Follow due process, yes but be reasonable!

Condonation for the late filing of legal documentation depends on whether the interests of justice will be served by the court granting such condonation

IN TAXPAYER M v CSARS (Case Number VAT1826) heard by the Gauteng Tax court, Windell, J handed down an important decision regarding the validity of a default notice (and the resultant impact on the default judgment application) and the application of judicial precedent to the facts under consideration for condoning an application for the late filing of court documents.

This article sets out the facts before the court and the applicable legal principles considered by the court in reaching its decision.

Legal framework

The legal provisions considered in this case relate to the tax dispute provisions in Chapter 9 of the Tax Administration Act 28 of 2011 ('the TAA'), and the Rules governing the procedures to be followed by a taxpayer and SARS in the event of a dispute (published in terms of Section 103 of the TAA). These Rules are of equal status to regulations and similar subordinate legislation.

Specifically, this case was concerned with the application of Rules 31, 52 and 56, as well as Section 129(2) of the TAA.  In short -

• When a taxpayer has lodged a notice of appeal against SARS' disallowance of an objection, Rule 31 requires SARS to deliver to the taxpayer a statement of the grounds of assessment and opposing the appeal ('the Statement') within 45 days after receiving the documentation.
• In terms of Rule 56 the taxpayer may deliver a notice to SARS if it has failed to comply with the aforementioned period informing SARS of the intention to apply to a tax court for a final order under section 129(2) ('the Default Notice'), and to subsequently approach the tax court if the default is not remedied by SARS within 15 days of that Notice.
• Rule 52(6) provides that if a party (i.e. SARS) failed to deliver a Statement as and when required under Rule 31, they may apply to the tax court for an order condoning the failure to deliver the Statement and the determination of a further period within which the Statement may be delivered.
• Section 129(2) empowers a tax court to order that an assessment is altered (together with alternative orders which are not relevant for the current purposes).
• The tax court may then either make a decision in terms of Section 129(2) or require the defaulting party to remedy the default within a time which the court deems appropriate in terms of Rule 52(6) or Rule 56(2).

Matters for consideration before the court

The parties' requests to the court were as follows:

• The taxpayer (the Applicant) requested that SARS' understatement penalty assessments totalling R175 million should be set aside.
• SARS (the Respondent) opposed the request for default judgment and brought a counter-application requesting condonation for its failure to file the Statement timeously.
• The taxpayer opposed SARS' application for condonation.

The main legal issues for determination by the court were:

• Whether SARS has shown good cause for its default to timeously file the Statement and whether the court should condone this late filing and direct that the taxpayer's appeal (against the imposition of understatement penalties) should proceed on the merits.
• If SARS' failure is not condoned, whether default judgment (in terms of rule 56(1)(a), read with section 129 of the TAA) should be granted in favour of the applicant.

Background facts

SARS raised VAT assessments for the taxpayer's 2013/11 and 2014/07 tax periods resulting in understatement penalties amounting to R175 million being levied by SARS. The taxpayer objected to these assessments, which SARS disallowed. The taxpayer thereafter delivered a notice of appeal against the disallowance of objection letter on 3 June 2019.

The parties then suspended litigation on this matter so that the legal representatives of each of the parties could meet to ventilate the issues as outlined below.

After some time, the taxpayer applied for a default judgment to set aside the understatement penalties, claiming that SARS failed to file the Statement for a period of nearly two years (i.e. the period between August 2019 and July 2021) and was accordingly in default of the period prescribed by the Rules.

SARS disputed that it was in default for this full period as they (SARS and the taxpayer) had an agreement (reached on 1 August 2019) to suspend litigation, which agreement only lapsed in April 2021 (i.e. when the taxpayer filed the Default Notice).

The court considered in detail the timeline of events as from the date when the notice of appeal against SARS' disallowance of the objection letter was delivered by the taxpayer.

We provide a schematic summary below showing the relevant dates that were considered by the court in determining whether there was a default by SARS, the validity of the taxpayer's Notice, and whether SARS' default warranted a condonation.

Decision of the court

The court set out the different elements which needed to be considered in arriving at its decision regarding the SARS condonation application, namely:

Was there an agreement to suspend litigation?

On the objective facts, the court found that there was an agreement-and therefore SARS was not, as alleged by the taxpayer, in default of filing its Statement for a period of almost two years.

When did the suspension lapse?

On the facts, the court found that there was no default by SARS prior to 21 June 2021 due to the agreement for all litigation to be suspended. The agreement was only terminated (at best) on 15 April 2021 (when the Default Notice was served to the incorrect address).

The validity of the Default Notice

The court considered whether the Default Notice was in fact a notice as envisaged in Rule 564. On the facts, the court found that the notice was invalid as:

• There must have been a default by SARS prior to the delivery of the Rule 56 notice (i.e. the Default Notice). The taxpayer should have served a formal Rule 56(1) notice on SARS to give it 15 days to file its Statement. The taxpayer failed to give SARS the further 15-day period required in terms of Rule 56(1), instead the taxpayer immediately filed the default application.  Accordingly, the applicant's default application was premature and fatally defective; and
• The Default Notice relied on SARS' failure to advise whether alternative dispute resolution ('ADR') proceedings would be appropriate instead of relying on SARS' failure to file a Rule 31 statement. The court held that the taxpayer's case advanced in the default application was in conflict with its 'Rule 56 notice'. As the understatement penalty dispute could never qualify for ADR, the Default Notice does not constitute a valid notice and SARS was not placed in default by this notice.

Explanation by SARS for the default

SARS had to file its Statement on 21 June 2021, but only filed it on 21 July 2021. SARS explained that the late filing resulted from delays caused by SARS' attorney of record falling ill with COVID-19 and SARS' counsel incorrectly diarising the filing date (as 25 June 2021).

SARS requested an extension for the filing at this time, which was refused by the taxpayer. During this time SARS' counsel contracted COVID-19 and was out of office until 19 July 2021, and on 20 July 2021 SARS attempted to serve the application for condonation for late filing electronically.

In the meantime, the taxpayer had served the application for default judgement on 29 June 2021. The court found that on this timeline, SARS was only in default for a short period of time and that the delay did not result from any non-compliance on SARS' part, but rather as a result of the conduct of its attorney and counsel.

The court was careful to not create a precedent in which the conduct of legal practitioners excused litigants from the relevant statutory timelines (it was expressly stated that this would not be the case), but it held that considering that the non-compliance by the legal practitioners was not severe nor attributable to any fault of the litigant, "the court will be loath to close the doors of the court to such litigant. Specifically, where the blame on the part of the [legal] representative is slight and the prejudice to the litigant would be severe."

Prospects of success in the tax appeal

Based on legal precedent, the test for condonation is whether it is in the interests of justice to grant condonation.  Relevant factors for consideration include (but are not limited to) -

• the extent and cause of delay;
• prejudice to other litigants;
• reasonableness of the explanation for the delay;
• importance of the issues to be decided in the intended appeal; and
• prospects of success.

None of the abovementioned factors are however decisive-the court has to weigh these against each other and determine what the interests of justice dictate.  Whether it is in the interests of justice to grant condonation will depend on the facts and circumstances of each case.

The court held that the interest of justice requires that a dispute be adjudicated by an impartial forum, in accordance with the Rules and the provisions of the TAA.

The court considered the facts and circumstances of this case and found that:

• the potential prejudice to SARS, should the condonation for late filing of the Statement not be condoned, will be manifest as it will preclude them from defending the imposition of the understatement penalties;
• the taxpayer's opposition to the condonation application was unreasonable, as the period for which condonation was sought was slight and SARS provided a satisfactory explanation for the default; and
• there will be no significant prejudice to the taxpayer.

Accordingly, the court found in favour of SARS, and granted the condonation application with costs.

The takeaway

Parties in legal proceedings should follow due process when filing the (correct) legal documentation timeously.  However, this clearly depends on the facts of each case, and parties should carefully consider the applicable legislation (including the provisions of the TAA and the Rules).

When considering a condonation application for the late filing of legal documentation (whether it is filed by SARS or a taxpayer), the main consideration remains whether the interest of justice will be served by the court granting the condonation.

In the present case, the court held that the importance for litigants to have access to a court of law outweighs a default resulting from a slight time delay (where a satisfactory explanation can be provided for that delay), and where the prejudice to the litigant will be severe if the condonation is not granted.

WRITTEN BY MIRON SAREMBOCK

Miron Sarembock is a senior tax associate at PwC. This article was first published in the July 2022 edition of PwC's Synopsis.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your adviser for specific and detailed advice. Errors and omissions excepted (E&OE).