CHATUKUTA J: The
applicant sought an order in the following terms:
“1. That
the Respondent be and is hereby directed to refund Applicant within
seven days of the date of this order the sum recovered from the
Applicant's Value Added Tax refund on the 20th
December 2005 (sic)
of $5,450,939,769.71.
2.
The Respondent shall pay interest to the Applicant on the sum
recovered from the Value Added Refund (sic)
on the 20th
December 2005 (sic)
in the sum of $5,450,939,769.71 at the prescribed rate of interest
from 20 December 2005 to the date of payment in full.
3. The Respondent shall pay
costs of this Application.”
The background
to the matter is that, in the exercise of its statutory duty, the
respondent reviewed the tax affairs of Trojan Nickel Mine and Bindura
Smelting Corporation for the period 2003 and 2005. Both companies are
subsidiaries of the applicant. At the conclusion of the review
exercise, the two companies were assessed to pay additional corporate
and withholding tax amounts due as according to the annual payment
dates. The respondent imposed a penalty and interest on the due
amounts in terms of sections 46 and 71(2) of the Income Tax Act
[Chapter
23:06]
respectively. The respondent objected to the payment of interest
beyond the capital debt. On 6 July 2003, the applicant instructed
respondent to hold back an amount of $8,000,000,000 from its Value
Added Tax refunds account with the respondent, as a deposit pending
the finalisation of the investigations on the two subsidiaries'
corporate tax. The interest due in relation to the applicant's two
subsidiaries was deducted from this amount. The applicant was of the
opinion that the amount deducted and withheld by the respondent in
the sum of $5,450,939,769 was interest in excess of the in
duplum
rule. The applicant then filed this application to recover that
amount.
The respondent
raised a point in
limine
that the applicant did not have the locus
standi
to institute these proceedings. It was submitted, for the respondent,
that the additional corporate and withholding tax was due, not from
the applicant, but from Trojan Nickel Mine and Bindura Smelting
Corporation. Although the two companies were applicant's
subsidiaries, they were separate legal personalities. The companies
should have brought the action in their individual names as they were
not incapacitated in any manner.
The applicant
submitted that it had a direct pecuniary interest in the affairs of
its subsidiaries and therefore had locus
standi.
The respondent had throughout the review of the affairs of the two
subsidiaries communicated with the applicant. The court was referred
to various communications between the applicant and the respondent in
connection with the matter at hand. In particular, the applicant
referred the court to the letter dated 6th
July 2005. That letter authorised the respondent to hold back as
deposit an amount of $8.8 billion being VAT returns submitted to
ZIMRA. ZIMRA held back that amount and deducted the interest due by
the two subsidiaries from that amount.
It is trite
that for a party to be able to sue
it
must have an interest in the subject-matter of the suit and that such
interest must be a direct one. There is a plethora of authority in
this regard.
The Supreme
Court in Law
Society of Zimbabwe & Ors v Minister of Finance (Attorney-General
Intervening) (supra)
cited with approval the meaning ascribed to “direct and substantial
interest” in Zimbabwe
Teachers Association & Ors v Ministry of Education
(supra) by EBRAHIM J (as he then was). At 52E it was observed that a
party needs to show that it has an interest in the right which is the
subject-matter of the litigation and not merely a financial interest
which is only an indirect interest in such litigation.
It is my view
that the applicant's financial interest in the current matter is
not indirect as in the other cases cited above. In this case, the
interest is direct by the very nature of the relationship of the
applicant vis
a vis
the two companies whose financial affairs were reviewed. It is not in
issue that the applicant wholly owns the subsidiary companies. The
applicant's position is reinforced by the fact that the respondent
did engage the applicant in its review of the affairs of the
subsidiaries. It accepted the applicant's authority to hold back as
deposit an amount of $8.8 billion being VAT returns due to the
applicant in order to off-set what was due from the subsidiaries. The
respondent did not object to this direct communication between the
holding company and itself. In fact, it is the balance of this amount
that the applicant sought to be refunded. Although the respondent
submitted that all the correspondence emanating from its office was
directed at the two subsidiaries, it is conceded in the heads of
argument that it had held a number of meetings with the applicant
over the two subsidiaries. One such meeting was held on 17 January
2006. It concedes that it is the applicant who instructed the holding
over of its VAT Refund, to settle the two subsidiaries'
indebtedness to the respondent. It is further conceded that the
applicant and the respondent held a meeting on 17th
of January 2006. It is my view that after all this engagement with
the applicant in connection with the tax affairs of the subsidiaries,
the respondent cannot turn round at this late hour and dispute the
applicant's direct interest in the matter and therefore its locus
standi.
Coming back to the merits of the application, it appears to me that
there are two issues for determination. The first issue as identified
by the applicants was whether the Commissioner is entitled to charge
interest on unpaid withholding taxes from the dates from which they
should have been paid or from the date of notification.
The applicant
submitted that interest is payable in terms of section 71(2) only
after the taxable capital amount has been determined by the
respondent and the applicant has been notified of the amount.
Interest will then become due on to the remaining capital unpaid by
the taxpayer. In this regard, the applicant relied on Air
Zimbabwe Corporation and Ors v The Zimbabwe Revenue Authority.
It was the respondent's contention that interest accrued at the
time when the taxes became due and the interest continued to accrue
on the outstanding debt.
Section 71(2) provides:
“If
tax is not paid on or before such days and at such places as are
fixed or prescribed by or under this Act or, where no such time or
place is so fixed or prescribed, as are notified by the Commissioner
in
terms of subsection (1), interest, calculated at a rate to be fixed
by the Minister, by statutory instrument, shall be payable on so much
of the tax or an instalment of the tax, as the case may be, as from
time to time remains unpaid by the taxpayer during the period
beginning on the date specified by the Commissioner in the
notification as the date on which the tax or the instalment of the
tax shall be paid and ending on the date the tax or the instalment of
the tax is paid in full:
Provided that in special
circumstances the Commissioner may extend the time for payment of the
tax without charging interest.” (own emphasis).
It appears to
me that the applicant's reliance on Air
Zimbabwe Corporation and Ors v The Zimbabwe Revenue Authority
is misplaced. The applicant relied on a section that had been
amended. Air
Zimbabwe Corporation and Ors v The Zimbabwe Revenue Authority
was decided on section 71(2) before it was amended by the Finance Act
2003, Act 10 of 2003. Prior to the amendment, the provision did not
refer to time fixed or prescribed by the Act. It is therefore my view
that section 71(2) is now clear that interest is not payable from the
date of notification but from the date when the tax was due in terms
of the Act.
The second
issue for determination is whether or not the in
duplum rule
applies to the fiscus.
The rule
states that interest runs only until the sum of the interest unpaid
is equal to the sum of the capital. The
applicant submitted that the rule was intended to protect borrowers
from the exploitation of lenders and it was entitled to the
protection afforded by the rule. In this regard, the applicant relied
on a number of cases.
The applicant
further submitted that at the time when interest was charged, the
common law rule applied to the fiscus. This has however changed with
the amendment of the General Laws Amendment Act [Chapter
8:07] by the Finance
Act (No. 2), Act 8 of 2005. The General Laws Amendment Act was
amended by the insertion of section 11A which provides that the rule
does not apply to the fiscus. It was submitted that the amendment
however did not have any retrospective effect and was therefore not
applicable to the applicant.
The respondent
submitted that the applicant and respondent's relationship was not
that of a borrower and a lender. It was submitted that the in
duplum rule
applies to the real world of commerce and not to public fiscus
matters. The applicant relied on South
African Revenue Services v Woulidge and
Verulam
Medicentre Pty v Ethekwin Municipality.
Indeed, the
purpose of the in
duplum
rule is the protection of the borrower from the lender and forms part
of our law. This is clearly presented in the cited cases. The
question is whether or not the rule applies to the fiscus. The
question is better answered from an examination of section 11A of the
General Laws Amendment Act. Section 11A provides -
“11A
Exclusion of in
duplum rule
in certain cases
(1) ……………………………..
(2)
For the avoidance of doubt it is declared that the rule of the common
law known as the in
duplum rule
that prohibits the payment of outstanding interest in excess of the
amount representing the capital or principal sum of a debt does not
apply to fiscal debts, that is, to debts by way of outstanding taxes
or duties or penalties in respect of the non-payment thereof that are
owed to the Authority by a person liable to pay such taxes, duties or
penalties under the Scheduled Acts.”
It appears to
me that the import of that section is that under common law, the in
duplum rule
does not and has never applied to debts due to the State.
The applicant
contented that prior to the introduction of the section in our
legislation, the in
duplum
rule applied to the fiscus as it did to any other entity. The
respondent submitted that section 11A was a restatement of the common
law position.
It is my view
that the wording of section 71(2) of the Income Tax Act is clear that
the in duplum rule does not apply to the fiscus. Section 11A of the
General Laws Amendment Act would therefore be a restatement of the
common law position on the rule. A strict approach is adopted in the
interpretation of fiscal legislation.
Where the statute is expressed in clear, precise and unambiguous
words, the court can only expound those words in their ordinary and
natural sense and nothing more.
The relevant part of section 71(2) provides that –
“……….
interest, calculated at a rate to be fixed by the Minister, by
statutory instrument, shall be payable on so much of the tax or an
instalment of the tax, as the case may be, as
from time to time remains unpaid
by the taxpayer during the period beginning on the date specified by
the Commissioner in the notification as the date on which the tax or
the instalment of the tax shall be paid and ending
on the date the tax or the instalment of the tax is paid in
full.”(own
emphasis).
It is my view that where tax due remains unpaid, interest is
chargeable at the rate fixed by the relevant Minister. Interest
ceases to be charged on the date the tax or any instalment thereof is
paid in full. Therefore whether or not interest exceeds the capital
the Commissioner is entitled to charge interest on any tax that
remains unpaid. It is my view that the provision is not ambigious and
therefore need not be interpreted in favour of the applicant.
It is my view that the confusion has arisen as a result of section
11A of the General Laws Amendment Act, where it begins with:
“For
the avoidance of doubt it is declared that the rule of the common law
known as the in
duplum rule……………”
The impression
created is that there may have been an ambiguity in the legislation
as to whether or not the in
duplum rule applied
to the fiscus. However, I cannot find any clearer language used by
the legislature as in this provision. It does not raise any
ambiguity. I am of the view, therefore that there is no need to
interpret it in favour of the applicant.
Assuming that I am wrong in my interpretation of section 71(2), it is
my view that the cases cited by the applicant do not in fact support
its contention that before the introduction of section 11A, the
common law rule applied to the fiscus.
In CBZ
Ltd v MM Builders & Supplies (Pvt) Ltd & Ors,
GILLESPIE J states, after an investigation into the history of the
rule, that-
“In
conclusion, the result of this investigation is such as to persuade
me that it is a principle firmly entrenched in our law that interest,
whether it accrues as simple or as compound interest, ceases to
accumulate upon any amount of capital owing, whether
the debt arises as a result of a financial loan or out of any
contract whereby a capital sum is payable together with interest
thereon at a determined rate,
once the accrued interest attains the amount of capital outstanding.
Upon judgment being given, interest on the full amount of the
judgment debt commences to run afresh but will once again cease to
accrue when it waxes to the amount of the judgment debt, being the
capital and interest thereon for which cause action was instituted.”
(own emphasis).
Citing the
decision in Union
Government v Jordaan's Executor
with approval GILLESPIE J stated at 433C-D -
“The
decision in Union
Government v Jordaan's Executor
is of great persuasive authority, bearing in mind the identity of the
Bench from which it comes. It
is also one of interest, not only as an example of the application of
the rule to debts other than loans (recovery of survey fees due and
unpaid),
but more importantly because it affirms the proposition that the
duplum rule does not simply render interest irrecoverable but
operates so as to prevent it from accruing at all.” (own emphasis)
The nature of
transactions to which the rule is applied is again referred to in
Commissioner for
SA Revenue Service v Woulidge.
DAVIES J at 611E-G, states:
“The
effect of the in
duplum
rule is that interest stops running when the unpaid interest equals
the outstanding capital. When the debtor repays a part of the
interest the quantum of the outstanding interest reduces below the
amount of outstanding capital. Interest again runs until it equals
the capital amount. The
rule applies not only to money-lending transactions but to any
transaction which involves the payment of interest on an amount due
in terms of the transaction.”
(Own emphasis).
It is my view that, by necessary
implication, in duplum
rule does not apply to any other relationship which is not that of a
borrower or lender, or which is not that of a commercial nature. The
relationship between the applicant and the respondent is a statutory
relationship where the interest charged is intended to be
compensatory for failure to pay tax on the due date. It
appears to me that the relationship is in fact more than that. It is
a relationship between the State and a subject, where it is in the
domain of the State to tax its subjects. It surely cannot be said to
be a contractual relationship where the in
duplum rule would
apply. It
is my view therefore that the relationship is not a transaction
envisaged in CBZ
Ltd v MM Builders & Supplies (Pvt) Ltd & Ors
and the cases cited therein and further the other cases that have
been decided on the rule.
As stated earlier, in CBZ
Ltd v MM Builders & Supplies (Pvt) Ltd & Ors
the court cited with approval the decision in Union
Government v Jordaan's Executor
(supra) where it was held that the in
duplum rule applied to
the fiscus. In that case the Union Government had paid survey fees of
the farm belonging to the plaintiff. The amount so paid out carried
interest at a fixed rate. When the plaintiff sought transfer of the
property, he realized that he had not paid the capital amount and the
interest. The interest claimed by the Union Government included
interest beyond that permitted under the in
duplum rule. DE
VILLIERS J.P. ruled in that case that no interest runs after the
amount is equivalent to the capital sum.
It appears to me that case is distinguishable from the present.
In Union
Government v Jordaan's Executor,
the relationship between the plaintiff and the Government was a
relationship where the State had expended money in paying surveyor
fees on behalf of Jordaan's Executor. The relationship created was
therefore that of a debtor and a creditor, even though the creditor
was now the State. It is my view that the Union Government had placed
itself under the common law rule. Secondly, the amount expended in
the payment of the surveyor fees started earning interest with effect
from the time it was expended. In the case of tax, interest is not
charged on tax during the period of the tax review. Tax is only
charged when the amount becomes due and has not been paid.
It is my view
that what is also important is the basis of the rule. The rule is
based on public policy intended to protect debtors
from exploitation by creditors by forcing them to pay unregulated
charges, and enforce sound fiscal discipline on creditors.
The rationale for the rule is broadened in Conforce
(Pvt) Ltd v City of Harare
where CHINHENGO J observed as follows
“The
rationale for the in duplum rule and its origins are fully examined
by GILLESPIE J in M
M Builders'
case supra. I am much persuaded by his Lordship's reasoning and
understanding of the rationale and origins of the rule. I do not need
to traverse the same ground. If I understand the reasoning of
GILLESPIE J correctly, then I venture to say that the public interest
served by the in duplum rule is not to be identified with sympathy
for the debtor, so as to say that the rule is design to protect him.
I view the public interest involved as encompassing a wider spectrum
of interests, from the protection of the debtor, to securing fiscal
discipline on the part of lenders, to considerations of justification
for charging interest in the first place i.e. to compensate the
creditor for deprivation of use of the money due until payment
(Mawere
v Mukuna
1997 (2) ZLR 360 (H) at 364G) and to the interests of commerce
generally and to perhaps many more interests. Thus the public
interest cannot be restricted to one or two considerations i.e. the
protection of the debtor and the dictates of modern commerce. But
even if it were to be so restricted, I cannot see anything
incompatible with the rule serving those interests if it were to be
applied in the manner advocated for in M
M Builders' case.
The creditor's claim for interest would be limited to an amount that
does not exceed the capital.”
The issue that arises from the
rationale for the rule is best stated in Verulam
Medicentre Pty v Ethekhin Municipality
where GALGUT
AJP says-
“It
would appear from this that where on a proper construction the
interest at issue serves a purpose other than the ordinary function
that interest fulfils, the in duplum rule will not apply.
It
may well be that the test is not as strict as that, however, because
Blieden J went on to refer (at 655E - F) to single capital annuities
and similar investments, and pointed out that concerns doing business
of those kinds do not require protection and that public policy would
not require that the investors concerned be limited by the rule, and
in Commissioner,
South African Revenue Service v Woulidge
2002 (1) SA 68 (SCA), which admittedly turned on entirely different
facts, Froneman AJA said (at 75B - C) that the in duplum rule can be
applied only where it serves considerations of public policy in the
protection of borrowers against exploitation by lenders.
It appears therefore that the
test might simply be whether in the particular case public policy
requires the debtor to be protected against exploitation by the
creditor.”
The import of the above observations by GALGUT AJP is firstly whether
public policy dictates that the rule should apply to tax debts and
secondly, whether the applicant required protection.
It has been
accepted in our jurisdiction that the rule is not limited to money
lending transactions but applies to all contracts or transactions
under which a debt is subject to interest at a fixed rate. As alluded
to earlier, it is my view that the relationship between the applicant
and the respondent is a statutory one and does not fall under the
contracts or transactions as perceived in the decided cases. The
whole purpose of the relationship between the applicant and the
respondent is to enable the respondent to raise, by way of tax,
public revenue. As stated in Revenue
Law-Principles and Practice,
tax is a compulsory levy imposed by the Government or local
authority. The money so raised is intended for public purpose i.e.
for Government expenditure.
Would it be in the public
interest that the in
duplum rule should
apply to a person who has a statutory obligation to pay tax when it
is due but fails to meet the obligations? What would be the
consequences of the application of the rule?
I do not believe that public
policy would dictate that a taxpayer, who has defaulted in paying tax
and interest thereon can benefit from the in
duplum rule. The tax
is raised for the good of the public. Judicial note is taken of the
fact that tax payable in any given year forms part of the national
budget. It is inconceivable to imagine what would happen to the
fiscus if taxpayers were to be given the comfort that they can hold
onto their money until interest due on overdue tax is equal to the
capital amount and they can proceed holding onto their money
thereafter until the Commissioner sues for what is due.
In
Commissioner of Taxes v First Merchant Bank Ltd,
GUBBAY CJ (as he then was) discussed the common law on the raising of
set-off against taxes due to the fiscus. He observed that:
“At
common law, set-off or compensation is a method by which mutual
debts, being liquidated and due, may be extinguished. It takes place
ipso
jure.
If the debts are equal, both are extinguished; if unequal, the
smaller is discharged and the larger is proportionally reduced. There
are, however, two important exceptions to the operation of the rule.
A debt owed by one department of the State cannot be set off against
a debt owed to another department. And set-off cannot be raised
against taxes due to the fiscus or where goods are sold for the
benefit of the State. See Schierhout
v Union Government
1926 AD 286 at 291; Pentecost
& Co v Cape Meat Supply Co
1933 CPD 472 at 479; Voet
Commentarius ad Pandectus 16.2.16 (Gane's translation, Vol 3 at 166);
van Leeuwen Censura Forensis 1.4.36.11 and 13 (Barber and Macfayden's
translation); Wessels The
Law of Contract in South Africa
2 ed vol II at paras 2567 and 2568; Wille's Principles
of South African Law
8 ed at 483.
Both these exceptions are
grounded in public policy and utility. The first is designed to avoid
confusion in State accounts; the second to ensure the uninterrupted
flow of tax revenues to the Treasury in the interests of good
governance. In each instance, it is for the State to decide whether
or not set-off should apply even though the debts co-exist.”
The above rationale against
set-off would surely apply to the non application of the in
duplum rule to tax
debts. The non-remittance of tax and the application of the rule to
tax debts would interrupt the flow of revenue to the fiscus with
adverse impact on good governance.
The purpose of the common law, on
set-off vis a vis
tax debt, is the preservation of the fiscus for the good of the
nation. Under such circumstances, it is my view that the applicant
cannot be said to require any protection against the respondent.
It appears to me that the very
nature of the relationship of the parties also has a bearing on the
purpose of the interest charged by the respondent. In the cases of a
borrower and a lender, interest starts accruing on the capital amount
from the date the amount is advanced. In the present case, interest
is payable from the date
fixed under the Income Tax Act or date as notified by the
Commissioner. The
tax is not computed throughout the tax year. It is my view therefore
that the underlining purpose of the interest charged by the
respondent is clearly different from interest charged in a commercial
transaction.
In the result, I find that the in
duplum rule does not
apply to tax debts. I have found it not necessary, because of my
conclusion above, to deal with the question raised by the applicant
that it was entitled to interest on the refund that it sought.
Accordingly, I make the following order:
The application is dismissed with costs.
1. See Hotel
Association of Southern Rhodesia and Another v Southern Rhodesian
Liquor Licensing Board and Another
1958 (1) SA 426 (SR); Law
Society of Zimbabwe & Ors v Minister of Finance (Attorney-General
Intervening) 1999 (2) ZLR 231 (SC)
at p234H-G; and Zimbabwe
Teachers Association & Ors v Ministry of Education
1990 (2) ZLR 48 (H)
2. HC 96/03
3. CBZ
Ltd v MM Builders & Supplies (Pvt) Ltd & Ors
1996 (2) ZLR 420; Georgias
& Anor v Standard Chartered Finance
1998 (2) ZLR 488; Ehlers
v Standard Chartered Bank Zimbabwe Ltd
2000 (1) ZLR 136 (HC); and Conforce
(Pvt) Ltd v City of Harare 2000 (1)
ZLR 445
4. 2002 (1) SA 68 (SCA) and 2005 (2) SA 45
5. See Richard Jooste on Revenue
Law, 1995 at 124; A. S. Silke on
South
African Income Tax, 8th
Edition 1975 at 898
6. Commissioner
of Taxes v C.W 1989
(3) ZLR 361 (SC) at 372C-D; C.W
v Commissioner of Taxes 1988 (2) ZLR
27 at 35; Loewenstein
v Commissioner of Taxes 1956 (4) SA
766 (FC) at 772A-F
7. 1996 (2) ZLR 420 at 441D-F
8. 1916 (1) TPD 412
9. 2000 (1) SA 600 ©
10. See Georgias
& Anor v Standard Chartered Finance Zimbabwe Ltd
(supra) at 495D
11. 2000 (1) ZLR 445 (HC)
12. at 457G-458A-D
13. supra at 454I-455B
14. C. Whitehouse and Elizabeth Stuart-Buttle, at p2-4
15. 1997 (1) ZLR 350 (SC)
16. at 353B-E
