Commercial Law Index

The respondent sued the appellant for general damages and restoration of the value of certain of its properties, arising from their sale at a public auction, prompted by a warrant of distress issued under the Income Tax Act. The High Court found that the respondent bore no tax liability to the appellant at the time the warrant was issued, and consequently that the vehicles were unlawfully distrained and sold, before making an award of damages, interest and costs of suit in the respondent’s favour.

On appeal, the tax authority successfully challenged the High Court decision on the grounds of jurisdiction. It contended that the relevant tax legislation (primarily the Income Tax Act, 1973) had established fora to preside over tax disputes at the first instance. As the respondent had failed to exhaust these internal statutory remedies before launching court proceedings, the High Court lacked jurisdiction to hear and determine the matter. The court had ousted the jurisdiction of the specialised fora designed for that very purpose.

Reiterating that jurisdiction may be raised by the parties or suo moto (by the court itself) at any stage of proceedings – even on appeal – the appellate court quashed and set aside the High Court’s decision and upheld the appeal.

The court was called upon to determine the authority of the Uganda Revenue Authority to transfer tax liability and collect money from bankers holding money for alleged offenders under the VAT Act.

The court decided 2 of 5 agreed points of law. Firstly, the court considered whether the defendant's decision to impose and transfer a tax liability of Uganda Shillings 5,553,634,271/= from SureTelecom Uganda Limited to the 1st plaintiff was legal. The court held that the purported transfer of liability from SureTelecom Uganda Limited was unlawful because it infringed the right of the first Plaintiff to be charged and tried before a court of law or an independent tribunal for the offence which the penal tax was imposed. The court agreed with the defendant that it was acceptable for a director of a company to be held liable for the offences of a company in absence of proof that they lacked knowledge of the offence or had tried to stop the commission thereof. However, the court noted that the Commissioner had compounded the offence prior to court proceedings without having an admission from the first plaintiff and thus violated his fundamental right to a fair hearing as envisaged by section 28 of the Constitution. Accordingly, the court found in favour of the first plaintiff. Secondly, the court considered whether the defendant’s act of issuing agency notices to and subsequently collecting USD 800,000 from the 2nd Plaintiff’s bankers in respect of the 1st Plaintiff’s tax liability is lawful or legal. Based on the determination of the previous issue, the court found in favour of both plaintiffs in this issue.

The matter arose from a dispute about the detention of goods belonging to the second plaintiff by the defendant. 

The first issue was whether the detention was lawful. Section 214 of the East African Community Customs Act required notice of detention to owners when known. As ownership was not clear, the court observed that notice was not necessary. It also further reasoned that the conduct of the defendant did not amount to seizure as the goods were already in their hands with the knowledge of owners before they were impounded. The court thus held lack of notice did not breach the legislation and therefore not unlawful. 

On whether the goods were wrongfully detained, the court reasoned that the act of holding out representation of title by the second plaintiff and the allegations of fraud was cause for investigation by the defendants and consequent detention pending investigation of ownership. Further, the defendant was legally obliged to hold on to the goods as a lien pending the demand of payment of tax. The detention was therefore lawful. 

Lastly, the court considered whether the MoU entered into by the plaintiffs and defendant was entered into by duress. Citing Pao On v Lau [1979] 3 ALL ER 65 for factors to prove duress, the court noted that the plaintiffs protested and denied indebtedness arising from the memorandum of understanding (MoU) but did not necessarily repudiate immediately or seek redress. It thus reasoned that the actions of the plaintiff did not show duress and therefore held the MoU was entered without duress.
 

The defendant had rejected a claim of a certain amount as allowable tax deductions by the plaintiff. This case reconciles the different calculations for bad debts used according to the Financial Institution Act and the 2005 regulations on the other hand the Income Tax Act (ITA) International Financial Reporting Standards (IFRS). 

The court considered whether the assessment followed by the defendant was unlawful.

The court held that it was not required to determine which methodology was more consistent with the ITA section 24. The rationale for accounting methods should not depart from what is provided under the ITA, which is the parent act. Therefore, the definition of a bad debt should be based on the ITA under. The court considered the practice note which had the interpretation of the Commissioner General and held that section 160 of the ITA must be followed because the practice note is only binding on the Commissioner General and her personnel. The court held that section 24 deals with deductions of bad debts and the conditions to be fulfilled for deduction must apply. Thus, the court held that a bad debt under section is allowable as a deduction under section 24.

The court held that the plaintiff was obliged to make provision for bad debts which meet the criteria under section 24 of the ITA and the practice note issued by the Commissioner, file accounts with the Bank of Uganda and be up to standard under the IFRS.

The court also considered whether the plaintiff had to comply with the Bank of Uganda Circular that regulated deductibility of bad debts for income tax. The court held that the circular was not binding because it does not deal with whether a bad debt is an allowable deduction or not.

The court was satisfied that the above sum was a bad debt that is supposed to be an allowable deduction under section 22 and 24 of the ITA.