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[2014] ZASCA 91
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Commissioner South African Revenue Services v Pretoria East Motors (Pty) Ltd (291/12) [2014] ZASCA 91; [2014] 3 All SA 266 (SCA); 2014 (5) SA 231 (SCA); 76 SATC 293 (12 June 2014)
THE
SUPREME COURT OF APPEAL OF SOUTH AFRICA
JUDGMENT
Case
no: 291/12
Reportable
In the matter
between:
THE
COMMISSIONER FOR THE SOUTH AFRICAN
REVENUE
SERVICES
…
.................................................................................................
APPELLANT
and
PRETORIA EAST
MOTORS (PTY)
LTD
....................................................................
RESPONDENT
Neutral
citation:
SARS v Pretoria East
Motors (Pty) Ltd
(291/12)
[2014] ZASCA
91
(12 June 2014)
Bench:
Ponnan, Theron, Wallis, Willis JJA and
Van Zyl AJA
Heard: 20 May
2014
Delivered: 12
June 2014
Summary
:
Revenue – Income Tax Act 58 of 1962 and Value Added Tax Act 89
of 1991 – assessment to additional income tax and
value added
tax – appeal against dismissal of objection by taxpayer –
onus of proof – evidence – sufficiency
of to discharge
onus.
ORDER
On
appeal from
:
Tax
Court, held at Pretoria (Goodey AJ sitting as court of first
instance):
1.
The appeal and cross-appeal are each upheld in part, with the costs,
including those consequent upon the employment of two counsel,
to be
paid in each instance by the Commissioner for the South African
Revenue Services.
2.
The additional income tax assessments in respect of the 2000, 2001
and 2002 tax years and the additional VAT assessments for
the tax
years 2000, 2001, 2002, 2003 and 2004 are set aside and referred back
to the Commissioner for reassessment in the light
of this judgment.
3.
The costs order of the court below is set aside and substituted with
an order that each party pay their own costs.
JUDGMENT
PONNAN JA
(THERON, WALLIS, WILLIS JJA and VAN ZYL AJA concurring):
[1] The
Respondent, Pretoria East Motors (Pty) Ltd (the taxpayer), an
authorised dealer on behalf of Toyota South Africa (Toyota
SA),
conducted business as a car dealership at Menlyn and Garsfontein in
Pretoria selling new and used vehicles. During June and
July 2003
officials in the employ of the appellant, the Commissioner for the
South African Revenue Services (SARS) conducted a
detailed audit of
the tax affairs of the taxpayer for the period 2000 to 2004. At the
conclusion of the audit various additional
Income Tax (IT) and
Value-added Tax (VAT) assessments were raised by SARS. Although the
assessments themselves were omitted from
the record it appears that
there were additional assessments for income tax in respect of each
of 2000, 2001 and 2002. There were
five additional VAT assessments,
respectively for 2000, 2001, 2002, 2003 and 2004. There was also an
assessment to Secondary Tax
for Companies but that appeal was
dismissed by the Tax Court and not persisted with in this Court. The
taxpayer’s objection
to those assessments, having been
disallowed by SARS, it then appealed to the Special Tax Court:
Pretoria. The Tax Court (Goodey
AJ sitting with assessors) upheld
SARS assessment in relation to 18 of the 21 items in dispute and
found for the taxpayer in respect
of the remaining 3 items. It also
confirmed the penalties at the maximum rate of 200 per cent that had
been levied by SARS in respect
of the additional assessments. SARS
was ordered to pay the costs of the appeal on the basis that the
taxpayer was ‘substantively
successful and is entitled to
costs’. The appeal by SARS and the cross-appeal by the taxpayer
direct to this court in each
instance against the conclusions adverse
to them are with the leave of the Tax Court.
[2] It is
important at the outset to emphasise, as Curlewis JA did in
Bailey
v Commissioner for Inland Revenue
1933 AD 204
at 220, that the
Tax Court is not a court of appeal in the ordinary sense: it is a
court of revision. That means, as Centlivres
JA observed in
Rand
Ropes (Pty) Ltd v Commissioner for Inland Revenue
1944 AD 142
(at
150):
‘
.
. . that the Legislature intended that there should be a re-hearing
of the whole matter by the Special Court and that that
Court
could substitute its own decision for that of the Commissioner.’
As the fate of
this appeal depends upon an interpretation of certain provisions of
the Income Tax Act 58 of 1962 (the IT Act) and
the Value-Added Tax
Act 89 of 1991 (VAT Act), before passing to a closer consideration of
the evidence and proceeding to narrate
the issues that arise for
decision, it would be appropriate to first record, in broad outline,
some general observations about
IT and VAT.
[3] Taxable
income is the basis upon which normal tax is levied. It is arrived at
by first determining the taxpayer’s gross
income, consisting of
all receipts and accruals, other than those of a capital nature, and
certain other specified amounts and
then deducting therefrom any
amounts exempt from normal tax. One thereby arrives at the income of
the taxpayer. The taxpayer’s
taxable income is then determined
by deducting from its income the various amounts which the IT Act
allows by way of deduction,
of which those covered by s 11(
a)
are
of relevance to this matter. Section 23 prescribes what deductions
may not be made in the determination of taxable income. Subsections
(
f
) and (
g
) of s 23 represent what has been described
as the ‘negative counterpart’ of s 11(
a
) and, in
determining whether a particular amount is deductible, it is
generally appropriate to consider whether or not such deduction
is
permitted by s 11(
a
) and whether or not it is prohibited by s
23(
f
) and/or (
g
). (See
Commissioner for Inland
Revenue v Nemojim (Pty) Ltd
1983 (4) SA 935
(A) at 946H-947C.)
[4] The general
deduction formula laid down in s 11(
a
) of the IT Act
permits the deduction from the taxpayer’s income of
‘expenditure and losses actually incurred in the
production of
the income, provided such expenditure and losses are not of a capital
nature’, whilst ss 23(
f
) and (
g
) of the Act
prohibit a deduction in respect of:
‘
(
f)
any expenses incurred in respect of any
amounts received or accrued which do not constitute income as defined
in section one;
(
g
)
any moneys, claimed as a deduction from income derived from trade, to
the extent to which such moneys were not laid out or expended
for the
purposes of trade.’
In
Joffe &
Co Ltd v Commissioner for Inland Revenue
1946 AD 157
at 163 it
was put thus:
‘
All
expenditure, therefore, necessarily attached to the performance of
the operations which constitute the carrying on of the income-earning
trade, would be deductible and also all expenditure which, though not
attached to the trading operations of necessity, is yet
bona
fide
incurred for the purpose of
carrying them on, provided such payments are wholly and exclusively
made for that purpose and are not
expenditure of a capital nature.’
[5] As its name
signifies, VAT is a tax on added value. The system was introduced by
s 7(1) of the VAT Act, which provides that
‘
.
. . there shall be levied and paid . . . a tax, to be known as the
value-added tax–
(
a
)
on the supply by any vendor of goods . . . supplied by him on or
after the commencement date in the course or furtherance of any
enterprise carried on by him;
.
. .
calculated
at the rate of 14 per cent on the value of the supply concerned . . .
.’
VAT is calculated
on the value of each successive step as goods move along the
commercial chain. Kriegler J explains (
Metcash Trading Ltd v
Commissioner, SARS
2001 (1) SA 1109
(CC)):
‘
[14]
Being a tax on added value, VAT is not levied on the full price of a
commodity at each transactional delivery step it takes
along the
distribution chain. It is not cumulative but merely a tax on the
added value the commodity gains during each interval
since the
previous supply. To arrive at this outcome a supplying vendor, when
calculating the VAT payable on the particular supply,
simply deducts
the VAT that was paid when the particular goods were supplied to it
in the first place. As a commodity is on-sold
by a succession of
vendors, each payment of VAT by each successive supplier must then
represent 14% of the selling price less the
14% of the price which
was payable when that commodity was acquired. According to the scheme
of the Act the tax that is payable
by a supplying vendor is called
output tax and the tax that was payable on the supply to that vendor
upon acquisition is called
input tax.
[15]
. . . In the result vendors are entrusted with a number of important
duties in relation to VAT. First there is the duty to
calculate and
levy VAT on each supply of goods; then to calculate the output tax
and the input tax on that transaction correctly;
also to keep proper
records supported by the prescribed vouchers, periodically to add up
the sum of output and input taxes attributable
to that period and
appropriately deducting the total of the input taxes from those of
the output taxes; and, ultimately and crucially,
to make due and
timeous return and payment of the VAT that is payable in accordance
with the vendor’s allocated tax period.
[16]
. . . The first significant point to note is that VAT, quite unlike
income tax, does not give rise to a liability only once
an assessment
has been made. VAT is a multi-stage tax, it arises continuously.
Moreover VAT vendors/taxpayers bear the ongoing
obligation to keep
the requisite records, to make periodic calculations of the balance
of output totals over and above deductible
input totals (and any
other permissible deductibles) and to pay such balances over to the
fisc. It is therefore a multi-stage system
with both continuous
self-assessment and predetermined periodic reporting/paying.’
[6] In terms of s
82 of the IT Act:
‘
The
burden of proof that any amount is –
(
a
)
exempt from or not liable to any tax chargeable under this Act;
.
. . shall be upon the person claiming such exemption, non-liability,
deduction, abatement or set-off, . . . and upon the
hearing of
any appeal from any decision of the Commissioner, the decision shall
not be reversed or altered unless it is shown by
the appellant that
the decision is wrong.’
A similar
provision is to be found in s 37 of the VAT Act. The present appeal
must therefore be approached on the basis that the
onus was on the
taxpayer to show on a preponderance of probability that the decisions
of SARS against which it appealed were wrong
(
CIR v SA Mutual Unit
Trust Management Co Ltd
[1990] ZASCA 76
;
1990 (4) SA 529
(A) at 538D). That,
however, is not to suggest that SARS was free to simply adopt a
supine attitude. It was bound before the appeal
to set out the
grounds for the disputed assessments and the taxpayer was obliged to
respond with the grounds of appeal and these
delineate the disputes
between the parties.
[7] To discharge
the onus resting upon it, the taxpayer called two witnesses, Dr WAA
Gouws and Mr C Wolpe. The former, a chartered
accountant, became
involved in the matter soon after the audit commenced. He prepared
the letter of objection on behalf of the
taxpayer and later a report
including annexures which formed part of the record before the Tax
Court on the strength of the taxpayer’s
contemporaneous
financial records and other documentation. The latter was the
financial director of the taxpayer and one of its
principal
shareholders. The managing director of the taxpayer, Mr Dick Jacobs,
who suffered from Alzheimer’s disease, was
unable to testify.
For SARS, Ms Jacqueline Victor, who had been principally responsible
for conducting the audit that gave rise
to the assessments and for
the disallowance of the various objections, testified. Much of the
evidence before the Tax Court, however,
took the form of documentary
exhibits, primarily in the form of court dossiers prepared by the
taxpayer. Those included documents
obtained or prepared by Ms Victor
during the course of the audit as well as the annexures to the letter
of objection prepared by
Dr Gouws and his summary.
[8] It is so that
the taxpayer’s
ipse dixit
will not lightly be regarded
as decisive. But it must be considered together with all of the other
evidence in the case. And, given
the unfavourable position of having
the onus resting upon it – a ‘formidable and difficult’
one to discharge
(per Trollip JA;
Barnato Holdings Ltd v Secretary
for Inland Revenue
1978 (2) SA 440
(A) at 454A-B) – the
interests of justice require that the taxpayer’s evidence and
questions of its credibility be
considered with great care. Indeed
the taxpayer’s evidence under oath and that of its witnesses
must necessarily be given
full consideration by the court, and the
credibility of the witnesses must be assessed as in any other case
that comes before the
court. (See
Malan v Kommissaris vir
Binnelandse Inkomste
1983 (3) SA 1
(A) at 18E.) It thus remains
the function of the court to make a determination of the issues that
arise for decision on an objective
review of all of the relevant
facts and circumstances. Not the least important of the facts,
according to Miller J (ITC 1185
(1972) 35 SATC 122
(N) at 124), ‘will
be the course of conduct of the taxpayer in relation to the
transactions in issue, the nature of his business
or occupation and
the frequency or otherwise of his past involvement or participation
in similar transactions. The facts in regard
to those matters will
form an important part of the material from which the court will draw
its own inferences against the background
of the general human and
business probabilities’.
[9] SARS raised
the additional assessments on the basis of information in the
taxpayer’s records and, in the case of the additional
VAT
assessments, the VAT 201 forms completed by the taxpayer for each
period of assessment. The approach adopted by Ms Victor was
to
examine the accounts and, where she found a discrepancy that she did
not understand and for which in her view no adequate explanation
was
furnished, she raised an assessment to additional tax - either income
tax or VAT or, in some instances, both.
[10] It does not
appear that Ms Victor sought to familiarise herself with the workings
of the accounting system utilised by the
taxpayer, even though the
information available to her, confirmed by the evidence in the
appeal, was that it was a customised system
installed not by the
taxpayer but by Toyota SA. It was designed not simply to reflect the
taxpayer’s financial position,
but to provide statistical
information to Toyota SA and to manage the complexities inherent in
the taxpayer financing its operations
under a floor-plan agreement
with Toyota Financial Services (Pty) Ltd. In the result a number of
transactions that were purely
internal to the taxpayer’s
operations were reflected on that system as ‘sales’.
Whilst that may have been useful
as a management tool to enable the
taxpayer to assess the profitability of the different branches of its
business, it could be
misleading if not properly understood. That was
because it resulted in entries being made in the accounts dealing
with VAT that
indicated that VATable transactions had occurred, when
in truth they had not and the entries were merely directed at
maintaining
the accounts in balance. Ms Victor ignored the internal
character of these transactions. Thus she treated as taxable
supplies:
the transfer of vehicles from sales stock to demonstration
purposes; sales clearly reflected in the accounts as internal
transactions;
and, the transfer of sales stock (swaps) between the
two branches of the business. This was incorrect, as it ignored the
fact that
under s 7(1)
(a)
of the VAT Act, read with the
definition of ‘supply’ in s 1, output tax is to be
raised only on taxable supplies
by a vendor and these internal
activities did not constitute supplies to anyone.
[11] As best as
can be discerned, Ms Victor’s approach was that if she did not
understand something she was free to raise
an additional assessment
and leave it to the taxpayer to prove in due course at the hearing
before the Tax Court that she was wrong.
Her approach was fallacious.
The raising of an additional assessment must be based on proper
grounds for believing that, in the
case of VAT, there has been an
under declaration of supplies and hence of output tax, or an
unjustified deduction of input tax.
In the case of income tax it must
be based on proper grounds for believing that there is undeclared
income or a claim for a deduction
or allowance that is unjustified.
It is only in this way that SARS can engage the taxpayer in an
administratively fair manner,
as it is obliged to do. It is also the
only basis upon which it can, as it must, provide grounds for raising
the assessment to
which the taxpayer must then respond by
demonstrating that the assessment is wrong. This erroneous approach
led to an inability
on Ms Victor’s part to explain the basis
for some of the additional assessments and an inability in some
instances to produce
the source of some of the figures she had used
in making the assessments. In addition, as a matter of routine, all
the additional
assessments raised by her were subject to penalties at
the maximum rate of 200 per cent, absent any explanation as to why
the taxpayer’s
conduct was said to be dishonest or directed at
the evasion of tax.
[12] According to
the unchallenged evidence of Dr Gouws, who represented the taxpayer
from about the end of 2003 or early 2004,
he had prepared schedules
from the taxpayer’s records and offered to provide additional
information to that already furnished,
but his overtures were
rejected by Ms Victor. He stated that in response to a suggestion
that insufficient proof had been proffered
by the taxpayer, all the
ledger accounts were put in a van and taken to the SARS office and Ms
Victor was invited to take whatever
she needed, but she declined to
do so. The SARS auditors had thus been given access to all the
documents foundational to the taxpayer’s
accounts but chose not
to examine any of them. This disturbing approach persisted in the Tax
Court. Prior to the hearing, Dr Gouws
approached Mr Tjiane, who
represented SARS at the hearing, and after pointing out that there
was a mass of invoices and files covering
the areas in dispute
between the parties enquired what he should bring to the hearing. He
was told that it was unnecessary to bring
everything and simply to
bring an example. During the course of the hearing documents were
tendered for inspection but once again
the SARS representatives did
not take up these offers. Mr Tjiane persisted in cross-examination in
asking Dr Gouws about source
documents that demonstrated that SARS
was wrong, without ever indicating, beyond a question about invoices
for entertainment expenditure
and charter fees, which documents he
had in mind, or why it was impermissible for Dr Gouws to make use of
the audited figures in
exactly the same way as Ms Victor had done. It
appeared as if he thought that it was necessary for the taxpayer to
reconstruct
its accounts in order to discharge the onus resting on
it.
[13] That
approach was untenable, for, it left the taxpayer none the wiser as
to what was truly in issue and what needed to be produced
in order
for it to discharge the burden of proof that rested upon it. The
taxpayer thus adopted the general approach that as Ms
Victor had
misunderstood the accounts and ignored the provisions in particular
of the VAT Act, it sufficed for it to demonstrate
that through the
evidence of Dr Gouws. That was a perfectly proper approach in respect
of most, but not all, items, particularly
in the light of Ms Victor
having informed the taxpayer that all sales had been properly entered
in the company’s accounts
and that she had relied for the
assessments on the trial balances prepared by the company’s
auditors. The taxpayer was not
alerted to any other issue and was
certainly not called upon to produce every underlying voucher or
invoice or to reconstruct its
accounts from scratch for the Tax
Court.
[14] In these
circumstances the submissions made to the Tax Court and repeated on
appeal in relation to many of the disputed items,
namely that the
original vouchers had not been produced or that Dr Gouws’
explanations were to be ignored because they were
based on hearsay,
cannot be sustained. Whilst there are disputes in tax appeals, such
as the entertainment expenditure in the present
appeal, where the
production of invoices or vouchers is called for if the taxpayer is
to discharge the onus of proof resting on
it, that is not always the
case. Everything will depend upon the nature of the dispute between
the parties as defined by the grounds
of assessment and the grounds
of appeal. Where, for example, the SARS auditor has based an
assessment upon the taxpayer’s
accounts and records, but has
misconstrued them, then it is sufficient for the taxpayer to explain
the nature of the misconception,
point out the flaws in the analysis
and explain how those records and accounts should be properly
understood. That can be done
by a witness such as Dr Gouws who, as a
qualified chartered accountant, is capable of giving such an
explanation after a full and
proper consideration of the accounts. If
there are underlying facts in support of that explanation that SARS
wishes to place in
dispute, then it should indicate clearly what
those facts are so that the taxpayer is alerted to the need to call
direct evidence
on those matters. Any other approach would make
litigation in the Tax Court unmanageable, as the taxpayer would be
left in the
dark as to the level of detail required of it in the
presentation of its case. It must be stressed that SARS is under an
obligation
throughout the assessment process leading up to the appeal
and the appeal itself to indicate clearly what matters and which
documents
are in dispute so that the taxpayer knows what is needed to
present its case.
[15] Against that
background I turn to the substantive issues raised by the appeal and
cross appeal.
The SARS
Appeal
First
ground: Input tax on the purchase of second hand vehicles
[16] Part of the
taxpayer’s business as a motor dealership involved the
acquisition of second-hand vehicles from third parties,
either by way
of an out-and-out purchase or as a trade-in against the purchase of a
new vehicle. In terms of s 16(3) of the VAT
Act the amount of VAT
payable by a vendor is calculated by,
inter alia
, deducting
from the sum of the output tax of the vendor the amounts of input tax
in respect of qualifying goods and services. The
taxpayer had claimed
input VAT deductions in respect of the purchase of second-hand
vehicles for the period 2000 to 2003 in the
total sum of R14 099 943.
Those were disallowed by SARS on the basis that the taxpayer had not
kept the necessary records
as required by the VAT Act.
[17] Input tax is
defined in s 1 of the VAT Act to include:
‘
(
a
)
tax charged under section 7 and payable in terms of that section by –
(i)
a supplier on the supply of goods or
services made by that supplier to the vendor; or
.
. .
(
b
)
an amount equal to the tax fraction . . . of the lesser of any
consideration in money given by the vendor for or the open market
value of the supply (not being a taxable supply) to him by way of a
sale on or after the commencement date by a resident of the
Republic
. . . of any second-hand goods situated in the Republic; . . . .’
Therefore
‘input tax’ in respect of second-hand goods acquired by a
vendor is a deemed amount equal to the tax fraction
[1]
(namely
14 over 114) of the lesser of the sale price or the open market value
of such goods. Section 16(2)
(c)
of the VAT Act, however, prohibits the deduction of input tax in
respect of the supply of goods, unless
inter
alia:
‘
(
c
)
sufficient records are maintained as required by section 20(8) where
the supply is a supply of second-hand goods or a supply of
goods as
contemplated in section 8(10) and in either case is a supply to which
that section relates; . . . .’
At the relevant
time, s 20(8) read:
‘
Notwithstanding
anything in this section, where a supplier makes a supply (not being
a taxable supply) of second-hand goods or of
goods as contemplated in
s 8(10) to a recipient, being a registered vendor, the recipient
shall, where the value of the supply
is R1 000 or more, obtain
and maintain a declaration by the supplier stating whether the supply
is taxable supply or not and
shall further maintain sufficient
records to enable the following particulars to be ascertained . . .
.’
[18] According to
the taxpayer, the transactions fell into three categories, namely,
the acquisition of used vehicles from: (a)
registered vendors; (b)
non-vendors for resale; and (c) non-vendors as a trade-in against the
sale of a new vehicle. The taxpayer
asserted that it had specifically
been brought to the attention of Ms Victor that each individual
vehicle bought or sold by it
had a separate file. And as all of those
files were quite voluminous, it had been agreed between Dr Gouws and
Mr Devlin Bissetty,
the legal officer then in the employ of SARS,
that although all of those files were available for inspection, a
random sample of
only 50 files would be scrutinised by SARS.
[19]
In respect of the transactions covered by category (a), the evidence
was to the effect that the registered vendor in each case
had
supplied the taxpayer with a valid invoice, which reflected its VAT
registration number and otherwise complied with the requirements
of
the VAT Act. But Ms Victor did not treat those transactions any
differently to those that fell into the other two categories.
The impermissibility of Ms Victor’s approach
was demonstrated by an exchange between her and one of the assessors
in which
he asked whether she had disregarded transactions where
there was a valid tax invoice and she agreed that she had.
[20] In regard to
categories (b) and (c), SARS disallowed the input tax deduction
solely on the basis that the taxpayer was not
in possession of a
‘declaration by the supplier stating whether the supply is a
taxable supply or not’ as contemplated
by s 20(8) of the VAT
Act. That requirement was introduced by way of an amendment to s
20(8) in terms of the
Taxation Laws Amendment Act 30 of 1998
. When
s
16(2)(
c
) was first enacted, a declaration by the seller was
not one of the documents contemplated by the expression ‘sufficient
records
. . . as required by
s 20(8)
’. Tellingly, when
s 20(8)
was amended there was no corresponding amendment to
s 16(2)(
c
).
Section 20(8)
requires the recipient vendor to ‘maintain a
declaration by the supplier’ and in addition to ‘further
maintain
sufficient records to enable the following particulars to be
ascertained’. The ‘following particulars’ to be
ascertained from the records, include the name of the supplier, a
copy of the seller’s identity document or details of the
seller
if not a natural person, the address of the supplier, the date of
sale, a description of the goods and the consideration
for the
supply, all of which the taxpayer admittedly possessed in this case.
A declaration by the supplier was not one of
those particulars. It
was an additional requirement over and above the requirement that
‘sufficient records’ be kept
of the particularised
matters. It follows that such a declaration - being a requirement
that is additional to those particulars
- is plainly not encompassed
by the expression ‘sufficient records’ in
s 16(2)(
c
).
Not being a requirement of that section, it must follow that SARS’
disallowance of the input tax deduction on the basis
that the
taxpayer was not in possession of those declarations, could not
stand. In the result the appeal by SARS in relation to
this ground
must fail.
Second
ground: Fuel coupons
[21] SARS
disallowed income tax deductions claimed by the taxpayer in respect
of the period 2000 to 2002 in the sum of R1 113 762
(involving tax of R334 129). This pertained to the use of fuel
coupons or vouchers to obtain fuel for demonstration vehicles,
delivery of vehicles or for other internal purposes by the taxpayer.
Mr Wolpe explained:
‘
And
then if M’Lord came in himself to buy a car, you would be
insisting that you get a full tank of petrol or half a tank,
and this
was the method that we put petrol in the tank.’
His
evidence was never challenged. Nor was it disputed that this type of
expenditure could be claimed by the taxpayer in terms of
s 11(
a
)
of the IT Act. In fact in its statement of grounds of assessment
filed in terms of rule 10,
[2]
SARS
conceded:
‘
22.
The Appellant claimed a deduction for the vouchers/coupons issued by
it for the petrol used on demo cars and other workshop
vehicles. It
is not disputed that such expenditure would be deductible for tax
purposes.
23.
However, the Appellant could not produce the proof of the expenditure
for the period assessed. The cash reconciliation presented
by the
Appellant was not for the period under scrutiny. Therefore, the
deduction was disallowed by the Commissioner.’
It was thus
disallowed because proof of the expenditure was not provided.
[22] In Dr Gouws’
report it was explained that these amounts related to ‘coupons’
which ‘authorised the
petrol attendants to sell petrol to the
value of the coupon and accept it [the coupon] as payment’.
Moreover, it was stated
‘the disbursements in the form of
petrol coupons relates to expenditure incurred for petrol used for
the demonstration vehicles
and other workshop vehicles where petrol
is needed’. According to Dr Gouws, on a daily basis the petrol
attendants completed
and reconciled sales reports which were
forwarded to the accountant, who reconciled them with the shift
report and passed ‘the
necessary journal entries to account for
the sales of the floor’. Dr Gouws, asserted that: there was a
daily reconciliation
after every eight hour shift for the entire year
and specifically for the period which was the subject of the audit;
and, while
all of the supporting documentation was available and had
earlier been made available to Ms Victor and had further been
tendered
at court, she had declined to peruse them. Dr Gouws added
that it would be ‘absolutely ridiculous’ to bring ‘every
petty cash voucher’ to court. What he did place before the Tax
Court (as he had before the SARS auditors) were separately
numbered
petrol vouchers and, as confirmation of the practice then prevailing
at the taxpayer, the following written statement:
‘
We
hereby confirm that the following procedure relating to fuel provided
for demo and the delivery of vehicles is as follows:
1.
Coupons which are required for the above, are obtained from Mr D.
Jacobs.
2.
On the issue of these coupons, the demo vehicle being taken out for
demonstration purposes, or new vehicles being delivered,
are driven
to the fuel pumps, and the necessary fuel to the value of the coupon
is inserted in the car.
THIS
PROCEDURE IS CONFIRMED BY:
A.
RAS
SALESMANAGER
DAAN
BEKKER
SALESMAN
WILLIE
VAN DEVENTER SALESMAN
ELIZE
LOMBAARD
SALESLADY’
That statement
bore the signature of each of those individuals alongside their name.
[23] It was not
suggested, either during the course of the audit or before the Tax
Court, that the taxpayer’s account on that
score was untruthful
and should be rejected. Quite the contrary, all of that evidence
simply did not elicit a response from Ms
Victor. Accordingly, SARS’
disallowance of the income tax deductions claimed by the taxpayer in
respect of the fuel vouchers
for the period in question could not
stand. In the result the appeal by SARS in relation to this ground
must fail.
Third
ground: Parking rentals
[24] SARS
disallowed IT deductions and VAT input tax deductions in respect of
payments allegedly made as rentals to a landlord in
respect of an
additional parking space leased by the taxpayer. Mr Wolpe testified
that the basement of a neighbouring shopping
centre called Marylyn
was rented for the parking of their new vehicles and customers’
vehicles. Ms Victor confirmed that
she had seen a parking area where
some cars were parked. It therefore did not appear to be in dispute
that a parking area was rented.
Ms Victor’s initial complaint
was that there was insufficient proof that the claimed expenditure
had in fact been incurred
as rental payments.
[25] In support
of the taxpayer’s objection, Dr Gouws stated that the rental
for the premises was paid on an invoice and he
attached what he said
was an example of such a monthly statement. He then went on to state
that ‘the owner of the property
insists that part of the rent
should be dealt with via invoice as above and the balance to be paid
monthly in cash to him’.
Ultimately, it was only the alleged
cash payments (amounting to R134 625.99) that remained in
dispute in the Tax Court. The
record of the proceedings before the
Tax Court reflects that whilst Mr Wolpe was testifying about the
Marylyn parking his evidence
was interrupted by a question from one
of the assessors about a related matter. When he sought to revert to
the parking rental,
the learned Judge stated:
‘
COURT
:
That was just an explanation what this flat is about as was the
parking. And the parking is clearly, what I can see here, for
generating an income, because you have to have the facilities so that
the motor vehicles of the – the new ones as well as
the ones of
clients, not standing in the hail.
MR
CLOETE
: Absolutely.
MR
WOLPE
: Yes.
MR
CLOETE
: And I can refer the court to
the bundle which was prepared by SARS . . . (intervention)
COURT
:
No, well do you need to go any further than that. Because it was
inspected that is the end of the case.’
[26] No doubt
believing that no further persuasion was necessary, that is where
matters were allowed to rest. There was thus, regrettably,
no further
evidence adduced on behalf of the taxpayer pertaining to those cash
payments. The Tax Court’s conclusion that
‘[w]e find that
SARS was not correct on this assessment’, appeared not to
appreciate that at issue between the parties
was not the entire
rental but just the alleged cash component and in that respect the
evidence was insufficient to discharge the
onus. However, that was
due to the intervention of the judge. As the taxpayer did not
discharge the onus of proof the appeal by
SARS must succeed in
relation to this item, but the matter must be remitted to SARS for
further investigation and assessment.
[27] To sum up on
the appeal: In relation to SARS first and second ground, the appeal
fails and it is accordingly dismissed. In
relation to SARS third
ground, the appeal succeeds. The cash component of the parking
rentals allegedly paid by the taxpayer in
the sum of R134 625.99
is remitted in terms of s 83(13)
(a)
(iii) of the IT Act to the
Commissioner for further investigation and assessment.
The
taxpayer’s cross appeal
First
ground: The difference between the VAT reports and VAT 201 returns –
liability R681 208
[28] According to
SARS, whilst the taxpayer’s internal VAT control account and
accounting VAT reports correlated with one
another, there was a
discrepancy between those and the VAT returns submitted by the
taxpayer. Ms Victor asserted that as at 28
February 2003 there had
been an under declaration of output VAT by the taxpayer in the sum of
R681 208. Mr Wolpe’s evidence
was to the effect that when
the taxpayer’s auditors had informed him that the taxpayer had
underpaid R500 000 in VAT,
it had sought to remedy the situation
in its VAT return for March 2003 by including an additional R500 000
to address the
previous under-payment. SARS does not intimate what
its approach was to that subsequent payment. But, as this ground is
inextricably
linked to the next, because they are both concerned with
under declarations of supplies and hence output VAT in the years in
question
and there can be only one shortfall in that regard not two,
the conclusion reached there is also determinative of this ground. I
accordingly turn, without more, to the taxpayer’s second ground
of cross appeal.
Second
ground: The difference between output and turnover liability:
R4 912 808
[29] SARS’
auditors compared the taxpayer’s internally generated VAT
reports for each of the 2000 to 2003 tax
years with the actual sales
turnover of its business as reflected in its general ledger.
According to Ms Victor, the general ledger
turnover was found to
exceed the amounts reflected in the VAT reports by a total of
R35 091 489 over the four years in
question. SARS
accordingly concluded that over that period the taxpayer’s
output VAT had been under declared by an aggregate
of R4 912 808.
The Tax Court appears to have accepted Ms Victor’s calculations
which differed from those of Dr
Gouws.
[30] Ms Victor
produced the following table to illustrate the under declaration for
the tax years in question:
2000
2001
2002
2003
TOTAL
TURNOVER (G/L)
65,438,220
102,029,743
133,551,736
164,533,281
465,552,980
VAT REPORTS
38,280,538
101,298,671
129,426,745
161,455,538
430,461,491
DIFF Exclusive
27,157,682
731,072
4,124,991
3,077,743
35,091,489
Output Vat
Under declared
3,802,075
102,350
577,499
430,884
4,912,808
Dr Gouws
testified as follows about the turnover items in this table:
‘
On
the 3
rd
page of the 102 million, if you go one page back. I’ve analysed
the sales and there is a figure of 81 million, 732, which
is actually
VATable sales. And then there is a figure of 20 million which is
non-vatable sales, is the internal swops between the
company where
vehicles are transferred from one branch to another branch, but it is
still recorded in the way of this system, as
a sale and a purchase.
Then there are internal parts, and petrol is a substantial amount
which is tax free, or VAT free. So the
allegation made by Mrs Victor,
that the whole 102 million is VATable is incorrect. She is charging
VAT on every item possible,
which is not VATable transactions.
The
next one is exactly the same. The VATable transactions is only about
100 million and not 133 million. And for 2003, the VATable
sales were
123 million and the internal sales and exempt sales, was 41 million.
Now once you compare this, now the turnover per
VAT reports, there is
a big discrepancy. The VAT reports shows 101 million turnover in
2001, in 2002 there is 129 million turnover
and for 2003, there is
160 million turnover, which indicates that there is something wrong
with the VAT reports. There is also
something fundamentally wrong in
her assumption that total sales, minus the 14%, should produce that
sort of VAT payable.’
[31] The fallacy
in Ms Victor’s approach would seem to be that she employed
gross figures without deducting the internal sales
or vehicle swaps
between the taxpayer’s two branches at Menlyn and Garsfontein.
The figures accepted by SARS as reliable
were the audited ledger
accounts in the trial balances used to prepare the annual financial
statements. Ms Victor therefore ought
to have taken the declarations
of output tax in the taxpayer’s 201 forms and compared them
with those accounts. She then
ought to have added up the total
supplies as per the trial balances for 2001, 2002 and 2003 and
deducted the exempt or zero-rated
supplies and the internal swaps
between the taxpayer’s two branches. Dr Gouws testified as to
the inappropriateness of Ms
Victor’s methodology. According to
him, given the nature of the business conducted by the taxpayer,
there were also many
items which did not attract VAT such as petrol
sales. Dr Gouws performed a comparison between the turnover as it
appeared in the
general ledger and what he described as the VATable
sales. He concluded that the taxpayer had in fact over declared
output VAT
for those years. On the audited figures in the general
ledger, which counsel for SARS accepted as correct, his logic cannot
be
faulted in respect of those three years.
[32] For the 2000
year Ms Victor relied on a turnover figure of R 65 428 220. Counsel
for SARS conceded that he did not know where
she had obtained that
figure. However if one were to have regard once again to the trial
balance for that year, the vehicle sales
for that period totalled R
39 987 336.65. If one then adds the external sales in the
ledger accounts corresponding to
the other trial balances (excluding
internal sales, vehicle swaps and exempt supplies of fuel), there
were taxable supplies of
a further R6 118 636.13. The total
for taxable supplies was therefore R 46 105 972.78. Here as
well Ms Victor
ignored internal transactions, exempt supplies and
vehicle swaps, which explains the difference between this amount and
her figure.
The taxable supplies reflected in the VAT 201 forms for
that year were R 38 280 538. Accordingly, for that year,
there
appears to have been an under declaration of taxable output
sales of R7 825 434.78, much less than Ms Victor’s
figure of R 27 157 682. But it is nonetheless significant,
attracting, as it does, additional tax in the amount of
R1 095 560.87.
[33] It follows
that the cross appeal on the first two grounds must be upheld
entirely in respect of the 2001, 2002 and 2003 years
and in relation
to the 2000 year it must succeed to the extent that the assessment in
respect of additional tax falls to be reduced
to R1 095 560.87.
Third
ground: The zero per cent VAT amounts – liability: R1 407 279
[34] This ground
concerns the treatment of demonstration stock. The taxpayer’s
contention was that certain vehicles were removed
from regular or
‘floor plan’ stock to be used by it as ‘demo
vehicles’ or were sold to staff or directors.
Dr Gouws
explained in his evidence:
‘
It
is a very complicated system that Toyota South Africa has got which
requires far substantially more information that you would
normally
have in an accounting system. Now what happens here, is a new vehicle
arrives from the factory. It goes onto the floor.
That floor-plan is
financed by Toyota Financial Services or whatever finance house
carries the book. That vehicle remains on the
floor. You cannot touch
it. For various reasons, there is insurance involved, there’s a
lot of cost involved. Then there’s
a policy of Toyota that
certain amount of vehicles must be kept as demonstration vehicles.
Now, what happens is, there is a floor-plan
arrangement, the specific
credit arrangements whereby this vehicle arrived and there is a
liability which is guaranteed by Toyota
South Africa. The next thing
that happens is now, once this vehicle moves from stock, where you
can’t touch it, to demonstration
stock it is no longer under
the floor-plan of Toyota South Africa. Consequently what you must do,
you must repay the credit, as
if the vehicle was sold, and then you
move it from, in your stock records, from new stock to demo stock.’
Dr Gouws added:
‘
So
what happens is, Toyota Oos, makes out an invoice as if it is a sale,
to clear the credit in the floor-plan. And then another
invoice to
take over the vehicle, back into stock. But virtually, it is an
internal sale, between himself. It is just to rectify
the correctness
of whether it is demo stock or full stock, because you are the owner
of both of them.’
[35] If one
followed the transaction through, according to Dr Gouws, there was no
furtherance of the enterprise of the taxpayer.
So understood,
according to him, those sales which were not effective sales had to
be disregarded. Dr Gouws’ explanation
was not disputed. The
taxpayer had already purchased the vehicle under the floor-plan
agreement and paid VAT. Until it disposed
of the vehicle it would not
recoup that VAT. Output VAT must only be collected when there is a
supply by a vendor in the furtherance
of the enterprise of the
taxpayer. These internal transactions, reflecting only a reallocation
of existing assets, should have
been disregarded. It follows that on
this ground the cross-appeal must be upheld.
Fourth
ground: Sales at no consideration – VAT liability: R856 141
and IT liability: R1 667 411
[36] According to
Ms Victor, a number of sales of vehicles by the taxpayer to third
parties had apparently been effected at no consideration.
Consequently, no output VAT had been declared by the taxpayer on
those sales. SARS assessed the taxpayer for output VAT on those
transactions, as well as for income tax on undeclared income. But, as
Dr Gouws explained:
‘
The
Receiver stated, “Sold at no value”. But we say it is not
sold at no value. What we are saying, it is a different
thing
altogether. I’d like to explain in short what happens. When a
vehicle comes in for a trade-in, that vehicle is mainly
taken in and,
for various reasons they want to check the car for the engine and the
gear box and what have you, and then places
a value on it. And mostly
the person is interested in buying a new vehicle. The transaction
then gets processed . . . The documents
are processed for the sale of
the new vehicle. It then goes to the finance houses and when it goes
there, the application for finance
is turned down. And the
transaction is cancelled and the motor vehicle that was given as
trade-in is given back to the original
person, who wanted to trade it
in.
MR
SETSHEDI
: Dr Gouws are you
telling me that when the trade-in comes in, does it trigger an
invoice?
MR
GOUWS
: No-no, what happens, there is a
little pink form that they fill in of the car . . . [T]hen they’ll
negotiate and then he
accepts the offer, let’s say for argument
sake, it is R15000. Now that car comes on the floor, it goes onto
used motor vehicle
stock. You debit your stock with R15000, You
credit your creditors with R15 000. Not exactly that, you debit
the notional
input. Now when that transaction is cancelled, it has
just been cancelled and removed from the books. . . .’
There was nothing
to gainsay Dr Gouws’ explanation. Ms Victor and the Tax Court
apparently thought that cancelling the transaction
would only result
in output VAT not being payable if a credit note had been issued in
terms of s 21(3)
(a)
of the VAT Act. But that is clearly
incorrect, because no VAT invoice would yet have been generated in
respect of the purchase underpinning
the trade-in. It follows that
the cross appeal in relation to this ground must succeed.
Fifth
ground: Incentive bonus liability: VAT – R470 172 and IT –
R882 615
[37] The amounts
in question here involved dealer incentive bonuses received by the
taxpayer from Toyota South Africa. Ms Victor
took the view that those
bonuses were taxable by virtue of the definition of gross income in
the IT Act and also in terms of s
7 of the VAT Act. She accordingly
assessed the taxpayer to tax pursuant to those provisions. In its
objection the taxpayer stated:
‘
The
amounts as stated in accounts 1075, 1075M, 1077 and 1077M are
acceptable, although the amounts for the year ending February
2003
had already been taking into consideration in their tax calculations.
The
amount of R2 258 897 is unacceptable as this amount
appeared on a list of debtors which were used as a working paper
during a period when the computers crashed and the accounts were
rectified by Toyota’s accountants.
We
cannot trace the amount in any ledger account that it had been taken
into consideration whatsoever.’
The
taxpayer thus did not object to the amounts raised as the basis for
additional assessments in respect of 2000, 2001 and 2002
respectively
being R 185 139, R 316 061 and R 593 841.
[38] Dr Gouws
testified:
‘
MR
GOUWS:
In my schedule Annexure 18 under
paragraph 12 Annexure G, it is the disallowance of the incentive
bonuses. [Ms] Victor raised these
additional assessments and a reason
for this was that these incentive bonuses received from Toyota South
Africa are taxable in
terms of Section 1 of the definition of gross
income and Section 7 of the Value Added Tax. So this adjustment
affects both income
tax and VAT.
She went to
Account 1075, Account 1075M and Account 1077 and Account 1077M, the M
is for Menlo Park and the G is normally for Garsfontein.
She analysed
these accounts and she got for the three years, for years subtotals
which in total comes to R1.589159.00.
MR
CLOETE
: Sorry, Dr Gouws, sorry to
hamper you, just, you know, in view of the dawning Friday coming, and
that is a repetition, isn’t
the gist of this it was claimed,
she said it is taxable, you provided proof and said and her finding
was the documents provided
is not for the 2000 or the year under
review. And then you said she is incorrect in that the schedule
appearing in 18.2 and so
on and in 18.1 is within the 2002 tax year
and it is within her period of review.
MR
GOUWS
: That is correct, yes.
MR
CLOETE
: Is that the gist of it?
MR
GOUWS
: That is the gist of it, yes.
MR
CLOETE
: And further, my Lord, the one
amount, the 2 million that appears on the schedule, there is no
information whatsoever. We just
don’t know where to find it and
what to do with it.
COURT
:
Yes, Mr Cloete?
MR
CLOETE
: Is there anything that you
would like to add regarding this aspect, Dr Gouws?
MR
GOUWS
: Well, you know, the gist of it
is the period, but what you also got completely wrong that these were
expense accounts and not
income accounts or debit balances and not
credit balances. So the whole calculation from beginning to end is
just completely wrong
without information.
MR
CLOETE
: And you have actually
looked at those ledger accounts?
MR
GOUWS
: Yes, and I have got copies
of the ledger accounts and the annexures that I have added onto as
examples 18.2, 18.3 where
the transactions are being analysed and it
is not remotely close incentives from Toyota Financial Services.
MR
CLOETE
: Can you refer the court
to the discovery file where it was discovered?
MR
GOUWS
: 18.2, 18.3 on a schedule
2003, 2002, on account 1075 she’s got 26 795 as being an
incentive bonus. If you go
to that specific account in the ledger,
which I have included under 18.2, the 26 000, it appears to be
petty cash expenses
incurred by the branch.
MR
CLOETE
: And it is contained in
the ledger that’s . . .
MR
GOUWS
: Yes, in the general ledger that
we have identified and followed the transactions through.
MR
CLOETE
: And it is in court, that
is the ledger (indistinct).
MR
GOUWS
: Yes, yes, well, not all the
ledgers, but that is an example.’
[39] But much of
Dr Gouws’ evidence, in particular his criticism of account
1075, addressed what was not in issue between
the parties. The
objection was directed at two aspects of that assessment: namely, the
R2 258 897, which ‘appeared
on a list of debtors
which were used as a working paper’; and, the ‘amounts
for the year ending February 2003’.
From the bar in this court
counsel for SARS conceded that the R 2 258 897, which did not appear
on any of the audited statements
of the taxpayer, ought not to have
been taken into the reckoning. The matter thus reduced itself to the
‘amounts for the
year ending February 2003’, which
totalled R 474 118. In respect of that amount, as I have shown, the
evidence adduced by
the taxpayer fell woefully short of supporting
the objection. Thus, save for the amount of R 2 258 897 which falls
to be excluded,
the cross appeal on this leg must otherwise fail.
Sixth
ground: Discount and over-allowance liability: VAT – R 605 725
and IT – R737 942
[40] According to
the taxpayer, clients who purchased new vehicles were afforded
discounts beyond the maximum discount threshold
allowed by Toyota.
Due to Toyota’s strict rule about a maximum discount threshold,
the taxpayer would bypass that rule by
issuing cheques to their
clients which could be cashed at its front desk. Ms Victor asserted
that as no proof existed for the discounts
allowed, the deduction was
to be added back for both IT and VAT purposes. SARS appeared to
accept that sale discounts paid to clients
would in principle be
allowable as deductions. At issue therefore was whether there was
sufficient proof of discounts having been
granted to clients.
[41] Mr Wolpe
testified:
‘
So
the invoice would be made at, for example, the full retail price, but
a cheque would be made out if it was a fleet owner, or
for whatever
reason, a cheque would be made out to the customer’s name,
which the customer would then cash with us, and either
that money
would be, usually was used as part of his deposit to buy the new
vehicle, or else the money belonged to him. It was
a discount that we
allowed on that vehicle. But whenever, that cheque was always cashed
by us first. And then as I say, it was
either used for him as part of
his deposit or else it was his.’
In
disallowing these allowances, Ms Victor stated: ‘[c]heques were
made out to “POT / Cash / Client name” but
paid into your
own bank account and the cash was received over the counter on your
own behalf.’
In his evidence,
Dr Gouws explained:
‘
These
are allowances or discounts given to clients over and above the
permitted allowance granted by Toyota. Now it is normally
given
either in cash, or it is normally given by paying it in cash, by
cheque which is cash or cheque made out to the client and
all these
expenditure which, according to Ms Victor, we did not supply
documentary proof. If we go to the analysis that I have
made of that
1 300 files, there the whole account has been analysed what the
selling price was, what the deposit was, what
additional expenses
was, what the discount was, what the whole analysis is there
completely. So all Ms Victor had to do was to
go to the specific file
as I have done and she will find the documentary proof where they had
given the discount and the cheque
was cashed at the counter. I cannot
give her more explanations than that.’
[42] Dr Gouws’
testimony was supported by an annexure to his report, which reflected
details of the purchaser, the date of
purchase, the invoice number,
whether the vehicle being purchased was a new or used vehicle, the
purchase price, the discount,
and, if applicable, the cheque number
issued by the taxpayer. Dr Gouws was not cross examined on any of
this evidence. The accuracy
of the schedule was never questioned. Ms
Victor appeared to suggest that the documents adduced and the
schedule in question was
not for the period under review. In that she
was wrong. It must follow that the cross appeal on this ground must
be upheld.
Seventh
ground: Journals at year end added back: IT liability - R195 742
[43] According to
Ms Victor, the taxpayer had effected two year end journal entries
that served to reduce its income and had claimed
these deductions
from IT. SARS had accordingly disallowed those deductions on the
basis that they ‘could not be explained
together with the
necessary proof’. In its notice of objection, the taxpayer
asserted: ‘We are awaiting full explanations
from the previous
auditors as to the particulars of this account and upon receipt
thereof, it will be forwarded to you’.
In his report Dr
Gouws stated:
‘
The
auditors, after they had done the necessary reconciliation, of the
VAT accounts, made the adjustment by crediting the VAT account
to
bring it in line with the various VAT reports and debiting the cost
of sales.’
He added:
‘
The
entry is incorrect in the sense that they should not have debited
cost of sales, but sale. The reason for this being is that
the VAT
accounts were understated and the sales overstated.
These
entries were necessary after there was a computer breakdown and
certain accounts had to be adjusted manually.’
[44] In his
evidence, Dr Gouws explained: ‘Now again I don’t know why
they have done it. I don’t know why they
did not do it to the
sales accounts, but nevertheless . . .’.
The promised
explanation from the previous auditors was never furnished. Instead
Dr Gouws had to resort to speculation when testifying
as to what he
‘suspected happened’. In the circumstances the cross
appeal on this ground must fail.
Eighth
ground: Stock liability: IT - R576 642
[45] According to
Ms Victor, during the course of the audit by SARS it was found that
in respect of the 2002 year of assessment
vehicle creditors in the
amount of R1 321 531 were not added back to closing stock on 28
February 2002. In her letter of assessment,
Ms Victor informed the
taxpayer:
‘
As
the creditors at year end were compared to the stock numbers and
dates sold, it was found that these vehicles were sold after
year
end, but were not included in the closing stock.’
Later in SARS
rule 10 statement, she asserted:
‘
The
trading stock not sold in a specific tax year forms part of a
taxpayer’s closing stock. The Appellant in its closing stock
for the years 2002 omitted certain vehicles still held in stock.
The
Commissioner found that these vehicles were only sold after year end.
An income tax assessment amounting to R576 642 was raised
by the
Commissioner in the 2002 tax year to take into account these omitted
sales.’
[46] In support
of her assertion Ms Victor produced the following schedule:
LIST OF CREDITORS
ON 28 Feb 2002
T Inv #
Inv Date
Creditor
Inclusive
VAT
Excl
SELL DATE
CLOSING STOCK
Under Stated
V04175
20010423
Carlona Toyota
(66 981.00)
(8 226.00)
(58 756.00)
(58 755.50)
T357962
20020104
Toyota SA
54 421.00
6 683.00
47 738.00
30/04/02
47 738.00
T362554
20020208
Toyota SA
228 226.00
28 028.00
200 198.00
04/03/02
200 198.00
T363143
20020211
Toyota SA
228 825.00
28 101.00
200 724.00
04/03/02
200 724.00
V05121
20020219
Toyota SA
166 156.00
20 405.00
145 751.00
12/03/02
145 751.00
T365695
20020220
Toyota SA
57 231.00
7 028.00
50 203.00
12/03/02
50 203.00
T365634
20020220
Toyota SA
135 630.00
16 656.00
118 974.00
30/04/02
118 974.00
T365790
20020221
Toyota SA
109 046.00
13 392.00
95 654.00
12/03/02
2 924.93
T365798
20020221
Toyota SA
109 046.00
13 392.00
95 654.00
30/04/02
95 654.00
T365637
20020221
Toyota SA
107 763.00
13 234.00
94 529.00
30/04/02
94 529.00
T365393
20020221
Toyota SA
92 917.00
11 411.00
81 506.00
30/04/02
81 506.00
T366223
20020222
Toyota SA
136 078.00
16 711.00
119 367.00
30/04/02
119 367.00
T366374
20020226
Toyota SA
153 343.00
18 832.00
134 511.00
30/04/02
134 511.00
20020228
Toyota SA
57 231.00
7 028.00
50 203.00
20/04/02
50 203.00
POT
5 321.00
38 004.00
38 003.92
1 321 531.35
[47] The response
that this elicited from Dr Gouws was:
‘
The
stock as detailed in your letter is detailed here below and all the
vehicles had been properly accounted for and no further
explanations
are necessary
.
Stock #
Creditor
Creditor Inv
No.
Creditor Inv
Date
Cost of
Vehicle
Exc VAT
Date of Sale
Inv #
Date Settled
6073
Toyota SA
T357962
04/01/2002
47 738.00
04/01/2002
106667
20/03/2002
6198
Toyota SA
T362554
08/02/2002
200 198.00
22/02/2002
106887
05/03/2002
6203
Toyota SA
T363143
11/02/2002
200 724.00
25/02/2002
106893
05/03/2002
6251
Toyota SA
T365633
19/02/2002
145 751.00
19/02/2002
106868
12/03/2002
6264
Toyota SA
T365695
20/02/2002
50 203.00
26/02/2002
106908
12/03/2002
6265
Toyota SA
T365634
20/02/2002
118 974.00
25/02/2002
106894
20/03/2002
6270
Toyota SA
T365798
21/02/2002
95 654.00
28/02/2002
106827
20/03/2002
6273
Toyota SA
T365637
21/02/2002
94 529.00
21/02/2002
106879
20/03/2002
6278
Toyota SA
T365393
21/02/2002
81 506.00
28/02/2002
106921
20/03/2002
6281
Toyota SA
T366223
22/02/2002
119 367.00
27/02/2002
106914
20/03/2002
6290
Toyota SA
T366374
26/02/2002
134 511.00
27/02/2002
106917
20/03/2002
6303
Toyota SA
28/02/2002
50 203.00
28/02/2002
106925
20/03/2002
1 339 358.00’
[48] The taxpayer
thus explained that although the vehicles in question may have been
sold and invoiced prior to 28 February 2002,
payment in each instance
was only received during the course of the subsequent tax year in
March 2002. That evidence was not disputed
by SARS. As the sales had
been concluded in the 2002 year the income from them accrued in that
year and income tax would be paid
on it in that year. Likewise the
cost of those sales, including the cost of the vehicles, would serve
as a deduction in that year.
Accordingly the removal of those
vehicles from stock was correct. It follows that the cross appeal in
relation to this ground must
be upheld.
Ninth
ground: Creditors: accrued expenses and provision account –
Liability: R54 178
[49] According to
Ms Victor, with regard to the 2001 year of assessment, the taxpayer
had claimed various deductions in respect
of a range of accrued
expenses amounting to R143 603 plus a ‘provision for
discount’ in the amount of R36 989.
Dr Gouws testified
that these expenses amounted to provision for known liabilities where
the precise amount of an incurred amount
is not yet known because the
invoice had not yet been received by the taxpayer. He explained:
‘
Yes.
My Lord, can I explain the nature of this transaction? Every year it
is standard accounting practices to make provision for
certain
expenses when you don’t have the vouchers which is known and
you’ve got them, like audit fee, bonuses, water
and lights,
telephone accounts. You make provision for it. It is a standard
practice. What happens in the next financial year,
you reverse the
transaction and the normal expenditure. So from year-to-year this
adjustment goes through.
What
had happened firstly, that was only done once-off. You must be
consistent. You cannot disallow the provisions in one year and
allow
them in the following year. No here she is very inconsistent in what
she did. So what in fact had happened, is she disallowed
it in 2001,
the following year the expenditure was reduced with this amount. So
she should have add it onto the following, or made
a deduction in the
following year when the expenses occurred. That is a mere
accounting adjustment going from year-to-year
and must be done
consistently.’
[50] Before us,
Counsel for the taxpayer conceded that these claims were allowable at
the discretion of the Commissioner. That being
so, the objection to
those disallowances by the taxpayer had to fail because the
Commissioner had exercised that discretion against
the taxpayer. In
the result the cross appeal on this ground must fail.
Tenth
ground: Expenses: liability - Vat: R280 363 and IT: R783 572
[51] The taxpayer
had claimed a number of deductions both from IT and as input VAT in
respect of expenses listed under the headings
‘Pretoria Oos
Cheques’; ‘Rental: flat and parking’; ‘Charter
Expenses and Hanger Fees’; ‘Entertainment’
and
‘General Expenses’. No case at all was pleaded in respect
of the Pretoria Oos Cheques, hence that disallowance
must be deemed
to have been accepted by the taxpayer. In its rule 11 statement, the
taxpayer accepted that as far as the rent for
the flat is concerned,
‘this expense is not a deductible expense envisaged in section
11A of the [IT] Act’; and, that
as far as the hangar fees were
concerned, that ‘does not constitute a deduction in the hands
of the taxpayer appellant and
therefore does not present a taxable
deduction’. For the remaining items, there simply was no proof
that those expenses had
been properly incurred in the production of
income. It must follow that on this ground the Tax Court cannot be
faulted and the
cross appeal in relation thereto must fail.
Eleventh
ground: Salaries and wages: IT - R103 041
[52] For the 2002
year of assessment the taxpayer had reflected a total sum of
R4 669 901
in its
annual financial statements as expenditure in relation to salaries
(R3 263 490), directors’ remuneration (R393 000)
and
commission (R 1 013 411). The taxpayer’s IRP5
certificates and wage registers, however, only reflected expenditure
of R4 386 431. There was also an adjustment of R60 000
as a result of a difference between the trial balance and
the
financial statements in relation to the directors’
remuneration. Ms Victor thus took the view that the taxpayer had
claimed R343 469 more in respect of deductions for salaries and
wages than could be substantiated by its records. Those deductions
were accordingly disallowed. In its notice of objection, the taxpayer
contended that the directors’ remuneration portion
(R393 000)
had to be eliminated from this schedule as it had been ‘dealt
with separately apparently in the accounts
and no further explanation
is necessary’. The evidence adduced on behalf of the taxpayer
however failed to indicate precisely
where the amounts had been dealt
with. Ms Victor testified that an amount of R153 000 had
appeared on Mr Wolpe’s IRP5,
which is at odds with the R393 000
reflected in the taxpayer’s annual financial statements.
[53] Mr Gouws
testified:
‘
Yes.
Here again there are certain assumptions made. According to the
financial accounts, Ms Victor referred to salaries, directors’
remuneration and commission, which is in total 4 696 901.
She then went to the IRP5 documents, which is the documents
issued at
year end to employees. And when she totalled the IRP5 reconciliation,
it disclosed an income, wages paid of 3 531 186.
She added
thereto 153 000 for Mr Wolpe and she did some calculations as
far as wages are concerned, which comes to about 702 000
and she
merely said but you’ve claimed salaries and wages for
4 669 000, but your records only show 4 386 000,
so there is a deficit of 283 000 and there is also a difference
on the trial balance of 60 000. So you’ve
over-claimed salaries and wages to the extent of R343 000.00. On
that 30% tax is 103 000.’
Dr
Gouws added:
‘
Now the big difference
here relates to the remuneration of Mr Wolpe, but if that is
allocated correctly, there is hardly any difference’.
However,
he did not explain where this amount had been accounted for or where
it should have been allocated or what the effect
of this on tax
should have been. It follows that the cross appeal on this ground
must fail.
Twelfth
ground: Penalties of 200 per cent raised (VAT and IT)
[54]
SARS imposed, and the Tax Court confirmed, penalties of 200 per cent
in respect of various amounts of tax (both IT and VAT)
held to be
payable by the taxpayer. The additional tax imposed was in terms of s
76 of the IT Act and s 60(1) of the VAT Act.
As the Tax Court,
on appeal to it, was called upon to exercise its own, original
discretion, this court will interfere with that
determination only on
the limited grounds on which a value judgment of a court of first
instance may be set aside or varied on
appeal (
Commissioner of
Inland Revenue v Da Costa
1985 (3) SA 768
(A) at 774F-J). It
bears noting, however, that in this instance the Tax Court simply
rubber-stamped SARS decision. Its failure
to even engage with the
issue means that we are at large.
[55]
Section 76(1)
(b)
of the IT Act provides that, if a
taxpayer omits from his return any amount which ought to have been
included therein, he shall
be required to pay, in addition to the tax
chargeable in respect of his taxable income, ‘an amount equal
to twice the difference
between the tax as calculated in respect of
the taxable income returned by him and the tax properly chargeable in
respect of his
taxable income as determined after including the
amount omitted’.
Subsections 2
(a)
and
(b)
read:
‘
(a)
The Commissioner may remit the additional charge imposed under
subsection (1) or any part thereof as he may think fit: Provided
that, unless he is of the opinion that there were extenuating
circumstances, he shall not so remit if he is satisfied that any
act
or omission of the taxpayer referred to in paragraph
(a)
,
(b)
or
(c)
of subsection (1) was done with intent to evade
taxation.
(b)
In the event of the Commissioner deciding not to remit the whole of
the additional charge imposed under subsection (1), his decision
shall be subject to objection and appeal.’
Section 83(13)
(b)
of the IT Act provides that, subject to the provisions of the Act, in
the case of any appeal against the amount of the additional
charge
(the penalty) imposed under s 76(1), the Special Court may reduce,
confirm or increase the amount of the penalty.
[56] Section 60
of the VAT Act reads:
‘
(1)
Where any vendor or any person under the control or acting on behalf
of the vendor fails to perform any duty imposed upon him
by this Act
or does or omits to do anything, with intent-
(
a
)
to evade the payment of any amount of tax payable by him; or
(
b
)
to cause a refund to him by the Commissioner of any amount of tax
(such amount being referred to hereunder as the excess) which
is in
excess of the amount properly refundable to him before applying
section 44 (6),
such
vendor shall be chargeable with additional tax not exceeding an
amount equal to double the amount of tax referred to in paragraph
(
a
)
or the excess referred to in paragraph (
b
), as the case may
be.’
[57] The key
words of s 76(2)
(a)
are ‘any act or omission of the
taxpayer . . . done with the intent to evade taxation’. In
Da
Costa
(at 777A)
,
Van Heerden JA suggested that whilst it
is certainly arguable that the phrase applies only to an actual - and
not also an imputed
- intention of the taxpayer to deceive, it was
unnecessary to decide the point. Like Van Heerden JA, I also deem it
unnecessary
to decide the point, for it was simply never suggested to
either Mr Wolpe or Dr Gouws in evidence that an intention to deceive
was being imputed to the taxpayer. Like its counterpart in the IT
Act,
s 60 of the VAT Act also required a finding
that the taxpayer had conducted itself ‘with intent . . . to
evade the payment
of any amount of tax payable by him’. During
argument counsel for SARS submitted that the presumption in s 59(2)
of the VAT
Act availed it. But, as he was ultimately constrained to
concede, that presumption - as that section makes plain - only finds
application
to proceedings under it, namely ‘offences and
penalties in regard to tax evasion’. It must follow that the
additional
tax and penalties imposed by SARS cannot stand and
accordingly on this ground the cross appeal must succeed.
[58] To sum up on
the cross appeal: It succeeds in respect of grounds 3, 4, 6, 8 and
12; and fails in respect of grounds 7, 9, 10
and 11. In respect of
grounds 1 and 2 – the cross appeal succeeds in respect of the
2001, 2002 and 2003 years and in relation
to the 2000 year it
succeeds to the extent that the assessment in respect of additional
tax falls to be reduced to R1 095 560
- 87. In respect of
ground 5 – save for the amount of R 2 258 897, which falls to
be excluded from any assessment, the appeal
fails.
[59] That leaves
costs: The Tax Court ordered SARS to pay the taxpayer’s costs
because the ‘taxpayer was substantively
successful’.
Given the wide ranging disputes between the parties and the manner in
which the matter unfolded before the Tax
Court, there appears to have
been no warrant for that order. Before us it was accepted that that
order should be substituted with
one that each party pay their own
costs. Turning to the costs of the appeal and cross appeal: In the
light of the substantial success
that the taxpayer has had in this
court, SARS must be ordered to pay the taxpayer’s costs, such
costs to include those of
two counsel.
[60] In the
result:
1.
The appeal and cross-appeal are each upheld in part, with the costs,
including those consequent upon the employment of two counsel,
to be
paid in each instance by the Commissioner for the South African
Revenue Services.
2.
The additional income tax assessments in respect of the 2000, 2001
and 2002 tax years and the additional VAT assessments for
the tax
years 2000, 2001, 2002, 2003 and 2004 are set aside and referred back
to the Commissioner for reassessment in the light
of this judgment.
3.
The costs order of the court below is set aside and substituted with
an order that each party pay their own costs.
_________________
V M
PONNAN
JUDGE
OF APPEAL
APPEARANCES:
For Appellant:
M.W. Janisch (with him P. Myburgh)
Instructed
by:
The
State Attorney, Cape Town
The
State Attorney, Bloemfontein
For
Respondent:
P. Pauw SC (with him S.S. Cohen)
Instructed
by:
Gary
Segal Attorneys, Johannesburg
Lovius
Block, Bloemfontein
[1]
According
to s 1 of the VAT Act, tax fraction means the fraction calculated in
accordance with the formula R over (100 plus R)
in which formula R
is the rate of tax applicable under s 7(1), namely 14 per cent.
[2]
Rules
promulgated under s 107A of the Income Tax Act 58 of 1962, GN R467,
GG
24639, 1 April 2003.