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[2012] ZASCA 36
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Eveready (Pty) Ltd v Commissioner for the South African Revenue Service (195/11) [2012] ZASCA 36; 74 SATC 185 (29 March 2012)
THE
SUPREME COURT OF APPEAL OF SOUTH AFRICA
JUDGMENT
Not reportable
Case No: 195/11
In the matter
between:
EVEREADY (PTY)
LIMITED
….......................................................
Appellant
and
THE COMMISSIONER
FOR THE SOUTH AFRICAN
REVENUE SERVICE
…..................................................................
Respondent
Neutral citation:
Eveready v The Commissioner for the SARS
(195/11)
[2012] ZASCA
36
(29 MARCH 2012)
Coram:
NUGENT, HEHER, MALAN and TSHIQI JJA and BORUCHOWITZ AJA
Heard:
2
MARCH 2012
Delivered: 29
MARCH 2012
Summary: Tax –
Income Tax Act 58 of 1962 – s 22(4) – trading stock
– whether acquired for ‘no
consideration’.
_____________________________________________________________
ORDER
_____________________________________________________________
On appeal from: Tax
Court, Port Elizabeth (Chetty J with Messrs P Ranchod and Z Mzimela
as assessors) sitting as court of first
instance):
1. The appeal is
dismissed with costs.
2. The cross-appeal
is dismissed with costs that include the costs of two counsel.
_____________________________________________________________
JUDGMENT
_____________________________________________________________
NUGENT and TSHIQI
JJA (HEHER, MALAN JJA and BORUCHOWITZ AJA CONCURRING)
[1] Before us is an
appeal and a cross-appeal against orders made by the Tax Court
sitting at Port Elizabeth (Chetty J with Messrs
P Ranchod and Z
Mzimela as assessors). The appeal concerns s 22 of the Income
Tax Act 58 of 1962 and in particular s 22(4).
[2] Section 22
determines the value to be attributed to trading stock when it is
taken into account in determining taxable income.
The value to be
attributed to closing stock is dealt with in s
22(1).
In broad terms its value is to be the cost price of the stock, less
any allowance that the Commissioner might consider to
be just and
reasonable for any diminution in its value. Section 22(2) determines
the value to be attributed to opening stock. If
it was held as
closing stock in the previous year, it is to be the value that was
attributed to the stock in determining taxable
income for that year.
If it was not held as closing stock for the previous year then its
value is to be its cost price. The manner
in which the cost price of
stock is to be determined for the purpose of those sections is
specified in some detail in s
22(3).
[3] The appeal
centres on s
22(4),
which determines the value to be placed on trading stock that was
acquired ‘for no consideration’. It provides
that the
cost price of such stock for purposes of s
22(3)
– and hence for determining its cost price where applicable in
the earlier subsections – is deemed to be its current
market
price at the date of acquisition.
1
[4] At one time
Gillette Group South Africa (Pty) Ltd (Gillette) had a division of
its business that manufactured, distributed and
sold zinc batteries
under the name ‘Eveready’. On 18 November 2002 Gillette
sold the business as a going concern to
Friedshelf 243 (Pty) Ltd, a
shelf company that changed its name to Eveready (Pty) Ltd, which is
the appellant in the appeal (we
will refer to it hereafter as
Eveready). The effective date of the sale was 1 March 2003.
[5] In its income
tax return for the 2004 year of assessment – which spanned the
period 1 March 2003, when Eveready commenced
trading, to its
accounting year-end on 30 June 2004 – Eveready claimed a
deduction from income of R103 532 179
for the trading stock
that it had acquired from Gillette pursuant to the purchase of the
business. It said that was the market
value of the stock at the date
of acquisition, and that it was entitled to deduct its market value
because it had acquired the
stock from Gillette ‘for no
consideration’ as contemplated by s
22(4).
[6] In an additional
assessment issued by the Commissioner after an audit of Eveready’s
business the deduction was disallowed.
At first the deduction was
disallowed altogether, but later the Commissioner allowed a deduction
of R21 562 918 for reasons
that we come to later. Interest
on the allegedly unpaid tax was levied under s
89
quat
(2).
[7] Objections by
Eveready to the disallowance of the deduction and to the levying of
interest were rejected by the Commissioner
and Eveready appealed to
the Tax Court. The Tax Court dismissed its appeal against the
disallowance of the deduction but upheld
its appeal against the
levying of interest. Eveready now appeals against the former order,
and the Commissioner cross-appeals against
the latter order, with the
leave of the court below.
[8] The Commissioner
accepts that the trading stock acquired from Gillette (which
constituted the opening stock of Eveready’s
business) is
deductible from its income.
2
What is in dispute
is the amount to be attributed to the stock for purposes of the
deduction. The Commissioner disputes that Eveready
is entitled to
deduct its market value because, so he says, it was not acquired ‘for
no consideration’. He contends
that the stock was acquired for
consideration and thus it falls to be deducted at its cost price as
contemplated by s
22(2)(
b
),
which he estimated to be R21 562 918, the amount that he
allowed.
[9] The sole
question in the appeal is thus whether Eveready acquired the trading
stock from Gillette ‘for no consideration’
(in which case
it falls to be deducted at its market value at the date of
acquisition as provided for in s
22(4))
or whether it was acquired for consideration (in which case it falls
to be deducted at its cost price as provided for in
s
22(2)(
b
)).
In either event we are not called upon to pronounce upon the quantum
of the deductions that have been claimed by Eveready or
allowed by
the Commissioner as the case may be.
[10] Whether or not
the stock was acquired for no consideration is a question of fact
that depends upon what was agreed between
the parties for its
acquisition. In the court below Eveready sought to advance oral
evidence as to the meaning of the written agreement
in that regard
but that evidence was rightly ruled to be inadmissible.
3
[11] The case
advanced by Eveready turns solely upon the construction that it gives
to schedule 6 of the agreement. That schedule
must be seen in the
context of clause 5.1, which provides as follows:
‘
The purchase
consideration payable by the Purchaser to the Seller for the Business
is the amount of R80
000 000
(Eighty million rand). The purchase consideration will be allocated
amongst the Business Assets as set out in
Schedule
6
.
’
[12]
Schedule
6 makes that allocation in the following terms:
‘
Allocation
of purchase price
Purchase price to
be allocated in the order below, each up to the maximum value shown.
Description
Maximum Value
Immovable Property
R30 million
Other Fixed Assets
R25 million
Trademarks R25
million
Display Inventory
[
left blank
]
Inventory [
left
blank
]
Receivables less
payables [
left blank
]’
[13] Eveready
construes that schedule to mean that where the column under the
heading ‘maximum value’ has been left
blank alongside a
particular item – amongst which are the trading stock of the
business, which is called ‘inventory’
in the schedule and
in the remainder of the agreement – the parties intended that
the allocation should be nil. On that basis
it submits that the
schedule demonstrates that the parties intended that no part of the
purchase price was to be paid for the trading
stock and thus it was
acquired ‘for no consideration’. That is the long and the
short of its submission.
[14] In our view the
submission has no merit. Not only does the submission ignore the
context in which the schedule must be read
but it is also
inconsistent with the language of the schedule itself.
[15] The subject of
the sale is recorded in Clause 4.1 of the agreement as being ‘the
Business as a going concern’.
The ‘Business’ is
defined to mean
‘
that part of
the business carried on by the Seller . . . as a going
concern and as a separate division under the name
“Eveready”
. . . using the Business Assets and including the
Transferred Liabilities and involving the manufacture,
distribution
marketing and sale of zinc chloride and zinc carbon batteries.’
The ‘Business
Assets’ are in turn defined to mean
‘
those
specified assets owned or used by the Seller in or in connection with
the Business at the Effective Date, comprising: Contracts;
Moveable
Assets; Display Inventory; Immovable Property; Intellectual Property;
Trade Marks; Customer Orders; Licences; Inventories;
Goodwill; and
Sundry Debtors.’
[16] It is apparent
from the subject matter of the sale alone that the purchase price was
paid at least partly for the trading stock,
but the matter goes
further than that.
[17] Clause 5.1 is
not exhaustive of the purchase price that was to be paid for the
business. That clause does no more than to set
a base price that is
subject to adjustment once the value of the working capital at the
effective date of the sale had been determined,
which included
determining the value of the inventory in accordance with clause 8.
[18] Clause 8
required a stocktaking to be done on the day prior to the effective
date and the preparation of schedules reflecting
all inventory and
display inventory that existed on that date.
4
Once those schedules
had been agreed (or determined by Gillette’s auditor in the
event of disagreement) the value of the inventory
and the display
inventory (excluding that which was damaged or otherwise reduced in
value) was to be valued on a specified basis.
When the value of the
inventory and the display inventory had been agreed (or determined by
the auditor in the event of disagreement)
clause 8.5 provided that
those values were to be ‘used for the purposes of the Effective
Date Accounts and the Working Capital
Statement’.
[19] The Working
Capital Statement, as its name implies, was a statement that was to
be prepared as soon as possible after the effective
date reflecting
Working Capital at that date. ‘Working Capital’ is
defined to mean ‘the aggregate of (i) Sundry
Debtors, (ii)
Display Inventory and (iii) Inventories less the Accounts Payable of
the Business as at the Effective Date’.
A statement reflecting
the calculation of working capital at June 2002 and September 2002
appears as schedule 12 to the agreement.
Working capital at the
former date was R34
997
(calculated as debtors of R1
637
729
+ display inventory of nil + inventories of R44
779
730
– accounts payable of R11
420
418).
[20] The
significance of the Working Capital Statement appears from clause
5.5:
‘
The purchase
consideration referred to in clause 5.1 [R80 million] shall be
adjusted up or down to the extent that the Working Capital
as
reflected in the Working Capital Schedule on the Effective Date is
less than or greater than, as the case may be, R34 997 041.
The Purchaser shall pay the Seller the amount by which the Working
Capital exceeds R34 997 041.00. The Seller shall pay
the
Purchaser the amount by which R34 997 041.00
exceeds the
Working Capital, . . ..’
I think it can be
inferred that the base amount of R34 997 041 referred to in
that clause was the amount of working capital
of the business at June
2002 as reflected in schedule 12.
[21] The purchase
price of the business was thus not R80 million as averred on behalf
of Eveready. It was that amount adjusted after
the working capital at
the effective date had been established – which entailed
determining the amount of sundry debtors
and display inventory and
inventory and accounts payable on that date. Needless to say, if the
value of the inventory at the effective
date was found to be
R54 779 730, and the other items in schedule 12 had
remained unchanged, thus taking the working
capital to R44 997 041,
then Eveready would have been required to pay the excess of
R10 000 000 to Gillette.
Conversely, if the value of the
inventory at the effective date was found to be R34 779 730
then Gillette would repay
the shortfall to Eveready. The payment by
one to the other of the excess or shortfall in the value of the
inventory so far as it
served to increase or decrease the working
capital above or below R34 997 041 is hardly consistent
with the inventory
having been given away for free.
[22] It is in that
context that we return to schedule 6. The schedule does not purport
to allocate R80 million, which was the basis
for the submission made
by counsel for Eveready. It purports to allocate ‘the purchase
price’, which remained undetermined
until such time as the
working capital at the effective date had been fixed. In its terms
the schedule determines, first, the order
in which that price is to
be allocated once it has been fixed, and secondly, the
maximum
amount that is to be allocated to each item. The blank
space alongside inventory – and those alongside display
inventory and
receivables less payables (debtors less accounts
payable) – clearly do not signify that the amount to be
allocated to those
items is nil. If that had been the case one might
ask where the excess was to be allocated if the purchase price turned
out to
be more than R80 million? The blank spaces alongside those
items signify only that an amount as yet undetermined was to be
allocated
to each. It was only once the effective date was reached
that the value of sundry debtors, and display inventory, and
inventory,
and accounts payable – the items that go towards
calculating working capital – would be capable of
determination.
[23] The only basis
for the contention by Eveready that no consideration was paid for
trading stock was that the amount that the
parties were said to have
intended to allocate to inventory was nil. Seen in its context that
is not what the schedule means. Indeed,
it would be most
extraordinary if Gillette had given away trading stock for free that
Eveready says had a market value of over
R100 million. It is quite
apparent from the agreement read as a whole that part of the purchase
price was paid for the trading
stock. Precisely what portion of the
purchase price was paid for the trading stock is not a matter that is
before us in the appeal
and I need say no more about that.
[24] In our view the
finding by the Tax Court on that issue cannot be faulted and the
appeal must fail. We turn then to the cross
appeal.
[25] Section
89
quat
(2)
levies interest on unpaid tax in certain circumstances but the
Commissioner may in his discretion waive that interest. On appeal
from his decision it is for the Tax Court to exercise that
discretion. The Tax Court found that Eveready had claimed the
deduction
in good faith on the basis of opinions that it had received
from two professional advisers. We are not sure that those opinions
were quite as unequivocal as Eveready suggests but that is
immaterial. It is open to us to interfere only if the Tax Court
failed
properly to exercise its discretion.
5
We do not think that
there are any grounds for finding that it did so and the cross-appeal
must fail.
[26] The following
orders are made:
1. The appeal is
dismissed with costs.
2. The cross-appeal
is dismissed with costs that include the costs of two counsel.
___________________
R W NUGENT
JUDGE OF APPEAL
___________________
Z L L TSHIQI
JUDGE OF APPEAL
APPEARANCES:
For
appellant: P J J Marais SC
C
Louw
Instructed
by:
Edward
Nathan Sonnenbergs, Sandton
Symington
& De Kok, Bloemfontein
For
respondents: R G Buchanan
Instructed
by:
The State Attorney,
Port Elizabeth
The
State Attorney, Bloemfontein
1
S22(4)
‘If any trading stock has been acquired by any person for no
consideration . . . such person shall for the purposes
of subsection
(3) . . . be deemed to have acquired such trading stock at a cost
equal to the current market price of such trading
stock on the date
on which it was acquired by such person . . .’
2
See
de Koker and R C Williams
Silke on South African Income Tax
Memorial Edition (2011) Vol 2 pages 8-290-1 to 8-290-2.
3
The
correctness of that ruling was placed in issue in the notice of
appeal but was not pursued in argument before us.
4
Defined
to mean ‘display racks and other point of sale promotional
materials exclusively exhibiting the Trade Marks or any
of them . .
.’
5
Commissioner
of Inland Revenue v Da Costa
1985 (3) SA 768
(A) at 775C-G.