MZUMBE UNIVERSITY

FACULTY OF LAW

NAME: IBRAHIM J MWAKALINGA

REG NO: 14304047/T.19

CLASS: LLB III

SUBJECT: TAX LAW

CODE: LAW 324

TASK: INDIVIDUAL ASSIGNMENT

LECTURE: DR. MASSAWE

SUBMISSION DATE: 03/01/2022

QUESTION:

It is a trite constitutional principle that no any income shall be subjected to tax except where the
law so provides. With regard to income from trade, it has been an intricate exercise for the tax
authority to define trade for the purpose of determining taxable income. It is suffice to add that
the definition of trade envisaged under the statutory law has not been very helpful. Consequently,
what constitutes a trade has been reviewed numerous times by courts resulting to criteria known
as the badges of trade which are used to determine taxable income from trade. Discuss.
 WORK OUTLINE

SCOPE OF THE QUESTION

INTRODUCTION

 Definition of key terms

MAIN DISCUSSION

 Discussion on principles of badges of trade

CONCLUSION

REFERENCES
SCOPE OF THE QUESTION

The question requires to discuss the concept of trade in relation to its income in term of
calculating the taxable income from trade by regarding the provision of the laws and other
authorities relating to income from trade for the purpose of taxation, also discussing the Courts’
views in categorizing the income from trade as so called badges of trade and how they determine
the income from trade for the purpose of taxation, as it is clear that the court has gone viral on
discussing and deciding various cases in order and for the purpose of taxation adducing
principles or rules to be considered when calculating income from trade.

INTRODUCTION

Tanzania had a taxation system according to modern principles since the turn of the century. It
was introduced by the colonial European powers which took charge of the administration of the
territory. Income taxation was first introduced by the British in 1940. The first Income Tax
Legislation was based on a model Colonial Income Tax Ordinance which was essentially a
simplified version of the United Kingdom Tax Legislation as it existed in about 1920. Under the
British Income Taxation was primarily intended for the European portion of the population. The
Africans were taxed through import and excise duties mainly because of their low income and
literacy levels1.

In modern times the theories and functions of taxation have been widely and broadly discussed.
It is argued that it is impossible to regard taxes as merely a means of obtaining revenue since it
may and is often used for more specific purposes such as discouraging the use of alcohol
purchase of cigarettes, or as an inducement to production for the market as opposed to
subsistence2. It is now clearly that even the Constitution of United Republic of Tanzania provides
for payment of tax as stipulated under Article 138(1) 3 it provides that no tax of any kind shall be
imposed save in accordance with the law enacted by parliament or pursuant to a procedure
lawfully prescribed and having force of law enacted by parliament. That as the mother law
guides how people should pay and by regarding the provision of the laws enacted4.

1
Luoga F.D.A.,(2007). A source book of income tax law in Tanzania, Dar es salaam university press: Dar es salaam
2
Ibid
3
The Constitution of the United Republic of Tanzania, 1977 (as amended time to time)
4
Supra note 1
The concept of trade
The Income Tax Act5 has not provided directly the definition of “trade”, but it should be
understood under section 3 where it is relevant as the term “business” to incorporate Trade, or
has been conceptualized to mean trade. Apart from the statutory definition of trade which is in
one way or another insufficient, there are other various areas that have attempted to define the
same in different ways; different writers and literatures which have covered this area. Trade has
been simply defined to mean the act of buying and selling goods, service or products6.
Badges of Trade
Different authors have been covered this concept in their views on the meaning of badges of
trade. One Baraka Saiteu in his book, defined Badges of Trade as different rules or principles
developed through case law which assist the tax authorities or courts or other stakeholders to
know whether trading has taken place or not in a particular transaction for the purpose of tax
liability.7 Badges of trade are the principles developed by the Court of law in order to determine
the income from the trade for the purpose of taxation, in a manner that a person will be required
to pay tax on the income from trade by considering and taking in regard the criteria and methods
imposed by the court for one to be taxed his or her income from trade8.
It is clear from the significant amount of case law on this subject that a decision on whether there
is a business activity is often not clear. In fact, the courts are of the opinion that it is important to
look at the whole picture rather than looking at each ‘badge’ in isolation or even relying too
heavily on the badges of trade at all. In some cases, taxpayers will seek to argue that their hobby
is actually a trade in order to benefit from certain tax reliefs, usually related to utilizing a trading
loss9. Thus it is so important to know that the income from trade has to be looked into various
aspects in order the taxpayers to have equal and fair taxation, this shall be taken in consideration
as the matter of gains and profit from a certain business10.

MAIN DISCUSSION

5
Cap 332 [R.E 2019]
6
Black's Law Dictionary, Eighth Ed. (2004)
7
Saiteu, B. (2017). Tax law and practice in Tanzania, Delah educational publisher: Dar es salaam, pp. 123
8
Ibid
9
Retrieved from https://www.kpsimpson.co.uk/what-are-the-badges-of-trade/ accessed on 31st December, 2021 at
11:23 AM
10
Makinyika, F. D. A. L. (2000). A source book of income tax law in Tanzania, 1st ed, Dar es salaam university
press: Dar es salaam
The court has developed what is so called badges of trade in order to distinguish between
ordinary income from the business or trade and capital gains. This is a collection of principles
established by case law to determine whether a person is trading. If so, he or she is taxed under
different rules from other persons who are not traders, although these badges of trade are not
actual and conclusive evidence that trade has taken place but they are guides in assessing
whether a particular transaction amount to trade or onto for the purpose of taxation 11. The
followings hereunder are the principles or rules developed by Courts of law when deciding
different cases before it as the tests, in order to determine the income from the trade for the
purpose of taxation.
The Subject matter of realization

The court in this test is looking on the subject matter of realization or the property held by the tax
payer if is capable of being held for self-enjoyment or not. While almost any form of property
can be acquired to be deal in, those forms of property, such as commodities or manufactured
articles which are normally the subject of trading is only very exceptionally the subject of
investment12. This can be vivid explained in the decision of the case of GRAINGER & SONS
VS. GOUGH13 where in this case Lord Davey was on the view that “Trade in its largest sense
is the business of selling, with a view to profit, goods which the trader has either manufactured
or himself purchased.” This means that trade has a wide perspective to look onto it as it covers a
wider area in term of business of selling, thus it is the duty of the authority to discover and
determine the certain business conducted by a person on the profits and gains on whether the
trader has been purchased those goods for which purpose.

The Court further, in the case of MARSON V MORTON14, in this case there was a land which
was purchased with the intension to hold it for investment. The land generated no income
however, it did have planning permission. Latter the land was sold following an unsolicited
offer. As the transaction was far removed from the taxpayer’s normal activity and was similar to
an investment, it was not a trading profit. This is so important to say a property which does not
yield to its owner an income or personal enjoyment merely by virtue of its ownership is more

11
Saiteu, B. (2017). Tax law and practice in Tanzania, Delah educational publisher: Dar es salaam,
12
Supra note 10
13
(1896) 3 RTC 462
14
[1986] 1 WLR 1343.
likely to have been acquired with the object of a deal than property does15. As it was so special in
a case of MARTIN VS LOWRY16 an Agricultural machinery merchant purchased from the
Government its entire stock of aircraft linen amounting to almost fourth five million yards. He
had hoped to sell the linen to manufactures but instead was forced to sell it through an extensive
retail operation direct to the public, where he made a profit of almost Sterling Pound two million.
It was held to be trading activity which should be calculated to income from business for the
purpose of taxation17. And this is so reflected in the Income Tax Act under section 36 18 that “A
person's gain from the realization of an asset or liability is the amount by which the sum of the
incomings for the asset or liability exceeds the cost of the asset or liability at the time of
realization”.

The Frequency or Number of Similar Transactions by the Same Person

As the tax payer performs more transaction frequently as greater the presumption of being
trading is being expected from him or her. The Court has been relied in this notion and trying to
evaluate different circumstances in which this principle can be applied mutatis mutandis, as it
was held in the case of H. MOHMED & COMPANY VS COMMISSIONER OF INCOME
TAX19 that, “trading implies some continuity and repeated acts of buying and selling in same or
other lines of business, However, frequency of similar transactions is simply a presumption of
trading. So even where there is only a single transaction that is “an isolated transaction” one
may still be trading”. Therefore it should be understood that not only repetition of transaction
makes trading but it is so considered because it is impossible for a person to have frequency
transaction with no profit20.
This was so emphasized in the case of PICKFORD V QUIRKE21, the appellant in this case was
involved in four isolated transactions which provided him a big profit. Taken separately each
transaction could be said to be of a capital nature, but when examined together they formed a
pattern of trading; Rowlatt J in his views contended that “Now of course it is very well known
that one transaction of buying and selling a property does not make a man a trader, but if that is

15
Supra note 10
16
(1927) AC 312
17
Supra note 11
18
CAP 332 R.E 2019
19
(1973) 1 EATC 65
20
Retrieved from https://indiankanoon.org/doc/1549560/ accessed on 31st December, 2021 at 14:21 PM
21
CA 1927, 13 TC 251
repeated and becomes systematic then he becomes a trader and the profits of the transaction, not
taxable so long as they remain isolated, become taxable as item in trade as a whole, setting losses
against profits, of course and combining them all into one trade”. Therefore this test is so
important by looking onto the repetition of transaction made by a trader in order to determine
whether the calculation of income tax should lie on which category of income tax22.

Profit seeking motive

The motive of a person can be evidently from his testimony or his display that a certain property
or transaction is for trade purpose or not, Motive is relevant in such cases that can be inferred
from surrounding circumstances in the absence of direct evidence of the seller’s intentions and
even, if necessary, in the face of his own evidence. The Court has tried to draw the test in this
circumstance when appears on identifying the motive of a person in a certain property or
transaction as it is evidently in a case of COMMISSIONER OF INTERNAL REVENUE VS.
FRASER23, whereby in this case the transaction was one of purchase and resale of whisky, the
court observed that goods were purchased with a clear intention of reselling at a profit hence the
transaction constituted trading and proceeds thereof income obtained was liable to calculation of
income tax24.

Also in a case of SALT V CHAMBERLAIN25, a research consultant made a loss on the Stock
Exchange after trying to forecast the market. The loss was made after several years and over 200
transactions. This was not seen as trade and capital in nature. It was concluded that share trading
by a private individual can never have the badges of trade pinned to them. These transactions are
subject to capital gains tax. However, the profit motive is not a necessary requirement in this test;
which has to be observed is only an indication of trading. Businessmen always contemplate a
range of alternative possibilities in respect to the purchase of an asset, including the sale thereof
if other considerations do not materialize or considered26.

22
Kitime, E & Mwamlangala, D. (2017). Laws of Taxation in Tanzania retrieved from
https://t.me/Tanzania_Lawyers_Forum accessed on 31st December, 2021 at 14:49 PM
23
[1942] 24 TC 498
24
Supra note 21
25
[1979] STC 750
26
Saiteu, B. (2017). Tax law and practice in Tanzania : Dar es salaam, Delah educational publisher, p. 106
It was so emphasized before in the case of GRIFFITH VS. HARRISON27 where, a merchant
company having incurred losses changed its business to finance company, there was a single
purchase of shares in another company. A dividend was declared to which the finance company
became entitled and subsequently the shares were sold at a loss after the dividend was declared.
The purpose of the transaction was to enable the finance company to claim a deduction for
setting off the loss on shares against the dividend to be received and thus lessen the tax burden. It
was held that the transaction had a character of trading and thus could not be contended by the
mere fact that it was entered into purely with the fiscal objective of obtaining deduction from the
Revenue by the company as a taxpayer not as a trader. Therefore the court has used to explain
the motive of certain activities in lieu with the nature of the property or transaction made28.

The Nature of asset

The assessment in this test is on asset owned by a person, although asset can be categorized in
term of investment and for trading purpose, then the assessment here will be over trading
purpose for example assets like machinery, plant and others can be relevant as a person can be
using them for trading issues. The Courts have made a critical assessment on this test by
deciding different cases in so called nature of asset for the purpose of taxation as in the case of
WISDOM V CHAMBERLAIN29 the court looked at the principle ‘pride of possession’ assets
that generate no income. A taxpayer purchased two large quantities of silver bullion to counter
the effects of the devaluation of the pound. The purchase was made following advice and was
partly financed by loan. It was held that as the purchase was done on a short term basis in order
to realize profit. There was an adventure in the nature of trade and was therefore assessed as
trading profit30.
The Court was on this position also in the case of MARSON V MORTON31, in this case a land
was purchased with the intension to hold it as an investment, but no income was generated by the
land, however, it did have planning permission. The land was sold later following an unsolicited
offer. It was held that the transaction was far removed from the taxpayer’s normal activity
(potato merchant) and was similar to an investment, and hence it was not a trading profit. The

27
(1963) AC 1
28
Supra note 25
29
(1968) CA 8
30
Supra note 21
31
[1986] 1 WLR 1343
transaction was not an adventure in the nature of a trade 32. Thus although courts are in this
position but this principle looks at the asset, but problems arise when assets are bought either as
an investment that has the ability to generate income thus why it is difficult to determine the
position of an asset in this test33. The Tanzania’s laws specifically under section 38 34 which
provides for income from an asset as describing that it should be of altering or decreasing the
value of an asset.

Changes of the asset

An asset can switch on its use or can be modified as a owner of a certain asset either for
investment or whatever can modify it to trading purpose, hence it is so important for those
changes to be taken in consideration so as such asset for the purpose of taxation to be in a
calculation of income tax as a trading tool. It was so observed in the case of CAPE BRANDY
SYNDICATE V COMMISSIONER OF INTERNAL REVENUE 35, whereby in this case
members of a wine syndicate joined in a separate syndicate to purchase brandy from South
Africa. Some was shipped to the East with the remainder being sent to London to be blended
with French brandy, re-casked and sold at a profit. The taxpayer tried to argue that the
transaction was of a capital nature from the sale of an investment. It was held that a trade or
business was carried on and was assessable as a trading profit, as there was a purchase and
transfer of a brandy in different areas for gaining profit.
Therefore this test in the other hand is called supplementary work and marketing, this provides
that if any supplementary work is done in respect of the asset such as modifications, repairing of
an asset, advertising, there is an assumption that all these supplementary work are to make the
asset more marketable and therefore the transaction to be concluded in respect of the asset may
attract tax liability, since all these activities suggest the existence of trading activity 36. The
Income Tax Act reflects this test under section 37(1) b)37 that the cost of an asset of a person is
the sum of includes the expenditures incurred from improvement of assets which should be
exempted from income tax from business.
32
Kitime, E & Mwamlangala, D. (2017). Laws of Taxation in Tanzania retrieved from
https://t.me/Tanzania_Lawyers_Forum accessed on 31st December, 2021at 15:20 PM
33
Ibid
34
CAP 332 [R.E 2019]
35
[1921] 2 KB 403
36
Saiteu, B. (2017). Tax law and practice in Tanzania : Dar es salaam, Delah educational publisher
37
CAP 332 [R.E 2019]
The way a sale was carried out
It is clear that the guide of the law is always on a pointer of trading for profit if a transaction that
follows the principle of an ‘undisputed trade’. This was so discussed in the case of CIR V
LIVINGSTON AND OTHERS38, which involved three unconnected individuals who together,
they bought a cargo vessel. The vessel was converted into a steam drifter and sold for a profit.
The purchase was the first vessel the three individuals bought later an assessment was raised on
the profit which was upheld as a trading profit. In deciding this case the judge was on the view
that: “I think the test, which must be used to determine whether a venture such as we are now
considering is, or is not, in the nature of “trade”, is whether the operations involved in it are of
the same kind, and carried on in the same way, as those which are characteristic of ordinary
trading in the line of business in which the venture was made.”
Thus, it has to be understood that this test relies on the way a certain sale of an asset or property
was done as whether such purchase was carried in a way of trade or not and it is the duty of the
authority on tax calculating the income of a certain purchase as categorizing the way such
purchase was done in the way that it will bring profit to such person or not39.

Method of Acquisition
An asset acquired at a market could indicate that it has either been purchased for a trade or an
investment, so each case should be treated in its own merits. It is important to look at how an
asset is acquired; as if it is inherited or gifted it is a good indication that a trade is not being
carried, although this is not always the case. The discussion was made in the case of TAYLOR
V GOOD40 where a taxpayer purchased a house with the intention of using it as a family home.
The taxpayer’s partner did not approve the house and refused to move in, which forced the
taxpayer to sell the house immediately. The purchaser genuinely had the intention of not buying
the property for a profit motive. As the sale was a short period of time after purchase it was still
not deemed to be a trade, however, within the decision the judge stated that even if the house was
purchased with no thought of trading, I do not see why an intention to trade could not be formed
later41.

38
11 TC 538
39
Supra note 33
40
CA 1974
41
supra
An asset which is bought or otherwise acquired it may be for will and with no thought of trading
cannot thereby acquire immunity so that, however filled with the desire and intention of trading
the owner may later become, it can never be said that any transaction by him with the property
constitutes trading. For the taxpayer a non-trading inception may be a valuable asset. The
proposition that an initial intention not to trade may be displaced by a subsequent intention, in
the course of the ownership of the property in question, is, I think, sufficiently established.

CONCLUSION
Therefore, many incomes may be treated as income gained or capital earnings depending on the
circumstances. Incomes such as payments of damages, premiums of loans, premiums for
granting leases, government subsidy payments and proceeds of expropriation of property may be
treated as gains of an income or of capital nature depending on the circumstances. As we have
seen that income from business includes gains and profits from a business. The Income Tax Act
imposes income tax from profits and gains of a business in a year of income. Moreover, tax is
imposed on residents’ person income in the year of income irrespective of the source of the
income, but a non-resident person is liable to income tax income only for that part of his income
that has a source in Tanzania.

REFERENCE

The Constitution of United republic of Tanzania of 1977, (as amended time to time)

STATUTES
The Income Tax Act [CAP 332, R.E 2019]

CASE LAWS
Grainger & Sons Vs Gough (1896) 3 RTC 462
Marson V Morton [1986] 1 WLR 1343
Martin Vs Lowry (1927) ACC 312
H. Mohmed & Company Vs Commissioner of Income Tax (1973) 1 EATC 65
Pickford V Quirke Ca 1927, 13 TC 251
Commissioner of Internal Revenue Vs Fraser [1942] 24 TC 498
Salt V Chamberlain [1979] STC 750
Griffith Vs Harrison (1963) AC 1
Wisdom V Chamberlain (1968) CA 8
Cape Brandy Syndicate V Commissioner of Internal Revenue [1921] 2 KB 403
CIR V Livingston and Others 11 TC 538
Taylor V Good CA (1974)

BOOKS
Makinyika, F. D. A. L. (2000). A source book of income tax law in Tanzania, 1 st ed, Dar es
salaam university press: Dar es salaam
Saiteu, B. (2017). Tax law and practice in Tanzania, Delah educational publisher: Dar es salaam,

ONLINE SOURCES
Retrieved from https://indiankanoon.org/doc/1549560/ accessed on 31st December, 2021 at 14:21
PM
Kitime, E & Mwamlangala, D. (2017). Laws of Taxation in Tanzania retrieved from
https://t.me/Tanzania_Lawyers_Forum accessed on 31st December, 2021 at 14:49 PM