Court name
Supreme Court of Zimbabwe
Case number
SC 43 of 2003
Civil Appeal 41 of 1999

Wet Blue Industries (Pvt) Ltd. v Commissioner of Taxes (41/99) (SC 43 of 2003, Civil Appeal 41 of 1999) [2003] ZWSC 443 (27 November 2003);

Law report citations
Media neutral citation
[2003] ZWSC 443













DISTRIBUTABLE
(53)


Judgment
No. SC 43/03


Civil
Appeal No. 41/99








WET BLUE
INDUSTRIES (PRIVATE) LIMITED





v
THE COMMISSIONER OF TAXES








SUPREME
COURT OF ZIMBABWE


CHIDYAUSIKU
CJ, ZIYAMBI JA & MALABA JA


HARARE,
OCTOBER 22, 2001 & NOVEMBER 28, 2003








J
C Andersen SC
,
for the appellant





A
P de Bourbon SC
,
for the respondent





MALABA
JA: This is an appeal from a judgment of the Special Court for
Income Tax Appeals (“the special court”) dismissing
with costs an
appeal against the decision of the respondent to disallow certain
deductions from gross income as rebates and raising
penalties for
non-payment of tax in the years of assessment 1993, 1994 and 1995.
I will refer to the parties as “Wet Blue Industries”
and “the
Commissioner” respectively.





The
facts are as follows. In 1988 the Government imposed an embargo on
the export of raw hides. The Cold Storage Commission
(“CSC”),
S.M. Lurie & Co (Pvt) Ltd (hereinafter referred to as
“Lurie”) and Tirzah Investments (Pvt) Ltd (“Tirzah”)
had been
involved in the business of processing and exporting raw hides.
After the embargo the “three parties” decided to form
a company
which would provide them with the services of wet blue tanning of
their hides. The company formed was Wet Blue Industries.
Whilst
the three parties were Wet Blue Industries’ shareholders, they were
also its partners.






In terms of
the agreement reached by the three parties, Wet Blue Industries was
to apply the wet blue tanning process exclusively
to hides owned and
forwarded to it by the three parties. It did not acquire ownership
of the hides. Each partner was to send
the hides it required
treated and Wet Blue Industries would raise invoices for the tanning
costs to each partner quarterly. To
raise working capital Wet Blue
Industries, which was run by a management committee from Tirzah, had
to raise provisional invoices
on a monthly basis.






Quarterly
invoices were then raised, based on the actual costs of processing
the hides. Added were interest and finance charges
incurred and the
cost of serving the capital portions of loan obligations. The
amounts paid by the partners on the provisional
monthly invoices
would then be deducted from the quarterly invoices. It was
understood by the parties that Wet Blue Industries
was a service
provider. The intention was that it would not make a profit. It
was an express term of the agreement that Wet Blue
Industries would
not retain earnings to be carried over from one financial year to the
next except such as might be required to meet
loan capital repayment
commitments.





The
invoicing system set out in the agreement, and which would have
ensured that no profit accrued to Wet Blue Industries, was not
followed by the management committee. Invoices were instead raised
for charges in respect of the tanning of raw hides on the completion
of each batch. The charges for the services rendered were fixed by
Wet Blue Industries. As a result of the money received by
Wet Blue
Industries from each of the three parties in payment of the charges
for the processing of the hides, the company generated
surplus funds
or profits, after deducting all the necessary expenditure and meeting
loan capital repayment commitments.





Initially
Wet Blue Industries decided to distribute the surplus amount to the
three parties as dividends. The CSC objected to
this arrangement
because it would have received an amount equal to that received by
Tirzah and Lurie, notwithstanding the larger
number of hides it would
have forwarded to Wet Blue Industries for processing.






The parties
then agreed that the money be paid out to them as rebates calculated
by reference to each party’s throughput of raw
hides. In 1993,
1994 and 1995
Wet Blue Industries paid the amounts of
$3.5 million, $4.4 million and $6.2 million
respectively as rebates. In
Wet Blue Industries’ books of account
the amounts paid out were reflected not as rebates but as costs of
purchase of material used
in the processing of the hides.






In examining
Wet Blue Industries’ books of account in respect of the three
years, the Commissioner assessed Wet Blue Industries’
taxable
income on the basis that the amount paid out to the three parties
formed part of its “gross income” and the rebates were
not
amounts allowed to be deducted in terms of s 15 of the Income
Tax Act [
Chapter 23:06]
(“the Act”). The Commissioner took into account the fact that
only a co-operative agricultural company or co-operative society
had,
under s 15(2)(y) of the Act, the right to deduct from gross
income “any amount distributed during the year of assessment
by way
of discounts, rebates or bonuses granted by the company or society to
shareholders, members or other persons in respect of
amounts paid or
payable by or to them on account of their transactions with the
company or society”. Wet Blue Industries was
not a “co-operative
agricultural company” or a “co-operative society”.





The
Commissioner also considered that in entering into the scheme whereby
Wet Blue Industries paid the amounts of money to the three,
CSC,
Lurie and Tirzah, as rebates, the parties had entered into a scheme,
the effect of which was the reduction or avoidance of tax
liability
by Wet Blue Industries, and that one of the main purposes of the
scheme was the reduction or avoidance of tax liability
on the part of
Wet Blue Industries in contravention of s 98 of the Act. The
Commissioner disallowed the amounts paid by Wet
Blue Industries to
the three parties in each of the three years of assessment and raised
penalties for its failure to pay tax.






Wet Blue Industries appealed to
the special court which held that the amounts of money paid out to
the three parties as rebates were
part of Wet Blue Industries’
“gross income” which the Commissioner had correctly taken into
account in calculating its taxable
income. The learned President of
the special court also held that the Commissioner had correctly taken
the view that the provisions
of s 98 of the Act had been
contravened.





On
appeal to this Court, the parties agreed that the facts found by the
learned President to have been proved on the evidence adduced
by the
parties are correct. They also agreed that the learned President
had correctly set out the law as contained in s 8
of the Act,
which defines “gross income” for purposes of calculation of the
taxable income as:





“… the
total amount received by or accrued to or in favour of a person or
deemed to have been received by or to have accrued to or in
favour of
a person in any year of assessment from a source within or deemed to
be within Zimbabwe excluding any amount so received
or accrued which
is proved by the taxpayer to be of a capital nature …”.





It
appears to me that the amounts paid out to the three parties as
rebates had been received by Wet Blue Industries as payment for
the
charges it had fixed for processing the hides. The amounts formed
part of its “gross income” before they were paid out.
Wet Blue
Industries had not purchased any material with the money. The money
was not part of expenditure of a capital nature.






The learned
President cited with approval the case of
Brookes
Lemos Ltd v Commissioner for Inland Revenue

1947 (2) SA 976 (A), which decided that:





“… once
the taxpayer receives an amount as his own during a tax year, the
fact that in terms of his contract he may, in certain circumstances,
have to repay the same later, does not have the effect of excluding
these amounts from his ‘gross income’ for the year in which
he
received same”.





In
respect of the legal principles to be applied in respect of the
application of s 98 of the Act, the learned President cited
with
approval the case of
Secretary
for Inland Revenue v Geustyn, Forsyth & Joubert

1971 (3) SA 567 (A), where OGILVIE-THOMAS CJ paraphrased the
provisions of s 103(1) of the South African Income Tax Act
(similar in wording to s 98 of the Act) as follows:





“To
warrant a determination by the Secretary of liability for tax in
terms of s 103(1) there must be established –






(a) a transaction, operation or
scheme entered into or carried out;





(b) which
has the effect of avoiding or postponing liability for tax on income
or reducing the amount thereof; and which





(c) in
the opinion of the Secretary, having regard to the circumstances
under which the transaction, operation or scheme was entered
into or
carried out –






(i) was entered into or carried
out by means or in a manner which would not normally be employed in
the entering into or carrying
out of a transaction, operation or
scheme of the nature of the transaction, operation or scheme in
question; or





(ii) has
created rights or obligations which would not normally be created
between persons dealing at arm’s length under a transaction,
operation or scheme of the nature of the transaction, operation or
scheme in question; and that






(d) the
avoidance, postponement or reduction of the amount of such liability
was, in the opinion of the Secretary, the sole or one
of the main
purposes of the transaction, operation or scheme.”





See
also
A v Commissioner
of Taxes
1985 (2) ZLR
223 (H), ITC 1513 (1988), 54 SATC 56 (2), ITC 1518 (1989), 54 SATC
113 (T) and ITC 1554 (1990) 44 SATC 115 (Z).





It
was common cause that the scheme had the effect of reducing Wet Blue
Industries’ taxable income. The learned President found
evidence
of abnormality in the scheme in the manner the amounts paid to the
three parties were reflected in the accounts as costs
of purchase of
processing material. He also found it in the decision not to pay
the money as dividends and that the amounts were
arbitrarily fixed by
the management committee at Wet Blue Industries. Finally, he found
that CSC, Lurie and Tirzah had no legal
right to claim refunds or
rebates from Wet Blue Industries. It was the finding of the learned
President that one of the main purposes
behind the scheme was to
avoid taxation.





The
heads of argument advanced by Mr 
Andersen,
on behalf of Wet Blue Industries, were to the effect that the learned
President erred in coming to the conclusion he did. Mr 
de Bourbon,
for the respondent, raised a point
in
limine
that the appeal
was on a question of fact. Section 66(1)(a) of the Act
provides that a taxpayer who is dissatisfied with the
determination
of an appeal by the special court may appeal to the Supreme Court
without leave of the President of the special court
on any ground
which involves a question of law only.





I
agree with Mr 
de Bourbon
that the determination by the learned President of the special court,
that the amounts of money paid by Wet Blue Industries to the
three
parties as rebates were part of the gross income it had received
during each year of assessment, was a finding of fact which
is not
appealable unless it is so grossly unreasonable as to amount to a
misdirection on the law.





There
was, in my view, no misdirection in the findings of fact made by the
learned President, because the parties were determined
that the money
which had accrued to, i.e. received by, Wet Blue Industries as gross
income was to be taken out and that the effect
of such a deduction
was the reduction of Wet Blue Industries’ tax liability. The fact
that the money was taken out before the
taxable income had been
determined by the Commissioner did not change the legal effect of the
deduction. To form part of the gross
income it was enough that the
money was received by Wet Blue Industries from a source within
Zimbabwe. It did not have to be a
source of income itself, as
Mr 
Andersen
argued. The gross income could only be reduced by deductions
effected in terms of s 15 of the Act.





I
also agree that the determination that the scheme was abnormal and
one of its main purposes was the avoidance of tax liability
by Wet
Blue Industries is a finding of fact.





If
Wet Blue Industries wanted to appeal against the findings of fact, it
should have applied for the leave of the President of the
special
court to appeal in terms of s 66(1)(b) of the Act. No such
leave was applied for.





The
appeal is accordingly dismissed with costs.











CHIDYAUSIKU  CJ:
I agree.











ZIYAMBI
JA: I agree.











Joel
Pincus, Konson & Wolhuter
,
appellant's legal practitioners


Civil
Division of the Attorney-General’s Office
,
respondent's legal practitioners