Kagera Saw Mills Limited v. The Commissioner General of Income Tax, Misc. Civ. App., 20 and 210 DSM-1971, 30/3/72, Biron, J.

Kagera Saw Mills Limited v. The Commissioner General of Income Tax, Misc. Civ. App., 20 and 210 DSM-1971, 30/3/72, Biron, J.

In each of these two consolidated appeals, one in respect of the assessment of income tax for the year of income 1967 and the other for the year 1968, the appellant company, is appealing – (a) against the allowance by the Commissioner-General of Income Tax, on the capital expenditure incurred in the purchase and installation of an irrigation system, and (b) against the refusal of the Commissioner to allow an investment deduction on the capital expenditure incurred in the purchase and installation of machinery an necessary alterations to the building’s housing such machinery, in respect of a sugar factory operating on the company’s land. (a) In assessing the income tax the Commissioner allowed in respect of the irrigation system 12¹/₂ of the cost, treating this system as machinery under paragraph 9 of Part 11 of the Second Schedule to the Act. It is contended by the company that part of this system constitutes farm works, on the purchase and installation of which there should be allowed a deduction of 20% of the cost for the first year and in each of the following four years, as laid down in paragraph 25 of the Part 1V of the Second Schedule to the Act. The irrigation system consists of a caterpillar diesel engine, a pump and a series of interconnected pipes of diminishing dimensions, ending up in a network of sprinklers. The pump, which derives its power from the diesel engine, draws up water from the Kagera River, which is then forced through a series of inter-connected pipes to connected sprinklers, forming a network of about four miles of overhead sprinklers, which irrigate the sugar plantation up to a mile from the main source of supply. Mr. Muli, who appeared for the Commissioner, submitted that this irrigation system constitutes but one unit and is machinery coming under paragraph 9 (2) (iii) above cited entitling the company to an allowance of 12¹/₂% for wear and tear. Mr. Riegels, who appeared for the company, conceded that the prime mover, the diesel engine, is machinery, coming under paragraph 9(2) (iii), but contended that the pipes which convey the water from the pump, and the sprinklers, constitute farm works within the meaning of paragraph 25 above cited. As for the pump, Mr. Riegels allowed that it was in an intermediary position, that is mid-way between the diesel engine, which he concedes is machinery under paragraph 9(2)(iii) and the pipes and sprinklers, which he contends, are farm works, and come under paragraph 25. (b) With respect to the second point there are two issues; one, whether the company was carrying on but one trade, that of the growing of sugar cane, or whether it was carrying on two trades, that of husbandry, and the manufacture of defined sugar, and two, if the company can be held to be carrying on two trades, whether the second trade, that of the manufacture of refined sugar, consists in the subjection of goods or materials of local origin to a process, within the meaning of sub-paragraph 27(e) of Part V of the Second Schedule to the Act. It is submitted by Mr. Muli that the company was engaged solely in the trade of husbandry, that is the growing of sugar cane and that the reduction of sugar cane into refined sugar as the end product of the sugar cane grown was part and parcel of the trade of husbandry, therefore the company was not entitled to any investment deduction in respect of the capital expenditure on the deduction in respect of the capital expenditure on the purchase and installation of the machinery in the buildings and the necessary alterations to such building, as claimed by it. The company’s case is that it is engaged in two trades; that of growing sugar cane, and the manufacture of refined sugar, which constitutes the subjection of goods or materials of local origin to a process, within the meaning of sub-paragraph 27(e). The company possesses 18,000 acres of land, of which 10,000 acres have been developed and were producing sugar cane. The factory which manufactures the refined sugar, occupies about ten acres of this developed land. There were about three hundred men employed in the sugar factory, these included engineers, technicians, chemists and analysts, and they were under the over-all supervision of two expert technicians. The manufacture of refined sugar consists of a number of complex and protracted processes involving the use of sophisticated machinery. In addition to refining the sugar cane grown on its land, the company also buys sugar cane from other growers, which it processes. In 1967 it bought sugar cane to the value of Shs. 99,839/=, in 1968 to the value of Shs. 186,553/-, and this quantity of outside sugar cane bought by the company is ever increasing, in that in 1969 the company bought sugar cane to the value of Shs. 280,400/= and in 1970 to the value of Shs. 434,236/=

            Held: (1) Machinery is defined in par. 34. Part VI, Second Schedule to the Act as follows: “’machinery’ includes ships and plant used in carrying on any trade.” “Farm works” are defined in par. 26 as follows: “’farm works’ means farmhouses, labour quarters, any on the immovable buildings necessary for the proper operation of the farm, fences, dips, drains, water and electricity supply works other than machinery, windbreaks, and other works necessary for the proper operation of the farm.” In construing words and expressions used in statutes, definitions in dictionaries and similar works are certainly of great help, but they are by no means conclusive, as it has been held that the same word occurring in the very same act has different meanings. Words and expressions used in enactments must be construed in the context of the particular passage in the act wherein they appear, irrespective of the definitions given to such words or expressions in dictionaries and similar works. [Citing: Bourne vs. Norwich Crematorium, Ltd. (1967) 2 All E. R. 576. ]…. It is often said that a fiscal statute, such as a tax act, must be construed strictly as against the tax authority. However, Knonstam on ‘The law of Income Tax’ (twelfth edition) at paragraph 8 somewhat qualifies this approach. “It is often said that a taxing Act must be 

Construed strictly in favour of the subject; it may perhaps be more correct to say that  a taxing Act must be construed against either the Crown or the person sought to be charged, with perfect strictness – so far as the language of the Act enables the judges to discover the intention of the Legislature.”………. The question that immediately poses itself is, how does one ascertain what the Legislature must have intended. It is trite to observe that Income Tax Acts are enacted for the purpose of raising revenue. At the same time the Legislature makes allowances for capital expenditure in order, I venture to say, to encourage economic development. Therefore, in construing an enactment dealing with allowances one should, I think, strike a balance between these two objects, which do not really conflict in the intention, though they may appear to do so in practice ….. To my mind, if the definition [of “farm works”] did not include “water and electricity supply works” and “other works necessary for the proper operation of the farm,” it could be argued that for any plant, to use as wide and innocuous an expression as possible, to constitute farm works it should be same kind of immovable fixture, like a farmhouse, labour quarters or any other immovable building, but this narrow construction is, in my view, rule out by the express inclusion of ‘water and electricity supply works’ and’ other works necessary for the proper operation of the farm’, which need not necessarily be permanent fixtures. It can also be argued, I think, that the expression ’water and electricity supply works other than machinery’, would in itself imply that such works, although connected to machinery, are severable and need not necessarily be treated together with the machinery to which they are connected, as one unit. In fact, electricity supply works could certainly not exist in isolation, as there must be some machinery in Words and Phrases Judicially Defined, which excludes “anything that is merely a reservoir or conduit, although connected with something which is …..a machine.”] It cannot, I think, be disputed that the pipes and sprinklers are no more than conduits; therefore, although connected through the pump with the diesel engine, which is a machine, they do not constitute machinery. I therefore have no hesitation in finding that the component parts of this irrigation system are severable, actually into three distinct sections – the diesel engine, the pump and the pipes and sprinklers. I have already remarked that the pipes and sprinklers are no more than conduits. They can therefore be equated with water supply works in the definition of farm works, and so I find them to constitute farm works within the meaning of paragraph 25. The prime mover the diesel engine, as conceded by Mr. Riegels, cannot be regarded as other than machinery within the meaning of paragraph 9. The pump, which Mr. Riegels himself admits facts midway between the position of the diesel engine and the pipes and sprinklers, presents

considerable difficulty. In fact, I think either contention, that it is machinery, or farm works, could be argued and supported with equal force ……. Therefore, as its classification is so equivocal, and, as any doubt in a case of this nature must, I consider, be resolved in the taxpayer’s favour, I find myself constrained to hold, albeit unconvinced, but as pointed out, I need not be convinced, that the pump likewise constitutes farm works within the meaning of paragraph 25. In the circumstances, I am disposed to allow the company’s appeal in respect of the pump, the pipes and sprinklers that hey constitute farm works with the meaning of paragraph 25, there by attracting an allowance of 20% of the cost of their purchase and installation, in the assessment of income tax for the years 1967 and 1968.” (2) With respect to the second point, whether the company was carrying on one trade or two, the following cases were referred to by counsel; Commissioners of Inland Revenue v. The Cavan Central Co-Operative Agricultural and Dairy Society, 12 T.C.1; Loan and Dickson v. Ball, 10 T.C 341; Peter Reid v. Commissioners of Inland Revenue, 28 T.C. 451; Earl of Derby v. Bassom, 42 T.L.R. 380; J. F. McLaughlin v. Mrs. Blance Bailey, 7 T.C. 508; Commissioner of Inland Revenue v. William Ranson & Son Ltd., 12T.C. 21; Commissioners of Inland Revenue v. Maxse, 12 T.C. 41; J.J. Farrel v. Sunderland Steamship Co. Ltd., 4 T.C. 605. “I have deliberately left the last case cited, actually by both parties, to the last, as it is the only case really binding on this Court, the English decisions no longer being binding, as stated by Sir Charles Newbold, P. in Rashid Moledina & Co. (Mombasa) Ltd. And others v. Hoima Gimmers Ltd. (1967) E.A 645 at page 655. The case, on which, as remarked, both sides rely, is that of Commissioner General of Income Tax v. Kiganga Estates Ltd. (1968) E.A. 464. The facts of that case as set out in the head note were as follows: “The respondents carried on the business of growing and preparing to the marketable stage tea, and all such activities were conceded to be for the purpose of husbandry. In terms of Prt 1V, Para. 25 of the Second Schedule to the East African Income Tax (Management) Act 1958, one fifth of the capital expenditure incurred for the purpose of husbandry on the construction of farm works on agricultural land might be deducted in each of five consecutive years. The Company claimed and was granted such a deduction in respect of expenditure on the construction and extension of a tea factory. The company conceded that it carried on only one business which was for the purpose of husbandry; but in addition it claimed an investment allowance under Part V, Para. 27 of the Second Schedule to the Act for capital expenditure for the purpose of a trade in processing goods or materials of local origin. The Commissioner-General refused to allow this investment allowance” ……. It was there held ….. that the company was carrying on only one trade, that of husbandry and therefore the company was not entitled to an investment deduction under paragraph 27. Mr Muli submitted that in this case likewise, the company was carrying on only one trade, that of husbandry and therefore was not entitled to an investment deduction under

Paragraph 27. Mr Muli further submitted that the Court of Appeal case also supported his contention that in the manufacture of refined sugar, the company was not engaged in a trade which consists in ‘the subjection of goods or materials of local origin to any process’ as required by paragraph 27(e), to entitle it to an investment deduction, as he equated the processing tea to the processing of sugar. In my view, the Court of Appeal case is easily distinguishable from this instant case on both aspects – on the question of the severability of the trades carried on by a company and on what constitutes ‘the subjection of goods or materials of local origin to any process’. In the Court of Appeal case, as expressly stated in the headnote above quoted, the company conceded that it carried on only one business, which was ‘for the purpose of husbandry’, and in his judgment sir Charles Newbold, P. stated, at p. 466: “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 material of local origin to any process merely because that activity forms one party of the may other activities which in conjunction form one business of husbandry carried on by the company.”  In this instant case, as expressly stated in the statement of Facts above set out, he company’s land was and I quote: “…… agricultural land being utilized b the appellant mainly for the purposes of husbandry, that is to say, the growing of sugar cane.” It is hardly necessary to point out that there is all the difference in the world between ‘mainly’ and ‘solely’ Further, in its Statement of Facts, the company states with reference to its claim for an investment deduction on the purchase and installation of the machinery under paragraph 27(e): “The said buildings are owned by the Appellant and the said machinery and buildings are used for the purposes of a trade which consists of subjecting goods of local origin to a process that is to say, the refining and manufacture of sugar from sugar cane.” It therefore cannot be said, as was said in the Court of Appeal case, that this refining and manufacture of sugar from the sugar cane forms, in words of Sir Charles New bold, P, ‘an integrated part’ of the growing of sugar cane, which although as pointed out, is the company’ main trade, is not necessarily its sole trade. In fact, there is a passage in Sir Charles Newbold’s judgment actually a continuation of the passage above quoted, which to my mind, supports the contention that the manufacture of sugar is not an integral part of the company’s trade of husbandry but a separate and distinct one. Continuing the passage above quoted, Sir Charles Newbold went on to say: “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 material; but that is not the position in this case.” 

In my view, as I think, sufficiently demonstrated, that is the position in this case. With regard to the other submission of Mr. Muli, that this Court of Appeal case is also an authority for his proposition that the refining and manufacture of sugar from sugar cane does not constitute the subjection of goods or materials of local origin to any process etc., as he manufacture of tea from tea leaves was held not to constitute such a processing, to my mind, it is a far cry from turning tea leaves into made tea, to the manufacture of refined sugar from sugar cane, having regard to the very involved and highly technical process described by Mr. Fernandes in his evidence Further, the Court of Appeal did not lay down that the processing of tea could not come within paragraph 27. All it laid down was that such processing was merely an integrals part of the company’s sole trade of husbandry. Therefore, the Court of Appeal case is not authority for either of Mr. Muli’s submissions, but rather supports those of Mr. Riegels, for the company. Mr. Muli further submitted that before a company can be said to carry on different trades or ventures, it must show them separately in its accounts. With respect, I am very far from persuaded that the failure to have different accounts for each trade or venture operated by a company would be fatal to treating them separately, either for the assessment of tax or for allowances or deductions, provided of course, that they can be ascertainable individually. And that view is, to my mind, supported by the cases cited, particularly by the last one, that of the Court of appeal for East Africa. Mr. Riegels submitted that in construing the various provisions of the Act, the Court should take into consideration a speech made by the Minister for Finance in the National Assembly on the 16^th of January, 1964, as an indication of the Legislature ‘s intent ….. The Minister’s remarks do, I agree with Mr. Riegels, indicate that the Legislature was aiming at encouraging development in general and in particular, the manufacture and processing of the agricultural produce of the country. However, it is doubtful how far this speech could influence the construction of the Act, particularly as the Act was enacted in 1958 and the speech was made in 1964. But I think that the intention of the Legislature can be ascertained from the Act itself, without calling in aid such extraneous matter as the Minister’s speech. As, I think, sufficiently demonstrated, the authorities are all in favour of the company’s contention that its operations are severable into two trades, its main trade, the cultivation of sugar cane, being that of husbandry, and its other trade, the manufacture of refined sugar, consists in the subjection of goods or materials of local origin to a process, thus entitling it to an investment deduction of 20% on the expenditure incurred in the purchase and installation of the machinery and the alteration to the buildings housing such machinery, as claimed by it. In the result, I allow both appeals with costs to the company ……..”