Ticktin Timbers CC v Commissioner for Inland Revenue

• Jurisdiction: South Africa

Ticktin Timbers CC v Commissioner for Inland Revenue
1999 (4) SA 939 (SCA)

1999 (4) SA p939

Citation	1999 (4) SA 939 (SCA)
Case No	443/97
Court	Supreme Court of Appeal
Judge	Hefer JA; Grosskopf JA; Marais JA; Zulman JA; Madlanga AJA
Heard	August 16, 1999
Judgment	September 10, 1999
Counsel	T S Emslie for the appellant.; O L Rogers for the respondent.

Flynote : Sleutelwoorde F

Revenue — Income tax — Deductions — Expenditure incurred in production of income — Income Tax Act 58 of 1962, ss 11(a) and 23(g) — Interest paid on capital borrowed by close corporation from its only member to finance day-to-day operations of close corporation — Whether deductible — Amount lent to CC constituting G dividends declared from reserves and net trading income of CC — No obvious need for diversion of money accruing to CC — Money could have been used to finance CC's trade — Fact that loan not needed not conclusive in deciding whether interest deductible or not but relevant in ascertaining real purpose for transaction — Reason CC borrowing back at interest from member money which it was under no obligation to part H with was to make distribution to member — Intention to increase member's income, not that of CC — Liability for interest not incurred in production of appellant's income — Even if so incurred, loan serving dual purpose, one of which having no bearing on appellant's trade — Deduction of interest accordingly also prohibited by s 23(g) of Act. I

Headnote : Kopnota

The appellant had come into being when T, the only member, had acquired the shares in a private company and converted it into a close corporation. Among the company's assets had been a substantial amount of distributable reserves, which were deemed to have been distributed to the CC. In the first entry in the loan account, the balance of the reserves after tax had been J

1999 (4) SA p940

credited to T. Thereafter the CC's net trading income for every ensuing A year was also credited to T. T's explanation for this was that, as the sole member of the CC, he was entitled to whatever dividends he wished to declare. The dividends so declared had been retained in the business as an interest-bearing loan in order to finance the day-to-day operations of the CC. The appellant B had sought to deduct interest on the capital, borrowed from its only member, from its income for the purpose of determining its taxable income during two particular years of assessment. The Full Court of a Provincial Division had held that the interest had not constituted expenditure incurred in the production of the CC's income as envisaged in s 11(a) of the Income Tax Act 58 of 1962 and that the Commissioner had correctly disallowed the deduction. On appeal,

Held, that it was quite clear that it was as a direct C result of T's actions that the CC had been compelled to exist on borrowed capital. There had been no obvious need for the diversion of the money which had accrued to it and that money could have been used to finance its trade. (Paragraph [5] at 943D - E .)

Held, further, as to T's motive for his actions, that the evidence showed that it had been agreed when T had purchased the shares D in the erstwhile company that the purchase price would not be payable immediately because the transaction had been structured as a 'loan' on which T had to pay interest. This loan was to be serviced by the CC. It was plain therefore that the whole scheme of diverting the CC's funds and making them available again in the form of an interest-bearing loan had been devised and agreed upon when T had purchased the shares and was aimed at ensuring that he would be able to pay the interest on the purchase price and possibly even the purchase price itself. (Paragraph [6] at 943E/F - G and 944B - C.) E

Held, further, that the fact that the loan had not been needed for the CC's income-producing activities was in itself not conclusive in deciding whether the interest paid on the loan was deductible but it was a very relevant factor to consider when ascertaining the real purpose for the particular transaction. The true reason why the CC had to borrow back at interest from T money which it F had had in its own coffers and had been under no obligation to part with was because it had wanted to make a distribution to T. The intention had been to increase T's income, not that of the CC. The liability for the interest had accordingly not been incurred in the production of the CC's income. Even if it had been so incurred, the loan had plainly served a dual purpose, one of which had no bearing on the CC's trade and the deduction of the interest was accordingly prohibited by s 23(g) of the Act. (Paragraphs [11], [9] G and [7] at 945G - H, B/C - C/D and 944F - G.) Appeal dismissed.

The decision in the Cape Provincial Division in Commissioner for Inland Revenue v Ticktin Timbers CC 1997 (3) SA 625 (1997 (1) JTLR 1) confirmed.

Cases Considered

Annotations

Reported cases

Commissioner for Inland Revenue v Nemojim (Pty) Ltd 1983 (4) SA 935 (A): dictum at 947A applied

Commissioner for Inland Revenue v Pick 'n Pay Wholesalers (Pty) Ltd 1987 (3) SA 453 (A): referred to

Commissioner for Inland Revenue v Standard I Bank of SA Ltd 1985 (4) SA 485 (A): dictum at 500H - J applied

Commissioner for Inland Revenue v Ticktin Timbers CC 1997 (3) SA 625 (C) (1997 (1) JTLR 1): confirmed on appeal

Natal Laeveld Boerdery (Edms) Bpk v Kommissaris van Binnelandse Inkomste 1998 (1) SA 639 (SCA) (1997 (5) JTLR 115): compared J

1999 (4) SA p941

Port Elizabeth Electric Tramway Co v A Commissioner for Inland Revenue 1936 CPD 241: dictum at 245 applied

Van Blommestein v Kommissaris van Binnelandse Inkomste 1997 (3) SA 908 (C) (1997 (1) JTLR 13): distinguished.

Statutes Considered

Statutes

The Income Tax Act 58 of 1962, ss 11(a), 23(g): see Juta's Statutes of South Africa 1998 vol 3 at 3-313, 3-350. B

Case Information

Appeal from a decision of a Full Bench in the Cape Provincial Division (Conradie J, Farlam J and Cleaver J). The facts appear from the judgment of Hefer JA.

T S Emslie for the appellant. C

O L Rogers for the respondent.

In addition to the authorities cited in the judgment of the Court, counsel for the parties referred to the following authorities:

Brookton Co-operative Society v Federal Commissioner of D Taxation 9 ATR 763

Commissioner for Inland Revenue v Elma Investments CC 58 SATC 295

Commissioner for Inland Revenue v Genn & Co Ltd 1955 E (3) SA 293 (A)

Commissioner for Inland Revenue v Guiseppe Brollo Properties (Pty) Ltd 1994 (2) SA 147 (A)

Commissioner for Inland Revenue v Malcomess Properties F (Isando) (Pty) Ltd 1991 (2) SA 27 (A)

Commissioner for Inland Revenue v Pick 'n Pay Employee Share Trust 1992 (4) SA 39 (A)

Commissioner of Taxes v Avenue Buildings (Pvt) Ltd 1963 (4) SA 954 (SR)

ITC 678 16 SATC 348

ITC 829 21 SATC 199

ITC 831 21 SATC 316

ITC 846 22 SATC 75

ITC 988 25...