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[2010] ZASCA 172
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Commissioner for South African Revenue Service v Sprigg Investment 117 CC t/a Global Investment (36/2010) [2010] ZASCA 172; 2011 (4) SA 551 (SCA); [2011] 3 All SA 18 (SCA); 73 SATC 114 (1 December 2010)
Links to summary
THE
SUPREME COURT OF APPEAL OF SOUTH AFRICA
Case No: 36/2010
In the matter between:
THE COMMISSIONER FOR THE SOUTH
AFRICAN REVENUE SERVICE
...............................................................................
Appellant
and
SPRIGG INVESTMENT 117 CC t/a
GLOBAL INVESTMENT
........................................................................................
Respondent
Neutral
citation
: CSARS v Sprigg Investment 117 CC (36/10)
[2010] ZASCA
172
(1 December 2010)
Coram:
HARMS DP, MAYA, CACHALIA, SHONGWE et
TSHIQI JJA
Heard:
05 November 2010
Delivered:
1 December 2010
Summary:
Income Tax Act 58 of
1962 – Appealability of orders of the tax court under
Tax
Court Rule 26(1)
–
s 86A(1) read
with ss 83(13)(d) and – adequacy of the reasons for a tax
assessment furnished by the Commissioner – composition
of the
tax court under s 83(4) and effect of failure to comply therewith.
ORDER
On appeal from:
Tax Court, (Cape Town) (NC
Erasmus J, sitting as court of first instance).
The appeal is upheld with costs of two counsel.
The order of the court below is set aside and the
following is substituted:
‘
The matter is struck from the
roll. The applicant is ordered to pay the costs including the costs
consequent upon the employment
of two counsel (to the extent
employed).’
JUDGMENT
MAYA JA (concurring Harms DP, Cachalia, Shongwe et
Tshiqi JJA)
[1] The Commissioner for the South
African Revenue Service (the commissioner) appeals against a judgment
of the tax court ordering
him, principally, to furnish the respondent
with adequate reasons for assessments made relating to employees’
tax, income
tax and Value-Added Tax (VAT). The matter comes before us
in terms of an order made by the court below under the provisions of
s 86A(5) of the Income Tax Act 58 of 1962 (the Act),
1
subject to the reservation of the
respondent’s right to challenge the appealability of the
judgment.
[2] The facts relevant to the dispute may be summarized
as follows. The respondent has been in operation since March 2001. It
is
a close corporation and registered vendor for purposes of the
Value-Added Tax Act 89 of 1991 (the VAT Act). It describes itself
as
an exclusive importer of branded electric home products which it
imports from Taiwan and sells through distributors in South
Africa
and Namibia. At the material time it sold an electricity-saving
device called Electro Smart (the device).
[3] The real tussle between the parties (this however
relates to the merits which are not before us, as will become
apparent, and
I refer to it and the surrounding facts merely to
provide context) relates to the precise nature of the relationship
between the
respondents and its distributors. The respondent alleges
that it sold the device to distributors who in turn, as principals,
sold
it to consumers for their own account. The commissioner, on the
other hand, contends that the sales to consumers were the
respondent’s
own sales because the distributors were its
‘employees’ for purposes of the 4
th
Schedule
of the Act.
[4] The genesis of the dispute can be traced to
September 2004, when the South African Revenue Service (SARS)
commenced a tax audit
on the respondent’s business under the
provisions of the Act and the VAT Act. Consequently, SARS auditors
sought various
information and documents from the respondent and a
chain of correspondence flowed between the parties in this regard.
The exchange
culminated in a letter containing the commissioner’s
findings which was dated 14 December 2006. The letter emphasized that
it did not constitute a tax assessment and merely contained ‘findings
based on a limited scope audit of [the respondent’s]
tax
affairs’. It set out what SARS believed formed evidence in
support of the findings and its legal conclusions.
[5] The key findings were that:
(a) in respect of employees’ tax, the respondent’s
distribution agents, consultants and electricians who installed the
devices, were paid commissions and incentives which constituted
‘remuneration’ from which employees’ tax was
not
deducted in breach of paragraph 2 of the Fourth Schedule, read with s
79 of the Act;
(b) in respect of income tax, the price paid by
consumers to the distributors formed part of the respondent’s
gross income,
ie the distributors’ product sales constituted
‘gross income’ of the respondent as defined in s 1 of the
Act;
(c) in respect of VAT, the distributors’ product
sales, by virtue of being the respondent’s gross income, were
taxable
supplies constituting ‘consideration’ as defined
in s 1 of the VAT Act on which output tax was leviable under s
7(1)(a)
of the VAT Act; and
(d) it was competent for the commissioner to impose
additional tax, penalties and interest in terms of various sections
of the Act
and the VAT Act.
[6] The respondent’s written response dated 2
February 2007 was lengthy and detailed and it vehemently denied the
main conclusions
that the distributors and electricians were its
employees and the distributors’ sales its own sales. However,
SARS was not
swayed. On 14 June 2007 it issued a ‘letter of
assessment’, followed by formal assessments dated 15 June and
26 July
2007, in respect of employees’ tax, VAT and income tax.
But for the income tax item, SARS confirmed its earlier findings and
imposed certain additional penalties in respect of VAT on the basis
that the respondent’s management had ‘caused an
evasion
of tax and/or improper refunds … alternatively they failed to
perform the duties imposed upon them by the [VAT]
Act’. No
revised assessments were issued regarding income tax. This was caused
by the fact that although the sales to consumers
were still
considered part of the respondent’s gross income, the
difference between its gross sales and the amounts paid
to its
distributors as commission or otherwise would be allowed as
corresponding deductible expenses in terms of s 11(a) of the
Act,
thus bringing about no change to the respondent’s taxable
income.
[7] The respondent did not accept the
assessment. As a result, it invoked its rights under rule 3 of the
rules of the tax court
2
and requested the commissioner to
furnish reasons for the assessment. The request was contained in two
letters dated 25 and 26 July
2007, which bore 97 detailed questions
targeted at the three items of assessment. SARS was not inclined to
indulge the respondent.
In its view, the ‘request require[d] a
response of such extraordinary nature that any response would be akin
to responding
to questions usually asked in a court of law’. It
then gave brief explanations in respect of each tax item assessed and
referred
the respondent to its ‘letter of assessment’
dated 14 June 2007 which incorporated the reasoning set out in the
letter
of findings.
[8] The respondent joined issue with SARS’
attitude and consequently
launched an application under tax
court rule 26(1)
3
which empowers the tax court to
compel the commissioner to furnish adequate reasons as contemplated
in rule 3. It sought an order
that its requests for reasons be
remitted to the commissioner for reconsideration with directions
issued by the tax court to ensure
that the commissioner provided
adequate reasons therefor.
[9] The tax court found in the respondent’s favour
and ordered a remittal of the letters of assessment to the
commissioner
for reconsideration. Its order further directed the
commissioner to give adequate reasons for the assessments that were
structured
‘so as to motivate his assessment clearly and set
out the findings of fact on which his conclusions depend; the
relevant
law upon which his conclusions are based; and the reasoning
process which led to those conclusions.’
[10] On appeal, the respondent did
not content itself merely with defending the tax court’s
finding on the adequacy of the
commissioner’s reasons. It also
raised preliminary objections and questioned this court’s
jurisdiction to entertain
the matter, the Commissioner’
locus
standi
to appeal
directly to this court and the appealability of the order of the tax
court.
Adequacy of the commissioner’s reasons
[11] I deal first with the question whether the
commissioner’s reasons were adequate as it may be disposed of
shortly. In
developing his argument that the commissioner’s
reasons were inadequate, counsel for the respondent submitted that
the commissioner’s
response to the request for reasons
constituted administrative action. Thus, he argued, the response fell
within the purview of
s 5(2) of the Promotion of Administrative
Justice Act 3 of 2000 (PAJA) which requires the administrator to whom
the request for
reasons is made to give adequate reasons in writing
for the administrative action.
[12] Reference was then made to the
judgment of this court in
Minister
of Environmental Affairs & Tourism v Phambili Fisheries (Pty)
Ltd
4
which endorsed the standard for what
constitutes ‘adequate reasons’ laid down by the Federal
Court of Australia in
Ansett
Transport Industries (Operations) Pty Ltd and Another v Wraith and
Others
5
as follows:
‘
[T]he decision-maker [must] explain his
decision in a way which will enable a person aggrieved to say, in
effect: “Even though
I may not agree with it, I now understand
why the decision went against me. I am now in a position to decide
whether that decision
has involved an unwarranted finding of fact, or
an error of law, which is worth challenging.” This requires
that the decision-maker
should set out his understanding of the
relevant law, any findings of fact on which his conclusions depend
(especially if those
facts have been in dispute), and the reasoning
processes which led him to those conclusions. He should do so in
clear and unambiguous
language, not in vague generalities or the
formal language of legislation. The appropriate length of the
statement covering such
matters will depend upon considerations such
as the nature and importance of the decision, its complexity and the
time available
to formulate the statement. Often those factors may
suggest a brief statement of one or two pages only.’
6
[13] I am in respectful agreement
with these views. But I do not think that they have the meaning that
the respondent ascribes to
them for present purposes. It was
contended on its behalf that the commissioner’s reasons did not
meet the above test. This
was so, it was argued, because the
commissioner, whose perception of the facts differed dramatically to
that of the respondent,
had failed to disclose the reasoning process
which led to his conclusion. The duty to give reasons, proceeded the
argument, requires
more than furnishing actual reasons; it entails a
duty to rationalise the decision and obliges the decision-maker to
‘apply
his mind to the decisional referents which ought to have
been taken into account’ where, as here, the actual reasons
given
fell short of the
Phambili
test. It was clear
from counsel’s submissions that what was actually being
challenged by the respondent were the very merits
of the assessments
and that it understood the order of tax court to entail, in its
words, ‘the Commissioner’s reconsideration
of the
decisions embodied in his assessments’.
[14] The respondent clearly
misconceived the nature of the proceedings. We are not here reviewing
the commissioner’s reasons
for the assessments but merely
adjudicating an application antecedent to that process. Thus, the
cogency or rationality of the
reasons is not yet in the balance. As
appears from the above-quoted dictum in
Phambili
,
the test envisages that the decision in issue may involve ‘an
unwarranted finding of fact, or an error of law, which is
worth
challenging’ and merely requires the decision-maker to explain
why he decided the way he did to enable the requester
of reasons to
launch his challenge. It is only when the objection itself is
adjudicated under judicial review that the PAJA test
which the
respondent wants imposed comes into play. The question now is simply
whether the respondent has sufficiently been furnished
with the
commissioner’s actual reasons for the assessments to enable it
to formulate its objection thereto.
[15] Interestingly, the respondent’s counsel
conceded in argument that the volume of the respondent’s
questions which
demanded exacting specificity from SARS was
unwarranted, and, in his words the product of ‘an attorney
being over-enthusiastic’.
More significant though is what the
respondent’s own deponent, Mr Dirk Hamish Fyfe, its financial
manager, said in the founding
affidavit. He stated that ‘the
[respondent’s] response [to the letter of findings] was lengthy
and answered in substance
the Commissioner’s queries’.
Later, in the same affidavit, he said that ‘the [respondent]
dealt with [the letter
of findings] comprehensively in its letter
dated 2 February 2007, setting out its disagreement with the
conclusions and on that
basis declined to provide the required
documentation and information.’
[16] It will be recalled that the letter of findings
formed the basis of the assessments which, as previously indicated,
incorporated
the reasoning it contained. Notably, the respondent did
not, at that stage, complain about the quality of SARS’ factual
findings
or that it did not understand why they had been made. What
it did instead, as Fyfe properly acknowledged, was reply in fine
detail
as to why it disagreed with the reasoning and findings and
clearly had no difficulty responding to them.
[17] The letter of assessment, which the respondent was
urged to read in conjunction with the letter of findings, stated in
plain
terms that the respondent was being assessed for income tax,
employees’ tax and VAT. It explained the reasons for the
imposition
of employees’ tax, VAT and the ancillary penalties
and interest. It explained further why no revised assessments would
be
issued in respect of income tax. The evidential basis for SARS’
main factual findings, those findings and the legal consequences
that
flowed from them were clearly set out – that because the
distributors were the respondent’s employees they therefore
sold the device on its behalf and that those sales formed part of the
respondent’s gross for which it should have accounted
for
output tax. There is absolutely no reason why the respondent would be
unable to formulate its objection, if it has any, in
the
circumstances. And I am inclined to agree with the commissioner that
this litigation is merely a delaying tactic. Accordingly,
I find that
the commissioner’s reasons for the assessment are adequate for
the purpose for which they were sought.
Appealability and related issues
[18] Appeals against decisions of the tax court are
governed by the provisions of s 86A of the Act. The relevant parts of
the section
read:
‘
(1) The appellant in the tax court or the
Commissioner may in the manner hereinafter provided appeal under this
section against
any decision of that court.
(2) Such appeal shall lie–
(a) to the provincial division of the High Court having jurisdiction
in the area in which the sitting of the special court was
held; or
(b) where–
(i) the President of the tax court has granted leave under subsection
(5); or
(ii) the appeal was heard by the tax court constituted in terms of
section 83(4B),
to the Supreme Court of Appeal, without any intermediate appeal to
such provincial division.’
[19] It was contended for the
respondent that the order of the tax court was interlocutory because
it was made pursuant to a simple
interlocutory application concerning
a preliminary matter of a procedural nature in terms of s 83(13)(d)
and rule 26(1)(b)(ii)
7
and would be appealable only if it is
a ‘decision’ as contemplated in section 86A(1). It was
argued further that the
order was not appealable because it did not
meet the criterion of a ‘decision’ under s 86A(1) set out
in
Hassim v
Commissioner, South African Revenue Service
.
8
[20]
In
the
Hassim
matter, this court interpreted the
words ‘any decision’ in s 86A(1) as follows:
‘
The words “any decision” are
also used in s 21 of the Supreme Court Act 59 of 1959. In the case of
s 21 it was held
that the “decision” referred to must be
a decision of the same nature as a “judgment” or “order”
in the sense in which those terms are used in s 20 of the Supreme
Court Act 59 of 1959 … A “judgment” or “order”
referred to in s 20 does not in general include “a decision
which is not final (because the Court of first instance is entitled
to alter it), nor definitive of the rights of the parties nor has the
effect of disposing of at least a substantial portion of
the relief
claimed in the main proceedings” (see
Zweni
v Minister of Law and Order
1993 (1) SA
523
(A) at 536B) … I do not think that the phrase “any
decision” in s 86A(1) should be interpreted differently …
To interpret the phrase literally would be at odds with the generally
accepted view that it is in general undesirable to have a
piecemeal
appellate disposal of the issues in litigation and that it is
advisable to limit appeals in certain respects’.
9
[21] Section 83(13)(d) was inserted in the Act in April
2003 to give taxpayers an additional right to challenge the
commissioner’s
furnishing of reasons. It gives the tax court
power, subject to the provisions of the Act, to ‘hear any
interlocutory application
and decide on procedural matters as
provided for in the rules of the tax court contemplated in section
107A’.
[22]
The
provision contemplates two types of ‘decisions’: those
pursuant to interlocutory applications’ and those that
decide
‘procedural matters’ that are necessarily not
interlocutory. Many decisions relating to ‘procedural matters’
are not necessarily interlocutory and they may, by their very nature,
be final in effect.
[23]
The
question is then whether the application for ‘adequate reasons’
was an interlocutory application.
An
‘interlocutory
application’
,
in its widest meaning, is one made at any stage between the inception
and the conclusion of the litigation
in
respect
of any
incidental matter
and
the consequent order
which
does
not finally determine the original
dispute.
10
It must be borne in mind that in this
matter the application was brought as a fore-runner to possible
judicial review proceedings.
There is as yet no dispute between the
parties over the merits of the assessment. The respondent sought
reasons for the commissioner’s
decision to determine if it was
assailable. It remains uncertain if the matter will proceed to the
objection stage. And if further
litigation should eventuate, it would
have no bearing whatsoever on the order of the tax court. Another
relevant fact is that the
tax court cannot alter its order; it is,
therefore, final in that regard.
It
follows from this that the application was not interlocutory but
concerned other procedural matters, which brings the tax court’s
order squarely within the category of decisions contemplated in the
latter half of s 83(13)(d).
[28] I believe it relevant too that
it is now firmly established that matters involving procedural issues
such as requests made
in contemplation of future litigation, for
example, for access to information under the
Promotion of Access to
Information Act 2 of 2000
or requests for decision-makers’
reasons for administrative action under PAJA, such as in this case,
may be appealable.
11
Counsel for the respondent was unable
to distinguish the present matter from these
instances
.
I find, in all these circumstances, that the order granted by the tax
court is appealable.
[29]
Having
come to the conclusion that the order was inherently appealable,
there
is
a further
problem relating to the
order.
The
composition of the tax court was flawed and its order
was thus not a valid decision. As indicated above, the matter was
heard by
the President of the tax court, sitting alone.
Section 83(4)
makes provision for the composition of the tax court and prescribes
when the President may sit alone. It reads:
‘
Subject to subsection (4B), every tax court
established in terms of this Act shall consist of a judge or an
acting judge of the
High Court, who shall be the President of the
court, an accountant and a representative of the commercial community
who shall be
of good standing and who have appropriate experience:
Provided that–
…
(c) when an appeal before the court involves a matter of law only or
constitutes an application for condonation, the court shall
consist
of the President of the court sitting alone.’
[30] The question which then arises
is whether the determination of whether the reasons furnished by the
commissioner were adequate
is a matter of law only. The answer is
in
the negative
.
The enquiry
involved
both
questions of law and fact and should
have been conducted by the Full Court in terms of s 83(4). The
proceedings were, therefore,
a nullity and the tax court’s
order is, for that reason, of no force or effect.
To
the extent that tax court rule 26(8) provides otherwise it must be
ultra vires.
[31] There is another matter that requires comment –
the manner in which the tax court dealt with the application. The sum
of the court’s reasoning, which follows a long narration of the
factual background of the matter and the submissions made
on behalf
of the parties, is set out in a single sentence which reads:
‘
I am in agreement with the argument of the
applicant and am consequently of the view that the respondent did not
comply with the
Rules in its response to applicant’s request
for reasons.’
[32] One understands that the court
chose the argument that it found persuasive. But merely setting out
that argument exhaustively
is no substitute for the court’s own
reasoning, without which it is impossible to fathom why it decided as
it did. The tax
court’s judgment – which, ironically,
requires the commissioner to explain his reasoning process –
whilst comprising
66 paragraphs covered in 32 typed pages, is as good
as a bare order and quite meaningless.
It
did not tell the Commissioner in which respects the reasons were
inadequate and the Commissioner was, accordingly, unable to
know how
to comply with the order.
That
is lamentable.
[33] The Constitutional Court
recently reiterated the importance of a court’s written reasons
in the matter of
Strategic
Liquor Services v Mvumbi NO
.
12
There, the court said:
‘
It is elementary that litigants are
ordinarily entitled to reasons for a judicial decision following upon
a hearing, and, when a
judgment is appealed, written reasons are
indispensable. Failure to supply them will usually be a grave lapse
of duty, a breach
of litigants’ rights, and an impediment to
the appeal process. In
Botes and Another
v Nedbank Ltd
[1983 (3) SA 27
(A) at
28], Corbett JA pointed out that “a reasoned judgment may well
discourage an appeal by the loser”:
“
The
failure to state reasons may have the opposite effect. In addition,
should the matter be taken on appeal, as happened in this
case, the
Court of Appeal has a similar interest in knowing why the Judge who
heard the matter made the order he did.”’
[34] The Constitutional Court then
cautioned that a court’s failure to furnish reasons for its
decision may well violate the
right of access to courts; a grave
consequence. The court pointed out another critical consideration –
that the rule of law
obliges judges not to act arbitrarily and to be
accountable, which they ordinarily do by giving reasons for their
decisions, despite
there being no express constitutional or statutory
requirement to do so.
13
Providing reasons therefore serves
several critical roles, including explaining to the litigants and the
public at large, who have
an interest in courts being open and
transparent, why a case is decided as it is, thus curbing arbitrary
judicial decisions, and
provides guidance to the public in respect of
similar matters.
14
[35] In the result the appeal is
upheld with costs of two counsel.
Because
the court below was not properly constituted the matter had to be
struck from the roll. And because the application was
in any event
mischievous it is appropriate to make a costs order in terms of s
83(17)(b) of the Act.
The
order of the court below is
accordingly
substituted with
the following:
‘
The application is struck from
the roll with costs of two counsel
(to
the extent employed).’
_______________
MML MAYA
JUDGE OF APPEAL
APPEARANCES:
For appellants: Owen Rogers SC (with him Renata Williams
SC)
Instructed by the State Attorney
For Respondent: TS Emslie SC (with him JL Van Dorstein)
Instructed by Van der Spuy, Cape Town
Hill McHardy & Herbst, Bloemfontein
1
Section
86A(5)
empowers the President of the tax court to
make a final order, granting or refusing leave to appeal against its
order, to a party
desirous of having his appeal heard by the Supreme
Court of Appeal directly from the tax court without an intermediate
appeal
to the provincial division.
2
The
tax court rules were promulgated under s 107A of the Act and
prescribe the procedures to be observed in lodging objections
and
noting appeals against assessments, procedures for alternative
dispute resolution and the conduct and hearing of appeals
before a
tax court.
Rule 3(1)(a) allows ‘[a]ny taxpayer who is
aggrieved by any assessment …by written notice delivered to
the Commissioner
within 30 days after the date of the assessment,
[to] request the Commissioner to furnish reasons for the
assessment’.
3
The
relevant portion of Rule 26 reads:
‘
(1)(a) 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.
(b) 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) …;
(ii)
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’.
4
2003
(6) SA 407
(SCA) at para 40.
5
[1983] FCA 179
;
(1983)
48 ALR 500
at 507
.
6
See
also Hoexter
The New Constitutional and Administrative Law
vol
2 at 244;
Nkondo v Minister of Law and Order
1986 (2) SA 756
(A) at 772I-773A.
7
Footnote
3.
8
2003
(2) SA 246
(SCA).
9
At
paras 10 and 11
.
It
is not necessary to decide for purposes of this judgment whether the
effect of this judgment was undone by the insertion of
s 83(18),
which provides that ‘[a]ny decision of the court under [s83]
shall, subject to the provisions of section 86A,
be final.’
10
Bell
v Bell
1908 TS 887
at 890.
11
See,
for example,
Unitas Hospital v Van Wyk
[2006] ZASCA 34
;
2006 (4) SA 436
(SCA);
Tetra
Mobile Radio (Pty) Ltd v MEC, Department of Works
2008
(1) SA 438
(SCA).
12
2010
(2) SA 92
(CC) para 15.
13
Ibid
in para 17.
14
Mphahlele
v First National Bank of South Africa Ltd
[1999] ZACC 1
;
1999
(2) SA 667
(CC) para 12.