Murowa Diamonds (Private) Limited Versus Commissioner-General OF Zimbabwe Revenue Authority

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MUROWA DIAMONDS (PRIVATE) LIMITED
versus
COMMISSIONER-GENERAL OF ZIMBABWE REVENUE AUTHORITY

HIGH COURT OF ZIMBABWE
PATEL J

Opposed Application

HARARE, 11 October 2011 and 13 March 2012

E. Morris, for the applicant
M. Sinyoro, for the respondent



         PATEL J:   The applicant herein seeks a declaratory order that: it

overpaid withholding tax to the respondent from January 2007 to

October 2008 in the total sum of US$215,878.65; it is therefore entitled to

offset the withholding tax payable for 2009 and 2010 against that

overpayment; and all withholding taxes due by it for 2009 and 2010 have

been settled in full. The respondent denies that any such overpayment

was made or that the applicant is entitled to any set-off against its liability

for withholding tax. Both parties seek an order for costs on a higher

scale.


Background

         In August 2008 the applicant made a payment in United States

Dollars (USD) from an offshore account into the respondent’s account

with the Reserve Bank of Zimbabwe (RBZ). According to the applicant, an

audit by the respondent in July 2009 showed that there was an

overpayment of US$215,878. It was then agreed that future taxes due by

the applicant be set off against the overpayment. In September 2009 the

respondent disputed any overpayment on the ground that the RBZ had
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converted the payment into Zimbabwean Dollars (ZWD) and had not

credited the respondent’s account with United States Dollars (USD). The

respondent then refused to allow any set-off and demanded payment of

withholding tax from the applicant.

      The applicant’s position is that it made the USD payment in good

faith and the RBZ acknowledged having received that payment. The

failure by the RBZ to credit the respondent’s account with USD is a matter

between the RBZ and the respondent. The RBZ acted of its own accord to

convert the USD into ZWD and retain the USD payment for its own use. In

any event, the respondent must have accepted and used the ZWD credit

for his own benefit.

      According to the respondent, the applicant was aware that the

respondent had two accounts, one in ZWD with the RBZ and the other

with the Commercial Bank of Zimbabwe (CBZ) in USD. The applicant’s

payment instruction in August 2008 required the RBZ to convert the

payment into ZWD to credit the respondent’s ZWD account. In July 2009

his official accepted the overpayment in error because she was unaware

that the RBZ had converted the payment into ZWD. Subsequently, when

the applicant was asked to furnish proof of payment in USD, it did not

produce the relevant receipts.

      The respondent’s position is that the tax regime in Zimbabwe

before March 2009, in the absence of specific statutory amendment, was

conducted exclusively in ZWD. Consequently, any overpayment in ZWD at

that time cannot be set off against tax obligations in USD incurred after

March 2009 under the present taxation laws.

      With this background, the issues for determination, as I perceive

them, are as follows: (a) whether the payment by the applicant was

effected in good faith; (b) whether there was a binding agreement for
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set-off between the parties; (c) whether it is legally possible to set off

ZWD receipts against USD tax obligations; and (d) whether set-off is

permissible and enforceable against the fiscus.


Whether Payment Effected in Good Faith

      It is common cause that the RBZ wrote to the applicant’s bankers

on 11 September 2003 granting authority to operate two offshore foreign

currency accounts, one to be credited with loan funds and the other with

export proceeds. The funds in these accounts were to be used only for

the purposes specified, including the payment of amounts owing to the

Government, to wit, all taxes and duties as well as mineral marketing

fees. What is not clear is how such payments were to be treated once

received into this country.

      The bank transfer documents filed of record show that the

applicant made a payment in USD into the respondent’s account with the

CBZ in November 2008, in respect of 5 Isuzu trucks imported in October

2008. They also show that, between January 2008 and February 2009, the

applicant made three ZWD payments into the respondent’s RBZ account,

in respect of excise duty and tax on loan interest. The payment in casu of

USD194,368 was made in August 2008 into the same RBZ account. This in

itself is not conclusive in light of the applicant’s averments that it was not

aware that the RBZ account was for ZWD only and that the payment into

the CBZ account was made on the specific instruction of the respondent.

The letter from the RBZ to the respondent, dated 9 September 2009,

states that the “funds were converted to Zimbabwe Dollars and posted to

Account    Number     20-11109    as   per   instructions   on   the   credit

confirmation”. This too is inconclusive given the ambiguity in the

statement as to whether the applicant’s instructions related only to the
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posting into the respondent’s account or both such posting and the

conversion to ZWD.

      In the event, it seems to me that it is not possible, simply on the

papers, to infer that the applicant knew that its USD payments into the

respondent’s RBZ account would be converted into ZWD. I am therefore

unable to make any definitive finding as to the applicant’s bona fides in

this regard.


Binding Agreement for Set-off

      On 24 July 2009, the applicant’s accountant wrote to one Regina

Chinamasa at ZIMRA requesting her to confirm that the applicant

“inadvertently overpaid withholding tax by US$215,878.45 between the

periods from January 2007 to December 2008”. The accountant also

asked her to “advise when we may expect a refund of the overpayment or

alternatively that we could apply some to offset other taxes due to

ZIMRA”. Chinamasa then stamped and counter-signed the letter

confirming the overpayment, but curiously and inexplicably, a day before

the date of the letter. Several months later, on 25 January 2010, she

wrote to the applicant disputing any USD overpayment. The reason she

gave was that the applicant had failed “to have receipts issued by our

cash office to confirm receipt of the USD payments made to ZIMRA in

accordance with the procedure” and that she “later discovered that your

payment records/accounts with ZIMRA reflect that no payment was

made”.

      The above correspondence suggests that the ZIMRA official in

question might have accepted the USD overpayment in error as a result

of a genuine mistake. It further suggests, perhaps more tellingly, that she

retracted her earlier confirmation of the overpayment after realising that
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she might have exceeded her authority. It is also possible, given the

anomaly that I have adverted to in the date of her counter-signature, that

she acted in collusion with the applicant’s accountant in agreeing the

overpayment.

      In any event, whatever might have actually transpired, the most

that can be gleaned from the ZIMRA official’s conduct is that she agreed

or confirmed the overpayment. There is no specific evidence in the

papers to show with any certainty that she, or any other ZIMRA official,

also agreed to the set-off claimed by the applicant. Any such agreement

cannot be inferred or attributed to the respondent for the simple reason

that it was never firmly concluded. It follows that there was no binding

agreement for set-off between the parties.


Set-off versus Prepayment

      At the hearing of this matter, counsel for the applicant embarked

on the startling proposition that the applicant’s claim was not one for a

set-off in respect of different debts but was founded on a prepayment

made in error. As I understood his argument, it was that the applicant’s

payment was merely one made in advance in respect of the same debt or

obligation. This is an aspect that was not canvassed at all in the

pleadings. Indeed, the applicant’s founding and answering papers are

utterly devoid of any assertion of prepayment, as is the order that it

seeks, all of which are unambiguously premised on its entitlement to

offset other tax obligations against the overpayment in question. As a

matter of fact, this is precisely what the applicant requested from the

respondent in its letter of 24 July 2009, which I have referred to earlier.

      All in all, the notion of any prepayment having been made in

anticipation of future withholding tax liability is clearly not borne out by
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the facts delineated in the papers. They simply point to the applicant

having made an overpayment in error, which error it now seeks to have

rectified by way of set-off. In short, I see no merit whatsoever in the

prepayment argument proffered by counsel for the applicant.


Set-off against Tax Obligations in USD

      The respondent’s position is that he received payment into his

account with the Reserve Bank in ZWD. Consequently, it is now not legally

possible to set off ZWD receipts against tax obligations in USD for two

reasons. Firstly, as at February 2009, any credit in ZWD would have been

extinguished because of the so-called zeroisation or devaluation of the

ZWD. Secondly, after February 2009, the fiscal legislation in place

required payment of withholding and other taxes in USD. The set-off

sought by the applicant would therefore be in violation of the governing

tax laws.

      The respondent’s argument, as I see it, is no more than an exercise

in unvarnished casuistry. The concept of set-off or compensatio was

succinctly explained by Innes CJ in Symon v Brecker 1904 TS 745 at 747 as

follows:

             “Compensation by our law is really equivalent to payment; it
      operates ipso facto as a discharge. So soon as there are two debts
      in existence, between which there is mutuality, so that the one can
      be compensated against the other, then by operation of law the
      one debt extinguishes the other pro tanto. … Compensation does
      not need to be set up; it needs no admission; it operates ipso jure,
      and is really in intendment of law a form of payment.”

      In the instant case, the following facts are common cause. The

amounts paid by the applicant by way of withholding tax from 2007 to

2008 exceeded its tax liability by US$215,878. The sums were paid by the

applicant in USD and converted by the RBZ into ZWD for the credit of the
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respondent’s account. On these facts, it cannot be disputed that the

respondent received the ZWD equivalent of US$215,878 into its account

for its own use and benefit. This amount was then acknowledged and

agreed, although possibly mistakenly, as having been overpaid. It thus

became a debt due to the applicant by the respondent in ZWD.

Thereafter, the applicant incurred further tax liabilities in USD which

became debts due to the respondent. In effect, there was a mutuality of

debts as between the applicant and the respondent, albeit in different

currencies.

      In my view, there is no reason in law why the applicant’s

indebtedness in USD cannot be set off against the equivalent of the

respondent’s prior indebtedness in ZWD. From a practical standpoint, set-

off is no more than an accounting exercise on paper (or computer)

whereby mutual debts are extinguished pro tanto. The fact that the debts

in question are denominated in different currencies should not preclude

the practicability of set-off in an equivalent amount. After all, it could

hardly be argued that an overpayment of tax in Pounds Sterling cannot

be applied to extinguish a subsequent tax liability incurred in South

African Rands. So long as it is practically possible, as a matter of

accounting, to convert one currency against the other, there can be no

legal impediment to the set-off of mutually extant debts in different

currencies. This would apply even where one of the currencies

concerned, the ZWD in particular, has become effectively moribund for

the time being. In the premises, subject to what follows below, I would

conclude that it is practically and therefore legally possible to set off

amounts received in ZWD against tax obligations incurred in USD.
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Set-off against the Fiscus

      The long established rule of our common law is that set-off cannot

be raised against taxes due to the fiscus. This rule is grounded in public

policy and utility and is designed to ensure the uninterrupted flow of tax

revenues to the Treasury in the interests of good governance. The rule

was categorically reaffirmed by Gubbay JA in Commissioner of Taxes v First

Merchant Bank Limited 1997 (1) ZLR 350 (S) at 353, as follows:

             “At common law, set-off or compensatio is a method by
      which mutual debts, being liquidated and due, may be
      extinguished. It takes place ipso jure. If the debts are equal, both
      are extinguished; if unequal, the smaller is discharged and the
      larger is proportionally reduced. There are, however, two
      important exceptions to the operation of the rule. A debt owed by
      one department of the State cannot be set off against a debt owed
      to another department. And set-off cannot be raised against taxes
      due to the fiscus or where goods are sold for the benefit of the
      State. See Schierhout v Union Government 1926 AD 286 at 291;
      Pentecost & Co v Cape Meat Supply Co 1933 CPD 472 at 479; Voet
      Commentarius ad Pandectus 16.2.16 (Gane’s translation, Vol 3 at
      166); van Leeuwen Censura Forensis 1.4.36.11 and 13 (Barber and
      Macfayden’s translation); Wessels The Law of Contract in South Africa
      2 ed vol II at paras 2567 and 2568; Wille’s Principles of South African
      Law 8 ed at 483. Both these exceptions are grounded in public
      policy and utility. The first is designed to avoid confusion in State
      accounts; the second to ensure the uninterrupted flow of tax
      revenues to the Treasury in the interests of good governance. In
      each instance, it is for the State to decide whether or not set-off
      should apply even though the debts co-exist.”

      Equally importantly, the two exceptions against set-off at common

law remain intact and unimpaired by statute. The Supreme Court

decisively rejected the proposition that the law had been altered or

modified by section 48 of the Audit and Exchequer Act [Chapter 22:03]. It

was held that the Legislature did not intend to alter the existing law

regarding set-off. Section 48 of the Act is confined to recovery of debts
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due to the State and one of the ways that the State can recover its debts

is by way of set-off. It was not intended to allow set-off to be claimed by

private persons or companies against tax debts due to the State.


Disposition

      In the present matter, no argument has been put forward by or on

behalf of the applicant to justify any deviation or departure from the

common law. Thus, even if it were to be found that the payment by the

applicant was effected in good faith and that there was a binding

agreement for set-off between the parties, and even though it may be

practically and legally possible to set off ZWD receipts against USD tax

obligations, it must nevertheless be held that set-off is not permissible

and enforceable against the fiscus.

      It follows that the applicant is not entitled to the declaratur that it

seeks herein. At best, having regard to the apparent enrichment of the

RBZ at its expense, it may crave the indulgence of the State to allow the

set-off that it claims. However, this is a purely discretionary matter with

essentially governmental implications, without any correlative rights or

remedy at law.

      As regards costs, I think that it would be rather unfair, on the

particular facts of this case, to grant a punitive award of costs as claimed

by the respondent in his opposing affidavit. Nor was any such award

sought by respondent’s counsel at the hearing of the matter. In the

result, the application is dismissed with costs on the ordinary scale.
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Gill Godlonton & Gerrans, applicant’s legal practitioners
ZIMRA Legal Division, respondent’s legal practitioners