Sampson v Commissioner of Taxes [1966] ZMHC 8 (1 May 1966)

SAMPSON v THE COMMISSIONER OF TAXES (1966) ZR 51 (HC) HIGH COURT BLAGDEN CJ MAY 1966 Flynote and Headnote [1] Revenue - Income Tax Act - Appeals. In any appeal under the Income Tax Act, 1954, the general burden of proving non-liability to income tax rests on the tax payer. [2] Evidence - Burden of proof - Taxpayer's burden under Income Tax Act, 1954. See [1] above. [3] Revenue - income tax - Taxable income - Deductions - Capital expenditure. In the absence of circumstances indicating the contrary, the purchase of shares in a company is a capital expenditure. [4] Revenue - Income tax - Taxable income - Deductions - Non - deductibility of capital expenditure. If an expenditure is of a capital nature, it is not allowable as a deduction from taxable income even though it results in the acquisition of capital of little or no monetary value. [5] Revenue - Income tax - Taxable income - Capital expenditure - Test for. If an expenditure produces an asset or at least an advantage to the permanent and enduring benefit of a trade, it is a capital (and not a revenue) expenditure. [6] Revenue - Income tax - Taxable income - Deductions - Payment wholly and exclusively for taxpayer's trade. In the absence of other motives, a payment made to preserve the good name of a taxpayer's trade is a payment wholly and exclusively incurred for the purposes of his trade. Cases cited: (1) Scammell & Nephew Ltd v Rowles [1939] 1 All ER 337. (2) Golden v Gt Bldr Pty Gold Mines Ltd [1952] 1 All ER 360. (3) Morgan v Tate & Lyle Ltd [1954] 2 All ER 413. (4) British Insulated & Helsby Cables Ltd v Atherton [1926] AC 205. (5) B P Aust Ltd v Commr of Tax [1965] 3 All ER 209. (6) Income Tax Case No.727 (1951), 18 S. A. T. C. 91. Statute construed: Income Tax Act (1954), ss. 13 (1), 13 (2) (a), 56, 59. Fleming, for the appellant Cook, for the respondent 1966 ZR p52 BLAGDEN CJ Judgment Blagden CJ: In delivering this judgment I am instructed to say that my brother, Dennison, J, agrees with the conclusions to which I have come. This is an appeal by a taxpayer and a cross - appeal by the Commissioner of Taxes against a decision of the Income Tax Special Court dated 4th February, 1963, pursuant to the provisions of s. 59 of the Income Tax Act, 1954. The appeals relate to the interpretation and application, in the particular circumstances of the case, of the provisions of s. 13 (1) and (2) (a) of the Act. Omitting words which are not relevant in the circumstances here, these provisions are in the following terms: ' 13. (1) For the purpose of determining the taxable income of any person, there shall be deducted from the income of such person the amounts set out in this section. (2) The deductions shall be - (a) expenditure . . . (not being expenditure . . . of a capital nature) wholly and exclusively incurred by the taxpayer for the purposes of his trade . . .' [1] [2] As in any appeal under the Act, the general burden of proving non-liability to income tax rests on the taxpayer (see s. 56 of the Act), it is for the taxpayer, who relies on the provisions which I have just quoted, to satisfy the court in respect of any expenditure which he claims should be deducted from his income in the assessment of the taxable portion of it that - (1) such expenditure is not of a capital nature; and such expenditure was incurred wholly and exclusively for the purpose of the taxpayer's (2) trade. The facts of this case, insofar as they are relevant to the present appeals, may be shortly stated. The appellant taxpayer, Mr Sampson (whom I shall continue to refer to as 'the appellant'), is an accountant and during the years 1955 to 1959 he had as his client a lady, whom I shall continue to refer to in this judgment as 'the widow', as this was how she was referred to in the judgment of the learned President of the Special Court, against whose decision this appeal is brought. In 1955 the appellant became interested in the possibilities of electronic accounting and during that year he formed a company, which I shall refer to as the 'A' Company, to further his schemes. He interested his client, the widow, in this company and on his advice she invested the sum of £3,000 in the company and was allotted 3,000 £1 shares. In 1957 the appellant formed a second company, which I shall refer to as the 'B' Company, also with the object of carrying on electronic accounting, but in a different town. Again, acting on the appellant's advice, the widow made available the sum of £1,750 for investment in the 'B' Company, but in the case of this company no shares were ever actually allotted to her. 1966 ZR p53 BLAGDEN CJ Early in 1958 it became apparent that the appellant's endeavours in the field of electronic accounting would be a failure. The widow became very concerned about the appellant's administration of her funds. She sought advice elsewhere and subsequently negotiations took place between them to see by what means the widow's losses in the appellant's ventures could be minimised. The outcome of these negotiations was an agreement dated 19th October, 1959, the parties to which were the widow (described as 'the vendor'), the appellant (described as 'the purchaser'), and the appellant's wife (described as Mrs Sampson). The agreement commenced by reciting the circumstances under which the 'A' Company was formed, and recorded that of the issued share capital of 6,501 shares of £1 value, 3,500 were issued and allotted to the purchaser, one share to Mrs Sampson, and the remaining 3,000 shares to the vendor - that is, the widow. It continued by reciting that the vendor, in or about the year 1957, had invested the sum of £1,750 in the 'B' Company, and recorded that this company was struck off the Register of Companies on or about the 2nd April, 1959. The agreement then went on to recite that the purchaser had undertaken to repay the said sum of £1,750 to the vendor, and after some further provisions regarding the assignment of a life policy as collateral security, recorded that the purchaser had agreed to purchase from the vendor her 3,000 shares in the 'A' Company. Following upon these recitals came the terms and conditions of the agreement, set out in numbered paragraphs. The first two of these paragraphs are the important ones and they are substantially in the following terms: ' 1. The Vendor will sell and the Purchaser will buy all those 3,000 shares of £1 each fully paid, of and in the capital of the said Richard Sampson & Co. Ltd (the 'A' Company), for the sum of £3,000, together with the sum of £148 8s. 9d. by way of interest thereon; 2. The Purchaser shall pay to the Vendor the sum of £1,750, being the Vendor's investment in the said Electronic Accounting Service Ltd (the "B" Company).' There were a number of other provisions, mostly dealing with methods by which the payments were to be made, and for the purpose of this appeal there is no need for me to say more about them than that. It is to be noted that nowhere in the agreement was there any reference to the settling of any dispute, or liability, or differences between the parties, or to the making of any payment by way of compensation. On the face of it, the first of the two terms which I have recited constitutes a transaction for the sale of certain shares in one company by the widow to the appellant, and the second amounts to no more than an agreement by the appellant to make a payment to the widow of a further sum in respect of the widow's investment in another company. 1966 ZR p54 BLAGDEN CJ In furtherance of this agreement the appellant paid £600 and interest to the widow during the financial year ended 31st March, 1960, and in submitting his income tax return for that year, he claimed that that payment was an allowable deduction from his income. The Commissioner refused to allow the deduction and the appellant appealed to the Special Court. The Special Court, in its judgment, differentiated between the £3,000 to be paid to the widow for her shares in the 'A' Company, and the £1,750 to be paid to her in respect of her investment in the 'B' Company, and held, in effect, that any payments made in respect of the £1,750 were deductible in assessing taxable income, but payments made in respect of the £3,000 were not. It is the appellant's contention in this appeal that payments in respect of both the £3,000 and the £1,750 were and are properly deductible. In his cross - appeal the Commissioner contends to the contrary. As I indicated at the beginning of my judgment, the termination of this appeal rests upon the interpretation and application of the provisions of s. 13 (1) and (2) (a) of the Income Tax Act, 1954, in the circumstances which I have just related; and it is for the appellant to establish to this court's satisfaction - (a) that the expenditure of the full £4,750 and interest was not expenditure of a capital nature; and (b) that the expenditure of the full £4,750 and interest was incurred wholly and exclusively for the purpose of his trade. In the course of his judgment the learned President of the Special Court, having reviewed the circumstances under which the appellant arrived at the settlement whereby he was to pay £4,750 and a certain amount of interest to the widow, came to the conclusion that this expenditure was expenditure wholly and exclusively incurred by the taxpayer for the purposes of his trade and then went on to say, on the strength of certain authorities, such as Scammell & Nephew Ltd v Rowles [1]; Golder v Gt. Bldr. Pty. Gold Mines Ltd [2]; and Morgan v Tate & Lyle Ltd [3], that he did not think that such expenditure could properly be said to be capital expenditure. It was argued by Mr. Fleming, for the appellant, that these findings by the learned President should have concluded the matter in the appellant's favour. But the learned President then went on to say in his judgment: ' These conclusions, however, do not dispose of the appeal because it is now necessary to determine precisely the nature of the settlement reached between the appellant and the widow.' By 'settlement' he was, of course, referring to the agreement of the 19th October, 1959. 1966 ZR p55 BLAGDEN CJ He continued: ' So far as the agreement to pay £3,000 is concerned this was on the face of the agreement between the two parties the price to be paid by the appellant for the 3,000 £1 shares in the 'A' Company held by the widow. The sum was not ostensibly paid merely to settle a liability, but in order that the appellant should obtain the 3,000 shares. For the appellant it was said that in fact these shares were worthless (and this was not seriously challenged), and that, therefore, it could be said that in fact the £3,000 had been paid as nothing more than a settling sum. Income tax, however, is a technical matter, and the incidence of taxation frequently depends upon the exact manner in which a person orders his affairs.' [3] [7] We would agree with these observations. The transaction in the first term of the agreement here, both in fact and in law, was a purchase of shares, whatever the ulterior motive behind that purchase might have been. The purchase of shares in a company is a purchase of a portion of that company's capital. Expenditure on such a transaction would be expenditure of a capital nature in the absence of any circumstances indicative of the contrary. There are no such circumstances appearing in the agreement here and it is primarily to the agreement which the Court must look in order to determine the actual nature of the transaction entered into. The fact that the expenditure resulted in the acquisition of shares of very little or even no monetary value does not seem to me to alter the position. Section 13 (2) (a) introduces no criterion of value. If the expenditure is but of a capital nature it cannot rank as an allowable deduction. It is open to question whether the Court is entitled even to look at the value which the appellant got for his expenditure. This Court thus finds itself in agreement with the learned President of the Special Court that in the circumstances the £3,000 expenditure does not qualify for deduction in the computation of Mr Sampson's taxable income since it fails to pass the first test, or requirement, of s. 13 (2) (a) of the Act. By the first term of the agreement the payment of the £3,000 was to be augmented by the further sum of £148 8s. 9d. by way of interest. The deductibility or otherwise of this interest has not been argued before us, nor was it referred to in the case stated by the Special Court, but in any case it seems to me that it also would fail to qualify as a deduction since it is clearly part of the consideration for the purchase of the 3,000 £1 shares and must therefore rank as part of a payment of a capital nature. I come now to the consideration of the payment of the £1,750. The learned President of the Special Court found as a matter of fact that there was no issue of any shares in the 'B' Company to the widow but that an investment company which had been formed to control and administer her funds had made an advance of £1,750 from those funds on her behalf to some company controlled by the appellant 1966 ZR p56 BLAGDEN CJ for the ultimate purpose of investment in the 'B' Company. It was suggested in argument by Mr Russell Cook that this transaction was really nothing more than a loan by the widow to the appellant, and that all that the appellant was doing under the agreement was to repay it. But this same contention was rejected by the learned President, who held that this could not be so on any version of the facts. He said: ' I accept the appellant's evidence that the payment he made was to settle all differences between himself and the widow and that this was not a direct repayment of a loan, but the settlement of what losses the widow might claim for from the appellant, and a payment made to protect his name as an accountant.' There was ample evidence to support this finding. But, for this payment of £1,750 to be properly deductible from the appellant's income in assessing his liability to tax, it still has to be shown that it complies with two requirements: first - it must not be a payment of a capital nature; second - it must be expended wholly and exclusively for the purpose of the appellant's trade as an accountant. [5] How does one determine whether a payment is of a capital or a revenue nature? In 20 Halsbury (3rd ed.) it is said at page 161 para. 280, that: ' One test is whether the expenditure produces an asset or at least an advantage to the permanent and enduring benefit of the trade; if so, it is not an item affecting the revenue account. That test was derived from the judgment of Viscount Cave in Brit. Insulated & Helsby Cables Ltd v Atherton [4], and it has been applied in countless cases since that decision. There are other tests, but most of these are only applicable in certain circumstances. I would refer to the judgment of Lord Pearce in B. P. Aust. Ltd v Commr of Taxation [5], particularly at pages 216 and 218, where His Lordship reviews a number of cases in which courts have formulated various tests. It is unnecessary for me to pursue these, however, since I am quite satisfied that the test propounded by Lord Cave is the proper and only test which it is necessary to apply here. Applying that test I ask myself can it be said that the appellant's payment of £1,750 to the widow here procured for him an asset or an advantage to the permanent and enduring benefit of the trade? In my view the answer is emphatically no. The appellant received nothing in return for that payment. What he achieved by that payment was the preservation of his good name and that was the object of his making that payment. As to that there is substantially no dispute. Mr Russell Cook cited to us a South African case in which the Natal Income Tax Special Court came to an opposite conclusion - Income Tax Case No. 727 [6]. In that case the taxpayer had made a payment of £300 as compensation for an error which he had committed during the course of work done by him in his capacity as a 1966 ZR p57 BLAGDEN CJ consulting engineer for a corporation. De Wet, J, the President of the Court, held, on the evidence before him, that it was quite clear that what had actuated this payment was the desire of the partnership, in which the appellant worked, to preserve its good name with the Corporation. The President concluded his judgment by saying that when the taxpayer's firm decided to forego its claim against the corporation 'it did so ex gratia and for the purpose of preserving its good name'. He went on to say: ' On the cases, which I need not cite, it is quite clearly an outlay of a capital nature and is not an amount which could be deducted as an expenditure under the provisions of s. 11.' I have made search for the cases which de Wet, J decided he need not cite, but I have been unsuccessful in finding any. I am thus unable to determine the reasoning by which de Wet, J came to the conclusion that this payment of compensation was an outlay of a capital nature. I am not, however, bound by the decision in that case and, in the circumstances, I decline to follow it. As I have already indicated, the answer to the question posed by Lord Cave's test, in this appeal, seems to me to be clear beyond peradventure. [6] There remains now the second test: Was the £1,750 paid wholly and exclusively for the purpose of the appellant's trade as an accountant? Mr Russell Cook urged upon us to construe the terms 'wholly and exclusively' with strictness. A payment made to preserve good name in trade would undoubtedly be a payment made for the purposes of trade. Would it be so 'wholly and exclusively'? I have looked in the record for evidence of any other motive, and I cannot find any. There is nothing in the evidence as recorded on which we could upset the learned President's finding on this issue. It follows that, in our view, the £1,750 was properly deductible by the appellant in assessing that portion of his income which was liable to the imposition of tax. The result of our conclusions is that the appellant's appeal fails and must be dismissed and the respondent's cross - appeal also fails and must likewise be dismissed. In accordance with the provisions of the Income Tax Act, 1954, s. 58 (13) there will be no orders to costs. Appeal and cross - appeal dismissed