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[1995] ZASCA 9
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Sentra-Oes Kooperatief Bpk v Kommissaris van Binnelandse Inkomste (312/93) [1995] ZASCA 9; 1995 (3) SA 197 (AD); (9 March 1995)
IN THE SUPREME COURT OF SOUTH AFRICA (APPELLATE DIVISION)
CASE NO. 312/93
SENTRA-OES KOöPERATIEF BPK
APPELLANT
VERSUS
KOMMISSARIS VAN BINNELANDSE INKOMSTE
RESPONDENT
CORAM
: CORBETT CJ, HOEXTER, SMALBERGER,
KUMLEBEN JJA et NICHOLAS AJA
DATE HEARD
: 17 NOVEMBER 1994
DATE DELIVERED
: 9 MARCH 1995
NICHOLAS AJA
2
JUDGMENT
NICHOLAS AJA
:
The question for decision in this appeal is whether a
deduction of R5 million claimed in the 1988 tax year by Sentra-oes
Koöperatief
Beperk ("the company") and disallowed by the Commissioner for
Inland Revenue ("the Commissioner") is allowable in terms of the Income
Tax Act
58 of 1962 ("the Act").
The company is a short-term insurer, offering
co-operative crop insurance to the members of its member co-operatives. Most of
its
business - about 98% - consists in the insurance of crops against damage by
hail. Its premium income is received throughout the year
with peaks
3
usually in the months between September and February. Claims arise mainly in
the rainy season and in general mostly in the months
of November to
February.
When hail damage occurs the insured is required to report that fact
within three days. The company has agricultural experts throughout
the country
one of whom visits the farm concerned as soon as possible after the report and
assesses the extent of the damage as a
percentage of the insured crop. When this
has been agreed with the insured, the assessment is sent to the head office of
the company
and processed there. A cheque is dispatched within three weeks at
most, but usually within a matter of days.
In order to ensure that it will always have funds available to
pay
4
claims as they arise, the company invests its premium income in short-term
deposits, either on daily call or for fixed periods of
three or four months and
occasionally even longer. Its practice is to invite selected banks and
recognized financial institutions
to make written quotations for specific
amounts as moneys for deposit become available, and then to make investments
according to
a definite plan and a cash-flow budget which provide for a
worst-case scenario in order that it can always comply fully and expeditiously
with the claims made upon it. The aim is to obtain the best income possible and
to provide an adequate spread of investments to reduce
risk and provide the
required cash flow.
Details of the company's short-term investments as at 7 December 1988 which
totalled R 56,5 million appear from the schedule which
is
5
annexed to this judgment.
In March 1988 a representative of Mr W H
Vermaas, a well known attorney and businessman in Pretoria, approached the
company and solicited
investments in Reef Acceptance (Pty) Ltd, one of Vermaas's
companies. He spoke of Vermaas's influential connections in high places.
He said
that favourable interest rates were available and offered other inducements. The
company obtained a bank report from Volkskas,
which was to the effect that it
regarded "Reef Acceptance (Pty) Ltd/Mnr W H Vermaas" as good for an amount of
R10 million. Between
28 March 1988 and 3 November 1988 the company made five
deposits with Reef Acceptance. They were of amounts varying from R2 million
to
R5 million, for periods of between 1 month and 3 months, and at rates of
6
interest varying between 12% and 19.55% per annum. All were duly repaid with
the exception of the deposit of R5 million which was
repayable on 3 December
1988. (See the second item in the annexe.) When it became clear to the company
that this amount would not
be repaid, it placed Reef Acceptance in liquidation.
The amount became irrecoverable.
In its return of income for the year ended 31 December 1988 the company
claimed as a deduction the sum of R5 million in terms of s
11(a) and s 28(2)(c)
of the Act. The Commissioner disallowed the deduction and issued an assessment
in respect of a taxable income
of R 1 314 754,00. The company's objection to the
assessment was disallowed and it appealed. The appeal was heard at a sitting of
the
7
Cape Income Tax Special Court at which Berman J presided. S 11(a) and s 28(2) of
the Act provide -
"11. For the purpose of determining the taxable income derived by any person
from carrying on any trade within the Republic, there
shall be allowed as
deductions from the income of such person so derived
-
(a) expenditure and losses actually incurred in
the Republic in the production of the income, provided such expenditure and
losses
are not of a capital nature". "28 (2) Subject to the provisions of this
Act the taxable income derived by any taxpayer from the carrying
on in the
Republic of short-term insurance business (whether on mutual principles or
otherwise) shall be determined by charging against
the sum of all premiums
(including premiums on reinsurance) received by or accrued to such taxpayer in
respect of
8
the insurance of any risk, and other amounts derived from the carrying on of
such business of insurance in the Republic, the sum of
-
(a) the total amount of the liability incurred in respect of premiums on
reinsurance;
(b) the actual amount of the liability incurred in respect of any claims during
the year of assessment in respect of that business
of insurance, less the value
of any claims recovered or recoverable under any contract of insurance,
guarantee, security or indemnity;
(c) the expenditure, not being expenditure falling under paragraph (a) or (b),
incurred in respect of that business of
insurance;
(d)
...;
(e)
...;
and
(f) ..."
9
In the judgment of the special court Berman J said that the Act drew a
distinction between "expenditure" and "losses"; that the amount
of R5 million in
issue was lost by the company, not expended by it; and that s 28(2)(c) related
only to expenditure and not to losses.
It followed that the appeal failed on
this simple ground.
However, Berman J went on to consider whether the loss
was deductible in terms of s 11(a). He said that in order to succeed the company
had to show two things: (1) that the loss of R5 million was incurred "in the
production of the income" and (2) that the loss was
not of a capital nature. He
concluded that the loss of R5 million was a loss of a capital nature and hence
did not qualify as a deduction.
The appeal was accordingly dismissed. The
company now appeals to this court.
10
The company applied
in limine
for condonation of its failure to
timeously file its power of attorney and the supporting resolution thereto. The
Commissioner opposed
the grant of condonation, but only on the ground that there
were no reasonable prospects of success on appeal. The court accordingly
deferred its decision on the application for condonation until it had heard the
argument on the merits.
It was submitted on behalf of the Commissioner that s
11(a) designedly uses the expression "expenditure and losses" whereas s 28(2)(c)
refers only to "expenditure"; that s 11(a) is concerned with the determination
of the taxable income derived by persons generally,
whereas s 28(2) is concerned
with the determination of the taxable income derived by short-term insurers; and
that on the principle
11
embodied in the maxim
generalia specialibus non derogant
. if a
deduction was claimable by a short-term insurer, it was claimable only under
s
28(2)(c).
The question whether there is a real distinction between "expenditure" and
"losses" for the purpose of s 11(a) and, if so, what the
distinction is, has
been discussed by this court in a number of cases. See
Stone v Secretary for
Inland Revenue
1974(3) SA 584(A) at 593 H -594 G and cases there cited; and
Solaglass Finance Co (Pty) Ltd v CIR
1991(2) SA 257(A) at 279 B - H. In
CIR v Felix Schuh(SA)(Ptv) Ltd
1994(2) SA 801(A) it was said at 812 A
that broadly speaking, as the cases show, "expenditure" refers to disbursements
or expenses
incurred or paid voluntarily, whereas "losses" connote involuntary
deprivations
12
occurring fortuitously. The amount of R5 million invested in Reef Acceptance
was not expenditure but a loss, in the sense of an involuntary
deprivation.
The question then is, whether the effect of s 28(2)(c) is to confine the
deduction available to a short-term insurer to "expenditure"
and to exclude a
loss. In this connection the opening words of ss(2) of s 28, "Subject to the
provisions of this Act", are important.
They are to be contrasted with the
opening words of ss(l), "Notwithstanding anything to the contrary contained in
this Act". In the
majority judgment in
S v Marwane
1982(3) SA 717(A) at
747H-748B, Miller JA explained that the purpose of the phrase "subject to" when
used in a legislative provision,
is -
13
". . . to establish what is dominant and what subordinate or
subservient; that to which a provision is 'subject', is dominant - in
case of
conflict it prevails over that which is subject to it. Certainly, in the Geld of
! legislation, the phrase has this clear
and accepted ! connotation. When the
legislator wishes to convey that that which is now being enacted is not to
prevail in circumstances
where it conflicts, or is inconsistent or incompatible,
with a specified other enactment, it very frequently, if not almost invariably,
qualifies such enactment by the method of declaring it to be 'subject to' the
other specified one. As MEGARRY J observed in
C and J Clark v Inland Revenue
Commissioners
(1973) 2 All ER 513
at 520:
'In my judgment, the phrase 'subject to' is a simple provision which merely
subjects the provisions of the subject subsections to
the provisions of the
master subsections. When there is no clash,
the
14
phrase does nothing: if there is collision, the phrase
shows what is to prevail.' But when the intention is that that which is now
being enacted shall prevail over other laws or provisions
which may be in
conflict with it, it is almost invariably prefaced by a phrase such as
'notwithstanding any contrary provision .
. .' or words to similar effect. . .
"
The effect of the words, "subject to the provisions of this Act",
is
therefore that if there is a conflict, inconsistency or
incompatibility
between them, the general deduction formula contained in s
11(a)
prevails over the specific provision in s 28(2)(c). And no
reason
suggests itself why the legislature should have wished to exclude
the
application to a short-term insurer of the deduction formula which
in
terms of s 11(a) is applicable to any person carrying on any trade
within
15
the Republic.
The enquiry then is whether the loss was one "not of a
capital
nature".
It was submitted on behalf of the company that the
amounts received by way of premiums were income in its hands. They were not
treated
as part of its general funds but were in effect sequestered in a
separate fund for the purpose of meeting claims. Consequently they
were not
capital, either in the sense of fixed capital or in the sense of circulating or
floating capital.
It is the fact that the premiums when received were revenue. But having been
received they were used by the company in order to produce
income by way of
interest and hence functioned as capital. "[Gross
16
income] . . . results from work and labour or the use of capital in
productive enterprise or the loan of capital. . ."
(Port Elizabeth Electric
Tramway Co v CIR
1936 CPD 241
at 243). So, when money is lent at interest it
is either fixed capital or circulating capital.
The evidence of Dr van
Rooyen, the general manager and chief executive officer of the company, was that
the essence of its business
was to receive from a large pool of insured persons,
premium income which would be available to satisfy claims in respect of crop
damage. Instead of placing that money in a box, the company made investments in
short-term deposits at the best possible rate of
interest. The short-term
investment of funds surplus to its immediate requirements was a limb of its
insurance business. It was a
part, and an important part, of that
17
business. (In the 1988 tax year there was a profit of about R10,9 million on
premium account, and an interest income of about R 6
million.)
The question
is, was the money which was lost fixed or floating (circulating) capital? If it
was fixed capital, then the loss was
of a capital nature; if floating (or
circulating) capital, then it was a non-capital loss. See
Stone's
case at
595 A, In that case Corbett JA said at 595 G -596 B, after discussing the
distinction between revenue expenditure and capital
expenditure:
"Applying the distinction, thus described, to the ordinary case of a loan of
money, there is no doubt, in my opinion, that the capital
lent constitutes fixed
capital. Such capital is not consumed in the very process of income production:
it does not disappear to be
replaced by something which when received by the
taxpayer forms part of his income. It is true
18
that the lender does not retain ownership in the actual money which passes
but, in an economic and accounting sense, it remains his
capital and upon the
termination of the loan (all being well) it returns to him intact. In the
process wealth may be produced for
the lender but this takes the form of a
consideration, usually in the form of interest, paid by the borrower for the use
of the capital;
it does not consist of the augmented proceeds of the capital,
which itself has disappeared in the process. It has been accepted in
a number of
cases, mainly in the Special Court, that where the taxpayer can show that he has
been carrying on the business of banking
or money-lending, then losses incurred
by him as a result of loans, made in the course of his business, becoming
irrecoverable are
losses of a non-capital nature and deductible.. . . The
rationale of these decisions appears to be that the capital used by a
money-lender
to make loans constitutes his circulating capital and that
consequently losses of such capital are on revenue account.
19
I shall accept, for the purposes of this case, that these decisions are correct,
provided that the business is purely that of money-lender
and the loans are not
made in order to acquire an asset or advantage calculated to promote the
interests and profits of some other
business conducted by the taxpayer. There
is, however, in my view, no warrant for extending this principle to loans by
persons who
are not conducting a money-lending
business."
The business of a bank was described in
Punjab Co-operative Bank. Ltd., Amritsar v Income Tax Commissioner,
Lahore
[1940] 4 All ER 87(PC)
at 95 F -
"In the ordinary case of a bank, the business consists, in its essence, of
dealing with money and credit. Numerous depositors place
their money with the
bank, often receiving a small rate of interest on it. Numerous borrowers
receive
20
loans of a large part of these deposited funds at somewhat higher rates of
interest, but the banker has always to keep enough cash
or easily realizable
securities to meet any probable demand by the depositors
..."
A
money-lender
is "One whose business is
lending money at interest." (The Shorter Oxford English Dictionary). Both a bank
and a money-lender are
in the business of dealing in money as their
stock-in-trade.
Whether a person is a money-lender is a question of fact. It is not enough
that a person has on several occasions lent money at interest.
To qualify as a
money-lender it is requisite that he should be in the
business
of
money-lending. That imports a certain degree of system and continuity about the
transactions and that he is a person who is ready
and willing to lend to all and
sundry if they are acceptable to him. See
21
Secretary for Inland Revenue v Crane
1977ff) SA 761(T) at 768 C -
F,
which was cited with approval by Friedman AJA in the
Solaglass
case
at 271 C-D. This was a minority judgment but in this respect the
majority
judgment is not at variance.
It was submitted on behalf of the company that the loss was a
loss
incurred in the course of its investment business and that
the principles
applicable to banks and to money-lenders apply equally to the company:
"It was prepared to lend such income to any borrower it regarded as eligible
and who offered an adequate return. Investment was done
on a system or plan
which discloses continuity in laying out and getting back the premium income for
further use and involved a frequent
turnover thereof. Interest earned therefrom
is not insubstantial."
The first sentence is not supported by the evidence. The company
22
did not hold itself out as being prepared to lend money to any eligible
borrower who applied for a loan. The initiative came always
from the company
which, when it had moneys available for deposit, would telephone the financial
institutions with which it customarily
dealt and request quotations in writing.
The business of the company was short-term insurance, not lending money. While
the income
it received by way of interest was considerable, the deposits were
made in the course of carrying on its insurance business, as an
incidental part
of it.
Reliance was placed on an Australian case (
The Commissioner of Taxation v
The Commercial Banking Co. of Sydney Ltd
) which was cited in ITC 836
(1957)
21 SATC 330
, a judgment of Faure Williamson J sitting in the Transvaal Income
Tax Special Court. There Street CJ
23
was reported as saying -
"It has been contended that this is a case of an ordinary realization of an
investment and that the loss is a loss of capital and
not a loss incurred in the
production of income . . . The purchases and sales of Government Stock were made
in the course of carrying
on the respondent's business as a bank and it is
manifest that what it did was to invest temporarily and for purposes of profit
funds
which it did not immediately require for other purposes but which in the
course of carrying on its business it might at any time
require. In order that
they might not be idle it invested them temporarily until they were required for
some other purpose: and in
order that they might be immediately available when
required it invested them in liquid securities, that is to say in Government
Stock. That in my opinion is not an investment of capital within the meaning of
the Act in any proper sense of the word; the money
used was part of the
respondent's stock-in-trade, it was used in
an
24
operation of business and it was used in carrying out the respondent's scheme of
profit-making as a banker."
There is a strong
similarity between the investment operations of the company and those described
in this passage. But there is a
fundamental distinction. The Commercial Bank of
Sydney was a bank; the purchases and sales of Government Stock were made in the
course
of carrying on its business as a bank; the money used was part of its
stock-in-trade; and it was used in carrying out its scheme
of profit-making as a
banker.
The company does not carry on the business of a bank. It does not
deal with money as its stock-in-trade. Essentially its business
consists in
receiving premiums and meeting claims. The fact that as an
25
incident of its business it performs some operations of a kind performed by a
bank does not mean that it is a banker or analogous
to a bank.
In my opinion
therefore the decision of the special court was right: the money lost was fixed
capital and the loss was "of a capital
nature". It is ordered that -
1. The application for condonation is refused with costs including the costs of
two counsel.
2. The appeal is struck off the roll. The appellant is ordered
to pay the
costs of appeal, including the costs of
two
counsel.
H C NICHOLAS ACTING JUDGE OF APPEAL
CORBETT CJ) HOEXTER JA) CONCUR SMALBERGER JA)
SEE ORIGINAL JUDGEMENT
TABLE