Income Tax Case No: 11283
| Jurisdiction | South Africa |
| Judge | Mbha J |
| Judgment Date | 26 October 2007 |
| Citation | 2007 JDR 1095 (JSpCrt) |
| Docket Number | 111283 |
Mbha J:
INTRODUCTION
[1] As at the beginning of 1994, the appellant ("AVL") held a 98% interest in its subsidiary, National Brands Limited ("NBL") via its 60% controlling interest in Anglovaal Industries Limited ("AVI").
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[2] It is common cause that this 98% shareholding in NBL was a strategic long-term investment of a capital nature.
[3] On 1 June 1994 the appellant acquired a 15,6% direct shareholding in NBL for an amount of R300 724 524,00
[4] On 16 September 1999, which was in the appellant's 1999 year of assessment, the appellant sold its 15,6% shareholding in NBL for an amount of R141 021 605,00 to AVI in which the appellant held a 60% controlling interest.
[5] In its 1999 tax return, the appellant claimed as a loss, a deduction equal to the difference between the amount of the purchase of the shares in NBL and the sale, being R159 702 919,00.
[6] The appellant was requested to motivate the deductibility of its loss and it stated that the loss was of a speculative nature and therefore deductible.
[7] The respondent did not accept this motivation and disallowed the deduction on the basis that the loss in question was of a capital nature.
[8] On 28 November 2003, the appellant lodged an objection, in terms of section 81 of the Income Tax Act 58 of 1962 ("the Act"), contending that the NBL shares were acquired with the intention of selling them at a profit and,
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accordingly, that the amount in question was not of a capital nature and was deductible in terms of section 11(a) of the Act.
[9] On 29 December 2003 the respondent disallowed the objection on the ground that the shareholding in NBL was of a capital nature and accordingly that the loss did not qualify for deduction in terms of section 11(a) of the Act.
THE ISSUES
[10] The issues in this appeal, as defined in the respondent's Amended Statement of Grounds of Assessment and the appellant's Amended Statement of Grounds of Appeal, can be summarised as follows:
whether, when acquiring the NBL shares, the appellant did so with the intention of holding the shares as a capital investment or as part of a scheme of profit-making; and
if the appellant had acquired the shares as part of a scheme of profit-making or as trading stock, was the appellant entitled to a deduction of the original cost of such shares in the amount of R300 721 524,00 in its 1999 year of assessment in terms of section 22(2) of the Act?
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DISCUSSION ON THE MERITS
[11] The appellant contends that it is entitled to the deduction of the relevant amount in terms of section 22(2) of the Act on the basis that the NBL shares it acquired constituted trading stock as defined, in its hands, because:
the shares were acquired for purposes of sale or exchange by the appellant; and
the subsequent proceeds from the disposal of the shares in 1999, formed part of the gross income of the appellant.
[12] The appellant relied, in the alternative, on the principle of mixed intentions, specifically that it had a secondary purpose of profit-making when it acquired and held the NBL shares.
[13] The appellant also relied on the so-called "all in" principle by which, according to the appellant's witness Mr Barber, all of its assets, no matter how strategic and of whatever nature, be it shares or mines or property, were acquired simply to be resold. If they were sold at a loss, the argument went, such loss was always part of income and therefore deductible.
[14] Clearly, the essential issue in this case is whether the intention of the appellant, in acquiring the NBL shares, was to hold them as a capital investment in order to derive income therefrom in the form of dividends (i.e. to
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derive income from the productive use thereof), in which case they were of a capital nature, or to acquire them as trading stock.
[15] It is trite that intention is a state of mind. Regarding the intention of a company, I can do no better than quote Botha JA in the case of SIR v Trust Bank of Africa Ltd 1975 (2) SA 652 (A) at 669A-D where he said:
"Just as there cannot in the case of a one-man company be any reason in principle why it should be incompetent for him to give evidence as to what the intention of his company at any given time was, Commissioner for Inland Revenue v Richmond Estates (Pty.) Ltd., 1956 (1) S.A. 502 (A) at p. 606, so I can see no reason in principle why the persons who are in effective control of a company cannot give evidence as to what was the intention or purpose of the company in relation to any matter at any given time."
The learned judge continued in the same passage:
"...I cannot find any reason in principle why the intention of the members of the Management Committee in regard to any matter in which it was concerned on behalf of the respondent cannot be taken to indicate the intention of the respondent."
[16] It accordingly follows that the evidence tendered on behalf of the appellant, namely that of Messrs Menell and Barber is of fundamental importance regarding the appellant's intention at the critical time of acquiring and subsequent disposal of the NBL shares. Needless to say, their evidence will obviously be assessed and weighed in the light of the probabilities and the objective facts in this case.
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[17] Mr Barber stated that he was intimately involved with the acquisitions and disposals made by the appellant and that he was aware of the purpose for which such acquisitions and disposals were made. Mr Menell also stated that he was aware of the intentions of the controlling minds of the appellant as he frequently discussed these matters with his deceased father Clive Menell, while he was the deputy chairman. Both he and Mr Barber went on the road show during May 1994 and were required to know and discuss the group strategy pertaining, inter alia, to the appellant's intentions regarding its 15,6% shareholding in NBL.
[18] Both Barber and Menell were adamant that the intention with which the appellant acquired and held the 15,6% shareholding in NBL was to dispose of it at a profit. The intention was that this 15,6% shareholding in NBL would be disposed of in one of three ways:
As the public float on a listing of NBL on the Johannesburg Stock Exchange ("JSE").
As a private placement of the shares with a foreign investor who was interested in the fast moving branded consumer goods industry in which NBL was involved; and
As a disposal to AVI.
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[19] In evaluating the evidence of Menell and Barber, it becomes necessary to examine, in a fair amount of detail, all the circumstances leading up to the appellant's acquisition of the 15,56% shareholding in NBL.
[20] As I have already mentioned, the appellant's 98% shareholding in NBL, as at the beginning of 1994, was a strategic long-term investment of a capital nature. According to Mr Menell, NBL was the star performer in the group, was highly profitable and accounted for approximately one-quarter of the appellant's profits. It should also be kept in mind that although the appellant held substantial mining interests, approximately 72% of its assets were made up of its industrial holdings via AVI.
[21] During April 1994 the appellant decided, through its executive committee, that NBL should tender R411 million to secure the assets, goodwill and trademarks of the principal business of Willards from the United Tobacco Company Ltd. By so doing, NBL would substantially expand its existing business by adding to its list of fast-moving consumer goods and brands.
[22] There is no question that from the appellant's group perspective, this was a massive capital investment. NBL had R111 million cash and there was a need for the additional R300 million to fund this capital investment. The evidence by both Menell and Barber, and by resolutions and other relevant documentation, shows conclusively that the appellant went about actively looking at various ways in which this capital investment could be financed. The specific and possible financing methods identified were the following:
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NBL could have listed its own shares on the JSE and utilised the resultant capital to make the purchase;
AVI could have listed further shares of its own on the JSE (it was already listed) in order to achieve the same result;
AVL could have lent the R300 million to NBL which already had R111 million each of its own; and
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