Eveready (Pty) Ltd purchased the "Eveready" business division (manufacturing, distributing and selling zinc batteries) from Gillette Group South Africa (Pty) Ltd as a going concern on 18 November 2002, with an effective date of 1 March 2003. The purchase agreement stipulated a base purchase price of R80 million to be allocated amongst business assets as set out in Schedule 6, with adjustments based on working capital at the effective date. In Schedule 6, the allocation for "Inventory" (trading stock) was left blank. In its 2004 tax return, Eveready claimed a deduction of R103,532,179, being the market value of trading stock acquired from Gillette, arguing it had acquired the stock "for no consideration" under section 22(4) of the Income Tax Act 58 of 1962. The Commissioner disallowed most of the deduction, allowing only R21,562,918 (the estimated cost price), and levied interest under section 89quat(2). Eveready's objections were rejected and it appealed to the Tax Court, which dismissed the appeal against the disallowance but upheld the appeal against the interest. Both parties appealed to the Supreme Court of Appeal.
1. The appeal was dismissed with costs. 2. The cross-appeal was dismissed with costs, including costs of two counsel.
Trading stock acquired as part of a business sale as a going concern is not acquired "for no consideration" within the meaning of section 22(4) of the Income Tax Act where the purchase agreement provides for adjustment of the purchase price based on working capital calculations that include the value of inventory. A blank space in an allocation schedule does not signify nil consideration but rather an amount to be determined. The interpretation of whether trading stock was acquired for consideration must be based on a contextual reading of the entire agreement, not isolated provisions. Where a purchase agreement includes mechanisms for adjusting the purchase price based on the value of inventory (through working capital adjustments), this demonstrates that consideration was paid for the inventory, and accordingly the cost price of such stock must be determined under section 22(2)(b) and section 22(3), not under section 22(4).
The court noted that it would be "most extraordinary" if Gillette had given away trading stock for free that had a market value of over R100 million, suggesting that commercial reality should inform the interpretation of tax provisions. While the court found the professional opinions received by Eveready were "not quite as unequivocal" as suggested, this observation was noted as immaterial to the decision on the exercise of discretion regarding interest. The court did not pronounce on the quantum of the deductions claimed by Eveready or allowed by the Commissioner, noting this was not before the court.
This case provides important guidance on the interpretation of section 22(4) of the Income Tax Act 58 of 1962, particularly the meaning of trading stock acquired "for no consideration". It establishes that where trading stock is acquired as part of a business purchased as a going concern, courts will examine the entire purchase agreement to determine whether consideration was paid for the stock, rather than relying on isolated provisions or blank spaces in schedules. The case emphasizes the importance of contextual interpretation of commercial agreements in tax matters and demonstrates that working capital adjustment mechanisms in sale agreements typically involve consideration for inventory. It serves as authority that taxpayers cannot rely on technical interpretations of allocation schedules to claim that valuable assets were acquired for no consideration when the broader commercial reality and contractual framework indicates otherwise.