Income Tax Special Court
| Jurisdiction | South Africa |
| Judge | Wunsh J |
| Judgment Date | 01 March 1996 |
| Docket Number | 9972 |
| Court | Transvaal Income Tax Special Court |
| Hearing Date | 13 February 1996 |
| Citation | 1998 JDR 0242 (TSpCrt) |
Wunsh J:
The appellant is a close corporation which in the year ended 28 February 1991, ("the year of assessment") carried on and still carries on business as customs clearing and freight forwarding agents.
The undisputed facts are (in some instances I indicate that this is what
1998 JDR 0242 p2
Wunsh J
the appellant's witnesses said, there having been no direct contradictory evidence):
In the year of assessment the appellant rendered services to a customer, A.
The services included the payment to Portnet, as the harbour authority, of wharfage fees which the appellant disbursed for and was entitled to recover from A.
According to B, who is the managing member of the appellant, it, through the instrumentality of his former fellow member and without his knowledge, fraudulently rendered accounts to A reflecting for wharfage fees disbursed amounts in excess of the actual expenditure and thereby recovered in the year of assessment R299 814 ("the disputed sum") more than should have been paid to it.
The disputed sum was included in the determination of the "fees and disbursements recovered" in the appellant's income statement for the year of assessment, but also in the determination of the item "less disbursements and fees".
1998 JDR 0242 p3
Wunsh J
The disputed sum found its way to the ledger from the purchases journal where the following items were entered:
|
"Airfreight to N/Y |
R132 771,43 |
|
Airfreight - Tokay - Ninweg |
R167 042,70 |
|
|
R299 813,83 |
It appears that these entries or those in the ledger appeared under the name C, a firm operating in the same field as the appellant, which had nothing to do with the transactions or the items in question. No explanation could be given for this.
The appellant says that the disputed sum formed part of the "accounts payable" in the financial statements.
B says a disgruntled employee reported the irregularity to
A in December 1992 and also to the Receiver of Revenue.
The Commissioner contended that the disputed sum is a provision made by the appellant for A's claim and that it could not, therefore, rank as expenditure incurred in the year of assessment for the purpose of section 11 (a) of the Income Tax Act 58 of 1962. This appeal is against his disallowance of the appellant's objection to the refusal to allow the
1998 JDR 0242 p4
Wunsh J
disputed sum as a deduction. The appellant did not challenge the position that if the disputed sum was indeed only a provision, it could not have been deducted.
Before I turn to the further evidence led at the hearing of the appeal, I shall refer to two documents emanating from the appellant in which its case is stated.
On 26 March 1993 it wrote to the Commissioner's inspector:
"In view of the fact that we were aware that a claim of approximately R300 000,00 could be instituted against the company we therefore made the provision for the liability.
As the client has now actually claimed the money from us, we believe that this provision was justified." (I emphasise).
The appellant's accounting officer wrote the letter of objection to the assessment on its behalf on 28 April 1993, saying inter alia:
"This amount (i.e. the disputed sum) relates to monies received by D as an agent on behalf of various Principals. This amount is accordingly not in the nature of an income receipt. You are respectfully referred to the judgment in the case of Genn vs C.I.R. when Mr Justice Schreiner dealt at length with the question of the
1998 JDR 0242 p5
Wunsh J
reality of income. It was held inter alia that amounts received cannot be in the nature of income under circumstances where there is a simultaneous obligation on the recipient to repay such monies (to a lender or Principal).
The criteria applicable under Tax Law as to whether amounts received constitute income or otherwise is on all fours with the Mercantile Law applicable to agents acting on behalf of Principals. An agent cannot enrich himself at the expense of his Principal and is obliged to account to the Principal in respect of all and any secret profits.
What is trite law, however, is that the inherent nature of monies received cannot be changed by a (subsequent) repayment of such monies in a subsequent Tax year. There is accordingly no basis either in fact or in Tax law for the Receiver's contentions that:-
The receipt of such monies in the 1991 Tax year constitutes a receipt of an income nature.
The subsequent repayment of such monies constitutes deductible expenditure
inasmuch as such contentions are inherently contradictory in nature.
The correct interpretation from a Tax Law point of view that:-
Monies received by the Taxpayer in the 1991 tax year
1998 JDR 0242 p6
Wunsh J
were received on behalf of various Principals as the ultimate beneficiaries thereof under circumstances where a loan obligation is imposed on the taxpayer to pay such monies to his Principal. This is in accordance with the judgment in Genn's case. The receipt of such monies is therefore in the nature of a Capital receipt. The subsequent repayment by the Taxpayer to his Principal of such monies constitutes a repayment of an obligation/indebtedness to his principal." (I emphasise)
The letter of objection is not quite in accordance with the appellant's case. That is not that it received monies on behalf of various principals; it is that it defrauded one principal of money. The letter of objection does not contend that there was no receipt; it argues that the receipt was of a capital nature. In view of the conclusion to which we have come I shall not pursue this aspect but shall say that the inconsistencies appearing in the correspondence emanating from the appellant and its advisers do not encourage the acceptance of its explanation of the accounting entries made and financial statements prepared by it.
No evidence was given with regard to the preparation of the appellant's financial statements for the year of assessment. B could not assist us. The partner in the firm of accountants and auditors which acted as the accounting officers who reported on them did not testify. E, another partner in the firm, give what amounted to opinion evidence, could not assist suggesting that the facts were known to his partner when the
1998 JDR 0242 p7
...To continue reading
Request your trial