Judgment summary
This judgment concerns an interlocutory application by MUK (Proprietary) Limited to strike out certain passages in the respondent's rule 31 statement. The passages targeted were paragraphs 345.9 and 353, which alleged wilful default by MUK, and the words 'managed or' in paragraph 37 of the statement. The application was brought in terms of Uniform Rule 23(2)(b) read with Tax Court Rule 42(1) [1].
The court also dealt with two condonation applications: one by the appellant for late filing of its rule 23(2)(a) notice, and one by the respondent for late filing of its answering affidavit. Both were granted [8, 11].
The court found that the allegations of wilful default were directly relevant to the appellant's second point in limine, which invoked the five-year time limit under Article 9(3) of the Convention Between the Republic of South Africa and the Swiss Confederation for the Avoidance of Double Taxation with respect to Taxes on Income, 2009. The court similarly found that the words 'managed or' were relevant to the question of whether MUK was a connected person to the foreign entities. The application was dismissed with costs [Order].
Background
MUK (Proprietary) Limited is a private company incorporated and registered under South African law, with its principal place of business at Office xxx, one Boulevard, Johannesburg, Gauteng [4].
On 24 March 2017, the Commissioner initiated an income tax audit of MUK in respect of the 2011 to 2013 years of assessment [7]. Following the audit, the Commissioner issued a Letter of Audit Findings asserting that section 31(2) of the Income Tax Act 51 of 1968 applied to four transactions in which various non-resident entities connected to MUK did not earn an arm's length return [7].
The Commissioner raised additional assessments in January 2020 following a transfer pricing analysis [6]. In its notice of appeal, MUK raised two points in limine. The second point in limine, which is relevant to this application, asserted that the additional assessments were unlawful by reason of the time limit imposed by Article 9(3) of the Convention Between the Republic of South Africa and the Swiss Confederation for the Avoidance of Double Taxation with respect to Taxes on Income, 2009 [7].
Core dispute
The appellant sought to strike out three portions of the respondent's rule 31 statement [2].
First, paragraph 345.9, which alleged that MUK's omission to account for the notional arm's length income constituted a wilful default, such that no five-year time bar applied to the raising of the additional assessment [2.1].
Second, paragraph 353, which alleged that even if raising the additional assessment constituted a 'change of profits', the Commissioner was entitled to do so because of MUK's wilful default in failing to account for the notional arm's length consideration at the time the transactions were effected [2.2].
Third, the words 'managed or' appearing in paragraph 37 of the rule 31 statement, which formed part of the Commissioner's assertion that RMI managed or controlled MUK, making MUK a connected person in relation to AMT and KT [2.3].
The appellant argued that these passages were impermissible new grounds of assessment or constituted a novation of the factual and legal basis of the disputed assessments, and were therefore irrelevant, and in the case of the wilful default allegations, also scandalous and vexatious [16, 17, 18]. The respondent opposed the application, arguing principally that the founding affidavit made no case for striking out the identified passages [1].
Court findings
On condonation, the court granted condonation to the appellant for the late filing of its rule 23(2)(a) notice, finding it in the interests of justice to do so [8]. The court also granted condonation to the respondent for the late filing of its answering affidavit, which was due on 6 February 2025 but delivered on 24 June 2025, exercising its discretion in the interests of justice [11].
On the applicable legal principles, the court reproduced the Constitutional Court's definition of 'scandalous', 'vexatious' and 'irrelevant' from Helen Suzman Foundation v President of the Republic of South Africa and Others. An irrelevant allegation is one that does not apply to the matter in hand and does not contribute one way or the other to a decision of that matter [13].
On the wilful default allegations, the court found that Article 9(3) of the DTA expressly excludes the five-year time bar in cases of fraud or wilful default [18]. The appellant's second point in limine invoked that time bar. The respondent's allegation of wilful default was a direct response to that point in limine. The court held that if the court entertaining the appeal agreed with the respondent, that would dispose of the appellant's point in limine. The allegation therefore contributed to a decision on the issue at hand and was relevant. The application to strike out paragraphs 345.9 and 353 accordingly failed [19].
On the words 'managed or' in paragraph 37, the court found that the words were taken directly from paragraph (d)(vA) of the definition of 'connected person' and that, read in context, the point being made was about control. The court further held that the allegation was relevant because, if accepted by the court entertaining the appeal, it would uphold the connection between MUK and the foreign entities that lay at the heart of the Commissioner's grounds of assessment [21, 24]. The court also noted that the attack on the words 'managed or' was inconsistent with settled rules of interpretation as set out in Natal Joint Municipal Pension Fund v Endumeni Municipality, which require language to be understood in context [22].
The court observed that the alleged conflict with rule 31(3) was irrelevant to the test for striking out, and that the bases for the Commissioner's additional assessments had always been the connection between MUK and the foreign entities, being RMI, AMT and KT [25].
On the respondent's own application to strike out portions of the appellant's founding affidavit on the basis that it contained legal argument, the court found no reason to exercise its discretion in the respondent's favour and dismissed that application as lacking merit [26].
Outcome
The application to strike out various passages in the respondent's rule 31 statement was dismissed with costs, including the costs of two counsels [Order].
Major issues / areas of contention
- Whether the appellant's application to strike out was filed in time and, if not, whether condonation should be granted.
- Whether the respondent's answering affidavit, filed without a condonation application, should be admitted, and whether condonation should be granted to the respondent.
- Whether the allegations of wilful default in paragraphs 345.9 and 353 of the respondent's rule 31 statement were scandalous, vexatious and/or irrelevant.
- Whether the wilful default allegations constituted impermissible new grounds of assessment or a novation of the basis for the disputed assessments.
- Whether the words 'managed or' in paragraph 37 of the respondent's rule 31 statement were vexatious and/or irrelevant.
- Whether the words 'managed or' constituted impermissible new grounds of assessment or a novation of the basis for the disputed assessments.
- Whether the respondent's application to strike out portions of the appellant's founding affidavit on the basis that it contained legal argument should succeed.
- Whether the five-year time limit in Article 9(3) of the South Africa and Switzerland Double Taxation Agreement applied to the Commissioner's additional assessments, given the exception for wilful default in that article.