Commissioner for Inland Revenue v Manganese Metal Co (Pty) Ltd

• Jurisdiction: South Africa
• Court: Transvaal Provincial Division
• Judge: Eloff JP, McCreath J, Wunsh J
• Judgment Date: 24 November 1995
• Citation: 1996 (3) SA 591 (T)
• Hearing Date: 20 September 1995
• Docket Number: A1086/94
• Counsel: A G Derksen for the appellant. P A Solomon SC (with him T Massyn) for the respondent.

Wunsh J:

This is an appeal from the decision of the Transvaal Income Tax Special Court B holding that the expenditure of R882 381,15 incurred by the respondent for the purpose of what in the judgment is described as 'creating a long-term disposal facility' was not of a capital nature for the purpose of s 11(a) of the Income Tax Act 58 of 1962 ('the Act'). Although the record consists of 1 298 pages, the material facts are stated in the C judgment, before an extensive review of the evidence, to be common cause. The facts in dispute relate to the time when certain items of the expenditure were incurred and some individual items which are not the subject of a cross-appeal. At the hearing of this appeal it was evident that the facts relating to the other ground upon which a deduction was claimed, ie s 11(g) of the Act ('s 11(g)'), were also common cause. This appeal is about D the legal conclusion to be drawn from the facts.

In the course of the process by which manganese in raw form is converted into manganese metal by the respondent in its plant in Nelspruit a slush is produced, leaving a E toxic residue of no commercial value which has to be disposed of daily. Disposal of what I shall call the waste and the supervision of the disposal site are important to ensure that pollution is avoided and the environment protected. The respondent's site was purchased from the Town Council of Nelspruit ('the council') in terms of an agreement dated 2 May 1973. The respondent's decision to select Nelspruit for its operation was prompted by the council's undertaking to provide storage facilities for the waste. Clause F 10 of the agreement is quoted in full because of its bearing on the second issue in this case:

'It is recorded that the council has provided free of charge to Deltamang a number of dongas on the farm Bester's Last, as indicated on the map attached hereto, approximately three miles from the centre of Nelspruit, for the purpose of G residue disposal by Deltamang in connection with the operations of the works. When the sites referred to above can no longer be utilised, the council undertakes, subject to the consent of the Department of Water Affairs, to provide a stone quarry on the council's property as indicated on the map attached hereto on the farm Stonehenge for the above-mentioned purpose. The council undertakes to build walls of an impermeable nature at the mouths of the dongas H as soon as possible after the execution date. Apart from the said walls, any other steps to prevent seepage of water and pollution of underground water as may be prescribed by the Department of Water Affairs must be taken by Deltamang. Deltamang shall provide its own dumping sites after the aforesaid dumping sites have been fully utilised.'

(This clause is hereinafter called 'clause 10'.)

I The respondent undertook to another company, EMD (Pty) Ltd ('EMD'), to dispose also of its plant residue, as a consideration for which EMD had to make a contribution to the respondent's costs. It is the respondent's share, ie the balance of the costs, with which the appeal was concerned. The total cost was R1 058 000. The respondent decided that J after the dongas provided by the council became full it would avail itself

Wunsh J

A of the use of the stone quarry in terms of clause 10. This was after alternative sites had been investigated. The consent of the Department of Water Affairs, which was required by clause 10 for the creation of a waste disposal site on the quarry, prescribed the condition that the site

'will be operated in accordance with the draft solid waste regulations made in B terms of s 12(2)(a) of the Environment Conservation Act, 1982, until promulgated. As from the date of enforcement of the regulations, the site will have to be run to comply to the regulations in full, probably in an amended form.'

These draft regulations provided, inter alia, for the retention on the waste disposal site of all seepage and eroded material arising on the site by means of 'properly defined, C constructed and maintained works'. Stormwater had to be diverted away from the site by properly engineered and compacted contour walls or cut-off channels.

The respondent commenced dumping residue in the stone quarry in 1986. For this to be done it had to immediately build an earth berm to contain the residue and in anticipation of D the construction of the concrete arch dam, which it was going to undertake. The dam had to contain both the residue from the processing operations and water to ensure that there was no pollution of the downstream water. The dam wall was built in 1986. It was anticipated that the quarry would meet the respondent's requirements for eleven years. In E the period between June 1988 and June 1989 the construction of a second wall was undertaken. In the sense that, when a dumping site is full, a new facility has to be found, the respondent's expenditure was recurrent. The dimensions of the concrete arch dam were to be of 20 metres height and 75 metres crest length and the width of the concrete section was to vary between 4 metres at the base and 3 metres at the 20 metre length. F The dam construction was to include approximately 4 800 m3 of concrete.

The scale of the respondent's operations can be gleaned from the following statistics. With each ton of metal 1,4 tons of waste were produced. The estimated annual output of waste by the respondent and EMD was about 60 000 cubic metres. The plant operated day and G night and waste was conveyed by 16 journeys undertaken by tankers, also called concrete mixers, every 24 hours to the quarry, which is six kilometres from the respondent's plant. The dam wall was designed to serve as a foundation for a further wall of a height of 10 metres.

On the termination of the respondent's right of use of the site the dam, acceding to the H land, remains the property of the council and the respondent has no obligation of restoration.

Further facts will emerge when they are discussed with reference to arguments raised by counsel.

Before looking at the considerations for distinguishing between expenditure of a capital I nature and what I shall call expenditure of a revenue nature, it will be convenient to mention the reasons why the Court a quo found that the expenditure in this case fell into the second category.

It was accepted that the establishment of the waste disposal facility of sufficient space and durability was an indispensable element to the respondent's business. It increased the capacity of the quarry to take the water from 50 000 to over 500 000 cubic metres. The need to dispose of the waste was continuous and the respondent, therefore, was faced J with

Wunsh J

A a recurrent business expense in finding the means of disposing of the waste residue. The wall that was constructed during the year of assessment made provision for a period of only three years. At the end of the lease the dam would be abandoned by the respondent.

B Speaking for himself and the other members of the Court the learned President said:

'By its very nature the expenditure in the residue disposal site exhausted itself by its very use. In this sense, the earth dam and the arch dam wall were akin to consumables. Unlike, for example, an ordinary water dam which remains usable over and over again as water is impounded and released, this dam, as it filled up, ceases to have any further use for the appellant. In fact, the continued use of the C facility at Stonehenge (the farm where the quarry was situated) has already involved recurrent expenditure in subsequent years as the wall is extended to increase the storage capacity.

By way of analogy, we are of the opinion that the construction of the dam wall and its peripherals in its various stages can be likened to the appellant purchasing from time to time stock of impermeable but disposable containers for disposal of D the residue created in the course of its income-earning operation. The deduction of the expenditure in the acquisition of such disposable containers would be allowable on acquisition.

In our view, although a benefit exists whilst the site has available storage space, this is not an enduring but a diminishing benefit to the appellant and, on the contrary, on being fully utilised and the solidified residue is covered with soil and E grass it will be an enduring benefit to the council.'

In a nutshell it seems to me that the basis of the decision is that, although the expenditure produced an asset (albeit not owned by the respondent) which would endure after having absorbed and while continuing to retain the waste, it was not of a capital nature because, F once the structure performed its finite function, the respondent would have no further use for it, and in due course it will lose the possession of the asset which will never become its property and it would have to incur expenditure again.

The crucial considerations were, therefore, that once the dam absorbed the waste disposal, it had no further use for the respondent and that the need to establish waste G disposal facilities would recur continually.

In the absence of countervailing indications, the one-time expenditure of a substantial sum on the construction of a large and permanent dam would appear to me to be a capital outlay. The dam was designed to and will retain the respondent's waste in perpetuity. Part of the works consisted of channels which have to keep surface water from entering the H quarry so as to prevent the toxic material from being leached out of the residue and into the surrounding area, including the Gladdespruit.

Expenditure directed at the creation or durable enhancement of a capital item, such as immovable property, is of a capital nature, even though the permanent and ultimate benefit I thereof will accrue to the...