The Supreme Court of Appeal ("SCA") delivered judgment in favour of the South African Revenue Service ("SARS") on 28 September 2011 in the case of CSARS v Labat Africa Limited (669/10) [2011] ZASCA 157, where the court was tasked with deciding whether Labat Africa Limited ("Labat") could deduct from its income the value of shares issued in consideration for the acquisition of a trademark by assignment.

background facts

During the course of 1999 Labat Africa, under its former name of Acrem Holdings Ltd ("the purchaser"), purchased "the entire business operations" of Labat-Anderson (South Africa) (Pty) Ltd ("the seller") which included the Labat Africa trade mark. The business operations were purchased for a consideration of R120 million, a portion of which was apportioned to the acquisition cost of the trade mark. The liability to pay for the latter was settled by the issue of shares by the purchaser.

The purchaser sought to claim a deduction equal to the nominal value of the shares issued to pay for the trade mark in terms of section 11(gA) of the Income Tax Act 58 of 1962 ("the Act"), which section essentially provided that a taxpayer may deduct from its income "expenditure actually incurred" in acquiring a trademark by assignment from any other person. SARS however denied the claim on the basis that the issue of shares did not constitute "expenditure" for income tax purposes.

The North Gauteng High Court (72 SATC 75) ruled in favour of the taxpayer by holding that the issue of shares constituted deductible expenditure actually incurred as long as the taxpayer has incurred an "unconditional legal obligation". However, on appeal, the SCA overturned this decision.

meaning of "expenditure actually incurred"

On appeal, the SCA criticised the conclusion of the court a quo that the expression "expenditure actually incurred" merely requires that a taxpayer must incur an unconditional legal obligation and that the actual discharging of that obligation is irrelevant.

The court a quo relied on a number of cases, including ITC 1801 (68 SATC 57) and Edgars Stores Ltd v CIR (1988 (3) SA 876 (A)), but the SCA pointed out that none of these cases dealt with the meaning of the term "expenditure" as much as they did with the question of when the expenditure was actually incurred. The SCA pointed out that in the current case the timing of the liability was not in issue and for this reason the question the court a quo should have posed was: (at paragraph 8):

"...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 does. The terms "obligation" or "liability" and "expenditure": are not synonyms.... In other words, the liability or obligation must be discharged by means of expenditure - timing is not the question." (Own emphasis)

In determining whether the issue of shares for the assignment of a trade mark could constitute expenditure for purposes of section 11(gA), the SCA considered the ordinary meaning of the word "expenditure" and held (at paragraph 12):

"The term "expenditure" is not defined in the Act and since it is an ordinary English word and, unless context indicates otherwise, this 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 sp

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