Law firm

Apex court denies IRB access to law firm’s client accounts

PUTRAJAYA (July 20): In a landmark decision, a seven-member bench ruled unanimously on Wednesday July 20 that the Inland Revenue Board (IRB) cannot review the accounts of clients of a law firm, in his attempt to investigate and impose new taxes on the law firm.

The Supreme Court ruled that this was to preserve solicitor-client privilege and that the law firm had the right not to disclose or withhold such information from the IRB with respect to the accounts. customers without the consent of the customers. However, the court added a caveat — the privilege is not protected by attempts to conceal the client’s illegal activities. When such circumstances arise, the law firm is not bound by this privilege.

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

“It appeared to us that the IRB did not understand that client accounts included funds and documents belonging to the client. In short, the contents of customer accounts belong to the customer and not [to] the lawyer as such.

“Therefore, the question of why is it necessary to verify a clients account in order to impose a tax on the law firm [does not arise]. There was no credible reason for the IRB to go to the third party account to levy a tax on the law firm,” she added.

However, the Chief Justice qualified the bench’s decision by imposing a qualification or exception — namely that this solicitor-client privilege is not protected by attempts to conceal the client’s illegal activities. When such circumstances arise, the law firm is not bound by this privilege.

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

The chief justice also ruled that the IRB cannot embark on a fishing expedition to sift through all of the lawyer’s client accounts to impose taxes.

The Supreme Court further ruled that Section 142(5)(b) of the Income Tax Act 1964 (ITA) does not overrule Section 126 of the Evidence Act which requires law firms to disclose such information.

Following today’s decision, the Supreme Court dismissed the appeal of the IRB and its Chief Executive, and upheld the decision of the High Court and the Court of Appeal on the matter.

The court made no order as to costs.

Other members of the bench were Federal Court Judges Datuk Nalini Pathmanathan, Datuk Vernon Ong Lam Kiat, Datuk Harmindar Singh Dhaliwal, Datuk Rhodzhariah Bujang, Datuk Mohd Zabidin Md Diah and Appeal Court Judge Datuk Hanipah Farikullah.

If lawyers can disclose client accounts to auditors, why not the IRB?

The IRB, led by senior federal counsel Dr. Hazlina Hussain, said ITA section 142(5)(b) states that “notwithstanding any other written law, where a document, thing, a matter, information, communication or advice consists in whole or in part of, or relates in whole or in part to receipts, payments, income, expenses or transactions or financial dealings of any person (whether of a barrister and solicitor, his client or any other person), it will not be protected from disclosure to any court, the special commissioners, the managing director or any authorized agent if contained in, or includes all or part of, any book, account, statement or other document prepared or maintained by a practitioner or a firm of practitioners in relation to any client or clients of the practitioner or firm of practitioners or any other person”.

She argued that the intention of Parliament was to have the 1974 amendment empowering the IRB to collect documents, information, communications and the like as stipulated by the ITA involving the law firm’s client account at the IRB.

Hazlina argued that the IRB is not asking lawyers to breach solicitor-client privilege, only to disclose 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 access to these client accounts because Section 142(5) (b) maintains that it will not be protected from disclosure.

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

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

The Sabah Law Society (SLA) and Sarawak Bar Association (AAS) also appeared in the case which attracted a lot of attention, and the two bodies also made submissions on the matter. The SLA was represented by Alvin Leong Yin Yuan and Roger Chin, while the AAS was represented by its President Antonio PK Sim and Gurvir Singh Sandhu as an amicus curiae (an impartial adviser to a court in a particular case) .

The situation began in 2016, when several law firms complained to the Law Society that the IRB raided law firms to audit their client accounts.

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

The IRB should not have sweeping powers

Anand Raj, representing the Malaysian Bar, told the Supreme Court that the High Court and Court of Appeal were right not to allow the IRB to review client accounts, as it gives the IRB broad powers to engage in a fishing expedition trying to seek or gain access to account information to tax notaries.

“Authorities cannot justify disclosure or be given such sweeping power to gain access to everything,” he told the top court, adding that protection should have been granted on the basis of professional secrecy. ‘lawyer.

Anand Raj said most Commonwealth countries, including Malaysia and India – Australia being an exception – recognize the need for greater protection of solicitor-client privilege, including client accounts.

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

“Lawyers are more afraid of criminal breach of trust of client accounts, as this would lead to striking off (roles, disqualification),” he said, adding that client accounts clients are detained to receive the client’s money and the money does not yet belong to the law firm until they have done the work.

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

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

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Issue: Taxes and privacy