The answer to the real question before me
The answer to the question whether the Commissioner is empowered by section 98 of the Income Tax Act to impute notional income and proceed to tax it is answered in the affirmative.
The closing words of section 98 of the Income Tax Act direct the Commissioner to “determine the liability for any tax and the amount thereof as if the transaction, operation or scheme had not been entered into or carried out or in such a manner as in the circumstances of the case it considers appropriate for the prevention or diminution of such avoidance, postponement or reduction” once the transaction, operation or scheme has the stipulated effect, and he, firstly, forms the opinion that it was entered into or executed in an abnormal manner or was not entered into or executed at arm's length, and, secondly, the further opinion that it was created and implement for the purpose of avoiding, reducing, or postponing the payment of tax.
I have found, that, the agreement had the stipulated effect and have upheld the Commissioner's opinion in both the aforementioned respects. The concluding words of section 98 of the Income Tax Act provide the Commissioner with a very wide discretion in computing the imputed notional tax.
He would have been within his rights to treat the agreement as a partnership despite the disavowal of the related parties in clause 8 of the 2003 agreement. He would, of course, have required information on which to apportion the partnership shares based amongst other factors on the ratio of the appellant's equipment to that of the related party.
Whether or not SI 163 of 2014 is applicable in casu?
It was common cause that the Finance Act Tax Amnesty Regulations, SI163 of 2014 were promulgated in terms of section 23 of the Finance Act (No.2) of 2014. They targeted tax defaulters and evaders. The period covered by the tax amnesty ran from 1 October 2014 to 31 March 2015 and was further extended to 30 September 2015.
The application was made on the prescribed form and full disclosure was required. All taxpayers who had made self-assessments, paid tax, were under investigation or audit, or were challenging their assessments were not eligible.
The appellant fell into the excluded category of taxpayers.
The eligible taxpayers were exempted from paying additional tax, penalties, and interest once the application was granted.
Counsel for the appellant contended, that, the appellant, as a law abiding citizen, was being discriminated against by being asked to pay additional tax and interest in violation of section 56(1) of the Constitution which required that all persons be treated equally before the law and have equal benefit of the law. He prayed for the extension of the benefits to the appellant.
He submitted, in the alternative, that, in exercising its discretion, this Court exempts the appellant from payment of any additional tax and interest.
Sections 56(1) and (6) of the Constitution stipulate that:
“(1) All persons are equal before the law and have the right to equal protection and benefit of the law.
(6) The State must take reasonable legislative and other measures to promote the achievement of equality and to protect or advance people or classes of people who have been disadvantaged by unfair discrimination, and —
(a) Such measures must be taken to redress circumstances of genuine need;
(b) No such measure is to be regarded as unfair for the purposes of subsection (3).”
Section 56 of the Constitution falls under the cluster of fundamental human rights and freedoms.
In terms of section 45(3) of the Constitution, they apply to both natural and juristic persons and must be construed in terms of section 46 of the Constitution, which, amongst other requirements, prescribes the promotion of the founding values and principles in section 3 of the Constitution that underlie a democratic society based on openness, justice, human dignity, equality and freedom by a court of law.
The right to equality before the law and equal benefit to the law are, however, not absolute rights.
They are limited in extent and application by section 86(2) of the Constitution which states that:
“(2) The fundamental rights and freedoms set out in this Chapter may be limited only in terms of a law of general application and to the extent that the limitation is fair, reasonable, necessary and justifiable in a democratic society based on openness, justice, human dignity, equality, and freedom, taking into account all relevant factors, including —
(a) The nature of the right or freedom concerned;
(b) The purpose of the limitation, in particular, whether it is necessary in the interests of defence, public safety, public order, public morality, public health, regional or town planning or the general public interest;
(c) The nature and extent of the limitation;
(d) The need to ensure that the enjoyment of rights and freedoms by any person does not prejudice the rights and freedoms of others;
(e) The relationship between the limitation and its purpose, in particular, whether it imposes greater restrictions on the right or freedom concerned than are necessary to achieve its purpose; and
(f) Whether there are any less restrictive means of achieving the purpose of the limitation.”
The inarticulate major premise embodied in counsel for the appellant's submission was that the tax amnesty provisions were, to the extent that they discriminated against the appellant, unconstitutional.
He did not disclose how the Finance Act (No.2) of 2014, on which these amnesty provisions are founded failed the test of constitutionality stipulated in section 86(2) of the Constitution.
I await proper and well-reasoned, rather than bald and unsubstantiated legal submissions on the point that would serve justice to both the taxpayer and the Commissioner.
The arguments advanced are inadequate to convince me, on a balance of probabilities, that, the appellant should be accorded the same treatment by the Commissioner or this Court as the truant taxpayers contemplated in the tax amnesty provisions.
The main and alternative submissions are devoid of depth and are accordingly dismissed.
I therefore hold, that, the statutory instrument in question has no application in the present matter.
Penalties
In paragraph 51 of his written submissions, counsel for the appellant conceded, that, the Commissioner was authorised, by section 64(2) as read with paragraph (m) to the Eleventh Schedule of the Income Tax Act to increase the level of penalties imposed during an assessment in his determination of an objection.
In the present matter, the penalties were increased from 90% to 100%.
In terms of section 46(6) of the Income Tax Act, the Commissioner has discretion to remit or waive additional penalty where the taxpayer did not intend to evade the payment of the tax due.
Where the intention to evade, in any one of the three alternatives propounded in ITC 1577, 56 SATC 236 of direct intent, awareness of certainty, and awareness of possibility is evinced, neither the Commissioner, in the first instance, nor this court, as a court of revision, can, on an appeal in the wider sense, remit or waive the additional tax to anything other than 100%: see the remarks of SQUIRES J in ITC No.1334 (1981) 43 SATC 98 (Z)…, and of SMITH J in ITC 1631 (1997) 60 SATC 63 (Z)…,.
Counsel for the appellant urged me to apply the principles that I set out in PL Mines v Zimbabwe Revenue Authority HH466-15.
In imposing the penalty, the Commissioner and the Appeal Court are obliged to consider the triad of the offender, the offence, and the interests of society.
Before dealing with each specific transaction for which penalty was imposed, I do take cognisant of the specific factors pertaining to the appellant.
It co-operated with the respondent in some and all instances. It was a good corporate citizen, which, until the investigation under consideration took place, had complied with its tax obligations. It was an employer which held the interests of its workforce at heart. It served the country by bringing some modicum of foreign currency into the country when the local economic environment was bleak.
The offence of tax avoidance was described by MACDONALD JP in Commissioner of Taxes v F 1976 (1) RLR 106 (A), in rather strong language, as an evil.
Of course, taxpayers are allowed to employ legitimate means to lessen their tax burden and these do not invite public opprobrium. Tax avoidance certainly places the burden of taxation on other taxpayers to the exclusion of the offender.
Courts emphasize both personal and general deterrence in imposing suitable penalties.
As will appear in my assessment of each offending transaction, the appellant, and its tax advisers, deliberately implemented an opaque system of tax avoidance and reduction with the intention of evading the payment of the correct tax due. This course of action obviously raises the moral turpitude of the appellant and results in the imposition of the maximum penalty permitted by law.
The interests of society require that taxpayers abide by the law and pay their fair share of taxes. Those who deliberately break the law must feel the pinch.
I have these factors in mind as I consider each offending transaction and assess the suitable penalty.
Penalties were imposed in respect of the following transactions:
Provision for leave pay and for security
In each of the four financial statements in question, the appellant made provision for accrued leave pay due to its staff, and, in 2010 and 2011 a provision for security.
Each provision was claimed as an expense incurred under the general deduction formula, section 15(2)(a) of the Income Tax Act in the year in which it was made, but, was not reversed in the following tax year.
The appellant conceded the failure to reverse these provisions in each of the four years of assessment.
The sole witness for the appellant averred, that, this was due to a bookkeeping oversight for which it did not evince any intention to mislead the respondent or seek to obtain a tax advantage.
The appellant ended up erroneously claiming excess deductions under this head of US$10,520 in 2009; US$28,982 in 2010; US$17,416 in 2011; and US$312 in 2012, which were added back to income, by consent, during the investigations and included in the amended assessments….,.
The respondent treated the non-reversal as a deliberate attempt to evade the payment of the correct tax and imposed the penalty of 100%. The appellant failed to show how such an error could have taken place consecutively in each year.
It seems to me, that, the respondent was justified in treating these failures as deliberate attempts motivated by the desire to reduce the appellant's tax liability.
The imposition of a penalty of 100% in these circumstances was justified.
The 2010 Bad Debt Claim
This was in respect of rentals in the sum of US$18,783 owed by a tenant for the appellant's property in Mutare for the 2011 calendar year. The claim in the summons and declaration, issued on 22 May 2012, was in respect of arrear rentals in the sum of US$2,000 per month for the period 1 June 2010 to 31 December 2011, eviction, and holding over damages from 1 January 2012 and other consequential relief…,.
However, an e-mail from the appellant, of 10 October 2013, indicated that the tenant paid all the rentals at the rate of US$2,300 per month during 2010 but defaulted in 2011.
The appellant included the unpaid rentals in its 2011 income but reversed it all at the end of that calendar year. The tenant commenced payment of reduced rentals of US$1,500 after the issue of summons.
In BT (Pvt) Ltd v Zimbabwe Revenue Authority HH617-14…, I set out the three requirements that a taxpayer is required to prove, on a balance of probabilities, in respect of a bad debt. An application of these requisite elements show that the amount claimed by the appellant was due and payable.
The financial statements for 2011 were prepared on 14 March 2012, the date on which the debt was declared to be bad.
It is clear to me, that, by that date, the amount was unlikely to have been recovered at the end of the 2011 financial year. The Commissioner must also have been satisfied that it was a bad debt. The amount had been included in the taxable income of the taxpayer in that year of assessment.
In my view, the amount should have been deducted from the appellant's income.
For undisclosed reasons, the appellant conceded that it wrongly deducted the amount and counsel for the appellant correctly found himself bound by that concession that the appellant knowingly and voluntarily made.
Clearly, the imposition of a penalty of any nature, let alone of 100%, was not justified.
In the exercise of my discretion, I will direct that the penalty imposed in respect of the bad debt be discharged in full.
The failure to reverse the donation of US$100 made in the 2011 financial year
This was attributed to a bookkeeping error. It was deducted in the 2011 tax computation as an expense.
Again, like in the issue in respect of leave pay and security provisions, the appellant failed to indicate how such “an error” could occur in the face of the accounting skills that were at its disposal.
The respondent was justified in treating the purported error as evincing a deliberate intention to reduce the appellant's taxable income for which he had no choice but to impose a 100% penalty.
The failure to apportion the wages of the drivers employed by the appellant who drove the related party's vehicles
The appellant paid all the statutory salaries and wages and allowances of some of its drivers who drove the related party's vehicles that did not form party of the leased equipment without any form of reimbursement from the related party.
The appellant always claimed these drivers wages as expenses against income. The appellant admitted that it had been doing this for years. This was only discovered during the investigation.
On the advice of its South African based accountants, the appellant agreed that 50.28% of the total wage bill be disallowed….,. The agreed amounts that were added back to income in respect of each tax year…, were US$90,908=17 for 2009; US$158,374=08 for 2010; US$170,616=13 for 2011; and US$190,669=93 for 2012.
It was apparent that the appellant did not incur the expense in relation to these drivers.
In terms of the agreements, the appellant leased only its equipment, and not the drivers, to the related party. All the 110 drivers were not rendering any service to or on behalf of the appellant but were doing so to the related party.
In my view, there was no legal justification for the appellant to deduct the wage bill of all the drivers who were driving both the appellant's rented equipment and the related party's equipment.
The appellant's case, throughout these proceedings, has always been that it was not in the business of cross-border transportation. It ill behoves the appellant to now claim that all the drivers involved in the cross border haulage business of the related party were actually engaged for the purpose of its own trade or in the production of its income.
The pleadings and evidence showed that its income, in respect of this equipment, was derived from the rental agreements. The salaries of these drivers were the responsibility of the related party.
I fail to discern how any self-respecting internal and external accountants of the appellant would allow such a practice to prevail for as long as it did without batting an eyelid. The only reason it prevailed was because the appellant and its erstwhile accountants and tax advisors deliberately intended to evade the payment of the appropriate tax due to the Zimbabwean fiscus.
The penalty imposed, of 100%, was most appropriate.
The assessment of additional income from the hire of equipment to the related party
The appellant conceded, that, some level of additional tax, less than the 100% penalty imposed, was appropriate.
The appellant was uncooperative.
I have already found, that, the transactions infringed the provisions of section 98 of the Income Tax Act. The appellant deliberately intended to evade the payment of tax due to the respondent.
A penalty of 100% was and remains most appropriate.
The unreconciled bank deposits
During the investigation, the appellant failed to reconcile bank deposits of US$100=25 for 2009; US$0=31 for 2010; and US$87=47 for 2012.
These amounts were omitted from the taxable income of the appellant and were added back, by consent, in the amended assessments.
The appellant failed to account for the anomaly.
The issue is not how insignificant they are, but the principle involved. This is because the logical conclusion such a contention would be that payment of a 100% penalty on these insignificant amounts would not place any undue burden on the appellant.
The failure to explain the discrepancy does demonstrate a pattern of tax avoidance or reduction on the part of the appellant that was motivated by the intention to evade the payment of the correct amount of tax due.
The imposition of a penalty of 100% on these insignificant amounts was and remains most appropriate.
Costs
In terms of section 65(12) of the Income Tax Act, an order for costs is only made against the Commissioner if the claim of the Commissioner is held to be unreasonable and against the appellant if the grounds of appeal are found to be frivolous.
I do not find the positions taken by the Commissioner to have been unreasonable neither do I find the grounds of appeal to have been frivolous. Accordingly, each party will bear its own costs.
Disposition
Accordingly, it is ordered that:
1. The amended assessments number 1/3433 for the tax year ended 31 December 2009; 1/3434 for the tax year ended 31 December 2010; 1/3435 for the tax year ended 31 December 2011; and 1/3436 for the tax year ended 31 December 2012, issued on 23 June 2014, be and are hereby set aside.
2. The Commissioner is directed to issue further amended assessments against the appellant in respect of each year of assessment in compliance with this judgment, and, in so doing, shall:
(i) Apply the gross rates per kilometre set out in Table 4 in computing the variance between the expected income and received income.
(ii) Apply the average exchange rates between the United States dollar and South African rand in each year of assessment of as set out in Table 4 of this judgment of R8.64 for 2009; R7.22 for 2010; R7.06 for 2011; and R7.98 for 2012 to 1U$.
3. The appellant is to pay additional tax of 100% in respect of provision for leave pay and for security, failure to reverse the donation, the failure to apportion the wages of the drivers employed by the appellant who drove the related party's vehicles, hire of equipment to the related party, and unreconciled bank deposits.
4. The additional penalty imposed in respect of bad debts is waived in full.
5. Each party shall bear its own costs.
