UCHENA
JA: This
is an appeal against the whole judgment of the Special Court for
Income Tax Appeals dated 28 November 2019, upholding the respondent's
amended assessment of tax against the appellant.
FACTS
The
facts of the case can be summarised as follows;
The
appellant is a registered Bank in Zimbabwe. It is also
a
subsidiary of MBCA Holdings Limited a local holding company which in
turn, is a subsidiary of Nedbank Limited (Nedbank) a South African
company.
The
respondent is an authority established in terms of the Revenue
Authority Act [Chapter
23:11].
It is responsible for assessing, collecting and enforcing payment of
taxes to the State.
On
5 June 2012, the appellant filed its income tax self-assessment with
the respondent for the tax year ending 31 December 2011.
On
27 June 2012, the respondent's Commissioner of Investigations and
International Affairs launched a tax review of the appellant's
operations for the period spanning January 2009 to May 2012.
The
exercise resulted in the respondent issuing amended manual notices of
assessment for Income Tax numbers 203324818 and 20324821 for the tax
years 2010 and 2011 respectively.
The
amended notice of assessment in respect of the 2010 tax year was
subsequently withdrawn whilst the amended assessment in respect of
the 2011 tax year resulted in additional tax and penalties amounting
to US$944,614.80.
The
appellant objected to the amendment for the tax year ending 31
December 2011.
The
respondent dismissed the objection after which the appellant appealed
to the Special Court for Income Tax Appeals (the court a
quo).
The
issue before the court a
quo
was
the validity of the amended assessment of Income Tax number 20324821,
for the 2011 tax year.
The
respondent disallowed the appellant's deductions pertaining to
“expenditure
incurred on general administration and management” in terms of
section 16(1)(r) of the Income Tax Act [Chapter
23:06]
and debts written off by the appellant in its income tax
self-assessment as “bad debts” in terms of section 15(2)(a) as
read with section 15(2)(g) of the Income Tax Act.
It
was established before the court a
quo
that the appellant is a subsidiary of MBCA Holdings Limited a local
holding company which in turn, is a subsidiary of Nedbank Limited
(Nedbank) a South African company.
In
terms of section 143(1)(b) of the then Companies Act [Chapter
24:03]
the appellant was deemed to be a subsidiary of Nedbank (South
Africa).
During
the 2011 tax year, Nedbank (South Africa) met several expenses on
behalf of the appellant including travelling costs,
telecommunications costs and postage and freight costs. It also
rendered services such as group technology infrastructure and
operation support services, system support service for the Africa
Banking and e-commerce, strategic planning assistance and risk
advisory service assistance.
The
appellant subsequently paid Nedbank (South Africa) for the incurred
expenses and accounted for all the payments made thereto, including
reimbursement, payment for services rendered and general and specific
administration costs through a single ledger account headed
“Operating Costs”.
The
respondent's amended assessment
was
based on its treatment of all the payments made to Nedbank (South
Africa) by the appellant as general administration and management
costs.
The
respondent disallowed all amounts in excess of limits set in terms of
section 16(1)(r)(ii) of the Act.
In
respect of bad debts, the respondent's position was that bad debts
could only be claimed in terms of section 15(2)(g) of the Act and
that the debts written off as “bad debts” by the appellant, for
the 2011 income tax year, failed to meet the criteria established in
terms section 15(2)(g) of the Act.
PROCEEDINGS
BEFORE THE COURT A
QUO
In
proceedings before the court a
quo
the
appellant submitted that general costs and not specific costs fell
under the purview of section 16(1)(r) of the Act, while the
respondent adopted the contrary view that section 16(1)(r) of the Act
did not differentiate between general and specific costs, but rather
gave effect to all costs incurred by a subsidiary company to its
holding company as general administration and management expenses
which were deductible in terms of the formula provided by section
16(1)(r)(i)and (ii) of the Act.
In
determining
the
appeal, the court a
quo
held
that section 16(1)(r) of the Act constituted an anti-tax avoidance
measure against a local taxpayer by limiting its allowable deductions
in respect of general administration and management expenses incurred
by a foreign holding company.
It
held that the provisions were enacted by the legislature to prevent
local sudsidiary companies and their foreign holding companies from
colluding to overload expenses on the local entity whilst
simultaneously reducing its Zimbabwean tax liability and increasing
the foreign entity's profits.
In
respect of all the payments made by the appellant to Nedbank (South
Africa), the court a
quo
held
that section 16(1)(r) as read with section 26(2) of the Act was
applicable.
The
appellant was therefore confined to the prescribed deductible income
limits provided for in section 16(1)(r)(ii) of the Act.
In
view of the foregoing, the court a
quo
determined that the expenses deducted by the appellant in favour of
Nedbank (South Africa) fell into the category of “expenditure on
general administration and management” in terms of section 16(1)(r)
of the Act.
The
court a
quo
took
into consideration the
Shorter Oxford English Dictionary
definition of the term “administration” and “management”
respectively, and determined that the former related to “the act of
administering, management” and the latter to “the act or manner
of managing, administrative skill”.
The
court a
quo,
was however, of the view that the definitions were not the
determinant factors of the issue, as “all of the appellant's
contracted functions (were) headlined as management of sorts” in
the appellant's accounting books. It held that the pertinent issue
for consideration was the proper definition of the word “general”,
which definition was held to pertain to “all or most of the parts
of the whole, completely or approximately universal within implied
limits.”
After
determining the issue of deductible income in terms of section
16(1)(r) of the Act, the court a
quo
considered
whether or not the bad debts claimed by the appellant were allowable
deductions in terms of section 15(2)(g) of the Act.
The
bad debts claimed by the appellant in its 2011 tax assessment
pertained to the sum of US$2,250,365.17 being unsatisfied loans due
to the appellant from its four Bulawayo based corporate clients.
The
respondent was not satisfied, that the debts written-off by the
appellant constituted bad debts in terms of section 15(2)(g) of the
Act.
The
appellant contended that loss sustained and written off by a banking
institution or money-lending business (such as itself) from loans,
constituted a deductible loss as contemplated in section 15(2)(a) of
the Act.
The
appellant argued that bad debts in the case of banking institutions
and money-lending institutions come into existence by operation of
law as contained in paragraphs 20, 22, 24 and 25 of the Banking
Regulations, 2000 (S.I 205 of 2000), (the Regulations).
The
appellant wrote off the four unsatisfied loans in terms of para 22(e)
of the Regulations, at the lapse of 360 days, which it argued placed
them in the ambit of section 15(2)(a) of the Act.
The
court a
quo
held
that a past due date loan could not be categorised as a loss when the
loan was well secured and/or where legal action to satisfy the loan
has commenced. It held that a loan could be classified as a loss when
it is established that it can no longer be recovered.
It
was established that the appellant had not commenced legal
proceedings against its first borrower when the debt was written off.
It
was therefore held that the appellant had failed to discharge the
onus upon it to prove, on a balance of probabilities, that the loan
was not recoverable at the time that the loss was declared. In
respect of the appellant's remaining three borrowers, it was
established that their matters were under legal proceedings, wherein
the respondent had secured judgments against the borrowers but had
only partially recovered the total amount due to it.
Sureties
for the three borrowers had not yet been sued.
The
court a
quo
held
that the appellant had failed to establish, on a balance of
probabilities, that the debts written-off were unrecoverable and
constituted a loss.
It
held that the appellant had failed to establish loss as provided for
in terms of para 22(e) of the Regulations or debt in terms of section
15(2)(g) of the Act, thus precluding the appellant from claiming
income tax deductions thereon.
The
court a
quo
therefore dismissed the appellant's appeal.
Aggrieved
by the decision of the court a
quo,
the appellant noted an appeal to this Court on the following grounds:
GROUNDS
OF APPEAL
“1.
The court a
quo
erred
in finding that there is no distinction between the expenditure
incurred on general administration and management as contemplated by
section 16(1)(r) of the Income Tax Act (Chapter 23:06) and
remuneration for reimbursement of specific services or expenses paid
by a subsidiary to a holding company.
2.
The court a
quo
erred
in finding that the disputed expenses constituted expenditure on
general administration and management as contemplated by section
16(1)(r) of the Income Tax Act and were properly disallowed.
3.
The court a
quo
erred
in finding that bad debts written off by a commercial bank
(specifically in terms of the Banking Regulations S.I. 205/2000)
cannot constitute expenses incurred for the purpose of trade or in
the production of income as contemplated by section 15(2)(a) of the
Income Tax Act.
4.
The court a
quo
erred
in finding that the disputed debts could not be categorized as losses
in terms of para 22(e) of the Banking Regulations.
5.
Alternatively, the court a
quo
erred
in finding that the disputed debts were not bad debts and therefore
deductible from the appellant's income in terms of section 15(2)(g)
of the Income Tax Act.”
The
appeal raises two issues for determination.
1.
Whether or not the court a
quo
erred
in determining that there was no distinction between general costs as
provided for in section 16(1)(r) of the Act and specific costs
incurred by a subsidiary in favour of its foreign holding company.
2.
Whether or not the court a
quo
erred
in finding that the disputed debts were improperly written off as bad
debts and therefore not deductible from the appellant's income in
terms of section 15(2)(a) or section 15(2)(g) of the Act.
SUBMISSIONS
MADE BY THE PARTIES
Mr
Ochieng
for
the appellant submitted that the court a
quo
did not make a finding on the nature of the services but rather the
recipient of the services. He further submitted that the nature of
the expenses was not distinguished as that is not in the judgment of
the court a
quo.
On
the deductibility of bad debts, he argued that as per Salisbury
Board of Executors Ltd v Commissioner of Taxes
1941 SR 147, such deductions depended on whether the losses are in
the course of the business of banking or money lending.
He
contended that debts written off constitute losses of a revenue
nature.
Mr
Ochieng
submitted that section 15(2)(a) and (g) of the Act are distinct and
it was difficult to see which one the court a
quo
was using between the two.
He
asserted that section 15(2)(a) applied primarily to and regulates a
situation where there is a secondary consideration. He contended that
in terms of section 15(2)(a) all that needs to be proved is that bad
debts were written off. Counsel for the appellant argued that the
criterion in the banking regulation was met bringing the claim in the
purview of section 15(2)(a) and not (g).
Mr
Magwaliba
for the respondent submitted that the judgment of the court a
quo
is
correct.
He
argued that when interpreting any statute, the context is a major
consideration as indicated in Zambezi
Gas (Pvt) Limited v N. R Barber (Pvt) Limited & Anor
SC3/20.
Counsel
for the respondent submitted that the appellant and Nedbank (South
Africa) are related parties.
He
further argued that the agreement between the parties stated that the
services were general. He contended that the heading thereon is
management support agreement between the appellant and Nedbank (South
Africa) and that the nature of the services is clear from the
agreement itself. Mr Magwaliba
argued that the purpose of section 16(1)(a) is not to distinguish
between general and specific costs.
He
submitted that a specific service maybe paid for in an exercise of
rendering general and administrative services. He further submitted
that in any event, the appellant's witness stated that all expenses
can be labelled under specific expenses.
Concerning
the issue of bad debts, counsel for the respondent submitted that the
Salisbury
case,
supra,
is not relevant in this case as section 15(2)(g) was not in existence
in its current form at the time of the (1941) judgment.
He
argued that the thrust of the respondent's submission is that there
were no actual losses incurred.
He
further argued that in 2011, the appellant held security which was
sufficient to cover the debts and that it was its duty in terms of
section 15(2)(g) of the Act to be satisfied that the debts were bad.
Mr
Magwaliba
contended
that the discretion of the Commissioner was properly exercised.
In
response, counsel for the appellant submitted that the respondent was
attempting to use the agreement to blanket all expenses as general
when there is a clear distinction in the provision of services.
Concerning
the issue of bad debts, he argued that the main consideration was
that it was a loss incurred in the course of trade.
APPLICATION
OF THE LAW TO THE FACTS
1.
Whether or not the court a
quo
erred
in determining that there was no distinction between general costs as
provided for in section 16(1)(r) of the Act and specific costs
incurred by a subsidiary in favour of its foreign holding company
The
first and second grounds of appeal raised by the appellant challenge
the application of section 16(1)(r) of the Act to the expenses it
incurred in favour of its holding company, Nedbank (South Africa).
The
appellant contends that it made payments for specific services to
Nedbank (South Africa), which payments were distinct from general
administration and management expenses as contemplated in section
16(1)(r) of the Act.
The
appellant is of the view that had the legislature intended that there
should be no distinction between general and specific expenses, the
inclusion of the qualifying term “expenditure incurred on general
administration and management”
would not have been included.
The
appellant further submitted that the interpretation adopted by the
court a
quo
would be applicable had the relevant provision read “expenditure
incurred in favour of a holding company” without the aforementioned
qualification.
In
the case of Parkington
v Attorney General,
1869 LR 4 H.L. 100, 122 LORD CAIRNS commenting on interpretation of
fiscal statutes said:
“As
I understand the principle of all fiscal legislation it is this. If a
person sought to be taxed comes within the letter of the law he must
be taxed, however great the hardship may appear to the judicial mind
to be. On the other hand if the Crown, seeking to recover the tax,
cannot bring the subject within the letter of the law, the subject is
free, however apparently within the spirit of the law the case might
otherwise appear to be.”
I
respectfully agree with the position of the law as stated by his
Lordship.
To
this I would add that if an amount to be taxed or the percentage at
which a subject has to be taxed or the formula for taxation is
established the subject will be taxed at the established amount,
percentage rate or in terms of the amount established by the formula.
The
law applicable to the determination of this issue is provided for by
section 16(1)(r)(i) and (ii) as read with section 26(2) of the Act.
Section
16(1)(r)(i) and (ii) provides as follows:
“(1)
Save as is otherwise expressly provided in this Act, no
deduction shall be made in respect of any of the following matters---
(r)
in
the case of expenditure incurred on general administration and
management in favour of a company of which the taxpayer is the
subsidiary or holding company or (where the company is a foreign
company) the local branch
(i)
incurred prior to the commencement of trade or the production of
income or during any period of non-production, any
amount in excess of zero comma seventy-five per
centum
of
the amount obtained by applying the following formula —
A
– (B + C)
Where
—
A
represents the total expenditure qualifying for deduction in terms of
section
fifteen;
B
represents the expenditure on general administration and management
paid outside Zimbabwe by such local branch or subsidiary, whether or
not such expenditure was incurred by the head office of that foreign
company;
C
represents expenditure qualifying for deduction in terms of section
(2) of paragraph (f)
of subparagraph (i) of section fifteen;
(ii)
incurred
after the commencement of trade or the production of income, any
amount in excess of one per
centum of
the amount obtained by applying the above formula.”
(Emphasis
added)
Section
26(2) of the Act provides as follows:
“(2)
For the purposes of this section, any
amount paid outside Zimbabwe by a local branch or subsidiary of a
foreign company in excess of the amount allowable as a deduction in
terms of paragraph (q)
or (r)
of subsection (1) of section sixteen
shall
be deemed to be the payment of a dividend upon which non-resident
shareholders tax shall be charged, and the term 'dividend' shall
be
so construed for the purposes of the Ninth Schedule.” (emphasis
added)
It
is trite that the objective of interpretation of statutes is to
discover the intention of the legislature, which once established
must be applied as the law governing the interpreted provisions of
the statute.
It
is also trite that provisions of a statute must be interpreted within
the context of the statute in which they are found.
The
Constitutional Court in the case of Chihava
& 2 Ors v Provincial Magistrate Francis Mapfumo N.O & Anor
CCZ
6/15 at p 6-7 said:
“The
starting point in relation to the interpretation of statutes
generally would be what is termed 'the golden rule' of statutory
interpretation. This rule is authoritatively stated thus in the case
of Coopers
and Lybrand & Others v Bryant
1995
(3) SA 761 (A) at 767;
'According
to the 'golden rule' of interpretation, the language in the
document is to be given its grammatical and ordinary meaning, unless
this would result in some absurdity, or some repugnancy or
inconsistency
with the rest of the instrument.'…(emphasis
added)
In
his book 'Principles
of Legal Interpretation - Statutes, Contracts and Wills'
1st
Ed. at p 57, E A Kellaway echoes this statement … The learned
author, at p62, states:
'Even
if a (South African) court comes to the conclusion that the language
is clear and unambiguous, it is entitled to reject the purely literal
meaning if it is apparent from
the anomalies which flow therefrom that the literal meaning could not
have been intended by the legislature.'”…
At
pp7 to 8 the court said:
“The
principles set out in the dicta
cited
above can aptly and instructively be summarized as follows:
(i)
the Legislature is presumed
not to intend an absurdity, ambiguity or repugnancy to arise out of
the grammatical and ordinary meaning of the words
that it uses in an enactment.
(ii) therefore,
in order to ascertain the true purpose and intent of the Legislature,
regard
is to be had, not only to the literal meaning of the words, but also
to their practical effect.
(iii) In
this respect -
(a)
the words in question must be capable of an
interpretation that is 'consistent' with the rest of the
instrument in which the words appear;
(b)
the state of the law in place before the enactment in question, is a
useful aid in ascertaining the legislative purpose and intention, and
(c)
where an earlier and later enactment (or provision) deals with the
same subject matter, then, in the case of uncertainty, the two should
be interpreted in such a way that there is mutual consistency.”
(emphasis added)
Section
16(r)(i) and (ii) as read with section 26 of the Act establish that
the intention of the legislature was to prevent related parties from
colluding to overload expenses on the local entity whilst reducing
Zimbabwean tax liability and increasing the foreign entity's
profits.
It
is clear that the limitation of deductible expenses provided for by
section 16(r)(ii) in respect of expenses incurred
after the commencement of trade or the production of income, arrived
at after calculations in terms of the fomula in section 16(r)(ii)
cannot
be exceeded.
The
use of the words “any
amount paid outside Zimbabwe by a local branch or subsidiary of a
foreign company in excess of the amount allowable as a deduction in
terms of paragraph (q)
or (r)
of subsection (1) of section sixteen
shall
be deemed to be the payment of a dividend upon which non-resident
shareholders tax shall be charged”
limits
the amount allowable to the amount imposed by the formula.
It
is apparent from these provisions that a limit of allowable
deductions has been set and has to be complied with by a tax payer
and enforced by the respondent.
I
am satisfied that the interpretation adopted by the court a
quo
is
consistent with the intention of the legislature and cannot therefore
be said to constitute a misdirection.
The
intention of the legislature in section 16(r)(i) and (ii) as made
clear by section 26 must be given effect.
Whether
or not the court a
quo
erroneously
made findings concerning the literal and ordinary grammatical meaning
of the term “general administration and management” as averred by
the appellant, is of no consequence as the overriding consideration
in the circumstances, in my view, is that the intention of the
legislature supersedes a literal interpretation of a provision of a
statute.
To
uphold the assertion that a subsidiary “will be unduly taxed for
expenses legitimately accrued to its holding company” would be
incorrect because that provision specifically relates to foreign
incurred expenditure and the need to avoid abuse of the local tax
system to the benefit of foreign entities.
I
am of the view, that the interpretation proffered by the appellant
would have the effect of creating room for every local entity in a
similar position to claim expenditure for specific costs to the
detriment of the objectives of the law.
I
respectifully associate myself with the reasoning and interpretation
of the court a
quo.
Its
decision should therefore be upheld.
2.
Whether or not the court a
quo
erred
in finding that the disputed debts were improperly written off as bad
debts and therefore not deductible from the appellant's income in
terms of section 15(2)(a) or section 15(2)(g) of the Act
The
court a
quo
upheld
the decision of the respondent that the disputed debts were
improperly written off as bad debts as the appellant had collateral
security in respect of each debt. The evidence placed before the
court a
quo
establish
that each debt was secured by a mortgage bond over immovable property
and sureties.
It
held that the appellant had failed to produce any documents
justifying the need to write-off the debts and that the Commissioner
had properly disallowed the deductions of bad debts.
Mr
Ochieng relied on the decision in Salisbury
Board of Executors Ltd v Commissioner of Taxes
1941
SR 147, where it was held that such deductions depended on whether
the losses are in the course of the business of banking or money
lending.
The
court a
quo
held that the issue before that court was not on the interpretation
of section 15(2)(g) but was an obiter statement hesitantly made in
passing.
A
reading of the case confirms the court a
quo's
observation.
Commenting
on the effect of the Salisbury case Mr Magwaliba
for the respondent said it was an irrelevant precedent as the case
was considering the statute as it then was and not as it now is.
I
agree with his submission.
A
statute which has been amended should be interpreted according to its
current wording.
An
interpretation given to it before an amendment which substantially
altered the law is not binding precedent.
In
this case section 15(2)(g) was amended and substituted by Act 10 of
2009 and now reads as follows:
“(g)
the
amount of any debts due to the taxpayer to the extent to which they
are proved to the satisfaction of the Commissioner to be bad, if such
amount is included in the current year of assessment or was included
in any previous year of assessment in the taxpayer's income either
in terms of this Act or a previous law;
[Paragraph
substituted by Act 10 of 2009].”
The
section must be read together with the Banking Regulations S.I 2005
of 2000 which also came into force long after the 1941 decision.
These
changes must therefore be taken into account in interpreting the
amended law.
I
therefore agree with the court a
quo
that the Salisbury
case is not a reliable precedent, and had no binding effect on the
court a
quo.
The
purpose of amending a law is to bring into effect the legislature's
current intention.
The
legislature's new intention must prevail over its former intention.
Reference
to the former law must be construed to mean the law which was in
existence immediately before the amendment and subsection of section
15(2)(g) by Act 10 of 2009. It does not mean the law as it was in
1941 as the 1941 provision and those which followed it were rendered
inoperative by the coming into force of the 2009 amendment.
Section
15(2)(a) of the Act provides for deductions which can be made by a
taxpayer 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;”
The
provisions of section 15(2)(a) provide in general for deductions of
expenditure and losses incurred for the purposes of trade which can
be deducted to the extend to which they are expenditure or losses of
a capital nature.
It
is apparent that section 15(2)(a) is of general application. Its
provisions are subordinated to those of section 15(2)(g) which
provides for the circumstances under which the deduction of losses
can be allowed.
Section
15(2)(g)
of the Income Tax Act which provides for the circumstances under
which bad debts can be deducted provides as follows:
“(2)
The deductions allowed shall be —
(g)
the
amount of any debts due to the taxpayer to the extent to which they
are proved to the satisfaction of the Commissioner to be bad,
if such amount is included in the current year of assessment or was
included in any previous year of assessment in the taxpayer's
income either in terms of this Act or a previous law;” (emphasis
added)
Section
15(2)(g) should be read together with section 22(e) and 24 of the
Banking Regulations, 2000 S.I.205 of 2000, but what is apparent from
the reading of section 15(2)(g) is that the loss must be proved to
the satisfaction of the Commissioner to be a bad debt.
It
therefore will not be granted on the say so of the tax payer to be a
bad debt.
The
taxpayer has to prove to the Commissioner that it is a bad debt. If
the Commissioner is not satisfied that it is a bad debt he is at law
entitled to disallow the deduction.
Section
22(e) of the Banking Regulations reads as follows:
“22
For the purpose of this Part, every banking institution shall
classify all assets according to the following gradations -
(a)---n/a
(b)---n/a
(c)---n/a
(d)---n/a
(e)
'loss' if the asset in question -
(i)
is
past due for more than 360 days, unless
such asset is well secured and legal action has actually commenced
which is expected to result in the timely realisation of the
collateral or enforcement of any guarantee relating to the asset;
or
(ii)---n/a
(iii)
is
otherwise considered uncollectable or of such little value that its
continuance as an asset is not warranted:
Provided
that a loss classification shall not preclude the possibility of
recovering the asset or securing a salvage value for it.”(emphasis
added)
Section
22 of the Banking Act clearly states that the purpose of the
gradations is for the classification of a banking institution's
assets. This means they remain assets of the bank as section 22 ends
by saying: “Provided that a loss classification shall not preclude
the possibility of recovering the asset or securing a salvage value
for it.”
This
means mere classification as a 'loss' does not prove an
irrecoverable loss of the asset.
The
Commissioner will in such circumstances be justified in disallowing
the deduction, if he is not satisfied that such a 'loss' is a bad
debt.
The
taxpayer must therefore prove to the satisfaction of the Commissioner
that the debt is no longer recoverable.
It
is not enough to merely deduct it as a bad debt without attaching
proof that it is no longer recoverable.
Section
24 of the Banking Regulations provides as follows:
“A
loan or asset graded 'loss' shall be immediately written off,
whether
or not the banking institution intends or is in the process of
attempting to recover the loan or asset”.(emphasis
added)
This
again proves the inconclusiveness of the gradations, as an asset can
be written off even if the bank intends or is in the process of
attempting to recover it.
The
Commissioner cannot be expected to be satisfied that such a 'loss'
constitutes a bad debt.
The
law requires the Commissioner to be satisfied that the debt is indeed
a bad debt in terms of section 15(2)(g) before allowing deductions to
be made.
The
Commissioner should therefore carefully assess the alleged bad debts
for him to be satisfied that they have been properly claimed in terms
of the law. If he is reasonably and justifiably not satisfied the law
allows him to refuse to allow the deduction of the alleged bad debts.
A
perusal of the record establishes that in respect of each borrower
the appellant had indeed not exhausted its rights against sureties
and was receiving payments from the borrowers during the period of
litigation.
It
was, therefore, not legally correct for such debts to be deducted as
bad debts whilst they could still be recovered from the sureties and
while the borrowers were making further payments.
Commenting
on the status of the four borrowers whose debts the appellant had
written off as bad debts and deducted in its self assessment of 2011,
the court a
quo
said:
“The
appellant declared the losses on 29 April 2011. At that time it was
the mortgagee of the encumbered propery, which belonged to a third
party and not the first borrower. That property had been
independently valued by valuators engaged by appellant a year before
on 11 February 2010 at US$1.1 million. The
appellant did not conduct another independent valuation before
declaring the loss. We know from the letter written by NSSA on 23
February 2011 that independent valuers engaged by NSSA between 11
February and 23 March 2011 had valued the property at US$2.7m. The
pleadings and the evidence of the head of credit never did explain
why the appellant never sought satisfaction of the loan from that
property and other properties encumbered by unlimited guarantees such
as the amalgamated contiguous building guaranteed by LB (Pvt) Ltd,
which according to the letter of the borrower's managing director
of 2 April 2009 was unencumbered.------
The
head of credit did not produce any evidence of the valuations done in
2011 either by an independent valuer or by a desktop valuer. He did
not intimate that any such evidence was availed to the
investigators or the Commissioner.
I
have already highlighted the weaknesses in the evidence provided by
the appellant in respect of the first borrower. Those findings apply
with equal force in the consideration of the satisfaction issue. I am
not satisfied that there was an unlikelihood of realization of the
securities held by the appellant against the debt of the first
borrower.
In
regards to the second borrower, the security would have been
sufficient to meet its indebtedness had it been executed in 2011.
The
debt went 360 days past due in July 2010. The head of credit was wont
to say ad
nauseum
that properties were overvalued in 2009 when the United States dollar
was introduced into the multicurrency monetary basket in Zimbabwe and
progressively fell in nominal terms in subsequent years. Apparently,
the trend was debunked by the residential property that secured the
second borrower's debt for it was sold by the Sheriff in 2015 for
US$57,500 and the surety complained that the price was too low.
I
agree with Mr Magwaliba
that the property could have been worth much more in 2011. It would
have been able to cover the second borrower's debt.
The
appellant wrongly considered the debt bad. The Commissioner properly
disallowed it from the appellant's 2011 income tax return.
In
respect of the third borrower, the debt went 360 days past due in May
2010. The security was disposed of in the Sherff's sale in
execution in November for US$35,000, an amount which was greater than
the debt owing but which the Sheriff considered too low such that he
invoked the private treaty route.
The
reasoning adopted in the second borrower's case applies with equal
force to the present matter.
I
am satisfied that the value of the security would have most likely
covered the debt that was considered bad by the appellant in the 2011
tax year. The Commissioner correctly disallowed it from the
appellant's 2011 income tax return.
Lastly,
the debt of the fourth borrower went 360 days past due in March 2010.
The debt had increased to US$26,225.78 from the original amount of
US$20,000 by the time judgment was taken in 2011.
The
property was valued at US$31,250 at the time the facility was availed
to the fourth borrower.
The
property attracted the highest bid of US$7,000 at the Sheriff'sale
in execution conducted in March 2015, a price which at the date of
hearing of this appeal was still awaiting the Sheriff's
confirmation.
The
appellant did not produce any valuation evidence which would have
tended to justify the partial write off of the debt. The appellant
failed to show on a balance of probabilities that the security was
inadequate to cover the outstanding debt in 2011.
I
am not satisfied that the security was inadequate to cover the
outstanding amount.
The
Commissioner correctly disallowed the deduction claimed in respect of
the fourth borrower in the appellant's 2011 income tax return.”
When
legal proceedings were instituted the second borrower owed the
appellant US$40,000-00. During the contested action the second
borrower made intermittent payments of US$17,191-13. The mortgaged
property was sold at US$57,500-00 at the Sheriff's sale, a price
much higher than the amount owed.
The
third borrower owed US$26,677-27. The mortgaged property was sold for
US$35,000-00 at the Sheriff's sale again a price much higher than
the amount owed.
The
fourth borrower had been placed under liquidation. The appellants
argue that that rendered the debt a bad debt.
This
is not correct as a debt can be recovered even if a company is under
liquidation subject to certain conditions.
A
debt can only be rendered irrecoverable when the company has wound up
and closed.
In
Allied
Bank Ltd v Dengu & Anor
SC52/16, this Court remarked as follows:
“The
court was not persuaded by Mr Matinenga's
submissions.
Section 213 of the Companies Act provides as follows;
'In
a winding up by the court —
(a)
no
action or proceeding shall be proceeded with or commenced against the
company except by leave of the court and subject to such terms as the
court may impose;
(b)
any attachment or execution put in force against the assets of the
company after the commencement of the winding up shall be void;
(c)
every disposition of the property, including rights of action, of the
company and every transfer of shares or alteration in the status of
its members, made after the commencement of the winding up, shall,
unless the court otherwise orders, be void.'
What
can be noted from the above section is that where the company is a
defendant, no action can be proceeded with or commenced against the
company without leave of the court.
This
section states that the only circumstance in which the leave of the
court is required 'to proceed' or 'to continue' with the
proceeding is where the company that fell under liquidation during
the proceedings, is a defendant/respondent.”(emphasis added)
In
light of the above, it is clear that a company under liquidation can
be sued subject to being granted leave to do so by the court.
It
is my view, that if sureties have not yet been sued a debt cannot be
classified as a bad debt. The court a
quo
was therefore correct when it held that there was still a possibility
of recovering the appellant's money from the borrower. The
appellant should therefore not have passively rendered it a bad debt.
The
appellant had to join the queue of other creditors and could only
treat it as a bad debt if all this had been exhausted.
Over
and above the fourth borrowers ability to liquidate its debt through
sureties and payments to creditors by a company under liquidation,
the appellant had during litigation received intermittent payments of
US$13,123-55 from the borrower.
DISPOSITION
The
court a
quo
correctly interpreted section 16(1)(r) as read with section 26 of the
Income Tax Act as having been enacted to prevent Zimbabwean companies
which are subsidiaries of foreign holding companies from colluding to
overload expenses on the local entity whilst reducing Zimbabwean tax
liability and increasing the foreign entity's profits.
The
court a
quo
took into consideration the facts of each borrower's debt and
correctly held that the security provided for each debt plus the
value of the properties mortgaged for each debt did not prove that
the debts were unrecoverable.
It
correctly dismissed the appellant's appeal.
There
is no merit in the appellant's appeal. In respect of costs there is
no reason why they should not follow the result.
It
is accordingly ordered as follows:
'The
appeal be and is hereby dismissed with costs.'
GUVAVA
JA: I
agree
MAKONI
JA: I
agree
Atherstone &
Cook,
appellant's legal practitioners
Legal
& Corporate Services Division,
respondent's legal practitioners
