How Important are Pleadings in the Tax Court
11 July 2013
Posted by: Author: Robert Gad & Taryn Solomon
Author: Robert Gad & Taryn Solomon (ENS)
The Rules of the Tax Court were introduced in 2003 in terms of section 107A of the Income Tax Act No. 58 of 1962. The Tax Administration Act No. 28 of 2011 (the "TAA”) makes provision for the adoption of new Rules, but these have only recently been released in the form of a draft notice. Accordingly the
position continues to be governed by the 2003 Rules. In summary, some of the key Rules relating to the exchange of documents in the Tax Court are the following:
- Rule 3 permits the taxpayer to request reasons for the issue of an assessment by the commissioner.
- Rule 4 provides that an objection to an assessment must set out in detail the ground which it is based. (There is no express rule limiting the objection to the grounds so stated.)
- Rule 10 provides that the Commissioner must file a statement of grounds of assessment (this is the first comprehensive pleading to be filed).
- Rule 11 provides that the taxpayer in turn must file a statement of grounds of appeal.
- Rule 12 provides that the issues in the tax case are defined by the Rule 10 and Rule 11 statements, which are often referred to as the pleadings in the matter.
- Rule 13 allows the parties to agree to an amendment of the Rule 10 and Rule 11 statements and failing such agreement ,application may be made to Court for leave to so amend.
Controversially, under the new draft Rules, the processes provided for in Rules 10 and 11 are reversed. Once the reasons for assessment have been requested and provided and the objection has been lodged, the taxpayer must file a comprehensive statement; the Commissioner has the right to oppose this statement; and the taxpayer has a right of reply. The fairness or otherwise of this reversal of Rules 10 and 11 will be discussed in a follow up article. For now, a key issue is that the new draft Rules provide that the reasons given by the Commissioner for his assessment in terms of draft Rule 6 are "final”.
So what is the current position if either party wishes to change its case during or even after the conclusion of the pleadings stage? It very frequently happens that a party becomes aware of a new line of attack or defence as the matter unfolds. Are the parties limited to what they have written at the outset?
In 2010, a value-added tax ("VAT”) case (ITC 1846 73 SATC 96) was argued before the Johannesburg Tax Court. In that Court, very briefly, the taxpayer applied to set aside the Commissioner’s Rule 10 statement on the grounds that it raised an issue for the first time. The Court reviewed the Rules and concluded that there was no precedent for the interpretation of Rule 10. It was therefore necessary to interpret Rule 10 from first principles. Based primarily on the type of language used, the Court concluded that the grounds on which SARS based its case at that time could be pleaded in the Rule 10 statement even if the effect was to raise new issues. The taxpayer would not, in the view of the Court, be prejudiced by the raising of new issues, because it had the right to reply thereto in its own Rule 11 statement.
The Court observed that this interpretation cuts both ways and that either party could raise new issues for the first time in its statements and in turn either of them would have the right to reply. The Court further referred to Rule 12 (mentioned above) which provides that the issues in the case are those defined by the Rule 10 and Rule 11 statements and stated that there is no suggestion that either party is bound to its initial stance either as set out in the assessment or objection respectively.
If this judgment is followed through to its logical conclusion, the Commissioner would not be bound by the reasons given for its assessment and the taxpayer in turn would not be limited to the grounds stated in its notice of objection. Each party can further develop its position in the exchange of their respective statements.
However, in November 2012 the Supreme Court of Appeal gave judgment in the matter of Computek v CSARS (No. 830/11). In this matter the taxpayer initially represented himself in a VAT case. The taxpayer was assessed, filed an objection (mainly against penalties) but did not dispute the amount of tax levied. In subsequent litigation the taxpayer was represented, and now sought to dispute the quantum of the tax in his Rule 11 statement. This attempt was contested by the Commissioner. Ponnan J ruled that the taxpayer was limited to his grounds of objection. He referred to previous decisions in which this principle had been held (although based on an earlier version of the legislation which expressly stated that the taxpayer was so limited). Under the current legislation there was no such express limitation. Despite this, the Court found that the principle must continue to pertain based on the common law notion that it is in the public interest that disputes must eventually come to an end. (Interestingly, the cases which upheld this public policy notion were contrary to the Commissioner and held that it would be unfair to an honest taxpayer if the Commissioner could keep changing his case until the Commissioner got it right.) The Court concluded that taking a new point (disputing the capital for the first time) in the Rule 11 statement effectively constituted a new objection and this was precluded. (On the facts of this matter the taxpayer faced further difficulties relating to the finality of assessments and the time bar against reopening such assessments which may be obstacles to the general application of the judgment.)
Arguably, this judgement sets a general principle that a taxpayer is limited to the grounds of objection and it would therefore follow that the taxpayer cannot raise arguments for the first time in the statement of grounds of appeal (Rule 11 statement). There is no reason why the principle does not extend also to the Commissioner. If this is so, by analogy, the Commissioner would be limited to the reasons for his assessment and would not be entitled to shift his stance in his statement of grounds of assessment (Rule 10 statement).
This principle is very important to the conduct of tax litigation. In practice, reasons for assessment are usually drafted by the Commissioner in house, whilst Rule 10 statements are drafted for the Commissioner by outside counsel. Very frequently the Rule 10 statement will raise substantively new matters. If Computek is applied as suggested above, this could well limit the Commissioner’s opportunity to shift his stance to a taxpayer’s detriment.
It also means that great care and consideration must be given to the request for reasons and the drafting of the grounds of objection because, quite conceivably, the taxpayer is limited to the grounds stated in the objection, whilst the Commissioner in turn is constrained by the reasons for assessment provided to the taxpayer.
This dramatically increases the importance of the very early stage of the tax litigation. These principles might well be completely overturned when the final version of the Tax Court Rules under the TAA are published.
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