ABC (Pty) Ltd v Commissioner for the South African Revenue Services
| Jurisdiction | South Africa |
| Judge | PM Mabuse J |
| Judgment Date | 06 July 2018 |
| Docket Number | 13879 |
| Court | Tax Court |
| Hearing Date | 06 July 2018 |
| Citation | 2019 JDR 0145 (Tax) |
Mabuse J:
This matter came before me as an appeal by ABC (Pty) Ltd against a decision of the Commissioner for the South African Revenue Services ("the Commissioner"), to disallow an objection against the assessment of 19 September 2013 in which the Commissioner had assessed two amounts for Income Tax purposes.
The Appellant in this matter is a company with limited liability registered as such in terms of the company statutes of this country. It conducts its brickmaking business in the province of Limpopo. The company is registered for Income Tax purposes with Tax Number XXX. For purposes of brevity I shall, in this judgment, refer to the company as "the taxpayer".
The Respondent is the Commissioner for the South African Revenue Services, the official duly appointed to administer the Income Tax Act No. 58 of 1962 ("the Income Tax Act"), and the Tax Administration Act 28 of 2011 ("the TAA"). Its principle place of business
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is situated at 299 Bronkhorst Street, Niew Muckleneuk, Pretoria. For purposes of brevity I shall refer to him as "the Commissioner".
The battlefield of the taxpayer and the Commissioner in this appeal is whether the taxpayer:
has under-declared its gross income for the 2010 year of assessment;
is liable for payment of 10% understatement penalties; and
is liable for interest in terms of section 89quat(2) of the Income Tax Act.
According to counsel for the Respondent, the disputes were solely in respect of whether the debtors with credit balances as well as the additional cash receipt accrued to the taxpayer, during the 2010 year of assessment; alternatively, whether any downward adjustment to the closing stock value should be made.
THE OVERVIEW
During September 2011 the Commissioner engaged the taxpayer for an audit of its income tax compliance for the 2010 year of assessment. On 19 March 2012 the Commissioner made its findings known to the taxpayer. The audit findings of the Commissioner were as follows:
Income in the amount of R9,832,766.43 received was not declared for income tax purposes as income; this amount was included by the respondent as taxable income in the Appellant's 2010 year of assessment as a result of the debtors with credit balances at year end. These amounts were recorded as receipts from customers with no corresponding invoices recorded in the accounting records of the taxpayer.
Furthermore it was also found that income was received and processed in the debtors' accounts "Cash sales, Cash clients and Small cash" to the amount of R631,628.00 but was not declared as gross income for income tax purposes. This amount was included by the Commissioner as taxable income in the taxpayer's 2010 year of assessment as a result of credit balances in the taxpayer's cash sales account at year end.
The said findings were subsequently followed by the Commissioner issuing additional assessments in terms of the provisions of section 92 of the TAA. These additional assessments were issued on 20 February 2013. Section 92 of the TAA deals with such additional assessments. It provides as follows:
"92. If at any time SARS is satisfied that an assessment does not reflect the correct application of a tax Act to the prejudice of SARS or fiscus, SARS must make an additional assessment to correct the prejudice."
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It is the Commissioner's contention that during the 2010 year of assessment, the taxpayer received various amounts. The Commissioner established that all of such amounts, for the following reasons, fell to be included in the taxpayer's total gross income as part of the taxpayer's taxable income for the 2010 year:
the taxpayer received the sum of R9,832,766.43 and another amount of R631,628.00 total R10,464,394.43 for its own benefit;
the taxpayer failed to include the aforementioned two amounts in its gross income notwithstanding the fact that the said amounts constituted integral parts of the taxpayer's income. 'Gross income' in terms of section 1 of the Income Tax Act means: "… (a) the total amount, in cash or otherwise, received by or accrued to or in favour of such resident; … during such year or period of assessment, excluding receipts or accruals of a capital nature…". 'Income' in terms of section 1 of the Income Tax Act means the amount remaining of the gross income of any person for any year or period of assessment after deducting therefrom any amounts exempt from normal tax under Part 1 of chapter II;
the taxpayer's failure to declare the said amounts as part of income resulted in the taxpayer's understating its taxable income for the 2010 year of assessment;
the taxpayer's protestations that the said amounts should not constitute part of its gross income could not be supported by any documentary proof despite the Commissioner having invited the taxpayer, on times without number, to submit proof of such documentary details to justify its claim that the two amounts could not be categorised as part of its gross income.
The additional assessment included the following on the strength of section 92 of the TAA:
UNDERSTATEMENT PENALTY
By way of its additional assessment, for the understatement, the Commissioner imposed a penalty of 75% in terms of sections 221, 222 and 223 of the TAA.
Section 221 provides, among others, as follows:
'Understatement' means any prejudice to SARS or the fiscus as a result of—
(a)
a default in rendering a return;
(b)
an omission from a return;
(c)
an incorrect statement in a return; or
(d)
if no return is required, the failure to pay the correct amount of "tax".
Section 222 provides as follows:
(1) in the event of an understatement by a taxpayer, the taxpayer must pay, in addition to the tax payable for the relevant tax period, the
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understatement penalty determined under subsection (2) unless the 'understatement' result from a bona fide inadvertent error;
(2) understatement penalty is an amount resulting from applying the highest applicable understatement penalty percentage in accordance with the table in section 223 to its shortfall determined under subsections 3 and 4 in relation to its understatement in the return.
Section 223 of the TAA deals with understatement penalty percentages table.
INTEREST
In terms of the provisions of section 89quat(2) or the Income Tax Act, an amount in respect of interest was added to the total of the assessed amount. Section 89quat(2) of the Income Tax Act states that:
'2. If the taxable income of any provisional taxpayer is finally determined for any year of assessment exceeds—
twenty thousand rand (R20,000.00) in case of company; or
fifty thousand rand (R50,000.00) in case of any person other than a company,
and the normal taxable income by him in respect of such taxable income exceeds the credit amount in relation to such year, interest shall, subject to the provisions of subsection (3) be payable by the taxpayer at the prescribed rate on the amount by which such normal tax exceeds the credit amount, such interest being calculated from the effective date in relation to the said year until the date of assessment of such normal tax.'
3. Where the Commissioner having regard to the circumstances of the case is satisfied that the interest payable in terms of the subsection (2) is a result of circumstances beyond the control of the taxpayer, the Commissioner may direct that interest shall not be paid in whole or in part by the taxpayer.'"
The Commissioner contends that:
"The Appellant is, in compliance with the requirements of section 89quat(2), a provisional taxpayer;
the taxable income determined by the Commissioner set out in the additional assessment in respect of the 2010 year assessment exceeded R20,000.00."
For the aforegoing reasons the taxpayer was liable to pay interest.
Through its attorneys and by a letter dated 13 September 2013, the taxpayer lodged, in terms of section 104(4) of the TAA an objection against the aforementioned assessment on several grounds. In particular with regard to the sum:
of R9,832,766.42 referred to in the final audit notice, the objection raised was that the said amount was received by the taxpayer but not included in income. The taxpayer's submission was that the said amount was received but did not form part of the taxpayer's gross income or income. In the alternative, the
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taxpayer submitted that if the amount of R9,832,766.42 formed part of the taxpayer's income, then in that event the amount of its trading stock (held and not disposed of) as at the end of 2010 year of assessment was overstated to the extent of the cost price of the trading stock regarded by the Commissioner as having been disposed of in return for that amount. For this reason, so contended the taxpayer, the additional assessment should have made provision for such adjustment since the Commissioner could not simultaneously allege that:
the taxpayer has disposed...
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