Nesongozwi v Commissioner for the South African Revenue Service

The taxpayer, Mr James Matodzi Nesongozwi, was a mining engineer and sole shareholder of Nesongozwi Mining Corporation (Pty) Ltd (NMC), which in turn held 50% of shares in Umthombo Resources (Pty) Ltd after selling the other 50% for R150 million in August 2008. Umthombo held coal prospecting and mining rights and had a consultancy agreement with Sumo Coal (Pty) Ltd, which provided for potential joint ventures with Sumo holding 60% participation interest. In October 2009, the taxpayer sold his NMC shares to the Nesongozwi Family Trust for R547,275, based on a valuation treating NMC as a holding entity only. In October 2014, SARS issued an additional assessment for the 2010 tax year, determining that the shares had been disposed of below market value and imposing donations tax and capital gains tax liability of R48,635,677.49. The taxpayer objected on the basis that SARS used incorrect valuations. SARS commissioned expert valuations from Venmyn Rand (Pty) Ltd and Dave Thayser, valuing the shares at approximately R548.1 million (taxpayer's 50% share worth R274 million). The taxpayer's expert valued them at negative R136 million.

• Whether the taxpayer could raise on appeal grounds not included in his original objection or notice of appeal
• Whether the valuation methodology used by SARS experts could be challenged when it had been agreed to by both parties
• Whether the full court properly exercised its discretion in refusing an amendment to introduce new grounds of appeal
• Whether Umthombo's mineral resources were correctly categorised as 'inferred resources' rather than 'resource targets'
• Whether the consultancy agreement with Sumo Coal required a 60% discount in valuing the NMC shares
• Whether contingent liabilities should be taken into account in share valuation for tax purposes

The appeal was dismissed with costs, including costs of two counsel. The tax court's order valuing the NMC shares at R115.7 million (50% of R231.4 million) for purposes of calculating capital gains tax and donations tax was confirmed.

Under the Tax Administration Act 28 of 2011 and its Rules, a taxpayer appealing to the tax court is limited to the grounds specified in their notice of objection (rule 7) and notice of appeal (rule 10). The issues before the tax court are strictly defined by rule 34 as those contained in the statement of grounds of assessment, the statement of grounds of appeal, and any reply. A taxpayer cannot raise on appeal grounds that constitute new objections to parts of the assessment not previously objected to. This limitation serves to prevent prejudice to SARS from shifting grounds of objection. Where parties have agreed on a methodology or factual issue, that agreement cannot be resiled from and raised as a ground of appeal. Courts should not be unduly technical in applying these rules but must look to the substance of the objection in the context of the particular case. However, this does not permit the introduction of entirely new grounds involving substantial factual issues not canvassed in the tax court proceedings.

Plasket JA observed that even if the valuation methodology issue had been properly before the court, the taxpayer would have had to establish a misdirection in the full court's exercise of discretion to refuse the amendment. The court noted that the full court had furnished full and complete justification for its decision, and the taxpayer had not attempted to assail that exercise of discretion or show that it was not judicially exercised or influenced by wrong principles. The court also made sympathetic observations about allowing some flexibility under the Matla Coal principle, noting that while courts should not be unduly technical, this must be balanced against the substance of what was actually objected to. The judgment implicitly recognizes the tension between procedural fairness (requiring proper notice of grounds) and substantive justice, but comes down firmly on the side of procedural requirements in the tax assessment context.

This case is significant for establishing the strict limits on grounds of appeal in tax matters under the Tax Administration Act 28 of 2011. It reinforces that taxpayers cannot raise new objections on appeal that were not included in their original notice of objection, protecting SARS from prejudice caused by shifting grounds. The judgment clarifies that rule 34 of the Tax Administration Rules definitively circumscribes the issues before a tax court to those contained in the formal pleadings. It also establishes that where parties have agreed on a methodology or settled an issue, that agreement cannot be resiled from opportunistically on appeal. The case provides important guidance on the application of the principle from Matla Coal that courts should not be unduly technical, balanced against the need for procedural fairness and finality. It also addresses substantive tax valuation issues, confirming that contingent liabilities (as opposed to actual liabilities) are not to be taken into account when valuing shares for donations tax and capital gains tax purposes.