South African Estates and Finance Corporation Ltd v Commissioner for Inland Revenue

• Jurisdiction: South Africa
• Judgment Date: 14 January 1927
• Citation: 1927 AD 230

South African Estates and Finance Corporation Ltd Appellant v Commissioner for Inland Revenue Respondent
1927 AD 230

1927 AD p230

Citation	1927 AD 230
Court	Appellate Division, Bloemfontein - Cape Town
Judge	Innes CJ, De Villiers JA, Kotzé JA, Wessels JA and JER De Villiers AJA
Heard	October 27, 1926
Judgment	January 14, 1927

Flynote : Sleutelwoorde

Revenue — Income tax — Dividend tax — Reduction of capital of company by order of court — Return of capital to shareholders — Whether dividend distributed — Act 41 of 1917, sections 35 (1), 38 (a).

Headnote : Kopnota

Appellant company was registered in the Transvaal in 1905 with limited liability, its main object being the acquisition of land, the laying out of such land in townships and the selling of the same. In respect of shares issued there was subscribed the sum of £51,261. Certain land was bought and developed by the company, and as a result of numerous sales extending over a series of years the company accumulated a sum of £33,600, according to the balance shoot of June 30, 1922. During these years no profit was disclosed in the accounts nor was any dividend declared on June 30, 1922, the company had assets remaining consisting of unsold land valued at £14,490, the profit and loss account showing a debit balance of £1,748. As the company had decided not to purchase any additional landed property it was resolved to utilise the accumulated fund in returning to the shareholders a portion of the capital subscribed and accordingly an order of court was obtained whereby the capital of the company was reduced to £28,005 10s.; the balance subscribed amounting to £23,256 10s., being thereafter paid to the holders of shares. The Commissioner assessed the company for dividend tax for the accounting period ending 30th June, 1923, in respect of the amount distributed, and the company appealed to the Special Court against the assessment. The assessment having been upheld by the Special Court and the Transvaal Provincial Division.

Held, dismissing an appeal, that the amount distributed among the shareholders, even assuming that it was a payment out of capital was a "dividend distributed" within the meaning of section 38 of Act 41 of 1917, and that the company had rightly been held liable to pay dividend tax under section 35 of the Act . The maxim expressio unius est exclusio alterius applied. Union Government v Modder B Gold Mines Ltd. (1923 AD 29); Commissioner for Inland Revenue v Collins (1923 AD 363) applied; City and Suburban G.M and Estate Co. Ltd. v Commissioner for Inland Revenue (1923 NPD 177); Commissioner for Inland Revenue v Lydenburg Estates (1923 T.P.D. 396); Lydenburg Gold Payne Ltd. v Commissioner for Inland Revenue (1925 T.P.D. 603), followed. The decision of the Transvaal Provincial Division in South African Estates and Finance Corporation Ltd. v Commissioner for Inland Revenue, confirmed.

1927 AD p231

Case Information

Appeal from a decision of the Transvaal Provincial Division. (GREENBERG, J and VAN PITTIUS, J.)

The facts of this case appear from the reasons of DE VILLIERS, J.A.

H. Rissik, for the appellant: There has in effect been a return of the capital originally subscribed. As the object of the Act is not to, tax capital, though sec. 38 (a) may be wide enough in terms to include the amount in dispute, the Court will interpret it restrictively. The Act read as a whole makes it clear that the Legislature intended to tax dividends only. Consequently sec. 38 (2) read in its widest sense is repugnant to the spirit of the Act and leads to 6 n absurdity. See Rex v Venter (1907 T.S. 910 at pp. 915, 920). The absurdity consists in the taxing of original capital, whereas the other sections of the Act show that the Legislature intended to tax profits. See Seluka v Suskind & Salkow (1912 T.P.D. 258); Walters v Attorney-General (1913, T P.D. 545); Union Government v Mack (1917 AD 731 at pp 739, 743); Brown v Brown (1921 AD 478); Storm & Co. v Durban Municipality (19,25 AD 49); Viscountess Rhondda's Claim 1922, 2 A.C. 339 at p. 397).

It is clear from the history of income tax legislation in South Africa that the Legislature intended to tax profits only. Sec. 49 of Act 28 of 1914 defined "income" as "gains" or "profits." The Mining Taxation Act, No. 6 of 191O, dealing with the taxation of mines, also taxed profits only. The amending Act No. 24 of 1915 merely enabled smaller mines to come under the Income Tax Act . In Booysens Estates case (1918 AD 576) it was held that profits and gains of a capital nature were not profits as contemplated in the definition in the Income Tax Act of 1914, and accruals and gains of a capital nature are expressly excluded from the definition of income in Act 41 of 1917. See also Act 34 of 1916.

Though the Legislature has adopted a different method of calculating the tax, it did not intend to change its nature. The Act of 1917 puts gold mining and other companies on the same footing so far as the normal tax is concerned. The dividend tax is intended to be on the same basis.

Sec. 35 2 (a) of Act 41 of 1917 provides that of the 2/- for every pound of the taxable amount of a dividend, sixpence is to be deemed as a special war levy. The war levy is under sec. 35 (3) on profits earned, and consequently it should be assumed

1927 AD p232

that the Legislature intended that the balance of the 21- should be levied on profits only. See also sec. 36 and sec. 40, Union Government v Modderfontein, B.G.M. Ltd. (1923 AD 15 at p. 29); Commissioner for Inland Revenue v Collins (1923 AD 347 at p. 363). The ruling meaning of dividend in sec. 38 is the ordinary meaning and it is clear from the English cases that a dividend cannot be paid out of capital. Sec. 38 (a) gives an artificial meaning to undistributed profits, but does not define "dividend." A distinction is drawn in sec. 46 (I and (2) between dividend distributed and dividend deemed to have been distributed.

The title of the Act should be looked to to discover the intention of the Legislature. See Vacher & Sons v London Society of Compositors (1913, A.C. 107 at p. 128); Commissioner for Inland Revenue v Lydenburg Estates (1923 T.P.D. 390 at p. 397) and Lydenburg Gold Farms Ltd. v Commissioner for Inland Revenue (1925 T.P.D. 613).

A. Davis, K.C. (with him J. M. Murray) for the respondent: The Legislature intended to tax more than income or profit in the case of companies. If not, there was no need for a special chapter in Act 41 of 191,7 on taxation of dividends. Sec. 6 only defines income for the purpose of the normal tax. There is nothing in sec. 38 to show that the Legislature intended only to tax profits. Sec. 45 (f) renders enhancements of capital nature liable to taxation. As to Rex v Venter (supra) there is...