Commissioner SARS v Labat Africa Ltd  JOL 27986 (SCA)
21 May 2012
Posted by: Stiaan Klue
The taxpayer, under its former
name of Acrem Holdings Ltd, purchased "the entire
business operations" of Labat-Anderson (South Africa) (Pty) Ltd in terms of a written agreement dated
15 February 1999. Its effective date was 1 June 1999. The business operations
of Labat-Anderson were defined to include all its tangible
and intangible assets including, more particularly, the trade mark. In terms of
clause 6 of the agreement, under the heading "sale", the taxpayer
"purchased" the business "for a consideration" of R120
million, "discharged by the issue to Labat-Anderson"
of 133 333 333 Acrem shares "at an issue price of 90 cents per
share". (Although called a sale, the agreement was not a sale because a
sale requires payment in money and not consideration in kind.)
The clause further provided
that the "purchase price" was to be apportioned as to the net
tangible assets at the values reflected in the accounts, then to the value of
the trade mark and name in an amount as determined by an independent and
suitably qualified valuator, and the balance was to be apportioned to goodwill.
The issue before the full bench
of the North Gauteng High
Court was the question of
whether the issue by a company of its own shares in consideration for a trade
mark constituted ‘expenditure actually incurred’ by the company for the
purposes of s 11(gA)(iii) of the Income Tax Act.
Section 11(gA), as it read
during the relevant 2000 tax year, provided for the amortisation of the cost of
the acquisition of intellectual property rights at the rate of 4 per cent per
annum. Taxpayers who incurred any expenditure in acquiring a trade mark by
assignment from any other person, where such trade mark was used by the
taxpayer in the production of his income, could claim such expenditure as a
SARS contended that no expenditure
had ‘actually been incurred’ by the taxpayer in acquiring the trade mark as
required by s 11(gA)(iii) of
the Income Tax Act on the ground that no expenditure had actually been incurred
by the respondent in acquiring the trade mark in issue.
The respondent acquired a trade
mark through assignment during the tax year and sought to claim the deductible
allowance. The agreement resulting in the acquisition of the trade mark
involved the respondent purchasing the entire business operations of a company.
That included all the company’s tangible and intangible assets including the
trade mark. Instead of money, the purchase price was discharged through the
assignment to the seller, of shares in the purchasing company. The shares were
issued and transferred in terms of the agreement and their value, at the time
of transfer, was in excess of the issue price. The trade mark was valued at
R44 462 000 and the allowance claimed was based on that valuation.
The appellant, the Commissioner of SARS, disallowed the claim but the Income
Tax Special Court upheld the respondent’s appeal. The Commissioner’s appeal
against the judgment of the special court was dismissed by the high court,
leading to the present appeal.
Harms AP (with whom Lewis JA, Heher JA, Maya JA and Plasket
AJA concurred) held that the question the court a quo should have posed was whether the
issuing of shares by a company amounts to "expenditure” and not whether
the undertaking to issue shares amounts to an obligation, which it obviously
The term "expenditure” is
not defined in the Act and since it is an ordinary English word and, unless
context indicates otherwise, its ordinary meaning must be attributed to it. Its
ordinary meaning refers to the action of spending funds; disbursement or consumption;
and hence the amount of money spent. In the context of the Act, it would also
include the disbursement of other assets with a monetary value. Expenditure,
accordingly, requires a diminution, or at the very least movement, of assets of
the person who expends. This does not mean that the taxpayer will, at the end
of the day, be poorer because the value of the counter-performance may be the
same or even more than the value expended.
In the present case, the
respondent assigned the trade mark as consideration for the shares and did not
"expend” any money or assets in acquiring the trade mark. An allotment or
issuing of shares does not in any way reduce the assets of the company although
it may reduce the value of the shares held by its shareholders, and it can
therefore not qualify as an expenditure.
In the premises, the appeal was
upheld and the court a quo’s
order was replaced with one upholding the Commissioner’s appeal from the Income
Tax Special Court with costs.