Dr A v CSARS ITC 13132 WCTC 8 Dec 2014
08 January 2015
Posted by: Author: Pieter Faber
Author: Pieter Faber (SAIT)
This is an appeal to the Western Cape tax court against the
inclusion of grapes delivered for wine making to a co-operative as "produce
held and not disposed of” in respect of the taxpayer’s 2009 year of assessment.
The taxpayer carried on a vineyard farm and for the purposes
of paragraph 2 of the First Schedule to the Income Tax Act included in his
2006, 2007 and 2008 returns for those years of assessment the value of the
grapes harvested by the taxpayer and delivered to a co-operative for the
purposes of producing wine, as produce held and not disposed of at the end of
The taxpayer is a member of the co-operative and delivers
grapes together with other farmers to the co-operative. The grapes are then
pooled and wine is produced from it by the co-operative. The farmers share in
the proceeds from the sale of the wine depending on the amount and quality of
the grapes produced.
The taxpayer in its 2009 tax return took the position that
as all the grapes harvested had been delivered to the co-operative it held no
produce and did not include an amount for closing stock as in previous years. The
grapes were at this date still in the process of wine making and not ready for
sale or delivery.
SARS conducted an audit on the taxpayer for the 2009 tax
year and included an amount of R789 338 in respect of closing stock from
farming operations. The amount was determined by taking the amount of grapes harvested
in tonnes and converting it to an estimation of liquid to be derived from the
grapes and multiplying the result with the estimated distilling wine price.
The court has to determine whether:
Grapes in process constitute "produce” of the
taxpayer at year end?
The grapes were "held and disposed of” by the
method of the value determination is correct?
The first matter to be decided was whether the grapes
delivered to the co-operative constituted "produce” as the taxpayer contended
that as it had been crushed and mixed with additional chemicals, it was no
longer identifiable as grapes.
The term "produce” is not defined in the Act and the court
applied the normal grammatical meaning. The court concluded that as the making
of wine forms part of wine farming, it logically follows that the crushed
grapes remain a result of the farming operation just like the uncrushed grapes.
In respect of the "produce held and not disposed of”, the
court concluded that it was common cause between the parties that a member does
not transfer ownership of the grapes to the co-operative as the latter merely
acts as agent. The court concluded that the taxpayer merely obtained joint
ownership of an undivided share citing the following:
"In the case of mingling (confusio) the original owner of the fluids or
metals become co-owners of the mixture in proportion to the value of their
material used in the final mixture. Each owner thus has an undivided share in
the common mixture.”
The court held that "held” extends beyond physical
possession and extends to any form of dominium, including an undivided share.
The conditions set out in the delivery agreements with the co-operative did not
result in a disposal of the grapes, the taxpayer merely exchanged his right to
exercise control over the grapes for a monetary claim subject to contingencies.
The court held that expanding the legal manifestation of a right does not in
this instance, lead to a change in the substance of a right. The grapes were
therefore held and not disposed of at year end by the taxpayer.
In respect of the value determination, SARS
conceded that the calculation in the assessment contained errors and it could
not justify its methodology. The court held that as SARS did not amend it
grounds of assessment nor did it provide reasons to the taxpayer for the basis
of the calculation, it was not in a position to make an alternative determination.
The court accordingly remitted this matter back to SARS for determination. The
court also held that notwithstanding that SARS were successful on the legal
basis of the assessment, the taxpayer was successful on the amount
determination and therefore SARS was not entitled to levy interest on the
assessed amount until it had been revised. On the same basis no cost order was
made by the court.
Please click here to access the judgement.