Commissioner for the South African Revenue Services v Wooltru Property Holdings (Pty) Limited (A395/07) [2008] ZAWCHC 44 (7 August 2008)

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[2008] ZAWCHC 44
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Commissioner for the South African Revenue Services v Wooltru Property Holdings (Pty) Limited (A395/07) [2008] ZAWCHC 44; 70 SATC 223 (7 August 2008)

REPORTABLE
IN
THE HIGH COURT OF SOUTH AFRICA
(CAPE OF GOOD
HOPE PROVINCIAL DIVISION)
Before
the Hon Ms Justice J H M Traverso (Acting Judge President), the Hon
Mr Justices N J Yekiso and S Desai
Case No.: A395/07
In this matter between:
THE COMMISSIONER FOR THE SOUTH AFRICAN
REVENUE SERVICES
Appellant
And
WOOLTRU PROPERTY HOLDINGS (PTY) LIMITED
Respondent
Counsel
for Appellant:
Adv O Rogers SC
Attorneys
for Appellant:
The State Attorney
Counsel
for Respondent:
Adv TS Emslie SC
Attorneys
for Respondent:
Hilton Gischen
Date
of Hearing:
25 January 2008
Date
of Judgment:
7 August 2008
IN THE HIGH COURT OF SOUTH AFRICA
(CAPE OF GOOD HOPE PROVINCIAL
DIVISION)
Case No.:
A395/07
In this
matter between:
THE
COMMISSIONER FOR THE SOUTH AFRICAN
REVENUE
SERVICES
Appellant
and
WOOLTRU PROPERTY HOLDINGS (PTY)
LIMITED
Respondent
JUDGMENT DELIVERED ON
7 AUGUST 2008
YEKISO,
J
The crux issue which calls for determination in this appeal is
whether a recoupment of certain tax allowances, which the appellant
contends were granted to the respondent, can arise in the
respondent’s hands or whether such tax allowances were granted to

and claimed by a different company other than the respondent. The
court
a quo
accepted the respondent’s contention that such
tax allowances were granted to and claimed by a different company
and thus cannot
arise in the respondent’s hands or recoupable in
the respondent’s hands.
FACTUAL BACKGROUND TO THE DISPUTE
The disputed recoupment arises from an agreement of lease concluded
between the Municipality of Cape Town and the Wooltru group
of
companies on 23 March 1982. In terms of the lease agreement, one
of the subsidiaries in the Wooltru group of companies, namely,
Wooltru Properties (Pty) Ltd (“Wooltru Properties”) which was
subsequently renamed Wooltru Property Investments (Pty) Ltd

(“Wooltru Property Investments”), acquired leasehold rights in
respect of a site known as “the Mayor’s Garden”, the latter
being a site on which the group’s headquarters in Cape Town are
situate. In terms of a further term of the lease agreement,
Wooltru Properties or its successor-in-title, was required to effect
certain leasehold improvements to the leased property. Once
the
lease agreement was concluded, Wooltru Properties paid a lease
premium in respect of the lease and subsequently effected certain
improvements to the leased property. Because of this expenditure,
Wooltru Properties became entitled to claim and did claim deductions
allowable in terms of sections 11(f) and 11(g) of the Income Tax
Act, 58 of 1962 (“the Income Tax Act”) in respect of the premium
paid and the improvements so effected. For the period January 1983
upto 30 June 1991 Wooltru Properties and/or Wooltru Property
Investments claimed and was granted deductions in respect of the
lease premiums paid and improvements made in the total amount
of
R24,522,112.
As pointed out in the preceding paragraph, on 30 June 1991 Wooltru
Properties changed its name to Wooltru Property Investments
(Pty)
Ltd (“Wooltru Property Investments”). The change in name was
pursuant to an application by Wooltru Limited, the holding
company
within the Wooltru group of companies, to rationalise its
property-owning subsidiaries and property portfolio in terms
of the
provisions of section 48 of the Taxation Laws Amendment Act, 87 of
1988. The rationalisation application was approved on
26 November
1991. Amongst other changes in the Group’s operations, pursuant
to this application, was a transfer of leasehold
rights in terms of
the lease, from Wooltru Properties (subsequently changed to Wooltru
Property Investments) to Wooltru House Properties
(Pty) Ltd
(“Wooltru House Properties”). For the period 30 June 1992 to
30 June 1997, Wooltru House Properties, as it was
then the holder of
leasehold rights in terms of the lease, claimed allowances in
respect of further improvements effected on the
leased property in
the total amount of R26,405,969. The allowances were claimed as
allowable deductions in terms of section 11(f)
and 11(g) of the
Income Tax Act.
In 2001 Wooltru House Properties, into which the leasehold rights
were transferred on 30 June 1991, went into voluntary liquidation.

Once liquidated, its leasehold rights in terms of the lease were
transferred to Wooltru Property Holdings (Pty) Ltd (“Wooltru
Property Holdings”) as a liquidation distribution
in specie
at a value of R82,505,092. The distribution
in specie
thus
constituted income of a capital nature, as opposed to income of a
revenue nature, and thus not liable to taxation. Wooltru
Property
Holdings, in turn, disposed of the leasehold rights distributed to
it, as disposal of a capital asset, to a third party
at a
consideration of R99,99m. The Commissioner treated the disposal of
leasehold rights as recoupment by Wooltru Property Holdings
of the
expenditure in an amount of R50,928,081, being the total amount of
deductions claimed for the period January 1983 upto June
1991 and
further deductions claimed for the period 30 June 1992 upto 30 June
1997. The Commissioner thus included the amount
of R50,928,078 in
the gross income of Wooltru Property Holdings on the basis that it
constituted a recoupment as contemplated in
section 8(4)(a) of the
Income Tax Act. Section 8(4)(a) of the Income Tax Act, as far as is
relevant in these proceedings, provides
as follows:
“
There
shall be included, in the taxpayers income, all amounts allowed to be
deducted or set off under the provisions of section 11
to 20
inclusive…… which have been recovered or recouped during the
current year of assessment.”
Prior to 1989, and up to and including the year of assessment ending
30 June 1991, the income and expenditure of the operating
companies
comprising the Wooltru property-owning sub-group within the Wooltru
group of companies, rendered a consolidated income
tax return to the
appellant in the name of Wooltru Properties. This was an extra
statutory arrangement negotiated with and approved
by the appellant.
This practice was resorted to as a practical method of reducing
the tax compliance burden upon the sub-group
of property owning
companies. The respondent contends that the effect of this
arrangement was nothing more than to permit the
reporting of the
income and expenditure of the relevant companies in a single tax
return. The respondent contends further that
the income and
expenditure of the relevant companies remained their income and
expenditure, that the tax liability of the relevant
companies
remained their tax liability and that the practice resorted to was a
mere administrative convenience to ease the burden
of having to file
separate tax returns in respect of each individual property owning
company.
On 31 August 1991 Wooltru Limited, the respondent’s holding
company within the Wooltru group and associated companies, applied
to the appellant for a rationalisation exemption in terms of the
provisions of section 48 of the Taxation Laws Amendment Act, 87
of
1988, as amended by section 26 of the Taxation Laws Amendment Act,
1989 (the Taxation Laws Amendment Act). The intention and
the
effect of the proposed rationalisation was to rationalise the
Wooltru property sub-group which, at that time, consisted of
numerous property-owning companies. Wooltru Properties was the
holding property-owning company in the group, either through direct
ownership of property or indirectly through its shareholding in its
subsidiaries. The rationalisation application was approved
by the
appellant.
The following changes were effected in the rationalisation process:
The respondent’s name was changed from Woolworths (Strand Street)
Properties (Pty) Ltd and thenceforth became known as Wooltru
Property Holdings (Pty) Ltd. This latter company is the respondent
in this appeal;
Wooltru Properties transferred the Wooltru House lease and the
leasehold improvements to Wooltru House Properties. Thus, the
parties to this transaction were Wooltru Properties and Wooltru
House Properties. For purposes of this transaction Wooltru
Properties and Wooltru House Properties were, in terms of section
48(5) of the Taxation Laws Amendment Act, deemed to be one
and the
same company to obviate potential payment of transfer and stamp
duty. The right to claim deductions in terms of sections
11(f)
and 11(g) of the Income Tax Act, which initially accrued to Wooltru
Properties had, as a result of this rationalisation
process,
accrued to Wooltru House Properties. As pointed out in paragraph
[3] of this judgment, for the period 30 June 1992
to 30 June 1997,
Wooltru House Properties claimed and there was allowed from the
gross income of Wooltru House Properties deductions
in an amount of
R26,405,969 in respect of further improvements effected on the
leased property.
The approval of the rationalisation application by the appellant was
conveyed to Wooltru Limited by way of the appellant’s letter
dated
26 November 1991. In paragraph 6 of the appellant’s letter, the
pre-existing practice of returning income was approved
as follows:
“
The
current method of returning the income and expenditure of the
subsidiary property owning companies of Wooltru Properties (Pty)
Limited may continue and
all
the income and expenditure of the subsidiaries
of Wooltru
Property Holdings may be accounted for in the tax return of Wooltru
Property Holdings (Pty) Limited, provided that for
every year of
assessment, a balance sheet is nevertheless submitted for each of the
affected subsidiaries.” (The emphasis are mine.)
I have already been pointed out in paragraph [4] of this judgment,
Wooltru House Properties was liquidated during the course of
2001.
Once liquidated, the leasehold rights in respect of the leased
property were transferred from Wooltru House Properties
(in
liquidation) to Wooltru Property Holdings as a liquidation
distribution. Wooltru Property Holdings, in turn, disposed of the
leasehold rights to a third party for a consideration of R99,99m.
Once Wooltru Property Holdings had disposed of the leasehold
rights
to a third party, the appellant became of the view that the
allowances previously granted to Wooltru Properties and, later,
to
Wooltru Property Investments and, ultimately, Wooltru House
Properties, were recovered through a sale of the leasehold rights
to
a third party and thus recoupable in the hands of the respondent,
Wooltru Property Holdings. It is on the basis of this disposition
that the appellant contends that the allowances, since recovered
according to the appellant’s contention, are recoupable in the
hands of the respondent. On the other hand, the respondent
contends that no recoupment in its hand is possible as it neither
claimed, on its own behalf, nor has it ever been granted, in its own
right, the allowances in question which the appellant contends
were
deducted by it. The Court
a quo
accepted the respondent’s
contention that the allowances are not recoupable in its hands, set
aside the assessment and referred
the matter back to the appellant
for re-assessment.
And finally, by way of background material, in its annual financial
statement for the year of assessment ending 30 June 2000, Wooltru
Property Holdings, the respondent in this appeal, provided for a
deferred tax liability in an amount of R15,278,424, but the
respondent
contends that this did not represent a tax liability
claimed by it in previous years. The respondent contends that the
fact that
this potential tax liability was raised in its annual
financial statements, did not in any way detract the fact that the
tax allowances
concerned were not claimed by it on its own behalf.
What I have stated in the preceding paragraphs constitutes
background material to the litigation between the parties which
culminated
in the adjudication of the issues in dispute in the Tax
Court. In the Tax Court, apart from the
viva voce
evidence
of Prof Alexandra Watson, an associate professor in the accounting
department at the University of Cape Town, whose evidence
was
intended to show that provision for the deferred tax liability
should not have been included in the balance sheet of Wooltru
Property Holdings because of the absence of the underlying asset
from which the recoupment would be sourced, and also the fact
that
deferred tax is an accounting concept which has no cash flow
implication, the matter was otherwise argued in the Tax Court
on the
basis of a statement of agreed facts drawn and agreed to by the
parties. The statement of agreed facts is rather a lengthy
document
which has been cited in full in the judgment of the Court
a quo.
I do not propose to cite the relevant agreed statement of facts
in full in this judgment except to refer to portions thereof, in
the
course of this judgment, which are relevant for purposes of
determination of issues in dispute.
It is on the basis of the background set out in the preceding
paragraphs, much of which is included in the statement of agreed
facts, and the
viva voce
evidence of Prof Alexandra Watson,
that the Tax Court found in favour of the respondent by setting
aside the appellant’s assessment
for the year of assessment ending
30 June 2001, simultaneously ordering the remission of the matter to
the appellant for re-assessment.
It is against the finding of the Tax Court referred to in the
preceding paragraph that the appellant noted an appeal to the Full
Bench of this Court on the basis that:
The Tax Court erred in finding that, despite the agreement that the
respondent would annually render a single tax return, in
its own
name, reflecting all the income and expenditure in respect of
properties held by itself and by its subsidiaries, such
income had
accrued to each such subsidiary and that such expenditure, as may
have been incurred, had been incurred by each such
subsidiary;
The Tax Court erred in finding that the section 11(g) allowance
claimed by Wooltru Property Holdings, totalling R26,405,969,
had
not been claimed and granted to Wooltru Property Holdings, but
rather claimed and granted to its subsidiary, Wooltru House
Properties;
That the Tax Court should have held, that upon the sale by Wooltru
Property Holdings of the leasehold rights during the year
of
assessment ending 30 June 2001, there was a recoupment, by Wooltru
Property Holdings, of the section 11(g) allowances in an
amount of
R26,405,969 which it had claimed and been granted in respect of the
leased property.
That by virtue of the provisions of section 48(5) of the Taxation
Laws Amendment Act, read with the Commissioner’s letter of
approval dated 26 November 1991, the Tax Court should have found
that, upon disposal by Wooltru Property Holdings of the leasehold
rights to a third party, Wooltru Property Holdings was required to
include in its gross income for the year of assessment ending
June
2001, section 11(g) allowances in an amount of R24,522,112
previously claimed by and granted to its predecessor, Wooltru
Property Investments.
THE PARTIES’ SUBMISSIONS
The submissions by
Mr Rogers
SC, for the appellant,
supplemented by oral argument in court during the hearing of this
appeal, boils down to this:
The arrangement in terms of which Wooltru Property Investments, and
after it Wooltru Property Holdings (the respondent), declared
all the
income and expenditure of its subsidiaries as its own, must have been
one in which Wooltru Property Holdings and the then
Commissioner of
Inland Revenue (now South African Revenue Service) acknowledged that
all income and expenditure reflected in Wooltru
Property Holdings’
(the respondent) returns had accrued to and had been incurred by
Wooltru Property Holdings; that the effect
of the approval for
rendition of a consolidated income tax return is, as between the
Wooltru group of companies and the South African
Revenue Service,
that the subsidiaries, whose income and expenditure was included in
the consolidated income tax return, meant that
the subsidiaries were
regarded as conducting business as nominees or agents for Wooltru
Property Investments, and after it, Wooltru
Property Holdings, with
all the income and expenditure of such subsidiaries being
attributable to Wooltru Property Investments and,
after it, Wooltru
Property Holdings.
On the other hand the submissions by
Mr Emslie
SC, for the
respondent, similarly supplemented by oral argument in court during
the hearing of this appeal, are that the allowances
which are the
subject of the proposed recoupment, were in law granted, claimed and
deducted by Wooltru House Properties and, before
it, Wooltru
Properties and/or Wooltru Property Investments; that the leasehold
rights of Wooltru House Properties under the relevant
lease were
subsequently distributed by Wooltru House Properties to Wooltru
Property Holdings, for no consideration, as a liquidation
distribution
in specie
and that when the said rights under
the relevant lease were sold by Wooltru Property Holdings (the
respondent) to a third party,
no recoupment was possible in the
hands of Wooltru Property Holdings as it had neither claimed, on its
own behalf, nor had it ever
been granted, in its own right, the
allowances in question, which were, as a matter of fact, claimed by
and granted to Wooltru
House Properties and before it, Wooltru
Properties and/or Wooltru Property Investments.
EFFECT OF CONSOLIDATION OF INCOME
For some time prior to 1989, as has already been pointed out
elsewhere in this judgment, the operating companies comprising the
Wooltru properties sub-group in the Wooltru group of companies,
rendered a consolidated income tax return to the then Receiver
of
Revenue in the name of Wooltru Properties. It appears that the
concession was negotiated with and was approved by the then
Commissioner of Inland Revenue. It further appears that the then
Commissioner approved this concession as a practical method
of
reducing the tax compliance burden upon the property group within
the Wooltru group of companies. Neither the original nor
a copy of
this concession could be found at both the offices of the appellant
or at the offices of the respondent, but it appears
to be accepted
by the parties that the practice had been in existence for quite
some time prior to the application for a rationalisation
exemption
in terms of the provisions of section 48 of the Taxation Laws
Amendment Act. The appellant was requested to confirm
this
practice, which had existed for quite sometime prior to 1989, in its
response to the rationalisation application in terms
of section 48
of the Taxation Laws Amendment Act lodged with the appellant under
cover of a letter dated 31 August 1991.
Paragraph 6 of the appellant’s letter of 26 November 1991 cited in
paragraph [8] of this judgment, is worth repeating. In its
letter
of approval of the rationalisation scheme dated 26 November 1991,
the appellant made the following ruling as regards this
pre-existing
practice:
“
The
current method of returning income and expenditure of the subsidiary
property-owning companies of Wooltru Properties (Pty) Ltd
may
continue and all the income and
expenditure
of the subsidiaries of Wooltru Property Holdings may be accounted for
in the tax return of Wooltru Property Holdings (Pty)
Ltd
,
provided that for every year of assessment, a balance sheet is
nevertheless submitted for each of the affected subsidiaries.”
(Further emphasis added are mine)
What is explicit in this letter of approval is the confirmation of
the then existing “current method” of “returning the income
and expenditure of the subsidiary property-owning companies of
Wooltru Properties (Pty) Ltd” that was to continue after the

approval of the property rationalisation scheme within the Wooltru
group of companies. What is further explicit in this part of
the
appellant’s ruling is that the relevant property-owning
subsidiaries would continue to carry on trade except that, instead
of rendering their individual tax return in respect of income,
received or accrued, and expenditure incurred, such income, received
or accrued, and expenditure incurred, would be transferred to the
holding company, Wooltru Property Holdings, in order that it
be
accounted for in the consolidated income tax return to be returned
by Wooltru Property Holdings. Neither the income, nor the
expenditure, ceased to be that of the subsidiary property-owning
companies merely because it was being returned by the holding
company. The income, received or accrued, and any expenditure
which may have been incurred, remained that of the individual
subsidiaries. What is further explicit in terms of this “current
method” of returning income is that, in the first instance,
the
income should first have been received or accrued and the
expenditure should have been incurred, before such income, and any
expenditure which may have been incurred, before transfer thereof to
the holding company in order to be accounted for and be returned.

Income and expenditure was merely being transferred to the holding
company in order that it be accounted for, by the holding
company,
in the consolidated tax return. The tax liability remained that of
the individual property-owning subsidiaries. It
was only after
such income was received or had accrued, and the expenditure had
been incurred, that it was transferred to the holding
company in
order to be accounted for in the consolidated tax return. How
income and expenditure from each subsidiary was accounted
for in the
consolidated return does not detract from the fact that such income
and expenditure was initially received and accrued
to each such
subsidiary before being transferred to the holding company in order
that it be accounted for in the consolidated tax
return.
It is trite that the taxpayer is taxed on the income he or she
receives or which accrues to him or her during the year of
assessment.
The same principle applies in as far as expenditure
and allowable deductions are concerned. Section 11(a) of the
Income Tax
Act permits a deduction of expenditure and losses
actually incurred by the tax payer during the year of assessment
provided that
such expenditure was incurred in the course of
production of income, not being of a capital nature.
The effect of the appellant’s ruling in terms of paragraph 6 of
its letter dated 26 November 1991 clearly did not mean that the
property-owning subsidiaries ceased to carry on trade. This is
implicit in the appellant’s ruling in its letter dated 26 November
1991 that “all the income and expenditure of the subsidiaries of
Wooltru Property Holdings may be accounted for in the tax return
of
Wooltru Property Holdings”, the proviso being that “for every
year of assessment, a balance sheet is nevertheless submitted
for
each affected subsidiary”. This therefore means that the
affected subsidiaries continued to carry on trade, either receiving
income or sustaining losses, as the case may be, and incurred
expenses in the process of carrying on such trade. Section 5(1)(d)
of the Income Tax Act provides:
“
Subject
to the provisions of the Fourth Schedule, there shall be paid
annually for the benefit of the National Revenue Fund an income
tax …
… in respect of the taxable income
received
or
accrued
to or in favour of –
………
.
………
.
………
.
Any company during every financial year of such
company.”
Thus, despite the appellant’s ruling contained in paragraph 6 of
its letter dated 26 November 1991, the affected subsidiaries
continued
to carry on trade, received income in the process and thus
became liable to taxation in terms of section 5(1)(d) of the Income
Tax
Act.
It is contended in the appellant’s submissions that the effect of
the approved arrangement amounted to, as between the Wooltru
group
and the appellant (SARS), that the subsidiaries would be regarded as
conducting business as nominees or agents for, initially,
Wooltru
Properties and/or Wooltru Property Investments and, thereafter,
Wooltru Property Holdings. There is no merit in this
contention.
The affected subsidiaries did not become dormant because of the
arrangement nor were they de-registered. They continued
carrying
on trade in their own right except that their income, either after
receipt or accrual thereof, and any expenditure which
may have been
incurred, was transferred to the holding company in order that it be
accounted for, on their behalf, in the consolidated
tax return.
The recordals at pp 308, 322 and 335 of the record to the effect
that “(n)o income statement has been prepared as all the income
and expenses of the company have been borne by the holding company,
Wooltru Property Holdings (Proprietary) Limited” be correct
as
such income, as may have been received or accrued, was transferred
to the holding company after receipt or accrual thereof.
In such
circumstances, the provisions of section 5(1)(d) of the Income Tax
Act do apply in the absence of any clear evidence
that the affected
subsidiaries antecedently divested themselves of any income on basis
of which they would be liable to taxation.
Such clear evidence,
at the very least, would be by way of a resolution of the board of
directors, that the company antecedently
divests itself of any
income, not being of a capital nature, from whatever source, in the
course of trade.
Liability for taxation, once income has either been received or
accrued, is best illustrated in
CIR v The Witwatersrand
Association of Racing Clubs
(3) SA 291(A),
23 SATC 380.
In this
case the taxpayer held a horse race with a view to donating the
profit to a charitable organisation. From the start
it had been
the intention to donate the profit to charity. The court held that
the moral duty to hand over the profits to charity
did not alter the
fact that the benefit had first accrued to the taxpayer before it
was given to charity. The same principle
applies in the instance
of this matter. The income which was transferred to the holding
company in order that it be accounted
for in the consolidated tax
return, first accrued to the affected subsidiaries before transfer
thereof to the holding company.
Once such income had been received
or accrued to each one of such subsidiaries, each one of them became
liable to be taxed thereon.
By way of contrast, in
ITC
1415, 48 SATC 179
, a minister of
religion managed to successfully antecedently divest himself of his
monthly salary which was paid on the 17
th
of each month.
To augment his congregation’s funds, the minister periodically
renounced part of his salary. Such renunciation
was effected by
written instruction given to the cashier before the 17
th
of each month. Revenue agreed that the minister had not received
the renounced part of his salary. However, Revenue argued
that the
entire amount, which included the renounced portion of his salary,
had accrued to him. The court, per Kriegler J, held
that the
minister had no right to claim his salary before the 17
th
.
His remuneration always took place before that date and,
consequently, no accrual had arisen.
At pages 198 and 217 of the record, and in respect of the 1994 and
1995 income tax returns of the affected subsidiary, there is
recorded in respect of the affected subsidiaries “the income and
expenditure in relation to which has been ceded to Wooltru Property
Holdings (Pty) Ltd in terms of a moratorium agreement with Inland
Revenue”. , this recordal cannot be correct. There is

absolutely no suggestion of a cession of income of the affected
subsidiaries in the appellant’s ruling contained in paragraph
6 of
the letter dated 26 November 1991. All that paragraph 6 of the 26
November 1991 letter says is that “… all the income
and
expenditure of the subsidiaries of Wooltru Property Holdings may be
accounted for in the tax return of Wooltru Property Holdings
(Pty)
Ltd, provided that for every year of assessment a balance sheet is
nevertheless submitted for each of the affected subsidiaries”.
I
have already pointed out, there is absolutely no suggestion of a
cession in this ruling. It cannot be accepted that the income
of
the affected subsidiaries was ceded to the holding company purely on
the
ipse dixit
the officials of the affected subsidiaries.
The inclusion of the income of the affected subsidiaries in the
consolidated tax return
did not alter the fact that each such
subsidiary did receive income, in its own right, and incurred
expenses, in their own right,
which expenses obviously would include
such expenditure as may have been incurred in effecting improvements
in the leased property.
It therefore follows, in my view, that in the absence of clear
evidence that each of the affected subsidiaries, had antecedently
divested themselves of whatever income they may have received or may
have accrued to them, they are liable to be taxed on such
income
from which, in the nature of things, would be deducted all allowable
expenditure, including expenditure arising from the
improvements
effected.
THE RATIONALISATION OF PROPERTY PORTFOLIO
Mention has already been made elsewhere in this judgment that in
terms of the lease agreement concluded between the Municipality
of
Cape Town and the Wooltru group on 23 March 1982, Wooltru Properties
acquired leasehold rights in respect of the leased property.
In
the rationalisation of the property portfolio within the Wooltru
group of property-owning subsidiaries applied for in terms
of
section 48 of the Taxation Laws Amendment Act, the lease with the
Municipality of Cape Town was transferred from Wooltru Properties
(which was then known as Wooltru Property Investments) to Wooltru
House Properties so that these two companies, in terms of section
48(5) of the Taxation Laws Amendment Act and per agreement with the
then Commissioner for Inland Revenue, were deemed to be one
and the
same company. The allowances granted in terms of section 11(g) of
the Income Tax Act, which were initially granted to
and claimed by
Wooltru Properties and/or Wooltru Property Investments, were
thenceforth granted to and were subsequently claimed
by Wooltru
House Properties. In terms of the rationalisation scheme, Wooltru
House Properties became a subsidiary of Wooltru
Property Holdings.
Wooltru Property Holdings was not a party to the transfer of the
lease from Wooltru Properties and/or Wooltru
Property Investments to
Wooltru House Properties.
Mr Rogers
makes a point in his submissions, correctly in my
view, that if Wooltru House Properties had been the party which had
sold the
leasehold rights, it would have been a party which would
have been liable to taxation or for the full recoupment of
R50,928,081.
This is so because Wooltru House Property is the
party to whom leasehold rights were transferred under the section 48
rationalisation
scheme and to whom the right to claim allowances in
terms of section 11(g) was conferred. As the holder of leasehold
rights and
the party which would have effected any improvement on
the leased property, it is only logical that it would have been the
party
liable to taxation in the event of recoupment.
But
Mr Rogers
goes a step further by making a submission that
since Wooltru Property Holdings is a party which had disposed of the
leasehold
rights and since paragraph 6 of the appellant’s letter
of 26 November 1991 was contained in the same letter which confirmed
the
applicability of section 48(5)(b) of the Taxation Laws Amendment
Act to the transfer of the lease and the accompanying leasehold
rights from Wooltru Properties and/or Wooltru Property Investments
to Wooltru House Properties, the combined effect of paragraph
6 of
the letter of 26 November 1991 and the rationalisation scheme was
that Wooltru House Properties, which was deemed to be the
same
entity as Wooltru Property Investments, was simultaneously accepted
by the appellant as being the nominee of the real returner
of
income, Wooltru Property Holdings in this instance, and that Wooltru
Property Holdings, as the principal of Wooltru House Properties,
was
implicitly deemed, for the purposes of section 11(g) allowances and
recoupment, to be the same entity as Wooltru Property Investments.

There is also no merit in this submission. This is because
paragraph 6 of the appellant’s letter of 26 November 1991 did
not
create a new concession in favour of Wooltru Property Holdings. It
was a mere confirmation of the existing practice. In
the second
instance, Wooltru Property Holdings was neither a transferor or a
transferee as contemplated in section 48(5)(b) of
the Taxation Laws
Amendment Act in regard to the transfer of the leasehold rights.
Section 48(5)(b) of the Taxation Laws Amendment
Act provide as
follows:
“
For the purposes of the taxation levied under the
Income Tax Act and notwithstanding anything to the contrary in that
Act –
…
where any property sold
or disposed of under an agreement contemplated in subsection (2)
includes any building in respect of which
any allowance has been
granted to the transferor company under the said Act, the transferor
company shall, for the purposes of
calculating any allowance under
the said act granted to the transferee company in respect of that
building or for the purpose of
determining whether any amount has
been recouped in respect of the allowances granted to the two
companies in respect of such building,
be deemed to be one and the
same company and any amount so recouped shall be deemed to be income
derived by the company in the
course of a trade carried on by it
separately from any other trade carried on by it.”
Wooltru House Properties was a subsidiary of Wooltru Property
Holdings and the latter company was a single shareholder in Wooltru
House Properties, no more, no less. Such an implication, as
suggested by
Mr Rogers,
my view, is neither a necessary one in
the light of the facts pertaining to this matter nor is it consistent
with the fundamental
principle of tax liability set out in section
5(1)(b) of the Income Tax Act.
For the reasons stated in the preceding paragraph, there similarly
is no merit in the appellant’s conclusion, in paragraph 20
of its
submissions, that as between the Wooltru group of companies and the
appellant, it was agreed that the property-owning subsidiaries
would
be regarded as “conducting business as nominees or agents for
Wooltru Property Investments, and after it, Wooltru Property
Holdings, with all income and expenditure being attributable
directly to Wooltru Property Investments, and thereafter, Wooltru
Property Holdings”. As correctly pointed out by
Mr Emslie
in
his submissions, supplemented by oral argument in the hearing of the
appeal, the direct opposite is the case: Wooltru Property
Holdings,
as far as the returning of income and expenditure was concerned, was
acting as the “agent” or “nominee” of Wooltru
House
Properties and other property-owning subsidiaries, to the extent
that it accounted for their income and expenditure in its
own income
statement and in its own tax returns. This is so because this is
what was agreed to by the appellant in paragraph
6 of its letter
dated 26 November 1991. To the extent that the appellant suggests
in its submissions, that the income and the
expenditure of the
subsidiaries had been ceded to Wooltru Property Holdings, it is
difficult to conceive of a cession by an agent
to its principal, as
the appellant contends that the property-owning subsidiaries, in
carrying on trade, acted as the agents or
nominees of Wooltru
Property Holdings. The agent, in the course of execution of the
mandate of its principal, does not establish
rights within its
mandate, which it can cede to its principal.
It thus follows in my view that, Wooltru Properties, subsequently
renamed Wooltru Property Investments, and after it, Wooltru House
Properties, as the entities which were granted a right to claim
allowances in terms of section 11(f) and 11(g) of the Income Tax
Act, and subsequently did claim such allowances, are the entities in
whose hands such allowances are recoupable.
DEFERRED TAXATION
In paragraph [11] of this judgment I refer to the
viva voce
evidence of Prof Alexandra Watson, an associate professor in the
accounting department at the University of Cape Town. I have
already
stated in the said paragraph that her evidence was intended
to show, on basis of her knowledge and expertise, that provision for
the deferred tax liability should not have been included in the
balance sheet of Wooltru Property Holdings because of the absence
of
the underlying asset from which the recoupment would be sourced.
This, she says, is because the asset to which the deferred
tax
liability relates is not reflected in the balance sheet of Wooltru
Property Holdings. She goes on to say that deferred tax
is an
accounting concept which has no cash flow implication so that the
raising of this item in the respondent’s balance sheet,
erroneous
as it could have been, is not necessarily indicative of deferred tax
liability on the part of Wooltru Property Holdings.
I have no reason to doubt the correctness of Prof Watson’s
evidence, particularly the evidence relating to the entry of the

deferred tax item in the respondent’s balance sheet without a
corresponding entry, in the balance sheet, of the asset from which
any recoupment could be sourced. What the professor should have
said and did not say is that the principle of double entry is
the
basic principle of accounting: you debit the receiver and you credit
the giver; you credit all assets and you debit all liabilities;
you
credit receipts and you credit payment, and so on it goes. It
therefore follows that the entry of the deferred tax item in
the
balance sheet of the respondent is not necessarily indicative of tax
liability on the part of the respondent and, thus, does
not advance
the appellant’s claim.
It is thus clear on basis of the evidence that the allowances in
question, which constitute the basis for the proposed recoupment,
were never in law or in fact granted by the appellant to the
respondent, Wooltru Property Holdings. Such allowances, as a
matter
of fact, were granted to and claimed, initially, by Wooltru
Properties and/or Wooltru Property Investments and, after it,
Wooltru
House Properties. Wooltru Property Holdings was never
granted, in its own right and claimed, in its own right, the
allowable
deductions in terms of sections 11(g) and 11(f) of the
Income Tax Act. As is correctly pointed out by
Mr Emslie
in
his submissions, one cannot recoup in terms of section 8(4)(a) of
the Income Tax Act what one has not previously deducted. What
the
respondent disposed of were leasehold rights which it received as a
liquidation distribution
in specie.
The respondent, not
having been granted, in its own right, a right to claim allowable
deductions in terms of sections 11(f) and
11(g) of the Income Tax
Act and the respondent, not having claimed, in its own right, any
such allowance, cannot be held liable
for the recoupment thereof.
It therefore follows that the allowances in question are not
recoupable in the respondent’s hand.
For the reasons stated in the preceding paragraph and elsewhere in
this judgment I would dismiss the appeal with costs and confirm
the
remission of the matter to the appellant for re-assessment.
…………………
...
NJ
Yekiso, J
I
agree.
……………………
S
Desai, J
I agree and it is so
ordered.
……………………
JHM Traverso, DJP