Joffe & Co Ltd v Commissioner for Inland Revenue

• Jurisdiction: South Africa
• Judge: Watermeyer CJ, Tindall JA and Davis AJA
• Judgment Date: 30 October 1945
• Hearing Date: 19 October 1945
• Court: Appellate Division

Watermeyer, C.J.:

This is an appeal from a decision of MURRAY, J., in a case stated by the Special Court for hearing Income Tax appeals.

The appellant is a private company which carries on the business of "reinforced concrete" engineering. In 1938 it entered into a contract to "design, bend supply and fix" the steel reinforcement required for a cantilever hood, portion of a building which being erected in Durban by a building contractor. This contract was performed and the cantilever hood was then constructed the building contractor. After it had been erected it collapsed and a plumber who was working beneath it on the uncompleted building was killed. It was afterwards discovered that the reinforcing steel rods had become displaced from their proper position at some time while the work of pouring the concrete was proceeding and the displacement weakened the structure and caused its collapse. An action was instituted on behalf of the dependants of the plumber, in which damages were claimed from the appellant on the ground that it was negligent in failing to take proper precautions to ensure that the reinforcing steel rods should become displaced while the cantilever hood was being constructed, and judgment was ultimately entered in their favour with costs. The appellant duly paid these damages and costs. In its return for Income Tax purposes the appellant claimed the right to deduct the damages and costs which it had been compelled to pay as well as its own costs in the action, from its gross income in order to arrive at its taxable income. This deduction was disallowed by the Commissioner, but on appeal to the Special Court it was allowed. At the request of the Commissioner a case, raising the question whether the damages and costs were allowable deductions under sec. 11 (2) of Act 31 of 1941, was stated for the consideration of the Witwatersrand Local Division of the Supreme Court. MURRAY, J., overruled the decision of the Special Court and decided that the deductions claimed could not be made. The appellant now appeals against the decision of MURRAY, J.

The decision of the case turns upon the construction to be placed upon provisions of Act 31 of 1941, more particularly upon sec. 11 (1) and (2) (a) and sec. 12 (g), which are as follows: -

"11 (1) For the purpose of determining the taxable income derived by any person from carrying on any trade within the Union there shall be deducted from or set off against the income

Watermeyer, C.J.

of such person so derived as defined by sec. 7 the amounts set cut in this section.

11 (2) The deductions allowed shall be -

(a)

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

12. No deduction shall in any case be made in respect of the following matters -

(g)

Any moneys, claimed as a deduction from income derived from trade, which are not wholly or exclusively laid out or expended for the purposes, of trade."

On behalf of the appellant it was contended that the damages and costs were either expenditure or losses, and that they had been incurred in the production of the income, because they arose directly out of an operation performed for the purpose of earning income and were so closely linked to it that they could be rightly regarded as part of the cost of performing that operation; it was not contended that they were part of the ordinary cost of performing the operation but that they were part of the real cost of the operation when performed in the manner in which the appellant chose to perform it. To support this contention reference was made to the case of The Herald and Weekly Times Limited v Federal Commissioner of Taxation (2 Australian Tax Decisions, p. 169) and further support for it was sought in the cases of Strong & Co., Ltd. v Woodifield (1906, A.C. 448) and Port Elizabeth Electric Tramway Company v Commissioner...