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[2016] ZASCA 90
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Avenant v Commissioner for the South African Revenue Service (367/2015) [2016] ZASCA 90; 78 SATC 343 (1 June 2016)
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THE
SUPREME COURT OF APPEAL OF SOUTH AFRICA
JUDGMENT
Reportable
Case
No: 367/2015
In
the matter between:
DR
H C
AVENANT
APPELLANT
and
THE
COMMISSIONER FOR THE
SOUTH
AFRICAN REVENUE
SERVICE
RESPONDENT
Neutral
citation
:
Avenant v CSARS
(367/2015)
[2016]
ZASCA 90
(1 June 2016)
Coram
:
Ponnan, Theron, Saldulker, Swain and Mbha JJA
Heard
:
23 May 2016
Delivered:
1 June 2016
Summary:
Paragraphs 2, 3(1), 4(1) and 9 of the
First Schedule to the Income Tax Act 58 of 1962 – ‘produce
held and not disposed
of’ – grapes delivered by wine
farmer to a co-operative – pressed into pulp and mixed with
pulp of other members
of co-operative – identity of natural
product retained – resultant pulp ‘produce’ –
ownership of
pulp retained by members of co-operative – produce
‘not disposed of’.
ORDER
On
appeal from:
Tax Court, Cape Town
(Allie J sitting as court of first instance).
The
appeal is dismissed with costs.
JUDGMENT
Swain
JA
(Ponnan,
Theron, Saldulker and Mbha JJA concurring):
[1]
The issue in this
appeal is whether harvested grapes delivered by a farmer to a
co-operative winery, which is pressed into pulp
and then mixed with
the pulp of other members of the co-operative, for processing into
wine, constitutes ‘produce held and
not disposed of’ at
the end of a tax year for the purposes of para 2 of the First
Schedule to the Income Tax Act 58 of 1962
(the Act). The appellant,
Dr H C Avenant, who conducts agricultural operations as contemplated
in s 26(1) of the Act, contends
that it does not. The view of the
respondent, the Commissioner for the South African Revenue Service
that it did, resulted in the
appellant being assessed to tax in the
2009 tax year. As a result an amount of R789 338 was included as
taxable income in
respect of ‘closing stock from farming
operations’ in terms of paras 2, 3(1) and 9 of the First
Schedule to the Act.
[2]
The appellant
unsuccessfully objected to the assessment and thereafter appealed to
the Tax Court, Cape Town (Allie J). The court
a quo held that the
grapes delivered to Namaqua Wines Ltd (the co-op) at the end of
February 2009 was ‘produce on hand that
was not disposed of as
at the end of the 2009 year of assessment that should have been
included’ as income being the value
of wine grapes. As regards
the assessed amount of R789 338 the court a quo concluded that
it was ‘manifestly erroneous,
unfair and unreasonable’
set it aside and referred it for re-assessment to the Commissioner.
Leave to appeal to this court
was granted by the court a quo in terms
of
s 135(1)
of the
Tax Administration Act 28 of 2011
.
[3]
The relevant statutory
provisions are as follows:
(a)
Section 26(1) of the
Act provides that:
‘
The
taxable income of any person carrying on pastoral, agricultural or
other farming operations shall, in so far as it is derived
from such
operations, be determined in accordance with the provisions of this
Act but subject to the provisions of the First Schedule.’
(b)
Para 2 of the First
Schedule to the Act provides that:
‘
Every
farmer shall include in his return rendered for income tax purposes
the value of all livestock or produce held and not disposed
of by him
at the beginning and the end of each year of assessment.’
(c)
Para 3(1) of the
First Schedule to the Act provides that:
‘
Subject
to the provisions of subparagraphs (2) and (3), the value of
livestock or produce held and not disposed of at the end of
the year
of assessment shall be included in income for such year of assessment
and there shall be allowed as a deduction from such
income the value
of livestock or produce, as determined in accordance with the
provisions of paragraph 4, held and not disposed
of at the beginning
of the year of assessment.’
(d)
Para 4(1)
(a)
of the First Schedule to the Act provides that:
‘
The
values of livestock and produce held and not disposed of at the
beginning of any year of assessment shall . . . be deemed to
be –
(a)
in the case of a farmer who was carrying on farming operations on the
last day of the year immediately preceding the year of assessment,
the sum of –
(i)
the values of livestock and produce held and not disposed of by him
at the end of the year of assessment. . .’
(e)
Para 9 of the First Schedule to the Act provided at the time that:
‘
The
value to be placed upon produce included in any return shall be such
fair and reasonable value as the Commissioner may fix.’
(f)
Section 3(4)
of the Act provides inter alia that:
‘
Any
decision of the Commissioner under . . . paragraphs . . . 9 . . . of
the First Schedule . . . shall be subject to objection
and appeal.’
[4]
The respondent submits
that the provisions of paras 2, 3(1) and 4(1) of the First Schedule
to the Act, perform a similar function
to the provisions of s 22 of
the Act, which pertains to the determination of the value of trading
stock. Trading stock is defined
in s 1 of the Act as follows:
‘“
Trading
stock” includes anything produced, manufactured, constructed,
assembled purchased or in any other manner acquired
by a taxpayer for
the purposes of manufacture, sale or exchange by the taxpayer or on
behalf of the taxpayer.’
[5]
The relevant portions
of s 22 of the Act provide as follows:
‘
(1)
The amount which shall, in
the determination of the taxable income derived by any
person during
any year of assessment from carrying on any trade (other than
farming), be taken into account in respect of the value
of any
trading stock
held
and not disposed of
by him at the end of such year of assessment, shall be –
(a)
in the case of trading stock other than trading stock contemplated in
paragraph
(b)
,
the cost price to such person of such trading stock, less such amount
as the Commissioner may think just and reasonable as representing
the
amount by which the value of such trading stock, not being, has been
diminished by reason of damage, deterioration, change
of fashion,
decrease in the market value or for any other reason satisfactory to
the Commissioner; . . . .
(2)
The amounts which
shall in the determination of the taxable income derived
by any
person during any year of assessment from carrying on any trade
(other than farming), be taken into account in respect of
the value
of any trading stock
held and not disposed of
by him at the
beginning of any year of assessment, shall –
(a)
if such
trading stock formed part of the trading stock of such person at the
end of the immediately preceding year of assessment
be the amount
which was, in the determination of the taxable income of such person
for such preceding year of assessment, taken
into account in respect
of the value of such trading stock at the end of such preceding year
of assessment; or
(b)
if such
trading stock did not form part of the trading stock of such person
at the end of the immediately preceding year of assessment,
be the
cost price to such person of such trading stock.’ (Emphasis
added).
[6]
In
Richards
Bay Iron & Titanium (Pty) Ltd & another v Commissioner for
Inland Revenue
[1995]
ZASCA 81
;
1996 (1) SA 311
(A) at 316F-317D the rationale for
provisions such as s 22 read with the extended definition of ‘trading
stock’
in s 1 of the Act, was described in the following terms:
‘
The
South African system of taxation of income entails determining what
the taxpayer’s gross income was, subtracting from
it any income
which is exempt from tax, subtracting from the resultant income any
deductions allowed by the Act, and thereby arriving
at the taxable
income. It is on the latter income that tax is levied . . . Where a
taxpayer is carrying on a trade, any expenditure
incurred by him in
the acquisition of trading stock is deductible in terms of s 11
(a)
of the Act because it is expenditure incurred in the production of
income, and it is not of a capital nature. Income generated
by the
sale of such stock is of course part of the trader’s gross
income. Where in his first year of trading a trader has
bought, and
thereafter sold, all the stock which he acquired during that year, no
problem arises. There will be a perfect correlation
between the
trading income earned and the expenditure incurred in that particular
year in purchasing and selling the stocks sold,
and the difference
between the two sums will give a true picture of the result of the
year’s trading. There will be no stock
on hand at the close of
the year of which account need be taken. Contrast with that situation
a situation in which the trader,
having sold all the stock acquired
earlier during that year at a substantial profit, purchases large
quantities of stock just prior
to the close of his tax and trading
year. If he were permitted to deduct the cost of purchasing that
stock from the income generated
by his sales, without acknowledging
the benefit of the stock acquired, he would be escaping taxation in
that year on income which
otherwise would have been taxable by the
simple expedient of converting it into trading stock of the same
value. That process could
be repeated every year
ad
infinitum
.
It is true that there would ultimately have to be a day of reckoning
when trading finally ceases, but the fact remains that the
taxpayer
will have been enabled to avoid liability for tax until that point is
reached. Where the trader is an individual who is
subject to rising
marginal tax rates as his trading profit increases, he would be
enabled to so regulate his apparent profit that
he immunised himself
from them indefinitely.’
[7]
As
pointed out by
Silke
,
if the trading stock is not sold in the same year it was acquired, a
taxpayer who only deducts the costs of acquiring the stock
without
taking into account the value of the stock, will not include a
‘balancing’ amount in gross income. Section
22(1) of the
Act therefore requires ‘the value of the trading stock held and
not disposed of’ at the end of the year
of assessment, to be
taken into account in the calculation of taxable income. The value of
the closing stock is added to taxable
income to ‘balance’
the tax calculation.
[1]
[8]
In
Richards
Bay
at 319D Marais
JA referred to Australian tax law and the decision in
Federal
Commissioner of Taxation v St Huberts Island (Pty) Ltd (in
liquidation)
(1978)
78 Australian Tax Reports 452 where Mason J stated that:
‘
The
recognition by accountants and commercial men that raw material used
for the purpose of manufacture in a manufacturing business
and partly
manufactured goods form part of the trading stock of the business was
an almost inevitable development.
It
enabled the value of raw materials and partly manufactured goods to
be included in the value of trading stock at the beginning
and end of
an accounting period
and by this means it led to the making of a more accurate calculation
of the profit earned or the loss sustained in that period.
It
is not easy to see how an accurate calculation of profit or loss
could be made unless the value of raw materials and partly
manufactured goods was taken into account.
Of course the value might be taken into account, even though by
different means. Partly manufactured goods may be dealt with as
“work
in progress”, as indeed they are sometimes, but this expression
is no more than an alternative description except
in so far as it is
intended to introduce different methods of valuation.
In
this respect I agree with Aickin J that the House of Lords in
Ostime
(Insp of Taxes) v Duple Motor Bodies Ltd
[1961] UKHL 6
;
[1961] 1 WLR 739
did not
treat work in progress as being essentially different from trading
stock.
Their Lordships used the expression “work in
progress” as an alternative description for partly manufactured
goods which,
like raw materials and completed goods, form part of the
trading stock of a business and which, as that case illustrates, give
rise to special problems of valuation.
At 751, Lord Reid, with
whose judgment Lord Tucker and Lord Hodson agreed, said:
“
Suppose
that the manufacture of an article was completed near the end of an
accounting period. If completed the day before that
date the article,
if not already sold, has become stock-in-trade, if completed the day
after that date it was still work in progress
on that date.”’
(Emphasis added).
[9]
Consequently, in
CSARS
v Foskor
[2010]
ZASCA 45
;
[2010] 3 All SA 594
(SCA) para 21 it was stated that:
‘
Historically,
trading stock denoted goods acquired by a trader or dealer and held
for sale. Both in Australia and South Africa the
narrower view of
what constituted trading stock gave way to the wider view to include
raw materials acquired for purposes of manufacture,
components and
partly manufactured goods.’
[10]
Trading stock for the
purposes of s 22(1) of the Act therefore includes partly manufactured
goods, also referred to as ‘work-in-progress’.
In
addition, as pointed out in
Richards
Bay
at 325 B-F the
definition of trading stock which includes:
‘
.
. . anything produced, manufactured, purchased or in any other manner
acquired by a taxpayer for purposes of manufacture . . .
by him or on
his behalf’
means
that:
‘
.
. . in order to fall within the definition, what the taxpayer
produces, manufactures, purchases or otherwise acquires
need
not be intended to be disposed of in the state in which it then is.
It suffices that it is intended to be used for the purposes of
manufacturing something.
Nor
does it matter whether or not that which is intended to be used is
capable of realisation or sale in the state in which it then
is.
Whether it is so realisable or not, there will be no contemplation of
receiving any quid pro quo for it in the state in which
it then is.
The fact that it may be saleable in its then state and have an
ascertainable market value is not what brings it into the first
part
of the definition, because it was not produced, manufactured,
purchased or in any other manner acquired for sale or exchange.
What
brings it into the definition notwithstanding that its sale or
exchange was not contemplated is its intended use for purposes
of
manufacture.’ (Emphasis added).
[11]
Although
s 22 of the Act excludes from its ambit taxable income derived by a
taxpayer from the activity of ‘farming’,
s 26 provides
that the taxable income of any person carrying on ‘pastoral,
agricultural or other farming operations’
shall be determined
in accordance with the Act, but ‘subject to the provisions of
the First Schedule’. Paragraphs 2,
3(1), 4(1) and 9 of the
First Schedule, which have as their object the valuation of
‘livestock and produce held and not disposed
of’ by a
taxpayer at the end of the year, accordingly form part of the Act. It
would be anomalous if the meaning attributed
to ‘trading stock
held and not disposed of’ in terms of s 22 of the Act differed
from the meaning to be attributed
to ‘livestock and produce
held and not disposed of’ in terms of paras 2, 3(1), 4(1) and 9
of the First Schedule to
the Act.
[2]
‘Trading stock’ has been construed for the purposes of s
22 as work-in-progress and stock which need not be in a saleable
form.
[12]
The following facts are
common cause, or not in dispute:
(a)
The appellant
carried on ‘pastoral, agricultural or other farming operations’
in terms of s 26(1) of the Act and filed tax returns which showed a
portion of his overall taxable income, being derived from his
farming
operations, which were described as ‘wingerd boerdery’.
The farming income consisted mainly of what was described
in his
personal financial statements as ‘Verkope Produkte’.
(b)
The farming income
consisted of payments that the appellant received from the
co-op, of
which he was a member, in respect of grapes that he delivered to the
co-op for the purpose of being made into wine.
(c)
On delivery, the
grapes of the appellant were pressed into a pulp and mixed
with the
pulp from pressing grapes of the same cultivar and class delivered by
other farmers, who were also members of the co-op.
These common pools
consisting of individual cultivars and classes of grapes such as
Sauvignon Blanc, Chenin Blanc, Merlot and Chiraz
were operated by the
co-op on behalf of its members.
(d)
As at midnight on 28
February 2009, (the end of the appellant’s 2009
year of
assessment) all of the appellant’s harvested grapes had been
delivered to the co-op and had been pressed into pulp
to begin the
process of wine making. The co-op thereafter bottled or packaged the
wine and marketed and sold it.
(e)
Each farmer who
participated in a pool received payment from the co-op of his
or her
pro rata share of the net proceeds of the sale of the wine, after the
deduction of the co-op expenditure incurred in making
and marketing
the wine. The pro rata share was calculated by reference to the
ratios in which each individual farmer delivered
grapes to the pool.
(f)
Three payments
were made to the appellant by the co-op. A ‘voorskot’
was
paid in July (after each February to April harvest), a ‘middelskot’
and an ‘agterskot’ was paid respectively
in March and
November of the following year. The ‘voorskot’ was paid
by the co-op out of borrowed money before any
income was earned from
the sale of wine and the ‘middelskot’ was based upon
ongoing estimates. The final amount owed
to the appellant was only
calculated when the ‘agterskot’ was paid.
(g)
The members of the
co-op did not sell their produce, or transfer ownership
to the co-op
accordingly the co-op did not become the owner of the produce.
[13]
Regard being had to the
statutory context and the factual background, the following issues
arise for determination:
(a)
Whether the income
received by the appellant, which is generated by the sale
of wine,
constitutes income ‘derived from such operations’ for the
purposes of s 26(1) of the Act?
(b)
Whether the pressing
of the grapes delivered by the appellant to the co-op
results in the
pulp no longer constituting ‘produce’ as
contemplated by para 2 of the First Schedule to
the Act?
(c)
Whether the pressing
into a pulp of the appellant’s grapes and its subsequent
mixing
with the pulp of other members of the co-op, results in what
was delivered by him no longer being ‘produce
held and
not disposed of by him’, in terms of para 2 of the First
Schedule to the Act?
[14]
With regard to the
first issue, the transformation of the grapes into wine, does not
result in the income earned from the sale of
wine, being removed from
the ambit of income derived from the appellant’s agricultural
operation. As stated in
Ko-Operatiewe
Wynbouers Vereniging van Zuid-Afrika Bpk v Industrial Council for the
Building Industry
1949 (2) SA 600
(A) at 614:
‘
Wine
farming consists of a number of different operations, such as
cultivation of vineyards, pruning of the grape vines, rendering
the
vines free from disease, gathering the crop, pressing the grapes into
wine and probably delivering the finished product to
the “first
buyer”.’
[15]
As regards the second
issue, the essence of the appellant’s argument was as follows:
After the grapes were pressed they no
longer existed at midnight on
28 February 2009 and once the resultant pulp was mixed with the pulp
from other farmers’ grapes,
the mixture was work-in-progress in
a process of manufacture, namely the manufacture of wine by the co-op
and therefore not the
appellant’s produce at all. It was
submitted that the appellant’s harvested grapes, being a
natural product, constituted
his produce, whereas the mixed pulp,
treated with chemicals to aid the fermentation process, did not.
[16]
The appellant relies
upon the decision in
R
v Giesken and Giesken
1947 (4) SA 561
(A) at 567, in relation to dairy farming where the
following, was stated:
‘
The
exemption does not exclude farmers or their employees, but farming
operations. If
Bryant’s
case is correctly decided, it would be part of such operations if the
milk sold and distributed were milk produced by the appellant’s
own farming operations. . . Once they are engaged in respect of milk
which is not the product of the appellant’s farming
operations,
whether it be mixed with such product or not, the exemption no longer
applies. The sale or distribution of milk obtained
from other sources
by purchase is not a farming operation, even if milk produced by the
seller is added. The position is that,
though they are engaged in
farming operations, the sale and distribution of the milk is not a
farming operation, and this is the
case whether what is being
delivered consists of 70 per cent of milk purchased and 30 per cent
of milk produced by their farming
operations, or
vice
versa
.’
The
appellant submits that whilst it may be accepted that it is a part of
dairy farming to pasteurise, sell and distribute a dairy
farmer’s
milk, the moment the farmer’s milk is mixed with milk from
other sources ie other farmers, what is done thereafter
ceases to be
part of a ‘farming operation’. On parity of reasoning,
once the pulp resulting from the appellant’s
grapes was mixed
with the pulp from other farmer’s grapes, no part of the
resultant mixture was ‘produce’.
[17]
Giesken
is not authority for this
proposition. In issue was a statutory exemption from regulations
pertaining to the ‘dairy trade’
if the activity was part
of a ‘farming operation’. The appellant conducted a dairy
farming operation, but also bought
milk from other producers which
was sold and distributed with the appellant’s own milk. It was
held that the sale and distribution
of milk from other sources was
not a farming operation. Once purchased milk from other sources was
introduced to the appellant
farmer’s distribution business it
lost the character of farming operations, whether the milk was mixed
or not. The ratio
of the case therefore concerned the introduction of
purchased goods into a sale and distribution chain and not the mixing
of produce.
[18]
In further support of
the appellant’s contention that the growing of grapes was not a
farming activity giving rise to ‘produce’,
but that the
process of taking the grapes and making wine from them was a ‘process
of manufacture’, reliance was placed
upon the decision in
Secretary for Inland
Revenue v Safranmark (Pty) Ltd
1982 (1) SA 113
(A) at 122B where it was held that the transformation
of raw chicken into Kentucky Fried Chicken was a ‘process of
manufacture’.
The hallmark of manufacturing was that ‘there
must have been a “substantial or essential change of the
character of
the materials” out of which the “manufactured”
article was made’. In the present case it was argued that
there
was a ‘substantial or essential change of the character of the
materials’ out of which the wine was made. The
grapes and
chemicals, the material used and processed by it to make wine were
very different from bottled wine. Harvested grapes
are to wine what
livestock in the form of chickens were to Kentucky Fried Chicken.
There was accordingly a major qualitative difference
between the raw
materials that went into making wine and the finished product, which
suggests a process of manufacture rather than
a farming operation.
[19]
Safranmark
is not authority for this
proposition. The court had to decide whether what the taxpayer was
engaged in was a ‘process of
manufacture’ being the
language of the statute in issue. It was not called upon to decide
whether the fried chicken constituted
‘produce’ of a
farming operation. The taxpayer was never a farmer and purchased the
raw chicken pieces from a supplier.
The respondent submits that the
outcome of the process in
Safranmark
was a new compound substance, the ingredients of which were chicken,
milk, egg mixture and breading mixture, which had ceased to
retain
their individual qualities. What is left after the wine making
process is fermented grape juice, not compounded with any
other
ingredients to create a compound substance. The harvested grapes are
not to wine, what livestock in the form of chickens
were to Kentucky
Fried Chicken. At the end of the day wine is grape juice albeit in a
fermented form.
[20]
The respondent
correctly submits that the concept of ‘wine in process’
falls comfortably within the concept of the ‘produce’
of
a wine grape farmer as envisaged by the First Schedule to the Act.
The fact that the grapes have been pressed into a pulp and
the
process of fermentation begun, does not mean that the appellant’s
produce has disappeared. It is still there albeit in
a different
form.
[21]
The extent to which the
identity of a natural product may be transformed by some form of
treatment until it no longer exists as
produce, must depend upon the
product as well as the nature and extent of the processing, or
treatment, to which it is subjected.
Each case must be decided upon
its own facts, but an important consideration is that:
‘
.
. . the raw product may conceivably in certain instances be subjected
to extensive processing and be mixed up with numerous other
commodities, to such an extent that it loses its identity by
confusion and survives only as an inseparable portion of a factory
product.’
[3]
[22]
The physical processing
that the appellant’s grapes had undergone by being pressed into
a pulp and the natural fermentation
process that had begun (even if
chemicals had been added at that stage) by midnight on 28 February
2009, did not make them essentially
different from the produce of the
harvest. They could not be said to have lost their identity by being
‘mixed up with numerous
other commodities’ and to
‘survive’ only as an inseparable portion of a ‘factory
product’.
[23]
The
word ‘produce’ in para 2 of the First Schedule must be
interpreted in the context in which it appears, as well as
the
apparent purpose to which it is directed.
[4]
Because ‘produce’ as in the case of ‘trading stock’
includes work-in-progress and does not need to be in
a saleable form
to qualify as such, it is clear that the pulp produced by pressing
the grapes falls within the definition of ‘produce’.
If
this were not so, the purpose of including ‘produce’ as
part of the closing stock of a farmer at the end of the
tax year,
would not be achieved. The deduction by the appellant of the costs of
producing the grapes will not be ‘balanced’
unless the
value of the grapes (albeit in the form of pulp) is added to
‘balance’ the tax calculation for that tax
year. Because
of the delay between the harvesting of grapes and the sale of the
wine, and the consequent delay between when expenses
are incurred in
producing trading stock and realising the proceeds thereof, no
balancing can take place unless the existence of
the pulp is taken
into account in that tax year.
[24]
I turn to the third
issue, namely, what was delivered no longer being classified as
‘produce held and not disposed of by him’.
[25]
According
to
Silke
[5]
‘held’ encompasses ownership or dominium although it is
wide enough to include ‘possession without legal ownership’.
Trading stock is ‘held and not disposed of’ if the
taxpayer has dominium in it, that is if he is the owner of it.
[6]
The respondent accordingly submits that ‘disposed of’
connotes conduct by which a trader has parted with ownership
of the
goods. Meyerowitz is of the view that ‘hold’ is not
synonymous with owned and is wide enough to include occupation
or
possession without legal ownership,
[7]
but that a disposal occurs when goods are sold unconditionally but
not yet delivered. In the present case where ownership is retained
by
the appellant but possession is not, the produce is clearly ‘held’
for the purposes of para 2 of the First Schedule.
[26]
Faced with the problem
of ownership of the produce delivered to the co-op, the appellant
advanced an argument which sought to diminish
the nature and extent
of the ownership held by him in the pulp. Because the pulp of the
grapes delivered by the appellant was immediately
mixed with the pulp
from grapes delivered by other farmers, it was impossible, so the
argument went, to identify who had contributed
which pulp as a result
of confusio, with the result that all of the farmers were co-owners
in undivided shares of the pulp. The
appellant accordingly only
retained fractional ownership of the pulp resulting from the grapes
delivered by him. This was drastically
curtailed ownership. In
addition, the resultant fractional ownership retained by the
appellant had as a consequence that the mixture
did not qualify as
the appellant’s produce. Furthermore, because the appellant had
‘authorised’ the co-op to
sell the wine once it had been
manufactured from the mixture of pulp and was entitled to nothing
more than a pro rata share of
the proceeds of the sale of wine, he
had ‘disposed of the pulp’. The pulp was not in the
appellant’s possession,
nor was it held by the co-op for him,
but was held by the co-op ‘for the purpose of sale by itself’.
[27]
A
complete answer to the submissions of the appellant lies in the fact
that the appellant retained joint ownership, in an undivided
share,
of the pooled pulp and at a later stage the pooled wine, pro rata to
the extent of his contribution of grapes to the pool.
This is the
effect of mixing or the mingling of the pulp with the pulp of other
members without the intention of transferring ownership,
where
identification of the pulp contributed is not possible.
[8]
That ownership was retained by the appellant means that the pulp
could never have been held by the co-op for the purpose of sale
by
itself. The pulp had to have been held by the co-op for the
appellant. As regards the appellant’s contention that the
resulting mixture of pulp could not be regarded as ‘own produce
derived from his or her farming operations,’
Silke
points out that para 2 of the First Schedule requires a farmer to
include ‘all . . . produce held and not disposed of “at
the end of the tax year”’. The reference to ‘all
produce’ suggests that the Schedule:
‘
is
concerned not only with a farmer’s own produce but also with
produce acquired from others for farming purposes. If the
legislature
intended that “produce” be restricted to that grown or
produced by the farmer, it would have used appropriate
language to
convey this intention’.
[9]
I
agree. The fact that the appellant owned an undivided share in the
resultant pulp, would not absolve the appellant from having
to
account for this produce. If this were not so, farmers could mix
their produce together before the year end to avoid having
to account
for closing stock.
[28]
An interpretation of
clauses 2 and 3(1) of the First Schedule that includes fractional
ownership of pooled produce, gives effect
to the purpose of the
legislation, is in accordance with the language used and achieves
sensible and business-like results. The
appellant therefore had
‘produce on hand and not disposed of’ in the form of an
undivided share in the pulp.
[29]
I turn to the issue of
whether the pulp had a value as at midnight on 28 February 2009 and
if so, how that value should be calculated?
The
appellant submits that based on the provisions of s 22(1) of the Act,
for the purposes of paras 2, 3(1), 4(1) and 9 of the First
Schedule,
‘value’ means market value and the pulp had no market
value. However, para 9 of the First Schedule does not
prescribe the
method of fixing a value for the purposes of para 2 and simply
provides that the value must be ‘fair and reasonable’.
The respondent is not bound to apply a market value to the pulp, but
may adopt another method, provided that it is fair and reasonable.
[30]
The appellant submits
that the costs incurred by the co-op for which the appellant and
other members were liable once they had delivered
their grapes, had
to be taken into account in arriving at a value for the pulp. Because
some 50 per cent of the fixed and variable
costs of the co-op had
been incurred before the first grapes had been delivered by any
farmer, the pulp had a negative value at
the end of February 2009.
The costs already incurred exceeded the value, if any of the pulp at
that date.
[31]
The cross-examination
of the appellant’s witnesses before the court a quo focussed on
two potential ways of valuing the pulp:
(a)
The application of
the distilling wine price; and
(b)
A determination of
the cost of production.
The
respondent submits that on either basis, the value of the pulp was
greater than zero.
[32]
As regards the issue of
whether the pulp had any value, Messrs Van den Heever (the manager of
the co-op) and Niewoudt (the owner
and winemaker of Cederberg Wines)
testified before the court a quo. They expressed the view that the
pulp that existed at the end
of February 2009 was without value and
there was no market for it. They conceded in cross-examination that
although the pulp may
have had a theoretical value to the winemaker,
there was no market for it which would have a negative value once the
co-op’s
costs, which were already incurred, were taken into
account. They were also of the view that even theoretically the pulp
could
never have been dealt with commercially, as no winemaker would
tamper with it before the fermentation process had been completed.
They both acknowledged, however, that they would not have allowed
somebody to take away the pulp for free. The co-op insured the
pulp
up to the full value of the wine it was expected to produce. Mr Van
den Heever agreed that it would be possible to determine
a value of
the pulp, by reference to the future price expected to be achieved by
making wine from it, taking into account the risks
and costs required
to get it to that point.
[33]
I agree with the
respondent that when regard is had to the fact that the pulp
represents the accumulated work and cost of a year
of farming
activities, the wine to be produced is intended to be sold at a
profit and in each year the appellant had received positive
returns
from the pool, to say the pulp is entirely valueless is unrealistic.
In
Richards Bay Iron
& Titanium (Pty) Ltd & another v Commissioner for Inland
Revenue
[1995]
ZASCA 81
;
1996 (1) SA 311
(A) at 326A-B the following was said
concerning the difficulty of valuing an unfinished product:
‘
The
suggested difficulty in identifying and ascribing a value to things
in the process of being manufactured on the last day of
the tax year
does not entitle the Court to disregard the plain language of the
definition. Moreover, the difficulty strikes me
as being more
apparent than real. Certainly in other tax jurisdictions the
legislators and the courts have not baulked at the concept
of valuing
work-in-progress and there is no reason to suppose that the South
African Parliament was daunted by the prospect. As
has been noted,
appellants themselves encountered no great difficulty in doing so
when required by respondent to do so.’
[34]
The appellant submits
that either method of valuing the pulp involves inexact conjecture
rather than a fair and reasonable value,
because the pulp was
unlikely to have finished the process of fermentation by the end of
February. The evidence, however, established
that the distilling wine
price was an ascertainable value, reflected in wine statistics and
publications and a known concept in
the industry. This method was
employed by the appellant’s accountant, Mr Vos, when he
completed the appellant’s 2007
and 2008 income tax returns. The
calculation used the volume of grapes harvested and delivered by the
appellant to the co-op before
the year end, converted into litres
(using an estimated juice yield) multiplied by that year’s
distilling wine price. He
had used this method of valuation, because
it was reflected as an alternative permissible method in the draft
guideline issued
by the respondent at the time. The guideline was
based upon paras 2 and 3 of the First Schedule. In 2009 a similar
calculation
was initially included in the return to reflect produce
held and not disposed of, but these accounting entries were then
reversed
by Mr Vos to reflect the value of produce on hand as zero.
An error, however, was made by the respondent in assessing the
appellant,
because an ‘estimated distilling wine price per
litre’ of R1.52 was used when the correct distilling wine price
for
2009 was 97.84 cents per litre. The respondent submits that
although the amount was incorrect, it was clear to the appellant what
methodology was used by the assessor and what the correct amount
should have been.
[35]
The use of the
distilling wine price as a minimum price operates to the advantage of
the taxpayer, as most of the wines destined
to become wine are of far
superior quality than distilling wine. Because distilling wine
attracts no real costs save for transport,
the danger that it will
return a negative value after cellar costs have been deducted, is not
real. The evidence showed that in
2008-2009 ‘D’ quality
grapes used for distilling wine realised a positive return for the
farmer of R450 per ton. This
method is practical, workable and
realises a positive value for the stock. It places a fair and
reasonable value upon the stock.
[36]
As regards the method
based upon production costs, Mr Vos had advised the respondent that
the appellant’s average production
costs were R580 per ton.
Although this was an industry average, from his evidence the
appellant’s costs in relation to his
wine farming activities
were objectively ascertainable and this exercise could be carried out
by the respondent.
[37]
An issue initially
advanced by the appellant was that the court a quo erred in referring
the matter back to the respondent for further
consideration and
re-assessment. At the hearing the appellant, however, properly
conceded that if the appeal failed on the merits
the court a quo
correctly referred the re-assessment to the respondent. It follows
that the Commissioner would be entitled to re-assess
the appellant to
tax in accordance with the principles set out in this judgment.
[38]
The appellant also
submits that if the appeal fails, he should not be liable for the
payment of interest on the amount as originally
assessed by the
respondent. It is clear, however, that the court a quo found that the
respondent was not entitled to levy interest
on the assessed amount
until it was revised.
[39]
The court a quo made no
order as to costs. The appellant requests an award of costs in the
tax court in his favour, on the basis
that the respondent’s
grounds of assessment were unreasonable. However, the appellant did
not include a prayer for costs
in his grounds of appeal, to the court
a quo. To seek this order after the proceedings before the court a
quo have been finalised,
is impermissible. The respondent was never
alerted to the fact that the appellant would seek an order of costs
and may have approached
the matter differently if forewarned. There
is no basis to interfere with the exercise by the court a quo of its
discretion in
this regard.
[40]
It is ordered that
The
appeal is dismissed with costs.
K G
B Swain
Judge
of Appeal
Appearances:
For
the Appellant:
T S Emslie sc
Instructed
by:
Spamer
Triebel Incorporated, Bellville
Symington
& De Kok, Bloemfontein
For the
Respondents:
M W Janisch SC
Instructed
by:
The
State Attorney, Cape Town
The
State Attorney, Bloemfontein
[1]
A P De
Koker & R C Williams
Silke
on
South
African Income Tax
(Service 57, 2016) para 21.2.
[2]
‘
There
is at least a reasonable supposition, if not a presumption, that the
legislature, in using a particular term. . .intended
it to bear the
same meaning throughout. . .’ a particular enactment.
Durban
City Council v Shell and B.P. Southern Africa Petroleum Refineries
(Pty.) Ltd.
1971 (4) SA 446
(A) at 457A-B.
[3]
R v Bade
1951 (3) SA 218
(T) at 221D-F. See also
Variawa
v R
1936 NPD 540
;
R
v Sarang
1947 (3) SA 620 (N).
[4]
Natal
Joint Municipal Pension Fund v Endumeni Municipality
[2012] ZASCA 13
;
2012 (4) SA 593
(SCA) para 18.
[5]
Paras 8.111
and 15.10.
[6]
Silke
at 8.111.
[7]
D
Meyerowitz
Meyerowitz
on
Income
Tax
(2007 – 2008) paras 20.24 and 20.26.
[8]
Andrews
v Rosenbaum & Co
1908 22 EDC 419
at 425; P J Badenhorst, Juanita M Pienaar and Hanri
Mostert
Silberberg
and Schoeman’s
The
Law of Property
5 ed (2006) para 8.5.
[9]
Silke
Para 15-9.