Solaglass Finance Co (Pty) Ltd v Commissioner for Inland Revenue

• Jurisdiction: South Africa
• Judge: Botha JA, E M Grosskopf JA, Nicholas AJA, Friendman AJA and Nienaber AJA
• Judgment Date: 30 September 1990
• Citation: 1991 (2) SA 257 (A)
• Hearing Date: 13 September 1990
• Court: Appellate Division

Friedman AJA:

This is an appeal by a taxpayer (the appellant) against a decision of the Transvaal Income Tax Special Court. The appellant is a private company and a wholly-owned subsidiary of Plate Glass E Shatterprufe Industries Ltd (PGSI), a public company quoted on the Johannesburg Stock Exchange. In submitting its income tax return in respect of the year of assessment ended 31 March 1978, appellant sought to deduct from its taxable income an amount of R4 545 922, being the loss incurred by appellant on what was described as 'the disposal of a F debtor'. In respect of the year of assessment ended 31 March 1979 appellant sought to deduct amounts totalling R55 153, being losses sustained on loans which had become irrecoverable. In its income tax assessments for the years in question, respondent refused to allow these losses as deductions. Appellant objected and, its objection having been overruled, appealed to the Transvaal Income Tax Special Court. The G latter Court upheld the appeal against the assessment for the 1978 tax year, but only to the extent to which certain interest charged should have been allowed as a bad debt, and referred the matter back to the respondent for reassessment in accordance with the judgment. The appeal against the assessment for the 1979 tax year was dismissed. Leave having been granted by the President of the Special Court in terms of s 86A(5) H of the Income Tax Act 58 of 1962 ('the Act'), appellant now appeals to this Court against the whole of the judgment of the Special Court, save to the extent to which appellant was successful in respect of the 1978 tax year.

The facts are not in dispute and may be summarised as follows. PGSI is I the holding company of a group of companies known as the Plate Glass Group ('the group'). PGSI's subsidiaries are of the order of 200, most of which are wholly owned by the parent company. The group is involved in the manufacture, processing, wholesaling and retailing of timberwood and glass products. Until about 1973 the finances of each company in the group were largely the responsibility of the particular company itself.In

Friedman AJA

A 1973 PGSI decided that the financial affairs of the group would be best served by a finance company which would secure and arrange the funds required by all the companies in the group. It would also monitor the use of those funds in the hands of the subsidiaries. In order to give effect to this decision a dormant subsidiary, previously called Plate B Glass and Shatterprufe Industries Finance Company (Pty) Ltd, but whose name was subsequently changed to Solaglass Finance Company (Pty) Ltd (the present appellant), was utilised. One of appellant's objects, in terms of its memorandum of association, is to lend money to any person or company and to borrow such money as it deems fit. This object was not changed when the decision was taken to utilise appellant for the C purposes contemplated. Henceforth, subsidiary companies requiring funds would apply to appellant which would, having regard to the budget of the subsidiary concerned, provide the necessary funds by way of loans. Security was not required on such loans. The subsidiaries were, however, required to pay interest on their loans. The rates varied, depending on D the financial position of the subsidiary concerned, but generally the rates of interest charged were approximately 1% higher than appellant itself paid for moneys borrowed by it. Surplus funds in the hands of the subsidiaries were required to be placed with appellant on a daily basis. Appellant did not, however, rely solely on the surplus funds received from its fellow subsidiaries. It borrowed moneys from PGSI as well as E from commercial banks, in the case of the latter by means of overdrafts and acceptance credit facilities. Loans obtained by appellant from banks would generally be guaranteed by PGSI.

Initially appellant's borrowings and lendings were confined to PGSI and the companies in the group. Subsequently appellant's field of F activities was extended: loans were made to staff members of companies in the group and bills were discounted for customers of trading subsidiaries in the group, in many instances with the object of enabling those customers to settle their accounts with the subsidiaries. Appellant also deposited moneys with building societies to enable staff members to obtain mortgage bonds. G

The loss which appellant claimed to deduct from its taxable income for the year ending 31 March 1978 arose as follows. A company called P G Environmental Systems (Pty) Ltd (PGES), which was a subsidiary of PGSI, owed money on loan account to the holding company. According to the evidence of Mr Scott, the group financial director and appellant's chief H executive, who was the only witness called by appellant, this loan was 'taken over' by appellant in 1973. How precisely this occurred was not spelt out in the evidence. Counsel were agreed, however, that the probabilities were that, when appellant entered upon the role determined for it by the holding company, PGES' loan account with PGSI was ceded to appellant and that appellant was substituted as debtor in the books of I account of PGSI. The only available records of the loan in appellant's books of account commence with an opening balance of R5 853 826,58 on 1 April 1976. Interest was debited to the account of PGES from time to time, cash payments were made by PGES and further advances were made to it by appellant. According to Mr Scott the account was operated like a J bank overdraft and it fluctuated on a regular basis. From about 1975

Friedman AJA

A PGES' financial position started to deteriorate and it became evident that the business of PGES, as then structured, could not become viable. It was also realised that the major portion of the debt owing by PGES to appellant had become irrecoverable. On 21 November 1977 an agreement was concluded between PGSI, appellant, Afcol Manufacturing Ltd (Afcol) and PGES in terms of which Afcol took over control of PGES by subscribing B for shares which ensured it a majority holding; it also took cession of appellant's loan account which, at the effective date of the agreement, stood at R5 980 759. The consideration paid for the loan, calculated in accordance with a formula provided in the agreement, amounted to R1 434 837. The balance of R4 545 922 was written off as irrecoverable. According to the uncontradicted evidence of Mr Scott, the consideration C paid by Afcol exceeded the true value of the loan. The only alternative to the Afcol agreement would have been liquidation which would have resulted in a dividend of substantially less than the amount of R1 434 837 paid by Afcol for the loan.

D The amount of R55 153 claimed as bad debts in respect of the 1979 tax year, is arrived at as follows:

Debtor	Amount
Midlothian Steel (Pty) Ltd	R20 242
Quality Kitchens (Pty) Ltd	R4 547
M I Berkman	R29 233
C L Oosthuizen	R453
C C van Wyngaardt	R408
L Berkman	R270
	R55 153

Midlothian Steel (Pty) Ltd and Quality Kitchens (Pty) Ltd, which were both in liquidation, were indebted to F appellant in the amounts indicated, in respect of bills discounted which were subsequently dishonoured. The remaining debtors were all employees or ex-employees of subsidiaries to whom appellant had lent moneys. At the hearing of the G appeal appellant's counsel informed the Court that the amount of R29 233 owing by M I Berkman was no longer in issue. That reduced the amount in issue, in respect of the 1979 tax year, to R25 920. All these debts were written off as irrecoverable during the 1979 tax year. No portions thereof related to interest, which had been written back to interest received. Appellant's counsel conceded that, should the appeal in H respect of these amounts succeed, it would be subject to appellant satisfying the respondent that there were adequate grounds for writing off the debts in question in the 1979 year of assessment.

In its income tax returns for the 1974 and 1975 tax years appellant I claimed losses which it had incurred by reason of unfavourable changes in the rates of exchange between the South African rand and the Swiss franc, on loans obtained by appellant in Switzerland. These losses were disallowed. This led to an appeal by appellant to the Transvaal Income Tax Special Court and in due course an appeal to a Full Bench of the Transvaal Provincial Division. The judgment of the Full Bench is reported sub nom Plate Glass & Shatterprufe Industries Finance Co (Pty) J Ltd

Friedman AJA

v Secretary for Inland Revenue 1979 (3) SA 1124 (T). One of the questions which arose in that case was whether appellant was carrying on a banking or a money-lending business. The Full Bench agreed with the Special Court's finding that appellant was not carrying on such a business. It held that appellant's sole function was that of controlling and channelling funds available to the group and that appellant had B accordingly failed to discharge the onus of proving that the losses incurred by it in respect of deteriorating foreign exchange rates were not of a capital nature. A

In the present case the approach of the Special Court was that the Full Bench had held that appellant was not carrying on business as a banker or money-lender; that finding, on the facts found proved, was a C question of law; if the activities of the appellant were not proved to have changed in the intervening years, the Court would be bound by the finding of the Full Bench. The judgment of the Special Court was therefore directed to the question whether the business and operations of the appellant during the 1978 and 1979 years of assessment differed D from those in the 1974 and 1975 years of assessment. The Special...