Commissioner for Inland Revenue v Estate Kohler and Others

• Jurisdiction: South Africa
• Judge: Centlivres CJ, Schreiner JA and Fagan JA
• Judgment Date: 01 April 1953
• Citation: 1953 (2) SA 584 (A)
• Hearing Date: 27 March 1953
• Court: Appellate Division

Centlivres, C.J.:

As I find myself in the unfortunate position of differing from the conclusion arrived at by the majority of the Court in this case, it is necessary for me to state my reasons for so differing. A As the facts are fully set forth in my Brother SCHREINER'S reasons for judgment, it is unnecessary for me to repeat them.

The first contention raised by the Commissioner in his plea was that there was a donatio by the deceased within the meaning of sec. 3 (4) (f) B of the Death Duties Act, 1922, as amended. In so far as that section is relevant, it is as follows:

'3(4). Property which is deemed to pass on the death of any person shall include -

(f)

any property exceeding in value one hundred pounds passing under a donatio inter vivos made . . . by the deceased and taking effect within two years prior to his death.'

C It is unnecessary to refer to the amendments made by Act 60 of 1951, for the provisions of that Act do not apply to the present case.

No property passed from the deceased in respect of the 35,500 shares. At a later stage in this judgment I shall discuss the meaning of the phrase D 'property passing'. It is true that by reason of the allotment of the 35,500 shares there was a substantial decrease in the value of the deceased's estate, and that by the device adopted substantial benefits were conferred on the allottees of those shares, but no property passed from the deceased to the allottees. The deceased retained his own E shares, which were diminished in value, and did not pass on to the allottees any property or rights to property. It is true also that the device adopted was designed in order to escape death duties, but it has long been a well-recognised principle of law that a person may so order F his affairs as to escape taxation. Forcible language was used to this effect by the House of Lords in the case of Inland Revenue Commissioners v The Duke of Westminster, 1936 A.C. 1. At pp. 19 and 20 LORD TOMLIN said:

'. . . it is said that in revenue cases there is a doctrine that the Court may ignore the legal position and regard what is called 'the substance of the matter', and that here the G substance of the matter is that the annuitant was serving the Duke for something equal to his former salary or wages, and that therefore, while he is so serving, the annuity must be treated as salary or wages. This supposed doctrine (upon which the Commissioners apparently acted) seems to rest for its support upon a misunderstanding of language used in some earlier cases. The sooner this misunderstanding is dispelled, and the supposed doctrine given its quietus, the better it will be for all concerned, for the doctrine seems to involve substituting 'the H incertain and crooked cord of discretion' for 'the golden and streight metwand of the law'. (4 Inst. 41.) Every man is entitled if he can to order his affairs so as that the tax attaching under the appropriate Acts is less than it otherwise would be. If he succeeds in ordering them so as to secure this result, then, however unappreciative the Commissioner of Inland Revenue or his fellow taxpayers may be of his ingenuity, he cannot be compelled to pay an increased tax. This so-called doctrine of 'the substance' seems to me to be nothing more

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than an attempt to make a man pay notwithstanding that he has so ordered his affairs that the amount of tax sought from him is not legally claimable.'

At pp. 24 and 25 of the same case LORD RUSSELL of KILLOWEN said:

'I confess that I view with disfavour the doctrine that in taxation cases the subject is to be taxed if, in accordance with a Court's view A of what it considers the substance of the transaction, the Court thinks that the case falls within the contemplation or spirit of the statute. The subject is not taxable by inference or by analogy, but only by the plain words of a statute applicable to the facts and circumstances of his case. As LORD CAIRNS said many years ago in Partington v Attorney-General (1869) L.R. 4 H.L. 100, 122: 'As I understand the principle of all fiscal legislation it is this: If the person sought to be taxed comes within the letter of the law he must B be taxed, however great the hardship may appear to the judicial mind to be. On the other hand, if the Crown, seeking to recover the tax, cannot bring the subject within the letter of the law, the subject is free, however apparently within the spirit of the law the case might otherwise appear to be.' If all that is meant by the doctrine is that having once ascertained the legal rights of the parties you may C disregard mere nomenclature and decide the question of taxability or non-taxability in accordance with the legal rights, well and good. That is what this House did in the case of Secretary of State in Council of India v Scoble, 1903 A.C. 299; that and no more. If, on the other hand, the doctrine means that you may brush aside deeds, disregard the legal rights and liabilities arising under a contract between parties, and decide the question of taxability or non-taxability upon the footing of rights and liabilities of the D parties being different from what in law they are, then I entirely dissent from such a doctrine.'

Partington's case, to which LORD RUSSELL refers, is an authority which this Court has recognised in several cases. See, e.g., Commissioner for Inland Revenue v George Forest Timber Company Limited, 1924 AD 516 at E p. 531, and Commissioner for Inland Revenue v Wolf, 1928 AD 177 at p. 184. The principle enunciated in the Duke of Westminster's case is a principle which is recognised by our Courts. See, e.g., Commissioner of Customs and Excise v Randles Brothers & Hudson Limited, 1941 AD 369 F at p. 396; Commissioner for Inland Revenue v King, 1947 (2) SA 196 at p. 212 (A.D.); and Gratus v Commissioner for Inland Revenue, 1933 W.L.D. 100 at pp. 104 and 108. In the very Act I am dealing with the Legislature recognised this principle and made certain provisions for preventing the avoidance of death duties through the instrumentality of G the company law. See sec. 3 (3) and (4) (g). In that Act there is no provision corresponding to sec. 90 of the Income Tax Act, 1941, which is designed to prevent 'any transaction, operation or scheme' from resulting in the avoidance of taxation on incomes. So long as there is no such provision in the Death Duties Act a taxpayer may (to adopt the words of LORD TOMLIN in the Duke of Westminster's case, supra), so order H his affairs that the amount of tax sought from his estate is not legally claimable.

Mr. Retief, who appeared on behalf of the Commissioner, strongly relied on the case of Rex v Gillett, 1929 AD 364. That case is not in point. That was a case where the real nature of the transaction was disguised by making a charge of usurious interest

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appear as other than it was. See p. 371 of the report of that case. And at p. 374 STRATFORD, J.A., said:

'. . . it was said that the act of a company was never the act of its shareholders - not of its one shareholder - if he were practically the sole shareholder, no matter how he chose to exercise his voting rights. I quite agree with the proposition for which there is clear authority in principle and precedent, but that A does not preclude us from enquiring whether the shareholder has influenced the company to do a criminal act, and in that enquiry shareholding can be looked to like any other fact to see how it was used as an instrument of persuasion.'

In the present case there was no disguising of the real nature of the transaction entered into by the company when it issued the 35,500 B shares, nor did the company do a criminal act when it issued those shares.

For these reasons it seems to me that there is no substance in the Commissioner's contention that there was a donatio within the meaning of sec. 3 (4) (f).

C The Commissioner raised in his plea a number of contentions which were alternatives to his contention that there was a donatio within the meaning of sec. 3 (4) (f) of the Death Duties Act, as amended. One of these alternatives was that there was a donatio by the company within the meaning of sec. 3 (4) (g) of the Act to the extent of the value of D the 35,500 shares subscribed by the allottees. This contention, which appears not to rely on the provisions of sec. 3 (6), cannot, in my opinion, be supported, firstly, because no property passed from the company to the allottees, and secondly because the company made no donatio.

E There can be no room for the operation of sec. 3 (4) (g) unless there has been a 'passing of property'. There can be no passing of property unless there are two persons from one of whom property passes to another. The same idea is expressed in the word 'overgegaan' in the Dutch version of the section. In Commissioner for Inland Revenue v. F Estate Crewe and Another, 1943 AD 656, and Commissioner for Inland Revenue v Estate Hersov and Others, 1952 (4) SA 559 (AD), this Court construed the phrase 'property passing on death', and it is implicit from the ratio decidendi of those cases that there must be two personce involved in the passing of property from one to the other. So, G too, in Minister of Finance v Minnaar's Executor, 1916 T.P.D. 520, the Court had to consider whether property had passed from the deceased to donees under a donatio inter vivos within a period of one year before the death of the deceased. When a company donates money or any right it has to any property and that donation takes effect, the subject matter H of the donation becomes the property of the donee; in such a case property passes from the company to the donee. But when a company issues shares to an allottee, no property passes from the company to the allottee. The allottee acquires a right against the company, but the company does not part with any portion of its property. The result of...