The Port Elizabeth Electric Tramway case:1 Is the meaning ascribed to the phrase “in the production of the income” by Watermeyer AJP in the Port Elizabeth Electric Tramway case still religiously followed today?

Abstract

This article analyses the meaning attributed to the phrase “in the production of the income” as used in the present section 11(a) of the Income Tax Act, which provides for general expenses to be allowed as deductions against income. Read together with section 23(g), section 11(a) is commonly referred to as the “general deduction formula”. It has been said that the meaning ascribed to the phrase by Watermeyer AJP (as he was then) in his judgment in the Port Elizabeth Electric Tramway Company Ltd v CIR is “too mechanical and contrived”. Consequently, the judiciary, in applying the meaning as attributed to it by Watermeyer AJP in subsequent cases, has sometimes led to inconsistent and conflicting judgments. In fact, the application of the meaning so ascribed takes no account of the economic and other non-economic realities of doing business in the 21st century. The main objective of this article has been to re-ignite the debate surrounding Watermeyer AJP’s interpretation of the phrase, “in the production of the income”, in the Port Electric Tramway case and in so doing establish whether the narrow meaning ascribed by him to that phrase has subtly been changed and widened by the judiciary in subsequent cases. It can be concluded from an analysis of the case law discussed in this article that Watermeyer AJP’s interpretation, if strictly adhered to, can and does lead to absurd results. However, it is submitted that sanity has fi nally prevailed. The Supreme Court of Appeal in the comparatively recently decided cases of C:SARS v Mobile Telephone Networks Holdings (Pty) Ltd and Warner Lambert SA (Pty) Ltd v C:SARS, have considerably widened the ambit of expenses that may now be claimed in terms of section 11(a) of the Income Tax Act. The deduction of expenditure as was allowed in those two cases by the Supreme Court of Appeal, would appear not to have been permissible in terms of Watermayer AJP’s interpretation of the meaning of the phrase “in the production of income”. It is submitted that the economic realities =of doing business in South Africa in the 21st century are now taken into account in determining whether a business expense falls within the ambit of the phrase “incurred in the production of the income”.