Stone v Secretary for Inland Revenue

• Jurisdiction: South Africa
• Judge: Botha JA, Jansen JA, Rabie JA, Muller JA and Corbett AJA
• Judgment Date: 30 May 1974
• Citation: 1974 (3) SA 584 (A)
• Hearing Date: 14 May 1974
• Court: Appellate Division

Corbett, A.J.A.:

This is an appeal upon a case stated by the Cape Income Tax Special Court. The appellant is a shareholder in, and a

Corbett AJA

director of, a company known as S. Stone and Sons (Pty.) Ltd., which carries on business in Cape Town as a manufacturer of furniture and bedding. The appellant's main source of income is a salary which he receives from this company but, in addition, he is in receipt of certain interest and dividend accruals. In A his return of income for the year of assessment ended 28 February 1967 appellant sought to deduct an amount of R40 483 as being a loss sustained by him in the production of income. In determining appellant's liability to normal tax for the year in question the respondent disallowed this deduction and on this basis assessed appellant in respect of a taxable income of B R17 299. Appellant's objection to this disallowance was overruled and his appeal to the Special Court was dismissed. He now comes direct to this Court on appeal against the decision of the Special Court, the necessary consents thereto having been lodged with the Registrar of the Special Court.

C It appears from the stated case that the appellant was the unfortunate victim of a confidence trickster named Cecil Kasmai. They met, by chance, on a social occasion one morning in February 1966. Kasmai was reputed to be a man of means, highly thought of in the city of Cape Town, and someone who was making a lot of money in the business world, as well as on the D racecourse. In about March 1966 Kasmai visited the appellant at the latter's office and during the discussion which ensued Kasmai produced to appellant a written contract, purporting to have been signed by the Clerk of the House of Assembly, in terms of which Kasmai was accorded the right to supply furniture and carpets of considerable value to the State. E Kasmai asked the appellant for financial assistance in the purchase of the furniture and carpets and assured him that a profit would result from the implementation of the contract. He promised to repay any moneys so advanced by the appellant on or before 15 May 1966, together with a share of the profit to be F made on the furniture and carpet contract amounting to 20 per cent of the amount advanced. The appellant agreed to advance R8 000 to Kasmai on these terms and as security Kasmai pledged to appellant 5 000 shares held by him in a company known as African Underwear Holdings Ltd. On 17 March 1966 Kasmai executed a written acknowledgment of debt for the sum of R8 000

"in respect of so much money lent and advanced and actually received",

G such amount to be repaid on or before 15 May 1966. In this acknowledgment provision is made for the pledge of shares but no reference is made to appellant's right to receive portion of the profit to be derived from the contract. In fact, the acknowledgment contains a statement to the effect that the loan H is advanced by appellant "free of interest". On the same date Kasmai's wife, Mrs. Norma Kasmai, signed a deed of suretyship, binding herself as surety and co-principal debtor to and in favour of the appellant for the due fulfilment by her husband of the obligations under the acknowledgment of debt, subject to certain terms and limitations which are not presently relevant.

In pursuance of these arrangements and sometime in March 1966 appellant advanced the amount of R8 000 to Kasmai. Not having the sum available in cash, appellant borrowed this amount on overdraft

Corbett AJA

from his bank, furnishing as security for the overdraft the shares pledged to him by Kasmai. On 15 May 1966 Kasmai repaid to appellant the loan of R8 000 and also paid to him an amount of R1 600, purporting to be appellant's share of the profit derived from the furniture and carpet contract and calculated A on the basis of 20 per cent of the capital sum advanced.

Shortly thereafter, on 20 May 1966, Kasmai again approached appellant with a request for financial assistance. He once more produced a written contract purporting to have been signed by the Clerk of the House of Assembly, this time according him the right to supply numerous boiler suits to the State. Kasmai B required a loan of R20 000 which he promised to repay in October 1966, together with a share of the profit to be derived from the boiler suit contract, calculated on the basis of 20 per cent of the sum loaned. Appellant agreed verbally to do so but on this occasion no written acknowledgment of debt was executed, nor did Mrs. Kasmai bind herself as surety and C co-principal debtor. As in the case of the previous transaction, appellant, not having the sum of R20 000 available in cash, borrowed the amount from his bank, giving as security the shares pledged by Kasmai in relation to the previous transaction.

On 7 August 1966 appellant became involved in two further D transactions with Kasmai. In the first place, he advanced to Kasmai the sum of R4 000 to assist the latter in executing an order for the supply of overalls which was supposed to have been placed by one Hamlet. The agreement was again a verbal one. Kasmai promised to repay the loan in November 1966, together with a 20 per cent share of the profit to be derived E from the overall contract, calculated as in the case of the previous transactions. This time no security was furnished. In the second place, appellant and two others agreed to assist Kasmai by signing as sureties for a loan to be raised by Kasmai in the sum of R25 000. Kasmai had produced to them a document purporting to be a State contract for the supply of motor tyres F to the Government Garage and the loan was said to be required in order to implement this contract. It was agreed that the sureties would be released in November 1966 and that they would receive a share of the profit amounting to 20 per cent of the sum guaranteed.

G Again on 12 September 1966 two additional transactions were entered into between Kasmai and appellant. The first was a deed of suretyship, similar to that entered into on 7 August, whereby appellant and two others bound themselves as sureties in order to enable Kasmai to borrow money to implement an alleged contract for the sale of furniture and typewriters. It was agreed that the sureties would share in the profits to be H derived from this contract on the same basis as before. The second transaction was also a suretyship agreement whereby appellant and another guaranteed a loan of R20 000 by Kasmai from a firm known as Master Holdings in order to enable Kasmai to purchase certain shares, viz. 5 000 Messina shares, 10 000 Sunderland shares and 5 000 Suid-Oranje shares. Kasmai assured appellant and his co-surety that upon the re-sale of the shares a profit would result and

Corbett AJA

that they would share therein. By way of security for the obligations undertaken by appellant and his co-surety, Kasmai pledged to them some 20 000 Meritex shares held by him.

It subsequently transpired that in the case of each of these A transactions Kasmai perpetrated a fraud. The contracts for the supply of goods which he showed the appellant and the other parties involved were all forgeries and Kasmai's conduct was fraudulent throughout. He was charged, convicted and sentenced for these crimes. Moreover, apart from the first transaction, Kasmai failed to repay to appellant the amounts advanced on B loan and, not surprisingly, appellant did not receive any payment in respect of the share of the alleged "profits" to be made. Kasmai was subsequently declared insolvent and all these amounts proved irrecoverable. In the case of the suretyship transactions, Kasmai defaulted on the principal obligations and appellant and his co-sureties were called upon to implement C their guarantees. Their claims for recourse as against Kasmai proved valueless. Nor were they able to recover their losses from any other source, save in the case of the last-mentioned transaction where the pledged Meritex shares were sold and the sureties were able to recover portion of their losses from the proceeds. In an endeavour to obtain release from legal D liability under the three deeds of suretyship the appellant incurred legal expenses amounting to R1 901. His efforts proved unavailing.

To sum up the position, the losses suffered by the appellant by reason of these various transactions were as follows (the individual transactions being numbered for convenience of future reference):

	Transaction	Date	Amount of Loss
(1)	Loan - R20 000	20.5.66	R20 000
(2)	Loan - R4 000	7.8.66	4 000
(3)	Suretyship	7.8.66	7 333
(4)	Suretyship	12.9.66	6 667
(5)	Suretyship	12.9.66	582
(6)	Legal costs	-	1 901
			R40 483

It is stated (in the statement of case) that appellant entered into transactions (1) to (5) inclusive with a view to making a G profit and that he believed that a profit would result from each transaction. The stated case proceeds:

"While in his own mind he never regarded Kasmai as a partner of his in the transactions referred to nor in those instances where he handed over money to Kasmai as loans, the appellant nevertheless looked to Kasmai for reimbursement of the money he had supplied him and Kasmai agreed to make such reimbursement.

H The appellant did not incur the expenditure by way of investment for he was to receive no interest on his money but was looking for a share of the profits in the case of a number of transactions involved in the purchase by Kasmai of goods or shares and their subsequent resale. The money was paid and in the case of the suretyships, the obligation to pay was incurred with the intention that the money be repaid and the obligation cease within...