Income Tax Case No 11986

• Jurisdiction: South Africa
• Judge: Davis J
• Judgment Date: 11 December 2006
• Docket Number: 11986
• Hearing Date: 11 December 2006

Davis J:

Introduction:

This is an appeal against an assessment for income tax raised in respect of a recoupment added back to appellant's income for the year of assessment ending 30 June 2001.

The parties prepared a statement of agreed facts upon which this dispute is to be resolved.

The statement of agreed facts reads thus:

1. For the period ending 30 June 2001, appellant received a distribution in specie, in the form of certain leasehold rights from one of its subsidiaries, A (Pty) Ltd. The distribution in specie was valued at R82 505 092. In the same period appellant disposed of the leasehold rights for an amount of R99 990 000 to a third party.

2. B (Pty) Ltd had acquired the leasehold rights to a site known as "the Mayor's garden" under a notarial deed of lease during March 1982, from the C Municipality in terms of the lease. B, or its successors in title, was required to effect certain leasehold improvements to the site.

3. B and the Commissioner had agreed prior to 1989 that B, as holding company of the property sub-group of the group of companies, would include all income and expenditure of its subsidiaries in its income statement. This resulted in B determining taxable income on the consolidated income and expenditure of its subsidiaries in addition to its own income and expenditure. The Commissioner assessed them on this consolidated basis, and no objection was lodged thereto by the company.

4. For the period 1983 to 1991, B (Pty) Limited, claimed an amount of R24 522 112 by way of leasehold improvements incurred in respect of the property known as the "mayor's garden", and as per the provisions of section 11(g) of The Income Tax Act, 58 of 1982, "The Act".

5. On 30 August 1991, X Ltd, appellant's holding company, applied to the Commissioner for a rationalization exemption, under the provisions of section 48 of the Taxation Laws Amendment Act, 1988, as amended by Section 28 of the

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Taxation Laws Amendment Act 1989. In terms of this rationalization application, the intention was to rationalize the X property sub-group, which had consisted of numerous property owning companies. B had been the property owning company in the Group either through direct ownership of property or indirectly through its shareholding in its subsidiaries. Under the rationalization application, X Limited proposed the following:

(i)

Appellant's name changed from X Properties (Pty) Limited to X Property Holdings (Pty) Limited.

(ii)

The shareholding in appellant was transferred from B to X Limited.

(iii)

B transferred its shareholding in, inter alia, A (Pty) Limited to appellant.

6. Included in the rationalization application was the transfer of the above mentioned lease from B to A (Pty) Ltd.

7. In the rationalization application letter, inter alia, the following rulings were requested from the Commissioner:

(i)

The controlling company and the controlled companies will be regarded as one and the same company in terms of section 48(5) of the Moratorium and no liability will arise for any taxation in terms of the Income Tax Act in respect of any of the transactions undertaken in terms of the agreements referred to in this document. In particular, all allowances currently being granted to B (Pty) Ltd in respect of the lease of A (Pty) Ltd will continue to be granted to A (Pty) Ltd as if no transfer of the lease had taken place.

(ii)

The current method of returning income and expenditure of the subsidiary companies of B (Pty) Ltd will continue and all the income and expenditure of the subsidiaries of the Appellant will be accounted for in the tax return of the Appellant.

8. The Commissioner responded to the rationalization application letter dated 30 August 1991, on the following terms:

(i)

In terms of section 48(5) of The Taxation Laws Amendment Act (Act 87 of 1988), the purchaser and seller of the submitted agreements are regarded as one and the same; more specifically all allowances currently granted to (B) (Pty) Ltd in respect of the lease of A will continue to be granted to A (Pty) Ltd, currently named Y (Pty) Ltd. as if no transfer of the lease had taken place (refer paragraph 2.1 of the letter dated 26 November 1991 issued by the Commissioner).

(ii)

The current method of returning the income and expenditure of the subsidiary owning companies of B (Pty) Limited may continue and all the income and expenditure of the subsidiaries of the Appellant may be accounted for in the tax return of the Appellant, provided that for every year of assessment, a balance sheet is nevertheless submitted for each of the affected subsidiaries. (refer paragraph 6 of the letter dated 26 November 1991 issued by the Commissioner)

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9. The appellant complied with the above arrangement. From the year ending June 1992, appellant accounted for all income and expenditure of all its subsidiaries in both it's annual financial statements and tax returns, and continues to return all the income and expenditure of its subsidiaries on this basis.

10. For the period June 1992 to June 1997, an amount of R26 405 966 was claimed by way of leasehold improvements as per the provisions of section 11(g) of The Act, in respect of the property known as "The mayor's garden", in the tax return submitted by the Appellant.

11. For the period ending June 2000, a deferred tax liability in the amount of R15 278 424 was reflected...