IN THE SUPREME COURT OF APPEAL

OF SOUTH AFRICA

Case Nr: 606/97

REPORTABLE

In the matter of:

THE COMMISSIONER FOR INLAND REVENUE
Appellant

and

CONHAGE (PROPRIETARY) LIMITED
Respondent
(formerly TYCON (PROPRIETARY) LIMITED)

Coram:

Mahomed CJ, Hefer, Olivier, JJA, Farlam et
Madlanga AJJA

Date of hearing:
23 August 1999

Date of delivery:
17 September 1999

Income Tax - tax avoidance- agreements of sale and leaseback
agreements not shown to be simulated transactions - s 103 of Act
58 of 1962 not applicable

J U D G M E N T

Hefer JA

HEFER JA
[1]      Within the bounds of any anti-avoidance provisions in the
relevant legislation, a taxpayer may minimise his tax liability by
arranging his affairs in a suitable manner.   If eg the same commercial
result can be achieved in different ways, he may enter into the type of
transaction which does not attract tax or attracts less tax.   But, when it
comes to considering whether by doing so he has succeeded in
avoiding or reducing the tax, the court will give effect to the true nature
and substance of the transaction and will not be deceived by its form.
(Erf 3183/1 Ladysmith (Pty) Ltd and Another v Commissioner for
Inland Revenue 1996(3) SA 942 (A) at 950I-952C.)
[2]      At issue in the present case is the true nature and substance of
two sets of agreements between the taxpayer (ATycon@) and Firstcorp
Merchant Bank Ltd (AFirstcorp@).   In form each set comprises a sale
and leaseback of some of Tycon=s manufacturing plant and
equipment.   The Commissioner=s contention is that the agreements
are not what they purport to be.   The  dispute arose when Tycon
sought to deduct the rentals paid in terms of the leasebacks as
expenditure in the production of income under  s 11(a) of the Income
Tax Act 58 of 1962, as amended.   When the Commissioner refused to

allow the deductions and in addition invoked s 103 of the Act, Tycon
appealed  to a Special Court.   The appeal succeeded  and the matter
was remitted to the Commissioner for re-assessment on the basis that
the rentals were deductible.  With the necessary leave the
Commissioner has now appealed directly to this Court.   The first issue
is the true nature and substance of the agreements.   In the event of a
finding that they are indeed what they purport to be as the Special
Court found, a further question will be whether the Commissioner
correctly invoked s 103.

The true nature of the agreements

[3]      In broad terms the Commissioner=s contention is that, despite
the form of the agreements, Tycon did not sell and lease back its
equipment, but in substance borrowed the Apurchase price@ from
Firstcorp.   Both in the Special Court and in this Court his counsel
expressly accepted that the parties did not act in fraudem legis by
deliberately disguising their transactions.   In the written heads of
argument the agreements came under attack solely for lack of what
was apparently regarded as essential elements of a sale (cf McAdams
v Fiander=s Trustee & Bell NO 1919 AD 207 at 223-224).   On this
basis it was submitted that there was no agreement on a verum

pretium nor an intention to transfer and acquire ownership.   At the
commencement of his oral argument Mr Rubens for the Commissioner
indicated that he would not press the argument relating to the price.
When it was pointed out to him that the only remaining point would
then be that the parties did not intend ownership to pass and that the
passing of ownership is not an essential element of a sale, he
informed us that he would argue that the agreements should not be
applied according to their tenor because, although Tycon and
Firstcorp might honestly have believed that it would be sufficient
to go through the formality of concluding that kind of agreement
in order to procure tax benefits for themselves, they had no real
intention to enter into agreements of sale and leaseback.
Argument then proceeded on this basis.
[4]      Despite the reference to the parties= honest belief, it seems to
me that the logical effect of the submission is precisely what the
Commissioner has constantly been disavowing, viz that they
dishonestly concealed the true nature of their transactions.   Certain
dicta in cases like McAdams v Fiander=s Trustee & Bell NO supra,
Goldinger=s Trustee v Whitelaw & Son 1917 AD 66, Bank Windhoek
Bpk v Rajie en `n Ander 1994(1) SA 115 (A) (the minority judgment)
and Nedcor Bank Ltd v Absa Ltd 1998(2) SA 830 (W) support the

proposition that the true nature of a transaction will prevail where the
parties enter into an agreement in the honest belief that they will
achieve a particular purpose by doing so, but do not actually intend it
to have effect according to its tenor. In McAdams eg the real
transaction was found to be a loan even though the parties had
deliberately cast their agreement in the form of a sale in the bona fide
belief that it would provide security to the Apurchaser@.   But even in
such a case the agreement is plainly a simulation;  and it may be a
dishonest simulation depending on what use the parties want to make
of it.   In  the present case Tycon required capital to expand its
business.   Firstcorp was prepared to make the funds available. Both
parties were aware of the tax benefits to be gained from sales and
leasebacks and decided to follow that course.   If they did not
genuinely intend ownership of the merx to pass upon signature of the
agreement  as each agreement of sale stipulated, the agreements
would have been simulations and could only have been signed with
the object of deceiving the Commissioner.   The conclusion that this
would indeed be a case of  fraus legis cannot be avoided.
[5]      This is not the only problem that I have with the submission.
Although Mr Rubens assured us that the Commissioner=s case was
conducted on the same basis in the Special Court, he candidly

confessed that he never suggested in his cross-examination of
Tycon=s witnesses that the agreements  had been signed under the
impression that the mere formality would be sufficient, or that the
actual intention was that the agreements would not have effect
according to their tenor.  The record leaves one with the firm
impression that the cross-examination of Tycon=s witnesses turned on
the effect of the agreements rather than on the signatories= actual
intentions.   Tycon=s case might well have been conducted differently
had the argument in this Court been raised in the Special Court and in
fairness we should really decline to entertain what is essentially a new
point.
[6]      I will nevertheless deal with the argument because I am of the
view that it is in any event not supported by the facts.   In view of the
analysis of the evidence and the submissions for the Commissioner in
the Special Court=s reported judgment (ITC 1636 in 60 (1998) SATC
267) only a brief discussion is required.
[7]      The Special Court found (on the strength of the presumption in s
82 of the Act) that the onus was on Tycon to prove the authenticity of
the agreements and that the onus had been discharged.   The
signatory on Tycon=s behalf and two Firstcorp officials who had
negotiated the transactions testified that the parties intended to give

effect to the transactions according to their terms.   The Special Court
accepted their evidence on the point.
[8]      The Court=s judgment was vigorously criticized in the written
heads of argument for the Commissioner.   In some respects the
criticism is valid;  in others not; and in still others it is no longer
relevant in view of the limited scope of the argument.   It is not
necessary to go into the details because it is quite clear to me that Mr
Rubens is clutching at straws.   The real point of his submission is that
neither Tycon nor Firstcorp actually intended to enter into agreements
of sale and leaseback.   One way of testing its validity is to ask: If the
parties did not intend to deceive, how did it come about that they
entered into agreements which they knew would have no effect inter
se as sales and leasebacks?   The problem facing the Commissioner
is that he has discarded the possibility that the agreements were
deliberately disguised.   The only other  explanation which he is able
to suggest is that the parties might have believed that the formal
instruments would gain them the desired tax benefits.   But this is
sheer speculation which finds no support in the evidence and is
against the probabilities.   I say this particularly in view of

the consideration which Tycon=s staff and financial director
in consultation with the financial directors of affiliated

companies gave to the advantages and disadvantages of
sales and leasebacks;

the fact that the disadvantage which the  loss of the
ownership of part of Tycon=s plant would bring about, was
expressly mentioned and considered;

the fact that offers by other banks to make funds available
by way of sales and leasebacks were received and
considered by the company;

the extensive negotiations which were conducted at arms
length with Firstcorp; and

the expertise of the people involved in the negotiations
and the signing of the agreements.
All this goes to show that the parties were not merely going through
the motions of concluding agreements.   And if they were not, the very
foundation of the submission crumbles.
[9]      The fact of the matter is that the evidence that the parties had
every intention of entering into agreements of sale and leaseback and
of putting the agreements into effect was not contradicted.   The result
was that the Special Court had no option but to accept it unless the
witnesses were not reliable, or all the available information and such
inferences as might justifiably be drawn, were cogent enough to cast

sufficient doubt thereon.  I have not been persuaded that the Court
erred in finding the witnesses reliable;  or that there is sufficient reason
to doubt the authenticity of the agreements.   Mr Rubens referred us to
certain provisions of the agreements which, he submitted, are not
usually found in agreements of sale and agreements of lease and
militate against an intention to buy and sell and to lease back.   But it
is by no means unusual to find provisions in a sale and leaseback
which do not typically appear in a contract of purchase and sale or in a
contract of lease.   On the contrary, as Professor Nereus Joubert
points out in AAsset-based financing, contracts of purchase and sale,
and simulated transactions@ 109 (1992) SALJ 707 at 708,
A[d]espite the fact that new asset-based financing transactions are
often carefully drafted to reflect contracts of purchase and sale or
contracts of letting and hiring, they almost invariably contain
provisions which are not typically found in such types of
contract ...@ (Emphasis added.)

Moreover, although  a sale and leaseback comprises an agreement of
sale as well as an agreement of lease, it must be treated as one
composite transaction.   This is why Mr Rubens=s reliance on the fact
that Tycon could not do without the equipment sold to Firstcorp
because it was in daily use in Tycon=s factory, is misplaced.   If we
were to look at the agreement of sale separately this would be a valid

point, but, viewed in the context of the whole transaction, the
argument loses its sting:  as lessee Tycon would be assured of the
use of the equipment for the duration of the lease.   It is really the
provisions dealing with their fate at the end of the lease that count.   In
this regard Mr Rubens stressed clause 5 of the each lease.   It is to
the effect that the equipment would on the expiry date remain
Firstcorp=s property.    But there is also clause 10 which grants Tycon
the option to renew the lease on that date and annually thereafter.   In
effect the company was entitled to the indefinite use of the equipment.
Admittedly it lost its ownership.   But this was a considered and
accepted disadvantage for which the capital generated by the
transactions more than compensated.   All in all the transactions made
perfectly good business sense.
[10]      In my view the Special Court was correct in deciding the first
issue in Tycon=s favour.

Did the Commissioner correctly invoke s 103?
[11]      Although s  103 was no doubt designed to enable the
Commissioner to deal effectively with tax avoidance schemes, it
operates only in the circumstances stipulated in the section itself.   As
Watermeyer CJ observed in Commissioner for Inland Revenue v IHB

King 1947(2) SA 196 (A) at 209,
Aif a transaction is covered by the terms of the section its provisions
come into operation, if it is not then its provisions cannot be
applied.@

Broadly speaking the section empowers the Commissioner  to
determine a taxpayer=s liability for income tax and other taxes by
disregarding any abnormal transaction which the latter has entered
into for the purpose of avoiding or postponing his tax liability or
reducing the amount thereof.   I need not list all the requirements that
must co-exist before the power may be exercised because we are only
concerned with the abnormality requirement and the purpose
requirement.   A transaction is regarded as abnormal if it was entered
into or carried out by means or in a manner which would not normally
be employed in the entering into or carrying out of a transaction of the
nature of the transaction in question;  or has created rights or
obligations which would not normally be created between persons
dealing at arms length under a transaction of the nature of the
transaction in question.   An abnormal transaction may be disregarded
if  it was entered into or carried out solely or mainly for the purposes
of the avoidance or the postponement of liability for the payment of
any tax or the reduction of the amount of such liability.
[12]      From the judgment in Secretary for Inland Revenue v Geustyn,

Forsyth & Joubert 1971(3) SA 567 (A) at 571E-H and other reported
judgments of this Court the following emerges:
(a)
Although the Commissioner may invoke the section whenever
he is satisfied of the presence of its requirements, a Special
Court may re-hear the whole case and, if necessary, substitute
its own decision for that of the Commissioner.   When Geustyn
was decided appeals against decisions of Special Courts were
limited to questions of law.  The Act has since been amended to
do away with this  limitation and this Court may now exercise the
same powers as a Special Court.
(b)
The effect, purpose and normality of a transaction are
essentially questions of fact.   The onus is on the Commissioner
to prove that its effect was to avoid or postpone the liability for
tax or to reduce the amount thereof.   Upon proof that this was
the case it is presumed (in terms of ss (4)) that the effect of the
transaction was also its sole or main purpose.
(c)
What has to be determined in every case is the subjective
purpose of the taxpayer.
[13]      In the present case the Special Court found that the
Commissioner had not established the abnormality of the sales and
leasebacks and that Tycon had established the absence of the

purpose requirement.   Both findings were attacked in this Court, but a
decision in Tycon=s favour on either will dispose of the appeal.   I
proceed to deal with the purpose of the transactions.
[14]      The enquiry is limited to a single question. I have already
mentioned that Firstcorp was prepared to make the capital available
which Tycon needed to expand its business.   The financing could be
structured either as a loan or as a sale and leaseback;  but from an
income tax point of view the latter was preferable and mainly for this
reason Tycon decided on a sale and leaseback.   The Commissioner=s
contention is that this is all that counts;  the sole purpose of the
transaction was to reduce the company=s tax liability;  and it matters
not that Tycon needed the capital to finance its expansion programme.
Tycon=s argument is precisely the opposite:  the purpose of the whole
exercise was to obtain capital, not to reduce tax;  and if the reduction
of its tax liability can be regarded as a purpose of the transactions as
envisaged in s 103 at all, it was not the main purpose.
[15]      I share the Special Court=s view that the agreements of sale
and leaseback served the dual purpose of providing Tycon with capital
and to take advantage of the tax benefits to be derived from that type
of transaction. The following passage in the Court=s judgment (at 393)
neatly describes the situation:

A[The raising of finance] was the fons et origo of the transactions
and it remained the underlying and basic purpose thereof ... This
whole arrangement ... was to achieve the predominant purpose of
raising finance but, because of the welcome by-product of the tax
benefit, the vehicles chosen were the sale and leaseback
transactions.@

It is submitted on behalf of the Commissioner that the only reason why
sales and leasebacks were preferred to a straightforward loan was
that a loan would not bring about such advantageous tax deductions.
This is not entirely correct because there were other commercial
reasons too.   But, even if the particular type of transaction was
chosen solely for the tax benefits, it would be wrong to ignore the fact
that, had Tycon not needed capital, there would not have been any
transaction at all.   Tycon did not approach Firstcorp in order to
alleviate its tax burden;  it did so because it was in need of capital and
this plainly remained the main purpose of the transactions.   It is not
necessary to deal with the case of Commissioner of Taxation of the
Commonwealth of Australia v Spotless Services Limited [1996] 186
CLR 404 on which the Commissioner relies because it is clearly
distinguishable both on the facts and in respect of the applicable
legislation.
[16]      In view of this conclusion it is not necessary to deal with the
Special Court=s finding that the abnormality of the transactions had not

been established.   Suffice it to say that what the Commissioner had to
establish, was the abnormality of the transactions as sales and
leasebacks.   To decide whether he had done so, the Court rightly
took all the circumstances of the case into account and did not content
itself with an examination of the typicality of the terms of the
agreements.
[17]      I conclude therefore that the Special Court correctly found in
Tycon=s favour on the second issue as well.

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

_________________

HEFER JA

Concurred:

Mahomed CJ
Olivier JA
Farlam AJA
Madlanga AJA