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Case Update: Federal Court Upholds Constitutionality of Tax Collection Provision

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31 October 2023

TAX LAW
Tax Collection – Judicial Powers – Fair Trial – Access to Justice – Federal Constitution – Income Tax Act – Judicial Review

Mohd Najib Bin Hj Abd Razak v Government of Malaysia
Civil Appeal No. 01(i)-18-05/2022(W) | Federal Court
- see the grounds of judgment here

Facts The Government of Malaysia (the ‘Respondent’) filed separate applications for summary judgement to be entered against Mohd Najib Bin Hj Abd Razak (the ‘Appellant’) under s. 106 of the Income Tax Act 1967 (‘ITA 1967’) for sums being additional income tax together with penalties which the Appellant allegedly failed to pay for the years of assessment from 2011 to 2017. The High Court Judge that heard the summary judgement application allowed it. Dissatisfied with the decisions of the High Court, the Appellant appealed to the Court of Appeal. The Court of Appeal dismissed the appeal and upheld the decisions of the High Court. Dissatisfied, an appeal was filed at the Federal Court. Hence this appeal.

Issues 1. Whether s. 106(3) of the ITA 1967 contravenes Article 121 of the Federal Constitution.
2. Whether s. 106(3) of the ITA 1967 is unconstitutional and/or ultra vires as it usurps the judicial power of this Honourable Court guaranteed by Article 121 of the Federal Constitution.
3. Whether, by reason of s. 103 and 106(3) of the ITA 1967, this Court is wholly prevented from considering whether or not there are triable issues and/or some other reason warranting a trial (within the meaning of Order 14 Rule 1 and Order 14 Rule 3 of the Rules of Court 2012 ), before deciding whether or not to give judgment in favour of the Plaintiff, despite the fundamental liberties, rights and powers enshrined in, inter alia, Articles 5, 8 and 121 of the Federal Constitution.
4. Whether Article 121 of the Federal Constitution, which guarantees the judicial power of this Honourable Court, is relevant in the determination of civil recovery proceedings in tax matters (including in summary judgment proceedings therein).
5. Whether Order 14 Rule 3 of the Rules of Court 2012, which provides that a Summary Judgment application may be dismissed if a Defendant can show “some other reason” for a trial to be held, applies in civil recovery proceedings in tax matters.
6. Whether in instances of manifest and obvious errors in calculation of a tax assessment, a court is entitled by virtue of its inherent and judicial powers to consider a Defendant’s defence of merit to dismiss or set aside an application for Summary Judgment by a Plaintiff and order full trial on the matter.
7. Whether the Judicial Power of the Federation that is vested in the High Court, Court of Appeal and Federal Court may be suspended and/or abrogated in a tax recovery suit filed under s.106(1) of the ITA 1967 on the basis of s. 106(3) of the same Act.
8. Whether the Judicial Power of the Federation vested in the High Court, Court of Appeal and Federal Court may be suspended and/or abrogated in a tax recovery suit filed under s. 106(1) of the ITA 1967 on the grounds that an appeal to the Special Commissioner of Income Tax has been filed under s. 99 of the ITA 1967.
9. Whether a Defendant’s defence as to the Plaintiff’s conduct of bad faith, mala fide, oppression, unconscionability, irresponsibility, unreasonableness and/or abuse of process falls within the scope of s. 106(3) of the ITA 1967, and whether the Courts are entitled to consider such a defence as a triable issue and/or some other reason warranting a trial in the context of civil recover proceedings in tax matters (including in summary judgment proceedings therein).

Held In dismissing the appeal, Judge Datuk Nallini Pathmanathan in the unanimous judgement emphasized the importance of exercising the power of constitutional review with great care and precision. It highlighted that the power of constitutional review, as provided in Article 4(1) of the Federal Constitution, should not be used indiscriminately or without a substantive basis. Furthermore, the Federal Court found that s. 106(3) of the ITA 1967 did not abrogate, remove, or usurp judicial power. Hence, the alleged infringement of Article 5 and Article 8 of the Federal Constitution were not established. The Federal Court highlighted that the purpose of s. 106(3) ITA 1967 was to ensure the efficient and expeditious collection of taxes for the benefit of the nation as a whole. It considered the provision as having a rational relation to this objective, and it found that s. 106(3) was a valid mechanism to collect taxes efficiently. Besides that, the Federal Court disagreed with the Appellants' contention that striking down s. 106(3) would not substantially affect government reserves. It pointed out that such a decision could lead to delays in tax collection, which could hinder the efficient functioning of the government. In light of the above considerations, the Federal Court concluded that there was no valid basis for the Appellants' claims. Consequently, the court dismissed the appeals with no order as to costs.

Zul Rafique & Partners
{31 October 2023}

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