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[2021] ZAGPJHC 167
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JMN v The Commissioner for the South African Revenue Service (A3096/2019; 14001) [2021] ZAGPJHC 167 (30 April 2021)
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REPUBLIC
OF SOUTH AFRICA
IN
THE HIGH COURT OF SOUTH AFRICA
GAUTENG
LOCAL DIVISION, JOHANNESBURG
CASE
NUMBER:
A3096/2019
TAX
COURT CASE NUMBER: 14001
REPORTABLE:
NO
OF
INTEREST TO OTHER JUDGES: NO
REVISED:
NO
In
the matter between:
JMN
APPELLANT
AND
THE COMMISSIONER FOR
THE SOUTH AFRICAN
REVENUE
SERVICE
RESPONDENT
JUDGMENT
Delivered:
This judgment was handed down
electronically by circulation to the parties’ legal
representatives by e-mail. The date and
time for hand-down is deemed
to be 10h00 on the 30
th
of April 2021.
DIPPENAAR
J
:
[1]
This
is an appeal from the Tax Court, (Francis J sitting as President of
the Tax Court) in an appeal under s107 of the Tax Administration
Act
(“TAA”)
[1]
against
the respondent’s disallowance of an objection. The objection
was lodged by appellant against an additional assessment
in respect
of the appellant’s 2010 year of assessment. The appellant’s
appeal to the Tax Court included challenges
in respect of his 2007,
2008, 2009 and 2010 tax assessments.
[2]
The
present appeal pertains only to the additional assessment by the
respondent for the 2010 year of assessment insofar as it relates
to
the valuation of appellant’s shareholding in N[....] Mining
Corporation (Pty) Ltd (“NMC”) for purposes of
Capital
Gains Tax (“CGT”) and Donations Tax and the orders
granted by the Tax Court in paragraphs 130.4 to 130.7 of
its judgment
in terms of which the additional assessment was altered in certain
respects, together with ancillary relief.
[2]
[3]
The relevant facts are set out
comprehensively in the judgment of the Tax Court and it is not
necessary to repeat them herein in
any detail, save as they are
relevant to the appeal.
[4]
The relevant facts are the following. The
appellant was the sole shareholder in NMC in his personal capacity.
NMC was the sole shareholder
of a mining company, U[....] Resources
(Pty) Ltd (“U[....]”), established in 2006. U[....]
obtained prospecting and
mining rights relating mainly to coal in
Limpopo, North West, Northern Cape, Gauteng and Mpumalanga. Initially
the appellant was
the sole director of U[....].
[5]
On 19 May 2006, U[....] and Sumo Coal (Pty)
Ltd (“Sumo”) concluded a consultancy agreement in terms
of which,
inter alia
,
U[....] and Sumo would conclude a joint venture agreement on certain
terms. This consultancy agreement endured until 19 May 2009.
[6]
During August 2006, Kalyana Resources (Pty)
Ltd acquired a 50% shareholding in U[....] through NMC. The remaining
50% shareholding
in U[....] was held by NMC. The disposal of any
shareholding in U[....] was restricted in terms of a shareholders’
agreement.
[7]
During October 2009, the appellant
concluded an oral agreement with his family trust, the N[....]
Matodzi Family Trust (“the
Trust”) to purchase his 50%
shareholding in NMC at a purchase consideration of R547 275. The date
of transfer of the shares
is 5 October 2009. The oral agreement was
subsequently recorded in a written loan agreement dated 16 November
2012. This share
transfer lies at the heart of the appeal. No
dividends had been declared in U[....] or NMC by the time the shares
were sold to
the Trust and no mining had taken place in U[....].
[8]
The
respondent’s view was that the purchase consideration for the
shares was not an adequate consideration and the transfer
was deemed
to be a disposal and donation in terms of s 11(1) and s 58
respectively of the Income Tax Act (“ITA”)
[3]
.
In terms of s26A of the ITA, the taxable capital gain of a taxpayer
shall be included in his taxable income for the relevant year
as
determined in the Eighth Schedule, which deals with CGT. It was
common cause that the NMC shares transferred to the Trust constituted
an asset as defined in s1 of the Eighth Schedule and that the
transfer was a disposal as contemplated in s11 (1) of the ITA.
[9]
In its additional assessment, the
respondent levied donations tax in terms of s58 of the ITA in an
amount of R5 481 000.00, together
with a 10% penalty thereon. It also
levied CGT in an amount of R26 856 900.00 together with a 10% penalty
thereon. The remainder
of the assessment amounts are not relevant to
the present appeal.
[10]
The respondent’s calculation
attributed a value of R274 050 000 to the NMC shares transferred by
the appellant to the Trust.
This calculation was based on a valuation
by Venmyn Rand (Pty) Ltd (“Venmyn”) and Mr Thayser,
commissioned by the respondent,
of the underlying value of the
minerals in respect of which U[....] had mineral rights at the date
of the transfer of the shares,
being 5 October 2009. Their valuation
was based on a net asset valuation (“NAV”) methodology.
The value of the minerals
in respect of which U[....] held mineral
rights was determined, which was accepted as the value of U[....]’s
shares. As NMC
held 50 % of the U[....] shares, the value of its
shareholding was determined as 50% of the value of the U[....]
shares, which
was determined as the value to be attributed for
purposes of CGT and Donations Tax.
[11]
The appellant objected to the assessment,
utilising a NAV methodology in his calculations. The respondent
disallowed the objection,
resulting in the appeal before the Tax
Court.
[12]
In the proceedings before the Tax Court,
five expert witnesses were called. The appellant, a qualified mining
engineer also testified.
The expert witnesses agreed on a mineral
valuation of either R152.7 million if the mineral resources were
categorized as a “resource
target”, as contended by the
appellant’s experts or R232 million, if the mineral resources
were categorized as “inferred
resources”, as contended by
the respondent’s experts. The experts for both parties were
agreed that the NAV methodology,
adopted by both throughout the
proceedings was the appropriate methodology.
[13]
In his application for leave to appeal and
notice of appeal, the appellant raised only two issues; one against
the merits and one
against the costs order granted. In his notice of
appeal, the issue was phrased that the Tax Court erred:
“
In
finding that the sixty (60%) percent discount contained in clause 7
of the written consultancy agreement does not create a liability
for
U[....] Resources (Pty) Ltd but rather a contingent liability in a
sense that it might or might not arise depending on whether
coal
reserves were identified and that Sumo Coal (Pty) Ltd had a right to
require U[....] Resources (Pty) Ltd to enter into a Joint
Venture,
but that right was not exercised yet as at 5 October 2009 and
therefore did not create any liability for U[....] Coal
Resources
(Pty) Ltd …”.
[14]
The second ground of appeal was against the
Tax Court’s determination that the tax payer be liable for 50%
of the costs of
the appeal and the qualifying fees of certain
experts. This ground was not strenuously pursued in argument.
[15]
In his notice of appeal, the appellant set
out the particular respect in which the variation of the judgment was
sought, in these
terms:
“
The
additional assessment for the 2010
[year]
be returned to the Respondent to be
altered as follows in terms of section 129(2)(b) of the TAA:
1.1.
To reflect a capital gain in
respect of the disposal by the Appellant of the shares held by NMC to
N[....] Family Trust, in the
amount of R46 280 000.00 (R231 400
000.00 x 40% = R92 560 000.00 x 50% = R46 280 000.00) …”.
[16]
In his heads of argument dated 1 April
2020, the appellant for the first time, raised two additional issues;
the first, challenging
the valuation methodology used in valuing the
NMC shares and contending that the market value of the shares was not
determined.
The second, whether the Tax Court was correct in
upholding the characterisation of U[....]’s mineral resources
as “inferred
resources” in terms of the SAMREC Code,
rather than as a “resource target”. The first issue was
the central focus
of appellant’s argument at the hearing.
[17]
In his heads of argument, the appellant
also sought to amend the respects in which the order of the Tax Court
was to be altered.
He sought alterations in three respects, sought in
the alternative. The alterations now sought differed from those
stated in the
notice of appeal. The primary alteration now sought,
was that the order of the Tax Court be set aside and the matter be
remitted
back to the respondent for further investigation and
assessment to determine the value of the appellant’s NCM shares
transferred
to the Trust.
[18]
In response, the respondent on 20 April
2020 in its heads of argument objected to those grounds being raised,
which it contended
were not properly before Court. It pointed out
that the applicant had not launched an application for leave to amend
its notice
of appeal. It nonetheless dealt with the new issues,
contending that they lacked merit.
[19]
Despite knowledge of the respondent’s
objection, no formal application for condonation or leave to amend
was launched by the
appellant nor was a written notice of amendment
provided in the intervening nine months before the appeal was heard.
This Court
and the respondent were notified via email on Sunday, 7
February 2021, the evening before the hearing, that an application
would
be made to amend appellant’s notice of appeal.
[20]
An oral application to amend appellant’s
notice of appeal was made from the bar at the hearing. In argument
the appellant
contended that the respondent would suffer no prejudice
as it had responded to the new grounds raised in its heads of
argument.
The respondent argued that as the amendment was not raised
timeously, the court’s discretion should be exercised against
granting it.
[21]
The issues to be determined in this
appeal are:
[20.1] Whether the
appellant should be allowed to orally amend its notice of appeal to
raise the new issues;
[20.2] If so, whether
either of the new grounds should be upheld;
[20.3] If not, whether
the grounds of appeal raised by the appellant in his notice of appeal
should be upheld.
[22]
Turning
to the first issue, the requirements of r 49(4) are peremptory
[4]
.
The rule provides:
“
Every
notice of appeal and cross-appeal shall state (a) what part of the
judgment or order is appealed against; and (b) the particular
respect
in which the variation of the judgment or order is sought”.
[23]
The
appellant can thus not raise the additional issues unless leave to
amend his notice of appeal is granted. No reasons for the
delay or
the absence of a formal application were provided.
The
appellant can be criticised for the lateness of the application and
the informal way in which it was launched.
However,
it is not impermissible for an oral application to be launched and,
of itself, is not a reason to dismiss the application.
[5]
Although no notice of amendment was produced, the amendments to the
grounds of appeal articulating in what respects the judgment
of the
Tax Court is appealed against and the respects in which the variation
of the order was sought, were articulated in appellant’s
heads
of argument and the respondent received notification thereof. It
responded to the new issues in its heads of argument. No
prejudice
[6]
would be suffered by the respondent to raise a ground of appeal that
was fully canvassed in the pleadings and traversed in the
hearing
before the Tax Court, such as
the
characterisation of the mineral resources as “inferred
resources” or “resource target”. In my view,
leave
should be granted to the appellant to raise this further ground of
appeaI and would be a just exercise of the discretion
afforded.
[24]
The introduction of the valuation
methodology issue, the primary focus of appellant’s argument at
the hearing, however stands
on a different footing and different
considerations apply as to whether the appellant can raise this issue
on appeal. The challenge
to the valuation methodology used in the
proceedings before the Tax Court seeks to change the entire focus of
the proceedings.
[25]
In the judgment of the Tax Court, the
following finding was made in relation to the valuation methodology:
“
The
above methodology followed by SARS was also followed by Charles
Stride (‘Stride’), the taxpayer’s expert who
took
the value of the shares in U[....] from Robert Greve’s
(‘Greve’) report and attributed 50% of that value
to the
NMC shares. The methodology followed by SARS and Stride was the same.
This was also the methodology that was proposed by
the taxpayer in
his objection of 24 February 2012 and when he testified in Court he
agreed that this was the position.”
[26]
The appellant argued that the focus of the
valuation ought to have been on the NMC shares but that instead, the
focus was on the
underlying value of the U[....] mineral resources.
The argument focused on the determination of the “market value”
of the shares sold and transferred by the appellant to the Trust. It
was common cause that such determination is in terms of the
Eighth
Schedule to the ITA. The appellant characterised the central issue to
be:
“
Whether
or not the Tax Court was correct in upholding the respondent’s
contentions regarding the calculation of the “market
value”
of the shares in the company, NMC specifically whether the Net Asset
Valuation Methodology (“NAV”) adopted
by the respondent
and upheld by the Tax Court was correct, using a straight line
extrapolation based on the valuation of the mineral
rights of
U[....], in which NMC held 50% of the shares for purposes of valuing
the appellant’s 100% shareholding in NMC both
for purposes of
Capital Gains Tax and Donations Tax”.
[27]
The appellant’s argument was
predicated on
the provisions of s31(3) of
the ITA dealing with “market value”. The relevant portion
of s31(3) of the Eighth Schedule
provides:
“
The
market value of any shares of a person in a company not listed on a
recognised stock exchange…must be determined at a
value equal
to the price which could have been obtained upon the sale of a share
between a willing buyer and a willing seller dealing
at arm’s
length in an open market subject to the following: (a) no regard
shall be had to any provision- (i)restricting the
transferability of
the shares therein, and it shall be assumed that those shares were
freely transferable… “
[28]
The
appellant argued that as a matter of law, the Tax Court erred in
accepting and adopting the NAV valuation methodology adopted
by the
respondent to establish the market value of the NMC shares and should
have applied the discount cash flow (“DCF”)
methodology
to establish the economic value of the shares and thus that it was
open to the appellant to raise the issue on appeal.
Reliance was
placed on
CSARS
v Stepney Investments (Pty) Ltd
[7]
(“Stepney”)
in
support of the contention that the DCF valuation method should have
been used to determine the market value of the shares. As
held in
Stepney
,
the DCF valuation method entails valuing the business of an entity on
its future forecast free cash flows discounted back to present
value
through the application of a discount factor.
[29]
In
Stepney,
a base cost for certain shares had to be determined for purposes of
CGT. The taxpayer had applied for a casino licence and as part
of the
process had to provide the anticipated cash flows that would be
generated from the licence. At the time, the taxpayer had
not
commenced with its business or built any infrastructure. A DCF
valuation had been prepared by the taxpayer, the contents of
which
was in dispute between the parties’ respective experts.
Evidence was presented that the DCF method was the most appropriate
method to value unlisted shares. The respondent had conceded that the
NAV valuation methodology was inappropriate.
[30]
It is trite that each case must be
determined on its own facts. The facts in
Stepney
are in my view distinguishable. A fundamental point of difference is
that in
Stepney
,
the type and level of information required to prepare a valuation
based on the DCF methodology was available and a valuation based
on
that methodology had been prepared and was presented in evidence
before the court a quo. The factual matrix for the valuation
was thus
fully canvassed in the court a quo.
[31]
Stepney
is
further not authority for the proposition that in all instances, the
valuation of the market value of unlisted shares should
be determined
utilising the DCF methodology. In the present instance and from the
information available at the relevant time, it
cannot be concluded
that the NAV methodology was inappropriate as no reliable financial
projections could be made regarding the
profitability or revenue of
U[....] to determine what price a willing buyer and willing seller
would agree on at an arms-length
transaction in the open market.
[32]
In the present matter, the parties’
experts were in agreement that the necessary information was not
available and that the
DCF methodology was thus inappropriate and
that rather the NAV valuation methodology should be used.
[33]
Our
courts have permitted an appellant to rely on a new point of law on
appeal as a court will not be precluded from giving the
right
decision on accepted facts merely because a party failed to raise a
legal point as a result of an error of law on his part
[8]
.
A
party may also revive on appeal a legal contention expressly
abandoned in a court a quo
[9]
.
However,
this approach only applies where the issue involved is a pure
question of law covered by the pleadings and turning on facts
which
have been fully canvassed
[10]
.
[34]
A
party is further bound by factual concessions and may not present
argument in conflict with facts which were common cause in the
court
a quo or in conflict with the parties’ common understanding as
to what exactly the issues were in the court a quo
[11]
.
Although it may be open to a party to raise a point of law which
involves no prejudice or unfairness to the other party and raises
new
factual issues, a point raised for the first time on appeal on
factual considerations not fully explored in the court below,
should
not be allowed.
[12]
Put
differently, where an appellant seeks to build a case on a foundation
not laid in the court a quo, he should be precluded from
doing
so
[13]
.
[35]
In applying these principles to the present
facts, I am not persuaded that the appellant should be allowed to
raise the issues surrounding
the valuation methodology on appeal for
the reasons set out below.
[36]
First,
the methodology issue was not fully canvassed in the proceedings
before the Tax Court. The appellant did not raise in his
pleadings or
in his evidence that the market value of the NMC shares should have
been determined on the basis of a DCF valuation
method. In his
pleadings before the Tax Court, although the appellant had raised as
a point
in
limine
,
“
the
mineral asset valuation of Venmyn has no legal effect
”,
the issue was predicated on the contention that “
the
2010 assessment issued by the respondent is an estimated assessment
as envisaged in s 95 of the TAA”
,
a point correctly dismissed by the Tax Court as it was an additional
assessment. The methodology of the mineral asset valuation
was not
challenged.
[14]
[37]
Throughout
the proceedings before the Tax Court, the issue that the NAV
valuation was an inappropriate methodology and that the
DCF would be
the appropriate remedy was never raised. It must be borne in mind
that the appellant bore the onus in respect of the
valuation of the
shares
[15]
.
The
appellant did not discharge this onus and did not present any
valuation to the Tax Court.
[38]
The respondents’ experts’
evidence was not challenged on the NAV valuation methodology by the
appellant during cross
examination and it was never put to them that
the basis of their valuation was incorrect or that the DCF
methodology should be
used.
[39]
Second,
the
appellant’s witnesses made various factual concessions during
the proceedings before the Tax Court pertaining to the determination
of the market value of the NMC shares and the methodology used.
The
parties’ respective expert witnesses had agreed on the NAV
methodology and had agreed on the values, subject to one area
of
dispute, being the characterisation of the mineral resources.
[40]
The
NAV valuation methodology was used by the respondent’s expert,
Mr Thayes, in the Venmyn report. That methodology was accepted
by the
appellant’s experts, Messrs Stride and Greve. The same
valuation method was also used by the appellant in its notice
of
objection, the dismissal of which resulted in the appeal proceedings
before the Tax Court. The application of the NAV valuation
methodology was thus common cause in the proceedings before the Tax
Court and, on the parties’ common understanding of the
issues
requiring determination, was not an issue in dispute between
them.
[16]
[41]
Mr Thayes, the respondent’s expert,
testified:
“
I
can’t think what I would do differently. Mine was in essence
quite a simple task. It was looking at the various mineral
valuations
around, deciding on one that looked most reasonable and then using
that as a platform on which to arrive at the equity
value of
U[....]”.
[42]
The appellant’s expert, Mr Greves
agreed that the DCF basis of valuation was not appropriate due to a
lack of credible information.
He testified:
“
I
note that in the Venmyn report it states that any discounted cash
flow valuation completed on the coal properties should be dismissed
due to a lack of credible techno- economic parameters and
techno-economic parameters are estimates of capital expenditure,
working
costs, coal grades, coal recoveries, sale prices of products,
exchange rates etc, and therefore the coal property should be
dismissed,
sorry cash flow valuations completed on the coal
properties should be dismissed due to lack of credible information
and that was
a view I concurred with”.
[43]
The appellant in evidence agreed that the
approach followed by him and the respondent in determining the market
value of the shares
was the same. Mr Stride, the appellant’s
other expert, agreed in cross examination that his approach and the
respondent’s
approach was the same. He further testified:
“
COURT:
Let me ask you this: is it the correct approach? MR STRIDE: M’Lord,
this is an approach always subject to what
are the risks you’re
taking to get your dividend. And I am saying this is a fair approach
to take …”
[44]
Third,
no evidence was presented before the Tax Court that the information
necessary to prepare a DCF valuation was available at
the date of the
share transfer. From the evidence, the DCF methodology could not be
utilised due to a lack of credible evidence.
The
evidence before the Tax Court was that there was no feasibility study
done nor any pre-feasibility study
[17]
.
On this issue, Mr Greves testified:
“
I’ve
seen no pre-feasibility study or feasibility study reports on any of
the coal assets. A pre-feasibility study is a study
which is
concluded in the exploration probably towards the middle or towards
the back-end of the exploration phase development
of a mineral
resource or a mining property and it’s an attempt to try and
begin a process of detailed technical analysis,
everything from
detailed geological reports, competent person’s reports,
estimates of mineral resources. Studies on environmental
matters,
estimates of working costs and capital expenditure, estimates of the
market and where you’re going to sell your
products, prices for
your products, exchange rates etc. one of the benefits of a
pre-feasibility report is that you can convert
mineral resources into
reserves. A benefit of a pre-feasibility is it also gives guidance to
the team that will finalise the feasibility
study”.
[45]
Mr Greve also explained what a
pre-feasibility study comprises, being all elements necessary to
start calculating the costs and
possible profit attainable from the
mining endeavours. Mr Greve also testified:
“
The
beauty about a pre-feasibility study is that it allows you to convert
mineral resources to mineral reserves and mineral reserves
are far
more important with regard to value than resources because you
starting to prove that they are economically viable, economically
and
technically viable to extract.”
[46]
From
the record, it appears that a DCF methodology was for the first time
used in the amended statement of claim in arbitration
proceedings
[18]
between Sumo and U[....] some seven months after the NMC share
transfer date pursuant to a dispute regarding the conclusion of
a
joint venture under the consultancy agreement.
[47]
A
challenge to the valuation methodology raises substantial new factual
issues not canvassed before the Tax Court and the appellant
is
seeking to build a case on a foundation not previously laid
[19]
.
If a consideration of the methodology issue is allowed and upheld,
this would necessitate a remittance of the matter back to the
respondent for investigation
under
s129(2)(c) of the TAA
.
The entire process would start again, requiring a fresh assessment
which would be subject to objection and appeal.
It
is further unclear what purpose
[20]
would be served to remit the matter back under s 129(2)(c) of the TAA
for further investigation, given that the valuation date
remains 5
October 2009 at which time it was the parties’ undisputed
evidence that the necessary information was not available
to conduct
a DCF valuation.
[48]
A
further important consideration is the need for finality in
litigation
[21]
and the fact
that a referral would result in the nullification of the agreements
between the experts and the efforts in that regard.
The matter was
considered by five experts before the Tax Court. If new valuations
had to be obtained, it would come at significant
cost to the parties
with no indication that any additional information would be
available. In fact, the evidence presented before
the Tax Court
points to the contrary. No grounds were advanced by the appellant
that the DCF valuation methodology was possible
considering the facts
of this matter. It would also significantly extend finalisation of
the matter which relates back to the 2010
year of assessment.
[49]
I
am not persuaded that the consideration of the methodology issue
involves no prejudice or unfairness to the respondent
[22]
,
a further reason militating against the granting of the amendment.
[50]
I conclude that the appellant should not be
allowed to raise this issue on appeal and that the application for
such amendment must
fail. The methodology issue is not a pure legal
point to be determined on accepted facts, nor were the factual
considerations on
which it relies fully explored in the Tax Court.
[51]
Even if the appellant were to be allowed to
raise this issue on appeal, for the reasons already provided, the
appellant has not
established that his challenge to the valuation
methodology should succeed on its merits.
[52]
I turn to whether the Tax Court was correct
in upholding the value of the mineral rights of U[....] in an amount
of R233 million
based on the SAMREC Code as an “inferred
resource” rather than characterizing it as a “resource
target”
with a value of R152.7 million.
[53]
In relation to the categorisation of the
mineral resources, the Tax Court held:
“
We
are satisfied that based on the evidence that was placed before us
that the resources reflected in Table 3 of the experts’
minute
should be categorized as ‘inferred’ …”.
[54]
In reaching this conclusion, the Tax Court
accepted the evidence of the respondent’s expert witnesses, Mr
Clay, in preference
to that of the appellant’s expert, Mr
Greves.
[55]
Mr Clay, as a geologist with almost 40
years’ experience, properly established his expertise as a
“competent person”,
as defined in the SAMREC Code,
required to express an opinion on the categorisation of a mineral
resource. His expertise was not
disputed by the appellant. Mr Greves
on the other hand did not in evidence establish the necessary five
years’ experience
in the style of mineralisation and type or
class of deposit under consideration to qualify himself as a
“competent person”.
On his own version, he qualified as a
competent person “on the fringes” and conceded that he
did not have as much experience
as consultants who have worked a long
period of time.
[56]
It
is trite that before the evidence of an expert witness can be
accepted, he must satisfy a court that because of his special skill,
training or experience, the reasons for the opinion which he
expresses are acceptable
[23]
.
On the evidence, Mr Greves failed to do so.
[57]
The
evidence of Mr Clay further established a sound factual basis for his
characterisation of the mineral resources as “inferred”
[24]
.
Those reasons were expressed in the Venmyn report. His evidence was
further corroborated in the report of KMJ Technical Services,
which
included drilling results and other information.
[58]
The evidence of Mr Greves was that
“resource target” is a reference to “
resources
which or property which have potential, some sort of theoretical
tonnage which could be strived for as you move into exploration”.
The SAMREC Code does not contain a
“resource target” category, nor is it contained in the
SAMVAL Code. He contended
that the mineral resource of U[....] should
be classified as “resource targets” but did not provide a
substantiated
basis for this categorisation other than to rely on a
lack of credible information and geoscientific confidence as there
were no
geological reports on the deposits and no exploration had
been carried out on the properties. In evidence, the factual premise
of his opinion was illustrated to be incorrect as there were indeed
two reports, the existence of which was not disclosed to him
by the
appellant. His evidence was further inconsistent with the agreement
reached by the experts who agreed on specific tonnages
in respect of
the various properties.
[59]
A
court’s approach to expert evidence is trite
[25]
.
Considering the evidence presented, the acceptance by the Tax Court
of the evidence of Mr Clay and the conclusion reached, cannot
be
faulted. It follows that this ground of appeal must fail.
[60]
The next issue is whether the Tax Court
erred in finding that the 60% discount contained in the written
consultancy agreement created
a contingent liability and could be
disregarded for purposes of determining the market value of the NMC
shares. Put differently,
the issue is whether there should be a 60%
reduction in the value of U[....]’s mineral resources value and
the consultancy
agreement could justifiably have been ignored on the
basis that it was a contingent liability for purposes of valuing the
NMC shares
as required in terms of s31(3) of the Eighth Schedule to
the ITA.
[61]
On this issue, the Tax Court held:
“
KPMG,
when compiling the 2010 annual financial statements, also recognised
it as a contingent liability in respect of the 2010 year
which ended
in February 2010. There is therefore no basis for applying a 60%
discount to the mineral values as agreed by the experts.
Firstly in
law the consultancy agreement does not have the effect of creating
such liability and secondly, because the facts do
not support such a
contention. Even if it is accepted that a 60% discount should apply,
the way in which it should be applied is
to take into consideration
100% of the JV (R500 million) and then deduct a R300 million
liability (60%). That means that the value
of Brummersheim will
increase to R200 million as opposed to the agreed figure between the
experts of approximately R84 million.
This would significantly
increase the valuation”.
[62]
In reaching its conclusion, the Tax Court
relied on the evidence that as at 5 October 2009, no feasibility
study had been concluded.
It also considered the wording of clause 7
of the consultancy agreement and the SAMREC code and the evidence of
Mr Greve and found:
“
Therefore
on 5 October 2009 the consultancy agreement did not create any
liability for U[....]. At best it was a contingent liability,
which
in our view cannot be taken into account for purposes of valuing the
mineral resources of U[....]. This was confirmed by
Andy Mc Donald”.
[63]
Clause 7 of the consultancy agreement
provided:
“
If
at any time during the term of this Agreement, the company [Sumo
Coal], in its sole discretion and opinion, resolves that any
coal
reserves identified by the consultant [U[....]] through providing the
Services, are viable for coal mining purposes the company
and
consultant shall set up a joint venture, either through a joint
venture agreement or through the incorporation of a special
purpose
company incorporated for this purpose (the ‘JV’) to
conduct coal mining activities in respect of the identified
reserves
it being agreed that the salient features of the JV shall be as
follows:
7.1 The company will
have 60 per cent … participation interest in the JV and the
consultant will have 40 per cent …
participation interest in
the JV.”
[64]
The
finding of the Tax Court that the liability was contingent, cannot be
faulted. Clause 7 of the consultancy agreement set three
conditions
for the conclusion of a joint venture between U[....] and Sumo, being
whether: (i) coal reserves
[26]
were identified; (ii) it was viable for coal mining
[27]
;
and (iii) Sumo Coal decided to request U[....] to enter into a joint
venture.
[65]
The
evidence did not establish that at the date of transfer of the shares
on 5 October 2009, either the first or second of these
conditions had
been fulfilled, having regard to the evidence and the relevant
definitions in the SAMREC Code. No evidence was in
fact presented
that the conditions were fulfilled. Regarding the third condition, at
best there was a dispute between Sumo and
U[....] on 5 October 2009
regarding whether U[....] should conclude a joint venture with Sumo
in respect of Brummersheim. This
dispute culminated in arbitration
proceedings which occurred well after the date of the transfer of the
shares.
[28]
. No evidence was
presented that a joint venture was in fact formed. There was no
misdirection of fact or law on the part of the
Tax Court in
concluding that the liability under the contingency agreement was
contingent.
[66]
The
appellant’s expert, Mr Greve, contended that a 60% discount to
the value determined by the experts (Exhibit “BB”)
should
be applied across the board. This contention is flawed for various
reasons and was correctly not accepted by the Tax Court.
First, it
was not proved that the conditions of clause 7 of the consultant
agreement pertaining to the joint venture were fulfilled.
Second, the
evidence established that the 60% discount would only apply in
respect of one property, namely Brummersheim, and not
all the
properties valued by the experts, considering the wording of the
settlement agreement
[29]
and
the evidence of Mr Greve, the appellant’s expert, that the only
election was in respect of the Brummersheim property.
In terms of the
agreement between the experts, the Brummersheim property constituted
R84,5 million of the total value of R232 million
testified to by Mr
Clay.
[67]
The respondent’s argument, accepted
by the Tax Court, was that even if the settlement agreement was taken
into account, the
effect thereof would be to increase the value of
U[....] and not to discount the value by 60%. This is because the
R300 million
constituted 60% of the anticipated future profits of the
Brummersheim mine. Therefore, 100% of the expected profits would be
R500
million. In terms of the settlement agreement, R300 million is
payable to Sumo, which represent Sumo’s 60%. The remaining
R200
million represents U[....]’s 40% share in the profits.
[68]
The appellant’s expert, Mr
Stride, further conceded in cross examination that if the R300
million liability was taken into
account, the total value of the
Brummersheim property of R500 million should also be taken into
account as found by the Tax Court.
The
remaining R200 million is substantially more than the R84.5 million
value of the mineral resource of U[....] agreed by the experts
as the
Brummersheim value. It cannot be concluded that there was any
misdirection of fact or law by the Tax Court on this issue.
[69]
The
appellant
in argument did not expressly attack the factual findings of the Tax
Court. Rather it was argued that the Tax Court overlooked
the entire
concept of economic value in focussing on the contingent nature of
the liability and how provision was made in the financial
statements
of U[....].
The
appellant’s argument on this issue again raised the contention
that the Tax Court did not consider the true economic or
market value
of the NMC shares based on a willing buyer willing seller scenario
and challenged the valuation methodology adopted.
As stated
previously, a challenge to the valuation methodology was not an issue
before the Tax Court and cannot be raised on appeal.
The challenge
now raised by the appellant seeks to make out a foundation for his
case not made out before the Tax Court.
[30]
[70]
The evidence of Mr McDonald, the
respondent’s expert, testifying in respect of Mr Greve’s
contention that the settlement
agreement (R300 million) should be
deducted from the mineral asset value was accepted by the Tax Court:
“
Deduction
of the Settlement Agreement to arrive at the final value is
incorrect, for two reasons – it arose after the Transaction
Date and in doing so confuses the effect of two valuation approaches.
The R300 million settlement amount agreed between U[....]
and Sumo on
22 November 2011 related to future profits from the Brummersheim
operation and release of U[....] from all other liabilities
pertaining to the consultancy agreement. The R300 million was a
compromise relative to the approximate R344 million due to Sumo
for
its 60% share per the Consultancy Agreement based on the discounted
cash flow in schedule B attached to the Amended Statement
of Claim.
Deduction of the R300 million settlement from the value derived from
the Market Approach is inappropriate, as it confuses
the effect of
two different valuation approaches where two valuation techniques are
mixed up, i.e. like for like is not compared.
Thus R562 million per
the Venmyn report less R300 million is not correct. The only way that
the settlement amount of R300 million
can be considered is if it is
deducted from the value determined for the Brummersheim operation
based on a discounted cash flow.
If the R300 million represents 60%
of the value for Brummersheim, the total value for Brummersheim would
be at least R500 million
(viz the value of R119 million assigned in
the Venmyn report).”
[71]
The findings of the Tax Court on these
issues cannot be faulted.
I conclude that
this ground of appeal must fail.
[72]
The
last issue is whether there is any basis to interfere with the
granting of the costs orders by the Tax Court that the appellant
be
liable for 50% of the costs of the appeal and the qualifying fees of
certain experts. There is in my view no basis to interfere
with the
exercise of its discretion
[31]
by the Tax Court.
[73]
The normal principle is that costs follow
the result. There is no basis to deviate from this principle.
Considering the complexity
of the issues involved, the employment of
two counsel was justified.
[74]
The following order is granted:
The appeal is dismissed
with costs, including the costs of two counsel where employed.
EF
DIPPENAAR
JUDGE
OF THE HIGH COURT
JOHANNESBURG
I
AGREE
M
SENYATSI
JUDGE
OF THE HIGH COURT
JOHANNESBURG
I
AGREE
B
WANLESS
ACTING
JUDGE OF THE HIGH COURT
JOHANNESBURG
APPEARANCES
DATE
OF HEARING
:
08 February 2021
DATE
OF JUDGMENT
:
30 April 2021
APPLICANT’S
COUNSEL
:
Adv. AE Bham SC
APPLICANT’S
ATTORNEYS
: Faber Goertz Ellis Austin Inc
Ms
Faber
RESPONDENT’S
COUNSEL
: Adv C Louw SC
Adv
HJ Snyman
RESPONDENT’S
ATTORNEYS
: Klagsbruin Edelstein Bosman DeVries
Mr
R Nyama
[1]
28
of 2011
[2]
The
Tax Court found that the 2010 additional assessment was to be
altered in terms of s129(2)(b) of the TAA as follows: (i) Capital
Gain in respect of the disposal of the NMC shares in an amount of
R115 700 000 (R231 400 000 x 50%); (ii) donation in respect
of the
disposal in an amount of R115 125 725 (R115 700 000 – R547
725); It also confirmed the understatement penalty in
terms of s222
and 223 of the TTA and the imposition of interest in terms of
s89quat of the TTA; The appellant was directed to
pay 50% of the
costs of the appeal including the qualifying fees of three named
experts.
[3]
58
of 1962
[4]
Sangono
v Minister of Law and Order 1996 (4) SA 384 (E)
[5]
De
Kock v Middelhoven
2018 (3) SA 180
(GP) paras [16]-[17] and the
authority cited therein
[6]
[7]
2016
(2) SA 608
(SCA)
[8]
De
Beers Holdings (Pty) Ltd v Commissioner for Inland Revenue
1986 (1)
SA 8
(A) at 33E-G
[9]
Paddock
Motors (Pty) Ltd v Inglesund
1976
(3) SA 16
(A) at 23D-24G wherein it was held
that
a litigant who had expressly abandoned a legal contention in a court
below was entitled to revive the contention on appeal
as the duty of
an appeal court is to ascertain whether the lower court reached a
correct conclusion on the case before it. To
prevent an appeal court
from considering a legal contention abandoned in a court below might
prevent it from performing that
duty if the appeal court were bound
by a mistake of law, resulting in a conformation of a decision that
is clearly wrong.
[10]
Workmen’s
Compensation Commissioner v Crawford
1987 (1) SA 296
(A) at 307 F-I;
Navidas (Pty) Ltd v Essop; Matha v Essop
[1994] ZASCA 84
;
1994 (4) SA 141
(A)
at148G-149C; BP South Africa (Pty) Ltd v Secretary for Customs and
Excise
1985 (1) SA 725
(A) at 773G-H
[11]
AJ
Shephard (Edms) Bpk v Santam Versekeringsmaatskappy Bpk
1985 (1) SA
399
(A) 413D-416D; F& I Advisors (Edms) Bpk v Eerste Nasionale
Bank van Suidelike Afrika Bpk 1999 (1) SA 515 (SCA)
[12]
Naude
v Fraser
[1998] ZASCA 56
;
1998 (4) SA 539
(SCA) 558A-E; Ras and Others NNO v Van der
Meulen
2011 (4) SA 17
(SCA) at 22 C, para [16]
[13]
Ras
supra 228C; Administrateur Transvaal v Theletsane
[1990] ZASCA 156
;
1991 (2) SA 192
(A) 195F-196I and 200G
[14]
The
Tax Court further held: “
Furthermore
due to the agreement between the experts in exhibit B (sic
BB)
and
the fact that the taxpayer had accepted the values contended for by
the experts, this point has become moot”.
[15]
S102(1)
TAA
[16]
per
authorities
in fn 10 above
[17]
The
definition of “
reserve”
in the SAMREC Code requires that a Pre-Feasibility Study must have
been done. A “
Pre-Feasibility
Study”
is defined in the SAMREC Code to mean:
“
A
comprehensive study of the viability of a range of options for a
mineral project that has advanced to a stage at which the preferring
mining method in the case of underground mining or the pit
configuration in the case of an open pit has been established and
an
effective method of mineral processing has been determined. It
includes a financial analyses based on realistic assumptions
of
technical, engineering, operating, economic factors and the
evaluation of other relevant factors that are sufficient for a
Competent Person, acting reasonably, to determine if all or part of
the Mineral Resource may be classified as a Mineral Reserve.
The
overall confidence of the study should be stated. A Pre-Feasibility
Study is at a lower confidence level than a Feasibility
Study.”
[18]
On
17 May 2010, although the valuation document was not attached to the
statement of claim in the record
[19]
Ras
supra 228C
[20]
ABC
(Pty) Ltd v Commissioner South African Revenue Services Tax court
case no 13251 para [117] and [147] upheld in Africa Cash
& Carry
(Pty) Ltd v Commissioner South African Revenue Service (“Africa
Cash & Carry”)
[2019] ZASCA 748
(21 November 2019)
[21]
Frazer
supra 558B
[22]
Naude
v Fraser
[1998] ZASCA 56
;
1998 (4) SA 539
(SCA) 558A-E; Ras and Others NNO v Van der
Meulen
2011 (4) SA 17
(SCA) at 22 C, para [16];
Alexcor
Ltd v The Richtersveld Community
[2003] ZACC 18
;
2004
(5) SA 460
(CC) at 476H-477C, paras 43-44
[23]
Menday
v Protea Assurance Company Ltd
1976 (1) SA 565
(E) 569B-E
[24]
The
SAMREC Code defines an “inferred mineral resource” as:
“
that
part of a Mineral Resource for which volume or tonnage, grade and
mineral content can be established with only a low level
of
confidence. It is inferred from geological evidence and sampling and
assumed but not verified geologically or through analysis
of grade
continuity. It is based on information gathered through appropriate
techniques from locations such as outcrops, trenches,
pits, workings
and drill holes that may be limited in scope or of uncertain quality
and reliability….this category is
intended to cover
situations in which a mineral concentration or occurrence has been
identified and limited measurements and
sampling have been
completed, but in which the data ae insufficient to allow the
geological or grade continuity to be interpreted
with confidence.
Due to the uncertainty that may be attached to some Inferred Mineral
Resources, it cannot be assumed that all
or part of an Inferred
Mineral Resource will necessarily be upgraded to an Indicated or
Measured Mineral Resource after continued
exploration.”
[25]
Stepney
supra para [16] and the authorities cited therein
[26]
Mineral
reserve and proved mineral reserve a
s
defined in the SAMREC Code, which must be economically mineable.
Under the Code the definition of “reserve” requires
a
pre-feasibility study to have been conducted, a term defined in the
Code
[27]
Economically
mineable as defined in the SAMREC Code
[28]
It
was common cause that the amended statement of claim in the
arbitration proceedings was delivered on 17 May 2010, the
arbitration
award was made on 6 September 2010 and the settlement
agreement between U[....] Coal (Pty) Ltd and Sumo was concluded on
22 November
2011.
[29]
It
was common cause that the R300 million settlement amount in terms of
the settlement agreement dated 22 November 2011 was in
lieu of Sumo
Coal’s entitlement, in terms of the consultancy agreement, to
share in future profits in respect of one property,
Brummersheim.
The settlement agreement was m
ade
an award by the arbitrator on 6 September 2010
[30]
Ras
supra 228C; Administrateur Transvaal v Theletsane supra 195F-196I
and 200G
[31]
S
130 TAA