Commissioner for Inland Revenue v Epstein

• Jurisdiction: South Africa
• Citation: 1954 (3) SA 689 (A)

Commissioner for Inland Revenue v Epstein
1954 (3) SA 689 (A)

1954 (3) SA p689

Citation	1954 (3) SA 689 (A)
Court	Appellate Division
Judge	Centlivres CJ, Schreiner JA, Van Den Heever JA, Hoexter JA and Fagan JA
Heard	May 25, 1954
Judgment	June 10, 1954

Flynote : Sleutelwoorde C

Revenue — Income tax — Source of income — Union taxpayer D purchasing asbestos in Union to meet sales by Argentinian firm to purchasers in Argentine — Taxpayer and Argentinian firm sharing profits equally — All taxpayer's activities exercised within Union — Taxpayer's half share of profits his quid pro quo for such services — Such profits received from a source within Union.

Headnote : Kopnota

E It is for the Courts to decide on the particular facts of each case whether 'gross income' has or has not been received from a source within the Union.

In taxing a taxpayer the Legislature looks at his activities and ascertains whether those activities were exercised within the Union; if they were, then he is taxable in respect of any profits resulting from such activities.

It may be said that when there is a partnership the members of which carry on their business activities in two different countries, the F income of the partnership is derived from two sources and that when one of the partners carries on his business activities in the Union his income from the partnership is derived from a source within the Union while the income of the other partner is derived from a source in a foreign country. For the income which the partner who carries on his business activities in the Union receives is the quid pro quo for the services he renders in the Union to the partnership.

Respondent, an agent in Johannesburg, had entered into an agreement with G H & Co., a partnership carrying on business in Argentina, in terms of which respondent undertook that he would, subject to certain reservations, import or export all commodities to or from Central and South America exclusively through H & Co. Each party was to bear their own overhead expenses and the profits were to be pooled and divided equally between them. The respondent had, in fact, made no imports, but the agreement was carried out in relation to his exports of asbestos as follows: H & Co. solicited orders for asbestos in the Argentine and concluded in their own name sales to such purchasers, whilst respondent H made corresponding purchases from producers in South Africa. H & Co. would then call upon a purchaser in the Argentine to open a letter of credit, in favour of respondent and payable at a bank in the Union, for the full amount of the purchase price due by the purchaser plus the amount of the freight and insurance. Thereupon the respondent shipped the asbestos direct to such purchaser without having any communication with him, the letter of credit being payable on production

1954 (3) SA p690

of the bill of lading. Occasionally the respondent had to pay the producer before he could draw on the letter of credit, in which case payment was made out of his own funds or partly out thereof and partly out of moneys held by him on behalf of H & Co. in the circumstances set out above. When a loss occurred it had been borne equally. The respondent rendered no services and spent no money outside the Union. The amount of the profit and the division thereof was effected as A follows: The respondent drew against the purchaser's letter of credit to the full extent of the amount for which the asbestos had been sold in the Argentine and deducted therefrom the amount paid by him to the producer in respect of the purchase price of the asbestos. The difference between these two amounts represented the profit, the respondent in due course remitting to H & Co. their half-share thereof. These transactions were operated through the respondent's own banking account. The Commissioner had included, in respondent's taxable income and income subject to super tax, the respondent's half-share of these B profits. The respondent having successfully appealed to the Special Income Tax Court, the Commissioner had then unsuccessfully appealed to a Provincial Division. In a further appeal,

Held (SCHREINER, J.A., dissenting), as all respondent's activities in connection with his dealings in asbestos were carried on in the Union, and as it was as a result of these activities that he earned the profits which the Commissioner sought to tax, that such profits were received from a source within the Union. Appeal accordingly allowed.

C The decision of the Transvaal Provincial Division in Commissioner for Inland Revenue v Epstein, 1954 (2) SA 55, reversed.

Case Information

Appeal from a decision in the Transvaal Provincial Division (DOWLING, J. and BRESLER, A.J.) dismissing an appeal from the Special Income Tax D Court. The facts appear from the judgment of CENTLIVRES, C.J.

W. G. Trollip (with him J. C. C. van Loggerenberg), for the appellant: Even if Sulley v The Attorney-General, 157 E.R. 1364, Grainger & Son v Gough, 1896 A.C. 325, Lovell & Christmas, Ltd v Commissioner of Taxes, 1908 A.C. 46 and Commissioner of Taxes of Western Australia v D. and W. E Murray, 42 C.L.R. 332 are applicable in the determination of the source of income, under sec. 7 of Act 31 of 1941, they were wrongly applied to the facts of the present case. The basis of these decisions is that it is the contracts of sale which directly and immediately yield the profits and the place where these contracts were concluded is therefore F the location of the profits. See Lovell's case, supra, at pp. 52 - 3; Commissioner of Taxes v Dunn & Co. Ltd., 1918 AD at pp. 609 - 10. In the present case the sales in the Argentine preceded the purchases of the asbestos in the Union and it was therefore the latter event which directly and immediately yielded the profits. In any event, the above cases do not provide either a decisive or a proper test or a safe guide G for determining the source of income under sec. 7 because the wording of the statutes in those cases is materially different. Also, in consequence of the wording in those statutes, the test or approach in those cases was to ascertain the place where the profits were made and the place where the trade or business that produced those profits was located, and for that purpose, the place where the sale contracts were H concluded was treated as decisive. Further, our Courts have not regarded the place where sale contracts are concluded as being decisive of the source of profits under sec. 7. See Millin v C.I.R., 1928 AD 207; Overseas Trust Corporation, Ltd v C.I.R., 1926 AD 444; Kergeulen Sealing & Whaling Co., Ltd v C.I.R., 1939 AD 487; Rhodesia Metals Ltd (In

1954 (3) SA p691

Liquidation) v Commissioner of Taxes, 1938 AD 282; 1940 AD 432. Further still, the test or approach adopted in Sulley's case and the other cases, supra, does not accord with the principles laid down in C.I.R v Lever Bros. and Another, 1946 AD at pp. 441, 452, 453, 459 and the distinction becomes clear by comparing the relative part of the A judgment in D. & W. Murray's case, supra, with the judgments in the Lever Bros. case, supra, where the first question asked is why were the profits earned, and then, the cause having been ascertained, the location thereof is fixed. The income of joint ventures or partnerships as such is not taxed under Act 31 of 1941 but the individual members thereof are taxed on the income that is received by or accrues to each B therefrom. See sec. 67 (7); Sacks v C.I.R., 1946 AD 31. Regard must therefore be had to 'the originating cause' of the amounts received, not by the joint venture, but by respondent, as income. See sec. 7, Lever Bros.' case, supra, at p. 450. The originating cause of such income in respondent's hands, was the making of the joint venture C agreement with Hendrickse & Co. and the work which respondent did, under and in terms of the agreement; cf. Lever Bros.' case, supra, at p. 456. As the joint venture agreement was concluded in the Union and respondent's work thereunder was carried out in the Union, the source of such income in respondent's hands was in the Union. Alternatively, if it is the profits of the joint venture that must be regarded, the source of D such profits was in the Union as the originating cause of those profits was the purchasing of the asbestos by respondent which took place in the Union, or, alternatively, the source of such profits was partly in the Union and partly in the Argentine, the Union source was the work and activities of respondent and as respondent's share of those profits E accrued to him by virtue of that work and those activities, the source of the whole of that share was in the Union. Under sec. 7 it is possible to have a dual source of income; see Commissioner of Taxation v Kirk, 1900 A.C. 588; Rhodesia Metals Ltd v Commissioner of Taxes, 1940 AD at p. 436; Lever Bros.' case, supra, at pp. 451, 454. In such a case F that part of the income accruing from the Union source would have to be ascertained but in the present case the joint venture agreement and the facts clearly determine that amount as being respondent's share of the profits. If the test laid down in the Rhodesia Metals Ltd. case, 1938 AD at p. 300; 1940 AD at p. 436, is still applicable in our law and G is applied in the present case, the practical man would regard the real source of respondent's income as being in the Union.

D. Gould, Q.C. (with him D. Spitz), for the respondent: The question what tests have to be applied under our Act for the purpose of determining the source of income derived from trading in commodities in cases such as the present where the trading activities are divided between the Union and other countries, was left open by the Privy Council in Rhodesia Metals Ltd v C.I.R., 1940 AD at p. 437, and has H not been specifically determined by our...