The Supreme Court of Appeal ("SCA") in Comptutek (Pty)
Ltd v C: SARS 2012 ZASCA 178 ("Computek case") has
entrenched an important lesson to all taxpayers that are required
to file objections and appeals in respect of assessments that have
been raised by the South African Revenue Service
("SARS"). The Computek case illustrates that errors made
or insufficient detail in filing comprehensive objections or
appeals may later be fatal to the taxpayer's case during the
litigation process.
The SARS raised an assessment against the taxpayer in the Computek
case for an amount of R4 040 377.28 in respect of under-declared
and under-paid value-added tax ("Vat"). The capital
portion of the outstanding Vat liability comprised of R1 246 177.57
and the remaining portion related to additional tax, penalties and
interest. The assessment letter informed the taxpayer of its
ability to lodge an objection in writing and that objection must be
received within a certain period. The taxpayer represented by its
sole member filed a notice of objection against the assessment
raised by the SARS and set out brief grounds for the objection. The
taxpayer omitted to formally object to the capital portion of the
assessment, which related to the additional Vat output that had
been raised by the SARS. In response to the taxpayer's
objection, SARS informed the taxpayer that there was 'no
objection to the quantum of additional vat output raised suggesting
your acceptance of these figures'. The SCA was requested to
decide on whether or not the taxpayer had objected to the capital
portion of the Vat liability.
The SCA found that the taxpayer did not formally object to the
capital portion and referred to the capital assessment as being
'uncontested' in a letter addressed to the SARS. The
taxpayer also informed the SARS in a later letter "I would
like to note that we are in agreement with your turnover
figures". In filing its Rule 11 statement, grounds of appeal,
the taxpayer for the first time raised the issue that in
calculating its Vat liability SARS had included the turnover
figures of a related entity. The SCA had to consider a further
issue of whether or not the taxpayer could raise a new ground of
objection in its Rule 11 statement.
The proceedings in respect of lodging objections and noting
appeals against SARS' assessments and the conduct and hearing
of appeals are set out in the Rules published in Government Gazette
24639. Rule 4 prescribes that a taxpayer who is aggrieved by an
assessment may object to an assessment and that the objection must
be in writing specifying in detail the grounds upon which it is
made. The taxpayer in the Computek case argued that it had objected
to the global amount of R4 040 377.28 which included the capital
portion of the outstanding Vat liability. However the SCA dismissed
that argument and said that the definition of 'assessment'
does not countenance an objection to a globular amount and the
capital amount with which the taxpayer was dissatisfied ought to
have been objected to.
The SCA then relied on Malta Coal Ltd v Commissioner for Inland
Revenue 1987 (1) SA 108 (A) ("Malta Coal"), where the
court relied on section 83(7)(b) of the Income Tax Act that stated
that "the appellant in an appeal against the disallowance of
his objection is limited to the grounds stated in his notice of
objection". In Malta Coal the court further said that the
Commissioner may be prejudiced by an appellant shifting the grounds
of his objection. The SCA in the Computek case acknowledged that
even though section 83(7)(b) has since been deleted from the Income
Tax Act, there was no reason why the principle established in Malta
Coal should not apply to the present case. Therefore it was held in
the Computek case that the taxpayer did not raise an objection to
the capital assessment and it was precluded from raising it on
appeal.
It is interesting to note that in the prior case of ITC 1843, the
Commissioner took the opposite view of that argued in the Computek
case. In this matter the Commissioner had introduced new grounds in
his Rule 10 statement for supporting the assessments that were
previously raised. The new grounds were not only contradictory but
also absent from the correspondence filed prior to the Rule 10
statement. The tax court had to decide whether or not it was
permissible for the Commissioner to include the new grounds in his
Rule 10 statement.
Rule 10 of the Rules requires that the Commissioner deliver to the
taxpayer a statement of the grounds of assessment in writing, that
must set out a clear and concise statement of the grounds upon
which the taxpayer's objection is disallowed and set out the
material facts as well as the legal grounds upon which the
Commissioner relies for such disallowance. The taxpayer argued that
the new grounds should be disallowed as a proper interpretation of
Rule 10 does not permit new grounds to be admitted and it will
constitute unfair administrative decision by the SARS. The tax
court interpreted Rule 10 as applying in the present tense and the
statement is to set out the current grounds and material facts as
at the date of its filing and not the grounds as at the date when
the disallowance occurred. The court also said that if there were
any prejudice suffered by the taxpayer, he would be entitled to
seek a postponement in order to properly prepare. Furthermore, the
taxpayer had not yet filed its Rule 11 statement and was entitled
to deal with all new or different grounds raised by the
Commissioner in its Rule 11 statement. The court then held that the
Commissioner was entitled to add new grounds to its Rule 10
statement.
The SCA in the Computek case adopted a very narrow view than that
expressed in ITC 1843 and has now overturned that judgment whereby
taxpayers and the Commissioner will now be precluded from
introducing new grounds during the tax litigation process.
The Computek case serves as an important reminder to taxpayers
that they will be limited to the statements made in their initial
objections and filing of appeals when objecting to assessments that
are raised by the SARS. Going forward taxpayers are advised to seek
the assistance of tax professionals in the drafting of their
objections and filing of appeals in respect of SARS's
assessments. The failure to draft detailed objections and notices
of appeals may prove to be very costly to the taxpayer in the long
run.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
