About SAFLII
Databases
Search
Terms of Use
RSS Feeds
South Africa: Supreme Court of Appeal
SAFLII
>>
Databases
>>
South Africa: Supreme Court of Appeal
>>
2011
>>
[2011] ZASCA 233
|
|
Commissioner for South African Revenue Services v South African Custodial Services (Pty) Ltd (131/2011) [2011] ZASCA 233; 2012 (1) SA 522 (SCA); [2012] 2 All SA 237 (SCA); 74 SATC 61; (30 November 2011)
Links to summary
THE
SUPREME COURT OF APPEAL OF SOUTH AFRICA
JUDGMENT
Case no: 131/2011
In the matter between:
COMMISSIONER FOR SOUTH AFRICAN
REVENUE SERVICE
…..............................................................................
Appellant
and
SOUTH AFRICAN CUSTODIAL SERVICES
(PTY) LTD
…...................
Respondent
Neutral citation:
Commissioner,
South African Revenue Services v South African Custodial Services
(Pty) Ltd
(131/11)
[2011] ZASCA 233
(30 November 2011)
Coram:
Brand, Maya, Cachalia
and Mhlantla JJA and Plasket AJA
Heard:
7 November 2011
Delivered:
30 November 2011
Summary:
Income Tax Act 58 of
1962 – s 79A – finality of assessment – whether
letter from Commissioner a revised assessment
– s 22(2A) –
deductibility of cost of building prison in terms of concession
agreement on land owned by State –
sub-contractor, not
respondent incurring expenses concerning materials and equipment –
cost of building prison not deductible
in terms of s 11(
a
) –
s 11(
bA
) – interest and related fees deductible.
ORDER
On appeal from: the Tax Court,
Pretoria (RD Claasen J sitting as court of appeal in terms of s 83 of
the Income Tax Act 58 of 1962):
1 The appeal is upheld in part.
2 The respondent is directed to pay
the costs of the appellant, including the costs of two counsel.
3 The order of the court below is set
aside and replaced with the following:
‘
The
assessment is referred back to the Commissioner for him to determine
the amount that is deductible from the appellant’s
income in
terms of s 11(
bA
)
of the Income Tax Act 58 of 1962.’
JUDGMENT
PLASKET AJA (BRAND, MAYA, CACHALIA AND
MHLANTLA JJA concurring)
[1] In terms of
s 103(1)
of the
Correctional Services Act 111 of 1998
, the Minister of Correctional
Services may ‘enter into a contract with any party to design,
construct, finance and operate
any prison or part of a prison’.
On 3 August 2000, the respondent, South African Custodial Services
(Louis Trichardt) (Pty)
Ltd (SACS) and the Minister concluded a
concession contract in terms of which SACS would design, construct
and operate a prison
in Louis Trichardt. The duration of the
concession is 25 years. This appeal from the Tax Court, Pretoria (RD
Claasen J) concerns
three issues: the validity of SACS’s
objection to the assessment for the 2002 year of assessment, the
deductibility of the
cost of constructing and equipping the prison
and the deductibility of interest and other costs.
[2] SACS appealed to the court below
in terms of s 83 of the Income Tax Act 58 of 1962 (the Act) against
the disallowance by the
Commissioner for the South African Revenue
Service, the present appellant, (the Commissioner) of its objection
to the assessments
of its tax liability for the 2002, 2003 and 2004
years of assessment. That appeal was successful, the court below
finding that
the assessment for the 2002 year of assessment had not
become final in terms of s 79A of the Act, as had been argued by the
Commissioner,
and that all of the expenditure in issue was
deductible.
[3] In allowing the appeal, the court
below made the following order (by a majority):
‘
1.
The prison constitutes appellant’s trading stock in terms of
section 22(2A) of the Act.
2.
The whole amount of R511 196 332.00 is to be treated as trading stock
and thus deductible.
3.
The section 11(e) depreciation granted to the appellant in its 2002
year of assessment must be reversed as it would give rise
to double
accounting.
4.
All the financial fees and expense and the legal fees are fully
deductible.’
The court below granted leave to
appeal to this court in terms of s 86A of the Act.
The facts
[4] SACS is a joint venture between a
South African company, Kensani Consortium (Pty) Ltd, and the GEO
Group, an American entity
that specialises in the operation of
correctional, detention and health facilities throughout the world.
The concession contract
that SACS concluded with the Minister is a
public private partnership – a PPP – for purposes of the
Treasury Regulations.
[5] The preamble of the concession
contract states that the object of the contract is to give effect to
the Department’s wish
to ‘provide the public with
cost-efficient, effective prison services, and to provide prisoners
with proper care, treatment,
rehabilitation and reformation in
accordance with the provisions of the Correctional Services Acts, No.
8 of 1959 and No. 111 of
1998’.
[6] To this end,
the concession contract provides that SACS would design and construct
the prison and a road
1
on land provided by
the Department.
2
SACS would have the
right to occupy the land for the duration of the concession but would
have ‘no title to, or ownership
interest in, or liens, or
leasehold rights or any other rights in the land’ and the State
would ‘at all times remain
the owner of the land’.
3
Clause 11.6
provides:
‘
At
the end of the Contract Term or at such earlier time as may be
provided herein, the Contractor shall hand over the Site to the
Department free of charges, liens, claims or encumbrances whatsoever,
and free of liabilities, except for those in respect of which
the
Department has given its written approval.’
[7] Clause 7 deals with
sub-contracting. Clause 7.1 provides:
‘
The
Contractor shall not at any time permit any of its obligations under
the Contract to be performed or undertaken by any parties
(other than
the Operating Sub-contractor or the Construction Sub-contractor
except where the primary responsibility for the obligations
which are
sub-contracted remains with the Operating Sub-contractors or the
Construction Sub-contractor (as the case may be) in
terms of the
Sub-Contracts and where any such sub-contractors have entered into
binding contractual arrangements which enable the
Contractor to
perform all its obligations to the Department under this Contract)
without the prior written consent of the Department,
which consent
shall not be unreasonably withheld or delayed.’
Clause 7.3 provides that SACS is
‘directly responsible for the management and supervision of
approved Sub-contractors’.
[8] SACS entered
into a sub-contract (the construction contract) with CGM (Louis
Trichardt) Joint Venture (CGM) in terms of which
the latter was
appointed to ‘undertake the design, construction and
commissioning of the prison at Louis Trichardt in accordance
with the
provisions of this contract’.
4
CGM was required,
in terms of clause 2.6, to ‘design, construct and commission
the prison in discharge of part of [SACS’s]
obligation for the
design, construction and commissioning of the prison in accordance
with the terms and subject to the conditions
in this contract’.
In terms of clause 3.1 of the construction contract all the terms and
conditions of the concession contract
‘applicable to the
design, construction, installation and commissioning of the prison
are incorporated into and form part
of’ the construction
contract.
[9] Clause 48 of the construction
contract defines the relationship between SACS and CGM as follows (to
the extent relevant for
present purposes):
‘
The
Construction Sub-Contractor shall at all times be an independent
contractor and nothing in the contract shall be construed as
creating
a relationship of employer and employee between the Contractor and
the Construction Sub-Contractor or any of the Construction
Sub-Contractor’s employees.’
[10] In terms of
clause 8.1 CGM was obliged to carry out and complete the works in
accordance with the construction contract. CGM
warranted that ‘the
design and construction of the works will be undertaken with all
reasonable skill and care to be expected
of a qualified and
experienced contractor with experience in the construction of works
of a similar type, nature and complexity
to that of the works’.
5
[11] In terms of clause 8.3.14 CGM
accepted responsibility ‘for the provision of’ and bore
‘all risks in relation
to all goods, materials and labour
necessary for the provision of the works’. Clause 17.1 required
‘materials and goods’
to meet prescribed standards and
CGM undertook in terms of clause 17.4 to provide SACS on request
‘with all the necessary
supporting documentation to prove that
the materials and goods comply with clause 17.1 hereof’.
[12] Clause 36.1 provided for a
contract price of R303 000 000 for ‘the performance
and delivery of the works’.
The term ‘works’ is
defined by clause 1.2.103 to mean ‘all the construction
services and activities associated
with or necessary to provide the
prison’.
[13] In order to finance the project
and to meet its other obligations in terms of the concession
contract, SACS entered into agreements
with BoE Merchant Bank and
First Rand Bank for loans of R384 000 000. These banks required
security which was provided in
the form of guarantees given by the
South African Government and the shareholders of SACS.
[14] The government undertook to
guarantee 80 percent of the loan while the shareholders of SACS
guaranteed the remaining 20 percent.
The GEO Group’s share of
the guarantee was provided by a company in the group, Wackenhut
Corrections Corporation. In terms
of a guarantee and put agreement,
SACS was required to pay Wackenhut what was termed a guarantee fee of
R15 561 131. Later, during
the tendering stage, SACS was required to
pay a bid guarantee fee to its financial advisor, African Merchant
Bank (AMB) of R77
333. The guarantee fees thus totalled R15 638 464.
[15] Kensani was unable to provide a
guarantee in the same way. Instead, it advanced a loan to SACS
equivalent to the liability
guaranteed by Wackenhut. In consideration
for this, SACS agreed to pay Kensani an introduction fee of R47 484
608.
[16] In consideration for the
financial advisory services provided to SACS by AMB, SACS agreed to
pay AMB a financial advisory fee
of R6 209 274, as well as a
margin fee of R2 545 077 in respect of its negotiations for loans
with BoE Merchant Bank and First
Rand Bank.
[17] In addition, SACS was obliged to
pay a commitment fee and an initial fee to BoE Merchant Bank and
First Rand Bank, administration
fees to First Rand Bank and legal
fees to its attorneys, Deneys Reitz. It also incurred interest on the
loan facilities.
[18] Apart from the various fees that
were payable by SACS, it incurred expenses of R228 821 436 in respect
of the building of the
prison and R95 558 256 in respect of
provisioning it, an amount of R324 379 692. The total amount
involved, made up of the construction
and equipping costs and the
financial costs was R464 376 824.
[19] The prison was designed and built
in accordance with the specifications contained in the concession
contract. It had to last
for 50 years, although SACS would only
operate it for 25 years. The prison was brought into use during
February 2002.
[20] SACS entered into three
sub-contracts for the running of the prison. They were with South
African Custodial Management (Pty)
Ltd to provide security,
administration and overall management of the prison, with Kensani
Corrections Management (Pty) Ltd to
provide routine maintenance,
inmate programs and purchasing services and with Royal Food
Correctional Services (Pty) Ltd to provide
food services.
[21] The prison is the infrastructure
of the Department of Correctional Services. SACS occupies it as a
service provider to the
Department. It is managed by a member of
SACS’s staff known as the director. This person’s
appointment, powers and
functions, as well as those of his or her
staff, are regulated by
ss 107
to
110
of the
Correctional Services
Act. The
operation of the prison is supervised by a member of staff
of the Department, termed a controller, whose appointment, powers and
functions are set out in the ss 105 and 106 of the Act. SACS earns
fixed and variable income from its running of the prison in
terms of
the concession contract, the fixed fee income being, for all intents
and purposes, payment for the construction of the
prison. It is
payable over a period of 18 years.
The first issue: the finality of
the 2002 assessment
[22] The Commissioner issued an
assessment to SACS for the 2002 year of assessment that had as its
due date – and hence the
date of assessment – 1 June
2004. On 5 June 2006, SACS wrote to the Commissioner requesting a
reduced assessment in terms
of s 79A of the Act on the basis that
certain expenses that qualified for deduction had not been claimed as
deductions in its tax
returns for the 2001 to 2004 years of
assessment. This letter was served on the Commissioner on 15
September 2006.
[23] By letter dated 11 December 2006,
and headed ‘INCOME TAX: YEARS OF ASSESSMENT 2001 TO 2004’,
the Commissioner stated
that the ‘proposed adjustments’
to his amended tax computation ‘to give effect to the above are
set out below’.
On 4 May 2007, the Commissioner sent a letter
to SACS which was headed ‘INCOME TAX: REVISED ASSESSMENTS FOR
THE YEARS OF
ASSESSMENT 2001 TO 2004’. The letter responded to
a number of issues that had been raised by SACS, such as the
deductibility
of the construction costs of the prison in terms of s
11(a) of the Act, and whether the materials used to build the prison
qualified
as trading stock for purposes of s 22(2A), to name but two.
After having dealt with each issue, the Commissioner stated:
‘
In
the revised assessments below I have added back to taxable income the
R1 719 920 interest claimed as a deduction in the 2001
year on the
basis that the taxpayer had not commenced trading in 2001 and
allowed, under section 11(bA) of the Act, the deduction
claimed in
the 2002 year of R46 819 508.’
[24] Under a heading: ‘Revised
assessments’, the Commissioner stated that the ‘adjustments
to give effect to the
above are set out below’. In respect of
the 2002 year it is indicated in the letter that the assessed loss of
R94 617 364
in the original assessment was reduced to R93 652 364.
The letter concluded with the following:
‘
Tax
assessments will be issued to you in due course.
If
you are not in agreement with the assessments, you have the right to
lodge an objection in terms of section 81 of the Act. The
objection
must be in writing in the prescribed form ADR1 which is available
from any SARS office or can be accessed on the SARS
website . . .
The
objection must be lodged with this office within 30 calender days of
the date of assessment.’
[25] On 14 August 2007 SACS requested
reasons for the revised assessments. It received a response dated 21
August 2007 in which
it was stated:
‘
I
am required, where adequate reasons were not supplied in my letter of
assessment dated 4 May 2007, to explain my decisions. I
am not
required to debate further issues with you or to enter into further
debate on the issues already addressed in my letter.’
The letter continued to say that ‘[m]y
assessment letter to you dated 4 May 2007 sets out the areas of
dispute and the reasons
for the stance taken by me’ and that ‘I
did not revise the assessments for 2001 and 2002 as these had
prescribed in
terms of section 79 of the Act’.
[26] SACS lodged a notice of objection
dated 19 September 2007 in which it described the year of assessment
to which it applied
as ‘2003-2004; alternatively 2002’.
The Commissioner’s response stated inter alia that ‘[t]his
letter should
be read in conjunction with my letter of assessment
dated 4 May 2007 and my letter dated 21 August 2007 providing reasons
for the
assessments’. Later, however, it is stated in relation
to the 2002 assessment:
‘
No
objection to the 2002 assessment was received within the three year
period after the date of assessment. Consequently the 2002
assessment
is final and conclusive.’
[27] Section 79A of the Act provides:
‘
(1)
The Commissioner may, notwithstanding the fact that no objection has
been lodged or appeal noted in terms of the provisions
of Part III of
Chapter III of this Act, reduce an assessment-
(a)
to rectify any processing error made in issuing that assessment; or
(b)
where it is proved to the satisfaction of the Commissioner that in
issuing that assessment any amount which-
(i)
was taken into account by the Commissioner in determining the
taxpayer's liability for tax, should not have been taken into
account; or
(ii)
should have been taken into account in determining the taxpayer's
liability for tax, was not taken into account by the Commissioner:
Provided
that such assessment, wherein the amount was so taken into account or
not taken into account, as contemplated in subparagraph
(i) or (ii),
as the case may be, was issued by the Commissioner based on
information provided in the taxpayer's return for the
current or any
previous year of assessment.
(2)
The Commissioner shall not reduce an assessment under subsection (1)-
(a)
after the expiration of three years from the date of that assessment;
or
(b)
. . .’
[28] It was argued by the Commissioner
that the letter of 4 May 2007 was not a revised assessment and that,
three years after the
date of assessment (1 June 2004), the
assessment for the 2002 year of assessment became final. SACS, on the
other hand, argued
that the letter of 4 May 2007 is indeed a revised
assessment and consequently that the assessment for the 2002 year of
assessment
had not become final.
[29] An assessment
is defined in s 1 of the Act as ‘the determination by the
Commissioner, by way of a notice of assessment
(including a notice of
assessment in electronic form) served in a manner contemplated in
section 106(2) . . . of an amount upon
which any tax leviable under
this Act is chargeable’. In
ITC
1740
6
Galgut DJP held
that in order to fall within this definition, ‘what is required
is at least a purposeful act, one whereby
the document embodying the
mental act is intended to be an assessment’.
[30] On its face, with one exception,
the letter of 4 May 2007 purports to be a determination as envisaged
by the definition: it
calls itself a revised assessment; it responded
to the issues raised by SACS when it requested a reduced assessment
in terms of
s 79A; it spoke, in the body of the document, of the
‘revised assessment below’, in explaining the decisions
encapsulated
in it; and it purported to make an adjustment under a
heading ‘Revised assessment’. It is apparent from these
features
that the letter records a determination.
[31] The only indication that runs
counter to the indications I have listed is the sentence that reads:
‘Tax assessment will
be issued to you in due course.’ It
was conceded by counsel for the Commissioner that if the letter had
not contained this
last sentence the argument that it was not an
assessment would have been closed to him. Counsel for SACS argued
that not too much
must be read into the sentence. It was simply
intended to convey to SACS that, the determination having been made,
the appropriate
computer-generated IT 34 form would in due course be
completed and sent to SACS.
[32] In my view, the overwhelming
impression created by the letter of 4 May 2007 is that it is, indeed,
an assessment: it determines,
in a reasoned manner, the request made
by SACS for a reduced assessment in terms of s 79A. The last
sentence, when viewed in the
context of the letter as a whole, must
therefore be taken to mean no more than an expression of intent on
the part of the Commissioner
to despatch in due course the IT34 form
to formally record the decision that had already been taken.
[33] I accordingly conclude that there
is no merit in the point that the original assessment for the 2002
year of assessment had
become final in terms of s 79A(2) of the Act.
The second issue: the construction
of the prison
[34] SACS argued
that, in the construction of the prison, it carried out a trade; the
materials that were used to construct the
prison constituted its
trading stock; those materials, when they were built into the prison,
acceded to the prison – and
hence became the property of the
State – and that, as a result, the materials were deemed to be
trading stock held and not
disposed of by it in terms of s 22(2A) of
the Act; and that consequently, being expenditure actually incurred,
and not being of
a capital nature, the cost of the construction of
the prison was a permissible deduction from SACS’s income in
terms of s
11(
a
)
of the Act.
[35] Section 1 defines the term
'trade' to include ‘every profession, trade, business,
employment, calling, occupation or
venture . . .’. The same
section defines the term ‘trading stock’ (at the time
applicable to this matter) to
include anything:
‘
(i)
produced, manufactured, constructed, assembled, purchased or in any
other manner acquired by a taxpayer for the purposes of
manufacture,
sale or exchange by him or on his behalf; or
(ii)
the proceeds from the disposal of which forms or will form part of
his gross income . . .’
[36] Section 22 of the Act concerns
itself with amounts to be taken into account in respect of values of
trading stocks. It provides:
‘
(1)
The amount which shall, in the determination of the taxable income
derived by any person during any year of assessment from
carrying on
any trade (other than farming), be taken into account in respect of
the value of any trading stock held and not disposed
of by him at the
end of such year of assessment, shall be-
(a)
in the case of trading stock other than trading stock contemplated in
paragraph (b), the cost price to such person of such trading
stock,
less such amount as the Commissioner may think just and reasonable as
representing the amount by which the value of such
trading stock, not
being shares held by any company in any other company, has been
diminished by reason of damage, deterioration,
change of fashion,
decrease in the market value or for any other reason satisfactory to
the Commissioner; and
(b)
. . .
(1A)
. . .
(2)
The amounts which shall in the determination of the taxable income
derived by any person during any year of assessment from
carrying on
any trade (other than farming), be taken into account in respect of
the value of any trading stock held and not disposed
of by him at the
beginning of any year of assessment, shall-
(a)
if such trading stock formed part of the trading stock of such person
at the end of the immediately preceding year of assessment
be the
amount which was, in the determination of the taxable income of such
person for such preceding year of assessment, taken
into account in
respect of the value of such trading stock at the end of such
preceding year of assessment; or
(b)
if such trading stock did not form part of the trading stock of such
person at the end of the immediately preceding year of
assessment, be
the cost price to such person of such trading stock.
(2A)
(a) Where any person carries on any construction, building,
engineering or other trade in the course of which improvements
are
effected by him to fixed property owned by any other person, any such
improvements effected by him and any materials delivered
by him to
such fixed property which are no longer owned by him shall, until the
contract under which such improvements are effected
has been
completed, be deemed for the purposes of this section to be trading
stock held and not disposed of by him.
(b)
For the purposes of paragraph (a), a contract shall be deemed to have
been completed when the taxpayer has carried out all the
obligations
imposed upon him under the contract and has become entitled to claim
payment of all amounts due to him under the contract.’
[37] Section 11(
a
)
provides that, for ‘the purpose of determining the taxable
income derived by any person from carrying on any trade, there
shall
be allowed as deductions from the income of such person so derived .
. . expenditure and losses actually incurred in the
production of the
income, provided such expenditure and losses are not of a capital
nature’.
[38] It is not
necessary to determine whether the expenditure incurred by SACS for
the construction of the prison was expenditure
of a capital nature
for purposes of s 11(
a
).
7
This issue is not
relevant because the case turns instead on s 22, and particularly s
22(2A) of the Act.
[39] In
Richards
Bay Iron and Titanium (Pty) Ltd & another v Commissioner for
Inland Revenue
,
8
Marais JA dealt
with the purpose and function of s 22. He stated:
9
‘
The
rationale for the existence of these provisions is neither far to
seek nor difficult to comprehend. The South African system
of
taxation of income entails determining what the taxpayer's gross
income was, subtracting from it any income which is exempt
from tax,
subtracting from the resultant income any deductions allowed by the
Act, and thereby arriving at the taxable income.
It is on the latter
income that tax is levied. The concepts involved are defined in the
Act.
Commissioner
for Inland Revenue v Nemojim (Pty) Ltd
1983
(4) SA 935
(A) at 946G-H. Where a taxpayer is carrying on a trade,
any expenditure incurred by him in the acquisition of trading stock
is
deductible in terms of s 11(
a
)
of the Act because it is expenditure incurred in the production of
income, and it is not of a capital nature. Income generated
by the
sale of such stock is of course part of the trader's gross income.
Where in his first year of trading a trader has bought,
and
thereafter sold, all the stock which he acquired during that year, no
problem arises. There will be a perfect correlation between
the
trading income earned and the expenditure incurred in that particular
year in purchasing and selling the stocks sold, and the
difference
between the two sums will give a true picture of the result of the
year's trading. There will be no stock on hand at
the close of the
year of which account need be taken. Contrast with that situation a
situation in which the trader, having sold
all the stock acquired
earlier during that year at a substantial profit, purchases large
quantities of stock just prior to the
close of his tax and trading
year. If he were permitted to deduct the cost of purchasing that
stock from the income generated by
his sales, without acknowledging
the benefit of the stock acquired, he would be escaping taxation in
that year on income which
otherwise would have been taxable by the
simple expedient of converting it into trading stock of the same
value. That process could
be repeated every year
ad
infinitum
.
It is true that there would ultimately have to be a day of reckoning
when trading finally ceases, but the fact remains that the
taxpayer
will have been enabled to avoid liability for tax until that point is
reached. Where the trader is an individual who is
subject to rising
marginal tax rates as his trading profit increases, he would be
enabled to so regulate his apparent profit that
he immunised himself
from them indefinitely.’
[40] Later in the
judgment Marais JA stated that there was no reason to doubt ‘that
it was for these reasons that the South
African legislation too
requires opening and closing trading stock to be taken into account
when determining taxable income derived
from carrying on any trade in
any year of assessment’.
10
[41] The crisp
issue to be decided is whether SACS’s activities fall within
the terms of s 22(2A). It is convenient to dispose
of a preliminary
argument at the outset. It was argued on behalf of SACS – and
the court below found this to be the case
– that the section
deems what may not be trading stock to be trading stock and in this
sense ‘overrides’ s 11(
a
).
I am of the view that this interpretation is not correct when
consideration is given to the purpose of the section. It is necessary
to deem materials to be trading stock for purposes of the benefit
provided by the section because, having acceded to the land upon
which they have been built, the materials in question ceased to be
owned by the person who had acquired them. The trading stock
is
deemed to have been ‘held and not disposed of’ by the
person who had acquired it for purposes of effecting improvements
to
the fixed property of another: the deeming provision qualifies this
phrase and not the term trading stock. It does not ‘override’
s 11(
a
)
by deeming expenditure of a capital nature to be expenditure of a
revenue nature.
[42] The question
to be answered is whether SACS ever held trading stock in the form of
materials and equipment that were built
into the prison or, put
slightly differently, did it ever effect improvements to the fixed
property of the State by delivering
materials and equipment to that
property which it then built into the prison, thus losing ownership
of the materials and equipment.
11
The court below
held that it did, because CGM, its sub-contractor, was its agent.
Claasen J dealt with this issue thus:
‘
The
second question is the submission by the Respondent that because it
operated through sub-contractors it was itself not really
trading
as
such and therefore could not become a
trader
as
per the definition thereof in the Act. There is no merit in this
argument either: “
Qui
facit per alium, facit per se
.”
This principle is part of our law. It simply means that he who acts
through agents, acts himself. It is thus clear that
whatever the
Applicant really is and however it might have operated whatever it
did, it did by and through itself. Therefore all
the definitions
regarding trader and trading stock, etc. must be viewed in the light
that they apply to the Appellant directly
and not to any of its
sub-contractors.’
[43] In order to determine whether the
court below was correct, it is necessary to have regard to the
essential features of the
construction contract between SACS and CGM.
In terms of the construction contract, CGM undertook to build and
equip a prison –
to perform ‘all the construction
services and activities associated with or necessary to provide the
prison’ –
on land owned by the State, for which SACS
undertook to pay a set price. The relationship between SACS and CGM
was expressly stated
not to be an employment relationship. Although
not expressly stated, it is evident that CGM was not SACS’s
agent either.
It acted as an independent contractor and it gave a
range of warranties as to the quality of its work and of the
materials that
it was to use that are incompatible with a
relationship of principal and agent. It stood in relation to SACS as
any construction
company would in relation to a client for whom it
had undertaken to construct a building. In terms of clause 8.3.14,
CGM undertook
to provide ‘all goods, materials and labour
necessary for the provision of the works’. From this it can be
concluded
that SACS never provided the materials or the equipment
that were built into the prison, and never owned them at any stage.
CGM
did.
[44] Reliance was
placed by counsel for SACS on
Timberfellers
(Pty) Ltd v Commissioner for Inland Revenue
12
as support for the
proposition that SACS was entitled to the benefits of the
deductibility of the cost of the trading stock acquired
by CGM and
built into the prison because it had built the prison through the
agency of CGM. The facts of
Timberfellers
distinguish it from
this case. In it, debts due to Timberfellers were collected by two
agents, its attorneys and its accountant.
In this case, as I have
shown, CGM was not an agent of SACS when it built the prison and the
materials that it built into the prison
were never the property of
SACS. While the ‘ordinary rule that
qui
facit per alium facit per se
’
13
was clearly
applicable to Timberfellers on the facts of that case, it is as
clearly not applicable to SACS on the facts of this
case.
[45] From the above, I conclude that
SACS does not fall within the parameters of s 22(2A). It never
carried on ‘any construction,
building, engineering or other
trade in the course of which improvements’ were effected by it
to the fixed property of the
State. As it never effected any
improvements and never delivered materials to the State’s fixed
property, it never held any
trading stock for purposes of the section
that could be deemed to be trading stock that was held and not
disposed of by it. It
seems to me that CGM would have been entitled
to a deduction in terms of s 22(2A) because its activities appear to
fall squarely
within the terms of the section and to correspond to
the purpose of the section.
[46] I conclude
accordingly, that SACS is not entitled to the deduction contended for
by it in terms of s 22(2A), read with s 11(
a
).
The Commissioner’s appeal must succeed to this extent.
The third issue: the deductibility
of the various fees
[47] In order to
bid for the tender and to raise the loans that it required to finance
the construction of the prison, SACS incurred
a number of fees
payable to various parties. The individual fees, their purpose and
the parties to whom they were paid have been
set out above. SACS also
incurred interest on its loans. It claims to be entitled to a
deduction in respect of the various fees
and the interest in terms of
s 11(
bA
)
of the Act.
[48] Section 11(
bA
) provides:
‘
For
the purpose of determining the taxable income derived by any person
from carrying on any trade, there shall be allowed as deductions
from
the income of such person so derived –
.
. .
(bA)
any interest (including related finance charges) which is not
otherwise allowable as a deduction under this Act, which has
been
actually incurred by the taxpayer on any loan, advance or credit
utilized by him for the acquisition, installation, erection
or
construction of any machinery, plant, building, or any improvements
to a building . . . to be used by him for the purposes of
his trade,
and which has been so incurred in respect of a period prior to such
machinery, plant, building, improvements . . . being
brought into use
for the purposes of the taxpayer's trade, such deduction to be
allowed in the year of assessment during which
such machinery, plant,
building, improvements . . . is or are brought into use for the said
purposes.’
[49] The interest
that SACS has incurred is, in my view, deductible in terms of s
11(
bA
):
it has been ‘actually incurred’ by SACS on its loans from
BoE Merchant Bank and First Rand Bank to pay CGM for the
construction
of the prison. I am also of the view that the various fees are
deductible in terms of s 11(
bA
):
because of their close connection to the obtaining of the loans and
the furtherance of SACS’s project, they qualify as
‘related
finance charges’ for purposes of the section.
[50] Consequently,
SACS succeeds on this aspect. I consider it necessary, however, to
refer the matter back to the Commissioner
for a decision to be taken
as to the precise quantum of the deduction in the light of the
principle set out in
Caltex
Oil (SA) Ltd v Secretary for Inland Revenue
14
that the interest
and fees had to have been actually incurred during the year of
assessment in which the deduction was sought.
Costs
[51] In the court
below, no costs order was made because, in terms of s 83(17)(
a
)
of the Act, the Commissioner’s opposition was not unreasonable.
Even though the order of the court below will be set aside
and
replaced with an order that reflects only partial success for SACS,
there remains no need to make a costs order: the Commissioner’s
opposition to the s 11(
bA
)
issue was not unreasonable and SACS’s unsuccessful appeal in
respect of the s 22(2A) issue was not frivolous (in terms of
s
83(17)(
b
)
of the Act). In this court, different considerations apply. The
Commissioner was substantially successful and is entitled to the
costs of the appeal.
The order
[52] The following order is made:
1 The appeal is upheld in part.
2 The respondent is directed to pay
the costs of the appellant, including the costs of two counsel.
3 The order of the court below is set
aside and replaced with the following:
‘
The
assessment is referred back to the Commissioner for him to determine
the amount that is deductible from the appellant’s
income in
terms of s 11(
bA
)
of the Income Tax Act 58 of 1962.’
____________________
C Plasket
Acting Judge of Appeal
APPEARANCES
APPELLANT P Solomon SC and J Boltar
Instructed by
The State Attorney
Bloemfontein
RESPONDENT TS Emslie SC
Instructed by
Bowman Gilfillan Inc
Johannesburg
Symington and De Kock
Bloemfontein
1
Clause
13.1.
2
Clause
11.1.
3
Clause
11.2.
4
Clause
2.5.
5
Clause
8.3.4. It is but one of a number of warranties given by CGM.
6
65
SATC 98
at 104E-F.
7
As
to the method of determining whether expenditure is of a capital or
revenue nature, see
New
State Areas Ltd v Commissioner for Inland Revenue
1946 AD 610
at
627;
Commissioner,
South African Revenue Service v BP South Africa (Pty) Ltd
2006 (5) SA 559
(SCA) para 23.
8
Richards
Bay Iron and Titanium (Pty) Ltd & another v Commissioner for
Inland Revenue
[1995] ZASCA 81
;
1996
(1) SA 311
(A).
9
At
316F-317C.
10
At
318C.
11
It
is not necessary to deal with the definition of trading stock
although it may be accepted that the materials that were used
to
build the prison were trading stock. As for the interpretation of
the term trading stock, see
De
Beers Holdings (Pty) Ltd v Commissioner for Inland Revenue
1986 (1) SA 8
(A)
at 32E-33C;
Richards
Bay Iron and Titanium (Pty) Ltd & another v Commissioner for
Inland Revenue
(note
8) at 324H-325F.
12
Timberfellers
(Pty) Ltd v Commissioner for Inland Revenue
59
SATC 155.
13
At
163.
14
Caltex
Oil (SA) Ltd v Secretary for Inland Revenue
1975
(1) SA 365
(A) at 374B-F.