IN THE SUPREME COURT OF APPEAL OF SOUTH AFRICA

CASE NO:  426/2001
Reportable

SAMRIL INVESTMENTS (PTY) LTD                       APPELLANT

AND

COMMISSIONER FOR THE
SA REVENUE SERVICE                                           RESPONDENT

CORAM:  HEFER AP, SCHUTZ, STREICHER, FARLAM JJA,  LEWIS
AJA

HEARD:      6 September 2002

DELIVERED:     25 September 2002

Summary:  Income Tax -  distinction between capital accrual and revenue –
sale of building sand.

JUDGMENT

JJF HEFER

HEFER AP :
[1] The appellant is the owner of the farm Droëvlei in the Malmesbury
district. For many years the company’s income consisted solely of the proceeds
of the sale of farm products and rentals received from an associated company
for the grazing on the farm. But between January 1994 and February 1996 a
total amount of more than R2m flowed into the appellant’s coffers as a result of
an agreement entered into with Mr JH Karsten for the removal of building sand
from the farm.  R774 704 was earned in  the 1995 income tax year and was
assessed by the Receiver of Revenue as part of the company’s gross income for
that year. After an unsuccessful objection to the assessment on the ground that
the amount in question represented a capital gain the appellant appealed to the
Cape Income Tax Special Court. The appeal was dismissed and the assessment
confirmed. With the necessary leave the appellant has now appealed to this
Court.
[2] The usual test for determining the true nature of a receipt or accrual for
income tax purposes is whether it constituted a gain made by an operation of
business in carrying out a scheme for profit-making. According to the decision
of this Court in Commissioner for Inland Revenue v Pick`N Pay Employee
Share Purchase Trust 1992 (4) SA 39 (A) at 57E-G this means that the receipt
or accrual was not fortuitous but designedly sought and worked for. However,
it must  be borne in mind that profit-making is also an element of capital

accumulation. As Wessels JA said in Commissioner for Inland Revenue v Stott
1928 AD 252 at 263
“every person who invests his surplus funds in land or stock or any other asset
is entitled to realize such asset to the best advantage and to accommodate the
asset to the exigencies of the market in which he is selling. The fact that he
does so does not alter what is an investment of capital into a trade or business
for earning profits.”

Every receipt or accrual arising from the sale of a capital asset and designedly
sought for with a view to the making of a profit can therefore not be regarded
as revenue. Each case must be decided on its own facts with due regard to the
distinction between capital and the income derived from the productive use
thereof as described inter alia in Commissioner for Inland Revenue v George
Forest Timber Co Ltd  1924 AD 516 at 522-523 and taking account of all the
circumstances of the case.
[3] It must also be borne in mind that s 82 of the Income Tax Act 58 of 1962
casts the burden of proving that any amount is exempt from or not liable to tax
on the person claiming such exemption or non-liability. Thus, where the court
is not persuaded on a preponderance of probability that the income derived
from the sale of an asset is to be regarded as capital gain, it must be included in
the taxpayer’s gross income.
[4] In the present matter the respondent submits that the appellant conducted
the business of selling sand and that it did so in carrying out a scheme of profit-
making. The appellant’s contention on the other hand is that it disposed of the

right to acquire the sand on Droëvlei in a single transaction which did not
constitute the carrying on of a business. Both parties rely for their contentions
mainly on the terms of the written agreement in pursuance of which the sand
was excavated and removed. It may be mentioned in passing that Mr Karsten
approached one of the appellant’s directors, Mr Currie,  with an offer for the
removal of the sand towards the end of 1993. An oral agreement was concluded
and Karsten commenced his operations during January 1994. On 25 March
1994 the oral agreement was reduced to writing. The terms of the written
agreement relevant to the present enquiry are the following:
“2. The Seller does hereby grant to the Purchaser the right to acquire the entire
deposit of sand on the farm.
3. The Seller shall in its sole discretion decide from which areas of the farm
sand may be removed from time to time.
4.1 It is recorded that neither of the parties can estimate the extent of the
building sand deposits available. The parties are thus unable to determine the
value to be placed on the right to remove the sand. The parties have thus agreed
that the right to remove sand shall be valued by the Purchaser settling upon the
Seller for the right to remove the sand the sum of R4,00 (four rand) per cubic
metre of sand removed plus Value-Added-Tax thereon.
4.2 The consideration shall be reassessed at the option of the Seller on the first
day of January 1995 and thereafter on the first day of each and every succeeding
year.
4.3 The Purchaser shall pay in advance, prior to the commencement of removal
of sand, a deposit for 5000 (five thousand) cubic metres of sand. Immediately
the total amount of 5000 cubic metres has been removed the Purchaser shall pay
for the next quantity of 5000 cubic metres.
4.4 Payment shall be effected by bank or building society guaranteed cheques
and the Purchaser shall not be entitled to perform any work on the
abovementioned farm or remove any sand until payment has been so made.

5.3 All bulldozing, excavation, loading and transport of the sand will be at the
sole cost and expense of the Purchaser as will be the provision of the equipment
and machinery required to perform such functions.
5.4 At the conclusion of mining operations on each area comprising two
hectares, the Purchaser shall procure the immediate restoration of such area
according to the rehabilitation guidelines and programme laid down by the
Department of Mineral and Energy Affairs.”

[5] The agreement was plainly one of purchase and sale and the first
question which presents itself is whether the subject matter of the sale was sand
(as submitted by the respondent) or the right to acquire the sand on Droëvlei (as
contended for by the appellant).

Clause 2 of the agreement cannot be read in isolation; the agreement
must be construed as a whole against the background of the surrounding
circumstances. Looking first at the agreement itself one is immediately struck
by the use in clause 2 of the curious notion of a right to acquire the sand. It is
difficult to understand how the appellant could have sold the right to acquire
the sand without selling the sand itself and, if one were to ask how the
purchaser, having merely obtained the right to acquire the sand, had to set
about in order to obtain the sand itself, the answer must plainly be that all he
had to do was to take delivery by excavating and loading it as envisaged in
clause 5.3. It follows, therefore that, despite its clumsy wording, clause 2
conferred upon the purchaser the right to the sand itself. For the same reason
clause 4.1 which creates the impression that the right to remove the sand from
the farm was conferred separately from the right to acquire it, takes the matter

no further. It merely affirms the right to remove the sand which is in any event
implicit in clause 2 read with clause 5.3. Finally, to confirm that it was indeed
the sand that was purchased, one merely has to turn to clause 4.3 which
provides that the purchaser would pay in advance  for 5000 cubic metres of
sand and, immediately upon the removal of the first 5000 cubic metres, would
pay for the next quantity of 5000 cubic metres.
The evidence about what had happened before the conclusion of the
agreement points the same way. Mr Karsten was a dealer in building sand
whose only concern seems to have been to secure supplies for his business. In
his dealings before the conclusion of the oral agreement with Mr Currie he
offered to pay for the sand at what was then the ruling price in the area. Mr
Currie accepted. Both Mr Karsten and Mr Currie testified in the Special Court
but neither explained how the reference to the right to acquire the sand, which
had never come up in their discussions, found its way into the written
agreement  later prepared by the appellant’s auditors. On the facts we know of
no reason for the introduction of the concept of the sale of a right.
[6] The next question is whether the income derived from the sale of the
sand falls to be classified as a gain made by the operation of a business for
carrying out a scheme of profit-making. In this regard the President of the
Special Court said in the court’s judgment:
“What, in my view, is pivotal to the present enquiry are the provisions of sub-
clauses 4.3 and 4.4 of the written agreement in terms whereof the right to perform
mining operations and remove sand from Droëvlei was dependent upon the

payment in advance by means of bank or building society guaranteed cheques of
an amount equal to the agreed value of 5000 cubic metres of sand and that when
that quantity had been removed such right could be extended/revived only by
means of repeated similar payments. The amount of R774 704 is the equivalent of
at least 38 such payments. In my view the appellant did not dispose of the right to
remove sand from Droëvlei in a single transaction as submitted by advocate
Emslie, but the dealings between the parties, when viewed holistically and against
a commercial backdrop, had all the characteristics of the trading in sand as a
commodity in tranches of 5000 cubic metres each.”

[7] I agree that, in order to judge the true nature of the income from the sale
of the sand, the enquiry should extend to all the dealings between the parties
during the period of about two years over which the payments were received.
Viewed in this manner the multiplicity of the amounts received (cf
Modderfontein B Gold Mining Co Ltd v Commissioner for Inland Revenue
1923 AD 34 at 46; Commissioner for Inland Revenue v Lunnon 1924 AD 94 at
98), coupled with the fact that the income was generated by exploiting the
resources on what was admittedly a capital asset and was plainly designedly
sought and worked for, affords at least prima facie  evidence that it was in the
nature of revenue and not capital. The only evidence which may point the other
way is that of Mr Currie to the effect that he merely sought to improve the
company’s land by removing an unwanted subsoil layer of sand. But the
Special Court regarded his evidence in this regard as suspect. Although  I have
no doubt about Mr Currie’s honesty, his evidence relating to the reason for the
removal of the sand is not convincing. The appellant has accordingly not
discharged the onus resting on it in terms of s 82.

The appeal is dismissed with costs including the costs of two counsel.

___________________
JJF Hefer

Acting President.

Concur:

Schutz JA
Streicher JA
Farlam JA
Lewis AJA