Commissioner for Inland Revenue v Butcher Bros (Pty) Ltd

• Jurisdiction: South Africa
• Judge: Watermeyer CJ, Tindall JA, Feetham JA, Greenberg JA and Davis AJA
• Judgment Date: 13 December 1944
• Citation: 1945 AD 301
• Hearing Date: 21 September 1944
• Court: Appellate Division

Commissioner for Inland Revenue Appellant v Butcher Bros (Pty) Ltd Respondent
1945 AD 301

1945 AD p301

Citation	1945 AD 301
Court	Appellate Division
Judge	Watermeyer CJ, Tindall JA, Feetham JA, Greenberg JA and Davis AJA
Heard	September 21, 1944
Judgment	December 13, 1944

Flynote : Sleutelwoorde

Revenue — Income Tax — Gross income — "Premium or like consideration" in respect of a lease — Long lease providing for erection of buildings to become property of lessor without compensation — Method of assessment — Act 40 of 1925, section 7 (1) (d).

Headnote : Kopnota

The words "premium or like consideration" in section 7 (1) (d) of Act 40 of 1925 in so far is they refer to relations between lessor and lessee mean consideration having an ascertainable money value passing from a lessee

1945 AD p302

to a lessor, whether in cash or otherwise, distinct from and in addition to, or in lieu of, rent, excluding any obligations accepted by a lessee in respect of matters normally incidental to leases such as undertakings to pay rates and maintain buildings.

The terms of section 7 (1) (d) may be applicable to the benefits to which a lessor becomes entitled by virtue of clauses in a lease providing that buildings are to be erected on the leased property by the lessee and that such buildings are to be the lessor's property on the termination of the lease without payment of compensation. Whether or not in any particular case they are applicable depends upon the circumstances of the case.

The appellant company in October, 1929, acquired from a partnership certain land which had been leased by the partnership to a third party for 50 years the latter being obliged to erect on the land buildings to a value of not less than £55,000 and to keep them in repair, such buildings to become the property of the lessor upon termination of the lease without any compensation being payable therefor. At the time of the lease a building worth £15,000 was on the property and the lessees were empowered to demolish this building. The new buildings were completed in June, 1935. In assessing the company for income tax for the year ending June 30, 1935, the Commissioner included in its gross income the sum of £55,000 on the ground that the erection on the land of the buildings constituted the receipt by the company of that amount as a premium or like consideration in respect of a grant of a right of the use and occupation of premises as contemplated by section 7 (1) (d) of Act 40 of 1925 and that such receipt took place on the completion of the buildings in June, 1935. On appeal to the Special Court the assessment was reduced so as to include the value in 1931 of £55,000 payable in 1976, the end of the 50 year period. Upon appeal upon various questions of law a Provincial Division held that the Company was assessable on no part of the £55,000.

Held, on appeal, that, assuming without deciding that the company for the purposes of section 7 (1) (d) was in the same position as the partnership would have been had no sale taken place, an assessment of the company upon the basis that it had received £55,000 in June, 1935, ignored the fact that from that date until the termination of the lease in 1976 the lessee had the exclusive right to such buildings, and that such assessment had been rightly set aside by the Special Court.

Held, further, that the basis adopted by the Special Court could not stand inasmuch as it assumed that the buildings would still be worth £55,000 in 1976 and also took no account of the fact that when the lease was granted buildings worth £15,000 were in existence on the site leased.

Held, further, that the facts set out in the stated case did not show that any "amount" either accrued to or was received by the Company by reason of the erection of the buildings in the tax year ended 30th June, 1935, and that therefore the Commissioner was not entitled to include in the Company's gross income for that tax year any sum representing the value of the buildings erected by the lessee on the land or of the Company's right to receive such buildings on the termination of the lease.

1945 AD p303

The cases of Ochberg v Commissioner for Inland Revenue (1931 AD 315) Reichman v Commissioner for Inland Revenue (1931 W.L.D. 81); Levy v Commissioner for Inland Revenue (1930 NPD 370), applied.

The decision of the Natal Provincial Division in Butcher Bros. Ltd. v Commissioner for Inland Revenue (1944 NPD 90), confirmed, but reasons varied.

Case Information

Appeal from a decision of the Natal Provincial Division (CARLISLE, J., SELKE, J., and BROOME, J.) upon certain questions of law stated by the Special Income Tax Court.

The material facts and the questions of law were stated by the Special Court as follows:

2. In the course of the hearing the following facts, inter alia, were admitted or proved:

(1)

On the 6th December, 1926, Walter Edward Butcher, Arthur George Butcher, Harry James Butcher and Leonard William Butcher, carrying on business in partnership under the name of S. Butcher & Sons (hereinafter referred to as "the partnership") leased certain property to African Theatres Ltd under and subject to the terms and conditions set forth in a notarial agreement of lease (a copy of which was annexed), which was registered in the Deeds Registry on 21st January, 1927. . . .

(2)

In terms of the aforesaid agreement of lease it was provided, inter alia:-

(a)

That the property leased consisted of two lots of land situate in Durban with all existing buildings erected thereon, which buildings the lessee should have the right to demolish and remove;

(b)

that the period of the lease should be 50 years as from 1st January, 1927, with right to the lessee to renew for a further period of 49 years;

(c)

that the lessee should, on being given possession of the property leased, proceed forthwith with the erection of theatre and other buildings thereon to a value of not less than £55,000, which buildings the lessee undertook not to pull down or remove without the consent in writing of the lessors, the lessors' consent, however, not to be unreasonably with held;

(d)

that on termination of the lease or any renewal thereof all buildings and improvements should revert to and ipso facto become the absolute property of the lessors without their having to pay any compensation therefor.

(3)

The value of the existing buildings on the leased property as at the date the lease was entered into on the 6th December, 1926, was £15,000.

(4)

The appellant company was registered in October, 1929, and on the 10th October, 1929, entered into an agreement (a copy of which was annexed) whereby it agreed to purchase from the partnership, inter alia, the property which was the subject of the aforesaid agreement of lease and all the rights of the partnership as lessor under the said agreement of lease. The said property was transferred by the partnership to and registered in the name of the appellant company in 1930.

(5)

The buildings which the lessee had undertaken to erect in terms of the aforesaid agreement of lease were completed in June, 1935, at a cost of not less than £55,000.

1945 AD p304

(6)

A fair estimate of the present value of £55,000, assuming an interest earning rate of 5 per cent. per annum, is -

£4,796 4s. 1d. as at 1st January, 1927, if payable on 31st December, 1976;

£439 3s. 7d. as at 1st January, 1927, if payable on 31st December, 2025;

£7,086 3s. 7d. as at, 30th June, 1935, if payable on 31st December, 1976;

£648 16s. 9d. as at, 30th June, 1935, if payable on 31st December, 2025.

3. The Commissioner, in his determination of the liability of appellant company to normal and super tax for the year of assessment ended 30th June, 1935, included the sum of £55,000 in its taxable income and income subject to super tax and on this basis issued on the appellant company assessments in which its taxable income and income subject to super tax were assessed at £58,431.

4. Against these assessments appellant company lodged objection and appeal on the following grounds:

(a)

No assessment is competent upon the company, and if any assessment is competent, which is denied, it should have been made against the original lessors. If anything taxable was received or accrued, which is denied, it was by and to the lessors in question.

(b)

The sum of £55,000 is not and never has been a part of the gross income of the company.

(c)

No premium or like consideration is or was conferred upon the company by the lease or otherwise.

(d)

Nothing has been received by or accrued to the company arising out of the lease or the erection of the buildings or otherwise, whether by way of premium or like consideration or not.

(e)

If an thing has been received or accrued, it is of a capital nature and was a consideration for the right of demolition conferred upon the lessees under the lease.

(f)

If anything has been received by or accrued to the company, which is denied, it is not an amount.

(g)

The contract of lease is not and never was a grant of the right of the use or occupation of premises.

(h)

In any event, if any additional assessment were competent at all, which is denied, the sum of £55,000 is erroneous and excessive, as it gives no credit for the value of buildings destroyed under the lease, and should at the most be computed only on the 1926 or 1935 value of a future payment or accrual.

(i)

The measure of such payment or accrual could only be the 1926 or 1935 value of a release from any obligation to pay the value at the end of the lease of the materials of the buildings erected.

(j)

There is nothing contained in the Income Tax Acts which warrants the additional assessment, and it has been made without any adequate grounds in law or in fact.

5. On appeal to this...