In the tax court held at Megawatt Park: Case no 11773
05 October 2007
Posted by: TaxFind™
Before the honourable Mr Gildenhuys J
Accountant member: AC Geake
Commercial member: S Tucker
Heard on: 9 and 10 May 2007
In case between C (PTY) LTD Appellant and the commissioner for the South African Revenue Service
The appellant’s primary business was the award of licences to the security industry for the use of a computer programme which it developed.The present case related to the assessment of the appellant for income tax in its 2004 year of assessment.
At the end of the appellant’s 2003 tax year, there was an accumulated assessed loss of R3 338 742, made up essentially of development expenditure in respect of the computer programme.In the 2004 tax year, a further loss of R424 057 was incurred.The Commissioner disallowed the set-off of the loss carried forward by the appellant in terms of section 20(1) of the Income Tax Act 58 of 1962, for the 2004 year of assessment.
The issues before the Court turned mainly on the interpretation of section 20(1) and (2) of the Income Tax Act.The subsections provide for set-off of any balance of assessed loss incurred by the taxpayer in any previous year which has been carried forward from the preceding year of assessment – provided that such assessed loss refers to any amount by which the deductions admissible under sections 11 to 19 exceeded the income in respect of which they are so admissible.
The commissioner submitted that, aside from the requirement that the appellant must have carried on a trade during the 2004 tax year, it is also a requirement of section 20(1) that income must have been received by or accrued to the taxpayer from such trade.If no such income had been derived, it will not be possible to balance the assessed loss against income, as required under section 20(1).The appellant, on the other hand, contended that the receipt or accrual of income is not a prerequisite.
Held that the issue to be decided was whether set-off can take place in respect of a year during which the taxpayer carried on a trade but earned no income from the trade.
The Court referred to case law dealing with the question and concluded that giving the wording of section 20(1) its plain meaning, a balance of assessed loss brought forward to any tax year cannot be set-off if there was no income during that tax year against which to set it off.It was declared that income must have been received by or accrued to the taxpayer in the relevant year of assessment in order for the taxpayer to satisfy the set-off requirements contained in section 20(1) of the Income Tax Act.
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