Commissioner for Inland Revenue v Giuseppe Brollo Properties (Pty) Ltd

• Jurisdiction: South Africa
• Citation: 1994 (2) SA 147 (A)

Commissioner for Inland Revenue v Giuseppe Brollo Properties (Pty) Ltd
1994 (2) SA 147 (A)

1994 (2) SA p147

Citation	1994 (2) SA 147 (A)
Case No	392/92
Court	Appellate Division
Judge	Corbett CJ, Hefer JA, Nienaber JA, Nicholas AJA and Harms AJA
Heard	November 11, 1993
Judgment	December 1, 1993

Flynote : Sleutelwoorde B

Revenue — Income tax — Deductions — Expenditure incurred in the production of income — Income Tax Act 58 of 1962 s 11(a) — Interest payable on money borrowed in order to pay a dividend — Purpose of such borrowing one other C than obtaining means of earning income — Interest thereon accordingly not deductible in terms of s 11(a).

Appeal — Costs of — Supplementary heads of argument filed by appellant in which point raised for first time in Appellate Division or Court a quo — D Respondent's supplementary heads of argument persuading appellant to abandon new point — Special order as costs in respect thereof refused as Court would not have made such order if new point had been in original heads of argument.

Headnote : Kopnota

In a case concerning the deductibility or otherwise, in terms of s 11(a) of the Income Tax Act 58 of 1962 (which provides for the deduction from a E taxpayer's income of 'expenditure and losses actually incurred . . . in the production of the income, provided such expenditure and losses are not of a capital nature'), of interest payable on money borrowed, the enquiry relates primarily to the purpose for which the money was borrowed. That is often the 'dominant' or 'vital' enquiry, although the ultimate user of the borrowed money may sometimes be a relevant factor. Where the taxpayer's purpose in borrowing money upon which it pays interest is to obtain the means of earning income, the interest paid on the money so borrowed is F prima facie an expenditure incurred in the production of income. (At 152I/J-153A/B.) If, on the other hand, the purpose of the borrowing was for some other purpose than obtaining the means of earning income (for example, to pay a dividend, as with the position in the present case), the interest is not deductible. (At 153D.)

In a successful appeal the respondent had contended that a special order as to costs should be made in respect of a new point raised by the G appellant in supplementary heads of argument. The point had been raised for the first time in such supplementary heads of argument and had not been raised at all in the Court a quo. The respondent thereafter filed supplementary heads of argument in response to the new point which persuaded the appellant to abandon the point. The Court held that a special order as to costs should not be made as the Court would not have H madea special order if the point had been raised in the original heads of argument filed in support of the appeal, and then abandoned. The fact that the point had been taken at a late stage should not produce a different result. (At 154I/J-155C.)

The decision in the Transvaal Income Tax Special Court in Income Tax Case No 1500 (1991) 53 SATC 272 reversed.

Case Information

Appeal from a decision in the Transvaal Income Tax Special Court (Melamet J), reported at (1991) 53 SATC 272. The facts appear from the judgment of I Nicholas AJA.

A P Rubens SC (with him J W G Campbell) for the appellant referred to the following authorities: As to the nature of the enquiry in terms of s 11(a) and s 23(g) of the Income Tax Act 58 of 1962, see Solaglass Finance Co (Pty) Ltd v Commissioner for Inland Revenue 1991 (2) SA 257 (A) at 268B, J 269A and 274F-276C; Commissioner of Taxes v BSA Co Investments

1994 (2) SA p148

Ltd 28 SATC 1 at 6. As to the contention that, if the purpose of a loan is to enable a company to distribute a dividend or profits, the interest paid on the loan is not deductible, see ITC 622 14 SATC 504; ITC 678 (1949) 16 SATC 348; ITC 1466 (1990) 52 SATC 25; Commissioner of Taxes v Avenue Buildings (Pvt) Ltd 1963 (4) SA 954 (SR) at 954H-956D ITC 1135 (1969) 31 B SATC 229 and ITC 1171 (1972) 34 SATC 80 being distinguishable). As to whether, on the facts of the present case, the reduction in the amount of the interest-bearing portion of the loan debt did not alter the purpose of the declaration of the dividends and the corresponding increase in the loan and whether that constituted a novation of the dividend debt, see Rose v Cloete (1847) 3 Menzies 377; Swadif (Pty) Ltd v Dyke NO 1978 (1) SA 928 (A) C at 940G; Darling v Registrar of Deeds 1912 AD 28 at 34-5; French v Sterling Finance Corporation (Pty) Ltd 1961 (4) SA 732 (A) at 736F; Ninian & Lester (Pty) Ltd v Perry 1991 (1) SA 66 (N) at 71G-72B; Christou v Christoudoulou 1959 (1) SA 586 (T) at 587E-588A; Commissioner for Inland Revenue v Allied Building Society 1963 (4) SA 1 (A) at 13C in fin. As to D the contention that the respondent was not entitled to the allowance claimed by it because it had contravened s 38 of the Companies Act 61 of 1973 by providing financial assistance in relation to the purchase of its shares, see BP Southern Africa (Pty) Ltd and Others v Secretary for Customs and Excise and Another 1985 (1) SA 725 (A) at 733C-H; Lipschitz NO E v UDC Bank Ltd 1979 (1) SA 789 (A) at 797H-798B, 799D, 801C-F, 802B-803C, 805A-B; Jacobson and Another v Liquidator of M Bulkin & Co Ltd 1976 (3) SA 781 (T) at 787H; Gradwell (Pty) Ltd v Rostra Printers Ltd and Another 1959 (4) SA 419 (A) at 425C-F, 426A-B, 426D-E; Albert v Papenfus 1964 (2) SA 713 (E). A

R S Welsh QC (with him M C Goldblatt) for the respondent referred to the F following authorities: As to the options open to the Commissioner flowing from the revaluation of the taxpayer's properties in 1983 and the declaration of dividends from its profits for the 1983 year and also of all its existing reserves and the new reserve resulting from the revaluation of the properties, see s 11(a), read with s 23(g) and s 103(1) of the Income Tax Act 58 of 1962; Silke South African Income Tax 11th ed G para 7.12 at 7-43, 7-45; Meyerowitz and Spiro Income Tax paras 710, 711 at 319-20; ITC 1530 (1992) 54 SATC 261 at 268-70. As to the novation of the original dividend debt, see Wessels Law of Contract in South Africa 2nd ed vol 2 para 2401 at 665; Caney Law of Novation 2nd ed at 22 and authorities cited in n 13 and n 14; Voet 46.2.5 (Gane's translation vol 7 at 78-9); H Pothier Obligations paras 546, 560 (Evans' translation at 380, 389-90); Williams v Atkinsons Motor Garages Ltd 1933 OPD 72 at 75; Trust Bank of Africa Ltd v Dhooma 1970 (3) SA 304 (N) at 307; Commissioner of Inland Revenue v Brown Bros Ltd 1955 (2) SA 165 (T); Wood v Odessa Waterworks Co (1889) 42 Ch D 636 at 642. As to the appellant's contention that interest paid in respect of loans to finance dividend payments is not deductible in I terms of s 11(a) and s 23(g) of the Act, see ITC 678 (1949) 16 SATC 348; Commissioner of Taxes v Avenue Buildings (Pvt) Ltd 1963 (4) SA 954 (SR); ITC 1466 (1989) 52 SATC 25; ITC 988 (1962) 25 SATC 113; Port Elizabeth Electric Tramway Co v Commissioner for Inland Revenue 1936 CPD 241 at 246; Commissioner for Inland Revenue v Genn & Co (Pty) Ltd 1955 (3) SA 293 (A) J at 299C-D and G, 300C-D; Commissioner for Inland

1994 (2) SA p149

Revenue v Standard Bank of SA Ltd 1985 (4) SA 485 (A) at 498F-G; Commissioner of Taxes v BSA Co Investments Ltd 1966 (1) SA 530 (SRA); Solaglass Finance Co (Pty) Ltd v Commissioner for Inland Revenue 1991 (2) SA 257 (A). As to whether the original purpose of the borrowing forever governs the deductibility of the interest paid on the loan, see Producer v B Commissioner of Taxes 1948 (4) SA 230 (SR); Financier v Commissioner of Taxes 1950 (3) SA 293 (SR); ITC 953 (1961) 24 SATC 552 at 554; ITC 1171 (1971) 34 SATC 80 at 81-2; ITC 1135 (1969) 31 SATC 228 at 232-3. As to the contention that the respondent had contravened s 38 of the Companies Act 61 of 1973, see BP Southern Africa (Pty) Ltd and Others v Secretary for Customs and Excise and Another 1985 (1) SA 725 (A) at 733C-H; Cole v C Government of the Union of South Africa 1910 AD 263 at 272; Paddock Motors (Pty) Ltd v Igesund 1976 (3) SA 16 (A) at 23B-G; De Beers Holdings (Pty) Ltd v Commissioner for Inland Revenue 1986 (1) SA 8 (A) at 33E-G; Lewis v Oneanate (Pty) Ltd and Another 1992 (4) SA 811 (A) at 818A-C; Cilliers and others Corporate Law (1987) paras 20.30-35 at 279-81; Hahlo South African D Company Law through the Cases 5th ed (1991) at 592-5; Dimbula Valley (Ceylon) Tea Co Ltd v Laurie and Another [1961] Ch 353 at 371-4; Gower Modern Company Law 4th ed (1979) at 232; Pennington's Company Law 4th ed (1979) at 364-5; Palmer Company Law 22nd ed (1976) vol 1 para 72.16 at 803-5; Novick and Another v Comair Holdings Ltd and Others 1979 (2) SA 116 (W) E at 135-7; Re Wellington Publishing Co Ltd (1973) 1 NZLR 133; Coleman v Myers (1977) 2 NZLR 225; Weinberg and Blank Take-Overs and Mergers 4th ed (1979) paras 1814-5 at 456-7; 'Section 38 Financial Assistance - By Dividend Declaration' 1979 SA Company Law Journal at F-18-F-26; Dawson 'Financing a Take-Over' (1974) 90 LQR 452; Albert v Papenfus 1964 (2) SA 713 (E); Lipschitz NO v UDC Bank Ltd 1979 (1) SA 789 (A) at 805A-B; In re F VGM Holdings Ltd [1942] Ch 235; Harrison v Harrison 1952 (3) SA 417 (N); Johnson v Johnson and Others 1983 (2) SA 324 (W) at 332A-H; Commissioner for Inland Revenue v Delagoa Bay Cigarette Co Ltd 1918 TPD 391 at 394; 'The Tax Implications of Unlawful Payments' (1989) 28 The Income Tax Reporter 60; ITC 343 (1935) 8 SATC 370; Salisbury Board of Executors v G Commisioner of Taxes, Southern Rhodesia (1941) 12 SATC 1 at 5; ITC 1199 (1973) 36 SATC 16; ITC 1212 (1974) 36 SATC 108; ITC 1270 (1977) 40 SATC 65 at 67 in fin; ITC 1490 (1990) 53 SATC 108; Commissioner for Inland Revenue v Insolvent Estate Botha t/a 'Trio Kulture' 1990 (2) SA 548 (A); Whiteman Income Tax 3rd ed (1988) para...