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[1994] ZASCA 104
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Conshu (Pty) Ltd v Commissioner for Inland Revenue (437/92) [1994] ZASCA 104; 1994 (4) SA 603 (AD); [1994] 2 All SA 501 (A) (2 September 1994)
CASE NO. 437/92 J VD M
IN THE SUPREME COURT OF SOUTH AFRICA
(
APPELLATE
DIVISION
)
In the matter between:
CONSHU (PTY)
LTD
APPELLANT
and
THE COMMISSIONER FOR INLAND REVENUE
RESPONDENT
CORAM
: HOEXTER, E M GROSSKOPF, NESTADT, HARMS
JJA et OLIVIER, AJA
HEARD
: 5 AND 25 MAY 1994
DELIVERED
: 2 SEPTEMBER 1994
JUDGMENT
HARMS, JA:
This appeal concerns the interpretation of s 103(2) of the Income Tax Act
58 of 1962 ("the Act").
2
The crisp question for decision is whether in the
circumstances of this case the Commissioner for Inland Revenue, not having
applied
the provisions of the sub-section during the tax year in which an
agreement
of the kind referred to in this section was entered
into, is entitled to apply it in respect of an ensuing
tax year.
The taxpayer, Conshu (Pty) Ltd (the present
appellant), was formerly known as National Tyre Company
(Pty) Ltd. The end of its tax year has always been 30
June. During the tax 1984 year the nature of its
business was that of a tyre retreader and dealer; it
suffered a loss of some R3,3m and, taking into account
its accumulated assessed loss, the Commissioner
determined the new balance of the assessed loss at
R5 856 947. The appellant conducted the same type of
business during 1985. Its trading results were
poorer still. In consequence of and due to pressure
3
from its bankers it was obliged to take drastic steps.
That
was done towards the end of the tax year. They
were:
(a) a change of name on 19 June 1985 to Conshu Holdings (Pty) Ltd. In
doing so it took over the name of another company and the erstwhile
Conshu
Holdings (Pty) Ltd then changed its name to United-Fram Footwear Manufacturers
(Pty) Ltd ("United-Fram"). (The "Holdings"
part of the name of the appellant
fell away on a later date.) United-Fram had been a footwear manufacturer and
distributor;
(b)
a change in the
shareholding of the appellant. The date was not given but it must have been at
about the same time. The change was
part of a reorganisation of the Calan group
of companies of which the appellant had been a
member;
(c)
the acquisition
of all the trading assets and
4
liabilities of United-Fram. It was alleged that
this took place on 30 June - the last day of the financial year and a
Sunday;
(d) the disposal of the bulk of its business. Only
the solid tyre business was retained, which in the
scheme of things, was a relatively small part of
its business.
As a result of these changes, the nature of
the appellant's
business was described in the 1985
return of income as that of
retreader and distributor of pneumatic and solid tyres, manufacturers of rubber
footwear, other footwear
and related products. The return also reflected the
effect of the disposal as well as the result of the purchase of the trading
assets
and liabilities of United-Fram. The tax calculation that formed part of
the audited accounts for the year ending 30 June 1985 had
these salient
features:
5
Net loss per income statement 5 728 732
Less: depreciation, doubtful debt
allowance (1984), provision
for bad debts etc 940 278
4 788 454 Add: initial allowance, profit on
disposal of fixed assets etc 121 251
4 909 705
Assessed loss brought forward 5 856 947
Estimated assessed loss 10 766 652
The Commissioner dealt with the 1985 return
in the following manner. He issued an original
assessment
during 1986 and assessed the loss in
accordance with the accounts to
be R10 766 652. Some
two years later an additional assessment was
issued.
Its purpose was to add back an initial allowance
incorrectly claimed on the purchase of the capital goods
from United-Fram. In the result the assessed loss for
1985 was reduced to R9 853 212. This assessment has not
since been reopened.
6
The changes effected to the appellant's business during 1985 had the
desired result and the income tax return for the 1986 tax year
reflected in its
tax calculation this conclusion:
Taxable income for the year 6 549 842
Assessed loss brought forward (10 766 652) Assessed loss to be carried
forward (4 216 810)
In other words, the appellant sought to utilise the provisions of s 20 of
the Act in the determination of its taxable income by setting
off against the
1986 income the balance of the assessed loss which had been
carried forward from the 1985 year. In the original assessment for 1986
the Commissioner allowed the appellant's claim to a set-off
(save that due to
some minor adjustments the income was assessed at R6 700 468 and the resultant
loss at R4 066 184).
During the course of 1988 the Commissioner
7
issued two revised assessments in relation to 1986 simultaneously. The
one was a "reduced" and the other an "additional" assessment.
The reason and
their nature appear from a letter dated 27 June 1988. In it the Commissioner
informed the appellant that he was satisfied
that the transaction whereby the
assets of "various footwear companies" (presumably United-Fram) had been
transferred to it had been
entered into "solely or mainly for the purposes of
the postponement of the liability for the payment of income tax". Invoking the
provisions of s 103 (and without limiting himself to sub-section (2)), he then
ruled that the appellant was not permitted to utilise
the 1985 assessed loss
against the income derived during 1986 from the transferred assets. In
consequence the "reduced" assessment
amounted to this:
Assessed loss available from 1985 (9 853 212)
less Income
from old business 2 211
8
Balance of assessed loss (9 851 001)
The "additional" assessment dealt with the so-called "tainted" income, i
e income derived from the transferred assets, in the following
manner. The
taxable income was calculated by deducting the R2 211 income produced by the
solid tyre business from the net income.
After some adjustments (which are not
germane) had been made, the taxable income was assessed at R6 812 438.
The appellant was dissatisfied with the ruling and noted an objection
which was rejected. An appeal to the Income Tax Special Court
was then lodged.
Whilst it was pending, the Commissioner informed the appellant by letter dated 4
October 1990 that although his
decision had been to apply both s 103(1) and s
103(2) and although he was still of the opinion that he had been entitled to
issue
a valid assessment in that way, he had now decided to abandon his right to
invoke ss (l);
9
and accordingly gave notice that he would argue the matter in terms of ss
(2) only.
It is not necessary to deal with the grounds of appeal as
originally filed because the special Court at the first hearing granted
leave to
the appellant to supplement its notice of appeal by the introduction of two
further, and alternative, grounds; and at the
second hearing leave was granted
to have the first of these heard and disposed of separately. That was done
pursuant to the provisions
of the Magistrates' Courts Rule 19(12) which allows
for a separate hearing of a defence which can be adjudicated upon without the
necessity of going into the main case.
This ground was apparently reformulated during the course of argument in
the Special Court in these terms:
"The Commissioner should have applied the provisions of section 103 (2)
of the Act in the
10
assessment that he raised for the year in which
the agreement was entered into and in which it took effect, namely the year
ended
30 June 1985. Once the Commissioner had failed to apply the provisions of
section 103(2) in respect of the
1985
year of
assessment, it was not competent for him to endeavour to apply the provisions of
the sub-section for the first time in respect
of
the
1986
year, as he
purported to do in the revised
assessment."
For the purpose of deciding
this issue, the Special Court was asked to make three assumptions: (1) that
there had been an agreement
and a change in
shareholding affecting the appellant. (There was no actual evidence that
the agreement had been entered into on 30 June 1985 or that
it had in fact been
concluded during that tax year. The Court was also not asked to make that
assumption but by implication did so.
Because of my conclusion in the matter I
shall deal with it on
11
the same footing.)
(2)
that the
agreement had been entered into and the change in shareholding effected for the
purpose of utilising the assessed loss of
the appellant in order to avoid
liability on the part of the appellant for the payment of
tax.
(3)
that there had been
no reduction in the appellant's tax liability in the 1985 year as a result of
the transaction. The first time
a difference was caused was in 1986. (The scope
and meaning of this last assumption became contentious during argument and I
shall
return to it in due course.)
At the
hearing only the evidence of Mr C Rapp was led. He was the financial director of
the appellant at the time of the appeal but
he had no personal knowledge of the
events in issue. He interpreted the financial statements of the
appellant.
12
The Special Court (presided over by Melamet AJ)
dismissed the preliminary ground of appeal and postponed the hearing of the
other
grounds indefinitely. The appellant preferred to obtain a final
determination of this point and, with the leave of the President,
appealed
directly to this Court. In its notice of appeal, the appellant joined issue with
the Special Court on its interpretation
of the sub-section and noted that the
sole issue in the instant case concerned the time when the Commissioner was
entitled to exercise
his discretionary powers.
Counsel for the appellant began his address to this Court with the
argument that the appeal had to succeed because there was no evidence
on record
to show that the Commissioner in fact had formed the opinion that one of the
prerequisites for the application of s 103(2)
had been present. The sub-section
requires that the Commissioner must be satisfied that the purpose
13
of the agreement must have been to "avoid" tax
before he can disallow the set-off of an assessed loss against tainted income.
That
was, according to the argument, absent. Counsel for the Commissioner also
raised a new issue, namely his entitlement to rely at some
stage or other on ss
(1) in addition to his argument on ss (2). I have been at some pains to indicate
what the case is all about
and there can be no doubt that these points are not
matters which we should or can decide.
Before proceeding to s 103(2), it is necessary to return to the third
assumption referred to earlier i e that there had been no reduction
in the
appellant's tax liability in the 1985 year as a result of the transaction.
Respondent's counsel submitted that it meant that
no tainted income had been
received by or had accrued to the appellant during that year. The Special Court
noted that it was common
cause that "income in the generally accepted meaning of
the term
14
from the acquisition of the assets had been
earned for the first time in the 1986 year of assessment". Melamet AJ went on to
state
that:
"(c)ertain items included in the 'gross income' reflected in the
financial statements accompanying the appellant's return to the Commissioner
for
Inland Revenue for the 1985 year of assessment, in terms of the provisions of
the Income Tax Act and accounting practices flow
from the agreement e g the
inclusion of the assets acquired as 'trading stock', adjustments to the
provisions for 'bad debts' and
'doubtful debts', the initial allowance claimed
in respect of plant and machinery acquired and recoupment resulting from the
sale
by the appellant of certain of its assets".
In my view the Special Court erred for the reasons that follow. As
mentioned earlier the initial allowance claimed had been disallowed
by the
Commissioner. The recoupment resulting from the sale of assets was a reference
to the sale by the appellant of its retreading
business to three subsidiaries of
Voltex
15
Electrical SA (Pty) Ltd. The evidence does not
support the proposition that this sale was part and parcel of the tainted
transaction.
Mr Rapp referred to two distinct transactions, the purchase of the
United-Fram assets and this sale. The only documentary "evidence"
was the
production of company resolutions concerning the United-Fram acquisition. It
will be also recalled that the transaction which
is the subject of the ruling by
the Commissioner related only to the transfer of assets to the appellant. The
adjustments to the
provision of bad and doubtful debts were also a consequence
of the Voltex transaction. As far as the trading stock is concerned,
it had in
part been obtained from United-Fram and was reflected as part of the appellant's
closing stock at cost. It had to be taken
"into account" in terms of s 22(1) of
the Act in the determination of the appellant's taxable income. That did not
elevate it to
income within either the ordinary or the defined meaning
16
of the word - an aspect to which I shall revert
(cf Divaris & Stein,
Silke on South African Income Tax
, §
8.111).
In the result I am of the view that although the last assumption did not
have the meaning ascribed to it on behalf of the Commissioner,
there was no
evidence that any tainted "income" (defined or otherwise) had been earned during
1985. It would appear that there was
some misconception as to the nature of the
proceedings before the Special Court. It was in the nature of a hearing on a
special plea.
That meant that the appellant had to prove all the facts necessary
for the success of his case, i e the upholding of the appeal to
that Court. The
relevant Rule 19(12) does not contemplate a piecemeal decision of the special
defence.
Turning then to the interpretation of s 103(2), it reads:
17
"Whenever the Commissioner is satisfied that any
agreement affecting any company or any change in the shareholding in any company
or in the member's interest in any company which is a close corporation
,
as a direct or indirect result of which income has been received by or has
accrued to that company during any year of assessment,
has at any time before or
after the commencement of the Income Tax Act, 1946, been entered into or
effected by any person solely
or mainly for the purpose of utilizing any
assessed loss incurred by the company, in order to avoid liability on the part
of that
company or any other person for the payment of any tax, duty or levy on
income, or to reduce the amount thereof, the set-off of any
such assessed loss
or balance of assessed loss against any such income shall be
disallowed."
(The words underlined were introduced by s 37(a) of the Income Tax Act
121 of 1984. The section before the amendment applied to the
appellant's tax
year of 1985 and the amended version to that of 1986 - see s 50(1). This
amendment has no effect on the issue under
consideration.)
18
The object of this provision was thus stated by D
M Stewart,
The Prohibition of Tax Avoidance : An Evaluation of Section 103 of
the South African Income Tax Act (No 58 of 1962)
,
(1970) 3 CILSA 168
at
189:
"The reason for this subsection is that elsewhere in the Act [s 20] it is
recognised that to divide a taxpayer's business up into
separate yearly
compartments is largely artificial, and, as a result, where in one year
allowable deductions exceed income, the taxpayer
may carry the balance of
deductible excess forward as an 'assessed loss.' This loss may be deducted from
income earned in the next
or a subsequent year. As a result, certain taxpayers,
whose businesses have failed to profit, build up large assessed losses. Where
these taxpayers are individuals the Revenue has nothing to fear for the assessed
loss is not itself transferable, but where the taxpayer
is a company, whose
shares can readily change hands, new proprietors will attach themselves to the
company and inject new income
into it in order to exploit the assessed loss. It
is this 'trafficking' in the shares of companies with assessed losses which gave
rise to the enactment
19
Of section 103 (2)."
In
Glen Anil Development Corporation Ltd v Secretary for Inland
Revenue
1975 (4) SA 715
(A) 727H-728A Botha JA, in a judgment dealing with
the interpretation of s 103(2), stated:
"Sec 103 of the Act is clearly directed at defeating tax avoidance
schemes. It does not impose a tax, nor does it relate to the tax
imposed by the
Act or to the liability therefor, but rather to schemes designed for the
avoidance of liability therefor. It should,
in my view, therefore, not be
construed as a taxing measure but rather in such a way that it will advance the
remedy provided by
the section and suppress the mischief against which the
section is directed ... The discretionary powers conferred upon the Secretary
should, therefore, not be restricted unnecessarily by interpretation."
On the other hand, Schreiner JA in a concurring judgment in
Commissioner for Inland Revenue v I H B King; Commissioner for Inland Revenue
v A H King
1947 (2) SA
20
196 (A) 216, said in this regard:
"I do not read sec. 90 [of the Income Tax Act 31
of 1941] as a penalty section or as widening the
net beyond the general scope of the Act. It seems
to aim at a truer or fairer determination of the
liability to the taxes imposed by the Act and
their due payment when so determined. It is
intended, I think, to deal with cases in which the
Commissioner, as representing the
fiscus
, is
properly aggrieved by a transaction or operation
designed to enable one of the parties thereto to
escape tax. The Commissioner is not properly
aggrieved merely because at a stage before income
has accrued to a taxpayer it might have been
predicted with confidence, amounting even to
certainty, that if the taxpayer took no steps in
the matter such income would accrue to him, and
because he then takes the avoiding steps. But the
Commissioner would be properly aggrieved if a
transaction or operation were entered into which
prevented income from accruing to the taxpayer
while leaving him in the position of one to whom
the income would normally and naturally accrue.
The section is not, in my opinion designed to
implement the expectations, however reasonable, of
the Commissioner that there will be no change in
21
the taxpayer's affairs which will result in him
getting less income; it is designed to meet the Commissioner's objections to the
creation
of | abnormal or unnatural situations, to the detriment of the
fiscus
."
The precursor of sec 103(2) was introduced
by
way of amendment (by s 90(1)(b)) to the Income Tax
Act 31 of 1941 by
the Income Tax Act 55 of 1946. It has
since been the subject of a
number of textual
alterations, none presently material. It
should,
however, be pointed out that the 1946 provision,
like
s 103(2), applied to any agreement entered into "at
any
time before or after the commencement of the Income
Tax
Act, 1946". This meant, at the time, that
the
Commissioner was entitled to apply, say during
1947,
this provision in relation to an agreement entered
into
during 1945. The 1962 Act came into operation on 1
July
1962 and on the plain wording of the section,
the
Commissioner was entitled to apply s 103(2) thereafter
22
to an agreement entered into before that date.
That being so, it is difficult to understand why, by way of extension, he was
not entitled
to apply it during 1986 in respect of an agreement entered into
during the preceding tax year. Furthermore, the quoted phrase contains
a
tautology because the words "at any time" encompass the balance of it. The use
of a tautology is a device often used in order to
emphasise a point.
The intention to cast the net as wide as possible can also be perceived
if regard is had to the use of the introductory "whenever".
Its ordinary
meanings are: "1. At whatever time; on whatever occasion. 2. Every time that"
(SOED sv "whenever"). And according to
the OED (2nd ed) its meaning in a
conditional clause is "at whatever time, no matter when". To paraphrase, the
sub-section states
that at whatever time the Commissioner is satisfied that any
agreement has at any time been effected, he may disallow
23
the attempted set-off. The
provision is replete with
the indefinite "any". It appears 13 times.
And as
Nicholas AJA pointed out in
Commissioner for
inland
Revenue v Ocean Manufacturing Ltd
[1990] ZASCA 66
;
1990 (3) SA 610
(A)
618H-619B, there is nothing in the provision to
suggest
that the word "any" was used in a limited sense.
If
regard is had to the wording of the tax
avoidance
provision contained in ss (1), it similarly contains
no
limitation as to time. By contrast, there is
a
provision such as s 79 which places strict time
limits
upon the Commissioner's power to raise
additional
assessments. Ss (2) also does not state that
the
failure of the Commissioner to have applied
its
provisions in the year of the agreement, prevents
him
from doing so in any future year. And counsel for
the
appellant agreed that his submission that it can only
be
applied in the year of the agreement is too wide
because
once applied, it can also be used against the
taxpayer
24
in the succeeding years.
S 20 of the
Act deals with the set-off of assessed losses. It provided at the time:
"(1) For the purpose of determining the taxable income derived by any
person from carrying on any trade in the Republic, there shall
be set off
against the income so derived by such person -
(a) any balance of assessed loss incurred by the taxpayer in any previous
year which has been carried forward from the preceding year
of assessment
...
(2) For the purpose of this section 'assessed loss' means any amount, as
established to the satisfaction of the Commissioner, by which
the deductions
admissible under sections eleven to nineteen, inclusive, ... exceeded the income
in respect of which they are so admissible
..."
(This section has since the tax years under discussion been amended but
those amendments are not material to
25
this case.)
The application of s 20
arises as follows in the context of the Act. The charging section is s 5 and it
provides (as far as is relevant
for present purposes) in ss (l)(d) that an
income tax is annually payable in respect of the taxable income received by or
accrued
to or in favour of a company during every financial year of that
company. As counsel for the appellant was at pains to point out,
it is one tax
payable on one synthesized income. "Taxable income" is defined in s 1 as the
amount remaining after deducting from
the income of the company all the amounts
allowed under Part 1 of Chapter 2 of the Act "to be deducted from or set off
against such
income". "Income" is defined as the amount remaining of the gross
income of a company after deducting from it any amounts exempt
from normal tax
under the same part. And "gross income" is the total amount received by or
accrued to or in favour of a
26
company during any tax year.
This means that from an accounting point
of
view the taxable income of a company is calculated
by
taking a number of steps in a predetermined
sequence.
The gross income is first established. From it
the
amounts exempted are deducted in order to determine
the
"income" as defined. Thereafter the
allowable
deductions are deducted. They are, in general
terms,
expenditure and losses incurred in the production
of
income (see generally s 11), marketing allowances (s
11
bis
), the cost of certain fixed assets and
improvements
used in the production of income (s 12B to s 14
bis
),
certain mining expenditures (s 15), certain
expenses
incurred by professional persons (s 16 and s
16A),
expenses incurred in appointing agents outside
the
Republic (s 17), soil erosion expenditures incurred by
a
lessor (s 17A), medical and dental expenses (s
18),
certain donations (s 18A) and sponsorship allowances.
27
(S 19 which then follows is, in this context, not
of any moment.) Adjustments are then made by adding or eliminating items
required
or permitted by the Act.
If, at this juncture, there is a loss, the Commissioner has to issue an
assessment of the loss "ranking for set-off" (s 1 sv "assessment").
This loss is
then carried forward to the succeeding year. On the other hand, if an assessed
loss has been brought forward from the
preceding year, it is set off against the
profit (if any) thus far calculated. As indicated above, that is also how the
accountants
and auditors of the appellant have prepared their tax calculation.
It follows in my view from this analysis that the word "income"
as used in the
introductory part of s 20(1) is not used in its defined sense (cf
Commissioner for Inland Revenue v Simpson
1949 (4) SA 678(A)
692) but
rather as the income taxable but for the set-off. This all simply means that a
set-off in terms of s 20 can
28
only arise if there would otherwise have been
taxable income i e pre-tax profit. I find it impossible to perceive how in an
assessment
to tax, set-off of an assessed loss can operate in relation to say an
individual item of income such as the recoupment on the sale
of an
asset.
Returning then to s 103(2), it empowers the Commissioner to disallow the
attempted set-off against "any such income" i e "income [that]
has been received
by or has accrued to that company during any year of assessment". It permits him
no more. It does not allow him
to issue a declaratory order. He has to await an
attempted set-off by the taxpayer in terms of s 20. I have shown that the
appellant
did not claim the benefit of s 20 in 1985. He did so for the first
time in 1986. There was consequently no occasion for the Commissioner
to
disallow the set-off of any assessed loss or balance of assessed loss during the
former year. In addition
29
the appellant had no otherwise taxable income
during 1985 against which the assessed loss could have been set off. To hold
that, because
the Commissioner could not have applied s 103(2) to the 1985 year,
entails that he could also not have done it in relation to 1986,
would be
destructive of the purpose of the provision. It would also allow for the evasion
of the provision. It must, from a commercial
point of view, be simple to
structure a deal in such a manner that the change in shareholding is effected in
year 1 and to have the
company receive income as a result of it in year 2 or 3
whilst the assessed loss is kept alive by some or other insignificant untainted
trade.
In the ordinary course of events, the failure of the Commissioner to
apply s 103(2) in any particular year will be to the benefit
of the taxpayer:
the set-off is then "allowed" for that year. Counsel postulated a case (dealt
with in some detail in the
30
judgment of E M Grosskopf JA) where the failure
of the Commissioner to apply the provision immediately could lead to the
disallowance
of a set-off of a loss suffered on untainted income. I find the
postulate to fall within the realm of the unlikely and in any event
those are
not the facts of this case. In such case the taxpayer's remedy may be to have
the earlier assessments reviewed; or it is
possible that, in spite of the
synthesis of income and taxation, that more than one assessment has to issue in
relation to the year
of application. If the Commissioner can unscramble the
taxable income of a company that carries on mining operations as well as other
trades (see Divaris & Stein,
op cit
, § 8.127) he ought to be
able to unscramble this omelette.
If it is assumed for purposes of argument that the appellant had received
income as a result of the transaction in 1985 and that in
some way or other
s
31
20 operated, I still fail to see what prejudice
the appellant suffered as a result of the Commissioner's inaction. It cannot be
said
that the result of the application of ss (2) amounted to an additional tax
or penalty. The appellant is still entitled to apply setoff
of the assessed loss
against untainted income.
To sum up: I am of the view that the Special Court was correct in finding
that it was competent for the Commissioner to apply s 103(2)
for the first time
in respect of the 1986 year.
It was also argued that the Commissioner erred in his application of the
sub-section by disallowing the set-off against the balance
of assessed loss as
at the end of the financial year in which the tainted transaction took place,
namely 1985. It was submitted that
the assessed loss of 1984 was the one that
had to be taken into account because the section requires an intention to
utilise an "assessed
loss
32
incurred", and not one to be incurred. Once
again, that question is not an issue in the appeal and the request for a
decision on it
must be declined. The same applies to the argument that the 1985
assessment was final and not subject to a reopening.
In conclusion it is necessary to comment on
the
manner in which this appeal was conducted. The
Chief Justice, as he
was entitled to do by virtue of AD
Rule 8(1), called for the filing
of heads well in
advance of the hearing of the appeal. The
parties
complied. By that stage counsel should have
been
prepared to argue all the issues in the appeal.
That
this may not have been the case is suggested by
the
manner in which on each side supplementary
heads
proliferated thereafter. Two days before the
hearing
the appellant filed its first supplementary heads.
They
had been prepared by counsel who had represented
the
appellant in the Special Court and eventually appeared
33
on its behalf in this Court. (The original heads
were prepared by another counsel.) The main thrust of counsel's oral argument
appeared
insufficiently from either set of heads. This resulted in the argument
lasting much longer than would otherwise have been the case.
At the end of the
day the appellant's counsel was requested to file a second supplementary set of
heads, incorporating his revised
argument. This was duly done. Counsel for the
respondent likewise produced a succession of heads: five days before the hearing
supplementary
heads were filed; and two further sets on the day of the hearing.
In response to the appellant's third set the respondent had to
file a fifth
set.
In the result an appeal set down for one day, and which merited no more
than one day's argument, occupied two full days. The object
of the rule was
stultified and the members of the Court were hampered in their preparation of
the appeal. In the normal course
6 34
of events all the issues involved in an appeal should be sufficiently and
finally dealt with therein.
The appeal is dismissed with costs, including the costs consequent upon
the employment of two counsel.
L T C HARMS JUDGE OF APPEAL
NESTADT JA )
CONCUR OLIVIER AJA )
JUDGMENT E M GROSSKOPF. JA
2 The background to this appeal is set out in the judgment of
Harms
JA and it is not necessary to repeat it herein.
For present purposes only the
following facts are relevant.
1.
At the end of
the 1984 year of assessment the appellant had a balance of assessed loss of
roughly R5,9
million.
2.
During the 1985
year of assessment the appellant entered into an agreement which, we assume for
the purposes of argument, fell within
the provisions of sec 103(2) of the Income
Tax Act.
3.
At the end of the
1985 tax year, the assessed loss had grown to roughly R9,9
million.
4.
During 1986 the
appellant had a taxable income of roughly R6,7 million. At the end of that year
the appellant set off against this
income the assessed loss of R9,9
million.
5. During 1988 the Commissioner
sought to apply sec 103(2) to the
The figures mentioned are the final ones accepted by the Commissioner.
Nothing turns on their correctness or otherwise.
3 assessment for
1986, i c, he disallowed the set-off of income earned or
accrued during that year against the assessed loss brought forward
from
1985.
The issue to be dealt with in this appeal is whether the
following
proposition is correct:
"The Commissioner should have applied the provisions of section 103(2) of
the Act in the assessment that he raised for the year in
which the agreement was
entered into and in which it took effect, namely the year ended 30 June
1985.
Once the Commissioner had failed to apply the
provisions of section 103(2) in respect of the 1985 year of assessment, it was
not competent
for him to endeavour to apply the provisions of the sub-section
for the first time in respect of the 1986 year, as he purported to
do in the
revised assessment."
The appellant's main argument in support of this proposition is
that
the remedy granted to the Commissioner by sec 103(2) is
intrinsically
incapable of being applied in respect of any tax year other than that
in
which the agreement is entered into and in which it takes effect.
This
On the facts of the present case the agreement Took effect in the year in
which it was entered into. 1: is consequently not necessary
to consider what the
position would be if an agreement is entered into in one year but is to take
effect only in a subsequent year.
4 follows, so it is contended,
from the very nature of the remedy. To assess
the validity of this argument it is necessary to determine the exact
ambit of
sec 103(2). The appropriate point of departure in this
enquiry is the wording
of the section. It reads as
follows
3
.
"Whenever the Commissioner is satisfied that any agreement affecting any
company or any change in the shareholding of any company
as a direct or indirect
result of which income has been received by or accrued to that company during
any year of assessment, has
at any time before or after the commencement of the
Income Tax Act, 1946, been entered into or effected by any person solely or
mainly
for the purpose of utilizing any assessed loss or any balance of assessed
loss incurred by the company, in order to avoid liability
on the part of that
company or any other person for the payment of any tax, duty or levy on income,
or to reduce the amount thereof,
the set-off of any such assessed loss or
balance of assessed loss against any such income shall be
disallowed."
This section deals with the effect which
may be given for tax purposes to an
agreement affecting any company or any change in the shareholding of
any
company. For convenience I shall refer to such an arrangement as a
relevant
agreement. For the section to be invoked the relevant agreement must
be
attended by two features:
I quote it as it was prior to the amendment introduced by Act 121 of 1984
which has no bearing on the present issue.
5
1. As a direct or indirect result of the relevant agreement income
must have been received by or accrued to the company during any year of
assessment; and
2. The Commissioner must be satisfied that the relevant
agreement
was entered into or effected solely or mainly for the
purpose of
utilizing any assessed loss or any balance of assessed
loss incurred
by the company in order to avoid liability for the
payment of any tax.
Where these features co-exist, the set-off of
"any such assessed loss
or balance of assessed loss" (i
c, one mentioned in para 2) against "any such income" (i e, income of the sort
mentioned in para 1)
shall be disallowed.
Of particular importance for present purposes is the nature of the
assessed losses covered by the section. In passing I should state
that nothing
turns on any distinction which there may be between an assessed loss and a
balance of assessed loss. For the sake of
brevity I shall accordingly henceforth
refer only to assessed losses. What is disallowed by sec 103(2) is the set-off
of
6
any "such" assessed loss, which, as I have said, means, in the context,
the
assessed loss for whose utilization the tax-avoiding agreement
was entered into. Thus, where a relevant agreement has, in the view
of the
Commissioner, been entered into for the purpose of utilizing an assessed loss
for tax avoidance, it is
that
assessed loss whose set-off against income
is to be disallowed.
The essential proposition for this part of the argument is that the
disallowance of set-off is restricted to the particular assessed
loss
contemplated by the relevant agreement. If this proposition is correct it would
follow that the disallowance could only arise
in the year in which the relevant
agreement is entered into and takes effect. This result flows from the very
nature of an assessed
loss. It may be best explained by examining the results of
a hypothetical company during three years of assessment. In year 1 the
company
trades at a loss. Its loss is assessed at the end of the year at, say, R50000.
This assessed loss is carried forward to year
2.
During year 2 the company enters into a relevant agreement. For
sec
7 103(2) to be invoked, the Commissioner must be satisfied that the
relevant
agreement was entered into for the purpose of utilizing, for tax
avoidance,
"any assessed loss ... incurred by the company". The only assessed
loss
incurred by the company at the time when the agreement is
entered into, is
the loss of R50000 incurred in year 1 and assessed
at the end of that year. It
is to that assessed loss to which the relevant agreement must relate (to
the
satisfaction of the Commissioner) before the section may be applied. And
it
is the set-off of that loss which will be disallowed in terms of the
section.
A particular assessed loss has a notional existence for only a
single
year of assessment. The carrying forward of
assessed losses is authorized by
sec 20(l)(a) of the Act, which, in so far as it is relevant, reads
-
"For the purpose of determining the taxable income derived by any person
from carrying on any trade within the Republic, there shall
be set off against
the income so derived by such person -
(a) any balance of assessed loss incurred by the taxpayer in any previous
year which has been carried forward from the preceding year
of assessment..."
(emphasis added).
This provision, and, in
particular, the italicized part,
"... envisages a continuity in setting off an assessed loss in every
year
8
succeeding the year in which it was originally
incurred, so that in
each succeeding year a balance can be struck to the satisfaction
of I
the Secretary which can then be carried forward from year to
year
until it is exhausted; if, for any reason, the assessed loss cannot be
so
set off and balanced in any particular year, there is then no
'balance
of assessed loss' for that year which (viewed from that year of
assessment) can be carried forward to the succeeding year, or
(viewed from the succeeding year of assessment) there is no
'balance
of assessed loss which has been carried forward from the preceding
year of assessment'; in other words, the essential continuity has
been
fatally interrupted." (New Urban Properties Ltd v Secretary for Inland
Revenue 1966 (1)SA 217 (A)at 224 E-F).
Inland Revenue
1966 (1) SA 217
(A) at 224 E-F).
It is clear therefore that at the end of each year of assessment a
new
balance is struck reflecting the effect of that
year's trading on the balance of
assessed loss brought forward from
the preceding year. In our hypothetical
example above, the loss assessed at the end of year 1 exists only during
year 2. At the end of year 2 it is replaced by a new figure
being either a
profit or a loss. If at the end of year 2 the company still has an assessed
loss, it is a different assessed loss
from that with which it started the year.
The assessed loss at the end of year 2 represents a balance between different
items from
those which made up the assessed loss in year 1.
From what I have said above, the following propositions emerge:
9
1. A relevant agreement is struck by sec 103(2) if it contemplates
the
utilization for tax avoidance of an "assessed loss ... incurred
by the company". This can only mean an assessed loss existing at the
time of the
conclusion and taking effect of the agreement.
2.
The effect of
sec 103(2) is to disallow the setoff of "such assessed loss", i e, the assessed
loss contemplated by the relevant
agreement.
3.
The assessed
loss has an effective existence for only one year. It is only during that year
that its set-off can be either permitted
or
disallowed.
4.
It follows
that sec 103(2) can be applied only to the assessed loss existing in the year in
which the relevant agreement is concluded
and takes
effect.
Applied to the facts of the present
case, this line of reasoning leads to the result that the Commissioner could
have applied sec
103(2) only to the appellant's 1985 year of assessment. In
respect of that year the Commissioner was entitled (assuming that all
other
requirements of the section had been satisfied) to disallow the set-off of the
assessed loss of R5,9 million, which had been
brought forward from the 1984 year
of
10
assessment, against income earned or accrued during the 1985 tax year as
a
result of the relevant agreement (i e, against tainted income). In
any subsequent year the relevant assessed loss (i e, the assessed
loss which
formed the raison d'être of the relevant agreement) no longer existed. Its
set-off could no longer be permitted
or disallowed. Nor could the section be
applied to a new assessed loss arising from a fresh balance struck at the end of
the 1985
year of assessment for utilization during the 1986 year of
assessment.
As I have said, this reasoning formed the basis of the appellant's
argument before us. Respondent's counsel provided no answer to
it. It is not
dealt with in the judgment of Harms JA.
I turn now to possible objections to this line of reasoning. The basis of
the reasoning is that the words "any assessed loss ... incurred
by the company"
should receive its ordinary grammatical meaning. To justify the Commissioner's
attitude a departure from the ordinary
meaning of the words is required. They
should then be read as covering not only an assessed loss
11
already incurred but also losses expected to be incurred and assessed in
the future. What justification is there for such extensive
interpretation?
Much attention was given in argument to the question
whether there was any tainted income
4
in the appellant's 1985 year of
assessment against which the assessed loss in that year could have been set off.
The factual position
by itself is, of course, irrelevant for present purposes.
If sec 103(2) could in principle have been applied only in the 1985 year
of
assessment, and in that year there was no tainted income, then sec 103(2) was
simply inapplicable. The factual circumstances would
not justify the application
of the section in a subsequent year in a manner not permitted by the
legislation. However, the scope
of the set-off authorized by sec 20 of the Act
(and, in defined circumstances, disallowed by sec 103(2)) is of great importance
in
itself, and may cast some light on the presumed intention of the lawgiver in
enacting sec 103(2). I therefore propose dealing with
it, particularly since I
respectfully disagree with what Harms JA has written in this regard.
i e. income received by or accrued to the appellant as a direct or
indirect result of the relevant agreement.
12 Sec 20
allows the set-off of an assessed loss against
"income".
"Income" is defined in sec 1 as "the amount
remaining of the gross income
... after deducting therefrom any
amounts exempt from normal tax under Part
I of Chapter II". "Income"
is then further reduced to establish "taxable
income". This step
entails the deduction from "income" of "all the amounts
allowed
under Part I of Chapter II to be deducted from or set off against
such income." Section 20 is the only section which provides for a
set-off
against income.
The position thus is that "taxable income" is made up of
"income"
less deductions (mainly of costs and expenses)
and less the set-off of
assessed losses. There is nothing in the Act to indicate that the set-off
can
operate only after the deductions have been made, and only if there
then
remains a profit, as suggested by Harms JA. The mere fact that
the
provisions regarding deductions appear in sections of the Act before sec
20
cannot lead to this result. Nor can the fact, if fact it be, that in
accounting
practice the matter is dealt with in this sequence. But in my view it is
the
13
practical result of the view expressed by Harms JA which, with
respect,
demonstrates its untenability. Let us again take a
hypothetical example. At the end of year 1 a company has an assessed loss of R50
000. During year 2 it earns income of R20 000 and incurs deductible expenditure
of R30 000. On the construction favoured by Harms
JA the first step in
calculating "taxable income" in year 2 would be to deduct the expenditure of R30
000 from the income of R20
000. This leaves a net deficit of R10 000. Because
there is not a trading profit, he suggests, sec 20 cannot be invoked. The
assessed
loss at the end of the year would accordingly be R10 000. The R50 000
brought forward from year 1 cannot be utilized in year 2, and,
because of the
principle applied in the New Urban Properties case (supra), can never be
utilized again. Nor, I take it, can the taxpayer
set off (in terms of sec 20
(l)(b)) an assessed loss incurred during the same year of assessment in carrying
on another trade. This
result would be so inconsistent with the scheme of the
Act that it would require clear language to achieve it. In my view both the
language of the Act, and the clear policy underlying it, lead to
14
a different conclusion. In the hypothetical case considered above the
true
position in my view is as follows. There is, in year 2, one credit item
and
two debit items. The credit item is the income of R20 000. The
debit items
are the expenditure of R30 000 and the assessed loss of R50 000
brought
forward from the preceding year. These must both be brought into
account
and a balance struck between the credit item and the debit items. The
result
is a new assessed loss of R60 000. As far as I know, this is also the
manner
in which sec 20(l)(a) and its predecessors have been consistently applied
in
the past.
It follows that "income" in sec 20 bears its ordinary meaning as
defined in sec
1. Sec. 20
does not require for its application that
the
taxpayer must have made a profit during the relevant year of
assessment.
Indeed, there is a school of thought that sec 20 may be applied even
where
no income was earned during the relevant year of assessment, provided
only
that the taxpayer carried on a trade. Cf I T C 644
(1948) 16 SATC 125
;
IT
C 777
(1953) 19 SATC 320
at 322; S A Bazaars (Pty) Ltd v
Commissioner
15 for Inland Revenue
1952 (4) SA 505
(A) at 511a;
Divans & Stein, Silke
South African Income Tax, para 8.127; 8.127; Meyerowitz and Spiro on
Income
Tax, para 856. It is not necessary for me to pronounce on this point.
For
present purposes it is sufficient to emphasize that the set-off, of an
assessed
loss against income under sec 20(l)(a), is permitted even if the taxpayer
did
not make a trading profit during the year of assessment in
question.
This discussion of the ambit of sec 20(l)(a) was to some extent
a
digression although, as will be seen, it is not entirely irrelevant. The
question
for decision remains: what is meant by the words "assessed loss ...
incurred
by the company" in sec 103 (2) of the Act?
A number of arguments were advanced in favour of a wider
interpretation than the words would appear to bear in their ordinary
meaning.
Firstly, it was suggested that the section would be easy to circumvent if
the
natural meaning of the words were to be applied. This argument ties in
to
some extent with the meaning of "income" in sec 20(l)(a) and in sec
103(2).
The scheme of the Act is that sec 20(l)(a) permits, in general, the
set-off of
16 an assessed loss against income. However, such set-off
is disallowed in
certain circumstances by virtue of sec 103(2). The two sections are
thus
complementary, and there is no reason in my view why the word
"income"
should not bear the same meaning in both sections, and no
reason why that
meaning should not be the defined meaning.
To circumvent sec 103(2), as suggested in argument, a
company
would therefore have to enter into a relevant
agreement which does not give
rise to any tainted income during the year in which the agreement
was
entered into and took effect. And in this regard I must emphasize again
that
I am talking about income in the technical sense, and not to profit. Even
in
the present case, where the agreement was entered into on the last day of
the
year, there was, in the view of the Special Court, tainted "income", in
the
technical sense, during that year. And, although Harms JA doubts
the
correctness of this finding, his strictures are based mainly on matters
of onus
and lack of evidence. I have little doubt that, if the Commissioner
had
wanted to apply sec 103(2) to the appellant's 1985 year of assessment,
a
17 proper investigation would have established the existence of
tainted income
during that year. On the whole I find it difficult to envisage easy ways
of
circumventing the section.
Of course I would not wish to underrate the ingenuity of businessmen. No
doubt schemes could and would be designed to circumvent the
provisions of sec
103(2). One must, however, bear in mind that sec 103(2) is not the only, or even
the main, provision to combat
tax avoidance. The principal one is section
103(1). A relevant agreement which is deliberately structured in such a way that
it takes
effect in year 1, but gives rise to no income at all in that year,
would, I imagine, be an easy target for the invocation of sec
103(1).
Then reliance was placed on the legislative history of sec 103(2). Its
origin is to be found in sec 90(l)(b) of the Income Tax Act,
No 31 of 1941,
which was introduced by sec 20(1) of the Income Tax Act No 55 of 1946. This
section referred to an agreement which
had "at any time before or after the
commencement of the Income Tax Act, 1946, been entered into or
18
effected by any person ...". The 1946 Act was promulgated on 21 June
1946.
At that stage the greater part of the 1946 year of assessment
(terminating on 30 June 1946) had elapsed. The reference to agreements
before
the commencement of the Act could be applied to the part of the current tax year
which had already elapsed. It accordingly
affords no reason to suppose that the
substantive provisions of the precursor to sec 103(2) were not to be interpreted
in accordance
with their normal meaning. And the repetition of the reference to
the commencement of the 1946 Act in the consolidation act of 1962
has in my view
as little significance as that traditionally accorded to the continued existence
of the vermiform appendix in the
human anatomy.
Much was made in argument and by the court a quo of the wide language
used in section 103(2), and, in particular, of the repetition
of the word "any".
Clearly the legislature wanted the section to be applied to all cases falling
within its ambit. However, in determining
its ambit one must have regard to its
substantive provisions. If at any one time there can be only one "assessed
loss... incurred
by the company" the use of the word
19
"any", however repetitively, cannot alter this situation. Reliance was
also
placed on the word "whenever" with which the section commences.
"Whenever" is defined in The Shorter Oxford Dictionary as, infer alia,
"in any
or every case in which". In this sense (which is very common in legislation, and
also in other provisions of the Income Tax
Act - see e g secs 37(1), 103(4) and
104(2)) the word has no connotation of time and is entirely consistent with the
ordinary meaning
of sec 103(2).
In short, I disagree with the various contentions which have been
advanced to support a result which is at variance with the normal
meaning of sec
103(2).
Mr Broomberg, who appeared for the appellant, submitted that in fact the
normal meaning of the words led to a much more practical
end equitable result
than would that contended for by the Commissioner. On the appellant's
construction the section would be applied
in the year in which the relevant
agreement was entered into and took effect. The set-off of the assessed loss
would accordingly
be disallowed during that year. This would
20
sterilize the assessed loss - it could not be further used in future
years*. In
argument it was accepted that this sterilization would
apply only in respect of the tainted income. In other words, the assessed loss
could be carried forward for the limited purpose of set-off against untainted
income. For the sake of the present argument I assume
(since it is not
important, as I shall show) that this view is correct and that the sterilization
of the assessed loss is not complete,
a matter which is not free from doubt (see
Meyerowitz and Spiro, supra, para 855). On that basis one must then compare the
practical
working of sec 103(2) in accordance with the contentions respectively
advanced by the parties.
I imagine that it would often be difficult to distinguish between tainted
and untainted income, particularly after the passage of
time. This difficulty
would be increased if an assessed loss in some future year were to be subject to
sec 103(2). Fairness would
then require that separate assessments would have to
be made not only of tainted and untainted
This does not mean that sec 103(2) is again used in succeeding years as
suggested by Harms JA. The sterilization of the assessed loss
flows from [he
provisions of sec 20(l)(a), as I have shows above.
21 income, but
also of the expenditure incurred in producing each of them.
And, in order to apportion the assessed loss accurately, the
relevant
calculations would have to be taken back from the date when
sec 103(2) is
applied to the date of the relevant agreement. On the
respondent's argument
this could be a substantial number of years. Even if legislative
sanction
existed for such a procedure (a matter which I do not propose deciding)
this
would often be an almost impossible task. It seems to me, therefore, that
Mr
Broomberg is right in contending that the interpretation which he
espouses
leads to a simpler and more equitable result than the rival
interpretation
advanced by the respondent. Of course, the result would be even
simpler,
but probably less equitable, if the application of sec 103(2) led to
the
complete sterilization of the assessed loss, even for future use
against
untainted income. Whether this is so or not does not, however,
materially
affect the argument one way or the other and, as I have indicated above,
and
I do not propose deciding it.
To sum up, I consider that no good grounds have been advanced
for
22
not according the language of sec 103(2) its ordinary meaning. It
follows
that in my view the Commissioner was entitled to apply the
section only in respect of the appellant's 1985 year of assessment and
his
purported application thereof during the 1986 year cannot stand. Whether the
Commissioner can still reopen the assessment for
the 1985 year so as to apply
sec 103(2) is a matter which was debated before us but does not, I consider,
fall to be decided in this
appeal.
Mr Henning, who appeared for the Commissioner, raised a number of
arguments extraneous to the interpretation of sec 103(2) in support
of the
dismissal of the appeal. Since this is a minority judgment I do not propose
dealing with them. In my view they are all without
substance.
I consider that the appeal should be allowed.
E M GROSSKOPF, JA
HOEXTER, JA Concur