Cr.A. 74/58.

ATTORNEY-GENERAL v. HORNSTEIN

In the Supreme Court Sittjng as a Court of Criminal Appeal

Agranat J., Silberg J. and Goitein J.

Administrative Law-Delegatus non potest delegare-Delegation by municipality of its statutory powers to Mayor-Legislative and admin­ istrative functions-Delegation of powers to impose tax-Road Transport Ordinance, sec. 25 (!)-Municipal Corporations Ordinance, sec. 99 (1).

Section 25(1) of the Road Transport Ordinance and section 99(1) of the Municipal Corporations Ordinance provide as follows:

"25(1) A municipal...council may, with the consent of the district commissioner and the licensing authorfty, make bye-laws in regard to the following matters-...

2. the regulation by prohibition or otherwise of vehicles when stationary within the municipal... area."

"99(1) A municipal council may make by-laws to enable or assist it to carry out any of the matters it is required or empowered to do under...any other Ordinance... and may by such by-laws provide for the payment of any fees...by any person...in connection with such matters."

In bye-laws made by the Municipal Council of Tel-Aviv-Jaffa under the above sections provision was made for the designation by the Council of "parking places", and the Mayor was empowered, after consultation with certain officials,  to set  apart a "parking  place", to regulate parking in a "regulated parking place" by an attendant or by means of mechan­ ical devices, and to prescribe different scales of fees for the different regulated parking areas according to the hours of parking, the periods and types of vehicles. The by-laws also provided that a person who contravenes any of their provisions shall  be liable to a fine of IL 100.

The respondent was convicted by a Municipal Court of an offence against the bye-laws in that he had parked his car in a "regulated parking place" regulated by means of mechan­ ical devices, namely, parking meters, without depositing the fee prescribed in the Mayor's notice which appeared thereon. On appeal to the District Court the conviction was quashed on the grounds that the delegation of powers by the council to the Mayor was ultra vires the powers of the Council under the sections cited, and that the Mayor's regulations regarding the duty to pay a fee at a certain rate were of a legislative character and had not been published as required by law. The Attorney-General appealed.

Held, dismissing the appeal:

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Per Agranat J. (Silberg J. concurring),

1. the function of the Mayor in designating a parking piace as a "regulated parking place" was of a legislative character, while the function of regulating parking thereon by an attendant  or by means of mechanical devices was merely administrative in character.

2. The principle of delegatus non potest delegare is not to be regarded, even to the extent that it 11pplies to the authority of a secondary legislator, as an inflexible rule but merely as a presumption which may sometimes be rebutted, and at least one recognised qualification upon its application is that in the case of a secondary legislator upon whom full legislative authority has been conferred to regulate a number of different matters-power to make primary regulations and not merely rules of an executive nature in relation thereto-it may be infer_red that the Law from which this authority derives intended by implication to permit him to place upon an administrative body the task of determining when or how the regulations prescribed by such legislator should come into effect.

3. The provisions of the bye-laws therefore empowering the Mayor to prescribe "regulated parking places" in  those  places  which had previously been designated as "parking places" by the Council itself, and having done so to determine whether parking thereon should be regulated by attendants or by means of parking meters, should be upheld.

4. The fee imposed for parking was not only of the nature of a "price" but also of the nature of a "tax", and as the authority to levy a tax emanates from the sovereign character of the supreme legislative organ, if for this purpose it has chosen to be assisted by a subordinate law-making body, the latter must necessarily abide, even to a greater degree, by the principle of delegatus non potest delegare; and as moreover the Council could itself control the fixing of the price either by outlining a  rational basis or mode of action for guiding the Mayor in prescribing "the relevant scales of fees or by fixing a maximum rate for the parking fee, the determination of the scale by the Mayor alone was of no effect.

Per Goitein J. (dissenting),

the parking fee was not of the nature of a tax, and  the Council had therefore not exceeded its powers in delegating the function of prescribing the fee to the Mayor.

Israel cases referred to :

1. Cr.A. 213/56-Attorney-General v. Yeshayahu and Genya Alex­ androvitz (1957) 11 P.D. 695.

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2. H.C. 220/51-Jemal Mahmud Ass/an and others v. Military Governor ofGp,/i/ee, Nazareth (19 1) 5 P.D. 1480.
3. H.C. 104/54-Irgun Nehagei-Moniot Sherut Le'Mehoz Tel-Aviv v. Mayor of Tel-Aviv, Haim Levanon, as Local Road Signs Committee within the meaning of Road Transport (Traffic) Regulations, 5713-1953 and others (1955) 9 P.D. 100.
4. C.A. 300/53-Yosef Woszczyna v. Local Council of Kiryat Ha­

roshet (1955) 9 P.D. 1639,.

5. H.C. 21/51-N. Binenbaum and others v. Tel-Aviv Municipality

(1952) 6 P.D. 375.

6. Cr.A. 75/54-Attorney-General v. B. Schreiber and A. Mite/man

(1954)  8 P.D. 927.                                                                   .

7. C.A. 43/53-The Local Council of Kjar Ata v. "Ata" Textile Company Ltd. (195.,5) 9 P.D. 869.

English cases referred to:

8. Allingham and another v. Minister of Agriculture and Fisheries

[1948] 1  All E.R. 780.

9. Ferdinand  Longfield  Speight  and  others v. Isaac Gaunt [1883-84]

9 App. Cas. 1.

10. The Queen v. Burah [1877-78] 3 App. Cas. 889.
11. Charles Russell v. The Queen [1881-82]7 App. Cas. 829.
12. Archibald G. Hodge v. The Queen [1883-84] 9 App. Cas. 117.
13. King Emperor v. Benoari Lal Sarma [1945] 1 All E.R. 210; [1945]

A.C. 14.

14. Shannon and others v. Lower Mainland Dairy Products Board

[1938] A.C. 708.

Australian cases referred to:

15. Croft v. Rose (1957) Argus Law Reports 148.

American cases referred to:

16. Union Bridge Company v. United States (1907) 51 Ed. 523.
17. May W. Borum v. H.S. Graham and others (1935). 4 Cal. App. (2d) 331.
18. Minnie Gould and others v. Western Dairy Products, Inc., and

others (1936) 12 Cal. App. (2d) 188, 191.

19. Angelo Mecchi, Jr., a Minor, etc. and others v. Lyon Van & Storage Co. (1940) 38 Cal. App. (2d) 674.

(20)     People v. Sullivan (1930) 238 N.Y. Supp. 253; 72 A.L.R. 231.

21. Samuel C. Taylor v. Abel J. Roberts (1922) 84 Fla. 654; 72 A.

L.R. 231.

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22. State ex rel. Harkov v. McCarthy (1936) 171 So. 314; 108 A.L.R.

1153-1154.

23. J.W. Hampton Jr., & Co. v. United States (1928) 48 S. Ct. 348.
24. City of Birmingham and others v. Hood-McPherson Realty Com­ pany (1937) 108 A.L.R. 1140.
25. Marion L. Frost and others Co-partners, Doing Business under the Name and Style of Frost & Frost Trucking Company v. Railroad Commission of The State of California (1926) 47 A.L.R. 457.

American Act referred to:

Constitution of the United States of America, 1787, Art. 1,2,3.

Zilbiger and Rivka Dinai for the appellant. The respondent appeared in person.

AGRANAT J. The problem involved in this appeal is of a constitutional character, concerning the legislative powers of a local authority, the Municipal Council of Tel Aviv-Jaffa. The question arose in connection with the following statutory provisions:

(The learned judge cited sec. 25(1) of the Road Transport Ordinance and sec. 99(1) of the Municipal Corporations Ordinance, 1934, and continued)

Relying on these two statutory provisions, the above Municipal Council (hereinafter referred to as "the Council") enacted the "Bye-laws for Tel Aviv-Jaffa (Stationing and Parking of Vehicles), 1945" (Reshu­ mot, 1954, no. 459, p. 1000-hereinafter referred to as "the Bye-laws").

Sec. 1 of the bye-laws contains the following definitions:

'"A parking place' is a place where the parking of vehicles is per­ mitted under section 2.

"'A Regulated Parking Place' is a parking place set apart as a regulated parking place under section 3(a).:'

The following are other sections of the bye-laws which are important

in the present context.

"2. With the approval of the Traffic Commissioner, and after consultation with the Chief of Police, the Council may prohibit, limit and regulate the stationing of vehicles or of a particular class of vehicles, and also designate a street or part thereof or some other place as a parking place in which the parking of vehicles or of a particular class of vehicles is per­ mitted, prescribe the days and hours and the periods when

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parking is permitted, and the number of vehicles which may at any one time park in such place.

3. (a) The Mayor may, after consultation with the Traffic Commissioner and the Chief of Police, designate a parking place as a regulated place and regulate parking thereon by·an attendant or by means of mechanical devices.

2. Where parking is regulated by an attendant, a person leaving a vehicle in the parking place must comply with the instructions of  such  attendant  in  every  manner  pertaining to parking.
3. Where parking is regulated by mechanical devices, a person leaving a vehicle in the parking area must leave it within one of the vacant spaces marked therefor, opposite the mechanical device allotted to such space, and set the mechan­ ical device in operation in accordance with the directions stated thereon.

1I. (a) No person shall station or park, or permit another to station or park, a vehicle in a regulated parking area unless he has paid a parking fee in accordance with the scale of fees prescribed for that parking place under subsection (c).

3. The Mayor, with the consent of the Traffic Commis­

sioner, may prescribe different scales of fees for different regulated parking areas, according to the hours of parking, the

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periods and types of vehicles.

4. The scale of fees as prescribed under subsection (c) shall be set out in a notice by the Mayor and publicly displayed in the regulated parking area or upon the mechanical devices.

(f) Where parking is regulated by means of mechanical devices, the fee shall be inserted in the mechanical device by a coin or by a special metal token in accordance with the direc­ tions for use which shall be set out upon such devices.

14. A person who contravenes any of the provisions of these By-laws shall be liable to a fine ofIL 100."

It is not in dispute that on November 19, 1956, the respondent stationed his car in one of the streets of the city of Tel Aviv-Jaffa in a place where parking was permitted under sec. 2 of the the bye-laws, which had been designated by the Mayor as a place where parking

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was "regulated" by means of a mechanical device (hereinafter referred to as a "parking meter") under sec. 3; likewise, that the  respondent did not deposit in the meter-and therefore did not pay-the fee prescribed in the Mayor's notice which appeared thereon. On these facts, the respondent was found guilty by the Municipal court, in his absence, of an offence under secs. 1l(a) and 14 of the bye-laws, and ordered to pay a fine amounting to IL 4. He appealed against the con­ viction to the District Court and his appeal was allowed upon the following grounds:

1. The effect of the provisions  enacted in secs.  3(a), 1l(a) and  1 l(c) of the Bye-laws is that the Council had delegated to the Mayor the authority conferred upon it at the time by Mandatory legislative organ pursuant to sec.  25  of  the  Road  Transport  Ordinance  and sec. 99(1) of the Municipal Corporations Ordinance, but such delegation of that authority was not permissible and ultra vires the Municipality's powers in view of the principle delegatus non potest dele[f_are. For this reason, the regulations made by the Mayor pursuant to secs. 3(c) and 1l(c) of the bye-laws were likewise lacking in legal force. To support this ground, the District Court relied upon the rule in Allingham v. Minister of Agriculture and Fisheries (8).
2. The Mayor's regulation regarding the duty to pay a fee at a certain rate made by virtue of sec. ll(c) of the bye-laws is ofa legislative character and required publication in Reshumot in accordance with sec. 17 of the Interpretation Ordinance. As for this ground, the District Court based itself on the rule in The Attorney-General v. Alexandrovitz (1).

I shall now deal with the first and main reason of the District Court. In this regard, I shall first of all confine myself to the question of the validity of the provisions  of sec. 3(a) of  the bye-laws.  I  hold, contrary to the District Court, that the Council was authorized to enact these provisions and accordingly that the designation of the "regulated area" involved, which was made by the Mayor by virtue thereof, is valid. My reasoning on this point is as follows:

1. The decision in the Allingham case (8) is not relevant because

:                                                            all that was decided there is that the principle that an agent cannot delegate precludes the delegation to another of a function of an admin­ istrative character by the one upon whom such function has been im­ posed. That rule is construed in this sense in Allen, Law and Orders (2nd edition) pp. 204-5, and also in Griffith and Street, Principles of Administrative Law. I will merely content myself with citing the first author:

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" ...it is clear...that any administrator,...if certain specific executive functions are committed to him,...cannot, without authority, entrust them to a deputy of his own choice."

This rule is not germane to the present case since the authority conferred upon the Municipal Council under sec. 25 of the Road 1:ransport Ordinance to enact by bye-law provisions regulating ·the parking of vehicles within its boundaries, is clearly of a legislative character. Moreover, in view of the wide language employed-"to regulate parking... by prohibition or otherwise"-the section is to be construed as vesting in the Council the power to determine even the "primary law-making" in this sphere and not merely the executory regulations. (As to the distinction between these two categories of second­ ary legislation, see an article by Professor H. Klinghoffer, Praeter Legem Regulations, in 14 Hed HaMishpat, 1957, p. 245, 257). Con­ sidering the broad character of the legislative authority  conferred upon the Council, no doubt whatever  can arise  regarding its power  to provide by bye-laws intended to regulate the parking of vehicles within its boundaries for the administrative functions which it has placed upon the Mayor to carry out for this purpose. Such bye-law provision wo ld accordingly not involve any "delegation" to another of a function of this character by one charged to carry it out. Therefore,  if the matter of designating a "regulated place" and the regulation of parking thereon by means of a parking meter constitutes a function of an administrative character, the provisions of sec. 3(a) of the bye-laws do not conflict howsoever with the principle of delegatus non potest delegare and are valid. But even if these provi.sions must be treated as conferring upon the Mayor a function of a legislative character, the question still remains whether the said principle is applicable to a situation in which a body which has been granted power to regulate a given matter by means of secondary legislation, purports to yield some of its legislative authority to another. This is evident from the following observation of Allen's (ibid.) when dealing with this question: "In respect of legislative func­ tions, however, the position is not so clear." Be that as it may, the rule in Allingham's case (8) does not assist us in the present case.

2. From what has been said in the preceding paragraphs it follows that the first question which we must resolve is whether the function dealt with in sec. 3(a) of the bye-laws-the designation of a "regulated place", etc.-is administrative or legislative. We all know that it is sometimes difficult nowadays to determine the quality of a function assigned to some or other body or official, in regard to whether it belongs to one or the other of these two categories. One of the factors

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giving rise to  this  difficulty  is  that  in  many  instances  the  legislative and administrative characteristics of  a  given  function  are  intermixed. Thus in England the report of  the  Committee  on  Ministers'  Powers, (Cmd.  4060)  published  in  1932, emphasized  (at p. 95):                                                                                         ,

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"It is indeed difficult in theory and impossible in practice to draw a precise dividing line between the legislative on the one hand and the purely administrative on the other; admin- istrative action so often partakes of both legislative and executive characteristics."

If we consider the content of sec. 3(a) carefully, we are persuaded that a dual function was placed upon the Mayor, or at least, one which is partly legislative and partly administrative. Firstly, he may determine that a place in which parking has been permitted by the Council, in accordance with sec. 2 of the bye-laws, shall be a "regulated" parking area. What such determination means is that any  person who parks his vehicle in that place must comply with the directions of the attendant who is present or the "instructions" upon the parking meter found there which he is to set in operation (Sec. 3(b)). Secondly, after  he has decided that a certain "parking place" shall be a "regulated" place, the Mayor must choose between two parking arrangements which are to be applied-regulation by an attendant, or by means of a mechanical device; and, having made the choice, it becomes his duty to put it into effect accordingly. Indeed, it may be supposed-since it is in the nature of things-that the Mayor will in practice carry out both such functions simultaneously and even be guided, as regards each of them, by the same considerations. In theory, however, it is possible to separate the two; for example, it is not impossible that the Council would assume the task of determining the "regulated" places, leaving to the Mayor only the decision as to the choice of one of the two parking arrange­ ments-attendant or meter-which must be made with regard to such places.

Reverting now to the question posed at the beginning of  this section, my answer is that the first function is to be regarded as of a legislative character but the second  as of  an  administrative character. To support this conclusion, I rely on the decision in Attorney-General v. Alexandrovitz (1) from which it appears that the distinguishing features of a regulation of  legislative  effect  are  "first,  that  it  should  establish a  legal  norm"  (rule  of  conduct)  and  thereby  bring  about  a  change in the law of the country,  and secondly, "that  this  should  be a general or  'abstract'  norm,  i.e.  a  norm  directed   to  the  public  generally,  or at least to an indefinite part thereof." It was accordingly held in that

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case that the prescription of a mark of identity for merchandise subject to purchase tax by the Director of Customs and Excise (by virtue of the

• authority granted to him under sec. 15 of the Purchase Tax Law, 1952) constitutes a provision of legislative effect, inasmuch as it "adds an obligation which, apart from  it,  would  not  exist"  (ibid,  p.  702).  In his judgment,  Sussman  J.  followed  the  decision  of  the  High  Court of Justice in Ass/an v. Military Governor of the Gali/ (2), which held that it was essential to treat as of legislative character an order issued pursuant to sec. 125 of the Emergency Defence Regulations, 1945, because the effect of the 9rder was to limit freedom of movement enjoyed previously by citizens in the region which had been proclaimed a closed area by the order.

This rule is also applicable to the designation of a particular parking area as a "regulated" place, since the two distinguishing features which characterize a legislative regulation exist in relation thereto: (a) the designation constitutes  a  provision  directed  to  an  indefinite  portion of the public, namely, the class of persons who need to park their vehicles in a place as aforesaid; (b) its effect is that those persons have to obey the attendant present at the regulated place, or to set the parking meter in motion, whereas before the designation  they were under  no  obligation to observe either of these rules of conduct. I must add that it is possible that the definition upon which I have based this conclusion cannot be reconciled with the view expressed in IrgWl Nehagei Moniot Sherut v. Mayor of Tel Aviv (3), with regard to the character of a  decision  to erect traffic signals, made pursuant to Reg. 111 (a) (2) of the Transport (Traffic Rules) Regulations, 1953. I do not intend to dwell at  length upon this matter except to observe that that view was obiter and was not required for determining the question which was considered in that case (see, ibid. (3) p. 102, between the letters C and D).

As for the function of regulating parking in a "regulated" place by the use of one of the two methods provided therefor in the bye-laws, I find that the decision of the Mayor thereon lacks the distinguishing feature of a "change in the law" and that consequently its character is merely administrative. The duty resting upon one who has put his vehicle in a parking place as aforesaid-to obey the attendant or to activate the meter-flows from the provisions of sec.  3, subsecs.  (b) and  (c) of  the bye-laws, as well as from the designation of the place by the Mayor as a "regulated" place. The fact that the choice of one or the other of the two forms of regulating parking requires the exercise of a certain discretion on the part of the Mayor cannot bestow upon this function any legislative character whatever. If it were otherwise, it would mean

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that it is impossible to impart to any function whatever an administrative character when to carry it into effect demands the exercise of discretion. Such is not the case.

I have deemed it p oper to dwell on the  theoretical  distinction which is to be drawn between  these  two  functions,  not  only in  order to give a precise answer to the above-mentioned question but also to forewarn that due to the close connection which  exists  between  them the distinction may have an important  legal consequence.  For example, it can be argued that whilst the act of designating a "regulated" place requires public notice, the same does not apply to the function of regulat­ ing parking in such a place by means of an attendant or a parking meter. In the report of the English Committee above-mentioned it was likewise stressed that

"to take any set of regulations and conclude that, because they are primarily administrative, they can be disregarded as having no legislative aspect may often be wrong."

3. The upshot of this is that the question which we have to answer at this stage is whether the District Court was right in holding that the Council did not have the power to delegate to the Mayor the legislative function of designating "regulated" places.

I                                                               To justify this conclusion, the respondent stressed that sec. 25(1) of the Road Transport Ordinance-the source of the Council's authority to regulate parking-says that it "may make by-laws" for  this  pur­ pose, from which it is inferred that it has the power to carry out such function in this matter alone and that therefore it may not be aided to this end by the Mayor or anyone else. The respondent found support

for his argument in Woszczyna  v. Local Council of Kiryat Haroshet (4),

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in which it was  decided  that  since Art.  40(2)  of  the  Palestine Order in Council 1922 provided that the appellate jurisdiction of the District Courts may be extended "as may be prescribed by any ordinance," the Palestine legislator could not thereby nominate any other person for this purpose wi1;h the result that sec. 84(a) of the  Local  Councils  Order (A), 1950, made by the Minister of the Interior by virtue of sec. 5(2) of the Local Councils Ordinance, 1941, (as amended  in 1947), according  to which the District Courts were authorized to hear appeals from a decision of the appeals committee in connection with tax assessments, was not lawfully enacted. In other words, just as the limitation  inherent in the words "as may be prescribed by any ordinance" in the Palestine Order in Council prevented the High Commissioner from nominating another to carry out the task of extending the appellate jurisdiction of

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the District Courts, so the limitation implicit in the words "may make by-laws" precluded the Council from designating the Mayor as  the person to make legislative arrangements for  regulating  parking within its boundaries.

It should be noted that there is nothing in common between this argument and the principle of delegatus non potest delegare by which the District Court judges were guided, since this argument relies upon the language used by the legislator, which in the respondent's opinion forbids in and by itself the Council to give up to another any of its powers in the matter under consideration, whereas the said principle is im'.oked­ for the purpose of deciding whether to nullify the transfer of power which some Law has conferred upon an authority-when no prohibition is expressly prescribed in that law. Similarily in the _Woszczyna case (4) from which the respondent drew. an analogy to the instant case, the Deputy President (Cheshin D.P.) emphasized that "there is no question here of a delegation of authority from one agent to another, but of adhering to express limitations which have been laid down by superior le slation" (at p. 1646).

As for the argument itself, I think it is untenable. In the Woszczyna case, the enabling provision was devoted to a specific limited objective, to enable the appellate jurisdiction of the District Courts to be extended, and since the provision had clearly prescribed that the method to be followed for extending such jurisdiction was by enactment of an "ordi­ nance", there was no avoiding the conclusion that this restriction con­ stituted an express prohibition upon the delegation of the power for achieving the result to one not  authorized  to  enact  "ordinances".  On the other hand, we have seen earlier that the enabling provision in the present case, in sec. 25(1) of the Road  Transport  Ordinance,  is  de­ voted to regulating  the  entire  field  of  matters  pertaining  to  parking  of vehicles within the boundaries of local authorities, and in view of the wide terms conferring the power upon the Municipality to do so within  its own area, which indicates that it was also empowered to  prescribe "the primary regulations" in this connection, it  is  impossible  to  hold ipso facto-merely in reliance upon the words prescribing  that  the Council may effect this purpose by means of bye-laws-that it is for­ bidden to delegate to the Mayor the task of formulating the "details" required for the putting into  effect  of  the  regulations  prescribed  by it in the bye-laws it has enacted. Such an "automatic" inference is not possible even if the prescription of such details bears a legislative char­ acter. This may be seen from the view expressed by Griffith and Street, op. cit. (p. 69), that

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"If the Minister is empowered to make subordinate legislation, it is suggested that his power to authorize himself or others by such subordinate legislation to make sub­ delegated legislation depends on the generality of the statute and the extent to which the powers to legislate are there defined. If the statute is so widely phrased that two or more 'tiers' of subordinate legislation  are  necessary  to  reduce it to specialised rules on which action can be  based,  then it may be that the courts will imply the power to make the neces­ sary subdelegated legislation."

Nevertheless, I do not in this part of my judgment adopt this view and have only mentioned it to show that in face of the "generality" of the language of the enabling provision in the present case and the extent of the powers thereby granted to the Council in order to enable it to regulate matters of this kind, it is impossible to hold that there is an express prohibition on delegating the functi_ n of designating "reg­ ulated" parking places to the Mayor, and that therefore the real pro­ blem calling for solution is whether it is possible for us to hold that this provision impliedly confers upon the Council power to authorize the Mayor to perform that function. The solution of this problem does indeed depend foremost upon the answer to the question whether the principle of delegatus non potest delegare, the principle invoked (if at all) only in those cases in which the statute has not expressly ·forbidden the delegation of powers granted to some authority, is applicable here. Whatever the answer to that question, it is clear in any event that the grounds upon which the respondent  sought  to support  the decision of the learned judges below are quite baseless.

4. To persuade us that that principle is irrelevant in the present context Mr. Zilbiger who appeared for the appellant pointed out, firstly, the dictum of Witkon J in  the  Woszczyna  case  (4),  that  "in  the absence of a different provision" "the legislative power granted to a non-sovereign legislative organ may be delegated" (at p. 1646). He argued further that the extended form-in sec. 25(1) of the Road Trans­ port Ordinance-of the Council's powers to regulate parking arrange­

ments within its area indicates to us that within the limits of these powers it constitutes a sovereign body which in such matters may

either itself legislate, or delegate the power to legislate to another. Counsel for the appellant found support and an analogy for this sub­ mission in what the Deputy President (Cheshin D. P.) said in the Woszcz­ yna case (4) about the position of the Palestine legislator of the time, namely,  that "he  was not in any sense the delegate or  proxy of the King

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in Council" even though "he drew his strength and derived his authority from the provisions comprised in the  Palestine  Order  in Council" but that "within the limits of this authority, he was himself sovereign and might himself legislate directly or delegate his law-making power to another, even as those who had promulgated the Order in Council" (ibid). Finally, Mr. Zilbiger emphasized the politically "autonomous" and "independent" character of the Municipal Council, in the sense that its members were chosen by the local inhabitants in free elections. The democratic character of this body, so he argued, is enough to negative any possibility of regarding it as a kind of delegate, i.e. a representative or agent of the sovereign legislator as to the matters which it was empowered to regulate by legislative means and that also from this point of view the principle aforesaid is not to be applied in the instant case. In this connection appellant's counsel drew our attention to a passage in Hart, Local Government and Administration (5th ed.) p. 6, on the independent status of local authorities in England:

"In the first place local authorities are legally independ­ ent, entities. They have separate legal existence as corporate bodies; they are not mere off-shoots of the Central Govern­ ment....

"Secondly, in modern times local government is admin­ istered by local authorities each acting in a particular area and elected by the inhabitants of that area. This dependence on local election serves in the political sphere to support the legal independence of local authorities. Local authorities are neither legally nor politically the agents of the Central Government."

And also to Klinghoffer, op. cit. (p. 257):

"Such secondary legislation"-meaning, secondary legislation of the praeter legem variety- "is made by in­ dependent local authorities chosen by the residents of their defined jurisdictional area. Like the rule of Law, municipal autonomy is also a combination of democratic and liberal elements."

These submissions  of  counsel-which  signify  that  within  the limits of  its  legislative  competence  a  municipal  council  constitutes an "omnipotent" body-strike me as excessively far-ranging. I shall deal with them in the reverse order.

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1. Notwithstanding the democratic nature of the Council's composition, it is impossible to hold that it is independent of the control and supervision of the central government in matters which it has been charged to regulate by secondary legislation. For example, sec. 99(4) of the Municipal Corporations Ordinance expressly provides that no bye­ law enacted by a council shall have effect until it is approved by the Minis­ ter of the Interior. Professor Klinghoffer also concedes that "our local government is subject to onerous control and supervision by the central government and, in many matters, to its discipline and  benevolence as well". He says further:

"As to secondary legisl tion entrusted to local councils, the said nexus of subordination expresses itself in that bye­ laws and certain kinds of general local government decisions require the approval of the central government."

It follows that a comparison  of  the status of a  municipal  council  in Israel with that of a local government council in England is not one which can be of assistance for the eeds of the present case.

It is true that when enacting bye-laws on a matter committed to its competence, the council acts in its own name and not in that of the sovereign legislative authority. It is conceivable that by emphasizing this point, counsel for the appellant started from the premise that the term "delegatus" in the Latin maxim has only the meaning of "rep­ resentative" or "agent", since one of the characteristic qualities of th agency relationship is that the agent is a person who acts for or on behalf of the principal so that whatever the former does within the scope of his authority is attributable to the latter. Accordingly Mr. Zilbiger argues that the Council is not the legislative "delegatus" of the sovereign law-making authority. One answer to this argument is that the authorising body possesses additional qualities the existence of which also characterizes the legal relationships subsisting  between the municipal council and the sovereign law-making authority in connection with the competence of the former to enact auxiliary laws, no less than they are characterized by the absence of the quality referred to by counsel. I refer here to the principal's power to control and main­ tain continuous supervision over his agent's activities, to limit his authority at any time and to revoke it, and even to take independent action in matters which he has been authorized to do.

My other and the main answer to that argument is that the terms "delegatus" and "agent" are not regarded today as necessarily synony­ mous for the purpose of applying the principle de/egatus non potest

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delegare. For example, in English private law, a distincti n is drawn between agent and trustee in that the former is limited by the instruction he has received from his principal, from which he may not deviate to any extent whatsoever, whereas the latter may generally exercise a wide discretion as to the subject matter of the trust. And so in the Com­ mon law the rule has been established that because of this quality characterizing the function of the trustee-namely, precisely because those who appoint another to act as trustee do so in reliance upon his personal qualification to exercise the discretion  proper to the matter in which he is required to act-the prohibition of the principle applies to him and therefore he may never delegate his authority (except as  to matters of a technical or ministerial character) to a third  person (See Speight v. Gaunt (9); also Richards, Delegation in Local Govern­ ment, p. 33). This approach, behind which lies the rule aforesaid and which enables the principle forbidding the delegation of delegated authority to be applied even to one who does not act as such in the legal technical sense, embraces the justification for its application also to matters relating to constitutional law. Thus, Dr. de Smith in his recent books, Principles and Scope of Judicial Review (p. 171), writes:

"A discretionary power must, in general, be exercised only by the authority to which it  has  been committed.  It  is a well known principle oflaw that when a power has been con­ fided to a person in circumstances indicating that trust is being placed in his individual judgment and discretion, he must exercise that power personally unless he has been ex­ pressly empowered to delegate it to another. This principle, which has often been applied in the law of agency, trusts and arbitration, is expressed in the form of the maxim delegatus non potest de/egare....The widespread assumption that it applies only to the sub-delegation of legislative powers...is unfounded."

It is superfluous to emphasize that the exercise of any kind of law­ making power necessitates recourse to discretion by the one exercising such power, which explains the view of this scholar that generally the said principle applies equally to one upon whom the power to enact secondary legislation has been lawfully conferred, and this even

"where  legislative  powers  are   delegated   by  Parliament, or validly sub-delegated by Parliament's delegate, the delegate or sub-delegate exercises his powers in his own name."

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Plainly the fact that the municipal council when it makes bye-laws acts in its own name does not-even though it permits the inference that that body is not then acting as the agent of the sovereign legislative authority-strengthen the argument of counsel for the appellant. Moreover, in as far as it is necessary to take account of the fact that the council constitutes a body of a democratic complexion and that the responsibility of its members is primarily to the electorate, the local residents, I think that this fact is antithetical to the argument. Just because the exercise of wide discretion is involved in the operation of the power, those resident-voters are entitled to expect that their representatives will not rid themselves of the responsibility they bear towards them but will  themselves  exercise  the  said  discretion-as far as it relates to carrying out of the law-making task imposed upon them-and not delegate it to others.

2. Likewise, there is no firm basis for the analogy which counsel drew between what Cheshin D.P. said in the Woszczyna Case (4) and the present case, that just as the Pale tine legislator was sovereign in the law-making sphere with the authority he had derived from the Palestine Order in Council and was therefore permitted to delegate it, so the municipal council is also sovereign in the realm of the legislative power conferred upon it and it also may delegate part thereof to another.

The justification for the view which attributes a "sovereign" character  to  the  legislative  authority  of  the  Palestine  legislator  lies in the broad and inclusive phraseology in which this is formulated  in  Art. 17(1) (a) of the Palestine Order in Council (as amended in 1923), pursuant to'which the High Commissioner (subject to certain restrictions not germane here)  had  the  power  to  enact  any  Ordinance  required for ensuring "peace, order and good government" in Palestine. What this power meant was that the High Commissioner could currently,  within the limits of his jurisdiction, enact any  Ordinance  he  pleased,  whether it was desirable or undesirable, reasonable or unreasonable. It  is clear that the same does not apply to the bye-laws which a municipal council may make and which, as is generally known, must always pass the test  of reasonableness (Binenbaum v. Municipality of Tel Aviv, (5)). This difference in the nature of the legislative competence conferred upon each of the authorities aforesaid requires us to attribute a "sovereign" character to that which the Palestine legislator at the time used to exercise and a non-sovereign character to that which a municipal council ex­ ercises. In their book The Constitutions of the Commonwealth, at

p. 47, Jennings and Young observe:

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"Within its po:wers a legislature, unlike a local authority

...can pass what legislation it pleases. It has been said that a colonial legislature is 'sovereign' within its powers. To a political scientist this phrase is nonsense, for the essence of sovereignty is.that powers are unlimited. But it is a convenient way of stating that a power to legislate for the peace, order and good government of a colony is a power to enact any kind of legislation, reasonable or unreasonable, desirable or undesirable...The bye-laws of a local authority may be declar­ ed invalid because they are unreasonable. There is no such power over colonial legislation."

Thus as soon as we attribute a "sovereign" character to the legisla­ tive authority which the ·Palestinian law-maker possessed, we are com­ pelled to concede his power to make it over to others. In contrast, since we have not found it at all possible to attribute such a character to the authority of the council to enact secondary legislation, it is impossible that we should, on the basis of the "sovereignty" theory or the "analogy" rule, render valid the delegation of that authority to anyone in the absence of an express provision in that behalf by the sovereign legislator

(see Jennings and Young, op. cit., pp. 47-8.)

I

3. From what has already been said, the rule would seem to be that the principle delegatus non potest delegare operates equally in the legislative sphere and therefore I cannot agree to the generaliza­ tion that "in the absence of a provision to the contrary, the law-making power granted to a non-sovereign legislator may be delegated". I said that this "would seem" to be the rule because I think it would not be right for us to treat it as a rigid rule from which one may not depart whatever the conditions. Even Allen-while expressing the view that"in principle" it would amount to ultra vires if the "legislative agent" were to put another in his place-admits that it is still impossible in the absence of a line of clear decisions to speak of this with "confidence" (op. cit. p. 205). I have also noted the views of Griffith and Street about the possibility that the court might construe a particular statute as impliedly authbrizing the secondary legislator to charge some other organ with the task of enacting "detailed regulations" whereby the arrangements prescribed by the secondary legislator would  be put into effect. However, they also emphasize that no authority exists upon this point and  that  therefore  a "more dogmatic"  view cannot be expressed (op.cit. p. 69). Finally, de Smith (op.cit. pp. 175-6) indicates his approval of the following view:

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"The maxim delegatus non potest delegare does not enun­ ciate a rule that knows no exception; it is a Tule of con­ struction to the effect that a discretion  conferred  by a statute is prima facie intended to be exercised by the authority on which the statute has conferred it and by no other authority, but this intention may be negatived by any ·contrary in- - dications found in the language, scope or object of  the statute."

In my opinion therefore the said principle is not to be regarded­ even to the extent that it applies to the authority of a secondary legislator

-as an inflexible rule but merely as a presumption, a presumption which may sometimes be rebutted. The question under  what  circumstances this can be done when no express provision exists, what are the limits within  which the application  of  the  principle in the legislative sphere  is to be confined-this question  has  not  as  yet  been  fully  answered. But I am certain that there exists at least one qualification upon its application, which all acknowledge and which is pertinent in the present context.

5. I now turn to the qualification dealt with by appellant's counsel in his further submission which is less far-reaching than the "sovereignty" argument upon which he relied. The qualification  is that in the case of a secondary legislator upon whom full legislative authority has been conferred to regulate a number of different matters-power to make primary regulations (and not merely "rules of an executive nature") in relation thereto-it may be inferred that the Law from which this authori­ ty derives intended by implication to permit him to place upon an admin­ istrative body the task of determining when or how the regulations prescribed by such legislator should come into effect. The justification for making this qualification is based upon the demands of political reality, with the object of ensuring that the affairs of state are regulated and conducted efficiently, and in the general recognition that otherwise the "wheels of government", especially in the complexities of modem life, will not be able to "turn". What I wish to say is that the time is not always appropriate for enforcing the legislative arrangements in which the secondary legislator is interested and its introduction to a particular place is not always expedient, since the matter depends upon the pre­ vailing factual conditions, and uch conditions are likely to vary in respect of both time and place. Nonetheless, it is sometimes desirable, prevention being. better than cure, that the arrangements should be fixed in anticipation and the actual execution thereof be subject to future decision on the question whether in point of time or place the

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conditions suitable therefor exist. Thus !1 secondary legislator charged with the task of finding fundamental solutions to broad topics, varied and numerous, has no available time-and if it is comprised of a body pursuing the legislative process along parliamentary lines, wµl find it difficult-to inquii:e daily whether the factual conditions are appropriate and suitable for putting into effect the special arrangements with which it is concerned. It is therefore better for it to assign the task to an ad­ ministrative body and delegate to the latter the function of deciding, in the light of the factual inquiry it has carried out, whether  the time is ripe or the place suitable for bringing the arrangements into force.

It is true that such a decision on  the  part  of  this  administrative body cannot be reached without prior exercise  of  its  discretion.  It  is also true that the determination of time or place in which the arrange­ ments of the secondary legislator should apply constitutes-so  the definition with which we dealt above in paragraph A requires-the enactment of regulations of legislative import. It follows that the ap­ proach which countenances the delegation of such a task by the secondary legislator  to  an  administrative  body  represents  indeed  a  departure from the principle delegatus non potest delegare.- Yet, as to the first concomitant, it may be observed that even the carrying out of obvious administrative functions sometimes requires  the  exercise  of  discretion by those charged therewith. Furthermore, the fact that the result of the factual inquiry which the administrative  body  has  made  must  be  its sole guide when making its decision means that the exercise of its dis­ cretion will cover a  rather  narrow  area.  As to  the second  concomitant, it may be said that for all the legislative character of the function carried out by administrative body in this situation it also represents the "apparatus" which enables the implementation of the arrangements prescribed by the secondary legislator in its regulation and  from  this point  of  view there is really  nothing  extraordinary  in committing  such a task to one who is accustomed to carry out executive functions. These two points which I have singled out-restricting the area in which the . administrative body exercises discretion and devoting its legislative function  toward  an  "operational"-"executive"-purpose  minimize  to some extent the deviations from the basic principle with which we are concerned.

Authority for the said qualification and for its justification is to be found in English and American d isions to most of which counsel for the appellant drew our attention. Before citing some part of what has been said on the subject in these authorities, I must by way of preface make one observation. A perusal of these authorities makes it apparent

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that the courts in approving the said rule do not admit that they are thereby validating a departure from our fundamental principle. The magic formu a which they invoke-this is mainly true of the English decisions-is that the legislation which makes the implementation of the arrangements, the object of the legislation, dependent upon the "factual" decision of an administrative body is merely conditional legislation and does not therefore involve the delegation of legislative

' authority to anyone. A different formula-and this is mostly true of the American cases-is that the function of determining when and where the legislative reform which has been prescribed shall apply is of an admin­ istrative character. In my opinion no other explanation exists for this un sual approach by the judiciary than that traceable to theµ- strong desire  to remain  loyal to the principle  that an agent may not appoint

/                                   a sub-agent, in the light of their premise that this principle does not toler­ ate-in the absence of any provision in that behalf by the sovereign leg­ islator-the slightest derogation. This is also the view of de Smith, (op.cit. p. 176):

"the  Courts  have  sometimes  assumed  that  the  maxim does lay down a rule of rigid application, so that devolution of power cannot (in the absence of express  authority)  be held to be valid unless it is held to fall short  of  delegation. In this way an unreasonably restricted meaning has often been given to the concept of delegation."

I proceed now to the authorities which I divide into these three categories: (1) English decisions; (2) Decisions of the Supreme Court of the United States; (3) American decisions dealing with a secondary legislator being a local authority.

1. To the first category belong: The Queen v. Burah (10); Russell v.

The  Queen (11);  Hodge  v. The  Queen (12);  King-Emperor v. Benoari                                                                                           '

Lal Sarma (13).

In the Burah (10) case, the question was whether the then Indian legislature might prescribe by a statute ·in which it had revoked the criminal jurisdiction of the High Court in certain regions in Bengal province and vested it in the local courts of those regions that this provision should come into effect only from such a day and in such regions as would be determined by the Lieutenant Governor of Bengal. This question was answered  in  the  affirmative  by  the  Privy  Council in holding:

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"Where plenary powers of legislation exist as to par­  ticulat subjects...they may...be well exercised, either abso­ lutely or conditionally. Legislation, conditional on the use of particular powers, or on the exercise of a limited discretion, en­ trusted by the Legislature to persons in whom it places con­ fidence, is no uncommon thing; nd, in certain circumstances, it may be highly convenient. ... It cannot be supposed that the Imperial Parliament did not, when constituting the Indian Legislature, contemplate this kind of conditional legislation as within the scope of the legislative powers it from time to time conferred."

I am fully alive to the fact that this case involved a "territorial" legislature which derived broad legislative powers from a statute of the British Parliament and that the decision of the Privy Council was influenced by the notion that such legislature is "sovereign"  within the area of its authority and may not therefore be regarded as the "legislative agent" of  the British Parliament  (p. 904).  Nevertheless,  I think that the words I have quoted from the judgment reflect an additional reason, and perhaps even the main reason, for the decision since otherwise they would have been superfluous. Thus this reason  is equally valid as to a secondary legislator to whom "plenary" legislative powers have been granted for the purpose of regulating "particular" matters, in the sense of the authority to prescribe therefor "primary regulations"; hence the qualification to the prohibition under con­ sideration, which we discussed above.

The same is also true of the three other cases. For example, in the Hodge case (12) the justification for making the said qualification is explained in language which differs in no respect from the "sovereignty" approach, as follows:

"Such an authority is ancillary to legislation, and with­ out it an attempt to provide for varying details and machinery to carry them out might become oppressive, or absolutely fail. The very full and very elaborate judgment of the Court of Appeal contains abundance of precedents for this legislation, entrusting a limited discretionary authority to others, and has many illustrations of its necessity and convenience. It was . argued at the bar that a legislature committing important regulations to agents or delegates effaces itself. That is not so.

It  retains its powers  intact,  and  can,  whenever  it pleases,

destroy the agency it has created and set up another or take the matter directly into its own hands.•,

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Similarly in the Benoari La,/ Sarma case (13):

"This is not delegated legislation at all. It is merely an example of the not uncommon legislative arrangement by which the local application of the provision of a statute is determined by the judgment of a local administrative body as to its necessity."

The Australian case of Croft v. Rose (15) in which the Burah decision was applied to the regulation of a secondary legislator is of inestimable importance. The regulation involved was enacted by the Governor General in Council and provided that driving above a certain speed on those parts of the state highways which required to be lighted was for­ bidden. In  adopting  this regulation,  the Governor  General  relied upon a 1951 statute under which he was granted the power to fix a maximum driving speed limit along any highway or section thereof. The Australian court held that regulation to be lawful, notwithstanding  the  fact  that care of the light  arrangements  of parts of  the highways  was in charge of others. In their reasons, the judges constituting the majority emphasiz­ ed these three points: (i) Whilst the matter involves a question concern­ ing the effect of a regulation passed by a subordinate law-making authority, the question must be examined against the  wide power which it derived from  the statute which authorized  it  to  regulate  the matter  of the speed of driving upon the highways. (ii) This approach justifies the application of the rule in the Burah case to the matter under consideration with the inevitable result that there was no defect in the regulation providing that the direction as to maximum speed should come  into effect for those portions of  the highways  which  would  be designated by others. (iii) While it is true that such a regulation amounts to a delegation to others of legislative power committed to a subordinate law-making authority, the delegation of the task of determining the limited question as to when and where the regulation should operate is permissible. As to this third point, it is as well to quote from the judgment:

"The most that could be said in favour of delegation was that the Governor-in-Council had placed in the hands of persons other than himself the power to determine when and where the provisions of the regulation should operate. But this does not amount to a delegation that has, as we under­ stand the matter, ever been considered as objectionable or as going to power."

2. In the Supreme Court of the United States the question  before us arose in connection with the authority of Congress to bestow some

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of its legislative power upon an executive authority in view of the doctrine of the separation of powers which constitutes a corner stone of the constitution of the United States (Articles 1, 2 and 3) and which seems to prescribe,that none of the legislative, executive or judicial branches should encroach upon the domains of each other (See Corwin, The Constitution and What It Means Today , pp. 2-3). Notwithstanding this doctrine-and it is pari passu with the principle de/egatus non potest delegare (ibid. p. 113)-the Supreme Court ruled in keeping with the above-stated qua ification. I shall content myself here with quoting from one decision to that effect. In the case of Union Bridge Co. v. U.S. (16), the statute considered was one which required the Secretary of War, upon finding that any bridge constitutes an obstacle. to navigation upon a navigable water-way, to effect appropriate changes to remove the hindrance. It was argued at the trial that this provision violates the Constitution because it constitutes a delegation to an executive authority of the legislative power which belongs to Congress. Rejecting this argument, the Supreme Court said (at pp. 533-4):

"But investigations by Congress as to each particular bridge alleged to constitute an unreasonable obstruction to free navigation, and direct legislation covering each case sepa­ rately, would be impracticable, in view of the vast and varied interests which require national legislation from time to time. By the statute in question Congress declared in effect that navigation should be free from unreasonable obstructions arising from bridges of insufficient height, width of span, or other defects. It stopped, however, with the declaration of a general rule, and imposed upon the Secretary of War the duty of ascertaining what particular cases come within the rule pre­ scribed by Congress, as well as the duty of enforcing the rule prescribed in such cases. In performing that duty the Secreta­ ry of War will only execute the clearly-expressed will of Congress, and will not, in any true sense, ...exert legislative... power."

And further:

"Indeed, it is not too much to say that a denial to Congress of the right, under the Constitution, to delegate the power to determine some factor of the state of things upon which the enforcement of its enactment depends, would be 'to stop the wheels of Government' and bring about con­ fusion, if not paralysis, in the conduct of the public business."

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3. In the State courts of the United States it has been decided on many occasions that whenever a municipal council is empowered to regulate traffic and parking within its area it may provide by the bye-law in which it prescribes  the  various  arrangements  for  these  purposes that these should apply to such places and at such times as should be determined by an official or body named in the bye-law: see Borum v. Graham (17); Gould v. Western Dairy Products Inc. (18); Mecchi  v. Lyon Van and Storage Co. (19); People v. Sullivan (20); Taylor v. Roberts, (21); State ex rel. Harkov v. McCarthy (22).

In the Gould case it was said (at p. 191):

"The right of legislative bodies to delegate power to ad­ ministrative officials to determine facts in carrying out pro­ visions of legislative enactments has been upheld in many cases.... Even a casual observer of government growth and development must have observed the ever-increasing multi­ plicity and complexity of administrative  affairs-national, state and municipal-and even the occasional reader of  the law must have perceived that from necessity, if for no better grounded reason, it has become increasingly imperative that many quasi-legislative and quasi-judicial functions...are in­ trusted to departments, boards, commissions and agents... These things must be done in this way or they cannot be done at all."

To the same effect in the Mecchi case (at p. 682):

"To enforce an ordinance, a legislative body-in this case the board of supervisors-may delegate to the board or commission the right to determine a state of facts upon which an ordinance shall operate.... Adenial of such right would be 'to stop the wheels of government'".

And also, in the Taylor case (at pp. 658):

"It is contended, however, that vesting in 'the Chief of Police with the approval of the Mayor' the authority to reg­ ulate traffic...at any...congested portion of the city, is an unlawful delegati n of power to the Chief of Police. The power vested in the Chief of Police was an administrative and not a legislative power.

The organization and government of municipalities, particularly with regard to the regulation and control of

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traffic on streets, necessarily contemplates a certain power and discretion being vested in th police officers in carrying into effect the ordinances of the city, and if the.rules and regulations, adopted by the police under the authority vested in them by the Ordinances, are within the express general

,purpose of the ordinance...theyare not su)Jject to the criticism

1

that they are an unlawful delegation of authority."

Finally, in the Harkov case  (22),  the Supreme  Court  of  the State of Florida uphold a bye-law adopted by the Miami Municipal Council, whereby the city manager was given the authority to determine the parking areas and to erect parking meters there.

In the face of the uniform reasoning in all these authorities, I am persuaded that the rule limiting the principle of delegatus non potest delegare has its place in the legislative field and should be applied in Israel as well.

6. By virtue of this  rule it  is  possible  to  uphold  th<. provisions of sec. 3 of the bye-laws empowering the Mayor to prescribe  "regu­ lated parking places" in those streets of the city Tel Aviv-Jaffa, which

·have previously been designated therefor by the Council itself (sec. 2), and having done so to determine whether parking thereon should be regulated by means of attendants or parking meters.

Firstly, the authority to solve the problem of parking vehicles moving within its boundaries, which the council has been granted  by sec. 25(1) of the Road Transport Ordinance, was phrased, as I have indicated, in very broad terms, embracing also the making of "primary regulations". The fact that the section says  that  the council  must  do this by means of bye-laws does not derogate from the wide extent of that authority.

Secondly, it is manifest from the provisions of the bye-laws that the Council's policy is to solve the problem of the existing traffic load, or of the one likely to arise, in certain of the city's streets, by regulating the parking of vehicles which happen to be there, by means of attendants or meters. It is clear that the designation of the specific places in which one or the other of the two arrangements is to be adopted in those streets requires a preliminary investigation of .the conditions bearing upon such problem; and  that  these conditions, are  likely to change at any moment. It follows that the task which the Mayor must carry out in the matter is at bottom merely one to institute an enquiry into the factual question whether the conditions in one or other place are suitable

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for the employment of one of the said parking arrangements and so to determine, in the light of the results of this enquiry, the precise time and the specific place for putting into effect the arrangement which he has selected. Indeed, the proper fulfilment by the Mayor of this task requires that he should in some degree exercise his discretion, but only  in  a rather narrow area. Although imposition of this task upon him con­ stitutes a delegation of the legislative authority of the Council and therefore some departure from the principle forbidding such delegation, the significance of vesting such power in him is only that  the Council  has set up the "machinery" to serve the purpose of executing the legisla­ tive policy which it has laid down with the object of solving the problem of parking for vehicles which move about the streets of  the city. Sec. 3 of the bye-laws merely means that the Mayor would serve as the auxiliary arm of the Council for operating  part of the primary  regulations  which it regarded as necessary  and  indispensable, so  that  the matter  should be properly and efficiently ordered.

Finally, I take into consideration the fact that  this problem  is not the only one committed to the Council  to deal  with  and  that  the area of its legislative activity comprises and extends to a number of other subjects (secs. 96 and 98 of the Municipal Corporations Ordinances); likewise, that the Council constitutes  a  body  whose  members  carry out the legislative procedures in which they engage in a parliamentary fashion. Under these circumstances,  it  would  not  be  practical  for  us to make it obligatory upon this body  to  take into its own  hands  the  task of making the continuing factual investigations, upon the result of which depends the realization of the policy which it had laid down for reg­ ulating the matter. It is therefore only right that the Council.should pos­ sess the power to be assisted in this regard by the person who serves as its xecutive arm, the Mayor  (ibid,  sec.  59  (a)).  Otherwise,  "the  wheels of (municipal) government will not be able to turn."

Accordingly, in my opinion, the delegation of the authority men­ tioned in sec. 3 of the bye-laws is legally supportable, and the deter­ mination of the Mayor regarding the location of regulated parking, which is the subject of our considerations, rests upon firm foundations.

7. Was it competent for the council also to delegate to the Mayor the task of prescribing the parking fees which anyone  parking  his vehicle in such a place must pay by depositing it into the adjoining mechanical device (secs. 11 (a), 11 (c), and 11 (f) of the bye-laws)? It will be recalled that the charge filed against appellant in  the  present case is  based  upon  his  non-fulfilment  of  this  duty  to  make payment.

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After some hesitation, I have come to the conclusion that the learned judges were right in answering this question in the negative.

1. It is superfluous to explain at this stage-in view of the definition of a regulation having legislative effect, with which we were concerned in the first part of this judgment-that the enactment in sec. 11 of the bye-laws regarding the obligation itself to pay a fee is of such a character. The same is true of the determination which the Mayor was to make regarding the scale of this fee, since the obligation would not be complete unless its amount were also determined. Thus  subsection  (a}  of  the said section provides that no one shall park a vehicle in a regulated parking place "unless he has paid a parking fee in accordance with the

" scale of fees prescribed for that parking  place  under  subsection  ( c) "; whilst under that subsection the task  of fixing  the  scale of  this fee is put upon the Mayor. The rule laid down  in  Attorney-Genera/  v. Schreiber (6), upon which appellant's counsel relied, is not  pertinent here, since it dealt with the non-payment of a fee for a building permit, the rate of which had been previously determined, and the fact that the municipality refused to accept this fee from the applicant for the permit­ this is the essence of the decision-did not  affect  his absolute  duty  to pay it before starting to build.

2. The relevant provision-concerning  the  Council's  authority for prescribing the various kinds of fees, and pursuant to which it acted when enacting the provisions of sec. 11 aforesaid-is to  be found in sec. 99(1) of the Municipal Corporations Ordinance. It will be re­ called that the latter states that with regard to the matters which the Council may or is empowered to regulate or to carry into effect by , means of bye-laws, it may "provide" in such bye-laws "for the payment of any fees". Appellant's counsel emphasized the words quoted, and inferred therefrom that the terms of the power were wide enough to permit the Council to be assisted by others in fixing the scale of fees, upon the payment of which it had decided. The proof lies in the fact that when the Mandatory legislator wished a council (or some other authority) itself to define the extent of the payment which it was empower­ ed to demand, he made use of narrower expressions such as "prescribe", "fix", "levy", etc.

In my opinion, appellant's counsel cannot rely upon such a distinc­ tion. The breadth of language· which the legislator employed in sec. 99(1) of the above Ordinance may be explained by his desire to express three things in "one breath": (1) the Council may impose the obligation of paying fees and their scales; (2) it may do so with regard to matters

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the regulation of which is part of its functions; (3)  it  must incorporate its directions in these matters in the bye-laws which it enacts. Compare, by way of contrast, sec. 5(5) of the Trades and Industries (Regulation) Ordinance, which contains  a  provision  concerning  the  payment  of fees for trade permits "at the rates prescribed" in the Schedule. It is quite obvious that here the legislator used the narrow expression "prescribed" in connection with the scale of the fees alone. Nonetheless, I think

that the terms of sec. 99(1)  do  not  exclude  from  consideration  the possibility  that   the  Council  could   to  some  extent  depart  from  our                                                                                       f' basic principle (against  the delegation  of legislative  authority).  But the

answer to e question whether it may do so in the present case-and to what extent-depends upon other factors,  namely,  (a)  the character  of the fee under consideration, and (b) the extent of the need to be aided

_by others in fixing the scale.

3. The nature of the fee. The dispositive question is, does the parking fee possess the character of a tax? This is a question which cannot easily be answered. In his Introduction to Taxation Law (p.4), Witkon J. -defines the term "fee"  as  an  obligatory  payment  payable "in consequence of some service". It seems  to  me  right  to  reconcile this definition with the term employed  in the present  matter as follows: a "parking fee" means a payment made in consequence of some privilege which a person parking his vehicle in a regulated parking place receives. The privilege consists in that he is entitled against this payment to park for a time in excess of that required for taking up or putting off passengers, or for immediate and uninterrupted loading  and  unloading  (compare the provision in sec. 5(a) of the bye-law.) In the above-cited Harkov  case (22), the American court said-according to the digest of the  decision published in 108 A.L.R. p. 1154-that

"those who enjoyed the privilege  of  parking,  rather  than the general public, paid the extra cost of providing and main­ taining the means for the enjoyment of the privilege, and the extra cost of the supervision and policing of it."

On the other hand, it is not to be supposed that the scale of a parking fee will be determined-even if a yardstick exists for enabling this to be done-by taking into account the monetary value of  the  privilege; "the absence of a direct quid pro quo" is "one of the indicia of a  tax in its primary sense" (Witkon, loc. cit.), Moreover, a per.son who in the course of attending to his business needs to park his vehicle in a street in which parking is regulated by means of parking meters, must do so only in a "regulated" parking place and then he has no choice

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but to pay a parking fee. Indeed, the use of different vehicles for essential needs is on the increase in this country as well, especially, in a large and busy city like Tel Aviv-Jaffa, and it cap. therefore be said that in practice if not in  theory  such a  person is not free to waive  the  benefit  which  he ·receives by utilizing the privilege (see Berinson J.'s judgment in Local Council of K'far Ata v. Ata (7) at  pp. 873-4).  It  follows  that in the payment of such a fee there also exists the element of "compulsion", which likewise constitutes a distinguishing feature of a tax.

The result is that the fee with which we are dealing is of the nature both of a "price" and a "tax", and therefore the description which Witkon J. has given t this type of payment-"something of a hybrid creature" (op. cit. p. 8)-also fits it. Nevertheless, as will subsequently appear more clearly, for the purpose of the problem  which  claims our attention, I attach greater importance to the tax element which it embraces.

4. As I have indicated, the second consideration to be considered arises from the need of the Courlcil to be assisted by someone in order that such fee should be set at an appropriate level. According to sec. 1l(c), the Mayor may prescribe "different scales of fees for different regulated parking places, according to the hours of parking, the periods and types of vehicles". I infer from this provision that upon its enactment the city fathers acted on the assumption that conditions in any regulated parking place, such as the size of the place and its capacity, the traffic load and the overcrowding of cars, change or are likely to change from place to place and from time to time, as well as in the light of the type of vehicle that is parked there. They decided therefore that it would not always be expedient in practice to fix a standard fee for every place nor to classify the fees in advance in different groups. In other words, I attribute to the members of the Council the view that since they themselves are unable always to follow the development of the situation at every regulated parking place in the city, it is equally im­ possible for the Council to be saddled at all times with the task of pre­ scribing the scale of the fee to be received from drivers who park their vehicles. Hence they found the solution to the problem by delegating to the Mayor the entire function of fixing the various scales. I think that these considerations which faced them-as distinguished from the solution which they found acceptable-constitute practical and legiti­ mate considerations which even we must take into account for the purposes of our decision.
5. How do the conclusions which  I  have reached in the preceding

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two paragraphs affect the question with which we are occupied? The first con lusion-that a privilege fee possesses the two elements char­ acteristic of a compulsory payment of the  nature  of  a t -requires that the Council should not rid itself of the task of determining the level of this fee. The accepted view is that the authority to levy a tax emanates from the sovereign character of the supreme legislative organ and that theoretically it alone can do so and if for this purpose it has chosen to be assisted by a subordinate law-making body, the latter must necessarily abide, even to a greater degree, by the principle of delegatus non potest delegare. The second conclusion-that one should  take into account the practical considerations which the members of the Council put to themselves as described above-requires that this body should be able to be assisted in discharging its task by its executive arm so that the matter should not prove unduly burdensome and in order that it might achieve its purpose. This conclusion therefore involves some deviation from the confines of our principle. It is essential to bridge these two conclusions and the question is how this is to be done.

My answer is that for this purpose two possibilities exist as to the means to be pursued by the Council. One possibility is to outline a rational basis or mode of action capable of guiding the Mayor in pre­ scribing the relevant scales of fees. Even if the employment of such a mode required prior examination and appraisal of the factual conditions in the light of which the fee scales have to be calculated, it does not matter since this may be reconciled with the qualification of our principle to which my remarks were devoted in the earlier part of my judgment. Moreover, in carrying out the task of investigation and appraisal of the facts lies the justification for following this method. On this point, the judgment of the Supreme Court of the United States in the case of Hampton v. U.S. (23) is instructive. That case involved a congressional

Law which empowered the President to increase or decrease up to 50%

the customs rates prescribed by the Law; the increased or decreased rate had to be determined by the President with reference to any imported article in an amount equal to the difference between the costs of produc­ tion of that article in a foreign "competing" country and the costs of production of a similar article in the United States. Chief Justice Taft pointed out in his judgment the factual difficulties which confronted Congress, in the light of changing conditions, and prevented it from dealing itself with the procedure for increasing or decreasing the customs rates. He said at p. 350:

"Because of the difliculty in practically determining what that difference is, Congress seems to have doubted that

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the information in its possession was such as to enable it to make the adjustment accurately, and also to have apprehen­ ed that with changing conditions the difference might vary in such a way that some readjvstments would be .necessary to give effect to the principle on which the statute proceeds."

Therefore, he continued, the solution to devise a plan and to be assisted in its operation by the executive branch occurred to Congress.

"To avoid such difficulties, Congress adopted...the method of describing with clearness what its policy and plan was and then authorizing a member of the executive branch to carry out its policy and plan and to find the changing difference from time to time and to make the adjustment necessary to conform the duties to the standard underlying that policy and plan....He was provided with a body of investigators who were to assist him in obtaining needed data and ascertaining the facts justifying readjustments."

Approving this solution, he stated at p. 353:

"If Congress shall lay down by legislative act an intel­ ligible principle to which the person or  body  authorized to fix such rates is directed to conform, such legislative action is not a forbidden delegation of legislative power. If it is thought wise to vary the customs duties according to chang­ ing conditions of production at home and abroad, it may authorize the Chief Executive t<;> carry out this purpose."

Mr. Zilbiger argues that likewise in the present case the Council  laid down in subsect. ll(c) of the bye-laws principles adequate to guide the Mayor in determining the scales. This argument is inherently erroneous because  there  is  nothing  in  those  principles  which  serve as any rational basis for calculating the scales.

6. The other possibility which  the Council  might  have  pursued, in my opinion, was to fix a maximum rate for the parking fee and to authorize the Mayor to vary it downwards with regard to different, regulated parking places and upon  consideration  of  the  other  factors set out in subsec. ll(c). I have not found any direct authority for  this  view, but it commends itself to me both on account of the practical reasons above referred  to, as well as because  after  all  the fee-and  here I  emphasize  its  other  aspect-also  partakes  of  being  "a   price",   due to the "benefit" derived, and does not constitute a  pure  tax.  Although the adoption of this method means vesting a discretion in the Mayor

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in respect of the level itself of the fee, he is restricted by the maximum which the Council has prescribed, and to a certain extent by the principles mentioned in subsec. 11(c). I think that in the absence of any possibility of prescribing any other  method  for  calculating  the scales,  the factor of dfectiveness justifies resort to this method.

In this connection I have given thought to the idea whether that part of the bye-laws now being considered may not be interpreted as impliedly providing that the scales which the Mayor prescribes must pass the test of reasonableness, i.e. whether this test may be regarded as a yardstick for the maximum rate at which he may fix the parking fee. But I have been convinced that it is not right to rely on such an idea, since on the one hand the Council itself i& bound to put the scales prescribed by it to the touchstone of this test; any one of a number of fees could be thought reasonable and the duty devolves upon the mem­ bers of the Council themselves to chose the amount which they regard as suitable to constitute the maximum rate of parking fee. On the other hand, resort to the yardstick of reasonableness-especially when it relates to the rate of any kind of payment,-necessitates the exercise of too wide a discretion. In other words, an attempt to validate in this manner the determination of the Mayor, under sec. 11 of the bye-laws, would result in removing the task of exercising such discretion from the shoulders of the members of the Council and transferring it to those  of the Mayor-and this cannot be.

Finally, I have borne in mind the possibility of attributing to the secondary law-maker the intention that the Mayor should calculate the scales according to the expenses involved in erecting and main­ taining the mechanical devices in the relevant places within the city. But I have rejected this possibility also, firstly, because it was not clearly established during the trial whether the collection of the parking fees was for the purpose only of covering these expenses-whether, for

example,  it  does not  also serve  the purpose  of  increasing the general                                                                                                   1

(14).  Secondly,  it  is difficult  to  assume  that  it is  within  the range of                                                                                                                   ^t

practical possibility to calculate the scales on  such  an  arithmetical basis. (Consider Dalton, Public Finance, pp. 30-1, regarding the impossibility of calculating  the  price  of  the  services  obtained  from the British Post Office, or any other public enterprise, according to the expense involved in providing these services.)

It is hardly necessary to observe that in subsec. ll(c) the Council did not resort to either of the above described methods for fixing the

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rates of the parking fee, nor did it determine such fees itself. (It is an interesting fact that in the two American cases I found, which turned upon the legality of regulating parking by means of parking meters, the city council itself prescribed the scale in the body of the regulation which it adopted: Birmingham v. Hood-McPherson Realty Co. (24) and Harkov (22) ). Such being the case, and in view of the principle of delegatus non potest delegare, the said provision must be regarded as invalid.

It follows that the determination of the scale by the  Mayor for the non-payment of which the appellant was prosecuted, was.of no effect, and his acquittal from the charge against him was well founded.

I must add that I have not ignored  the fact  that  the scale  which had been fixed in the present case is of such an  insignificant  amount that it is difficult  to envisage  that any citizen  would  refuse to  pay it.  In this regard the appellant's attitude is undoubtedly extraordinary. On the other hand, had we validated the method whereby that scale was prescribed, it might have opened the door wide to municipal and local councils divesting themselves  of the  responsibility resting upon  them  to give their attention to the level of the fees which  they are authorized to levy in many other spheres. Briefly, the principle that the amount involved is not relevant  is no less.valid  in constitutional law than  it is in private law.

This conclusion relieves me of the duty  to  deal  with  the  reasons of the judges below that  the fixing of the scales  was invalid  by reason of its non-publication in Reshumot pursuant to sec. 17 of the Inter­ pretation Ordinance. For myself, I think that this requirement has been sufficiently met by virtue of the provisions of subsec. 1 l(d) of the bye­ laws, since in these  provisions-which  were  published  in  Reshumot­ the public is referred to the Mayor's notice (concerning the scales pre­ scribed by him) which he was to display "upon the regulated  parking area or upon the mechanical device" (see, by way of analogy, lrgun Nehagei Moniot Sherut v. Mayor of Tel Aviv (3) at p. 102).

The conclusion is that the appeal should be dismissed and the judgment of the District Court affirmed.

SILBERG J. I concur,

GOITEIN J: I agree with the first part of the judgment of my learned colleague, Agranat J., and I have nothing to add to it. I regret that I do not see my way clear to agree with him as to the latter part and, with all due respect, I take issue with him thereon.

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If I understand this part of his judgment correctly, my colleague is prepared to dismiss the appeal of the Tel Aviv-Jaffa  Municipality  on two grounds:

1. The fee which a driver has to pay, if he wants to use a parking place regulated by meters, is a tax. And if this fee is really deemed to be a tax, then it is fot the whole Council to determine its amount and the Mayor has no right to prescribe it.
2. If a bye-law of the Tel Aviv-Jaffa Municipality authorizes the Mayor to prescribe the level of the fee, the bye-law is ultra vires, the authorization being repugnant to the principle that an agent may not delegate.

I find it difficult to agree that the payment which a driver makes for using a certain parking space for a particular time is to be considered a tax. In his judgment my learned colleague says that this fee partakes of the quality of a tax because we do not know whether the receipts, or part thereof, which the city obtains in this way, will not be included in its general income as would be the case with any other tax.

There is not a scintilla of  evidence  before  us  to  prove  that  the use of regulated parking areas in  which  meters  have  been  installed will produce a profit for the Municipality, or·that this profit will be included in the city's budget.

It is clear that money is required to acquire these meters. It is equally clear that to keep them in working condition and the special supervision required of the police or municipal officials, likewise in­ volve expenditure.

I am prepared  to assume that the lion's share of the receipts from  the use of these meters was intended for their purchase and maintenance and that a small part will perhaps be left over and  diverted  into  the city's budget, but I would not agree to hold that the fee is not a payment for a definite service, only because the possibility _exists that a small percentage of the receipts will find its way to the municipality's treasury.

I do not think that this court has to decide that the installation of these parking meters-the purpose of which is to regulate traffic in a city in which transport problems have reached a critical stage-was designed in order to exact taxes in a round-about way; I do not see here any conspiracy between the Mayor and Council to levy taxes unlawfully.

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It appears that my colleague's judgment reveals concern lest the grant of authority to the-Mayor to determine the level of the fee carries with it the danger that the citizen will be called upon to pay taxes which have not been levied upon him in accordance with law.

It may be that I am mistaken, but it seems to me-and I say this res­ pectfully-that this concern flows from the political struggle with the monarchy of past centuries, at first in England and afterwards across the Atlantic Ocean in the United States. There were times when the citizen fought for his right not to pay taxes unless his representatives in Parliament agreed to the imposition of these taxes (no taxation without representation). But the echoes of the historical past in other countries need not reach as far as Israel where, during the thirty years of the Mandate, we all paid taxes without having any right to elect our repre­ sentatives to approve the levy of any tax whatever. We received an edict from above and paid the taxes which were demanded from us. Even income tax which takes away an appreciable part of our income was imposed upon us by the High Commissioner in Council and to this very day that is the la"!' which applies in Israel. The same may be said of the Municipal Corporations Ordinance. We received this Law also from the High Commissioner in Council and after eleven years  of statehood it is still valid and subsisting, and determinative of the rights of city dwellers. It is true that the citizens elect those who will manage the affairs of the city, but it is not they who decide the levying of taxes. A veto or approval  of  the taxes  which  the representatives of the electors desire is dependent upon the will of the Minister of the Interior. Therefore, the whole theory according to which  no  taxes  are to be imposed unless they are  prescribed  by  the representatives of the people is of small value in the cities of Israel.

Moreover, if the respondent wanted to prove that a part of the meter fee is ultimately to be included in the city's budget, like other taxes, he should have produced evidence to that effect. I have not for­ gotten that we are dealing with a criminal trial in which it is for the prosecution to prove the offence, but the burden of  proof  shifted to the  respondent  the  moment  when  the  Attorney-General  produced to the court the Municipality's bye-laws which  have  been  published in Reshumot and bear the signatures of the Mayor, the acting Minister of Transport, and the Minister of the Interior. Prima facie these bye-laws are valid. This court will assume that omnia rite et solemniter acta and  if the respondent wishes to adduce facts to prove that it is not so, the burden is_upon him. It follows that in the case before us the respondent , has not endeavoured to shift the burden of proof back upon the Attorney-

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General and we have no evidence at all that what is called a fee-i.e., a payment for a service and not a tax-is not really a  fee, a  payment which covers the expenses of purchasing the meters, their supervision ' and maintenance. Without evidence I am not prepared to accept as a fact that part of the receipts from the use of the meters goes to the municipal­ ity's budget.

'

I am, respectfully, in agreement with Berinson J. who in the appeal of the Local Council of Kjar Ata v. Ata Textile  Co. Ltd  (7) (at p  874), says:

"There are services which  the  Council  may  conduct on a purely business basis and  make avai}able  to residents or property owners who will use them according to their free choice, in consideration of a certain payment for each use and service, such as a local transport enterprise, a swimming pool,

a place of public entertainment, water supply which is not exclusively in the hands of the council etc."

It is my view that although the  object  of  installing  the  meters i not for the purpose of doing business but for regulating traffic, payment for use of parking space is purely a business matter and there is prima facie no difference between a swimming pool, for example, as Berinson J. remarked, and a service regulated by parking meters.

Instead of a driver roaming around the streets in his car for a quarter of an hour or more in search of a place where to park and instead of wasting petrol and thereby  foreign  currency,  he  pays a fixed  amount so that he should be permitted to use a regulated parking space in different parts of the city. I cannot therefore adopt this part of  my learned colleague's judgment which treats this fee not as a fee for a definite service but as a payment for.the benefit of the city's taxes.

Agranat J. regards as an additional indication that this is a fee of a tax character and not a price, that the  driver  is  compelled  in  some areas to use only a regulated parking place and, as is known, compulsion constitutes one of the indicia of a tax. I respectfully disagree with this view. If a driver were permitted to park his vehicle only in a regulated parking place, it is conceivable that I might agree that there is an element of compulsion, but  it  is  not  so.  There  are  numerous  parking  places in Tel Aviv-Jaffa which are not regulated parking places and if there is no sign forbidding parking in a certain place any driver may park his vehicle there (subject, of course, to prohibitions prescribed by the Transport Regul tions). In many streets, non-regulated parking places

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are found some small distance away from a regulated parking place.

In an announcement pursuant to the Transport (Traffic Signs) Regulations, 1949, regarding the determination of classes of signs, their form and meaning (Official Gazette, 1950, no. 61, p. 505), we find (at p. 507) in class B, Directional signals-(1) Prohibitory Traffic Signs, the sign no. 2A-19, which forbids waiting and parking and sign no. 2A-20 forbidding parking; and also, in class C-Information Traffic Signs­ sign no. 1-3, for the parking of vehicles. Even though the municipality has installed parking meters and permanent parking places, there are still to be found parking places for vehicles where sign no. 1-3 is posted, and many places where signs no. 2A-19 and no. 2A-20, which prohibit parking, are absent.

It follows then that a driver is under no obligation to park  his vehicle in a regulated parking place alone but is entirely free to find for himself some other place in the city where parking is not prohibited.

In my opinion therefore the two foundations upon  which  my learned colleague based that part of his judgment which holds that subsec. 1l(c) of the bye-laws is ultra vires, because it prescribes a fee which is in fact a tax (which only the Municipality can impose), are not foundations upon which it is possible to base such a finding.

Under sec. 99(1) of the Municipal Corporations Ordinance, 1934-and the bye-laws of Tel Aviv-Jaffa concerning the stationing and parking of vehicles were adopted pursuant to this s ction-the Municipal Council may adopt such bye-laws "to enable  or  assist  it  to carry out any of.the matters it is required or empowered to do under this Ordinance or any other Ordinance or  law...and  may  by  such  bye-laws  provide for the payment of any fees or charges...and for the grant or issue of licenses or permits in connection  with  such  matters,  and  for  the fees to be paid therefor."

I infer from this that although the Council is under a duty to enact the bye-law and afterwards to obtain the approval of the High Com­ missioner (now the  Minister  of  the Interior). it  does not mean that  it must in the bye-law itself take upon itself the execution of those things which are to be done pursuant thereto.

In the case before us, if we look at it in a practical and not merely a theoretical manner, it would appear that neither the Council nor even the Mayor would be able to prescribe the appropriate fee on the basis of personal knowledge alone.

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The Council, like· the Mayor, would have to refer to statistics regarding the volume of traffic in various. places in the city before deciding where to. instal parking meters. Additionally,. the Council, if it wer,e making the decision, and likewise the Mayor, if he decided, would have to know the price of the parking meters and the cost of their main­ tenance, and many other things in connection with the methods of using parking meters.

I do not imagine that al the members of the Council are required to stand a whole day or perhaps a week with notebook and pencil in hand at a particular spot in the city to record the number of cars that pass there at all the hours of the day, and having completed their work there to go on to a different spot to make a similar statistical study.

If the Coup.di were indeed required to do this, the Municipality would not instal parking meters until Doomsday. The Mayor, likewise, who has to determine the places for installing the parking meters and the fee, would not be able to carry out this work by himself but would have to obtain detailed information from experts in this matter, and on the basis of the statistics he obtained from them and upon whicµ he would have to rely, would prescribe the conditions under which a driver was to make use of the meters. It is therefore true to say that when the Council have delegated this function of designating the parking places and the fee which drivers have to pay, they do not impart any of their authority to anyone else.

The Mayor will determine the fee on the basis of the information which he receives from the experts and the Council thereby performs its function, for neither will it be able to determine the fee without such information.

This is not a delegation of authority; it is only a way of carrying  into effect that which lies within its authority.

Sec. 99 of the Municipal Corporations  Ordinance  does  not preclude the Council from taking  steps for effecting  the  arrangement by one of its members, the Mayor, and with his help.

When we take into account the difficult prQblems which arise from the increase in the number of cars in our cities, we should look favourably upon regulations whose purpose is the enforcement of order in place of chaos, and not to be over zealous in inquiring whether or not they are ultra vires or according to the letter and not the spirit of the law.

Judge McReynolds says concerning this subject in Frost and Frost

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Deputy President E. Rivlin

Is a person’s expenditure for childcare  while at work deductible as an expense incurred in the production of income,? This is the legal question before us. Apparently, the existing law offers us one, and only one, answer.

The facts

1.    The respondent (the counter-appellant) is the mother of two children, and a lawyer in private practice.  She and her life partner – the father of the children - are jointly raising their children.  During the tax years under appeal – 1999-2001 – the respondent requested to deduct expenditures for her children’s  pre-school and day care from her taxable income. The respondent’s daughter Maya was born in 1994, and her son Guy was born in 1997.  The respondent sought to deduct pre-school payments for Guy for the years in dispute. She also sought to deduct pre-school payments for Maya up to July 2000, and payments for afternoon day-care after Maya began attending elementary school that year. The respondent did not request a tax deduction for clubs that the children participated in during the afternoon, nor for day camps during the vacation summer months when the day care center was closed. The respondent declared that had her two children not been looked after in these frameworks until the afternoon hours, she could not have continued to work as a lawyer in private practice. The appellant refused to allow the deduction of the disputed expenses, and the issue was brought before the District Court. This is an appeal against its decision.

       The Israel Bar Association requested to join the appeal proceeding as amicus curiae. We see no need to grant that request, inasmuch as the Bar Association has no unique interest in the questions in dispute, despite the fact that the respondent is an lawyer by profession and occupation.  Nonetheless, the written position of the Bar Association, and its oral statements were all before us when we wrote our opinion.

The District Court judgment

2.    The District Court granted the respondent’s appeal in part, ruling that the part of the expenses incurred for her children’s care should be allowed as a deduction from income, in accordance with certain rules that it specified. The court ruled that the parental obligation to  care for children is established both by law and natural imperative. The District Court stated that “evidently the parties do not dispute that placing the [respondent’s] children in supervisory frameworks was a necessity, without which she would not have been able to maximize income”. The District Court therefore ruled:  

'The basic assumption is that each of the individual spouses is entitled to realize his professional ambitions, his right to realize his desire to work in his occupation and to produce income for himself and his family members. The entrustment of children requiring adult supervision, including by dint of law, enables the parents to go to work and do their work. As distinct from food and medicines, as claimed by the respondent, the children would not have been under another person’s supervision for the aforementioned times and for the aforementioned number of days per year, had the spouses not been busy in the production of income... in that sense, this not an expense which "is absolutely private”…’

Nonetheless, the District Court noted that the child's presence in the various supervisory frameworks also contributes to the child's development and education.  The contribution stems from the very fact of children spending time with toddlers their own age, from spending time in the presence of non-parental adult figures, and from educational and enrichment activities.  This has been ruled  a "benefit" that accrues to the parents from the very fact of their children being in the different supervisory frameworks. Regarding this point, the District Court accepted the respondent’s claim that "were it not for the need to spend long hours at work, both she and her children would benefit from spending as much time as possible with one another, and certainly for a period of time in excess of the time required for their education, development, imparting of knowledge, etc."  That benefit, according to the District Court, "would also have accrued from spending a few hours during a smaller number of days...especially for toddlers".  In this context, the District Court noted that "it is undisputed that the company of children in the day-care center, and the activity there, replace entertaining friends at home, or participating in clubs, but this could be accomplished through other, more limited means than spending no insignificant number of hours every day outside the house, in the school."

The District Court therefore ruled that the total payments made for supervision should be classified in accordance with two categories of payments. The first reflects payments that should be ascribed to "enrichment" activities, while the other should be ascribed to “supervision" costs. Only the latter should be permitted for deduction as an expense in the production of income:

‘First of all, supervision expenses that are not enrichment expenses are not expended by reason of personal or individual taste. The assessee is forced to make these payments in order to be able to produce his income. It is, however, clear that having been compelled to do so, he will choose supervision in accordance with his own taste, which is where the personal preferences play a role.  Were it not for the need to purchase  supervisory services for the children, in order to provide for personal needs, he would choose different, more limited frameworks.  To be clear: the need arises initially in order to facilitate the production of income, and only after that are the personal considerations factored in, relating to the best interests of the child, the appropriate framework etc.  This is not comparable with the direct purchase of enrichment services, such as hobby clubs, private lessons, or other enrichment programs.’

   3. The District Court distinguished between expenses for "direct enrichment" and expenses for "indirect enrichment". It therefore ruled that there is no basis for permitting payments made for all categories of enrichment, however,  the mechanism for identifying the costs is different. Expenses incurred for "direct enrichment" include payment for education, clubs and other clearly enriching activities. The court ruled that the central element of "direct enrichment" is the granting of lasting benefits to the child, whereas the supervisory component in this particular context is secondary to the main component - education and enrichment.  If a certain payment can be identified as intended for an activity classified as "direct enrichment" - it will not be permitted as a deduction.  On the other hand, "indirect enrichment", as defined by the District Court, is that enrichment from which children derive from frameworks that are primarily the supervisory.   In this context, the court ruled that expenses imputable to supervision should be separated from expenses attributable to indirect enrichment.  The District Court noted that:

'In this computerized, documented era, in which all activities can be monitored and reconstructed, assuming the existence of economic and other models that allow it, it would seem that the aspiration for an accurate assessment requires that where an assessee can prove that a certain expense should be attributed, under  s. 17 of the Ordinance,  to the production of his income, and that component can be quantified as a part of the total in a manner that distinguishes it from the portion that does not serve for the production of income, that portion should be permitted for deduction.'

The District Court observed that the supervision and enrichment costs can be quantified based on the data collected by organizations that run day care centers, such as Wizo and Na’amat.  The District Court also noted that the day care centers managed by these organizations "can also serve as a point of reference for the reasonability of an expense". In this context the District Court noted that the question of the reasonability of the expense as prescribed by section 30 of the Ordinance was not adjudicated in the appeal before it. The District Court further stressed that supervisory expenses not incurred for the purpose of parents going to work could not be deducted.

4.  Equipped with these determinations, the District Court proceeded to classify the expenses that the responded sought to deduct.  The court ruled that payment to a babysitter or a care-giver in the home was payment for supervision, and was fully deductible, subject to the principle of the reasonability of the expense.  Regarding the after-school center where the respondent's daughter spent the afternoon , the District Court ruled that the expense was primarily for purposes of supervision. As such two thirds of it should be permitted for deduction (while the other third “takes into account the personal benefit, including the meal"). As for the payments to the pre-school (where the children also received lunch), the District Court ruled that one half of the sum would be regarded as an expense for indirect enrichment and personal components such as food, and would not be permitted for deduction. The [other] half of the payments, which the District Court attributed to supervision expenses, would be deductible. The District Court further ruled that where separate payment was made for the children's meals, two thirds of the payment would be regarded as an expense for supervision.

5.    The District Court rejected the appellant's claim that,  at the very most, the claimed expense merely prepared the ground for generating income, but was not an expense "in the production of income", as required under s.17 of the Ordinance. The District Court distinguished childcare expenses from expenses for the purchasing of food and medicines, arguing that food and medicines are required at all events, even where a person does not generate income. The court was also of the opinion that in the case at hand one could not draw an analogy from case law that determined that travel expenses to a workplace were not a permitted deduction, and that in the case at hand, the expenses also met the test  that they serve their purpose at the time the income is created.  When the respondent is at work - it ruled – "she is only able to earn her income by virtue of the fact that her children are under supervision." The District Court held that childcare expenses for the children are connected to the creation of income, and are incidental to the creation of income, because had the children not been under supervision, the respondent would not have been able to produce income. It therefore held that the expenses were not just "a preliminary condition for her to go out to work", but rather that the expenses were required “for every hour during which she makes money". The court further ruled that if expenses intended to increase the yield of workers at the place of work were permitted for deduction, then "the supervision of the children must at least be considered as increasing output from a situation in which the parents are unable or limited in their capacity to produce income, to a situation where, for as long as the children are under supervision, they can operate at an increased output for the sake of producing their income."

6. Finally, the District Court dismissed the appellant's claim that the credit points given to the working mother (in conjunction with child allowances) constitute an exhaustive arrangement, and that the deduction of expenses in addition to that arrangement constitutes a double benefit. The court ruled that this claim was only raised by the appellant in  summations, and that it constituted an impermissible broadening of the scope of the dispute. On the merits, the District Court ruled that absent an explicit statutory provision, there were no grounds for denying permission to deduct an expense that fell within the ambit of s. 17. Furthermore, the District Court opined that credit points and child allowances are arrangements that serve an extra-fiscal purpose that is external to that of the Ordinance, . The court held that this result held true even when taking into consideration the fact that, over the years, various Knesset Members had made explicit proposals, which were not accepted, to recognize the deduction of child-care expenses related to their parents' work.  It ruled that this legislative history does not impugn the fundamental principle whereby an expense incurred in the creation of income is a permitted deduction.

This judgment is the subject of the appeal before us

The Appellant's claims

7.  The appellant brought an arsenal of claims contesting the permission to deduct supervisory expenses of children while their parents are at their place of work. The appellant's view is that "the expense will only be recognized for deduction if it is an integral part of the natural structure of the business and constitutes part of the business process itself" (hereinafter: the "incidentality test"). The appellant claims that the "if not for" test that served the District Court (in other words: if not for the payment of childcare expenses for the children, the respondent would not have been capable of producing income) is not the accepted test in case-law. The appellant claims that the appropriate test is the incidentality test, and the requirement that there be a close, tight and direct connection between the expense and the income. The appellant therefore claims that childcare expenses do not satisfy the conditions of this test, given that at the most it can be considered only a "preliminary condition" for earning income, and is not an integral part of the process of producing income. This expense does not bear the close, tight and direct connection required for purposes of deduction. The District Court’s judgment, according to the appellant, blurs the boundaries between business and non-business expenses, and between revenue expenditure and capital expenditure, which likewise bear a connection to the production of income. The appellant further claims that permitting the deduction of an expense that is neither directly nor tightly connected requires explicit grounding in a statutory provision (such as the provisions of ss. 17 (11)  - 17 (13)).

Even were it to be held that childcare expenses involve a business component, the appellant claims that this does not mean that these expenses should be permitted, given that they are mixed expenses, and the business component of is not clearly discernible. The appellant refers to the District Court's rulings concerning the personal benefit to the children from merely being in the supervisory framework. Its view is that if the expense is determined as being a mixed one, then its components are inseparable because "each and every act of supervision…..benefits the child and the parent whose child is learning and developing at a time he can also work". The appellant opines that given the respondent's failure to provide a clear and accurate basis for differentiating between the private and business components, the expense should not be permitted "based on guesswork and all manner of calculations". In its view, where the components of a "mixed" expense cannot be determined precisely, an explicit provision is necessary, such as the regulations enacted by the Minister of Finance under section 31 of the Ordinance concerning the deduction of expenses for maintaining a car (see: Income Tax Regulations) (Deduction of Car Expenses), 5755-1995, telephone expenses, refreshments at the place of business location, and clothing expenses (see: Income Tax Regulations) (Deduction of Certain Expenses), 5732-1972). On the merits, the appellant claims that there is no basis for the determination that the total amount of expenses to be ascribed to indirect enrichment expenses is lower than the amount of expenses to be ascribed to supervision.

The appellant argues that the matter at hand is comparable to that of expenses for traveling to work - meaning that if it has been determined that the latter are not permitted for deduction, then a fortiori this must be the conclusion regarding childcare expenses.   

8. The appellant claims that its position is also supported by the legislative history, which shows that childcare costs are not deductible, and that the current legislative arrangement with respect to credit points and allowances is exhaustive. The appellant noted that prior to the passage of Amendment No. 22 to the Ordinance (in 1975), the Income Tax Ordinance contained a specific arrangement by which child care expenses could be deducted up to prescribed ceilings. The appellant stresses that this arrangement was replaced by the arrangement based on credit points and allowance points.  It refers to the Explanatory Notes to Amendment No. 22 which indicate that the credit was given to working mothers as "an additional incentive for married women to go out to work".   It also cites the report published by the Tax Reform Committee concerning the Recommendations for Changing Direct Tax – 5735-1975 (hereinafter: Ben Shachar Report), which states that the credits system was preferred, inter alia by reason of its simplicity. Based on all these, the appellant argues that, ab initio, the legislature viewed childcare expenses as private expenses, because from the very outset the deduction was specifically permitted by virtue of a specific section. The arrangement adopted in 1975 is thus unique and exhaustive, and replaces the deduction of childcare expenses. The appellant maintains that granting the credit and allowance points to a woman constitutes "partial recognition" of childcare expenses. It claims that there can be no deduction of an expense that already confers credit.  The appellant bases this claim on judgments given in  regard to National Insurance payments.  The appellant argues that recognition of the expense as a deduction would constitute a double benefit, which was not the legislature's intention. The appellant also pointed out the various legislative proposals made over last decade, with respect to childcare expenses, which were ultimately rejected by the legislature. It argues that the failure of these numerous attempts to grant a tax deduction for  childcare expenses also supports the conclusion that these expenses are not deductible.

9. The appellant further argues that the District Court's judgment "ignores its expected economic implications", and that "it does not achieve its aims and even impairs the efficiency of resource allocation in the economy".  According to the appellant, the financial cost of the judgment amounts to three billion shekels a year, and as such substantially affects the entire state budget. The appellant repeated these claims in writing in its supplementary pleadings on 22 December 2008. The thrust of the argument that the director general of the Finance Ministry intended to bring to our attention concerning a number of economic matters, was set out in the notice that was submitted on the appellant's behalf on 7 January 2009. In that, notice the appellant claims that the current economic crisis is liable to cause a significant reduction in tax collection, and that the dimensions of the additional burden on the public coffers are still unclear.  The appellant stated that covering the budgetary costs of the judgment will probably necessitate a raise in taxes – "a step which is regressive and inevitably harms the weaker sectors". The appellant also maintains that permitting the deduction of childcare costs constitutes a deviation from the policy of "broadening the tax base, cancellation of sectorial exemptions, and lowering of tax rates – a policy intended to "create the possibility of economic growth in the economy, while constructing a simple, transparent, and fair tax system thay projects certainty while emphasizing the reduction of tax rates".  The appellant raises the fear of a "slippery slope": permitting the deduction of childcare expenses may compel the deduction of additional expenses only remotely connected to production of income, such as commuting expenses, rent  paid by the assessee for purposes of his work, clothing expenses, food expenses, etc.

10. The appellant believes that it is for the legislature to decide upon the manner by which women should be encouraged to go to work. It claims that the legislature, and not the court, should decide matters that have significant, broad implications. The appellant also stated that the State of Israel operates a "governmental assistance network in all matters related to child care". In the framework of the arrangements established for that purpose, it cites the credit points given to working women for each child; subsidies for day care centers; negative income tax; child allowances, and a compulsory education system.  The appellant claims that permitting the deduction of childcare expenses will mainly benefit the wealthy, and economically secure sectors of the population, among which the proportion of working women is already high.  This – it argues – would yield a regressive result. Recognizing childcare costs as tax deductible is inefficient in the appellant’s view, because it increases the friction between the citizen and the tax authorities, and because it necessitates extensive resources. Permitting the deduction of childcare expenses will result in a significant broadening of the scope of reporting, because numerous assessees who do not currently file tax returns will begin to file them in order to obtain the tax deduction. These expenses are not recorded on the books, which makes tracking and verification difficult. The appellant believes that the deduction cannot be made through the employers, because that would require conducting an assessment. The end result  will be an increase in the costs of  abiding the law for assessees, and an increase in the administrative costs of the tax authorities.

The Respondents Arguments

11.  The respondent maintains that chilcare costs are permitted deductions under the opening clause of s. 17 of the Ordinance.  The respondent notes that under the provisions of this section, the expenses incurred in the creation of particular income can be deducted from that income. Where the legislative intention is not to permit the deduction of certain expenses –the respondent argues – they are explicitly disallowed under the Ordinance and  its associated regulations.  According to the respondent, childcare expenses fall within the scope of s. 17 of the Ordinance, in accordance with the accepted tests for recognizing expenses. The respondent argues that the expenses are all related to maintaining the existing situation, and bear a concrete connection to the relevant income yielding activity.  As such, they relate to income and fulfill the incidentality test.

The respondent further stresses that childcare expenses are not private expenditures comparable to food and medicine. They also differ from travel expenses. They are expended exclusively by reason of going to work.   They are expended in order to enable the production of income, and would not otherwise have been spent. As far as “mixed” expenses – which combine a business expense with a personal expense – are concerned, the respondent argues that the components must be distinguished so that only the appropriate part  be permitted as a deduction.

12.       The respondent requests that we reject the appellant’s argument that the solution to the economic ramifications of going to work is to be found in the credit points granted for dependent children. She argues that this is a social benefit intended to enable the assessee to enjoy a higher disposable income when she has dependent children.  Credit points are intended to preserve financial resources for the assessee’s “private” expenses. According to the respondent, they are entirely unrelated to childcare expenses, which are deductible to ensure the payment of true tax  on the assessee’s business activity.  The respondent argues that this deduction satisfies both the test of preservation of the productivity of an asset intended to produce income, and the “incidentality test” – in other words, it is an expense related to the process of producing income.

13.       The respondent argues that the appellant’s claims pertaining to the financial, budgetary and national economic ramifications of the lower court’s ruling cannot alter the proper interpretation of the Ordinance’s provisions. It is her position that once it is determined that the Ordinance’s provisions  permit the deduction of childcare expenses, the appellant can no longer challenge the implementation of those provisions. The provisions can only be amended by legislation.  Furthermore, the respondent claims that the forecasts regarding the grave consequences of the judgment are unfounded. The is no real fear of an increase in tax in the wake of the judgment, and even were there to be a tax increase, it would not necessarily be regressive.  The respondent maintains that the appellant’s claim that the judgment is not exhaustive should prompt the appellant to enact supplementary regulations. The respondent also seeks to minimize the appellant’s concerns regarding the “retroactive” effect of the ruling, inasmuch as expenses that were not reported as a caregivers’ wages, and for which taxes were not withheld, would not be deductible. This would be the case for various other reasons, such as a lack of  appropriate documentation, or due to prescription.

We have decided to dismiss the appeal, subject to the following specification.

Deduction of childcare expenses - General

          14. The dispute grounding the appeal that we decide raises a number of issues. The first is whether an expense for  childcare can be defined as “an expense in the production of income”. The second pertains to the question of characterizing an expense as a “mixed expense”. The third concerns whether the arrangement for allowances and credit points, to which the appellant refers, is exclusive and exhaustive, such that no additional expense can be deducted. Finally, there is the question of whether the law applies prospectively or retroactively. We will examine these questions in order.

Childcare expenses – An expense incurred in the production of income

15.  In the absence of a statutory provision specifically addressing the possibility of deducting childcare expenses, the question of whether such an expense is deductible must be examined in accordance with s. 17 of the Ordinance, similar to the examination of other expenses for which there is no special arrangement. The opening section of s.17 of the Ordinance states:

‘In ascertaining the chargeable income of any person, all disbursements and expenses that person incurred during the tax year wholly and exclusively in the production of his income shall be deducted – unless the deduction is limited or disallowed under section 31 [emphasis added – E.R.].

As noted by the District Court, “the parties do not dispute that the placement of the (respondent’s) children in a supervisory framework is a necessity in the absence of which she would not be able to maximize income”.  The parent’s duty to provide supervision for their young children is not just an imperative of nature; it is also legally prescribed (see: Capacity and Guardianship Law, 5722-1962, ss. 14,15,17; Penal Law, 5737-1977, ss. 361,362).  It is not disputed that had the respondent not gone out to work, her children would not have required particular supervisory frameworks, such as after-school day care , and that at least some of the respondent’s expense would have been saved. Needless to say, herein lies the fundamental and substantive, albeit not the only, difference between supervisory expenses for children and expenses for food and medicine. Whereas the latter are expended irrespective of whether a person works, the former are not required where a person does not work, and tends to his children himself (see A. Likhovsky, “Gender Categories and Status in the Laws of Income Tax”, 24 Tel-Aviv U. Law Review  205 (2000)).

16.    The appellant is of the opinion that it is not sufficient that an expense serve to produce income in order to permit its deduction, but that  it must also be incidental to the production of income, in other words - involved in it. The test of incidentality was defined by Justice A. Witkon in CA 284/66 Kopilovitz v. Assessment Officer for Large Factories, Tel –Aviv, [1], at p. 718, in the following manner:

‘The test of “incidentality” means viewing the source of income – in this case the employer-employee connection – in an organic sense, and asking whether the said expense arises from the natural course and structure of the source. To be deductible, it can be regular or irregular, but it cannot be an expense that is external to the nature and framework of the income. The difficulty of applying this test was already noted in the well-known Strong v. Woodifield case: “Many cases might be put near the line, and no degree of ingenuity can frame a formula so precise and comprehensive as to solve at sight all the cases that may arise”.’

This test was adopted into Israeli Law from English Law, where it served as an old, well-established rule. This Court has implement the rule even where it lead to problematic results. For example, we may cite the dispute that emerged in CA 190/61 Borek v. Assessment Officer  [2],  at p. 1801.  That case discussed whether to permit the deduction of travel and food expenses of the appellant, who was the employee  of two separate employers, and was required to travel by shared taxi from one place of work to the other. The Supreme Court affirmed the ruling of the District Court, which rejected the assessee’s claims:

‘The aforesaid is legally well-founded, and correctly reflects the long-established rule, even though criticism has been leveled at the narrowness of the test, from time to time. See the incisive comments of the Royal Commission on the taxation of profits and income (1955) Cmd. 9474, secs. 238-241), but this is the law….it is true that such a person too is “forced” to incur travel or food expenses “in the production” of his income that stems from his second source of income. This, however, is not the decisive test set forth in s. 11 (1) of the Income Tax Ordinance, 1947. We must ask ourselves whether the assessee incurred the expense “in the production” of his income, and that question can only be answered in the negative…

As such, and not without misgivings, we must reject the appeal’ [emphasis added - E.R].

In our case, as mentioned, the District Court viewed childcare expenses as satisfying the conditions of the incidentality text. The court ruled that childcare costs are incidental to the production of the income, because had the children not been under supervision, the respondent would not have been able to produce income at all. As such, it ruled that the expenses are not just “an initial condition” for going to work, but are also required “hour-by-hour in the course of producing income”.  The District Court added that just as expenses intended to increase the productivity of workers at their workplace are deductible, “so too, supervision of children at least raises productivity from a situation in which parents are unable to produce income, or in which their capacity to do so is limited, to a situation in which, for as long as the children are supervised, they can operate with increased productivity in the production of income” and the expense should therefore be a permitted deduction.

The “Incidentiality” test

    17. My view is that even were we to accept the appellant’s claim that the expense under discussion does not fulfill the conditions of the traditional incidentality text, and that it does not “arise from the natural course and structure” of the income producing source, it would not necessarily disallow the expense as a deduction. The character and the status of the incidentialy text must be examined in light of current rules of interpretation, and in keeping with the purpose of s. 17 of the Ordinance. The test is, indeed, based opon a century-old rule, but its vintage does not per se justify a deviation from the currently accepted rules of interpretation (see: CA 165/82 Kibbutz Hatzor v. Assessment Officer Rehovot [3], at p. 70). The interpretative question concerns the proper construction of the term “expenses …in the production of income”. These words do admit of a number of interpretative possibilities. “Production of income” is a process that is not always clearly delineated. For example, one could argue that only expenses that are located directly on “the production line” of the income – if the productive unit is compared to a factory – would be defined as “expenses … in the production of income”. This is a narrow interpretation of the term “production of income”. On the other hand, the production process could be viewed as including not only the “production line”, but also additional components necessary for production purposes, and which serve the need of producing income.

The purpose, which guides the interpretative task,  is the purpose of the provisions of s. 17 itself, i.e., the obligation to pay true tax (see: CA 1527/97 Interbuilding Construction Company v. Assessment Officer T.A-1 [4] at  p. 699). In other words, the taxation of  the assessee’s  real income, which is the income after deduction of the expenses incurred in order to produce it (and cf: : CA 4271/00 M.L. Investments and Development v. Director of Land Appreciation Tax  [5], at p. 959.  Charging tax for an amount that does not reflect a person’s real income cannot be defined as “income tax”. If an assessee is not permitted to deduct an expense incurred in the production of his income, it is tantamount to ”over taxation”, because the income taken into account for purposes of determining his tax liabililty is higher than his real income (see: Yoram Margaliot, “Fictitious Regressiveness in Family Taxation,” 2 Maazaney Mishpat   358 (2002)).  The legislature is entitled to deviate from this fundamental principle, and determine that a particular expense, incurred in the production of income, is not deductible, but in view of the aforementioned purpose, this must be done explicitly. The aforementioned purpose indicates that nothing compels the conclusion that only an expense “which arises from the natural course and structure of the source” will be a recognized expense, if there are other expenses that are incurred exclusively in the production of income. By the same token, deduction of an expense is not permitted when the deduction would create a situation in which the assessee’s income for tax purposes would be less than his real income. For example, consumer expenses of the assessee (which may, occasionally, bear some connection to the production of income), as well as expenses which are only indirectly and remotely connected to the production of income. Taxation of the true income is the purpose, and the incidentiality test is meant only to serve that purpose.

For our purposes, we can seek some guidance from accounting practices, which provide that “recognized expenses in a profit and loss report – where there is a reduction in future economic benefits related to a reduction in the asset or an increased undertaking which admits of reliable measurement”; and also: “recognized expenses in the profit and loss report based on the direct connection between the costs incurred by the entity and the production of particular items of income (see ss. 94 and 95 of the “Conceptual Framework for Preparing and Presenting Financial Reports” of the Israeli Accounting Standards Board (2005), [emphases added - E.R.]. These rules mandate a direct connection between the expense and the production of items of income. They also require reliable measurement of the expense. They do not require that the expense  “arise from the natural course and structure” of the income producing source.

18.  All of this leads to the conclusion that there must be a real, direct  connection between the expense and the production of income as a condition for allowing the deduction of the expense.  The borders of the production process lie beyond the “production line”, and their precise delineation is in accordance with the concrete circumstances and the aforementioned purpose. The emphasis is not on the location where the expense is incurred – in the “factory” or external to it. This distinction loses its importance in an era in which the boundaries between the “factory” and the ”house” have become blurred. As indicated by s. 17 of the Ordinance, the requirement is that the expense be incurred exclusively in order to produce income. An expense that a person would have made even had he not produced the income will not, so it would seem, be permitted (see examples above regarding medicines and food). In other words, the incidentality test should be (only) an auxiliary test for the identification of revenue expenditures in the production of income. Other expenses, too, proved by the assessee as bearing a real and direct connection to the production of income, and which were expended exclusively for the production of income, may be permitted for deduction.

Intermediary Cases and the Accepted Test

19.  As stated in Kopilovitz v. Assessment Officer [1]: “Many cases might be put near the line, and no degree of ingenuity can frame a formula so precise and comprehensive as to solve at sight all the cases that may arise”. Indeed, certain expenses are categorically incurred in “the production of income” and expenses that are not categorically “the production of income”; there is also a variety of intermediary cases. There can be no doubt that in terms of certainty of the law, the legislature would do well by clarifying the law in these latter cases. In the absence of clarification by the legislature, the court is required to decide, and this indeed has occurred more than once in the past. The rulings in those cases indicate that the ab initio the test of incidentality deviated from its original borders. A few examples will demonstrate this.

In terms of the prevailing law, a number of expenses are permitted as deductions even though they are not really incidental to the production of income. An example of this is the permitted deduction of study expenses, which are considered as “preserving what already exists”. Thus in CA 141/54 Wolf –Bloch v. Jerusalem District Assessment Officer [6], Justices A. Witkon and Y. Sussman ruled, in opposition to the dissenting opinion of Deputy President S.Z. Cheshin, that the overseas travel expenses of the appellant – a dentist by profession – to a professional training seminar should be permitted. The reason was that these expenses could be defined as “preserving what already exists” in the sense of maintaining the doctor’s professional level. Justice Witkon noted that:

‘I have already commented that if the expenditure was made in relation to a capital asset, but not for the purpose of its production or improvement, but rather in order to maintain it – within the framework of activities that are organically a part of the income – then there are grounds for permitting the deduction of that kind of expense. In my view, the question is ultimately whether the purpose of the expense was to create a new product, or to improve an existing product, or whether its purpose was to maintain the asset in its current condition’ [emphasis added – E.R.].

It could have been argued that maintaining one’s professional level constitutes a condition for the continued production of income in the future, but cannot properly be viewed as an “organic” part of the income producing process. One could claim that for a dentist, the process of producing income for purposes of the incidentality test is providing medical treatment to patients, and that when a doctor engages in further studies she is not treating her patients and is not performing any action that produces income as a direct result.  The Supreme Court, per Justice Witkon, took a different view, finding, as stated, that professional studies abroad may be conducted “within the framework of activities that are organically a part of the income”.  This is as it should be, despite the doubt regarding whether this expense satisfies the case-law test of incidentality.  There is, however, no doubt that that an expense for studies abroad intended for the purposes of maintaining one’s professional level constitutes an expense in the production of income, in view of the purpose of s. 17. The expense bears a real, direct connection to the production of income, inasmuch as failure to maintain one’s professional level will prevent the production of income in the future (even if not immediately); the expense is expended for the sole purpose of producing income for the person studying; it is neither a capital nor an appreciation expense (in accordance with the tests established by case law, see Wolf –Bloch v. Jerusalem District Assessment Officer [6] ibid.). The conclusion is, therefore, that in view of the goal of paying true tax, and taxation of the assessee’s real income, this expense should be permitted for deduction. The Supreme Court arrived at the correct and appropriate result in accordance with the purpose of s. 17, even in a case in which it was questionable whether the expense satisfied the requirements of the incidentality test.

20.  To complete the picture, it bears mention that there were cases in which it was held that even an expense incurred in order to “preserve what already exists” must satisfy the test of incidentality in order to be permitted for deduction (see: CA 358/82 Alco Ltd v. Assessment Officer for Large Factories [7]). The learned Amnon Raphael criticized this ruling (Income Tax, vol.1 – 291-292 (3rd ed. 1995)), writing:

‘A revenue expenditure is generally, but not always, incidental to the process of producing income… It seems to us that it the test established under s. 17 of the Ordinance includes both revenue producing expenses and revenue expenses that are not incidental, such as expenses recognized by reason of preserving what already exists. In our view, there is no necessity that these expenses be incidental to the production of income, and their deduction will nonetheless be permitted […] Our opinion is, as stated, that the “incidentality test” is just one of the tests for purposes of examining whether an expenses is for the production of income or not, but not the only one.

Finally, we should remember that there is no single, conclusive test in accordance with which the nature of each and every expense can be examined’

            I concur with this view. I too believe, as mentioned, that the incidentality test is an auxiliary test which is not exclusive, and that particular expenses may be permitted for deduction even if not satisfying that condition, provided that they satisfy the requirements set forth above.

Naturally, this interpretative conclusion does not alter the case-law rules pertaining to the non-deductibility of capital expenditures, or those that touch upon the questions of the actual classification of expenditures as revenue or capital . The prohibition on the deduction of capital expenditures and appreciation expenditures was explicitly prescribed in the Ordinance (see the provisions of ss. 32 (3) and 32 (4) of the Ordinance). The incidentality test may serve, inter alia,  in drawing a distinction between capital and revenue expenditures (see: Raphael,  ibid  at p. 291; A, Witkon and Y. Neeman, Tax Law,   4th ed., p. 151 (1969); CA 735/86 Zvi Ben Shachar Seeds Ltd v. Assessment Officer Tel-Aviv 3 [8]). However, these questions do not arise in the case before us, and we will not address them.

From the Principle to the Question in Dispute

21. We now turn to the implementation of the above in the case before us. The District Court’s view was that childcare expenses satisfy the incidentality test given that they are necessary “hour by hour in the course of producing income”. The court compared these expenses to expenses to improve worker productivity, concluding that if the latter were deductible, then it was appropriate that the same rule  apply to the former, the absence of which precluded production altogether. It is conceded that the application of the incidentality test in this case is somewhat contrived. It is doubtful whether the expense for childcare “arise from the natural course and structure” of the income producing source. However, this does not determine the fate of the expense. The childcare expense bears a real, direct connection to the production of income. It is expended to enable the parent to produce income. Placing the children under supervision is a necessity, the absence of which renders the parent unable to produce income, – due to the parents’ natural responsibility for their children,  which is also a duty imposed on them by law. To the extent that one can quantify childcare expenses, there are grounds for holding that this is an expense exclusively for the purpose of producing income. This being so, even were we to accept the appellant’s claim that childcare expenses do not satisfy the incidentality test, in its narrow construction, it would not prevent our permitting the expense as a deduction as an expense “in the production of income”. At the same time, and by force of the same rules, in a family unit consisting of two parents, the expense childcare would not be permitted if one of the parents were not working (and  would, therefore, be capable of supervising his children), for it would not be an expense incurred “in the production of income”.

Childcare costs as a mixed expense

22.  In addition to the requirement that the expense be incurred in the production of income, there is also a requirement, as stated, that it be "for that purpose only". This requirement adopts the requirement of English Law that the expense must be expended "Wholly and exclusively in the production of income” (Raphael, ibid, p. 287).  Prima facie, it could have been argued that a "mixed" expense, containing a component of revenue (expense in the production of income) and a non-revenue element, would not satisfy that requirement and would not be allowed as a deduction (see Yair Newdorf, "Mixed Expense", 22 (3) Taxes A-68, A-70 (2008) (Hebrew)). This however is not the case. In this context, accounting principles do not have a parallel requirement regarding the "exclusivity" of the expense.  Where a certain expense comprises a component that satisfies the requirement and a component that does not, that part of the expense which satisfies the condition specified in the definition may be allowed as an expense. The deduction of that part is even an obligation in accordance with accounting principles, because the non-deduction of expenses (when they can be quantified reliably) distorts the financial results of the reporting body.

An examination of the circulars issued by the income tax authorities shows that the they, too, are of the opinion that the requirement of "exclusivity" should not be given too literal an interpretation, and that in various situations in which the expenses are mixed, an effort should be made to distinguish between the revenue component and the non-revenue component, and to permit the former for deduction (see: I.T. Circulars 17/89, 35/93, 37/93). For example, Income Tax and Appreciation Tax Circular 35/93 determined that: "it is possible that in respect of a particular asset, expenses are mixed, in the sense that some of them are intended to repair that which exists, while the other part is intended to improve the asset.  In such a case, an attempt should be made to distinguish between the  two components of the expenditure, so that only the first component is permitted for deduction under s. 17 (3) of the Ordinance". In Circular 17/89, rules were established for permitting the deduction of trips abroad, including the relative manner of permitting the deduction of a mixed expense of which the income production component which was the main component. Another example is the Directive to the Administration of the Tax Authority under which one third of the expense incurred in purchasing a newspaper would be permitted as a deduction, for a person whose profession or position required use of the economic information appearing in the newspaper (Newdorf, ibid, p. A-71).

23.  The approach, which permits the assessee to extract from a mixed expense the income producing component from a mixed expense, and allows its deduction, was adopted by this Court in CA 580/65 E. Ben-Ezer and Sons Ltd. v. Assessment Officer for Large Factories  [ 9 ].  Justice Mani ruled that travel expenses incurred for going overseas were not permitted if they included the travel expenses of the managers' family members, whose trip was not for the purpose of producing income. Justice Silberg concurred with this result, "Since those expenses also included the expenses of the wife, the husband's report did not distinguish between his expenses and those of his wife". Justice Kister concurred with this result, and did not see any need to "express an opinion on whether and to what extent it was possible to distinguish between the overall travel expenses of a number of people". In view of this reasoning, it has been claimed that this judgment too, which prohibited the deduction of a mixed expense, created an opening for the recognition of part of a mixed expense (Newdorf, ibid). In CA 35/67 Shtadlan v. Tel-Aviv Assessement Officer 4 [10], Justice Mani ruled that attorneys fees paid by an appellant to his lawyer constituted a mixed expense – both revenue and capital. All the same, this result did not lead to the dismissal of the appeal, but rather to the file being returned “to the assessment officer to determine, having given the appellant the opportunity of stating his claims and producing evidence, which part of the fees should be attributed to revenue expenditure”.

Over the years, this rule has been implemented in numerous decisions. In Tax App. (T.A) 22/67 Eliyahu v. Tel-Aviv Assessment Officer 1 [11] the District Court (per  Judge S. Asher) accepted the recommendation of the Assessment Officer to permit 50% of the assessee's car maintenance costs as an expenditure for the production of income. In Tax App. 45/97 Levav v. Assessment Officer [12], the District Court (per Judge B. Ophir-Tom) ruled:  “Although, as explained, the expense is a mixed one…. having found a reasonable way of dividing it and neutralizing the component permitted for deduction, it would be appropriate for the respondent to adopt an approach that would enable the deduction of the portion meriting deduction, as dictated by economic and tax logic”. In that case, the court applied a particular method of attribution in order to distinguish between the revenue and personal components of the expense.

This approach also found support in academic writing from four decades ago. In their book (ibid., at p. 137), A. Witkon and Y. Neeman note that:

‘[I]n fact, where the expenditure admits of division, such as an expense for maintenance of a car that serves both business and private purposes, it is permitted to deduct the portion appropriate to business use’

In his aforementioned article (ibid,  p. A-72), Newdorf analyzes the significance of that example – the distinguishing of the car–maintenance expenses – noting: “Conceivably, Justice Witkon was hinting that even in mixed expenses in which the separation of the revenue component from the others is not simple, a method must be found to recognize the revenue aspect, for otherwise it is unclear why Witkon chose an example in which the separation is particularly difficult if not impossible”.

   24.  This interpretation, which has been adopted by the courts over the years, is linguistically possible, and is consistent with the purpose of s. 17. The purpose, as stated, is to tax the true income of the assessee - accurate taxation. The question is what constitutes an “expense” that must be examined through the lens of s. 17. Where it is possible to quantify the amount spent in the production of revenue, that portion may be regarded as an “expense” to be evaluated under s. 17. The portion expended in the production of income – the “expense” – was made “for that purpose only”. This portion satisfies the requirement of exclusivity, and should therefore be a permitted deduction. This is a linguistic  possibility within the semantic field of sec. 17. It does not inappropriately stretch the borders of the language. This is shown by the fact that this interpretation has been applied in practice for decades, even during the period when literal interpretation reigned supreme. As mentioned, it is also the desirable interpretation in terms of the purpose of s. 17. Failure to permit the deduction of an expenditure made for the production of income leads to the assessee being taxed in excess of his real income, which is an unsuitable consequence in terms of the purpose of income taxation in general, and the provisions of s. 17, in particular.

Identifying the permitted deductible expense in a mixed expense

25.  The assessee bears burden of proof for identifying the portion of a mixed expense that constitutes an expense in the production of income. Should he fail to discharge that onus, the expense will not be permitted as a deduction. (Raphael, ibid, p. 288; CA 2082/92 Shacham v. Assessment Officer Tel-Aviv 2 [13]; TaxApp (Tel-Aviv)  97/85  Peretz Ettinger Ltd v. Assessment Officer Tel Aviv 1 [14]). The burden of proof is that generally applied in civil law, and its elements are determined in accordance with the matter at hand and the concrete circumstances (see, for example, how this burden was met in Levav v. Assessment Officer [12].

    The legislature and the delegated authority adopted various arrangements allowing the partial deduction of mixed expenses.  Section 31 of the Ordinance states:

The Minister of Finance may, with approval by the Knesset Finance Committee, make regulations – whether in general or for particular categories of assessees – on the limitation or disallowance of the deduction of certain expenses under sections 17 to 27, and in particular on –

(1) the method of calculating or estimating expenses;

(2) the amounts or rates of deductible expenses;

(3) the conditions for allowing expenses;

(4) the manner of proving expenses.

 [emphasis added - E.R.]                                                       

 Section 243 of provides:

The Minister of Finance may make regulations for the implementation of the provisions of this Ordinance, especially including regulations on –

…(3)  any matter on which the Ordinance authorizes him to  prescribe.

By force of these provisions, the Minister of Finance enacted various regulations, including Income Tax Regulations (Deduction of Certain Expenses), 5732-1972,  and Income Tax Regulations (Deduction of Vehicle Expenses), 5755-1995. These regulations quantify the deductible component to be allowed as an income producing expense  in various mixed expenses, such as expenses for vehicle maintenance (which may serve both for the production of income and for personal use), different expenses attendant to trips abroad, bed and breakfast expenses, telephone expenses, etc. A certain difficulty may be posed by the fact that, in these regulations, “expense” is defined as “an expense permitted for deduction  in accordance with ss 17- 27 and s. 30 of the Ordinance…” in accordance with the wording of s. 31 which confers the Minister of Finance with the authority to enact regulations regarding “the limitation or disallowance of the deduction of certain expenses under sections 17 to 27”. If indeed the legislature’s view was that mixed expenses could never be permitted for deduction under s. 17, and inasmuch as the expenses under the Regulations must be deductible under s. 17, how is it that the Regulations permit mixed expenses? (see:  Newdorf, in his aforementioned article, at pp. A-75-77; TaxApp. 539/03 Agbaria Maarof Abd el-Kadr v. Assessment Officer Hadera [15].  Even if there is come clumsy drafting in this collection of provisions, they shed light on the legislature’s position on this matter: Where a mixed expense may be separated into its components, the part constituting an expense in the production of income will be permitted for deduction. The portion permitted for deduction was stipulated in the Regulations at a particular rate or a fixed, determined sum, which serves the interests of certainty, simplicity, and saves administrative and costs (CA 280/99 Kima v. Assessment Officer Dan Region [16], at p. 530). The advantages of clear, explicit determinations in the regulations are obvious, but where such determinations in secondary legislature are absent, the Court will address the matter, as we will now do.

     26.  The District Court held that expenses for “direct enrichment” are not permitted as deductions. The District Court defined “direct enrichment” as including “studies, compulsory studies, various clubs, and classical enrichment activities, etc”. As noted by the District Court, the primary, central component of these frameworks is the education and enrichment of the children. In tax jargon, this means the granting of an “enduring advantage” to the children. As such, the expenses are of a private character, and are not allowed for deduction. Indeed, as the District Court held, even if the child is supervised while being in an enrichment framework, the supervision component is secondary to the principal component – personal enrichment – and expenses occasioned thereby will not be permitted for deduction. In that regard, the lower court was strict with the assessee, but that issue is not in dispute between the parties.

     The District Court further held that the payment to a babysitter or a caregiver, at home, is given as salary for supervision, and the entire expense should be permitted for deduction, subject to the principle of the reasonability of the expense. This result is appropriate and raises no grounds for intervention. The entire expense incurred for paying a babysitter or a care-giver while the parents are at work constitutes an “expense in the production of income” that is spent “exclusively for that purpose”. Even though the children may gain lasting advantage from being supervised by a care-giver or baby sitter, this advantage is marginal and limited to the extent of not meriting any weight (all, naturally, subject to the proviso that that the caregiver does not carry out additional tasks or roles that go beyond tending the children)..

   27.  The question becomes more complex when it relates to supervisory frameworks that carry added value for the children, such as staying in kindergartens, after-school programs, and the like. The expense incurred by the parent in paying for the children to stay in these frameworks, is, in general terms, a mixed expense, which includes both income producing and the private expenditure. (See Margoliot, in his article, ibid, at p. 354). On the other hand, under no circumstances can we accept the appellant’s claim that the expense is a mixed one that is indivisible.  The child staying in a supervisory framework simultaneously benefits both from “indirect enrichment” and from supervision, but this is not the question. The question is whether it is possible to extract the supervision expense from out of the total expense. The answer to that question cannot be sweepingly negative. For the sake of simplicity, let us assume that a business venture is established in which two, separately owned companies operate. The first provides care and supervision for the children and nothing else. The other provides the children with a variety of enrichment activities, while they are under the supervision of the first company. It provides them with games, crayons for drawing, and one of the company’s workers tells the children stories and plays with them. Let us assume that the parents pay each company separately for its services. In that situation, it cannot be said that the payment for supervision is unquantifiable.  A similar quantification can be conducted even when the various services are all supplied to the children by the same entity.  This kind of quantification is not substantively different from the methods adopted in various judgments, some of which were cited above. Such quantification may, indeed,  comprise some element of arbitrariness, whether it is the result of legislation or of a judgment. Either way, if the assessee proved, to the required degree, the relative part that should be regarded as an income producing expense, that part should be allowed as a deduction.

    It seems that the District Court rightly ruled that in this case it was proven that the expense was primarily for supervision, subject to the principle of the reasonability of the expense (under section 32 of the Ordinance). As noted by the District Court, expenses for a supervisory framework are made first and foremost to enable the parent to produce income. Once a parent knows that he must incur that expense, he will choose the framework according to his personal taste and preferences. In the hearing before the District Court, the question of the reasonability of the expense did not arise, and we accept the principled approach of the District Court that the various public supervision frameworks may serve as a standard for the reasonability of the expenses, at least with respect to frameworks intended for relatively older children.

    Having held that expenses for the supervision of children fall within the definition of expenses for the production of income, and that, in principle, they admit of quantification and are therefore permitted as a deduction, the path is open for the legislature, the delegated authority and the Tax authorities, should they so choose, to take actions intended to clarify the rules for extracting the expense permitted as a deduction.  The legislature and the delegated authority, and perhaps even the Tax authorities, will also be able to address the question of which partner should be granted the deduction.  Until then, it would seem appropriate for the tax authorities to grant the deduction at equal rates against the income of each spouse. A provision of this kind not only prevents unjustified fiscal manipulations; it  also dovetails precisely with the principles of fairness and equality, which we have stressed in this judgment.

    The credit  arrangement for working mothers – Is it comprehensive?

   28. The appellant argues that the arrangement established under the Ordinance for credit and allowance points is exclusive and exhaustive, replacing the legislative arrangement that preceded it which permitted the deduction of supervision expenses for children, and was repealed. This being the case, the appellant argues that deduction of supervision expenses for children cannot be allowed in addition to the credit, in as much as “where an expense confers a credit, it cannot be deducted under section 17 of the Ordinance (see: CA  30/73 Roth v. Haifa Assessment Officer [17].  This claim is unfounded.

This is the wording of section 40 before it was amended in 1975:

           (a) (1) In the calculation of the chargeable income of an individual resident of Israel, who proved to the satisfaction of the assessment clerk that during the tax year there were living children who he supported and who were not yet 20 years old, he will be permitted a deduction of 250 Lirot for the first child, 300 Lirot for the second child, 325 Lirot for the third child and 375 Lirot for each additional child.

          (2) An individual entitled to a deduction under paragraph (1) but who is not entitled to a deduction under section 37, will be permitted an additional deduction for the sum of 700 Lirot; this paragraph shall not apply to an individual who would have been entitled to a deduction under section 37 were it not for the provisions of section 66 (a)(2);

          (3) Parents living apart and for whom the child support is divided between them, shall divide the deductions under paragraphs (1) and (2) in accordance with the support expenses made by each one of the parents; where the parents were unable to agree upon the relationship of support expenses, it shall be determined by the assessment clerk

The appellant seeks to infer from this arrangement that the legislature regarded childcare expenses as non-deductible, and that an explicit provisions is required in order to permit them for deduction.  An examination of this arrangement indicates that this is not the case. Prior to its amendment in 1975, s. 40 permitted the deduction of expenses for “children’s maintenance”.  Today, as in the past, it is not disputed that a person’s basic support, expenses for a person’s sustenance, are not deductible. This is entirely unrelated to the matter under discussion.  More precisely, our concern is not with maintenance of  children in general, but rather with a specific, far more restricted issue – expenses for supervision of children, - expenses made for purposes of the production of the parents’ income. The cancellation of the specific arrangement that existed in the past, and which permitted the deduction of specific private expenses, carries no implications for permitting the deduction of expenses that were determined to be deductible under s. 17 of the Ordinance.  It bears note that even the deduction under s. 40, before its amendment, was also granted for cases in which the children were not in any supervisory framework. This being so, the cancellation of that arrangement is of no relevance for the matter before us.

29.  An analysis of the existing arrangement for credit and pension points yields a similar conclusion. The provision of section 40, in its current wording, reads as follows:

‘(a) An individual Israel resident is entitled to pension points for each of his children, as prescribed in section 109 of the National Insurance Law [Consolidated Version], 5728-1968; the pension points shall be paid by the National Insurance Institute under the National Insurance Law.

(b) (1) If an Israel resident individual, who is the parent of a single parent family, has children who during the tax year had not yet reached age 19 and were maintained by him, but is not entitled to credit points under section 37, then, in calculating his tax, in addition to the pension points under subsection (a) in respect of the children who live with him, 1/2 credit point shall be taken into account in respect of each child in the year of its birth and in the year of its maturity, and one credit point in respect of each child beginning with the tax year after the year of its birth until the tax year before the year of its maturity; and in respect of his being the parent of a single parent family – one additional credit point only;

(2) If parents live separately and the maintenance of their children is shared by them, then the parent who is not entitled to a credit point under paragraph (1) shall receive one credit point or part thereof, according to his share in the maintenance.

(3) For purposes of this subsection:

"year of birth" – the tax year in which the child was born;

"year of maturity" – the tax year in which the child reached the age of eighteen.

The provision of section 66 (c)(3) states:

The following provisions shall apply to the separate tax calculation:

…. (3) only the registered spouse shall be entitled to pension points under section 40(a); the woman shall be entitled to half a credit point under section 36A, and – further against the tax due on her income from personal exertion – to credit points for her children as follows:

(a) half a credit point for each of her children in the year of its birth and in the year of its maturity;

(b) one credit point for each of her children beginning with the tax year after the year of its birth until the tax year before the

year of its maturity;

For this purpose: "year of birth" and "year of maturity" – as defined in section 40(b)(3).

It is not disputed that granting credit points constitutes an incentive for both spouses to go to work outside the household (see Margliot, in aforementioned article, at p. 336). But this is irrelevant to the case in point. The question requiring an answer for our purposes is whether the credit points arrangement is exhaustive in the sense that it bars any possibility of an assessee deducting  childcare expenses. This question must be answered in the negative. First,  in order for an expense to be disqualified for deduction by reason of the granting of a credit, the  credit must be given for that specific expense. Credit points are given from the year of birth until the child reaches the age of 18, i.e., even for ages at which the child does not require supervision in order for the parent to go to work. The credit points under s. 40 are also given when only one of the parents goes to work. Second,  the legislature did not explicitly determine that granting credit points was intended to replace the deduction of childcare expenses. Third, an analysis of the purpose of the credit points arrangement does not lead to the conclusion that the appellant seeks to draw.  Many hold the view that in imposing income tax, consideration should be given for child-raising costs that do not fall within the definition of expenses in the production of income. This point was made by Margaliot (see article, ibid,  at pp 353-354):

There is extensive literature treating of the need to have consideration for the general expenditure for raising children when calculating the tax burden, since it is accepted that children are not a consumer product but a part of the tax payint unit (the assessee). This means that there is a need to calculate the income of the family liable for tax having consideration for the number of children. An assesee with children should pay less tax than another assessee with the same income, but who has no children. The reason is that income tax is imposed in accordance with ability to pay and the ability of an assessee without children is greater, because he does not bear the expenses of raising children…and they should therefore be taken into consideration when determining the tax chargeable income of the assessee-parent.

The purpose revealed by the aforementioned arrangement regarding the credit points - which bears no direct relation to childcare expenses -  may definitely be consistent with the imposition of income tax according to the ability to pay, having consideration for the number of children. There is no basis for the claim that the central goal of the credit points arrangement is to replace the permitted deduction of childcare expenses incurred in the production of the parent’s income.

30.  The appellant maintains that support for its construction can be found in the very fact of the non-adoption of various bills proposing the explicit recognition of childcare expenses. But that does not lead to the conclusion that the appellant seeks to draw. The question requiring this Court’s decision concerns the interpretation of the existing statute law. Having concluded that a particular expense should be recognized for deduction according to our interpretation of s. 17 of the Ordinance, the existence of incomplete legislative proceedings does not change that conclusion. Obviously, if the legislature chooses to allow and expense that is currently not allowed, or to disallow a currently permitted expense, it has the ability and authority to do so by explicit legislation.

   “Regressivity”, equality and other issues

31.                   The appellant claims that the main beneficiaries of permitting the deduction of childcare expenses will be the upper, well- established social echelons, among which the rate of working women is high, in any case. In its view, this result is regressive. Making this claim requires precision. Allowing the deduction of an expense in the production of income is neither a benefit nor a sectoral subsidy. Permitting the deduction of an expense in production of income derives from the goal of income tax, which is to tax a person’s real income. The fundamental principle deriving from that goal - that an expense incurred in production should be permitted -  is implemented in the same manner for the rich and the poor.  Regarding the alleged regressivity, there are numerous factors that may result in a tax being progressive or regressive.  Hence, should it be determined that  certain assessees from among a group of high-income assesses, cannot deduct part of their expenses, it would have a progressive effect. On the other hand, establishing a rule that would prevent some of the high-income assesses from deducting an expense incurred in the production of income would be inappropriate, for it would violate the equality in the distribution of the tax burden among the group of high-income assesses. This is so because the tax burden would not be determined exclusively in accordance with the assessees’ income, but rather as a factor of the manner in which they produced it (see Margaliot, in his article,  p. 361).   By the same token, were we to assume that the majority of those benefitting from the deduction of financing and administrating expenses are the holders of capital in the top percentile, would avoiding the deduction of such costs in that situation be an appropriate progressive step, or perhaps a discriminatory, inefficient distortion of the tax system?  Alternatively, if two assessees - one with children and the other without -  earn the same gross salary, and one of them is forced to pay childcare costs in the production of his salary, then obligating them to pay an identical tax, without permitting the deduction of the income-producing expense, would distort the tax system, and create wrongful inequality between the assesees.  In fact, this is the question of equality relevant for our purposes – equality in the application of the tax law, and equality in the imposition of tax on real income, and permitting the deduction of an expense that serves in the production of income. The equal imposition of tax laws removes various distortions in decisions, which stem from over taxation.  The practical result of the removal of these distortions is likely to induce  women who do not to work because of the tax distortions, to go out to work.  Such a result is also likely to be efficient in economic terms, because by their work these woman increase the economic product  (and the state’s income from taxes, even if only in the long term). Encouraging woman with children to enter the workforce need not come at the expense of other woman who enjoy a high income. If the legislature wishes to grant a subsidy or a benefit to woman who are unable to earn large salaries, the economic cost of that subsidy could be financed by a tax imposed equally to all of the high-income assessees. At all events, there is no justification for creating distortions and inequality in the high-income sector by determining that only assessees with children will bear the funding burden (by not permitting the deduction of expenses from their income).    

32.    The consideration of encouraging women to enter the work force is neither a guiding, nor even a secondary consideration in our conclusion. As explained, our conclusion derives from the basic principles of tax law, and from the goal of taxing the real income of the assessee. The social goal goes beyond these principles. Recognition of the  contribution of women to the labor market crosses the boundaries of income levels, and is not limited to the tax or financial advantages that they gain by reason of the balance of income over expenditure. Failure to recognize childcare expenses is a valueless  - and in this case illegal - relic of the archaic division of roles between the spouses, in which the nature of things was that the female was entrusted with care giving and supervision. According to that conception, releasing the wife from that duty by hiring a care giver was regarded as a private expense that was deemed a luxury. Accordingly, in a judgment handed down in the United States one generation ago (but never overturned), the tax court maintained that child care expenses, like other aspects of family life and maintaining the household, should not be treated differently from any other private expense. It clarified its position as follows:

‘The wife's services as custodian of the home and protector of its children are ordinarily rendered without monetary compensation. There results no taxable income from the performance of this service and the correlative expenditure is personal… Here the wife has chosen to employ others to discharge her domestic function and the services she perform are rendered outside the home’ (Smith v. Commissioner of Internal Revenue [ ]).  

The “private” duty imposed on the wife confers a private status upon the care-giving expenses.  זו גם This, even if we ignore the feminization of the work. This archaic conception also leads to the question of whether it is economically “worthwhile” for the woman to go out to work, and to the proposed distinction between woman of high economic status and others. This distinction is not relevant to the question of the social recognition of childcare expenses, because such recognition is a result of the equality of the spouses with respect to the right and the duty to work. A hint of this archaic conception can also be found in our midst by the fact that credit points were only granted to the woman. The deduction, on the other hand, according to our interpretation is bi-sexual.  Abandoning the archaic conception, in our case, is consistent with the basic principles of tax law, and with the purpose of taxing the real income of both the male and the female assessee. These principles stand at the basis of the interpretation we propose for the provisions of s. 17 of the Ordinance.

We do not presume to replace the legislature or the executive branch in the creation of arrangements intended to encourage women to enter the labor market. The legislature also has the authority to determine that a particular expense which serves in the production of income will not be allowed as a deduction. However, in the absence of an explicit determination on the legislature’s part, it is not possible to reach the conclusion that an expense in the creation of income cannot be deducted.

Application

33.    The bottom line is that the appeal is denied. Regarding the method of deduction, if at all, and the manner of extracting the permitted expense for deduction from the overall “mixed” expenses, the legislature and the delegated authority would do well to give this matter their attention. In the absence of regulations, these topics will be treated at the level of the the assessee and the assessment officer. The deduction will be calculated using the methods used in the past with respect to mixed expenses.  The assessment officer will be the one to decide the portion that should properly be deducted, and that portion which is not permitted for deduction – and in the case of disagreement, the matter will be brought before the court, as in the past. In the matter before us, the concrete questions have already been decided by the trial court, and there is no need for them to be reconsidered.

All that we have decided today is that in the absence of legislation, there is a legal duty of deduction. The legislature may decide otherwise, but as long as it does not, we have done nothing other than declare the existing law. The question remaining for our examination is the date upon which this ruling goes into effect.

34.  In general, a new judicial rule operates both retrospectively and prospectively (LCA 8925/04  Solel Boneh Construction and Infrastructures Ltd v Estate of Alhamid [18] (hereinafter: Solel Boneh). When interpreting a legislative provision, the court declares the existing law and does not create it: it declares what the law always was. Even when the court chooses prospective effect for its judgment, the accepted distinction is between the litigant who seeks to deviate from the previous law, for whom the new rule will have retroactive application, and other litigants whose matters have yet to be resolved, and in respect of whom the new rule will not apply (ibid, para. 7 of President Barak’s judgment). This distinction provides an incentive for the litigant arguing for a change in the law.

This is not the case when the previous law is not fundamentally flawed, and it is the change in the social and cultural environment in which the court operates that catalyzes the change in the law. In cases such as these, the effect may be purely prospective (the rule would not even be applicable to the litigant who initiated the legal proceeding in order to bring about the new case law), or qualified (the ruling applies to that particular litigant). A request for prospective effect may also arise in cases in which the parties relied on the previous rule for an extended period of time and regulated their relations in reliance thereupon (see ibid,  para. 12). The choice of non-retrospective change of the law thereby limits the harm to the reliance interest that might be caused by giving retrospective effect to a new rule. In the words of President A. Barak (ibid, para. 14), it prevents the need to decide between “truth” and “stability” (an expression coined by President Smoira), and it enables the attainment of both “truth” and “stability”.

35.  It seems that this case justifies giving today’s ruling only prospective effect , starting as of the tax year beginning in the January 2010, subject to one qualification regarding its application to the parties before us. There are a number of reasons for both the choice and its qualification.

The construction given today to the provision of s. 17 brings about a practical change in the way the appellant has treated assessees for many years. The need to protect the reliance interest in this case is a powerful one.  The old rule created a real, substantial reliance that precludes the retrospective application of the rule. Returning taxes collected undermines the tax collector’s reliance interest (ibid, para. 20).  In the present context, it is doubtful whether this interest can be protected by means of other legal doctrines. The proviso presented here to retrospective application would not apply to the case of the respondent in this case. The reason for this is the general need to provide an economic incentive to the litigant, in appropriate cases, to take steps to change the existing law. The concrete reason in this particular case is that a decision was already made concerning the respondent by the trial court. As stated,  as long as appropriate regulations have net been enacted, the question of how to implement the new rule will be an issue for case-by-case examination by the assessment officer, and in the absence of agreement, a subject for judicial resolution. In the matter of the respondent, this last stage has already been exhausted. The result is that, in this case, the general qualification frequently accompanying prospective application has been realized.

It should be emphasized that the criteria for distinguishing the appropriately deductible expenses from the overall “mixed expenses” were chosen in accordance with the particular circumstances of the respondent. They do not prevent other assessees, or the assessment officer, from reaching other results in appropriate circumstances.

In conclusion, the application of this judgment is prospective, but it will apply to the respondent in this case, whose claim succeeded in changing the rule.

Deputy President

Justice E. Rubinstein

A.    I concur with the result reached by my colleague the Deputy President, and his elucidative reasoning. I would like to add a few comments.

B.   In my view, the judgment of my colleague and that of the trial court bring the interpretation of taxation law, and for our purposes of section 17 of the Tax Ordinance (along with section 32 (1) which prohibits the deduction of home or private expenses), closer to social developments, in other words, closer to reality, and true tax can be levied only if anchored in reality. Reality, as any socially aware person knows,is a “gradual revolution” in relation to the past, now expressed by the fact that women work outside the home. This phenomenon crosses social boundaries and is expanding, fortunately, into social circles among which women did not previously work outside the home. I stress the expression “outside the home” because work inside the home, even for women who are only homemakers - or for a man who plays the same role at home - is difficult, taxing work. The expression “a working woman” is an archaic term. Maintaining a home is no trivial matter, and the woman who is a homemaker, or a man fulfilling that role, are working in the most basic sense of the word.  This reality has been partially recognized by the law in certain contexts. In any case, it is clear that the interpretation of tax law must reflect the dynamic social situation, just as the law itself must go hand in hand with social developments. Personally, with all due respect, I dispute the position expressed by the appellant that the recognition of the deduction constitutes, in and of itself, a benefit for the richer classes, and is regressive with respect to the weaker socio-economic sectors.   It is clear for all to see that young couples, even from relatively well established families, where both spouses work outside the home, are forced to spend considerable sums for childcare. Indeed, in the absence of a grandmother or grandfather who has the time, or is retired,  and who can voluntarily care for the children, the amount spent for that purpose constitutes a large portion of the couple’s expenses, or as expressed in the immortal aphorism attributed to the late Knesset Member Abraham Hertzfeld, “All  income is dedicated to expenses”. Taking the bull by the horns, it is clear that without incurring these expenses, one of the spouses would not be able to work outside the home.  Accordingly, it is quite obvious that childcare expenses are expenses necessary for the production of income, and the qualms regarding its regressive character can be allayed without difficulty, as also explained below.

C.    Needless to say, this was not the dominant approach in the past (see, inter alia, Asaf Lachovsky “Categories of Gender and Status in Income Tax Law”, 24 (1) Tel-Aviv Law Journal 205, 225 – 228 (2000), and references there (hereinafter: “Lachovsky”). The author criticizes the conception that views childcare expenses as private expenses, stating (p. 227)

‘It seems that the real reason for the special treatment of childcare expenses is the identification of this expense as a woman’s expense.’

 We will return to the gender issue further on. Regarding the deduction, in the article by Dr. Yoram Margaliot, cited by my colleague, he suggested disguising childcare costs as a “mixed expense” (p. 360).

D.   The learned Prof. Y. M. Edrey, in his (new) book “Introduction to the Theory of Taxation” (5769-2009), treated the subject at length, and similarly took issue with the "accepted theory" according to which study expenses, travel expenses, and childcare expenses are private expenses (pp. 221-112). In his view, this accepted view is based on "social assumptions that are no longer appropriate in a modern, egalitarian Israeli society" (p. 223), and that ignore the human capital and changing social conditions in different areas.  I will not address the issues that digress from the specific matter at hand, but I will only note that regarding expenses for academic studies, the author’s view is that developments in this area include the need to recognize advanced academic studies as expenses for maintaining existing economic value  (p. 210 and p. 215), and that in his view, the half-credit points granted in the Income Tax Ordinance are insufficient (p. 226). I had the opportunity in the past to address the issue of studying towards an academic degree in CA 350/05 Jerusalem Assessment Clerk v. Bank Yahav  (not yet reported) [19]. I stated there:

'(1) Academic studies, as with any other studies, are for the person's benefit, they contribute to his values,  broaden his professional and other horizons, and raise his level. However, the legislature chose to express this recognition by way of credit points, and not by way of deduction. We also learn this from the legislative developments in this area. On  10 August 2005, the Tax (Amendment No. 147) Ordinance, 5765-2005,  came into force. Section 9 establishes an arrangement for credit points based on expenses for academic and education studies (the addition of ss. 40C and 40D to the Ordinance, including "half a credit point for an individual who completed studies towards a first or second academic degree," and "half a credit point for teaching studies", respectively.  Prima facie, it may be inferred that studies towards an academic degree, until that time, were not allowed as a deduction from the chargeable income of the student, and hence the amendment. Furthermore, in Amendment 151, 5766-2006, the legislature went another step down the same path, and explicitly prohibited viewing academic studies as a permitted expense, stipulating among the "matters prohibited for deduction":  “educational expenses, including expenses for acquiring academic education or for acquiring a profession, and apart from expenses for professional advanced studies, which are not studies for acquiring academic education or a profession, for purposes of preserving that which exists"  (see s. 32 (15)).  This also appears in the explanatory notes: “It is proposed to clarify that deductions for educational expenses for the purposes of acquiring a profession or acquiring academic education are not deductible from a person’s taxable income unless they were expenses for preserving that which exists that do not confer the student with a permanent advantage. As stated, this is the existing situation, but in order to remove all doubt, it is proposed to establish this explicitly in legislation” (Government Draft Proposals,  5766, 236, pp.  305-306 (emphasis added – E.R.).

(2) The absolute majority of the workers in the bank in this case studied, as mentioned, towards a first or second degree in business administration, and with respect to studies of anthropology or geography, for example, the bank itself agrees that the expenses are not recognized for tax purposes.  The present case involves the study of business administration, which may be of benefit to the bank workers, but the academic degree as such cannot be regarded as fulfilling the required connection between itself and the function of the assessee.   To be precise - this does not constitute a rejection of the "substantial test" which the court must adopt when examining the recognition of academic degrees as allowable  expenses (see: R. Livnat, "Advanced Academic Degrees – as a Recognized Professional Studies Expense", Taxes  13/2 (April 1999); L. Newman, "The Parameters for Permitting the Deduction of Expenses for Academic Studies" Taxes 16/3 (June 2002)). The studies must be essentially connected to the assessee’s professional role, but they must also focus on, and be essential to his job. Furthermore, while academic study does provide the student with tools, in the current case these extend beyond the knowledge required for discharging his role. As such, they are in a field in respect of which the fiscal legislator adopted a different approach. This point was addressed by Judge Altovia in his comments on the second degree, but they are also applicable to a first degree:

“From the perspective of tax law, second degree studies are not different from studies towards a first or third degree. Second degree studies give the student, apart from the academic degree as such, academic tools, personal skills of analysis, study, research, data processing, analytical abilities, capacity for broad and focused perspective, ability to confront different and conflicting opinions, and others such life skills which cannot be enumerated, and which deviate above and beyond the particular subject being studied”(ITA (Tel_Aviv) 1122/03 Heichal Yair v. Assessment Clerk - Gush Dan  (not yet reported).

However, a broad perspective and the legislature's considerations, are separate issues. Even if we  are aggrieved by this situation and hope for its change, this is the current situation.’

E.  How does the issue of childcare differ from the aforementioned academic studies expenses (to which recognition should, ideally, be extended)?  At least in that  the legislature made his views patently and explicitly clear in regard to education, as shown above, and it has the capacity to do so, as mentioned by the Deputy President, in the matter concerning us, as well.  However, as distinct from the issue of educational studies, with respect to childcare we find ourselves in the more flexible realm of interpreting the subject of deductions, which is regulated, albeit laconically, in the Ordinance.

F.   As Edrey argues concerning the subject of childcare expenses, the solution provided was that of credit points – from birth until age 19 –  which is also the response of the state in the matter before us, “irrespective of whether the children require supervision or not. Furthermore, to the best of my knowledge, there has been no systematic discussion of the question of whether these credit points actually contributed to encouraging women to go to work, or whether they encouraged employers to discriminate against women and pay them a low wage” (p. 226). The author rejects the criticism levelled by the authorities against the District Court’s decision, and notes, inter alia (p. 226), that the authorities have the ability to provide appropriate solutions:

'One possible example of a creative solution to the question of deduction of expenses for the care and supervision of small children can be found in the examination of the accumulated cost to the state treasury of implementing the aforementioned judgment, and a courageous decision to direct these sums for the development of a network of quality daycare centers situated near places of work; to provide a real incentive to employers to invest in daycare centers for the children of their employees, and other similar solutions. Needless to say, a serious examination of the optimal solution requires the involvement of experts from the fields of early-childhood education, sociology, and economics.

G. With all due respect, I concur with these last comments, and personally, I cannot understand the claim that recognizing the deduction would not encourage women to work - or  couples to work. I have no doubt that, looked at from a broad perspective, it would provide that kind of encouragement, and to me, this appears as clear as day.

H. Indeed, initially, I was impressed by the aforementioned claim - that credit points are granted, and that the state had therefore provided an appropriate solution, and there was, therefore, no need for an additional solution relating to childcare expenses.  However, closer examination reveals that there is no correlation between the purpose served by credit points and that of the deduction, as explained by my colleague the Deputy President.  Furthermore, as also noted by the District Court, the proposal for the 1975 legislative reform (the Ben Shachar Reform) stated (Draft Amendment of the Tax Ordinance (No. 22) 5735-1975, Draft Laws, 5735, 319, 320): "The credit points will replace the deduction for residence and the deduction for a woman...allowance points will replace the deductions for children, and replace the child allowance paid by the National Insurance Institute". In other words, as the trial judge pointed out, the subject was the encouragement of childbirth. I am aware that there may be a certain overlap of the deduction and the credit during certain years of child rearing, and if we are really  intent upon true tax, that is inappropriate. But the challenge of regulating the matter so that the public coffer is not harmed falls to the authorities.

I.         Indeed, it could be claimed that, to a certain extent, our decision turns the back the clock, at least with respect to the burden to be imposed on the tax authorities - after the tax system underwent a reform in 1975, to a regime of credit points and allowances, as distinct from deductions, and  its life was made easier in this regard.    My colleague the Deputy President  gave a detailed description of the developments from 1975, in order to show that, in essence, our ruling does not turn the clock back. Of course, the multi-assessee dialogue with the tax clerks will certainly not be easy, and there will be additional work for tax clerks, work from which they were exempt over the years with respect to childcare.  Shlomo Yitzhaki, in his article “Tax Reform 1975” (in  David Glicksberg (ed.) Tax Reform, 5766-2005, p. 195, and see p. 215ff), points out that the 1975 reform was directed, inter alia,  and with special emphasis, to the streamlining of proceedings in the tax system (see: Draft Bills, 5735, 319; Tax Reforms, ibid., 226ff). Our judgment thus makes it necessary for the tax system to deal with numerous new details in every file, and one needn’t be an administrative genius to understand – and we state it quite frankly – that it involves a significant administrative burden.  However, as noted by my colleague, even if the Jordan flows slightly backwards, the legislature , the secondary legislator and the Tax Authority have a ”medicine cupboard”.  That is’ they can  establish norms to regulate the deduction to be recognized, in order to simplify, as far as possible, the individual auditing process. This is accomplished by determining  even such matters as what constitute reasonable childcare expenses, and the cost of “baby sitting”, which is hardly  beyond human capability. To my understanding, there are accepted market rates childcare costs, in addition to the other classifications mentioned by  my colleague (and see:  Margaliot, at pp. 360- 361, who suggests allowing the deduction of a certain percentage of the expense, or the setting of a ceiling , as per the practice with other items (office hospitality costs, telephone expenses) that were regulated by the establishment of presumptions).  Such regulation should be done earlier than later, in order to avoid local and individual “trench wars” between the assessees and the tax authorities regarding the amount of childcare expenses permitted for deduction. Regulation of this kind would resolve issues such as the distinction between supervision expenses and “enrichment” expenses, which were dwelt upon by the District Court, and would also quell the fears of deduction “out of all proportions”, which might lead to reduced taxation specifically of those who pay particularly high supervision expenses.

J.    My colleague the Deputy President rightly noted that our decision is not limited to one gender, but applies to both. This is similarly a part of the conceptual-social revolution in which this judgment is rooted, which militates against identification of the woman exclusively with private activity (Lachovsky, p. 225;  and see: Labor.App. (Jer) 2456/03 Bahat v. State of Israel [20]  where a man (a lawyer in the District Attorney’s Office) claimed and obtained a shortened work day, and a day-care supplement, etc.). There is no need to belabor the point that many more couples share the burden of childraising than in the past, so that the man’s role in family care, with its implications for his ability to work outside of the home is, in many cases, almost equal to that of the woman, the traditional house keeper, who now goes out to work herself, even if his status is  not yet entirely equal to hers, as there are also subjects that nature itself dictates (breast feeding). Perhaps the psalmist was referring to our times in writing (Psalms 102:13): “A person goeth out to his work and labor towards evening”. The first verse says neither “man” nor “woman”, but rather “person”[(adam ­–Heb.]. From my perspective, I think that the approach in this judgment brings it close to the spirit of the International Convention on Economic, Social and Cultural Rights, and the Convention on the Rights of the Child, which was ratified by  Israel in 1991 (and see also: Draft Bill – Basic Law: Social Rights (Draft Bills 3068, 23 Tevet, 5762-7.1.02) s. 4).

K.       This last matter brings us to consideration of social rights in general. A person has a right to human dignity (Basic Law: Human Dignity and Liberty)  and to freedom of occupation (Basic Law: Freedom of Occupation).  A person’s right to self-realization should and ought to receive expression in the practical possibility of fulfilling that right.  Our concern here is not with lofty words but with “basic sustenance”, in accordance with the simple equation that if a person is unable to go to work because the price of caring for his children (for obviously the “daily separation” from his children is in itself difficult) consumes the fruits of his labor, then that element of self-realization involved in his leaving the home will be severely impaired. (As for his social rights, see: Dafna Barak – Erez and Aeyal Gross, in Dalia Dorner Volume (S. Almog, D. Beinish, Y.Rotem, eds.),  5769-2009, p. 189). Tax law is an integral part of the economic-social fabric and, in my opinion, its interpretation should take these aspects into account.

L. It would not be superfluous here to mention that the obligation of charity in Jewish Law (for its basis, see Shulhan Arukh, Yoreh Deah, Laws of Charity, 247:1),  which is of such singular importance (see Midot Zedakah of the esteemed Hasidic rabbi, Menachem Mendel Schneerson of Lubavitch, 5754) is fixed as follows (Shuhan Arukh, Yoreh Deah, ibid,  249:1): “if he is financially capable, he should give in accordance with the needs of the poor, and if not, he should give up to one fifth of his assets, which is the ideal performance of the commandment, and one tenth is the mediocre and less than that is mean”. This commandment is known as “Tithing of Assets” The question is what constitutes the basis from which tithe (one tenth) is given and inter alia what is recognized as an expenditure to be deducted from the profit in its calculation. It has been ruled that  the cost of a child carer hired by the woman going to work, for purposes of her work, can be deducted from her profits which are liable for tithes of assets.  See inter alia the responsum of Rabbi Joseph Ginzburg in Pinat Ha-Halakhah, Weekly Session (Habad)  1164, 30 Nissan, 5769 (20.4.09) and references.  See also the responsum of Rabbi Chaim Katz “Tithing Assets – Offsetting Expenses” on the internet site of the Beth El Yeshiva, 11 Iyar 5768. See also Ahavat Hesed of the esteemed Rabbi Yisrael Meir Hacohen, the Hafetz Hayyim (ed. Rabbis D. Zicherman, and B. Zeligman, 5763, at 232): It seems that he should also have a special book, in which he records all of the profits bestowed to him by Hashem, after deduction of the expenses of his business”, and in the editors note, ibid 20, concerning “all of the expenses that are necessary for the business”, and references. The emerging picture is that Jewish law regards necessary expenses, including expenses for a caregiver, as appropriate for deduction from the basis of tithes (ma’aser kesafim),  and the analogy to our case is clear.

M.  After writing all of the above, I perused the article of Dr. Tzila Dagan “Recognized Expense” (31 (2) Tel-Aviv Law Review  257 (2009)). Among other things, the article addresses the subject of expenses for childcare, from the initial assumption (p. 293) that it is first necessary to establish who is the “normative assessee, through whom we can arrive at appropriate conclusions. By examining considerations of efficiency, division, community and identity, the author concludes (p. 300) that “permitting the recognition of expenses for childcare will, indeed, promote economic efficiency, and will contribute to equality between women and men”. She notes however that this may have problematic distributive consequences. For example, women whose tax rate is high will receive more of a benefit than those whose tax rate is low (pp. 296-297, 300). But in her view, this effect can be moderated by a ceiling that restricts the expenses permitted for deduction, and a bonus for women who earn less than the tax threshold. The spirit of the comments is consistent with our approach. Indeed, in my view, the significance of our judgment in this case is that there is a need to achieve a new balance, which accurately reflects contemporary Israeli society, taking into account the changes in the socio-economic environment, changes that are often – though not always –  for the better.

N.  As stated, I concur with the opinion of my colleague the Deputy President.

Justice

Justice E. Arbel

I concur with the judgment of my colleague, the Deputy President, and with his reasoning.  Indeed, as stressed by the Deputy President, the result whereby the deduction of working parents' childcare expenses are deducted from taxable income stems from, and does not deviate from the general principles of tax law. It leads to a result of true taxation, which is the central goal of tax law. At the same, it cannot be ignored that this particular decision concerning tax issues also raises other important social issues. The result reached by my colleague, the Deputy President, in my view, also achieves an important social goal that enables women to go out to work, or at least makes it easier. Should  a woman wish to work, whether for economic reasons or for considerations of self-realization and development, then society should not frustrate that desire by disregarding the significant economic burden of childcare while she is at work. One cannot ignore the social reality that this economic burden is usually borne by the female member of the family, for a variety of reasons.   As such, recognition of childcare expenses is a step towards a more egalitarian society (see: Tzila Dagan, “Recognized Expense”, 31 (3) ­Tel-Aviv Law Review 257, 297 (2009).

On the practical level, I find it proper to mention that in my view,  when both parents are at work, activities such as clubs and day camps that fall outside the usual childcare framework, may be regarded as partially deductible expenses because part of their purpose is the supervision of children while the parents are at work. It should be remembered that the hours of activity and holidays of the kindergartens and schools are not always identical to the work hours and holidays of the worker. As such, parents are often compelled to find frameworks for their children when the regular frameworks are not available. The fact that some of these frameworks also provide enrichment for the children does not prevent recognition of part of the expenses as intended for the supervision of the children, even though the rates paid for day camps or clubs may differ. Granting partial recognition will also prevent a situation in which the parents will opt for frameworks that do not provide any enrichment so that part of the expense will be recognized for tax purposes, rather than choose frameworks that provide some enrichment  but would not be recognized for tax purposes. On the other hand, in my view, consideration should also be given to additional factors, such as social interests, and considerations of the child’s best interests, which presumably support encouraging parents to spend  more time with their children. It may, therefore, be proper to consider the determining a limit to the number of childcare hours per day that would be recognized as an expense, for reasons of public policy. In addition, in the framework of establishing rules for this field, consideration should be given to the distributive implications as they relate to families from varying economic backgrounds, that spend varying sums on childcare (see: Dagan, p. 296).  In any case, establishing guidelines for implementing of the rule laid down in this judgment is a matter for the legislature, or the delegated authority, and they would do well in regulating the matter in a clear, prompt manner in order to prevent individual disputes with assessees.

Justice M. Naor

            1.         I concur with the principal conclusion of my colleague the Deputy President according to which childcare expenses are permitted for deduction. I also concur with the comments of my colleague Justice Rubinstein.

2.    Following an exhaustive hearing before this panel, the Director General of the Ministry of Finance requested to appear before us to present the budgetary implications of the rejection of the appeal.  There was no basis for that request. If – and this is our legal conclusion – the expense is one which is permitted as a deduction, then it cannot be expected that our conclusion will change due to the budgetary implications, serious as they may be. On the day of the hearing before this Court, we proposed that the state regulate the subject of deduction of childcare expenses in regulations, but that proposal was rejected. It would seem, in the wake of this judgment, that it would be appropriate to reconsider the arrangement of the subject in primary legislation (or, at least, in secondary legislation), which will establish clearly defined criteria for childcare expenses. Legislative arrangement will prevent the need for superfluous individual litigation for each and every assessee.

3.    I will not deny that I was disturbed, not from the legal point of view but from the social point of view, by the question raised by the state concerning whether the recognition of the deduction did not constitute a benefit for the more established social classes, and regressivity with respect to the weaker socio-economic sectors.  My colleague Justice Rubinstein also addressed this subject, disputing the appellant’s position on this matter.  Personally, I am unable to dismiss the appellant’s arguments.  As stated, this is a disturbing issue from the social point of view; however, the solution. cannot lie in the non-recognition of the possibility of deducting the expense, just as the burden on the state budget cannot distort the result. My colleague Justice Rubinstein cited, with approval, the comments of Prof. Edrei, who brings a possible example of a creative solution to the question of deducting childcare expenses for small children by opening a network of quality daycare centers near workplaces. I warmly endorse the proposal to examine the possibility of expanding the free education provided by the state to young children. Such a solution, if found feasible, would benefit all Israel children (and their parents), and might well broaden the circle of those who go out to work (including women), even among those in low tax brackets.

4.    Regarding the date upon which our judgment takes effect, unlike my colleague the Deputy President, my view is that the matter should not be decided in the framework of this proceeding. I think that the matter should be left pending for proceedings in which arguments can be heard on the matter. According to my colleague, although we are concerned with  a declaration concerning an “existing situation”, there is justification for giving our judgment only prospective effect (except with respect to the respondent). The question of when a judicial ruling comes into force is a complex one that cuts both ways. While our judgment is a “revolution” in terms of actual practice, to the best of my knowledge, this judgment is the first to address and decide the question of the deduction of childcare expenses in Israel. The appellant, too, agrees that the question has not previously been addressed directly in Israel. Our judgment is, therefore, not a deviation from existing precedent (which is also permitted). Even if the assessment officers were asked to recognize these expenses and refused, until today that refusal had never been subjected to judicial review.  The “revolution” is, therefore, not in the settled law, but rather in the practice of the assessment officers. Under these circumstances, when the matter at hand “has never been ruled on in the past, it cannot be said that there is a reliance interest worthy of protection” (LCA 8925/04 Solel Boneh Construction and Infrastructures Ltd v. Estate Ahmad Abd Alhamid  [18], para. 18) that justifies retroactive application. Furthermore, presumably, there are a substantial number of assessees who waited for a decision in the respondent’s case, and thus prospective application will not only prevent the restitution claims that worry my colleague the Deputy President, but will also hurt all of those whose claims are still pending regarding open tax years, without having had any opportunity of presenting their claims on the matter. Note that regarding the latter it is certainly not a matter of “restitution of taxes that were collected, [that] harms the reliance interest of the tax collector”  - an interest that was addressed by my colleague. Furthermore, even if the question of restitution of taxes arises, there may be other legal doctrines which provide us sufficient grounds for not determining prospective application (see, e.g: CA 1761/02 Antiquities Authority v. Mifalei Tahanot Ltd [21], para. 69).  Thus, the question can go either way, but since we have not heard arguments concerning application in respect to time, I would refrain from ruling on the question, and leave it for future resolution (cf: HCJ 2390/96 Karasic v. State of Israel [22], 694 a-b). Under the circumstances, the appropriate place for resolving the question of the date of application is  in future litigation, with any particular assessee, and not the current case.

Justice

Justice E. Hayut

I concur with the conclusion of my colleague the Deputy President E. Rivlin, that the appeal should be dismissed and we should uphold the ruling of the District Court, according to which s. 17 of the Tax Ordinance [New Version] should be interpreted to permit the deduction of a person’s childcare expenses from his chargeable income.  I also concur with his conclusion that these expenses should also be permitted in cases of a “mixed expense”, in other words, an expense that contains an additional, non-revenue component.

Regarding the effect of the new ruling, whether retrospective or prospective, my colleague feels that even if it should be applied to the appellant before us, due to the need to provide incentives for litigants in appropriate cases to take measures to change the existing law, the case at hand justifies only prospective effect for this judicial ruling (as of the tax year beginning in January 2010). The reason for his approach is:

‘The construction given today to the provision of s. 17 brings about a practical change in the way the appellant has treated assesees for many years. The need to protect the reliance interest in this case is a powerful one.  The old rule created a real, substantial reliance that precludes the retrospective application of the rule. Returning taxes collected undermines the tax collector’s reliance interest :’

Justice Naor, on the other hand, feels that the decision on the issue of the ruling’s effect (prospective or retrospective)  should be left for another proceeding, as the question being “a complex one which cuts both ways”, and because we have not heard the parties’ arguments on the matter. On this issue, I concur with the view of my colleague Justice Naor.  I, too, feel that the question is a complex one which should be examined in all its ramifications before we rule  categorically on the judgment handed down in this appeal. I will further add that, in my view, and even though the Court has not previously addressed the issue of deduction of child-care expenses from taxable income, the criterion implemented by my colleague the Deputy President in determining that these expenses are permitted for deduction, is a new test, which is broader than the incidentality test, which prevailed until today, and which the District Court sought to implement in the current case (and I concur with the comments of my colleague, in para. 19 of his opinion, that any attempt to apply the incidentality test to this case is somewhat contrived). Indeed, as held by my colleague the Deputy President, the incidentailty test should be an auxiliary test for identifying revenue expenditures in the production of income, but not an exclusive test. In its stead, a more sophisticated test should be endorsed, that of the real and substantial connection between the expenditure and the production of income (See para. 16 of the opinion of my colleague the Deputy President).  In that sense, we are handing down a new ruling that replaces the old one, and this being the case, in my view, there is even more of a need for a solid, detailed basis to justify deviating from the ruling in Solel Boneh Construction v. Estate of Ahmad Alhamid [18], according to which the point of departure is that a new judicial ruling goes into effect retrospectively. Finally, and in order to remove all doubt, I will add that, in any case, I concur with the position of my colleague the Deputy President according to which our new ruling should be applied to the case at hand.  In this context, it is not amiss to mention that it was for similar reasons that the Deputy President M. Cheshin, who was in the minority in Solel Boneh  [18], had difficulty in finding any case in which a successful plaintiff whose case had led to a change in the existing law and the creation of a new one, would not be found worthy of enjoying the fruits of the new ruling (See ibid, para. 26). This approach, as stated, is acceptable to me.

            For all of the above reasons, I join in the conclusion of my colleague the Deputy President, that the appeal should be dismissed.

Decided in accordance with the judgment of Deputy President E. Rivlin.

6 Iyar 5769 (30 April 2009)

Justice T. Or

Partners in a partnership set up a corporation and transferred all their rights and liabilities in the partnership to it.  Will they be taxed as one who has sold an interest in a partnership (similar to a share) or as one who sold his share in each and every asset of the partnership assets (similar to a sole proprietorship)?  That is the question at the center of this appeal.

The primary facts and proceedings

1.    The respondents 2 and 3 (hereinafter: ‘the respondents’) were partners in a partnership titled ‘Sadot’ (hereinafter: ‘the Partnership’).  The Partnership dealt in transport and among its assets had fixed assets and current assets.  During the course of the year 1982 the respondents decided to change the form of the association in which they ran their business and established a company named Sadot Transportation Corporation (1982) Ltd. (hereinafter ‘the Corporation’).  All the assets and liabilities of the Partnership were transferred to the Corporation.  Each one of the respondents held shares in the Corporation in the same proportion of holdings in the Partnership that he had in his possession prior to that.  In the Corporation’s books the closing balances of the Partnership balance sheet were recorded as the opening balances of the Corporation. 

The Income Tax Assessor (hereinafter: ‘the appellant’) taxed the partners for the capital gain they acquired, according to his claim, from the transfer of fixed assets (trucks) of the Partnership to the Corporation.  The respondents objected to these assessments and their objections were dismissed.

The respondents appealed to the District court.  Their argument was that transfer of their interests in the Partnership to the Corporation is not a ‘sale’ according to its meaning in section 88 of the Income Tax Ordinance (New Version) (hereinafter: ‘the Income Tax Ordinance’ or ‘the Ordinance’).  Alternatively the ‘asset’ that was sold is not their interest in each and every asset of the Partnership assets, rather, the asset that was sold is their overall interest in the Partnership.

The District Court determined that the transfer of the Partnership assets to the Corporation is within the broad definition of the term ‘sale’ in section 88 of the Ordinance.  However, the court determined that the tax assessment of capital gain to the extent that such a gain indeed has been generated from transfer of the fixed assets to the Corporation will be determined as per the overall share of each partner in the Partnership that was transferred to the Corporation and not as to each and every asset separately.  It was determined that the discussion be remanded to the objection stage for the capital gain to be calculated, to the extent that indeed such capital gain was created.  From here comes the appeal before us.

The parties’ arguments and the framework of the dispute

2.    The appellant claims that the Income Tax Ordinance does not recognize the separate legal personality of a partnership.  Therefore, unlike a share, which reflects the conglomerate of rights and duties of a shareholder in a corporation, the Ordinance does not recognize an interest in a partnership which similarly reflects the conglomerate of rights and duties of a partner in a partnership.  A partner in a partnership has the right to a certain percentage (in accordance with the partnership agreement) in each of the partnership’s assets and liabilities.  Therefore, in the transfer of the partnership assets, the partner is taxed on each asset separately, according to the character of the partnership asset, and according to the partner’s share in this asset.  The appellant also raises the procedural claim according to which the claim that we are dealing with the sale of an interest in the Partnership was not raised in the appeal that was submitted to the District Court, and therefore should not have been heard.

The appellant further emphasizes that the decision of the District Court is difficult to implement.  Determining the worth of an association in and of itself is a complex and complicated task, all the more so in this case where the calculation is to be done many years after the event.

The respondents, for their part, argue that the Ordinance does not refute the legal character of the partnership, but it ignores it for certain purposes.  In any case, the partnership is undoubtedly an economic entity in which the partner can sell his interest.  An interest in a partnership is an ‘asset’ as per its meaning in section 88 of the Ordinance.  Which includes, inter alia, any right or benefit merited or held.  In light of what was said, when a transfer of all the assets and liabilities of a partnership takes place, the interest of the partner in the partnership is transferred and not his share in each and every asset.  As for the procedural claim, the respondents argue that the dispute as to the substance of the transferred asset was raised and discussed fully and no injustice was caused to the appellant.  Therefore, the argument is to be dismissed.

The respondents further claim that even if the transfer of the trucks is to be taxed with a capital gains tax, detached from the transfer of the rest of the assets and liabilities to the company, then under the circumstances the transfer is not included in the framework of a ‘sale’ as defined in section 88 of the Ordinance.

It is to be noted that we do not have before us the claim that section 95 of the Ordinance that deals with the transfer of an asset to a corporation in exchange for shares (this section, which applies to transfer of assets to a corporation during the time period relevant to our matter, has been replaced by a more comprehensive arrangement which is set in section 104B of the Ordinance) applies to the transfer of the trucks from the Partnership to the Corporation.  According to the conditions established in it, said section enables deferral of the tax liability.  According to the appellant’s claim, section 95 and its replacement section 104B, do not apply to cases such as those before us, in which assets are transferred to a corporation in exchange for payment of debts.  This, according to his claim, for the reason that a condition for applying that arrangement is that the transfer of the assets is for shares alone.  It should be commented, that this construction of the appellant is not the only one possible.  However, in light of the fact that the respondents themselves are not claiming that transfer of the asset in this case fulfills the conditions of section 95 we will leave the question of the construction of sections 95 and 104B of the Ordinance to an instance where it is necessary.

4.  I do not accept the procedural claim of the appellant as to ‘change of direction’ for the reasons detailed in the opinion of my colleague, Justice Englard.  So too, I accept my colleague’s view that the right of a partner to his share in the partnership is within the broad definition of the term ‘asset’ in section 88 of the Ordinance, and that the transfer of the partner’s share in the partnership is within the framework of the broad definition of the term ‘sale’ in said section 88.  However, this is not sufficient to settle the primary dispute in this appeal.  Just as the interest in a partnership is an asset, so too the interest in each and every asset of the partnership assets is an asset.  The dispute remains therefore as to the substance of the transferred asset in the sale of the partner’s share in the partnership.  Whether, in terms of the tax, the transfer of the share of a partner in a partnership is to be related to as the sale of an asset which is an ‘interest in the partnership’ or as the sale of his interest in each and every asset?

5.    In the topic of partnership taxation, there exist two analytical theories in which the basic concepts which are at their foundation contradict each other.  Accordingly, they address the question before us differently.  The entity theory sees the partnership as an independent unit separate from the partners that make it up.  The partnership is the taxpayer and the tax is levied on its income.  It is clear, that this theory if applied to the case before us, will regard the sale of the share of a partner in a partnership as the sale of an interest in the partnership.  The second, the aggregate theory holds that for tax purposes, the partnership does not have its own independent existence.  It is not a tax unit. The tax units are the partners that make up the partnership.  Each partner is taxed separately according to his share in the partnership incomes.  Applying this theory to the case we are dealing with will lead to the determination that in the sale of a share of a partner in a partnership in fact his share in each and every asset of the partnership assets is being sold.  As I will detail infra (in paragraph 10) it is not necessary to adopt either of these theories in a sweeping manner, and it is possible to adopt an integrated approach which applies both theories – each in different taxation matters.

These conflicting theories, are reflected in the disagreement between scholars as to the topic of partnership taxation.  Some hold that in light of the separate legal personality of the partnership, the assets are held by the partnership and not the partners, and therefore the sale of interests in the partnership is not the sale of each asset individually, but the sale of the interest in the partnership which holds the assets (Y. Ne’eman ‘Method of Calculation of Capital Gains in the Sale of the Interests of a Partner in a Partnership’ [27], p. 195; A. Alter ‘The Separate Legal personality of a Partnership of the Purposes of Tax Law in Israel’ [28] 336; A. Raphael and D. Ephrati, Income Tax Laws, Volume 2 [25] 299).  Others are of the view that for purposes of the tax laws, the partnership assets are viewed as belonging to the partners, in accordance with their share in the partnership, and therefore when a partner sells his share in a partnership he is selling a proportional share in each of the assets which belong to the partnership (see: Y. M. Edri and Y. Eden ‘On the Problem of the Excess Tax Liability, Statutory Veil and the Taxation of a Partnership, a Cooperative Agricultural Association, a House-Corporation, and a Family Corporation in the Income Tax Ordinance’ [29] at p. 320).

6.    I will preface and state that my view is that as to the sale of the share of a partner in a partnership, our legal system adopts the aggregate theory which views this as the sale of the share of the partner in each and every asset of the partnership assets.  This is how the case law has seen it, this is the practice and it is not appropriate to change this approach by way of case law.  Below, I will clarify my rationales for this stance.  The following will be the order of things: first, I will present the normative background relating to partnership taxation; later, I will survey the legal situation in the matter we are dealing with in various legal systems in which there exists a normative background similar to ours; and finally, I will detail my rationales which are at the foundation of the conclusion I have reached.

Normative background

The Income Tax Ordinance is lacking comprehensive and coherent regulation as to the overall topic of partnership taxation, and the specific matter before us in particular.  The provision in the Ordinance which deals with partnership taxation is the provision of section 63.  Section 63(a) which is important for our matter, prescribes as follows:

‘63(a)  Where it has been proven to the satisfaction of the Income Tax Assessor that two or more people are engaged together in a certain business or certain occupation

(1) The share each partner is entitled to in the tax year from the partnership incomes – and it will be determined in accordance with the provisions of this Ordinance – will be viewed as the income of that partner, and it shall be included in the report of his income which he must submit according to the provision of this Ordinance.

(2)  The chief partner, meaning that partner from among the partners who are residents of Israel whose name appears first in the agreement as to the partnership – and if this head of partners is not active then the head of partners who is active – will prepare and submit according to the demand of the Income Tax Assessor, a report of the partnership income for each year, as it is determined in accordance with the provisions of this Ordinance, and will specify in it the names and addresses of the other partners in the firm and the share that each partner is entitled to in the income of that year; if none of the partners is a resident of Israel, one with power of attorney, an agent, a manager, or a broker of the firm who resides in Israel will prepare and submit the report.’

From this section it arises, that on the topic of the income tax liability for partnership incomes, the Ordinance relates to a partnership as a collection of individuals and not as an independent unit separate from the partners who make it up.  The section expresses, therefore, the view of the aggregate theory.  Indeed section 63(a)(2) directs that the head of the partners will submit a report of the partners incomes, however, the report of the partnership incomes is not submitted for the purpose of taxing this income to the partnership but for the purpose of distributing it among the partners and for the purpose of taxation of each partner for his share in this income.

It is to be emphasized, that the provision of section 63 is an important provision in all that relates to the tax laws which apply to a partnership and to partners, being the provision which relates to one of the topics of importance in tax laws, which is the provision as to the tax liability.  It deals, like the question in the dispute in the appeal before us, with the question which relates to the tax liability in its broader sense.  And here, the provision of the section views the partnership, in terms of the tax laws,  as a collection of individuals and not as a separate legal body.

8.    By the nature of things, given that section 63 is the only provision which deals with partnership taxation, it stands at the center of the discussion in matters which arise in the areas of partnership taxation.  Courts have turned to the construction of section 63 in a long line of decisions  which dealt with specific matters in this area.  The case law which dealt with section 63 of the Ordinance has gone clearly in the direction of disregarding the independent existence of the partnership for tax purposes.  Justice Witkon expressed this approach in the following manner:

‘Indeed, it is true, our legislator granted the partnership a legal personality, but be the significance and purposes of this legal personality what they may be, one cannot disregard the basic provision in the Partnership Ordinance (section 2) which defines the term ‘partnership’.  Partnership, according to this definition is the relationship that exists between persons dealing in a joint business for the purpose of making a profit.  Learn from this that the partners are those dealing with the business and they are making the profits. .  .  in this vein section 52 of the Income Tax Ordinance also places the tax liability on the partners themselves for the share of each of them in the partnership income, and we find that determining this income is none other than a mechanistic phase in order to reach the partner’s income from the partnership. . .  we cannot therefore learn by analogy from the law of the corporation to the law of the partnership, as the appellant has done (CA 82/60 Poychtunger v. Income Tax Assessor, Tel-Aviv [8] at 1368)’.

President Shamgar explained this when noting:

‘According to the rules that were delineated, be the status of the partnership according to the general law what they may be, section 63 of the Ordinance is to be seen as a specific provision for income tax purposes, according to which the partnership is not a taxpayer and does not bear independent liability in income tax:. . .That is to say, one is not to speak of the partnership incomes as a separate concept from the incomes of the partners.  The tax liability is imposed directly on the partners for the share of each one of them in the partnership incomes.  In this sense, ‘one is not to distinguish, therefore, between the dealings of a person on an individual basis and their dealings (in the same business) as a partner. . .’  (CA 20/63 at p. 1968)’ (CA 536/88 Etz Levod v. Income Tax Assessor for Large Plants [7]).

This approach was expressed consistently in the case law.  Thus, for example in CA 477/71 Shtetner v. Income Tax Assessor, Haifa [11] Justice Witkon discussed the question of permitting deduction of life insurance expense that the partnership paid to insure the lives of the partners.  In order to answer the question, Justice Witkon examined whether this expense was an expense in generating the income of the partner and not the income of the partnership.  This, since the taxable income is the income of the partner and not the income of the partnership.  He established as to this matter that:

‘An expense that is prohibited to the partner cannot be permitted for the partnership.  It is found that in the end the two are not to be separated.’ (Ibid, [11] at p. 516).

In CA 425/79 Angel Ltd. v. Income Tax Assessor, Income Tax, Jerusalem [10], a partnership was established between the appellant corporation which was an industrial corporation as per its definition in the Law for Encouragement of Industry (Taxes) 5729-1969 –  and another person.  The Income Tax Assessor sought to deny the appellant the tax benefits which are granted by said law to an ‘industrial corporation’ based on the claim, that the partnership is a separate legal personality, and it produces said incomes and not the ‘industrial corporation’.  The court dismissed this claim.  The Court determined that:

‘The partnership incomes are the direct incomes of the partners.  From here that the partners incomes are to be seen as stemming directly from their first source, without the separate legal personality of the partnership partitioning between this source and the entitled partner.’ (Ibid, at p. 835.  See also: CA 231/58 Income Tax Assessor, Rehovot v. Amos Bohanik, [12]; CA 20/63 Ben-Zvi v. Income Tax Assessor, Bet-Hadar, Tel-Aviv-Yaffo 1 [9]).

9.    To summarize this point, in all that relates to the construction of section 63 of the Ordinance, the case law has consistently adopted the aggregate theory.  It viewed the partnership as a collection of individuals who together manage a joint business.  This does not contain a direct answer to the matter we are dealing with, however, it does contain an indication as to the manner in which the tax legislator views the status of the partnership for tax purposes.

Transfer of a the share of the partner in the partnership – comparative law

Perusal of comparative law provides a window through which it is possible to understand the various arrangements followed in this matter in other legal systems with a normative background similar to ours, and enable us to learn from their experience.  The similar side to the legal systems which we will present later is that, similar to the law applicable in Israel, income tax is imposed on the partners according to the share of each one of them in the partnership assets.

In comparative law there is no uniformity in relating to the taxation of the transfer of a share in a partnership.  In the United States, prior to legislation of Chapter K of the Internal Revenue Code (hereinafter: ‘IRC’) the U.S. Appeals Court ruled in a long line of decisions, that the sale of a share of a partner in a partnership will be taxed with capital gains tax for the sale of the overall interest in the partnership.  (See: C.I.R v. Shapiro  [15]; C.I.R : v. Smith [22]; Long v. C.I.R. [23]; Thornly v. C.I.R. [17]; United States v. Shapiro [16]; but compare Helvering v. Smith [24]; Williams v. McGowan [20]).  This legal rule created a loophole which was taken advantage of by taxpayers in order to tax earned income with capital gains tax.  The American legislator later anchored the legal rule according to which the sale of an interest in a partnership is the sale of an overall interest in the partnership in section 741 of IRC 1954.  However alongside this section, section 751 was legislated whose purpose is to close up the loophole which enabled evasion of taxation of earned income.  (See:  B. Bittker, Federal Taxation of Income, Estates and Gifts (Volume 3) [36] 82-7; Mertens, the Law of Federal Income Taxation (Volume 9) [37] 460-525 ).   Section 751 establishes as follows:

‘(a) The amount of any property, or the fair market value of any property, received by a transferor partner in exchange for all or a part of his interest in the partnership attributable to-

(1) Unrealized receivables of the partners, or

(2) Inventory items of the partnership, shall be considered as an amount realized from the sale or exchange of property other than a capital asset’.

This exception taxes the current assets that come within it with regular tax and not capital gains tax.  From here that the American method indeed represents the entity theory approach in the matter we are dealing with, however, it is a very tempered version.

As for the American law it is also worth noting that the American Law Institute (ALI), supports, in its position paper from 1984, changing the law.  The view was expressed in the position paper that policy considerations do not support the present rule which taxes the transfer of an interest in a partnership with capital gains tax.  Among the rationales for changing the law, the position paper explains the complexity of the present system and the difficulty of actually implementing it.

In Canadian law as well it was determined that the sale of the interest of a partner in a partnership will be taxed with capital gains tax for the overall interest in the partnership. (See: R. Beam & S. Laiken, Introduction to Federal Income Taxation in Canada [38]; Canadian  Master Tax Guide [39]; J. Weinstein, ‘Sale of a Partnership Business’, 1996 Corporate Management Tax Conference (1996)).  As we will detail below, both the American Legislation and the Canadian Legislation deal with the sale of the interest of a partner in a partnership, including adjustment provisions whose purpose is to adjust laws of capital gains taxation to an ‘interest in partnership’ asset.

11.   As opposed to the law applied in the United States and Canada, in England it was determined, in a guideline of the tax authorities (from January 17, 1975) that the sale of the interest of a partner in a partnership is viewed as the sale of each and every asset of the partnership assets.  The text of the guideline is as follows.

‘1. Nature of the asset liable to tax [TCGA 1992 s 59] treats any partnership dealings in chargeable assets for capital gains tax purposes as dealings by the individual partners rather than by the firm as such. Each partner has therefore to be regarded as owing a fractional share of each of the partnership assets and not for this purpose an interest in the partnership.

....

2. Disposals of assets by a partnership.

Where an asset is disposed of by a partnership to an outside party each of the partners will be treated as disposing of his fractional share of the asset. Similarly if a partnership makes a part disposal of an asset each partner will be treated as making a part disposal of his fractional share...’ (See: Simons Direct Tax Services, p. 1860).’

Similar to the situation in England, it was determined by the tax authorities in Australia, in Guideline IT 2540 (from June 22, 1989) that the sale will be viewed as the sale of each and every asset of the partnership assets.  This guideline was anchored in the law in Taxation Laws Amendment Act which added sections 160A-160C to the Income Tax Assessment Act 1936 (see J. Waincymer, Australian Income Tax: Principles and Policy [41] 306-317; Australian Tax Handbook [42] 822-844).  In South African law as well such an event is taxed as though each and every asset of the partnership assets is sold (see: Silke on South African Income Tax : ((Volume 2) [43] p. 11.1-11.25).

12.  We can see, that in countries with a similar legislative history to ours, various approaches were adopted as to the manner of taxation of the transfer of a share of the partner in a partnership.  They have an echo both of the aggregate theory and the entity theory.   However, at least in all that relates to American law, in which the transfer of the interest of a partner in a partnership is taxed with capital gains tax, it is a matter of a very weak version of the entity theory, as from the rule of transfer of an interest in partnership as a capital asset, many assets with an earned character are excepted.  So too, in legal systems that adopted the entity theory in the area, specific adjustment provisions are included in the relevant legislation whose purpose is to adjust the capital taxation to the special asset of an ‘interest in a partnership’.

The considerations for adoption of the aggregate approach as to the sale of the share of a partner in a partnership

13.  As said, my opinion is that in the matter we are dealing with the aggregate theory, which taxes a partner in accordance with his relative share in each of the partnership assets, is to be adopted.  The central rationale which supports the conclusion I reached, is the rationale which is at the basis of section 63 of the Ordinance.  From this section it can be learned that the Israeli legislator is of the opinion that the partnership resembles more closely a business run by a private individual than a business run by an association such as a corporation.  In my view this rationale must guide us even in determining the question which is at the center of our matter.  In addition to what has been said, there are two additional rationales which strengthen my said conclusion.  The one, a determination according to which it is a matter of the sale of an interest in an asset, will lead to a blurring between capital assets and earned assets, and will lead to distortions and unwanted results.  The second, the Ordinance, in its present formula, is not set up to absorb such a determination.  Its absorption may lead in its wake to severe implementation problems due to the lack of adjustment provisions in the Ordinance for capital gains taxation of the special asset of ‘an interest in partnership’.

A. The rationale at the basis of section 63

14.  I  join the position of my colleague Justice Englard that in our matter there is no relevance to the question whether the partnership is a legal personality or not (and this in contrast with the view of Y. Ne’eman in said article, which bases the substance of the problem on the existence of the separate legal personality of the partnership).  The question is as my colleague defined it, how do the tax laws view the business of a partnership.  If we want to simplify it, the question which must be determined is, whether in terms of the tax laws, a partnership more closely resembles a limited liability corporation or a private business.

Section 63 points clearly to the fact that at least, from the perspective of the ‘incomes’ of the partnership, the tax legislator views the partnership as a private business in the hands of several individuals and not as a separate entity such as a limited liability corporation.  Indeed, this section, on its own, is not sufficient to provide a clear and final answer to the question before us.  However, as mentioned above, section 63 can also serve as a guide for the direction of the tax legislator on the topic of taxation of transfer of the share of a partner in a partnership.  In taxation of a partnership, the taxable income is of each of the partners who owes taxes for his profits in the partnership and not of the partnership.  The emphasis is on the partner as an individual.  In this vein it can also be said that as to the matter of determining the capital gains which apply to each partner, he is to be regarded as any other individual and the capital gains tax which apply to him are to be calculated, under the assumption that he is an individual with interests in each of the assets of the partnership, which he transferred to the purchaser of the interests.  My view is, that as to the sale of the share of the partner in the partnership, there is no good reason to deviate from said direction of the legislator as it is reflected by section 63.

15.  My colleague, Justice Englard, is of the view that in our matter we are to adopt the entity theory and accordingly to tax the interest of a partner in a partnership that is transferred to another with capital gains tax.  In this context he mentions that section 63 does not directly address the question that arises in this case.  In addition he notes that there are a line of provisions in the Ordinance which conceive of the partnership, explicitly or implicitly, as a separate business unit.  So too, my friend explains that there is case law which determines that the law of the partnership is as the law of a separate business.

As said, I agree with the view of Justice Englard according to which section 63 itself does not provide a direct answer to the case we are dealing with.  However, it is to be reiterated that section 63 is the only section in the Ordinance which deals with partnership taxation and it can point in the direction of the aggregate theory.

As for the other sections which point, according to the view of my colleague, to a different approach, my view is that they cannot serve as a reference for such an approach.  The provision of section 63(a)(2) to which my colleague refers, is merely a technical provision.  My colleague wishes to conclude, from the provisions of sections 63(b), 131(a)(5) combined with 131(c) and (d) and 224(a) of the Ordinance, which in part exclude the partnership from their application, that from this it can be inferred, ostensibly, that the rest of the provisions which apply to an association of persons also apply to a partnership.  In my opinion, we cannot learn from these provisions to our matter.  The provisions, primarily deal with technical matters and not the question of tax liability.  And even if it can be concluded from them that the partnership is an association of persons, the significance of this is not that it is a matter of an association of persons of a corporation type to which the laws which apply to a corporation apply.

As for the case law which Justice Englard brings in support of his position, it is to be emphasized that this case law amounts to a single judgment (ITA 118/90 Lev Hagalil Partnership v. Income Tax Assessor, Tiberias [14]) which is not from the study halls of this court.  In this, I do not wish to express an opinion as to said judgment on its merits in itself, as it is not up for discussion before us.  I will only clarify that that judgment focused on a specific determination and not a general one, according to which a partnership is an ‘association of persons’ as to section 181B of the Ordinance and therefore it was determined in it that that section applies to the partnership.  This construction was done using careful language and with the awareness that this is not an easy determination and that it needs to be reconciled with the provisions of section 63 of the Ordinance.  I would like to reiterate that the accepted approach in Israeli case law as to taxation of partnership, an approach which has existed for some time, consistently and unequivocally follows the aggregate approach.

16.  The direction of the legislator, as it is reflected in section 63 of the Ordinance, is also supported by the provisions of the general law, from which one can learn that one can find a broader common denominator between a partnership and the business of a private person than between a partnership and a corporation.  A limited liability company is a very sophisticated legal personality.  According to section 4 of the Corporations Law 5759-1999:

‘A corporation is a legal personality with the capacity for any right, duty and operation which is consistent with its character and nature as an associated body.’

This section emphasizes that a corporation has the legal capacity which comes very close in degree to the legal capacity of a person made of flesh and blood.  The independent entity of a limited liability corporation has powerful expression in that there is a clear-cut and impassable partition (apart from the exceptional cases of lifting of the veil) between its creditors and its shareholders.  Moreover, even in the inner circle, between it and its shareholders, the latter do not owe the corporation anything apart from the capital they committed to invest in it (the principle of limitation of liability).  The situation of partners in a partnership is different.  According to section 20 of the Partnership Ordinance [New Version], 5735-1975 (hereinafter: ‘the Partnership Ordinance’) every partner is liable, jointly with the other partners and severally, for all the liabilities that the partnership is liable for.  Indeed, according to section 20(b), an enforcement order will first be issued against the partnership and only in the situations listed in the section will be issued against a partner.  However, the principle by which first one turns to the partnership and only later to the partners, does not dull the distinction between the status of partners and the status of shareholders in a company.  In the inner circle, among the partners and the partnership, section 34(1) establishes that every partner is liable for covering the losses of the partnership at a rate proportional to the capital sum that he agreed to sign to.  Here too, the distinction between a partnership and a corporation is clear.  As said above, a shareholder in a limited liability corporation does not owe it anything beyond the capital that he committed to invest in it.  On the other hand, the liability of the partner for the losses of the partnership is not static, but it stands in direct relation to the amount of the loss and to the proportion of his share in the partnership.  In summary, even if we assume that some of the characteristics of the partnership  grant it the status of an entity within the legal world, there is a great distance between this status and the status that is granted to a limited liability company.

17.  On the other hand, the partnership is close in essence to a business run by an individual.  The real distinction between it and a sole proprietorship is that the partnership is managed by several persons.  Indeed, for considerations of efficiency the Partnership Ordinance grants the partnership certain capacities that are not granted to an individual managing a business.  While the sole proprietor does not have an entity separate from the individual himself, a registered partnership has the capacity to sue and be sued  (section 66(a) of the Partnership Ordinance).  So too, the partnership, as distinct from each of the partners separately, holds the partnership assets (section 31 of the Partnership Ordinance).  These capacities enable efficient management of a business which is managed collectively by a number of owners.  It is easy to understand the discomfort that would be caused, for example, if it was necessary to register the partnership assets in the names of the partners themselves.  In such a case, whenever there would be a change in the composition of the partnership the immediate need would arise to change the registration of the ownership of assets which require registration.  As said, these capacities were granted to the partnership so that the partnership business could be managed more efficiently.  However, they do not create a substantive distinction between a private business and a partnership like the one that exists between a partnership and a limited liability corporation (for additional considerations see Y. M. Edri and Y. Eden in said article [29] p. 317).

18.  My colleague, Justice Englard, presents a different position.  In his view, an interest in an ‘active business’ of a partnership is similar, at its core, to the concept of a share in a business corporation, as in the two cases it is a matter of a unique economic entity that is separated from those holding it.  In that, in his view, a partnership is distinguished from a business run by an individual, as to whom it is difficult to separate between his private assets and liabilities and those of his business.  My colleague Justice Englard further adds that imposing a tax only on the tangible assets from the ‘active business’ of this entity, does not reconcile with the economic reality.

From an economic standpoint, there is great logic in the position of my colleague, according to which a one is to examine a business in an overall and coherent manner, as a ‘going concern’, and not to split it artificially to its various components.  There is therefore much rationale behind the claim that in terms of the economic reality, there is a similarity between the taxation of the sale of the shares of a shareholder in a corporation and taxation of the sale of the share of a partner in a partnership.  But similar economic logic applies as to a ‘going concern’ managed by an individual.  Also as to the sale of a business of a private individual, as opposed to  his other private assets, there is logic  in determining the value of the sold interest in accordance with the value of the sold business as a whole business unit and not as a sale of each of the assets included in it separately.  Indeed, a situation in which an individual sells his business, is very similar to a situation in which two partners sell their interests in the partnership business.  For example, Reuven manages a photo developing business.  Shimon and Levi also manage a similar photo developing business but they manage it as a partnership, Reuven, Shimon and Levi decide to retire and sell their business – Reuven  sells his interests in his business while Shimon and Levi sell the interests in their joint business.  Is there a real rationale for a distinction, in terms of the tax laws, between the manner of determining the liability in capital gains tax between Reuven and Shimon and Levi?  In the case of Reuven as the sole owner of the business, it is a matter of a live and active business which can be related to separately from its owners.  The entire difference between a partnership and such a business is in the number of people managing it.  Ostensibly, there is no real reason to claim that the fact that a number of people manage a business and not an individual constitutes an appropriate criteria which justifies a distinction in the manner of taxation between the two cases.

19.  My colleague, Justice Englard seeks to distinguish between his approach as to transfer of an ‘interest in a partnership’ and adoption of the ‘going concern’ approach also as to a sole proprietorship.  He suggests a distinction which focuses on the likelihood of blending of assets.  According to his approach, it is difficult to distinguish for an individual between private assets and business assets.  On the other hand, in a partnership, due to the conflict of interest between the partners, identification of the business assets is easier.  This distinction between a partnership and the sole proprietorship, is difficult in my view.  Blending of assets is a factual matter.  In fact, it is possible that there is a business managed by an individual in which the distinction between the business and the other personal affairs and accounts of the business owner is meticulously maintained, and there may be a partnership where the line of separation between the partnership business and the private affairs of the partners is not maintained.  In any event, in a corporation, blending of assets is a cause for retroactive ‘lifting of the veil’, to the extent that it is proven that such blending occurred.  If we apply these grounds to our matter, with the necessary changes, as of course there is not any veil partitioning between a person and his business, then the situation of blending of assets justifies that the business of an individual not be considered a separate business unit for tax purposes, however, it does not justify a distinction, to begin with, between the manner of taxation of a partnership and the manner of taxation of a sole proprietorship.

20.  To summarize what has been stated in paragraphs 14-19 above, it can be said that the approach of the legislator of the Ordinance, as reflected in its section 63, is to see the interests of the partner in the partnership as similar to the interests of a private individual in his business.  As I have sought to show, indeed there are lines of similarity between the interest of an individual in his business and the interest of a partner in the business he shares with others, a similarity on which a similar treatment of the tax laws in the two cases is based.  From hence the conclusion, that when a partner transfers his interests in a partnership, he is similar to an individual who transfers an interest in his business, and will be viewed as transferring his interest in each of the assets of the partnership business.  The ‘going concern’ or ‘active business’ approach, which my colleague Justice Englard seeks to apply, as to transfer of interests in a partnership – without my expressing an opinion as to whether it constitutes the lex ferenda – if examined, ought to also be examined as to the transfer of the business of an individual who manages his business separately from his other private matters.

In any event, be the lex ferenda what it may, in its current version the Income Tax Ordinance is not laid out for such a radical change without causing damage to the fundamental principles on which it is founded.  It is proper, therefore, that the initiative for the revolution in tax laws which apply to a partnership and those who are partners in it, as my colleague suggests, and to the extent that it should be so, come from the legislator.  It is to be presumed that in the event of such a change in the law, the legislator will ensure a comprehensive and coherent arrangement which will properly address all the consequences which stem from this.  It is not proper that a change of such magnitude, will be the product of case law, as there is a real concern, as will still be clarified below, that it will leave in its wake more questions and queries than those it seeks to resolve.

B. Harm to the distinction between regular income and capital income

21.  The Income Tax Ordinance, similar to additional legal systems, distinguishes between the taxation of regular income and the taxation of capital gains.  Indeed, the general tendency existing in many countries as well as in Israel, is to bring together the two taxation regimes, and today the tax rates which apply to regular income and to capital gain are even identical.  However, the tax regimes have not been completely united and the difference between taxation of capital gain and taxation of regular income still stands in several ways, some of which I will mention below.  First, the international rules of taxation of regular income differ from the international rules of taxation of capital gain (see for example sections 2,5,89(b) of the Ordinance).  While the application of the personal tie is very broad in the taxation of capital gains (sections 89(b)(1) of the Ordinance) it is very limited in the taxation of regular income.  Second, while there is no arrangement which enables the spreading out of regular income, as the legislator was aware of the fact that the capital gain was accumulated over a number of years and not only at the date of implementation, and therefore established a spreading out arrangement in section 91(e) of the Ordinance, which enables spread of the capital gains up to a period no longer than four tax years or the period of ownership of the asset, whichever is shorter.  Third, the laws for deduction of regular expenses are different from the laws of deduction of capital expenses.  While regular expenses are deductible to the extent that they were expended in the generation of the income of the taxpayer (section 17 of the Ordinance) capital expenses are not deductible.  Fourth, while it is not possible to deduct depreciation of earned income , it is possible to deduct depreciation of depreciable capital assets.  Fifth, the laws of offset of regular losses are different from the laws of offset of capital losses (see:  sections 28, 92 of the Ordinance).

22.  Taxation of the sale of a share in a partnership as the sale of an overall interest in a partnership as an asset, ignores the character and classification of the assets in the partnership’s ownership and taxes all these assets as though they were capital assets which influence the value of the overall interest being sold.  As long as the distinction between taxation of regular income and taxation of a capital asset stands as is, it is not appropriate to blur the borders between the two types of incomes.  Such blurring may incentivize evasion of tax, and lead to unreasonable consequences.

My colleague Justice Englard, does not see any difficulty in this.  In his view, just as a share, which aggregates within it capital and earned assets, is taxed as capital so too the interest in a partnership.  According to his view the aggregate approach specifically may create difficulties, as it requires the application of different laws on different assets within the partnership.

According to my view, there is no doubt that blurring of the realms between earned and capital income which stems from applying capital taxation on the transfer of an interest in a partnership will drag unwanted consequences after it, among them consequence of tax evasion.  To this the situation that existed in the United States following the approach of the case law there to tax the transfer of an interest in a partnership with capital taxation serves as a thousand witnesses.  This is the place to emphasize that the tax reductions which are caused as a result of the blurring of the boundaries between earned and capital income constitute tax reductions which result from a judicial determination, namely from the determination (as in my colleague’s version) according to which an overall interest in a share in the partnership is transferred.  Therefore, it is ostensibly a matter of tax reductions which were done lawfully and which cannot be dealt with via anti-planning norms.  The result is unsatisfactory in two senses.  Not only is it a matter of a tax reduction that will hold from a legal standpoint, but it is a matter of a tax reduction that is the product of the Court’s case law.

I also do not share my colleague’s position, that the aggregate theory creates a difficulty in light of its distinction between capital and earned taxation.  The aggregate theory, is a simple approach which is aligned with the existing solutions and existing laws and applies them as they are on the sale of assets in the process of sale of an interest in a partnership.  There is no need, in its framework to invent new solutions and no difficulty arises in implementing solutions.  All that is needed is to apply the regular law to each and every asset.  Just as the law will apply to an individual business owner, so too it will apply to a partner in a partnership as to his share in the partnership assets.  As to the ‘difficulty’ which my colleague Justice Englard mentions with the aggregate theory according to which it leads to application of the international taxation tie on only some of the assets and not on all the assets, there is no difficulty in this.  It is natural that in the sale of assets of various types different laws apply.  More than once it will occur that capital and earned assets are sold, and on each type different laws apply, including the laws of international taxation as to the taxation tie which justifies taxation.

23.  My position that the approach of my colleague will lead to a blurring of boundaries between earned and capital incomes can be exemplified in the following way.  Take a case where the taxable income of a partnership all of whose assets are current assets, was, during each of its three years of operation, negligible.  In the fourth year the partnership earned a profit.  At the end of the fourth year the partner, who has no additional income beyond the partnership, sells his share in it.  According to the approach which sees in this sale the sale of an interest in an asset, then the partner is entitled to demand the spread of the profit that he earned from the sale over a period which is not to exceed four years, and thereby significantly reduce the effective tax he bears, in light of the fact that he had no income in the past years.  It is clear that the profit was not earned over the years, but it stemmed from the partnership business over the last year, which increased the value of his interest in the partnership.  This unwanted consequence stems from the application of section 91(e) of the Ordinance which is suited to ‘natural’ capital assets for a sale that by its nature and character is not a capital sale.  In earned assets the ‘compression effect’ that the spreading out arrangement comes to overcome does not exist (See D. Glicksberg ‘Averaging Property Betterment and Spread of Capital Gains’ [30] at 371). 

My colleague Justice Englard takes issue with this example, saying that the reasons which justify the spread of the profit over four years with capital assets are also valid as to an interest in a partnership.  So too, he comments that in many cases, the presumption at the foundation of the arrangement of spread of the profits, according to which there is an even yearly growth in the value of the capital asset in a manner that justifies attribution of equal parts to the tax years in the spread period, does not match the reality.  My view is different.  When it is a matter of natural capital assets, the match between the presumption at the foundation of the arrangement of spread of capital gain and reality is great and therefore, in this context, the presumption is reasonable.  On the other hand, with an asset of a ‘partnership interest’ the degree of matching between this presumption and the reality is minimal and therefore is not reasonable.  Moreover, and this is the main point, my colleague’s approach grants the taxpayer the possibility of controlling the substance of the transferred (this in total contrast with the existing situation as to natural capital assets).  If the taxpayer wishes, he will transfer his share in one unit as a ‘partnership interest’ including undistributed profits, and will be taxed on this in an overall manner as capital gain.  In this last way, he has the choice to turn an earned asset into a capital asset.  This choice, which may benefit the taxpayer, is of course not given to the taxpayer where it is a matter of natural capital assets.  It turns out, therefore, that according to the approach of my colleague an unwanted opening was created for tax evasion.

It should be mentioned that the consideration of blurring of the boundaries between taxation of capital income and earned income, was one of the main considerations that drove the American legislator to establish section 751 (quoted above) in a law, alongside a provision which recognizes the sale of a share of a partner in a partnership as the sale of an interest in a partnership.   Establishing a legal rule according to which the sale of a share in a partnership is the sale of an interest taxed as a capital gain, will lead to the problematic reality that existed in the United States prior to the statutory arrangement that came to address it.

24.  It will be noted that the case that I mentioned above serves only as an example of the unwanted consequences as a result of the fact that due to the sale of a ‘partnership interest’ there has resulted a blurring in the distinction between capital income and regular income.  There are additional examples of this.  Such blurring could lead to unwanted consequences in terms of tax laws, in light of the difference between the provisions in the Income Tax Ordinance as to taxation of regular income and the provisions as to the taxation of capital gain, some of which I discussed in paragraph 21 above.

C. Implementation problems

25.  A ‘partnership interest’ is a special asset.  This asset has characteristics that are not characteristics of ‘natural’ capital assets.  The asset changes from time to time, in accordance with the change in the assets which make it up.  Its value changes in accordance with these changes.  Its value also changes in accordance with the economic results of the partnership business.  Applying section E of the Ordinance, that deals with the taxation of capital gains which grow from the sale of a capital assets, on a ‘partnership interest’ raises significant difficulties.  Section E is designated for dealing with ‘natural’ capital assets.  Its provisions are adjusted to such assets.  It is not built for dealing with capital assets of the ‘partnership interest’ type.  Applying its provision on a ‘partnership interest’ will encounter substantial difficulties.

26.  In order to understand these difficulties, it is appropriate to explain the way in which the Ordinance taxes capital gains.  Section 91 imposes a capital gains tax on the actual capital gains that the taxpayer gained, at the same rates as his regular income, when the capital gains is regarded as income at the highest level in the ladder of his existing income.  The Ordinance establishes a number of definitions and formulas for calculating the actual capital.  Put simply, the actual capital gain is the actual rise (after neutralizing the effects of inflation) in the value of the capital asset from the date of its purchase until the date of its sale.  In the terminology and technical definitions of the Ordinance ‘actual capital gain’ is defined in section 88 as the ‘amount by which the consideration is greater than the balance of the original price’.  The ‘inflationary amount’ is defined as ‘(1) the part of the capital gain which is equal to the amount by which the balance of the adjusted original price is greater than the balance of the original price. . .’  From hence, that in order to calculate the actual capital gain, we need the definitions of ‘the balance of the original price’ and ‘the balance of the adjusted original price’ and of ‘the consideration’.  These terms are defined in section 88 of the Ordinance as follows:

The balance of the original price’ – the original price of the asset after the deduction of depreciation amounts;

‘The balance of the adjusted original price’– the balance of the original price . . .  multiplied by the index on the day of the sale divided by the index on the day of the purchase . . .;

‘consideration’ – the price that is to be anticipated from the sale of the asset by a willing seller to a willing buyer when the asset is free of any encumbrance which comes to guarantee a debt, a mortgage or other right which is intended to guarantee payment;. . .’

‘The original price’ is defined in section 88 as follows:

‘’Original price’ –

(1) For an asset that is bought – the amount the that taxpayer spent for the purchase of that asset; (2) For an asset received in a barter – the consideration at the time of the barter;

. . .

(5) For an asset that the taxpayer created – the amount that the taxpayer spent for creating the asset.

(6) For an asset that reached the taxpayer in any other way – the amount that the taxpayer spent for the purchase of that asset;

And all with the addition of expenses spent by the taxpayer for improving the asset or holding it from the day of purchase until its sale, as long as they were not deducted in the past in calculating the taxable income of the taxpayer.

It is found, that in order to calculate the capital gains tax liability, the ‘balance of the original price’ is to be calculated and subtracted from the ‘consideration’ and thereby the ‘capital gain’ is reached.  The ‘balance of the original price’ is to be subtracted from the ‘balance of the adjusted original price’ and thereby the ‘inflation amount’ is reached.  The tax will be imposed on the ‘actual capital gain’, meaning, the difference between the capital gain and the ‘inflation amount’.  At the center of the calculations, is the value of the ‘original price’ when, as said, it not possible to calculate the capital gains tax liability without first calculating the ‘original price’ of the asset being sold.

27.  Applying said provisions to the sale of a ‘partnership interest’ entails many difficulties.  What, for example, is the ‘original price’ of the ‘partnership interest’?  Is it the amount that a partner invested when he joined the partnership or perhaps it is the accumulation of the ‘original prices’ of all the partnership assets?  What is the ‘balance of the original price’ of the ‘partnership interest’?  Can we say that it is the ‘original price’ of the interest deducting the depreciation on the interest, when it is difficult to view the ‘partnership interest’ as a depreciable asset?  Does it stem from this that depreciation and ‘balance of the original price’ of the partnership interest is identical to the ‘original price’?  Or perhaps we would say that ‘balance of the original price’ is the ‘balance of the original price’ for each and every partnership asset?  How will the adjustment for inflation be made and the balance of the adjusted original price be calculated?  These questions clarify the difficulty in applying Chapter E of the Ordinance on the ‘partnership interest’.  Such an application in fact is not possible without statutory intervention which will establish adjustment provisions which will enable application of Chapter E of the Ordinance on a partnership interest.

My colleague, Justice Englard, does not relate to all these questions, whose resolution is necessary in order to implement the provisions of Chapter E of the Ordinance on the transfer of a ‘partnership interest’.  However, he comments that calculation of the ‘original price’ of the partnership interest does not raise a special problem.  According to him, this is to be calculated similarly to the manner of calculation of the ‘original price’ of a share in a corporation.  I do not share the approach that this is necessarily the only or appropriate solution.  Usually, the original price of a share is the sum that was paid for its purchase or the market value of the share at the date of its purchase and changes that occurred in the corporation’s assets between the date of purchase and the date of sale do not influence the original price.  On the other hand, it is not at all clear that assets that a partner brought into a partnership during its lifetime do not influence the ‘original price’ of the partnership interest.  The opposite, it is very possible that it is appropriate that additional investments and assets that the partner invested in a partnership will influence the original price of the partnership interest.  Therefore, the determination is necessary as to the degree of effect of these additional investments by the partner and a determination as to the manner of its calculation.  The Income Tax Ordinance does not provide a clear cut answer to this.

28.  Generally, my colleague is of the view that the absence of adjustment provisions is not a determinative factor when a question of a fundamental character is in the mortar.  In his view ‘Were that special problems will arise with the acceptance of the proposed approach, then the hand of the legislator is poised to complete that which requires completion.’ (paragraph 41 of his judgment).  As said above, my view is, that the approach of my colleague will lead to a revolution in the area of tax law of partnerships, a revolution which the Income Tax Ordinance is not set up to deal with.  It will be emphasized, it is not a matter of a regular question of construction which the judge dealing with is meant to decide according to the various construction options open before it.  In its present formula, the Income Tax Ordinance lacks any provisions which enable applying capital taxation on the transfer of a ‘partnership interest’.  In order for the matter to be possible, ‘creative case law’ of the Court is needed, ab nihilo.  On the other hand, the aggregate approach which is reflected in section 63 of the Ordinance and the application of this approach does not raise, as previously mentioned, any vagueness.  I prefer the approach, according to which one must operate within the law which supplies satisfactory answers for its implementation, rather than the approach according to which the court will determine the general policy, the principle, in the topic of partnership taxation and thereby force the legislator to be dragged after it and complete what needs completion and repair that which needs repair.  As I clarified above, my view is that even if it is proper to change the existing situation relative to the taxation of a partnership – without establishing this – it is appropriate to leave to the legislator the task of shaping general policy as to taxation of a partnership in general and taxation of the transfer of the partnership interest in particular and to develop this policy in a detailed and comprehensive arrangement which will enable its implementation.  It is not appropriate in my view, that this court place a preference on one of the two paths in the matter of partnership taxation, with the knowledge that the legislator must come on its heels and disassemble the mines that it leaves in its wake.

29.  The difficulties in applying Chapter E on the ‘partnership interest’ in the present statutory situation, in which the adjustment provisions do not exist, can be exemplified with three examples.  The one, two partners who set up a partnership and each invest 100,000 NIS in it.  The partnership purchases a truck in the amount of 200,000 NIS.  During the course of the year the partnership accumulated an income of 100,000 NIS which was not distributed.  According to what was said in section 63 of the Ordinance, each partner will pay tax according to his share in the income (under the assumption that the average tax rate which applies to the taxpayer is 50%, his share in the income is 50,000 NIS).  If he sells his share in the partnership for the sum of 150,000 NIS, he will have a capital gain of 50,000 NIS (150,000-100,000).  The outcome is that he pays a double tax.  In light of what is said, the need is created for a provision which will adjust the ‘original price’ to the fact that the partnership incomes were not distributed and therefore the ‘original price’ is to be increased by the undistributed profit or the consideration is to be reduced at the same rate. (See Y. M. Edri and Y. Eden, Ibid, [29] at p. 322).  Such an adjustment provision, was established by the Israeli legislator in section 64a(a)(7) in regards to a ‘family corporation’.  Similar to a partnership in the taxation of a ‘family corporation’ as well there is an arrangement of lifting of the veil.  In order to avoid double taxation of the members of the corporation, upon the sale of their shares in the corporation section 64a(a)(7) establishes that:

‘In the sale of a share of a family corporation an amount equal to the part of the sum of the profits that accumulated in the corporation during the period of the benefit and it did not distribute, as per the part of the share in the rights to corporations profits, will be subtracted from the consideration, in the matter of section 88 both as to the seller and as to the buyer.’

Such adjustment as said is also established in American law, which as said, taxes the sale of a share in a partnership as the capital sale of the interest in the partnership.  Section 1001, which is found in Chapter O of the IRC, which deals with calculation of the profit for the sale of the capital assets, establishes that the profit or loss is the amount realized over the adjusted basis.  The chapter contains provisions for calculation of the adjusted basis, in addition to provisions which impact its calculation, which are spread in the various chapters including chapter K.  Section 705, which is found in Chapter K, deals with calculation of the adjusted basis of the interest of the partner in the partnership.  The section adds to the adjusted basis the share of the partner in the partnership incomes, in order to avoid the double taxation which we pointed out above.  A similar adjustment provision is absent from the Ordinance as to the taxation of the transfer of the share of a partner in a partnership.  In its absence, the taxation of a share in a partnership as an interest in a partnership will lead to an unwanted consequence of double taxation.

As to said example, my colleague Justice Englard responds that it would be possible to solve the problem that arises in light of the lack of an adjusting provision in our matter by way of the purposive interpretation of the law which will avoid double taxation.  It is appropriate to emphasize in relation to this, first that we are not dealing with the interpretation of an existing statutory provision but in creating an arrangement ex nihilo by this court.  Second, preventing the double taxation can be done under the circumstances in one of two ways – the one by increasing the ‘original price’ by undistributed profits; and the second, by reducing the consideration by the same rate.  Each of these ways may have a different impact on taxation in the future.  Which of the two ways should the Court undertake?  Is it not a matter for the legislator to regulate?

30.  A second example, exemplifying the implementation problems that will be created as a result of the determination that in transferring a share in a partnership an interest in a partnership is sold, is as follows.  The partnership spends 100,000 NIS that is not deductible.  The next day one of the partners sells his share in the partnership for 50,000 NIS.  Should we say that he had a capital loss of 50,000 NIS (150,000-100,000)?  It is clear that the answer to this is in the negative, as otherwise the selling partner will be able to deduct a non-deductible expense.  In actuality, this partner has not experienced a capital loss or a capital gain – he received his investment back at the same value.  In order to avoid the indirect deduction of the non-deductible expense, an adjusting provision is needed which will reduce from the ‘original price’ the expenses expended by the partnership and which are not deductible.  The adjusting provision which resolves this anomaly is found in section 705 of the IRC The section reduces from the adjusted basis the partner’s share in the partnership’s non-deductible expenses in order to prevent this indirect deduction.  Such a provision is necessary to the extent that the rule is adopted that the sale of an interest of a partner in a partnership is taxable with capital gains tax for the sale of the interest in the partnership.  But an adjusting provision of this type is absent from the Ordinance.  In its absence, the rule according to which the sale of a share in a partnership is like the sale of an interest in a partnership will lead to an unwanted result of indirect deduction of a non-deductible expense.

31.  A third example, three partners set up a partnership with an investment of 100,000 NIS each.  During the course of the tax year, the partnership received one intake in the amount of 90,000 NIS, which is not taxable, a gift or other intake which is tax exempt.  To the extent that later, the partner sells his interest in the partnership in the amount of 130,000 NIS, he will be taxed for the capital gain of 30,000 NIS.  We find that the partner was taxed for an intake that is not taxable.  In order to avoid this result, an adjusting provision is necessary which will increase the original price by the sum of the intakes which are taxable or are tax exempt, or which will reduce the consideration by the same rate.  Such a provision is found in section 705(a)(1)(b) of the American IRC.  The section increased the adjusted basis of the partner at the proportion of his share in the non taxable incomes of the partnership.  Such a provision does not exist in the Ordinance.  In its absence adoption of the rule, according to which the sale of the interest of the partner in the partnership is the sale of a capital gain of an interest in a partnership, will lead to the unwanted result of the taxation of a partner for non-taxable income.

My colleague Justice Englard is of the view that a tax exempt intake will not be taxed by force of the core principle which prohibits collection of a double tax.  In this subject, first, it is not necessary, as a one and only solution, that a tax exempt intake, which turns to a partnership asset and is included in its assets, will not be taken into account in determining a capital gain with the sale of an interest in a partnership.  Second, even if it is a matter of a double tax, I will turn to what is said in the latter part of paragraph 29 which is appropriate, with the necessary changes, in our matter as well.

32.  These examples, of course do not exhaust the spectrum of unwanted results which may result from adoption of said rule lacking suitable adjustment provisions.  They exemplify, that in its present state, Chapter E of the Ordinance is not adapted to the taxation of the special asset of a ‘partnership interest’.  Indeed I clarified above that in those legal systems which chose to adopt a rule according to which the sale of a share in a partnership is to be taxed as the sale of an interest in a partnership, such as the American and Canadian legal systems, the relevant tax law includes clear provisions which adjust the taxation arrangement which applies with taxation of capital gains to the special asset of an interest in a partnership.

My colleague, Justice Englard notes that in particular the American experience is counter evidence to the claim that imposing liability on the transfer of a share in a partnership as an interest in a partnership is not implementable absent specific adjusting provisions.  He reminds in this context, that the case law took this step, without waiting for a detailed statutory arrangement.  As I noted above, comparative law enables us to learn from the experience of others and to avoid problematic situations they got into.  Indeed, in the United States the case law preceded the statutory arrangement.  However, as I detailed above, this fact created difficulties which required statutory intervention.  From this experience one can learn that even if according to one view or another the lex ferenda is to tax transfer of a share in a partnership as the transfer of an interest in a partnership – without expressing an opinion that it is so – the right way is to direct a recommendation to the legislator to anchor a full and coherent statutory arrangement in this vein.  This is not to be done by way of case law which does not suit the practiced legal provisions.

Conclusion

33.  The dispute as to the appropriate way to tax the transfer of the share of a partner in a partnership is legitimate.  In this complex matter there are views in one direction and another.  Different legal systems take different approaches.  As I sought to show, Israeli law chose to impose a tax in such a case for the transfer of a share of the partner in each of the partnership assets and not for the transfer of a ‘partnership interest’.  The principle which arises from section 63 of the Ordinance, the provisions as to the distinction between a regular income and a capital income, and the statutory provisions which establish the way to taxation of capital gains – all these point clearly in this direction.  This was also the practice until now.  In my view, this situation is not to be changed other than by the explicit word of the legislator.

34.  If my view were to be heard, the appeal would be granted, the judgment of the District Court would be overturned, and the decision of the appellant the subject of the appeal to the District Court would be upheld.  So too, I would impose on the respondents the appellant’s costs in both courts, in the amount of 25,000 NIS.

President A. Barak

I join the opinion of my colleague Justice Or.  I accept his rationales.  I seek to draw the attention of the legislator to the matter before us.  It is appropriate for it to be regulated – whether by adoption of my colleague Justice Englard’s model, or by adoption of my colleague Justice Or’s model or by the adoption of a third model – by a comprehensive and thorough act of legislation.

It was decided by a majority of opinions as per the opinion of Justice Englard.

27 Iyar 5761

20 May 2001

CA 6726/05

and Cross-Appeal

Hydrola Ltd.

v.

Income Tax Assessor Tel Aviv 1

The Supreme Court sitting as the Court of Civil Appeals

 [5 June 2008]

Before Justices E. Rubinstein, E. Hayut, Y. Elon

Appeal and Cross-Appeal of the decision of the Tel Aviv District Court (Judge Bracha Ofir-Tom) on May 31 2005 in ITA 1068/00.

Israeli Legislation cited:

Bank of Israel Law, 5714-1954.

Court Regulations (Appeals Regarding Income Tax) 5739-1978, r. 10(b).

Currency Supervision and Trade with Enemy States Law.

Income Tax Ordinance ss. 17, 30-33, 32(12)-(13), 145(a)(2)(b), 152(b), 170.

National Insurance Law [Consolidated Version], 5728-1968, s. 179.

Penal Law, 5737-1977, ss. 7(b), 34, 290.

Wireless Telegraph Ordinance [New Version] 5732-1972.

American legislation cited:

15 U.S.C §§ 78m, 78dd-1 (1988).

Foreign Corrupt Practices Act (FCPA), 15 U.S.C §§ 78m, 78dd-1, 78dd-2, 78ff (1977).

H.R. REP. No. 640, 95th Cong., 1st Sess. (1977).

Internal Revenue Code, 26 U.S.C § 162(c)(1) (1958).

French legislation cited:

Loi de finances rectificative pour 1997 (Amending Law on Finances for 1997), Law No. 97-1239 of Dec. 29, 1997, J. O no. 302 Dec. 30, 1997, p. 19101; Code général des impost, article 39, 2 bis.

International conventions cited:

Convention on Combating Bribery of Foreign Public Officials in International Business Transactions (Nov. 21 1997, 37 I. L. M 1 (1997).

United Nations Convention Against Corruption, Articles 12(4), 15 and 16.

Swiss legislation cited:

Bundesgesetz über die direkte Bundessteuer (DBG), (Law on Direct Federal Tax), 642.11 RS, Dec. 14 1990, Abs. 27, 59 (1990).

Bundesgesetz über die Harmonisierung der direkten Steuern der Kantone und Gemeinden (StHG), (Law on the Harmonization of Direct Tax), Dec. 14 1990, Abs. 10, 25 (1990).

Israeli Supreme Court cases cited:

[1]                           FH 22/61 HaOleh Loan Fund, Mutual Society Ltd. and HaPoel HaMizrahi Credit Fund, Mutual Society Ltd. v. Tax Assessor for Large Enterprises, Tel Aviv [1963] IsrSC 17, 533.

[2]                           CA 507-508/59 Credit Fund v. Loan Fund [1961] IsrSC 15, 2213.

[3]                           CA 380/75 Pardes Cooperative Association of Citrus Growers Ltd. v. Tax Assessor for Large Enterprises [1976] IsrSC 30(2) 312.

[4]                           CA 438/90 Tax Assessor Haifa v. Hed HaKrayot Ltd [1997] IsrSC 41(5) 668.

[5]           CA 661/88 Haimov v. Hamid et al. [2000] IsrSC 44(1) 75, 84.

[6]           HCJ 693/91 Efrat v. Population Registry Commissioner at the Ministry of the Interior [1993] IsrSC 47(1) 749, 779.

[7]           CrimA 2521/03 Sirkis v. State of Israel [2003] IsrSC 57(6) 337, 346.

[8]           CA 294/94 Jewish Burial Society v. Kestenbaum [1992] IsrSC 46(2) 464, 534.

[9]           CA 5258/98 A. v. B. [2004] IsrSC 58(6), 209, 222.

[10]         CrimA 7646/07 Cohen v. State of Israel (2007) (unreported).

[11]         LCA 8253/99 A. v. B. [2003] IsrSC 58(2) 213, 228.

[12]         HCJ 5413/07 Anon. v. State of Israel (2007) (unreported).

[13]         CA 522/63 Beit Zakai Ltd. v. Tax Assessor [1964] IsrSC 18(2) 548, 551.

[14]         CA 6416/01 Benvenisti v. Official Receiver [2003] IsrSC 57(4) 197, 206.

[15]         CA 3498/94 A. v. B. [1996] IsrSC 50(3) 133, 153.

[16]         CA 578/75 Ben-Tal v. Ben-Tal [1976] IsrSC 31(1) 57.

[17]         FCrimH 2980/04 Evico v. State of Israel (2003) (unreported).

[18]         CrimA 163/82 Moshe David v. State of Israel [1983] IsrSC 37(1) 622.

[19]         HCJ 4562/94 Abu Daka v. Lod Military Court [1994] IsrSC 48(4) 742, 748.

[20]         CrimA 2597/04 Roitman v. State of Israel (20040 (unreported).

[21]         LCA 1436/90 Giora Arad, Investment Management and Services Co. Ltd. v. Director of Value Added Tax  [1992] IsrSC 46(5) 101.

[22]         CrimA 8573/96 Mercado v. State of Israel [1997]  IsrSC 51(5) 481.

[23]         LCrimA 5905/98 Ronen v. State of Israel [1999] IsrSC 53(1) 728.

[24]         CrimA 733/07 Cohen v. State of Israel (2007) (unreported).

[25]         CSA 1/77 Klein v. State of Israel [1977] IsrSC 31(2) 164.

[26]         CrimA 5046/93 State of Israel v. Hochman [1996] IsrSC 50(1) 2.

[27]         HCJ 368/76 Gozlan v. Beit Shemesh Local Council [1976] IsrSC 31(1), 505.

[28]         CA 6585/95 M.G.U.R.  v. Municipality of Nesher [1996] IsrSC 50(4) 206.

[29]         FH 22/82 Beit Jules Ltd. v. Raviv Moshe and Assoc. Ltd. [1989] IsrSC 43(1) 441.

[30]         CrimA 7068/06 State of Israel v. Ariel Electrical Engineering Traffic Lights and Maintenance Ltd. (2006) (unreported).

[31]         CrimA 71/83 Flatto-Sharon v. State of Israel [1984] IsrSC 38(2) 757.

[32]         CrimA 355/88 Levi v. State of Israel [1989] IsrSC 43(3), 221.

[33]         CrimA 389/72 Zokaim v. State of Israel [1973]  IsrSC 27(2) 487.

[34]         CrimA 341/73 State of Israel v. Vita [1973] IsrSC 27(2) 610.

[35]         CrimA 126/76 State of Israel v. Shefer [1976] IsrSC 30(3) 466.

[36]         CA 101/74 Hiram Landau Road Construction and Development Works Ltd. v. Water Sources Development (Foreign Countries) Ltd [1976] IsrSC 30(3) 661.

[37]         CrimA 4596/05 Rosenstein v. State of Israel (2005) (unreported).

[38]         LCA 10231/04 Traum v. Gaidamak (2004) (unreported).

[39]         CrimA 4722/92 Markowitz v. State of Israel [1993] IsrSC 47(2) 45.

[40]         CA 1527/97 Interbuilding Construction Company Ltd. v. Tax Assessor Tel Aviv 1 [1999] IsrSC 53(1) 699.

[41]         CA 4030/03 Granot Enterprises – Central Agricultural Cooperative Ltd. v. Tax Assessor for Large Enterprises (2003) (unreported).

[42]         CA 900/01 Keles v. Tax Assessor Tel Aviv 4 [2003] IsrSC 57(3) 750.

[43]         CrimA 256/97 Lachman v. State of Israel (1997) (unreported).

[44]         CA 486/01 Hoter-Yishai v. Tax Assessor Tel Aviv 4 [2004] IsrSC 58(5) 326.

[45]         CA 1124/03 Ganei Ofer Construction and Investment Ltd. v. Tax Assessor Tel Aviv 1 [2005] IsrSC 59(5) 313.

[46]         CA 435/65 Nagid, Trustee Businesses Ltd. v. Income Tax Commissioner [1966] IsrSC 20(3) 287.

[47]         CA 647/79 Ivun v. Tax Assessor for Special Collections [1981] IsrSC 35(4) 645.

[48]         CA 274/84 Shapiro and Shweitzer v. Income Tax Assessor Tel Aviv 2 [1987] Taxes 2/a, 53.

[49]         CA 734/89 Pikanti Food Industries Ltd. v. Tax Assessor Gush Dan [1992] Taxes 6/f, 77.

[50]         CA 21/60 Levtov v. Tax Assessor Haifa [1960] IsrSC 14, 1606.

[51]         CA 506/71 Hafetz v. Tax Assessor Haifa [1972] IsrSC 27(1) 212.

[52]         CA 5709/95 Ben-Shlomo v. Director of VAT Jerusalem [1998] IsrSC 52(4) 241.

[53]         LCA 3476/04 Siman-Tov v. Gad (2004) (unreported).

Israeli District Court Cases Cited:

[54]         ITA (Jer) 54/84 El-Arabiya Hotels Ltd. v. Tax Assessor Jerusalem  [1987] Taxes 6/a, 63.

[55]         ITA (Haifa) 13/82 Frumkin v. Tax Assessor [1982] DC 5743(A) 410.

[56]         ITA (TA) 98/84 Frankel v. Tax Assessor Tel Aviv 1 [1985] DC 5745(C) 332.

[57]         ITA (Haifa) 40/95 Vered Recycling v. Tax Assessor Haifa [1996] Taxes J/3 172.

[58]         ITA (TA) 1143/01 Miller v. Tax Assessor Tel Aviv 3 [2006] Taxes K/2, 122.

[59]         ITA 5019/97 D. & D. Zra'im Ltd. v. Tax Assessor Haifa [2000] Taxes O/1, 131.

[60]         ITA 140/89 Dar v. Tax Assessor Haifa [1999] Taxes 4/D 116.

[61]         ITA 1015/03 Company Ltd. v. Tax Assessor Netanya (January 30, 2008).

[62]         OM (Jer) 2212/03 Gad v. Siman-Tov 920030(unreported).

United States Cases Cited:

[63]         Textile Mills Corp.‎ v.‎ Commissioner, 314 U.S.‎ 326 (1941).

[64]         Lilly v.‎ Commissioner, 343 U.S.‎ 90 (1952).

[65]         Camarano v.‎ United States, 358 U.S.‎ 498 (1959).

[66]         Bob Jones University v.‎ United States, Goldsboro Christian Schools, Inc.‎ v.‎ United States 103 S.‎ Ct.‎ 2017 (1983).

[67]         S.E.C. v. Lockheed Aircraft Corp., 1976 WL 779 (D. D. C. 1976).

Jewish Law sources cited:

[68]         Babylonian Talmud, Ketubot 17a.

[69]         Song of Songs Rabba 5:2.

[70]         Mishnah Hallah, 2:7.

[71]         Exodus 23:8.

[72]         Deuteronomy 16:19.

[73]         Shulhan Arukh, Hoshen Mishpat 9:1.

[74]         R. Zvi Hirsch Eisenstadt, Pithei Tshuva (Hoshen Mishpat 34:27).

[75]         R. Haim Yosef David Azulai, Birkei Yosef (Hoshen Mishpat 9:10).

[76]         R. Yehiel Michel HaLevi Epstein, Arukh Hashulhan (Hoshen Mishpat 9: 1).

[77]         Babylonian Talmud, Ketubot 105b.

[78]         Isaiah 1:23.

[79]         Ezekiel 22:12.

[80]         Babylonian Talmud, Sotah 47b.

[81]         Midrash Tanhuma (Warsaw Edition, Toldot, 8).

[82]         Book of Kings II 7:3.

[83]         Babylonian Talmud, Sanhedrin 107b.

[84]         Babylonian Talmud, Bava Kama 35a.

JUDGMENT

Justice E. Rubinstein

1.             This is an appeal and counter-appeal against the judgment of the Tel Aviv-Jaffa District Court (Judge Bracha Ofir-Tom) of May 31, 2005 in ITA 1068/00, in which the appellant’s appeal regarding its income tax assessment for the years 1992-1996 was partially allowed. The appeals are based on the appellant’s claim that the sums of money that it transferred to its agents outside Israel were expended to generate its income and the respondent must allow them to be deducted as expenses; the respondent argues, inter alia, that some of the expenses were illegal, in that they were for bribe payments.

Background

2.             (1) The appellant, Hydrola Ltd., engaged in various business activities in the states of the Former Soviet Union, primarily Russia; these activities included the sale of medical equipment and food products. Inter alia, the appellant was active there throughout the 1990s, after the Soviet Union was dismantled in 1991. Those were years of crisis and dramatic change in those states, due to the change of the political and economic regime; this historical background, it is claimed, is very relevant to our case and to the appellant’s mode of operation there.

(2) The appellant conducted its business through dealings with local agents; the nature of these dealings is described in the appellant’s statements of appeal and appendices, and in the testimony of the witnesses for the appellant, including the agents themselves, in the District Court. The appellant transferred significant sums of money to the agents, which were used both to pay the salaries of the agents themselves and for other purposes, including the transfer of sums of money to local bodies in order to promote the success of the deals, the exact significance of which we will address below. Due to the economic situation and the state of the banking system in the former Soviet states, so it is claimed, the agents opened bank accounts in Israeli banks in Israel, and some of them also gave the appellant’s managers powers of attorney to act as they saw fit. The payments designated for those agents were transferred to those accounts.

                (3) It will be noted, that for some of the payments to the agents, made prior to 1996, the respondent – at the appellant’s request – granted an exemption from deduction of tax at source, in accordance with s. 170 of the Income Tax Ordinance (hereinafter: "the Ordinance"), and we will address this below. The appellant also received permission from the Bank of Israel to send these sums abroad. The turning point came towards the end of 1996, when the respondent made the granting of a requested exemption – relating to a sum of $50,000 designated for one of the agents (Isaac Lipkin) – conditional on the presentation of an invoice for the aforesaid sum and an authorization from the income tax authorities in the agent’s country. The documents were not produced, and the respondent refused to grant the requested exemption. In 1997 it also denied an application for an exemption relating to a commission totaling $140,000 that the appellant was to pay to Cura Consulting Ltd. (hereinafter: "Cura") because the documents requested by the respondent relating to the transaction were not produced, and due to its suspicion that the connection between Cura and the appellant was not a genuine business connection. Following the denial of these exemptions, the appellant did not transfer the aforementioned sums to Lipkin and Cura, and in subsequent years the appellant’s payments to its agents in this manner ceased altogether (at least in 1997-1998 – as shown by the financial statements that the appellant submitted to the respondent).

3. The appellant subsequently requested that the aforementioned payments from the years 1992-1996 be recognized as expenses incurred in the generation of income.  The respondent refused the appellant’s request, and issued it with an assessment notice for those years in accordance with s. 145(a)(2)(b) of the Ordinance. In the explanation of the assessment, dated December 28, 1998, the reasons for not allowing deduction of the payments were given as follows: 

'(1) In the reports I did not allow the payments [to be considered expenses] because you did not provide the proper documentation proving that they were incurred in generating income.

(2) Alternatively, the ‘commission’ payments [quotation marks in original – E.R.] were illegal expenses that cannot be allowed.'

The appellant’s objections to the tax assessment were rejected, and another assessment notice was issued, in accordance with section 152(b) of the Ordinance, which repeated the original assessment.  Hence the appeal to the District Court.

The Deliberations in the District Court and the Judgment

4. (1) In its presentation of evidence before the District Court, the appellant's complex dealings and its business connections with its various agents were addressed down to the minutest detail. A recounting of all the details is not necessary here; as noted by the court in its judgment, the appellant’s manner of conducting its business in Russia, as emerges from the testimony, was questionable (p. 25 of the judgment). Of all that was said there, we will mention only a few details that are relevant to the appeal.  The appellant claims that the evidence it produced shows that payments were transferred to seven agents (excluding Lipkin and Cura: ultimately there was no claim that payments were made to these two). Four of these agents testified before the Court. The testimony of the appellant’s employees and its agents revealed that the appellant transferred large sums to its agents, which were designated, inter alia, to cover the costs of maintaining the equipment that was allegedly sold, and to pay the commissions of the agents themselves (i.e. their fees), at low rates relative to the large sums transferred. Most of the money, it seems, was transferred by these agents to various bodies, for what was defined as “transaction promotion” commissions, to which we will return later.

(2) It should be noted that the other three agents were not summoned to testify. The Court denied the appellant’s request to admit their depositions in place of testimony, due to the absence of any possibility of submitting them to cross-examination.

(3) In its judgment, the Court first ruled on the question of the burden of proof, which arose during the hearings. It ruled that with regard to recognition of expenses as deductible, the onus was on the appellant a priori, and that normally, relevant documentation and paperwork are required in order to fulfill this evidentiary requirement. Nevertheless, the court ruled that under the special circumstances that prevailed in the business environment in which the appellant was operating during that period, other forms of evidence were acceptable: 

'When dealing with a unique situation that is out of the ordinary, such as the one that prevailed in the business environment in which the appellant was operating in our case – a fact that has not been denied by the respondent – the appellant’s claim regarding its inability to produce the evidence required under normal circumstances must be taken seriously. The aforementioned difficulty, which has led to a lack of evidence, was sufficient, in my opinion, to justify allowing the requested expenses to be deducted, providing that these were proven by means of other forms of evidence, such as testimony before the court by trustworthy witnesses, whose credibility has not been called into question...

In our case, I heard about the extraordinary circumstances under which the appellant dealt with its clients in Russia from the Company’s director.... Those agents who appeared in Court also described it, and their testimony painted the same picture of chaos and confusion to which the director referred' (at pp. 16-17).

                (4) The Court therefore accepted the appellant’s appeal in a partial fashion, based on the testimony of the four agents who testified before it. As noted, the agents testified regarding the significant sums of money that the appellant transferred to them – even though their testimony was not totally consistent with the appellant’s reports – but the Court recognized only that portion of the money that was used, according to their testimony, to pay their fees. It was ruled that only these sums were proportionate to the value of the reported transactions, and that they (and they alone) were clearly used to generate the appellant’s income. Regarding the rest of the money, it was ruled that it was not proven that it had been expended in order to generate income, and therefore it should not be allowed. Furthermore, regarding the appellant’s other agents who had not appeared to testify (and whose depositions were not admitted, as noted), it was ruled that the expenses claimed in their regard had not been proven and should not be allowed. The appellant’s claim that their expenses should be allowed in light of the four testimonies that were heard, which indicated a recurring pattern or method of payment, was rejected.

(5) The expenses that the District Court recognized as allowable for deduction represented only a small fraction of what the appellant had requested.

(6) The court also addressed the question of the legality of the aforementioned expenses, and determined that some of the money had been used, according to the appellant’s director and the witnesses, to pay bribes (p. 28 of the judgment). Nevertheless, the court did not rule unequivocally on the question of recognition of expenses of questionable legality, referring to case-law whereby, on the one hand, expenses incurred in the context of breaking the law will not as a rule be recognized as deductible, whereas on the other hand, deduction of expenses of this kind will be allowed in certain circumstances. It was determined that in all events, in our case the bribery issue had not been sufficiently elucidated. This is a complex case involving an alleged violation of a foreign law; and nothing has been proven in this regard, and the Tax Assessor is not required to concern himself with its enforcement. We will return to this later, too.

The parties’ claims

5.               (1) An appeal and cross-appeal were filed on the District Court’s judgment. The appellant contends that the court erred in allowing the appeal only in relation to the commission payments that according to the agents' testimony, they had received as fees, arguing that the respondent should have allowed deduction of all of the commission expenses declared, particularly since it issued exemptions from deduction of tax at source in their regard. It is claimed that based on these authorizations, the appellant was entitled to assume that the payments would constitute recognized expenses, and that non-recognition constitutes a retroactive retraction, which causes disproportionate damage to the appellant’s property. It is further claimed that the respondent lacks the tools to make a sound assessment of the appellant’s income with regard to its expenditures in Russia.

                  (2) It also argues, from the procedural aspect, against the court’s decision not to admit the depositions of the three agents who did not appear to testify before it. According to the appellant, the provisions of r. 10(b) of the Court Regulations (Appeals on Matters of Income Tax) 5739-1978 (hereinafter: "the Regulations"), make admission of the depositions obligatory, since they were submitted as evidence to the respondent at its request.  It is further argued, in this regard, that the court should also have accepted the appellant’s claims because the agents’ testimonies and the depositions proved the payment of the commissions as a "modus operandi".

 (3) The cross-appellant, i.e. the respondent to the appeal (for the sake of convenience, hereinafter referred to as “the respondent”), claims that the District Court erred when it recognized the commission payments to a limited extent, as noted above. It claims, on the evidentiary level, that regarding all of the payments, including those payments that were determined to have been incurred for the agents’ fees, the appellant has neither demonstrated nor proved that they were incurred only to generate income. This, in the respondent’s opinion, is due to the lack of adequate documentation regarding the business relationships between the appellant and its agents and regarding the payments it made. It contends that the arguments regarding the inability to produce documentation due to the prevailing circumstances in Russia should be rejected in view of the arrival of the appellant’s agents in Israel during the said period, and that the allegedly abnormally high commissions – both in relation to the value of the transactions reported and in relation to the agents’ testimonies – are an indication of the evidentiary problem with accepting the appellant’s claims.

                                (4) The respondent further argues, on the normative plane, that even if the appellant satisfied the burden of proof standard, there would be no reason to recognize its expenses – including the agents’ fees – due to their illegal nature. It claims that there is a clear evidentiary basis for determining that the payments were bribe money. It is further argued that according to case-law and academic opinions, illegal expenses may not be deducted – and certainly not if they are tainted by criminality, as in the present case, according to the respondent. In this regard, the respondent cites the United Nations Convention Against Corruption (hereinafter: "the Convention Against Corruption"), although its signing post-dates the relevant period. Still, the respondent claims that it elucidates the legal situation that prevailed even prior to its signing.

                                (5) The appellant responded to this last point by claiming that the payments were commissions to its agents in Russia and not bribe money, and that in any case, the bribery allegations have not been proven. It also claims that even if it was proven that the payments were bribes, they are still not an illegal expenditure, since paying a bribe in Russia does not constitute a crime in Israel, and it has not been proven that under the circumstances it was even a crime in Russia, certainly not during the period relevant to the appeal.

Deliberations

6.             We will first address the appellant’s position that the respondent should have allowed deduction of the full amounts as expenses. The respondent, as noted, based his decision not to allow deduction of the expenses on two alternative reasons: the evidentiary reason – the failure to properly prove the expenses; and the normative reason – the illegality of the expenses. The lower Court partially accepted the respondent’s position for the evidentiary reason, and did not issue a clear ruling on the normative question, notwithstanding its determination that the expenses were used to pay bribes. I will say at the outset that as far as I am concerned, the appellant’s arguments should not be accepted and I am of the opinion that the evidentiary reason alone is sufficient to uphold the respondent’s position that the expenses claimed by the appellant should not be allowed as deductions, since they have not been properly proven. However, I think that the outcome would be the same based on the illegality issue as well; due to its significance, I will elaborate this point below.

The nature and purpose of the commissions that the appellant transferred to its agents

7.             (1) To dispel any doubts, we shall describe the nature, character and purpose of the payments made by the appellant to its agents before discussing the issue at hand. As noted, the District Court determined that these were, at least in part, bribe payments, even though their exact nature was not fully clarified. The said nature of the payments is evinced directly, and even explicitly, by the testimony before the Court. It is clear that the payments involved bribery of officials, sometimes senior ones, who by virtue of their positions were involved in transactions with the appellant – despite the attempt by some of the witnesses to present the nature of the transactions as “providing a discount.” For example, in the cross-examination of the witness Josef Garbuz, who acted as an agent for the appellant in a transaction for the sale of medical equipment to Poliklinika (a clinic of the  Russian Foreign Ministry), he said as follows:

'$313,000 was the price according to the contract, and after the contract was drawn up, a discount of $52,400 was obtained... What I suggest is not to call it a discount but rather a brokerage fee, but according to the contract I retained $10,000...

Q.  The $52,400 was a brokerage fee or a discount?

A.  A brokerage fee. Commission. I received a brokerage fee of $52,400.

Q.  What was the discount you obtained?

A.  As far as I understand it, the 42,000 that I forwarded to Poliklinika was the discount I obtained. Correct, previously I defined the NIS 52,000 [error in original - E.R.] as a brokerage fee, it could be that these are the accepted terms in Russia and therefore they are not precise' (p. 61 of the protocol).

The witness does not specify to which individuals the “discount” or “brokerage fee” was forwarded. The testimony of the witness Svetlana Koznitzova sheds light on the matter:

'During those years there were many offers from all the states that came to us to supply products, whoever had money and wanted to buy products wanted assurance that they would get something too.

Q.  Who were the ‘they’ who were involved in the story?

A.  Whoever had control of the money wanted to get a piece of the payment...

Everyone - one wanted to get 10%, one 5% or 15% of the payment. There were many like that.... There was one deal between that factory [Kronichev Space Center - E.R.] and Muchinik [one of the directors of Hydrola - E.R.], and Levdiev [Deputy-Director of the Factory - E.R.] asked me if I would receive his share in the amount of $62,000, so that it would be as if I received this amount, and he would give me 10% of the amount.

Q.  Why didn’t he contact Hydrola directly?

A.  He didn’t want to be exposed' (p. 69 of the protocol).

Later in her testimony, she said, inter alia: 

'The commissions are for the customers. The thing is that it is not private individuals who are ordering. The customers are institutions. These are people who represent the customers. The customers ordered and the people representing them received commissions.

Q.  That [payment of] $122,000 went to those customers who represented the institutions, whoever they were ….

A.   Yes. The Director-General of the Geological Association called on the phone, can you supply some equipment to the northern areas, I will make an order of $150,000 but $10,000 is for me' (p. 73).

The testimony of the agent Yaakov Lutzky was similar: “I would give a certain amount of money, so that they would... trust me, at the moment that we would do this deal” (p. 21 of the protocol). It was even more pronounced in the testimony of the agent Vladimir Friedman, who presented the matter without painting it as a “discount” or a “brokerage fee” and without “embellishment and dressing-up” (as referred to in the Babylonian Talmud Ketubot [68] 17A):

'Why do you pay more – in order to get authorization for that equipment I need to pay a bribe to every official at every level.... In answer to the Court’s question – are you paying a bribe – what, is bribery a bad word? It’s a way of saying thank you for signing the authorization. I gave bribes to dozens of people. And not just me...' (p. 29).

          (2) Thus, the payments that were transferred to the appellant’s agents and recorded in its books as expenses for “‘agents’ commissions outside Israel,” did not serve only as fees for the agents for their brokerage of the transactions. In actuality, these fees were a relatively small component of the payments; a significant part of it was handed over to public servants in order to guarantee them a private profit from transactions with the public institution in which they worked. It is inconceivable that the appellant’s management was not aware of this, even if it turned a blind eye to the destination of the money and the conduct of its agents. This is evident from the testimony of one of the appellant’s directors, Mr. Shimon Muchnik:

'Some of the money was spent for bribing people in Russia but I didn’t know who or what. I could only guess. We determine the amount that we need to send to Russia before we sign the contract' (p. 45 of the protocol).

'There were discussions [with the respondent – E.R.] about commissions for the agents, but commissions to the agents were not just commissions to the agents, technically they were recorded as commissions to the agents, part of it was the commissions to the agents and part of it was money that was refunded in accordance with earlier agreements based on the Income Tax Authority’s consent to give us authorizations for these payments...

To the best of my knowledge, Freidkes [the appellant’s accountant – E.R.] concluded this with the Income Tax Authority in the first case that arose. That it would be termed ‘commission to agent outside Israel’ even though it also referred to other components. I did not have to go into these components. During the conversations and communications between us, they explained to us where the money was going so that we would not think that all the money was for commissions. I also did not care where the money was going' (pp. 43-44). 

Moreover, Muchnik’s lack of knowledge did not prevent him from advising others on how to successfully navigate the business maze that then prevailed in Russia. One of the witnesses on behalf of the appellant was Mr. Aryeh Carosh, a director of a different company that was involved in similar deals. In his testimony, he too claimed that “the main concern of all the officials was what they personally would earn from the deal, including the acquisition clerks” (p. 34 of the protocol). He also stated that he enlisted Muchnik's help to “seal the deal,” as he put it, and that he acted in accordance with the instructions he received from the appellant (ibid.). 

The deductibility of illegal expenses

‎8.  (1) 'Normally, it can be said that a problem relating to expenses that have their source in illegal activities is not necessarily within the bounds of tax law. Two contradictory principles collide in such a case. One demands an accurate determination of income, without taking considerations of law and ethics into account, and the other is based on considerations of “setting the world aright” (public policy). This latter principle – which is usually the decisive one – recoils from recognizing and authorizing expenses incurred through illegal activities, in order that crime not pay' (Alfred Witkon and Yaakov Neeman, Laws of Taxation - Income, Inheritance and Betterment Taxes (Fourth Edition, 5729), at p. 157 (hereinafter: Witkon and Neeman)).

        (2) S. 17 of the Income Tax Ordinance (hereinafter: "the Ordinance"), which governs the issue of deductibility of expenses, states that “in order to determine a person’s income, deductions will be made... for expenses that were incurred entirely for the generation of his income during the fiscal year, and for this purpose alone.” Ss. 30-33 of the Ordinance (part D of chap. 2) contain several provisions restricting and limiting the deduction of expenses. Included among them, in s. 32, is a long list of expenses that will not be allowed. Expenses involving a violation of the law, or resulting therefrom, are not included in this list. However, according to the case-law, deductions for expenses incurred while violating the law may be prohibited.

9.             (1) The issue of deductibility of expenses involving a violation of the law has been addressed over the years by Israeli courts as obiter dicta, in several cases relating to legitimate expenses stemming from illegal activities, e.g. financial sanctions and legal costs. In the nature of things, cases in which recognition of tax deductibility is sought for payments involving a violation of the law cross the threshold of the courtroom quite rarely. One of these rare cases in which the question of deducting expenses made illegally was addressed in Israel in ITA (Jer.) 54/84 El-Arabiya Hotels Ltd. v. Tax Assessor Jerusalem [54], at p. 63. Judge Prof. Bazak said as follows in that case:

'It can be assumed that the problem with recognizing illegal expenses is more theoretical than practical. Usually someone making illegal payments will be in no hurry to admit this in an official document for fear that this will lead to criminal prosecution for his involvement in those activities.... Another reason that the problem of illegal expenses is a theoretical issue is that in general, it will be difficult for the assessee to adequately prove that he did indeed make the illegal expenditure. After all, the party who received the payment will not confirm this in writing or orally, for fear of the law. For these reasons, it would seem, there are so few precedents on the subject' (at pp. 69-70).

       (2) In FH 22/61 HaOleh Loan Fund, Mutual Society Ltd. and HaPoel HaMizrahi Credit Fund, Mutual Society Ltd. v. Tax Assessor for Large Enterprises, Tel Aviv [1], at p. 533, the Court addressed the possibility of recognizing, for tax purposes, a payment that the appellant was liable to pay to the Bank of Israel for contravening the instructions of the Governor of the Bank of Israel under the Bank of Israel Law, 5714-1954. Justice Berinson (in a majority opinion) noted in his conclusion:

'For reasons related to the public welfare, we cannot allow an income tax deduction for an expense incurred while breaking the law, or which is liable to undermine policy stemming from the law of the State or from a legitimate action of the government regarding a matter of public importance' (at p. 551).

It will be mentioned that in that case, Justice Witkon's (minority) opinion was that a punitive function should not be attributed to the relevant section of the Bank of Israel Law (at p. 549); this was also his approach in the previous incarnation of the case, in CA 507-508/59 Credit Fund v. Loan Fund [2], at pp. 2213, 2217. Justice Dr. Witkon reiterated the majority court ruling that he originally disputed in CA 380/75 Pardes Cooperative Association of Citrus Growers Ltd. v. Tax Assessor for Large Enterprises [3], at pp. 616-617. (That case dealt with the deduction of legal costs for a transaction involving illegality; however, the primary reason for not allowing the expenses was that they were not interest payments and were not made in the regular and normal course of business.)

(3) In El-Arabiya Hotels Ltd. v. Tax Assessor Jerusalem  [54], as we have said, payments which were illegal in themselves were addressed – i.e. loan repayments paid to Jordanian banks, in violation of the provisions of the Currency Supervision and Trade with Enemy States Law. Following a review of the cited laws, Justice Bazak stated:

'The problem is not a simple one and it should not be assumed that it has a simple, unequivocal and comprehensive solution, since the matter is extremely dependent on the circumstances of the case. I would say that the rule is that it all depends on the nature and the degree of severity of the illegality involved.... There are illegal expenses that could never be allowed, such as bribing a public servant or payments to burglars and thieves. On the other hand, there is no reason not to recognize some illegal expenses, such as grossly-inflated rent payments, etc. This is the case regarding payments made in violation of the laws controlling foreign currency, as in the present matter. No hard and fast rules can be set. It very much depends on the circumstances of the case' (at pp. 69-70).

                (4) This issue has subsequently been addressed once more, again incidentally, in CA 438/90 Tax Assessor Haifa v. Hed HaKrayot Ltd. [4], at p. 668. The issue in that case was not illegal payments per se; rather, Justice E. Goldberg mentioned, inter alia, the law regarding the non-deductibility of expenses that are contrary to public policy, and noted the relationship between this law and the partial arrangements found in the Ordinance, in ss. 32(12) and 32(13) (the prohibition on deducting sums financing or assisting sea-based transmissions, as defined in the Wireless Telegraph Ordinance [New Version] 5732-1972, and the prohibition on deducting payments paid as fines and linkage differentials in accordance with s. 179 of the National Insurance Law [Consolidated Version], 5728-1968, respectively). In light of the circumstances in which these amendments were enacted, Justice Goldberg concluded that they did not constitute a negative arrangement (for a different opinion, cf: Amnon Rafael and Yaron Mehulal, Income Tax – Volume One (3rd edition, 1995) at p. 429 (hereinafter: Rafael)). He said:

'Is there a basis in the law for economic logic being overruled by public policy? There is no general provision in the Ordinance that permits taking public policy into account when determining an assessee's taxable income. Instead, there are several partial arrangements found in the law that restrict the deduction of an expense due to the said considerations.... The preliminary question is: are the partial arrangements in the Ordinance exhaustive of the tax authorities’ competence to take considerations of public policy into account in determining a person’s taxable income? According to case-law, considerations of public policy are appropriate considerations in the tax assessment process, and the deduction of an expense may be prohibited for their sake. For example in FH 22/61 HaOleh Loan Fund v. Tax Assessor [1] … the provisions of s. 32(12) and s. 32(13) of the Ordinance should not be viewed as exhaustive of considerations that the tax assessor is entitled to take into account when determining a tax-payer’s taxable income... Public policy is a relevant consideration for the process of determining the taxable income of an assessee...' (at pp. 712-713).

10.          (1) If so, the principle of public policy (“public welfare” as Justice Berinson calls it in HaOleh Loan Fund v. Tax Assessor for Large Enterprises case [1], or “setting the world aright” as Witkon and Neeman call it) is a relevant consideration when determining taxable income, and it stands in opposition to recognition of expenses for tax deduction purposes (see also Nitsa Uretzky, Illegal Income and Expenses in Taxation Law (1990) at pp. 13-18, 57-59 (hereinafter: Uretzky); Aharon Namdar, Taxation Law [Income Taxes] - Income Tax, Company Tax and Capital Gains Tax (Part A, 1993) at pp.  35, 229 (hereinafter: Namdar)). The term “public policy” has been defined in our judgments on more than one occasion:

'Public policy’ signifies the primary and essential values, interests and principles that a given society at a given time wishes to uphold, preserve and develop... public policy reflects the elemental foundations of the social contract... (per President Shamgar in CA 661/88 Haimov v. Hamid et al. [5], at pp. 75, 84).... Public policy is a central tool through which the legal system safeguards the essence of its values against various loci of power that wish to create legal norms or pursue physical activities that contradict these values. This is a tool through which the "proper functioning of the judicial institutions essential to society" is maintained (I. Englard, “The Status of Religious Law in Israeli Law (Part 3)" Mishpatim 4 (5732-33) at pp. 31, 57; HCJ 693/91 Efrat v. Population Registry Commissioner at the Ministry of the Interior [6], at pp. 749, 779, per Justice Barak).

                (2) This is straightforward. It should, however, be borne in mind that public policy is itself a broad concept, a “meta-principle, an overarching consideration” (CrimA 2521/03 Sirkis v. State of Israel [7], at pp. 337, 346, per (then) Justice M. Cheshin) and there are those who call this concept a “legal safety-valve” (CA 294/94 Jewish Burial Society v. Kestenbaum [8], at pp. 464, 534), per (then) Justice Barak). This concept embraces various considerations as well as the balance between them – “in determining the scope of ‘public policy’ there must be an internal balancing between conflicting values and interests” (CA 5258/98 A. v. B. [9], at pp. 209, 222, per President Barak, and the other references cited there). Obviously, these are cases that public integrity, in a state purporting to be moral, cannot tolerate (see, by analogy, the issue of money laundering in the explanatory notes to the Prohibition Against Money Laundering Bill, 5769-1999 at pp. 420, 423; see also CrimA 7646/07 Cohen v. State of Israel [10]). Public policy is the “principle that reflects the fundamental social credo of the judicial system” (President Barak in LCA 8253/99 A. v. B. [11], at pp. 213, 228; cited in HCJ 5413/07 A. v. State of Israel [12]). Therefore, in my humble opinion, in any discussion regarding illegal expenses, an examination of any claims that are incompatible with the principles mentioned above is required.

11.  (1) One of the central considerations in considering the deductibility of illegal expenses is the concern that permitting these kinds of deductions makes a mockery of the law. This point was already made in the above-cited words of Justice Berinson in HaOleh Loan Fund v. Tax Assessor for Large Enterprises [1], as well as in the words of Justice Goldberg in Tax Assessor Haifa v. Hed HaKrayot Ltd. [4]:

'The concern is for conflicting trends in the two bodies of law and the conveying of a mixed message to the tax-paying public, whereby from the perspective of criminal law, the tax-payer's conduct is reprehensible and should be penalized, whereas  ‘the expenses incurred’ in committing the crime are recognized under taxation law. In her book [cited above – E.R.], N. Uretzky discussed this, writing (on p. 58) that "[a]llowing the deduction of an expense stemming from business activities that are premeditated and preplanned, and that knowingly violated the law, undermines the legal and moral foundation upon which the legal system is founded"' (at p. 715; see also Rafael, at p. 427; see also CA 522/63 Beit Zakai Ltd. v. Tax Assessor [13], at pp. 548, 551, per Justice Witkon).

This consideration is extremely weighty, and it combines with the meta-principle of safeguarding the rule of law, which is also based in public policy: “Public policy includes, inter alia, the importance of safeguarding the rule of law (both formal and substantive). Therefore, safeguarding public policy also means upholding the law and its provisions and deterring criminal activity and law-breaking” (CA 6416/01 Benvenisti v. Official Receiver [14], at p. 197, 206, per (then) Justice Barak). Certainly, non-recognition of the deductibility of illegal expenses does not mean that the taxation laws serve as tools for penalization or deterrence; rather they protect such tools – which are designed to protect serious public interests enshrined in other bodies of law – from neutralization, or at least impotence due to exploitation by criminals by means of the taxation laws. This is also a matter of common sense. I will add that I agree with Dr. Uretzky’s narrower definition, which she quoted from Justice Goldberg, and I do not count myself among the more lenient in this matter. We would do better to express our reservations about the opposite stance, lest we fall victim to the perils of a slippery slope. A tiny chink in the proverbial armor could gradually widen until “wagons and coaches could enter through it” (Song of Songs Rabba [69] 5:2). I will add here that by their very essence, the “judicial genes,” the DNA in every fiber of the judge – the hidden, internal compass of conscience within him/her – demand that a judge refrain from giving his/her seal of approval, be it explicit or implicit, to any illegal activity or to the benefit therefrom.

                (2) Another consideration, deeply enmeshed in the first one, is the public policy principle that “crime must not pay” (based on the Mishnah, Hallah [70] 2:7; CA 3498/94 A. v. B. [15] at pp. 133, 153, per Justice Dorner; Benvenisti v. Official Receiver [14], at p. 206). The essence of this principle is that one who breaks the law should not enjoy his ill-gotten gains – and permitting the deduction of an illegal expense would allow a law-breaker to reap the rewards of his illegal act (see Witkon and Neeman, at p. 157; Beit Zakai Ltd. v. Tax Assessor  [13], at p. 551; on this principle in Jewish law in relation to property matters, see Eliav Shochetmann, Ma'aseh Haba Ba'avera (1981), at pp. 250-254).

(3) Other considerations that may be taken into account relate to the specific character of the illegal activities in the particular case. We will address this, in relation to our case, below.

(4) Indeed, opposed to all of these considerations stands a basic principle of taxation law, i.e. accurate assessment. There are those who claim that the non-deduction of illegal expenses violates this principle; the violation is more serious in light of the law that illegal income will be taxed – in spite of its illegality. As well the economic illogic of this tax and the principle of accurate assessment, there are those who would claim that taxation laws should not be used as a method of penalization additional to the penal code, and that in any case the deterrent power of taxation laws is limited in its effect (see Tax Assessor Haifa v. Hed HaKrayot Ltd. [4], at p. 715, per Justice Goldberg; Uretzky, at pp. 58-59; 64-65; Namdar, at p. 229; Rafael, at pp. 427-430).

(5) I will note at this point that in my opinion, those considerations designed to maintain the values of the law and to preserve the incorruptibility of the government authority should prevail over the concern for appearing to collaborate or indirectly "authorize" illegal activities. I see no legal or moral problem with the fact that illegal income is taxed while illegal expenses are not recognized as deductible. Moreover, while it is true that the tax authorities deal with collection, and that is their main role, they are also an integral part of the wider spectrum of governmental authorities. As far as I’m concerned there is no particular reason why they should wash their hands of imposing sanctions, where appropriate, against those who act illegally, within the framework of the tax system. This is consistent with an approach that does not cast the entire burden onto the criminal law system, but rather complements it.

12.          (1) In the real world we find various categories of expenses related to illegal activities, regarding which deductions are sought. One such category includes payments the very making of which is illegal. Clear-cut examples of these are bribe payments, money paid to a hired assassin in order to “increase business profits” or a payment to finance burglary or theft from a competitor; however, there are also less clear-cut examples, such as payments made in violation of the provisions of the currency control laws (see El-Arabiya Hotels Ltd. v. Tax Assessor Jerusalem [54]). The second category includes expenses for legitimate payments incurred as a result of illegal activities, e.g. monetary sanctions such as fines and compensation, and court costs. In the nature of things, this category finds its way into the courtroom more often, and has been discussed relatively often (HaOleh Loan Fund v. Tax Assessor for Large Enterprises [1]; Tax Assessor Haifa v. Hed HaKrayot Ltd. [4]; and also ITA (Haifa) 13/82 Frumkin v. Tax Assessor [55], at pp. 410, 418-419, per Justice Dr. Bein; ITA (TA) 98/84 Frankel v. Tax Assessor Tel Aviv 1[56], at p. 332, per Justice Pilpel; ITA (Haifa) 40/95 Vered Recycling v. Tax Assessor Haifa [57],  at pp. 172, 177-181, per Justice  Dr. Bein; ITA (TA) 1143/01 Miller v. Tax Assessor Tel Aviv 3 [58]  p. 122, per Justice Altuvia). The third category includes “illegitimate expenses” – those that are incompatible with public policy, even though they themselves do not contravene the provisions of any law. There is a variety of examples of this:  repayment of a loan at a usurious rate of interest in violation of the law (see Beit Zakai Ltd. v. Tax Assessor [13]); expenses incurred in creating an illegal contract (see Pardes v. Tax Assessor [3]); legitimate expenses incurred by an illegal enterprise, such as an unregistered gambling establishment; commercial bribe payments (see CA 578/75 Ben-Tal v. Ben-Tal [16], at p. 57) and others, as far as the tax-payer’s imagination stretches (see other examples from US case law: Textile Mills Corp.‎ v.‎ Commissioner, 314 U.S.‎ 326 [63]; Lilly v.‎ Commissioner, 343 U.S.‎ 90 [64];  Camarano v.‎ United States, 358 U.S.‎ 498 [65]; Bob Jones University v.‎ United States, Goldsboro Christian Schools, Inc.‎ v.‎ United States 103 S.‎ Ct.‎ 2017 [66]).‎

(2) Even if the question of deductibility of expenses related to illegal activities is considered for each case on its merits and in direct relation to the nature of the illegal activities in the particular case, it is still only natural that insofar as the first category of expenses is concerned, the above-mentioned considerations militating against recognition for tax purposes will obviously carry significant weight. In these cases, which involve a direct monetary outlay for activities that the legislature has prohibited, as far as I am concerned the answer is clear, in accordance with a value-based judicial policy. Moreover, even though cases that fall into the second or third categories are widely disputed, my tendency in their regard is similar, and I think that in these types of cases the burden of persuasion borne by the assessee seeking the deduction is very heavy (see Uretzky, pp. 15-18, 89-94, 103; Namdar, at pp. 321-322; Rafael, pp. 430-435; Boaz Barzilai, “The Income Tax Authority – A Way of Collecting Taxes or a Tool for Regulating Public Conduct: A Review of the Issue and its Development based on the Hed HaKrayot Judgment” Missim XII/1, p. 65a (1998); Lior Neuman and Ofir Kaplan, “The Deductibility of Legal Defense Costs in Criminal Law” Missim XVIII/3, at p. 1a (2004); "Deduction of Business Expenses: Illegality and Public Policy", 54 Harv. L. Rev. 852 (1940-1); Donald H.‎ Gordo‎n, "The Public Policy Limitation on Deductions from Gross Income: A Conceptual Analysis", 43   Ind. L. J. 406 (1967-8); Cathryn V.‎ Deal, "Reining in the Unruly Horse:‎ The Public Policy Test for Disallowing Tax Deductions", 9 Vt. L. Rev. 11 (1984).

The deductibility of illegal expenses incurred outside Israel

13.  (1) The question of the deduction of illegal expenses incurred outside Israel adds further weight and complexity to the issue currently under discussion, since for the purposes of the necessary balancing between the two bodies of law – penal law and taxation law (and I have already indicated which way the scales are tipped in my opinion) – the question of how to relate to the law in the foreign state must be considered (see Uretzky, at p. 142).

(2) Regarding this issue, counsel for the appellant claimed that it had not been proven that the payments made by the agents were bribes, and even if they were bribes – it was not proven that paying bribes is a crime in Russia (referring to the words of Vice-President Cheshin in FCrimH 2980/04 Evico v. State of Israel [17], at para. 3). Counsel for the  appellant claimed that at the very most, it could be said that these activities contradict public policy; but – so he claims – why should Israeli public policy be concerned with Russian public policy, since [the two states] do not share the same “values, interests, and central and essential principles, which a given society at a given time seeks to establish, to maintain and to develop” (Efrat v. Population Registry Commissioner [6], at p. 779), and in any case,  “the content of public policy varies in different societies” (per President Barak in the abovementioned A. v. B. [9], at p. 222). This claim, captivating though it may be, holds no charm for me.

Expenses relating to illegal activities conducted outside Israel could fit into each of the three categories reviewed above, and could be examined within the framework of each. Indeed one could encounter difficulties in relation to the non-deductibility of expenses incurred in a legal and legitimate manner in country A, due to public policy in country B. In this case, however, we are dealing with a situation that falls within the first category, that of expenses which in themselves constitute a violation of the law, even though they were incurred outside Israel, as I will explain below. Furthermore, there are matters of public policy that are universal, in principle if not in practice, and bribery – a biblical prohibition that is also part of the cultural heritage of the Russian nation – is included among them.

       (3) On the other hand, neither should we be overly impressed by the argument of counsel for the respondent in his summation, that this is a case of an extraterritorial crime (see the definition of “extraterritorial crime” in section 7(b) of the Penal Law, 5737-1977), and that Israel's extraterritorial jurisdiction applies, by virtue of s. 15 of the Penal Law – and therefore the said payments may not be deducted. It seems to me that in the response summations, counsel for the respondent abandoned this argument, or at least expressed some reservations. In any case, I am doubtful whether there are grounds for this position. First of all, the question of whether as a rule, there can be an extraterritorial application of Israeli law with regard to the acts in the present case is a serious one, particularly in light of the nature of the crime – bribery – which includes a patently local connection in the definition of a “public servant” (see ss. 34 and 290 of the Penal Law; see in this context S. Z. Feller, Principles of Penal Laws (Vol. 1, 5747-1987) at pp. 216-217 and pp. 291-292). Secondly, statements are one thing and actions another: my doubts also stem from practical considerations in that I am doubtful whether we will actually see indictments of this kind filed any time soon. And thirdly, another important question relates to the treatment of the legality of expenses incurred outside Israel, for the purposes of the question of tax deductibility, when they constitute extraterritorial crimes by virtue of extraterritorial application. However, I think that there is no need to address these questions, since the illegality of the expenses becomes clear by another way, as will now be explained.

14.  (1) The payments made by the appellant’s agents outside Israel are, in my opinion, illegal expenses for the purpose of tax deduction since, as will be explained in detail, they are not legal in the country in which they were made – or at least it is so presumed as long as the appellant has not proved otherwise – and they would not have been legal had they been expended in the taxing state, i.e. Israel. In other words, they are, if you will, a case of “double illegality” (in the sense of the term “double criminality” in the area of extradition law), both in Israel and in the foreign state. You’re damned if you do it in Russia, and you’re damned if you do it in Israel.

 (2) Regarding the question of the hypothetical legality of the expenses in Israel: In spite of the fact that the payments were made outside Israel, we must hypothetically examine the legality of the expense in Israel, i.e. what would be the situation had the deed taken place in Israel (see also Uretzky, at p. 142). Vice-President Cheshin called this a "transplanting of foreign events into Israeli law” (Evico v. State of Israel [17]). “Hypothetical criminality means that the deed would constitute a crime in the perpetrator’s country of origin too, if it includes the factors that form the basis for effective criminality, in abstracto and in concreto, in the country in whose territory the crime was committed” (Feller, at pp. 219-220). Even in cases in which the expenses incurred outside Israel involved, according to the definitions of criminal law, elements that are based on a clear local connection, such as in this case, the circumstances of the deed can be substituted and examined as though they took place in Israel. Vice-President Cheshin’s words in Evico v. State of Israel [17] are particularly apposite in this matter, and even though the statement was made in a different context, it is almost as if it were written for us:

'How can we carry out this transplantation into Israel of an event that took place outside Israel? Close examination will reveal that it is possible to perform this transplantation without any particular difficulty. This is the case, for example, in relation to crimes that are not "local" ¬– floating crimes, if you will – i.e. crimes that are not, by their very nature, dependent on the place of commission of the crime.... The procedure is different in a case in which one of the components of the deed (that was committed outside Israel) is a "local component," a component characterized by a specific local context. Such, for example, is the component of the crime of bribery in Israel if the person receiving the bribe is a "public servant." This concept is defined in the Penal Law (s. 34(24)) and its nexus is specific to the State of Israel. A "public servant" in Israel is not the same as a "public servant" in the country in which the event took place (inasmuch as the concept exists in that country). The question that therefore arises is how to effect the transplantation in these kinds of cases, and the answer given was – and is – that we must adopt a "conceptual approach" (as per (then) Justice Barak in Moshe David v. State of Israel [18]) or one of "hypothetical criminality" (in the words of Feller). The technique for transplantation is that of a "conversion of factors", and the act of conversion will be effected by exchanging "the actual factual circumstances [that existed outside Israel] for corresponding hypothetical Israeli circumstances" (Moshe David v. State of Israel [18], at p. 636). In these cases of "local" circumstances we will, therefore, examine whether it is possible to transfer the circumstances that pertained in another country to corresponding, hypothetical, circumstances in Israel' (paras. 13-14, and see also Moshe David v. State of Israel [18], at p. 622, cited by the Vice-President; see also Feller, at pp. 213-220).

I will add that for the purposes of this examination, we should recall the process of globalization that is sweeping the world, and with it the international war on corruption that finds expression inter alia in the United Nations Convention against Corruption, which we shall address below. In our case there can be little doubt that the agents used the money that they received from the appellant to bribe public officials and civil servants in public institutions in Russia – who pocketed the money in exchange for closing deals with the appellant. There is no doubt that had these expenses been made in Israel, they would have constituted an act of calumny falling within the bounds of the crime of bribery.

 (3) The question of the legality of the expense in the foreign country: This question is examined as a factual-evidentiary question. As elaborated above (para. 8), the appellant’s agents themselves testified that they “gave bribes.” Indeed, some of them claimed that at that time this was a common phenomenon, though this may not necessarily attest to its legality – “anyone who had control of the money wanted a share of the payment...” (as stated by the witness Koznitzova, see above). These words speak for themselves, and indicate illegality. The Russian President, upon his recent retirement, noted that the war on corruption had not made much progress, and he hoped that it would be more successful in the future. Apparently a problematic basic situation had been created in Russia whereby public servants received low salaries, which constituted an incentive to seek additional sources of income; this coincided with a period of huge spending, the opening up of profitable commercial avenues and new opportunities; in terms of corruption, this is a lethal combination. Edward Shevardnadze, who was Foreign Minister of the Soviet Union in the 1980s before he became President of Georgia, first made his name as a crusader against corruption.

Returning to Israel: on the legal plane, the question of the status of the deed under the law of the foreign country required proof through the regular methods of the foreign law, i.e. testimony from a suitable expert (see HCJ 4562/94 Abu Daka v. Lod Military Court [19], at pp. 742, 748; CrimA 2597/04 Roitman v. State of Israel [20],  paras. 69-73; Menashe Shawa “The Nature and Manner of Proving Foreign Law in Anglo-American Law and Israeli Law,” Tel Aviv U. Law J. (Iyunei Mishpat) 3 at p. 725 (1973)). In our case, no expert witness was summoned by either party. Since the burden of proof regarding an expense incurred in generating income falls on the appellant (see LCA 1436/90 Giora Arad, Investment Management and Services Co. Ltd. v. Director of Value Added Tax [21], at p. 101), the appellant also bears the burden of proof of the legality of the expense: “the burden of proof encompasses both the actual performance of the act and the goal served by its performance” (ITA 5019/97 D. and D.  Zra’im Ltd. v. Tax Assessor Haifa [59], at pp. 131, 142, per Deputy President Dr. Bein). In our case, allegations regarding the legality of the expenses have been raised both through the respondent’s investigations and through the questioning of the appellant’s witnesses in the lower Court. Certainly under these circumstances the onus was on the appellant to prove its contention that this was not an illegal expense under the foreign law, inasmuch as this is indeed its claim, via the accepted methods mentioned. Since it did not do so, the expense will be considered illegal for purposes of tax deduction.

(4) From the aforesaid it transpires that the said expenses were tainted by “double illegality” – in concreto, in the country in which they were incurred, and in abstracto, had they been incurred in Israel. In this case I am of the opinion, as noted, that these expenses are subject to the same law as expenses incurred through a violation of the law, and therefore extra weight should be assigned to the considerations denying them recognition when determining taxable income. It would appear that this outcome should not, as a rule, be different from other cases in which this kind of overlap does not exist, and of these, too, it has been said that the deductions may possibly be disallowed for reasons of public policy, although it was said that this should appear in explicit statutory provisions (and see extensively in Uretzky, at pp. 142-146). These cases must be addressed on a case-by-case basis.

On bribery and corruption in Israel and abroad

15.            (1) Above we addressed questions relating to the framework for the deductibility of illegal expenses incurred outside Israel. We will now fill in this framework with the particulars of the illegal activity in the present case, i.e. the payment of bribes. The value that is protected by the law prescribing the offense of bribery is dual-faceted (see CrimA 8573/96 Mercado v. State of Israel [22],  at p. 481 (1997), at pp. 505-506, per Justice Turkel; LCrimA 5905/98 Ronen v. State of Israel [23], at pp. 728, 735; CrimA 733/07 Cohen v. State of Israel [24], per Justice Grunis, para. 13, and the references there; see also Mordechai Kremnitzer, “Are we Short of Crimes?”  Mishpatim, 13 at pp. 159, 161-162 (5743-5744), hereinafter: Kremnitzer; also cf:  Liat Levanon and Mordechai Kremnitzer, “How Far will the Crime of Bribery Extend – In the Aftermath of CrimA 8573/96” Alei Mishpat (Bikurim Volume, Booklet 2) at pp. 369, 372-375 (2000)): first, ensuring the proper functioning of the public administration, such that it serves the public interest and acts without bias and without foreign influences swaying governmental discretion; this includes protection of the integrity of the public administration (there are those who see this as a separate goal, see Justice Grunis in Cohen v. State of Israel [24]); secondly, preservation of the public’s trust in the administrative authorities and of the prestige of the administration in the eyes of the public, as President Shamgar said:

'These phenomena can seriously erode the trust with which a citizen regards those who have been appointed to serve the public, it fouls the atmosphere and sows the seeds of disappointment and frustration.... Distorted standards in human relationships and the relationship between the government and the citizen emerge and grow, posing a latent danger to society as a whole' (CSA 1/77 Klein v. State of Israel [25], at pp. 164, 167).

In my opinion, these concerns are ultimately two sides of the same coin for a society wanting a fair system of governance that it can trust.   This is evident to every intelligent and decent person.

 (2) In Ronen v. State of Israel [23], Justice Strasbourg-Cohen commented:

'The act of bribery is one of the most serious crimes. It has the power to corrupt the public administrative system, and to lead it to act in ways contrary to relevant criteria, contrary to the norms worthy of a proper public administration, and contrary to the law. The act of bribery corrupts the character of public servants and damages the delicate fabric of the relationship between individuals and public servants, which is based on fairness, relevance, impartiality, equality and more. It eats away at the foundations of the societal construct; it damages the public’s trust in the administration, which is a necessary basis for the existence of a proper society' (at p. 734).

President Barak summarized the dual-faceted value as follows:

'The basis of the law of bribery is the concern that receiving a gift will affect a public servant’s decisions on the one hand, and the public’s trust in the government authorities on the other' (CrimA 5046/93 State of Israel v. Hochman [26], at pp. 2, 10).

 (3) In relation to bribery in commercial contexts, it seems that in most cases, including the present case, this occurs in the context of contracts with public authorities, which as a rule ought to be awarded through tenders. In such cases, the bribery adversely affects other values that the public would wish to uphold, such as efficiency and thrift in the expenditure of public funds, as well as fair competition. As is known, the mechanism of the public tender is designed to facilitate the existence and combination of two fundamental objectives – proper administration and equal and fair treatment, by ensuring fair competition and equal opportunities for all; and economic efficiency in the management of the economy and the use of public funds (see HCJ 368/76 Gozlan v. Beit Shemesh Local Council [27], at pp. 505, 511-512; CA 6585/95 M.G.U.R. v. Nesher Municipality [28], at pp. 206, 212; Gabriela Shalev, “Public Tenders since the Mandatory Tenders Law 5752-1992", Mehkarei Mishpat 12 at pp. 393, 396-397 (1995)). It will be mentioned that some divide the first objective into two objectives – proper administration and the maintenance of the integrity, on one hand, and the granting of equal opportunity, on the other: see Omer Dekel, Tenders, Vol. 1, at pp. 92-98 (2004)(hereinafter: Dekel)). It is clear that a bribe paid to secure a biased outcome of a tender impacts negatively on these objectives. We have explained the importance of proper administration above, and there is no need to say any more; in addition, however, “in the nature of things, corruption and bias also entail serious economic damage to the public and the economy in general, both immediately – due to the decreased efficiency of contractual arrangements, and in the long-term – due to the loss of trust in the system of governance” (Dekel, at p. 118; see also regarding the interface of  bribery and tenders ibid. at pp. 197-199).

 (4) The value of fair competition – which Justice Berinson defined as “integrity in commerce” (Ben-Tal v. Ben-Tal [16], at p. 61) – is also a public interest of great significance, and the law protects it in various ways, including through the laws of tenders (see, for example, FH 22/82 Beit Jules Ltd. v. Raviv Moshe and Assoc. Ltd. [29], at p. 441; see also, in a criminal context, CrimA 7068/06 State of Israel v. Ariel Electrical Engineering Traffic Lights and Control Ltd. [30]). In our case, even if the damage to fair competition is not one of the interests protected by the criminal prohibition against paying bribes, there is no doubt that when this kind of payment is made in a commercial context, damage to fair competition ensues as a side-effect.

16.            (1) It is impossible to address this issue in the State of Israel without reference to Jewish law. In the law of Israel and the tradition of Israel, the prohibition on bribery and the negative attitude towards it are anchored in biblical law. In the Torah portion of Mishpatim (Laws), it is written: “And you shall take no bribe; for a bribe blinds they that have sight, and perverts the words of the righteous” (Exodus [71] 23:8; see also Deuteronomy [72] 16:19; Shulhan Arukh, Hoshen Mishpat [73] 9:1) Even though the biblical prohibition relates to judges, the later commentators applied it, based on the words of earlier commentators, to public officials as well. R. Zvi Hirsch Eisenstadt (Poland, 19th century), author of Pit'hei Tshuva [74], cites the Pilpula Harifta (R. Yom Tov Heller, Prague, 17th century):

'Another great thing is understood from the words of Rosh [R. Asher, Germany-Spain, 14th  century – E.R.], that bribery is prohibited not just in the courts but also for all types of fines... And I write this to instruct those appointed by the public, even though they are not judges and have not been accepted as such, even so they should avoid accepting gifts for their decisions' (Hoshen Mishpat 34:27).

In other words, an official who holds a public office other than in a rabbinical court is also forbidden to accept unlawful gifts. In Birkhei Yosef [75], R. Haim Yosef David Azulai (known by the acronym HIDA - Israel and Italy, 18th century) noted:  “Public officials, even though they are not judges in a court of law and have not been accepted as such, must still avoid accepting gifts for their decisions” (Hoshen Mishpat 9:10, p. 26). R. Yechiel Michel HaLevi Epstein (Russia, 19th and early 20th centuries), author of the renowned halakhic work, Arukh Hashulhan [76], wrote:

'It does not necessarily mean that only a judge is forbidden to accept bribes, but rather anyone who is appointed and who deals with public affairs, even if he is not a judge in a court of law, is forbidden to pervert and distort an issue due to feelings of love or hatred and certainly not by taking a bribe” (Hoshen Mishpat 9:1; see also in this regard R. Avraham Tzvi Scheinfeld, “Bribing a Public Servant,” Tchumin V, at pp. 332, 333 (5744), which discusses a case with circumstances somewhat similar to ours (hereinafter: Scheinfeld); Nahum Rakover, The Rule of Law in Israel, at pp. 96-99 (1989 R. Itamar Warhaftig, “A Gift to an Employee from Another – His or His Employer’s?” Tchumin XVII at pp. 293, 297-299 (5757); Eliav Shochetmann “For a Bribe Blinds the Eyes of the Wise, and Perverts the Words of the Righteous: Integrity of Judgment and Integrity of Public Administration” Parashat Hashavua, Aviad Cohen and Michael Wigoda, eds. (Parashat Shoftim, 5763, Issue No. 135) (hereinafter: Shochetman); R. Shlomo Ishon, “Gifts to a Government Official,' Tchumin XXVI at pp. 335, 337-338 (5766)).        (2) The Talmud asks:  “What is shohad (bribery)? Shehu-had (they are one)” (Babylonian Talmud, Ketubot [68] 105b). Rashi explains as follows: “The giver and receiver are made to have one heart.” And further: “Rava said: How does bribery work? One who receives a bribe from another begins to agree with him and becomes like a part of him and no-one sees his own shortcomings.” These words (even though, as stated, they were said in relation to judges) illustrate the two-fold basis of bribery – the need to prevent “closeness” between a public official and a citizen giving a bribe, both for the sake of proper administration and for the sake of the public’s trust in its representatives and institutions (for more on bribery in Jewish law, see CrimA 71/83 Flatto-Sharon v. State of Israel [31], at pp. 757, 768-769; CrimA 355/88 Levi v. State of Israel, [32] at pp. 221, 230-232,  per Justice D. Levin in both these cases; Haim Cohn, “Reflections on Integrity,” Haim Cohn - Selected Writings, Aharon Barak and Ruth Gavison, eds., at pp. 417, 421-423 (2001), and the citations ibid.; Shochetmann).

17.  (1) The odious practice of bribery was widespread during various periods throughout history. Bribery was prevalent in Israel both in the times of the Prophets (see for example Isaiah [77] 1:23; Ezekiel [78] 22:12), and in the times of Talmudic Sages (Babylonian Talmud Sotah [79] 47B), and of course in many other societies and entities. In the early days of the State of Israel, the legislature was aware of a scourge of bribery, and addressed the issue several times by expanding the definitions of the crime and increasing the penalty it carries (see the Commentary to the Penal Law Amendment Bill (Bribery and Corruption), 5711-1950, Bill 60; Commentary to the Penal Law Amendment Bill (Amendment No. 3), 5724-1964, Bill 591, 54; see also Shimon Agranat, “Developments in Criminal Law,” Iyunei Mishpat 11 at pp. 33, 35-36 (1986); but see Kremnitzer). Over the years bribes have been accepted by public servants, in a variety of circumstances, whether due to personal need or to the desire for supplementary income (see, for example, CrimA 389/72 Zokaim v. State of Israel [33], at p. 487; CrimA 341/73 State of Israel v. Vita [34], at p. 610; CrimA 126/76 State of Israel v. Shefer [35] at p. 466 (hereinafter: State of Israel v. Shefer [35]); and many examples – most recently the aforementioned CrimA 766/07 Cohen [24]).      

                (2) The odious practice of bribery crosses geographical boundaries. Obviously, the phenomenon of bribery, as well as the need to fight it, exists in other countries besides Israel (see for example, the Commentary to the Penal Law Amendment Bill (Bribery and Corruption), 5711-1950). The more international commerce becomes in our generation, known as the “age of globalization,” the more opportunities there are for bribery to become “international” in nature. It is also clear that in years gone by, even well-respected and legitimate Israeli companies used to engage in bribery in foreign countries, and they were not too ashamed to bring their cases before the Israeli courts (see CA 101/74 Hiram Landau Road Construction and Development Works Ltd. v. Water Sources Development (Foreign Countries) Ltd [36], at pp. 661, 668, regarding bribes given in Uganda). In this context, which involves international economic activity and the “export” of bribes, harm is done - by the very nature of these kinds of activities - to the values of economic efficiency and fair competition, in addition to the damage to the values of integrity and public trust. Any kind of bribery is bribery and is damaging. As our Sages said: “To what can bribery be compared? To a stone. Wherever it falls – it breaks things” (Midrash Tanchuma [80] (Toldot, 8); see also Mercado v. State of Israel [22], at p. 592).

                   (3) The Hebrew poetess Rachel, in her poem “Day of Tidings,” writes of the reluctance, even in troubled times, to benefit from activities that pollute the moral-ideological atmosphere. This is the poem, which was based on a biblical story in the Book of Kings II  7:3 ff. It is cited here without interpretation or reference to the background material to its composition:

'In days past the terrible foe

Laid Samaria under siege;

Four lepers brought it glad tidings

They brought it tidings of liberty.As Samaria in siege – all the land is as one

And the hunger too heavy to bear.

But I do not wish for redemption’s tidings

If they come from the mouth of a leper.

 A pure one will tell and a pure one redeem

And if his hand is not found to redeem –

Then it has been chosen for me to fall

In the plight of the siege

At the dawn of day of great tidings.”

Even if a bribe in a particular country might be financially fruitful for Israelis, and through them for the Israeli economy – the Israeli economy should not thrive on the “fruit of the poisonous tree.”

18.  (1) To deal with corruption, and following legislative developments in various countries around the world, some of which we will address below, in 2003 the United Nations adopted the Convention against Corruption, some aspects of which are relevant to our case – i.e. the question of tax deduction of expenses incurred in a bribery situation. In the Preamble to the Convention, concern is expressed regarding the problems and threats that corruption poses to the stability and security of societies and democratic institutions; the Convention goes on to emphasize that international cooperation and a comprehensive, inter-disciplinary approach are essential in order to overcome this phenomenon: 

'The States Parties to this Convention,

Concerned about the seriousness of problems and threats posed by corruption to the stability and security of societies, undermining the institutions and values of democracy, ethical values and justice and jeopardizing sustainable development and the rule of law,…

Convinced that corruption is no longer a local matter but a transnational phenomenon that affects all societies and economies, making international cooperation to prevent and control it essential,

Convinced also that a comprehensive and multidisciplinary approach is required to prevent and combat corruption effectively…'

   (2) The Convention includes many articles prescribing a variety of methods of fighting corruption within member states and outside them. Chapter III of the Convention, subtitled “Criminalization and Law Enforcement,” provides, in arts. 15 and 16, that the states will act by means of legislation to criminalize activities intended to provide an undue advantage to public officials in an improper manner in order to influence their activities in their official capacity – both regarding the officials of the State itself (in art. 15) and regarding officials of a foreign state (or international organization, art. 16). Particularly relevant to our case is art. 12(4), which lays down provisions regarding recognition and deductibility for tax purposes: 

'4. Each State Party shall disallow the tax deductibility of expenses that constitute bribes, the latter being one of the constituent elements of the offences established in accordance with articles 15 and 16 of this Convention and, where appropriate, other expenses incurred in furtherance of corrupt conduct.”

These words are clear and require no explanation. 

 (3) The State of Israel signed the Convention against Corruption on November 29, 2005. However, it is yet to ratify the Convention, and indeed, even its signing of the Convention was marked by problems and delays (apparently primarily due to Israeli Ministry of Defense officials – see the protocol of the meeting of the Parliamentary Commission of Inquiry on Exposing Governmental Corruption, of November 16, 2005). Moreover, Israel’s signing of the Convention, and the Convention itself, post-date the events that are the subject of this appeal. In any case, we do not need to rely on the Convention as legal grounds in this case. Rather, it serves as a compass and a road map that show us the most desirable interpretation and the appropriate judicial policy in cases such as this – desirable and appropriate today, following the signing of the Convention, as at the time relevant to the appeal, prior thereto.

19.            In today’s world, the massive advances in transportation and communications, the technological innovations and the resulting global “proximity” have brought about the expansion and spread of international and multi-national economic and business activity. This has major implications for various areas of law; one such consequence is the transformation of corruption from a national and local matter to an issue of broad-ranging, international significance, which needs to be treated as such, including in relation to taxation. In CrimA 4596/05 Rosenstein v. State of Israel [37] I had occasion to comment: 

'"The Global Village" is not just a technological concept, relating to the expanding possibilities for communication and travel, which no one can dispute; in my opinion it is also an ideological concept, even though it is still an ongoing process and there remains much that is unclear about it…. However, our case falls clearly into the category in which the law will be interpreted according to what is appropriate, which in this case is also what is effective. Globalization therefore includes questions of terrorism on one hand, and of economics on the other, besides environmental issues and many other concerns. In more than one sense, the law lags behind the new technology and it must catch up materially and ideologically.'

It transpires that these words are applicable to various matters – including the case at hand, in the context of bribing the officials of a foreign state. In LCA 10231/04 Troim v. Gaidamak [38], Justice Arbel stated (albeit in essentially different circumstances): 

 'The contention that bribery in Kazakhstan should not be viewed as seriously as we would view this crime in a law-abiding state, but rather as the accepted mode of business conduct, has no leg to stand on. Even if it is acceptable somewhere, this does not vindicate bribery and certainly does not lead us to the conclusion that bribery should not be viewed as a criminal act' (para. 5). 

A clear and incisive approach here is inescapable. No one claims that the phenomenon of bribery does not exist in various countries. It is sometimes practically an open secret and the aforementioned Convention was initiated for good reason. But it should not be rationalized that it has always been that way. There will be Sisyphean struggles in the future, but we must persist, and there are tools to help us in our quest. 

Comparative law – expenses incurred for bribery in a foreign country from a tax perspective

20. (1) The specific phenomenon of promoting business interests in foreign countries through bribery and corruption is not a new one and, as stated above, various states have addressed it, inter alia in relation to the question of the deductibility of these kinds of expenses. In the USA, as early as 1958 a section in the US Internal Revenue Code was enacted prohibiting the deduction of expenses incurred through illegal payments to foreign governmental officials (Internal Revenue Code, 26 U.S.C § 162(c)(1) (1958)). 

                                (2) In 1977 a law was enacted expressly criminalizing the payment of bribes by US companies to government officials outside the USA: the Foreign Corrupt Practices Act (FCPA), 15 U.S.C §§ 78m, 78dd-1, 78dd-2, 78ff (1977). The aforementioned § 162(c) was amended to include direct reference to the FCPA. The background to this legislation was, on the one hand, the criticism leveled against § 162(c)(1) – primarily after it was extended – due to its lack of clarity and the fact that it had become a method of penalization through the taxation system (see, for example: Christopher A. Lewis, "Penalizing Bribery of Foreign Officials Through the Tax Laws: A Case for Repealing Section 162(c)(1)" 11 U. Mich. J. L. Reform (1977-78)); on the other hand, an investigation by the U.S. Securities and Exchange Commission found that the incidence of bribe payments to foreign governmental officials was extremely widespread, involving hundreds of US companies and payments worth hundreds of millions of dollars (Securities and Exchange Commission (SEC) Report on Questionable and Illegal Corporate Payments and Practices, CCH Federal Securities Law Reports No. 642, pt. II (1976), quoted in: Morgan Chu & Daniel Magraw, "The Deductibility of Questionable Foreign Payments", 87 Yale L. J. 1091 (1977-78; hereinafter: Chu & Magraw), in note 2; see also Uretzky, at pp. 149-151). The discovery of this phenomenon resulted, inter alia, from the exposure of a scandal relating to the aerospace company Lockheed, where it was found that the company had paid bribes worth tens of millions of dollars to senior foreign government officials  (S.E.C. v. Lockheed Aircraft Corp., 1976 WL 779 [67]. 

                      (3) As part of the policy considerations behind the enactment of the FCPA, it was explained that not only is bribing foreign governmental officials an unethical act that violates the moral and ideological expectations of the American public, but it also does damage to business by creating unfair competition, sabotaging public trust in the free market system and encouraging corruption at the expense of efficiency. It was stated that such an act is contrary to American interests, both because US companies not participating in bribery are at a disadvantage, and because the reputation of all US companies is tarnished, and also because of the serious difficulties it creates for US foreign policy with friendly governments and states (H.R. Rep. No. 640, 95th Cong., 1st Sess. (1977); Chu & Magraw, pp. 1095-97). 

           (4) It should be noted, nonetheless, that in subsequent years the FCPA was amended and the range of payments it criminalized scaled back, so that payments intended to smooth or expedite a “routine governmental action” would not be considered illegal under the FCPA; this also applies, in a case where it is proven that payments were legal in the country in which they were expended, or constituted good faith expenditures directly related to the promotion of products and services or execution of a contract with a foreign government (15 U.S.C §§ 78m, 78dd-1 (1988)).

21. (1) In 1997, member States of the Organization for Economic Co-operation and Development (OECD) and five additional States signed the Convention on Combating Bribery of Foreign Public Officials in International Business Transactions (Nov. 21 1997, 37 I. L. M 1 (1997)). In this Convention, the signatory states committed themselves, inter alia, to adopt measures to criminalize the bribery of public officials, using a relatively broad definition of the said term. As part of the Convention the signatory states undertook to uphold the Recommendation of the Council of the OECD on the Tax Deductibility of Bribes to Foreign Public Officials (April 11, 1996, 35 I. L. M. 1311 (1996)). 

 (2) Following the signing of this Convention, in 1997 France enacted a provision in its taxation code prohibiting the deduction of payments to foreign public officials, as defined in the Convention (Loi de finances rectificative pour 1997 (Amending Law on Finances for 1997), Law No. 97-1239 of Dec. 29, 1997, J. O no. 302 Dec. 30, 1997, p. 19101; Code général des impost, article 39, 2 bis). 

 (3) Similar provisions were also legislated in Switzerland, prohibiting tax deductions of bribes paid to Swiss or foreign public officials – whether on the federal level or the cantonal level (Bundesgesetz über die direkte Bundessteuer (DBG), (Law on Direct Federal Tax), 642.11 RS, Dec. 14 1990, Abs. 27, 59 (1990); Bundesgesetz über die Harmonisierung der direkten Steuern der Kantone und Gemeinden (StHG)  (Law on the Harmonization of Direct Tax), Dec. 14 1990, Abs. 10, 25 (1990). 

 (4) It will be mentioned that the American FCPA was amended one further time to align its provisions with those of the OECD Convention, which defined bribery in a broader manner than the pre-amendment US law (15 U.S.C. § 78m (1998). 

Interim summation

22.          (1) All the abovesaid indicates that the payments transferred by the appellant to its agents and used for bribes should not be deductible, due to the illegality of the expenses. These payments, which were intended to bribe and corrupt public officials in a foreign country, would have been illegal had they been made in Israel, and by presumption – at least – were illegal in the country in which they were made. They will therefore be considered as expenses made illegally. Recognition of these payments as tax deductible contradicts public policy. It would make crime pay. It would make this court into a partner in whitewashing a crime and rendering the law an empty vessel. This outcome, prohibiting deduction of the payments, is also inevitable in light of the protected interests that are compromised by bribery – proper public administration and public trust in the government authorities and the law. The fact that the illegal act was perpetrated outside Israel does not detract from the force of these interests. On the contrary, in the context of the development of international business activity, the damage caused by bribery extends beyond the concerns of the national and the local communal domains – it undermines proper and trustworthy administration throughout the world. An additional consideration is the concern for compromising the State of Israel’s foreign relations and image (cf. CrimA 4722/92 Markovitz v. State of Israel [39], at pp. 45, 49-50). Moreover, this outcome is reasonable in terms of the rules of fair competition – which are particularly important in the context of international economic activity; of encouragement of economic efficiency and the saving of public funds; and of common decency. 

(2) It could be claimed that this outcome puts Israeli investors active in certain locations outside Israel at a competitive disadvantage vis-à-vis investors from other states whose policies allow these deductions (regarding considerations of competition in questions of international taxation, see Tzili Dagan, International Taxation, at pp. 19-22, 49-66 (2004)). However, the consideration of the economic benefit to the assessee – and to the State itself, through taxation of the assessee – in no way justifies such deductions, in light of the counterbalancing list of grave concerns mentioned above. This is especially true in light of the existence of a similar legislative mechanism in other developed countries. This can also be said in relation to the principle of “exact taxation,” which is liable to be compromised by the prohibition on deducting illegal expenses. As stated, in my opinion, no heed should be paid to the argument against “imposing sanctions” via taxation law, since the non-recognition of deductibility does not constitute “penalization” per se, but rather a normative necessity, a natural extension and complement to policies reflected in other bodies of law. Otherwise the law would be contradicting itself: “the left hand pushes away and the right hand draws close” (Babylonian Talmud Sanhedrin [82] 107B).

(3) This outcome is also consistent with the purpose which underlies taxation law. Indeed, the particular purpose of the Income Tax Ordinance is exact collection of tax: “The payment of exact tax is the essence and purpose of the law” (CA 1527/97 Interbuilding Construction Company Ltd. v. Tax Assessor Tel Aviv 1 [40], at pp. 699, 719, per Justice Ariel; see also CA 4030/03 Granot Enterprises – Central Agricultural Cooperative Ltd. v. Tax Assessor for Large Enterprises [41], per Justice Adiel, para. 30). At the same time, the principle of exact tax serves the need for tax collection – which in itself is a mechanism for financing government and state activities. The principle of exact taxation is intended to serve justice, by upholding the first of the four principles of the “good tax” as defined by Adam Smith – “tax must be equal and just” (see Joseph M. Edrey, “An Overall Tax Base in Israel,” Mishpatim 12, at pp. 431, 432 (1983); see also CA 900/01 Keles v. Tax Assessor Tel Aviv 4 [42], at pp. 750, 765-766). But what is the justice in legal recognition – in the sense of allowance – of an expense incurred through crime? Indeed, taxation laws do not exist in a vacuum. Prof. Barak explained their purpose in his article “Interpretation of Taxation Laws,” Mishpatim 28, at pp. 425, 434-436 (1997): 

 The first-order purpose is to guarantee income for the public purse. This basically covers the immediate purpose, but it is not the only purpose. Behind the immediate purpose may lie other purposes that are societal in character. Taxation is a social instrument. Through it, society combats phenomena that it perceives as negative. It encourages those activities that it wishes to encourage and acts as a deterrent against those activities that it wishes to prevent…. It is assumed that the purpose of the law is to aspire to normative harmony. A tax law does not exist in a vacuum. It is interlinked with other laws that impose similar taxation and with the entire body of taxation legislation in Israel. It should be interpreted with a view to creating internal harmony within tax legislation. This harmony is not limited to ‘internal-taxation’ harmony only. The interpreter must aspire to an overall normative harmony. Therefore it is assumed that taxation laws are interlinked with the law in general' (emphasis added). 

  (4) Finally I repeat that in our case I have not addressed the question of the deductibility of expenses in the case of payments that are proven to have been made lawfully in the foreign state. As stated, the laws of various countries distinguish these kinds of cases from other cases of illegal expenses incurred on foreign soil; US law also distinguishes cases in which it was proven that the bribes were paid in order to expedite or facilitate routine governmental procedures not involving discretion (in this context see also the discussion in Uretzky, at p. 144; and by analogy see also Scheinfeld,  at p. 339). In my opinion the cases are different, and the latter case, for example, justifies an interpretation that disqualifies it outright. At any rate, no claim of this kind has been made in this case (all that was claimed by the appellant was that corruption was a very widespread phenomenon in Russia in the years following the collapse of the Soviet Union, and that many believe that corruption helped Russia to survive the transition between regimes; however, the prevalence of this phenomenon does not attest to its legality (see also State of Israel v. Shefer [35], at pp. 470-471; Ben-Tal v. Ben-Tal [16], at p. 61; CrimA 256/97 Lachman v. State of Israel [43]). 

The alternative reason – the evidentiary aspect and the question of proving the expenses

23.  As will be recalled, the major reason given by the lower court for the conclusion it reached was the evidentiary aspect, i.e. the extent to which the appellant proved the expenses it claimed. Based on this aspect, and in light of the testimony of the agents, the Court decided to allow the appeal in a partial manner, in relation to those parts of the commissions paid to the agents as their salaries only, and not in relation to the full expenses that the appellant claimed. The appellant directed its arguments against this decision too, as stated; however I am of the opinion that the appeal should not be allowed on this aspect either.

24. (1) No one disputes that it was incumbent on the appellant to prove the expenses claimed. In an income tax appeal, the burden of proof is squarely on the assessee’s shoulders when addressing a non-accounting dispute, even if – as the appellant claims in this case – it kept its books properly (see Arad [21], at pp. 107-111; CA 486/01 Hoter-Yishai v. Tax Assessor Tel Aviv 4 [44], at p. 326; CA 1124/03 Ganei Ofer Construction and Investment Ltd. v. Tax Assessor Tel Aviv 1 [45], at pp. 313, 323-324; see also Dan Bein, “The Burden of Persuasion and Obligation of Evidence in Taxation Laws,” Mishpat U’Mimshal 3, at p. 277 (1995)).  This is certainly the case when the assessee seeks to prove expenses incurred in generating income. In such a case the Talmudic maxim holds especially true: “He who wishes to extract [money] from his fellow is the one who must bring evidence” (Babylonian Talmud Bava Kama, [83] 35A; see also Beit Zakai Ltd. v. Tax Assessor [13], at p. 522; CA 435/65 Nagid, Trustee Businesses Ltd. v. Commissioner for Income Tax  [46], at p. 287; Namdar, at pp. 226-227). 

(2) The appellant argues that the lower Court erred when it imposed the regular burden of proof on it, and did not consider the difficulties it encountered in producing evidence for payments made in Russia during the period in question, especially in light of the particular circumstances. This argument should be rejected. Basically the appellant is attacking the factual findings of the lower court. In this regard it should be recalled, first, that “the question of the credibility of the evidence and how much weight should be attributed to it is given over to the court of first instance, and it is not the place of the appellate court to interfere with this, except in rare cases” (CA 647/79 Ivun v. Tax Assessor for Special Collections [47], at p. 648, per Justice Bejski; see also CA 274/84 Shapiro and Schweitzer v. Income Tax Assessor Tel Aviv 2 [48] at p. 53; CA 734/89 Pikanti Food Industries Ltd. v. Tax Assessor Gush Dan [49] at pp. 83-84, and the sources ibid). Secondly, I believe that on the merits of the case, there is no reason to interfere with the decision of the lower Court, which weighed the burden of proof borne by the appellant against the evidentiary difficulties that it faced (on this issue see and compare D. and D.  Zra’im Ltd. v. Tax Assessor Haifa [59], at pp. 142-144). The commercial and political circumstances prevailing in Russia at that time did indeed cause evidentiary difficulties; however, at least a few of the appellant’s agents visited Israel, as will be recalled, and yet insufficient documentation was presented regarding the expenses that the appellant paid to them too. Note that the Court did not disqualify all the appellant’s expenses due to lack of documentation; rather, it considered the testimony of the agents who appeared before it, and on that basis it recognized the expenses in a partial manner. In the words of the Court: “If not for the existence of an abnormal situation in the locations where the appellant was operating at that time, which all agree existed, it would have had nothing to say when confronted with the respondent’s claims in regard to the verification of its expenses” (p. 27 of the judgment). Therefore it cannot be said that the Court did not take the evidentiary difficulties encountered by the appellant into consideration. For this reason, too, I cannot accept the appellant’s argument. 

 (3) In this context, I am also unable to accept the appellant’s argument that the Court should have admitted the depositions of the three remaining agents, who did not testify, based on the provisions of reg. 10(b) of the Regulations. Indeed, in hearing an income tax appeal, the Court is not bound by the regular rules of evidence, and it may accept any evidence on which the respondent based its assessment (see also CA 21/60 Levtov v. Tax Assessor Haifa [50], at p. 1606; CA 506/71 Hafetz v. Tax Assessor Haifa [51], at pp. 212, 217; CA 5709/95 Ben-Shlomo v. Director of VAT Jerusalem [52], at pp. 241, 252-254; and also Amnon Rafael, Income Tax – Vol. VI (Osnat Frank, ed.) at pp. 264-268 (2005)) but in our case the respondent did not base its assessment on these depositions. These depositions were submitted in February 1999, during a hearing held by the respondent at the appellant’s instigation, and they are formulated in the most general of terms and in the same format, in a manner that led the respondent to assume that they had been prepared especially for the hearing (see the testimony of Income Tax Coordinator Tzipi Yosef of April 29, 2004, p. 84 of the protocol; I will add that this was also my impression from looking at the depositions – the submission of which was approved by a decision of the District Court of April 29, 2004, see p. 87 of the protocol). At any rate, even if the court had accepted the depositions as evidence, this would have been of no help to the appellant – since the court’s recognition of the appellant’s expenses was ultimately granted only in accordance with the testimony of the agents that held up in the face of cross-examination, and in any case the amounts that were recognized were not consistent with the amounts reported in their depositions. 

25.          The appellant’s other argument relates to the fact that the respondent authorized an exemption from deduction of tax at source from the payments transferred to its agents. I cannot accept this argument, irrespective of whether it was raised in an attempt to reinforce the evidence that the payments were incurred in generating the appellant’s income, or whether it was raised on the normative level. According to counsel for the appellant, authorization of the exemption constitutes a “governmental promise” to recognize the payments as expenses, and non-recognition is therefore a violation of a property right. Deduction at source is a method of tax collection for which the recipient of a payment may, in certain circumstances, be liable, and it is unrelated to the question of proving an expense in the generation of income by the payer: “Deduction at source does not, in essence, relate to the substance of the tax liability or the generation of tax liabilities – when is a person liable for tax and when is that person not liable for tax; rather it relates to the method of tax collection and the administration of taxation” (Tax Assessor Haifa v. Hed HaKrayot Ltd. [4], at p. 683 (regarding deduction at source by an employer), per Vice-President Cheshin; see also ITA 140/89 Dar v. Tax Assessor Haifa [60], at p. 116), and it would not be superfluous to mention s. 1.4 of Directive No. 34/93 on the issue of deduction of tax at source from payments to foreign residents, according to which: “It is hereby emphasized that an exemption from deduction of tax at the stage of deduction at source in no way determines the final status regarding the non-liability of the payment as taxable income for the payee”; a fortiori, in no way does it determine the status of the payment as an expense for the payer. 

The cross appeal 

26.  The respondent cross-appealed the decision of the District Court to partially recognize payments made by the appellant – those that were destined for the agents’ pockets – as expenses. At any rate, I find it difficult to accept the respondent’s assertion that these payments have not been proven. As noted, this is a question of credibility and factual determinations of the District Court, and I have found no grounds to interfere with its decision, which was based on the testimony it heard. Nonetheless, I admit that I had my doubts regarding the question of legality: perhaps the full amount transferred to the agents was “tainted” and “stained” by illegality stemming from the bribery as described above. Ultimately I decided, following careful consideration of the testimony, that the payments transferred to the agents themselves, as payment for their work, should not be viewed as illegal payments. The agents, who were retired or former Russian public servants, performed many tasks for the appellant, foremost of which was the brokerage and contacts between the appellant and the organizations that constituted potential buyers –– activities that are not illegitimate per se, especially under the particular conditions that prevailed in Russia at that time. In the words of the lower court, the agents “led him [the appellant’s director – E.R.] through the commercial and fiscal maze created by Perestroika” (p. 17 of the judgment). They received their fees for this agency, which entailed costs. From the testimony it is also evident that the role of the agents did not end with brokering the transactions, but apparently also involved the installation, adaptation and maintenance of the medical equipment. See, for example, the testimony of the agent Garbuz:

'I knew that the clinic of the Foreign Ministry needed a particular piece of equipment, I approached the clinic and said that I know a body that can supply a suitable piece of equipment... (p. 58 of the protocol) 

I would monitor all the activities, I would release goods at customs, when they got held up. When they installed the equipment and there were problems in the beginning, I would help with the installation' (p. 66, see also p. 63).

A similar story emerged from the testimonies of the agent Lutzky (“What did I physically do – I had meetings in different cities… I met with the workers of the factories…” (p. 21 of the protocol)), and the agent Koznitzova (“I dealt with supply but I looked for customers. I had connections throughout the Soviet Union” (p. 74 of the protocol)); the agent Friedman testified about training and studies (pp. 30, 32)). From here we see that even though promoting the transactions through bribes was a part of the agents’ role – and perhaps even a central part – it was not the only part, and it cannot be said that their fees, which were paid by the appellant, were tainted by illegality such as to disqualify them from being recognized as expenses.

Epilogue

27.          (1)          The completion of the writing of this judgment coincided with the publication of the judgment of the Tel Aviv-Jaffa District Court (Judge M. Eltuvia) in ITA 1015/03 Company Ltd. v. Tax Assessor Netanya [61]; that case, too, addressed the question of the deduction of expenses paid as bribes outside Israel, under rather similar circumstances, and its conclusion is consistent with the aforesaid. In that case the bribe was paid directly by the company being assessed, as part of a single transaction that was larger in scope than the transactions in our case. I will not address the circumstances of that case here, but I will briefly address several of the principle-based reasons for the decision. The judgment addresses, inter alia, the claim of a governmental promise and damage to property due to its violation, and the use of monies by the controlling shareholder in order to give a bribe – but these questions are not relevant to our case.

 (2) According to the judgment, recognition of bribes given outside Israel as an expense undermines the fundamental principles of the State of Israel and is incompatible with its obligations under the UN Charter, as well as with public policy, which is not confined to the borders of the State (citing a case of an arbitration award being revoked due to bribe payments that were made outside Israel and that constituted the factual basis for the arbitration award – OM (Jer) 2212/03 Gad v. Siman-Tov [62], per Judge Okon; LCA 3476/04 Siman-Tov v. Gad [53], per Justice Joubran). It was ruled that recognizing a bribe payment as an expense would make the Israeli public an accomplice to the crime, and that when accurate assessment and public policy clash, the latter must prevail. It was also determined that the prohibition on deducting bribe payments is designed to act as a disincentive to engaging in activities that involve giving bribes, and that it is doubtful whether bribe payments, which are antithetical to public policy, can be  considered a necessary and essential expense for generating income. 

                 (3) I humbly agree with the message of these words, as I explained above. As stated, in my opinion the recognition of expenses that were incurred to pay bribes is in general incompatible with public policy. Our case, as stated above, falls into the category of illegal expenses – the payment of which constituted an actual crime – and these should not be recognized for tax purposes for reasons of public policy. I have expressed my position that a person who chooses to spend money on bribes should know that the legal authorities will not support these activities, even indirectly, by recognizing them as an expense. 

                 (4) After these lines were written, the respondent requested that this judgment be appended as a reference.

28.            In conclusion, I recommend that my colleagues not allow the appeal or the cross-appeal.

 Justice E. Hayut

I agree with my colleague Justice E. Rubinstein that the appeal and cross-appeal should be denied, but in my opinion the fundamental question regarding the deductibility of illegal expenses (which the lower court said it addressed most perfunctorily, and even then, more than was necessary) may be left for a more opportune moment, since the appeals can be denied by simply adopting the lower court’s finding and conclusions on the factual plane.

 In its judgment the lower court ruled that the income tax appeal filed by the appellant should be partially allowed and that the fees the appellant paid to the four agents who worked on its behalf in Russia during the 1992-1996 fiscal years should be recognized as deductible expenses. The Court emphasized at the start of its judgment that the appeal before it “turns primarily on questions of fact and credibility,” and the deliberations on these questions are indeed the main focus of the judgment. The court noted that the point of departure in this context is the well-established rule that in cases involving recognition of expenses as deductible, the burden of proof is borne by the assessee, who must present material evidence and appropriate documentation to establish his claims regarding the expenses incurred.  Nevertheless, the lower court held that under special circumstances the assessee may be allowed to provide a basis for recognizing the expenses it claims “even in the absence of formal documentation… providing that in place of the documentation required to support the claims, other credible evidence is submitted, such as oral testimony from credible witnesses.” In this case, the appellant claims that its activities in the states of the Soviet Union were mainly carried out via seven agents, but it did not possess formal documentation to show that these expenses were incurred as claimed, in the relevant fiscal years, as fees to the agents and as additional payments for “marketing facilitation” and “brokerage.” Ultimately the appellant managed, following a not inconsiderable effort, to obtain testimony from four of the agents who worked for it during those years, and the court was prepared to recognize that these were special circumstances due to the unique situation that prevailed in the Soviet states with the advent of Perestroika. It was therefore willing to examine and rely on the testimonies of those agents who testified before it (Koznitzova, Garbuz, Lutzky, and Friedman, as well as the testimony of Koznitzova’s daughter Mrs. Dvinsky) regarding the question of the expenses, even in the absence of formal documentation for the relevant transactions. The court examined and analyzed these testimonies thoroughly and found them credible and convincing. It therefore used them as the basis for its decision to allow partial deduction of the expenses that the appellant claimed, in the amount of the fees that it paid to those agents according to their testimony (Koznitzova – $48,000; Garbuz – $10,000; Friedman – $30,000; and Lutzky – $135,000). Regarding the remainder of the expenses claimed by the appellant, including the payments which it termed “under the table” payments, the court thought that these had not been proven through any material evidence and that this was sufficient to deny the appellant’s claims in their regard. In the words of the court:

'In our case, since there is no real proof regarding a significant portion of the expenses claimed by the appellant, there is no room to recognize these as deductible. Regarding the other portion of the expenses, those accounted for in the testimony of the agents summoned before me – i.e. Mr. Garbuz, Mr. Lutzky, Mr. Friedman, and Ms. Koznitzova – I have reached the conclusion that what I heard from them was enough to create an evidentiary basis for proving that these payments were made to them, even in the material absence of documents that should have substantiated the transactions that generated those expenses.'  

These findings and conclusions of the lower Court are based, as stated, on a thorough and exhaustive evaluation of the testimonies before it and, like my colleague Justice Rubinstein, I too see no reason to interfere with them. This is also the case regarding the ruling of the lower court that in light of the special situation that prevailed in the Soviet states during the years in question, the credible testimony of the agents is sufficient in terms of evidence, insofar as it relates to the fees paid to them by the appellant for their services. 

For these reasons, I concur with the position of my colleague Justice Rubinstein that both the appeal and the cross-appeal should be denied.

Justice Y. Elon

I concur with position of my colleagues Justice E. Rubinstein and Justice E. Hayut that the appeal and cross-appeal should be denied.

 Like my colleague Justice Hayut, I too am of the opinion that in the matter of these appeals, the concrete factual findings of the lower court and the judicial outcome that they entail are sufficient basis for this conclusion. 

 The fundamental question raised by my colleague Justice Rubinstein regarding the general approach that should be adopted in relation to the deductibility of expenses that are allegedly illegal, and which were incurred by an Israeli tax-payer outside Israel, need not be decided in the context of the appeals before us. This is a complex and multi-faceted issue, which has manifold implications on many and various planes. It is possible that many aspects of this issue are a matter for statutory regulation.

In any case, I concur with the words of my colleague Justice Hayut, that a systematic investigation of this issue should be left for a more opportune occasion, when a decision on the matter is actually required.

Decided as per the judgment of Justice E. Rubinstein.

2 Sivan 5768

June 5, 2008

1

15 U.S.C §§ 78m, 78dd-1 (1988)       1, 39

1Court Regulations (Appeals Regarding Income Tax) 5739-1978               11

3

3Textile Mills Corp.‎ v.‎ Commissioner               5

A

Anon case             21, 26

Arad case              43

B

Babylonian Talmud Bava Kama          6, 43

Babylonian Talmud Ketubot               5

Babylonian Talmud Ketubot, 105B    6

Babylonian Talmud Sanhedrin           6, 41

Babylonian Talmud Sotah 47B           6

Bank of Israel Law, 5714-1954          1, 18

Beit Zakai case      23, 24

Ben-Tal case          32

Bob Jones University v.‎ United States, Goldsboro Christian Schools, Inc.‎ v.‎ United States     5, 25

Book of Kings II     6, 35

Bundesgesetz über die direkte Bundessteuer (DBG), (Law on Direct Federal Tax), 642.11 RS, Dec. 14 1990, Abs. 27, 59 (1990)                2, 40

Bundesgesetz über die Harmonisierung der direkten Steuern der Kantone und Gemeinden (StHG), (Law on the Harmonization of Direct Tax), Dec. 14 1990, Abs. 10, 25 (1990)            2, 40

C

CA 101/74 Hiram Landau Road Construction and Development Works Ltd. v. Water Sources Development (Foreign Countries) Ltd        4, 35

CA 1124/03 Ganei Ofer Construction and Investment Ltd. v. Tax Assessor Tel Aviv 1           4, 43

CA 1527/97 Interbuilding Construction Company Ltd. v. Tax Assessor Tel Aviv 1   4, 41

CA 21/60 Levtov v. Tax Assessor Haifa            4, 44

CA 274/84 Shapiro and Shweitzer v. Tax Assessor Tel Aviv 2      4, 44

CA 294/94 Jewish Burial Society v. Kestenbaum           2, 21

CA 3498/94 A. v. B.             3, 23

CA 380/75 Pardes Cooperative Association of Citrus Growers Ltd. v. Tax Assessor for Big Enterprises             2, 19

CA 435/65 Nagid, Trustee Businesses Ltd. v. Income Tax Commissioner  4, 43

CA 438/90 Haifa Tax Assessor v. Hed HaKrayot Ltd       2, 19

CA 486/01 Hoter-Yishai v. Tax Assessor Tel Aviv 4        4, 43

CA 506/71 Hafetz v. Tax Assessor Haifa           4, 44

CA 507-508/59 Credit Fund v. Loan Fund       2, 19

CA 522/63 Beit Zakai Ltd. v. Tax Assessor       3

CA 5258/98 A. v. B.             2, 21

CA 5709/95 Ben-Shlomo v. Director of VAT Jerusalem                4, 44

CA 578/75 Ben-Tal v. Ben-Tal            3, 25

CA 6416/01 Benvenisti v. Official Receiver    3, 22

CA 647/79 Ivun v. Tax Assessor for Special Collections                4, 44

CA 6585/95 M.G.U.R.  v. Municipality of Nesher           3

CA 661/88 Haimov v. Hamid et al.    2, 21

CA 734/89 Pikanti Food Industries Ltd. v. Tax Assessor Gush Dan              4, 44

CA 900/01 Keles v. Tax Assessor Tel Aviv 4    4, 42

CA Granot Enterprises – Central Agricultural Cooperative Ltd. v. Tax Assessor for Large Enterprises                4, 41

Camarano v.‎ United States 5, 25

Convention on Combating Bribery of Foreign Public Officials in International Business Transactions (Nov. 21 1997, 37 I. L. M 1 (1997)    2, 40

Court Regulations (Appeals Regarding Income Tax) 5739-1978 1

CrimA 126/76 State of Israel v. Shefer            4, 34

CrimA 163/82 Moshe David v. State of Israel 3

CrimA 2521/03 Sirkis v. State of Israel             2, 21

CrimA 256/97 Lachman v. State of Israel        4, 43

CrimA 2597/04 Roitman v. State of Israel       3, 29

CrimA 341/73 State of Israel v. Vita  4, 34

CrimA 355/88 Levi v. State of Israel 4, 34

CrimA 389/72 Zokaim v. State of Israel            4, 34

CrimA 4596/05 Rosenstein v. State of Israel  4, 37

CrimA 4722/92 Markowitz v. State of Israel   4, 41

CrimA 5046/93 State of Israel v. Hochman     3, 31

CrimA 7068/06 State of Israel v. Ariel Electrical Engineering Traffic Lights and Maintenance Ltd.      3, 32

CrimA 71/83 Flatto-Sharon v. State of Israel   3, 34

CrimA 733/07 Cohen v. State of Israel             3, 30

CrimA 7646/07 Cohen v. State of Israel          2, 22

CrimA 8573/96 Mercado v. State of Israel      3, 30

CSA 1/77 Klein v. State of Israel        3, 31

Currency Supervision and Trade with Enemy States Law             1, 19

D

Deuteronomy       5, 33

E

Efrat case               26

El-Arbiya case       19

El-Arbiya Hotels case           18, 24

Evico case              27

Exodus   5, 33

Ezekiel    6, 34

F

FCrimH 2980/04 Evico v. State of Israel           3, 26

FH 22/61 HaOleh Loan Fund, Mutual Society Ltd. and HaPoel HaMizrahi Credit Fund, Mutual Society Ltd. v. Tax Assessor for Large Enterprises, Tel Aviv            2, 18

FH 22/82 Beit Jules Ltd. v. Raviv Moshe and Assoc. Ltd                3

Foreign Corrupt Practices Act (FCPA), 15 U.S.C §§ 78m, 78dd-1, 78dd-2, 78ff (1977)          1, 38

H

HaOleh Loan Fund v. Tax Assessor for Large Enterprises case    18, 20

HCJ 368/76 Gozlan v. Beit Shemesh Local Council        3, 32

HCJ 4562/94 Abu Daka v. Lod Military Court  3, 29

HCJ 5413/07 A. v. State of Israel       3, 22

HCJ 693/91 Efrat v. Population RegistryCommissioner at the Ministry of the Interior            2, 21

Hed HaKrayot case              22, 23

I

Income Tax Ordinance  s.17              1, 8, 17, 41

Internal Revenue Code, 26 U.S.C § 162(c)(1) (1958)    1, 38

Isaiah      6, 34

ITA (Haifa) 13/82 Frumkin v. Tax Assessor      5, 24

ITA (Haifa) 40/95 Vered Recycling v. Tax Assessor Haifa              5, 24

ITA (Jer) 54/84 El-Arbiya Hotels Ltd. v. Tax Assessor Jerusalem  5, 18

ITA (TA) 1143/01 Miller v. Tax Assessor Tel Aviv 3        5, 24

ITA (TA) 98/84 Frankel v. Tax Assessor Tel Aviv 1          5, 24

ITA 1015/03 Company Ltd. v. Tax Assessor Netanya     5, 47

ITA 140/89 Dar v. Tax Assessor Haifa               5, 45

ITA 5019/97 D.  and D.  Zra'im Ltd. v. Tax Assessor Haifa             5, 30

L

LCA 10231/04 Traum v. Gaidamak   4, 38

LCA 1436/90 Giora Arad, Company for Investment Management and Services Ltd. v. Value Added Tax Administration                3

LCA 3476/04 Siman-Tov v. Gad         5, 47

LCA 8253/99 A. v. B.           3, 22

LCrimA 5905/98 Ronen v. State of Israel        3, 30

Lilly v.‎ Commissioner           5, 25

Loi de Finances Rectificative Pour 1997 (Amending Law on Finances for 1997), Law No. 97-1239 of Dec. 29, 1997, J. O no. 302 Dec. 30, 1997       2, 40

M

Mercado case       35

Midrash Tanhuma                6, 35

Mishnah Hallah     5

N

National Insurance Law [Consolidated Version], 5728-1968       1, 20

O

OM (Jer) 2212/03 Gad v. Siman-Tov                5, 47

P

Pardes v. Tax Assessor case               19, 24

Penal Law, 5737-1977        1, 26

R

Rabbi Chaim Yosef David Azulai, Birkei Yosef (Hoshen Mishpat, s. 9, ss. 10)             6

Rabbi Yechiel Michel HaLevi Epstein, Aruch Hashulhan, (Hoshen Mishpat, s. 9, ss. 1             6

Rabbi Zvi Hirsch Eisenstadt, Pithei Tshuva, (Hoshen Mishpat, 34, 27)        6

Ronen case           31

S

S.E.C. v. Lockheed Aircraft Corp.       5

Shefer case           43

Shulhan Arukh, Hoshen Mishpat       5, 33

Song of Songs Rabba           5, 23

T

Textile Mills Corp.‎ v.‎ Commissioner  25

U

United Nations Convention Against Corruption, Articles 12(4), 15 and 16               2

W

Wireless Telegraph Ordinance [New Version] 5732-1972          1, 20