Reduced assessments and the meaning of assessment (First SA Holdings Case)
04 November 2011
Posted by: SAIT Technical
Reduced assessments and the meaning of assessment - Silke
In the recent Supreme Court of Appeal decision in First South African Holdings (Pty) Ltd v C: SARS 73 SATC 221 (to be reported in the South African Tax Cases Reports Vol 73 Part 6) the court had need to consider s 79A of the Income Tax Act 58 of 1962 which provided that the Commissioner may reduce an assessment in certain circumstances even if no objection or appeal had been lodged but he may not so reduce an assessment more than three years from the date of the assessment and the issue was whether the taxpayer had been time barred by s 79A(2)(a) of the Act.
The facts were that the appellant, being the taxpayer, had applied on notice of motion to the High Court for an order setting aside a decision of the respondent, being the Commissioner for SARS, that he had been precluded by law from considering its quest for the issue of a reduced assessment to income tax in terms of s 79A of the Act in respect of the 2002 tax year.The aforementioned application had been dismissed with costs but leave to appeal was subsequently granted to the Supreme Court of Appeal.
The appellant had rendered an income tax return for the 2002 year of assessment stating that its taxable income had amounted to R15 892 978 and it sought to set off against that income an assessed loss of R34 978 418 carried over from the previous tax year and this meant that it had on its own showing suffered a tax loss of R19 085 440 which, presumably, could be carried over to the next financial year.
The appellant, in calculating its 2002 income, had failed to take account of the fact that certain foreign exchange gains were not fully taxable in terms of s 24I(7A) of the Act and it had accordingly overstated its taxable income.It did not repeat this mistake in the subsequent years but it also did not notify the respondent of the mistake made previously because it was unaware of it.
The respondent, also oblivious of the error, accepted the appellant’s figures and issued an income tax assessment on 17 July 2003 accordingly. He had assessed the appellant’s income at R15 892 978 and he had allowed the carrying over of the assessed loss of R34 978 418 for purposes of set-off and, therefore, no tax became due to the respondent for the particular year.
The respondent, on 12 April 2006, issued an additional assessment in respect of the 2002 year of assessment in which he disallowed set-off of the 2001 assessed loss as he was entitled to do so in terms of s 79(1) of the Act since the three year period, which began to run on 17 July 2003, had not yet expired and this meant that the appellant’s income for that year, namely R15 892 978, became fully taxable.At that point the respondent, ex facie the papers, did not reassess the appellant’s income but only the set-off of the 2001 assessed loss.
The appellant had lodged an appeal against the refusal of the respondent to set-off the balance of this assessed loss but the matter was settled and it withdrew its appeal relating to the particular additional assessment.
The appellant, in a letter dated 24 July 2007, having by then realised that it had overstated its income for the 2002 year of assessment by not taking into account the provisions of s 24I(7A), applied to the respondent for a reduced assessment for the 2002 year in terms of s 79A of the Act, which had been introduced by s 28 of the Taxation Laws Amendment Act 30 of 2002 and which provided, inter alia, that the Commissioner may reduce an assessment in certain circumstances but may not do so after the expiration of three years from the date of that assessment.
The appellant contended that: (a) the 2006 assessment was based on information provided by it for the 2002 year; (b) it was not in dispute that the appellant had overstated its taxable income for that year; (c) tax was accordingly calculated on an incorrect amount; (d) the respondent should have accepted that he had a discretion to reduce the assessment under s 79A(1); and (e) he was consequently incorrect in assuming that he was not entitled to consider the application for reduction.
The respondent had opposed the High Court application on two bases: he first argued as a point in limine that s 79A did not apply to the 2002 year; and, alternatively, he contended that the appellant was time-barred by s 79A(2)(a) because the three-year period began to run when the original assessment was issued on 17 July 2003 and not on the date of the additional assessment, namely 12 April 2006, as was submitted by the appellant.Harms DP (with whom Lewis JA, Ponnan JA, Bosielo JA and Theron JA concurred) stated that as a general principle taxing provisions dealt with future matters and were backdated only exceptionally; moreover, s 79A of the Act was not a provision inserted for purposes of assessments in respect of normal tax and the point in limine, which was not decided in the court below, could not be upheld.
The second issue was whether the appellant was time barred by s 79A(2)(a) of the Act and this depended on the question whether the three-year ‘prescription’ period began to run once the original assessment was issued or the date of the additional assessment and the date of the ‘error’ was irrelevant.
The court was of the view that if ‘assessment’ in s 79A of the Act were to be a reference to the notice of assessment, the latter date (ie the date of the additional assessment) would presumably be the applicable one but that is not what an assessment is – it is a ‘determination’ by the Commissioner of one or more matters and this appeared from the definition of ‘assessment’ in s 1 of the Act which defined it to mean ‘the determination by the Commissioner, by way of a notice of assessment . . . (a) of an amount upon which any tax leviable under this Act is chargeable; or (b) of the amount of any such tax; or (c) of any loss ranking for set-off; or (d) of any assessed capital loss determined in terms of para 9 of the Eighth Schedule. . ..’ The additional assessment dated 12 April 2006 was a re-assessment of a loss ranking for set-off under para (c) of the definition of ‘assessment’ and it did not re-assess the income of R15 892 978 under para (a) thereof.
What the appellant sought was an indulgence relating to the latter (under para (a) of the definition of ‘assessment’ and not the former(under para (c) of the definition of ‘assessment’) – it had overstated its income and it wanted the Commissioner to re-consider the quantum of its taxable income but, using the wording of the section, ‘that assessment’ was made during 2003 and became final during 2006 and s 79A did not allow the Commissioner to revisit ‘any’ assessment.
The appellant had submitted that it was in effect seeking a re-assessment of the tax payable under para (b) of the definition of ‘assessment’ and that it was entitled to do so because that amount was assessed for the first time in 2006 in the additional assessment and that the three-year period had not lapsed but the problem with the submission was that any re-assessment of the tax payable under para (b) would be dependent upon a re-assessment under para (a), which meant that the amount of tax payable would simply be a mathematical calculation based on a re-assessment under para (a) and, in other words, a re-assessment under para (a) would be a prerequisite for one under para (b).
The court noted that this result might at first blush appear to be unfair towards the appellant in the circumstances of this case but any other conclusion about the meaning of ‘assessment’ would have meant that the Commissioner could within three years as from 2006 have reconsidered the appellant’s taxable income of R15 892 978 by means of a new assessment under s 79(1), thereby raising the taxable amount six years after his original assessment of that amount and that was unthinkable in view of the judgment in C: SARS v Brummeria Renaissance (Pty) Ltd and Others 69 SATC 205 at para 26.In the result the appeal was dismissed with costs.