Sub-Nigel Ltd v Commissioner for Inland Revenue

• Jurisdiction: South Africa
• Judge: Centlivres JA, Greenberg JA and Hoexter AJA
• Judgment Date: 06 October 1948
• Citation: 1948 (4) SA 580 (A)
• Hearing Date: 14 September 1948
• Court: Appellate Division

Centlivres, J.A.:

This is an appeal on a case stated by the Special Income Tax Court, the parties having duly lodged their written consents, in terms of sec. 81 (b) of Act 31 of 1941 as amended, to the appeal being heard by this Court without an intermediate appeal to a Provincial or Local Division.

It appears from the stated case that the appellant company, to which I shall refer as the Company, for many years carried on the business of mining for gold in the Transvaal and that it was its practice to take out policies of insurance against loss occasioned by fire of nett profits and standing charges. The stated case gives the following reasons for taking out such policies of insurance: -

'(a) Nett profits: Because the company considers it prudent policy to provide that in the event of a cessation of mining operations, the capacity to make a steady return by way of dividend to shareholders should be maintained.

(b) Standing charges: In the event of a cessation of operations it would still be necessary for the company to continue essential services and to maintain the requisite plant and equipment, such as pumping plants, sewerage plants, electric power plant and system of water mains, and for these purposes it is bound to retain sufficient European and Native personnel for the administration and maintenance thereof. The Native labour force is engaged on contract in terms whereof the said force is housed and paid. The dispersal and repatriation of the said force would entail great difficulty and heavy expense in reinstating it on the resumption of operations. The conditions under which gold mining is carried on are such that fire always constitutes a considerable hazard. An appreciable cessation of mining operations would entail very considerable standing charges, the failure to insure against which would seriously impair the company's finances, and a stoppage over a long period might result in the permanent closing down of the mine owing to lack of funds to recommence operations.

(c) The companies comprising the group, namely, The New Consolidated Gold Fields Limited, and including the Company, have always taken out policies insuring against loss of profits and standing charges in the ordinary course of business because in the opinion of the company the taking out of such policies are necessary and prudent steps in the conduct of their operations.

Centlivres JA

(d) Because according to the understanding of the public officer of the company this practice is one adopted by substantially all producing gold mining companies, members of the Transvaal Chamber of Mines.'

It was not, however, proved to the satisfaction of the Income Tax Special Court that the practice referred to in the concluding paragraph of the above quotation was in fact adopted by all gold producing mining companies which are members of the Transvaal Chamber of Mines.

No claim was made by the Company on its insurer under the policies taken out by it against loss occasioned by fire of nett profits and standing charges.

For the year of assessment ending on June 30th, 1946, the Company sought to deduct -

(a)

in the determination of its normal taxable income derived from activities other than mining in the Union for gold an amount of £1,565 paid by it as a premium under a policy of insurance against loss of nett profits occasioned by fire;

(b)

in the determination of its normal taxable income derived from mining in the Union for gold an amount of £1,102 paid by it as a premium under a policy of insurance against loss of standing charges during a period when production of gold might be interrupted on account of destruction of plant by fire.

For the year of assessment ending on December 31st, 1945, the Company sought to deduct in the determination of its taxable profit derived from mining for gold for the purpose of the gold mines special contribution (levied under sec. 2 of Act 25 of 1940) an amount of £1,055 paid by it as a premium under policies of insurance against loss of standing charges. It will be noted that the Company drew a distinction between its income derived from mining and its other income. This distinction was drawn presumably because of the provisions of sec. 3 (1) (a) of Act 25 of 1940 and of sec. 1 (1) (v) of Act 39 of 1945. The Commissioner in his assessment of the Company for normal tax in respect of the year ending on June 30th, 1946, disallowed and added back the amounts of £1,565 and £1,102 referred to above, and in his assessment for the gold mines special contribution in respect of the year ending on December 31st, 1945, he disallowed and added back the amount of £1,055. The Company lodged an objection against the above assessments on the ground that the deductions it had made were permissible under sec. 11 (2) (a) of the Act.

Centlivres JA

The issue before the Special Court was whether the Company was entitled under the Act to deduct these amounts. The Special Court held that these amounts were not wholly and exclusively laid out and expended for the purposes of the Company's trade and that consequently the deduction of those amounts was forbidden by sec. 12 (g) of Act 31 of 1941, to which I shall refer as the Act. That Court dismissed the appeal and confirmed the Commissioner's assessments. It is against that decision that the present appeal is brought.

At the outset it must be pointed out that the Court is not concerned with deductions which may be considered proper from an accountant's point of view or from the point of view of a prudent trader, but merely with the deductions which are permissible according to the language of the Act. See Joffe & Co., Ltd v Commissioner for Inland Revenue (1946 AD 157 at p. 165). In the present case it may be conceded that it would be in accordance with sound business principles for the Company to deduct the amount of the premiums paid by it in order to arrive at its nett profits. This consideration is, however, irrelevant: the only relevant matters in this case are the provisions of the Act which deal with permissible and non-permissible deductions. Cf. Pyott Ltd v Commissioner for Inland Revenue (1945 AD 128 at p. 135).

Regard, therefore, must be had to the Act and the Act alone in order to ascertain whether the deductions sought to be made by the Company are permissible. For the purposes of this case I shall assume that the proper method of approach in enquiring whether a particular deduction is permissible is, firstly, to ascertain whether it is permissible under sec. 11 (2) (a) and then to find out whether it is prohibited by sec. 12 (g) - a method of approach which does not seem to have been applied previously in this Court. Cf. Joffe & Co., Ltd v Commissioner for Inland Revenue (supra) and Vew State Areas Ltd v Commissioner for Inland Revenue (1946 AD 610). There is much to be said for the view that the two sections must be read together, for the general rule is that a statute must be construed as a whole; it is, however, not necessary in this case to express any view on this point Sec. 11 (2) (a) of the Act provides that for the purpose of determining the taxable income derived by any person carrying on any trade within the Union, the deductions allowed shall be

Centlivres JA

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

In the present case it is common cause that the amounts paid by way of premiums were actually expended in the Union, and therefore the first questions that arise are whether that expenditure was incurred 'in the production of the income' and whether the expenditure was or was not of a capital nature.

It was contended by Mr. Ettlinger on behalf of the Commissioner that stress should be laid on the definite article 'the' before the word 'income' in sec. 11 (2) (a) and that as the expenditure of the amounts by way of premiums produced no income, such expenditure was not incurred in the production of the income and was therefore not deductible. Pressed to its logical conclusion this contention means that if a merchant were to buy goods for the purpose of re-sale and pay for them on the last day of the tax year, and were to sell none of these goods before the end of the tax year, he would not be able to deduct the purchase price of those goods from his gross income for that year because the expenditure, although incurred in that year, produced no income in that year. That this is not so is shown by such cases as Commissioner for Inland Revenue v Niko (1940 AD 416, at p. 427), for it is clear that the merchant, in determining his taxable income, is entitled to deduct from the proceeds of any re-sales effected by him the purchase price of goods which he has not resold during the tax year. Indeed, if Mr. Ettlinger's argument were correct, the merchant would not be allowed, in the example I have given, to deduct the purchase price of the goods bought at the end of the tax year from his gross income for that year, nor would he be able to deduct it in respect of the following tax year, although he may have disposed of all the goods during the latter year. For the whole scheme of the Act shows that, as the taxpayer is assessed for income tax for a period of one year, no expenditure incurred in a year previous to the particular tax year can be deducted. It is true that under sec. 11 (3) there may be set off any balance of assessed loss incurred by a taxpayer in any previous year which has been carried forward from the preceding year of assessment but such assessed loss is not arrived at by deducting from the gross income earned during the year of assessment expenditure incurred in a previous year; such expenditure having already been deducted in the year in which it was incurred. If Mr. Ettlinger's contention were correct it would

Centlivres JA

also follow that if a merchant opened his business to...