THE SUPREME COURT OF APPEAL
REPUBLIC OF SOUTH AFRICA

JUDGMENT

REPORTABLE
Case no:  282/07

In the matter between

ERNST BESTER TRUST

APPELLANT

and

THE COMMISSIONER SOUTH AFRICAN
REVENUE SERVICE

RESPONDENT

Coram:
HARMS ADP, NAVSA, HEHER, CACHALIA JJA and SNYDERS
AJA

Heard:
5 MAY 2008

Delivered: 26 MAY 2008

Summary: Income Tax – Act 58 of 1962 – sales of sand – capital or revenue; s
22 – trading stock deduction – when allowed – SARS practice.

Neutral citation: This judgment may be referred to as Ernst Bester Trust v
Commissioner South African Revenue Service (282/2007) [2008] ZASCA 55 (26
MAY 2008).

____________________________________________________________________
_

HEHER JA

HEHER JA:
[1] This is an appeal against a judgment of Davis J sitting in the Income Tax
Special Court, Cape Town. (The appellant will be referred to as ‘the taxpayer’ in this
judgment.) The learned judge dismissed the taxpayer’s appeal against the refusal to
sustain its objections to an assessment which treated sales of sand extracted from the
taxpayer’s farm, Klein Môrewag, during the years of assessment 2000, 2001 and 2002
as revenue rather than capital1. He also rejected an alternative submission that, in the
event that the Commissioner had properly categorised the nature of the income as
revenue, the taxpayer was entitled to an opening stock deduction in respect of trading
stock held by it at the beginning of each of the years of assessment. Both issues were
re-argued before us.
[2] The late Mr Van Zyl Bester purchased the farm in 1965. He farmed grapes and
grain on it until his death in 1989. About 1980 he was approached by representatives
of Malans Transport. They had identified a commercially attractive sand deposit on
the farm (as they also did on neighbouring properties, see Samril Investments (Pty)
Ltd v Commissioner, South African Revenue Service 2003 (1) SA 658 (SCA) and
Commissioner, South African Revenue Service v Van Blerk 2000 (2) SA 1016 (C)).
From time to time thereafter Mr Van Zyl Bester sold sand to Malans Transport or an
entity, Brickrush CC, which controlled it.
[3] The taxpayer acquired Klein Môrewag by bequest from Mr Van Zyl Bester. It

1 The amounts in question were R81 228, R433 127 and R653 391 respectively.

leased the farm to the testator’s son, Mr Ernst Bester, who pursued on it agricultural
interests similar to those previously practised. He was the only witness to testify for
either party before the tax court. He was both a trustee and beneficiary of the Trust.
[4] The taxpayer derived some income from the lease2 but a great deal more from
sales of sand, irregular though they were for some years. The circumstances which
gave rise to such transactions were described by the witness. By the time the taxpayer
acquired the farm its potential to provide income by disposal of sand was known to
the trustees. This sand did not provide a particularly productive base for viticulture
and when, not long after the taxpayer took over, Mr Ernst Bester was approached by
representatives of Brickrush to sell sand to it, he took the opportunity to re-establish
the vineyards affected by the sale on more fruitful soil elsewhere on the farm. This
practice he subsequently repeated as and when the opportunity arose.
[5] As to the substance of the agreement concluded between Mr Ernst Bester on
behalf of the taxpayer and Brickrush, the tax court was largely dependent on his say-
so. Apparently there had been in existence a written contract which was destroyed in
a fire. The witness produced an unsigned copy of an agreement the origin and date of
which was uncertain. He testified that the terms of sale were substantially as reflected
in that document and the court accepted his word.
[6] As reflected in that document the terms material to the present dispute are the
following:

2 A fixed annual rental of R72 500 during the relevant tax years.

1.
The subject of the sale (‘Koopsaak’) was defined as ‘Sand geleë op die
Terrein’. In turn, the site (‘Terrein’) was identified as ‘Die gedeelte van die
Eiendom wat aangedui is op die aangehegte kaart as ABCDE en in geel
ingekleur is’. That plan was not proved in evidence but some indication of the
probable location and extent of the site is derivable from a motivation
submitted by Brickrush in support of its successful application for a mining
licence to which reference is made below. Mr Ernst Bester identified the site
on a map of the farm on which the location of the sand deposit is also
indicated. As the surface area of the deposit far exceeds that of the site it would
seem that the rights granted to Brickrush must have been extended at some
stage after the mining licence application to which reference is made below.
The property, ‘Eiendom’, is defined in the document as the farm Klein
Môrewag, Malmesbury.
2.
‘4.
VERKOPING

4.1
Die EIENAAR verkoop hiermee aan die KONTRAKTEUR die KOOPSAAK.

4.2
Aangesien die partye nie voor die aanvang van verwydering van die KOOPSAAK
presies kan bepaal hoeveel sand op die TERREIN voorkom nie, word ooreengekom
dat die koopprys wat die KONTRAKTEUR aan die EIENAAR sal betaal vir
gemelde KOOPSAAK, gelykstaande sal wees aan die getal kubieke meters sand
verwyder vanaf gemelde gebied, vermenigvuldig met R3,50 (DRIE RAND EN
VYFTIG SENT), welke koopprys betaalbaar is in opeenvolgende maandelikse
paaiemente nie later nie as die 10de dag van elke  daarop volgende maand.
Voormelde prys per kubieke meter sal jaarliks verhoog word vanaf 1 Januarie elke

jaar met ‘n persentasie waarop onderling ooreengekom sal word.
4.3
Die KONTRAKTEUR moet op eie koste volledige rekords hou van alle sand wat
aldus deur hulle van die TERREIN verwyder word. Hierdie rekord is te alle redelike
tye vir die EIENAAR ter insae.’
3.
‘6.2
Verpligtinge van die Kontrakteur

In die uitoefening van sy regte hierin vervat sal die KONTRAKTEUR:

. . .
6.2.7 alle nie-sanddraende bogrond verwyder en eenkant plaas voordat met die
ontginning van sand in aanvang geneem word. Sodanige bogrond sal van tyd
tot tyd soos en wanneer die EIENAAR dit mag versoek deur die
KONTRAKTEUR op eie koste teruggeplaas word op sodanige gedeeltes van
die TERREIN waarvandaan sanddraende grond verwyder is en waar geen
verdere ontginning van sand gaan plaasvind nie, maar nie later as 30
(DERTIG) dae na beëindiging van hierdie ooreenkoms nie. Op dieselfde
wyse sal die KONTRAKTEUR verplig wees om by beëindiging van die
kontrak alle sodanige bogrond terug te plaas, soos hierbo beskryf;
. . .
6.2.12 die nodige toestemming van alle staats- en alle relevante liggame verkry, om
hom in staat te stel om met sy bedrywighede voort te gaan.’
4.
‘6.3
Verbod
Die EIENAAR sal nie die reg hê om gedurende die bestaan van hierdie ooreenkoms
aan enige derde party die reg te gee om sand te ontgin op die EIENDOM nie.’
5.
In terms of clause 11.1 the contractor was required to restore the site by the re-
establishment of all non-sandbearing topsoil on termination of the contract.

[7] During or about 1994 Brickrush CC applied for and obtained a mining licence
to mine sand on the farm. The supporting motivation included the following
averments:
‘Die terrein waarop die voorgestelde mynbou gaan plaasvind is ongeveer 600 meter lank en 300
meter wyd (agtien hektaar).
Die gemiddelde diepte van die ontginbare sand is 0,5 meter d.w.s. oor die totale oppervlakte van
agtien hektaar, ontginbare sand van 90 000 kubieke meter. Die waarde van die sandbron teen die
huidige markverwante prys sal kapitaal aan die eienaar vir verdere boerdery-bedrywighede
beskikbaar stel.
. . .
Nege en dertig profielgate is op die terrein gegrawe soos aangedui op die uitlegkaart. ’n Aangehegte
tabel wys die afsonderlike profielgate se dieptes aan, die profielgate se x en y koördinate en foto’s
van die afsonderlike gate.’
[8] Malans Transport had, it seems, acquired rights over various farms which gave
it the ability to pick and choose its sources of supply. No evidence was led to
establish the volume of sand which thus became available to the purchaser, or the
scope for the utilization of such sources in the open market. It is impossible to know
whether all or any given part of the sand deposit on Klein Môrewag represented a
commercially valuable asset except in so far as Brickrush chose to separate and
remove measured quantities of sand from time to time according to its judgment of
the market, location, price, quality or whatever other factors may have influenced its
decision to exercise its rights on that farm. None of these obvious factors was
however explained or enlarged on in evidence.

[9] It seems clear that Brickrush was free to exploit the deposit as it deemed fit or
to ignore it entirely without contractual penalty. The evidence of Bester shows that he
and the taxpayer played no part in the extraction or disposal of the sand, took no
particular interest in its quality or quantification, was content to allow Brickrush to fix
the market price (the starting price for the contract) and made no effort to control the
removal of sand from the site or to check the volumes so removed. All that the
taxpayer required was due payment per cubic metre of sand removed as and when it
suited Brickrush to exercise its rights. In the circumstances the arrangement between
the parties resembled a mineral lease with royalty payments to the holder of the
rights.
[10] The main contention of the taxpayer before the tax court was that the proceeds
derived from the sales of sand were capital in its hands. In its heads of argument the
emphasis was shifted to the alternative basis and before us counsel put forward the
reliance on capital proceeds with obvious lack of conviction. That was
understandable, since to all intents and purposes the principles had been clearly
established in Samril, supra and the argument could only succeed if that judgment
could properly be distinguished on the facts.
[11] In brief, this Court held in Samril, (to quote from the headnote at 658H-659B,
which correctly summarises the ratio):
‘. . . that the usual test for determining the true nature of a receipt or accrual for income tax purposes
was whether it constituted a gain made by an operation of business in carrying out a scheme for
profit-making, which meant that the receipt or accrual should not have been fortuitous but

designedly sought and worked for. However, it had to be borne in mind that profit-making was
also an element of capital accumulation, and accordingly 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 could not be
regarded as revenue. Each case had to be decided on its own facts with due regard to the distinction
between capital and the income derived from the productive use thereof. It also had to be borne in
mind that s 82 of the Income Tax Act 58 of 1962 cast 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 had to be included in the taxpayer’s gross
income.’
[12] From the evidence adduced before the tax court to which I have referred above
there can be no doubt that the amounts received by the taxpayer from Brickrush
represented gains made in the operation of an ongoing scheme of profit-making over
many years out of the sales of sand ostensibly at a market-related price. There was
nothing of chance in such a consequence. It was the result of a contractual
relationship designed for that purpose. The taxpayer used the money so derived to
finance the development of the farms. All this provides prima facie evidence that the
income so derived was revenue.
[13] I have referred earlier to the similarity of the parties’ arrangement to the terms
of a mineral lease. Although such a lease may exhibit certain elements of sale, the
periodic payments made by the lessee  to the lessor are of a revenue nature: see
Modderfontein B Gold Mining Co Ltd v CIR 1923 AD 34 at 46-47; COT v Rezende
Gold and Silver Mines (Pvt) Ltd 1975 (1) SA 968 (RAD) at 970B-971A, 972B-H. It

is not necessary to enquire in such cases whether the land was acquired with a view
to re-selling the minerals at a profit. It is enough to say that the rental or royalties are
‘the product of capital productively employed’ and therefore constitute income: COT
v Rezende at 970H.
[14] In the case of a mineral  lease, the value of the land is diminished by the
extraction of the minerals, yet the owner’s compensation (rent or royalties) is taxable.
I agree with counsel for the respondent’s submission that it does not matter whether
the rent is a fixed recurrent amount or whether  it is linked to the quantity of minerals
removed (as in Bellville-Inry (Edms) Bpk v Continental China (Pty) Ltd 1976 (3) SA
583 (C) at 584H), or to the gross profits made by the lessee (as in ITC 652 and the
Rezende case at 969G).
[15] Thus, where the taxpayer permits another to enter his property and remove
sand against  a monthly consideration calculated with reference to the volume
removed, he is productively employing his capital asset (the farm) in a way which is,
at least for fiscal purposes, not materially distinguishable from a lessor under a
mineral lease. As was said by Innes CJ in the Modderfontein case, above, (at 44) one
must have regard not so much to the form as to the real character of the transaction.
[16] What was adduced by the taxpayer to gainsay that conclusion? Mr Emslie, on
its behalf, referred to six features, which cumulatively, according to him,
distinguished the case from Samril and rendered the true nature of the transactions the
disposal of a capital asset and not the production of revenue. In this regard the
following reminder in the judgment of the court a quo warrants repetition:

‘It is trite that distinguishing a case does not entail the mere discovery of different facts. Courts
distinguish cases upon a discovery of what facts are regarded as material in the previous case and
which formed the basis upon which the decision was predicated. (See A L Goodhart (1959) 22
Modern Law Review  117).’
[17] The first ground of distinction, so counsel submitted, was that the taxpayer
received no advance deposits for each tranche of sand sold, as the seller had in
Samril. Second, the taxpayer in Samril had one of its own employees monitoring the
quantity of sand removed while here the appellant relied on the purchaser to carry out
that task. Third, the taxpayer in Samril had an interest in obtaining as high a price for
its sand as possible to assist it to obtain compensation for an expropriated portion of
its land; no such consideration influenced the appellant. Fourth, in Samril, he
submitted, the purchaser of the sand mined it on behalf of the taxpayer whereas
Brickrush acquired the permit in its own name. Fifth, the taxpayer’s role on Klein
Môrewag was entirely passive. Finally, the content of the agreement between the
taxpayer and Brickrush was so minimal as to fall short of trading in sand.
[18] The first four features are distinctions without a difference. None affects the
essential (trading) nature of the transaction between the taxpayer and Brickrush. The
alleged passivity of the taxpayer is misleading. It was only so because the profit-
making transaction was so constructed as to allow it that advantage without
derogating from the ongoing inflow of income to it. So also the so-called ‘minimal’
transaction was sufficient to ensure the repeated separation and removal of the sand
for a market-related return in the hands of the taxpayer for every cubic metre taken

off the property. The extent of that return during the three years of assessment with
which this appeal was concerned shows that its profits were very substantial. There is
no suggestion at all in the evidence that, if the farming operations were in anyway
curtailed or rendered more expensive, the result was any material negation of such
profits.
[19] There being no merit in the distinguishing features raised on behalf of the
taxpayer, I conclude that the Special Court was correct in finding that it had not
shown that the decision of the Commissioner to treat the receipts from the sales as
revenue in its hands was wrong3.
[20] The second question concerns the taxpayer’s entitlement to an opening stock
deduction. In this regard its counsel blew hot and cold in regard to the basis for his
submission. In his heads of argument he accepted that such a claim could only arise
after separation of the sand from the remainder of the land comprising the farm.
However, when the shoe pinched during oral argument, he cast his client’s lot upon
the whole deposit in situ. Likewise, he initially invoked s 22 of the Income Tax Act
58 of 1962 as the source of the taxpayer’s entitlement, but finally relied upon an
alleged practice in the Receiver’s office. I shall address all of these possibilities.
[21] It is convenient to commence with s 22, the effect of which is to grant a
deduction in respect of trading stock held by a taxpayer at the beginning of a year of
assessment. ‘Trading stock’ is defined in s 1. It includes ‘(a) anything – . . . (ii) the

3 The material facts in this appeal (and certain of the ‘distinctions’) are closely analogous to those in the Canadian cases
of Orlando v Minister of National Revenue [1962] CTC 108 and Minister of National Revenue v Lamon [1963] CTC 68.
So is the conclusion.

proceeds from the disposal of which forms or will form part of [the taxpayer’s]
gross income, otherwise than . . .’ (the exceptions are not presently relevant). Section
22,

before its supplementation by s 12 of Act 5 of 2001, which catered for capital gains
tax, provided (in so far as is relevant hereto):
‘(1)
The amount which shall, in the determination of the taxable income derived by any person
during any year of assessment from carrying on any trade (other than farming), be taken into
account in respect of the value of any trading stock held and not disposed of by him at the end of
such year of assessment, shall be─
(a)
in the case of trading stock other than trading stock contemplated in paragraph (b), the cost
price to such person of such trading stock, less such amount as the Commissioner may think
just and reasonable as representing the amount by which the value of such trading stock, not
being shares held by any company in any other company, has been diminished by reason of
damage, deterioration, change in fashion, decrease in the market value or for any other
reason satisfactory to the Commissioner;
. . .
(2)
The amounts which shall in the determination of the taxable income derived by any person
during any year of assessment from carrying on any trade (other than farming), be taken into
account in respect of the value of any trading stock held and not disposed of by him at the beginning
of any year of assessment, shall─
(a)
if such trading stock formed part of the trading stock of such person at the end of the
immediately preceding year of assessment be the amount which was, in the determination of
the taxable income of such person for such preceding year of assessment, taken into account
in respect of the value of such trading stock at the end of such preceding year of assessment;
or
(b)
if such trading stock did not form part of the trading stock of such person at the end of the
immediately preceding year of assessment, be the cost price to such person of such trading
stock.

. . .
(3) (a) For the purposes of this section the cost price at any date of any trading stock in relation to
any person shall, be the cost incurred by such person, whether in the current or any previous year of
assessment in acquiring such trading stock plus, subject to the provisions of paragraph (b), any
further costs incurred by him up to and including the said date in getting such trading stock into its
then existing condition and location, but excluding any exchange difference as defined in section
24I (1) relating to the acquisition of such trading stock.
(b)
The further costs which in terms of paragraph (a) are required to be included in the cost
price of any trading stock shall be such costs as in terms of any generally accepted accounting
practice approved by the Commissioner should be included in the valuation of such trading stock.
. . .
(4)
If any trading stock has been acquired by any person for no consideration or for a
consideration which is not measurable in terms of money, such person shall for the purposes of
subsection (3) be deemed to have acquired such trading stock at a cost equal to the current market
price of such trading stock on the date on which it was acquired by such person: Provided that any
capitalization shares awarded by any company to shareholders of that company on or after 1 July
1957 shall have no value as trading stock in the hands of such shareholders: Provided further that
options or any other rights to acquire shares in any company which have been acquired as aforesaid
shall have no value.’
[22] The raison d’etre of s 22 was identified and discussed in Richards Bay Iron &
Titanium (Pty) Ltd v CIR 1996 (1) SA 311 (A) at 315E-323E. See also CIR v
Nemojim

(Pty) Ltd 1983 (4) SA 935 (A) at 956G-957A.4
[23] Counsel for the Commissioner submitted that inherent in s 22 is the premise
that the section has no bearing on stock acquired and wholly disposed of during the
same year of assessment. I agree. See Richards Bay Iron and Titanium, above, at
316H-I. Such transactions are relevant for tax purposes purely for the purposes of s
11 (a) and for the amount of profit or loss that they contribute to the income
statement.
[24] The evidence, such as it is in the present case, demonstrates that Brickrush
purchased the sand on credit. Brickrush separated the sand only when necessary and
removed it forthwith, paying each at month-end for the volume so removed. It could
not have taken delivery (and, therefore, acquired ownership) while the sand remained
attached to the land. Delivery probably occurred when, having decided upon the exact
quantity it required, Brickrush extracted the sand, calculated its volume and removed
it from the site. There is no suggestion that sand was, after separation, allowed to lie
or accumulate on the farm. From these facts and inferences two conclusions are
inevitable. First, that in the overwhelming majority of cases (the only possible
exception being separation at the end of a year of assessment and removal a day or
two later) separation and disposal took place within the same year and therefore s 22
was of no application to the separated stock. Second, because separation and transfer

4 As explained by De Koker and Urquhart, Income Tax in South Africa, para 11.9.1:
‘The effect of the trading stock provisions in s 22 is to postpone the deduction of the expense of trading stock purchased
until the tax year in which that stock is disposed of. The full cost of acquiring trading stock is deductible under s 11 (a),
but the effect of this deduction is matched to the years of disposal by means of the provisions governing closing stock
and opening stock.’ The respondent, in the papers before the tax court, correctly described the section as ‘a timing
provision’.

of ownership were, to all intents and purposes, if not simultaneous, then at least part
of one continuous process, the taxpayer never intended to create or hold trading stock
in the separated sand for the short time preceding removal from the farm. For this
reason too, s 22 would not have become a relevant factor in the financial history of
the sand.
[25] For one or both of these reasons, no doubt, counsel for the taxpayer realized
that his client’s prospects of success could not benefit from s 22 if the stockpile only
came into existence on separation. As I have said he threw himself instead on the
uncertain ground of the unseparated in situ deposit.
[26] But the taxpayer faces manifest problems in this regard. It its original grounds
of objection submitted to SARS in November 2004 its case was stated as follows:
‘If the proceeds [received from Brickrush] are as a result of the disposal of trading stock, then  in
terms of section 22 (4) and 22 (3)(a)(ii) the Trust should be allowed a deduction of the market value
of the trading stock, either acquired or when the sand became trading stock, ie on extraction from
the ground on or after October 2001.’
The same contention was repeated in the grounds of appeal under rule 11 of the Rules
promulgated under GN R467 of 1 April 2003. The judgment of Davis J was based on
the stated premise. In his heads of argument the taxpayer’s counsel submitted, as a
matter ‘not in issue’, that the sand became trading stock in the hands of his client
when it was extracted from the land.
[27] Because of the taxpayer’s approach from the outset the Commissioner was not

apprised of the case it was asked  to meet during the appeal.5 Nor did counsel find

5 This did not deter the Commissioner’s counsel from arguing strenuously that an unseparated sand deposit was not
capable of constituting trading stock. It is unnecessary to pronounce on the correctness of that submission.

himself with the facts necessary to sustain the legal argument. In this regard two
shortcomings stand out. First, there was no evidence that the whole or any part  of the
sand deposit ever transcended a notional stock in trade given the ad hoc nature of the
purchases and the absence of proof of the size of the market. See in this regard De
Beers Holdings (Pty) Ltd v CIR 1986 (1) SA 8 (A) at 32H-I. Second, the taxpayer
acquired the trading stock for no consideration. It was accordingly deemed by s 22
(4), for the purposes of s 22 (3), to have acquired the stock at a cost equal to the
current market price of the stock on the date of acquisition. However, its counsel was
obliged to concede that no evidence had been adduced to prove that price and that his
reliance on s 22 (3) was accordingly without foundation. Indeed the only scintilla of
evidence in this regard suggested that the quantity of mineable sand was not capable
of accurate estimation.
[28] The taxpayer’s counsel sought refuge in a so-called ‘practice’ which is
described in Silke, Income Tax, para 8.112 as follows:
‘The practice of SARS is usually to permit as a deduction to a taxpayer who has acquired trading
stock for no consideration or for a consideration that is not measurable in terms of money the fair
market value of the trading stock at the date of acquisition. Therefore, in the example given, in the
year inwhich the inherited stock becomes the taxpayer’s trading stock SARS will allow as a
deduction the market value on the date  of inheritance, namely R50 000, so that, upon a subsequent
realization of the trading stock, the full proceeds less the sum of R50 000 will effectively be
taxable.’
[29] Counsel was unable to refer us to any statutory provision which bound us to
enforce or empowered us to adopt or sanction this practice (of which no evidence was

in any event adduced). Nor is the formulation capable of enforcement, since what is
‘normal’ within the understanding of SARS is beyond the scope of judicial notice.6 In
any event, as I have already found, no ascertainable part of the sand deposit could
fairly be described as trading stock held by the taxpayer.
[30] The consequence is that the appeal fails. The following order is made:
‘The appeal is dismissed with costs including those consequent upon the employment
of two counsel.’

__________________
J A   HEHER

JUDGE OF APPEAL

HARMS ADP
)Concur
NAVSA JA
)
CACHALIA JA )
SNYDERS AJA )

6 De Koker and Urquhart, loc cit, say the following:
‘In practice the market value of trading stock acquired for no consideration is allowed as a deduction if that stock is not
on hand at the end of the year of assessment in which acquired. This is clearly not authorized by the Act, since the
provision described deals with the cost of trading stock which forms part of opening or closing stock, but it is submitted
that, on a holistic interpretation, this is the intention of the legislature.’
The statute was not thus interpreted to us by counsel and it is unnecessary to do so mero motu.