Commissioner for Inland Revenue v Lever Bros and Another

• Jurisdiction: South Africa

Commissioner for Inland Revenue Appellant v Lever Bros and Another Respondents
1946 AD 441

1946 AD p441

Citation	1946 AD 441
Court	Appellate Division
Judge	Watermeyer CJ, Schreiner JA and Davis AJA
Heard	December 4, 1945
Judgment	March 30, 1946

Flynote : Sleutelwoorde

Revenue — Income tax — Gross income — Source of income — Interest on money lent — Interest derived from non-Union source source though debtor resident in the Union — Act 31 of 1941, section 7.

Headnote : Kopnota

A company registered in South Africa entered into an agreement abroad, the result of which was that it took over an obligation entered into abroad by an overseas company to pay to the taxpayer, another overseas company, interest upon a large sum of money being the unpaid portion of the purchase price of a large holding of shares in companies registered and carrying on business abroad, the shares remaining overseas pledged to the taxpayer. The interest was paid out of dividends accruing to the South African Company abroad on the shares owned by the company and pledged to the taxpayer. In authorising the agreement entered into by the South African company, the Treasury had imposed a condition that no capital or interest should be paid from any funds in South Africa and this condition had been fully observed.

Held (SCHREINER, J.A., dissenting) that notwithstanding the fact, that the debtor in respect of the loan by the taxpayer resided in South Africa, the interest was not received from a source within the Union and therefore did not form part of the taxpayer's gross income.

1946 AD p442

The decisions dealing with the principles to be applied in determining the source of income, reviewed.

Case Information

Appeal on a case stated by the Special Income Tax Court, the parties having duly lodged their written consents, in terms of sec. 81 (1) (b) of Act 31 of 1941 as amended, to an appeal to the Appellate Division.

The facts appear from the judgment of WATERMEYER, C.J.

O. Pirow, K.C. (with him G. Findlay, K.C.) for appellant: The interest paid by Overseas, Holdings (Pty.), Ltd., accrued to first respondent within the Union in terms of the definition of "gross income" in sec. 7, Act 31 of 1941. The whereabouts of securities or pledges is irrelevant. See Union Government v Fisher's Executrix (1921 T.P.D. 328). The only "source of income" is the taxpayer's own work-producing earnings or the taxpayer's own capital-producing profits or interest according to its form. Capital used not industrially but as finance or loan capital, that is, converted into a money claim in personam and not a right in rem, is located where the debtor resides. See Union Government v Fisher's Executrix (supra); Randfontein Estates Gold Mining Co. v Custodian of Enemy Property (1923 AD at 581); Nisbett v Murray (5 Ves. 149); Arnold v Arnold (2 My. & K. 365); Earl of Tyrone v Marquis of Waterford (1 De G. F. & J. 613, 625); Guthrie v Walrond (22 Ch.D. 573); Clark: McKechnie v Clark (1904, 1 Ch.D. 294). The case of Commissioner of Taxes v William Dunn & Co., Ltd. (1918 AD 607), relied on by the Court below, is distinguishable from the present case in that the former is a border-line case between the charge of an agency fee and an increase in the price of goods bought and sold, but it is not a case of "interest". The present case is one of loan capital, pure and simple.

N. E. Rosenberg, K.C. (with him B. A. Ettlinger, K.C.) for respondents: On the facts, first respondent derived the interest from a non-Union source (Commissioner of Taxes v Dunn & Co., Ltd. (1918 AD 607) as applied in Overseas Trust Corporation, Ltd. v C.I.R. (1926 AD at 446, 453, 457) ). The contracts which produced the interest were entered into in Holland and in England and the obligations thereunder were to be performed in England. See Lovell & Christmas, Ltd. v Commissioner of Taxes (1908, A.C. 46). First respondent did not at any time have any capital employed in the Union (Overseas Trust Corporation, Ltd. v C.I.R.

1946 AD p443

(supra). A change of debtor does not per se bring about a change of source (Dunn's case (supra) at 615) ). The debt still remained, as far as respondent was concerned, a "London debt" (Ratcliffe and McGrath, Income Tax Decisions, 1891-1927 (p. 214) ); the "real source" of first respondent's income remained the sale of the shares on credit outside the Union and the resulting debt secured by the pledge in London (Rhodesia Metals, Ltd. v Commissioner of Taxes (1940 AD 432 at 436) Questions of jurisdiction and domicile have nothing to do with "source" (De Beer's Consolidated Mines, Ltd. v Howe (1906, A.C. 455 at 459) ). The question of "source" is a practical hard matter of fact and not a question of legal concept (Nathan v F. C. T. (Ratcliffe and McGrath (supra), pp. 164, 165) The Studebaker Corporation of Australia v Commissioner of Taxes (Ratcliffe and McGrath (supra), pp. 164, 165) ). It is conceded that for purposes of probate and estate duty, a simple contract debt may, in the absence of special arrangements, be assumed to be situate where the debtor resides (The Royal Trust Co. v A.-G. for Alberta (I 930, A.C. 144 at 150); New York Life Insurance Co. v Public Trustee (1924, 2 Ch.D. 101 at 115, 119) ), but the residence of the debtor is only one element. The locality where the debtor resides can only be important when performance is due there, and it is there where the debtor must be sued for performance (Randfontein Estates Gold Mining Co., Ltd. v Custodian of Enemy Property (1923 AD 576 at 581, 585); New York Life Insurance Co. v Public Trustee (supra, at 116, 119, 120); Union Government v Fisher's Executrix (1921 TPD 328 at 333-4); cf. Kootcher's Estate v C.I.R. (1941 AD 256) ). The rule that a debt is assumed to be situate where the debtor resides, has not been applied to debts under seal or specialty debts. See Royal Trust Co., Ltd. v A.-G. for Alberta (supra, at 150); Commissioner of Stamps v Hope (1891, A.C. 476 at 481-2); Nesbitt v Murray (5 Ves. 149; 31 E.R. 518) Union Government v Fisher's Executrix (supra, at 333). In the U.S.A. it has been held that the source of interest of a debt is the locality where the creditor is (Minor, Conflict of Laws (secs. 121, 126); Goodrich, Conflict of Laws (Chap. IV)). It is fallacious to regard the debt per se without regard to the transaction which brought it into existence and the place and mode of performance agreed upon by the parties. The debt in the present case is situate in England. See Westlake's Private International Law (7th ed., para. 152 (b)); In re Russo Asiatic Bank (1934, Ch.D. 720 at 728).

1946 AD p444

Findlay, K.C., in reply.

Cur. adv. vult.

Postea (March 30th).

Judgment

Watermeyer, C.J.:

This is an appeal on a case stated by the Special Income Tax Court under the provisions of sec. 81 of Act 31 of 1941 as amended by sec. 10 of Act 39 of 1945.

Lever Brothers and Unilever, Ltd., and Associated Enterprises, Ltd., are two English companies which were assessed for South African Income Tax for the years 1940 to 1942, in respect of money received by them from a third company, registered in South Africa under the name of Overseas Holdings, (Pty.), Ltd. (I shall refer to the first company as Levers and to the third as Overseas Holdings.)

The Special Court held that Levers and Associated Enterprises, Ltd., were not liable to pay income tax, because the source of their income was not located within the Union. This special case raises the question whether or not that decision was correct.

The facts stated in the special case relate only to Levers as it was agreed between the parties that the position of Associated Enterprises, Ltd., which is described as a subsidiary of Levers, was similar to that of Levers and a decision in the one case would settle the dispute arising in the other case. Levers is described in the stated case as a holding company and its issued capital is £60,000,000. At the time of the transactions which gave rise to this case it held shares in various trading companies in England and throughout the empire.

It did not carry on any business nor did it own any capital within the Union of South Africa unless a debt owed to it by Overseas Holdings can properly be described as capital which it owns within the Union. Lever Brothers and Unilever N.V. is another holding company registered in Holland. At the time of the transactions, to which I shall refer, it held shares in another group of associated trading companies which carried on business outside of the British Empire. These two holding companies are closely associated; the shareholders differ, but until the war the directors of the two companies were the same, and there was in existence an agreement between the companies for the equalisation of the dividends on and capital values of the ordinary shares in the two companies.

1946 AD p445

Watermeyer, C.J.

In both companies the right to nominate directors was vested in particular shares, and these shares were held or controlled by the English and Dutch companies, respectively.

Mavibel (Maatschappy voor Internationale Beleggingen N.V.) was a Dutch company; it is described as a subsidiary of Lever Brothers and Unilever N.V., and its registered office was at Rotterdam. The Whitehall Trust, Ltd. (which I shall refer to as the trustee), is an English company, which acts as trustee under certain agreements, which will be referred to presently; it holds shakes in a South African company (Internationale Maatschappy voor Handel en Nywerheid Beperk) on behalf of Associated Enterprises and oil behalf of Levers.

On 31st December, 1937, an agreement was entered into at Rotterdam between Levers, Mavibel and the trustee, which was subsequently amended by a further agreement entered into at Rotterdam on 5th April, 1939. These two agreements will be referred to as the trust agreements. They were somewhat involved but...