Earlier we discussed how a discount given to a related party has to be reasonable and commercially justifiable. Today, we look at the actual legal case where this principle played out.

𝐁𝐚𝐜𝐤𝐠𝐫𝐨𝐮𝐧𝐝 𝐨𝐟 𝐭𝐡𝐞 𝐜𝐚𝐬𝐞 Silverdrum sold two units of the Imperiale Residence Project Phase 2 to its own directors. LHDN treated this sale as not at arm's length under Sections 140(1) and 140(6) of the Income Tax Act 1967 and adjusted the taxable profit accordingly. Silverdrum also claimed a Section 33(1) deduction for stamp duty and conversion premium. These adjustments led LHDN to find the tax return understated, resulting in a Section 113(2) penalty of RM197,216.13. The High Court ruled against Silverdrum on all three issues, and Silverdrum appealed.

𝐏𝐨𝐬𝐢𝐭𝐢𝐨𝐧 𝐨𝐟 𝐭𝐡𝐞 𝐭𝐚𝐱𝐩𝐚𝐲𝐞𝐫 Silverdrum relied on Ketua Pengarah Hasil Dalam Negeri v Rainforest Heights Sdn Bhd, where a 10% discount to directors was found not to fall under Section 140(6). It argued the assessment should follow the private valuer's figures, which the Special Commissioners had preferred. It also said the stamp duty and conversion premium became due once the sale agreement was signed, since that was the point the company committed to the transaction. It also argued that the penalty was unfair since it relied on its tax agent's advice.

𝐏𝐨𝐬𝐢𝐭𝐢𝐨𝐧 𝐨𝐟 𝐋𝐇𝐃𝐍 LHDN said Rainforest Heights was different. Here, the government valuer found a discount of over 35%, and even the private valuer's figures showed the price was more than 30% below market value, with no commercial reason given. On the deduction, LHDN agreed stamp duty and conversion premium are deductible, but pointed out that signing a sale agreement only creates a commitment between the buyer and seller. It does not create a debt owed to the government. That debt only arises once the relevant authority actually issues a demand, and no demand had been issued when Silverdrum claimed the deduction.

𝐃𝐞𝐜𝐢𝐬𝐢𝐨𝐧 𝐨𝐟 𝐭𝐡𝐞 𝐂𝐨𝐮𝐫𝐭 The Court of Appeal agreed with LHDN on all counts. The size of the discount, with no commercial justification, meant the sale was correctly caught under Section 140(6). The deduction was disallowed as no obligation to pay existed yet. The penalty under Section 113(2) was upheld. The appeal was dismissed with costs of RM15,000.

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