Commissioner for Inland Revenue v Genn & Co (Pty) Ltd

• Jurisdiction: South Africa
• Judge: Schreiner JA, Van Den Heever JA, Hoexter JA, Fagan JA and Steyn JA
• Judgment Date: 23 May 1955
• Citation: 1955 (3) SA 293 (A)
• Hearing Date: 28 March 1955
• Court: Appellate Division

Schreiner, J.A.:

The respondent, which I shall call 'the Company', appealed to the Special Court for hearing Income Tax Appeals against the H disallowance of certain deductions under assessments of taxable income and income subject to supertax in respect of the year ended 30th June, 1951. The Special Court allowed the Company's appeal. The Commissioner appealed on a case stated to the Cape Provincial Division and failing there now brings a further appeal to this Corut.

The stated case recites the following facts as having been admitted at the hearing before the Special Court:

Schreiner JA

'(1) The appellant company is a private company in terms of the Act incorporated in the Union of South Africa with its registered office at Claremont, Cape, where it carries on the business of hardware and timber merchants.

(2) In its profit and loss account for the year ended 30th June, 1951, there appeared a debit item of £2,330 3s. 5d. described as 'interest and finance charges on loans.'

(3) In this amount of £2,330 3s. 5d. was an amount of £384 1s. 9d. A expended by the appellant company and made up as follows:

Commission paid to General Trust and Investment Company (Proprietary) Limited	£290	0	0
Bank Charges	£23	5	1
Interest to General Trust and Investment Company (Proprietary) Limited	£70	16	8
Total	£384	1	9

(4) The appellant company purchases some of its stock-in-trade locally B and also imports stock-in-trade on a large scale.

(5) Prior to the year ended 30th June, 1951, the imports of the appellant company were financed by shippers, for which service the shippers charged the appellant company, in addition to bank interest of 6 per cent per annum on the amount involved, a further commission of 3 C per cent to 3 3/4 per cent for every 90 days or 120 days for which the appellant company was being accommodated. The cost of financing on this basis worked out at up to 18 per cent per annum.

(6) During the year ended 30th June, 1951, the method of financing purchases of stock-in-trade was changed and the method followed in that year has now become the normal way in which the appellant company finances its purchases.

(7) The method referred to in the preceding sub-paragraph was to obtain short term loans locally. The appellant company made it known to General Trust and Investment Company (Proprietary) Limited that it was prepared D to pay 10 per annum for money to be borrowed by it including the raising fee. General Trust and Investment Company (Proprietary) Limited was to arrange for a client to make a loan to the appellant company for a stipulated period at a prescribed interest rate and General Trust and Investment Company (Proprietary) Limited was to get a raising fee equal to the difference between the prescribed interest rate payable by the appellant company and 10 per cent per annum. In practice, usually 8 per cent per annum interest was paid by the appellant company to the lender E for the use of the money and General Trust and Investment Company (Proprietary) Limited in such a case would receive from the appellant company a raising fee equivalent to 2 per cent per annum on the amount of money borrowed.

(8) During the year ended 30th June, 1951, following the procedure outlined in sub-para. (7), the appellant company raised seven short term loans, viz: -

18/10/1950	£2,000 from E. Gild
24/10/1950	£3,000 from P. Lurie.
24/10/1950	£5,000 from M. Raphael. F
17/ 2/1951	£3,000 from M. Gross.
20/ 2/1951	£2,500 from Sher.
22 /3/1951	£1,000 from P. Gild.
25/ 4/1951	£2,000 from Lurie.

Raising fees in respect of these loans of £60, £30, £50, £60, £50, £20 and £20 respectively were paid by the appellant company to General Trust G and Investment Company (Proprietary) Limited. A total of £290, which is the amount of £290 referred to in sub-para. (3) above.

(9) The loans referred to in the preceding sub-paragraph were all raised by the appellant company for purposes of financing its purchases of stock-in-trade and were in fact so used. By paying for stock-in-trade supplied by certain local suppliers within 7 days of date of purchase the appellant company received discounts of 2½ per cent and 5 per cent. Some of the money borrowed by the appellant company was used to pay cash H for local purchases, thus gaining the benefit of the discounts. The balance of the borrowed money was used for the purpose of financing the purchase of stock-in-trade imported by the appellant company.'

Before this Court it was agreed by counsel that three of the seven loans were for a period of six months and that the remaining four were for one year. In its judgment the Special Court pointed out that

Schreiner JA

the amount of the commission was in each case directly proportionate to the duration of the loan.

The decision of the question whether the sum of £290, being the total amount of the commissions paid by the Company during the year in A question, was deductible from its income depends on the effect of the following provisions of the Act. So much of the definition of 'Gross Income' as is relevant reads, 'the total amount whether in cash or otherwise received by or accrued to or in favour of any person, excluding such receipts or accruals of a capital nature' as are not referred to in certain paragraphs which need not be particularised. B 'Income', being what remains of 'gross income' after exemptions under sec. 10 have been taken away, is subject to deductions under sec. 11, in order to arrive at 'taxable income'. The directly relevant provision is sec. 11 (2) (a), which reads,

'(2) The deductions allowed shall be

(a)

expenditure and lossess actually incurred in the Union in the production of the income, provided such expenditure and C losses are not of a capital nature.'

Sec. 12 provides that no deduction shall in any case be made in respect of certain matters, including,

'(f)

any expenses incurred in respect of any amounts received or accrued which are not included in the term 'income' as defined in this Chapter;

(g)

any moneys, claimed as a deduction from income derived from trade, which are not...