Income Tax Case No 11466

• Jurisdiction: South Africa
• Judge: Foxcroft J
• Judgment Date: 14 November 2005
• Docket Number: 11466
• Hearing Date: 16 May 2005
• Citation: 2006 JDR 0109 (CSpCrt)

Foxcroft J:

This is an appeal against assessments by the South African Revenue Service ['SARS'] for the 2000 and 2001 tax years.

In accordance with Rule 11, a Statement of Grounds of Appeal was handed up at the commencement of the hearing in a volume constituting Volume 2 of the Dossier. Mr Emslie, who appeared for Appellant, informed the Court from the Bar that he had also received this second volume of the Dossier only on the morning of the appeal.

In accordance with the statement of 'Grounds of Appeal', Appellant was the managing director of a company named A ['A'] having entered into an agreement with A in respect of his appointment as managing director. This agreement entitled him to a gross annual salary of R550 000,00 commencing on 1 April 1999. It was common cause that the employment agreement embodied a restraint of trade arrangement in terms of which Appellant was entitled to acquire, free of consideration, the proceeds of the sale of one million A shares, subject to certain terms and conditions. It was also not disputed by Mr Tsele, who appeared for the Commissioner, that the Appellant had not received the promised cash in respect of the proceeds of the said one million shares. He did not accept the further allegation in the Statement of Grounds of Appeal that

"By agreement with (A) an amount of R1 890 000 was credited to a loan account in the Appellant's name to reflect the fact that money was owed to the Appellant in respect of the restraint of trade."

This became one of the issues at the appeal.

Central to the appeal was a letter, typed on the face of it on 15 September 1999, which appears at p60 of Volume 1 of the Dossier. That letter is as follows :

"We hereby confirm that we initially agreed to a remuneration package of R45 833,33 per month plus benefits.

In order to assist the company with its cash flow requirements, it is hereby recorded that it is agreed between you, the employee, and (A), the employer, that the cash portion of your remuneration package will be reduced to R2000,00 per month until further notice.

2006 JDR 0109 p2

Foxcroft J

You will be entitled to all fringe benefits relating to the use of assets you currently enjoy. You agree that you will be re-entitled to the full cash portion of this remuneration package of R45 833,33 per month once the employer is in a financial position to pay the cash portion of your remuneration package.

Furthermore, once the employer is in a financial position to resume paying the full salary to which you are entitled then the employer will also pay your "arrear" salary. This "arrear" salary will thus accrue and be paid to you at the earlier of :

1)

When the company is in the financial position to pay the remuneration.

2)

Termination of your services.

The full salary will accrue and be paid to you as a lumpsum due and payable on the earlier of any of the above two conditions being fulfilled."

Appellant's case is that after that agreement was reached, he received the following amounts from A :

8 October 1999	-	R 20 000
19 November 1999	-	R 50 000
7 December 1999	-	R 15 000
7 February 2000	-	R 15 044
29 February 2000	-	R 20 000
7 April 2000	-	R 30 000
18 May 2000	-	R 200 000
2 June 2000	-	R 43 000
28 June 2000	-	R 41 844
20 July 2000	-	R 41 844

These sums of money were drawn by Appellant against his loan account, that is to say these amounts were paid by A to Appellant in reduction of the amount owing to him in respect of the cash due to him by A after sale of the shares promised to him as consideration for his signing of a restraint of trade agreement. It is further Appellant's case that the amounts set out above were erroneously recorded in A's books as an expense to the directors' fees expense account.

There was evidence by Appellant and the erstwhile financial director of A, Mr C, which supported this allegation of a bona fide error, and it is further Appellant's case that his services with A were not terminated as envisaged in the letter dated 15 September 1999, nor were A ever in a position to pay "arrear" salary during the Appellant's 2000 or 2001 years of assessment, or at all.

It appears from the Respondent's Dossier Volume 2 that A was placed under provisional liquidation on June 20, 2001 and the Appellant was quite fairly, in my view, entitled to say during his evidence that he was unaware of the legal position flowing

2006 JDR 0109 p3

Foxcroft J

from the fact of liquidation in regard to whether his services had been terminated or not in terms of the contract reached on 15 September 1999.

The grounds of appeal which appear at p4 of Volume 2 of the Dossier, are as follows:

"1.

The amount credited to the Appellant's loan account in the books of (A)...