Income Tax Case No 11773

• Jurisdiction: South Africa
• Judge: Gildenhuys J
• Judgment Date: 05 October 2007
• Citation: 2008 JDR 0010 (SpCrt)
• Docket Number: 11773

Gildenhuys J:

[1] The appellant in this matter is a company duly registered and incorporated in terms of the Companies Act 61 of 1973. The appellant's primary business is the award of licences to the security industry for the use of a computer program which it developed, known as the CT Program.

[2] The case before the Court relates to the assessment of the appellant for income tax in its 2004 year of assessment, covering the period from 1 March 2003 to 29 February 2004.

[3] At the end of the appellant's 2003 tax year, there was an accumulated assessed loss of R3 338 742.00. The loss was principally made up of development expenditure in respect of the CT Program. In the 2004 tax year, further loss of R424 057.00 was incurred. The only income for that year was R12 302.00 in respect of interest plus small amounts of sundry income, all of which the appellant conceded, for purposes of adjudication of the issues before me, to have been unrelated to trading.

[4] The Commissioner disallowed the set-off of the loss carried forward by the appellant in terms of s 20(1) of the Income Tax Act 58 of 1962, for the 2004 year of assessment.

[5] The issues before the Court turn mainly on the interpretation of sub-ss 20(1) and (2) of the Income Tax Act 58 of 1962. The relevant subsections read as follows:

"(1) For the purposes of determining the taxable income derived by any person from carrying on any trade, there shall be, subject to section 20A, be set off against the income so derived by such person -

(a)

any balance of assessed loss incurred by the taxpayer in any previous year which has been carried forward from the preceding year of assessment: Provided that -

(2) For the purposes of this section "assessed loss" means any amount by which the deductions admissible under sections 11 to 19, inclusive, exceeded the income in respect of which they are so admissible."

[6] The Commissioner submits that, aside from the requirement that the appellant must have carried on a trade during the 2004 tax year, it is also a requirement of s 20(1) that income must have been received by or accrued to the taxpayer from such trade. If no such income had been derived, it will not be possible to balance the assessed loss against income, as required under s 20(1). The appellant, on the other hand, contends that the receipt or accrual of income is not a prerequisite, and if it is, then the section is unconstitutional on grounds set out in its Statement of Grounds of Appeal. Those grounds are not relevant for purposes of this judgment.

[7] Several questions arise from the appeal. The parties agreed to separate one of them, viz whether the receipt or accrual of income is a prerequisite for a set-off under s 20, for prior hearing and decision. I thereupon made the following order:

"1. In terms of s 83 of the Income Tax Act read with Rule 20(1) of the Income Tax Rules and Rule 33(4) of the High Court Rules there is a question of law which it is convenient to decide before evidence is led and separately from any other question, including the constitutional enforceability of the section, namely:

Whether or not income must have been received by or accrued to the taxpayer in the relevant year of assessment in order for the taxpayer to satisfy the requirements of s 20(1) of the IT Act.

2. The aforesaid issue will be determined before the determination of any other issue, all the other issues being stayed pending such determination.

2008 JDR 0010 p2

Gildenhuys J

3. Such determination shall be in the form of a declarator and limited to whether or not, on an interpretation of the section and the Act as it stands (and without considering the constitutional enforceability of such section), income must have been received by or accrued to the taxpayer in the relevant year of assessment in order to satisfy the requirements of s 20(1) of the IT Act."

I will, for purposes of this judgment, assume that the other requirement for utilising an assessed loss, namely that the taxpayer has carried on a trade during the year of assessment, has been fulfilled.

[8] The issue has been raised in several Appellate Division and Supreme Court of Appeal decisions, but not conclusively decided. In the seminal decision of SA Bazaars (Pty) Ltd v Commissioner for Inland Revenue 1952 (4) SA 505 (A), the Court considered a predecessor of the present s 20(1) which was, although differently constructed, for all practical purposes identical. Centlivres CJ said (at 510F):

"Under sub-s (3) of s 11 the balance of assessed loss incurred in any previous year can only be set off when it has been carried forward from the preceding year of assessment."

The learned Judge then continued and said (at 510H-511F):

"During the year ending on 30 June 1944, therefore, the appellant did not carry on, within the meaning of s 11(1), a trade within the Union and it derived no income from any trade. Under that subsection a deduction or set-off is admissible only against income derived from carrying on a trade. As the appellant carried on no trade during the year under consideration it was not competent for it to set-off in its income tax return for that year the balance of assessed loss incurred by it in previous years. It is not necessary for the purpose of this case to decide whether the appellant would have been entitled to set-off that balance in respect of the year ending on 30 June 1944, if during that year it had carried on a trade but earned no income."

[9] Beyers JA explained the SA Bazaars case...