Rand Ropes (Pty) Ltd v Commissioner for Inland Revenue

• Jurisdiction: South Africa

Rand Ropes (Pty) Ltd Appellant v Commissioner for Inland Revenue Respondent
1944 AD 142

1944 AD p142

Citation	1944 AD 142
Court	Appellate Division
Judge	Watermeyer CJ, Tindall JA, Centlivres JA, Feetham JA and Greenberg JA
Heard	October 19, 1943
Judgment	December 1, 1943

Flynote : Sleutelwoorde

Revenue — Excess Profits Duty — Determination of capital employed in trade — Deduction of debts owed in respect of trade — Dividend declared — Whether to be deducted — Deduction of managerial remuneration — Disallowed by Commissioner — Discretion under section 13 (1) (b) of Act — Rights of taxpayer on appeal to Special Court — Special Court misdirecting itself on point of law — Remittal by Supreme Court — Act 25 of 1940, sections 13, 24.

Headnote : Kopnota

Money owing by a company to its shareholders as a result of a dividend declared payable as and when convenient is not a debt incurred by the company for the purpose of or in the conduct of trading operations, and is, therefore, not to be deducted in arriving at the capital employed in trade as defined in section?,4 of Act 25 of 1940 for the purpose of Excess Profits Duty.

Where the Commissioner has for the purpose of Excess Profits Duty disallowed a deduction in respect of managerial remuneration in whole or in part, the taxpayer, by virtue of the proviso to section 13 (1) of Act 25 of 1940, has a right to a rehearing before the Special Court, and that Court may substitute its own decision for that of the Commissioner.

In exercising the power conferred upon him by section 13 (1) (b) of Act 25 of 1940 of disallowing managerial remuneration, if he is satisfied that such remuneration depends on the profits arising from the trade, the Commissioner has the widest discretion and is not limited to the reasons specified in section 13 (1) (a), viz., that the remuneration was excessive or unjustifiable.

Where the Special Court had restored a deduction in respect of managerial remuneration disallowed by the Commissioner in part, such Court holding that the Commissioner was only entitled to exercise his power under section 13 (1) (b) of Act 25 of 1940 if the remuneration is excessive or unjustifiable.

Held, upon a question of law stated by the Special Court, that that Court had erred in interfering with the decision of the Commissioner upon the ground stated.

Held, further (GREENBERG, J.A., dissenting), that as the Special Court had misdirected itself upon a question of law, the matter should be remitted to that Court for further consideration and decision.

The decision of the Transvaal Provincial Division in Rand Ropes (Pty.), Ltd. v Commissioner for Inland Revenue (1943 T.P.D. 279) in part confirmed and in part reversed.

Case Information

Appeal and cross-appeal from a decision of the Transvaal Provincial Division (MARITZ, J., and RAMSBOTTOM, J.).

The facts appear from the judgment of CENTLIVRES, J.A.

N.E. Rosenberg, K.C. (with him Blakeway), for the

1944 AD p143

appellant: The function of the Special Court is that of Court of review and revision. See Bailey v C.I.R. (1933 AD 204 at p. 220) and Barnes on Income Tax (4th ed., pp. 242-3).

The object of sec. 13 (1) is to prevent diminution of incomes by deducting improper remuneration. Whether remuneration depends on profits or is a fixed salary, it still remains remuneration. Cf. Rex v Postmaster-General (1 Q.B.D. 658 at p. 664) and Palmer on Companies. (14th ed., vol. I, p. 674). The distinction between a fixed salary and one ascertainable in relation to profits was first made in sec. 10 of Act 28 of 1932, See Ben Richards (Pty.) Ltd. v C.I.R. (1940 T.P.D. 321 at pp. 326-7). Sec. 13 (1) affords no guide to the Commissioner, where remuneration depends on profits, as to what should be allowed or disallowed. He must determine what is reasonable and such determination is reviewable by the Special Income Tax Court.

It is the disallowance by the Commissioner which is the basis of the assessment which is to be confirmed, altered or set aside by the Special Court. See also The King v Commissioner of Inland Revenue (1918, 1 K.B. 143 at p. 148); and Johnson Bros. and Another v C.I.R. (1919, 2 K.B. 717 at p. 721).

I. L. Horwitz K.C. (with him N. J. Grobler), for the respondent: The unambiguous and literal meaning of sec. 13 (1) (b) must be followed. See Principal Immigration Officer v Hawabu and Another (1936 AD at pp. 30-1); Shenker v The Master and Another (1936 AD 136 at pp. 142-3); Hatch v Koopoomal (1936 AD 190 at p. 204); Ben Richards (Pty.) Ltd. v C.I.R. (supra); Brownstein v C.I.R. (1939 AD 156 at p. 165).

Alternatively, where the remuneration depends wholly or partly on the profits, or on the volume of trade, the manager or managing director is virtually in the position of a trader or part-owner or partner, and the incidence of the duty is under sec. 13 (2) indirectly cast upon him.

The history of the legislation must be considered. See secs 11 (2) (a) and 13 (b) of Act 4 of 1925 and Aspro Ltd. v Commissioner of Taxes (1932, A.C. 683 at p. 688). Sec. 13 (1) (6) of the 1940 Act was intended to have a wider effect, designed to meet remuneration which has the effect of dissipating excess profits.

The Special Court has not considered sec. 13 (1) (b) as a ground for supporting the Commissioner's decision. In the absence of reasons for upsetting the decision in terms of that paragraph, the

1944 AD p144

Commissioner's decision must stand. Cf. Shidiack v Union Government 1912 AD 642 at pp. 651-2); Crown Mines v C.I.R. (1922 AD 91 at p. 101) and Shenker v The Master (supra at p. 147).

On the cross-appeal - the declaration of the dividend constituted a debt owed by the company to its shareholders. See In re Severn and Wye & Severn Bridge Railway Co. (1896, 1 Ch. 559 at pp. 564-6) Ann Dalton v Midland Counties Railway. Co. (138 E.R. 1284). Compare Bond v Barrow Haematite Steel Co. (1902, 1 Ch. D. 353 at p. 362); In re Accrington Corp. Steam Tramways Co. (1909, 92 Ch. D. 40 at p. 47); see also Halsbury's Laws of England (Hailsham ed., vol. 4, note (e) to sec. 777 at p. 419; sec. 786 at p. 422; vol. 5, sec. 146, note (e), p. 81; sec. 653, p. 396; and sec. 1173, p. 703).

The purpose of withholding payment of the dividend end of continuing the liability towards shareholders was to support, the assets of the company used in its trade. As those assets are trade assets the liability must be in respect of trade.

The debt owed by the company was a debt incurred for the purposes of its trade and therefore also "in respect of" its trade. See Davis v Schneider (1932 W.L.D. 121); C.I.R. v Crown Mines Ltd. (1923 AD 121 at p. 125); De Villiers v C.I.R. (1929 AD 227 at p. 229); Khaled v Durban Corporation (1940 NPD 124 at p. 129).

Rosenberg, K.C., on the cross; appeal: The words "owed in respect of trade" in the definition of "the amount of capital employed in trade" in sec. 24 of Act 25 of 1940 are intended to qualify the word "debts" and to indicate the species of debt.

"In respect of trade" denotes a causal or direct relationship between the debt and the trade. See C.I.R. v Crown Mines Ltd. (1923 AD 121 at pp. 125, 128, 130). Cf. "in connection with trade" in para. (c) and proviso (iii), p, 494 of the Statute book. For other references to "trade" see secs. 10 (3), 12, 13, 24 and para. (v) at p. 490.

A debt owing under a dividend declared is not commonly regarded as a trade debt. See sec. 107 (j) of Act 46 of 1926.

Rosenberg, K.C., replied on the appeal.

N. J. Grobler, in reply on the cross-appeal. A trading company cannot incur a debt other than for the purpose of trade. See C.I.R. v George Forest Timber Co., Ltd. (1924 AD 616 at p. 531) and C.I.R. v Delfos (1933 AD 242 at pp. 263, 254).

1944 AD p145

Cur. adv. vult.

Postea (December 1st).

Judgment

Centlivres, J.A.:

This is an appeal and a cross-appeal from an order made by the Transvaal Provincial Division on a case stated by the Special Court for hearing income tax appeals.

It appears that the Commissioner for Inland Revenue, acting under the proviso to sec. 37 (13) of Act 40 of 1925, accepted a return of income from the appellant company made up for the year ended September 30, 1940. Under sec. 14 (1) of Act 25 of 1940 the return so made by the company is deemed, for the purposes cf. the assessment of excess profits duty, to be a return made, for the period of twelve months ending on June 30, 1940.

On December 19, 1939, the company declared a dividend of £22,500 in terms of a resolution of that date reading as follows:

"Resolved that a dividend of. 15 per cent. be and is hereby declared and be payable to the shareholders registered in the register of members as at the 19th December, 1939, and be remitted as and when convenient".

The dividends were subsequently paid on various dates beginning on March 15, 1940, and ending on July 27, 1940. In terms of a written contract entered into between G. C. Smith and the company on February 21, 1937, Smith was appointed its managing director for a period of ten years commencing on April 2, 1937. That contract provided that Smith was to receive the following remuneration for his services: (1) a fixed salary of £2,250 per annum and (p) a commission of ten per cent. of the nett profits of the company in excess of £7,500. During the year ended September 30, 1939, the company paid to Smith a total remuneration of £5,482, whereof £2,260 represented his fixed salary, £2,732 represented his commission and £500 was entertainment allowance. No provision was made in the contract for the payment of an entertainment allowance but nothing turns on this. During the year ended September 30, 1940, the total remuneration received by Smith from the company was £9,224 made up as follows: (1) £2,250 fixed salary; (2) £6,474 commission in terms of the contract; and (3) £500 entertainment allowance. During the year of assessment there was an increase in the...