Commissioner for Inland Revenue v General Motors SA (Pty) Ltd

• Judge: Irving Steyn J, Le Grange J and McCreath J
• Judgment Date: 02 October 1981
• Citation: 1982 (1) SA 196 (T)
• Hearing Date: 09 September 1981
• Court: Transvaal Provincial Division

McCreath J:

This is an appeal against a decision of the Transvaal Income Tax Special Court. The respondent (to whom I shall hereinafter refer as the taxpayer) is a private company having its registered office in Port Elizabeth, where it carries on business as the

McCreath J

manufacturer, assembler and marketer of, inter alia, motor cars. The taxpayer is a wholly owned subsidiary of an American company known as A General Motors Corporation. For the year of assessment ending 31 December 1976 the taxpayer submitted a return of its income to the appellant wherein it sought to deduct from its income a sum of R5 439 835 which it described in its accounts as a 'realised exchange loss on repayments of foreign loans.' There were four loans in respect whereof such loss had been incurred.

B In determining the taxpayer's liability for normal tax for the year of assessment in question the appellant disallowed the aforesaid deduction of R5 439 835, maintaining that the loss incurred was one of a capital and not of a revenue nature. On appeal to the Income Tax Special Court it was held that of the four loans only the fourth, which was a C loan raised on 28 February 1975 from General Motors Corporation of America, was a loan of a capital nature. The assessment by the present appellant was set aside with directions to the appellant to frame fresh assessments on the basis that the losses sustained in respect of the repayment of the other three loans were losses of a revenue nature.

D The present appeal is against the decision of the Special Court in relation to the said three loans. The ground of appeal set out in the notice of appeal is that the losses incurred are of a capital nature and therefore not an allowable deduction in terms of s 11 (a) of the Income Tax Act 58 of 1962.

E It was common cause at the hearing before the Special Court that the loans in question were monies which the taxpayer had been compelled to borrow in countries other than the Republic of South Africa in order to continue its activities. The relevant facts appertaining to each of the loans were also not in dispute. Those facts are detailed in the judgment F of the Special Court and I quote therefrom in regard to the three loans forming the subject-matter of the present appeal:

'Loan No 1 dated 27 December 1968 was for DM14 210 000 at a rand equivalent of R2 567 995, the lender being General Motors Overseas Capital Corporation of the United States, and the loan was granted for a period of one year renewable for one or more successive periods of one G year each, but not beyond November 1976. The purpose of the loan was to pay for trading stock purchased by appellant from various General Motors 'source' plants. These payments were effected within days of the loan being raised. The loan was repaid in November 1976 and the amount required to repay the loan was R5 137 976,75. The loss incurred on repayment of the loan was R2 569 981,82.

H Loan No 2 : The lender was Barclays Bank International London. The loan is referred to as an 'overdraft facility' and was raised in March 1972. The initial amount of £1 500 000 was increased to £4 000 000 in July 1972, the rand equivalent to the draw downs of the overdraft aggregating R6 984 949. This overdraft was granted between March 1972 and February 1973 for the payment of loans to sister companies, being 'source' plants of General Motors Corporation, or in direct payment of stock from 'source' plants. It also included amounts in respect of interest on other related items. The loss eventually incurred by appellant when overdrafts were finally repaid in May 1976 was R1 635 565,72.

Loan No 3 was raised on 1 April 1975 for US $6 000 000 at a rand equivalent of R4 037 141,70 - six-month notes, dated 1 April and 1 October, with

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renewals available until final payment on 1 April 1978, were made. The lender was the Irvine Trust Company New York and the loan was used to repay a loan of UK £2,5 million owed to Lloyds Bank Ltd. The Lloyds loan was utilised in part-payment of a loan of DM25 000 000 which had been A loaned to the company by Adam Opel of Germany and the application of that loan is part of that set out in the schedule relating to the application of the use of loan No 2, namely the overdraft facilities of Barclays International. When this loan was repaid there was a loss of R1 193 439,77. The loan was also used to repay loans allowed to appellant by various sister companies and was therefore also utilised for payment to 'source' plants in respect of trading stock.'

B Mr Galgut, who appeared on behalf of the appellant, originally advanced in his heads of argument a two-pronged attack against the findings of the Special Court. It was suggested, firstly, on the facts as set out above, that each of the said three loans was raised, not to serve a revenue purpose but a purpose of a capital nature. Secondly, it was contended that, even if it be held that any one of the three loans C was raised to serve a revenue purpose, that purpose later became 'exhausted' or underwent a change, so that the loans later served a capital purpose. During the hearing of the present appeal, however, Mr Galgut abandoned the second contention and limited his argument to the D submission that the three loans were raised to serve a purpose of a capital nature and that, accordingly, in terms of s 11 (a) of the Income Tax Act, any additional expenditure incurred in the repayment thereof was not an expenditure which constituted an allowable deduction from the income of the taxpayer.

In his judgment in the Special Court COETZEE J dealt with the argument E advanced on behalf of the present appellant that, on the strength of certain cases in Canada and New Zealand, it is necessary in analysing loans of this nature to separate into two distinct parts the original causa and the subsequent method of payment and on that basis to divorce the loan transaction from the transaction in terms whereof the trading F stock was purchased and paid for. In...