Commissioner for Inland Revenue v George Forest Timber Co Ltd

• Jurisdiction: South Africa
• Judge: Innes CJ, De Villiers JA, Kotzé JA, Wessels JA and JER De Villiers AJA
• Judgment Date: 07 July 1924
• Hearing Date: 18 March 1924
• Court: Appellate Division

Innes, C.J.:

In 1916 the respondent company, which carries on the business of timber merchants, purchased for £8,000 about 600 morgen of naturally forested land. The nature of the trees is such that they do not renew themselves, and for practical purposes the value of the land without the timber is negligible. A quantity of timber has been felled each year, sawn up in the company's mill, and the resulting product sold as part of its stock-in-trade. In its income tax returns for the year ending June 30th, 1919, the company deducted from the proceeds of the sale of stock produced from the forest the sum of £1,000 which roughly represented the cost of the relative timber. The Commissioner had passed similar debits in his assessments for the two preceding years, but

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he disallowed the deduction claimed for the year in question. The company appealed to a Special Court, claiming on the ground of analogy that the allowance for the redemption of capital expenditure to which a mine was entitled under sec. 17 (1) (f) of the Act should also be made in respect of the working of a natural forest. The Special Court allowed the appeal, holding that the amount deducted constituted a receipt of a capital nature which was rightly eliminated from the return of gross income. At the request of the Commissioner a case was stated for the Cape Provincial Division in the following form: -

"Is the appellant company entitled to deduct from the proceeds of its sales of timber during the year of assessment an amount representing the proportionate return to it of the capital invested in the acquisition of the forest from which the timber was cut, on the grounds that the amount constitutes a receipt of a capital nature in terms of sec. 6 of the Income Tax (Consolidation) Act No. 41 of 1917?"

The Provincial Division (SEARLE, J.P., dubitante) upheld the view of the Special Court, and answered the question in favour of the company; the Commissioner now appeals against that decision.

Sec., 84 (3) of the statute confines the taxpayer on appeal to the grounds stated in his objection. But the benefit of that limitation was apparently waived by the Commissioner, and the Special Court found in favour of the company on a different ground. The decision was based not on sec. 17 (1) (f), but on sec. 6; and the case submitted to the Provincial Division was concerned merely with the interpretation and effect of that section. Before this Division, however, the conclusion reached was supported on yet another ground. Mr. McCausland's main argument was that though the total receipts from the sawn timber did fall within the definition of "gross income" in sec. 6, yet the item in dispute was an outgoing deductible under sec. 17 (1) (a). Mr. Roper raised no objection to the widening of the controversy which this contention involved and the parties formally consented "to the Court deciding all the contentions raised in argument, if the terms of the Statute allow it." I think they do allow it. The restrictive provisions of sec. 84 (3) operate solely in favour of the

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Commissioner and can properly be waived by him; and the limits of the stated case may, with his consent, be regarded as enlarged so as to cover the further point raised during the present appeal. It will be necessary therefore to consider the operation upon the present facts both of sec. 6 and of sec. 17 (1) (a).

These clauses lay down the general lines on which assessments are to proceed. Normal tax is levied on gross incomes, less deductions, abatements and exemptions. "Gross income" is defined as the total amount received or accrued as specified during the year of tax, other than receipts or accruals of a capital nature; and among the deductions allowed are losses and outgoings duly incurred in the production of the income, provided that such losses and outgoings are not of a capital nature. There is no definition of capital; nor is the expression "of a capital nature" anywhere interpreted. We must fall back therefore upon the ordinary economic meaning of those terms. The first point to be determined is whether the entire price obtained for the worked up, or partly worked up, produce of the forest comes under the definition of gross income in sec. 6. If that question is answered in the, affirmative, but only then, the further question will arise, whether a proportionate share of the first cost of the timber can be deducted as an outgoing under sec. 17 (1) (a). The words "of a capital nature" occur in both sections, having relation in the one case to incomings, and in the other to outgoings. In order to appreciate their effect, it is necessary to bear in mind the distinguishing characteristics of capital, that which differentiates it from income.

In Commissioner of Taxes v Booysen (1918 AD at p. 582), WESSELS, J., said that as a general rule income was revenue derived from capital productively employed. He was considering it from an economic standpoint, apart from statutory definition. Similarly and also as a general rule capital, as opposed to income, may be said to be wealth used for the purpose of producing fresh wealth.

We are concerned here with the moneys received for the sawn timber; the question is whether they were receipts of a capital nature. Unless they were, they should have been included in the. gross income for the period of assessment.

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The land with the growing timber upon it was capital; it was acquired with a view to the production of wealth. Had it been sold as it stood the proceeds need probably not have been accounted for to the Commissioner, for assuming that such a transaction fell outside the business of the company, the operation would have been a mere realisation of capital, not an employment of capital (see Booysen's case).

But the property was actually dealt with in accordance with the purpose for which it was acquired - namely, the production of revenue through the channel of the company's ordinary business. The trees were felled, the timber was put through the sawmill, and the planks or logs, when they came from the mill, were sold as portion of the ordinary stock-in-trade. The price obtained was portion of the company's revenue; it...