Whether feasibility study conducted to prepare recommendations to meet regulatory requirements is tax deductible? Whether the costs of the study is considered as revenue expense?

Ketua Pengarah Hasil Dalam Negeri v. Shell Refining Co. (FOM) Berhad [2014] 9 MLJ 689 [2018] AMTC 105

Issue:	Whether feasibility study conducted to prepare recommendations to meet regulatory requirements is tax deductible? Whether the costs of the study is considered as revenue expense?
Answer:	The payment made in conducting the feasibility study on the Company’s refinery was a revenue expense. It was tax deductible.
Facts/Case Study :	1.      The Company was established in 1960. 2.    The Company hired Shell Global Solutions International (SGSI) to conduct a feasibility study on the Company’s plant in Port Dickson. 3.      The Company was of the view that the payment made to SGSI (amounting to RM3,476,716.79) for the feasibility study is tax deductible under Section 33 of the Income Tax Act 1967. The Company was of the view that the payment was made for the purposes of ensuring business profitability and to comply with regulatory requirements and thus qualified for tax deductions under Section 33 (1). It was also argued that a revenue expense qualified for tax deduction even though no profit was generated. 4.      However the IRB was of the view that the payment was capital in nature. Further, feasibility study did not generate any income to the Company. IRB claims the Company had filed its return incorrectly and is subjected to penalty.
Decision:	1.       IRB’s witness committed many errors in imposing the penalty and in rejecting the tax deductions. 2.       The payment made to SGSI was an outgoings and expenses wholly and exclusively incurred during the relevant period by the Company in production of its gross income. 3.       The feasibility study was a revenue expense and it was tax deductible. 4.       The Company argued that the payment to SGSI for the report was to ensure its business remains profitable and to comply with current laws and as such must be allowed to be deducted under Section 33(1) of the Act. 5.    The “common sense test” must be applied to determined whether the expense could be deducted. 6.    The Company also argued that expenses incurred for the purpose to increase the efficiency of the business is tax deductible.
Cases referred:	Syarikat Jasa Bumi v. Ketua Pengarah Hasil Dalam Negeri [2000] 2 MLJ 317
Judge:	Zaleha Yusof J