MAVANGIRA
JA: 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 the 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
the 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 the 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
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, para 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 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. Mr
Magwaliba
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.
Mr
Magwaliba
also
argued that the respondent could not move for such relief predicated
on the exact antithesis 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 at 259 which proscribes approbation and reprobation or
the taking of two positions that are inconsistent with each other. He
argued that the “reference” made by Mr de
Bourbon
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.
Mr
Magwaliba
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, Mr de Bourbon
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.
Mr
de
Bourbon
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, Mr de
Bourbon
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.
Mr
de
Bourbon 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) at 695 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 (supra)
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 Mr de
Bourbon'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
Mr
Magwaliba'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
subparas 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
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. 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. 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 at 259, 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) at 63.
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 para 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,
para 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 para 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 Act. It being in conflict with the Act,
it is therefore incapable of implementation.
The
prayer by Mr Magwaliba
on behalf of the appellant for amendment of the order of the court a
quo
by the deletion of para 4(b) as well as the reference in para 5 to
para 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
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 Mr de
Bourbon
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 Mr de
Bourbon,
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 Mr
Magwaliba
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 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.
Mr
de
Bourbon
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
SC 61/17 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
Mr de
Bourbon 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 (as he then was) 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 para 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 subpara (b) of para 4; and
(ii)
the deletion of the reference in para 5 to para 4(b) such that where
it reads “para 4 (a) to (d)” will now read “para 4(a), (c) and
(d).”
GUVAVA
JA: I
agree
ZIYAMBI
JA: I
agree
Advocates'
Chambers,
appellant's legal practitioners
Atherstone
& Cook,
respondent's legal practitioners
1.
Income Tax in Zimbabwe, Fourth Edition, Butterworths 1997 p118
