"A" v COMMISSIONER OF TAXES 1985 (2) ZLR 223 (H)

Flynote

Income Tax Act [Chapter 181] — ss 8, 18, and 81 — "gross income" — credit sales — avoidance or postponement of liability to tax.

Headnote

The appellant was a wholly-owned subsidiary of another company and sold goods wholesale to that parent company. The parent company in turn sold the goods to members of the public through various retail outlets. As a result of changes in the accounting system of an external controlling group of companies which were to be followed in Zimbabwe, the appellant sold goods to the parent company at cost and subsequently received payment of a 25 per cent mark-up when the parent company had in turn sold the goods to the public.

The respondent assessed the appellant in respect of the year ended 31 March 1981 and included in the assessment an amount of $309 522. The appellant objected on the basis that that amount represented the mark-up allowance it was due but had not in fact received in the year of assessment and accordingly was not part of its taxable income for that year. The respondent disallowed the objection and the appellant appealed.

The respondent contended that the amount assessed formed part of the selling price of the goods sold by the appellant and was therefore taxable in terms of s 8(1) of the Income Tax Act [Chapter 181]; alternatively s 18 of the Act applied as the transaction amounted to a credit sale and the amount was therefore deemed to accrue to the appellant; alternatively s 81 of the Act applied as the scheme was one intended to avoid or postpone the liability of tax by the appellant.

Held that the effect of the system introduced was that when appellant sold goods to the parent company they were sold on the basis of cost plus a mark-up of 25 per cent. Therefore, the mark-up payment accrued to the appellant when the goods were delivered to the parent company.

Held, further, that in any event the appellant and the parent company had entered into an agreement the effect of which was that ownership of the goods passed on delivery and full payment therefor was to be made at a later date. Such an arrangement would constitute a credit sale for the purposes of s 18 of the Act and the appellant would be liable to tax on the amount assessed.

Held, further, that in deciding whether or not s 81 of the Act is applicable, it is irrelevant that the effect of any scheme or arrangement does not alter the situation that previously existed in so far as the liability to tax is concerned. Regard must be had to the scheme or arrangement irrespective of whether it has an effect which differs from, or is the same as, that of a scheme or arrangement which it replaces. The appeal was accordingly dismissed.