Kluh Investments (Pty) Ltd v Commissioner, South African Revenue Service

• Jurisdiction: South Africa
• Citation: 2015 (1) SA 60 (WCC)

Kluh Investments (Pty) Ltd v Commissioner, South African Revenue Service
2015 (1) SA 60 (WCC)

2015 (1) SA p60

Citation	2015 (1) SA 60 (WCC)
Case No	A 48/2014
Court	Western Cape Division, Cape Town
Judge	Traverso DJP, Allie J and Rogers J
Heard	August 8, 2014
Judgment	September 9, 2014
Counsel	L Kuschke SC (with TS Emslie SC) for the appellant.; AR Sholto-Douglas SC (with MW Janisch and H Cassim) for the respondent.

Flynote : Sleutelwoorde B

Revenue — Income tax — Income or capitaI accrual — Income from farming — Whether income so qualifying two-pronged enquiry — First threshold enquiry whether taxpayer carrying on farming operation — Only if so, C second enquiry arising whether disputed income derived from such farming operations — Income Tax Act 58 of 1962, s 26; and para 14 of sch1.

Headnote : Kopnota

Section 26(1) of the Income Tax Act 58 of 1962 (the Act) provides that '(t)he D taxable income of any person carrying on pastoral, agricultural or other farming operations shall, insofar as it is derived from such operations, be determined . . . subject to the provisions of the First Schedule'. Paragraph 14(1) of the first schedule to the Act (para 14) provides that —

'(a)ny amount received by or accrued to a farmer in respect of the disposal of any plantation shall, whether such plantation is disposed of separately or with the land on which it is growing, be deemed not to be E a receipt or accrual of a capital nature and shall form part of such farmer's gross income'.

Here the respondent (SARS) had invoked para 14(1) to include as gross income the proceeds of the appellant's disposal (to S Co) of a plantation together F with the land on which it was growing. It was common cause that the appellant (the taxpayer) at no point conducted any plantation operations itself but instead, from the outset of its acquisition of the land, had permitted S Co to do so for its own profit and loss in terms of an oral agreement to that effect.

SARS' bases for the disputed additional assessment were (1) that even if the G appellant conducted no other farming operations, the mere disposal of an operating plantation was itself sufficient to trigger the para 14(1) deeming provision; alternatively (2) that there was a 'sufficiently close connection' between disposal proceeds and the conducting of the plantation operations to trigger the operation of s 26(1) and para 14. The tax court having dismissed its appeal against SARS' additional assessment, the taxpayer H appealed to the full bench.

Held: SARS' first basis fell to be rejected. Paragraph 14 did not stipulate in unqualified language that the proceeds of the disposal of a plantation constituted gross income; it stated that the disposal of a plantation constituted deemed gross income if it were an amount received by or I accrued to a 'farmer', ie a person carrying on farming operations as contemplated in s 26(1). The question as to what constituted farming operations was a threshold enquiry. Thus, there must be conduct by the taxpayer apart from disposing of a plantation previously acquired by the taxpayer in order to constitute the carrying-on by him of farming operations. SARS could not for that threshold premise rely on para 14 itself. J (Paragraphs [61] – [62] and [68] at 75D – F and 77A – B.)

2015 (1) SA p61

Insofar as SARS' argument rested on the closeness of the connection between the A disposal proceeds and the conducting of farming operations, such argument conflated two distinct issues. Section 26(1) did not apply merely because there had accrued to the taxpayer income which had 'derived from' farming operations: the section applied to a person carrying on farming operations to the extent that his income had derived from such operations. The B question was not whether the accrual to the taxpayer of a particular item of income was directly connected to the farming operations of any person but whether it was directly connected to (ie derived from) the farming operations of the taxpayer himself.

Two questions therefore had to be answered: (i) Was the person whom SARS wished to tax a person carrying on farming operations during the year of C assessment in question? (ii) If so, did the particular item of income in dispute derive from those farming operations? Where, as in the present case, the first of these two questions was at issue, it was impermissible to proceed to the second issue as if it would also provide an answer to the first. (Paragraphs [53], [55], [60] at 73D – F, 73H – I and 75B – C.)

The critical legal question, given the undisputed facts as to the oral agreement, D was whether the amount had accrued to the appellant as a person carrying on farming operations. The inapplicability of s 26(1) was, in the present matter, an a fortiori case. The appellant did not even start to conduct plantation operations but at the outset made the plantation available to S Co so that the latter could conduct plantation operations for its own profit and loss. Therefore, SARS' contentions must be rejected, and the tax court erred in dismissing the taxpayer's appeal. (Paragraphs [49], [83] and [87] E at 72C, 80D and 81B.)

Cases Considered

Annotations

Case law F

Absa Bank Ltd v Mkhize [2014] 1 All SA 1 (SCA): referred to

Bourke's Estate v Commissioner for Inland Revenue 1991 (1) SA 661 (A) (53 SATC 86): dictum at 673F – I applied

Bresky v Vivier 1928 CPD 202: dictum at 203 compared

Burgess v Commissioner for Inland Revenue 1993 (4) SA 161 (A): dictum at 181H – 182I applied

Commissioner for Inland Revenue v D & N Promotions (Pty) Ltd 1995 (2) SA 296 (A): distinguished G

Commissioner, South African Revenue Service v Smith 2002 (6) SA 621 (SCA): dictum in para [22] applied

De Beers Holdings (Pty) Ltd v Commissioner for Inland Revenue 1986 (1) SA 8 (A): dictum at 33E – 37D applied

Henning v Le Roux 1921 CPD 587: compared H

ISEP Structural Engineering and Plating (Pty) Ltd v Inland Exploration Co (Pty) Ltd 1981 (4) SA 1 (A): dictum at 4 et seq compared

ITC 166 (1930) 5 SATC 85: criticised

ITC 732 (1953) 18 SATC 108: considered

ITC 926 (1959) 24 SATC 254: distinguished

ITC 1185 (1973) 35 SATC 122: referred to I

ITC 1319 (1980) 42 SATC 263: considered

ITC 1324 (1980) 42 SATC 288: considered

ITC 1630 (1997) 60 SATC 59: criticised

Lubbe v Volkskas Bpk 1992 (3) SA 868 (A): referred to

Malan v Kommissaris van Binnelandse Inkomste 1983 (3) SA 1 (A): referred to J

2015 (1) SA p62

Poynton v Cran A 1910 AD 205: compared

S v Naidoo 2003 (1) SACR 347 (SCA) ([2002] 4 All SA 710): referred to

Sarkin v Koren 1950 (1) SA 495 (C): dictum at 497 – 499 compared

Sekretaris van Binnelandse Inkomste v Aveling 1978 (1) SA 862 (A): dictum at 877B – 878B applied

Stevens v Van Rensburg B 1948 (4) SA 779 (T): referred to.

Statutes Considered

Statutes

The Income Tax Act 58 of 1962 , s 26(1) and para 14 of sch 1: see Juta's Statutes of South Africa 2013/14 vol 3 at 1-587 and 1-663.

Case Information

L Kuschke SC (with TS Emslie SC) for the appellant.

AR Sholto-Douglas SC C (with MW Janisch and H Cassim) for the respondent.

An appeal against a tax court decision.

Order

(a)

The appeal is upheld with costs, including those attendant on the D employment of two counsel.

(b)

The order made by the tax court on 19 August 2013 is set aside and replaced with an order in the following terms:

'(i)

The appellant's appeal against the additional assessment in respect of its 2004 tax year, with a due date 1 September 2010, E succeeds and the said additional assessment is set aside.

(ii)

The capital gains tax treatment arising from the appellant's acquisition and disposal of the plantation and land which was the subject of the additional assessment is remitted to the tax court for determination on the pleadings already filed in the F tax court on the capital gains tax issues.'

Judgment

Rogers J (Traverso DJP and Allie J concurring):

Introduction

G [1] This is an appeal against the dismissal by the tax court (Davis J sitting with two assessors) of an appeal brought in that court against an additional assessment levied by the respondent (SARS) in respect of the appellant's year of assessment ended 30 June 2004. By way of the assessment an amount of R109 932 321 was added to the appellant's taxable income. [1]

H [2] SARS issued the additional assessment on the basis that a gross amount giving rise to the said taxable income had accrued to the appellant upon the disposal, during its 2004 tax year, of a plantation as contemplated in para 14 of the first schedule to the Income Tax Act 58 of 1962. The first schedule applies in the circumstances contemplated J in s 26(1) of the Act.

2015 (1) SA p63

Rogers J (Traverso DJP and Allie J concurring)

[3] It is common cause that the appellant disposed of a plantation during A the course of its 2004 tax year for an amount which yielded, if the said statutory provisions were applicable, the taxable income forming the subject of the additional assessment. The dispute is, in essence, whether the amount accrued to the appellant as a person carrying on farming operations. SARS says yes, the appellant says no. B

[4] Section 26(1) reads thus:

'The taxable income of any person carrying on pastoral, agricultural or other farming operations shall, insofar as it is derived from such operations, be determined in accordance with the provisions of this Act but subject to the provisions of the First Schedule.' C

[5] The first schedule uses the word 'farmer'. This is clearly a shorthand reference to the expression 'any person carrying on pastoral, agricultural or other farming operations' in s 26(1). I shall for convenience use the phrase 'farming operations' to cover the expression used in s 26(1).

[6] Paragraph 14 of the first schedule provides as...