Ackermans Ltd v Commissioner, South African Revenue Service; Pep Stores (SA) Ltd v Commissioner, South African Revenue Service

• Jurisdiction: South Africa
• Judge: Navsa JA, Cloete JA, Cachalia JA, Mhlantla JA and Bosielo JA
• Judgment Date: 01 October 2010
• Citation: 2011 (1) SA 1 (SCA)
• Docket Number: 441/2009
• Hearing Date: 20 September 2010
• Counsel: OL Rogers SC (with MW Janisch) for the appellants in both appeals. A Rafik Bhana SC (with JT Boltar) for the respondent in both appeals.
• Court: Supreme Court of Appeal

Cloete JA (Navsa JA, Cachalia JA, Mhlantla JA and Bosielo JA concurring):

[1] There are two appeals before the court: one by Ackermans Ltd and one by Pep Stores (SA) Ltd. On 1 March 2004 Ackermans sold its retail F business as a going concern to Pepkor Ltd. At issue in the appeal is whether by virtue of the sale agreement Ackermans is entitled to a deduction, in terms of s 11(a) of the Income Tax Act 58 of 1962, of the sum of R17 174 777 in respect of its 2004 year of assessment. Save for the specific nature and amount of the contingent liabilities on which the disputed deductions sought by Pep Stores were based, the facts of the G Pep Stores appeal are identical to the Ackermans appeal. The outcome of the Ackermans appeal will accordingly determine the fate of the Pep Stores appeal. The South Gauteng Tax Court sitting in Johannesburg (presided over by Willis J) found against the appellants and confirmed the assessments of the Commissioner. The appellants' application for leave to appeal to this court in terms of s 86A of the Act was H subsequently granted.

[2] In terms of the sale agreement Ackermans sold the 'business' to Pepkor as a going concern. The 'business' was defined as Ackermans' retail clothing business, including the 'business assets', the 'liabilities' and the 'contracts' as at the effective date (1 March 2004). The I 'liabilities' were defined as meaning 'all the liabilities arising in connection with the business, in respect of any period prior to the effective date, known to [Ackermans] as at the effective date'. The liabilities were in fact R329 440 402. They included three amounts, to which I shall for convenience refer as 'the three contingent liabilities', namely: J

Cloete JA (Navsa JA, Cachalia JA, Mhlantla JA and Bosielo JA concurring)

(a)

A R9 880 666, being a contingent liability in respect of Ackermans' contractual obligation to fund post-retirement medical-aid benefits for its employees;

(b)

R6 394 111, being a contingent liability in respect of Ackermans' obligations to employees under a long-term bonus scheme; and

(c)

R900 000, being a contingent liability in respect of repair obligations B undertaken by Ackermans under property leases.

It is these three contingent liabilities, which total R17 174 777, around which this appeal revolves.

[3] The 'purchase price' was defined as 'the amount equal to the sum of C R800 million and the rand amount of the liabilities' - ie R800 million plus R329 440 402, totalling R1 129 440 402. The purchase price was to be discharged as follows:

(a)

as consideration for inter-company and other loans owed to Ackermans, by an assumption by Pepkor of an equivalent amount of the D 'accounts payable', ie amounts due by Ackermans to trade creditors as at and in respect of the period prior to 1 March 2004;

(b)

as consideration for the remaining business assets sold,

(i)

the assumption by Pepkor of the remainder of the liabilities; and

(ii)

the creation of an R800 million loan account owed by Pepkor E to Ackermans.

[4] In terms of the sale agreement, therefore, Pepkor assumed all of Ackermans' liabilities, including the three contingent liabilities. The appellants' counsel submitted, and the submission is not contentious, that, had Ackermans retained its business and continued to trade, the F three contingent liabilities would have been deductible in its hands as and when they became unconditional because:

(a)

Salary and employee benefits paid by a taxpayer are incurred in the production of income and are of a revenue nature. Post-retirement medical-aid subsidies and long-term bonuses are designed to attract G and retain high-quality staff...