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.