Eveready (Pty) Ltd v The Commissioner for SARS  JOL 28648 (SCA)
09 May 2012
Posted by: SAIT Technical
In November 2002, the appellant purchased a business as a going concern, with effect from 1 March 2003. In its income tax assessment for the 2004 year, the appellant claimed a deduction for the trading stock which it had acquired pursuant to its purchase of the business. According to the appellant, the deduction claimed represented the market value of the stock at the date of acquisition, and it was entitled to deduct its market value because it had acquired the stock "for no consideration” as contemplated by section 22(4) of the Income Tax Act 58 of 1962.
The respondent disallowed the deduction, and an appeal to the Tax Court was dismissed – although the Tax Court did uphold the appellant’s appeal against the levying of interest. The appellant now appealed against the Tax Court’s dismissal of its appeal against the disallowing of the deduction, while the respondent cross-appealed against the upholding of the appeal against the levying of interest.
The respondent accepted that the trading stock acquired by the appellant in terms of the sale of business was deductible from its income. What was in dispute was the amount to be attributed to the stock for purposes of the deduction. The respondent disputed that the appellant was entitled to deduct its market value, arguing that it was not acquired "for no consideration”. According to the respondent, the stock was acquired for consideration and thus it fell to be deducted at its cost price as contemplated by section 22(2)(b).
Held that section 22 determines the value to be attributed to trading stock when it is taken into account in determining taxable income. Section 22(4) 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 determining its cost price is deemed to be its current market price at the date of acquisition.
The sole question in the appeal was whether the appellant acquired the trading stock "for no consideration” (in which case it fell to be deducted at its market value at the date of acquisition as provided for in section 22(4)) or whether it was acquired for consideration (in which case it fell to be deducted at its cost price as provided for in section 22(2)(b)).
Whether or not stock is acquired for no consideration is a question of fact that depends upon what was agreed between the parties for its acquisition. The appellant’s case was based on a schedule to the sale of business agreement, in which no value was assigned to the inventory. The appellant therefore contended that the parties intended that the allocation should be nil. On that basis it submitted that the schedule demonstrated 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. The Court rejected that submission on the basis that it ignored the context in which the schedule had to be read and was also inconsistent with the language of the schedule itself. The blank spaces suggesting that no value was assigned to the inventory did not mean that the seller in the agreement was simply giving away trading stock for free. Instead, the blanks merely meant that the amounts were yet to be assigned. The finding by the Tax Court on this issue could not be faulted and the appeal had to fail.
Turning to the cross-appeal, the Court held that section 89quat(2) levies interest on unpaid tax in certain circumstances but the respondent may in his discretion waive that interest. On appeal from his decision it is for the Tax Court to exercise that discretion. It was open for the present Court to interfere only if the Tax Court failed properly to exercise its discretion. No such finding could be made, and the cross-appeal was also dismissed.