9 July 2021 by Tax and Exchange Control Alert

What to consider when seeking to amend an appeal in Tax Court

In DEF Mining (Pty) Ltd v the Commissioner for the South African Revenue Service (IT24578) (27 January 2021) (as yet unreported), the Tax Court dismissed an application brought by the applicant, DEF Mining, in terms of rule 35(2) of the Tax Court’s dispute resolution rules to amend its statement of grounds of appeal under rule 32. The Tax Court’s dispute resolution rules were promulgated under section 103 of the Tax Administration Act 28 of 2011.

In terms of rule 35, there are two ways in which the parties to a dispute can amend a statement. Rule 35(1) enables parties to agree to an amendment, or, where there is no agreement, rule 35(2) allows them to apply to the Tax Court for an order in terms of rule 52. Under rule 52(7), this includes an order concerning the postponement of the hearing.

A court has the discretion whether or not to allow an amendment and will usually allow it in instances where:

  • the party seeking the amendment can prove that the amendment will not prejudice the other party;
  • the amendment is made in good faith; and
  • granting the amendment will ensure that justice is done in deciding the real issues between the parties.

As the Tax Court’s dispute resolution rules do not specifically outline the procedural steps to follow when seeking to amend a statement, rule 42(1) must be considered. Rule 42(1) provides that where “these rules do not provide for a procedure in the tax court, then the most appropriate rule under the rules for the High Court … may be utilised by a party of the tax court”. In this regard, rule 28 of the Uniform Rules of Court becomes relevant as it deals with the amendment of pleadings and documents, and outlines the procedure to follow.

Background

Two weeks before trial, DEF Mining provided the respondent, the Commissioner for the South African Revenue Service (SARS), with notice to amend its rule 32 statement. The notice to amend was brought in terms of the approach outlined above. Accordingly, DEF Mining sought to:

  • present as an additional ground of appeal, the deductibility of its qualifying expenditure in terms of section 11(a) of the Income Tax Act 58 of 1962 (ITA), for the 2013, 2014, and 2015 years of assessment from income derived by DEF Mining from its mining operations;
  • attach as an annexure to its rule 32 statement, a document which reflected the classification of its expenditure during the relevant years of assessment; and
  • provide a summary of its arguments in relation to the section 11(a) issue.

SARS opposed the application, alleging that DEF Mining had abandoned the section 11(a) issue by not including it as part of its appeal and having admitted to SARS’s finding in relation to this ground at the objection stage. Moreover, the contents of the annexure which DEF Mining sought to attach, were inconsistent with the documents provided to SARS, as the amounts claimed had not all been included during the objection. 

In considering the position in relation to amendments, the court referred to Caxton Ltd v Reeva Forman (Pty) Ltd [1990] (3) SA 547 (A), in which it was held that the court has the discretion to allow or deny an application to amend an appeal, with due regard to certain fundamental principles. In Ciba-Geigy (Pty) Ltd v Lushof Farms (Pty) [2002] (2) SA 447 (SCA), also referred to by the court, it was held that where a party seeks an amendment at an advanced stage of the proceedings (much like in this case), that party would be required to provide reasons for the delay. In this instance, the considerations that would apply included DEF Mining being required to:

  • prove that it did not delay its application after becoming aware of the evidentiary material upon which it intended to rely;
  • provide an explanation of the reason for the amendment; and
  • show prima facie that it had a triable issue (i.e. a dispute that would be relevant if proved by DEF Mining in its application).

First ground of amendment

DEF Mining had previously raised the section 11(a) issue as a ground of objection but did not include it as part of its grounds of appeal. According to DEF Mining, the reason for the omission was that it relied on advice from its professional advisors at the objection stage that SARS’s decision to disallow this ground of objection appeared to be correct. Thereafter, and on that basis, DEF Mining admitted SARS’s finding and confirmed that it would not base its deduction on the provision. As a result, the appeal proceeded on the issues which remained between the parties.

DEF Mining further alleged that it had subsequently received contrary advice that its expenditure for the relevant years of assessment qualified to be deducted under section 11(a) of the ITA, which motivated DEF Mining to bring the notice of amendment and thus revive the section 11(a) issue. In addressing SARS’s arguments, DEF Mining submitted that although the section 11(a) issue effectively amounted to a new ground, because SARS had considered this ground at the objection stage, its introduction in the appeal would not cause prejudice to SARS. In addition, DEF Mining submitted that its decision not to pursue the ground at the first instance did not amount to an abandonment of the section 11(a) issue in the appeal.

The question therefore became whether DEF Mining’s decision not to pursue the issue amounted to an abandonment and whether it could withdraw the admission previously made to SARS in the latter’s decision to disallow the ground at the objection stage.

In relation to the abandonment issue, the Tax Court held that as a result of its decision not to include the section 11(a) issue in its rule 32 statement, DEF Mining had created the impression that it would waive its right to raise the issue in the appeal. Especially since DEF Mining had previously admitted that SARS’s finding in relation to the issue was correct (i.e. that the expenditure was capital in nature and did not qualify for deduction under section 11(a)).

In this regard, the court referred to Amod v SA Mutual Fire & General Insurance Co Ltd [1971] (2) SA 611 (N), in which it was held that in the case of an amendment involving a withdrawal of an admission, the court has a discretion to grant or refuse an application for the amendment of a pleading, but will require a reasonable explanation of the circumstances under which the admission was made and the reasons why it is sought to be withdrawn. The court concluded that DEF Mining had failed to explain the circumstances under which the admission was made to SARS and the reasons why it sought to withdraw the admission.

 

Second and third grounds of amendment

The court considered whether DEF Mining could include the document reflecting the classification of its expenditure during the relevant years of assessment, which it sought to attach as an annexure to its rule 32 statement, as well as the summary of its arguments in relation to the section 11(a) issue.

DEF Mining submitted that the new annexure differed from the annexures that related to the initial grounds of objection, on the basis that the new annexure included a classification of all expenditure incurred in the relevant years of assessment. Furthermore, the new annexure did not only apply to its argument in relation to the section 11(a) issue, but the remaining issues in the appeal too. SARS, on the other hand, opposed the inclusion of the new annexure on the basis that it would have to consider expenditure which it did not previously deal with. It argued that DEF Mining had previously accepted that certain of the expenditure constituted capital expenditure, and DEF Mining had conceded that the contents of the new annexure and the initial annexures differed.

In considering these arguments, the court held that the difference in the annexures was an indication of prejudice to SARS as it would be required to deal with a case which had not previously been presented to it. In addition, the court could not find sufficient reason as to why the new annexure was not presented to SARS at an earlier stage. The court further referred to rule 7(2)(b) of the Tax Court’s dispute resolution rules, which requires that a taxpayer lodging an objection to an assessment includes the documents required to substantiate the grounds of objection, and which the taxpayer had not previously delivered to SARS for purposes of the disputed assessment. On this basis, the court concluded that DEF Mining was not permitted to introduce the new annexure in terms of the Tax Court’s dispute resolution rules.

In light of the above, the court refused to allow the application for amendment on all grounds.

Comment

A few lessons can be learned from this judgment. Firstly, taxpayers and their tax advisors must be cognisant of the opportunity afforded to them at the time of lodging an objection to an assessment to deliver documents substantiating the grounds of objection. Secondly, where a taxpayer seeks to introduce (at the appeal stage) documents that were not delivered at the objection stage but which were required to substantiate a ground of objection or appeal, the taxpayer may run the risk of not succeeding with an application to include these documents. The key issue is whether the introduction of the new documents could be seen as an attempt to introduce a new ground of appeal. Finally, where parties make an admission of fact, they must understand the consequences of the admission and how it may affect their case going forward, especially if they want to withdraw the admission at a later stage.

 

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