Plate Glass & Shatterprufe Industries Finance Co (Pty) Ltd v Secretary for Inland Revenue

• Jurisdiction: South Africa
• Judge: Margo J, Eloff J and Preiss J
• Judgment Date: 28 March 1979
• Court: Transvaal Provincial Division
• Hearing Date: 28 March 1979
• Citation: 1979 (3) SA 1124 (T)

Margo J:

The appellant company, in its income tax returns for the 1974 and 1975 years, referred to losses of R74137 and R431231 respectively, which had been incurred by reason of unfavourable changes in the rate of exchange between the South African rand and the Swiss franc. The appellant claimed that those losses had been incurred on revenue G account, that is as part of its trading activities, and that they were therefore deductible items in the ascertainment of its taxable income for those years.

The Secretary for Inland Revenue, who is the respondent in this appeal, disagreed. In assessing the appellant for income tax for the 1974 and 1975 H years he disallowed these amounts as deductions and rejected an objection to the assessments. An appeal to the Transvaal Income Tax Special Court failed, and the present appeal is against the decision of that Court.

The issues raised in the appeal are, firstly, whether any losses were actually incurred by reason of admittedly unfavourable changes in the rate of exchange; secondly, if there were such losses, whether such were incurred by the appellant and not by some other company with which it was associated; and, thirdly, if such losses were actually incurred by the

Margo J

appellant, whether they were suffered in the production of income and were not of a capital nature. (See s 11 (a) of the Income Tax Act 58 of 1962.)

A The onus of proof rested upon the appellant on each of these issues. (See s 82 of the Act.)

A brief review is necessary of the facts presented in the Court a quo. The appellant is a wholly owned subsidiary of Plate Glass and Shatterprufe B Industries Ltd (PGSI), which is a public company listed on the Johannesburg Stock Exchange and the parent company of a group consisting of some 200 subsidiary and associated companies with many diverse interests. Approximately 15 members of the group are overseas companies. Some of the companies in the group are engaged in the export trade and a C number of others import various commodities from overseas. The group has approximately 16000 employees and an annual turnover of the order of R300 million.

The raison d'être of the appellant was summarised as follows by TRENGOVE J in delivering the judgment of the Special Court:

"As a result of the expansion of the group's activities and the increase in the number of subsidiary and associated companies, PGSI eventually D decided to take steps to put the financing of its subsidiaries on a sounder business footing. Initially each subsidiary controlled its own funds and made its own arrangements for financial facilities. But this was not an entirely satisfactory system. It was found that the funds and resources of the subsidiaries were not being used for the best advantage of the group as a whole - from time to time some subsidiaries would be i n possession of excess funds whilst others would be in need of financial facilities and, by not utilising all the available funds for the benefit of the group as a whole, PGSI and its subsidiaries were losing money.

E The original system also had another drawback. The subsidiaries did not, individually, have as high a rating in financial circles as the group as a whole. Some of them experienced problems in raising capital or in borrowing money. The group, as one can well understand, was in a position to obtain loans more easily, and at far more attractive rates of interest than the subsidiaries acting on their own. PGSI decided, therefore, to F appoint a financial director to the group, a Mr Scott, to control the finances of the group; it also decided to establish a finance company for the purpose of harnessing the funds and the financial resources of the group and of utilising them to the best possible advantage of all the companies in the group. To this end a dormant company, Atlantic Glass Industries (Cape) (Pty) Ltd - which subsequently changed its name to Plate Glass and Shatterprufe Industries Finance Co (Pty) Ltd, ie the appellant - G was resuscit ated, and this is how it came about that the appellant has been acting as 'finance company' for the group since 1972. The appellant, so it is said, carries on the business of banking and money-lending - it acts as financial and banking company to the members of the group. Its sole function consists of the 'borrowing and lending' of money. The appellant, it is said, borrows money from three sources, namely from bankers, from fellow subsidiaries and, in the main, from PGSI and the moneys so borrowed are then lent to fellow subsidiaries. Under this H system excess funds accruing from time to time, to various subsidiaries within the group, are paid to the appellant on current account, and the appellant, in turn, meets the funding requirements of the subsidiaries by making money available to them on a call basis."

The circumstances in which losses were incurred in the 1974 and 1975 years were that, at some time prior to 1972, PGSI made arrangements with United Overseas Bank of Geneva (UOB) for a loan in the amount of 11 million Swiss francs. The loan was to be made available to Solaglass International Establishment (SIE), one of the overseas companies in the group, and PGSI guaranteed repayment.

Margo J

In April 1972 PGSI and/or SIE obtained approval from the South African Reserve Bank to utilise 10 million Swiss francs of the loan to assist in A financing the importation of goods into South Africa by companies in the group. SIE lent the money obtained from UOB to the appellant, which then "on-lent" it to other companies in the group. The arrangement approved by the South African Reserve Bank in regard to the 10 million Swiss francs was that an amount of three million was to be in the form of an outright, B indefinite period interest-bearing loan, repayable on demand. The balance of seven million was to be paid out to cover the cost of imports from time to time by companies in the group, and in respect thereof PGSI was to submit after each period of 120 days a schedule of the imports during that period, and was to issue a promissory note, in favour of SIE, covering the C amount of such imports during each such period, which promissory note was then to be endorsed over to UOB.

The promissory notes were to be issued every 120 days on a so-called roll-over or revolving basis, whereby, as I understand it, an earlier promissory note was to be replaced by a fresh one which covered the amount of the earlier note plus the cost of imports during the last 120 day period.

D The amount required to finance the imports from time to time was made available by SIE to the appellant from the proceeds of the loan. There was to be no physical transfer of funds out of the Republic to repay the loan until the seven million Swiss francs facility had been exhausted or...