TAX APPEALS TRIBUNAL DECISION ON WITHHOLDING TAX ON BUSINESS ASSETS

 

LUWALUWA INVESTMENTS LIMITED VERSUS UGANDA REVENUE AUTHORITY APPLICATION NO. 39 OF 2021

Before Asa Mugenyi, Mr. Siraj Ali, Ms. Christine Katwe in Tax Appeals Tribunal of Uganda at Kampala.

Brief Facts.

Luwaluwa Investments Limited instituted an application challenging a Withholding Tax (WHT) assessment of Shs. 965,700,000 arising from the purchase of mortgaged land. The background of this application is on 8^th October 2020, Luwaluwa (the Applicant) purchased mortgaged properties known as Afrique suite sitting on five plots from Equity Bank on a public auction. On 8^th April 2021, Uganda Revenue Authority (the respondent) issued a WHT assessment of Shs. 965,700,000 on the applicant on ground that it ought to have withheld taxes of 6% on its purchase. The applicant objected and contended that it did not purchase a business asset from the mortgagee and is therefore not required to pay WHT. The Respondent disallowed the objection.

The following issues were agreed upon.

1.   Whether the applicant is liable to pay the WHT assessed?

2.   What remedies are available?

Resolution

The court noted that the dispute related to whether the land purchased by the applicant was a business asset under the Income Tax Act and whether WHT under the Income Tax Act applied to purchase of mortgaged land.

The Income tax under Section 118(b)(2) stipulates that a resident person who purchases a business asset shall withhold tax at a rate specified in Part VIII of the Third schedule which is 6% of the gross payment. Section 2(h) of the Income Tax defines a ‘business asset’ to mean; “an asset which is used or held ready for use in business, and includes any asset held for sale in a business and any asset of a partnership or a company”. The Applicant contended that its purchase of Afrique suites was not that of a business asset under the law.

The court considered the case of Comfort Homes (U) Ltd versus URA Application 66 of 2020 where the Tribunal stated that “Before one is assessed for tax liability, the law imposing the liability should be clear and unequivocal”. Therefore, the Tribunal observed that it must ask itself as to whether the law imposing the duty on the applicant was clear.

The court noted that a reading of S. 118B (2) of the Income Tax shows that for one to withhold tax under the said section, the following conditions must be met;

1)   There must be a resident person.

2)   There must be a purchase.

3)   The Purchase must be of a business or business asset.

4)   The purchase must withhold tax.

Statutory Interpretation.

The court stated that to understand whether the above provisions are clear and applicable to the applicant, one must apply rules of statutory interpretation. It noted that the first rule of statutory interpretation is that words must be given their ordinary and literal meaning and cited the case of Cape Brandy Syndicate v Inland Revenue Commissioners [1920] 1 KB 64 where it was stated in taxing Act, clear words are necessary to tax the subject and that there is no room for intendment.

The Tribunal also asked itself whether the intention of legislature in enacting S. 118B (2) intended to give effect to the Mortgage Act. The Tribunal cited the case of Uganda Revenue Authority v Uganda Tax Operators and Drivers Association Civil Appeal 13 of 2015 where justice Mwonda noted that if court finds that the language of the taxation provision is ambiguous, then court has to adopt the interpretation that favours the tax payer. The Tribunal considered whether there was any ambiguity in S.118B(2). It relied on the case of Lafarge Midwest Inc. versus City of Detroit, State of Michigan Court of Appeal No. 289292 where it was held that a provision of the law is ambiguous only if it is irreconcilably conflicting with another provision or when it is equally susceptible to more than one meaning.

The Tribunal also noted that in the event the provisions of a statute are unclear, it will apply the golden or purposive rules of statutory interpretation to see if it can cure the uncertainty. It stated that the golden rule hinges on two words “ambiguity” and “absurdity”. That a word may be clear or unambiguous but creates an absurd effect.  The Tribunal therefore considered whether section 118B (2) of the Income Tax Act was ambiguous and or absurd?

The Tribunal held that it was not in contention that the applicant was a resident person as defined under section 2(yy), 2(hhh), section 10(a) of the Income Tax Act. That Tribunal then addressed whether there was a purchase and found that the word “purchase” is not defined under the Income tax Act. It again cited the case of Cape Brandy Syndicate v IRA [1920] 1 KB 64 to the effect that where the Act does not define a word or term, then the word must be given its ordinary literal meaning by having recourse to dictionaries. The Tribunal held that the dictionary meaning of the word ‘purchase’ is clear, unambiguous and unequivocal and made a finding that the applicant purchased Afrique suites having acquired its interest through a public auction arising from a mortgage.

Whether the purchase was of a business asset?

The Tribunal then addressed whether the property in question was a business asset? It noted that section 2(h) of the Income Tax Act defines a ‘business asset’ as “an asset which is used or held ready for use in a business, and includes any asset held for sale in a business and any asset of a partnership or company.” It noted that the Applicant’s contention that the clause intended to exclude assets owned by individuals from being classified as a business asset and held that this is an erroneous interpretation of the section. That Section 2(h) uses the word “include” which shows that the assets of a partnership or a company are part of a business asset, but do not define what a business asset is. That section 2(h) merely asserts that an asset of a company or a partnership is a business asset whether or not it is being used in the business, or held ready for use, or is held for sale. That for an individual, not all its assets are business assets, he or she has to show that the asset was used or held for use in the business or held for sale.

The court went ahead to define the word ‘asset’ according to Black’s Law Dictionary 10^th Edition p.140 as an item that is owned and has value. Then the Tribunal noted that whether the Afrique suites was a business asset is determined by what the business it was involved in. The Tribunal made a finding that the asset was a hotel.

The Tribunal considered the Applicant’s contention that the Act should be interested in the business of the seller. The Applicant stated that the asset was not in the balance sheet of Equity bank as an indication that the property was not its asset. That Equity Bank is in the business of providing financial services and is not in hotel business and therefore, it could not be a business asset of it.  The Tribunal held that Section 118B (2) of the Income Act does not state whose business the asset should be assigned to as long as it is a business asset. The Applicant contended that the law should have provided that purchaser must be buying a business asset of a seller and that Section 118B (2) by merely stating that “a resident person who purchases a business asset shall withhold tax” created an ambiguity. The Tribunal observed that in most cases, persons who sell are not the owners. It held that by omitting to state who the business asset belongs to, the provision applies to all purchases irrespective of the owner or seller. The Tribunal further held that a purchase of a business asset not being restricted to an owner, or a seller does not make S. 118B (2) ambiguous is absurd. It simply widens the tax base which the provision applies to. That where an Act is clear, one cannot add into the law or statute what is not there. That one cannot add the word ‘seller’ or ‘owner’ because he does not want it to apply to others.  The Tribunal remarked that;

“There is no room of intendment. The legislature did not wish to restrict the withholding of taxes to only where the business belonged to the seller.”

That the legislature wanted to cover all purchases of business assets. That if the Act had restricted its application of the law to an owner or user of that asset, the application of the law would not only create an ambiguity but also inequities and discrimination in its application. The Tribunal therefore held that the omission to state that the business asset should belong to an owner or seller did not create any ambiguity or absurdity.

Whether the Purchaser should have withheld tax.

The Applicants further contended that section 118B (2) of the Income Tax conflicts with section 117(2)(b) of the same Act. The Court observed that section 117(2)(b) of the Income Tax Act deals with withholding tax on interest paid to banks. The Applicant contended that Equity Bank sold mortgaged properties to recover loan amount and interest obtained under the loan. A resident person is exempted from withholding tax on interest that is paid to a bank. Therefore, the applicant argued that they were exempted under section 117(2)(b) from withholding tax as the bank was recovering the loan and interest.

The Tribunal held that section 117(2)(b) deals with exemption of withholding tax on interest which is business income. Section 118B (2) deals with withholding tax on purchase of property which is property income. That business income and property income are not the same and are treated differently under the Income Tax Act. If one is exempted from business income, it does not mean that it is automatically exempted from property tax.  The Tribunal held that the applicant paid a purchase price for mortgaged properties. It was not payment for an interest under a loan arrangement. That there was nothing to prevent the applicant from withholding tax. There was no evidence that the money recovered from the sale was only used to pay interest of the bank and nothing more.

The Applicant further contended that Equity bank is included on the list of entities that are exempt from payment of Withholding tax under Section 119(5)(f)(ii). The Tribunal observed that section 119 applies to provision of payment of goods or services to Government and other entities who are obliged to withhold tax where the amount exceeds one million. The Tribunal held that the applicant did not avail a list of entities that are exempted from payment of Withholding tax. Without prejudice, s. 119 of the Income Tax applies to payment of goods and services and that Equity Bank was not providing goods and services to the applicant who is not obliged to without under section 119(1). That the business asset or property sold was immovable properties which would not qualify to be considered as goods.

The Tribunal relying on Manilla North Tollways Corporation versus Commissioner of Internal Revenue C-T. A ED No. 812 of 2012, went on to hold that If the Income Tax had intended the exemptions in section 119(5) and section 117(2)(b) would apply to section 118B (2) of the Income Tax would have clearly stated so. That there is no exemption under section 118B (2) of the Income Tax.

That the applicant as purchaser is obliged to withhold tax on purchased business assets. It is not affected whether the property was sold under a mortgage or not. The tribunal commented that in order for a bank (mortgagee) not to be affected by Withholding tax under section 118(B)(2) of the Income Tax, when appraising the values of business assets at the time of mortgaging, the forced sale values should carter for the loan, interest and Withholding Tax. All a purchaser is required to do is withhold a tax of 6% on the purchase payment.

 

Dissenting judgement of Siraj Ali.

Section 118B (2) of the Income Tax Act does not apply to proceeds arising out of the sale of properties by a financial institution under a mortgage. The judge considered section 4 of the Income Tax which stipulates that income tax shall be charged for each year of income and is imposed on every person who has chargeable income, to state that income tax can only be imposed on income. Section 118(B)(2) is a withholding tax. A withholding tax is an income Tax.

For S. 118(B)(2) to apply to the proceeds arising from the sale of property by a financial institution, such proceeds must constitute income in the hands of the financial institution. That in order to determine whether the money paid by the applicant to Equity bank Ltd amounts to income in the hands of the bank, we must look at what a mortgagee is entitled to from proceeds of the sale of the property under a mortgage.

The judge considered provisions of section 31 of the Mortgages Act which stipulates how proceeds from the purchase money received by a mortgagee are applied which includes payment of the principal amount and interest. The judge stated that principal amount does not constitute income in the hands of the financial institution following the sale of property under mortgage for the reason that it is neither a gain nor a profit. That however, interest as defined under section 2(kk) of the Income Tax as “any payment, including a discount or premium, made under a debt obligation which is not return of capital.” constitutes income in the hands of a financial institution.

That however, Section 117(2)(b) of the Income Tax Act exempts financial institutions from withholding tax in respect of interest paid to them with the exception of government securities. Without delving into whether the property sold under the mortgage constitutes a business asset for our purposes of section 118(B)(2), section 117 (2)(b) is in conflict with section 118(B)(2), as one appears to sanction the withholding of tax on payment of interest to a financial institution upon the sale of mortgaged property while the other exempts the withholding tax on payments of interests to financial institutions. The judged stated that it is a well-established principle that where there is conflict between two statutory provisions, one of them a general statement and the other a specific statement, the court will apply the more specific statement as an exception to the more general statement. He quoted an excerpt from Sullivan R, Sullivan & Driedger on Construction if statutes 4^th Edition where it was stated that;

“where two provisions are in conflict and one of them deals specifically with the matter in question while the other is of more general application, the conflict may be avoided by applying the specific provision to the exclusion of the more general one…’’

The judge held that section 117(2)(b) which applies specifically to interest should prevail over section 118(B)(2) which is of general application. The judge concluded that Equity Bank Ltd was not liable to withholding tax on the proceeds arising from the sale of mortgaged properties to the applicant. That the applicant was under no legal duty to withhold tax on the purchase price paid to Equity Bank Ltd.

Commentary on the decision of the Tax Appeals Tribunal.

The majority decision of the Tax Appeals Tribunal that the purchasers of properties sold by banks during foreclosure must withhold tax of 6% on the purchase price and as collecting agents must remit the money to Uganda Revenue Authority. This has the effect of increasing the forced sale value of properties that are subject to foreclosure in order to carter for withholding tax.