THE SUPREME COURT OF APPEAL
OF SOUTH AFRICA

Case number : 190/04
Reportable

In the matter between :

CHIPKIN (NATAL) (PTY) LIMITED

APPELLANT

and

THE COMMISSIONER FOR THE
SA REVENUE SERVICE

RESPONDENT

CORAM :   HOWIE P, CAMERON, NUGENT, CLOETE, PONNAN JJA

HEARD :
12 MAY 2005

DELIVERED :   20 MAY 2005

Summary:   Income Tax Act, 58 of 1962 ─ recoupment by partner (in terms of s
8(4)(a)) of pro rata share (calculated in terms of s 24H(5)(b)) of
allowance (granted in terms of s 14 bis) for purchase by partnership of
aircraft, held to have occurred where partner disposed of partnership
interest.

_________________________________________________________

JUDGMENT

CLOETE JA/

CLOETE JA:

[1] On 31 March 1989 the appellant and eleven others entered into a
partnership named The Southern Cross Air Partnership. The only
disclosed partner was Air Southern Cross Management (Pty) Limited
(‘ASCM’); the others, including the appellant, were partners en
commandite.

[2] Clause 2.5 of the partnership agreement provided that ‘Each partner
shall share in the profits, losses, rights and obligations of this partnership
in accordance with his percentage interest, and in the manner provided for
in this agreement’. The appellant’s contribution to the partnership was a
cash amount, for which it acquired a 30 per cent interest in the
partnership. The appellant financed this contribution by taking out a loan
with Investec Bank Limited. ASCM acted as the manager of the
partnership and its contribution comprised its skill, management and
administration of the business and affairs of the partnership. For this it
received a 0,1 per cent interest in the partnership and, in addition,
payment of a sum of money from the other partners. The remaining nine
partners also made cash contributions to the partnership and held the
remaining 69,9 per cent interest in the partnership.

[3] The business of the partnership was to purchase a particular aircraft
and either by itself or with other persons to conduct the business of
transporting by air and for reward persons, livestock, goods or mail. In fact
the aircraft had already been purchased by ASCM but it was paid for out
of partnership funds and it accordingly became a partnership asset. The
partnership (on the same day it was formed) entered into a partnership
with BOP Air (Pty) Limited (‘the Southern-BOP partnership’). The purpose
of the Southern-BOP partnership was also to use the aircraft to conduct
air transportation business for reward and it did so.

[4] Section 14 bis of the Income Tax Act, 58 of 1962 (‘the Act’), provides
for an allowance to be deducted from ‘the income of any person’ in
respect of an aircraft acquired by such person  on or after the first day of
April 1965. The definition of ‘person’ in s 1 does not include a partnership
and a partnership is not a person at common law.

[5] Income that has accrued to partners in common is deemed to have
accrued to each of the partners individually in their proportionate shares
by s24H(5)(a), which provides as follows:
‘(a)
Where any income has in common been received by or accrued to the
members of any partnership, a portion (determined in accordance with any agreement

between such members as to the ratio in which the profits or losses of the partnership
are to be shared) of such income shall, notwithstanding anything to the contrary
contained in any law or the relevant agreement or partnership, be deemed to have
been received by or to have accrued to each such member individually on the date
upon which such income was received by or accrued to them in common.’

[6] Where income has accrued to a partner in terms of para (a) the
partner is also entitled to deduct a proportionate share of deductions and
allowances that are granted by the Act ─ thereby arriving at the partners’
taxable income ─ by s 24H(5)(b), which provides as follows:
‘(b)
Where a portion of any income is under the provisions of paragraph (a) deemed
to have been received by or to have accrued to a taxpayer, a portion (determined as
aforesaid) of any deduction or allowance which may be granted under the provisions
of this Act in the determination of the taxable income derived from such income shall
be granted in the determination of the taxpayer’s taxable income so derived.’

[7] The appellant claimed its pro rata portion of the s 14 bis allowance
during the 1989, 1990 and 1991 years of assessment. During the
appellant’s 1992 year of assessment, the appellant transferred 99,9 per
cent of its 30 per cent interest in The Southern Cross Air Partnership to
ASCM. In consideration for this disposal, Investec Bank Limited released
the appellant from the outstanding balance of the loan which the appellant

had originally taken out to finance its capital contribution to the partnership.
(The amount of the balance in fact exceeded the amount of the loan.)

[8] The Commissioner held the view that by virtue of the disposal, the
pro rata s 14 bis allowances previously claimed by the appellant were
recouped in terms of s 8(4)(a) of the Act. That section at all material times
provided, to the extent relevant, that:
‘There shall be included in a taxpayer’s income all amounts allowed to be deducted or
set off under the provisions of sections 11 to 20, inclusive … whether in the current or
any previous year of assessment which have been recovered or recouped during the
current year of assessment…’.
The Commissioner accordingly issued the appellant’s original income tax
assessment for the 1992 tax year on the basis that there had indeed been
a recoupment. The appellant’s objection was disallowed and the appeal to
the Johannesburg tax court was unsuccessful. (The judgment of the tax
court is reported as ITC 1784 in 67 SA Tax Cases 40.) Leave to appeal
directly to this court was granted by the tax court.

[9] In my judgment, the approach of the Commissioner and the
conclusion reached by the tax court are undoubtedly correct. The
appellant’s counsel stressed the distinction between the cost to a partner
of acquiring a share in the partnership and the cost to the partnership of

acquiring an asset. That distinction was made by this court in Rane
Investments Trust v Commissioner, SARS 2003 (6) SA 332 (SCA) para
35:
‘The Commissioner argued further, however, that Rane’s expenditure was in respect
of its acquisition of its partnership share, not in the acquisition of the film. That
argument loses sight of the principle that in acquiring the share, Rane was also
acquiring, as part of the business of the former partnership, a share in the film ─
already an asset. It was the expenditure on the film as an asset taken over by the new
partnership that was deductible, and not the amount of R90 000 paid to become a
partner.’
The appellant’s counsel also emphasized the distinction between the
disposal by a partner of an interest in a partnership, and the disposal by
the partners of a partnership asset. But it does not follow from these
distinctions that the appellant did not recover or recoup (as envisaged in s
8(4)(a)) a pro rata portion (calculated in terms of s 24H(5)(b)) of the
allowance deducted (under s 14 bis). The appellant made a capital
contribution to the partnership that gave it, simultaneously, a 30 per cent
share in the partnership, and an undivided share in the aircraft. The
acquisition of the share in the aircraft entitled the appellant to a share of
the s 14 bis allowance for the cost of the aircraft. Because of the
provisions of s 24H(5)(b), the acquisition of the 30 per cent interest in the

partnership determined the appellant’s share of that allowance at 30 per
cent.  When the appellant disposed of 99 per cent of its 30 per cent
interest in the partnership, it disposed of a corresponding percentage of its
undivided share in the aircraft. As Schreiner J (Maritz J concurring) said in
Whiteaway’s Estate v CIR 1938 TPD 482 at 491:
‘[E]ven when no change in the membership of the firm took place, whenever there was
a change in the proportion in which the partners were to share in the profits and losses
of the business, there was a change in their rights in the partnership assets.’
In order to make its capital contribution and acquire its 30 per cent
interest in the partnership, which gave it its share in the aircraft (and the
right to make the s 14 bis deductions), the appellant took out a loan with
Investec Bank; and in exchange for its transfer of its partnership interest
and thereby its share in the aircraft, the appellant was credited with the
amount owing on that loan (which exceeded the amount originally
borrowed). The appellant accordingly recouped the cost to it of its share in
the asset in respect of which it had made the tax deductions ─ as Howie
P said in Omnia Fertilizer Limited v Commissioner, SARS 2003 (4) SA
513 (SCA) para 17:
‘Where unpaid expenditure has been allowed as deduction from taxable income there
is not just an expenditure entry in the taxpayer’s books of account reflecting the
relevant debt. There is, in addition, an assertion by the taxpayer, accepted and acted

upon by the Commissioner, recognising the likelihood, if not the inevitability, that the
debt will be paid. That is the basis for regarding the unpaid debts as actual expenditure.
If the taxpayer later, in effect erases the debt from its books and treats the amount
concerned as available for another purpose, the questions which arise are:
(a)
whether the debt has for some reason ceased to exist and, if not,
(b)
whether the amount unpaid, but expended in the eyes of the tax law, has

nevertheless, for all practical purposes, reverted to the taxpayer’s “pocket”.’

[10] The appellant’s counsel submitted that the allowances were
recouped only when the partnership sold the aircraft in 1995.  The
foundation for that submission was that the allowances had accrued to the
partnership (when it acquired the aircraft) and not to the partners
individually (when they each acquired their proportionate shares in the
aircraft upon becoming partners) and by the same token it was only when
the partnership disposed of the aircraft that the allowances were recouped.
The argument was advanced on the basis of the following passage in the
concurring minority judgment of Trollip J in Van der Merwe v SIR 1977 (1)
SA 462 (A) at 478G-H:
‘According to the fundamental provisions of the Income Tax Act, 58 of 1962, the
“taxable amount” [now termed “taxable income”] of the new partnership was its “gross
income”, i.e., “the total amount received by or accrued to or in favour” of it during the
particular years of assessment, less the permissible deductions for expenses, and

allowable abatements and exemptions (see the definitions of the respective
expressions in sec.1 of the Act).’
The appellant’s counsel submitted with reference to this passage (and I
quote from the heads of argument):
‘The provisions of section 14 bis of the Act, which provide for the grant of the aircraft
allowances, and the provisions of section 8(4), which require any recoupment of such
allowances to be included in “gross income”, are not exceptions to this basic rule. In
other words, if the section 14 bis allowances were granted in the determination of the
“taxable income”, not of the Appellant’s own trade, but in the determination of the
“taxable income” of the Southern Cross Air Partnership, in accordance with the
“fundamental provisions” of the Act as aforementioned, then any recoupment of such
allowances must, on the same principles, be taken into account in determining the
taxable income of the Southern Cross Air Partnership. By the same token, an amount
received by the Appellant itself, i.e. an amount not received in common, cannot be
treated as a taxable recoupment of amounts expended by the partnership, and in
respect of which an allowance was granted in the determination of the partnership’s
“taxable income”.’
The appellant’s counsel went on to point out three alleged anomalies
which would arise if the approach for which it contends is not adopted.

[11] The passage quoted from Van der Merwe is not to be interpreted as
meaning that a partnership is a ‘taxpayer’ for the purposes of the Act, and
that the Act attributes to individual partners a proportionate share of the

partnership’s ‘taxable income’ (i.e. income after allowing for deductions
and allowances). That is not correct. The Act does not recognise a
partnership. It recognises only income (gross income after allowing for
tax-exempt income) that accrues to partners in common (in accounting
terms, the income of the partnership) which it attributes to them
proportionally, and it similarly attributes to the individual partners
deductions and allowances that are granted by the Act, with a resultant
‘taxable income’ of the partners individually. A partnership cannot have a
taxable income, simply because it is not a taxable entity. At the time when
Trollip JA wrote his concurring judgment in Van der Merwe, it was not
necessary to emphasize this fact as s 24H had not yet been introduced
into the Act. (The section was inserted by s 21 of Act 90 of 1988.) The
approach followed by Trollip JA is not now appropriate inasmuch as
subsection (5) of that section makes it clear that a pro rata portion of a
deduction or allowance shall be granted in the determination of an
individual partner’s taxable income derived from the partnership ─ the
entire deduction or allowance is not applied to the globular income of the
partnership, which was the approach of Trollip JA. The significance of the
difference is this. Because the partnership is not a taxpayer and regard
must therefore be had to the taxable income of each individual partner,

and because a portion of the allowance is granted in the determination of
each individual partner’s taxable income, it is possible for one partner to
recoup the amount of the allowance previously granted to such partner
even if the other partners recoup nothing.  It is to the individual partner that
a proportionate share of the allowance accrues when he becomes a
partner, and it is the partner who recoups that allowance when he
disposes of his interest.

[12] The appellant’s counsel referred to a number of sections in the Act
in support of the proposition that the expenses and losses of a partnership
business cannot be used in reduction of income derived by the partners
from another trade. That proposition is obviously correct. But it is no
justification for the further proposition advanced by counsel that
(notwithstanding the insertion of s 24H into the Act) what counsel termed
‘the taxable income of a partnership trade’ must be determined separately,
and each partner’s taxable income or tax loss is to be brought to account
by the individual partners only when the partnership’s taxable income or
tax loss for the relevant period has been determined in the partnership’s
own financial statements. Nor is there any warrant, as counsel suggested,
for reading the word ‘partnership’ into the definition of ‘gross income’ so
that that definition would (to the extent relevant to the present matter) be

understood as follows:
‘In the case of any partnership, the total amount in cash or otherwise, received by or
accrued to or in favour of such partnership … during such year or period of
assessment … including, without in any way limiting the scope of this definition, such
amounts (whether of a capital nature or not) so received or accrued as are described
hereunder, namely ─
…
(n)
any amount which in terms of any other provision of this Act is specifically
required to be included in the partnership’s income, and for the purposes of this
paragraph all amounts which in terms of subsection (4) of section eight are required to
be included in the partnership’s income shall be deemed to have been received by or
to have accrued to the partnership from a source within the Republic notwithstanding
that such amounts may have been recovered or recouped outside the Republic…’.
The fallacy of this approach is that it seeks to treat a partnership as a
taxpayer, which it manifestly is not. There is no such thing as ‘the taxable
income of a partnership trade’. Nor does the fact that the income,
deductions and allowances of the trade carried on by each partner in a
partnership must be calculated separately from that of any other trade
carried on by such partner, necessitate the approach urged on us by
counsel. Section 24H(5)(b) itself expressly provides that the deductions
and allowances may be granted in respect of the income each partner is
deemed to derive from the partnership business in terms of subsection

(5)(a). What must happen in the ordinary course is that for tax purposes at
the end of a partner’s tax year (which may not coincide with the interval
agreed on by the partners in sharing profits), the income of the partnership
will be determined; amounts exempt from tax will be deducted; each
partner’s share of the income will then be calculated; and each partner will
then be entitled to that partner’s portion of any deduction or allowance in
respect of that partner’s share to produce that partner’s taxable income
derived from the partnership. The appellant’s counsel submitted that this
approach is divorced from reality in that accounts are invariably drawn up
according to the method set out by Trollip JA in Van der Merwe. But the
point is that for the purposes of s 24H(5), the manner in which the
calculation has to be done is as set out above.

[13] It remains for me to deal with the anomalies which the appellant’s
counsel said would result from this approach.

[14] First it was submitted that the s 14 bis allowances will be recouped
twice: when the appellant sold its partnership interest and again when the
partnership sold the aircraft. The answer is that only such portion of the s
14 bis allowance as had not already been recouped by the appellant,
would be recouped by the appellant when the aircraft was sold.

[15] Second, it was submitted that the Act does not contemplate a
recoupment when an asset, in respect of which allowances have been
deducted, is still in use. The answer is that a recoupment occurs when a
taxpayer recovers what the taxpayer expended and for which the taxpayer
was allowed a deduction; and whether or not the asset is still in use, is
irrelevant.

[16] Third, it was submitted that if, at a stage when the aircraft is still
owned by the partnership, a partner is individually subject to tax on
recoupment in respect of the aircraft in view of what counsel termed ‘a
mere change in the profit sharing between the partners’, it becomes
impossible to apply the complex provisions of ss 14 bis and 8(4) on an
ongoing basis as contemplated in those sections. In the present matter
there is much to be said for the blunt comment by the court a quo that ‘the
disposal of the share in the partnership is a poorly disguised manner of
disposing, inter alia, of ownership of a share in the aircraft’. But taking the
argument of the appellant’s counsel at face value, the answer is that the
calculations are not impossible; and the fact that in a particular case
(unlike the present) it may be difficult to calculate the different
recoupments and allowances, does not detract from the fact that an

individual partner may have recouped what such partner expended.

[17] The appeal is dismissed with costs, including the costs of two
counsel.

______________
T D CLOETE
JUDGE OF APPEAL

Concur:  Howie P

Cameron JA

Nugent JA

Ponnan JA