THE SUPREME COURT OF APPEAL OF SOUTH AFRICA

JUDGMENT

Case No: 441/09

In the matter between:

ACKERMANS LIMITED

Appellant

and

THE COMMISSIONER FOR THE SOUTH AFRICAN
REVENUE SERVICE

Respondent

In the matter between

PEP STORES (SA) LIMITED

Appellant

and

THE COMMISSIONER FOR THE SOUTH AFRICAN
REVENUE SERVICE

Respondent

Neutral citation: Ackermans v CSARS (441/09) [2010] ZASCA 131

(1 October 2010).

Coram:
NAVSA, CLOETE, CACHALIA, MHLANTLA and BOSIELO JJA

Heard:
20 September 2010

Delivered:
1 October 2010

Summary:
Income Tax Act 58 of 1962; meaning of 'expenditure' in s 11(a).

______________________________________________________________

ORDER
______________________________________________________________

On appeal from: South Gauteng Tax Court (Johannesburg) (Willis J
presiding):

The appeals are dismissed, with costs, including the costs of two counsel.
______________________________________________________________

JUDGMENT
______________________________________________________________

CLOETE JA (NAVSA, CACHALIA, MHLANTLA and BOSIELO JJA
concurring):

[1] There are two appeals before the court: one by Ackermans Ltd and
one by Pep Stores (SA) Ltd. On 1 March 2004 Ackermans sold its retail
business as a going concern to Pepkor Ltd. At issue in the appeal is whether
by virtue of the sale agreement Ackermans is entitled to a deduction, in terms
of s 11(a) of The Income Tax Act 58 of 1962, of the sum of R17 174 777 in
respect of its 2004 year of assessment. Save for the specific nature and
amount of the contingent liabilities on which the disputed deductions sought
by Pep Stores were based, the facts of the Pep Stores appeal are identical to
the Ackermans appeal. The outcome of the Ackermans appeal will
accordingly determine the fate of the Pep Stores appeal. The South Gauteng
Tax Court sitting in Johannesburg (presided over by Willis J) found against
the appellants and confirmed the assessments of the Commissioner. The
appellants' application for leave to appeal to this court in terms of s 86A of the
Act was subsequently granted.

[2] In terms of the sale agreement Ackermans sold the 'business' to
Pepkor as a going concern. The 'business' was defined as Ackermans' retail
clothing business, including the 'business assets', the 'liabilities' and the
'contracts' as at the effective date (1 March 2004). The 'liabilities' were defined

as meaning 'all the liabilities arising in connection with the business, in respect
of any period prior to the effective date, known to [Ackermans] as at the
effective date'. The liabilities were in fact R329 440 402. They included three
amounts, to which I shall for convenience refer as 'the three contingent
liabilities', namely:
(a)
R9 880 666, being a contingent liability in respect of Ackermans'
contractual obligation to fund post-retirement medical aid benefits for its
employees;
(b)
R6 394 111, being a contingent liability in respect of Ackermans'
obligations to employees under a long-term bonus scheme; and
(c)
R900 000, being a contingent liability in respect of repair obligations
undertaken by Ackermans under property leases.
It is these three contingent liabilities, which total R17 174 777, around which
this appeal revolves.

[3] The 'purchase price' was defined as 'the amount equal to the sum of
R800m and the rand amount of the liabilities' ─ ie R800m plus R329 440 402,
totalling R1 129 440 402. The purchase price was to be discharged as
follows:
(a)
as consideration for inter-company and other loans owed to
Ackermans, by an assumption by Pepkor of an equivalent amount of the
'accounts payable' ie amounts due by Ackermans to trade creditors as at and
in respect of the period prior to 1 March 2004;
(b)
as consideration for the remaining business assets sold,
(i)
the assumption by Pepkor of the remainder of the liabilities and
(ii)
the creation of an R800m loan account owed by Pepkor to Ackermans.

[4] In terms of the sale agreement therefore, Pepkor assumed all of
Ackermans' liabilities, including the three contingent liabilities. The appellants'
counsel submitted, and the submission is not contentious, that had
Ackermans retained its business and continued to trade, the three contingent
liabilities would have been deductable in its hands as and when they became
unconditional because:

(a)
salary and employee benefits paid by a taxpayer are incurred in the
production of income and are of a revenue nature. Post-retirement medical
aid subsidies and long-term bonuses are designed to attract and retain high
quality staff and to incentivize them to render good service, all for the benefit
of the business; and
(b)
similarly, rental and related property expenditure (eg maintenance,
repair and restoration) incurred by a taxpayer for the use of the premises from
which it trades are revenue expenses incurred in the production of income.

[5] Ackermans does not claim an entitlement to deduct the three
contingent liabilities. This would not have been competent since they were still
conditional at the effective date when Pepkor assumed them. Rather, a
deduction is claimed on the basis that under the sale agreement Ackermans
incurred expenditure (in the sense envisaged in s 11(a) of the Act) in an
amount equal to the contingent liabilities. The submission was that
Ackermans did so by foregoing a portion of the asset purchase price (to which
it would otherwise have been entitled) equal to the value of the contingent
liabilities. The economic effect of the sale agreement in respect of Ackermans'
liabilities, including the three contingent liabilities, it was contended, was that
Ackermans received, for assets sold at R1 129 440 402, only R800m; and
that the position is the same as if Ackermans had received R1 129 440 402
from Pepkor and paid R329 440 402 back to Pepkor for the latter to assume
the liabilities as at the effective date. The appellants' counsel submitted, with
reference to South African,1 English2 and Australian3 authorities, that when
lump sum expenditure is incurred by a taxpayer to free itself from anticipated
or contingent revenue expenses, such expenditure is generally itself of a
revenue nature, and that this applies to Ackermans' expenditure in the present
case. It will not be necessary to consider the correctness of this submission.

1 SIR v John Cullum Construction Co (Pty) Ltd 1965 (4) SA 697 (A).
2 Hancock v General Reversionary & Investment Co Ltd [1919] 1 KB 25; Rowntree & Co Ltd v
Curtis [1925] 1 KB 328 (CA); British Insulated & Helsby Cables Ltd v Atherton [1926] AC 205
(HL); Anglo-Persian Oil Co Ltd v Dale [1932] 1 KB 124 (CA);Heather v P-E Consulting Group
Ltd [1973] 1 All ER 8 (CA) and Vodafone Cellular Ltd v G Shaw (HM's Inspector of Taxes)
[1997] EWCA Civ 1297.
3 Spotlight Stores (Pty) Ltd v CoT [2004] FCA 650 and (on appeal) Pridecraft Pty Ltd v CoT;
CoT v Spotlight Stores Pty Ltd [2004] FCAFC 339.

[6] It was contended on behalf of the Commissioner that the deduction
claimed:
(a)
did not constitute 'expenditure' or 'expenditure actually incurred';
(b)
was not incurred in the production of income;
(c)
was of a capital nature;
(d)
was not incurred for the purposes of Ackermans' trade as required by
s 23(g) of the Act;
(e)
was precluded from deduction by operation of s 23(e) of the Act (which
refers to 'income carried to any reserve fund or capitalised in any way'); and
(f)
was precluded from deduction by operation of s 23(f) of the Act (which
refers to 'expenses incurred in respect of any amounts received or accrued
which do not constitute income as defined in section one').
It will be necessary to deal only with the first issue raised by the
Commissioner.

[7] The Commissioner submitted that Ackermans did not have any
obligation to make a payment to Pepkor in terms of the sale agreement, and
that the manner in which the purchase price was discharged did not involve
any expenditure being incurred by Ackermans. To this the appellant replied
that deductable 'losses', as comprehended in the phrase in s 11(a)
'expenditure and losses actually incurred', can exist independently of a legal
liability (eg where trade stock is destroyed in a fire or money is stolen from the
business); and that being so, there is no reason why 'expenditure' must
necessarily have its source in a legal liability owed by a taxpayer to a third
party. The economic consequences of a transaction should thus be examined
to ascertain whether it has resulted in an actual diminution of, or has had a
prejudicial effect on, the taxpayer's patrimony. Therefore (I quote from
counsel's heads of argument):
'Whether the contract created an actual liability on Ackermans' part to pay
R329 440 402 to Pepkor (a liability which would be settled through set-off) is, we
submit, irrelevant. From the perspective of Ackermans' patrimony, the commercial
effect is precisely the same as if such a liability had been created.'

[8] I cannot accept this argument. To my mind, 'expenditure incurred'
means the undertaking of an obligation to pay or (which amounts to the same
thing) the actual incurring of a liability. No liability was incurred by Ackermans
to Pepkor in terms of the sale agreement. The manner in which the purchase
price was discharged by Pepkor did not result in the discharge of any
obligation owed by Ackermans to Pepkor. Ackermans owed Pepkor nothing in
terms of the sale agreement and one looks in vain for a clause in that
agreement that has this effect. It is for this very reason that the appellant in its
oral submissions abandoned any reliance on set-off, which would have been
the inevitable effect if there had been these reciprocal obligations. At the
outset, in the initial letter of objection to the assessment by SARS, written by
auditors acting on behalf of the appellants, there was reliance on set-off in the
following terms:
'13.8.1 The purchaser undertook to buy Ackermans' business for R1 129 440 402.
The purchaser thus owed this amount to Ackermans.
13.8.2 Ackermans undertook to pay the purchaser R329 440 402 to take over its
existing and future liabilities. Ackermans thus owed this amount to the purchaser.
13.8.3 It is the two aforementioned mutual but opposing debts which were set off
against each other, namely the R1 129 440 402 owed to Ackermans by the
purchaser, and the R329 440 402 owed to the purchaser by Ackermans, which
underscores clause 6.1.2.4
13.8.4 In other words, in stead of the purchaser physically paying Ackermans
R1 129 440 402, and Ackermans physically paying the purchaser R329 440 402, the
parties allowed for set-off to operate, which meant that the amount of R329 440 402
was set-off against R1 120 440 402, resulting in a figure of R800 000 000 owed by
the purchaser to Ackermans. There is nothing sinister about such a contractual
arrangement, it occurs in overabundance in commercial life.
13.9
The payment of R23 017 959 so incurred by Ackermans on 1 March 2004 as
part of the set-off arrangement was unconditional, as it was actually paid to the

4 Clause 6.1.2 of the sale agreement, paraphrased in para 3 above, provides:
'6.1
The Purchase Price shall be discharged as follows by the Purchaser:
. . .
6.1.2
as consideration for the remaining Business Assets:
6.1.2.1  the Purchaser will assume the remainder of the Liabilities, and
6.1.2.2 the Purchaser will with effect from the Effective Date owe the Seller R800 000 000,00
(eight hundred million rand) as a loan and which will be reflected as a loan account in the
books of the Seller.'

purchaser through set-off on the day (1 March 2004) that the obligation arose to pay
this amount.'
The argument is untenable. It is trite that set-off comes into operation when
two parties are mutually indebted to each other, and both debts are liquidated
and fully due. That is not what happened here and the argument based on
set-off was correctly abandoned.

[9] It was submitted on behalf of the respondent that unless the three
contingent liabilities were allowed as a deduction in the hands of Ackermans,
an anomaly would arise as they would never be deductible. The argument is
without foundation. There would be no bar to Pepkor deducting the liabilities
as and when they became unconditional, as counsel representing the
Commissioner rightly conceded.

[10] It is clear that what occurred, as is usually the case in transactions of
this nature, is that the nett asset value of the business ─ the assets less the
liabilities ─ was calculated and that this valuation dictated the purchase price.
In the ordinary course of purchasing the business as a going concern on this
basis it would follow that the liabilities would be discharged by the purchaser.
The journal entries relied on by the appellants do not equate to expenditure
actually incurred. On the contrary, the mechanism employed in the agreement
of sale resulting in the journal entries was to facilitate the sale.

[11] The fact that Ackermans rid itself of liabilities by accepting a lesser
purchase price than it would have received had it retained the liabilities, does
not mean in fact or in law that it incurred expenditure to the extent that the
purchase price was reduced by the liabilities. At the effective date no
expenditure was actually incurred by Ackermans.

[12] The appellants accordingly fail at the first hurdle. The appeals are
dismissed, with costs, including the costs of two counsel.

_______________
T D CLOETE
JUDGE OF APPEAL

APPEARANCES:
APPELLANTS:

O L Rogers SC (with him M W Janisch)
Instructed by Werksmans, Tyger Valley
McIntyre & Van der Post, Bloemfontein

RESPONDENTS:

A Rafik Bhana SC (with him Ms J T Boltar)
Instructed by The Registrar, Tax Court, Pretoria
The Commissioner for The South African Revenue
Service, Pretoria

THE SUPREME COURT OF APPEAL
REPUBLIC OF SOUTH AFRICA

MEDIA SUMMARY – JUDGMENT DELIVERED IN THE SUPREME COURT OF APPEAL

From: The Registrar, Supreme Court of Appeal
Date: 1 October 2010

Status: Immediate
Please note that the media summary is intended for the benefit of the media and does not
form part of the judgment of the Supreme Court of Appeal

ACKERMANS LTD v THE COMMISSIONER FOR THE SOUTH AFRICAN REVENUE
SERVICE

1.
In 2004 Ackermans Ltd sold its retail business as a going concern to Pepkor Ltd.
Ackermans claimed a deduction under the Income Tax Act of R17m in respect of three
liabilities which Pepkor had assumed under the sale agreement. The Commissioner of the SA
Revenue Service disallowed the deduction. The SCA held that Ackermans had incurred no
expenditure in respect of the three liabilities and was accordingly not entitled to any
deduction.

2.
An appeal by Pep Stores (SA) Ltd for similar relief was dismissed for the same
reason.

--ends--