REPUBLIC OF SOUTH AFRICA

IN THE TAX COURT OF SOUTH AFRICA
(HELD AT MEGAWATT PARK, JOHANNESBURG )

Case N o.: IT 25209

In the matter between :
FLOWER Appellant
and
THE COMMISSIONER FOR THE Respondent
SOUTH AFRICAN REVENUE SERVICE


J U D G M E N T

(1) REPORTABLE: YES / NO
(2) OF INTEREST TO OTHER JUDGES: YES / NO
(3) REVISED.
03/02/202 5 _________________
DATE SIGNATURE
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CRUTCHFIELD, J
[1] The appellant, Flower (“Flower ” alternatively “the taxpayer”), appeals in terms of
rule 56(1)( a). Before me, Flower claims an order in terms s129(2) of the Tax Administration
Act, 2011, for the alteration of the additional assessment dated 13 December 2018,
alternatively, the setting aside of SARS’ s rule 31 statement and ordering SARS to deliver a
rule 31 statement that complies with rule 31(3) and ancillary relief, including costs of the
appeal.
[2] The respondent, the Commissioner for the South African Revenue Service (“SARS”),
opposes this matter , brought as an interlocutory application by the appellant in the appeal
against the respondent. For the sake of clarity , the matter before me comprises an
interlocutory application in the appeal proceedings brought by the appellant against the
respondent.
[3] Flower ’s complaint is that SARS’ s rule 31 statement does not comply with rule 31(3)
of the Tax Administration Act, which prohibits new grounds in a rule 31 statement that
constitute a novation of the whole of the factual or legal basis of the assessment or requires
the issue of a revised assessment.
[4] SARS alleges that it did not introduce new grounds in its rule 31 statement but simply
amplified its position on why the section 11A pre -trade expenditure had not been shown
satisfactorily to not be capital in nature.
[5] Flower is an independent power producer operating a solar photovoltaic electricity
generation farm (“the solar facility”) in the Northern Cape Province. Flower ’s income results
from a single trade, the sale of energy generated by Flower through the solar facility , to Eskom
Holdings Society Limited (“Eskom”).
[6] Flower ’s solar facility commence d operating on 21 May 2014. Flower , at that stage,
started earning revenue from its trading activities, being the sale of energy to its single client,
Eskom.
[7] Prior to Flower commencing its trading activities, Flower incurred significant
expenditure in the construction, erection and establishment of the solar facility. This included
not only raising loans and financial credit facilities necessary to fund the initial capital outlay
required to reach the position from w hich Flower could begin its trading activities. Flower , in
terms of its revised tax return for the 2014 tax year, deducted certain expenditure incurred
prior to the commencement of its trading activi ties and in preparation for the carrying on of its
trading activities, described as “development fees”, in the sum of R320 984 903.00 (“the
development fees”).
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[8] The development fees represent ed the cost of expenditure incurred by Flower in
connection with the raising of funds and credit facilities required to provide the monies
necessary to pay for the establishment of the solar facility.
[9] The development fees were not directly included in the various credit agreements
concluded by Flower with its creditors that made the funding available.
[10] Flower alleged that the development fees fell within the meaning of “related finance
charges” and the definition of “interest” contained in section 24J of the Income Tax Act, and
that Flower was entitled to claim the development fees as deductions from income in the 2014
tax year in terms of section 11A(1)( b) of the Income Tax Act. SARS initially allowed the
deduction of the development fees but subsequent to an audit of Flower ’s tax affairs by SARS,
SARS disallowed the deduction of the development fees in Flower ’s 2014 assessment.
[11] In order to test if the new ground s in the rule 31 statement constitute a contravention
of rule 31(3), it is necessary to compare the provisions of SARS’ s rule 31 statement with the
assessment itself, in this case the amended assessment.
[12] Whilst SARS argued that the comparison ought to be made against the objection
phase, that is incorrect. The scheme of the process and the wording of rule 31(3) itself is such
as to make the comparison between the rule 31 statement and what is in the assessment
itself. The wording of rule 31(3) makes it plain that the comparison is between the assessment.
rule 31(3) is permissive in that it provides that SARS may include in the statement a new
ground of assessment or basis for the partial disallowance of the objection unless that new
ground constitutes a novation of the whole of the fact ual or legal basis of the disputed
assessment, or which requires the issue of a revised assessment.
[13] Accordingly, the comparison arises between the rule 31 statement and the
assessment itself and not the objection.
[14] SARS accordingly cannot introduce new matter that constitutes a novation of the
assessment in terms of the objection or appeal stages of the process. SARS’ s use of the
objection stage as a benchmark , in the circumstances, is legally impermissible.
[15] SARS issued a letter of audit findings dated 29 October 2018 followed by a letter of
finalisation of audit dated 13 December 2018. There is no substantial difference, only minor
differences, between the two documents.
[16] SARS , in its finalisation of audit letter , records the taxpayer’s response to SARS’ s
previous request for representations from the taxpayer, Flower , in respect of a breakdown of
the pre-trade expenses , being the developmental expenses, and an explanation as to why
each expense should be allowed as a deduction by SARS.
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[17] Flower relied on the close connection to the obtaining of the loans and the furtherance
of the project as a whole. Flower relied on SARS v South African Custodial Services (Pty) Ltd1
and ITC 1870 ,2 which comprised the next iteration of SACS .
[18] Flower ’s claims to the deduction of the developmental fees were premised on
section 24J and section 11A of the Income Tax Act. Section 11A permits the deduction from
income derived from a trade , of expenditure actually incurred by the taxpayer prior to the
commencement and in preparation of the carrying on of that trade , if such expenditure would
have been allowed as a deduction in terms of certain other provisions of the Income Tax Act,
had such expenditure been incurred after the taxpayer commenced carrying on the trade.
[19] Section 24J(2) permits the deduction of interest expenditure from the income of a trade
if that amount was incurred in the production of income, with no limitation or exclusion on the
basis that the interest expenditure was capital in nature.
[20] Flower relied on the definition in section 24J (1) during the 2014 year of assessment,
that included the expression “related finance charges”. Section 11A(1) permits the deduction
of interest expenditure under s ection 24J, if incurred after trade commenced, which can be
deducted under section 11A if such expenditure was incurred prior to the commencement of
trade.
[21] Flower claimed a deduction of the developmental fees on the basis that they comprised
pre-trading expenses, pre -commencement expenditure, incurred in anticipation of Flower
producing income because Flower was not trading at that time. Section 11A enables the
deduction of pre -trade expenses comprising interest and finance charges in terms of
section 24J, irrespective of whether it is of an income or capital nature. Section 24J does not
have a non -capital requirement in it.
[22] Flower always acknowledged that the developmental fees were of a capital nature.
Section 24J does not have a non -capital requirement and the taxpayer’s claim did not arise in
terms of paragraph (a) of section 11 of the Income Tax Act but in terms of section 11A, read
with section 24J.
[23] Section 24J provides for two categories of expenditure, an interest charge that is
directly related to the amount of credit and the period for which the credit is extended, and
secondly, “related finance charges”. The latter refer to legal fees, guarantee costs, t he cost of
raising a loan and financing, brokers and lawyers’ fees, all fees being not included directly in
the finance agreements themselves.

1 SARS v South African Custodial Services (Pty) Ltd 2012(1) SA 522 (SCA) (“SACS ”).
2 ITC 1870.
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[24] SACS found that costs not directly included in credit agreements, being costs
associated with credit, so called “category 2 costs” or “category 2 expenses”, may be claimed
as a deduction.
[25] SARS, in the finalisation of audit letter, contended that SACS and ITC 1870 only
applied to section 11(bA) and not to section 24J. This is contrary to what was held by the SCA
in SACS . SARS attempted to distinguish SACS on the basis that it was never the intention of
the SCA in SACS to recognise fees such as legal fees and related financ e charges, being fees
not arising directly from and not being included in the finance agreements. SARS alleged that
the fees, in order to qualify for the deduction, had to b e costs or charges that comprise part of
the financial arrangement itself, payable in terms of the financial arrangement itself, and not
include costs associated with executing a loan. Accordingly, SARS refused the deduction of
the developmental fees becau se they comprised related finance charges, category 2
expenses, and did not , according to SARS , meet the requirements of section 24J.
Furthermore, that reliance on SACS and ITC 1870 was misplaced by Flower as a result.
[26] It is significant that SARS acknowledge d in the finalisation of audit findings that it had
requested and received from Flower , a breakdown of the pre -trade developmental expenses,
which SARS factually accepted as having a close connection to Flower procuring loans and
raising finance for the furtherance of the solar farm project as a whole, and which SARS did
not challenge factually at that stage.
[27] Flower , on 24 October 2019, filed a notice of appeal against the additional assessment
lodged by SARS for the 2014 year as regards the deductibility of the developmental fees that
SARS disallowed , and the consequential understatement penalties that SARS levied against
the taxpayer.
[28] On 19 March 2024, for reasons not relevant hereto, SARS delivered its rule 31
statement, in which SARS conceded that SACS and ITC 1870 appli ed and that so called
“related finance charges ”, being category 2 expenses, may be deducted under section 24J.
[29] SARS position in its rule 31 statement constituted a complete turnaround, whereas
SARS previously alleged that SACS and ITC 1870 did not apply to section 24J and did not
apply to the matter at hand, now SARS , in terms of its rule 31 statement , conceded that SACS
and ITC 1870 apply directly to section 24J, related finance charges and to the matter at hand.
SARS, in short did a volte-face.
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[30] SARS, in contrast to the grounds of the amended assessment and the basis for
disallowing the objection, conceded Flower ’s contention in respect of the applicability of
“related finance charges” in the definition of interest in section 24J(1)( a). However, SARS,
whilst conceding that Flower incurred the pre -trade expenditure, den ied that it was deductible
by Flower . The basis for denying the deduction in the rule 31 statement was the paucity of
specificity or particularity provided by Flower in respect of the pre-trade expenditure. In other
words, SARS , in terms of its rule 31 statement , proffered a factual challenge to a premise that
SARS previously accepted.
[31] According to SARS, Flower claimed a plethora of pre -trade expenses under the
heading “developmental fees ”, without including the necessary particularity required of Flower
in order to discharge the burden of proof in terms of section 102(1)( b) of the Tax Administration
Act.
[32] SARS contention is surprising as SARS previously acknowledged that Flower had
supplied it with a breakdown of the pre -trade expenditure and an explanation as to why that
pre-trade expenditure was justifiable as a deduction.
[33] SARS did not , prior to delivering its rule 31 statement, challenge on a factual level, the
closeness of the expenditure to the financial agreements concluded by Flower . SARS previous
argument, in terms of the revised assessment, was that a close connection was insufficient to
merit the deduction claimed by Flower because the pre -trade expenditure did not arise in terms
of the financial arrangements themselves.
[34] Paragraph 13 of SARS ’s rule 31 statement comprises a complete novation of the legal
basis of the assessment. It is self -evident that SARS in terms of the rule 31 statement , did not
merely elucidate or further articulate on the same position previously adopted by it. Contrary
to SARS contention, SARS did a complete about turn in the rule 31 statement. SARS, in the
revised assessment, contended that Flower ’s stance was incorrect, that SACS and ITC 1870
did not apply, that those cases applied to section 11(bA) and not to section 24J, that the
finance charges had to arise directly from and in terms of the finance agreements. In SARS ’s
rule 31 statement, it alleged that the wide meaning of related “finance charges ”, always
contended for by Flower , was applicable.
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[35] SARS raise d the alleged lack of particularity in respect of the pre -trade expenditure for
the first time in its rule 31 statement, However , SARS did not raise any such concerns prior to
the rule 31 statement . In fact, contrary thereto, SARS accepted the close connection between
the pre -trade expenditure claimed as developmental fees and the credit agreements
concluded by Flower . There was never a blurring of the nature of the pre -trade expenditure as
alleged by SARS in the rule 31 statement. Flower was clear throughou t that the developmental
fees were of a capital nature.
[36] SARS contention in the rule 31 statement that there was a lack of particularity that the
expenses qualif ied factually as category 2 expenses that are permitted by SACS and
ITC 1870 , is a completely new case proffered by SARS at the rule 31 stage.
[37] Whereas previously SARS accepted that the expenditure was category 2 expenditure
but contended that such category 2 expenditure was legally insufficient to justify the deduction,
now SARS advanced a wholly different and contrary case.
[38] The prejudice to the taxpayer resulting from SARS changing its course midstream is
significant. Both the legal premise previously proffered by SARS as well as the factual premise
of SARS case was novated by the rule 31 statement. SARS new case required the taxpayer
to undergo a massive factual enquiry in respect of expenditure incurred prior to 2014, in order
to locate the necessary documents and witnesses. This is in circumstances where SARS
previously acknowledg ed in the assessment , that Flower provided a breakdown of the
expenditure claimed and an explanation for the deduction claimed by Flower .
[39] In the circumstances, SARS ’s rule 31 statement does not comply with rule 31(3) in that
it constitutes a novation of the whole of the factual and the legal basis of the disputed
assessment and, the new grounds introduced in the rule 31 statement require the issue by
SARS of a revised assessment.
[40] In respect of SARS claim to ring -fencing , this is misplaced because Flower only has a
single trade, the generation and supply of energy to Eskom. Flower has a single source of
income being Eskom, its only client. Thus, the requirement of the second trade by the taxpayer
necessary for ring -fencing to apply, does not arise in this matter and there is no merit to SARS
ring-fencing argument.
[41] As to SARS reliance on Baseline Civil Contractors Pty Ltd v CSARS,3 Baseline
provides an answer to SARS contention that Flower must plead over on the merits , and that
the merits should proceed to a full hearing prior to this procedural point being raised.

3 Baseline Civil Contractors Pty Ltd v CSARS [2024 ZAWCHC 113(‘’ BaseLine”).
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[42] However, the taxpayer can only be expected to plead over to statements that are
permissibly included in the rule 31 statement. The taxpayer is not required to plea d over to
statements that are impermissibly included, as is the case in this matter, where SARS
averments in its rule 31 statement contravene rule 31(3), comprising a novation of the entire
factual and legal basis of the assessment.
[43] To allow SARS now to introduce an entirely new case and expect Flower to go back
11 years in order to find the necessary proof , is prejudicial in the extreme, blatantly unfair and
simply untenable.
[44] Furthermore, SARS cannot be permitted to dismiss the objection on grounds that are
introduced after the assessment because the taxpayer would not have had an opportunity to
object t o them.
[45] It is apparent that SARS abandoned the entire legal basis of the assessment, being
SARS legal interpretation of section 24J as being distinguishable from SACS and ITC 1870 .
[46] In the circumstances , given that SARS abandoned the entire legal basis of its
assessment there is nothing left of this appeal and the matter stands to be determined in
favour of Flower .
[47] In these circumstances and regard being had to section 129 and section 130 of the
Tax Administration Act, 2012, I grant the following order:
a. The additional assessment dated 13 December 2018 stands to be altered in
the following manner:
i. The disallowance of the amount of development fees in the sum of
R320 984 903 is to be reversed and such amount is to be allowed
as a deduction in terms of Section 11A of the Income Tax Act, 1962;
ii. The understatement penalties consequent upon such disallowance
are to be reversed by SARS together with any consequent interest
charges;
iii. The appellant’s pre -trade expenses are not to be ring -fenced but to
be included in the calculation of taxable income or assessed loss,
where applicable to be carried forward to the following tax year; and
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iv. The understatement penalties consequent upon the ring -fencing
are to be reversed, together with any consequent interest charges.
b. The respondent is ordered to pay the costs of this application and the appeal,
including the costs of two counsel on scale C.
___________________________
CRUTCHFIELD J
JUDGE OF THE HIGH COURT
JOHANNESBURG



Date of the hearing: 20 August 2024


Date of judgment: 3 February 2025