Caltex Oil (SA) Ltd v Secretary for Inland Revenue

• Jurisdiction: South Africa
• Judge: Botha JA, Holmes JA, Trollip JA, Rabie JA and Corbett JA
• Judgment Date: 02 December 1974
• Citation: 1975 (1) SA 665 (A)
• Hearing Date: 18 November 1974
• Court: Appellate Division

Botha, J.A.:

The appellant, by consent of the parties, appeals G direct to this Court on a case stated under sec. 86 of the Income Tax Act, 58 of 1962, against the dismissal of an appeal made by it to the Special Court constituted for hearing income tax appeals within the area of jurisdiction of the Cape Provincial Division of the Supreme Court, against an assessment for normal tax raised against it by the respondent under the H Income Tax Act, 58 of 1962, for the year of assessment ended 25 December 1967.

The appellant, a public company, carries on business in the Republic as an importer, manufacturer and distributor of petroleum products. Caltex (U. K.) Ltd. and Caltex Services Ltd., both registered and carrying on business in the United Kingdom, are, together with the appellant company, wholly-owned subsidiaries of a company incorporated in the United States of America.

In terms of agreements entered into in January 1948 and October 1966, as amended from time to time, the appellant obtained supplies of crude oil

Botha JA

and other petroleum products from Caltex (U. K.) Ltd. In a further agreement entered into between the appellant and Caltex Services Ltd., provision is made for the purchase by the appellant from Caltex Services Ltd. of subsidiary supplies, such as refinery additives, refinery material for plant repairs and maintenance, and for the rendering of certain services by A that company to the appellant. Appellant, in its turn, also sold certain petroleum products and rendered services to both the United Kingdom companies.

It appears, according to the stated case, that orders by the appellant for supplies of crude oil and other petroleum B products were executed by Caltex (U. K.) Ltd. by the purchase of such supplies and the shipment thereof to the appellant generally from one or other Persian Gulf port. Immediately upon shipment of such supplies Caltex (U. K.) Ltd. would render invoices in respect of such supplies to the appellant. According to these invoices the appellant was obliged to pay Caltex (U. K.) Ltd. in pounds sterling for all products sold by it to the appellant. Upon receipt of the C relevant invoices the purchase price shown therein in sterling was converted into South African currency at the rate of exchange prevailing as between sterling and rand at the date of shipment of the relevant supplies. Entries in the appellant's books of account were made in the converted currency.

According to the appellant's stock records all products so D purchased from Caltex (U. K.) Ltd. became part of the appellant's stock-in-trade from the moment of loading thereof in the Persian Gulf port, and the value thereof, representing their purchase price together with the costs of transport and other incidental expenses, is reflected in the rand currency. The value so recorded was never altered, despite any fluctuation in the rate of exchange between the date of E purchase and the end of the appellant's financial year on 25 December.

Transactions between the appellant and Caltex Services Ltd. were reflected in the appellant's books of account in the rand currency, although payments were required to be made in sterling. The conversion from sterling to rand took place F according to the rate of exchange prevailing on the dates of the relevant invoices. Supplies purchased from Caltex Services Ltd., and which formed part of the appellant's stock-in-trade, were reflected in the appellant's records at the cost thereof in rands, determined as in the case of products acquired from Caltex (U. K.) Ltd.

Amounts owing by the appellant to either Caltex (U. K.) Ltd. or G Caltex Services Ltd. were set off against any amounts owing by the said companies to the appellant. Payments to those companies were not made so as to coincide with any particular invoiced amount, or any balance owing at any particular time, but were usually round sum payments leaving substantial balances owing during the relevant period by the appellant to the said companies.

H In order to effect payment the appellant purchased sterling from its bank in the Republic and caused it to be forwarded through banking channels to the said companies in the United Kingdom. Such purchases of sterling were made at the telegraphic rate of exchange prevailing on the date of such purchases.

On 29 August 1967 the directorate of the appellant company, after consultation with its officials in New York, passed the following resolution in Cape Town:

Botha JA

"In order that Caltex South Africa may accumulate sufficient cash to (1) reduce the Barclays overdraft, (2) repay U. A. L. acceptance maturities, (3) remit the R1,5 million dividend, (4) repay Volkskas overdraft, remittances to Caltex U. K. Ltd., (Caluk) will be suspended forthwith including reserve storage crude indebtedness. Furthermore, charges to Caluk for A bunker/aviation deliveries will be recorded in a separate account. Periodically the status of this account will be reviewed with New York Financial Planning Department to determine whether the balance should be remitted by Caluk or offset against the crude supply account. Remittances by Caltex S. A. (the appellant) will be recommended as soon as it appears that the foregoing provisions can be met, but the total must not exceed a six months' credit. To keep New York informed, the B monthly 'Cash and Indebtedness' cable will be expanded to include the relevant information."

Appellant's financial year, as well as its year of assessment for normal tax under the Income Tax Act, ends on 25 December, and with effect from 19 November 1967, as a result of the devaluation of sterling on that date, the rate of exchange between the pound sterling and the rand changed from R2 to 1 C (approximately) to R1,7207 to 1. Fluctuations in this rate of exchange between 19 November and 25 December 1967 were minimal.

On 18 November 1967, the day before the aforesaid devaluation, the amounts then still owing by the appellant, expressed in sterling and in rand, to Caltex (U. K.) Ltd. and Caltex Services Ltd. in respect of transactions between 26 December 1966 and 18 November 1967 were:

	Sterling	Rand
Caltex (U.K.) Ltd.	£4 659 486	R9 353 920
Caltex Services Ltd.	48 925	98 217
	£4 708 411	R9 452 137

The amount owing to Caltex Services ltd. was paid by the appellant after 19 November 1967 but before the close of its 1967 financial year, by the remittal of sterling in the manner set out above. As a result of the devaluation of sterling, the F appellant was required to pay only R84 186 for 48 925 worth of sterling, i. e. R14 031 less than it would have had to pay but for the devaluation.

The amount of 4 659 486 (R9 353 920) owed by the appellant to Caltex (U. K.) Ltd. was not paid in appellant's 1967 financial year, but at the close of that financial year it was known that the purchase of 4 659 486 worth of sterling would, by reason of G the devaluation of sterling on 19 November 1967, at the rate of exchange prevailing on 25 December 1967, have cost only R8 017 647, i. e. R1 336 271 less than it would have cost but for such devaluation.

As already indicated, no alteration in the value of stock by reason of the aforesaid alteration in the rates of exchange was H effected in the appellant's books of account as at the close of...