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 team for the new system and was involved in the implementation of the whole project. He described the software that was installed by Misys International Banking Systems (Pty) Ltd (Misys). It was an intangible program loaded on disc. The licence and services agreement, BA 89-LA…, was executed on 31 May 2008 between the licensor, Misys of Dublin Ireland, the intervener/guarantor for payment by the licensee, the related party and the appellant as the licensee.

The licence was a personal, non-exclusive and non-transferrable one for the use of the software and documentation in exchange for maintenance and services set out in the agreement. Clause 8.0(i) bestowed:

“All intellectual property rights in any tailoring or additional functionality either created using the facilities of the software or within the software developed by the licensee pursuant to clause 6 [the right of appellant to alter the software to suit peculiar operational requirements for itself or other users] above shall as between the licensor and the licensee vest absolutely in the licensor and the licensee shall deliver such developments to the licensor and execute such instruments as the licensor may reasonably request, at the licensor's expense, to give effect to the licensor's rights as aforesaid.”

In terms of clause 8(ii)(c), where the licensor licenced any additional functionality to other customers it was obliged to provide a credit voucher to the appellant. The maximum value for the appellant was set at 50% of the contract value paid to the licensor by such new customer. The amount due to the appellant was based on the total development time and related expenses incurred in creating such additional functionality. The appellant could offset the credit value against 50% of the prevailing recurring licence fee or 25% of the initial licence fee due. Where it had not been licensed to another, it remained vested in the licensor.

In terms of clause 8(iv), the licensee had the right to withhold the additional functionality from the licensor. The licensor was permitted to develop similar additional functionality on its own initiative but could not utilise inside information to copy, decompile, dis-assemble, reverse engineer or search for source codes or underlying algorithms of such modifications. The licensor was protected from liability and could be indemnified by the appellant for any claims by other customers arising from the use of the modification.

While the import of clause 8 was to vest the modifications to the software by the appellant to the licensor, the benefit that accrued to the licensee from use of that software by third parties, in my view, demonstrated that such software was an income-producing machine.

Clause 15.0 provided a notice period of termination by either party of two years and clause 16 placed the duty to pay for the software and other supplies on the related party within 30 days of the due date of invoice once the appellant failed to honour such invoice.

The four schedules to the main agreement are set out on pages 21 to 69 of bundle 2. These four schedules to the agreement came into force on the same day as the main agreement. In case of conflict between the documents, the schedules superseded the main agreement.

Schedule BA91(1)–ZIM spells out the services to be provided to the licensee by the licensor in terms of the main agreement. It is in two parts. The first part deals with the time and material services to be supplied to support user acceptance test, conversion preparation, end-user training and go-live. It sets out the criteria for costing the time and material services provided. The broad areas covered for costing were based on notice period of the personnel and each personnel grade daily fee rate, overtime, travel, accommodation and visa costs.

Part two set out the provisions expected from the licensee for the implementation of the project. These were grouped into three categories of technical facilities, business provisions and software. Under technical facilities are listed eight (8) stages of implementation. The first being the provision of infrastructure described as entire hardware, operating system and standard software necessary for overall licensee solution. The other stages involved connectivity with third-party systems and provision of documentation, installation of operating and other system software and configuration of the hardware. Under business provisions fall testing concepts based on test cases, test data and testing activities, training concepts, documents and training implementation and management of the implementation process.

Schedule BA 93(1)-ZIM, for time and materials, was also in two parts. It listed the personnel expected from the licensee from administrative support, analysts, to validators and the criteria for the invoicing of the licensee by the licensor. The technical facilities, business provisions and software required were similar to those set out in BA 92(1) ZIM - part 2.

Schedule BA89-ZIM was a statement of the software and documentation to be licenced and maintenance to be provided to the licensee by the licensor. The licensed software was identified as BankFusion Universal Banking (BFUB) release 1.0 consisting of 10 modules and 39 sub-modules, BankFusion Integration Framework for Universal Banking (BFIFUB) release 1.0 consisting of four modules and 12 sub-modules; BankFusion Design Workbench (BFDW) release 1.0 consisting of 7 modules and 22 sub-modules. The licenced software was further confirmed at page 33 of bundle 2.

The BankFusion Universal Banking (BFUB) modules and sub-modules, in parenthesis, that were provided were Foundation services (data management, financial processes, charges, interest, limits, static data management, process scheduler, security framework, event framework for authorisations and alerts), customer party management (customer acquisition, party-relationship management), retail deposits (current, time, notice, savings), retail lending (origination, mortgages, consumer loans, commercial loans, offsets), Treasury-Money market (Bills, CDs, securities, bonds), Treasury–foreign exchange (spots, forwards, options, swaps), payments (standing orders, sweeps, batch payment processing, money transmission services), international payments (including swift) (outward defined list of messages supported, SWIFT statements, financial management (general ledger, profit and loss, balance sheet, FX revaluation, accruals) and collateral management.

The BankFusion Integration Framework for Universal Banking (BFIFUB) release 1.0 consisted of Interaction methods being inward notifications, outward notifications, request-response; integration protocols [XML, Byte Stream, SMTP, WSDL JMX] application specific interfaces [branchpower, CR2 ATM Sparrow system, IBSnet, MoneyGram, Fontis] external job scheduler gateway.

The BankFusion Design Workbench (BFDW) release 1.0 consisted of the following modules and sub-modules: Producer design, Process design (business object connector, sub-processor execution, process flow branching, for loop, Do-while lop, While-do-loop, table lop); external interaction-screen designer (attribute Type definition, Attribute Type validation, screen style definition, attributable event/rule definition, sub-process calling function,) External Interaction-message builder [byte stream, XML, Email (SMTP), Web services, expression/rules builder, software component builder (activity step, feature, extension points) and Business object component builder (user-definition attributes, attribute ID generator, attribute ID valuator).

I have listed the modules and sub-modules of the software to dispel any mystique that may be attached to the term. In my view, the modules and sub-modules listed on pages 29-30 of bundle 2 of the appellant's case were the basic structures (frameworks) which produced the income for the Bank - they were not the income. They formed an integral and indivisible part of the income-generating machine for the Bank. They were much like the hardware for the Bank.

The initial licence fee (ILF) of GBP250,000= incurred was due on the effective date of schedule BA89-ZIM and thereafter a recurring licence fee (RLF) of GBP37,500= was due and payable in advance on 1 May each calendar year following delivery.

Schedule No. ONO 9232-ZIM was the statement of the services provided to the licensee for specified scope of works. A fixed price of GBP77,668= was set for the installation, configuration and system test of the software and thereafter appropriate training based on technical facilities, business provisions and software…,. The phases of implementation were set out at pages 41-43. The key activities and responsibilities of the parties were shown on pages 44 to 48. Interface with third parties was the subject of pages 45 to 51 and deliverables and change of control from licensor to licensee were stated from 49 to 61.

In the excerpts to the financial statement of the appellant, from annexure J to annexure M3 to the Commissioner's case, covering the 2009, 2010 and 2011 financial years the appellant treated the computer software as an intangible asset and amortised it. In the notes of its accounting policies, replicated in the three financial years in annexure M1, M2 and M3, the appellant stated that:

“Intangible assets: computer software:

Generally, costs associated with developing or maintaining computer software programmes and the acquisition of software licenses are recognised as an expense as incurred. However, direct computer software development costs that are clearly associated with an identifiable and unique system, which will be controlled by the Bank and have a probable future economic benefit beyond one year, are recognised as intangible assets. Capitalisation is further limited to development costs where the Bank is able to demonstrate its intention and ability to complete and use the software, the technical feasibility of the development, the availability of resources to complete the development, how the development will generate probable future economic benefits and the ability to reliably measure costs relating to the development. Direct costs include employee costs arising from software development and an appropriate portion of relevant overheads. Subsequent expenditure on computer software is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates. Direct computer software development costs recognised as intangible assets are amortised on the straight line basis at rates appropriate to the expected useful lives of the assets (two to 10 years) and are carried at cost less accumulated amortisation and accumulated impairment losses. The carrying amount of capitalised computer software is reviewed annually and is written down when impaired.”

The economic benefit of the MUB system, as conceded by the local Chief Finance Officer, did not just have a probable future economic benefit beyond one year but was still in use even as he testified on 1 September 2014 - some 5 years later.

The respondent contended that the future economic benefit that accrued to the appellant was synonymous with the enduring benefit test propounded in British Insulated Helsby Cables Ltd v Atherton (1926) AC 205. It was held, in that case, that where an expenditure was made with a view to bringing into existence an asset or an advantage for the enduring benefit of trade there was very good reason for treating such expenditure as properly attributable to capital and not to revenue.

In my view, the computer software installed by the appellant was intended to procure an advantage for the enduring benefit of the appellant's banking business. It was not transient but durable in nature. The two year notice period to discontinue use and the length of the future economic benefit of up to 10 years, enunciated in the accounting policy, is clear testimony of the enduring nature of the software. The expenditure on the software thus amounted to capital expenditure.

The respondent also relied on Amway India Enterprises v Dy CIT (2008) 111 ITD 112 for the submission that software expenditure was of a capital rather than revenue nature. The case extensively surveyed the Indian tax topography and extensively examined American cases in point. In paragraph [43] and [44] it unveiled the “three tests generally applied to decide the nature of expenditure as to whether it is capital or revenue, (as) the test of enduring benefit, ownership test and functional test” that are based on practical and business point of view and sound principles of accountancy.

In India, expenditure is treated as capital expenditure either when it results in the acquisition of ownership of a capital asset (ownership test) or when it results in the accrual of an advantage of an enduring nature to the user in the capital field (the enduring and functional test). Accrual of benefit in the capital field was defined in paragraph [44] to mean a benefit that forms part of the profit–making apparatus of the taxpayer's business.

In the present matter, I agree with counsel for the appellant that the appellant did not acquire ownership of the software. The first arm of the test does not apply to it.

The use of the software, by the appellant's own admission, resulted in accrual of an enduring benefit to its business. The treatment of the software as an intangible asset, albeit in compliance with International Financial Reporting Standards and the recommendations of the Public Accountants and Auditors Board, the potential to derive revenue from tailoring or additional functionality of the software and the close affinity of the software to computer hardware (incorporation of information in the software into the user's computer-programmed at user's site or from remote supplier site by wireless or use of punch cards, discs magnetic tapes), in my view, all form part of the profit-making apparatus of the appellant's business. After all, software, in my view, constitutes the living and inseparable force of a computer.

My conclusions in this regard resonate with those of the Special Bench in Amway India Enterprises v Dy CIT (2008) 111 ITD 112. That Special Bench was set by the President of India, in terms of Indian tax legislation, to determine the issue whether software was of a capital or revenue nature in view of the many conflicting decisions of various Division Benches in India. It was to provide a holistic determination on the issue.

The facts were that the assessee, Amway, claimed a deduction for expenditure incurred for software in its tax return for 2001-2002 tax year. It acquired eight (8) computer application software programmes whose nature and purpose were outlined in the judgment. The assessee contended that the expenditure incurred in obtaining the licence to use the application software was of a revenue nature as it only facilitated its day to day operations and that the life of such software was invariably short and bound to become technically obsolete pretty quickly.

The assessing officer found all the software had long-lasting use of between 3 and 4 years. He dismissed the claim on the basis that the software was part of the plant and machinery of the assessee and gave an enduring benefit to it.

The taxpayer appealed to the Division Bench. The taxman contended that acquiring a licence to use software was the common mode of “purchase” of software and that expenditure incurred of such software that gave an enduring benefit to the assessee was of a capital nature. The Division Bench held that computer software was an intangible asset that constituted an integral part of a computer and without which a computer could not function was of a capital nature.

The appeal was set before the Special Bench.

The taxpayer argued before the Special Bench, much along the lines followed by counsel for the appellant in the present matter, that it was a mere non-exclusive licensee with no title for improvements, modifications and derivatives as these were vested in the licensor.

The Special Bench held;

(i) Firstly, in paragraphs [55] and [61], on the authority of various Supreme Court of India cases, that software was not an intangible but a tangible asset “though a licensee, the person purchasing the disk or other medium containing the software is owner to the extent of the rights comprised in the license.”

(ii) Secondly, that the acquisition of computer software, or, for that matter, the licence to use such software, amounted to an acquisition of a tangible asset for which the assessee became the owner thereof;

(iii) Thirdly, that where the lifespan of the software was under two years it could be considered as revenue expenditure but where the utility value went beyond two years, as long as it met the functional test, such expenditure would be considered an accrual of an enduring nature; and

(iv) Lastly, that the application of the functional test was more important and relevant to the consideration of whether software expenditure was of a revenue or capital nature regard being had to its use in the business of the taxpayer.

I am satisfied that applying practical business and sound accounting principles emanating from International Financial Reporting Standards that informed the treatment of software as an amortised intangible asset in the financial accounts of the appellant for three consecutive years all expenditure attaching to computer software was of a capital nature. I, therefore, agree with counsel for the respondent that Commissioner of Taxes v Rendle 1964 RLR 463 (AD)…, dealt with deduction of designed and fortuitous expenditure of a revenue nature and does not apply in the instant case.

The first issue referred for determination, whether the cost of computer software acquired by the appellant was a revenue expense which was allowable as a deduction in terms of section 15(2)(a) of the Income Tax Act [Chapter 23:06] or constituted an expenditure of a capital nature and thus not allowable as a deduction is answered in favour of the respondent. The cost of the computer software acquired by the appellant was not deductible as it constituted capital expenditure. It was properly disallowed….,.

In the light of these findings, I agree with counsel for the appellant that the respondent is obliged to allow the deduction of special initial allowance on the cost of the software in question at the rate prescribed in the Income Tax Act.

I, therefore, hold that software expenditure was of a capital nature. The respondent correctly disallowed the claim for deduction of US$2,329,776=85 from the appellant's tax return for the year ending 31 December 2009….,.

1. The appeal against the dis-allowance on the claim for deduction of software expenditure in the sum of US$2,329,776=85 is dismissed.

2….,.

3…,.

4. The respondent is directed to issue a further amended assessment for the year ending 31 December 2009:

(a) Disallowing the deduction of software expenditure in the sum US$2,329,776=85;

(b) Allowing the deduction of the prescribed special initial allowance in terms of the Income Tax Act in respect of the expenditure on software in (a) above;

THE DIVIDEND TRANSACTION

The third issue was whether the amount obtained by the appellant in the dividend transaction should be treated as the appellant's taxable income or as non-taxable income when calculating the appellant's taxable income.

The facts relating to the dividend transaction were common cause. The Head of Global Markets for the appellant and the local Chief Finance Officer testified on what transpired. The 29-paged bundle 4 confirmed the paper trail of the events.

On 17 December 2008, the appellant was requested by a foreign-based company to act as its agent in payment of an interim dividend for its Zimbabwe-registered shareholders. The timetable for the last day of trade for receipt of dividend, 2 January 2009; the ex-dividend share trade, 5 January 2009; the currency conversion date, 9 January 2009; and the dividend payment date, 12 January 2009 were all provided. ZAR45,580,500=, described by the local Chief Finance Officer as a capital amount to pay the dividend, was transferred into the Nostro account of the appellant on 8 January 2009. It was instructed to pay the non-resident shareholders on the Zimbabwe register in United States dollars. The sum of R366,503=40 was converted to US$38,989=72…, at the rate ZAR9=40: US$1 and appropriated for that purpose. The balance of ZAR45,213,996=60 equivalent to US$4,521,340= was converted to

ZW$158,729,988,063,723,967=24 (ZW$158,7 trillion), which, at that time, was the functional local currency for payment to local registered shareholders. The exchange rate used for the conversion on 9 January 2009 was ZW$3,510,638,287=87 to ZAR1=…,.

On 12 January 2009, the appellant transferred the sum of ZW$158,7 trillion to the local transfer secretaries for payment. The local resident shareholders were duly paid in the local functional currency.

The appellant utilized its own stock of local currency of ZW$158,7 trillion and retained the equivalent sum of US$4,521,340= in its New York Nostro account. Between 13 and 16 January 2009, the appellant sold US$2 million, inclusive of commission of 5% amounting to US$100,000=, to the Reserve Bank of Zimbabwe and remained with a balance of US$2,521,340=. The commission was accounted for in its income tax return for the tax year ending December 2009.

The introduction of the multi-currency regime, on 29 January 2009, practically, though not legally, rendered the local currency defunct. In line with the requirements of the International Financial Reporting Standards and recommendations from the Public Accountants and Auditors Board of Zimbabwe the appellant debited the sum of US$2,521,340=44 in its United States dollar balance sheet and made a corresponding credit entry in its Zimbabwe dollar balance sheet. It excluded local currency in its United States dollar denominated financial statements for the period 1 January to 31 December 2009. Its capital account showed United States dollar assets had increased by US$2,521,340=44. A corresponding accounting entry was posted to the income statement to balance the account. The amount was not shown as income but was treated in the same way as were other assets such as buildings, furniture and foreign currency balances acquired in local currency. These were revalued into United States dollar balances and an accounting credit entered in the income statement representing current year reserves merely to complete the double entry accounting framework.

It was the local chief financial officer's uncontroverted testimony that the US$2,521,340=44 was credited to the income statement to fulfil these double entry accounting requirements prompted by dollarization. It did not represent taxable income. In the tax return submitted to the respondent, the appellant claimed a deduction against income for the sum in issue. The respondent disallowed the claim made by the appellant that this amount constituted an asset of a capital nature and added it back to income for the appellant for the year ending December 2009 as being an exceptional gain made as result of the introduction of the multi-currency regime.

The appellant's objection was disallowed hence the present appeal.

The appellant contended that the sum of US$4,521,340= from which the balance of US$2,521,340= derived was of a capital nature and could not be assessed to tax as income. The respondent contended that it was income.

The local Chief Finance Officer and Head of Global Banking averred that the ZW$158.7 trillion exchanged for US$4,521,340=44 was capital in the hands of the appellant. The appellant used the local currency to purchase the United States dollars, which remained a financial asset in its hands. His evidence was that one asset was disposed of and another purchased. The amount in issue did not change character merely because the appellant held onto it. The basis on which the respondent treated the amount as income is not apparent.

Four reasons were advanced in the determination of the respondent of 30 November 2012.

(i) The first was the purported absence of proof that the money came from the foreign based company;

(ii) The second was the absence of communication between the appellant and the foreign-based company in regards to purchase of the dividend outlay;

(iii) The third was the absence of instructions to transfer the amount to the transfer secretaries; and

(iv) The fourth was the exceptional foreign exchange gain derived from the appellant's ordinary course of trade. The fourth reason was cast in different wording in paragraph 17 and 19 of the Commissioner's case where it was contended that the appellant benefited from purchasing the amount at favourable exchange rates.

Counsel for the appellant contended, on the authority of Meman & Anor v Controller of Customs & Excise 1987 (1) ZLR 170 (SC)…, and Standard Chartered Bank Zimbabwe Ltd v China Shougang International SC49-13…, that the appellant became the owner of the funds on deposit. He accordingly submitted that the funds were capital assets in the hands of the Bank from which it could derive income.

The approach to adopt was spelt out in Natal Estates Ltd v Secretary for Inland Revenue 1975 (4) SA 177…, thus:

“In deciding whether a case is one of realising a capital asset or of carrying on a business or embarking upon a scheme of selling land for profit, one must think one's way through all of the particular facts of each case. Important considerations include, inter alia, the intention of the owner; both at the time of buying the land and when selling it (for his intention may have changed in the interim), the objects of the owner, if a company, the activities of the owner's ipse dixit as to intention, where the owner subdivides the land, the planning extent, duration, nature, degree, organisation and marketing operations of the enterprise; and the relationship of all this to the ordinary commercial concept of carrying on business or embarking on a scheme for profit. Those considerations are not individually decisive and the list is not exhaustive. From the totality of the facts one enquires whether it can be said that the owner had crossed the Rubicon and gone over to the business, or embarked upon a scheme, of selling such land for profit, using the land as his stock-in-trade. Lastly, one does not lose sight of the incidence of onus of proving non-liability, imposed by section 82 of the Act, on the person claiming such non-liability, in this case, the appellant.”

The commercial concept of a Bank is to mobilise deposits for purposes of earning revenue income from charges and fees, interest and investments. The obvious stock-in-trade of a Bank, amongst others, is money. The deposits the Bank mobilises, according to Meman & Anor v Controller of Customs & Excise 1987 (1) ZLR 170 (SC) and Standard Chartered Bank Zimbabwe Ltd v China Shougang International SC49-13 are owned by the Bank in the sense that the Bank has ultimate control of those funds. It would seem to me that the deposits held by a Bank would constitute trading capital for the Bank. It is accepted in Banking Law and practice that capital exists in two forms. It may either be fixed capital or floating/circulating capital. In Solaglass Finance Co (Pty) Ltd v CIR 1991 (2) SA 257 (A)…, FRIEDMAN AJA stated:

“As what the appellant lost was capital which it advanced to the various debtors and which has become irrecoverable, it is necessary to decide whether the capital thus lost was fixed or floating (sometimes called circulating) capital. If it was fixed capital, the loss was of a capital nature; and if it was floating, the loss was of a revenue nature.

See Stone v Secretary for Inland Revenue 1974 (3) SA 584 (A) at 595A-B.

The distinction between fixed and floating or circulating capital was explained by INNES CJ in Commissioner for Inland Revenue v George Forest Timber Co Ltd 1924 AD 516 at 524, as follows:

'Capital, it should be remembered, may be either fixed or floating. I take the substantial difference to be that floating capital is consumed or disappears in the very process of production, while fixed capital does not; though it produces fresh wealth, it remains intact.'

See also the New State Areas case supra at 620-1 where WATERMEYER CJ, after quoting the above passage, stated:

'As to the latter (expenditure of a capital nature), the distinction must be remembered between floating or circulating and fixed capital. When the capital employed in a business is frequently changing its form from money to goods and vice versa (eg the purchase and sale of stock by a merchant or the purchase of raw material by a manufacturer for the purpose of conversion to a manufactured article), and this is done for the purpose of making a profit, then the capital so employed is floating capital. The expenditure of a capital nature, the deduction of which is prohibited under section 11(2), is expenditure of a fixed capital nature, not expenditure of a floating capital nature, because expenditure which constitutes the use of floating capital for the purpose of earning a profit, such as the purchase price of stock in trade, must necessarily be deducted from the proceeds of the sale of stock in trade in order to arrive at the taxable income derived by the taxpayer from that trade.'

In Ammonia Soda Co v Chamberlain [1918] 1 Ch 266 SWINFEN EADY LJ defined fixed capital as follows at 286:

'That which a company retains, in the shape of assets upon which the subscribed capital has been expended, and which assets either themselves produce income, independent of any further action by the company, or being retained by the company are made use of to produce income or gain profits.'

At 286-7 he described circulating capital in the following terms:

'It is a portion of the subscribed capital of the company intended to be used by being temporarily parted with and circulated in business, in the form of money, goods or other assets, and which, or the proceeds of which, are intended to return to the company with an increment, and are intended to be used again and again, and to always return with some accretion. Thus, the capital with which a trader buys goods circulates; he parts with it, and with the goods bought by it, intending to receive it back again with profit arising from the resale of the goods. A banker lending money to a customer parts with his money, and thus circulates it, hoping and intending to receive it back with interest.'

The distinction and its tax ramifications was approved by BOTHA JA, who delivered the majority decision in Solaglass, supra, at 277J-278A, in these words:

“I have had the benefit of reading the judgment of my Brother Friedman. In his judgment, it is held:

(a) That the capital which the appellant lost as a result of being unable to recover the loans in question was not fixed, but circulating capital, and, therefore, of a revenue nature, and that the losses in question were accordingly deductible in terms of s11(a); and

(b) That the losses were not disqualified from deduction by reason of the provisions of s 23(g).

I agree with (a),but I respectfully differ on (b).”

The principle that I extract from the distinction set out in the above cited cases is that a gain or loss arising from fixed capital would be of a capital nature while a loss or gain arising from floating capital would be of a revenue nature.

The appellant did not disclose whether the ZWD158,7 trillion was fixed capital or floating capital. The evidence of both the local chief financial officer and global head of banking disclosed that the amount in question was derived from the appellant's own funds. The impression I had was that the witnesses were referring to floating capital. In the words of INNES CJ in Commissioner for Inland Revenue v George Forest Timber Co Ltd 1924 AD 516 the ZW$158,7 trillion was consumed and disappeared in the very process of production. It did not remain intact. It was therefore floating capital. The new product was ZAR45,213,996=60 which was soon thereafter converted to US$4,521,340=40.

Counsel for the respondent submitted that the appellant made a profit of US$2,521,340=40 on the dividend transaction for which he is liable to income tax. He relied on the appellant's statement on page 7 of bundle 1. The tax consultant wrote to the appellant on 5 September 2012 that:

“As explained in the letter of 6^th June 2012, [the foreign company] transferred ZAR45,580,499=95 to [appellant] to fund dividend pay-outs to their shareholders (resident and non-resident shareholders in Zimbabwe) in January 2009. As the economy had not yet dollarized in January 2009, the dividend pay-out to Zimbabwean shareholders was to be in Zimbabwe dollars thus [appellant] negotiated with the Reserve Bank of Zimbabwe (RBZ) for a rate for the transaction in comparison to the official ZWD:USD exchange rates obtaining then. The ZAR:USD exchange rate at the time resulted in the ZAR amount translating to USD4,560,330=16. USD2,000,000= of this was sold to the RBZ in exchange for ZWD. A further USD38,989=72 was paid out to non-resident shareholders and [appellant] then provided the ZWD equivalent of USD2,521,340=44 that was paid to the Zimbabwe residents. This is reflected in the table provided to you showing:”

(The table did show that the amount converted to ZWD158,7 trillion was the sum of USD4,521,340=44 and not USD2,521,340=44).

Counsel for the respondent reasoned that the equivalent amount to ZAR45,213,996=60 of USD4,521,340=40 should have been exchanged at the official exchange and not at the favourable exchange rate negotiated with the Reserve Bank of Zimbabwe. He contended that the favourable exchange rate resulted in the disposal of USD2 million for ZWD158,7 trillion that was paid out to the local registered shareholders while the balance of USD2,521,340=40 accrued to the appellant as profit. He suggested that had the appellant exchanged the whole amount at the official rate all the USD4,521,340=40 would have been taken up by the Reserve Bank and the local shareholders would have received the correct value on the dividends while the appellant, as a middleman, would have maintained a zero balance. He found confirmation for his contention in annexure N to the Commissioner's case, the tax computation by the appellant for the tax year ending December 2009 in which it claimed a deduction of the alleged profit from taxable income as a revaluation of investment property.

The contentions and submissions by counsel for the respondent are not supported by the evidence led in this court. The evidence was that the balance of the rands that remained after appropriating payment for foreign shareholders on the Zimbabwe register was all converted to Zimbabwe dollars at the favourable rate negotiated with the Central Bank. There is no evidence to support the suggestion that USD2 million was converted to ZWD158,7 trillion. Had such evidence been adduced, the submission might have had merit. The tenor of the contentions and submissions seeks to deny the appellant the right it exercised to interpose as the purchaser of the Rands directly converted into Zimbabwe dollars in accordance with the mandate of the foreign company that paid out the dividend.

In my view, the Rands did not constitute revenue income but remained floating capital of equivalent value - albeit in the form of foreign currency. It seems to me that the ZAR45 million, when resident in the Rand Nostro account of the appellant, was not revenue income. It was floating capital from which revenue income would be earned on disposal, as clearly exemplified by the sale of the US$2 million to the Reserve Bank of Zimbabwe, or on investment. It would be illogical to aver that the appellant purchased the foreign currency that it already owned. The two local employees of the appellant testified that ZW$158,7 trillion constituted capital in the possession of the appellant. It would also be illogical to aver that the appellant exchanged the local currency it owned for the United States dollars it already owned. In Meman & Anor v Controller of Customs & Excise 1987 (1) ZLR 170 (SC)…, McNALLY JA warned that:

“Whether you could call that the Bank's own money would depend on the context - in particular what you are contrasting it with.”

In the context of the present matter, the ZAR45 million did not become the appellant's money. It was deposited with specific instructions to transmit it in functional currency to the transfer secretaries for payment of dividends to shareholders in the Zimbabwe register. In my view, whoever the owner of the funds was between the company that transmitted them to the Nostro account of the appellant, the transfer secretaries and the shareholders in the Zimbabwe register, what is clear is that these funds were held in trust by the appellant. The appellant could not, in context, be the owner of the funds at that stage.

The instructions from the company that declared the dividend were that the Rands be converted to United States dollars for the payment of the 106 foreign shareholders registered on the Zimbabwe register and the balance in Zimbabwe dollars for the account of the local shareholders. The documentation establishes that this was done at the rate of ZAR9:40 to US$1 and ZW$3.5 billion to ZAR1.

The appellant utilised its own Zimbabwe funds to purchase the Rands. The evidence of two of its local employees, that it utilised local capital funds to purchase the Rands, was not disputed.

It thereafter converted the Rands into United States dollars, a portion of which it sold to the Reserve Bank of Zimbabwe. It earned commission from the sale. The respondent did not question this transaction but was happy to treat the amount sold to the Reserve Bank of Zimbabwe (RBZ) as the income-earning apparatus.

I am unable to distinguish between the portion that was sold to the Reserve Bank of Zimbabwe (RBZ) and the one that remained in the appellant's possession. It seems to me that both sums were capital in nature. I am unable to conceptualize how a capital sum in Zimbabwe dollars that is utilised to purchase an equivalent amount in South African Rands that are converted to United States dollars could be apportioned to revenue. The RBZ transaction suggests that had the local currency remained functional, the appellant would have had, at some stage, to dispose it to best advantage or utilize it to earn income.

I am satisfied that the appellant has discharged the onus on it to show, on a balance of probabilities, that the sum of US$2,521,340=40 constituted capital and not revenue. While I find in favour of the appellant in regards to the nature of the amount in issue, I hold also that it was remiss of the appellant to claim this amount as an allowable capital deduction, in circumstances that are not sanctioned by the Income Tax Act, from taxable income….,.

1….,.

2. The appeal against the dividend transaction and the loan write-off is allowed.

3…,.

4. The respondent is directed to issue a further amended assessment for the year ending 31 December 2009:

(a)…,.

(b)…,.

(c) Dis-allowing the deduction of US$2,521,340=44 from the taxable income of the appellant;

LOAN AGREEMENT OR BESTOWED BENEFIT

The fourth issue for determination was whether the amount of R27,632,759=71, that was provided to the appellant by the related party, was a genuine and bona fide loan or was in effect a grant camouflaged as a loan.

The facts on this issue are generally common cause. The parties disagree on their interpretation. All the three foreign-based witnesses called by the appellant, and the local chief financial officer, testified on what transpired. The documents in the 41-paged bundle exhibit 5 cover the events connected to this issue.

The appellant executed an agreement of supply with the supplier of the MUB core banking system on 31 May 2008. In terms of clause 16 of that agreement the related party undertook to meet the financial obligations of the appellant to the supplier in the event that the appellant failed to pay for the supplies within 30 days of the due date of invoice.

The appellant entered into an undated one-paged loan agreement…, with the related party. The related party and the appellant are both subsidiaries of a foreign-based holding company. The agreement was witnessed by two separate witnesses for each signatory. The related party advanced a temporary interest-free loan facility to the appellant to cover the costs incurred by the appellant in the development and implementation of the new MUB core banking system…,. The loan facility was advanced to enable the appellant to settle financial obligations in foreign currency for the MUB core banking system. It was structured in such a way that the related party paid the relevant charges due from the appellant from 1 May 2008 directly to the suppliers of the hardware and software of the core banking system. The appellant undertook to repay all funds paid by 31 December 2009.

The suppliers of the hardware and software invoiced the appellant within 30 days of rendering each supply and service. The invoiced amounts were honoured by the related party within a further 30 days of the invoiced date. The related party was invoiced with a charge of GBP250,000= equivalent to ZAR4,3 million, by MIBS, for BankFusion software supplied to the appellant. On 20 October 2008 the related party successfully applied for exchange control authority…, from the South African Reserve Bank to make payment even though it had committed itself to pay without exchange control approval. The retrospective approval of the incurred contractual obligation and authority to make prospective payment…, dated 12 November 2008, were premised on the undertaking by the related party that the appellant would be invoiced separately to reimburse the related party and that no offset against management fees was contemplated. Again, on 14 May 2009…, the related party applied to the exchange control authority in its country of domicile for payment of US$294,681=94 equivalent to ZAR2,504,796= to TCL of the United Kingdom due for computer parts and accessories essential to support the appellant's IT systems infrastructure supplied to the appellant. It confirmed that the appellant held Reserve Bank of Zimbabwe exchange control authority to pay but was unable to do so due to the endemic shortage of foreign currency in Zimbabwe. Further, it confirmed that it would recover the amount from the appellant once it was in a position to pay. The application was approved on 25 May 2009…, on the basis of the anticipated recovery. The appellant established, through the evidence of its witnesses and the documents…, that the related party paid the equivalent of the total sum of ZAR27,632,795=71 to the three suppliers.

The appellant repaid ZAR3,597,753=73 to the related party in three tranches on 19 January, 18 June and 6 August 2009. The dates of repayment and amounts paid are set out in the appellant's bank statement of 3 January 2010 with the related party…,.

The debts incurred by the related party, on behalf of the appellant, between 19 August and 30 September 2008 were all cleared with the payment, on 16 January 2009…, of a lump sum of ZAR2 million equivalent to US$200,000= for which exchange control applications to purchase such foreign currency was made to the Reserve Bank of Zimbabwe (RBZ) on 15 June 2009 (for US$150,000= and 4 August 2009 for US$50,000=….,. for IT support and development costs. The US$200,000= was transmitted from the appellant's Nostro account with the Deutsche Bank Trust Company in New York to the related party on 23 June…, and 5 August 2009….,. The related party, however, paid the suppliers of the appellant the debit balance due of ZAR24,035,041=98 between 24 March and 6 August 2009. The related party paid the equivalent of ZAR17,723,954= to MIFS for system development and implementation, ZAR654,429= to TGL for hardware and ZAR656,659= to OT for training purposes. The breakdown of these payments is set out in the Zimbabwe New Account reconciliation of 19 August 2009…,.

The outstanding loan amount owed by the appellant, as at 30 November 2009, in the sum of ZAR24,035,042= was cancelled by the related party on 31 December 2009. The signatory to the loan agreement and his two previous witnesses appended their signatures on the loan facility cancellation document…,. The cancellation recorded that the total loan amount paid to the three vendors was in the sum of ZAR24,035,042= being payments of ZAR17,723,954= to MIFS for system development and implementation, ZAR654,429= to TGL for hardware and ZAR656,659= to OT for training purposes.

The cancellation, according to the evidence of the general Group Counsel, the Head Group Central Finance/Chief Finance Officer, the Financial Controller of the related party, and the local Chief Finance Officer, was prompted by the need to recapitalize the appellant in the wake of new United States dollar denominated prescribed minimum capital requirements for all financial institutions mandated by S.I.178 of 2008 and decreed by the Reserve Bank of Zimbabwe in a mid-monetary policy statement dated 30 July 2009…,.

The statement recognized the existence of capital erosion and diminution of bank balances of financial institutions denominated in local currency by chronic hyperinflation and the change-over to the multi-currency system. A phased plan for enforcement of the prescribed minimum capital requirements was outlined. All financial institutions were required to meet one-half of the prescribed capital levels, being US$6,25 million by 30 September 2009 and the full levels of US$ 12,5 million by 31 March 2010 for commercial banks such as the appellant.

The e-mail exchanges between the local and group chief finance officers, commencing on 4 November and ending on 9 December 2009, is covered from page 15-17 of bundle 5. The appellant requested for its sundry creditors account of liabilities as at 31 October 2009. It also requested for the account to be dispatched every month end. The indebtedness as at 12 November 2009 was indicated. In consequence of the write-off of the outstanding debt as at 30 November a nil debtor book balance was submitted on 8 December 2009. On 9 December the local chief finance officer wrote to his head office counterpart that the write-off would “definitely go a long way toward our capitalisation exercise.” He was advised in the response of the same day that the group general counsel was making progress on the legal issue with a likelihood of the related party directors signing off some proposed resolution on capitalisation (transfer to reserves).

The email supports that the appellant tracked the debt and the write-off was linked to capitalisation.

In the monetary policy statement, the Reserve Bank of Zimbabwe indicated that the recapitalisation plans submitted by financial institutions showed that capital injections were expected from holding companies, private placements, rights issues, mergers and strategic partnerships with new investors. The appellant did not produce to the respondent or this court the recapitalisation plan it submitted to the Reserve Bank of Zimbabwe. Neither did it produce the resolution, if any, that the directors of the related party passed in regards to the capitalisation of the appellant.

In response to an enquiry of 12 March 2013, from SARS, the related party revealed on 5 July 2013…, amongst other things, that the standard repayment terms availed to the appellant was 30 days from the date of payment to the supplier. The related party was invoiced by the suppliers on 24 March, 28 April, 20 May and 8 June 2009. Save for the repayment of ZAR3,597,753=73, the appellant was unable to pay. For tax purposes, the related party debited the appellant's loan account and credited its own income statement. It did not make any tax adjustment in the 2009 income tax return but claimed the loan write off as a deduction of a money lender. The related party wrote-off the outstanding loan account. The related party cleared the appellant's loan account in its balance sheet with a corresponding expense in the related party's income statement.

The evidence of the Group General Counsel of the holding company and the financial controller of the related party established that intra-group loan agreements were deliberately short form memorials that served the dual purpose of creating joint contractual obligations on the one hand and accounting and audit trail on the other. The Group General Counsel further established that section 70A of the South African Bank Act of 1990 requires a Bank-controlling holding company, for which the Group General Counsel worked and which owned both the related party and appellant, to meet the minimum capital requirements prescribed by the relevant regulatory authorities in the jurisdiction its subsidiaries operated in. The holding company complied with the Reserve Bank of Zimbabwe directive to recapitalize the appellant by waiving the loan repayment and appropriating the proceeds to capital.

The legal arguments

The respondent basically contented that the appellant and the related party consummated a simulated loan agreement to camouflage a grant or subsidy advanced to the appellant. Accordingly, it treated the sum of ZAR27,632,795=71 as a grant or subsidy as contemplated in section 8(1)(m) of the Income Tax Act and added it back to gross income in the appellant's 2009 tax return.

Counsel for the appellant submitted that the appellant had discharged the onus on it to establish that the amount in issue constituted a loan and was therefore not subject to income tax.

Counsel for the respondent submitted, on the authority of Commissioner for South African Revenue Services v MWK Ltd 2010 ZASCA 168; 2011 (2) SA 67 (SCA); (2011) 73 SATC 55, that the loan agreement was a simulated agreement. At paragraph 55, LEWIS JA stated that:

“[55] In my view, the test to determine simulation cannot simply be whether there is an intention to give effect to a contract in accordance with its terms. Invariably, where parties' structure a transaction to achieve an objective other than the one ostensibly achieved they will intend to give effect to the transaction on the terms agreed. The test should thus go further and require an examination of the commercial sense of the transaction: of its real substance and purpose. If the purpose of the transaction is only to achieve an object that allows the evasion of tax, or of a peremptory law, then it will be regarded as simulated. And the mere fact that parties do perform in terms of the contract does not show that it is not simulated: the charade of performance is generally meant to give credence to their simulation.”

He contended that the loan agreement was not a genuine one notwithstanding that three repayments were made. The disquieting features he advanced were the short form nature of the agreement. It was interest free. It was not dated. It did not set out specific repayment dates. It was apparent that the appellant would not be able to repay within 30 days of the related party's payment. The related party was not the parent company and did not bear the legal obligation to capitalize the appellant both under South African legislation and Zimbabwean law. He contended that the cumulative effect of these factors was that the loan agreement did not make commercial sense and submitted that the real substance and purpose of the loan agreement was to benefit the appellant by bestowing a grant or subsidy to it.

In my view, the loan agreement contained the essential features that constitute such an agreement. The loan amount was not specifically stated but it was easily ascertainable. It was constituted by “all the costs incurred (from 1 May 2008) by the appellant relating to the development and implementation of a new MUB core banking system” paid by the related party to the vendor and suppliers of hardware equipment required to support the new system.

It was common cause that the amount expended for this purpose was in the sum of ZAR27,632,795=71. The loan agreement also stated the date on which repayment of the loan was due. It was 31 December 2009.

The uncontroverted oral testimony of the Group Finance Officer and the Financial Controller of the related party was that the understanding between the parties was that repayment was due on each paid invoice thirty days after such payment. The Group Chief Finance Officer testified to numerous e-mails and telephone calls made to the appellant for payment of the amounts whenever they fell due while the Financial Controller stated that she used to dispatch intra-group debtor's statements on a monthly basis to all African entities that fell within her purview reflecting all payments made on their behalf by the related party.

That the amount that was eventually written off constituted a loan was apparent from the short form agreement; the existence of an agreement with the suppliers; the applications to the South African Reserve Bank exchange control for approval to make payments; and the reimbursement undertakings made therein. That the loan agreement was genuine was also demonstrated by the three repayments of 19 January, 18 June and 6 August 2009 in the aggregate sum of ZAR3,597,753=73. It was common cause during the trial that proof of these repayments were supplied to the respondent on 12 September 2012 notwithstanding the averment in paragraphs 22 and 25 the respondent's case filed on 23 August 2013 disputing the submission of such proof. It was established by the appellant that it cleared its indebtedness as at 19 January 2009. The email communication between the local Chief Finance Officer and various personnel in the related party's office culminating in the e-mail of 9 December 2009 established the negotiations preceding the loan cancellation.

The three witnesses from the related party justified the use of the short form agreement. It was an intra-group agreement for which detailed terms and conditions redolent in similar agreements with unrelated parties was not necessary. It was meant to record the existence of the loan and to satisfy accounting and audit requirements. In my view, it does not appear that at the date the agreement was concluded, which preceded the first application to the South African Exchange Control of 20 October 2008, the parties had foreknowledge that Zimbabwe would introduce the multicurrency regime on 29 January 2009 and thereafter rebase capital requirements for financial institutions through the mid-year monetary policy of July 2009. That the related party was not the Bank holding company responsible for recapitalizing the appellant actually reinforces the genuineness of the loan. In any event, it cannot, from the facts, be found that the only purpose for concluding the loan agreement was to evade tax.

Accordingly, I hold that the loan agreement did not constitute a simulated agreement.

I am satisfied that the appellant established, on a balance of probabilities, that the loan amount constituted part of its working capital and not revenue income in its hands. The character of the loan as capital income could not have changed to revenue income by reason of cancellation for the simple reason, amongst others, that it had already been consumed by capital goods.

The appeal in respect of the loan write-off is allowed….,.

1….,.

2….,.

3….,.

4. The respondent is directed to issue a further amended assessment for the year ending 31 December 2009:

(a)…,.

(b)…,.

(c)…,.

(d) Exempting the loan write-off of US$485,059=93 from the taxable income of the appellant;

5. The respondent shall refund the balance due to the appellant arising from the implementation of the directive in para 4(a) to (d) above from the US$2,038,425=86 adjustment paid by the appellant to the respondent between 1 June and 1 August 2013.

This is an appeal against part of the judgment of the Special Court of Income Tax Appeals.

BACKGROUND

On 18 November 2012, the appellant issued to the respondent three amended assessments for the tax years ending December 2009, December 2010 and December 2011. The first of these assessments related to computer software acquired by the respondent which the appellant disallowed as capital expenditure and therefore not deductible under section 12(2)(a) of the Income Tax Act [Chapter 23:06] (the Income Tax Act).

The second related to the dividends that the respondent held for its customer, Portland Pretoria Cement Limited.

The assessments also related to a loan which the respondent received from Standard Bank Limited in South Africa for the value of ZAR27,632,795=71 out of which it paid off ZAR3,597,753=73 and had the balance written off. The appellant reckoned the whole amount of the loan as the respondent's taxable income for the year 2009 as a 'grant or subsidy' in terms of section 8(1)(m) of the Income Tax Act.

The assessments related, as well, to Nostro accounts transactions which the appellant determined to be interest-earning deposits for the years ending 2009, 2010 and 2011.

The appellant imposed a 100 percent penalty by way of additional tax on the computer expenditure and the Nostro accounts. It imposed a 50 percent penalty on Portland Pretoria Cement Limited dividends.

In a letter dated 17 December 2012, the respondent, through its legal practitioners, objected, in terms of section 62 of the Income Tax Act, to the amendments and the penalties imposed on it by the appellant. The proviso to section 62 of the Income Tax Act reads:

“Provided that, if the Commissioner has not notified the person who lodged the objection of his decision on it within three months after receiving the notice of objection, or within such longer period as the Commissioner and that person may agree, the objection shall be deemed to have been disallowed.”

The appellant's Commissioner-General failed to notify the respondent within three months of the taking of the objection to its decision thereon. Acting on the assumption that the objection had been disallowed, the respondent invoked section 62(4) of the Income Tax Act. It noted an appeal to the Special Court for Income Tax Appeals on 27 March 2013 in terms of section 65 of the Income Tax Act.

The Commissioner General wrote a letter to the respondent, on 3 April 2013, acknowledging receipt of a letter dated 27 March 2013 informing it of the respondent's intention to appeal to the High Court. In that letter, the appellant explained that the delay in responding to the objection was due to the complexity of the issues involved and sought to extend the period of three months by an additional two months in terms of the proviso to section 62(4) of the Income Tax Act. It would then make a determination and communicate it to the respondent. The respondent replied, by a letter dated 5 April 2013, acknowledging receipt of the letter of 3 April 2013 but did not accept the position that the Commissioner General of the appellant could unilaterally extend the three-month period. It argued that that could only be done with the consent of the respondent. It insisted that it had properly filed its notice of appeal in the Special Court for Income Tax Appeals.

On 19 April 2013, the appellant communicated its determination on the objection.

Regarding the disallowing of the software expenditure deducted from the respondent, the appellant denied the applicability of the principle of legitimate expectation that the respondent, relying on a letter dated 18 May 1999 by the Commissioner General, had invoked and relied upon. It contended that such letter was a non-binding private opinion and was not directed to the respondent. It maintained that the expenditure was of a capital nature, and, on that basis, held that the ground of objection was disallowed in full.

The grounds of objection relating to the taxability of the dividends from Portland Pretoria Cement Limited and the written off loan were disallowed in full.

In relation to the taxability of the amounts deemed to have accrued to the respondent on the Nostro accounts, the appellant did not make a determination but stated that it was still looking into the issue. Accordingly, it suspended payment of tax in respect of the issue as it was still to be resolved.

The penalties were waived in full except for the 50 percent penalty levied upon US$2,521,340=44 relating to the Portland Pretoria Cement deal. Consequent to the determination of the objection, the appellant issued an amended notice of assessment on 29 April 2013.

The court a quo settled the issues between the parties, deciding the matter partly in favour of the respondent and partly in favour of the appellant. The court a quo dealt with the appeal by the respondent on five issues that arose from the amended assessments issued to it by the appellant.

It allowed the appeal in respect of the dividend transaction and the written off loan and set aside the amended assessment of 20 May 2013 along with the penalty imposed thereon. It also directed the appellant to issue an amended assessment for the year ending 2009 to give effect to the outcome of the appeal and the deduction of the sum of US$2,521,340=44 from the taxable income of the respondent.

Of particular interest to this appeal is the fact that the court a quo dismissed the appeal in respect of the claim for deduction of software expenditure and directed the appellant to allow the deduction of the special initial allowance in respect of the expenditure on the software. The appellant is now appealing against the finding made after the court a quo had agreed with it that the computer software constituted capital expenditure but held that the respondent was entitled to a special initial allowance.

ISSUE

The appellant has appealed to this Court on three grounds, namely, that:

1. The Special Court for Income Tax Appeals erred in finding, as it impliedly did, that the Income Tax Act, as it existed in the year 2009, prescribed the deduction of a special initial allowance in respect of expenditure of a computer software in terms section 15(2)(a) as read with the Fourth Schedule to the Act.

2. The Special Court for Income Tax Appeals further consequently erred in directing the Appellant to issue a further amended assessment allowing the deduction of special initial allowance in terms of the Income Tax Act when there was no such allowance permissible for such expenditure.

3. The court a quo further erred in directing the Appellant to refund the Respondent the balance due taking into account the deduction of such special initial allowance.

On the basis of these grounds, it therefore sought the following relief:

“WHEREFORE, the Appellant prays that the appeal be allowed with costs and the order of the Special Court for Income Tax Appeals be and is hereby amended by the deletion of para 4(b) and reference in para 5 to para 4(b) relating to the refund of amounts arising from special initial allowance.”

The issue that arises before the court is whether a special initial allowance could be deducted in respect of the software expenditure by the respondent.

The court a quo answered this issue in the affirmative. It is important to look at the relevant provisions dealing with special initial allowance.

THE PROVISIONS

The starting point is section 15(2)(a) and (c) of the Income Tax Act [Chapter 23:06] which provides as follows:

“(2) The deductions allowed shall be -

(a) Expenditure and losses to the extent to which they are incurred for the purposes of trade or in the production of the income except to the extent to which they are expenditure or losses of a capital nature;

(b)...,.

(c) The allowances in respect of –

(i)...,.

(ii) Articles, implements, machinery and utensils belonging to and used by the taxpayer for the purposes of his trade;

(iii)...,.

which are provided in the Fourth Schedule.”

The section provides for deductions for expenses and losses incurred for the purposes of trade or in the production of income unless such expenditure or losses are of a capital nature. It is however read with the Fourth schedule to the Income Tax Act. Before amendment in 2014, and for the relevant period covered by the amended assessment, that is, 2009, paragraph 2 of the Fourth Schedule provided as follows:

“Deduction of special initial allowance

2. If the taxpayer so elects (which election shall be binding) an allowance (hereinafter called a special initial allowance) in respect of capital expenditure incurred by the taxpayer during the year of assessment on -

(a) The construction of new farm improvements, industrial building, railway lines, staff housing or tobacco barns; or

(b) Additions or alterations to existing farm improvements, industrial buildings, railway lines, staff housing or tobacco barns; or

(c) The purchase of articles, implements, machinery or utensils; used by the taxpayer during such year for the purposes of his trade subject to the conditions mentioned in, and calculated in accordance with, paragraphs 9 and 10:

Provided that -

(i) If farm improvements, industrial buildings, railway lines, staff housing or tobacco barns are constructed or articles, implements, machinery or utensils are purchased in one year of assessment and first put into use in a later year of assessment, then the special initial allowance shall be allowed in the year of assessment in which such asset is first used;

(ii) In the case of articles, implements, machinery or utensils, the special initial allowance shall only be allowed if the Commissioner decides, having regard to the use to which such articles, implements, machinery or utensils were put by the taxpayer in the year of assessment in which they were first put into use or the next following year of assessment, that the articles, implements, machinery or utensils were purchased by the taxpayer wholly or almost wholly for the purposes of his trade;

(iii) The special initial allowance shall not be allowed in respect of articles, implements, machinery or utensils purchased by the taxpayer and leased to another person for use by him unless the taxpayer establishes, to the satisfaction of the Commissioner, that -

A. At the termination of the period of the lease, he is entitled to the return of the articles, implements, machinery or utensils concerned and no option to purchase or other right in relation to the acquisition or disposal of the articles, implements, machinery or utensils concerned is or will be given to the lessee or any other person; and

B. The articles, implements, machinery or utensils concerned were not purchased by him for the purpose of being leased to a particular person with the intention of giving that person or any other person an option or other right such as is referred to in paragraph A.”

The Fourth Schedule, in my view, constitutes an exception to the provision of section 15(2)(a) of the Income Tax Act which does not allow deductions in respect of capital expenditure. The Schedule then allows for the deduction of certain capital expenditure identified therein.

Before the 2014 amendment, the capital expenditure that qualified for deductions included the purchase of articles, implements, machinery or utensils used by the taxpayer during the relevant year for the purposes of his trade. Such articles, implements, machinery or utensils were not specified and had to pass the test of being purchased for the purposes of the trade of a person.

In 2014, the Fourth Schedule was amended. The amendment introduced the definition of articles, implements, machinery and utensils to include computer software in the Fourth Schedule as follows:

“(1) In this Schedule -

'articles, implements, machinery and utensils' includes tangible or intangible property in the form of computer software that is acquired, developed or used by a taxpayer for the purposes of his or her trade, otherwise than as trading stock;

[Definition inserted by Act 11 of 2014]”

It did not end there. It further provided the definition of computer software:

“'Computer software' means any set of machine-readable instructions that directs a computer's processor to perform specific operations;

[Definition inserted by Act 11 of 2014].”

Before amendment by Act 1 of 2014, the Fourth Schedule to the Income Tax Act did not define articles, implements, machinery and utensils nor did it have the definition of computer software.

SUBMISSIONS BEFORE THIS COURT

The appellant contended that in granting the special initial allowance, the court a quo made a decision on a matter that was not properly before it. Counsel for the appellant argued that in determining the issue, the court a quo erred at law as the matter that was before it was the question of whether or not the expenditure on software was of a capital or revenue nature. He further argued that the question of the special initial allowance was not brought before the court a quo by the respondent as, in its objection against the amended assessments, the respondent never related to a claim for special initial allowance. The reason for not making such a claim, he argued, being that a claim for special initial allowance, by its nature, constitutes an admission that the software in issue is a capital asset. This would then not tally with the claim by the respondent that the computer software constituted expenditure of a revenue nature.

Counsel for the appellant also argued that the respondent could not move for such relief predicated on the exact anti-thesis of the position it had taken in relation to the nature of the expenditure that the software constituted. To buttress the argument, he cited the case of Hlatshwayo v Mare & Deas 1912 AD 243..., which proscribes approbation and reprobation or the taking of two positions that are inconsistent with each other. He argued that the “reference” made by counsel for the respondent to the special initial allowance was not, and could not, be construed as a “prayer” for such allowance, neither could it be, in light of the position taken by the respondent in the treatment of the computer software.

He argued, further, that the allowance could not have been allowed as at 2009 because the amendment which introduced computer software as expenditure of a capital nature, qualifying for special initial allowance, came into being in 2014 and became effective as from 2015.

Counsel for the appellant further submitted that not all capital expenditure necessitated the claim for special initial allowance but only those which are specified in the Fourth Schedule. As at 2009, the word 'articles' did not include “computer software”. He argued, further, that a taxpayer who wants to claim special initial allowance must make an election to claim such allowance and part of that election is to accept the computer expenditure as of a capital nature. He submitted that the issue of special initial allowance was not argued in the court a quo.

On the other hand, counsel for the respondent submitted that the present appeal raises two issues;

Firstly, the respondent discards as wrong, the assertion that a taxpayer who claims expenditure to be of a revenue nature cannot claim the deductions that are allowed for capital expenditure as set out in the Income Tax Act. He submitted that in the court a quo the respondent argued that the software was of a revenue nature and that, alternatively, if it was found to be of a capital nature, special initial allowance ought to be allowed for it. He submitted that the order by the court a quo, in respect of the allowance, was, in terms of that alternative position, rightly made.

Counsel for the respondent further submitted that the fact that a taxpayer makes an incorrect claim does not preclude such taxpayer from the benefits in respect of what is then later found to be the correct position. He contended that the purpose of the whole system of assessment and appeal is to determine the correct amount of taxable income in the hands of the taxpayer and then to apply to that correct amount the provisions of the Finance Act [Chapter 23:04] and the Income Tax Act.

In heads of argument filed with this Court, counsel for the respondent submitted as follows:

“4. On behalf of the Respondent, it was argued at the hearing below that the expenditure was indeed other (of a?) revenue nature, but in the alternative it was submitted that if the approach of the Respondent was found to be incorrect, the respondent was entitled to claim as against the capital expenditure the special initial allowances set out in the Fourth Schedule to the Income tax Act. The learned Judge agreed with the Appellant that the expenditure was not of a revenue nature but other (of a?) capital nature. The learned Judge therefore confirmed the amended assessments, but, equally confirmed that the appellant was entitled to the special initial allowance on that capital expenditure. It is submitted that the learned Judge acted correctly in that regard.”

It was also his submission that the extent of any moral turpitude in the approach of the taxpayer is dealt with by the imposition of additional tax penalties and not by precluding a claim that could be legitimately made in terms of legislation. He submitted that the respondent is merely a party to a dispute as to the correct treatment of admitted expenditure, which dispute was resolved by the court a quo.

In response to the argument that, as at 2009, computer expenditure did not fall in the ambit of capital expenditure for which special initial allowance could be claimed, he submitted that the respondent's stance was that the fact of the amendment does not mean that computer software was previously not part of “articles, implements, machinery or utensils” alluded to in the Fourth Schedule.

Counsel for the respondent cited the case of AS School & Ors v Zimbabwe Revenue Authority HH314-16 where the court held that the introduction of a specific provision relating to teachers did not mean that the law prior to the introduction of the amendment did not cover teachers. He further submitted that the appellant had not examined the statute as it existed at the relevant time in respect of assessments for the year ending 31 December 2009. It was his submission that there was no definition of the term “articles, implements, machinery or utensils” in the Schedule and that, as a result, such words must be given their ordinary meaning to ascertain whether or not they cover computer software.

It was also submitted that there was no dispute that the computer software was purchased “wholly or almost wholly” for the purposes of the trade of the respondent. Furthermore, that the requirement to claim the allowances was never an issue between the parties. He argued, on the strength of Commissioner for Inland Revenue v Simpson 1949 (4) SA 678 (A)..., that, in the interpretation of fiscal legislation, one must look to what is clearly said. He contended that the meaning of the words “articles, implements, machinery or utensils” was considered in the case of Commissioner of Taxes v C 1981 (2) SA 298 (ZA) which followed the decisions of Secretary for Inland Revenue v Charkay Properties (Pty) Ltd 1976 (4) SA 872 (A) and Jarrold (Inspector of Taxes) v John Good and Sons Ltd [1963] 1 All ER 141 (CA).

After quoting the portion of the judgment in Commissioner of Taxes v C 1981 (2) SA 298 (ZA) to the effect that the word “article” has a wide connotation and that it relates to a material thing which is not so merged with other things so as to lose its separate identity as an article, he argued that although computer software cannot be described as material or tangible, it undoubtedly is an article. He argued that it can be sold or bought and is readily identifiable as being distinct and separate as from one person to another. He argued that in general parlance computer software is an article or implement or utensil, which, in the modern world, is used just as machinery for the furtherance of a business.

It was also counsel for the respondent's contention that the 2014 amendment clarified the term(s) “articles, implements, machinery or utensils” to include tangible and intangible property in the form of computer software. It was submitted that if the legislature intended to introduce a brand new concept, it would have added “computer software” to the list of “articles, implements, machinery or utensils”. Consequently, there was no change brought by the amendment, only clarification. He submitted that words and language evolve.

ANALYSIS

Counsel for the appellant's heads of argument aptly put this matter in its proper perspective and the articulation therein has been particularly helpful in the preparation of this judgment.

He submitted that the only issue relating to computer software that was placed by the appellant before the Special Court for Income Tax Appeals was whether the expenditure for the purchase of such software was an expense of a revenue or capital nature. This arose because the appellant had provided for it as an expense of a revenue nature, and, therefore, an allowable deduction in terms of section 15(2)(a) of the Income Tax Act. The issue was never whether the respondent ought to have been allowed a special initial allowance.

In its letter of objection in terms of section 62 of the Income Tax Act, the respondent also confined itself to the said issue.

Paragraph 1 of the said letter is headed “Software Deduction” and has five sub-paragraphs numbered 1.1 to 1.5. It is devoted to the question of whether the expenditure was an allowable deduction in terms of section 15(2)(a) of the Income Tax Act. The contentions therein were;

(i) Firstly, that the respondent had a legitimate expectation that the software would be treated as an expense of a revenue nature, the legitimate expectation arising from a letter written by the predecessor to the appellant's Commissioner General to Messrs Ernst and Young.

(ii) Secondly, that the letter constituted a non-binding private opinion which applied to the respondent in terms of section 5(2) of Schedule 4 to the Revenue Authority Act.

(iii) Thirdly, that upon proper interpretation, section 15(2)(a) of the Income Tax Act permitted the nature of such expenditure as an allowable deduction.

It is significant that section 65(4) of the Income Tax Act provides as follows in relation to appeals lodged to the Special Court for Income Tax Appeals by taxpayers:

“At the hearing of any such appeal the arguments of the appellant shall be limited to the grounds stated in his objection:

Provided that the High Court or the Special Court which hears such an appeal may, on good cause being shown or by agreement by the parties grant leave to the appellant to rely on other grounds.”

A perusal of the record clearly shows that the Special Court for Income Tax Appeals granted to the respondent a special initial allowance which was not founded on the grounds set out in the letter of objection dated 17 December 2012. This is so because a claim for special initial allowance would, by its nature, be an admission that the software in issue was a capital asset.

However, in casu the respondent's contentions throughout, and as set out in the letter of objection referred to above, were to the contrary; it being contended that it was expenditure of a revenue nature.

The Income Tax Act does not provide for expenditure of a revenue nature to qualify for a special initial allowance except in accordance with section 15(2) as read with the Fourth Schedule.

In its case before the Special Court for Income Tax Appeals the respondent (then as appellant) agreed that the software expenditure was an expense of a revenue nature. In its paragraph 13, the respondent summed up its stance in relation to the software. The paragraph reads:

“The Appellant contends that as a matter of fact and as a matter of law it did not purchase the computer software in question, but merely acquired a right to use such software in accordance with the license agreement, and that, accordingly, such expenditure incurred in the acquisition of the right to use the software was not an expense of a capital nature but was expenditure incurred for the purposes of trade or in the production of income by the Appellant.”

With this as its pronounced stance, the respondent could not, without abandoning its argument, move for relief which was predicated on an exact antithesis of its given position. In the words of DE VILLIERS JP in Hlatshwayo v Mare & Deas 1912 AD 242..., dealing with a similar principle of pre-emption:

“At bottom, the doctrine is based upon the application of the principle that no person can be allowed to take up two positions inconsistent with one another, or, as is commonly expressed, to blow hot and cold, to approbate and reprobate.”

Before the Special Court for Income Tax Appeals, the respondent did not seek any order in respect of the grant of special initial allowance. In the last of 15 paragraphs that dealt with the issue of computer software the following submission was made on behalf of the respondent:

“It is therefore submitted that based on the evidence presented to this Honourable Court, including the terms of the licence agreement, as that evidence is applied to the legal approach to this issue as determined in the cases cited, there can be no doubt that the Appellant incurred the costs of acquiring the right to use the computer software in circumstances which render those costs as being of a revenue nature.”

Thus, the respondent did not raise the issue of a special initial allowance in the letter of objection or in its case and heads of argument in the Special Court for Income Tax Appeals. It was only in oral submissions that, for the first time, the respondent's counsel in the court a quo made the following submission in which some kind of “claim” is made to a special initial allowance:

“The second question that can be put, Mr President, to demonstrate the fallacy of the approach of ZIMRA is this; if it is a capital asset of 2(.) (w)hatever it is million, where has ZIMRA allowed the SIA on that. If you have a capital asset you are entitled to pay SIA; where has ZIMRA allowed that. ZIMRA has not approached this rationally. I will be making the same point in respect of the fourth issue. It is simply latched on to this, in our submission incorrect approach that what is in your public financial statement must be what you pay tax on.”

This submission was not made, and, cannot be viewed as a prayer for a special initial allowance. It was in fact a question posed to demonstrate a point in counsel's argument. In any event, he could not make such a prayer as it had no factual background in the matter presented to the court a quo. The submission could not therefore be the basis for the court a quo's judgment.

A reading of the judgment of the court a quo will show that in the portion where the President dealt with the question of the nature of computer software (pages 2 to 13 of the judgment), he devoted most of his time to dismissing the respondent's argument that the expenditure was an allowable deduction in terms of section 15(2)(a) of the Income Tax Act. He dismissed it on the grounds that the nature of the computer software was such that it was an asset which gave the respondent an enduring benefit and was therefore not deductible in terms of section 15(2)(a). Furthermore, that there was no practice established by the respondent as generally prevailing in terms of which such a deduction could be allowed.

The President's conclusion on the issue reads:

“In the light of these findings, I agree with Mr de Bourbon that the respondent is obliged to allow the deduction of special initial allowance on the cost of the software in question at the rate prescribed in the Income Tax Act.

I, therefore, hold that software expenditure was of a capital nature. The respondent correctly disallowed the claim for deduction of US$2,329,776=85 from the appellant's tax return for the year ending 31 December 2009.”

The paragraphs preceding these concluding paragraphs make no reference to any argument presented to the court by the parties in respect of special initial allowance. It is not proper for a court to determine a matter which is not raised or argued before it or to determine a matter on the basis of a point that was not raised before it. See Proton Bakery (Pvt) Ltd v Takaendesa 2005 (1) ZLR 60 (S)...,.

No evidence was placed before the court a quo showing that the cost of computer software was expenditure of a capital nature such as would qualify for a special initial allowance. Such evidence was important because the special initial allowance is not allowable in respect of all forms of capital expenditure as claims for a special initial allowance are regulated by section 15(2)(c) as read with the Fourth Schedule to the Income Tax Act. As indicated earlier in this judgment, the definition section of the Fourth Schedule was only amended by the Finance Act (No.3), Act No.11 of 2014 which defined articles, implements, machinery and tools and included computer software which was also defined in that Act.

Before the amendment, computer software had not been included or made mention of.

Section 13 of the Finance Act (No.3) Act No.11 of 2014 amended the Fourth Schedule to the Income Tax Act, with effect from 1 January 2015, to make expenditure in respect of computer software subject to special initial allowance. It must follow that, as at 2009, while computer software of the nature in issue might have been of a capital nature, it was not specified in the Fourth Schedule for purposes of deduction of a special initial allowance. There was therefore no provision, as at 31 December 2009, on the basis of which paragraph 4(b) of the order by the Special Court for Income Tax Appeals to the appellant to allow the deduction of a special initial allowance in respect of expenditure on software could be sustained.

A fortiori, paragraph 5 of the order of the court a quo, directing the appellant to refund the balance due to the respondent arising from the implementation of paragraph 4(b), cannot be sustained as there was no obligation on the part of the appellant to grant the respondent a special initial allowance in respect of such expenditure of US$2,239,776=85.

What therefore comes to the fore is that when the court a quo ordered the appellant to allow the deduction of the prescribed special initial allowance in respect of expenditure on computer software, and, purportedly in terms of the Income Tax Act, the Income Tax Act did not, at the material time, prescribe any special initial allowance in respect of computer software. The order of the court a quo is thus inconsistent with the Income Tax Act. It being in conflict with the Income Tax Act, it is therefore incapable of implementation.

The prayer by counsel for the appellant for amendment of the order of the court a quo by the deletion of paragraph 4(b) as well as the reference in paragraph 5 to paragraph 4(b) must, in the circumstances, succeed. Although this conclusion seems to me to be clear and unavoidable, the following discourse ensues if only for the purpose of further showing justification for the success of the appeal.

The court a quo dealt with the issue of the computer software with a two-pronged approach. It firstly dealt with whether or not the expenditure on such software constituted expenditure of a capital or revenue nature. It found that the expenditure was of a capital nature and that the appellant was obliged to grant the respondent the deduction of special initial allowance. The respondent's case against the appellant in the court a quo had been that the expenditure on software had to be classified as expenditure of a revenue expenditure and not as of a capital nature as the appellant had sought to do. The court a quo agreed with the appellant on the conclusion but went on to order for the allowing of the special initial allowance. In so doing, the court a quo did not deal with or pay heed to the amendment and its effect on the Fourth Schedule.

The deduction of a special initial allowance, as formulated in the Fourth Schedule, is subject to or dependent upon an election by the taxpayer. The election is binding. However, no distinct claim in its papers for such allowance by the respondent was placed before the court a quo specifically in relation to the Fourth Schedule. HILL, Income Tax in Zimbabwe, Fourth Edition, Butterworths 1997..., dealt with a similarly worded provision for special initial allowance and opined:

“The allowance is granted only if the taxpayer so elects. Such election is virtually automatic in the case of all companies and those of individuals with high levels of taxable income, in order to obtain the advantage of the early deduction.”

A claim for a deduction was however made in respect of a tax “ruling” dated 18 May 1999 by the Commissioner of Taxes in the Department of Taxes. It was made in response to a letter from Ernst and Young dated 24 November 2008 requesting, essentially, to be informed of the Department's practice in the treatment of computer expenditure in relation to section 15(2)(a) of the Income Tax Act.

The “ruling” was to the effect that computer software constituted a consumable item whether or not the taxpayer owned it, and, as such, was deductible in term of section 15(2)(a) of the Income Tax Act. It also dealt with whether such costs could be capitalised as had been asked by Ernst and Young.

The court a quo found that such letter was not a generally binding ruling and was not binding at all in 2009. Regardless of this fact, the respondent was granted a special initial allowance in terms of the Fourth Schedule.

The further difficulty with the respondent's approach is that in its case before the court a quo it did not make a claim in the alternative for special initial allowance in the event that it was wrong in classifying computer software expenditure as being of a revenue nature. The election was obliquely made, or more accurately, referred to, in a contentious statement by counsel for the respondent whilst making submissions in the court a quo. The specific issue of special initial allowance was not argued or ventilated by the parties before the court a quo.

Whilst it is a fact, as submitted by counsel for the respondent, that generally a party can make claims in the alternative, it is also a fact that in the case of a special initial allowance in terms of the Income Tax Act, an election ought to be made even though the Act does not state when such election is made. It cannot, however, be the position of the law, that the election could be made before the Special Court for Income Tax Appeals or before this Court. As counsel for the appellant aptly put it, that election is made in or during the arrangements of a taxpayer's affairs and that did not happen in this case.

For this reason, we found the submission made by the respondent's counsel on this point to be of no assistance to this Court in the determination of this appeal favourably for the respondent. He submitted that because the Income Tax Act, while requiring an election to be made, does not state when such an election is to be made, it follows that in a matter such as in casu where there are appeal proceedings against a decision of the Commissioner General, and the contentious issue is resolved by a finding that expenditure on computer software is not of a revenue nature, the respondent can, after such finding, successfully make a claim for special initial allowance.

An election not having been made and the matter not having been raised and ventilated before it, it was thus not open to the court a quo to grant to the respondent a special initial allowance in respect of the computer software. In any event, such an election could not have validly been made before the amendment introduced by Act No.11 of 2014.

Counsel for the respondent argued that computer software is covered by the word “article” in the provision in the Fourth Schedule. He argued that language evolves and that an article covers computer software, in the sense of it being “an article used by the taxpayer during such year for the purposes of his trade.” Furthermore, that the amendment merely clarified a position that was already provided for before its enactment.

In Secretary for Inland Revenue v Charkay Properties (Pty) Ltd 1976 (4) SA 872, the court dealt with the meaning of “articles” in the context of “machinery, implements, utensils and articles used by the taxpayer for the purpose of his trade” in terms of section 11(e) of South Africa's Income Tax Act, 58 of 1962. In dealing with the meaning of “articles”, the court held:

“The word 'article' is of a wide and somewhat vague or definite connotation. Its ordinary meaning, relevant here, is a material thing forming part of, or coming under the head of, any class (Oxford English Dictionary, meaning IV, 13 and 14; and Webster, Third New International Dictionary, meanings 5a and 6a). The phrase quoted above itself identifies the particular class of things in question. 'Articles' there thus means the class of all those material things that are used by the taxpayer for the purpose of his 'trade'. 'Things' means, of course, material entities or objects of any kind. 'Trade' is also comprehensively defined in sec. 1 of the Act as including 'every profession, trade, business, employment, calling, occupation or venture, including the letting of any property.'

Hence, the class of things involved is of considerable amplitude...,. Moreover, the preceding words 'machinery, implements, utensils', do not sufficiently point to any genus; so no reason exists for not giving that word the ordinary, wide connotation canvassed above.”

The approach of the court was to use the ordinary meaning of the word as the Act did not define it and according to the ordinary meaning, the word must be construed widely.

In Quarries Ltd v Federal Commissioner of Taxation [1961] HCA 69; 106 CLR 310, the High Court of Australia dealt with the word “articles” albeit in the context of “plant or articles”. TAYLOR J said the following:

“'Article', of course, is an extremely wide word and it is undefined. But this may be of no more consequence than it was thought to be in M'Intyre v M'Intee (1915) SC (J) 27 where Lord Strathclyde observed:

'The statute gives us no definition of 'article'. That is not surprising, for everyone understands the meaning of 'article'. A more comprehensive word could not by any possibility have been used' (1915) SC (J), at p 28.'”

The court in that case was confronted with the argument that the use of “articles” was restricted by the word “plant”. Such argument is not relevant to this judgment. No argument has been advanced that articles, implements, machinery or utensils must be construed as denoting a genus.

A reading of the applicable provision shows that the nexus connecting all these words is that they all must be used for the purposes of the trade of the taxpayer.

From the foregoing, the word “article” is ordinarily given a wide meaning. While the ordinary meaning of the word leads to the conclusion that it is of wide application, courts do not ascribe the intention of clarification of legislation on the legislature in a vacuum.

This Court was referred to the case of AS Schools & Ors v ZIMRA HH314-16 for the proposition that amendments can clarify the law.

In AS Schools v Zimbabwe Revenue Authority SC61-17 UCHENA JA stated:

“Mr Magwaliba, 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) 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.”

What is of significance is the fact that in casu counsel for the respondent did not provide any clear justification for the contention that the amendment merely clarified an already existing position of the law. Clarification means what is expressly stated by an amendment was already there even before amendment. Such clarification ought to arise out of a need. It cannot be based on conjecture. There has to be a basis for the amendment to be interpreted as mere clarification. No such basis was pleaded before this court. In the absence of such a basis the amendment must be read and be applied as it is.

In Amberley Estates (Pvt) Ltd v Controller of Customs and Excise 1986 (2) ZLR 269 (SC), GUBBAY JA..., dealt with the import of the word “includes” in the definition of “manufacture” in terms of section 2 of the Customs and Excise Act and held:

“It is to my mind clear that by the use of the word 'includes', the Legislature intended to extend the meaning of 'manufacture' in its ordinary, popular and natural sense, to embrace the specially mentioned activities of 'mixing, brewing, distilling' or 'production' about which there might have been disputes whether they came within the overall process of manufacture. (See R v Ah Tong 1919 AD 186 at 189; R v Debele 1956 (4) SA 570 (AD) at 575). Much the same view was expressed by Young J in E S & A Robinson (Rhodesia) (Pvt) Ltd v Macintyre NO 1962 (2) SA 638 (SR) at 644A.”

The effect of the word “includes” is thus understood as an extension of the ordinary meaning of the word to be defined.

In this case, the amendment was through an inclusion to “articles, implements, machinery or utensils” of tangible or intangible property in the form of computer software acquired, developed or used by a taxpayer for the purposes of his or her trade otherwise than as trading stock. The amendment then defined computer software. That this was an inclusion or in a way, an addition to “articles, implements, machinery or utensils” is further buttressed by the fact that in including “tangible or intangible property in the form of computer software acquired…,” the amendment also introduced a separate test for the inclusion of the said computer software. It ought to be acquired or developed or used by a taxpayer for the purposes of his or her trade and that it must not be used, developed or acquired as trading stock.

In the Fourth Schedule, in relation to “articles, implements, machinery or utensils” the test is already laid out in paragraph 2(c) as “that the articles, implements, machinery or utensils were purchased by the taxpayer wholly or almost wholly for the purposes of his trade.” If computer software was already included in the Fourth Schedule, before the amendment, as argued for the respondent, then there would have been no need to provide a specific test to be provided for it as the amendment does.

While it must be accepted that generally legislation can be amended to clarify the position at law, it is not enough for a litigant to urge this Court to find in favour of such an interpretation without showing the basis for such a conclusion.

DISPOSITION

Accordingly, I find that the appeal has merit and must succeed. Costs will follow the cause. It is therefore ordered as follows:

1. The appeal is allowed with costs.

2. The order of the Special Court for Income Tax Appeals is amended by:

(i) The deletion of sub-paragraph (b) of para 4; and

(ii) The deletion of the reference in paragraph 5 to paragraph 4(b) such that where it reads “para 4(a) to (d)” will now read “para 4(a), (c) and (d).”

These six appeals were filed separately. The parties were all represented by the same firm of legal practitioners', which, in turn, briefed one counsel. All the appeals raised the same legal issues. At the pre-trial hearing of 1 October 2014, the appeals were, for these reasons, consolidated for hearing.

In the absence of factual disputes, the parties argued the legal issues on the basis of the Statement of Agreed Facts furnished at the pre-trial hearing.

The essence of the Statement of Agreed Facts was as follows:

1. All the six appellants were private senior schools operating in Zimbabwe in terms of their respective Trust Deeds. The second to fourth appellants also operated primary schools, which were jointly administered with the high schools.

2. In the case of each appeal and each school, certain 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 were members of staff.

3. 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 other non-staff parents whose children were enrolled at the school. These children were spread across the schools they were enrolled in various classes.

4. In either case, the employees were charged by the appellants between 20% and 25% of the full fees and no taxes were paid on the difference between the 20% and 25% of the fees and the full fees payable at the respective schools. The first, second, third and sixth respondents charged 20% while the remaining two charged 25%. The fourth used to charge 3% before it was directed, on 30 November 2009, by the respondent, to charge 25% which it did from the third term of 2009.

5. The employee parents, like all other non-staff parents, provided all other school items that were not provided by the schools.

6. The appellants asserted that some of their costs were not affected by and did not vary because of the addition of children of staff members. They termed them non-variable costs.

6.1 These direct costs of education comprised teacher and other employee salaries as well as the capital costs of the buildings, movable assets such as motor vehicles and buses and sports equipment as well as municipal taxes and the costs for sport and cultural facilities, school transport, school magazines, awards, class outings and annual group camps.

6.2 The costs related to the repairs and maintenance of buildings and other facilities at each school was not affected by the number of pupils enrolled at the school.

6.3 In none of the schools was the salary paid to any teacher dependent on the number of pupils actually taught, or in the case of administrators and other staff related to the number of pupils enrolled at the school.

6.4 No additional staff were employed as a consequence of the pupil-sponsoring schemes.

7. The appellants further asserted that there were some costs incurred by the appellant schools which were affected by the addition of children of staff members, which varied depending on the number of pupils enrolled at the school. They termed them variable costs. These comprised stationery and book costs, and, for boarders, food costs.

8. The respondent contended that the difference between the amount of the fees paid by the employee parents to the schools and the full fees payable at the school was an advantage or a benefit in terms of section 8(1)(f) of the Income Tax Act [Chapter 23:06] enjoyed by the employee parents arising from their employment relationship with the appellants that fell to be taxed in the relevant period. The appellants disputed the position.

9. The respondent also asserted that the cost of the benefit to the appellants in respect of each benefiting child was the same as the costs of every other pupil at the school and assessed 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 this position.

10. 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 that 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.

11. 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 accordingly objected to the tax assessments in terms of the law and all the objections were dismissed.

12. The appellants appealed to this Honourable Court against the various decisions of the Commissioner-General to disallow their objections.

The determination of the issues referred on appeal will of necessity be decided on the basis of the Statement of Agreed Facts and the information placed before me in the Rule 11 documents in respect of each appellant…,.

The Rule 11 Documents

The Rule 11 documents comprised 199 pages consisting of the schedules of the grossed up benefits for each employee, certified copies of the assessments raised, the objection to tax assessment on school fees benefit for employees whose children were enrolled at the school, requests for suspension of the payment of the new assessments, the determination of each objection, and the notice and grounds of appeal of each of the six appellants.

The first five determinations were made on 29 November 2012 while the last determination was made on 4 November 2013. The first five appellants filed their notices of appeal on 21 December 2012 while the sixth appellant did so on 25 November 2013. All the appellants averred, amongst other things, in their letters of objection that the benefit which staff members received was the placing of their children in a few places at the school….,.

Their collective contention was that the respondent wrongly valued the benefits in kind received by these employees. The Commissioner opined that these benefits, unravelled during the payroll audit, should have been included in the gross income in terms of section 8(1)(f) of the Income Tax Act….,.

On 12 October 2011, the association to which the appellants belonged wrote to the respondent seeking written guidance on the correct tax treatment of the school fees benefit accruing to these employees. The guidance from the Commissioner-General was based on section 8(1)(f) of the Income Tax Act. He advised that the use of any educational and boarding facilities of any of the association affiliated schools by the children of these employees constituted a section 8(1)(f) benefit equivalent to the waived amount.

It was common cause from the letters seeking suspension of payment of tax, of 21 December 2012, that all the schools were non-profit making organisations…., whose anticipated costs of providing education were derived solely from prospective school fees income….,. The school fees income was disparately computed between full fee and concessionary paying pupils based on anticipated non-variable and variable costs of providing education to all these pupils. The anticipated cost of providing education to pupils in each category was proportionately shared between them.

The first appellant: AS

The first appellant, AS's maximum enrolment capacity was for 540 pupils. In 2009 and 2010 it enrolled 515 and 521 pupils respectively of which 174 and 162 were boarders. In each year, 11 children benefitted from the payment of concessionary school fees. The cumulative waived amounts for these children were in the sum of US$28,314= in 2009 and US$40,524= in 2010. The respondent raised assessments…, against the appellant on the waived amounts provided to these employees to which objection was raised on 21 June 2012 and disallowed on 29 November 2012.

The audited 2009 and 2010 financial statements indicated the values of non-current assets…., and current assets…, and the revenue inflows and outflows. A deficit of US$43,241= was incurred in 2009 while a surplus of US$120,306= was earned in 2010. The actual expenditure in these two tax years in respect of non-variable expenditure…, consisted of six categories that were further divided into different line items. The main categories were administration, staff, educational, boarding, motor vehicles and maintenance. The line items under administration were audit/accountancy, bank charges, insurance, legal expenses, sundry, telephone and postage and security. Staff costs comprised of salaries and wages, pensions, NSSA pensions, medical aid, staff training, staff welfare and uniforms. Educational costs covered bursaries and bad debts while maintenance costs covered cleaning, electricity and water, depreciation, repairs and maintenance. The lion's share of costs were absorbed by staff costs in the sum of US$1,262,234= constituting 58.62% of the total expenditure in 2009 and US$1,695,232= constituting 58.08% in 2010. The expenditure for non-variable costs was US$2,026,901= constituting 94.14% in 2009 and US$2,691,254= constituting 92.12% in 2010.

Variables costs consisted of a different category of “educational” incorporating printing and stationery, textbooks, library, magazine, science, sport, travel and accommodation, medical and subscriptions line items. The total expenditure under this head was in the sum of US$126,215= constituting 5.86% in 2009 and US$227,555= constituting 7.80% in 2010.

The second appellant: CSS

The maximum enrolment capacity of the second appellant was 840. It enrolled a total of 694 with 54 in boarding in 2009 and 715 with 55 boarders in 2010. The number of pupils who benefited from the concessionary scheme were 25 in 2009 and 30 in 2010. The assessed benefits were in the cumulative sum of US$74,600= and US$115,337= in each respective year. In addition, there were 28 children in 2009 and 29 in 2010 whose parents were employees of the second appellant who attended other association affiliated schools at concessionary rates applicable to those schools. The assessed benefit was in the sum of US$73,508= and US$95,584= in each year respectively.

The second appellant objected to the schedule on 6 July 2012. It only received the official assessments…, on 29 October 2012 and proceeded to incorporate them in the earlier objection on that date.

The expenditure heads and line items were similar to those in the first appellant's pleadings. The total non-variables costs in 2009 were US$2,988,953= constituting 96.33% and in 2010 were US$3,523,448= constituting 96.16% of the total costs. The variable costs amounted to US$113,750= constituting 3.67% in 2009 and US$140,645= constituting 3.84% in 2010. The financial statements as at 31 December 2009 and 2010 indicated that the school costs were all met from school fees income and showed the amounts charged against depreciation on all categories of property, plant and equipment.

The third appellant: SET

The maximum capacity for both the primary and secondary schools operated by the third appellant was 1,120…,. In 2009 both had 523 and 628 pupils respectively. The number of children on the concessionary scheme in both schools was 32 in 2009. In 2010 the schools enrolled 524 and 661 pupils of whom 33 were on the concessionary scheme. The waived amounts in respect of each tax year were indicated in the schedules raised by the respondent. In addition, there were 10 children of staff who enjoyed concessionary fees at another kindred school in both 2009 and 2010. The benefit that accrued to their parents was in the sum of US$28,368= in 2009 and US$37,008= in 2010. Six assessments were raised on 17 October 2012…, in respect of each year to which the appellant unsuccessfully objected.

The appellant prepared its financial statements in the same format as the other appellants…^,The non-variable expenditure in 2009 was US$1,411,915= constituting 95.91% of total expenditure for the primary school and US$2,847,300= being 93.96% for the secondary schools. The variable expenditure and percentage of total expenditure for each school in 2010 was US$60,146= constituting 4.09% and US$183,092= being 6.04%, respectively. The respective figures and percentages for each respective school in 2009 for non-variable costs was US$1,723,371= constituting 95.44% and US$3,221,243= being 91.69% of total expenditure. The variable expenditure for 2010 was US$82,423 (4.56%) and US$291,757 (8.31%). The line items covering variable expenditure were more detailed than in the other schools. They covered art and pottery materials, bond paper, computer expenses and maintenance, exercise books, stationery, trips and camps, magazine, library, music drama play, photocopier maintenance consumables, science materials, departmental hand-outs, clubs travel, equipment, IB curriculum, Cambridge courier, staff training and sports.

The actual audited reports for the two schools encompass some 70 pages. While minimal income was earned from voluntary donations and fund raising activities, the bulk of the revenue was derived from tuition and general purposes fees. Surpluses of US$131,734= and US$173,700= accrued to the primary school in 2009 and 2010, respectively…,. During the same periods, the secondary school sustained deficits of US$507,673= and US$265,295….,. The property and equipment listed comprised of land and buildings, furniture and fittings, books and equipment, musical instruments, office equipment, plant and equipment, school books and equipment, science equipment, sports equipment, computer equipment, and motor vehicles and work-in-progress….,.

The fourth appellant: GST

In 2009, the primary school enrolled 640 pupils against 625 pupils at the secondary school. In 2010 each had 647 and 620 students, respectively. In 2009, 82 children were on the concessionary scheme while in 2010 the number stood at 96. The variable costs for both schools constituted 3.31% in 2009 and 2.94% in 2010 of the total costs of educating them. In the first two terms of 2009 the concessionary fees constituted 3% of the fees paid by other pupils and 25% thereafter following a directive from the respondent. In 2009 the aggregate benefit of US$202,256=50 accrued to the 57 staff members while the figure was US$312,126=56 in 2010 in respect of 66 members.

The audited financial statements listed thirteen cost centres and their respective detailed line items….,. In 2009, the non-variable cost centres utilised US$3,942,558= constituting 96.69% of total expenditure for the primary school and US$6,517,352= constituting 97.06% for the secondary school. The variable costs were US$134,962= (3.31%) and US$197,472= (2.94%), respectively.

The audited financial statements showed that the appellant incurred a net deficit of US$281,721= in 2009 and US$301,281= in 2010. In addition, in 2010, liabilities exceeded assets by US$645,767=. These were against aggregate school fees payments of US$3,794,625= in 2009 and US$6,413,543= in 2010 and an asset base less depreciation of US$10,897,111= and US$11,163,319= in each respective year. The appellant took an overdraft of US$353,346= to fund building operations in 2010.

The fifth appellant: SC

The maximum enrolment capacity was 383 for the primary school and 780…, for the secondary school.

The fifth appellant objected to both the schedules to tax of 26 May 2012 and the subsequent assessments of 12 September 2012. The Rule 11 documents incorporate 2012 Term 3 concessionary rates which were irrelevant to the 2009 and 2010 assessments. The relevant documents are found in the appellant's bundle of documents. In 2009, the primary school enrolled 369 pupils of whom 10 were on the concessionary scheme. In 2010, the figures were 368 and 9. The primary school had 13 classes. For the secondary school, the 2009 enrolment was 769 and concessionary scheme children were 27 while in 2010 the figures stood at 768 and 24. The secondary school had 30 classes. The combined total benefit was US$103,558= in 2009 and US$110,196= in 2010….,. The concessionary scheme was contractually sanctioned. The appellant apportioned costs between non-variables and variables. The non-variables for the primary school were in the sum of US$1,179,353= (96.87%) in 2009 and US$1,394,155= (96.9%) in 2010. The figures and percentages to total expenditure for the secondary school were US$3,133,850= (92.66%) in 2009 and US$4,070,650= (92.61%) in 2010. The variable costs for the primary school were US$38,050= (3.13%) in 2009 and US$44,557= (3.10%) in 2010. Those for the secondary school were US$248,323= (7.34%) and US$325,399= (7.39%) in each respective year.

The income raised from tuition fees was in the sum of US$4,379,183= in 2009 and US$5,323,110= in 2010…,. The financial statements reveal, amongst other information, that depreciation charged on buildings, plant and equipment furniture and fittings, computers, motor vehicles, bicycles library and text books was in the sum of US$423,753= in 2009 and US$434,871= in 2010. The cash flow statement indicated that fixed assets valued at US$226,338= and US$294,442= were added to the inventory of the secondary school in each year, respectively. The cost of refurbishments in each respective year were in the sum of US$210,400= and US$383,704=.

The sixth appellant: CB

In 2009, the school had a total enrolment of 560 children of whom 8 were on the concessionary scheme. The figures in 2010 were 601 and 15. The benefit that accrued to these children amounted to US$17,680= in 2009 and US$39,240= in 2010. The concessionary amount paid was deemed by the appellant to be the cost of education to the employer…,. The present appeal is limited to the assessments in respect of 2009 and 2010 notwithstanding the figures and amounts availed in the pleadings for the 2011 and 2012 tax years. On 23 May 2013…, the respondent waived the penalties in full resulting in the withdrawal of the penalty objection. The appellant apportioned costs under the broad headings of non-variable and variable costs for both years. The non-variables were in the sum of US$1,528,991= (94.37%) in 2009 and US$1,883,392= (91.43%) in 2010…,. The variables were US$91,287= (5.63%) in 2009 and US$176,576= (8.57%) in 2010. In addition, a review as opposed to an audit of the accounts revealed a deficit of US$44,778= in 2009 and a surplus of US$14,909= in 2010…,. The fixed assets of the school were valued at US$2,934,700= after depreciation of US$133,967= and US$2,961,831= after depreciation of US$280,489= while the current assets were US$78,946= and US$196 39 in each tax year, respectively…,.

The appellant objected to the four assessments on 15 March…, and 15 May 2013. All the seven objections were disallowed on 4 November 2013. On appeal, the sixth appellant collaborated with the other appellants in attacking the correctness of the interpretation and application of section 8(1)(f) of the Income Tax Act rendered by the respondent.

A Summary of Rule 11 Documents

The Rule 11 documents delineated the interaction between the appellants and the respondent that gave rise to the present appeal. They revealed that the appellants categorised their running expenses into non-variable and variable costs on the basis of their respective accounting policies which, inter alia, placed the burden of funding non-variable costs on full fee paying students as long as the maximum enrolment threshold of each school was not breached. They also revealed that the appellants modelled their applicable accounting policy, objection to the Commissioner, and appeal to this court, on an English statute that was discussed and applied in the interesting case of Pepper (Inspector of Taxes) v Hart [1993] AC 593. Unfortunately for the appellants, counsel for the appellants wisely abandoned that case on the ground that it was irrelevant to the present appeal.

The Issues for Determination

The following three issues were referred on appeal;

(a) Whether each employee parent whose children are educated at any of these schools at either a lesser cost than charged to other parents or at a notional cost received an advantage or benefit as defined in section 8(1)(f) of the Income Tax Act subject to the deduction of pay as you earn by each appellant;

(b) If so, the computation of the value of such an advantage or benefit, that is whether or not it is equivalent to the waived amount;

(c) Whether Zimra was correct to add back the waived amount into gross income and assess pay as you earn on the aggregate amount.

My task is essentially to determine whether or not the waived amounts were an advantage or benefit, and, if so, how the advantage or benefit is to be computed.

It was common cause that in terms of sub-paragraph (1) of paragraph (3) of the 13^th Schedule to the Income Tax Act, each of the appellants were employers obligated by law to deduct pay as you earn in respect of benefits forming part of the gross income of their employees. They did not deduct and remit the full extent of the tax due on the benefit and rendered themselves liable to make payment in terms of paragraph 10 of the 13^th Schedule of the Income Tax Act.

The benefiting employees paid concessionary school fees ranging between 20% and 25% of the normal fees paid by other students. The rationale for paying less fees being that their salaries were inadequate to meet the education provided by their employers.

The starting point is to set out the relevant portions of section 8(1)(f) of the Income Tax Act that were applicable in both 2009 and 2010. The section read:

“8 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 -

(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 -

I. '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 an amount is not paid by the employee, his spouse or child in respect of its grant; words qualify all 5 (now 6) of the defined forms of advantage or benefit]; and

(b)…,.

(c)…,.

'employee' includes a person who is a director of a company, agent or servant or is otherwise gainfully occupied and 'employer', in relation to such person, shall be construed accordingly;

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 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 definition of gross income denotes a positive aspect on the one hand and a notional aspect on the other. The positive aspect involves the actual receipt or accrual while the notional aspect deems such receipt or accrual of income.

In my view, the waived amount was not physically received but was deemed to have been received by each affected employee. I am however satisfied that the amounts positively accrued to each employee on enrolment of each child at each of the participating schools. It was common cause that the waived amount was regarded by all the appellants as a benefit or advantage. Paragraph 5 of each appellant's case denoted the waived amount as a supplement to the low earnings of each qualifying employee. In addition, except for the second appellant, all the other appellants juxtaposed the right to participate in the concessionary scheme with the other benefits of employment.

The legislature, in its wisdom, deliberately broke down the definition of gross income into two parts demarcated by the word “includes”. The opening words preceding “includes” generalise while those subsequent to it particularise and stretch the meaning of gross income by way of inexhaustive examples of the term without limiting its broadness. It seemed to me that both counsel for the appellant and counsel for the respondent were agreed that the particularised provisions were intrinsically subsumed in the opening words of the definition. The correctness of this submission was underscored, firstly, by the deliberate resort by the legislature to the phrase “without derogation from the generality of the foregoing” that immediately precedes “includes”; and, secondly, by the sentiments in THORNTON's Legislative Drafting 2^nd ed…, cited with approval by GWAUNZA JA in Sagittarian (Pvt) Ltd v Workers Committee, Sagittarian (Pvt) Ltd 2006 (1) ZLR 115 (SC)…, that “a section of whatever length must have unity of purpose…,.; separate subsections must all have some relevance to the central theme which characterises the section.”

All the appellants admit, in paragrpah 5 of their respective cases, that the payment of the concessionary fees was a benefit enjoyed by the affected staff members. They received the benefit by virtue of their status as employees at these schools. An amount referred to in section 8(1) of the Income Tax Act for the determination of the gross income, income or taxable income, is defined in section 2 as:

“(a) Money; or

(b) Any other property, corporeal or incorporeal, having an ascertainable money value.”

A reading of Lategan v CIR 1926 CPD 203 reveals that this was not how it was defined in the Income Tax Act in force at that time. WATERMEYER J stated…, that:

“But the word income in, its ordinary sense, does not always consist of money, as was pointed out in Booysen's case (1918 AD 576).

'''Income', unless it is in some form such as a pension or annuity, is what a man earns by his work or wits or by the employment of his capital. The rewards which he gets may come to him in the form of cash or some other kind of corporeal property or in the form of rights. Ordinarily speaking, the value of these rewards is the man's income. Unless the word 'amount' means something more than amount of money, the definition given in the Act would not seem to be wide enough to include the 'value' of property or rights earned by the taxpayers, unless they were benefits granted in respect of employment. The legislature could hardly have intended such as a result because then it would be open to any taxpayer [who did not earn his income by employment] to receive payment in some form other than money, and thus escape taxation. In my opinion, the word 'amount' must be given a wider meaning, and must include not only money, but the value of every form of property earned by the taxpayer, whether corporeal or incorporeal, which has a money value…,.; if this view be correct then the taxpayer's income for taxation purposes includes not only the cash which he has received or which has accrued to him, but the value of every other form of property which he has received or which has accrued to him, including debts and rights of action…, which he could turn into money if he wished.”

It appears that at the time Lategan v CIR 1926 CPD 203 was decided “amount” was limited to money and was extended by dint of judicial interpretation to include the value of every form of property earned by the taxpayer, whether corporeal or incorporeal, which had a money value. The rewards earned by his work or wits or the employment of his capital accrued to him in the form of cash or some kind of property or in the form of rights.

The meaning of the word amount proffered by WATERMEYER J was cited and approved by SANDURA JA in Standard Chartered Bank (Zimbabwe) Ltd v Zimbabwe Revenue Authority 2009 (1) ZLR 251 (S)…,.

In the present matter, the right to have children educated at the concessionary rate derived from employment. It vested in each employee parent and accrued to him in the year of assessment and was capable of being turned into money. The right had an ascertainable money value equivalent to the waived amount. In my view, it constituted income. I accordingly agree with the sentiments expressed by counsel for the respondent, in paragraph 13 of his heads of argument, that:

“The employees in this case get the benefit of paying less fees than other parents only because they render service to the appellants. There is therefore a causal nexus between the contract of employment and the benefit. If it had not been for the employment of their labour, service or wits, they would not be entitled to this benefit. The ordinary and grammatical meaning of the word income therefore includes the right which these employees get to educate their children at these and other schools at a concessionary fee.”

The children paid between 20 and 25% of the fees paid by other children whose parents were not employed at these schools. The waived amount was between 75% and 80% of the normal school fees and had an ascertainable monetary value. At the very least it was money notionally received by, or, at best, money that actually accrued to or was in favour of each employee parent by virtue of employment. It clearly fits into the opening words of section 8(1) of the Income Tax Act.

The appeal would fail on this ground.

While conceding that section 8(1) of the Income Tax Act had to be considered as a whole and not in fragments, counsel for the appellants sought to persuade me to resolve the first issue by excising paragraph (f) and its consequential provisions from the opening words of the subsection under consideration. In so doing, he suggested that gross income “means” rather than “includes” paragraph (f) and its constituent definitions of advantage or benefit.

It was common cause that the liability of an employer arises from its failure to deduct, as prescribed by paragraph (3)(1) of the 13^th Schedule of the Income Tax Act the correct pay as you earn from the gross income of the subsidised employee parents. It was also common cause that Act No. 6 of 2012, which came into force on 1 January 2013, amended paragraph (f) of section 8(1) of the Income Tax Act to specifically incorporate the school fees benefit. A new subparagraph (vi) states that:

“In the case of an employee whom 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 employee for any child of his or hers who is a student at that or another school.”

The contention by counsel for the appellants that the benefit was not previously incorporated in section 8(1)(f) before the 2012 amendment does not prove the benefit was beyond the tax reach prior to the amendment. In my view, the benefit was, at that time, also caught in the tax net by the provisions of section 8(1)(b) of the Income Tax Act, which reads:

“(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 provided that [all the provisos are inapplicable to the present case]”.

In my view, the waived amount accrued to each of the affected employees on enrolment of their children at each of the participating schools. It was, on that basis, correctly added back to each employee's gross income and assessed for pay as you earn.

Counsel for the appellants concentrated his firepower on the meaning of section 8(1)(f) and its consequential paragraphs. In that paragraph, the key words are “an amount equal to the value of an advantage or benefit in respect of employment.” He contended that the definition of advantage or benefit in paragraph (f) is restricted to the five meanings postulated in subparagraph I.

In my view, he correctly contended that the waived amount did not constitute board, nor occupation of quarters or residence. He forcefully argued that the waived amount could not be equated to the use of furniture or motor vehicle. He further argued that the waived amount did not constitute the use or enjoyment of any other property whatsoever, corporeal or incorporeal, including a loan, whether of the same kind as board, occupation of quarters or of residence or use of furniture or a motor vehicle or not which was not an amount referred to in paragraph (a)(b)(c) of the definition of gross income in this subsection. He however recognised that all the six schools own furniture in the form of chairs and desks used in class rooms and vehicles such as buses and other smaller motor cars available for use by these day scholars in various school driven extra-curricular activities.

In my view, furniture and motor vehicles constitute property. In fact, all the items listed in (f)I(i)(ii) and (iii) constituted property in the mind of the legislature otherwise the word 'other' in the phrase “any other property whatsoever” in sub-paragraph (f)(iv) would be tautologous. The financial statements and the various cost centres of each school defined the specific activities that constituted education. Each school was identified by the building and classrooms, grounds, desks and chairs, equipment, books and stationery and vehicles. These constitute corporeal property availed for the use and enjoyment of each student at each specific school. These are covered in the definition of an advantage or benefit. The only cost centre that may pose difficulties concerns staff costs. The staff corps do not work in a vacuum. They utilize school premises and property and provide both formal and informal education to the students. The students have the right to receive, use and enjoy that education. The triad of premises, property and the right to education constitute, in my view, an admixture aptly incorporated in the phrase “use or enjoyment of any other property whatsoever, corporeal or incorporeal”. Fortunately, for the school staff, we no longer live in the era of slavery where providers of labour were regarded as chattels to capital.

In 27 LAWSA 'Things' cited by counsel for the appellants in his written heads of argument PROFESSOR Van Der MERWE states, inter alia,…, the following enlightening description of and distinction between corporeal and incorporeal property in these terms:

“When signifying a legal object, the word 'property' refers to everything which is susceptible of pecuniary evaluation, that is, everything which has a monetary value or can constitute an asset in an estate. The notion 'property' thus not only includes corporeal or material objects like land, houses and motor vehicles but also incorporeal or immaterial objects like personal rights, shares in a company and patent rights.”

Again, Stander v CIR 59 SATC 213…, cited CIR v Estate CP Crewe & Anor 1943 AD 656…, where WATERMEYER CJ said:

“One would expect that when an estate of a person is described as consisting of property what is meant by property is all rights vested in him which have a pecuniary or economic value. Such rights can conveniently be referred to as proprietary rights and the include jure in rem, real rights, such as rights of ownership in both immovable property and also jure in personam such as debts and rights of action.”

In my view, the right to education at concessionary rates constituted incorporeal property that was used or enjoyed by these children at these schools. It had a monetary value. It was a personal right possessed by the employee. It was capable of enforcement. That the right was intrinsically transferable was underscored by the determined efforts of the schools to prohibit such transfer to other parents. The waived amount would be disqualified for inclusion in gross income had it been utilised in the business operations of the schools or had the employee made any contributions in respect of its grant.

In casu, the appellants were actually denied use of the monetary value of the waived amounts nor did any employee pay any amount in respect of its grant. It was therefore not utilised in the business transactions of each school.

Viewed from a functional perspective, the waived amounts met the requirements of sub-paragraph (f)I(iv) of section 8(1) of the Income Tax Act and constituted an advantage or benefit.

The observation made by the respondent, in dismissing the objections, that “the benefit granted to the employee was for the use of school property whatsoever, corporeal or incorporeal, (which property) included educational and other facilities that were offered by the school”…, was on point.

The word “whatsoever” in the provision is wide enough to embrace all the school property used or enjoyed by the targeted student notwithstanding that other staff members without children at the school used the same facilities. The waived amounts were not consumed in the business of the employer.

Counsel for the appellants further contended that the waived amount was not a loan contemplated in (iv) nor an amount regarded in (a)(b)(c) of the definition of gross income nor in the same class with them.

I agree with counsel for the respondent that the waived amount is an amount equal to the value of an advantage or benefit in respect of employment. It falls into the definition of amount as defined in section 2 of the Income Tax Act. Again, it seems to me that the use of 'other' in the phrase “any other property” suggests that the legislature regarded money as property. The advantage or benefit advanced to the parent employee of paying concessionary fees constituted an amount which accrued to the employee parent and warrants inclusion in his or her gross income.

Accordingly, the answer to the first issue is that each employee whose children were educated at either a lesser cost than charged to other parents or at a notional cost received an advantage or benefit as defined in section 8(1)(f) of the Income Tax Act which is subject to the deduction of pay as you earn by each appellant.

I would answer the first issue referred on appeal in favour of the respondent.

It seems to me that even if the argument advanced by counsel for the appellants was valid, the benefit would form part of the gross income in terms of section 8(1)(b) of the Income Tax Act. It was money or property, corporeal or incorporeal, having an ascertainable money value that, at the very least, accrued to the parent employee in each respective tax year of assessment. The appellant's argument would also fail on the basis of the main provisions of section 8(1) and also the specific provisions of section 8(1)(b).

The second issue referred to trial was whether the computation of the value of such an advantage or benefit was equivalent to the waived amount.

The determination of this issue only arises in respect of a tax liability founded on the provisions of section 8(1)(f) of the Income Tax Act. In other words, the issue would not arise in respect of liability based on the main charging portion of section 8(1) or 8(1)(b).

The key to the determination of this issue is found in section 8(1)(f)II(b) of the Income Tax Act which provides that:

“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 parties disagree on what the cost to the employer in respect of the advantage or benefit of paying the concessionary school fees was. The six appellants produced financial statements for each tax year in which they apportioned costs under two major headings styled non-variable and variable costs. The non-variable or basic costs were divided into six sub-heads of administration, staff, educational, motor vehicles and maintenance while the variable or additional costs were lumped together under a separate sub-heading of educational. Under each sub-head were listed detailed lines of expenditure. I have drawn up a table summarising the apportionment of the costs by each appellant;

The accuracy of the computations were not put in issue by the respondent. The calculations demonstrated that the variable costs for each school were below the 20 to 25% of the concessionary school fees paid by each employee parent at each school. Each appellant contended that the actual cost to each school of running that school ranged, in the two year tax period, between 2.94% for the lowest and 8.57% for the highest. The net result was that each school actually benefitted on the 20% to 25% of the concessionary fees paid by the employee parents who benefited from the scheme.

The respondent did not dispute the accuracy of the computations. Rather, it consistently attacked the legal basis for the apportionment of the expenditure into non-variable and variable costs throughout the audit, in the determination of the objection, in the appeal pleadings, and in both its written and oral heads of argument.

The basis for the apportionment advanced by all the appellants was simply that they crafted their budgets against the backdrop of the full fee paying pupils. The schools were all non-profit making organisations. The school fees were fixed based on the anticipated costs of each school divided by the anticipated enrolment. The anticipated costs were all met by the pupils. These pupils paid for all the fixed costs and expenses budgeted under the so called non-variable costs. The fixed costs covered the budget lines under the broad headings adverted to earlier on in this judgment. The very fact that these non-variable costs were budgeted to cover the anticipated yearly costs of the appellants underscored their absolute necessity.

This method of budgeting was not derived from nor sanctioned by any known legal instrument.

The contention by counsel for the respondent that the budgeting process was based on each school's accounting preferences was not refuted by counsel for the appellants. It is trite law that all accounting practices, procedures, policies and preferences play second fiddle to the tax legislation in force in any given year of assessment. I made the same point in Standard Chartered Bank of Zimbabwe v Zimbabwe Revenue Authority 2007 (1) ZLR 228 (H)…,.

That the distinction sought by the appellants has no force of law in this country was laid out some 35 years ago by SQUIRES J in the local Income Tax Case No.1336 (1981) 43 SATC 114.

In that case, the appellant was allocated a motor vehicle as a perquisite of employment. The taxman estimated all the costs incurred by the employer in running the vehicle and incorporated them into the gross income of the employee as an advantage or benefit received from his employment in terms of section 8(1)(f)II(b) of the Income Tax Act. In objecting to the assessment, the taxpayer apportioned the costs to his employer of running the motor vehicle into two categories of variable costs for fuel and garage repairs and service and non-variable costs for constant expenses such as licensing, insurance, depreciation and the like. He averred that only the variable or additional costs constituted a benefit since these were directly the result of the use of the motor vehicle and that the constant basic or non-variable costs were incurred by his employer and remained the same whether the employee used the vehicle or not. In jettisoning the narrower interpretation advocated by the taxpayer, based as it was on strikingly similar contentions raised in the present matter, SQUIRES J stated…, that:

“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 words used their ordinary meaning.”

The reasoning of the learned judge is unassailable and applies, mutatis mutandis, with equal force to each of these six appeals. The necessity for these constant basic costs to each school cannot be gainsaid. They were all costs required to run the school, otherwise they would not have been budgeted for and levied against the full-paying students. A simple survey of the line costs demonstrates the fiction advanced by each school that these costs would not, and were not, directly related to the benefiting pupils. Again, the provision under consideration does not differentiate the costs incurred by the employer on the basis of variable and non-variable costs. The underlying reason behind the dismissal of the objections was simply that all these schools were non-profit making organisations mainly run on the school fees paid in an equal amount by each enrolled student. The intrinsic nature of such schools demand that their running costs should be equitably met by every enrolled student. And this is apparent from the application of this principle to all full fee paying pupils.

I however find the formula applied in computing the cost to the employer flawed in one respect.

The cost of the benefit is not equivalent to the difference between what other pupils paid and what the benefiting pupils paid. The correct cost to the employer, under this provision, for all these schools, would be equivalent to 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. As all the beneficiaries were day scholars the calculation would, of necessity, exclude all costs that all other day scholars are exempted from paying such as those associated with boarding facilities.

However, as I dismiss this appeal on the basis of both the opening words in section 8(1) and section 8(1)(b) of the Income Tax Act, the method of computation applied by the respondent in arriving at the value of the amount that accrued to the employee parents that was susceptible to inclusion in the gross income of each employee for payment of pay as you earn was the difference between what was paid by full fee paying students and what each of these students paid. The respondent therefore correctly added back the waived amount to the gross income before assessing pay as you earn on the aggregate amount.

The last issue raised by counsel for the respondent pertains to the second and third appellants only. Some of the employees of these two appellants had children enrolled at the other school at the concessionary rates offered by the other school. The respondent taxed the two appellants based on the waived amounts availed by the two appellants to those employees whose children were enrolled by the appellants rather than on the waived amount of the enrolling school. A total of 77 children were involved.

The respondent took the view that the arrangement of allowing children to attend another school was an amount equal to the value of an advantage or benefit in respect of the employment consequent upon such employment.

Counsel for the appellants contended that the contract between the parent and school where the child was educated was not based on an employer-employee relationship between the appellant and the parent. It was simply a discount offered by the enrolling school to some of the employees of the appellants that could not invoke any tax liability for the appellants.

It seems to me that the contention ignores the averments made in paragraph(s) 2 and 3 of the Statement of Agreed Facts and 16 and 17 of each appellant's case. The Statement of Agreed Facts indicated that this was by mutual agreement between the schools. The employees of the other school were treated in the same way as employees of the enrolling school whose children were enrolled thereat. The effect of paragraphs 16 and 17 of each appellant's case was that the children of staff members enrolled at the other appellant paid concessionary school fees offered by the other school; and, further, that each appellant did not incur any costs in respect of those children of staff members enrolled at the other school.

The employees under consideration were not employees of the enrolling schools. They received the benefit from the enrolling school by virtue of the agreement between their employer and the enrolling school. It seems to me that section 8(1)(f) of the Income Tax Act applies to these employees in that they received the value of the advantage or benefit by virtue of their employment not with the enrolling school whose property their children enjoyed but with the appellants who executed these mutual agreements for these employees' benefit. In my view, the appellants were caught in the respondent's tax net by the closing words “granted to an employee, his spouse or child by or on behalf of his employer” perched at the tail end of section 8(1)(f)I(a). It seems to me that these benefits were granted to these employees by each of the appellants on behalf of the other appellant, respectively. Consequently, as the value of the advantage or benefit that accrued to each employee was made on behalf of his or her employer, it must be taxed in the hands of that employer.

The respondent wrongly assessed the value of the benefit in respect of these children as equivalent to the amount waived by each employee parent's employer. He should have assessed the benefit on the amount waived by the school at which these children attended.

In line with my earlier findings on the computation of the value of the benefit, it would be equivalent to the pro rata share paid by each student at the enrolling school in each tax year calculated by dividing the total costs incurred by the school by all the children enrolled at the school, inclusive of all concessionary fee beneficiaries, less the concessionary fees paid.

However, I do not base liability against the two appellants on the basis of section 8(1)(f) of the Income Tax Act. Liability for the inclusion of the amounts that accrued to each of the 77 children into their parents' gross income is derived from the main charging provision of section 8(1) of the Act. The amount that accrued to or was received by or was in favour of each employee of the appellants was equivalent to the difference between the amounts paid by the full paying students and those paid by each of the 77 children at the school each was enrolled. In my view, by virtue of the agreement executed between the two appellants, which initiated the benefit, the benefit is known and is payable by the employee and each employee's pay as you earn is administered by his own employer; the outstanding pay as you earn in question should, for convenience and ease of administration, be assessed in the hands of his or her employer. In my view, while the respondent correctly found the employee parents of these 77 children liable for pay as you earn, he erroneously assessed it on the amount waived by each parent's own employer….,.

Accordingly, it is ordered that:

1. The appeal of the 1^st, 2^nd, 3^rd, 4^th, 5^th and 6^th appellants against the inclusion of the waived amounts brought into the gross income of each employee parent who participated in the concessionary scheme offered by each appellant and the subsequent assessment of pay as you earn against each appellant in respect of such employee parent whose child was enrolled by such parent's employer in respect of the 2009 and 2010 tax years be and is hereby dismissed.

2. In respect of the second and third respondents:

(a) The assessments raised by the respondent in respect of the employee parents of the 77 children enrolled at the other school are hereby set aside.

(b) The respondent shall include in the gross income of each such employee parent the amount waived by the school at which the child of such an employee parent was enrolled before re-assessing the appropriate pay as you earn liability of the second and third appellants.