WJ Fourie Beleggings CC v Commissioner of The South African Revenue Services

• Jurisdiction: South Africa
• Judge: Musi J
• Judgment Date: 27 September 2007
• Docket Number: A264/2006
• Court: Orange Free State Provincial Division
• Hearing Date: 06 August 2007
• Citation: 2008 JDR 1059 (O)

C.J Musi J

[1]

The appellant taxpayer, W J Fourie Beleggings CC, appeals under section 86 A(1) read with section 86 (2) (a) of the Income Tax Act 58 of 1962 (the Act), against the decision of the Free State Income Tax Special Court.

[2]

The question that falls to be decided in this appeal is whether an amount of R1292 760.00 which was paid to the appellant, during the year of assessment ending 28 February 2002,

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pursuant to a settlement agreement was a capital receipt and therefore non taxable or a revenue receipt, which is taxable.

[3]

The appellant is the lessee of the Elgro Hotel at Potchefstroom. The owner/lessor is Bultfontein Eiendomme Beleggings (Edms) Bpk. On 4 April 2001 Naschem, a division of Denel (Pty) Ltd, requested the appellant to provide accommodation and meals for students from the United Arab Emirates (UAE) who were to be trained by Naschem in South Africa. The appellant agreed. Thirty eight students were to be accommodated and supplied with meals from 1 April 2001 for 791 days. Twelve students were to stay from 1 April 2001 to 6 May 2001 (36 days); seventeen were to stay from 1 April 2001 to 30 September 2001 (183 days); eighteen were to stay from 1 April 2001 to 30 September 2001 (183 days). Meals were also to be provided for five officers from 1 April 2001 to 30 September 2001. The total value of the contract was R 8 791 913.70.

[4]

A few days after the attack on, inter alia, the twin towers in New York (United States of America) on 11 September 2001 the students left the Elgro Hotel without any rhyme or reason. The appellant viewed their conduct as a breach of

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the agreement. After the appellant threatened to sue Naschem the parties agreed to settle the matter out of court.

[5]

On 6 December 2001 they inter alia agreed to the following terms:

"1.

SKIKKINGSBETALlNG:

Naschem onderneem om 'n bedrag van R1 292 760.00 (Een miljoen twee honderd, twee en negentig duisend sewehonderd en sestig rand) BTW ingesluit aan ELGRO HOTEL, te betaal in volle en finale vereffening van alle eise, van welke aard ookal, wat ELGRO HOTEL teen (hom) mag hê, ongeag of dit spruit uit die kontraktereg, of ingevolge die Gemenereg.

2.

AFSTANDDOENING VAN REGTE:

As teenprestasie vir die betaling van bogenoemde skikkingsbedrag, onderneem ELGRO HOTEL om:

2.1

alle regte wat hy mag hê op skadevergoeding te abandoneer, en

2.2

enige hangende - of beoogde hofaksie teen NASCHEM te laat vaar."

Naschem paid the money to the appellant.

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[6]

The appellant called two witnesses viz Ms Gerber - a legal advisor and member of the executive committee of Naschem - and Mr Fourie, the sole member of the appellant.

[7]

Ms Gerber, an admitted attorney, confirmed the existence of the agreement between Naschem and the appellant. She also confirmed that the students left the Elgro Hotel without notice. After she heard about their departure from the appellant's hotel she contacted an attorney to seek legal advice. She and the attorney agreed that the best course of action would be to try and settle the matter out of court in order to save litigation costs, avoid being exposed to a claim for damages and to retain the business relationship with the appellant.

[8]

Naschem offered the appellant R600 000.00 which was rejected. The appellant proposed R 1.2 million. The proposal was accepted on condition, inter alia, that the appellant should waive its right to institute any claim against Naschem as a result of the students' actions. According to her, approximately two-thirds of the Elgro Hotel was occupied by students from the UAE. As a result, the appellant lost a lot of clients. The students also caused

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extensive damage to the rooms. She does not know how the amount that was ultimately paid was computed. Her brief was to get the appellant off their backs and to settle the matter out of court by keeping the settlement amount as low as possible. The money paid to the appellant was therefore meant as a settlement to get it off their backs and to retain the good business relationship that Naschem had with the appellant. She conceded that the 2001 contract between Naschem and the appellant had no terms in relation to renovations that had to be done to the hotel.

[9]

Mr Fourie testified that he is the sole member of the appellant. The Elgro Hotel is leased by the appellant. He confirmed the accommodation and catering contract that the appellant had with Naschem. According to him the appellant had to effect many changes to the hotel in order to secure the contract. Those changes were done prior to the tax year that is relevant to these proceedings. The appellant also employed specialist personnel to look after the dietary requirements of the students. The hotel was doing good business before the contract with Naschem. It could accommodate up to 25 conferences per week. On entering the contract with Naschem 70% of the hotel was occupied by

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the UAE students. The students occupied all the double rooms and only single rooms were available for other guests. Days after the 11 September 2001 attack in the USA the students left the hotel. There was still R4.7 million outstanding on the contract. After the students moved out they saw that the rooms in which they were staying were wrecked. The carpets were burned, the mattrasses had holes, the furniture was damaged and the walls were dirty. He estimated that the repair costs would be in the region of R1.2 million. He settled the matter to repair the rooms so that he could - as soon as possible-continue with his business. Initially he testified that he did not know how the settlement amount was computed. He later stated that the settlement amount included repair costs as well as operating, or running costs (salaries), water and lights etc. During cross examination the turnover, expenses and repair costs for the years 1998 to 2004 of the hostel was put to him. He also conceded that the appellant used approximately R1 million of the money; ± R500 000.00 to repay a loan and ±500 000.00 towards trade debts. He later - during re-examination - testified that the amount was computed as follows: R1.1 million plus vat for damages and R34 000.00 for legal fees and services rendered.

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[10]

The factual findings as well as the legal conclusions of the Court a quo were challenged by Mr Van Breda on behalf of the appellant. The nub of his argument was that the Special Court should - on the facts - have found that the amount received by the appellant was a capital receipt and not a revenue receipt. Mr Stevens on behalf of the respondent contended that the Court a quo was correct in finding that the settlement amount was a surrogatum for future profits surrendered.

[11]

The Court a quo did not actually make any credibility findings in relation to the witnesses. In the absence of any findings on demeanour and or credibility this Court is at large to make its own factual findings where necessary. See Hicklin v Secretary For Inland Revenue 1980 (1) SA 481 (AD) at 485 D-H.

[12]

In relation to Ms Gerber the Court a quo said that:

"(H)aar pogings om te probeer verduidelik dat dit die hele doel van die kontrak was kom neer op 'n oorneem van die funksie van die hof."

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This criticism of this witness is unfortunate. Ms Gerber was a party to the negotiations that led to the signing of the settlement agreement. She assisted in the drafting thereof. She also signed it as a witness. Her evidence is - the way I see it - helpful to assist the court in determining what in fact the receipt was actually for. The court must not look at the form of the agreement but its real nature. A court in determining the true character of the receipt must of necessity have regard to all the surrounding circumstances. The court may in particular also have regard to extrinsic evidence to assist it in determining the purpose and sometimes effect of the receipt or expenditure. The court should not be bound by labels that the parties attach to the compensation. It is only after the court has had regard to the full picture that it, not the witnesses, attaches a particular label to the compensation or receipt. [1] It is not always easy to discern from an agreement what a receipt was for. The tête - a - tête of the parties might then be of assistance to the court. The intention of the taxpayer or the parties is also relevant to determine what the receipt was for. The intention

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of the parties is relevant because if the facts show that the amount is prima facie of an income nature, the taxpayer may be able to provide an explanation, in person or through witnesses, to rebut the inference that the amount is of an income nature. The explanation of the events, including the intention of the parties to the transaction is therefore relevant. This evidence must be evaluated in the light of all the other objective facts and circumstances. [2]

[13]

It is clear from...