Commissioner for Inland Revenue v D & N Promotions (Pty) Ltd

• Jurisdiction: South Africa
• Judge: Corbett CJ, Hefer JA, Vivier JA, Nienaber JA and Howie JA
• Judgment Date: 29 November 1994
• Docket Number: 249/93
• Court: Appellate Division
• Hearing Date: 08 November 1994
• Citation: 1995 (2) SA 296 (A)

Corbett CJ:

This is an income tax appeal. The respondent is a private company with its registered office in Pietermaritzburg, Natal. It derives its income mainly from farming operations. These operations consist D principally in the growing and marketing of sugar cane. Other subsidiary operations include livestock trading, the production and marketing of dairy products and livestock feed and timber growing. The matters which give rise to this appeal relate to respondent's sugar farming operations.

During the tax year ended 30 April 1985 the respondent received two items of interest, viz a sum of R12 035 and a sum of R71 025. It is common E cause that these receipts constituted income in respondent's hands. The dispute between the parties concerns the question whether or not in each case the receipt constituted income derived from farming operations. The appellant (the Commissioner for Inland Revenue) contends that they did not; respondent contends that they did.

F Before dealing with the facts it is convenient to sketch the legal background to the dispute and to explain briefly why it is to the advantage of the fiscus that the interest receipts in question be classified as income not derived from farming operations and to the advantage of the taxpayer that they be regarded as income derived from farming operations.

G Section 26(1) of the Income Tax Act 58 of 1962 ('the Act') provides that the income of any person carrying on 'pastoral, agricultural or other farming operations' (for convenience I shall refer merely to 'farming operations') shall, insofar as it is derived from such operations, be determined in accordance with the provisions of the Act, but subject to the provisions of the First Schedule. The First Schedule deals in detail H with how taxable income derived from farming operations is to be computed.

Paragraph 12(1) of the First Schedule then provided that, subject to the provisions of subparas (2)-(6) inclusive (of which only (3) is relevant in this case), there shall be allowed, as deductions in the determination of the taxable income derived by any farmer, expenditure incurred by him during the year of assessment in respect of certain defined items, listed I (a)-(j). Several of these items relate to what would otherwise constitute non-deductible capital expenditure, such as expenditure on dipping tanks, dams, boreholes, fences, the erection of or extensions, additions or improvements to farm buildings, the building of roads and bridges, the acquisition of machinery used for farming purposes and so on. In this respect farmers are, as a class, placed in a favourable position and for J this

Corbett CJ

A reason the Courts have, in dubio, tended to reject a construction of such a statutory provision which implied the extension of such a class privilege and to interpret the provision strictly (see Ernst v Commissioner for Inland Revenue 1954 (1) SA 318 (A) at 323C-F; Buglers Post (Pty) Ltd v Secretary for Inland Revenue 1974 (3) SA 28 (A) at 34B-E).

B A limitation is in effect placed upon the total amount which may be allowed by way of deduction in terms of most of the subparagraphs of para 12(1) by para 12(3), which reads as follows:

'(3) The amount by which the total expenditure incurred by any farmer C during any year of assessment in respect of the matters referred to in items (c)-(j), inclusive, of subpara (1) exceeds the taxable income (as calculated before allowing the deduction of such expenditure and before the inclusion as hereinafter provided of the said amount in the farmer's income) derived by him from farming operations during that year of assessment shall be included in his income from such operations for that year and be carried forward and be deemed for the purposes of subpara (1) to be expenditure which has been incurred by him during the next D succeeding year of assessment in respect of the matters referred to in the said items.'

In terms of this somewhat convoluted provision, where the deductions allowable under subparas (c)-(j) of para 12(1) in a tax year exceed the E farmer's taxable income derived from farming operations (before the deduction of such expenditure), then such excess is treated as income for that year and is also carried forward as deductible expenditure in the next ensuing tax year. The effect of treating this excess as income in the immediate tax year is to wipe out any loss and to produce a nil income from farming operations in that tax year; and this...