Commissioner for Inland Revenue v Pick 'n Pay Wholesalers (Pty) Ltd (44/87) [1987] ZASCA 44; [1987] 4 All SA 432 (AD) (14 May 1987)

IN THE SUPREME COURT OF SOUTH AFRICA APPELLATE DIVISION In the matter betweenCOMMISSIONER FOR INLAND REVENUE APPELLANTandPICK 'N PAY WHOLESALERS (PTY) LTD RESPONDENTCORAM : CORBETT, BOTHA, HEFER,NESTADT,JJA, et NICHOLAS,AJA. HEARD :16 MARCH 1987. DELIVERED: 14 May 1987

JUDGMENT NICHOLAS,AJA :

The facts which gave rise to this case had theirbeginning in 1977. In April of that year PICK 'n PAY

WHOLESALERS 2

2WHOLESALERS (PTY) LTD ("PICK 'n PAY") pledged itself to donate to the URBAN FOUNDATION a total of R500 000 in five equal annual instalments. In each of the years of assessment ended 28 February 1978 and 28 February 1979 it claimed to deduct R100 000 from its income as "advertisihg". The Commissioner for Inland Revenue ("the Commissioner")disallowed the deductions and issued assessments accordingly. An objection by PICK 'n PAY dated 13 March 1981 was overruled.

There followed an appeal to the Cape Income Tax Special Court. The hearing began on 13 November 1981 with GROSSKOPF J presiding. On 17 March 1982 a judgment allowing the appeal was handed down.

The 3

3 The Commissioner appealed to the full bench of

the Cape Provincial Division. Shortly before the hear-ing of the appeal, notice was given of an applicationto amend the grounds of appeal in order to raise cer-tain points not canvassed at the hearing before theSpecial Court. By consent the full bench set asidethe order of the Special Court and remitted the matterthereto for the hearing of further evidence and addi-tional argument.

There was a second hearing before the SpecialCourt on 27 March 1985. In a judgment which was han-ded down on 6 June 1985, the Special Court rejected the

new points raised in the amended grounds of appeal, and

again 4

4 again allowed the appeal.On 16 September 1985, GROSSKOPF J granted leave to appeal to this Court in terms of s. 86 A(5) of the Income Tax Act, 1962 ("the Act").In the Specïal Court evidence was given on behalf of PICK 'n PAY by a number of witnesses including Mr. RAYMOND ACKERMAN and Mr. CHRISTOPHER HURST. This evidence was not contradicted, and GROSSKOPF J said in the judgment that the Special Court had no reason to doubt its correctness.

The main facts of the case were these.

Despite its name, PICK 'n PAY is not a wholesaler. It carries on business as a retailer, operating super-

markets

5

markets in the Western and Eastern Cape, Natal and the Orange Free State. It has associated companies in the Transvaal, and together they comprise the PICK 'n PAY group, of which PICK 'n PAY is the managing company.Mr ACKERMAN is the chairman and managing direc-tor, and as such he has had, to use his own words," a strong di-rection of the company". He is the mainspring and driving force behind the group's activities. At the relevant time he held 30% of the issued shares in PICK 'n PAY. He is a public figure:. he is a member of the main board of the URBAN FOUNDATION, a governor of RHODES UNIVERSITY, and head of S.A.FORUM and of other bodies.

Mr HURST is the secretary and financial director,

and 6

6

and takes a special interest in the marketing side.PICK 'n PAY keeps its name constantly before the public by sustained and intensive advertising which it regards as essential to the successful conduct of its business. Broadly its advertising falls into three categories. There is the "laundry list" type of ad-vertisement, which appears from day to day, and lists goods and their prices. Then there is advertising of so-called "special events", which is more general in its nature: examples of "special events" are an anni-versary of the ópening of a supermarket; the launching of the company's "No Name" brands; an operation in which the price of chickens, which was raised by other supermarkets, was held down in PICK 'n PAY's stores; and a petrol sales scheme.

Thirdly

7

Thirdly there is "indirect advertising", which is considered to be the most important and valuable. This consists, not in placing paid advertisements, but in obtaining notice in the news and editorial columns of the media. Such publicity is not readily achieved.PICK 'n PAY has always been concerned to promote its public image as "the consumer's champion" and as a company which has a concern for people and is aware of its social re-sponsibilities to the community. So, it has campaigned against cartels, and for the need to fight inflation.

A notable example of PICK 'n PAY's promotion of its persona and its use of "indirect advertising" was provided by the donation to the URBAN FOUNDATION. This is an or-

ganisation

8

ganisation which grew out of a conference of concerned leading businessmen in 1976. It was formed to tackle South Africa's pressing social needs and to improve the quality of life of the less privileged urban dwellers. It is specially concerned with the upgrading of housing and the provision of community facilities. Mr. Justice STEYN steered it through its formative years.As a member of the main board of the URBAN FOUNDATION, Mr. ACKERMAN was involved in conceiving the idea of raising money by means of a self-imposed levy in the whole private sector of a percentage of turn-over or profits. His evidencewas:

"So, then they said to me, wearing my Urban Foundation hat: Mr Ackerman, will you wear

your Pick 'n Pay hat and lead the way? So,

then

9

then I had a private meeting with Mr Justice Steyn and I said, yes, we will lead the way but we want to be the first in and we would like to have a press publicity meeting ..."

He considered that in this way PICK 'n PAY would get very

valuable publicity. He continued:

"... When I brought this matter to the Board (sc. of PICK 'n PAY), I was wearing my Pick 'n Pay hat that this would be a major way of us being first to support a good cause ... but that we could get major publicity out of it which would be good for our com-pany and would draw customers in to our stores."

When Mr. HURST was asked in his evidence in chief a-

bout the motive for the donation, he said:

"Well, the main spring behind the idea was Mr Ackerman and we discussed the matter at Board level and its possibilities and we decided to go ahead and make this contri-

bution

10

bution as a business exercise".He was sure that

"(W)e would, if we handled it correctly, get a great deal of publicity out of it."

He cóntinued:

"... We were going to be the first ... There is a tremendous plus in being first, I think, and at the same time Mr Ackerman was going to ensure that we got the proper type of publicity; that once we've made our contribution, that the Press would be aware of it. With the knowledge of this I thought that ... (it) sounded like it was going to be a success .... The Urban Foundation was something that really seemed to appeal to the public. It was in the Press all the time, people were talking about it. It was an opportunity waiting to be seized and I don't think that type of opportunity comes along very often."

The Board of directors of PICK 'n PAY took the decision

to

11

to make the donation of R500 000 to the URBAN FOUNDATION.

It was announced at a press conference in Cape Town whichwas attended by Mr. Justice STEYN and Mr. ACKERMAN. Theannoúncement received wide publicity throughout the Republic.This was shówn by a bundle of press cuttings which was put

in through Mr. HURST. They included one from THE ARGUSnewspaper. It was a front page story with banner headlines.The following are extracts:

R25-M AID PLAN FOR NEEDY FOOD CHAIN GIVES URBAN FUND R ½-M The Urban Foundation's initial target of R25-million to improve the quality of life of South Africa's urban communities came nearer achievement today with a gift of R500 000 over five years. The gift from Pick 'n Pay is linked to the

supermarket ....

12

supermarket chain's annual turnover - and other firms are to be asked to participate on a similar basis.

The newly-formed Urban Foundation is being steered through its formative years by Mr Justice Steyn, who is on three years' leave from the Cape Supreme Court for the task.

In Cape Town today, Mr Justice Steyn announced Pick 'n Pay's 'wonderful contribution' at a Press conference attended also by the chairman, Mr Raymond Ackerman. The R500 000 would be paid in annual instalments of R100 000.

'This represents a self-imposed tithe based on a percentage of Pick 'n Pay's annual turnover,' he said. Investment

'Mr Ackerman has emphasised to me he be-lieves this is an investment in the future . of a stable South Africa.

'He has also emphasised how essential it is that the private sector must make its con-tribution to the solution of our vexed urban problems.

I

13

'I trust that Mr Ackerman's magnificent example will act as a stimulus and an in-spiration. for other organisations and in-dividuals.

I anticipate that others will also give consideration to giving an annual tithe to the Foundation - based on a percentage of turnover or after-tax profits.'

For a period of several months after the announcement, the publicity had a marked positive effect on PICK 'n PAY'sturnover in all its stores throughout the group.

Mr. HURST was cross-examined by the Commissioner'srepresentative, Mr. VAN BREDA, in regard to the purpose ofthe donation.

"MR VAN BREDA: Now, what motivation did you advance for this donation to be made? Was it based on purely business considera-tions or were there also other motivations? The motivation behind this contribution

was

14

was, as I've said before, part of our public relations exercise. There was a golden op-portunity to contribute to this (cause) and bring to the company an immense amount of publicity. The reason for the contribution was to get publicity.

Was that also how Mr Ackerman put it to the board? — Absolutely."

Again,

"MR VAN BREDA: ... Did the Board go along with the aims of the Urban Foundation? -— Absolutely. We thought that it was a good cause. I want to emphasise again: we picked this cause because it was a good one in which the public were interested ... Here was a cause which was an excellent cause and the public was interested in it. If it had been a bad cause, then, if the public knew about it, it would have reflect-ed badly against us and if the public didn't know about it, then it wouldn't have achieved the object any way. So, this cause was picked because it was a good cause in the

public

15

public eye. Of necessity it is a good cause.

But also in the eyes of the Board? — We analysed it as a Board and saw it to be a good cause.

I want to put it to you that the Board had dual intentions. It wanted to get the publicity but also albeit secondary, it wanted to contribute towards a worthy cause. Isn't that so? — The Board's object was to subscribe to a worthy cause. It must be a worthy cause. That was their object ... So far as the Pick 'n Pay Board is concerned, this is publicity and I reiterate it again: I think you relate it to be a good cause and therefore you say it is a donation ..."

Mr. ACKERMAN was similarly cross-examined:

"But the point is you made a donation in order to derive maximum publicity, but what do you say about my submission that you were equally moved by other considerations that being in order to advance the aims of the Urban Foundation? — No, to support a good cause which as Mr Hurst said, a good cause

we 16

we will always look at and particularly at a timeous good cause like something like this and we will support it and then wearing our PICK 'n PAY hat, try and maximise the promotion effort out of it but supporting a good cause and we always want to hold our head up high.

Just tell the Court: if it wasn't for this publicity, you wouldn't have made the donation to the Urban Foundation although you agree with its aims? — That is a very good question. I am very frank: We certainly would have made a donation but it would have been absolutely a R10 000 or R20 000 donation. It would have been a very big donation for us to have made. It would have been a donation to that category. Yes, we would have made one. But we went for this high figure as a package deal to really promote it strongly."

The Special Court held against the Commissioner on allof the issues raised at the hearing. In this Court counselfor the Commissioner submitted that

"(a)

17

"(a) The expenditure of the two amounts of R100 000 was of a capital nature.

(b) The said amounts were not wholly or ex-clusively laid out for purposes of trade. (c) In the alternative to the aforegoing and even if it should be found that the R100 000 donated during the 1978 fiscal year was deductible, the further amount of R100 000 donated during the 1979 fiscal year did not constitute expenditure actually incurred

in the production of income and/or was not wholly or exclusively laid out for purposes of trade."

The result of the appeal turns on the proper applica-tion to the facts of the present case of para (a) of s. 11and para (g) of s. 23 of the Act. Section 11 provides:

"11. For the purpose of determining the taxable income derived by any person from carrying on any trade within the Republic, there

shall

18

shall be allowed as deductions from the in-come of such person so derived -(a) expenditure and losses actually in-curred in the Republic in the production of the income, provided such expenditure and losses are not of a capital nature; ..."

And in terms of section 23 -

"23. No deduction shall in any case be made

in respect of the following matters, namely -

(g) any moneys claimed as a deduction from income derived from trade, which are not wholly or exclusively laid out or expended for the purposes of trade: ...."

(On the relation between these provisions, see the discussion

in Commissioner for Inland Revenue v Nemojim (Pty) Ltd 1983

(4) SA 935 (A) at 946.)

In the view that I take of the matter, it is neces-

sary to consider only the second of the submissions

by

19

by counsel.

It arises by reason of s. 23(g), and the first questionto be considered is the meaning of the words "moneys . . . whichare not wholly or exclusively laid out or expended for thepurposes of trade". The answer is provided by the analysisof similar words in the judgment of ROMER L J in Bentleys,Stokes and Lowless v Beeson (1952) 33 T.C. 491 (CA) at 503-4

(See also (1952) 2 All ER 82 (CA) at 84 G to 85 B):

"The relevant words .. -'wholly and ex-clusively laid out or expended for the purposes of the profession' - appear straightforward enough. It is conceded that the first adverb - 'wholly' - is in reference to the quantum of the money ex-pended and has no relevance to the present case. The sole question is whether the expenditure in question was 'exclusively'

laid

20

laid out for business purposes, that is: What was the motive or object in the mind of the two individuals responsible for the activities in question? It is well establish-ed that the question is one of fact: and again, therefore, the problem seems simple enough. The difficulty however arises, as we think, from the nature of the activity in question. Entertaining involves in-evitably the characteristic of hospitality. Giving to charity or subscribing to a staff pension fund involves inevitably the object of benefaction. An undertaking to guarantee to a limited amount a national exhibition involves inevitably supporting that exhi-bition and the purpose for which it has been organised. But the question in all such cases is: Was the entertaining, the chari-table subscription, the guarantee, under-taken solely for the purposes of business, that is, solely with the object of promoting the business or its profit. earning capacity? It is, as we have said, a question of fact. And it is quite clear that the purpose must

be

21

be the sole purpose. The paragraph says so in clear terms. If the activity be under-taken with the object both of promoting business and also with some other purpose, for example, with the object of indulging an independent wish of entertaining a friend or stranger or of supporting a charitable or benevolent object, then the paragraph is not satisfied though in the mind of the actor the business motive may predominate. For the statute so prescribes. Per contra, if in truth the sole object is business pro- . motion, the expenditure is not disqualified because the nature of the activity neces-sarily involves some other result, or the attainment or furtherance of some other objective, since the latter result or ob-jective is necessarily inherent in the act."

In a comment on this judgment in Bowden v Russel & Russel

(1965) 42 T C 301 (Ch.) at 306, PENNYCUICK J said:

"... As appears from that judgment it may often be difficult to determine whether the

person

22

person incurring the expense has in mind two distinct purposes, or a single purpose which will or may produce some secondary consequences. But once it is found that the person has a distinct purpose other than that of enabling him to carry on and earn profits in his trade or profession Section 137(a) prohibits deduction of the expense."

In his speech in Mallalieu v Drummond 1983(2) AllER 1095 (H L) LORD BRIGHTMAN said at p 1100 a-d that the dis-tinction between the object of the expenditure and its effectwas basic:

"The object of the taxpayer in making the expenditure must be distinguished from the effect of the expenditure. An expen-diture may be made exclusively to serve the purpose of the business, but it may have a private advantage. The existence of that private advantage does not necessarily pre-clude the exclusivity of the business pur-poses."

In 22 A

In terms of s. 82 of the Act, the onus of proof is on the tax payer. He must show that the donation was made solely for the purpose of trade. He must éxclude any other purpose - in this case a philanthropic purpose. If he does not do so, the paragraph is not satisfied.

In the judgment of the Special Court GROSSROPF Jdealt with the matter as follows:

"The final question was whether the expen-diture was wholly or exclusively laid out or expended for the purposes of trade (vide

sec 23

sec. 23(g) of the Act which is quoted above). The Commissioner's representative contended that in part at least the donation was made for philanthropic reasons. We do not think that the evidence supports this contention. I have already referred to the evidence of Messrs Hurst and Ackerman on this point. The fact that the appellant might in dif-ferent circumstances have made a relatively small donation to the Urban Foundation from motives of liberality does not detract from the evidence that the large donation which was in fact made, was made for purposes of trade. Expenditure which is made for pur-poses of trade is not rendered non-ceductible merely because the maker of the expenditure is pleased to be able to support or help the person to whom it is made. Business which is conducted with friends, relatives or well-wishers does not cease to be business."

In the case of an appeal under s. 86 A of the Act,an appellant is not bound by the facts found by the SpecialCourt. He has a full right of appeal. In Hicklin v

Secretary

24

Secretary for Inland Revenue 1980(1) SA 481 (A) TROLLIP JAsaid at 485 E:

"The appeal is therefore a re-hearing of the case in the ordinary, well-known way in which this Court, while paying due regard to the findings of the Special Court on the facts and credibility of witnesses, is not necessarily bound by them."

In the present case counsel for the Commissioner does not impugn the credibility of the witnesses for PICK 'n PAY. This Court is therefore in as good a position as was the Special Court to decide the issue.It was contended on behalf of PICK 'n PAY that the do-nation was merely the vehicle which it used to ride to publi-city and profits, and that the benefit to the URBAN FOUNDATION

25

was incidental . While charity was an effect of the donation, it was not part of PICK 'n PAY's purpose, which was solely the promotion of business. The contention of the Commis-sioner on the other hand was that the donation was made with a dual purpose which included philanthropy.The questión is one of fact, and the fact is the state of mind of those responsible for making the donation at the time it was made. See Mallalieu v Drummond (supra) at 1097 h to 1098 a; 1099 h-j. A witness can testify directly to his own state of mind but not to that of others. Apart from direct evidence, state of mind is a matter for in-ference from relevant and admissible contemporaneous state-ments and from the surrounding circumstances.

The

26

The direct evidence ás to the purpose of the donation was given by Mr ACKERMAN and Mr HURST. Their veracity is not in questién. There are however circumstances which affect the cogency of their evidence in this regard.That evidence was given more than 4½ years after the date of the donation. Human memory is inherently and notoriously liable to error. One knows that people are less likely to be complete and accurate in their accounts after a long interval than after a short one. It is a matter of common experience that during the stage of retention or storage in the memory, perceived information may be forgotten or it may be modified, or added to, or distorted by sub-sequent information. One is aware too that there can occur

a

26 A

a process of unconscious reconstruction.

Moreover there is the fact that the issue - whetherthe expenditure was exclusively for the purpose of trade butproduced the incidental effect, or the secondary consequence,of benefit to the Urban Foundation, or whether it had thedual purpose of promoting trade and benefiting the UrbanFoundation - is a narrow one, and the line difficult to draw.There is nothing in the record to suggest that the distinc-tion was present to the mind of any one at the time of thedonation, or that it was of any importance before the ex-

penditure was disallowed by the Commissioner.In the circumstances the direct evidence cannot be decisive, but it must be weighed together with all the other evidence in the light of the probabilities.

It. 27

It is clear on the evidence that an object of themaking of the donation was to obtain major publicity and soattract customers into PICK 'n PAY's stores. Without thatbusiness object, the donation might indeed have been ultravires of the directors. In Hutton v West Cork Railway Com-pany (1888) L.R. 23 Ch. D 654 (CA) BOWEN L J said at 673 thatin the case of Hampson v Price's Patent Candle Company,

"The Master of the Rolls ... held that the company might lawfully expend a week's wages as gratuities for their servants; because that sort of liberal dealing with servants eases the friction between masters and servants, and is, in the end, a benefit to the company. It is not charity sitting at the board of directors, because as it seems to me charity has no business to sit at boards of directors qua charity. There is, however, a kind of charitable dealing which is for the interest of those who

practise

28

practise it, and to that extent and in that garb (I admit not a very philanthropic garb) charity may sit at the board, but for no other purpose."

But it may be that there existed a dual purpose, namely, a purpose to make a benefaction to the Urban Foundation and a purpose to promote the business of PICK 'n PAY by the publicity which was to be obtained from the announcement of the benefaction.

There are passages in Mr. ACKERMAN's evidence whichpoint to such a dual purpose. He said:

"... this would be a major way of us being first to support a good cause ... but ... we could get major publicity out of it ..."

When asked whether PICK 'n PAY would not have made a donation

to the URBAN FOUNDATION in any event, Mr. Ackerman replied:

"Yes, we would have made one. But we went

for 29

for this high figure as a package deal real-ly to promote it strongly."

(There was some debate in argument as to what he meant by

"package deal", but I think that in the context his meaningis reasonably clear. The package consisted of a single large do-nation made with two objects: a benefaction to the URBANFOUNDATION and the obtaining of publicity in consequence.)Again, Mr. ACKERMAN said that they would always support a

"timeous good cause" ("You must run the business in a waythat we can all hold our. heads up high and that to me is allpart of the game"). and then try and maximize the promotioneffort out of it.

The fact that there may have been no

discussion at the directors' meeting about the benefit to

the

30

the URBAN FOUNDATION does not, I think, affect the matter. There would have been no call for such discussion. The donation of R500 000 was considerable.. It woúld have been obvious to anyone that it would greatly benefit the URBAN FOUNDATION, which was regarded by all as a very worthy cause. The case was one where res ipsa loquitur - the purpose was on the face of it philanthropic.

Mr. ACKERMAN's involvement in this matter was in a dual capacity. He was a director of the URBAN FOUNDATION, and the chairman and managing director of PICK 'n PAY. He was on the side of the donor and also that of the donee. His evidence makes it clear that, sitting at the board table of the URBAN FOUNDATION, he saw the donation as a benefaction

31

to the URBAN FOUNDATION, while he perceived at the same time that it could provide valuable publicity for PICK 'n PAY. Sitting at the board table of PICK 'n PAY he no doubt saw the operation as an opportunity for indirect publicity, but it was publicity which would be given to a philanthropic action. It is suggested that when dealing with the matter as chair-man and managing director of PICK 'n PAY, his purpose was sole-ly a business one, although it was the same donation to the same charity. I cannot accept that. A man does not change his mind when he changes his hat.

Then regard should be had to what was said at the press conference in April 1977. A "press publicity meeting" was

something for which Mr. ACKERMAN had stipulated when agreeing

to make the donation. He attended the meeting as chairman of PICK 'n PAY. He did not in his evidence disavow anything

which 32

which was said there in regard to PICK 'n PAY by Mr. Justice

STEYN.According to the report in THE ARGUS, Mr. Justice STEYN described the donation as PICK 'n PAY's "wonderful contribution". Mr. ACKERMAN had emphasized to him that he believed that this was an investment in the future of a stable South Africa, and had also emphasized how essential it was that the private sector should make its contribution to the solution of our vexed urban problems. Mr. Justice STEYN trusted that Mr. ACKERMAN's magnificent example would act as a stimulus and an inspiration to other organisations and individuals.

Thus, the donation was presented at the press conference,

and 33

and in the ensuing publicity, as an act of disinterested benevolence. I think that what was said about PICK 'n PAY in Mr. ACKERMAN's presence is to be given its face value, and that Mr. ACKERMAN's philanthropic purpose was genuine. The alternative - to regard it, so far as PICK 'n PAY was concerned, merely as a cynical ploy to trade on the charitable senti-ments of the community, in order to promote the naked business advantage of PICK 'n PAY - is unworthy and unacceptable. The alternative is wholly inconsistent with the persona of a company concerned for people and aware of its social respon-sibility to the community, which PICK 'n PAY has sought over the years, no doubt sincerely, to build up.

In all the circumstances I am of the opinion that

PICK

34PICK 'n PAY did not show, on the probabilities, that in making the donation it did not have a philanthropic purpose as well as a business purpose.The appeal is allowed with costs including the costs of two counsel. The order of the Special Court is altered to read: "Appeal dismissed. The assessments are confirmed."H C NICHOLAS, AJA

CORBETT, JA

BOTHA, JA Concur