Chipkin (Natal) (Pty) Ltd v Commissioner, South African Revenue Service

• Jurisdiction: South Africa
• Judge: Howie P, Cameron JA, Nugent JA, Cloete JA and Ponnan JA
• Judgment Date: 20 May 2005
• Citation: 2005 (5) SA 566 (SCA)
• Docket Number: 190/04
• Hearing Date: 12 May 2005
• Counsel: E B Broomberg SC for the appellant. H G A Snyman (with him S P Mothle) for the respondent.
• Court: Supreme Court of Appeal

Cloete JA:

[1] On 31 March 1989 the appellant and 11 others entered into a partnership named the Southern Cross Air Partnership. The only disclosed partner was Air Southern Cross Management (Pty) Ltd (ASCM); the others, including the appellant, were partners en commandite. I

[2] Clause 2.5 of the partnership agreement provided that '(e)ach partner shall share in the profits, losses, rights and obligations of this partnership in accordance with his percentage interest, and in the J

Cloete JA

manner provided for in this agreement'. The appellant's contribution to the partnership was a cash amount, for A which it acquired a 30% interest in the partnership. The appellant financed this contribution by taking out a loan with Investec Bank Ltd. ASCM acted as the manager of the partnership and its contribution comprised its skill, management and administration of the business and affairs of the partnership. For this it received a 0,1% interest in B the partnership and, in addition, payment of a sum of money from the other partners. The remaining nine partners also made cash contributions to the partnership and held the remaining 69,9% interest in the partnership.

[3] The business of the partnership was to purchase a particular C aircraft and either by itself or with other persons to conduct the business of transporting by air and for reward persons, livestock, goods or mail. In fact the aircraft had already been purchased by ASCM but it was paid for out of partnership funds and it accordingly became a partnership asset. The partnership (on the same day it was formed) D entered into a partnership with BOP Air (Pty) Ltd (the Southern-BOP partnership). The purpose of the Southern-BOP partnership was also to use the aircraft to conduct air transportation business for reward and it did so.

[4] Section 14bis of the Income Tax Act 58 of 1962 (the Act), provides for an allowance to be deducted from 'the income of any person' in respect of an aircraft acquired by such person on or E after the first day of April 1965. The definition of 'person' in s 1 does not include a partnership and a partnership is not a person at common law.

[5] Income that has accrued to partners in common is deemed to F have accrued to each of the partners individually in their proportionate shares by s 24H(5)(a), which provides as follows:

'(5)(a) Where any income has in common been received by or accrued to the members of any partnership, a portion (determined in accordance with any agreement between such members as to the ratio in which the profits or losses of the partnership are to be shared) of G such income shall, notwithstanding anything to the contrary contained in any law or the relevant agreement or partnership, be deemed to have been received by or to have accrued to each such member individually on the date upon which such income was received by or accrued to them in common.'

[6] Where income has accrued to a partner in terms of para (a) the partner is also entitled to deduct a proportionate H share of deductions and allowances that are granted by the Act - thereby arriving at the partners' taxable income - by s 24H(5)(b), which provides as follows:

'5(b) Where a portion of any income is under the provisions of para (a) deemed to have been received by or to I have accrued to a taxpayer, a portion (determined as aforesaid) of any deduction or allowance which may be granted under the provisions of this Act in the determination of the taxable income derived from such income shall be granted in the determination of the taxpayer's taxable income so derived.'

[7] The appellant claimed its pro rata portion of the s 14bis allowance during the 1989, 1990 and 1991 years of assessment. During the J

Cloete JA

appellant's 1992 year of assessment, the appellant transferred 99,9% of its 30% interest in the Southern Cross A Air Partnership to ASCM. In consideration for this disposal, Investec Bank Ltd released the appellant from the outstanding balance of the loan the appellant had originally taken out to finance its capital contribution to the partnership. (The amount of the balance in fact exceeded the amount of the loan.) B

[8] The Commissioner held the view that, by virtue of the disposal, the pro rata s 14bis allowances previously claimed by the appellant were recouped in terms of s 8(4)(a) of the Act. That section at all material times provided, to the extent relevant, that:

'There shall be included in a taxpayer's income all amounts C allowed to be deducted or set off under the provisions of ss 11 to 20, inclusive . . . whether in the current or any previous year of assessment which have been recovered or recouped during the current year of assessment. . . .'

The Commissioner accordingly issued the appellant's original...