[1951] EACA 331

# APPELLATE CIVIL (Income Tax Appeal)

#### Before WINDHAM, J.

# GENERAL INVESTMENT COMPANY LIMITED, Appellant $v$ .

## THE COMMISSIONER FOR INCOME TAX, Respondent

### Civil Appeal No. 935 of 1950

(Appeal from decision of the Local Committee for any area other than the Coast Province)

Income Tax-Isolated buying of an estate with object of reselling at a profit-Whether profits taxable as trade or business-Income Tax Ordinance, section 7 (1) $(a)$ .

Assessment was made by the Commissioner for Income Tax in respect of profit derived by the appellant company upon purchase and resale of the Amboni Estate. The appellant company had agreed to purchase the estate in 1944 with the intention of reselling it, the total profit on purchase and resale was Sh. 56,309. Except for this transaction and two others (purchase and resale) in 1937 and 1938 the business of the company was that of a holding company. The points for decision were whether this amount of Sh. 56,309 was "profits from any trade or business" of the appellant company and if so whether they are assessable as income or are capital appreciation.

Held (9-3-51)—(1) The Kenya Income Tax Ordinance contains no definition of trade or business but renders taxable profits from any business as well as trade for whatever period of time such trade, business, profession or vocation may have been carried on or exercised.

(2) The fact that "goods" are bought with the express object of reselling at a profit is a relevant factor; it was with such an object that Amboni Estate was bought.

(3) Though it would seem to be very doubtful whether under the English cases a single transaction such as the present could be considered as a trade, the transaction in the present case can be called a "business", as profits from a business include profits from any piece of business.

(4) The word "business" is wide enough to embrace a single trade or commercial or financial transcation.

Cases referred to: Martin v. Lowry, 11 T. C. 297; Cayser & Co. v. Commissioner of Inland Revenue, 24 T. C. 491; Benyon & Co., Ltd., v. Ogg, 7. T. C. 125; Commissioners of Inland Revenue v. Fraser, 24 T. C. 498; Leeming (1918) 1 K. B. 205; Commissioners of Inland Revenue v. The Korean Syndicate, Ltd.,<br>12 T. C. 181, 205; Commissioners of Inland Revenue v. The Korean Syndicate, Ltd.,<br>v. British Insulated & Helsby Cables, Ltd., 10 T. C. 155, 19 12 T. C. 266, 282.

### Lean for appellant.

Newbold, K. C. (with Bechgaard) for respondent.

JUDGMENT.—The appellant company appeals under section 62 of the Income Tax Ordinance against a refusal by the Local Committee to amend an assessment made by the Commissioner for Income Tax. The assessment was made in respect of the profit derived by the appellant company upon the purchase and

re-sale of a certain estate at Nyeri known as the Amboni Estate. The committee in confirming the assessment held that the profit was caught by section 7 (1) (a) of the Income Tax Ordinance as being income in respect of a gain or profit from the trade or business of the appellant company.

The agreed facts relevant to this appeal are set out in the "Statements of Facts", of which it will be convenient here to recite paragraphs 2 to 9 inclusive. They read as follows: -

"2. The appellant company was incorporated on the 4th day of September, 1934, under the Companies Ordinance, 1933, as a company limited by shares.

3. The Memorandum of Association of the appellant company contains, inter alia, the following: -

Clause 3 (a) 'To purchase or otherwise acquire, sell, dispose of and $\mathcal{L}$ deal in movable and immovable property of all kinds, and in particular, lands, buildings, hereditaments, business concerns and undertakings, mortgages, charges, annuities, patents, licences, shares, stocks, debentures, debenture stock, securities, concessions, options, produce, policies, book debts and claims, and any interest in movable or immovable property and any claims against such property or against any persons or company, and to carry on any business, concern or undertaking so acquired.' And a further part of clause 3 'The objects set forth in any sub-clause of this clause shall not, except when the context expressly so requires, be in any wise limited or restricted by reference to or inference from the terms of any other sub-clause or by the name of the company. None of such sub-clauses or the objects therein specified or the powers thereby conferred shall be deemed. subsidiary or auxiliary merely to the objects mentioned in the first sub-clause of this clause, but the company shall have full power to exercise all or any of the powers conferred by any part of this clause in any part of the world, and notwithstanding that the business, undertaking, property or acts proposed to be transacted, acquired, dealt with or performed do not fall within the objects of the first sub-clause of this clause.'

4. The great majority of limited liability companies registered in pursuance of the Laws of Kenya Colony have objects in their respective Memoranda of Association similar or of like effect to the objects set forth in clause 3 $(a)$ of the Memorandum of Association of the appellant company.

5. The appellant company has on three occasions only purchased land, and such land was dealt with as follows:

- (a) In 1937 it purchased a property known as Guest House Estate which said estate it purchased and held as a Trustee for a person named 'Cornelius' and such estate was farmed by the appellant company as a general mixed farm for the benefit of the said Cornelius. The said Cornelius was killed in the 1939-45 war and then the estate was transferred, together with all improvements thereon and together also with all livestock, implements and other movable property utilized in connexion therewith, to a relative of the said Cornelius in satisfaction of certain debts due to such relative by the said Cornelius. - (b) In 1938 it purchased Mogera Estate, a coffee estate, and farmed the said estate as a coffee farm from the time of purchase till March, 1947, when it sold the said estate. The said estate had approximately

200 acres under corfee and the appellant company found that suchacreage was uneconomic. The appellant company endeavoured unsuccessfully, to purchase other adjoining coffee estates with a view to reducing overhead expenses and running the same with Mogera Estate. Mogera Estate was situate at Makuyu and was marginal coffee land and not in the same good category as coffee land as Kiambu and Donyo Sabuk. The directors of the appellant company considered it wiser to sell for the foregoing reasons and the estate was consequently sold.

(c) In January, 1944, it agreed to purchase Amboni Estate situate at Nyeri being land reference No. 1251 (comprising 5,876 acres or thereabouts less 131 acres or thereabouts road reserve) with the intention of reselling the said estate, and a prospective purchaser was already in view in respect of a portion thereof. The said estate was sold in the manner following: -

| (i) 27th June, 1945, by sale to Movo Drift | | |------------------------------------------------------------------------------------------------------|-------------------| | Farm Limited<br>$\ldots \qquad \ldots \qquad \ldots$<br>$\mathcal{L} = \mathcal{L} \cup \mathcal{L}$ | 1,408 net acres | | (ii) 27th March, 1945, by sale to J. W. K. Pease | $1.005$ net acres | | (iii) 15th May, 1946, by sale to G. C. Wilby | $1.012$ net acres | | (iv) 12th August, 1946, by sale to Mrs. Elliott<br>$\cdots$ | $2.317$ net acres |

The sole expenditure incurred by the appellant company in relation to Amboni Estate was as follows: -

| 1.22nd November, 1944, To Purchase Price | 143,625.00 | |------------------------------------------------------|------------| | To Legal Charges<br>$\cdot$ | 4,254.00 | | 2. July to December, 1946, Agents selling commission | | | on sales $\cdots$ $\cdots$ $\cdots$ $\cdots$ | 8.383.75 | | 3.30th November, 1946, Valuation fee re land | | | <table><tbody>Control Board</tbody></table> | 200.00 | | 4. June to December, 1946, Travelling expenses, | | | Government rent, boys' wages, food, etc. | 3.025.55 | | Total Sh. | 159.488.30 |

6. The purchasers of each subdivision of Amboni Estate bore the expense of survey of his or her subdivision in accordance with the provisions of his or her contract of sale with the appellant company. In conformity with such contracts of sale the appellant company caused the land to be surveyed into four parts as described in paragraph 5 $(c)$ , and paid for such survey, and was reimbursed for such expenditure by the purchasers.

. The land in each case was sold on agreement for sale, a portion of the purchase price being paid on execution of the agreement and the balance (by way of adjustment) when survey was completed.

7. Except as stated in paragraph 5 (c) hereof the appellant company at no time or times incurred any expenditure on Amboni Estate aforesaid by way of improvements, development, laying out of the estate for buildings or otherwise, nor has the appellant company set up any organization

$\mathcal{A}^{\mathcal{A}}$

or business to sell such land or incurred any expenditure, except as aforesaid, in doing so. The labour employed on the estate by the appellant company was caretaker labour only, employed by maintaining fencing, piping, etc., that existed on the estate when the appellant company purchased the same

8. The total profit realized by the appellant company on the purchase and resale of Amboni Estate was Sh. 56.309.

8A. Save and except for the transactions aforesaid, the business of the company has been that of a holding company, that is to say, its business has been the investment of funds in mortgages, debentures, stocks and shares and securities of a similar nature.

9. The respondent has claimed that the resultant profit derived on the purchase and resale of Amboni Estate by the appellant company, namely, Sh. 56,309, was income and is liable to income tax and has accordingly assessed the appellant company under assessments No. 2893 and 3006 for the year $1948$ in the sum of Sh. 10.199.

The points for decision are first, whether the profits derived from the re-sale of the Amboni Estate are profits from any trade or business of the appellant company and secondly, if they are, then whether they are assessable as income or are capital appreciation.

The first point involves the consideration whether the purchase and re-sale of the estate, having in view its isolated nature, can be said to have constituted the trade or business, or part of the trade or business, of the appellant company. In deciding upon this point it has been necessary to consider a large number of decisions in English and Scotch cases arising out of the Income Tax Act, 1918, while at the same time bearing in mind the differences in wording between the relevant provisions in the English and the Kenya legislation. The relevant provision in the Kenya Income Tax Ordinance is section 7 (1) $(a)$ , which provides as follows: $-$

"7. (1) Income Tax shall, subject to the provisions of this Ordinance, be payable at the rate or rates specified hereafter for the year of assessment commencing on 1st January, 1937, and for each subsequent year of assessment upon the income of any person, who is not resident in the Colony, accruing in, derived from, or received in, the Colony, and upon the income of any person who is resident in the Colony, accruing in, derived from, or received in, the Colony and/or another East African territory in respect of $-$

(a) gains or profits from any trade, business, profession or vocation for whatever period of time such trade, business, profession or vocation may have been carried on or exercised."

The corresponding and relevant provisions in the English legislation are contained in Schedule D, and in section 237, of the Income Tax Act, 1918. Schedule D provides that: "Tax under this Schedule shall be charged under the following cases respectively, that is to say; Case I. Tax in respect of any trade not contained in any other Schedule; Case II. Tax in respect of any profession, employment, or vocation not contained in any other Schedule; Case VI. Tax in respect of any annual profits or gains not falling under any of the foregoing cases, and not charged by virtue of any other Schedule." There follows a "Rule applicable to Case I," which provides that: "The tax shall extend to every trade carried on in the United Kingdom or elsewhere ... "Section 237 of the Act definies "trade" to include "every trade, manufacture, adventure or concern in the nature of trade".

In considering the present case in the light of the English decisions, three main differences must be borne in mind between the English and the Kenya provisions. First, the Kenya Ordinance contains no definition of "trade" or "business", and consequently nothing corresponding to the English definition of "trade" whereunder it is defined to include an "adventure in the nature of trade". Secondly, the Kenya Ordinance renders taxable profits from any "business" as well as from any "trade", which the English Act does not expressly do. Thirdly, the Kenya Ordinance has the added words, absent from the English Act, "for whatever period of time such trade, business, profession or vocation may have been carried on or exercised".

Now a number of English cases have been cited for the respondent wherein a single venture resulting in profit has been held to constitute a trade. In some of these, as for instance Martin v. Lowry, 11 T. C. 297, and Cayser and Co. v. Commissioners of Inland Revenue, 24 T. C 491, the transaction, and in particular the organization and money expenditure devoted to achieving a profitable re-sale, were on a far larger scale than in the present case. In others the organization and expenditure appears to have been proportionately on much the same scale as in the present case; while in at least two cases, Benyon & Co. Ltd. v Ogg. 7 T. C. 125, and Commissioners of Inland Revenue v. Fraser, 24 T. C. 498, there was practically no organization and expenditure for effecting the re-sales. In each of these last two cases a relevant factor that weighed with the court in deciding that the transaction was a "trade" was the fact that the goods in question (railway wagons in the former case and whisky in the second) were bought with the express object of re-selling them at a profit. It was with such an object that the Amboni Estate was admittedly bought in the present case. Bearing this in mind, and having in view the splitting up of the estate into four parts, their re-sale to different purchasers over a period of time extending to nearly three years, and the expenditure, though admittedly not very large, on selling agents' commission and valuation and the other expenses set out in paragraph 5 (c) of the Statement of Facts, I would have no hesitation in holding that the venture would have fallen under the heading of "trade" under the English legislation. Two cases have been referred to by learned counsel for the appellant where an isolated business transaction was held not to constitute a "trade", namely Leeming v. Jones, 15 T. C. 333, which went to the House of Lords, and Cooksey v. Rednall, 30 T. C. 514. But a careful reading of the judgments in the former case shows that the learned Law Lords, whatever their own views might have been, were not asked to challenge and did not challenge, a bare finding of fact by the Commissioners that the transaction was not an "adventure in the nature of trade", so that the decision has little value as a precedent; while Cooksey v. Rednall, a case of buying and re-selling land at a profit, is distinguishable from the present case by the fact that there, unlike here, the property was not purchased with the object of profitable re-sale.

A difficulty arises, however, when one reads the judgments in those English cases to which I have referred and which are relied upon by the respondent. I have read these judgments carefully. I have also read the judgments in those other cases which have been cited to me as examples of a single purchase followed by re-sale at a profit being held to constitute a trade: I would mention in particular Commissioners of Inland Revenue v. Livingston, 11 T. C. 538; and Rutledge v. Commissioners of Inland Revenue, 14 T. C. 490. In every case the transaction in dispute was held to be a trade by virtue of its being an "adventure in the nature of trade", which the expression "trade" is defined to include under the English but not under the Kenya legislation. In more than one of the

judgments it was expressly stated that an isolated transaction would not constitute a trade as distinct from an adventure in the nature of trade. In Rutledge $v$ . Commissioners of Inland Revenue, the Lord President (Clyde) in his judgment said, "there seems little difficulty in arriving at the conclusion that the deal was 'in the nature of trade', though it may be wholly insufficient to constitute by itself a trade". In Commissioners of Inland Revenue v. Livingston the same Lord President said, "I think the profits of an isolated adventure, such as that in which the respondents engaged, may be taxable under Schedule D provided the venture is 'in the nature of trade'". And in Commissioners of Inland Revenue v. Fraser the Lord President (Normand) said, "It would be extremely difficult to hold that a single transaction amounted to a trade but it may be much less difficult to hold that a single transaction is an adventure in the nature of trade".

It would seem, then, very doubtful whether upon the authority of the English decided cases a single transaction such as we are considering in the present case could be considered as a "trade" in the absence of any definition extending that term to an adventure in the nature of trade. For without such an artificial extension the expression "trade" does imply some continuity and repetition of acts of buying and selling in the same line of business. There exist in the Kenya legislation, however, to counterbalance the absence of such a definition of trade, the presence of the word "business" and the additional words "for whatever period of time such trade, business, profession or vocation may have been carried on or exercised". If such a transaction as the present, namely an isolated purchase of land from a single vendor, followed by its sub-division into four portions and the re-sale of each to a different purchaser at a profit-if such a transaction can be held to fall under the description of a "trade or business" for whatever period of time such trade or business may have been carried on", then the profits from it, provided they are assessable as income and are not capital appreciation, are taxable.

Now it seems to me that, even without the words "for whatever period of time such business may have been carried on", the transaction in the present case can properly be called a "business". The expression "business" is admittedly a wider term than trade, inasmuch as every trade is a business while not every business is a trade. But is it wider to the extent that while "trade" (undefined by legislation) cannot properly be held to embrace an isolated trade transaction, "business" can properly be said to include an isolated business transaction? I think it is. It seems to me that, according to the ordinary usage of words, "profits from any ... business" (the words used in section 7 (1) $(a)$ of the Income Tax Ordinance) must include profits from what we may call any piece of business, or any business transaction. It is true that the expression "business" pure and simple is more frequently applied to the habitual transaction of trade or commercial or financial transactions having particular features in common according to the nature of the business; but the word is in my view wide enough to embrace a single trade or commercial or financial transaction, although such a single transaction is more commonly spoken of not as a business simpliciter but as a piece of business or a business transaction. It was pointed out by Jessel, M. R. in Smith v. Anderson, 1881 50 L. J. Ch. 39, that Dr. Johnson in his dictionary defines the word "business" as including "subject of business" and "something to be transacted". I do not think these connotations have become obsolete in the intervening two centuries. I have been referred, it is true, to certain observations of Brett L. J in that case when it went to the Court of Appeal (at page 52) where he says, with reference to the meaning of "carrying on business" in section 4 of the Companies Act, 1862, "It is they who are to carry on the business, whatever may be the meaning of that word 'business'. That seems to me to exclude the case of its being for one particular act to be done and never to be repeated. The phrase 'carrying on' implies a repetition or series of acts." This observation, however, has reference not to the scope of the word "business", but rather to the expression "carrying on" which appears in the section of the Companies Act which was being construed. The same consideration applies to certain decisions on the scope of the word "business" in some further judgments which I have discovered, namely Revashanker Devchand Doshi and another v. Hussein Bros. (1936) 3 E. A. C. A. 88, and Rex v. Desai. (1949) Crim. App. 60/1949 (unreported), both of which relied on *Edgelow* $v$ . MacElwee, (1918) 1 K. B. 205. In each of these cases it was observed that the word "business" imports the notion of system, repetition and continuity. But each case was concerned with the interpretation of an expression in a particular Act or Ordinance referring to the "carrying on" of a particular business, and the observations of the court, in their context, must be read as referring to business from the aspect of the carrying on of it.

But the charging section of the Kenya Income Tax Ordinance, section 7 (1) (a), does not require that the business from which the profits are derived shall have been "carried on"; at least, it does not so require it unless it be held that the words "for whatever period of time such trade, business, profession or vocation may have been carried on or exercised" can be held to impose a positive requirement that the business must have been "carried on" (the word "exercised" is inapplicable to "business"), which would have the result of excluding from section $7(1)(a)$ a single business transaction which but for those words would have been caught.

I cannot construe those added words as cutting down in this way the scope of the words which precede them, a result which would be completely contrary to the clear purpose of the added words, namely to extend rather than to restrict the scope of the preceding words. Could it reasonably be held, for instance, that the effect of the expression "carried on" in those additional words would be that a company transacting a single piece of business which took two years to complete was not carrying on business or not carrying on a business, while a company transacting half a dozen similar pieces of business and completing them all within one year was carrying on business or a business? I think not. The object and effect of the added words, as I read them, is to leave no room for doubt that a business shall not be the less a business because it has endured but for a brief period of time, whether the business be a single business transaction or a carrying on of business in the more usual meaning of that word. It may at this point be observed that all the English decisions which I have earlier cited, wherein isolated transactions were held to constitute adventures in the nature of trade, were arrived at notwithstanding the requirement in Schedule D of the English Act that the tax shall extend to every trade "carrying on" in the United Kingdom or elsewhere.

I would touch briefly on one further point, namely that the appellants are a holding company. This fact is irrelevant. A holding company, if it indulges in trade or business is to that extent taxable as any other company. "I see nothing," said Atkin L. J. in Commissioners of Inland Revenue v. The Korean Syndicate Ltd., 12 T. C. 181, at page 205, "to prevent a holding company, which is a very well known method of carrying on business in these days, from carrying on business."

1 accordingly hold that the purchase, division and re-sale of the Amboni property in the present case constituted a "business" of the appellant company. It remains only to see whether the profits from this business are assessable as income or are capital appreciation and as such not taxable. On this point I do not think much difficulty arises. The test was clearly laid down by Clerk L. J.

in Californian Copper Syndicate v. Harris, 5 T. C. 159, at pages 165 and 166 in the following words, "It is quite a well settled principle in dealing with questions of assessment of Income Tax, that where the owner of an ordinary investment chooses to realize it, and obtains a greater price for it than he originally acquired it at, the enhanced price is not profit in the sense of Schedule D of the Income Tax Act of 1842 assessable to Income Tax. But it is equally well established that enhanced values obtained from realization or conversion of securities may be so assessable, where what is done is not merely a realization or change of investment, but an act done in what is truly the carrying on, or carrying out, of a business. The simplest case is that of a person or association of persons buying and selling lands or securities speculatively, in order to make gain, dealing in such investments as a business, and thereby seeking to make profits. There are many companies which in their very inception are formed for such a purpose, and in these cases it is not doubtful that, where they make a gain by a realization, the gain they make is liable to be assessed for Income Tax. What is the line which separates the two classes of cases may be difficult to define, and each case must be considered according to its facts; the question to be determined being, "Is the sum of gain that has been made a mere enhancement of value by realizing a security, or is it a gain made in an operation of business in carrying out a scheme for profit-making?" Applying this test to the facts of the present case, where the purchase of the Amboni Estate was admittedly made with the object of re-selling at a profit, it is clear that the resulting profit of the appellant's business transaction is assessable. Moreover, these profits would not be capital appreciations, and as such exempt from taxation, unless they passed the test, based on Adam Smith's classical distinction between fixed and circulating capital, and expressed by Cave L. C. in *Atherton v*. British Insulated and Helsby Cables, Ltd., 10 T. C. 155 at page 192, namely that the expenditure on the transaction, in order to be considered as capital expenditure, should have been made "not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade." In the present case it was clearly not fixed but circulating capital which was spent on the disputed transaction, and the profit therefore not a capital appreciation but an assessable revenue gain. As was pointed out by Viscount Haldane in John Smith & Son v. Moore, 12 T. C. 266, at page 282, "Adam Smith described fixed capital as what the owner turns to profit by keeping it in his own possession, circulating capital as what he makes profit of by parting with it and letting it change masters." By all these tests the profit on the re-sale of the Amboni Estate was assessable as income and was not a capital appreciation.

For all these reasons this appeal must be dismissed with costs.