Whoops, Wrong Section! – July 2008
“If the exercise of a power can be traced to a legitimate source the fact that the same was purported to have been exercised under a different power does not vitiate the exercise of the power in question.”
J.K. Steel Ltd. v Union of India AIR (1970) 1173 at page 1187-88
It is becoming increasingly easy for the CIR and practitioners to rely on the wrong section of the Income Tax Act or the Tax Administration Act, or indeed on the wrong Act, in making returns, assessments and proposing or litigation of adjustments or disputes.
The evolution of cases over the past decade provides a level of assurance for both parties that a misdescription of the provision relating to the power to issue the assessment, adjustment or return will not be fatal.
However, absent the application of a continuity provision, it appears as if the misdescription of the substantive taxing act under which the assessment, adjustment or return is made, may be fatal.
Over the past century the duration of Income Tax Acts has become increasingly brief as shown by the following table:
|Land & Income Tax Act 1922||32 years|
|Land & Income Tax Act 1954||22 years|
|Income Tax Act 1976||18 years|
|Income Tax Act 1994||10 years|
|Income Tax Act 2004||3 years|
|Income Tax Act 2007||?|
Continuing this extrapolation we can expect that the current (2007) Income Tax Act (“ITA”) will be replaced in a matter of months by a 4000-page enactment.
Even if this does not happen, the hapless practitioner is faced with at least two old acts which apply to transactions entered into reasonably recently.
The CIR is in the same position. Assessing a transaction which took place over a number of years, the CIR may have to assess under a number of different acts. The complication is worsened because the 1994 act underwent a “rolling re-enactment” whereby the “core provisions” were replaced over the period 1997 to 1999. So within the same act, different provisions applied at different times.
In addition the Tax Administration Act 1994 (“TAA 1994”) replaced the administrative provisions of the ITA 1976 and the Inland Revenue Department Act 1974. So the provision under which an assessment (for example) is raised will depend on the tax year which is under assessment.
Legislative Response to Discontinuities
Each successive ITA and the TAA 1994 had a continuity and savings provision towards the back, similar to the current section ZA 3 ITA 2007 which materially provides:
SECT ZA 3 TRANSITIONAL PROVISIONS
When reference to this Act includes earlier Act
(1) A reference in an enactment or document to this Act, or to a provision of it, is to be interpreted as a reference to the Income Tax Act 2004, or the Income Tax Act 1994, or the Income Tax Act 1976, or to the corresponding provision of the earlier Act, to the extent necessary to reflect sensibly the intent of the enactment or document.
When reference to earlier Act includes this Act
(2) A reference in an enactment or document to the Income Tax Act 2004, or the Income Tax Act 1994, or the Income Tax Act 1976, or to a provision of that earlier Act, is to be interpreted as a reference to this Act, or to the corresponding provision in this Act, to the extent necessary to reflect sensibly the intent of the enactment or document.
There is however no equivalent for the reassessed provisions of the ITA 1994. Consequently a CIR’s assessment which, for example, wrongly assessed a 1999 tax year receipt as income under section BB 3 ITA 1994 as originally enacted, could not be deemed to be an assessment under the correct section in the “core provisions” re-enactment.
Administrative Law – Wrong Procedural Power
Whether jurisdiction over something, or to do something, exists, is an objective question to be decided by the Courts and not by the decision-making body. So it is said in Wade on Administrative Law (6th Ed 1988) at 280:
“Even though so many kinds of “going wrong” have now been brought within the scope of judicial review, it always remains true that there is some area of discretion within which the administrator has a free hand.
The principle of objectivity authorises the courts to define that area of freedom. It is only one of the many weapons in their armoury, but it is of primary importance. Without it they would be powerless to prevent serious usurpations. A public authority might then, by making some mistake as to the extent of its powers, do something which the statute never intended to permit. The object of the courts is to prevent this at all costs by standing guard over the frontiers of free discretion. In other words, the minister or other body must not be allowed to be the judge of the extent of his own powers.”
This concept, that the existence of jurisdiction is to be objectively determined by the Courts, is of fundamental importance to the scope of the CIR’s power to assess.
Cases on Wrong Assessment Power
In 2001 the Taxation Review Authority ruled that an assessment issued by the Commissioner of Inland Revenue was invalid solely because the officer responsible had referred to the incorrect section and purported to assess under the TAA 1994 instead of the ITA 1976, which was the Act which applied to the tax years in question: see Case V4 (2001) NZTC 10,045. In effect, the Authority found that, if an assessment can only be issued under a particular section, then if the officer purported to make that assessment under a different section, that assessment was invalid.
With respect, this decision appears to be both wrong on the facts presented to the Authority and on the application of administrative law. Within the year, the Authority itself reversed the effect of its decision and took the hitherto unprecedented step of imposing its own assessment on the taxpayer in place of the (said to be invalid) assessment originally issued by the Commissioner: see Case V 10 (2002) 20 NZTC 10,131.
In Case V4 the officer concerned:
· Had delegated authority to assess under the 1976 Act
· Undertook a mental process that calculated the taxpayer’s legal liability for, and quantum of tax, and
· Did so intending that it be a final quantification of the tax for the taxpayers for the years in question.
That being the case, objectively considered, the officer assessed the taxpayer within her power to do so. She did not act ultra vires or without authority. On the administrative law principles set out above it would appear that any mistake on the officer’s part as to the source of that power is as immaterial to the question of whether jurisdiction existed as would have been a false belief that she had jurisdiction, if she had not in fact so had it.
The wrongness of case V4 is evident from:
- The Authority’s own reversal of its decision, as noted above;
- English decisions which hold that misdescription of the source of the power that is being exercised does not invalidate the exercise of that power: Finbow v Air Ministry  2 All ER 647 (QBD), R v Hall  1 All ER 75 (CA), R v Dover Magistrates’ Court ex p Webb (Unreported QBD 18 March 1998 CO/4423/96, Lord Bingham CJ & Dyson J), upheld on appeal as R v Dover Magistrates’ Court Ex Parte Norman Lionel Webb (unrep  EWCA Civ 1858 (15th July, 1999) QBCOF 98/1609/4) and Burrells Wharf Freeholds Limited v Galliard Homes Limited (1999 HT37, QBD 1 July 1999, Dyson J).
- Five cases on point from the Supreme Court of India, all providing support for the proposition that if an official has a power, a wrong reference to another power will not vitiate the exercise of the power: Balakotoiah v Union of India AIR (1958) 232, Afzal Allah v State of Uttar Pradesh AIR (1964) 264, Hukumchand Mills Limited v State of Madhya Pradesh AIR (1964) 1329, J.K. Steel Ltd. v Union of India AIR (1970) 1173 (a revenue case) and P.R. Naidu v Government of Andhra Pradesh AIR (1977) 854
- The interlocutory proceedings relating to the CIR’s appeal from the decision in Case V4 itself. Those interlocutory proceedings involved whether the CIR had appealed from the Authority’s decision using the proper procedure: the CIR had appealed under section 26A Taxation Review Authorities Act 1994 in the belief that this new procedure governed appeals from all Authority decision given after 1997, regardless of the tax year to which that decision related. The Respondents said that was wrong, and that the correct appeal provision was in fact contained in the Inland Revenue Department Act 1974, as that Act governed the income year under appeal. O’Regan J held (CIR v Liburne Holdings & Others (2001) 20 NZTC 17,268) that the Commissioner’s view was correct. The 1994 Act governed the procedure for appealing. However, he also held that, even if the Commissioner was wrong and the appeal should have been filed under the 1974 Act, the appeal would still have been valid. He said at paragraph 52:
“If it had been necessary, therefore, I would have found that the notice filed with (or served on) the TRA on 6 April 2000 (being the original notice of appeal with the intituling subsequently corrected at the direction of the High Court staff, was sufficient compliance with s 43 of the Inland Revenue Department Act and sufficient to commence the appeal process under that provision.”
- Subsequent decisions of the Court of Appeal, most recently the Trinity decision, Accent Management Limited v CIR (2007) 23 NZTC 21,323, where it was held that the fact that the CIR may have assessed executors of a deceased estate under the wrong provision of the TAA did not invalidate the assessments.
- Even an unreported case from the Supreme Court of Zambia (Shilling Bob Zinka v The Attorney General (Unrep Supreme Court of Zambia 9/91, 5 July 1991, Silungwe CJ, Ngulube DCJ, Gardner, Chaila and Chirwa JJS)).
In summary on this point, as long as the assessing officer has the power to assess, and does what, objectively considered, amounts to an assessment, it does not matter if he or she points to the wrong section or even Act as the source of the power. The same applies to actions, such as issuing returns, NOPAs, or Court proceedings, taken by or on behalf of taxpayers.
Must an assessment correctly describe the substantive taxing section?
In Wilson v CIR (1995) 17 NZTC 12,047 (HC) Greig J said at 12,051:
“I agree with Mr Matheson’s submission that a paramount policy running through the Act and informing all its procedural provisions is that each taxpayer’s liability to tax should be correctly assessed in accordance with the substantive provisions of the Act in accordance with law.”
Although this statement was made in the context of a late objection application, it may be taken as having wider implications, namely that the Commissioner in raising an assessment must apply of have in mind the correct provision of the correct Act. This is a different situation from that in Case V 4 where the taxpayer expressly accepted that the Commissioner’s basis of assessment was correct.
It appears beyond argument that the misdescription or misapprehension of the source of a statutory power will not invalidate its otherwise lawful exercise. Accordingly, it appears certain that an assessment issued by the Commissioner in reliance upon the incorrect Act, or the incorrect section of the correct Act, will nevertheless be valid.
However, if the Commissioner refers to the wrong substantive taxing provision (one that does not apply in the year in question), that may well be fatal to the validity of his assessment unless the continuity provisions apply to deem the wrong reference to be the right one.
 In accordance with the process described in the Golden Bay Cement Ltd case.