Commissioner for Inland Revenue v Costa (14/1984) [1985] ZASCA 32; [1985] 2 All SA 335 (A) (24 May 1985)

LL Case NO. 14/1984

IN THE SUPREME COURT OF SOUTH AFRICA APPELLATE DIVISION

In the matter between:

THE COMMISSIONER FOR INLAND REVENUE Appellantand M.N. DA COSTA Respondent

CORAM: CORBETT, JOUBERT, VAN HEERDEN, JJA, GALGUT et NICHOLAS, AJJA

HEARD: 6 MAY 1985

DELIVERED: 24 MAY 1985

JUDGMENT

/VAN HEERDEN, JA ...

2.

VAN HEERDEN, JA:

In respect of the years of assessment ended 28:

February 1971 to: 1977 the respondent submitted returns

of his income together with supporting accounts. The

Secretary for Inland Revenue, as the incumbent of the

appellant's office was known from 1964 to 1980, 'was,

dissatisfied with the returns and caused an investiga-

tion to be carried out into the respondent's financial

affairs. In the result the Secretary issued, additional

assessments for the tax years in question and, following

on an objection by the respondent, reduced assessments

for 1971, 1972 and 1976, on the basis that the respon-

dent's income had been understated , by a substantial

amount. The additional read with the reduced, as-

sessments reflected that additional normal tax was pay-

able in respect of each of the relevant years. Acting

I, in terms of s 76 of the Income Tax Act the Secretary

furthermore imposed a penalty equal to the additional

normal tax. The upshot was that a total amount of

Rl5 590 ...

3.

R15 590 was payable as additional tax and a like amount

as a penalty.

The respondent lodged an appeal which was even-

ually confined to the alleged excessiveness of the

penalty. The Cape Income Tax Special Court (German,

AJ, presiding)! allowed the appeal and reduced the' amount

of the penalty to R3 000. With the leave of the Pre-

sident of the Special Court the appellant in turn ap-

pealed to this Court.

It appears from a letter written on behalf of

the Secretary to the respondent's representatives that

the extent of the penalty was determined by a committee

in Pretoria. The Special Court expressed doubt as to

whether it was competent for the Secretary to delegate his function in terms of s 76 (2) (a); to the committee ,

(or, for that matter, to any person or body) but found

it unnecessary to decide the point. The court's approach was

that assuming that it was competent for the committee

4.

fix the penalty, the court was in terms of s 83 (13)

(b) at large to reduce, confirm or increase the amount

of the penalty, unfettered by any discretion exercised

by or on behalf of the Secretary. The court expressed

agreement with what was said by Melamet, J, in IT C

1331, 43 S A T C 76, 84, and disagreement with the con-

trary view entertained by Friedman, J, in I T C 1295, 42 S A T C 19, 30-31, read with I T C 1351, 44 S A T C

58, 62-63.S 76 (1) (b) provides that if a taxpayer omits

from his return any amount which ought to have been in-cluded therein, he shall be required to pay, in addition

to the tax chargeable in respect of his taxable income,

"an amount equal to twice the difference between the tax as calculated in respect of the taxable income returned

by him and the tax properly chargeable in respect of his

taxable income as determined after including the a-

omitted". Subsections 2 (a) and (b)read as follows:

/"(a)...

5.

"(a) The Commissioner may remit the additional. charge imposed under sub-sectionl (1) or any part thereof as he may think fit: Provided that,' unless he is of the opinion that there were extenuating cir- cumstances, he shall not so remit if he is satisfied that any act or omission of

the taxpayer referred to in paragraph (a),

(b) or (c) of sub-section (1) was done

with intent to evade taxation.

(b) In the event of the Commissioner deciding

not to remit the whole of the additional charge imposed under sub-section (1), his decision shall be subject to objection and appeal."

S 83 (13) (b) provides that, subject to the pro-

visions of the Act, in, the case of any appeal against the amount of the additional charge (the penalty) imposed under s 76 (1) the Special Court may reduce, confirm or increase the amount of the penalty.

With regard to the discretion conferred upon the

Commissioner (previously the Secretary); by s 76 (2) (a) Friedman, J, said in I T C 1295 at p 30:

"The Secretary deals with a large number of

/cases ...

6.

cases of this kind. He has yardsticks by

which to go and is in a far better position

to decide upon appropriate remissions than

this court. Where, of course, the Secre-

tary exercises his discretion on an incor-

rect basis or by taking into account matters

which he is not entitled to take into account,

this court will disregard the Secretary's

decision and be at large to itself decide

upon an appropriate remission. Where,

however, the Secretary has properly exercised

his discretion in a bona fide manner, then it

seems to me that this court will interfere

only where there has been an unreasonable

exercise by the Secretary of his discretion.

In order, however, to decide what is or is not an unreasonable exercise of discretion

it is, as I have already indicated, necessary

for this court itself to decide what it re-

gards as an appropriate remission and if

there is a significant difference between

that which this court regards as appropriate

and that which the Secretary has decided is

appropriate, this court is entitled to infer

that there has been an unreasonable exercise

by the Secretary of his discretion and will

interfere.

In this regard it seems to me that, the

position is not entirely different from that

of, for example, a court of appeal hearing

an appeal in a criminal case against a sen-

tence imposed by a lower court, ..."

In I T C 1351 at p 63 Friedman, J, reiterated

/his "...

7.

his view and added:

"It seems to me ... that where one is concerned with a permitted appeal against the exercise by the Commissioner of a discretionary power, then the approach of this court should be similar to that adopted by appeal courts in general when considering appeals against decisions involving the exercise by the court a_ quo of a discretion."

In my view the above passages cannot be reconciled with the approach of this Court in Rand Ropes (Pty) Ltd v Commissioner for Inland Revenue 1944 AD 142. With reference to the provisions of the Income Tax Act 40 of 1925, Centlivres, JA said (at p 150):

"That the Legislature apparently thought that it was necessary to give a special right of appeal in cases where a matter is left to the discretion of the Commissioner appears from a number of instances where that special right is conferred. ... In all these cases it seems to me that the Legislature intended that there should be a re-hearing of the whole matter by the Special Court and that that Court could substitute its own decision for that of the Commissioner. For, as CURLEWIS, J.A., pointed out in Bailey v. Commissioner for Inland Revenue (1933, A.D. at p. 220), the

/Special ...

8.

Special Court is not a Court of appeal in the ordinary sense: it is a court of revision:"'

It seems clear, therefore, that in cases in-

volving the exercise of a discretion by the Commissioner

the Special Court on appeal to it is called upon to

exercise its own, original, discretion and that the views

expressed by Friedman, J, are not well-founded. That much was indeed common cause at the hearing of this appeal. And since the appeal is directed against thepenalty determined by the court a quo, 'it is immaterial whether the Commissioner was entitled to delegate his

function to the aforesaid committee.

It was also common cause that this Court will

interfere with the determination of the extent of apenalty (or the exercise of any discretion) by a Special

Court only on the limited grounds on which a value judq-ment of a court of first instance may be set aside or

varied on appeal. Prior to the enactment of s 86 A

/of ...

9.

of the Act in 1976 (by virtue of Act 103 of 1976) such a determination would have been final unless it was erroneous in law: Rand Ropes case at p 150. S 86 A now provides for a full right of appeal against any decision of a Special Court on issues of fact or law. As was pointed out by Trollip, JA, in Hicklin v Secretary for Inland Revenue 1980 (1) SA 481 (A) 485, such an appeal "is therefore a re-hearing of the case in the ordinary well-known way in which this Court, while paying due regard to the findings of the Special Court on the facts and credibility of witnesses, is not necessarily bound by them". Having pointed out that the section is silent about the powers of this Court in such an appeal, Trollip, JA, went on to say that it was manifestly the intention of the legislature that this Court was to have those general powers that are conferred upon it by s 22 of the Supreme Court Act 59 of 1959. In my view it is implicit in these dicta that

/in ...

10.

in an appeal from a Special Court those powers should be exercised according to the principles and subject to the restrictions applicable to appeals in general. And, there is indeed no reason to differentiate between an appeal from a Special Court and an appeal from a local or provincial division. Unlike the position obtaining in a Special Court where a decision is given on facts which may not have been considered by the Commissioner, this Court hears an appeal from a Special Court on the record of the proceedings in that court. It follows that if a decision of a Special Court is based on the exercise of a discretion, this Court will interfere only if the Special Court did not bring an unbiased judgment to bear on the question, or did not act for substantial reasons, or exercised its discretion capriciously or upon a wrong principle: Ex parte Neethling and Others 1951 (4) SA 331 (A) 335.

I turn to the facts of the present appeal. Only the respondent gave evidence but his testimony must be read in conjunction with certain information

/conveyed ...

11.conveyed on his behalf to the appellant. That informa-tion is contained in the respondent's formal objection to the additional assessments which formed part of the dossier placed before the Special Court by the appellant

in terms of regulation B 3 of the regulations made under

the Act (GN R105, Government Gazette Extraordinary 1011

of 22 January 1965). The gist of the letter of ob-

jection was that throughout the relevant period the respondent employed a firm of accountants to maintain pro-

per books of account for the respondent's business from

information supplied by the respondent and to draw up

tax returns reflecting the respondent's true income and.

expenditure; that the firm chose to disregard the

figures in the{respondent's rough cash books and em-

ployed a "short-cut" method of bookkeeping which had

the effect of drastically reducing the true revenue of

the business; that this caused the firm to understate

the respondent's income in the tax returns prepared and

/submitted ...12.submitted by it on behalf of the respondent, and that the latter was unaware of the firm's failure to maintainproper books and to submit accurate returns, there being

no question of collusion between the firm and the respondent.

There is no doubt that the appellant's represen-tative in the court a quo accepted that these explana-tions were true. At the outset, and before evidence

was led, he made it clear that no intention to deceive was being imputed to the respondent and that the latter

was not to blame for the understatement of his income

in the relevant returns. The appellant's representative

also accepted that those facts constituted extenuating

circumstances but submitted that the respondent should

be penalised for the deceit of his agents.

The gist of the respondent's evidence, and the court's impressions of the respondent as a witness, ap-pear from the following extract from the judgment of

/the ...

14.

taking all the circumstances into account and without setting off with any mathematical precision interest which might have been earned by the taxpayer from the tax withheld over the years against that which the full R15 590,00 paid by the taxpayer as a penalty might have yielded to the revenue, an appropriate penalty should not exceed the sum of R3 000,00. Such an amount, which cannot conceivably be regarded as trifling to a person of the taxpayer's means, enjoying the life-style he does, will certainly bring home to him the lesson which the legislature sought to teach errant taxpayers by providing for a penalty in circumstances such as are present here. A lesser penalty would not serve the legislature's purpose. On the other hand, one as heavy as that deemed proper by the 'penalty fixing committee' is out of all proportion to the wrong committed. The punishment must fit the crime, in tax matters no less than elsewhere."

It will be recalled that in terms of s 76 (2) (a) the Commissioner may not remit the penalty imposed under subsection (1), or any part thereof, if he is satisfied that any act or omission of the taxpayer referred to in that subsection was done with intent to evade taxation, unless he is of the opinion that there were extenuating circumstances. The Special Court's

/approach ...

15.

approach was clearly that because in its view the respondent's agents had acted with intent to evade taxation, the penalty could not be remitted unless extenuation existed. Assuming that such intent can be ascribed to the aforesaid firm, I am not satisfied that the court a quo adopted the correct approach. The key words of s 76 (2) (a) are "any act or omission of the taxpayer ... done with the intent to deceive", and it is certainly arguable that this phrase applies only to an actual - and not also an imputed - intention of the taxpayer. However, in view of the conclusion at which I have arrived, I find it unnecessary to de-cide this point. I shall therefore assume in favourof the appellant that the penalty could not be remitted

unless extenuating circumstances were present.

Counsel for the appellant submitted that the

court a quo misdirected itself in a number of respects.

/In ...

16.

In the first place it was contended, with reliance on I T C 1331, 43 S A T C 76, 84, that the court's approach should have been by how much the penalty prescribed by s 76 (1) should be abated downwards (if at all), and that the court erred in law in simply coming to the decision that a penalty of R3 000 should be imposed. Now, it it true that one should have regard to the fact that unless s 76 (2) is applied, the penalty payable in terms of subsection 1 (b) is an amount equal to twice the additional normal tax assessed with reference to the undisclosed income. But although this was not spelled out in the judgment there is no reason to doubt that the court was aware of the effect of s 76 (1) (b). Indeed, in the judgment the penalty determined on behalf of the appellant was referred to as "being 50% of the maximum penalty". Consequently it cannot be said that the court fixed a penalty of R3 000 without regard to the fact that some R31 000 would have

/been ...

17.been payable in the absence of a remission in terms of -s 76 (2) (a) (read with s 83 (13)(b)).

In the second place it was submitted that the

court erred in taking into account the respondent's financial position as an extenuating factor. The

short answer is that the court did not do so.' Having

found that there were extenuating circumstances, the

court merely said that a penalty of R3 000 could not

conceivably "be regarded as trifling to a person of thetaxpayer's means, enjoying the life-style he does". Itappears to me that the submission in question tends to

confuse two separate enquiries. If intent to evadetaxation was present, the first enquiry in terms of s 76

(2)(a) is whether there were extenuating circumstances.

If the answer is in the affirmative, the second enquiry

is whether the additional charge or any part thereof

should be remitted. For the purposes of the second

enquiry regard may be had not only to the extenuating

/circumstances ...

18.

circumstances but to all relevant factors. And themeans of the taxpayer clearly may be - and in the present case were-a relevant factor in determining thequantum of the reduced penalty.

Counsel for the appellant also submitted that the court a quo misdirected itself in regard to other aspects. It suffices to say that the further submissions are without substance.

It was not contended that the penalty determined by the court a quo was one at which no reasonable court could have arrived. Nor do I think that it was.

The appeal is dismissed with costs.

H.J.O. VAN HEERDEN, JA

CORBETT, JA

JOUBERT, JACONCUR GALGUT, AJA

NICHOLAS, AJA