Secretary for Inland Revenue v Trust Bank of Africa Ltd

• Jurisdiction: South Africa
• Judge: Botha JA, Holmes JA, Trollip JA, Muller JA and Galgut AJA
• Judgment Date: 20 March 1975
• Citation: 1975 (2) SA 652 (A)
• Hearing Date: 03 March 1975
• Court: Appellate Division

Botha, J.A.:

This is an appeal direct to this Court on a case stated under sec. 86 of the Income Tax Act, 58 of 1962, against the decision of the Special Court constituted for hearing income tax appeals arising within the area of jurisdiction of E the Cape Provincial Division. The appeal is concerned with the taxability under the Income Tax Act, 58 of 1962, of an amount of R8 028 066 which represents the profits realised by the respondent bank upon the sale of certain shares held by it in a company known as National Fund Holdings (Pty.) Ltd.

The appellant had, for the year of assessment ended 31 December F 1969, included the above amount in the respondent's gross income for that year. Against this inclusion the respondent unsuccessfully lodged objection and appeal to the appellant on the ground that the said amount of R8 028 066 was an accrual of a capital nature and therefore excluded from "gross income", as G defined in sec. 1 of the Income Tax Act, and accordingly not subject to tax under that Act. The Special Court on appeal to it upheld the respondent's contention and ordered the appellant's assessment to be set aside and to be referred back to him for re-assessment in accordance with that Court's judgment. Against that decision the appellant now appeals direct to this Court with the necessary consent of the parties.

The respondent was incorporated as a public company in 1954 and H is registered as a general bank under the Banks Act, 23 of 1965. It carries on the business of banking throughout the Republic. During its earlier years of existence and also when the shares in question were first acquired by it in 1965, the respondent was essentially a Western Cape based bank and was encountering some difficulty in establishing itself in competition with the then existing commercial banks, but it gradually extended its business activities to other parts of the Republic. In 1964 the respondent added to its activities a commercial bank division, and in 1965 it had between 50

Botha JA

and 60 branch offices established in various parts of the Republic, which, however, at that time compared unfavourably with some of the older banks.

The business of the respondent is governed by a board of five A to eleven directors which meets regularly. The day-to-day running of the respondent's business and the formulation of proposals on matters of policy for submission to the board of directors are, however, entrusted to a management committee consisting of respondent's chief executive officers. It is clear from the stated case that considerable powers in connection with the running of respondent's business were B entrusted to the management committee.

The respondent had from its inception invested certain of its surplus funds in quoted equities, as well as in Government and municipal stocks, as it was authorised to do under its memorandum of association. It is relevant to note at this stage C that before the respondent embarked upon share-dealing the matter was discussed with the Registrar of Banks who raised no objection thereto provided the investment was limited to a small amount of respondent's resources and was made in absolutely liquid assets only, such as stock exchange securities. This branch of activity was entrusted to the D respondent's investment advisory department, which also advised its clients in regard to the investment of their funds. Respondent's investment advisory department had full authority as regards the buying and selling of specific stocks and shares on behalf of the respondent. The management committee referred to above would only be consulted in matters of general investment policy. The board of directors as such was not troubled in such matters at all.

E The accounts of the respondent over the years 1964 to 1969 show that it had purchased and sold stocks and shares on a fairly substantial scale and that, in addition to an annual income in the form of dividends received, it had also made overall annual profits on the realisation of such stocks and shares. Such profits had always been returned by the respondent F as income subject to tax under the Income Tax Act.

In 1965 the respondent's management committee mainly consisted of its three chief executive officers, namely, (1) Dr. Jan Marais, who was then the managing director, but became chairman of the board of directors and chief executive officer in 1968; (2) Mr. A. P. J. Burger, the then general manager who in 1968 G became the managing director, and (3) Mr. G. R. S. Home, one of the chief executive officers in 1965 who became the general manager in 1968. Under their leadership the respondent's business activities had been diversified to such an extent that, in addition to ordinary commercial banking, the respondent had become engaged, either directly or through H subsidiary companies, in hire-purchase and other types of financing, insurance broking, estate planning, savings and investments, travel services, and so on. The respondent's object was the development of what was termed a "one-stop" service concept by which the respondent's clients could be enabled to satisfy many of their financial and other requirements within the portals of the respondent's branch offices. Although the respondent with its 50 or 60 branch offices in 1965 compared unfavourably with some of the older banks, it sought to overcome this by maintaining a mobile force of canvassers whose function it was to solicit business in parts of the country where it was not represented.

Botha JA

Shortly after the promulgation of the Unit Trusts Control Amendment Act, 65 of 1963, certain influential businessmen, who had done research into the growth fund movement, endeavoured to interest a number of powerful financial institutions in the formation of a growth fund in the Republic. Their object was to A find financial institutions willing to stake the minimum capital of R600 000 required by sec. 3 (2) (b) of the Unit Trusts Control Act, 18 of 1947, for the registration of the necessary management company. In the second half of 1964 interest in the formation of a growth fund was elicited from the Accepting Bank for Industry whose main shareholders included several powerful financial institutions. Thereafter B further financial institutions became interested in the formation of the proposed management company.

When at a meeting of the board of directors of the Accepting Bank for Industry the question of the institutions to be approached to participate as possible shareholders in the proposed management company was discussed, it was realised that C what was required was an "outlet" to the public, i. e. an organisation through which the growth fund units could be marketed to the public. It was felt that the respondent, being a "progressive" banking institution with wide, diversified interests and an active sales organisation, would be an efficient medium through which to market the units. With this D object in view the respondent was offered a 10 per cent interest in the proposed management company and the appointment as an agent for the sale of units in the proposed growth fund. Dr. Jan Marais, to whom the offer was made, stressed the point that, as the respondent had the selling network available for the sale of the units, the respondent should also be appointed as banker to the proposed growth fund. This was agreed to subject to the approval of the board of directors of the E proposed management company. Dr. Marais also pressed for a larger interest in the proposed management company and he was assured that efforts would be made to increase the 10 per cent offered.

Participation by the respondent as a shareholder in the formation of the proposed management company was considered by F Dr. Marais as a necessary and useful addition to the respondent's banking framework, and the respondent's management committee was persuaded by a consideration of the following factors to recommend to its board of directors acceptance of the offer made -

(a)

the merits of such a participation as an investment;

(b)

the banking business which it was expected would G accrue to the respondent by reason of its participation, particularly also in the Transvaal where the proposed growth fund was to be based;

(c)

the prestige value of being associated with the other participants in the fund and of being a banker to the fund;

(d)

the advantage of obtaining what was termed a "priority H agency" for the sale of the units of the proposed growth fund; and

(e)

the benefit of being able to provide clients of the respondent with another investment facility, which fitted into its "one-stop" service concept.

These factors were stressed in a memorandum prepared by Home and submitted to the respondent's board of directors in support of the management committee's recommendation that the offer made be accepted.

On 30 March 1965 the respondent's board passed a resolution "approving"

Botha JA

the acquisition by the respondent of a 10 per cent interest in the proposed management company at a total capital outlay of R60 000. There is no documentary evidence of the considerations which led to the adoption of this resolution; but it is clear A from the stated case that, in the debate which preceded the adoption of the resolution, the collateral benefits which were expected to accrue to the respondent in its banking business from such a participation, apart from the merits of such a participation as an investment, were emphasised by Dr. Marais.

On 17 June 1965 the proposed management company, Fund Advisers B Ltd., was incorporated with an authorised share capital of R1 000 000 divided into 2 000 000 shares of 50 cents each. On 4 August 1965 the respondent was allotted 120 000 shares at a cost of R60 000 and on 25 October 1965 it was allotted a further 12 000 shares for which it paid R12 600, being the...