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IN THE SUPREME COURT OF SOUTH AFRICA (APPELLATE DIVISION)
In the appeal of :
BLUE CIRCLE CEMENT LIMITED appellant
and THE COMMISSIONER FOR INLAND REVENUE.. respondent
Coram: CORBETT, MILLER et NICHOLAS, JJA, GALGUT et HOWARD, AJJA.
Date of hearing: 5 March 1984
Date of judgment: 16 March 1984
JUDGMENT CORBETT JA
This appeal concerns a claim by appellant, a
public company, to be entitled to a machinery initial allowance, in terms of s
12(1)
of the Income Tax Act
/ 58 of 1962
2 58 of 1962 ("the Act"), and a machinery investment
allowance, in terms
of s 12(2) of the Act, in respect of the cost incurred by it in the construction
of a railway line. Appellant
claimed these allowances, together with a wear and
tear allowance under s 11(e) of the Act, as deductions in the computation of its
taxable income for the 1975 year of assessment. In determining appellant's
liability to normal tax for that year, the respondent,
the Commissioner for
Inland Revenue, disallowed these deductions and assessed appellant accordingly.
An objection to the assessment
on the ground of the disallowance of these
deductions having been rejected by respondent, appellant appealed to the Special
Court.
The appeal was
/ heard
3
heard by the Transvaal Income Tax Special Court, which dismissed appellant's appeal and confirmed the assessment. The present appeal is against that decision, in so far as it relates to the allowances provided for in ss 12(1) and 12(2) of the Act. (Appellant does not persist in the claim for a wear and tear allowance.) The appeal comes directly to this Court in terms of s 86A(2)(b) of the Act, the requisite leave having been granted by the President of the Special Court.
The facts are not in dispute and may be stated quite briefly. The appellant manufactures cement. Its factory is situated at Lichtenburg in the Western Transvaal. The basic raw material used in the manufacture of cement is limestone. Prior to 1975 appellant obtained the
/ required
4 required limestone from a deposit in the Lovedale area,
close to the factory at Lichtenburg. In order to transport the quarried
and
crushed limestone to the factory appellant had constructed a railway line from
the quarry area at Lovedale to the factory. During
the 1975 tax year appellant
completed and brought into use an extension of this railway line beyond Lovedale
to an area known as
Springbokpan. The length of this extension was some 41 km.
The purpose of this extension was to provide a railway link between the
factory
and a new limestone quarry and crushing plant which appellant had established at
Springbokpan. It is the cost of this railway
line of 41 km, stated to amount in
all to R2 047 699, which constitutes
/ the
5 the basis of appellant's claim for an initial allowance of 25 per
cent of the cost, viz. R511 924, and for an investment allowance
of 30 per cent
of the cost, viz. R614 309, in respect of the 1975 tax year.
The evidence indicates that the concession area at Springbokpan over which appellant holds the rights to the limestone is very large and has proven and estimated reserves totalling some 120 million tons. Appellant intends to quarry and consume in the process of manufacture about 3 million tons per annum from this area. At this rate of extraction these limestone deposits have a "life" of about 40 years.
The extraction process as described to the
/ Special
6
Special Court, is the following. The first task is to remove by means of a scraperloader the overburden, which varies from 150 mm to about a metre in depth. This exposes the underlying limestone deposit, which is about 8 metres deep. Limestone is broken away from this rock deposit by blasting. The blasting operation, which is designed to break loose from the quarry face sufficient limestone for one day's processing, produces material varying in size from fine powder to large boulders. Boulders which are too large for the crushing plant are then broken up into manageable pieces on the quarry floor by a process termed "secondary blasting". The reduced material is then loaded into large dumper trucks, and
/ transported
7
transported to the crusher plant, situated a short distance (evidently a few hundred metres) away.
At the crusher plant the limestone is further
reduced and screened. During the blasting operations and
also at the crushing stage samples of the material are
taken and tested in
order to ensure that what is being
processed is not excessively silicious in
content. If it
is, then it cannot be used for the manufacture of
cement
and it is treated as waste material. From the screening
building
one conveyor belt carries such waste material to a
waste dump and another
conveyor belt takes the fine crushed
limestone suitable for processing to a
stockpile, from where
it is loaded onto railway trucks for conveyance to
the
factory.
/ From
8 From where it leaves the concession area the railway line
crosses privately-owned farms until it reaches the factory at Lichtenburg.
Appellant ob-tained the necessary servitudes to enable it to build the railway
line over these farms. According to the evidence,
the railway line was
constructed in accordance with specifications laid down by the South African
Railways and called the "Main Lines
Standard". In order to construct the line
the route thereof had to be suitably "profiled" by building embankments or
earthworks over
depressions in the land and making "cuttings" through elevated
areas. The "profile" had to be well consolidated and, where it consisted
of an
embankment, a good bond
/ between
9
between the embankment and the natural ground had to be obtained. Concrete railway sleepers were then laid at suitable intervals along the profile and the rails laid on the sleepers and attached thereto by means of a specially designed rail assembly, which clamped the rail to the sleeper. After the rails were laid ballast of crushed stone was placed along the track, around and underneath the sleepers. The track was lifted for this purpose. The ballast was then compacted so that it would not move under load. That basically completed the construction process.
The evidence was further to the effect that the life of the railway line was determined by the life of the
/ limestone
10 limestone deposit at Springbokpan. From time to time
repair and maintenance would have to be done to the line. This might involve
the
replacement of sections of rail which were defective or had become worn.
Prior to deciding to build the railway line appellant considered alternative methods of conveying the crushed limestone from Springbokpan to the factory at Lichtenburg. These included conveyor belts, roadways and road transport, but the railway system was preferred because it was found to be the most economical.
That completes my recital of the relevant facts. The question whether appellant was entitled to the machinery initial allowance and the machinery investment allowance
/ claimed
11
claimed by it depends upon the proper application to those
facts of
the provisions of s 12(1) and (2). The relevant
portions of subsection (1) read as follows:
"12(1) In respect of new or unused machinery or plant —
(a) which is brought into use by any
taxpayer for the purposes of
his
trade.... and. is used by him
directly in a process of
manufac
ture .; or
there shall be allowed to be de-deducted from the income of such taxpayer for the year of assessment during which such machinery or plant is so brought into use an allowance, to be known as the machinery initial allowance."
The wording of the relevant portions of subsection (2) is virtually identical to that of subsection (1) and it need
/ not
12 not be quoted.
During the course of the hearing before the Special Court and while the evidence of appellant's only witness was being led by Mr Swersky, who appeared in the Special Court on appellant's behalf, the representative of the Commissioner made certain important concessions, which had the effect of considerably narrowing the issues in the case. After the mid-morning adjournment Mr Swersky informed the Court that the Commissioner's representative (Mr Van Breda) had made "certain concessions" and there then followed the following exchanges:
"PRESIDENT: What do you want to admit, Mr
Van Breda?
MR VAN BREDA: My lord, the Commissioner is
not disputing the fact that the actual
/ manufacturing
13
manufacturing process starts at the quarry and coupled with that of course that it is new machinery brought into use by the taxpayer for the purposes of the appellant's trade.
PRESIDENT: So, you will accept that the manufacturing process starts at a stage prior to loading the material onto the railway line? MR VAN BREDA: Yes, my lord."
Certain discussions followed and then the following further
exchange
between the President and the legal representatives
took place:
"MR SWERSKY: My lord, to clarify the issues,
my learned friend was kind enough to say that
the only issue between the parties, as far
as he is concerned, is the question of whether
the railway line falls within the compass
of the phrase 'machinery or plant'.
PRESIDENT: Used in the process of manufacture?
MR SWERSKY: Machinery or plant, my lord,
falls within the compass of the phrase
/ machinery
14
machinery or plant within the meaning of those words in the section. My learned friend accepts for the purposes of this case that the railway line is brought into use by the taxpayer for the purposes of his trade which is other than mining or farming and is used by him. Here I am not quite clear. 1 would like clarification from my learned friend whether he agrees that the railway line is used directly in a process of manufacture. MR VAN BREDA: Yes.
MR SWERSKY: My learned friend accepts that the railway line is used in a process of manufacture and this narrows the issues very considerably.
PRESIDENT: The railway line falls into the concept of machinery or plant? MR SWERSKY: Yes, that is the issue in this case."
From this it is clear that the Commissioner's
representative formally conceded:
/ (1) That
15
(1) That the railway line was new and unused;
(2) that it was brought into use by the appellant
for the purposes of its
trade;
(3) that the appellant's manufacturing process
started at a stage prior to the loading of the
material onto the railway trucks;
(4) that the railway line was used directly in a process of manufacture; and
(5) that the only issue in the case was whether the the railway line fell into the concept of machinery or plant.
These concessions having been recorded, the evidence proceeded, evidently on a more restricted basis than had
/ originally
16
originally been envisaged by appellant's counsel.
In his judgment, the President discussed the
meaning
of the words "machinery or plant" in the context
of s 12, but appears to have
left undecided the question
as to. whether the railway line constituted machinery or
plant. The
judgment concludes:
"The railway line, in my view, cannot even remotely be considered as directly being used in the manufacturing process. A true interpretation is that the railway line is merely a connecting link between the two plants, one being at Springbokpan and the other 41 kilometers plus away at Lichtenburg.
As a matter of interpretation and law I hold that the railway line is not used directly in the manufacturing process in
/ either
17
either of the two subsections and that neither the 'machinery initial allowance' nor the 'machinery investment allowance' is claimable as a deduction."
It is thus clear that the Special Court decided the appeal
on the finding that the railway line was not used directly
in a process of manufacture. This finding flies in the
face of the formal
concessions made by the Commissioner's
representative. On appeal before us
counsel for the
respondent conceded that in so deciding the case the
Special
Court erred, and that the only issue to be decided on appeal
was
whether or not the railway line constituted "machinery
or plant" in the
context of s 12(1) and (2). Before turning
to this issue, I might just add
that on the evidence placed
/ before
18 before the Special Court I am satisfied that the concessions of the
Commissioner's representative in the Special Court were correctly
made.
Before us appellant's counsel conceded (rightly in my view) that it
could not be contended that the railway line constituted machinery.
His
submission, however, was that it did constitute plant. Respondent's counsel
argued to the contrary.
The word "plant" is not defined in the Act and, so
far as I am aware, its meaning in the context of s 12 of the Act, has never been
dealt with by our courts. Certainly no relevant South African case was quoted to
us; and I have not been able to find any such case.
We were
/ referred
19
referred by counsel to various dictionary meanings. I do
not find it necessary to repeat all the references cited
to us. Three of them will suffice. "Plant", as a noun,
has a wide variety of meanings, ranging from the botanical
concept of "a young tree, shrub or herb newly planted"
to a slang expression denoting a "spy" or "detective" (see
Oxford English Dictionary, sub "plant"). Obviously in s 12
one is concerned with plant used directly in a process of
manufacture, ie
industrial plant. In this context the
following relevant meanings are of
assistance:
"The fixtures, implements, machinery, and apparatus used in carrying on any industrial process". (Oxford English Dictionary.)
"The equipment, including machinery,
/ tools
20
tools, instruments and fixtures, and
the buildings containing them, necessary
for any industrial or manufacturing
operation".
(The American Heritage Dictionary of
the English Language.)
"The land, buildings, machinery, apparatus
and fixtures employed in carrying on a
trade or a mechanical or other industrial
business".
(Webster's Third New International Dictionary.)
Having regard to the context of s 12, it seems to me that the first of these definitions is the most helpful. Although it is not necessary to decide these points — and I do not do so — I doubt whether "plant" in s 12 would include a building which merely housed or contained industrial equipment, etc. used in an industrial operation (cf the Heritage Dictionary definition; and see in this regard
/ the
21 the English decisions referred to below) or the land upon which
an industrial undertaking was carried on (cf the Webster's Dictionary
definition). The enquiry is thus whether the items alleged to be "plant"
constituted fixtures, implements, machinery or apparatus
used in carrying on any
industrial process. Before proceeding to apply this definition to the facts of
the present case, I wish to
refer to certain English authorities cited by
counsel for the appellant.
In recent years there have been a number of
decisions by the English courts concerning the meaning of the word "plant", as
it occurs
in certain successive statutory provisions in English fiscal
legislation (viz. ss 279 and 280 of the Income Tax Act 1952, ss 18 and
19 of
the
/ Capital
22 Capital Allowances Act 1968 and ss 41 and 44 of the Finance
Act 1971). These statutory provisions all employ the same verbal formula
authorising capital allowances, from the taxation point of view, in respect of
capital expenditure incurred by a person carrying
on a trade "on the provision
of machinery or plant for the purpose of the trade" (see Benson v Yard Arm
Club Ltd,
[1979] 2 All ER 336, at p 338 h) . Most, if not all, of the
relevant decisions are referred to in Benson's case (supra), a
decision of the Court of Appeal, in Inland Revenue Commissioners v Scottish
and Newcastle Breweries Ltd, [l982] 2 All ER 230, a decision of the House of
Lords, and in Leeds Permanent Building Society v Procter, [l982] 3 All ER
925, a decision given in the
/ Chancery
23
Chancery Division.
The starting point of these decisions has, almost
without exception, been a dictum of LINDLEY LJ in Yarmouth v
France (1887) 19 QBD 647, a case concerned with the meaning of the word
"plant", as it occurred in certain non-fiscal legislation, viz.
the Employers'
Liability Act 1880. In this connection LINDLEY LJ stated (at p 658) —
"There is no definition of plant in the Act: but, in its ordinary sense, it includes whatever apparatus is used by a business man for carrying on his business, - not his stock-in-trade which he buys or makes for sale; but all goods and chattels, fixed or movable, live or dead, which he keeps for permanent employment in his business."
In the subsequent cases, dealing with fiscal legislation
/ providing
24
providing for capital allowances similar to those contained in s 12 of
the Act, the English courts have placed emphasis upon the use
which was made of
the item alleged to be plant and in this connection have evolved what is termed
the functional test. This test
has been of particular value in applying the
distinction which the courts have been constrained to draw between the "setting"
in
which a business is carried on and the apparatus with which a business is
carried on. The general approach has been described by
BUCKLEY LJ in a judgment
subsequently described by Lord HAILSHAM LC as "expository" (see Cole Bros Ltd
v Phillips, [1982] 2 All ER 247, at p 254 b) as follows:
/ "In
25
"In all these cases the court had regard to the use which was made of the subject-matter under consideration. To an extent this was necessitated by the statutes, for to qualify for capital allowances the subject-matter must have been provided 'for the purposes of the trade'. This, however, is not the end of the matter, for stock-in-trade is provided for the purposes of the trade but is admittedly not 'plant'. The building in which a business is carried on may accurately be described as 'provided for the purposes of the business', but again admittedly is not
plant. A structure attached to the soil may be plant. The dry dock in Inland Revenue Comrs v Barclay Curie & Co ( [1969] 1 All ER 732) was such, as also were the pools in Cooke (Inspector of Taxes) v Beach Station Caravans Ltd ([l974] 3 All ER 159). On the other hand, a structure of the nature of a building which was not attached to the soil was held not to be plant in St John's School (Mountford and Knibbs) v Ward (Inspector of Taxes) ( [1974] STC 69).
/The.
26
The distinction, I think, is that in the one case the structure is something by means of which the business activities are in part carried on; in the other case the structure plays no part in the carrying on of those activities, but is merely the place within which they are carried on. So, in the case at any rate of a subject-matter which is a building or some other kind of structure, regard must be paid to the way in which it is used to discover whether it can or cannot be properly described as plant. This is what has been referred to as the functional test. Indeed I think that this test is applicable to every kind of subject-matter. In some cases the effect of the functional test may be so immediately apparent that the character of the subject-matter as plant goes without saying and the test need not be consciously applied. But in cases nearer the line, in my opinion, the functional test provides the criterion to be applied. Is the subject-matter the apparatus, or part of the apparatus, employed in carrying on the activities of the business? If it is, it is no matter that it consists of some structure attached to the soil. If it is not part of the apparatus so employed, it is not plant, whatever its characteristics may be."
/ (See
27
(See Benson's case, supra, at pp 342 g - 343 d. )
In
addition, it has been held that the word "plant" connotes some degree of
durability and would not include articles which are quickly
consumed or worn out
in the course of a few operations (see Hinton v Maden & Ireland, Ltd,
[1959] 3 All ER 356.
I think that this general approach and in particular the
functional test can be fruitfully applied in the interpretation of the word
"plant" as it occurs in s 12 of the Act. Of course, ultimately each case must be
decided by a careful consideration of its own particular
facts and by a common
sense approach to what subject-matter can, and what subject-matter cannot
properly be classified
/ as
28
as "plant". As it was put by Lord WILBERFORCE in Inland
Revenue
Commissioners v Scottish and Newcastle Breweries
Ltd,
supra, at p 233 e —
"In the end each case must be resolved, in my opinion, by considering carefully the nature of the particular trade being carried on, and the relation of the expenditure to the promotion of the trade".
The distinction alluded to in the English
authorities between a building or structure by means of
which the
taxpayer's business activities are carried on
and one which is merely the
place within which they are
carried on has no particular relevance in the
present case.
Nevertheless, the functional test, which poses the
general
question as to how the subject-matter of the enquiry is used
and whether it is employed to carry on or promote the
/ taxpayer's
28 A taxpayer's business activities, is a relevant and useful yardstick to be
applied to the issue in this appeal.
Adopting this general approach, I am of
the view that the railway line constructed by appellant did constitute "plant"
within the
meaning of s 12. The trade being carried on by appellant is the
manufacture of cement. As the facts show - and as is conceded by
respondent -the
process of manufacture commences at the appellant's works at Springbokpan, where
the limestone is quarried, crushed
and, after testing, separated into usable and
non-usable material. The next stages of the manufacturing process are
necessarily performed
at appellant's factory in Lichtenburg, some forty odd
kilometres away. Obviously this circumstance compels appellant to provide some
form of
/ conveyance
29 conveyance for the crushed limestone from Springbokpan to Lichtenburg. The
form chosen, as being the most economical
alternative, is a railway line. The
function performed by the railway line and the rolling stock used thereon in
conveying the material
is, in my opinion, part and parcel of appellant's
industrial process and I can see no reason why the railway line should not be
regarded
as apparatus used in carrying on the industrial process of
manufacturing cement. Had the appellant decided to effect the conveyance
by
means of an immensely long conveyor belt it could hardly be contended that this
was not part of appellant's plant. The railway
line, though needing periodic
maintenance and repair, is durable and is intended to last the life of the
limestone deposits at Springbokpan.
/ In
30
In my opinion, it has all the characteristics of plant.
In his heads of
argument respondent's counsel submitted that the word "plant" should be
restrictively interpreted so as to mean machinery
or something akin to
machinery. There is, in my view, no warrant for such a restrictive
interpretation, which would virtually render
the word "plant" tautologous, and
counsel wisely did not press this submission in oral argument. Nor did he pursue
another contention
which appeared to be made in his heads, viz. that plant did
not include buildings and fixtures. In certain circumstances buildings
and
fixtures can clearly constitute plant.
In the end respondent's counsel fell
back on the argument that the railway line could not be regarded as
/plant
31 plant because of its length and the distance separating the
Springbokpan works and the factory at Lichtenburg. The length of the
railway
line, so it was argued, was inconsistent with the concept of plant and the
distance separating Springbokpan and Lichtenburg
had the effect of interrupting
the process of manufacture. (The Special Court appears to have based its
decision upon a similar line
of argument.) This argument cannot prevail. The
size of a piece of apparatus cannot per se prevent it constituting plant,
if it otherwise possesses the characteristics of plant. Moreover, if counsel's
argument were sound,
it would be necessary to draw the line somewhere and decide
at what point a railway line of this nature becomes too
/ long
32 long to be plant. There is no basis in logic or principle upon
which this could be done. Nor do common sense considerations compel
me to do so.
As to the point that the distance involved had the effect of interrupting the
process of manufacture, this, as I understand
it, amounts to a contention that
the conveyance on the railway line is not part of the process of manufacture.
This contention is
in conflict with the concession made that the railway line is
used directly in the process of manufacture; and, in any event, I cannot
agree
that the process of manufacture is interrupted, as suggested, or that the
conveyance is not part of the process of manufacture.
To illustrate his argument, counsel posed the
/ hypothetical
33
hypothetical analogy of a manufacturer who part-manufactures goods and then sends the half-finished goods some distance away, even overseas, to have them completed. In such a case, it was contended, the means of conveyance could hardly be classified as plant. I do not find the analogy helpful. Depending on all the facts and circumstances, the means of conveyance might constitute plant; but, in any event, one must consider the issue in relation to the actual farts of the present case. In appellant's case the works at Spring-bokpan and the factory are linked by a permanent railway line constructed and operated by appellant at its own expense. It is laid along a route to which appellant has servitutal rights. The line is used solely for the purpose
/ of
34 of conveying crushed limestone from Springbokpan to the factory. The line
is like a very long conveyor belt leading from the crushing
plant to the
factory.
For these reasons 1 am of the view that, contrary to the finding of
the Special Court, the railway line constructed by appellant did
constitute
"plant" within the meaning of that term in ss 12(1) and 12(2) and that, the
other requisites of these subsections being
satisfied, appellant was entitled to
an initial allowance and an investment allowance on the cost to appellant of the
railway line.
No finding is made as to whether or not such cost includes all the
items which go to make up the amount of R2 047 699 referred to
in the
dossier.
/ The
35 The following order is made:
(1) The appeal is allowed with costs, including the costs of two counsel.
(2) The order of the Special Court is set aside and there is substituted an order allowing the appeal and remitting the case to the Commissioner to enable him to revise appellant's assessment for the 1975 tax year in accordance with the findings made in this judgment.
M M CORBETT
MILLER JA) NICHOLAS JA)/ GALGUT AJA) Concur HOWARD AJA)
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