Rescission of a tax ‘judgment’

April 1st, 2012
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By Fareed Moosa

The Income Tax Act 58 of 1962 and the Value-Added Tax Act 89 of 1991 (VAT Act) impose on taxpayers a liability to the fiscus on the issuing of an ‘assessment’. The fiscus is conferred the right to recover a tax debt and execute against a taxpayer’s assets notwithstanding a pending objection or appeal. This so-called ‘pay now, argue later’ principle is entrenched in s 88 of the Income Tax Act and s 36 of the VAT Act. Section 91(1)(b) of the Income Tax Act and s 40(2)(a) of the VAT Act embody a summary enforcement mechanism enabling the Commissioner of the South African Revenue Service (CSARS) to recover a liability that is ‘due or payable’. For the meaning of ‘due’ and ‘payable’ in this context, see Singh v Commissioner, South African Revenue Service 2003 (4) SA 520 (SCA). The difference between s 91(1)(b) and s 40(2)(a) is that the net of the latter is cast in wider terms than the former in the sense that, whereas the former is limited to the recovery of ‘any tax or any interest’, s 40(2)(a) applies to ‘any tax, additional tax, penalty or interest’. Both these provisions short-circuit the judicial process by permitting CSARS to –

‘file with the clerk or registrar of any competent court a statement certified by him as correct and setting forth the amount … so due or payable by that person, and such statement shall thereupon have all the effects of, and any proceedings may be taken thereon as if it were, a civil judgment lawfully given in that court in favour of the commissioner for a liquid debt of the amount specified in the statement’.

These provisions are the precursors to s 172(1), read with s 174, of the Tax Administration Bill (11B of 2011) (TAB) (as passed by the National Assembly on 24 November 2011). In practice, the clerk or registrar of the relevant court enters the statement in a judgment book. This does not, however, bring about a judgment by default. This is so because there is no failure by the taxpayer to defend the case (see Kruger v Commissioner for Inland Revenue 1966 (1) SA 457 (C) at 462F). No court process is issued to initiate the claim nor is there service of any process summoning the taxpayer to court to answer the claim. In due course a writ is issued for the recovery of the amount certified as being due or payable. In the Kruger v Commissioner for Inland Revenue case, at 461H, Van Zyl J described s 91(1)(b) as ‘an easy and cheap method of recovering’ a debt (in this case arrear interest). The constitutionality of this debt recovery scheme is now settled. In Metcash Trading Ltd v Commissioner, South African Revenue Service, and Another 2001 (1) SA 1109 (CC) Kriegler J (at para 51) stated that: ‘Filing the statement sets in train the ordinary execution processes of the particular court.’

The court in Modibane v South African Revenue Service (GSJ) (unreported case no 09/9651, 20-10-2011) (Tsoka J) concluded that the statement filed under s 91(1)(b) was not susceptible to rescission in terms of either the rules of court or the common law. If correct, this would apply equally to a statement filed under s 40(2)(a) of the VAT Act. This article aims to consider the correctness of Tsoka J’s pronouncement.

The kernel of the judge’s reasoning is contained in the following extract, at para 14:

‘It seems to me somewhat misleading to refer to the certified statement by the commissioner filed with the registrar in terms of section 91(1) of the Act as judgment. The registrar is not granting any judgment or making any pronouncement on the statement. The statement merely has the effect of a civil judgment as if it were indeed a civil judgment.’

In reaching this conclusion, Tsoka J relied on Capstone 556 (Pty) Ltd and Another v Commissioner, South African Revenue Service and Another 2011 (6) SA 65 (WCC) (Binns-Ward J), in which Binns-Ward J, at para 37, held that:

‘Although a statement filed by the commissioner in terms of s 91(1)(b) has all the effects (ie consequences) of a judgment, it is nevertheless not in itself a judgment in the ordinary sense. It does not determine any dispute or contest between the taxpayer and the commissioner.’

To this end, Tsoka J, at para 16, added that:

‘If the statement is a judgment, I fail to see how the said judgment could, in terms of section 91(1)(bA), be unilaterally withdrawn by the commissioner and again the commissioner be at liberty to institute proceedings afresh based on the said withdrawn statement.’

The Capstone 556 case did not deal with the issue whether the statement filed by CSARS is susceptible to rescission. Binns-Ward J was seized with the question of a review pertaining to CSARS’ refusal to suspend the operation of the ‘pay now, argue later’ principle in relation to the taxpayer concerned. Accordingly, Tsoka J made the leap to the conclusion he reached. His judgment is, to my mind, the sole judicial authority for same.

I submit that, for the reasons set out below, Tsoka J misdirected himself in concluding that rescission is not a remedy available to taxpayers insofar as statements filed under s 91(1)(b) are concerned. It is worth mentioning that the judge, at para 19, appreciated the possibility that his conclusion may be incorrect.

Firstly, Tsoka J’s conclusion leaves taxpayers vulnerable and at the mercy of CSARS in those instances where it refuses to withdraw the statement as provided for in s 91(1)(bA) of the Income Tax Act and s 40(2)(b) of the VAT Act. These provisions are the precursors to s 176 of the TAB. Such refusal is an administrative act and is not susceptible to an objection or appeal. Section 81 of the Income Tax Act, read with ss 83 and 86A thereof, permit objections and appeals only against ‘any assessment’. A refusal of this nature is not an ‘assessment’ as defined (s 1). For a discussion on the meaning of ‘assessment’, see Commissioner, South African Revenue Service v South African Custodial Services (Pty) Ltd 2012 (1) SA 522 (SCA) and First South African Holdings (Pty) Ltd v Commissioner for South African Revenue Service (SCA) (unreported case no 372/10, 11-5-2011) (Harms DP). Section 32 of the VAT Act, read with ss 33 and 34 thereof, permit objections and appeals against ‘any assessment and a closed list of administrative decisions (see s 32(1)(a) and (c)). A refusal to withdraw a statement filed under s 40(2)(a) is not included in the list concerned. Consequently, on Tsoka J’s approach, the only remedy available to an aggrieved taxpayer is judicial review in terms of the right to administrative justice contained in s 33 of the Constitution read with the Promotion of Administrative Justice Act 3 of 2000. The problem with this legal position is that review is permissible only on certain narrowly defined grounds, namely that the South African Revenue Service failed to properly apply its mind to the relevant issue as required by the tax statute or the rules of natural justice by, for example, acting arbitrarily, grossly unreasonably, capriciously or mala fide (see Johannesburg Stock Exchange and Another v Witwatersrand Nigel Ltd and Another 1988 (3) SA 132 (A) at 152 A-E). Review provides no adequate remedy to a taxpayer who wishes to assert any of the ‘wide field of defences’ contemplated by Jansen JA in Kruger v Sekretaris van Binnelandse Inkomste 1973 (1) SA 394 (A) at 412F-H. For example, that the statement filed under s 91(1)(b) impermissibly covers additional tax or penalties. The statement filed under ss 91(1)(b) and 40(2)(a) arises from an ‘assessment’ issued under the Income Tax Act or the VAT Act respectively. In the Metcash Trading case Kriegler J, at para 55, recognised that while s 40(5) of the VAT Act bars a challenge to the correctness of an assessment, it does not prohibit litigation on ‘other disputes foundational to, arising from or otherwise relating to it. Accordingly, neither statute contains an impediment to a rescission application. Thus, I submit, Tsoka J’s approach must be discouraged as it holds the inherent danger of denying taxpayers their constitutional right of access to a court (s 34 of the Constitution) to ventilate a justiciable dispute by way of a rescission application.

A second consideration militating against Tsoka J’s conclusion is that it has the effect of ousting the court’s jurisdiction in circumstances where this was not contemplated by the legislature. High Courts have inherent jurisdiction to adjudicate matters of law in tax cases (see Friedman and Others NNO v Commissioner for Inland Revenue: In Re Phillip Frame Will Trust v Commissioner for Inland Revenue 1991 (2) SA 340 (WLD)). Also, s 169(b) of the Constitution confers authority on the High Court to decide ‘any matter not assigned to another court by an Act of parliament’. In the Metcash Trading case Kriegler J, at para 53, referring to the presumption at common law and under the Constitution against judicial ousters, remarked that when interpreting a tax statute ‘verbal precision is essential. Nothing that is not stated is to be read in, especially not an element as important as an ouster.’ The rules of interpretation are trite (see First National Bank of SA Ltd t/a Wesbank v Commissioner, South African Revenue Service and Another, First National Bank of SA Ltd t/a Wesbank v Minister of Finance 2002 (4) SA 768 (CC) and Bato Star Fishing (Pty) Ltd v Minister of Environmental Affairs and Others 2004 (4) SA 490 (CC)). There is nothing in the express wording of either the Income Tax Act or the VAT Act that is indicative of a legislative intention to oust the courts’ jurisdiction concerning rescission of the statutory ‘civil judgment’. In fact, their respective provisions reflect the opposite intention. Both ss 91(1)(b) and 40(2)(a) employ the words ‘and any proceedings may be taken thereon as if it were a civil judgment lawfully given in that court’ (my emphasis). Section 92 of the Income Tax Act provides that ‘[i]t shall not be competent for any person in any proceedings in connection with any statement filed in terms of paragraph (b) of subsection (1) of section 91 to question the correctness of any assessment on which such statement is based, notwithstanding that objection and appeal may have been lodged thereto’ (my emphasis). Section 40(5) of the VAT Act has a corresponding provision. The words ‘any person’, ‘proceedings’ and ‘in connection with any statement’ are of wide import (per Kriegler J in the Metcash Trading case at para 53) (see also Body Corporate of Greenacres v Greenacres Unit 17 CC and Another 2008 (3) SA 167 (SCA)). The combination of these words used together evidences a legislative intention to cast the net as wide as possible. The words ‘any proceedings’ are not limited to execution processes alone; they are sufficiently broad in scope and ambit to cover, inter alia, sequestration proceedings (s 91(1)(c) of the Income Tax Act, s 40(2)(c) of the VAT Act) and a rescission application. Such ‘proceedings’ are related to, or arise from, the statement filed by CSARS. For purposes of such ‘proceedings’, it is deemed ‘as if it were’ to be ‘a civil judgment lawfully given’. Accordingly, while the filing of the statement does not bring about a ‘judgment’ in the ordinary sense through a conventional judicial process in which the parties’ respective rights and obligations are definitively determined, it is not correct to conclude that it is not a ‘judgment’ for purposes of a rescission application. The tax statutes concerned elevate the statement to the status of a ‘civil judgment’ of the court where it is filed. However, this deemed status applies in a limited setting only, that is, in ‘any proceedings in connection with any statement’. Outside such ‘proceedings’ it merely has ‘all the effects of a civil judgment’. When viewed in this light, the withdrawal of the statement is not tantamount to the usurping of a judicial function. Such administrative act is invariably unconnected to ‘any proceedings’. The deemed status is thus not attached to the statement for purposes of the withdrawal. This enables CSARS to act accordingly.

The South African system of precedential authority is a final consideration reinforcing my view that Tsoka J’s conclusion is unsound. In the Metcash Trading case Kriegler J, at paras 65 and 66, referred with approval to the principle established in the Kruger v Sekretaris van Binnelandse Inkomtse case that rescission of a statement filed by CSARS is permissible. He stated it thus:

The numerous court battles included an application for rescission of a “judgment” obtained by the revenue in the magistrate’s court on a certified statement by the commissioner under s 91(1)(b) and (2) of the Income Tax Act. The magistrate ruled that the judgment was not susceptible to rescission under section 36 (read with rule 46) of the Magistrates’ Courts Act [32 of 1944] as it was not truly a judgment but merely a step in an administrative procedure. On appeal the Supreme Court held that the judgment was a judgment for the purposes of s 36 of the Magistrates’ Courts Act and was indeed susceptible to rescission under that section, eg because it had been taken by default or that it had been obtained by fraud or mistake common to the parties. That finding was considered and approved by the Appellate Division in a later attempt by Kruger to have the original imposition of additional tax set aside on a variety of procedural grounds . … The observation not only signifies that s 42 is no bar to an application for rescission once a judgment has been entered under s 40(2) of the Act, but necessarily implies that a “wide field of defences” would be available to the taxpayer who wishes to pre-empt the entry of such judgment’ (my emphasis).

Although Tsoka J referred, at para 32, to the Metcash Trading case, he failed to reconcile the legal basis on which he believed himself to be entitled, notwithstanding the doctrine of stare decisis, to deviate from the diametrically opposed pronouncement by Kriegler J.

In Mokoena v Commissioner, South African Revenue Service 2011 (2) SA 556 (GSJ) rescission was granted in respect of a statement filed under s 91(1)(b) of the Income Tax Act. While this case also serves as authority for the availability of such a remedy, I submit that on the facts in casu Spilg J was wrong to grant a rescission order. The statement concerned had been withdrawn by CSARS, who, for obvious reasons, did not oppose the relief sought. Section 91(1)(bA) stipulates that on withdrawal ‘such statement shall thereupon cease to have any effect’. The ‘effect’ referred to would include any of those falling within the compass of, inter alia, s 91(1)(b). The word ‘any’ in this context encompasses every ‘effect’ in law. The words ‘shall thereupon cease’ reflect a legislative intention that all legal consequences terminate immediately on the filing of the withdrawal notice. Such cessation is peremptory and operates automatically. Consequently, no proceedings’ of any nature can be taken in connection with the statement since it has no further legal force or effect. This means that there is no deemed ‘civil judgment’ that can form the subject matter of a rescission application. Accordingly, the order granted by Spilg J is, with respect, untenable. It is also worth noting that other aspects of the Mokoena judgment were also criticised, correctly so in my view, by both Binns-Ward J in the Capstone 556 case (at paras 35 to 36) and by Tsoka J in the Modibane case (at paras 35 to 36). Since those aspects criticised in these cases fall beyond the purview of this article, a discussion thereof will not be undertaken.

In conclusion, I submit that every taxpayer has the right, in appropriate circumstances, to apply for an order rescinding (and, I submit too, varying) the ‘civil judgment’ contemplated in s 91(1)(b) of the Income Tax Act and s 40(2)(a) of the VAT Act. Section 175 of the TAB provides for the power of CSARS to file an amendment to a certified statement referred to in s 172(1) thereof. Since the statement is not a default judgment, in the magistrates’ courts such applications are covered by r 49(7), which applies to ‘all applications for rescission or variation of judgment other than a default judgment’. Insofar as the High Court is concerned, such applications may be brought under r 42 and its inherent jurisdiction at common law.

Fareed Moosa BProc LLB (UWC) LLM (Tax) (UCT) is an attorney and lecturer in the department of mercantile law at the University of the Western Cape.

This article was first published in De Rebus in 2012 (April) DR 30.

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