Anglovaal Mining Ltd v Commissioner for the South African Revenue Services (411/08) [2009] ZASCA 109; 2010 (2) SA 299 (SCA) ; [2010] 1 All SA 187 (SCA) (22 September 2009)

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Anglovaal Mining Ltd v Commissioner for the South African Revenue Services (411/08) [2009] ZASCA 109; 2010 (2) SA 299 (SCA); [2010] 1 All SA 187 (SCA); 71 SATC 293 (22 September 2009)

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THE
SUPREME COURT OF APPEAL
REPUBLIC
OF SOUTH AFRICA
JUDGMENT
Case No: 411/08
In the matter between :
ANGLOVAAL MINING
LIMITED
Appellant
and
THE COMMISSIONER FOR THE SOUTH
AFRICAN
REVENUE SERVICE Respondent
Neutral citation:
Anglovaal
v SARS
(411/08)
[2009] ZASCA 109
(22 September 2009)
Coram: STREICHER, MTHIYANE JJA,
HURT, LEACH and BOSIELO AJJA
Heard: 18 AUGUST 2009
Delivered:
22
SEPTEMBER 2009
Summary: Income Tax Act 58 of
1962 – acquisition of shares – whether acquired as capital
investment or trading stock – whether
computation of appellant’s
income tax liability done in accordance with s 22.
ORDER
On appeal from: the Tax Court (Mbha J sitting as court
of first instance).
1 The appeal is allowed with costs including the costs
of two counsel.
2 The order by the Tax Court is set aside and the matter
is referred back to the respondent to revise the appellant’s
assessment
for the 1999 year of assessment on the basis that the
appellant is entitled to the deduction of the amount of R159 702 919

from its taxable income.
JUDGMENT
STREICHER JA (MTHIYANE JA, HURT, LEACH and BOSIELO AJJA
concurring)
[1] On 1 June 1994 the appellant acquired shares in
National Brands Limited (‘NBL’). During its 1999 year of
assessment it sold
these shares at a loss. In its income tax return
for that tax year the appellant claimed a deduction equal to this
loss but the
respondent disallowed the deduction on the ground that
the shareholding was of a capital nature and that the loss did not
qualify
for deduction. An appeal by the appellant to the Tax Court
was dismissed but that court granted leave to the appellant to appeal

to this court.
[2] In 1994 the appellant, then known as Anglovaal
Limited and at the time controlled by two families, had a mining
division and
an industrial division. The mining division consisted of
various subsidiary mining companies whereas the industrial division
consisted
of a 60% shareholding in Anglovaal Industries Limited
(‘AVI’), a company listed on the Johannesburg Stock Exchange
(‘the
JSE’), which in turn had a number of subsidiaries. One of
AVI’s subsidiaries was NBL in which it had a 97,7% shareholding.
NBL was the company in which all the fast moving consumer goods
businesses such as Five Roses Tea, Bakers Biscuits and Beaumont’s

Biscuits were housed. Apart from its mining and industrial interests
the appellant, since the formation of the group of companies
in 1933,
had actively traded in shares, particularly in listed mining shares,
which were not regarded as strategic long term assets
with the object
of making money by speculative investment.
[3] On 21 April 1994, pursuant to a resolution by the
appellant, NBL purchased a snack food business carried on by United
Tobacco
Company under the name ‘Willards Foods’. The appellant
funded the acquisition by acquiring a 15,6% shareholding in NBL for
the amount of R300m. It in turn acquired the funds by issuing N
ordinary shares to foreign investors.
[4] In early 1998 Morgan Stanley, an investment bank,
advised the appellant to separate the mining from the industrial
companies.
The appellant implemented the proposal by changing its
name to Anglovaal Mining Limited and transferring its shares in AVI
to another
holding company. At the same time the appellant decided to
sell the NBL shares held by it to AVI. The sale took place in the
appellant’s
1999 tax year at a price of R141 021 605
leaving the appellant as a purely mining investment company. The sale
resulted
in a loss of R159 702 919.
[5] As stated above the respondent disallowed the
deduction of the loss from the appellant’s income during its 1999
year of assessment.
In its objection to the disallowance the
appellant stated that under normal circumstances the shares issued by
NBL to fund the
Willards acquisition would have been issued to the
holding company of NBL, namely AVI, and that the shares would have
become part
of AVI’s long term portfolio. However, the appellant’s
merchant bankers advised that funds could be raised in the
international
market by way of a foreign equity placement of
appellant’s shares. The appellant followed the advice and raised
the funds required
to acquire the new equity in NBL. It stated that
normally it would not have had a direct holding in a food company but
would have
had its exposure to NBL via AVI. An exception was made in
this case because NBL was earmarked for a listing on the Stock
Exchange
later in the year and the shares would have been sold by the
appellant within a few months. The intention of taking up the shares

directly was with a speculative motive and should be distinguished
from appellant’s long-term strategic investment in NBL which
was
held indirectly through AVI. Unfortunately, according to the
appellant, NBL’s profit performance after the Willard’s
transaction
deteriorated sharply with the result that the proposed
listing did not materialize. For these reasons, the appellant
contended,
the loss was tax deductible.
[6] The respondent dismissed the objection whereupon the
appellant appealed to the Tax Court on the ground that the loss
incurred
on the disposal of the shares should be allowed as a
deduction from income in the determination of taxable income on the
basis
that the amount represented a revenue loss actually incurred in
the production of income as envisaged in section 11(a) read together

with section 23(g) of the Income Tax Act 58 of 1962.
[7] At the time concerned the relevant part of s 11(a)
of Act 58 of 1962 read as follows:
‘11 For the purpose of determining the taxable income derived by
any person from carrying on any trade within the Republic, there

shall be allowed as deductions from the income of such person so
derived –
(a) expenditure and losses actually incurred in the Republic in the
production of the income, provided such expenditure and losses
are
not of a capital nature; . . .’
Section 23(g) provided:
’23 No deductions shall in any case be made in respect of the
following matters, namely-
. . .
(g) any moneys claimed as a deduction from income derived from trade,
to the extent to which such moneys were not laid out or expended
for
the purposes of trade;
. . .’
‘Income’ was defined in s 1 as meaning ‘the amount
remaining of the gross income of any person for any year or period
of
assessment after deducting therefrom any amounts exempt from normal
tax under Part I of Chapter II’.
‘Gross income’, in terms of s 1, ‘in relation to any year
or period of assessment, means, in the case of any person,
the total
amount, in cash or otherwise, received by or accrued to or in favour
of such person during such year or period of assessment
from a source
within or deemed to be within the Republic, excluding receipts or
accruals of a capital nature . . .’
[8] To qualify for deduction the appellant’s loss had
to be a loss other than a loss of a capital nature. The appellant
contended
that it was not of a capital nature whereas the respondent
submitted that it was. If the shares were acquired as trading stock
with the intention of disposing of them at a profit the former is the
case. See
Elandsheuwel Farming (Edms) Bpk v
Sekretaris van Binnelandse Inkomste
1
where Corbett JA said:
‘Where a taxpayer sells property, the question as to whether the
profits derived from the sale are taxable in his hands by reason
of
the proceeds constituting gross income or are not subject to tax
because the proceeds constitute receipts or accruals of a capital

nature, turns on the further enquiry as to whether the sale amounted
to the realisation of a capital asset or whether it was the
sale of
an asset in the course of carrying on a business or in pursuance of a
profit-making scheme. Where a single transaction
is involved it is
usually more appropriate to limit the enquiry to the simple
alternatives of a capital realisation or a profit-making
scheme. In
its normal and most straightforward form, the latter connotes the
acquisition of an asset for the purpose of reselling
it at a profit.
This profit is then the result of the productive turnover of the
capital represented by the asset and consequently
falls into the
category of income. The asset constitutes in effect the taxpayer's
stock-in-trade or floating capital. In contrast
to this the sale of
an asset acquired with a view to holding it either in a
non-productive state or in order to derive income from
the productive
use thereof, and in fact so held, constitutes a realisation of fixed
capital and the proceeds an accrual of a capital
nature. In the
determination of the question into which of these two classes a
particular transaction falls, the intention of the
taxpayer, both at
the time of acquiring the asset and at the time of its sale, is of
great, and sometimes decisive, importance.
Other significant factors
include,
inter alia
, the actual activities of the taxpayer in
relation to the asset in question, the manner of its realisation, the
taxpayer's other
business operations (if any) and, in the case of a
company, its objects as laid down in its memorandum of association.’
[9] At the hearing of the appeal in the Tax Court the
appellant tendered the evidence of two witnesses, Peter Menell and
David Barber.
David Barber became the Group Financial Manager of the
Anglo Vaal Group in 1994 and in 1996 he was appointed Group Financial
Director.
He oversaw the unbundling process in 1998 and left the
group when it was completed. At the time of the hearing in the Tax
Court
he no longer had any financial interest in the group. According
to him the appellant often invested in shares with the purpose of

reselling them and at every executive committee (‘exco’) meeting
of the appellant there was a slot for reporting on the purchase
and
sale of shares. He was responsible for the buying and selling of
investments and before he became a member of exco he attended
that
part of the exco meetings relating to the buying and selling of
investments.
[10] In respect of the Willards transaction Barber, in a
written presentation, suggested to exco that R300m of the funds
required
by NBL be funded by the appellant purchasing shares in NBL.
He testified that the appellant did not normally invest in an
industrial
subsidiary. There had to be some justification to permit
this type of unusual activity. His justification to exco was first
that
by acquiring the shares the appellant would increase the group
holding in NBL from 59% to 65%. Second, the direct holding could
be
sold at a profit to a potential foreign partner. It was thought,
after the first democratic elections, with foreign companies
looking
at South Africa as a potential new market, that it would be better to
have foreign fast moving consumer goods and food
companies as a
partner than a competitor and so get access to their brands. Third,
AVI was an acquisitive company and sometimes
acquired companies in
exchange for AVI shares thereby diluting the appellant’s
shareholding in AVI. To counter such dilution
the appellant would be
able to sell its NBL shares to AVI in exchange for AVI shares so as
to maintain its 60% shareholding in
AVI which it considered to be the
desired holding. Fourth, in the event of a stock exchange listing of
NBL being sought, a certain
number of shares would have to be sold to
the public and the NBL shares could be used for that purpose without
reducing AVI’s
strategic investment. He also stated in his written
presentation that the NBL shares would be held in a tax efficient
vehicle to
minimise tax liability in the event of onward sale.
However, no way could be found to ‘shelter the tax liability’ so
the shares
were left in the appellant.
[11] The direct holding by the appellant of shares in
NBL was according to Barber inconsistent with the group structure but
was
undertaken for two reasons. First, it allowed the appellant to
take advantage of the offshore market. Second, it was felt that it

was not a long term holding and that the structure would be restored
within a short period of time as the intention was to dispose
of the
holding for profit in one of the three ways referred to above. Asked
whether AVI shares as opposed to the appellant’s
shares could have
been placed with a foreign investor Barber said that AVI would not
have given foreign investors an exposure to
mining and would probably
not have been that attractive.
[12] Menell joined the appellant in 1992 as Manager,
Finance and Administration, Mines. In September/October 1994 he was
appointed
as a director of the appellant. Exco, which met every
Thursday, was the ‘main forum’ for debating business decisions.
He only
became a regular participant in these discussions as a member
of the committee after October 1994 and was therefore not a party
to
the actual decision relating to the acquisition by NBL of Willards or
the acquisition of a 15,6% shareholding by the appellant
in NBL. He
did however confirm Barber’s evidence that the acquisition by the
appellant of the 15,6% shareholding in NBL was inconsistent
with the
structure of the group as AVI was created ‘to be the home for all
the industrial interests’. To hold some of the NBL
shares in the
appellant was according to him ‘a step backwards to a more complex
structure’.
[13] Menell and Barber were two of the senior members of
the executive of the appellant who embarked on a marketing trip to
North
America and Europe to sell its shares in order to raise the
R300m required for the acquisition of the NBL shares. The group of
executives was led by the managing director of the appellant and he
spoke at every meeting of foreign investors. Menell testified
that
foreign investors were told how the proceeds of the shares were going
to be used. It was explained to them that buying a direct
stake in
NBL was contrary to the appellant’s policy of ‘streamlining’
its industrial holdings through AVI but that it was
an efficient
mechanism and created various options to make an extra profit from
the transaction. Three options were mentioned.
One was to promote a
listing of NBL and sell the shares once NBL had been listed. Another
one was to sell the shares to an incoming
foreign investor. The third
one was, in the event of a rights issue by AVI, to take up the shares
in AVI against delivery of the
NBL shares to AVI in lieu of cash so
as to maintain the appellant’s 60% shareholding in AVI.
[14] Barber testified that he gave the financial
perspective of the Anglo Vaal Group at the presentations to foreign
investors.
He confirmed Menell’s evidence that the appellant’s
intentions with the NBL shares were mentioned to the foreign
investors
and stated that if the appellant held on to the NBL shares
outside the AVI structure it would have been subject to criticism and

that that situation could not have lasted on a long-term basis.
[15] The statement in the appellant’s objection to the
respondent’s 1999 assessment that NBL was earmarked for a listing
on
the stock exchange later in the 1994 year and that NBL shares
would have been sold within a few months was not borne out by the

evidence. In the public announcement of the acquisition by NBL of the
business of Willards Food Division it was stated:
‘Various financing alternatives are presently being evaluated and a
further announcement will be published once these are finalised.
This
is not expected to result in the listing of NBL in the immediate
future.’
Although it appears from the papers discovered, such as
a draft prospectus, that a listing of NBL shares was on the cards in
1993,
and although it is stated in the exco minute dated 10 February
1994 that a listing is being reviewed on an ongoing basis, that
option was not proceeded with. Menell testified that as from the end
of 1994 signs of a decline in the fortunes of NBL became apparent
and
that profits dropped dramatically as from 1995 as a result of which
the listing of the shares was not proceeded with. But under

cross-examination he had to concede that during 1993, 1994 and 1995
NBL was the star performer in the AVI group, that NBL’s profits

declined after June 1995, and that the statement in the objection was
not correct. A listing was only one of the options.
[16] According to Barber the Willards’ transaction did
not meet the expectations. As a result it became difficult to achieve
the
benefits foreseen in the acquisition of the NBL shares. Foreign
partners would have required undertakings and warranties relating
to
the health of the company, AVI would not have paid an amount which
would have allowed the appellant to make a profit and for
a listing
it would have been necessary to show that the Willards transaction
was successful.
[17] In 1998 Morgan Stanley advised that the Group was
too diversified, that the worldwide trend was back to core business
and that
the market disliked family controlled structures. As a
result it was decided to restructure the group into firstly two and
ultimately
three separate companies in which, respectively, the focus
was on mining, engineering and food activities. The intention was
that
the appellant should end up being a purely mining investment
company. It would have been anomalous for a mining company to retain

the 15% shareholding in NBL. For that reason it was decided that, as
part of the transaction, the NBL shares should be sold to
AVI.
[18] In a document prepared in 1998, at the time of the
unbundling, it was stated in respect of the acquisition of the
appellant’s
NBL shares by AVI –
‘This splitting of the shareholding was deemed appropriate at the
time as the shares acquired by Anglovaal would be those utilised
for
the introduction of any outside minority in National Brands. (At that
time certain global operations were considering returning
to South
Africa and investing in F.M.C.G.
2
operations in the country.)
Any outside shareholding introduction did not occur and the proposed
restructuring of AVI gives rise to the opportunity to rationalise
the
National Brands’ shareholding.’
[19] The Tax Court held that the essential issue was
whether the intention of the appellant in acquiring the NBL shares
was to hold
them as a capital investment in order to derive income
therefrom in the form of dividends. It stated that ‘the appellant’s
98% shareholding in NBL as at the beginning of 1994, was a strategic
long-term investment of a capital nature’. The Barber memorandum,

in which it was stated that the Willards acquisition would have a
major long-term strategic benefit for NBL’s activities, according

to the Tax Court ‘quite clearly explains the appellant’s capital
intent regarding the purported acquisition of the 15,6% shareholding

in NBL’. The NBL shares acquired by the appellant never became
stock in trade.
[20] The Tax Court found support for its finding that
the acquisition was of a capital nature in the offering circular in
respect
of the international placement of N ordinary shares in the
appellant, more particularly:
(a) In the passage in which it is said that the
directors ‘consider the acquisition of Willards to be an important
step in Anglovaal’s
strategy of developing its interests in the
branded fast-moving consumer goods market’.
(b) In the fact that there is no mention in the document
‘that suggests that they were being invited to put up the
R300million
(for the Willards acquisition) as a short term
speculation on the JSE as Messrs Menell and Barber would like the
court to believe’.
The direct holding of NBL shares in the appellant was a
by-product of the method of financing of the Willards acquisition and
the
resulting structure was not created for any speculative reasons,
the Tax Court held.
[21] The appellant submitted that it did not acquire the
NBL shares as a capital investment but acquired them as trading
stock.
In terms of s 1 of the Income Tax Act 58 of 1962, as it
read at the time, 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 . . ..’
[22] The appellant submitted that the NBL shares were
‘purchased . . . for purposes of . . . sale or exchange’ and
also that
‘the proceeds from the disposal of (the shares) forms
part of its gross income’ ie that on either basis the shares
qualified
as trading stock as defined.
[23] The Tax Court erred in equating the intention with
which NBL shares were held in the appellant with the intention with
which
NBL shares were held in AVI. This is apparent from the Tax
Court’s reference to ‘the appellant’s 98% shareholding in NBL
as at the beginning of 1994’ whereas it was AVI that held 98% of
the NBL shares. The appellant had an indirect interest of
approximately
59% in NBL only through its 60% shareholding in AVI.
Consequently, the fact that the directors of the appellant considered
the
acquisition of Willards to be an important step in the
appellant’s strategy of developing its interests in the branded
fast-moving
consumer market and the fact that the Willards
acquisition would have had a major long-term strategic benefit for
NBL’s activities
indicated that the group had a long-term strategic
interest in NBL but it did not necessarily indicate an intention on
the part
of the appellant to have a direct shareholding in NBL on a
long-term basis. None of these facts excluded the possibility that
the
appellant had no long term intention to hold on to the NBL
shares. It clearly had a long-term strategic interest in NBL through

AVI but that is not to say that it had a long-term interest in having
a direct shareholding in NBL. The object of the Willards
transaction
was to strengthen the position of NBL but that is not to say that the
method used to finance the transaction was intended
to have permanent
consequences in so far as the direct holding of shares in NBL was
concerned.
[24] The Tax Court also erred in holding that if the
intention of the appellant was to dispose, in due course, of the NBL
shares
acquired by it at a profit and if foreign investors were told
that that was the intention it would mean that the foreign investors

were invited to put up R300m as a short term speculation on the JSE.
It is true that the R300m was required for the purchase of
the NBL
shares but the foreigners were not invited to invest in NBL; they
were invited to invest in the appellant which had mining
interests
and industrial interests of which NBL constituted only 2%. The
foreigners who bought shares in the appellant therefore
invested in
the appellant. That was not a speculative investment whether or not
it was the appellant’s intention to dispose of
the NBL shares at a
profit.
[25] In
Commissioner, South
African Revenue Service v Smith
2002 (6) SA
621
(SCA) at 629C-E this court approved of the following dictum by
Miller J in ITC 1185,
35 SATC 122
at 123-124:
‘It is often very difficult, however, to discover what [the
taxpayer’s] true intention was. It is necessary to bear in mind
in
that regard that the
ipse dixit
of the taxpayer as to his
intent and purpose should not lightly be regarded as decisive. It is
the function of the court to determine
on an objective review of all
the relevant facts and circumstances what the motive, purpose and
intention of the taxpayer were.
Not the least important of the facts
will be the course of conduct of the taxpayer in relation to the
transactions in issue, the
nature of his business or occupation and
the frequency or otherwise of his past involvement or participation
in similar transactions.
The facts in regard to those matters will
form an important part of the material from which the court will draw
its own inferences
against the background of the general human and
business probabilities. This is not to say that the court will give
little or no
weight to what the taxpayer says his intention was, as
is sometimes contended in argument on behalf of the Secretary in
cases of
this nature. The taxpayer’s evidence under oath and that
of his witnesses must necessarily be given full consideration and the

credibility of the witnesses must be assessed as in any other case
which comes before the court. But direct evidence of intent
and
purpose must be weighed and tested against the probabilities and the
inferences normally to be drawn from the established facts.’
[26]
Silke on South African
Income Tax
11
th
Memorial Edition vol 1 para 3.2 says:
‘The taxpayer’s own evidence about his intention and his
credibility will be considered by a court but, because of
subjectivity,
self-interest, the uncertainties of recollection and
the possibility of mere reconstruction, it will test that evidence
against
the surrounding facts and circumstances in order to establish
his true intention.’
[27] Relying on these passages the respondent submitted
that the evidence of Barber and Menell that the appellant intended to
dispose
of the NBL shares at a profit should not be believed. The
respondent referred to the fact that they were testifying many years
after the event and submitted that their evidence is contradicted by
the content of the appellant’s objection to the assessment
and that
of the offering circular.
[28] In the objection to the assessment it is said that
the NBL shares were earmarked for a listing on the JSE later in the
year
and that the shares would have been sold by the appellant within
a few months. That statement does not accord with the evidence
of
Menell and Barber. According to them a listing of the shares was
merely one of the possibilities. It is however not contended
that any
one of them was responsible for the statement. Both of them testified
that they no longer had any financial interest in
the matter and that
evidence of theirs was never challenged. It is nevertheless worrying
that the appellant based its objection
on a wrong statement of fact,
but as to how it came to be made was never explored. In the
circumstances the fact that the statement
is wrong does in my view
not afford a basis for criticising the evidence of Menell and Barber.
[29] In the circular in terms of which the appellant’s
N shares were offered to foreigners so as to raise R300m (‘the
offering
circular’) it was simply stated that the ‘net proceeds
of the Offer will be used to expand Anglovaal’s interests in the
branded
fast-moving consumer goods sector through the acquisition of
the Willards savoury snacks business’. The respondent submitted
that the fact that the offering circular failed to mention that the
proceeds of the foreign placement of shares was intended to
be
utilised for the acquisition of the NBL shares in a speculative
venture, justified the Tax Court’s rejection of Menell’s
and
Barber’s evidence as to such intention. However, the statement in
the circular was correct and the fact that it was the intention
to
dispose, in due course, of the appellant’s direct holding of 15.6%
of the NBL shares is not inconsistent with that statement
or any
other statement in the offering circular. Furthermore, in the light
of the appellant’s vast mining and industrial interests,
its
intention, in so far as the NBL shares held by it are concerned, did
not warrant a mention in the circular.
[30] As stated above the appellant, before the
acquisition of Willards, held all its industrial interests through
AVI. In the offering
circular it is stated:
‘Anglovaal’s industrial interests are controlled through a 60 per
cent holding in AVI, a company which is itself listed on
The
Johannesburg Stock Exchange. AVI’s businesses are, in the main,
major participants in the markets which they serve. AVI’s
principal
subsidiaries are Consol, engaged in the manufacture and marketing of
packaging and rubber; National Brands, a leading
supplier of branded
fast-moving consumer goods; AVI Diversified Holdings, a holding
company for engineering and textile interests;
Irvin & Johnson,
which procures, markets and distributes fish and frozen foods; and
Grinaker, which is engaged in construction
and construction materials
and the manufacture of electronic equipment and acts as a provider of
a wide range of communication
and information technology services.’
Contrary to this statement the circular included a
diagrammatical representation of the group structure which indicated
that the
appellant, in addition to its 60% shareholding in AVI held
15,6% of the shares in NBL.
[31] The acquisition of a direct shareholding in NBL was
clearly contrary to the existing structure as was testified by Barber
and
Menell. It is furthermore beyond question, in the light of
Barber’s memorandum, that he explained to exco that the best option

was nevertheless to finance the Willards transaction by way of an
acquisition of NBL shares, that the immediate effect would be
that
the appellant increased its interest in NBL which it could in due
course sell to AVI, to a foreign investor or to private
investors as
a float if it were decided to list the NBL shares on the JSE.
[32] In the light of the aforegoing there is in my view
no reason to doubt the evidence of Barber and Menell that foreign
investors
asked questions about the appellant’s direct holding of
15,6% of the shares in NBL. One would have expected them to do so. In

the light of the incongruous nature of the structure and Barber’s
memorandum there is also no reason to doubt Barber’s and
Menell’s
evidence that such direct shareholding was but a temporary aberration
and that that was explained to the foreign investors.
It is highly
improbable that having structured the industrial holdings the way it
did the appellant would have hung on to its direct
shareholding in
NBL.
[33] The Tax Court rejected the evidence that one of the
options open to the appellant was to sell the NBL shares to a foreign
investor
on the basis, first, that it was not supported by any
evidence, documentary or otherwise and, second, that it was never
shown that
‘there was any foreign investor “waiting in the wings”
so to speak’. It may be that there was no foreign investor waiting

in the wings but the evidence that a sale to a foreign investor was
one of the options is borne out by the Barber memorandum and

supported by the statement in the offering circular that it was ‘the
objective of the Group to form partnerships with overseas

corporations to exploit business opportunities both in South Africa
and elsewhere’. At the time of the acquisition of the shares
the
probabilities were that in the event of a sale to a foreign investor
or another third party not occurring, the appellant would
in due
course sell the NBL shares to AVI at market value which the appellant
thought would be higher than the purchase price ie
at a profit. In
the event, the shares where not sold until the unbundling of the
appellant in 1998. Barber testified that the reason
for not having
sold them before the time was that NBL’s performance was such that
the shares became worth less than R300m. Again
there is no reason not
to accept this evidence.
[34] Prof Wainer, a chartered accountant, was the only
witness called by the respondent. He testified that it was unusual
for a
company to hold shares in its subsidiary with a speculative
intent. If it was indeed the intention of the appellant to sell the

NBL shares at a profit he would have expected disclosure of that
intention in the financial statements of the appellant. Absent
such a
disclosure everything in the financial statements suggests that the
holding was long-term. The respondent submitted that
this evidence
casts grave doubt on the reliability of Menell’s and Barber’s
evidence as to the intention of the appellant.
However, the direct
holding of shares in NBL in itself was unusual and it cannot be said
that the financial statements suggest
that the holding was long-term,
as it is not disputed that the appellant traded in shares and that
such shares were dealt with
in the appellant’s financial statements
in the same way as the NBL shares.
[35] In the light of the evidence of Menell and Barber,
the documentary evidence and the probabilities I am of the view that
the
Tax Court erred in not finding that it had been proved on a
balance of probabilities that the NBL shares had been acquired by the

appellant with the intention of disposing of them at a profit ie that
the shares constituted trading stock in the hands of the
appellant.
[36] The Tax Court, held that even if the NBL shares
were ‘acquired and held as part of a scheme of profit-making and
were part
of [the appellant’s] trading stock, the expense of the
purchase of R300 million, incurred in 1994, cannot nevertheless be
claimed
as a deduction in the 1999 year of assessment’. Its reason
for so holding was that the appellant had not, so the Tax Court held,

in the 1994 tax year and in the ensuing tax years taken the expense
into account, whether as opening stock, purchases or closing
stock.
Referring to ss 11(a) and 22 of the Act it held that it was of
fundamental importance ‘that the actual deduction in respect
of the
cost price (of the shares) must have been made and taken into account
in the determination of taxable income in the year
of their
acquisition (in terms of section 11(a)), and in addition in each year
thereafter until disposition there must be appropriate
figures for
closing and opening (in terms of section 22)’.
[37] The respondent submitted that this finding of the
Tax Court was correct as income tax is an annual tax, which entails
that
deductions are to be claimed in the year of assessment during
which the expenditure is actually incurred. It referred in this
regard
to
Sub-Nigel Ltd v Commissioner for
Inland Revenue
1948 (4) SA 580
(A) and
Caltex
Oil (SA) Ltd v Secretary for Inland Revenue
1975 (1) SA 665
(A). In the
Caltex Oil
case Botha JA said at 674B-C:
‘In determining the taxable income of a person carrying on any
trade in any year of assessment there is, in terms of sec.11 (a),

deductible from such person’s income the expenditure actually
incurred by him in the production of the income during that year
of
assessment.’
In the
Sub-Nigel
case Centlivres JA said at 589:
‘For the whole scheme of the Act shows that, as the taxpayer is
assessed for income tax for a period of one year, no expenditure

incurred in a year previous to the particular tax year can be
deducted.’
[38] At the relevant time s 22 of the Act provided
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 value or for any other
reason satisfactory to the Commissioner; and
(b) . . .
(1A) . . .
(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) . . ..’
[39] It follows that in terms of the section, in the
determination of taxable income, the amount to be taken into account
in respect
of the value of shares held and not disposed of at the end
of a year of assessment should be the cost price of those shares.
That
same amount, ie the cost price of the shares, is the amount that
should be taken into account in respect of the value of the shares

held and not disposed of at the beginning of the immediately
following year of assessment. In effect the cost price of shares as

trading stock is in terms of the section to be carried forward as
opening and closing stock until the shares are disposed of. The

legislature clearly intended that the value of opening stock should
be deducted and the value of closing stock should be added
to the
taxpayer’s taxable income.
3
[40] The financial statements of the appellant for the
1994 year of assessment contain a schedule in which the appellant’s
shareholdings
at the beginning of the year, their book value, share
purchases during the year, the cost price of the shares, sales of
shares
during the year, the selling price, the appellant’s
shareholdings at the end of the year and their book value are listed.
The
schedule indicates that the NBL shares had been purchased during
that year for a purchase consideration of R300m, that the book
value
of those shares at the end of that year was R300m and that no profit
or loss had been made in respect of the shares during
that year. The
income statement contains an item ‘profit on sale of investments’
which reflects the profit on the realisation
of investments as per a
schedule of profit on the sale of ‘investments-taxable’ and
profit on sale of ‘investments-non-taxable’.
[41] The financial statements of the appellant for the
1995 year of assessment are similar. Insofar as the NBL shares are
concerned
their value at the end of the 1994 year is taken as their
value at the beginning of the year; 1 344 shares at a value of
R724 524
being a dividend in specie is added as being a purchase
during the year; no profit or loss is shown for the year; and the
book
value at the end of the year is reflected as R300 724 524
ie the cost of acquiring the shares. The same accounting procedure

was followed in respect of the 1996 and 1997 years of assessment. In
respect of the 1998 year of assessment the NBL shares were
dealt with
differently because the shares were going to be sold and the price at
which they were going to be sold had already been
determined. It was
therefore considered to be imprudent to carry the shares in the
appellant’s accounts at R300 724 524
when it was apparent
that they were worth R159m less. Provision was consequently made for
a loss of R159 068 301 (the
amount was wrongly calculated
and should have been R159 702 919) and the book value of
the shares as at the end of the
year was reflected as R141 021 605.
However, that loss was added back in order to arrive at the profit on
investments
for the year. The net result for purposes of calculating
the income tax payable was therefore the same as it would have been
if
the book value of the shares at the end of the year had been taken
as being the same as at the beginning of the year namely
R300 724 524.
[42] In the financial statements for the 1999 tax year
the book value of the NBL shares at the beginning of the year is
reflected
as R141 021 605 and it is also indicated that
they were sold for that price. However, in the computation of normal
taxation
a loss of R159 702 919 is taken into account. The
net result for purposes of calculating the income tax payable was
therefore
the same as it would have been if the book value of the
shares at the beginning of the year had been taken as the cost price
of
the shares.
[43] Referring to these financial statements Barber
testified that, during the 1994, 1995, 1996 and 1997 years of
assessment no
account was taken of the appellant’s expenditure in
respect of the NBL shares in the computation of the appellant’s tax
liability.
Counsel for the respondent argued that as no account of
such expenditure was claimed during these years there is ‘no basis
upon
which deduction pertaining to the cost price of [the shares] can
suddenly be claimed in the 1999 year of assessment, for expenditure

already incurred in the 1994 year of assessment’. In this regard he
referred to an editorial in The Taxpayer, October 1967 which

concluded:
‘While, therefore, the practice of including opening and closing
stock in determining taxable income, is well established, its
legal
foundation remains most uncertain.’
Counsel submitted that ‘although the legal basis for
adding back closing stock and carrying forward opening stock as a
deduction
is uncertain, one thing which is certain is that one
commences the process by claiming a deduction in the year of
assessment when
the expenditure is actually incurred’.
[44] In my view there is no merit in the submission.
When Barber testified that no account was taken of the appellant’s
expenditure
in respect of the 1994 to 1997 years of assessment in the
computation of the appellant’s income tax liability he could have
meant
only that the expenditure had no effect on such computation as
it was cancelled out by the book value of the shares at the end of

the particular year as required by s 22. For purposes of
computing the appellant’s income tax liability it acted in
accordance
with the provisions of s 22.
[45] For these reasons the Tax Court should have found
that the appellant discharged the onus of proving that it was
entitled to
the deduction of the amount of R159 702 919,
being the loss suffered on the disposal of the NBL shares, against
its taxable
income in the 1999 year of assessment.
[
46] The following order is made:
1 The appeal is allowed with costs including the costs
of two counsel.
2 The order by the Tax Court is set aside and the matter
is referred back to the respondent to revise the appellant’s
assessment
for the 1999 year of assessment on the basis that the
appellant is entitled to the deduction of the amount of R159 702 919

from its taxable income.
__________________
P E STREICHER
JUDGE OF APPEAL
A
ppearances
:
For Appellant: P A Solomon SC
J M A Cane
Instructed by
Deneys Reitz Attorneys, Johannesburg
Webbers, Bloemfontein
For Respondent: H Z Slomowitz SC
R Bhana SC
Instructed by
The South African Revenue Service, Pretoria
The State Attorney, Bloemfontein
1
1978 (1) SA 101
(A) at 118A-D.
2
Fast-moving consumer goods.
3
RC Williams
Income Tax in South Africa - Law and Practice
1994 p 281 para 24.2.