Posted in sections, this is my Doctoral Thesis on taxpayers rights when audited by the tax authorities in South Africa – equally applicable to many English-based law systems in Africa and abroad (eg. India). This will be of particular use to any tax practitioners doing work in Africa and in other English-based legal systems around the world.

Analysis Of Challenging The Commissioner’s Discretionary Powers In Auditing Taxpayers under The Constitution Of The Republic of South Africa

2.4 THE RELEVANCE OF PAJA AND THE PRINCIPLE OF LEGALITY

2.4.2 The principle of legality
The principle of legality was considered as an aspect of the rule of law in Fedsure Life Assurance Ltd v Greater Johannesburg Transitional Metropolitan Council116 where the Constitutional Court held that local government may only act within the powers lawfully conferred upon it: ‘(I)t is a fundamental principle of the rule of law,117 recognised widely, that the exercise of public power is only legitimate where lawful. The rule of law – to the extent at least that it expresses this principle of legality – is generally understood to be a fundamental principle of constitutional law…’.118

In President of the Republic of South Africa and another v South African Rugby Football Union and others119 the Constitutional Court held that public power must be exercised in good faith and in exercising those powers, should not be misconstrued. In this regard:

[148]… the exercise of the powers must not infringe any provision of the Bill of Rights; the exercise of the powers is also clearly constrained by the principle of legality. (Emphasis supplied)

The Constitutional Court has made it clear that, in accordance with the constraints placed on public power by the rule of law and the principle of legality, the exercise of all public power is subject to the Constitution. This gives taxpayers the opportunity to review any conduct of SARS that is contrary to the rule of law (including the principle of legality), without having to ‘claim space and push boundaries’ to find means of controlling public powers.120

In the Pharmaceutical Manufacturers case,121 the Constitutional Court established the following:

[85]It is a requirement of the rule of law that the exercise of public power by the Executive and other functionaries should not be arbitrary. Decisions must be rationally related to the purpose for which the power was given, otherwise they are in effect arbitrary and inconsistent with this requirement…

[86] The question whether a decision is rationally related to the purpose for which the power was given calls for an objective inquiry. Otherwise a decision that, viewed objectively, is in fact irrational, might pass muster simply because the person who took it mistakenly and in good faith believed it to be rational. Such a conclusion would place form above substance, and undermine an important constitutional principle. (Emphasis supplied)

These principles are not unique to the Executive. The Constitutional Court made specific reference to ‘other functionaries’. This would include SARS. Hence, in relation to the exercise by SARS of its powers under ss 74A and 74B, the rule of law including the principle of legality will at the very least require the following, that:

(a) the exercise of SARS’ power must fall within the powers lawfully  conferred upon them in terms of the Constitution (ss 1(c) and 41(1)), and must not be arbitrary or irrational;122

(b) the decision taken to request information, documents or things must be rationally123 related to the purpose for which the power was given,124 namely, for ‘the administration of the Act’, as defined in s 74 of the Income Tax Act;

(c) this requirement must be satisfied so as not to fall short of the standards demanded by the Constitution, which would include compliance with the principle of legality generally, and various constitutional obligations such as s 195(1) of the Constitution; and

(d) merely accepting that the person making the decision has done so mistakenly and in good faith, believing it to be rational, would place form over substance, undermining the applicable constitutional principles.

The principle of legality and the duty imposed by s 7(2) of the Constitution that the State must respect, protect, promote and fulfil the rights in the Bill of Rights are also well illustrated in the unanimous decision of the Constitutional Court in Mohamed and Another v President of the Republic of South Africa and Others.125 In this case, the Constitutional Court found that immigration officers, in handing over ‘Mohamed’ to the Federal Bureau of Investigation in the United States of America without getting at the very least a guarantee from the United States government that he would not be subject to a death sentence on conviction, was a gross transgression of the values inherent in the Constitution ‘… and contrary to the underlying values of our Constitution. It is inconsistent with the government’s … and it ignores the commitment implicit in the Constitution that South Africa will not be party to the imposition of cruel, inhuman or degrading punishment.’ Having found that the conduct of the state in handing over Mohamed to the United States was unlawful, the Court went on to state that it was a serious finding as the State lead by example: ‘If the government becomes a lawbreaker, it breeds contempt for the law; it invites every man to become a law unto himself, it invites anarchy.’

In applying these principles to ss 74A and 74B when making a decision to request information, documents or things, SARS must protect taxpayers’ constitutional rights, uphold their constitutional obligations, and not break the law. If not, its actions (by analogy) will be seen to breed contempt for the law. SARS must lead by example. The legitimacy of the constitutional order is undermined when SARS acts unlawfully, unreasonably or without procedural fairness and adequate reasons. This conclusion is supported by the clear obligation placed upon SARS to diligently and without delay perform its obligations in terms of the Constitution. The principle of legality can be viewed in a broad sense to mean that SARS must, in the first instance, uphold the principles and values of the Constitution in exercising any  decision or executing any conduct. It must comply with the jurisdictional facts of ss 74A and 74B read with the definition of ‘administration of this Act’ in s 74, and comply with its constitutional obligations set out in ss 1(c), 33, 41(1), 195(1) and 237 of the Constitution. SARS must do so diligently and without delay.126 This means, inter alia, that SARS cannot: exercise power not conferred upon it in terms of the Constitution; ignore its constitutional obligations such as those in terms of s 195(1) of the Constitution; and, exercise power arbitrarily and merely in good faith, in the belief that its decision is rationally127 related to the purpose for which the power was given, albeit mistakenly. This would give credence to form over substance, undermining constitutional principles. To transgress these provisions in the Constitution would amount to conduct that is unlawful and ultra vires128 the Constitution and ‘invalid’.

In practice, the first inquiry as to the reviewability of ‘invalid’ conduct by SARS would be to determine whether that conduct is ‘administrative conduct’ under PAJA, and then subject to the codified grounds of review in s 6(2) of PAJA. If this step is not satisfied, the ‘accountability vacuum’ referred to by Professor Hoexter above129 is filled by the taxpayer relying upon the principle of legality in reviewing the ‘invalid’ conduct by SARS. The applicable review actions available to taxpayers both through PAJA, or the principle of legality, are discussed and analysed in this thesis.

The conclusion was reached in 1.3: A Constitutional Balance of SARS’ Powers and the ‘Administrative Action’ Debate above that the definition of ‘administrative action’ includes a transgression by SARS of its constitutional obligations in ss 1(c),  33,41(1) and 195(1) of the Constitution when SARS make a decision in terms of ss 74A and 74B. SARS must: comply with the rule of law, only assume powers as provided for in the Constitution; apply just administrative action; display a high standard of professional ethics; provide efficient economic and effective use of resource; provide services that are provided impartially, fairly, equitably and without bias; respond to the people’s needs; and, act in an accountable and transparent manner, by providing the public with timely accessible and accurate information.130

One of the emerging problems with s 195(1) of the Constitution is that, although it regulates Public Administration generally by imposing constitutional obligations SARS (an organ of State), the Constitutional Court has held that it does not give rise to justiciable rights – Chirwa v Transnet Limited and Others:131

[76] Therefore although section 195 of the Constitution provides valuable interpretive assistance it does not found a right to bring an action.

The claimant attempted to raise s 195(1) as support for a justiciable right the party had. The Constitutional Court was not impressed with the argument, simply stating s 195(1) does not create a set of justiciable rights. They do however creating duties and obligations that must be fulfilled, otherwise conduct is inconsistent with the Constitution. In threcent Constitution Court decision in Glenister v President of the Republic of South Africa and Others132 the court held that the High Court had jurisdiction to hear applications challenging the non-fulfilment of constitutional obligations such as ‘to act reasonably and accountably; to cultivate good human resource management; to respect international treaty obligations; … and to respect values enshrined in the Bill of Rights.’ It is submitted, similarly, the failure by SARS to adhere to its constitutional obligations such as ss 1(c), 33, 41(1) and 195(1) of the Constitution, read with s 4(2) of the SARS Act, is unlawful and would be the non-fulfillment of constitutional obligations as envisaged in theGlenister case,133 bringing such failure by SARS to act consistently with the Constitution within the ambit of a judicial review on grounds of unlawfulness, with the resultant remedies available to the taxpayer through s 172(1) of the Constitution in terms of s 6(2) of PAJA, or the constitutional principle of legality.

Next:  2.4.3 Recent developments in the principle of legality

In accordance with Circular 230 Disclosure

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Footnotes:

116 1998 (12) BCLR 1458 (CC) to para’s [56]-[57].
117 Footnote to para [56] – see Dicey, Introduction to the Study of the Law of the Constitution 10ed. (Macmillan Press, London 1959) at 193, in which Dicey refers to this aspect of the rule of law in the following terms: ‘We mean in the second place, when we speak of the ‘rule of law’ as a characteristic of our country, not only that with us no man is above the law, but (what is a different thing) that here every man, whatever be his rank or condition, is subject to the ordinary law of the realm and amenable to the jurisdiction of the ordinary tribunals. … With us every official, from the Prime Minister down to a constable or a collector of taxes, is under the same responsibility for every act done without legal justification as any other citizen.’ [footnotes omitted] (Emphasis supplied)
118See also, for example, Reference Re Language Rights under the Manitoba Act, 1870 [1985] 19 DLR [4th] 1 at 24, where the Supreme Court of Canada held that: ‘The Constitution, as the supreme law, must be understood as a purposive ordering of social relations providing a basis upon which an actual order of positive laws can be brought into existence. The founders of this nation must have intended, as one of the basic principles of nation building, that Canada can be a society of legal order and normative structure: one governed by rule of law. While this is not set out in a specific provision, the principle of the rule of law is clearly a principle of our Constitution.’ 119 2000(1) SA 1 (CC) at para [148]; See also section 3.3: Lawfulness infra and 3.3.3.2: Mala Fides or Bad Faith infra.
120Pharmaceutical Manufacturers case op. cit. at para [45].
121Ibid. at para’s [85]-[86].
122Ibid. at 261.
123Pharmaceutical Manufacturers case supra footnote 11 at para [45]; See also University of Cape Town v Ministers of Education & Culture (House of Assembly & House of Representatives) 1988 3 SA 203 (C); LAWSA Volume 1 2nd ed Administrative Law Lexis Nexis at para 139 footnote 6; ‘In order to establish a prima facie case for enforceability of an Internal Revenue Service summons, plaintiffs must plead: (1) that the investigation has a legitimate purpose and that the inquiry may be relevant to that purpose, (2) that the information sought is not already within the Government’s possession, and (3) that the Government has followed the procedural steps required by the Internal Revenue Code’: US v McCarthy 514 F 2d 368.
124Ibid. at para [45].
125 2001(3) SA 893 (CC) at para’s [37], [48], [52], [53], [58], and [68] and quoting Justice Brandeis in Olmstead et al. v United States 277 U.S. 438 (1928), a case about using unlawfully obtained evidence from wire tapping violations.
126Section 237 of the Constitution.
127Pharmaceutical Manufacturers case op. cit.; University of Cape Town v Ministers of Education & Culture (House of Assembly & House of Representatives) 1988 3 SA 203 (C); LAWSA Volume 1 2nd ed Administrative Law Lexis Nexis at para 139 footnote 6.
128 See section 3.3: Lawfulness infra.
129 Hoexter (2012) at page 248.
130 Sections 41(1)(f) and 195(1)(a), (b), (d), (e), (f) and (g); Mpande Foodliner CC v C SARS 63 SATC 46 at pages 51 and 64.
131 2008 (4) SA 367 (CC) at [74] – [76], [146] and [195].
132 2011 (3) SA 347 (CC) at para’s [13] and [22].
133 Ibid.