Commissioner of Income Tax v Lerematesho Ltd [1976] KECA 8 (KLR)
The bottom line
#Kenya's tax authority won: frequent, large share sales made a farming company's profits taxable business income, and taxpayers bear the burden of proving assessments wrong.
What this practically means
#Executive summary
#Questions the Court framed
#The issues the Court set itself to decide, in its own words.
- 1.Whether the purchases and sales of shares and stocks in 1971 amounted to carrying on a business or trade of dealing in shares, so that the profits were taxable under section 3 of the East African Income Tax Management Act
- 2.Whether the first appellate judge misdirected himself on the onus of proof and failed to evaluate the evidence himself instead of adopting the local committee's findings
- 3.Whether the commissioner bore any burden of proving a change of intention from investment to trading
Key legal issues
#Whether the company was carrying on a trade or business in shares
Yes. Having regard to the company's objects, the frequency of purchases and sales, the magnitude of the transactions and the profits, the taxpayer was dealing in shares as a business; the sales were not mere realisation of investments.
The company had extensive powers including share dealing; it systematically bought and sold shares from 1968 to 1971 with considerable profits in 1971. No evidence was called to rebut the presumption of trading or to show sales were made to protect investments against loss. The principles in Californian Copper Syndicate v Harris apply, and on the facts the inference of a change of intention from investment to trade was warranted.
Onus of proof on appeal against an assessment
The first appellate judge misdirected himself in law by failing to approach the issues as res integra and by placing on the commissioner the burden of proving a change of intention, thereby shifting the statutory burden from the taxpayer.
Under section 103(c)/(d) of the Act the onus is on the taxpayer to show the assessment is excessive. The judge relied on the local committee's findings without making his own findings, and held the commissioner had to show a reversal of the investment intention. That, the court held, cut across the statute by shifting the burden of proof to the assessor.
Effect of the commissioner's failure to assess earlier profits
The commissioner's failure to assess profits from share sales before 1971 does not raise a presumption in favour of the taxpayer or shift the onus of establishing a change of intention to the commissioner.
Mustafa JA held the assessment itself triggers the taxpayer's statutory burden; the commissioner was entitled to look at the evidence as a whole and the earlier non-assessment could not alter the nature of the transactions or reverse the statutory onus.
Legal principles established
#- A judge on appeal under section 103(d) must weigh and evaluate the evidence and draw his own conclusions irrespective of the findings of the local committee, and the onus is always on the taxpayer to show that the original assessment was excessive.
- The onus is on the taxpayer to establish that a particular transaction is of a capital and not a revenue nature if he seeks thereby to avoid liability for tax; establishing an original intention to invest does not shift any burden of proof onto the commissioner.
- Where a company is authorised by its memorandum or articles to deal in a venture, dealing in that venture raises a rebuttable presumption that it is carrying on a business or trade in it, which the taxpayer may rebut.
- Even if the original purpose was investment, the facts (frequency, magnitude, system of transactions) may warrant an inference that the owner changed his intention and utilised the asset in trade; the fact of assessment itself places the burden of proving it excessive on the taxpayer.
Court orders
#- 1.Appeal allowed with costs here and in the High Court
- 2.The assessment raised by the commissioner on the profits from the sale of shares in 1971 restored as prayed by the appellant
The bench
#One judgment of the whole court — no separate or dissenting opinions.
Wrote the judgment
Delivered the main judgment: the first appellate judge failed to treat the facts as res integra and wrongly shifted the burden of proof to the commissioner; on the evidence (frequency, magnitude and system of share transactions) the taxpayer was dealing in shares as a business.
I would allow the appeal with costs here and in the High Court and restore the assessment as prayed by the appellant commissioner.p. 6
Wrote the judgment
Wrote separately agreeing with Wambuzi P's proposed order. He held the first appellate judge neither analysed the evidence afresh nor correctly placed the onus; the taxpayer company failed to discharge its burden of proving the assessment excessive, as the frequency, nature and magnitude of transactions could support a finding of trading.
In my opinion the taxpayer company did not discharge that burden, and the commissioner’s appeal must succeed.p. 8
- On appeal from
- High Court of Kenya
- Not stated
- Jurisdiction invoked
- Statutory appeal under the East African Income Tax Management Act (section 103 appeal from High Court against local committee/assessment decision)
Quotable passages
#Verbatim from the judgment, each located to the page it appears on in the official PDF — so these can be cited and checked directly.
I would allow the appeal with costs here and in the High Court and restore the assessment as prayed by the appellant commissioner.
The High Court is obliged, regardless of any findings of the committee, to approach every issue of fact as res integra, and to make its own findings thereon, and that in so doing it is bound by the provision that the onus is always on the taxpayer to show that the original assessment was excessive.
Where a company which is authorised by its articles of association to deal in a venture deals in that venture, prima facie, there is a rebuttable presumption that the company is carrying on a business or trade in that venture.
The onus is on the taxpayer to establish that a particular transaction is of a capital and not a revenue nature if he seeks thereby to avoid liability for tax.
It is not what business does the taxpayer profess to carry on but what business does he actually carry on.
Issues in the judgment
#The judgment cites section 103(d) when describing the appeal judge's powers but section 103(c) when describing the onus of proof; the internal references to section 103(c) and 103(d) are not fully consistent in the text.
O v Commissioner of Income Tax is cited with two different page references in the judgment (1 EATC 125 and 1 EATC 124).
Key timeline
#Practical implications
#Frequently asked questions
#Cite this brief
#Cite this brief
Caselaw, "Commissioner of Income Tax v Lerematesho Ltd [1976] KECA 8 (KLR)", Case Analysis (1976). Not stated in the judgment as provided. Source: https://new.kenyalaw.org/akn/ke/judgment/keca/1976/8/eng@1976-05-31
Suggested citation format for research notes or client memos. Always verify the original judgment before relying on any point.