Commissioner General of Income Tax v. Diamond Corporation Tanzania Ltd. Mis. Civ. App. 21-D-69; 31/12/69; Georges, C.J. and Court of Appeal Civ. App. 12-D-70; 9/6/70; Duffus, P. Law and Mustafa, JJ. A.

Commissioner General of Income Tax v. Diamond Corporation Tanzania Ltd. Mis. Civ. App. 21-D-69; 31/12/69; Georges, C.J. and Court of Appeal Civ. App. 12-D-70; 9/6/70; Duffus, P. Law and Mustafa, JJ. A.

Under and agreement the respondent company would sell all the gemstones it purchases from Williamson Diamonds Ltd. Williamson Diamonds Ltd. and its associated companies mine and produce diamonds in mainland Tanzania. Williamson Diamonds Ltd. market the gemstones though an organisation known as the Central Selling Organisation which operates in London and which controls about 85% of the diamond trade in the world market. The Central Selling Organisation is composed of the Diamond Corporation Ltd. and its connected companies. The respondent company is registered as a limited liability company in Tanzania and is a fully owned subsidiary of the Diamond Corporation Ltd. which is a United Kingdom based company. The respondent company buys diamonds from the Williams Diamonds Ltd. At a price 7¹/₂% below the price it obtains from its parent company in London. The 7¹/₂% commission is retained as deposits with the parent company on a seven day call basis at a low interest rate. At the end of December 1969 it had a balance of ₤1,249, 346- 19-5 sterling with the parent company representing commission on its sales during 1967. Respondent company’s tax liability was computed in Tanzania currency. It claimed a loss of Tan. Shs. 3,579,140/- on its sterling holding as a result of the devaluation of sterling in 1967. The appellant disallowed the claim. The respondents successfully appealed to High Court. On appeal to the Court of Appeal the appellant argued that (a) the deposits with the parent company were of a capital nature, (b) loss on devaluation was not a trade loss, and (c) the respondents were not justified in keeping the deposits in London and the loss on devaluation could have been avoided.

            Held: A – per Georges, C. J. “I am satisfied that the appellant company did suffer a loss. It traded in sterling and when devaluation came its sterling holdings produced fewer Tanzanian shillings on conversion. It is true that no actual conversion took place but the fact is that had the company sent its sterling accounts to the Income Tax authorities here they too would have converted to shillings to calculate the appellant’s tax liability ….. The deposits with the parent company was trading capital, and in no sense part of the fixed assets of the company. I find that there was a loss on this deposit as a result of devaluation …… accordingly this appeal succeeds.” Court of Appeal: B – (1) Per Mustafa, J. A. “In my view the sums credited to respondent company by the Diamond Corporation Ltd. were trading receipts – profits earned in diamond trading ……. The respondent company was justified in keeping that money in sterling in London during each yearly accounting period, as all its dealings and transactions in respect of the diamond business were in sterling. The respondent company has certain legal and financial obligations in terms of the agreements entered into by it, although in practice it may never be called upon to perform them.” (2) “I believe the respondent company was using the Diamond Corporation Ltd. as a banker, but because of the special relationship and arrangements between it and its holding company, the respondent company was paid interest at a rate 2% less than the normal bank rate on its deposit. I do not think the money, by being deposited with the Diamond Corporation ltd. in the way it was, has been converted into an investment of a capital nature. The money, which incidentally was of a large amount, was placed on a seven day call basis, and would retain its character of a current and liquid asset. Such a deposit with its holding company has always been regarded by the respondent company as a current, not a fixed asset, as all its balance sheets, both for 1967 and prior to 1967, show.

These balance sheets were never questioned by the appellant.” (iii)”….. the accounting period is from 1^st  January to 31^st December each year. The devaluation of the pound sterling took place in November 1967, before the end of the accounting year. The respondent company could not finalise its accounts until the end of December 1967, and profits and losses can be computed only at the end of the accounting period, when the sum total of all the transactions can be worked out. It was in order for the respondent company to keep open and current its assets and liabilities until the end of the accounting year, and during such accounting period the respondent company deposited its money on a current basis with company Diamond Corporation Ltd. …… if the deposit was held over to the following year, after the end of the accounting period, say into 1968, I would have been prepared to agree with the proposition put forward by learned counsel for the appellant. But here devaluation took place at a point of time within the accounting period, and affected the respondent company’ profits earned during that period. The loss, if any, would be a trade loss. It means the profits earned by the respondent company do not represent that much in terms of Tanzanian shillings at the end of December 1967. The sum earned, which was in sterling, by the fact of devaluation, represented a lesser sum in terms of Tanzanian currency. The leaned Chief Justice found the respondent suffered a loss on devaluation. I am not sure if the loss is not merely a notional as opposed to a real loss. The sum earned in sterling has not decreased, only its convertibility value in terms of Tanzanian shillings has.” (iv) Appeal dismissed.