BT (PVT) LTD v ZIMBABWE REVENUE AUTHORITY 2014 (2) ZLR 640 (H)

Flynote

Appeal — income tax — appeal against decision of Commissioner of Revenue C Authority — nature of appeal — appeal a broad appeal, with rehearing of evidence — court not restricted to evidence provided to Commissioner — court entitled to exercise its own discretion

Revenue and public finance — income tax — appeal — against decision of D Commissioner of Revenue Authority — nature of appeal — appeal a broad appeal, with rehearing of evidence — court not restricted to evidence provided to Commissioner — court entitled to exercise its own discretion

Revenue and public finance — income tax — deductions allowable — doubtful and bad debts — what constitute such debts — debtor issuing acknowledgment of debt — debtor's inability to pay established — deductions allowed

Revenue and public finance — Reserve Bank — powers of — issue of bonds in lieu of repayment of debt — no lawful authority for Bank to issue such bonds — bonds merely having effect of acknowledgment of debt

Headnote

The ZRA had disallowed deductions claimed by the appellant in respect of doubtful debts (for the year 2009) and bad debts (for the year 2010). The appellant was a gold mining company. The production of and trading in gold in Zimbabwe is strictly controlled by and regulated under the Gold Trade Act [Chapter 21:03]. The appellant came into the local mining scene in 2006 and became one of the three largest producers of gold in the country. At various dates during the 2008 calendar year, the appellant sold the gold bullion it produced to a company wholly owned by the Reserve Bank (RBZ). The law, contract and practice obliged the RBZ to pay the appellant for all the gold bullion delivered to the company.

Before the onset of the multi-currency monetary regime in the country, one component of the payment was in local currency, while the other was in United States dollars. Payment in local currency was on delivery and through bank transfer based on an implied exchange rate set unilaterally by the RBZ. Payment in foreign currency was slow and lethargic and was done through transfer into foreign currency denominated bank accounts of the appellant, usually after a monetary policy statement. The foreign currency component was set against the price of gold on the London afternoon fix. The RBZ always unilaterally fixed the gold support price from time to time in local currency. The appellant was not paid the foreign currency component for any of the deliveries it made in 2008. In January 2009 the Governor of the RBZ unilaterally converted all outstanding amounts to the gold sector into tradable "Special Gold-backed Foreign Exchange Bonds" with a tenor of 12 months. The bank undertook to honour the full principal plus interest on maturity to the holders of the bonds. The appellant found that if it wanted to trade the bonds on the market, there would be a discount of 40-50 percent on the face value. It decided to wait until the maturity date. When that date arrived, the bonds were not redeemed. The RBZ unilaterally rolled over the bonds for a further six months. After that, it issued replacement bonds, but up to the date of the appeal, the bonds had not been redeemable, further roll overs being unilaterally declared by the RBZ.

There being no prospect of payment by the RBZ, the appellant wrote off approximately half of the value of the bonds for the year 2009 as doubtful debts and the balance, for the following year, as a bad debt. The respondent treated the bonds in the hands of the appellant as investment and not debt. It took the view, firstly, that the debt was converted into an investment by the issue of the bonds and, secondly, that the acceptance of the conversion constituted a full repayment of the debt.

Held, that all appeals in tax matters brought in the High Court or Special Court against the decisions of the Commissioner of the ZRA, whether on substantive issues or against penalties, are appeals in the broad rather than in the narrow sense. This principle is unaffected by the choice of forum exercised in terms of s 65(1) of the Income Tax Act [Chapter 23:06]. After all, these two courts hold concurrent jurisdiction in income tax appeal cases. In an appeal against a decision where the Commissioner exercised a discretion, the Special Court is called upon to exercise its own original discretion. It is not restricted to the evidence which the Commissioner had before him. The appeal to the Special Court is not only a rehearing but can involve the leading of evidence and the submission of facts and arguments of which the Commissioner was unaware. The appeal was not a mere review of the correctness of the Commissioner's determination.

The court was required to exercise its own independent and unfettered discretion unaffected by imputed wrong motives or errors of fact and law of the Commissioner.

Held, further, that the bonds issued by the RBZ had no legal standing. Under s 4(2)(a) of the State Loans and Guarantees Act [Chapter 22:13], the power to issue bonds was vested in the Minister of Finance. When the Act was repealed by the Public Finance Management Act [Chapter 22:19], that power remained with the Minister. No Act gave the RBZ the power to issue bonds in order to meet its financial obligations. While s 13(1)(b) of the Reserve Bank Act [Chapter 22:15] allows the bank to discount bills, notes and other debt securities issued by it, these must be in respect of a banking institution that holds an account with it. The bonds issued by the RBZ were little different from a bill of exchange or a promissory note or even a post-dated cheque to pay an outstanding debt, but the RBZ would be precluded from issuing such instruments as the appellant was not a banking institution. The RBZ was not empowered to issue bills, notes or other debt securities to the appellant. In the absence of statutory authority to issue bonds, the bonds were not lawful tender and could not discharge a debt. They remained at best acknowledgments of debt.

Held, further, that for the year 2009, it was permissible, under s 15(2)(g)(ii) of the Income Tax Act, to deduct "doubtful" debts. The section was amended, and from the following year onwards, only "bad" debts could be deducted. The essential factors for a claim for both doubtful debts and bad debts that the appellant must prove on a balance of probability are that (a) the amount claimed must be due and payable; (b) the ZRA considers (is satisfied that) the amount is unlikely to have been recovered at the end of the financial year; (c) the amount must have been included in the taxable income of the taxpayer in the current or any previous year of assessment; and (d) once the claim was allowed it would have to be added back to income in the following year of assessment. The debt here was "due and payable", in the sense of "accrual" or "entitled to". Payment was due immediately on delivery of the gold. The creation of the bonds merely constituted a unilateral rescheduling of the debt. The purported gold bonds were null and void. They were of no force or effect and, in law, did not exist. They could not therefore constitute a payment for the debt. Even if they were valid, they would be akin to mere rescheduled acknowledgments of debt. An acknowledgement of debt is a document which confirms the existence of a debt, but does not constitute payment of the debt.

Held, further, that a "doubtful" debt can be equated with uncertainty of the likelihood by a creditor of receiving the amount owed. This uncertainty was borne out by events. The RBZ had demonstrated inability to pay and was in poor standing in the local market. It was also failing to settle recurring obligations to its workers. Any reasonable person submitting the return to the respondent would doubt the likelihood of the debt being paid, even though he might recognise an outside and remote possibility that such payment might take place. There was no reasonable probability of payment occurring, but this did not completely exclude that payment might happen. A likelihood of lack of collectability existed. It was a doubt, as opposed to a certainty.

Held, further, that the Act does not define a "bad" debt. It is, however, defined in ordinary commercial and accounting practice as an amount that is unlikely to be paid. The appellant had established that, by the end of 2010, the claimed amount had been outstanding for more than 26 months. The accounts for that year end were compiled on 31 March 2011. The purported gold bonds had been issued and rolled over time without number. It was clear that the RBZ was unable to pay. It had no funds to pay. Suing the RBZ would be fruitless, as its assets could not be attached to satisfy the debt. The respondent should have allowed the deductions.