Commissioner for Inland Revenue v Stott

• Jurisdiction: South Africa
• Judge: Solomon CJ, De Villiers JA, Wessels JA, Curlewis JA and Stratford JA
• Judgment Date: 16 March 1928
• Citation: 1928 AD 252
• Hearing Date: 06 March 1928
• Court: Appellate Division

Wessels, J.A.:

This is an appeal from the Natal Provincial Division on a case stated to that Division by the Special Court for hearing income tax appeals. The question of law as stated

Wessels, J.A.

by the Special Court under sec. 60 of Act 40 of 1925 is whether the proceeds of the sale by the respondent of certain lots of land on the Bluff at Durban and at Ifafa in Natal were to be regarded under sec. 6 of Act 41 of 1917 as gross income. In other words whether the profits derived from the sale of these lots were to be considered as income or as receipts or accruals of a capital nature.

The procedure, as is pointed out by the learned Judge in the court below, is under Act 40 of 19211 but the obligations of the taxpayer are to be determined by the repealed Act 41 of 1917 inasmuch as these sales were effected after the Act of 1917 came into operation, but before the Act of 1925 was gazetted. This is clear from the terms of sec. 73 of the Act of 1925. Though we are concerned only with the proceeds of the respondent's Bluff and Ifafa properties, yet in order to determine whether these proceeds are gross income or accruals of a capital nature, we have to consider all the land transactions of the respondent as found in the stated case, for the solution of the question depends upon whether he was carrying on the business of a landjobber or engaged in a scheme for profit-making in regard to these transactions. The following are the essential facts necessary for the determination of the question at issue: 1. The taxpayer is an architect and a surveyor practising at Pietermaritzburg, and his occupation gives him opportunities of judging the value of land. 2. He has three classes of investments-stock, mortgages and land. If his funds permit he utilises money in the acquisition of land, 3. His land investments were as follows: (a) His first investment in land was made some 30 years ago. He bought land on the north coast of Natal, let it and subsequently sold it at a profit. (b) He bought a farm in Vryheid district which he has let for five years, and he has one or two town properties from which he receives rent. (c) He bought two acres at Winkelspruit, Natal, as a seaside residence. The place became congested, and he decided to move away. In 1918 he cut the property up into five lots and sold them. (d) In August, 1920, he wanted another seaside residence. He bought 54 acres of land at Ifafa. The block was sold as a whole. He bought it for £990, and at once chose a site on which he erected a cottage. His primary intention in buying the block was to build a seaside residence there.

Wessels, J.A.

In April, 1921, he was asked to sell 30 acres. He replied that he had no desire to sell, but if the applicant was prepared to pay him £3,000 he would sell the whole block for that amount. Later on he surveyed half of the block in lots and sold these at a profit. In each of the years 1922, 1923 and 1924 he realised a profit of £706 on the lots sold. (e) In March, 1921, the taxpayer bought a small fruit farm at the Bluff. There was a long lease on the farm at the time it was bought. The lessee failed to pay the rent. The taxpayer relet the farm subject to his right to cut it up and to sell it in lots. The second tenant also caused trouble. He then cut up the farm in lots and sold these at a profit of £623 in 1923 and £624 in 1924. (f) In 1924 the taxpayer bought the farm "Woody Glen," in extent 1,800 acres at 23s. per morgen. The land was bought to assist natives living on it who were in fear of being ejected. Half of the farm is stony and valueless. A portion was cut up into lots and these were sold to the natives at £3 per acre. The profit on this sale was £16 for 1924. The Special Court found that this farm was bought primarily from philanthropic motive-s to assist the natives.

Upon these facts the majority of the Special Court found that as regards the farm on the Bluff and the land at Ifafa the enhanced value at which the respondent sold the land was a profit upon which income tax was payable. The reasons given by the Special Court for this finding are (1) That "by putting his brains into it and organisms a trade in the selling of the lots, he converted his original intention in buying in such a way as to bring it within the scope of a profit-earning undertaking." (2) By cutting up the properties into small lots and selling these at a profit, the taxpayer was carrying on a business as part of his business as a surveyor, and therefore the profits on these transactions cannot be rewarded as being of a capital nature.

The Natal Provincial Division upheld the minority judgment of the PRESIDENT of the Special Court...