REPORTABLE
CASE NO:  343/2000

IN THE SUPREME COURT OF APPEAL OF SOUTH AFRICA

In the matter between:

FIRST NATIONAL BANK OF SOUTHERN
AFRICA LTD

APPELLANT

and

COMMISSIONER FOR INLAND REVENUE

RESPONDENT

CORAM: SMALBERGER ADP, HARMS, STREICHER, FARLAM and
BRAND JJA

DATE OF HEARING: 18 FEBRUARY 2002

DELIVERY DATE:
7 MARCH 2002

Summary:  Income Tax - whether income accruing to the appellant was "from a
source within . . . the Republic" in terms of the definition of "gross income" in sec
1 of the Income Tax Act - principles applicable.

___________________________________________________________________

JUDGMENT
___________________________________________________________________

SMALBERGER ADP

SMALBERGER ADP:
[1] The central issue in this appeal is whether certain income accruing to the
appellant during the 1987 and 1988 tax years was received "from a source within . . .
the Republic [of South Africa]" as envisaged in the definition of "gross income" in sec
1 of the Income Tax Act 58 of 1962 (before its amendment by Act 59 of 2000), and
hence subject to tax.  The appellant contends that it was not; the respondent disputes
this.
[2] The appellant carries on business as a commercial bank.  The appellant objected
to the inclusion of the amounts of R17 633 032,00 and R20 379 947,00 (as finally
calculated) in its gross income for the years of assessment ended September 1987 and
September 1988 respectively.  It claimed that the amounts constituted interest received
from a source outside the Republic.  It is common cause that if that were the case they
would not have been subject to tax as part of the appellant's gross income.  The
appellant's objection  was rejected by the respondent.

[3] The appellant appealed to the Income Tax Special Court ("the Special Court").
Its appeal was upheld.  The Special Court set aside the assessments for the years in
question and directed that the matter be referred back to the respondent to assess afresh
in terms of its judgment.  The respondent appealed to the Full Court of the Transvaal
Provincial Division of the High Court ("the Court a quo").  The appeal succeeded, the
order of the Special Court was set aside and the assessments in question confirmed in
so far as they pertained to matters under consideration in the appeal.  The present
appeal lies with leave of this Court.
[4] As, for reasons which will appear later, the answer to the question whether the
source of the interest received by the appellant was within the Republic depends
ultimately upon the proper interpretation  of the relevant factual matrix giving rise to
the receipt of the interest, it is appropriate to commence with a review of the salient
facts, which are by and large common cause.  In doing so I propose to borrow liberally
from the judgments of the Special Court and the Court a quo.  The facts were deposed

to by the only two witnesses who testified, Mr Evans, who at the relevant time was a
manager within the appellant's international banking department, and Mr Howes, its
group tax manager.
[5] At all material times the appellant had access to foreign currency borrowed by it,
as and when required, from foreign banks interested in lending money to a South
African bank.  This enabled it to meet the foreign currency borrowing requirements of
its clients.  Its access to such funds was made possible because of, inter alia, the
favourable state of its assets and liabilities, its sound business reputation, the quality of
its customer base and the creditworthiness of South Africa as a country.  The funds
relevant to the present appeal which were on-lent to clients were all derived from
foreign borrowings; the appellant made no use of any accumulated foreign funds of its
own.
[6] When negotiating a loan, agreement would be reached between the appellant and
the foreign bank concerned in respect of the amount and duration of the loan and the

interest payable by the appellant.  They would further agree, irrespective of the
location of the foreign bank, that the loan would be paid to the appellant at the Chase
Manhattan Bank in New York in the applicable foreign currency for the credit of the
appellant's account at that bank.  On maturity of the loan the appellant would repay it,
plus interest, by effecting payment, in the currency borrowed, from its account at the
Chase Manhattan Bank to the foreign bank's New York account.  All the necessary
arrangements in the above regard would be made by a dealer employed in the
appellant's international banking department in South Africa.  The loans would be
arranged as clients required them.
[7] The starting point to any international financing transaction would be a request
from a client of the appellant (usually a corporate client) for a foreign credit facility to
fund either its exports, its imports or its working capital requirements in South Africa.
The bulk of the funding was for the latter purpose.  For import requirements the
funding was probably required overseas; it is not clear where the funding for export

requirements was needed.  For the purpose of determining what I have identified as the
central issue in the present appeal there is no difference in principle between the three
situations.  The advantage to the appellant's clients in acquiring a foreign facility lay in
the lower interest rate payable in respect of such facility compared to that payable on a
normal overdraft.  From the appellant's perspective, although its profit margin on such
foreign financing transactions was small compared to that on rand denominated loans,
it constituted a profitable source of business as, because it required less infrastructure,
it was cost effective.
[8] The client would request foreign currency in its rand equivalent.  This
requirement was set to quantify the appellant's maximum exposure.  The client
obtained the rand equivalent of the foreign currency in South Africa via the appellant's
treasury account in New York and was debited locally, in rand, in the books of the
branch of the appellant at which it was a customer.  If the foreign currency was paid to
the client overseas, or paid out overseas on its behalf, its branch account with the

appellant was debited with the then rand equivalent.  In addition to the capital of the
loan, the client was debited in South African rand with the interest charged by the
foreign bank together with an added margin on the interest (being the appellant's
remuneration or profit) as well as a premium for forward exchange rate cover, if
required.  The latter served to ensure that the client, who bore the risk of currency
fluctuations, would not be detrimentally exposed to such fluctuations.
[9] The loan, being a foreign currency loan, was pegged to the foreign currency in
question and had to be repaid to the appellant in New York in that currency on the
maturity date.  Where the client utilised the appellant's services for this purpose, which
was usually the case, payment was effected by converting the client's South African
rand into the required foreign currency in the foreign exchange department at the
appellant's head office in South Africa and passing the necessary credits by means of
appropriate book entries.  This resulted in the client's branch account being credited in
rand with the amount repaid and the equivalent foreign currency being transferred to

the appellant's Chase Manhattan Bank account via its treasury account in New York.  If
the client made alternative arrangements for repayment into the appellant's Chase
Manhattan Bank account of the foreign currency amount that was due, its branch
account in South Africa would ultimately be credited with the equivalent amount in
rand.
[10]  In 1985 a debt standstill was declared by the South African government.  It
effectively prohibited South African banks from repaying foreign obligations to
foreign creditors.  The appellant at that time had obligations to foreign banks of  some
$1.5 billion.  This was by and large matched by indebtedness to the appellant by
corporate clients in South Africa.  Upon the appellant being repaid, it had the choice of
either repaying the money in the blocked accounts to the Public Investment
Commissioners (which would have rendered it useless to the appellant as an income
earning asset) or prevailing upon its overseas creditors to permit it to continue to use
such foreign currency for lending to its clients.  It successfully followed the latter

course, the blocked accounts providing a pool of foreign currency from which it could
draw.  The debt standstill has no significant bearing on the outcome of the appeal; the
appellant's modus operandi remained essentially the same.
[11]  The thrust of the appellant's argument (and this has been its case throughout) is
that in our law the source of interest is determined by the place where the funds which
attracted the interest are made available to the borrower.  As this occurred in New
York the source of the appellant's interest was located outside the Republic and was
therefore excluded from its gross income.  The appellant relies for this contention on
the decision of this Court in Commissioner for Inland Revenue v Lever Bros and
Another 1946 AD 441 ("the Lever Bros case").  It is on this narrow basis that the
appellant claims the appeal should succeed on what it refers to as the "source issue".
[12]  The legal principles that hold sway in matters involving questions of source
were articulated by Corbett CJ in Essential Sterolin Products (Pty) Ltd v Commissioner
for Inland Revenue 1993(4) SA 859 (A) ("the Essential Sterolin case") at 870 C to 871

B as follows:
"The legal principles to be applied in determining whether or not an amount was
received from a source within the Republic have been stated in a number of
decisions of this Court, more particularly in Commissioner for Inland Revenue v
Lever Bros and Another 1946 AD 441; Commissioner for Inland Revenue v
Epstein 1954 (3) SA 689 (A) ; Commissioner for Inland Revenue v Black 1957
(3) SA 536 (A) . These authorities point out that the Legislature, probably aware
of the difficulty of doing so, has not attempted to define the phrase 'source . . .
within the Republic' and has left it to Courts to decide on the particular facts of
each case whether an amount was or was not received from such a source. As
was stated by Watermeyer CJ in the Lever Bros case supra (at 450),
'. . . the source of receipts, received as income, is not the quarter whence they come, but the
originating cause of their being received as income, and . . . this originating cause is the work
which the taxpayer does to earn them, the quid pro quo which he gives in return for which he
receives them. The work which he does may be a business which he carries on, or an
enterprise which he undertakes, or an activity in which he engages and it may take the form
of personal exertion, mental or physical, or it may take the form of employment of capital
either by using it to earn income or by letting its use to someone else. Often the work is some
combination of these.'
(See also Epstein's case supra at 698E; Black's case supra at 541.) In a
particular case there may be a number of causal factors relevant to the
ascertainment of source and, here it would seem, it is appropriate to weigh these
factors in order to determine the dominant or main or substantial or real and
basic cause of the receipt (Black's case supra at 543A-C). In a number of cases
in our Courts reference has been made (in various forms) to the following
remarks of Isaacs J delivering the judgment of the High Court in Australia in the
case of Nathan v Federal Commissioner of Taxation (1918) 25 CLR 183 at 189-

90:

'The Legislature in using the word "source" meant, not a legal concept, but something
which a practical man would regard as a real source of income. . . (T)he ascertainment of the
actual source of a given income is a practical, hard matter of fact.'
(See Rhodesia Metals Ltd (In Liquidation) v Commissioner of Taxes 1938 AD
282 at 300; Rhodesian Metals Ltd (in Liquidation) v Commissioner of Taxes
1940 AD 432 (PC) at 436; Lever Bros case supra at 454.)

In applying these general principles, the Courts have adopted certain rules
and criteria for locating the source of particular types of accrual or receipt, such
as dividends, annuities, director's fees, interest, payment for services, rent,
royalties, and so on. None of these would seem to have relevance to the
somewhat unusual character of the inability consideration. In seeking the
originating cause of this amount one must, in my view, have regard to the
factual matrix underlying and giving rise to the agreement in terms of which it
became payable and then apply thereto the basic principles outlined above."

No substantial or persuasive challenge was directed against the applicability of these
principles in the present appeal.  Nor was it suggested that there might be special cases
falling beyond the principles enunciated.
[13]  In my view the appellant's reliance upon the Lever Bros case is misplaced.  The
case does not provide authority for the narrow proposition advanced by the appellant.
The facts of the Lever Bros case differ materially from the present matter.  Those facts,

as succinctly reflected in the headnote, were the following:  A company registered in
South Africa entered into an agreement abroad, the result of which was that it took
over an obligation entered into abroad by an overseas company to pay to the taxpayer
(Lever Bros), another overseas company, interest upon a large sum of money being the
unpaid portion of the purchase price of a large holding of shares in companies
registered and carrying on business abroad, the shares remaining overseas pledged to
the taxpayer.  The interest was paid out of dividends accruing to the South African
company abroad on the shares owned by the company and pledged to the taxpayer.  In
authorising the agreement entered into by the South African company, the Treasury
had imposed a condition that no capital or interest should be paid from any funds in
South Africa and this condition had been fully observed.  It was held by Watermeyer
CJ (Davis AJA concurring in a separate judgment, Schreiner JA dissenting) that
notwithstanding the fact that the debtor in respect of the loan by Lever Bros resided in
South Africa, the interest was not received from a source within the then Union and

therefore did not form part of Lever Bros's gross income.  The argument that the source
of interest is the location of the debt was rejected by Watermeyer CJ.
[14]  In the course of his judgment Watermeyer CJ stated (at 449):
"When the question has to be decided whether or not money, received by a
taxpayer, is gross income within the meaning of the definition referred to above,
two problems arise which have not always been differentiated from one another
in decided cases.  The first problem is to determine what is the source from
which it has been received and when that has been determined, the second
problem is to locate it in order to decide whether it is or is not within the
Union."

[15]  It was when dealing with the first problem that Watermeyer CJ made the
statement (at 450) referred to in the passage from the Essential Sterolin case quoted
above that the source of receipts was "the originating cause of their being received as
income."
[16]  Watermeyer CJ went on to add (at 451) that the supply of credit (or, for that
matter, money) "is the service which the lender performs for the borrower, in return for
which the borrower pays him interest.  Consequently, this provision of credit is the

originating cause or source of the interest received by the lender . . . . the borrower
pays interest . . . . as consideration for the benefits allowed to him by the lender."
[17]  Turning to the problem of locating a source of income, Watermeyer CJ opined
(also at 451) that "it is obvious that a taxpayer's activities, which are the originating
cause of a particular receipt, need not all occur in the same place and may even occur
in different countries, and, consequently, after the activities which are the source of the
particular 'gross income' have been identified, the problem of locating them may
present considerable difficulties. . ."  Later in his judgment (at 454) he referred
indirectly (and seemingly with approval) to the remarks of Isaacs J in Nathan v Federal
Commissioner of Taxation quoted in the Essential Sterolin case at 870 H - I (see para
[12] above), to the effect that the ascertainment of the actual source of a given income
is a practical, hard matter of fact.
[18]  Watermeyer CJ went on (at 455-6) to consider the facts of the case, emphasizing
as he did so the absence of considerations pointing to the source of the interest

concerned being in South Africa.  From his treatment of the evidence it is apparent that
he thought it necessary to consider the relevant factual matrix in order to determine
where the source of interest was located.  This would have been a totally needless
exercise if he intended to convey, or for it to be understood, that the sole criterion for
determining the location of the source of interest was where the credit (or money, as
the case may be) was made available.  What the appellant contends for was neither said
explicitly by Watermeyer CJ nor does it follow as a matter of necessary implication
from Watermeyer CJ's treatment of the question of source.  On the contrary, the
contention is inconsistent with the tenor of both his judgment and that of Davis AJA.
The principles and approach laid down in the Essential Sterolin case are not in any way
at variance with the judgment of Watermeyer CJ.
[19]  The overall factual situation relevant to the determination of the location of the
source of the interest received by the appellant may be summarised as follows.  The
appellant is a South African institution with an essentially South African client base.

The provision of foreign currency to individual South African corporate clients had its
origin in a loan facility agreed to in South Africa.  The foreign currency was made
available in New York and had to be repaid there.  The foreign currency was sourced
by way of loans from a foreign bank by a foreign exchange dealer employed by the
appellant in, and operating from, South Africa.  The appellant did not have a branch in
New York nor did the client concerned have a separate account with the appellant
there.  The client was debited in South Africa with the rand equivalent of the available
foreign currency.  In the majority of cases the foreign currency was brought to South
Africa, converted into rand, through the agency of the appellant and its various
divisions, none of which operated in isolation, all forming an integral part of the
appellant's overall structure.  The rand equivalent of the foreign currency was made
available to the client, and utilised by it, in South Africa.  The add-on margin of
interest, which constituted the appellant's income from the overall loan transaction, was
debited in rand against the client's branch account in South Africa.  While notionally

the client was required to repay the foreign currency loan in New York in the currency
concerned, in practice the loan was repaid to the appellant (certainly in the majority of
cases) in rand in South Africa before it was converted back to the required currency,
using the appellant's structures in South Africa, and eventually paid into its Chase
Manhattan Bank account.
[20]  Apart from the fact that contractually the foreign currency was made available to
the borrowing client in New York and had to be repaid there, all the other important
factors which caused the interest income to arise (and which constituted the dominant
cause of the receipt of the interest) had their origin in South Africa and flowed from
the appellant's business activities and operations here.  The narrow view taken by the
appellant focuses only on where the funds were made available and had to be repaid.  It
overlooks the need to have regard to the essence of the whole transaction which
generated the interest with a view to determining the location of its source.  It was
conceded on behalf of the appellant that had it borrowed foreign currency in New

York, transferred it to South Africa and lent out the rand equivalent here, the source of
the interest income generated by the loan would have been South Africa.  There is no
logical reason why the position should be any different because of the expedient of
making the foreign currency available in New York to the client before transferring it
to South Africa (and later back to New York) essentially using the same modus
operandi.  The substance of the underlying income-generating transaction remains the
same, even though the means used to achieve the same result may differ.  On an overall
conspectus of the relevant factual matrix, and applying the principles enunciated in the
Essential Sterolin case, the source of the interest, which is the subject of the present
appeal, was in my view located in South Africa, and was correctly held by the Court a
quo to have been part of the appellant's gross income and subject to tax.
[21]  The conclusion reached on the source issue makes it unnecessary to decide the
only remaining issue, namely, whether the appellant proved the quantum of the
deductions it claimed, or should be allowed a further opportunity to do so.  It is very

likely that the appellant would have failed on this issue as well.  Speaking generally,
when a party, on whom the onus rests, is specifically challenged in court to prove its
case in relation to quantum, accepts the challenge and undertakes to do so but then fails
in that regard, which prima facie is the situation here, the party concerned would
normally not be entitled to a second bite at the cherry.  However, there is no need to
express a firm view on the matter.
[22]  In the result the appeal is dismissed with costs, including the costs of two
counsel.

_____________________
J W SMALBERGER
ACTING DEPUTY PRESIDENT

HARMS JA
)Concur
STREICHER JA )
FARLAM JA
)
BRAND JA
)