Matla Coal Ltd v Commissioner for Inland Revenue

• Jurisdiction: South Africa
• Judge: Corbett JA, Botha JA, Van Heerden JA, Galgut AJA and Nicholas AJA
• Judgment Date: 30 September 1986
• Hearing Date: 21 August 1986
• Court: Appellate Division

Corbett JA:

The appellant in this matter is Matla Coal Ltd ('Matla'). On 20 February 1980 Matla received from the Electricity Supply Commission ('Escom') a payment by cheque of an amount of R9 365 000. In its accounts attached to its return F of income for the 1980 income tax year (its financial year having ended on 30 June 1980) Matla described this amount as a -

'capital receipt arising from sterilisation of certain coal rights, in terms of an agreement between Escom, the Matla Joint Venture and Matla Coal Ltd';

and the amount was transferred to its non-distributable reserve. In assessing Matla to income tax in respect of this G return, respondent, the Commissioner for Inland Revenue ('the Commissioner') included this amount of R9 365 000 in Matla's income under the notation 'Verkoop van steenkool'. Matla objected to this assessment, generally on the ground that the amount in question constituted a receipt of a capital nature and, therefore, did not form part of its gross income. In the H alternative it was contended that, if it should be found that any portion of the amount was of a revenue nature, Matla was entitled to an appropriate deduction in terms of s 11(a) of the Income Tax Act 58 of 1962 ('the Act'). Its objection having been disallowed by the Commissioner, Matla appealed to the Transvaal Income Tax Special Court. That Court held that the I amount had correctly been included in Matla's taxable income, but ordered that the matter be remitted to the Commissioner to enable him to make a suitable deduction in respect of the costs associated with the transaction. With the leave of the President of the Special Court, granted in terms of s 86A(5) of the Act, Matla now appeals to this Court against the portion of the judgment of the Special Court holding that the R9 365 000 J constituted a receipt of a revenue nature.

Corbett JA

A The background facts and the events leading up to the payment of this amount, as revealed by the evidence before the Court a quo, may be summarised as follows. Trans-Natal Coal Corporation Ltd ('Trans-Natal') is a coal-mining company within the General Mining and Finance Corporation Ltd ('General Mining') group. B Normally it operates through subsidiary companies, each company controlling an individual mine. At the time of the hearing in the Court below, Trans-Natal's output from the mining operations thus conducted by it amounted to about 30m tons per annum.

The bulk of South Africa's coal reserves are located in the Eastern Transvaal. Trans-Natal had been prospecting in this C region for some time and had discovered a large coalfield. For various reasons (which need not be canvassed) Trans-Natal in about 1968/69 entered into an agreement with Clydesdale (Transvaal) Collieries Ltd ('Clydesdale') in terms whereof it was arranged that Trans-Natal and Clydesdale would exploit portion of this coalfield (known as 'Block IV') on the basis of D an equal partnership. Trans-Natal and Clydesdale further decided that this joint venture would be carried on through the vehicle of Matla, which was then named Alpha Coal Ltd ('Alpha Coal') and was a dormant coal-mining company in the Trans-Natal group. Trans-Natal and Clydesdale each acquired 500 shares in Alpha Coal and the mining rights and options held by Trans-Natal over Block IV were ceded and transferred to Alpha E Coal. Trans-Natal was to manage both Alpha Coal and Clydesdale.

At about this time Escom announced that it was contemplating the construction of a new coal-fired power station in the Eastern Transvaal and invited tenders for the supply of coal. (Later the scheme was amended to include two power stations.) F It was the practice of Escom to establish its power station on the coalfield of the successful tenderer. After some initial hesitation the joint venturers decided to submit a tender in respect of Block IV. This was done on 31 August 1973 by Trans-Natal, acting on behalf of Alpha Coal. In the tender it is explained that Block IV contains three coal seams of economic importance, viz, in descending order, Nos 5, 4 and 2 G seams; that the No 5 seam coal reserves have properties making this coal suitable for future metallurgical use; and that the No 5 seam is consequently excluded from the tender. Other relevant features of the tender are that in terms thereof:

(1)

it is proposed that all mining operations be undertaken by Trans-Natal;

(2)

H the total capital requirements for a two-mine layout are estimated to amount to R31 123 000;

(3)

it appears that the coal reserves in situ are adequate to meet Escom's requirements of approximately 9,6m tons per annum for a period of full operation of 30 years;

(4)

I it is proposed that a royalty of 12,5 cents per ton be paid by Escom, subject to various provisions for the escalation thereof; and

(5)

a formula is provided for determining the price to be paid for the coal from time to time on a cost-plus basis.

Escom's reaction to the tender was generally a favourable one. J It accepted that Block IV would be able to supply the coal required for the

Corbett JA

two power stations it was intending to establish and it raised A no objection to the price formula. It was not, however, favourably disposed to paying a royalty, especially in view of the escalation provisions. It also wished to have control over the mining techniques to be employed in the exploitation of the coalfield. Accordingly, it counter-offered to buy the rights to all coal contained in seams Nos 2 B and 4 for the sum of R7 704000, payable in six equal instalments. The capital cost of establishing the colliery and acquiring the associated assets was to be shared on a certain basis. These proposals were contained in a letter dated 14 November 1973. Later, on 31 January 1974, Escom altered its counter-proposals to include No 5 seam in its offer to purchase the coal rights, and at the same time it increased the price to R9 365 000. This price was C worked out on the basis of the estimated total amount the royalties would have generated over the contract period, reduced to its present value. The attitude of the tenderer was that it really had no alternative but to agree to the counter-offer.

From here on the negotiations appear to have meandered somewhat. On 13 March 1974 Escom wrote stating that it had D decided to enter into a contract with Trans-Natal for the supply of coal to the proposed new power station on the basis of its counter-offer -

'to purchase all rights of Alpha Coal Ltd to the coal in Block IV, subject however to your corporation undertaking the design, establish and work the collieries needed for mining this coalfield...'

E and suggesting that the parties prepare heads of agreement

'which will serve as the basis for starting the investigations and planning which is involved in this joint venture, and for drawing up the final contract in due course'.

This was accepted by Trans-Natal and heads of agreement (dated 8 May 1974) were drafted, but apparently not signed. This F document provides, under the heading 'Coal rights', as follows:

'The tendered coal rights per the attached schedule which are at present being held by Alpha Coal Ltd will be sold to Escom for the amount of R9 365 000 payable in one amount within 90 days of the date of commissioning the first boiler and turbo-generator set of the first power station.

It is envisaged that either the coal rights will be sold from Alpha Coal Ltd to Escom or the shares in Alpha Coal Ltd will be G sold to Escom. In the event of a sale of shares all the coal rights held by Alpha Coal, but not included in the tender per the attached map, will be transferred to Trans-Natal Coal Corporation Ltd and Clydesdale (Tvl) Collieries Ltd prior to such sale of shares.

Either the sale of the rights of Alpha Coal or the sale of Alpha Coal shares will be made conditional to Escom and Trans-Natal concluding a contract whereby Trans-Natal will undertake and accept full responsibility for the mining operations.

It follows that no royalty will be payable by Escom on coal H delivered to Escom from Block IV.'

On 11 April 1975 the name of Alpha Coal was changed to Matla Coal Ltd in order to coincide with the recently announced name of Escom's new power station, viz Matla Power Station.

Thereafter Matla, under the management of Trans-Natal, went I ahead with the establishment of the colliery - sinking shafts, installing equipment and so on. Owing to inflation the original estimate of the capital cost of establishing the mine, viz R31m, proved to be far too low. There was a need for additional capital to be provided. Initially this was...