Secretary for Inland Revenue v Rile Investments (Pty) Ltd

• Jurisdiction: South Africa
• Judge: Wessels ACJ, Muller JA, Corbett JA, Hofmeyr JA and Joubert JA
• Judgment Date: 30 May 1978
• Hearing Date: 02 May 1978
• Court: Appellate Division

Corbett JA:

This is an appeal upon a case stated in terms of s 86 of the Income Tax Act 58 of 1962 against a decision of the Special Court for hearing income tax appeals within the area of the Transvaal. The parties have consented to an appeal direct to this Court. In the Court a quo the respondent, Rile Investments (Pty) Ltd ("Rile"), appealed against the dismissal by appellant, the Secretary for Inland Revenue (the "Secretary"), of its objection to an additional assessment for the year ended 28 February 1970. The Special Court upheld Rile's objection and appeal.

Corbett JA

In this Court the Secretary seeks a reversal of the decision of the Special Court.

The dispute between the parties relates to the sale by Rile of certain A land in Pretoria owned by it to a company known as Nedbank Medical Centre Ltd ("NMC") on 19 September 1969 for the sum of R300 000. The profit made by Rile upon this transaction was assessed to amount to R185 240 and in the additional assessment previously referred to the Secretary included this sum in Rile's income for the 1970 tax year on the ground that it represented a revenue accrual. Rile's contention, which was accepted by B the Special Court, was broadly to the effect that at the time of the sale to NMC the land constituted a capital asset and that this transaction did not result in a revenue accrual.

Where the question at issue is whether or not a profit made on the sale of land constitutes an accrual of income, important, and often decisive, C considerations are, inter alia, the intention of the taxpayer (owner) when he first acquired the land and when he sold it, his activities in relation to the land up to the time of deciding to sell it and the light which such activities may throw on the taxpayer's ipse dixit as to intention (Natal Estates Ltd v Secretary for Inland Revenue1975 (4) SA 177 (A) D at 202H). Where the taxpayer concerned is a company, which can only think and act through the medium of living beings, then, depending on the circumstances, evidence of the state of mind of intention of the persons in effective control of the company may provide an important indication as to the intention of the company itself in relation to the matters in issue (Secretary for Inland Revenue v Trust Bank of Africa Ltd E 1975 (2) SA 652 (A) at 669). Moreover, account must be taken of changes in shareholding which cause control of the company to pass into new hands since the advent of new controllers may bring about a change in the intentions of the company (see eg Elandsheuwel Farming (Edms) Bpk v Sekretaris van Binnelandse Inkomste 1978 (1) SA 101 (A)). Another F consideration of some importance in the case of a taxpayer which is a company is the objects of the company as formulated in its memorandum of association, although the well-known practice in South Africa of framing objects in very wide terms may, in a particular case, reduce the significance of this factor (Natal Estates case supra at 197F - H).

In the present case there were a number of changes in the control of Rile G and, with the above-stated principles in mind, it is necessary to trace the more important of these and at the same time to examine at the relevant stages the evidence as to the intentions of the company as revealed by those in control thereof and by the actual activities of the company, seen in the light of the company's objects.

H The pertinent facts, as set forth in the stated case, may be summarized as follows:

(1) Rile was incorporated on 8 July 1964 with an authorised share capital of R1 000 divided into 1 000 shares of R1 each. At all material times all those shares were issued and were fully paid. The promoters and initial shareholders (and presumably directors) of Rile were Messrs L A van Breukelen and K Breebart. They were both building contractors and formed Rile to carry on the business of retailers and wholesalers of various commodities. This is reflected in the first two paragraphs of the company's

Corbett JA

objects clause. No such business was, however, ever carried on by Rile.

(2) At some time between the date of its incorporation and 28 February 1965 Rile acquired two adjacent erven, described as portion A of erf 49 A and the remainder of erf 49, Trevenna (also described as erf 49A and erf 49R), situated on the corner of Trevenna and Welkom Streets, Pretoria, at a cost of R32 740. On one of these erven was an old house which was let during 1965 to a furniture shop for use as a place for the storage of goods and this yielded income to the company by way of rental in an amount B of R200 during the 1966 tax year. During the years in question Rile earned no other income and the house was demolished during 1967. The company's administrative expenses were capitalised and added to the cost of its landed property from year to year.

(3) On 29 March 1965 the total issued share capital of Rile was acquired C by a company known as Helrob Investments (Pty) Ltd ("Helrob"), the shares in which were controlled Messrs H W E Stauch and R Vorster, who practised in partnership as architects under the name Stauch, Vorster and Partners. According to Vorster, who gave evidence before the Special Court, Helrob acquired these shares as a long term investment.

D (4) On 26 April 1965 Stauch and Vorster incorporated Brew Properties (Pty) Ltd ("Brew") and were the first shareholders and directors of the company. Shortly thereafter, however, ie on 6 May 1965, and as a result of various transfers and allotments of shares, the total issued share capital of Brew (viz 100 shares) came to be held as follows: Helrob - 50 shares; Ivan Katzen and Co (Pty) Ltd ("Katzen") - 25 shares; and Clive Rogers and Co E (Pty) Ltd ("Rogers") - 25 shares. The last-mentioned two companies were controlled respectively by Messrs I M Katzen and C Rogers, both of whom were engaged in the business of building contractors in Pretoria. At about the same time Brew acquired certain erven which were adjacent to or in the vicinity of Rile's property for a total price of R143 350. Brew also obtained options to purchase a number of other erven in the vicinity.

F (5) In about August 1965 a new party became interested in Brew. He was Mr E A H F Behnsen, a financier and investor of Windhoek, South West Africa, who invested R50 000 in the company. At a meeting of the directors of Brew G held on 17 August 1965 (which Behnsen attended by invitation), it was confirmed that he would become a shareholder with a one-third participation in the company. The minutes of this meeting further record under the heading "Sunnyside Development" that after Behnsen had been shown the site for the proposed development, the policy of the company was discussed and it was agreed, inter alia, that:

H "the initial purpose of the company would be to secure all the necessary properties to ensure that the scheme could be realized. At this stage the idea was property speculation but once the properties had been secured, it might be possible also to develop the sites. However, once the properties had been secured and additional rights obtained from the municipality, a negotiable asset will have been gained to everybody's benefit."

Other matters discussed and agreed to at this meeting included what properties would be included in the development scheme, the financing thereof and the possibility of approaching the SA Mutual Life Assurance Society ("SA Mutual") for financial assistance. In evidence Vorster agreed that what was envisaged at that stage was a "partnership idea"

Corbett JA

with the SA Mutual but, if such idea was unacceptable, a sale of the properties, including Rile's property, to the SA Mutual was then contemplated.

A (6) The nature of this proposed development scheme was outlined in a document dated 11 September 1965 and entitled "Sunnyside Development for Brew Properties (Pty) Ltd". It was prepared by Messrs Stauch, Vorster and Partners. The scheme envisaged the erection of a large shopping complex on a block of land approximately 10 acres in extent, which included the properties owned by Brew as well as Rile's property and the other adjacent B properties over which options had been secured. The whole project was estimated to involve a capital outlay of over R6 million. Approaches were made successively to the SA Mutual, the SA Breweries Ltd ("SAB") and a Mr Glazer of Johannesburg with a view to one of them participating in the C scheme but in the end nothing came of these overtures.

(7) On 9 December 1965 a company known as Trevesen Properties (Pty) Ltd ("Trevesen") was incorporated. At all material times it had an issued share capital of R300 divided into 300 R1 fully paid shares. Initially these shares were held as follows: Helrob - 100 shares; Herta Ernst Investments (Pty) Ltd ("Herta"), a company controlled by Behnsen - 100 D shares; Katzen - 50 shares; and Rogers - 50 shares. Upon its incorporation Trevesen acquired certain properties in Sunnyside also in the vicinity of Rile's property.

(8) On 28 February 1966 Brew acquired the entire issued share capital in Rile and consequently Rile became a wholly-owned subsidiary of Brew. On 18 E March 1966 and as a result of certain further allotments and transfers of shares the shareholdings in Brew became the following: Helrob - 40 shares; Herta - 40 shares; Katzen - 20 shares; and Rogers - 20 shares. The issued share capital was thus increased from 100 to 120 shares.

(9) On 4 October 1966 a company known as RTB Investments (Pty) Ltd ("RTB") F - RTB being derived from the first letters of the names Rile, Trevesen and Brew - was incorporated. Until 1 April 1969 the issued share capital of RTB was R6 divided into 6 fully paid shares of R1 each. Thereupon (ie on 1 April 1969) its issued capital was increased to 10 such shares. As a result of various transfers and allotments in October/November 1966 the G shares in RTB were...