A (Pty) Ltd v Commissioner for the South African Revenue Service

• Jurisdiction: South Africa
• Judge: Coppin J
• Judgment Date: 13 February 2012
• Docket Number: 12644
• Court: Tax Court
• Hearing Date: 13 February 2012
• Citation: 2013 JDR 0353 (Tax)

Coppin, J:

[1]

This is an appeal in terms of the Income Tax Act, 1962 ("the Act") against the respondent's dismissal of an objection raised by the appellant to the respondent's assessment for the year 2003 in which the respondent reduced and disallowed a capital loss claimed by the appellant in respect of

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the redemption of redeemable preference shares ("preference shares"), which it held in B Ltd, by B Ltd, on the basis that the loss was a "clogged loss" contemplated in paragraph 39(1) of the Eighth Schedule of the Act.

[2]

There were essentially two main issues between the parties that were argued before us. The order in which I mention them is not in the sequence in which they were argued. [1] The first issue, which is purely one of law, relates to the interpretation of paragraph 39(1) of the Eighth Schedule of the Act ("paragraph 39(1)") and, more particularly, whether that paragraph applied to the redemption of the preference shares and accordingly rendered the appellant's capital loss, as a result of the redemption of the preference shares, a "clogged loss" [2] because of the connection between the appellant and B Ltd. [3] The second issue relates to the quantum of the appellant's capital loss and, more particularly, to the meaning of the word, "recovery" in paragraph 20(3) of the Eighth Schedule of the Act ("paragraph 20(3)") (which is a legal issue) and whether the appellant actually recovered part of the cost of purchasing the preference shares from E Bank when B Ltd redeemed them (which is a factual issue).

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[3]

Insofar as this judgment pertains to issues of law, they have been decided only by me as President of this Court. The factual issues have been decided jointly with my assessors. [4]

[4]

The parties submitted written statements of facts agreed between them, which the court received respectively as Exhibits "A" and "B". In terms of Exhibit "A" the parties agreed to the following facts:

"1.1

On 31 August 2001, B Ltd (formerly B Ltd Retail Limited) passed special resolutions approving an increase in its authorised share capital to include 2933 333 333 fixed rate compulsory convertible cumulative preference shares of 1,10 cents each and introducing a new Article 34 into its Articles of Association ('Article 34' and the 'B Ltd Articles of Association', respectively) a copy of these resolutions is in the trial bundle at 1-14. These resolutions were registered with the Registrar of Companies on the 25th of September 2001.

1.2

In October 2001, 833 333 175 redeemable preference shares were allotted and issued by B Ltd in accordance with Article 34. Of these preference shares, 830 757 065 shares ('the preference shares') were issued to a number of banks making up a so-called E Bank at a price of 18 cents per share (par value of .01 cents per share plus premium of 17.99 cents per share).

1.3

Although the date of allotment and issue of the preference shares was October 2001, as between B Ltd and the holders of the preference shares, the date of allotment and issue of such shares was treated as being 30 June 2001.

1.4

Articles 34.2 and 34.3 dealt with a dividend in respect of the preference shares.

1.5

Article 34.5 dealt with the redemption of the preference shares.

1.6

On 3 November 2003 the written agreement in the trial bundle at 41 ff was concluded by D Group and the E Bank ('the purchase agreement') inter alia for the acquisition of the preference shares.

1.7

The transaction gave effect to part of the D Group's intention to obtain the preference shares and 100% of the ordinary shares of B Ltd. The acquisition of the ordinary shares was also given effect to pursuant to the purchase agreement.

1.8

In terms of clause 1.2.40 of the purchase agreement, the 'preference shares purchase price' was defined as 'a purchase price equal to 33 cents … less

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the amount of the December 2003 dividend in respect thereof …'. As a result, the purchase price of the preference shares was an amount of R274 149 831 less the 'December 2003 dividend'.

1.9

The 'December 2003 dividend', as referred to in clause 1.2.40 of the purchase agreement was an amount of R3 738 406. This was the dividend which accrued to the holders of the preference shares in terms of Article 34.2, read with Article 34.3, in December 2003.

1.10

Pursuant to the purchase agreement, the appellant paid an amount of R274 149 831 to E Bank on 25 February 2004. Having received the 'December 2003 dividend' of R3 738 406, E Bank repaid that amount to the appellant.

1.11

The appellant contends that the 'implementation date' defined in clause 1.2.19 of the purchase agreement was on or about 5 February 2004. The respondent contends that the 'implementation date' was on 9 February 2004. However, if the appellant provides the respondent with documentation in relation to the 'implementation date', the parties are willing to agree a date.

1.12

In March 2004, B Ltd (then under the control of D Group) redeemed the preference shares in accordance with Article 34, pursuant to a resolution dated 12 March 2004 (included in the trial bundle at 161) for a total redemption price of R234 893 886 ('the redemption price'). D Group had 100% control of B Ltd and the appellant.

1.13

The parties agree that at the time of the redemption of the preference shares, there was no certificate which could be surrendered because the preference shares were dematerialised. The cancellation of the preference shares was registered through STRATE (the licensed central securities depository for the electronic settlement of financial instruments in South Africa).

1.14

B Ltd was obliged to cancel the preference shares on redemption.

1.15

Documentation relating to the cancellation of the redeemed preference shares was requested by the respondent but the appellant was unable to obtain any such documentation.

1.16

The parties agree that upon redemption of the redeemable preference shares, the par value of the redeemable preference shares, in the sum of R83 075 (being 01 cents per share i.e. one-tenth of a cent, multiplied by the number of shares redeemed), was transferred from current profits to the capital redemption reserve fund of B Ltd.

1.17

The parties agree that whether the redeemable preference shares were redeemed in terms of section 98 of the Companies Act, 61 of 1973 (as amended) ('the Companies Act') or cancelled in terms of section 85(8) of the Companies Act pursuant to an acquisition by a company of its shares in terms of section 85 of the Companies Act:

1.17.1

the accounting treatment would be the same

1.17.2

at the level of the books of account (save for the transfer of an amount equal to the aggregate of the par value of the redeemable preference shares to the capital redemption reserve fund of such company, which applies solemnly in the case of redemption) the accounting entries in the books and records of such a company would precisely be the same, viz:

1.17.2.1

reduction of issued share capital;

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1.17.2.2

reduction of share premium; and

1.17.2.3

debit to reserves or current profits to the extent that payment exceeds the sum of 1.17.2.1 and 1.17.2.2.

In its financial statements, B Ltd applied South African statement of generally accepted accounting practice AC125 which only affects how the amounts are classified on the balance sheet for financial statement purposes (see trial bundle at 201), which does not affect 1.17.2.1, 1.17.2.2 and 1.17.2.3 above).

1.17.3

The financial effect on B Ltd would be identical."

In agreeing to the contents of paragraph 1.17, appellant does not admit that the contents of that paragraph are relevant to the issues in this appeal.

1.18

Although the redemption occurred on 12 March 2004, for the purposes of calculating the redemption price the parties treated the date of redemption as 10 March 2004.

1.19

The redemption price was paid by B Ltd to appellant on 12 March 2004.

1.20

The redemption price was calculated on behalf of B Ltd in the manner reflected in the document in the trial bundle at 304 and in an amount of R234 893 886 was paid by B Ltd as the redemption price.

1.21

The total redemption price was made up as follows:

Issue price:	Par R149 536 272		R0.18 x 830	757065
Value plus original
Dividend in terms of Article 34.2 read with 34.3	R1 433 909	R0.001	72603	(rounded) x 830757065
Redemption premium in terms of Article 34.5	R83 923 705	R0.10102		(rounded) x 830757065
TOTAL	R234 893 886	R0.28275		(rounded) x 830757065

1.22

The difference between the redemption price paid by B Ltd of R234 893 886 and/or regional issue price of the preference shares of R149 536 272 is R85 357 614. This amount of R85 357 614 fell within the definition of 'dividend' in section 1 of the Income Tax Act. This amount of R85 357 614 is made up of the dividend of R1 433 909 and the redemption premium of R83 923 705 referred to in paragraph 1.2.1 above.

1.23

The expenditure incurred in acquiring the preference shares before any 'recovery' in terms of the Income Tax Act or other reduction was R270 411 425.

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1.24

The appellant does not accept that there was any recovery or reduction of the expenditure of R270 411 425, incurred by the appellant in respect of the preference shares, either in terms of any of the provisions of the Income Tax Act or at all. However, if it is held, as contended by the respondent, that the redemption premium and the dividend, referred to in paragraph 1.2.1 above, were recoveries or a reduction of the cost of the preference...