Page 800 - SAIT Compendium 2016 Volume1

CASE DIGEST 2014-2015
In respect of the interest levied in terms of section 89quat, the court held that subsection (3) provides the Commissioner with a discretion and that based on the nding of the reasonableness of the taxpayer’s actions, such interest should also be remitted.
20. ITC 13238 & ITC 13164 WCTC (8 December 2014)
Issue
Amendments to grounds of assessment - rule 10 of the rules previously governing proceedings in the Tax Court. At issue is whether SARS may amend its statement of grounds of assessment issued in terms of Rule 10 of the Rules promulgated in terms of section 107A of the Income Tax Act (No. 58 of 1962).
Posture of the case
This case is an application to the Western Cape Tax Court by SARS, with a counter-application also being made by the taxpayer.
Facts
During March 2002, the taxpayer sold its assets to XYZ for R1milllion with the option for XYZ to acquire all of the shares in the taxpayer for R1. On the 5th of March 2003 XYZ exercised its option to acquire all of the shares in the taxpayer. At that time, the taxpayer had an assessed loss in excess of R85 million. This sale was followed by an agreement concluded on the 7th of May 2003 which resulted in the restoration of ownership of the business to the taxpayer with effect from 6 March 2003. The 7 May 2003 agreement effecting the reversal was entered into because of litigation in which the taxpayer was initially involved in. XYZ did not wish to acquire the business until the litigation was resolved.
Some months later XYZ started renegotiating an agreement with D company which was unsuccessful when it initially acquired the shares in the taxpayer. In terms of the agreement, XYZ was to dispose of the shares in the taxpayer to D company. XYZ consequently concluded an agreement with D company on the 25th of November 2003 whereby all of the shares in the taxpayer were disposed of to a subsidiary of D company, namely E company.
The taxpayer’s business then continued under E company’s control and substantial income was derived for the 2005 to 2008 years of assessment against which the taxpayer has set-off its balance of assessed loss.
SARS provided the taxpayer with a letter of audit on 10 December 2009 in which it set out ndings regarding the proposed adjustments for the 2005 to 2008 years of assessment. This letter only mentioned the disposal of shares by the taxpayer to XYZ and not the subsequent disposal by XYZ to E company as SARS was not aware of the subsequent disposal at the time of issuance of the letter. The taxpayer replied to the letter of ndings on the 13th of May 2010. SARS, however, retained the proposed adjustments to the assessment and therefore issued an assessment letter on the 30th of November 2010 disallowing the set-off of the balance of assessed loss by the taxpayer in terms of section 103(2) of the Act. The taxpayer objected to the assessment which was disallowed. The taxpayer has subsequently noted an appeal.
SARS delivered its statement of grounds of assessment in terms of Rule 10 of the rules promulgated in terms of section 107A of the Act (“old rules”). The taxpayer was not satis ed with paragraph 30 of the statements of grounds of assessment which referred to the November 2003 change of shareholding (the transfer of shares from XYZ to E company) and with the part of paragraph 31 that made reference to the transfer of shares from XYZ to E company. The matter was not resolved between the parties, hence the application and cross-application to the court.
The taxpayer contended that the Commissioner was only satis ed that the requirements of section 103(2) were met in relation to the rst change of shareholding between the taxpayer and XYZ at the time the revised assessments were issued and that it therefore cannot rely on the further change in shareholding which occurred in November 2003 when ZYX sold the shares to E company. The Commissioner, however, wished to rely not only on the rst change of shareholding, but also on the second change.
Outcome
SARS’ application to amend its statement of grounds of appeal was consequently dismissed and the taxpayer’s counter- application was allowed with costs.
Reasoning
The court referred to section 103(2) where it was held that the Commissioner must be satis ed that the circumstances in section 103(2) are present before he could disallow the set-off of the assessed loss. Rogers J subsequently stated the following at paragraphs [20] to [22]:
“Be that as it may, it appears to me that a distinction needs to be drawn between a tax appeal which is concerned with objective questions of fact and law on the one hand and tax appeals which are concerned with the exercise by the Commissioner of powers which he has upon being satis ed of particular matters. In the former class a case would belong to the sort of situation where the Commissioner disallows an item of expense as a deduction on the basis that it is of a capital nature and then later seeks to support the disallowance on the new basis that it was not incurred in the production of income. Various objective criteria must exist in order for expenditure to be deducted and it might be said that, subject to fair play and the other party being suf ciently forewarned before trial, it is not unfair that either party may raise additional grounds to show why, objectively speaking, the item was or was not deductible.
792 SAIT CompendIum oF TAx LegISLATIon VoLume 1