Solaglass Finance Company (Pty) Ltd. v Commissioner for Inland Revenue (125/1989) [1990] ZASCA 157; 1991 (2) SA 257 (AD); [1991] 1 All SA 339(A) (30 November 1990)

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[1990] ZASCA 157
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Solaglass Finance Company (Pty) Ltd. v Commissioner for Inland Revenue (125/1989) [1990] ZASCA 157; 1991 (2) SA 257 (AD); [1991] 1 All SA 339(A) (30 November 1990)

LL
Case
No 125/1989
IN THE
SUPREME COURT OF SOUTH AFRICA (APPELLATE DIVISION)
In the
matter between:
SOLAGLASS
FINANCE COMPANY (PTY) LIMITED
Appellant
and
COMMISSIONER
FOR INLAND REVENUE
Respondent
CORAM:
BOTHA,
E M GROSSKOPF JJA, NICHOLAS,
FRIEDMAN
et NIENABER AJJA
HEARD
:
13
SEPTEMBER 1990
DELIVERED
:
30
NOVEMBER 1990
JUDGMENT
BOTHA JA
:-
2.
I
have
had the benefit of reading the judgment of my Brother FRIEDMAN. In
his judgment it is held (a) that the capital which the appellant
lost
as a result of being unable to recover the loans in question was not
fixed, but circulating capital, and therefore of a revenue
nature,
and that the losses in question were accordingly deductible in terms
of section 11(a); and (b) that the losses were not disqualified
from
deduction by reason of the provisions of section 23(g).
I
agree with (a), but
I
respectfully differ on (b). In my judgment
section 23(g) precludes the deductions claimed by the appellant, and
the appeal should
fail on that ground. My reasons for this view
follow.
Section 23(g) does not refer in
terms to "losses", as does section 11(a). Counsel for the
appellant based an argument on
the difference, in this respect,
between the two sections. He said that it showed that the Legislature
did not intend section 23(g)
to apply to the deduction of "losses"
at all;
3.
and, since the appellant was
clearly claiming a
deduction of "losses",
and nothing else, its claim
could not be
barred by section 23(g).
I
do
not agree.
It seems to me that the argument
does violence to the
plain meaning and effect of the
language used in
section 23(g), particularly when
it is contrasted with
the wording of section 11(a), and
more especially when
it is considered in the context of
the other paragraphs
of section 23,
as
I
shall now
endeavour to show.
Section 23(g) reads:
"23. No deductions shall in
any case be made in respect of the following matters, namely -
(g) any moneys claimed as a
deduction
from income derived frqm trade,
which are not wholly
or exclusively
laid out or expended for the
purposes of trade;
"
The prohibition is of wide ambit.
This can be seen
when that against which the
prohibition is directed is
dissected into its component
parts, as follows:
(i) deductions
4. (ii) in respect of (iii) any
moneys (iv) claimed as a deduction from income derived from trade (v)
which are not wholly or exclusively
laid out or expended for the
purposes of trade. The core of the prohibition is to be found in
(iii) : "any moneys". That
expression in itself is not
concerned with "losses", either inclusively or exclusively;
it is entirely neutral in relation
to the concept of "losses".
So is the wording of (v) , which is the substance of the prohibition.
Re-casting it in positive
terms, the requirement is that any moneys
sought to be deducted must be moneys which are laid out or expended
in the manner specified.
The reguirement comprises two component
notions: (a) moneys which are laid out or expended; and (b) in a
particular manner, i e wholly
and exclusively for the purposes of
trade.
5. But the requirement in no way
touches upon the question whether moneys which are laid out or
expended have been lost or not. That
is immaterial f or the purposes
of the section, according to its wording. Moneys which are laid out
or expended are decreed not to
be deductible if they are not laid out
or expended in the manner required. There is nothing in the section
to support the argument
that the prohibition does not apply when
moneys which are laid out or expended happen to result in losses.
I
turn
to section 11(a). In so far as it is relevant for present purposes,
its ingredients may be stated as follows:
(i) there shall be allowed as
deductions from the income (ii) expenditure and losses (iii) actually
incurred (iv) in the production
of the income (v) provided such
expenditure and losses are not
6.
of a capital nature.
The pivot of the provision lies in
(ii): ""expenditure
and losses". This expression
characterizes the nature
of that which is authorized to be
deducted.
Consequently, in applying the
section, it may be
necessary to consider the
distinction between
"expenditure" and
"losses" and the contrasting concepts
of voluntary payments and
involuntary deprivations (
cf
Joffe & Co Ltd v
Commissioner for Inland Revenue
1946
AD 157
at 166-7), and such
consideration may be
important when it comes to
applying the proviso in (v),
where the issue is whether or not
the expenditure, or
the losses, are of a capital
nature (see
Stone v
Secretary for Inland Revenue
1974 (3) SA 584
(A) at
593E-594H, and
Burman v
Commissioner for Inland
Revenue
, AD judgment
delivered on 23 November 1990).
So, in the case of a loan which
has become
irrecoverable, the amount of which
is sought to be
deducted, important considerations
are that it is not
7. the "expenditure"
incurred in advancing the loan which is sought to be deducted, but
the loss of the loan capital by
reason of its having become
irrecoverable; and in that regard, for the purposes of applying the
section, it is relevant to observe
that were it not for the loss of
the loan capital there would be no question of any deduction and that
the real issue in such a case
is the deductibility of the loss (see
Stone
' s case
supra
at 593E-F) . But in my view
considerations such as these are confined to the context of section
11(a); they have no bearing on the
application of section 23(g).
Section 11(a) provides positively for what may be deducted, and
section 23(g) negatively for what may
not, but there is no direct
correlation between the one and the other. So, for instance, the
question whether or not expenditure
is of a capital nature is vital
to the enquiry under section 11(a), but it plays no role in the
application of section 23(g). The
enquiries under the two sections
are notionally and logically
8.
discrete. That this is so is
demonstrated by the fact that the Legislature did not transpose the
descriptive expression "expendituré
and losses" from
section 11(a) to section 23(g); instead, it used in the latter
section the colourless expression "any
moneys". Section
11(a) is concerned with the deduction of "expenditure"
qua
expenditure and the deduction of "losses"
qua
losses, while section 23(g) focusses on the deduction of "moneys"
qua
moneys. And "moneys
laid out or expended" do
not become the less so
because they are lost.
The impact of
the difference in phraseology that
I
have
mentioned becomes even clearer when regard is had to the setting of
paragraph (g) of section 23 in the section as a whole. Each
of the
paragraphs (a) to (i) commences with a statement of the particular
matter in respect of which no deduction shall be made.
The
Legislature's choice of wording is significant:
"(a) the cost incurred .....
9.
domestic
or private expenses
any loss
or expense, the deduction of which would otherwise be allowable
the
taxation levied
income
any
expenses incurred
(g) any
moneys claimed as a deduction
(h)
interest
(i)
entertainment expenditure "
The
differences in the wording speak for themselves: there is no reason
for thinking that the Legislature's selection of language
in
paragraph (g) was anything but deliberate and designed.
Applying
the views expressed above to the
facts of
this case,
I
see
the position as follows. The
appellant, in
taking over or advancing the loans in question, laid out and expended
moneys; it incurred expenditure. When the loans
became irrecoverable,
it
incurred losses. The deductions to which
the appellant
lays claim represent, at one
and the same time, the
moneys laid out and
expended, the expenditure incurred,
and the
losses incurred. In order to determine whether
10.
the deductions claimed are
allowable under section
11(a), an assessment of the nature
of the losses
incurred is called for. That
enquiry yields the answer
that the losses are deductible
under section 11(a). We
then move on to a different
enquiry: whether the
losses, found to be deductible
under section 11(a), are
disqualified from deduction by
virtue of section 23(g).
For the purposes of this enquiry,
the nature of the
losses,
qua
losses, is no
longer of any consequence.
What is important, viewed through
the framework of
section 23(g), is the
characteristic of the losses as
constituting, as a matter of fact,
"moneys claimed as a
deduction from income derived from
trade". There is no
doubt that the losses fall
squarely within the ambit of
these words. Nor can there be any
doubt that the
"losses", in their new
garb of "moneys claimed as a
deduction", were, again as a
matter of fact, "laid out
or expended" by the
appellant. In consequence, for the
deductions claimed by the
appellant to pass the test of
11.
section 23(g), it must be shown
that the amounts of the loans made by the appellant were wholly and
exclusively laid out or expended
for the purposes of trade.
I
proceed,
then, to consider whether that has been established.
I
commence with some general observations.
The word "wholly" has no role to play in this case, and may
be left out of account.
In so far as there may be different nuances
to the expressions "laid out" and "expended",
I
do not see that they can be of any
relevance to the facts of this case; they can also be left out of
consideration. The word "trade",
in the expression "for
the purposes of trade", is not expressly qualified, but it must
be taken to be confined to the actual
trade being carried on by the
taxpayer. That is no doubt an obviously necessary implication, but,
in view of the particular facts
of this case, it needs to be pointed
out that a purpose connected with a trade being carried on by a
person other than the taxpayer
may aerve to disqualify a
12. deduction, if the link between
the purpose and such other business is sufficiently close to be
caught in the net of the section.
The meaning of the words
"exclusively laid out or expended for the purposes of trade",
and of similar words in other statutes,
has been considered in a
number of cases, some of which are discussed in the judgment of my
Brother FRIEDMAN (and to which may be
added a recent case decided in
the House of Lords, to which we were referred in argument,
MacKinlay
(Inspector of Taxes) v Arthur Young McClelland Moores & Co
[1990] 1 All ER 45).
However, in none of the cases referred to in
argument did the facts resemble, even remotely, the peculiar facts of
the present matter.
To the extent that the reported judgments reflect
the use of general criteria in applying the words of the statute
concerned to the
facts of a particular case, such criteria appear to
me to furnish no more than vague and imprecise guidelines, fitting
nicely perhaps
the facts under consideration,
13. but to be applied to other and
different factual situations, if at ail, only with caution and
circumspection. So, for instance,
the distinction between "motive"
and "purpose" in this context seems to me to be a nebulous
one: it may sometimes
be found to be helpful, but at other times it
may be conducive more to confusion than to clarity. Again, the
distinction between
"object" and "effect" seems
to me to be in-capable of exact definition, and hence of little real
use as a general
test. And the same applies to the suggested
distinction, urged upon us by counsel for the appellant, between
"subjective intention"
and "objective purpose".
The truth is, in my judgment, that there are no hard and fast rules
for deciding whether a taxpaper's
expenditure falls within or outside
the ambit of the section; it is not possible to devise any precise
universal test for determining
whether expenditure comprises moneys
"exclusively laid out or expended for the purposes of trade".
In
14. general, one can say no more
than that the issue is to be resolved by examining the particular
facts of each individual case.
I
turn,
then, to the facts. They have been summarized in the judgment of my
Brother FRIEDMAN, which contains also some excerpts from
the evidence
of Mr Scott. In my view that evidence provides a clear and cogent
answer to the present enquiry.
I
find
it necessary, therefore, to quote again the relevant passages from
the evidence, grouping them together, and making some minor
additions, to let the story flow more easily. The extracts which
follow are all taken from the witness's evidence when he was being
examined in chief by the appellant's counsel.
"In your capacity as Finance
Director of the group, were you involved with the affairs of the
Appellant company? — The affairs
of the Appellant company were by
and large my responsibility.
When you joined the group, the
Appellant company was already in existence? -- That is correct.
Are you aware of the reason for it
15.
coming into
existence? -- Yes,
I
am.
Would you just- explain that to
the Court? — My lord, it had been determined prior to my arrival at
Plate Glass, that the financial
affairs of the group would most
effectively [be] conducted by the formation of a finance company
through which the securing and arrangements
of funds for the group
could be best done and through which the use of those funds, by
subsidiary companies, could be best monitored."
"Now did the Appellant
company make a profit on these Bills, or was it aiming to make a prof
it on these Bills? — Yes, my lord,
it was.
Did the Appellant company aim to
make a profit on the borrowing and lending of its funds? — Yes, my
lord.
What was the Appellant company's
philosophy with regard to its dealings with its fellow subsidiary
companies?— The philosophy, my
lord, of the Finance Company was at
all times to be supportive and back the aims of the group trading
companies. That was one of
the main philosophies guiding the Finance
Company. In the structuring and design of the method whereby it
performed this function
it sought at all times to make a profit by
the process of securing funds at a lesser average rate than the rate
at which it lent
funds to its fellow subsidiaries in respect of the
acquisition of Bills Re-ceivable, and even in fact, in the majority
of instances
to the lending of money to members of staff.
We've seen that there was some
16.
R34 000 000 odd owing to the
holding company and fellow subsidiaries. What happened when one of
the fellow subsidiaries had surplus
funds? — Surplus funds. The
process, my lord, whereby the affairs of the Finance Company and in
fact, the finances of the group
were managed were such, that surplus
funds were required to be placed with the Finance Company on a daily
basis.
What happened when some other
subsidiary was short of funds? — Then it was the responsibility, my
lord, of the Finance Company to
make available those funds to the
subsidiary for the purposes of its operations."
"The interest rates did vary
from company to company, did they? -- Yes, they did from company to
company, my lord.
Would you explain to the Court why
there was this variation? -- In terms of its basic lending and
operational philosophy, my lord,
the lending was conducted for two
reasons firstly, to ensure there was a profit overall on average cost
of money to average cost
of lending money, but at the same time the
interest of the borrowing company as a member of the group of
companies was borne in mind
and there were occasions when loans at
lower rates of interest were made to companies that were not
performing perhaps as well as
others."
"Would you
agree with a suggestion that the Appellant company was not an
independent company operating an independent business?
—
I
would accept,
my lord, that it was not
17.
totally independent.
What were your aims in that
regard? --The aims, my lord, of this company were several, but the
principal objective was by means of
consolidating third party debt to
secure the most advantageous terms and conditions for borrowings
whilst at the same time organizing
and ensuring the availability of
finance for the group's subsidiaries. But within the structure of
those motives the company was
designed to secure profit for itself."
In my opinion the evidence speaks
for itself, and in so speaking it proclaims that the appellant's
trading activities were geared
to the achievement of a dual purpose:
furthering the interests of the Group's subsidiaries and thus of the
Group itself; and making
a profit for the appellant.
Counsel for the
appellant argued to the contrary, on a number of grounds.
I
proceed to deal with the main points raised
in argument. To begin with, it was suggested that, although the
appellant company may
have been brought into operation for the
purpose of promoting the interests of the Group, when
18.
once it commenced, and thereafter
continued, its
trading activities, it did
so for the sole purpose of
serving its own
interests by earning a profit, and not
with
a. purpose of advancing the Group interests.
I
see
no merit in
the suggested dichotomy between the creation of the trading concern
and its actual activities. What was aimed at by the
former was
achieved by the latter. The object of
promoting the
Group interests, which gave
birth to the appellant as a
trading entity,
did not disappear with the actual
carrying
on of the business, but was in fact
implemented
thereby. The appellant was itself a wholly
owned
subsidiary within the Group. The controlling
mind
which brought it into operation also directed its ongoing activities.
And the evidence shows that such
activities
were in fact directed, not only at earning a
profit
for the appellant, but also at promoting the
interests
of the Group.
Then it
was argued that the promotion of the
19.
Group
interests was merely a motive of the appellant in carrying on its
trade, and not a purpose of it.
I
am
unable to perceive any room for applying the distinction between the
two concepts to the facts of this case, whatever the line
of
demarcation between them may be. The present is not the kind of case
which is epitomized by the example of a trader who elects
to buy his
stock-in-trade from a relative or friend, in order to benefit the
latter (cf
Commissioner of Taxes v B S A
Co Investments Ltd
1966 (1) SA 530
(SR
AD), a case heavily relied on by the appellant's counsel). In that
kind of case the benefit conferred on another person is but
indirectly and remotely connected with the trading activities of the
taxpayer. Here the position is quite different. On the evidence,
the
promotion of the Group interests is an integral part of the very
activities carried on by the appellant. It borrows money from
subsidiaries in the Group whenever they have a surplus available,
irrespective of the
20. needs of the appellant at that
time. It lends money to subsidiaries at a reduced rate of interest
whenever the interests of the
subsidiaries concerned require that to
be done, irrespective of the attendant disadvantage to the appellant.
In short, the trading
activities of the appellant are governed by
policy considerations dictated by the interests of the Group. To talk
of "motive"
as opposed to "purpose" in relation
to the appellant's furthering of Group interests is to ignore the
evidence.
Two further lines of argument
advanced on behalf of the appellant fall to be rejected for reasons
similar to those stated above. The
first was that the promotion of
the Group interests was merely the appellant's "subjective
intention" and not the "objective
purpose" of its
trading activities. The second was that the promotion of the Group
interests was not a "purpose" of
the appellant' s trade,
but merely an "effect" of it, or a "result". In
the last-
21
.
mentioned respect
I
would add the following observations. In
dealing with section 11(a), my
Brother
FRIEDMAN says in his judgment: "Subject to the
self-imposed
constraints under which appellant operated within the Group context,
appellant's business could be
described as
one consisting entirely of the borrowing of money and the lending of
that money at a profit".
With respect,
I
am in full
accord with this description
of the
appellant's business, but, in my view, when it comes to applying the
test of section 23(g), one must
be on one's
guard not to beg the question by simply
elevating
the words "at a profit" to the status of
"purpose"
and relegating the "self-imposed restraints"
to
the status of "result". In the context of section
23(g)
I
would say that
the appellant's business
consists entirely
of the borrowing and the lending of
money;
that is its nature. What calls for determination then, is the
relationship of that business vis-
á
-vis
the promotion of the Group
22.
interests,
on the one hand, and the making of a profit,
on
the other. On the evidence,
I
am
unable to discern
any
qualitative difference between the one relationship
and the
other. The evidence shows plainly, in my
opinion,
that the appellant's business is wholly
structured
and conducted with a view to achieving both
the
promotion of the Group interests and the making of
a profit.
If the former is a "result", so is the
latter;
and if the latter is a "purpose", so is the
former. In
incurring expenditure by making loans the
appellant
pursues both aims simultaneously; the
advantages
accruing therefrom enure to the benefit of
both the
Group and the appellant; and in both instances
they are
"necessarily inherent in the act",
irrespective
of whether they are viewed as being
"objectives"
or "results". It is true that a profit is
to be made
always, and to that limited extent it may be
said that
the Group interests are subservient to the
appellant's
own interest. But that is neither here nor
23. there.
It does not render the promotion of the Group interests the less a
"purpose" of the appellant's business. The
concept of a
"dominant purpose" has no role to play here.
Counsel
for the appellant stressed that it is
an
everyday occurrence for the affairs of a subsidiary
company
within a group of companies to be so arranged
as
to serve the interests of the group. That is so, of
course.
But
I
do not see
how it can avail the
appellant. In every
case where that occurs, and the
question
arises whether a particular item of
expenditure
is hit by section 23(g), the answer will
have
to be found by analyzing the particular facts of
the
case.
Inter alia
one would have to examine the
nature of the
activities carried on, the nature of the
expenditure,
and the closeness (or remoteness) of the
connection
between the expenditure and the benefit
derived
therefrom by the group. For example: in the
present
case the appellant presumably incurs ordinary
24.
day-to-day expenses in the running of its business, such as paying
salaries to its employees, perhaps paying rental for the premises
occupied by it, and so forth. There is no doubt that the deduction of
such expenses from the appellant's income is not precluded
by section
23(g). The. reason for this is that the connection between such
expenditure and the benefit to the Group flowing from
the appellant's
activities is too remote for the latter to qualify as a "purpose"
in terms of the section. But the appellant's
expenditure in the form
of loans advanced to subsidiaries in the Group stands on quite a
different footing. Such expenditure is part
and parcel, the essential
substance, in fact, of the very activities which were designed and
carried out in order to benefit the
Group, through the subsidiaries
concerned. The connection between this expenditure and the benefit is
both direct and immediate.
In these particular circumstances the
benefit falls within the ambit of the word "purposes"
25.
in the
section.
Finally,
I
must refer to
two hypothetical situations thought out and presented to us by
counsel
for the appellant, as analogously
supporting his
argument. The first is the
case of a bookshop which is brought into being, and carries on
business, with the
object of promoting the
sale of Christian literature
and the
spreading of the gospel; in order the better
to
achieve his aim, the bookseller cuts his prof it
margin
on the sale of books to a minimum. If a
customer
bu
ý
s a
book on account and then fails to pay
for
it, counsel said, the bookseller could deduct the
loss
as a bad debt despite the "purpose" for which the business
was being carried on. The other case is this:
an
African Bank is put up with the object of serving
the
interests of Black commerce; it does business only
with
Black entrepreneurs, and in advancing loans to
such
customers it charges interest far below the
customary
rate. The "purpose" of the bank's
26.
activities,
counsel said, would not preclude it from
deducting
the loss of the amount of a loan which is not
repaid.
I
shall assume
that counsel is right in saying
that in
both cases the amounts in question are properly
deductible.
In my view, however, the situations
postulated
are not truly analogous to the facts of the
present
case. The vital points of distinction lie in
the nature
of the relationship between the bookseller
and his
customers and the bank and its customers, on
the one
hand, and the appellant and the Group, on the
other.
Taking the case of the bank and its customers
first, it
is clear that the bank operates as a
completely
independent trading concern. It is not tied
to its
customers, potential or actual, except to the
extent
that its activities do not go beyond a loosely
specified
and large class of persons. It is not
obliged to
do business with anyone. No one is obliged
to do
business with it. The bank and its customers
deal with
one another at arm' s length. The same
27.
considerations
apply to the case of the bookseller and
his
customers. But when we consider the relationship
between
the appellant and the Group the position is
very
different. The appellant is itself a member of
the Group.
It does not function independently. It is
controlled,
and its activities directed, as in the case
of all the
subsidiaries, by the holding company of the
Group. The
appellant and the subsidiaries with which
it does
business are knit together as members of one
and the
same family, and they deal with each other as
such. The
confines of the family are precisely defined
with
reference to the individual companies within the
Group. The
appellant and the other subsidiaries are
obliged to
do business with cme another; they have no
choice in
the matter. The conclusion to be drawn from
the above
considerations, in my opinion, is that the
connection
between the activities of the appellant and
the
benefit conferred thereby on the Group is very
substantially
closer than the connection between the
28.
activities
of the bookseller or the bank and the benefits conferred thereby on
their respective customers. If it is accepted that
in the latter
situations the benefits are too remotely
connected with
the trading activities to be
brought home under the
word "purpose"
in the section,
I
am
nevertheless
satisfied that the link
between the appellant's
activities and the
furthering of the Group's interests
is
sufficiently close, on the evidence, to cause the
latter
to fall within the ambit of the word "purposes"
as
used in the section.
The order
of the Court is that the appeal is dismissed with costs, including
the costs of two counsel.
A.S.
BOTHA JA
NICHOLAS
AJA
CONCUR
NIENABER AJA
Case No 125/89 /MC
IN THE SUPREME COURT OF SOUTH
AFRICA (APPELLATE DIVISION)
Between
SOLAGLASS FINANCE COMPANY
(PTY) LIMITED.
Appellant
and
COMMISSIONER FOR INLAND
REVENUE
Respondent
CORAM:
BOTHA,
E M GROSSKOPF JJA et
NICHOLAS, FRIEDMAN, NIENABER AJJA
HEARD:
13
September 1990
DELIVERED:
30
November 1990.
JUDGMENT
FRIEDMAN AJA.
2.
FRIEDMAN AJA:
This is an appeal by a taxpayer
(the appellant) against a decision of the Transvaal Income Tax
Special Court. The appellant is a private
company and a wholly owned
subsidiary of Plate Glass Shatterprufe Industries Limited (PGSI), a
public company quoted on the Johannesburg
Stock Exchange. In
submitting its income tax return in respect of the year of assessment
ended 31 March 1978, appellant sought to
deduct from its taxable
income an amount of R4 545 922-00, being the loss incurred by
appellant on what was described as "the
disposal of a debtor".
In respect of the year of assessment ended 31 March 1979 appellant
sought to deduct amounts totalling
R55 153-00, being losses sustained
on loans which had become irrecoverable. In its income tax
assessments
3/...
3.
for the years in question,
respondent refused to allow these losses as deductions. Appellant
objected and, its objection having been
overruled, appealed to the
Transvaal Income Tax Special Court. The latter court upheld the
appeal against the assessment for the
1978 tax year, but only to the
extent to which certain interest charged should have been allowed as
a bad debt, and referred the
matter back to the respondent for
reassessment in accordance with the judgment. The appeal against the
assessment for the 1979 tax
year was dismissed. Leave having been
granted by the President of the Special Court in terms of sec 86 A(5)
of the Income Tax Act
58 of 1962 (the Act), appellant now appeals to
this Court against the whole of the judgment of the Special Court,
save to the extent
to which appellant was successful in respect of
the 1978
4/...
4.
tax year.
The facts are not in dispute and
may be summarised as follows. PGSI is the holding company of a group
of companies known as the Plate
Glass Group (the Group). PGSI's
subsidiaries are of the order of 20Ó, most of which are wholly
owned by the parent company.
The Group is involved in the
manufacture, processing, wholesaling and retailing of timberwood and
glass products. Until about 1973
the finances of each company in the
Group were largely the responsibility of the particular company
itself. In 1973 PGSI decided
that the financial affairs of the Group
would be best served by a finance company which would secure and
arrange the funds required
by all the companies in the Group. It
would also monitor the use of those funds in the hands of the
subsidiaries. In
5/...
5.
order to give effect to this
decision a dormant subsidiary, previously called Plate Glass and
Shatterprufe Industries Finance Company
(Pty) Ltd, but whose name was
subsequently changed to Solaglass Finance Company (Pty) Ltd (the
present appellant), was utilised.
One of appellant's objects, in
terms of its memorandum of association, is to lend money to any
person or company and to borrow such
money as it deems fit. This
object was not changed when the decision was taken to utilise
appellant for the purposes contemplated.
Henceforth, subsidiary
companies requiring funds would apply to appellant which would,
having regard to the budget of the subsidiary
concerned, provide the
necessary funds by way of loans. Security was not required on such
loans. The subsidiaries were, however,
required to pay
6/...
6.
interest on their loans. The rates
varied, depending on the financial position of the subsidiary
concerned, but generally the rates
of interest charged were
approximately 1% higher than appellant itself paid for moneys
borrowed by it. Surplus funds in the hands
of the subsidiaries were
required to be placed with appellant on a daily basis. Appellant did
not, however, rely solely on the surplus
funds received from its
fellow subsidiaries. It borrowed moneys from PGSI as well as from
commercial banks, in the case of the latter
by means of overdrafts
and acceptance credit facilities. Loans obtained by appellant from
banks would generally be guaranteed by
PGSI.
Initially appellant's borrowings
and lendings were conf ined to PGSI and the companies in the Group.
Subsequently appellant's field
of activities was
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7.
extended: loans were made to staff
members of companies in the Group and bills were discounted for
customers of trading subsidiaries
in the Group, in many instances
with the object of enabling those customers to settle their accounts
with the subsidiaries. Appellant
also deposited moneys with building
societies to enable staff members to obtain mortgage bonds.
The loss which appellant claimed
to deduct from its taxable income for the year ending 31 March 1978
arose as follows. A company called
P G Environmental Systems (Pty)
Ltd (PGES), which was a subsidiary of PGSI, owed money on loan
account to the holding company. According
to the evidence of Mr
Scott, the Group financial director and appellant's chief executive,
who was the only witness called by appellant,
this loan was "taken
over" by appellant in
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8.
1973. How precisely this occurred
was not spelt out in the evidence. Counsel were agreed, however, that
the probabilities were that,
when appellant entered upon the role
determined for it by the holding company, PGES's loan account with
PGSI was ceded to appellant
and that appellant was substituted as
debtor in the books of account of PGSI. The only available records of
the loan in appellant's
books of account commence with an opening
balance of R5 853 826-58 on 1 April 1976. Interest was debited to the
account of PGES from
time to time, cash payments were made by PGES
and further advances were made to it by appellant. According to Mr
Scott the account
was operated like a bank overdraft and it
fluctuated on a regular basis. From about 1975 PGES's financial
position started to deteriorate
and it became evident that the
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9.
business of PGES, as then
structured, could not become viable. It was also realised that the
major portion of the debt owing by PGES
to appellant had become
irrecoverable. On 21 November 1977 an agreement was concluded between
PGSI, appellant, Afcol Manufacturing
Ltd (Afcol) and PGES in terms of
which Afcol took over control of PGES by subscribing for shares which
ensured it a majority holding;
it also took cession of appellant's
loan account which, at the effective date of the agreement, stood at
R5 980 759-00. The consideration
paid for the loan, calculated in
accordance with a formula provided in the agreement, amounted to Rl
434 837-00. The balance of R4
545 922-00 was written off as
irrecoverable. According to the uncontradicted evidence of Mr Scott,
the consideration paid by Afcol
exceeded the true value
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10.
of the loan. The only alternative
to the Afcol agreement would have been liquidation which would have
resulted in a dividend of substantially
less than the amount of Rl
434 837-00 paid by Afcol for the loan.
The amount of R55 153-00 claimed
as bad debts in respect of the 1979 tax year, is arrived at as
follows:
Debtor
Amount
Midlothian Steel (Pty) Ltd
R20
242
Quality
Kitchens (Pty) Ltd
R
4
547
M
I
Berkman
R29
233
C L Oosthuizen
R
453
C C van Wyngaardt
R
408
L Berkman
R
270
R
55
153
Midlothian Steel (Pty) Ltd and
Quality Kitchens (Pty) Ltd, which were both in liquidation, were
indebted to appellant in the amounts
indicated, in respect of bills
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11.
discounted
which were subsequently dishonoured. The remaining debtors were all
employees or ex-employees of subsidiaries to whom appellant
had lent
moneys. At the hearing of the appeal appellant's counsel informed the
Court that the amount of R29 233-00 owing by M
I
Berkman was no longer in issue. That
reduced the amount in issue in respect of the 1979 tax year, to R25
920-00. All these debts were
written off as irrecoverable during the
1979 tax year. No portions thereof related to interest, which had
been written back to interest
received. Appellant's counsel conceded
that, should the appeal in respect of these amounts succeed, it would
be subject to appellant
satisfying the respondent that there were
adequate grounds for writing off the debts in question in the 1979
year of assessment.
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12.
In its income tax returns for the
1974 and 1975 tax years appellant claimed losses which it had
incurred by reason of unfavourable
changes in the rates of exchange
between the South African rand and the Swiss franc, on loans obtalned
by appellant in Switzerland.
These losses were disallowed. This led
to an appeal by appellant to the Transvaal Income Tax Special Court
and in due course an appeal
to a Full Bench of the Transvaal
Provincial Division. The judgment of the Full Bench is reported
sub
nom Plate Glass and Shatterprufe Industries Finance Co (Pty) Ltd v
Secretary for Inland Revenue
1979(3) SA 1124(T). One of the
questions which arose in that case was whether appellant was carrying
on a banking or a money-lending
business. The Full Bench agreed with
the Special Court's finding that appellant was not carrying on such
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13.
a business. It held that
appellant's sole
function was that of controlling
and channelling funds
available to the Group and that
appellant had
accordingly failed to discharge
the onus of proving
that the losses incurred by it in
respect of
deteriorating foreign exchange
rates, were not of a
capital nature.
In the present case the approach
of the
Special Court was that the Full
Bench had held that
appellant was not carrying on
business as a banker or
money-lender; that finding, on the
facts found proved,
was a question of law; if the
activities of the
appellant were not proved to have
changed in the
intervening years, the Court would
be bound by the
finding of the Full Bench. The
judgment of the
Special Court was therefore
directed to the question
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14.
whether the business and
operations of the appellant during the 1978 and 1979 years of
assessment differed from those in the 1974
and 1975 years of
assessment. The Special Court's finding was that no significant
change had occurred and that it had accordingly
not been shown that
the losses claimed were not of a capital nature. The losses were
accordingly held to be not deductible.
The evidence in the present case
was not the same as that in the previous case, and it was common
cause, at the hearing before us,
that this appeal fell to be decided
on its own facts and that this Court was in no way bound by the
judgment of the Full Bench in
the previous case. It is therefore
unnecessary to consider the previous case any further.
The amounts which appellant claims
as
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15.
deductions from its taxable income
for the 1978 and 1979 years of assessment are the losses it sustained
as a result of loans having
become irrecoverable. In other words,
what appellant claims to have lost is the capital which formed the
subject matter of these
loans, and which has become irrecoverable.
Appellant relies, as the basis for
its claim to be entitled to these deductions from its taxable income,
on sec ll(a) of the Act which
reads :
"11. For the purpose of
determining the
taxable income derived by any
person from
carrying on any trade within the
Republic,
there shall be allowed as
deductions from the
income of such person so derived -
(a) expenditure and losses
actually incurred
in the Republic in the production
of the
income, provided such expenditure
and
losses are not of a capital
nature;"
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16.
It is common cause that this
section must be read with its counterpart, sec 23(g), which provides
that :
"23. No deductions shall in
any case be made
in respect of the following
matters, namely -
(g) any moneys claimed as a
deduction from
income derived from trade, which
are
not wholly or exclusively laid out
or
expended for the purposes of
trade;"
Sec ll(a) provides positively for
what may, and sec 23 negatively for what may not, be deducted in the
determination of a taxpayer's
taxable income; a deduction claimed
must satisfy both sections. See
Commissioner for Inland Revenue v
Nemoiim
1983(4) SA 935(A) at 946-7.
Dealing first with section ll(a),
what appellant has to establish is that (1) it was carrying on a
trade; (2) the losses claimed were
incurred in
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17.
the production of income; (3) they
are not of a capital nature. The Act contains in sec 1 a very wide
definition of "trade"
and there can be no doubt that the
business which appellant was conducting falls within that definition.
The second requirement also
presents no difficulty: appellant's
income consisted exclusively of interest earned on moneys lent by it
in the course of its activities,
and the losses were clearly incurred
in the production of such income. The third requirement involves a
consideration of the question
whether the losses are of a capital or
revenue nature.
The distinction between losses of
a capital and those of a revenue nature, has been formulated in
various ways. In
New State Areas Ltd v Commissioner for Inland
Revenue
1946 AD 613
, WATERMEYER CJ,
18/...
18.
explained the distinction as
follows at 620:
"It has been pointed out
before (see
Port
Elizabeth Electric Tramway Co v
Commissioner
for Inland Revenue
,
1936
CPD 241)
that in a
literal sense expenditure and
losses do not
produce income. Save in the case
of the
leasing or the loan of capital in
some form
or other, income is produced by
work or
service or activities or
operations and as a
rule expenditure is attendant upon
the
performance of such operations
sometimes
necessarily, sometimes not.
Expenditure may
also occur in the acquisition by
the taxpayer
of the means of production, i.e.,
the
property, plant, tools, etc, which
he uses
in the performance of his income
earning
operations and not only for their
acguisition
but for their expansion and
improvement.
Both these forms of expenditure
can be
described as expenditure in the
production of
the income but the former is, as a
rule,
current or revenue expenditure and
the latter
is, as a rule, expenditure of a
capital
nature."
19/...
19.
And at 627 WATERMEYER CJ stated
his conclusions on the various tests applied in order to determine
into which of the two categories
- capital or revenue expenditure
falls, as follows:
"The conclusion to be drawn
from all of these cases, seems to be that the true nature of each
transaction must be enquired into
in order to determine whether the
expenditure attached to it is capital or revenue expenditure. Its
true nature is a matter of fact
and the purpose of the expenditure is
an important factor; if it is incurred for the purpose of acquiring a
capital asset for the
business, it is capital expenditure, even if it
is paid in annual instalments; if, on the other hand it is in truth
no more than
part of the cost incidental to the performance of the
income-producing operations, as distinguished from the equipment of
the income-producing
machine, then it is revenue expenditure, even if
it is paid in a lump
20/...
20.
sum."
As what appellant lost was the
capital which it advanced to the various debtors and which has become
irrecoverable, it is necessary
to decide whether the capital thus
lost was fixed or floating (sometimes called circulating) capital. If
it was fixed capital, the
loss was of a capital nature; if it was
floating, the loss was of a revenue nature. See
Stone v Secretary
for Inland Revenue
, 1974(3) SA 854(A) at 595A-B.
The distinction between fixed and
floating or circulating capital was explained by INNES CJ in
Commissioner for Inland Revenue v Georqe Forest Timber Co Ltd
1924 AD 516
at 524, as follows:
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21 .
"Capital,
it should be remembered, may be either fixed or floating.
I
take the substantial difference to be that
floating capital is consumed or disappears in the very process of
production, while fixed
capital does not; though it produces fresh
wealth, it remains intact."
See also the
New State Areas
case,
supra
, at 620-1 where WATERMEYER CJ, after quoting the
above passage, stated:
"As to the latter
(expenditure of a capital nature), the distinction must be remembered
between floating or circulating and fixed
capital. When the capital
employed in a business is frequently changing its form from money to
goods and
vice versa
(e.g. the purchase and sale of stock by a
merchant or the purchase of raw material by a manufacturer for the
purpose of conversion
to a manufactured article), and this is done
for
22/...
22.
the purpose of making a profit,
then the capital so employed is floating capital. The expenditure of
a capital nature, the deduction
of which is prohibited under sec
11(2), is expenditure of a fixed capital nature, not expenditure of a
floating capital nature, because
expenditure which constitutes the
use of floating capital for the purpose of earning a profit, such as
the purchase price of stock
in trade, must necessarily be deducted
from the proceeds of the sale of stock in trade in order to arrive at
the taxable income derived
by the taxpayer from that trade."
In
Ammonia Soda Co v
Chamberlain
(1918) 1 Ch D 266
SWINFEN EADY LJ defined fixed
capital as follows at 286:
"That which a company
retains, in the shape of assets upon which the subscribed capital has
been expended, and which assets either
23/...
23.
themselves produce income,
independent of any further action by the company, or being retained
by the company are made use of to produce
income or gain profits."
At 286-7 he described circulating
capital in the following terms:
"It is a portion of the
subscribed capital of the company intended to be used by being
temporarily parted with and circulated
in business, in the form of
money, goods or other assets, and which, or the proceeds of which,
are intended to return to the company
with an increment, and are
intended to be used again and again, and to always return with some
accretion. Thus the capital with which
a trader buys goods
circulates; he parts with it, and with the goods bought by it,
intending to receive it back again with profit
arising from the
resale of the goods. A banker lending money to a customer parts with
his money, and thus circulates it, hoping and
intending to receive it
back with
24/...
24.
interest."
In
Stone
's case,
supra
,
CORBETT AJA, with reference to the distinction drawn in the
New
State Areas
case and the
George Forest Timber Company
case
between fixed and floating capital, said the following at 595G-596A:
"Applying the distinction,
thus described, to the ordinary case of a loan of money, there is no
doubt, in my opinion, that the
capital lent constitutes fixed
capital. Such capital is not consumed in the very process of income
production: it does not disappear
to be replaced by something which
when received by the taxpayer forms part of his income. It is true
that the lender does not retain
ownership in the actual money which
passes but, in an economic and accounting sense, it remains his
capital and upon the termination
of the loan (all being well) it
25/...
25.
returns to
him intact. In the process wealth may be produced for the lender but
this takes the form of a consideration, usually in
the form of
interest, paid by the borrower for the use of the capital; it does
not consist of the augmented proceeds of the capital,
which itself
has disappeared in the process."
The
position is, however, different when a loan is made in the course of
his business by a money-lender or banker. There have been
several
cases in our courts where it has been held that if a taxpayer can
show that he has been carrying on the business of banking
or
money-lending, losses incurred by him as a result of loans made by
him in the course of such business becoming irrecoverable,
constitute
losses of a non-capital nature and are accordingly deductible. In
Stone's case,
supra
, CORBETT AJA at 596A-B referred to
26/...
26.
a number of the cases in the
Special Court where this proposition was accepted. To those could be
added the
Ammonia Soda Co
case,
supra
at 286-7 and
Read's Brewery Co Ltd v Male
[1891] 2 QB 1.
Whether or not a taxpayer can be
said to be carrying on the business of a money-lender or banker is in
each case a question of fact
to be decided in the light of the
circumstances of the particular case. The foilowing are guidelines
which have been laid down for
the determination of the question
whether a taxpayer can be said to be carrying on such a business:
There must be an intention to
lend to all and sundry provided they are, from his point of view,
eligible. See
Secretary for Inland Revenue v Crane
1977(4) SA
761(T) at 768D-E.
The lending must be done on a
system or plan which discloses a degree of continuity in
27/...
27.
laying out and getting back the
capital for further use and which involves a frequent turnover of the
capital. See Income Tax Case
No 1138,
32 SATC 3
at 6; Income Tax Case
No 812,
20 SATC 469
at 473; Income Tax Case No 933,
24 SATC 347
at
348; and
Crane
's case
supra
, at 768D-E.
The obtaining of security is a
usual, though not essential, feature of a loan made in the course of
a money-lending business. See
Income Tax Case No 999,
25 SATC 183
at
186; Income Tax Case No 1003,
25 SATC 237
at 239; Income Tax Case No
1138,
32 SATC 3
at 6.
The fact that money has on
several occasions been lent at remunerative rates of interest, is
not enough to show that the business
of money-lending is being
carried on; there must be a certain degree of continuity and system
about the transactions. See Income
Tax Case No 812,
20 SATC 469.
The proportion of the income from
loans to the total income: the smallness of the proportion cannot,
however, be decisive if the
other essential elements of a money-
28/...
28.
lending business exist. See Income
Tax Case No 1138,
32 SATC 3
at 6; Income Tax Case No 979,
25 SATC 44
at 46.
In
Stone
's case,
supra
,
CORBETT AJA referred to these
and other cases and went on to
state at 596B-D:
"The
rationale of these decisions appears to be that the capital used by a
money-lender to make loans constitutes his circulating
capital and
that consequently losses of such capital are on revenue account.
I
shall accept, for the purposes of this
case, that these decisions are correct, provided that the business is
purely that of money-lender
and the loans are not made in order to
acquire an asset or advantage calculated to promote the interests and
profits of some other
business conducted by the taxpayer (cf
Atlantic
Refining Company of Africa (Pty) Ltd v C
I
R
1957(2) SA 330 (AD)). There is, however, in my view, no warrant for
extending this principle to loans by persons who are
29/...
29.
not conducting a money-lending
business."
As
I
understand this statement, the learned
judge intended, by the proviso which he attached to his acceptance of
the correctness of these
decisions, that such acceptance should apply
only in the case of loans made by a banker or money-lender in the
course and for the
purposes of
that
business, and not for the purpose of the advancement of another
business conducted by the taxpayer. This follows, as
I
see it, from the reference to the
Atlantic
Refinery
case, where a loan was
advanced by a wholesale supplier of petrol and petroleum products and
where the "decisive inducement"
for making the loan, was
not to recover a reward in the form of interest, but to acquire a
"tie" i. e. an agreement with
a distributor restricting the
latter's
30/...
30.
right to trade in petrol and
petroleum products, to products of the supplier, to the exclusion of
all such supplier's competitors.
Appellant's counsel argued, on the
strength
inter alia
of the authorities referred to in
Stone
'
s case, that appellant was conducting the business of a banker or
money-lender or a business "sufficiently similar to and
analogous
with" such a business, and that the losses were
accordingly losses of floating or circulating capital and were thus
deductible
from appellant's taxable income in terms of sec 11(a) of
the Act. Respondent's counsel, on the other hand, contended that
appellant
was not conducting the business of a banker or
money-lender; it was, he argued, merely carrying on an administrative
business and
its income was derived from the managerial
31/...
31 .
functions it performed in the
course thereof. Counsel argued that what distinguished appellant from
a money-lending company, were
the following:
Appellant's dominant motive was
to assist the Group.
Appellant had no system of
structuring its business to ensure that it made a profit.
Security was not taken on loans.
Loans were not made to all and
sundry, but only to "an elitist element".
Financial considerations were not
taken into account in deciding whether to make a loan; it was the
Group interests which were decisive,
the intention being to provide
a support system for appellant's associated companies in the Group.
There is no gainsaying the fact
that appellant does not fall within the ambit of all
32/...
32.
the guidelines referred to above.
It does not, for example, lend to all and sundry; it does not seek to
obtain security for the loans
which it advances; its business is not
structured to maximise profits. On the other hand, appellant's sole
business consists of borrowing
moneys and utilising the moneys so
acquired for making loans, albeit only to companies in the Group, to
staff members and customers
of trading companies in the Group. This
business was moreover conducted on an extensive scale. Appellant's
balance sheet as at 31
March 1978 reveals that, as at that date, the
amounts owing to appellant by fellow subsidiaries amounted to R43 848
258-00 and by
"other" borrowers, R4 070 325-00. The
corresponding figures according to appellant's balance sheet as at 31
March 1979,
were R45 167 389-00 and R2 081 881-00
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33.
respectively. Appellant's income
statement for the year ending 31 March 1978 reveals that interest
received amounted to R6 506 250-00
made up as follows:
Fellow subsidiary companies
R5
784 946
Other
R
721 304
Interest received for the year
ending 31 March 1979 amounted to R5 003 203-00 which was made up as
follows:
Fellow subsidiary companies
R4
716 004
Other
R
286 599
Interest paid for the years ended
31 March 1978 and 31 March 1979, amounted to R5 702 898-00 and R4 530
387-00 respectively, which
amounts were made up as follows:
1978
1979
Holding
and fellow
subsidiary companies R4 031 782
R2
795 341
Other Rl 735
049
Rl
671
116
These figures show that the
interest received in these
34/...
34.
two years exceeded the interest
paid by R803 352-00 in 1978 and R472 816-00 in 1979.
The extent of the borrowing and
lending activities in which appellant was involved, appears also from
the sources and application
of appellant's funds in respect of the
years of assessment, which were as follows:
Sources of funds
1978
1979
- Loans from Holding
Co. and
fellow
subsidiaries R39 965 002 R39 896
714
- Loans from other
parties
R
4 062 225 R 8 957 585
- Acceptance credit
loans
R
7 908 853
R
3 387 252
R51 936 078 R52 241 551
Application of funds
- Loans to
subsidiaries and
associated companies R45 025 931
R46 289 389
- Loans to other
parties
Staff members ..
R
351 880
R 236 113
Building Society
deposits
R
121 700
R 111 700
Bills discounted
R
160 243
R 546 468
Sundry loan ...
R
665 012
R 667 174
R46 304 766
R47
850 844
35/...
35.
The fact that appellant's monthly
turnover was, according to Mr Scott, of the order of R30 million,
involving a large number of transactions,
provides a further
illustration of the extent of the borrowing and lending in which
appellant was involved.
I
do
not agree with the submission made by respondent's counsel that
financial considerations were not taken into account in deciding
whether to make a loan. According to Mr Scott funds were not made
available merely for the asking. The subsidiaries were required
to
prepare budgets; based on these, appellant made funds available to
the subsidiaries to enable them to operate within their budgets,
in
accordance with borrowing limits set by Mr Scott himself. Aithough,
according to Mr Scott,
36/...
36.
appeiiant's philosophy was "to
be supportive and back the aims of the Group"-
"In the structuring and
design of the method whereby it performed this function it sought at
all times to make a profit by the
process of securing funds at a
lesser average rate than the rate at which it lent funds to its
fellow subsidiaries in respect of
the acquisition of Biils
Receivable, and even in fact, in the majority of instances to the
lending of money to members of staff."
All the subsidiaries paid interest
on their ioans, but the interest rates varied from company to
company. Mr Scott explained the reason
for this as follows:
"In terms of its basic
lending and operational philosophy, my lord, the lending was
conducted for two reasons firstly, to ensure
there was a profit
overall on average
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cost of money to average cost of
lending money, but at the same time the interest of the borrowing
company as a member of the group
of companies was borne in mind and
there were occasions when loans at lower rates of interest were made
to companies that were not
performing perhaps as well as others."
Subject to the self-imposed
constraints under which appellant operated within the Group context,
appellant's business could be described
as one consisting entirely of
the borrowing of money and the lending of that money at a profit.
Because of these constraints, there
are features of appellant's
business which are not normally found in an ordinary, commercial
money-lending business.
Non constat
, however, that the
business conducted by appellant is not that of money-lending. To my
mind, that is exactly what
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38.
appellant is doing. In the
circumstances the capital utilised by appellant for this purpose is,
in my judgment, not fixed, but circulating
capital. It is obtained
for one purpose and one purpose only, namely that of parting with it
temporarily in the f orm of loans, in
the expectation of receiving it
back with an increment in the.form of interest. The capital which
appellant lost as a result of being
unable to recover the loans, was
therefore of a revenue nature. The losses in question were
accordingly deductible in terms of sec
ll(a).
It remains to be considered
whether the losses are disqualified from deduction by reason of the
provisions of sec 23(g). According
to that section no deduction shall
be made in respect of moneys claimed as a deduction from income
derived from trade which are
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39.
not
"wholly or exclusively laid out or expended for the purposes of
trade".
The moneys
claimed as deductions represent, as indicated above, the capital lost
by appellant as a result of the loans becoming irrecoverable.
Two
questions arise, namely (a) were those moneys "laid out" or
"expended" within the meaning of sec 23(g); and
if so, (b)
were they wholly or exclusively laid out for the purposes of trade?
Mhen money
which is advanced by way of a loan, becomes irrecoverable, the
taxpayer incurs a "loss". It was argued on behalf
of
appellant that the word "loss" does not necessarily mean
the same as "expenditure" (the word used in sec ll(a))
and
that sec 23(g) does not apply to a loss caused to a taxpayer as a
result of his becoming unable to recover a loan made
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40.
by
him, which loss would otherwise be deductible in terms of sec ll(a).
In view of the conclusion
I
have
reached on the second question
I
find it unnecessary
to
decide whether or not it can be said that the moneys
in
question were "laid out" or "expended" within the
meaning of sec 23(g) of the Act.
I
shall assume
that
they were. The next question then is whether the
moneys
were so laid out or expended "wholly or exclusively for the
purposes of trade". This
involves a
consideration of what is meant by these
words.
There is a
similarly worded provision in the English tax legislation which reads
as follows:
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"... in computing the amount
of the profits or gains to be charged .... no sum shall be deducted
in respect of (a) any disbursements
or expenses, not being money
wholly and exclusively laid out or expended for the purposes of
trade, profession, employment or vocation
...."
The English Court of Appeal had
occasion to consider the meaning of the words "wholly and
exclusively laid out or expended for
the purposes of trade ...."
in
Bentleys, Stokes and Lowless v Beeson
(H
M Inspector of
Taxes
)
[1952] 33 TC 491
;
[1952] 2 All ER 82
(CA) . The issue in
the
Bentley
s case was whether the taxpayers, who were members
of a firm of solicitors, were entitled to a deduction in respect of
expenses incurred
in entertaining clients. The clients were
entertained to lunch, during which
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42.
business interviews were
conducted. The clients were charged fees for the legal advice given,
but the lunches were charged by the
taxpayers as an expense against
the firm's income. ROMER LJ, in delivering the judgment of the court,
said the following at 503-4
(33 TC) ([1952] 2 All ER at 84G-85B):
"The relevant words ....
'wholly and exclusively laid out or expended for the purposes of the
profession' - appear straightforward
enough. It is conceded that the
first adverb- 'wholly' -is in reference to the
quantum
of the
money expended and has no relevance to the present case. The sole
question is whether the expenditure in question was 'exclusively'
laid out for business purposes, that is: Mhat was the motive or
object in the mind of the two individuals responsible for the
activities
in question? It is well established that the question is
one of fact: and again,
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43.
therefore, the problem seems
simple enough. The difficulty however arises, as we think, from the
nature of the activity in question.
Entertaining involves inevitably
the characteristic of hospitality. Giving to charity or subscribing
to a staff pension fund involves
inevitably the object of
benefaction. An undertaking to guarantee to a limited amount a
national exhibition involves inevitably supporting
that exhibition
and the purposes for which it has been organised. But the question in
all such cases is: Was the entertaining, the
charitable subscription,
the guarantee, undertaken
solely
for the purposes of business,
that is, solely with the object of promoting the business or its
profit earning capacity?
It is, as we have said, a question
of fact. And it is quite clear that the purpose must be the sole
purpose. The paragraph says so
in clear terms. If the activity be
undertaken with the object both of promoting business and also with
some
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44.
other purpose, for example, with
the object of indulging an independent wish of entertaining a friend
or stranger or of supporting
a charitable or benevolent object, then
the paragraph is not satisfied though in the mind of the actor the
business motive may predominate.
For the statute so prescribes.
Per
contra
, if in truth the sole object is business promotion, the
expenditure is not disqualified because the nature of the activity
necessarily
involves some other result, or the attainment or
furtherance of some other objective, since the latter result or
objective is necessarily
inherent in the act."
On the facts of that case, the
Court of Appeal held that the expenses in question were deductible;
the element of hospitality involved
did not, so it was held,
constitute a dual purpose with the professional purpose involved.
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45.
The words "wholly and
exclusively laid out or
expended for the purposes of the
trade " were
subsequently considered by the
House of Lords in
Mallalieu v Drummond (Inspector of Taxes)
[1983] 2 All ER 1095.
The taxpayer was a female barrister who
claimed, as a deduction, the expenditure incurred by her on the
replacement, cleaning and
laundering of certain items of clothing
which she wore in court. In considering the words of the tax
provision, LORD BRIGHTMAN said
at 1099e-f that they mean "expended
to
serve the purposes
of the trade ...." or "for the
purpose of enabling a person to carry on and earn profits in the
trade ...". His Lordship
proceeded, at 1099g-h, to state:
"The effect of the word
'exclusively' is to
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46.
preclude a deduction if it appears
that the expenditure was not only to serve the purposes of the trade,
profession or vocation of
the taxpayer but also to serve some other
purposes. Such other purposes, if found to exist, will usually be the
private purposes
of the taxpayer."
To ascertain whether the money was
expended to serve the taxpayer's business, it was necessary,
according to LORD BRIGHTMAN, "to
discover the taxpayer's
'object' in making the expenditure" by looking into the
taxpayer's mind at the moment when the expenditure
was made. At 1099j
- llOOa LORD BRIGHTMAN continued as follows:
"If it appears that the
object of the taxpayer at the time of the expenditure was to serve
two purposes, the purposes of his
business and other purposes, it is
immaterial
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47.
to the application of s 130(a)
that the business purposes are the predominant purposes intended to
be served.
The object of the taxpayer in
making the expenditure must be distinguished from the effect of the
expenditure. An expenditure may
be made exclusively to serve the
purposes of the business, but it may have a private advantage. The
existence of that private advantage
does not necessarily preclude the
exclusivity of the business purposes."
The appeal was therefore, said
LORD BRIGHTMAN at HOOd "basically concerned with the distinction
between object and effect".
The taxpayer in
Mallalieu
' s
case was heid to have two objects, nameiy to serve the purposes of
her profession and to serve her own purposes and the deduction
was
therefore not allowed.
In
Commissioner for Inland
Revenue v Pick h
48/...
48.
Pay Wholesalers (Pty) Ltd
1987(3) SA 453(A) this Court adopted the analysis of ROMER LJ in the
Bentleys
case, and referred also to the distinction between
the object of expenditure and its effect as outlined in LORD
BRIGHTMAN's speech
in
Mallalieu
's case. Applying the
principles thus enunciated, this Court held that the taxpayer who had
made a large charitable donation which
it sought to deduct from its
income as an "advertising" expense, had not shown that, in
making the donation, it did not
have a dual purpose, namely a
philanthropic as well as a business purpose; the deduction was
therefore disqualified by the provisions
of sec 23(g).
In the present case the business
of the
áppellant was, in a general
sense, that of banker or
financier to the Group. In the
course of that
business, it borrowed and lent out
moneys in
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49.
accordance with the financial
requirements" of the members of the Group, its business
activities subsequently being expanded
to encompass loans to
employees of the Group and the discounting of bills for customers of
the trading companies in the Group. The
purpose of the business which
appellant so conducted in accordance with the decision taken by its
controlling shareholder, was to
make a profit out of the loans it
made and the bills it discounted. The loans were all advanced and the
bills discounted in the furtherance
of that purpose. The fact that
the making of the loans and the discounting of the bilis involved
another result, namely that of providing
a benefit to the Group which
result was inherent in the expenditure in question - does not
disqualify appellant from claiming the
deductions.
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50.
Mr Scott
did not, in his evidence, seek to hide the f act that appellant was
"not totally independent". He explained this
as follows:
"The
aims, my lord, of this company were several, but the principal
objective was by means of consolidating third party debts
to secure
the most advantageous terms and conditions for borrowings whilst at
the time organizing and ensuring the availability of
finance for the
group's subsidiaries. But within the structure of those motives the
company was designed to secure profit for itself."
It is by
no means uncommon, in a large group of companies, for the business of
the group to be rationalised in such a way that the
activities of
each subsidiary are structured with the interests of the group in
mind. If the sole object of an expenditure
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51 .
by a subsidiary is the promotion
of its business, the expenditure would not, as ROMER LJ pointed out
in the
Bentleys
case, be "disqualified because the nature
of the activity necessarily involves some other result, or the
attainment or furtherance
of some other objective" which is
"necessarily inherent in the act".
The losses which form the subject
matter of the present appeal, all arose out of expenditure incurred
by appeliant for the purposes
of its trade as a money-lender. The
fact that the loans were made necessarily resulted in an advantage to
the Group. That result
did not, however, constitute a "purpose"
different from that of promoting the business which appellant was
itself conducting.
That being so, the losses in question were not, in
my judgment, disqualified as deductions by reason of sec 23(g).
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52.
It appears from the judgment of
the Special Court, that the consideration received by appellant from
Afcol for the PGES loan, was
appropriated by appellant solely to
capital. The full amount of interest charged since 1 April 1976 was
consequently
reflected as unpaid. The Special
Court dismissed the argument advanced on behalf of the Commissioner
that appellant was not entitled
to appropriate the payment it
received, in the manner in which it had done. The Commissioner's
representative had apparently conceded,
however, that if the Special
Court dismissed that argument, the amount of interest charged to the
account should have been allowed
as a bad debt in terms of sec ll(i)
of the Act. It was not clear how much that interest amounted to and
the matter was accordingly
referred back to the Commissioner for
re-assessment in
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53.
accordance
with the findings of the Special Court. In
the
light of the conclusion
I
have
reached, it would
not be necessary to
calculate the interest separately:
on the
view
I
take the
whole amount of the loss in
respect of the
PGES loan is deductible.
I
would uphold the appeal with costs,
including the costs consequent upon the
employment of
two counsel, and substitute
an appropriate order for
that made by the
Transvaal Special Income Tax Court.
G.
FRIEDMAN AJA. E.M. GROSSKOPF concurs.