Berea West Estates (Pty) Ltd v Secretary for Inland Revenue

• Jurisdiction: South Africa
• Judge: Holmes JA, Wessels JA, Jansen JA, Corbett JA and Viljoen AJA
• Judgment Date: 04 March 1976
• Citation: 1976 (2) SA 614 (A)
• Hearing Date: 19 February 1976
• Court: Appellate Division

Holmes, J.A.:

The issue in this appeal relates to the difficult question whether profits on the sales of some of the C appellant's land represented (a) income or (b) capital appreciation. The Secretary's assessment for normal tax for the year ended 30 June 1967 was raised on the basis of (a); and the appeal against that decision was dismissed by the Special Court for hearing income tax appeals, sitting in Durban. The appeal D therefrom direct to this Court is by consent.

The facts relate to two stages. First, the circumstances leading to the formation of the appellant company. Second, the activities of the appellant after its formation. I shall endeavour to distil the facts under those two headings.

E Circumstances leading to the formation of the company.

(a)

More than 100 years ago Hermann Wilhelm Konigkramer married his wife, Elise Christina, in community of property. In 1890 they entered into a post-nuptial contract excluding such community. It is common cause that this operated retrospectively to the date of the marriage.

(b)

Elise died in 1912 leaving a will in which she F bequeathed her estate (subject to a usufruct in favour of her husband) to the 13 children of the marriage. She had practically no estate as she had brought very little property of her own into the marriage and did not acquire any during the marriage.

(c)

After her death a dispute arose in the family as to G the effect of the post-nuptial contract, and one of the children commenced legal proceedings against his father. In order to settle the litigation, the family entered into an agreement. This took the form of a trust deed, inter vivos, to which the father (Konigkramer) and all of his 13 children were the parties. One of his sons, and also a son-in-law, were the first trustees. The deed was executed notarially on 5 August 1922 and was registered in the Deeds H Office, Natal, being No. 1 of 1923. The effect of the deed was that Konigkramer donated an undivided half share of the Konigkramer property in trust for his 13 children. Their rights to such property fell to be dealt with in terms of the trust deed and not in the estate of his deceased wife; that estate had no legal interest in the property. Transfer to the trustees of the half share of the property was not, however, registered during the lifetime of Konigkramer.

Holmes JA

(d)

Konigkramer died on 15 August 1927. He left, by his will, his remaining undivided half share in the property (that is, the half not disposed of by the deed of trust), to the same 13 children (save that the children of two predeceased sons took their father's A share, and that, by a codicil, a granddaughter was substituted for a daughter).

(e)

The administration of Konigkramer's estate, and of the deed of trust, proved to be difficult, protracted, desultory and at times in the doldrums, because of the facts which follow.

(f)

For some time it was not appreciated that the estate B and the trust had to be administered separately, each as to a half share of the Konigkramer property.

(g)

The said immovable properties, comprising the Konigkramer farm, Berea West, near Durban, ran to hundreds of acres.

(h)

The liabilities in the Konigkramer estate were considerable: they were not fully paid until September 1937.

(i)

C At the date of Konigkramer's death in 1927, the immovable property in his estate and in the deed of trust were under option for £76 000; and this option was renewed by the executors and the trustees in May 1928. This hampered the administration; but eventually the option was not taken up.

(j)

D In 1928 all of the beneficiaries formed a syndicate and purchased the immovable property at a public auction for £26 750. As the syndicate could not raise the necessary loan in order to pay the price to the executors and trustees, it was agreed among the beneficiaries to subdivide the property into subdivisions of equal value, but not necessarily of E equal acreage, and to draw lots for the purpose of distributing the subdivisions among themselves. This arrangement was completed on 14 November 1930.

(k)

By this time the creditors of estate Konigkramer had become very restive and were threatening sequestration. It was a time of grim economic depression (those who lived through it speak of it F still: the young, innocently, wot not of it). Some of the members of the syndicate were not able to raise the necessary loans to enable them to pay for and take transfer of their respective lots. Accordingly, the members of the syndicate cancelled the syndicate agreement; and the beneficiaries in the estate and the trust entered into a new agreement with the executors and trustees, which was confirmed by the Natal G Provincial Division on 9 August 1932. The order read in part:

'Authority is hereby given to sell, either by public auction or private sale, and as a whole or in subdivision and for cash or upon credit or in the discretion of the executors and trustees, and all sales shall be subject to the approval of the Master of this Honourable Court'.

(l)

H Thereafter, as stated in the judgment of the Special Court:

'Meetings of the beneficiaries were held from time to time and it was agreed that Messrs Acutt and Sons of Durban should be appointed the selling agents for the property. The economic depression which existed at about the time of the order of Court slowly began to lift and from time to time subdivisions of the property were sold by such agents. The debts of the late Hermann Wilhelm Konigkramer were finally paid in full in or about September 1937. Thereafter distributions were made to the beneficiaries under the deed of trust of the proceeds of all sales. Between the date of death of the testator and 2 March 1950 seven of the testator's 13 children died, two having predeceased him. By the late 1940s the administration of the estate had become complicated by an adverse financial climate and the difficult

Holmes JA

proportionate shares resulting from persons taking by representation. In addition the Master of the Supreme Court was pressing for the completion of the liquidation of the estate. A meeting of those interested was held at the offices to the attorney who had been engaged in winding up the estate and it was there proposed by another attorney representing some of those interested that a company be formed to A acquire the assets of the deceased estate and the trust, with an issue of shares calculated in such a way as to give each of the heirs and beneficiaries an interest in proportion to his or her entitlement. As some of those entitled owed money to the estate, it was proposed that these should be adjusted by the issue of debentures. This proposal was adopted and resulted in an application to Court.'

(m)

The signatures to the said agreement were completed by B 3 March 1950. The signatories were the beneficiaries under Konigkramer's will and under the trust (and the executors of deceased beneficiaries); and the sole surviving executor of Konigkramer's estate; and the trustees of the trust; and an attorney in his capacity as trustee on behalf of the company about to be incorporated and registered.

(n)

The agreement related to the remaining land held by C estate Konigkramer and the trust in equal undivided shares. The gist of the agreement was that this land should be transferred direct to the company. The consideration therefore was to be satisfied by the issue to the shareholders (who consisted of the beneficiaries under the estate and the trust) of fully D paid up shares and debentures; and by the payment by the company of certain estate expenses.

(o)

At that time the administration of the estate had been running for 22 years. Only a third of the lands comprising the Konigkramer farm had been sold. The area of the unsold two-thirds (consisting of 15 lots) was 620 acres; and there were, by then, 23 beneficiaries because of the death of some of E the Konigkramer children and their representation by their own children. The land was situated on the outer marches of the township of Westville, near Durban.

(p)

Part of the preamble of the said agreement reads as follows:

'And whereas the said beneficiaries and executors desire accordingly to take into their own hands the F rest of the realisation of the said property, for which purpose they desire to form a private company with limited liability, which company will take transfer from them of the said property in consideration of the allotment to each of the said beneficiaries of the number of fully paid up shares in the company as hereinafter set forth, the object of the foregoing transaction being that in due course the company may complete the realisation of the said property and from time to time distribute the nett profits from such realisation among the shareholders, G and so relieve the executors and the trustees of their obligations and complete the estate to tile relief and satisfaction of the Master.'

(q)

Clause 2 (a) of the agreement was in the following terms:

'The principal objects of the company shall be

(i)

to take transfer of the Konigkramer property... ;

(ii)

to realise the same to the best advantage in H the interest of the shareholders;

(iii)

to distribute the available proceeds of such realisation after payment of outgoings and liabilities of the estate among the shareholders.

(iv)

to prohibit any invitation to the public to the subscribe for shares in the company, and

(v)

the ratification of this agreement and of the acquisition of all the rights and obligations thereunder.'

(r)

Clause 9 of the said agreement reads as follows:

'When after payment of debts and outgoings the funds from realisation of portions of the Konigkramer property shall from time to time become

Holmes JA

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