1.
MAKONI
JA:
This is an appeal against part of the judgment of the Special Court
for Income Tax Appeals, handed down on 25 March 2020, which dismissed
the appellant's appeal filed in terms of section 65 of the Income
Tax Act [Chapter 23:06] (“The Act”) against the decision of the
respondent. The respondent had dismissed certain aspects of an
objection filed by the appellant against various amended assessments
that the respondent had issued.
FACTUAL
BACKGROUND
2.
The respondent, which is the administrative body tasked with
assessment, collection and enforcement of the payment of taxes
leviable under the Act, carried out an investigation and audit into
the appellant's tax compliance for annual income tax assessment
returns for the period 2009 to 2013. The investigation constituted a
review into the appellant's submitted tax self-assessment returns.
Several documents were submitted to the respondent and a number of
meetings were held between the parties. During the scope of the
review, the respondent noted numerous anomalies within the tax
self-assessment returns submitted by the appellant.
3.
Thereafter, on 1 June 2016, the respondent issued five amended tax
assessments for the 2009 to 2013 tax years on all the disputed issues
claiming an aggregate amount of US$4,905,776.34.
4.
The appellant proceeded to note its objection to the amended income
tax assessments in terms of section
62 of the Act.
The appellant's objections centred on prescription regarding the
2009 income tax year, written-off bad debts, disallowed excess
capital, accrued expenses, management fees and excess royalty
payments on brands.
5.
On the 26 September 2016, the Commissioner determined the objections
lodged by the appellant. The Commissioner held that he was entitled
to issue amended tax assessments with regards to the tax year 2009 as
a result of the various misrepresentations arising from excess
capital allowances, unrealised exchange losses and bad debts that
were deducted from the taxable income and were unsubstantiated. In
respect of the other years the Commissioner largely disallowed the
objections lodged by the appellant except excess royalty on grossed
up payments due to adjustments on withholding tax which was paid
late. The respondent ruled that the fifty per
centum
penalty on unpaid principal tax would remain in force to deter
non-compliance.
6.
The appellant, dissatisfied with the determination by the
Commissioner appealed to the court a
quo.
At the pre hearing meeting the parties settled ten issues to be
determined by the court a
quo.
During the hearing, the appellant called evidence of two tax experts
and produced two sets of documentary exhibits. The respondent did not
call oral evidence but relied on the pleadings filed of record.
7.
The court a
quo
made the following findings in respect of the issues appealed
against. It found that —
(i)
The respondent was entitled to re-open the 2009 tax assessment after
six years in terms of section
47(1)(ii) of the Act
in light of the misrepresentation by the appellant of its tax affairs
in its tax returns;
(ii)
The respondent correctly disallowed capital allowances for mark-ups
on capital assets acquired by the appellant's related company
exceeding the perimeter of the margins used by the appellant's
group as these were in excess of the unconditional legal obligation
to pay the related company;
(iii)
The appellant had failed to prove that the basis of the deductions on
management fees were equivalent to the cost mark-up formula provided
in the appellant's Management Services Agreement and that the
respondent had correctly disallowed the deductions in respect of the
management fees relating to the appellant's related company;
(iv)
The appellant could not claim deductions in respect of brands as this
expenditure was indivisible from expenditure in respect of
intellectual property.
8.
The appellant, aggrieved by the decision of the court a
quo,
noted an appeal to this Court against part of the judgment on the
following grounds:
GROUNDS
OF APPEAL
“1.
The learned President erred as a matter of law in determining that
the word 'misrepresentation' as used in proviso (ii) of section
47(1) of the Income Tax Act [Chapter 23:06] fell to be interpreted as
any error made by the taxpayer in submitting a return, regardless of
the state of mind of the taxpayer.
2.
The learned President erred on the facts in finding that the
appellant had misrepresented any facts to the Respondent when it
filed its self–assessment for the tax year ending 31 December 2009.
3.The
learned President accordingly erred in finding that the respondent
was entitled as a matter of law to issue an amended assessment in
respect of the tax year ending 31 December 2009.
4.
The learned President erred as a matter of law and fact in holding
that the appellant was only entitled to a deduction in terms of
section 15 of the Income Tax Act in respect of charges raised by and
paid to a related party on the acquisition of capital goods on the
basis of an unconditional legal obligation to pay rather than on the
basis of expenditure, actually incurred in the tax year in which the
deduction was made, for the purpose of trade and producing income,
and erred in imposing a ceiling of Swiss francs 8,000 on such
expenditure.
5.The
learned President erred in fact by rejecting the evidence of the
appellant as to the amount it had actually expended in each of the
tax years in question in respect of management fees, which because of
exchange control requirements had been capped at 2% of its annual
turnover, and which amount had actually been paid to its regional
management service company in the Republic of Kenya, and was thus
expenditure actually incurred for the purposes of its business and in
the production of income and as such deductible in terms of the
legislation.
6.The
learned President erred in fact and as a matter of law in holding
that the appellant was not entitled to claim a deduction in terms of
section 15 of the Income Tax Act in respect of expenses incurred on
branding, and disregarded the fact that those expenses were actually
incurred for the purposes of its trade or the production of income.
7.The
learned President erred both as a matter of law and as a matter of
fact in holding that tax was payable on expenditure incurred in
respect of branding yet having agreed that the expenditure was
deductible for corporate income tax, being indivisible from
expenditure incurred in the use and application of other intellectual
property rights.”
RELIEF
SOUGHT
9.
The appellant prays that the appeal be allowed and that an order for
costs be made in its favour in terms of section 15(2)(bb) of the
Income Tax Act [Chapter 23:06], and that para 2 of the order of the
Special Court for Income Tax Appeal be altered as follows:
(i)
By the deletion from sub–paragraph (c) thereof of US$32,094.23 to
the 2009 tax year;
(ii)
By the deletion from sub–paragraph (d) thereof of US$303,379 to the
2009 tax year;
(iii)
By the deletion therefrom of sub–paragraphs (e), (f), and (h);
(iv)
By the insertion at the end of sub–paragraph (i) of the words
'other
than the 2009 tax year'.
SUBMISSIONS
BEFORE THIS COURT
10.
At the hearing of the appeal, counsel for the appellant, Mr
Mpofu,
took two preliminary points which were not raised in the appellant's
Heads of Arguments. His first point was that a
quo
the respondent did not lead any evidence. It was only the appellant
that led evidence. He stated that this has consequences in that in
the absence of evidence led by the taxman, the prima
facie
case
led by the appellant coalesces into a conclusive case in its favour.
For authority he relied on CIR
v Middleman
1991
(1) SA 200 (C)
and A
& Anor v Commissioner of Taxes
2018 ZATC 10. He submitted that in respect of issues relating to
management fees, handling fees and branding fees it is only the
taxpayer which established a case before the court a
quo.
11.
Mr Mpofu's
second point was that the assessments before the court a
quo
for tax years 2010 to 2013 did not comply with the requirements of
section
2 of the Act.
He submitted that in effect there were no assessments. For authority
he relied on Barclays
Bank of Zimbabwe v Zimbabwe Revenue Authority
04-HH-162 2004 (2) ZLR 151 (H). The assessment for the year 2009
would otherwise have been an assessment as contemplated in terms of
section
2 of the Act
but negated its validity upon being made “subject
to an audit”.
It was his submission that the position of the law is that if a
taxman is adjusting an assessment he cannot make that assessment
subject to an audit because it is a correction of an assessment
already accepted.
12.
On the merits Mr Mpofu
contended that the purported revised assessments did not contain a
statement stating the respondent's reasons for undertaking the
reassessment which is contrary to the law. He submitted that section
37A(13) of the Act
provides that if the Commissioner intends to re-visit an assessment
he is required to include, with the reassessment, a statement of
reasons why he considers it necessary to make such an assessment.
There were no such statements in respect of all the assessments in
issue that were before the court a
quo.
Where the taxman intends to re-visit a prescribed assessment he must
be satisfied that there has been fraud, wilful non-disclosure or
misrepresentation. The existence of the fraud, wilful non-disclosure
or fraud must be communicated in the statement. There is no such
statement regarding the 2009 assessment. The factors that must be
considered before a prescribed assessment can be reassessed do not
exist. For that reason, the 2009 assessment must be withdrawn.
13.
Mr Mpofu
further
submitted that misrepresentation in terms of the Act must be
construed with regard to the taxpayer's intentions or state of
mind. He contended that, any contrary interpretation voids the
statutory immunity provided in section
47 of the Act.
14.
Regarding management fees, Mr Mpofu
submitted that the taxman does not determine the necessity of
expenditure or regulate how the taxpayer runs his affairs. He
submitted that once expenditure has been incurred in the production
of income, it is deductible. He also submitted that on branding fees,
the appellant led evidence on payments made for technical assistance
which was not rebutted.
15.
Per
contra,
Mr Bhebhe,
counsel for the respondent submitted that in terms of section
63 of the Act,
the onus
to prove that one is not liable to tax lies with the taxpayer.
Counsel submitted that detailed assessments were provided on p98 of
the record which negated the preliminary points raised by the
appellant.
16.
On the merits, Mr Bhebhe
submitted that misrepresentation ought to be construed on an
objective basis that does not delve into the intentions of the
taxpayer. He also submitted that the respondent failed to show how
the management fees were expended in the production of income. In
respect of branding fees, he submitted that intellectual property
expenditure could not be separated from branding. Hence, the court a
quo
was justified in disallowing the deduction.
17.
On the need for a statement in terms of section
37A(13),
Mr Bhebhe
submitted the statements were provided to the appellant although they
do not appear in the record. This is explained by the fact that the
appellant did not raise these issues in its objection and in the
court a
quo.
There was however an extensive exchange of documents between the
parties in respect of the tax period between 2009 and 2013. There is
a document on p123 of the record that reflect that the appellant was
aware that the assessment of 2009 is being re-opened as it is the
only year affected by prescription.
ISSUES
FOR DETERMINATION
1.
Whether the assessments that were before the court a
quo
complied with the provisions of section
2 of the Act?
2.
What is the effect of failure by the respondent to lead evidence
before the court a
quo?
3.
Whether or not the court a
quo
erred
in its interpretation of 'misrepresentation' and finding that the
Respondent had a legal basis to issue an amended assessment in
respect of the tax year 2009?
4.
Whether or not the appellant was entitled to a capital expenditure
allowance in respect of handling fees paid in the acquisition of
capital assets?
5.
Whether or not the appellant was entitled to a deduction based on
management fees?
6.Whether
or not the appellant could claim deductions for branding costs as
expenditure distinct from that incurred in the use and application of
other intellectual property rights in the production of income?
APPLICATION
OF THE LAW TO THE FACTS
18.
I will start by dealing with the points in
limine
raised by Mr Mpofu
before delving into the merits of the appeal. In doing so I will deal
with the second point in
limine
first as it might dispose of the appeal.
19.
Mr Mpofu's
second point in
limine
was that there were no assessments a
quo
as is defined in section
2 of the Act
and as laid down in Barclays
Bank case supra.
He submitted that the assessment for the year 2019 could have passed
as an assessment were it not for the remark that 'the
assessment is subject to an audit'.
This also applies to the assessments for the year 2010 and 2011. They
negate their validity by the endorsement 'subject to an audit.'
In respect of the years 2012 and 2013, the purported assessments do
not meet the requirements of section
2 of the Act
at all. Those kind of documents are not known in law. He further
contended that our tax system is based on self-assessment. If the
taxman accepts the self-assessment in terms of section
37A of the Act,
it becomes his assessment. If he raises queries or adjusts that
assessment what he then issues is a final assessment. It cannot be an
estimate or subject to an audit. The assessments in issue are
therefore invalid on that basis.
20.
Mr Bhebhe
started by pointing out that the issues being raised by Mr Mpofu
were being raised for the first time in this court. They were not
raised in the objection to the Commissioner neither were they raised
in the court a
quo.
He however submitted that for a taxpayer to object in terms of
section
62
and to appeal in terms of section
65 of the Act
there would have to be an assessment. Where there is no assessment,
there can be no valid objection or appeal. If the appellant felt that
there were no valid assessments, it should have approached the High
Court seeking a declaratur
to that effect.
21.
On being engaged by the court in respect of the purported assessments
for 2012 and 2013, he conceded that the documents do not meet the
requirements of section
2.
He however sought to explain that there is an endorsement that “a
detailed assessment can be made available on request'.
He then directed the court to p98 for the detailed statement of the
taxable income, deductions and the tax payable.
22.
On being further engaged on what the import of the term “this
assessment is subject to audit”
was he submitted that it meant that the assessment was as a result of
an audit that was done and not that it is going to be the subject of
a further audit.
23.
I must observe that the points raised by Mr Mpofu
were points of law which can be raised at any time. It is trite and
requires no authority that a point of law can be raised at any time
provided that there is no prejudice to the other party. Mr Bhebhe
did not seriously contest the point. He also did not argue that the
respondent would be prejudiced in any way.
24.
As was stated in Barclays
Bank supra,
an assessment must contain the taxable income and the credits to
which a person is entitled or the determination of an assessed loss
ranking for deduction. Going by the above definition, the purported
assessments for the years 2012 and 2013 fall far short of being
assessments as defined in section
2 of the Act.
The document on p98 titled 'Income
tax computation'
did not and could not save the respondent. It is a detailed
assessment covering the period 2009 to 2013. There is no provision in
the Act for such an omnibus assessment. Mr Bhebhe
conceded the point in respect of the assessments for the years 2012
and 2013. The concession is properly made.
25.
The assessments for the years 2009, 2010 and 2011 would have met the
requirements of the Act were it not for the endorsement that they
were subject to an audit. Mr Bhebhe
struggled when asked to explain the import of the endorsement
“subject
to audit”.
26
Mr Mpofu's
point, which I agree with, is that when the respondent issues an
assessment, after having considered a taxman's self-assessment,
that resultant assessment is final. It cannot be subject to an audit.
There is no provision for such an assessment in terms of section
2 of the Act.
The only endorsements permitted on an assessment are found in section
51 of the Act
such as notice of the period within which to file an objection.
27.
The rationale for the Commissioner to comply with the Act regarding
assessments was given in Barclays
Bank supra
at
paras 18-21 and page 154F-G as follows:
“It
is imperative that an assessment contains the requirements of the Act
as the administrative functions bestowed by the Act on the
Commissioner amount to a determination which is executable through a
garnishee. He is also bestowed with the power to hear any objections,
in terms of the assessment made, after which he can insist on payment
of the tax pending the determination of any dispute arising from an
assessment. The legislature could only have envisaged granting the
commissioner power to execute pending determination in circumstances
where the taxpayer has been clearly advised of the basis for the
assessment.
In addition, section
51
requires the taxpayer to be given due notice of the assessment and
the tax payable in the manner stipulated in that section. There
should be no doubt as to whether the document sent by the
Commissioner to a tax payer is an assessment in view of the
taxpayer's right to object within 30 days.
Annexure
A is not headed 'Notice of assessment' nor 'assessment' and
does not give 30 days notice for objection as is required by the Act.
Further, the document cannot be said to constitute an assessment as
it falls short of the definition of assessment in terms of section
2 of the Act.
In
the process of serving the taxpayer with an assessment and hearing
objection, the Commissioner should comply with the provisions of the
Act as his administrative acts have far reaching consequences of a
garnishee on the taxpayer.”
28.
Although the above remarks were made in a case where the Commissioner
had issued a garnishee order to a disputed assessment they apply with
equal force in
casu.
There should never be any doubt as to whether what the Commissioner
would have issued is an assessment or not as any default by the
taxpayer can be met with the administrative powers bestowed on the
Commissioner in the Act.
29.
In view of the above the assessments are null and void as they were
issued contrary to the requirements of the Act. They were a nullity
and cannot create any obligation to pay tax. What this means is that
there were no proper assessments for the court a
quo
to relate to. Consequently, there is no proper appeal before this
court.
Mr
Mpofu's
second point in
limine
has merit and is upheld.
30.
Having made the above findings, it will not be necessary for me to
deal with the first point in
limine
raised by Mr Mpofu
and the merits of the matter. This is an appropriate case to invoke
the provisions of section 25(2) of the Supreme Court Act [Chapter
7:13] to set aside the proceedings of the court a
quo
as they are irregular. Costs will follow the cause.
Accordingly,
I will make the following order:
1.
In terms of the powers set out in section 25(2) of the Supreme Court
Act, the proceedings of the court a
quo
in ITC
9/2016
be and are hereby set aside.
2.
The respondent is to pay the appellant's costs in terms of section
15(2)(bb) of the Income Tax Act [Chapter 23:06].
GUVAVA
JA: I agree
MAVANGIRA
JA: I agree
Gill,
Godlonton & Gerrans, appellant's legal practitioners
Kantor
& Immerman, respondent's legal practitioners
