Commissioner for South African Revenue Services v Foskor (375/09) [2010] ZASCA 45; [2010] 3 All SA 594 (SCA) (31 March 2010)

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[2010] ZASCA 45
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Commissioner for South African Revenue Services v Foskor (375/09) [2010] ZASCA 45; [2010] 3 All SA 594 (SCA); 72 SATC 174 (31 March 2010)

THE
SUPREME COURT OF APPEAL
OF
SOUTH AFRICA
JUDGMENT
Case no: 375/09
THE COMMISSIONER FOR THE SOUTH
AFRICAN
Appellant
REVENUE SERVICES
and
FOSKOR Respondent
________________________________________________________________
Neutral citation:
The
Commissioner for SARS v Foskor
(375/09)
[2010] ZASCA 45
(31 March 2010)
CORAM:
Navsa,
Mhlantla, Tshiqi JJA, Majiedt and Saldulker AJJA
HEARD:
15
March 2010
DELIVERED:
31
March 2010
SUMMARY:
Whether
ore stockpiles constitute trading stock as described in s 1 read with
s 22 of the Income Tax Act 58 of 1962 ─ rationale
for these
provisions discussed ─ ore subjected to complex processes which
resulted in a saleable product for the manufacture of
fertilizer ─
held that stockpiles constituted trading stock ─ interest on unpaid
tax remitted based, inter alia, on the fact
that appellant had
remained passive for a lengthy period and that taxpayer had acted on
legal advice.
________________________________________________________________
ORDER
________________________________________________________________
On appeal from:
The
South Gauteng Tax Court (Joffe J sitting as court of first instance).
1. The appeal is upheld and the
respondent is ordered to pay 50 per cent of the appellant’s costs.
2. The order of the tax court is set
aside and replaced with an order in the following terms:
‘
1. The appeal of the appellant
against the inclusion in its income of the amount of R203 205 437 as
trading stock in respect of its
1999 year of assessment is dismissed.
2. The appeal of the appellant against
the refusal of the respondent, in terms of s 89
quat
(3), to remit the interest of R51 170 908 imposed in terms of s
89
quat
(2) in respect of the appellant’s 1999 year of assessment is
upheld, and the said interest is hereby remitted.’
________________________________________________________________
JUDGMENT
________________________________________________________________
NAVSA JA (Mhlantla, Tshiqi JJA,
Majiedt and Saldulker AJJA concurring)
[1] The question in this appeal is
whether extracted, mineral-bearing ore belonging to the respondent,
Foskor (Pty) Ltd (Foskor),
a mining company, is ‘trading stock’
for the purposes of the Income Tax Act 58 of 1962 (the Act). The
appellant, the Commissioner
of the South African Revenue Services
(the Commissioner) contends that it is. Foskor is adamant that it is
not.
[2] In the event that the Commissioner
is correct it would increase Foskor’s initially assessed income by
R203 205 437
1
rendering Foskor liable to taxation on that amount. Foskor contends
that even in the event of it being so liable the Commissioner
ought,
nevertheless, to have exercised a discretion to remit the interest
which at the relevant time was in an amount of R51 170
908.80.
[3] Thankfully, the facts in this case
are largely common cause and are set out hereafter.
[4] Foskor’s main business is
mining, although it derives non-mining income as well, which it
asserts is related to its secondary
business, namely, the recovery
and marketing of baddeleyite (a mineral) and the production of
electrofused zirconia from zircon sand.
[5] During 1952 Foskor acquired the
right to mine base minerals, including phosphates over the farms
Wegsteek 30 LE, Loole 31 LE and
Laaste 24 LU, all belonging to the
State.
[6] During 1963 Phalaborwa Mining
Company Limited (PMC) obtained the right to mine copper and other
base minerals, except phosphorous
minerals, over some of the areas
over which Foskor held its rights.
[7] On 8 October 1979, in order to
utilise the full potential of the ore body, Foskor and PMC entered
into what was called an Extension-100
F agreement and an Ancillary
agreement. PMC had an open pit copper mine which it could utilise
optimally by extending its operations
into Foskor’s claims. The
agreement was intended to maximise the benefit for both institutions,
allowing PMC to concentrate on
copper mining and Foskor on the
phosphate-bearing ore, called foskorite. PMC undertook to mine the
foskorite as a by-product of its
copper mining operations and to
deliver the ore to Foskor, which agreed to pay its mining and
transport costs. Upon delivery of the
ore Foskor became the owner
thereof.
[8] Between the 1979 and 1998 tax
years approximately 183 million metric tons of foskorite were
allocated and dumped by PMC for further
processing by Foskor. At the
end of that period the open pit from which the ore was extracted had
reached its final economic limits
and could no longer continue to be
exploited.
[9] From the ore dumped by PMC Foskor
extracted phosphates and other minerals by way of the following
processes:
(a) the phosphate-bearing ore is
loaded and hauled to a primary crusher and then conveyed to secondary
and tertiary crushers for further
crushing;
(b) the crushed material is then
conveyed to Rod and Ball mills for milling to liberate the mineral
particles from the ore;
(c) the pulp containing the minerals
is then pumped to a flotation plant where the minerals of economic
importance are separated by
means of three metallurgical processes,
namely, a froth flotation process, a magnetic concentration step and
a gravity separation
process;
(d) the product from these processes
are various concentrates. The phosphate concentrate which is the main
object of the enterprise
is then dried and stockpiled.
[10] The phosphate concentrates are
sold to customers worldwide, who in turn use the phosphate minerals
contained in the concentrate
mainly for making fertilizers.
[11] Baddeleyite, a mineral which is
contained in the foskorite is also recovered by Foskor and
furthermore, low concentrates of copper
sulphide minerals are
extracted and contribute to the appellant’s income. Magnetite which
is recovered from the ore is also stockpiled
as a possible future
source of iron and titanium.
[12] It is also true that in its
unprocessed form the foskorite is un-saleable largely because of the
prohibitive costs of the processing
referred to above. It is,
however, not contested that the stockpiles can be valued.
[13] The amount of R203 205 437, which
the Commissioner included in a revised tax assessment, in 2006, for
the 1999 year of assessment,
in Foskor’s taxable income, represents
closing stock on hand as at 30 June 1999 within the definition
of ‘trading stock’
in s 1 of the Act. The amount itself is the
accumulated cost incurred by Foskor in terms of the agreement
referred to in para 7 above,
reduced by the costs relating to the
usage of the foskorite ore dumps since dumping commenced.
[14] In the 1991 and 1992 years of
assessment a debate had arisen between Foskor and the Commissioner
concerning the question presently
being addressed, namely whether the
foskorite dumps were trading stock. Foskor took legal advice. After
submissions were made to
the Commissioner, the latter consequently
assessed Foskor on the basis that the dumps did not constitute
trading stock. For more
than two decades the Commissioner did not
bring the dumps into account on the income side in determining
Foskor’s tax liability.
That attitude changed with the revised
assessment presently in dispute.
[15] The Johannesburg Income Tax
Special Court upheld Foskor’s appeal against the Commissioner’s
assessment, hence the present
appeal by the latter. To answer the
question posed in this appeal it is necessary to have regard to the
applicable statutory provisions
and then to apply them to the facts
set out above.
[16] The relevant parts of s 22 of the
Act read 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 shares
held by any company in any other company, has been diminished by
reason of damage, deterioration, change
in fashion, decrease in the
market vale 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 the 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 to such trading stock.’
[17] The definition of trading stock
in s 1 of the Act, prior to an amendment after 2001, reads as
follows:
‘ “
Trading stock”
includes anything produced, manufactured, purchased or in any other
manner acquired by a taxpayer
for
purposes of manufacture
,
sale or exchange by him or on his behalf, or the proceeds from the
disposal of which forms or will form part of his gross income,
or any
consumable stores and spare parts acquired by him to be used or
consumed in the course of his trade, but does not include
a foreign
currency option contract and a forward exchange contract as defined
in section 241(1).’
[18] The rationale for the existence
of these provisions, which bears upon the central question in this
appeal, is explained in the
judgment of this court 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 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.’
[19] It is the conduct referred to in
the last three sentences of the passage set out in the preceding
paragraph that Foskor is accused
of by the appellant.
[20] In
Richards
Bay
, Marais JA had regard
to Australian Tax Law which has much in common with our system of
taxation and referred, inter alia, to
Federal
Commissioner of Taxation v St Hubert’s Island Pty Ltd (in
Liquidation)
(1978) 78
Australasian Tax Reports 452, where Stephen J concluded that, only
‘by taking account of stock-in-trade in the conventional
way can a
correct reflex of the trader’s income
for
the accounting period
be
obtained.’
2
(My emphasis.)
[21] 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.
3
[22] As pointed out above PMC
extracted the ore and delivered it to Foskor whereupon Foskor became
the owner. The pre-trial minute
records an admission on behalf of
Foskor that it had ‘acquired’ the ore. This appeal turns on
whether the foskorite dumps were
acquired by Foskor for ‘the
purpose of manufacture’ in terms of the definition of ‘trading
stock’ (highlighted in para 16
above). A decision in the
affirmative will mean success for the Commissioner on this question.
The remittal of interest is an issue
that will flow from a decision
on the primary question.
[23] The court below considered
Secretary for Inland Revenue
v Safranmark (Pty) Ltd
1982
(1) SA 113
(A) at 122G-H, which quoted with approval, the following
statement by Miller J in
ITC
1247
38 SATC at 31:
‘
That the ordinary
connotation of the term “process of manufacture” is an action or
series of actions directed to the production
of an object or thing
which is different from the materials or components which went into
its making, appears to have been generally
accepted. The emphasis has
been laid on the difference between the original material and the
finished product.’
[24] In
Safranmark
the court had to decide whether the tax authorities were correct in
disallowing deductions in respect of machinery allowances. The
allowances were deductible if the machinery was ‘used directly in a
process of manufacture’ or in a process of a similar nature
to a
process of manufacture. That case involved raw chicken and its
subsequent treatment in order to be sold at fast food outlets.
The
taxpayer contended that the final product sold to consumers had been
subject to a process of manufacture. This court had regard
to the
specialised plant and machinery, the human effort and labour
employed, the volume of production and importantly that the end
product was significantly different from the raw material, not only
in nature but in utility and value. At 124A-B the majority of
the
court held as follows:
‘
The conclusion to be
drawn from the above is that not only did each of the ingredients
cease to retain its individual qualities but
upon completion of the
process a different compound substance having a special quality as
such . . . has been produced . . .’
[25] The court below concluded that
the processes referred to in para 9 above, employed in relation to
the foskorite, were not such
that a different finished product
emerged. It said the following (at para 26):
‘
What is sold to
customers is the phosphates originally found in the phosphate-bearing
ore, and no different substance with different
qualities has been
produced. All that occurs is a process which liberates the mineral
particles from the ore and which separates
the mineral particles.’
[26] The court below thought it
significant that the Act distinguished between manufacturing and
mining. It had regard to the definition
of mining in the Act, which
includes ‘every method or process by which any mineral is won from
the soil or from any substance or
constituent thereof’.
Manufacturing on the other hand is not defined. The court below
referred to
ITC
1455, 51 SATC 111
where the treatment of magnetite ore was
considered. The following passage from that case was relied on by
the court in support
of its ultimate conclusion:
‘
It is tempting to
compare appellant’s operation to the production of gold bullion on
a gold mine. The gold ore exists in discreet
particles in the rock.
The mined rock is crushed and the gold is leached out. The gold ore
is then heated and bullion is poured.
In ordinary parlance the latter
operation will not be referred to as the manufacturing of gold but to
the mining of gold . . . Another
comparison is with diamond mining.
It must in that context be accepted that all the acts done, whether
underground or on the surface,
to win diamonds will be regarded as
mining operations . . . These two instances differ from the
present instance in that
in those cases one mines for gold and
diamond. The gold and diamond is already in the earth. One merely
isolates it. In the case
of iron production the iron is not in the
ore. Iron oxide is. The iron is produced by an industrial process and
not a mining process.’
[27] In para 29 of its judgment the
court below said the following:
‘
In the result it must
be held that the phosphates sold by the appellant occurs naturally in
the earth and the phosphates is not, and
cannot be manufactured, just
as gold or diamonds cannot be manufactured but can only be mined. The
phosphate-bearing ore was therefore
not acquired for the purpose of
manufacture. Regard being had to the purpose requirement as
contemplated in the first part of the
definition, the ore stockpiles
do not constitute trading stock in terms of that part of the
definition.’
[28] In its submissions before us
Foskor adopted and advanced the reasoning of the court below set out
in the preceding three paragraphs.
[29] In
Richards
Bay
minerals were extracted
from coastal dunes. Two companies had joined forces to extract and
beneficiate those minerals which were
valuable. In the course of
complex operations heavy mineral concentrate is produced. During the
course of these operations there
are brought into existence
stockpiles of materials. It was the status in tax law, of some of
those stockpiles, that was decided in
that case. Counsel on behalf of
the taxpayer had submitted that the stockpiles were not saleable
assets in the form in which they
existed and that they all required
to be subjected to further processing before anything capable of
being sold was realised or emerged
and it could never have been
intended that those stockpiles should be assigned a value.
Furthermore, it had been contended that had
the legislature intended
anything that was being used in a process of manufacture to be
regarded as trading stock, it would have
employed specific language
to that effect.
[30] The Tax Court in
Richards
Bay
was prepared to assume
that the material in the stockpiles was un-saleable in its then
condition and that there was no market for
it, but nevertheless held
that they fell squarely within the definition referred to above. This
court said the following about that
part of the definition of
‘trading stock’ highlighted in para 17 above (at 325C-F):
‘
Those words are quite
plain and unambiguous. It is inherent in them 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 purpose 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. . . . What
brings it into the definition
notwithstanding that its sale or
exchange was not contemplated is its intended use for purposes of
manufacture.’
[31] Foskor sought to distinguish the
Richards Bay
case on the basis that counsel representing the taxpayer in that case
had made a concession ─ he had stated that he could not argue
with
any conviction that the stockpiles in that case had not been
‘produced’ or ‘manufactured’ within the meaning of the
definition of ‘trading stock’. Foskor submitted that it was
consequently unnecessary for the court in
Richards
Bay
to decide whether the
taxpayer was precluded from contending that the stockpiles were
mining stock because that point had not been
made in its grounds of
objection.
4
[32] The following part of the dictum
in the
Richards Bay
case,
referred to in the preceding paragraph, is important:
5
‘
It is therefore
unnecessary to detail the evidence given in regard to those
processes; it suffices to say that it establishes that
the processes
do indeed fall within the definition.’
The central issue in that case was
whether or not the stockpiles had been manufactured or produced
within the meaning of the definition
and this court answered it in
the affirmative.
[33] In
Secretary
for Inland Revenue v Hersamar (Pty) Ltd
1967 (3) SA 177
(A), this court, in determining whether a taxpayer
was entitled to allowances in respect of machinery or plant used in a
‘process
of manufacture’, said the following (at 186H-187A):
‘
Neither of the
governing words in the phrase under consideration, viz. “process”
and “manufacture”, are words of any exact
significance.
Consequently the whole phrase, “a process of manufacture”, is one
to which it may be very difficult to assign a
meaning expressed in
terms which would properly distinguish between all cases which fall
within the scope of the phrase and those
which should fall outside
its scope.’
[34] At 187B-C of the
Hersamar
case the following passage from
ITC
1052,
26 SATC 253
at p 255
was referred to:
‘
the article claimed to
have resulted from a process of manufacture must be essentially
different from the article as it existed before
it had undergone such
process.’
[35] Williamson JA in the
Hersamar
case, commenting on that passage, said the following:
‘
[I]t must be
recognised that the term “essentially” obviously imports an
element of degree into the determination of the sufficiency
of the
change that must be effected for a process to be one of
“manufacture”. As a result of being processed, a change may take
place in regard to the nature or form or shape or utility, etc., of
the previous article or material or substance. There can be no
fixed
criteria as to when any such change can be said to have effected an
essential difference. It is a matter to be decided on the
particular
facts of the case under consideration. The most exhaustive
examination of imaginary examples of change really does not
carry the
matter further.’
6
[36] In
Secretary
for Inland Revenue v Cape Lime Co Ltd
1967 (4) SA 226
(A) the taxpayer produced lime from raw material
available on its land in the form of natural deposits of limestone.
It utilised
a reduction plant two and a half miles away from the
quarry. It had purchased two new lorries for use in the carriage of
the limestone
from the quarry to the reduction plant. The question
for decision was whether the lorries had been brought into use by the
taxpayer
‘for the purposes of his trade and used by him directly in
a process of manufacture’, within the meaning of s 12(1) of the
Income
Tax Act 58 of 1962, thereby entitling it to the deductions
provided for. At the reduction plant there were crushers that broke
up
the limestone to a size that would enable it to be fed into kilns.
The court concluded that the trucks were used in the process of
manufacture of hydrated lime.
[37] We were referred to several cases
decided in other jurisdictions, including Australia and Ireland,
which were concerned with
whether or not particular items were
manufactured or produced. I agree with what is stated by Windeyer J
in a decision of the High
Court of Australia
MP
Metals Pty Ltd v Federal Commissioner of Taxation
[1968]
HCA 89
;
(1968) 117 CLR 631
(at para 16):
‘
I have considered
cases to which I was referred and also some others concerning the
denotation of the word “manufacture” appearing
in other Acts. I
have gained only two things from them. One is a conviction of the
futility of trying to decide the present case
by observations made
about other facts and other Acts. The other is that the expression
“manufactured goods” is not a technical
term capable of a precise
definition universally applicable.’
[38] At para 15 of
MP
Metals
the following
appears:
‘
Whether or not a
particular article answers the description “manufactured goods”
must depend upon the context of language and
subject matter in which
the phrase is used.’
Later in the same paragraph, Windeyer
J said:
‘
It is no doubt true
that all manufacturing involves the making of a new thing.’
The learned judge referred to the
following statement by Darling J in
McNicol
v Pinch
(1906) 2 KB 352
at
p 361:
‘
[T]he essence of
making or of manufacturing is that what is made shall be a different
thing from that out of which it is made.’
He observed that this does not,
however, supply the answer to the following question: What is a
different thing?
[39] The present case has to be
decided against the background of the rationale for the provisions
relating to ‘trading stock’
and the progressive inclusion of raw
materials acquired for the purposes of manufacture so as to widen the
net to ensure proper accountability
in each tax year.
[40] In the present case the ore is
mined and extracted by PMC. It is acquired by Foskor upon delivery by
PMC. It is acquired so as
to subject it to the processes referred to
in para 9. It is common cause that before the ore is subjected to
those processes it is
not saleable. Subsequent to these processes
Foskor has a worldwide market for the end products.
[41] That part of the judgment in
ITC
1455, cited and relied on by the court below (and referred to in para
26 above), must be seen in proper perspective. In that case
the Tax
Court was called upon to consider the effect of an amendment to the
then Sales Tax Act 103 of 1978 which extended the definition
of
‘mining
operations’. The relevant part of
the amended provision
7
reads as follows:
‘
[T]he expression
“mining operations” means those operations the essential object
of which is the recovery of mineral or oil deposits
from the earth,
including operations concerned with prospecting for such deposits,
the extraction of the deposit-bearing materials
from the earth and
the treatment of those materials for the purpose of recovering such
deposits therefrom.’
[42] In
ITC
1455 the distinction between mining operations and manufacturing was
important for the ensuing sales tax implications. The extended
definition as can be seen from the text of the amendment, set out in
the preceding paragraph, clearly covers treatment of ore beyond
its
extraction from the earth and includes the further treatment of the
raw material.
[43] Furthermore, it is true that when
a mining house extracts gold ore and then subjects it to processes
including refinement one
would be hard-pressed not to concede that
the mining house in question has mined the gold. So too, when
diamonds are extracted from
the earth by a diamond mining company and
then subjected by it to cutting and other processes one would readily
concede that the
diamonds it then onwards sells to jewellers and
others had been mined by it.
[44] In the present case, the mining
is done by PMC. The ore, after it is acquired by Foskor, is subjected
by it to what is set out
in para 9 above as part of a process towards
the ultimate end, namely, the fertilizer produced by its customers.
The foskorite ore
is acquired by Foskor for the purpose of
manufacture towards that final object. The fertilizer, although it
contains phosphates,
is a product substantially different to the
foskorite ore. One would not in ordinary parlance speak of mining
fertilizer, particularly
where the mining institution and the
producers of the intermediate and end products are distinct.
[45] In my view, the submission that
the phosphate minerals that occur naturally in the earth are
contained in what is sold to fertilizer
producers worldwide and that
the end product was therefore not manufactured, is too simplistic. It
ignores not only the complexity
of the processes to which the ore was
subjected but the fact that in the result several minerals are
separated and sold independently.
It also ignores the fact that
before the processes referred to the ore is not saleable but that
what is produced thereafter has a
worldwide market. Put simply, the
end products that emerge after the processes referred to above are
significantly different from
the raw ore.
[46] In my view, the distinction
sought to be made between mining operations and manufacture, in the
present context, is unhelpful.
In a legal opinion obtained by Foskor
the distinction between mining operations and manufacturing was drawn
in an effort to substantiate
the view that the stockpiles were not
trading stock. In that opinion reference is made to allowances to
which miners are entitled
in relation to capital expenditure.
Furthermore, the opinion refers to the deductibility of expenditure
in connection with prospecting
and exploratory work. We were,
however, not referred by Foskor to any provision of the Act or to any
other statute which, in the
circumstances of this case, would have
entitled Foskor to the benefits of a distinct tax regime or which
would in some other way
have afforded it tax relief in the form of an
allowance or deduction. More importantly, it does not appear that
Foskor, during the
lengthy period when it completed tax returns on
the basis that the ore stockpiles did not constitute trading stock
within the meaning
of s 1 of the Act, claimed any particular mining
deduction, allowance or other benefit. This might be due to the fact
that PMC conducted
the mining.
[47] It is important to bear in mind
that the deductions claimed by Foskor were in relation to the cost of
acquiring the ore stockpiles,
which is the kind of expenditure that
in the ordinary course is deductible in bringing trading stock into
account.
[48] In my view, the
Richards
Bay
case is not
distinguishable. The fact that the ore was not saleable before the
processes referred to above does not exclude it from
constituting
trading stock. The primary question, for all the reasons set out
above, is answered in favour the Commissioner. This
leads to the
question, whether the Commissioner justifiably did not remit the
interest that would in the ordinary course have been
imposed on the
taxable amount.
[49] Section 89
quat
(2) regulates the payment of interest on the underpayment of
provisional tax. Section 89
quat
(3) provides as follows:
‘
Where the Commissioner
having regard to the circumstances of the case is satisfied that any
amount has been included in the taxpayer’s
taxable income or that
any deduction, allowance, disregarding or exclusion claimed by the
taxpayer has not been allowed, and the
taxpayer has on reasonable
grounds contended that such amount should not have been so included
or that such deduction, allowance,
disregarding or exclusion should
have been allowed, the Commissioner may, subject to the provisions of
section 103 (6), direct that
interest shall not be paid by the
taxpayer on so much of the said normal tax as is attributable to the
inclusion of such amount or
the disallowance of such deduction,
allowance, disregarding or exclusion.’
[50] In the Tax Court Foskor contended
that even if it failed on the merits the Commissioner should remit
the interest which would
otherwise be payable. Before us it persisted
in that submission. The basis on which this submission rests is set
out hereafter. Prior
and subsequent to the Tax Court judgment in
Richards Bay
it had taken legal advice in respect of the stockpiles in question on
the strength of which it had regulated its affairs. It provided
the
opinion to the Commissioner who, for more than two decades, had not
considered the stockpiles to form part of Foskor’s trading
stock.
[51] It is true that Foskor does not
appear to have taken legal advice subsequent to the decision of this
court in
Richards Bay
.
However, the court below itself saw merit in Foskor’s approach. In
my view, on the basis contemplated in s 89
quat
(3), we can consider that
issue afresh and substitute the Commissioner’s decision in this
regard.
8
[52] What remains is the question of
costs. The appeal was clearly warranted and the Commissioner has been
successful on the primary
question. Foskor, on the other hand, will
as a result of the conclusion reached above in respect of the
remittal of interest be the
beneficiary of substantial financial
relief approximating the amount of taxation for which it is liable.
In my view, considering
the importance and extent of the primary
question and taking into account all the circumstances of the case,
including the Commissioner’s
passive position for a considerable
period of time, a cost order restricting the appellant to recovery of
50 per cent of its costs
is warranted.
[53] The following order is made:
1. The appeal is upheld and the
respondent is ordered to pay 50 per cent of the appellant’s costs.
2. The order of the tax court is set
aside and replaced with an order in the following terms:
‘
1. The appeal of the appellant
against the inclusion in its income of the amount of R203 205 437 as
trading stock in respect of its
1999 year of assessment is dismissed.
2. The appeal of the appellant against
the refusal of the respondent, in terms of s 89
quat
(3), to remit the interest of R51 170 908 imposed in terms of s
89
quat
(2) in respect of the appellant’s 1999 year of assessment is
upheld, and the said interest is hereby remitted.’
_________________
M S NAVSA
JUDGE OF APPEAL
APPEARANCES:
For
Appellant: O Rogers SC
Instructed
by
The
State Attorney Cape Town
The
State Attorney Bloemfontein
For
Respondent: P J J Marais SC
J
Truter
Instructed
by
Rooth
Wessels Motla Conradie Inc Pretoria
Rosendorff
Reitz Barry Bloemfontein
1
As at 18 September 2006 taxation on this amount was calculated by
the appellant in an amount of R60 647 003.10.
2
See
Richards Bay op cit
at
317D-J.
3
Richards Bay op cit
at 318C-E.
4
At 328H-329C.
5
At 328I.
6
At 187C-F.
7
Inserted by s 8 of the Sales Tax Amendment Act 102 of 1985 (with
effect from 31 July 1985).
8
See s 89
quat
(5).