Case  CCT 13/19
[2020] ZACC 16

Hearing Date:      12 November  2019
Judgement Date:  21 July 2020

Post Judgment Media Summary  

The following explanatory note is provided to assist the media in reporting this case and is not binding on the Constitutional Court or any member of the Court.

On Tuesday, 21 July 2020 at 10h00 the Constitutional Court handed down judgment in an application for leave to appeal against the whole judgment and order of the Supreme Court of Appeal (SCA). The SCA upheld an appeal by the respondent, the Commissioner of the South African Revenue Service, against an order of the Tax Court of South Africa, Western Cape Division, Cape Town (Tax Court). At issue was the correct interpretation of section 24C of the Income Tax Act 58 of 1962. In particular, the question was whether Big G was entitled to an allowance in terms of this section for the 2011 – 2014 years of assessment.

Section 24C provides for a tax allowance in respect of future expenditure to be incurred under a contract. In order for a taxpayer to claim the allowance, the section requires that the income of the taxpayer in a particular year of assessment must include an amount received by or accrued to the taxpayer in terms of any contract, and that the Commissioner must be satisfied that such amount will be utilised in whole, or in part, to finance future expenditure which would be incurred by the taxpayer in the performance of their obligations under such contract.

The applicant, Big G Restaurants (Pty) Limited (Big G), is a franchisee operating certain restaurants in terms of a written franchise agreement concluded with a franchisor, the Spur Group (Pty) Limited. Big G claimed a section 24C allowance for the 2011 – 2014 years of assessment for the future costs of revamping its restaurant premises on the basis that the franchise agreement obliged it to periodically revamp the premises. It contended that the costs of revamping the premises constitute “future expenditure” as envisaged in section 24C(2) of the Income Tax Act. The Commissioner disallowed the allowance on the basis that: (i) the income received by or accrued to Big G during the relevant years of assessment was not received in terms of the franchise agreement from which an obligation to incur future expenditure arose; and (ii) the obligation to incur the expenditure sought to be deducted by Big G was neither unconditional nor certain, as required by section 24C.

Big G objected, contending that its income in any year includes amounts received or accrued in terms of the franchise agreement. The Commissioner disallowed the objection and raised additional assessments for the 2011−2014 years of assessment. Big G appealed to the Tax Court.

The Tax Court found in Big G’s favour. It reasoned that the franchise agreement imposed an obligation on Big G to actively provide and sell meals to customers. Although customers are not parties to that agreement, the proximate cause of those sales was this obligation, which obligation appeared in the same contract that contains the obligation to refurbish the premises. Consequently, the Tax Court set aside the additional assessments raised by the Commissioner. The Commissioner was granted leave to appeal to the SCA.

The SCA upheld the appeal and set aside the decision of the Tax Court. It held that section 24C(2) has two basic requirements: first, there must be income received or accrued in terms of a contract; and second, the Commissioner must be satisfied that such income will be used wholly or partially to finance future expenditure that a taxpayer will incur in performing its obligations under that same contract. It held further that section 24C(2) does not allow for different income-earning and obligation-imposing contracts. It reasoned that Big G receives income as a result of the contracts it concludes with individual patrons who come into its restaurants to buy food. That income, according to the SCA, does not accrue in terms of the franchise agreement, which is the agreement that imposes the obligation to revamp the restaurant premises.

Before the Constitutional Court, Big G submitted that the matter turned on the interpretation of the words “in terms of” in section 24C and thus raised an arguable point of law of general public importance, which ought to be considered by the Court. It argued that, on accepted principles of interpretation, the interpretation contended for by it was the only one that is consistent with the language of the section, and which gives rise to a sensible and business-like result and does not undermine the purpose of the section. The SCA therefore erred in its interpretation of section 24C.

The Commissioner submitted that it was not in the interests of justice for the appeal to be heard as the matter does not transcend the narrow interests of Big G and does not implicate the interests of a significant part of the general public. On the merits, the Commissioner contended that Big G did not meet the requirements of section 24C(2), in that it failed to demonstrate that: (i) the income in the particular years of assessment included or consisted of an amount which was received or accrued under “such contract” as envisaged by the section; and (ii) the amount claimed would, as a fact, be used to finance an expenditure which would be incurred by Big G in a subsequent year of assessment in performing obligations under such contract. The Commissioner also argued that in order to give effect to the intention of the legislation, the phrase “in terms of” must be interpreted narrowly.

A majority judgment penned by Madlanga J (Jafta J, Khampepe J, Mhlantla J, Theron J, Tshiqi J and Victor AJ concurring) granted leave to appeal but dismissed the appeal. It held that the matter required the interpretation of the relevant contracts, so as to determine whether the franchise agreements and contracts of sale of food are so interlinked as to fall within section 24C(2). This also required an interpretation of section 24C(2). It held that both are legal questions. On the issue of public importance, the judgment held that the questions at hand would affect several other Spur franchisees, of which there are many in South Africa. On the merits, the judgment accepted that it is a requirement of section 24C that the contract in terms of which the income that is to finance future expenditure is received or accrues must be the same contract under which the expenditure is incurred; and that two or more contracts may be so inextricably linked that they may satisfy this requirement of “sameness”. However, it found that Big G was unable to place the contracts in terms of which it earned an income from its customers within the ambit of the contract envisaged in section 24C, as the obligations that Big G had to perform were not imposed by the sale of food contracts, but by the franchise agreement. This lack of correlation between the income-earning sale of food contracts and the obligation-imposing franchise agreement thus made section 24C inapplicable.

Another judgment penned by Majiedt J (Froneman J concurring), unlike the majority judgment which granted leave to appeal but dismissed the appeal on the merits, would have refused leave to appeal on the basis that the matter did not engage the Court’s jurisdiction. This judgment found that the matter concerned the proper interpretation of the words “in terms of any contract” in section 24C(2) and, linked to this determination was the question whether the patron and franchise contracts should be interpreted as constituting a “contract” for purposes of the section. On these issues, it held that the interpretation of “in terms of” in section 24C(2) involves no law, but is simply a question of fact. It further held that the phrase “in terms of” plainly equates to “concerning”, “regarding”, “relating to”, “pertaining to”, or “with regard to” and could only in its ordinary meaning, refer to a single contract. Accordingly, it endorsed the SCA’s reasoning and conclusion on the meaning of the phrase. To this end, it found that it cannot be that an enquiry into which of two contracts, or whether they can be regarded as a single contract for the purpose of interpreting the phrase “in terms of” in section 24C(2) amounts to a constitutional matter or even an arguable point of law of general public importance, which ought to be considered by the Court.

The Full judgment  here