Commissioner for Inland Revenue v Strathmore Consolidated Investments Ltd

• Jurisdiction: South Africa
• Judge: Schreiner ACJ, Steyn JA, Beyers JA, Ogilvie Thompson JA and Smit AJA
• Judgment Date: 10 December 1958
• Citation: 1959 (1) SA 469 (A)
• Hearing Date: 25 November 1958
• Court: Appellate Division

Ogilvie Thompson, J.A.:

During the tax year ended 30th June 1953 respondent Company sold (a) certain 72 morgen of land at a profit of H £38,053, and (b) the rights to take up 69,210 shares in the Stilfontein Gold Mining Company Ltd. for the sum of £11,246, being 3s. 3d. per right. In assessing respondent for normal tax in respect of the tax year in question the Commissioner included both these amounts of £38,053 and £11,246 in its gross income. Respondent, its objection to this having been overruled by the Commissioner, appealed to the Special Court which upheld the assessment in regard to the £38,053 but allowed respondent's appeal in relation to the £11,246 which it held to be a

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receipt of a capital nature. Being dissatisfied with this last-mentioned decision of the Special Court, the Commissioner required it to state a case under sec. 81 of Act 31 of 1941 for the decision of this Court: the A consents necessary in terms of sec. 81 (1) (b) of the Act have been duly filed. The finding of the Special Court in relation to the £38,053 profit on the land transaction is not challenged by respondent. The sole question for decision in the present appeal, accordingly, is whether or not the £11,246, obtained by respondents on the sale of the rights to take up the Stilfontein shares, attracts tax. For a proper appreciation and determination of that question it is necessary first to make some B reference to the circumstances preceding the acquisition by respondent of the relative Stilfontein shares and which ultimately led up to the sale of the rights in issue.

The Stilfontein Gold Mining Company Ltd - which I will call the Stilfontein Company - was registered on 23rd April, 1949, with a C nominal capital of £100 divided into 100 shares of £1 each. This company was promoted by the New Pioneer Central Rand Gold Mining Company Ltd. (hereafter referred to as the New Pioneer Company) of which Strathmore Investments Ltd. (which I will call the Investments Company) had control. At all times material to this appeal Messrs. Jack Scott, J. D C. McIntyre and C. W. Roper were associated together as shareholders in, and directors of, the various companies I have mentioned, and also of various other companies collectively known as the Strathmore group. As between themselves, these three gentlemen held their shares in the proportions of 84 per cent, 12 per cent, and 4 per cent respectively. At all times material to this appeal Scott, through his shareholding, had E effective control of the Investments Company, of the New Pioneer Company, and of the Stilfontein Company and was also chairman of these companies.

On 13th June, 1949, the original 100 £1 shares in the Stilfontein Company were sub-divided into 400 shares of 5s. each and the nominal F capital of the Company was increased to £3,500,000 by the creation of a further 13,999,600 shares of 5s. each. On 28th June, 1949, one million of these shares were issued to various companies, including the New Pioneer Company and the Investments Company, who respectively acquired 400,000 and 200,000 shares. During June and July 1949 the Stilfontein Company purchased from the Strathmore Development Company (Pty.) Ltd. G and Eastern Rand Extensions Ltd. certain mineral rights and prospecting contracts (with options to purchase mineral rights) over various portions of the farms Stilfontein No. 39, Hartebeesfontein No. 41 and Buffelsfontein. Included among the rights so purchased from the Strathmore Development Company (Pty.) Ltd. were certain option and H prospecting rights over the farm Stilfontein which Scott had, in his personal capacity, acquired during 1946 and which, subject to the retention of a 10 per cent participation right, he had in March, 1957, ceded to Strathmore Development Company (Pty.) Ltd. This 10 per cent participation right was ceded by Scott, free of charge, to the Investments Company on 19th September, 1947. When, in September, 1949, the Stilfontein Company decided to issue a further 10,000,000 of its remaining 13,000,000 shares, the Investments Company acquired, in satisfaction of Scott's aforementioned 10 per cent participation

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right, a further parcel of 792,100 Stilfontein shares. Of these 792,100 shares, 100,000 were, by virtue of a prior agreement not material to this appeal, handed over to the Estate G. F. Jooste, thus reducing the parcel to 692,100 shares.

The Investments Company was incorporated in 1936 and, until December, A 1947, its authorised and issued capital was £2,500 divided into 1,250 ordinary shares of £1 each and 1,250 preference shares of £1 each. All these shares were held by Scott, McIntyre and Roper in the proportions of 84 per cent, 12 per cent and 4 per cent respectively. The Investments Company was a financial company much of whose income was derived from B profits on sharedealing: during the years 1945 - 1948 its profits on the sale of listed shares amounted to £228,980. Prior to September 1947 the Investments Company obtained de facto control of the New Pioneer Company. The latter's sole asset was a gold mine which had reached the limit of its payability, but it had a Stock Exchange quotation for its shares. In November, 1947, the capital of the New Pioneer Company was C increased, the Investments Company taking up 200,000 shares at 5s. each and acquiring an option to take up a further 400,000 shares at 10s. each. During 1947 the Investments Company suffered from a shortage of capital and an inability to increase its existing overdraft of £100,000. Negotiations between Scott and certain financial houses in England D ultimately resulted in a re-arrangement of assets between the Investments Company and Strathmore Holdings (Pty.) Ltd. (another Company controlled by Scott) and in the Investments Company being granted a loan of £200,000. In December 1947 the ordinary share capital of the Investments Company was increased from £1,250 to £301,250 by the creation of 300,000 ordinary shares of £1 each. Scott and his associates E took up 200,000 of the new shares thus retaining control of the Investments Company, whereof Scott remained chairman.

Respondent company was originally incorporated in the South African Republic on 25th March, 1899, under the name of G.F. Company Ltd. On 20th August, 1902, its name was changed to Kleinfontein Estates and F Township Ltd. Throughout its history, up to the tax year in issue in this appeal, the company derived income, inter alia, from supplying water to various mines and from dealing in land and was taxed upon the income so derived. At all material times the company's shares had a Stock Exchange quotation. In May, 1949, Scott and his above-named G associates acquired sufficient shares in the company to obtain control of it, and on 10th October, 1949, the Company's name was changed to Strathmore Consolidated Investments Ltd. (i.e. present respondent). Before the name of the company was changed, the capital of Kleinfontein Estates and Township Ltd. had, on 27th June, 1949, been increased from H £21,250 to £321,250 by the creation of 1,200,000 new shares of 5s. each. In terms of a prior agreement, these 1,200,000 shares were allotted as fully paid up to the holders of the ordinary shares in the Investments Company in consideration of the latter's shareholders transferring to Kleinfontein Estates and Township Ltd. their 300,000 shares in the Investments Company. As a result of this transaction, the Investments Company now became, according to the stated case, the wholly-owned subsidiary of the Consolidated Company (present respondent;

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then still called Kleinfontein Estates and Township Ltd.). Of the 1,200,000 new shares in the Consolidated Company, 993,000 were awarded to Scott, McIntyre and Roper, in the aforementioned proportions, Scott A thus retaining control of respondent and, through it, of the Investments Company. In order, inter alia, to satisfy Stock Exchange requirements, a further 257,000 shares were retained and, after the change of name to Strathmore Consolidated Investments Ltd., these 257,000 shares were in November, 1949, offered to the public at 37s. 6d. per share, the proceeds being paid to the shareholders of the Investments Company: Scott's share of these proceeds was in excess of B £300,000. Scott became, and at all material times remained, the chairman of respondent Company.

On 21st October, 1949, the Investments Company (which had, on 10th October, 1949, changed its name to Strathmore Exploration and Management C Ltd., but which I shall continue to call the Investments Co.) took up a short term loan of £400,000, pledging as security, inter alia, the aforementioned parcel of 692,100 Stilfontein shares. In November, 1949, the amount of this loan was increased to £480,000, the 692,100 Stilfontein shares remaining portion of the security for the loan.

D I turn now to the circumstances whereunder respondent acquired the abovementioned 692,100 Stilfontein shares and to the events which culminated in the sale of the rights pertaining to those shares. On 6th March, 1950, respondent's board of directors passed the following resolution:

'Permanent Investment Portfolio. In connection with the permanent investment portfolio to be held by the company, it was agreed that consideration be given to taking transfer from Strathmore Exploration E and Management Ltd. (i.e. the Investments Company) of shares of a book value of £500,000.'

Between the date of this resolution and the end of the tax year on 30th June, 1950, the Investments Company transferred to respondent the aforementioned 692,100 Stilfontein shares for the sum of £173,025, i.e. at 5s. per share, and also the following shares:

Quoted Shares:
F New Pioneer Company	20,000 shares for £23,254
Alpha Free State Holdings	100,000 shares for £54,514
Shares in...