Judgment No. SC 43/03
Civil Appeal No. 41/99
WET BLUE INDUSTRIES (PRIVATE) LIMITED
v THE COMMISSIONER OF TAXES
SUPREME COURT OF ZIMBABWE
CHIDYAUSIKU CJ, ZIYAMBI JA & MALABA JA
HARARE, OCTOBER 22, 2001 & NOVEMBER 28, 2003
J C Andersen SC, for the appellant
A P de Bourbon SC, for the respondent
MALABA JA: This is an appeal from a judgment of the Special
Court for Income Tax Appeals (“the special court”) dismissing with costs an appeal
against the decision of the respondent to disallow certain deductions from gross
income as rebates and raising penalties for non-payment of tax in the years of
assessment 1993, 1994 and 1995. I will refer to the parties as “Wet Blue Industries”
and “the Commissioner” respectively.
The facts are as follows. In 1988 the Government imposed an
embargo on the export of raw hides. The Cold Storage Commission (“CSC”),
S.M. Lurie & Co (Pvt) Ltd (hereinafter referred to as “Lurie”) and Tirzah
Investments (Pvt) Ltd (“Tirzah”) had been involved in the business of processing and
exporting raw hides. After the embargo the “three parties” decided to form a
company which would provide them with the services of wet blue tanning of their
hides. The company formed was Wet Blue Industries. Whilst the three parties
were Wet Blue Industries’ shareholders, they were also its partners.
In terms of the agreement reached by the three parties, Wet Blue
Industries was to apply the wet blue tanning process exclusively to hides owned and
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forwarded to it by the three parties. It did not acquire ownership of the hides.
Each partner was to send the hides it required treated and Wet Blue Industries would
raise invoices for the tanning costs to each partner quarterly. To raise working
capital Wet Blue Industries, which was run by a management committee from Tirzah,
had to raise provisional invoices on a monthly basis.
Quarterly invoices were then raised, based on the actual costs of
processing the hides. Added were interest and finance charges incurred and the cost
of serving the capital portions of loan obligations. The amounts paid by the partners
on the provisional monthly invoices would then be deducted from the quarterly
invoices. It was understood by the parties that Wet Blue Industries was a service
provider. The intention was that it would not make a profit. It was an express
term of the agreement that Wet Blue Industries would not retain earnings to be carried
over from one financial year to the next except such as might be required to meet loan
capital repayment commitments.
The invoicing system set out in the agreement, and which would have
ensured that no profit accrued to Wet Blue Industries, was not followed by the
management committee. Invoices were instead raised for charges in respect of the
tanning of raw hides on the completion of each batch. The charges for the services
rendered were fixed by Wet Blue Industries. As a result of the money received by
Wet Blue Industries from each of the three parties in payment of the charges for the
processing of the hides, the company generated surplus funds or profits, after
deducting all the necessary expenditure and meeting loan capital repayment
Initially Wet Blue Industries decided to distribute the surplus amount
to the three parties as dividends. The CSC objected to this arrangement because it
would have received an amount equal to that received by Tirzah and Lurie,
notwithstanding the larger number of hides it would have forwarded to Wet Blue
Industries for processing.
The parties then agreed that the money be paid out to them as rebates
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calculated by reference to each party’s throughput of raw hides. In 1993, 1994 and
1995 Wet Blue Industries paid the amounts of $3.5 million, $4.4 million and
$6.2 million respectively as rebates. In Wet Blue Industries’ books of account the
amounts paid out were reflected not as rebates but as costs of purchase of material
used in the processing of the hides.
In examining Wet Blue Industries’ books of account in respect of the
three years, the Commissioner assessed Wet Blue Industries’ taxable income on the
basis that the amount paid out to the three parties formed part of its “gross income”
and the rebates were not amounts allowed to be deducted in terms of s 15 of the
Income Tax Act [Chapter 23:06] (“the Act”). The Commissioner took into account
the fact that only a co-operative agricultural company or co-operative society had,
under s 15(2)(y) of the Act, the right to deduct from gross income “any amount
distributed during the year of assessment by way of discounts, rebates or bonuses
granted by the company or society to shareholders, members or other persons in
respect of amounts paid or payable by or to them on account of their transactions with
the company or society”. Wet Blue Industries was not a “co-operative agricultural
company” or a “co-operative society”.
The Commissioner also considered that in entering into the scheme
whereby Wet Blue Industries paid the amounts of money to the three, CSC, Lurie and
Tirzah, as rebates, the parties had entered into a scheme, the effect of which was the
reduction or avoidance of tax liability by Wet Blue Industries, and that one of the
main purposes of the scheme was the reduction or avoidance of tax liability on the
part of Wet Blue Industries in contravention of s 98 of the Act. The Commissioner
disallowed the amounts paid by Wet Blue Industries to the three parties in each of the
three years of assessment and raised penalties for its failure to pay tax.
Wet Blue Industries appealed to the special court which held that the
amounts of money paid out to the three parties as rebates were part of Wet Blue
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Industries’ “gross income” which the Commissioner had correctly taken into account
in calculating its taxable income. The learned President of the special court also
held that the Commissioner had correctly taken the view that the provisions of s 98 of
the Act had been contravened.
On appeal to this Court, the parties agreed that the facts found by the learned
President to have been proved on the evidence adduced by the parties are correct.
They also agreed that the learned President had correctly set out the law as contained
in s 8 of the Act, which defines “gross income” for purposes of calculation of the
taxable income as:
“… the total amount received by or accrued to or in favour of a person or
deemed to have been received by or to have accrued to or in favour of a person
in any year of assessment from a source within or deemed to be within
Zimbabwe excluding any amount so received or accrued which is proved by
the taxpayer to be of a capital nature …”.
It appears to me that the amounts paid out to the three parties as rebates
had been received by Wet Blue Industries as payment for the charges it had fixed for
processing the hides. The amounts formed part of its “gross income” before they
were paid out. Wet Blue Industries had not purchased any material with the money.
The money was not part of expenditure of a capital nature.
The learned President cited with approval the case of Brookes Lemos
Ltd v Commissioner for Inland Revenue 1947 (2) SA 976 (A), which decided that:
“… once the taxpayer receives an amount as his own during a tax year, the
fact that in terms of his contract he may, in certain circumstances, have to
repay the same later, does not have the effect of excluding these amounts from
his ‘gross income’ for the year in which he received same”.
In respect of the legal principles to be applied in respect of the
application of s 98 of the Act, the learned President cited with approval the case of
Secretary for Inland Revenue v Geustyn, Forsyth & Joubert 1971 (3) SA 567 (A),
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where OGILVIE-THOMAS CJ paraphrased the provisions of s 103(1) of the South
African Income Tax Act (similar in wording to s 98 of the Act) as follows:
“To warrant a determination by the Secretary of liability for tax in terms of
s 103(1) there must be established –
(a) a transaction, operation or scheme entered into or carried out;
(b) which has the effect of avoiding or postponing liability for tax on income or
reducing the amount thereof; and which
(c) in the opinion of the Secretary, having regard to the circumstances under
which the transaction, operation or scheme was entered into or carried out –
(i) was entered into or carried out by means or in a
manner which would not normally be employed
in the entering into or carrying out of a
transaction, operation or scheme of the nature of
the transaction, operation or scheme in question;
(ii) has created rights or obligations which would not normally be created between
persons dealing at arm’s length under a transaction, operation or scheme of the nature
of the transaction, operation or scheme in question; and that
(d) the avoidance, postponement or reduction of the amount of such liability was,
in the opinion of the Secretary, the sole or one of the main purposes of the transaction,
operation or scheme.”
See also A v Commissioner of Taxes 1985 (2) ZLR 223 (H), ITC 1513 (1988), 54
SATC 56 (2), ITC 1518 (1989), 54 SATC 113 (T) and ITC 1554 (1990) 44 SATC
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It was common cause that the scheme had the effect of reducing Wet
Blue Industries’ taxable income. The learned President found evidence of
abnormality in the scheme in the manner the amounts paid to the three parties were
reflected in the accounts as costs of purchase of processing material. He also found
it in the decision not to pay the money as dividends and that the amounts were
arbitrarily fixed by the management committee at Wet Blue Industries. Finally, he
found that CSC, Lurie and Tirzah had no legal right to claim refunds or rebates from
Wet Blue Industries. It was the finding of the learned President that one of the main
purposes behind the scheme was to avoid taxation.
The heads of argument advanced by Mr Andersen, on behalf of Wet Blue
Industries, were to the effect that the learned President erred in coming to the
conclusion he did. Mr de Bourbon, for the respondent, raised a point in limine that
the appeal was on a question of fact. Section 66(1)(a) of the Act provides that a
taxpayer who is dissatisfied with the determination of an appeal by the special court
may appeal to the Supreme Court without leave of the President of the special court
on any ground which involves a question of law only.
I agree with Mr de Bourbon that the determination by the learned
President of the special court, that the amounts of money paid by Wet Blue Industries
to the three parties as rebates were part of the gross income it had received during
each year of assessment, was a finding of fact which is not appealable unless it is so
grossly unreasonable as to amount to a misdirection on the law.
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There was, in my view, no misdirection in the findings of fact made by
the learned President, because the parties were determined that the money which had
accrued to, i.e. received by, Wet Blue Industries as gross income was to be taken out
and that the effect of such a deduction was the reduction of Wet Blue Industries’ tax
liability. The fact that the money was taken out before the taxable income had been
determined by the Commissioner did not change the legal effect of the deduction.
To form part of the gross income it was enough that the money was received by Wet
Blue Industries from a source within Zimbabwe. It did not have to be a source of
income itself, as Mr Andersen argued. The gross income could only be reduced by
deductions effected in terms of s 15 of the Act.
I also agree that the determination that the scheme was abnormal and
one of its main purposes was the avoidance of tax liability by Wet Blue Industries is a
finding of fact.
If Wet Blue Industries wanted to appeal against the findings of fact, it
should have applied for the leave of the President of the special court to appeal in
terms of s 66(1)(b) of the Act. No such leave was applied for.
The appeal is accordingly dismissed with costs.
CHIDYAUSIKU CJ: I agree.
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ZIYAMBI JA: I agree.
Joel Pincus, Konson & Wolhuter, appellant's legal practitioners
Civil Division of the Attorney-General’s Office, respondent's legal practitioners