UNIT 2:

TAXATION OF INCOME
DEFINITION OF INCOME
Mohammad Hussein v Zambia Revenue Authority - 2001/RAT/36 where it was held that
money brought into Zambia for purposes of investment was not earned income within the
meaning of section 17 of the Income Tax Act and therefore was not taxable.
Capital is not income
Federal Commissioner of Taxation v Whit fords Beach Pty Ltd. The authorities establish that a profit or
gain so made will constitute income if the property generating the profit or gain was acquired in a
business operation or commercial transaction for the purpose of profit-making by the means giving rise to
the profit.
Vodafone Cellular Limited and others v Shaw (Inspector of Taxes) the Court of
Appeal provided for a general test which may be applied to distinguish capital payment receipts
from revenue payment receipts. The Court found that the distinction is a question of law and
that a number of factors may be taken into account in making the distinction. The Court found
that among the factors to be considered include: (i) whether the payment is a lump sum or not;
and (ii) the purpose for which the payment is being made.

UNIT 4:
TAXATION OF EMOLUMENTS
Meaning of Office
The term has been judicially defined as “a permanent substantive position that exists
independent of the person who fills it and which goes on and on and is filled in succession by
successive holders “Great Western Railway Co. v Bater
Meaning of Employment
Davies (Inspector of Taxes) v Braithwaite1 Rowlatt J considered that
employments were something like ‘offices’ and likened them to ‘posts’. He states that:
“Where one finds a method of earning a livelihood which does not contemplate the
obtaining of a post and staying in it but essentially contemplates a series of
engagements and moving from one to the other that each of those engagements
could not be considered an employment but a mere engagement in course of a
profession”.
Ready Mixed Concrete (SE) Ltd v Minister of Pensions and National Insurance2
laid down three tests – work and skill, control over the worker, and financial risk. If these were
met, a contract of service existed.
Ngulube v Zambia Revenue Authority
This case considered, inter alia, whether payments made to a Chief Justice of Zambia
in the UK from government funds were payments made in connection with his office
as Chief Justice.

In the English case of Cooper v Blakiston,3 the following dictum by the Lord Chancellor was
given:
“where a sum of money is given to an incumbent substantially in respect of his services
as incumbent, it accrues to him by reason of his office. Had it been a gift of an

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exceptional kind such as a testimonial or a contribution for a specific purpose as to
provide a holiday or a subscription peculiarly due to the personal qualities of the
particular clergyman, it might not have been a voluntary payment for services, but a
mere present.”
Herbert v McQuade,4a grant made by a Clergy Sustentation Fund to a
Clergyman to augment the income of his benefices was held to be assessable because it accrues to him by
reason of the office which he holds. “A profit accrues by reason of an office when it comes to the holder
of an office as such in that capacity and without the fulfillment of any further or other condition on his
part”.
However, in the case of Turner v Cuxson,5 a sum of money received by a curate from a religious
society in recognition of his faithful service as a Clergyman was not assessed. It was held that
the payment was not in respect of any particular curacy and could not therefore, be an
emolument of his office as curate. (Curate - a priest or deacon who assists a Rector or Vicar;
curacy – the office of a curate).
Gifts of Exceptional Kind
The dictum of the Lord Chancellor in Cooper v Blakiston stated that gifts of exceptional kind
cannot be considered as payments made in connection with an office held. It would therefore
be necessary to consider what constitutes “gifts of exceptional kind.”
The case of Cowan v. Seymour6 concerned a secretary of a company who received no
remuneration for his services. The Company was then wound up and he was appointed as a
liquidator. The shareholders, at the final meeting of the company asked him to accept a sum of
money which would normally have been distributed to them. This was taxed in his hands and
Commissioners agreed that the sum was correctly assessed.
When the case came up before the court, it was admitted that the facts were not conclusive of
the point though, the Court placed a great weight on the fact that the office of Secretary had
ended sometime before and that the money was given by the shareholders and not by the natural
paymaster – the company. These facts indicated that it was a gift of an exceptional kind such as a
testimonial personal in character. “The personality of the appellant was everything”. The Court, therefore
reversed the Commissioner’s decision that the sum was assessable.
To some extent, however, the decision turned on the words “accruing by reason of the office”
- Young L.J. said that the office may have been a “causa sine qua non” but it was not a “causa
causans”. It should be noted that the words “by reason of the office” do not appear in the definition of
emoluments in our Income Tax Act, but the distinction expressed by the dictum is very valid and should
be examined critically. It must also be remembered that the considerations applicable to “employment”,
as distinct from an “office”, are always not the same.
The case of Mudd v Collins7on the other hand involved an employee of a company who
negotiated the sale of a branch for which he received special payment from his employers. He
was assessed on the sum so received, and he unsuccessfully claimed that the sum did not arise
by virtue of his office. The court stated that: “If an officer is willing to do something outside the duties of
his office and his employer gives him something in that respect, that is a profit it becomes a profit of his
office which is enlarged a little so as to receive it”
Receipts not assessable - Case I
Reed v. Seymour 11 TC 625
In this case the committee of a Cricket club exercising their absolute discretion, granted a
benefit match to a professional cricketer in their service. The proceeds of the match, together
with certain public subscription, were invested in the name of the trustees of the Club the
income therefrom paid to the beneficiary in accordance with the rules of the Club.

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Subsequently the investments were realized and the proceeds were paid over to the beneficiary; who with
that sum purchased a farm with the approval of the trustees. He was assessed on the proceeds of the
benefit match (public subscription were excluded), and
the assessment was discharged by the General Commissioner. It was held that the award of
proceeds of the benefit match to the cricketer was not a profit accruing to him in respect of his
office or employment but was the nature of personal gifts and not assessable to Income Tax”.
Receipts assessable - Case 2.
Davis v Harrison 11 TC 707.
In this case the benefit money paid to a professional footballer by his old club after he had been
transferred to another club was held to be assessable remuneration and not as contended
compensation for loss of office. The rules of the Football League (in England) allowed a club
to agree to pay a player a money-benefit after five or ten years and if he was transferred before
the end of the period to pay him a percentage of the promised benefit as a reward for services.
CHARGEABLE EMOLUMENTS
Benefits
Benefits in kind
The question whether a benefit in kind is assessable, on the employee was considered in the
case of Tennant v Smith8. In this case, a bank manager, was required as part of his duty to
reside in the “bank house adjoining the bank. He lived there rent free; he had no power to sublet
and when he retired or moved to another branch of the bank, he would be required to vacate the
premises. It was held that the benefit of the house did not constitute an emolument since it was
not convertible into money. The House of Lords indicated as a general principle that “benefits
received in kind” was a profit if it represented “money’s worth” and where a person receives
substantial things of money value capable of being turned into money, they represented
money’s worth”. It must be observed in passing that “substantial” in this context does not mean
large; the term is used as an antonym to insubstantial. The right to live in a house is not a
“substantial thing” nor in this case was it capable of being converted into money.
It must be noted that the test applied in Tennant v Smith was whether the benefit could be
lawfully converted into money; it is irrelevant whether the employee actually converts it into
money.
The law as decided in Tennant v Smith therefore is that benefits in kind are only taxable if they
are of money value capable of being converted into money.
Value of convertible benefits
If a benefit in kind is convertible into money, tax is levied on the value of the benefit to the employee:
this is taken to be the second-hand value. In the case of Wilkins v Rogerson,9 a company arranged with a
firm of tailors that each employee would be entitled to obtain clothes of up to £15 in value. Under this
arrangement Rogerson, an employee of the company, ordered a suit costing £14.5 which his employer
paid for directly to the tailors. It was held that Rogerson had received a benefit in kind that was
convertible into money because he could sell the suit,but that he could only be taxed on the second-hand
value, estimated at £5. As Herman L.J. said at page 353 - “The only controversy was whether he was to
pay tax on the cost of that perquisite to his employer or on the value of it to him, and it appears to me that
this perquisite is a taxable subject matter because it is money’s worth. It is money’s worth because it can
be turned into money and, when turned into money, the taxable subject matter is the value received.”
Pecuniary liability of an employee met by the employer

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This point was made clear in Hartland v Diggins.10 It was held in this case that the income tax liability
of an employee if paid by his employer, the amount assessable on the employee is the remuneration
which he actually receives plus the tax liability on the amount assessable. It should also be noted that
legal obligation need not be statutory, for it has been held that a premium paid by an employer under an
employee’s life assurance policy represented money’s worth. In the case of Nicoll v Austin,11the
Managing Director of a company owned and resided in a large and imposing house but found difficulty in
meeting the expenses connected therewith. The company agreed in addition to paying a salary, to meet all
the outgoings on the house (rates, repairs gardener’s wages etc.), on condition that he agreed to continue
to reside there. This was rather different from the situation of the bank manager in Tennant v Smith
because not only was he required to live in the house as manager as a condition of his services, but when
his appointment was terminated or he was moved to another branch he would be required to give up the
house. Tennant’s occupation of the house was clearly “representative” and all outgoings on such as rates
were the legal liabilities of the bank and not of the tenant. In Austin’s case the house was his own and
liability for rates and repairs was his. The court took the view that the only proper construction to be
placed on his agreement with the company was that the terms of his employment provided him with
money as his salary, and money’s worth as the expenses of the house were defrayed by the company.
Consider the case of Dingley v McNulty.12 In this case the taxpayer was Vice-President and a Director of
a Benevolent Fund incorporated under special Acts of parliament. He attended seventy-four director’s
meetings and received one guinea in respect of each meeting. On appeal against an assessment of income
tax made upon him under schedule E in respect of these sums less allowance of 25% for expenses, he
contended that – (a) his office of Director was not an office of employment of profit assessable under
schedule E; and (b) the whole sum paid was simply an allowance for sums expended wholly exclusively
and necessarily in the performance of his duties. The Special Commissioners decided that the sum paid to
the taxpayer constituted remuneration as a Director in respect of which he was assessable under schedule
E, and in the absence of detailed evidence which was not submitted, the allowance made in respect of
expenses was adequate. On appeal, the court held that the decision of the Special Commissioners was
correct.
The principle established by this case was that: “Where the employer reimburses a genuine expense
incurred on the employer’s behalf during the course of his work, the employee will not be taxed on
“expenses payment” received if expended fully. But where an employer reimburses an employee for
an expense that conferred some benefit on the employee that benefit would be assessable.
NON-CHARGEABLE EMOLUMENTS
Accommodation provided by employer
In the case of Reed v Cattermole,16it was held a Methodist Minister, who lived in the manse supplied by
his employers and required by them to live therein was not the occupier under Schedule E of the U.K.
Income Tax Act 1918, but that his employers were.
PAYMENTS MADE ON CESSATION OF EMPLOYMENT
Salary in lieu of notice
In EMI Group Electronics Ltd v Coldicott18 a company had employed individuals on
employment contracts, which provided that the employees may be dismissed with six
months’ notice. Under the contracts, the company was able to dismiss the employees
immediately and pay them the equivalent of salary in lieu of notice. The employees were
so dismissed and the paid them six months’ salary in lieu of notice. The Inland Revenue
contended that the payments were assessable as an emolument from employment; the
taxpayer contended that the payments were non-taxable payments in lieu of notice. It was
held that the compensation was paid in accordance with provisions in the director's
contract, and was therefore taxable as emoluments from employment.

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Unit 5
Taxation of business a Income
Profession
IRC V Maxse
Principle: involving the idea of an occupation requiring either purely intellectual skill or manual skill
controlled by the intellectual skill of the operator
Vocation
Partridge v Mallandaine
Principle:the way in which a man passes his life.
Trade
Fry v Burma Corporation Limited3 stated that:
“Trade refers to the various activities of commerce – the wining and using the products of the earth, or
multiplying the products of the earth and selling them or manufacturing them and selling them, the
purchase and sale of commodities or the offering of services for a reward such as conveyance and the
like”.
Ransom v Higgs,4 Lord Wilberforce stated that:
“Trade normally involves the exchange of goods or services for reward...there must be something which
the trade offers to provide by way of business. Trade, moreover presupposes a customer.’
Adventure in the nature of trade
Leeming v Jones7:
“...adventure in this context must plainly be a “trading adventure”.
Rutledge v IRC,8 the taxpayer was a businessman connected with the film industry. Whilst in Berlin he
purchased 1 million toilet rolls for £1,000 that he resold in the UK at a profit of approximately £11,000.
The Court of Session held that the taxpayer had engaged in an adventure in the nature of a trade so that
the profits were assessable. The Court stressed that such a quantity of goods must have been intended for
resale.
Profit seeking evidence
Wisdom v Chamberlain10 the taxpayer, a comedian, who bought £200,000 of silver bullion as a hedge
against an expected devaluation of the sterling pound and three months later sold it realising a profit of
£50,000 was held to be trading. His claim that he had made no profit, but rather that the pound had fallen
in value, was rejected.
The nature of the asset acquired
Rutledge v IRC,8 the taxpayer was a businessman connected with the film industry. Whilst in Berlin he
purchased 1 million toilet rolls for £1,000 that he resold in the UK at a profit of approximately £11,000.
The Court of Session held that the taxpayer had engaged in an adventure in the nature of a trade so that
the profits were assessable. The Court stressed that such a quantity of goods must have been intended for
resale.

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The interval of time between purchase and sale
Wisdom v Chamberlain [1969] 1 All ER 332).
the presumption that a quick sale is more consistent with a business activity
The existence of a sales organisation. Any form of organised activity designed to promote a sale is
evidence in favour of deciding that a trade is carried on, e.g. a sale by advertisement or the use of a selling
agency or sales staff. In the case of Cape Brand Syndicate v CIR:However, as they had set up a special
phone line and information desk and published brochures and adverts advertising their brandy, HMRC
successfully argued that they had commenced a trade.
The frequency of transactions. If any particular transaction is found to be one of a series, and there is
evidence of methodical activity then the transaction tends to fall into the general pattern which in a whole
constitutes a trade. The case is much stronger than if there is only one transaction to be judged on its
merits. In Pickford v Quirke
Financing arrangements
On the other hand, the evidence may be that the money for purchase is merely changing investments. See
Wisdom v Chamberlain
Deductible expenditure
Ashton Gas Co. v A-G
the payment of income tax is an application of profit which has been earned and is, therefore, not
deductible
Test to be used for capital and revenue expenditure
The object of the expenditure
This test, set out in the case of Atherton v British Insulation Helsby Cables Limited,17 arguably looks to
the purpose or motive of expenditure (‘...with a view to...') - expenditure is of a capital nature if it is made
for the purpose of bringing into existence an asset for the enduring advantage of the business
Different view: they argue that you should seek to identify on what the expenditure was incurred or what
was obtained for it (or would have been obtained if the expenditure had not proved to be abortive). Thus,
in Tucker v Granada Motorway Services Ltd18 expenditure for the purpose of reducing a revenue
outgoing (rentals due over a period of years under a lease of land) was nevertheless capital because it was
incurred on a capital asset (the lease of land).
A definition of difference is suggested again by Rowlatt J., in Rees Roturbo Development Syndicate Ltd
v Ducker & CIR22 at p.379:
“In one sense the words “capital assets” are not words of art because you do not have one set of assets
representing income. Of course, but what is meant by the phrase “capital assets” is that this is an asset
which represents fixed capital as opposed to circulating capital, that is to say that this is an article which
is possessed by an individual in question, not that he may turn it over and make a profit by the sale of it to
his advantage, but that he may keep it and use it and make a profit by its use. Then if an article of that sort
is sold at a profit, that profit is not a profit of trade.”
The one kind of capital shades off into another. The point made is by Lord Hanworth, MR in The
European Investment Trust Co. Ltd v Jackson 18 TC at page 13 –

6
“The question whether or not a sum is fixed capital is one of degree; and he goes on to say, therefore, a
question of fact.
Whether expenditure is recurring or once-off
Watney Combe Reid & Co. Ltd v Pike
be capital, because their purpose was to tender capital assets (the premises) more valuable.
Whether the expenditure produces, improves or disposes of an asset
One of the tests in determining whether expenditure is of a capital nature is whether the expenditure
produces an asset or at least an advantage to the permanent and enduring benefit of a trade. If so, the
expenditure is a capital expenditure - Sampson v The Commissioner of Taxes.
Lawson v Johnson Matthey Plc
Held, allowing the taxpayer’s appeal:A payment to get rid of an obstacle to successful trading was a
revenue and not a capital payment. Thus, if the payment was made to procure the transfer of the shares in
JMB to the bank, it was a capital payment; but if it was made to remove the threat to the taxpayer’s trade
posed by the insolvency of JMB, it was a revenue payment.
Walker v Joint Credit Card Co. Ltd29 for example, a payment by a credit card company to preserve its
goodwill was held to be a capital expenditure.
How payment would be treated under ordinary accounting principles
Atherton v British Insulation Helsby Cables Limited
Held, (Lords Carson and Blanesburgh dissenting), that the sum in question was not an admissible
deduction in arriving at the Company’s profits for Income Tax purposes.
Unit 8
Traditional rule
Partington v. The Attorney General
the strict and literal approach
1. Tax legislation is to be construed strictly
Tenant v. Smith
The legislature is therefore presumed to be an almost perfect author and accordingly:
(a) construction should have regard to all the words used;
(b) no additions may be made to the word; and
(c) alteration of language in an Act suggests alteration of intention.
In Vestey v IRC, Lord Wilberforce stated that:
A citizen is not to be taxed unless he is designated in clear terms by the taxing Act as
a tax payer and the amount of his liability is clearly defined
Principle of strict interpretation followed and in Zambia

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In the case of OJ Kalunga v Zambia Revenue Authority the Revenue Appeals Tribunal further observed
that the principle of strict interpretation of tax legislation gives rise to two consequences:
(a) Firstly, it is for the Zambia Revenue Authority to establish that a subject falls within the charge to be
taxed. But this does not open the door for the subject to have the "benefit of any argument that ingenuity
can suggest." But only in the event that after careful and balanced examination the judicial mind still
entertains reasonable doubt. If there is no ambiguity the words must take then natural meaning;
(b) Secondly, the consequence of strict interpretation applies equally to the taxpayer as much as to the
Revenue Authority. So whether or not the literal interpretation produces a construction whereby hardship
falls on innocent beneficiaries...that interpretation must be adhered to.
2.Tax legislation is to be construed as a whole
COR v. Wilsons Executors it was held that:
When we come to matter of doubtful construction, when it is possible without any
perversion or staining, to place either the one construction or the other upon a provision; in such
circumstances I consider it to be our duty to prefer the construction which harmonises with the general
intention of the Legislature as we gather it from the whole statute.
History of taxing act
Pepper (Inspector of Taxes) v Hart
The court established the principle that when primary legislation is ambiguous then, in certain
circumstances, the court may refer to statements made in the House of Commons or House of Lords in an
attempt to interpret the meaning of the legislation.
3. amniguity of a taxing proivision should be construed in favour of the tax payeer

United States v. Merriam

On behalf of the Government it is urged that taxation is a practical matter and
concerns itself with the substance of the thing upon which the tax is imposed rather
than with legal forms or expressions. But in statutes levying taxes the literal
meaning of the words employed is most important, for such statutes are not to be
extended by implication beyond the clear import of the language used. If the words
are doubtful, the doubt must be resolved against the Government and in
favour of the taxpayer
rationale for the strict interpretation
Pryce v. Monmouthshire Canal and Railway Companies, Lord Cairns stated
that:
inasmuch as there was not any a priori liability in a subject to pay any particular tax,
nor any antecedent relationship between the taxpayer and the taxing authority, no
reasoning founded upon any supposed relationship of the taxpayer and the taxing
authority could be brought to bear upon the construction of the Act, and therefore the
taxpayer had a right to stand upon a literal construction of the words used, whatever
might be the consequence.12
This reflected the traditional view that tax legislation had no purpose other than the raising of
taxes, and therefore even if the statutory context and purpose were relevant to statutory
interpretation generally (itself a disputed point), there was in fact no broader context or statutory
purpose relevant to the interpretation of tax legislation

8
the minority view
Cartwright v. City of Toronto, Duff J held that tax statutes “must be construed according to the usual rule,
that is to say, with reasonable regard to the manifest object of them as disclosed by the
enactment as a whole
exceptions to the traditional rule
Astor v. Perry
[I]n order to avoid imputing to Parliament an intention to produce an unreasonable result,
we are entitled and indeed bound to discard the ordinary meaning of any provision and
adopt some other possible meaning which will avoid that result
technological changes

Simpson v. Teignmouth and Shaldon Bridge Company

[t]he broad principle of construction put shortly must be this: What would, in an
ordinary sense, be considered to be a carriage (by whatever specific name it might be
called) in the contemplation of the Legislature at the time the Act was passed? If the
thing so sought to be brought within the Act would substantially correspond to what
the Legislature meant by a carriage (called by whatever name you please), I think that
the tax would apply; but if not, it is not for the Court to make an effort by ingenious
subtleties to bring within the grasp of the tax something which was not intended in
substance by the Legislature at that time to be the subject of taxation
The place of tax avoidance
IRC v. Duke of Westminster
the House of Lords confirmed that taxpayers were entitled
to arrange their affairs to minimize their tax obligations. Their Lordships rejected arguments
suggesting that somehow tax liabilities could be determined through the application of a
“substance over form” doctrine, which would impose results based on a characterization of
documents, events, or transactions different from the legal relationships and consequences
established by the parties.