Question

c) Section 33(1) of Income Tax Act 1967 states the general deduction test for income: "... all outgoings and expenses wholly and exclusively incurred during that period by that person in the production of gross income from that source..." Many cases have been brought to court to decide whether a particular expense fulfils the requirement of Section 33(1) above. Required: Explain one case law related to deductibility of expenses. Your explanation should include the title of the case, the facts of the case, the decision of the court and the justification given by the court

Answer 1

Title of the case - Smart Tag Bhd (STB) Facts of the case - STB employed Muhd Shukri as an IT Engineer. STB provided him with hotel accommodation on many occasions as the travel needs are frequent. The company pays all the expenses. These expenses are classified by the company as entertainment expense under business expense. All expenses paid are wholly and exclusively incurred during that period by Shukri in the production of gross income. Decision of the court and the justification Entertainment is defined in the Income Tax Act under section 18 as (i) the provision of food, drink, recreation or hospitality of any kind; or (ii) the provision of accommodation or travel in connection with or for the purpose of facilitating entertainment of the kind mentioned in (i), by a person or an employee which related to a trade or business carried out by that person. With effect from YA 2004, entertainment expenses incurred in relation to specific business transaction on suppliers and bankers either by a company or the staffs of the company are 50% deductible. This encompasses entertainment allowance paid to employees for the purpose of defraying expenses incurred by employee in the provision of entertainment. However, there are certain entertainment expenses which are wholly deductible as business expenses if they fall under the provision of Section 39(1)(1). They are 100% deductible. These exceptions included entertainment business where the business consists of entertainment, promotional gifts at foreign trade fairs, promotional samples of the company's products, cultural or sporting events, and entertainment relates wholly to sales. As a conclusion, hotel accommodation expenses paid by STB for Shukri are entertainment expense. This is because the entertainment of the employees is incidental to the entertainment to the client. The expenditure is allowed only 50% deduction.