Crowe v Commissioner for Inland Revenue

• Jurisdiction: South Africa
• Judge: De Villiers CJ, Wessels JA, Curlewis JA and Stratford JA
• Judgment Date: 20 November 1929
• Citation: 1930 AD 122
• Hearing Date: 05 November 1929
• Court: Appellate Division

Stratford, J.A.:

The facts on which the present dispute arises all appear in the stated case submitted for consideration of the Natal Provincial Division, and it is therefore unnecessary to restate them in detail. An agreed correction to that statement, however, should be noted. The agreed addition to par. 2 (e) of the stated case, taken from the judgment of the President of the Special Court, is the following:

"The Natal Tanning Extract Company promised if he bought the' farm, to buy the bark from the appellant at £12 5s. per acre, and Hunt, Leuchars, and Hepburn the timber at £4 5s. per acre, and both companies agreed to let him have the money whenever he required it."

The broad outline of the case can be shortly stated, for details I shall refer to the stated case when necessary. Towards the end of the calendar year 1926 the appellant, a wattle farmer, who up to then had managed two wattle farms, one for his wife and one for a Mrs. Lloyd, was desirous of purchasing the farm of the latter, which was for sale. Upon this farm was a mature wattle plantation. Two companies, one of which dealt in wattle extract, and the other in timber, were desirous of purchasing these respective commodities - wattle bark and timber - but did not wish to buy the farm when it was offered to them. Appellant, hearing of this offer, and not having the necessary funds to make the purchase of the farm and plantation, secured from the companies the promise to buy from him the bark and timber on the terms set out above, if he purchased the farm. Armed with this promise, the appellant bought the farm for £8,750 and, obtaining the sum of £3,318 from the companies, paid it over in part payment of the purchase price. He was assessed for income tax for the year ending 30th June, 1927, on this sum of £3,318, and the Special Court affirmed the assessment. Two questions were submitted to the Natal Provincial Division, viz:

(1) "Were the sums received by the appellant for the sale of wattle bark and timber under the circumstances set out in the statement a receipt of a capital nature?"

Alternatively:

Stratford, J.A.

(2) "If they were not receipts of a capital nature, can the amount of £2.194, allocated' to the wattle plantation in terms of Law 20 of 1865 (Natal) rank for deduction on revenue account?"

Both questions were answered in the negative, and the appellant now appeals to this Court.

"Gross income" is defined in sec. 7 (1) of Law 40 of 1925 to mean "the total amount received by, or accrued to and person-, other than receipts of a capital nature . ."

If then the receipt of the sum in question was not a receipt of a capital nature, it forms part of "gross income" by operation of the definition, and, subject to the allowed deductions, becomes liable to the incidence of the tax. The assumption underlying the definition is that all receipts by the taxpayer must fall into one category or the other - income or capital. And also from an economic and business point of view this must also be true, with the proviso, of course, that a stated sum may be the total of two one being income, the other capital. As the CHIEF JUSTICE pointed out in the case of Commissioner for Inland Revenue v George Forest Timber Co. (1924, A.D at p. 522) "there is no definition in the Act of 'capital' or of 'a capital nature,' and we must fall back, therefore, upon the ordinary economic meaning of these terms." And in Commissioner of Taxes v Booysens Estates (quoted in the appeal, 1918, A.D at p. 582), WESSELS, J.A approached the question directly by examining what was the ordinary economic meaning of income. Though the words of the definition direct attention only to the economic meaning of capital, in finding that meaning it is at least helpful to consider whether the receipt in question can from an economic standpoint, possibly 'be regarded as income. If then for the moment we look at the nature of this receipt of £3,318 from the ordinary business or economic point of view, it is manifestly absurd to call it income, it conforms to no possible test of what income should be, as I shall endeavour to show later.

But it is said that nothing can be made of the fact that the arrangement with the companies was antecedent to the purchase of the farm, that we must look to the essential nature of the transaction and that, therefore, it should be examined on the

Stratford, J.A.

supposition that this was an out and out purchase of the farm with its accessory plantation for £8,750, and a subsequent re-sale of that plantation for £3,318. Although INNES, C.J., said in the George Forest case (supra): "It is dangerous in income tax cases to depart from the actual facts." I will assume for the moment that the above supposition is permissible to test the real nature of the sum in question. Let us take then the case of a man purchasing something for £8,750 and immediately thereafter selling portion of it for £3,318. The nature of that transaction is a partial realisation of his capital, just as it would be a total realisation of capital if instead of selling part he sold the whole. It is quite true that if he makes a profit on such re-sale, in either case, such profit may be income, but this is another question entirely depending upon the nature of his business, and we are not now concerned with it. It is said, however, that in this case what was bought was a farm and what was sold was not a portion of it, but the produce from it and, therefore, was the revenue which the purchase was designed to produce. It is here that it is said that the decision in the George Forest case applies. A moment's reflection will show how extremely artificial this view is. The man's capital consisted in the first place of a farm, with its valuable adjunct the plantation, the whole presumably worth £8,750, on the sale of the plantation for £3,318 he is left with a bare farm obviously worth less than £8,750, and yet it is said that he has not realised any of his capital, since the whole £3,318 is income. If the reasoning is sound it must apply in all cases, no matter what the relative value of ground and plantation may be, that is, the ground may be compartively valueless and the real value lie in the growth upon it. This was the fact in the George Forest case, and at page 523, the learned CHIEF JUSTICE says: "The land with the timber growing upon it was capital; it was acquired with a view to the production of wealth. Had it been sold as it stood the proceeds need probably not have been accounted for to the Commissioner, for assuming that such a transaction fell outside the business of the company, the operation would have been a mere realisation of capital, not an employment of capital."

That was exactly what was done in this case; the plantation was sold as it stood, capital was not...