Edgars Stores Ltd v Commissioner for Inland Revenue

• Jurisdiction: South Africa
• Judge: Corbett JA, Hoexter JA, Vivier JA, Viljoen AJA and Nicholas AJA
• Judgment Date: 30 May 1988
• Citation: 1988 (3) SA 876 (A)
• Hearing Date: 19 May 1988
• Court: Appellate Division

Nicholas AJA:

This is an appeal by Edgars Stores Ltd ('Edgars') against a judgment by Ackermann J (Kirk-Cohen J and Roux J concurring) which was delivered in the Transvaal Provincial Division. The judgment has been reported (Commissioner for Inland Revenue v Edgars Stores Ltd 1986 (4) SA 312 (T)), and it will be referred to as 'the reported judgment'. The H Court a quo upheld an appeal against a decision of the Transvaal Income Tax Special Court (Nestadt J presiding), in which the Special Court had allowed an appeal by Edgars against the disallowance by the Commissioner for Inland Revenue ('the Commissioner') of certain deductions from its taxable income which had been claimed in its returns of income for the years of assessment ended 30 June 1978 and 30 June 1980.

I Edgars operates retail stores dealing in clothing throughout southern Africa. It appears that it does not itself own the premises on which the businesses are conducted. It leases those premises from various lessors who, under arrangements with Edgars, have constructed them on suitable sites in accordance with Edgars' requirements. The total annual rental J payments are substantial: in the 1980 tax year they exceeded R16 million.

Nicholas AJA

A The leases are long-term notarial leases, for which standard forms are used. The lease agreements relating to 41 stores contain so-called 'turnover' clauses. Under such leases there is payable a 'basic rental' and a 'turnover rental' which is related to the annual turnover of the store concerned. It was problems connected with such leases which gave rise to Edgars' appeal to the Special Court. B

Under the leases, which contain turnover clauses, there enters into the calculation of the rent a percentage of the net turnover of the store concerned during each 12-month period of the lease. Such 12-month period ends of course on various dates in different leases, depending as it does on the date of commencement of a particular lease. Where the C 12-month period of any lease ends after the close of Edgars' tax year, it is not possible to ascertain, for the purposes of Edgars' return of income for that year, the net annual turnover (and hence the amount of the rental attributable to turnover). Since it has been the experience of Edgars that the turnover of its stores has been increasing from year D to year, it has sought to deduct 'turnover rental' from its taxable income, not in the year of assessment during which it is paid to the lessor, but in the year in which Edgars contends that the liability to pay it arose. That is what happened in the years of assessment ended 30 June 1978 and 30 June 1980. At the end of each of those years, the E turnover figures for the 12-month period of some leases could not then be calculated. In the respective returns of income for those tax years, Edgars claimed deductions for rent amounting to R12 156 393 (which included an amount of R123 560) and R16 997 101 (which included an amount of R322 203). The amounts of R123 560 and R322 203 represented estimates of the amounts by which the turnover rentals payable to the F lessors concerned exceeded the basic rentals. Edgars adopted the view that liability for such amounts had been incurred in the respective tax years. The Commissioner disallowed the deductions of those amounts. There followed the appeal to the Special Court. This was upheld: the assessments were set aside and they were referred back to the Commissioner for reassessment on the basis that the amounts of R123 560 G in respect of the 1978 year of assessment and the amount of R322 203 in respect of the 1980 year of assessment should have been allowed as deductions from Edgars' income in those years.

Under s 11(a) of the Income Tax Act 58 of 1962, allowable deductions from income are

H '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'.

The problem of whether expenditure was 'actually incurred' in the tax year concerned is a perennial one, and it has frequently been considered by the courts. See the full discussion in the reported judgment at 315E - 320E, to which should be added a reference to Nasionale Pers Bpk v I Kommissaris van Binnelandse Inkomste 1986 (3) SA 549 (A).

The principles which apply to this case are well established. I have extracted them, with slight changes in wording, from the judgment of Ackermann J at 315 - 16:

For the purpose of s 11(a) a deduction in respect of rental is properly to be made in the tax year in which the rental is 'actually J incurred'.

Nicholas AJA

'Actually Incurred' Does 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. a Distinction must be Drawn Between

(a)

the case where the existence of the liability itself is conditional and dependent upon the happening of an event after B 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 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 C as having been incurred in the tax year in question.

The application of those principles to the present case is governed by the proper construction of the relevant provisions of the leases. For the purposes of the appeal to the Special Court it was agreed that it was only necessary to look at the provisions contained in clause 5 of D one standard form of lease agreement. They are set out in full in the reported judgment at 320F - 321H, but for the sake of clarity I have in what follows omitted those portions which are not now material.

'5. Rent

5.1

The lessee shall pay to the lessor from the date of commencement E of this lease a rental in South African currency, free of exchange, at

or such other address in the Republic of South Africa as the lessor may from time to time nominate to the lessee in writing.

5.2

The monthly rental payable by the lessee to the lessor shall be the greater of the amounts as defined in 5.2.1 on the one hand and in 5.2.2 read with 5.2.3, 5.2.4, 5.2.5 and 5.2.6 on the F other hand.

5.2.1

For the full period of the lease as from the date of commencement thereof an amount equivalent to ¹⁄₁₂ (one-twelfth) of Ror such lesser amount of the total capital outlay as defined below in clause 5.2.12.... The rental as defined shall be the minimum rental payable by the lessee throughout the currency of G the lease and is hereinafter referred to as "the basic rental".

5.2.2

¹⁄₁₂ (one-twelfth) of% of the lessee's net annual turnover, as defined in clause 5.2.2 produced from the leased premises during the first years of the lease....

The turnover rental payable herein in...