A v COMMISSIONER OF TAXES

1988 (1) ZLR 344 (HC)

Division: High Court, Harare
Judges: Smith J
Subject Area: Income Tax Appeal
Date: 19 June 1987 & 1 June 1988

Revenue and public finance — income tax — Income Tax Act [Chapter 181] — Fourth
Schedule, para 1 — farm improvements — whether school erected on farm for education
of dependents of farm employees is a farm improvement.
The appellant was a company which carried on farming operations. A school was built on
the farm for the benefit primarily of dependents of farm employees, although children
from neighbouring farms were admitted if there were vacancies.
The Fourth Schedule to the Income Tax Act [Chapter 181] provided for deductions which
were allowed in respect of “farm improvements”. This term was defined in para 1 of the
Schedule as meaning, inter alia, “any building . . . used in the carrying on of farm
operations”, but did not include “staff housing”.
Held, that while the school buildings were necesarily incidental to and used in connection
with the carrying on of the appellant’s farming operations, in the same way as are staff
accommodation and staff amenities such as beerhalls, they were not used in the carrying
on of those operations. There was no direct and proximate connection between the
farming operations and the provision of a school for the dependents of the farm’s
employees. The school buildings therefore did not rank as “farm improvements”, as
defined.
Cases cited:
Income Tax Case No 885 (1959) 23 SATC 336
Commissioner of Taxes v Swaziland Ranches Ltd (1978) 40 SATC 232
Page 345 of 1988 (1) ZLR 344 (HC)
J Sayce for the appellant
M J Gillespie for the respondent
SMITH J: The appellant is a company which carries on farming operations near Banket.
In its return of income for the year ending 31 March 1984 the appellant claimed a
deduction of the cost of erecting a school on the farm it operated. The cost thereof
amounted to $13 130. In the notice of assessment the respondent refused to allow the
deduction so claimed. The appellant duly objected and its objection was disallowed. It
thereafter appealed to the High Court.
The managing director of the appellant, who is in fact the owner of the company, gave
evidence which was uncontradicted. The appellant produced tobacco, maize and soya-
beans on the farm and kept cattle. It had carried on farming operations since 1961.
During the period 1983-84 its labour force consisted of 85 permanent employees and
between 20 and 30 seasonal employees. In addition, some 50 to 60 women, who were
wives of the employees, worked on the farm when their services were required. This
word was seasonal. It consisted mainly of helping with the planting, suckering and
topping of tobacco and the picking and grading thereof, and the weeding of the maize and
soya bean lands and the reaping of the crop. The labour provided by the women was an
important factor in the farming operations and augmented the earnings of the families
concerned. There was a village on the farm in which all the employees were housed. The
average size of family amongst the employees was 4 or 5 children, which meant that
there were almost 300 children living in the village.
There had been a school on the farm since 1968. It had been rebuilt to Government
specifications in the year under review. It consisted of two classrooms, an office, a
storeroom and a number of toilets. The school was registered with the Ministry of
Education and supervised by Government inspectors. Two teachers were employed, their
salaries being paid by Government. The appellant provides desks, benches and other
equipment, but the parents of the pupils had to provide such items as paper, pens and
pencils. The school could accommodate 100 pupils and priority was given to children of
employees. If there were vacancies, children from neighbouring farms were admitted.
The school provided primary education only. The nearest alternative primary school was
in the town of Banket, some 5 km distant. No fees were charged for schooling, even in
the case of children from neighbouring farms.
Page 346 of 1988 (1) ZLR 344 (HC)
The owner of the appellant said that he had been engaged in farming operations since
1957. He found that prospective employees who were family men sought work where
there were adequate housing and facilities for educating their children. He felt that the
provision of the school attracted a more settled type of employee and helped to keep him
on the farm. It also made the wives of the employees more contented if educational
facilities were at hand for the children. Furthermore, when the wives were working on the
farm they were more productive and concentrated better on their work when they knew
that their children were at school under supervision. He concluded his evidence by
submitting that a stable labour force improved the efficiency and output of the farming
operations. He felt that in order to maintain a stable labour force it was necessary to
provide good housing, clean water and educational facilities.
The Fourth Schedule to the Income Tax Act [Chapter 18] provides, inter alia, for the
deductions which are allowed in respect of farm improvements. That term is defined in
para 1 of the Fourth Schedule. It was repealed by s 9 of the Finance No. 2) Act 1980 (No.
11 of 1980) and the following was substituted:
“‘farm improvement’ means any building or structure or work of a permanent nature,
including any water-furrow, which is used in the carrying on of farming operations, but
does not include —
(a) any building, structure or work of a permanent nature referred to in paragraph 2 of
the Seventh Schedule; or
(b) staff housing or any dwelling —
(i) used by the taxpayer as the homestead of himself and his family; or
(ii) purchased or constructed after the year of assessment beginning on the 1st
April, 1979;
or
(c) a tobacco barn;”
The previous definition, which was repealed by Act 11 of 1980, read as follows:
“‘farm improvement’ means any building or structure or work of a permanent nature,
including any water-furrow and farm dwelling, which is used in the carrying on of
farming operations, but does not include—
(a) any building, structure of work of a permanent nature referred to in paragraph 2 of
the Seventh Schedule; or
(b) African housing; or
Page 347 of 1988 (1) ZLR 344 (HC)
(c) any building which is used by the taxpayer as the homestead of himself and his
family; or
(d) a tobacco barn.”
The term “African housing”, which was repealed by Act No. 11 of 1980, read in part as
follows:
“‘African housing’ means any permanent building acquired or constructed by the
taxpayer and used by him for the purpose of his trade for the housing or general welfare
of African employees but does not include . . .”
In Income Tax Case No. 885 (1959) 23 SATC 336, the Cape Income Tax Special Court
considered whether expenditure incurred in the erection of a school and a medical clinic
could be deducted in the determination of the taxable income of the taxpayer. Paragraph
17(1)(f) of the 3rd Schedule to the South African Income Tax Act 1941 provided for the
deduction of expenditure incurred by a farmer in respect of “the erection of buildings
used in or in connection with farming operations, other than those used for the domestic
purposes of persons who are not employees of such farmers.” At p 337 of the judgment
Herbstein J said:
“It is common cause that these buildings are not used in farming operations and what is
really in issue between appellant and the Commissioner is whether the school and the
clinic can be said to be buildings used in connection with farming operations.”
The learned President of the Court went on to consider a number of cases where the
meaning to be accorded to the phrase “in connection with” had been considered, and
concluded at p 338:
“The true position is that while the closest and most intimate relationship is not necessary
it is not enough to show merely a loose and remote one. As Rowlatt J said in Prance’s
case (supra) —
‘it is a matter of degree in which we are to be guided by common sense’.”
He went on to say:
“In its approach the court must not lose sight of the language of the Legislature. It must
be shown by the taxpayer that the expenditure was incurred in ‘the erection of buildings
used in connection with farming
Page 348 of 1988 (1) ZLR 344 (HC)
operations’. That the buildings might be useful or desirable or even necessary from the
taxpayer’s point of view will not justify the deduction of their cost, if, in fact, the
buildings are not used in, or in connection with, farming operations. Thus, while it might
be greatly in the interests of the farmer-taxpayer to have a contented labour force to
which end the provision of recreational facilities in the form of a swimming pool, a
squash court or a cinema might contribute, the expenditure on such buildings would
clearly not be deductible inasmuch as they would not ‘be used in connection with farming
operations’. Likewise while it might be highly advantageous to a taxpayer to have an
educated labour force able because of this to shoulder greater responsibilities,
nevertheless, in my opinion, expenditure incurred in the erection of school buildings to
provide such education would not be deductible in terms of paragraph 17(1)(f) of the
Third Schedule for the simple reason that the buildings would not be ‘used in connection
with farming operations’. The school buildings would be used for educational purposes
and any connection with the taxpayer’s ‘farming operations’ would be so remote and
indirect as to be negligible. It might, perhaps, be pointed out that in the instant case, the
school is not attended by the employees but by their children who might never enter the
employ of the taxpayer. Furthermore the taxpayer has no right to interfere with the
syllabus or to require that what is taught should be of such a nature as to prepare the
pupils as agricultural workers. Appellant’s direct interest in the school is in respect of the
rental it receives for the buildings.”
This statement of the law was apparently accepted by all for many years because there
has been no case in which a similar deduction was claimed until 1978. In that year the
Swaziland Court of Appeal considered an appeal from a decision of the High Court of
Swaziland which held that a school was not a building used in connection with the
taxpayer’s farming operations. The decision of the High Court was founded mainly on
Income Tax Case No. 885 supra. In Commissioner of Taxes v Swaziland Ranches Ltd
(1978) 40 SATC 232 the appeal concerned, inter alia, the meaning of “buildings used in
connection with farming operations”. In that case it was agreed that the purpose in
building the school was to induce potential employees to enter into and remain in the
appellant’s service by creating satisfactory conditions of employment, and to keep its
staff, consisting of married people with young children of early school-going age,
contented and therefore productive, and to attract additional married staff in the same
category. Ogivlie Thompson P found that “there is thus a good deal to be said for the
view that the buildings in issue (ie the school) are no less ‘used in connection with
farming
Page 349 of 1988 (1) ZLR 344 (HC)
operations’ conducted by the taxpayer than are any buildings it may have erected to
house its employees”. However, after analysing the contents of the relevant subsection
and the history of the provision, he came to the conclusion at p 239 that —
“the use of the buildings in issue — although undoubtedly an amenity for the taxpayer’s
employees — is too remote to warrant them being included within the category of
‘buildings used in connection with farming operations’ within the meaning of subpara
17(1)(f).”
The other members of the court, Milne and Smit JJA reached a different conclusion, their
judgment being delivered by the former. At pp 240 and 241 Milne JA said:
“It is clear, as he (ie Ogilvie Thompson P) says, that in subpara (f) the legislature does
not require as a prerequisite for deductibility that expenditure in respect of buildings used
for the domestic purposes of a farmer’s employees, should have any direct connection
with the actual operations of farming. But it seems to me, with respect, once it is clear
that a farmer has erected a building on his farm, though it is not used or intended to be
used for the domestic purposes of his employees at all, that unless one concludes that he
may have erected the building as a matter of mere charity, or for the purposes of some
commercial venture quite separate from his farming operations and that the building is
not used for the domestic purposes of persons other than his employees, one is entitled
and, indeed, obliged to say that he has erected the building, for business reasons, in
connection with his farming operations. In this case the agreed facts as set out by the
President show quite clearly and strongly that the erection of the school and beerhalls was
not done for charity or in connection with some commercial venture other than that the
taxpayer would have a contented and, therefore, as well, a stable labour force. The
legislature, as we have seen, regards the cost (within the prescribed limits) of buildings
used for the domestic purposes of a farmer’s employees as deductible, clearly showing, in
my view, that it is much concerned with the housing on his farm of a farmer’s employees.
Why should it be so concerned other than to ensure that the farmer’s resident labour force
will be a contented one? What, one asks, were the beerhalls and the school erected for
other than for bettering the taxpayer’s farming operations by enhancing the productivity
of his employees, as the agreed facts indeed indicate? I find myself unable to say that the
building with which we are concerned in this case were any less used
Page 350 of 1988 (1) ZLR 344 (HC)
in connection with the taxpayer’s farming operations than buildings used by its
employees as places where they merely sleep and eat and wash and, presumably, spend
some leisure. No less in the former case than in the latter can the buildings be said, in any
sense, to be used in any direct connection with the farming operations, but the legislature
plainly recognizes that buildings may be used in connection with farming operations,
although they are in no way, at all, directly so used.”
The buildings, structures and works which are specifically excluded, by virtue of paras
(a), (b) and (c) of the definition of “farm improvement”, from the ambit of the deductions
provided for in the Fourth Schedule give some indication of what buildings, structures
and works would otherwise be regarded as farm improvements. The buildings, structures
and works mentioned in para (a) of the definition are those referred to in para 2 of the
Seventh Schedule, namely works for the prevention of soil erosion, water conservation
works and fencing. Those mentioned in paras (b) and (c) are staff housing and the
taxpayer’s homestead and tobacco barns. Clearly works for the prevention of soil erosion,
water conservation works and fencing, whilst not connected with the actual operating of a
farm in the sense of income-earning operations as that expression is understood in tax
matters, are used in the carrying on of farming operations. Likewise, tobacco barns are
used in the carrying on of farming operations. Staff housing and the taxpayer’s
homestead, whilst not actually used in the carrying on of farming operations as such, are
necessarily incidental to farming operations as labour is essential for that purpose and
must be housed. There is a direct and proximate connection between farming operations
and the provision of housing for persons carrying on the farming operations. Mr Sayce
argued that, because the definition of “farm improvement”, which was in force prior to
Act No. 11 of 1980 coming into force, excluded “African housing”, and that term was
defined as meaning any building used “for the housing or general welfare of African
employees”, the Legislature must have contemplated that buildings used for the general
welfare of staff would otherwise have been regarded as farm improvements. I cannot
accept this submission. The Fourth Schedule used to provide for deductions for African
housing, and obviously it was intended to extend the deductions to buildings used for
general welfare purposes. Hence the extended definition of the term “African housing”. I
do not think, however, that such extension of the definition can colour the meaning to be
given to the term “farm improvement”.
In Income Tax Case No. 885 supra Herbstein J said that it was common cause
Page 351 of 1988 (1) ZLR 344 (HC)
that the school buildings were not used in farming operations. He was of the view that
they were likewise not used in connection with farming operations. For the reasons given
by Milne JA in the Swaziland Ranches case (supra) I do not agree with him on that point.
I consider that the school buildings erected by the appellant were used in connection with
the carrying on of its farming operations. Consequently, had the term “farm
improvement” been defined in the same manner as it was defined in para 17(1)(f) of the
Third Schedule to the South African Income Tax Act, I would have allowed the appeal.
However the term is defined more narrowly in para 1 of the Fourth Schedule to the
Income Tax Act [Chapter 181]. In order to qualify for the deduction the building,
structure or work must be used in the carrying on of farming operations. The onus lies on
the appellant to satisfy me in this regard and he has failed to do so. I do not consider that
there is a direct and proximate connection between the school and the farming operations.
I sympathise fully with the appellant in its desire to provide educational opportunities for
children of its employees. The policy of the Government is enunciated in Part II of the
Education Act 1987. Section 4 thereof provides that every child in Zimbabwe shall have
the right to school education. In s 5 it is stated that the objective in Zimbabwe is that
primary education for every child of school-going age shall be compulsory and to that
end it shall be the duty of the parents of any such child to ensure that such child attends
primary school. Then s 8 provides that for the purpose of ensuring a fair and equitable
provision of primary education throughout Zimbabwe every local authority shall
endeavour to establish and maintain such primary schools as may be necessary for all
children in the area under its jurisdiction.
This statement of Government policy cannot, however, be used to ascertain the intention
of the Legislature when formulating the Income Tax. In the light of this policy, however,
employers in the rural areas should be encouraged to provide educational facilities for
children of their employees. If this is to be done by way of tax benefits, then the
legislative provisions must be appropriately worded.
The appeal is dismissed.
Honey & Blanckenberg, appellant’s legal practitioners
Civil Division of the Attorney-General’s Office, respondent’s legal practitioners