Africa Cash and Carry (Pty) Limited v The Commissioner for the South African Revenue Service

Africa Cash and Carry (the taxpayer) operated a cash and carry business. During 2011, SARS raised estimated assessments for additional income tax and VAT, penalties and interest for financial years 2003 to 2009, totalling approximately R600 million. The taxpayer had fraudulently suppressed its sales figures using a functionality in its point-of-sale (POS) system that allowed manual manipulation of sales figures. SARS conducted investigations, executed search and seizure warrants on 20 March 2009, and obtained limited financial data. SARS was restricted to raw data from a Windows version of the React POS system covering a seven-month period (August 2008 to February 2009). SARS discovered that quantities sold exceeded sales recorded, indicating sales suppression. Based on this data, SARS calculated a sales variance of R38,994,851 and a gross profit percentage of 3.6%, which it extrapolated to the 2003-2009 tax years. SARS later identified errors in its calculations and recalculated the variance to R28,020,064 with a revised gross profit percentage of 2.04%. The taxpayer objected to the assessments and appealed to the Tax Court. The Tax Court dismissed the appeal but altered the assessments under s 129(2)(b) of the Tax Administration Act to reflect the lesser amounts based on the 2.04% gross profit percentage. The taxpayer appealed to the Supreme Court of Appeal.

• Whether SARS was bound by the original assessments and could not defend based on materially different tax liability without issuing revised assessments or making a valid concession
• Whether the Tax Court had jurisdiction under s 129(2)(b) of the Tax Administration Act to alter the assessments in the manner it did
• Whether the Tax Court usurped the executive function of SARS by altering the assessments
• Whether the alteration of the assessments violated the taxpayer's right to a fair trial under s 34 of the Constitution and the audi alteram partem principle
• Whether SARS proved that the gross profit percentage methodology used was reasonable
• Whether SARS should have considered alternative methodologies or additional information readily available to it
• Whether the Tax Court erred in not remitting s 89quat interest altogether

The appeal was dismissed with costs, including costs of two counsel where employed.

The binding legal principles established are: (1) Section 129(2)(b) of the Tax Administration Act empowers the Tax Court to alter an assessment where: (a) the same methodology is used but with corrected input values; (b) the errors are identifiable and correctable; (c) the taxpayer has had adequate notice and opportunity to respond; (d) the court has all necessary information to decide the matter; and (e) principles of fairness and audi alteram partem are satisfied. (2) The Tax Court is a court of revision, not an appeal court in the ordinary sense. It may substitute its own decision for that of SARS based on a rehearing of the evidence. This function is judicial in nature and does not violate the separation of powers doctrine. (3) The reasonableness of an estimated assessment under s 95 (formerly s 78 of the Income Tax Act and s 31 of the VAT Act) is determined contextually. SARS must strike a balance fairly and reasonably open to it based on information readily available. The assessment must be rational, lawful, and directed to a proper purpose. (4) Where a taxpayer fraudulently suppresses sales and fails to maintain or provide adequate records, SARS may reasonably rely on the limited reliable data available to extrapolate tax liability across multiple periods. (5) The taxpayer bears the onus of proving that an assessment is unreasonable (subject to SARS bearing the onus of proving the reasonableness of the estimate under s 102(2)). Where the taxpayer fails to adduce factual evidence supporting criticisms of SARS's methodology or alternative methodologies, the taxpayer has not discharged even the evidentiary onus.

The court made several obiter observations: (1) The court noted that SARS's belated reliance on the concession mechanism under s 107(7) was "opportunistic and not conscientious," though it did not need to decide whether valid concession occurred. (2) The court observed that pleadings are important in tax matters, but within limits, a Tax Court has wide discretion and parties will not be held strictly to pleadings where no prejudice results and there has been full opportunity for enquiry. (3) The court commented that the manner of a taxpayer's accounting is irrelevant for determining tax liability, citing Secretary for Inland Revenue v Eaton Hall. (4) The court noted that it would be unsafe to compare the taxpayer's results with those of dissimilar businesses like Massmart without factual evidence establishing validity of such comparison. (5) The court observed that there is no obligation on SARS to reconstruct a taxpayer's financial records, particularly where the taxpayer has deliberately manipulated records and failed to maintain proper documentation. (6) The court indicated that where the evidence before the Tax Court does not sustain the amount in an estimated assessment, or the amount is determined to be unreasonable, the court has discretion to either alter the assessment (if it has sufficient information and fairness is satisfied) or refer it back to SARS for further examination and assessment. The choice depends on whether further investigation or evidence is required.

This case is significant for clarifying the powers of the Tax Court under s 129(2)(b) of the Tax Administration Act to alter assessments. It establishes that: (1) A Tax Court may alter an assessment where errors in calculation are identified, provided the methodology remains the same, the taxpayer has adequate notice, and principles of fairness and audi alteram partem are observed. (2) Such alteration does not constitute a usurpation of executive function or violation of separation of powers, as the Tax Court is a court of revision with unique powers to substitute its decision for that of SARS. (3) The reasonableness of an estimated assessment methodology must be assessed contextually, considering the available information, the taxpayer's conduct, and whether SARS struck a balance fairly and reasonably open to it on the facts available. (4) Where a taxpayer has fraudulently suppressed sales and failed to maintain proper records, SARS may reasonably rely on limited reliable data to extrapolate tax liability, and the taxpayer bears the evidentiary burden of demonstrating that alternative methodologies would be more reasonable. The case reinforces that the Tax Court's function is to rehear matters de novo and that procedural fairness does not require SARS to issue revised assessments where the court can properly alter the assessment based on evidence before it.