Income Tax Special Court

• Jurisdiction: South Africa
• Judge: Wunsh J
• Judgment Date: 03 June 1997
• Docket Number: 9818
• Court: Transvaal Income Tax Special Court
• Hearing Date: 03 June 1997
• Citation: 1998 JDR 0237 (TSpCrt)

Wunsh J:

The appellant and the Commissioner for Inland Revenue ('the Commissioner') reached agreement on the facts in this appeal so that no evidence was led.

The appeal is against additional assessments for the years of assessment ended 30 June 1987, 1988, 1989 and 1990. After introductory matter the statement of agreed facts proceeds:

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"4. amounts in dispute are the following:

Year	Amount
1987	110 424
1988	165 924
1989	527 146
1990	1 134 135

(I interpolate that these amounts were treated as taxable income in so-called "revised" assessment issued in September 1991 and that they had the effect in some years at least of reducing the appellant's assessed loss.)

5.

During the years of assessment under review, the appellant carried on business as shipping, clearing and forwarding agents and in the management of terminals and container transport. The appellant continues to carry on these business activities to the present day.

6.

In terms of its terms and conditions of trade, the appellant incurred (during and prior to the years of assessment under review) various types of expenditure in the carrying out of its duties, for example where the appellant made use of the port and wharfage facilities and the railage facilities of the South African Transport Services ('SATS' - now 'Transnet').

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7.

Once the appellant had completed its contractual obligations to any particular customer, the appellant became entitled to be recompensed by the customer for any such expenditure incurred in the performance of its duties. Such recompense was effective pursuant to an invoice, incorporating a detailed disbursement account specifying the expenditures in question, sent by the appellant to the customer.

8.

At the time of invoicing the customer, the appellant was not always in possession of an invoice from the supplier of the services, although the appellant was in a position to determine with certainty the amount of the expenditure either by virtue of the fact that the amount was tariff-based according to a fixed tariff of rates for example Association of Ships Agents and Brokers of South Africa (ASABOSA) or Portnet or because the appellant had obtained a consignment note which contained the amount of the charge for the facilities.

9.

The accounting entries recording the various transactions are set out in detail on p. 126 of the dossier and can be summarised as follows (these accounting entries forming part of these agreed facts):

(i)	Dr	Cumstomer Disbursement A/C	xx
	Cr	Recoverable disbursements		xx

Debit to customer disbursement account on incurrence by the company of disbursement liability

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(ii)	Dr	Debtors	xx
	Cr	Customer disbursement A/C		xx

Invoicing of customer for disbursements incurred upon completion by the company of its contractual obligations.

(iii)	Dr	Recoverable disbursements	xx
	Cr	Supplier (e.g. SATS)		xx

Raising of amount payable to SATS in respect of Invoice No .....

Upon payment to the supplier, the following entry is raised:

(iv)	Dr	Supplier (SATS)	xx
	Cr	Cash		xx

Payment of SATS Invoice No . .....

10.

On occasion it happened that the appellant was not in fact invoiced for the facilities or services used, notwithstanding that the relevant facilities or services had been provided to the appellant. In the case of certain suppliers, the trading terms between the parties only required the appellant to make payment against or within a period after receipt of a statement. It follows that the appellant would not have effected payment to such suppliers unless and until it received an appropriate statement. In the case of SATS, the appellant had an arrangement whereby SATS debited the appellant SATS ledger account for the requisite amount for the facilities or

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services provided. Again, on occasion SATS did not, for whatever reason, debit such ledger account for the facilities or services provided, and consequently the related amount would not have been paid by the appellant . (I interpolate that in a letter to the Receiver of Revenue on 20 July 1988 the appellant wrote:

'... it should be noted that the standard trading conditions of the company's suppliers provide for payment of amounts due within a stipulated number of days of either invoice date or, in the case of SATS, debiting to the company's SATS ledger account. If no invoice is rendered, or if SATS fails to debit the company's ledger account, payment by the company in respect of the relevant service provided is not due.' I underline,)

11.

The above accounting entries show that the appellant , upon the supply to it of facilities or services, debited the relevant customer disbursement account and raised the liability to pay for the facilities and services by crediting the recoverable disbursement account (refer accounting entry (i) in 9 above). As stated above, the liability was for a known amount being tariff-based or having been notified to the appellant by way of consignment note. Such amount was thereafter invoiced to the customer and recovered by the appellant, this resulting in a credit to the customer disbursement account (refer accounting entry (ii) in 9 above). The net accounting position at this stage was thus

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Dr	Debtors/Cash	xx
Cr	Recoverable disbursements		xx

12.

In terms of the appellant's standard accounting procedures, when an invoice was not received or the appellant SATS ledger account was not debited in the circumstances outlined above, the resulting credit on the recoverable disbursement account was cleared after the expiry of 6 months by transferring such amount to a 'credits- in-suspense' account. The effect of this accounting entry was not to transfer any such credit amounts to the appellant's income statement but the credit amounts were merely moved from one category to another category on the appellant's balance sheet by way of the following accounting entry:

(v)	Dr	Recoveralbe disburesements	xx
	Cr	Credits in suspense		xx

Credit to suspense in respect of SATS consignment note No ....not debited to SATS ledger account.

As this entry did not impact upon the appellant's income statement, it similarly did not affect the taxable income of the appellant at that point in time.

13.

In terms of the appellant standard accounting procedures, if suppliers had not, within a period of two years of the transaction date, rendered an invoice to the appellant (or, in the case of SATS, raised a debit on the

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the appellant SATS ledger account), the relevant credit amount was transferred from 'credits in suspense' to profit, through the income statement, by means of the following journal entry:

(vi)	Dr	Credits in suspense (balance sheet)	xx
	Cr	Income statement		xx

Transfer of credit in suspense to income statement

14.

The aforegoing deals with the situation where a supplier of facilities or services to 'he appellant failed to render a related invoice (or, in the case of SATS, failed to debit the appellant SATS ledger account), as a consequence of which the appellant did not pay any amount for the relevant facilities or services provided to it.

A variation of the above was also fairly commonplace, whereby the supplier invoiced the appellant, (or, in the case of SATS, debited the appellant SATS ledger account) but for whatever reason did so in an amount less than that provided in terms of the relevant tariff or prior notification, by which time the appellant had already raised the full liability on the recoverable disbursement account and billed/recovered same from its customer.

In such circumstances the amount so under-charged by the supplier resulted in a credit on the recoverable disbursement account, which

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credit was dealt with in the same manner by the appellant as set out in 12 and 13 above.

15.

The amounts so transferred by the appellant to its accounting profit were excluded from taxable income in the appellant's tax returns for the years of assessment in issue, and it is respect of the exclusion from taxable income of these amounts that the current dispute exists between the appellant and the Commissioner for Inland Revenue.

16.

The issues which the Court is asked to decide are the following:

16.1

Are the credit amounts so transferred by the appellant to accounting profit and excluded by the appellant from taxable income to be included in taxable income by virtue of the definition of 'gross income' in section 1 of the Income Tax Act and, more specifically, are these credit amounts 'amounts, in cash or otherwise' that were 'received by' or which 'accrued to' the appellant, for purposes of that definition, in the years of assessment in which the amounts were so transferred to the appellant's accounting profit?

16.2

If 16.1 is to be answered in the negative, are the amounts to be included in the taxable income of' the appellant on the basis that such amounts represent a recovery or recoupment, for the purposes of section 8(4)(a), of the Income Tax Act, of expenditure previously

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claimed as a deduction by the appellant? (in this regard, it should be noted that the appellant did claim a deduction in terms of section 11(a) of the Income Tax Act of the expenditure representing...