IN THE COURT OF APPEAL FOR EAST AFRICA
AT DAR ES SALAAM
(CORAM: DUFFUS, P., LAW AND MUSTAFA, JJ.A.)
CIVIL APPEAL NO 12 OF 1970
THE COMMISSIONER GENERAL OF INCOME TAX. . . . . . . .APPELLANT
THE DIAMOND CORPORATION TANZANIA LIMITED………RESPONDENT
(Appeal from the judgment and decree of the High Court of Tanzania at Dar es Salaam (Georges, C.J.) dated 31st December, 1969 in Civil Appeal No. 21 of 1969)
9th June, 1970.
The following Judgments were read:-
The facts in this appeal have been fully set out in the judgment of the learned Chief Justice of Tanzania. I will briefly summarise them; indeed the facts as such are not in dispute. Williamson Diamonds Ltd. and its associated companies mine and produce diamonds in mainland Tanzania Williamson Diamonds Ltd. market the gemstones through an organization known as the Central Selling Organization which operates in London and which controls about 85% of the diamond trade in the world market. The Central Selling Organization is composed of the Diamond Corporation Ltd. and its connected companies.
The respondent company is registered as a limited liability company in Tanzania and is a fully owned subsidiary of the Diamond Corporation Ltd. which is a United Kingdom based company. Before 1960 Williamson Diamonds Ltd. sold its gemstones to the Diamond Corporation Ltd. at a price which was less than that obtainable in the trade in London. The profit thus made by the Diamond Corporation Ltd. was taxable in London. The respondent company was formed in or about 1961 and by agreement the respondent company was to buy diamonds produced by Williamson Diamonds Ltd. at a price 7 ½ % below the best price available to the trade in London.
The respondent company would sell all the gemstones it purchases from Williamson Diamonds Ltd. to the Diamond Corporation Ltd. at the best price available in the diamond trade. By this means the profit on the first sale of diamonds would be made by the respondent company and such profit would be taxable in Tanzania. In fact the respondent company was formed with that sole object in view. In actual practice the diamonds are purchased directly from Williamson Diamonds Ltd. by the respondent company's parent company, the Diamond Corporation Ltd. Once the gemstones have been sorted and the valuation agreed, the Diamond Corporation Ltd., on behalf of the respondent company, sends a cheque for the agreed price and collects the stones. Simultaneously with the dispatch of the cheque the Diamond Corporation Ltd., in its own books, credits the respondent company with a sum representing 7 ½ % of the best price the stones would fetch in the market, this being the agreed percentage of profit the respondent company earns on its sale to the Diamond Corporation Ltd. All transactions and dealings in respect of valuation, sale and purchase of the stones were in terms of pound sterling. Prior to this dispute the respondent company with the approval and concurrence of the appellant, paid its income tax to the Crown Agents in London who remitted to the appellant. The accounting period for income tax purposes of the respondent is 1st January to 31st December each year. Prior to 1967 the pound sterling was at parity with the Tanzanian pound.
In November 1967 the pound sterling was devalued, while the Tanzanian shilling was not. At the end of December 1967 the respondent company had a credit balance with the Diamond Corporation Ltd. amounting to £1,249,346.19.5 sterling. This was made up of periodic credits due to the respondent in respect of the sale of diamonds during 1967. At the end of December 1967 the respondent company made up its accounts for income tax for 1967. The accounts were expressed in Tanzanian shillings as tax liability has to be computed in Tanzanian currency. The respondent company claimed a loss of T.shs.3,579,140/- on its sterling holding as a result of the devaluation of the pound sterling. The appellant disallowed this item and taxed the respondent company on it. The respondent company successfully appealed to the High Court of Tanzania and from that judgment the appellant appeals to this Court.
Learned counsel for the appellant submits that the respondent company is not entitled to deduct the loss as a result of devaluation from its trading profits in 1967. He maintains that the sum of £1,249,346.19.5. Sterling was a capital account, and had become an investment.
The said sum was deposited with the Diamond Corporation Ltd. during 1967 on a seven day call basis at a rate of interest 2% below the normal bank rate. Learned counsel for the appellant submits that such a deposit alters the character of the money held, and since it was deposited for a certain period, however short, and was interest earning, it has assumed the character of an investment and therefore has become capital.
He also argues that the respondent company was a dealer in diamonds and the loss in devaluation was not incurred in trading, that is, buying and selling of diamonds, nor had the loss anything to do with the production of income. The sum deposited was in respect of concluded trading transactions or business operations, and the income had been earned from concluded trading operations before devaluation, and the loss on devaluation was outside the trading activities of a diamond merchant and dealer. He also submits that the respondent company was under no obligation to deposit and should not have deposited the profits earned with the parent company in London.
The income could and should have been transferred, presumably as and when the amounts were credited, to Tanzania, in which case no loss due to devaluation would have occurred. In my view the sums credited to respondent company by the Diamond Corporation Ltd. were trading receipts - profits earned in diamond trading. On the evidence adduced the respondent company was justified in keeping that m nay in sterling in London during each yearly accounting period, as all its dealings and transactions in respect of the diamond business were in sterling. The respondent company has certain legal and financial obligations in terms of the agreements entered into by it, although in practice it may never be called upon to perform them. I believe the respondent company was using the Diamond Corporation Ltd, as a banker, but because of the special relationship and arrangements between it and its holding company, the respondent company was paid interest at a rate 2% less than the normal bank rate on its deposit.
I do not think the money, by being deposited with the Diamond Corporation Ltd. in the way it was, has been converted into an investment of a capital nature. The money, which incidentally was of a large amount, was placed on a seven day call basis, and would retain its character of a current and liquid asset. Such a deposit with its holding company has always been regarded by the respondent company as a current, not a fixed asset, as all its balance sheets, both for 1967 and prior to 1967, show. These balance sheets were never questioned by the appellant. There is credible evidence, not challenged: that this would be in accordance with normal commercial accounting methods, and on the evidence adduced I am inclined to the view that it is so. It has not been shown there is any provision in the taxing legislation or regulations to the contrary.
As I have said the accounting period is from 1st January to 31st December each year. The devaluation of the pound sterling took place in November 1967, before the end of the accounting year. The respondent company could not finalize its accounts until the end of December 1967, and profits and losses can be computed only at the end of the accounting period, when the sum total of all the transactions can be worked out. It was in order for the respondent company to keep open and current its assets and liabilities until the end of the accounting year, and during such accounting period the respondent company deposited its money on a current basis with Diamond Corporation Ltd.
Learned counsel for the appellant has stressed the respondent company has agreed the deposit account was in respect of concluded trading transactions. True, but it is clear the respondent company can only mean isolated and individual transactions. The transactions as a series could only conclude at the end of December 1967, not in November 1967 when the pound sterling was devalued. In Exhibit E being the respondent company's balance sheet and annual accounts for 1967 at p. 31 of the record item 1 of the notes on accounts reads:
"1. These accounts are expressed in Tanzanian shillings. Diamond account transactions since the date of sterling devaluation and balances in the United Kingdom at 31st December, 1967 have been converted at a standard rate of shs.17.12 to the £ sterling."
This indicates there were transactions after November 1967 the date the £ sterling was devalued. If the deposit was held over to the following year, after the end of the accounting period say into 1968, I would have been prepared to agree with the proposition put forward by learned counsel for the appellant. But here devaluation took place at a point of time within the accounting period, and affected the respondent company's profits earned during that period. The loss, if any, would be a trade loss. It means the profits earned by the respondent company do not represent that much in terms of Tanzanian shillings at the end of December 1961. The sum earned, which was in sterling, by the fact of devaluation, represented a lesser sum in terms of Tanzanian currency.
The learned Chief Justice found the respondent suffered a loss on devaluation. I am not sure if the loss is not merely a notional as opposed to a real loss. The sum earned in sterling has not decreased, only its convertibility value in terms of Tanzanian shillings has. In fact as Mr. Horton has testified, instead of showing the devaluation loss as a separate item, he could have represented it as a diminuation in the value of the proceeds of sale of diamonds and put it in as a deduction from the diamond account figure, that is to say, instead of showing the diamond account as T.shs. 24, 176, 100 he could have shown it as T.shs.20,596,960 - that is less the "loss" of T.3,579,140, since £1,249,346 sterling, the actual sum earned by the respondent company, converted only amounts to T.shs.20,596,960. I cannot see how the appellant can complain if this was done, for as the learned Chief Justice said in his judgment:
"The appellant (i.e. the respondent in this appeal) company in fact does not pay its tax in East Africa. It has made arrangements to pay to the Crown Agents in London who remit. I understand that the Income Tax authorities would accept accounts made up in pounds sterling and would convert at the appropriate rate."
If that were so, and the statement has not been challenged, it is clear the respondent company was to pay tax on the equivalent amount of Tanzanian shillings for its profits in sterling. Both learned counsel will forgive me if I do not refer to the authorities they have 60 extensively cited. In my view the cases quoted are not particularly in point, this case being, on the facts, clearly distinguishable from those authorities. I am of opinion the learned Chief Justice came to the right conclusion. I would dismiss the appeal with costs.
I have had the advantage of reading in draft the judgment prepared by Mustafa, J.A. I agree with it entirely, and would only add a few words out of respect for the able arguments presented to us by Mr. Khaminwa for the appellant Commissioner General of Income Tax. I am unable to accept Mr. Khaminwa's submission that the amounts credited to the respondent company in the books of the Diamond Corporation Limited lost their character of circulating capital or liquid assets from the fact of being placed on deposit at seven days' call and from the fact that interest was paid on these deposits. A trading company's profits and 1osses cannot be ascertained, as was pointed out by Romer L.J. in Golden Horse Shoe (New) Ltd. v. Thurgood 18 T.C. 280 at page 300:
"…unless a comparison be made of the circulating capital as it existed at the beginning of the year with the circulating capital as it exists at the end of the year. It is, indeed, by causing the floating capital to change in value that a. loss or profit is made".
In my view, the sums credited to the respondent company from time to time in anyone year in respect of the sale of diamonds constituted circulating capital until the close of the year, when the accounts were made up and the profits allocated. The respondent company being a Tanzanian company its profits had to be converted at the end of the year, into Tanzanian currency from sterling, to enable its liability to East African income tax to be assessed. It so happened that in 1967 the pound sterling was devalued but the Tanzanian shilling was not. The resulting loss to the respondent company had to be shown in its accounts. This could be done in two ways, either by reducing the annual profits by the amount of the devaluation loss, or by showing that loss as a separate item of expenditure. The respondent company is accounts chose the latter method as the loss was of a non-recurrent nature. It is not surprising that the Revenue authorities chose to regard this loss as an item of capital expenditure, not deductible in the computation of income tax. One must however have regard to the realities of the situation. The learned Chief Justice has found that, notwithstanding the way it was expressed in the accounts, the loss on devaluation represented a loss on the respondent company is trading capital, and not on its fixed assets, and that the loss was deductible from its trading profits for 1967. This is a finding of fact which should not be disturbed unless shown to rest on no evidence or no sufficient evidence or to be plainly wrong.
As to this, Mr. D. Horton, a qualified and experienced accountant, deposed that the loss on devaluation, being an exceptional occurrence, was shown as a separate item but could equally well have been shown as a deduction from profits. He was emphatic that the credits deposited with the Diamond Corporation Limited in the course of a trading year represented current assets and had always been dealt with as such in the respondent company's accounts. The devaluation loss, in Mr. Horton's view, represented a diminuation in the value of the proceeds of sales of diamonds in 1967 and was according1y deductible from profits in the computation of liability to East African income tax. The Chief Justice accepted this evidence, and the appellant called no evidence to rebut it. In cases of this nature, regard must be had to the ordinary principles of commercial accounting and as Lord Halsbury said in Gresham Life Assurance Society v. Styles (1892) A.C. 309, quoted with approval by Lord Hanworth M.R. in Naval Colliery Co. Ltd. v. Commissioners of In1and Revenue_ 12 T.C. 1017.
"Profits and gains must be ascertained on ordinary principles of commercial trading.”
He evidence as to these principles adduced before the Chief Justice amply supports his findings that the deposits credited to the respondent company in the Diamond Corporation Ltd.’s books in the course of the trading year 1967 represented trading capital, and that the loss consequent upon devaluation was a trading loss deductible for income tax purposes from the computation of the respondent company is profits for the year 1967. For these reasons I agree that this appeal fails, and I concur in the order proposed by Mustafa, J.A.
I have read the draft judgments of Mustafa and Law, JJA. I entirely agree with their conclusions and accordingly the appeal will be dismissed with costs.