Tame v Commissioner of Income Tax (Civil Appeal No. 10 of 1949) [1949] EACA 9 (1 January 1949)

Full Case Text

#### COURT OF APPEAL FOR EASTERN AFRICA

# Before SIR BARCLAY NIHILL, C. J. (Kenya), EDWARDS, C. J. (Uganda), and SIR JOHN GRAY, C. J. (Zanzibar)

## JEAN FREDERICK TAME, Appellant (Original Respondent) $\mathbf{v}$

COMMISSIONER OF INCOME TAX, Respondent (Original Appellant) Civil Appeal No. 10 of 1949

(Appeal from decision of H. M. High Court of Tanganyika)

Tanganyika War Revenue (Income Tax) (Replacement) Ordinance, 1940-Assessment by Commissioner under section 21 (1)—Discretion of Commissioner—Appeal to Local Committee under section 22 (2)—Powers of Local Committee under section 61 (4).

Section 21 $(1)$ states:

"Where the Commissioner of Income Tax is satisfied that profits distributed as dividends are less than 60 per cent of the total income 'he may unless he is satisfied that having regard to losses previously incurred by the Company or to the smallness of the profits made, the payment of dividend or a larger dividend than that declared would be unreasonable, by notice in writing order that the undistributed portion of 60 per cent of such total income of the Company shall be deemed to have been distributed as dividends amongst the shareholders as at the said last date and thereupon the proportionate share thereof of each shareholder shall be included in the total income of such shareholder for the purposes of this Ordinance."

Section 22 $(2)$ states:

"Nothing in this section or section 21 contained shall prevent the decision of the Commissioner in the exercise of any discretion given to him by either section from being questioned on appeal against an assessment in accordance with Part XI."

The appellant was managing director and holds 98 per cent shares of a private company. The company declared no dividends for 1944 and 1945. The Commissioner of Income Tax assessed appellant in a sum of Sh. 358,000 in respect of "deemed dividend" of 60 per cent of profits earned by the company but not distributed. Appellant appealed to the Local Committee (appointed under section 60, Tanganyika War Revenue (Income Tax) (Replacement) Ordinance, 1940) which directed a distribution of Sh. 40,350 from 1943 profits and Sh. 178,904 from 1944 profits, i.e. 25 per cent of the 1943 and 40 per cent of the 1944 -profits, reducing the sum liable from income tax by approximately Sh. 138,566.

Held (25-4-49).-(1) By section 21 of the Income Tax Ordinance of 1940, if private companies leave more than 40 per cent of their profits undistributed the money is treated as "notionally having been paid over and the Commissioner is empowered to exercise a discretion only in one way, viz. by deeming 60 per cent of the undistributed profits to be distributed dividend".

(2) By sections 22 (2), 61 (1) and 61 (4) there is an appeal against the decision of the<br>Commissioner to exercise his discretion and the Local Committee had powers of confirm-<br>ing, increasing or annulling an assessment. Su established:

(a) that the Commissioner was wrong in his facts in respect of the amount of profits kept back from distribution; or

$(b)$ that he failed to have regard to "losses previously incurred by the Company<br>or to the smallness of the profits made"; but

(3) An assessment or part of an assessment resulting from the exercise of the Commissioner's discretion under S.21 was not capable of variation unless the Committee had grounds for holding that there had been an improper exercise of that discretion.

(4) There being no ambiguity in S.21 this is not a case where the "Objects and Reasons" of the Bill can be looked at for the purpose of giving preference to the subject affected.

Cases referred to: Administrator General of Bengal v. Prem Lall Mullick, 22 Cal. 788; Brooks v. Baker (1906), 1 K. B. 11, and David Carlaw and Sons, Ltd. v. Commissioner of Inland Revenue (1926), XI Tax Cases, 96.

## MacRoberts for the Appellant.

#### Newbould for the Respondent.

JUDGMENT (delivered by SIR BARCLAY NIHILL, C. J.).—This is an appeal from a judgment of the High Court of Tanganyika which allowed an appeal by the Commissioner of Income Tax against a decision of a Local Committee appointed under section 60 of the Tanganyika War Revenue (Income Tax) (Replacement) Ordinance. 1940.

The appellant is the managing director of a private company registered and carrying on business in Tanganyika. According to agreed facts he holds 98 per cent approximately of the shares, his wife holding the balance. This company not having declared a dividend in respect of profits earned for the accounting periods ending 30th September, 1944 and 30th September, 1945, notice was served on the company in respect of each period by the Commissioner of Income Tax under the provisions of section 21 (1) of the War Revenue (Income Tax) (Replacement) Ordinance, 1940, as enacted by the War Revenue (Income Tax) (Amendment) Ordinance, 1943. The effect of these notices on the appellant was to assess him for income tax on a sum of about Sh. 358,000 being his share of the "deemed dividend" of sixty per cent of the profits earned by the company none of which had been distributed to the shareholders. The appellant objected to both assessments and on the Commissioner of Income Tax refusing to amend he appealed to the Local Committee under the provisions of section 61 of the Ordinance. The Local Committee after hearing arguments from both sides directed a distribution of Sh. 40,530 from the 1943 profits and Sh. 178,904 from the 1944 profits thereby reducing the sum on which the appellant would be liable to pay income tax by approximately Sh. 138,566. It is evident from the written "decision" of the Local Committee that they attempted to put themselves into the position of a Board of Directors considering what dividend, if any, it was reasonable and prudent to declare, and that taking into account the past history of the company and its future prospects it came to the conclusion the dividends of 25 per cent of the 1943 profits and 40 per cent of the 1944 profits would have been fair and reasonable.

During the course of the hearing of the appeal from the decision of the Local Committee in the Court below counsel for the Commissioner of Income Tax intimated that if the Court held that the Local Committee acted within its lawful powers in varying the assessments the Department would not challenge the reasonableness of the Committee's decision. The basis of the appeal in the Court below, as in this Court, is however that on a proper construction of section 21 (1) of the Ordinance whilst the Local Committee could challenge the exercise of the Commissioner's discretion under the section it cannot if it finds that the discretion has been lawfully exercised vary the assessments. The matter therefore reduces itself to a question of construction and the issue before this' Court is to determine whether the learned Judge in the Court below came to a wrong conclusion when he held that the Commissioner once having properly exercised his discretion under the section was bound by its provisions to give notice that up to 60 per cent of the company's profits in respect of the two years in question would be regarded as having been distributed by way of dividend. Before examining the wording of the section I will get out of the way a point on which I think the learned Judge in the Court below was unduly troubled. It was argued

by Counsel for the respondent in the Court below that the learned Judge in order to aid him in arriving at a true meaning of what the legislature intended when they enacted section 21 (1) he was entitled to look at the Objects and Reasons which accompanied the Bill and which were signed by the Attorney General of Tanganyika when the War Revenue (Income Tax) (Amendment) Ordinance, 1943, was first published as a Bill in the Government Gazette. A perusal of those Objects and Reasons so far as they affected clause 5 of the Bill which was the clause enacting a new section 21 to the principal Ordinance do seem to indicate that the draftsman of the measure thought that the new section would enable the Commissioner to declare as distributed as dividend not necessarily 60 per cent of the earned profits, where the dividend declared had not amounted to that figure, but any figure up to 60 per cent. The learned Judge in the Court below did not look to the Objects and Reasons for enlightenment because he found nothing ambiguous in the wording of section 21 or anything which led to any absurdity or inconsistency but from his judgment it would seem that had he done so he might on the authority of *Administrator of Bengal* v. Prem Lall Mullick (1894) 22 Calcutta 732 have felt himself entitled to do so. It is evident, I think, that the learned Judge could not have expressed himself thus had he had cited to him the judgment of the Privy Council on this case which is reported in 1895, 22 Calcutta 788 (P. C.). In the course of the judgment the following observation was made: —

"Their Lordships observe that the two learned Judges who constituted the majority in the appellate Court, although they do not base their judgments upon them, refer to the proceedings in the legislature which resulted in the passing of the Act of 1874, as legitimate aids to the construction of section 31. Their Lordships think it right to express their dissent from that proposition. The same reasons which exclude these considerations when the clauses of an Act of the British Legislature are under construction are equally cogent in the case of an Indian Statute."

It has been argued by Mr. MacRoberts before us that "Objects and Reasons" are not part of Parliamentary proceedings but are a proclamation of a Colonial Government's intentions of what it proposes to do by the legislation put forward, and that when as in the present case the Legislative Council enacts the Bill as published no better guide could be had as to draftsman's intentions. I regard this as a specious and dangerous submission. "Objects and Reasons" are nothing but a statement to the public by the Attorney General of the Colony explaining as best he may what he thinks a Bill is about. If he wrongly construes a clause in a Bill as he did in this case the public may be deceived but this can have no effect on the application of the conventional rules of construction which must be applied by a Court to the Acts of the Legislature. As it is in the matter now before us the learned Judge did not construe section 21 by the light of anything to be found in the Objects and Reasons, but on what he held to be the clear unambiguous effect of the wording used in the section. I find myself in complete agreement with the construction placed by him on the section and I do not consider any other construction possible. This is not a case where because of an ambiguity preference must be given to the subject. A comparison of section 21 as it stood in the Ordinance of 1940 with the new section as enacted by section 5 of the 1943 amending Ordinance reveals that the legislature intended a change. Under the old section the Commissioner could not act unless he had evidence before him from which he could infer that profits had been withheld from the shareholders with a view to tax avoidance or reduction and secondly he had to be satisfied before deeming any such profits as distributed dividend that they could have been distributed without detriment to the company's existing business. In the new section nothing is said about "tax avoidance or reduction" but the Commissioner is empowered on a certain state of things existing to exercise a discretion. If he exercises that discretion he can only exercise it in one way namely by deeming 60 per cent of the undistributed profits to be deemed to be "distributed dividend". The section is clearly designed to have deterrent effect. It is a warning notice to private companies that if they choose to leave more than 40 per cent of their profits undistributed, the State may step in and if it does then 60 per cent of such profits will be deemed to have been distributed.

The question may be asked what then was the use of an appeal against the assessment and why did the Local Committee waste its time in considering it? That a right of appeal lay is clear by the provisions of section 22 (2) of the 1940 Ordinance and the wording of this sub-section indicates that what is appealable against under section 21 is the decision of the Commissioner to exercise his discretion. Neither in a proper case need an appeal be necessarily fruitless for an appellant might establish either that the Commissioner was wrong on his facts in respect of the amount of profits kept back from distribution or that he had failed to have regard for, as required by the section, "losses previously incurred by the Company or the smallness of the profits made". It is not contended by the appellant that in the present case either of these two factors obtain and that being so it is an end of the matter. There is no basis on which the exercise of the discretion by the Commissioner can be attacked. The Local Committee, doubtless through lack of guidance and to a misconception of section 61 (4) of the Ordinance exceeded its powers in dealing with the matter as it did but this has now been set right by the judgment of the learned Judge in the Court below. Certainly under section 61 (4) a Local Committee can confirm. reduce, increase or annul an assessment, but what was overlooked was that an assessment or part of an assessment resulting from the exercise of the Commissioner's discretion under section 21, was not by the provisions of that section capable of variation unless the Committee had grounds for holding that there had been an improper exercise of that discretion.

In my opinion this appeal should be dismissed with costs.

EDWARDS, C. J.—I agree with the judgment of the learned President and with the judgment about to be delivered by the learned Chief Justice of Zanzibar which I have had the privilege of perusing and with the reasoning contained in both these judgments. I have nothing to add.

SIR JOHN GRAY, C. J.—The appellant is the managing director of W. J. Tame, Ltd., a private company registered in Tanganyika Territory. There are only two shareholders in the company. Of these the appellant is one and holds approximately 98 per cent of the shares.

The total income of the company for the year ended 31st December, 1943, as computed for income tax purposes was Sh. 162,194. As the company did not declare a dividend in respect of that sum notice was served upon it in accordance with section 21 (1) of the War Revenue (Income Tax) (Replacement) Ordinance, 1940, deeming 60 per cent of the said sum, amounting to Sh. 97,374 to have been distributed by way of dividend as at the last date upon which the accounts of the company for the period were required by the Companies Ordinance, 1931, to be laid before the company in general meeting, i.e. on 30th September, 1944.

The proportion of this "deemed dividend" attributable to the appellant amounted to a gross sum of Sh. 93,240, and was assessed upon the appellant by an assessment notice issued under the Income Tax Ordinance.

A similar position arose again in the following year, when notice was again served upon the company under section 21 of the Income Tax Ordinance deeming 60 per cent of the profit of Sh. 268,356 to have been distributed by way of dividend as upon 30th September, 1945. The appellant was served with an assessment notice attributing Sh. 264,820 of this "deemed dividend" to him.

The appellant appealed under section 61 of the Income Tax Ordinance to the Local Committee constituted under that Ordinance. The Local Committee reached the unanimous opinion "that a dividend amounting to 25 per cent of the 1943 profits and 40 per cent of the 1944 profits would have been fair and

reasonable", adding that, "whilst the Committee recognize that the Commissioner of Income Tax may deem dividends up to 60 per cent to have been declared it considers that the dividends recommended in its finding are the maximum compatible with sound business principles as applied to the appellant company [sic] for the period under review".

The Commissioner of Income Tax appealed from this decision of the Local Committee to the High Court of Tanganyika, which allowed the appeal, setting aside the decision of the Local Committee and confirming the assessments on the appellant in respect of the "deemed dividends" attributable to him under the orders issued by the Commissioner of Income Tax under section 21 of the Income Tax Ordinance.

The appellant now appeals from that decision to this Court. It is urged on his behalf that the judgment of the High Court is contrary to the provisions of section 21 of the Income Tax Ordinance, as substituted by section 5 of the Income Tax (Amendment) Ordinance, 1943, and is based upon a misconstruction of that section. It is also alleged that on appeal under section 61 of the Ordinance to the Local Committee, that Committee had by virtue of sub-section (4) thereof power to confirm, reduce, increase or annul the assessments on the appellant, or to make such other orders thereon as it thought fit. Therefore by reason of that sub-section the Local Committee was entitled to reduce the assessments in the manner in which it did and that the orders of the Commissioner of Income Tax under section 21 the Court was entitled to look at the "Objects and Reasons" annexed to a Bill, as the same Bill was passed and became law without any material alteration or amendments and that orders under section 21 of the Income Tax Ordinance could only be made in cases in which the non-distribution of profits was attributable to a desire to evade payment of income tax.

To deal with this last ground of appeal first, it is clear to me from the Privy Council's decision in Administrator-General of Bengal v. Prem Lall Mullick, 22 Cal. 788 at p. 799 that the Court cannot look at the Objects and Reasons of a Bill for the purposes of interpreting an enactment. Indeed, a very cogent reason is disclosed in the present case for not referring to the Objects and Reasons. These state that the new section 21, as enacted by the amending Ordinance of 1943, enables "up to 60 per cent of a company's total income in any year to be deemed to have been distributed" whereas the section itself enacts "that the undistributed portion of 60 per cent of such total income shall be deemed to have been distributed as dividends". In other words, the section itself fixes an immutable percentage, and not a maximum percentage as alleged by the Objects and Reasons. Clearly, one cannot in such circumstances read into the section words from the Objects and Reasons which are at variance with the enacting words of that section. Similarly, one cannot introduce words from the Objects and Reasons which do not appear in the enactment itself.

One has only to look at the history of section 21 of the Income Tax Ordinance to realize that this is true. In that section, as originally enacted in 1940, the Commissioner of Income Tax was empowered to treat undistributed profits of a company as distributed "where it appears to him that such non-distribution was with a view to the avoidance of tax". But this original section was repealed in 1943 and replaced by the present section 21, from which the words "with a view to the avoidance or reduction of tax" are entirely omitted. One can only assume that the Legislature, when recasting the section in 1943, omitted these particular words deliberately and intentionally and that in the circumstances one is not justified in reading into the enactment words which are not there. Under the present section 21 (1) of the Income Tax Ordinance, where the Commissioner of Income Tax is satisfied that the profits distributed as dividends by a company are less than 60 per cent of the total income of the company, as ascertained in accordance with the provisions of the Income Tax Ordinance, "he may, unless he is satisfied that having regard to losses previously incurred by the company or to the smallness of the profits made, the payment of dividend

or a larger dividend than that declared would be unreasonable, by notice in writing order that the undistributed portion of 60 per cent of such total income of the company shall be deemed to have been distributed as dividends amongst the shareholders as at the said last date and thereupon the proportionate share thereof of each shareholder shall be included in the total income of such shareholder for the purposes of this Ordinance".

If therefore the Commissioner in the exercise of his jurisdiction sees fit to make an order under section 21, what he in effect does is to declare a dividend in respect of "the undistributed portion of 60 per cent of such total income of the company" and the proportionate share of each shareholder in the amount thus allocated for purposes of dividend becomes for the purposes of the Ordinance part of the total income of such shareholder. The money is treated as notionally having been paid over to the shareholder in the same manner as money representing dividends actually declared by the company itself.

As section 22 (2) of the Income Tax Ordinance shows, an appeal lies from an order made by the Commissioner under section 21. Section 22 (2) of the Ordinance reads as follows: —

Section 61 (1) of the Income Tax Ordinance provides the remedy by way of appeal to a Local Committee for a taxpayer who is dissatisfied with his assessment for purposes of income tax. Section 61 (4) empowers the Local Committee to "confirm, reduce, increase or annul the assessment or make such orders thereon as to it may seem fit". Counsel for the appellant urges that this last sub-section empowers the Local Committee to reduce the amount of the profits which "shall be deemed to have been distributed as dividends amongst the shareholders" below the figure of 60 per cent prescribed by section 21 (1) of the Ordinance.

Now, section 7 (1) (d) of the Income Tax Ordinance enacts that the income of a person chargeable with income tax shall include "dividends, interests or discounts". Therefore, if a person actually receives a dividend from a company, the amount of that dividend forms part of his chargeable income. In such case, the shareholder, having received the dividend, cannot be heard to say that the company ought to have paid a less dividend than that which he has actually received. For instance, if the company has paid a dividend at the rate of 20 per cent, he cannot be heard to say that the officers of the company have been guilty of unsound or reckless finance and that the dividend ought to have been at the rate of 5 per cent. Similarly, when section 21 (1) of the Income Tax Ordinance enacts that "the undistributed portion of 60 per cent of such total income of the company for that period shall be deemed to have been distributed as dividends amongst the shareholders", a shareholder cannot be heard to say that the undistributed portion so distributed ought to be less than 60 per cent. When the Legislature enacts that something shall be deemed to have been done, and plainly indicates between what persons that statutory fiction is to be resorted. to, the Court is bound to treat the thing which "shall be deemed" to have been done as having been done and cannot go behind the plain language of the enactment. In Darling, J.'s words in *Brooks v. Baker* (1906) 1 K. B. 11 at p. 15, "the Court is sometimes obliged by the legislature to put an interpretation on a word which it does not ordinarily bear when it has been enacted that something 'shall be deemed' to be something else".

In this case I am satisfied that this is the construction which we are compelled to place upon section 21 of the Income Tax Ordinance and that the amount which that section declares "shall be deemed to have been distributed as dividends" cannot be reduced by the Local Committee under section 61 (4) of

the Ordinance. All that the Local Committee can do is question under section 22 (2) of the Ordinance the exercise of the discretion given to the Commissioner by section 21 (1). For example, as section 21 (1) shows, "having regard to the losses previously incurred by the company or to the smallness of the profits made", the payment of a dividend or a larger dividend may be unreasonable. In either of these sets of circumstances the Local Committee may question the discretion of the Commissioner in making an order under section 21 (1) and may annul so much of the assessment as consists of moneys, which "shall be deemed to have been distributed as dividends" by reason of the Commissioner's order. But, for the reasons already given, I am of opinion that, if the Local Committee are of opinion that the Commissioner exercised a proper discretion in making the order, it cannot alter the percentage of 60 per cent as prescribed by section $21$ (1).

I feel that, although the relevant Tanganyika and United Kingdom enactments are somewhat differently worded, confirmation of this view is forthcoming in the decision of the Court of Session, Scotland, in David Carlaw and Sons, Ltd, v. Commissioner of Inland Revenue (1926) XI Tax Cases 96. The decision in that case turned upon the construction of section 21 of the United Kingdom Finance Act, 1922, which, as the marginal note to the section shows, is designed for the purpose of collecting super-tax on the undistributed income of certain companies. The operative words of the section enact that "the Commissioners may, by notice in writing to the company, direct that for the purposes of assessment to super-tax, the said income of the company shall, for the year or other specified in the notice, be deemed to be the income of the members, and the amount thereof shall be apportioned among the members".

In the course of his judgment Lord Sands, in commenting upon the wording of section 21, made the following observations (at pp. 120, 121):-

"It would be quite a reasonable provision that, where the Commissioners were satisfied that a certain retention would have been justifiable and reasonable, but that the sum retained is excessive, only the excess amount should be treated as if it had not been distributed as profits to the shareholders. But it is not so provided. On the contrary, where there is an excess, then the whole income, even including that part which might reasonably have been retained, is treated as if it had been distributed. I think, however, there is probably an intelligible reason for the matter being so treated. As-I indicated, the object is to prevent the avoidance of super-tax, and I can quite conceive that the Legislature may have deemed that those who were disposed to devise means for the avoidance of this tax would think it worth while to try it, at all events if they were to suffer nothing more than that the margin was to be rendered subject to the tax, if they were found to have acted unreasonably as regards that margin ... I think the policy of the Legislature was to allow no holes in the net, because if any holes were left there was no guarantee that some of the fish that were really wanted would pass through these holes."

As we have been asked to hold that section 21 of the Tanganyika Ordinance is a penal section, it would appear also not to be out of place to quote a passage from the judgment of the Lord President in the same case:

"The appellants endeavoured to support their contentions on this matter by founding on the penal quality of the effect of a 'direction'. If the company has not distributed a reasonable proportion of its income-in the sense of the section—it appears that the whole of its undistributed income may be affected by the 'direction', even although some part of the undistributed income might reasonably have been withheld for good business reasons from distribution. The result is to put a heavy probational onus on the company and its directors or shareholders. And this does not seem to me to give any material support to the appellant's contention, which I think an unsound one." $\mathcal{L}_{\mathcal{L}} = \mathcal{L}_{\mathcal{L}}$

Similar reasoning appears to me to apply to the present case. The intention of the Legislature of the United Kingdom and of Tanganyika is the same. Section 21 of the Tanganyika Income Tax Ordinance is not of a penal nature and its effect is to debar the Local Committee from reducing the portion of the company's income "which shall be deemed to have been distributed as dividends amongst the shareholders" below the percentage fixed by sub-section (1). The Local Committee can only question the exercise of the discretion given to the Commissioner to make and order under sub-section (1).

Here, I can see no reason for questioning the Commissioner's discretion. The Local Committee has found as a fact "that a dividend of 25 per cent of the 1943 profits and 40 per cent of the 1944 profits would have been fair and reasonable". Counsel for the appellant has not alleged that this finding of fact was wrong. This being so, as said by Lord Sands in David Carlaw and Sons, Ltd. (*supra*), the consequence is that the undistributed income of the company must be deemed to have been distributed as dividends amongst the shareholders to the full extent prescribed by section 21 (1) of the Tanganyika Ordinance, even including that part which might reasonably have been retained.

For these reasons I am of opinion that the learned Judge in the Court below was right in setting aside the decision of the Local Committee. I would therefore dismiss this appeal with costs to the respondent.