Natal Estates Ltd v Secretary for Inland Revenue

• Jurisdiction: South Africa
• Citation: 1975 (4) SA 177 (A)

Natal Estates Ltd v Secretary for Inland Revenue
1975 (4) SA 177 (A)

1975 (4) SA p177

Citation	1975 (4) SA 177 (A)
Court	Appellate Division
Judge	Holmes JA, Trollip JA, Muller JA, Corbett JA and Galgut AJA
Heard	May 26, 1975; May 27, 1975
Judgment	July 11, 1975

Flynote : Sleutelwoorde

Revenue — Income tax — Income or capital accrual — Company having among its objects both dealing in and holding of property — Profits from realisation of property not necessarily income — Company acquiring assets of capital B nature — Company subsequently changing its intention in regard to some of its immovable assets and embarking on schemes of township development — Profits from realization of such assets constituting income and not capital accrual — Quaere: Whether appreciation in value of such immovable assets up to time of change of intention can be excluded from C gross income — Not necessary for taxpayer to have bought land for re-sale before it can be said to be engaged in business of selling land for profit — Determination of whether sale of an asset a realisation of a capital asset or a carrying on of business or scheme of selling for profit — Approach of Court — Company's activites constituting a business of selling land for profit using land as its D stock-in-trade — Special Court upholding an objection by company to the re-opening of an assessment made more than three years preiously — Cross-appeal by Secretary — Act 58 of 1962, sec. 79 (1) (a) — Even if Secretary "satisfied" as contemplated by section, there must be some evidence that he was so satisfied — Mere submission that he was so satisfied insufficient — Maxim omnia praesumuntur rite esse acta not applicable — Taxpayer should be informed of the particular conduct in respect of which the Secretary is satisfied under sec. 79 (1) (a) — Onus of proving non-liability for tax — Sec. 82 of Act — Lack of evidence that Secretary E "satisfied" under sec. 79 (1) (a) constituting proof that Secretary's decision wrong — Profits from sales of other pieces of land correctly held to have been capital accrual.

Headnote : Kopnota

It is not the law that, where a company has among its objects both dealing and holding (of assets), a profit made on the realisation of assets will necessarily be income; the mere fact F that a company has power to sell a particular asset or all of its assets does not imply that it is part of the businesss of the company to sell that particular asset or its assets.

It is not a definitive characteristic of carrying out a scheme for profit-making in land that there should be a buying in for the purpose of a re-sale at a profit; that feature may often be present but, on the other hand, the taxpayer may find it unnecessary to buy in for purposes of re-sale; he may have at G hand such a stock-in-trade of hitherto capital assets that he does not need to buy in further stock; and to say that there must always be buying in for purposes of re-sale at a profit is effect to say that capital assets immutably remain capital assets in the hands of the acquirer.

In deciding whether a case is one of realising a capital asset or of carrying on a business or embarking upon a scheme of selling land for profit. one must think one's way through all of the particular facts of each case. Important considerations include. inter alia, the intention of the owner, both at the time of buying the land and when selling it (for his intention may have changed in the interim); the objects of the owner, if a company, the activities of the owner in relation to

1975 (4) SA p178

his land up to the time of deciding to sell it in whole or in part; the light which such activities throw on the owner's ipse dixit as to intention; where the owner sub-divides the land, the planning, extent, duration, nature, degree, organisation and marketing operations of the enterprise; and the A relationship of all this to the ordinary commercial concept of carrying on a business or embarking on a scheme for profit. Those considerations are not individually decisive and the list is not exhaustive. From the totality of the facts one enquires whether it can be said that the owner had crossed the Rubicon and gone over to the business, or embarked upon a scheme, of selling such land for profit, using the land as his stock-in-trade. Finally, one does not lose sight of the incidence of the onus of proving non-liability, imposed by section 82 of Act 58 of 1962, on the person claiming such non-liability.

B Appellant had in 1920 purchased as a going concern all the assets, movable and immovable, of a company engaged in sugar growing and milling. The land consisted of some 21 000 acres, all to the north of Durban and bound on the east by the sea. 13 000 acres were then under sugar cane. Since 1921 the appellant cane. At a very early stage land was expropriated from the C appellant and in later years there were many instances of expropriations or sales under threats of expropriations and in this way some 3 474 acres of its land were lost. One of the objects in the memorandum of the appellant was the disposal of any of the property of the appellant. In order to build up its capital reserves and expand its sugar business northwards the appellant spent time and money investigating the possibility of D acquiring cane fields. Throughout its existence the appellant acquired land for this purpose and had by 1966 acquired nearly 7 000 acres of land. Appellant was at all times aware of the possibility of portions of its land being expropriated and also the growing pressure for land suitable for residential development north of Durban. Appellant's land along the coast was particularly suitable for such purposes. During 1957 the establishment of a township on its coastal land at La Lucia was discussed by the appellant's board and up to 1962 some work in E connection with the establishment of the township was done although the appellant was reluctant to dispose of the land. In 1962 the appellant was taken over by H Ltd. and shortly thereafter H Ltd. was taken over by a consortium of companies, the h Group. Thereafter, town planners were instructed to prepare plans for the development of part of the La Lucia township and in 1963 consulting engineers and architects were appointed. Lots in the township were then sold and in 1964 a company was formed to construct homes in La Lucia. In the Umhlanga Rocks area similar development took place through F another company in the H group. Further sales of lots in the La Lucia and Umhlanga Rocks areas took place. Thereafter bulk sales of large areas of land for township development in both areas took place. Such sales were made to associated companies in the H group. Other land on the coast was also sold. The H group also envisaged plans for a city stretching northwards from La Lucia and a committee responsible for the G implementation of this plan and other plans was formed. Other land, further inland, was also sold by appellant although not much money had been spent on township development in these areas. Some of the inland land was sold after receipt of notices of expropration or because it was surplus agricultural land. Between 1965 and 1970 appellant had disposed of 4 845 acres of its coastal and inland land. The respondent had assessed to tax the profits received on certain of these transactions. In his 1965 assessment respondent had not treated as income the profits realised on certain disposals H of land during the year ended 30 April 1965 but these profits were included in an additional assessment of R548 010 issued by respondent in April 1972. Appellant's objections to the assessments between 1965 and 1970 and the additional assessment in 1972 were unsuccessful. Appellant appealed to the Special Court for Income Tax Appeals which set aside the additional assessment of 1972 and found in favour of appellant in respect of some of the profits from its land disposals and in favour of the respondent in others. In a further appeal, the appellant contended, in respect of the coastal properties, (i) that there was never a change of the original intention that all appellant's land represented a capital investment and the sale of its land was no more than a realisation of part of its capital investment; (ii) that any change of the original intention on the part

1975 (4) SA p179

of the appellant did not transmute that land from capital to stock-in-trade and that it was only when a taxpayer carried on the business of buying land for re-sale and then selling it that the land was stock-in-trade and the proceeds income; (iii) that appellant's business operations in selling the land related only to the realisation of a capital asset to the best advantage and that it was not using the land as stock-in-trade A in a profit-making business; and (iv) that certain sales of land in bulk in the coastal areas were only the realisation of capital assets and the proceeds not income. The respondent cross-appealed against the decision upholding the objection to the additional assessment, contending that section 79 (1) (a) of the Income Tax Act, 58 of 1962, which precluded the re-opening of an assessment after three years from the date of the assessment unless the Secretary was satisfied that an amount was not assessed because of fraud, misrepresentation B or non-disclosure, did not apply as the decision was unappealable in the absence of contrary indications, of which there were none. Respondent further contended that the maxim omnia praesumuntur rite esse acta applied and gave rise to the inference that respondent had applied his mind to the requirements of section 79 (1) (a), and further that section 82 of the Act cast upon appellant the burden of proving non-liability for tax. Respondent also cross-appealed against the decision upholding the objections to the assessment to tax C ...