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[2018] ZAECMHC 55
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Ntayiya v South African Revenue Service (CA36/2018) [2018] ZAECMHC 55 (17 August 2018)
IN
THE HIGH COURT OF SOUTH AFRICA
EASTERN
CAPE LOCAL DIVISION, MTHATHA
CASE
NO: CA36/2018
DATE
HEARD: 13/08/2018
DATE
DELIVERED: 17/08/2018
In
the matter between
FIKILE
NTAYIYA
APPELLANT
and
SOUTH
AFRICAN REVENUE
SERVICE
RESPONDENT
JUDGMENT
ROBERSON
J:-
[1]
The appellant, as applicant in the court
a
quo
, sought an order
reviewing and setting aside the respondent’s tax assessment for
the tax years 2008 to 2013. He further
sought an order that
annual financial statements (the AFS) prepared by his tax consultants
be accepted as correct. At the
hearing the respondent raised
two points in
limine
,
namely non-compliance with the provisions of ss 11(4) and 11(5) of
the Tax Administration Act 28 of 2011 (the Act). These
sub-sections provide:
“
(4) Unless the
court otherwise directs, no legal proceedings may be instituted in
the High Court against the Commissioner unless
the applicant has
given the Commissioner written notice of at least one week of the
applicant’s intention to institute legal
proceedings.
(5) The notice or any
process by which the legal proceedings referred to in subsection (4)
are instituted, must be served at the
address specified by the
Commissioner by public notice.”
[2]
It is common cause that the appellant did not comply with these
provisions. The court
a
quo
(Laing AJ) was prepared
to adopt a wide interpretation of s11(4) and took the position that
it was competent for a court to direct
that one week’s notice
need not be given, after proceedings had already been launched.
The court
a
quo
was further of the view that a condonation application should be
brought by an applicant who had not complied with s11(5).
[3]
The court
a quo
declined to grant condonation to the appellant for his non-compliance
with the subsections and dismissed the application with costs.
This appeal lies against that decision, with the leave of the court
a
quo
. The court
a
quo
was of the view that
there were no prospects of success in the appeal but granted leave in
terms of s 17 (1) (a) (ii) of the Superior
Courts Act 10 of 2013
which provides:
“
17.(1) Leave to
appeal may only be given where the judge or judges concerned are of
the opinion that-
(a)
(i) ……………………..
(ii) there is some other
compelling reason why the appeal should be heard, including
conflicting judgments on the matter under consideration;”
The
compelling reason was, according to the judgment, the interpretation
of ss 11 (4) and 11(5) of the Act. We did not take
issue with
the court
a quo
’s interpretation and our approach in
this appeal is whether or not the court
a quo
was correct in
not granting condonation for non-compliance with those subsections.
Background
[4]
The appellant is a practising attorney. He instructed his
previous tax consultants, MNG Business Consultants (MNG), to
prepare
tax returns for the years 2008 to 2013. These returns included
the AFS for those years. Nil returns were submitted
and during
2014 an official of the respondent notified the appellant that the
AFS were incorrect. The appellant was allowed
to correct the
AFS. MNG prepared a second set of AFS and the respondent
audited MNG’s assessment of the applicant’s
tax
liability. The respondent’s auditor, Ms Karin van
Niekerk, added together amounts deposited in the applicant’s
business and private bank accounts and compared the total with the
income recorded in the AFS. She concluded that the applicant
had grossly understated his income and imposed penalties in terms of
s 222 of the Act for intentional tax evasion, at the rate
of 150%, as
provided for in s 223 of the Act. The appellant’s total
tax liability for those years was assessed in the
sum of some R3.6
million.
[5]
The appellant instructed new tax consultants, Apac, who lodged an
objection to the assessment. This objection was partially
allowed, based on the revised AFS which were submitted with the
objection. A new set of taxable profits was accepted.
The
applicant was advised of his right to appeal the respondent’s
decision on the objection. An appeal by the appellant
was
lodged but was out of time.
[6]
The appellant then requested a reduced assessment in terms of s
93(1)(d) and s 93(1)(e) of the Act which provide:
“
93 Reduced
assessments
(1)
SARS may make a reduced
assessment if-
…
..
(a)
…
..
(b)
…
..
(c)
…
..
(d)
SARS is satisfied that there is a readily apparent undisputed error
in the assessment by-
(i) SARS; or
(ii) the taxpayer in a
return; or
(e)
a senior SARS official is satisfied that an assessment was based on-
(i) the failure to submit
a return or submission of an incorrect return by a third party under
section 26 or by an employer under
a tax Act;
(ii) a processing error
by SARS; or
(iii) a return
fraudulently submitted by a person not authorised by the taxpayer.”
This
request was declined by the respondent. In its letter to the
appellant setting out the grounds for not granting the request,
the
respondent concluded by saying:
“
Should you wish to
pursue this matter further, you should seek legal advice with regards
to legal remedies available, which may
include a Review Application
to the High Court”.
The
application
[7]
In response to the points in
limine
the applicant stated in
his replying affidavit that he had interpreted the concluding
sentence of the respondent’s letter
as consent to proceed with
the application without giving notice. In his application for
condonation he stated that he is
unfamiliar with the law relating to
tax administration and was not aware of the provisions of the Act.
He repeated that he
interpreted the respondent’s letter as
consent to the institution of legal proceedings and maintained that
the respondent
had not suffered prejudice as a result of the
non-compliance with the Act.
[8]
The applicant’s criticism of the assessment was based on a
number of grounds. Chief among these was that the assessment
was based on the original incorrect AFS, which according to the
applicant the respondent had agreed were incorrect. The
applicant was initially not aware that the AFS were incorrect. There
was therefore, so he maintained, an undisputed error warranting
a
reduced assessment. The bank statements relied upon by the
respondent had included amounts which had been paid to creditors,
including counsel, but these amounts had been included in his gross
income. In particular amounts paid to the applicant by
the
State were all taken as gross income whereas counsel had been paid
from these amounts. Value Added Tax had also been
included in
the gross income. The respondent never provided a full
explanation regarding the calculation of the penalties
and further
should not have imposed the harshest penalty. The applicant
said he trusted his former tax consultants and was
misled by them in
submitting nil returns. The applicant pointed out that although
the objection was partially allowed, this
did not result in a reduced
assessment.
The
court a
quo
’s
judgment
[9]
In considering whether or not to grant condonation, the court
a
quo
referred to the
judgment in
Van Wyk v Unitas
Hospital and Anothe
r (Open
Democratic Advice Centre as
amicus
curiae
)
[2007] ZACC 24
;
2008 (2) SA 472
(CC) at paragraph
[20]
where the following was said:
“
This
Court has held that the standard for considering an application for
condonation is the interests of justice. Whether
it is in the
interests of justice to grant condonation depends on the facts and
circumstances of each case. Factors that
are relevant to this
enquiry include but are not limited to the nature of the relief
sought, the extent and cause of the delay,
the effect of the delay on
the administration of justice and other litigants, the reasonableness
of the explanation for the delay,
the importance of the issue to be
raised in the intended appeal and the prospects of success.”
[10]
It is apposite in this regard also to refer to what was stated in
Brummer v Gorfil Brothers Investments (Pty) Ltd
[2000] ZACC 3
;
2000 (2) SA
837
(CC) at paragraph
[3]
:
“
This
Court has held than application for leave to appeal will be granted
if it is in the interests
of
justice to do so and that the existence of prospects of success,
though an important consideration in deciding whether to grant
leave
to appeal, is not the only factor in the determination of the
interests of justice. It is appropriate that an application
for
condonation be considered on the same basis and that such an
application should be granted if that is in the interests of justice
and refused if it is not. The interests of justice must be
determined by reference to all relevant factors, including the
nature
of the relief sought, the extent and cause of the delay, the nature
and cause of any other defect in respect of which condonation
is
sought, the effect on the administration of justice, prejudice and
the reasonableness of the applicant’s explanation for
the delay
or defect.”
[11]
The court
a quo
was of the view that the applicant’s explanation for
non-compliance with the Act was inadequate. The applicant, as
an attorney, should have consulted the applicable legislation and
ensured that he complied with procedural requirements.
The
court
a q
uo
was further of the view that the concluding sentence of the
respondent’s letter (see paragraph [6] above) could not be
construed as a waiver of the applicant’s obligation to give
notice.
[12]
The court
a quo
did not agree that there was no prejudice to
the respondent as a result of the non-compliance. It was of the view
that a week’s
notice would have given the respondent an
opportunity to investigate the matter further and to decide how to
resolve the dispute,
thereby avoiding litigation at the public’s
expense. Similarly, service at the correct address would have
allowed the
respondent to explore a dispute resolution process.
[13]
The court
a quo
also dealt with the prospects of success in deciding whether or not
to grant condonation. It was of the view that the applicant
had
not explicitly stated the grounds of review as provided for in
s 6(2)
of the
Promotion of Administrative Justice Act 3 of 2000
. It
further stated that the fundamental difficulty which it had with the
application was that the errors on which the assessment
was allegedly
based were far from clear. For example precise details of
income received in his bank account (presumably from
the State) and
what was paid to counsel were not given, nor did the applicant say
how Ms van Niekerk should have interpreted and
applied such
information in reaching her assessment. Further, the applicant
did not explain which accounting or legal principles
were applicable
in determining the assessment and in what respect Ms van Niekerk
infringed these principles.
[14]
The court
a quo
therefore concluded that the applicant failed
to provide a factual and legal basis in order to convince the court
that there was
a prospect of success in the review application.
The court
a quo
was further of the view that there was no
prospect of success in the application for an order that the new AFS
should be accepted.
It said that the applicant failed to
establish a factual and legal basis upon which to assert that these
AFS were correct and should
be accepted in place of those prepared by
MNG.
Discussion
[15]
In my view the court
a quo
misdirected itself with regard to the question of prejudice to the
respondent. The applicant’s difficulties with the
assessment had been extensively addressed by way of the notice of
objection, the request for a reduced assessment, and other
communications.
The respondent in my view indicated that it
could not take the matter any further when it suggested a review to
the High Court.
In setting out the points in
limine
in the answering affidavit, Ms van Niekerk did not mention that the
respondent would have investigated the matter further had there
been
compliance with the Act. She merely said that the application
was not properly before the court. While the applicant’s
interpretation of the concluding sentence of the respondent’s
letter was at best somewhat strained, his assertion that he
was not
aware of the procedural provisions of the Act cannot be discounted,
even though he should have consulted the Act before
launching the
application.
[16]
As far as the prospects of success are concerned, it is so that
precise details of what should not have been included in gross
income
were lacking. On the other hand, in my view it may be said that
the contention that the assessment was based on the
incorrect AFS was
not squarely addressed by the respondent, particularly in the light
of the acceptance of new taxable profits.
Although the
respondent referred to s 222 and s 223 of the Act when dealing with
the penalties imposed, the shortfall on which
the 150% was imposed
was not fully explained. A shortfall is described in s
222(3)(a) of the Act as the difference between
the amount of tax
properly chargeable and the amount of tax which would have been
chargeable if the understatement had been accepted.
Again this
is important in the light of the contention that the assessment was
based on the incorrect AFS. Further the applicant’s
complaint about the percentage penalty selected by the respondent
merits at least some consideration. These are all matters
which
should be fully ventilated, in the interests of justice.
[17]
In my view it cannot be said that there are no prospects of success
and I bear in mind what was said in
Brummer
(
supra
)
that the prospect of success is not the only factor to be considered.
The matter is of great importance to the respondent,
given the
very large amount of the assessment. As the court
a
quo
said in its judgment in
the application for leave to appeal, “the case at hand could
result in the Applicant’s financial
ruin”.
[18]
For the above reasons I am of the view that the court
a
quo
should have granted
condonation and proceeded to hear the application on the merits.
With regard to the costs of the condonation
application, while the
appellant was seeking an indulgence, I am of the view that it would
be fair to order that each party should
pay their own costs
occasioned by the opposition to that application.
[19]
The order of the court
a quo
in the application for leave to appeal was as follows:
“
(a) leave to
appeal is granted to a full court of this Division, subject to the
condition that the appeal be limited to:
(i)
A determination of whether the
court
a quo
ought
to have granted condonation of the Applicant’s non-compliance
with sub-sections 11 (4) and (5) of the TAA; and
(ii)
In the event that the court of
appeal determines that condonation ought to have been granted,
whether the court
a quo
ought to have granted to
the Applicant the relief that he sought;
(b) costs in the
application for leave are those in the appeal.”
[20]
I am of the view that the second limitation is not appropriate.
The court
a quo
only considered the merits of the application in relation to the
prospect of success, which is a factor to be taken into account
in
deciding whether or not to grant condonation. The merits of the
application were not adjudicated. The court
a
quo
specifically stated
that a finding for the respondent on the points in
limine
would be dispositive of the application and upheld the points in
limine
.
In that case it is appropriate to refer the matter for a
hearing on the merits.
[21]
Lastly, in its judgment the court
a
quo
referred to the
possibility of a referral of the matter to an alternative dispute
resolution process and said that this option
had not been properly
investigated. It stated as follows:
“
The process
underpins the provisions of sub-sections 11 (4) and 11 (5) of the
[Tax Administration Act] as already discussed.
Without
intending to make any pronouncement upon whether or not an
alternative dispute resolution process is still available to
the
Applicant, it would be in the interests of both parties to
investigate such possibility by considering the dispute settlement
provisions contained in Part F of Chapter 9 of the [Tax
Administration Act], read with the rules promulgated under section
103,
prescribing the procedures for alternative dispute resolution.”
[22]
This suggestion has obviously not been taken up, but, again without
being prescriptive, it is a suggestion which is worth consideration
by the parties.
[23]
The following order will issue:
[23.1] The appeal
is upheld with costs.
[23.2] The order of
the court
a quo
is set aside and substituted with the
following order:
“
The
application for condonation is granted. Each party is to pay
their own costs occasioned by the opposition to the application
for
condonation.”
[23.3] The matter
is referred back to the court
a quo
, before a judge other than
Laing AJ, for hearing on the merits of the application, on a date to
be arranged with the Registrar.
_________________________
J
M ROBERSON
JUDGE
OF THE HIGH COURT
LOWE,
J
:
I
agree.
_________________________
M
J LOWE
JUDGE
OF THE HIGH COURT
MLOMZALE,
AJ
:
I
agree.
_________________________
N
MLOMZALE
JUDGE
OF THE HIGH COURT (ACTING)
Appearances:
For
the Appellant: Adv S G Poswa, instructed by Zilwa Attorneys, Mthatha
For
the Respondent: Adv S X Mapoma, State Attorney, Mthatha