Eisner vs. Macomber
This case dealt with the issue “is stock dividends income?” Standard O. C. company of California , which had an authorized share / capital stock of 100 million US dollars , had issued stock amounting to 50 million US dollars , unissued stock of half its unauthorized capital. In its trading account had surplus undivided profits invested in plant , property and other business necessary for the cooperation amounting to 45 million dollars of which 20 million had been earned after 1913 and the balance after that date. To adjust its capitalization , directors resolved to issue additional shares to existing shareholders to constitute stock dividend of 50% of outstanding stock and to account an amount equal to such issue. The new stock was divided among stockholders and upon delivery of receipts , the respondent was asked to pay a tax on the same assessed at the value of the new shares. He paid the tax under protest and sued the commissioner for recovery.
A majority held that value of shares and not income and therefore should not be taxed.
J Bitney observed , “The fundamental relationship of capital to income has been much discussed by economists , the former being likened to the free or land , the lather to the fruit or crop. The former depicted as a reservoir from springs , the lather as outlet streams to be measured by its flow during a period. Income may be described as the gain derived from capital from labour or from both combined provided it is understood to include profits gained through sale/ conversion of capital assets. A stock dividend shows that a company’s accumulated profits have been capitalized instead of being distributed to stockholders or being retained as surplus available for distribution in money or in kind should the opportunity arise. Far from being a realization of profits for the stockholder , it tends to postpone such a realization , in that the fund represented by the new stocks has been transferred to capital and is no longer available for actual distribution. The essential and controlling fact is that stockholders have received nothing out of the company’s assets for separate use and benefit. It should contain every dollar of his original investment together with whatever accumulation resulting from his employment of his business money in the business of the company still remains property of the company.”
Susna Oliver and Brandy dissented
The stockholder received income equal to the value of stock dividends and should therefore be taxed on the same.
Financiers with the aid of lawyers devised long ago two different methods by which a corporation can without increasing its indebtedness keep for corporate purposes accumulated profits and yet in effect distribute these profits amongst its shareholders.
1) The capital stock is increased , the new stock is paid up with accumulated profits and new shares of paid up stock are then distributed among stockholders pro rate as dividends.
2) Arrangements are made for an increase in stock to be offered to stockholders prorate as per and at the same time , payment of cash dividends equal to the amount which the stockholder will be required to pay to the company if he avails himself of the right of the new stock. If stockholders take the new stock , he may endorse the dividends cheque received to the corporation and it thus appears that among financiers and investors , the distribution of the stock by whichever method is called a stock dividend and that the two methods by which accumulated profits are legally retained for corporate purposes and at the same time distributed as dividends are recognized to be equivalent. If stock dividends represents profits are held exempt from taxation , then owners of the most successful businesses in America will be able to escape taxation on a large part of what is actually their income and so far as their profits are represented by stock received as dividends they will pat those taxes not upon their income but only upon the income of their income.
Old Colony Trust Co. Vs. Commissioner
The company paid taxes of some of its director sand the issue was whether payment of taxes of a director was additional compensation and the income to him. It was held to be income and was taxable because it was in consideration of the services of that employee.
Commissioner vs. Glenshaw Glass Co.
The respondent had earned damages which comprised additionally both exemplary damages for fraud and punitive damages represented two thirds and it was held that these were also income because:
-They were an increase in the net worth of the taxpayer
-Money received that represents those profits was clearly taxable just like profits
They had been if they had been earned.
E. A. N Ltd vs. Income Tax Commissioner
The appellant bought a plot for purposes of building a petrol station with a view to distributing petroleum oil products from Caltex under anticipated distributorship products. Distributor rights however refused and the appellant sold the plot at a profit whereupon the Commissioner assessed the profit to tax arguing that they were income to the appellant since it had changed its business for petroleum purposes and was now engaged in trading activity of selling plots for which it was liable to tax on the profits.
The appellant appealed and it was held it be allowed since the profit was not from an adventure in the nature of a business but one from an earlier investment.
Section 4a of the Income Tax Act deals with taxation of income from businesses where it provides that where business is partly in Kenya and partly outside Kenya , its deemed to have accrued in Kenya and though Section 4 does not define business , Section 2 does so and defines business as including any trade , profession , vocational or even manufacture adventure and concern in the nature of trade but does not include employment.
J Ltd vs. Income Tax Department
The appellants company carried on insurance business but also invested in equities and government stock and upon sale of equities and retention of government stock , at a profit , the commissioner assessed a tax on that profit arguing that this was income from a trading activity against which assessment the appellant appealed. It was held that the appeal be dismissed as the appellant had been involved in the trade of buying and selling stocks and shares.
Income Tax Commissioner vs. Laringnatesho Ltd
The respondent taxpayers had been incorporated to carry on a farming business but were allowed under its objects to purchase and sell shares and stock. From 1967 onwards , they sold shares and were not assessed to tax. In 1971 , when the commissioner assessed tax on income , earned on shares in and after 1971 ,the respondent appealed to the local committee contending that first , he was not carrying on business of dealing in shares but was merely realizing its initial investment for which the local committee held in his favour. The commissioner appealed to the High Court which dismissed the appeal arguing that the failure by the commissioner to raise any assessment on such taxation before 1971 raised a presumption that such profits were not chargeable to tax and that onus was on the commissioner to show that purposes for which taxation were carried out had changed before these profits are taxed. The commissioner appealed to the court of appeal which allowed the appeal and held that the High Court ought to have indicated in referring to findings of the local committee whether it agreed with them or not and to have evaluated that evidence and reached its own conclusion and secondly , that once an assessment to income had been made on the taxpayer , the onus of proving it was excessive was placed by the law on the taxpayer who was required if he disputes an assessment to object to the same by a notice in writing. Consequently , these profits were taxable.
Section 8 of the Income Tax Act gives that provision.
Bapoo case
B lived in Tanzania and was declared bankrupt in 1931.He was later discharged in 1941 during this period of bankruptcy , he managed his wife’s business , which had acquired two shipwrecks , which he did in order to recover bad debts owed by owners of the wreck.
After discharge took over , the wires business had also began to deal in second hand machinery. After failing to sell the shipwreck , he broke them up to sell them as scrap metal in which he made some profits. The commissioner assessed the profits made both from the broken up ship and from the hulks that he sold later. He appealed the cost assessment where the high court allowed the appeal on the profits from the sale of the hulks butt affirmed the assessment from the sale of broken up parts of the ship. The commissioner appealed to the court of appeal of East Africa and it was held that the commissioners appeal be allowed because although the single taxation man ordinarily needs not to be a businessman , an earlier case had held that in specified circumstances , a single tax can amount to business in East Africa. It was immaterial that the shipwreck were taken over to liquidate bad debts it being established that the taxation were an operation or a business in carrying out a profit making venture and were therefore taxable.
Income tax v Sidney tatee
The respondent bought a coffee estate , which he found unprofitable , he abandoned it and began a quarry in the same farm. It also became unprofitable and he abandoned it. He subdivided the land , installed sewers and roads and then advertised it for sale. He borrowed money from a bank , which were then used in these later developments. Later he sold plots at a profit and the commissioner assessed the profit to tax arguing he had traded in land and the profits realized were from a business of trading in land. He appealed against the decision and all that he had done was to realize the capital investment which the supreme court agreed with against which the commissioner applied to the court of appeal arguing that tax payers as an investor in coffee estate had upon abandoning that business notionally sold the farm to himself as a trader in land on which grounds he had installed sewer lines and roads upon subdivision and was therefore taxable on profits. It was Held , The respondent merely realizing earlier investment in land which he had failed to recover at earlier attempts at coffee , dairy farming and quarrying therefore not traded in land and profits were not taxable
Sec 4(b) sets out the manner of calculating the tax
Sec 4(c) Taxation of damages and other compensation for loss. The money received under insurance against loss of profits , then Sec 4(c) assess them in parts and such a sum is taxed as income of the year in which it is received. It is only these relating to loss of profits that are taxed
Modern building ltd v Income tax
The appellant awarded by the consent a sum of money as liquidated damages in settlement of all claims in suit for breach of contract on account of having been supplied with a defective machine by supplier. The commissioner assessed the whole sum to tax. On Appeal it was held that only these damages for agreed compensation of a sum had been agreed for unliquidated damages , capital and income and hence the whole sum wasn’t taxable.Sec 4(d) raises the amount put as read with Sec 15(2)a
Sec 4 (d) aims at capturing any income recovered in subsequent years when a reserve or provision to meet any liability has been made if that recovery either releases liability otherwise makes the reserve unnecessary.
Sec 5 Employment incomes
Gains a profit from employment defined in Sec 5(2) to include wages , salaries and several other allowances. The second provision excludes income for subsisting , traveling , entertainment or other allowance that represents solely the reimbursement to a resident of an amount expended by him wholly and exclusively in production of his income from employment
Persons: Any income in respect of any employment or services by him shall be deemed to be derived from Kenya , worldwide income may then be subject to taxation.
Importance of Section 5(2) in excluding reimbursed income in those taxpayers will have used his sum , of money wholly and exclusively for purposes of carrying income from employment that will be taxed.