Big G Restaurants (Pty) Limited vs Commissioner for the South African Revenue Service


On appeal from the Supreme Court of Appeal (hearing an appeal from the Tax Court):

1. Leave to appeal is granted.

2. The appeal is dismissed with costs, including the costs of two counsel.


MADLANGA J (Jafta J, Khampepe J, Mhlantla J, Theron J, Tshiqi J and Victor AJ concurring): 

[1] At issue is whether income derived from patrons of certain Spur and Panarottis restaurants is deductible by the Spur or Panarottis restaurateur in terms of section 24C(2) of the Income Tax Act. At the relevant time section 24C provided:

“(1) For purposes of this section, ‘future expenditure’ in relation to any year of assessment means an amount of expenditure which the Commissioner is satisfied will be incurred after the end of such year—

(a) in such manner that such amount will be allowed as a deduction from income in a subsequent year of assessment; or
(b) in respect of the acquisition of any asset in respect of which any deduction will be admissible under the provisions of the Act.

(2) If the income of any taxpayer in any year of assessment includes or consists of an amount received by or accrued to him in terms of any contract and the Commissioner is satisfied that such amount will be utilised in whole or in part to finance future expenditure which will be incurred by the taxpayer in the performance of his obligations under such contract, there shall be deducted in the determination of the taxpayer’s taxable income for such year allowance (not exceeding the said amount) as the Commissioner may determine, in respect of so much or such future expenditure as in his opinion relates to the said amount.

(3) The amount of any allowance deducted under sub-section (2) in any year of assessment shall be deemed to be income received by or accrued to the taxpayer in the following year of assessment.”

[2] The applicant, Big G Restaurants (Pty) Ltd (Big G), is a franchisee operating a number of Spur and Panarottis restaurants in terms of written franchise agreements concluded with a franchisor, the Spur Group (Pty) Ltd (Spur Group). It claimed from the respondent, the Commissioner of the South African Revenue Service (Commissioner), a section 24C(2) allowance for the 2011−2014 years of assessment for the future costs of revamping its restaurant premises. These costs were the direct result of a stipulation in the franchise agreements that Big G periodically revamp the premises. Big G claimed the allowance on the basis that for purposes of section 24C(2): income received from customers in terms of individual contracts of sale between it and its customers was income received in terms of the franchise agreements between it and the Spur Group; and costs of revamping the premises constitute “future expenditure” as envisaged in section 24C of the Income Tax Act. Big G’s stance was that the income from customers has to be used in whole or in part to finance the inevitable future revamping expenditure which will be incurred by it in the performance of its obligations under the franchise agreements.

[3] The Commissioner disallowed the allowance and raised an additional assessment for the 2011−2014 years of assessment. The substance of why he did so is this: the income in respect of which an allowance is claimed must have accrued in terms of the same contract that imposes the future expenditure in respect of which the allowance is being claimed; the income in respect of which Big G was claiming the allowance was income that accrued in terms of contracts concluded by it with individual customers at its restaurants; the future expenditure is not imposed by those contracts; and, that the future expenditure is imposed by different contracts, these being the franchise agreements between Big G and the Spur Group.

[4] An objection to this additional assessment was unsuccessful. Big G appealed to the Tax Court. In a stated case the parties asked the Tax Court to determine two issues, namely—

(a) whether the income received by Big G from operating the franchise businesses includes or consists of any amount received or accrued to Big G in terms of the franchise agreements as envisaged in section 24C of the Income Tax Act; and

(b) whether the expenditure required to refurbish or upgrade is incurred by Big G “in the performance of the taxpayer’s obligations under such contract” as envisaged in section 24C.

[5] These questions are interlinked. I say so because under section 24C the contract in terms of which income is received or accrues (income-earning contract ) must be the same contract that imposes the obligations the performance of which is to be financed with that income (obligation-imposing contract ).

[6] The Tax Court answered the questions in Big G’s favour. Paraphrased, its reasoning was that the franchise agreements imposed an obligation on Big G to actively provide and sell meals to customers. Although customers are not parties to those agreements, the proximate cause of those sales is this obligation. In each case this obligation appeared in the same contract that contains the obligation to refurbish the premises. The potential to refurbish is the future expenditure envisaged in section 24C(2). Consequently, the Tax Court set aside the additional assessments raised by the Commissioner. With leave of the Tax Court, the Commissioner appealed to the Supreme Court of Appeal.

[7] The Supreme Court of Appeal upheld the appeal and set aside the decision of the Tax Court. In brief, 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 does not accrue in terms of the franchise agreements.

[8] Big G now seeks leave from us to appeal against the Supreme Court of Appeal judgment. It submits that the matter turns on the interpretation of the words “in terms of” in section 24C. It contends that the general principles of interpretation require a “unitary exercise” of interpretation, which whilst loyal to the text of a document, must make commercial sense. It submits that the interpretation it proffers is the only interpretation that is business-like, consistent with the language of the section and does not undermine the purpose of section 24C. Big G also engages in an interpretation of the franchise agreements and the contracts of sale of food to customers in an attempt to demonstrate that section 24C does, indeed, find application

[9] Big G pegs this Court’s jurisdiction on section 167(3)(b)(ii). It contends that the matter raises an arguable point of law of general public importance which ought to be considered by this Court.

[10] The Commissioner argues that Big G’s case is unsustainable. In this regard, he supports the reasoning of the Supreme Court of Appeal. On jurisdiction he takes issue with the submission that this Court’s jurisdiction under section 167(3)(b)(ii) is engaged. According to him, this matter does not transcend the narrow interests of Big G and does not implicate the interests of a significant part of the general public.

[11] Do we have jurisdiction? I believe we do. This matter involves the interpretation of the franchise agreements and the individual contracts of sale of food. In this regard, the question is whether the franchise agreements and the contracts of sale of food are so interlinked that the sale of food income may be held to be income that accrues in terms of each franchise contract; each franchise agreement, of course, being the contract that imposes the obligation to revamp in future and thus creates the future expenditure. This interpretative question is a quintessential point of law. This question is also closely bound up with the interpretation of section 24C(2): what is the nature of the contract envisaged in the section? This element of interpretation adds to the legal character of the question to be determined.

[12] Is the question arguable? In Paulsen we held:

“The notion that a point of law is arguable entails some degree of merit in the argument. Although the argument need not, of necessity, be convincing at this stage, it must have a measure of plausibility. . . . [T]he word ‘arguable’ is used ‘in the sense that there is substance in the argument advanced’.”

[13] Big G’s point meets this test. The well-reasoned judgment of the Tax Court is indication enough in this regard.

[14] The point is of general public importance. It is hardly likely that within the Spur Group Big G’s franchise agreements are unique. Also, we can take judicial notice of the obvious fact that Spur restaurants in particular – not so much Panarottis restaurants – are spread across the length and breadth of South Africa. So, a determination of the contested issue is likely to affect Spur franchisees throughout South Africa. The issue “transcend[s] the narrow interests of the litigants and implicate[s] the interest of a significant part of the general public”. That general public is the several other Spur franchisees spread across South Africa.

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