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[2009] ZAGPPHC 28
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KNA Insurance and Investment Brokers (Pty) Ltd (In Liquidation) v South African Revenue Service and Another (15330/05) [2009] ZAGPPHC 28; 71 SATC 155 (17 April 2009)
IN
THE HIGH COURT OF SOUTH AFRICA
(
NORTH GAUTENG HIGH COURT, PRETORIA
)
REPORTABLE CASE
NO: 15330/05
DATE:
17/4/2009
IN
THE MATTER BETWEEN
KNA INSURANCE AND
INVESTMENT
BROKERS (PTY) LTD (IN
LIQUIDATION) APPLICANT
AND
THE SOUTH AFRICAN
REVENUE SERVICE 1
ST
RESPONDENT
THE COMMISSIONER FOR
THE SOUTH AFRICAN
REVENUE
SERVICE 2
ND
RESPONDENT
JUDGMENT
SITHOLE,
AJ
(A)
INTRODUCTION
[1] 0n 12 June 2006, the Applicant filed an application in this
Court in terms of which he seeks the relief mentioned in paragraph
[2] below. The matter was heard by me on the opposed roll of 20 June
2006. At the end of argument it became necessary
that judgment
be reserved as the matter involved abstruse principles of Tax Law and
counsel, in their argument, had made copious
references to case law
and to old authorities such as
Voet
and
Groenewegen
, as
well as modern legal textbooks. What appears to be a considerable
time has since passed before I could come round to
finalise
judgment in this matter. This has been on account of circumstances
beyond my control such as poor health and pressure
of work at the Bar
and on the Bench during my acting stints. Any inconvenience which
might have been occasioned to the parties
by the delay is hereby
deeply regretted. Nonetheless, my judgment follows below.
[2] In the relevant notice of motion the Applicant seeks an order in
terms of which-
(a) the Respondent is ordered to pay the Applicant interest
determined in terms of section 89
quat
(4) of the Income Tax
Act, 58 of 1962, on R6 300 000,00 calculated at the
prescribed rate from 30 September 1999
until 17 May 2002;
(b) alternatively, that the Respondent be ordered to issue an
assessment against the Applicant in respect of the 1999 year of
assessment within a reasonable time and thereafter pay the Applicant
the amount of interest determined in terms of section 89
quat
(4)
of the Income Tax Act on R6 300 000,00 calculated at the
prescribed rate from 30 September 1999;
(c) that the Respondent pay the amount of R250 000,00 to the
Applicant, together with interest at the rate of 15,5% per annum
from
7 February 2002, alternatively,
a tempore morae
, to
the date of payment;
(d) that the Respondent pay the Applicant
mora
interest in the
amount of R53 082,19 being the amount calculated at the rate of
15,5% per annum on the amount of R1 250 000,00
for the
period 7 February 2002 to 17 May 2002;
(e) alternatively, to (d) above, that the Respondent be ordered to
pay the Applicant
mora
interest calculated at the rate of
15,5% per annum on the amount of R1 250 000,00
a tempore
morae
, to 17 May 2002.
[3] The parties were duly represented at the hearing. The Applicant
was represented by Adv J M A Cane of the
Sandton
Chambers, whilst the two Respondents were represented by Adv H J de
Wet of the Pretoria Bar.
(B)
THE FACTS
[4] Whereas the Applicant contends and submits that the factual
background narrated by it is common cause, the Respondents maintain
that such background is not relevant to the present application, and
to the extent that it is an exposition of the history of the
matter
from Applicant's point of view, then it is admitted. But to the
extent that the statements of the Applicant's deponent
are factually
incorrect, then such background is denied. For whatever it is worth
and for completeness sake, however, it is necessary
to restate the
factual backdrop against which Applicant's claim has to be evaluated.
It is as follows:
4.1 the Applicant is the wholly-owned subsidiary of KNA Holdings
(Pty) Ltd ("KNA Holdings");
4.2 the Applicant's business was to purchase second-hand endowment
policies in South Africa as the agent of Securefin Limited
("Securefin"). Securefin was a company incorporated in
Jersey. During the period from about March 1998 to November 1999,
Securefin provided (and also procured from an overseas financial
institution) working capital from offshore to enable the Applicant
to
carry on its business;
4.3 The Applicant's erstwhile managing director was David Geoffrey
Alexander ("Alexander"). During about November 1999
it
became apparent that Alexander had been dealing in an irregular
manner with the working capital provided to the Applicant.
As a
result, a police investigation into the affairs of the Applicant and
Alexander commenced. Large scale theft of the financial
resources
that had been made available to the Applicant for the purposes of its
business was uncovered;
4.4 on 24 February 2000 Securefin launched the successful
application for the winding-up of the Applicant;
4.5 the joint liquidators investigated the financial affairs of the
Applicant and it became apparent that in September 1998 the
Applicant
had declared a so called dividend of R10 000 000,00 –
not to its sole shareholder, KNA Holdings
– but to persons
related to the directors or to the directors themselves;
4.6 the company was not in a financial position to have declared the
aforesaid dividend when it did. The erstwhile auditor of
the
company, Mr Retief Smith ("Smith") had prepared the
audited financial statements for the year ending February
1998, and
those audited financial statements show that the Applicant had
carried forward retained reserves in the amount of R585 746,00;
4.7 Stewart Patterson ("Patterson") prepared an accounting
and forensic report and provided balance sheets and income
statements
for the seven month period from 1 March 1998 to 30 September
1998;
4.8 Patterson confirmed that the so called dividend of
R10 000 000,00 did not pass through KNA Holdings' bank
account. He reported,
inter alia
, that the Applicant had made
an operating loss of R1 357 112,00 for the seven months
ended 30 September 1998, which
exceeded the retained reserves
brought forward from the previous year of R585 746,00;
4.9 Patterson reviewed the draft financial statements for the year
ending February 1999 and confirmed that the aforesaid financial
statements were reasonable and that it was accordingly reasonable to
conclude that the Applicant had made a loss amounting to
R4 184 974,00 for the period ended 28 February 1999;
4.10 the so called dividend of R10 000 000,00 could
thus not have been lawfully declared and paid, as it was not
paid to
the Applicant's shareholder and because there was no retained
reserves nor current profits available for distribution as
a
dividend. The Applicant's managing director, Alexander, had merely
described the misappropriation of this amount as a "dividend"
to disguise the theft;
4.11 notwithstanding that the Applicant had not paid a dividend, on
30 0ctober 1998 the Applicant had made a payment to SARS
in the
amount of R1 250 000,00 as secondary tax on companies
("STC"), as if the R10 000 000,00 had
in fact
constituted a "dividend";
4.12 Smith had advised the Applicant that it would be liable for
interest in terms of section 89
quat
of the Income Tax Act, 58
of 1962 ("the Income Tax Act") unless it made a payment of
provisional tax before 30 September
1999. He estimated the
Applicant's liability for provisional tax to be R6 300 000,00,
payment of which by 30 September
1999 would, in his view, be
sufficient to avoid the aforesaid interest. In calculating the
aforesaid amount, Smith was fraudulently
misled as to the profits of
the company and the true reason for its cash resources;
4.13 in accordance with Smith's advice, on 30 September 1999 the
Applicant paid provisional tax in respect of the 1999 year
of
assessment in terms of paragraph 23A of the Fourth Schedule of the
Income Tax Act in the amount of R6 300 000,00.
4.14 It is common cause that the Income Tax Act did not impose any
liability on the Applicant for secondary tax on companies (STC)
and,
as the Applicant had made a loss amounting to R4 184 974,00
for the relevant tax year the Income Tax Act therefore
did not impose
any liability on the Applicant for income tax;
4.15 on 7 February 2002 the attorneys acting on behalf of the
joint liquidators of the Applicant, made a written presentation
to
SARS (Johannesburg 0ffice) for the repayment of the amounts of
R1 250 000,00 and R6 300 000,00, together
with
interest;
4.16 in a letter dated 17 May 2002 the SARS Johannesburg 0ffice
informed the Applicant's attorneys that the amounts claimed
were to
be repaid except for the amount of R250 000,00, which would be
retained "as a reserve in the event of tax
claims against
the estate". Also, that "the claim for the interest to be
paid is noted and will be referred to SARS
Head 0ffice";
4.17 by 30 September 1999 an amount of R6 300 000,00
had been paid to the Johannesburg 0ffice of SARS as provisional
tax
on behalf of the Applicant;
4.18 Applicant had no taxable income for the 1999 tax year of
assessment and as at that date of hearing of this matter, Applicant
had not yet been assessed for the said year of assessment.
(C)
THE ISSUES TO BE DECIDED
[5] The issues between the parties and which have to be decided by
the Court are threefold, namely,
5.1 whether the Second Respondent is liable:
5.1.1 for the payment of interest in terms of section 89
quat
of the Income Tax Act in respect of the amount of R6 300 000,00;
5.1.2 for the payment of
mora
interest in respect of the
amount of R1 250 000,00; and
5.1.3 to refund the Applicant the amount of R250 000,00 together
with
mora
interest.
(D)
THE APPLICANT'S CASE
Payment of interest in terms of section 89
quat
in respect of R6 300 000,00
[6] 0n this issue it was contended and submitted on behalf of the
Applicant that:
6.1 the rate and
quantum
of interest in respect of the amount
of R6 300 000,00 is not in dispute. The total amount of
interest payable is R1 532 194,52;
6.2 after quoting the provisions of section 89
quat
(1) and (4)
it is submitted on behalf of Applicant that since the Applicant paid
an amount of R6 300 000,00 on 30 September
1999 in
terms of paragraph 23A of the Fourth Schedule in respect of
provisional tax for the 1999 year of assessment, the amount
of
R6 300 000,00 thus constitutes the "credit amount"
as defined in section 89
quat
of the Income Tax Act for
purposes of section 89
quat
(4);
6.3 although the Respondent says that "it is not accepted that
it is common cause that the Applicant had no taxable income
for the
1999 year of assessment", that is the only reasonable inference
that can be drawn based on the evidence for the following
reasons:
6.3.1 income tax is a tax levied on "taxable income" as
defined in the Income Tax Act (sections 1 and 5 of the Income
Tax
Act);
6.3.2 the Applicant had no "taxable income" during the 1999
year of assessment, having sustained a significant loss:
6.3.2.1 page 5 of the Applicant's tax return shows a net loss of
R3 961 698,00;
6.3.2.2 the auditor's Annual Financial Statements prepared during
April 2005 and submitted with the tax return confirm the aforesaid;
6.3.2.3 the aforesaid amount differs in an immaterial amount from the
estimated loss of R4 184 974,00 reflected in the
draft
financial statements prepared by the liquidators during 2001;
6.3.2.4 Patterson confirmed the aforesaid draft financial statements
as a reasonable assessment of the position in 0ctober 2001.
6.3.3 The Second Respondent has not disputed any of the aforesaid
figures, furnished any basis for doubting their correctness or
even
suggested that his own audit could establish that the Applicant had
taxable income during the 1999 year of assessment;
6.3.4 in addition, the Second Respondent refunded the amount paid in
respect of provisional tax "on the basis of a decision
…
that the amounts did not constitute taxes properly due and chargeable
at the time". The refunds must have been made
upon a
determination that the Applicant had no taxable income and hence no
liability for tax for the 1999 year of assessment (at the
very
least, not exceeding R250 000,00), because if not, the Second
Respondent acted
ultra vires
in refunding the amounts;
6.3.5 furthermore, the only claims submitted by SARS to the
liquidators were in respect of VAT, which claim was paid in full and
PAYE, which claim was substantially paid. No claim was
submitted in respect of income tax and accordingly the Second
Respondent
did not timeously prove a claim against the company in
liquidation in terms of
section 44
of the
Insolvency Act 24 of 1936
as read with sections 339 and 366 of the Companies Act. The Second
Respondent cannot, after the payment of claims in terms of
a
liquidation and distribution account, reopen that account for the
purpose of submitting a further claim in respect of income
tax,
except if there has been fraud;
Henochsberg on
The Companies Act
, Vol 1 at 865 and the
authorities set out in the notes to section 408 of the Act;
6.3.6 lastly, the Applicant's tax return was submitted on 6 May
2005. To date the Second Respondent has failed to issue
his
assessment notwithstanding that this application was pending. Even
if the assessment could now be relevant, it is submitted
that it is
appropriate to draw an adverse inference against the Second
Respondent and determine this matter on the basis that there
is no
taxable income for the 1999 year of assessment.
6.4 Accordingly, it is submitted that in terms of section 89
quat
(4) of the Income Tax Act, the Applicant is entitled to interest at
the prescribed rate on the difference between the credit amount
(being R6 300 000,00) and its normal tax (being R0) ie on
R6 300 000,00, such interest to be calculated from
30 September
1999 (being the effective date) until 17 May
2002, being the date on which the R6 300 000,00 was
refunded to the
taxpayer. The applicable prescribed rates during the
aforesaid period and the amount of interest, being R1 532
194,52, are
common cause.
6.5 0nly if the above Honourable Court rejects all the aforesaid
submissions, will the Applicant seek an order that the Second
Respondent issue an assessment forthwith, having already had a
reasonable time to do so, and thereafter pay the Applicant the amount
of interest on the difference between the credit amount (being
R6 300 000,00) and its normal tax (as reflected in
the
assessment), calculated at the prescribed rate from 30 September
1999 until 17 May 2002.
[7] 0n the Second Respondent's contentions in relation to section
89
quat
(4) of the Income Tax Act and interest in respect of
the amount of R6 300 000,00, the Applicant argued and
submitted
that:
7.1 the Second Respondent's contentions are set out below.
7.2 Firstly, the Second Respondent contends that the normal tax
payable in respect of the Applicant's taxable income has not been
determined for the 1999 year as no assessment has been issued. This
contention should, with respect, be rejected for the reasons
set out
in the above paragraph.
7.3 Secondly, the Second Respondent contends that the amount of
R6 300 000,00 was not paid in terms of paragraph 23A
of the
Income Tax Act because the Applicant submits that there was no
liability to pay income tax. This contention should, with
respect,
be rejected for the following reasons:
7.3.1 on the Second Respondent's own version, provisional tax
"is payment in advance determined by the taxpayer in
respect
of the
estimated liability
in respect of income tax
for a specific year of assessment. A taxpayer, who is a
provisional taxpayer, is obliged to make
an
estimate
of
taxable income";
7.3.2 provisional tax is by definition
provisional
ie it is
paid prior to the final determination of normal tax for the year in
question and is not necessarily equal to the taxpayer's
liability for
income tax;
7.3.3 a taxpayer is entitled to elect to make a third provisional
payment in terms of paragraph 23A of the Fourth Schedule to the
Income Tax Act for the purpose of avoiding or reducing its liability
for any interest that may become payable. Section 89
quat
of
the Income Tax Act is specifically necessary because provisional tax
paid may be less or more than the liability to tax imposed
by the
aforesaid Act.
7.4 Thirdly, the Second Respondent contends that the excess on which
interest will be payable must be determined at the time that
the
taxpayer's taxable income is finally determined in respect of the
relevant year of assessment. He contends that as final determination
of a taxpayer's taxable income takes place upon the issue of an
assessment, the credit amount will be between R0 and R250 000,00
at the most. The Applicant submits that this contention has no merit
for the following reasons:
7.4.1 the timing of
when
interest is to run is fully set out
in the last paragraph of section 89
quat
(4) as read with the
definition of "effective date". The phrase in the lead in
to section 89
quat
(4) "taxable income as finally
determined for that year" is not a timing provision, but part of
the prescribed method
of determining the
quantum
upon which
interest is to be paid;
7.4.2 the contention, if accepted, would lead to the absurd
consequence that provided the Second Respondent repaid any excess the
day before he issued an assessment, he would never incur any
liability for interest in respect of provisional tax, irrespective
of
how long he retained that excess. In the light of the fact that
provisional tax is by definition
provisional
ie it is paid
prior to the final determination of normal tax for the year in
question, this would frustrate the equity sought to
be achieved by
the legislature in section 89
quat
of the Income Tax Act.
Accordingly, this interpretation of the Income Tax Act is to be
rejected.
[8] Concerning the refund and
mora
interest in terms of the
Prescribed Rate of Interest Act in respect of the amount of
R250 000,00, the Applicant contended
and submitted that:
8.1 The Second Respondent had no authority, under the Income Tax Act,
the
Insolvency Act, the
Companies Act or the common law, to retain
the amount of R250 000,00 as a reserve in the event of tax
claims against the Applicant,
and hence this amount should be
refunded to the Applicant, together with interest at the rate of
15,5% per annum from 7 February
2002 to the date of payment.
8.2 The Second Respondent contends that the amount of R250 000,00
was retained in terms of an agreement with the Applicant.
The SARS
official who dealt with the matter has left SARS and the only
evidence of the alleged agreement is a letter from the
liquidators'
attorneys at the time, the relevant part of which reads as follows:
"1.2 an amount of R250 000,00 is to be retained by you for
a period of
three months to enable you to determine whether there
are any claims against the company in liquidation
and if in the
affirmative, formal claims will be lodged against the estate
therefore and if in the negative, the amount in question
will be
electronically transferred to the same account." (Emphasis
added.)
8.3 It is common cause that the Feinstein letter dated 17 May
2002 preceded the SARS letter dated 17 May 2002. It is
clear
that paragraph 1.2 of the said letter relating to the retention of
the amount of R250 000,00 was not accepted by the
Second
Respondent as:
8.3.1 paragraph 1.2 of the said letter differs materially from the
terms of the SARS letter;
8.3.2 the Second Respondent did not retain the amount for only three
months to determine whether there were any claims against
the
Applicant;
8.3.3 the claims the Second Respondent submitted for PAYE and VAT
were long after the period of three months had elapsed;
8.3.4 there was no set-off of the Second Respondent's aforesaid
claims against the R250 000,00.
8.4 The Second Respondent's contention is not borne out by the
evidence of his own conduct and his own correspondence. The alleged
agreement is not established by the evidence.
8.5 Accordingly, at common law, as
mora
interest runs from the
date of demand in respect of amounts which the debtor is not entitled
to retain,
mora
interest ran from 7 February 2002 in
respect of the R250 000,00.
Commissioner for Inland Revenue v First National Industrial Bank
Ltd
[1990] ZASCA 49
;
1990 3 SA 641
(A) at 654.
8.6 The
fiscus
is not immune from the payment of interest
ex mora
under the common law. The Applicant referred the
Court to the following three tax cases:
BAT v Commissioner of Taxes
57 SATC 271
at 281;
Commissioner of Taxes v Kristiansten (Pvt) Ltd
SC
57 SATC
238
;
Ellis NO v Commissioner of Taxes
57 SATC 282
at p296.
8.7 The Second Respondent also contends that he will refund the
amount of any excess paid once an assessment has been issued.
The
Second Respondent did not timeously prove a claim against the company
in liquidation in terms of
section 44
of the
Insolvency Act, 24 of
1936
as read with sections 339 and 366 of the Companies Act for
income tax. The Second Respondent cannot, at this stage, re open
the liquidation and distribution account for the purpose of
submitting a further claim in respect of income tax, except if there
has been fraud. (
Henochsberg, supra
at 865.) He was not
entitled to retain the R250 000,00 but was obliged to pay that
amount to the liquidators, submit claims
in terms of the laws of
insolvency and receive the amounts out of the liquidated estate in
terms of the laws of insolvency.
8.8 In conclusion, the Second Respondent is obliged to refund the
R250 000,00 to the Applicant, together with interest at
the rate
of 15,5% per annum from 7 February 2002 to the date of payment.
[9] In so far as the claim for
mora
interest in terms of the
Prescribed Rate of Interest Act in respect of the amount of
R1 250 000,00 is concerned, the
Applicant for the same
reasons set out in paragraph 8 above and in terms of section 1 of the
Prescribed Rate of Interest Act, the
Second Respondent is liable to
the Applicant for
mora
interest at the rate of 15,5% per annum
on the amount of R1 250 000,00 for the period 7 February
2002 to 17 May
2002. It is not disputed that the total amount
of interest payable is R53 082,19.
[10] In conclusion the Applicant submitted that the above Honourable
Court should grant an order in terms of the notice of motion.
If the
Court is inclined to grant the alternative prayer to prayer 1,
Applicant submitted that prayer 2 should be as
set out in
paragraph 6.5 above.
(E)
THE CASE FOR THE RESPONDENTS
In his heads of argument, counsel for the Respondents contended and
submitted that:
[11] 0n the basis of the foregoing factual background in paragraph
[4] above, the Applicant is
not
entitled to interest in terms
of section 89
quat
of the Act, because if a company such as the
Applicant wants to avail itself of the provisions of section 89
quat
of the Income Tax Act it must be common cause that:
11.1 the payments on behalf of the company constitute provisional tax
payments;
11.2 the taxable income of the company must have been finally
determined;
11.3 the credit amount (ie the provisional tax payments, in relation
to any year of assessment) must exceed the normal tax payable;
and
11.4 the amount of the excess must exceed R10 000,00 or the
taxable income must exceed R10 000,00 (R20 000,00 in
the
case of a company).
[12] As to whether in reality provisional tax was paid by the
Applicant or not, the Respondents argued and submitted that:
12.1 Applicant's introductory averment namely that "all amounts
were paid without legal liability" is common cause on
the
papers.
12.2 It is furthermore Applicant's case that the amounts purportedly
paid as provisional tax were not really provisional tax.
The income
figures were inflated as a result of Mr Alexander's fraud and
thus fictional: "In calculating the aforesaid
amount
(provisional tax), Smith was fraudulently misled as to the profits of
the company and the true reasons for its cash resources."
(Founding affidavit, par 5.11, p12.)
12.3 The Applicant made a voluminous presentation to Respondent to
release the above monies and the monies were released:
"5.8.1 Following due and proper consideration of the
presentation and once Respondent was satisfied that the amounts were
not proper due and chargeable the refund of the amounts was
immediately affected on or about 17 May 2002, and in no manner
wrongfully and unduly withheld …" (p123)
From the same paragraph it appears that Respondent's consideration of
the presentation took approximately three months.
The Applicant's submission, namely that there was no tax liability
was thus accepted and the amounts were repaid on the basis that
the
same did not constitute taxes properly due and chargeable at the
time. See also answering affidavit par 7.8, p127.
[13] In the matter
Commissioner of Inland Revenue v Bowman NO
[1990] ZASCA 28
;
1990 3 SA 311
(SCA) tax returns were filed that reflected fictitious
income, and the tax thereon was paid. The question arose whether the
said
fictitious income can be recovered by the liquidator of the
company as dispositions for no value. The Supreme Court of Appeal
found that these payments do constitute dispositions for no value due
to the fact that no release of any obligation to pay has been
affected by these payments (p314B 315A). 0n 314I 315
the following was said:
"In having regard to all the circumstances under which the
transactions was made,
I am of the view that one must seek the
substance rather than the form thereof
. In the case before us,
on the facts alleged in the summons, in substance no income tax was
payable by the company to the appellant.
The payments, therefore,
did constitute dispositions of property not made for value. To use
the words of WATERMEYER CJ in
the passage from
Jager
's
case, cited above, 'no benefit or value is or has been received or
promised as a
quid pro quo
'."
13.1 Respondent views Applicant's payments in a similar light: the
amounts paid "do not constitute taxes properly due and
chargeable at the time" (answering affidavit par 7.8, p127).
Respondent is in effect saying that the monies were paid
sine
causa
, alternatively reclaimable in terms of the
condictio in
debiti
. These payments by Applicant did not release and were not
intended to release Applicant from any payment obligation in terms of
the Income Tax Act. No taxes were payable. The monies were
paid as a result of Mr Alexander's fraudulent misrepresentations
to the auditor. The director being the directing mind of the
company, had no intention to pay provisional tax. His intention
was
to cover up his theft by alluding to fictional profits which would
necessitate provisional tax payments. The substance of
the
transaction is thus not a regular payment of provisional tax but an
effort to perpetuate the sham. See
Van Zyl & 0thers v Turner
& 0thers
1989 2 SA 236
(CPD) at 247.
13.2 There was no estimation of a tax liability due to the fact that
the income was fictional.
[14] In the light of the above submission, the repayment of the
monies were in law motivated on an enrichment basis. It matters
not
which enrichment condition applies. The Respondent realised that it
is enriched at the expense of the Applicant and in that
context an
agreement was reached on 17 May 2002 in terms of which all
monies but R200 000,00 (
sic
) was repaid to Applicant.
The repayment is not a refund of an over payment of provisional tax,
but the reimbursement of an amount
"paid without legal
liability" as alleged by Applicant. The agreement simply
confirms the underlying
causa
.
If the submission is upheld that section 89
quat
does not
apply then one has to have reference to the common law to determine
the legal position.
[15] Concerning the common law position on the payment of interest
Respondents argued and submitted that:
15.1 The common law position regarding interest is dealt with in
Kudu
Granite 0perations (Pty) Ltd v Caterna Ltd
2003 5 SA 193
(SCA) on
205C E:
"The learned Judge made no order in respect of the payment of
interest. In
Baliol Investment Co (Pty) Ltd v Jacobs
1946 TPD
269
the Court held, after a consideration of the common law, that
interest is not recoverable under the
condictio causa data causa
non secuta
or under the
condictio in debiti
unless the
subject of agreement or the debtor is in default or has been placed
in
mora
. See also
Commissioner for Inland
Revenue v First National Industrial Bank Ltd
[1990] ZASCA 49
;
1990 3 SA 641
(A) at
654C D and 659A B. The matter is now regulated by statute:
s2A
of the
Prescribed Rate of Interest Act 55 of 1975
provides that
the amount of every unliquidated debt as determined by a Court shall
bear interest as contemplated in
s1
, ie at the rate prescribed.
s2A(2)(a)
further provides that, subject to any other agreement
between the parties, the interest on an unliquidated debt determined
by a
Court of law shall run from the date on which payment of the
debt is claimed by service on the debtor of a demand or summons,
whichever
date is the earlier. In the present case there was no
evidence of a demand but the summons was served on 6 January
1999."
15.2 It is submitted that in the present circumstances the Respondent
investigated and evaluated the presentation of the Applicant;
realised that the monies were not payable and paid
in debiti
,
whereafter the agreement was reached to repay the said monies. Under
these circumstances there can be no question of interest
running from
the date of payment by Applicant ie 30 September 1999 until the
date of repayment by Respondent ie 17 May
2002. [Prayer 1
(
sic
).] The issuing of an assessment prayed for in prayer 2
(
sic
) is with respect not applicable in the light of the
aforegoing submissions.
[16] Alternative argument: The taxable income of the company was at
no stage finally determined when the monies were paid back
to
Applicant:
The statutory framework
:
16.1
Part IV
of the Fourth Schedule is titled "Employees' Tax
And Provisional Tax To Be Set 0ff Against Tax Liability" and
provides
in terms of paragraph 28 that:
"28.(1) There shall be set off against the
liability of the
taxpayer in respect of any taxes (as defined in subparagraph 8) due
by the taxpayer, … the amounts of provisional tax paid by the
taxpayer in respect of any such year, and if-
(a) the sum of the said amounts of … provisional tax exceeds
the amount of the taxpayer's total liability for the said taxes,
the
excess amount shall be refunded to the taxpayer;"
"28.(8) For the purposes of this paragraph, 'taxes' means the
normal tax levied under this Act."
16.2 Chapter II, Part I of the Act, is titled "Normal tax"
and begins with section 5, the introduction of which
reads as
follows:
"5. Levy of normal tax and rates thereof.- (1) Subject to the
provisions of the Fourth Schedule there shall be paid annually
for
the benefit of the National Revenue Fund, an income tax (in this Act
referred to as normal tax) in respect of the taxable income
received
by or accrued to or in favour of-"
16.3 "Tax" is defined in section 1 of the Act as:
"any levy or tax leviable under this Act and for purposes of
Part IV or Chapter III includes any levy or tax leviable
under
any previous Income Tax Act."
16.4 Section 1 of the Act defines "assessment" as follows:
"means the determination by the Commissioner, by way of notice
of assessment (including a notice of assessment in electronic
form)
served in a manner contemplated in section 106(2)-
(a) of an amount upon which any tax leviable under this Act is
chargeable; or
(b) of the amount of any such tax; or
(c) of any loss ranking for set-off; or
(d) of any assessed capital loss determined in terms of paragraph 9
of the Eighth Schedule,"
16.5 It is submitted that before a refund of provisional tax can
occur it is a prerequisite that there must be an assessment as
defined, ie the determination by way of a notice of assessment of the
amount of any such tax. The amount assessed constitutes
the
"
liability of the taxpayer in respect of any taxes (as
defined in subparagraph 8) due
.", against which provisional
tax paid must be set off to determine if there is an excess. It is
only once this process has
occurred that the Respondent is allowed to
effect a refund.
16.6 It is common cause that the Income Tax Return for the relevant
year of assessment has only recently been submitted and that
an
assessment has not been issued. Accordingly, it is submitted that
the repayment effected by the Respondent on 17 May 2002
was not
a refund falling within the provisions of paragraph 28 of the Fourth
Schedule and accordingly cannot be subject to interest
in terms of
section 89
quat
.
[17] The Honourable Court is with respect referred to the following:
17.1 Applicant's taxable income has not yet been established in terms
of the Act. A tax return for the 1999 tax year was
only
received by Respondent on 6 May 2005 (Answering Affidavit par
7.2.1, p125).
17.2 The further exposition in paragraph 18 below is with respect
highly relevant and the Honourable Court is referred thereto.
[18] As to the issue of
mora
interest on the amount of
R1 250 000,00 (STC), the Respondents contend and submit
that:
18.1 It is common cause that secondary tax on companies was not due
and payable and the only issue, in this regard, between the
parties
is for the payment of
mora
interest in respect of the
R1 250 000,00.
18.2 It is submitted that in principle the Respondent can be held
liable for the payment of
mora
interest. It has, however,
been denied that the Respondent is liable
in casu
.
18.3 It is submitted that before
mora debitoris
can arise
there are prerequisite elements that must be present, ie
(a) there must be a debt and the debt must be enforceable;
(b) performance must be due and, depending on the circumstances, the
question of when performance is due can be determined by the
terms of
the contract (
mora ex re
) or by demand duly made by the
creditor (
mora ex persona
);
(c) the debtor must be or deemed to be aware of the nature of the
performance required of him and the fact that it is due.
See: LAWSA (new edition), paras 217(1), 218(2) and 220(4);
R H Christie
The Law of Contract
3
rd
ed
at 551.
18.4
In casu
the Applicant is seeking
mora
interest
from 7 February 2002, the date that interest was purportedly
demanded. It is submitted that on such date all the
necessary
requirements were not present inasmuch as there was no enforceable
debt. In this regard I refer the above Honourable
Court to the case
of
CIR v First National Industrial Bank Ltd
[1990] ZASCA 49
;
1990 3 SA 641
(A)
at pp652 and 653, where it is stated:
"The Commissioner could not be in
mora
as regards
repayment until such time as it was decided that a duty to repay
existed. That was the very point of their understanding:
that the
money would only be refundable once it has been established (by a
tribunal or by compromise) that the Commissioner misconstrued
the
statute and was obliged to repay the money. Any claim by the Bank
for repayment to be made prior to the determination of the
dispute
could be met by the Commissioner with the defence that such a claim
would be premature and might yet prove to be idle.
That in my view, is the short and simple answer to the Bank's
contention: the Commissioner was not in
mora
and so cannot be
liable for interest
a tempore morae
."
18.5 It is submitted that on the facts of this matter that a duty to
repay was established by compromise, such compromise being
reached on
17 May 2002. The Applicant's cause of action lies in the
agreement concluded on 17 May 2002, in terms of
which the
earliest point at which the Respondent could possibly have been in
mora ex re
is 17 May 2002. However, it is common cause
that payment was effected on this date so the question of liability
to
mora
interest does not arise.
[19] In so far as the interest on the amount of R250 000,00 is
concerned, the Respondents argued and submitted in conclusion
that:
19.1 In this regard the Applicant is requesting repayment of the
capital amount together with interest at the rate of 15,5% per
annum
from 7 February 2002 to date of payment.
19.2 It is submitted that prior to 17 May 2002 there was no
legal obligation on the Respondent to repay any amounts to the
Applicant. 0n 17 May 2002 it was agreed between the parties
that the amount of R250 000,00 would be retained by the
Respondent for a period of three months. The obligation to repay
this amount arises in terms of the agreement and the Respondent
could
only be held liable for interest (
mora ex re
) as
from 17 August 2002.
19.3 The obligation to pay interest running from 17 August 2002
at the prescribed rate on the amount of R250 000,00 is
not in
dispute and either already being paid to Applicant or in the process
of payment.
That concluded the Respondents' argument.
(F)
ANALYSIS AND FINDINGS
[20] In order to address the first question, namely, whether the
Second Respondent is at law liable for the payment of interest
in
terms of section 89
quat
of the Income Tax Act in respect of
the amount of R6 300 000,00, one has, of necessity, to have
a close look at section
89
quat
's wording and accord to it its
true meaning by means of well-known canons of construction so as to
determine whether it applies
in casu
in the light of the
facts. This implies a determination of whether the Applicant paid
the R6 300 000,00 to the Second
Respondent as provisional
tax in terms of section 89
quat
of the Act.
[21] Section 89
quat
provides for interest on underpayments and
overpayments of provisional tax. The relevant subsections applicable
to Applicant's
claim are (1) and (4). Section 89
quat
(1) of
the Income Tax Act no 58 of 1962 provides,
inter alia
, as
follows:
"For the purposes of this section-
'credit amount', in relation to any year of assessment of any
provisional taxpayer, means the sum of-
(a) the provisional tax paid by the taxpayer under the provisions of
paragraph 21 or 23 of the Fourth Schedule in respect of such
year;
(b) any additional provisional tax paid by the taxpayer in respect of
such year under the provisions of paragraph 23A of that Schedule;
(c) …
(d) …
'effective date', in relation to any year of assessment of a
provisional taxpayer, means-
(a) where the provisional taxpayer is a company which has a year of
assessment which ends on the last day of February …
the date
falling seven months after the last day of such year; or …"
And section 89
quat
(4) provides as follows:
"If in the case of any provisional taxpayer the credit amount in
relation to any year of assessment exceeds the normal tax
payable in
respect of his taxable income as finally determined for that year
and-
(a) the amount of that excess exceeds R10 000,00; or
(b) such taxable income exceeds R20 000,00 in the case of a
company or R50 000,00 in the case of any person other than
a
company,
interest shall be payable to the taxpayer at the prescribed rate on
the difference between the credit amount and such normal tax,
such
interest being calculated from the effective date in relation to the
said year until the date on which such difference is
refunded to the
taxpayer: …"
[22] The Applicant alleges that on 30 September 1999 it paid an
amount of R6 300 000,00 in terms of paragraph 23A
of the
Fourth Schedule in respect of provisional tax for the 1999 year of
assessment. The Applicant further alleges that that
amount thus
constitutes the "credit amount" as defined in section
89
quat
of the Income Tax Act for the purposes of section
89
quat
(4).
[23] Section 23A of the Income Tax Act no 58 of 1962 provides that:
(1) Any provisional taxpayer may for the purpose of avoiding or
reducing his liability for any interest which may become payable
by
him in respect of any year of assessment under section 89
quat
,
elect to make an
additional payment
of provisional tax in
respect of such year.
(2) If any
additional payment
of provisional tax contemplated
in subparagraph (1) is paid after the end of the period ending
on the effective date in relation
to the said year as determined
under section 89
quat
(1), such payment shall be deemed for the
purpose of section 89
bis
(2) to be an amount of provisional
tax which was payable within the said period.
[24] Further provisions on provisional tax are to be found in Part
III of the Fourth Schedule of the Act. These include the following:
the definition of a provisional taxpayer; obligations of the
provisional taxpayer; the basis of calculation of provisional tax;
the manner and time period for the submission of provisional tax to
SARS; how and when it will be determined that a provisional
taxpayer
has made an overpayment as well as the point in time and the
circumstances in which the Respondent (SARS) shall determine
and make
a refund of the excess amount to a provisional taxpayer. (See
Schedule Four paragraphs 21 29 of the Act.)
[25] In terms of Schedule Four par 29, if the sum of the amounts
employees' tax and provisional tax paid exceeds the amount of
the
taxpayer's total liability for tax in respect of a year of
assessment, the excess amount must be refunded to the taxpayer.
Refunds may also be made in circumstances which are determined by the
Commissioner (Second Respondent) in the deduction tables
prescribed
by him. This happens in terms of Schedule Four par 9.
[26] Also, if, in the case of a provisional taxpayer, the credit
amount in relation to a year of assessment exceeds the normal
tax
payable in respect of his taxable income as finally determined for
that year, and that the amount of such excess exceeds R20 000,00
in the case of a company (as
in casu
), interest is payable to
the taxpayer at a prescribed rate on the difference between the
credit amount and the normal tax [see
section 89
quat
(4). See
also par [21]
supra
].
[27] It may also be mentioned in passing that provisional taxpayers
are obliged to make two obligatory estimates of their taxable
income
for each year of assessment. It is on the basis of these
assessments that compulsory payments of provisional tax will
be made.
This is in terms of paragraph 19(b) and 23 of the Fourth Schedule of
the Act.
[28] Paragraph 23 of the Fourth Schedule also provides that all
provisional taxpayers are obliged to make only two compulsory
provisional tax payments, ie the first payment within the period
ending six months after the commencement of the relevant year of
assessment and the second payment within the period ending on the
last day of that year.
[29] A third
additional
payment is not compulsory but a
provisional taxpayer may, for the purpose of avoiding or reducing its
liability for any interest
which may become payable by him in respect
of any year of assessment in terms of the provisions of section
89
quat
, elect to make another payment in terms of paragraph
23A of the Fourth Schedule.
[30]
In casu
the payment effected by the Applicant cannot, by
any stretch of imagination, be regarded as an additional payment over
and above
the two obligatory estimates of the Applicant's taxable
income by means of which compulsory payments of provisional tax which
had
been made (if any). Besides, in its founding papers, the
Applicant states expressly that this application for the payment by
the
First Respondent of interest owing to the Applicant on certain
amounts which were paid erroneously to the First Respondent "without
any legal liability" to do so and "which have been
refunded" to the Applicant. It follows that the amount
of
R6 300 000,00 which was paid by Applicant to Respondents on
30 September 1999 and which was refunded to Applicant
on or
about 17 May 2002 by the Respondents cannot, by any language, be
termed a payment of provisional tax as defined in Schedule
Four of
the Act. It also follows that there cannot be any entitlement
to section 89
quat
interest since the said amount could not, in
the circumstances, have been paid in terms of paragraph 23A of the
Fourth Schedule
of the Act and cannot be regarded as provisional tax.
Needless to state that the existence of an excess of provisional tax
is
a
sine qua non
for payment of interest in terms of section
89
quat
of the Act.
[31] I also make the finding that, in the light of the foregoing, the
refunds by Respondents which were made to Applicant on 17 May
2002 were not made on the basis of a determination of the Applicant's
taxable income and tax liability for the 1999 year of assessment
but
on the basis of a decision by the Respondents that the amount did not
constitute taxes properly due and chargeable at the time.
[32] As was, in my opinion, rightly held (per SCHABORT, J) in
D A Meyer Consultants CC v Allied Electronics
Corporation Ltd and 0thers
1994 4 SA 451
(WLD) that the payment
of interest was something that had been provided
ex lege
and was incidental to the defendants' income tax refund but was in
itself not a "refund" of anything that the defendants
had
paid to the Receiver of Revenue. [Cf
Van der Merwe v Minister
of State Expenditure
1999 4 SA 532
(T) at 534.]
[33] If one views the payment of R6 300 000,00 by the
Applicant from the common law point of view, such payment was made
sine causa
and this resulted in the undue enrichment of the
Respondents. It follows that the common law principles of enrichment
ought to
find application
in casu
, more so that the
Respondents realised and accepted that they had been unduly enriched
at the expense of the Applicant and, as
a consequence thereof an
agreement was reached on 17 May 2002 in terms of which all,
except an amount of R250 000,00,
was repaid to the Applicant,
who admits that the amount of R6 300 000,00 was paid to
Respondents "without legal
liability". This means that the
repayment of the said amount, minus the amount "retained as a
reserve in the event of
tax claims against the estate" was not a
refund of an overpayment of provisional tax. Section 89
quat,
therefore, does not apply. What applies is the common law position
on interest as articulated by NAVSA, JA et HEHER, AJA
in
Kudu Granite 0perations (Pty) Ltd v Caterna Ltd
2003 5 SA 193
at 205C E, that interest is recoverable under the
condictio
causa data causa non secuta
or under the
condictio in debiti
provided the subject of the agreement or the debtor is in default or
has been placed in
mora
, as well as the provisions of the
Prescribed Rate of Interest Act 55 of 1975
.
[34] I now move over to the second question, namely, whether the
Second Respondent is liable at law for the payment of
mora
interest in respect of the amount of R1 250 000,00. It is
clear from a letter dated 17 May 2002 written by
one
J J G Viljoen under the letterheads of the Respondents
to the liquidator of the Applicant one Mr N Klein
that the
said amount was paid to the Respondents as secondary tax on companies
(STC). It is common cause, however, that such tax
was not due and
payable. This means that the only issue between the parties is the
payment of
mora
interest in respect of the R1 250 000,00.
[35] The Applicant, in its heads of argument, advances the same
reasons as in the
mora
interest in terms of the
Prescribed
Rate of Interest Act in
respect of the amount of R250 000,00.
These will be considered under the third issue below. The
Respondents deny that they
are liable for the payment of such
interest because the prerequisites of
mora debitoris
have not
been shown. Besides, so contended the Respondents, the Applicant is
seeking
mora
interest from 7 February 2002, ie the date
that interest was purportedly demanded. Respondents submit that on
such date all
the necessary requirements of
mora debitoris
were not present inasmuch as there was no enforceable debt. For this
proposition they rely on
CIR v First National Industrial Bank Ltd
[1990] ZASCA 49
;
1990 3 SA 641
at 652I J and 653A B as authority. The
Respondents further argue that the Applicant's cause of action lies
in the agreement
concluded by the parties on 17 May 2002 when
the parties reached a compromise.
[36] If regard is had to the fact that the Applicant claims
mora
interest on this amount from 7 February 2002 to 17 May
2002, I find it difficult to accept that the Respondents were
in
mora
as from 7 February 2002, ie the date on which Feinsteins on
behalf of the Applicant's joint liquidators made a written
representation
to the Respondents for the payment of the said amount.
This is so especially if one has regard to the "discussions"
and "agreement" referred to in Feinsteins' letter of 17 May
2002 to SARS. Furthermore, the fact that payment of
the said amount
was effected on 17 May 2002 the question of
mora
interest
does not come into the picture. I therefore find that the
Respondents are not liable for the payment of
mora
interest
from 7 February 2002 to 17 May 2002 in the amount of
R53 082,19 in respect of the STC payment of R1 250 000,00.
[37] In so far as the third and last question is concerned namely
whether the Respondents are at law liable to refund the Applicant
the
amount of R250 000,00 with
mora
interest from 7 February
2002 to date of payment, the Applicant argued that:
37.1 the Second Respondent had no authority under the Income Tax Act,
the
Insolvency Act, the
Companies Act or common law to retain the
amount of R250 000,00 as a reserve in the event of tax claims
against the Applicant;
37.2 it is basically for the above reason that this amount should be
refunded to the Applicant together with interest at the rate
of 15,5%
per annum from 7 February 2002 to date of payment.
37.3 The contention by the Second Respondent that the said amount was
retained in terms of an agreement with the Applicant is not
borne out
by the evidence and facts in that:
(a) In terms of paragraph 1.2 of the letter by Feinsteins to SARS
dated 17 May 2002, the amount of R250 000,00 was to
be
retained by the Second Respondent for a period of three months to
enable the Second Respondent to determine whether there are
any
claims against the Applicant in liquidation.
(b) The Second Respondent did not accept the retention of the said
amount because in his letter to Applicant's liquidator dated
17 May
2002 he
inter alia
wrote:
"R250 000,00 has been retained as a reserve in the event of
tax claims against the estate."
This differs materially from the contents of paragraph 1.2 of
Feinsteins' letter referred to above.
(c) Moreover, the Second Respondent did not retain the amount for
only three months as per Feinsteins' letter.
(d) The claims the Second Respondent submitted for PAYE and VAT were
submitted long after the period of three months had elapsed.
(e) No set-off was effected for the aforesaid claims against the
amount of R250 000,00 by the Second Respondent.
37.4 I am inclined to agree with the Applicant that, under the
foregoing circumstances, the Second Respondent had no justification
for retaining the said amount longer than is stated in Feinsteins'
letter of 17 May 2002 and the alleged agreement the Second
Respondent relies on is not established by evidence. It follows that
the Second Respondent, as a debtor for the amount of R250 000,00,
is liable for interest
a tempore morae
from the date of
demand in respect of the said amount which he is not entitled to
retain. This is the position at common law and
in terms of the
Prescribed Rate of Interest Act. The
date of demand is generally
considered to be the date of service of summons, but could, arguably,
be taken to be the date of delivery
of a letter of demand.
Consequently, it is my considered opinion that the Second Respondent
is liable for
mora
interest on the said amount not from
7 February 2002 as Applicant alleges, or from 17 August
2002 as the Second Respondent
alleges, but as from 17 May 2002.
Furthermore, I am in full agreement with the case law cited as
authority by the Applicant
for the proposition that although the old
authorities thought otherwise, in our modern law the
fiscus
is
not immune from paying interest
ex mora
.
37.5 As to the refund of R250 000,00 by the Second Respondent to
the Applicant, the former contends that he will refund the
amount of
any excess paid once an assessment has been made. The latter, on the
other hand, contends that the Second Respondent
did not timeously
prove a claim against the Applicant in liquidation in terms of
section 44
of the
Insolvency Act, 24 of 1936
, read together with
sections 339 and 366 of the Companies Act, for income tax purposes.
The Applicant also contends that the Second
Respondent was therefore
not entitled to retain the R250 000,00 but was obliged to pay
that amount to the liquidators, submit
claims in terms of the laws of
insolvency and receive the amounts out of the liquidated estate in
terms of the laws of insolvency.
I have no quarrel with the
contention by Applicant and am inclined to agree with it. In the
premises the Second Respondent
is obliged to refund the R250 000,00
to the Applicant together with interest on the said amount at the
rate of 15,5% per annum
from 17 May 2002 to date of payment
thereof.
(G)
CONCLUSION AND ORDER
[38] In the light of the preceding analysis, findings and
authorities, I am constrained to arrive at the ineluctable conclusion
that:
38.1 the first issue, ie whether the Second Respondent is at law
liable for the payment of interest in terms of section 89
quat
of the Income Tax Act in respect of the amount of R6 300 000,00,
is answered in the negative because the provisions of
section 89
quat
of the Act are not applicable
in casu
;
38.2 the second issue, namely whether the Second Respondent is at law
liable for the payment of
mora
interest in respect of the
amount of R1 250 000,00 is also answered in the negative,
because evidence indicates that
there were discussions held between
the legal representatives of the parties who arrived at an agreement
confirmed in Feinsteins'
letter of 17 May 2002. Also, that the
said amount was repaid to the Applicant on 17 May 2002;
38.3 the third issue, namely whether the Second Respondent is at law
liable to refund the Applicant the amount of R250 000,00
together with
mora
interest, is answered affirmatively with
the qualification that such interest shall run from 17 May 2002
and not from 7 February
2002.
In the result the following order is hereby made:
(i) Prayers (a) and (d) of the notice of motion are dismissed with
costs.
(ii) Prayer (c) is hereby granted. The Second Respondent is ordered
to refund the Applicant the amount of R250 000,00 (within
fourteen days after judgment) together with
mora
interest
calculated at 15,5% per annum on the said amount from 17 May
2002 to date of payment, with costs.
M N S SITHOLE
ACTING
JUDGE OF THE NORTH GAUTENG HIGH COURT
15330-2005
HEARD ON: 23/11/2005
FOR THE APPLICANT: ADV J M A CANE
INSTRUCTED BY: WERKSMANS ATT, JHB,
c/o EDELSTEIN-BOSMAN INC, PTA
FOR THE RESPONDENTS: ADV H J DE WET
INSTRUCTED BY: STATE ATTORNEY, PTA