11 November 2011

Taxpayer loses application to rescind judgement

The recent winning streak of the South African Revenue Service (SARS) in the courts continued in the judgment of Joseph Gadifele Modibane v SARS Case No: 09/9651 (Modibane). Mr Modibane launched an application in the South Gauteng High Court for the rescission of judgment obtained by SARS on 5 March 2009, which was dismissed.

By way of background, SARS issued an income tax assessment of R22 million against Mr Modibane on 13 August 2007, which was not paid. Mr Modibane proceeded to lodge an objection to the income tax assessment which was dismissed by SARS on 30 January 2008. An appeal was lodged by Mr Modibane to the tax court on 7 March 2008 which, based on the reading of the case, is still pending.

As a result of discussions with Mr Modibane relating to his tax liability proving to be fruitless, SARS obtained judgment of R25 million (incl. interest) against the taxpayer under section 91(1)(b) of the Income Tax Act (the Act). Mr Modibane's main argument was to the effect that it was wrong of SARS to proceed and obtain judgment against him as there was, at all material times, an appeal pending on the assessment. The taxpayer also advanced arguments that the judgment is wrong on procedural grounds and that on the merits of the case, the income tax assessment is incorrect.

The court first dealt with the issue of whether the certified statement filed by SARS with the Registrar can in fact be referred to as a 'judgment'. In summary, the court held that the certified statement filed by SARS under section 91(1) of the Act is not a judgment in the ordinary sense of the word, agreeing with the court in Capstone 556 (Pty) Ltd v Commissioner SARS and Another [2011] ZAWCHC 297. In Capstone 556, the court stated that although a statement filed by SARS under section 91(1)(b) of the Act has all the effects of a judgment, it is nevertheless not in itself a judgment in the ordinary sense and does not determine any dispute or contest between the taxpayer and SARS. The effect of the aforementioned is that there is technically no 'judgment' to be rescinded, which in the court's view should dispose of the issue. From a taxpayer's perspective, this creates more uncertainty regarding the status of judgments obtained under section 91(1)(b) of the Act as many taxpayers have in the past successfully argued for judgments of this nature to be rescinded.

Notwithstanding the above, the court proceeded to deal with the Modibane case on the basis that the Registrar issued 'judgment', in the ordinary sense of the word as understood by the applicant, which is susceptible to rescission. In order for the judgment to be rescinded, the applicant, in this case Mr Modibane, must show 'sufficient cause'. To establish 'sufficient cause', two elements must be considered:

  • the party seeking relief must present a reasonable and acceptable explanation for his default; and
  • that on the merits such party has a bona fide defence, which prima facie, carries some prospect of success.

Mr Modibane failed to show 'sufficient cause' on both of the abovementioned elements. Firstly, the court found that there was wilful default on the part of Mr Modibane in that he refused to engage with SARS directly, or through his advisers, to fruitfully resolve his obligation to pay tax. Secondly, the court dismissed Mr Modibane's reliance on the earlier judgment of Mokoena v Commissioner South African Revenue Service 2011 (2) SA 556 (GSJ), also involving section 91(1)(b) of the Act, which held that no judgment can be obtained pending the outcome of an objection or appeal.

In Mokoena, which provided short lived hope for taxpayers, the court held that it is self-evidently incompetent, having regard to the rights of objection and appeal, to obtain judgment in the interim. The court, in Mokoena, further stated that it is inconsistent with the framework of the Income Tax Act and its provisions, eg the express right to collect tax despite and objection and appeal would be unnecessary if judgment could be obtained in the interim. The court in Capstone 556 and Modibane disagreed with the decision in Mokoena, holding that it is not supported by a proper construction of the relevant statutes and relevant precedents.

In Modibane the court confirmed that section 91(1)(b) of the Act entitles SARS to exact payment from a taxpayer pending an appeal.

Ruaan van Eeden

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