Income Tax Case No 11024
| Jurisdiction | South Africa |
| Judge | Jooste J |
| Judgment Date | 18 May 2005 |
| Docket Number | 11024 |
| Hearing Date | 21 October 2005 |
| Citation | 2006 JDR 0110 (PSpCrt) |
Jooste J:
Introduction:
This is an appeal against the revised income tax assessment issued by the Commissioner for the South African Revenue Services for the tax year ending on 29 February 2000. The dispute concerns the acquisition of a trade mark by the Appellant and the consequent claiming of an allowance in terms of section 11(gA) of the Income Tax Act, 58 of 1962 ("the Act").
No evidence was lead but a list of essential common cause and admitted facts were handed in by the parties as exhibit "X".
The essential common cause facts are the following:
A Holdings Limited purchased the business of B (SA) (Pty) Ltd as a going concern. The name of the Appellant was changed from "A Holdings Limited" to "B Africa Limited" on 11 June 1999. The acquisition agreement was signed on 15 February 1999 and the addendum thereto on 30 March 1999. The agreement became unconditional on 1 June 1999.
In terms of the agreement, the Appellant purchased the trademark "X" from B SA (Pty) Ltd.
The total purchase price was R120 million and the portion of the purchase price that was attributable to the acquisition of the trade mark was R44 462 000,00.
The Appellant acquired the rights to the trademark on 1 June 1999 and on 15 June 1999 issued 49 402 222,20 shares at an issue price of 90c per share to B SA (Pty) Ltd in compliance with its obligations to give consideration for the trademark.
On 1 June 1999 as well as 15 June 1999 the market value of these shares was in excess of R44 462 000,00 whilst the market value of the trademark acquired by the Appellant was at all relevant times R44 462 000,00.
On 18 May 1999 a prelisting statement was issued by the Appellant. In terms thereof, comprehensive information as regards the acquisition of
2006 JDR 0110 p2
Jooste J
the trademark and other company assets acquired by the Appellant was given. The shareholders were apprised of all these matters and the necessary resolutions were duly adopted.
As stated above, the Appellant acquired the trademark in its 2000 year of assessment and pursuant thereto, claimed an allowance in terms of section 11(gA) of the Act. It is a requirement of section 11(gA) that the taxpayer should have incurred expenditure in acquiring the trademark concerned.
From the grounds of assessment it appears that the Commissioner disallowed the allowance on the following grounds (dossier pp 79 - 80):
In terms of the agreement the performance required from the Appellant was stipulated as the issue of a specified number of shares.
In complying with its contractual obligation, the Appellant did not expend any monies or assets.
Accordingly, no expenditure was actually incurred by the Appellant in acquiring the trademark as required by section 11(gA) of the Act.
Alternatively, in so far as it may be held that expenditure was actually incurred when the appellant concluded the agreement and that the requirement of section 11(gA) of the Act have accordingly been fulfilled, the Commissioner is of the view that the provisions of section 8(4)(n) of the Act are applicable, due to the following grounds:
By the issue of shares and the acceptance thereof by the seller, the Appellant was relieved, or partially relieved from the obligation to make payment of the expenditure actually incurred and is deemed to have recovered or recouped an amount equal to the amount of the obligation, which was solely relieved or partially relieved".
The alternative ground of assessment was abandoned at the hearing of the appeal.
The Appellant's contentions are, in essence, as follows:
As regards the main ground of assessment: the Appellant contains that it incurred an unconditional obligation to pay the purchase price of the trademark to the amount of R44 462 000,00.
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Jooste J
That the incurral of that obligation constituted expenditure incurred in acquiring the trademark; and that the fact that it discharged its obligation by issuing shares to the seller, does not detract from this circumstance.
The main ground of assessment: Incurral of expenditure in terms of s 11(gA):
The relevant part of section 11(gA)(iii)(aa)(A) reads as follows for purposes of the 2000 year of assessment:
For the purpose of determining the taxable income derived by any person from carrying on any trade in the Republic, there shall be allowed as deductions from the income of such person so derived -
An allowance in respect of any expenditure ... actually incurred by the taxpayer -
(iii)
in acquiring by assignment from any other person any ... trademark ....
If such ... trademark ... is used by the taxpayer in the production of his income or income is derived by him therefrom: Provided that -
(aa)
where such expenditure exceeds R3000 and was incurred -
(A)
before 29 October 1999, the allowance shall not exceed for any one year such portion of the amount of the expenditure as is equal to such amount divided by the number of years, which in the opinion of the Commissioner, represents the probable duration of the use of the ... trademark ... or four percent of the said amount, whichever is the greater".
As appears from the grounds of assessment, the only requirement of the subsection that is in dispute is that the taxpayer should have incurred expenditure in a certain amount. The Respondent accepts that, if the Appellant were to show that he did incur expenditure in the amount of R44 462 000,00, that expenditure was incurred in acquiring a trademark by assignment, as intended in the subsection, and that all the other requirements of the subsection were also met.
The expression "expenditure actually incurred" means, for purposes of sections such as 11(gA) that the taxpayer should have incurred an unconditional legal obligation in respect of the amount concerned. It is not required that the obligation should also be discharged. Where the obligation has been incurred, the expenditure becomes deductible if it also complies with the other requirements for the deductibility laid down by the section concerned.
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Jooste J
This was stated as follows in Edgars Stores Limited / CIR 1988 (3) SA 876 (A) at 888G - 889C (per Corbett, JA):
"As my Brother (Nicholas, AJA) as pointed out, the case hinges on the application of the general deduction formula in section 11(a) of the Income Tax Act, 58 of 1962 - and more particularly the word 'expenditure ... actually incurred ...' (Afrikaans text: 'Onkoste...
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