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[2003] ZASCA 10
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Omnia Fertilizer Ltd v Commissioner for the South African Revenue Service (103/2002) [2003] ZASCA 10; 2003 (4) SA 513 (SCA); 65 SATC 159 (13 March 2003)
IN THE SUPREME COURT OF APPEAL
OF SOUTH AFRICA
REPORTABLE
CASE NO 103/2002
In the matter between
OMNIA FERTILIZER LIMITED
Appellant
and
THE COMMISSIONER FOR THE SOUTH AFRICAN
REVENUE SERVICE
Respondent
________________________________________________________________________
CORAM: HOWIE P, SCHUTZ, ZULMAN, NAVSA JJA et
HEHER AJA
________________________________________________________________________
Date Heard:
17 February 2003
Delivered:
13 March 2003
Summary: 'Recouped' in s 8(4)(a) of Income Tax Act
58 A 1962 â meaning of â whether recoupment effected.
________________________________________________________________________
J U D G M E N T
________________________________________________________________________
HOWIE P
HOWIE P
[1] The
issue in this appeal is whether the appellant taxpayer effected a
'recoupment' within the meaning of s 8(4)(a) of the Income
Tax Act,
58 of 1962.
[2] In tax
years preceding 1991 the taxpayer, a fertilizer manufacturer, claimed
and was allowed deductions, in terms of s 11(a) of
the Act, of
expenditure incurred in the production of its income. The expenditure
included the purchase price of raw materials bought
on credit that
were necessary for the manufacture of the taxpayer's product and the
transportation of such materials to the taxpayer's
factory. When
certain of the creditors concerned subsequently failed to claim
payment, the taxpayer, in later tax years, allocated
the amounts
unclaimed to income. In each of the tax years 1991 to 1994 the
taxpayer allocated to income the following sums representing
such
unclaimed debts:
1991 R2 200 000
1992 R1 600 000
1993 R1 000 000
1994 R1 935 000.
[3] In
respect of each of those years the Commissioner, the respondent in
the appeal, assessed the sums in question to tax. The taxpayer's
ensuing objection was disallowed and its consequent appeal to the
Income Tax Special Court failed. With the leave of the President
of
the Court (Goldblatt J) the taxpayer appeals directly to this
Court.
[4]
The basic facts, including those
stated already, are few and uncontested. When the taxpayer received
the required materials which
were dispatched by road and rail it
calculated the price and transport costs with which it expected to be
invoiced. It then made
appropriate entries in its books by debiting
an expenditure account and crediting an account which showed goods
'received but not
invoiced'. On receipt of invoices the latter
account would be debited and the suppliers' accounts credited. If no
invoices were received
the taxpayer simply did not pay for the
uninvoiced goods. The acquisition costs of all received materials,
invoiced or not, were
reflected in the taxpayer's income tax returns
and, as mentioned, allowed as deductible expenditure.
[5] When, as occurred to an apparently
extraordinary extent, certain creditors failed to invoice the
taxpayer, half the unclaimed
amounts were
credited
to its income account after a year and the other half after two
years.
[6] The
Commissioner treated the sums written back as gross income. The
taxpayer's objection and its case on appeal in the Special
Court were
essentially founded on the contention that, having regard to the
definition of 'gross income' and the wording of s 8(4)(a),
its mere
accounting treatment of these amounts did not, and could not, render
them receipts, accruals, recoveries or recoupments
within the meaning
of the Act. This was also part of its argument in this Court.
[7] It is
plain that once expenditure has been allowed to be deducted the
overriding provision of the Act in so far as the present
dispute is
concerned is s 8(4)(a). Omitting irrelevant wording, it read as
follows at all times relevant to the tax years in question:
'There shall
be included in the taxpayer's income all amounts allowed to be
deducted . . . under the provisions of sections 11 to
20, inclusive,
. . . whether in the current or any previous year of assessment which
have been recovered or recouped during the current
year of
assessment.'
[8]
Accordingly,
once there is recovery or recoupment of the deducted amounts they
have inevitably to be included in the taxpayer's income
in the year
when they are recovered or recouped (cf ITC 1704
(2001) 63 SATC 258
at 262C-263A).
[9] If the
proper interpretation of 'recouped' leads to a result favourable to
the Commissioner, as I think it does, then it is unnecessary
in this
case to construe 'recovered' or to consider how these words differ in
meaning.
[10] The thrust of the argument for the taxpayer in this
Court is that there cannot be recoupment where the indebtedness which
gives
rise to an allowed deduction still exists in law. It follows
that the taxpayer's prediction that it will probably never be called
upon by its creditor to pay the debt is, according to the argument,
therefore irrelevant, as are its accounting entries.
[11] In the present case the debts in question had not
prescribed at any stage material to the litigation. For the decision
of this
matter, therefore, the amounts written to income must be
taken to have still been subject to the taxpayer's legal liability to
pay
the suppliers concerned if they had demanded payment.
[12] Counsel for the taxpayer argued that
recoupment should not be held to depend solely on the actions or
subjective decisions of
individual taxpayers, influenced by their
view that payment would never be exacted. It was pointed out that in
the case of accruals
the Act required taxpayers to produce positive
proof that they would not be paid and the least that ought to be
present in the case
of recoupment was, on a proper interpretation of
the Act, proof, to the same degree, that a taxpayer would never
actually have to
pay.
I did not
understand counsel, however, to seek to evade the fundamental
requirement that it was for the taxpayer to show that the
Commissioner was wrong in taxing the amounts written back.
[13] Although the debts here were still
legally due when the sums in issue were
credited
to income the vital consideration in my view is that
s 8(4)(a) has to do with the recoupment of amounts, not the
extinction of liabilities.
This indicates that the legislature
contemplated that recoupment could occur despite the continuing
chance that the taxpayer might
after all be called on to pay. The
reason for that stance would be, no doubt, that the legislature
wished to ensure that if the
deduction of expenditure was once
allowed a taxpayer should not escape taxation if alleged expenditure
was not to be expenditure
after all, whether or not liability was
legally terminated. Had it been intended that an amount previously
allowed as deductible
expenditure would become taxable only if legal
liability for payment ceased to exist (whether by way of
prescription, agreement or
otherwise) then the legislature could have
said so simply. Instead it linked taxability only to recovery or
recoupment. These are
words of very wide meaning, as was said in
Moorreesburg Produce Company Ltd v Commissioner for Inland Revenue
1945 CPD 289
at 296-7.
[14]
Nothing in s 8(4)(a) or its
context signifies a legislative intention that 'recoup' should bear
any narrower meaning than any of
those which it ordinarily does.
According to the Oxford English Dictionary, 'recoup' means in law
'(t)o deduct; to take off or keep back; . . . to make a
deduction.'
Here, the taxpayer deducted or took off the amounts in
issue from its previously declared, and allowed, expenditure and so
turned
such erstwhile expenditure into income. These amounts would,
according to that particular meaning, therefore have been recouped.
[15] It may
be as well, however, to be wary of that particular meaning because in
English law (and it is that law to which the dictionary
refers) it
may have a particular connotation, or nuances, with which we are not
familiar. (cf ITC 1704 at 263B-C.)
[16] A more
common instance of the ordinary meaning of 'recoup', again according
to the Oxford English Dictionary, is 'to recover
what one has
expended'. To get back what one has actually paid out would be a
clear illustration of this meaning. The question
here is whether
expenditure, which by reason of taxation provisions constitutes that
which is legally owing but has not yet been
paid out can, on these
facts, be recouped within the meaning of the section.
[17] Where
unpaid expenditure has been allowed as deduction from taxable income
there is not just an expenditure entry in the taxpayer's
books of
account reflecting the relevant debt. There is, in addition, an
assertion by the taxpayer, accepted and acted upon by the
Commissioner, recognising the likelihood, if not the inevitability,
that the debt will be paid. That is the basis for regarding the
unpaid debts as actual expenditure. If the taxpayer later, in effect
erases the debt from its books and treats the amount concerned
as
available for another purpose, the questions which arise are:
(a) whether the debt has for some reason ceased to exist
and, if not,
(b) whether the amount unpaid, but expended in the eyes of the tax
law, has nevertheless, for all practical purposes, reverted to
the
taxpayer's 'pocket'.
[18] As
indicated, the taxpayer's argument is that an affirmative answer to
(a) is essential before recoupment can occur. I disagree.
A debt also
ceases to exist on payment, not only when it prescribes. And if it
does cease to exist before payment occurs even then
there may not be
recoupment until the taxpayer takes some or other step to recoup. The
crucial enquiry, therefore, is (b).
[19] There
was one witness in the case, Mr WJ Prinsloo, who was the taxpayer's
financial manager during the tax years in question.
Clearly he spoke
with abundant experience of the efficiency, or lack of it, of the
creditors concerned. The patterns and regularity
of their failures to
invoice the taxpayer eventually enabled the latter to determine a
stage in each case when, from experience and
on a very conservative
view, it could be said, in the words of the witness, that 'in all
probabilities it is not possible' that an
invoice would be received.
He added that there was never an instance after an amount had been
written to income that the creditor
concerned demanded payment.
[20] On this evidence, therefore, the
amounts in contention in this case were shown to be amounts that
probably would not be actual
expenditure after all. The taxpayer
accordingly regarded itself as at liberty to deal with them as
unexpended and for that reason
credited
them to income. As such, they were available for a purpose
other than that for which the tax deduction had originally been
allowed.
In plain terms the amounts reverted to the taxpayer's
pocket. In my view, in the circumstances, the taxpayer recouped those
amounts.
[21] On
facts substantially comparable to those in the present case the
Special Court in ITC 1634
(1997) 60 SATC 235
concluded (at 259) that
by the taxpayer's having recognised that 'for all practical purposes,
the unpaid liabilities had ceased to
exist as such, by reason of the
ineptitude of the creditors, in particular by transferring the
amounts to its profit account and
ceasing not only to reflect the
whilom creditor as one but even to hold the amounts in suspense' the
taxpayer had procured a recoupment
of its expenditure.
[22] It was
contended before us that that conclusion was wrong and that the
Australian cases by which it was influenced did not support
it. In my
view it is unnecessary to analyse the Australian cases because I
consider, for the reasons I have already stated, that
the conclusion
of the Special Court in ITC 1634 that recoupment had occurred was
indeed correct. I should add that such conclusion
was also approved
in ITC 1704, to which I have already referred. (In the latter case,
of course, the debts had prescribed and that
serves to distinguish
the matter.)
[23] Furthermore,
assuming that the relevant entries did not in themselves effect
recoupment the facts nonetheless compel the conclusion
that the
writing back to income constituted an admission by the taxpayer that
the amounts had been recouped, by which admission,
in the absence of
any consideration depriving it of binding effect, the taxpayer must
be bound.
[24]
Finally, counsel for the
taxpayer pointed to the introduction in 1997 of a new paragraph, s
8(4)(m), in terms of which, if a taxpayer
is 'relieved from the
obligation to make payment of any expenditure actually incurred', and
a deduction has been allowed in respect
of such expenditure, the
taxpayer is deemed to have recovered or recouped the amount owing
under the obligation. It was argued that
this indicated that the
legislature's intention had always been that recoupment had
necessarily to involve the extinction of the
obligation underlying
the allowed expenditure. This contention cannot succeed. Release from
indebtedness is not entailed in the ordinary
meanings of 'recovered'
or 'recouped'. Termination of liability is not itself a recoupment.
It merely enables recoupment. If anything
the new paragraph detracts
from the taxpayer's argument because it signifies that ordinarily the
termination of legal liability is
not a requirement for recoupment.
There was therefore a need for the inserted paragraph to introduce
the deemed meaning.
[25] Therefore
the Special Court was right in concluding that the amounts in
question were recouped within the meaning of s 8(4)(a)
and thus
correctly taxed by the Commissioner. The appeal must fail. It is
dismissed with costs, including the costs of two counsel.
__________________
CT HOWIE
PRESIDENT
SUPREME COURT OF APPEAL
CONCURRED:
SCHUTZ JA
ZULMAN JA
NAVSA JA
HEHER AJA