Commissioner for Inland Revenue v Edgars Stores Ltd

• Jurisdiction: South Africa
• Judge: Ackermann J, Kirk-Cohen AJ and Roux AJ
• Judgment Date: 30 May 1986
• Court: Transvaal Provincial Division
• Hearing Date: 02 May 1986

Ackermann J:

The respondent (to whom I shall refer as "the taxpayer") carries on trade in the Republic of South Africa as a retailer of clothing and for this purpose leases various E premises in the Republic of South Africa. These premises are leased in terms of written agreements of lease under which the taxpayer pays rental to the lessors. The taxpayer submitted returns of income for its tax years ended 30 June 1978 and 30 June 1980 in which deductions for rent in the respective sums of R12 156 393 and R16 997 101 were claimed. Included in the former sum was an amount of R123 560 and in the latter R322 F 203. The appellant (to whom I shall refer as "the Commissioner") disallowed the deductions to the extent of the sums of R123 560 and R322 203. The taxpayer appealed and the Transvaal Income Tax Special Court (NESTADT J presiding) allowed the appeal and made the following order:

"The assessments for the years ending 30 June 1978 and 30 June 1980 are set aside. They are referred back to the Commissioner for reassessment on the basis that -

(a)

the amount of R123 560 in respect of the 1978 year of assessment; and

(b)

the amount of R322 203 in respect of the 1980 year of H assessment should have been allowed as deductions from appellant's income in those years."

It is against this judgment and order that the Commissioner now appeals to this Court. The dispute is a very narrow one and involves the correct application of s 11 (a) of the Income Tax I Act 58 of 1962 ("the Act") to the facts of the present case, which are undisputed, involving mainly the construction of one particular lease.

Although the leases in respect of the relevant properties are not identical, the Special Court was requested to confine its attention to only one of them, namely the pro forma lease appearing at pp 37 - 44 of the present appeal record. It was apparently agreed between the parties, which agreement was in J any event confirmed at the hearing of the present

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A appeal, that whatever decision was reached in respect of this lease would determine the issue in respect of all the disputed deductions, as if they all arose under this type of lease.

In terms of the lease so selected the monthly rental payable by the taxpayer to the lessor was the greater of:

(a)

B a fixed or determinable amount, styled "basic rental", which was payable monthly in advance; and,

(b)

1/12th (one twelfth) of a certain percentage of the taxpayer's so-called "net annual turnover" as defined in the lease and calculated over a 12-month period running from the date of commencement of the lease or C from the anniversary of such commencement, as the case might be. I shall refer to this amount as "the turnover rental".)

The lease provided that the basic rental was to be paid monthly in advance and was to be paid until the annual turnover figures in respect of any year became available.

D Within three months after the end of every 12-month period completed after the commencement of the lease the taxpayer was obliged to pay the lessor the turnover rental, "if applicable", and to deliver to the lessor a statement of the net annual turnover for that 12-month period certified as correct by the auditors of the taxpayer.

E At the end of the years of assessment ended 30 June 1978 and 30 June 1980 and at the time of submission of the taxpayer's returns in respect of these years of assessment, the turnover rental figures were not available. For this reason the respondent, in respect of the two aforementioned years, claimed as deductions the aforementioned sums of R123 560 and R322 203, F being estimates of the amounts by which the turnover rental for the respective years would exceed the basic rental for such months falling within the year of assessment.

In the Court a quo, the Commissioner conceded that the taxpayer was entitled to deduct from income those portions of the amounts of R123 560 and R322 203 (as eventually quantified) G which applied to those leases whose 12-month lease periods ended on the last day of the respective year of assessment.

The present appeal is limited to those instances where the 12-month period of a lease ends after the taxpayer's year of assessment. It is also limited to the rental for those months H of the lease-year that fall within the tax years under review.

It is common cause that the rental in question is expenditure actually incurred in the Republic in the production of income and is not of a capital nature. The issue relates solely to the timing of the deduction of turnover rental, that is, the proper tax year in which it is to be made.

In regard to those portions of the amounts of R123 560 and R322 I 203 which related to leases whose 12-month periods ended after the respective year of assessment, the Court a quo found that:

(a)

there was only one rent which was payable monthly;

(b)

on a realistic approach to the wording of the lease the quantum of the monthly rental was calculable simply on a turnover basis subject to a minimum;

(c)

J the monthly payments of the basic rental stand on account of the

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turnover rental until the annual turnover figures A become known and the relevant calculations are made. If the turnover rental so calculated is found to be more than the basic rental, the rent is ex post facto quantified with retrospective effect, the difference becoming payable by way of a lump sum;

(d)

an unconditional, absolute liability on the part of B the taxpayer to pay rent arises each month by virtue of its occupation of the premises. The precise amount which would in due course be payable would, as at the end of the taxpayer's tax year, be uncertain. There can be no question of the liability being nil. Only the quantification thereof, not its existence, C remains to be ascertained. This would affect merely what a reasonable estimate of the liability should be.

In consequence of these findings the Court a quo decided that the full amounts of R123 560 and R322 203 were legitimate D deductions in terms of s 11 (a) of the Act.

The Receiver appeals against the order made by the Court a quo on the ground that it erred in holding that an unqualified liability for turnover rental based on the taxpayer's turnover for a particular 12-month period came into existence before the completion of that period.

E Section 11 (a) of the Act provides that -

"For the purpose of determining the taxable income derived by any person from carrying on any trade within the Republic, there shall be allowed as deductions from the income of such person so derived -

(a)

expenditure and losses actually incurred in the Republic in the production of the income, provided such expenditure and losses are not of a capital nature;"

For the purpose of s 11 (a) such a deduction is properly to be F made in the tax year in which the rental is "actually incurred". Although not expressly so stated in the section it is implied that a deduction for expenditure can only be made in the tax year during which it is "actually incurred". (See G Sub-Nigel Ltd v Commissioner for Inland Revenue 1948 (4) SA 580 (A) at 589 - 590 and Caltex Oil (SA) Ltd v Secretary for Inland Revenue 1975 (1) SA 665 (A) at 674B - C.)

The qualifying word "actually" does not add anything to the plain and ordinary meaning of "incurred". (See ITC 1117 30 SATC 130 at 131.)

It is authoritatively established that "actually incurred" does H not mean "actually paid", but means all expenditure actually incurred during the year, whether the liability has been discharged during that tax year or not. It is in the tax year in which the liability for the expenditure is incurred, and not in the tax year in which it is actually paid (if paid in a subsequent year), that the expenditure is actually incurred for I the purpose of s 11 (a). See the Caltex Oil case supra at 674E - F where BOTHA JA inter alia stated that:

"The expression 'expenditure actually incurred' in s 11 (a)... means all expenditure for which a liability has been incurred during the year, whether the liability has been discharged during that year or not."

Another well-established principle, not challenged in this J appeal, is that a distinction must be drawn between:

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(a)

A the case where the existence of the liability itself is conditional and dependent upon the happening of an event after the tax year in question, in which event the liability is not incurred in the tax year in question; and

(b)

the case where the existence of the liability is B certain and established within the tax year in question, but the amount of the liability cannot be accurately determined at the tax year-end, in which event the liability is nevertheless regarded as having been incurred in the tax year in question.

As far as case (a) above is concerned Silke on SA Income Tax 10th ed at 313 states that:

C "If there is no definite and absolute liability during the year of assessment to pay an amount, expenditure has not been 'actually incurred'. Thus estimates of contingent liabilities are not expenditure 'actually incurred'."

According to Meyerowitz and Spiro Income Tax in South Africa (Permanent Volume) para 625:

D "Where there is no absolute liability but merely a contingent one, however likely the taxpayer may be called upon to pay, there is no expenditure actually incurred."

In ITC 380 9 SATC 347 the taxpayer was liable to pay its agent commission on sales of land sold on hire-purchase. By agreement one-half of the commission was kept back, and it was only to be paid to the agent in future years when the purchasers of the E land on hire-purchase had made full and final payment on the instalment. The full commission was claimed as an expenditure. At 348 the President, Dr Manfred Nathan KC, quoted with approval the following passage from an earlier unreported...