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[1994] ZASCA 176
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Commissioner for Inland Revenue v D. & N. Promotions (Pty) Ltd (249/93) [1994] ZASCA 176; 1995 (2) SA 296 (AD); [1995] 2 All SA 47 (A) (29 November 1994)
IN THE SUPREME COURT OF SOUTH AFRICA
(
APPELLATE DIVISION
)
In the appeal of:
THE COMMISSIONER FOR INLAND REVENUE
Appellant
versus
D. & N. PROMOTIONS (PTY) LTD
Respondent
CORAM
: CORBETT CJ, HEFER, VIVIER, NIENABER et HOWIE JJA
DATE OF HEARING
: 8 November 1994
DATE OF JUDGMENT
: 29-November 1994
JUDGMENT
/
CORBETT CJ
:
2
CORBETT
CJ
:
This is an income tax appeal. The respondent is a private
company with its registered office in Pietermaritzburg, Natal. It derives
its
income mainly from farming operations. These operations consist principally in
the growing and marketing of sugar cane. Other
subsidiary operations include
livestock trading, the production and marketing of dairy products and livestock
feed and timber growing.
The matters which give rise to this appeal relate to
respondent's sugar farming operations.
During the tax year ended 30 April 1985 the respondent received two items
of interest, viz a sum of R12 035 and a sum of R71 025.
It is common cause that
these receipts constituted income in respondent's hands. The dispute between the
parties concerns the question
whether or not in each case the receipt
constituted income derived from farming operations. The appellant (the
Commissioner for Inland
Revenue) contends that they did not: respondent contends
that they did.
Before dealing with the facts it is convenient
3 to sketch the legal background to the dispute and
to
explain briefly why it is to the advantage of the
fiscus
that the interest receipts in question be classified
as
income
not
derived from farming operations and to the
advantage of the taxpayer that they be regarded as
income
derived from farming operations.
Sec 26(1) of the Income Tax Act 58 of 1962 ("the Act") provides that the
income of any person carrying on "pastoral, agricultural
or other farming
operations" (for convenience I shall refer merely to "farming operations")
shall, in so far as it is derived from
such operations, be determined in
accordance with the provisions of the Act, but subject to the provisions of the
First Schedule.
The First Schedule deals in detail with how taxable income
derived from farming operations is to be computed.
Par 12(1) of the First Schedule then provided that, subject to the
provisions of subparas (2) to (6) inclusive (of which only (3)
is relevant in
this case), there shall be allowed, as deductions in the determination of the
taxable income derived by any
4 farmer, expenditure incurred by him
during the year of
assessment in respect of certain defined items,
listed
(a) to (j). Several of these items relate to what
would
otherwise constitute non-deductible capital
expenditure,
such as expenditure on dipping tanks, dams,
boreholes,
fences, the erection of or extensions, additions
or
improvements to farm buildings, the building of roads
and
bridges, the acquisition of machinery used for
farming
purposes and so on. In this respect farmers are, as
a
class, placed in a favourable position and for
this
reason the courts have, in dubio, tended to reject a
construction of such a statutory provision which implied
the extension of such a class privilege and to interpret
the provision strictly (see Ernst v Commissioner for
Inland Revenue
1954 (1) SA 318
(A), at 323 C-F; Buglers
Post (Pty) Ltd v Secretary for Inland Revenue 1974 (3) SA
28 (A), at 34 B-E).
A limitation is in effect placed upon the total amount which may be
allowed by way of deduction in terms of most of the subparas of
par 12(1) by par
12(3), which reads as follows:
5
"(3) The amount by which the total expenditure incurred by any farmer
during any year of assessment in respect of the matters referred
to in items (c)
to (j), inclusive, of subparagraph (1) exceeds the taxable income (as calculated
before allowing the deduction of
such expenditure and before the inclusion as
hereinafter provided of the said amount in the farmer's income) derived by him
from
farming operations during that year of assessment shall be included in his
income from such operations for that year and be carried
forward and be deemed
for the purposes of subparagraph (1) to be expenditure which has been incurred
by him during the next succeeding
year of assessment in respect of the matters
referred to in the said items."
In terms of this somewhat convoluted provision, where the deductions
allowable under subparas (c) to (j) of par 12(1) in a tax year
exceed the
farmer's taxable income derived from farming operations (before the deduction of
such expenditure), then such excess is
treated as income for that year and is
also carried forward as deductible expenditure in the next ensuing tax year. The
effect of
treating this excess as income in the immediate tax year is to wipe
out any loss and to produce a nil income from farming operations
in that tax
year; and this means that
6 the farmer is in effect prevented from
deducting excess
expenditure on the items listed in par 12(1) (c) - (j)
from income derived from non-farming sources. The
amount of
the excess is then carried forward from year to
year as deductible
expenditure until it has been fully
deducted.
It is normally to the advantage of a farmer that income earned by him be
classified as derived from farming operations because he
can then deduct
therefrom the type of expenditure referred to above; whereas such expenditure
cannot be deducted from income not
derived from farming operations. Conversely
it is to the advantage of the fiscus that such income be classified as income
not derived
from farming operations.
In assessing respondent to income tax in the 1985 tax year the appellant,
in a revised assessment, treated the two receipts referred
to above as income
not derived from farming operations. Respondent objected to this and certain
other items in the assessment (no
longer in issue) and, the objection having
been disallowed, appealed to the Natal Income Tax Special Court.
The
7 Special Court allowed the appeal in respect of
the
receipt of R12 035 and dismissed the appeal in so far
as
it related to the receipt of R71 025. (The judgment
of
the Court has been reported - see Income Tax Case No
1505
53 SATC 406.)
The appellant appealed to the
Natal
Provincial Division in respect of the decision
concerning
the R12 035 and respondent cross-appealed against
the
decision concerning the R71 025. The full bench of
the
Natal Provincial Division (consisting of
Thirion,
Levinsohn and Van der Reyden JJ) dismissed both
the
appeal and the cross-appeal. (See Commissioner for
Inland Revenue v D & N Promotions (Pty) Ltd 1993 (3) SA
33 (N).)
There is no definition of "farming operations"
in the Act and whether or not a person's economic
activity constitutes farming operations is essentially a
question of fact (see Income Tax Case No 1319 42 SATC
263, at 264) . In the Court a guo Levinsohn J, who
delivered the judgment of the Court, considered the
question as to what was meant by the phrase "derived from
farming operations" in the context of sec 26(1) of the
8
Act and the various provisions of the First Schedule
which require income to be derived from farming operations. He concluded
(at 38F) that for income to so qualify -
". . . the income and the source from which the income arises, namely
farming operations, which of course embraces numerous agricultural
activities,
must be directly connected. An indirect connection or a remote one will not
suffice."
I agree. (See also the judgment
of Melamet J in the Special Court, at 414-15.)
I turn now to the facts. In terms of sec 4 of the Sugar Act 9 of 1978 the
Minister of Economic Affairs is empowered, after consultation
with the South
African Sugar Association, to determine and publish the terms of an agreement to
be known as the Sugar Industry Agreement.
This agreement may provide for, inter
alia, the regulation and control of the production, marketing and exportation of
sugar industry
products. On 27 April 1979, acting in pursuance of this power,
the Minister published such an agreement in the Government Gazette.
9
(I shall refer to this as "the Sugar Agreement".)
Growers of
sugar market their product by selling and delivering the cane to sugar millers.
Clause 42 of the Sugar Agreement deals
with the determination of the price to be
paid for cane delivered by a grower to a miller; and clause 46 prescribes the
basis for
payment of the price by millers to growers. Clause 46 has been quoted
in its entirety in the judgment of the full bench (see reported
judgment at 36 G
to 37 E) and it is not necessary to repeat this. In essence, what it amounts to
is that the grower is paid by means
of (a) monthly provisional payments and (b)
a final annual payment. The provisional payments are based upon 90 per cent of
an estimated
price per metric ton of sucrose in cane, determined in a particular
way, for the sucrose deliveries made. The final payment, made
on 30 April each
year, is based upon a finally determined price per metric ton for that whole
year. This final payment is required
to include what is termed "retention
interest", calculated in accordance with an elaborate formula and designed, as I
understand
it, to compensate the grower
10 for the miller's
retention during the year of such
difference as there may be between
the final price per
metric ton and the provisional price therefor.
In this
case the R12 035 represents retention interest paid by
a
miller, Illovo Sugar Estates Limited, to the
respondent
during the 1985 tax year.
In delivering the judgment of the Special Court
Melamet J said with reference to this amount of retention
interest (at 416):
"It is clear that such interest payments are part and parcel of the final
payment of the sugar cane delivered by the grower to the
appellant. It is thus
part of the compensation for the product produced in the course of the farming
operations of the appellant.
It is part of the equalisation process for the
products delivered to the mill. In our view the interest so received is Income
directly
derived from the farming operations of the appellant and falls to be
dealt with in terms of s 26(1) of the First Schedule to the
Income Tax
Act."
In my view this reasoning cannot be
faulted. The argument put forward, somewhat tentatively, by counsel for the
appellant was that
the moneys retained by
11
the miller in terms of the scheme of payment
prescribed
by clause 46 of the Sugar Agreement were a form
of
investment which carried interest and that,
therefore,
the interest did not constitute income derived
from
farming operations. I find this argument far-fetched.
It is true that if a farmer invests surplus funds, even
funds derived from farming operations, then interest paid
on the investment would not normally be regarded as
income derived from farming operations, but the present
case is a far cry from that. The interest receipt does
not derive from an investment of surplus funds: it is
part and parcel of a scheme devised for the remuneration
of the farmer for the sugar cane delivered by him to the
miller. It is no doubt a healthy mechanism designed to
ensure that there is not too great a disparity between
provisional and final payments and to compensate the
farmer for the delay in receiving the full price for his
goods. The income which a sugar farmer derives from his
farming operations is the price which he is paid by the
sugar miller for his product. This includes retention
interest. The appellant's argument on this aspect of
12 the
matter cannot prevail and the appeal must be
dismissed.
I come to the cross-appeal relating to the item
of income amounting to R71 025. This arises from an
amendment
to the Sugar Agreement which was published in
the Government Gazette
on 30 March 1984. Clause 37 of
the original agreement provided as
follows:
"37. The cost of delivering cane to the mills to which growers are obliged
under any existing contracts to deliver, or, in the absence
of any existing
contracts, to the
mills to which they are or may subsequently be attached for quota purposes
under this Agreement shall be calculated, apportioned and
recovered by growers
and millers in such manner and subject to such rules as may be laid down by the
Sugar Association with the approval
of the
Minister."
As was explained in evidence,
under the original Sugar Agreement growers were free to make their own
arrangements as to the transport
of cane to the sugar mills and over the years
growers had established contractual arrangements with the various millers. The
cost
of delivery was borne by the grower, but in terms of
13 clause
37 he was entitled to be paid a cane transport
allowance by the SA
Sugar Association in accordance with
a certain formula. In addition,
many growers enjoyed
what were termed "mill site rights". These came
about
when a mill was closed down. In such a case it was
a
common practice for the new mill owner, who took over
the
cane supply which previously had gone to that mill, to
say to the growers concerned: "we will make the site of
that
mill a mill site to which you may deliver your cane
at your expense and we as miller will bear the cost
of
transporting the cane from there to the site of the
new
mill". Some growers also had arrangements with mills
in
which they received subsidies or "kick-backs" from
the
mill itself.
As a result of many anomalies in the
organization of the sugar industry a Commission of
Inquiry was appointed in 1980. The Commission
recommended the elimination of these anomalies and the
rationalization of the industry. In pursuance of these
recommendations the Sugar Agreement was amended in 1984
by the substitution of a new clause 37. This is a
14 lengthy
provision, portion of which is quoted in the
judgment of the Special
Court (at 417). The general
effect of the new clause and regulatory
action taken in
terms thereof was explained in evidence. Growers
were
no longer permitted freedom of choice as to the mills
to i
which they could deliver their cane.
Delivery
arrangements were generally rationalized with a view
to
efficiency and mill site rights were abolished.
Furthermore,
growers were made to bear the full cost of
transport of cane to the
mills and all forms of
subsidization were prohibited.
In order to recompense growers for the loss
of
these rights and the additional burdens
imposed upon them
monetary compensation was paid to them by the Sugar
Association. The amount of such compensation was
assessed in each individual case and the quantum thereof
depended upon the application of various criteria to the
grower's particular circumstances. Compensation was
paid in five instalments over a period and interest was
paid to growers on the outstanding compensation not yet
paid. The R71 025 in question constituted such interest
15
received during the 1985 tax year. It was held by the
Special Court (at 417-18) that -
"Such compensation was a capital sum paid for the loss of, or interference
with the taxpayer's right to have or make its own arrangements
for the transport
of its sugar cane. Such compensation was under a similarly worded agreement held
to be of a capital nature for
purposes of taxation. Kommissaris van Binnelandse
Inkomste v Transvaalse Suikerkorporasie Bpk
49 SATC 11
In view of the fact that there was not to be a payout in one lump sum of the
capital, it
was regulated that the Sugar Association would pay interest each year on the
balance of the moneys due to the grower but being retained
by the SA Sugar
Association.
It is clear that the interest was derived from a capital sum due to the
appellant retained by the SA Sugar Association. It was interest
accruing on
either a compulsory investment of a fixed amount by the appellant with the SA
Sugar Association or on a compulsory loan
of this amount by the appellant to the
SA Sugar Association. If the capital sum had been paid in one lump sum and such
moneys invested
with or loaned to another institution, it is clear that such
interest would not have been regarded as being derived from farming
operations.
In our view the position is not altered by the fact that
such
16
investment or loan was not effected voluntarily but
compulsorily.
We are of the view that the
appellant has
failed to discharge the omus of proving that
such interest was derived from the farming operations conducted by the
appellant."
Counsel for the respondent
conceded that the compensation itself constituted a receipt, or rather a series
of receipts, of a capital
nature. The compensation thus fell outside the general
ambit of respondent's income-earning operations from sugar farming, which,
as I
have said, consisted essentially of growing and marketing sugar cane.
Counsel submitted, however, that the interest payable on the compensation
was derived from farming operations since this interest
would not have accrued
to respondent unless it had been conducting sugar farming operations and since
the quantum thereof was determined
by the peculiar features of respondent's
operations. He furthermore pointed out that the transport, loading and delivery
of respondent's
cane formed an Integral part of respondent's farming
operations.
It is true that respondent would not have
17 received the compensation and the interest had it not
been carrying on sugar farming operations. In other
words,
the carrying on of such operations was a conditio
sine gua non of these receipts. But I do not think that
it follows from this that the interest was derived
directly from farming operations; and here I would
emphasize the word "directly". On the contrary it seems
to me that the interest was
not
directly derived from
farming operations. It was admittedly derived from the
abolition of certain rights relating to the
transportation and delivery of respondent's farming
productsy but this, in my view, is too remote and tenuous
a connection with respondent's actual farming operations
for the interest to be regarded as having been derived
from farming operations. The fact that the compensation
was assessed in relation to the peculiar position of each
farmer takes the matter no further.
Similar arguments were advanced in the Court a
quo and rejected for similar reasons (see reported
judgment at 41 D - 42 F). The cross appeal fails.
18
It is ordered: |
(1) That the appeal is dismissed with costs.
(2) That the cross-appeal is dismissed with costs.
M
M CORBETT
HEFER JA) VIVIER JA) NIENABER JA) CONCUR HOWIE JA)