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[1995] ZASCA 81
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Richards Bay Iron & Titanium (Pty) Ltd and Another v Commissioner for Inland Revenue (458/93) [1995] ZASCA 81; 1996 (1) SA 311 (SCA); (24 August 1995)
CASE NO. 458/93
IN THE SUPREME COURT OF SOUTH AFRICA (APPELLATE DIVISION)
In the matter between:
RICHARDS BAY IRON & TITANIUM
(PTY) LTD & TISAND (PTY) LTD APPELLANTS
and
THE COMMISSIONER FOR
INLAND REVENUE RESPONDENT
CORAM
: CORBETT CJ, BOTHA, EKSTEEN, HOWIE et
MARAIS JJA
HEARD
: 2 MAY 1995
DELIVERED
: 24 AUGUST 1995
JUDGMENT
MARAIS JA/
2
MARAIS JA/
These are appeals by Richards Bay Iron and Titanium (Pty) Ltd
("REIT") and Tisand (Pty) Ltd ("Tisand") against the dismissal by the
Natal
Income Tax Special Court of their respective appeals against the Commissioner
for Inland Revenue's assessment of the normal
tax payable by REIT for the years
of assessment ended 31 December 1987,1988, and 1989, and by Tisand for the years
of assessment
ended 31 December 1987, 1988, 1989 and 1990. The income generating
activities of REIT and Tisand are so closely intertwined that
the hearings of
both appeals were consolidated before the court
a quo
, as were the
appeals to this court. Both appellants were represented by the same counsel and
attorneys in the court a quo. On appeal
to this court they were represented
again by the same
3
counsel and attorneys.
The questions which fall to be considered will be
better understood if their formulation is deferred until after the factual
background
giving rise to them has been sketched. The coastal dunes in the
vicinity of Richards Bay in Zululand are rich in certain minerals.
REIT and
Tisand join forces to extract and beneficiate those which are valuable. The
process, in broad, consists of creating in the
dunes self-contained ponds of
water into which dune sand is made to slump by undermining the face of the
dunes; of removing the resultant
slurry by suction with the aid of a floating
dredger; of separating the heavy mineral concentrate from the dune sand in a
floating
concentrator plant by means of a gravity separation process; of
separating that heavy mineral concentrate in a mineral separation
plant into
rutile, zircon, monazite and ilmenite; and of thereafter
4
beneficiating the ilmenite in a sophisticated smelter complex to yield
titania slag and an iron of high purity.
Rutile and zircon are sold as mineral sands. Rutile is used as a raw material
in the manufacture of pigment and in the production
of titanium metal, as well
as a flux coating on welding electrodes. Zircon is used mostly as an opacifier
in ceramic glazes, a constituent
of refractory materials used in the production
of steel and glass, and as a moulding sand in foundries. It is also used in the
production
of zirconium oxide, metal and chemicals, sanitary ware and tiles.
The titania slag is cooled, crushed and screened into different grades,
stored in silos, and sold to customers both here and abroad.
It is an essential
raw material for the production of titanium dioxide pigment which is a white
pigment used in the production of
5
paints, plastics, paper and printing inks. It is also used in the production
of textile fibres and vitreous enamels.
The high purity iron is essentially a
raw material used by the ductile iron foundry industry. The iron's low manganese
and phosphorus
content provides important metallurgical and economic advantages
for the industry. The iron is marketed in the form of "pigs" or
ingots.
The role of each of the appellants in this process requires explanation.
Tisand is owned by a majority of South African shareholders
and holds the
mineral rights which are being exploited. REIT is owned by a majority of
Canadian shareholders. The two companies operate
in conjunction with one another
under the style Richards Bay Minerals. Tisand conducts the operations which
result in the production
of the heavy mineral concentrate. It separates them
6
into three main products, namely, ilmenite, rutile and zircon. Some monazite
is also produced. It sells the ilmenite to RBIT and the
rutile and zircon to
whomsoever will buy them (mainly, purchasers abroad). The monazite was at one
time readily saleable but has
become less so as a consequence of the discovery
of a better product in China. Tisand sells it when it can. RBIT processes and
smelts
the ilmenite purchased from Tisand to produce titania slag and high
purity iron, mainly for export.
In the course of these operations, there are
brought into existence at various stages what are described by appellants as
"stockpiles"
of material. It is the status in tax law of some of those
stockpiles, and the extent, if any, to which they are to be taken into
account
in assessing appellants' taxable income, which require to be considered in this
appeal. That necessitates a more detailed
7
description of some aspects of appellants' operations, and the nature of the
relevant stockpiles.
From every 1000 tons of dune sand, Tisand produces some
50-70 tons of heavy mineral concentrate of which about 70 per cent are valuable
heavy minerals. The heavy mineral concentrate is pumped to a specially prepared
stockpile area and it is that concentrate which is
referred to as stockpile 1.
Heavy mineral concentrate taken from there may go directly into the mineral
separation plant or may go
into another stockpile of heavy mineral concentrate
maintained at the plant. That stockpile is known as stockpile 2, or the "Sunday"
stockpile and it serves as a "stand-by" supply of heavy mineral concentrate to
ensure that at all times there will be a supply of
concentrate available to keep
the plant operating continuously. Temporary shut downs are expensive and
restarting complicated.
8
What is in stockpiles 1 and 2 is mainly a mixture of ilmenite, rutile,
zircon, and monazite.
Tisand subjects the heavy mineral concentrate to
treatment in a minerals separation plant. What emerges is, on the one hand,
ilmenite
which goes into stockpile 3, and is referred to as roaster feed and, on
the other, a mixture of rutile and zircon which goes into
stockpile 4. There is
also a residual mixture of ilmenite, monazite, rutile and zircon (described as
LSR (low susceptible rejects)
concentrates in the documentation and the record)
which constitutes stockpile 5. The material in stockpile 5 is subjected by
Tisand
to a process designed to extract from it, and to separate, any remaining
ilmenite. Any ilmenite so recovered is added to stockpile
3. It is the ilmenite
in stockpile 3 which is sold by Tisand to REIT. The monazite is also separated
from the material in stockpile
5 during this
9
process, as are the rutile and zircon. The monazite is stored in a silo and
referred to as stockpile 9. The rutile and zircon recovered
will have not yet
have been separated from one another and they will be processed together with
the rutile and zircon mixture emanating
from stockpile 4. The two minerals are
separated from each other by electrostatic techniques. The rutile goes into a
silo described
as stockpile 6. The zircon is subjected to further treatment
which yields two grades of zircon. The standard grade goes to stockpile
7; the
prime grade goes to stockpile 8. That describes Tisand's operations sufficiently
for present purposes, and accounts for stockpiles
1 to 9. I turn now to the
operations of REIT.
REIT subjects the ilmenite in stockpile 3 to a roasting and magnetic process
which removes calcium and chrome from it and renders
it suitable for smelting.
It emerges as pure ilmenite and it is
10
stored in silos described as stockpile 10. At this stage it is referred to as
smelter feed and is a composite of titanium and iron
oxide. The smelting process
requires anthracite to be used as a reductant. It is heated in a charring plant
to reduce its volatile
content and to create char and coke stockpiles. The char
is conveyed to the smelter where it is blended with the smelter feed (roasted
ilmenite) from stockpile 10 and the resultant blend is referred to as furnace
charge and constitutes stockpile 10a.
In the furnace the carbon in the char combines with the oxygen in the iron
oxide and molten iron is produced. The iron oxide having
been removed from the
ilmenite, a high grade titania slag (titanium dioxide) is produced. The titania
slag is tapped into moulds,
cooled, crushed, and sized. The various grades and
types of slag are in stockpiles 11, 12,12a, 12b, 12c, 12d, and 12c. They are
marketable
11
as such.
The molten iron is subjected to further treatment at an iron
injection plant where chemical additives are injected to obtain grades
required
by REIT's customers. The molten iron is then cast into "pigs" or ingots and
comprises stockpile 13.
In completing their income tax returns for the
relevant tax years, and more specifically, when calculating their trading
income, appellants
failed to take into account the value of certain of the
stockpiles. Appellants subtracted from their trading income all the deductible
expenses incurred in producing these stockpiles, but failed to add to such
income the value to appellants of the stockpiles generated
by a good deal of
that expenditure. The economic and financial benefit which had accrued to
appellants as a result of such expenditure
was simply ignored.
12
The questions which arise in this appeal are the consequence of the
Commissioner adding to the profits of appellants for the tax years
in issue
substantial amounts running into millions of rands and representing what the
Commissioner styled "closing stock in respect
of work in progress" for the 1987
tax year, and "increase in work in progress stock" in the tax years 1988, 1989,
and 1990. In the
case of REIT, and for the 1989 tax year, the Commissioner
deducted from its taxable income an amount representing what he styled
"decrease
in work in progress stock". In effecting these adjustments the Commissioner
sought to rectify the failure of appellants
to reflect the value of the
particular stockpiles when calculating their taxable income. Appellants contend
that they acted correctly
in ignoring the relevant stockpiles. The Commissioner
contends that they did not.
The Commissioner's contention is founded upon the
13
provisions of sec. 22 read with the definition of "trading stock" in sec.
1, of the Income Tax Act No. 58 of 1962 ("the Act") and the
particular
character of the stockpiles in issue. Those provisions of sec.
22 of the Act
which are directly relevant to the questions (I omit those
which are not)
then read:
"(1) The amount which shall, in the determination of the taxable income
derived by any person during any year of assessment from carrying
on any trade
(other than farming), be taken into account in respect of the value of any
trading stock held and not disposed of by
him at the end of such year of
assessment, shall be the cost price to such person of such trading stock, less
such amount as the
Commissioner may think just and reasonable as representing
the amount by which the value of such trading stock, not being shares
held by
any company in any other company, has been diminished by reason of damage,
deterioration, change in fashion, decrease in
the market value or for any other
reason satisfactory to the Commissioner.
(2) The amount which shall in the determination of the taxable income derived
by any person during the year of
14
assessment from carrying on any trade (other than farming), be taken into
account in respect of the value of any trading stock held
and not disposed of by
him at the beginning of any year of assessment, shall -
(a)
if such trading stock
formed part of the trading stock of such person at the end of the immediately
preceding year of assessment be
the amount which was, in the determination of
the taxable income of such person for such preceding year of assessment, taken
into
account in respect of the value of such trading stock at the end of such
preceding year of assessment; or
(b)
if such
trading stock did not form part of the trading stock of such person at the end
of the immediately preceding year of assessment,
be the cost price to such
person of such trading stock.
(3) (a) For the
purposes of this section the cost price at any date of any trading stock in
relation to any person shall be the cost
incurred by such person, whether in the
current or any previous year of assessment in acquiring such trading stock,
plus, subject
to the provisions of paragraph (b), any further costs incurred by
him up to and including the said date in getting such trading stock
into its
then existing condition and location.
(b) The further costs which in terms of paragraph (a) are required to be
included in the cost price
15
of any trading stock shall be such costs as in terms of any generally accepted
accounting practice approved by the Commissioner should
be included in the
valuation of such trading stock."
"(4) If any trading stock has been acquired by any person for no consideration
or for a consideration which is not measurable in
terms of money, such person
shall for the purposes of sub-section (3) be deemed to have acquired such
trading stock at a cost equal
to the price which in the opinion of the
Commissioner was the current market price of such trading stock on the date on
which it
was acquired by such person: Provided that any capitalization shares
awarded by any company to shareholders of that company on or
after 1 July 1957
shall have no value as trading stock in the hands of such shareholders: Provided
further that options or any other
rights to acquire shares in any company which
have been acquired as aforesaid shall have no
value."
Legislative alterations of sec 22 have been
made since, but without retroactive effect, and the changes made have no bearing
upon
the questions raised in this appeal.
The definition of "trading stock" in sec. 1 of the Act
read
16
at the relevant times:
" 'Trading stock' includes 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".
Subsequent
amendments brought about by sec 2 (1) (e) of Act No 101 of 1990 and sec 2 (1)
(m) of Act No 113 of 1993 were not operative
during the tax years in issue and
are consequently not material for present purposes.
The rationale for the existence of these provisions is neither far to seek
nor difficult to comprehend. The South African system of
taxation of income
entails determining what the taxpayer's gross income was, subtracting from it
any income which is exempt from
tax, subtracting from the resultant income any
deductions allowed by the Act, and thereby arriving at the taxable income. It is
on
the
17
latter income that tax is levied. The concepts involved are defined in the
Act.
Commissioner for Inland Revenue v Nemojim (Pty) Ltd
1983(4) SA
935(A) at 946G-H. Where a taxpayer is carrying on a trade, any expenditure
incurred by him in the acquisition of trading
stock is deductible in terms of
sec. 11(a) of the Act because it is expenditure incurred in the production of
income, and it is not
of a capital nature. Income generated by the sale of such
stock is of course part of the trader's gross income. Where in his first
year of
trading a trader has bought, and thereafter sold, all the stock which he
acquired during that year, no problem arises. There
will be a perfect
correlation between the trading income earned and the expenditure incurred in
that particular year in purchasing
and selling the stocks sold, and the
difference between the two sums will give a true picture of the result of the
year's trading.
There will be no stock on hand at the close of
18
the year of which account need be taken. Contrast with that situation, a
situation in which the trader, having sold all the stock
acquired earlier during
that year at a substantial profit, purchases large quantities of stock just
prior to the close of his tax
and trading year. | If he were permitted to deduct
the cost of purchasing that stock from the income generated by his sales,
without
acknowledging the benefit of the stock acquired, he would be escaping
taxation in that year on income which otherwise would have
been taxable, by the
simple expedient of converting it into trading stock of the same value. That
process could be repeated every
year
ad infinitum
. It is true that there
would ultimately have to be a day of reckoning when trading finally ceases, but
the fact remains that the
taxpayer will have been enabled to avoid liability for
tax until that point is reached. Where the trader is an individual who is
subject to rising marginal tax rates
19
as his trading profit increases, he would be enabled to so regulate his
apparent profit that he immunised himself from them indefinitely.
All this
appears to be recognised expressly or implicitly by the writers of text-books on
income tax in South Africa. See
Meyerowitz and Spiro on Income Tax
, para.
538;
Silke on South African Income Tax,
para. 8.111; Williams,
Income
Tax in South Africa
.
Law and Practice
. (1994) at page 281; Stack and
Cronje,
The Taxation of Individuals and Companies
. 8th ed. (1994), pages
163 and 342. In Australia, whose system of taxation has much in common with our
own in its eschewal of the
assessment of tax on the profits or gains of a
business in accordance with undiluted accounting principles and practices, and
its
preference for the assessment of tax upon the excess of assessable income
over allowable deductions, the rationale for the existence
of provisions broadly
similar to sec 22 of the South
20
African Act has been explained by the High Court in
Federal Commissioner
of Taxation v St Hubert's Island Pty Ltd (in liquidation
) (1978) 78
Australasian Tax Reports 452. The decision is helpful in two respects. Firstly,
it explains why it is necessary to take
into account the value of trading stock
on hand at the beginning and at the close of a tax year. Secondly, it explains
why trading
stock is now regarded as encompassing more than the stock of goods
acquired or ! manufactured by a trader to be sold. Because the
report of the
case is unlikely to be generally accessible in South Africa I shall quote
extensively from it.
Stephen J
(at 456) recalled that in
C of T (SA)v Executor Trustee
& Agency Co of SA Ltd (Garden's case
)
[1938] HCA 69
;
(1938) 63 CLR 108
at 156,
1 AITR
416
at 443,
Dixon J
had said: "The basis of a trading account is stock on
hand at the beginning and end of the period and
21
sales and purchases". He went on to say that
Dixon J
had explained why
it is impracticable to estimate income from trade otherwise than by means of a
profit and loss account, and had
added that the computation of profits from
trading "has always been upon the principle that the profit may be contained in
stock-in-trade
—".
Stephen J
concluded that only "by taking account
of stock-in-trade in the conventional way can a correct reflex of the trader's
income for
the accounting period be obtained", and that the provisions in
sections 28-31 of the Australian legislation were there to ensure
"such a
correct reflex in the case of stock-in-trade". Reference was also made to a
passage from the speech of
Lord Reid
in
Duple Motor Bodies Ltd
v
Ostime
[1961] UKHL 6
;
(1961) 39 TC 537
at 569-70 in which he said " long ago
it became customary to take account of stock-in-trade, and for a simple
reason. If the amount of stock-in-trade has increased materially
during
22
the year then in effect sums which would have gone to swell the year's
profits are represented at the end of the year by tangible
assets, the extra
stock-in-trade which they have been spent to buy; and similar reasoning will
apply if the amount of stock-in-trade
has decreased. So to omit the
stock-in-trade would give a false result". There is no reason to doubt that it
was for these reasons
that the South African legislation too requires opening
and closing trading stock to be taken into account when determining taxable
income derived from carrying on any trade in any year of assessment. Certainly,
no other reasons have been suggested. See the case
of
Nemoiim
, supra, at
956G -957A.
How it came about that the narrower view of what constituted trading stock or
stock-in-trade gave way to the wider view now taken
in both Australia and South
Africa is also explained. In the
23
Australian legislation "trading stock" is defined as including
"anything
produced, manufactured, acquired or purchased for purposes
of
manufacture, sale or exchange, and also includes live stock".
Stephen J
said:
"In deciding this question one notes, at the outset, that the statutory meaning,
by including in 'trading stock' things acquired
not only for purposes of sale or
exchange but also for purposes of manufacture, enlarges the ordinary meaning of
the term. Dictionary
meanings of 'stock', in the sense of stock-in-trade or
trading stock, generally involve the concept of being kept on hand by a trader
for sale by him and would not extend so as to include raw materials acquired for
purposes of manufacture. The inclusion of live stock
effects a further
enlargement of the meaning of trading stock, a dairy farmer's milking herd,
although 'live stock', would not be
trading stock as ordinarily understood". (At
454.)
Mason J
said:
"It has been suggested that the definition contained in s 6(1) of the Act, to
the extent to which it refers to anything 'acquired
or purchased for the
purposes of manufacture', represents an extension of the accepted meaning of the
term. No doubt it is correct
to say that historically 'trading stock' and
'stock-in-trade' denoted the stock of goods acquired by a trader or dealer
and
24
held for sale. Even today it would be correct to speak of the trading stock
or stock-in-trade of Steptoe & Son. But whereas both
expressions may have
had this limited meaning in times gone by, trading stock has acquired a more
extensive denotation in modern
times. It is a commercial term, ordinarily
employed by accountants and auditors and it is to usage by commercial men that
we must
look in determining what it signifies, rather than to standard
dictionaries which so often fail to reflect current usage and just
as frequently
fail to reflect modern commercial usage.
As applied to the business of a manufacturer of goods, accountants and
commercial men by their use of the expression 'trading stock'
denote not only
the goods which he has manufactured and holds for sale but his stock of raw
materials, components and partly manufactured
goods.
Whiteman and Wheatcroft
on Income Tax,
2nd ed (1976) p 444, under the heading 'Stock-in-Trade and
Work in Progress', say:
'A manufacturer who buys raw materials, processes them and sells the finished
product will normally have on hand some unused raw
materials, some partly
manufactured goods and some finished goods awaiting sale. The first and last are
stock, the partly processed
goods being sometimes called stock and sometimes
work in progress. In addition, a manufacturer may have on hand goods which he
consumes
in the course of his manufacture, such as coal; this is also regarded
as stock'.
25
See also
Simon's Taxes
, 3rd ed, vol B, pp 411 et seq.
The view expressed by Whiteman and Wheatcroft is not a mere outgrowth of the
United Kingdom statutory definitions to which I have
already referred. It is a
reflection of commercial usage arising from the development of accounting
principles over a long period
of time. The authors refer, in support of the last
sentence in the passage quoted, to the decision of Rowlatt J in
George
Thompson & Co Ltd v IR Comrs
(1927) 12 TC 1091
where a shipping company
having contracted to purchase a quantity of coal for the purpose of running its
ships subsequently transferred
the benefit of the contract at a profit -when its
ships were requisitioned in 1916, there being no need for the coal. It was held
that the coal was bought on revenue account as consumable stores as part of the
business and that therefore the profit was taxable.
In effect the coal was
treated as part of the taxpayer's trading stock.
The recognition by accountants and commercial men that raw material used for
the purpose of manufacture in a manufacturing business
and partly manufactured
goods form part of the trading stock of the business was an almost inevitable
development. It enabled the
value of raw materials and partly manufactured goods
to be included in the value of trading stock at the beginning and end of an
accounting period and by this means it led to the making or a more accurate
calculation of the profit earned or the loss sustained
in that period. It is not
easy to see how an accurate calculation of profit or loss could be made
26
unless the value of raw materials and partly manufactured goods was taken
into account. Of course the value might be taken into account,
even though by
different means. Partly manufactured goods may be dealt with as 'work in
progress', as indeed they are sometimes,
but this expression is no more than an
alternative description except in so far as it is intended to introduce
different methods
of valuation.
In this respect I agree with Aickin J that
the House of Lords in
Ostime (Insp of Taxes) v Duple Motor Bodies Ltd
[1961] UKHL 6
;
(1961) 1 WLR 739
did not treat work in progress as being essentially different
from trading stock. Their Lordships used the expression 'work in progress'
as an
alternative description for partly manufactured goods which, like raw materials
and completed goods, form part of the trading
stock of a business and which, as
that case illustrates, give rise to special problems of valuation. At 751, Lord
Reid. with whose
judgment Lord Tucker and Lord Hodson agreed, said:
'Suppose that the manufacture of an article was completed near the end of an
accounting period. If completed the day before that
date the article, if not
already sold, has become stock-in-trade, if completed the day after that date it
was still work in progress
on that date'.
In
Henderson v FC of
T
(1969) 119 CLR 612
at 635;
1 ATR 133
at 146, Windeyer J, after referring
to this statement, said:
27
'These propositions relate to 'work in progress' as a synonym for tangible
things, goods in process of manufacture from raw materials,
things which when
completed will become stock-in-trade'.
These observations were
directed to the question whether the
stock of partly manufactured goods is to
be treated for taxation !
purposes in the same fashion as completed goods and
to this
question an affirmative answer was returned. The expression
'work
in progress' was used to differentiate goods in the former
from those in the latter category. It is, I think, taking too much
from what was said to conclude that these statements positively
express the view that goods in process of manufacture are
excluded from 'trading stock'. If they go so far, I would, with
respect, disagree with them. The wide view of the ordinary
denotation of 'trading stock' is not something which is peculiar
to the United Kingdom and foreign to Australia. In 1 CTBR
(NS) Case 120 at 572, the Chairman, Mr Gibson, observed that
he had little doubt that raw materials came to be regarded long
ago commercially as trading stock.
It has been pointed out previously that, unlike the United
Kingdom income tax legislation, the Act does not provide for
the assessment of tax on the profits or gains of a business -
see
Commercial & General Acceptance Ltd v FC of T
(1977)
[1977] HCA 47
;
7 ATR 716
at 720-1;
16 ALR 267
at 272-3, and the cases
cited;
J Rowe & Son (Pty)Ltd v FC of T
[1971] HCA 80
;
(1971) 124 CLR 421
at 450-1;
2 ATR 497
at 500-1. One consequence of this
28
difference is that some accounting principles and practices
which have been held to be appropriate in the ascertainment of
a taxpayer's profit may have no application here because our
statutory provisions specifically instruct us as to what constitutes
assessable income and as to the items that shall be allowed as
deductions from that income. The trading stock provisions
contained in ss 28 to 36 are a case in point. Accounting
principle and practice cannot prevail over them. However, as
the definition of 'trading stock' contained in s 6(1) is not an
exclusive definition, it requires us to give effect to the ordinary,
and in this case that happens to be the commercial, meaning of
the expression, notwithstanding that in part at least it is a
meaning which may have derived from or may have been
influenced by accounting principle or practice.
If trading stock according to its ordinary meaning denotes land
as well as goods and commodities, it must follow that land may
form part of the trading stock of a business before it has been
converted into the condition in which it is intended to be sold.
Just as raw materials and partly manufactured goods form part
of the trading stock of a manufacturer, so also virgin land which
has been acquired by a land developer for the purpose of
improvement, subdivision and sale in the form of allotments will i
form part of his trading stock". (At 461-462)
Aickin J
said nothing inconsistent with the views of
Stephen J
and
Mason
J
.
29
I did not understand counsel for appellants to contest during oral argument
the rationale for the existence of provisions such as
sec 22 read with the
extended definition of trading stock in sec 1 of the Act. In the heads of
argument filed by appellants it had
been contended that the decision of this
court in
De Beers Holdings (Pty) Ltd v Commissioner for Inland Revenue
1986(1) SA 8(A) showed at 32 E-F that the definition of trading stock in sec 1
should be interpreted in such a way that only that
which would ordinarily have
been regarded as trading stock or stock-in-trade falls within its ambit.
However, during oral argument
counsel for appellant frankly conceded that in
making that submission in the heads of argument, the impact of the use of the
word
"comprehend" in the following passage in the judgment was not sufficiently
taken into account:
" the definition would seem to comprehend what is
30
ordinarily understood by the term trading stock". (At 33 C.) If the entire
sentence (of which the above passage is but a part) in
the judgment is read, it
is plain that the court did not intend to convey that the meaning to be given to
the words "trading stock"
had to be so confined. The court was concerned with a
different question, namely, whether or not the definition was exhaustive.
While accepting that the definition had the effect of
encompassing things
which would or might not ordinarily be regarded
as trading stock, counsel for
appellants submitted that it should not be
interpreted as encompassing that
which has no separate identity and
value as a saleable article, or product,
or commodity. He contended
that that is especially so in the case of anything
manufactured. He
emphasised the use of the word "anything" in the definition
and
contended that that part of the definition which reads "anything
31
the proceeds from the disposal of which forms or will form part of his gross
income" shows that a saleable product was contemplated.
It was suggested that
the reference in sec 22(1) of the Act to a possible diminution in the value by
reason of a "decrease in the
market value" of trading stock held by the
taxpayer, and the reference in sec 22 (4) to trading stock being deemed in the
circumstances
there set out to have been acquired "at a cost equal to the
current market price of such trading stock on the date on which it was
acquired"
strengthened the contention. A "purposive" approach to the interpretation of the
definition of trading stock, such as that
described in
Public Carriers
Association and Others v Toll Road Concessionaries (Pty) Ltd and Others
1990(1) SA 925(A) at 943C - 944D, was submitted to be appropriate because of the
generality of the language employed in the definition
and the need to restrict
the meaning to be assigned to it so
32
as to achieve the purpose of the legislature, without at the same time
dubbing as trading stock things which there could be no sensible
legislative
purpose in treating as trading stock. As I have said, the contention was that
the purpose of the legislation was to ensure
that only saleable or realisable
stock is brought to account. The corollary of the submission was that if
something is merely in
the process of being "produced, manufactured, purchased
or in any other manner acquired" by the taxpayer and it has as yet no realisable
value, it cannot be regarded as trading stock within the meaning of the
definition. The use of the past tense in the definition ("produced",
"manufactured", "purchased" or "acquired") showed, so it was argued, that if
what was acquired or manufactured was what counsel called
"part of a continuous
process of acquisition or manufacture", it could not fall within the definition
because the process was incomplete.
I
33
interpolate here en passant that this would result in what is referred to in
England and Australia as work-in-progress being largely,
if not entirely,
excluded from the statutory concept of trading stock.
A further submission made by counsel for appellant
was
that it was inherent in the concept in the
definition of "anything
the proceeds from the disposal of which forms or will
form part of his gross income" that a saleable or realisable thing was
contemplated because there could be no talk of proceeds if
that were not so, and
"to hold otherwise would mean that a taxpayer would be obliged to pay tax on the
deemed value of something
which at that stage is not realisable by him".
It was contended that the particular stockpiles in issue did not comply with
the interpretation of the relevant provisions postulated
by counsel for
appellants and that they were therefore rightly
34
disregarded by appellants in calculating their taxable income. The particular
stockpiles disregarded are listed below with a brief
accompanying description of
what they contained.
Tisand's Stockpiles
Stockpile No 1
-
Heavy Mineral
Concentrate (HMC) Stockpile
This is situated close to the dredging pond and it consists of heavy mineral
concentrate which has been separated from the dredged
sand. The heavy mineral
concentrate is mainly a mixture of ilmenite, rutile, zircon and monazite.
Stockpile No 2
-
"Sunday" Stockpile
This too consists of heavy mineral concentrate and is a reserve supply.
Stockpile No 4
-
Zircon/Rutile Stockpile
This consists of a mixture of rutile and zircon derived from the processing
of heavy mineral concentrate in a minerals separation
plant.
Stockpile No 5
-
Low Susceptible Rejects Stockpile
This is a residual mixture of ilmenite, monazite,
35
rutile and zircon which is subjected thereafter to further processes designed
to separate the four minerals from one another.
REIT's
Stockpiles
Stockpile No 10
-
Ilmenite Feedstock
Stockpile
This is also described as smelter feed. It is ilmenite from which calcium and
chrome have been removed by a roasting and magnetic
process. It is a composite
of titanium and iron oxide which is destined for the smelter.
Stockpile No
10(a)
-
Furnace Charge Stockpile
This is a blend of ilmenite feedstock (smelter feed) from Stockpile 10 and
char derived from the heating of anthracite. It is this
blend which goes to the
furnace and yields titania slag (titanium dioxide) and molten iron. Counsel for
appellants submitted that
these stockpiles
were not realisable or saleable assets in the form in which they were
and had no market value as such, that they represented no more than
36
particular phases of a continuous process of production or manufacture or
"bulges in the pipeline", that they all required to be subjected
to yet further
processing before anything capable of being sold or realised would emerge, and
that it could never have been intended
that this continuous process should be
notionally halted at the end of a tax year, and that these stockpiles should be
assigned a
"completely artificial value". He suggested that if the legislature
had intended anything which was being used in a process of manufacture
to be
regarded as trading stock, it would have employed the language which it had used
elsewhere in the Act to so describe such things.
He pointed out that there are
other provisions in the Act in which the legislature has used the expression
"used in a process of
manufacture" and suggested that its choice of different
language in the definition indicated that it did not intend to include anything
used in a process of manufacture.
37
An alternative argument was presented along the following lines. Even if a
"strictly literal" interpretation be given to the definition,
the stockpiles
would still not fall within it because they were not "created" (counsel's word)
for the purpose of "manufacture, sale,
or exchange" (the relevant words in the
definition). None was created for sale or exchange. Stockpiles Nos 1, 2, 4 and 5
were created
for the purpose of separating their contents into their constituent
parts. That process is not a manufacturing process but a mining
process falling
within the definition of "mining" in sec 1 of the Act. The same applies to
Stockpile 10 which is acquired by REIT
from Tisand for beneficiation, namely,
conversion of the ilmenite to titania slag and high purity iron. The process
entails winning
titania slag from ilmenite which is a constituent of the soil.
Stockpile 10(a) is (but for the char, which is not in issue) in the
same
category.
38
Because none of the stockpiles are disposed of in a way which will
result directly in the receipt of any "proceeds", but are disposed of by
|
being utilised in a further stage of a continuous process, they cannot fall
within that part of the definition which relates to "anything
the proceeds from the disposal of which forms or
will form part of his
gross income".
In yet another alternative argument, it was contended that respondent had
failed to apply his mind to whether or not there had been
a reduction in the
value of the stockpiles by reason of, inter alia, a "decrease in the market
value" thereof. It was submitted that
the value had decreased to nil and that
the question should be referred back to respondent for consideration in terms of
sec 22(1)
of the Act.
The court
a quo
concluded that there was no scope for a purposive
interpretation of the relevant provisions because there was
39
no uncertainty or ambiguity lurking in the language used by the legislature.
It rejected the suggestion that it had been held by this
court in the
De
Beers Holdings
case supra, that the definition of trading stock encompassed
no more than what would ordinarily have been included in that term.
It drew
attention to the breadth of the definition and concluded that it embraced
"considerably more than what would otherwise be
understood thereby". The
evidence established in its view that the stockpiles in issue were "produced" or
"manufactured" by appellants
"for purposes of manufacture" within the meaning of
the definition.
In considering appellants' contention that the stockpiles had no value for
the purposes of sec 22, the court
a quo
was prepared to assume that the
material in the stockpiles was unsaleable in its then condition and that there
was no market for
it. Even if the stockpiles
40
could properly be described as "bulges in the pipeline" of production (which
it doubted), the court regarded that as irrelevant because
they would none the
less fall squarely within the first part of the definition. The assumed absence
of any market for the stockpiles
in the state in which they were was thought to
be of no consequence. So was the absence of any intent on the part of appellants
to
sell them. That they | had a considerable value to appellants seemed to the
court to be quite plain, at least for as long as appellants
continued their
operations and did not terminate them abruptly. The court did not elaborate but
I take it that what it had in mind
was that appellants had expended time, effort
and money in accumulating what was in those stockpiles; they contained materials
which
after further processing could be profitably marketed; if the stockpiles
were for any reason to be lost or destroyed, appellants
would have sustained a
loss occasioned by the
41
fact that the money, time and effort spent in establishing the stockpiles
would have been spent fruitlessly and the potential profit
which they stood to
make on the sale of their contents after further processing would also have been
lost.
The court
a quo
went on to say that sub-secs 22(1) and (3) do
not refer to the market value of trading stock but to the cost price of such
stock.
Such cost price is defined in sec 22(3) (a) as being
"the cost incurred in acquiring such trading stock, plus,
subject to the provisions of paragraph (b), any further costs incurred
in getting such trading stock into its then existing condition
and location". The Court pointed out that those were the very costs which had
been quantified by appellants when respondent required
the value of the
stockpiles to be calculated. It concluded that the stockpiles had at least that
value for the purposes of sec 22.
42
The contention that respondent had failed to consider reducing the value of
the stockpiles pursuant to the discretion vested in him
by sec 22(1) and that
the matter should be remitted to him for consideration was rejected. The court
a quo
said that the question had never been raised until the hearing of
argument and that respondent himself had had no opportunity of
responding to the
allegation that he had failed to consider the question. It queried whether in
the absence of any provision enabling
appellants to appeal against a failure to
exercise such a discretion, it was within the power of the Income Tax Special
Court to
entertain what amounted to a review of respondent's alleged failure. It
thought that what little there was before it suggested that
respondent had
considered the matter and it added that prima facie there were grounds upon
which a refusal to reduce the value could
be justified. In the result, the
appeals were dismissed and the assessments
43
confirmed.
Were the stockpiles trading stock?
Some preliminary
observations about the scope of the definition seem appropriate. As was observed
in the
De Beers Holdings
case supra, the definition may be notionally and
grammatically divided into two parts. The first part lays emphasis upon the
purpose
for which anything may have been produced, manufactured, purchased or in
any other manner acquired by a taxpayer. The specified purposes
are manufacture,
sale or exchange by the taxpayer or on his behalf. The second part makes no
direct reference to any purpose which
the taxpayer must have had at the time of
acquisition; it postulates an objective assessment, namely, whether, if the
thing under
consideration was disposed of, the proceeds would form part of his
gross income. The first part, in so far as it refers to
44
the purpose of sale or exchange, envisages that upon disposal of the thing in
question something will be received in return, either
money or some other quid
pro quo. To that extent, the definition is consistent with the general thrust of
the argument of counsel
for appellants that what is contemplated is anything
which has an independent existence and value as a saleable or exchangeable
article,
product or commodity. But the argument falls foul of other aspects of
the definition. The first part of the definition also includes
"anything
produced, manufactured, purchased or in any other manner acquired by a
taxpayer for purposes of manufacture by him or on his
behalf". Those words are quite plain and unambiguous. It is inherent in them
that, in order to fall within the definition, what the
taxpayer produces,
manufactures, purchases or otherwise acquires need not be intended to be
disposed of in the state in which it
then is. It suffices
45
that it is intended to be used for the purpose of manufacturing something.
Nor does it matter whether or not that which is intended
to be used, is capable
of realisation or sale in the state in which it then is. Whether it is so
realisable or not, there will be
no contemplation of receiving any quid pro quo
for it in the state in which it then is. The fact that it may be saleable in its
then
state and have an ascertainable market value is not what brings it into the
first part of the definition because it was not produced,
manufactured,
purchased or in any other manner acquired for sale or exchange. What brings it
into the definition notwithstanding
that its sale or exchange was not
contemplated, is its intended use for purposes of manufacture. To illustrate: a
manufacturer of
sewing machines may purchase or manufacture screws for the sole
purpose of using them in the manufacture of the sewing machines.
The screws may
have an
46
ascertainable market value and a functional existence separate from, and
independent of, the sewing machines, yet they would not be
trading stock for the
purposes of the definition, but for their intended use in the manufacture of the
sewing machines. The same
manufacturer may purchase or produce or manufacture
for incorporation in the sewing machines a custom made part which is not capable
of use by anyone other than himself, and has no value to anyone other than
himself. While it may have a separate physical existence,
it has no independent
functional utility capable of being turned to account in any other way. It may
even have no value as scrap.
Yet it falls within the plain and unambiguous
language of the definition. Once it is obvious, as I think it is, that the
legislature
has deliberately chosen to extend the concept of trading stock
beyond its colloquial ambit so as to include things which the taxpayer
has
no
47
intention of disposing of as separate entities, but intends to use solely for
the purpose of manufacturing something else in which
he trades, there is little,
if any, scope for a purposive interpretation of the provisions. In any event,
what, one may ask, is the
more restricted purpose which is so apparent that
effect should be given to it? In my view, there is none.
The suggested
difficulty in identifying and ascribing a value to things in the process of
being manufactured on the last day of the
tax year does not entitle the court to
disregard the plain language of the definition. Moreover, the difficulty strikes
me as being
more apparent than real. Certainly in other tax jurisdictions the
legislators and the courts have not baulked at the concept of valuing
work-in-progress and there is no reason to suppose that the South African
parliament was daunted by the prospect. As has been noted,
48
appellants themselves encountered no great difficulty in doing so when
required by respondent to do so.
A fundamental weakness in the argument of
counsel for appellants, in my view, is that it postulates that something which
is plainly
trading stock by definition when acquired, purchased, produced or
manufactured will cease to be regarded as such the moment it commences
being
integrated or incorporated in that which is in the process of being
manufactured. Once it is clear (as it is) that, for example,
raw materials
purchased for purpose of manufacture must be regarded as trading stock even
although they have not been purchased for
the purpose of selling or exchanging
them, and once it is clear (as it is) that the rationale for requiring them to
be so regarded
is to obtain a more accurate calculation of the profit earned or
the loss sustained during the year, it would make little sense to
ignore the
value of the
49
raw materials utilised in such partly manufactured goods as may be on hand.
It would result, not in the true reflection of the taxpayer's
trading fortunes
which the legislation is designed to produce, but in a distorted reflection of
them. In short, it entails ignoring
work in progress despite the fact that it
may have very great value, and despite the fact that the cost of producing it
has not been
ignored but, on the contrary, brought to account as an expense
incurred. I can find no warrant in the language used by the legislature
for
attributing any such inconsistency of approach to the legislature:
I do not consider that the use of the past tense ("produced", "manufactured",
"purchased" or "acquired") in the definition can be
invested with the
significance suggested by counsel for appellants. A thing produced or
manufactured for the purposes of manufacture
is manifestly something which is
intended to be used in
50
a process of manufacture, yet it plainly falls within the definition. It will
continue to be regarded as trading stock until the process
of manufacture for
use in which it was itself manufactured, is complete. Only then will its
classification as trading stock in its
own right cease, and that will be simply
because it will have become an integral part of the finished product which, in
its completed
state, represents a newly created item of trading stock in which
the value of such trading stock as may have been used in its manufacture
is
subsumed.
Nor do I consider that the second part of the definition shows that in the
first part only a product saleable in its own right is
contemplated. The Erst
part certainly includes things saleable in their own right. The very fact that
it contemplates a thing which
has been purchased by the taxpayer carries with it
an implication of saleability. But there is no justification for implying the
quality of saleability
51
when it comes to anything produced or manufactured for purposes of
manufacture. Such a thing may or may not be saleable in its own
right, but
nothing in the language used by the legislature would justify the drawing of a
distinction between those things which
are saleable and those which are not and
the regarding of only things saleable in their own right as trading stock. As
pointed out
earlier, it would also be inimical to the attainment of the object
which the legislation is designed to achieve, namely, a true reflection
of the
taxpayer's trading fortunes.
The references in sec 22(1) to a "decrease in market value" and in sec 22(4)
to "current market price" do not appear to me to provide
any support for the
interpretation contended for by counsel for appellants. A decrease in market
value is but one of a number of
factors listed in sec 22(1) which may be taken
into account by the
52
Commissioner in deciding whether or not to allow a taxpayer to reduce the
value of trading stock held by him at the close of the tax
year to below the
cost price (as defined) to him of such stock. What requires to be emphasised, is
that what the Commissioner is
empowered to do is to allow the taxpayer to deduct
an amount thought by the Commissioner to be just and reasonable "as representing
the
amount by which the value of such trading stock has been
diminished". The value which must have diminished by reason of any of the
listed factors is obviously the pre-existing value. That
preexisting value is
the cost price (as defined) to the taxpayer of the relevant trading stock. If
the factors listed have not caused
the trading stock to fall below the cost
price of such trading stock to the taxpayer, there would appear to be no warrant
for allowing
the taxpayer to deduct an amount "representing the amount by which
the value of such
53
trading stock has been diminished" because no such
diminution would have
occurred in fact. Merely because a decrease in the market value of goods which a
trader purchased for resale
has occurred will not necessarily mean that he is
entitled to be allowed to make an equivalent deduction; it is only to the extent
that the market price falls below the cost price (as defined) which he paid for
the goods that a deduction would be permissible.
To grant a deduction to cater
for a non-existent diminution of value of goods in the trader's hands, would be
to falsify his true
financial position. The same would apply to any of the other
possible causes of diminution of value listed in sec 22(1).
In any event, the fact that one of the possible causes of a diminution in
market value mentioned in sec 22(1) is a decrease in market
value, provides no
logical basis for the assumption that sec
54
22(1) is concerned only with saleable things. All the other potential causes
of a diminution in value of trading stock (damage, deterioration,
change in
fashion, any other reason satisfactory to the Commissioner) are potentially
quite capable of application to work in progress
even although such work in
progress may have no market value.
As for the reference to "current market price" in sec 22(4), that too is no
indication that trading stock can comprehend only saleable
things. It can
obviously only be applied if a current market price is ascertainable. This
provision is to deal with a case in which
trading stock has been acquired for no
consideration or for a consideration which is not measurable in terms of money.
It will follow
that nothing which could be claimed as a deduction by the
taxpayer will have been expended on its acquisition and, from the
S5
point of view of the fiscus, there is therefore not the same imperative need
to value the corresponding benefit and to take it into
account when assessing
the taxpayer's liability for tax. If therefore cases should arise in which it is
not possible to value certain
trading stock, that is a consequence to which the
legislature must be taken to have resigned itself.
It is true that the
legislature has employed the expression
"used in a process of manufacture" in
some of the other provisions of
the Act and that it did not use it in the
definition of "trading stock" but
the legislature does not always use exactly
the same language to
convey the same notion. As long as the words which it
has chosen to
use convey plainly and unambiguously the same notion, nothing
can
be made of the point. I consider that the words "for purposes
of
manufacture by him or on his behalf in the definition
56
can only mean "for use in manufacture".
The method of assessment of the
value of trading stock as defined which is prescribed in sec 22(1), (2) and (3)
also shows, I think,
that the legislature contemplated that the trading stock
which may have to be valued in a given case may consist of work in progress.
Those provisions make the cost price to the taxpayer of the trading stock the
basic measure of value but recognise firstly, that
"further costs" may have been
"incurred" by the taxpayer, inter alia, "in getting such trading stock into its
then existing condition"
and therefore have to be included, and secondly, that
there exist generally accepted accounting practices by reference to which it
may
be determined whether or not any particular further cost is one which should be
included in the valuation of the trading stock
in question. It is common cause
that there existed at the time, and still exists, a
57
generally accepted accounting practice approved by respondent and known as AC
108. That provides for the valuation of "work in progress"
as a component of
"stock". It is described as stock "in the process of production for sale". The
historical cost of stock is defined
as "the aggregate of cost of purchase, cost
of conversion, and other costs incurred in bringing the stock to its present
location
and condition". The "cost of conversion" is defined as "the cost that
relates to bringing the stock to its present location and condition".
It is
clear from AC 108 that costs such as, for example, materials and labour, are to
be taken into account when valuing stock. It
is therefore generally accepted in
accounting practice that there will be an ascertainable value attaching to
things which are still
in the process of being manufactured and are not yet
saleable.
The contentions which rested upon the proposition that the
58
stockpiles in question were not "produced" or "manufactured" within the
meaning of the definition of trading stock but were "mined"
within the meaning
of the definition of "mining" in sec 1 were not pressed in oral argument by
counsel for appellants. He conceded
that save possibly for the initial dredging
operation, he could not argue with any conviction that in carrying out any of
the ensuing
processes which resulted in the existence of the stockpiles,
appellants had not "produced" or "manufactured" them "for the purposes
of
manufacture" within the meaning of the definition of trading stock in sec 1. It
is therefore unnecessary to detail the evidence
given in regard to those
processes; it suffices to say that it establishes that the processes do indeed
fall within the definition.
It is also unnecessary to consider the contention of
counsel for respondent that the point was not made in appellants' grounds of
objection, that far from there being any
59
application to the court
a quo
to allow an amendment of the notice of
objection, appellants' objection had been argued on the basis that the
stockpiles in question
were indeed produced by manufacturing operations, and
that as a consequence appellants are barred by sec 83(7) (c) of the Act from
raising the contention that the stockpiles were mining stocks.
I conclude
therefore that the court
a quo
was correct in holding that the relevant
stockpiles were trading stock as defined.
The alternative claim for remittal
of the matter to respondent.
What actually happened in this regard is
shrouded in obscurity. It is not entirely clear whether respondent did or did
not give consideration
to the question of whether appellants should be permitted
to reduce the value of the relevant stockpiles for any of the reasons set
forth
in sec 22(1). His reply to the notices of objection is a pro forma rejection
60
of the objections raised. If he did consider the question and if he concluded
that no reduction should be permitted, counsel for appellants
concedes that
appellants would have no redress in either the court a
quo
or this court.
Had appellants pertinently alleged that respondent had failed to consider their
request for a reduction in their notice
of objection, or made that allegation in
other proceedings designed to compel respondent to consider their request,
respondent would
have responded to the allegation and what had actually happened
would have become known. It is true that in the course of his argument
before
the court
a quo
respondent's representative submitted that the respondent
had not considered the question but that was merely a submission made without
reference to respondent in response to a contention raised for the first time in
argument by counsel for appellants that respondent
had not considered allowing a
reduction in
61
value. The context in which the submission was made was that a number of tax
years had gone by in none of which had appellants reflected
the stockpiles in
question as trading stock. It followed that appellants had never asked
respondent in those tax years to allow the
value of the stockpiles to be
reduced, and that respondent could obviously not have considered any such
request then. It is far from
clear that respondent's representative was basing
his submissions on anything more than inferences drawn by himself. The only
occasion
when anything resembling a pertinent request to respondent to consider
allowing a reduction in value of the relevant stockpiles was
made by appellants,
was after the assessments for those tax years had been made. The form which the
"request" took was in reality
more in the nature of a contention designed to
reinforce the primary contention that those stockpiles were not trading stock as
defined
because they
62
were not saleable in that state and therefore had no market value. For all I
know, respondent considered the contention and rejected
it. Prima facie, and
without purporting to express any definite opinion upon the question, there are
grounds which could justify
a rejection of the contention. It was the
appellant's contention that the stockpiles had never had any market value, not
that since
the creation of the stockpiles there had been a diminution in their
value by reason of a decrease in market value. It is therefore
difficult to see
upon what basis a reduction in the defined value of the stockpiles could have
been founded. However that may be,
I share the view of the court a
quo
that a complaint of this nature cannot be entertained given the failure of
appellants to raise it pertinently in a manner which would
have required
respondent to respond to it.
In the result, the appeals are dismissed with costs and the
63
assessments are confirmed. It was common cause that the costs of
two
counsel should be allowed. It is noted for the benefit of the
taxing
master that only one counsel was engaged to draft respondent's
heads
of argument.
R M MARAIS
CORBETT CJ
BOTHA )
EKSTEEN ) JJA
HOWIE ) Concur