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[1986] ZASCA 120
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Matla Coal Ltd. v Commissioner for Inland Revenue (22/85) [1986] ZASCA 120 (30 September 1986)
Case No
22/85
IN THE SUPREME COURT OF SOUTH AFRICA
(APPELLATE DIVISION)
In the appeal of:
MATLA COAL LIMITED
appellant
and
THE COMMISSIONER FOR INLAND REVENUE
... respondent
Coram
: CORBETT, BOTHA, VAN HEERDEN, JJA, GALGUT et NICHOLAS,
AJJA.
Date of Hearing
: 21 August 1986
Date
of Judgment:
30 September 1986
JUDGMENT
CORBETT JA :
The appellant in this matter is Matla Coal
/ Limited
2
Limited ("Matla"). On 20 February 1980 Matla received from the
Electricity Supply Commission ("Escom") a payment by cheque of an amount
of R9
365 000. In its accounts attached to its return of income for the 1980 income
tax year (its financial year having ended on
30 June 1980) Matla described this
amount as a -
"capital receipt arising from sterilisation of certain coal rights, in terms
of an agreement between Escom, the Matla Joint Venture
and Matla Coal
Limited";
and the amount was transferred to its non-distributable reserve. In assessing
Matla to income tax in respect of this return, respondent,
the Commissioner for
Inland Revenue ("the Commissioner" ) included this amount of R9 365 000 in
Matla's income under the notation
"Verkoop van steenkool" Matla objected to this
assessment, generally on the ground that the amount in question constituted a
receipt
of a capital nature and, therefore, did not form part of its gross
income. In the alternative it was contended that,
/ if
3
if it should be found that any portion of the amount was of a revenue
nature, Matla was entitled to an appropriate deduction in terms
of sec. 11(a) of
the Income Tax Act 58 of 1962 ("the Act"). Its objection having been disallowed
by the Commissioner, Matla appealed
to the Transvaal Income Tax Special Court.
That Court held that the amount had correctly been included in Matla's taxable
income,
but ordered that the matter be remitted to the Commissioner to enable
him to make a suitable deduction in respect of the costs associated
with the
transaction. With the leave of the President of the Special Court, granted in
terms of sec. 86A(5) of the Act, Matla now
appeals to this Court against the
portion of the judgment of the Special Court holding that the R9 365 000
constituted a receipt
of a revenue nature.
The background facts and the events leading up to the payment of this amount,
as revealed by the evidence before the Court a quo,
may be summarized as
follows.
/ Trans-Natal
4
Trans-Natal Coal Corporation Limited ("Trans-Natal") is a coal-mining
company within the General Mining and Finance Corporation Ltd.
("General
Mining") group. Normally it operates through subsidiary companies, each company
controlling an individual mine- At the
time of the hearing in the Court below
Trans-Natal's output from the mining operations thus conducted by it amounted to
about 30m.
tons
per annum
.
The bulk of South Africa's coal reserves
are located
in the Eastern Transvaal. Trans-Natal had been prospecting in this region for
some time and had discovered a large coalfield.
For various reasons (which need
not be canvassed) Trans-Natal in about 1968/69 entered into an agreement with
Clydesdale (Transvaal)
Collieries Limited ("Clydesdale") in terms whereof it was
arranged that Trans-Natal and Clydesdale would exploit portion of this
coalfield
(known as "Block IV") on the basis
/ of
5
of an equal partnership. Trans-Natal and Clydesdale further decided that
this joint venture would be carried on through the vehicle
of Matla, which was
then named Alpha Coal Limited ("Alpha Coal") and was a dormant coalmining
company in the Trans-Natal group. Trans-Natal
and Clydesdale each acquired 500
shares in Alpha Coal and the mining rights and options held by Trans-Natal over
Block IV were ceded
and transferred to Alpha Coal. Trans-Natal was to manage
both Alpha Coal and Clydesdale.
At about this time Escom announced that it was contemplating the construction
of a new coal-fired power station in the Eastern Transvaal
and invited tenders
for the supply of coal. (Later the scheme was amended to include two power
stations.) It was the practice of
Escom to establish its power station on the
coalfield of the successful tenderer. After some initial hesitation the joint
venturers
decided to submit a tender in respect of Block IV. This was done on
31
/ August
6
August 1973 by Trans-Natal, acting on behalf of Alpha Coal. In the
tender it is explained that Block IV contains three coal seams
of economic
importance, viz., in descending order, nos. 5
,
4 and 2 seams; that the
no. 5 seam coal reserves have properties making this coal suitable for future
metallurgical use; and that
the no. 5 seam is consequently excluded from the
tender. Other relevant features of the tender are that in terms thereof
—
(1) it is proposed that all mining operations be undertaken by
Trans-Natal;
( 2 ) the total capital requirements for a two-mine layout are estimated to
amount to R31 123 000;
(3)
it appears that the coal
reserves in
situ
are adequate to meet Escom's requirements of
approximately 9,6m. tons
per annum
for a period of full operation of
30
years;
(4)
it is proposed that a
royalty of 12,5 cents per ton be paid by Escom, subject to
various
/ provisions
7
provisions for the escalation thereof; and
(5) a formula is provided for determining the price to be paid for the coal from
time to time on a cost-plus basis.
Escom's reaction
to the tender was generally a favourable one. It accepted that Block IV would be
able to supply the coal required
for the two power stations it was intending to
establish and it raised no objection to the price formula. It was not, however,
favourably
disposed to paying a royalty, especially in view of the escalation
provisions. It also wished to have control over the mining techniques
to be
employed in the exploitation of the coalfield, Accordingly, it counter-offered
to buy the rights to all coal contained in seams
nos. 2 and 4 for the sum of R7
704 000, payable in six equal instalments. The capital cost of establishing the
colliery and acquiring
the associated assets was to be shared on a certain
basis. These pro-
/ posals
8
posals were contained in a letter dated 14 November 1973. Later, on 31
January 1974, Escora altered its counterproposals to include
no. 5 seam in its
offer to purchase the coal rights, and at the same time it increased the price
to R9 365 000. This price was worked
out on the basis of the estimated total
amount the royalties would have generated over the contract period, reduced to
its present
value- The attitude of the tenderer was that it really had no
alternative but to agree to the counter-offer.
From here on the negotiations appear to
have
meandered somewhat. On 13 March 1974 Escom
wrote stating that it had decided to enter into a contract with Trans-Natal for
the supply
of coal to the proposed new power station on the basis of its
counter-offer —
"to purchase all rights of Alpha Coal Limited
to the coal in Block IV,
subject however to
your Corporation undertaking to design, es
tablish and
work the collieries needed for
mining this coalfield "
/ and
9
and suggesting that the parties prepare heads of agreement
"which will serve as the basis for starting the investigations and planning
which is involved in this joint venture, and for drawing
up the final contract
in due course."
This was accepted by
Trans-Natal and heads of agreement (dated 8 May 1974) were drafted, but
apparently not signed. This document
provides, under the heading "Coal Rights",
as follows:
"The tendered coal rights per the attached schedule which are at present
being held by Alpha Coal Limited will be sold to Es-com for
the amount of R9 365
000 payable in one amount within 90 days of the date of commissioning the first
boiler and turbo-generator set
of the first Power Station.
It is envisaged that either the coal rights will be sold from Alpha Coal
Limited to Escom or the shares in Alpha Coal Limited will
be sold to Escom. In
the event of a sale of shares all the coal rights held by Alpha Coal but not
included in the tender per the
attached map will be transferred to Trans Natal
Coal Corporation Limited and Clydesdale (Tvl) Collieries Limited prior to such
sale
of shares.
/ Either
10
Either the sale of the rights of Alpha Coal or the sale of Alpha Coal shares
will be made conditional to Escom and Trans Natal concluding
a contract whereby
Trans Natal will undertake and accept full responsibility for the mining
operations-It follows that no Royalty
will be payable by Escom on coal delivered
to Escom from Block IV."
On 11 April 1975 the name of Alpha Coal was changed
to Matla Coal Limited
in order to coincide with the recently
announced name of Escom's new power
station, viz. Matla Power
Station.
Thereafter Matla, under the management of Trans-Natal, went ahead with the
establishment of the colliery — sinking shafts, installing
equipment and
so on. Owing to inflation the original estimate of the capital cost of
establishing the mine, viz. R31m, proved to
be far too low. There was a need for
additional capital to be provided. Initially this was to be provided by Escom.
Subsequently
, however, Escom found difficulty in raising the
/ money
11
money and approached Matla to increase its capital participation in the
colliery. For reasons which need not be elaborated Trans-Natal
and Clydesdale
did not wish to continue to use Matla as the vehicle for this additional .
financing and accordingly on 30 June 1978
a series of agreements were entered
into with a view to providing for the direct participation of Trans-Natal and
Clydesdale in the
mining operations. The first such agreement was a joint
venture agreement between Trans-Natal, represented by two subsidiaries, and
Clydesdale, in terms of which the parties agreed to take over the mining and
financing of the colliery as a joint venture in which
the parties were to
participate equally. The second was an agreement between the joint venturers and
Matla whereby for a consideration
of R2 479 000 Matla agreed to cede, assign and
transfer to the joint ven-turers "all its right title and interest in and to all
mining
assets, development assets and property situated on the coalfield", but
excluding the rights to coal and options
/ to
12
to acquire rights to coal held by Matla. In terms of this agreement the joint
venturers also assumed all Matla's obligations to Escom
in regard to the
development and operation of the colliery and the supply of coal to Escom. The
third agreement was one foreshadowed
in the second agreement, viz. a mineral
lease whereby Matla granted to the joint venturers the sole and exclusive right
to exploit
the coalfield in return for the payment to Matla of a royalty of 12,5
cents per ton in respect of all coal mined, recovered and removed
from the
coalfield. These new arrangements were acceptable to Escom.
At about this time Mr L S du P van Eeden, who was then commercial manager of
the coal division of General Mining, had a discussion
with an official of the
Inland Revenue Department, in the course of which the latter raised the question
as to whether, in the event
of the coal rights being alienated to Escom, the
companies operating the
/ colliery
13
colliery would not cease, from the income tax point of view, to be treated as
miners and would be regarded merely as contractors.
This would be a consequence
detrimental to the interests of the companies concerned since a mining company
is allowed for income
tax purposes to write off its capital expenditure as soon
as it comes into production, whereas a contractor is only allowed an annual
depreciation allowance on its capital equipment. In the opinion of Van Eeden,
who gave evidence before the Court a
quo
, it was doubtful whether a
mining company could exist if it had to rely solely on depreciation allowances:
it was "just not economically
feasible".
To Van Eeden this presented a real problem. As he put it —
"We were contractually obliged to sell the mining rights at that stage, to
Escom".
He nevertheless approached Escom and explained the difficulty to the Escom
officials dealing with the matter.
/ He
14
He suggested that the parties should come to some other arrangement which
would still give Escom security of title to the coal reserve.
Escom suggested
that Van Eeden come back to them with a concrete proposal.
On 14 December 1978 a meeting was held at the offices of General Mining
between representatives of Trans-Natal and Escom to —
"....review the progress with the Matla agreement to date, to record the
items on which agreement has been reached and to consider
negotiations which are
still inconclusive".
The minutes of this meeting contain, under the heading "Payment for coal
reserves"
,
the following:
"Although they are prepared to consider alternative proposals which may
assist the Joint Venture, the position at present still stands
that they have
committed themselves to purchase the coal rights."
(In this passage the word "they" obviously refers to Escom. )
/ At
15
At a meeting on 21 March 1979 attended by
executives of Trans-Natal and Clydesdale (it is not clear what the nature of
the meeting was) it was agreed that negotiations should
commence for the purpose
of putting into effect the sale of the coal rights, subject to the existing
lease, to Escom; that the joint
venture would continue to pay the royalty of
12,5 cents per ton to the lessor which would be Escom; and that the royalty paid
would
in turn be recovered from Escom "by way of working costs". In a letter
dated 3 April 1979 proposals along these lines were conveyed
to Escom.
A long correspondence then ensued between the parties. It is not necessary to
refer to this in detail . Indeed it is evident that
not all the letters
exchanged were placed before the Court a
quo.
I would merely highlight
certain features of this correspondence. In a letter of 2 November 1979 Escom
reaffirmed its in-
/ tention
16
tention "to acquire all Matla's rights to the coal 'in the Coalfields',
subject to the rights of the joint venture"; stated that no
royalties would be
payable by the joint venture to Escom; and stated that it required a resolution
of the shareholders of Matla "authorising
the sale of the mineral rights to
Escom". On 7 November 1979 a copy of a resolution of the shareholders of Matla
agreeing to "the
alienation of its main asset, viz. the coal rights" was sent to
Escom.
On 28 November 1979 Trans-Natal wrote to Escom proposing that Escom accept
that "the pre-payment of royalties in the agreed sum",
viz. R9,365m, be "in lieu
of an outright purchase of the coal reserve". In this letter reference was made
to an earlier letter from
Escom, dated 13 June 1978, in which it was stated
—
" that the substance of the present
agreement is that for the payment of R9 365 million Escom will receive all
coal from the Matla field
without the
/
payment
17
payment of royalties
. Escom will therefore pay the R9 365 million as
previously agreed as a pre-payment
in lieu of royalties
". (My
italics.)
This proposal was repeated in a letter to Escom dated 11 December 1979- Escom
replied on 13 December 1979 that it was prepared to
accept the proposal subject
to certain stated conditions- The letter concludes —
"Kindly confirm your acceptance of these conditions and inform me of the date
you wish payment to be made."
There this particular line of correspondence (which was placed before the
Court a
quo
by the Commissioner's representative during the
cross-examination of Van Eeden) appears to come to an end.
On 20 February 1980 Escom sent to Trans-Natal a cheque for R9 365m. under
cover of a letter, which reads as follows —
/ " I refer
18
"I refer to previous correspondence and the numerous discussions between
certain Escom staff and members of your staff which have
failed to reach any
satisfactory conclusion.
In terms of the agreement presently in existence between Escom and the joint
venture all the coal rights in respect of the Matla Coal
Fields as tendered,
plus the coal from the No. 5 seam must be transferred to Escom against payment
of the amount of R9,365 million
which is now tendered in the attached
cheque.
I shall be pleased if immediate arrangements could be made for the transfer
of these rights or equivalent agreed protection for Escom
is concluded."
Thereafter negotiations and discussions proceeded in regard to the
possibility of devising an "equivalent agreed protection". Eventually
the
parties agreed upon what was termed a "restraint agreement" and a contract in
these terms was signed on 29 September 1980. Under
this contract Matla and the
joint venture agree and undertake that they will not be entitled to extract or
dispose of any coal from
the coalfield other than for the pur-
/ pose
19
pose of supplying the same to Escom or as Escom may direct, save with the
prior written consent of Escom and then on such terms and
conditions and at such
rate as Escom may prescribe. Escom, on the other hand, is given the right to
utilise or dispose of all such
coal as it pleases. Clause 4 of the contract
provides:
"In consideration of the restraint imposed herein and the consequent
sterilisation of the capital asset of Matla, Escom has agreed
to pay to Matla
the sum of R9,365m (NINE comma THREE SIX FIVE MILLION RAND), which amount, it is
recorded, has already been paid."
Those are the facts. I now turn to the question as to whether the amount of
R9 365 000 paid by Escom to Matla constituted income or
a receipt of a capital
nature in Matla's hands. It seems to me, however, that before this question can
be answered it is necessary
to characterize this payment. Obviously it was paid
by Escom as the consideration for some asset or benefit to be
/ received
20
received by it from Matla and/or the joint venture. The problem is, what
asset or benefit?
It was submitted by counsel appearing on behalf of Matla that the amount of
R9 365 000 was paid by Escom to Matla as the purchase
price of the coal rights
relating to Block IV; that mineral and mining rights, like any other property,
can be held either as trading
stock or as fixed capital assets; that in this
instance the coal rights in question had been acquired and held by Matla as
capital
assets; and that consequently the money paid as the purchase price of
these assets constituted a capital receipt in Matla's hands.
Before considering the merits of these submissions it is necessary to deal
with a preliminary point raised by counsel for the Commissioner.
He referred to
Matla's letter of objection. In this letter Matla's
/ attorneys
21
attorneys state:
"The grounds of objection are that the amount of R9 365 000 which was received
by our client from the Electricity Supply Commission
(Escom) was an amount of a
capital nature and therefor does not fall into the 'gross income' of the company
as defined in s 1 of
the Income Tax Act, 58 of 1962. The said amount was
received from Escom under cover of a letter of the 20th February 1980, copy of
which we enclose herewith. The 'equivalent agreed protection' referred to in the
ultimate paragraph of this letter was an arrangement
finally entered into and
formalised in a written agreement entered into on the 29th September 1980
between Matla Coal Limited (hereafter
Matla Coal), Escom and the Matla Joint
Venture, a copy of which is enclosed herewith. As will be noted therefrom Matla
Coal undertook
that it would not be entitled to extract or dispose of any coal
from a certain coalfield other than for the purpose of supplying
Escom or as
Escom might direct and this restrictive covenant was to apply to Matla Coal
whether or not the joint venture terminated
the mineral lease which it had. The
payment made to Matla Coal of R9 365 000 was made in consideration of the
restraint imposed on
it and the consequent sterilisation of its major
asset".
/ The
22
The letter then goes on to sketch in some detail the background to the
transaction and the history of events leading up to it and
concludes —
"In summary, the amount of R9 365 000 was paid to Matla Coal in respect of
the sterilisation of the coalfield owned by it, and is
accordingly a receipt of
a capital nature."
Then follow certain alternative submissions. Counsel for the Commissioner
contended that in view of the provisions of sec. 83(7)(b)
Matla should not be
permitted to base its case upon the contention that the payment was
consideration for the sale of coal rights:
it should be confined to the case
made out in its letter of objection, viz. that the pay-ment was consideration
for the sterilisation
of a capital asset, viz. the coalfield. And here I might
point out that Matla's counsel did also present an alternative argument
based
upon the sterilisation point.
/ Sec. 81 (3)
23
Sec. 81(3) of the Act provides that every objection shall be in writing and
shall specify in detail the grounds upon which it is made.
And in terms of sec.
83(7) (b) the appellant in an appeal against the disallowance of his objection
is limited to the grounds stated
in his notice of objection. This limitation is
for the benefit of the Commissioner and may be waived by him (see
CIR v
George Forest Timber Co Ltd
1924 AD 516
, at p 521). In this case, however,
there is no such waiver. In opening his case before the Court a
quo
,
counsel for Matla referred to both the "sale of coal rights" and the subsequent
"restraint agreement" and said that it would be
Matla's submission,
inter
alia,
that the transaction was a sale of coal rights on capital account. At
the end of counsel's opening address the Commissioner's representative
pointed
out that this submission was contrary to the grounds of objection which focused
upon a sterilisation of the coal reserves.
The record of the
/ proceedings
24
proceedings then continues:
"PRESIDENT: The substance of the objection is that the receipt is one on
capital account, whether it arises from sterilization or
from the sale of
rights?
MR VAN BREDA: That is so, my Lord.
PRESIDENT: Perhaps this is a matter you could canvass further in argument or
in cross-examination of the witnesses?
MR VAN BREDA: My Lord, my submission is that because of the reasons set out
in his letter of objection appellant is not free at this
stage to advance a
different reason for regarding it as of a capital nature. He is not free to do
so. He is bound by what is stated
in his grounds of objection.
PRESIDENT: You raise this now as a preliminary point.
MR SWERSKY: My Lord, we do not intend to go outside the grounds of objection,
in our submission. I did say, the disposal or surrender
of its rights. It is
true that the letter of objection refers to the agreement as being a restrictive
covenant, but as I indicated,
the essence of the thing is that it constitutes
either a disposal or surrender of certain of its rights - its freedom to deal
with
certain of the coal, or whatever your Lordship considers the nature of the
agreement to be."
/ That
25
That is where matters rested. No ruling was given and the evidence proceeded
to canvass fully both the alleged sale of coal rights
and the restraint
agreement.
It is naturally important that the provisions of sec- 83(7)(b) be adhered to,
for otherwise the Commissioner may be prejudiced by
an appellant shifting the
grounds of his objection to the assessment in issue. At the same time I do not
think that in interpreting
and applying sec. 83(7)(b) the Court should be unduly
technical or rigid in its approach. It should look at the substance of the
objection and the issue as to whether it covers the point which the appellant
wishes to advance on appeal must be adjudged on the
particular facts of the
case.
The letter of objection in the present instance is a very full and detailed
one. The basic objection taken is that the amount of R9
365 000, included in
Matla's income
/ by
26
by the Commissioner, was a receipt of a capital nature; and that is
essentially the case made out in the letter. The facts of the
matter are fully
canvassed. Letters referring to the sale of coal rights are quoted and a copy of
the letter which accompanied the
payment of R9 365 000 is enclosed. It is stated
that, although in principle Matla Coal had agreed to a sale of coal rights as
required
by Escom, the final arrangement took a different form, viz. the
agreement of 29 September 1980. The sterilisation arrangement was,
therefore, an
agreement in lieu of the sale of coal rights to Escom.
Throughout, even in this Court, it was a matter of some debate whether in
characterizing the payment of R9 365 000 regard should be
had to the alleged
agreement to sell the coal rights to Escom, which obtained when the payment was
made, or to the "equivalent agreed
protection" viz. the restraint agreement,
which was concluded after
/ the
27
the end of the 1980 tax year. In its letter of objection Matla did appear to
opt for the restraint agreement, but in all the circumstances
I do not think
that this should preclude Matla from now contending that the appropriate
agreement to consider was the sale of coal
rights. The preliminary point must,
therefore, be decided in Matla's favour.
I come now to the merits of the appeal. The first question to be decided is
for what the amount of R9 365 000 was paid as consideration.
A study of the
evidence as to the course of negotiations between the parties from the earliest
beginnings in 1973
,
when Matla (then Alpha Coal) submitted its original
tender, to 20 February 1980, when the payment was made, leaves me in no doubt
that as at 20 February there was in existence an agreement between the parties
that the coal rights held by Matla would be sold and
transferred to Escom
/ in
28
in consideration of the payment of R9 365 000; and that the payment was made
on this basis. I have already recounted this evidence
in detail. At this stage 1
would merely focus attention on Escom's letters of 14 November 1973, 31 January
1974 and 13 March 1974;
on the heads of agreement dated 8 May 1974 (the
suggested sale of shares in Matla does not appear to have been pursued at all);
on
the minutes of the meeting between representatives of Trans-Natal and Escom
held on 14 December 1978; on the meeting attended by
executives of Trans-Natal
and Clydesdale on 21 March 1979; and on the resolution of shareholders of Matla
taken in November 1979
and authorising the sale of the mineral rights to Escom.
In addition, there is the evidence of Van Eeden that Matla became contractually
obliged to sell the coal rights to Escom. It is true that as a result of Van
Eeden's discussion with the Inland Revenue Department
,
which probably
took place about
/ mid-1978,
29
mid-1978, Matla and the joint venture were anxious, for tax reasons, to
explore the possibility of an alternative arrangement with
Escom - hence the
correspondence speaking of "a pre-payment of royalties" or "a pre-payment in
lieu of royalties" — but as
at 20 February 1980 nothing concrete seems to
have emerged from this. This explains the opening sentence of Escom's letter of
20
February 1980, which refers to discussions which had failed "to reach any
satisfactory conclusion". Moreover, the following sentence
makes it clear (i)
that in Escom's view the agreement then in existence between the parties was one
for the sale and transfer of
the coal rights to Escom against payment of the
purchase price of R9 365 000, and (ii) that the enclosed cheque was tendered in
payment
of this purchase price. The final sentence demands transfer of the coal
rights, but also mentions the possibility of concluding "equivalent
agreed
protection" for Escom. This last statement ob-
/viously
30
viously refers to the alternative arrangement which Matla and the joint
venture were seeking in order to overcome their tax problems
and which until
then had been the subject-matter of inconclusive negotiations. Matla and
Trans-Natal (its manager) received the letter
and the payment without apparently
disagreeing with the contents of the letter or the basis upon which the R9 365
000 was being paid.
All that happened was that the search for an equivalent
agreed protection continued, resulting eventually in the contract of 28
September
1980. This contract was a novation of the original agreement for the
sale of coal rights. Obligations of Matla and the joint venture
to sell and
transfer the coal rights to Escom were replaced by a restraint undertaking in
favour of Escom; it was agreed that the
consideration to be paid therefor by
Escom be an amount of R9 365 000; and it was further agreed in effect that the
payment in this
amount already
/ made
31
made by way of the purchase price of the coal rights
be treated as payment
of the consideration due under the
restraint agreement.
In the result, therefore, the payment of R9 365 000 underwent a
metamorphosis. At the actual time of payment, viz. 20 February 1980,
it was the
consideration for the purchase of coal rights; and on 28 September 1980 it
became the consideration for the restraint
undertakings. How must it be
classified from the fiscal point of view in determining Matla's liability for
income tax for the tax
year which ended on 30 June 1980? Counsel were not able
to refer us to any authority directly in point; nor am I aware of any. On
principle, however, it seems to me that the payment must be characterized either
with reference to the position which obtained at
the time of payment (cf.
Mooi v SIR
1972 (1) SA 675
(A) at p 684 E-H) or, at the latest, to the
position which obtained
on.......
32
on the last day of the fiscal year (cf.
Caltex Oil (SA) Ltd v SIR
1975
(1) SA 665
(A), at pp 675 E - 676 D, 677 G -678 A; and see Silke South African
Income Tax 10 ed § 2.17). It is not necessary to choose
between these
alternatives since in this case the position which obtained as at the. time of
payment persisted unchanged until the
end of the fiscal year.
For these reasons the receipt by Matla of
R9 365 000 must, in my view, be characterized as the consideration paid by
Escom for the purchase of the coal rights. That being the
position, the next
question which arises is whether the coal rights were held by Matla as trading
stock or as fixed capital assets.
According to the evidence of Mr G Clark,
the general manager of Trans-Natal, Trans-Natal never acquired coal rights or
options or prospecting rights over coal with the object
of disposing of them at
a profit. He said —
/ "That
33
"That would have been a negation of our total function. We are miners not
speculators."
Matla , which was managed by Trans-Natal, was run on the same philosophy. Nor
had Trans-Natal, or any company in the Trans-Natal group,
ever sold coal rights
for the purpose of making a profit. Clark explained —
"I should emphasize here that we started as a very small company, trying to
establish ourselves in the mining business, and your ability
to become a power
in the mining business depends on your reserves. So buying and selling reserves
was totally foreign to any concept
- a quick small profit is not the way you
build up a major annual income."
These averments were not challenged in cross-examination; nor was any
rebutting evidence adduced. Clark also stated, with particular
reference to
Block IV, that the rights in respect thereof were acquired by Alpha Coal in
order to exploit the rights themselves,
and not with the intention
/ of
34
of disposing of those rights to outside interested parties.
The Court a
quo
made no credibility finding in regard to this
evidence. It did nevertheless hold that (I quote from the judgment of the
President)
—
"The appellant came into the picture as
a vehicle in which the coal rights
were
conveniently placed solely in order to
carry into effect the purposes
of the
joint venture between Clydesdale and
Trans-Natal. One must
therefore look
through the narrow structure of the appel-
ant company to
see what was really done,
and that was the business of securing
and
implementing a contract for the sale of coal
to Escom to the value of
approximately
R800 million
In all
the circumstances it has not, in our view, been established, on a balance of
probabilities, that the appellant acquired the
coal rights in question as a
fixed capital asset. The amount of R9 365 000 was therefore correctly included
by the Commissioner in
the taxable income of the appellant.
In my view, there is no reason to reject the evidence of Clark on this issue.
His testimony on the
/ general
35
philosophy and past practices of the Trans-Natal group was not challenged
either in cross-examination or by way of rebutting evidence-
Nor is there any
circumstantial evidence to contradict it. Indeed Matla's initial tender was
wholly consistent with this general
policy, viz- to exploit coal rights and not
to trade in them; and it was only when Escom rejected the idea of paying
royalties and
insisted on acquiring the coal rights that the transaction assumed
the form of a sale of coal rights.
Moreover, I cannot agree that the sale of coal rights can be equated to a
sale of all the extractable coal in the coalfield. It seems
to me that the coal
itself can only be regarded as stock-in-trade and become the subject-matter of a
sale in the course of a business
once it is separated from the land of which it
forms part, ie. , is mined. (Cf. remarks of INNES CJ in
CIR v George Forest
Timber Co Ltd
1924 AD 516
, at pp 523-4, 525-6.)
/ In
36
in support of his general submission that Matla decided to sell the coal
rights as part of a scheme of profit-making
,
counsel for the Commissioner
stated that a substantial part of the coal rights was acquired by Matla only
after Escom had decided
that it wanted the coal rights. This is not strictly
correct. According to Clark's evidence, at the time when Escom decided that
it
wanted to purchase the coal rights, Matla either held these rights or held the
option to acquire them. He explained that it was
normal practice in the mining
industry to obtain mineral rights under prospecting contracts for the
exploration of an area with a
right to buy. At the time of tender it was
indicated to Escom that part of Alpha Coal's title rested on its prospecting
contracts.
Later the options were exercised in order to make transfer of the
relevant coal rights to Escom. I do not think that there is any
substance in
this point.
/ In
37
In determining the intention with which the coal rights were acquired by
Matla regard must be had, in my view, to the time when the
prospecting
contracts, containing the options, were first entered into. (Cf. the decision of
the Canadian Federal Court,
D and K Thorn v The Queen
(FCTD)
[1979] CTC
403
, cited to us by counsel for Matla; and see also the decision of the High
Court of Australia in the case
Western Gold Mines No Liability v Commissioner
of Taxation (WA)
1 A1TR 248, at pp 251-2.)
There is no doubt that mining and mineral rights, like any other property,
may be acquired and held by a taxpayer with a view to exploiting
the rights
themselves as income-producing capital assets or alternatively with a view to
realization as part of a profit-making scheme,
in which case they assume the
character of trading stock. (See, eg. ,
Commissioner of Taxes v Booysens
Estates Ltd
1918 AD 576
;
SIR v Smi
t
1965 (3) SA 591
(A);
/ SIR v Struben
38
SIR v Struben Minerals Ltd
1966 (4) SA 582
(A).) When the rights are
sold, then in the former case the proceeds constitute a capital receipt in the
hands of the taxpayer, in
the latter case income. In my view, the evidence in
the present case establishes, upon a preponderance of probability, that the coal
rights in question were acquired by Alpha Coal (later Matla) as
incoming-producing capital assets and so held until it was agreed
that they
should be sold to Escom; and, with respect, I cannot agree with the contrary
finding of the Court a
quo
. It follows that the proceeds of the sale,
amounting to R9 365 000 was a capital receipt in Matla's hands and that the
Commissioner
erred in including this amount in Matlas's taxable income for the
1980 year of assessment.
The appeal is allowed with costs, including the costs of two counsel, and the
order of the Court a
quo
/ is
39
is altered to read:
"Appeal allowed and the assessment set aside The matter is remitted to the
Commissioner' for reassessment on the basis that the receipt
of R9 365 000
constituted a receipt of a capital nature."
M M CORBETT
BOTHA, JA)
VAN
HEERDEN, JA)
GALGUT, AJA)
NICHOLAS AJA)
VAN HEERDEN, JA) CONCUR GALGUT, AJA)