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

• Jurisdiction: South Africa
• Citation: 2011 (1) SA 1 (SCA)

Ackermans Ltd v Commissioner, South African Revenue Service;
Pep Stores (SA) Ltd v Commissioner, South African Revenue Service
2011 (1) SA 1 (SCA)

2011 (1) SA p1

Citation	2011 (1) SA 1 (SCA)
Case No	441/2009
Court	Supreme Court of Appeal
Judge	Navsa JA, Cloete JA, Cachalia JA, Mhlantla JA and Bosielo JA
Heard	September 20, 2010
Judgment	October 1, 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.

Flynote : Sleutelwoorde B

Revenue — Income tax — Deductions — Expenditure incurred in production of C income — Actual incurring of liability required — Contingent liabilities sold as part of sale of business — Lesser purchase price accepted as result of value assigned to contingent liabilities — Seller claiming deduction equal to sum of contingent liabilities — Transaction not resulting in discharge of obligation owed by seller to purchaser — Obligation to pay required D — Deduction disallowed — Quaere: Whether deduction claimable by purchaser once liabilities no longer contingent — Income Tax Act 58 of 1962, s 11(a).

Headnote : Kopnota

The appellant (Ackermans) sold its retail business as a going concern to P Ltd, E and the appellant (Pep Stores) likewise sold its business to P Ltd. Both sellers appealed against an Income Tax Court's dismissal of their claims for deduction in terms of s 11(a) of the Income Tax Act 58 of 1962. As the facts in both cases were for all intents and purposes identical, the outcome of the Ackermans appeal would determine the Pep Stores appeal. In terms of the agreement of sale in the Ackermans matter the 'business' sold was F defined as the retail clothing business, including the 'business assets', the 'liabilities' and the 'contracts' as at the effective date. The '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, amounting in all to R329 440 402, included three amounts, which could be referred to as 'the G

2011 (1) SA p2

A three contingent liabilities', and which totalled R17 174 777. Had Ackermans retained its business and continued to trade, the three contingent liabilities would have been deductible in its hands as and when they became unconditional. The 'purchase price' was defined in the agreement as 'the amount equal to the sum of R800 million and the rand amount of the liabilities', ie R800 million plus R329 440 402, totalling R1 129 440 402. B Included in the method of discharging the purchase price was the assumption by P Ltd of the remainder of Ackerman's liabilities. In terms of the agreement, therefore, P Ltd assumed all of Ackermans' liabilities, including the three contingent liabilities. Ackermans claimed a deduction in terms of s 11(a) of the Act, on the basis that, under the sale agreement, Ackermans C incurred expenditure (in the sense envisaged in s 11(a)) in an amount equal to the contingent liabilities. It was contended that Ackermans did so by foregoing a portion of the asset purchase price (to which it would otherwise have been entitled) equal to the value of the contingent liabilities. The argument was that the economic effect of the agreement of sale in respect of Ackermans' liabilities, including the three contingent liabilities, was that D Ackermans received, for assets sold at R1 129 440 402, only R800 million; and that the position was the same as if Ackermans had received R1 129 440 402 from P Ltd and paid R329 440 402 back to P Ltd for the latter to assume the liabilities as at the effective date. An Income Tax Court having found against the appellants, in an appeal to the SCA,

Held, that the expression 'expenditure . . . incurred' in s 11(a) of the Act meant E the undertaking of an obligation to pay or (which amounted to the same thing) the actual incurring of a liability. (Paragraph [8] at 6C.)

Held, further, that no liability was incurred by Ackermans to P Ltd in terms of the sale agreement. The manner in which the purchase price was discharged by P Ltd did not result in the discharge of any obligation owed by Ackermans to P Ltd. (Paragraph [8] at 6C - D.)

F Held, further, that the fact that Ackermans rid itself of liabilities by accepting a lesser purchase price than it would have received had it retained the liabilities, did not mean in fact or in law that it incurred expenditure to the extent that the purchase price was reduced by the liabilities. At the effective date no expenditure was actually incurred by Ackermans. (Paragraph [11] at 7F - G.) Appeals dismissed.

Cases Considered

Annotations G

Reported cases

Southern Africa

Secretary for Inland Revenue v John Cullum Construction Co (Pty) Ltd 1965 (4) SA 697 (A): referred to. H

Australia

Pridecraft Pty Ltd v Federal Commissioner of Taxation; Federal Commissioner of Taxation v Spotlight Stores Pty Ltd [2004] FCAFC 339: referred to

Spotlight Stores (Pty) Ltd v Federal Commissioner of Taxation [2004] FCA 650: referred to. I

England

Anglo-Persian Oil Co Ltd v Dale (Inspector of Taxes) [1932] 1 KB 124 (CA) ((1931) 16 TC 253): J referred to

2011 (1) SA p3

British Insulated & Helsby Cables Ltd v Atherton (HM Inspector of Taxes) A [1926] AC 205 (HL) ((1926) 10 TC 155): referred to

Hancock (Surveyor of Taxes) v General Reversionary and Investment Co Ltd [1919] 1 KB 25: referred to

Heather (Inspector of Taxes) v PE Consulting Group Ltd [1973] 1 All ER 8 (CA): referred to

Rowntree & Co Ltd v Curtis (Inspector of Taxes) [1925] 1 KB 328 (CA): referred to B

Vodafone Cellular Ltd v G Shaw (HM's Inspector of Taxes) 1997 STC 734 ([1997] EWCA Civ 1297): referred to.

Statutes Considered

Statutes

The Income Tax Act 58 of 1962, s 11(a): see Juta's Statutes of South Africa 2009/10 C vol 3 at 1-401.

Case Information

Appeals from decisions in the South Gauteng Tax Court (Willis J). The facts appear from the judgment of Cloete JA.

OL Rogers SC (with MW Janisch) for the appellants in both appeals. D

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