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And there is a Revenue Law principle that needsto be repeated – both the Inland Revenue Board andthe taxpayer cannot choose methods of recognisingprofit or deduction but must follow the provisions inthe Income Tax Act 1967. This principle was statedin Ostime (Inspector of Taxes) v Duple Motors Bodies Ltd 8as follows:In EM Bhd v Director General of Inland Revenue 9 , thisprinciple not only was accepted in Malaysia but the Courtheld that the Inland Revenue Board must act in accordanceto the provisions of the Income Tax Act 1967:It is up to the respondent (Inland RevenueBoard) to do so in accordance with the provisions ofthe Malaysian, Income Tax Act 1967 and in compliancewith the normal accounting practice.Percentage of completion method or the progressivepayments basis.Progressive Payments FormulaThe Inland Revenue Board Ruling in paragraph 7.9.2 reads:7.9.2 The progressive payments basis providesan estimate of the gross profit of a project(or phase as the case may be) proportionateto payments received and receivable foreach accounting year. The estimated grossprofit for each year is arrived at by usingthe formula:Estimated gross profitfor a year of assessment= (a) x (c)(b)Where –(a) = the sum of payments, including deposits, receivedand receivable in the year and the figures mustreflect the actual position prevailing at thebalance sheet date.(b) = the total value of development of the project, i.e.the total anticipated sales proceeds(c) = the estimated gross profit for the project i.e. thegross profit which the developer expects to makein relation to the project or phase.Outgoings and Expenses Whollyand Exclusive Incurred – s 33(21),Income Tax Act 1967 applicationThe Inland Revenue Board Public Ruling provides:(a) Development expenditure must be adjusted to excludenon-allowable expenses.(b)(c)Expenses relating to income generating propertieswould be allowable.Interest expense incurred by a property developer:14.8.1 Interest paid on loans taken for financingthe purchase of land and developmentworks are to be capitalised or debited in theDevelopment Expenditure Account, andnot charged to the Profit and Loss Accountevery year as part of administrativeexpenses. Where funds borrowed to acquireland cannot be related to a particularparcel or parcels, the interest incurredshould be allocated to all land held duringthe year in proportion to the cost of eachparcel. Interest would be allowed as part ofthe cost of sales based on the percentage ofcompletion method.Interest expense incurred on moneyborrowed and employed in the productionof gross income of a property developer isallowable under subsection 33(1) of theIncome Tax Act 1967. To qualify for adeduction, the interest expense of a propertydeveloper must not only be incurred butmust also satisfy the test that it is incurredin the production of gross income. In otherwords, “only interest attributable to thephases or projects, whichever is applicable,which produced income would be allowed as adeduction under sub-s 33(1) of the Income TaxAct 1967”. The deductibility of the interestexpense should strictly follow the principleof percentage of completion that is deductionis based on the progress of completion ofthe phase or project.In paragraph 7.7 of the ‘Ruling’ the Inland RevenueBoard takes a position that expected loss on a developmentproject recognised in the accounts would be allowed ongrounds that the loss is a ’anticipated contingent loss’. Thisapplies to an estimated gross loss as outlined in paragraph12 of the ‘ruling’. A provision made for liquidateddamages is not allowed as per paragraph 14.5.3 of the‘Ruling’. This treatment draws the following comment:(a) if an excepted loss is not allowed, then on what basis isan expected profit taxed?(b) if an expected gross loss cannot be set off against othersources of income, then what is the basis of taxingand expected gross profit?(c) a provision made for liquidated damages can beallowed if late delivery or defects have alreadyoccurred i.e. the event which triggers the liability hasoccurred, because the legal liability to pay has arisen 10 .www.micpa.com.myJune/August 2007 | The Malaysian Accountant |13