Petron Oil (M) Sdn Bhd & Anors v Ketua Pengarah Hasil Dalam Negeri (IRB)

Petron Oil (M) Sdn Bhd & Anors (Appellants) v Ketua Pengarah Hasil Dalam Negeri (IRB)

Lesson from Tax Case:

To claim the tax deduction on the finance expenses and related cost, the Company is advised to keep proper documentation on purpose of the loan amount used, list the related expenses incurred and claim the tax deduction in the year assessment incurred.

Background information

This is an appeal case made by three companies (Appellants) against the Deciding Order of the Special Commissioners of Income Tax (SCIT).

On 7.8.2013 the Appellants had submitted its tax returns (Forms C) for YA 2012 without taking a deduction for the Financing Expenses.

On 23.8.2013, the Appellants filed notices of appeal against their own assessments to claim deduction on the following expenses:

1) upfront fees

2) stamp duty charges

3) legal fees.

On 30.1.2020 SCIT via a Deciding Order dismissed the Appellants’ appeal as the finance cost incurred are not deductible under section 33(1) of the Income Tax Act 1967 (ITA).

Tax Issue:

Whether the Financing Expenses incurred for the YA 2012 by the Appellants in respect of the financing obtained are deductible under section 33(1) of the ITA.

IRB opinion:

The abovementioned expenses are not deductible under section 33 (1) of the ITA as the expenses were incurred in order to secure the granting of the facility by the financier.

The expenses are capital in nature.

The decision by The Court of Appeal

1) The nature of the Appellants businesses was dealing with the sale, marketing, distribution and refining petroleum and petroleum related products and does not deal with monitory, where finance fund used for share investment.

2) The related expenses claimed by the Appellants were incurred to obtain the loan.

3) That the expenses claimed were capital in nature and thus not deductible under section 39(1)(c) of the ITA.

4) To be eligible for deduction under section 33(1) of the ITA, an expense must fulfil “wholly and exclusively incurred in the production of gross income”.

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