Income Tax Case No: 10246

• Jurisdiction: South Africa
• Judge: Wunsh J
• Judgment Date: 13 November 1999
• Docket Number: 10246
• Court: Transvaal Income Tax Special Court
• Hearing Date: 29 July 1998
• Citation: 1999 JDR 0234 (TSpCrt)

Wunsh J:

Introduction: The year of assessment which ended on 28 February 1989 ("the 1989 year"), with which this appeal is concerned, was a time when many taxpayers were claiming deductions arising from investments in film schemes. These schemes generally involved the formation of large partnerships and in many cases, because of sec 30(1) of the Companies Act 61 of 1973, subpartnerships, with the members of the latter being undisclosed to parties contracting with the partnerships and the members thereof., The legitimacy of the claims was disputed and gave rise to lengthy arguments and negotiations between taxpayers and their advisers and the then Commissioner for Inland Revenue ("the Commissioner"). The deduction of certain film production costs was dealt with in s 24F of the Income Tax Act No 58 of 1962 ("the Act" ) which did not feature in this appeal.

Because of the uncertainty where deductions arising from investments in film schemes were claimed

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assessments were generally held up. On 11 May 1992 the Commissioner sent a circular letter to Receivers of Revenue the gist of which was that schemes (not only relating to films) were being encountered in-every Revenue office of which the "greater majority" consisted of en commandite partnerships and that the disclosed partners were being asked the same types of questions by "every Receiver of Revenue", leading to a massive duplication of work. The handling of the work was to be centralised and inter alia film schemes would be dealt with by the Johannesburg office.

Paragraph 3 of the letter read: (I translate from the specimen which was handed in)

"No assessments of an investor must be summarily issued before the office concerned gives notice as to what action must be taken in regard to the scheme".

The appellant's return for the 1989 year was submitted to the Receiver of Revenue, A early in 1990. It was accompanied by a tax computation which took as its :starting figure the profit of R2 814 539 reflected in the appellant's audited income statement, added items which had been shown in the statement as expenditure but which were not claimed as deductions, such as donations, fines and provisions and also recoupments and expenses previously deducted for tax purposes, R2 918 661 in aggregate, and subtracted six items not dealt with as

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expenditure in the income statement, coming in all to R6 170 839, and including an item

"Loss on investment R1 991 778"

The subtractions and additions had the effect of converting the profit of R2 814 539 in the income statement to a computed tax loss of R437 639. No details were given of the loss on investment but another document, enclosed with the tax return, read as follows:

B

Managing Partner:	C
Income Tax Reference No:	9052/220/84/6P
Export Reference No:	663270 (November 21, 1988)

STATEMENT FOR INCOME TAX PURPOSES
FOR THE YEAR OF ASSESSMENT
ENDED FEBRUARY 28, 1989

Partner:	D
Income Tax reference No .:	9260/034/83/1P
Investor's Contribution .:	R739 600
Partners' Contribution .:	R5 956 228
Investors Percentage .:	12,4173
	Current; Exporter; R	Qualifying; Exporter; R
Net loss of Partnership per financial statements	5 593 894	5 593 894
Add: export marketing allowance	10 446 449	13 928 598
Tax loss for year	16 040 343; 75%	19 522 492; 100%
Investors' portion of tax loss	R1 991 778	R2 424 166

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It will be seen that the appellant was called a partner and an investor. The explanation of the two columns headed "Current Exporter" and "Qualifying Exporter" is that s 11bis (3) of the Act provided that in the case of certain exporters the marketing allowance which was granted by s 11bis (2) was one hundred per cent of the recognised marketing expenditure while, generally in the case of other exporters, s 11bis (3)(a) provided that the marketing allowance was seventy-five per cent of such marketing expenditure. The financial statements of the B were not included with the appellant's return; they were presumably submitted by the managing partner with its own tax return.

The appellant's assessment for the 1989 year was issued on about 2 May 1990. It showed the loss of R437 639 claimed by the appellant.

According to the evidence of Philip Lochner, who was doing his military service at the office of the Receiver of Revenue in A in June 1993 and was working in the audit section there, an instruction had been given by the Commissioner that, in order to expedite recoveries of tax, assessments should be issued summarily on the basis of the figures submitted by taxpayers and their claims without examination. This was apparently the procedure even where the taxpayer's return claimed a loss. Miss Botha submitted that there was no evidence of the

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practice which prevailed when the original assessment for the 1989 year was issued in 1990. However, the issue of the original assessment in this case is consistent with such a practice.

The appellant and its tax adviser were pleased with the tax assessment. However, the tax adviser cautioned the appellant that that was not the end of the matter. The Receiver, she warned her client, could always issue an additional assessment in terms of s 79(1) of the Act in which, for example, he would not grant the investment loss which had been claimed. Since the due date reflected in the tax assessment was 1 July 1990, the Commissioner's deadline date, according to this advice, was 30 June 1993. The Receiver of Revenue did indeed, so he says, issue an additional assessment ("the additional assessment") in which the loss of R1 991 778 was disallowed and the appellant was assessed on business income of R1 554 139 (the previous assessed loss of R437 639 plus the R1 991 778). Whether the assessment was issued and delivered on 30 June 1993 is an issue in this appeal. The appellant denies that it was ever received. According to the copy of the additional assessment in the dossier a "statement of account (was) to follow". That statement was issued on 22 July 1993 and was received by the appellant which was given an extension to object to the additional assessment. The grounds of objection were -

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1.

The additional assessment had not been received by 30 June 1993 or, indeed, at all.

2.

The marketing allowance had been granted and the assessed loss had been allowed by the Receiver of Revenue in the exercise of his discretion so that the Commissioner could not reverse the decisions after 30 June 1992.

The objection was disallowed and the appellant noted this appeal.

On 30 April 1993 the Commissioner issued a press release concerning deductions claimed by taxpayers who had invested in film schemes. It was announced that an amendment to the Act was to be introduced (it later was) to empower the Commissioner to make an offer of settlement to all taxpayers who had invested in a partnership which was formed to manufacture and market a film. There were certain requirements for eligibility and the deadline for acceptance of the offer was 30 September 1993; this was later extended to 30 November 1993. On that date the appellant says it entered into the agreement in the manner set out below.

It submitted an "application form" with the following rider -

"Subject to the Commissioner's right to re-open the assessment in respect of the 1989 tax year being established, the application is hereby filed".

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The general offer made by the Commissioner, the acceptance of which would give rise to an agreement of settlement, was to allow a deduction of "1,5 times the net amount which the taxpayer paid as his or her contribution to the partnership which manufactured the film" . Since the appellant's net payment had been R739 600, the Receiver of Revenue calculated its "settlement offer" deduction as R1 109 400 and issued a "reduced assessment" converting the previous business income of R1 554 139 to an amount of R444 739. The assessment was issued on 4 July 1995 and evoked the following response from the appellant:

"We refer to the reduced assessment issued to the company in respect of the 1989 year of assessment and dated 4 July 1995 and wish to advise that insofar as the assessment does not give effect to the objection and appeal which was lodged against the additional assessment purportedly issued on 30 June 1993, our appeal is not withdrawn."

At the hearing of the appeal Mr Van der Walt submitted that the appellant had not effectively accepted the offer of settlement by 30 November 1993 or at all and, therefore, that, if the appeal fails, the appellant will not be entitled to rely on it.

Although the Commissioner announced a proposed offer of settlement which could be accepted by taxpayers, it is not clear which part of any settlement was to be the offer and which the acceptance. A taxpayer could make an

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application, providing information which was required, to arrive at a settlement on the terms that had been announced and the Commissioner, if he saw fit, could accept the application. I do not consider that anything turns on this analysis. It is not always possible to find an offer and an acceptance when a contract has been concluded (see R H Cristie, The Law of Contract in South Africa, 3rd ed (1996) at 85-7). The critical question is whether there was some action on the part of each of the parties that indicates that they reached consensus animo contrahendi. To enforce a settlement, if its appeal against the additional assessment fails, the appellant has to show that the Commissioner and it agreed to settle the dispute, as it will be seen later in this judgment, on or...