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[1988] ZASCA 70
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Edgars Stores Ltd v Commissioner for Inland Revenue (416/86) [1988] ZASCA 70 (30 May 1988)
Case No 416/86
IN THE SUPREME COURT OF SOUTH AFRICA
(
APPELLATE DIVISION
)
In the appeal of:
EDGARS STORES LIMITED
appellant
and
COMMISSIONER FOR INLAND REVENUE
respondent
CORAM
: CORBETT, HOEXTER, VIVIER JJA, VILJOEN et NICHOLAS AJJA
DATE OF HEARING
: 19 May 1988
DATE OF JUDGMENT:
JUDGMENT
CORBETT
JA:
I have read the judgment prepared by my Brother Nicholas in this matter.
Unfortunately I am not able to agree with the conclusion
reached by him. In my
view, the appeal should be dismissed. Here are my reasons.
/ The
2
The background facts are to be found in my
Brother's
judgment and also in the reported judgment
of the Court a
quo (at
1986 (4) SA 312
(T) ). I, therefore, need
not
repeat them.
As my Brother has pointed out, the case hinges on the application of the
general deduction formula in sec 11(a) of the Income Tax
Act 58 of 1962 —
and more particularly the words "expenditure.... actually incurred ...."
(Afrikaans text: "onkoste... werklik....aangegaan")
appearing therein — to
the rentals paid or payable by the appellant in respect of the various business
pre-mises hired by it.
In the recent case of
Nasionale Pers Bpk v
Kommi
ssaris van Bi
nnelandse
Inko
mste
,
1986 (3) SA 549
(A),
this Court had occasion to consider the meaning of these words in sec 11(a) and
at page 564 A-C Hoexter JA stated the position
as follows:
/ "Dit
3
"Dit 1 s 'n bekende grondstelling dat, vir doeleindes van art 11 (a) van Wet 58
van 1962, onkoste werklik aangegaan is in daardie
belastingjaar waarin
aanspreeklik-heid daarvoor regtens ontstaan, en nie (vir geval betaling daarvan
later sou plaasvind) in die
belastingjaar waarin daadwerklike vereffening van
die skuld geskied het nie. Kyk
Port Elizabeth Electric Tramway Co v
Commissioner for Inland Revenue
1936 CPD 241
op 244
(8 SATC 13)
;
Concentra (Pty
) Lt
d v Commissio
ner f
or Inland Revenue
1942
CPD 509
op 513
(12 SATC 95)
;
Caltex Oil (SA) Ltd v Secretary for Inland
Revenue
1975 (1) SA 665
(A) op 674 D-E
(37 SATC 1).
Die vereiste dat die
onkoste 'werklik aangegaan' moet word, het egter tot gevolg dat moontlike
toekomstige uit-gawes wat bloot as
waarskynlik geag word nie ingevolge art 11(a)
aftrekbaar is nie. Alleen onkoste ten opsigte waarvan die be-lastingbetaler 'n
volstrekte
en onvoorwaar-delike aanspreeklikheid op die hals gehaal het, mag in
die betrokke belastingjaar af-getrek
word."
Thus it is clear that only
expenditure (otherwise quali-fying for deduction) in respect of which the
taxpayer has incurred an unconditional
legal obligation during the year of
assessment in question may be deducted in terms of sec
/ 11(a)
4
11(a) from income returned for that year. The obligation may be unconditional
ab initio or, though initially con-ditional, may become
unconditional by
fulfilment of the condition during the year of assessment; in either case the
relative expenditure is deductible
in that year. But if the obligation is
initially incurred as a condi-tional one during a particular year of assessment
and the condition
i s fulfilled only in the following year of assessment, it i s
deductible only in the latter year of assessment (the other requirements
of
deductibility being satisfied).
It is, of course, important in this context to distinguish between (i)
expenditure in respect of which the obligation is conditional
and remains so
during the year of assessment, and (ii) expenditure in respect of which the
obligation is or during the year of assessment
becomes unconditional, but cannot
be quantified until
/ after
5
after the termination of the year of assessment. The latter situation, with
reference to a loss instead of an expenditure, is exemplified
by the Rhodesian
Appellate Division case of
Commission
er
of T
axe
s v
"
A"
Company
1979 (2) SA 409
(R,AD), which was concerned with a loan made by the
taxpayer, a merchant banker, to a company which subsequently was placed in
liquidation.
For por-tion of this loan, amounting to $72 000, the taxpayer
ranked as a concurrent creditor. The taxpayer sought to deduct this
amount, as a
loss incurred, in the year in which the company was placed in liquidation. At
that stage the probabilities indicated
that concurrent creditors would receive a
dividend of not more than 5c in the $1, which would yield a recoupment to the
taxpayer
of $3 600. The Court held that, as the loss had been suffered once and
for all during the tax year in question, it was deductible
even though final
quantification thereof, which was dependent on the exact amount of the dividend,
could take place
/ only
6
only after the end of the tax year. It was further held that in the unlikely
event of the dividend exceeding 5c, the excess would
constitute gross income in
the taxpayer's hands in the year in which it accrued. (See particularly p 416
A-E; also article by Mr
H Vorster entitled "Unquantified and defeasible expenses
incurred in the production of income", 1 SATJ 1, at pp 8-11.)
In the present case counsel were agreed that the crux of the matter was
whether the provisions in clause 5 of the standard form of
lease relating to a
turnover rental created a contingent obligation which was incurred, if at all,
only at the end of the annual
lease period (as defined in clause 5.2.6 and which
I shall call "the lease year")or whether they gave rise to an unconditional
obligation
the quantification of which took place at the end of the lease year.
This is not an easy question — as the differences of judicial
opinion in
this Court and
/ between
7
between the Courts a
quo
demonstrate — but I have come to the
conclusion that the former of these propositions is the correct one and that,
therefore,
the Transvaal
Provincial Division ("the TPD") reached a correct
de-cision.
Essentially clause 5, as I see it, provides not for a single rental
obligation, as argued by appellant's counsel and as held by my
Brother Nicholas,
but two alternative rental obligations: the obligation to pay a basic rental or
in certain circumstances the obligation
to pay a turnover rental. The obligation
to pay the basic rental accrues from month to month during the lease year and
must be discharged
in advance. It is payable "until the nett annual turnover
figures in respect of (the) year are available" (clause 5.2.4). The obligation
to pay the turnover rental is dependent upon the turnover produced from the
leased premises during the lease year
/ being
8
being such that the turnover rental, as calculated in accordance with the
formula laid down in clause 5.2.2., exceeds the basic rental.
In that event it
replaces the
basic rental; otherwise the rental obligation remains one to pay
merely the basic rental. This emerges, I think, from :
(1) Clause 5.2, which provides that 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" (1 e the basic rental —
see clause 5.2.1) "and in 5.2.2 read with
5.2.3, 5.2.4, 5.2.5 and 5.2.6 on the other
hand" (ie the turnover rental).
(2) Clause 5.2.3, which provides that —
"Should the rental
calculated in terms of 5.2.2 " (ie the turnover rental) "in any year, after
deducting therefrom....
amount to less than the basic
rental, then in respect of that year the rental payable shall be as defined
in 5.2.1" (ie the basic rental).
(3) Clause 5.2.8 which provides that within 3 months
of the end of every
lease year the lessee —
/" shall
9
" shall pay to the LESSOR the sum due
under paragraph 5.2.2 above if
applicable
" (my emphasis)
and shall deliver to the lessor a statement of the nett annual turnover for the
lease year, certified as correct by the lessee's
auditors. The words 'if
applicable' obviously have re-ference to the contingency as to whether the
turnover rental, as calculated
in terms of clause 5.2.2, exceeds the basic
rental or not. If it does, then the obligation to pay this turnover rental
arises; if
it does not, then this obligation does not arise.
It is true that there is no express provision
in
clause 5 to the effect that, in the event of the
turnover
rental becoming payable, only the amount by which the
turnover
exceeds the basic rental, which has in the mean-
while been paid from month
to month, is payable or, to put it another way, that the basic rental paid
should be set off against the
total turnover rental as calculated, but this is
clearly implicit in the clause. And indeed this is how the parties have
evidently
operated
/ under
10
under the agreement (see the letters written on appellant's behalf, dated 3
July 1980 and 10 November 1981, which speak of the "additional
rental" payable
in terms of the turnover rental clause).
As pointed out by Ackermann J in delivering the judgment of the TPD in this
matter, the case is concerned only with those instances
where the lease year
ends after the appellant's year of assessment, respondent (the Commissioner for
Inland Revenue) having conceded
that appellant was entitled to deduct from
income in the re-levant tax year those portions of the amounts claimed in
respect of turnover
rental (as eventually quantified) which applied to those
leases whose lease year ended on the last day of appellant's tax year (see
reported judgment at p 314 G-H). The learned Judge also mentioned (at p 325 B-F)
the possibility that even in the case of a lease
having a lease year ending
after the termination of appel-
/ lant's
11
lant's tax year, appellant might be able to establish that the turnover
during the portion of the lease year falling within the tax
year was of such a
magnitude as to bring into operation during the tax year the obligation to pay
additional turnover rental, but
held that that was not the case presented by the
appellant and that, therefore, no view need be expressed on this possibility.
Before
us appellant's counsel accepted this and argued the case on the premise
that the liability to pay turnover rentals under the leases
in question had not
become apparent before the end of the tax year. I might just add, in case this
is not already clear, that this
case i s only concerned with the appropriate tax
year in which the additional turnover rental may be de-ducted. Its deductibility
in one year or the other is not in question.
Before the TPD appellant's counsel postulated four ways in which rental could
be determined, the fourth
/ bei ng
12
being in essence the position under the standard form of lease used by
appellant; and argued by analogy from the other three postulates
that in the
fourth case the turnover rental was in fact expenditure incurred month by month
during the tax year. (See reported judgment
p 323 C-F.) On appeal before us
appellant's counsel advanced the same argument. I do not find such arguments
based on analogy at
all helpful. In the final resort the case must be decided on
its own facts and the fact that, had the appellant arranged its leases
differently a dif-ferent result, from the taxation point of view, might have
ensued, seems to me to be beside the point.
To sum up the position as I see it, the standard form of lease makes
provision for two alternative rental obligations: one to pay
the basic rental
and one to pay the turnover rental. Appellant as tenant is obliged to pay
whichever of these rentals, each as calculated
/ according
13
according to a certain formula, is the greater. The basic rental accrues and
is paid from month to month in advance. The liability
to pay the turnover rental
can only be determined at the end of the lease year, when the annual turnover is
known. It the turnover
is below a certain level, and the turnover rental as
calculated is less than the basic rental, then there is no obligation to pay
turnover rental. There cannot be a vested obli-gation to pay nil rental. In that
case the obligation to pay the basic rental prevails.
If, on the other hand, the
turnover level i s such that the turnover rental, as calculated, exceeds the
basic rental, then the obliga-tion
to pay it displaces the obligation to pay
basic rental, subject to the lessee not being obliged to pay more than the
excess. The
obligation to pay turnover rental is thus contingent until the
turnover for the lease year is determined at the end of the year.
The
expenditure re-
/ lating
14
lating to the payment of turnover rental can, therefore, not be regarded as
having been actually incurred in a tax year which ended
prior to the termination
of the lease year. It can, therefore, not be deducted in that tax year.
For these reasons I am of the view that the TPD reached the correct
conclusion.
The appeal is accordingly dismissed with costs.
M M CORBETTT
HOEXTER JA)
VIVIER JA) CONCUR.
VILJOEN AJA)