COMMISSIONER FOR SOUTH AFRICAN REVENUE SERVICE v CAPE CONSUMERS (PTY) LTD61 SATC 91

Division: Cape Provincial DivisionJudges: VAN REENEN J, DAVIS J and VAN HEERDEN AJDate: 1 February and 23 March 1999

Income tax – Gross Income – Meaning of ‘received by or accrued to’ in the definition of ‘gross income’ in s 1 of the Income Tax Act 58 of 1962 – Whether the income upon which the Commissioner had sought to assess the taxpayer had been received by or had accrued to or in favour of the taxpayer – Taxpayer, a buy-aid organisation, obtained physical control over moneys which constituted the difference between what its members, the buyers, paid to it and what it was obliged to pay to its suppliers – From this difference a surplus was created and at the end of a financial year the taxpayer retained its operational expenses while the balance was distributed to the buyers – Taxpayer also negotiating discounts with its suppliers on behalf of buyers – From the total amount of discounts received during a particular year, together with investment income earned on behalf of the buyers, an amount was transferred annually to a buyers’ reserve fund – Whether, on the facts, taxpayer received the money for itself or on behalf of its members – Held that an examination of the taxpayer’s Memorandum and Articles of Association as well as its conduct as reflected in its accounts supported the conclusion that the amounts taxed in its hands were not for the benefit of the taxpayer – The doctrine of the disguised transaction is not a panacea for the Commissioner to ignore agreements where the parties in fact and in law intend that they must be given their legal effect – Held that the taxpayer was not entitled to the amount standing in the buyers’ reserve fund and accordingly such amount had not been received nor had it accrued to the taxpayer within the meaning of ‘gross income’ as defined in the Income Tax Act 58 of 1962 – Held that even if onus was on taxpayer to show that there was no receipt or accrual, the taxpayer had discharged the onus.

Value-added tax – Whether discounts received by taxpayer were subject to VAT – Commissioner for Inland Revenue contending that discounts received by taxpayer were subject to VAT on the basis that taxpayer had rendered services to suppliers and buyers and that its operation constituted an enterprise which received consideration for such services and which services were accordingly subject to VAT – Whether discounts granted by suppliers

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were received as a result of a supply of services or goods by the taxpayer – Held that the discounts constituted no more than a reduced purchase price gained as a result of prompt payment – Nothing was done by the taxpayer other than to pay the agreed amount to the supplier – Held that, on its own, such an arrangement did not fall within the definition of ‘services’ as defined in the Value-Added Tax Act 89 of 1991 which would subject such amounts to value-added tax.

The Income Tax Appeal

Respondent, a private company duly registered in terms of the Companies Act 61 of 1973, was established in 1955 as a buy-aid organisation which grew rapidly and had become the largest buy-aid organisation in the Western Cape.

It acted as a mutual buying organisation with the object of obtaining benefits for its buyers and accordingly, as described by the annual directors’ report, all income received belonged to the buyers and was received on their behalf and similarly all expenses incurred were so incurred on behalf of the buyers. Similarly, the buyers had authorised the company to create and add to a fund belonging to the buyers and known as the Buyers’ Reserve Fund which was administered by the company for and on behalf of the buyers.

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Respondent’s Memorandum of Association described the main business of respondent as being ‘To carry on and conduct the business of a buy-aid for and on behalf of Buyers and accordingly to assist the said Buyers to effect economies and savings in regard to the expenditure by them on their requirements.’

In essence respondent obtained discounts from suppliers on behalf of buyers who had entered into the buyer’s contract and agreed with such suppliers that it would effect payment of all such amounts due. Respondent thus assumed responsibility for the payment of the obligations incurred by buyers in respect of purchases from suppliers.

Respondent collected from the buyers the full amounts due to the suppliers without taking into account any discounts which might have been negotiated with suppliers. The amounts due to the suppliers were then paid over by respondent on behalf of the buyers. In terms of the agreement between respondent and a supplier the company was entitled to an allowance of X% of the aggregate amount provided for if payment was effected on or before the day stipulated.

After deducting the costs incurred by respondent in the performance of its functions, the balance was invested by respondent on behalf of the buyers.

Twice a year respondent in advance determined the percentages of the balance which would be paid out to the buyers.

From the total amount of discounts received during a particular year, together with the total amount of investment income earned on behalf of the buyers, an amount was transferred annually to a buyers’ reserve fund and this amount represented the undistributed portion of the total amount held on behalf of the buyers.

Clause 85bis of respondent’s Articles of Association provided the justification for the manner in which respondent dealt with such funds as this clause expressly provided that all income from discounts, collection fees, commission and income from investments was received by respondent on behalf of buyers and the balance of the clause sets out the manner in which respondent must deal with such moneys on behalf of buyers.

Respondent, for the years of assessment ended 6 July 1988 - 6 July 1993, submitted returns of income supported by appropriate financial statements.

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The Commissioner for Inland Revenue, in assessing respondent’s liability to tax, had included in its taxable income certain income received by respondent and placed into the ‘buyers reserve fund.’

The Commissioner had written to respondent to confirm that the discounts in respect of the transactions entered into by respondent on behalf of its members would not be considered to be income in the hands of respondent but that the interest, commission and administration fees received by respondent would be taxed in its hands and accordingly a percentage of its expenditure incurred in the production of such interest income would be deductible in the determination of its taxable income.

Respondent objected to the inclusion of this income but the objections were disallowed and it accordingly lodged an appeal against the relevant assessments.

The Cape Special Court for Hearing Income Tax Appeals (per Foxcroft J) found that respondent had proved that the Commissioner for Inland Revenue was not entitled to include such income in its gross income for the 1988-93 years of assessment in that this income had been earned on behalf of and for the benefit of the buyers and not for the benefit of respondent.

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The Commissioner for Inland Revenue then appealed to a Full Bench of the Cape Provincial Division of the High Court in terms of s 86A(1) of the Income Tax Act 58 of 1962.

The Commissioner for Inland Revenue contended that respondent was a trading company in which its directors, largely independent of the control of the buyers, acted in order to earn profits for shareholders. Accordingly, as ‘an ordinary trading company’ such profits should be taxed in its hands. Also, the buyers did not have a vested right in the income received by respondent nor in the amounts allocated by respondent to the buyers’ reserve fund as so long as respondent had an unfettered discretion with regard to the use and payment of its funds, the buyers could not claim to have any vested right to the amounts in question.

The dispute between the parties turned on whether the income upon which the Commissioner had sought to assess respondent to tax was received by or accrued to or in favour of respondent within the contemplation of the definition of ‘gross income’ in the Income Tax Act 58 of 1962.

The VAT appeal

Respondent had also lodged an appeal against a payment of value-added tax (VAT) of R283 252,30 which it had made when submitting its October 1995 VAT returns.

The payment of VAT had originally been made because the Commissioner for Inland Revenue considered that discounts received by respondent were subject to VAT.

Respondent requested a refund of this amount in terms of s 44(2) of the Value-Added Tax Act 89 of 1991 but the Commissioner refused to refund this amount and for that reason respondent appealed.

In the Cape Special Court for Hearing Income Tax Appeals (per Foxcroft J) the President of the Court was of the view that s 54(1) of Act 89 of 1991 was of application in the circumstances of the case and accordingly he found that the decision in the income tax appeal to which the court had come with regard to the business activities of respondent, namely that such activities were based on a relationship of agent and principal between respondent and its buyers was ‘dispositive of this appeal.’

The Commissioner for Inland Revenue then appealed to a Full Bench of the Cape Provincial Division of the High Court in terms of s 86A(1) of the Income Tax Act 58 of 1962.

The Commissioner contended that respondent had rendered services to suppliers and buyers, that its operation constituted an enterprise which received consideration for such services and which services were accordingly subject to VAT.

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The dispute was whether the discounts granted by suppliers were received as a result of a supply of services or goods by respondent.

Held

As to the Income Tax Appeal

(i) That the phrase ‘received by’ or ‘accrued to’ as it appeared in the definition of ‘gross income’ in s 1 of the Income Tax Act 58 of 1962 has been held to connote a receipt by or accrual to a taxpayer on his own behalf and for his own benefit.

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(ii) That the structure of respondent as a mutual buying organisation, including the memorandum, articles of association and the contract with buyers, all support a conclusion that respondent did not receive the income in the defined sense and the financial statements support this analysis.

(iii) That, viewed in its totality, the factual circumstances show that the income which has been subjected to tax in the hands of respondent was not received by nor did it accrue to respondent within the defined meaning and the amounts transferred to the buyers’ reserve fund were held for the benefit of the buyers.

(iv) That the respondent’s financial statements reflected that its activities were strictly in accordance with the provisions of Clause 85bis of its articles of association and for this reason it cannot be said that respondent had a legal entitlement to such income which was necessary for such amounts to have been received by or to have accrued to respondent for the purposes of the Income Tax Act.

(v) That the facts in Commissioner for Inland Revenue v Witwatersrand Association of Racing Clubs 23 SATC 380 differ markedly from those which confronted the court in the instant case; in that case there was no prior entitlement which the two charities enjoyed to certain money and, by contrast, in the instant case respondent was obliged in terms of its articles of association to credit the income earned to the buyers’ reserve fund; in terms of the legal relationships between itself and the buyers, such moneys were not for its own benefit but for the benefit of the buyers and, accordingly, there was no prior receipt or accrual within the defined meaning as was the position in the Witwatersrand Association of Racing Clubs case, supra.

(vi) That an examination of respondent’s Memorandum and Articles of Association as well as its conduct as reflected in the accounts supports the conclusion that the amount in the buyers’ reserve fund was not for the benefit of respondent.

(vii) That the doctrine of the disguised transaction is not a panacea for the Commissioner to ignore agreements where the parties in fact and in law intend that they must be given their legal effect and this is precisely what occurred in the instant case and accordingly there exists no basis to ignore such agreements.

(viii) That, accordingly, respondent was not entitled to the amount standing in the buyers’ reserve fund and accordingly such amount had not been received nor had it accrued to respondent within the meaning of ‘gross income’ as defined in s 1 of the Income Tax Act 58 of 1962.

(ix) That the decision in Commissioner for Inland Revenue v Datakor Engineering (Pty) Ltd 60 SATC 503 was that where there clearly is a fixed amount, as is the position in the present case, the onus rests upon the taxpayer to show that there has been no receipt or accrual; even if the onus were upon the taxpayer to show that there was no receipt or accrual within the meaning of the Income Tax Act, it was clear that the onus in the instant case had been discharged.

As to the VAT appeal

(x) That the factual position as between respondent, the buyers and the suppliers was such that nothing was done by respondent other than to pay the agreed

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amount to the supplier; respondent did not render services to suppliers or buyers and the discount received by respondent from the suppliers did not constitute consideration for services which would be subject to VAT; moreover, the difference between the price paid by the buyers over that paid to the suppliers and retained by respondent constituted no more than a reduced purchase price gained as a result of prompt payment.

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(xi) That, accordingly, on its own, such an arrangement did not fall within the definition of ‘services’ as defined in the Value-Added Tax Act 89 of 1991 which would subject such amounts to value-added tax.

Both appeals dismissed with the costs of two counsel.

DAVIS J:  Respondent trades as a mutual buying organisation. For the years of assessment ended 6 July 1988 to 6 July 1993 respondent submitted returns of income supported by appropriate financial statements. In assessing respondent’s liability to tax, appellant included in its taxable income certain income received by respondent and placed in to the ‘buyers reserve fund’. The respondent objected to the inclusion of this income which objections were disallowed. It accordingly lodged an appeal against the relevant assessments.

An appeal was also lodged against a payment of value-added tax (VAT) of R283 252,30 which respondent made when submitting its October 1995 VAT returns. The payment of VAT had originally been made because the Commissioner considered that discounts received by respondent were subject to VAT. Respondent requested a refund of this amount in terms of s 44(2) of the Value-Added Tax Act 89 of 1991 (VAT Act). The Commissioner refused to refund this amount and for this reason the respondent appealed.

The appeal from these decisions to the Cape Income Tax Special Court having been successful, the appellant has appealed to this court in terms of s 86A(1) of the Income Tax Act 58 of 1962.

Background

Respondent was established in 1955 as a buy-aid organisation. It grew rapidly and by the time the assessments in question had been disputed it had become the largest buy-aid organisation in the Western Cape. The report of the directors for the year ending 6 July 1993 described the activities of the company thus:

‘The company acts as a mutual buying organisation with the object of obtaining benefits for its buyers and accordingly all income received belongs to the buyers and is received on their behalf and similarly all expenses incurred are so incurred on behalf of the buyers. Similarly the buyers have authorised the company to create and add to a fund belonging to the buyers and known to the Buyers’ Reserve Fund which is administered by the company for and on behalf of the buyers.’

Clause 2 of the Memorandum of Association of respondent describes the main business of the respondent as follows:

‘To carry on and conduct the business of a buy-aid for and on behalf of Buyers and accordingly to assist the said Buyers to effect economies and savings in regard to the expenditure by them on their requirements.’

The members on behalf of whom respondent acts enter into a contract with the respondent, clause 1(a) of which provides

‘I hereby undertake to pay to the Company in accordance with the terms and conditions hereinafter set out, all amounts which the Company will disburse on my behalf in effecting payment for me and on my behalf to such suppliers who rendered services to me, or supplied goods to me and with whom the Company has contracted to

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pay on my behalf against the production to it of the vouchers duly completed by me . . .’.

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In essence respondent obtains discounts from suppliers on behalf of buyers who have entered into the buyer’s contract and agrees with such suppliers that it will effect payment of all such amounts due. Respondent thus assumes responsibility for the payment of the obligations incurred by buyers in respect of purchases from suppliers. It collects from the buyers the full amounts due to the suppliers, that is without taking into account any discounts which might have been negotiated with suppliers. The amounts due to the suppliers are then paid over by the respondent on behalf of the buyers. In terms of clause 4 of the agreement between respondent and a supplier ‘the Company shall be entitled to an allowance of % of the aggregate amount referred to in para 2 above if payment is effected on or before the day stipulated in that paragraph. The parties agree that payment of such aggregate amount less such allowance will constitute a full and final performance and discharge by the Company of its obligation undertaken in para 2 above.’ After deducting the costs incurred by the respondent in the performance of its functions, the balance is invested by respondent on behalf of the buyers. Twice a year respondent in advance determines the percentages of such balance which will be paid out to such buyers. From the total amount of discounts received during a particular year, together with the total amount of investment income earned on behalf of the buyers, an amount is transferred annually to a buyers’ reserve fund. This amount represents the undistributed portion of the total amount held on behalf of the buyers.

The justification for the manner in which respondent deals with such money is to be found in clause 85bis of the Articles of Association which provides as follows:

‘(a) All amounts which the company may receive from suppliers by way of discounts, collection fees, underwriting commission or similar charges as well as interest from investments and the company’s other miscellaneous income will be received by the company for and on behalf of its buyers subject to the condition that all amounts so received shall be utilised in the manner and devoted to the following purposes, namely–

(i) To reimburse the company for all administrative and other expenses incurred by it in the exercise of its aforementioned powers and to recompense it in respect of losses sustained by it in the fulfilment of obligations undertaken by it to suppliers or otherwise howsoever in carrying out its objects and exercising its powers in so far as the company’s own income or funds are insufficient to pay the same.

(ii) To place to the credit of the buyers’ reserve fund such portion of the said amounts as the company may determine, provided that buyers shall have the right if dissatisfied with any decision of the company in the exercise of this discretion to pass a majority resolution at any general meeting of buyers varying the decision of the company and the company shall thereupon be obliged to act in accordance with such resolution provided that not less than twenty-one (21) days written notice of the intention to propose such resolution had been given to the chairman of the company or to the general manager prior to the date of such meeting.

(iii) To allow buyers at such time or times as may be decided by the company the rebate determined in terms of paragraph (iv) below, provided, however that–

(a) rebates unclaimed after three (3) years of their determination shall revert to and vest in the buyers’ reserve fund, and

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(b) the terms and conditions of the written agreement between the buyer and the company have been complied with by the buyer.

(iv) The company shall, prior to 6th February and 6th August of each year, determine in advance and advise the buyers of the percentage of rebate for the period of six (6) months following the respective dates, which shall be allowed to buyers, subject to paragraph (iii)(b), in accordance with the arrangement for payment of the buyers’ purchases of goods from approved suppliers or in respect of services rendered to the buyer by approved suppliers; provided that the company may alter the aforementioned dates as may become necessary and that any rebate is subject to the provisions of the agreement between the buyer and the company.

(b) The buyers’ reserve fund shall be created and administered for and on behalf of buyers and shall consist of the amounts credited to it from time to time in accordance with the provisions of the last preceding sub-article.

(c) The capital and income of the buyers’ reserve fund shall be held by the company in trust for and on behalf of buyers and in the proportions determined in accordance with these articles, and the company shall have the following powers and obligations in regard thereto:

(i) To pay out of the said buyers’ reserve fund all or any amounts for which the company might become liable to pay to suppliers pursuant to obligations assumed by it under and in terms of any agreement or arrangements effected by suppliers in the exercise of its powers as hereinbefore set out.

(ii) To recoup or reimburse itself out of the said buyers’ reserve fund such portion of the expenditure incurred by it in the fulfilment of its obligations and the performance of its functions as might not be covered in any financial year by the monies received by the company during such year.

(iii) To invest the whole or any portion of the buyers’ reserve fund in such manner and upon such security as the company may think fit and to realise any such investment and to re-invest the proceeds thereof.

(iv) To distribute from the buyers’ reserve fund, amongst buyers in the proportion in which it vests in buyers in accordance with these articles, such sums as the company may think fit.

(v) To distribute to a buyer or his legal representative upon the death of such buyer the total amount vesting in the buyer as at the date of his/her death.

(vi) To distribute (subject always to the proviso contained in the second sentence of this sub-paragraph) to any buyer whose contract is cancelled, within twenty-four (24) months from the date of such cancellation, the total amount vesting in the buyer as at the date of cancellation; provided that if the contract be cancelled by reason of any default or breach by the buyer, the said amount vesting in him/her shall be forfeited and vest in

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the company as and for liquidated damages. If the company, after taking reasonable steps to locate any buyer who becomes entitled to his/her portion of the buyers’ reserve fund, is unable to establish the address of such buyer within thirty-six (36) months of his/her contract being cancelled, then such portion shall revert to and vest in the buyers’ reserve fund.

(vii) For the purpose of sub-paras (iv), (v) and (vi) above, the general manager shall certify the proportion and/or amount of the buyers’ reserve fund to which the buyer is entitled and may for this purpose estimate the proportion and/or amount on such basis as he may consider fair and reasonable and such certificate shall be final and conclusive as to the amount due by the company to the buyer.’

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This clause expressly provides that all income from discounts, collection fees, commission and income from investments is received by respondent on behalf of buyers. The balance of the clause sets out the manner in which respondent must deal with such moneys on behalf of buyers. In his evidence to the Special Court the General Manager of respondent, Mr Hugo, explained the consequences of this legal structure thus:

‘A person purchases from a certain supplier, he purchases certain goods and services, he pays the full amount by means of the voucher which is bound in a booklet like a cheque. At the end of the stated period the supplier of goods and services which we call the contractor, supplies to us a list of all the transactions made by our buyers at his premises. We then put all these purchases on account, an account for the individual buyer, the buyers to pay us as is said here, by the end of the calendar month, the last day of the month. We retain the monies for a certain period and then pay over to the suppliers whatever money is due to him minus the previously agreed upon discount.’

He then proceeded to explain the process of distribution to members of unexpended monies as follows:

‘At the end of the year we look at what amounts are our surplus and we say that this surplus belongs in totality to our buyers but we retain a certain portion for operational expenses and this is what we call a buyers’ reserve. The rest is paid out to our members in total.’

The Income Tax Appeal

The initial dispute between the parties was the subject of intense negotiations, the result of which was that the subject matter of the appeal was considerably narrowed. The Commissioner wrote to respondent on 10 November 1994 to confirm that the discounts in respect of the transactions entered into by respondent on behalf of its members would not be considered to be income in the hands of respondent. However the interest, commission and administration fees received by respondent would be taxed in the hands of respondent and accordingly a percentage of its expenditure incurred in the production of such interest income would be deductible in the determination of its taxable income. It was these amounts which had been distributed to the Buyers’ Reserve Fund.

The Special Court found that respondent had proved that the appellant was not entitled to include such income in respondent’s gross income for the years of assessment 1988-1993 in that this income had been earned on behalf of and for the benefit of the buyers and not for the benefit of respondent.

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The Commissioner’s case

On appeal Mr Viljoen, who appeared together with Mr Silke on behalf of appellant, submitted that respondent was a trading company in which its directors, largely independent of the control of the buyers, acted in order to earn profits for shareholders. Accordingly as ‘an ordinary trading company’ such profits should be taxed in its hands. The buyers did not have a vested right in the income received by respondent nor in the amounts allocated by respondent to the buyers’ reserve fund. So long as respondent had an unfettered discretion with regard to the use and payment of its funds, the buyers could not claim to have any vested right to the amounts in question.

In support of this submission Mr Viljoen referred to the Memorandum and Articles of Association of respondent and in particular to clause 1 thereof which contained a definition of buyers as being ‘those persons who have contracted with the Company on such terms and conditions as may be mutually agreed

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upon and as may be lawfully varied or altered by mutual agreement, or in terms of the provisions of any agreement with such buyers, or in terms of the provisions of the Company’s Memorandum and Articles of Association for the time being.’

Clause 6 of the terms and conditions that were attached to the Buyers’ Membership Application form provided:

‘I shall be entitled to all benefits, rights and privileges and shall be subject to all obligations in terms of the statutes of the Company which shall mutatis mutandis be deemed to be incorporated herein and form part of this contract. I further agree that upon breach of the contract I shall forfeit to the Company all my right to any monies held by it on my behalf including my share of the buyers’ reserve fund’.

Clause 8 provided that the contract shall continue for an indefinite period but subject, inter alia, to the condition that it may be cancelled by the Company on one calendar month’s notice.

Mr Viljoen submitted that these clauses were inconsistent with the view that the buyers had vested rights in the income of respondent or in the buyers’ reserve fund. In short any rights in the buyers’ reserve fund were conditional upon a buyer performing in terms of the terms and conditions of the contract. Clause 9 of the agreement provided that

‘the Company may at any time at its sole and absolute discretion amend or substitute all or any of the conditions by notice addressed to me at my domicilium citandi et executandi’.

In analysing clause 85bis of the Articles of Association Mr Viljoen drew particular attention to sub-clause (c)(vi) and (vii) which subjected payment from the buyers’ reserve fund to certain conditions. He also relied upon the financial statements in support of the submission that the picture which emerged therefrom was that of a company trading to make a profit. In the 1993 financial statements there appeared, in addition to the buyers’ reserve fund of R5 013 326, an accumulated surplus of R715 481 and that of the debtors amounting to R6 823 682 listed under current assets, R3 676 049 was owed to the respondent in respect of hire-purchase loans and R756 830 in respect of loans to buyers. Accordingly Mr Viljoen submitted that, when the total picture reflected in the financial statements was analysed, there were profits from activities which did not accord with respondent’s stated objective of carrying on and conducting the business of a buy-aid for and on behalf of buyers.

As authority for the analysis which he placed before the court, Mr Viljoen invoked the doctrine of a disguised transaction recently analysed in Erf 3183/1 Ladysmith (Pty) Ltd and Another v Commissioner

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for Inland Revenue 1996 (3) SA 942 (A) where this doctrine was employed in order to support a submission that the court was free to ‘pierce the corporate veil’ in order to analyse the true nature of the respondent’s operation and hence to determine its liability to taxation. Were the Special Court to have employed this doctrine, Mr Viljoen submitted, it would have found the respondent to have had a life of its own with its directors largely independent of the control of buyers and acting as would directors of any trading company, with the objective of obtaining a profit for the shareholders.

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Mr Viljoen correctly pointed to the inconsistency of the approach adopted in the letter of the 10 November 1996, in that were respondent to be classified as an ordinary trading company, all income derived from trade discounts afforded by suppliers and not only the income transferred to the Buyers’ Reserve Fund should have been taxed in the hands of respondent. Before the Special Court, appellant’s representative requested that, if the court agreed with the Commissioner’s argument, it should refer the matter back for assessment in terms of s 83(13)(a). Notwithstanding the judgment in Commissioner of Taxes v Ridgeway Hotel Ltd 24 SATC 616 Mr Viljoen urged that if the appeal was successful the entire question of the assessment of income received by respondent should be referred back for assessment.

The essence of the dispute

The essential dispute between the parties turned on whether the income upon which appellant had sought to assess respondent to tax was received by or accrued to or in favour of respondent within the contemplation of the definition of gross income in the Income Tax Act. The phrase ‘received by’ or ‘accrued to’ as it appears in the definition of gross income has been held to connote a receipt by or accrual to a taxpayer on his own behalf and for his own benefit. In Geldenhuys v Commissioner for Inland Revenue 1947 (3) SA 256 (C) at 266-758 Steyn J said ‘so that in the determination of a farmer’s taxable income we continue to be concerned with amounts received by or accrued to him, ie such amounts as are received by him for his own benefit. The section merely provides for two alternative methods for the determination of a farmer’s taxable income, sub-s (3)(a) providing for what is known as the ‘cash basis’ method. In terms of this latter sub-section the farmer is charged for taxable income ‘in respect of all amounts whatsoever for which livestock or produce have been disposed of by him or on his behalf’ and it seems to me clear that these words can only mean ‘disposed of, etc’ for his, the farmer’s benefit. Were it otherwise the farmer would be taxed on amounts received by him for another; and this could never have been intended by the Legislature.’ See also Secretary for Inland Revenue v Smant 1973 (1) SA 754 (A) at 764A-C and E Spiro ‘The receipts or account basis of South African income tax’ 1973 CILSA 199.

In Commissioner for Inland Revenue v Genn and Co (Pty) Ltd 1955 (3) SA 293 (A) at 301 Schreiner JA said:

‘it certainly is not every obtaining of physical control over money or money’s worth that constitutes a receipt for the purposes of these provisions. If, for instance, money is obtained and banked by someone as agent or trustee for another, the former has not received it as his income’.

Clause 85bis(a) of the Articles of Association specifically provides that all amounts which respondent receives, including interest on investments, is received for the benefit and on behalf of the buyers. Similarly articles 85bis(b) and (c) provide that the buyers’ reserve fund has been created and is administered and held for the benefit and on behalf of the buyers. As Mr Seligson who appeared together with Mr Rogers on behalf of respondent argued, respondent obtains physical control over a sum of money which is the difference

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between what the buyers pay to respondent and what the latter is obliged to pay to the supplier. From this difference, a surplus is created and at the end of a financial year respondent retains from the surplus amount operational expenses while the balance thereof is distributed to the buyers. Mr Seligson suggested that respondent acted as an agent on behalf of the buyers, a legal relationship created by respondent’s memorandum, articles of association and the buyer’s contract.

In support of this construction of the relationship between the respondent and the buyers he relied upon Raad van Toesig op die Suiwelnywerheid v Ladysmith Towerkop Ko-operatiewe Kaasfabriek 1971 (3) SA 511 (C) at 520-22, where it was held that a co-operative society may itself act as a seller of its members’ goods, though its relationship with its members may be one of agency. Whatever the merits of this construction the evidence before the court and the arguments thereon were directed to the question of whether, on the facts, respondent received the money for itself or on its behalf rather than an enquiry into agency.

The structure of respondent as a mutual buying organisation, including the memorandum, articles of association and the contract with buyers, all support a conclusion that respondent did not receive the income in the defined sense. The financial statements support this analysis. The 1993 financial statements reflect an amount available for appropriation of R15 255 853 being an excess of income over expenditure, and that from this an amount of R13 331 743 was distributed to the buyers, while the balance was transferred to the Buyers’ Reserve Fund which at 6 July 1993 stood at R5 013 326. The accumulated surplus of R715 481 on which Mr Viljoen had relied as indicative of ordinary trading activities was reflected as a profit in the balance sheet on the sale of capital asset, namely a building. As far as the question of hire purchase contracts was concerned an examination of the relevant income statement revealed that all sources of income accounted for therein (including that from such contracts) after the deduction of expenditure were available for appropriation, namely R15 255 853.

Although respondent decided upon the transfer of income to the buyers’ reserve fund, buyers were not without rights. In terms of article 85bis(a)(ii), if the buyers are dissatisfied with the decision of respondent in the exercise of its discretion to credit part of the profit to the buyers’ reserve fund, they could, by way of a majority resolution at a general meeting, vary the decision and respondent would then be obliged to act in accordance with such a resolution.

In the event that a buyer’s contract was cancelled, article 85bis(c)(vii) provides that respondent should distribute to such buyer, within twenty-four months from the date of cancellation, the total amount vesting in the buyer as his or her share of the fund as at the date of cancellation. Respondent was also empowered to distribute to a buyer or his legal representative upon his or her death the total amount vesting in the buyer as at the date of his or her death.

Viewed in its totality, the factual circumstances show that the income which has been subjected to tax in the hands of respondent was not received by nor did it accrue to respondent within the defined meaning. The amounts transferred to the buyers’ reserve fund were held for the benefit of the buyers. Whether such income vested in the individual buyers is not an issue on which a decision is necessary for the disposal of this case. Clause 85bis provides that such funds were to be held for the benefit of buyers and not for the benefit of the respondent. The financial statements reflect that respondent’s activities were strictly in accordance with the provisions of Clause 85bis. For this reason it

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cannot be said that respondent had a legal entitlement to such income which is necessary for such amounts to have been received by or to have accrued to respondent for the purposes of the Income Tax Act.

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Mr Viljoen placed reliance on Commissioner for Inland Revenue v Witwatersrand Association of Racing Clubs 1960 (3) SA 291 (A) to counter the argument that the distribution to buyers showed that respondent had not received income.

In this case the Witwatersrand Association of Racing Clubs organised a race meeting the proceeds of which were to be divided between the South African National Tuberculosis Association and the Johannesburg Coronation Founda-tion. The proceeds of the meeting amounted to £7 906 which sum, together with £269 received from donations, was divided between the two charitable bodies for whose benefit the meeting was held. In finding in favour of the Commissioner, Van Blerk JA said ‘Die assosiasie het die geld ontvang en die feit dat dit die bedoeling gehad het om dit as ’n geskenk aan die liefdadigheids- organisasie oor te betaal en dit werklik oorbetaal het is irrelevant wat betref die vraag of dit aan die assosiasie ingevolge die Inkomstebelastingwet toegeval het. As dit anders was sou enige belastingpligtige betaling van belasting kan vermy deur vooraf ’n reëling te tref om sy inkomste soos hy dit ontvang aan ander oor te maak hetsy by wyse van geskenk of andersins. Aangesien die assosiasie ’n belastingpligtige is en die profyte van die wedrenbyeenkoms wat hy ontvang het ook regtens aan hom toegeval het, was die aanslag gemaak deur die appellant geldig’ (at 298).62

The facts of the Witwatersrand Association of Racing Clubs case differ markedly from those which confront this court. In that case the taxpayer decided to organise a race meeting and to pay over the profits to two designated charities. There was no prior entitlement which the two charities enjoyed to such money. Rather the association decided that, whatever profits accrued to it, it would pay these to the charities. By contrast respondent was obliged in terms of its Articles of Association to credit the income earned to the Buyers’ Reserve Fund. In terms of the legal relationships between itself and the buyers, such monies were not for its own benefit but for the benefit of the buyers. Accordingly there was no prior receipt or accrual within the defined meaning as was the position in the Witwatersrand Association of Racing Clubs case.

The disguised transaction

Confronted with clause 85bis of the Articles of Association which expressly provides that all discounts and income from investments are received by respondent on behalf of buyers, Mr Viljoen, relying upon the doctrine of a disguised transaction as set out in Erf 3183/1 Ladysmith (Pty) Ltd (supra), submitted that the form of this provision must give way to the reality that respondent traded for its own account. In the Ladysmith case, the issue turned upon the interpretation of the definition of gross income, namely whether there had accrued to the taxpayer a right to have improvements effected on its land. The court was required to examine the nature of the legal obligation between the parties to determine whether and where the right to improvements accrued.Page 103 of 61 SATC 91

In analysing the doctrine of a disguised transaction as set out comprehensively in Commissioner for Customs and Excise v Randles, Brothers and Hudson Ltd 1941 AD 369 Hefer JA said in Ladysmith (supra) at 95364 that he had canvassed this doctrine in order

‘to reveal the fundamental flaw in a submission which tinged the entire argument for the appellants. It is to the effect that, once it was found that the parties to the present agreements actually intended to structure these arrangements in the form of a lease coupled with a sub-lease and a building contract, there is really an end to the matter because in that event effect must be given to each agreement according to its tenor. This is plainly not so. That the parties did indeed deliberately cast their arrangement in the form mentioned, must of course be accepted; that, after all, is what they had been advised to do. The real question is, however, whether they actually intended that each agreement would inter partes have effect according to its tenor. If not, effect must be given to what the transaction really is . . . Therefore, unless the appellants have shown on a preponderance

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of probability that the agreements do indeed reflect the actual intention of the parties thereto, the Commissioner’s decision cannot be disturbed’ (at 953).

In short the court examined the true nature of the various agreements in order to ascertain the nature of the rights which had accrued in terms of the agreement and their concomitant effect upon the application of para (h) of the definition of gross income.

Mr Viljoen urged that a similar approach should be adopted in analysing the activities of respondent. An examination of respondent’s Memorandum and Articles of Association as well as its conduct as reflected in the accounts supports the conclusion that the amount in the buyers’ reserve fund was not for the benefit of respondent. The evidence revealed that both respondent and the buyers intended that the relevant agreements between the parties be given effect to according to their tenor. As illustrated in the financial statements this is in fact what occurred. The doctrine of the disguised transaction is not a panacea for appellant to ignore agreements where the parties in fact and in law intend that they must be given their legal effect. This is precisely what occurred in the instant case and accordingly there exists no basis to ignore such agreements. I conclude that respondent was not entitled to the amount standing in the buyers’ reserve fund and accordingly such amount had not been received nor had it accrued to respondent within the meaning of gross income as defined in the Act.

Onus

There was a considerable debate as to the question of onus; in particular whether the Commissioner bore an onus in this case. Mr Seligson argued that, insofar as it might be relevant to the determination of the case, the onus rested on the Commissioner to prove on a balance of probabilities that there was a receipt or accrual within the meaning of the Act. He further submitted that s 82 of the Act, did not impose a burden of proof on the taxpayer in circumstances where the prime issue was whether income had been received by or accrued to in favour of a taxpayer.

For this submission he relied upon Commissioner for Inland Revenue v Butcher Brothers (Pty) Ltd 1945 AD 301 at 322 where Feetham JA said ‘the

Page 104 of 61 SATC 91

assessment in dispute, made by the Commissioner under s 7(1)(d) . . . can only be allowed to stand if some ‘amount’ accrued to or was received by the company in a tax year ended 30 June 1935 by virtue of its rights under the building clauses and lease, and it is essential that the Commissioner, in order to support his assessment, show that some amount has accrued to or been received by the company by virtue of such rights.’ It would appear that the Supreme Court of Appeal in Commissioner for Inland Revenue v Datakor Engineering (Pty) Ltd 1998 (4) SA 1050 (SCA) at 1059H-1060B66 gave the dictum of Feetham JA in Butcher Bros (supra) a somewhat narrower interpretation than that urged by Mr Seligson. The decision in the Datakor case (supra) was that where there clearly is a fixed amount, as is the position in the present case, the onus rests upon the taxpayer to show that there has been no receipt or accrual. However, even if the onus were upon the taxpayer to show that there was no receipt or accrual within the meaning of the Act, I am satisfied that the onus in the instant case has been discharged.

In the light of this finding it is unnecessary to analyse whether this court should refer the question of the taxation of the total amount of respondent’s income from its buy-aid activities including the discounts, to the Commissioner for re-assessment.

The VAT appeal

Respondent applied in terms of s 44(2) of the VAT Act for the repayment of R283 352,30 which had initially been paid in October 1995 to the Receiver of Revenue. Respondent’s tax accountant explained in a letter on behalf of respondent on 29 November 1995 that

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‘die rede hoekom die bedrag oorbetaal is, is as gevolg van instruksies van die Kommissaris van Binnelandse Inkomste . . . dat diskonto’s deur Kaapse Verbruikers ontvang, aan BTW onderhewig is. Ons stem nie hiermee saam nie. Volgens ons mening ontvang Kaapse Verbruikers die bydrae as agent. Ons versoek daarom dat die bedrae terug betaal word.’

In a further letter of 30 January 1996, respondent provided an additional reason for the repayment namely

‘Die vergoeding wat Kaapse Verbruikers vanaf leweransiers ontvang en as ’n agent aan kopers oorbetaal is volgens ons mening ’n volume korting wat beding is as gevolg van die massa aankope van kopers en is nie, soos die KBI aanvoer, ’n vergoeding vir dienste wat Kaapse Verbruikers aan die leweransiers lewer nie.’

In his judgment Foxcroft J referred to s 54(1) of the VAT Act which provides:

‘For the purposes of this Act, where an agent makes a supply of goods or services for and on behalf of any other person who is the principal or the agent, that supply shall be deemed to be made by that principal and not by that agent.’

Accordingly he found that the decision in the income tax appeal to which the court had come with regard to the business activities of respondent, namely that such activities were based on a relationship of agent and principal between appellant and its buyers, was ‘dispositive of this appeal’.

Mr Viljoen submitted that respondent rendered services to suppliers and buyers, that its operation constituted an enterprise which received consideration for such services which services were accordingly subject to VAT. In order to analyse this argument, it is necessary to examine the relevant sections of the Act.

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In terms of s 7(a) of the Value-Added Tax Act, VAT shall be levied or applied by any vendor on goods or services supplied by him on or after the commence-ment date in the course or furtherance of any enterprise carried on by him.

‘Enterprise’ is defined in s 1 of the Act as:

(a) in the case of any vendor other than a local authority, an enterprise or activity which is carried on continuously or regularly by any person in the Republic or partly in the Republic and in the course or furtherance of which goods or services are supplied to any other person for a consideration whether or not for profit, including any enterprise or activity carried on in the form of a commercial, financial, industrial, mining, farming, fishing or professional concern or any other concern of a continuing nature or in the form of an association or club;

‘Consideration’ is defined in s 1 as follows:

“Consideration”, in relation to the supply of goods or services to any person, includes any payment made or to be made (including any deposit on any returnable container and tax), whether in money or otherwise, or any act of forbearance, whether or not voluntary, in respect of, in response to, or for the inducement of, the supply of any goods or services, whether by that person or by any other person, but does not include any payment made by any person as an unconditional gift to any association not for gain (emphasis added);

‘Services’ is defined as:

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“Services”, means anything done or to be done, including the granting, assignment, cession or surrender of any right or the making available of any facility or advantage, but excluding a supply of goods, money or any stamp, form or card contemplated in para (c) of the definition of ‘goods’.

The dispute is whether the discounts granted by suppliers are received as a result of a supply of services or goods by respondent. Within the context of its activities the question arises whether the service cannot be considered as an act of forebearance in respect of or in response to the supply of any goods or services, in terms of the definition of ‘consideration’ set out above. In terms of clause 4.1 of the contract between respondent and its suppliers, ‘the Company shall be entitled to an allowance of % of the aggregate amount referred to in para 2 (the aggregate of all amounts properly entered on vouchers received by the supplier) if payment is effected on or before the day stipulated in that paragraph. The parties agree that payment of such aggregate amount less such allowance will constitute a full and final performance and discharge by the company of its obligation . . .’

Mr Viljoen submitted that there was no justification for relying solely on the terms of the written contract between respondent and the suppliers and ignoring the evidence which was before the Special Court. In particular he referred to the evidence of respondent’s accountant who said:

‘. . . die gedeelte van die kortings en rente wat nie aan kopers uitgekeer word nie maar aangewend word om die maatskappy se koste te dek, is ’n vergoeding vir die finansiële diens wat die maatskappy lewer.’

And further:

‘Soos hierbo genoem is die diens van Kaapse Verbruikers (Edms) Beperk die fasiliteer van die betaal en invordering van die skuldobligasie (koopstrokie) tussen kopers en verkopers.’

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Respondent’s accountant also explained the discount as a ‘volume korting’ which only supports a conclusion that such person’s interpretation of the facts must be treated with circumspection.

The factual position is that the buyers agree to pay respondent the full price of their purchases. The so-called discount represents the difference between the full cash price and the price which applies between respondent and the suppliers, such difference being the discount agreed to in terms of clause 4.1. For this reason the suppliers do not pay the respondent any money. Respondent’s obligation to the suppliers is discharged in full and the difference retained by it constitutes the excess of the price paid by the buyers over that paid to the suppliers. This amount constitutes no more than a reduced purchase price gained as a result of prompt payment. Nothing is done by the respondent other than to pay the agreed amount to the supplier. On its own, such an arrangement does not fall within the definition of ‘services’ as defined in the Act which would subject such amounts to Value-Added Tax.

In the result, I would dismiss both appeals with the costs of two counsel.

Van Reenen J and Van Heerden AJ concurred.

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