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S.Africa: SARS cannot amend its grounds of assessment after the letter of assessment

ITC 13238 & ITC 13164 WCTC (8 December 2014)

17 March 2015

Author: Erich Bell (SAIT Technical)


This case considers an application by SARS to 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) (“Act”) and by the taxpayer through a counter-application to delete a paragraph and certain words from SARS’ statement of grounds of assessment. The application and counter-application concerns the extent to which SARS may travel beyond the matters on which it initially expressed satisfaction pursuant to a section 103 of the Act transaction.


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 were 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 findings 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 findings 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 satisfied 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 court referred to section 103(2) where it was held that the Commissioner must be satisfied that the circumstances in section 103(2) are present before he could disallow the set-off of the assessed loss. The taxpayer contended that the Commissioner was only satisfied that the requirements of section 103(2) were met in relation to the first 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 first change of shareholding, but also on the second change.

After holding that Rule 31 of the Rules promulgated under section 103 of the Tax Administration Act (No 28 of 2011) (“new Rules”) is not applicable, Rogers J investigated the judgements of ITC 1843 72 SATC 229 and HR Computek (Pty) Ltd v CSARS [2012] ZASCA 178. Rogers J held that the Computek case supra did not consider the ITC 1843 judgement which allowed both the taxpayer and SARS to depart from their previously stated positions in letters of assessment and letters of disallowance on the one hand and objections and notices of appeal on the other. It was furthermore remarked by Rogers J that the Computek case supra was influenced by the decision in Matla Coal v CIR 1987 (1) SA 108 (A) which was decided at a time when section 83(7)(b) of the Act (which was subsequently repealed) expressly stated that a taxpayer is limited to the grounds set out in his notice of objection. Rogers J subsequently stated the following at paragraphs [20] to [22] (emphasis added):

“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 satisfied of particular matters. In the former class a case would belong 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 sufficiently 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.

[21] In the case of the powers which the Commissioner can exercise upon being satisfied of particulars matters, one is dealing with a different situation. One is not dealing with a situation where the law prescribes that certain expenses shall be disallowed or certain income shall be taxed if a certain state of affairs objectively exists. One is dealing, rather, with a situation where a particular fiscal result follows only if the Commissioner himself is satisfied of certain matters. In the latter class of case it is the Commissioner’s satisfaction upon the points in question which constitutes the jurisdictional fact for the issuing of the assessment.

[22] It is for this reason that one will find that, where the Commissioner’s powers are so expressed, special provision is made for an appeal against the Commissioner’s decision. In the case, for example, of ss 103(1), (2) and (3) of the Income Tax Act, s 103(4) says that any decision of the Commissioner under the preceding three subsections shall be subject to objection and appeal. The reason this is necessary is that ordinarily speaking if a certain result were to flow upon the Commissioner being satisfied of the matters in question, there would not be an appeal, at least not the conventional appeal 5 for which ss 81 ff of the old Income Tax Act used to provide.”

The court subsequently held that it is necessary to establish on what matters the Commissioner was satisfied when he invoked section 103(2) to disallow the set-off of the assessed loss to determine against what it is that the taxpayer has a right to appeal against in terms of section 103(4) of the Act.


The court predominantly investigated SARS’ assessment letter dated 30 November 2010 to determine the matters on which the Commissioner was satisfied. The court also investigated the letter of findings, the taxpayer’s objection and SARS’ statement of grounds of assessment and held that the statement of grounds of assessment (which was predominantly based on the assessment letter) focusses more on the first change of shareholding. In this regard, Rogers J stated the following at paragraphs [42] to [44] (emphasis added):

“…The fact that the Commissioner referred to and accepted the fact that there had been a further change in shareholding does not, on a proper understanding and reading of the letter of assessment, disclose an intention to rely on the further change in shareholding as the change which had the result, directly or indirectly, of causing income to be earned by the taxpayer or as having been the transaction concluded for the sole or main purpose of utilising an assessed loss.

[43] In regard to the entitlement or otherwise of the Commissioner to depart from the grounds on which he was satisfied in a matter of this kind by way of an amendment of his rule 10 statement, I was referred to ITC 1862 75 SATC 34. That was a case arising under s 103(1) of the Income Tax Act and the question arose not in the context of an amendment to a rule 10 statement but rather in regard to the extent to which the Commissioner at the end of a trial could rely on grounds not contained in his rule 10 statement. Nevertheless I think the following statement in paras 59 and 60 of the judgment of Desai J is relevant:


  1. The basic jurisdictional requirement for the exercise of the power is that the Commissioner is “satisfied” of the various requirements. Once the Commissioner reaches the requisite level of satisfaction and exercises the power to determine the tax liability on the strength of such satisfaction, an appeal must of necessity go to whether he was justified in being so satisfied. He must stand or fall by his reasons for exercising the power. If the Commissioner did not make his tax determination on the basis of being “satisfied” about an alternative scheme, he cannot rely on the alternative when his s 103(1) determination is challenged on appeal. ’

[44] I agree with those observations and they appear to me to apply as much to what can legitimately be relied upon by the Commissioner in his rule 10 statement as to what he can rely upon at the end of a trial in the tax court. That is not to say that if, having assessed on the basis of being satisfied of certain matters, the Commissioner discovers other facts which cause him to be satisfied on other matters, he cannot issue a further assessment based on his new satisfaction. However, it is only upon reaching satisfaction on the new elements that he can then issue a fresh assessment. What he cannot do is support his existing assessment on the basis of matters on which he was not satisfied when he issued that first assessment.”

The court accordingly refused SARS’ application to amend its statement of grounds of appeal and allowed the taxpayer’s counter-application with costs.

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