About SAFLII
Databases
Search
Terms of Use
RSS Feeds
South Africa: Supreme Court of Appeal
SAFLII
>>
Databases
>>
South Africa: Supreme Court of Appeal
>>
2001
>>
[2001] ZASCA 95
|
|
Milner Street Properties (Pty) Ltd v Eckstein Properties (Pty) Ltd (488/99) [2001] ZASCA 95; 2001 (4) SA 1315 (SCA); 64 SATC 60 (21 September 2001)
IN THE SUPREME COURT OF APPEAL
OF SOUTH
AFRICA
Case number : 488/99
In the matter between :
MILNER STREET PROPERTIES (PTY) LTD APPELLANT
and
ECKSTEIN PROPERTIES (PTY) LTD RESPONDENT
CORAM : NIENABER, SCHUTZ, SCOTT, NAVSA JJA and NUGENT
AJA
HEARD : 30 AUGUST 2001
DELIVERED : 21 SEPTEMBER 2001
Summary: Value Added Tax Act 89 of
1991 - sale of immovable property by and to registered vendor as a going concern
- formalities
for zero rating prescribed by 1994 amendment to s 11(1)(e) not
complied with- parties unaware of amendment - rectification of
agreement.
_______________________________________________________________
JUDGMENT
________________________________________________________________
NIENABER JA
/
NIENABER JA
:
[1] If the contentions advanced on behalf of the
appellant (a registered vendor in terms of the Value Added Tax Act 89 of 1991
(‘the
Act’)) are sound, the appellant will have managed, unwittingly
as it happens, to foist on the respondent (also a registered
vendor in terms of
the Act) a value-added tax (‘VAT’) liability of R429 824.56, to
which the appellant can now lay claim
as a refund from the Commissioner for
Revenue Services (‘the Commissioner’). Such will be the anticipated
end-result.
To understand those contentions it is necessary to consider both
the statutory and the factual backdrop to the claim for a declarator,
alternatively, damages, which the appellant instituted against the respondent in
the Natal Provincial Division.
[2] The statutory setting may conveniently be
summarised in the form of a series of broad propositions.
(a) Section 7(1)(a)
of the Act provides generally that VAT shall be levied on the supply by a vendor
(as defined) of goods or services
(as defined) in the course or furtherance of
any enterprise (as defined) carried on by him, calculated at the rate of 14 per
cent
on the value of the goods or services so supplied.
(b) When the
contract is silent as to the inclusion of VAT in the agreed price it is deemed
to be so included (s 64(1) of the Act).
(c) When a taxable supply of goods is
made by, say, a manufacturer to a wholesaler, by a wholesaler to a retailer and
by a retailer
to an end-user, VAT is levied at each stage of the distribution
chain. Each vendor (or supplier) is accountable in turn to the Commissioner
for
the payment of VAT which he is required to collect from his recipient. But
because VAT is in principle only levied on the ‘value
added on’,
each recipient may, on the production of a tax invoice from his supplier, deduct
his ‘input tax’ i.e.
the amount for which his supplier was
accountable to the Commissioner (and which was chargeable against him) from his
‘output
tax’ i.e. the amount for which he is accountable to the
Commissioner (and which is chargeable against his recipient). The
excess is
payable to the Commissioner. Over a relevant tax period a vendor would
therefore be entitled to deduct from the totality
of the output tax levied
against his recipients the totality of the input tax levied against him. Since
the end-user can make no
deduction the end-result is that the burden of VAT
ultimately falls on him.
(d) In terms of s 20(1) of the Act each supplier who
is a registered vendor making a taxable supply is obliged to provide his
recipient,
at the latter’s request, with a tax invoice reflecting,
inter alia
, the amount of VAT charged against him.
(e) In like manner
that the Commissioner is entitled to the excess when the output tax exceeds the
input tax, the recipient vendor
is entitled to claim a refund from the
Commissioner when his input tax over a tax period exceeds his output tax (s
15(8), 16(5) and
44(1) of the Act).
(f) The Act provides for exemptions (in
which case no VAT is raised) and in certain instances for zero rating (in which
case VAT is
raised but charged at a rate of zero per cent, for which a tax
invoice to that effect is nonetheless to be supplied).
(g) Section 11(1)(e)
of the Act provides for zero rating when the taxable supply is by one registered
vendor to another of an enterprise
which is disposed of as a ‘going
concern’.
(h) The central issue in this case is whether the transaction
between the respondent and the appellant complied with s 11(1)(e) of
the Act, as
amended, so as to qualify for zero rating.
(i) In terms of
s 9(15)
of the
Transfer Duty Act 40 of 1949
no transfer duty is payable in respect of a sale of
property which ‘is a taxable supply of goods’ where ‘such
supply
was subject to the said tax at the rate of zero per
cent.’
[3] The factual background is as follows. Until January 1995
the respondent, a company, was the registered owner of a property in
Pietermaritzburg described as Remainder of Lot 3043, Pietermaritzburg, with its
street address at 37 Willowton Road (‘the property’).
On the
property was a factory. The property was leased by a company, Amalgamated Shoes
Limited (‘Amshoe’) which used
the factory to manufacture shoes. The
brothers Roy and Edward Eckstein were the shareholders and directors of the
respondent. Roy
Eckstein was also a shareholder in and, at one time, the chief
executive officer of Amshoe. The holding company of Amshoe was a
company with
its premises in the Western Cape, Lenco Holdings Limited, (‘Lenco’),
the chief executive officer of which
was a certain Mr D de Jager. Amshoe, as
tenant, had a long term lease on the property. When the lease eventually
expired Amshoe
continued to occupy the property on a monthly tenancy. Towards
the end of 1993 Lenco bought out Roy Eckstein’s shareholding
in Amshoe.
He decided to sever his relationship with Amshoe. Lenco was anxious to obtain
some security of tenure on the property
for Amshoe. Amshoe was intent on
continuing its operations on the property which Lenco would either purchase or
continue to occupy
in terms of a new long term lease.
[4] Lenco eventually
resolved to purchase the property and on 4 July 1994 it made a written offer to
the respondent which Roy Eckstein
duly accepted in writing on its behalf. It
was short, to the point and read:
‘We hereby offer to acquire the above property from your company for an
amount equal to R3,5 million (three million five hundred
thousand rand). This
offer is open for acceptance within a period of 21 days from date hereof. The
purchase price will be payable
free of commission, and will be paid on or before
the date of transfer.’
[5] Before the agreement could
be implemented and on 29 August 1994 Lenco requested the respondent to accept
one of its subsidiary
companies, Hendler & Hendler Properties (Pty) Ltd
(‘Hendler’), as the purchaser in substitution for Lenco and on
11
November 1994 the respondent agreed to do so.
[6] It is necessary to
interrupt this résumé of the factual history at this stage by
interposing an item of legislative
history. It was during this period that s
11(1)(e) of the Act was amended in a manner that eventually underlay the burning
issue
between the parties in this litigation.
[7] The section, prior to its
amendment, read as follows:
‘11(1) Where, but for the provisions of this section, a supply of goods
would be charged with tax under section 7(1)(a), such
supply of goods shall,
subject to compliance with subsection (3) of this section, be charged with tax
at the rate of zero per cent
where -
(e) the supply is to a registered vendor of an enterprise or part of an
enterprise which is capable of separate operation, where
such enterprise or
part, as the case may be, is disposed of as a going
concern.’
[8] Section 11(1)(e) was amended, with effect
from 25 November 1994, by s 13(a) of Act 20 of 1994 which substituted a new s
11(1)(e)
reading as follows:
‘(e) the supply is to a registered vendor of an enterprise or of a
part of an enterprise which is capable of separate
operation, where the
supplier and the recipient have agreed in writing that such enterprise or part,
as the case may be, is disposed
of as a going concern: Provided that
-
(i) such enterprise or part, as the case may be, shall not be disposed of as a
going concern unless-
(aa) such supplier and such recipient have,
at the time of the conclusion of the agreement for the disposal of the
enterprise or part,
as the case may be, agreed in writing that such enterprise
or part, as the case may be, will be an income-earning activity on the
date of
transfer thereof; and
(bb) ...’
[9] The amendment did not add to
the substance of the section but it introduced several formal requirements, more
particularly, that
certain provisions had to be ‘agreed in writing’
as a prerequisite for the application of zero rating. What had to be
‘agreed in writing’ was (a) that the enterprise (or part thereof)
‘is disposed of as a going concern’; (b)
that the enterprise
‘will be an income-earning activity on the date of transfer
thereof’; and (c) that ‘at the
time of the conclusion of the
agreement’ the consideration agreed upon is inclusive of tax at the rate
of zero per cent.
[10] At the time both the appellant and the respondent and
their respective advisers were unaware of the amendment to the
subsection.
[11] On 29 November 1994, after the amendment took effect, the
respondent’s attorney forwarded the necessary documentation to
the
appellant in order to effect a substitution of Hendler for Lenco as the new
purchaser. This included a new agreement which followed
the wording of the
first agreement and thus did not take account of the new requirements introduced
by the amendment. The covering
letter concluded:
‘Please would you arrange for signature in black ink and return to us.
Please would you also forward us the VAT number for
the Purchaser so that we may
claim a zero rating provision under section 11(1)(e) of the VAT Act and exempt
the transaction from
transfer duty.’
[12] On 2 December
1994, and before the new substitution could be implemented, the respondent was
once again requested to substitute
another of Lenco’s subsidiaries, the
present appellant, as the purchaser. The respondent was again prepared to
accommodate
Lenco and a new set of documents, identical to the earlier documents
(except for the change in the identity of the purchaser), was
prepared by the
respondent’s attorneys.
[13] Amongst the draft documents forwarded to
Cape Town was a new agreement, drawn in the form of an offer by the appellant
to the
respondent in the following terms:
‘We hereby offer to acquire the above property from your company for R3,5
million. The purchase price shall be payable free
of commission and will be
paid on or before the date of transfer which shall take place as soon as
possible after signature hereof.’
This document was
signed on behalf of the respondent by Edward Eckstein (in the temporary absence
of Roy Eckstein) on 7 December 1994
and forwarded to the appellant in Cape Town
under cover of a letter dated 9 December 1994, containing the same supporting
documents
as before, to be completed by Hendler, Lenco and the appellant, with
the request:
‘Please would you also forward us the VAT number for the purchaser so that
we may claim a zero rating provision under s 11(1)(e)
of the VAT Act and exempt
the transaction from transfer duty.’
[14] The agreement
and its supporting documentation were completed, signed and returned, together
with the appellant’s VAT number,
to the respondent’s attorneys on 3
January 1995. The purchase price was thereafter duly paid and transfer was
effected to
the appellant on 7 February 1995.
[15] What is abundantly clear
from the above account is (a) that both parties through their legal
representatives were alive to the
VAT legislation; (b) that the respondent,
through its attorneys, was firmly of the belief that the transaction was zero
rated; (c)
that the appellant and its advisors gave no indication that it
disagreed with that view; and (d) that both parties were unaware
of the changes
to the legislation which had come into effect after they had reached agreement
on the sale but before the substitution
of a new purchaser had been
finalised.
[16] And that is where matters rested until 4 August 1995 when
Lenco wrote to the Commissioner in the following terms:
‘We enclose an additional VAT 201 for February 1995 where we failed to
claim input VAT on the purchase of 37 Willowton Road
from Eckstein Properties
(Pty) Ltd for R3 500,000.00. We subsequently sold this property which had been
accounted for in our April
return with a net settlement of R2 008 625,55 for
that period.’
In the VAT 201 form an amount of R429
824,56 (the amount now in dispute between the parties) was claimed as a
‘return for remittance
of value-added tax’.
[17] On 10 June
1996 the appellant wrote to the respondent:
‘We refer to the purchase of 37 Willowton Road Pietermaritzburg by Milner
Street Properties (Pty) Ltd and advise that we have
still not received a VAT
invoice covering the transaction in spite of previous
requests.
Kindly supply the required invoice per return of post
so that this matter can be finalised.’
The respondent’s attorneys
thereupon supplied a VAT invoice which stated:
‘This consideration is exclusive of Value Added Tax, and the sale is zero
rated.
‘ - amount of Value Added Tax charged -
Nil.’
(It was common cause that the word ‘exclusive’
should have read ‘inclusive’.)
[18] Both Mr Stubbs and Mr Whyte
who gave evidence on behalf of the appellant confirmed that it was the
appellant’s external
auditors who alerted it to the prospect of claiming a
refund on the transaction. Implicit in such a claim by the appellant was the
demand that the respondent, in order to produce a tax invoice reflecting the
amount claimed, should first effect payment thereof
to the Commissioner. The
respondent refused to supply a VAT invoice to that effect since it persisted in
its attitude that the sale
was zero rated.
[19] The appellant thereupon
instituted proceedings against the respondent in which it sought relief in the
following terms:
‘(a) an order declaring that the defendant is obliged in terms of the
provisions of section 20(1) of Act 89 of 1991, to deliver
to the plaintiff a tax
invoice in respect of the sale by the defendant to the plaintiff of the
property, Remainder of Lot 3043 Pietermaritzburg
and having the street address
37 Willowton Road
which:
(i) reflects the consideration for the supply in the amount of R3 500
000,00;
(ii) the amount of the tax
charged in the said sum of R429 824,56,
and otherwise complying with the requirements of section 20(4) of the Act;
(b) directing the defendant to deliver to the plaintiff forthwith a tax invoice
as referred to in paragraph (a)
above;
(c) Alternatively to paragraph (b) above,
damages in the sum of R429 824,56;
(d) Damages calculated at the
prescribed rate of 15,5% per annum on the said sum of R429 824,56 from 25
October, 1996 to the last
day for the rendering by the plaintiff of its return
for remittance of value added tax for the tax period in which the said tax
invoice
is so delivered, alternatively to the date of payment to the plaintiff
of the said sum of R429 824,56;
(e) Costs of suit;
(f) Alternative
relief.’
[20] The respondent raised a number of defences,
inter
alia
, that the exchange of correspondence between the parties satisfied the
newly introduced formal requirements of s 11(1)(e) of the
Act, failing which,
that the respondent was in any event entitled to have the written agreement
rectified in the manner set out in
its conditional counterclaim, by the
introduction of the following words:
“It is recorded that the abovementioned sale will be the sale of an
enterprise which is a going concern and that such enterprise
will be an
income-earning activity on the date of transfer and will consist of the property
duly leased to a tenant.”
[21] The matter came before Thirion J who dismissed
the appellant’s claim and granted the respondent’s counterclaim,
both
with costs. This is an appeal, with the leave of the Court
a quo
,
against the orders so made.
[22] To qualify for zero rating where both the
supplier and the recipient were duly registered vendors in terms of the Act, the
enterprise,
or part thereof, had to be disposed of as a going concern and had
to be ‘an income-earning activity’ on the date of
transfer thereof.
In the instant case the property was obtained by the appellant in order to
continue the subsisting tenancy of
Amshoe for the foreseeable future and
certainly beyond the date of transfer. As such the transaction, but for the
failure to spell
out these facts in the written agreement, qualified, according
to the respondent, for zero rating. Notwithstanding certain reservations
expressed by the appellant’s witnesses about it, I did not understand
appellant’s counsel to contend to the contrary.
The argument for the
appellant was twofold: since neither the statutory preconditions for zero
rating nor the common law preconditions
for rectification had been satisfied, it
was not competent for the respondent to rely on either the correspondence or on
rectification;
that being so, the transaction was not zero rated; and if it
was not zero rated, the appellant was entitled to payment of R429
824,56, either
indirectly via a refund from the Commissioner or directly via a claim for
damages.
[23] Before this Court the argument was largely confined to the
effect of the non-compliance of the written agreement of sale with
the newly
prescribed statutory formalities. It was common cause between the parties that
the written agreement of sale did not comply
with the formalities introduced by
the amending legislation. In particular, the agreement did not stipulate that
the enterprise
or part thereof ‘is disposed of as a going concern’
(the legislation being silent as to when this was to be so stated)
nor did it
specify ‘at the time of the conclusion of the agreement’ that the
enterprise or part thereof ‘will be
an income-earning activity at the date
thereof’.
[24] It was contended on behalf of the appellant that, just
like an agreement, invalid for want of compliance with formalities prescribed
by
statute, cannot be validated by rectification (
Intercontinental Exports (Pty)
Ltd v Fowles
1999 (2) SA 1045
(SCA) at 1051C-I;
Greathead v SA
Commercial Catering & Allied Workers Union
[2000] ZASCA 142
;
2001 (3) SA 464
(SCA) at
469H-J), so rectification in this instance could likewise not circumvent
non-compliance with the formalities prescribed
for zero rating. The proposition
is sound; the analogy is not.
[25] Central to the contention was a dictum
of Hoexter AJA in
Magwaza v Heenan
1979 (2) SA 1019
(A) at 1029B-C:
‘ ... [I]t seems to me that as a matter of principle that proposition
[“... you cannot, by rectification, invest a document
which, on the face
of it is null and void, with legal force” - 1026A] is legally correct. In
my judgment any departure from
the legal position as stated by Dowling AJ in
Dowdle’s
case [
Dowdle’s Estate v Dowdle and Others
1947 (3) SA 340
(T)] is in theory subversive of the statutory formalities
prescribed by the statute; and in practice such departure must inevitably
prove
emasculatory of them.’
In the instant case, so counsel
contended, rectification would equally be ‘subversive of the statutory
formalities prescribed
by the statute’ and ‘prove emasculatory of
them’. The argument, in my opinion, loses sight of several relevant
considerations.
[26] In the first place the dictum of Dowling AJ, on which
Hoexter AJA placed the
imprimatur
of this Court, was not in point. That
dictum, and indeed the subsequent dictum of Hoexter AJA, dealt with a situation
which differs
fundamentally from the present one, in that the sanction for
non-compliance with the stipulated formalities was nullity. In the
present case
non-compliance with the formalities prescribed by s 11(1)(e) concerns not the
conclusion and hence the formal validity
of the transaction but a fiscal
consequence thereof, the rate at which VAT is to be levied. In the first class
of case, where compliance
with the statutory formalities is a prerequisite for
the actual formation of an agreement, a failure to comply means that nothing
is
constituted and consequently there is by definition nothing that can be
rectified, just as the cipher zero cannot be added or
subtracted, multiplied or
divided. The underlying non-conforming agreement is legally irrelevant, also
for the purpose of rectification.
One cannot, it has been said, rectify out of
formal invalidity. The very point is made in a dictum in
Spiller and Others
v Lawrence
1976 (1) SA 307
(N) at 312B-C, quoted with approval in
Magwaza’s
case at 1027E-F, where the Court, in contrasting voidness
for want of compliance with essential formalities with other forms of
invalidity,
said:
‘It does not support the much wider proposition that there can never be
rectification if the agreement, although in fact valid,
wrongly appears from the
documentary evidence of it to be invalid for some other reason. Nor does this
follow logically. The two
situations are fundamentally different. In the one
like the present, when the question of validity relates to the substance of the
transaction and not its form, nullity is an illusion produced by a document
testifying falsely to what was agreed. In the other,
that envisaged in the
obiter dictum,
the cause of nullity is indeed to be found in the
transaction’s form.’
[27] Secondly, it is important to bear the respective purpose and function of
the prescribed formalities in mind when comparing the
two classes of cases. In
the class of case (such as alienation of land, suretyship, and executory
donations) where the sanction
is nullity, the objective of the legislature has
been said to be ‘to prevent litigation and to remove a temptation to
perjury
and fraud’ (
Wilken v Kohler
1913 AD 135
at 142) or to avoid
‘uncertainty, disputes and possible malpractices’ (
Clements v
Simpson
1971 (3) SA 1
(A) at 7A) or ‘to achieve certainty as to the
true terms agreed upon and thus avoid or minimize the possibility of perjury
or
fraud and unnecessary litigation’ (
Fourlamel (Pty) Ltd v Maddison
1977 (1) SA 333
(A) at 343A). To permit rectification in such cases would open
the door to the potential areas of dispute which the legislation
sought to
exclude. In the instant case the reason for the introduction of the
formalities in s 11(1)(e) is different. It was put
thus by Thirion J in the
Court
a quo
:
“Now, it would appear to me that the object of the requirement regarding
writing in the amended section 11(1)(e) is to obtain
certainty that the parties
to a supply of an enterprise as a going concern, were
ad idem
when they
concluded this agreement, that the enterprise was disposed of as a going concern
and that they contemplated at that stage
that the enterprise would be an
income-earning activity on the date of transfer thereof. Having these matters
stated in writing
would tend to eliminate disputes and uncertainty occurring
afterwards as to the nature of what was disposed of in the agreement and
as to
what was in the contemplation of the parties when they concluded their
agreement. I would think that the requirement that
these matters be stated in
writing was inserted in the section largely for the benefit of the Commissioner
to enable him to determine
whether what was supplied was indeed an enterprise
which was supplied as a going concern and to satisfy him that the parties, when
they concluded the agreement, did indeed contemplate that the enterprise would
be an income-earning activity at the date of its
transfer.”
I agree with this analysis. What the Commissioner wants is formal proof
eliminating disputes emerging after the conclusion of the
contract which he must
then resolve. Once the document has been rectified, having been vetted by a
court, the need for such formal
proof would have been satisfied. And if that is
the correct approach there is no reason why rectification in this class of case,
unlike the other where the sanction is nullity, should not in principle be
competent. The formalities in this case are not constitutive
but probative:
the underlying purpose of the legislation will be enhanced, not undermined, if
rectification is granted.
[28] That the Commissioner himself did not regard non-compliance as preclusive
appears from VAT Practice Note No. 14, which he issued
on 20 January 1995. It
provides
inter alia
:
‘Where an agreement for the sale of an enterprise as a going concern was
concluded before, on or after 25 November 1994, but
the parties did not agree in
writing that the enterprise is disposed of as a going concern (as they were
unaware of the amendment
to section 11(1)(e)) they may enter into a separate
agreement - based on the original contract - regarding this aspect’
The Commissioner was, patently, aware that some transactions were concluded and
recorded in ignorance of the amendment to the legislation.
It was to provide
for that very eventuality that the practice note was issued. The mere fact that
the formalities had not been
complied with at the time the agreement was entered
into, was not, in his view, necessarily fatal. This of course was not a case
where the parties by subsequent agreement supplemented what they had previously
omitted. The significance of the practice note is
nevertheless that it shows
that from the Commissioner’s perspective no policy reasons existed which
precluded a subsequent
correction of a prior omission; and if that is so, there
can likewise be no policy reasons for not allowing rectification.
[29] The purpose of rectification in circumstances such as the present is not to
avoid the payment of a tax which would otherwise
be due to the Commissioner.
Nothing would prevent the Commissioner, even if the document should be
rectified, from going behind
its terms to determine for himself whether the
supply of the goods was to be charged with VAT at zero per cent. The
Commissioner
accordingly had no financial interest in the outcome of the current
proceedings. The issue of non-joinder was in fact raised by
the respondent but
at a pre-trial conference it was recorded, admittedly in a slightly different
context,
‘that the fiscus has no financial interest in the outcome of the action
because, whatever the facts thereof, no nett tax accrues
to the Receiver of
Revenue. The matter is one dealing with the legal effect of the Value Added Tax
Act as between the plaintiff
and the defendant.’
The Commissioner in fact filed a document stating ‘the South African
Revenue Services hereby confirms that it will abide by
the decision in this
matter.’
[30] The intention of the legislature is that a transaction will be zero rated
if the supply is to a registered vendor of an enterprise
or part thereof which
is disposed of as a going concern. Those are the substantive requirements for
zero rating. To promote form
above substance, where it can be shown and is
accepted by the Commissioner that those requirements have been fulfilled, would
be
subversive of the true intention of the legislature. Rectification, it has
been said, is an equitable remedy (
Intercontinental Exports (Pty) Ltd v
Fowles, supra,
1051H-J). A court should not be miserly in granting it where
the substantive preconditions for its invocation are present. To deny
rectification in such circumstances would facilitate rather than discourage
duplicity.
[31] There being no principial reasons why rectification should not be granted,
the next question is whether the factual preconditions
for its invocation have
indeed been satisfied. That question must in my opinion also be answered in the
affirmative. Counsel for
the appellant conceded that, but for the failure to
comply with the prescribed formalities, the respondent would on the facts be
entitled to an order of rectification. De Jager not having been called to
contradict the testimony of the witnesses for the appellant,
that concession was
properly made. The exchange of correspondence between the parties makes it
abundantly clear that they were in
agreement amongst themselves (a) that a zero
rating would apply to the sale; (b) that the consideration of R3 500 000 would
be the
full purchase consideration that the appellant would pay and the
respondent would receive; and consequently (c) that it should not
be reduced by
a tax factor of R429 824.56. The document signed in early December 1994 was
simply an extension, at the behest of
Lenco and to accommodate it, of an
agreement that was initially concluded in July 1994 before the amending
legislation was enacted.
As the legislation and the agreement then stood it
would have had the effect (subject to the Commissioner’s ultimate
assessment)
that the transaction would have been zero rated and that the
stipulated purchase price would have represented the net proceeds to
the
respondent of the sale. That is what the parties, experienced businessmen who
were alive to the Act if not to its later amendment,
had in mind in July as well
as in December 1994. Their common assumption was that their written agreement
complied with the prerequisites
for zero rating. Had they been aware, at the
time the agreement was signed in December 1994, that the Act had been amended
they
would as a matter of course have redrafted the terms thereof to maintain
the status quo as far as the zero rating was concerned.
The appellant’s
representatives only appreciated the significance of the manner in which the
agreement was drafted when this
was pointed out to them by its external
auditors. It was only during June 1996 that the appellant demanded a tax
invoice from the
respondent on the supposition that the latter was liable to the
Commissioner for VAT. That the point was only discovered by the
appellant’s external auditors and conveyed to the respondent some fifteen
months after the event is in itself proof that it
was never the parties’
own understanding that the appellant should enjoy a tax bonanza of R429 824.56
at the respondent’s
expense.
[32] Unlike cases such as
Mouton v Hanekom
1959 (3) SA 35
(A) and
Brits v Van Heerden
2001 (3) SA 257
(C), this was not a case where
parties deliberately omitted an agreed term from the written record of their
agreement. The mistake
in this instance was the failure of the parties, due to
their ignorance of the existence of the amending legislation, to appreciate
that
certain facts underlying their agreement and which were themselves not even the
subject matter of discussion and consent, had
to be formally recorded in writing
to qualify the transaction for zero rating. Compared to
Mouton v Hanekom,
supra,
and
Brits v Van Heerden, supra,
this is an
a fortiori
case (cf
Tesven CC and Another v South African Bank of Athens
2000 (1) SA
268
(SCA) at 275C-E).
[33] There are accordingly in my opinion no obstacles, legal or factual, to
allowing the respondent to meet the appellant’s
case by a plea of
rectification. Rectification, once granted, operates
ex tunc
, as if the
document at its inception read as it has now been reconstructed to read.
Rectification does not alter the terms of the
agreement, it perfects the written
memorial so as to accord with what the parties actually had in mind. Far from
emasculating the
subsection of the Act, as has been claimed on behalf of the
appellant, rectification restores the agreement to full potency in terms
thereof: by the interpolation of a term as formulated in the counterclaim the
agreement complies
ex post facto
with the formal requirements of s
11(1)(e). This latter consequence also disposes of another suggestion raised in
the course of
argument, namely, that the parties must have agreed in writing
at the time of the conclusion of the agreement
that the enterprise will
be an income-earning activity on the date of transfer. Having been rectified
with retroactive effect, the
agreement is deemed to have so provided at the time
of its conclusion.
[34] In the light of the above conclusion it is not necessary to examine the
other ground on which the respondent sought to rely
in the appeal, i e that it
is evident from the exchange of correspondence between the parties’
respective legal representatives
that the transaction in fact complied with s
11(1)(e) in its amended form. In that context the phrase ‘at the time of
the
conclusion of the agreement’ which appears in subsection
11(1)(e)(i)(aa) (but nowhere else) may have featured rather more prominently
than in the context of rectification.
[35] It follows that the respondent was entitled to rectification and that the
Court
a quo
was right in so ordering it. The following order is
made:
The appeal is dismissed with costs.
.....................
P M NIENABER
JUDGE OF APPEAL
Corcur
:
Schutz JA
Scott JA
Navsa JA
Nugent
AJA