Z (PVT) LTD v ZIMBABWE REVENUE AUTHORITY 2014 (2) ZLR 568 (H)

Flynote

Revenue and public finance — income tax — income — deductions allowable — loss incurred for the purposes of trade or in the production of income — money paid to the Reserve Bank as part of normal method of carrying on trade — money not returned by Reserve Bank — such money should be regarded as a loss and deducted from taxable income

Headnote

The appellant company was a tobacco merchant. During the years before the introduction of the multi-currency system, growers of tobacco would be paid in local currency but the purchasers had to pay in foreign currency. Merchants like the appellant had to deposit foreign currency with the Reserve Bank. The tobacco merchant purchased the tobacco in foreign currency but paid for it in local currency. The foreign currency was sold to the Reserve Bank which converted the amount into local currency for transmission to the tobacco grower by the appellant through the on-shore bank.

The currency of account for all purchases of local tobacco, whether from contract growers or auction floors, was denominated in United States dollars. These had to be sourced off-shore and transmitted through the on-shore bank to the Special Tobacco Foreign Currency Account for the appellant in the Reserve Bank. The account in the Reserve Bank represented a pre-payment of the anticipated tobacco purchases during each calendar year trading season. The on-shore bank kept a mirror account of the funds. The appellant would participate on the auction floor only after confirmation by the Reserve Bank of the deposit of off-shore funds into the Special Tobacco Foreign Currency Account.

On purchasing the tobacco, the appellant would be invoiced in the currency of account. It would transmit the invoice to the on-shore bank which

would in turn dispatch it to the Reserve Bank, which would transfer the local currency equivalent of the invoiced amount to the on-shore bank. The amount would be deposited in the appellant's Zimbabwe dollar tobacco special account of the appellant held in the on-shore bank. The local currency would be paid over to the tobacco grower at the auction floor or to the contract farmer. The on-shore bank would make a corresponding debit in the mirror United States dollar special tobacco account it held for the appellant.

During the tax year in question, some US$5 million, on instruction of the appellant, was remitted to the on-shore bank and deposited with the Reserve Bank for the purchase of tobacco by the appellant in August 2008 for that year's tobacco purchases. There were inadequate supplies of tobacco on the market to exhaust the amount and a balance of about US$2.3 million remained outstanding. The Reserve Bank and the appellant agreed to roll over the amount to the 2009 tobacco season. Of that, just over US$1 million was not converted by the Reserve Bank into local currency in the 2009 tobacco trading season. The Reserve Bank failed to avail these funds to the on-shore bank for payment of the appellant's obligations to the tobacco sellers.

The missing money did not constitute planned voluntary expenditure. The appellant did not spend the money before it was lost. The funds were sitting in readiness to purchase tobacco and awaiting draw down. The amount remained outstanding. Liability had been acknowledged, but the Reserve Bank was unable to pay.

The appellant sought to have the missing money classed as a deduction in terms of s 15(2)(a) of the Income Tax Act [Chapter 23:06], as being an expenditure or loss incurred for the purposes of trade or in the production of the income.

Held, that the general principle is to allow as deductions all expenses attached to the performance of a business operation bona fide performed for the purpose of earning income, whether such expenses are necessary for its performance or attached to it by chance or are bona fide incurred for the more efficient performance of such operation, provided they are so closely connected with it that it would be proper, natural or reasonable to regard the expenses as part of the cost of performing the operation. In this case, the issue was whether the expense was one attached to the performance of the business operation by chance. The loss was integrated in and an adjunct of the ordinary trading of the appellant. The system followed was the way the appellant had to carry on business. The payment was not one of a capital nature. The effect of the failure to avail the amount in question was that other funds were used to pay for tobacco purchases and pay the off-shore financier. The loss of the money thus constituted fortuitous expenditure that was closely linked to the appellant's business operations and should have been allowed as a deduction.