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[2018] ZASCA 179
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Commissioner for the South African Revenue Service v Big G Restaurants (Pty) Ltd (157/2018) [2018] ZASCA 179; 2019 (3) SA 90 (SCA); 81 SATC 185 (3 December 2018)
THE
SUPREME COURT OF APPEAL OF SOUTH AFRICA
JUDGMENT
Reportable
Case
No: 157/2018
In
the matter between:
THE COMMISSIONER FOR THE
SOUTH AFRICAN REVENUE
SERVICE APPELLANT
and
BIG G RESTUARANTS (PTY)
LTD RESPONDENT
Neutral
citation:
CSARS v Big G Restaurants (Pty) Ltd
(157/18)
[2018] ZASCA 179
(3 December 2018)
Coram:
Ponnan, Mbha, Mathopo and Schippers JJA and Rogers AJA
Heard:
19 November 2018
Delivered:
3 December 2018
Summary:
Income tax –
s 24C of the Income Tax Act 58
of 1962 – whether income of taxpayer in years of assessment
received or accrued in terms of
franchise agreement – used to
finance future expenditure incurred by taxpayer in the performance of
obligations under that
agreement
–
income
and obligations must originate from the same contract.
ORDER
On appeal from:
Tax Court of South Africa, held in Cape Town
(Cloete J sitting as court of appeal in terms of
s 107(1)
of
the
Tax Administration Act 28 of 2011
):
1. The appeal is
upheld with costs, including the costs of two counsel.
2. The order of the
court a quo is set aside and replaced with the following:
‘
The appeal is
dismissed.’
JUDGMENT
Schippers
JA (Ponnan, Mbha and Mathopo JJA and Rogers AJ concurring):
[1]
Section 24C of the Income Tax Act 58 of 1962 (the Act) provides for
an allowance in respect of future expenditure against income
received
by or accruing to a taxpayer which will be utilised in whole or in
part to finance that expenditure. The main issue in
this appeal, with
leave of the court a quo, is whether the income which the taxpayer
received from operating a franchise business,
included any amount
received or accrued in terms of a franchise agreement, as envisaged
in s 24C of the Act.
[2]
The matter came before the court a quo as a special case in terms of
rule 42 of the tax court’s rules read with rule 33
of the
Uniform Rules of Court. The agreed facts, in summary, were these. The
respondent, Big G Restaurants (Pty) Ltd (the taxpayer),
is a
franchisee that operates restaurants in terms of various written
franchise agreements with the franchisor, Spur Group (Pty)
Ltd. The
terms of the franchise agreements are virtually identical. A copy of
one of those agreements annexed to the special case
(the franchise
agreement) was considered to reflect the terms of all the agreements.
In terms of clause Q.1.1 of the franchise
agreement the taxpayer gave
an undertaking in favour of the franchisor that during the currency
of the agreement, the main object
and sole business carried on by the
taxpayer would be the operation of Spur Steak Ranch Restaurants and
restaurants specialising
in pizza and pasta, under the style of
Panarottis.
[3]
The taxpayer was obliged, in terms of clause J.2 of the franchise
agreement, to pay the franchisor a monthly franchise and service
fee
of 5% of the gross sales, less VAT attributable to the gross sales,
for each of the restaurants it operated. The minimum monthly
franchise fee payable during the currency of the agreement was
R25 000, which escalated by the Consumer Price Index (CPIX),
compounded annually.
[4]
In terms of clause L.1.4 of the franchise agreement, the taxpayer was
required to upgrade and/or refurbish its restaurants at
reasonable
intervals as determined by the franchisor.
[5]
In respect of its 2011 to 2014 years of assessment, the taxpayer
claimed certain amounts in terms of s 24C of the Act in relation
to
future expenditure to be incurred by virtue of the obligation imposed
by the franchise agreements to upgrade and refurbish its
restaurants.
[6]
In the special case the court a quo was asked to decide two questions
of law. The first was whether the income received by the
taxpayer
from operating the franchise businesses, were amounts received or
accrued in terms of the franchise agreement as envisaged
in s 24C of
the Act. The second was whether the expenditure required to refurbish
or upgrade restaurants was incurred ‘in
the performance of the
taxpayer’s obligations under such contract’, as
contemplated in s 24C.
[7]
The court a quo found for the taxpayer. It held that the taxpayer’s
income was income earned for purposes of s 24C under
the same
contract as that under which the taxpayer’s future expenditure
was to be incurred. Consequently, it made an order
setting aside the
additional assessments raised by the appellant, the Commissioner for
the South African Revenue Service (the Commissioner),
for the
taxpayer’s 2011 to 2014 years of assessment. The parties were
ordered to pay their own costs.
[8]
At the relevant time s 24C read:
‘
(1) For the
purposes of this section, ‘future expenditure’ in
relation to any year of assessment means an amount of
expenditure
which the Commissioner is satisfied will be incurred after the end of
such year–
(a)
in such manner that such amount will be allowed as a deduction
from income in a subsequent year of assessment; or
(b)
in respect of the acquisition of any asset in respect of which
any deduction will be admissible under the provisions of this Act.
(2) If the income of
any taxpayer in any year of assessment includes or consists of an
amount
received by or accrued to him in terms of any contract
and the Commissioner is satisfied that such amount will be
utilised
in whole or in part to finance future expenditure
which will be
incurred by the taxpayer
in the performance of his
obligations under such contract
, there shall be deducted in the
determination of the taxpayer’s taxable income for such year
such allowance (not exceeding
the said amount) as the Commissioner
may determine, in respect of so much of such future expenditure as in
his opinion relates
to the said amount.
(3) The amount of
any allowance deducted under subsection (2) in any year of assessment
shall be deemed to be income received by
or accrued to the taxpayer
in the following year of assessment.’
[1]
[9]
Mr Lüderitz SC for the Commissioner alluded to various
provisions of the franchise agreement and submitted that on any
interpretation of those provisions, the taxpayer did not earn income
from the franchise agreement. It merely enabled the taxpayer
to earn
income. Instead, the taxpayer received income in terms of the
ad
hoc
contracts it concluded with patrons when it sold meals to
them (the patron contract).
[10]
Mr
Emslie SC for the taxpayer conceded that the taxpayer would not earn
any income if it did not provide meals to patrons, but contended
that
it was obliged to do so in terms of the franchise agreement, which
was not only the source of the taxpayer’s income,
but also
spelt out how it was obliged to operate its restaurants. Relying upon
Oosthuizen
,
[2]
he submitted that the words ‘in terms of’ (in the signed
Afrikaans text, ‘ingevolge’), hereafter ‘the
phrase’, in s 24C(2) should be given a wide meaning,
namely that the taxpayer’s income was earned ‘pursuant
to’ or ‘in accordance with’ the franchise
agreement.
[11]
The
phrase has an ‘ordinary’ (narrow) or ‘wide’
meaning, as appears from the judgment of this court in
Slims.
[3]
The case concerned the meaning of the word ‘under’ (in
the signed Afrikaans text, ‘kragtens’) in
s 37(5)
of the
Insolvency Act 24 of 1936
. After emphasising that the meaning of a
word depends upon the subject matter and the context in which it
appears, Botha JA said:
‘
In my view
the word “kragtens” is clearly capable of bearing
different shades of meaning. Used as a link a word, connecting
two
concepts, it is capable of connoting varying degrees of closeness
between the one concept and the other. In the narrow sense,
at the
one end of the spectrum, it may be used to denote a direct and
immediate connection between the two concepts linked by it
(“uit
krag van”, “luidens”). In a wide sense, at the
other end of the spectrum, it may connote no more
than a loose and
indirect relationship between the two concepts (“ten gevolge
van”, “uit hoofde van”) .
. . . In this sense the
word could, I consider, be rendered appropriately as “voortspruitend
uit”. . . . Similarly,
the English word “under” has
different shades of meaning. Some of the meanings ascribed to it in
the cases are: ‘in
terms of’, “in accordance with”,
“in compliance with”, “in pursuance of”, “by
virtue
of”, and “pursuant to” . . . In its wide
meaning the word is certainly not confined, in my view, to the
designation
of a direct or exclusive connection between the two
matters which it serves to link to each other.’
[4]
[12]
Botha
JA held that in the particular context the wide meaning should be
preferred.
[5]
Van Heerden JA and
Nicholas AJA concurred in Botha JA’s judgment.
[6]
Corbett JA, in whose judgment Nestadt JA concurred, concluded that
the words ‘right under the lease’ meant ‘a
right
arising from, created by or having its origin in, the lease’,
[7]
ie the narrow meaning.
[13]
In
Oosthuizen
[8]
the question was whether a particular lease agreement was a credit
agreement ‘in terms of which [ingevolge waarvan] a person
purchases or hires goods for the sole purpose of selling or leasing
them. . . .’ Nicholas AJA, in whose judgment Smalberger
JA
concurred, answered this question in the affirmative. Kumleben JA
(with whom Botha JA and Kriegler AJA concurred) took the opposite
view. The majority held that ‘in terms of’ (‘ingevolge’)
in the context under consideration meant ‘by
virtue of’
or ‘in consequence of’, ie the wide meaning.
[14]
The
next stage of the enquiry is to consider the sense in which the
phrase is used in
s 24C(2).
The section has two basic requirements.
First, there must be income received or accrued in terms of a
contract. Second, the Commissioner
must be satisfied that such
amount, ie the income received from the contract, will be used wholly
or partially to finance future
expenditure that a taxpayer will incur
in performing its obligations under that same contract. There is thus
a direct and immediate
connection between these two requirements.
[9]
The section does not allow for different income-earning and
obligation-imposing contracts.
[15]
The fact that the income and obligations must originate from the same
contract points strongly to the conclusion that the special
allowance
in
s 24C
was intended to apply to cases where income earned in terms
of (or ‘by’) a contract is received before expenditure
will be incurred to perform obligations under that same contract. Mr
Emslie SC correctly conceded that the expression ‘obligations
under such contract’ meant obligations created by the same
contract. In other words, in relation to the obligations, the
word
‘under’ (‘ingevolge’ in the Afrikaans text)
has its ordinary or narrow meaning.
[16]
The
narrow meaning of the phrase, in my view, is supported by the context
and the background to the provision.
Section 24C
constitutes an
exception to the general prohibition contained in s 23
(e)
of the Act, which provides that no deduction shall in any case be
made in respect of income carried to any reserve fund or capitalised
in any way.
[10]
Section 24C
was introduced by s 18(1) of the Income Tax Act 104 of 1980.
According to the explanatory memorandum, the purpose of
s 24C
was to address situations where a contract, typically a construction
contract, provides for an advance payment to enable
the recipient to
finance the performance of its obligations under the contract (eg to
purchase materials). In the situation contemplated
by the explanatory
memorandum, the same contract creates the right to the income (the
advance payment) and the obligation which
has to be performed.
[17]
Applying
the narrow meaning of the phrase, the question is whether the
taxpayer receives income under the franchise agreement. The
answer is
clearly no. None of the rights accorded to the taxpayer under the
franchise agreement are rights to income. This is hardly
surprising,
since a right to receive income by a franchisee is not an element of
a franchise agreement. Features generally common
to a franchise
agreement are the granting of the right by the franchisor to conduct
business in exchange for fees; the acquisition
by the franchisee of
the right to conduct a franchise business within the franchisor’s
network; and the right and obligation
of the franchisee to use the
franchisor’s trademarks, know-how and business methods.
[11]
[18]
The taxpayer does not receive any advance payment or indeed any
income from the franchise agreement, but earns income from
each
patron contract. Patrons have the right to receive food sold to them
by the taxpayer and the corresponding obligation to pay
for the food.
The taxpayer’s income is derived from payments received from
patrons, directly as a result of food sold to
them. If it does not
sell food to patrons, the taxpayer will not receive any income.
[19]
Mr Emslie SC however contended that the franchise agreement and the
patron contract were inextricably linked, and that both
these
contracts required the taxpayer to serve meals to its patrons in
order to earn income, out of which franchise fees were payable
to the
franchisor. He supported the court a quo’s reasoning that given
the ‘contractual arrangement’ in this
case, the franchise
agreement imposed on the taxpayer the obligation ‘by necessary
inference … to sell meals to its
customers. Although the
customers are not parties to that agreement, the proximate cause of
those sales is that obligation’.
[20]
The argument is unsound. It is simply another way of putting the
argument for the wide interpretation of the phrase. The argument
acknowledges that the contract creating the right to the income is
the patron contract but places reliance on the fact that the
patron
contract is able to be concluded because of the existence of the
franchise agreement. The fact that a contract is useful
or even
necessary to enable a taxpayer to earn income does not mean that its
income is earned ‘in terms of’ such contract.
A
taxpayer’s income is not earned ‘in terms of’ the
lease under which it occupies its commercial premises or
‘in
terms of’ the overdraft agreement which provides it with the
necessary working capital.
[21]
A
similar argument was essayed – and rejected – in ITC
1667.
[12]
In that case a
taxpayer claimed a s 24C allowance, contending that although it
received the income under a different contract than
the one under
which it was obliged to perform an obligation, the income transaction
formed an integral part of a scheme that obliged
it to incur future
expenditure in carrying out its obligations. In dismissing the
taxpayer’s appeal, the court (Blignault
J) correctly, in my
view, held that s 24C(2) required that the taxpayer incur the
expenditure in the performance of its obligations
in terms of the
same contract as the contract under which it received income. The
legislature did not use the term ‘scheme’
or
‘transaction’: the operative concept was ‘contract’.
[22]
My conclusion on the first question of law is dispositive of the
appeal. Consequently, it is unnecessary to decide the second
question. It follows that the appeal must be upheld and the order of
the court a quo set aside.
[23]
I make the following order:
1. The appeal is
upheld with costs, including the costs of two counsel.
2. The order of the
court a quo is set aside and replaced with the following: ‘The
appeal is dismissed.’
_______________________
A
Schippers
Judge of Appeal
APPEARANCES
For
Appellant: K W L
ü
deritz SC (with him K
D Magano)
Instructed
by:
RW
Attorneys, Pretoria
Pieter
Skein Attorneys, Bloemfontein
For
Respondent: T S Emslie SC (with him M Madison)
Instructed
by:
Potgieter
Joubert Inc, Cape Town
Rosendorff
Reitz Barry, Bloemfontein
[1]
Emphasis added.
[2]
Oosthuizen
& another v Standard Credit Corporation Ltd
[1993] ZASCA 59
;
1993 (3) SA 891
(A) at 900J-901B.
[3]
Slims
(Pty) Ltd & another v Morris
NO
1988 (1) SA 715
(A) at 744G-H.
[4]
Slims
fn 4 at 733B-G.
[5]
Slims
fn 4 at 732D-733H.
[6]
Slims
fn
4 at 729C-D.
[7]
Slims
fn 4 at 743G-H.
[8]
Footnote
2.
[9]
Slims
fn 4 at 733B-C per Botha JA.
[10]
D Clegg and R Stretch
Income
Tax in South Africa
(2018) para 11.11.4.
[11]
PE
Pack 4100 CC v Sanders & others
[2013] 4 BLLR 348
(LAC) para 15.
[12]
ITC
1667
(1999)
61
SATC 439
(C).