Dismissed: IRB's appeal over right to access account of law firm's client

PUTRAJAYA: The Federal Court seven-member bench today dismissed the Inland Revenue Board's (IRB) appeal against the High Court's decision on its right to access and audit a client's account maintained by a law firm.

Chief Justice Tun Tengku Maimun Tuan Mat who chaired the panel, said the contents of the client's account related to the monies belonging to the client were covered by solicitor-client privilege.

"Therefore, it is not open to the solicitor to divulge or make available the contents of the client's account to the IRB by reason of Section 126 of the Evidence Act 1950.

"That privilege belongs to the client and not the solicitor. It requires the client to waive the privilege in order that the solicitor may make available the content of the client's account to the IRB," she said.

Justice Tengku Maimun said the IRB had failed to comprehend that the contents of a client's account comprised monies and documents belonging to the client and made or given in the course of employing a solicitor for services.

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She said that there had been no credible reason accorded to the IRB to seek viewing a third party's account in order to impose tax on the solicitor or the firm.

In the court's unanimous decision, the judiciary's top judge (Justice Tengku Maimun) said the court was of the view that Section 142(5) of the Income Tax Act 1967 did not oust Section 126 of the Evidence Act, which states that money belonging to a client is covered by solicitor-client privilege.

"There is an exception to Section 126 which confers the privilege where a solicitor is allowed to report the commission of illegal activity involving his client to the authorities.

"This provides sufficient safeguard against persons trying to illegally evade the imposition of tax," she said.

Justice Tengku Maimun said the IRB should be prevented from embarking on a "fishing expedition" to go through all the accounts of taxpayers with a view to imposing tax.

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The other judges presiding on the bench were Federal Court judges Datuk Nallini Pathmanathan, Datuk Vernon Ong Lam Kiat, Datuk Harmindar Singh Dhaliwal, Datuk Rhodariah Bujang, Datuk Mohamad Zabidin Mohd Diah and Court of Appeal judge, Datuk Hanipah Farikullah.

In 2016, the Malaysian Bar wrote a letter to the IRB director-general, stating that it received complaints from its members that the IRB had been carrying out raids on law firms to conduct audits on their clients' accounts and insisted on seeing the accounting books and records of those accounts.

The Bar claimed that the documents and information sought by the IRB were protected by solicitor-client privilege and might not be made available to the IRB.

On Dec 7, the same year, the IRB director-general responded by saying that the audits on clients' accounts were necessary to ensure tax compliance by taxpayers.

The IRB director-general contended that the audits were not in breach of any solicitor-client privilege as Section 142 (5) of the Income Tax Act 1967 overrode the provisions of the Evidence Act 1950 and the Legal Profession Act 1976.

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The Malaysian Bar then filed a judicial review in the Kuala Lumpur High Court, seeking several declarations pertaining to the issue. It named the director-general of the IRB as respondent.

On April 2, 2018, the High Court ruled in favour of the Bar and held that Section 142 (5) did not override Section 126 of the Evidence Act.

As such, the privilege provided under Section 126 of the Evidence Act precluded the IRB director-general from insisting on documents or information relating to the clients' accounts.

The Court of Appeal three-member panel upheld the decision of the High Court on Oct 27, last year prompting the IRB director-general to bring the matter to the Federal Court.

Head of the Revenue Solicitor, Dr Hazlina Hussain appeared for the IRB director-general while lawyer Anand Raj acted for the Bar. Sabah Law Society and Advocates Association of Sarawak appeared as amici curiae (friends of the court).

-- BERNAMA