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[2012] ZAGPPHC 75
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Pearse v Commissioner for the South African Revenue Service (10498/11) [2012] ZAGPPHC 75 (4 May 2012)
NOT REPORTABLE
IN THE NORTH GAUTENG HIGH COURT.
PRETORIA /ES
(REPUBLIC OF SOUTH AFRICA)
CASE NO: 10498/11
DATE:04/05/2012
IN
THE MATTER BETWEEN
MARTIN
FRASER WINGATE
PEARSE
................................................................
APPLICANT
AND
COMMISSIONER
FOR THE SOUTH AFRICAN
REVENUE
SERVICE
.........................................................................................
RESPONDENT
JUDGMENT
PRINSLOO.
J
[1]
In this review application the applicant seeks the reviewing and
setting aside of decisions of the respondent to issue certain
tax
assessments and also to persist with and refuse to withdraw the
assessments.
[2]
There is also an application for condonation of the applicant's
failure to institute this application within the time limits
prescribed by the Promotion of Administrative Justice Act 3 of 2000
("PAJA"), alternatively an application to ' extend
the
prescribed period in terms of section 9(1) of PAJA.
[3]
Before me, Ms Cane SC, assisted by Ms Boltar appeared for the
applicant and Mr Snyman SC, assisted by Ms Naude, appeared for
the
respondent.
Introduction
and background
[4]
The respondent investigated the applicant's tax affairs, which
culminated in a warrant for search and seizure in terms of section
74D of the Income Tax Act, Act 58 of 1962 ("the Income Tax Act")
and section 57D of the'Value Added Tax Act, Act 89 of
1991 ("the
VAT Act") being issued during November 2004 by a judge of this
court.
[5]
The warrant for search and seizure was executed during April 2005 and
documents, information and other articles were seized
in terms
thereof.
[6]
As a result of a so-called "capital reconciliation"
performed by the respondent and his officials, it was concluded
that
the respondent had grossly understated his taxable income for the
years 1998 to 2005.
[7]
On or about 18 April 2006 the respondent issued additional estimated
income tax assessments in terms of section 79 of the Income
Tax Act,
read with sections 76, 78 and 89 quat thereof, for the applicant's
1998 to 2004 years of assessment.
[8]
On or about 18 April 2006 the respondent raised an original estimated
income tax assessment for the applicant in respect of
his 2005 year
of assessment in terms of section 77 of the Income Tax Act, read with
sections 76 and 89 quat thereof.
[9]
In terms of these assessments the applicant's additional tax
liability for each year of assessment ("the relevant years",
namely 1998 to 2005), including normal tax, additional tax, interest
and penalties was fixed in certain amounts appearing on '
schedules
supplied by the respondent and forming part of the record.
[10]
These additional assessments issued in terms of the aforesaid
statutory provisions in respect of the relevant years in April
2006
will be referred to in this judgment as "the 2006 assessments".
[11]
On or about 2 May 2006, the applicant, as he was entitled to do.
requested written reasons for the April 2006 assessments in
terms of
the relevant provisions of the Income Tax Act and rules, and on or
about 15 May 2006 the respondent duly complied and
provided such
reasons.
[12]
The applicant lodged an objection in terras of the provisions of
section 81 of the Income Tax Act. read with rule 4 of the
Tax Court
rules, against the April 2006 assessments on or about 27 June 2006.
[13]
On or about 26 March 2007, the respondent partially allowed and
partially disallowed the applicant's objections and the applicant
was
duly notified about the respondent's decision in writing. Reduced
assessments were issued to give effect to this decision in
terms of
section 81 of the Income Tax Act read with rule 5 of the Tax Court
rules.
[14]
These reduced assessments, issued on or about 26 March 2007, will be
referred to in this judgment as "the 2007 assessments".
[15]
On or about 1 August 2007 the applicant lodged an appeal against the
partial disallowance of his objection in terms of section
83 of the
Income Tax Act, read with rule 6 of the Tax Court rules.
[16]
In his notice of appeal, the applicant indicated in respect of which
of the grounds specified in his objection he was appealing
and he
also included new grounds not previously raised as part of his
objection.
[17]
The respondent considered himself duty bound to consider the new
grounds and came to the conclusion that some of them are valid
and
should be allowed. In the result, the respondent issued further
reduced assessments for the relevant years on or about 14 May
2008
(these will be referred to in this judgment as "the 2008
assessments") to give effect to the further reduction.
[18]
The respondent was empowered to issue these further reduced
assessments in terms of section 81 of the Income Tax Act. read
with
rule 5 of the Tax Court rules and/or section 83(1 C) of the Income
Tax Act read with rule 23 of the Tax Court rules.
[19]
In the meantime, namely on 31 May 2007, the applicant had submitted
an application for amnesty in terms of the Small Business
Tax Amnesty
and Amendment of Taxation Laws Act, Act 9 of 2006 ("the SBTA
Act") and the Second Small Business Tax Amnesty
and Amendment of
Taxation Laws Act, Act 10 of 2006 ("the Second SBTA Act").
In
terms of the same legislation, the applicant also applied for the
waiver of additional tax, interest and penalties ("the
waiver
application").
[20]
The new grounds raised for the first time in the applicant's
aforesaid notice of appeal did not include a reference to the
fact
that the applicant had applied for amnesty.
[21]
In terms of the 2006 assessments, the respondent taxed estimated
undeclared income in the total amount of some R24.5 million
and the
applicant's total additional tax liability, including normal tax,
additional tax. and section 89 quat interest and penalties
was fixed
at some R41,7 million. This tax liability was reduced, as described,
in terms of the 2007 assessments and further reduced
in the 2008
assessments to a tax liability including normal tax, additional tax,
section 89 qua! interest and penalties in an amount
of R19 191
583,86,
[22]
In raising the additional assessments, the reduced assessments and
the further reduced assessments of May 2008. the respondent
was duly
carrying out the provisions of the Income Tax Act.
[23]
In the meantime, the amnesty unit of the South African Revenue
Service considered the applicant's application for amnesty and
in a
letter of 19 September 2008, the applicant was informed by SARS that
"in terms of the Small Business Tax Amnesty Legislation,
you are
hereby advised that your application has been approved subject to
receipt of full payment of the amnesty levy". There
was an
earlier letter bearing the same good tiding dated 21 February 2008
which, according to the applicant, was not brought to
his attention.
[24]
Due to various reasons, not relevant for purposes of this
application, SARS, on or about 12 March 2009. caused a judgment,
as
contemplated in section 91(l)(b) of the Income Tax Act to be entered
against the applicant in respect of the outstanding assessed
income
tax liability.
[25]
In March 2009, the applicant launched an urgent application in the
South Gauteng High Court for interim interdictory relief
restraining
the respondent from collecting the tax due In respect of the
additional, revised and reduced assessments referred to.
This
urgent application was settled pending determination of the tax
appeal (to which I have referred) against the assessments raised
by
the respondent for the relevant years. In terms of the settlement,
the respondent would hold back recovery steps pending the
outcome of
the tax appeal and the applicant would make a certain interim
payment. The applicant would also cede, in securhatem
debiti his
right, title and interest in and to his shareholdings and member's
interest in some eleven close corporations who were
also parties to
this settlement agreement, which is part of the record.
[26]
The tax appeal was set down for hearing on 19 November 2010, in the
Tax Court.
[27]
At a pre-trial conference, held on 13 September 2010. the applicant
gave notice of his intention to raise three points in limine
during
the hearing of the tax appeal: these were, firstly, whether the tax
amnesty granted to the applicant in terms of the SBTA
Act invalidates
the assessments and renders the appeal academic.
secondly,
whether the search and seizure referred to earlier was lawful and,
thirdly, whether the applicant's constitutional rights
as a taxpayer
had been offended through the search and seizure operation.
[28]
At the pre-trial conference, the respondent adopted the attitude that
the Tax Court did not have jurisdiction to entertain
these points in
limine.
At
a second pre-trial conference, held on 2 November 2010, the point
taken on jurisdiction by the respondent was conceded and the
applicant indicated that he would seek a postponement of the tax
appeal so that he could argue the points in limine in a court
with
jurisdiction to entertain them.
[29]
On 19 November 2010, the Tax Court made an order postponing the tax
appeal sine die and directing the applicant (as appellant)
to pay the
wasted costs occasioned by the postponement. It was also ordered that
the applicant was to launch his application for
declaratory relief to
the effect that the assessments in respect of the relevant years were
invalid on the three points mentioned,
on or before 15 February 2011.
The
application, which is the one that is now under consideration, was
duly launched on the appointed day, but the applicant only
relies on
the first of the three grounds, clearly abandoning the other two
grounds.
[30]
So much for the background of the case. I turn to an application to
strike out launched by the applicant, as well as certain
preliminary
arguments which ought to be dealt with at the outset.
The
application to strike out
[31]
In an application in terms of rule 6(15) of the Uniform Rules of
Court, the applicant seeks to strike out the first portion
of the
answering affidavit comprising paragraphgraphs 8 to 77. This deals
with "chronology and background".
[32]
The only subparagraph not targeted for striking out in this section
of the answering affidavit, are those recording the reducing
assessed
tax liability as the objections to the 2006, 2007 and 2008
assessments were partially allowed as the process unfolded.
[33]
Rule 6(15) reads as follows:
"The
court may on application order to be struck out from any affidavit
any matter which is scandalous, vexatious or irrelevant,
with an
appropriate order as to costs, including costs as between attorney
and client. The court shall not grant the application
unless it is
satisfied that the applicant will be prejudiced in his case if it be
not granted."
[34]
It was submitted by counsel on behalf of the respondent, in opposing
this application, that the evidence contained in this
portion of the
answering affidavit is relevant and needs to be taken into account in
adjudicating the application.
[35]
The portion targeted for striking out deals with the search and
seizure operation which led to the various additional and increased
assessments being raised by the respondent and his staff. Paragraphs
8 to 13 set out the circumstances in which the 2006 assessments
were
raised. Paragraph 14 explains the process adopted by the respondent
to estimate the applicant's undeclared income. This must
be relevant
evidence and also important from the point of view of the applicant.
Paragraphs 5 to 18 set out the basis of the 2006
assessments and
introduce a schedule illustrating the financial implications of all
the assessments raised, which contain material
information and also
introduce the respondent's reasons for the 2006 assessments.
Paragraphs 19 to 27 provide the factual background
regarding the
objection noted by the applicant against the 2006 assessments and
describe the partial allowance and the basis for
the 2007 reduced
assessments. Paragraph 28 deals with the facts relating to the
applicant's submission of the amnesty applications.
[36]
The remainder of the paragraphs deal with inter alia the further
facts provided by the applicant, the respondent's consideration
thereof, the notice of appeal and the raising of the 2008 further
reduced assessments. It provides the chronology leading up to
the
launching of this application.
[37]
The annexures introduced by these paragraphs contain, inter alia, the
information that was taken into account by the respondent
in reaching
the decision to raise the 2008 assessments.
[38]
Most notably, the applicant, in the replying affidavit, refers to a
series of annexures introduced by the paragraphs sought
to be struck
out.
[39]
Some of the topics introduced by the portion of the affidavit sought
to be struck out are dealt with in some detail in the
heads of
argument offered on behalf of the applicant. These include the 2006
assessments and the 2007 assessments.
[
40] The only argument of note offered by the applicant in support of
this striking out application is that all the allegations
are
"prejudicial as they deliberately seek to cast the applicant in
an adverse light without in any way contributing to the
determination
of the issue. They are purely atmospheric and, unless struck out
would cause unnecessary prolixity and costs ..."
[41]
I cannot agree with these submissions of the applicant. In my view,
and for the reasons mentioned, the particulars introduced
by the
paragraphs under attack are clearly relevant and important for
purposes of adjudicating this application. I fail to see
how the
applicant can claim to be prejudiced by a useful, accurate,
chronological summary of the background of the case leading
up to the
launching of the application.
[42]
There is also nothing scandalous, vexatious or irrelevant [as
intended by the wording of rule 6(15)] in the allegations and
explanations contained in these paragraphs now under attack.
[43]
In my view, there is no merit in the striking out application.
[44]
The order that I make, which will be repeated at the end of this
judgment, is that the application to strike out is dismissed
with
costs including the costs of two counsel.
Did
the decisions taken by the respondent, now under attack in this
review application-amount to "administrative action"
as
defined in PAJA?
[45]
The relevant prayers in the notice of motion dealing with the relief
sought read as follows:
"2.
Reviewing and setting aside the decisions of the respondent to issue
the assessments of 15 May 2008 and/or to persist with
and refuse to
withdraw the aforesaid assessments once amnesty had been granted to
the applicant in terms of the Small Business
Tax Amnesty and
Amendment Act 9 of 2006 and the Second Small
Business
Tax Amnesty and Amendment of Taxation of Laws Act 10 of 2006.
3.
Alternatively, declaring the respondent's aforesaid decisions to be
in conflict with the constitutional principle of legality
and'
accordingly unconstitutional, unlawful and invalid."
[46]
In terms of section 1 of PAJA "administrative action" means
"Any
decision taken, or any failure to take a decision, by -
(a)
an organ of state, when-
(I)
...
(ii)
exercising a public power or performing a public function in terms of
any legislation; or
(b)
a natural or juristic person, other than an organ of state, when
exercising a public power or performing a public function in
terms of
an empowering provision, which adversely affects the rights of any
person and which has a direct-external legal effect,
but does not
include - ..." (Emphasis added.)
[47]
The exclusions to be found in this definition are not relevant for
present purposes.
[48]
In terms of section 1 of PAJA, "organ of state" bears the
same meaning assigned to it in section 239 of the Constitution.
[49]
In terms of section 239 of the Constitution. Act 108 of 1996. "organ
of state" means -
"(a)
any department of state or administration in the national, provincial
or local sphere of government; or (b) any other
functionary or
institution -
(i)
exercising a power or performing a function in terms of the
Constitution or a provincial constitution; or
(ii)
exercising a public power or performing a public function in terms of
any legislation,
but
does not include a court or a judicial officer;"
I
am in respectful agreement with the submission made on behalf of the
applicant that the South African Revenue Service, as represented
by
the respondent is clearly "any other functionary or institution
exercising a public power or performing a public function
in terms of
any legislation".
In
the result, I am of the view that the respondent took the decisions
now under attack in the review application as an organ of
state as
intended by the section 1 PAJA definition read with the section 239
definition in the Constitution. It follows that the
decisions taken
amounted to "administrative action" as defined in PAJA so
that PAJA will find application for purposes
of these review
proceedings.
[51]
Authority for this proposition can also be found in Metcash Trading
Ltd v Commissioner South African Revenue Service &
Another
2001 1
SA 1109
(CC) at 1130C-Fand 1136F-G.
[52]
The main thrust of the respondent's argument that the decisions under
attack are not "administrative action" in the
spirit of
section 1 of PAJA, is based on the portion of the section 1 PAJA
definition (emphasised above when quoting the definition)
that
administrative action involves a decision taken "which adversely
affects the rights of any person and which has a direct,
external
legal effect, ..."
[53]
The attitude of the respondent is expressed as follows in the
opposing affidavit:
"I
deny that the raising of the May 2008 further reduced assessments is
administrative action within the meaning of section
1 of PAJA. The
raising of these assessments is an action by SARS, which is to the
benefit or in favour of the applicant."
[54]
The argument, if I understand it correctly, is that where the 2008
assessments, and, for that matter, also the 2007 assessments,
significantly reduced the tax liability of the respondent as
initially reflected in the 2006 assessments, the decision to raise
the 2008 assessments cannot be said to "adversely affect the
rights" of the respondent so that the decision cannot fall
within the ambit of "administrative action" as intended by
the section 1 PAJA definition.
[55]
In countering this argument, I was referred by counsel for the
applicant to the following passage from Greys Marine Hout Bay
(Pty)
Ltd & Others v Minister of Public Works & Others
[2005] ZASCA 43
;
2005 6 SA
313
(SCA) at paragraph
[23]
:
"While
PAJA's definition purports to restrict administrative action to
decisions that, as a fact, 'adversely affect the rights
of any
person', I do not think that literal meaning could have been
intended. For administrative action to be characterised by
its effect
in particular cases (either beneficial or adverse) seems to me to be
paradoxical and also finds no support from the
construction that has
until now been placed on section 33 of the Constitution. Moreover,
that literal construction would be inconsonant
with section 3(1),
which envisages that administrative action might or might not affect
the rights adversely. The qualification,
particularly when seen in
conjunction with the requirement that it must have a 'direct and
external legal effect', was probably
intended rather to convey that
administrative action is action that has the capacity to affect legal
rights, the two qualifications
in tandem serving to emphasise that
administrative action impacts directly and immediately on
individuals."
[56]
In any event, it is argued on behalf of the applicant that the 2008
assessments also "adversely affect" the rights
of the
applicant, because their merits (the amount assessed) are also
challenged in the tax appeal. This is apart from the challenge
on the
validity of the 2008 assessments which forms the subject of this
review-application.
[57]
In the circumstances I am satisfied that the respondent's decisions
under attack in this application fall inside the ambit
of
"administrative action" as intended by PAJA so that this
application is justiciable in terms of that Act.
The
application to extend the prescribed period within which these
proceedings could be instituted in terms of the requirements
of PAJA
alternatively an application for condonation for the late launching
of the proceedings
[58]
In terms of the provisions of section 7 of PAJA, the aggrieved person
affected by the administrative action must institute
the review
application without unreasonable delay and not later than 180 days
after the date on which he or she became aware of
the administrative
action or after the date on which he or she first exhausted relevant
internal remedies available prior to launching
a review application,
[59]
In terms of section 9 this period of 180 days can be extended by
agreement between the parties or by a court on application.
The
latter procedure was adopted in this matter. The relevant relief is
sought in paragraph 1.1 of the notice of motion where the
applicant
asks for the period to be extended to the date when the application
was launched, alternatively for condonation in terms
of this court's
inherent jurisdictional powers (paragraph 1.2 of the notice of
motion).
[60]
The submissions made by the applicant in support of his prayer for
the relief contained in paragraph 1 of the notice of motion,
can be
summarised as follows: until the days leading up to the hearing of
the tax appeal the applicant and his legal advisors were
under the
impression that the question of the validity of the 2008 assessments
in the face of the amnesty granted could be determined
by the Tax
Court. It is after the two legal teams entered into discussion on the
subject that they came to the conclusion that
this argument could not
be raised before the Tax Court which did not have jurisdiction
to'rule on the matter. I already pointed
out that the issues were
debated in the September 2010 pre-trial conference and later in the
November 2010 pre-trial conference,
shortly before the scheduled
hearing of 19 November 2010. Had the applicant known or been advised
of this potential problem he
would have instituted the application
timeously and within the period prescribed in section 7(1) of PAJA.
[61]
Moreover, the order of I9November 2010, supra, to the effect that
this application had to be launched in a court with jurisdiction
to
entertain the matter by not later than 15 February 2011, was made by
agreement between the parties and the application was timeously
launched in compliance with that order.
[62]
In opposition to the applicant's quest to obtain this relief, the
respondent argued that the applicant already raised the issue
of
attacking the assessments in the face of the amnesty that had been
granted in the process of launching the urgent application
in 2009.
Accordingly, it was argued on behalf of the respondent that the
application could have been launched earlier and timeously.
I
consider this argument to be unconvincing in the circumstances. In my
view the respondent does not have a legitimate answer to
the fact
that it was agreed before the Tax Court that this application could
be launched by 15 February 2011 and to the fact that
it was timeously
done.
[63]
In the result. I am of the view that the relief sought in prayer 1.1
of the notice of motion should be granted, and I order
accordingly.
The
essence of the dispute between the parties
[64]
The origin of the dispute is to be found in the wording of section 10
of the SBTA Act, and. more particularly, section 10(c).
It
is convenient to quote the relevant passages:
"10.
Circumstances where tax amnesty relief does not apply. - The
Tax
amnesty relief does not apply in respect of any amount of tax, levy,
contribution, interest, penalty or additional tax, to the
extent that
it-
(a)...
(b)
...
(c)
is payable by the applicant in terms of an assessment issued by the
Commissioner before the submission of the application; or
(d)
..."
[65]
The application for amnesty was lodged (submitted) on 31 May 2007.
This was after the 2007 assessments were raised in March
of that year
but before the 2008 assessments were raised in May of 2008. There is
some uncertainty, judging by the evidence, whether
the amnesty
application was submitted on 31 May 2007 or on 28'May 2007. Nothing
turns on this because it is common cause that the
amnesty application
was submitted, as intended by the provisions of section 10(c) of the
SBTA Act ("section 10(c)") before
the 2008 assessments were
raised.
[66]
In the founding affidavit, tentative submissions are made to the
effect that the date of promulgation of the amnesty legislation
(in
July 2006) is of relevance, but this is not the case, neither was any
argument based on the date of promulgation pursued before
me. Indeed,
the persistent reference to the date of promulgation as being
relevant to the enquiry, renders the founding affidavit
confusing and
flawed, although not fatally so.
[67]
Although, somewhat surprisingly, the founding affidavit contains no
reference to section 10(c), the basic argument is advanced
that the
2008 assessments extend to certain taxes not previously "due"
before the end of the 2006 income tax year of
assessment, which taxes
were covered by the scope of the amnesty granted in September 2008
(or perhaps in February 2008, as I previously
explained, but this is
not relevant for present purposes).
[68]
In the replying affidavit, the applicant gets closer to the mark by
specifically dealing with the provisions of section 10(c)
and
recognising that the issue for decision is whether the 2008
assessments include tax. interest, penalties or additional taxes
not
payable by the applicant in terms of assessments issued by the
respondent before the submission of the amnesty application.
[69]
In the replying affidavit, for the first time, the applicant makes
mention of certain taxes which, according to him, were not
raised in
assessments issued before the amnesty application was lodged. I will
return to this subject.
[70]
In the opposing affidavit, the respondent emphatically denies that
the income tax, additional tax. penalties and interest as
raised in
the 2008 assessments are covered by the scope of the amnesty granted.
The
respondent submits that the 2008 assessments merely reduced the
applicant's existing tax liabilities in respect of income tax.
additional tax. penalties and interest in accordance with the partial
allowance, supra, of the applicant's objections. The applicant
only
applied for amnesty in May 2007 and the assessments that were revised
and reduced in 2007 and 2008 were raised as long ago
as April 2006.
[71]
The respondent acknowledged in the opposing affidavit that the
applicant also applied for a waiver of penalties and interest
and
that such waiver (up to a maximum of Rl million) was granted to the
applicant. It was submitted by the respondent that once
the pending
tax appeal has been finalised and if the Tax Court upholds the
assessments or partially upholds the assessments, such
waiver will be
applied to the penalties and interest due by the applicant in respect
of the assessments over the relevant years.
This "acknowledgement"
is contained in paragraph 101 of the opposing affidavit and in
paragraph 157 it is repeated that
the Rl million waiver will only be
applied to the additional tax, penalties and interest still due after
the pending tax appeal
has been finalised.
In
their heads of argument, counsel for the applicant argued that by
these "acknowledgements" the respondent "conceded
that
he is seeking to hold the applicant liable for amounts of interest
which the applicant is not liable to pay in terms of the
Income Tax
Act". It was submitted in the heads of argument on behalf of the
applicant that based on this ground alone, the
application should be
granted and the respondent should be ordered to issue new assessments
in respect of the relevant years. During
the proceedings before me
counsel for the applicant confirmed that I need not decide the
argument relating to the waiver, such
as it is. It was confirmed that
this "issue" would be up for decision in the tax appeal. It
was argued, however, that
because of these "concessions"
the costs flowing from the waiver issue should be paid'by the
respondent. I see no acceptable
basis for such a proposal. Inasmuch
as it may indeed be a triable "issue" it will be dealt with
in a tax appeal.
[7
2] In the opposing affidavit, the respondent denies the applicant's
allegations that the 2006 assessments are not relevant to
the present
application as they "were replaced" by the subsequent
assessments in 2007 and 2008. It was pointed out by
the respondent,
correctly in my view, that to the extent that the 2006 assessments
were not reduced, the amounts remained assessed
and due and the
assessments were not altered. The 2006 assessments are relevant to
this application. They are the assessments,
revised and reduced by
the 2007 and 2008 assessments and they form the basis of the pending
tax appeal. The undeclared income that
was subjected to the 2006
assessments, is still the same undeclared income subjected to tax in
both the 2007 and 2008 assessments.
The only purpose of the revised
assessments in 2007 and 2008 was to reduce the estimated undeclared
income in accordance with the
partial allowance of the objections
raised by the applicant. The basis upon which the assessments were
originally raised remains
intact. The taxes reflected in the
assessments for the relevant years became due by the latest at the
end of those years of assessment
to which they related.
[73]
In this regard, the applicant makes the following concession in the
founding affidavit:
"Although
I dispute the correctness of the above assessments issued in April
2006, I do not dispute that certain taxes, penalties
and interest
were assessed by the respondent to be 'due' before the end of the
2006 income tax year of assessment before the promulgation
of the
amnesty legislation (as I have pointed out, this remark about
promulgation is irrelevant) and as such are not covered by
the scope
of the tax amnesty or the waiver of penalties and interest."
In
the opposing affidavit, the respondent submits that this concession,
namely that the taxes assessed with the 2006 assessments
are neither
covered by. the provisions of the SBTA Act nor by the amnesty granted
to the applicant, is fatal to the applicant's
application. In my
view, there is much to be said for this submission, given the
provisions of section 10(c). although it is met
with a denial in the
replying affidavit.
[74]
This same issue again rears its head later on in the founding
affidavit (paragraph 22) where the applicant states that he lodged
the amnesty application in respect of taxes not assessed by the
respondent to be "due" before the 2006 income tax year
of
assessment together with the waiver application in respect of
penalties and interest not assessed by the respondent to be due
in
respect of the years of assessment falling before the end of the 2006
income tax year of assessment.
In
response to this, the respondent, in the opposing affidavit, repeats
the earlier argument by stating:
"It
is noted that the applicant admits that such application could only
have been submitted in respect of tax liabilities due
on income not
previously assessed. In the result, the applicant's amnesty
application did therefore not cover the taxes assessed
with the April
2006 additional assessments. Since those assessments are the only
assessments relevant for purposes of the tax appeal
currently before
the Tax Court, the applicant's application is factually flawed and
legally untenable."
In
the replying affidavit the applicant states that these remarks of the
respondent shows "his fundamental misunderstanding
of the legal
effect of the amnesty which was granted ..."
Given
the provisions of section 10(c) to the effect that tax amnesty relief
does not apply in respect of taxes payable in terms
of an assessment
issued by the Commissioner before the submission of the application,
and given the respondent's compelling argument
that the 2007 and 2008
assessments did not determine a new tax liability but only reduced
the previously (2006) assessed and due
liability, I am of the view
that there is merit in the stance adopted by the respondent: on the
applicant's own admission, his
amnesty application only involved
taxes not previously assessed. From this it follows that the taxes
"previously assessed",
as in the 2006 assessments, are not
covered by the amnesty relief subsequently granted because of the
provisions of section 10(c).
[75]
In his comprehensive opposing affidavit, the respondent repeatedly
denies that any taxes, penalties or interest were raised
in the 2008
assessments that were not previously raised in the 2006 or 2007
assessments [the latter assessments also before the
amnesty
application was submitted as intended by section 10(c)]. The basis
for the assessment did not change. It remained an estimate
by SARS of
the applicant's undeclared taxable income. Only the amount was
reduced.
It
was pointed out by counsel for the respondent that in appropriate
cases the respondent is entitled to rely on estimated assessments.
Section 78(1) of the Income Tax Act reads as follows:
"(1)
In every case in which any person makes default in furnishing any
return or information or the Commissioner is not satisfied
with the
return or information furnished by any person, the Commissioner may
estimate either in whole or in part the taxable income
in relation to
which the return or information is required."
[76]
In this case, part of the applicant's estimated taxable income
(grossly under declared by the applicant as 1 pointed out) as
assessed by the respondent after the
search
and seizure operation, comprised "private and domestic
expenses". These expenses were estimated by the respondent
in
respect of each of the eight relevant years on the strength of all
the information available after the search and seizure exercise.
For
purposes of the 2007 assessment, also taking into account the
objection lodged by the applicant against the 2006 assessments,
the
respondent^ for example, calculated the total amount of
expenses/taxable income in respect of "private and domestic
expenses"
in the amount of R2 634 865.00. Similar exercises were
done with other alleged expenses/taxable income namely R3 905 245,00
in
respect of "bank statement debit" and R720 528.00 in
respect of "cash books". These exercises were all performed
on the strength of powers vested in the respondent by the Income Tax
Act. The three sources of expenses/taxable income were added
together
and the total amount of R7 260 639.00 was divided by eight (the
number of relevant years) resulting in an estimated taxable
income of
R907 579,00 per annum. For practical considerations and, presumably,
to reduce or eliminate the margin of error, this
amount was reduced
by some 12% resulting in a figure of an estimated R800 000.00 per
annum taxable income. Of course, all this
happened before the amnesty
application was lodged in May 2007 so that the amnesty relief would
not apply to this assessment.
[77]
Although not being familiar with the details of the tax appeal that
is pending, I assume that the merits of this assessment
and the
method of calculating the annual taxable income, will be an issue
tabled for consideration by the Tax Court.
[78]
As to the 2008 assessments, the respondent embarked on the same
exercise except for the fact that some of the figures arrived
at in
respect of each of the relevant years in respect of "private and
domestic expenses/taxable income" were reduced
in view of new
information which came to hand primarily through the objections and
new grounds of appeal advanced by the applicant.
The same applies to
the estimated figures in respect of "bank statement debit"
and "cash books".
After
the total amount was divided by eight (like in 2007) the annual
estimated figure for taxable income came to R831 282,00. This
time,
the respondent reduced that figure by a discretionary 4%
(approximately) still resulting in a total estimated taxable income
of R800 000,00 per annum.
All
this information appears from a somewhat elaborate (but helpful)
exercise done by the applicant for purposes of compiling his
replying
affidavit. The figures I have mentioned are based on what is stated
in the replying affidavit.
[79]
Of course, the merits of this exercise and these calculations will
come up for discussion, so I assume, during the course of
the hearing
of the tax appeal before the Tax Court.
[80] In my view, none of this can
assist the applicant in persuading me that the estimated taxes
exposed by these exercises were
not payable by the applicant in terms
of assessments issued by the respondent before the submission of the
amnesty application
as intended by the provisions of section 10(c).
If anything, these exercises clearly exhibit, in my view, that the
2007 and 2008
assessments only represented reductions of the 2006
assessments as repeatedly stated in the opposing affidavit.
[8I]
On the question of altering or reducing (like in this case)
assessments upon receipt of objections by the taxpayer, I was
referred by counsel for the respondent to the provisions of section
81(4) of the Income Tax Act, which stipulate:
"(4)
The Commissioner may on receipt of a notice of objection to an
assessment alter the assessment or may disallow the objection
and
shall send to the taxpayer or his or her representative notice of
such alteration or disallowance, and record therein any alteration
or
disallowance made in the assessment."
In
this regard, the respondent points out in his opposing affidavit that
he was entitled, and in fact duty bound, in terms of the
aforesaid
legislative provisions, to issue the 2007 assessments and later the
2008 assessments under circumstances where he was
persuaded that his
estimate in terms of the 2006 assessments were over-stated. This
conduct appears to me to be in line with the
powers vested in the
respondent by the relevant legislation.
[82]
I turn briefly to efforts by the applicant to single out certain
evidence in the record, running into almost 400 pages, which
may
demonstrate items assessed in the 2008 assessments which were not
assessed before the amnesty application was submitted as
intended by
the provisions of section 10(c).
[83]
No details of such alleged items are disclosed in the founding
affidavit. In paragraph 5 of the founding affidavit the applicant
merely refers to annexures "FA7.1" to "FA7.5",
being copies of schedules prepared by the respondent and attached
to
the 2008 assessments. It is alleged that these schedules confirm that
taxes, penalties and interest not previously assessed
to be "due"
in the 2007 assessments were for the first time assessed to be "due"
in the 2008 assessments.
[84]
In a lengthy answer to these allegations, (paragraphs 132 to 150 of
the answering affidavit) the respondent emphatically denies,
repeatedly, that these allegations are correct.
[85]
I have already dwelled on the stance adopted by the respondent on
this subject, which is really the central issue of the case
before
me. but I add that his answer to the bold allegation contained in the
founding affidavit can perhaps be summarised as follows:
no taxes (or
penalties and interest) were included in the 2008 assessments which
were not already previously assessed in respect
of the relevant
years. The annexures referred to by the applicant are extracts of
schedules that were used to estimate the applicant's
undeclared
income. It is clearly indicated in the respondent's statement of
grounds of assessment that he used certain calculations
to estimate
the applicant's undeclared income. These calculations and the
conclusions reached based thereon are. as I have already
pointed out.
the subject-matter of the pending tax appeal.
In
the process of estimating the applicant's undeclared income (which
was done by way of a capital reconciliation and a living expense
estimation), a process was included by which the respondent took the
information at his disposal, categorised it, analysed it and
then
based on those results, estimated the amount of income that the
applicant had to have at his disposal. I have already referred
to
this when dealing with the estimate of R800 000,00 per annum taxable
income, supra. As already briefly illustrated, one of these
processes
involved the analysis of the applicant's private and domestic
expenses obtained from invoices, bank statements, cash
books and
other financial records. These were then grouped together, sorted in
the various years of assessment and analysed. The
annexures referred
to in the founding affidavit are working papers of the SARS auditors
used during the process of calculation.
The respondent also attaches
to the opposing affidavit, as SARS 29, an extract from the SARS
statement of grounds of assessment
where the basis of estimation and
the amounts were duly set out. These I have already alluded to.
Coupled
with his repeated denial that any taxes, penalties or interest were
raised in the 2008 assessments that were not previously
raised in
2006 and 2007, the respondent points out that in the 2008
assessments, by their very nature, since they were reduced
assessments, nothing made an appearance "for the first time"
as alleged by the applicant, i
[86]
In the replying affidavit, for the first time, some details are
advanced in an effort to suggest the presence in the annexures
"FA7.1" to "FA7.5" of "new taxes" and
"new penalties and interest" not appearing in the
earlier
assessments before the amnesty application was submitted.
In
my debate with the applicant's counsel during the hearing, it emerged
that there were only two such items relied upon by the
applicant:
(i)
in "FA7.2", which is a working document relating to the
1998 financial year, there is reference of an insurance payment
from
the applicant's "LIB policies" in 1996 coming to some R145
000.00. The entry is made in the working papers that
"The
amount therefore received from this policy is from unexplained
income. This amount has therefore been excluded."
Counsel's
argument, if I understood it correctly, was that "excluded"
in this sense means excluded from earlier assessments
so that it was
now-included in the 2008 assessments "to boost the newly
assessed taxable income".
(ii)
The second item relied upon is found in the working papers of the
1999
financial year and refers to a miscellaneous entry in the
applicant's cashbook of some R300 000,00. The entry in the working
document,
"FA7.3", is difficult to read but it states
"Details
regarding this payment is unknown. The credit could be taxable income
and therefore has been excluded ... (illegible)."
The same
argument was advanced by counsel, namely that "excluded"
means that it was excluded from the earlier assessments
and now "used
to boost the taxable income", presumably as part of the 2008
assessments.
[87]
1 debated the submissions in some detail with Mr Snyman for the
respondent. He argued strongly that there was no question of
new
items being introduced in the 2008 assessments. He referred me to
"FA7.1", which is part of the working documents
of the SARS
auditors, and displays a- comparison between the old assessment
(2007) and the new assessment (2008) of estimated private
and
domestic expenses of the applicant. If I understood the argument
correctly, the two items relied upon by the applicant were
part of
the tax liability assessment reflected in the 2007 assessments, in
the amount of some R22,8 million and also part of the
reduced tax
liability assessed in the amount of some R 19.19 million in the 2008
assessments. Included in these larger assessments,
of course, is the
calculation of R800 000,00 per annum taxable income flowing from the
private and domestic expenses and other
categorised items as already
illustrated. The R800 000,00 estimate, of course, already formed part
of the 2007 assessments which
were issued before submission of the
amnesty application and therefore not subject to the amnesty in terms
of the provisions of
section 10(c). The same applies to the unchanged
estimate reflected in the 2008 assessments.
[88]
Against this background, I was not persuaded by applicant's counsel,
during their address in reply, that any newly assessed
items in the
2008 assessments, which were not assessed before, had been shown to
exist and to qualify for the amnesty relief as
intended by section
10(c).
[89]
It should be borne in mind that the two relatively insignificant
items rather speculatively singled out on behalf of the applicant
only form part of a larger estimate (R800 000,00 per annum estimated
taxable income) validly made in terms of section 78 of the
Income Tax
Act and this estimate remained unchanged from the 2007 assessments to
the 2008 assessments. The "merits" of
the assessments will
be debated during the tax appeal.
[90]
In terms of the provisions of section 82 of the Income Tax Act. the
burden of proof that any amount is exempt from or not liable
to any
tax chargeable or subject to any deduction, abatement or set off in
terms of the Income Tax Act or to be disregarded or
excluded "shall
be upon the person claiming such exemption, non-liability, deduction,
abatement or set off, or that such amount
must be disregarded or
excluded …"
[91]
In my view, the applicant failed to discharge this burden of proof
for purposes of this review application by failing to show
newly
assessed items of tax reflected in the 2008 assessments in the light
of the provisions of section 10(c).
[92]
I add that an argument developed by the applicant in the face of an
allegation by the respondent "that the assessed and
not reduced
amount has been running interest in terms of the Income Tax Act since
the second due date of the April 2006 additional
assessments"
was not proceeded with before me and it was agreed by the parties
that this argument, such as it is, will be
ventilated in the tax
appeal.
[93]
Under all the circumstances, I have come to the conclusion that this
application cannot succeed.
The
order
[94]
I make the following order:
1.
The application to strike out is dismissed.
2.
The application is dismissed.
3.
The applicant is ordered to pay the costs which will include the
costs flowing from the employment of two counsel.
WRC
PRINSLOO
JUDGE
OF THE NORTH GAUTENG HIGH COURT
10498-2011
HEARD
ON: 15 FEBRUARY 2012
FOR
THE APPLICANT: JENNY CANE SC ASSISTED BY JULIA BOLTAR
INSTRUCTED BY: ALAN ALLSHWANG &
ASSOCIATES INCORPORATED
FOR
THE RESPONDENT: H G A SNYMAN SC ASSISTED BY C NAUDE
INSTRUCTED
BY: MAHLANGU INCORPORATED