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[1987] ZASCA 44
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Commissioner for Inland Revenue v Pick 'n Pay Wholesalers (Pty) Ltd (44/87) [1987] ZASCA 44; [1987] 4 All SA 432 (AD) (14 May 1987)
IN THE SUPREME COURT OF SOUTH AFRICA APPELLATE DIVISION
In the matter
between
COMMISSIONER FOR INLAND REVENUE
APPELLANT
and
PICK 'N
PAY WHOLESALERS (PTY) LTD
RESPONDENT
CORAM
: CORBETT, BOTHA,
HEFER,NESTADT,JJA, et NICHOLAS,AJA.
HEARD
:16 MARCH 1987.
DELIVERED
: 14 May 1987
JUDGMENT NICHOLAS,AJA
:
The facts which gave rise to this case had their
beginning in 1977. In
April of that year PICK 'n PAY
WHOLESALERS 2
2
WHOLESALERS (PTY) LTD ("PICK 'n PAY") pledged itself to donate to the
URBAN FOUNDATION a total of R500 000 in five equal annual instalments.
In each
of the years of assessment ended 28 February 1978 and 28 February 1979 it
claimed to deduct R100 000 from its income as "advertisihg".
The Commissioner
for Inland Revenue ("the Commissioner")disallowed the deductions and issued
assessments accordingly. An objection
by PICK 'n PAY dated 13 March 1981 was
overruled.
There followed an appeal to the Cape Income Tax Special Court. The hearing
began on 13 November 1981 with GROSSKOPF J presiding. On
17 March 1982 a
judgment allowing the appeal was handed down.
The 3
3 The Commissioner appealed to the full bench of
the Cape Provincial Division. Shortly before the hear-
ing of the appeal,
notice was given of an application
to amend the grounds of appeal in order to
raise cer-
tain points not canvassed at the hearing before the
Special
Court. By consent the full bench set aside
the order of the Special Court and
remitted the matter
thereto for the hearing of further evidence and
addi-
tional argument.
There was a second hearing before the Special
Court on 27 March 1985. In a
judgment which was han-
ded down on 6 June 1985, the Special Court rejected
the
new points raised in the amended grounds of appeal, and
again 4
4 again allowed the appeal.
On 16
September 1985, GROSSKOPF J granted leave to appeal to this Court in terms of s.
86 A(5) of the
Income Tax Act
, 1962 ("the Act").
In the Specïal
Court evidence was given on behalf of PICK 'n PAY by a number of witnesses
including Mr. RAYMOND ACKERMAN and
Mr. CHRISTOPHER HURST. This evidence was not
contradicted, and GROSSKOPF J said in the judgment that the Special Court had no
reason
to doubt its correctness.
The main facts of the case were these.
Despite its name, PICK 'n PAY is not a wholesaler. It carries on business as
a retailer, operating super-
markets
5
markets in the Western and Eastern Cape, Natal and the Orange
Free State. It has associated companies in the Transvaal, and together
they
comprise the PICK 'n PAY group, of which PICK 'n PAY is the managing
company.
Mr ACKERMAN is the chairman and managing direc-tor, and as such he
has had, to use his own words," a strong di-rection of the company".
He is the
mainspring and driving force behind the group's activities. At the relevant time
he held 30% of the issued shares in PICK
'n PAY. He is a public figure:. he is a
member of the main board of the URBAN FOUNDATION, a governor of RHODES
UNIVERSITY, and head
of S.A.FORUM and of other bodies.
Mr HURST is the secretary and financial director,
and 6
6
and takes a special interest in the marketing side.
PICK 'n PAY keeps its
name constantly before the public by sustained and intensive advertising which
it regards as essential to the
successful conduct of its business. Broadly its
advertising falls into three categories. There is the "laundry list" type of
ad-vertisement,
which appears from day to day, and lists goods and their prices.
Then there is advertising of so-called "special events", which is
more general
in its nature: examples of "special events" are an anni-versary of the
ópening of a supermarket; the launching
of the company's "No Name"
brands; an operation in which the price of chickens, which was raised by other
supermarkets, was held
down in PICK 'n PAY's stores; and a petrol sales
scheme.
Thirdly
7
Thirdly there is "indirect advertising", which is considered to
be the most important and valuable. This consists, not in placing
paid
advertisements, but in obtaining notice in the news and editorial columns of the
media. Such publicity is not readily achieved.
PICK 'n PAY has always been
concerned to promote its public image as "the consumer's champion" and as a
company which has a concern
for people and is aware of its social
re-sponsibilities to the community. So, it has campaigned against cartels, and
for the need
to fight inflation.
A notable example of PICK 'n PAY's promotion of its
persona
and its
use of "indirect advertising" was provided by the donation to the URBAN
FOUNDATION. This is an or-
ganisation
8
ganisation which grew out of a conference of concerned leading
businessmen in 1976. It was formed to tackle South Africa's pressing
social
needs and to improve the quality of life of the less privileged urban dwellers.
It is specially concerned with the upgrading
of housing and the provision of
community facilities. Mr. Justice STEYN steered it through its formative
years.
As a member of the main board of the URBAN FOUNDATION, Mr. ACKERMAN
was involved in conceiving the idea of raising money by means
of a self-imposed
levy in the whole private sector of a percentage of turn-over or profits. His
evidence
was:
"So, then they said to me, wearing my Urban Foundation hat: Mr Ackerman, will
you wear
your Pick 'n Pay hat and lead the way? So,
then
9
then I had a private meeting with Mr Justice Steyn and I said,
yes, we will lead the way but we want to be the first in and we would
like to
have a press publicity meeting ..."
He considered that in this way PICK 'n PAY would get very
valuable publicity. He continued:
"... When I brought this matter to the Board (sc. of PICK 'n PAY), I was
wearing my Pick 'n Pay hat that this would be a major way
of us being first to
support a good cause ... but that we could get major publicity out of it which
would be good for our com-pany
and would draw customers in to our stores."
When Mr. HURST was asked in his evidence in chief a-
bout the motive for the donation, he said:
"Well, the main spring behind the idea was Mr Ackerman and we discussed the
matter at Board level and its possibilities and we decided
to go ahead and make
this contri-
bution
10
bution as a business exercise".
He was sure that
"(W)e would, if we handled it correctly, get a great deal of publicity out of
it."
He cóntinued:
"... We were going to be the first ... There is a tremendous plus in being
first, I think, and at the same time Mr Ackerman was going
to ensure that we got
the proper type of publicity; that once we've made our contribution, that the
Press would be aware of it. With
the knowledge of this I thought that ... (it)
sounded like it was going to be a success .... The Urban Foundation was
something that
really seemed to appeal to the public. It was in the Press all
the time, people were talking about it. It was an opportunity waiting
to be
seized and I don't think that type of opportunity comes along very often."
The Board of directors of PICK 'n PAY took the decision
to
11
to make the donation of R500 000 to the URBAN FOUNDATION.
It was announced at a press conference in Cape Town which
was attended by
Mr. Justice STEYN and Mr. ACKERMAN. The
annoúncement received wide
publicity throughout the Republic.
This was shówn by a bundle of press
cuttings which was put
in through Mr. HURST. They included one from THE ARGUS
newspaper. It was a
front page story with banner headlines.
The following are extracts:
R25-M AID PLAN FOR NEEDY
FOOD CHAIN GIVES URBAN FUND R ½-M The
Urban Foundation's initial target of R25-million to improve the quality of life
of South
Africa's urban communities came nearer achievement today with a gift of
R500 000 over five years. The gift from Pick 'n Pay is linked
to the
supermarket ....
12
supermarket chain's annual turnover - and other firms are to be asked to
participate on a similar basis.
The newly-formed Urban Foundation is being steered through its formative
years by Mr Justice Steyn, who is on three years' leave from
the Cape Supreme
Court for the task.
In Cape Town today, Mr Justice Steyn announced Pick 'n Pay's 'wonderful
contribution' at a Press conference attended also by the chairman,
Mr Raymond
Ackerman. The R500 000 would be paid in annual instalments of R100 000.
'This represents a self-imposed tithe based on a percentage of Pick 'n Pay's
annual turnover,' he said.
Investment
'Mr Ackerman has emphasised to me he be-lieves this is an investment in the
future . of a stable South Africa.
'He has also emphasised how essential it is that the private sector must make
its con-tribution to the solution of our vexed urban
problems.
I
13
'I trust that Mr Ackerman's magnificent example will act as a
stimulus and an in-spiration. for other organisations and in-dividuals.
I anticipate that others will also give consideration to giving an annual
tithe to the Foundation - based on a percentage of turnover
or after-tax
profits.'
For a period of several months after the announcement, the publicity had a
marked positive effect on PICK 'n PAY's
turnover in all its stores throughout
the group.
Mr. HURST was cross-examined by the Commissioner's
representative, Mr. VAN
BREDA, in regard to the purpose of
the donation.
"
MR VAN BREDA
: Now, what motivation did you advance for this donation
to be made? Was it based on purely business considera-tions or were there
also
other motivations? The motivation behind this contribution
was
14
was, as I've said before, part of our public relations
exercise. There was a golden op-portunity to contribute to this (cause) and
bring to the company an immense amount of publicity. The reason for the
contribution was to get publicity.
Was that also how Mr Ackerman put it to the board? — Absolutely."
Again,
"
MR VAN BREDA
: ... Did the Board go along with the aims of the Urban
Foundation? -— Absolutely. We thought that it was a good cause. I want
to
emphasise again: we picked this cause because it was a good one in which the
public were interested ... Here was a cause which
was an excellent cause and the
public was interested in it. If it had been a bad cause, then, if the public
knew about it, it would
have reflect-ed badly against us and if the public
didn't know about it, then it wouldn't have achieved the object any way. So,
this
cause was picked because it was a good cause in the
public
15
public eye. Of necessity it is a good cause.
But also in the eyes of the Board? — We analysed it as a Board and saw
it to be a good cause.
I want to put it to you that the Board had dual intentions. It wanted to get
the publicity but also albeit secondary, it wanted to
contribute towards a
worthy cause. Isn't that so? — The Board's object was to subscribe to a
worthy cause. It must be a worthy
cause. That was their object ... So far as the
Pick 'n Pay Board is concerned, this is publicity and I reiterate it again: I
think
you relate it to be a good cause and therefore you say it is a donation
..."
Mr. ACKERMAN was similarly cross-examined:
"But the point is you made a donation in order to derive maximum publicity,
but what do you say about my submission that you were
equally moved by other
considerations that being in order to advance the aims of the Urban Foundation?
— No, to support a good
cause which as Mr Hurst said, a good cause
we
16
we will always look at and particularly at a timeous good
cause like something like this and we will support it and then wearing our
PICK
'n PAY hat, try and maximise the promotion effort out of it but supporting a
good cause and we always want to hold our head
up high.
Just tell the Court: if it wasn't for this publicity, you wouldn't have made
the donation to the Urban Foundation although you agree
with its aims? —
That is a very good question. I am very frank: We certainly would have made a
donation but it would have been
absolutely a R10 000 or R20 000 donation. It
would have been a very big donation for us to have made. It would have been a
donation
to that category. Yes, we would have made one. But we went for this
high figure as a package deal to really promote it strongly."
The Special Court held against the Commissioner on all
of the issues
raised at the hearing. In this Court counsel
for the Commissioner submitted
that
"(a)
17
"(a) The expenditure of the two amounts of R100 000 was of a
capital nature.
(b)
The said amounts were not
wholly or ex-clusively laid out for purposes of trade.
(c)
In the alternative to the aforegoing and even if it should be found
that the R100 000 donated during the 1978 fiscal year was deductible,
the
further amount of R100 000 donated during the 1979 fiscal year did not
constitute expenditure actually incurred
in the
production of income and/or was not wholly or exclusively laid out for purposes
of trade."
The result of the appeal turns on the proper applica-
tion to the facts of
the present case of para (a) of s. 11
and para (g) of s. 23 of the Act.
Section 11 provides:
"11. For the purpose of determining the taxable income derived by any person
from carrying on any trade within the Republic, there
shall
18
shall be allowed as deductions from the in-come of such person
so derived -(a) expenditure and losses actually in-curred in the Republic
in the
production of the income, provided such expenditure and losses are not of a
capital nature; ..."
And in terms of section 23 -
"23. No deduction shall in any case be made
in respect of the following matters, namely -
(g) any moneys claimed as a deduction from income derived from trade, which
are not wholly or exclusively laid out or expended for
the purposes of trade:
...."
(On the relation between these provisions, see the discussion
in
Commissioner for Inland Revenue v Nemojim (Pty) Ltd
1983
(4) SA 935 (A) at 946.)
In the view that I take of the matter, it is neces-
sary to consider only the second of the submissions
by
19
by counsel.
It arises by reason of s. 23(g), and the first question
to be considered
is the meaning of the words "moneys . . . which
are not wholly or exclusively
laid out or expended for the
purposes of trade". The answer is provided by
the analysis
of similar words in the judgment of ROMER L J in
Bentleys
,
Stokes and Lowless v Beeson
(1952) 33 T.C. 491
(CA)
at 503-4
(See also
(1952) 2 All ER 82
(CA) at 84 G to 85 B):
"The relevant words .. -'wholly and ex-clusively laid out or expended for the
purposes of the profession' - appear straightforward
enough. It is conceded that
the first adverb - 'wholly' - is in reference to the
quantum
of the money
ex-pended and has no relevance to the present case. The sole question is whether
the expenditure in question was 'exclusively'
laid
20
laid out for business purposes, that is: What was the motive or object in the
mind of the two individuals responsible for the activities
in question? It is
well establish-ed that the question is one of fact: and again, therefore, the
problem seems simple enough. The
difficulty however arises, as we think, from
the nature of the activity in question. Entertaining involves in-evitably the
characteristic
of hospitality. Giving to charity or subscribing to a staff
pension fund involves inevitably the object of benefaction. An undertaking
to
guarantee to a limited amount a national exhibition involves inevitably
supporting that exhi-bition and the purpose for which
it has been organised. But
the question in all such cases is: Was the entertaining, the chari-table
subscription, the guarantee,
under-taken
solely
for the purposes of
business, that is, solely with the object of promoting the business or its
profit. earning capacity? It is, as
we have said, a question of fact. And it is
quite clear that the purpose must
be
21
be the sole purpose. The paragraph says so in clear terms. If
the activity be under-taken with the object both of promoting business
and also
with some other purpose, for example, with the object of indulging an
independent wish of entertaining a friend or stranger
or of supporting a
charitable or benevolent object, then the paragraph is not satisfied though in
the mind of the actor the business
motive may predominate. For the statute so
prescribes.
Per contra
, if in truth the sole object is business pro- .
motion, the expenditure is not disqualified because the nature of the activity
neces-sarily
involves some other result, or the attainment or furtherance of
some other objective, since the latter result or ob-jective is necessarily
inherent in the act."
In a comment on this judgment in
Bowden v Russel & Russel
(1965) 42 T C 301
(Ch.) at 306, PENNYCUICK J said:
"... As appears from that judgment it may often be difficult to determine
whether the
person
22
person incurring the expense has in mind two distinct purposes, or a single
purpose which will or may produce some secondary consequences.
But once it is
found that the person has a distinct purpose other than that of enabling him to
carry on and earn profits in his trade
or profession Section 137(a) prohibits
deduction of the expense."
In his speech in
Mallalieu v Drummond
1983(2) All
ER 1095 (H L)
LORD BRIGHTMAN said at p 1100 a-d that the dis-
tinction between the object
of the expenditure and its effect
was basic:
"The object of the taxpayer in making the expenditure must be distinguished
from the effect of the expenditure. An expen-diture may
be made exclusively to
serve the purpose of the business, but it may have a private advantage. The
existence of that private advantage
does not necessarily pre-clude the
exclusivity of the business pur-poses."
In
22 A
In terms of s. 82 of the Act, the onus of proof is on the
tax payer. He must show that the donation was made solely for the purpose
of
trade. He must éxclude any other purpose - in this case a philanthropic
purpose. If he does not do so, the paragraph is
not satisfied.
In the judgment of the Special Court GROSSROPF J
dealt with the matter as
follows:
"The final question was whether the expen-diture was wholly or exclusively
laid out or expended for the purposes of trade (vide
sec
23
sec. 23(g) of the Act which is quoted above). The
Commissioner's representative contended that in part at least the donation was
made
for philanthropic reasons. We do not think that the evidence supports this
contention. I have already referred to the evidence of
Messrs Hurst and Ackerman
on this point. The fact that the appellant might in dif-ferent circumstances
have made a relatively small
donation to the Urban Foundation from motives of
liberality does not detract from the evidence that the large donation which was
in fact made, was made for purposes of trade. Expenditure which is made for
pur-poses of trade is not rendered non-ceductible merely
because the maker of
the expenditure is pleased to be able to support or help the person to whom it
is made. Business which is conducted
with friends, relatives or well-wishers
does not cease to be business."
In the case of an appeal under s. 86 A of the Act,
an appellant is not
bound by the facts found by the Special
Court. He has a full right of appeal.
In
Hicklin v
Secretary
24
Secretary for Inland Revenue
1980(1) SA 481 (A) TROLLIP
JA
said at 485 E:
"The appeal is therefore a re-hearing of the case in the ordinary, well-known
way in which this Court, while paying due regard to
the findings of the Special
Court on the facts and credibility of witnesses, is not necessarily bound by
them."
In the present case counsel for the Commissioner does not impugn the
credibility of the witnesses for PICK 'n PAY. This Court is therefore
in as good
a position as was the Special Court to decide the issue.
It was contended on
behalf of PICK 'n PAY that the do-nation was merely the vehicle which it used to
ride to publi-city and profits,
and that the benefit to the URBAN FOUNDATION
was
25
was incidental . While charity was an effect of
the donation, it was not part of PICK 'n PAY's purpose, which was solely the
promotion
of business. The contention of the Commis-sioner on the other hand was
that the donation was made with a dual purpose which included
philanthropy.
The questión is one of fact, and the fact is the state
of mind of those responsible for making the donation at the time it
was made.
See
Mallalieu v Drummond
(
supra
) at 1097 h to 1098 a; 1099 h-j. A
witness can testify directly to his own state of mind but not to that of others.
Apart from direct
evidence, state of mind is a matter for in-ference from
relevant and admissible contemporaneous state-ments and from the surrounding
circumstances.
The
26
The direct evidence ás to the purpose of the donation
was given by Mr ACKERMAN and Mr HURST. Their veracity is not in questién.
There are however circumstances which affect the cogency of their evidence in
this regard.
That evidence was given more than 4½ years after the date
of the donation. Human memory is inherently and notoriously liable
to error. One
knows that people are less likely to be complete and accurate in their accounts
after a long interval than after a
short one. It is a matter of common
experience that during the stage of retention or storage in the memory,
perceived information
may be forgotten or it may be modified, or added to, or
distorted by sub-sequent information. One is aware too that there can occur
a
26 A
a process of unconscious reconstruction.
Moreover there is the fact that the issue - whether
the expenditure was
exclusively for the purpose of trade but
produced the incidental effect, or
the secondary consequence,
of benefit to the Urban Foundation, or whether it
had the
dual purpose of promoting trade and benefiting the
Urban
Foundation - is a narrow one, and the line difficult to draw.
There
is nothing in the record to suggest that the distinc-
tion was present to the
mind of any one at the time of the
donation, or that it was of any importance
before the ex-
penditure was disallowed by the Commissioner.
In the circumstances the
direct evidence cannot be decisive, but it must be weighed together with all the
other evidence in the light
of the probabilities.
It.
27
It is clear on the evidence that an object of the
making of
the donation was to obtain major publicity and so
attract customers into PICK
'n PAY's stores. Without that
business object, the donation might indeed have
been
ultra
vires
of the directors. In
Hutton v West Cork
Railway Com
-
pany
(1888) L.R. 23 Ch. D 654
(CA) BOWEN L J said at
673 that
in the case of
Hampson v Price's Patent Candle Company
,
"The Master of the Rolls ... held that the company might lawfully expend a
week's wages as gratuities for their servants; because
that sort of liberal
dealing with servants eases the friction between masters and servants, and is,
in the end, a benefit to the
company. It is not charity sitting at the board of
directors, because as it seems to me charity has no business to sit at boards
of
directors
qua
charity. There is, however, a kind of charitable dealing
which is for the interest of those who
practise
28
practise it, and to that extent and in that garb
(I admit not a very philanthropic garb) charity may sit at the board, but for no
other purpose."
But it may be that there existed a dual purpose, namely, a purpose to make a
benefaction to the Urban Foundation and a purpose to
promote the business of
PICK 'n PAY by the publicity which was to be obtained from the announcement of
the benefaction.
There are passages in Mr. ACKERMAN's evidence which
point to such a dual
purpose. He said:
"... this would be a major way of us being first to support a good cause ...
but ... we could get major publicity out of it ..."
When asked whether PICK 'n PAY would not have made a donation
to the URBAN FOUNDATION in any event, Mr. Ackerman replied:
"Yes, we would have made one. But we went
for
29
for this high figure as a package deal real-ly to promote it
strongly."
(There was some debate in argument as to what he meant by
"package deal", but I think that in the context his meaning
is reasonably
clear. The package consisted of a single large do-
nation made with two
objects: a benefaction to the URBAN
FOUNDATION and the obtaining of publicity
in consequence.)
Again, Mr. ACKERMAN said that they would always support
a
"timeous good cause" ("You must run the business in a way
that we can all
hold our. heads up high and that to me is all
part of the game"). and then
try and maximize the promotion
effort out of it.
The fact that there may have been no
discussion at the directors' meeting about the benefit to
the
30
the URBAN FOUNDATION does not, I think, affect the matter.
There would have been no call for such discussion. The donation of R500
000 was
considerable.. It woúld have been obvious to anyone that it would greatly
benefit the URBAN FOUNDATION, which was
regarded by all as a very worthy cause.
The case was one where
res ipsa loquitur
- the purpose was on the face of
it philanthropic.
Mr. ACKERMAN's involvement in this matter was in a dual capacity. He was a
director of the URBAN FOUNDATION, and the chairman and
managing director of PICK
'n PAY. He was on the side of the donor and also that of the donee. His evidence
makes it clear that, sitting
at the board table of the URBAN FOUNDATION, he saw
the donation as a benefaction
to
31
to the URBAN FOUNDATION, while he perceived at the same time
that it could provide valuable publicity for PICK 'n PAY. Sitting at
the board
table of PICK 'n PAY he no doubt saw the operation as an opportunity for
indirect publicity, but it was publicity which
would be given to a philanthropic
action. It is suggested that when dealing with the matter as chair-man and
managing director of
PICK 'n PAY, his purpose was sole-ly a business one,
although it was the same donation to the same charity. I cannot accept that.
A
man does not change his mind when he changes his hat.
Then regard should be had to what was said at the press conference in April
1977. A "press publicity meeting" was
something for which Mr. ACKERMAN had stipulated when agreeing
to make the donation. He attended the meeting as chairman of PICK 'n PAY. He
did not in his evidence disavow anything
which
32
which was said there in regard to PICK 'n PAY by Mr.
Justice
STEYN.
According to the report in THE ARGUS, Mr. Justice STEYN described
the donation as PICK 'n PAY's "wonderful contribution". Mr. ACKERMAN
had
emphasized to him that he believed that this was an investment in the future of
a stable South Africa, and had also emphasized
how essential it was that the
private sector should make its contribution to the solution of our vexed urban
problems. Mr. Justice
STEYN trusted that Mr. ACKERMAN's magnificent example
would act as a stimulus and an inspiration to other organisations and
individuals.
Thus, the donation was presented at the press conference,
and
33
and in the ensuing publicity, as an act of disinterested
benevolence. I think that what was said about PICK 'n PAY in Mr. ACKERMAN's
presence is to be given its face value, and that Mr. ACKERMAN's philanthropic
purpose was genuine. The alternative - to regard it,
so far as PICK 'n PAY was
concerned, merely as a cynical ploy to trade on the charitable senti-ments of
the community, in order to
promote the naked business advantage of PICK 'n PAY -
is unworthy and unacceptable. The alternative is wholly inconsistent with the
persona
of a company concerned for people and aware of its social
respon-sibility to the community, which PICK 'n PAY has sought over the
years,
no doubt sincerely, to build up.
In all the circumstances I am of the opinion that
PICK
34
PICK 'n PAY did not show, on the probabilities, that in making the
donation it did not have a philanthropic purpose as well as a business
purpose.
The appeal is allowed with costs including the costs of two counsel.
The order of the Special Court is altered to read: "Appeal dismissed.
The
assessments are confirmed."
H C NICHOLAS, AJA
CORBETT, JA
BOTHA, JA Concur