Sentra-Oes Kööperatief Bpk v Commissioner for Inland Revenue

• Jurisdiction: South Africa
• Judge: Corbett CJ, Hoexter JA, Smalberger JA, Kumleben JA and Nicholas AJA
• Judgment Date: 09 March 1995
• Citation: 1995 (3) SA 197 (A)
• Hearing Date: 17 November 1994
• Court: Appellate Division

G Nicholas AJA:

The question for decision in this appeal is whether a deduction of R5 million claimed in the 1988 tax year by Sentra-Oes Koöperatief Bpk ('the company') and disallowed by the Commissioner for Inland Revenue ('the Commissioner') is allowable in terms of the Income Tax Act 58 of 1962 ('the Act').

H The company is a short-term insurer, offering co-operative crop insurance to the members of its member co-operatives. Most of its business - about 98% - consists in the insurance of crops against damage by hail. Its premium income is received throughout the year with peaks usually in the months between September and February. Claims arise mainly in the rainy I season and in general mostly in the months of November to February.

When hail damage occurs the insured is required to report that fact within three days. The company has agricultural experts throughout the country, one of whom visits the farm concerned as soon as possible after the report and assesses the extent of the damage as a percentage of the insured crop. J When this has been agreed with the insured, the assessment

Nicholas AJA

A is sent to the head office of the company and processed there. A cheque is dispatched within three weeks at most, but usually within a matter of days.

In order to ensure that it will always have funds available to pay claims as they arise, the company invests its premium income in short-term B deposits, either on daily call or for fixed periods of three or four months and occasionally even longer. Its practice is to invite selected banks and recognised financial institutions to make written quotations for specific amounts as moneys for deposit become available, and then to make investments according to a definite plan and a cash-flow budget which provides for a worst-case scenario in order that it can always comply C fully and expeditiously with the claims made upon it. The aim is to obtain the best income possible and to provide an adequate spread of investments to reduce risk and provide the required cash flow.

Details of the company's short-term investments as at 7 December 1988, which totalled R56,5 million, appear from the schedule which is annexed to D this judgment.

In March 1988 a representative of Mr W H Vermaas, a well-known attorney and businessman in Pretoria, approached the company and solicited investments in Reef Acceptance (Pty) Ltd, one of Vermaas' companies. He spoke of Vermaas' influential connections in high places. He said that E favourable interest rates were available and offered other inducements. The company obtained a bank report from Volkskas, which was to the effect that it regarded 'Reef Acceptance (Pty) Ltd/Mnr W H Vermaas' as good for an amount of R10 million. Between 28 March 1988 and 3 November 1988 the company made five deposits with Reef Acceptance. They were of amounts F varying from R2 million to R5 million, for periods of between one month and three months, and at rates of interest varying between 12% and 19,55% per annum. All were duly repaid with the exception of the deposit of R5 million which was repayable on 3 December 1988. (See the second item in the annexe.) When it became clear to the company that this amount would G not be repaid, it placed Reef Acceptance in liquidation. The amount became irrecoverable.

In its return of income for the year ended 31 December 1988 the company claimed as a deduction the sum of R5 million in terms of s 11(a) and s H 28(2)(c) of the Act. The Commissioner disallowed the deduction and issued an assessment in respect of a taxable income of R1 314 754. The company's objection to the assessment was disallowed and it appealed. The appeal was heard at a sitting of the Cape Income Tax Special Court at which Berman J presided. Sections 11(a) and s 28(2) of the Act provide:

I '11. For the purpose of determining the taxable income derived by any person from carrying on any trade within the Republic, there shall be allowed as deductions from the income of such person so derived -

(a)

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

J . . .

Nicholas AJA

A 28(2) Subject to the provisions of this Act the taxable income derived by any taxpayer from the carrying on in the Republic of short-term insurance business (whether on mutual principles or otherwise) shall be determined by charging against the sum of all premiums (including premiums on reinsurance) received by or accrued to such taxpayer in respect of the insurance of any risk, and other amounts derived from the carrying on of B such business of insurance in the Republic, the sum of -

(a)

the total amount of the liability incurred in respect of premiums on reinsurance;

(b)

the actual amount of the liability incurred in respect of any claims during the year of assessment in respect of that business of insurance, less the value of any claims recovered or recoverable C under any contract of insurance, guarantee, security or indemnity;

(c)

the expenditure, not being expenditure falling under para (a) or (b), incurred in respect of that business of insurance;

(d)

. . .;

(e)

. . .; and

(f)

. . . .'

D In the judgment of the Special Court Berman J said that the Act drew a distinction between 'expenditure' and 'losses'; that the amount of R5 million in issue was lost by the company, not expended by it; and that s 28(2)(c) related only to expenditure and not to losses. It followed that the appeal failed on this simple ground.

E However, Berman J went on to consider whether the loss was deductible in terms of s 11(a). He said that in order to succeed the company had to show two things: (1) that the loss of R5 million was incurred 'in the production of the income' and (2) that the loss was not of a capital nature. He concluded that the loss of R5 million was a loss of a capital F nature and hence did not qualify as a deduction. The appeal was accordingly dismissed. The company now appeals to this Court.

The company applied in limine for condonation of its failure timeously to file its power of attorney and the supporting resolution thereto. The Commissioner opposed the grant of condonation, but only on the ground that there were no reasonable prospects of success on appeal. The Court G accordingly deferred its decision on the application for condonation until it had heard the argument on the merits.

It was submitted on behalf of the Commissioner that s 11(a) designedly uses the expression 'expenditure and losses' whereas s 28(2)(c) refers only to 'expenditure'; that s 11(a) is concerned with the determination of H the taxable income derived by persons generally, whereas s 28(2) is concerned with the determination of the taxable income derived by short-term insurers; and that on the principle embodied in the maxim generalia specialibus non derogant, if a deduction was claimable by a short-term insurer, it was claimable only under s 28(2)(c).

The question whether there is a real distinction between 'expenditure' and I 'losses' for the purpose of s 11(a) and, if so, what the distinction is, has been discussed by this Court in a number of cases. See Stone v Secretary for Inland Revenue 1974 (3) SA 584 (A) at 593H-594G and cases there cited; and Solaglass Finance Co (Pty) Ltd v Commissioner for Inland Revenue 1991 (2) SA 257 (A) at 279B-H. In Commissioner for Inland Revenue J v Felix Schuh (SA) (Pty) Ltd 1994 (2) SA 801 (A) it was

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A said at 812A that broadly speaking, as the cases show, 'expenditure' refers to disbursements or expenses incurred or paid voluntarily, whereas 'losses' connote involuntary deprivations occurring fortuitously. The amount of R5 million invested in Reef Acceptance was not expenditure but a loss, in the sense of an involuntary deprivation.

The question then is whether the effect of s 28(2)(c) is to confine the B deduction available to a short-term insurer to 'expenditure' and to exclude a loss. In this connection the opening words of ss (2) of s 28, '(s)ubject to the provisions of this Act', are important. They are to be contrasted with the opening words of ss (1), '(n)otwithstanding anything to the contrary contained in this Act'. In the majority judgment in S v C Marwane 1982 (3) SA 717 (A) at 747H-748B, Miller JA explained that the purpose of the phrase 'subject to' when used in a legislative provision, is

'. . . to establish what is dominant and what subordinate or subservient; that to which a provision is "subject", is dominant - in case of conflict D it prevails over that which is subject to it. Certainly, in the field of legislation, the phrase has this clear and accepted connotation. When the legislator wishes to convey that that which is now being enacted is not to prevail in circumstances where it conflicts, or is inconsistent or incompatible, with a specified other enactment, it very frequently, if not almost invariably, qualifies such enactment by the method of declaring it to be "subject" to the other specified one. As Megarry J observed in C E and J Clark v Inland Revenue Commissioners [1973] 2 All ER 513 at 520:

"In my judgment, the phrase 'subject to' is a simple provision which merely subjects the provisions of the subject subsections to the provisions of the master subsections. When there is no clash, the phrase does nothing: if there is collision, the phrase shows what is to prevail."

But when the intention is that that which is now being enacted shall F prevail over other laws or provisions which may be in conflict with it, it is almost invariably prefaced by a phrase such as "notwithstanding any contrary provision . . ." or words to similar effect. . . .'

The effect of the words '(s)ubject to the provisions of this Act' is therefore that, if there is a...