23/05/2026
This Court of Appeal case is important for company directors, shareholders, and SMEs that provide employee allowances because it clarifies when tax exemptions on benefits such as meal, petrol, parking, and telephone allowances may no longer apply. It also highlights an important distinction between a genuine tax dispute and a situation involving intentional tax evasion, especially when penalties are imposed by LHDN. The case focused on whether a managing director who held shares in his company had “control” over the employer company under the Income Tax (Exemption) Order 2009, and whether penalties under Section 113(2) of the Income Tax Act 1967 were justified.
𝐁𝐚𝐜𝐤𝐠𝐫𝐨𝐮𝐧𝐝 𝐨𝐟 𝐭𝐡𝐞 𝐜𝐚𝐬𝐞
The taxpayer, Lam Kam Wing, was the Managing Director of Tasmanco Consultancy Services Sdn Bhd and held 30% shareholding in the company. Following an audit by LHDN on the company’s Scheduled Tax Deduction records for YA 2011 to 2013, LHDN found that certain allowances received by the taxpayer, namely meal, petrol, parking, and telephone allowances, had not been included in the taxable income calculation because the company treated them as tax exempt under the Income Tax (Exemption) Order 2009. LHDN took the position that the taxpayer was not entitled to the exemption because he had “control” over the company under Paragraph 3(a)(i) of the Exemption Order. Additional assessments together with penalties under Section 113(2) of the Income Tax Act 1967 were raised for YA 2011 and 2012 amounting to RM5,011.20 for each year.
𝐏𝐨𝐬𝐢𝐭𝐢𝐨𝐧 𝐨𝐟 𝐭𝐡𝐞 𝐭𝐚𝐱𝐩𝐚𝐲𝐞𝐫
The taxpayer argued that he did not have “control” over Tasmanco despite being a shareholder and Managing Director. He maintained that the allowances received should qualify for tax exemption under the Exemption Order and therefore were correctly excluded from his taxable income for YA 2011 and 2012. The taxpayer also disputed the penalties imposed, arguing that there was no intention to mislead or deceive LHDN.
𝐏𝐨𝐬𝐢𝐭𝐢𝐨𝐧 𝐨𝐟 𝐋𝐇𝐃𝐍
LHDN argued that the wording of the Exemption Order was clear and unambiguous. According to LHDN, the taxpayer had sufficient “control” over the employer company because he was both the Managing Director and the largest shareholder at the material time. As such, the exemption under Paragraph 3(a)(i) did not apply to him. LHDN further maintained that the taxpayer had under declared his income, justifying the additional assessments and penalties under Section 113(2) of the Income Tax Act 1967.
𝐃𝐞𝐜𝐢𝐬𝐢𝐨𝐧 𝐨𝐟 𝐭𝐡𝐞 𝐂𝐨𝐮𝐫𝐭
The Court of Appeal allowed the appeal in part. The Court agreed with LHDN that the taxpayer had “control” over the company within the meaning of the Exemption Order because he was the largest shareholder and stood to benefit significantly from the company’s assets and affairs. As a result, the allowances received were not exempt from income tax, and the additional assessments for YA 2011 and 2012 were upheld. However, the Court set aside the penalties imposed under Section 113(2) of the Income Tax Act 1967. The Court found no evidence that the taxpayer had intentionally attempted to deceive LHDN, and referred to Section 124(3) of the Act in concluding that the benefit of doubt should be given to the taxpayer. No order as to costs was made.
This case is a useful reminder that directors and shareholders of private companies should carefully assess whether employee tax exemptions genuinely apply to them, especially where ownership and management overlap. A misunderstanding of exemption rules can still result in additional tax exposure even if there was no intention to evade tax.
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