Ngaremtoni Coffee Estate Ltd. v. Commission of Income Tax; Civ. App. 6-A-68, 23/7/69, Platt J

Ngaremtoni Coffee Estate Ltd. v. Commission of Income Tax; Civ. App. 6-A-68, 23/7/69, Platt J

The promoters of the appellant company, before its incorporation, agreed to purchase two parcels of land held for Government leases and which consisted of coffee trees, beans and a dairy. After the company’s incorporation, the Vendors transferred the land to the company’s (in terms of an agreement dated the 19^th August, 1969) which agreement was said to adopted by the company upon the Vendors in respect of land, buildings and all fixed assets on the land, ₤3,150 in respect of movables and ₤13,250 as agreed expenses incurred by the Vendors as from 1/5/64. It was further provided that the total purchase price of ₤60,000 was to consist of down payments totaling ₤20,000; and ₤40,000 was to be received y the Vendors from the crop proceeds direct. The latter were to suffer the loss or receive the benefit of any shortage or excess over ₤40,000 respectively from the crops. The purchasers also accepted responsibility for income tax liability arising from these farm operations. One of the Vendors, Hasham, was to stay on the farm until the crops had been “processed and removed.” The appellant company produced a balance sheet (from 19/8/64 to 30/6/65) and in its Income and Expenditure Accounts. Set out Shs. 800,000 as receipts from sales of produce in accordance with the agreement and Shs .265, 000 i.e. ₤3,250 as expenses under the agreement, leaving a balance of Shs. 535,000. The Commissioner-General of Income Tax disallowed the item of expenses of Shs. 265.000. The company argued that either it had purchased the land and all the crops, in which case it should be allowed to deduct expenses under Section 14(2) (f) of the East African Income Tax (Management) Act, or, if it did not purchase the crops with the land, so that the expenses were not deductible, then neither did it get an income from the sale of the coffee, in which case it was not liable to tax on Shs. 800,000. the Commissioner-General argued that he expenses of bringing the company into existence were not expenses incurred by the company and that the company having acquired the land and the crops, had then sold the crops in order that it should be able to pay the purchase price of ₤60,000, so that he was justified both in disallowing the expenses and in assessing tax on the income.  

Held: (1) “The vendors had sold the whole undertaking plus expenses for ₤60,000 and although Mr. Hasham was to gather in the crops for payment to the Vendors, who were to receive payment direct, nevertheless, the property in the crops had passed to the purchasers. Only in that way did the purchasers have something with which to pay the Vendors, who were to receive payment direct, nevertheless, the property in the crops had passed to the purchasers. Only in that way did the purchasers have something with which to pay the Vendors to cover the balance of the purchase price ……. The income and expenditure account …. Clearly stated that he company had received the income of ₤40,000 as sale of produce “as per agreement”…… that can only refer to the agreement of the 19^th August, 1964 …. There fore, on the documents subscribed by the parties, I hold that the purchasers bough the whole concern for ₤60,000 including the crops.” (2) “If the appellant company had paid a lump sum down, and had then sold the crops, it would have had to pay tax on its income from the sale of the crops. The fact that the company could not pay the full price in a lump sum, but had to resort to the sale of produce in order to pay off the price, could not thereby obscure the fact

that the money was income in its hands. It was, in truth, simply paying off the price out of what would normally be its income from produce. Therefore it could not deduct under section 14(1) of the Act the value of the payment from the coffee crop, which was a capital payment as far as the Vendor was concerned; and, nor could it escape liability on earned income received in its hands as such. It seems to me that the accountants properly recorded the sales of the produce as income.” (3) Concerning the expenses incurred by the Vendors to the sum of Shs. 265,000/-, the deduction depends on the construction section 14(2) (f) of the Act and is as follows:- “(2) Without prejudice to the operation of subsection (1) in computing the gains or profits for any year of income chargeable to tax under paragraph (a) of sub-section (1) of section 3, the following amounts shall be deducted (f) any expenditure, other than expenditure referred to in paragraph (g) incurred in connexion with any business before the date o commencement of such business where such expenditure would have been deductible under this section if incurred after such date, so however, that such expenditure shall be deemed to have been incurred on the date on which such business commenced:” (Paragraph g is not relevant). A promoter has no right of indemnity against the company which he promotes in respect of any obligation under taken on its behalf before its incorporation, and he cannot sue it upon a contract made by him with an agent or trustee on its behalf before its incorporation, even where the articles of association provide that the company shall defray preliminary expenses. The company cannot ratify an agreement purporting to be made on its behalf before its incorporation is a question of fact. (Of Halsbury’s Laws of England Vol. 6 pp. 98 and 99; KELNER v. BAXTER (1866) l. R. 2 C.P. 174; NATAL LAND etc. CO. LTD. v. PAULINE COLLIERY etc. SYNDICATE LTD. (1904) A.C. 120, to which I was referred) ……. While I agree that the purchaser could not bind the company before its incorporation, it seems to me that the only conclusion that can be drawn from the circumstance is that the company entered into a new contract with the Vendors to pay their expenses. As the transfer document shows, the land was transferred to the company for a consideration and I am satisfied that had the company not agreed to pay the expenses, the Vendors would not have transferred the land … They were expenses involved in the running and sale of the plantations crops and ……. They were such expenses as could have been deducted by the company after it commenced business. For instance, if company had been in existence and then purchased the plantations as a fresh venture on those terms, I do not see how it could be argued that they were not expenditures in connection with its business. At any rate, I have not been able to find any authority, and none was quoted, against that proposition. If then expenditure before its commencement of business is to be in the same position as expenditure incurred after its commencement of business, (though they shall be deemed to be expenditure as at the date of commencement of business) they must be deductible.” (4) Appeal allowed in part.