interpretation than the provision Thomson opined:10 “… the prosecution must the duty of giving an explanation is cast upon
clearly provides. prove its case to the satisfaction of the court a defendant, and an explanation is given,
and the court must not convict an accused which is consistent with innocence, the court
2 Penalties are not enforceable unless
person unless it is satisfied he is guilty.” must consider whether it might reasonably
they are expressed in clear terms.
The standard of proof in fraud is “beyond be true although not convinced of its truth.
3 Where there are various possible inter-
reasonable doubt”. In this regard, Supreme The learned Magistrate does not appear to
pretations of a section, it is always Court Judge Syed Agil Barakbah held in have given his attention to this matter.
against adopting a particular interpre- Chu Choon Moi vs. Ngan Sew Tin:11 “We In view of the evidence of the translator,
tation if it shall appear that the result is agree that fraud whether made in civil or the explanation that the accused was not
unreasonable or oppressive.2 criminal proceedings must be proved beyond aware of the contents of the goods in ques-
4 If the legislature had intended that reasonable doubt and cannot be based on tion, and considered them undutiable (an
there should be more than one penalty, suspicion and conjecture.” explanation which was consistent with in-
that intention must be expressed in His Lordship then sets out the weight of nocence) might reasonably be true although
clear and unequivocal terms.3 “beyond reasonable doubt”. He opined: the Court might not be convinced of its truth.
“Proof beyond reasonable doubt does not mean Therefore the accused should have been
Fraud proof beyond the shadow of doubt. The degree acquitted. The appeal is accordingly allowed,
The meaning of fraud is not defined in the of proof need not reach certainty but it must and the conviction and sentence are quashed;
Act. In PJTV Denson (M) Sdn Bhd & Ors vs. carry a high degree of probability. What it any fine paid to be refunded to the appellant.
Roxy (Malaysia) Sdn Bhd,4 Chief Justice means is that the evidence adduced is such Duty will, of course, have to be paid.”
Raja Azlan Shah said:5 “Whether fraud exists that the Court believes its existence or a pru- Fraud is a serious offence. A taxpayer
is a question of fact, to be decided upon the dent man considers its existence probable in will be liable to a penalty of three times of
circumstances of each particular case. De- the circumstances of the particular case. If the tax due and possible imprisonment of
cided cases are only illustrative of fraud.” such proof extends only to a possibility but not up to three years. If the taxpayer’s expla-
In the leading fraud case of Derry vs. in the least a probability, then it falls short of nation is consistent with his innocence, he
Peek,6 Lord Herschell laid down the prin- proving beyond reasonable doubt.” should not be liable to the penalty nor im-
ciple that fraud is proven when it is shown In Mohamed Taiyob vs. Public Prosecu- prisonment but only be accountable for the
that a false representation has been made: tor,12 the prosecutor’s contention that the tax undercharged, relying on the dictum
(a) knowingly, or individual’s conduct and remarks when he of Chief Justice Thomas in the above case.
(b) without belief in its truth, or was being questioned were evidence of a In case of fraud or wilful default, the onus
(c) recklessly, careless, be it true or false. guilty mind was rejected by the cour t lies on the prosecution to satisfy the court
The above principle is accepted in Mag- which held that it fell short of the weight as to the guilt of an accused taxpayer. The
num Finance Berhad vs. Tan Ah Poi & of beyond reasonable doubt. The court prosecution must prove its case to the sat-
Anor 7 where Justice Mohd Ghazali bin found the accused was just being confused. isfaction of the court to the extent of beyond
Mohd Yusoff held:8 “Fraud is obtaining of In the author’s opinion, fraud requires an reasonable doubt. The court shall only con-
a material advantage by unfair or wrongful active role of a taxpayer in committing a vict the taxpayer after having fully consid-
means, it involves moral obliquity. It must transaction. A mere omission of an act does ered the evidence and explanations given.
be proved to sustain the common law action not tantamount to fraud. A taxpayer is pre- If in any event an explanation offered is one
of deceit. Fraud is proved when it is shown sumed innocent until fraud is proven. Cer- which leaves the court in doubt as to the
that a false representation has been made: tainly, the behaviour in answering the pros- guilt, the taxpayer must not be convicted.
(a) knowingly, or ecution question during cross examination 1 [1988] 2 MLJ 534.
(b) without belief in its truth, or can never be conclusive to indicate fraud as 2 See AG vs. Till 5 TC 440 at 452.
(c) recklessly, careless whether it be true or one may be too nervous during a trial query. 3 See Garrett vs. Messenger (1866-7) 2 Common
Pleas cases 583.
false.” The tax authorities must establish their
4 [1980] 2 MLJ 136.
In the event the tax authorities suspect case and the taxpayer’s duty is to weaken 5 Ibid at pp. 138.
fraud, an explanation from the taxpayer is the case. The duty of providing an expla- 6 14 AC 337.
called for. Where there is reasonable doubt nation is cast upon the taxpayer, and when 7 [1997] 3 AMR 2265.
on the intention of the taxpayer to evade an explanation given is consistent with his 8 Ibid at pp. 2280.
tax by fraud, the taxpayer should be given 9 [1952] 18 MLJ 180.
innocence, the tax authorities must accept
10 Ibid at pp. 180.
the benefit of the doubt. The tax authori- it at face value. This also applies to the
11 [1986] 1 MLJ 34 at 38.
ties bear the burden of proof to establish courts. In Loh Chan Wan vs. Public Pros- 12 [1947] 13 MLJ 101.
fraud. The law is such that who alleges ecutor,13 a case concerning customs duty, 13 [1939] MLJ Rep 68.
fraud must clearly and distinctively prove the accused charged with evading customs 14 Ibid at pp. 69.

May 2004 • ACCOUNTANTS TODAY 35


Fraud, Wilful Default and Negligence

Wilful default the assessment, not only on the ground that Some failure to do some act which a reason-
Taxpayers have a legal and moral duty to there has been no wilful default, but also on able man in the circumstances would do, or
submit their tax returns and be responsible the ground that the receipts did not represent doing some act which a reasonable man in
for income tax payable. Thus, a taxpayer who income from the particular source selected the circumstances would not do; and if that
knows and understands his duty and respon- by the Revenue.” failure or doing of that act results in injury,
sibility and yet does not fulfil his obligation then there is a cause of action. How do you test
is said to have committed “wilful default.” Negligence whether this act or failure is negligent? In an
Lord Justice Bowen held in Re Young & Taxpayers owe a duty of care to the gov- ordinary case it is generally said, that you judge
Harston’s Contract:15 “The term ‘wilful de- ernment when submitting their tax returns. that by the action of the man in the street. He
fault’ is not a term of art … Default is a They must exercise reasonable care when is the ordinary man. In one case it has been
purely relative term, just like negligence. It providing information on their tax affairs for said that you judge it by the conduct of the man
means … not doing what is reasonable un- the ascertainment of income tax payable. on the top of a Clapham omnibus. He is the
der the circumstances — not doing some- In Blyth vs. Birmingham Waterworks Co,18 ordinary man. But where you get a situation
thing which you ought to do, having regard Justice Alderson held:19 “Negligence is the which involves the use of some special skill or
to the relations which you occupy competence, then the test whether
towards the other persons inter- there has been negligence or not is
ested in the transaction. The not the test of the man on the top
other word which is sought to of a Clapham omnibus, because
define is ‘wilful’ … it generally, he has not got this special skill. The
as used in courts of law, implies test is the standard of the ordinary
nothing blameable, but merely skilled man exercising and profess-
that the person of whose action ing to have that special skill. A
or default the expression is used, man need not possess the highest
is a free agent, and that what has expert skill at the risk of being
been done arises from the spon- found negligent. It is well-estab-
taneous action of his will. It lished law that it is sufficient if he
amounts to nothing more than exercises the ordinary skill of an
this, that he knows what he is ordinary competent man exercis-
doing, and intends to do what he ing that particular art.”
is doing, and is a free agent.”
Once the tax authorities estab- Conclusion
lish a prima facie case that a tax- The allegation of fraud or wil-
payer has committed wilful de- ful default requires the tax au-
fault, the taxpayer will bear the thorities to prove its case be-
onus to weaken the tax authori- yond reasonable doubt, as it is
ties’ contention by adducing sig- a serious of fence which, if
nificant documentary evidence proven, allows the tax authori-
and offer consistent explanation ties to raise assessments in ex-
to the Special Commissioners or cess of six years notwithstand-
the court, failing which, an ad- ing the records may no longer
verse inference can be drawn on be available. It is therefore im-
the taxpayer as the taxpayer is the material omission to do something which a reasonable portant to know the scope, definition and
witness who is aware of the full facts of the man, guided upon those considerations which nature of fraud and wilful default. AT
case. In this regard, Justice Pennycuick in ordinarily regulate the conduct of human af- ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○

Hudson vs. Humbles16 summarises the po- fairs, would do, or doing something which a The writer is a Tax Consultant and an Associate
sition of the law as follows:17 “The taxpayer prudent and reasonable man would not do.” Professor, Faculty of Business and Accountancy,
University Malaya. He can be contacted at e-
knows the full facts, and the Revenue does not. Whether a taxpayer is negligent when sub- mail: kwaifatt @yahoo.com. See website www.
In the nature of things, it must often be the mitting his tax return is a matter of facts judg- kwaifatt.com for Malaysian taxation updates.
case that, even if the Revenue can show a ing by the “reasonable man standard”. Jus-
prima facie case that receipts have not been tice McNair lucidly propounded the principle 15 [1885] 31 Ch D 168 at 174.

satisfactorily accounted for, it has no mate- of negligence in Bolam vs. Friern Hospital 16 42 TC 380.
17 Ibid at p 387.
rial upon which to set up a prima facie case Committee.20 His Lordship held:21 “I must
18 [1856] 11 Exch 781.
for bringing the receipts in question under one explain what in law we mean by ‘negligence’. 19 Ibid at pp. 784.
or other source of income. On the other hand, In the ordinary case which does not involve 20 [1975] 2 All ER 118.
it is always open to the taxpayer to challenge any special skill, negligence in law means this: 21 Ibid at pp. 121.

36 ACCOUNTANTS TODAY • May 2004