Wakilii

Commissioner of Income Tax v Amboni Estates Limited and Others (Civil Appeals Nos. 57, 58, 59, 60, 61 and 62 of 1953)

East African Court of Appeal · [1955] EACA 66 · 1955 Appeal Dismissed AI-generated summary ↓ Download Pin to watchlist Add to matter
Jurisdiction
Uganda
Case Type
Appeals from the decision of the High Court of Tanganyika which allowed appeals by taxpayers against income tax assessments
Decision
All six appeals by the Commissioner of Income Tax dismissed; original High Court order allowing taxpayers' appeals upheld

Observed later treatment

No later-treatment classification is recorded for this judgment.

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Holding

The Court held that directors' remuneration calculated as a percentage of profits under a bona fide commercial arrangement is a deductible expense for the company, not profit-sharing. The quantum of such remuneration cannot be questioned by the Commissioner. The remuneration was not derived from Tanganyika where directors performed no duties there and were paid from the company's Guernsey account. Appeals dismissed.

Outcome

All six appeals by the Commissioner of Income Tax dismissed; original High Court order allowing taxpayers' appeals upheld

Facts

Amboni Estates Limited, a Guernsey-incorporated company operating sisal plantations in Tanganyika, paid its directors 7.5% of net profits under Article 88 of its articles and its managing director 4% under a service agreement. In 1947 and 1948, the company made exceptionally large profits due to a British Government contract purchasing all sisal output at high prices. The Commissioner of Income Tax assessed the company on the basis that these percentage payments were not deductible expenses but profit-sharing, and assessed the individual directors on the ground that the payments were income derived from Tanganyika. The directors were not resident in Tanganyika, performed their duties in Guernsey, England or Switzerland, and were paid from the company's Guernsey bank account. The High Court allowed the taxpayers' appeals. The Commissioner appealed.

Issues

  1. Whether the amended Article 88 of the company's articles of association, though not registered until immediately before the hearing, should apply for the purposes of the proceedings.
  2. Whether directors' remuneration calculated as a percentage of profits constitutes a deductible expense wholly and exclusively incurred in the production of income, or whether it represents profit-sharing.
  3. Whether the quantum of directors' remuneration paid under a bona fide commercial arrangement can be questioned by the Commissioner of Income Tax.
  4. Whether the directors' remuneration was income 'accrued in or derived from' Tanganyika within the meaning of section 7 of the Income Tax (Consolidation) Ordinance 1950.

Orders

  • Appeals dismissed against all respondents.
  • Costs awarded to respondents.
  • Costs of two counsel certified.

Rules and key headnotes

Company Law — Foreign Company Registration — Effect of Failure to Register Amendment to Articles
Where a foreign company has failed to register locally an amendment to its articles of association, but the amendment was validly passed and has been acted upon for many years, the court will apply the amended articles rather than the superseded articles, absent estoppel or prejudice to third parties who relied on the registered articles.
Tax Law — Income Tax — Directors' Remuneration — Quantum
Where directors' remuneration is paid in good faith under a purely commercial arrangement entered into by the company, the quantum thereof as an expense cannot be questioned by the Commissioner of Income Tax, even if the amounts are large in particular years.
Tax Law — Income Tax — Deductible Expenses — Profit-Sharing Distinguished from Commission
Where a company agrees to pay any person a share of its profits, it is necessary first to ascertain the consideration for which the payment is made. If the true consideration is services rendered to the company in the conduct of its business by an employee (including a director or managing director), the payment is prima facie a necessary expense for the purpose of making profits. It matters not whether the profits on which the payment is to be made are ascertained by some special method of calculation or by ordinary commercial methods. In either event, the profits from which the payment is to be made are only the 'apparent' net profits and not the 'real' net profits; a participation in the latter would be profit-sharing.
Tax Law — Income Tax — Source of Income — Directors' Remuneration
The source of income of a company and the source of income of the employees of the company, paid out of the assets thereof, may be two entirely different sources. It is the immediate source of revenue which must be looked at as far as individual employees of the company are concerned. Where a company is not incorporated in the taxing territory, directors' remuneration may be said to be derived from the proper locus of the company (its place of incorporation) or from the place where the company maintains its principal and central funds, rather than from the territory where the company conducts its business operations.
Tax Law — Income Tax — 'Derived From' — Meaning
To say that a thing 'derives from' a place is merely to say that it has its source in that place. A payment out of profits by A to B is derived not from any contract between them but from whatever is the source of A's profits. However, one cannot go behind the contract of employment to look at the ultimate source of the employer's profits; the immediate source of the employee's remuneration is the contract and the place of payment.

Legislation cited (8)

  • Income Tax (Consolidation) Ordinance 1950 s.7
  • Income Tax (Consolidation) Ordinance 1950 s.13
  • Indian Companies Act 1913 s.277
  • Companies Ordinance (Cap. 212) s.315
  • Companies Ordinance (Cap. 212) s.319
  • Companies Ordinance (Cap. 212) s.321
  • Companies Ordinance (Cap. 212) s.322
  • Companies Ordinance (Cap. 212) s.327

Cases cited (26)

  • Muirhead v Forth & North Sea S.M.I. Association (1894) A.C. 73
  • Ho Tung v Man On Insurance Co. (1902) A.C. 232
  • Employers Liability Assurance v Sedgwick Collins (1927) A.C. 95
  • Sabatier v The Trading Co. (1927) 1 Ch. 495
  • Young v Mayor of Leamington (1882) 8 A.C. 517
  • Copeman v Flood (1941) 2 K.B. 202
  • Aspro Ltd. v Commissioner of Taxes (1932) A.C. 683
  • Johnson Bros. & Co. v Inland Revenue Commissioners (1919) 2 K.B. 717
  • Stott and Ingham v Trehearne 9 T.C. 69
  • Pondicherry Railway Co. Ltd. v Commissioner of Income Tax, Madras 58 I.A. 239
  • British Sugar Manufacturers Ltd. v Harris (1938) 2 K.B. 220
  • Moore v Stewarts & Lloyds Ltd. (1906) 6 T.C. 501
  • Gresham Life Assurance Society v Styles (1892) A.C. 309
  • Union Cold Storage Co. Ltd. v Adamson (1932) 146 L.T. 172
  • Tata Hydro-Electric Agencies Ltd. v Commissioner of Income Tax, Bombay (1937) 3 A.C. 685
  • Colquhoun v Brooks (1889) 14 A.C. 493
  • Foulsham v Pickles (1925) A.C. 458
  • Bennett v Marshall (1938) 1 K.B. 591
  • Bray v Colenbrander (1953) 1 A.E.R. 1090
  • Commissioners of Taxation v Kirk (1900) A.C. 588
  • Liquidator Rhodesia Metals Ltd. v Commissioner of Taxes (1940) A.C. 774
  • McMillan v Guest (1942) A.C. 561
  • Brewster v Goodwin 32 T.C. 80
  • O'Mahoney v Inland Revenue Commissioner 33 T.C. 259
  • Morgan v Tate & Lyle Ltd. (1953) 2 A.E.R. 162
  • Indian Radio Communications v Commissioner of Income Tax, Bombay (1937) 3 A.E.R. 709

Full judgment

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Commissioner of Income Tax v Amboni Estates Limited and Others (Civil Appeals Nos. 57, 58, 59, 60, 61 and 62 of 1953) [1955] EACA 66 (1 January 1955)
Source: this page presents Wakilii’s issue analysis and metadata for a publicly reported Ugandan judgment. Any AI-generated summary is marked as such. Judgment text is sourced from the Uganda Legal Information Institute (ulii.org). Wakilii is not affiliated with ULII.