Carlson Investments Share Block (Pty) Ltd v Commissioner, South African Revenue Service

• Jurisdiction: South Africa
• Judge: Navsa J
• Judgment Date: 02 February 2001
• Citation: 2001 (3) SA 210 (W)
• Docket Number: 6055/2000
• Hearing Date: 11 October 2000
• Counsel: R D Levin SC (with P R Jammy) for the applicant. G J Marcus SC (with P Mokoena) for the respondent.
• Court: Witwatersrand Local Division

Navsa J:

The applicant seeks an order declaring part of s 79(1) of the Income Tax Act 58 of 1962 (the Act) to be unconstitutional. The part challenged authorises the respondent, the Commissioner of the South African Revenue Service, to reconsider a tax assessment within a three-year period, including an assessment made E after an objection by a taxpayer was allowed, and to thereafter issue a revised assessment. The applicant also seeks an order declaring the conduct of the second respondent in reversing decisions in its favour as being of no force and effect. F

The issue

The parties are agreed that the applicant's case is accurately summarised in the respondent's heads of argument:

'In essence, Carlson's complaint is that the right to fair administrative action is infringed in circumstances where the Commissioner revises an assessment, within the three-year period, after G a decision has been taken to allow an objection thereto. This, contends Carlson, results in unfairness by reason of the fact that taxpayers are ''entitled'' to rely upon the ''finality'' of a decision allowing an objection.'

The statutory provisions H

Sections 3(2), 79(1), 81(5) and 81(13) of the Act are interrelated. It is necessary to consider the provision of these sections before dealing with the history leading up to the present application. I have emphasised the part of s 79(1) which the applicant asserts is unconstitutional. I

Section 3(1) provides that the powers conferred and the duties imposed by or under the Act, may be exercised or performed by the respondent personally or by any officer engaged in carrying out the provisions of the Act under the respondent's control, direction or supervision. References to 'officer' in the provisions that follow must be understood against the provisions of s 3(1). J

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Section 3(2): A

'Any decision made and any notice or communication issued or signed by such officer may be withdrawn or amended by the Commissioner or by the officer concerned, and shall for the purposes of the said provisions, until it has been so withdrawn, be deemed to have been made, issued or signed by the Commissioner: Provided that a decision made by any such officer in the exercise of any discretionary power under the provisions of this Act or of any other previous Income Tax B Act shall not be withdrawn or amended after the expiration of three years from the date of the written notification of such decision or of the notice of assessment giving effect thereto, if all the material facts were known to the said officer when he made his decision.'

Section 79(1):

'Additional assessments C

If at any time the Commissioner is satisfied -

(a)

that any amount which was subject to tax and should have been assessed to tax under this Act has not been assessed to tax; or

(b)

that any amount of tax which was chargeable and should have been assessed under this Act has not been assessed; or D

(c)

that, as respects any tax which is chargeable and has become payable under this Act otherwise than under an assessment, such tax has not been paid in respect of any amount upon which such tax is chargeable or an amount is owing in respect of such tax,

he shall raise an assessment or assessments in respect of the said amount or amounts, notwithstanding that an assessment or assessments may have been made upon the person concerned in respect of the year or E years of assessments in respect of which the amount or amounts are assessable, and notwithstanding the provisions of ss 81(5) and 83(18):

Provided that the Commissioner shall not raise an assessment under this subsection -

(i)

After the expiration of three years from the date of the assessment (if any) in terms of which any amount which should have been assessed F to tax under such assessment was not so assessed or in terms of which the amount of tax assessed was less than the amount of such tax which was properly chargeable, unless the Commissioner is satisfied that the fact that the amount which should have been assessed to tax was not so assessed or the fact that the full amount of tax chargeable was not assessed, was due to fraud or misrepresentation or non-disclosure of G material facts; or

(ii)

. . . .'

(My emphasis)

Section 81(5):

'Where no objections are made to any assessment or where objections have been allowed or withdrawn, such assessments or altered H or reduced assessment, as the case may be, shall, subject to the rights of appeal hereinafter provided, be final and conclusive.'

Section 85(13) which deals with decisions of the Special Income Tax Court provides:

'Any decision of the Court under this section shall subject to I the provisions of s 86A be final.'

Section 86A which deals with appeals from the Special Income Tax Court is irrelevant to this application.

Having regard to the structural scheme of the legislation, counsel for the applicant submitted that on consideration of the nature of the J

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applicant's complaint they would be content to have only the emphasised part of s 79(1) struck down as being unconstitutional. The A crux of the submission is that there should be no power to change an assessment after an objection has been allowed.

I turn to an examination of the facts leading up to the present dispute.

A brief history of the facts leading up to the dispute B

In 1989 a property-owning company known as Carlson Investments (Pty) Ltd (Carlson) had as its major asset a building known as Dashing Centre. At the time a consortium headed by the principal deponent on behalf of the applicant, Abe Sher, expressed an interest in purchasing Carlson. To that end the consortium's tax advisers proposed a number C of methods in terms of which the purchase could be structured. The third option with its perceived tax benefits was spelt out in a memorandum by the tax advisers. It reads as follows:

'The third suggested alternative addresses the deductibility of . . . interest. This requires the conversion of Carlson . . . to a share block company. A share block company is a fixed property company the shares in which confer on or upon its shareholders the right of use D and occupation of the company's property in terms of the Share Blocks Control Act.

The steps would be similar to those in the previous alternative where the property would be revalued and such revaluation surplus of R6 million would be distributed as a dividend to shareholders by giving rise to loan accounts for an amount equivalent to the dividend. The company would procure a first mortgage bond in favour of a financial E institution which would advance funds to the company which in turn will be paid to the shareholders to enable them to acquire the necessary blocks of shares.

The purchasers of the share blocks will be entitled to deduct the interest paid against the rental income derived which accrues directly to the shareblock holders and not the company itself. The costs in this instance are not significant as all the reserves will have been F converted into claims by the shareholders leaving the company with a share capital of R200 on which 1,5% stamp duty on the share transfer would be payable.'

This advice was accepted by the consortium. During December 1989 all the shares in Carlson were sold to the consortium. In the same month G Carlson was converted into a close corporation known as Carlson Investments CC.

In January 1990 two mortgage bonds totalling R6 million were registered over the close corporation's fixed asset in favour of the Standard Bank. H

In August 1990 Carlson Investments CC was converted back into a company, Carlson.

In July 1992 Carlson was converted into its present form, namely, a share block company.

The 1990 tax year I

For the year ended 31 December 1990 the audited financial statements for Carlson recorded that:

(a)

the company paid R1 260 772 in interest on the mortgage bonds registered over its property;

(b)

the directors had effected a revaluation of the property which J

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resulted in a revaluation reserve of R5 878 562 and that this amount was declared as a dividend on 1 September 1990. A

In 1992 an assessor in the office of the Receiver of Revenue, Johannesburg sent an enquiry to Carlson calling upon it to reply to issues arising out of an examination of the income tax return for the tax year 1990. The letter stated the following:

'1.

Kindly indicate where the amount of R5 878 652 shown in the cash flow as dividends paid is shown in the income statement. B

2.

It is my opinion that the loan of R590 000 is unproductive. Kindly provide me with your calculation of the unproductive portion.'

It is common cause that the statement by Carlson, in its financial statements for the year ended 31 December 1990, that no dividends C were declared or paid to members was factually incorrect. The following statement on behalf of the respondent, in the answering affidavits, is conceded by the applicant in its replying affidavit:

'In accordance with the Fourth Schedule to the Companies Act 61 of 1973, a dividend declared or proposed is to be disclosed in the income statement and the directors' report. Such disclosure is in D accordance with normal accounting practice. The general principle that income and expenditure be recorded in the income statement is to avoid the concealment of income and expenditure.'

In February 1992 the applicant's auditors attended a meeting with representatives of the respondent. A memorandum was tabled by the applicant motivating the deduction of interest incurred on the mortgage E bond. Thereafter, the applicant's auditors wrote to the Receiver apologising for the fact that the amount of the dividend declared was not reflected in the appropriate schedule of the income tax return for the 1990 year. A fully completed...