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Eveready v CSARS (195/11) [2012] ZASCA 36 (29 MARCH 2012)

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Summary: Tax – Income Tax Act 58 of 1962 – s 22(4) – trading stock – whether acquired for ‘no consideration’.
    THE SUPREME COURT OF APPEAL OF SOUTH AFRICAJUDGMENT  Not reportableCase No: 195/11In the matter between: EVEREADY (PTY) LIMITED Appellant and THE COMMISSIONER FOR THE SOUTH AFRICANREVENUE SERVICE RespondentNeutral citation:    Eveready v The Commissioner for the SARS  (195/11)[2012] ZASCA 36 (29 MARCH 2012) Coram: NUGENT, HEHER, MALAN and TSHIQI JJA andBORUCHOWITZ AJA Heard:   2 MARCH 2012   Delivered: 29 MARCH 2012Summary: Tax – Income Tax Act 58 of 1962 – s 22(4) – tradingstock – whether acquired for ‘no consideration’.    2_____________________________________________________________ ORDER _____________________________________________________________On appeal from: Tax Court, Port Elizabeth (Chetty J with Messrs P Ranchodand Z Mzimela as assessors) sitting as court of first instance):1. The appeal is dismissed with costs.2. The cross-appeal is dismissed with costs that include the costs of twocounsel._____________________________________________________________ JUDGMENT _____________________________________________________________NUGENT and TSHIQI JJA (HEHER, MALAN JJA and BORUCHOWITZAJA CONCURRING)[1] Before us is an appeal and a cross-appeal against orders made by theTax Court sitting at Port Elizabeth (Chetty J with Messrs P Ranchod and ZMzimela as assessors). The appeal concerns s 22 of the Income Tax Act 58of 1962 and in particular s 22(4).[2] Section 22 determines the value to be attributed to trading stock whenit is taken into account in determining taxable income. The value to beattributed to closing stock is dealt with in s 22(1). In broad terms its value is    3to be the cost price of the stock, less any allowance that the Commissionermight consider to be just and reasonable for any diminution in its value.Section 22(2) determines the value to be attributed to opening stock. If itwas held as closing stock in the previous year, it is to be the value that wasattributed to the stock in determining taxable income for that year. If it wasnot held as closing stock for the previous year then its value is to be its costprice. The manner in which the cost price of stock is to be determined for thepurpose of those sections is specified in some detail in s 22(3).[3] The appeal centres on s 22(4), which determines the value to beplaced on trading stock that was acquired ‘for no consideration’. It providesthat the cost price of such stock for purposes of s 22(3) – and hence fordetermining its cost price where applicable in the earlier subsections – isdeemed to be its current market price at the date of acquisition. 1  [4] At one time Gillette Group South Africa (Pty) Ltd (Gillette) had adivision of its business that manufactured, distributed and sold zinc batteriesunder the name ‘Eveready’. On 18 November 2002 Gillette sold the businessas a going concern to Friedshelf 243 (Pty) Ltd, a shelf company that changedits name to Eveready (Pty) Ltd, which is the appellant in the appeal (we willrefer to it hereafter as Eveready). The effective date of the sale was 1 March2003.[5] In its income tax return for the 2004 year of assessment – whichspanned the period 1 March 2003, when Eveready commenced trading, to its 1 S22(4) ‘If any trading stock has been acquired by any person for no consideration . . . such person shallfor the purposes of subsection (3) . . . be deemed to have acquired such trading stock at a cost equal to thecurrent market price of such trading stock on the date on which it was acquired by such person . . .’    4accounting year-end on 30 June 2004 – Eveready claimed a deduction fromincome of R103 532 179 for the trading stock that it had acquired fromGillette pursuant to the purchase of the business. It said that was the marketvalue of the stock at the date of acquisition, and that it was entitled to deductits market value because it had acquired the stock from Gillette ‘for noconsideration’ as contemplated by s 22(4).[6] In an additional assessment issued by the Commissioner after an auditof Eveready’s business the deduction was disallowed. At first the deductionwas disallowed altogether, but later the Commissioner allowed a deductionof R21 562 918 for reasons that we come to later. Interest on the allegedlyunpaid tax was levied under s 89 quat  (2).[7] Objections by Eveready to the disallowance of the deduction and tothe levying of interest were rejected by the Commissioner and Evereadyappealed to the Tax Court. The Tax Court dismissed its appeal against thedisallowance of the deduction but upheld its appeal against the levying of interest. Eveready now appeals against the former order, and theCommissioner cross-appeals against the latter order, with the leave of thecourt below.[8] The Commissioner accepts that the trading stock acquired fromGillette (which constituted the opening stock of Eveready’s business) isdeductible from its income. 2   2 See de Koker and R C Williams Silke on South African Income Tax Memorial Edition (2011) Vol 2 pages8-290-1 to 8-290-2.   What is in dispute is the amount to be attributedto the stock for purposes of the deduction. The Commissioner disputes that
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