Sentra-Oes Kööperatief Bpk v Commissioner for Inland Revenue

• Jurisdiction: South Africa

Sentra-Oes Kööperatief Bpk v Commissioner for Inland Revenue
1995 (3) SA 197 (A)

1995 (3) SA p197

Citation	1995 (3) SA 197 (A)
Court	Appellate Division
Judge	Corbett CJ, Hoexter JA, Smalberger JA, Kumleben JA and Nicholas AJA
Heard	November 17, 1994
Judgment	March 9, 1995

Flynote : Sleutelwoorde

E Revenue — Income tax — Deductions — Deductions claimable by short-term insurer in terms of s 28(2)(c) of Income Tax Act 58 of 1962 — Effect of words '(s)ubject to the provisions of this Act' in s 28(2) being that general deduction formula in s 11(a) of Act prevails over specific F provision in s 28(2)(c) — No reason why Legislature should have wished to exclude application of deduction formula in s 11(a) to such insurer — Insurer having invested part of its premium income as a short-term investment — Company with which such investment made not repaying such money and loss thereof irrecoverable — Although such money constituting G income when received by insurer, it functioned as capital when used to produce income by way of interest — Insurer not carrying on business as a banker or using money as its stock-in-trade — Money lost accordingly fixed capital and loss one of a capital nature — Loss not deductible in terms of s 11(a) of Act.

Headnote : Kopnota

H Per Nicholas AJA, Corbett CJ, Hoexter JA, Smalberger JA and Kumleben JA concurring: The effect of the words '(s)ubject to the provisions of this Act', in s 28(2) of the Income Tax Act 58 of 1962 (which in para (c) provides for the deduction of certain expenditure from the determination of the taxable income of short-term insurers) is that, if there is a conflict, inconsistency or incompatibility between them, the general deduction formula contained in s 11(a) of the Act prevails over the I specific provision in s 28(2)(c). And no reason suggests itself why the Legislature should have wished to exclude the application to a short-term insurer of the deduction formula which in terms of s 11(a) is applicable to any person carrying on any trade within the Republic of South Africa. (At 207F/G-H.)

The appellant was a short-term insurer offering crop insurance to members of its member co-operatives. Moneys which the appellant received as premiums were used to satisfy claims in respect of crop damage. Until the premium income was required for this purpose it was invested in short-term J deposits at the best possible rate of

1995 (3) SA p198

A interest. A deposit of R5 million from such premium income was made by the appellant with the RA Co, but, when the appellant realised that the RA Co would not repay this amount, it placed the RA Co in liquidation. The amount became irrecoverable. In its return of income for the 1988 tax year the appellant claimed the sum of R5 million as a deduction in terms of s 11(a) and s 28(2)(c) of the Income Tax Act. The Commissioner disallowed the deduction and the appellant's objection to the assessment B was also disallowed. An appeal to an Income Tax Special Court failed. In a further appeal the appellant failed to file the required power of attorney and resolution timeously. In an application for condonation of such failure in which the only issue was whether the appellant had reasonable prospects of success on appeal, the appellant, in moving such application, contended that the amounts received by way of premiums were income in its hands and were not treated as part of the appellant's general funds but were in effect sequestered in a separate fund for the purpose of meeting claims, with the result that they were not capital, C either in the sense of fixed capital or in the sense of circulating or floating capital. It was further contended that the loss had been incurred by the appellant in the course of its investment business and that the principles applicable to banks and to moneylenders applied equally to the appellant as the appellant was prepared to lend its premium income to any borrower it regarded as eligible and who offered an adequate return and the money was invested in a systematic or planned manner which disclosed continuity in laying out and getting back the premium income for D further use.

Held (Kumleben JA dissenting), that the fact was that the premiums when received were revenue, but, having been received they were used by the appellant in order to produce income by way of interest and hence functioned as capital. (At 207I-I/J.)

Held, further, that the question which had to be determined was whether the money which had been lost was fixed or floating (circulating) capital: if it was fixed capital, then the loss was of a capital nature; if it was E floating (or circulating) capital, then it was a non-capital loss. (At 208C/D-D.)

Held, further, that the appellant did not carry on the business of a bank and it did not deal with money as its stock-in-trade: essentially its business consisted in receiving premiums and meeting claims, and the fact that as an incident of its business it performed some operations of a kind performed by a bank did not mean that it was a banker or analogous to a bank. (At 210B-C.)

F Held, accordingly, that the money lost was fixed capital and the loss was of a capital nature, as found by the Special Court. (At 210C.) Application for condonation dismissed.

Case Information

Application for condonation of the late filing of a power of attorney and resolution by the appellant in an appeal from a decision in the Cape Income Tax Special Court (Berman J). The facts appear from the judgment G of Nicholas AJA.

B W Burman SC (with him J J Wessels) for the appellant (the heads of argument having been prepared by E M du Toit SC and J J Wessels): The loss was not of a capital nature and is deductible from appellant's income in terms of ss 28(2) and/or 11(a) of the Income Tax Act 58 of 1962. In order H to 'obtain clarity as to precisely what it is that appellant seeks to deduct' (Burman v Commissioner for Inland Revenue 1991 (1) SA 533 (A) at 535D), it is first necessary to examine the nature of appellant's business and its modus operandi in conducting it. Ninety-eight per cent of appellant's business is the insurance of agricultural crops against hail I damage whilst insurance against other natural perils comprise the remaining 2% thereof. The crop is insured from the moment it comes up until it is harvested and although the insurance period, or season, runs from 1 April to 31 March, the 'season' is extended or 'kept open' where a crop such as maize, for example, is only harvested during the next 'season'. Claims are paid within three weeks of the insured loss J occurring. In the circumstances appellant's premium income and claims

1995 (3) SA p199

A expenditure differ, and its cash flow varies from month to month. Experience has taught that the only way to ensure that sufficient cash is available to pay claims is to ensure that the whole premium income received during a year is available at short notice to meet claims liabilities. It is therefore appellant's policy to invest its entire premium income for the season in the short term, ranging from call to a B maximum of three or four months. Long-term investment of a season's premium income is not even considered until appellant is of the opinion that the season has finally reached its end. The short-term investment of funds is part of the appellant's business. During the year in question appellant earned interest of over R6 million. Appellant's investment C policy is to invest its whole premium income on call or for such longer short-term periods as is warranted in terms of the cash flow budget; to ensure the best rates in respect of loans in various amounts over various periods by obtaining quotations in respect thereof; to plan its investments according to its projected cash requirements; and constantly to change and, quite apart from the investment requirements of the D Insurance Act 27 of 1943, spread its investments. Since it is accepted that any investment involves risk, appellant attempts to evaluate the risk and in certain circumstances analyses the financial statements of the financial institution concerned. The loan in question to Reef Acceptance (Pty) Ltd was just another short-term investment made in accordance with E appellant's investment policy. It was not the first loan made to that company after appellant had satisfied itself as to its financial standing. Although the present loss is the biggest to date, appellant did suffer smaller losses in respect of investments in government stock. At least until the season is regarded as closed, appellant employs its premium income as stock-in-trade, or circulating or floating capital, in the same F way as a bank or moneylender uses its money. Compare, for example, New State Areas Ltd v Commissioner for Inland Revenue 1946 AD 610 at 620; and Secretary for Inland Revenue v Crane 1977 (4) SA 761 (T) at 767D-G. Appellant's investment of its premium income is merely the retention thereof in liquid form and did not convert it into fixed capital. Until G allocated, the premium income remained part of appellant's stock-in-trade, or its circulating or floating capital. The investments formed an integral part of appellant's business. See the dictum of Faure Williamson J in ITC 836 (1957) 21 SATC 330 at 331. In the evidence, reference was made to the obligation of an insurance company to make investments in H respect of its premium income in terms of the Insurance Act 27 of 1943 (vide s 17(4) read with the Third Schedule of that Act). See also ITC 1366 (1979) 45 SATC 33. The appellant lost R5 million of its premium income and the loss is on a par with the theft of moneys from a building society's agent in ITC 1268 (1978) 40 SATC 57 or the defalcations by a I bank employee in ITC 1383 (1984) 46 SATC 90. But in any event the loss was a loss incurred in the course...