Revenue Law and Taxation LLB -Questions and Answers

Question 8: LLB Exams IUIU 2011/2012Session:

In the case of K.M Doukole v URA, HCCS No.11/97 Justice Kibuuka Musoke held that it appears to me to be a
well know principle of law that a taxing legislation must be strictly constructed, any ambiguity or doubt must
be resolved in favour of a tax payer. The need for clear and un ambiguous language in all taxing legislation has
been emphasized by the courts again and again
a) In light of the above assertion, explain the rules applied in interpretation of tax statutes. (12 Marks)
b) Briefly describe the changing trends in the judicial interpretation of tax statutes. (13 Marks)
Approach to a): In light of the above assertion, explain the rules applied in interpretation of tax statutes
i.
ii.
iii.

Introduction with background

Discuss the rules with decided cases and illustrations
Conclusion

Suggested solution
Introduction
It is an important requirement to legislation drafted in clear terms that aim for accuracy of expression covering all
foreseeable circumstances even often at the expenses of volumes of legislations. It is therefore, necessary to
acquire accuracy in interpretation and it is therefore necessary to obtain knowledge of the rules of interpretation
which have emerged from a number of decided cases.
In deterring the meaning of statutory provisions, there are usually three questions that need to be addressed as to
guide the interpretation and these include;
i)

What rules will court apply in ascertaining the meaning of particular provisions (i.e. The principles of

statutory interpretation);
ii) In determining a particular legal issues, to what extent will the courts be bound to follow prior cases (i.e.
the doctrine of precedents) and;
iii) Which parts of a particular binding decisions will court be obliged to follow and apply (i.e the reflection
between ratio descendendi and obita dictum). Ratio descendendi refers to the rationale given for the
decision taken by court, whereas, obita dictum is the opinions of the judges on interpretation of points
outside the immediate question of law put before them in the case they have decided.
The courts over several centuries have developed principles or rules to guide them in the task of ascertaining the
meaning of legislative provisions. The rules courts apply in interpreting tax legislations are basically the same as
those used in other statutes. However, because English courts first encountered tax laws, in the context of cases
involves penalties, they have at various times and in particular in the earlier centuries tended to view tax law with
some judicial intolerance as that accorded to penal statues.
Courts have treated tax as if it were an unjustified interference with private property and therefore resolve that
the statute should be interpreted strictly and tax avoidance should be tolerated since tax payers are only trying to
protect what is rightly belongs to them. Justice Christopher Madrama in Kinyara Sugar Ltd vs Commissioner
General Uganda Revenue Authority, H.C.C.S NO 73 OF 2011 cited the general principles for interpretation of tax
statutes as laid out in the case of Mangin v Inland Revenue Commissioner [1971] 1 All ER 179 by the Privy
Council when Lord Donovan who delivered the majority opinion set out 4 principles of interpretation.;
a.

Firstly words are to be given their ordinary meaning. They are not to be given some other meaning
simply because their object is to frustrate legitimate tax avoidance devices. In Re Mickleth Weight 156
ER 908 at 910 Lord Parker B observed that the subject is not to be taxed without clear words for the
purpose and that the words in the Act must be given their literal meaning.
This is what is often referred to as the literal rule. This approach requires that a provision be interpreted
in accordance with the intention of parliament, as determined by an examination of the language used in
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the statute as a whole as held in Amalgamated Society of Engineers v Adelaide Steamship Co Ltd (1920)
28 CLR 129, 1612. Under the literal rule, words are to be given their ordinary and natural meaning. The
court does not involve itself with the consequences of the interpretation.
This approach was first articulated back in 1936 in the House of Lords decision in Inland Revenue
Commissioners v Westminster (Duke) [1936] AC 1, when community attitudes to taxation, as observed by
the courts generally, saw taxation as something approaching theft as Income tax was a relative newcomer
to the law, being a 20th century burden on property. Hence the law at this time saw tax as a punitive
measure. The Duke of Westminster, it may be recalled, entered into a deed with his gardener to pay the
gardener, in his employment, a fixed sum per week for a period of seven years or during the joint lives of
the parties. The question was whether the Duke could deduct for tax purposes the annual payments. By a
majority, the House of Lords upheld the Dukes position that the sums were not payments of salary or
wages. He was entitled, accordingly, to deduct them as annual payments. Lord Atkin dissented. Lord
Tomlin delivered the leading judgment: It is said that in revenue cases there is a doctrine that the Court
may ignore the legal position and regard what is called the substance of the matter, and that here the
substance of the matter is that the annuitant was serving the Duke for something equal to his former
salary or wages, and that therefore, while he is so serving, the annuity must be treated as salary or wages.
This supposed doctrine (upon which the Commissioners apparently acted) seems to rest for its support
upon a misunderstanding of language used in some of the earlier cases. Lord Russell of Killowen stated in
the following words in Inland Revenue Commissioners v Westminster (Duke) [1936] AC 1, I confess that
I view with disfavour the doctrine that in taxation cases the subject is to be taxed if, in accordance with a
courts view of what it considers the substance of the transaction, the court thinks that the case falls
within the contemplation or spirit of the statute.14 The subject is not taxable by inference or by analogy,
but only by the plain words of a statute applicable to the facts and circumstances of his case
b.

Secondly, one has to look merely at what is clearly said. There is no room for any intendment. There is
no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be
implied. One can only look fairly at the language used. as per Rowlatt J in Cape Brandy Syndicate v
Inland Revenue Commissioners ([1921] 1 KB 64 at 71), approved by Viscount Simons LC in Canadian
Eagle Oil Co Ltd v King (1946) AC 119, where the appellant claimed that where dividends of shares, in a
foreign co were paid to a share holder thus being residents in the UK and attracting income, tax relief
from taxation should be given in so far as the income come from the foreign company has already borne
tax or has been taxed on its trading profits. The claimed relief was based upon on alleged tax to avoid
double taxation. It was held that the theory relating to double taxation gives rise to a claim to exemption
or repayment of tax or it must rest on an express enactment of tax staute. It was observed that it is really
beyond the power of court to correct or afford justice by an implication which is not based on the
language of statute.

c.

Thirdly, the object of the construction of a statute being to ascertain the will of the legislature, it may be
presumed that neither injustice nor absurdity was intended. If therefore a literal interpretation would
produce such a result, and the language admits of an interpretation which would avoid it, then such an
interpretation may be adopted. The history of an enactment and the reasons which led to its being
passed may be used as an aid to construction.
This rule is normally referred to as the golden rule. This approach allows the court to take into account
the consequences of a particular interpretation. If the literal meaning of the words results in an absurdity;
the court will modify the ordinary meaning of the words to overcome this. This approach allows for
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rectification of an error in the wording of the provision when a literal meaning may not result in the
intention of parliament being realised. Lord Wensleydale outlined the approach to the golden rule in
Grey v Pearson. 1857) 6 HLC 61, 106.
d. Fourthly, the history of an enactment and the reasons which led to its being passed may be used as an
aid to its construction.
This rule is referred to as the mischief rule. This approach allows the court to determine the reasons or
purpose for the passing of the Act by parliament (the mischief to which the Act is directed) and provides
for an interpretation to be preferred that advances the purpose of the Act to one that does not. This
approach is only applied if there is an ambiguity in the legislation as the position in Heydons case (1584)
3 Co Rep 7a, 7b.4. In Heydons Case the mischief rule was stated in the following way: [F]or the sure and true
interpretation of all Statutes in general four things are to be discerned and considered: (1st) What was the common
law before the making of the Act? (2nd) What was the mischief and defect for which the common law did not
provide? (3rd) What remedy the Parliament hath resolved and appointed to cure the disease of the Commonwealth?
And (4th) the true reason for the remedy; and then the office of all the Judges is always to make such construction as
shall suppress the mischief, and advance the remedy, and to suppress subtle inventions and evasions for continuance
of the mischief, pro privato commodo, and to add force and life to the cure and remedy, according to the true intent of
the makers of the Act, pro bono publico. Under this rule a court is required to make a sure and true interpretation
of a statute by interpreting it according to the true intent of the makers of the Act. Heydons Case specifically
refers to the situation where common law did not adequately deal with a problem, but by logical extension the rule
should also apply where earlier statute law on a subject is inadequate and has, for that reason, been changed by a
later statute.
In support of the proposition that in the construction of an earlier statute one can have reference to a later
statute as held in the case of Jafferali M. Alibhai versus the Commissioner of Income Tax [1961] EA page
610 at page 614 the Court of Appeal of East Africa in the judgment of Sir Alistair Forbes stated at page 614
paragraphs A and B that a reference to a later Act for the purpose of clarifying a provision in an earlier
Act is permissible. In the Jafferali case the latter statute was held to clarify and therefore lend support to a
particular interpretation of an earlier statute.
The Mischief Rule is of narrower application than the golden rule or the plain meaning rule, in that it can
only be used to interpret a statute and, strictly speaking, only when the statute was passed to remedy a
defect in the common law. Legislative intent is determined by examining secondary sources, such as
committee reports, treatises, law review articles and corresponding statutes. The application of this rule
gives the judge more discretion than the literal and the golden rule as it allows him to effectively decide
on Parliament's intent. It can be argued that this undermines Parliament's supremacy and is undemocratic
as it takes law-making decisions away from the legislature.
The principles in the earlier case of interpreting tax statutes strongly derived support from the language and
commentators on particularly tax legislations and it was viewed as derogation from the citizens ordinary rights
by compulsorily extracting money.
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Approach to b): Briefly describe the changing trends in the judicial interpretation of tax statutes
i.
ii.

Introduction with background

Discuss the changing trends with decided cases and illustrations

Suggested solution: Briefly describe the changing trends in the judicial interpretation of tax statutes
In more recent times however, there has been a tendency for courts to seek and construe tax laws in accordance
with the normal principles of statutory interpretations without any bias or favour to the tax payer. In the case of
Ramsay v IRC (1982) AC 300, the question before court was that by going beyond the literal interpretation, courts
were attempting to make law. In response to this Lord Stein stated that courts were exercising broad purposive
interpretation giving effect to the intention of parliament, rejecting formalism in fiscal matter over realistic legal
analysis. The facts of the Ramsay decision (upon which the doctrine of fiscal nullity is based) involved a company
seeking to create an allowable loss to offset a chargeable capital gain. The House of Lords held that this loss
making scheme was contrived and not such a loss as the legislation is dealingwith.113 Therefore, the steps to
contrive the loss were ignored.
The established rule that no tax can be imposed on a subject by an Act of Parliament without words which clearly
show an intention to lay the burden upon him does not mean that the court will strive to find loopholes where
none are apparent; the words of the Act must be given a fair and reasonable construction without leaning one way
or the other. However if the terms of the Act plainly impose the tax they should be given effect, equally if they
do not reveal a clear intention to do so the liability should not be inferred from ambiguous words. If the words in
question are words of exception or exemption the same rules of construction should be applied. Where the
meaning of the terms in a statute is ambiguous, the court may resort to the purposive meaning of the term in
interpretation of the statute.
The move to a more purposive approach was brought out in the High Court of Australia in Cooper Brookes
(Wollongong) Pty Ltd v Commissioner of Taxation (1980) 147 CLR 297 signaled a shift away from the literalist
approach to a more purposive approach, although Justice Hill was quick to point out the case is far less radical
than many commentators have claimed.32 The case concerned the availability of tax losses within a group of
companies and hence the application of s 80C (3) of the Income Tax Assessment Act 1936 of Australia. The provisions
of s 80 had been amended from time to time, as loopholes in its application were revealed. This was happening
during the period of a growing tax avoidance industry in the trafficking of tax losses. The amendments were
designed to ensure that s 80C (3) was only available where there was a real 40%continuity of ownership. The
taxpayer had relied upon the ordinary meaning of the words that Parliament had used. If this interpretation were
accepted, the amendments would have been virtually ineffective.
In rejecting the literal interpretation of the provision in Cooper Brookes Case, Mason and Wilson JJ delivered the
leading judgment jointly. They gave two reasons for concluding that there should be a departure from the literal
wording contained in s 80C (3). First, their Honours agreed that the literal reading did not conform to the
legislative intent as ascertained from the provisions of the statute. The literal reading gave rise to a result, which
could be viewed as absurd, irrational or obscure. Secondly, their Honours found, in the history of the
amendments to s 80, the mischief which the legislature sought to remedy. There had been an oversight on the
part of the drafter. Accordingly, the provision should be construed to give effect to the legislative intention, which
an analysis of the provisions as a whole revealed. Their Honours stated: But the propriety of departing from the
literal interpretation is not confinedIt extends to any situation in which for good reason the operation of the
statute on a literal reading does not conform to the legislative intent as ascertained from the provisions of the
statute, including the policy which may be discerned from those provisions.

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Lord Mackey of Clashfern in the case of Pepper V. Hart [1993]1 All ER 42 at 48 found that, If reference to
Parliamentary material is permitted as an aid to the construction of legislation which is ambiguous, or obscure or the literal
meaning of which leads to an absurdity, I believe as I have said that in practically every case it will be incumbent on those
preparing the argument to examine the whole proceedings on the bill in question in both Houses of Parliament. Questions of
construction may be involved on what is said in Parliament and I can not see how if the rule is modified in this way the
parties legal advisers could properly come to court without having looked to see whether there was anything in the Hansard
report on the bill which could assist their case.
Furthermore, Lord Bridge of Harwich at pg 50 in the same case found that, The object of the court in interpreting
legislation is to give effect so far as the language permits to the legislature. If the language is to be ambiguous I can see no
sound reason not to consult Hansard to see if there is a clear statement of the meaning that the words were intended to carry.
The days have long passed when the courts adopted a strict constructionist view of interpretation which required them to
adopt the literal meaning of the language. The courts now adopt the purposive approach which seeks to give effect to the true
purpose of legislation and are prepared to look at much extraneous material that bears on the background against which the
legislation was enacted.
The position of the law is that if any doubt arises from the words used in the statute, where the literal meaning
yields more than one interpretation, the purposive approach may be used, to determine the intention of the law
maker in enacting of the statute. (See Justice Choudry in the case of UGANDA REVENUE AUTHORITY V.
SPEKE HOTEL (1996) LTD (CA No. 12 of 2008). The purposive approach has been used in several cases. In the
case of the SUSSEX v PEERAGE (1844) 8 ER 1034 at 1057, it was held that If the words of the statute are in
themselves precise and unambiguous, then no more can be necessary than to expound those words in their natural and
ordinary sense. The words themselves alone do in such case best declare the intention of the law giver but if any doubt arises
from the terms employed by the legislature, it has always been held a safe means of collecting the intention to call in aid the
grounds and cause of enacting the statute and to have recourse to the preamble which according to Dire CJ is a key to open
the minds of the makers of the Act and the mischiefs they intend to redress.
Lord Griffiths in the case of Pepper V. Hart [1993] 1 All ER 42 at pg 50, also held that The days have long passed
when the courts adopted a strict constructionist view of interpretation which required them to adopt a literal meaning of the
language. The court must adopt a purposive approach which seeks to give effect to the true purpose of the legislation and are
prepared to look at much extraneous material that bears on the background against which the legislation was enacted.
Justice Hill stated in 2001 that the following principles could be extracted from the Cooper Brookes case as a guide
to the present judicial approach to the interpretation of taxation statutes:
i)

The fundamental rule of interpretation is to ascertain what Parliament intended as expressed in the words

it has used.
ii) Context is vital. Sections are not to be construed in isolation.
iii) Where the language of a statute is clear and unambiguous and consistent with context it must be given its
ordinary and grammatical meaning, even if the result is inconvenient.
iv) Where two constructions are open the court will prefer the construction that avoids inconvenience or
injustice.
v) Where the literal meaning of words is to be departed from it must be clear that that literal meaning does
not give effect to the intention of the legislature and that a departure from the literal meaning will achieve
that intention.
vi) The literal meaning will be departed from where it gives rise to an operation that is capricious or
irrational.
Justice Hill explained that there is no doubt that the task of a judge in interpreting any statute is to endeavour to
ascertain the meaning of the words used. Often this will not be a problem as the words are clear and the statute
will mean what it says, but words are capable of ambiguity.40 When ambiguity arises the task is to ascertain the
meaning of the words as Parliament intended them to be read, and that meaning is ordinarily to be found in the
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actual words used. Justice Hill considered that it is the context in which the words appear which is critical to
resolving any ambiguity.
However, the following general principles are now used to guide courts in interpreting tax statutes; (Lecture
notes-Musa Modoi)
i) The tax must be expressly imposed upon the subject, by clear words of the statutes. In taxing a subject, it
is important to show that clear powers to tax were granted by the legislature, therefore once there are no
clear words imposing the tax the he/she would not be required to pay tax;
ii) Where the meaning of the tax statute is ambiguous, the tax payer must be given a benefit of doubt.;
iii) There is no equity in taxation. This proposition may therefore operate in favour of the tax payer or against
him.
iv) In a tax statute, specific provisions override inconsistent general provisions unless there is a clear
intention to the contrary;
v) The meaning of words used in the taxing Act is affected by the content in which they appear. Technical
words are generally given their technical meaning and for instance in the case of Meniven (Her Majestys
Inspectors of Taxes) V Westmoreland Investments Limited [2001] UKHL 6, it was held that if words are
used in the commercial context, they must be given commercial meaning. The words in question in this
case were lost and disposal and it was held that they must be interpreted in the commercial sense so as
to establish whether the applicant had in effect paid the disposal within the meaning off the tax Act.
vi) Where words are not used in a technical sense they must be given their natural meaning. The tax payer is
entitled to stand or base upon the literal meaning or construction of statutory provisions even if the result
produced is against the taxing authority. In the case of Rennel v IRC (1963) ALL ER 803, it was held that
in interpreting tax statutes, one has to simply look at the words of the statute and construe them fairly
and reasonably and then the results in a particular case must be accepted whether the tax authority of tax
payer is thereby advantaged;
vii) Where a list of objects with some common dominant features is followed by general words, the general
words will be limited to the items of the same class as those on the general list;
viii)Where one member of the category is expressly mentioned, other members of that category are impliedly
excluded.
In Uganda courts have based on some of these principles while interpreting tax legislation. In the case of Crane
Bank v Uganda Revenue Authority, HCT-00-CC-CA-18-2010, the appellant objected to manner of treatment by
respondent of interest on agricultural loans contenting that interest on loans extend to companies in the business
of processing and exempting fish and coffee was not exempt from tax under the provisions of s.21(1)(u) of ITA,
one of issues of determination of whether the interpretation of the word farming. In his ruling, Kiryabwire J
stated that where the meaning of the term in a statute is ambiguous, the court may resort to the purposive
meaning of the term, in interpretation of the statute and the position of the law is that if any doubt arises from the
words used in the statute, where the literal meaning yields more than one interpretation, the purposive approach
may be used, to determine the intention of the law maker in enacting of the statute and he further referred to
Justice Choudry in the case of UGANDA REVENUE AUTHORITY V. SPEKE HOTEL (1996) LTD (CA No. 12 of
2008).
The need for clear and ambiguous language in all taxing legislation has been emphasised by the courts again and
again, perhaps the best best highly descriptive of words by the relevant principles were those of Rowlatt J
distinguished in Cape Brandy Syndicate v Inland Revenue Comrs ([1921] 1 KB 64 at 71), where he stated that
there is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing
is to be read in, nothing is to be implied. One can only look fairly at the language used.
In conclusion, the last 70 or so years, the interpretation of tax legislation has swung from one extreme to another.
From the Duke of Westminster case in England in the mid 1930s to the highpoint of literalism in the 1970s, the
pendulum generally swung firmly in favour of the taxpayer. From 1980, beginning with the court decision in
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Cooper Brookes, and from 1982 with the House of Lords decision in Ramsay, a more purposive approach can be
seen, where the pendulum has swung more generally in favour of the revenue authorities. This result is not
surprising, since community attitudes have also altered markedly during this period and judges, in their decision
making, whether consciously or not, by and large reflect the community attitudes of the day.

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