The Court of Appeal case I want to discuss is Gerald Davies and Four Others v The Commissioner, Botswana Unified Revenue Services (CACGB-038-14). I represented the appellant and the four companies. Judgement was handed down on 5 February and is extremely lucid and logical.
The facts of the matter were that, although nothing untoward was found during an audit, the Commissioner deemed interest upon loans Davis had made to his four companies at 10%, with no interest being charged upon inter-company loans.
The deemed interest gave rise to tax being applied retrospectively for a number of years. These years had already been assessed to tax after full and accurate tax returns had been submitted by the applicant – and the tax paid. In addition, the loans in question had been disclosed as required by law in the annual financial statements. Adding insult to injury, the deeming of interest and re-assessment resulted in a large tax bill.
The Commissioner acknowledged that the appellant was (and is) a fastidious taxpayer, but proceeded to freeze the appellant’s bank account.
Before doing so, however, the Commissioner gave the applicant a choice: 25% penalties to be levied if he did not object to the assessments, or 100% if he chose to defend his rights! The appellant stood his ground through numerous High Court applications which the Commissioner defended tooth and nail.
As stated by the learned Judges of Appeal, the High Court rulings left very much to be desired. In fact, the ruling against which the eventual appeal was launched contained a pronouncement by the judge that flew in the face of the facts placed before the court and ignored pertinent evidence favouring the appellant.
The appellant relied upon three basic arguments. Namely that:
Section 79 of the Botswana Income Tax Act (which is very similar to the old Section 79 that existed in South Africa prior to the promulgation of the Tax Administration Act), did not allow the Commissioner to tax income in a certain year when that income did not arise in that year. In the words of the late John Leid, who assisted in taking this matter to the Appeal Court, the Commissioner sought a “second bite of the cherry”.
The deeming provisions of the Botswana Income Tax Act did not apply between companies. The rate of interest charged by the taxpayer was in fact an acceptable commercial rate of interest and the Commissioner had no business levying a higher rate.
The appellant succeeded on all three grounds and costs were awarded against the Commissioner, who has to pay interest upon all the funds the appellant had paid as a result of the deeming of interest and assessments raised as a result. The Commissioner was also ordered to release the banking account of the appellant. The judgement should prove of value to tax practitioners in South Africa who seek to challenge deeming of certain types of income against taxpayers.