PUTRAJAYA (July 20): In a landmark decision, a seven member bench on Wednesday (July 20) unanimously ruled that the Inland Revenue Board (IRB) cannot look into the client accounts of a law firm, in its bid to study and impose further taxes on the law firm.

The apex court ruled that this is to preserve solicitor-client privilege, and the law firm was entitled not to disclose or divulge such information to the IRB in relation to client accounts without the consent of the clients. However, the court added a caveat — the privilege is not protected by attempts to hide illegal activities of the client. Where such circumstances arise, the law firm was not bound by such privilege.

Chief Justice (CJ) Tun Tengku Maimun Tuan Mat, who led the bench, asked why it was necessary for the IRB to audit the client accounts in a bid to tax the law firm.

“It appeared to us that the IRB has failed to comprehend that the client accounts comprise of monies and documents belonging to the client. In short, the contents of client accounts belong to the client and not [to] the solicitor as such.

“Therefore, the question as to why is it necessary to audit an account of the clients for the purpose of imposing tax on the solicitor firm [does not arise]. There has not been any credible reason for the IRB to go into the third-party account to impose tax on the solicitor firm,” she added.

However, the CJ qualified the bench's decision by imposing a proviso or exception — namely that such solicitor-client privilege is not protected by attempts to hide the illegal activities of the client. Where such circumstances arise, the law firm was not bound by such privilege.

“This means that if there is illegal activity or commission that comes to the knowledge of the solicitor, [this decision] is not bound by the privilege and (the firm) must report the illegal activity,” she added.

The CJ also ruled that the IRB cannot embark on a fishing expedition to go through all the accounts of clients of the solicitor to impose taxes.

The apex court bench further ruled that Section 142(5)(b) of the Income Tax Act 1964 (ITA) does not oust Section 126 of the Evidence Act that requires law firms to disclose such information.

Following the decision today, the apex court dismissed the appeal by the IRB and its director-general, and upheld the decision of the High Court and Court of Appeal on the issue.

The bench made no order as to costs.

The other members of the bench were Federal Court judges Justices Datuk Nalini Pathmanathan, Datuk Vernon Ong Lam Kiat, Datuk Harmindar Singh Dhaliwal, Datuk Rhodzhariah Bujang, Datuk Mohd Zabidin Md Diah, and Court of Appeal judge Datuk Hanipah Farikullah.

The IRB led by senior federal counsel Dr Hazlina Hussain said that Section 142 (5)(b) of the ITA stipulates that “notwithstanding any other written law, where any document, thing, matter, information, communication or advice consists wholly or partly of, or relates wholly or partly to, the receipts, payments, income, expenditure, or financial transactions or dealings of any person (whether an advocate and solicitor, his client, or any other person), it shall not be privileged from disclosure to a court, the Special Commissioners, the Director General or any authorised officer if it is contained in, or comprises the whole or part of, any book, account, statement, or other record prepared or kept by any practitioner or firm of practitioners in connection with any client or clients of the practitioner or firm of practitioners or any other person”.

She argued that it was the Parliament's intention to have the 1974 amendment that empowers the IRB to gather such documents, information, communication, and others as stipulated from the ITA involving the client account of the law firm to the IRB.

Hazlina contended that the IRB was not asking the lawyers to violate solicitor-client privilege, but only to divulge information.

On this issue alone, Hazlina, who appeared with Senior Federal Counsel Ahmad Isyak Mohd Hassan and Mohamad Asyraf Zakaria, argued that the IRB should have been allowed to gain access to such client accounts, as the Section 142 (5)(b) argues that it shall not be privileged from disclosure.

Hazlina added that if the law firms could disclose the accounts to an accountant or auditor, then such disclosures could be made to IRB for income tax purposes.

The Malaysian Bar is challenging the disclosure demanded by the IRB on the grounds that it violates the solicitor-client privilege.

The Sabah Law Society (SLA) and the Advocates Association of Sarawak (AAS) also appeared in the case which has attracted much attention, and both bodies had also submitted on the issue. SLA was represented by Alvin Leong Yin Yuan, and Roger Chin, while AAS was represented by its president Antonio PK Sim and Gurvir Singh Sandhu as amicus curiae (an impartial adviser to a court of law in a particular case).

The predicament began in 2016, when several law firms complained to the Bar that the IRB had been carrying out raids on law firms to conduct audits on their client accounts.

The law firms also claimed that the IRB wanted to have information, accounts and records pertaining to the client accounts. Following that, the Malaysian Bar wrote to the IRB director-general to express that such information was protected by solicitor-client privilege, but the IRB argued that this was to ensure tax compliance.

Anand Raj, representing the Malaysian Bar, told the apex court that the High Court and the appellate court were right in not allowing the IRB to look into the client accounts, as it gives the IRB wide ranging powers to engage in a fishing expedition by trying to look or gain access to information on the accounts to tax the solicitors.

“Authorities cannot justify disclosure or be given such sweeping power to gain access to give them everything,” he told the apex court, adding that protection should have been accorded based on the solicitor-client privilege.

Anand Raj said most Commonwealth countries including Malaysia and India — Australia is an exception — recognise the need to further protect solicitor-client privilege including the client accounts.

He added that if the appeal is allowed, it would have far reaching consequences.

“Lawyers are more afraid of criminal breach of trust of the client accounts, as it would lead to the striking out (from the rolls, being disbarred from practise),” he said, adding that the client accounts are held for receiving client's money and the money is not yet owned by the law firm until it had done the work.

Anand Raj said the client account remains with the client until (payment is made) and when it does, it comes to the law firm's office account.

At the Court of Appeal, Justice Datuk Darryl Goon Siew Chye wrote the unanimous decision in dismissing the IRB's appeal.

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Issue: Taxes and privacy