Blue Circle Cement Ltd v Commissioner for Inland Revenue

• Jurisdiction: South Africa
• Judge: Corbett JA, Miller JA, Nicholas JA, Galgut AJA and Howard AJA
• Judgment Date: 16 March 1984
• Hearing Date: 05 March 1984
• Court: Appellate Division

Corbett JA:

This appeal concerns a claim by appellant, a public company, to be entitled to a machinery initial allowance, in terms of s 12 (1) of the Income Tax Act 58 of 1962 ("the Act"), and a machinery investment allowance, in terms of s 12 (2) of the Act, in respect of the

Corbett JA

cost incurred by it in the construction of a railway line. Appellant claimed these allowances, together with a wear and tear allowance under s 11 (e) of the Act, as deductions in the computation of its taxable income for the 1975 year of assessment. In determining appellant's liability to normal tax A for that year, the respondent, the Commissioner for Inland Revenue, disallowed these deductions and assessed appellant accordingly. An objection to the assessment on the ground of the disallowance of these deductions having been rejected by respondent, appellant appealed to the Special Court. The appeal was heard by the Transvaal Income Tax Special Court, which B dismissed appellant's appeal and confirmed the assessment. The present appeal is against that decision, in so far as it relates to the allowances provided for in ss 12 (1) and 12 (2) of the Act. (Appellant does not persist in the claim for a wear and tear allowance.) The appeal comes directly to this Court in C terms of s 86A (2) (b) of the Act, the requisite leave having been granted by the President of the Special Court.

The facts are not in dispute and may be stated quite briefly. The appellant manufactures cement. Its factory is situated at Lichtenburg in the Western Transvaal. The basic raw material used in the manufacture of cement is limestone. Prior to 1975 D appellant obtained the required limestone from a deposit in the Lovedale area, close to the factory at Lichtenburg. In order to transport the quarried and crushed limestone to the factory appellant had constructed a railway line from the quarry area at Lovedale to the factory. During the 1975 tax year appellant completed and brought into use an extension of this railway line beyond Lovedale to an area known as E Springbokpan. The length of this extension was some 41 km. The purpose of this extension was to provide a railway link between the factory and a new limestone quarry and crushing plant which appellant had established at Springbokpan. It is the cost of this railway line of 41 km, stated to amount in all to R2 047 F 699, which constitutes the basis of appellant's claim for an initial allowance of 25 per cent of the cost, viz R511 924, and for an investment allowance of 30 per cent of the cost, viz R614 309, in respect of the 1975 tax year.

The evidence indicates that the concession area at Springbokpan over which appellant holds the rights to the limestone is very G large and has proven estimated reserves totalling some 120 million tons. Appellant intends to quarry and consume in the process of manufacture about three million tons per annum from this area. At this rate of extraction these limestone deposits have a "life" of about 40 years.

The extraction process, as described to the Special Court, is the following. The first task is to remove by means of a H scraperloader the overburden, which varies from 150 mm to about a metre in depth. This exposes the underlying limestone deposit, which is about eight metres deep. Limestone is broken away from this rock deposit by blasting. The blasting operation, which is designed to break loose from the quarry face sufficient limestone for one day's processing, produces material varying in size from fine powder to large boulders. Boulders which are too large for the crushing plant are then broken up into

Corbett JA

manageable pieces on the quarry floor by a process termed "secondary blasting". The reduced material is then loaded into large dumper trucks, and transported to the crusher plant, situated a short distance (evidently a few hundred metres) away.

A At the crusher plant the limestone is further reduced and screened. During the blasting operations and also at the crushing stage samples of the material are taken and tested in order to ensure that what is being processed is not excessively silicious in content. If it is, then it cannot be used for the B manufacture of cement and it is treated as waste material. From the screening building one conveyor belt carries such waste material to a waste dump and another conveyor belt takes the fine crushed limestone suitable for processing to a stockpile, from where it is loaded into railway trucks for conveyance to the factory.

From where it leaves the concession area the railway line C crosses privately-owned farms until it reaches the factory at Lichtenburg. Appellant obtained the necessary servitudes to enable it to build the railway line over these farms. According to the evidence, the railway line was constructed in accordance with specifications laid down by the South African Railways and D called the "Main Lines Standard". In order to construct the line the route thereof had to be suitably "profiled" by building embankments or earthworks over depressions in the land and making "cuttings" through elevated areas. The "profile" had to be well consolidated and, where it consisted of an embankment, a good bond between the embankment and the natural ground had to be obtained. Concrete railway sleepers were then E laid at suitable intervals along the profile and the rails laid on the sleepers and attached thereto by means of a specially designed rail assembly, which clamped the rail to the sleeper. After the rails were laid, ballast of crushed stone was placed along the track, around and underneath the sleepers. The track was lifted for this purpose. The ballast was then F compacted so that it would not move under load. That basically completed the construction process.

The evidence was further to the effect that the life of the railway line was determined by the life of the limestone deposit at Springbokpan. From time to time repair and G maintenance would have to be done to the line. This might involve the replacement of sections of rail which were defective or had become worn. Prior to deciding to build the railway line appellant considered alternative methods of conveying the crushed limestone from Springbokpan to the factory at Lichtenburg. These included conveyor belts, roadways H and road transport, but the railway system was preferred because it was found to be the most economical.

That completes my recital of the relevant facts. The question whether...