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IN THE SUPREME COURT OF SOUTH AFRICA (APPELLATE DIVISION)
In the matter between:
EDGARS STORES LIMITED
Appellant
and
COMMISSIONER FOR INLAND REVENUE
Respondent
Coram: CORBETT, HOEXTER, VIVIER JJA, VILJOEN et NICHOLAS
AJJA Heard: 19 May 1988 Delivered: 30 May 1988
JUDGMENT
NICHOLAS, AJA :
This is an appeal by Edgars Stores Limiced
("Edgars") .... / 2
2
("Edgars") against a judgment by ACKERMANN J (KIRK-COHEN J and ROUX J concurring) which was delivered in the Trans-vaal Provincial Division. The iudgmenr has been reported (Commissioner for Inland Revenue v Edgars Stores Limited, 1986 (4) SA 312 (T)),and it will be referred to as "the reported judgment". The Court a guo upheld an appeal against a decision of the Transvaal Income Tax Special Court (NESTADT J presiding), in which the Special Court had allowed an appeal by Edgars against the disallowance by the Commissioner for Inland Revenue ("the Commissioner") of certain deductions from its taxable income which had been claimed in its returns of income for the years of assessment ended 30 June 1978 anc 30 June 1980.
Edgars operates retail stores dealing in
clothing .... / 3
3
clothing throughout Southern Africa. It appears that it
does not itself
own the premises on which the businesses
are conducted. It leases those
premises rrom various
lessors who, under arrangements with Edgars, have con-
structed them on
suitable sites in accordance with Edgars'
requirements. The total annual
rental payments are sub-
stantial: in the 1980 tax year they exceeded R16 million.
The leases are long-term notarial leases,
for which standard forms are
used. The lease agreements
relating to 41 stores contain so-called "turnover"
clauses.
Under such leases there is payable a "basic rental" and a
"turnover rental" which is related to the annual turnover
of the store
concerned, It was problems connected with
such leases which gave rise to
Edgars' appeal to bhe
Special .... / 4
4
Special Courr.
Under the leases which contain turnover clauses, there
enters into the calculation of the rent a percentage of the nett turnover of
the
store concerned during each 12-month period of the lease. Such 12-month period
ends of course on various dates in different leases,
depending as it does on the
date of commencement of a particular lease. Where the 12-month period of any
lease ends after the close
of Edgars' tax year, it is not possible to ascertain,
for the purposes of Edgars' return of income for that year, the nett annual
turnover (and hence the amount of the rental attributable to turn-over.) Since
it has been the experience oE Edgars that the turnover
of its stores has been
increasing Erom year
to .... / 5
5
to year, it has sought to deduct "turnover rental" crom its taxable income, not in the year of assessment during which it is paid to the lessot, but in the year in which Edgars contends that the liability to pay it arose. That is what happened in the years of assessment ended 30 June 1978 and 30 June 1980. At the end of each of those years, the turnover figures for the 12-month period of some leases could not then be calculated. In the re-spective returns of income for those tax years, Edgars claimed deductions for rent amounting to R12 156 393 (which included an amount of R123 560) and R16 997 101 (which included an amount of R322 203). The amounts of R123 560 and R322 203 representec estimaces of the amounts by which the turnover rentals payable co che lessors
concerned .... / 6
6
concerned exceeded the basic rentais. Edgars adopted the view that liability
f or such amounts had been in-curred in the respective
tax years. The
Commissioner disallowed the deductions of those amounts. There followed the
appeal to the Special Courr. This was
upheld: the assessments were set aside and
they were referred back to the Commissioner for reassessment on the basis that
the amounts
of R123 560 in respect of the 1978 year of assessment and the amount
of R322 203 in respect of the 1980 year of assessment should
have been allowed
as deductions from Edgars' income in those years.
Under s. 11(a) of the
Income Tax Act, 58 of 1962, allowable deductions from income are
"expenditure and losses actually incurred in the
Republic .... / 7
7
Republic in the production ot che income, provided such expenditure and losses are not of a caoital
nature."
The problem of whether expenditure was "actually
incurred"
in the tax year concerned is a perennial one, and it has
frequently been considered by the courts. See the full
discussion in the
reported judgment at 315 E to 320 E,
to which should be added a referencs to
Nasionale Pers
Bpk v Kommissaris van Binnelandse Inkomste, 1986
(3) SA
549 (AA).
The principles which apply to this case are
well-established. I have
extracted them, with slight changes
in wording, from the judgment of
ACKERMANN J at 315-316:
For the purpose of s. 11(a) a deduction in respect of rental is properiy to be made in the tax year in which the rental is "actually incurred".
"Actually .... / 8
8
"Actually incurred" does not mean "actually paid", but means all expenditure actually incurred during the year, whether the liability has been discharged during that tax year or not.
A distinction must be drawn between:
(a) the case where the existence of che liability itself is conditional and dependent upon the happening of an event after the tax year in question, in which event the liability is not incurred in the tax year in question; and (b) the case where the existence of the liability is certain and established within the tax year in question, but the amount of the lia-bility cannot be accurately determined at
the tax year-end, in which event the liability is nevertheless regarded as having been in-curred in the tax year in question.
The application of those principles to the
present case is governed by the proper construction of
the relevant
provisions of the leases. For the purposes
of /9
9
of the appeal to the Special Court it was agreec that it was only necessary to look at the provisions contained in clause 5 of one standard form of lease agreement. They are set out in full in the reported judgment at 320 F to 321 H, but for the sake of clarity I have in what follows omitted those portions which are not now material.
"5. RENT
5.1 The LESSEE shall pay to the LESSOR from the
date of commencement of
this lease a rental
in South African currency, free of exchange,
at
or such other address in the Republic of South Africa as the LESSOR may from time to time nominate to the LESSEE in writing.
5.2 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 and in
5.2.2
read with 5.2.3, 5.2.4, 5.2.5 and 5.2.6
on the other hand.
5.2.1 For the Eull period of the lease as from the
date .... / 10
10
date of commencement thereof an amount equi-valent to 1/12 (ONE TWELFTH) oE R or such lesser amount of the total capital outlay as defined below in clause 5.2.12 ... The rental as defined shall be the minimum rental payable by the LESSEE throughout the currency of the lease and is hereinafter referred to as 'the basic renzal'. 5.2.2 1/l2 (ONE TWELFTH) of % of the LESSEE's nett annual turnover, as defined in qlause 5.2.2 produced from the leased premises during the rirst years of the lease;
The turnover rental payable herein in terms of
this clause shall not in
any one year exceed an
amount equivalent to 1/12 (ONE TWELFTH) of %
per
annum of or such lesser amount of
the total capital outlay as defined in clause
(Clause 5.2.12 defines "the total capital outlay" as comprising (insofar as it does not exceed a specified sum) the total cost of the lessor's land,
the .... / 11
11
the costs ot demolition of any exisring buildings
thereon, the cosrs oï planning and constructing the
contemplated improvements in accordance with the
plans and specifications thereof, and a number of
other costs. There then follows the remaining
sub-clauses 5.2.3 to 5.2.8,)
"5.2.3 Should the rental calculated in terms of
5.2.2. in any year amount to less
than the basic rental, then in respect of that year the rental payable shall be as defined in 5.2.1.
5.2.4 The basic rental shall be payable until the nett annual turnover figures in respect of any year are available in terms of 5.2.5 read with 5.2.6, 5.2.7 and 5.2.8." 5.2.5 (This sub-clause defir.es the "nett annual turnover".)
"5.2.6 The 12 (TWELVE) month period referred to in 5.2.5 and 5.2.8 shall mean a period running from the date of commencement of the lease to the date before the corresponding day in
the .... / 12
12
the next calender year inclusive.
5.2.7 The rental mentioned in paragraph 5.2.1 above shall be paid monthly in advance by the LESSEE to the LESSOR. 5.2.8 Within 3 (THREE) months after the end of every 12 (TWELVE) month period completed after the commencement of this lease the LESSEE shall pay to the LESSOR the sum due under paragraph 5.2.2 above if applicable and shall deliver to the LESSOR a statement of the nett annual turnover for thac 12 (TWELVE) month period certified as correct by the auditors
of the LESSEE. Such starement shall be delivered at the place where rentals will be payable at that time."
Clause 5 with its sub-clauses gives rise
to problems of interpretation,
mainly because it is not
always internally consistent. It is manifest from
the
scheme of the clause as a whole, however, that the aim
was that the
lessor should, from the start of lease, re-
ceive by way of rent a stipulated
minimum return on his
capital / 13
13
capital investment (the basic rental), which would in-crease in relation to
the lessee's annual turnover (the turnover rental).
The obligation to pay "a
rental" is created by 5.1. The main part of 5.2 defines the amount of the
monthly rental payable by the lessee
to the lessor. It does so, not by fixing a
definite sum of money as the rental, but by providing a "formula" for its
calcu-lation.
In terms, the clause provides for two alter-native rentals, of
which the greater is the rental pay-able: the amount as defined in
5.2.1 (the
basic rental) on the one hand; and the amount as defined in 5.2.2 (the turnover
rental) on the other hand. Analysis of
5.2 as a whole, however, shows that the
basic rental
and .... / 14
14
and the turnover rental are not discrete alternatives -neither by itself is "the monthly rental payable" - but that they are interdependent components of the formula by means of which there is to be ascertained: the amount of the liability for rent; when that liability is incurred; and when it is to be discharged.
The basic rental "shall be paid monthly in advance" (5.2.7), "for the full period of the lease" (5.2.1), and it "shall be payable until the nett annual figures in respect of any year are available" (5.2.4).
In terms of 5.2.8, where it is applicable, the lessee shall pay to the lessor the turnover rental ("the sum due under paragraph 5.2.2 above") within three months after the end oE every 12-month period completed
after .... / 15
15
after the commencement of the lease.
Thus, the lessee is obliged to pay
both basic rental aná turnover rental: basic renral monthly in advance,
and turnover rental,
if any, in a lump sum by the time fixed by 5.2.8.
On the
literal meaning of the words of 5.2.8, the lessee is obliged to effect payment
of the whole of the turnover rental as calculated
in 5.2.2. But that cannot be
the proper incerpreration of 5.2.8. What is payable is the balance remaining
after deduction from the
turnover rental (as calculated in 5.2.2) of the basic
rental paid. If it were otherwise, the lessee would have to pay both the basic
rental and the turnover rental. That would be in irreconcilable conflict
with
the .... / 16
16
the main part of 5.2, under which the obligation is to pay the greater of the
basic rental and the turnover rental, not to pay both.
Such a construction must
be avoided. In my view therefore the effect of clause 5.2 read as a whole is to
create a liability for one
rental, payable as to the basic rental month by
month, and as to any excess of the turnover rental over the basic rental in a
lump
sum within 3 months after the end of each 12-month period of the
lease.
Although the balance of the turnover rental (if there is any) only
becomes calculable and hence pay-able after the end of the 12-month
period, the
liability to pay it (like the liability to pay the basic rental) arises month by
month. That that is so is shown by bhe
fact .... / 17
17
fact that the turnover rental is subsumed under "the monthly rental payable",
and that, like 5.2.1, 5.2.2 provides for a monthly liability
("1/12 (ONE
TWELFTH) of -% of the lessee's nett annual turnover.")
In my opinion,
therefore, there was under the lease a single obligation to pay rent which was
made up of two components: basic rental,
and the surplus, if any, of turnover
rental over basic rental. The obli-gation arose month by month. The
quantum of the turn-over rental component could not be ascertained during
the tax year in question, but nevertheless the liability to pay
it was certain
and established within that year.
The Court a quo rejected a
submission on these lines which was made on behalf oc Edgars, and
accepted .... / 18
18
accepted the contention put forward on behalf of the Commissioner. That contention in summary was this: Clauses 5.2, 5.2.3 and 5.2.5 contemplated two separate obligations in regard to rentals (viz.
basic rental and turnover rental ); liability to pay turnover rental is dependent on the extent of the annual turnover; due to a multiplicity of circumstances which may occur after the end of the tax year, it is uncertain whether that liability will be incurred; it cannot be said, therefore, that there is a clear and unconditional liability incurred during the tax year.
In the course of the reported judgment ACKERMANN J held at 323 I to 324 H that -
It .... / 19
19
It cannot be said that there was only one un-changing obligation to pay rent.
Clause 5.2 clearly envisages two different obli-gations, which clearly cannot both exist at the same time.
Clause 5.2 envisages the basic rental obligation which comes into operation immediately.
Clause 5.2.8 makes provision f or the substitution of the basic rental obligation with the turnover rental obligation "if applicable".
The contract envisages a definite unconditional primary basic rental which may, depending on the nett annual turnover rental be replaced by the turnover rental after the 12-month lease period. The very obligation to pay turnover rental is conditional and dependent on the fulfilment of a condition after the end of the year of assessment.
In my respectful opinion the learned
Judge
fell into error, mainly because he did not appre-
ciate that 5.2.8 is not to
be interpreted according to
the / 20
20
the literal meaning of the words used. In order to give
a sensible meaning
to 5.2 read as a whole, 5.2.8 must be
interpreted as providing that the
lessee shall pay to
the lessor the sum which, when added to the basic
rental
already paid, will bring it up to the turnover rental.
In other
words, the obligations created by 5.2 is an ob-
ligation to pay the basic rental and, in addition, the
difference if any
between the turnover rental and the
basic rental. It is correct that an
obligation to pay
a nil rental is a contradiction in terms. But there
is
not, I conceive, any reason why there should not be an
unconditional
obligation to pay whatever amount is found
to be due upon an application of
the rental formula.
And that, in my opinion, is the effect of 5.2. It
matters
not .... / 21
21
not that the amount can only be determined after the end
of the 12-month
period of the lease, or that it may turn
out to be nil. There is accordingly
one single obliga-
tion to pay rent. The obligations to pay basic rent
and
turnover rent can and do co-exist: properly inter-
preted 5.2 does not
provide f or the substitution by
turnover rental of basic rental. In the
ordinary
course, the basic rental will have been fully paid |
during the
12-month lease period, and it is inappropriate i
and unreal to speak of
replacing by another obligation
one which has already been performed.
My conclusion is that the Special Court
was right in upholding the appeal. It was agreed during
argument in that court that in the event of the appeal
succeeding .... / 22
22
succeeding the amounts of the deductions should be as claimed by Edgars.
I
would make an order upholding the appeal with costs, including the costs of two
counsel, and setting aside the order of the Court
a quo and substituting
therefor an order that "The appeal is dismissed with costs."
H C NICHOLAS, AJA
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