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1985
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[1985] ZASCA 32
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Commissioner for Inland Revenue v Costa (14/1984) [1985] ZASCA 32; [1985] 2 All SA 335 (A) (24 May 1985)
LL
Case NO. 14/1984
IN THE SUPREME COURT OF SOUTH AFRICA APPELLATE DIVISION
In the matter between:
THE COMMISSIONER FOR INLAND REVENUE
Appellant
and
M.N. DA
COSTA
Respondent
CORAM
: CORBETT, JOUBERT, VAN HEERDEN, JJA, GALGUT et NICHOLAS,
AJJA
HEARD
: 6 MAY 1985
DELIVERED
: 24 MAY 1985
JUDGMENT
/
VAN HEERDEN, JA
...
2.
VAN HEERDEN, JA
:
In respect of the years of assessment ended 28:
February 1971 to: 1977 the respondent submitted returns
of his income together with supporting accounts. The
Secretary for Inland Revenue, as the incumbent of the
appellant's office was known from 1964 to 1980, 'was,
dissatisfied with the returns and caused an investiga-
tion to be carried out into the respondent's financial
affairs. In the result the Secretary issued, additional
assessments for the tax years in question and, following
on an objection by the respondent, reduced assessments
for 1971, 1972 and 1976, on the basis that the respon-
dent's income had been understated , by a substantial
amount. The additional read with the reduced, as-
sessments reflected that additional normal tax was pay-
able in respect of each of the relevant years. Acting
I, in terms of s 76 of the Income Tax Act the Secretary
furthermore imposed a penalty equal to the additional
normal tax. The upshot was that a total amount of
Rl5 590 ...
3.
R15 590 was payable as additional tax and a like amount
as a penalty.
The respondent lodged an appeal which was even-
ually confined to the alleged excessiveness of
the
penalty. The Cape Income Tax Special Court
(German,
AJ, presiding)! allowed the appeal and reduced the' amount
of the penalty to R3 000. With the leave of the Pre-
sident of the Special Court the appellant in turn ap-
pealed to this Court.
It appears from a letter written on behalf of
the Secretary to the respondent's representatives that
the extent of the penalty was determined by a committee
in Pretoria. The Special Court expressed doubt as to
whether it was competent for the Secretary to delegate his function in terms
of s 76 (2) (a); to the committee ,
(or, for that matter, to any person or body) but found
it unnecessary to decide the point. The court's approach was
that assuming that it was competent for the committee
4.
fix the penalty, the court was in terms of s 83 (13)
(b) at large to reduce, confirm or increase the amount
of the penalty, unfettered by any discretion exercised
by or on behalf of the Secretary. The court expressed
agreement with what was said by Melamet, J, in
IT C
1331, 43 S A T C 76, 84, and disagreement with the con-
trary view entertained by Friedman, J, in
I T C
1295, 42 S A T C 19,
30-31, read with
I T C 1351
, 44 S A T C
58, 62-63.S 76 (1) (b) provides that if a taxpayer omits
from his return any amount which ought to have been in-
cluded therein, he
shall be required to pay, in addition
to the tax chargeable in respect of his taxable income,
"an amount equal to twice the difference between the tax as calculated in
respect of the taxable income returned
by him and the tax properly chargeable in respect of his
taxable income as determined after including the a-
omitted". Subsections 2 (a) and (b)read as follows:
/"(a)...
5.
"(a) The Commissioner may remit the additional. charge imposed under
sub-sectionl (1) or any part thereof as he may think fit:
Provided that,' unless he is of the opinion that there were extenuating cir-
cumstances, he shall not so remit if he
is satisfied that any act or omission of
the
taxpayer referred to in paragraph (a),
(b) or (c) of sub-section (1) was done
with intent to evade taxation.
(b) In the event of the Commissioner
deciding
not to remit the whole of the additional
charge imposed under sub-section (1), his
decision shall be subject to objection
and appeal."
S 83 (13) (b) provides that, subject
to the pro-
visions of the Act, in, the case of any appeal against
the amount of the additional charge (the penalty) imposed
under s 76 (1) the Special Court may reduce, confirm or
increase the amount of the penalty.
With regard to
the discretion conferred upon the
Commissioner (previously the Secretary); by s 76 (2) (a)
Friedman, J, said in
I T C 1295
at p 30:
"The Secretary deals with a large number of
/cases ...
6.
cases of this kind. He has yardsticks by
which to go and is in a far better position
to decide upon appropriate remissions than
this court. Where, of course, the Secre-
tary exercises his discretion on an incor-
rect basis or by taking into account matters
which he is not entitled to take into account,
this court will disregard the Secretary's
decision and be at large to itself decide
upon an appropriate remission. Where,
however, the Secretary has properly exercised
his discretion in a bona fide manner, then it
seems to me that this court will interfere
only where there has been an unreasonable
exercise by the Secretary of his discretion.
In order, however, to decide what is or is
not an unreasonable exercise
of discretion
it is, as I have already indicated, necessary
for this court itself to decide what it re-
gards as an appropriate remission and if
there is a significant difference between
that which this court regards as appropriate
and that which the Secretary has decided is
appropriate, this court is entitled to infer
that there has been an unreasonable exercise
by the Secretary of his discretion and will
interfere.
In this regard it seems to me that, the
position is not entirely different from that
of, for example, a court of appeal hearing
an appeal in a criminal case against a sen-
tence imposed by a lower court, ..."
In
I T C 1351
at p 63 Friedman, J, reiterated
/his "...
7.
his view and added:
"It seems to me ... that where one is concerned with a permitted appeal
against the exercise by the Commissioner of a discretionary
power, then the
approach of this court should be similar to that adopted by appeal courts in
general when considering appeals against
decisions involving the exercise by the
court a_
quo
of a discretion."
In my view the above passages cannot be reconciled with the approach of this
Court in
Rand Ropes (Pty) Ltd v Commissioner for Inland Revenue
1944 AD
142.
With reference to the provisions of the Income Tax Act 40 of 1925,
Centlivres, JA said (at p 150):
"That the Legislature apparently thought that it was necessary to give a
special right of appeal in cases where a matter is left to
the discretion of the
Commissioner appears from a number of instances where that special right is
conferred. ... In all these cases
it seems to me that the Legislature intended
that there should be a re-hearing of the whole matter by the Special Court and
that
that Court could substitute its own decision for that of the Commissioner.
For, as CURLEWIS, J.A., pointed out in
Bailey v. Commissioner for Inland
Revenue
(1933, A.D. at p. 220), the
/Special ...
8.
Special Court is not a Court of appeal in the ordinary sense: it is a court
of revision:"'
It seems clear, therefore, that in cases in-
volving the exercise of a discretion by the Commissioner
the Special Court on appeal to it is called upon to
exercise its own, original, discretion and that the views
expressed by Friedman, J, are not well-founded. That much was indeed common
cause at the hearing of this appeal. And since the appeal
is directed against
the
penalty determined by the court a quo, 'it is immaterial whether the
Commissioner was entitled to delegate his
function to the aforesaid committee.
It was also common cause that this Court will
interfere with the determination of the extent of a
penalty (or the
exercise of any discretion) by a Special
Court only on the limited grounds on which a value judq-
ment of a court
of first instance may be set aside or
varied on appeal. Prior to the enactment of s 86 A
/of ...
9.
of the Act in 1976 (by virtue of Act 103 of 1976) such a determination would
have been final unless it was erroneous in law:
Rand Ropes
case at p 150.
S 86 A now provides for a full right of appeal against any decision of a Special
Court on issues of fact or law. As
was pointed out by Trollip, JA, in
Hicklin
v Secretary for Inland Revenue
1980 (1) SA 481
(A) 485, such an appeal "is
therefore a re-hearing of the case in the ordinary well-known way in which this
Court, while paying due
regard to the findings of the Special Court on the facts
and credibility of witnesses, is not necessarily bound by them". Having
pointed
out that the section is silent about the powers of this Court in such an appeal,
Trollip, JA, went on to say that it was
manifestly the intention of the
legislature that this Court was to have those general powers that are conferred
upon it by s 22 of
the Supreme Court Act 59 of 1959. In my view it is implicit
in these
dicta
that
/in ...
10.
in an appeal from a Special Court those powers should be exercised according
to the principles and subject to the restrictions applicable
to appeals in
general. And, there is indeed no reason to differentiate between an appeal from
a Special Court and an appeal from
a local or provincial division. Unlike the
position obtaining in a Special Court where a decision is given on facts which
may not
have been considered by the Commissioner, this Court hears an appeal
from a Special Court on the record of the proceedings in that
court. It follows
that if a decision of a Special Court is based on the exercise of a discretion,
this Court will interfere only
if the Special Court did not bring an unbiased
judgment to bear on the question, or did not act for substantial reasons, or
exercised
its discretion capriciously or upon a wrong principle:
Ex parte
Neethling and Others
1951 (4) SA 331
(A) 335.
I turn to the facts of the present appeal. Only the respondent gave evidence
but his testimony must be read in conjunction with certain
information
/conveyed ...
11.
conveyed on his behalf to the appellant. That informa-tion is
contained in the respondent's formal objection to the additional assessments
which formed part of the dossier placed before the Special Court by the
appellant
in terms of regulation B 3 of the regulations made under
the Act (GN R105, Government Gazette Extraordinary 1011
of 22 January 1965). The gist of the letter of ob-
jection was that throughout the relevant period the respondent employed a
firm of accountants to maintain pro-
per books of account for the respondent's business from
information supplied by the respondent and to draw up
tax returns reflecting the respondent's true income and.
expenditure; that the firm chose to disregard the
figures in the{respondent's rough cash books and em-
ployed a "short-cut" method of bookkeeping which had
the effect of drastically reducing the true revenue of
the business; that this caused the firm to understate
the respondent's income in the tax returns prepared and
/submitted ...
12.
submitted by it on behalf of the respondent, and
that the latter was unaware of the firm's failure to maintain
proper books
and to submit accurate returns, there being
no question of collusion between the firm and the respondent.
There is no doubt that the appellant's represen-tative in the court a quo
accepted that these explana-tions were true. At the outset,
and before
evidence
was led, he made it clear that no intention to deceive was being imputed to
the respondent and that the latter
was not to blame for the understatement of his income
in the relevant returns. The appellant's representative
also accepted that those facts constituted extenuating
circumstances but submitted that the respondent should
be penalised for the deceit of his agents.
The gist of the respondent's evidence, and the court's impressions of the
respondent as a witness, ap-pear from the following extract
from the judgment
of
/the ...
14.
taking all the circumstances into account and without setting
off with any mathematical precision interest which might have been earned
by the
taxpayer from the tax withheld over the years against that which the full R15
590,00 paid by the taxpayer as a penalty might
have yielded to the revenue, an
appropriate penalty should not exceed the sum of R3 000,00. Such an amount,
which cannot conceivably
be regarded as trifling to a person of the taxpayer's
means, enjoying the life-style he does, will certainly bring home to him the
lesson which the legislature sought to teach errant taxpayers by providing for a
penalty in circumstances such as are present here.
A lesser penalty would not
serve the legislature's purpose. On the other hand, one as heavy as that deemed
proper by the 'penalty
fixing committee' is out of all proportion to the wrong
committed. The punishment must fit the crime, in tax matters no less than
elsewhere."
It will be recalled that in terms of s 76 (2) (a) the Commissioner may not
remit the penalty imposed under subsection (1), or any
part thereof, if he is
satisfied that any act or omission of the taxpayer referred to in that
subsection was done with intent to
evade taxation, unless he is of the opinion
that there were extenuating circumstances. The Special Court's
/approach ...
15.
approach was clearly that because in its view the
respondent's agents had acted with intent to evade taxation, the penalty could
not
be remitted unless extenuation existed. Assuming that such intent can be
ascribed to the aforesaid firm, I am not satisfied that
the court a
quo
adopted the correct approach. The key words of s 76 (2) (a) are "any act or
omission of the taxpayer ... done with the intent to
deceive", and it is
certainly arguable that this phrase applies only to an actual - and not also an
imputed - intention of the taxpayer.
However, in view of the conclusion at which
I have arrived, I find it unnecessary to de-cide this point. I shall therefore
assume
in favour
of the appellant that the penalty could not be remitted
unless extenuating circumstances were present.
Counsel for the appellant submitted that the
court a quo misdirected itself in a number of respects.
/In ...
16.
In the first place it was contended, with reliance on
I T C 1331
, 43 S
A T C 76, 84, that the court's approach should have been by how much the penalty
prescribed by s 76 (1) should be abated downwards
(if at all), and that the
court erred in law in simply coming to the decision that a penalty of R3 000
should be imposed. Now, it
it true that one should have regard to the fact that
unless s 76 (2) is applied, the penalty payable in terms of subsection 1 (b)
is
an amount equal to twice the additional normal tax assessed with reference to
the undisclosed income. But although this was not
spelled out in the judgment
there is no reason to doubt that the court was aware of the effect of s 76 (1)
(b). Indeed, in the judgment
the penalty determined on behalf of the appellant
was referred to as "being 50% of the maximum penalty". Consequently it cannot be
said that the court fixed a penalty of R3 000 without regard to the fact that
some R31 000 would have
/been ...
17.
been payable in the absence of a remission in terms of -s 76 (2) (a)
(read with s 83 (13)(b)).
In the second place it was submitted that the
court erred in taking into account the respondent's financial position as an
extenuating factor. The
short answer is that the court did not do so.' Having
found that there were extenuating circumstances, the
court merely said that a penalty of R3 000 could not
conceivably "be regarded as trifling to a person of the
taxpayer's means,
enjoying the life-style he does". It
appears to me that the submission in
question tends to
confuse two separate enquiries. If intent to evade
taxation was present,
the first enquiry in terms of s 76
(2)(a) is whether there were extenuating circumstances.
If the answer is in the affirmative, the second enquiry
is whether the additional charge or any part thereof
should be remitted. For the purposes of the second
enquiry regard may be had not only to the extenuating
/circumstances ...
18.
circumstances but to all relevant factors. And the
means of the taxpayer
clearly may be - and in the pre
sent case were-a relevant factor in
determining the
quantum of the reduced penalty.
Counsel for the appellant also submitted that the court a
quo
misdirected itself in regard to other aspects. It suffices to say that the
further submissions are without substance.
It was not contended that the penalty determined by the court a
quo
was one at which no reasonable court could have arrived. Nor do I think that it
was.
The appeal is dismissed with costs.
H.J.O. VAN HEERDEN, JA
CORBETT, JA
JOUBERT, JA
CONCUR
GALGUT, AJA
NICHOLAS, AJA