Mokoena v Commissioner for South African Revenue Service (05/20445) [2010] ZAGPJHC 79; 2011 (2) SA 556 (GSJ) (31 August 2010)

85 Reportability

Tax Law

Brief Summary

Tax Law — Rescission of judgment — Application for rescission of judgment granted against taxpayer due to lack of notice and pending objection — Commissioner for South African Revenue Service withdrew judgment after taxpayer became aware of it through a credit check — Judgment declared a nullity as it was obtained while an objection was pending, violating taxpayer's rights to appeal and due process.

Comprehensive Summary

Summary of Judgment

1. Introduction

This was an application in the South Gauteng High Court, Johannesburg, for the rescission and setting aside of a monetary judgment that had been obtained by the Commissioner for the South African Revenue Service (SARS) through the statutory mechanism in section 91(1)(b) of the Income Tax Act 58 of 1962. The proceedings were not initiated by summons; rather, the judgment had originally been procured through the filing of a certified statement with the Registrar, which by statute has the effect of a civil judgment.

The parties were Mokoena Albert Sepataka as the applicant (the taxpayer) and the Commissioner for the South African Revenue Service as the respondent. The applicant sought rescission on the basis that he was unaware of the judgment until a credit check revealed it when he applied for a bond at Nedbank.

The procedural history relevant to the court’s decision was that SARS had raised additional assessments in 2004 following an audit, the applicant had lodged an objection in 2005, SARS nonetheless filed a section 91 statement and obtained judgment in late 2005 without notice to the applicant, and SARS later allowed the objection in 2007. In March 2010 SARS purported to withdraw the section 91 statement in terms of section 91(1)(bA). The applicant then approached the court for rescission and related relief.

The general subject-matter of the dispute concerned the lawfulness and competence of obtaining a section 91 judgment while an objection to the underlying assessment was pending, and whether such a judgment should be rescinded or set aside as a nullity in the circumstances.

2. Material Facts

SARS conducted an income tax audit and concluded that there was “unexplained income” attributable to the applicant. On 22 April 2004, SARS issued additional assessments in the amounts of R702 215 for the 2001 year of assessment and R597 175 for the 2002 year of assessment. The court recorded an explanation (advanced in the applicant’s papers and relied upon by the court) that “unexplained income” was calculated by comparing increases in assets (net of liabilities) together with estimated living expenses, and treating any shortfall relative to disclosed income as taxable income.

The applicant objected to the additional assessments on 27 June 2005. Notwithstanding the pending objection, SARS filed a statement under section 91(1)(b) with the Registrar on 7 November 2005, which resulted in judgment being granted on 1 December 2005 without notice to the applicant, as the statutory procedure permits.

Subsequently, on 29 August 2007, SARS allowed the objection in respect of both years of assessment and accepted the income as declared by the applicant. The court recorded that SARS’s earlier estimate had been incorrect and was based on a duplication of certain amounts, resulting in estimates that were described as fundamentally flawed.

The applicant stated that he only became aware of the judgment much later, after approaching Nedbank for a bond and having a credit check reveal the outstanding judgment. On 17 March 2010, SARS filed with the Registrar a notice dated 16 March 2010 purporting to withdraw the section 91 statement in terms of section 91(1)(bA).

The court treated it as material that the applicant’s supplementary material, including an affidavit from his chartered accountant and supporting documentation (admitted by the court), disclosed both a bona fide defence on the merits and, more centrally, that the judgment should not have been sought while an objection was pending.

3. Legal Issues

The principal legal questions were whether rescission was competent in the circumstances where the applicant alleged he had been unaware of the judgment, and whether the section 91 judgment was lawfully and competently obtained given that the applicant had lodged an objection that had not yet been finalised at the time SARS sought judgment.

The dispute was primarily one of law and statutory application. It required the court to interpret and apply the framework created by sections 78, 88, 89(2), 89quat, 91, and 92 of the Income Tax Act, and to determine the legal consequences of using the section 91 mechanism in the face of a pending objection and appeal structure. The matter also involved an evaluative conclusion about the incompatibility of obtaining judgment “in the interim” with the Act’s design, though the core finding turned on competence and legality rather than a discretionary balancing.

A related issue concerned the appropriate approach to costs, given that the applicant requested costs but the notice of motion did not seek costs in the event of non-opposition and SARS did not oppose the application.

4. Court’s Reasoning

The court first accepted that rescission was competent where the applicant had not previously been aware of the judgment. In reaching that conclusion, the court relied on authority recognising rescission in relation to judgments obtained through the section 91 statement mechanism.

The court then set out the statutory scheme governing SARS’s powers to estimate taxable income and recover tax. It noted that section 78(1) empowers SARS to estimate taxable income where a taxpayer defaults in furnishing a return or SARS is dissatisfied with a return or information provided. Such estimates remain subject to objection and appeal under the Act. Where assessed tax is not paid, interest may accrue, and SARS may file a statement under section 91(1)(b) which has the effect of a civil judgment. The court acknowledged that this mechanism is constitutionally permissible and forms part of the broader “pay now, argue later” framework (linked in the judgment to section 88(1) read with sections 99 and 100), as confirmed in prior Constitutional Court authority.

However, the court emphasised the draconian nature of the estimation and recovery powers. It noted that the statutory structure allows SARS to collect tax notwithstanding objection or appeal, including through seizure and realisation of assets, which can have serious consequences for a taxpayer’s business and cash flow. For that reason, the court stressed that these powers must be exercised with care and by suitably qualified or experienced personnel to avoid arbitrary outcomes.

On the core question of competence, the court reasoned that although the Act permits SARS to demand and collect assessed tax even while an objection or appeal is pending, this occurs by operation of the statutory “pay now, argue later” principle and not by obtaining a civil judgment during the pendency of the objection. The court considered it inconsistent with the framework of the Act to obtain judgment under section 91 while the taxpayer’s objection rights were still being pursued and not finally disposed of. It observed that the express statutory entitlement to collect tax despite objection and appeal would be rendered unnecessary if SARS could simply obtain judgment in the interim through section 91.

The court also referred to general principles concerning the right to a hearing and access to courts, and to the role of the objection and appeal procedures as safeguards within the administrative exercise of SARS’s powers. Against that background, the court concluded that obtaining judgment under section 91 while an objection was pending was incompetent, and that the judgment was therefore a nullity which had to be set aside.

Although the court discussed, in an obiter and precautionary vein, possible safeguards that might reduce the risk of similar errors in the future (including clearer indications on the face of a section 91 statement about whether the assessment is estimated and whether any objection or appeal is pending), it expressly stated that the case did not require an enquiry into the appropriate means of safeguarding taxpayers’ rights. The reasoning remained focused on the legality of the judgment obtained in the particular circumstances.

On costs, the court noted that the applicant requested costs, but because the application papers did not seek costs if there was no opposition and SARS did not oppose, the court considered it necessary to afford SARS an opportunity to address costs by issuing a rule nisi calling upon SARS to show cause why costs should not be awarded against it.

5. Outcome and Relief

The court set aside the judgment granted against the applicant on 7 November 2005 and declared it null and void.

The court issued a rule nisi calling upon the Commissioner, in his official capacity, to show cause on Tuesday 21 September 2010 why he should not be liable for the costs of the application. The question of costs was therefore not finally determined in the operative order on 31 August 2010, but was deferred for determination on the return date.

Cases Cited

Kruger v Commissioner for Inland Revenue 1966 (1) SA 457 (A).

Metcash Trading Limited v Commissioner for South African Revenue Service and Another 2001 (1) SA 1109 (CC).

Legislation Cited

Income Tax Act 58 of 1962, sections 78(1)–(2), 79, 81, 83, 83A, 86A, 88(1), 89(2), 89quat, 91(1)(a), 91(1)(b), 91(1)(bA), 91A, 92, 99, and 100.

Rules of Court Cited

No specific rule of court was cited in the judgment. The court issued a rule nisi as part of the costs procedure.

Held

The court held that rescission was competent where the taxpayer had not been aware of the section 91 judgment. It further held that it was incompetent for SARS to obtain a judgment under section 91(1)(b) while a properly lodged objection to the relevant assessment was pending and had not been finalised. Because the judgment was not lawfully obtained in those circumstances, it was a nullity and had to be set aside.

The court accordingly set aside the 2005 judgment and declared it null and void, and issued a rule nisi to determine whether SARS should bear the costs of the application.

LEGAL PRINCIPLES

The statutory mechanism in section 91(1)(b) of the Income Tax Act permits SARS to file a certified statement which has the effect of a civil judgment for a liquid debt, and this can occur without summons and without notice to the taxpayer. Rescission may be competent in appropriate circumstances in relation to such a judgment, including where the taxpayer was unaware of it.

Although SARS may enforce payment of assessed tax under the “pay now, argue later” framework despite a pending objection or appeal (associated in the judgment with section 88(1) read with sections 99 and 100), obtaining a civil judgment under section 91 while an objection is pending is inconsistent with the statutory structure that provides for objection and appeal safeguards. A section 91 judgment obtained in those circumstances is incompetent and a nullity, and must be set aside.

The judgment also illustrates the court’s concern about the potentially draconian consequences of estimated assessments and the section 91 procedure, and underscores the need for careful administrative checks to ensure that no pending objection or appeal bars the use of the section 91 judgment mechanism, although the court did not purport to lay down binding procedural requirements beyond deciding the case before it.