Commissioner for Inland Revenue v People's Stores (Walvis Bay) (Pty) Ltd. (244/88) [1990] ZASCA 1; 1990 (2) SA 353 (AD); (22 February 1990)

IN THE SUPREME COURT OP SOUTH AFRICA APPELLATE DIVISION

In the matter between

COMMISSIONER FOR INLAND REVENUE APPELLANT

and

PEOPLE'S STORES (WALVIS BAY)

(PTY) LIMITED RESPONDENT

CORAM : CORBETT CJ, JOUBERT, HEFER,NESTADT JJA et NICHOLAS AJA.

HEARD : 14 NOVEMBER 1989.

DELIVERED : 22 FEBRUARY 1990.

JUDGMENT BY J J F HEFER

1.

HEFER JA:This is an appeal in terms of sec 86 A (2) (b) of the Income Tax Act 58 of 1962, as amended, ("the Act") against a decision of a special court. The question to be decided relates to the definition of "gross income" in sec 1 of the Act which provides that -

" 'gross income' in relation to any year or period of assessment, means, in the case of any person,

by or accrued to or in favour of such person during such year or period of assessment from a source within or deemed to be within the Republic, excluding re- ceipts or accruals of a capital nature ... " (I have emphasized the pertinent part of the definition.)

From the agreed statement of case presented to

the special court it appears that the respondent ("the

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taxpayer") carries on business as a subsidiary in theEdgars group of companies as a retailer of clothing, foot-wear, household textiles and related goods,and that it

sells its wares to its customers for cash and on credit.The bulk of its credit sales are made under its so-cailed6-months-to-pay revolving credit scheme. This entails

that -

"(amounts)charged to a customer's account, are payable in six equal monthly instalments. At or soon after every month end, a statement of account is rendered to each customer. The in-stalment reflected on the statement as payable, has to be paid before the next statement date. In other words, a purchase made in Januarywould be reflected on the statement rendered at or soon after the end of that month. One-sixth of the purchase price would be reflected on the statement as payable. It would have to be

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paid before the date of the next statement ren-

dered at or soon after the end of February."

(The quotation is from the agreed statement of case.)During the 1983 tax year the taxpayer sold goods under the scheme for a total amount of some Rl,3m. At year-end an amount of R341 28 1 representing instalments not yet payable was still outstanding. The appellant ("the Commissioner") included the latter amount in the taxable i ncome on which the taxpayer was assessed for . normal tax for the year in question, subject to a deduc-tion of R7 702 in terms of sec ll(j) of the Act for debts considered to be doubtful. Having unsuccessfully objected to the assessment, the taxpayer appealed to the special court on the grounds that -

"13.1 The instalments not yet payable nor paid

4.

of R341 218,00 did not constítute an 'amount, in cash or otherwise, received by or accrued to or in favour of' the tax-payer within the meaning of 'gross income' defined in sl, and ought therefore not to have been treated as such.

13.2 Alternatively to 13.1

13.2.2. The instalments not yet payable nor paid ... ought not to have been included in the taxpayer's gross income at their face value. They should have been included at no more than the present value of the right to receive those instalments in fu-ture."

Three questions were submitted to the specialcourt for decision. The third one is no longer relevant;the first two read as follows:

"19.1 Ought the value of the instalments not

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yet payable nor paid to have been in-cluded in the taxpayer's gross income?

19.2 If so, at what value ought those instal-ments to have been included in the gross income? Ought it to have been done at the face value or at the value to the taxpayer or at the market value or at some other value? "

The special court answered the first question inthe affirmative and ruled that the outstanding debts hadto be valued at their market value. The matter was ac-

cordingly remitted to the Commissioner "for further in-

vestigation and assessment in accordance with the prin-ciples set out above". Before us now is an appeal by

the Commissioner against the special court's ruling on

the second question and a cross-appeal by the taxpayer

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against its decision on the first question.

The special court considered itself bound by the judgment of the full bench of the Cape Provincial Dí-

vision in Lategan v Commissioner for Inland Revenue 1926

C P D 203. Under consideration in that case was the definitíon of "gross income" in sec 6 of Act 4 1 of 1917 in the context of the sale during the year of assessment oí wine by a wine farmer in terms of an agreement provi-ding for payment of part of the purchase price ín the succeeding year. "Gross income" was defined in sec 6 as "the total amount received by or accrued to or in favour of any person other than receipts or accruals of a capital nature ... " and the question was whether the

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part of the purchase price that was payable during thesucceeding year could rightiy be regarded as having ac-crued to the taxpayer during the year of assessment. Thecourt held that it couid. WATERMEYER J, who preparedthe judgment, said in this regard at 207-210 :

" it will be noticed that the definition

of 'gross income' does not seem to limit re-ceipts of money in the year of assessment to such receipts as are the reward of work done or capital employed in the year of assessment.

So far as receipts are concerned, the time of the receipt seems to be looked to rather than

the time when the work is done which earns the receipt, whereas, as far as earnings which are due but have not been received are concerned, the time when the work is done is looked to, and not the time of the receipt.

This seems to be an attempt to combine in the definition two fundamentally different conceptions of income, because the same sum of

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money may accrue in one year and be received in another, and it could never have been intended that income tax should be paid twice over .... The definition seems also to contemplate

that 'gross income' shall always be a sum

of money, because it uses the words 'total amount', and amount usually means an amount of money. But the word 'income' in its ordinary sense does not always consist of money, as was pointed out inBooysen's Case (1918, A.D. 576). 'Income' un-less it is in some form such as a pension or an-nuity, is what a man earns by his work or his wits or by the employment of his capital. The rewards which he gets may come to him in the form of cash or of some other kind of corporeal property, or in the form of rights. Ordinarily speaking, the value of these re-'wards is the man's income. Unless the word 'amount' means something more than amount of money, the de-finition given in the Act would not seem to be wide enough to include the 'value' of property

or rights earned by the taxpayers

The Legislature could hardly, however,have intended such a result, because then it would be

open to any taxpayer to receive payment in

some form other than money, and thus escape

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taxation. In my opinion, the word 'amount' must be given a wider meaning, and must include not only money, but the value of every form of property earned by the taxpayer, whether corpo-

real or incorporeal, which has a money value If this view be correct, then the tax-payer is income for taxation purposes includes not only the cash which he has received or which has accrued to him, but the value of every other form of property which he has received or which has accrued to him, including debts and rights of action .It was argued, on behalf of the appellant, that a debt payable in the future was not an a-mount of money 'accrued to' the taxpayer, and consequently it was not part of his 'gross in-come,' and a number of cases were cited on the meaning of the word 'accrue.'In my opinion, the words in the Act, 'has accrued to or in favour of any person,' merely mean 'to which he has become entitled.'

So far as a debt is concerned which is payable in the future and not in the year of assessment, it might be difficult to hold that the cash amount of the debt has accrued to the taxpayer in the year of assessment. He has not

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become entitled to a right to claim payment of the debt in the year of assessment, but he has acquired a right to claim payment of the debt in future. This right has vested in him, has accrued to him in the year of assessment, and it is a valuable right which he could turn into money if he wished to do so.

According to what has been stated above, the value of this right must, in my opinion, be included in the taxpayer's gross income for tax-

ation purposes

In my opinion, therefore, the answer to the. first question in the special case is that the instalments must be regarded as gross in-come, but something must be deducted from their

face value to allow for the fact that they were not payable at the close of the year of assess-

ment. Assuming that the right to receive the instalments was not converted into money by sale or otherwise during the year of assessment, the value to be fixed (apart from any question whet-her the debt was good or bad) would be the pre-sent worth of the instalments at the end of the year, i.e., 30th June, 192 0. "

I have quoted extensively from the judgment because,

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as will presently be seen, there is a controversy about

the correctness of the ruling that the words "accrued toor in favour of" merely envisage that the person concer-ned has become entitled to the amount in question, andsince the reasoning underlying the ruling must obviouslybe considered as a whole. It is convenient to say at

this stage that,although Act 4 1 of 1917, which was in

force at the time when Lategan's case was decided, was

replaced by later legislation, the concept of the ac-

crual of income (in contradistinction to the receipt

thereof) was retained in all subsequent enactments.The 1917 Act was replaced by Act 40 of 1925 which was in

turn replaced by Act 31 of 1941 and the latter by Act

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12. 58 of 1962. "Gross income" was defined in each Act and every definition concluded with a list of amounts that were specifically said to be included in the concept. These amounts were not always the same, but the basic con-ception that gross income represented the total amount, in cash or otherwise, receéved by or accrued to or in favour of a person, remained. (5ee sec 7(1) of Act 40 of 1925,

sec 7 of Act 31 of 1941, sec 1 of Act 58 of 1962.)The precise ambit of the expression "accrued to or in favour of" has never been defined by this court; on the contrary, the conflicting pronouncements in Commissioner for Inland Revenue v Delfos 1933 A D 242 seem to be the ori-gin of the present controversy about the meaning of the

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words in question. Five members of the court heard that

appeal. WESSELS CJ with whose judgment CURLEWIS JA mainlyagreed, subscribed (at 251) to the view expressed in theLategan case, whereas DE VILLIER5 JA (at 260) and STRATFORD

JA (at 262) were of the opinion that an amount only accrues

in terms of the definition when it becomes due and payable.The fifth member, BEYERS JA, did not commit himself on the

definition and the result was that the court was equally

divided on its construction.

The divergence in the Delfos case was mentioned in

later cases such as Hersov's Estate v Commissione for In-

land Revenue 1957(1) S A 471 (A) at 481; Rishworth v Secretary

for Inland Revenue 1964(4) S A 493 (A) at 499 E-F and Mooi v Sec-

retary for Inland Revenue 1972(1) 5 A 675 (A) at 682 H-683 A, but

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14. was never resolved. It is nevertheless stated in Silke on South African Income Tax, 11th at 2.7 that the so-called Lategan principle is accepted in practice as cor-rectly reflecting the law. It is our task now to con-sider the position afresh. For convenience I shall do so by stating and consideríng the validity of the two main propositions ín the judgment in Lagan's case.

The first and basic proposition is that income,

although expressed as an amount in the definition, need

not be an actual amount of money but may be "every form

of property earned by the taxpayer, whether corporeal or

incorporeal, which has a money value including

debts and rights of action" (per WATERMEYER J at 209).

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15. This proposition is obviously correct so that very little need be added to what WATERMEYER J himself said in sup-port thereof. It is hardly conceivable that the legis-lature could not have been aware of, or would have turned a blind eye to, the handsome profits often reaped from commercial transactions in which money is not the medium of exchange. Consider eg the many instances of valuable property changing hands, not for money, but for shares in public or private companies; or share-cropping agree-ments, dividends in the form of bonus shares, or remune-ration for services in the form of free or subsidised housing and the use of motor vehicles. These are only a few of the many possible illustrations that readily

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come to mind and which, as we know, have not been over-looked by the legislature. Nor can the reference in the definition of "gross income" in the 1962 Act to re-ceipts and accruals "in cash or otherwise", or other pro-visions of the Act (such as paragraphs (h) and (i) of the definition, sec 26(1) read with the First Schedule and sec ll(i) and (j))be ignored. There are clear indica-tions in all these provisions of the extended meaning of "amount".This court has, in any event, adopted and acted upon the principle that income in a form other than money may be taxable. In Lace Proprietary Mines Ltd v Commis-sioner for Inland Revenue 1938 A D 267 eg an assessment

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17. based on the value of shares in a company which had been allotted to the taxpayer as consideration for the "sale" of mineral rights, was unanimously upheld. In Ochberg v Commissioner for Inland Revenue 1931 A D 215 the value of shares allotted to the taxpayer as remuneration for services rendered was held to be taxable. And Mooi v Secretary for Inland Revenue (supra) was decided on the

basis that a right (in casu an option to purchase shares)

may indeed constitute an "amount accrued to" the

taxpayer. At 684 OGILVIE THOMPSON CJ said:

"The object of para (c) of the definition is of course to bring into the category of 'gross in-come' all 'amounts', whether of a capital nature

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or not, accrued in respect of services. Ling-uistically inappropriate though the word 'amount' may be in this context, when a taxpayer becomes entitled to a right 'in respect of services' a money value must be assigned to that right in order to determine the relevant 'amount' to be incorporated as 'gross income'. "

It must be emphasized that income in a form otherthan money must, in order to qualify for inclusion in the"gross income", be of such a nature that a value can beattached to it in money. As WESSELS CJ said in the Del-fos case (supra) at 251,

"The tax is to be assessed in money on all re-ceipts or accruals having a money value. If it is something which is not money's worth or can-not be turned into money, it is not to be regar-ded as income."

(See also Mooi v Secretary for Inland Revenue (supra)

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at 683 A-F). On the other hand, the fact that the valu-ation may sometimes be a matter of considerable complex-ity (of the Lace Proprietary Mines case (supra) at 279-281) does not detract from the principle that all income having a money value must be included. How the valua-tion is to be done, depends, of course, entírely on the nature of the income and the circumstances of the case.The second proposition - that no more is re-quired for an accrual in terms of the definition of "gross income" than that the person concerned has become entit-led to the "amount" in question - is apractical applica-tion of the first one. The pith of the supporting rea-soning is that any right (of a non-capital nature)

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acquired by the taxpayer during the year of assessment

and to which a money vaiue can be attached, forms part

of the "gross income" irrespective of whether it is im-mediately enforceable or not, but that its value is af-

fected if it is not immediately enforceable. Accordingto WATERMEYER J at 209-210,

" he has acquired a right to claim payment

of the debt in future. This right has vested in him, has accrued to him in the year of assess-ment, and it is a valuable right which he could turn into money if he wishes to do so."

There is no logicai answer to, this reasoning. That Late-gan acquired a right during the year of assessment is be-

yond dispute and, provided that a money value could be

attached to it, then, on the premise of the first propo-

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sition, the right formed part of his "gross income". ít is worth noting that neither DE VILLÍERS JA nor STRATFORD JA in the Delfos case (supra) could find any fault with the logic in WATERMEYER J's reasoning and that they rejec-ted hís conclusion in the light of what they regarded as indications in the provisions of Act 40 of 1925 that a debt only accrues to the taxpayer when it becomes payable. WATERMEYER J's judgment was criticized in Ingram's The Law of Income Tax of South Africa at 32 on 33 on the same grounds. The first point made by Ingram is that there was no justi-fication in Act 40 of 1925 for a reduction in the face value of a debt apart from an allowance in respect of bad or doubtful debts. This was said in view of WATERMEYER

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J's ruling that a debt payable in the future must be in-cluded in the "gross income" at its present value. There

is no merit in this point. It is correct that the onlypermissible deductions in terms of Act 40 of 1925 were

those provided for in sec 11 but the Lategan principledoes not purport to allow the taxpayer an additional de-duction; it merely defínes the extent of the "gross in-come" from which the permissible deductions are to be made.The right that Lategan had acquired had to be valued for

inclusion in his "gross income" and the fact that it wasnot immediately enforceable obviously affected its value.

Ingrams's second point of criticism is that "sec-

tion & seems to emphasise that the test of accrual is

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whether or not the amount though not paid over 'remains due and payable' ". There is no merit in this point. either. Section 8 of Act 40 of 1925 was in terms iden-tical to the present sec 7(1) (on which counsel for the taxpayer in the present case relied in support of the very point made by Ingram). It is not readily ascertain-able what the purpose of sec 8 was and what the purpose of the present sec 7(1) is. Both sections merely list a number of situations in which the accrual of income is deemed not to be affected. But it seems to be clear, by virtue of the definition of "gross income", that there would in these situations be an accrual in any event. Be that as it may, however, the legislature plainly dealt

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24. both sections with postulated factual situations, one of which is where income is not paid over to the taxpayer but remains due and payable to him. This does not jus-tify the conclusion that the test of an accrual is that the income in question is due and payable.In the Delfos case (supra) DE VILLIERS and 5TRAT-FORD JJA relied on section & and two other provisions of Act 40 of 1925. At 260 DE VILLIERS JA referred to sec 7(b) in terms of which "any amount so received or accrued in respect of services rendered, whether due and payable under a contract of service or not" was included in "gross income". This section, he said, "to all intents and pur-póses defines an amount accrued as an amount 'due and pay-

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able' ". The present legislation contains no similar

provision but, although it is accordingly not strictly necessary to do so, I may say that I find it difficult to accord sec 7(b) the weight that DE VILLIERS JA accor-ded to it since íts real import seems to lie in the words that I emphasized. STRATFORD JA (at 262) added a refe-rence to sec 11(2)(g) where provision was made for a de-duction in respect of bad debts (cf sec 11(i) of the pre-sent Act), and said : "A bad debt cannot, generally speak-ing, be estimated as bad until it has become payable". This view is, with respect, quite unrealistic.Counsel for the taxpayer, albeit in a different manner, also relied on the provisions of the Act relating

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to bad or doubtful debts. Sec ll(i) and (j) respectively provide for a deduction in respect of bad and doubtful "debts due to the taxpayer". If the Lategan principle were to be appliéd, so the argument went, the anomalous resuít would be that debts due to the taxpayer would be subject to the deduction for bad or doubtful debts, whereas debts owing to him but not due would have to be included in his "gross income" without the benefit of such a deduction. The problem that I have with this submission is that it pre-supposes that the word "due" in sec 11(i) and (j) means "due and payable", which is by no means clear. Admit-tedly, "due" often means "due and payable" when it is said eg that a debt is due or when one speaks of the due

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date of a debt. But I am not convinced that the word was used in that sense here. "Due and payable" is ac-tually used at least twice in thé Act (in secs 7(1) and 91(3) ) and in sec 7 A (2) mention is even made of a salary or pension which "has become payable". Taking account also of the Afrikaans version of sec 11(i) and ( j ) ("skulde aan die belastingpligtige verskuldig") it appears to me rather that "due" was intended to mean "owing" and no more.

Counsel for the taxpayer did not refer us to, nor could I find, any other provision of the Act that supports his contention that a debt can only be said to have accrued if it is payable during the year of assess-

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ment. He submitted, however, that the result of the application of the Lategan principle could be that a taxpayer is taxed twice in successive years on the same income - in the first year on the accrual of the debt and in the second on the amount received when the debt is paid. 1 do not agree. The possibility of double taxation in the sense just mentioned, arises, not from the application of the Lategan principle, but from the

essential principle on which South African income tax is based viz that receipts and accruals both form part of the "gross income". (cf Secretary for Inland Re-

venue v Silverglen Investments (Pty) Ltd 1969(1) 5 A

365 (A) at 377 A-C). That this is so is demonstrated

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by the fact that there is a possibility of the same in-come being taxed twice even in cases where a debt, pay-able during one year, is paid during the next or a later one. The real answer to the submission is, however,that the possibility of double taxation is more imaginary than real since there is, what has been referred to as, a "necessary implication" "that an amount which has been taxed as an accrual or receipt, cannot again be taxedwhen it is received or accrued" (Meyerowitz & Spiro,

Income Tax in South Africa & 35 par 134. See also Silke on South African Income Tax 11th ed 2-3 par 2.3, 2-4, 25-6 par 25.3). This is borne out by the remarks of some of the judges in the Delfos case (supra) at

30 30.

254-255, 259, 261 and by WATERMEYER CJ's judgment

in Isaacs v Commissioner for Inland Revenue 1949(4) S A561 (A). At 567-568 the learned Chief Justice said:

"I think, bearing in mind that an income tax is fundamentally a tax upon a man's annual profits or gains, that the Income Tax Act should not be read as imposing normal tax or super tax upon a taxpayer twice in respect of the same profits or gains unless the language of the Statute makes it clear that such a result was intended."

In my view the decision in the Lategan case

reflects the law correctly. It being common cause that

the debts which accrued to the taxpayer in the presentcase cóuld be turned into money, I am also of the view

that the special court's ruling on the first questíonwas correct. This conclusion disposes of the cross-

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31 . appeal.Very little need be said about the commissioner's appeal. His contention is that the debts have to be re-flected as part of the "gross income", not at their pre-sent value as the special court found,but at their full or face value. This is plainly not so. The argument on the Commissioner's behalf followed the same lines as Ingram's first point of criticism described and rejected earlier. All that need be added, is that WATERMEYER J's ruling on the value of accrued rights is inseparably linked to the rest of the principle. It is the right to receive payment in the future that accrued to the tax-payer; it is that right that has to be valued and, as

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stated before, its value is obviously affected by its

lack of irrmediate enforceability.

The result is that the appeal and the cross-appeal are both dismissed with costs which will include,

in the case of the appeal, the costs of two counsel.

J J F HEFER JA.

CORBETT CJ )

JOUBERT JA )

CONCUR.NESTADT JA )

NICHOLAS AJA )