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Case Update: Inland Revenue Board does not have rights to check client’s account maintained by law firms

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15 August 2022

TAX LAW
Legal Profession - Professional privilege - Accounting books and records of law firms containing clients' accounts - Director-General of Income Tax - Construction of statutes

Ketua Pengarah Hasil Dalam Negeri v Bar Malaysia
Civil Appeal No: 01(F)-11-09/2021(W) |Federal Court
- see the grounds of judgment here

Facts Bar Malaysia (“Respondent”) is a body corporate established under the Legal Profession Act 1976 (“LPA”) to regulate the legal profession. The Respondent wrote to the Ketua Pengarah Hasil Dalam Negeri (“Appellant”) to inform that the Respondent had received complaints from its members that the Appellant had been carrying out raids on law firms to conduct audits on their clients' accounts and insisting on having sight of accounting books and records pertaining to these accounts. The Respondent expressed its objections and its view that the documents and information sought by the Appellant were protected by solicitor-client privilege and may not be made available to the Appellant. The Appellant maintained that the audits complained of were necessary to ensure "tax compliance" by taxpayers. The Appellant maintained that the audits were not in breach of any solicitor-client privilege by reason of s.142(5) of the Income Tax Act 1967 ("ITA") which overrides the provisions of Chapter IX of Part III of the Evidence Act 1950 ("EA") and the LPA. Looking to have the matter resolved, the Respondent brought the matter to the High Court seeking several declarations on the issue. The High Court ruled in favour of the Respondent and the Appellant appealed. At the Court of Appeal, the Court held that it was unable to agree with the Appellant's contention that the client's account and information relating thereto do not come within the purview of s.126 of the EA. Hence this appeal.

Issues 1. Whether s.142(5) of the ITA overrides the Solicitor-Client Privilege as provided under s.126 of the EA.
2. Whether the Client's Account under the Legal Firm's name and administered by the Firm falls within the ambit of Privilege under s.126 of the EA as it provides privilege only for communications between solicitors and client.
3. Whether the word "practitioner" in s.142(5)(b) of the ITA refers to and includes "advocate and solicitor" or it merely refers to other practitioners such as tax agent and accountant.

Held In unanimously dismissing the appeal, the Federal Court held that contents of a client’s account belongs to the client of the solicitor and not the solicitors themselves. Therefore, there has been no credible reason accorded for seeking to sight a third party’s accounts in order to impose tax on the solicitor or the firm. The Federal Court further held that s.142(5) of the ITA does not oust s.126 of the EA, hence contents of the client’s account which relates to accounts and monies belonging to the client are covered by solicitor-client privilege. It is therefore, not open to a solicitor to divulge or make available the contents of the client’s account to the Inland Revenue Board by reason of s.126 of the EA. This privilege belongs to the client and not the solicitor. The Federal Court held that it requires the client to waive the privilege in order that the solicitor may make available the content of the client’s account to the Appellant. Hence, the appeal was dismissed.

Zul Rafique & Partners
{15 August 2022}

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