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[2000] ZASCA 179
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Commissioner for South African Revenue Services v Foodcorp Limited (134/98) [2000] ZASCA 179; 2000 (3) SA 614 (SCA) (31 May 2000)
THE SUPREME COURT OF
APPEAL
OF SOUTH AFRICA
Case number : 134/98
In the matter between :
THE COMMISSIONER FOR SOUTH AFRICAN
REVENUE SERVICES Appellant
and
FOODCORP LIMITED Respondent
CORAM : F H Grosskopf, Zulman, Streicher JJA, Melunsky
and Mthiyane AJJA
HEARD : 16 May 2000
DELIVERED : 31 May 2000
________________________________________________________________
JUDGMENT
INCOME TAX - WHAT CONSTITUTES “A MINING PROPERTY”
IN TERMS OF SECTION 37 OF INCOME TAX ACT - REFERRAL BACK TO
COMMISSIONER
FOR RE-ASSESSMENT
________________________________________________________________
MELUNSKY AJA/
MELUNSKY AJA
:
[1] The essential question in this appeal is whether
the provisions of s 37 of the Income Tax Act 58 of 1962 (“the
Act”),
read with par (j) of the definition of “gross
income” in s 1, apply to an amount of R20 million received by
the respondent
during the 1989 year of assessment. The amount was
paid to the respondent by Douglas Colliery Limited (“Douglas”)
pursuant to two contracts entered into on the same day, 12 July 1989
- R15 million in terms of one of the contracts (“the
coal
rights sale agreement”) and R5 million in terms of the other
(“the sale and assignment agreement”).
The appellant
(“the Commissioner”) contended that pursuant to the
contracts ownership of the respondent’s mining
property had
passed to Douglas, that s 37 of the Act applied to the transactions,
that development assets the cost of which had
previously been
allowed as a deduction to the respondent were included in the assets
transferred, and that the effective value
of the development assets,
as determined by the government mining engineer in terms of the
section, amounted to R12 498 078.
[2] The Commissioner included the sum of R12 498 078 in
the respondent’s gross income for the 1989 year of assessment
and
assessed the respondent accordingly. The respondent objected
to the assessment and appealed to the Special Income Tax Court,
Pretoria. The appeal was partially successful. In the view of the
Special Court the R5 million received in terms of the sale
and
assignment agreement was subject to the provisions of s 37 read with
the aforesaid par (j), but the R15 million received
under the coal
rights sale agreement was not. The court remitted the assessment to
the Commissioner for re-assessment on the
basis that only R5 million
was subject to the provisions of the said par (j) read with s 37(1)
and (2) of the Act. The President
of the Special Court (Southwood
J) granted the Commissioner leave to appeal directly to this Court
in terms of s 86 A(5) of the
Act against the decision that the R15
million was not subject to the aforesaid provisions and the
respondent noted a cross-appeal
against that part of the judgment
relating to the referral back to the Commissioner for re-assessment.
[3] The respondent is the owner of portions 1 and 2 of
the farm Klipfontein in the district of Middelburg. On 21 September
1977
it ceded a half share of the coal rights on the properties to
BP Southern Africa (Pty) Limited (“BP”). On 21 October
1982 BP, Douglas and the respondent (then known as Kanhym Estates
(Pty) Limited) entered into a written agreement in which they
recorded that they “shall be deemed to have ... associated
themselves as a joint venture” with effect from 16 June
1980.
The joint venture was formed for the purpose of carrying on coal
mining, prospecting and ancillary operations on land
known as the
Middelburg Mine. Each party to the agreement (referred to as “the
members” therein) undertook in terms
of clause 4.2.1 to
“
contribute to the joint venture their respective
coal rights as fully described in Annexure “A” hereto
....”
Annexure “A” contains a description of
various immovable properties, including portions 1 and 2 of
Klipfontein, and
a reference to the mineral rights held by each
party in respect of the properties. The coal rights which the
respondent contributed
to the joint venture consisted of its half
share of the coal rights on portions 1 and 2 of Klipfontein. The
respondent’s
share in the joint venture was fixed at 6.497%
and its “operating expenses obligations” was determined
at 5.867%.
[4] In terms of the sale and assignment agreement the
respondent (then known as Kanhym Limited) sold Douglas its interests
in
the joint venture for R5 million and in terms of the coal rights
sales agreement it sold to Douglas its rights to coal on portions
1
and 2 of Klipfontein for R15 million. It will become necessary to
refer to some of the terms of the agreements in due course
but for
the present it is sufficient to record that the agreements were
implemented by both parties.
[5] This is a convenient stage to refer to the
statutory provisions that apply to the appeal and cross-appeal.
Section 15(a)
of the Act allows a deduction from the income derived
by a taxpayer from mining operations in respect of capital
expenditure
as ascertained according to the provisions of s 36.
“Capital expenditure” is defined in s 36(11) and it
includes
expenditure on shaft sinking and mine equipment and on
development, general administration and management prior to the
commencement
of production. The expressions “capital
expenditure incurred” is defined in s 36(11) to mean the
amount (if any)
by which the capital expenditure during the period
of assessment in respect of a mine exceeds the sum of the amounts
received
or accrued during that period from disposals of assets the
cost of which has wholly or partially been taken into account for
the purposes of a deduction in respect of that mine.
[6] Paragraph (j) to the definition
of “gross income” in s 1 deals with recoupments of
capital expenditure by the
taxpayer. For the purposes of this
appeal it is sufficient to say that the paragraph provides that
amounts received by a taxpayer
during a year of assessment in
respect of the disposal of assets, the cost of which had previously
been taken into account as
a deduction under s 15(a) in respect of a
mine, is included in the taxpayer’s gross income to the extent
that the amount
so received exceeds the capital expenditure incurred
during the year of assessment in respect of that mine. The capital
expenditure
incurred during the year in question is determined
before applying the definition of “capital expenditure
incurred”
in s 36(11), thus resulting in the avoidance of
double taxation on the recoupments (see De Koker:
Silke
on South African Income Tax,
Memorial
Ed Vol II, par 16.4).
[7] The Commissioner, as I have indicated, was of the
view that a change of ownership of a mining property had occurred
pursuant
to the two agreements between the respondent and Douglas
and he applied the provisions of s 37 to the amount of R20 million
received
by the respondent. It is therefore desirable to set out
the terms of that section in full. At the relevant time s 37 read:
“
Calculation of capital
expenditure on change of ownership of mining property.
37. (1) For the purposes of this Act, whenever a
change of ownership of a mining property occurs the new owner shall
be deemed
to have acquired such preliminary surveys, boreholes,
shafts, development and equipment (in this section referred to as
the development
assets) as are included in the assets passing by
such change of ownership, at a cost equal to the effective value to
the new
owner of the development assets at the time the change of
ownership takes place, and the said cost shall be deemed to be
expenditure
that is incurred by the new owner during the period of
assessment during which the change of ownership occurs and to be
capital
expenditure which is in respect of such period required to
be taken into account for the purposes of the definition of ‘capital
expenditure incurred’ in section 36(11): Provided that if in a
case in which consideration is given, the effective value
of all the
assets so passing exceeds the consideration, the amount of such cost
and expenditure shall be deemed to be an amount
which bears to the
amount of such consideration the same ratio as such effective value
of the development assets bears to the
effective value to the new
owner at the said time of all the assets passing.
(2) For the purposes of par (j) of the definition
of ‘gross income’ in section 1 and section 36, the
person from
whom ownership of any mining property is acquired in
consequence of a change of ownership of that property shall be
deemed to
have disposed of the development assets included in the
assets passing by the change of ownership for a consideration equal
in
value to the cost of the development assets to the new owner, as
determined under subsection (1), and such consideration shall
be
deemed to have been received by or to have accrued to the said
person at the time the change of ownership takes place.
(3) If the value of the consideration given or of
the property passing where no consideration is given is in dispute,
it may
with the consent of the new owner be fixed by the
Commissioner and shall failing such consent be determined in the
same manner
as if transfer duty were payable.
(4) The effective value at the time the change of
ownership takes place, of all the assets passing and of the
development
assets included therein shall be determined by the
Government Mining Engineer who shall notwithstanding the repeal of
the Second
Schedule to the Transvaal Mining Leases and Mineral Law
Amendment Act, 1918 (Act No. 30 of 1918), for the purposes of such
determination
have all the powers which were conferred upon him by
the provisions of that Schedule.”
[8] In terms of s 37 the government mining engineer
determined the value of the development assets sold at almost R18,2
million
and the effective value of all the assets passing at
slightly more than R29 million. By applying the formula contained
in the
proviso to s 37(1), the value of the development assets
passing was fixed at R12 498 078, the amount which the Commissioner
included
in the respondent’s gross income. It is to be
observed that in terms of s 37(1) the effective value of the
development
assets ranks as “capital expenditure incurred”
in the hands of the transferee and the same amount, for the purposes
of par (j), is deemed to be a recoupment in the hands of the
transferor in terms of s 37(2). Interestingly enough, clause 7.6
of
the sale and assignment agreement contains an undertaking by Douglas
that it would not, without the respondent’s written
consent,
“... claim as a deduction any portion of the
purchase price (R5 million) in terms of any provision of the Income
Tax Act,
1962, as amended.”
The only witness to testify before the Special Court,
the respondent’s group financial adviser, Mr Payne, gave an
explanation
for the inclusion of clause 7.6. He said that the
respondent considered that the sale and assignment agreement would
not result
in a recoupment of capital expenditure in the
respondent’s hands in terms of s 37 and for this reason
Douglas was apparently
prevailed upon not to claim the deduction.
It is not clear, however, whether Douglas, too, believed that s 37
did not apply
and abandoned its right to claim the deduction on this
ground but there is no need for anything further to be said on that
matter.
[9] The court
a
quo
decided that
the provisions of par (j) read with s 37 did not apply to the coal
rights sale agreement on the grounds that coal
rights, which were
the subject matter of the sale, were not defined as capital
expenditure in terms of s 36. On the other hand,
the Special Court
held that the respondent’s interest in the joint venture,
which was sold in terms of the sale and assignment
agreement,
included the respondent’s rights to development assets. The
parties agreed before the court
a
quo
that such a
finding would have the result that the provisions of par (j) and ss
37(1) and (2) of the Act should be applied to
the sum of R5 million.
It was on this basis that the matter was remitted to the
Commissioner for re-assessment.
[10] In this Court it was argued on the Commissioner’s
behalf that the two contracts - the coal rights sale agreement and
the sale and assignment agreement - were in substance one
transaction in terms whereof the respondent sold its assets and
rights
connected with the joint venture to Douglas for R20 million.
Consequently, according to the argument, it was artificial to
separate
the two agreements and to apply the provisions of s 37 to
one and not to the other. Moreover, it was submitted that the
subject
matter of the transaction was “a mining property”
for the purposes of s 37 and the Commissioner was therefore entitled
to assess the respondent in terms of the section as he had done.
[11] There is considerable substance in the first part
of the argument. Indeed, it has not been properly explained why the
parties
found it necessary to enter into two contracts. In both
instances the seller was the respondent and the purchaser Douglas.
The subject matter of the sales were similar, if not identical. On
the respondent’s behalf it was argued that different
parties
were involved in the contracts as another company, Witbank Colliery
Limited (“Witbank”) was a party to both
agreements while
BP and Kanhym Investments Limited (the respondent’s holding
company) were additional parties to the sale
and assignment
agreement. The joining of the extra parties hardly necessitated
separate agreements. BP and Kanhym Investments
Limited apparently
became parties to the sale and assignment agreement as they were
parties to the joint venture agreement.
Witbank undertook to
perform all of Douglas’ obligations under the sale and
assignment agreement in the event of the latter’s
default and
this was the reason why it became a party thereto. The reason for
Witbank’s participation in the coal rights
sale agreement is
unclear as it acquired no rights and incurred no obligations
thereunder.
[12] The subject matter of the coal rights sale
agreement was the respondent’s rights to coal in, on and under
portions
1 and 2 of Klipfontein. The purchase price of R15 million
was allocated as to R5 million for the rights to coal on portion 1
and R10 million for the coal rights on portion 2. Douglas was also
granted certain surface rights and rights ancillary to mining
on the
properties including the rights which a holder of mineral rights may
be entitled to exercise in law. For its part Douglas
agreed that it
would not be entitled to exercise the rights “in respect of
coal ... in any manner other than as contemplated
in the [joint
venture] agreement”, and also undertook in terms of clause
3.5.2.1 that
“
The rights to coal acquired by it in terms of
this agreement shall be made available by it to the joint venture
...”
[13] The sale and assignment agreement recorded that
the respondent had agreed to sell to Douglas all of its rights, save
for
certain rights that were excluded, in the following agreements:
“
The MJV documents, the sales agreement and in
respect of the SATS loan.”
“
The MJV documents” denotes the joint
venture agreement and an operating agreement relating to the
development and operation
of the Middelburg Mine. “The sales
agreement” refers to an agreement between the members of the
joint venture whereunder
BP undertook to market the coal from the
Mine. For the purposes of this agreement BP undertook to make use
of its provisional
export licence and its port allocation at the
Richards Bay Coal Terminal (”The RBCT”). “The
SATS loan”
relates to money lent to the South African
Transport Services (SATS) in connection with the construction of a
railway link.
At the time of the sale and assignment agreement, the
respondent was owed R825 000 in respect of the SATS loan. In terms
of
clause 6.1.3 of the sale and assignment agreement, all of the
respondent’s rights under the MJV documents were ceded to
Douglas. These rights included, specifically, the right
“
to take delivery ... of an to sell for its own
account, [the respondent’s] entitlement to coal in terms of
the MJV agreement.”
[14] Douglas and the respondent agreed, in terms of the
sale and assignment agreement, that the purchase price of R5 million
consisted
of the respondent’s unredeemed contribution to the
SATS loan of R825 000 and the purchase price of the respondent’s
rights in the sales agreement, including its right in respect of the
RBCT entitlement, “subject to a maximum of R4 175
000".
The balance of the purchase price, if any, was to be paid “as
the purchase price of the rights referred to
in [clause] 6.1.3".
In effect, therefore, no value was given for the redeemable assets,
i.e. the capital expenditure as
defined in s 36(11). Mr Payne
conceded that no value was given for those assets. Moreover, and
while the respondent’s
rights to coal were transferred to
Douglas in terms of the coal rights sale agreement, the same rights,
which were part of the
respondent’s contribution to the joint
venture, were apparently sold to Douglas in terms of clause 6.1.3 of
the sale and
assignment agreement. What seems to be clear, however,
is that, save for the immovable properties on which the mining was
carried
on, all of the respondent’s mining assets and
interests in the said properties passed to Douglas in terms of the
two agreements.
Mr Payne agreed that this was the case. The
Special Court, in my view, erred in treating each of the two
contracts as unrelated
or separate transactions. Perhaps the
Special Court adopted this approach because the Commissioner’s
representative accepted
“that he could not argue that the
transactions were simulated transactions”. However that may
be, I am satisfied
that counsel for the Commissioner in this court
was correct in submitting that on the face of it the respondent sold
its rights
and assets in the joint venture, save for the immovable
property, to Douglas for R20 million.
[15] The second part of the
Commissioner’s argument - that the subject matter of the two
transactions was “a mining
property” for the purposes of
s 37 is, however, not correct. The words “mining” and
“mining operations”
are defined in the Act but the
expression “mining property” is not. It is true, as
counsel for the Commissioner
emphasised, that the word “property”
is capable of a variety of meanings (cf
Commissioner
for Inland Revenue v Estate Crewe and Another
1943 AD 656
at 667), but it is not merely the word “property”
which requires to be considered in this appeal. In its ordinary
sense the phrase “a mining property” relates to a
property (i.e. land) on which mining is carried on. This was the
meaning given to the same expression in the High Court of Australia
by Kitto J in
Commissioner
of Taxation of the Commonwealth of Australia v Broken Hill
Proprietary
Company Limited
[1968] HCA 16
;
(1969) 120 CLR 240
at 245. The learned judge said:
“
The word ‘property’ seems here to be
used in its popular sense of land considered as a subject of private
rights,
and accordingly ‘a mining property’ may be
defined as land which a person is mining in exercise of a private
right,
either his own right or (by licence) a right vested in
someone else.”
Although an appeal against the
judgment was partially successful, Kitto J’s definition was
endorsed by the Full Court which
also considered mining property to
be land on which mining, or at least some steps for mining, was
undertaken (at 271). The
Broken
Hill
case was
concerned with the meaning of “a mining property” in a
section of an Australian Income Tax statute which
differed
completely from s 37 of the Act. It is obvious that the same
meaning cannot be mechanically attributed to identical
words used in
different statutes but the decision in the Australian case is
illustrative of a sense in which the words may be
used if the
context so permits and it shows that both Courts had no hesitation
in concluding that the words referred to land.
[16] Counsel for the Commissioner contended that the
mineral rights and the other mining assets which the respondent
transferred
to Douglas constituted a mining property within the
meaning of that expression in s 37. It was therefore submitted that
the
transfer of a right to carry on mining operations amounted to a
transfer of a mining property. It may be accepted, as counsel
argued, that one of the objects of the section is to enable the
Commissioner to apply a value to development assets where the
parties to an agreement do not do so. This, however, is no
justification for extending the sense of the words in the section
beyond their proper meaning. There are clear indications in the
section that the legislature intended the phrase to apply only
to
land on which mining was carried on. For the purposes of this
judgment I leave aside the question of whether the word “ownership”
in the section might be applied to all rights, both personal and
real, and also to physical property. It will also be assumed
that,
in an appropriate context, the word “property” may
include property of every description, including rights.
It is not
readily conceivable, however, that the phrase “a property”
can apply to anything other than an immovable
property. If it is
assumed, therefore, that the transfer of mineral rights and the
right to conduct mining operations might,
in an appropriate case, be
described as a transfer of mining property, such transfer cannot be
characterised as a change of ownership
of “a mining
property”. On a proper interpretation the latter expression
in s 37 means land on which mining is
carried on.
[17] It is not disputed that the properties known as
portions 1 and 2 of Klipfontein remained registered in the
respondent’s
name at all relevant times and that no part of
the land was transferred to Douglas. It follows that the
Commissioner’s
assessment was incorrect to the extent that he
relied upon s 37 to establish the amount received by the respondent
for the development
assets. He should have determined the amount
received by the respondent in respect of the disposal of assets
according to the
provisions of par (j) without regard to s 37. To
fix this amount will probably require further investigation into the
circumstances
surrounding the two agreements whereunder the
respondent’s mining interests were sold. The amount, if any,
which is ultimately
determined by the Commissioner in respect of the
disposal of the assets might differ considerably from the amount
which the respondent
was deemed to have received in terms of s
37(2). It would therefore be appropriate to remit the matter to the
Commissioner for
further investigation and assessment.
[18] On the respondent’s
behalf it was argued that the respondent did not dispose of assets,
the costs of which had previously
been included in capital
expenditure under s 15(a). What the respondent disposed of, it was
submitted, was its participating
interest in the joint venture
agreement and that this interest amounted to “a bundle of
rights” and not to the underlying
assets. This submission was
based on remarks made in
Desai
and Others v Desai and Another
1993 (3) SA 874
(N) at 881B-C to the effect that a partner’s
interest in a partnership, “that is the bundle of rights of
action where
the existence of such interest persists”, does
not include immovable property for the purposes of the Contracts of
Sale
of Land Act 71 of 1969. That is not the issue that arises in
this appeal. This Court has to decide which assets of the members
became joint venture assets in terms of the joint venture agreement
and the answer depends upon the terms of the agreement.
Clause
5.3.3 of the agreement reads:
“
The assets shall be owned by the members in the
proportions of their perspective percentage shares in the joint
venture and in
the event of any asset being disposed of during the
operation the net proceeds of such disposal will be distributed to
the members
in proportion to their participation interests.”
The agreement defines “assets” as the
mining facilities and all other property, movable, immovable and
incorporeal,
developed, constructed, held or acquired by the members
or any of them in connection with the joint venture (excluding
saleable
coal which is referred to in clause 5.4). The agreement
defines “participation interest” as follows:
“
(i) each Member’s respective interest (as
determined in accordance with sub-clause 5.3 hereof) in the Assets;
and
(ii) each Member’s Coal and surface rights
referred to in Clause 4 hereof and other rights and obligations
under this Agreement
(save and except each Member’s respective
Operating Expenses Obligation) and where the context so requires,
each Member’s
percentage share for the time being in the Joint
Venture.”
[19] It is clear from the aforesaid
provisions that the members were to become joint owners of all of
the assets as defined.
For the movables to become the joint
property of all of the members it was sufficient for each member to
hold the assets in co-ownership
without physical delivery; but
ownership in the immovable properties did not pass as registration
of transfer was not effected
(cf
Berman
v Brest and Another
1934 WLD 135
at 138-9). It is also clear that a sale of a member’s
participation interest (which is dealt with in clause 14 of the
agreement) includes a sale of the assets. This follows from the
definitions and from clause 5.3.3. That the parties intended
co-ownership of the movable assets to occur is underscored by clause
5.4 which provides that the saleable coal was regarded as
each
member’s “own and absolute property”.
[20] In my view, therefore, the provisions of par (j)
apply to the disposal of at least some of the assets which were
transferred
to Douglas in terms of one or both of the agreements.
[21] As a result of the aforegoing, the appeal should
be dismissed. The cross-appeal succeeds to the extent that the
Commissioner,
in reconsidering the matter, should do so without
regard to the deeming provisions of s 37.
[22] On behalf of the Commissioner it was submitted
that costs should be reserved in the event of this Court deciding to
refer
the matter back to the Commissioner. This submission cannot
be acceded to. Quite apart from all other considerations, the
matter
is no longer pending in any court. The costs of the appeal
should, therefore, be paid by the Commissioner. As far as the costs
of the cross-appeal are concerned, the respondent was wrong in
contending that there was no sale and that the matter should not
be
referred back. This contention was argued fully both in the heads
of argument and in the oral submissions. As the respondent
fails on
this issue it seems to me that it would be reasonable to make no
order as to costs in respect of the cross-appeal.
The order which
is made is the following:
The appeal is dismissed with costs;
The orders of the
court
a quo
are set aside;
There is no order as to the costs of the
cross-appeal;
The Commissioner’s assessment is referred
back for investigation and re-assessment in respect of the
receipt of R20
million by the respondent, such re-assessment to be
made without the application of the provisions of s 37 of the Act.
............................
L S MELUNSKY
ACTING JUDGE OF APPEAL
Concur:
F H Grosskopf JA
Zulman JA
Streicher JA
Mthiyane AJA