Income Tax Case of 2005

• Jurisdiction: South Africa
• Judge: Jajbhay J
• Judgment Date: 28 November 2005
• Docket Number: 4/2005
• Hearing Date: 18 November 2005

Jajbhay J:

INTRODUCTION:

This is an appeal by the taxpayer, the Applicant, against a decision by the Respondent, the Commissioner for the South African Revenue Service in terms of rule 3(2); alternatively rule 3(3). The appeal is in terms of an application on notice, in terms of rule 26(1). (The Rules pertaining to procedures in the Tax Court ("the rules"), promulgated in terms of section 107A of the Income Tax Act, 58 of 1962 ("the Income Tax Act"). The Applicant seeks an order remitting the Applicant's

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request for reasons for the Commissioner's assessment dated 6 October 2004 ("the assessment"), made in terms of section 31 of the Value-Added Tax Act, 89 of 1991 ("the VAT Act") to the Commissioner for reconsideration and with directions to provide such reasons which in the opinion of the Court are adequate.

The Respondent issued assessments in terms of section 31 of the Vat Act for the period November 1998 to July 2001, to the Applicant. In the assessments, exports to customers in Lesotho, purportedly making use of the services of Qwa-Qwa Transport (Proprietary) Limited, were subjected to the standard vat rate. An additional tax calculated at the rate of 200% of the tax payable, was imposed.

The Applicant requested reasons for the assessment issued in terms of rule 3(1) (a) of the rules.

The Respondent furnished a reply to this request in a letter dated 8 June 2005. This letter suggested that the Applicant was informed in December 2004, that adequate reasons had been provided.

The Applicant's allegation that the Respondent "failed to provide adequate reasons that would enable the Applicant to determine whether or not he agrees with the basis of the assessment

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and that it fully understands why the decision was taken against it, even if it does not agree with such decision", places this application in terms of rule 26.

THE JURISDICTION OF THE COURT:

The jurisdiction of the Tax Court to hear the appeal, in this application, is based on the following statutory provisions:

Section 33(1) of the VAT Act provides that, subject to the provisions of section 33(A) (which is not relevant here) an appeal against any decision or assessment of the Commissioner under the VAT Act shall be to this Court. Section 33(4) provides that:

"The provisions of sections 83(8),(11),(12),(14),(17),(18),(19), 84,85, 107A of Part IIIA of Chapter III of the Income Tax Act and any rules under that Act relating to any appeal to the tax court or to the settlement of disputes shall mutatis mutandis apply with reference to any appeal under this section which is or is to be heard by that court or to any settlement of a dispute in terms of this Act."

Rule 3 provides as follows:

"(1)(a) Any taxpayer who is aggrieved by any assessment may by written notice delivered to the Commissioner within 30 days after the date of the assessment, request the Commissioner to furnish reasons for the assessment. The written notice must specify the address at which the

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taxpayer will accept notice and delivery of such reasons and all documents in terms of the proceedings contemplated in rule 26.

(b) Upon request by the taxpayer, the period prescribed in paragraph (1) may be extended by the Commissioner for a period of not more than 60 days where the Commissioner is satisfied that reasonable grounds exist for the delay in complying with that period.

(2) Where in the opinion of the Commissioner adequate reasons have already been provided, the Commissioner must, within 30 days after receipt of the notice contemplated in subrule (1), notify the taxpayer accordingly in writing, which notice must refer to the documents wherein such reasons were provided.

(3) Where in the opinion of the Commissioner adequate reasons have not yet been provided, the Commissioner must provide written reasons for the assessment within 60 days after receipt of the notice contemplated in subrule (1):

Provided that where in the opinion of the Commissioner more time is required due to exceptional circumstances, the complexity of the matter or the principle or the amount involved, the Commissioner must, before expiry of that 60 day period, inform the taxpayer that written reasons will be provided not later than 45 days after the date of expiry of that first 60 day period.

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Rule 26(1)(a) provides as follows:

"Any decision by the Commissioner in the exercise of his or her discretion under rules 3(1)(b), 3(2), 3(3), 5(1) and 5(2)(c) will be subject to objection and appeal, and may notwithstanding the procedures contemplated in rules 6 to 18 be brought before the Court by application on notice."

Rule 26(1)(b) provides in its relevant part as follows:

"The Court may upon application on notice under this subrule and on good cause shown, in respect of a decision by the Commissioner under:

(i)

...

(i)

rule 3(2) or 3(3), make an order remitting the matter for reconsideration by the Commissioner with or without directions to provide such reasons as in the opinion of the Court are adequate; or

(iii)

..."

On a proper interpretation of rule 26(1)(b) in the context of rule 3(2), this Court can, on appeal, find that the Commissioner's decision, suggesting that adequate reasons have already been given, is wrong because his reasons are inadequate, and direct the Commissioner to provide "such reasons as in the opinion of the Court are adequate". The Court can also remit without directions as to what is adequate. On a literal interpretation the words "are adequate" imply that the Court should

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approve the reasons. This result was probably not intended. A more purposive interpretation would be to read rule 26(1)(b)(ii) as meaning that the one option is that the Court can direct the Commissioner to provide reasons, simpliciter, leaving it to the discretion of the Commissioner to decide what reasons would be adequate. The other option is to give such directions to the Commissioner as would, in the opinion of the Court, ensure as far as possible, that the reasons will be adequate. In either instance, because of the specific wording of the rule, there is no room for the application of the principle in Maimela's case that the High Court cannot order an administrative decision-maker who has furnished reasons, to give "further or better reasons" Commissioner, South African Police Service and Others v Maimela, 2003 (5) SA 480 (T), 487B-D

FACTUAL BACKGROUND.

Following a SARS VAT audit which lasted several years and during which there was regular communication between the parties, in the form of correspondence, and meetings the Applicant was notified of the assessment on 6 October 2004. The assessment refers expressly to the findings in a previous letter from the Respondent to the Applicant dated 1 April 2004.

In a letter dated 3 November 2004 the Applicant's tax advisers requested reasons for the assessment in terms of rule 3(1)(a). What happened after this is a matter of some controversy. Mr Dunn says the Respondent's response took the form of a letter dated 8 June 2005. Mr

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Olwage does not deny that the letter constituted a response but says there were prior communications during December 2004 and a letter dated 17 March 2005. The contents of the communications are not revealed except that the essence of the said letter is stated to be that the Respondent informed the Applicant that it "will utilise a further period as provided for in rule 3(1)(b) of the rules ....".

This letter adds to the uncertainty and confusion. The rule referred to is clearly misquoted. Rule 3(1) (b) deals with a request by the taxpayer for an extension of the time limit for requesting reasons. The intention of the Respondent was probably to act under rule 3(3) which allows the Commissioner to extend the deadline for furnishing reasons. The letter is important because it shows that the Respondent, as at 17 March 2005, recognised the need to provide reasons and intended to provide them. The essential question in this appeal is whether the Respondent carried out his duty as he was obliged to.

The above forms the background to the undated letter received by the Applicant on 8 June 2005, namely the assessment. The letter requires analysis. This will be undertaken below.

THE RELEVANT SECTIONS OF THE VAT ACT:

Part 4 of the VAT Act deals with "RETURNS, PAYMENTS AND ASSESSMENTS". An important provision is section 28 which requires

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the vendor to furnish the Commissioner with the required returns, to calculate the amounts of such tax "... and pay the tax payable to the Commissioner or calculate the amount of any refund due to the vendor".

Up to this stage of the administration of the VAT Act the term "assessment" is not used. It is provided for the first time, in section 31.

Section 31(1) provides as follows:

"Assessments.-(1) Where-

(a)

any person fails to furnish any return as required by section 28, 29 or 30 or fails to furnish any declaration as required by section 13(4) or 14; or

(b)

the Commissioner is not satisfied with any return or declaration which any person is required to furnish under a section referred to in paragraph (1); or

(c)

the Commissioner has reason to believe that any person has become liable for the payment of any amount of tax but has not paid such amount; or

(d)

any person, not being a vendor, supplies goods or services and represents that tax is charged on that supply; or

(e)

any vendor supplies goods or services and such supply is not a taxable supply or such supply is a taxable supply in respect of which tax is chargeable at a rate of zero per cent, and in either case that vendor represents that tax is charged on such supply at a rate in excess of zero per cent;

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(f)

any person who holds himself out as a person...