Commissioner for Inland Revenue v Strathmore Exploration and Management Ltd

• Jurisdiction: South Africa
• Judge: Centlivres CJ, Schreiner JA, Hoexter JA, De Villiers JA and Brink JA
• Judgment Date: 03 December 1955
• Citation: 1956 (1) SA 591 (A)
• Hearing Date: 02 November 1955
• Court: Appellate Division

G Centlivres, C.J.:

This is an appeal from the Special Court for hearing income tax appeals, the parties having duly lodged with the Registrar of that Court their written consents, in terms of sec. 81 (1) (b) of Act 31 of 1941 (as amended), to an appeal direct to the Appellate Division.

H The respondent company was registered in 1936. Its memorandum of association authorised it, inter alia, to purchase or otherwise acquire immovable property, to hold immovable property for the purposes of investment, to deal in and turn to account immovable property, to deal in and turn to account prospecting contracts over any land and to deal in shares and securities of every kind in any company. The main

Centlivres CJ

activities of the respondent company consisted in either dealing in shares or holding shares in subsidiary or associated companies described by it as investments. It has never disposed of any land or mineral rights other than those it acquired by inheritance, save that on one occasion it disposed of property at its original cost to Jack Scott, A this property having been bought by it as a residence for Jack Scott. Up to December 9th, 1947, Jack Scott, by virtue of his holding of ordinary shares in the respondent company, had virtual control of it.

At about the same time as the respondent company was registered, the B Strathmore Development Company (Pty.) Ltd. was registered. All the shares in that company were held by the respondent company. The Strathmore Development Company was formed for the purpose of acquiring certain land from Mrs. I. D. Scott, who was the mother of Jack Scott, and in March 1937 the Strathmore Development Company entered into a written contract to purchase that land. In September 1938 Mrs. Scott by C a deed of donation made over to Jack Scott all her right, title and interest to that contract. That contract was cancelled in 1939 presumably with the acquiescence of Jack Scott. In October 1939 Mrs. Scott made a will in which she bequeathed to the respondent company the following property owned by her (those properties being the same as those previously sold to the Strathmore Development Company):

'(a)

D Certain remaining extent of the quitrent farm Strathmore No. 15. District Klerksdorp; measuring six hundred and sixteen (616) morgen, two hundred and seventy-one (271) square roods, and

(b)

Certain portion of the quitrent farm Roodepoort No. 57, situate in the District of Klerksdorp; measuring thirty-six (36) morgen, four hundred and forty (440) square roods including such portion of the above properties as has been laid out in a township called E 'Ellaton', and including the contract entered into by me with the Anglo-Transvaal Consolidated Investment Company Limited.'

In September, 1941, Mrs. Scott died leaving her will of full force and effect. In January, 1943, the respondent company took transfer of the land bequeathed to it and in its books of account entered the land as F being £15,124 in value. This figure represented the value of the land in the accounts lodged with the Master of the Supreme Court in Mrs. Scott's estate, plus death duty and transfer charges paid by the respondent company. Of the value of £15,124, £2,063 represented the value placed on the mineral rights in the inherited land, £10,041 the value placed (exclusive of mineral rights) on a portion of the property G which had been laid out as a township under the name of Ellaton Township and £3,020 the value placed on the balance of the property, exclusive of mineral rights. The respondent company held the inherited property until such time as a suitable opportunity occurred for the profitable disposal of it. In the meantime it carried on farming operations on the land at a loss. It did not exploit or develop the land H or the mineral rights thereon nor did it advertise the land or any part of it for sale.

In September, 1946, the respondent company made over for the sum of £141,750 to the Eastern Rand Extensions Limited all its rights, title and interest in and to all rights to minerals (excluding diamonds) in the property it inherited which was described as follows in the notarial deed of cession:

Centlivres CJ

'(1)

Certain remaining extent of the farm 'Strathmore' No. 15, situate in the District of Klerksdorp and measuring as such 418.0850 (four hundred and eighteen decimal nought eight five nought) morgen.

(2)

Certain portion of the farm 'Roodepoort' No. 57, situate in the District of Klerksdorp, measuring as such 36 (thirty-six) morgen, 440 (four hundred and forty) square roods.

(3)

Certain portion 'B' (including the public places) now known as A the township of Ellaton, of the farm 'Strathmore' No. 15, situate in the District of Klerksdorp, measuring 195.9928 (one hundred and ninety-five decimal nine nine two eight) morgen.'

This sum was not paid in cash but by the issue of shares in the Eastern Rand Extensions Limited to the respondent company. From November, 1938, B Jack Scott was one of the directors of the Eastern Rand Extensions Limited. The respondent company acted as secretaries and technical advisers to that company and by virtue of its large shareholding in that company the respondent company had, for practical purposes, the control of that company. In his assessment of the respondent company's income for the year ended June 30th, 1947, the Commissioner included the sum of C £139,687 which was the difference between the above sum of £141,750 and £2,063 which, as I have explained, was the value placed on the mineral rights in the inherited property at the time of its acquisition by the respondent company.

In September, 1947, the respondent company sold the Ellaton Township to D the New Pioneer Central Rand Gold Mining Company Limited for the sum of £50,000. This sum was not paid in cash but by the issue of shares in the New Pioneer Company. From January, 1947, the respondent company, by reason of having bought a large block of shares in the New Pioneer Company, acquired administrative control of that company and Jack Scott was chairman of its board of directors. In his assessment of the E respondent company's income for the year ended June 30th, 1948, the Commissioner included the sum of £39,958 which was the approximate difference between £50,000 and £10,041 which was the value placed on Ellaton Township at the time of its acquisition by the respondent company.

The respondent company lodged an objection to the two assessments F mentioned above. Its objection was disallowed by the Commissioner and it appealed to the Special Court on the ground that the proceeds that it received from the sale of its mineral rights and Ellaton Township were the result of the realisation by it of a capital asset. The Commissioner's contentions before the Special Court were as follows:

'(a)

the information before the Court regarding the circumstances of the acquisition of the inherited property was suggestive not of G an outright bequest but of an arrangement between Jack Scott and his mother that the appellant company would acquire the property by inheritance from her;

(b)

the appellant company is a financial or investment company whose business it is to turn property to profitable account no matter in what manner such property may have been acquired by it;

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