Carte Blanche Marketing CC and Others v Commissioner for the South African Revenue Service (26244/2015) [2017] ZAGPPHC 253 (26 May 2017)

REPUBLIC OF SOUTH

AFRICA

IN THE HIGH COURT OF

SOUTH AFRICA

GAUTENG DIVISION,

PRETORIA

CASE NO: 26244/2015

Not reportable

Not of interest to other judges

Revised.

7 June 2017

In the matter between:

CARTE

BLANCHE MARKETING CC First Applicant

C

B M HOT EXPRESS CC Second Applicant

MICHELLE

JENNIFER AIREY Third Applicant

and

COMMISSIONER

FOR THE SOUTH AFRICAN

REVENUE SERVICE Respondent

JUDGMENT

C R JANSEN, AJ

[1] This is an interlocutory application in which the applicants seek to compel discovery of certain further documents from the respondent

(SARS) in terms of Rule 35(3) of the Uniform Rules of the High Court.

[2] The main proceeding is a review application which the three applicants brought against SARS in which they seek to set aside the “decision” of SARS to audit them in terms of section 40 of the Tax Administration Act 28 of 2011. I use the word “decision” cautiously as the legal description of the action taken in terms of section 40 is at issue in this matter[1].

[3] The three applicants are all registered taxpayers. The first and second applicants are corporate entities and the third applicant is an individual taxpayer. From the facts it appears that the third applicant conducts business, among others, through the first and second applicants. She is also their managing director.

[4] The background to the litigation is briefly the following:

4.1 In August 2014, SARS gave notice in terms of section 40 of the Tax Administration Act that it intends auditing the income tax affairs of the applicants. On the face of it, this must be the most routine of “decisions” taken at SARS. I am sure thousands such section 40 notices are sent out every year.

4.2 In the same notice of August 2014, SARS requested a range of documents in terms of section 46 of the same act[2]. I understand that it is regular practice for the sections 40 and 46 notices to be combined in one notice. The documents sought were quite comprehensive. They included all the books of account and the financial statements of the applicants going back for a period of 5 years. Also included, was all payroll information. Despite the intrusive nature of the request, these are the type of documents that a compliant tax payer should have ready at any given moment, most certainly any corporate that must in any event have its financials audited.

4.3 The applicants refused to hand over the documents. Instead, they informed SARS, in letters sent by their tax court practitioner, that they sought reasons why SARS wanted to perform the audit.

4.4 The applicants allege that the decision to audit their financial affairs was motivated by improper motives. Third applicant alleges that the decision was made as a result of a series of custom and excise disputes and resultant legal battles that SARS and the applicants were involved in over a number of years. She alleges that she was being targeted for no good reason, other than the animosity that existed as a result of the other litigation.

4.5 In the original audit notice SARS indicated that the audit was required based on a “risk assessment”. This is one of the bases on which an audit can be instigated in terms of section 40 of the Tax Administration Act. As appears from the wording of the section, a person can even be chosen on a random basis. Neither “risk” nor “risk assessment” is defined in the Tax Administration Act. I take it that it is accounting jargon for money potentially gone missing or money owing that was possibly not paid. The word “suspicion” is possibly a too impolite word in the accounting world.

4.6

SARS gave a fairly substantial reply to the letter of the tax court practitioner. Although most of the content of the letter is simply a pro forma SARS response setting out a range of the provisions of the Tax Administration Act and how they are utilised by SARS, the response by SARS does refer to facts specific to this case. SARS informed that they had obtained bank statements in terms of section 46(3) of the Tax Administration Act and that there existed large discrepancies between the gross income declared by the applicants and the actual turnovers reflected in their bank statements.

4.7 The applicants were not happy with the reasons given by SARS. The applicants then instituted the main review application to have the “decision to audit” set aside.

[5]

SARS filed a “record of the proceedings” as required by Rule 53(1). It consisted of three volumes of documents.

[6] The applicants were not satisfied that the record contained all documents relevant to the matter. In addition to the three volumes of documents filed, the applicants sought, by way of this interlocutory application, access to further documents. These were divided into two categories. The first category consisted of a list of documents to which express reference was made in the documents disclosed. The second category were documents not referred to in the disclosed documents, but which the applicants otherwise regarded as relevant.

[7]

SARS opposed this application for the disclosure of further documentation.

[8] SARS’ position was that it was not under any duty to disclose any documentation as its decision to embark on an audit does not constitute administrative action for purposes of the Promotion of Administrative Justice Act 3 of 2000 (PAJA).

[9]

SARS alleges in its answering affidavit that it filed the “record of proceedings” for pragmatic reasons. It wanted to expedite the litigation which it considered as completely unfounded.

[10] However, when the applicants sought further discovery of documents, SARS put its proverbial foot down and took the position that the court should effectively put an end to this litigation by deciding that the main application has no merits. It apparently no longer wanted to be pragmatic, but wanted to bring the litigation to an end, as it then believed that the applicants were delaying the litigation intentionally.

[11] Counsel for SARS referred to a number of reported cases in which it was decided that a court hearing an interlocutory application cannot avoid deciding a purely legal issue[3]. As is apparent from the Geyser-case, which was relied on by applicants’ counsel, this can sometimes be a complicated issue. There are no hard-and-fast rules that can be applied. In my view such cases can only be decided on a case by case basis. The court hearing the interlocutory application must be reasonably certain that a decision on the legal point will put an end to the case, or will dispose of a substantial part of the case. If there is a risk that the early decision of a legal point could complicate the further and full ventilation of the matter, the court should decline the invitation to decide such a legal issue.

[12] Our rules of court do not provide for the summary dismissal of cases with dubious merits. Procedures such as taking an exception in action proceedings, or noting only legal points in application proceedings apply only in limited cases. Generally, our rules allow a litigant the use of the full spectrum of procedures and requires a defendant/respondent to plead over and to deal with all issues in one go.

[13] In the Fourie-case the issues were crisp, namely whether a party was entitled to cancel an agreement and whether the cancellation had been properly effected. The decision was made easier by the fact that the factual finding could be made that the notice of cancellation had not, as a fact, reached the other party. The present case concerns allegations of mala fides. It is the polar opposite of the Fourie-case. But SARS calls on this court to find that the allegations of mala fides must either be rejected at this stage or must be found to be irrelevant. I don’t believe I can do either.

[14] This case can also not be compared with the type of case where the issues in a matter are fully ventilated during the rule nisi stage. In such cases, there is obviously no point in repeating the same process. This point was validly made in the St Clair Lynn-case. This case is different. The issue here is simply whether additional documents should be discovered.

[15] Where one deals with the question whether an act is reviewable in principle, I would suggest that it is advisable to err on the side of caution. After all, it is now generally accepted that the exercise of all public power is reviewable on some or other basis[4] And the concept of legality incudes the requirements of lawfulness, rationality and constitutional consistency[5]. Whatever happened to creatures like the political questions doctrine and other rules that insulated the executive and the legislative branches from judicial review, I do not know. But this case deals with something that is distinctly part of state administration, namely tax collection. So there is no need for any doctrinal anxiety. Tax disputes, if not otherwise settled, will end up in one or other court of law.

[16] I accept that the argument made on behalf of SARS includes the argument that this case has nothing to do with the distinction between

administrative action and other forms of the exercise of public power. The argument is that the specific act does not have any direct external legal effect, and is therefore not reviewable, no matter what nametag is attached to it. I deal with this issue below.

[17] It should be noted that the threshold for SARS to pass before it can utilise section 40 must be extremely low, and I accept that the instances where a court will interfere with such a decision will be extremely rare. On the other hand, the words relevant for the proper administration of a tax act[6] and for the purposes of the administration of a tax act[7] cannot be ignored. Utilising the provisions of the act for ulterior purposes will always be unlawful and will be a serious breach of the mutual trust that should exist between a tax payer and SARS. The express wording of the act requires this. In other words, a finding that an act was not taken for purposes of the administration of a tax act, would vitiate such an act. Whatever one’s scepticism may be about the merits of this matter, that does not mean that as a matter of law the decision involved cannot be reviewed.

[18] In essence, SARS’ position was that the litigation was vexatious and constituted an abuse of process. Counsel for SARS further

advanced the notion that should litigants be allowed to take decisions made in terms of section 40 of the Tax Administration Act on review, it would bring the entire tax administration system to a halt. I find these arguments advanced on behalf of SARS somewhat

exaggerated. When litigants enforce their rights through court processes, it inevitably creates delays. These type of “floodgates

of litigation” or “the end of the administration as we know it” arguments have never prevailed. They are often just a guise for inappropriate judicial conservatism or betray a streak of authoritarianism. The answer is always to ensure that parties use the existing rules of court sensibly and efficiently.

[19]

SARS could easily have continued with its pragmatic approach by handing over the relevant documents. Steering a matter to finality through the ordinary processes is more often faster than seeking some shortcut to final adjudication. Requesting further discovery is not anything unusual.

[20] Getting rid of cases with dubious merits is not the most important problem faced by procedural law. Enabling marginalised and voiceless people to bring their cases to court and to overcome cumbersome procedures is a far bigger problem. Again, a court should err on the side of indulgence of regular use of the rules.

[21]

SARS is the last litigant that can complain. Our courts have created a number of exceptions to the ordinary principles of how debt

enforcement works when it comes to fiscal matters. The interests of the fiscus in efficient collection have been strongly

protected by our courts and the legislature, both at national and local government level[8]. Considering these matters, it is appropriate to talk of fiscal exceptions to the ordinary rules of procedural fairness and appropriate relief.

[22] But SARS agreed in this case to the making of an interim order that it would not collect the additional assessment pending finalisation of the matter. In my view, if SARS makes a reasonable and rational assessment in any given case, it should insist on the interim

payment. After all, that is what the “pay now argue later” rule is all about. In this case it abandoned that right, possibly because its decision of slapping a R 250 million tax bill on the applicants was grossly unreasonable. The applicants’

recalcitrance didn’t help, but that does not justify the use of a sledge hammer to crack a nut. SARS could have subpoenaed some of the documents from the auditors, or could have made some intelligent estimates while the high court litigation continued.

[23]

SARS can also not select at what stage it wants to object to the litigation, or at what stage, as SARS put it, it no longer wishes to be pragmatic. If it felt so strongly about the principle, it should have taken the point at the commencement of the proceedings, not half way through.

[24] The first problem that SARS has is that the main application does not only constitute a review in terms of PAJA. It also raises

general grounds of rationality review.

[25] Whatever the correct description of the powers under sections 40 and 46 of the Tax Administration Act is, they remain exercises of public power, and must as such comply with the principles of legality. When considering the provisions of section 6 of the Tax Administration Act, one would tend to think that the legislature considered the issuing of notices as administrative acts. Sections 99 to 105 appear to convey some intention as to what may be appealed to the tax court and what not, but the matter is a lot more complex than that.

[26] I accept for present purposes that there are strong arguments to be made in favour of the view that the decision to commence an audit does not constitute administrative action. As I understand the argument, this decision is merely provisional and is part of a process which eventually leads to a decision to either accept a self-assessment by the taxpayer or else to raise an additional

assessment. Only once the additional assessment is raised, does the action constitute administrative action for purposes of PAJA. In other words, it is comparable to disciplinary proceedings that have many components to it[9].

[27] Unfortunately, the definition in PAJA has conflated issues which used to be dealt with as the requirement of prejudice, ripeness, premature applications and the like. If prejudice was still a requirement, or if those principles were still applied as they were in the pre-democratic era, it would have been easy to determine that the requirement of handing over ordinary books of account does not constitute prejudice. Only once an assessment has been amended, would there be actual prejudice.[10]

[28] But we live in a very different era. I must agree with Mr Mastenbroek for the applicants that we need a more nuanced approach post 1994, and certainly a more generous one when fundamental rights are concerned. The requirements of adversely affecting rights and direct, external legal effect must not be used to shield acts of bias, mala fides, corruption and the like from judicial scrutiny at the earliest possible stage. But this is not the occasion to do more than identify the outlines of the issues in this case[11].

[29] The decisions and processes involved in tax administration are all related to a decision that will ultimately constitute administrative

action. These related actions and decisions must be part of an overall fair process and must be free from any bias, ulterior purpose or corruption. In fact, only the highest professional standards will do. Considering that these investigations can spill over into criminal investigations, complicate matters even further.

[30] However, the question when a court will interfere and what remedies it will grant at any particular stage is truly a complex one that should, in my view, not be answered while all the issues have not been ventilated.

[31] It has always been possible for a court, in exceptional circumstances, to interfere in administrative processes and even in judicial

processes of lower courts before the final decision has been made. Such are rare and exceptional cases, but they are not unknown[12].

[32] I do not wish to venture any final opinion on this matter.

[33] SARS’ main argument relates to its assertion that its actions do not have any external legal effect and therefore do not fall within the definition of administrative action. It relies on the authority of Viking Pony[13] and Corpclo.[14]. Viking Pony was a case where a local authority received information of fronting and as a result started an investigation. It is clear from the judgment that no external steps had been taken and no determinations had been made by the local authority. Corpclo deals with functions of the Registrar of Banks. The observations in that case were mainly obiter, as the PAJA case had not been pleaded and was only raised on appeal.

[34] The concept of “direct external legal effect” has created much consternation in our academic discourse and it will no doubt continue to do so in future. It is apparently a German import. The real purpose for the inclusion of this concept may actually have been to assist the citizen, by ameliorating the old requirement of prejudice[15].

[35] I believe it would be wrong to make any definitive pronouncement on this issue while the main application will again have to confront

this issue in the context of mixed questions of fact and law. It may even be that action taken under sections 40 and 46 may under certain circumstances constitute administrative action but under other circumstances not. In Greys Marine the literal meaning of the words were tempered to mean “has the capacity to affect legal rights”[16].

[36] The word “audit” is not defined in the Tax Administration Act. It can therefore mean a wide range of things. More importantly, an audit can be something very unobtrusive and simple as the verification of very basic information, such as medical expenses or travelling expenses. On the other hand, it could be an extremely invasive process seriously affecting a business’s commercial confidentiality and an individual’s

privacy.

[37] The notice is also a formal notice sent to the tax payer, and is the start of the use of statutory powers against a tax payer. As a result, some measure of caution is required. Deciding the issue now also adds the risk that the matter may be decided piecemeal and thus lead to even more delays.

[38] This may simply be an instance where the section 40 notice is but one step in the overall assessment process, and therefore that the matter is not ripe for review at this stage of the process. On the other hand, if it is proven that a SARS official is acting with malice, I have no doubt that some relief may be granted, even if it is just to remove that individual from the audit process.

[39] I accept that high court review proceedings can seriously affect the efficacy of SARS’ work, and that some taxpayers have, on occasion, seriously abused court processes.[17]

[40] The real problem in this matter is that the legislature has prevaricated on the issue of the jurisdiction of tax courts. For reasons which are not quite clear, it would appear that the legislature has had difficulty in deciding whether it wants to give exclusive jurisdiction over tax matters to the tax courts. It would appear that the legislature has expressly chosen to retain high court jurisdiction over tax cases in certain limited instances. But this has only created more uncertainty and has opened up the possibility of abuse and forum shopping.

[41] The Tax Administration Act no doubt seeks to have tax disputes adjudicated both quickly and fairly. For this reason it is difficult to understand why the legislature has retained conventional high court review as an option for an aggrieved tax payer, as it has done in section 105 of the act[18].

[42] Section 105 of the Tax Administration Act was amended in 2015 to clear up certain uncertainties in respect of the initial words used in the section. However, the legislature has simply replaced one ambiguous section with another ambiguous one[19]. The problem is further complicated by the fact that this case does not deal with either an “assessment” or a “decision”

as defined in section 104.

[43] It may be tempting to argue that the legislature wanted review powers to be limited to those mentioned in section 105, but the act gives SARS and its officials wide powers of inquiry as well as the power to investigate criminal offences. These invasive powers will almost certainly be subject to judicial review of some sort[20].

[44] When considering the extensive detail in which the statute deals with dispute resolution in tax administration, through a system of tax boards, a tax court and eventually an appeal to either a full bench of the High Court or the Supreme Court of Appeal, it is unclear why some residual review jurisdiction of the High Court is retained.

[45] The jurisdiction of the tax courts is not framed in section 105 in words that exclude judicial review of the High Court and it is not even expressly stated to be a court of equal status to that of the High Court, despite the fact that it is presided over by a judge of the high court and that it is a specialised field of law.

[46] Assuming that the actions of a malicious SARS official is a reality that must be taken into consideration, there is still no reason why an ordinary tax court should not be competent to grant urgent interim relief as other courts with similar status to that of a high court can do in matters such as those involving labour law or land claims[21].

[47] It is not even clear to me why tax administration, while being governed by such detailed provisions in the Tax Administration Act, should even fall under PAJA, which after all is an act which attempts to deal with administrative justice in a generic way[22].

[48] Again, it is not clear why the legislature has seen fit not to grant tax courts separate and exclusive review jurisdiction. Tax is a specialised field where law and accounting mix and where a specific kind of reasoning is applied, and a fairly rigid one at that. It makes no sense to retain ordinary review jurisdiction.

[49] After all, a tax court will be in a far better position to adjudicate on allegations of bias as the allegations of bias, as in this case, may very well be shown up in the fact that the “risk assessment” of SARS has no merits.

[50] These matters are simply too complex to be adjudicated on in an interlocutory matter which simply seeks the discovery of further

documentation.

[51] As a result I decline to decide the legal issues which SARS sought to be decided. I therefore make the following order:

1. The respondent is ordered to, within twenty days, provide the applicants copies of the documents listed in Parts A and B of the applicants’ notice dated 20 May 2015 in terms of Rule 35(3), alternatively, should state under oath that it is not in possession of such document/s and should further state whether it knows where such documents are.

2. Respondent must pay the applicants’ costs of this application to compel.

C

R JANSEN AJ

JUDGE OF THE GAUTENG DIVISION, PRETORIA

Heard on:

2 March 2017

Date of judgment: ____ May 2017

Counsel for the applicants: Adv R Mastenbroek

Attorneys for applicants: Savage, Jooste and Adams

141 Boshoff Street

Nieuw Muckleneuk

Pretoria

Tel 012 452 8200

Ref: Floretee Storm/jl/M448

Counsel for the Respondent: Adv J A Meyer SC

Adv H Mpshe

Attorneys for Respondent: Rooth & Wessels

Attorneys for Respondent

Walker Creek Office Park

2nd Floor, Walker Creek

90 Florence Rebeiro Street

Muckleneuk

Tel: 012 452 4117

MJ Maluleke/np/MAT23648

[1] The section reads as follows: 40. SARS may select a person for inspection, verification or audit on the basis of any consideration relevant for the proper administration of a tax Act, including on a random or a risk assessment basis.

[1] The section reads as follows:

40. SARS may select a person for inspection, verification or audit on the basis of any consideration relevant for the proper administration of a tax Act, including on a random or a risk assessment basis.

[2] This section reads as follows: 46.(1) SARS may, for the purposes of the administration of a tax Act in relation to a taxpayer, whether identified by name or otherwise objectively identifiable, require the taxpayer or another person to, within a reasonable period, submit relevant material (whether orally or in writing) that SARS requires.

[2] This section reads as follows:

46.(1) SARS may, for the purposes of the administration of a tax Act in relation to a taxpayer, whether identified by name or otherwise objectively identifiable, require the taxpayer or another person to, within a reasonable period, submit relevant material (whether orally or in writing) that SARS requires.

[3] Fourie v Olivier 1971 (3) SA 274 (TPA) at 285F; Ex parte St Clair Lynn 1980(3) SA 163 (WLD) at 164 D-G; Geyser v Nedbank and Others: In re Nedbank Ltd v Geyser at paras 8 to 10.

[4] Fedsure Life Assurance Ltd and Others v Greater Johannesburg Transitional Metropolitan Council and Others 1999(1) SA 374 CC at paras 40 to 60; Gauteng Gambling Board and Another v MEC for Economic Development, Gauteng 2013 (5) SA 24 (SCA) at para 1; Pharmaceutical Manufacturers Association of South Africa and Another: In re Ex Parte President of the Republic of South Africa and Others [2000] ZACC 1; 2000 (2) SA 674; 2000 (3) BCLR 241 at para 90.

[5] Masetlha v President of the Republic of South Africa and Another [2007] ZACC 20; 2008 (1) SA 566 (CC); 2008 (1) BCLR 1 at paras 78 to 80.

[6] In section 40

[7] In section 46

[8] Metcash Trading Ltd v Commissioner, South African Revenue Service and Another 2001(1) SA 1109 CC at paras 42 and 43; City Council of Pretoria v Walker [1998] ZACC 1; 1998 (2) SA 363; 1998 (3) BCLR 257 at paras 88 to 96; Rademan v Moqhaka Local Municipality and Others (CCT 41/12) [2013] ZACC 11; 2013 (4) SA 225 (CC); 2013 (7) BCLR 791 (CC) at paras 39 and 40. City of Tshwane v Mitchell 2016 (3) SA 231 (SCA).

[9] Netto v Clarkson 1974(1) SA 66 (D)

[10] There was an actual assessment in this case that was made after the first review application was brought. This led to a second review application. This case does not deal with any of the merits in that matter.

[11] For a general discussion see Administrative Law in South Africa, Hoexter, 2nd ed, JUTA, pp 221 to 234.

[12] Roberts v Chairman, TRTB and Others 1980(2) SA 480 (CPD) at 486 D-H and 488D.

[13] Viking Pony Africa Pumps (Pty) Ltd t/a Tricom Africa v Hidro-Tech Systems (Pty) Ltd and Another [2010] ZACC 21; 2011 (1) SA 327 (CC) ; 2011 (2) BCLR 207 (CC) at paras 37 to 39;

[14] Corpclo 2290 CC t/a U-Care v Registrar of Banks [2012] ZASCA 156; [2013] 1 All SA 127 (SCA) at para 26.

[15] Manong & Associates v Director General: Department of Public Works [2004] 1 All SA 673 (C) at 685a

[16] Grey’s Marine Hout Bay (Pty) Ltd & Others v Minister of Public Works & Others [2005] ZASCA 43; 2005 (6) SA 313 (SCA) at para 23

[17] The matter of Dave King has become notorious and made headlines for almost a decade long.

[18] The section initially read as follows: 105 A taxpayer may not dispute an assessment or ‘decision’ as described in section 104 in any court or other proceedings, except in proceedings under this Chapter or by application to the High Court for review.

[18] The section initially read as follows:

105 A taxpayer may not dispute an assessment or ‘decision’ as described in section 104 in any court or other proceedings, except in proceedings under this Chapter or by application to the High Court for review.

[19] By amendment in terms of act 23 of 2015, section 105 now reads as follows: 105 A taxpayer may only dispute an assessment or 'decision' as described in section 104 in proceedings under this Chapter, unless a High Court otherwise directs.

[19] By amendment in terms of act 23 of 2015, section 105 now reads as follows:

105 A taxpayer may only dispute an assessment or 'decision' as described in section 104 in proceedings under this Chapter, unless a High Court otherwise directs.

[20] See in general the provisions of Chapter 5 of the Tax Administration Act. It should be noted that sections 40 and 46 powers are provided for in this chapter, and may be part of a criminal investigation.

[21] Sections 157 and 158 of the Labour Relations Act 66 of 1995 and section 22 of the Restitution of Land Rights Act 22 of 1994.

[22] Sidumo and another v Rustenburg Platinum Mines Ltd and Another 2008 (2) SA 24 (CC) at paras 88 and 104.