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[1990] ZASCA 28
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Commissioner for Inland Revenue v Bowman NO (612/88) [1990] ZASCA 28; 1990 (3) SA 311 (AD); (27 March 1990)
IN THE SUPREME COURT OF SOUTH AFRICA
(
APPELLATE DIVISION
)
CASE NUMBER: 612/88
In the matter between:
THE COMMISSIONER FOR INLAND
REVENUE
APPELLANT
and
NEIL BOWMAN N.O
RESPONDENT
Coram
: CORBETT CJ, SMALBERGER et MILNE JJA, FRIEDMAN et GOLDSTONE
AJJA.
Date heard: Monday 19 March 1990
Date delivered: Teusday 27 March 1990
2 JUDGMENT
GOLDSTONE
AJA:
Texchange (Pty) Limited (the company) rendered income tax returns to the
appellant which reflected fictitious income. This case concerns
those returns
rendered for the 1977 to 1982 years of assessment. The company received income
tax
assessments from the appellant based upon such returns. In
respect of
each of those years the company had no taxable income. The amounts, as assessed,
were paid by the company. No objection
to any of the assessments was ever made
by the company.
The company was subsequently liquidated by order of the Witwatersrand Local
Division of the Supreme Court. The
3 respondent is the liquidator of the company. He claimed
repayment from the appellant of each of the amounts paid by
the company to him pursuant to the aforementioned assessments.
He did so
on the basis that the payments constituted dispositions
not for value. He
alleged in his summons that they are liable
to be set aside in terms of
section 26(1) of the Insolvency
Act, No. 24 of 1936 (the
Insolvency Act). It
is there provided
that:
"26(1) Every disposition of property not made for value may be set aside by
the court if such disposition was made by an insolvent
-
(a) more than two years before the sequestration
of his estate, and it is proved that, immediately after the disposition was
made, the liabilities of the insolvent exceeded his
assets;
4 (b) within two years of the
seguestration of his
estate, and the person claiming under or
benefited by the disposition is unable to
prove that, immediately after the disposition
was made, the assets of the insolvent exceeded
his liabilities;
Provided that if it is
proved that the liabilities of the insolvent at any time after the making of the
disposition exceeded his assets
by less than the value of the property disposed
of, it may be set aside only to the extent of such excess."
Section 26
of the
Insolvency Act is
made applicable to companies in
liquidation by the provisions of section 340 of the Companies Act, No. 61 of
1973.
An exception that the summons was bad in law and lacked averments
5 necessary to sustain an action was dismissed. With leave
of the Court
a quo
(De Klerk J), an appeal against that decision
is now before us. The judgment of the Court
a guo
has been
reported in
1989 (4) SA 63
(W) as
Bowman NO v Kommissaris
van Binnelandse Inkomste
.
The first ground of appeal argued by counsel for the appellant was that,
having regard to the provisions of the Income Tax Act, No
58 of 1962 (the Act),
the company did receive value for its payments, viz. its release from a lawful
obligation to pay to the appellant
the amounts assessed by him. In support. of
this ground of appeal we were referred to the judgment of Watermeyer CJ in
Estate Jager v Whittaker and Another
1944 AD 246
where at 250/1 the
learned Chief Justice said the following:
" The words 'disposition not made for value' mean, in their ordinary
signification, a disposition for which
6 no benefit or value is
or has been received or promised
as a
quid pro quo
. The most obvious example of such
a disposition is a donation and if we call to mind the
definition of a donation given in
Digest
(50.17.82)
donari
videtur guod nullo jure cogente conceditur
, it would
appear
prima facie
that any payment, purporting to be
made solely
in discharge of an existing obligation, is
in effect a donation if no obligation to make such payment
in fact exists. If a
lawful
obligation to pay the money
in fact exists, then the obvious benefit which the payer
receives in
return for such payment is a discharge from
his liability to pay. Such a
payment decreases his assets
but at the same time it diminishes his
liabilities, and
in transactions which are entered into in the ordinary
course of business such a discharge from a liability
would be value for
the payment made. For the purposes
of this case, it is unnecessary to
consider what the
legal position would be if the obligation which is
7 discharged arises from a promise to donate or a promise
made in return for an inadequate consideration."
I would
immediately observe that in the present case the payments were made in
circumstances where there was no underlying obligation
to pay any amounts at all
to the appellant. There was no income earned by the company and therefore no
normal income tax was assessable
or payable under the Act: section 5; and see
the authorities referred to in
Secretary for Finance v Esselmann
1988 (1)
SA 594
(SWA) at 599 D - 600 D. The present is thus a situation similar to those
expressly left-out of consideration by Watermeyer CJ.
In
Goode, Durrant and Murray Ltd v Hewitt and Cornell NNO
1961 (4) SA
286
(N) Fannin J said at 291 F that:
" Whether an insolvent has received 'value' for a disposition must be decided by
reference to all the
8
circumstances under which the transaction was made."
The passage in which that
dictum
appears was cited with approval in
this Court in
Langeberg Kooperasie Bpk v Inverdoorn Farming and Trading
Company Ltd
1965 (2) SA 597
(A) at 604 B - D; and
Umbogintwini Land and
Investment Co (Pty) Ltd (In Liquidation) v Barclays National Bank Ltd and
Another
1987 (4) SA 894
(A) at 912 H - 913 B; and see
Swanee's Boerdery
(Edms) Bpk (In Liquidation) v Trust Bank of Africa Ltd
1986 (2) SA 850
(A)
at 859 F - I.
In having regard to all the circumstances under which the transaction 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
9 from
Jager
's case, cited above, "no benefit or value is or
has been received or promised as a
quid pro guo
". The first
ground of appeal advanced by counsel must be rejected.
It was then submitted on behalf of the appellant that the provisions of the
Act are such as to make assessments of income tax final
and conclusive, not only
as against the taxpayer but also, on insolvency, as against a liguidator or
trustee. In this regard we were
referred to the following provisions of the
Act:
section 77(1) which provides that all assessments required to be made under the
Act shall be made by the Commissioner or under his
direction;
section 78(1) which enables the Commissioner to estimate a person's taxable
income where such person is in default in furnishing
any return or information
or the Commissioner
10
is not satisfied with the return or information furnished
by any person;
section 81(1) which provides for objections to be made to assessments and
section 81(5) which provides that where no objection is
made to any assessment,
subject to the right of appeal, it becomes final and conclusive;
section 83 which provides for appeals against decisions
of the Commissioner to a special court for hearing income tax appeals;
section 88 which provides that pending an appeal the obligation to pay income
tax shall not, unless the Commissioner so directs, be
suspended;
section 89(1) in terms of which the Commissioner determines the date upon
which income tax chargeable shall be paid;
11
and section 89(2) in terms of which interest becomes payable on overdue
payments;
section 91(1)(a) which deems income tax payable to be a debt due to the
State; and section 91(1)(b) which empowers the Commissioner,
where income tax or
interest has not been paid, to file with the clerk or registrar of any competent
cburt a certified statement
setting forth the amount of income tax or interest
due and provides that
such statement thereupon has the effect of a civil judgment;
section 92 which makes it incompetent for any person in any proceedings in
connection with any statement filed in terms of section
91(1)(b) to question the
correctness of any assessment on which such statement is based, notwithstanding
that objection and appeal
may have been lodged thereto;
12 section 94 which provides that the production of any
document under the hand of the Commissioner purporting
to be a copy of an extract from any notice of assessment
shall be conclusive evidence of the making of such
assessment and, except in the case of appeal proceedings,
shall be conclusive evidence that the particulars of
such assessment are correct;
section 102(1) providing for repayment of income tax proved to the satisfaction
of the Commissioner to have been overpaid; and sectioh
102(2) which provides
that the Commissioner may not authorize such repayment unless the claim therefor
is made within three years
after the date of the assessment in
question.
It would be strange, submitted the appellant's counsel,
if against the background of all these provisions, it was open to a liquidator
or trustee to reopen assessments to which
13 there never has been an objection. Indeed, so the submission
ran, if a liquidator or trustee could do so, it would have
the result of enabling an assessment to be reopened ten or
even twenty
years after it had become final and conclusive
under the provisions of the
Act. It was further submitted
that the provisions of the Act must be deemed
to have overridden
the provisions of
section 26(1)
of the
Insolvency Act.
>That submission, although an attractive one, in my judgment cannot be upheld.
All of the provisions of the Act mentioned by counsel
clearly refer to the
Commissioner and the taxpayer. As between them an assessment becomes final and
conclusive in the absence of
objection. That is the effect of section 81(5) of
the Act:
Irvin and Johnson (SA) Ltd v Commissioner for Inland Revenue
1946 AD 483 at 499/500;
Miller v Commissioner for Inland Revenue (SWA)
1952 (1) SA 474 (A) at 483 A - F;
Turnbull v Commissioner for Inland
Revenue
1953 (2) SA 573 (A) at 582 G - H.
14
An assessment to which no objection has been made would undoubtedly become
final and conclusive also against persons privy to the
taxpayer, eg. his
executor. However, the liguidator of a company is not privy to the company in
liquidation. He is a third party.
Thus, for example, where a company has acted
unlawfully, the
in pari delicto
rule cannot be relied upon against a
liguidator in answer to a statutory claim such as that created by
section 26
of
the
Insolvency Act:
Visser
en 'n Ander v Rousseau en Andere NNO
1990 (1)
SA 139
(A) at 159 E - H. So, too, he is not bound by a judgment against the
company to which he is not a party: a plea of
res judicata
cannot be
raised against him:
Swadif (Pty) Ltd v Dyke NO
1978 (1) SA 928
(A) at 945
B - E. An assessment, after all, is "a mental act in the nature of a decision"
per Schreiner JA in
Irvin and Johnson (SA) Ltd v Commissioner of Inland
Revenue
(
supra
) at 494, and becomes binding upon the taxpayer as a
statutory obligation. A liquidator is not a party thereto
15 and it follows,
in my opinion, that it is not binding upon
him. There is nothing in the Act which, in any way, is
inconsistent with the provisions of section 26(1) of the
Insolvency Act and
there is consequently no basis upon which
the latter can be said to have been overridden by the former.
It was argued further that, in terms of the Act, the only manner in which an
assessment can be questioned is by way
of objection under section 81 and
appeal under section 83.
For that submission counsel relied on the judgment
of Steyn JA in
Whitfield v Phillips and Another
1957 (3) SA 318
(A) at
345 F - H. The issue there under consideration was whether damages awarded by
the court would constitute a capital accrual
or income. The learned Judge of
Appeal said this:
"In dealing with the question whether the award is for income tax purposes to be
regarded as a capital accrual or as income, the
very first difficulty which
would be
16 encountered would be that by Act of Parliament
the
determination of the merits of that question, as distinct
from a question
of law, has been entrusted entirely to
the Commissioner for Inland Revenue
and, on appeal from
his decision, to the Special Court for hearing
income
tax appeals. Another court cannot usurp that function.
No other
court can interfere with the decision of the
Commissioner, except on appeal
from the Special Court,
nor will any court interfere with the decision of
the
Special Court except where, on the facts, no reasonable
person could
have arrived at the finding of the Special
Court. (
Commissioner for Inland
Revenue v Paul
, 1956
(3) SA 335 (AD) at p 340;
Durban North Traders Ltd
v
Commissioner for Inland Revenue
,
1956 (4) SA 594
(AD)
at p
599). A court other than the Special Court cannot,
therefore, give any
definite answer to this question
without substituting its own decision for
that of the
only competent authorities."
17
The present case is distinguishable. Here the respondent has not sought to
have anyone other than the Commissioner make an assessment.
The amounts of the
assessments are not attacked. The respondent concedes that on the returns made
by the company, it was correctly
assessed by the appellant. The issue here
relates to the question as to whether the payment of those assessments amount to
dispositions
not made for value. That is not a question which lies within the
competence of the Commissioner or the Special Court to determine.
The decision
of the full bench of the Eastern Cape Division in
Van Zyl NO v The Master
and.Another
49 SATC 165
is distinguishable on a similar basis. It is
unnecessary in this appeal to consider the question which could arise if a
liquidator
sought, under
section 26(1)
of the
Insolvency Act, to
have a portion
and not the whole of an assessment set aside as a disposition not made for
value.
18
Counsel's fear of a liquidator or trustee seeking to reopen
an assessment
some ten or more years after it was made is based upon a remote and unlikely
event. In the first place, a disposition
can only be set aside as one not for
value where at the time it was made the insolvent's liabilities exceeded his
assets. It would
be most unusual for a person or company to carry on business in
insolvent circumstances for so long a period of time. Secondly, there
is the
further consideration Chat the Legislature, in enacting
section 26(1)
of the
Insolvency Act, appears
to have contemplated that a lengthy period of time might
elapse between the date of the dispósition ahd the date on which
a
trustee might seek to set it aside. I refer here to the provision in
section
26(1)
for a shifting of the onus of proof of insolvency from the person who
benefited from the disposition to the trustee (or liguidator)
where the
disposition took place more than two years prior to sequestration (or
liquidation).
19
It follows, in my judgment, that the second ground of appeal
argued by counsel for the appellant also cannot be upheld.
It remains to consider the suggestion made by De Klerk J that a payment of
income tax can never be the subject-matter of a claim made
under
section 26(1)
of the
Insolvency Act. The
approach of the learned Judge was the following. The
obligation to pay income tax is created by legislation in order to provide the
State with the necessary funds to administer the country and to provide services
for its citizens. At least some of those services
are of value to every
taxpayer. As was stated in
Langeberg Kooperasie Bpk v Inverdoorn Farming and
Trading Co Ltd
(
supra
), the word "value" in
section 26
of the
Insolvency Act is
not confined to a monetary or tangible consideration. In
consequence of the aforegoing, the Legislature could not have intended that
the
payment of income tax could form the subject of an enguiry under
section 26
as
to whether the payment of assessed income tax was or was not for value.
20
I do not agree with this approach. The benefit which a taxpayer may enjoy
from the manner in which the State spends revenue collected
by the Commissioner
appears to me to be too speculative and tenuous to be regarded as "value" within
the meaning of
section 26(1)
of the
Insolvency Act. There
is no reason why the
provisions of the section should not apply to the payment of income tax which in
fact was not assessable or
payable.
The appeal is dismissed with costs. Such costs are to include those
occasioned by the employment of two counsel.
CORBETT CT ) GOLDSTONE AJA
SMALBERGER AJ )
) CONCUR MILNE AJ )
FRIEDMAN AJA )