De L and Another v Commissioner for the South African Revenue Services (IT 12291, VAT 596 ) [2010] ZATC 3 (4 November 2010)

IN THE TAX COURT OF

BLOEMFONTEIN

Case No.: IT 12291

and VAT 596

In the matter between:

A DE L …........................................................................................Appellant

A’s

TRUST ….................................................................................Appellant

and

THE

COMMISSIONER FOR THE SOUTH

AFRICAN

REVENUE SERVICE …............................................Respondent

___________

JUDGMENT BY: MOLEMELA, J

DELIVERED ON: 4 NOVEMBER 2010

[1] The appellant lodged an appeal against the assessments issued by the respondent (“the Commissioner”) in respect of the appellant’s Income Tax under case no IT 12291 and in respect of the appellant trust’s Value Added Tax under case no VAT 596. The former related to assessments issued by the Commissioner for the tax years 1998 to 2004, while the latter pertained to an assessment for the tax period 08/2004 to 02/2005.

[2] On the 9th April 2008 my brother Kruger, J postponed this matter sine die based on the appellant’s averment that the matter was pending at the Constitutional Court. The matter was subsequently set down for the 22nd April 2010, on which date it served before me. On that day the appellant indicated that he did not want the matter to be proceeded with as it involved constitutional issues which ought to be dealt with by the Constitutional Court. The respondent’s representative handed up an order issued by the Constitutional Court, in terms of which the appellant’s application for direct access was dismissed. The matter was then postponed to the 5th August 2010 to afford the appellant an opportunity of bringing an appropriate application to an appropriate forum for the ventilation of the constitutional issues.

[3] On the 5th August 2010 it was placed on record that the appellant had attempted to bring an application to the High Court, but such application had been dismissed with costs by my brother Jordaan, J. I then indicated to the appellant that the matter would have to be proceeded with as it was no longer pending in any court. He indicated that he still had intentions of appealing against the decision of the

Constitutional Court. I accordingly advised him that such a step was simply impossible as the Constitutional Court could not, by virtue of it being the highest court of appeal in respect of constitutional matters, entertain an appeal against its own judgment. The appellant was still adamant that he did not want to participate in the proceedings in the Tax Court as it was an unconstitutional

institution and furthermore on the grounds that various provisions of the Income Tax Act were unconstitutional.

[4] I informed the appellant that I was not amenable to postponing the matter any further as it had been pending for a long time and needed to be brought to finality. I also reminded him that he was the one that had, in terms of his notice of appeal, initiated the proceedings. I further pointed out to him that if he no longer intended pursuing the appeal, he could withdraw it as envisaged in the Tax Court Rules. He was not amenable to this suggestion. I warned him that if he did not want to participate in the proceedings, the matter would be proceeded with to finality without his input. This warning bore no fruit and I accordingly decided to proceed with the matter without his participation.

[5] I must mention that I found it odd that the appellant was unwilling to participate in the Tax Court proceedings when he had initiated them by completing a notice of appeal in which he, in one of the annexures, stated: “Ons wil ‘n belasting hof uitspraak hê.”

In the same form the appellant opted to refer the matter for alternative dispute resolution and subsequently participated in those proceedings. His appeal was also heard by the Tax Board and he participated in those proceedings without objecting to that process. It was only about two years after finalisation of the Tax Board proceedings that the appellant decided that the issues in his matter were ones which needed to be ventilated by the Constitutional Court. Even after being denied direct access by the Constitutional Court the appellant was still reluctant to participate in the Tax Court proceedings so that they could be finalised.

[6] Point in limine: Constitutionality of the Income Tax Act

In his voluminous grounds of appeal the appellant inter alia submitted that various sections of the Income Tax Act, 1962 (“Income Tax Act”) were unconstitutional, including section 83, in terms of which the Tax Court is established. I expressed the view that I could not entertain the issue pertaining to the unconstitutionality of the Income Tax Act as the Tax Court is a creature of statute and has not been granted the power to pronounce on the validity of any legislation. In my view, the Tax Court has no inherent powers and cannot abrogate to itself powers that the enabling Act, viz the Income Tax Act, have not granted to it. Its powers are clearly set out in section 83(13) and are as follows:

“(13) Subject to the provisions of this Act, the court may-

in the case of any assessment under appeal-

confirm the assessment; or

order that assessment to be altered; or

if it thinks fit, refer the assessment back to the Commissioner for further investigation and assessment;

in the case of any appeal against the amount of any additional tax imposed by the Commissioner, reduce, confirm or increase the amount of the additional tax so imposed, subject to the maximum amount chargeable in terms of this Act;

in the case of any other decision of the Commissioner which is subject to appeal, confirm or amend such decision; and

hear any interlocutory application and decide on procedural matters as provided for in the rules of the tax court contemplated in section 107A.”

In my view, the powers of the Tax Court are limited to what is set out in the aforementioned section and are not comparable to those of the High Court. I am fortified in this view by the decision of Southwood J in the matter of A & ANOTHER v CSARS Case Number VAT 304 at paragraphs 56 – 58.

[7] Ruling re point in limine

The Tax Court constituted in terms of section 83 of the Income Tax Act, 58 of 1962, is not a court of a similar status to the High Court and accordingly may not make an order concerning the constitutional validity of an Act of Parliament, including an order that a section of a statutory provision is invalid. The point in limine is accordingly dismissed.

[8] Re: Merits – Income Tax (IT 12291)

Unchallenged oral evidence was adduced on behalf of the respondent. Documentary evidence was also tendered. On the evidence tendered, I am satisfied that the deductions claimed by the appellant in respect of repairs and maintenance of premises and motor vehicles, as well as the deduction in respect of telephone, insurance, water, electricity and medical costs were not incurred in the production of income. In the absence of any proof that the appellant purchased any trading stock in the financial year before the assessment, I find that the appellant failed to discharge the burden of proving that he was entitled to this deduction. See section 82 of the Income Tax Act. Thus, the respondent correctly disallowed the deduction in respect of trading stock. In my view, the assessment was correctly issued by the respondent.

[9] Re: Merits – VAT 596

The basis of the respondent’s assessment is that the appellant trust did not carry on an “enterprise” as defined in the VAT Act. It is trite that any VAT vendor must conduct an enterprise.

The respondent’s unchallenged evidence is that the appellant purchased a residential property on 10 December 2002. On the 1st December 2003 the appellant registered itself as a VAT vendor and declared its main business activity as the “letting of a building”. On 25 May 2005 the appellant submitted its VAT 201 returns and claimed VAT refunds as a result of which the respondent decided to conduct an audit of the appellant’s business affairs. The audit revealed that the output tax declared by the appellant in VAT 201 returns was the commission received by the appellant’s trustee from his profession as a financial broker. Significantly, on the face of the 2004 Income Tax return the appellant, through its trustee, stated “geen inkomste vloei deur bogenoemde nie”. Furthermore, the appellant stated as follows in a letter dated 31 October 2004: “Die trust het geen inkomste nie – geen verhuring nie.” The appellant’s financial statements also did not show any rental revenue. In light of the afore-mentioned documentary evidence, I am inclined to agree with the respondent that the appellant was not deriving an income and thus made no taxable supplies. It is clear from the definition of an enterprise that a vendor must carry on its enterprise continuously, which the appellant was, by its own trustee’s admission, not doing.

[10] It also deserves to be mentioned that in a letter from the appellant to the respondent, dated 12 April 2005 the following was stated: “Daar is geen trustrekening geopen nie.....”. This, in my view, serves as corroboration of the fact that the appellant was not carrying on an enterprise. I, therefore, accept that the property was a purely residential property that did not make any taxable supplies. The respondent correctly disallowed the input tax claimed by the appellant, including the input tax claimed on the purchase of a residential property.

[11] Costs

Section 83(17) provides as follows:

“83(17) Where-

(a) the claim of the Commissioner is held to be unreasonable;

(b) the grounds of appeal of the appellant are held to be frivolous;

(c) the decision of the tax board contemplated in section 83A is substantially confirmed;

(d) the hearing of the appeal is postponed at the request of one of the parties; or

(e) the appeal has been withdrawn or conceded by one of the parties after a date of hearing has been allocated by the registrar,

the tax court may, on application by the aggrieved party, grant an order for costs in favour of that aggrieved party, which costs shall be determined in accordance with the fees prescribed by the rules of the High Court.

On two occasions, the matter was postponed at the instance of the appellant. I would not mulct him with the costs of the postponement as he was awaiting the outcome of processes initiated at the constitutional court and the High Court, respectively. This, however, does not detract from the fact that when these processes were exhausted, the appellant was reluctant to participate in the proceedings so as to adduce evidence showing that the respondent acted wrongly. The fact of the matter is that the grounds of appeal, voluminous as they were, were simply frivolous. In my view, the appellant acted frivolously by willingly participating in all the proceedings right up to the Tax Board hearing, only to refuse to see the matter to finality in the Tax Court. I have also taken into account that the unanimous decision of this court substantially confirms the decision of the Tax Board. These are all factors that have persuaded this court in concluding that a proper case has been made for the granting of a cost order against the appellant.

WHEREFORE the following order is made:

1. The assessments made by the respondent in respect of the appellant’s income tax and VAT are confirmed.

2. The appellant is ordered to pay the costs of the hearing of the appeal, excluding the wasted costs occasioned by the postponements.

_____

M.B. MOLEMELA, J

PRESIDENT

______

MS G.C. GOULD

ASSESSOR

________

MR N.R. CRAFFORD-LAZARUS

On behalf of the appellant: No representation

On behalf of the respondent: Adv. Makobe Tjiana

Instructed by:

/spieterse