Income Tax Case No 11547

• Jurisdiction: South Africa
• Judge: Tsoka J
• Judgment Date: 08 September 2006
• Docket Number: 11547
• Hearing Date: 08 September 2006
• Citation: 2006 JDR 0850 (JSpCrt)

Tsoka J:

[1]

On 9 June 1999 the appellant, a listed but dormant public company, entered into a written agreement with A, a company incorporated in the United States of America. In terms of the agreement A sold to the appellant the entire share capital in B for an amount of R74 750 000,00.

[2]

The purchase price was settled by the issuing of 50 000 000 new shares at 80 cents per share and the balance of R34,75 m was funded by a loan of USD 6,5 m raised on 8 July 1999 from C.

[3]

C changed its name to D. D is a wholly owned subsidiary of the appellant and its main asset is the D Mine ("the mine") situated in the district of E.

[4]

Prior to the acquisition of D, the appellant's financial year end was 31 December and after the acquisition this was changed to 30 June to coincide with the financial year end of D. The appellant's 2000 financial year ended 30 June 2000.

[5]

On 17 June 1999 the appellant issued a circular to its shareholders to approve and ratify the acquisition of D. The acquisition was ratified and approved on 2 July 1999.

[6]

On 23 September 1999 the appellant and D entered into a marketing agreement in terms of which the appellant was appointed the sole marketing agent of D. The appellant was to conduct a study of the world supply and demand of a non-precious mineral. D agreed to pay the appellant the intent fee of R3 000 000 and a monthly fee of R200 000. The agreement was for a period of 5 years. After the expiry of 5 years the agreement would continue indefinitely until terminated by either party on 12 months' notice. In terms of the agreement, D had to bear the costs of the appointment of any sub-agents as well as all other costs incurred in the performance of the services in terms of the agreement. As at 30 June 2000 the appellant had earned R5 000 000 in respect of the marketing fees. The agreement was effective from 15 July 1999.

[7]

On 23 April 2004 the respondent issued an income tax assessment to the appellant based on the marketing fees in respect of the year of assessment ended 30 June 2000. On 15 July 2004 the appellant objected to the assessment. On 20 October 2004 the respondent disallowed the objection. On 10 November 2004 the appellant filed a notice of appeal.

[8]

Initially the appeal was based on two grounds, namely:

2006 JDR 0850 p2

Tsoka J

8.1

In terms of section 103(2) of the Income Tax Act 58 of 1962 ("the Act") the respondent disallowed the set off of the marketing fees against the appellant's assessed loss of R5 316 549;

8.2

In terms of sections 11(a) and 23(f) and (g) of the Act, the respondent disallowed the interest as the interest did not satisfy the requirements of the provisions of these sections.

[9]

The appeal relating to paragraph 8.1 above has been resolved between the parties. The appeal relating to paragraph 8.2 above remains.

[10]

The sole issue to be determined is whether the appellant is entitled to deduct the interest incurred by it in respect of the USD6,5 borrowed by it in order to acquire the shares of D.

[11]

Section 11(a) provides that -

"For the purposes of determining the taxable income derived by any person from carrying on any trade, there shall be allowed as deductions from the income of such person so derived -

(a)

expenditure and losses actually incurred in the production of the income, provided such expenditure and losses are not of a capital nature."

[12]

Section 23(f) provides that -

"No deductions shall in any case be made in respect of the following matters,...