Posted in sections, this is my Doctoral Thesis on taxpayers rights when audited by the tax authorities in South Africa – equally applicable to many English-based law systems in Africa and abroad (eg. India). This will be of particular use to any tax practitioners doing work in Africa and in other English-based legal systems around the world.

Analysis Of Challenging The Commissioner’s Discretionary Powers In Auditing Taxpayers under The Constitution Of The Republic of South Africa

2.5 ADEQUATE REASONS

2.5.2 The relevance of s 74 of the Income Tax Act

However, the necessity for adequate reasons goes beyond the requirements of PAJA. Sections 74A and 74B require an inquiry or audit to be ‘for the purposes of the administration of this Act’. This phrase is defined in s 74 of the Income Tax Act. Section 74 of the Income Tax Act reads:

74. GENERAL PROVISIONS WITH REGARD TO INFORMATION DOCUMENTS OR THINGS…

‘administration of this Act’ means–

(a) obtaining of full information in relation to any –

(i) amount received by or accrued to any person;
(ii) property disposed of under a donation by any person; and
(iii) dividend declared by any company;

(b) ascertaining of the correctness of any return, financial statement, document, declaration of facts or valuation;
(c) determination of the liability of any person for any tax, duty or levy and any interest or penalty141 in relation thereto leviable under this Act;
(d) collecting of any such liability;
(e) ascertaining whether an offence in terms of this Act has been committed;
(f) ascertaining whether a person has, other than in relation to a matter contemplated in paragraphs (a),(b),(c),(d) and (e) of this definition, complied with the provisions of this Act;
(g) enforcement of any of the Commissioner’s remedies under this Act to ensure that any obligation imposed upon any person by or under
this Act, is complied with; and
(h) performance of any other administrative function which is necessary for the carrying out of the provisions of this Act. (Emphasis supplied).

It is not sufficient for SARS to simply restate the provisions in s 74 as the purpose for its inquiry and audit. A rational objective reason for invoking the provisions must exist.142 A reasonable decision143 must be supported by ‘concrete evidence’144 with reasons145 given for taking the decision in the first place. The decision must be objectively capable of furthering the purpose for which the power was given and for which the decision was taken.

In the case of Nkondo & Gumede v Minister of Law and Order,146 the Appellate Division held that repeating the wording of the enabling legislation did not constitute reasons: ‘I cannot accept the proposition that if the Minister acts on one of these grounds and informs the person concerned of that fact by repeating the relevant words in the relevant paragraph, that ground thereby assumes the character of “reasons”…’. In this case the court held that: the functionary must comply with the jurisdictional facts of the empowering provisions, otherwise the notice is invalid; all prescribed procedures must be complied with; a statement of statutory grounds is not reasons for a notice – as such, reasons must give the person concerned an opportunity to make proper representations; the Minister cannot act arbitrarily or capriciously; he must make a decision based on the information before him, otherwise he is acting arbitrarily. This is also supported by Hoexter,147who states that:‘… reasons are not really reasons unless they are properly informative. They must explain why action was taken or not taken.’

The decision taken by SARS in taking a decision in terms of ss 74A and 74B must therefore be rationally148 related to the purpose (one of those listed in s 74) for which the power was given.149 In order to require information, documents or things, SARS must give an informative and adequate reason for the decision. For instance, the request for information, documents, or things could be formulated along the following lines, in order to comply with these provisions:

The taxpayer is required to furnish, produce or make available information, documents or things for the purposes of the administration of the Income Tax Act, in accordance with the provisions of ss 74A and 74B, for the following reasons:

At this juncture, SARS would have to be selective in choosing one or more of the following, so as to demonstrate the rational exercise (as opposed to arbitrary exercise) of its power in line with a specific purpose. An example of such a lawful inquiry by SARS which is compliant with the jurisdictional facts of the sections mentioned follows:

1. to obtain full information in relation to the amount specified in item __ of the tax return, as supported by item __ of the attached financial statements;
2. to ascertain the correctness of the tax return at item __ as supported by item __ of the attached financial statements;
3. to determine the liability for income tax with respect to the following transactions [with specific reasons why the liability for tax is being questioned].150

Failure by SARS to formulate reasons along the suggested lines at the commencement of an inquiry and audit would mean that SARS have failed to comply with the jurisdictional facts of s 74 of the Income Tax Act and s 3(2) of PAJA (if the decision in terms of ss 74A and 74B is ‘administrative action’).

Next:  2.5.3 The meaning of ‘adequate reasons’

In accordance with Circular 230 Disclosure

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Footnotes:

141See the Canadian Supreme Court case of R v Jarvis 2002 (3) SCR 757 as support for this submission – discussed later in this thesis at page 88; In Palmer v McMahon 133 US 660 (1890) the court held that the imposition of the penalty did not deprive the taxpayer of liberty and property without due process of law, as the taxpayer had the opportunity to object before the assessment. In South Africa, objection only happens after the revised assessment and the imposition of punitive penalties, so if SARS were to use the inquiry and audit provisions in s 74 to investigate punitive penalties (as opposed to administrative penalties) and obtain evidence to pursue the punitive penalties and any criminal charges, the conduct of SARS would, it is submitted, be unconstitutional.
142Ferucci and Others v Commissioner for South African Revenue Service and Another 65 SATC 47 at page 52 and pages 54-5.
143 See section 3.4: Reasonableness infra; LAWSA Volume 5(3) 2nd ed at para 165: ‘There is no quantitative legal yardstick since the quality of reasonableness of the provision (or conduct) under challenge “must be judged according to whether it arbitrarily or excessively invades the enjoyment of a constitutionally guaranteed right”’; Commissioner of Taxes v CW (Pvt) Ltd 1989 (3) ZLR 361 (S) at 370F-372C; Union Government (Minister of Mines and Industries) v Union Steel Corporation (South Africa) Limited 1928 AD 220, 236-7; and National Transport Commission v Chetty’s Motor Transport (Pty) Ltd 1972 (3) SA 726 (A); See also Local 174 International Brotherhood of  Teamsters v US, 240 F.2d 387 (quoted from the headnote): where ‘(i)n proceedings by revenue agents to compel a union’s production of records relating to transactions with the taxpayer-president, agents had a burden to show that a demand was reasonable under all circumstances and to prove that books and records were relevant or material to the tax liability of the taxpayer and that the union possessed the books or records containing items relating to the taxpayer’s business’.(Emphasis supplied)
144 Preiss, M, Silke J, & Zulman R H The Income Tax Practice Manual (November 2012), www.mylexisnexis.co.za. at para B 8 (7): ‘The inference to be drawn from the decision in an unreported case in 1944, and from other decisions, is that the Court, while giving due weight to the onus placed upon the taxpayer under s 82, will not be satisfied with guesses by SARS which are not supported by concrete evidence and that if it has to decide on probabilities it will be guided by the relative strength of the evidence tendered by the appellant and by the Commissioner respectively.’ (Emphasis supplied)
145 See also Park-Ross and Another v Director: Office for Serious Economic Offences 1995 (2) SA 148 (C) at pages 1641-165A; Sachs v Minister of Justice 1934 AD 11.
146 1986 (2) SA 756 (A) at page 785; See also Sachs v Minister of Justice 1934 AD 11.
147 Hoexter & Lyster R The New Constitutional & Administrative Law (2002) Juta at page 244.
148Pharmaceutical Manufacturers case op. cit. at para [85]; University of Cape Town v Ministers of Education & Culture (House of Assembly & House of Representatives) 1988 3 SA 203 (C); LAWSA Volume 1 2nd ed Administrative Law Lexis Nexis at para 139 footnote 6.
149 Wheelright K Taxpayer’ Rights in Australia in Bentley D Taxpayers’ Rights: An International Perspective Revenue Law Journal Bond University: Queensland 1998 at page 49; Pharmaceutical Manufacturers case op.cit.
150 An example drafted by the writer based upon reviewing many such requests in the past two decades of tax practice.