Commissioner for Inland Revenue v Cactus Investments (Pty) Ltd

• Jurisdiction: South Africa
• Citation: 1999 (1) SA 264 (T)

Commissioner for Inland Revenue v Cactus Investments (Pty) Ltd
1999 (1) SA 264 (T)

1999 (1) SA p264

Citation	1999 (1) SA 264 (T)
Case No	A560/95
Court	Transvaal Provincial Division
Judge	Southwood J, Wunsh J and Ginsburg AJ
Heard	April 17, 1996
Judgment	July 5, 1996
Counsel	A G Derksen for the appellant; P A Solomon SC for the respondent

Flynote : Sleutelwoorde B

Revenue — Income tax — Income — 'Gross income' as defined in s 1 of Income Tax Act 58 of 1962 — Accrual of — Whether rights to interest accrued to respondent as 'gross income' before their cession to certain financial institutions in C exchange for their rights to tax-exempt income — Reciprocal agreement between respondent and said financial institutions stipulating that respondent would invest moneys with banks on fixed deposit or in interest-bearing loans for fixed period — Interest accruing to respondent only at end of each period — Respondent would then cede right to D interest to financial institution while institution would in turn cede to respondent right to (tax exempt) dividends on shares — Commissioner contending that interest accrued to respondent as gross income before rights thereto ceded — Terms of respondent's fixed deposits and loan agreements with banks determining whether interest payable accrued to respondent before or after cessions — Said agreements silent as to fate of interest if capital E repaid before due date — Banks accordingly obliged to pay full amount of interest even if capital repaid before time — Respondent therefore immediately acquired right to claim payment of capital and interest — Right to claim interest vesting in respondent on date on which each investment made and accordingly accruing to it as 'gross income' on that date.

Headnote : Kopnota

The respondent, a private company whose main business was the issuing of and investment in preference shares, had until 1988 had no investments producing interest income. Late in 1987, however, it devised a scheme in terms of which it would invest funds, in respect of which interest would accrue, with certain financial institutions (the A G institutions) for a fixed period and then cede the right to the interest payable on the investment to certain other institutions (the B institutions) in return for a cession by these institutions of their rights to dividends from their shares. The object as far as the respondent was concerned was the receipt of dividend income, which was at that time exempt from income tax. The object as far as the B institutions were concerned was to increase the return H on their shareholdings: the respondent would cede a larger amount of interest to them than the amount of dividends they would cede to the respondent. The respondent would invest the funds so received in fixed deposits and in loan agreements with the A institutions. It was common cause that the terms of the agreements with the A institutions would determine whether the interest payable accrued to the respondent before or after the cessions to the B institutions. The main issue was whether the rights of interest ceded to the B institutions had accrued to the I respondent as 'gross income' as defined in s 1 of the Income Tax Act 58 of 1962 before the cessions. The secondary issue was whether, if the right to interest had not accrued to the respondent before the cessions, the interest was in any event taxable under the provisions of s 103 of the Act. The Transvaal Income Tax Special Court held that the cessions had preceded the date on which the respondent had J

1999 (1) SA p265

become entitled to the interest and that accordingly the respondent had validly divested itself of the interest income A before it had accrued to it. The appellant contended on appeal that once the agreement had been entered into and the money paid over, the respondent had acquired the unconditional right to claim payment of the interest payable even though payment could only be enforced at the later date stipulated in the agreements. The appellant B accordingly contended that the right had vested as soon as the agreement was concluded and that therefore the right of interest immediately accrued to the respondent. It lastly contended that if the sums in question had not accrued to the respondent then it was entitled to include them in the 1988 tax year by virtue of the provisions of s 103 of the Act. The respondent supported the finding of the Special Court and argued that s 103 had no application to the present case. C

Held (per Southwood J, Ginsburg AJ concurring), that it was clear from the agreements concluded with the A institutions that both the capital and the interest were payable only on the due date and that before that the lender (ie the respondent) had no right to claim earlier payment of either capital or interest. (At 275C.)

Held, further, that it was also clear from these agreements that the respondent had undertaken to lend a fixed sum D to the borrowers (ie the A institutions) for a fixed period at a fixed rate of interest and that the borrowers in turn undertook to repay the capital and to pay the interest to the respondent on a fixed date. There could be no doubt that the amounts lent were investments made by the respondent and that the fixed period, fixed rate of interest and fixed date of repayment and payment were stipulated for the benefit of both parties. (At 278I—J.) E

Held, further, that the respondent had only one obligation under the agreements, viz to pay over the agreed sum to the borrower. There was no other continuing obligation to make the money available to the borrower for the full period of the agreement: once the respondent had paid the money to the borrower it had no right to repayment of F the capital or payment of the interest until the agreed period had lapsed. (At 279A—B.)

Held, further, that the borrower's obligation in terms of the agreements was to repay the capital and to pay the interest on the agreed due date. The borrower was not entitled to repay the capital before the agreed due date unless it paid the interest on the whole period of the agreement. (At 279B/C—C.) G

Held, further, that none of the agreements made provision for the repayment of the capital before the agreed due date and that it was also clear that the money was being lent for a fixed period. Because the agreements were silent as to the fate of the interest in the event that the capital was repaid before the agreed due date, it was an implied term that the borrower was obliged to pay the full amount of the interest if it repaid the capital before the H completion date. Such a term was not in conflict with the express terms of the agreements. (At 280A/B—C.)

Held, further, that in the result the respondent immediately acquired the right to claim payment of the capital and interest payable in terms of the agreements when it entered into the agreements with the A institutions. Both were I fixed irrespective of the date upon which they were paid and the respondent's right to claim interest was not subject to any further performance of any obligation by it, but simply subject to a time provision. (At 280C/D—D/E.)

Held, further, that it had been certain both that the period would elapse and that interest in terms of the agreements would accrue and become payable. Accordingly, the right to claim interest in terms of the agreements vested in the respondent on the day when each investment was made and accrued to J

1999 (1) SA p266

the respondent on that date as 'gross income' in terms of s 1 of the Act. (At 280E—F.) A

Held, further, that in view of the above finding it was not necessary to consider the applicability of s 103(1) of the Act. (At 280F.)

Wunsh J in a separate but concurring judgment held that the respondent's assignment of his rights to interest was not effective to prevent the accrual thereof: the interest had accrued to it either on general principle or by reason B of s 7(1) of the Act.

The appeal in respect of the 1988 year of assessment was accordingly upheld and the appellant's assessment of the respondent's income tax for 1988 confirmed.

Cases Considered

Annotations

Reported cases C

Alfred McAlpine & Son (Pty) Ltd v Transvaal Provincial Administration1974 (3) SA 506 (A): dictum at 531D—H applied

Arnold v Viljoen1954 (3) SA 322 (C): referred to

B and H Engineering v First National Bank of Southern Africa Ltd1995 (2) SA 279 (A): referred to D

Bellairs v Hodnett and Another1978 (1) SA 1109 (A): referred to

Bernitz v Euvrard1943 AD 595: dictum at 602 applied

Boland Bank Bpk v Engelbrecht en Andere1996 (3) SA 537 (A): referred to

Buys v South Rand Exploration Co Ltd 1910 TPD 1058: referred to

Caltex Oil (SA) Ltd v Secretary for Inland Revenue1975 (1) SA 665 (A): referred to E

Campbell v Ramlakan1949 (3) SA 126 (D): dictum at 127 applied

Challenor's Estate v Commissioner for Inland Revenue1960 (1) SA 13 (N): referred to

Commissioner for Customs and Excise v Randles, Brothers and Hudson Ltd1941 AD 369: referred to

Commissioner for Inland Revenue v George Forest Timber Co Ltd1924 AD 516: referred to F

Commissioner for Inland Revenue v I H B King; Commissioner for Inland Revenue v A H King1947 (2) SA 196 (A): referred to

Commissioner for Inland Revenue v Lever Brothers and Another1946 AD 441: referred to

Commissioner for Inland Revenue v Lo and Lo (a firm) (1984) STC 366: referred to G

Commissioner for Inland Revenue v Manganese Metal Co (Pty) Ltd1996 (3) SA 591 (T): referred to

Commissioner for Inland Revenue v People's Stores (Walvis Bay) (Pty) Ltd1990 (2) SA 353 (A) (52 SATC 9): dicta at 363I—364J, 365A—B and 367D applied

Commissioner for Inland Revenue v Pick 'n Pay Employee Share Purchase Trust1992 (4) SA 39 (A): H referred to

Commissioner for Inland Revenue v...