Court name
Supreme Court of Zimbabwe
Case number
SC 31 of 2006
Civil Appeal 323 of 2004

Barclays Bank of Zimbabwe v Zimbabwe Revenue Authority (23/04) (SC 31 of 2006, Civil Appeal 323 of 2004) [2006] ZWSC 31 (24 September 2006);

Law report citations
Media neutral citation
[2006] ZWSC 31

ZLR (35)

Judgment No. SC 31/06

Appeal No. 323/04






, for the

, for the

ZIYAMBI JA: The appellant is a
Commercial Bank which carries on business within Zimbabwe. On 23
October 2001, the respondent, as
the authority responsible for the
collection of revenue in Zimbabwe, served a garnishee order upon the
Reserve Bank of Zimbabwe requiring
that bank to pay to the
respondent, by way of taxes, the sum of $301 572 750.05 from the
appellant’s account with the Reserve Bank.

Thereafter, on 6 November 2001,
the garnishee was effected. Part of the funds represented
employees’ tax (“PAYE”) which the
respondent claimed ought to
have been withheld by the appellant from the employees for payment to
the respondent.

In the High Court, the appellant
brought a court application seeking,

“No taxable benefit accrued to
the employees of the applicant as at the date of exercising rights in
terms of the management share
option scheme, and accordingly that the
applicant was not obliged to withhold any employees’ tax in respect
of the exercise of
such options”;

and, an order that the
respondent repay to the appellant the sums garnished from its account
with the Reserve Bank.

This appeal is against that part
of the judgment of the High Court in which it found, in favour of the
respondent, that a taxable
benefit did accrue to the employees at the
time of the exercise of their rights in terms of the management share
option scheme.

The management share option
scheme (“the Scheme”) was set up by the appellant to grant to its
managerial employees options to
purchase its shares within a certain
period at prices ruling at the time of the grant of such options
thereby giving, to the employees,
preferential rights of allotment
commensurate with their seniority within the bank. The purpose of
the scheme was to provide further
incentives for motivating and
retaining managerial staff for the benefit of the bank. The number
of shares allocated to the scheme
constituted 1.5% of the issued
share capital of the bank and was to be maintained at that level at
all times. The option price
payable on exercise of the option was
the middle market price prevailing on the day immediately prior to
the day on which such option
was granted. The options were not
transferable and were to expire:

(a) when the employee’s
employment was terminated whether through resignation or dismissal;

(b) upon demotion of the
participant to a grade lower than that of manager;

(c) at the lapse of 12 months
from the date on which the participant retired from the bank’s
service after reaching normal retirement
age; and,

(d) upon the expiry of 10 years
from the date on which the option was granted.

option was to be exercised by way of a written notice signed by the
participant and stating the number of shares the participant
to take. The date on which the bank received the notice was deemed
to be the date on which the option was granted.

The appellant contended that
because the grant of the share options was unconditional and the
employees were entitled to use their
discretion as to when to
exercise the options, the taxable event was to be determined by
reference to the share option price and
the middle market value of
shares ruling at the date of granting the option. Thus, if the
prices were the same, there would be
no taxable event. While
accepting that the subsequent rise in the value of the shares between
the dates of granting and exercising
the share options was a benefit
to the employees, the appellant denied that the benefit thus obtained
was a taxable benefit in terms
of ss 8(1)(b) or 8(1)(f) of the Income
Tax Act [
Cap 23:06]
(“the Act”), for which the appellant was obliged by virtue of
paragraph 3(1) of the Thirteenth Schedule to the Act, to deduct
as opposed to a capital gains tax liability taxable in the hands of
the employee.

It was further contended by the
appellant that since the Act does not specifically deal with share
options, regard should be had to
the case law developed over the
years in particular the English case of
v Philbin
(1960) 2 All
E.R. 763 (HL) and the South African case of
v Secretary For Inland Revenue

(1972)(1) SA 675 (A).

respondent’s stance was that the grant of the option was
conditional as seen from the fact that the options were not
they lapsed automatically upon resignation or
dismissal, and they were granted: upon promotion of employees to
managerial level,
in recognition of services rendered or as an
inducement to render future services to the bank. Accordingly, so it
was argued, the
provisions of s 8(1)(b) and (f) of the Act are
applicable in these circumstances in that there was an accrual of an
advantage with
an ascertainable money value at the time of exercising
the offer.

The respondent further submitted
that the case of
& Philbin
was not
applicable as the facts therein differed materially from those in the
instant case and that there existed the necessary “casual
relationship” between the benefit acquired by the employees and
their services to the bank to bring the benefit within the statutory
definition of gross income. See
Inland Revenue
1929 AD
(229) 233.

The relevant provisions of the
Act are set out hereunder:

Interpretation of terms
relating to income tax

(1) For the purposes of this part

“gross income” means 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 (not being an amount included
in “gross income” by virtue of any of the following paragraphs of
this definition) so
received or accrued which is proved by the
taxpayer to be of a capital nature and, without derogation from the
generality of the
foregoing, includes:

(a) … .

(b) any amount so received or
accrued in respect of services rendered or to be rendered, whether
due and payable under any contract
of employment or service or not,
and any amount so received or accrued by reason of the cessation of
the employment or service of
a person other than a benefit (not being
a pension or gratuity) received or accrued by reason of contributions
made to the Consolidated
Revenue Fund, and any amount so received or
accrued in commutation of amounts due under a contract of employment
or service.…

(c) ….

(d) ….

(e) ….

(f) an amount equal to the value
of an advantage or benefit in respect of employment, service, office
or other gainful occupation
or in connection with the taking up or
termination of employment, service, office or other gainful

For the purposes of this
paragraph -

  1. ‘advantage or benefit’-

    1. means-

(i) …

(ii) …

(iii) …

  1. the use or enjoyment of any
    other property whatsoever, corporeal or incorporeal, including a
    loan, …”;

There is no doubt that the share
options were granted, in respect of services rendered, to those who
had rendered satisfactory service
to the bank and were promoted to
the rank of managers and, in respect of services to be rendered, to
all managers including new managerial
appointees. The appellant
says that the scheme was an incentive to them. Assuming the share
options were exercised on the day
of grant of the options there would
be no profit accruing to the employee. However, as the options were
exercised at a later date
when the value of the shares at the date of
the exercise of the option had risen, the difference between the
option price and the
actual value of the shares would be a profit to
the employee and constitute a benefit. That much was conceded by
the appellant
who maintained, nevertheless, that the benefit so
obtained does not fall within the definition of remuneration in
paragraph 1(1)(b)
of the Thirteenth Schedule of the Act and
accordingly that there was no obligation on the appellant to deduct
PAYE therefrom in terms
of paragraph 3(1) of the said Schedule.

What in fact occurred upon
exercise of the share options is that when notice was given to the
bank, in terms of the conditions of
the scheme, that the employee
wished to exercise his option in respect of x number of shares, the
appellant sold x shares on behalf
of the employee, deducted from the
proceeds thereof the price of the shares (the option price in terms
of the scheme) and paid the
balance to the employee. That was a
profit obtained without the employee having to make any out-of-pocket
payment. It is this
profit which the appellant claims is not
taxable in the employer’s hands while the respondent maintains that
it is an amount equal
to an advantage or benefit in respect of
employment, service, office or other gainful occupation in terms of s
8(1)(f), and an amount
received or accrued in respect of services
rendered or to be rendered in terms of s 8(1)(b) of the Act.

my view the respondent is correct. The provisions of the Act
aforesaid are clear and unambiguous and the amounts accrued to the
employees fall within the provisions of both the said paragraphs.

It was submitted by the appellant
that the cases of
& Mooi, supra,
authority for the proposition that the share option itself was the
thing granted to the managers as a perquisite of their employment;
that it is a thing which could be turned to some value; and that the
date of the grant of the option was the date on which it should
taxed. If the value of the shares at the date of grant of the
option was different from the share option price offered to the
employee then the difference would be taxable. However, as in this
case there was no difference, the option price being the mid
price of the shares, there was nothing to be taxed.

The decisions referred to, though
not binding on this Court would of course be persuasive authority
which could assist this Court
in arriving at a decision in the
instant matter. But, as it was put by RUMPFF JA in
at p 686, referring to the decision in
v Philbin

does persuasive authority mean? In my view certainly not the mere
final order of that Court, but the force and validity of the
reasoning upon which the order is based.”

In that event, I am persuaded by
the reasoning of DENNING LJ in
v Philbin
, supra,
in his dissenting judgment at p 777F – 778C, where he stated as

Salmon v Weight
case shows decisively that the expectation of receiving a benefit, no
matter how well founded is not itself a perquisite or a
profit. It
must be reduced into possession. A bird in the hand is taxable, but
a bird in the bush is not. So, here, if nothing
had been paid for the
option, the letters that passed would have been no more than a
standing offer by the company to allot shares
to the appellant at
68s. 6d. a share. That offer could have been withdrawn by the
company, at any time before acceptance, with impunity.
The offer
itself would not be a perquisite or profit, for it conferred only the
expectation of the profit, not any profit itself.
But, when it was
accepted and shares worth 82s. apiece were allotted to the appellant
for 68s. 6d., he would then receive profits
which would be taxable in
his hands. No difficulty would arise about the year of assessment.
The profits would accrue to him in
the year they were received.

… I
ask myself what is the difference between the case I have just put,
where nothing is paid for the option, and the case we have before
where a nominal sum is paid? The difference is that in the one case
he has only an expectation of profit whereas in the other
he has a
right to make profits in future, if the opportunity arises. But in
either case, until the option is exercised, he has
not the profits
themselves. And, as I read the Act, it is not the expectation to
make profits, nor the right to make profits, which
is taxable, but
only the profits themselves. Just as it is not the expectation to
salary nor the right to salary which is taxable,
but only the salary
itself. A bird in the bush is not taxable if it is still there.
You must have it in hand before you can be
taxed for it. And when
you come to consider what ‘profits’ the servant receives from his
employment by virtue of the option,
surely it makes no difference
whether he pays a nominal sum or not. In either case the employer
grants him the option as a reward
or return for his services; and the
profits he makes out of it are the same save for this: if he paid
nothing, it is all profit:
if he paid a peppercorn, it is all profit
less the value of a pepper berry; if he paid 1s., less a 1s., if he
paid £20, less £20.”

It follows from the above that I
do not accede to the submission made on behalf of the appellant that
no taxable event occurred upon
the exercise of the share options by
the employees. Rather, I take the view that upon the grant of the
option, the employee receives
a mere expectation to make a profit
from the shares. Once he exercises the option and receives the
shares, their value, less any
amount paid for them before or upon
exercise of the option, is taxable in terms of para 3(1). The
argument that the employee received,
at the time of the grant of the
option, an offer which could be turned to monetary value does not
assist the appellant. The option
was not transferable. In any
event, until he exercised the option there was nothing to transfer
but an expectation which would
in this case be valueless.

Accordingly, the judgment of the
a quo
is upheld and the appeal is dismissed with costs.

JA: I agree.

MALABA JA: I agree.

Scanlen & Holderness,
appellant's legal practitioners

& Immerman
respondent's legal practitioners