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[1993] ZASCA 89
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Commissioner for Inland Revenue v Golden Dumps (Pty) Ltd. (47/92) [1993] ZASCA 89; 1993 (4) SA 110 (AD); [1993] 2 All SA 496 (A) (2 June 1993)
CASE NO 47/92
/ccc
IN THE SUPREME COURT OF SOUTH AFRICA
(APPELLATE DIVISION)
In the matter between:
COMMISSIONER FOR INLAND
REVENUE
APPELLANT
and
GOLDEN DUMPS (PTY)
LIMITED
RESPONDENT
CORAM
: CORBETT CJ, VAN HEERDEN, SMALBERGER, KUMLEBEN JJA et NICHOLAS
AJA
DATE HEARD
: 11 MAY 1993
DATE DELIVERED
: 2 JUNE 1993
J U D G M E N T
NICHOLAS, AJA
:
This is an appeal by the Commissioner
for
2
Inland Revenue from a decision of the Transvaal Income Tax Special Court,
namely, that the appellant in that Court, Golden Dumps (Pty)
Ltd ("Golden
Dumps"), the present respondent, was entitled
inter alia
to a deduction
of R3 081 750.00 in terms of s 11(a) of the Income Tax Act, 58 of 1962 ("the
Act"). This was the nett expenditure
incurred in the tax year ending 30 June
1985 in respect of the purchase of 200 000 shares in Consolidated Modderfontein
Mines Ltd
("Modderfontein"), which Golden Dumps later transferred to Mr Adrian
Nash ("Nash"), a former employee.
In the Special Court the Commissioner's representative contended that the
expenditure was not incurred during the 1985 year of assessment;
that the
expenditure was of a capital nature; and that it was not wholly and exclusively
laid out or expended for the
3
purposes of trade. The Special Court found against the Commissioner in
all three respects. Leave to appeal to this Court was granted
in terms of s
86A(5) of the Act.
In argument on behalf of the Commissioner in this Court, counsel relied
on one ground only, viz, that the Special Court erred in finding
that the
expenditure was actually incurred during the 1985 year of assessment.
Golden Dumps was formed on 22 March 1977. Until 1978 its members were Mr
Loucas Christos Pouroulis and two others. In that year Pouroulis
became the sole
shareholder, and Golden Dumps began to carry on the business of a management
company. On 23 October 1979 it concluded
a management contract with Government
Gold Mining Areas (Modderfontein) Consolidated Ltd ("GGMA") which subsequently
changed its
name to Consolidated
4
Moddeffontein Mines Ltd ("Modderfontein"). Under the
contract
Golden Dumps was appointed as the technical
and administrative
adviser, the consultant and the
manager of the mine operated by
GGMA. Its functions
later extended to the raising of some R20 000 000 needed
for a project of reorganisation and amalgamation
which
Modderfontein had in preparation in 1980.
On 19 September 1980 Pouroulis handed to Nash
a letter written on a Golden Dumps letterhead and signed
"L C Pouroulis Chairman". The body of the letter read
as follows:
"Dear Adrian
I am pleased to be able to offer you a position
with our group in the capacity of financial
director
with effect from 15 October 1980.
Your commencing salary will be R60 000 per annum,
and you will have the free use of a Mercedes 230
Automatic motor car.
On conclusion of your
negotiations abroad of all
matters concerned with the re-organisation and
amalgamation of Modderfontein Seventy-Four (Pty)
Ltd and Government Gold Mining Areas
5
(Modderfontein) Consolidated Ltd you will be entitled to 200 000 shares in
the new company broken down as follows: 75 000 at 1c each
75 000 at 50c each, and 50 000 at R1 each."
Nash
accepted this offer and on 20 September 1980 left
for London to
begin the negotiations. He returned to
South Africa on 17 October
1980 and took up his position
as financial director of Golden Dumps
and continued to
perform functions in regard to obtaining
foreign
capital. On 27 December 1980, Pouroulis
summarily
dismissed him. On 6 January 1981 attorneys acting
for
Nash wrote a letter to Golden Dumps demanding
delivery
of the shares referred to in the letter dated 19
September 1980 against payment of R85 750, and stating
that failing delivery proceedings to compel such
transfer would be instituted. On 9 January the
attorneys acting for Golden Dumps replied denying
6
liability and refusing to accede to Nash's demand.
In
February 1981 Nash instituted in the Witwatersrand
Local
Division the proceedings foreshadowed in the letter of
6
January. The action was heard in 1983 by G Coetzee
J,
who granted an order of absolution from the
instance.
An appeal by Nash to the Appellate Division was
upheld
on 27 March 1985 and the substantive order of the
Court a quo was altered to read:
"(1) Defendant is ordered to deliver to plaintiff 200 000 shares in
negotiable form in Consolidated Modderfontein Mines Ltd against
payment by
plaintiff to defendant of the sum of R88 250."
(The judgment, which was written by Corbett JA, was
reported s.v
Nash v Golden Dumps (Pty) Ltd
1985(3) SA
1(A). In the Special Court the parties accepted as
correct the findings of fact contained in the judgment.)
As a purely management company Golden
Dumps
7
did not normally hold shares, but following the judgment
and
in order to comply with it, Golden Dumps acquired
from Pouroulis 200
000 Modderfontein shares at the then
listed price of R15,85 per share, thus incurring
an
expenditure of R3 170 000. It delivered these shares
to Nash and received in return R88 250 being the
price
calculated in terms of the letter of 19 September
1980.
In support of its return of income for the
1985 year of assessment, Golden Dumps attached its
annual financial statements in which there was reflected
the amount of R3 081 750 as a deduction from income
under the heading "EXTRAORDINARY ITEMS". This was
explained in note 16 to the annual financial
statements:
"Remuneration paid to ex-employee accrued after Appeal Court decision dated
27 March 1985 and settled by the delivery of 200 000 Consolidated
Modderfontein
Mines Limited shares as
follows:
8
200 000 Consolidated Modderfontein Mines Limited shares purchased from L C
Pouroulis
at R15,85 per share 3 170 000
Deduct: Paid by ex-employee in
terms of settlement
88 250
3 081
750"
In determining the liability of Golden Dumps for normal
tax
the Commissioner disallowed the deduction. Golden
Dumps lodged an
objection and noted an appeal against
the assessment. The Special
Court allowed the appeal
and referred the matter back to the Commissioner for
reassessment.
In the judgment in
Nash v Golden Dumps
(Pty)
Ltd (supra)
, Corbett JA considered first the question
of
what constituted the contract between the parties
and
what was its meaning and effect (see 17 B-C). He
expressed the view (at 19 E-F) -
"...that contrary to the finding of the Court a
quo
, the share option
contained in the letter of 19 September was contingent, as the letter
indicates,
9
on the successful conclusion by Nash of the negotiations abroad. It was in
effect the reward for the carrying out of a
mandate...
and at 19J-20A
"In effect...Nash's main task was to introduce someone overseas who was
prepared to provide the additional working capital required
to enable the new
company, Modderfontein, to carry on its proposed mining
activities."
The learned judge of appeal said further
(at 20 B-F);
"To sum up, I am of the view that the last paragraph of the letter of 19
September did constitute a separate mandate in terms whereof
it was provided
that, if Nash successfully concluded abroad negotiations which were aimed mainly
at introducing a source of additional
working capital, he would become entitled
to purchase 200 000 shares in the new company, if and when the new company was
formed and
the shares became available. Thus, the mandate having been
successfully carried out, Nash's entitlement to the shares was still contingent
upon the occurrence of a future uncertain event and could be implemented only
after that event had occurred.
The next issue to be considered is whether Nash did what he was required to
do in order to earn the right to the 200 000 shares in
the new company. The
trial Judge found that Pouroulis '...conceded that whatever Nash could have
done
10
'abroad', had been done by 15 October 1980 and he (meaning Pouroulis) was
obviously then very satisfied with what Nash had achieved
at that
stage'.
A conclusion that Nash had done what was required of him to earn the right
to the shares is also implicit in the Court's finding that
by 7 January the
condition upon which Nash's right to the shares depended had been fulfilled; and
generally in the Court's reasons
for non-suiting Nash on the ground of the
Crest Enterprises
principle."
Counsel for the appellant
contended that the
rights and obligations of the parties existed at the
time of
the institution of the action in February 1981.
The obligation of
Golden Dumps to deliver the shares,
and any loss which such delivery
might occasion, had
been "actually incurred" within the meaning of s
11(a)
of the Act during the 1981 year of assessment. The
judgment did n6t constitute a novation and it did not
amount to the fulfilment of a condition which resulted
in the liability of Golden Dumps arising, but it served
11
only to confirm the rights and obligations which
already
existed in 1981. Relying on the
dictum
in
Sub-Nigel
Ltd v Commissioner for Inland Revenue
1948(4) SA 580(A)
at 589 -
"... the whole scheme of the Act shows that, as the taxpayer is assessed for
income tax for a period of one year, no expenditure incurred
in a year previous
to the particular tax year can be deducted"
counsel
submitted that the deduction was not claimable
in the 1985 tax year.
The validity of the argument depends on the
proper interpretation of the words "expenditure and
losses actually incurred" in s 11(a) of the Act. This
provides -
"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,
12
provided such expenditure and losses are not of a capital
nature."
In
Caltex Oil (SA) Ltd v
Secretary for Inland
Revenue
1975(1) SA 665(A) Botha JA referred at pp 673H
to 674B to certain provisions of the Act (to which I
shall return), and said at 674 B-E:
"It is clear from these provisions that income tax is assessed on an annual
basis in respect of the taxable income received by or
accrued to any person
during the period of assessment, and determined in accordance with the
provisions of the Act. In determining
the taxable income of a person carrying on
any trade in any year of assessment there is, in terms of sec. 11(a), deductible
from
such person's income the expenditure actually incurred by him in the
production of the income during that year of assessment. (
Sub-Nigel Ltd., v.
Commissioner for Inland Revenue
, 1948(4) S.A. 580(A.D.) at p. 589). It is
only at the end of the year of assessment that it is possible, and then it is
imperative,
to determine the amounts received or accrued on the one hand and the
expenditure actually incurred on the other during the year of
assessment. (Cf.
Port Elizabeth Electric Tramway Co. Ltd. v. Commissioner for Inland
Revenue
,
1936 C.P.D. 241
at p. 244, and
Commissioner for Inland Revenue
v. Delfos
,
1933 A.D. 242
at p. 257). The expression 'expenditure actually
incurred' in
13
sec. 11(a) does not mean expenditure actually paid during the year of
assessment, but means all expenditure for which a liability
has been incurred
during the year, whether the liability has been discharged during that year or
not. (
Port Elizabeth Electric Tramway Co. v. Commissioner for Inland Revenue,
supra
at p. 244, and I.T. Case 542
(13 S.A.T.C. 116
at p. 118)). It is in
the tax year in which the liability for the expenditure is incurred, and not in
the tax year in which it is
actually paid (if paid in a subsequent year), that
the expenditure is actually incurred for the purposes of sec.
11(a)."
In case ITC 1117 decided in the
Rhodesia
Special Court ((1968)
30 SATC 130)
Mr J B Macaulay
Q.C.,
President, said at 131 that he did not regard the
presence of the
qualifying word "actually" in s 11(a) of
the South African Income
Tax Act as adding anything to
the plain and ordinary meaning of "incurred", observing
that "expenditure is either incurred or it is not
incurred and if no legal liability for it arises it is
not
'incurred'". The dictum was adopted in the
14
judgment of the full court of the Transvaal
Provincial
Division in
CIR v Edgars Stores
(1986) 48 SATC 89
at 94.
If the implication is that the word
actually
is mere surplusage and can be ignored, that would be
contrary
to the firmly established rule of statutory
construction that a meaning must be given to every
word. See
Steyn,
Die Uitleg van Wette
, 5e uitgawe, pp
17-19. In
Attorney-General, Transvaal v
Additional
Magistrate for Johannesburg
1924 AD 421
KOTZE
JA said at
436 that to regard words occurring in a section as
having been inserted
per incuriam
is contrary to the
well approved canon of construction:
"'A statute', says COCKBURN, C.J., 'Should be so construed that, if it
can be prevented, no clause, sentence or word shall be superfluous,
void or
insignificant.'
The Queen v Bishop of Oxford
(4 Q.B.D. at 261). To hold
certain words occurring in a section of an Act of Parliament as insensible, and
as having been inserted
through inadvertence or error, is only permissible as a
last resort. It is, in the language of ERLE, CJ: 'the
ultima
ratio,
15
when an absurdity would follow from giving effect to the words as they
stand.'
Reg. v St John
(2 B and S 706), in the Exchequer Chamber
affirming the judgment of the Queen's Bench."
See also
Craies on Statute Law, 7th ed at pp 103-4:
"'It is a good general rule in jurisprudence,' said the Judicial Committee
in
Ditcher v Denison
, 'that one who reads a legal document whether public
or private, should not be prompt to ascribe - should not, without necessity
or
some sound reason, impute - to its language tautology or superfluity, and should
be rather at the outset inclined to suppose every
word intended to have some
effect or be of some use.' And this is as justly and even more tersely put by
Lord Bramwell, who said
in
Cowper-Essex v Acton L.B
.: 'The words of a
statute never should in interpretation be added to or subtracted from, without
almost a necessity.'"
The learned author acknowledges
that surplusage, or even
tautology, is not wholly unknown in the language of the
legislature, but continues -
"Nevertheless, as Lord Brougham said in
Auchterarder Presbytery v Lord
Kinnoull
, 'a statute is never supposed to use words without a
meaning.'"
16
It cannot be suggested that in s 11(a) the legislature used the word
actually
through inadvertence or error. The phrase
actually
incurred
is used repeatedly in successive Income Tax Acts since Union, and
occurs in several other paragraphs of s 11 (see for example paras
(b), (bA),
(d), (gB), and (gC). The phrase is used frequently in Australian tax statutes,
including s 28(1) of the New South Wales
Act of 1895, 59 Victoria C.15, which
was used as the model by the officials responsible for the drafting of the first
Union
Income Tax Act
, 1914. (See Ingram,
The Law of Income Tax in
South Africa
, p 2, and p 278 ad s 11(2) (a) of the
Income Tax Act
,
1925.)
According to the
Shorter Oxford English Dictionary
,
the adverb
actually
means "in act or fact; really". Ingram referred at
102 to a passage in an
17
unreported judgment of Watermeyer, when President of
Special
Court for Income Tax Appeals (Cape), in
Jacobsohn's
case
(
circa
1923):
"The phrase 'actually incurred' here in our opinion means no more than that
the loss must be an ascertained loss in the year of assessment
: the word
'actually' does not push the meaning of 'incurred' further so as to give it the
sense 'realised in cash' as contended by
the
Commissioner."
(My emphasis).
In a judgment in
New Zealand Flax Investments Ltd v
Federal Commissioner of Taxation
[1938] HCA 60
;
(1938) 61 CLR 179
(High
Court of Australia), Dixon J said at 207:
"To come within that provision [sc. s23(l)(a) of the
Income Tax
Assessment Act
1922-1934] there must be a loss or outgoing actually
incurred. 'Incurred' does not mean only defrayed, discharged, or borne, but
rather it includes encountered, run into, or fallen upon. It is unsafe to
attempt exhaustive definitions of a conception intended
to have such a various
or multifarious application. But i
t does not include a loss or expenditure
which is no more than impending, threatened, or
expected
."
18
(My emphasis)
In support of the dictum in
Caltex Oil (SA)
Ltd v Secretary for Inland Revenue
which is
quoted
above, Botha JA relied on the following at pp
673H-674B:
"In terms of sec 5(1) of the Income Tax Act em income tax is levied annually
in respect of the taxable income received by or accrued
to or in favour of a
person during the year of assessment... In terms of secs 66(13) and 66(13)
quat
the return of income to be made by any person in respect of any year
of assessment shall be a full and true return for the whole
period ending upon
the last day of the year of assessment under charge. An assessment of tax made
under the Act shall, in terms of
sec 81(5), be final and conclusive, subject to
the right of appeal provided for in the Act, and subject to the provisions of
sec
79."
The learned judge of appeal emphasized that it
"is only
at the end of the year of assessment that it is
possible, and
then it is imperative, to determine the
expenditure actually incurred during the year of
assessment."
19
In the case of a liability which is contingent
in the legal sense, the expenditure is incurred during
the
year of assessment only if the condition on which it
depends is
fulfilled during that year. See
Nasionale
Pers Bpk v
Kommissaris van Binnelandse Inkomste
1986(3)
SA 549(A) where
Hoexter JA said at 564 C-D:
"Die vereiste dat die onkoste 'werklik aangegaan' moet word, het egter tot
gevolg dat moontlike toekomstige uitgawes wat bloot as
waarskynlik geag word nie
ingevolge art 11(a) aftrekbaar is nie. Alleen onkoste ten opsigte waarvan die
belastingbetaler 'n volstrekte
en onvoorwaardelike aanspreeklikheid op die hals
gehaal het, mag in die betrokke belastingjaar afgetrek
word."
After quoting this passage in
Edgars Stores
Ltd v
Commissioner for Inland Revenue
1988(3) SA 876(A),
Corbett JA said at 889 A-C:
"Thus it is clear that only expenditure (otherwise qualifying for deduction)
in respect of which the taxpayer has incurred an unconditional
legal obligation
during the year of assessment in question may be deducted in terms of s 11(a)
from income returned for that year.
The obligation
may
20
be unconditional
ab initio
or, though initially conditional, may
become unconditional by fulfilment of the condition during the year of
assessment; in either
case the relative expenditure is deductible in that year.
But if the obligation is initially incurred as a conditional one during
a
particular year of assessment and the condition is fulfilled only in the
following year of assessment, it is deductible only in
the latter year of
assessment (the other requirements of deductibility being
satisfied.)"
There is no difference in
principle between a
case where liability is contingent in the legal sense
and one
where it is contingent in the popular sense.
In the field of
accounting a contingency is understood
as
"...a condition or situation, the ultimate outcome of which, gain or loss,
will be confirmed only on the occurrence, or non-occurrence,
of one or more
uncertain future events."
(See Faul
et al
,
Financial Accounting
, p 475.)
A liability is contingent in that sense in a
case where there is a claim which is disputed, at any
21
rate genuinely disputed and not vexatiously or frivolously for the
purposes of delay. In such a case the ultimate outcome of the situation
will be
confirmed only if the claim is admitted or if it is finally upheld by the
decision of a court or arbitrator. Where at the
end of the tax year in which a
deduction is claimed, the outcome of the dispute is undetermined, it cannot be
said that a liability
has been actually incurred. The taxpayer could not
properly claim the deduction in that tax year, and the receiver of revenue could
not, in the light of the onus provision of s 82 of the Act, properly allow
it.
A prudent accountant would no doubt require that provision' be made in
the taxpayer's financial statements for the expenditure that
might be incurred
(see
Financial Accounting ubi cit
) but any reserve
22
thereby created would not be a permissible deduction. Sec 23(e) of the
Act provides that no deduction shall in any case be made in
respect
inter
alia
of income carried to any reserve fund.
What then was the
situation regarding the liability of Golden Dumps to deliver Modderfontein
shares to Nash as at the crucial date,
namely the last day of the 1981 year of
assessment?
Nash had claimed delivery in January 1981, and his claim
had been rejected, because, according to Pouroulis in his evidence in the
Special Court, he had formed the view acting on legal advice that Nash was not
entitled to the shares. Nash had instituted an action
claiming delivery and this
was being defended. On the crucial date the outcome was undetermined. Liability
was then, to use the words
of Sir Owen Dixon, no more
23
than impending or threatened. The ultimate outcome would be known only
upon the delivery of the Appellate Division's judgment, which
lay four years in
the future.
In my view therefore the decision of the Special Court was clearly
right.
The appeal is dismissed with costs, including the costs of two
counsel.
NICHOLAS, AJA
CORBETT, CJ )
VAN HEERDEN JA ) CONCUR
SMALBERGER, JA )
KUMLEBEN, JA )