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NEWBOLD, P.
[1] This is an appeal by the Commissioner-General of Income Tax (hereinafter
referred to as the Commissioner) against a decision of the High Court
amending an assessment to income tax for the year of income 1965 made on a
company which is the owner of a tea estate. The facts are not in dispute and
so far as they are relevant may be stated as follows:
[2] The company incurred capital expenditure on the construction or
extension of buildings forming part of a factory on the estate, in which
factory tea was processed, and on the purchase of machinery for use in the
factory and such building and machinery was first used in 1965. The company
claimed and was granted a deduction in respect of such capital expenditure
under Part IV, paragraph 25, of the second schedule to the East African
Income Tax (Management) Act, 1958, as amended (herein referred to as the
Act). Under that paragraph one-fifth of the capital expenditure incurred for
the purposes of husbandry on the construction of farm works on agricultural
land may be deducted in each of five consecutive years. It is accepted by
the company that it pursues only one business, which is the growing and
preparing to marketable stage of tea, and that all of such activities are
"for the purposes of husbandry". In addition the company claims an
investment allowance under Part V, paragraph 7, of such second schedule.
That paragraph, so far as is relevant, reads as follows:
"27. Subject to this schedule, where:
(c) A person incurs capital expenditure to which this Schedule applies on
the construction of an industrial building . . . which is used by him …for
the purposes of a trade which consists in the subjection of goods or
materials of local origin to any process.
(e) The owner of a building incurs.... capital expenditure to which this
schedule applies on the purchase and installation of machinery in such
building which building and machinery is subsequently used for the purposes
of a trade which consists in the subjection of goods or materials of local
origin to any process…”
[3] There shall be deducted in computing his gains or profits for the year
of income in which the. building or extension or machinery is first so used
a deduction (referred to as an investment deduction
I) equal.....
(iii) In the case of capital expenditure to which paragraphs (c),(d),(e)
applies, to twenty per cent of such expenditure."
[4] The Commissioner refused to allow the investment allowance. The company
appealed and the High Court held that the company was entitled to the
investment allowance. From that decision the Commissioner appealed to this
Court. Mr. Muli for the Commissioner urged two points. The first was that
the business of the company comprised one trade of husbandry that the
capital expenditure in question was incurred for the purposes of husbandry
and deductible under paragraph 25, and that paragraph 27 only applied to
expenditure for a separate trade the activities of which do not form part of
a larger business. The second was that if the expenditure was incurred for a
trade to which paragraph 27 applies then under paragraph 25(3) (b) such
expenditure would "serve partly the purposes of husbandry and partly other
purposes" with the result that it then fell to the Commissioner to determine
what just and reasonable proportion of the expenditure should be deducted
under paragraph 25.
[5] Dealing with the first point, I was in considerable uncertainty for some
time before corning to a definite conclusion. I should first I think,
dispose of one aspect of the matter. As the company would be entitled under
paragraph 25 to deduct over period of five years all the capital expenditure
it had incurred and as it was claiming in addition the right to deduct a
further 20% under paragraph 27, the result would be that the company, if its
claims were correct would deduct more capital expenditure than it had in
fact incurred. This, on the face of it, would b. n extraordinary result, and
the courts lean against any construc¬tion of legislation which leads to an
extraordinary result unless it is quite clear that the legislature intended
that the extra¬ ordinary result might arise in certain cases.
[6] This matter, however, is dealt with in paragraph 32 of the second
schedule in which provision is made for the prevention of double allowances,
but there is a proviso which specifies that the paragraph shal¬l have no
application to an investment deduction. It is thus clear that the
legislature envisaged the possibility of double deductions in respect of'
the same expenditure. In these circumstances I do not consider that the
extraordinary result which would eventuate if the company's claim is correct
should have any influence on the interpretation of the provisions of
paragraph 27 taken in conjunction with paragraph 25.
[7] Before a person is entitled to an investment allowance under paragraph
27(c) or (e) in respect of capital expenditure, whether that expenditure be
on the construction of an industrial building or the purchase and
installation of machinery in a building, the capital expenditure must be
"for the purpose of a trade" of a certain specified nature. If the nature of
the trade as specified consists of activities which form part of a larger
business carried on by the same person, can it be said that person is
carrying on that trade? For example, if a person is carrying on the business
of husbandry for the purposes of which he ploughs his land by tractor, can
it be said that he is also carrying on the trade of ploughing by mechanical
means? It is clear that if his only occupation is hiring out tractors fur
ploughing, then he is carrying on the trade of ploughing by mechanical
means, It is, I think, also clear that if he carries on this trade as a
separate activity from his other trades or businesses, it can be said that
he is carrying on the trade of ploughing by mechanical means no matter what
other businesses or trades he may also carry on. But, in my view, if the
activities of a person form an integral part of a larger trade or business
carried on by him as one integrated business, that person cannot be said to
be carrying on not only the larger trade of business, but also the
multifarious trades which could be attached to each of the various
activities which form an integral and integrated part of the larger trade or
business. It must not be forgotten that every decision on income tax
legislation has a reverse as well as an obverse side. If, for example, a tax
were imposed on the trade of ploughing by mechanical means, surely it would
not attach to a farmer who is carrying on the business of husbandry in the
course of which, and for the purposes of which business alone, he uses his
own tractor for ploughing. Equally well, any expenditure incurred on the
tractors cannot be said to be expenditure incurred in the trade of ploughing
by mechanical means.
[8] In this case the company has accepted that it is carrying on one
business, the growing and preparing for the market of tea. That business is
the business of husbandry and expenditure therein is for the purposes of
husbandry. An integral and integrated part of that business is the
processing of the green tea leaf into made tea I cannot see that the company
can be said in those circumstances to be carrying on the trade of the
subjection of materials of local origin to any process merely because that
activity forms one part of the many other activities which in conjunction
form one business of husbandry carried on by the company. In different
circumstances, for example, if the company carried on its processing
activities in the factory quite separate from its growing activities, the
company might be said to be carrying on the trade of processing local
materia1s but that is not the position in this case.
[9] As I have already pointed out, unless the company is carrying on the
trade of subjecting materials of local origin to any process, it will not be
entitled to an investment allowance under paragraph 27. In my view, it is
not carrying on any such trade, and the first point urged by Mr. Muli on
behalf of the
[10] Commissioner is correct. It is, therefore, unnecessary to consider the
second point. For these reasons I would allow the appeal with costs and set
aside the judgment and decree of the High Court and substitute therefore a
judgment and decree dismissing the appeal to the High Court with costs and
confirming the assessment. As the other members of the Court agree it is so
ordered.
SPRY, JA:,
[11] I have had the advantage of reading in draft the judgment of my Lord
the President, with which I respectfully. It seems to me that this appeal
really turns on the meaning of the words "consists in" as used in
subparagraphs (c) and (e) of paragraph 27 of the Second Schedule to the East
African Income Tax (Management) Act, 1958. I have not found this easy to
decide. If "consist in" could be equated with "comprises", the respondent
company would, I think, be entitled to succeed. I think, however, that Mr.
Muli's contention is correct and that "consist in" has an exclusive meaning.
I note that the Shorter Oxford English Dictionary defines "consist in" as
"to have its being in; to be comprised or contained in". That is the reverse
of comprising. I think, therefore, that the respondent
[12] company, whose trade is that of growing and processing tea, is not
entitled to deductions under paragraph 27(c) and (e), to which it would have
been entitled had its trade been exclusively that of processing tea.
DE LESTANG, V-P.
[13] I agree. |
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