Getting the facts straight
05 June 2015
Posted by: Author: PwC South Africa
Author: PwC South Africa
It is well-known and often said that it does not matter how good your case may look in law; if the evidence is weak, your prospects of success are limited. Litigants must therefore be astute to ensure that evidence that they lead relating to events or occurrences is direct evidence given by persons who can attest to the events because they witnessed them at first hand. Failure in this regard proved fatal to SARS in a matter in the Tax Court.
In the Tax Court, SARS bears the onus of proving that additional tax was appropriately imposed.
It is well established that the Tax Court is not a court of appeal in the ordinary sense, but is a tribunal of review and revision (Bailey v CIR (2933( AD 204) at 220).
An appeal to the Tax Court against an assessment by the Commissioner involves a re-hearing, de novo, in contrast to an appeal in the ordinary courts which is decided on the written record of the proceedings in the court below, without any further evidence being led or witnesses called in the course of the appeal. (Hicklin v Secretary for Inland Revenue 1980 (1) SA 481 (A) at 485E - F);Metcash Trading Ltd v Commissioner, South African Revenue Service 2001 (1) SA 1109 (CC) footnote 49).
From this it follows that the Tax Court can consider the entire matter afresh and substitute its own decision for that of the Commissioner.
An appeal to the Tax Court
The principle that an appeal to the Tax Court involves a reconsideration de novo of the disputed issues is equally applicable to an appeal to the Tax Court against a discretionary decision of the Commissioner.
The decision of the Johannesburg Tax Court in AB (Pty) Ltd v CSARS  ZATC 1 concerned the question whether the taxpayer was liable for additional tax (some R32 million), penalties (some R1.6 million), and interest (some R5.2 million), imposed by SARS in terms of section 60 of the Value-Added Tax Act 89 of 1991 in revised additional assessments spanning a four year period.
Prior to the hearing, the taxpayer abandoned its appeal against the capital amount of tax that had been assessed.
The factual background to the hearing
The background to the hearing in the Tax Court was that, following an audit of the taxpayer’s affairs, SARS asserted that the taxpayer had under-declared its VAT output tax, and requested the taxpayer, in writing, to provide an explanation and supporting documents.
The taxpayer (whose business involved the rendering of security services to its customers) did not provide SARS with any of the requested supporting documents but, by way of explanation, said that in terms of its contract with a particular customer, the customer would be entitled to a commission, and that the customer would provide the taxpayer with VAT-inclusive monthly invoices.
SARS requested the taxpayer to provide copies of all such invoices and proof of payment, but the taxpayer did not do so.
The judgment recounts that SARS thereupon –
In a letter to SARS, the taxpayer denied any intention to defraud the fiscus and said that all its tax affairs had been handled by an auditor whose judgment they trusted.
"due to the failure of the [taxpayer] to furnish it with any of the documentation mentioned above, raised additional tax of 200% as it rightly concluded that such failure on the part of the [taxpayer] constituted an intent by the [taxpayer] to obtain an improper VAT refund with a view of defrauding the fiscus [and further] as a result of the non-payment of VAT timeously by the [taxpayer], imposed a 10% penalty on the capital amounts owed to it [and], further, as a result of the non-payment of VAT timeously by the [taxpayer] levied interest on the capital amounts owed to it.”
The question before the Tax Court was whether the taxpayer was liable for additional tax in terms of section 60 of the Value-Added Tax Act.
The onus of proof
The judgment recounts (at para ) that –
"Counsel appearing before this court were in agreement that the Commissioner had the duty to begin and has the onus to prove that the imposition of the additional tax of 200% was correctly imposed.”
SARS called only one witness, an auditor in its employ, who testified as to why he had recommended to the relevant SARS committee that additional tax should be imposed and at the rate of 200%. That recommendation was then referred to a more senior committee which took the decision to impose additional tax of 200%.
The court observed (at para ) that –
The judgment of the Tax Court
"No witness was called to explain the decision of the senior committee. This failure results in this court being unable to assess the correctness of the decision of the committee to impose the penalty.”
then goes on to say that –
The Tax Court concluded its brief judgment by issuing an order that the additional tax be set aside, and that the matter be referred back to the Commissioner with the direction that the additional tax be remitted to nil.
" Where the correctness of a discretionary decision, which is subject to objection and appeal, is contested in a tax court, there is a re-hearing of the whole matter, including the additional tax, by the tax court. Accordingly, the tax court can consider the issue afresh and substitute the respondent’s decision in that regard.
 The Commissioner, having failed to place any evidence before the court as to how and why the senior committee arrived at a decision to impose the 200% additional tax, failed to prove that
the imposition of the additional tax was justified and the imposition thereof cannot be upheld. This is more so by virtue of the fact that the Commissioner, at least impliedly, conceded that the imposition of the 200% additional tax was not justified by advising the court at the outset of the hearing that it no longer sought 200% additional tax but additional tax at the rate of 100%. Having made this concession, it was incumbent upon the Commissioner to lead evidence to show how this figure was arrived at. There is nothing before this court to determine the issue. In the circumstances, the Commissioner, who accepted the onus of proving that the penalty was correctly imposed, failed to discharge that onus.”
Commentary and reflections
This is an extraordinary case.
The amount of additional tax claimed by SARS was substantial – in excess of R32 million.
Prior to the hearing, the taxpayer had not responded to SARS’s requests for explanations and supporting documentation.
Presumably, the taxpayer came to the Tax Court with some plan of action for arguing that additional tax should not have been imposed, or had been imposed at too high a rate. In the event, it seems that the taxpayer led no evidence and tabled no documents, and simply closed its case after the single witness for SARS had testified.
Did SARS think that the testimony of its single witness would suffice to support its assessment to additional tax? Did SARS not realise that the cardinal issue was the reason why SARS had decided to impose additional tax, and to impose it at a particular rate? Clearly, its witness had decided that additional tax of 200% was appropriate and no doubt he had his reasons. However, the operative decision in regard to the imposition of additional tax had been made, not by that witness, but by a SARS committee of which the witness was not a member.
It may be inferred that even if the witness had been informed of the reasons why the committee had decided on additional tax of 200%, he would not have been allowed to testify to those reasons in the Tax Court because he was not party to the committee’s deliberations and decision.
Even if he had been told what the committee’s reasons were, he would not have been permitted to recount those reasons in court – this would have been hearsay evidence, which is inadmissible in a court of law. A witness must testify to facts that are within his personal knowledge, not to the opinions held by other people.
So this hearing in the Tax Court ended not with a bang, but a whimper. The taxpayer emerged into the sunshine, a burden of R32 million having been lifted off its shoulders without, it seems, having had to say a word.
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This article first appeared on pwc.co.za.