Commissioner for Inland Revenue v Golden Dumps (Pty) Ltd

• Jurisdiction: South Africa
• Judge: Corbett CJ, Van Heerden JA, Smalberger JA, Kumleben JA, Nicholas AJA
• Judgment Date: 02 June 1993
• Citation: 1993 (4) SA 110 (A)
• Hearing Date: 11 May 1993
• Court: Appellate Division

Nicholas AJA:

This is an appeal by the Commissioner for Inland Revenue from a decision of the Transvaal Income Tax Special Court, namely that the appellant in that Court, Golden Dumps (Pty) Ltd ('Golden Dumps'), the J present respondent, was entitled inter alia to a

Nicholas AJA

A deduction of R3 081 750 in terms of s 11(a) of the Income Tax Act 58 of 1962 ('the Act'). This was the net expenditure incurred in the tax year ending 30 June 1985 in respect of the purchase of 200 000 shares in Consolidated Modderfontein Mines Ltd ('Modderfontein'), which Golden Dumps later transferred to Mr Adrian Nash ('Nash'), a former employee.

In the Special Court the Commissioner's representative contended that B the expenditure was not incurred during the 1985 year of assessment; that the expenditure was of a capital nature; and that it was not wholly and exclusively laid out or expended for the purposes of trade. The Special Court found against the Commissioner in all three aspects. Leave to appeal to this Court was granted in terms of s 86A(5) of the Act. C

In argument on behalf of the Commissioner in this Court, counsel relied on one ground only, viz that the Special Court erred in finding that the expenditure was actually incurred during the 1985 year of assessment.

Golden Dumps was formed on 22 March 1977. Until 1978 its members were Mr Loucas Christos Pouroulis and two others. In that year Pouroulis became D the sole shareholder, and Golden Dumps began to carry on the business of a management company. On 23 October 1979 it concluded a management contract with Government Gold Mining Areas (Modderfontein) Consolidated Ltd ('GGMA') which subsequently changed its name to Consolidated Modderfontein Mines Ltd ('Modderfontein'). Under the contract Golden Dumps was appointed E as the technical and administrative adviser, the consultant and the manager of the mine operated by GGMA. Its functions later extended to the raising of some R20 000 000 needed for a project of reorganisation and amalgamation which Modderfontein had in preparation in 1980.

On 19 September 1980 Pouroulis handed to Nash a letter written on a F Golden Dumps letterhead and signed 'L C Pouroulis, Chairman'. The body of the letter read as follows:

'Dear Adrian

I am pleased to be able to offer you a position with our group in the capacity of financial director with effect from 15 October 1980.

G Your commencing salary will be R60 000 per annum, and you will have the free use of a Mercedes 230 Automatic motor car.

On conclusion of your negotiations abroad of all matters concerned with the reorganisation and amalgamation of Modderfontein Seventy-Four (Pty) Ltd and Government Gold Mining Areas (Modderfontein) Consolidated Ltd you will be entitled to 200 000 shares in the new company broken down as follows:

75 000 at 1c each H 75 000 at 50c each, and

50 000 at R1 each.'

Nash accepted this offer and on 20 September 1980 left for London to begin the negotiations. He returned to South Africa on 17 October 1980 and took up his position as financial director of Golden Dumps and continued to I perform functions in regard to obtaining foreign capital. On 27 December 1980 Pouroulis summarily dismissed him. On 6 January 1981 attorneys acting for Nash wrote a letter to Golden Dumps demanding delivery of the shares referred to in the letter dated 19 September 1980 against payment of R85 750, and stating that failing delivery proceedings to compel such transfer J would be instituted. On 9 January the attorneys

Nicholas AJA

A acting for Golden Dumps replied, denying liability and refusing to accede to Nash's demand. In February 1981 Nash instituted in the Witwatersrand Local Division the proceedings foreshadowed in the letter of 6 January. The action was heard in 1983 by G Coetzee J, who granted an order of absolution from the instance. An appeal by Nash to the Appellate Division was upheld on 27 March 1985 and the substantive order of the Court a quo B was altered to read:

'(1) Defendant is ordered to deliver to plaintiff 200 000 shares in negotiable form in Consolidated Modderfontein Mines Ltd against payment by plaintiff to defendant of the sum of R88 250.'

(The judgment, which was written by Corbett JA, was reported sub nom Nash C v Golden Dumps (Pty) Ltd 1985 (3) SA 1 (A). In the Special Court the parties accepted as correct the findings of fact contained in the judgment.)

As a purely management company Golden Dumps did not normally hold shares, but following the judgment and in order to comply with it, Golden Dumps acquired from Pouroulis 200 000 Modderfontein shares at the then D listed price of R15,85 per share, thus incurring an expenditure of R3170000. It delivered these shares to Nash and received in return R88250, being the price calculated in terms of the letter of 19 September 1980.

In support of its return of income for the 1985 year of assessment, E Golden Dumps attached its annual financial statements in which there was reflected the amount of R3 081 750 as a deduction from income under the heading 'Extraordinary items'. This was explained in note 16 to the annual financial statements:

'Remuneration paid to ex-employee accrued after Appeal Court decision F dated 27 March 1985 and settled by the delivery of 200 000 Consolidated Modderfontein Mines Ltd shares as follows:

200 000 Consolidated Modderfontein Mines Ltd shares purchased from L C
Pouroulis at R15,85 per share	3 170 000
Deduct: Paid by ex-employee in terms of settlement	88 250
	3 081 750'

G In determining the liability of Golden Dumps for normal tax the Commissioner disallowed the deduction. Golden Dumps lodged an objection and noted an appeal against the assessment. The Special Court allowed the appeal and referred the matter back to the Commissioner for reassessment.

H In the judgment in Nash v Golden Dumps (Pty) Ltd (supra), Corbett JA considered first the question of what constituted the contract between the...