Commissioner for Inland Revenue v Pick 'n Pay Wholesalers (Pty) Ltd

• Jurisdiction: South Africa

Commissioner for Inland Revenue v Pick 'n Pay Wholesalers (Pty) Ltd
1987 (3) SA 453 (A)

1987 (3) SA p453

Citation	1987 (3) SA 453 (A)
Court	Appellate Division
Judge	Corbett JA, Botha JA, Hefer JA, Nestadt JA and Nicholas AJA
Heard	March 16, 1987
Judgment	May 14, 1987

Flynote : Sleutelwoorde

Income tax — Deductions — Expenditure in the production H of income — Prohibition in s 23 (g) of Income Tax Act 58 of 1962 on deductions which are not 'wholly or exclusively laid out or expended for the purposes of trade' — Retailer making donation to organisation concerned with social upliftment and claiming contributions as deductions — Retailer contending that donations made with intent to gain major publicity and I that benefit to organisation was purely incidental thereto — Court holding that, on the facts, indications were that retailer had a dual purpose in making donation, viz philanthropic motive as well as business purpose, and expenditure accordingly not wholly or exclusively for the J purposes of trade.

1987 (3) SA p454

Headnote : Kopnota

In 1977 the respondent pledged to donate to the Urban Foundation a total of R500 000 in five A equal annual instalments and in each of the years ended 28 February 1978 and 28 February 1979 it claimed to deduct R100000 from its income as 'advertising'. These deductions were disallowed and an objection was overruled. An appeal to the Cape Income Tax Special Court was upheld. By consent the Full Bench set aside this decision and the matter was remitted for the hearing of further evidence by the Special Court which again allowed the B appeal. Leave to appeal was granted to the Commissioner to appeal to the Appellate Division. The evidence before the Special Court was to the effect that the respondent kept its name constantly before the public by intensive advertising, the most important and valuable of which it regarded as its indirect advertising, viz obtaining notice in the news and editorial columns of the media promoting its public image as 'the consumer's champion' and a company aware of its social C responsibilities to the community. The managing director of the respondent was a member of the board of the Urban Foundation, an organisation concerned with the upgrading of housing and the provision of community facilities. As a member of the main board of the Urban Foundation, the managing director of the respondent was involved in planning a fund-raising project by means of a self-imposed levy in the whole of the private sector of a percentage of turnover or profit. He was asked if he would lead the way and took the project to the board of the respondent with the idea that this would be a way of getting D major publicity out of it which would be good for the company and would draw customers into its shop. In the appeal it was contended, on behalf of the appellant, inter alia, that expenditure of the two amounts of R100 000 were 'not wholly or exclusively laid out or expended for the purposes of trade', as intended in s 23(g) of the Income Tax Act 58 of 1962, and that the donations were made with a dual purpose which included philanthropy. The respondent contended that the donation was merely the vehicle which it used to ride to publicity and E profits and that the benefit to the Urban Foundation was purely incidental.

Held, that it was clear on the evidence that an object of the donation was to obtain major publicity and so attract customers into respondent's shops: without that object the donation might have been ultra vires the directors.

Held, further, on the facts, that there were indications which pointed to a dual purpose and the fact that there was no discussion at the respondent's directors' meeting about the benefits to the Urban Foundation did not affect the matter: the F donation was also presented at the press conference and in the ensuing publicity as an act of disinterested benevolence and to regard it merely as a cynical ploy to trade on the charitable sentiments of the community in order to promote the naked business advantage of the respondent was unworthy and unacceptable and was wholly inconsistent with the persona of a company concerned for people and aware of its social responsibility to the community which the respondent had over G the years sought, no doubt sincerely, to build up.

Held, accordingly, that the respondent had not shown on the probabilities that in making the donation it did not have a philanthropic purpose as well as a business purpose and that the appeal therefore had to be allowed. (Hefer JA and Nestadt JA dissenting in respect of the tax year ended 28 February 1978.) H

Case Information

Appeal from a decision in the Cape Income Tax Special Court (Grosskopf J). The facts appear from the judgment of Nicholas AJA.

M Seligson SC for the appellant (the heads of argument having been drawn by M Seligson SC and F D J Brand ): Respondent relied upon the provisions of s 11(a) of the Income Tax Act 58 of 1962 ('the Act') for the deduction of the donations in question. In I order to succeed on this basis the onus was upon respondent to persuade the Court a quo that the donations were 'expenditure... actually incurred in the Republic in the production of the income, provided such expenditure... is not of a capital nature'. (Vide s 11(a) of the Act and see also s 82 of the Act.) From the evidence of Mr D P Buirski, the representative J of respondent's advertising consultant, it appears that respondent's strategy in order to

1987 (3) SA p455

build up its business as a retailer was, right from the outset, A to place itself in the mind of the public as the 'consumer's champion'. One of the things that respondent decided to do in order to build that image was to make donations to charities. In a letter dated 1 July 1980, respondent's secretary, Mr C D G Hurst, made it clear that the whole purpose of the donations in B question was to 'promote the image' of respondent as a socially responsible company and to secure publicity for itself in order to project such image. The aforementioned letter was put to Hurst in cross-examination, whereupon he answered that the term 'image' was not correct. Hurst's attempt, however, to escape from the use of the term 'image' is unpersuasive. The contents of the letter are directly in line with respondent's whole strategy in building its business, ie to create for C itself an image in the public mind as the consumer's champion. This strategy is obviously a long-term and ongoing operation. As was decided by this Court in Commissioner for Inland Revenue v George Forest Timber Co Ltd 1924 AD 516 at 526, 'money spent in creating or acquiring an income producing D concern, must be capital expenditure'. Money spent as part of a long-term and ongoing business strategy to build up and maintain a particular image in order to create or sustain an income-producing concern must be classified as expenditure of a capital nature as envisaged by s 11(a). Support for this submission is also to be found in Income Tax Case 1129 (1969) 31 SATC 144 where the Special Court in Rhodesia held that in so far as the object of the expenditure in question was 'to E improve the appellant's image and so to build up goodwill' (at 147) it was an expenditure of a capital nature.

It appears from the evidence led by respondent that, even if the expenditure in question was not of a capital nature, it was not made exclusively for purposes of trade as envisaged by s F 23(g) of the Act. The onus rested on respondent to satisfy the Court a quo that the said donations were expended 'wholly or exclusively' for the purposes of its trade. It is settled law that, where an expenditure is for dual purposes, one of the purposes not being a trading purpose, and the expenditure on trade cannot be separated and identified, then no portion of the expenditure is deductible. (See Silke on South African G Income Tax 10th ed at 333 and authorities there quoted. See also ITC 698 17 SATC 97; ITC 734 18 SATC 202; ITC 847 22 SATC 77; Odhams Press v Cook [1940] 3 All ER 15 (HL) at 20; Ransom v Higgs [1973] 2 All ER 657 (CA) at 690E - 692G and 699B - D; Ransom v Higgs [1974] 3 All ER 949 (HL) at 958E - 959A, 962E - 963A, 968H - 969E; cf Commissioner for Inland Revenue v H Nemojim (Pty) Ltd 1983 (4) SA 935 (A) at 951B - E.) As to the purpose(s) for which the donations were made, the crucial evidence in this regard is that of the appellant's managing director, Mr R D Ackerman. Mr Ackerman was the mainspring behind the donation and his status was of such a nature that he would have been able to make the donation on behalf of respondent, even if respondent's board had disagreed with him. I From the evidence of Mr Ackerman it is clear that, when he decided that respondent should make the donations in question, he was wearing 'two hats' which were really inseparable and he had at least two or more purposes in mind: (a) respondent itself would benefit from the donation in that it would get widespread favourable publicity in the press; (b) respondent J would

1987 (3) SA p456

A achieve a philanthropic purpose by donating moneys to the Urban Foundation, a charitable organisation; (c) the Urban Foundation, being an organisation on whose board Mr Ackerman served, would benefit by receiving the amounts involved; (d) respondent would set an example to other companies in the B private sector, thereby inducing them to make similar donations. In the light therefore of the evidence of Messrs Ackerman and Hurst the donations were incontestably made partly for a charitable purpose. In the light of the above-quoted authorities, in such a 'package deal' situation where no apportionment can be made as to which part of the amount was expended for the production of income and which part thereof C was not so expended, no deduction can validly be made. The...