About SAFLII
Databases
Search
Terms of Use
RSS Feeds
South Africa: Supreme Court of Appeal
SAFLII
>>
Databases
>>
South Africa: Supreme Court of Appeal
>>
1994
>>
[1994] ZASCA 40
|
|
Commissioner for Inland Revenue v Felix Schuh (SA) (Pty) Ltd (392/92) [1994] ZASCA 40; 1994 (2) SA 801 (AD); [1994] 2 All SA 329 (A) (28 March 1994)
44/94
Case No 392/92
IN THE SUPREME COURT OF SOUTH AFRICA
(
APPELATE
DIVISION
)
In the appeal of:
COMMISSIONER FOR INLAND REVENUE
Appellant
versus
FELIX SCHUH (SA) (PTY) LTD
Respondent
CORAM
: CORBETT CJ, SMALBERGER, NIENABER, HOWIE, JJA, et OLIVIER
AJA.
DATE OF HEARING
: 22 February 1994
DATE OF JUDGMENT
: 28 March 1994
JUDGMENT
/
CORBETT
CJ:
2
CORBETT
CJ:
This
appeal, which comes to us direct from the Transvaal Income Tax Special Court,
concerns the deductibility under sec 11(a) of the
Income Tax Act, 58 of 1962
("the Act"), of so-called "foreign exchange losses". In the Special Court the
parties submitted, by agreement,
a statement of facts and no evidence was led.
From this statement and from the usual dossier the following picture
emerges.
The respondent, Felix Schuh (SA) (Pty) Ltd, is a South African company.
It is the wholly-owned subsidiary of a German corporation,
Felix Schuh & Co
GmbH ("Schuh"), whose main business is industrial insulation, painting and fire
protection. Prior to February
1983 Schuh conducted business in South Africa from
a branch in Johannesburg and was registered as an external company under the
Act.
In November 1982 the respondent was incorporated and in February 1983 a
written agreement was
3 entered into in terms of which Schuh sold
its branch business in South Africa to the respondent. The purchase price of the
business
was its nett asset value as at the "effective date", which was agreed
to be 1 January 1983, and it was to be paid by the issue to
Schuh of shares in
the respondent having an equivalent nominal value. The agreement was
implemented.
During the 1983 tax year, which in respondent's case ended on 31 December
1983, the respondent borrowed an amount from Schuh and from
Schuh's own holding
company, G & H Montage GmbH ("Montage"). It was alleged by the respondent in
its letter of objection that
this and subsequent similar borrowings were
incurred in order to provide the respondent with working capital. On 1 August
1983 the
respondent received the proceeds of this first loan, which amounted in
South African currency to R360 000. The loan was repayable,
however, in
Deutschmarks.
4 Between 1 August and 31 December 1983 the value of
the rand as against that of the Deutschmark ("DM") declined substantially and
on
the basis of the rate of exchange prevailing on 31 December 1983 the
indebtedness of respondent to Schuh and Montage expressed
in rands, amounted to
R370 509,16, i e R10 509,16 more than it was on the day that the proceeds of the
loan were received by the
respondent. This sum of R10 509,16 was taken into
account by respondent as a deductible loss in its income tax return for the 1983
tax year. The deduction of this loss was apparently allowed by the appellant in
the assessment of the respondent's taxable income
for the 1983 tax
year.
During the 1984 tax year a further amount of R200 000 was loaned to the
respondent by Schuh and/or Montage. This loan was also repayable
in DM. As a
result of a further decline in the value of the rand as against the DM the
respondent's total indebtedness in
5 respect of these two loans
expressed in rands as at 31 December 1984 stood at R730 382,65. This represented
a further "loss" of
R159 873,49, calculated as follows:
Total liability as at 31/12/84 R730 382,65
Less
Total liability
as
at 31/12/83 R370 509,16
Further loan 200 000,00
570 509,16
R
159 873,49
Again this amount of R159 873,49 was claimed and apparently allowed as a
loss in the determination of the respondent's taxable income
for the 1984 tax
year.
No further loans were made during the 1985 tax year, but the value of the
rand relative to the DM continued to decline. As at 31 December
1985 the
respondent's total liability in respect of these loans expressed in rands
amounted to Rl 195 199,33. This represented a
further increase in liability, or
"loss",
6 of R464 816,68. In its income tax return for the 1985 tax
year the respondent, as before, claimed this last-mentioned amount as
a
deduction in the computation of its taxable income. This time, however, the
appellant disallowed the deduction. The respondent
appealed to the Special
Court, which upheld the appeal and referred the matter back to the Commissioner.
The Commissioner now appeals
to this Court.
Certain other matters appearing from the statement of facts should be
mentioned. Firstly, during the three tax years referred to no
capital repayments
on the loans were made by the respondent. Secondly, for the purposes of the
present appeal no issue arises in
respect of the 1983 and 1984 years of
assessment. And, thirdly, it is agreed that the sole issue is whether the
respondent is entitled
"as a matter of principle" to deduct the sum of R464
816,68 in the 1985 tax year as being an "unrealised loss" resulting from
exchange
rate
7 variations. The final paragraph of the statement
reads:
"If the Court holds that, as a matter of principle, the Appellant [now
respondent] is entitled to the deduction, the Court is asked,
in terms of
section 83(13)(a) of the Act, to refer the assessment back to the Commissioner
for further investigation, and assessment
on the basis that a deduction should
be allowed to the extent that the loans were raised and utilised by the
Appellant for the purpose
of expenditure that was not of a capital
nature."
It is common cause that the resolution of this issue depends on whether a
foreign exchange "loss" such as that referred to above constitutes,
in terms of
sec 11(a) of the Act, an expenditure or loss -
".... actually incurred in the Republic in the production of the
income...."
8
The further question whether, accepting that it is such an
expenditure or loss, it is of a capital nature or not does not, as I have
indicated, arise for decision in these proceedings.
In coming to the
conclusion that the respondent's foreign exchange "loss" was an expenditure or
loss actually incurred in the Republic
in the production of the income the
Special Court relied mainly on three decisions:
Caltex Oil (SA) Ltd v
Secretary for Inland Revenue
1975 (1) SA 665
(A),
Plate Glass &
Shatterprufe Industries Finance Co (Pty) Ltd v Secretary for Inland Revenue
1979 (3) SA 1124
(T) and
Commissioner for Inland Revenue v General Motors SA
(Pty) Ltd
1982 (1) SA 196
(T). It is necessary to consider these cases in
some detail.
In the
Caltex
case the taxpayer was a South African company
carrying on business within the Republic as an importer, manufacturer and
distributor
of petroleum
9 products. It was a subsidiary of a
company incorporated in the United States of America. The taxpayer purchased its
supplies of
crude oil and other petroleum products and subsidiary supplies from
two fellow subsidiaries both incorporated and carrying on business
in the United
Kingdom, viz Caltex (U.K.) Ltd ("Caltex UK") and Caltex Services Ltd ("Caltex
Services"). The goods so purchased formed
part of the taxpayer's
stock-in-trade.
The taxpayer was obliged to pay for these goods in pounds sterling and
the suppliers would invoice the taxpayer accordingly. Upon
receipt of such an
invoice the taxpayer would convert the purchase price shown therein (in pounds
sterling) into rands at the prevailing
rate of exchange between sterling and the
rand and enter the converted amount in its books as the cost price of the
supplies received
in terms of the invoice. The taxpayer's tax year ended on 25
December.
10 On 18 November 1967 there were owing to Caltex UK and
Caltex Services respectively the amounts of 24 659 486 and 248 925. These
had
been expressed in rands in the taxpayer's books of account as R9 353 920 and R98
217. On 19 November 1967 as a result of the
devaluation of sterling on that date
the rate of exchange between the rand and the pound changed from R2 to 21
(approximately) to
Rl,7207 to £l.
The amount owing to Caltex Services, viz £48 925, was paid by the
taxpayer after 19 November, but before 25 December 1967. The
discharge of this
obligation cost the taxpayer in rand terms R84 186, i e R14 031 less than the
amount owing prior to 19 November
and as reflected in the relevant entries in
the taxpayer's books of account. The amount owing to Caltex UK, viz £4 659
486,
was not paid during the 1967 tax year, but as at the close of the financial
year it was known that by reason of the devaluation and
the then
11
prevailing rate of exchange this obligation could be discharged at a cost
to the taxpayer of R8 017 647, i e Rl 336 271 less than
the cost would have been
but for devaluation and so much less than the amount reflected as owing in the
taxpayer's books of account.
The question which then arose before the Special Court and later before
this Court was whether in the determination of the taxpayer's
taxable income for
the 1967 tax year the full amounts of R9 353 920 and R98 217 should have been
included in calculating the amount
of "expenditure actually incurred" in terms
of sec 11(a) by the taxpayer in the acquisition of trading stock during that
year; or
whether these amounts should have been reduced by the afore-mentioned
amounts of Rl 336 271 and R14 031 respectively. The taxpayer
contended for the
former approach; the Commissioner (or Secretary as he was then known) for the
latter. The Special Court upheld
the Commissioner's contention and the
taxpayer
12 appealed. For reasons which I shall elaborate this Court
dismissed the appeal.
In the judgment of this Court (delivered by
Botha JA.) a number of important preliminary points were made. In the first
place, it
was pointed out that it was common cause that the expenditure incurred
by the taxpayer (appellant) in the acquisition of the goods
in question was
incurred in the production of its income, that such expenditure was not of a
capital nature and was wholly expended
for the purposes of the appellant's
trade. The sole question was whether or not the two sums which the appellant was
by reason of
the devaluation of sterling not required to expend in rands in
order to discharge its obligations in sterling to its suppliers could
be said to
be part of the "expenditure actually incurred" in terms of sec 11(a) (see
Caltex
judgment, at 673 F-H).
13 The second point which was
emphasized was that income tax is assessed on an annual basis in respect of the
taxable income received
by or accrued to the taxpayer during the year of
assessment; that in determining such taxable income there is in terms of sec
11(a)
deductible from income expenditure actually incurred by the taxpayer
during the year of assessment; and that 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 hand during the year of assessment. (See at 674
B-D.)
The third preliminary point made was that "expenditure actually incurred"
does not mean only 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. It is in the
tax
14 year in which the liability is incurred and not the year in
which it is actually paid (if paid in a subsequent year) that the expenditure
is
"actually incurred". (See at 674 E-F.)
The judgment then proceeded to deal with the obligation (to Caltex
Services) which was actually discharged by payment during the 19
67 tax year and
held that the appellant actually discharged its obligation by expending R14 031
less than the amount of R98 217 entered
in its books of account. Said Botha JA
(at 675 A-C):
"It seems to me quite impossible to say that, merely because the higher
amount of R98 217 was entered in appellant's books of account
as the equivalent,
as at the date of the relevant transactions, of 248 925 sterling, the
expenditure actually incurred in connection
with the Caltex Services Ltd
transactions was anything more than the amount actually expended by
the appellant
It is important to bear in mind that the
15
liability to Caltex Services Ltd. was incurred in
sterling and not in rands, and the amount of expenditure actually incurred for
the
purpose of sec 11 (a) can only be the amount required in rands to discharge
that liability in the tax year in which it was incurred."
Turning to the liability to Caltex UK, the Court held that the position
was no different in principle. At the end of the 1967 tax
year the appellant
owed this creditor £4 659 486, but since sterling was not legal tender in
South Africa this obligation had
to be quantified in rands as at the end of the
financial year for the appropriate deduction to be made in the appellant's
income
tax return. This quantification had to be made at the rate of exchange
prevailing at the end of the fiscal year. (See at 675 E-H.)
In support of this
conclusion Botha JA stated (at 675 in fin - 676 A):
16
"Were it otherwise a completely unrealistic
result would be achieved in that a trader would be allowed, for the purpose of
determining
his taxable income for the year of assessment, to deduct from his
income moneys which he in fact did not expend or for the payment
of which he
incurred no liablity in the production of his income during that year, and which
could not be said to have been 'wholly
or exclusively laid out or expended for
the purposes of trade' in terms of sec 23(g) of the Act. I agree with counsel
for the respondent
that it would be doing violence to language to suggest that,
where a trader has incurred a liability to pay a fixed amount for trading
stock
during any tax year, and that amount is for any reason reduced during that year
and before it is paid, the amount of the expenditure
actually incurred by that
trader during that year was the original amount agreed upon and not the reduced
amount. "
In the
Caltex
case it was argued on behalf of the appellant that
where a trader incurred liability to
17
pay for trading stock in a foreign currency it was
necessary in terms of our taxation laws that the relevant transaction and the
amount
owing be reflected in the trader's books of account in terms of South
African currency, that the conversion from the foreign currency
to rands be made
at the date of the relevant transaction and that the amount so reflected in
rands be regarded as the amount of the
expenditure actually incurred by the
trader for the purposes of sec 11(a), irrespective of subsequent fluctuations in
the applicable
rate of exchange. (See at 676 E-F.) The Court gave the following
reasons for rejecting this argument (at 676 G -677 A):
"It is true that for the purposes of the Republic's taxation laws it was
necessary for the appellant to reflect in its books of account
its trading
operations with Caltex Services Ltd. and Caltex (U.K.) Ltd. in South African
currency, and that the conversion from
18
sterling to rands was therefore made according to the rate of exchange
prevailing at the relevant time. Although the amount so converted
reflected the
liability incurred by the appellant expressed in South African currency at the
time of the conversion, it did not follow
that that amount so expressed would
remain unchanged until the discharge of the liability in sterling or until the
end of the tax
year when the deductions in respect of the expenditure actually
incurred by the appellant came to be made under sec 11(a). The Court
is only
concerned with deductions permissible according to the language of the Income
Tax Act and not debits made in a taxpayer's
books of account for deduction even
though considered proper from an accountant's point of view. (
Joffe & Co
Ltd v Commissioner for Inland Revenue
,
1946 A D 157
at p 165.)"
Finally the Court emphasized (at 677 G-H):
"We are here concerned only with the case where the foreign currency
is
19
devalued in the same tax year in which the liability to make payment in that
currency was incurred, and before that liability is discharged.
We are not
concerned with the case where the devaluation occurs in a subsequent year before
the liability is discharged. In the latter
case the quantification, for the
purpose of sec 11(a), at the end of the tax year, of the expenditure actually
incurred during that
year, is not affected by the subsequent devaluation of the
foreign currency (cf
The British Mexican Petroleum Company
case, supra),
but in such a case the devaluation may attract other tax consequences in the
fiscal year in which the devaluation takes
place, depending upon whether or not
the tax legislation provides for such a contingency, expressly or impliedly. It
is not necessary
in this case to express any views on that aspect of the
matter."
I turn now to the
Plate Glass
case (supra). In this case the taxpayer (appellant) was a
company in a
20
large group, comprising domestic and foreign companies. It
was formed to look to the financial requirements of the group. A loan was
obtained from a Swiss bank by a member of the group, which in turn lent 10
million Swiss francs (the major part of the loan) to the
appellant, which
"on-lent" the money to other members of the group. It was arranged that three
million Swiss francs would be regarded
as an outright, indefinite period,
interest-bearing loan, repayable on demand; whereas in respect of the balance of
seven million
Swiss francs promissory notes were to be issued for 120-day
periods on a so-called "roll-over" basis. In its income tax returns for
the 1974
and 1975 fiscal years the appellant claimed as deductions losses on this loan
transaction by reason of unfavourable changes
in the rate of exchange between
the rand and the Swiss franc. The deductions were disallowed and an appeal to
the Special Court failed,
as also did an appeal to the full bench of the
Transvaal Provincial
21
Division. In the judgment of the full bench (which
is
reported at
1979 (3) SA 1124)
it was noted that the
appeal raised three issues: (i) whether any losses were
actually incurred by reason of the exchange rate
fluctuations; (ii) if there were such losses, whether
they were incurred by appellant, and not some other
company within the group; and (iii) whether such losses
were suffered in the production of the income and were
not of a capital nature. The full bench (per Margo J,
Eloff and Preiss JJ concurring) held that the appellant had failed to
prove that the losses were not of a capital nature and accordingly
dismissed the
appeal. In regard to issue (i) above, the President of the Special Court,
Trengove J, had stated with reference to
the outright loan of three million
Swiss francs (I quote from the unreported judgment):
"The outright loan of Sw. Fr. 3 000 000 was granted in April 1972, and at
a
22
foreign exchange rate of Sw. Fr. 5,208 to the R1,00 (which was the
conversion rate as at that date) the amount available to the appellant,
for its
purposes, would have been approximately R576 037. This is the amount at which
the loan would have been reflected in the appellant's
books of account, in April
1972. This amount was still available to the appellant and in its hands as
circulating capital during
the 1973 and 1974 tax years; according to the
evidence, there was no demand for the repayment of this loan during the tax
years in
question. If such a demand had been made, and the appellant had been
obliged to repay the loan it would undoubtedly have incurred
a loss in doing so,
as a result of the deterioration in the rate of exchange. But, in my view, it
cannot be contended that the appellant
has, as yet, incurred any actual loss on
this loan as a result of the adverse foreign exchange rate. While it is no doubt
in accordance
with the principles of sound accountancy to make some provision in
the balance sheet for such an eventuality and to reflect the extent
of
23
the appellant's liability in respect of the loan at the current rate of
exchange, a loss, reflected in the balance sheet for this
purpose, would not, in
my view, constitute a loss actually incurred, as envisaged in section 11(a) of
the Act."
In the judgment of the full bench reference is made to this passage in
the reasons of Trengove J (see at 1127 H) and the following
observation is made
thereon (at 1127 in fin - 1128 D):
"On the other hand, it seems to me that there is logic in adopting the
accounting method to determine liabilities or losses, whether
on capital account
as set forth in a balance sheet as at a particular date, or on a trading account
covering a particular period.
The expression
'expenditure actually incurred', in s
11(a) of the Income Tax Act, 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
24
been discharged during that year or not. 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 purpose
of s 11 (a). See
Caltex Oil (SA) Ltd v
Secretary for Inland Revenue
1975 (1) SA 665
(A) per Botha JA at 674D-F.
That applies equally to losses, for s 11 (a) refers to 'expenditure and losses
actually incurred'. Here,
since part of the loan was repayable on demand, and
the rest was repayable on demand at the end of any of the 120-day periods, the
liability continued for each tax year until it was repaid. If, in a case such as
the present, after such a liability has been brought
to account in an increased
amount because of a loss caused by a change in the rate of exchange, there
should be an improvement in
the rate of exchange resulting in a profit, or in a
reduction of the loss, that would have to be accounted for as at the later date
or in the later trading period. The ultimate
25
actual profit or loss would then be properly
brought to account in this way. For a short discussion on this method, and its
acceptability,
see Simon Taxes 3rd ed vol B para Bl.1101 at 542-543."
In view of the fact that the Court's decision was founded on the capital
or revenue nature issue, these remarks must be regarded as
obiter
dicta.
My reference to the
General Motors
case (supra) need
not be more than brief for it dealt with a principle which does not arise for
decision in this case and upon the
correctness of which I do not propose to
express any opinion. The case concerned certain foreign loans made to the
taxpayer (respondent
before the Court) and (unlike the present case) repaid by
the respondent during the 1976 tax year. The loans were repayable in foreign
currencies and owing to changes in rates of exchange the respondent had to pay
more in rand terms when repaying than it had received,
in rand terms, when the
loans were
26
granted. The question which arose in that case was whether
these "foreign exchange losses" were on capital or revenue account. The
Court (a
full bench of the Transvaal Provincial Division consisting of Irving Steyn, Le
Grange and McCreath JJ) held that in order
to determine this issue it was
necessary to have regard to the "substance and reality" of the transactions in
question; and that,
inasmuch as the loans, so regarded, were for the purpose of
acquiring trading stock, and did not form part of the respondent's
"infrastructure",
losses incurred in the repayment of the loans were of a
revenue nature.
Reverting to the present case, I would point out that the President of
the Special Court (Melamet J) stated in the judgment of the
Court (with
reference to the
Caltex
,
Plate Glass
and
General Motors
cases) that:
"The effect of the three judgments, read in conjunction, is that an
unrealised
27
foreign exchange loss relating to a loan raised for working capital purposes
must be taken into account for income tax purposes at
the end of the year of the
assessment irrespective of the year in which the proceeds of the loan were
received by the borrower."
It
was argued before the Special Court on behalf of the Commissioner that the
losses in question were not "actually incurred" in terms
of sec 11(a) in that at
the end of the tax year in question they were merely notional losses and were
conditional on the actual rate
of exchange prevailing at the time of repayment.
Melamet J rejected this argument and stated:
"When a taxpayer owes an amount expressed in a foreign currency and the
amount is owed unconditionally and uncontingently there is,
with certainty, an
amount of expenditure actually incurred. Fluctuations in the rate of exchange
can only affect the amount or quantification
of the
28
certain liability. It is only the quan
tification that is
contingent - the
liability itself is absolute. On
this
basis, a deduction for an unrealised loss
falls
within the basic principles for
deduction in terms of section 11(a)
of the
Income Tax Act."
While not necessarily accepting all the reasoning in the obiter dicta
(quoted above) in the
Plate Glass
case, Melamet J nevertheless agreed
with the conclusion reached therein and regarded himself bound thereby.
With respect, I am unable to agree with either the reasoning or the
conclusion of the Court a quo. In my view the so-called foreign
exchange "loss"
claimed as a deduction under sec 11(a) by the respondent in this case was not a
loss "actually incurred.... in the
production of the income". In principle it
seems to me that it makes no difference whether there were one or more loans or
whether
the loans in question were made
29 during the 1985 fiscal
year or in a previous year; and so for the sake of simplicity I shall, in
discussing the case, treat them
as a single loan made, but not repaid, during
the 1985 tax year. I shall also assume that the actual proceeds of the loan, in
rand
terms, when received by the respondent was R730 382,65; and accept that as
at 31 December 1985 it would, in rand terms, have cost
the respondent Rl 195
199,33 to repay the loan: hence the so-called loss of R464 816,68.
Sec 11(a) speaks of "expenditure" and "losses". The distinction between
these two concepts has been discussed by this Court relatively
recently in the
cases of
Stone v Secretary for Inland Revenue
1974 (3) SA 584
(A), at 593
E - 594 H;
Burman v Commissioner for Inland Revenue
1991 (1) SA 533
(A),
at 536 D - F;
Solaglass Finance Co (Pty) Ltd v Commissioner for Inland
Revenue
[1990] ZASCA 157
;
1991 (2) SA 257
(A), at 279 B - H). Broadly speaking,
30
as these cases show, "expenditure" refers to disbursements
or expenses incurred or paid voluntarily, whereas "losses" connote involuntary
deprivations occurring fortuitously. In individual cases, however, it may be
difficult to decide which side of the dividing line
a particular outgoing
falls.
In the present case appellant's counsel submitted that the deduction
claimed by the respondent should be categorized as a loss because
it was an
involuntary liability arising from the extraneous and fortuitous occurrence of
an adverse decline in currency exchange
rates. I am inclined to agree, but I do
not think that this categorization is of critical importance. The real question
is whether,
by reason of currency fluctuations, the respondent actually incurred
during the year of assessment any outgoing or liability in respect
of its
foreign loan which could be classed as
31 either an expenditure or a
loss in the production of the income.
In this connection it is
important to obtain clarity on precisely what it is that the respondent seeks to
deduct. The respondent was
lent a sum of money and it incurred an obligation to
repay this capital sum in DM on some unspecified (and, during the relevant tax
year, unascertained) future date. The loan and the obligation to repay by
themselves have no fiscal consequences whatever. They do
not figure in either
the computation of the respondent's receipts and accruals or in the
determination of its deductible expenditure
and losses for the tax year in
question. The loan itself is what has been termed "a neutral factor". But
because the loan has to
be repaid in a foreign currency, viz DM, there is
inherent in the transaction the possibility that when repayment is eventually
made
exchange rate fluctuations may result in the respondent having to
pay
32
in rands either more, or perhaps less, than it originally
received in rands from the lender. If in some future fiscal year when repayment
is made to do so costs the respondent more in rands than the capital amount in
rands which was originally advanced to it, then it
will have incurred a loss
which, provided the other requirements of sec 11(a) are satisfied, will be
deductible. But it will only
be deductible in the year of repayment because only
then
will such a loss have
actually
been incurred. To my mind, it
is as simple as that.
The reliance of the Court a quo, and of respondent's counsel, on the
decision of this Court in the
Caltex
case is, with respect, misplaced. In
that case this Court dealt with an instance of expenditure par excellence, viz
the purchase
price of stock-in-trade acquired by the taxpayer during the fiscal
year in question. An absolute and unconditional (cf Commissioner
for Inland
Revenue v Golden Dumps (Pty) Ltd
33
[1993] ZASCA 89
;
1993 (4) SA 110
(A) at 117A - 118 H, and the
cases there
cited) obligation to pay for the goods was
incurred
during that fiscal year. In respect of the one
creditor
payment was made during the year, but after
devaluation.
The Court held the amount to be deducted in terms of
sec
11(a) was the amount in rands which it actually cost
the
taxpayer to make this payment. The factual situation
in
respect of the other creditor is more relevant to
the
present case in that at the end of the fiscal year
the
obligation remained undischarged. Nevertheless, for
the
reasons which I have fully indicated in dealing with
the
Caltex
case, at that year-end this obligation
had
to
be
quantified
. This was because only in that fiscal
year
was the expenditure actually incurred and,
therefore,
only in that fiscal year could the deduction be
claimed.
The problem which arose did not relate to the question
as
to whether expenditure had actually been
incurred:
clearly it had. The problem related merely to
the
34
question whether in quantifying that expenditure
regard
should be had to the original invoiced price of the
goods
in rands, as it was before devaluation and as it
was
reflected in the taxpayer's books, or to the
outstanding
price owing in rands as at the end of the fiscal year
and
taking into account devaluation. The Court chose
the
latter basis of quantification. That the problem
in
question was merely one of quantification and did
not
relate to the issue as to whether expenditure
had
actually been incurred appears clearly from the
Court's
judgment (see at 675 H, 677 H, 678 A - D) . The
Caltex
case is thus clearly distinguishable from the
present
case and is not authority for the submission that where
a
loan debt repayable in a foreign currency
remains
undischarged at the end of a fiscal year and it
appears
that owing to an adverse change in exchange rates
more
rands would then notionally be required to repay the
debt
than would have been the case when the money was first
35
advanced such increase constitutes a loss actually incurred in that
fiscal year. Moreover, as I have indicated, the submission itself
is unsound. It
follows that the obiter dicta in the judgment of the full bench in the
Plate
Glass
case must be similarly regarded and the above-quoted remarks of
Trengove J in the Special Court preferred.
It is true that where such adverse alterations in the exchange rates take
place and continue year by year the prudent borrower will
no doubt make annual
provision for the possible additional cost (in rands) of discharging the loan
obligation. And this provision
will be reflected in his books and annual
accounts. But this cannot affect the income tax position as I have expounded it.
As has
frequently been pointed out, the Court is concerned with the deductions
permitted in terms of the Act and not with debits or other
provisions made in a
taxpayer's accounts, even though these may be
36 regarded as prudent
and proper from an accounting point of view.
The main argument of counsel for the
respondent
was that the deduction of the foreign exchange
"loss"
claimed was justified on the authority of the
Caltex
case. I have dealt fully with this argument. In
the
alternative, counsel argued that there were in truth
two
sets of transactions: the loan transaction and
the
transaction whereby the proceeds of the loan (in DM)
were
converted by the bank into rands at
respondent's
instance. The argument, as I understand it, is that
by
so converting the respondent exposed itself to the
risk
of loss in the event of an adverse change in
exchange
rates as between the rand and the DM. By the end of
the
fiscal year this adverse change had materialized and
an
"absolute liability" to pay an additional amount in
rands
in order to acquire the DM required to repay the loan
had
come into existence. This increase in liability was "in
37
the nature of a cost" and was an amount of expenditure and
loss within the meaning of sec 11(a).
This argument cannot succeed. In the
first
place, it lacks a factual foundation. Neither
the
statement of facts nor the dossier discloses how the
loan
was made available to the respondent and there is
no
basis for holding that the respondent was party to
a
conversion transaction with the bank. Furthermore,
the
point that it is this conversion transaction and not
the
loan itself which gives rise to the expenditure or
loss
was never taken in the letter of objection.
However,
even if one ignores these difficulties and assumes
in
respondent's favour that there was such a
conversion
transaction with the bank, I am satisfied that
the
argument has no merit. Firstly, in substance
and
reality there was one transaction, viz the loan.
The
conversion of the proceeds of the loan from DM to
rands
in order to enable the respondent to make commercial
use
38
of the loan in South Africa was merely part of the
practical mechanics of giving effect to the loan. Secondly, the conversion of
the
DM into rands constituted neither an expenditure nor a loss. It was simply a
currency conversion. The respondent expended nothing;
it merely received in
rands the proceeds of the loan to it. A fortiori there was no loss. Nor did the
situation change at the end
of the fiscal year. There was still no expenditure
or loss which had then to be quantified. As I have already emphasized, such
expenditure
or (preferably) loss could only occur when the respondent had to
provide rands to purchase the necessary DM to repay the loan. That
did not
happen during the tax year in question.
During the course of argument counsel on both sides referred us to
decisions of the Australian and English courts. In my view, however,
the
position in our law is clear and it is not necessary to seek
39
persuasive authority elsewhere. Nothing that I have read in those
judgments would, however, appear to be adverse to the conclusion
I have reached
in this case.
Finally, I must mention certain amendments to the Act. The first is the
sec 24 B which was introduced by sec 13(1) of Act 104 of 1979
and dealt with
realized gains or losses on the repayment of loans or advances in foreign
currency. This clearly had no application
in the present case. The second is the
new sec 24 I introduced by sec 21 of Act 113 of 1993, which deals with realized
and unrealized
foreign exchange gains and losses which came into operation only
on 1 January 1994 and does not affect this case.
The appeal is accordingly allowed with costs, including the costs of two
counsel. The order of the Court a quo is set aside and is
replaced by an order
dismissing the appeal.
M M C0RBETT SMALBERGER JA)
NIENABER JA) CONCUR HOWIE JA) OLIVIER AJA)