On 17 October 2017 the Tax Court (Western Cape Division: Cape Town) delivered judgment in the matter between S Company v The Commissioner for the South African Revenue Service (SARS) under case number IT0122/2017. The judgment was handed down by Judge Cloete. This judgment is of great interest to any taxpayers currently involved in prolonged disputes with SARS, in particular where there are delays on the part of SARS.
The case involved two applications relevant for purposes of this article and discussed herein, namely:
- an application by the taxpayer for default judgment in terms of rule 56 of the Tax Court rules (Rules); and
- an application by SARS for condonation for the late filing of its answering affidavit opposing the default judgment application.
SARS assessed the taxpayer on 2 November 2015 for the tax periods 2005 to 2010 and on 3 November 2015 for the tax periods 2011 and 2012.
On 31 January 2017 the taxpayer filed its notice of appeal in terms of s107(1) of the Tax Administration Act, 2011 (TAA) read with rule 10 of the Rules. In terms of rule 31, SARS was required to deliver its statement of grounds of assessment and opposing the appeal (Rule 31 Statement) within 45 days thereafter. This period expired on 5 April 2017 and SARS failed to deliver the Rule 31 Statement timeously. There was no agreement between the parties pertaining to late delivery nor had SARS requested an extension in terms of rule 4(2).
The SARS official to whom the appeal had been allocated (Masola) invited the taxpayers tax consultant (Kotze) to a meeting held on 10 April 2017. According to Masola the purpose of the meeting was to introduce himself to Kotze as the SARS official dealing with the appeal. He informed Kotze that he had only recently been appointed in SARSs litigation division (two months earlier, on 7 February 2017) and would need time to acclimatise himself with SARSs processes and the facts of the appeal. Masola requested an extension for delivery of the Rule 31 Statement and the taxpayer reluctantly agreed to an extension until 13 June 2017 (a further 45 days calculated from the initial deadline of 5 April 2017).
On 26 May 2017 the taxpayer made a without prejudice settlement proposal to SARS. The proposal did not state that the taxpayer relieved SARS of its obligation to deliver the Rule 31 Statement by the agreed extended deadline of 13 June 2017.
On 31 May 2017 Masola informed Kotze that the Rule 31 Statement would not be forthcoming by 13 June 2017. On 1 June 2017 Kotze wrote to Masola informing him that SARS already had 90 days to prepare and file the Rule 31 Statement. Even though his client was unhappy about the extension, the taxpayer wanted SARS to consider the settlement proposal whilst preparing the Rule 31 Statement, and therefore agreed to a further extension to 14 July 2017 (an additional month). Kotze advised SARS that his advice to the taxpayer would be not to grant SARS any further extensions to file its Rule 31 Statement.
Masola explained in his affidavit that he received the settlement proposal whilst busy dealing with the matter. On receipt thereof he turned his attention to the settlement proposal as its acceptance would conclude the matter and render further processes and action (including the Rule 31 Statement) unnecessary. Masola did not disclose the stage he had reached in drafting the Rule 31 Statement or whether he had in fact started with the drafting at all.
SARS failed to comply with the final deadline. Accordingly, the taxpayer delivered its notice in terms of rule 56(1) on 17 July 2017 (Rule 56 Notice). The Rule 56 Notice pointed out that, despite the extensions granted and having had 113 days to deliver the Rule 31 Statement, SARS had failed to deliver same. The taxpayer formally indicated that it would apply to the Tax Court for a final order in terms of s129(2) of the TAA in the event of SARS failing to remedy its non-compliance within 15 days, ie by 7 August 2017. SARS failed to comply with this deadline and, on 8 August 2017, the taxpayer delivered an application for default judgment. SARS delivered the Rule 31 Statement on 9 September 2017, one month after delivery of the application for default judgment. In the application the taxpayer sought as its main relief a final order in terms of s129(2)(b) of the TAA upholding its appeal in its notice of appeal dated 31 January 2017. In the alternative the taxpayer sought an order directing SARS to deliver its Rule 31 Statement within five days thereof in the event that the court found good cause for SARSs default.
SARS timeously filed its notice of intention to oppose but failed to deliver its answering affidavit timeously, which was required by 12 September 2017. The Rule 31 Statement was delivered 107 days after the initial deadline expired on 5 April 2017. SARS failed to secure another extension for its delivery after 7 August 2017 and did not request one. SARS also did not seek condonation for the late filing of the Rule 31 Statement, it simply served and filed it, which did not remedy its non-compliance.
On 13 September 2017 the taxpayer requested the registrar to allocate a hearing date for the default judgment application. The notice of set down was provided to the parties on 20 September 2017. SARS only brought its application for condonation for late filing of its answering affidavit on 29 September 2017 (five days before the hearing on 9 October 2017). In his affidavit, Masola complained that the default judgment application was set down despite delivery of the Rule 31 Statement. He complained that his subsequent requests for the default judgment application to be withdrawn were refused. In his view there was no prejudice to the taxpayer since it had been in possession of the Rule 31 Statement since 9 September 2017. On this basis he sought condonation for the late filing of the answering affidavit. Masola attached the Rule 31 Statement to his affidavit without attempting to summarise it for the court.
In response the taxpayer pointed out that Masola had not explained why he believed that SARSs non-compliance could simply be remedied by delivering the Rule 31 Statement before the deadline for delivery of its answering affidavit. The taxpayers prejudice arising from SARSs repeated failure to comply with the Rules was manifest. The taxpayer explained that it had over the past 10 years tried to regularise its tax affairs and during this period locked horns with SARS in court on four occasions. Consequently it had difficulty in performing income tax calculations, filing income tax returns and attending to provisional tax. It had nonetheless never defaulted on payment of sums due to SARS. Despite SARSs averments about its consideration of the settlement offer (submitted over four months earlier), it had yet to provide a response.
Discussion by the court
The court, in considering SARSs application for condonation, referred to the case of Van Wyk v Unitas Hospital 2008 (2) SA 472 (CC) where the Constitutional Court stated that the standard for considering an application for condonation is the interests of justice. Whether it is in the interests of justice to grant condonation depends on the facts and circumstances of each case. Relevant factors include the nature of the relief sought, the extent and cause of the delay, the effect of the delay on the administration of justice and other litigants, the reasonableness of the explanation for the delay, the importance of the issue to be raised in the intended appeal, and the prospects of success. An applicant for condonation must give a full explanation for the delay which must cover the entire period of the delay. The explanation must also be reasonable.
The court referred to the case of SARS v Muller Marais Yekiso Inc (Tax Case No. 12013/2012) in which both the taxpayer and SARS failed to comply with the Rules or follow up on matters. The Court stated that the:
Timetable in the rules is a generous one; far longer periods are permitted for the filing of pleadings, by which I mean the statements in terms of Rule 10 [now 31] and 11 [now 32], than applies in High Court proceedings under the Uniform Rules of CourtDespite these generous time periods, one sees time and time again that neither SARS nor the taxpayers comply with them; they simply seem to go along in their own way. This is strongly discouraged. SARS, in particular, should take the lead and should display efficiency in the conduct of litigation. It should comply with time periods, and where it does not, it should promptly raise that matter in correspondence, providing reasons and seeking written agreements to extensions.
Having said that SARS should take the lead, taxpayers themselves should not allow matters to drift. If SARS does not comply with a requirement imposed by the rules, a taxpayer is entitled, in terms of Rule 26 [now 56], to bring an application to compel compliance with the Commissioners obligations. That is the way in which a taxpayer prevents prejudice which can otherwise arise from lengthy delays in the finalisation of tax disputes.
The Court referred to the Van Wyk case where the Constitutional Court stated that:
There is now a growing trend for litigants in this Court [ie the Constitutional Court] to disregard time limits without seeking condonationIn some cases litigants either did not apply for condonation at all or if they did, they put up flimsy explanations This practice must be stopped in its tracks.
The court stated that the explanation provided by SARS for its delay of five months beyond the time limit of 45 days stipulated in rule 31 was grossly inadequate. It was not a full explanation and did not cover the entire period of the delay. Moreover, it was not reasonable. During the period 5 April 2017 to 13 June 2017 (the first agreed extended deadline) the only steps Masola took were to meet Kotze on 10 April 2017, essentially to ask for an extension, and to consider the settlement offer. Apart from that, the court was left with the bald averment that he was busy dealing with the matter. The court further stated that it was not possible to discern the actual steps taken by Masola between 14 June 2017 and 14 July 2017 (the second and final agreed extended deadline). All that is known is that by 17 July 2017 he was engaged in drafting the Rule 31 Statement.
The court noted that the Rule 31 Statement was still not finalised by 7 August 2017 and must have been nowhere near completion even when SARS filed its notice of intention to oppose the default judgment application on 22 August 2017, given that the statement was only served and filed on 9 September 2017. However, the court found that SARSs fundamental difficulty was that there was no application for condonation for late filing of the Rule 31 Statement before the court. The only application before the court was for condonation for late filing of its answering affidavit. Even if the latter were to be granted it would not cure that fundamental difficulty. The Rule 31 Statement was not properly before the court – it was delivered months out of time and at the very least more than a month after the deadline of 7 August 2017 stipulated in the Rule 56 Notice.
In the courts view Masola may have been a recent appointee in SARSs litigation division when the appeal was allocated to him on 27 February 2017, however, there was no suggestion that he lacked the necessary skills and experience. He may have required a reasonable period of time to familiarise himself with SARSs internal processes and the appeal. However, he had been employed in SARSs litigation division for over four months by the date when the first agreed deadline expired. In such circumstances he could surely have had the opportunity to familiarise himself with the Rules. In addition, by 10 April 2017 he must have been aware of the 45 day time limit contained in rule 31 as he knew that he required an agreed extension. The same applies to the further extension requested and to which the taxpayer agreed.
In the courts view it was difficult to accept that, by 7 August 2017, he was wholly unaware of the provisions of rule 4 relating to the extension of time periods and that he laboured under the misapprehension that delivery of the Rule 31 Statement would automatically remedy the non-compliance. Even if he genuinely believed this to be the case, it was not the end of the matter. Masola was employed by SARS itself. The court referred to the case of Saloojee and Another v Minister of Community Development 1965 (2) SA 135 (AD) where that court considered delays caused by the neglect of the applicants attorneys. The court stated that there is a limit beyond which a litigant cannot escape the results of his attorneys lack of diligence or the insufficiency of the explanation tendered. Since the attorney is the representative that the litigant chose himself and there is little reason why, in regard to condonation of a failure to comply with a Rule of Court, the litigant should be absolved from the normal consequences of such a relationship, no matter what the circumstances of the failure are. The court in the Saloojee case stated that a litigant who knows that the prescribed period has elapsed and that an application for condonation is necessary is not entitled to hand over the matter to his attorney and wash his hands of it. He cannot sit passively by without any reminder or enquiry to his attorney and expect to be exonerated of all blame. If he relies upon the ineptitude or remissness of his attorney, he should at least explain that none of it is to be imputed to himself.
Referring to the case at hand, the court stated that, although Masola took responsibility for his belief that simply delivering the Rule 31 Statement, albeit grossly out of time, would automatically remedy SARSs non-compliance, SARS was otherwise silent. The court accepted that the amount involved was substantial, however, insofar as the delay was concerned, SARSs conduct was inexcusable. It paid little, if any, regard to the proper administration of justice and the effect of its delay on the taxpayer and the fiscus. The onus rested upon SARS to persuade the court that it had good prospects of success in the context of whether it had shown good cause for condonation. SARS failed to deal with all the findings by which it was bound and merely incorporated the content of its Rule 31 Statement by reference in its affidavit, coupled with the averment that the statement showed that it had a bona fide case. This approach did not enable the court to determine that it enjoyed good prospects of success and, accordingly, the application for condonation failed.
The court concluded that the taxpayer had complied with the procedural provisions of rule 56 whereas SARS failed to show good cause for condonation for its default. The taxpayer sought a final order under s129(2)(b) of the TAA to alter SARSs assessment in the manner contemplated in its notice of appeal. The court was persuaded that the taxpayer was entitled to such order and that costs should follow the result. Accordingly:
- SARSs application for condonation for the late filing of its answering affidavit was dismissed;
- A final order was granted under s129(2)(b) of the TAA altering the assessments issued by SARS on 2 November 2015 in respect of the 2005 to 2010 tax periods and on 3 November 2015 in respect of the 2011 and 2012 tax periods, in the manner contemplated in the taxpayers notice of appeal dated 31 January 2017; and
- SARS was ordered to pay the taxpayers costs in respect of both applications, including the costs of two counsel where employed.