John Bell & Co (Pty) Ltd v Secretary for Inland Revenue

• Jurisdiction: South Africa
• Judge: Wessels JA, Trollip JA, Rabie JA, Muller JA and Galgut JA
• Judgment Date: 19 August 1976
• Hearing Date: 24 May 1976
• Court: Appellate Division

Wessels, J.A.:

This is an appeal, direct to this Court, on a case stated under sec. 86 of the Income Tax Act, 58 of 1962 (hereinafter referred to as the Act), against a decision of the Transvaal Special Court for hearing income tax appeals, constituted in terms of sec. 83 of the Act. In assessments for normal tax and undistributed profits tax for the year of assessment ended 28 February, 1969, raised by respondent upon G appellant, there was included the sum of R131 019, being the profit received by appellant from the sale of immovable property in Johannesburg during the year of assessment in question. Appellant appealed to the Court a quo against the inclusion of the profit in the assessments: it contended that it was a receipt of a capital nature within the meaning of the H definition of 'gross income' in sec. 1 of the Act. The appeal was dismissed, hence the appeal to this Court.

The following is a summary of facts set out in the statement of case:

Appellant was incorporated on 3 October 1916. From its memorandum of association it appears that the company was established primarily for the purpose of acquiring and taking over 'as a going concern' the businesses of fruit merchants, exporters, importers and distributors then being carried on in Johannesburg and Cape Town under the style or firm of John Bell and Company. Para. 2 of the objects clause reads as follows:

Wessels JA

'To carry on the business of fruit merchants, exporters, importers, and distributors of fruit, farmers, fruit growers, merchants, general dealers, ware-housemen, charterers of ships or other vessels, auctioneers, packers, cold storage agents or proprietors, carriers and forwarding agents, in all their branches.'

It is to be noted that there is no reference in para. 2 to the carrying on of 'the business' of dealing in real estate. It A was, however, empowered,

'generally to purchase... or otherwise acquire any real... property'

and to

'... sell... turn to account or otherwise deal with or dispose of the... lands, buildings, and other property for the time being of the Company'.

Until March 1956 the affairs of appellant were under the control of Mr. P. A. Litopoulos and his co-shareholders. Until B then, appellant carried on the business of market agent (mainly in the field of selling flowers for farmers), assurance broker or agent and auctioneer in premises on stand 340, Johannesburg. Appellant had acquired the leasehold of the property on 28 March 1922, and on 5 March 1924 the freehold title thereof, at a cost of R15 981. The property was situated C at 44 President Street West, Johannesburg.

Since 1946 Mr. I. Fine, a tailor, and Messers Philip, Joseph and Solomon Sher (hereinafter referred to as 'the Sher Brothers') had been associated in the carrying on of a clothing manufacturing business. Early in 1956 Fine suggested to the Sher Brothers that a new business of importing cloth and selling it to tailors - especially Indian tailors, with whom D Fine had extensive connections - should be established. Fine suggested, further, that this business could conveniently be carried on in the premises owned by appellant (i.e., in the building on stand 340), since it was situated in a predominantly Indian area where a number of Indian tailors carried on business. In April 196, after negotiations between E Philip Sher and Litopoulos had been successfully concluded, the Sher Brothers and Fine acquired the shares in appellant then held by Litopoulos and his co-shareholders. Hereafter the Sher Brothers and Fine were in effective control of appellant until September 1961, when the Sher Brothers acquired from Fine the shares he held in appellant. In the result, the Sher F Brothers between them held all the shares in appellant.

The primary purpose of the Sher Brothers and Fine in acquiring the shareholding in appellant was to secure suitable premises for their new business, and not to cause appellant to sell the property at a profit. Philip Sher, however, with his understanding and experience of the property market, was conscious, at the time the Sher Brothers and Fine gained G control of appellant, and at all material times thereafter, of a likelihood that at some future stage it would be possible to dispose of stand 340 at a price well in excess of its book value (assigned to it by its previous directors) of £50 000 - i.e., R100 000.

Despite the acquisition of the shares in the appellant by the Sher Brothers and Fine, the property remained a capital asset H held by appellant for use as such, and it was held for that purpose for about a year after the change of control. As from 1 April 1956 a portion of the property was used by appellant for the purpose of carrying on the business of importing and selling cloth to tailors. The remaining portion of the building was used by appellant for its business of selling flowers until May 1957, when it discontinued carrying on this business. During the same month, appellant's textile business was transferred to premises situated at 116 President Street

Wessels JA

East, which was owned by Presco Investments (Pty.) Ltd. (Presco). About the same time the Sher Brothers had acquired control through other companies of 75 per cent of the issued shares of Presco and Fine had acquired the remaining 25 per cent thereof. In September 1961, when the Sher Brothers A acquired Fine's shares in appellant they also acquired his shares in Presco. The details of these transactions are fully set out in the stated case but Presco company, the Sher Brothers and Fine were able to transfer appellant's textile business from the premises on stand 340 to the premises owned by the Presco company at 116 President Street East. In about September 1959 appellant disposed of its business to Fine's B Textile Co. (Pty.) Ltd., a company which had been registered for the purpose of taking over appellant's textile business.

After discontinuing its business as a flower seller and transferring its textile business to the above-mentioned premises at 116 President Street East in May 1957, appellant's C property was no longer required for the purposes which the Sher Brothers and Fine had in mind when they gained control of appellant. The area of the property was too small for development by itself. As from and after May 1957, appellant intended to retain the property for the purpose of selling it at a good profit when the market for property in the area (which was within about half a mile of the Johannesburg City Hall) had risen sufficiently.

D As from 1 June 1957, appellant let the property to Starlite Cinema (Pty.) Ltd., for the purpose of carrying on therein the business of a cinema and tea kiosk for non-Whites. The property was let on a monthly basis up to the end of December 1957. On 20 December 1957 appellant entered into a notarial agreement with Starlite Cinema (Pty.) Ltd. for the lease of the property E for a period of 11 years as from 1 January 1958 until 31 December 1968, with the option of a renewal for a further period of five years. The agreed rental for the first 11 years was R400 per month, and for the renewal period, R550 per month. The lessee, which was entitled but not obliged to do so, spent approximately R15 000 on building alterations and a similar F amount on equipment. In terms of the lease, the lessee was not, on the termination thereof, entitled to any compensation in respect of any improvements effected by it. The rents provided for in the notarial lease were unattractive in relation to the value of the property from appellant's point of view.

In May 1967, but with effect from March 1968, appellant sold the property in question to Mr. L. G. Thomas,. a shareholder in G Starlite Cinema (Pty.) Ltd., for the sum of R147 000. The payment of R110 000 thereof was deferred for 10 years subject to the payment of interest. Philip Sher negotiated the sale, which yielded a profit of R131 019 to appellant. At no time did appellant offer the property for sale. The sale came about as a result of an offer to purchase the property made by Thomas to appellant. Appellant received an annual interest from the H proceeds of the sale amounting to at least R14 700. The rental return received by appellant prior to the sale was approximately R3 700 per annum.

During the period from 1 April 1956 to 28 February 1969 appellant, mainly through the instrumentality of Philip Sher, received income in the form of commissions and fees in respect of services rendered by it, e.g., assisting in the raising of bonds, organising syndicates formed for the purposes of land development, etc. At no time, however, during its existence did appellant buy or sell any land apart from the property with which the

Wessels JA

appeal before the Court a quo was concerned. In the year ended 28 February 1966 the appellant made a profit of R13 899 on the sale of shares in a property-owning company known as Fays Buildings (Pty.) Ltd. The latter company owned a piece of land in Hillbrow, Johannesburg, on which a block of flats was being erected. The appellant acquired a 25 per cent interest in that A company early in 1963 and lent that company R18 911. On 1 October 1965, when the building of the block of flats was nearing completion, the appellant, together with all the other shareholders, disposed of their interests in that company. The appellant had acquired its shareholding in Fays Buildings (Pty.) Ltd. in 1963 from the Sher Brothers and the block of flats erected by that company was financed by a syndicate of which appellant and Rapp and Maister (Pty.) Ltd., building B contractors, were members. Philip Sher was the founder of the syndicate.

The profit made by appellant on the sale of the shares of Fays Buildings (Pty.) Ltd. (R13 899) was transferred to investment realisation reserve. The Secretary included this profit in the income of appellant for the year of assessment ended 28 C ...