Commissioner for Inland Revenue v African Oxygen Ltd

• Jurisdiction: South Africa
• Judge: Steyn CJ, Beyers JA, Ogilvie Thompson JA, Botha JA and Williamson JA
• Judgment Date: 22 November 1962
• Hearing Date: 02 November 1962
• Court: Appellate Division

C Steyn, C.J.:

This appeal concerns the deduction, in terms of sec. 11 (2) (a)read with sec. 12 (g) of the Income Tax Act, 30 of 1941, from the income of the respondent, of the amounts of R2,424 and R1,520, respectively, in respect of the years of assessment ended upon 30th D June, 1956, and 30th June, 1957, as expenditure, not of a capital nature, actually incurred in the production of the respondent's income, and wholly or exclusively laid out or expended for the purposes of its trade. The Commissioner disallowed the deduction of these amounts, but on appeal to the Special Court of the Transvaal, his decision was reversed.

E According to the stated case, the respondent, a private company, carried on an extensive business in the manufacture and sale of gases, more particularly dissolved acetylene and oxygen, and of apparatus for the use of such gases. A Swedish company, Svenska Aktiebolaget Gas-Accumulator, carried on a somewhat similar business and had found a F market for a number of its products, also in South Africa. These products included dissolved acetylene, though not in large quantities. In order to avoid competition with its own product, the respondent entered into negotiations with the Swedish company. In the result another company, Gas Accumulator Sales (Pty.) Ltd., was formed and an agreement was entered into between the three companies on 6th August, 1937. The G company so formed and the Swedish company are respectively referred to in the stated case as Gasco and the Aga company.

The respondent held 49 per cent and the Aga company 51 per cent of the shares in Gasco and each had the right to appoint one of the two H directors of the latter. In terms of the agreement the Aga company appointed Gasco as its exclusive representative for the sale in South Africa, Northern and Southern Rhodesia and South West Africa of such of its apparatus and other products as were specified in the agreement, but not including oxygen or dissolved acetylene, and Gasco undertook not to deal in any apparatus or products which would in any way compete with those of the Aga company. In regard to trade in those countries, the respondent contracted not to compete with the Aga company in the apparatus and other products mentioned, except

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gas welding and cutting apparatus, while the Aga company agreed not to concern itself either directly or indirectly with the production or sale A of oxygen or dissolved acetylene. The agreement was to endure for five years, being terminable as at 31st December, 1942, by six months' notice. In the absence of such a notice, it was to continue for an indefinite period, subject to similar notice of termination, but these restrictions on trade as between the respondent and the Aga company were in any event to remain in force until two years after its termination

B 'by effluxion of time or through any breach on the part of the Gas Accumulator Sales Company'.

The respondent further undertook certain financial obligations, amongst them the obligation to make good, during the subsistence of the agreement, all loss in trading incurred by Gasco, as certified by the auditors of that company.

C The stated case does not disclose the trading results of Gasco during the period 1937 - 1948. During the period 1949 - 1957, there was a nett profit of R2,316 in 1949 and of R130 in 1955. In the other years there were losses. The amounts in question represent the losses incurred in 1956 and 1957 respectively.

D Before the Special Court the respondent contended that it had entered into an agreement for the purpose of protecting the major portion of its trade and of maintaining and, if possible, increasing its income, and that these amounts did not constitute expenditure of a capital nature because the Aga company's undertaking not to compete, in consideration E of which they had been paid, did not give rise to the acquisition of any asset or to an enduring advantage for the benefit of the respondent's trade. The Commissioner raised two contentions. The first was that, although the respondent entered into the agreement with the motive of protecting its own market, these payments had at least partly been made F to maintain Gasco as a commercial enterprise within the scheme of the agreement, and had therefore not been wholly and exclusively laid out for the purposes of the respondent's trade. The second was that, even if they had been so laid out, they were nevertheless of a capital nature because by the elimination of the Aga company's competition, the respondent did obtain a right or advantage of an enduring character for the benefit of its trade.

G It would seem, therefore, that while it was common cause that these payments constituted expenditure incurred in the production of the respondent's income, the disputed issues were, firstly, whether or not that expenditure had been exclusively laid out for the purposes of the respondent's trade, and, secondly, if it had so been laid out, whether H or not it was of a capital nature.

Before this Court, the first submission made by counsel for the appellant was that the Court a quo has made no finding upon the second issue and that, as was done in allegedly similar circumstances in Rand Speculation and Finance Co. Ltd v Commissioner for Inland Revenue, 1953 (1) SA 348 (AD) at p.356, this Court must itself determine that issue upon the facts set out in the stated case without regard to any finding by the Special Court. From the judgment it is apparent that it contains nothing in the nature of an express finding, but that,

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of course, does not necessarily mean that the Court below lost sight of and came to no conclusion in regard to this issue. It had been pointedly raised by both parties and in the judgment the non-capital nature of the...