Africa Cash & Carry (Pty) Ltd v The Commissioner for the South African Revenue Service (783/18) [2019] ZASCA 148; [2020] 1 All SA 1 (SCA); 2020 (2) SA 19 (SCA) (21 November 2019)

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[2019] ZASCA 148
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Africa Cash & Carry (Pty) Ltd v The Commissioner for the South African Revenue Service (783/18) [2019] ZASCA 148; [2020] 1 All SA 1 (SCA); 2020 (2) SA 19 (SCA); 82 SATC 73 (21 November 2019)

THE
SUPREME COURT OF APPEAL OF SOUTH AFRICA
JUDGMENT
Reportable
Case
No:
783/18
In
the matter between:
AFRICA
CASH AND CARRY (PTY)
LIMITED

Appellant
and
THE
COMMISSIONER FOR THE SOUTH AFRICAN
REVENUE
SERVICE

Respondent
Neutral
citation:
Africa Cash & Carry (Pty) Ltd v The Commissioner
for the South African Revenue Service (783/18)
[2019] ZASCA 148
(21
November 2019).
Coram:
Navsa, Swain and Zondi JJA and Koen and Hughes AJJA
Heard:
6 November 2019
Delivered:
21 November 2019
Summary:
Income and value added tax –
Tax Administration Act 28 of
2011
– powers of tax court to alter assessment under
s
129(2)
(b)
– whether SARS proved
that the methods of assessment used were reasonable –
whether the tax court ought to have remitted the assessment -
s 89
quat interest.
ORDER
On
appeal from:
The Tax Court (Satchwell, Makume et Mali JJ) and N.
Singh (assessor).
The
appeal is dismissed with costs, such costs to include the costs of
two counsel where employed.
JUDGMENT
Koen
AJA (Navsa, Swain, Zondi JJA and Hughes AJA concurring):
[1]
The appellant (the taxpayer) operates a cash and carry business and
as the facts set out hereunder demonstrate, it generates
substantial
amounts of cash. During 2011 the respondent (SARS) raised estimated
assessments (the assessments) in relation to the
taxpayer in respect
of additional income tax and value added tax (VAT), penalties and
interest for the financial years 2003 to
2009, totalling some R600
million. It is not in dispute that the taxpayer fraudulently
suppressed its sales figures for those years
which resulted in its
income tax and VAT liability being under-declared. On the version of
its own experts it is liable to the
fiscus for unpaid taxes of at
least R68 million. The taxpayer objected to the assessments, and when
the objections were disallowed,
appealed to the Tax Court (tax
court). The taxpayer raised the defence of prescription, which was
not persisted with as the assessments
arose from a fraudulent
understatement of income. The tax court dismissed the appeal and
ordered that the additional tax per the
assessments be altered in
terms of
s 129(2)
(b)
of the Tax Administration Act 28 of 2011
(the Act) to lesser amounts, as fixed in the tax court’s order.
This appeal is against
those parts of the judgement of the tax court:
(a) dismissing the taxpayer’s
first point that SARS was bound by the assessments;
(b) finding that the assessments were
reasonable;
(c) concluding that the tax court had
jurisdiction in terms of s 129(2)
(b)
of the Act to alter the
assessments and grant the order it did; and
(d) concluding that the interest in
terms of s 89quat of the Income Tax Act 58 of 1962 (Income Tax Act)
should not be remitted altogether.
Background
[2]
During 2007 SARS became privy
to certain information
[1]
concerning tax evasion in the Jumbo Group of companies (Jumbo) which
operated in the same cash and carry market as the taxpayer.
It shared
certain shareholders in common with the taxpayer, notably a Mr
Hathurani, who, in discussions with SARS officials, which
included a
Ms Pretisha Rowesh Khoosal, a specialist forensic auditor employed by
SARS, admitted that Jumbo had under
declared cash sales of
approximately
R200 million. It had under-
reported its sales by using a functionality in its point of sale
(POS) system, which allowed manual
manipulation of its sales figures.
The point of sale system used by the taxpayer is similar to the one
used by Jumbo.
[3]
SARS thereafter commenced an investigation into the tax affairs of
the taxpayer. According to its annual financial statements
it traded
at a negative gross profit margin and only returned a positive profit
margin through the earning of rebates and discounts.
The
investigation then turned to a scrutiny of the taxpayer’s
records of its sales and stock.
[4]
SARS visited the taxpayer’s
premises on 19 March 2009 to obtain and copy the relevant financial
data to perform its investigation.
A hopelessly inadequate disclosure
of
the
taxpayer’s
financial
records
caused
SARS
to
apply
[2]
for
search
and
seizure warrants. These were
executed at the taxpayer’s premises on 20 March 2009. Computer
equipment was seized, sealed in
evidence bags and removed. Available
computer hard drives were also imaged at the taxpayer’s
premises. Documents were placed
in boxes, each having a template
indicating the location from which documents were removed and a brief
description of the documents
contained therein, and removed. What was
seized was acknowledged in writing by the taxpayer’s legal
representative. About
74,000 documents in pallets were seized
comprising sales invoices, supplier invoices, supplier trade
agreements, and financial
records.
[3]
[5]
Ms Khoosal was present during the visit to the taxpayer’s
premises on 19 March 2009, and thereafter during the execution
of the
warrants. She has personal knowledge of all material dealings SARS
had with the taxpayer regarding its tax liability, throughout,
until
her resignation from SARS in 2015. Her factual evidence as to what
records were made available by the taxpayer and the inadequacy

thereof, stands unchallenged. It is not in dispute that the records
that could be found and were seized were incomplete and inadequate.

The taxpayer’s representatives were invited to be present when
the seals to the records that were seized would be broken.
None of
the taxpayer’s representatives however attended.
[6]
The software related to the POS
system
[4]
used by the taxpayer to record its sale transactions is distributed
by React Solutions (Pty) Ltd (the React System). The taxpayer
used a
DOS version (the DOS version) of the React system from early trading,
customised to its requirements. During July 2008 the
DOS version was
replaced with a standard Windows version of the React System (the
Windows version). Both the DOS and Windows versions
have a sale
suppression functionality which allows for the manual manipulation of
sales details.
[5]
[7]
The only source data which SARS was able to image, was from the
Windows version, which only covered the seven month period from

August 2008 to the end of February 2009 (the seven month period). As
regards the period prior to that when the taxpayer used its
DOS
version, SARS requested the particular DOS version software to access
the data, but this was not forthcoming. SARS did not
find any backup
data for this period during its search and seizure operation.
Requests for copies of the backup data for the period
before August
2009 were met with the response that the DVDs containing the backup
data for that period were stolen during a burglary
at the taxpayer’s
premises. No evidence to confirm a theft of the backup data was
adduced by the taxpayer before the tax
court. SARS requested the
relevant customised DOS software application from the taxpayer. The
taxpayer alleged that this DOS version
was on drives seized by SARS.
Ms Khoosal denied that these drives had been seized by SARS. Her
evidence stands unchallenged.
[8]
The result was that SARS was
restricted to the so-called raw data from the Windows version, which
only covered the seven month period.
Ms Khoosal,
analysed this data and
discovered that the quantities sold per the stock table exceeded the
sales count in the sales table.
[6]
These quantity variances were caused by the taxpayer suppressing its
disclosed sales to below the level of its true sales. SARS
adduced
the evidence of Mr Moosa Loonat Ebrahim and Mr Imitaz Ahmat Ishmael
Kara, former employees of the taxpayer, who testified
about the
‘ooplang’
[7]
practices of the taxpayer and the suppression of sales, which
occurred in an erratic fashion. Their evidence was not disputed.
[9]
In addition to the raw data for the seven month period, SARS had some
records from the Pastel accounting program used by the
taxpayer on
which data was captured across from the React system, hard copies of
some management reports, VAT returns, and annual
financial statements
for each of the financial years ending February 2003 to 2009. The
manipulated sales figures were carried forward
in all these records,
thus rendering them unreliable.
[10]
Having determined the quantity variance of under-disclosed sales for
the seven month period, SARS, by using the pricing field
from the
sales table in the database it was able to access, calculated the
sales value variance for the seven months to be R38
994 851 (the R38
million variance). This amount was added to the fictitious sales
figure declared by the taxpayer for that seven
month period,
resulting in a figure of R1 518 847 563. The cost of sales for that
seven-month period was then calculated by extracting
the value of the
opening stock as at 1 August 2008 and the value of the closing stock
as at 28 February 2009 from the stock table
in the database. An
amount of R1 526 104 367 was extracted in respect of purchases from
the ‘goodsdoc’ table and reduced
by R 11 694 337 for
returned goods. The gross profit for the seven month period using
these figures was calculated as follows:
Sales
disclosed by the taxpayer    R1 479 852 712
Sales
variance
R38 994 850
R1 518 847 563
Cost
of sales:
Opening
Stock

R219 461 109
Purchases

R1 151 410 031
Closing
Stock
(R268 954 558)
R1
464 916 582
Gross
Profit

R53 930 981
The
gross profit expressed as a percentage of the adjusted sales figure
was 3,6%.
[11]
Section 95 of the Act provides for the estimation of assessments by
SARS in the following terms:
‘
(1) SARS may make an original,
additional, reduced or jeopardy assessment based in whole or in part
on an estimate if the taxpayer
–
(a)  fails to submit a return as
required; or
(b)  submits a return or
information that is incorrect or inadequate.
(2) SARS must make the estimate based
on information readily available to it.
(3) If the taxpayer is unable to
submit an accurate return, a senior SARS official may agree in
writing with the taxpayer as the
amount of tax chargeable and issue
an assessment accordingly, which assessment is not subject to
objection or appeal.’
An
estimated assessment, unlike an assessment in terms of s91 of the
Act, is not a precise determination of the undeclared taxable
income,
because all the necessary data for a proper estimate is not
available. SARS perforce had to base the estimated assessments
on
such records as were made available to it by the taxpayer.
[12]
SARS applied a gross margin percentage of 3,6% for the seven month
period to the taxpayer’s 2003 to 2008 and the full
2009 years
of assessment. It did so by using the cost of sales figures in the
taxpayer’s annual financial statements declared
for those
years, to calculate the sales which would produce a gross profit
percentage of 3,6% for each year.
[13]
Following that methodology, SARS claimed estimated additional income
tax from the taxpayer as follows:
Year
Under
declared sales
Income
tax
Additional
tax at 200%
2003
R35
555 740
R10
666 722
R21
333 444
2004
R71
884 116
R21
565 235
R43
130 470
2005
R86
937 318
R26
081 196
R52
162 392
2006
R112
416 989
R32
600 927
R65
201 854
2007
R89
057 501
R25
826 676
R51
653 352
2008
R116
517 421
R33
790 052
R67
580 104
2009
R145
602 847
R42
224 826
R84
449 652
[14]
SARS applied the same methodology in respect of under-declared sales
to claim additional VAT from the taxpayer as follows:
Tax
period
Output
tax on under declared sales
Additional
tax at 200%
2003
R4
977 804
R9
955 608
2004
R10
063 776
R20
127 552
2005
R12
171 225
R24
342 450
2006
R15
738 379
R31
476 758
2007
R12
468 050
R24
936 100
2008
R16
312 439
R32
624 878
2009
R20
387 399
R40
768 798
[15]
On 19 November 2010 SARS issued
a letter of its preliminary audit findings based on the above
methodology claiming the above amounts,
followed by a Letter of
Findings, and finally it issued the estimated assessments which
formed the subject matter of the dispute
before the tax court. It did
so acting in terms of s 78 of the Income Tax Act and s 31 of the
Value Added Tax Act (prior to their
repeal and substitution
respectively by the provisions of the Act).
[8]
In terms of s 270 (3) of the Act,
[9]
which came into operation on 1 October 2012, these assessments are to
be regarded as having been issued under the comparable provisions
of
the Act, namely ss 95 and 102(2).
[16]
The taxpayer objected to these
estimated income tax and VAT assessments, principally on the grounds
that it had not under-declared
its income tax or VAT liability, that
SARS’ approach to establish sales was incorrect, that the
Windows version contained
certain
defects,
and
that
the
period
within
which
additional
assessments could be issued had
lapsed.
[10]
The objections were disallowed by SARS by letter dated 17 March 2012.
The taxpayer then filed a notice of appeal and thereafter
delivered
its Letter of Appeal, noting the appeal against such disallowance.
That is the appeal which served before the tax court.
[17]
SARS’s ‘Statement of Grounds of Assessment’
delivered on 23 May 2013 essentially mirrors the contents of
its
letter of assessment, the import whereof has been set out briefly
above.
[18]
On 30 April 2015, preparatory
to the hearing before the tax court, SARS filed
a notice in terms of rule 37
(a)
and
(b)
of
the rules
[11]
promulgated in terms of the Act, in respect of the expert testimony
of Ms Khoosal. This notice recorded that in preparing for the
tax
appeal, Ms Khoosal identified three errors in the previous estimation
by SARS, namely that:
(a)
the value of the variance of
R38 million previously calculated did not take into account so called
positive P adjustments;
[12]
(b)
the value of the purchases
previously used in the calculation of cost of sales had been
overstated due to an error in the computer
program script,
[13]
which merged the data in respect of goods returned and goods
received.
A
correction of this error resulted in the variances identified being
reduced to nil and therefore no adjustment, as had previously
been
made, was required to purchases;
and
(c)  In its calculations SARS
made a typographical error with regard to the cost of sales figure
for the 2008 year of assessment,
resulting in an over-statement of
the assessment raised for that year by R1 706 543.
She
explained the methodology used by SARS in detail and confirmed that
it had remained the same.
[19]
Taking the aforesaid into
account, Ms Khoosal recalculated the stock variance for the seven
months and determined that the quantity
of sales units under-declared
reduced from 3 412 578 to 2 390 259. She confirmed that any variance
from the reconciliation between
the stock and sales tables was not
attributable to a purchase from or a return to a supplier,
[14]
but arose due to the manipulation of sales in the Windows version,
either being unrecorded sales using the stock adjustment account,
or
the reversal of recorded sales by recognition of a negative sale.
[20]
The value of the under–declared sales for the seven-month
period was recalculated as R28 020 064 (the R 28 million variance).

Ms Khoosal accepted that the initial R38 million variance was wrong.
[21]
The taxpayer’s experts, Mr Charles Arthur Stride and Mr Daniel
Sabbagh, do not dispute the variance in sales due to the
sales
figures being understated. Indeed, it became common cause before the
tax court that the R 28 million variance reflects the
value of sales
understated by the taxpayer during the seven month period. No
explanation for such variance has however been forthcoming
from the
taxpayer.
[22]
As was done previously, SARS added the R28 million variance to the
contrived sales per the React POS system disclosed by the
taxpayer in
its records for the seven month period. The purchases were adjusted
by R 11 694 337, which had previously been taken
into account
erroneously, and recalculated as R1 526 550 542. The gross profit for
the seven month period from 1 August 2008 to
28 February 2009 was re-
calculated, as follows:
Sales
Sales
variance
Cost
of sales:
R1
479 852 712
R
28 028 064
R1
507 880 776
Opening
Stock
R219
461 109
Purchases
R1
526 550 542
Closing
Stock
(R268 954 558)
R1
477 057 093
Gross
Profit
R30
823 683
The
recalculated gross profit expressed as a percentage of sales produced
a now reduced gross profit percentage of 2,04%.
[23]
Again, as was done previously, the 2,04% gross profit percentage was
extrapolated to the 2003 to 2008 and full 2009 years of
assessment,
to revise the contrived annual sales figures reflected in the annual
financial statements submitted for those years,
to result in a gross
profit expressed as a percentage of sales of 2,04% for each year. The
total income tax and VAT liability payable
for those years were
recalculated as R 208 288 350,47 (R140 632 842,84 income tax and R 67
655 507,63 VAT).
[24]
On 3 September 2015 Ms Khoosal produced a factual report. Annexure FR
48 to her report sets out how these amounts were calculated
for each
of the tax years from 2003 to 2009. That was the first time that the
corrections and revised amounts SARS would persist
with, were set out
for each year of assessment. The schedule of her calculations based
on the 2,04% gross profit percentage is
reproduced in the schedule
below. The income tax and VAT payable were calculated as R192 755
633,20 and R92 116 071,04 respectively,
excluding additional tax
interest and penalties. Her previous calculations based on a gross
profit percentage of 3,6% and containing
the errors alluded to by Ms
Khoosal, which was annexed to the assessment letter, annexure FR 47
to Ms Khoosal’s factual report,
are set out in the second
schedule below.
[See
PDF for tables]
[25]
The methodology adopted in calculating the original R38 million
variance, which resulted in a gross profit percentage of 3,6%
and
gave rise to the estimated assessments, and the methodology adopted
in calculating the R28 million variance and resulting in
a gross
profit percentage of 2,04%, were identical. The difference was caused
by two incorrect input values, the understated sales
(due to a lower
calculated sales variance) and the purchases figure (due to an
incorrect script and the typographical error in
the cost of sales
figure for 2008).
[26]
The original assessments were
not withdrawn
[15]
nor amended, but remained together with the objection to the
assessments by the taxpayer, the disallowance of the objections, and

the appeal as framed by the pleadings. Ms Khoosal’s expert
summary simply concluded that:
’
47. In Ms Khoosal’s
opinion the analysis and extrapolation conducted provides a
sufficient and reasonable foundation and methodology
for SARS to
assess the taxable income and VAT on the basis explained above.
48. The calculations, inferences and
methodologies followed by SARS, having regard to the Taxpayer’s
failure to maintain and
produce proper accounting records and source
documents, are reasonable and appropriate in order to arrive at the
estimates, determinations
and quantifications identified above and in
the assessments. The assessments must be evaluated taking into
account what is stated
in this expert summary.’
[27]
On 19 October 2015 the taxpayer filed its amended Grounds of appeal
with the caveat that the taxpayer disputed that there had
been
‘assessments’ as defined in the Act. In response to an
enquiry by the taxpayer’s attorneys, SARS’s
attorneys on
23 October 2015 in a letter advised the taxpayer’s attorneys
that:
’
20. Although our client intends
proving the reasonability of the methodology used at the tax appeal,
the Tax Court will be asked
to confirm the reduced calculated margin
of 2,04%, as extrapolated. Therefore, the Tax Court will be asked to
make an order in
terms of s 129(2)(
b
) of the
Tax
Administration Act, Act
28 of 2011.
21. In light of the above, we place on
record that our client does not, as currently advised, intend issuing
reduced assessments
prior to determination by the Tax Court of the
tax appeal.’
[28]
At the commencement of the proceedings before the tax court, SARS’s
counsel, according to the judgement of the tax court,
placed on
record that SARS, ‘did not intend to and was not proceeding
with an insistence upon full liability in accordance
with the figures
of 2011 and 2015 but that it was proceeding only with the figures set
out in the amended Khoosal report based
upon undeclared sales for the
seven-month period of the lesser amount of R28 million resulting in
the 2,04% gross profit margin
– as set out in the expert
witness summary of April 2015 and confirmed in the correspondence of
23 October 2015’.
[29]
SARS adopted the stance during
the trial before the tax court that the ‘amount of the
liability’ had changed ‘at
appeal stage’, and that
it was not required of SARS to amend the assessments accordingly.
[16]
[30]
The tax court dismissed the appeals and ordered that ‘the
assessments are altered in accordance with
s 129(2)(b)
of the
Tax
Administration Act as
indicated below, and it is directed that SARS
alter the assessments in respect of the 2003 to 2009 income tax
assessments and VAT
assessments, forming the subject of this tax
appeal accordingly’.
The
issues in the appeal
[31]
The taxpayer raises what it terms are four key issues, namely that:
(a)
it was not open to SARS to
defend the assessments by contending for a materially different tax
liability to that reflected in the
assessments, in the absence of
revised assessments or a valid concession of the appeal, whether in
whole or in part;
[17]
(b)  the tax court, by
substantially ‘altering’ the assessments, exercised the
functions of SARS, which it may
not do, hence it acted beyond its
powers;
(c)  if the aforesaid arguments
both fail, that SARS has not discharged the burden of proving the
reasonableness of the assessments
effectively revised by the tax
court; and
(d)
the
s 89
quat interest ought to
have been remitted.
[18]
In
raising these issues, it was emphasized that the audi alteram partem
principle was not adhered to.
Was
SARS bound by the assessments?
[32]
Section 1 of the Act defines ‘assessment’ as meaning:
‘
the determination of the amount
of tax liability or refund, by way of self-assessment by the taxpayer
or assessment by SARS’.
Based
on the wording of this definition, the taxpayer emphasises that not
only must the amount of liability be determined, but that
the amount
must be determined by SARS, not by the court.
[33]
It is clear that SARS must fix
a liability in a certain amount and communicate it to a taxpayer, for
such notification to qualify
as an ‘assessment’. An
assessment cannot mean the unexpressed thoughts of an assessing
revenue officer. It requires
the written representation of those
thoughts.
[19]
The taxpayer consequently argues that an assessment requires a
‘formal act’ where an assessing officer in SARS records

the amount of the liability, such as the initial assessments. In its
submission, the amount of the liability cannot change without
the
assessment being changed by SARS.
[20]
It follows, it was submitted, that if SARS is asked what assessment
it relies upon that it must
be
able to point to
the
letter of assessment (and
pleadings). It was also
submitted, that an assessment is ‘administrative action’
for the purposes of the Promotion of
Administrative Justice Act 3 of
2000 (PAJA) and that once made, unless challenged successfully, would
harden into finality.
[21]
Finally, in terms of the principle of functus officio, the taxpayer
submitted that once an assessment has been made, it may be
revisited
only within the parameters of prescribed powers in the Act.
[22]
[34]
The argument advanced is that
these powers in the Act allow SARS only to either issue additional
assessments, reduce assessments
in terms of s 93(1)
(e)
(ii)
[23]
or withdraw assessments in terms of s 98 (1)
(d)
(i)(bb)
[24]
if there was ‘a processing error by SARS’ provided the
jurisdictional requirements are met, or to concede the appeal
whether
in whole or in part, provided such concession was made in compliance
with the law. The taxpayer contends that none of this
happened and
hence that the approach of SARS is fatally flawed.
[35]
SARS does not dispute that the assessments were not reduced or
withdrawn. But is does maintain that the assessments were conceded
in
part. The issues arising accordingly are whether there was a valid
concession and/or whether the assessments could be lawfully
altered
as the tax court ultimately did.
Was
there a valid concession by SARS?
[36]
The taxpayer complained that SARS for the first time during argument
before the tax court contended that it conceded the appeal
in part.
SARS however maintained that it had given notice that it conceded
part of the assessments to reduce the amount of the
taxpayer’s
liability, in accordance with what was set out in the expert summary
of Ms Khoosal much earlier, referring firstly
to the summary of her
expert evidence delivered on 30 April 2015, secondly SARS’s
attorney’s letter of 23 October 2015,
and thirdly SARS’s
counsel’s address at the commencement of the proceedings before
the tax court. The tax court held
that the expert summary of Ms
Khoosal and the attorney’s letter of 23 October 2015 both
constituted notice of a concession.
[37]
The issue raised is whether there was a concession of part of the
appeal before the tax court. Concessions are governed by
s 107 (7) of
the Act and rule 46 of the tax court rules.
Section
107(7) of the Act provides:
‘
(7) SARS may concede an appeal
in whole or in part before –
(a)  the matter is heard by the
tax board or the tax court; or
(b)  an appeal against the
judgement of the tax court or higher court is heard.’
Rule
46 of the tax court rules promulgated under s 103 of the Act,
[25]
provides:
‘
(1) If at any time before it
has been set down under rule 39 an appeal or application under Part F
is withdrawn by the taxpayer
or conceded by SARS under s 107 of the
Act, notice of the withdrawal or concession, whichever is applicable,
must be given to the
other party.
(2) If an appeal or application has
been set down for hearing under rule 39, or is part heard, and the
taxpayer withdraws or SARS
concedes the appeal or application, the
relevant party must–
(a)
deliver a notice of withdrawal or concession, whichever is
applicable, to the other party and to the registrar; and
(b)
in such notice, indicate whether or not the party consents to pay the
costs of the other party.’
[38]
Neither Ms Khoosal’s letter, nor the attorney’s letter,
nor counsel’s address referred to the actual amounts
in respect
of the actual years of assessment with which SARS would persist as
representing the taxpayer’s additional income
tax and VAT
liability. The expert summary of Ms Khoosal made no express reference
to a concession. It simply recorded that ‘the
assessments must
be evaluated taking into account what is stated in this expert
summary’. The summary of her expert evidence
did however
pre-warn the taxpayer as to what SARS’s approach would be so it
would not be taken by surprise.
[39]
The same observations, so the taxpayer contended, applied in respect
SARS’ attorney’s letter of 23 October 2015,
which simply
advised that, ‘…the Tax Court will be asked to confirm
the reduced calculated margin of 2,04%, as extrapolated.
Therefore,
the Tax Court will be asked to make an order in terms of
s 129(2)
(b)
of the
Tax Administration Act, Act
28 of 2011’. The amounts
‘conceded’ were not stated. SARS’ counsel’s
address at the beginning of
the appeal before the tax court also did
not record the actual amounts conceded. In all three instances, so it
was submitted, the
amounts conceded would have to be calculated,
being the difference between what was originally sought as per the
assessments and
the amounts of the tax liability SARS would persist
with based on the 2,04% gross profit percentage.
[40]
It is clear that SARS, when faced with the enquiry by the taxpayer as
to whether the original assessments would be withdrawn,
belatedly
resorted to the mechanism of a concession. The belated reliance on
s
107(7)
was opportunistic and not conscientious. Whether the tax court
correctly concluded that the expert summary of Ms Khoosal and the

attorney’s letter of 23 October 2015, constituted a valid
notice of a concession, does not have to be decided because the
tax
court ultimately resorted to an alteration of the assessments, in
terms of
s 129(2)
(b)
. Whether it had the authority to do so
and did so correctly, is for the reasons that follow, dispositive of
this appeal.
The
tax court’s power to alter an assessment in terms of
s129(2)
(b)
of the Act
[41]
At the conclusion of the
hearing the tax court was faced with the original assessments and
evidence which did not support the amounts
in the assessments, but a
tax liability for lesser amounts, based primarily
[26]
on calculations, applying a gross profit percentage of 2,04%, certain
other evidence (including that of Mr Louis Strydom) and the
errors in
the previous calculations identified by Ms Khoosal. The taxpayer
maintained that the assessments should in those circumstances
have
been set aside in toto, and if the tax court was so minded, the
matter remitted to SARS, particularly as the 16 page draft
order
handed up during oral argument at the end of the hearing, was not the
relief the taxpayer had pleaded to. The draft order
it submitted,
provided for a tax liability substantively and substantially
different to the amounts determined in the assessments.
[42]
The tax court however decided
to order the assessments ‘to be altered’ to result in the
order which was granted. It
did so relying on s 129 of the Act
[27]
which
provides:
‘
Decision by tax court
(1)
The tax court, after hearing the ‘appellant’s’
appeal lodged under s 107 against an assessment or ‘decision’,

must decide the matter on the basis that the burden of proof as
described in s 102 is upon the taxpayer.
(2)
In the case of an assessment or ‘decision’ under
appeal or an application in a procedural matter referred to in s
117(3),
the tax court may–
(a)
confirm the assessment or ‘decision’;
(b)
order the assessment or ‘decision’ to be altered; or
(c)
refer the assessment back to SARS for further examination and
assessment.
(3)
In the case of an appeal against an understatement penalty
imposed by SARS under a tax Act, the tax court must decide the matter

on the basis that the burden of proof is upon SARS and may reduce,
confirm or increase the understatement penalty.
(4)
If SARS alters an assessment as a result of a referral under
subsection (2) (c), the assessment is subject to objection and
appeal.
(5)
….’
[43]
The taxpayer contended that the
tax court ‘altered’ the assessments in a manner not
contemplated by s 129(2)
(b)
of the Act. It construed
the power to ‘alter’ to mean something not comprehended
by ss 129(2)
(a)
or
(c)
,
as the power to ‘alter’ stands in the alternative to
those subsections. In particular it argued that to ‘alter’

means either to set aside in the macro sense as in
Commissioner,
South African Revenue Service v Stepney Investments (Pty) Ltd
,
[28]
or to change in a manner and to a degree which leaves the original
assessment and its function as a notice to the taxpayer (permitting

no more than what was termed ‘keyhole surgery’) as in ITC
1869 (75 SATC 329)
intact.
[44]
The taxpayer specifically maintained that there was a fundamental and
substantial change and not just an obvious error which
needed to be
corrected, which resulted in a change in the basis of the assessment
and called for a reassessment. Further, to interpret
s 129 of the Act
as giving the tax court the power to reduce an assessment in line
with a new liability relied upon by it:
(a)
violates the separation of
powers doctrine as the court would be usurping a function ‘close
to the “heartland”
[29]
of executive power’, as the altering of the assessments in the
manner done by the tax court is a non-judicial function not
expressly
provided for in the Constitution and not connected with the core
function of the judiciary.
[30]
(b)
violates the taxpayer’s right to a fair trial entrenched
in s 34 of the Constitution, as SARS, having rejected the objection

and determined the tax liability in the assessments, cannot fairly
after the event change the basis for its ‘estimation’

relied on in its Statement of Grounds of Assessment. In terms of rule
34 of the tax court rules, the Statement of the Grounds of
Assessment
read with the taxpayer’s Statement of the Grounds of Appeal
and, if any, the Reply, constitute the pleadings and
define the
issues in the appeal. In essence the argument is that s 129 (2)
(b)
does not allow the tax court itself, in effect, to ‘re-issue’
assessments under the guise of an ‘alteration’
thereby
depriving the taxpayer of procedural entitlements under the rules.
[45]
The Oxford English Dictionary defines the word ‘alter’
as:
‘
to make (a thing)
otherwise or different in some respect; to make some change in
character, shape , condition, position, quantity,
value etc without
changing the thing itself for another; to modify, to change the
appearance of’
‘
to become otherwise, to undergo
some change in character or appearance.’
It
defines the word ‘examination’, which appears in s
129(2)
(c)
of the Act dealing with the power of a tax court to
‘refer the assessment back to SARS for further examination and
assessment’,
as:
‘
a testing, trial, proof’
or ‘the action of testing or judging by a standard rule’
or ‘the action of investigating
the nature, qualities or
condition or any object by inspection or experiment, minute
inspection, scrutiny’ or ‘the
action or process or
searching or enquiry into (facts, opinions, statements etc),
investigation, scrutiny.’
[46]
The tax court held that:
‘
Subsection
(b)
envisages
that when an assessment is ordered to “be altered”, the
assessment is changed or modified in identified respects
but the
assessment is not completely transmuted or transmogrified into an
entirely new entity comprising new DNA. Subsection
(c)
envisages
that the assessment is referred back to the creator thereof, SARS,
for a further process of investigation so as to test
the subject
matter and arrive at a further result.’
That
is a correct interpretation of s 129(2
)(b)
. It also emphasizes
the distinction between instances where a tax court may ‘alter’
an assessment, and those instances
where it needs to refer an
assessment back to SARS ‘for further examination and
assessment’.
[47]
That a tax court in principle
has this power to alter an assessment, cannot be doubted. The clear
wording of s 129(2)
(b)
provides for such
eventuality. It is exactly what happened in
ITC
1869
[31]
where a management fee of
some R12 million had been allowed twice as a deduction. The court
granted an order amending the original
assessment to exclude the
double deduction of the management fee. Such an alteration would not
offend against the separation of
powers doctrine. The taxpayer
however argues that in
ITC
1869
the court was faced
with an obvious error that did not affect the rest of the assessment,
and that this is not the position in the
present matter. That
submission is incorrect. The reduced tax liability calculated on the
2,04% arose because of an obvious error
on the part of SARS in the
three limited respects, identified and easily corrected by Ms
Khoosal.
[48]
In
Commissioner,
South African Revenue Service v Pretoria East Motors
,
[32]
SARS disallowed certain income tax and VAT input tax deductions in
respect of payments allegedly made in cash as rentals to a landlord

in respect of an additional parking space leased by the taxpayer.
Following an interruption of a witness’ testimony by the
court,
no further evidence was adduced on behalf of the taxpayer of these
cash payments. The tax court concluded that SARS had
failed to
appreciate that the issue between the parties was not the entire
rental but just the alleged cash component. The evidence
in that
regard was insufficient to discharge the onus, but the insufficiency
of the evidence was considered to be as a result of
the intervention
by the court. Accordingly, it was found that the appeal had to
succeed in relation to this item but that the matter
had to be
remitted in terms of s 83(13)
(a)
(ii)
of the Income Tax Act
[33]
to the Commissioner for further investigation and assessment of the
parking rentals allegedly paid. Unlike
Pretoria
East Motors
, in the present
matter there is no further evidence requiring further investigation
and assessment. All the facts, investigations
and assessments
underlying the calculation of the tax liability based on the gross
profit percentage of 2,04 had been disclosed
timeously to the
taxpayer, was placed before the tax court, and the tax court was in a
position where it could grant the order
it did.
[49]
In
Avenant
v Commissioner for the South African Revenue Service
,
[34]
referred to in the judgment of the tax court,
[35]
SARS had issued an additional assessment in respect of ‘closing
stock from farm operations’. In that case the tax court
found
there was an error as to the amounts included as taxable income in
respect of the closing stock from farming operations,
which was
‘manifestly erroneous, unfair and unreasonable’ and which
‘arose out of employing an illogical and
incongruous
methodology’. The tax court noted that ‘no evidence was
adduced on behalf of SARS in support of the error’.
Following
an amendment by SARS of its grounds of assessment ‘no
alternative value was fixed in respect of closing stock
and the taxpayer was not
informed what SARS’ case was. SARS also did not respond to the
taxpayer’s request for reasons
for the assessment as required
by the rules of the tax court. The tax court concluded that:
‘
With the paucity of evidence
adduced on what would constitute a fair and reasonable method of
quantification, this court is not
in a position to substantiate
respondent’s calculation with that of its own.’
[36]
The
issue of determining the value to be placed on the income was
submitted to SARS for further consideration and reassessment in
terms
of s 129(2)
(c)
.
On appeal
[37]
to this court, the appellant initially submitted that the tax court
erred in referring the matter back to SARS, for further consideration

and re-assessment. However, at the hearing of the appeal, the
appellant conceded that if the appeal failed on the merits, the tax

court correctly referred the re-assessment to SARS.
The tax court simply did not
have that information before it. The present appeal is plainly
distinguishable from
Avenant
on that basis. No further
information was required by the tax court to grant the order it did.
[50]
In
Stepney
Investments,
[38]
SARS contended for a net
asset valuation methodology in respect of the value of shares in a
company which held a casino licence,
whereas the taxpayer contended
for a discounted cash–flow method of valuation. This court
accepted certain concessions made
by SARS at the hearing of the
appeal but also found that the taxpayer’s valuation was flawed
in certain respects. The methods
of valuation clearly required
further examination and investigation. There were insufficient facts
before the court. The court
accordingly ordered that the matter be
remitted to the Commissioner for further investigation and
assessment. There is no need
for any such further examination and
investigation in the present appeal.
[51]
The question whether an alteration of an assessment is competent
must, like the issue of the reasonableness of an assessment
or the
methodology used to determine the amount of an estimated assessment,
be answered in the light of the facts and circumstances
of each case.
It is not necessarily determined by the magnitude, in monetary terms,
of the alteration but is dictated by considerations
of fairness, with
due observance of the audi alteram partem principle.
[52]
The point of departure should
always be that a tax court is a court of revision and, ‘not a
court of appeal in the ordinary
sense’.
[39]
The legislature ‘intended that there could be a re-hearing of
the whole matter by the Special Court and that the Court could

substitute its own decision for that of the Commissioner’, if
justified on the evidence before it.
[40]
A tax court accordingly rehears the issues before it and decides
afresh whether an estimated assessment is reasonable.
[41]
It is not bound by what the Commissioner found. In rehearing the case
it can either uphold the opinion of SARS or overrule it and

substitute it with its own opinion. The powers of the tax court and
its functions are unique. It
places itself in the shoes of the functionary and re-evaluates the
facts and circumstances of the subject
matter on which the
assessments were based. By its very nature an estimated assessment is
subject to change based on an evaluation
of the evidence and any
information that becomes available. What is important is that the
methodology used and the assumptions
on the strength of which the
estimated estimates were made should remain the same, otherwise the
conclusions reached by the tax
court might not be procedurally fair.
The tax court must place itself in the shoes of the functionary to
determine whether the
methodology followed and the assumptions on
which the estimated assessment are based, are reasonable and produce
a reasonable result.
[53]
Being a court of revision does
not mean that a tax court is free of restrictions. It too must
observe an administratively fair process.
[42]
That will entail inter alia that the dispute must be resolved on the
issues raised by the parties and the enquiry confined to the
facts
placed before court.
[43]
In this regard the pleadings are important and the parties will be
kept to their pleadings, where any departure from the pleadings
would
cause prejudice or prevent a full enquiry. But within those limits a
tax court has a wide discretion, for pleadings are made
for the court
and not the court for pleadings. Where a party has had every facility
to place all the facts before the tax court
and the investigation
into all the circumstances has been thorough, then there is no
justification to interfere simply because
the pleadings had not been
as explicit as they might have been.
[44]
[54]
The taxpayer is entitled to
enjoy all the benefits of the audi alteram partem rule. It must not
be taken by surprise, and the process
must have been conducted
fairly.
[45]
Whether the taxpayer was adequately forewarned to present its case
fully, is again a question of fact dependent on the circumstances
of
each case.
[55]
The evidence in this matter established, inter alia, that the
taxpayer:
(a) was appraised of the errors in the
calculation of the assessments and SARS’ intention to ask for a
reduced tax liability
to be fixed based on only a 2,04% gross profit
margin. That was communicated inter alia by the expert summary of Mrs
Khoosal on
30 April 2015 and in the attorney’s letter of 23
October 2015;
(b) had the aforesaid basis for
recalculation reiterated by SARS’ counsel at the commencement
of the hearing;
(c) by then stood possessed of
annexure ‘A’ to SARS’ assessment letter, which is
reproduced as the second schedule
in paragraph 24 above;
(d) by then also had received the
revised quantification, annexure FR 48 to the factual report by Mrs
Khoosal dated 3 September
2015, reproduced as the first schedule in
paragraph 24 above;
(e)  had prepared fully and was
able to cross-examine SARS’ witnesses comprehensively on the
calculations based on the
same methodology employed in respect of the
assessments, but now based on the R28 million variance and a 2,04%
gross profit margin,
as opposed to the assessments which were based
on the R36 million variance and a 3,6% gross profit margin. A perusal
of the extensive
evidence adduced by the taxpayer and the detailed
cross examination of SARS’s witnesses on the quantification of
these input
values and matters related thereto, unequivocally
demonstrate that the taxpayer was well aware of the details of the
case it had
to meet and that it confronted that case squarely and
with meticulous detail.
(f) in regard to the so-called ‘third’
draft order presented by SARS at the end of the trial, was allowed an
adjournment
to allow supplementary heads to be filed, which process
would address any potential prejudice it might have suffered.
Certainly
no prejudice has been identified.
(g) Most significantly, did not have
to deal with a change in the methodology of the assessment, but was
confronted merely with
an arithmetical recalculation.
[56]
Resorting to terminology, such as that a tax court can only alter an
assessment if it is not a substitute for the executive,
is unhelpful.
Every alteration by a tax court resulting in the determination of a
tax liability different to that in an estimated
assessment, could
bring such determination by the court within the definition of
‘assessment’, and could be criticised
for being new and
something which SARS could and perhaps should have done. To conclude
that in those circumstances a court would
not be empowered after
hearing all the evidence and pursuant to a considered judgment on all
the facts before it, to ‘alter’
the assessment, would be
to render the power to alter an assessment in s 129(2)
(b)
worthless.
[57]
A tax court does not have inherent jurisdiction. However, if the
evidence before it does not sustain the amount determined
in an
estimated assessment of a taxpayer’s liability, or it
determines that the amount in the estimated assessment is
unreasonable
then, subject to constitutional principles and
compliance with the audi alteram partem principle, and fairness,
provided that the
basis for taxation is not now entirely different,
and provided the court has all the information it requires to decide
the matter
before it, a tax court can alter an assessment, rather
than ’refer the assessment back to SARS’.
[58]
Such an alteration, if in compliance with the aforesaid principles
and justified on the facts as reasonable, will fall within
the powers
conferred in s 129(2)
(b)
of the Act, accordingly be competent,
not offend against the separation of powers doctrine, amount to a
proper discharge of the
obligation imposed upon a tax court, and be
entirely consistent with the tax court’s function in the
greater constitutional
framework as a court of revision. The tax
court will simply be discharging one of its core functions.
[59]
What was said by the full court
in
Arepee Industries Ltd v
Commissioner for Inland Revenue,
[46]
albeit in a different
context, is
instructive:
‘
It is at the hearing itself
that the Commissioner’s case must be presented, and it is only
what is raised by him at the hearing
that is of any relevance to
the matters in issue. In this
connection the Commissioner’s reasons are totally irrelevant,
for it is not his reasons that
are in any way at stake at the hearing
before the Special Court. At most it is his grounds that may be an
issue, but even this
statement must be qualified, because whatever
grounds the Commissioner might earlier have had when he made the
assessment or when
he disallowed the objection concerned may also
become irrelevant. The reason is that the Commissioner is not obliged
to adhere
to any such earlier reasons or grounds as he may have had
and, provided the Special Court itself applies the
audi
alteram partem
rule at the
hearing of the appeal, it is not precluded from confirming an
assessment merely because its conclusion is based upon
a ground
which differs from that which
the Commissioner relied on when making it or relies on before the
Special Court.’
[47]
[60]
The taxpayer’s complaint that the alteration of the assessments
by the tax court would offend against the separation
of powers
doctrine is unfounded, provided the tax court properly restricts
itself to the confines of s 129(2)
(b)
of the Act. If the
taxpayer’s rights to a fair trial are not impaired in any way,
then a tax court would be perfectly entitled,
and indeed legally
obliged, to invoke and exercise its powers in terms of s 129(2)
(b)
of the Act. The absence of any explanation from SARS as to why it
did not withdraw the assessment and issue a fresh assessment, is

irrelevant provided s 129(2)
(b)
found proper application.
[61]
Both Ms Khoosal and Mr Strydom respectively stated in their evidence
that the 3,6% gross profit margin was incorrect. But that
does not
mean, as an inevitable consequence that where a lesser amount would
be justified, regardless of the quantum of how much
less, that it
follows simpliciter that the appeal should be upheld, the assessments
be set aside, and the taxpayer’s tax
liability be referred back
to SARS to assess afresh.
[62]
The methodology used to justify the reasonableness of the amounts
determined in the assessments is the same methodology used,
but now
with different lower input values in respect of the sales variance
(the R 28 million variance instead of the R38 million
variance), and
the purchases figure for that seven month period, resulting in a
different gross profit percentage (2,04% instead
of 3,6%), which was
extrapolated and applied to the same cost of sales figures as
previously, for the 2003 to 2009 tax years.
[63]
Whether the gross profit percentage methodology adopted by SARS was
reasonable is a different issue. There is no reason why
the
assessments cannot be altered by the tax court to give effect to a
lesser correct tax liability, calculated by applying input
variables
which are justified on accepted evidence. In altering the amounts,
the tax liability of the taxpayer is not determined
by an official of
SARS (Ms Khoosal) or an independent expert from PWC, Mr Strydom, none
of whom has the power in terms of the Act
to make assessments, as the
taxpayer complains. The evidence of these experts was adduced to
assist the court. The court was persuaded
by the evidence of these
witnesses, and adopted their reasoning. The alterations to the tax
liability for each of the years of
assessment are simply
consequential upon the determinations which the court is empowered
and enjoined to make as a court of revision.
[64]
The tax court correctly concluded that s 129(2)
(b)
of the Act
is the appropriate tool:
‘
where
portion of the original assessment can be set aside with clarity,
where the taxpayer had not been taken unawares and proper
notice has
been given of the proposed alteration, where the provenance of the
alteration is known to all and has been carefully
examined by SARS
and the taxpayer and the court, where there can be no prejudice to
either the taxpayer or SARS, where a matter
is brought to finality
and it is appropriate so to do.’
The
reasonableness of SARS’ gross profit percentage methodology
[65]
The taxpayer contended, in the alternative, that if the tax court had
the power to alter the assessments, that it erred in
using SARS’
gross profit percentage methodology in doing so, because it was not
reasonable to rely on that methodology:
(a)
where there are several
alternative and more reasonable extrapolation methods
[48]
available to it, the contention being that the gross profit method
results in distorted results and fails to take account of information

readily available to SARS;
(b)  where there is an issue of
the effect of rebates and discounts;
(c)  where it is reasonable to
allow adjustments for shrinkage provided for in s 22(1) of the Income
Tax Act, typically to
closing stock at year end, which were not made.
[66]
In terms of s 102(2)
[49]
of the
Act:
‘
(2) The burden of proving
whether an estimate under s 95 is reasonable or the facts on which
SARS based the imposition of an understatement
penalty under Chapter
16, is upon SARS.’
[67]
The Act does not provide any
guidance or criteria to determine whether an estimate made by SARS is
reasonable. Following what was
said in
Head
of the Western Cape, Education Department and others v Governing Body
of the Point High School and others
,
[50]
in a different context with reference to what is meant by
‘unreasonableness’ in s 6(2)
(h)
of PAJA, reasonableness
would require that SARS strike a balance fairly and reasonably open
to it on the facts before it or available
to it. Reasonableness
requires that
a
balance
must
be struck between a range of
competing considerations in the context of a particular case.
[51]
The principal enquiry is whether SARS struck a balance fairly
[52]
and reasonably open to it on the facts before it, or readily
available to it.
[53]
If the choice of the gross profit percentage method is one that
reasonably could be applied, then a court will not interfere with

that decision.
[54]
What is required for a decision to be justifiable, is that it should
be ‘a rational decision taken lawfully and directed
to a proper
purpose’.
[55]
[68]
Clearly, if the results of a
decision are patently distorted, it cannot be reasonable.
[56]
An estimated assessment by SARS may also not be an ‘arbitrary
guesstimate’.
[57]
If a decision ‘is so unreasonable that no reasonable person
could have so exercised the power’, it will be reviewable.
[58]
In all instances a discretion must ‘be exercised with care by
properly experienced and suitably qualified personnel, since
it may
otherwise be reduced to an arbitrary guesstimate, with grave
consequences for the taxpayer’.
[59]
[69]
SARS had to consider all
reliable information readily available to it in arriving at the
assessments and must have acted rationally,
in accordance with
principles established in
Bato
Star
[60]
and
Bel Porto School
Governing Body.
[61]
Factors relevant to determining whether a decision is reasonable or
not would include amongst others the nature of the decision,
the
identity and expertise of the decision–maker, the range of
factors relevant to the decision, the reasons given for the
decision,
the nature of the competing interests involved and the impact of the
decision on the lives and well-being of those affected.
[62]
This list is not
exhaustive.
[70]
The issue is not whether the
decision to adopt the gross profit methodology is necessarily the
best decision in the circumstances.
What this court has to decide is
whether the decision to apply the gross profit methodology struck a
reasonable equilibrium between
the applicable principles and
objectives sought to be achieved, in the context of the established
facts of this case.
[63]
[71]
In support of its argument that
the gross profit methodology was not reasonable the taxpayer relied
on the opinions of the two experts,
namely Mr Stride and Mr Sabbagh.
SARS relied on the evidence and opinions of Ms Khoosal and Mr
Strydom. It is trite law that an
evaluation of expert testimony,
involves a determination of whether and to what extent, their
opinions are founded on logical and
cogent reasoning.
[64]
That would also apply to the experts’ opinions on what is
reasonable in this appeal.
[72]
Experts generally express opinions in respect of established facts.
No factual evidence was however adduced by the taxpayer,
its
management or directors. The only factual evidence available to SARS
were the limited records of the taxpayer found at the
taxpayer’s
premises, inaccurate and contrived as some may be, of which Ms
Khoosal had knowledge and which she could identify
as she was
personally and directly involved in finding, securing and evaluating
those records. That was the only information on
which SARS could
estimate the tax liability of the taxpayer in respect of the
suppressed sales. The absence of any factual evidence
from the
taxpayer, detracted from the cogency of some of the opinions
expressed by Mr Stride and Mr Sabbagh, as genuine or helpful
as they
might have wanted to be, and their criticisms of SARS’
methodology, as shall be demonstrated below.
[73]
It was not disputed that:
(a)  there was a manual sales
suppression functionality available in the Windows version and in the
DOS version used by the
taxpayer;
(b)  sales were suppressed
resulting in the R28 million variance;
(c)  the taxpayer had an ooplang
system in place which was planned, calculated, and part and parcel of
the business operations
of the taxpayer, which it implemented
continuously, albeit erratically, according to the evidence of Mr
Ebrahim (an employee of
the taxpayer) and Mr Kara (a chartered
accountant and former financial manager at the taxpayer). Their
evidence was not disputed
by the taxpayer;
(d)  SARS even resorted to a
search and seizure warrant to obtain the prime records of the
taxpayer, with limited success.
It was unable to gain access to the
React POS backup data under the DOS version and only managed to
obtain the seven months’
worth of React POS data in the Windows
version;
(e)  Mr Strydom recalculated
every aspect of the gross profit margin calculations of SARS and
found them in line with the conclusions
reached by SARS.
[74]
The gross profit percentage
methodology resulted in only the sales figures in the taxpayer’s
annual financial statements for
2003 to 2009 being adjusted. The
other variables in the extrapolation calculations influencing the
cost of sales were, and had
to be accepted in the case of the 2003 to
2008 years and the first five months of the 2009 year, as per the
taxpayer’s annual
financial statements. There was no other
information available to SARS. The exact same methodology was
employed when the sales
variance was reduced to R28 million with a
resultant gross profit margin of 2,04%. The revised calculations were
attached to Ms
Khoosal’s factual report, and are set out in the
first schedule in paragraph 24 above. The present is not an instance,
such
as in
Pretoria East
Motors,
where the tax
official responsible for the additional assessments did not
familiarise herself with the workings of the accounting
system
utilised by the taxpayer and simply proceeded on the basis that where
‘she did not understand something she was free
to raise an
additional assessment and leave it to the taxpayer to prove in due
course at the hearing before the tax court that
she was wrong’.
[65]
Mrs Khoosal had extensive experience of the cash and carry business,
also from her involvement with the tax affairs of Jumbo. She
was as
meticulous and thorough in her approach as the limited data available
to her permitted.
[75]
In its heads of argument the taxpayer maintained that the gross
profit percentage methodology used by SARS gave rise to a flawed

result, because:
(a)  it’s application
resulted in distorted figures;
(b)  the calculation does not
take account of rebates;
(c)  SARS used inaccurate figures
for stock; and
(d)  SARS mixed the data it used.
The
alleged distorted figures
[76]
In applying the gross profit percentage methodology SARS, in its
initial calculation, concluded that there was an under declaration
of
sales of R145 million for the 2009 year, R38 million in the seven
months analysed and R107 million in the other five months.
This, in
the view of Mr Sabbagh, was an ‘unbelievable variation’
and a distortion which should have alerted SARS to
a likelihood that
there was something seriously wrong with the application of the gross
profit methodology, because a variance
of ‘X’ for seven
months, but 3’X’ for 5 months did ‘not make sense’.
In his view SARS ought
to have had regard to the VAT returns for the
whole 2009 tax year and not only for seven months. He compiled a
schedule setting
out the sales as per the VAT returns for the period
March 2008 to February 2009 which reflected the sales as R 1 479 847
468, and
the sales for March 2008 to July 2008 (five months) as R950
067 489, giving a total of R 2 429 914 957 (which figure differed
from
the sales figure in the annual financial statements by R2). This
he concludes demonstrates that the taxpayer’s VAT records
were
reliable and that the gross profit methodology is not reasonable.
[77]
During her cross examination Ms Khoosal however convincingly
explained that it was not SARS’s methodology that caused
any
distorted result. What at first might appear as a distorted result
arose from the taxpayer for the full twelve months of the
2009 tax
year having reported a negative gross profit margin of some 2,2%.
Having regard to the React POS data for the seven months
which she
analysed, the taxpayer during the preceding five months for which
SARS had no reliable data available, operated at a
profit margin in
excess of negative 2% and in the seven-month period (excluding the
suppressed sales), operated at a positive margin
of 0.19%. The
suppressed sales were considerably more in the first five months.
When the sales were adjusted for the full year
in accordance with the
gross profit percentage of 2,04 calculated on the data available for
the seven month period, almost three
times the volume of sales to
that which has been calculated in respect of the seven month period
now appeared in respect of the
preceding five months from 1 February
to 31 July 2008 because the suppression of sales was greater in the
first five months of
the tax 2009 year. This explains the alleged
‘distortion’.
[78]
All of this points to the reasonableness of the gross profit
percentage methodology adopted by SARS, while detracting from
the
suitability and reasonableness of a range of possible alternative
methodologies. Ms Khoosal’s explanation of the distortion
makes
obvious sense and is logical.
[79]
Mr Strydom similarly confirmed that the apparent distortion was the
result of the taxpayer’s own declared (contrived)
negative
gross profit margins during the first five months of 2009. He
explained how, using the taxpayer’s figures extracted
by Mr
Sabbagh, excluding the add back in respect of suppressed sales, the
taxpayer made a smaller loss in the seven months analysed
than it
made in the preceding five months.
[80]
SARS could not use the VAT returns. The taxpayer has not denied that
the sales figures recorded in its records were suppressed.
That would
include the sales figures used in the VAT returns. The suppressed
sales figures carried forward in the VAT returns would
be the same as
those in the annual financial statements. To what extent they might
have been less suppressed in the last seven
months of 2009, only the
taxpayer would know. It chose not to take the tax court into its
confidence. The raw data for the first
five months of the 2009 tax
year could not be accessed because the taxpayer used the customised
DOS React version which SARS could
not access. The taxpayer failed to
provide any back up records in respect of those five months. SARS
cannot be criticised for not
attaching weight to the VAT returns as
they are unreliable, if not fraudulent.
[81]
On the data available, the alleged distortion, is not as a result of
the methodology adopted by SARS but arises only as a consequence
of
the negative gross profit margin declared by the taxpayer for the
full 12 month 2009 tax year compared to the positive 2,04%
margin as
per the Windows React POS system for the seven month period for which
data was available and was analysed.
Rebates
and discounts
[82]
The taxpayer complained that SARS disregarded rebates and discounts,
which ordinarily affect the cost of sales calculation
and hence the
gross profit percentage. Both Mr Sabbagh and Mr Stride criticized
SARS for not taking proper cognizance of rebates.
That criticism was
persisted with before this court.
[83]
Mr Sabbagh explained, and this was common cause, that the rebates and
discounts were reflected in only the taxpayer’s
Pastel
accounting package, and in its annual financial statements, the same
annual financial statements from which SARS derived
the cost of sales
figures which it used to determine the extent of suppressed sales. He
also referred to rebate agreements with
suppliers providing for the
rebates being contained in five lever arch files which were allegedly
seized during the raid by SARS.
Accordingly, he maintained that the
absence of any reference to rebates in the React raw data which SARS
used to calculate the
2,04 gross profit percentage meant that the raw
data did not constitute a reliable source to benchmark acceptable
trading performances.
[84]
Rebates and discounts ordinarily affect the calculation of gross
profit (this was rightly accepted by Ms Khoosal) because it
affects
the purchases figure and could affect the net difference between
opening and closing stock. The taxpayer maintained that
if SARS had
interrogated the information in the annual financial statements for
the periods of assessment, it would have realised
that the taxpayer’s
reported gross profit was an average of negative 2,2% before rebates
and 5,4% after rebates, a 7,6% difference,
which would mean that the
taxpayer achieved gross profit margins of some 10% (3.6%, or 2.04%
+7.6%) taking rebates into account.
[85]
There is however nothing improbable about a 10% gross profit margin,
unless a valid comparison with past trading history, or
a comparison
with similar type businesses showed otherwise. Comparisons with the
results of Massmart, for example, are in the nature
of similar fact
evidence. Absent factual evidence from the taxpayer that such a
comparison would be valid, they are not helpful.
The taxpayer elected
not to adduce evidence of its trading results.
[86]
More significantly however, rebates and negative profit margins are
not relevant to the objective quantification of ‘suppressed

sales’ and would have no effect on the variances in sales
during the seven month period. It would only impact on purchases
and
opening and closing stock. In respect of purchases, it would have the
effect of reducing the purchases figure and hence the
cost of sales,
resulting in an increased gross profit and hence a higher gross
profit percentage. An increased gross profit percentage
would, when
applied to the opening stock, closing stock and purchases figures
which the taxpayer apparently accepted as it reflected
those figures
in its annual financial statements for the years of assessment under
review, would have resulted in an even larger
understated sales
figure, to the detriment of the taxpayer.
[87]
What is important is that SARS,
in applying its methodology, used figures excluding rebates and
discounts in respect of the seven
month period analysed,
[66]
and applied the resultant 2,04% gross profit percentage similarly to
cost of sales figures for the entire 2009 and the preceding
2003 to
2008 tax years, which likewise did not include rebates and discounts.
[88]
The taxpayer’s criticism that SARS failed to take into account
rebates and discounts in the calculation of cost of sales
is further
unfair as it lacks a sound evidential base, is based on an
impossibility, and therefore is at best a theoretical challenge.
Ms
Khoosal repeatedly stated that it is not the function of SARS to
reconstruct the books of the taxpayer. On what records are
available,
Mr Stride and Mr Sabbagh confirmed that it would be a matter of
impossibility to link rebates and discounts, which are
often in
respect of a calendar year, to financial data such as purchases for a
particular tax year (which does not coincide with
the calendar year).
Mr Sabbagh conceded that one ‘absolutely’ could not take
a rebate into account against sales over
a different period and that
the period and the rebate must be matched properly. He stated that
any exercise to match the rebates
to purchases with any degree of
reliability, would be a ‘mammoth’ task. That is assuming
it would be possible.
[89]
Mr Stride confirmed that he did not do the calculation of cost of
sales reduced by deducting rebates and discounts. Mr Sabbagh
also
understandably said that he could not state what the correct amounts
of the rebates and discounts for any year would be. He
also did not
conduct an investigation as to the correct opening or closing stock
in any financial year. SARS not only did the best
with what it had at
its disposal, but most importantly, consistently used figures in the
calculation of cost of sales which excluded
rebates and discounts.
[90]
It is trite law that the manner
of a taxpayer’s accounting is irrelevant for the purposes of
determining a tax liability.
[67]
Although generally accepted accounting practice and other accounting
directives might recommend that rebates and discounts should

generally be taken into account against purchases and stock figures,
the reality is that the taxpayer deliberately did not do so.
It
elected, for reasons best known to itself but never explained, to
report rebates and discounts in its financial statements as
‘other
income’. This ‘other income’ it reflected in its
annual financial statements until the 2007 financial
year below the
gross profit calculation, so-called ‘below the line’, as
part of the calculation of its net profit and
taxable income.
Treating it thus, rather than deducting it from purchases and stock
‘above the line’ as part of the
gross profit calculation,
would leave the ‘bottom line’ calculation of net profit
and net taxable income unaffected.
In the tax years post the 2007 tax
year the rebates and discounts were still not taken into account
against purchases and stock,
but were simply added ‘above the
line’ as a revenue item to ‘sales’. Treating it in
that manner would distort
the sales figures and would not be an
accurate representation of actual sales. What
it meant was that rebates and
discounts were again taken into account as a ‘revenue’
item, as it had previously been
when ‘under the line’,
and not in any manner affecting cost of sales.
[91]
There was no evidence or explanation forthcoming from the taxpayer as
to why rebates and discounts were treated in this manner.
An
inference might be that the taxpayer, or its accountants, were simply
unable accurately to allocate rebates and discounts to
particular
purchases or stock of a particular tax year, in calculating the cost
of sales for such year. In all likelihood it is
related to the
manipulated financial records.
[92]
Ms Khoosal furthermore confirmed that if one is to allocate rebates
and discounts to purchases and stock, then it must be done

consistently and that one cannot selectively adjust purchases but not
stock. She confirmed that there was no evidence to suggest
that any
adjustments had been done by the taxpayer in respect of its stock.
She also agreed that if a taxpayer adjusted closing
stock for
rebates, that it would not benefit the taxpayer much at all because
one year’s closing stock simply becomes the
next year’s
opening stock. Ms Khoosal confirmed that the figures used by her in
respect of the seven-month period analysed
to calculate the cost of
sales (stock and purchases) did not take account of rebates and
discounts.
[93]
Ms Khoosal and Mr Sabbagh both
accepted that the figures in the financial statements in respect of
the calculation of cost of sales
for the years going back to the
commencement of the 2003 tax year, were unlikely to be understated
and hence reliable, as one can
safely assume that a taxpayer
generally would not understate cost of sales.
[68]
If a taxpayer understated its cost of sales then it would increase
its gross profit and eventually its net taxable income, resulting
in
it paying more tax. The cost of sales figures in the taxpayer’s
annual financial statements were the only figures available
in
respect of those years. Unreliable as the sales figures in the annual
financial statements may be, based on the assumption afore
stated,
the cost of sales figures were probably reliable, or sufficiently
reliable, for SARS to use in the calculation of the estimated

assessments. If they were not, then it was for the taxpayer to adduce
evidence casting doubt on the reliability of those figures.
[94]
The cost of sales figures in these previous financial periods
certainly did not include rebates and discounts as these were

specified separately, either ‘under’ and later ‘above
the line’. If the cost of sales calculations in the
annual
financial statements for the tax years under review included rebates
and discounts, then rebates and discounts would have
been included
twice, which would have overstated the net profit position of the
taxpayer, an unlikely result. SARS therefore was
comfortable in its
knowledge that in the extrapolation exercise it performed it applied
a gross profit percentage unaffected by
rebates and discounts, to
cost of sales figures in the prior years which likewise did not
include rebates and discounts.
[95]
Mr Strydom confirmed that SARS’s calculations indeed compared
‘apples with apples’. The issue of rebates
and discounts
was, as the tax court rightly observed, a ‘red herring’.
Inaccurate
opening and closing stock figures
.
[96]
Opening and closing stock figures are an integral part of the
calculation of cost of sales. The closing stock of one financial
or
tax year is carried forward as the opening stock of the next
financial period. The tax court found that SARS accurately reflected

the opening stock as at 1 August 2008 and the closing stock as at 28
February 2009, as per the React POS system data. The taxpayer

contended that this finding was incorrect but does not dispute that
the figures were extracted from the React POS data. The taxpayer’s

criticism is that:
(a)  SARS used the values for
opening stock and closing stock as reflected in the REACT POS where
rebates are not reflected
as they were only accounted for in Pastel
and following from there in the annual financial statements;
(b)  Stock reflected in the React
POS is reflected at a value prior to any s 22(1)
(a)
(of the
Income Tax Act) adjustments to closing stock for damage,
deterioration, change of fashion, decrease in the market value,
or
for any other reason satisfactory to SARS;
(c)  The tax court erred in
finding that the taxpayer’s experts did not dispute and
challenge the accuracy of the opening
stock at 1 August 2008 or the
closing stock at 28 February 2009;
(d)  Accordingly, and even if
SARS started with figures as reflected in the REACT raw data, a
reasonable approach would require
that adjustment should be made even
if Pastel and the annual financial statements are disregarded. In
short, that it was not reasonable
for SARS to disregard acceptable
adjustments for shrinkage and rebates, as allowed by s 22(1)
(a)
.
[97]
It is not in dispute, and accepted by Ms Khoosal and Mr Strydom that
adjustments are normally made to stock at year end, that
rebates
would reduce the figure for closing stock, and that inventory should
generally be at the lower of cost or selling price
as a principle of
accounting. As much as such an adjustment might not have been made to
the closing stock figure used in respect
of the seven-month period,
the opening stock figure would similarly have been obtained from raw
data, and would not have been adjusted
for rebates and discounts or
for any other possible allowances. SARS is not privy to the extent of
any stock damage, deterioration,
change of fashion, decrease in the
market value, shrinkage, wastage, redundant stock et cetera which
might justify an adjustment
to stock values. It is unclear whether
any such adjustments had been made in prior years. If they were, then
there should have
been some adjusting journal entry. Mr Sabbagh did
not identify any such journal entry. The taxpayer did not adduce
evidence of
any adjustments made by it in the general ledgers or any
other books of account in previous years for shrinkage, or whether
there
was shrinkage, and if so, the value thereof. In the absence of
any such evidence SARS can hardly be criticised for not making any

end of year adjustments. The suggestions of shrinkage were not
substantiated by reference to any documents or evidence. This
information
falls peculiarly within the knowledge of the taxpayer who
could have advanced evidence in that regard, if so advised. The
taxpayer
simply did not adduce any evidence as to any specific types
of adjustment, or the amounts of any such adjustments.
The
mixing of data
[98]
This aspect has already been touched on earlier. The taxpayer
complains that SARS calculated the gross profit percentage by

inter-alia using the REACT raw data which does not account for
rebates and adjustments, yet had determined the gross profit
percentage
taking into account adjusted sales, and cost of sales
figures (opening and closing stock and purchases) in the annual
financial
statements which did include rebates. That accusation is
unfounded and proceeds on a factual premise which was not proved, and
which on the probabilities is unlikely.
[99]
Ms Khoosal explained that she
used costs of sale figures from the annual financial statements which
did not take account of rebates,
or at least were not proved to take
account of rebates and discounts, and compared these to REACT raw
data figures which similarly
excluded rebates, thus
comparing
like for like.
[69]
No factual basis was advanced by the taxpayer to show that she had
erred in that
regard.
[100]
Opening and closing stock figures would not generally be
significantly dissimilar and accordingly would not affect the
calculation
of the gross profit percentage significantly, even if the
opening and closing stock figures in the annual financial statements
included rebates and discounts. There was no evidence from the
taxpayer on this issue. In the absence of more detailed information

from the taxpayer, it has not been shown that the tax court erred in
concluding that the approach adopted by SARS was reasonable
in the
circumstances.
SARS
failed to consider information readily available to it
[101]
The taxpayer contended that SARS should not only have had regard to
the REACT POS data but that it should also have considered
other
information available, or considered alternative sources of
information alleged to be available, such as the taxpayer’s
VAT
returns, the Pastel accounting system, the annual financial
statements, the REACT management reports, and source documents
seized
by the taxpayer during the raid. In the view of Mr Sabbagh this was
because the REACT POS system did not reflect rebates,
and that Pastel
and the annual financial statements in contrast provided useful
information on rebates and the effect on trading
margins, that the
accounting records and VAT returns provided information for the full
2009 year and the prior years from 2003
to 2008 as opposed to the
seven months in the REACT raw data, and finally that the management
reporting records would contain information
on the composition of the
taxpayer’s turnover and product mix affected by the adjustments
to sales.
[102]
This additional information, as Ms Khoosal confirmed when cross
examined, contained ‘the manipulated’ results.
Her
evidence has not been rebutted. The raw REACT source data, prior to
manipulation, was the only reliable data. That explanation
did not
however satisfy the taxpayer which contended that SARS selectively
used information from the annual financial statements
for purposes of
its extrapolation exercise. That is so, but the data used by SARS
from the financial statements related only to
the calculation of the
cost of sales, which cost it has been assumed safely, any taxpayer
would not readily understate because
it would result in a greater
reported gross profit. No one from the taxpayer testified that these
figures were inaccurate.
[103]
Mr Sabbagh nevertheless persisted that it would have been prudent to
consider not only what SARS viewed as reliable, but also
the other
available (probably unreliable) information. The contention is that
SARS would then have realised that the gross profit
methodology gave
rise to distorted and unreasonable results, and the additional
information would have assisted SARS to benchmark
its findings to
constitute reasonable assessments. The additional information which
he contends should have been so considered,
include the VAT returns,
Pastel records, the annual financial statements and the source
documents. All of these however contained
fictitious and unreliable
data, at least insofar as the sales figures were suppressed. That
much has become common cause. His arguments
are nevertheless
considered briefly in turn below.
[104]
The criticism that SARS should have considered the VAT returns, must
fail. It did, but the VAT returns contained the under-declared
sales
figures. In the words of Mr Strydom the VAT returns as a source:
‘
... is unsubstantiated in terms
of the data per React. There is no data to compare it with. I do not
know what type of variance
exists in those periods.’
[105]
The Pastel system would contain general ledgers, creditors’
ledgers, cashbook and trial balances and some information
on rebates,
for the entire 2009 and prior years. The value of referring to the
Pastel records apparently lies therein, as stated
by Mr Sabbagh, that
the Pastel records correlated with both the annual financial
statements and the VAT returns. That is not surprising
as the
suppressed sales figures were transferred to the Pastel records and
that incorrect data was used in the VAT returns and
other records.
The fact that they correlate does not alter the unreliability of that
information. Ms Khoosal however explained
that she was unable to gain
access to the Pastel records and that she was advised that the
information was corrupted. She was criticised
for not thereafter
again asking the taxpayer to make the Pastel data available, which
would seem senseless, if the data had indeed
been corrupted. The
pertinent issue is whether it was represented to her that the data
had been corrupted and was not available
to SARS. On that issue the
evidence of Ms Khoosal stands unchallenged. The fact that Mr Sabbagh
might subsequently have been given
access to the Pastel records does
not detract from the fact that as far as SARS was concerned, it was
not given access thereto.
This is not a valid criticism.
[106]
The financial statements of the taxpayer were not used by SARS, save
as indicated above in respect of the cost of sales for
the periods
under review. Mr Sabbagh contended that the annual financial
statements ‘are very useful additional sources of
information
regarding a business’ financial performance’. He was
critical of what he referred to as SARS’ ‘selective
use
of the annual financial statements’ and maintained that the
financial statements would have provided SARS with information

against which it could have benchmarked its findings. That argument
is misplaced, particularly where it has become common cause
that the
sales figures in the financial statements were suppressed. No factual
evidence was presented on behalf of the taxpayer
as to what
conceivable benefit could have been achieved by consulting the
financial statements over and above the extent that they
were. The
financial statements only had the limited benefit that it disclosed
the best and only evidence available regarding the
opening and
closing stock and purchases figures, at least on the basis of what
the taxpayer was seemingly prepared to accept, in
the absence of it
taking the tax court into its confidence and adducing evidence that
the cost of sales figures were also misrepresented,
if in fact they
were
[107]
According to Mr Sabbagh SARS seized about 74,000 documents on 19/20
March 2009, which it is maintained were readily available
to SARS.
These allegedly comprised some sales invoices, supplier invoices and
supplier trade agreements. These were subsequently
discovered and
made available for use by the taxpayer at the hearing before the tax
court. It was contended by the taxpayer’s
experts that these
may well have contained extracts from the creditors’ journal
evidencing rebates and the like. No factual
evidence to that effect
was however given on behalf of the taxpayer. Furthermore, in the
absence of all the financial records of
the taxpayer, not just some
74,000 documents being available, an accurate and complete
reconstruction of the taxpayer’s financial
records was
impossible. That is leaving aside that there is no obligation on SARS
to reconstruct the taxpayer’s financial
records, assuming in
the first place that such a reconstruction would have been possible.
[108]
It was reasonable for SARS to use, as the best evidence available,
the figures relating to cost of sales contained in the
annual
financial statements, which it can reasonably be assumed, in the
absence of evidence to the contrary, to be unlikely to
have been
understated.
[109]
In regard to not consulting REACT Management reports, Mr Sabbagh
contended that the management reports produce far more extensive

information than the raw data contained in REACT. Ms Khoosal had only
limited access to these reports until the licence affording
SARS
access to React expired. She was unequivocal that these other sources
would not have given any additional information regarding
the
non-disclosure or under disclosure of sales and the extent thereof.
No factual evidence of what is actually recorded or not
recorded in
the management reports was adduced to suggest that she was wrong in
that view.
Alternative
methodologies
[110]
Apart from criticising the suitability of SARS’ methodology,
the taxpayer contended that there were alternative methods
of
extrapolation which would have been more reasonable to adopt, namely
the Percentage of sale method, the Identified variance
approach, or
the Adapted SARS methodology. These were suggested for the first time
only during or about 2015.
[111]
Mr Sabbagh confirmed, in answer to a question from the court, that no
accounting rule requires one particular extrapolation
method over
another. However, in his view, SARS’ failure to have due regard
to the nature of the taxpayer’s operations
as a cash-and-carry
business, resulted in Ms Khoosal selecting an inappropriate
extrapolation method. This was also the view of
Mr Stride. That
criticism is unfounded. Ms Khoosal was well aware of the nature of
the operations and as stated above, was well
familiar with Cash and
Carry operations.
[112]
Mr Sabbagh and Mr Stride considered other methods of extrapolation.
These alternative methods according to comparative calculations
done
by Mr Sabbagh would result in a lower estimated tax liability for the
taxpayer. They will be considered and evaluated in the
context of the
taxpayer’s operations, the task SARS had to perform, the
reliability and extent of information/data and records
available to
SARS, and similar relevant considerations.
[113]
The tax court did not consider the alternative methodologies
suggested as reasonable, commenting that ‘(t)he only disputes

and challenges made to evidence were either technicalities or
presentation of a different view on what would be or was a reasonable

assessment. But facts were not challenged’.
The
percentage of sales method
[114]
Both Mr Sabbagh and Mr Stride recommended the percentage of sale
method as a more reasonable alternative. This method expresses
the
variance in sales (R28 million) as a percentage of the reported sales
(for the seven-month period). That percentage would then
be applied
to the suppressed sales figures reported by the taxpayer for each of
the tax years from 2003 to 2009 to arrive at the
understated sales.
The appeal of this methodology is said to lie in the fact that it
uses only the one variable, namely sales,
and ignores the values for
opening stock, closing stock and purchases, thereby eliminating any
difficulties pertaining to rebates,
mixing of information, et cetera.
[115]
Accepting the R 28 million variance, Mr Stride calculated that the
percentage of sales variance averaged 1,977%, consequently
that the
understated sales for the period would be R198,954,177 and that the
taxpayer’s tax liability would be some R85 539
598. The
taxpayer accordingly submitted that the percentage of sales
methodology was on the evidence a more reasonable alternative
to
apply as it is simple, uncomplicated and involves sales only, which
is the disputed issue.
[116]
Ms Khoosal simply acknowledged, without any further comment, that the
percentage of sales method was an ‘alternative
method’.
Mr Strydom was however clear, with respect correctly so, that one
cannot simply ignore the influence of the cost
of sales in the
determination of suppressed sales, and therefore taxable income.
[117]
The percentage of sales method assumes that the extent of
under-disclosed sales was consistent. Ms Khoosal confirmed that
in
the data she analysed, the monthly under-disclosure of sales was
erratic. It, for example, resulted in the distortion in the
2009 year
dealt with earlier. There is no reason why that would not also be the
case in prior years. According to the former employees
of the
taxpayer, Mr Ebrahim and Mr Kara who were called as witnesses by
SARS, the under-disclosure of sales and the syphoning off
of the
money to senior managers was erratic also during the earlier years.
Simply applying a percentage to the under-disclosed
contrived sales
figures disclosed by the taxpayer in its financial statements and
records could result in either a gross over or
under statement of
sales. That would give rise to extremely unreliable and
unsatisfactory results.
[118]
The extent of true sales during any given period, and smoothed out
over a tax year, would correlate more closely to the cost
of sales,
that is what the actual sales generated during a particular tax year
would have cost. Sales generally vary in extent
depending on the cost
of sales figure. The cost of sales figures for every tax year
appearing in the annual financial statements
can, for reasons
indicated earlier in this judgement, be accepted as reliable. A more
accurate and reasonable method to estimate
actual sales would
therefore be to apply the gross profit percentage to the cost of
sales figure (to which it bears some relationship
and will take
account of fluctuations from period to another), rather than using
inconsistent fictitious suppressed sales figures
adjusted by a fixed
percentage of sale method. Not adopting the percentage of sale method
was reasonable and certainly not irrational.
The
identified variance approach
[119]
Mr Sabbagh contended, in the alternative, for the identified variance
approach as a preferred reasonable alternative, because
in his view
the bulk of the variance was made up of certain lines of products. He
extracted information on purchases of the alleged
lines of products
for which sales were understated for the years of assessment 2003 to
2009 from Pastel and applying the trading
margins for those products
calculated the understated sales to be R162 million, resulting in a
tax liability of R 68 million.
[120]
Ms Khoosal likewise acknowledged that this was an alternative way to
extrapolate, without any material comment. Mr Strydom
rightly
indicated that although he agreed with the principle encapsulated by
the method, he had no information regarding the particular
products
in respect of the periods for which there was no React POS data.
Accordingly, in his opinion this methodology would not
be ‘an
accurate or a reasonable variance...to follow’.
[121]
Mr Strydom’s criticism is well founded. In the absence of
factual evidence from the taxpayer as to what the actual product

lines were in respect of which sales were suppressed, assuming that
it is only the sales in respect of those particular product
lines
that were consistently suppressed (which assumption will also require
some factual foundation being laid), and what the trading
margins
would be, a proper evaluation of this methodology and its comparison
to the gross profit percentage method used by SARS
could simply not
be made.
[122]
The identified variance approach has not been demonstrated to be a
more reasonable method to have adopted.
The
adapted SARS methodology
[123]
Mr Sabbagh, maintained that if the gross profit percentage
methodology adopted by SARS was to be applied then he would have
used
information for the full 2009 year, he would have accounted for
rebates, and he would have made certain adjustments for the
lengthy
period of assessment. In his view the information in Pastel and the
end of year financial statements correlated to an acceptable
level to
justify the use of that information.
[124]
The information in the annual financial statements obviously
correlated to that in Pastel, as the annual financial statements
were
produced on the basis of what is contained in Pastel. This
information was unreliable and in respect of sales was accepted
to
have been understated. The information available to SARS also did not
extend to the full 2009 taxation year and little information,
other
than annual financial statements which contained suppressed sales
figures, were available to SARS in respect of the prior
years under
review.
[125]
Further, as indicated previously in this judgment, it was impossible
to correlate rebates with particular purchases. This
was conceded by
Mr Sabbagh who said it is almost impossible to reconcile the details
of rebate agreements exactly with financial
statement figures because
one has different financial years and calendar years for the rebates.
[126]
Making ‘certain adjustments’ for the lengthy period of
assessment would also remain at best speculative in the
absence of
factual evidence from the management or officials of the taxpayer as
to what these should be. Adjustments would presumably
have to be
informed by what factual differences there might have been from one
tax year to the next. There is simply no evidence
on these aspects.
It is accordingly safer to assume that over time, barring any
catastrophic or similar events (of which there
was no evidence), the
financial market in which the taxpayer operates would have been
relatively consistent.
[127]
Mr Strydom also disputed the reasonableness of the adapted SARS
methodology for ignoring the difference between the closing
stock in
the React POS system and the closing stock reported in the 2009
annual financial statement. No documentary or other evidence
was
presented to explain the difference.
[128]
The onus is on SARS to show
that the methodology used was reasonable. That required no more than
satisfying the tax court that an
acceptable methodology, recognised
as an acceptable methodology in the accounting discipline, was used
and that there were cogent
reasons
for
doing so. The taxpayer’s approach of simply
picking away at SARS’s
methodology in the absence of factual evidence in rebuttal to sustain
the criticism levelled does not,
even at the level of an evidentiary
onus, demonstrate that the use of the gross profit percentage method
was irrational, or not
rationally justified, and that the decision to
use the gross profit percentage method,
[70]
was unreasonable.
[129]
The tax court did not err in concluding that SARS’s assessment
was reasonable. The criticisms by the taxpayer’s
expert
witnesses, amongst others, failed to take into account that there was
a systematic plan in which the taxpayer suppressed
its sales and
manipulated its records. The taxpayer has elected not to make a full
disclosure of its activities in this regard.
There is simply no basis
to set aside the methodology employed by SARS as being not
reasonable.
The
section 89quat interest
[130]
The taxpayer argued that its contention that it was not liable for
the amount set out in the assessment (calculated on the
3,6% gross
profit percentage), on SARS’s own version (SARS having accepted
that it should be 2,04%), was reasonable and that
the tax court
therefore ought to have remitted the interest in terms of s 89quat
(3) of the Income Tax Act as it read at the relevant
time.
[131]
The relevant provisions of s 89quat read:
‘
(2) If the taxable income of
any provisional taxpayer as finally determined for any year of
assessment exceeds –
(a) R 20,000 in the case of a company;
or
(b) R 50,000 in the case of any person
other than a company,
and the normal tax payable by him in
respect of such taxable income exceeds the credit amount in relation
to such year, interest
shall, subject to the provisions of subs (3),
be payable by the taxpayer at the prescribed rate on the amount by
which such normal
tax exceeds the credit amount, such interest being
calculated from the effective date in relation to the said year until
the date
of assessment of such normal tax.
(3) Where the Commissioner having
regard to the circumstances of the case is satisfied that any amount
has been included in the
taxpayer’s taxable income or that any
deduction, allowance, disregarding or exclusion claimed by the
taxpayer has not been
allowed, and the taxpayer has on reasonable
grounds contended that such amount should not have been so included
or that such deduction,
allowance, disregarding or exclusion should
have been allowed, the Commissioner may, subject to the provisions of
s 103(6), direct
that interest shall not be paid by the taxpayer on
so much of the said normal tax as is attributable to the inclusion of
such amount
or the disallowance of such deduction, allowance,
disregarding or exclusion.’
[132]
The tax court reduced the s 89quat interest in accordance with the
reduced quantum of the under declared taxable income. In
respect of
income tax, the standard order, with details inserted specific to
each assessment period, provided that:
‘
The Section 89quat (2) interest
on the under payment of provisional tax, be altered to be calculated
on the amount with which the
normal tax payable (on the total taxable
income taking into account the altered under declared taxable income
referred to above)
exceeds the credit amount in relation to the …
year of assessment, at the prescribed interest rate, from the
effective date
(….) until the assessment of such normal tax,
being …’
In
each instance of VAT assessment, the standard order, with details
inserted specific to each assessment period, provided that:
‘
The interest in terms of s
39(1) be altered to be calculated at the prescribed rate on the
outstanding balance (taking into account
the altered under declared
output VAT), from…, to date of payment.’
[133]
In granting that order, the tax court has not erred and no basis has
been advanced to interfere with its order.
Conclusion
[134]
There is no basis to interfere with the order granted by the tax
court. This appeal accordingly falls to be dismissed.
Costs
[135]
SARS has been successful. The taxpayer asked in the event of the
appeal being upheld with costs, that such costs should include
the
cost of three counsel as the multiplicity and complexity of the legal
and factual issues made it reasonable for the taxpayer
to engage the
services of three counsel. A similar request emanated from SARS,
which likewise employed three counsel, in the event
of the appeal
being dismissed.
[136]
The appeal did involve some complex issues. Two counsel could however
deal with these issues adequately. In the exercise of
this court’s
discretion on the issue of costs the cost of two counsel only is
allowed.
Order
[137]
The appeal is dismissed with costs, such costs to include the costs
of two counsel where employed.
__________________
P
A Koen
Acting
Judge of Appeal
APPEARANCES
APPELLANTS:
J J Gauntlett SC QC (with C Louw SC and E Muller)
Instructed
by: Faber Goertz Ellis Austen Inc, Bryanston
McIntyre
Van der Post, Bloemfontein
RESPONDENT:
E E Coetzee SC (with C Naudé)
Instructed
by: Gildenhuys Malatji Inc, Pretoria
Honey
Attorneys, Bloemfontein
[1]
These related mainly to the Jumbo group of companies and
specifically Jumbo Cash and Carry. An enquiry had been launched into

its affairs in terms of s 74C of the Income Tax Act.
[2]
These were applied for in terms of s 74D of the Income Tax Act and s
57D of the Value Added Tax Act 89 of 1999 (the VAT Act)
as they then
read.
[3]
These records were subsequently discovered by SARS for the purpose
of the trial before the tax court.
[4]
The point of sales programme used by the taxpayer recorded sales of
stock and monitored stock levels in the warehouse/shop. Transactions

are recorded at the terminals by the cashiers and the information
then feeds into the server and the server records all the
information from the Point of Sale terminals.
[5]
These are referred to as a P-Type adjustment.
[6]
A total of 1076 P-type adjustments were found to have been made
throughout the period from August 2008 to February 2009 according
to
the report from independent accountants PriceWaterhouseCoopers
(PWC). The adjustments were apparently actioned by two users,
user
42 and user 202, identified as Mr Moulana Sajjad and Mr Ziyaad
Bhikhoo, both of whom were allocated the “ADMIN-POS’

role within the React system used by the taxpayer.
[7]
An ‘ooplang’ practice essentially involves the keeping
of two sets of financial accounts for an enterprise with the
object
of manipulating financial records, usually to evade tax.
[8]
At the time, s 78 of the Income Tax Act provided that the
Commissioner, if not satisfied with a return 'may estimate the
taxable
income of a taxpayer'. Section 31 of the VAT Act empowered
the Commissioner to issue a further assessment if 'the Commissioner

is not satisfied with any return or declaration'. Neither of these
provisions specified that SARS was to consider information
'readily
available' to it. It is not provided under s 95 of the Act.
[9]
Section 270(3) of the Act provides:
‘
(3)
A form, notice, demand or other document issued, given or received
by a person or SARS under the provisions of a tax Act repealed
by
this Act, must be regarded as issued, given or received in terms of
any comparable provision of this Act, as from the date
that the
form, notice, demand or other document was issued, given or received
under the repealed provisions’.
[10]
These were set out in the taxpayer’s letter of objection dated
18 October 2011.
[11]
SARS's notice in terms of r 37 (a) and (b) was dated 30 April 2015.
[12]
Suppressed sales were negative P adjustments. The converse of that
is the positive P adjustment which would have the effect of
bringing
the sale back into sales. They arise where something that was
previously a negative P adjustment would be reversed and
brought
back into sales as a positive P adjustment.
[13]
A script is an instruction fed into the software program of a
computer instructing it to do certain calculations. Ms Khoosal

explained that there was a script error in the merging of the goods
doc and goods doc item tables. The program did not take into
account
goods returned on a different date of its receipt. Her
uncontradicted evidence was that this only changed the amount,
not
the calculation or the methodology followed by SARS.
[14]
A reconciliation of the outflow of stock items per the stock table
to the outflow of stock items per the sales table, generated
a
variance report of a movement in stockstatsdaily but not in saleitem
and in some instances a movement in saleitem but not in

stockstatdaily.
[15]
SARS maintains that it was not obliged to withdraw the assessments.
[16]
It filed an expert summary in respect of an independent expert, Mr
Louis Strydom, employed by PWC. He confirmed that the calculations

of SARS were reliable.
[17]
This issue is perhaps more accurately described in the judgement of
the tax court as the argument that 'Change in calculation
of an
amount is not an “assessment”’.
[18]
The tax court failed to address this aspect in the judgement, but
made an order that s-89quat interest is payable.
[19]
Irvin & Johnson (SA) Limited v Commissioner for Inland Revenue
1946 AD 483
at 487.
[20]
SARS cannot change an assessment at will or in any manner it
devises, which is not in accordance with the law, and it is not
at
liberty to waive tax, unless a tax law specifically allows it to do
so. Carlson Investments Share Block (Pty) Ltd v Commissioner
for the
South African Revenue Services
2001 (3) SA 210
(W) at 231 F-G.
[21]
Oudekraal Estates (Pty) Ltd v Municipality of Cape Town
[2004] ZASCA
48
;
2004 (6) SA 222
(SCA) para 26.
[22]
Retail Motor Industry Organisation v Minister of Water and
Environmental Affairs and another
[2013] ZASCA 70
; 2014(3) SA
251(SCA) paras 23-25. Carlson Investments Share Block (Pty) Ltd v
Commissioner for the South African Revenue Service
2001 (3) SA 210
(W).
[23]
Section 93 provides:
‘
SARS
may make a reduced assessment if –
(a)
…
(b)
…
(c)
…
(d)
…
(e)
a senior SARS official is satisfied that an assessment was based on-
(i)
…
(ii)
A processing error by SARS;
(iii)
…’
[24]
Section 98 provides:
‘
SARS
may, despite the fact that no objection has been lodged or appeal
noted, withdraw an assessment which-
(1)
(a)   …
(b)
…
(c
)       …
(d)
in respect of which the Commissioner is satisfied that –
(i)
it was based on-
(aa)
…
(bb)
a processing error by SARS; or
(cc)
...’
[25]
These rules provide for ‘the procedure to be followed in
lodging an objection and appeal against an assessment or decision

and the conduct and hearing of an appeal before a tax court’.
[26]
The order also took account of the evidence and the errors
identified by Mrs Khoosal (even prior to the hearing commencing).
[27]
The predecessor to s 129 was s 83 of the Income Tax Act.
[28]
Commissioner, South African Revenue Service v Stepney Investments
(Pty) Ltd
[2015] ZASCA 138
;
2016 (2) SA 608
(SCA) para 29.
[29]
South African Association of Personal Injury Lawyers v Heath &
others 2001(1) SA 883 (CC) para 24 and National Treasury &

others v Opposition to Urban Tolling Alliance & others
[2012]
ZACC 18
;
2012 (6) SA 223
(CC) paras 67 and 69.
[30]
That is applying the test in National Society for the Prevention of
Cruelty to Animals v Minister of Agriculture, Forestry and
Fisheries
& others
[2013] ZACC 26
;
2013 (5) SA 571(CC)
para 38.
[31]
Income Tax Case
1869 (75 SATC 329).
[32]
Commissioner, South African Revenue Service v Pretoria East Motors
and another
[2014] ZASCA 91
;
2014 (5) SA 231
(SCA). The comments
above arise from the third ground of appeal in that matter.
[33]
The applicable section prior to its repeal by the provisions of the
Act which introduced s 129(2)(c), provided that the tax court
may
‘refer the assessment back to SARS for further examination and
assessment’.
[34]
Avenant v Commissioner for the South African Revenue Service
[2016]
ZASCA 90
; 2016 JDR 1025 (SCA).
[35]
Income Tax Case No 1873 77 SATC.
[36]
Ibid para 64.
[37]
Note 34 above para 37.
[38]
Note 28 above.
[39]
Bailey v Commissioner for Inland Revenue
1933 AD 204
at 220.
[40]
Rand Ropes (Pty) Ltd v Commissioner for Inland Revenue
1944 AD 142
at 150.
[41]
Johannesburg Consolidated Investment Co v Johannesburg Town Council
1903 TS 111.
[42]
Note 32 above para 11.
[43]
Director of Hospital Services v Mistry
1979 (1) SA 626
(AD) at
635F-H.
[44]
Shill v Milner
1937 AD 101
at 105.
[45]
Bel Porto School Governing Body & others v Premier, Western Cape
& another
[2002] ZACC 2
;
2002 (3) SA 265
(CC) para 87.
[46]
Arepee Industries Ltd v Commissioner for Inland Revenue 1993 (2) SA
216 (N).
[47]
Ibid at 222H-223B.
[48]
The taxpayer submitted that this court is not asked to select the
most appropriate method but to uphold the appeal and to refer
the
matter back to SARS for further investigation and reassessment.
[49]
It makes no material difference with s 78 of the Income Tax Act or s
31 of the VAT Act or s 95 of the Act is applicable because
all these
provisions require that the estimations must be reasonable.
[50]
Head of the Western Cape, Education Department and others v
Governing Body of the Point High School and others
[2008] ZASCA 48
;
2008 (5) SA 18
(SCA) para 16.
[51]
This is the kind of balancing exercise required to be performed
referred to in Bato Star Fishing (Pty) Limited v Minister of

Environmental Affairs and Tourism & others
[2004] ZACC 15
;
2004
(4) SA 490
(CC).
[52]
However as was said in Bel Porto School Governing Body para 86, ‘The
unfairness of the decision in itself has never been
a ground for
review. Something more is required. The unfairness has to be of such
a degree that an inference can be drawn from
it that the person who
made the decision had erred in respects that would provide grounds
for review. That inference is not easily
drawn’.
[53]
Note 51 para 44.
[54]
Note 45 above para 87.
[55]
Note 45 above para 89.
[56]
Foodcorp (Pty) Ltd v Deputy Director- General, Department of
Environmental Affairs and Tourism: Branch Marine and Coastal
Management
2006 (2) SA 191
(SCA) para 19.
[57]
Mokoena v Commissioner for the South African Revenue Service
2011
(2) SA 556
(GSJ) para 10.
[58]
Associated Provincila Picture Houses Ltd v Wednesbury Corporation
[1948] 1 KB 223
at 233-234; referred to in Bato Star para 44.
[59]
Note 57.
[60]
Note 51 above paras 42-50.
[61]
Note 51 above paras 87-90.
[62]
Note 51 above para 45.
[63]
Ibid para 54.
[64]
Michael & another v Linksfield Park Clinic (Pty) Ltd &
another
[2001] ZASCA 12
;
2001 (3) SA 1188
(SCA) para 36; Twine &
another v Naidoo & another
[2018] 1 All SA 297
(GSJ) para 18.
[65]
Note 32 above paras 10-11.
[66]
Mr Stride confirmed that in SARS's gross profit methodology, when
using the seven months’ data that was available, rebates
and
discounts were not deducted from cost of sales and also not added to
revenue, as was done in the financial statements.
[67]
Secretary for Inland Revenue v Eaton Hall (Pty) Ltd
1975 (4) SA 953
(A) at 958B-D.
[68]
Mr Sabbagh also agreed that as a basic assumption taxpayer very
seldom understate an expense, specifically cost of sales.
[69]
The notes in the annual financial statements record that the
inventories were shown ‘at the lower of cost or net realisable

value, or the lower of cost and selling price’, but these were
not proved nor properly audited.
[70]
Rustenburg
Platinum Mines Ltd (Rustenburg Section) v Commission for
Conciliation, Mediation and Arbitration
[2006] ZASCA 175
;
2007 (1)
SA 576
(SCA) para 20.