Commissioner for Inland Revenue v Malcomess Properties (Isando) (Pty) Ltd

• Jurisdiction: South Africa
• Citation: 1991 (2) SA 27 (A)

Commissioner for Inland Revenue v Malcomess Properties (Isando) (Pty) Ltd
1991 (2) SA 27 (A)

1991 (2) SA p27

Citation	1991 (2) SA 27 (A)
Court	Appellate Division
Judge	Botha JA, Nestadt JA, Kumleben JA, Nicholas AJA and Preiss AJA
Heard	November 15, 1990
Judgment	November 30, 1990

Flynote : Sleutelwoorde F

Revenue — Income tax — Income or capital accrual — Profit realised on G sale of land — Taxpayer had acquired land in 1969 as capital investment from which income derived by way of rentals, and continuing to hold such land with same intention until 1975, when decision taken to dispose of land — Lessee of land, in order to secure long-term tenure, devising scheme whereby lessee purchased all shares in taxpayer, such acquisition being subject to condition precedent that land be sold to acceptable H purchaser — Land sold in 1976 at net profit of R1 127 127 — Commissioner contending that such profit liable to income tax on grounds that lessee's intention to make profit from sale of land attributable to taxpayer because, at time when land sold, lessee was controlling mind of, and had executive control over, taxpayer — Court holding that it I was trite that owner of land entitled to realise it to best advantage, and fact that land realised at profit not altering what had been investment of capital into a trade or business earning profits — Between 1975, when decision taken to dispose of land, and disposal of land in 1976 nothing done by taxpayer to metamorphose character of J property from capital asset to item of

1991 (2) SA p28

A stock-in-trade in business of selling land for profit — Even if lessee's intention had been to make profit from sale of land, taxpayer not party to such scheme — Lessee's intention in embarking upon scheme thus having no bearing upon question whether taxpayer had continued to hold land as capital asset — As to argument that lessee's intention B attributable to taxpayer, Court finding that lessee's acquisition of shares subject to condition precedent which was only fulfilled upon sale of property and, secondly, that evidence showing that, despite ownership of all shares in taxpayer, lessee not having de facto control over what taxpayer did — Lessee's intentions in devising and executing scheme C thus irrelevant to taxpayer's intentions in regard to land — Court concluding, accordingly, that disposal of land had been realisation of capital asset and that profit therefrom not liable to income tax.

Headnote : Kopnota

D A property in Isando owned by the respondent company had been sold in 1977 at a net profit of R1 127 127, which sum the appellant had included in the respondent company's income in his determination of its liability to normal tax for the year in question. The respondent company's appeal against the disallowance of its objection was upheld by an Income Tax Special Court. The Isando property had been acquired in 1963 to serve as the headquarters of the M group of companies. During 1969, as a result of a merger between certain of the M group's interests and the B E company, and in order to retain the various properties owned by the M group within the M family, the respondent company was incorporated to acquire and hold the Isando property. The merged group, Malbak, continued to conduct its business on the property in terms of an agreement of lease. The respondent was a subsidiary of M Properties Ltd, the holding company through which the family properties were held. During 1975 the shareholders of M Properties Ltd decided to place the company and its subsidiaries in voluntary liquidation. The liquidator's F brief was to realise the assets to the best advantage. Malbak wished either to acquire or to secure long-term tenure of those properties from which it operated, and in particular of the Isando property, which was central to its operations. The liquidator's attitude was that he wanted to dispose of the entire property portfolio in a single transaction. A scheme was devised whereby Malbak would acquire all the shares in M Properties Ltd, the purchase price to be calculated 'with a view to ensuring that the shareholders of the seller receive 90 cents per G share'. The contract providing for such acquisition was subject to the condition precedent that 'an offer to purchase the property belonging to [the respondent company] is received, such offer to be from a reasonably acceptable company or pension fund'. In 1976 the Isando property was sold to a superannuation fund for R1 500000, subject to a lease being concluded between Malbak and the purchaser. A notarial deed of lease between Malbak and the purchaser was executed on the same day in terms H of which the purchaser would receive an 11% per annum return on the purchase price as rental. In a further appeal,

Held, that it was trite that an owner of land, or of any other asset, was entitled to realise such asset to the best advantage, and that the fact that he did so did not alter what had been an investment of capital into a trade or business earning profits.

Held, further, that the respondent company's intention to hold the I Isando property as a capital asset from which it would derive income by way of rentals had remained unchanged until 1975 when the shareholders of M Properties Ltd had resolved that the company and its subsidiaries be wound up and its assets realised.

Held, further, that, during the interval between the decision to realise the assets and the sale of the Isando property in 1976, nothing had been done by the respondent company to metamorphose the character of the property.

Held, further, that in the present case there were no facts at all which could lead to an affirmative answer to the question whether 'the owner J had crossed the Rubicon and

1991 (2) SA p29

A gone over to the business... of selling land for profit, using the land as his stock-in-trade ' (Natal Estates Ltd v Secretary for Inland Revenue 1975 (4) SA 177 (A) at 203A): in the interval, the respondent company had done no more with the property than receive rentals from it.

Held, accordingly, that, on the face of it, the transaction had been the realisation of a capital asset, so that the profit had not been liable to income tax.

Held, further, even if it was assumed (without deciding) that the intention of the Malbak scheme had been that a profit should be made for B the benefit of Malbak, inter alia from the sale of the Isando property, that the respondent company had not been a party to the scheme; that Malbak and M Properties had operated at arm's length (the Special Court had observed that a relevant factor in the appeal before it had been that M Properties and its subsidiaries had been entirely independent of Malbak and its subsidiaries); and that Malbak's intention or purpose in embarking upon its scheme had no bearing upon the question whether the C respondent company had continued to hold the Isando property as a capital asset.

Held, further, as to the appellant's argument that Malbak's intention to make a profit had been attributable to the respondent company because Malbak had executive control over, and its was the controlling mind of, the respondent company when the Isando property had been sold, that, firstly, the agreement between Malbak and M Properties had been subject to a condition precedent which had not been fulfilled until the sale of D the Isando property, which sale itself had been subject to a lease being concluded between Malbak and the purchaser and, secondly, even if by acquiring all the shares in the respondent company Malbak might be said to have had a controlling interest in it, in the context of the ascertainment of the intention of a company, 'control' connoted de facto control of what the company did and, on the evidence, Malbak had not been in control of the respondent company in that sense.

Held, accordingly, that Malbak's intention in devising and executing its E scheme had been irrelevant to the intentions of the respondent company in regard to the Isando property. The appeal was thus dismissed.

Case Information

Appeal from a decision in the Transvaal Income Tax Special Court (Margo J). The facts appear from the judgment of Nicholas AJA.

F D M Fine SC (with him S van Nieuwenhuizen) for the appellant referred to the following authorities: Natal Estates Ltd v Secretary for Inland Revenue 1975 (4) SA 177 (A) at 203A; Silke Income Tax Law of South Africa 10th ed at 1226; Hicklin v Secretary for Inland Revenue 1980 (1) SA 481 (A) G at 485; Commissioner for Inland Revenue v Louw 1983 (3) SA 551 (A) at 569H; Commissioner for Inland Revenue v African Oxygen Ltd 1963 (1) SA 681 (A) at 691A - D; Commissioner for Inland Revenue v Richmond Estates (Pty) Ltd 1956 (1) SA 602 (A) at 607B, 610C - E; Commissioner for Inland Revenue v Leydenberg Platinum Ltd 1929 AD 137 at 144 - 5; Reliance Land & Investment Co (Pty) Ltd v Commissioner for Inland Revenue 1946 WLD 171 at 181; LHC Corporation of South Africa H (Pty) Ltd v Commissioner for Inland Revenue 1950 (4) SA 640 (A) at 646G - H; Commissioner for Inland Revenue v George Forest Timber Co Ltd 1924 AD 516 at 524; Sekretaris van Binnelandse Inkomste v Aveling 1978 (1) SA 862 (A) at 880E - F; Commissioner for Inland Revenue v Stott 1928 AD 252 at 263; John Bell & Co (Pty) Ltd v Secretary for Inland Revenue 1976 (4) SA 415 (A) at 429C - D; Elandsheuwel Farming (Edms) Bpk v I Sekretaris van Binnelandse Inkomste 1978 (1) SA 101 (A) at 119F; Secretary for Inland Revenue v Trust Bank of Africa Ltd 1975 (2) SA 652 (A) at 669F - G; Secretary for Inland Revenue v Rile Investments (Pty) Ltd 1978 (3) SA 732 (A).

E B Broomberg SC (with him B E Doctor) for the respondent referred to J the following authorities: John Bell & Co Ltd v Secretary for Inland

1991 (2) SA p30

Revenue 1976 (4) SA 415 (A) at 428A (38 SATC 87); Berea West...