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[1990] ZASCA 76
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Commissioner for Inland Revenue v SA Mutual Unit Trust Management Company Ltd. (532/88) [1990] ZASCA 76; 1990 (4) SA 529 (AD); (23 August 1990)
Case No 532/88
IN THE SUPREME COURT OF SOUTH AFRICA
(
APPELLATE DIVISION
)
In the matter of
THE COMMISSIONER FOR INLAND REVENUE
... Appellant
ánd
S A MUTUAL UNIT TRUST MANAGEMENT
COMPANY LTD
Respondent
CORAM
: CORBETT CJ, VAN HEERDEN, KUMLEBEN, JJA, NICHOLAS et GOLDSTONE,
AJJA.
DATE OF HEARING
: 15 May 1990
DATE OF JUDGMENT
: 23 August 1990
JUDGMENT
CORBETT
CJ:
The respondent is a public company, which carries on business as the
management company of a unit trust scheme known as the Old Mutual
Unit Trust. In
the course of its business respondent deals in shares. During the 1981
income
2
tax year respondent entered into two share transactions which have given
rise to a dispute between respondent and appellant, the Commissioner
for Inland
Revenue ("the Commissioner"), as to how respondent should properly be assessed
to income tax for that tax year. This dispute
was resolved in favour of
respondent by the Cape Income Tax Special Court, against whose decision
appellant now appeals (with the
necessary leave) directly to this Court.
One of these transactions related to shares in a public company called
Tollgate Holdings Limited-("Tollgate"), which is listed on
the Johannesburg
Stock Exchange ("JSE"). In February 1981 and for reasons which need not be
canvassed the directors of Tollgate conceived
and announced a scheme which was
designed to return to shareholders surplus cash in the coffers of the company.
The scheme involved
the surrender by Tollgate shareholders of each of their
existing ordinary shares in exchange for
3
one new ordinary share and one "A" ordinary share, each of no par value
(such surrender to commence as from 6 March 1981) ; the listing
of the new and
"A" ordinary shares on the JSE (as from 9 March 1981); the declaration on 2
April 1981 of a dividend of 220 cents
per share to the holders of "A" ordinary
shares registered as such on 24 April 1981; the automatic conversion of the "A"
ordinary
shares into "A" redeemable preference sháres, also on 24 April
1981; the redemption forthwith of the "A" redeemable preference
shares at 50
cents per share; the delisting of the "A" ordinary shares; and on 30 April 1981
the payment to shareholders of the dividend-plus-redemption
moneys of 270 cents
per "A" ordinary share against surrender of the share certificates. This scheme
was approved by shareholders
at a general meeting held on 4 March 1981.
Over the period 9 - 12 March 1981 respondent purchased 651 200 Tolgate "A"
ordinary shares on the JSE;
4 and on 22 April 1981 respondent acquired
another 223 280 such shares by way of a private deal. The total outlay for the
874 480
shares was R2 413 677. In implementation of the scheme respondent in due
course received a total dividend of Rl 923 856 on its "A"
ordinary shares and in
addition was paid an amount of R437 240 in redemption of the shares, of which an
amount of R197 632 (22,6
cents per share) was classified by appellant in terms
of the Income Tax Act 58 of 1962 ("the Act") as dividend. The total dividend
thus amounted to R2 121 488 and the balance of the proceeds of the redemption to
R239 608.
The other transaction related to another public company, Natal Anthracite
Collieries Limited ("Anthracite"), also listed on the JSE.
On 25 November 1981
respondent acguired 100 000 stock units (for convenience I shall refer to them
as shares), 70 000 of these on
the stock exchange and 30 000 by way of a private
transaction, for a total
5
outlay of R2 080 685. The entire issued capital of Anthracite
was acquired by Anglo American Coal Corporation Ltd and in terms of
proposals
adopted by the members of Anthracite on 9 February 1982 shareholders were
afforded certain options regarding the take-over
of their shares. One of these
was to receive a special dividend of 850 cents per share, plus a capital payment
of 1050 cents per
share. Respondent chose this option and on 27 February 1982
surrendered its shares against payment of a dividend of R850 000 and
a capital
payment of Rl 050 000.
The dividends received by respondent from Tollgate and Anthracite in this way
were exempt from income tax in terms of sec 10(1)(k)
of the Act. In its return
of income (together with annual accounts) submitted under the Act for the 1981
tax year (which ended on
30 June) respondent showed a loss on the sale of
investments amounting to R3 204 754. This figure was made up as follows:
6
Cost of Proceeds
Shares
Acquisition on Sale
Loss
874 480 Tollgate R2 413 677 R239 608 R2 174 069
100
000 Anthracite . R2 080
685 Rl 050
000 Rl 030
685
Total:
R3 204 754
Respondent considered that, as a dealer in shares, this loss should be taken
into account in the computation of its taxable income
and it framed its return
accordingly. This resulted in a computed assessed loss for the year of R2 430
577.
In a commercial sense, of course, there was no loss of such dimensions for in
the case of each company respondent received on its
shares substantial
dividends. It was only the non-taxability of the dividends under the Act that,
according to respondent, created
a loss for tax purposes. But for such
exemption, respondent would have been obliged to bring the dividends into
account as income
7
and this would largely have off-set the loss.
On about 1 April 1982 appellant issued respondent with an income tax
assessment for the 1981 tax year. This assessment accepted the
correctness of
respondent's return and reflected, in respect of taxable income, a loss of R2
430 577 and a nil assessment for tax
payable. This loss was carried through into
respondent's assessment for the 1982 tax year, which was issued on about 1 June
1983,
and resulted, after setting off income amounting to R897 759, in a loss in
that year, for income tax purposes, of R1 532 818.
On about 1 November 1983 appellant issued to respondent revised assessments
in regard to the 1981 and 1982 tax years. In the 1981
reyised assessment
appellant disallowed the loss of R3 204 754 claimed in respect of the Tollgate
and Anthracite transactions, with
the result that a taxable income of R774 177
was assessed for that year. The consequential revision of the 1982 assessment
(there
being
8 no loss to be carried forward) resulted in a taxable income
for that year of R897 759.
In its return for the 1983 tax year the respondent sought to bring forward an
assessed loss of Rl 532 818 from the 1982 tax year.
In assessing respondent (the
notice was issued on about 1 March 1984) appellant disregarded this alleged
assessed loss and determined
a taxable income of Rl 832 566.
Respondent objected to the revised ássessments for 1981 and 1982 and
the assessment for 1983 broadly on the
ground that, since it was a dealer in
shares, the losses in
1981 on the Tollgate and Anthracite transactions were
incurred in the production of the income and were not of a
capital nature;
that consequently they should have been
allowed as a deduction from income in
terms of sec ll(a) of
the Act in the 1981 assessment; and that had this been done
an assessed loss would have resulted, which would have been
9
carried through into the 1982 and 1983 tax assessments. I pause here to
observe that it would have been more accurate to say, with
reference to the
Tollgate and Anthracite transactions, that the proceeds of the shares (amounting
to R239 608 and R1 050 000 respectively)
constituted income, from which the
taxpayer claimed to be entitled to deduct in terms of sec ll(a) the full cost of
acguisition (R2
413 677 in the one instance and R2 080 685 in the other),
resulting in the combined loss of R3 204 754.
Subsequently, with appellant's consent, respondent amplified its grounds to
include the following alternative grounds:
(1) that portions of the expenditure incurred in the cost of acquisition of the
shares in Tollgate and Anthracite should have been
allowed as a deduction in
terms of sec ll(a); and
(2) that appellant's allowance in full, in
his
10 original assessment for 1981, of respondent's claim to be entitled to deduct
the full cost price of the shares was in accordance
with the practice generally
prevailing at the date of issue of this assessment and that in the circumstances
appellant was precluded
by proviso (iii) to sec 79(1) of the Act from re-opening
the assessment,and issuing a revised
assessment.
Appellant having disallowed these
objections, the case came on appeal to the Cape Income Tax Special Court. At the
hearing (presided
over by Berman J) only the second alternative objection was
pursued by the respondent. It was upheld by the Special Court and the
appeal was
allowed, but respondent was ordered to pay wasted costs incurred as a result of
a postponement of the hearing ordered
at the instance of the respondent. In
addition to the appeal by appellant against the order of the Special Court
upholding
11
the appeal to it against the assessments, respondent
cross-appealed against the costs order. Prior to the hearing before this Court,
however, appellant notified the respondent that it abandoned the costs order in
its favour and tendered to pay respondent's wasted
costs of cross-appeal up to
the date of the notification. It is consequently not necessary to consider or
make any order in regard
to the cross-appeal.
Before discussing the merits of the appeal it is appropriate to make
reference to a factor which looms largely in this case, viz the
decision of this
Court in the case of
Commissioner for Inland Revenue v Nemoiim (Pty) Ltd
1983 (4) SA 935
(A). That case dealt with a commercial operation known as
"dividend stripping". The facts were that the taxpayer, a one-man private
company, embarked upon a business of purchasing the shares in dormant companies
with, as their only assets, substantial cash reserves
12 available for
distribution by way of dividend; of stripping the companies of their assets by
way of dividend declarations comprising
their cash reserves; and of
sêlling the shares in the remaining "shell" companies (there being a ready
market in such companies).
In each case the dividend and the resale price of the
shares constituted the commercial proceeds of the transaction, the dividend
being
by far the major component thereof. In terms of sec
10(1)(k) of the
Act, however, the dividends were exempt from tax, and only the resale proceeds
of the shares constituted income from
these transactions in the taxpayer's
hands. The taxpayer nevertheless sought to deduct the full purchase price of the
shares, as
being expenditure incurred in the production of the income, in terms
of sec ll(a) of the Act. Because the income earned from resale
was relatively
small the effect of such deduction was to produce large losses, which were
carried forward into subsequent years of
13 assessment. This was in contrast
to the actual commercial results of the dividend stripping business, which were
to show an annual
profit.
This Court held that the expenditure incurred by the taxpayer in the
acguisition of the shares in these dormant companies had a dual
purpose, viz (a)
the receipt of moneys on resale which constituted income in the taxpayer's hands
and (b) the receipt of dividends
which were exempt income in the taxpayer's
hands; that in so far as the expenditure related to the receipt of the dividends
it was
not incurred in the production of the income (in terms of sec ll(a) ) and
it was incurred in respect of amounts received which do
not constitute income
(in terms of sec 23(f) ); and that in the circumstances, and following the
precedent of
Commissioner for Inland Revenue v Rand Selections Corporation
Ltd
1956 (3) SA 124
(A), the expenditure should be split up and apportioned
according to
14 a formula which took account of this dual purpose.
It is of some importance to note some of the relevant facts and dates
pertaining to the
Nemoiim
case. The taxpayer conducted its dividend
stripping business during the 1977 and 1978 tax years. In those years the
taxpayer reflected
losses, which were carried forward into the 1979 and 1980 tax
years. These losses were initially allowed by the Commissioner in assessments
issued (for the four years) between 1 December 1977 and 1 November 1980. On 28
November 1980, however, the Commissioner, having.had.
second thoughts on the
matter, issued additional assessments in which he allowed as a deduction that
portion of the purchase price
of the shares which was equivalent to the actual
proceeds of the shares when sold by the taxpayer. This was, in effect, an
apportionment
not dissimilar to that adopted by this Court. After the usual
objections and disallowance thereof the matter came before the Natal
Income
15 Tax Special Court which gave judgment in favour of the taxpayer on
25 June 1981. The Commissioner appealed and the matter was heard
by this Court
on 15 August 1983. This Court gave judgment on 23 September 1983.
The respondent's decision not to pursue . the original ground of objection in
the Court a
quo
was evidently motivated by the belief that it was legally
precluded from doing so by the decision of this Court in
Nemoiim
's case;
and, in addition, the application of the apportionment system laid down by
Nemoiim
's case appeared to render superfluous the first alternative
ground of objection. This left the second alternative objection.
The general rule is that where no objection has been made to an assessment it
becomes final and conclusive as regards both the taxpayer
and the Commissioner
(see sec 81(5) of the Act and
Silke on South African Income Tax
llth ed,
par 18.23 and the cases cited in note 106). Sec 79(1),
16
79(1), however, gives the Commissioner the power to re-open an
assessment and raise an additional or revised assessment, notwithstanding
the
provisions of sec 81(5), where,
inter alia
, an amount which was subject
to tax and should have been assessed to tax under the Act, has not been so
assessed to tax. This power
to re-open is, however, circumscribed by a proviso
to sec 79(1), the relevant portion of which
reads:
"Provided that the Commissioner shall not raise an assessment' under this
subsection -
(i) after the expiration
of three years from the date of the assessment (if any) in terms of which any
amount which should have been
assessed to tax under such assessment was not so
assessed or in terms of which the amount of tax assessed was less than the
amount
of such tax which was properly chargeable, unless the Commissioner is
satisfied that the fact that the amount which should have been
assessed to tax
was not so assessed or the fact that the
17
full amount of tax chargeable was not assessed, was due to
fraud or misrepresentation or non-disclosure of material facts; or
(iii) if the amount which should have
been assessed to tax under
the
assessment referred to in paragraph
(i) of this proviso was,
in
accordance with the practice
generally prevailing at the date of
the
assessment, not assessed to
tax, or the full amount of tax
which should
have been assessed
under such assessment was, in
accordance with such
practice, not
assessed; ".
Respondent's second alternative objection assumes and accepts that in the
light of the decision of this Court in
Nemoiim
's case, the original
assessment for 1981 failed to assess to tax an amount which should have been so
assessed. This came about because
of the Commissioner's initial acceptance of
the deduction of the full cost of the Tollgate and Anthracite shares with the
result
that a loss,
18
and no income subject to tax, was assessed; whereas, as the
revised assessment for 1981 indicates, if the
NemoJim
principle had been
applied, the loss would have been far less and there would have been income
subject to tax. The revised assessment
does not, of course, apply the
apportionment principle, but even so without making precise calculations it is
clear from the figures
which I have already quoted that the amounts which, in
accordance with the
Nemoiim
principle, would have been allowed by way of
deduction would have left a substantial taxable income.
Respondent's objection is based upon the proposition that the non-assessment
to tax in 1981 of the amount referred to was
"in accordance with the practice generally prevailing at the date of
assessment"
and that consequently in terms of proviso (iii) the appellant was precluded
from raising a revised assessment in
19. regard thereto. The soundness of
this objection depends upon the meaning to be attached to the words "practice
generally prevailing"
and upon the evidence as to whether or not a relevant
practice generally prevailed at the time of the original assessment, ie on
or
about 1 April 1982.
In his judgment in the Court a
quo
Berman J held (relying upon
Silke on South African Income Tax
10th ed, par 18.34) that the words
"practice generally prevailing" related to
" . . . . a practice which is both known to the
Commissioner and which he has
authorised for
application by the various Receivers of
Revenue in the
Republic ".
(This interpretation was
followed by Howie J in
Income Tax Case No
1459
51 SATC 142
, at 148.) The
reference to
Silke
,
supra
, is to a paragraph in the book dealing
with sec 102(1)
20
of the Act, which concerns the power of the Commissioner to
authorize a refund to a taxpayer of tax overpaid and contains the same
phrase,
"practice generally prevailing", in a proviso. The full text of
Silke
's
comment on this proviso (which has been retained in the llth edition) reads as
follows:
"The 'practice generally prevailing' at the time, it is submitted, is the
practice known to and applied by the Commissioner, whether
it is founded on his
own interpretation of the law or upon the then existing judicial interpretation
of the law. Furthermore, it
is considered that the 'practice generally
prevailing' is one that has been authorized by the Commissioner and is being
applied throughout
the country."
It
seems to me, with respect, that what was stated by Berman J, as set forth above,
places insufficient emphasis upon what is actually
done in the different offices
of the Department of Inland Revenue in the assessment of taxpayers.
21
I also am of the view that it may be misleading to
suggest
as a requisite personal knowledge and approval of the
practice on
the part of the Commissioner. Although in
terms of sec 2(1) of the Act the
Commissioner is the
official responsible for carrying out the provisions of
the
Act, under sec 3(1) the powers and duties thereby imposed
upon him may
be exercised or performed by him personally or
bý any officer engaged
in carrying out the provisions of the
Act
"... under the control, direction or supervision of the
Commissioner".
At all events, a
practice "generally prevailing" is one which is applied
generally
in the
different offices of the Department in the assessment of taxpayers and in
seeking to establish such a practice in regard to
a particular aspect of tax
assessment it would not be sufficient to show that the practice was applied in
merely one or two offices.
22
Moreover, the word "practice", in this context, means "a
habitual way or mode of acting" (see Oxford English Dictionary, meaning 2.c);
and consequently, in general, it would also not be sufficient to show that, in
regard to an aspect of assessment, a certain attitude
had been adopted by the
assessors concerned only in some instances.
In the Court a
quo
it was held that the burden of proving such a
"practice generally prevailing" rested upon the taxpayer and that in the present
case
there rested an onus on the respondent
"..ito prove, on a preponderance of probabilities, that a practice generally
prevailed at the time of (respondent's) 1981 assessment
allowing for losses such
as that claimed by (respondent) as a legitimate
deduction".
The question of onus, an
issue in the Court a
quo
, was also debated before us.
23
Sec 82
of the Act provides as
follows:
"82. The burden of proof that any amount is exempt from or not liable to any tax
chargeable under this Act or is subject to any deduction,
abatement or set-off
in terms of this Act, shall be upon the person claiming such exemption,
non-liability, deduction, abatement
or set-off, and upon the hearing of any
appeal from any decision of the Commissioner, the decision shall not be reversed
or altered
unless it is shown by the appellant that the decision is
wrong."
In
Income Tax Case No
1233
, 37 SATC 179
, which was concerned with the taxability of profits made
on the sale of shares, the question arose as to whether the three year period
prescribed by proviso (i) to sec 79(1) had elapsed or not. The assessment in
question had been issued in terms of sec 79(1) and it
wascommon cause that there
had been no such fraud, misrepresentation or non-disclosure of material facts as
in the ref erred to proviso
(i) . The President of the
24
24
Special Court, Colman J, held that the onus was on
the
appellant taxpayer. He reasoned as follows (at pp 184-5):
"It was argued on behalf of the appellant that, for that reason, the appeal
shoúld succeed, inasmuch as the Secretary for
Inland Revenue had failed
to produce evidence on matters peculiarly within his knowledge, to show that the
additional assessment
was raised within the three-year period. But that
argument, in my view, is in conflict with the provisions of s 82 of the Act. In
quoting the terms of that section I shall, to facilitate later reference, divide
it into two parts which I shall letter (a) and (b)..
With these amendments the
section reads thus:
(a) 'The burden of
proof that any amount is exempt from or not liable to any tax chargeable under
this Act or is subject to any deduction,
abatement or set-off in terms of this
Act, shall be upon the person claiming such exemption, non-liability, deduction,
abatement
or set-off';
24 A. and
(b) 'upon the hearing of any appeal from any decision of the Secretary, the
decision shall not be reversed or altered unless it is
shown by the appellant
that the decision is wrong'.
It is argued, perhaps
correctly, that the language in the part of the section which I have lettered
(a) does not cover the ground
of appeal under consideration; the contention is
not that the share profits were exempt from, or not liable to taxation; it is
that
the Secretary for Inland Revenue is barred by effluxion of time from
recovering the tax thereon.
The language of the part of the section which I
have lettered (b) is, however, much wider, and in my view it covers a contention
such
as the one raised in this appeal against the additional assessment for the
1968 tax year.
24 B.
It was argued that part (b) of the section should be read restrictively, and
interpreted to apply only to reversals or alterations
on the grounds listed in
part (a), or grounds of a like nature. It is in effect the
noscitur a
sociis
rule which counsel is seeking to have applied. But, as was pointed
out in such cases as
Rex v Jones
1925 AD 117
at 129,
Director of
Education, Transvaal v McCagie & others
1918 AD 616
at 623, and
Grobbelaar v Van de Vyver
1954 (1) SA 248
at 254-5, the rule is not
automatically applied to every-statutory provision in which particular words are
followed by general ones.
It is always the duty of the court to seek the true
intention of the legislature; and proper weight must be given to the presumption
against tautology.
If the legislature had not wished to add anything to what it had provided in
that part of s 82 which I have lettered (a) , it would
presumably not have
enacted the part which I
25
have lettered (b). What did it wish to add? The answer is to be sought in part
(b), which is wide enough to cover all possible attacks
on the correctness of a
decision bý the Secretary. If that language had not been intended to have
the wide operation which
its natural meaning indicates, the legislature would
surely have given guidance as to the intended ambit of that part of the section.
And if there had been issues which could be raised in an appeal but which were
not intended to be covered by the language of part
(a) or (b) of s 82, one would
have expected the legislature to say on whom onus of proof would lie in respeot
of such issues.
It is, therefore, my view that in respect of the issue under discussion, the
onus was on the appellant."
This
decision was followed by Grosskopf J in
Income Tax Case
No
1303
, 42 SATC 95
, at 98, and, with respect, it seems to
me to be correct
and to apply equally to proviso (iii) to
sec 79(1). It was argued by respondent's counsel that the
26
portion of sec 82 labelled (b) by Colman J was designed to
apply to the many provisions elsewhere in the Act where the Commissioner
is
given a power of decision. This is no doubt correct, but I can find no reason
why the correctness of a decision of the Commissioner
to re-open an assessment
in terms of sec 79 and whether or not he was precluded from doing so by proviso
(iii) should not also fall
within the purview of portion (b).
The present appeal must, therefore, be approached on the basis that the onus
was upon the respondent to show on a preponderance of
probability that the
original 1981 assessment allowing the deduction in full of the cost of the
Tollgate and Anthracite shares was
in accordance with a practice generally
prevailing at the time of assessment, ie on 1 April 1982.
In the Court below respondent called three witnesses and appellant one.
Respondent's first witness
27
was Mr W B Cronje, a practising chartered accountant, who
specializes in taxation. He told the Court that prior to the decision of
the
Appellate Division in the
Nemoiim
case it was "well-known in fact amongst
tax practitioners" that "such losses" (meaning evidently losses resulting from
the deduction
of the full purchase price of shares acquired by a company for
dividend stripping operations) were allowed by
the Receiver; ánd that
this was an issue discussed amongst
tax practitioners. In this connection he
referred to dividend stripping operations alleged to have been conducted on a
large scale
by two companies, National Acceptances Limited ("NA") and Barclays
National Merchant Bank Limited ("Barname"). In the. course of
Cronje's
testimony, particularly under cross-examination, it appéared that his
evidence was based entirely on hearsay. He
had no personal knowledge or
experience of what I shall, for the sake of brevity, call "dividend stripping
losses" being allowed
by
28
the Revenue Department: he was merely retailing what he had
heard from other tax practitioners in the course of discussion. Barname
was a
client of Cronje's firm and Cronje claimed to have "some knowledge of what they
were doing as they are clients of ours", but
he also seemed to concede under
cross-examination that the facts pertaining to the actual cases of dividend
stripping were not within
his knowledge.
In my view, Cronje's evidence is whoíly inadmissible and ought not to
have been relied upon (as it was) by the Court a
quo
. The
factum
probandum
was whether in the assessment of taxpayers who had carried on
dividend stripping operations there was a generally prevailing practice,
in the
sense described above, that dividend stripping losses be allowed. The existence
of such a practice could be established by
showing that the Commissioner, or
someone in the Department with the
29
necessary authority, had issued a departmental directive to
that effect and that this directive was being followed generally in the
assessment of taxpaýers; or by showing that in the general process of
assessment dividend stripping losses were consistently
allowed in a sufficient
number of cases to lead to the inference that such a practice was authorized and
generally prevailed. These
are factual matters to be decided by the Court; and
they are not matters in respect of which assistance may be derived from expert
evidence as such. Cronje's evidence in regard to actual cases of the allowance
of dividend stripping losses being pure hearsay, there
is, in my view, no basis
upon which it could be held to be acceptable in law.
It is true that the appellant's representative in the Court a
quo
did
not formally object to Cronje's evidence when it was first led, but he did later
expose its hearsay character in cross-examination
and there is no question
of
30
any waiver or consent by the appellant. This Court must
accordingly disregard the evidence of Cronje and determine on the admissible
evidence on record whether the decision of the Court a
quo
was correct or
not (see
Estate Lala v Mahomed
1944 AD 324
, at 330;
Radus & Mindel
v Plaza Outfitters
1945 TPD 350
, at 352).
Respondent's second witness was Mr H G Howes, the group taxation manager of
Barclays National Bank (as it was then known). He assumed
this position in
February 1979. He stated that as from that time he was aware of the fact that
dividend stripping losses incurred
by Barname had been allowed by the appellant
in the assessment of that company's income tax for the 1979, 1981 and 1983 tax
years.
In substantiation of this he referred to various transactions entered
into by Barname and produced Barname's income tax returns and
its assessments
for the three years in question in order to show how the transactions had been
reflected in
31 the returns and what the reaction of the appellant had been.
The first such transaction related to a company known as Edworks (1936)
Limited
("Edworks") which approached Barname for assistance in regard to an internal
problem concerning dividend policy. It was decided
that this could only be
resolved by "taking out" the minprity shareholders. This was to be achieved by
converting the minority shares,
under a scheme of arrangement, into redeemable
preference shares which would then be redeemed by using the proceeds of a fresh
issue
of redeemable preference shares of 10 cents each to be issued to Barname
at a premium of 90 cents. In terms of the scheme Edworks
was obliged to redeem
the Barname shares over a five year period (1979 - 1983), as to 10 cents per
share out of capital and as to
90 cents per share out of distributable reserves.
For tax purposes the 90 cents per share constituted a dividend in Barname's
hands.
In its return of income for 1979 Barname showed, in respect of
32
Edworks shares redeemed, an amount representing 90 cents per
share as a non-taxable "deemed dividend", an amount representing 10 cents
per
share as income and the full cost of the shares (ie R1 per share) as a
deduction. This obviously resulted in a loss for tax purposes
on this
transaction. A similar transaction took place at about the same time in regard
to a company called East London Daily Dispatch
(Pty) Limited ("ELDD") and the
proceeds of redemption received during the 1979 tax year were treated in the
same way as the proceeds
of the Edworks shares, resulting again in a loss for
tax purposes. In each case the full facts were disclosed in Barname's income
tax
return, which was dated 28 February 1980. The assessment issued on about 1 July
accepted these losses.
In the 1981 tax year there were further redemptions of Edworks and ELDD
shares and in terms of a similar transaction (entered into
during the 1981 tax
year)
33
involving the issue of redeemable preference shares in a
company known as HMB Industries (Pty) Ltd ("HMB"). And in the 1983 tax year,
according to the returns placed before the Court, there were redemptions of
Edworks shares and further redemptions in terms of the
two further transactions
entered into during that year and involving NDUMU Limited "Ndumu") and Trescon
Holdings (Pty) Limited ("TH").
Assessments for the 1981 and 1983 tax years were
issued respectively on about 1 August 1982 and on about 1 July 1984. In both
assessments
the losses claimed by Barname by, reason of these various
transactions were not queried.
The legitimacy of the claimed losses in these three years was first
questioned in terms of a letter dated 4 January 1985, in which,
with reference
thereto, the Receiver of Revenue, Johannesburg wrote:
"In my opinion these items are not allowable as deductions for tax purposes as
they aré
34
not in production of income. (Please refer to CIR vs Nemojim
1983 (4) SA 935
(A)
where the principles involved are essentially similar to the case at hand).
Please forward reasons, if any, why these items should
be allowed as deductions
for tax purposes."
Under
cross-examination of Mr Howes it transpired that Barname was approached to
participate in the Tollgate scheme, to which reference
has already been made. On
3 March 1981 Barname wrote to the appellant describing the scheme, indicating
that it proposed to purchase
l,lm Tollgate "A" ordinary shares cum dividend and
seeking his confirmation (i) that, in the event of Barname purchasing these
shares,
the dividends received of 242,6 cents per share wpuld constitute exempt
income under sec 10(1)(k); (ii) that the 27,4 cents per share,
representing the
balance of the redemption payment, would be treated as gross income in Barname's
hands; and (iii) that the total
cost of the
35
shares would be treated as a deductible expense in terms of
sec ll(a) of the Act. To this the appellant replied:
"I write .... to inform you that it is not possible to give you the assurances
which you are seeking".
Partly because
of this reply Barname decided not to take up the Tollgate shares.
The third witness called by the respondent was Mr S V C Richardson, the tax
partner in a large firm of accountants. NA was a client
of his firm. From about
the middle of 1983 he dealt directly with NA's tax affairs. In 1980 NA commenced
dividend stripping and it
did so on an extensive scale during the 1981 and 1982
tax years. Dividend stripping was, however, "phased out" during 1983. In its
income tax return for 1981 NA included a schedule headed "Purchase and sale of
unlisted investments/subsidiaries". The schedule is
divided into
36 five
columns reflecting (1) name of company, (2) cost, (3) sale proceeds, (4) loss
and (5) dividend declared. The schedule reflects
over 80 share transactions. In
almost every case the sale proceeds constitute a small proportion of the cost of
the shares. In every
case a loss is shown and this loss is generally matched or
exceeded by the dividend declared. A simple calculation shows that the
loss in
each case is the difference between the cost and the sale proceeds of the shares
in question. In aggregate the schedule reflects
a loss of R24 167 158 and
dividends declared of R24 712 814. This loss is brought into account in
computing NA's taxable income,
with the result that a tax loss of nearly R25m is
shown in the return. It is not clear when this return was submitted. On about 1
May 1982 an assessment was issued reflecting a loss in exactly the same amount
as that claimed in the return.
The 1982 return and assessment followed the same
37
pattern. The return contained a similar schedule of some 27
share transactions, in which losses totalling R15 985 850 were incurred
and
dividends totalling R16 305 179 were received. These losses were brought into
account in computing NA's taxable income in its
return. The result was a loss
for the year of R15 797 126, which together with the assessed loss for 1981
resulted in a total loss
of R40 705 007. The return was submitted on 30 November
1982. The assessment, issued on about 1 March 1983, accepted these figures.
At an early stage and with reference to the 1980 year of assessment NA
received from the Receiver of Revenue, Johannesburg a written
enquiry dated 13
August 1981, the opening paragraph of which read -
"It has come to my notice that National
Acceptances (Pty) Ltd is buying shares of
companies for purposes of
dividend
stripping."
38 The enquiry
went on to request schedules reflecting certain details concerning "all
companies acquired for this purpose". The query
had to be answered within 21
days. NA replïed, asking for an extension of time wïthin which to
supply the information.
Thereafter from Mr Richardson's point of view the trail
runs cold; and for various reasons he was unable to say what response, if
any,
there had been to this enquiry.
On 28 June 1983 the Receiver of Revenue, Johannesburg, initiated a further
series of enquiries concerning,
inter alia
, NA's 1981 and 1982 returns.
It is clear that the schedules which formed part of NA's 1981 and 1982 tax
returns reflected its dividend
stripping operations. These enguiries did not,
however, at first mention dividend stripping. This matter was first raised by
the
Receiver in a letter dated 28 November 1983, which contains the following
comment:
39
" 5) Dividend stripping losses will not be
allowed."
This was followed by a letter
dated 18 January 1984 stating,
inter alia
,
"Kindly note that the company's taxable income will be adjusted according to the
judgment handed down in CIR v Nemojim (Pty) Ltd
45 SATC
241."
Additional assessments
disallowing these losses in 1981 and
1982 followed in due course.
The witness called by appellant in the Court a
quo
was Mr W P Coetzee,
presently a member of the Law Interpretation section in the office of the
Commissioner. His section advises the
Commissioner in tax matters. He explained
how a practice becomes established in the Department. When Receivers experience
a problem
in assessment it is referred to the Commissioner's office. The
40
Law Interpretation section then evaluates the problem and advises the Receivers
what approach to adopt. This is done by circular
minutes distributed to
Receivers throughout the country. Subsequently the point is included in the
official income tax handbook,
distributed within the Department. The handbook is
not available to the public. Receivers are not permitted to establish practices
on their own.
Mr Coetzee stated that the practice of the Department was not to allow losses
incurred in dividend stripping operations. In regard
to redeemable preference
shares the position was as follows:
" The Department will particularly look
at the preference shares and determine for what purpose the shares were taken up
and investigate in detail what the purpose behind
the acquisition of preference
shares was.
Would you say that in some instances losses could become allowable?-- In
some
41 instances losses might become
allowable."
Mr Coetzee pointed out that
there was a standing instruction in the handbook referring to the situation of
dividend stripping where
a company is being liquidated. This took the form of a
section in the handbook summarizing the facts and decision in the
Rand
Selections
case,
supra
.
With reference to the instances, referred to in
the evidence of Messrs Howes and Richardson, where dividend
stripping losses had been allowed by the Revenue Department,
Mr Coetzee
pointed to two factors. The first was that from
1978 onwards the Department had adopted a new system of
assessment,
referred to as the "auditing system". In terms
thereof a taxpayer's return is initially accepted at its
face value and an assessment is issued accordingly.
Thereafter, during the
ensuing three years, the Receiver
concerned will reconsider the return and assessment, make a
more thorough investigation and determine whether the
42 original
assessment fully accounts for the taxpayer's tax liability. (Hence the term
"audit".) The object behind this system is
to expedite tax assessments. This has
various advantages. The second factor was that some assessors are new and
inexperienced and
mistakes are made. These, however, should be picked up and
corrected at the time of the three-year audit.
Specifically with regard to NA, Mr Coetzee pointed out that he had been the
author of the enquiry dated 13 August 1981, referred to
above. Later, towards
the end of the 1981 tax year someone from NA brought to him a list of all the
companies and the required details
relating to NA's dividend stripping
operations. Mr Coetzee then, on 8 April 1982, submitted an internal memorandum
to his senior
recommending that the matter be referred to head office for
instructions. He stated that his own attitude was that the dividend stripping
losses should not be allowed.
43
With reference to Barname's approach to the Commissioner, by
way of the letter of 3 March 1981 (referred to above), Mr Coetzee stated
that
the letter was referred to one of the senior officers on the staff of the
Receiver of Revenue, Johannesburg. In an internal
memorandum he expressed the
view that
" as was the case of C I R v Rand
Selection Corp. Ltd
(20 SATC 390)
the amount which will accrue to the Bank as a
result of the expenditure to be incurred, will consist of (1) a return of
floating
capital and (2) dividends. Thus the expenditure, to my mind, will have
to be apportioned between the taxable and exempt income on
the income
basis."
He accordingly concluded
that
"The Department cannot be party to these transactions and we cannot give the
assurance that the losses will be allowed. In my view
the losses should be
disallowed."
44
Then there is a further note on file, dated 3 April 1981,
containing the following instruction
The loss which will be incurred by the Company nmst not under any circumstances
be allowed without the authority of the Assistant
Receiver,
Companies."
Mr Coetzee further deposed
to having scrutinized the files of a number of Tollgate shareholders (taken at
random) in the Cape Town
office to ascertain whether any losses from the
Tollgate shares had been allowed. He found that they were not, for various
reasons;
in some cases because of the fact that it was a dividend stripping
operation.
The Court a
quo
held that the evidence given by respondent's three
witnesses made out "a
prima facie
case for the Commissioner to answer";
and that the evidence of Mr Coetzee did not constitute an acceptable answer
thereto.
45
In this connection the Court emphasized that the Commissioner
himself did not testify.
Appellant's counsel criticized the general approach of the Court a
quo
as constituting a "piecemeal process of reasoning" and he referred in this
regard to
R v Sacco
1958 (2) SA 349
(N), at 352 E-H and
Arthur v
Bezuidenhout & Mieny
1962 (2) SA 566
(A), at 574 A-B. I think there is
substance in this criticism and that the correct approach is to ask oneself
whether on a consideration
of all the evidence placed before the Court (about
which there is virtually no dispute) respondent discharged the onus of showing
that as at the time of assessment (1 April 1982) there was a practice generally
prevailing whereby the Commissioner allowed what
I have termed dividend
stripping losses. Moreover, I do not attach any significance to the failure of
the Commissioner himself to
give evidence.
46
In my opinion, respondent failed to discharge this onus. The
general impression created by the evidence is that there was a measure
of
uncertainty in the Department, or in certain sectors of the Department, about
the general question of the taxation of dividend
stripping operations, but that
at the same time there are indications that the policy was to disallow tax
losses incurred by companies
in this way. There is certainly not proof, in my
view, of a consistent and generally prevailing practice to allow dividend
stripping
losses.
To begin with, there is the
Nemoiim
case itself. As I have indicated,
in that case the additional assessments disallowing the dividend strippihg
losses were issued on
28 November 1980; and on 1 September 1981 the Commissioner
appealed against the adverse judgment of the Special Court, which had
been
delivered on 25 June 1981. (I have ascertained these latter dates from the
original record.)
47 This was all well before the critical date in this case
and tends to refute the respondent's case.
It is true that initially the extensive tax losses from dividend stripping
operations claimed by NA and the similar losses claimed
by Barname in respect of
the Edworks, ELDD, HMB, Ndumu and TH transactions were allowed by the Revenue
Department. But this evidence
loses much of its force when viewed against the
background of the audit system of assessment. Moreover, the negative response
received
by Barname from the Department in regard to its enquiry concerning a
possible purchase of Tollgate "A" ordinary shares, and the evidence
as to
internal departmental exchanges on the subject, point the other way. So does the
evidence relating to the enquiry dated 13
August 1981 directed to NA and the
internal memoranda in regard thereto. On the other hand the handbook itself does
not appear to
take the matter much further.
48
In respondent's own case the Receiver of Revenue, Cape Town,
on 20 August 1982 raised queries concerning the Tollgate and Anthracite
transactions and asked respondent,
inter alia
, to state why the losses
should be allowed for tax purposes. Although the revised assessments were issued
only on about 1 November
1983, respondent was notified on 7 September 1983 that
these losses were to be disallowed.
Then there is the further factor that whilst there are some thirty Receivers
offices in the country the admissible evidence led by
the respondent related to
the allowance of such losses by only one such office, viz the Johannesburg
office.
Respondent's counsel emphasized the fact that the
Nemoiim
case was
concerned with shares in private companies, whereas the transactions involved in
respondent's case related to shares in
public companies; and argued that
49
because of this difference the disallowance of the deduction
in the
Nemoiim
case in November 1980 did not run contrary to the
existence (alleged by respondent) of a generally prevailing practice to allow
dividend
stripping losses in regard to public companies. In support of this
proposition counsel made reference to secs 8C and 8D of the Act,
which apply
only to shares in private companies. This argument cannot succeed. I can see no
logical reason why a distinction should
be drawn between the case where a
taxpayer buys shares in a private company in order to receive a large dividend
and thereafter sell
his shares and the case where he does the same thing in
regard to shares in a public company. And the evidence does not indicate
that in
practice the Department drew any such distinction. In fact such indications as
there are tend to the contrary. Furthermore,
I cannot see upon what basis secs
8C and 8D can be used to show factually what the practice was at the
50
relevant time.
For these reasons I hold that it has not been showh that the original
assessment for the 1981 tax year was made in accordance with
a practice
generally prevailing at the time; and that consequently the appellant was not
precluded by sec 79(1), proviso (iii), from
issuing a revised assessment for
that year. That disposes of the issue upon which the appeal was fought both in
this Court and in
the Court a
quo
. It would seem, however, that the
revised assessment for 1981 does not apply the
Nemoiim
formula and that
it (and consequently those for 1982 and 1983) should be referred back to the
appellant for reassessment. This would
be in accordance with respondent's first
alternative ground of objection.
It is accordingly ordered that :-
(1)
The appeal be allowed with costs, such costs
51
to include the costs of two counsel.
(2) The order of the Special Court be set aside and there be substituted
therefor the following:
"The revised
assessments for 1981 and 1982 and the assessment for 1983 be referred back to
the Commissioner for reassessment, applying
to the 1981 assessment the formula
laid down in
C I R v Nemoiim (Pty) Ltd
1983 (4) SA 935
(A)".
M M CORBETT VAN HEERDEN JA)
GOLDSTONE AJA)