If Your Land Compensation Was Taxed, Please Read This Court Case That May Help You Get A Refund

Businesses whose land is taken by the state through compulsory acquisition now have clarity on two points. The compensation should not be taxed, and those who have already paid tax on it can ask for a refund, even for past years.

Section 4C of the Income Tax Act 1967 treated compensation for land held for sale as stock in trade as taxable business income. In December 2022, the Federal Court ruled that this section was unconstitutional. It said compensation is not a profit, and taxing it reduces the adequate compensation that the Federal Constitution promises.

However, the Federal Court did not say whether its ruling also covered tax paid in earlier years. The Court of Appeal answered that question on October 19, 2026. In this case, a developer received about RM22.47 million in compensation and paid tax on it for the year of assessment 2017. It did not appeal, so the assessment became final. It later asked LHDN for a refund.

LHDN argued that the ruling should only apply to the future, or only to the company that won the earlier case and to cases already in court. LHDN also argued that because the 2017 assessment was final, it could no longer be changed.

The Court of Appeal disagreed on both points. A court ruling also applies to past years, unless the court clearly says it applies only to the future, and the Federal Court never said that. This means Section 4C was invalid from the start, and LHDN had no legal right to collect the tax. A final assessment does not change that.

The court upheld the order for LHDN to refund the tax with interest of 5% a year, from March 8, 2023, when the developer filed its case. It also made clear that LHDN must apply the Federal Court's ruling to every affected taxpayer, not only to the one who went to court.

If you wish to get more details, you may refer to the case of Ketua Pengarah Hasil Dalam Negeri v Lush Development Sdn Bhd, where the Court of Appeal ordered LHDN to refund tax paid under Section 4C.

If you wish to focus on running and growing your business, our CFO advisory team can take care of your accounting, payroll, tax planning, e-stamping, corporate secretarial and compliance matters for you. Feel free to WhatsApp us at 010-246 2151.