The applicant carries on business as a transport operator. During the months of November 2008, December 2008 and January 2009 the applicant availed to its employees' fuel coupons and food hampers as part payment of remuneration due to them.

Following an audit of the applicant's business by the respondent in June 2009, the respondent wrote to the applicant's accountants contending that the fuel coupons and food vouchers should be treated as remuneration in foreign currency and that PAYE in respect thereof should have been paid by the applicant in foreign currency.

The applicant contended that the issuance of fuel coupons and food hampers cannot, as a matter of law, be regarded as remuneration in foreign currency. The applicant had, in fact, for the period under consideration, paid employee tax in local currency.

The parties are unable to agree on the correct interpretation of the relevant provisions of the Income Tax Act [Chapter 23:06]. In order to safeguard its interests the applicant has filed the present papers seeking a declaratory order in the following terms:

“IT BE AND IS HEREBY DECLARED:

That the receipt by applicant's employees of fuel coupons and food hampers during the months of November 2008, December 2008 and January 2009 cannot be treated as remuneration in foreign currency, and that, therefore, PAYE in respect thereof was not payable in foreign currency as provided for in paragraph 3(1)(a) of the 13^th Schedule to the Income Tax Act [Cap 23:06].”

The respondent opposes this application on the basis that since it is common cause that the applicant obtained the fuel coupons and food hampers using foreign currency and that the employees would, in turn, redeem same on the market in the form of foreign currency, PAYE, it stands to reason, should be paid in foreign currency. Alternatively, argues the respondent, the payment of remuneration in the form of fuel coupons and food hampers was a scheme aimed at avoiding the payment of tax in foreign currency as envisaged in section 98 of the Income Tax Act [Chapter 23:06].

This is an appeal against the decision of the Special Court for Income Tax Appeals which dismissed the appellants' appeals against the determination of the Commissioner-General turning down the appellants' objection against an income tax assessment for additional profit tax.

The appeal is based on a statement of agreed facts which was summarised in the judgment of the court a quo. For the purposes of this appeal I summarise them as follows:-

The six appellants are private senior schools operating in Zimbabwe in terms of their respective Trust Deeds. The second to fourth appellants also operate primary schools which are jointly administered with the high schools.

Some employees of these schools had their children enrolled at the schools where they worked or at other schools which had mutual agreements with the school at which they are staff members. In terms of those arrangements, the employees of the appellant schools whose children were enrolled at these schools did not pay the same amount of school fees as non-staff parents whose children were enrolled at the schools. The employees' children were spread across the schools and were enrolled in various classes.

The appellants charged their employees between 20 per cent and 25 per cent of the full fees payable per child. No taxes were paid on the difference between the 20 per cent and 25 per cent of the fees and the full fees payable at the respective schools for the 2009 and 2010 tax years. The first, second, third and sixth appellants charged 20 per cent while the remaining two charged 25 per cent. The fourth appellant used to charge 3 per cent before it was directed by the respondent, on 30 November 2009, to charge 25 per cent. It started charging 25 per cent from the third term of 2009.

The respondent contended that the difference between the fees paid by the employee parents to the schools and the full fees payable at the schools was an advantage or a benefit in terms of section 8(1)(f) of the Income Tax Act [Chapter 23:06] to the employee parents, arising from their contracts of employment with the appellants, which should have been taxed.

The respondent further asserted that the cost of the benefit to the appellants in respect of each benefiting child was the same as the cost of every other pupil enrolled at the school and therefore decided to tax the appellants on the basis that the advantage or benefit claimed by the respondent was equivalent to the waived amount.

The appellants disputed the respondents' contentions.

Tax assessments were raised and issued against the appellants in terms of paragraph 10 of the Thirteenth Schedule to the Income Tax Act for taxes which were alleged to be due from the employee parents and which the respondent asserted the appellants were obliged, but failed, to withhold from the incomes of the concerned employee parents. The appellants disputed both the obligation asserted by the respondent and the application of the legislation in the manner invoked by the respondent. The appellants objected to the respondent's tax assessments. The respondent dismissed the objections. The appellants appealed to the Special Court for Income Tax Appeals against the decisions of the Commissioner-General disallowing their objections.

The appellants' contention before the court a quo was that the difference between the subsidised school fees paid by children of the appellants' employees and the fees paid by full school fee paying students was not taxable in terms of section 8(1)(f) of the Income Tax Act [Chapter 23:06] because it was not an advantage or benefit.

The court a quo dismissed the appellants' appeals holding that the concessionary scheme for the payment of part of the school fees by employees whose children were enrolled at these schools should be included in the gross income of the employees in terms of section 8(1) and section 8(1)(b) of the Income Tax Act [Chapter 23:06] and should be included in the assessment of Pay As You Earn. The court a quo held that the subsidised school fees was an advantage or benefit in terms of section 8(1)(f) I (a) of the Income Tax Act [Chapter 23:06]. It found that the correct assessment had been made in terms of section 8(1)(f) I (a) of the Income Tax Act [Chapter 23:06].

In respect of the second and third appellants, the court a quo set aside the assessments raised by the respondent. It found that the liability of the second and third appellants was not in terms of section 8(1)(f) of the Income Tax Act [Chapter 23:06], but was in terms of the main charging provision of section 8(1) of the Income Tax Act [Chapter 23:06]. It held that the respondent should include in the gross income the amount waived by the school at which the child of each such employee parent was enrolled before re-assessing the appropriate Pay As You Earn liability of the second and third appellants.

The appellants were aggrieved by the decision of the court a quo.They appealed against it to this court. The appeal is based on the following grounds of appeal:-

“1.The court a quo erred at law by holding that the difference between what was paid by full school fee paying children at each appellant and the school fees charged on each of the affected children of employees enrolled at each appellant constitutes “gross income” in terms of both ss 8(1) and 8(1) (b) of the Income Tax Act [Chapter 23:06] of the employee parent and should be assessed for Pay As You Earn tax whereas it should have found that, that difference does not constitute an “amount” in terms of s 2 of the same Act.

2. Alternatively, the court a quo erred at law by holding that the difference between what was paid by full school fee paying children enrolled at each appellant and the school fees charged on each of the affected children of employees enrolled at each appellant constitutes gross income in terms of both ss 8(1) and 8(1)(b) of the Income Tax Act [Chapter 23:06], whereas it should have found that, that difference constitutes an advantage or benefit in terms of s 8(1)(f) of the same act.

3. Alternatively , the court a quo erred at law by finding that the correct value of the amount that accrued to the employee parents in each of these matters, is computed as the difference between what was paid by full school fee paying children enrolled at each appellant and school fees charged on each of the affected children of employees enrolled at each appellant, whereas the court should have found that the correct value of the amount accruing to the employees should be their proportionate share of the variable cost of running the school excluding boarding fees.

4. Alternatively, the court a quo erred at law by finding that the cost to the employer in terms of s 8(1)(f)(ii)(b) is the total cost incurred in running each school divided by the total enrolment of each school inclusive of the favoured pupils less the concessionary fees paid and all costs related to boarding facilities whereas the court should have found that the cost to the employer is each employee's child's proportionate share of the variable cost of running the school excluding boarding fees.

5. The court a quo erred at law by finding as gross income, in terms of s 8(1) of the Income Tax Act [Chapter 23:06], the difference between what was paid by full school fee paying children enrolled at either of these two schools by mutual agreement and should be assessed for Pay As You Earn tax whereas the court should have found that, that difference does not constitute an amount in terms of s 2 of the same Act.

6. Alternatively, the court a quo erred at law by finding as gross income in terms of s 8(1) of the Income Tax Act the difference between what was paid by full school fee paying children enrolled at the second and third appellant, whichever is applicable, and school fees charged on each of the 77 children of employees enrolled at either of these two schools by mutual agreement, whereas the court should have found that, that difference constitutes an advantage or benefit in terms of s 8(1)(f) of the same Act.

7. Alternatively , the court a quo erred at law in finding that the correct value of the benefit accruing to the employee parents of the 77 children enrolled at either second or third appellant on the basis of mutual agreement between these two schools is the difference between what was paid by full school fees paying children enrolled at each appellant and school fees charged on each of the affected children of employees enrolled at each appellant, whereas the court should have found that the correct value of the amount accruing to the employees should be their proportionate share of the variable costs of running the school excluding boarding fees.”

The appeal raised three issues for determination. These are:

1. Whether or not the court a quo correctly found that the subsidised school fees fit in the definition of gross income in terms of sections 8(1) and 8(1)(b) of the Income Tax Act [Chapter 23:06] and is therefore liable to taxation.

2. Whether or not the court a quo correctly found that the subsidized school fees were “an advantage or benefit” in terms of section 8(1)(f) I(a) of the Income Tax Act [Chapter 23:06].

3. Whether or not the court a quo correctly assessed the calculations of such waived amounts.

I deal with each of these in turn.

Whether or not the court a quo correctly found that the subsidised school fees fits in the definition of gross income in terms of sections 8(1) and 8(1)(b) of the Income Tax Act [Chapter 23:06] and is therefore liable to taxation

Counsel for the appellants submitted that the difference between the amount paid by full school fee paying children and the amount paid by the children of parents employed at these schools is not part of the appellants' employees' gross income in terms section 8(1) of the Income Tax Act [Chapter 23:06]. He submitted that the court a quo erred in dismissing their objection to that difference being included in the assessment of payable tax.

On the other hand, counsel for the respondent submitted that the appellants were liable to pay tax in terms of section 8(1) of the Income Tax Act [Chapter 23:06]. According to the respondent, the definition of the term 'gross income' covers the position of the appellants' employees' school fee concession for their children.

Counsel for the appellants' submitted that the subsidised fees is not part of the appellants' employees' gross income in terms of section 8(1) of the Income Tax Act. He argued that the subsidised fees were not an amount in terms of section 2 of the Income Tax Act.

The Income Tax Act defines the term “gross income” as follows:

“8 (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:-“…,.

In terms of section 2 of the Income Tax Act [Chapter 23:06], an “amount” is defined as;

“'Amount', for the purposes of the provisions of this Act relating to the determination of the gross income, income or taxable income, as defined in subs (1) of section eight, of a person, means -

(a) Money; or

(b) Any other property, corporeal or incorporeal, having an ascertainable money value; and “accrued”, “paid, “received” or any cognate expression shall, in so far as it applies to an amount as defined in paragraph (b), be construed in a sense correlative with that in which it is construed when it applies to money;”…,.

In my view, these provisions are wide enough to cover all money and any other property, corporeal or incorporeal, which has an ascertainable monetary value. Non-monetary items which have an ascertainable monetary value are included in the terms of this provision. A non-monetary item can only escape if it has no ascertainable value.

The question which arises, is whether the difference between the amount paid by full school fee paying children and the amount paid by the children whose parents are employed at these schools an incorporeal thing with an ascertainable value?

It is obvious that the benefit received by the employees of the appellants is an incorporeal thing with an ascertainable value. As such, the advantage received by the employees of the appellants falls within the broad definition of the term gross income.

It should also be noted that income is not only construed in monetary terms but may be in any other form other than money. In Commissioner for Inland Revenue v People's Stores (Walvis Bay) (Pty) Ltd 1990 (2) SA 353 (A) HEFER JA…, said:

"It must be emphasised that income in a form other than money must, in order to qualify for inclusion in 'gross income', be of such a nature that a value can be attached to it in money. As WESSELS CJ said in the Delfos case (supra) at 251:

'The tax is to be assessed in money on all receipts or accruals having a money value. If it is something which is not money's worth or cannot be turned into money, it is not regarded as income.'

(See also Mooi v Secretary for Inland Revenue (supra at 683A-F).

On the other hand, the fact that the valuation may sometimes be a matter of considerable complexity (of the Lace Property Mines case (supra) at 279 - 81) does not detract from the principle that all income having a money value must be included. How the valuation is to be done depends, of course, entirely on the nature of the income and the circumstances of the case.”

In light of this dictum, I find that the concessionary rate of school fees which was offered to the appellants' employees is income and should have been taxed. The concessionary rate of school fees has a value which is taxable in terms of section 8(1) of the Income Tax Act [Chapter 23:06]. The court a quo, therefore, correctly found that the subsidised school fees fits in the definition of gross income in terms of section 8(1) of the Income Tax Act [Chapter 23:06] and is therefore liable to taxation.

Section 8(1)(b) of the Income Tax Act [Chapter 23:06] clearly states that any amount received or accrued in respect of services rendered or to be rendered, whether due and payable under any contract of employment or service is liable to taxation. Having accepted that the subsidised fees are an amount in terms of the Act, it is therefore clear that that amount accrued to the appellants' employees because of their contract of employment.

I therefore find that sections 8(1) and 8(1)(b) of the Income Tax Act [Chapter 23:06] are wide enough to cover the difference between the concessionary fees and full school fees which accrued to the appellants' employees.

I do not accept counsel for the appellants' contention that the court a quo erred in finding that the difference between the amount paid by full school fee paying children and the amount paid by the children of parents employed at these schools is income in terms of sections 8(1) and 8(1)(b) of the Income Tax Act.

It is clear that the benefit received by the employees of the appellants' falls within the broad definition of the term gross income and therefore was subject to taxation.

Whether or not the court a quo correctly found that the subsidised school fees is “an advantage or benefit” in terms of section 8(1)(f) I (a) of the Income Tax Act

Even though I have already found that the appellants were liable to pay tax in terms of sections 8(1) and 8(1)(b) of the Income Tax Act [Chapter 23:06], the determination of the second issue is important in the disposition of the third issue concerning the value of the benefit.

It is important to highlight that the assessment of the tax in question was for the 2009 and 2010 tax years. Section 8(1)(f) of the Income Tax Act, as applicable during the relevant period, included within the meaning of “gross income” the following:-

“(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 occupation:

Provided that -

(i)…,.

(ii)…,.

For the purposes of this paragraph -

1. 'advantage or benefit” –

(a) means -

(i) Board; or

(ii) The occupation of quarters or of a residence; or

(iii) The use of furniture or of a motor vehicle; or

(iv) The use or enjoyment of any other property whatsoever, corporeal or incorporeal, including a loan, whether of the same kind as that referred to in subparagraph (i), (ii) or (iii) or not, which is not an amount referred to in paragraph (a), (b) or (c) of the definition of “gross income” in this subsection; or

(v) An allowance;'

granted to an employee, his spouse or child by or on behalf of his employer in so far as it is not consumed, occupied, used or enjoyed, as the case may be, for the purpose of the business transactions of the employer and in so far as a amount is not paid by the employee, his spouse or child in respect of its grant; and…,.”

The use, in (iv) above, of the words 'any other property whatsoever…, whether of the same kind as that referred to in subpara (i) (ii) or (iii) or not' is significant.

It means the words 'advantage or benefit' are not confined to what is stated in (i) to (iii). It, in my view, means any 'advantage or benefit' and what is stated in (i) to (iii) are mere examples whose possible limiting effect is removed by paragraph (iv) which provides that the advantage or benefit can be the use of 'any property whatsoever' and can or cannot be of the same kind as those mentioned in paragraphs (i) to (iii). The words 'any other property whatsoever' and 'or not' broadens the ambit of the meaning of the words 'advantage or benefit.'

There is no doubt that the concessionary school fee benefit was granted to the appellants' employees by the appellants. The benefit is not being used for the benefit of the appellants' business but that of their employees. It is not paid for by the employees but is an advantage or benefit accruing to them by virtue of their being the appellants' employees in terms of their contracts of employment.

It is therefore part of the employees' taxable income.

Section 8(1)(f) I(a)(iv) of the Income Tax Act [Chapter 23:06] was subsequently amended by the Finance Act (No.2) of 2012 (Act 6 of 2012) which includes, in the definition of the words 'advantage or benefit', the following:-

“(vi) In the case of an employee who is a member of the teaching or non-teaching staff of a 'school' as defined in the Education Act [Chapter 25:04], the waiver of the whole or any portion of the amount of tuition fees, levies and boarding fees (hereinafter called a 'school benefit') that would otherwise be payable by the employee for any child of his or hers who is a student at that or another school;”

It should be noted that the amendment specifically addresses a problem identical to the one before this court. It specifically provides for the taxation of a school benefit, an issue which had been in dispute between the appellants and the respondent since 2009.

Counsel for the appellants submitted that the clear meaning of section 8(1)(f) of the Income Tax Act [Chapter 23:06], prior to its amendment in 2012, is that not all perquisites fall to be treated as advantages or benefits, but only those to which specific meaning is given. He submitted that the use of the verb 'means' in subparagraph I(a) of the definition of 'advantage or benefit' is undoubtedly used in contradistinction to the more general verb 'includes.' He further submitted that the fact that the provision was amended meant that the legislature cannot be assumed to be repeating itself. He submitted that section 8(1)(f)I(a)(iv) of the Income Tax Act [Chapter 23:06] was amended to include something new which had not previously been covered by legislation. He submitted that the difference between what other parents pay for the education of their children and what the employees of the appellants pay is not an 'advantage or benefit' contemplated by section 8(1)(f) of the Income Tax Act [Chapter 23:06]. He submitted that the waived amount was not corporeal or incorporeal property as it has no tangible being.

I do not agree.

It seems to me that on a proper interpretation of the provision, if the legislature intended to exclude other advantages and benefits which it subsequently decided to include in the amended section 8(1)(f) I(a)(iv), it would not have used the words “any other property whatsoever…, whether of the same kind as referred to in paras (i), (ii) or (iii) or not.” The subsequent specific inclusion of the school fees advantage or benefit in 2012 does not mean that the employee parents' “advantage or benefits” were being included for taxation for the first time. In my view, it was merely being clarified. That is why the amendment is worded in a manner which gives the impression that it was intended to resolve the disputes in this case which had started in 2009.

Counsel for the respondent submitted that the concessionary rate of school fees which was offered to the appellants' employees was an advantage or benefit in terms of section 8(1)(f)I(a)(iv) of the Income Tax Act [Chapter 23:06] in that it was an entitlement arising from an employment contract, and, as such, it was a right. According to him, it was not the pupils who have a right to education but rather the parents who have the right to have their children educated at the concessionary rate. That right to have their children educated at a concessionary rate constituted incorporeal property which has a monetary value. Counsel for the respondent therefore submitted that the amendment did not bring in a new thing, but was legislated to clarify existing legislation.

I agree.

It is not unusual for the legislature to clarify legislation whose wording would have caused disputes. In this case, the wording of section 8(1)(f) I (a)(iv) of the Income Tax Act  had caused disputes between the six appellants and the respondent in the 2009 and 2010 income tax years which had not been resolved at the time of the amendment.

L.W. HILL In his book; Income Tax in Zimbabwe, 4^th Edition…, commented on section 8(1)(f) of the Income Tax Act, as it was before the 2012 amendment, as follows:-

“Employers may remunerate their employees for services rendered either in cash or in any other way, but any advantage or benefit which can be connected with an employee's employment forms part of his gross income. 'Advantage or benefit' is defined as: board; the occupation of quarters or of a residence; the use of furniture or of a motor vehicle; the use or enjoyment of any other property, including a loan; or an allowance…,.

For the most part, paragraph (f) imposes liability on the employee's private use of the employer's assets. This is because many receipts by employees from employers, in cash or in kind, will already have fallen within the provisions of paragraph (b), considered earlier.”…,.

In view of the above, it is clear that the liability imposed by paragraph (f) is for the use of the employer's assets.

In this case, it is not in dispute that the employees of the appellants have rights which entitle their children to be educated at the appellants' educational institutions at concessional rates because of their contracts of employment. Those rights, although personal, are capable of being enforced against the appellants. The right to have their children educated at a concessionary rate is an incorporeal property envisaged in paragraph (f) of the Income Tax Act.

It is on that basis that I find no fault in the judgment of the court a quo that the waived amount is an amount equal to the value of an advantage or benefit in respect of employment.

Whether or not the court a quo correctly assessed the calculations of the waived amounts

Counsel for the appellants submitted that the court a quo erred at law by finding that the cost to the employer, in terms of section 8(1)(f)(ii)(b) of the Income Tax Act [Chapter 23:06] is the total cost incurred in running each school divided by the total enrolment of each school inclusive of the favoured pupils less the concessionary fees paid and all costs related to boarding facilities whereas the court should have found that the cost to the employer is each employee's child's proportionate share of the variable cost of running the school excluding boarding fees.

I do not agree.

Section 8(1)(f)II(b) of the Income Tax Act provides:

“II. The value of the grant of an advantage or benefit, other than a payment by way of an allowance, shall be determined…., -

(a) In the case of the occupation or the use of quarters, residence or furniture, by reference to its value to the employee; and

(b) In the case of any other advantage or benefit, by reference to the cost to the employer.”

The import of this provision is that the value of the school fees benefit which is afforded to the employees of all six appellants should be computed with reference to the cost to the employer.

The appellants' argument was that the non-variable costs should not be included in the assessment of the value of the benefit because these costs would have been incurred by the employer whether or not the employee is conferred with the benefit and these are incurred by the employer in running the school.

That argument is flawed.

The provision made it clear that the value of the benefit is to be determined with regard to its cost to the employer. To draw a distinction between variable costs and non-variable costs would be tantamount to reading into the provision what was never intended by the legislature. The remarks of GUBBAY JA…, in Mxumalo & Ors v Guni 1987 (2) ZLR 1 (S) are apposite. He said:-

“The language used is plain and unambiguous and the intention of the Law Society is to be gathered therefrom. It is not for a court to surmise that the Law Society may have had an intention other than that which clearly emerges from the language used. This principle has been stated frequently and I need only refer to Ex parte Minister of Justice: In re R v Jacobson & Levy 1931 AD 466 at 480, where STRATFORD J said that:

'The function of a Court of Law is to construe the language of the Legislature and arrive at its intention in that way; it has no power to redraft or alter the language. (The) intention is not to be ascertained by surmise however probable such surmise may be.'”

The provision does not draw a distinction between variable and non-variable costs. The learned judge a quo, in making his determination, made reference to Income Tax Case No.1336…, where SQUIRES J said:

“The clear intention of the legislature is manifestly to tax, in a taxpayer's hands, all the benefits or advantages afforded to him as an employee from his employment, as well as the income he earns. The advantage or benefit of using a car belonging to the employer is to relieve the employee taxpayer of the financial burden of owning the car himself. It can be a very substantial benefit compared to the person who receives no such advantage, and not the least relief is the costs of licencing and insuring such asset, quite apart from the diminution in value that is inherent in the aspect of depreciating whether actual or notional. Since the relief thus afforded is unquestionably a benefit to the employee, I can see no basis on which the spirit of the Act would save to exclude these from what falls into the gross income, particularly as they are equally clearly a cost to the employer. Not only, therefore, is there no reason for implying additional words, but, as it seems to me, a strong reason for giving the word used their ordinary meaning."

Counsel for the appellants submitted that the facts of that case can be distinguished from the facts in casu because in that judgment the car was not used for the public. He argued that if the car was used for the public as well as for the employee's benefit, the learned judge would not have come to the same conclusion because all the costs of running the vehicle (variable and non-variable) would not have been found to constitute the value of the benefit to the employee. 

I do not agree with that argument.

The cost to the employee should be computed with regard to the total cost of running the school regardless of the allegation that under the school budget, the non-variable costs are covered by the full school fees paying children. To hold that non-variable costs should be excluded from the meaning of “cost to the employer” would be reading into the language of the statute what was not intended by the legislature.

This is an appeal against a judgment of the High Court sitting as an Appeal Court in terms of section 65 of the Income Tax Act [Chapter 23:06] (hereinafter referred to as “the Act”).

It concerns certain income tax assessments made in respect of the appellant by the respondent with regard to the years 2009, 2010 and 2011. Of the four issues which were raised in the High Court, three were decided against the appellant and form the subject of this appeal. They are:

“Whether or not the appellant was entitled to claim the costs of a staff reduction exercise in the year in which the offer was made to the staff to take voluntary retirement; whether the appellant was correctly held to have earned interest in respect of offshore loans made to various customers in each of the three years of the amended assessments; and whether the charges debited against the foreign nostro accounts of the appellant by the bank operating such accounts were liable to withholding tax in terms of s30 as read with the 17^th Schedule of the Act.”

I deal with each of these issues in turn.

Whether or not the appellant was entitled to claim the costs of a staff reduction exercise in the year in which the offer was made to the staff to take voluntary retirement

The parties were agreed that if the staff reduction exercise constituted a retrenchment in terms of the Labour Act then the costs of such a scheme would properly be written into the taxable income of the year in which the retrenchment took place. They were also agreed that the definition of “retrench” in section 2 of the Labour Act [Chapter 28:01] was broad enough to include the exercise undertaken by the appellant.

The question which fell to be decided was whether the exercise constituted a retrenchment in terms of the Labour Act [Chapter 28:01].

I did not understand the appellant to dispute the submission made on behalf of the respondent that the retrenchment would take effect from the date of its approval by the Minister. See Kadir & Sons (Pvt) Ltd v Panganai and Anor 1996 (1) ZLR 598 (S)…,.

The background facts are largely common cause.

The appellant, a Commercial Bank operating in Zimbabwe, embarked on a staff reduction exercise during the year 2009. By resolution of its Board of Directors, dated the 26^th of November 2009, the appellant undertook “a voluntary retrenchment exercise to reduce its staff head count by up to two hundred and fifty-two (252) staff members.” The rationale for the decision taken by the Board was the downturn in economic activity which triggered a drastic fall in business volumes from average monthly transactions of US$1.9m in 2008 to US$380,000= in 2009 in the face of static staffing levels in excess to capacity. All interested staff were required to submit formal applications by 31 December 2009. The appellant reserved the right to approve or decline such applications.

Between 3 and 31 December 2009, a total of 74 applications were received by the appellant. However, the confirmation certificates, wherein each applicant affirmed freely and voluntary terminating employment, were all signed by the 74 during the period 7 to 14 January 2010. Each employee was given 3 months' notice of termination of his employment from the date of acceptance of his application. The gross costs of the 'voluntary retrenchment' exercise was US$1,995,402=. A further 27 staff members submitted applications in January and February 2010 but this appeal does not relate to them. It is confined to the exercise in respect of the 74.

In the return for the tax year ending 31 December 2009, the appellant submitted applications in respect of each of the 74 employees to the respondent for a tax directive. It claimed a deduction for staff retrenchment costs in terms of section 15(2)(a) of the Income Tax Act [Chapter 23:06] as an expenditure incurred for the purpose of trade and for conducting its business and earning income in that year of assessment. The respondent disallowed the deduction but included it in the amended assessment for the 2010 tax year.

The appellant contended that the deduction ought to have been allowed in the year 2009 which is the year in which the expenditure was incurred.

Counsel for the appellant submitted that the exercise was a voluntary retirement scheme to which the provisions of section 12C and 12D of the Labour Act [Chapter 28:01] did not apply. By accepting the applications of the 74 on or before 31 December 2009, the appellant had incurred an unconditional legal obligation to make payment to the 74. Therefore, the obligation to pay the 74 arose in December 2009 and should be deducted in the assessment year 2009.

On behalf of the respondent, counsel countered that the exercise constituted a retrenchment in terms of the Labour Act. He accepted the legal position that, in terms of section 15(2)(a) of the Income Tax Act [Chapter 23:06], the costs of the exercise were deductible in the year of expenditure, viz, the year in which the expenditure is incurred (see Caltex Oil (SA) Ltd v Secretary for Inland Revenue 1975 (1) SA 665 (A)….,.) even if paid in a subsequent year. He submitted, however, that in the instant case, the assessment was properly made in 2010 which is the tax year in which the expenditure was incurred.

At page 6 of its judgment, the court a quo, in arriving at its conclusion that the exercise constituted a retrenchment in terms of the Labour Act said:

“The onus to show, on a balance of probabilities, that the scheme was not a retrenchment exercise fell on the appellant. The discharge of the onus was complicated by the sole witness called by the appellant on this aspect. He conceded, under cross examination, that the scheme constituted a retrenchment exercise. His attempt to correct the picture in re-examination failed to paper the cracks. His prevarication on the point did not paint him as a credible witness in that respect only. The documentation emanating from the appellant is replete with reference to retrenchment exercise, retrenchment costs and retrenchment expenses.”

As it was submitted, on behalf of the respondent, that the appellant itself referred to the exercise as a retrenchment.

In his heads of argument before this Court, counsel for the appellant explained those references away by describing them as 'inappropriate'. Paragraph 2 of the appellant's heads of argument reads:

“At the end of November 2009, the appellant resolved to undertake what it termed a voluntary retrenchment exercise (record 55)…,.”

And at Para 4:

“For the purposes of its accounts, the appellant claimed the whole costs of the voluntary separation scheme (often using the inappropriate term retrenchment) as a cost of its business in the tax year ending 31 December 2009.”….,.

It is common cause that the appellant submitted, for approval by the Retrenchment Board, a list of the employees affected by the exercise. Such a procedure is necessary only where employees are being retrenched. See section 12C of the Labour Act [Chapter 28:01].

In four letters dated between 12 January and 2 February 2010, the appellant was advised by the Minister of the Board's approval of the retrenchment exercise in relation to 94 employees, including the 74, in the following terms:

“Re: Retrenchment of [the names of the staff members]. The retrenchment Board acknowledges receipt of correspondence referring to the Works/Employment Council Agreement in Form LRR2. Please proceed as per agreement.”…,.

It is evident that the appellant followed the retrenchment procedure set out in the Labour Act - right down to the use of the forms. The approvals were granted by the Retrenchment Board in 2010. In the light of the above, the conclusion reached by the learned Judge that the staff reduction exercise constituted a retrenchment in terms of the Labour Act was inescapable.

I therefore agree with counsel for the respondent that the commitments made by the appellant to the employees were conditional upon the approval of the Minister of Labour and Social Services and that since the approvals were only granted in 2010, the expenditure could not be deducted in the tax year ending 2009 but was properly deducted in the tax year 2010.

Whether the appellant was correctly held to have earned interest in respect of offshore loans made to various customers in each of the three years of the amended assessments

On 6 October 2009, the appellant (sometimes referred to herein as “the Bank”) obtained authority from the External Loans Co-ordination Committee of the Reserve Bank of Zimbabwe (“ELCC”) to borrow offshore funds on behalf of its clients. The letter of approval read, in part:

“Re: Standard Chartered Bank Pre and Post Shipment Finance Facility USD100Million

Please be advised that your application for the approval of a pre and post shipment finance facility to the tune of USD100 million has been approved by the External Loans Co-ordination Committee (ELCC)…,.”

The lender was stated to be Standard Chartered Bank PLC London and the borrower Standard Chartered Bank Zimbabwe Limited. The approval related to an ordinary non-tobacco pre and post shipment finance facility in the sum of US$50 million as well as a further US$50 million for tobacco financing. The facilities expired on the 31^st of August 2010. However, on the 9^th of September 2010, the External Loans Co-ordination Committee (ELCC) approved an enhanced ordinary non-tobacco pre and post shipment finance facility increasing the loan from US$50 million, granted on 6 October 2009, to US$100 million sought by the appellant from the offshore related party at an interest rate of Libor plus 4%. The tobacco pre and post-shipment facility was also increased from US$50 million to US$100 million with an interest rate of Libor plus 3% expiring on the 31 August 2011.

During the period 2009 to 2012, the appellant extended loan facilities to six (6) onshore customers of which three (3) were tobacco companies. The remaining three (3) comprised of a cotton company, a cement manufacturing company and a manufacturing and distributing conglomerate. In terms of each of the facility letters the appellant stated itself to be the lender and the customer the borrower. Each agreement specified the amounts borrowed, the period of repayment, the provision of security to the appellant and the manner of calculation of interest. Save for the conglomerate, in respect of which in one instance (the facility dated 2011 for US$200 million) the courts of England were to have jurisdiction, the courts of Zimbabwe were to have jurisdiction to settle any dispute arising in connection with the facility letters. In terms of the facility letters, all amounts paid to the Bank in repayment of the facility would be applied firstly to the payment of interest accrued and any fees or charges due and thereafter to the reduction of the capital amount.

One tobacco company was required to open an Evidence Account with the appellant into which account repayments would be made. Any balance in that account, after the repayment of the facilities, would be applied toward the reduction of “any other offshore loans made available by the Bank on the due date of such loans”. Any residual surplus balance in the Evidence Account would be paid to the borrower. Interest was to be debited to the borrower's account at a 'day convenient to the bank'.

The respondent took the view that the interest in terms of each loan agreement had been earned by the appellant and therefore became part of the appellant's taxable income. On this basis, the respondent wrote back into the appellant's taxable income for the three years under mention, the interest paid by the six (6) onshore borrowers. The appellant's objection to the assessments was disallowed by the respondent and its appeal to the High Court was dismissed.

Submissions on appeal

It was contended by counsel, on behalf of the appellant, that interest accruing on the loans had been paid directly to the offshore lender, namely, Standard Chartered Bank PLC London. Regarding the three (3) tobacco companies and the cotton company, which were in a separate category by virtue of the Exchange Control (Tobacco Finance) Order 2004, S.I.161 of 2004 as amended by S.I.229 of 2004, and the Exchange Control (Cotton) Order 2008, S.I.150 of 2008, the appellant had neither received, nor accrued the right to, any interest and that the finding of the court a quo to the contrary was wrong.

Regarding the loans to the conglomerate and to the cement company, these were external loans paid externally and the agreements were subject to the laws of England. The only factors linking the appellant to the matter are the facility letters which were drawn in the name of the appellant but even that did not establish that the appellant either received or accrued the right to interest on these loans as all payments were made directly to the offshore Bank, Standard Chartered PLC in London.

On behalf of the respondent, counsel submitted that the real issue for determination was whether the appellant had discharged the onus of establishing, on the evidence placed before the court, that there was no causa for the payment of interest to it by the onshore borrowers and that such interest was in fact not earned by the appellant. That onus, he submitted, was not discharged by the appellant. He drew the court's attention to the unsatisfactory nature of the evidence led by the appellant from its Head of Corporate Banking, Mr Young, as found by the court a quo, in particular, the following remarks at page 25 of the judgment:

“There was a plethora of disquieting features in the testimony of the Head of Corporate Banking. He disputed that any money was paid to the appellant by the offshore lender contrary to the stipulation in clause 3 of the MRPA. He disputed that the appellant borrowed funds from the offshore lender, again contrary to all the approvals he produced that emanated from the Central Bank. The lender was clearly indicated as the offshore related party and the [appellant] the borrower and in later approvals the beneficiary as the appellant. The unexplained discrepancy between the first facility letter and the acceptance agreement, in respect of the first tobacco company, did not engender confidence in his testimony. More importantly, the failure to produce the acceptance agreements of all the other facility letters save for the one in respect of the conglomerate, exhibit 7, and rate fix documents, in respect of all the facility letters, undermined his credibility. The impression left in my mind was that the appellant was deliberately hiding information in corporate underbrush. Similarity of all the letters, save for the first two for the first tobacco company, with the ones the appellant admitted were provided with local funds undermined the appellant's case. There was no reference to any Evidence Account in these facility letters. The choice of law clause conferred jurisdiction on the local courts. The calculation of the computation of the interest rate in respect of the cement manufacturer demonstrated that it was receiving onshore finance from the appellant.

In my view, it was simply incredible that the appellant did not have the capacity to fund the requirements of the conglomerate. It admitted to funding the conglomerate in the aggregate sum of US$30 million from onshore funds. In any event, it held approvals from the ELCC to on-lend funds borrowed offshore to both tobacco and seed cotton merchants and other non-tobacco customers. I was satisfied that the Head of Banking, for reasons best known to himself and the appellant, chose to mislead this court about the nature of the interest payments that were paid by the six onshore companies.”

It is evident that the appellant's witness did not make a good impression on the court a quo which found that the allegations made in his evidence contradicted the facility letters and the External Loans Co-ordination Committee (ELCC) approvals which were produced in evidence. For instance, despite his insistence that Standard Chartered Bank PLC London was the lender, this allegation was contradicted in each facility letter wherein the appellant was stated to be the lender and the customer the borrower. Each agreement required interest to be paid to the appellant. In each facility letter, the appellant obtained a tax indemnity from the borrower.

The gist of the evidence of Mr Young, and the beneficiaries of the facility letters in question, was that the beneficiaries sourced offshore funds which they borrowed from Standard Chartered Bank PLC London (the offshore Bank) and repaid, with interest, to the offshore Bank; the appellant acting merely as a conduit pipe for facilitating access to the funds and for seeking Reserve Bank approval on behalf of both the borrowers and the offshore Bank. However, while their evidence corroborated each other, it conflicted with the documentary evidence placed by the appellant before the court purportedly in support of its case.

It seems to me that what clearly emerges from the contents of the facility letters and the External Loans Co-ordination Committee (ELCC) approvals, read together, is that the appellant borrowed money from the offshore Bank for on lending to the six onshore customers or borrowers. The six borrowers were to make payments in terms of their agreements with the appellant. In terms of these agreements, all repayments were to be applied, first, to interest and then to capital. Nothing in the facility agreements required the borrowers to make payment to any person other than the appellant. In the premises, Mr Young's evidence to the effect that the repayments, inclusive of interest, were made offshore to the offshore Bank on the appellant's instruction, called for an explanation.

The explanation given by Mr Young is that the Bank was the agent of the offshore Bank. But this explanation presents a further difficulty.

It is this.

The Master Risk Participation Agreement (MRPA) concluded between the appellant (as Grantor) and the offshore Bank (as Participant) and placed by the appellant before the court as an exhibit, expressly provides to the contrary. Clause 6.4 provides in relevant part:

“6.4 Relationship:

There is, and the Participant acknowledges that there is nothing in this Master Agreement or any Acceptance Agreement or any other agreement or understanding between the parties in relation to a participation which:

(a) Constitutes the Grantor an agent, fiduciary or trustee for the Participant;”

Granted, the Master Risk Participation Agreement (MRPA) further provides that the Acceptance Agreement would prevail over it. However, the Acceptance Agreement was not produced by the appellant and it was not part of the appellant's case that the Acceptance Agreement contained instructions requiring the appellant to ensure that payments were made offshore. Suffice it to say that the evidence presented by the appellant established no justification for payments in respect of the loans to be made offshore.

The second issue is, therefore, determined in favour of the respondent.

This appeal deals with five issues in four categories arising from the dis-allowance of the tax deductions that were claimed by the appellant in the tax year ending December 2009.

The four categories are in respect of expenditure on computer software, foreign currency accruals derived from leveraging a dividend pay-out by a public company quoted on both the Zimbabwe Stock Exchange and the Johannesburg Stock Exchange, a purported loan advanced to the appellant by a related foreign Bank, hereinafter referred to as the related party, that was subsequently purportedly written-off and the penalty imposed on the appellant by the respondent over the dividend leverage.

The appellant company is a registered commercial Bank. The respondent is a statutory body established in terms of the Zimbabwe Revenue Authority Act [Chapter 23:11].

At the appeal hearing, the appellant called the testimony of six witnesses and produced five (5) bundles of documents. Three of the witnesses flew from the headquarters of the foreign-based Banking group that controls both the appellant and the related party. These were the Group General Counsel, who has been with the group since 2002, the Financial Controller, who has been with the Banking group since 2008, and the Head of Central Finance and Chief Finance Officer of the Africa Division of the Banking group. The last three witnesses were the Chief Finance Officer and the Head of Global Markets and Treasury of the appellant and a tax consultant with a local firm of chartered accountants.

The five (5) bundles were the 71-paged bundle 1 of the correspondence between the parties in the period 15 May 2012 to 21 November 2013; the 83-paged bundle 2, of which pages 11-83 cover the licence and service agreements and the main agreement between the appellant and the main software licensor; the 41-paged bundle 3 that contains the Reserve Bank of Zimbabwe monetary policy statement on capitalisation of financial institutions; the 29-paged bundle 4 that covers the information on the dividend transaction and the 41-paged bundle 5 that contains the loan agreement and other ancillary documents between the appellant and the foreign-related Banking group.

The respondent did not lead any oral evidence but was content to rely on its 57-paged Commissioner's case.

On 18 November 2012, the respondent issued to the appellant three amended assessments in respect of income tax for the tax years ending December 2009, December 2010 and December 2011 [annexures A1, A2 and A3 of the respondent's case and pages 41-43 of bundle 1, respectively]. The appellant objected to these assessments and penalties on 17 December 2012 in accordance with the provisions of section 62 of the Income Tax Act [Chapter 23:06] [annexure B of respondent's case]. The respondent failed to determine the matter within three months. By virtue of section 62(4) of the Income Tax Act, the objection was deemed disallowed.

An appeal was duly noted to this Court on 27 March 2013.

The noting of the appeal triggered a belated response dated 19 April 2013 to the earlier objection. The response disallowed every objection except the one on interest earned on Nostro accounts and partially allowed the objection to penalties. On 29 April the respondent issued a further amended assessment, annexure G of the respondent's case, for the year ending December 2009. Objection to the further amended assessment resulted in yet another corrected assessment issued on 20 May 2013, annexure H of the respondent's case. The appellant paid the assessed tax on 20 May 2013 in the sum of USD2,038,425=86 in three installments between 1 June and 1 August 2013…,.

This appeal, by consent of the parties, is restricted to the objections in respect of the deductions that were disallowed in the tax return for the year ending 31 December 2009. The appellant indicated its intention to proceed with the other aspects of the appeal, placed in abeyance, soon after the delivery of judgment in this appeal.

THE COMPUTER SOFTWARE

The first issue for determination in regards to the software was whether the expenditure on the software was of a revenue or capital nature.

The appellant contended that the installation of new software for its banking business, at a cost of US$2,329,776=85, was for the purposes of trade or the production of income and therefore deductible in accordance with section 15(2)(a) of the Income Tax Act. The respondent disallowed it on the ground that the expenditure was an expense of a capital nature and was therefore not deductible under that section.

The evidence led by the appellant on the new software explained the justification for the software and how it was implemented. The appellant established, through the evidence of both the local and Group Chief Finance Officers, the objective necessity for the new software. In 2008, world record hyperinflation took its toll on the Zimbabwean economy. The Public Accountants and Auditors Board, Zimbabwe Accounting Practices Board and Institute of Chartered Accountants of Zimbabwe issued a persuasive but not prescriptive 33-page Guidance: Change in Functional Currency 2009 document for use by preparers and auditors of International Financial Reporting Standards compliant financial reports in Zimbabwe…,. On the basis of hyperinflation, estimated by the World Bank at 500 billion percent by the end 2008, multiple exchange rates escalating at corresponding rates and multiple interest rates ranging from 100% to 10,000% per annum the document categorised our moribund economy as a dysfunctional economy.

The digits in our currency grew exponentially to millions, billions, trillions and quintillions. The monetary authorities removed a total of 25 zeroes from the local currency (3 in 2006, 10 in August 2008 and 12 in January 2009). The core banking system, Bankmaster 7, of the appellant could cope with up to 12 digits. Once the balance reached 1 trillion, the system failed to cope and posted wrong customer transaction values and account balances. Internal creation of secondary accounts by splitting customer balances, and, in some instances, splitting a customer's account into 20 accounts to hold various balances just in order to contain the figures, using the manual system and constant removals of zeroes by the Bank in addition to those at the national level and advising the customer to multiply by a given figure to know the correct balances to reduce the digits offered temporary rather than permanent relief….,. These measures failed to curtail the presence of poor accounting records at some of the branches of the appellant as at 13 May 2008…,. The risk of a complete system failure was highlighted by both auditors and internal oversight committees of the Bank such as the Executive Management Committee, the Board Audit Committee and the Board of Directors.

Permanent relief came with the use of a new core banking system from Misys International Banking Systems (Pty) Ltd (Misys) that had capacity to accommodate up to 25 digits. The upgrade commenced with the execution of the agreement on 31 May 2008. It was test run on 15 November 2008 and was completed in July 2009 at a total cost of US$2,329,776=85.

The total cost of installation was not disputed by the respondent. The computation of the cost is set out at page 20 of bundle 2 and I reproduce it below:

Total cost of MUB system

GBP USD

Initial licence fees [BA89-ZIM] 250 000.00 [361 300.00]

System customisation and field configurations (ONO 9232-ZIM) 77 668.00 [112 245.79]

System customisation and field configurations (ONO 9232-ZIM) 56 118.00 [81 101.73]

User acceptance testing, conversion preparation; end

User training and go-live [BA92 (1) ZIM] 424 342.00 [613 259.06]

Post go-live support [BA 93 (1) ZIM] 113 600.00 [164 174.72]

Administering support, analysing support requests, providing

Resolution, testing/validating the support

Request resolution [BA 93 (1) ZIM] 313 819.00 [453 531.22]

Accommodation at Meikles for project team 295 000.00

VAT paid 179 151.00

Project overheads 70 013.33

TOTAL ------------------------------------------- 1 235 547.00 544 164.33

RATE 1.45 1.00

TOTAL (USD EQUIV) 1 785 612.52 544 164.33

GRAND TOTAL 2 329 776.85_

The main factual dispute between the parties was whether the appellant purchased the computer software or not.

The appellant stated that it purchased the right to use the software and not the software. The respondent contended that it purchased a copy of the computer software and not merely the right of use.

The local Chief Finance Officer of the appellant chaired the implementation te