THE SUPREME COURT OF APPEAL OF SOUTH AFRICA

Case No:  36/2010

In the matter between:

THE COMMISSIONER FOR THE SOUTH
AFRICAN REVENUE SERVICE

Appellant

and

SPRIGG INVESTMENT 117 CC t/a
GLOBAL INVESTMENT                                                             Respondent

Neutral citation: CSARS v Sprigg Investment 117 CC (36/10) [2010]
ZASCA 172 (1 December 2010)

Coram:
HARMS DP, MAYA, CACHALIA, SHONGWE et TSHIQI
JJA

Heard:
05 November 2010

Delivered:  1 December 2010

Summary:  Income Tax Act 58 of 1962 – Appealability of orders of the tax
court under Tax Court Rule 26(1) – s 86A(1) read with ss 83(13)(d) and –
adequacy of the reasons for a tax assessment furnished by the Commissioner
– composition of the tax court under s 83(4) and effect of failure to comply
therewith.

ORDER

On appeal from: Tax Court, (Cape Town) (NC Erasmus J, sitting as court
of first instance).
1.
The appeal is upheld with costs of two counsel.
2.
The order of the court below is set aside and the following is
substituted:
‘The matter is struck from the roll. The applicant is ordered to pay the costs
including the costs consequent upon the employment of two counsel (to the
extent employed).’

JUDGMENT

MAYA JA (concurring Harms DP, Cachalia, Shongwe et Tshiqi  JJA)

[1] The Commissioner for the South African Revenue Service (the
commissioner) appeals against a judgment of the tax court ordering him,
principally, to furnish the respondent with adequate reasons for assessments
made relating to employees’ tax, income tax and Value-Added Tax (VAT).
The matter comes before us in terms of an order made by the court below
under the provisions of s 86A(5) of the Income Tax Act 58 of 1962 (the
Act),1 subject to the reservation of the respondent’s right to challenge the
appealability of the judgment.

1 Section 86A(5) empowers the President of the tax court to make a final order, granting or refusing leave
to appeal against its order, to a party desirous of having his appeal heard by the Supreme Court of Appeal
directly from the tax court without an intermediate appeal to the provincial division.

[2] The facts relevant to the dispute may be summarized as follows. The
respondent has been in operation since March 2001. It is a close corporation
and registered vendor for purposes of the Value-Added Tax Act 89 of 1991
(the VAT Act). It describes itself as an exclusive importer of branded
electric home products which it imports from Taiwan and sells through
distributors in South Africa and Namibia. At the material time it sold an
electricity-saving device called Electro Smart (the device).

[3] The real tussle between the parties (this however relates to the merits
which are not before us, as will become apparent, and I refer to it and the
surrounding facts merely to provide context) relates to the precise nature of
the relationship between the respondents and its distributors. The respondent
alleges that it sold the device to distributors who in turn, as principals, sold it
to consumers for their own account. The commissioner, on the other hand,
contends that the sales to consumers were the respondent’s own sales
because the distributors were its ‘employees’ for purposes of the 4th
Schedule of the Act.

[4] The genesis of the dispute can be traced to September 2004, when the
South African Revenue Service (SARS) commenced a tax audit on the
respondent’s business under the provisions of the Act and the VAT Act.
Consequently, SARS auditors sought various information and documents
from the respondent and a chain of correspondence flowed between the
parties in this regard. The exchange culminated in a letter containing the
commissioner’s findings which was dated 14 December 2006. The letter
emphasized that it did not constitute a tax assessment and merely contained
‘findings based on a limited scope audit of [the respondent’s] tax affairs’. It
set out what SARS believed formed evidence in support of the findings and
its legal conclusions.

[5] The key findings were that:
(a) in respect of employees’ tax, the respondent’s distribution agents,
consultants and electricians who installed the devices, were paid
commissions and incentives which constituted ‘remuneration’ from which
employees’ tax was not deducted in breach of paragraph 2 of the Fourth
Schedule, read with s 79 of the Act;
(b) in respect of income tax, the price paid by consumers to the distributors
formed part of the respondent’s gross income, ie the distributors’ product
sales constituted ‘gross income’ of the respondent as defined in s 1 of the
Act;
(c) in respect of VAT, the distributors’ product sales, by virtue of being the
respondent’s
gross
income,
were
taxable
supplies
constituting
‘consideration’ as defined in s 1 of the VAT Act on which output tax was
leviable under s 7(1)(a) of the VAT Act; and
(d) it was competent for the commissioner to impose additional tax,
penalties and interest in terms of various sections of the Act and the VAT
Act.

[6] The respondent’s written response dated 2 February 2007 was lengthy
and detailed and it vehemently denied the main conclusions that the
distributors and electricians were its employees and the distributors’ sales its
own sales. However, SARS was not swayed. On 14 June 2007 it issued a
‘letter of assessment’, followed by formal assessments dated 15 June and 26
July 2007, in respect of employees’ tax, VAT and income tax. But for the
income tax item, SARS confirmed its earlier findings and imposed certain
additional penalties in respect of VAT on the basis that the respondent’s
management had ‘caused an evasion of tax and/or improper refunds …
alternatively they failed to perform the duties imposed upon them by the

[VAT] Act’. No revised assessments were issued regarding income tax. This
was caused by the fact that although the sales to consumers were still
considered part of the respondent’s gross income, the difference between its
gross sales and the amounts paid to its distributors as commission or
otherwise would be allowed as corresponding deductible expenses in terms
of s 11(a) of the Act, thus bringing about no change to the respondent’s
taxable income.

[7] The respondent did not accept the assessment. As a result, it invoked its
rights under rule 3 of the rules of the tax court2 and requested the
commissioner to furnish reasons for the assessment. The request was
contained in two letters dated 25 and 26 July 2007, which bore 97 detailed
questions targeted at the three items of assessment. SARS was not inclined
to indulge the respondent. In its view, the ‘request require[d] a response of
such extraordinary nature that any response would be akin to responding to
questions usually asked in a court of law’. It then gave brief explanations in
respect of each tax item assessed and referred the respondent to its ‘letter of
assessment’ dated 14 June 2007 which incorporated the reasoning set out in
the letter of findings.

[8] The respondent joined issue with SARS’ attitude and consequently

2 The tax court rules were promulgated under s 107A of the Act and prescribe the procedures to be
observed in lodging objections and noting appeals against assessments, procedures for alternative dispute
resolution and the conduct and hearing of appeals before a tax court. Rule 3(1)(a) allows ‘[a]ny taxpayer
who is aggrieved by any assessment …by written notice delivered to the Commissioner within 30 days
after the date of the assessment, [to] request the Commissioner to furnish reasons for the assessment’.

launched an application under tax court rule 26(1)3 which empowers the tax
court to compel the commissioner to furnish adequate reasons as
contemplated in rule 3. It sought an order that its requests for reasons be
remitted to the commissioner for reconsideration with directions issued by
the tax court to ensure that the commissioner provided adequate reasons
therefor.

[9] The tax court found in the respondent’s favour and ordered a remittal of
the letters of assessment to the commissioner for reconsideration. Its order
further directed the commissioner to give adequate reasons for the
assessments that were structured ‘so as to motivate his assessment clearly
and set out the findings of fact on which his conclusions depend; the relevant
law upon which his conclusions are based; and the reasoning process which
led to those conclusions.’

[10] On appeal, the respondent did not content itself merely with defending
the tax court’s finding on the adequacy of the commissioner’s reasons. It
also raised preliminary objections and questioned this court’s jurisdiction to
entertain the matter, the Commissioner’ locus standi to appeal directly to
this court and the appealability of the order of the tax court.

Adequacy of the commissioner’s reasons
[11] I deal first with the question whether the commissioner’s reasons were
adequate as it may be disposed of shortly. In developing his argument that

3 The relevant portion of Rule 26 reads:
‘(1)(a) Any decision by the Commissioner in the exercise of his or her discretion under rules 3(1)(b), 3(2),
3(3), 5(1) and 5(2)(c) will be subject to objection and appeal, and may notwithstanding the procedures
contemplated in rules 6 to 18 be brought before the Court by application on notice.
(b) The court may upon application on notice under this subrule and on good cause shown, in respect of a
decision by the Commissioner under:
(i) …;
(ii) rule 3(2) or 3(3), make an order remitting the matter for reconsideration by the Commissioner with
or without directions to provide such reasons as in the opinion of the Court are adequate’.

the commissioner’s reasons were inadequate, counsel for the respondent
submitted that the commissioner’s response to the request for reasons
constituted administrative action. Thus, he argued, the response fell within
the purview of s 5(2) of the Promotion of Administrative Justice Act 3 of
2000 (PAJA) which requires the administrator to whom the request for
reasons is made to give adequate reasons in writing for the administrative
action.

[12] Reference was then made to the judgment of this court in Minister of
Environmental Affairs & Tourism v Phambili Fisheries (Pty) Ltd4 which
endorsed the standard for what constitutes ‘adequate reasons’ laid down by
the Federal Court of Australia in Ansett Transport Industries (Operations)
Pty Ltd and Another v Wraith and Others5 as follows:
‘[T]he decision-maker [must] explain his decision in a way which will enable a person
aggrieved to say, in effect: “Even though I may not agree with it, I now understand why
the decision went against me. I am now in a position to decide whether that decision has
involved an unwarranted finding of fact, or an error of law, which is worth challenging.”
This requires that the decision-maker should set out his understanding of the relevant law,
any findings of fact on which his conclusions depend (especially if those facts have been
in dispute), and the reasoning processes which led him to those conclusions. He should
do so in clear and unambiguous language, not in vague generalities or the formal
language of legislation. The appropriate length of the statement covering such matters
will depend upon considerations such as the nature and importance of the decision, its
complexity and the time available to formulate the statement. Often those factors may
suggest a brief statement of one or two pages only.’6

[13] I am in respectful agreement with these views. But I do not think that
they have the meaning that the respondent ascribes to them for present

4 2003 (6) SA 407 (SCA) at para 40.
5 (1983) 48 ALR 500 at 507.
6 See also Hoexter The New Constitutional and Administrative Law vol 2 at 244; Nkondo v Minister of Law
and Order 1986 (2) SA 756 (A) at 772I-773A.

purposes. It was contended on its behalf that the commissioner’s reasons did
not meet the above test. This was so, it was argued, because the
commissioner, whose perception of the facts differed dramatically to that of
the respondent, had failed to disclose the reasoning process which led to his
conclusion. The duty to give reasons, proceeded the argument, requires more
than furnishing actual reasons; it entails a duty to rationalise the decision and
obliges the decision-maker to ‘apply his mind to the decisional referents
which ought to have been taken into account’ where, as here, the actual
reasons given fell short of the Phambili test. It was clear from counsel’s
submissions that what was actually being challenged by the respondent were
the very merits of the assessments and that it understood the order of tax
court to entail, in its words, ‘the Commissioner’s reconsideration of the
decisions embodied in his assessments’.

[14] The respondent clearly misconceived the nature of the proceedings. We
are not here reviewing the commissioner’s reasons for the assessments but
merely adjudicating an application antecedent to that process. Thus, the
cogency or rationality of the reasons is not yet in the balance. As appears
from the above-quoted dictum in Phambili, the test envisages that the
decision in issue may involve ‘an unwarranted finding of fact, or an error of
law, which is worth challenging’ and merely requires the decision-maker to
explain why he decided the way he did to enable the requester of reasons to
launch his challenge. It is only when the objection itself is adjudicated under
judicial review that the PAJA test which the respondent wants imposed
comes into play. The question now is simply whether the respondent has
sufficiently been furnished with the commissioner’s actual reasons for the
assessments to enable it to formulate its objection thereto.

[15] Interestingly, the respondent’s counsel conceded in argument that the
volume of the respondent’s questions which demanded exacting specificity
from SARS was unwarranted, and, in his words the product of ‘an attorney
being over-enthusiastic’. More significant though is what the respondent’s
own deponent, Mr Dirk Hamish Fyfe, its financial manager, said in the
founding affidavit. He stated that ‘the [respondent’s] response [to the letter
of findings] was lengthy and answered in substance the Commissioner’s
queries’. Later, in the same affidavit, he said that ‘the [respondent] dealt
with [the letter of findings] comprehensively in its letter dated 2 February
2007, setting out its disagreement with the conclusions and on that basis
declined to provide the required documentation and information.’

[16] It will be recalled that the letter of findings formed the basis of the
assessments which, as previously indicated, incorporated the reasoning it
contained. Notably, the respondent did not, at that stage, complain about the
quality of SARS’ factual findings or that it did not understand why they had
been made. What it did instead, as Fyfe properly acknowledged, was reply in
fine detail as to why it disagreed with the reasoning and findings and clearly
had no difficulty responding to them.

[17] The letter of assessment, which the respondent was urged to read in
conjunction with the letter of findings, stated in plain terms that the
respondent was being assessed for income tax, employees’ tax and VAT. It
explained the reasons for the imposition of employees’ tax, VAT and the
ancillary penalties and interest. It explained further why no revised
assessments would be issued in respect of income tax. The evidential basis
for SARS’ main factual findings, those findings and the legal consequences
that flowed from them were clearly set out – that because the distributors
were the respondent’s employees they therefore sold the device on its behalf

and that those sales formed part of the respondent’s gross for which it should
have accounted for output tax. There is absolutely no reason why the
respondent would be unable to formulate its objection, if it has any, in the
circumstances. And I am inclined to agree with the commissioner that this
litigation is merely a delaying tactic. Accordingly, I find that the
commissioner’s reasons for the assessment are adequate for the purpose for
which they were sought.

Appealability and related issues
[18] Appeals against decisions of the tax court are governed by the
provisions of s 86A of the Act. The relevant parts of the section read:
‘(1) The appellant in the tax court or the Commissioner may in the manner hereinafter
provided appeal under this section against any decision of that court.
(2) Such appeal shall lie–
(a) to the provincial division of the High Court having jurisdiction in the area in which
the sitting of the special court was held; or
(b) where–
(i) the President of the tax court has granted leave under subsection (5); or
(ii) the appeal was heard by the tax court constituted in terms of section 83(4B),
to the Supreme Court of Appeal, without any intermediate appeal to such provincial
division.’

[19] It was contended for the respondent that the order of the tax court was
interlocutory because it was made pursuant to a simple interlocutory
application concerning a preliminary matter of a procedural nature in terms
of s 83(13)(d) and rule 26(1)(b)(ii)7 and would be appealable only if it is a
‘decision’ as contemplated in section 86A(1). It was argued further that the
order was not appealable because it did not meet the criterion of a ‘decision’

7 Footnote 3.

under s 86A(1) set out in Hassim v Commissioner, South African Revenue
Service.8

[20] In the Hassim matter, this court interpreted the words ‘any decision’ in
s 86A(1) as follows:
‘The words “any decision” are also used in s 21 of the Supreme Court Act 59 of 1959. In
the case of s 21 it was held that the “decision” referred to must be a decision of the same
nature as a “judgment” or “order” in the sense in which those terms are used in s 20 of
the Supreme Court Act 59 of 1959 … A “judgment” or “order” referred to in s 20 does
not in general include “a decision which is not final (because the Court of first instance is
entitled to alter it), nor definitive of the rights of the parties nor has the effect of disposing
of at least a substantial portion of the relief claimed in the main proceedings” (see Zweni
v Minister of Law and Order 1993 (1) SA 523 (A) at 536B) … I do not think that the
phrase “any decision” in s 86A(1) should be interpreted differently … To interpret the
phrase literally would be at odds with the generally accepted view that it is in general
undesirable to have a piecemeal appellate disposal of the issues in litigation and that it is
advisable to limit appeals in certain respects’.9

[21] Section 83(13)(d) was inserted in the Act in April 2003 to give
taxpayers an additional right to challenge the commissioner’s furnishing of
reasons. It gives the tax court power, subject to the provisions of the Act, to
‘hear any interlocutory application and decide on procedural matters as
provided for in the rules of the tax court contemplated in section 107A’.

[22] The provision contemplates two types of ‘decisions’: those pursuant to
interlocutory applications’ and those that decide ‘procedural matters’ that are
necessarily not interlocutory. Many decisions relating to ‘procedural

8 2003 (2) SA 246 (SCA).
9 At paras 10 and 11. It is not necessary to decide for purposes of this judgment whether the effect of this
judgment was undone by the insertion of s 83(18), which provides that ‘[a]ny decision of the court under
[s83] shall, subject to the provisions of section 86A, be final.’

matters’ are not necessarily interlocutory and they may, by their very nature,
be final in effect.

[23] The question is then whether the application for ‘adequate reasons’ was
an interlocutory application.  An ‘interlocutory application’, in its widest
meaning, is one made at any stage between the inception and the conclusion
of the litigation in respect of any incidental matter and the consequent order
which does not finally determine the original dispute.10 It must be borne in
mind that in this matter the application was brought as a fore-runner to
possible judicial review proceedings. There is as yet no dispute between the
parties over the merits of the assessment. The respondent sought reasons for
the commissioner’s decision to determine if it was assailable. It remains
uncertain if the matter will proceed to the objection stage. And if further
litigation should eventuate, it would have no bearing whatsoever on the
order of the tax court. Another relevant fact is that the tax court cannot alter
its order; it is, therefore, final in that regard. It follows from this that the
application was not interlocutory but concerned other procedural matters,
which brings the tax court’s order squarely within the category of decisions
contemplated in the latter half of s 83(13)(d).

[28] I believe it relevant too that it is now firmly established that matters
involving procedural issues such as requests made in contemplation of future
litigation, for example, for access to information under the Promotion of
Access to Information Act 2 of 2000 or requests for decision-makers’
reasons for administrative action under PAJA, such as in this case, may be

10 Bell v Bell 1908 TS 887 at 890.

appealable.11 Counsel for the respondent was unable to distinguish the
present matter from these instances. I find, in all these circumstances, that
the order granted by the tax court is appealable.

[29] Having come to the conclusion that the order was inherently appealable,
there is a further problem relating to the order. The composition of the tax
court was flawed and its order was thus not a valid decision. As indicated
above, the matter was heard by the President of the tax court, sitting alone.
Section 83(4) makes provision for the composition of the tax court and
prescribes when the President may sit alone. It reads:
‘Subject to subsection (4B), every tax court established in terms of this Act shall consist
of a judge or an acting judge of the High Court, who shall be the President of the court,
an accountant and a representative of the commercial community who shall be of good
standing and who have appropriate experience: Provided that–
…
(c) when an appeal before the court involves a matter of law only or constitutes an
application for condonation, the court shall consist of the President of the court sitting
alone.’

[30] The question which then arises is whether the determination of whether
the reasons furnished by the commissioner were adequate is a matter of law
only. The answer is in the negative. The enquiry involved both questions of
law and fact and should have been conducted by the Full Court in terms of s
83(4). The proceedings were, therefore, a nullity and the tax court’s order is,
for that reason, of no force or effect. To the extent that tax court rule 26(8)
provides otherwise it must be ultra vires.

11 See, for example, Unitas Hospital v Van Wyk 2006 (4) SA 436 (SCA); Tetra Mobile Radio (Pty) Ltd v
MEC, Department of Works 2008 (1) SA 438 (SCA).

[31] There is another matter that requires comment – the manner in which
the tax court dealt with the application. The sum of the court’s reasoning,
which follows a long narration of the factual background of the matter and
the submissions made on behalf of the parties, is set out in a single sentence
which reads:
‘I am in agreement with the argument of the applicant and am consequently of the view
that the respondent did not comply with the Rules in its response to applicant’s request
for reasons.’

[32] One understands that the court chose the argument that it found
persuasive. But merely setting out that argument exhaustively is no
substitute for the court’s own reasoning, without which it is impossible to
fathom why it decided as it did. The tax court’s judgment – which,
ironically, requires the commissioner to explain his reasoning process –
whilst comprising 66 paragraphs covered in 32 typed pages, is as good as a
bare order and quite meaningless. It did not tell the Commissioner in which
respects the reasons were inadequate and the Commissioner was,
accordingly, unable to know how to comply with the order. That is
lamentable.

[33] The Constitutional Court recently reiterated the importance of a court’s
written reasons in the matter of Strategic Liquor Services v Mvumbi NO.12
There, the court said:
‘It is elementary that litigants are ordinarily entitled to reasons for a judicial decision
following upon a hearing, and, when a judgment is appealed, written reasons are
indispensable. Failure to supply them will usually be a grave lapse of duty, a breach of
litigants’ rights, and an impediment to the appeal process. In Botes and Another v
Nedbank Ltd [1983 (3) SA 27 (A) at 28], Corbett JA pointed out that “a reasoned
judgment may well discourage an appeal by the loser”:

12 2010 (2) SA 92 (CC) para 15.

“The failure to state reasons may have the opposite effect. In addition, should the matter be taken
on appeal, as happened in this case, the Court of Appeal has a similar interest in knowing why the
Judge who heard the matter made the order he did.”’

[34] The Constitutional Court then cautioned that a court’s failure to furnish
reasons for its decision may well violate the right of access to courts; a grave
consequence. The court pointed out another critical consideration – that the
rule of law obliges judges not to act arbitrarily and to be accountable, which
they ordinarily do by giving reasons for their decisions, despite there being
no express constitutional or statutory requirement to do so.13 Providing
reasons therefore serves several critical roles, including explaining to the
litigants and the public at large, who have an interest in courts being open
and transparent, why a case is decided as it is, thus curbing arbitrary judicial
decisions, and provides guidance to the public in respect of similar matters.14

[35] In the result the appeal is upheld with costs of two counsel. Because the
court below was not properly constituted the matter had to be struck from
the roll. And because the application was in any event mischievous it is
appropriate to make a costs order in terms of s 83(17)(b) of the Act. The
order of the court below is accordingly substituted with the following:

13 Ibid in para 17.
14 Mphahlele v First National Bank of South Africa Ltd 1999 (2) SA 667 (CC) para 12.

‘The application is struck from the roll with costs of two counsel (to the
extent employed).’

_______________
MML MAYA
JUDGE OF APPEAL

APPEARANCES:
For appellants:    Owen Rogers SC (with him Renata Williams SC)
Instructed by the State Attorney
For Respondent:  TS Emslie SC (with him JL Van Dorstein)
Instructed by Van der Spuy, Cape Town
Hill McHardy & Herbst, Bloemfontein
THE SUPREME COURT OF APPEAL
REPUBLIC OF SOUTH AFRICA

MEDIA SUMMARY – JUDGMENT DELIVERED IN THE SUPREME COURT OF APPEAL

MEDIA SUMMARY – JUDGMENT DELIVERED IN THE SUPREME COURT OF
APPEAL

From:  The Registrar, Supreme Court of Appeal
Date:  1 December 2010
Status:  Immediate

Please note that the media summary is intended for the benefit of the media and does not
form part of the judgment of the Supreme Court of Appeal

The Supreme of Court of Appeal today upheld an appeal brought by SARS against the order
of the Cape Town Tax Court, which ordered the Commissioner for SARS to provide Sprigg
Investment 117 CC with adequate reasons for assessments made in relation to employees tax,
income tax and VAT.

The SCA found that the application Sprigg Investments brought before the tax court,
although procedural in nature in terms of s 83 (13) (d) of the Income Tax Act 58 of 1962,
was final in effect and, therefore, appealable and was a valid decision under s 86 A (1) of that
Act.

The SCA found further that the application to be furnished with adequate reasons for tax
assessments was merely antecedent to an objection to the assessments on  its merits and was
not a judicial review proceeding. The court held that the cogency of the reasons which Sprigg
Investments contested related to the merits of those reasons and was not yet relevant, and that
the question in the present proceedings was merely whether Sprigg Investments had
sufficiently been furnished with the Commissioner’s actual reasons for the tax assessments to
enable it to formulate an objection thereto.

The SCA concluded that the reasons already furnished by the Commissioner were adequate
for the purpose for which they were sought.

---ends---