ABC LIMITED Applicant

and

THE COMMISSIONER FOR THE
SOUTH AFRICAN REVENUE SERVICE Respondent

DELETE WHICHEVER IS NOT APPLICABLE

(1)

(2)

(3)

REPORTABLE: YES/NO

OF INTEREST TO OTHER JUDGES: YES/NO REVISED

DATE

SIGNATURE

JUDGMENT

C. J. CLAASSEN J:

This is a n application on Notice of Motion wherein the applicant, who is t he taxpayer, seeks the following relief:

“The applicant will seek an order in the following terms:

That the assessment referred to in the respondent’s notice filed in terms of Tax Court Rule 10(b) is set aside;

That t he respondent pa ys t he c ost o f t his a pplication i ncluding t he c ost o f 2( two) counsel where applicable;

ALTERNATIVELY

that the statements of grounds of assessment issued by the respondent on or about 9 December 2009 be set aside for failure to comply with the requirements of Rule 10 of the Tax Court Rules;

that the respondent pays the costs of this application including t he costs of 2 (two) counsel where applicable.”

It is common cause th at this application is an interlocutory rev iew application as contemplated in Rule 26(5) of the rules promulgated under section 107A of the Income Tax Act N o 58 of 1962. These rules prescribe the proce dures to be followed when lodging objections and noting appeals against assessments made b y the respon dent, the Co mmissioner f or the South Af rican Revenue Services hereinafter referred to as “SARS”.

SARS issued an assessment in r espect of the Vat input tax f or the years 1999, 2000, 2001 and 2002. These assessments are set out in certain correspondence to which I will refer to briefly.

The f irst letter from SARS is dated 14 th July 2003 and headed as f ollows: “VALUE ADDED TAX EXPENDITURE INCURRED IN THE MAKING OF NON TAXAB LE AN D EXEMP T SUP PLIES AND AP PORTIONMENT OF

CERTAIN INPUTS”. The letter procee ds to ref er to a certain European Court of Justice decision which held that where a taxable person supplies services to another taxable perso n who uses such services for an exempt trans action, that person is not entitled to deduct the i nput VAT whether the ultimate purpose of the transaction is the carrying out of a taxable or non-taxable transaction. Based

on this decision, the let ter maintains that the ultimate purpose for incurring the expenses are irrelevant f or purposes of judging whether t he VA T pa yable constitutes an input tax or not.

The letter further argues that section 17(1) of the Value Added Tax Act No 89 of 1981, is not applicable to a “change in us e” scenario. Section 1 7(1) of the aforesaid Act provide s expressly for situati ons where goo ds or s ervices are acquired or imported by a vendor partly for consumption, use or supply in the course of making taxable supplies and partly for another intended us e. Any tax which has bec ome payable in respect of the s upply or importation of goods or services to the vendor , as the case m ay be, shall be an amount th at bears a relation to the f ull amount of such tax or a mount, in the sa me ra tio as the intended use of such goods or services in the course of making taxable supplies bears to the tot al inte nded use of such go ods or service s. The letter then proceeds to question the applic ant as to whether or not so me of its input tax claims fell within the provisions referred to in the letter.

The next letter is dated 14th May 2004. It is stated herein that assessments were raised in each of the Dece mber 1999 , 2000 , 2001 and 2002 tax periods as indicated in the tax schedules. It further alleges that the expenditure for drafting the annual financial statements have not been written back as t his expenditure falls for inclusion in the “mixed use ” category and is su bject to the apportionment calculation. This apportionment calculation refers to the section 17 calculation mentioned above.

The next relevant letter is the response by SARS after the applicant objected to the aforesaid assessments. This letter states the following:

“1. Having considered several judgments of the European Court of Justice and having taken into account the interpretive effect in terms of the South African legislation, the South African Revenue Services has concluded that the Value Added Tax incurred on the exp enses pe r the schedule a ttached to m y l etter da ted 14 M ay 2004, doe s not constitute input tax.”

SARS disallowed these amounts as inp ut tax and also raised certa in penalties and interest. However, the penalties were subsequently withdrawn. Attached to this lette r is the formal VAT 201 document, which states that the applicant’s objection is di sallowed f or the reasons as conve yed in the let ter of 14 Jul y 2003.

The applicant appealed this decision and in accordance with the rules, the respondent f iled a Rul e 10 state ment containing its “grounds of assess ment”. The particular pro vision in Rule 10 which com es up f or scrutin y in thi s application is Rule 10(3) which reads as follows:

“The statement of the grounds of assessment must be in writing and be signed by the Commissioner or his or her representative and must be divided into paragraphs-

setting ou t a clear and concise statement o f the g rounds up on which the taxpayer’s objection is disallowed; and

stating the material facts and legal grounds upon w hich the Commissioner relies for such disallowances.”

This Rule 10 sta tement was f iled so me 5 (five) years later af ter the correspondence referred to earlier in this judgment. It is this particular Rule 10 statement which the applicant seeks to set aside alternatively to have it declared as non-compliant with the requirements of Rule 10 of the Tax Court Rules.

It is common cause between the parties that the Rule 10 statement indeed raises a new ground which was not relied upon pr eviously b y the Co mmissioner in any of the preceding letters. I agree wi th Mr Vorster for the taxpa yer, that the

Commissioner inde ed changed tack b y a dopting in its Rule 1 0 st atement a different attitude which conflicts with that expressed in the letter dated 14th July 2003. The grounds stated in the Rule 10 submission by SARS, now states that the ulti mate pur pose f or incurring t he di sputed ex penses is i ndeed ver y relevant. Where the f irst letter state d that section 1 7(1) of the Act is not applicable, t he resp ondent now relies i n the Rule 10 state ment on an apportionment principle to be applied . It may be necessar y b riefly to state the background to this dispute.

The applicant is an incorporated entity with certain subsidiaries. It raises capital by i ssuing s hares f or purposes of bu ying u p certain prop erties which wer e required for its portf olio. These shares were listed, and certain expenses wer e incurred in this whole process. SARS divided these expenses into 2 (two) categories namely:

Corporate S ervice expenses: SARS conce ded in its Rule 10 state ment that the ass essment in respect of corporate services cann ot stand in its current f orm and admitted that the assess ments in respect to such corporate services must be set aside and referred back to SARS in terms of section 33(3) for further consideration.

Buyback Service expenses: In ter ms hereof certain sh ares were bought back by the applicant. In doing so certain expenses were incurred by the applicant’s agent. SA RS descri bes the se bu yback serv ices as exp enses which were not incurred for the business of the applicant at all and were not incurred in th e course of an enterprise a s def ined in the VAT Act. Thus, they were not input expenses that could have been deducted from the output tax.

The Rule 10 state ment seeks to appl y an apportion ment to th e corporate services and apportionment to the buyback services in the alternative.

The application is brought in ter ms of Rule 2 6(5) which reads as f ollows and I quote:

“26(5) Where e ither party f ails to comply with any r equirement contained in these rules th e Court m ay, upon a pplication on not ice b y t he ot her p arty, or der the defaulting party to comply with that requirement within such time as the Court deems appropriate.”

It may be noted that the Notice of Motion does not require an o rder from this Court obliging SARS to comply with Rule 10 within a certain period of time. However, that does not seem to be a proble m as the application was argued by both parties’ counsel on the basis that the crux of this matter is whether or not SARS’ Rule 10 statement complied with the prerequisites stated in Rule 10. If I were to hold that it d oes so comply, then the parties agreed that the application should be dismissed with costs. On the other hand should I hold that it does not so comply, then the pr oper order to be made would be to set aside the Rule 10 statement submitted by SARS.

Neither part y wa s able to ref er me to an y pr evious decisi on directly in po int dealing with the interpretation of Rule 10 of the Tax Cour t Rules. I t seems to me I will have to traverse new ground for purposes of resolving the issues.

The question which requires an an swer is whether or not it is per missible f or SARS to inc lude in t he Rule 10 statement the new basis f or sup porting t he assessments raised by SARS which is not only contrary to but also absent from the correspondence preceding the f iling of the Rule 1 0 statement. Mr Vorster strenuously contended that it is not permissible to do so on two grounds:

On a proper construction of Rule 10 in the light of the Act and other Rules, it is impermissible to do so; and

that it will constitute an unfair administrative decision by SARS which falls foul of section 33 of the Constitution.

It is therefore necessary to commence with a construction and an int erpretation of Rule 10. What immediately attracts one’s attention is the fact that Rule 10(3) is formulated in the pr esent tense. In Rule 1 0(3) (a) it requires S ARS to set out the grounds upon which the taxpayer’s objection “is” disallowed and not “was” disallowed. Furthermore in Rule 10(3 ) (b) it states that the d ocument must set out the material facts or legal grounds u pon which the Co mmissioner “relies” and not “relied” for such disallowance.

On a pure linguistic in terpretation according to the “golden rule”, the present tense would indic ate that the state ment is to set out the current gr ounds and material facts as at the date of its filing and not the grounds as at the date when the disallowance took place. I am fortified in this conclusion by comparing the similar present tense wording used in the statement of the grounds of appeal to be filed by the taxpayer in accordance with Rule 11. In terms of Rule 11(2) (d) the taxpa yer is obli ged to set o ut the material f acts and legal gro unds up on which he or she “rel ies” and not “relied” for such appeal. The d uties flowing from the parties to t he appeal as set out i n Rules 10 and 11 seem to me to oblige both parties to set out the various grounds and facts which each will rely on when the appeal i s heard. In f act, in c ommon parlanc e, it has become accepted terminology to ref er to these two state ments as the “pleadings” filed by the respect parties in any appeal.

Rule 12 dealing with the issues in the appeal expressly state the following:

“12. The issues in an appeal to the Court will be those defined in the statement of the grounds of assessment read with the statement of the grounds of appeal.”

It will be noticed that the rule does NOT state that the issues are defined by any preceding correspondence.

I have no doubt that the legislative intention as well as a proper construction of Rule 12, leads one to conclude that the iss ues bef ore the Tax Court are those defined in the plead ings i.e. the Rule 10 and 11 statements filed by the parties. The issues bef ore Court are theref ore limited to those set out in the pleadings. There is in my view no ambiguity as far as these 3 (three) rules are concerned.

Mr Vorster argued tha t such an interpretation will lead to a prejud icial result burdening the taxpayer with an unfair disadvantage. He submitted that the preceding correspondence sets out the reasoning adopted by SARS for making the assessments and disallowing the ta xpayer’s objecti on ther eto. If S ARS is permitted t hereafter to add f resh or ad ditional or dif ferent grounds i n its Rule 10 statement, the taxpayer will be at a disadv antage in not bein g able to know the true reasons for the decision to disallow the objection. The taxpayer would only become aware of such reaso ns for the f irst time when receiving the Rule 10 statement. He submitted that the taxpayer may be unfairly taken by surprise when a new or different ground appears in a Rule 10 statement.

I cannot agree with this contention nor is the taxpayer at a disadvantage if the Rule 10 stat ement incorporates additional or diff erent grounds. First of all, it cuts both ways. Both SARS and the taxpayer will be ent itled to add additional grounds or additional defences in their statements. No disadvantage flows from the af oresaid interpret ation, because e ach p arty w ill have an opp ortunity b y adding new or dif ferent argu ments and ther efore be in a position to state his case better or more fully than the case set out in the preceding correspondence.

Secondly, the taxpayer is entitled to a sk f or reasons for having disa llowed its objection pursua nt t o the prov isions of Rul e 3. I n the prese nt i nstance th e applicant did not utilise this benefit afforded it in terms of that rule. Mr Vorster submitted that the pre ceding c orrespondence w as, in h is vi ew, sufficient to enable the ta xpayer t o appeal the disallowance b y S ARS of its objection. However, had it a sked f or the reasons i n ter ms of Rule 3, it woul d no dou bt have caused the respondent to include such additional and/or different reasons in its reply, at a point in time even before it filed its Rule 10 statement. It would be diff icult f or the ta xpayer to argue that t he respondent is pr ecluded f rom altering i ts sta nce from that contain ed in t he precedi ng correspondence. A change in reasoning for a particular decision may have a bearing on credibility, but I f ail to see how it can be prohibited. If a change cannot be prohibited in preceding correspondence, I f ail to see the lo gic in prohib iting such change in the Rule 10 statement.

Mr Vorster further submitted that it would leave the Rules open-ended if SARS is per mitted to add any ne w ground irr espective of what the preceding correspondence contain. That may be so. But in my view, that will not cause the taxpayer any prejudice because the taxpayer will have the opportunity when filing his Rule 11 stat ement to cou nter and /or deal with an y new ground i n SARS’ Rule 10 s tatement. It must be remembered that an y new ground contained in the Rule 10 statement cannot b e a vague state ment i n vacuu m. Rule 10(3) expressly requires SARS to set out “a clear and concise statement of the grou nds why the objection was disallo wed” a nd in additi on, it is also required that “the material facts and the legal grounds” for the Commissioner’s conduct is to be s et out. If any new or dif ferent ground clearly and concisely stated in the Ru le 10 state ment, I can se e no reason f or holdin g that the taxpayer will be at a di sadvantage. It will be faced with a document setting out a clear state ment of the grounds upon wh ich its objection wa s disa llowed as well as a statement containing all the material facts for such disallowance. This

will or ought t o enabl e the taxpa yer to defend itself fully a nd properly in its Rule 11 statement.

One m ay ask , rhetorically, well what more does the taxpayers wa nt? If Mr Vorster’s s ubmissions are correct it would m ean that th e Co mmissioner i s bound by any previous grounds referred to in any preceding correspondence. In my view , the clear wording used in the Rule s militates against Mr Vorster’s contentions.

I was ref erred to cases which were decided p rior to the promulgation of these Rules (which occurred in 2003 ). However, the principles therei n set out seem to me to comply with the literal and linguistic interpretation of Rules 10 and 11 which I referred to above.

The first decision was that of Davis J in Warner Lambart SA (PTY) Limited no 10700 decided on 12 F ebruary 2001. In that case the argum ent that the particular expenditure was of capital nature was first raised in argument before the court. The court then a llowed both parties to f ile additi onal writte n submissions dealing with that particular point. Counsel for the taxpayer in that case made similar su bmissions to that made by Mr Vorster regarding the unfairness if the Commissioner is allowed to raise new grounds at the hearing. Davis J dealt with this argument as follows:

“Mr Emslie further contended that it would be inherently, unr easonable and indeed unfair if a taxpayer, having been assessed on a particular basis in respect of which he has objected, the objection having been considered and an appeal having been noted, were t o b ear t he b urden o f pr oving not on ly t hat he w as not t axable on the basis assessed but on any other basis which the Commissioner might choose to raise at the hearing of the appeal.”

That argument was rejected in circumstances where the Income Tax Act at that point in ti me b ound the taxpa yer to its gro unds of objection . On e m ay have thought i t unf air to bind t he taxp ayer to his defences but allow t he Commissioner to have the freedom to alter the grounds for its assessment. Yet the court held that th e Co mmissioner’s f reedom not to be limited by the original re asons f or disallowing the objection, was f air. S ubsequently, th e Rules of the Tax Court were promulgated which amended this lacuna. It would seem to me that there would be no unfairness if a part y is permitted to change its reasoning either in the pleadings or ther eafter, provided adequate steps are taken to protect the ot her part y f rom an y res ultant prejudice by, f or example, the granting of a postponement or leave to lead fresh evidence or permission to file new submissions.

Davis J al so dealt with the Con stitutional i mplications of per mitting such a course of action on the part of the Commissioner. In this regard Davis J held as follows:

“Section 39(2) of t he C onstitution provides tha t w hen interpreting le gislation and developing c ommon l aw a nd c ustomary l aw e very court, t ribunal o r f orum must promote the spirit, purport and objects of the Bill of Rights. The implication of Mr Emslie’s argument is that the interpretation of “decision” in section 82 which is most congruent with the principles of fairness and equality in the Constitution is that which insists that what is imposed upon t he taxpayer is a burden of proof to show that the decision which included the reasons given at the time the assessment was raised, was wrong.”

It was f urther submitted to Davis J that t he taxpayer upon whom the burden of proof rests would h ave to discharg e the onus with regard t o a whole range of issues whic h the Co mmissioner may nev er ha ve contemplated in actuall y arriving at its a ssessment. Davis J rejecte d this ar gument base d on pre- constitutional authorit y which is in conf lict with this approach . T hus in ITC 583; 14 SATC 1011, Englen P said at 112:

“It is of course possible for this court to deal with the question of law arising on the facts and to decide it adversely to the appellant notwithstanding that the ground for its decision are other than those relied upon by the Commissioner always providing that the maxim audi alterem partem has been observed.”

The aforesaid dictum found support in Baily v CIR 1933 AD 204 at 220 where it was stated:

“A Special Court is a court of revision with power to investigate matters before it and to hear evidence thereon; and if it arrives at the conclusion that the appellant is liable for the tax which the Commissioner has levied, it is not precluded from upholding the same, merely because its conclusion is based on a ground other than that advanced by the Commissioner in support of its levy provided that the maxim audi alterem partem is observed.”

Davis J concluded that the af oresaid principles apply to any particular appeal case in a tax court and does not violate the Constitutional rights of a taxpayer. Davis J h eld further that, if there were t o be an y prej udice s uffered b y the taxpayer, he would al ways be entit led to seek a postpone ment i n order to prepare properl y f or an y arg uments rai sed b y the Co mmissioner. I am in respectful agreement with the conclusion of Davis J.

In the present instance the applicant has not yet filed its Rule 11 statement. The applicant will be perfectly en titled to deal w ith all new or dif ferent grounds raised by the Commissioner in its Rule 11 statement and, if the applicant needs more time for doing so, it would be at liberty to ask for an extension of the 30 (thirty) da ys within which it is obliged to f ile the Rule 11 state ment. Furthermore a taxpayer in the position of the ap plicant has an additional remedy namely b y amending his s tatement in ter ms of Rule 1 1 if he is confronted with a new or diff erent ground raised b y the Commissioner or f or that m atter raised in Court. Thi s re medy may be exe rcised by makin g application as provided f or in R ule 13 of t he Rules of the Tax Court. T he taxpayer’s ri ghts are t herefore doubly protected to avoid any trial by ambush,

surprise or an y preju dice which might resu lt f rom a new or dif ferent ground being raised by the Commissioner in its Rule 10 statement.

I must just refer to the fact that the applicant is not complaining that the Rule

10 statement f iled by the Commissioner is incomplete or inadequate. The complaint is li mited to the one sole ground and that is that it contains new matter which was not contained in the prece ding corres pondence. There is no attack on the adequacy of that which is contained in SARS’ Rule 10 statement. It must therefore be assumed that, although it contains a different ground for its decision to disallow t he objectio n, suc h ground is adequately a nd comprehensively state d to such extent that t he applicant will be a ble to deal with it in its Rule 11 statement.

My conclusion means that the Commissioner is entitled to add new grounds to its Rule 10 state ment different to that contained in the preceding correspondence. The t axpayer will have a s econd bite to the cher ry when i t comes to the final appeal hearing. It is in that hearing t hat the rules of natural justice (audi alterem partem) will be satisfied. The taxpayer is not in this interlocutory application required to f inally or once and for all respo nd to an y new grounds raised by the Commissioner in his Rule 10 statement.

In the subsequent appe al hearing an y n ew gr ound will be properl y ventilated. The taxpayer will be entitled to lead evidence to counter whatever new grounds have been raised by the Commissioner in th e Rule 10 state ment. The taxpayer will also be en titled to call f or further discovery of documentation if needs be to counter any such new ground. There are therefore many built-in structures in the rules to protect th e taxpa yer f rom the v ery mischief which M r Vorster referred to in argument.

And then the last consideration: This new ground actually relieves the taxpayer from proving his ca se in certain res pects. Why do I sa y that? SARS conceded that certain aspects of the asses sment were incorrect. The addition of this new ground has therefore, to a certain ex tent, benefited the taxpa yer in that it is no longer necessary to p rove its case i n respect of those aspects c onceded to be incorrect.

For all of the above reasons I am of the view that there can be no prejudice to the applic ant if Rule s 10 and 11 are inter preted as a bove because of all the built-in saf e guards which are available to a taxpayer. The application should therefore be dismissed.

The question of costs has not really been debated with me by Mr Vorster and I intend to make a n ord er that , should Mr Vorster feel that he wish es to add additional argu ments i n regard to cos ts, I will grant him l eave to do so in writing within 7 (seven) days from this judgment.

The order I therefore make is as follows:

The application is dismissed.

The applica nt is to pa y the costs which are to include costs of 2 (two) counsel.

The applicant is given leave to s ubmit within seven days of today, f urther written argument in regard to costs.

JUDGE C. J. CLAASSEN – PRESIDENT

JUDGMENT GIVEN ON 6 MAY 2010