Question

Paragraph 33(1) of the Malaysian Income Tax Act 1967 provides the general deduction test for a business. A summary of paragraph 33(1) is as follows: " Subject to this Act, the adjusted income of a person from a source shall be an amount ascertained by deducting from the gross income of that person all outgoings and expenses wholly and exclusively incurred during that period..." In respect of the above statement , deliberate any five general provisions that have to be fulfilled in order to secure a deduction from the gross income of a business source under the Malaysian Income Tax Act. Support your answer with appropriate case law. Give the provisions.

Answer 1

In order to secure a deduction from gross income of a business source under the Malaysian Income Tax Act following are the five general provisions which have to be fulfilled:-

1) Each and every business source is required to be accounted seperately

2)Expenses which are required to be deducted should be wholly and exclusively for and towards the business. The phrase wholly and exclusively referts to the totallity of the quantum of amount spent and the intention or motive with which the amount is spent has to be for the business purpose and not for personal benefits.

3) Expenses have to be incurred which implies that the amount has to be actually paid or payable. The expenses should not be by way of mere provision.There has to be an actual and legal liability to pay the amount. Provision being in the nature of contingent nature , it is too uncertain to be treated as an expense.

4) The amount which is to be deducted is referred to as " outgoings and expenses'' The word expense has a verly limited scope and understanding as against outgoings . The term outgoings will cover oll business losses, thefts,bad debts etc. Further only revenue expenses are deductible and expenses in the nature of capital does not qualify for deduction from business income.

5) Expenses should have been incurred exclusively towards the production of gorss income from particular business source. Expenses which are incurred partly for personal reason and partly for business purpose fails to qualify the test of exclusivity and hence will not be allowed as deduction from the gross income.The expenses should have been incurred to earn income either for current year or for future.

Employer X has hired services of Technology engineer Mr P and also provided him hotel accomodation whenever he travelled . All the expenses were paid by the company . The nature of the above expenses can be entertainment expenses in the nature of business expenses and such expenses are deductible to the extent of 50% with effect from AY 2004. Hence amount paid by Employer X for Mr P are allowed a deduction of only 50% from business income.

The value of hotel accomodtion provided to Mr P will be taxable in the hands of Mr P under section 13 (1)(c) of the Act or section 13(1)(b) depending upon unfurnished or furnished. The value of hotel accomodation to be taxed in the hands of P . The value is to be arrived at after considering the location of the hotel. If the hotel, hostel or house is located in the plantation or forest area or situated in the rateable area the value is to be taken at 3% of his gross income under sec 13(1)(a)