IN THE COURT OF APPEAL FOR EAST AFRICA
CORAM: (NEWBOLD, P., DE LESTANG, V-P., AND SPRY, JA)
CIVIL APPEAL No. 6 OF 1968
THE COMMISSIONER GENERAL OF INCOME TAX…….…………APPELLANT
KIGANGA ESTATES LIMITED………………………………………..RESPONDENT
[Appeal from the judgment of the High Court of Kenya at Nairobi (Rudd, J,) dated 17th November, 1967 in Civil Appeal No.19 of 1967]
28th June, 1968.
The Following judgments were read:-
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:
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…”
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
(iii) In the case of capital expenditure to which paragraphs (c),(d),(e) applies, to twenty per cent of such expenditure."
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.
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 construction 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.
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 shall 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.
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.
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.
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 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.
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
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.