Supreme Court of Appeal of South Africa

MEDIA SUMMARY– JUDGMENT DELIVERED IN THE SUPREME
COURT OF APPEAL
From:
The Registrar, Supreme Court of Appeal
Date:
19 September 2018
Status:
Immediate
Please note that the media summary is intended for the benefit of the
media and does not form part of the judgment of the Supreme Court of
Appeal.
C: SARS v Volkswagen South Africa (Pty) Ltd
The SCA today upheld an appeal by the Commissioner for the South
African Revenue Service against a decision by the Tax Court, Port
Elizabeth concerning the valuation of Volkswagen’s trading stock on
hand at the close of a tax year. The Tax Court had held that the trading
stock be valued in accordance with its net realisable value as set out in
IAS 2 of the International Financial Reporting Standards and published in
South Africa by the Accounting Practices Board as AC 108 in Generally
Accepted Accounting Practice (GAAP).
In terms of s 22(1)(a) of the Income Tax Act trading stock must be valued
at cost price, subject to the Commissioner being entitled to make a just
and reasonable allowance if the stock has diminished in value for any
reason acceptable to the Commissioner. The SCA held that this does not
mean that it is to be valued at market value or net realisable value, but on
the basis that cost price is the baseline. It is only where in lay parlance the
stock is no longer worth what was paid for it, that the Commissioner may
make an allowance.
The SCA held that valuing stock at net realisable value was contrary to
two fundamental principles. The first was that taxable income is

determined from year to year by looking at events that have taken place
during that year so that tax is backward looking, while net realisable
value is forward looking. The second was that the effect of using net
realisable value is that expenses that will only be incurred in a future year
in the production of taxable income in that future year would become
deductible in an earlier tax year. That is inconsistent with the provision
that only expenses incurred in the production of income in a particular
year are deductible in that year.
The appeal was accordingly upheld with costs, including the costs of two
counsel and the additional assessments raised by the Commissioner were
confirmed.