Commissioner for Inland Revenue v Felix Schuh (SA) (Pty) Ltd

• Jurisdiction: South Africa
• Citation: 1994 (2) SA 801 (A)

Commissioner for Inland Revenue v Felix Schuh (SA) (Pty) Ltd
1994 (2) SA 801 (A)

1994 (2) SA p801

Citation	1994 (2) SA 801 (A)
Case No	392/92
Court	Appellate Division
Judge	Corbett CJ, Smalberger JA, Nienaber JA, Howie JA and Olivier AJA
Heard	February 22, 1994
Judgment	March 28, 1994

Flynote : Sleutelwoorde B

Revenue — Income tax — Deductions — Losses incurred in the production of income — Income Tax Act 58 of 1962, s 11(a) — When loss deductible — Taxpayer having to repay loan in foreign currency — Fluctuations in C exchange rate possibly resulting in taxpayer having to pay in rands either more, or perhaps less, than it originally received in rands from lender — If in future fiscal year, when repayment made, to do so costs taxpayer more in rands than capital amount in rands originally advanced, taxpayer will have incurred loss which, provided other requirements of s 11(a) D satisfied, will be deductible — But such loss only deductible in year of repayment as only then will loss have actually been incurred.

Headnote : Kopnota

The respondent, the taxpayer, had been lent a sum of money by a German company, the capital sum of which was repayable by the respondent in Deutschmarks on an unspecified future date. At the end of the respondent's E 1985 tax year, the respondent, in its return of income, claimed in terms of s 11(a) of the Income Tax Act 58 of 1962 a deduction arising out of the fact that by reason of fluctuations in the exchange rate between rands and Deutschmarks, it would have to repay more in rands than the capital sum which it had received. The respondent had in fact not repaid the loan during the 1985 tax year. The appellant disallowed the deduction, but an appeal to an Income Tax Special Court was successful and the matter was F referred back to the appellant. In a further appeal,

Held, that, because the loan had to be repaid in a foreign currency, viz Deutschmarks, there was inherent in the transaction the possibility that when repayment was eventually made exchange rate fluctuations might result in the respondent having to pay in rands either more, or perhaps less, than it originally received in rands from the lender. (At 812E/F-F.)

Held, further, that, if in some future fiscal year, when repayment was G made, to do so would cost the respondent more in rands than the capital amount in rands which had originally been advanced to it, then it would have incurred a loss which, provided the other requirements of s 11(a) of the Act had been satisified, would be deductible. (At 812F-G.)

Held, further, that the loss would only be deductible in the year of repayment because only then would such a loss have actually been incurred. (At 812G.)

Held, accordingly, that the loss could only occur when the respondent had H to provide rands to purchase the necessary Deutschmarks to repay the loan; and that had not happened during the tax year in question. (At 814C/D-D.) Appeal allowed.

The decision in the Transvaal Income Tax Special Court in Felix Schuh (SA) (Pty) Ltd v Commissioner for Inland Revenue reversed.

Case Information

Appeal from a decision in the Transvaal Income Tax Special Court (Melamet I J). The facts appear from the judgment of Corbett CJ.

P J van R Henning SC (with him M M Lincesso) for the appellant referred to the following authorities: As to the meaning of the expression 'actually incurred' in s 11(a) of the Income Tax Act 58 of 1962, see Port Elizabeth Electric Tramway Co Ltd v Commissioner for Inland Revenue 1936 CPD 241 at J 244; Caltex Oil (SA) Ltd v Secretary for Inland Revenue 1975

1994 (2) SA p802

A (1) SA 665 (A) at 674E; Plate Glass & Shatterprufe Industries Finance Co (Pty) Ltd v Secretary for Inland Revenue 1979 (3) SA 1124 (T) at 1127H-1128D; Nasionale Pers Bpk v Kommissaris van Binnelandse Inkom-ste 1986 (3) SA 549 (A) at 564B; Commissioner for Inland Revenue v Edgars Stores Ltd 1986 (4) SA 312 (T) at 315H-I; Edgars Stores Ltd v Commissioner B for Inland Revenue 1988 (3) SA 876 (A) at 888G-I. As to the meaning of the word 'loss' (Afrikaans 'verlies'), see The Oxford English Dictionary 2nd ed vol IX at 37 sv 'loss'; Handwoordeboek van die Afrikaanse Taal at 968 sv 'verliese'; Joffe & Co Ltd v Commissioner for Inland Revenue 1946 AD 157 at 166; Edgars Stores Ltd v Commissioner for Inland Revenue (supra at 888I-889B). As to the approach in Australia, see Caltex Ltd v Federal C Commissioner of Taxation 12 ATD 170 (Australian HC) at 177; The Texas Co (Australasia) Ltd v Federal Commissioner of Taxation 5 ATD 298 (HC) at 300-1; International Nickel Australia Ltd v Commissioner of Taxation of the Commonwealth of Australia (1977) 137 CLR 347 at 351-4, 360-8, 371-2; Avco Financial Services Ltd v Commissioner of Taxation (1982) CLR 510 at D 514. As to the position in England, see Pattison (Inspector of Taxes) v Marine Midland Bank Ltd [1984] AC 362 (HL) at 372E. As to the contention that, although no express provision therefor had been made in s 11(a), as the taxpayer is assessed for income tax for a period of one year, no expenditure or losses incurred in a year other than the particular tax year can be deducted, see Concentra (Pty) Ltd v Commissioner for Inland E Revenue 1942 CPD 509 at 513; Sub-Nigel Ltd v Commissioner for Inland Revenue 1948 (4) SA 580 (A) at 589-90; Caltex Oil (SA) Ltd v Commissioner for Inland Revenue (supra at 674B); Nasionale Pers Bpk v Kommissaris van Binnelandse Inkomste (supra at 564A-C). As to the contention that the Court a quo erred in relying on the accounting method to determine whether F the losses were 'actually incurred', see Pyott Ltd v Commissioner for Inland Revenue 1945 AD 128 at 135; Joffe & Co Ltd v Commissioner for Inland Revenue (supra at 165); Sub-Nigel Ltd v Commissioner for Inland Revenue (supra at 588); Divaris 'Foreign Exchange Losses on Loans - the Plate Glass Case' 9 (1980) Income Tax Reporter 29; 'Unrealised Foreign Exchange Losses and the "Second Year" Problem' - Editorial in 36 (1987) G The Taxpayer 121; Voster 'Unquantified and Defeasible Expenses Incurred in the Production of Income' 1 SA Tax Journal 1; Walker 'Tax Treatment of Foreign Exchange Gains and Losses' 2 SA Tax Journal (1987-8) 34. As to the losses having to be unconditional, see Commissioner for Inland Revenue v H General Motors SA (Pty) Ltd 1982 (1) SA 196 (T) at 201H; Commissioner for Inland Revenue v Edgars Stores Ltd (supra at 318H-319D).

E B Broomberg SC for the respondent referred to the following authorities: As to the nature of the deduction claimed by the respondent, see Stone v Secretary for Inland Revenue 1974 (3) SA 584 (A) at 592H; Caltex Ltd v I Federal Commissioner of Taxation 8 AITR 25 (HC) at 53 lines 35-42 ('the Australian Caltex case'); Income Tax Case 1160 (1971) 33 SATC 193 at 197; Commissioner for Inland Revenue v General Motors SA (Pty) Ltd 1982 (1) SA 196 (T) at 199E-H, 203G-H; Texas Co (Australasia) Ltd v Federal Commissioner of Taxation (1940) 63 CLR 382 (2 AITR 4 at 31; 5 ATD 298); Farmer v The Scottish North American Trust Ltd 1910 SC 693 (5 TC 693; J [1912] AC 118); Lombard Australia Ltd v Federal

1994 (2) SA p803

Commissioner of Taxation (1980) 10 ATR 743 (SC NSW) at 753 lines 28-41, 769 lines 37-44; Pattison (Inspector of Taxes) v Marine Midland Bank Ltd [1984] AC 362 (HL) at 372E-F, 373B-E; Commissioner for Inland Revenue v Genn & Co (Pty) Ltd 1955 (3) SA 293 (A) at 299A-D; Caltex Oil (SA) Ltd v Secretary for Inland Revenue 1975 (1) SA 665 (A) ('the SA Caltex case'). As to the meaning of 'expenditure' and 'losses' in s 11(a) of the Income B Tax Act 58 of 1962, see Simpson v Inland Revenue Commissioners [1914] 2 KB 842 at 845; Black's Law Dictionary 5th ed at 851 sv 'loss'; The Shorter Oxford English Dictionary vol 1 at 705 sv 'expend' and 'expense', at 1240-1 sv 'loss'; Lockie Bros Ltd v Commissioner for Inland Revenue 1922 TPD 42 at 47; Baxter v Commissioner of Taxes, Southern Rhodesia 1937 SR 48 C (9 SATC 1 at 5); New Kleinfontein Co Ltd v Commissioner for Inland Revenue 1920 AD 338 at 348-9; Commissioner of Taxes v BSA Co Investments Ltd 1966 (1) SA 530 (SRA) at 534E-F; Palabora Mining Co Ltd v Secretary for Inland Revenue 1973 (3) SA 819 (A); Income Tax Case 1218 (1974) 36 SATC 212 at 214-7. As to instances where a 'loss' has been claimed as a deduction, see D Income Tax Case 968 (1962) 24 SATC 726; Stone v Secretary for Inland Revenue (supra at 598A); Income Tax Case 426 (1940) 10 SATC 343; Commissioner of Taxes v Rendle 1965 (1) SA 59 (SRA); Commissioner of Taxes v 'A' Company 1979 (2) SA 409 (RA); Arenson v Commissioner for Inland Revenue 1948 (2) SA 795 (W). As to Australian law on the point, see the Texas Co (Australasia) Ltd case; the Australian Caltex case supra at 41-3; E the SA Caltex case supra at 674H-675H; Simon's Taxes revised 3rd ed vol B at 2151-2; Oliver 'Plus ca Change, Plus c'est la Meme Chose' (1984) British Tax Review 2 at 4. As to the position in England, see Pattison (Inspector of Taxes) v Marine Midland Bank Ltd [1984] AC 362 (HL); Jill Pagan 'Marine Midland - the Tip of the Iceberg for Trades in Foreign F Currency' (1984) British Tax Review 161; Henbrey 'Marine Midland - a Personal View' (1985) British Tax Review 2; Halsbury's Laws of England 4th ed Reissue vol 23 para 226 at 185; Simon's Taxes (supra); Golden Horse Shoe (New) Ltd v Thurgood (Inspector of Taxes) [1934] 1 KB 548 (CA) at 563 (18 TC 280 at 300). As to the position in South Africa, see Secretary for Inland Revenue v Silverglen Investments (Pty) Ltd 1969 (1) SA 365 (A) at G 377B-C; Plate Glass & Shatterprufe Industries Finance Co (Pty) Ltd v Secretary for Inland Revenue 1979 (3) SA 1124 (T) at 1127H-1128A; Commissioner of Taxes v 'A' Company (supra at 415G-H). As to the question whether the respondent actually incurred an expenditure or a loss during the year of assessment in question...