The High Court recently reversed the position taken in the decisions of a number of Special Commissioners of Income Tax tribunals in holding that sums equivalent to Bumiputra discounts paid to a State Authority in return for releasing Bumiputra units to Non-Bumiputras was not a penalty, was incurred wholly and exclusively in the production of income and was therefore deductible for the purposes of income tax.

Update: The High Court has since released the full grounds of judgment, which can be downloaded from the link below.

Grounds of Judgment


Housing developers when granted approval to carry out housing development are invariably subjected to certain conditions.  One of the conditions is the sale of a proportion of the development to bumiputras (the Bumiputra quota).

The imposition and enforcement mechanisms of Bumiputra quotas is a state-governed affair. Where developers are unable to fulfil the selling requirement of Bumiputra Quotas, they may apply to local state Director of Lands and Mines for permission to sell the unsold bumiputra units to non-bumiputras. Such sale of bumiputra units to non-bumiputras are invariably subjected to a condition that an amount equivalent to the bumiputra discount be paid to the state government.

The legal issue faced by property developers is whether payment of this bumiputra discount is deductible pursuant to S.33(1) of the Income Tax Act 1967 (“ITA 1967”) on grounds that the expenditures were wholly and exclusively incurred in the production of income.

The Special Commissioner of Income Tax (“SCIT”) held that the payment of such Bumiputra discounts are not deductible pursuant to S. 33(1) of the ITA 1967 on grounds that the nature of the payment is one of a penalty and therefore not incurred wholly and exclusively in the production of income.

This issue was considered in the Kuala Lumpur High Court case of Prima Nova Harta Development Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri (Case Number: WA-14-7-12/2019). On 29th June 2020, YA Mariana Binti Haji Yahya held that the Bumiputra discount is deductible pursuant to S. 33(1) of ITA 1967 and reversed the decision of the SCIT.

The taxpayer was represented by Datuk Francis Tan together with Brandon Shen, from the firm’s Tax Practice.


The Taxpayer, Prima Nova Harta Development Sdn Bhd, is a Selangor-based property developer that builds and sells houses and other landed properties.

In respect of the Selangor project known as Taman Tasik Prima, the Taxpayer was unable to meet the Bumiputra Quota despite making efforts to do so.

The Taxpayer applied to the Director of Lands and Mines for multiple variations of the Bumiputra Quota condition and ultimately obtained approval for reduction of the Bumiputra Quota for medium cost houses to 30%, bungalows to 20% and shop buildings to 13%. The Taxpayer sold the units to non-bumiputras, duly paid the amount equivalent to bumiputra discount to the state government, and claimed a deduction of this payment under S. 33(1) of ITA 1967.

The Inland Revenue not only disallowed the amounts equivalent to bumiputra discount amounting to RM934,569 and RM935,185 for years of assessment 2010 and 2011 respectively but also imposed a penalty of 45% pursuant to S.113(2) of the ITA.  The basis of the IRB was that the sum were penalties and therefore were not incurred in the production of income.  The IRB also took the view that by making the claim the Taxpayer was guilty of S. 113(2) of the ITA.  Additional assessments were then issued.

The Taxpayer appealed against these additional assessments.

First Instance Decision

At first instance, the SCIT dismissed the Taxpayer’s appeal, deciding unanimously that the payments of the amounts equivalent to bumiputra discount are penalties paid for breaching the Bumiputra Quotas and thus not wholly and exclusively incurred in the production of income, and in turn, not deductible under S. 33(1) of ITA 1967.  The SCIT ignored the submission that since approval to sell to non Bumiputra was granted there was no transgression of any administrative ruling.  Therefore the character of the payment is not penal in nature.  They also ignored the submission that difference of opinion with the IRB cannot amount to giving false or incorrect information to reduce liability to tax pursuant to S. 113 (2) of the ITA 1967.

The Taxpayer appealed this decision to the High Court. 

High Court Judgment

Yang Arif Dato’ Sri Mariana binti Haji Yahya in her oral grounds laid down the following principles:

  1. The main issue is whether the payment of the bumiputra discount was wholly and exclusively incurred in the production of income.
  2. When referring to the amounts equivalent to bumiputra discount which was to be paid back to the state government, the terms used in the Selangor Director of Lands and Mines Circular No. 3/2007 (“the circular”) were “bayaran balik potongan harga” (repayment of discount).
  3. The main purpose for the developer’s application to release the Bumiputra Quota and payment of this amount equivalent to the discount to state government by the Taxpayer is to secure non-bumiputra buyers to purchase the remaining unsold bumiputra units.
  4. If there was no such application for release of Bumiputra Quota, there would be no sale and there would not be any generation of income. It is thus reasonable to conclude that the payment is closely linked to the generation of income.
  5. Paragraph 3.3.2 of the circular, which was applied in the present case, states that where a developer is given a release of Bumiputra Quota it will be imposed with a “syarat” (Condition) that the discount must be repaid as a contribution to the state government and does not use the term “penalti” (Penalty).
  6. The usage of the term penalty is confined to Paragraph 3.2 of the circular, which is only utilised where a developer has breached Bumiputra Quota without permission and sold bumiputra units to non-Bumiputra Quotas, and was not applied in the present case.
  7. On the facts of the present case, the payments made by the taxpayer are in fact one of the nature of repayment of bumiputra discount to the state government and not a penalty.
  8. The payment by the Taxpayer is wholly and exclusively incurred for the generation of income and the carrying out of the taxpayers business and therefore deductible under S. 33(1) ITA 1967.
  9. Lord Keith’s statement in British Insulated and Helsby Cables Limited v. Atherton [1926] AC 205 followed by the Federal Court case of Director General of Inland Revenue v. Kulim Plantation Ltd [1981] MLJ 214 was followed. The statement of Lord Kieth reads:

a sum of money expended, not of necessity and with a view to a direct and immediate benefit to the trade, but voluntarily and on the grounds of commercial expediency, and in order indirectly  to facilitate the carrying on of the business, may yet be expended wholly and exclusively for the  purposes of the trade”


The Court held that the SCIT had erred in finding that the payment made by the Taxpayer amounted to a penalty and in dismissing the appeal by the taxpayer.

The Court further held that the payment made was closely connected to the nature of business and for generation of income by the Taxpayer.  It had fulfilled the requirement of the ITA 1967 under Section 33(1) which entitled the Taxpayer to claim a deduction from tax.

The Court also found that the imposition of penalty on the taxpayer under S.113(2) of the ITA 1967 was also wrong.

Accordingly the Court ordered that the notice of additional assessment dated 6 November 2014 for the year of assessment 2010 and 2011 be discharged.


This decision has far reaching implications for Housing Developers, as they are not now subject to arbitrary impositions of income tax and penalties for the amounts equivalent to bumiputera discounts paid to state authorities as a condition for permitting them to selling bumiputera lots to non-bumiputras, as there is now an authoritative High Court decision which entitles them to claim a deduction from income tax and rejecting the notion that these payments are penalties.

Co-written by

Datuk Francis Tan (view profile)
Consultant , Azman Davidson & Co (Banking and Finance, Corporate and Commercial, Real Estate and Property, Employment, Tax)

+603 2164 0200 (ext no. 131)

Brandon Shen Shi Han (view profile)
Associate , Azman Davidson & Co (Construction Litigation, Construction Arbitration, General Litigation, Tax Litigation)
+603 2164 0200 (ext no. 120)

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