Overseas Trust Corporation Ltd v Commissioner for Inland Revenue

• Jurisdiction: South Africa
• Judge: Innes CJ, Solomon JA, De Villiers JA, Wessels JA and JER De Villiers AJA
• Judgment Date: 14 July 1926
• Citation: 1926 AD 444
• Hearing Date: 08 April 1926
• Court: Appellate Division

Innes, C.J.:

This case presents some unusual features. The appellant company was formed to take over certain interests held by Dr. Lubbert in South West Africa; and it was registered both in Cape Town and Windhoek. These interests consisted mainly of shares and debentures in mining companies in the Protectorate they included, however, some small shareholdings in mining companies in the Union. At the date of formation a number of the Protectorate companies were in liquidation, and the share capital had already been repaid. But there were further amounts due to shareholders which were in the hands of the Custodian of Enemy Property; these amounts represented for the most part dividends declared but not distributed during the war period. They also included smaller sums, being the proceeds of the realisation of surplus assets. The Custodian ultimately accounted for the money in his hands by the issue to the shareholders concerned

Innes, C.J.

of statutory certificates for the original amounts plus accumulated interest at the prescribed rate. When, therefore, the company was formed each share in the concerns under liquidation entitled the holder to an a ascertainable sum in the hands of the custodian. And yet the interests of the promoter were taken over by the Overseas Trust Corporation (in which Dr Lubbert held 9, per cent of the shares) at less than half their market value. That was a profitable arrangement for the appellant company; and the first question raised by the stated concerns its liability to be assessed for income tax on a sum of £32,628, being the excess received in respect of the liquidated shares over the amount at which they had been acquired. The second question relates to a sum of £4,354, being profits on the sale of shares effected in Germany. The company contended that both these amounts were exempt from assessment is being accruals of a capital nature, or otherwise as having, accrued from sources outside the Union.

Alternatively it was claimed that the business of the company extended outside the Union, and that it was therefore entitled to a statutory apportionment of its taxable income. The finding of the Cape Provincial Division was adverse to the appellant on all those contentions.

It would have been more satisfactory had the record included extracts from the memorandum of association showing the company's objects; also detailed particulars of the vendor's agreement and of the settlement thereunder. As the matter stands it is difficult to appreciate the true inwardness of the transaction, in the sense of understanding why the promoter was satisfied to part with his valuable interests at less than half their market price to a company, three per cent. of whose hares were in other hands. But it is unnecessary to speculate on that point, because there are sufficient facts in the stated case and in the able reasons of the President of the Special Court to warrant a decision upon the issues submitted. It is common cause that the Overseas Trust is a financial and investment company, and has carried on business as such, buying and selling shares and securities with a view to profit. The company having been formed and registered here, the special court was justified in assuming that the contract with the vendor was entered into here and the payment for his interests

Innes, C.J.

arranged here. These assumptions were not questioned in argument. And the mode of payment - whether by the issue of shares or otherwise - is, as regards the present controversy, immaterial.

The first question submitted for decision is whether the £32,623 Constituted gross income within the meaning of sec. 6 of Act 41 of 1917. If it did, then (subject to due allowance for exemption deductions and abatement) the appellant was rightly assessed in respect of it. The amount was recovered by., or accrued to, the company during the years of tax; and it would be gross income unless (a) it were a receipt or accrual of a capital nature, or (b) were derived from a source outside the Union. The character which this money would have possessed in the hands of Dr. Lubbert was discussed during the argument. But full information on that point is not before the Court. We do not know the exact circumstances surrounding the declaration of dividends before liquidation and the payment into the hands of the custorian. Nor is it...