Tax authority must refund compensation payments, court decides

The Court of Appeal has determined that a 2022 Federal Court ruling declaring Section 4C of the Income Tax Act unconstitutional will apply to past cases, opening the door for taxpayers to claim refunds on taxes paid on land acquisition compensation.

The decision clarifies that the provision, which previously allowed the Inland Revenue Board (LHDN) to tax compensation received for compulsory land acquisitions, is invalid and cannot be enforced retrospectively. This retroactive application means affected taxpayers can pursue refunds for taxes paid under the now-unconstitutional section.

The ruling addresses a significant tax liability issue that has affected property owners and corporations receiving compensation from government or state authorities for land taken through compulsory acquisition orders. The constitutional challenge had questioned whether such compensation should be subject to income tax at all.

The decision is expected to prompt the LHDN to process refund claims from taxpayers who paid taxes on land acquisition compensation under Section 4C prior to the Federal Court's 2022 ruling. Legal experts anticipate increased claims from affected parties seeking to recover taxes paid in previous years.