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[1990] ZASCA 166
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Estate Late AG Bourke v Commissioner for Inland Revenue (249/89) [1990] ZASCA 166; [1991] 4 All SA 94 (AD) (30 November 1990)
Case No. 249/89
IN THE SUPREME COURT OF SOUTH
AFRICA APPELLATE DIV
ISION
In the matter between:
ESTATE LATE A G
BOURKE
Appellant
And
COMMISSIONER FOR INLAND REVENUE
CORAM:
HOEXTER, BOTHA,
NESTADT, GOLDSTONE, JJA et PREISS, AJA
HEARD:
1 November 1990
DELIVERED:
30 November 1990
HOEXTER, JA
2
HOEXTER,
JA,
This is an
appeal, in terms of sec 86A(5) of the
Income Tax
Act No 58 of 1962 ("the Act") against a decision of the
Cape Income Tax Speclal Court. The late Mrs A G Bourke
("the
taxpayer") was a widow resident in Cape Town. She derived income
from investments, rentals and certain farming interests.
The
appellants in this appeal are the executors in the taxpayer's estate.
The respondent is the Commissioner for Inland Revenue ("the
commissioner").
During the
year of assessment ended on 28 February 1982, and in connection with
her farming interests, the taxpayer received by way
of compensation
an amount of R109 924,00 ("the accrual"). The events
leading up to the accrual will be mentioned later
in this judgment.
In a revised assessment dated 1 November 1984 the commissioner
included the accrual as part of the taxpayer's taxable
income. On
behalf of the taxpayer an objection
3
was lodged
with the commissioner against the inclusion of the accrual as part of
the taxpayer's taxable income. The commissioner disallowed
the
objection. In February 1985 the taxpayer appealed to the court below
against the commissioner's disallowance of her objection.
The
taxpayer died in March 1985, whereafter the appeal to the court below
was pursued by the appellants.
For
purposes of the appeal to the special court there was prepared an
"Agreed Statement of Facts and Issues" to which reference
will hereafter be made as "the statement of facts". At the
end of argument in the court below only one issue fell to be
decided.
That issue was decided against the taxpayer. Hence the present
appeal.
The
essential facts fall within a small compass. Mr Bernard John Bourke
("Bourke") was at one time the owner of seven Lowveld
farms
("the property") in the district of Nelspruit, Transvaal.
Bourke leased three of the farms
4
forming part of
the property to the members of the Mayo Timber Syndicate ("the
syndicate"). It would appear
that at
some time after January 1971 the ownership of the property was
transferred from Bourke to the Bernard Bourke Trust ("the
trust"). For some years before 1979 the trust and the syndicate
had carried cm the business of timber plantation growers on
the
property. The plantations consisted of pine trees and gum trees. They
also farmed with fruit trees on the property. The aforesaid
business
was carried on by the syndicate on the three farms of which it was
the lessee, and by the trust on the balance of the property.
The taxpayer was the beneficiary
of one-half of the trust. In turn the trust held a one-seventh share
in the syndicate. In her own
right, furthermore, the taxpayer held a
one-seventh share in the syndicate.
Adjoining the property was a farm
("the
5
neighbouring farm") owned by
the company H L Hall and Sons
Ltd ("Hall"). On 26 June
1979 a fire started on the
neighbouring farm. It spread to
the property where it
destroyed many trees. As
compensation for the destruction
of the trees Hall paid the trust
and the syndicate two
amounts totalling almost R336
000,00. By virtue of her
interests in the trust and the
syndicate the taxpayer
received a share of the
compensation so paid. It is
common cause that if the
compensation received by the
trust and by the syndicate from
Hall represented income in
their hands, then the accrual
represented income in the
hands of the taxpayer.
In para 9 of the statement of
facts it was agreed
that -
"...the total amount of
compensation received by the appellant" (the taxpayer) "can
be apportioned as follows:
6
For the loss of pine trees R102
553,00
For the loss of gum trees R 4
160,00
For the loss of avocado pear
and pecan nut trees
R
3 211,00
R109 924,00"
In the initial objection to the
commissioner's
revised assessment and in the
appeal before the court below
it was contended on behalf of the
taxpayer that no portion
of the accrual was subject to tax
since it was a receipt of
a capital nature. In sec 1 of the
Act the definition of
"gross income" reads as
follows:-
"
'gross income'
, in
relation to any year or
period of assessment, means, in
the case of any
person, the total amount, in cash
or otherwise,
received by or accrued to or in
favour of such
person during such year or period
of assessment
from a source within or deemed to
be within the
Republic, excluding receipts or
accruals of a
capital nature, but including,
without in any way
limiting the scope of this
definition, such
amounts (whether of a capital
nature or not) so
received or accrued as are
described hereunder,
namely:-
...."
(Paras (a) to (n) of the
definition then follow).
7
It was not contended on behalf of
the commissioner that the
present case is covered by any of
the provisions set forth
in paras (a) to (n) of the
definition.
In para 10 of the statement of f
acts it was
agreed -
"...that the amount of R3
211,00 in respect of
the loss of the avocado pear trees
and the pecan nut trees was a receipt of a capital nature."
At the outset of the appeal in the
court below a further
concession was made on behalf of
the commissioner, namely,
that the compensation for the loss
of the gum trees was
likewise a receipt of a capital
nature. The propriety or
otherwise of the last-mentioned
concession is not an issue
in the appeal before this court.
Accordingly the only issue which
remained for
decision in the court below was
whether the amounts
received by the trust and the
syndicate for the loss of the
pine trees were receipts of a
capital nature within the
8
meaning of "gross income"
in sec 1 of the Act. In terms of
sec 82 of the Act the burden of
proof that such
compensation was a receipt of a
capital nature rested upon
the taxpayer. The court below came
to the conclusion that
the compensation for the loss of
the pine trees could not
be regarded as receipts of a
capital nature. The outcome
was - to quote from the judgment
of the learned President
(BERMAN, J) in the court below:-
"...that save insofar as the
gum trees are concerned (where the appeal was conceded by the
Commissioner at the commencement of
the hearing) the appeal, which
was confined to the question of the pine trees, is dismissed."
At the date when the fire
destroyed trees on the
property there existed and there
was being duly performed a
written agreement ("the
contract") between the trust and
the syndicate as sellers and a
company known as Densa
Sawmill (Pty) Ltd ("Densa")
as buyer. The contract, which
had been concluded in January
1971, related to the sale of
9
the yield of pine sawlogs on the
property. The full terms of the contract need not here be stated.
Suffice it to say that in terms
thereof:-
the trust and the syndicate
agreed to sell to Densa the total yield of pine sawlogs (as
specified in the contract) "which shall
be produced on a
sustained basis" from the forestry activities of the trust and
the syndicate on the property;
the pine sawlogs aforesaid were
divided into certain classes according to age, diameter and length,
and the prices of the various
log classes were defined;
the sellers would deliver the
pine sawlogs to the buyer at the plantation road and payment
therefor would be made by Densa within
30 days of the date appearing
on the monthly statements submitted by
10
the sellers to the buyer.
Both in the court below and in
this court the appeal was argued on behalf of the appellants by Mr
Blignault. In both courts he advanced
substantially the same argument
in support of his submission that in respect of the pine trees lost
in the f ire the compensation
received by the trust and the syndicate
was a receipt of a capital nature and therefore not subject to tax.
Starting with the well-established
principle that money received by a
taxpayer as compensation for the loss of what is "an
income-producing structure" is
a receipt of a capital nature,
the kernel of the argument of counsel for the appellants came to the
following: In terms of the contract
the trust and the syndicate would
have received income from the pine trees destroyed in the fire only
after they had been felled;
before actual felling the pine trees
standing on the property were an integral part of the
11
income-producing structure of the
trust and the syndicate.
In the court below the
commissioner's representative countered the above argument by
contending that the pine trees simply represented
a crop produced by,
but separate from, the income-producing structure of the timber
growers; such structure consisted of the ground
on which the pine
trees grew.
The special court rejected the
appellants'
contention. In the course of his
judgment the learned
President remarked as follows:-
"A pine tree does not fall
within the category of sylva caedua in that, as pointed out earlier,
it does not, upon being felled,
grow again. The loss of the pine
trees as a result of the fire is to be equated with the loss of the
actual peaches or apples of
the fruit-farmer, and not with the loss
of the peach trees or apple trees themselves. The pine tree is the
fructus of the land, as
the fruit is that of the fruit tree, cf ITC
No.
596, SATC 261.
There can be no difference between the case where
fruit is destroyed whilst unpicked and that where it has already been
picked and
packed, and the fact that in the instant case the pine
trees were still
12
standing and had not yet been
felled and
delivered to Densa cannot alter
their
'status'. The pine trees destroyed
by the fire, standing and unfelled, did not form part of the
income-producing machines of the Trust
and the Syndicate, as did the
other varieties of trees destroyed in the same fire, for these other
varieties of trees were, for want
of a better word,
self-replenishing; had they not been destroyed they would have
continued to yield crops and they thus constituted
'income-producing
machines'. On the other hand by no stretch of the imagination can
pine trees be so described for they did not constitute,
when
standing, 'income-producing machines' manufacturing or producing
goods (or fruit); they constitute themselves the fruit of the
land,
whether standing thereon or in the form of logs."
The phrase "receipts or
accruals of a capital nature" which occurs in the definition of
"gross income" already
quoted is not defined elsewhere in
the Act; and, understandably perhaps, the courts have not attempted
any exhaustive definition
of it. The question whether an accrual is
to be categorised as capital or income falls to be decided on the
facts of each particular
case.
When the receipt in question
represents
13
compensation to the taxpayer, a
test which is sometimes
applied is to ask the question
whether the compensation was
designed to fill a hole in the
taxpayer's profits, or
whether it was intended to fill a
hole in his assets. Cf
Burmah Steam Ship Co Ltd v CIR,
16
TC 67.
However, as
pointed out by Broomberg, Tax
Strategy, 2nd ed (1983) at
199 - 200, the fact that what is
plugged is a hole in
assets, does not by itself,
conclude the inquiry -
"Of course, it is not
sufficient to establish that the compensation is being paid in order
to fill a hole in the taxpayer' s
assets. It is necessary, in
addition, to ascertain the true nature of that asset in the
recipient's hands. More particularly, was
the asset, prior to its
destruction or damage, an asset of a capital nature or was it
floating capital? If it was floating capital,
such as trading stock,
standing crops, or consumable stores (like petrol, oil and so forth)
the compensation will, obviously, be
of a revenue nature, and will be
subject to tax. In short, it is only where the payment received is to
fill a hole in the capital
assets of the taxpayer that the payment
will escape the tax net."
In the context of the present case
it is useful to remember
14
that in sec 1 of the Act "trading
stock" is widely defined
as including -
"...anything produced,
manufactured, purchased or in any other manner acquired by a taxpayer
for purposes of manufacture, sale
or exchange by him or on his
behalf, or the proceeds from the disposal of which forms or will form
part of his gross income."
The distinction between "fixed"
and "floating" (or
"circulating") capital
which is so frequent a topic of
discussion in tax cases, is not a
distinction drawn in the
Act, or its predecessor, and the
same position applies in
the Companies Acts of the United
Kingdom. See: Ammonia
Soda Company Ltd v Chamberlain
(l918)
1 Ch 266
(CA) at
286. It is a distinction derived
from writers on
political economy. The distinction
has, however, become
entrenched in tax law, and its
essence is described thus by
RABIE, JA in Sekretaris van
Binnelandse Inkomste v Aveling
1978(1) SA 862 (A) at 880 E-F:
"Soos blyk uit die aanhaling
hierbo", (CIR v
15
George Forest Timber Co Ltd
1924
AD 516
at 524)
"het 'n mens in die geval van
vaste kapitaal 'n
element van permanentheid, in die
sin dat daar 'n
bedoeling is om die betrokke bate
min of meer permanent te hou met die doel dat dit inkomste moet
voortbring. Kenmerkend van bedryfskapitaal
daarenteen is 'n bedoeling
om die betrokke bate voortdurend in kontant of ander goed om te sit."
Having regard to the crisp issue
which arises in
the present appeal, certain
aspects of the distinction
between the two categories of
capital thus recognised in
tax
law should,
I
think,
be stressed at the outset. The
first is this. The labelling of
capital in either
category at a given time and in a
particular situation does
not impart any ingrained
character* incapable of
fluctuation, to the capital
involved. The mutability of
the nature of capital is neatly
put by SWINFEN EADY, J in
the Ammonia case (supra) at 287 in
the following words:-
"It must not, however, be
assumed that the division into which capital thus falls is permanent.
The language is merely used to
describe the purpose to which it is
for the time being appropriated."
16
Second, what must be steadily
borne in mind is that the
assignment of capital to the one
or other category -
" .... depends in no way upon
what may be the nature of the asset in fact or in law. Land may in
certain circumstances be circulating
capital. A chattel or a chose in
action may be fixed capital. The determining factor must be the
nature of the trade in which the
asset is employed. The land upon
which a manufacturer carries on his business is part of his f ixed
capital. The land with which
a dealer in real estate carries on his
business is part of his circulating capital."
(per ROMER, LJ in Golden Horse
Shoe (New), Limited v
Thurgood (H M Inspector of Taxes)
(l934)
1 KB 548
(CA) at
563.)
Cases not
infrequently occur in which the facts are such that the line of
demarcation between fixed and floating capital is somewhat
blurred
and difficult to draw with precision.
I
do
not think that the facts of the present case present any real
difficulty. The argument for the appellants focuses in the main on
the legal nature of the
17
asset for which compensation was
paid (the pine trees standing on the property and, prior to felling,
adhering thereto). Now it is
trite that the planting of land and the
taking root thereon of trees provides an example of industrial
accession. The trees are incorporated
into the soil which nurtures
them. But here the inquiry relates not to the legal status, in the
law of things, of the crop on the
. property but exclusively to the
nature of the business carried on by the trust and the syndicate in
relation to such pine trees.
The trust and the syndicate farmed with
the pine trees in order to derive income therefrom.
In determining whether the
compensation paid for the loss of the pine trees is income or
capital, the feature of the case that prior
to severance from the
soil the pine trees adhered to the property and that the pine trees
were converted into income only after they
had been
18
felled is an
entirely irrelevant circumstance. It is clear, in my opinion, that
the pine trees on the property represented a trading
asset of the
trust and the syndicate no less before they were felled than after
they were felled and delivered to Densa as sawlogs.
Mr Seligson, who,
with Mr Kuschke, argued the appeal for the commissioner in this
court, submitted that the conclusion just stated
was reinforced by
the consideration that in terms of the contract the entire yield of
logs from the pine trees was "pre-sold"
to Densa. It seems
to me, with respect, that the pre-sale does not really advance the
case for the commissioner. It is unnecessary,
I
think, to look beyond the fact that having
regard to the essential nature of the business of the trust and the
syndicate the pine
trees on the property constituted trading stock as
defined in sec 1 of the Act. On the grounds undermentioned
I
am unable to agree with some of the
reasoning which impelled the special
19
court to conclude that the pine
trees standing on the property formed no part of the
"income-producing structure" of the
trust and the
syndicate; but in my respectful view the result at which the special
court arrived was correct. In my opinion the pine
trees, even before
felling, clearly constitutêd floating capital in the business.
As appears from
that portion of its judgment already quoted, the special court
appeared to regard as significant the fact that a pine
tree does not
fall within the category of sylva caedua. In argument before us
counsel on both sides were agreed, correctly
I
think, at least in regard to one matter:
that the arboricultural distinction between trees which are sylva
caedua and those which
are not, is unhelpful to a determination of
the appeal. It is true that in ITC 596,
14 SATC 261
, to which the
judgment of the court below makes reference in this connection, one
ground upon which the appeal succeeded
20
was that since pine trees are not
sylva caedua their
proceeds could not be regarded as
fructus of the land. In
passing
I
would mention that in the context of cases
such
as the present one use of the word
"fruits" or "crops" is
to be preferred to the word
"fructus" because the latter
sometimes.carries technical
overtones, and in its widest
acceptation signifies the
equivalent of any enjoyment or
pecuniary advantage. See Goudsmit,
Pandects (1873), Gould
translation, at 110 note 5.
However that may be, the
distinction between trees which
are sylva caedua and those
which are not, appears to me to be
irrelevant to the matter
in issue. As examples of fructus
naturales brought forth
from nature from a fruit-bearing
thing, Lee & Honoré,
Family, Things and Succession, 2nd
ed par 228 (at page 234)
include also -
" trees grown to provide
firewood or timber
irrespective of whether they
have the
quality of renascentia i e whether
they sprout again when cut down as in the case of gum trees,
21
or not."
I
agree, further, with the submission of Mr
Seligson that the ratio for the finding in ITC 596 (supra) was
directly related to the question
whether the taxpayer in that case
had engaged in the business of cutting the timber and selling the
product. In the result the President
(INGRAM, KC) found that the
appellant company had not engaged in such business; and (at 262) that
the sale of the timber in question
was simply the realisation of part
of an asset and its conversion into cash.
Returning to
the judgment of the special court in the instant case,
I
respectfully agree with the view therein
expressed that the loss of the pine trees is akin to the loss of the
apples from an apple
tree rather than to the loss of the apple tree
itself. In the case of an apple orchard the income-producing
structure has a dual
component : the soil on which the apple trees
stand and the
22
apple trees from whose branches
the apples hang. The crop is the apples which are picked. In the
present case the crop is the pine
trees. The income-producing
structure was here the soil of the property on which the pine trees
stood. What was destroyed was simply
the crop. There was no
sterilisation of the capital asset, the property, which could
forthwith have been replanted to pine trees
to produce further
"crops" or "fruits".
For the sake of completeness it is
necessary to deal briefly with a trilogy of decisions in this court
from which Mr Blignault extracted
various dicta which, so it was
urged, were destructive of the commissioner's argument that the
compensation paid for the loss of
the pine trees represented income.
The three decisions are respectively Commissioner for Inland Revenue
v George Forest Timber Co
Ltd
1924 AD 516
("the George Forest
case"); Crowe v Commissioner for Inland Revenue
1930 AD 122
"the
Crowe
23
case"); and Baikie v
Commissioner for Inland Revenue
1931
AD 496
("the Baikie case").
In the George Forest case the
decision of this
court was unanimous, but separate
judgments were delivered
by INNES, CJ and DE VILLIERS, JA.
In the course of his
judgment (at 523) the learned
Chief Justice sounded a
warning which has been echoed in
many subsequent tax
decisions:-
"It is dangerous in income
tax cases to depart from the actual facts; the true course is to take
the facts as they stand and
apply the provisions of the statute."
Having regard to the thrust of the
appellants' argument in
the present appeal another
cautionary precept might not be
out of place. When guidance is
sought from judicial
utterances in earlier decided
cases their true significance
and their value in solving the
matter under consideration
has to be assessed with a careful
regard to the particular
issue involved in the earlier
case; and the precise scope
24
of the inquiry upon which in such
earlier case the court had embarked. Dicta wrested from a completely
alien context are unhelpful
and may be misleading.
In the George Forest case the
taxpayer was a company which carried on business as timber merchants
and sawyers. For the purpose of
its business it acquired 600 morgen
of natural forest. For practical purposes the value of the land
without the forest was negligible.
The company annually felled a
quantity of timber. This was sawn up in its mill and sold as part of
its trading stock. In the calculation
of its taxable income the
company claimed to deduct a sum representing the proportion of the
cost of the forest reiative to the timber
felled in that year. This
court held that the total amount received from the sale of
stock-in-trade in the course of the business
of the company fell
within the definition of "gross income"; that no part of
its receipts constituted receipts of a
25
capital nature; and that no
deduction was permissible from
those receipts by way of
provisions for redemption of
wasting capital. One of the issues
which arose was whether
the price paid by the taxpayer for
the af forested land
represented expenditure "of a
capital nature" (see 525).
In this connection Mr Blignault
called our attention to the
following dicta in the George
Forest case. At 526 INNES,
CJ observed:
"No doubt the trees
constituted the chief value of the property, and formed the
inducement for its acquisition. But the same
might be said of the
stone or the clay in land purchased for the purpose of a quarry or a
brickfield. They formed part of the realty
to which they acceded, and
they passed with it.
Now, money spent in creating or
acquiring an income-producing concern must be capital
expenditure "
And at 530 DE VILLIERS, JA
stated:-
"The land, with its
accessories, forms a portion of the fixed capital of the company to
be used in its business for the purpose
of producing income. The cost
of such land, therefore, must be considered as an outgoing of a
capital nature,
26
for it went to purchase property
which was added to the fixed capital stock of the company."
Having regard to the issues in the
George Forest case the
above-quoted dicta appear to me to
have no relevance
whatever to the question whether
in the instant case the
pine trees standing on the
property represented the
taxpayer's floating capital and
trading stock.
In Crowe's case the taxpayer
wished to buy a farm
on which a mature wattle
plantation already stood, but he
had insufficient money to pay the
purchase price. Two
companies, one of which dealt in
wattle-bark and the other
in timber, were interested in
securing the produce of the
plantation but not in the purchase
of the property itself.
With these two companies the
taxpayer conciuded agreements
to buy the wattle-bark and the
timber for the eventuality
that he should acquire the farm;
and he also secured a
contract for the felling ánd
stripping of the wattle trees
at a remuneration. Armed with
these contracts the
27
taxpayer bought the farm and
proceeded to fell and strip the plantation, delivering the bark and
timber to the companies which had
bought them. The proceeds so
received for the bark and timber were paid immediately by the
taxpayer to the seller of the farm on
account of the purchase price.
By a majority decision this court held that, in the particular
circumstances of the case, the plantation
had been sold as a portion
of the capital asset acquired; and consequently that the amount
received by the taxpayer for the bark
and timber was simply a
realisation of portion of his capital, and not a receipt on income
account. It is unnecessary to expatiate
further on the Crowe case.
Suffice it to say that the taxpayer did not buy and sell the
plantation to make a profit. What he did
was to buy an improved farm
and at the same time he sold the improvements to raise enough money
to pay the purchase price of the
farm. On the view adopted by the
majority,
28
the position was the same as if
the taxpayer had sold a portion of the farm in advance in order to
enable him to pay for the whole.
Nothing said in the judgment of
STRATFORD, JA, who delivered the majority judgment in the Crowe case,
remotely represents authority
for the proposition that in the present
case the pine trees grown by the trust and the syndicate in order to
derive income therefrom
represented fixed capital.
There is
likewise a vast difference between the issue in the Baikie case and
the issue in the present appeal. The appellant, a wattle
farmer,
bought a farm for
â¤
13,750,
the wattle plantation on the farm being valued for
the
purposes of transfer duty at
â¤
3,470.
During the following tax year the appellant sold bark and wood for a
sum of E6,687, which sum was included by the commissioner
as part of
the appellant' s income for that year. The appellant having claimed
without success to deduct the sum
29
of E3,470 on the ground that this
sum was expenditure
actually incurred in the
production of income, and
therefore not of a capital nature,
this court in dismissing
the appellant's appeal held that
the expenditure was in
the circumstances of a capital
nature and therefore not
deductible under the Income Tax
Act of 1925. The court
held (at 500) that it was
impermissible "to divide the
single purchase of the farm with
all its accessories
into two purchases" and that
the separation for the special
purpose of transfer duty was
irrelevant. STRATFORD, JA,
who delivered the judgment of the
court, concluded by
saying (at 500):-
" it is impossible to accept
the appellant's
argument that there was a separate
- a floating capital -expenditure on the plantation, and it is also
impossible to distinguish the
case before us from that of the George
Forest case."
The inquiry in the Baikie case
bears no resemblance to that
in the instant case; and the ratio
of the Baikie case has
30
no
application here.
The appeal
is dismissed with costs, such costs to include the costs of two
counsel.
G G
HOEXTER, JA
BOTHA, JA
) PREISS, AJA )