Commissioner-General of Income Tax v. Kagera Saw Mills Ltd. E.A.C.A. Civ. App. 29-DSM-72, 19/8/72.

Commissioner-General of Income Tax v. Kagera Saw Mills Ltd. E.A.C.A. Civ. App. 29-DSM-72, 19/8/72.        

            MUSTAFA, J. A. – The respondent company (hereinafter called the company) was assessed to income tax in respect of the years of income 1967 and 1968 by the appellant commissioner General of Income Tax (hereinafter called the Commissioner). The Company was dissatisfied with the assessments and unsuccessfully appealed to the local committee against such assessment. The company then appealed to the High Court which allowed its appeals, [(1972) H.C.D. n. 124] and the Commissioner now appeals to this Court.

            The facts in the case are not in dispute. The Company owns 18,000 acres of land, 10,000 acres of which are under sugar cane cultivation, the other 8,000 acres being undeveloped. The Company owns and operates a sugar mill and factory for the manufacture and processing of refined sugar from sugar cane. The sugar mill occupies about 10 acres of land in the sugar plantation the cost of the sugar mill was about 10 million shillings and it employs 300 people, of whom 20 to 25 are highly skilled workers. The sugar mill processes the Company’s sugar canes and also that purchased from other sugar cane growers. In 1966, 3.3% of sugar cane was supplied by outside growers, in 1967 4.9% and in 1968 10.5%. In 1967 the mill purchased outside sugar cane to the value of Shs. 99,839; in 1968 – Shs. 186.553; in 1969 – Shs. 280,400; and in 1970 – Shs. 434,236/-. The Company commenced growing sugar canes from 1956 and commenced building the sugar mill in 1957. The Company has two departments, the timber department and the sugar department which comprises both the sugar mill and the sugar plantation there is only one set of books for the sugar department. In the timber department the labour force is 135; in the sugar department it is 1,400.

            During the financial years 1967 the Company incurred capital expenditure to the extent of Shs. 1,601,579/= on the construction of an irrigation system on its land. The Commissioner allowed a deduction of 12¹/₂% on the said capital expenditure by way of a “wear and tear” allowance on machinery under paragraph 9(2) (iii) of Part 11 of the Second Schedule to the East African Income Tax Management Act 1958 (hereinafter referred to as the Act.) The Company contended that the Commissioner should have allowed a deduction of 20% on the said capital expenditure by way or deduction on “farm words” on agricultural land under paragraph 25 of the Part 1V of the Second Schedule to the Act.

            Similarly during the financial year 1967 the Company incurred capital expenditure to the extent of Shs. 144,707/= in the purchase and installation machinery in buildings of the sugar mill and the necessary alterations thereto. The Commissioner refused any deduction for such capital expenditure on the ground that the company was engaged solely in the trade of husbandry, that is to say, the growing sugar cane and the manufacture and processing of sugar cane into refined sugar was only part and parcel of the trade of husbandry and therefore the Company was not entitled to any investment deduction in respect of such capital expenditure. The Company claimed that it was engaged in the separate and distinct trades, that of growing sugar canes and that of the manufacture and refining of sugar which constitutes the subjection of goods or material of local origin to a process, within the meaning of Paragraph 27(e) of Part V of the Second Schedule to the Act. The Company claimed an “investment deduction” of 20% of the capital expenditure in terms of paragraph 27 (e) (ii) of Part V of the Act.

            The same state of affairs applied to the financial year 1968, except for some difference in the sums for capital expenditure.

            I will deal with the irrigation system first. The irrigation system consists of a caterpillar diesel engine, apparently housed in a building, linked to a pump which is affixed to the ground, and a series of interconnected pipes of diminishing sizes and dimensions ending in a network of sprinklers connected at intervals to the pipes of the smallest dimensions. The pipes are all above ground and can be disconnected and moved about. The diesel engine is the prime mover, and operates the pump which draws water from a river and by the operation of its valve it pumps and forced water through the series of interconnected pipes to the sprinklers which irrigate about 2000 acres of the sugar plantation. The Commissioner submitted that the irrigation system constitutes but one unit and is machinery coming under paragraph 9(2) (iii) of Part 11 of the Second Schedule to the Act, entitling the Company to an allowance of 12¹/₂% for wear and tear. The Company contended that apart from the diesel engine which is machinery, the rest of the equipment is “farm works” within the meaning of paragraph 25 of Part 1V of the Second Schedule to the Act and qualifies for a 20% deduction. Machinery is defined in paragraph 34 of Part V1 of the Second Schedule to the Act as – “34(1) In this Schedule, except where the context otherwise requires – ‘Machinery’ includes ships and plant used in carrying on any trade”, “Farm works” is defined in paragraph 26 of Part 1V of the Second Schedule to the Act as – “’farm works’ means farmhouses, labour quarters, any other 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 Auckland City Corporation City Corporation v. Auckland Gas Company Ltd. (1919) N.Z.L.R. 561 at p. 561 at p. 586, quoted in Words and Phrases Legally Defined (Second Edition) – “a machine in its popular sense is a piece of mechanism, which by means of its inter-related parts, serves to utilize or apply power, but does not include anything that is merely a reservoir or conduit, although connected with something which is without doubt a machine.”

            The trial judge found that the components of the irrigation system were severable and he divided them into 3 sections, the diesel engine, the pump and the pipes and sprinklers. He found that the diesel engine was machinery, but that the pump and the pipes and sprinklers were “farm works”. In the course of this appeal, Mr. Wilkinson for the Company conceded that pump would be “machinery”. That would leave for decision only the pipes and sprinklers. Reading “farm works” as defined in paragraph 26 of Part 1V of the Second Schedule to the act, especially the phrase “water and electricity supply works other than machinery”,

I am satisfied that the pipes and sprinklers must be farm works. “Water…… supply works other than machinery” must cannote the means or conduits by which water is carried, just as “……… electricity supply works other than machinery “must cannote the cables and lines and posts by which electricity is carried. Mr. Khaminwa for the Commissioner referred to an unreported case of this Court being Civil Appeal No. 47 of 1970 (Kenya) The Commissioner General of Customs and Excise v. Elliot’s Bakeries Ltd, where it was held that baking pans were an integral part of the bread baking machinery. In that case the pans were regarded as part of the machine because the machine could not operate without them. Here the facts are different. The engine and the pump could extract and pump water from the river without the pipes and sprinklers, the water pumped out could be carried away in wagons or flow away to the field through channels. I agree with the trial judge that the irrigation system here is severable, between what is machinery and farm works, although the system is operated as one unit. This does not necessarily conflict with the wide definition of machinery in paragraph 34 of Part V1 of the Second Schedule to the act because this definition contains the words “……..where the context otherwise requires”.

            I now come to the issue whether the Company was engaged solely in the trade of husbandry, that is the growing of sugar cane was the mainland substantial trade, with the manufacturing and refining of sugar being only ancillary and incidental part of such husbandry, or whether the company was engaged in two separate and distinct trades, that of growing and planting sugar canes and that of manufacturing and processing and refining sugar from sugar canes. Commissioner General of Income Tax v. Kiganga Estates Ltd., (1968) E.A. 464 for the proposition that the Company was only carrying on one trade, that of sugar planting husbandry. He submitted that as the sugar factory was situated on the sugar plantation the presumption must be that the trade of manufacturing and refining sugar from sugar cane was only ancillary that of growing sugar.

            Trade is defined in Section 2 of the Act as – “’trade’ includes every trade, manufacture adventure or concern in the nature of trade.” It is thus clear that the manufacture and refining of sugar is a trade, the only question being whether it is a separate and distinct trade or is merely a part of the trade of husbandry. In dealing with such a question, the particular facts of each case have to be looked at, and ultimately it is a question degree.

            In this case the sugar mill cost 10 million shillings, a not inconsiderable sum. It has a labour force of 300, of whom 20 to 25 are highly skilled. It has chemist analysts, engineers, samplers and highly specialized sugar experts imported from Mauritius. The process of manufacturing and refining sugar is highly complex and technical involving liming, “sulphuration” clarifying heating boiling, and crystallization and so on. It is true that, in the sugar mill, the rendering sugar cane from the fields into refined sugar is a continuous, extensive and complex process. However the sugar mill has been purchasing sugar canes from other growers on an increasing scale: in 1966 it was 3.3%; in 1967 it was 4.9% and in 1968 it was 10.5%. In terms of cash the purchases of outside sugar cane were as follows – in 1967 it was Shs. 99,839; in 1968 it was Shs. 186,553; in 1969 it was Shs. 280,400 and in 1970 it was Shs. 434,236. it is  a considerable undertaking in its own right. This case is easily distinguishable from the Kiganga Estates case. In the Kiganga case it was agreed that the Kiganga Estates case. In the Kiganga case it was agreed that the Kiganga Estates was only carrying on one business, which was the growing and preparing to marketable stage of tea, and that all of such activities were “for the purposes of husbandry”. In the instant case the company claims it is carrying on two separate and distinct trades in the Kiganga case there was no evidence as to whether the preparation of tea grown on the estate to a marketable stage was a complex process or not. It would seem that the drying of tea leaves and its process to a marketable stage must be comparatively a simple operation. The processing, manufacturing and refining of sugar is a highly technical, delicate and complex process. There was no evidence in the Kiganga case that the Estates bought any tea grown from other tea growers for processing, whereas in the instant case there is evidence that the Company was purchasing

 Sugar canes from other sources for processing into refined sugar. From the evidence adduced the sugar mill of the Company could exist by itself by processing sugar canes from other sources without necessarily relying on sugar canes grown on the Company’s land. It would appear that the situation was different in the Kiganga case.

            Mr. Khaminwa submitted that the Company has admitted that its main trade was husbandry. I have perused the passages in the proceedings referred to by Mr. Khaminwa as supporting that proposition, but with respect, I cannot find any such admission. The Company has consistently asserted that it has two separate and distinct trades. It is true that there was only one set of accounts covering both the sugar cane growing and the manufacture of refined sugar, but it is not necessary to have two separate sets of accounts to establish two separate trades, see Commissioner of Inland Revenue v. William Ramson & Son Ltd. 12 T.C. p. 21. Taking all the facts into consideration, and considering the size, investment, complexity and independent standing of the sugar mill, I am of opinion that the manufacturing of refined sugar, that is, the subjection of goods or materials of local origin to a process, was a separate and distinct trade from that of sugar cane growing. As I have said earlier, in deciding such a matter, it is a question of degree. I believe that the Company was carrying on its processing activities in the sugar mill separate from its sugar cane growing activities. As was said by Newbold, P. in the Kiganga Estates case -  

“In different circumstances, for example,

If the company carried on it’s 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 …………….”

            Before concluding I think I should comment on an observation made by Mr. Wilkinson in the course of arguing his appeal. He laid particular stress on a ministerial statement in Parliament as indicating the intention of the Legislature on the construction of the Act. I doubt whether such a statement could influence a court in the construction of an enactment. I would have thought the intention or Parliament should be ascertained from the enactment and legislation itself.

The Company has rightly conceded that the pump is machinery. I would amend the judgment and decree of the High Court accordingly. Apart from this amendment I would affirm the judgment and decree of the High Court, and would dismiss the appeal. [ Spry, V-P., and Duffus, P., concurred].