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[1992] ZASCA 84
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Commissioner for Inland Revenue v Pick 'n Pay Employee Share Purchase Trust (640/90) [1992] ZASCA 84; 1992 (4) SA 39 (AD); [1992] 2 All SA 245 (A) (22 May 1992)
Case No 640/90
/wlb
IN THE SUPREME COURT OF SOUTH
AFRICA
(
APPELLATE DIVISION
)
In the matter between:
COMMISSIONER
FOR INLAND REVENUE
Appellant
and
PICK 'N PAY EMPLOYEE SHARE
PURCHASE TRUST
Respondent
CORAM
:
HOEXTER,
SMALBERGER, GOLDSTONE JJA
et NICHOLAS, HOWIE AJJA
DATE OF HEARING
: 2 March
1992
DATE
OF JUDGMENT
: 22 May 1992
JUDGMENT
NICHOLAS AJA/
2
NICHOLAS
AJA:
This is an appeal by the
Commissioner for Inland Revenue ("the Commissioner")
against a decision
of the Cape Income Tax Special
Court. The case concerned the liability to normal tax of profits made
by Pick 'n Pay Employee Share
Purchase Trust ("the Trust").
This was established by the Pick 'n Pay group of companies pursuant
to the provisions of
s 38(2)(b) of the Companies Act 61 of 1973 to
administer a share purchase scheme for the benefit of employees of
the group.
In his determinations of the
Trust's liability for normal tax in respect of the 1982 - 1984 years
of assessment, the Commissioner
included the following profits on the
sale of shares, namely.
Year of assessment
Profit
R28 006
R31 699
R39 782
3
and in
respect of the 1985 year of assessment he allowed a loss of R70 619
incurred on the sale of shares, and on this basis issued
assessments
on the Trust.
The Trust
lodged objection against these
assessments
on the ground -
"...
that the proceeds arising upon the disposal of shares by the Trust
(constitute) amounts of a capital nature which are accordingly
excluded from 'gross income' in terms of the definition of that
expression in schedule 1 of the Income Tax Act.
The Trust
was created and maintained to enable employees to purchase shares in
Pick 'n Pay, their (employer) company. The Trust does
not acquire
shares with the intention of reselling them at a profit in a scheme
of profit-making. It purchases shares in order to
make them available
to employees entitled to them in terms of its rules, and in terms of
its constitution is compelled to repurchase
shares from employees who
are required to forfeit their holdings.
Accordingly,
all gains or losses constitute fortuitous gains or losses of a
capital nature and the Trust does not intend to claim
as a deduction
the R70 619 loss suffered on the reissue of shares in the 1985
year."
4
The
Commissioner disallowed the objection and the Trust
appealed
to the Special Court.
In the
judgment of the Special Court (in which
Tebbutt J
presided) , it was held that any receipts or accruals to the Trust
were of a capital nature and not liable to tax. An order
was made
upholding the appeal and setting aside "the Commissioner's
decision to assess the Trust on the basis that its profits
and losses
constitute gross income."
Leave
having been granted by Tebbutt J, the Commissioner now appeals
directly to this court.
The
question was not res nova in the Cape Special Court. A similar
question had been considered in the judgment of Grosskopf J,
presiding
in the Cape Special Court in a case reported as ITC No 1413
(1986) 48 SATC 167.
The court's finding there was that the
5
appellant
had not proved that the surplus on the sale, by a trust created to
implement a share purchase scheme for employees, of quoted
shares in
the employer company, was a receipt or accrual of a capital nature.
The appeal was dismissed and the assessments confirmed.
Tebbutt J
concluded in the judgment under appeal that ITC No 1413 was
distinguishable on the facts, and that in any event it was
incorrect
and should not be followed. Tebbutt J's judgment has not been
reported but an abridged version is to be found in a note
in the
November 1987 issue of The Taxpayer (Vol 36, p 206 at pp 211 ff).
The
question arose again in a case heard in the Natal Special Court which
is reported as ITC No 1450
(1989) 51 SATC 70.
In the judgment the
president, Friedman J, agreed substantially with the reasoning of
Tebbutt J.
6
The
Facts
The only
witness in the proceedings before the Special Court was Mr
Christopher Hurst, who has been for many years the financial director
of the Pick 'n Pay group. Although not himself a trustee, he
administered the Trust.
He gave a
brief description of the structure of the Pick 'n Pay group. It is
headed by Pick 'n Pay Holdings Ltd, a company listed
on the
Johannesburg Stock Exchange. It has a majority holding in Pick 'n Pay
Stores Ltd ("Stores"), which is also a listed
company.
Stores was the holding company until about 1981 when Pick 'n Pay
Holdings Ltd was formed upon the restructuring of the group.
Stores
has a number of wholly-owned subsidiaries, including Pick 'n Pay
Retailers (Pty) Ltd ("Retailers"), through which
all the
group's retail operations are conducted. The participants in the
scheme
7
administered by the Trust
are mainly employees of Retailers.
It is
unnecessary to detail all the provisions of the scheme. I shall refer
to them only in their main outlines and to the extent
that it is
necessary to do so for the purpose of this judgment.
The
scheme, entitled "Pick 'n Pay Stores
Limited
Employee Share Purchase Scheme", was adopted at
a general
meeting of Stores held on 8 November 1977, and
the
trustees accepted appointment as such on the same
day. Its
purpose was set out in the first paragraph -
"1.1
This scheme is adopted to enable the Company to provide its employees
and the employees of its subsidiaries, including directors
holding
salaried employment or office, with the opportunity of acquiring
interests in the share capital of the Company, to provide
such
employees with incentives to advance the Company's interests, and to
promote an identity of interests between such employees
8
and the shareholders of the
Company."
"The Company" was
defined as Pick 'n Pay Stores Ltd, but
after the formation of Pick 'n Pay
Holdings Ltd the
employees and shares of the latter
were also treated as
falling within the scheme. It was
part of the duties of
the trustees inter alia to
subscribe for or purchase
shares in the capital of Stores in
accordance with the
provisions of the scheme; to seek
applications from
eligible applicants for the
purchase of such shares and
to sell them to such applicants;
and to administer the
scheme in order to achieve and
maintain the objects
stated in paragraph 1.1. The price
payable by
participants for scheme shares was
in practice the middle
market price on the Johannesburg
Stock Exchange at the
time of acceptance of the
application concerned. The
purchase or subscription price of
shares acquired by the
Trust was to be met out of loans
to be made to the Trust
by the companies in the group by
which participants were
9
employed.
In the ordinary course payment to the Trust for shares by
participants was to be made by not later
than the
tenth anniversary of the date of purchase ("the initial date"),
and could, at the option of participants, be made
between the fifth
and tenth anniversaries of such date. Special provision was made in
regard to participants whose employment with
the group was terminated
prior to the fifth anniversary of the initial date, or at any time on
the grounds of dishonest or fraudulent
conduct. In such event the
Trust was entitled and obliged to purchase and appropriate the
relevant shares as the property of the
Trust at an amount equal to
the amount then owing by the participant in respect of his shares
("the share debt").
Hurst
described the operation of the scheme. After an initial allotment of
shares by Stores, the Trust acquired scheme shares in one
of three
ways:
10
from
members of staff who had paid for their shares and wished to realise
their holdings;
as a
result of the forfeiture of shares by employees
who left
the group within five years of the initial purchase or were dismissed
for fraud or dishonesty;
(3) by
purchase on the open market when the Trust did
not have available,
for issue to applicants for
shares under the scheme, sufficient
shares acquired
under methods (1) and (2).
The price
payable for shares under method (1) was the then current middle
market price. The price payable for shares under method
(2) was the
amount of the share debt owed by the employee concerned.
Hurst
handed in as Exhibit "8" a document entitled "Share
Movement Analysis - 1982 to 1985". It is divided into
two main
sections: one devoted to Stores, the other to Pick 'n Pay Holdings
Ltd. The first column in each section is headed "Date"
which, Hurst explained,
11
is the
date on which the relevant entry was made in the books of the Trust,
and is not necessarily the date of
any
particular transaction. And an entry could relate to a number of
transactions which were lumped together. The next column is headed
"Average Acquiring Price", which is the average price of
shares purchased. Then there is a column "Shares Acquired",
with three sub-columns: "Forfeits", "Ex Staff"
and "On Market". "Forfeits" are shares forfeited
in terms of the scheme; "Ex Staff" and "On Market"
are self-explanatory. There is then a column headed "Issues"
which relates to sales of shares to participants, followed by
"Average Selling Price" and "Share Balance".
In the
case of Stores, the first date given is 31 May 1981 and the last 20
February 1985. There is a total of 120 dates recorded.
Entries under
"Forfeits" total 39, "Ex Staff" total 50, and "On
Market" total 12. There are 25 entries
under "Issues";
12
In
the case of Pick ' n Pay Holdings Ltd, the
first
date given is 10 June 1982 and the last 26 February
1985.
There is a total of 98 dates recorded. Entries
under
"Forfeits" total 9, "Ex Staff" 56, and "On
Market"
total 5.
There are 36 entries under "Issues".
The
schedule records a continuous series of
share-dealing
activities by the Trust during the four years of assessment. The
results of these operations are shown on Exhibit "C",
which
is an analysis of profits earned (and losses sustained) on "reissues"
i.e. the sale of shares to participants:-
ANALYSIS
OF PROFITS EARNED ON RE-ISSUE OF SHARES
ON
ON
FORFEITS
PURCHASES
TOTAL
R
R
R
97
335
-67 553
29
782
28 231
-2
085
26 146
46
638
-11 638
35
000
1985
185
561
-258 277
-
72 716
357 765
-
339 553
18 212
13
It appears
from this that profits were made in each year on forfeits, and that
losses were experienced in each year on purchases.
Hurst
explained that in cases where forfeited
shares had
been held by the respective participants for
some time,
"...
it invariably occurs that the market value of the shares is higher at
the time of forfeiture, and a profit accrues to the
Trust."
The reason
for the losses "On Purchases" was not investigated in the
Special Court. Counsel for the Trust was about to lead
the witness in
this regard when the president intervened, saying that he did not
think it necessary to go through the whole of the
schedules -"What
we are looking at is the bottom line."
14
The
Law
The
starting point of the discussion is the
definition
of "gross income" in s 1 of the Income Tax Act
58 of 1962
("the Act"), namely -
"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
..."
Reference
may also be made to the corresponding provision
in s 11 of
the Act which sets out the general deductions
allowed in
the determination of "taxable income". In
terms of
para (a) of s 11, there shall be allowed as
deductions
"(a)
expenditure and losses actually incurred in the Republic in the
production of the income, provided such expenditure and
losses are
not
of a capital nature
".
(My
emphasis in each case.)
15
(In order
to avoid repetition I shall speak in what follows only of "receipts"
and "expenditure".)
Because
"gross income" comprehends all receipts except those of a
capital nature, other receipts must be receipts of an
income or
revenue nature. Capital is here used in contradistinction to income
in its economic sense. The Act does not define either
of the
expressions, and it is difficult for the purposes of income tax to
define them save in relation to one other (see Commissioner
for
Inland Revenue v Lunnon
1924 AD 94
at 98). "Profit or gain may
be made in many ways; men may earn it by their labour, by their wits,
by their capital ... (I)ncome
considered in relation to capital is
revenue derived from capital productively employed." (per Innes
CJ in Commissioner of Taxes
v Booysens Estates Ltd
1918 AD 576
at
594-5).
16
Maritz
J said in Commissioner for Inland Revenue v Visser
1937 TPD 77
at 81,
"If we take the
economic
meaning of 'capital' and 'income', the one
excludes
the other." And in Pyott Ltd v Commissioner for
Inland
Revenue
1945 AD 128
Davis AJA said at 135 that he
could
not understand how a receipt could be "non
capital",
and yet "not income", observing that "This is a
half-way house of which I
have no knowledge."
"Income"
is a protean expression whose forms are multifarious. Comprising as
it does all receipts (save those of a capital
nature) gross income
has no definable boundaries. Although labels have been attached to
specific kinds of income, the list is per
naturam not a closed one.
The
problems to which the expressions receipts "of a capital nature"
and expenditure "not of a capital nature"
give rise are
perennial and have
17
generated a large number of
decided cases, but the tests
therein enunciated are not to be
regarded as either
prescriptive or comprehensive:
they do no more than
provide guidelines for the
solution of the problems which
arise. Ultimately each case must
be decided on its own
facts. Cf the observation of
Holmes JA in Natal Estates
Ltd v Secretary for Inland Revenue
1975(4) SA 177 (A) at
202 G-H:
"In deciding whether a case
is one of realising a capital asset or of carrying on a business or
embarking upon a scheme of selling
land for profit, one must think
one's way through all of the particular facts of each case."
Where profit has resulted from the
disposal of the taxpayer's assets, it may be either capital or
income, depending on the circumstances.
If there was a mere
realization of capital at an enhanced value, the entire proceeds
would remain capital. But if it was an act done
in the ordinary
course of the vendor's business (if it resulted from the productive
use of capital to
18
earn it), then the resulting gain
would be income. (See Commissioner of Taxes v Booysens Estates Ltd,
supra, at 595; Overseas Trust
Corporation Ltd v Commissioner for
Inland Revenue
1926 AD 444
at
452-3). In the Booysens
Estates case Innes CJ said:
"The general rule approved by
the Privy Council in Commissioner of Taxes v Melbourne Trust (1914,
A.C. at p. 1,010), was thus
stated in the Californian Copper
Syndicate case, to which I shall refer again.
'It is quite a well-settled
principle in dealing with questions of income tax, that where the
owner of an ordinary investment chooses
to realize it, and obtains a
greater price than he originally acquired it at, the enhanced price
is not profit in the sense of Schedule
D of the Income Tax Act, 1842,
assessable to income tax. But it is equally well established that
enhanced values obtained from realization
or conversion of securities
may be so assessable where what is done is not merely a realization
or change of investment, but an act
done in what is truly the
carrying on or carrying out of a business.'"
And in the Overseas Trust case,
the learned Chief Justice
said at 452-3:
"The reason for the
distinction is clear. Where an asset is realised at a profit as a
mere change of investment there is no difference
in character between
the amount of
19
enhancement
and the balance of the proceeds. But where the profit is, in the
words of an eminent Scotch Judge, see Californian Copper
Syndicate v
Inland Revenue (41 Sc.L.R, p 694) 'a gain made by an operation of
business in carrying out a scheme for profit making,'
then it is
revenue derived from capital productively employed, and must be
income."
A similar
distinction has been drawn in regard
to the
deduction of expenditure under s 11(a) of the
Act.
In Commissioner for Inland Revenue, v George Forest
Timber
Co., Ltd.,
1924 AD 516
Innes CJ said at 526:
"Now,
money spent in creating or acquiring an income-producing concern must
be capital expenditure. It is invested to yield future
profit; and
while the outlay does not recur the income does. There is a great
difference between money spent in creating or acquiring
a source of
profit, and money spent in working it. The one is capital
expenditure, the other is not."
The
learned Chief Justice had referred at 524 to the
distinction
between fixed capital and floating capital,
saying,
"Capital,
it should be remembered, may be either fixed or floating. I take the
substantial difference to be that floating
20
capital is
consumed or disappears in the very process of production, while fixed
capital does not; though it produces fresh wealth,
it remains intact.
The distinction is relative, for even fixed capital, such as
machinery, gradually wears away and needs to be renewed.
But as
pointed out by MASON J, in Stephan v Commissioner of Inland Revenue
(1919, W.L.D., at p 5) the two phrases have an ascertained
meaning in
accountancy as well as in economics. Ordinary merchandise in the
hands of a trader would be floating capital. Its use
involves its
disappearance; and the money obtained for it is received as part of
the ordinary revenue of the business. It could never
have been
intended that money received by a merchant in the course, and as the
result of his trading, should not form part of his
gross income.
The
proceeds of fixed capital stand in a different position. The sale of
such capital would, generally speaking, represent a mere
realisation,
which ought from its nature to be excluded, and which I think the
section intended to exclude from the calculation of
income."
And
in New State Areas, Ltd., v Commissioner for Inland
Revenue
1946 AD 610
, Watermeyer CJ said at 620 - 621:
"As
to the latter [sc expenditure of a capital nature] the distinction
must be remembered between floating or circulating and
fixed capital.
When the capital employed in a business is frequently changing its
form from money to goods and vice versa (e.g.,
the purchase and sale
of stock by a merchant or the purchase of raw material by a
manufacturer for
21
the
purpose of conversion to a manufactured article), and this is done
for the purpose of
making a
profit, then the capital so employed is floating capital. The
expenditure of a capital nature, the deduction of which is
prohibited
under sec. 11(2), is expenditure of a fixed capital nature, not
expenditure of a floating capital nature, because expenditure
which
constitutes the use of floating capital for the purpose of earning a
profit, such as the purchase price of stock in trade,
must
necessarily be deducted from the proceeds of the sale of stock in
trade in order to arrive at the taxable income derived by
the
taxpayer from that trade. The problem which arises when deductions
are claimed is, therefore, usually whether the expenditure
in
question should properly be regarded as part of the cost of
performing the income-earning operations or as part of the cost of
establishing or improving or adding to the income-earning plant or
machinery ..."
And
at 627 the learned Chief Justice said:
"The
conclusion to be drawn from all of these cases, seems to be that the
true nature of each transaction must be enquired into
in order to
determine whether the expenditure attached to it is capital or
revenue expenditure. Its true nature is a matter of fact
and the
purpose of the expenditure is an important factor; if it is incurred
for the purpose of acquiring a capital asset for the
business, it is
capital expenditure, even if it is paid in annual instalments; if, on
the other hand, it is in truth no more than
part of the cost
incidental to the performance of the
22
income-producing
operations, as distinguished from the equipment of the
income-producing machine, then it is revenue expenditure,
even
if it is
paid in a lump sum."
In
Secretary for Inland Revenue v Cadac Engineering Works (Pty.) Ltd.,
1965(2) SA 511 (A) at 522B, Ogilvie Thompson
JA said
that he preferred the phrase "income-earning structure" to
"income-producing machine".
In
Sekretaris van Binnelandse Inkomste v
Aveling
1978(1) SA 862 (A), Rabie JA quoted the passage
in the
judgment of Innes CJ in Commissioner for Inland
Revenue v
George Forest Timber Co Ltd which is set out
above, and
said at 880 E to 881 A:
"Soos
blyk uit die aanhaling hierbo, net '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. Hierdie kenmerkende
verskil word soos volg in die uitspraak van Viscount HALDANE in John
Smith & Son v Moore (H.M. Inspector of Taxes),
12 T.C. 226
op bl
282, beskrywe:
23
'My Lords, it is not necessary to
draw an exact line of demarcation between fixed and circulating
capital. Since Adam Smith drew the
distinction in the Second Book of
his 'Wealth of Nations', which appears in the chapter on the Division
of Stock, a distinction which
has since become classical, economists
have never been able to define much more precisely what the line of
demarcation is. Adam Smith
described fixed capital as what the owner
turns to profit by keeping it in his own possession, circulating
capital as what he makes
profit of by parting with it and letting it
change masters.' Die bogemelde verskil tussen vaste en vlottende
kapitaal blyk ook uit
Ammonia Soda Co Ltd v Chamberlain,
(1918) 1 Ch.
266
op bl 286-287, waar SWINFEN EADY L.J. horn o. a. soos volg oor
die verskil tussen die vaste en vlottende kapitaal van 'n maatskappy
uitgelaat het: ' In these cases the capital is fixed in the sense of
being invested to be retained by the company more or less permanently
and used in producing an income. What is circulating capital? It is a
portion of the subscribed capital of the company intended to
be used
by being temporarily parted with and circulated in business, in the
form of money, goods or other assets, and which are intended
to
return to the company with an increment, and are intended to be used
again, and to always return with some accretion.'"
24
To the last quotation may usefully
be added the immediately following sentences in the judgment of
Swinfen Eady L.J.:
"Thus the capital with which
a trader buys goods circulates; he parts with it, and with the goods
bought by it, intending to
receive it back again with profit arising
from the resale of the goods. A banker lending money to a customer
parts with his money,
and thus circulates it, hoping and intending to
receive it back with interest. He retains, more or less permanently,
bank premises
in which the money invested becomes fixed capital."
In Elandsheuwel Farming (Edms.)
Bpk. v Sekretaris van Binnelandse Inkomste 1978(1) SA 101 (A),
Corbett JA said at 118 A-B:
"Where a taxpayer sells
property, the question as to whether the profits derived from the
sale are taxable in his hands by reason
of the proceeds constituting
gross income or are not subject to tax because the proceeds
constitute receipts or accruals of a capital
nature, turns on the
further
enquiry as to whether the sale amounted to the realisation
of a capital asset or whether it was the sale of an asset in the
course
of carrying on a
25
business
or in pursuance of a profit-making
scheme. Where a single
transaction is involved
it is usually more appropriate to
limit the
enquiry to the simple alternatives of a capital
realisation or a profit-making scheme
. In its normal and
most straightforward form, the latter connotes the acquisition of an
asset for the purpose of reselling it at
a profit. This profit is
then the result of the productive turn-over of the capital
represented by the asset and consequently falls
into the category of
income. The asset constitutes in effect the taxpayer's stock-in-trade
or floating capital." (My emphasis).
In this
passage the learned judge of appeal pointed to
two
situations: the sale of an asset in the course of
carrying
on a business, and the sale of an asset in
pursuance
of a profit-making scheme. Compare the
observation
of Holmes JA in Natal Estates Ltd v Secretary
for Inland
Revenue supra at 198 E-G as to the distinction
consistently
drawn by the Appellate Division between (a)
realising
a capital asset, and (b) selling an asset in
the course
of carrying on a business or embarking on a
scheme for
profit.
26
Corbett JA
pointed out that where a single transaction is involved it is usually
more appropriate to limit the enquiry to the simple
alternative of a
capital realisation or a profit-making scheme. The corollary is that
where a series of transactions is involved,
the appropriate enquiry
is usually whether or not the receipts flow from the carrying on of a
business.
(In the
Booysens Estate case, there was quoted one portion from the judgment
of the Lord Justice Clerk in Californian Copper Syndicate
v Inland
Revenue
(1904) 4 Sc.L.R. 691
at 694, and in the Overseas Trust
Corporation
case
another portion was quoted. The whole of the
relevant
passage reads as follows:
"It
is quite a well-settled principle in dealing with questions of
assessment of income-tax, that where the owner of an ordinary
investment chooses to realise it, and obtains a greater price for it
than he originally acquired it at, the enhanced price is not
profit
in the sense of Schedule D of the Income-Tax Act of 1812, and
therefore assessable to income-tax. But it is equally well
established
that enhanced values. obtained from realisation or
conversion of securities may be so assessable where
27
what is
done is not merely a realisation or change of investment, but an act
done in what is truly the carrying on or carrying out
of a business.
The
simplest
case is that of a person or association of persons buying and selling
lands or securities speculatively in order to make
gain, dealing in
such investments as a business, and thereby seeking to make profits.
There are many companies which in their very
inception are formed for
such a purpose, and in these cases it is not doubtful that where they
make a gain by a realisation, the
gain they make is liable to be
assessed for income-tax.
What is
the line which separates the two classes of cases may be difficult to
define, and each case must be considered according to
its facts, the
question to be determined being, is the sum of gain that has been
made a mere enhancement of value by realising a
security, or is it,
again, made by an operation of business in carrying out a scheme for
profit-making."
It is
manifest that the first paragraph states the
general
principles: the second paragraph deals with the
application
of those principles to the specific case of a
single
'operation of business'. The distinction referred
to by
Corbett JA was therefore not a novel one.)
In an
enquiry, whether or not the receipts flow from the carrying on of a
business, the emphasis is on
28
the actual
operations of the taxpayer. So, in Commissioner for Inland Revenue v
Stott
1928 AD 252
, Wessels JA said at 259:
"The
question we have to determine is whether the facts as set out in the
special case show that the proceeds of the sale of
the Ifafa and
Bluff properties constitute gross income or capital. In order to
arrive at this decision it is necessary to know whether
the acts of
the taxpayer in buying and selling these properties show that he was
carrying on the trade or business of a land-jobber."
Cf
Commissioner for Inland Revenue v Leydenberg Platinum
Ltd.,
1929
AD 137
at 145-6.
A
"business", so far as an individual taxpayer is concerned,
is characterized by a series of transactions having an element
of
continuity, and usually performed in the contemplation of making a
profit.
In regard
to the first two characteristics,
reference
may be made to the following dicta:
"In
the case of a company formed for certain purposes, the question of
the continuity of the
29
acts,
which is another factor to be considered in deciding whether a
business is carried on, is not of the same importance as in the
case
of an individual." (per Juta JA in Platt v Commissioner for
Inland Revenue
1922 AD 42
at 51).
"If
you are dealing with a company one of whose objects is to buy and
sell land, then the company might well be considered to
be doing the
business of selling and buying land even though it carries out only a
single transaction; but when an individual like
a surveyor who is not
professedly carrying on the occupation of a land-jobber buys and
sells one or more plots of land, he cannot
be said prima facie to be
doing the business of a land-jobber. Before it can be said that an
individual is carrying on a business
there must be some proof of
continuity." (per Wessels JA in Stott's case supra at 262.)
See
also Commissioner for Inland Revenue v Leydenberg
Platinum
Ltd., supra, ubi cit.
As to the
contemplation of profit, there are cases in which it has been held
that there may be a carrying on of a business without
the
contemplation of pecuniary gain (Piatt's case at 50; see also
Modderfontein Deep Levels Ltd. and Another v Feinstein
30
1920 TPD
288)
; but in relation to income tax law the "acquisition of gain
or profit is a material factor in the consideration when does a
person carry on a business." (Piatt's case at 51).
A taxpayer
may, in order to establish that receipts are of a capital nature,
seek to prove that fact directly; or he may seek to show
it
indirectly, by inference from the fact that the receipts are
non-revenue/non-income.
The latter
(indirect) approach was epitomized
by
Friedman J in ITC No 1450 supra at 77 as follows:
"Tebbutt
J ... approached the matter by enquiring whether or not the profits
were revenue profits. Strictly speaking, of course,
and having regard
to the definition of 'gross income', the real enquiry is whether or
not the profits are of a capital nature. But
nothing, as I see it,
turns on this. Quite clearly profits can only be either of a revenue
or of a capital nature. There is no third
category. Consequently if
profits are not revenue, they must be capital and vice versa."
31
The
indirect approach was followed in Lunnon's
case
supra. The question there was whether an amount of
a thousand
pounds voted to Lunnon some months after the
termination
of his services as a director, was liable to
income
tax. Innes CJ said at 98:
"Now
this gift has none of the attributes of income; it was not produced
by the respondent's capital, nor was it earned by his
labour or his
wits or in any other way. There is no recurrence about it. What is
sometimes called annuality is not necessarily a
decisive test as to
whether a receipt or accrual is capital or income; but it [is] an
important element to be taken into consideration.
And in the present
instance it is wholly absent. This grant is a fortuitous addition to
the capital of the recipient and it appears
to me to be of a capital
nature; like any ordinary donation or legacy."
Other
instances of fortuitous additions to capital are isolated lottery,
betting or sweepstake wins. Cases of fortuitous gains apart,
it is
difficult to see in what way the indirect approach offers any
advantage over the straightforward one. And, involving as it
does
32
proof of a
negative, the indirect approach may be
difficult
to apply in practice. It was a rule of the
Civil law
that per naturam a negative is not capable of
proof. See
Kunz v Swart & Others
1924 AD 618
at 653. In
dealing
with the onus of proof, Voet said (in GANE's
translation
22.3.10) that
"Evidence
also is given by him who asserts, not by him who denies, because in
the nature of things no proof is possible for one
who denies a fact."
See also
Pillay v Krishna & Another
1946 AD 946
at 952:
"But
there is a third rule, which VOET states in the next section as
follows: 'He who asserts, proves and not he who denies,
since a
denial of a fact cannot naturally be proved provided that it is a
fact that is denied and that the denial is absolute. '
This rule is
likewise to be found in a number of places in the Corpus Juris: I
again give only one version: 'Ei incumbit probatio
qui dicit, non qui
negat' (D 22.3.2). The onus is on the person who alleges something
and not on his opponent who merely denies it.
This rule is stated by
Matthaeus, de Prob (8.1) to be lippis et tonsoribus nota, that is to
say, known to everyone ... Before I leave
the subject of the Roman
law I should add that the three rules to which I have referred are
very shortly referred to, and approved,
by Kotze . JA in Kunz v Swart
and Others (1924, A.D. at pp 662, 663)."
33
The onus of proving that any
receipt is of a capital nature is upon the tax-payer. In Elandsheuwel
Farming (Edms.) Bpk. v Sekretaris
van Binnelandse
Inkomste, supra, Wessels JA
discussed the approach to be
adopted by a court in considering
a question of capital
or income, and said at 112 B-C:
"Ten slotte moet onthou word
dat die belastingpligtige met die bewyslas beswaar is ten aansien van
sy bewering dat die betrokke
ontvangs een van ' n kapitale aard is,
en dus nie aan belasting onderhewig is nie. Kyk, bv.. Natal Estates
Ltd v Secretary for Inland
Revenue, 1975(4) SA 177 (A.A.) op bl. 202G
-203A, en John Bell & Co (Pty) Ltd v Secretary for Inland
Revenue, 1976(4) SA 415
(A.A.) op bl. 426F - 427G."
It is true that the question is
ultimately one of law:
whether receipts are of a capital
or revenue nature is an
inference from facts, and whether
the inference can
properly be drawn is a matter of
law. Juta JA said in
Piatt's case, supra, at 49 - 50:
"The proper rule has I
venture to think been laid down by LORD PARKER in Farmer v Cotton's
Trustee
(1915, A.C. 922)
, and it seems to me to
34
be
confirmed by the weight of judicial decision in the English Courts.
He said 'Where all the material facts are fully found, and
the only
question is whether the facts are such as to bring the case within
the provisions properly construed of some statutory enactment,
the
question is one of law.'"
See
also Commissioner for Inland Revenue v Stott supra at
259. But
the onus of establishing the facts from which the desired inference
can and should properly be drawn is on the taxpayer.
A taxpayer
who follows the indirect approach must, therefore, establish facts
from which it can properly and validly be inferred that
the receipts
in question are not of a revenue nature.
Whichever
approach be adopted, the conclusion should in logic be the same.
Contradictory conclusions cannot exist together: one of
them must be
wrong.
35
Application of the Law to the
Facts
It is clear from the evidence of
Hurst, from the provisions of the scheme itself and from the annual
financial statements included
in the dossier, that the
Trust does not possess an
income-earning structure. It has no premises or equipment of its own
and it does not employ its own staff.
The following is a copy of the
Trust's balance
sheet at 28 February 1982.
"PICK 'n PAY EMPLOYEE SHARE
PURCHASE TRUST BALANCE SHEET AT FEBRUARY 28, 1982
1982 1981
Notes
R
R
CAPITAL EMPLOYED
NON DISTRIBUTABLE RESERVE
153
593 125 587
Net surplus on re-issue of shares
LONG TERM LIABILITY
2
5 803 168 2 217 028
R
5 956 761
R
2 342 615
EMPLOYMENT OF CAPITAL
LISTED INVESTMENT
3
41 025
LOANS TO PARTICIPANTS 4
5 915
736 2 342 615
R
5 956 761
R
2 342 615"
36
The "long-term liability"
of R5 803 168 is the total of the amounts lent to the Trust by the
Pick 'n Pay group in
order to finance the scheme, which
were applied towards "loans to participants" totalling R5
915 736. This liability accordingly
represents loan capital. The item
"non-distributable reserve" is the surplus accumulated over
the years in consequence
of resales of shares. It appears from the
"INCOME STATEMENT FOR THE YEAR ENDED FEBRUARY 28, 1982"
that in that year the
amount of R28 006 was transferred to
non-distributable reserves, and that is the amount of the profit
assessed by the Commissioner
in the 1982 assessment. There is nothing
in the evidence, and nothing in the annual financial statements, to
show that the Trust
ever held Pick 'n Pay shares (or any shares) as a
permanent investment. Under "employment of capital", it is
true, there
is a "listed investment" of R41 025, but it
appears from note 3 that this "comprises 3 250 ordinary shares
of 10 cents
each in
37
Pick 'n
Pay Stores Limited, acquired but not allocated to participants at
February 28, 1982 ..." Hurst's evidence shows that
there was no
element of permanency in regard
to shares
acquired. In summary he said:
At times
there was an over-sold situation, when the Trust had had to sell more
shares to staff than it had available at the time.
Consequently it
had to quickly make acquisitions to right the situation ... When
going to the market it was always with a view to
an imminent issue of
shares and being ready for that issue.
The third
method of acquisition was to purchase shares on the open market and
that was only applied if there were not sufficient shares
available
to the Trust under methods (1) and (2). The Trust never bought shares
'to stock up' . When going to the market it was always
with a view to
an imminent issue of shares.
It was
never possible that the Trust was sitting with surplus shares that it
had to sell on the open market. The Trust had never got
into an
over-purchased situation. Whenever it purchased it was always with a
view to a fairly imminent issue of shares.
On these
facts it is plain that none of the shares acquired by the Trust were
fixed capital. If they
38
were
capital at all, they were floating capital, and when the shares were
realised, there was a realisation of floating capital. Thus
the
receipts could not be receipts "of a capital nature".
The
Special Court ignored the direct approach to the question, but
adopted the indirect approach. Similarly in ITC No 1450 the Natal
Special Court adopted that approach, and was satisfied "substantially
for the reasons advanced by Tebbutt J", that the
profits made by
the appellant in that case constituted receipts of a capital nature.
In the
judgment of the Special Court, Tebbutt J referred to a number of
cases dealing with "(the) idea of the asset being used
in a
scheme of profit making", and said:
39
"...
if the Trust can show that what it did in acquiring the shares and
then selling them to its employees, was not in pursuance
of a scheme
of profit-making, it will have discharged the onus of showing that
such profits as it made or losses it sustained were
of a capital
nature."
In the
discussion of the question whether the scheme
adopted in
November 1977 was a scheme of profit-making,
the
Special Court placed reliance on the evidence of
Hurst,
"who made a very favourable impression ... as an
honest,
fair and completely reliable witness". The
conclusion
which the Special Court reached was that
"the
considerations put forward by Hurst have persuaded us that the Trust
has not embarked on a scheme of profit-making."
I agree
with the Special Court that the scheme of the Trust did not have the
purpose of making a profit. The acquisition of gain formed
no part of
the raison d' etre of the scheme, which, as stated in its
introductory paragraph and in Hurst's evidence, was to enable
Pick 'n
Pay employees to acquire a shareholding in Pick 'n Pay
40
with
no immediate capital outlay and with advantageous
terms
of payment. The only thing that Pick 'n Pay were
interested
in was getting shares into the hands of employees, and the furthest
thing from their minds was whether the Trust would
make a profit or a
loss. Hurst said, "I am sure we never sat and thought about
profits and losses within the Pick 'n Pay organisation."
The
reason for the 5-year rule was not to enable the Trust to make a
profit, but to tie an employee to the group - it would frustrate
one
of the purposes of the scheme if an employee could "take a
short-term profit and run".
In my
view, however, the Special Court erred in going on to draw the
conclusion that because the Trust had showed that its acquisition
and
resale of the shares was not in pursuance of a scheme of
profit-making, the proceeds were not income and were accordingly of
a
capital nature. The premise on which the Special Court's conclusion
was based is contained in the second paragraph
41
in
the judgment in the Califomian Copper Syndicate
case which is quoted above:
namely, a gain of a particular kind (sc one made by an operation of
business in carrying out a scheme
for profit making) - P - is revenue
derived from capital productively employed and hence income - Q. From
that premise it cannot
validly be concluded that a gain not of that
kind is non-revenue (non-income) From the premise, if P then Q, the
conclusion cannot
validly be drawn that if non-P then non-Q; or,
substituting real terms, from the premise, if apples then fruit, the
conclusion cannot
validly be drawn that if non-apples (oranges, say)
then non-fruit. The premise P is Q does not state that P is the
exclusive condition
for Q, but only that Q is a necessary consequent
of P.
It follows that the Trust did not
discharge the onus of proving that the receipts from the sales of
shares were revenue, and hence
not of a capital nature.
42
The
test applied in the judgment of the Special Court was not the
appropriate test in the circumstances.
This
was not a case involving a single transaction or
isolated
transactions, but one involving a series of
transactions;
and the appropriate enquiry was whether
the
actitivities of the Trust were such that they
amounted
to the carrying on a trade or business. A
distinction
is to be drawn between the raison d'
ê
tre
of
the scheme and the
scheme in action - between the overall
purpose
of the scheme and the transactions performed in
executing
it. The real question to be decided is whether the profits resulting
from the sale by the Trust of Pick
'n
Pay shares were capital or income, and that depends
upon
whether the transactions were mere realisations of
capital
at an enhanced value or were acts done in the
ordinary
course of the Trust's business. (See the Overseas Trust Corporation
case supra.).
In each of
the years of assessment, the Trust
43
engaged
in share-dealing activities which were
characteristic
of a business. They were part of a series
and
they were continuous. In regard to the profit
element,
it was inherent in all the activities, which
were
conducted in a fluctuating market, that in the
ordinary
course they would result in profits/losses. And
in
the case of forfeited shares which had been held for
some
time, the accrual of a profit to the trust was
"inevitable".
Certain of
the provisions of the scheme itself
evince a
contemplation of surpluses arising from the
Trust's
operations. Under clause 3.6 the trustees have
the power
-
"3.6.3
to invest
any surplus moneys
of the trust in shares of the
Company, or in such other manner as the board may approve".
Clause 13
provides that the group employers of the
participants
will bear all costs of and incidental to the
implementation
and administration of the scheme, and in
44
terms
of clause 13.2 the Company is to provide
"all secretarial, accounting,
administrative, legal and financial advice and services, office
accommodation, stationary and so
forth, to enable the trustees
properly and efficiently to perform their duties and functions in
terms of this scheme."
In terms of clause 13.2.2,
however,
"... the group employers of
the participants will be entitled to recover from the trust all the
abovementioned costs
in the event that the trust is able to pay
these costs from its own resources
and, in addition, the Company
will be entitled to a fee to be determined by the Company for
performing the duties and providing the
services set out in 13.2.1
above
in the event that the trust has any surplus resources
."
It is provided in clause 16 that
upon termination of the
Trust,
"the assets, if any, of the
trust shall be realised and
any surplus remaining
after the
discharge of the trust's liabilities shall be paid over to the
Company."
(My emphasis in each case.)
A surplus could be produced only
by making profits, and
the only resources which the Trust
could acquire would be
from profits.
45
By the end
of the 1981 financial year the Trust had already accumulated profits
amounting to R125 587, and it continued to make profits
in each of
the following years 1982, 1983 and 1984.
The making
of profits from the operations of the Trust must, therefore, have
been in the contemplation of the trustees as likely to
result from
their transactions during those years, and it cannot be said that the
profits which did result were unintended. That
being so, it is plain
that it was not proved that the trustees were not carrying on a
business.
Tebbutt J
did not deal with this aspect, but Friedman J referred to it in the
judgment in ITC No 1450. He said at p 78 that one ought
not to look
simply at the activities of the Trust, but should have regard to the
larger scheme of which the activities simply formed
a
46
part.
He continued:
"In
our view, to say that the share incentive trust actively trades in
the shares of the company, is to adopt an unduly narrow
approach to
the overall scheme in which the trust simply plays a part. The trust
does not trade in the true sense of that word. It
acquires shares for
a particular purpose and that is to allocate these shares to
employees who hold important positions in the company
and whose
continued employment with the company the company seeks to maintain
and preserve. There is, in our view, no intention on
the part of the
company responsible for creating the trust that the trust should, in
its own right, operate for the purpose of making
a profit. Whether or
not the trust makes a profit is entirely fortuitous."
The
adoption of a broader approach should not cause one to ignore the
nature of the transactions which produced the profits in question.
The conclusion that a trust is carrying on a business is an inference
to be drawn from its acts, and it does not wholly depend on
the
intention of the company responsible for creating the trust.
47
It is true
that in performing those
transactions
the Trust did not carry on a business as the
word is
ordinarily understood. A profit motive was not the driving force
behind its activities. They were subject to constraints not
usual in
the ordinary share-dealing business: the Trust's buying and selling
of shares was not determined with reference to market
conditions and
it was not entirely within its control: by and large it bought only
shares which were forfeited or shares which were
offered to it by
participants who had paid for them, and it sold shares only to
persons entitled to obtain them under the terms of
the Trust. But it
is irrelevant to the real question for decision that the
share-dealing actitivities carried on by the Trust differed
from
those of the ordinary share-dealing business. The fact is that the
Trust was engaged in trading in shares and not in realizing
investments. "The essential idea underlying trade is buying and
selling." (per Wessels J in the court a quo in Western
Deep
Levels
48
&
Another v Feinstein, supra, at 290.) The receipts from such trading
had all the attributes of income: they were
produced
by the Trust's capital; they were recurrent; and they were not
fortuitous in any relevant sense. It is true that the acquisition
of
forfeited shares was not within the control of the trustees, who were
obliged to purchase such shares, and could not foresee or
determine
what shares would become liable to forfeiture, or when. But this does
not mean that the receipts from their resale were
fortuitous in any
relevant sense. They were the result of the trading activities
performed by the Trust. It cannot properly be said
that the profits
realised from those activities were the mere realisation of capital
at an enhanced value, or were fortuitous additions
to the capital of
the Trust.
In my
opinion, therefore, the conclusion of the
Special
Court was wrong.
49
I would
uphold the appeal with costs, and set
aside the
order of the Special Court and substitute an
order
dismissing the appeal and confirming the
assessments.
H C
NICHOLAS
Acting
Judge of Appeal
HOEXTER JA
] Concurs.
CASE
NO 640/90
N
V
H
IN THE SUPREME COURT OF SOUTH
AFRICA
(
APPELLATE DIVISION
)
In the matter between:
COMMISSIONER FOR INLAND
REVENUE
Appellant
and
PICK 'N PAY EMPLOYEE SHARE
PURCHASE TRUST
Respondent
CORAM
:
HOEXTER,
SMALBERGER, GOLDSTONE, JJA
et
NICHOLAS, HOWIE, AJJA
HEARD
:
2
MARCH 1992
DELIVERED
:
22 MAY 1992
JUDGMENT
SMALBERGER, JA :-
I have had the privilege of
reading the judgment of my learned brother NICHOLAS. He has come to
the conclusion that (1) at best for
the Trust the shares acquired by
it constituted floating capital
2
which on realisation did not
amount to receipts of a capital nature; and (2) in any event the
Trust failed to establish that the receipts
with which this case is
concerned were of a non-income and hence of a capital nature. For the
reasons that follow I am unable, with
respect, to agree with the
conclusions reached by him. I shall deal first with the second
conclusion, the underlying reason for which
is that it was not proved
that the trustees were not carrying on a business with the
contemplation of making profits.
The Trust can escape liability for
normal tax on the profits made in the tax years 1982, 1983 and 1984
provided it establishes that
such profits are non-revenue. In the
present matter the relevant facts are either common cause or not in
dispute. The question whether
the receipts are capital or income is a
matter of inference from such facts and therefore ultimately a matter
of law. The fact that
the onus
3
rests on the Trust is accordingly
not a material
consideration.
There are a variety of tests for
determining
whether or not a particular
receipt is one of a revenue
or capital nature. They are laid
down as guidelines
only - there being no single
infallible test of
invariable application. In this
respect I agree with
the following remarks of FRIEDMAN
J in ITC 1450 (at 76)
"But when all is said and
done, whatever guideline one chooses to follow, one should not be led
to a result in one's classification
of a receipt as income or capital
which is, as I have had occasion previously to remark, contrary to
sound commercial and good sense."
The appropriate test in a matter
such as the present is a well established one. The receipts accruing
to the Trust will be revenue
if they constitute "a gain made by
an operation of business in carrying out a scheme for profit-making"
in the words of
4
the eminent Scottish Judge in the
Californian Copper Syndicate
case quoted with approval in the
passage from
Overseas Trust Corporation Ltd v Commissioner for
Inland Revenue
1926 AD 444
at 452-3 referred to in my colleague's
judgment. (See, too,
Commissioner for Inland Revenue v Stott
1928 AD 252
at 259 - 260;
Commissioner for Inland Revenue v
Leydenberg Platinum Ltd
1929 AD 137
at 145;
Lace Proprietary
Mines Ltd v Commissioner for Inland Revenue
1938 AD 267
at 275;
Commissioner for Inland Revenue v Strathmore Exploration and
Management Ltd
1956(1) SA 591 (A) at 599.) The corollary is that
they will be non-revenue if they do not derive from "an
operation of business
in carrying out a scheme for profit-making".
The phrase from the
Californian Copper Syndicate
case has
undergone some measure of refinement in the cases of
Natal Estates
Ltd v Secretary for Inland Revenue
1975(4) SA 177(A) (at 198 E -
G) and
Elandsheuwel Farming (Edms) Bpk v Sekretaris
5
van
Binnelandse Inkomste
1978(1) SA 101(A) (at 118 A -
B) to the
extent that a distinction is drawn between the carrying on of a
business and the pursuance of a profit-making scheme. The
basis for
such distinction is that it is more appropriate to refer to a
profit-making scheme where a single transaction is involved.
I accept
that a series of transactions is characteristic of the carrying on of
a business. But irrespective of the number of transactions,
whether
the receipts that flow from the carrying on of a business are revenue
still depends on whether the business was conducted
with a profit
making purpose, i e as part of a profit-making venture or scheme. To
hold otherwise would amount to a departure from
the earlier
authorities - something clearly never intended in either the
Natal
Estates
or
Elandsheuwel Farming
cases. In this respect I
agree with what is said in
Meyerowitz and Spiro
on Income Tax:
para 299 that "[t]he rather clumsy phrase: 'operation
6
of
business in carrying out a scheme of profit-making' in plain language
really means that receipts or accruals bear the imprint of
revenue if
they are not fortuitous, but designedly sought for and worked for".
The application of this test involves a consideration
of the
objectives of the taxpayer (the Trust) and what its purpose, or if
there was more than one, what its dominant purpose was
(cf.
Commissioner of Taxes v Levy
1952(2) 413 (A)). Transactions
involving shares do not differ from transactions in respect of any
other property and the capital or
revenue nature of a receipt is
determined in the same way whether one is dealing with land or shares
(
Silke
on South African Income Tax, 11 ed, Vol 1, 3 -90; cf
Deceased Estate v Commissioner
of Taxes
1949(4) SA 491
(SR)).
I am
unable to agree with NICHOLAS AJA that the Trust was carrying on a
business by trading in shares. Whether or not it was doing
so must be
7
determined applying ordinary
common sense and business standards (cf
Rhodesia Railways and
Others v Commissioner of Taxes
1925 AD 438
at 462). There was no
intention on the part of the Trust to conduct a business in shares.
The Trust was to operate primarily as a
conduit for the acquisition
of shares by employees entitled to them in terms of the scheme's
rules. The Trust did not operate along
accepted business lines. The
normal way in which a trader in shares operates is to buy shares and
resell them at a profit (
De Beers Holdings (Pty() Ltd v
Commissioner for Inland Revenue
1986(1) SA 8 (A) at 30 E) . The
Trust had no such intention. While a profit motive is not essential
for the carrying on of a business,
its presence or absence is an
important factor in determining whether a business is being
conducted. A dealer doing business in shares
can be expected to
engage freely in the market; to buy and sell at the most advantageous
times and prices
8
according to the dictates of the
market. This is not what the Trust did. It bought when it was obliged
to and sold when it was required
to. The constraints placed upon the
trustees in dealing with the shares are altogether foreign to trading
or business in the accepted
commercial sense. On a common sense
approach the Trust was not carrying on a business by trading in
shares.
But even if the Trust could be
said in a broad sense to have been conducting a business, it was not
a business carried on as part
of a scheme of profit-making. Receipts
of a revenue nature (in the form of profits) accrue to a trader who
acquires and disposes
of shares as part of a scheme of profit-making
(cf
De Beers Holdings (Pty) Ltd v Commissioner for Inland Revenue
(
supra
) at 30 G). NICHOLAS AJA accepts, in my view
correctly, that the purpose of the scheme was not one of
profit-making. If that is so
it seems
9
impossible
to conclude, as a matter of logic, that any
business
conducted in pursuance of the scheme, and
according
to the strict letter thereof (which is
essentially
the case here) could be part of a scheme of
profit-making.
But apart from this the trustees never
intended
or designedly set out to make a profit - it was
not their
purpose to do so. As was pointed out in
Secretary
for Inland Revenue v Trust Bank of Africa Ltd
1975(2) SA
652 (A) at 669 E - G
"[i]n
an enquiry as to the intention with which a transaction was entered
into for the purpose of the law relating to income
tax, a court of
law is not concerned with that kind of subjective state of mind
required for the purposes of the criminal law, but
rather with the
purpose for which the transaction was entered into."
Contemplation
is not to be confused with intention in the above sense. In a tax
case one is not concerned with what possibilities,
apart from his
actual purpose, the taxpayer foresaw and with which he
10
reconciled
himself. One is solely concerned with his object, his aim, his actual
purpose. While they might have contemplated the possibility
of
profits, it was not the purpose of either the company (Stores) in
founding the Trust, or the trustees in conducting the affairs
of the
Trust, to carry on a profit-making scheme. The sole purpose of
acquiring, holding and selling the shares was to place them
in the
hands of eligible employees. The forfeiture provision was not
intended to yield a profit. Its purpose was to deter unwanted
resignations.
A
different conclusion might have been justified if the making of
profits was inevitable. But this was not the case. The prospects
of
profits were highly problematical. They depended upon the degree of
success achieved by the scheme. If it had operated to its
full
potential, and there had been no forfeitures, there would probably
have been no profits. But even accepting that forfeitures
were
inevitable, whether they
11
resulted in profits being made
depended on when they occurred in relation to the date of acquisition
of the shares and the state of
the market at the time of forfeiture.
And the overall profits would depend further on whether other
purchases and sales resulted
in profits or losses. There were thus a
number of variables which could influence the profit factor. That
profits were not inevitable
is proved by the fact that in the 1985
year of assessment the operation of the scheme showed a loss of R70
619.
In my view, therefore, any
receipts accruing to the Trust were not intended or worked for, but
purely fortuitous in the sense of being
an incidental byproduct.
They were therefore non-revenue. That makes them accruals of a
capital nature falling outside the definition
of "gross income"
in the Income Tax Act, and therefore not subject to tax. This
probably renders it unnecessary to consider
NICHOLAS AJA's
12
first conclusion viz that the
shares bought and sold by the Trust amounted to floating capital.
However, to the extent that it may
be necessary I proceed to do so.
In our law no company in the Pick
'n Pay group ("the Group") could itself lawfully assist
group employees to purchase or
subscribe for shares in any company in
the group. That follows from the prohibition against a company
purchasing its own shares:
Lipschitz NO v UDC Bank Ltd
1979(1)
SA 789 (A) at 797 H - 798 A;
AA Mutual Insurance Association Ltd v
Century Insurance Co Ltd
1986(4) SA 93 (A) at 101 D -E; and the
further prohibition contained in s 38(1) of the Companies Act, 61 of
1973 ("the Act")
against a company giving financial
assistance for the purpose of or in connection with a purchase or
subscription by any person for
shares of such company.
The reason for the establishment
of the Trust is to be found in the provisions of s 38(2) (b) of the
13
Act.
In terms thereof the prohibition contained in
subsec (1) does not apply to:
"(b) the provision by a
company, in accordance with any scheme for the time being in force,
of money for the subscription for
or purchase of shares of the
company or its holding company by trustees to be held by or for the
benefit of employees of the company,
including any director holding a
salaried employment or office in the company;"
In my view, there can be no doubt
that the
Trust was established by Stores in
order to act as its
alter ego
. It is correctly
accepted by NICHOLAS AJA,
as I have said, that the purpose
of the scheme was not
one of profit-making. As he puts
it:
"The acquisition of gain
formed no part of the raison d'être of the scheme, which, as
stated in its introductory paragraph
and Hurst's evidence, was to
enable Pick 'n Pay employees to acquire a shareholding in Pick 'n Pay
with no immediate capital outlay
and with advantageous terms of
payment. The only thing that Pick 'n Pay were interested in was
getting shares into the hands of employees,
and the furthest thing
from their minds was whether the Trust would make a profit or a
loss."
14
That notwithstanding, NICHOLAS AJA
holds that the shares acquired by the Trust constituted floating
capital. In my opinion, an analysis
of the manner in which the Trust
held and dealt with the shares makes that conclusion untenable.
The Trust initially received
shares allotted to it by Stores. When it sold those shares to an
employee, they were appropriated to
him and held in trust by the
Trust for at least five years unless the employee left the employ of
the Group prior to the expiry of
the five year period. In the event
of the employee leaving prior thereto, or in the event of the
employee leaving at any time in
consequence of dishonesty or
fraudulent conduct, then such employee would forfeit his shares and
his loan account would be credited
with whatever amount he might then
owe to the Trust. Those shares would then become available for resale
to other employees in terms
of the scheme.
15
During the relatively short
periods between forfeiture and resale, the shares would be held by
the Trust pursuant to and for the limited
purposes of the scheme. The
position is similar when the Trust acquires shares by way of purchase
on the Johannesburg Stock Exchange
or voluntarily from employees of
the Group. In respect of those shares the trustees were given no
discretion. They were obliged to
sell them to employees who qualified
for and purchased them. The price in terms of the scheme, and as
required by the Rules of the
Johannesburg Stock Exchange, was the
middle market price on the day of the purchase.
Despite what has hitherto been
said it is arguable that any intention or contemplation of a profit
accruing to the Trust could only
have been that of the founder of the
Trust, viz. Stores. The fact that the Trust, in effect, is the
alter
ego
of Stores would seem to demonstrate this proposition. In that
context, it
16
is consistent that provision is
made, on termination of the Trust, for any surplus to be paid over to
Stores. However, it is not necessary
to decide the point. Whatever
the position, for the reasons already advanced, it was not the
intention (purpose) of Stores or the
trustees that the Trust should
carry on business by trading in shares for profit. That conclusion,
with respect, effectively disposes
of the finding by NICHOLAS AJA
that the unsold shares held by the Trust from time to time
constituted floating capital. Where no
trade is conducted there
cannot be floating capital: see
Sekretaris van Binnelandse
Inkomste v Aveling
1978(1) SA 862 (A) at 880 B - 881 A.
It remains to deal with the
Commissioner's application for condonation of the failure to
timeously lodge the notice of appeal with
the registrar of this
Court. A satisfactory explanation for the omission has been tendered.
It is averred by the Commissioner
17
that the matter is one of
substantial importance: this is a test case for 15 similar cases
involving some R18,5 million. The grant
or refusal of condonation is
partly dependent upon the prospects of success. The Court held over
the decision in that regard until
it had heard full argument on the
merits of the appeal (cf
Rennie NO v Gordon and Another NNO
1988(1) SA 1 (A) at 20). This Court is divided as to the outcome of
the appeal. The test of reasonable prospects of success on appeal
being satisfied, condonation will be granted. The following order is
made:
The application for
condonation
is granted. The costs
in
connection therewith are to be
paid
by the appellant.
The appeal is dismissed with
costs, including the costs of two counsel.
J W SMALBERGER JUDGE OF APPEAL
GOLDSTONE, JA ) concur HOWIE, AJA
)