Commissioner for Inland Revenue v Conhage (Pty) Ltd (Formerly Tycon (Pty) Ltd)

• Jurisdiction: South Africa
• Judge: Mahomed CJ; Hefer JA; Olivier JA; Farlam AJA; Madlanga AJA
• Judgment Date: 17 September 1999
• Citation: 1999 (4) SA 1149 (SCA)
• Docket Number: 606/97
• Hearing Date: 23 August 1999
• Counsel: A P Rubens SC (with him L N Harris and D C Mpofu) for the appellant. P A Solomon SC (with him A G Derksen SC) for the respondent.
• Court: Supreme Court of Appeal

Commissioner for Inland Revenue v Conhage (Pty) Ltd (Formerly Tycon (Pty) Ltd)
1999 (4) SA 1149 (SCA)

1999 (4) SA p1149

Citation	1999 (4) SA 1149 (SCA)
Case No	606/97
Court	Supreme Court of Appeal
Judge	Mahomed CJ; Hefer JA; Olivier JA; Farlam AJA; Madlanga AJA
Heard	August 23, 1999
Judgment	September 17, 1999
Counsel	A P Rubens SC (with him L N Harris and D C Mpofu) for the appellant.; P A Solomon SC (with him A G Derksen SC) for the respondent.

Flynote : Sleutelwoorde H

Revenue — Income tax — Scheme for avoidance of — Income Tax Act 58 of 1962, s 103 — Taxpayer requiring capital for expansion of business — Bank making funds available — Parties aware of tax benefits inherent in sale and leaseback transactions and structuring financing I as such — Taxpayer seeking to deduct rentals paid in terms of leasebacks — Commissioner disallowing deduction and invoking s 103 — In terms of section, Commissioner empowered to determine taxpayer's liability for tax by disregarding any abnormal transaction entered into for purpose of avoiding or postponing tax liability or reducing amount thereof — Transaction J

1999 (4) SA p1150

regarded as abnormal if entered into or carried out by means or in manner A not normally employed in entering into transaction of that nature or creating rights and obligations not normally created between persons dealing at arm's length — Effect, purpose and normality of transaction question of fact — Onus on Commissioner to prove effect of transaction to avoid or postpone liability for tax or reduce amount thereof — If such proved, presumed B effect of transaction its sole or main purpose — Agreements serving dual purpose of providing taxpayer with capital and allowing tax benefits — If taxpayer not needing capital, no transaction would have transpired at all — Taxpayer not approaching bank to alleviate tax burden but to obtain capital — Obtaining capital plainly main purpose of transactions — Commissioner incorrectly invoking s 103.

Headnote : Kopnota

The main issues in the present appeal from a decision in an Income C Tax Special Court revolved around two sets of agreements between the taxpayer and Firstcorp Merchant Bank Ltd (Firstcorp) comprising the sale and leaseback of some of the taxpayer's manufacturing plant and equipment. The taxpayer had required capital to expand its business and D Firstcorp had been prepared to make the funds available. Both parties had, however, been aware that there were tax benefits to be gained from structuring the financing as a set of sale and leaseback transactions and had decided to follow that course instead of a simple loan.

A dispute between the taxpayer and the Commissioner arose when the E taxpayer had sought to deduct the rentals paid in terms of the leasebacks as expenditure incurred in the production of income under s 11(a) of the Income Tax Act 58 of 1962 (the Act). The Commissioner had disagreed with this submission and disallowed the deductions. The Commissioner had further contended that, despite the F form of the agreements, the taxpayer had not in fact sold and leased back its equipment but had in substance borrowed the 'purchase price' of the equipment from Firstcorp. The Commissioner submitted that neither the taxpayer nor Firstcorp had actually intended to enter into agreements of sale and leaseback and that the only reason this vehicle had been used was to reduce the taxpayer's tax liability. Structuring the financing as a straightforward loan would not have brought about the same advantageous tax deductions. In addition to disallowing the deductions, therefore, the Commissioner invoked the provisions of s 103 of the Act, treating the taxpayer's actions as an operation or G scheme for the purpose of avoiding liability for or reducing the amounts of taxes due on income.

The taxpayer contended that the purpose of the whole exercise had been to obtain capital, not to reduce tax and, if the reduction of its tax liability could in any way be regarded as a purpose of the transactions as envisaged by s 103 of the Act, then such had not been the main H purpose. The taxpayer appealed to a Special Court on this point, which found for the taxpayer and remitted the matter to the Commissioner for reassessment. The Commissioner appealed against the decision of the Special Court, arguing that, while accepting that the taxpayer and Firstcorp had not acted in fraudem legis by deliberately disguising their transactions, the agreements should not be applied I according to their tenor as, although the taxpayer and Firstcorp might honestly have believed that it would be sufficient to go through the formality of concluding the kind of agreement they had in order to procure tax benefits for themselves, they had no real intention to enter into agreements of sale and leaseback.

Held, that a taxpayer was free, within the bounds of any anti-avoidance J

1999 (4) SA p1151

provisions, to minimise his tax liability by arranging his affairs in a A suitable manner. If the same commercial result could therefore be achieved in different ways, he could enter into the type of transaction which did not attract tax or attracted less tax. When it came to considering whether by doing so he had succeeded in avoiding or reducing tax, the Court would give effect to the true nature and substance of the transaction and would not be deceived by its form. (At 1155G - H/I.) B

Held, further, that, despite the Commissioner's reference to what he perceived to be the parties' honest belief that it would be sufficient to go through the formality of concluding a sale and leaseback transaction to procure the tax benefits, the logical effect of the Commissioner's submission was that the taxpayer had dishonestly concealed the true nature of the transactions. The problem facing the Commissioner was that he had discarded the possibility that the agreements had been deliberately disguised. The only other explanation C which he was therefore able to suggest was that the parties believed that the formal instruments would gain them the desired tax benefits. This was sheer speculation which was not supported by the evidence and was against the probabilities. (At 1156G/H - H and 1157J - 1158B.) D

Held, further, that, if the parties had not intended ownership of the merx to pass as the agreements of sale stipulated, the agreements would have been simulations and could only have been signed with the object of deceiving the Commissioner. The Commissioner's representative, however, did not strive to obtain clarity on this aspect when cross-examining the taxpayer's witnesses and instead concentrated on the effect of the agreements rather than the actual intention of the signatories. (At 1157B - B/C and D/E.) E

Held, further, that the evidence showed that the parties' had not merely been going through the motions of concluding the agreements but had intended to enter into sale and leaseback agreements and had had every intention of putting those agreements into effect. Viewed in context, the transactions made perfectly good business sense. The Special Court had accordingly correctly decided that the transactions were indeed what they purported to be. (At 1158D - E/F and 1159B/C - C.) F

Held, further, that the provisions of s 103 of the Act empowered the Commissioner to determine a taxpayer's liability for income tax by disregarding any abnormal transaction which the taxpayer had entered into for the purpose of avoiding or postponing his tax liability or reducing the amount thereof. A transaction was G regarded as abnormal if it was entered into or carried out by means or in a manner which would not normally be employed in the entering into or carrying out of a transaction of that nature, or which had created rights or obligations which would not normally be created between persons dealing at arm's length concluding a transaction of the type in question. Such an abnormal transaction could be disregarded if it was entered into or carried out solely or mainly for the purpose of avoiding or postponing liability for tax or reducing the amount of such liability. (At 1159E - H.) H

Held, further, that the effect, purpose and normality of a transaction was a question of fact. The onus was on the Commissioner to prove that the effect of a transaction was to avoid or postpone liability for tax or to reduce the amount thereof. If this was proved, it was presumed that the effect of the transaction was also its sole or main purpose. What had to be determined in every case was the I subjective purpose of the taxpayer. (At 1160A - B/C.)

Held, further, that the agreements of sale and leaseback served the dual purpose of providing the taxpayer with capital while allowing it to take advantage of the tax benefits derived from the particular type of transaction. The advantageous tax deductions were not the only reason for choosing the J

1999 (4) SA p1152

particular type of transaction but, even if it had been, it could not be A ignored that, if the taxpayer had not needed any capital, there would have been no transaction at all. The taxpayer had not approached Firstcorp to alleviate its tax burden but to obtain capital and this had plainly been the main purpose of the transactions. (At 1160F - G and H/I - J.)

Held, further, that, in order to decide whether the B Commissioner had established that the sale and leaseback transactions had been abnormal, the Special Court had taken account of all the circumstances of the case and had not contented itself with an examination of the typicality of the terms of the agreements. Its approach in this respect had been correct. Accordingly, the Special Court's decision that the Commissioner had incorrectly invoked the provisions of s 103 could not be contradicted. (At 1161B - C.) Appeal dismissed. C

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