Questions:
(a) Discuss the concept of “Best Judgment Rule” Applicable in Tanzania
(b) Madiba and Co LTD was incorporated in 2012 and started carrying on business in the same year. Since then, the corporation has been furnishing return of income tax and dully paying tax assessed thereon. On 2015 the Commissioner of income tax suddenly raised additional assessment in respect of the year income 2013,2014.the Company contests that the said additional assessment are invalid as they contravene the rule of finality of assessed. What are their chances of success?
Answer:
In answering these two questions we shall consider few tips:
- The meaning of tax
- Types of tax
- Rationale of tax
- Meaning of best judgment rule
- The Facts and Applicability of the Doctrine of Finality of Tax Assessment
- The Chances of Success of Madiba And Co Ltd
- Exceptions to the Finality Rule
INTRODUCTION
It is generally difficult to define what a tax or taxation is. In broad terms, a tax may be defined as a required payment to the government. However this is both an inclusive definition. This is because not all the required payments to the government are taxes. Sometime tax may refer to mean some amount of money to be paid by the people or business to a government for the public purpose.
Another way of defining tax is a Compulsory contribution or financial charge which is normally imposed on an individual or legal entity and imposition is done by state. The only authority which can impose tax is state.
But according to the Oxford Dictionary quoted by Luoga in The Source Book of Income Tax in Tanzania, A tax is defined to mean a compulsory contribution to support the government levied on persons, property, income, commodities, transaction. But according to most of these countries, used to define the term tax are as monetary contribution unilaterally imposed under public law which serves in part to raise revenues and it is payable to public authorities.[1]Also in the eyes of the Black’s law dictionary[2] tax is defined to mean a monetary charge imposed by the government on persons, entities, transactions, or property to yield public revenue.
The rationale behind of the aspect of the state to impose tax to its people, it has a paramount importance to the government because it’s the source of income and economic of the state and help to run government matters. The government runs its matters depending to taxes payable by the people in relation to activities that run within the government. Also it’s important to remember that taxes can be classified in number of different ways. But in case of Tanzania taxes can be classified in two ways, which is Direct and Indirect.
Direct tax refers to income derived either from employment or business. Whereas Indirect tax these are taxes on goods and services, including sales and excise taxes on imports, which are largest source of revenues in Tanzania. Excises should be confined to a narrow range of goods such as alcoholic drinks, beverages.
Therefore due to that, every person who have a responsibility to pay tax has to pay to avoid his/her to be liable, and any person who receive income during a year of income, may be Investor, on employments, Business will be liable to pay tax, unless exempted from the Income Tax Act imposed by the state to the government as a statutory requirements as per Section 4 of Income Tax Act, and the imposition of tax is to tax on income or profit and not capital.
Example; the requirement of paying tax was elaborated in the case of IRC V.Duke of Westminster[3]Where it was held that Everyman is entitled to pay tax, if he can to order or operate business and thus cannot be avoided to any taxpayer.
There is no legal definition of tax or taxation. The Oxford dictionary defines tax to mean a compulsory contribution to the support of the government levied on persons property, income, commodities, transaction and so on, at fixed rate mostly proportionate to the amount in which contributions is levied.[4]According to Tiley Jin the book Revenue law 3rd Edition London 1981[5]he says that tax still begs for a definition any tax must have legal sanction. Tax can be classified in number of ways for example head tax, income tax, a wealth tax, commodity tax, user tax and a value added tax.[6]
The objective of tax are to seek and knowledge of the potential role that a tax system can play in achievement of goals aim of government is need for revenue , mobilization of capital for capital formation, allocation of resources, stabilization of economy and distribution of wealth[7].
THE BEST JUDGMENT RULE:
The phrase “best of his judgment” carries no statutory definition, but was judicially defined in the case of GUNDA SHUBBAYA VS. CIT[8] to mean that the Commissioner must have material on which to base hisassessments must not be capricious, and is not entitled to make a guess without evidence, in that, he must himself take steps to procure material for the purpose if it is not already in his possession. The Commissioner in this regard has power to call witnesses and can make his own enquiries.
In the case of WILD SPIRIT SAFARIS LTD. V. COMMISSIONER GENERAL INCOME TAX[9]since other tour operators of the standard of the Appellant Company in Arusha used to charge between 130 and 150 US Dollars for handling a single tourist per day, the Respondent did not error by using his decision on the common rate of 130 US Dollars as service charges per tourist per day;in the absence of satisfactory evidence to the contrary, the Tribunal is unable to interfere with the Respondent’s best judgment in this case;In CIT VS. GIAN SINGH[10] the defendant neglected to submit a return of income. The Commissioner assessed him to income tax on estimated income. He did not object or appeal against the assessment. Having failed to pay the tax due after the demand note was served; the Commissioner sued him for the tax and penalties. The defendant claimed that the assessments were excessive.The court held that. The Commissioner may raise an estimated assessment in the absence of a return even though non-delivery of the return is due to circumstances such as being lost in the post.
Note, however, taxpayers must be given an opportunity to submit a return before valid estimated assessment can be made.In the case of MANDAVIA VS. CIT[11] the Appellant was assessable to income tax for the years of income 1943-51. He had not been required to make a return for all that time. Subsequently he gave oral notice of his liability to the charge of income tax in respect of the period in question. In 1953 the Commissioner sent notice requiring him to submit returns. But prior to the time for making such returns had expired the Commissioner raised assessments on his estimated income subject to final adjustments under sub-section 71 .The Privy Council held that granting the taxpayer an opportunity to make a return is a condition precedent to assessment under section 71. Before making an assessment under section 71 the time allowed for submitting returns under section 59 and 57 must elapse otherwise the assessments will not have been validly made.
In the case of PARASTATAL PENSIONS FUND V. COMMISSIONER GENERAL[12]in this case the application was refused. Aggrieved by the refusal, the Applicant brought this reference before the Board objecting the Respondent’s refusal and praying for an order to compel the Respondent to grant to the Applicant the relief for error as provided for under section 98(2) of the Act. The Respondent opposed the application arguing that the application could not be granted because he made a best judgment assessment under section 79(2)(b) and that the applicant was not assessed under section 79(2)(a) of the Act. The court held that where the Respondent has reasonable cause to believe that a return of income delivered to him by a tax payer is not true and correct, he is not supposed to make any adjustment on it but to reject it altogether and put it aside and the Applicant in this case was assessed for tax by the Respondent not under section 79(2)(b) but under section 79(2)(a) of the Income Tax Act, 1973
In AT VS. CIT[13]the appellant had made no returns for the years of income 1952-55. The Commissioner sent him notice to submit returns in one month form the date of issuing notice. Such time was less than the statutory period. The Commissioner allowed an extension of time but no returns were submitted. Subsequently estimated assessments were made on each year of income for the period.
It was held that the notice requiring the returns of income were invalid as they did not give the appellant minimum statutory time in which to submit the returns. Further that a notice requiring a return to be submitted by a taxpayer in less than the statutory time is void ab initio and an extension will not cure the irregularity. The right to assess under section 71 (i.e. the current sub-section 79 (3)) arises from giving a valid notice requiring return under section 59 (the current sub-section 57 (2). Therefore the estimated assessments by the Commissioner were held to be invalid.
THE FACTS AND APPLICABILITY OF THE DOCTRINE OF FINALITY OF TAX ASSESSMENT
Estimated normal assessment; here the commissioner for tax shall raise estimated normal assessment where in occurrence of the following incidences, one where the return submitted found to be unreliable as per section 79(2) (b) of the Income Tax Act. Second, where the taxpayer has not submitted a return while the Commissioner has already served the Notice as per section 79(3). In GUNDA SHUBBAYYA VS CIT[14]gives the meaning of “the best Judgment Rule” in which he is supposed to have materials as evidence during assessments.
Adjusted Tax Assessment; it happens where the taxpayer escaped from being assessed or delayed from paying tax[15], hence under this circumstances the Commissioner for Income tax can make additional assessment as per section 83, 95(2) of the Income Tax Act.[16]In JONES VS MASON INVESTMENT LTD held that, the Commissioner can apply adjusted tax assessment where there are grounds to do so.
Jeopardy Tax Assessment; the Commissioner for Income Tax can make an assessment and raise the tax where in the incidence that the taxpayer is about to leave the United State of Tanzania permanently, as per section 81 of the Income Tax Act [17]
RULE OF FINALITY OF TAX ASSESSMENT
This is a stage of decision whereby the General Commissioner has conclusive power to make an assessment to tax in which it is not subject to challenges unless otherwise taxpayer appeals to The National Tax Appeals Board and lastly to The Tax Appeals Tribunal[18], as per section 15 of the Tax Revenue A appeals Act. This happen where taxpayer has not sent notice of objection, there is no appeal or assessment has finally determined on appeal. In PERKIN VS CATTEL[19]held that, if the Revenue authority seems to justice in assessing tax then there could be no doubt and interference to the authority.
THE CHANCES OF SUCCESS OF MADIBA AND CO LTD ARE AS FOLLOWS
The concept of assessment is to be found in the Simons Income Tax, Volume 1, 1964 -–65, at Page 174, Paragraph 501. In this volume, “assessing” means the process of making assessments of income or tax and it covers the process from the examination of the completed return forms to the issuance of the notices of assessment showing the amount of tax payable.
According to the scenario Madiba and Co. Ltd will not succeed in the ground that, the additional assessment is contravening the Doctrine of Finality of Assessment because the additional assessment enshrined by law as per section 96 (1) of the Income Tax Act as it provides that the commissioner may raise tax basing on facts if proper to do so. In Jones Vs Mason Investment Ltd it was held that, the Commissioner may apply adjusted tax assessment in appreciation with fact.
Assessments have to have an end to facilitate and expedite smooth collection of taxes. Sub-section 95 91) provides that an assessment shall be final and conclusive if, no notice of objection has been given; andwhere notice of objection has been given. There is disputed assessment under section 93 (3) but no appeal has been preferred.The assessment has been finally determined on appeal.
HOWEVER, SUB-SECTION 95 (2) GIVES TWO EXCEPTIONS TO THE FINALITY RULE, NAMELY:
The Commissioner, despite the finality envisaged in sub-section 95 (1), can raise additional assessment for any year of income, provided that, in so doing he does not re-open any matter which has been determined on an appeal or an assessment for such year of income.
The commissioner, may, however, raise an additional assessment which re-opens a matter which has been determined on appeal where fraud or willful neglect has been committed by or on behalf of any person in connection with or in relation to tax for any year of income.[20]
Additional assessment should proceed since it’s possible for taxpayers to have businesses which grow every day, hence under principle of “pay as you earn” the commissioner may make additional tax.
CONCLUSION
The presence of evasion and avoidance of tax normally practiced by taxpayers hence there is a need of additional assessment with no doubt as always done by Income tax Commissioners.Therefore MADIBA and Co. will not succeed because the Commissioner may make adjustment in tax as in accordance with the law as per section 96 (1) of the Income Tax Act as amended from time to time.
[2]Black's Law Dictionary (8th ed. 2004) , Page 4560
[3] (1971) CTC,
[4] Oxford dictionary Advanced learners
[5] Income Tax law theory
[6]Lipumba, N. H. I., L. A. Msambichaka, et al., Eds. (1984).
[7] Sourcebook of income tax law in Tanzania Luoga F.D.A.M
[8](1939) 1 ITR 21
[9]Appeal No. AR 1 Of 2001
[10]3 EATC 24
[11]2 EATC 426.
[12]In the Tax Revenue Appeals Board at Dar Es Salaam Income Tax Application No. Dsm 2 Of 2002
[13]2 EATC 370.
[14] (1939) 7 ITR 21
[15] L.F.D.A Makinyika, A Sourcebook of Income Tax Law in Tanzania Pg. 187
[16] (CAP 332 RE 2010)
[17] L.F.D.A Makinyika, A Sourcebook of Income Tax Law in Tanzania Pg. 187
[18]Ibid
BIBLIOGRAPHY
BOOKS
- Kimambo, I. N. and A. J. Temu, Eds. (1969).A History of Tanzania. Nairobi, East African Publishing House.
- L.F.D.A Makinyika, A Sourcebook of Income Tax Law in Tanzania
- Lipumba, N. H. I., L. A. Msambichaka, et al., Eds. (1984).Economic Stabilisation Policies in Tanzania.Dar es Salaam, Economics Department & Economic Research Bureau, University of Dar es Salaam.
- Luoga, F. D. A. M. (1988). Ability to Pay: The Basis for Fair Income Taxation in a Developing Country: A Study of the Tanzanian Income Tax Act, 1973. LL M. Kingston, Ontario, Queens University.
