Question

1. Businesses have been hit severely in the light of Covid-19 pandemic and the Movement Control Order imposed by the Malaysian Government to curb the spread of the disease. Karim, a business owner of a restaurant in Negeri Sembilan, had to shut down his business as the abrupt decline in his business income could not sustain the business operating expenses. Briefly explain the type of assessment that could be issued to Karim by the Director-General of Inland Revenue Board of Malaysia when he ceased his business, and why this assessment is issued.

                                                                                                                                        

2. Based on each of the situations below, explain the type of offence, the provision of the offence under Income Tax Act 1967, and penalty (fine/imprisonment) faced by the taxpayers:

                                         

1. Aaron submitted a duly completed return for the year of assessment 2019 on his own. He had declared business income from selling imported gift items and souvenirs. It was discovered during a tax audit that he had not declared his income from the rental business that he has been carrying on for the past 5 (five) years.

                                                                                                                  

2. Ben is a head of accounting department in LHS Sdn Bhd. For the year of assessment 2019, he was instructed by the director of the company (Tan), to reclassify certain entertainment expenses of the company (which are not allowable for income tax purposes) as purchases of goods and service. By doing so, he managed to understate the tax liability of the company by more than RM5,000 for 2019. This was discovered during a tax audit.

                                                                                                                                                                                                       

3. Chong is a tax agent, appointed by Rinata Sdn Bhd to prepare the tax computation for the company. A detailed statement for "Sundry Expenses" of RM80,000 provided by Rinata Sdn Bhd had clearly indicated that a donation of RM10,000 was included therein. Chong made an immediate request in writing for the receipt, advising the company that only donations made to approved bodies or institutions under section 44(6) would be eligible for deduction. Rinata Sdn Bhd confirmed in a letter that the donation had been made to an approved body and that it was in the process of obtaining the receipt for it. In view of the impending due date for the submission of the return and relying on that confirmation, Chong made the relevant adjustments for the donation in the tax computation. It was discovered during a tax audit that there has been an understatement of the company's tax liability as the donation had been made to a non-approved body, about which the company had neglected to inform Chong as the tax agent subsequently.

     

4. Fatt, a graduate of Lim Kok Wing University, founded a startup business in Selangor after he graduated. He has been earning a steady income from his business venture in 2019. However, he did not declare any of his income to the Inland Revenue Board of Malaysia by filing Income Tax Return Form, as he was afraid of not getting any government assistance thereafter as his income exceeds the limit stipulated.

Answer 1

Part - A

In this said case of Karim the business is ceased and the opertaions are fully stopped due to Covid -19 pandemic. As the business operations are totally stopped due to decline in business and the operating expenses are also not even be paid by the owner the operations are ceased. The Covid – 19 pandemic is started in the month of Feb. or March all over the world. Since the business is stopped and there is no hope for any income income tax liability of the owner becomes NIL after the business operations are stopped. In this case the business owner has earned some income prior in this financial year say for 3-4 months. Hence the liability to pay taxes on the income falls on the business owner. In this case the Director General can assess the income and impose an advance assessment on the business owner as per section 77(b) of the Income Tax Act 1967.

Why the Director General has to made an advance assessment the reason for the same is that the business owner has operated the activity for 3-4 months and derived income from the operations. If the income is chargeable income that need to be ascertained from the books of accounts maintained by him. The provisions of the act clearly states that if the any business owner has ceased operations consisting business activity the Director General can assess the income for the assessment year and following year with advance assessment. Since the operations are carried out and income is generated previously and now the source has stopped completely record of accounts is available for the prior period and not for the current period hence the advance assessment is to be made to ascertain the tax liability on a pro rata basis or by any method which the department thinks fit for the current and following tax periods.

Part A-1

In this case the person has committed offence of incorrect returns. As per the provisions of the Income Tax Act 1967 he has understated the income. He has filed the return based on the income from his business only and later on in the audit it is discovered that the person has income from rent also which is also liable to tax but which was not disclosed and the income is understated. This can not be treated as a omission as he is generating rent income for last five years and it is clear matter of tax evasion. Hence as per the provisions of the Act the Director General may impose a penalty equal to the amount of tax which has been understated based on the incorrect return.

Part A-2

In this situation the person is working as head of accounting department of the company and is responsible for keeping the account books perfect and in order of the Income Tax Act rules and regulation. However he has been instructed to reclassify certain expenses which are allowed to tax. This clearly shows willful evasion of Income tax as by reclassifying the expenses the tax liability of the company was undercharged. Being the head of the accounts department he acted on the instructions of the director it means that he has assisted in the act of willful evasion of tax and the offence can be booked under Wilful Evasion of tax. This is basis he has reclassified the taxable expenses and understated the tax liability by providing false or incorrect information by manipulating the books of accounts. For this act of evasion of tax as per the provisions of the Income Tax Act 1967 the penalty will be minimum two thousand ringgit and not more than 20000 ringgit or imprisonment for a period of three years or both.

Part A-3

In this situation the company was supposed to submit the copy of receipt for donation made to approved body. This information was expected by the person filing the tax computation of the company. This was asked by the person to get tax deduction as donations to approved bodies are eligible for tax deduction. However the company has confirmed the donation with a simple letter and the original receipt for donation was missing. Even though the original receipt was not attached along with the income tax return the income tax liability of the company was understated. This act is classified under the offence of incorrect Returns, information Returns or reports As per the provisions of Income Tax Act 1967. this has been done on the basis of information asked by the computing authority but the company intentionally failed to provide necessary report or information. For this offence the penalty would be a a fine not less than 20000 ringgit and not more than 100000 ringgit or an imprisonment for a period of 6 months or both.

Part A-4

In this situation the business owner is a literate person and knows his responsibility of filling return for the year when he has earned substantial income in. He has intentionally skipped to file return in anticipation of the government benefits. Even though earning substantial income and not filing a return is an offence under category Failure to furnish return or notice of chargeability. He intentionally concealed his income for the year to get the government benefits even though his income was taxable or the limit stipulated to file tax as per the provisions of the Income Tax Act 1967. It was his responsibility to declare his income by filing the income tax return but he failed to do so and need to be punished for the offence committed.For this offence the person is liable for a penalty in the form of a fine not less than 2000 ringgit and not more than 20000 ringgit or imprisonment for a period of 6 months or to both.

This will be the treatment to the tax payers and tax evaders as per the provisions of the Income Tax Act 1967 and the powers given to the Director General of the Inland Revenue Board of Malaysia.