[2024] KETAT 105 (KLR)

Africa Reit Limited v Commissioner of Domestic Taxes (Tax Appeal 1443 of 2022) [2024] KETAT 105 (KLR) (2 February 2024) (Judgment)

Neutral citation: [2024] KETAT 105 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 1443 of 2022

RM Mutuma, Chair, BK Terer, EN Njeru, M Makau & W Ongeti, Members

February 2, 2024

Between

Africa Reit Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a registered company under the Kenyan Companies Act carrying on of realtors’ business and is a registered taxpayer.

2. The Respondent is a principal officer appointed under and in accordance with Section 13 of the Kenya Revenue Authority Act, the Authority is charged with the responsibility of among others, assessment, collection, accounting, and the general administration of tax revenue on behalf of the Government of Kenya.

3. The Respondent carried out investigations on the Appellant covering the period between January 2014 and December 2017 for Corporation Income tax, PAYE and VAT.

4. The investigations sought to establish and assess the true amount of taxes due from the taxpayer; to determine the existence of any tax evasion schemes by the taxpayer; to take the appropriate action resulting from the finding of the investigations including recommending prosecution.

5. The Appellant was served with initial preliminary findings on 15th January 2019. The Respondent thereon engaged with the Appellant on the basis of the findings and later upon close of the discussions, the Respondent issued the Appellant a notice of assessment dated 24th June 2015.

6. Being aggrieved by the assessments raised, the Respondent made an objection to the assessments vide a letter dated 15th July 2022 and supplied the necessary documentation in support of the objection thereafter.

7. The Respondent considered the documents supplied by the Appellant and issued an objection dated 17th October 2022 making adjustments to the assessments on supported objections and giving a revised figure of Kshs. 20,493,132. 00 being the taxes due and owing.

8. Aggrieved by the confirmation of assessments, the Appellant filed a Notice of Appeal before this Tribunal on the 25th November, 2022.

The Appeal 9. In its Memorandum of Appeal dated 29th November 2022 and filed on the 8th December, 2022 the Appellant premised its Appeal on the grounds:-a.That the Respondent erred in law, facts and issued an invalid objection decision contrary to the VAT Act 1989 on exempt supplies and contrary to Section 29 of the Tax Procedures Act 2015, Sections 5 & 6 and Section 107 and 108 of the Evidence Act, Kenya Constitution 2010 Articles 201 and 210. b.That the Respondent erred in law by demanding VAT on a transaction that happened before the VAT Act was amended hence acting retrospectively.c.That the Respondent erred in law by applying nonexistent law as required in the KRA Act No 2 of 1995 Section 5 (2) (ii) which requires the authority in its function to administer and enforce as written laws, and to collect and account as per the same written laws.d.That the Respondent erred in law and facts by demanding tax that are unreasonable and unfair as per Article 210 and 201 (b) (i) of the Constitution of Kenya.e.That the Respondent erred in law and facts by eliminating certainty as an integral ingredient of the rule of law as stated to be the lifeline of business and business plans. This is contrary to Article 47 of the Kenya Constitution 2010 and the Fair Administration Actions Act, 2015. f.That the Respondent actions are contrary to legitimate expectations on the operations of the taxpayer, as per Article 47 (1) (2) of the Constitution of Kenya 2010. g.The Respondent deliberate disregard to consider the evidence produced by the Appellant and demanding PAYE, which had already been paid.h.The Respondent did not understand the Appellant business model, and completely disregarded the Sale of Good Act, Law of Contract and the explanations given on the off-plan sale agreement which was sealed in 2012.

Appellant’s Case 10. The Appellant’s case is premised on the following documents:-a.The Appellant’s Statement of Facts dated 29th November, 2022 and filed on the 8th December, 2022b.The Appellant’s Written submissions dated 22nd June, 2023 and filed on 26th June, 2023.

11. That the Respondent sent a letter of preliminary findings to the Appellant on the 15th of January 2019 covering the periods 2011 to 2017 being seven years with a tax summary of Kshs. 69,793 ,646. 41. According to the Appellant, this was done beyond the five years legal limit for documents in custody by the Appellant and Respondent’s failure to demonstrate that there was any evidence of gross or wilful neglect to warrant extension of the period, contrary to Section 20 (5) & (6) of the Tax Procedures Act.

12. It is the Appellant’s case that the Respondent though aware of the legal requirements, ignored the law and by the above-mentioned letter required responses, reconciliations and explanations within seven days so at to amend or confirm the preliminary findings. This was done within three days but the Respondent chose to deliberately ignore the law and only issued an assessment notice on the 24th of June 2022, three and half years later and over ten year (10) after the return filing date.

13. The Respondent considered the availed documents and varied the preliminary findings from the tax summary of Kshs. 69,793,646. 41 to a tax decision of Kshs. 36,565,089. 00, The Tribunal in the case of Gitere Kahura Investments Limited vs. Commissioner of Domestic Taxes Tat No.16 of 2019-Judgement [2021] eKLR ruled that;“the Respondent has the burden of proof pursuant to Section 107 and 108 of the Evidence Act to prove that the Appellant is in breach of Section 29 (6) of the TPA for he hadn't demonstrated or provided any proof. The tribunal equally noted that taxes that were for 2012-2013 being demanded in 2018 without the Respondent demonstrating gross or wilful neglect, evasion or fraudulent activities concerning taxes as provided for under Section 29 (6) of the Act were time barred and should be expunged pursuant to Section 29 (5) of the TPA and similarly taxes for 2011 to 2016 being demanded in 2022 should suffer the same fate and be expunged as per the Act.”

14. The Appellant also stated that Tribunal in the TAT Appeal No 42 of 2018 Step Up Holdings (K) Ltd vs. Commissioner of Domestic taxes, the Tribunal Ruled that“As such, we find that the provisions of Section 51 (11) of the Tax Procedures Act fittingly apply to the Appeal currently before use. We find that the Respondent simply sat on laurels until 28th March 2018 and the same in law has the implication that the Appellant’s objection is deemed allowed. The Respondent as the key institution charged with the administration of all the tax laws in country should have known of these statutory timelines if at all it is seeks to enforce assessments, as such, it is our considered view that the Appellant’s objection is deemed as allowed by law hence making it moot for this Tribunal to address any substantive tax disputes relating to the Commissioner’s assessment.”

15. The Appellant stated that this Tribunal was guided by Republic vs. Commissioner of Customs Services Ex-Parte Unilever Kenya Limited [2012] eKLR, in which Korir J stated thus:“My understanding of the above quoted Section is that once a taxpayer lodges an application for review, the Commissioner of Customs who is the Respondent in this case has 30 days within which to make and communicate a decision to the taxpayer. If the Respondent does not communicate a decision within 30 days, then the Respondent “shall be deemed to have made a decision to allow the application.” The law is so clear that it can only be interpreted in one way. The Respondent communicated the decision to the ex-parte applicant on 18th July, 2011. By communicating the decision four months from 16thMarch, 2011 the Respondent was clearly in breach of the provisions of Section 229 EACCMA. The implication of the Respondent’s non-communication within the statutory period of 30 days is that the Exparte applicant did not owe the taxes demanded by the demand notice of 9th February 2011. The Respondent's decision in the letter dated 18th July 2011 which revised the tax demand downwards from Kshs. 102,254,601. 00 to Kshs, 65,335,378. 00 was therefore void from the beginning. The law as it is presumes that by failing to communicate a decision by 16th April, 2011 the Respondent was telling the ex-parte applicant that its appeal against the tax demand contained in the notice dated 9th February, 2011 had been allowed and the ex-parte applicant did not owe the Respondent any tax in respect of that particular demand.”

16. The Appellant as required by the law whenever a tax decision is raised by the Respondent replied to the Respondent's tax decision through an objection letter listed the ground of the objection and attached the bundle of all necessary documents as required by the law and the same was received by the Respondent on the 21st of July 2022 both manually and digitally.

17. The Respondent on the 3rd and 4th of August 2022 replied to the Appellant on the basis that the Appellant had not supported the objection and alleged that the objection was not validly lodged as per Section 51 (3) of the TPA, filed after statutory time on the 28th of July 2022 and advised to be furnished with the evidence within seven (7) days.

18. The Appellant replied to the Respondent through a letter on the 12th of August 2022 and explained to the Respondent the objection details and support documents provided as required by the TPA 2015.

19. The Respondent and the Appellant had engagement over meetings and exchange of documents as acknowledged by the Appellant’s letters dated 26th August 2022 noting the need to conclude the case within the legal framework, and the 5th October 2022 letter listing further documents as per the request of the Respondent.

20. The Respondent having examined the documents varied the assessment order of the 24th June 2022 and issued an objection decision on the 17th of October 2022 with a tax demand of Kshs. 20,493,132 for the years 2014, 2015 and 2016.

21. According to the Appellant, the Respondent issued a decision that is arbitrary, capricious, unreasonable, unfair and contrary to the administration of justice and overrides the legitimate taxpayer's expectations. The Appellant relied on the High Court Income Tax Appeal No.17of 2017 — Lewa Wildlife Conservancy vs. Commissioner of Domestic Taxes, in which the High court held that:-“the legitimate expectation in this case was so strongly grounded that it established an economic right in the form of the VAT not charged to the visitors, KRA created a legitimate expectation by the interpretation of the legal provision and therefore KRA could not be allowed to renege.”

22. According to the Appellant, this is what is express and clear in Article 47 of the Constitution of Kenya 2010, and anything on the contrary is illegal and an abuse of power on the part of the Respondent.

23. The Appellant also relied on the High court case No 743 of 2006 Keroche Industries Limited vs. Kenya Revenue Authority & 5 Others [2007] eKLR where the court held that;“By rejecting the applicants decision to change the tariff as proposed, the court will be Sending out a clear signal that legitimate expectation is based not only on ensuring that legitimate expectations by the parties are not thwarted, but on a higher public interest beneficial to all including the Respondents, which is, the value or the need of holding authorities to promises and practices they have made and acted on and by so doing upholding responsible public administration. This in turn enables people affected to plan their lives with a sense reasonableness and reasonable expectation. An abrupt change as was intended in this case, targeted at a particular company or industry is certainly abuse of power. Stated simply legitimate expectation arises for example a member of the public as a result of a promise or other conduct expects that he will be treated in one way and the public body wishes to treat him or her in a different way.”

24. Therefore, according to the Appellant, the Respondent cannot therefore in any way impose VAT on the Appellant several years past statutory deadlines and also considering he was provided with the sale agreement that was executed in 2012 and any considerations received by the Appellant were declared as exempt and no query was raised in that year.

25. The Appellant stated that it had paid the PAYE being demanded by the Respondent and even favoured the Respondent with payment slips for the same during the engagement meetings and as a support document to the tax decision, despite such being in the Respondent custody and the Respondent deliberately ignored the payment and went ahead to confirm the assessment an action that is unfair and unconstitutional contrary to Article 210 of the Constitution of Kenya 2010 and that under Article 201 (b) (i) (6) requires the public finance system to promote an equitable society, and in particular—(i) the burden of taxation shall be shared fairly. The Appellant opined that this clearly states the Respondent cannot demand the same tax twice.

26. The Appellant submitted that Respondent acted ultra vires contrary to the Tax Procedure's Act No 29 of 2015 Section 31 (4) (b) (i).

27. The Appellant submitted that the Respondent erred in law by issuing an assessments eleven years after the transaction had taken place and eight years after the financial statements for 2014 were filed and there was no proof or evidenced adduced by the Respondent to warrant the action.

28. The Appellant also submitted that the Respondent visited the Appellant in 2018 and issued preliminary findings in January 2019 requiring the Appellant to respond with explanation, documents and support within seven days. Whereas the Appellant responded to the demands within 'three days' the Respondent was expected to respond within reasonable time. The mere fact that the Respondent decided to ignore the response and only did so after three and half years is a clear demonstration that its actions are unfair, and injurious to the Appellant for there is no recourse to collect the tax and forward to the Respondent. According to the Appellant’s submissions, this is in sync with the Nairobi Civil Appeal No. 150 Of 2018: Kenya Revenue Authority vs. Universal Corporation Ltd [2020] eKLR It was noted that;“Respondent is obligated to meet its tax commitments to the Appellant either as self-assessed or upon assessment by the Appellant. The Appellant is duty bound to exercise its statutory power with due diligence and as prescribed for by the law namely within the time frame permitted for by law to allow the Respondent claim a refund it is entitled to in law within the time frame stipulated for within the law. Tax law with penal consequences must be interpreted with great caution and that any ambiguity in such a law must be resolved in favour of a taxpayer. The penal consequence in the law is that the appellant was mandated to demand short levied taxes as and when assessed.''

29. The Appellant relied on the cases of Step Up Holdings (K) Ltd vs. Commissioner of Domestic taxes and Republic vs. Commissioner of Customs Services Ex-Parte Unilever Kenya Limited [2012] eKLR to submit and emphasise that the Respondent’s letter dated 24th June 2022 and the objection decision dated 17th October 2022 are void from the beginning.

30. In addition, the Appellant relied on the case of Kenya Revenue Authority vs. Jimmy Mutuku Kiamba [2015] eKLR where the learned judge analysed the provision of the now repealed provisions of Section 79 of the Income Tax which similarly granted the Respondent powers to assess outside the statutory period of 7 years in cases of wilful neglect or fraud and stated as follows:‘‘by dint of the provisions of Section 79 (1) (a) of the Income Tax Act, the Kenya Revenue Authority is permitted to conduct an assessment of tax even after the lapse of 7 years, provided that the person for who tax was being assessed, wilfully neglected an accurate self-assessment, or where the said person was deemed to have been fraudulent."I am very cautious about being perceived as making any pronouncement which could be construed to imply that the Respondent was guilty of a criminal offence, yet he had not been charged, tried and convicted for any such criminal offence. It is important to distinguish between criminal culpability and civil liability. A person is only said to be criminally culpable upon his being convicted for a criminal offence. And in order for the court to find somebody criminally culpable, the evidence adduced must prove the guilt of that person beyond any reasonable doubt ... "

31. The Appellant submitted that the Appellant's directors have not at any time been tried and convicted for a criminal offence in relation to fraud and therefore the Respondent cannot purport to rely on the provisions of Section 29 (6) to assess the Appellant outside the five-year statutory period. The Appellant thus submitted that any attempt to so do can only be termed as ultra vires to the clear provisions of the law.

Whether the Respondent erred by demanding VAT on a transaction that was exempt as per the VAT act 1989 cap 476 32. On this issue, the Appellant submitted that the Respondent was provided the Agreement to sell document which was executed in the year 2012 when the nature of the transaction was clearly exempted from VAT as per the repealed VAT Act Cap 476 under Third Schedule - Exempt Services.

33. Apart from the above, the Appellant also submitted that the Respondent computed the tax on assumption that the Appellant had charged VAT on the transaction and therefore based the tax on a wrong figure of Kshs. 120,689,655. 00 ignoring clear facts in the Agreement for sale where a deposit of Kshs. 5,000,000. 00 was be paid in 2012 as part of sales proceeds and can't be subject to VAT in 2014. This according to the Appellant, demonstrates that the assessment done by the Respondent was not factual but one that is methodically random and wanting in regularity, the result of which are wrong, unfair, unequal and oppressive. The Appellant also submitted that the Respondent was also provided with PAYE payments for the year 2015 but the Respondent went ahead to confirm the demand, a clear indication that the Respondent was unfair to the Appellant by demanding taxes that had already been settled.

34. Further, the Appellant submitted that the Commissioner, while demanding revenue, should demonstrate sufficiently that a certain payment forms the basis of tax. Consequently, the Appellant relied on the case of Republic vs. Commissioner of Income Tax ex parte SD V Transami (Kenya) Limited which held that taxes must be consistent with the law. The Appellant also relied on the case of Republic vs. Commissioner of Domestic Taxes Large Tax Payer's Office Ex Parte Barclays Bank of Kenya Ltd for the proposition that the decision to tax must have a legal basis.

35. In conclusion, the Appellant requested the Tribunal to take note that the Respondent did not comply with Section 15 of the TAT Act No 40 of 2013 therefore; the Appellant had not received responses from the Respondent.

The Appellant’s Prayers 36. The Appellant prayed that this Honourable Tribunal be pleased to find that:i.The Respondent objection decision is invalid, incorrect, time barred and unfair and failed to meet the legitimate expectations of the taxpayer as per Section 29 (5) and (6) of the TPA 2015, VAT Act 1989 and Section 47 of the Constitution of Kenya 2010, and article 201 (b) (i), 210. ii.Upon determination that the objection decision of the Respondent is invalid, time barred, illegal, wrong and unreasonable the Appellant objection be upheld and the Respondent demand and confirmation be quashed entirely.iii.The Respondent's demand for additional taxes and Confirmation of amended assessment be stuck out entirely.iv.That Respondent’s actions be declared arbitrary, capricious, subjective, unfair and contrary to the fair administration of justice and to the legitimate expectations of the taxpayer.v.That the Respondent and its agent be estopped from demanding or taking further action or steps to ensure recovery of the alleged principal tax.vi.Cost of the Appeal andvii.Any other remedies that this Tribunal may determine.

The Respondent’s Case 37. The Respondent’s case is premised on its;

a. Written submissions dated 11th July 2023 and filed on 22nd August 2023. 38. That the Respondent submitted that the review of the documents from both the taxpayer and third parties the letter of findings was shared with the taxpayer on 15th January 2019 with estimated taxes of Kshs. 69,795,646. 00 as summarized below:-Table 1 — Taxes Established at Issuance of FindingsTax Head Corporation Tax VAT PAYE Totals

Principal Tax 44,108,679 24,631,159 1,055,808 69,795,646

39. The Respondent contended that the estimated tax computation was arrived at after the team established that the taxpayer undertook the following projects, resulting in expected taxable income and tax liabilities as shown below during the period under investigation.

40. Concerning VAT, it was the Respondent’s assertion that the investigation team established that the income declared in the VAT returns had been under-declared during the period with the variance in year 2014 relating to sale of a commercial (office block) building to Symbion Properties Limited.Table 3 — VAT Analysis2014 2015 2016 2017 Totals

revenue as perFinancial Statements 120,689,655 16,005,806 17,491,962 47,652,665 201,840,0

Revenue as per the VAT3 returns - 12,321,969 15,720,143 19,853,210 47,895,3

Variance (under Declared income) 120,689,655 3,683,817 1,771,819 27,799,455 153,944,74

VAT thereon @16% 19,310,345 589,411 283,491 4,447,913 24,631,15

41. Regarding Pay as You Earn, the Respondent’s team established that the taxpayer was consistently submitting PAYE returns but failed to remit the deducted PAYE (PRWCs) as summarized in the table below.Table 4 — PAYE AnalysisTaxPeriod Oct-15 Oct-16 Nov-16 Dec-16 May 18 Jun-18 Jul-18 Sept-18 ----

PAYEDue 309,885 120,209 238,694 59,754 1,759 188,245 122,337 14,925 ----

42. The Appellant responded and provided reconciliations to the issues on 18th January 2019 and its position with regards to the issues highlighted in the letter of findings were as follows: -a.That the total declared income for the years under investigations was actually Kshs.855,314,110. 00 and not Kshs. 698,011,159. 00 as captured in the letter of findings, which was actually more than the total expected income as per the Commissioner’s findings.b.That they were in agreement with unpaid VAT and PAYE liabilities of Kshs. 1,235,675. 00 as tabulated below.Table 5- PAYE and VAT by the taxpayerTax Head VAT PAYE Totals

Principal Tax 179,867 1,055,808 1,235,675

43. For the year 2014, the sale of office block B to Symbion Properties Limited was an exempt supply as per the provisions of the First Schedule of the VAT Act 2013 which specifically set out in part, II services that “supply by way of sale, renting and leasing, hiring, letting of land or residential premises” was exempt from VAT.

44. The Respondent reviewed the documents and explanations by the taxpayer and the following was the Commissioner’s positions concerning the issues raised.

45. Since the amount declared by the taxpayer was higher than the amount estimated in the letter of findings; no additional assessment was established under income tax save for an outstanding tax liability of Kshs. 118,007. 00 in 2011 and Kshs. 10,760,114. 00 for 2014.

46. Regarding the VAT exempt status of the sale of the office Block B in 2014, and relying on provisions of the First Schedule Part II of the VAT Act, 2013, specifically Part II (8) “supply be way of sale, renting, leasing, hiring, letting of land or residential premises.”a.That the sale of the office Block B was for commercial purpose.b.That the Appellant based its argument on supply by way of sale of land.

47. Concerning the taxable income, the Respondent submitted computation for the year 2017 for Kshs. 47,652,665. 00 and upon review of the records provided by the taxpayer it was noted that the taxpayer was not consistent with declarations made in the returns and as such, no adjustments were made to the taxable income of Kshs. 47,652,665. 00.

48. In view of the above findings, the taxes payable amounted to Kshs. 36,565,088 as computed below.Table 6 — Income Tax on AssessmentTax Head 2011 2014 Total

Principal tax 118,007 10,760,114 10,878,121 Table 7 — VAT on Assessment2014 2015 2016 2017 total

Revenue as perFinancial Statements 120,689,655 16,005,806 17,491,962 47,652,665 201,840,0.

Declared income inVAT3 ---- 12,321,989 15,720,143 19,853,210 47,895,34

Variance-Under declared Income 120,689,655 3,683,817 1,771,819 27,799,455 153,944,7:

VAT 16% 19,310,345 589,411 283,491 4,447,913 24,631,15 Table 8- PAYE on AssessmentPAYE 2015 2016 2018 Totals

309,885 418,657 327,266 1,055,808 Table 9- Summary of Taxes on AssessmentCorporation Tax Vat Paye Totals

Taxes Due 10,878,121 24,631,159 1,055,808 36,565,088

49. The Respondent thereon proceeded to issue a tax assessment vide a letter dated 24th June 2022, and the Appellant being aggrieved with the assessment above objected to the same on 15th July 2022.

50. The Respondent reviewed the objection together with the documentation supplied supported adjustments and made the determinations below:a.For Corporation tax for the year 2011 and 2014, the Respondent took into account the losses brought forward in the Income tax returns for which no adjustment had been made and thus accordingly adjusted the same and vacated the assessment for the year 2011 and 2014. b.For the VAT assessments for the year 2017, the Respondent noted that variance between the declarations made in the income tax returns and the financial statements was as a result of the re-valuation of the properties and thus vacated the assessments having found that the same was adequately explained.c.On the charging of VAT on the sale of commercial property for the year 2014, the Respondent noted that the assessments were raised based on the variance between sales as per the financial statements and sales declared in the VAT returns (which were NIL).d.The Respondent thus noted that the High Court in the case of National Bank of Kenya Limited vs. Commissioner of Domestic Taxes (Income Tax Appeal Nos. E155 & 533 of 2020) had held that commercial property erected on land is inseparable from the land and thus the Respondent cannot be faulted from charging VAT on the sale.e.On the reliance on the authority of David Mwangi Ndegwa vs. Kenya Revenue Authority [2018] eKLR, the Commissioner advised that the decision had been stayed pending appeal and was thus not applicable and thus no adjustments was made for the claim against charging of VAT for the sale of the property.f.Lastly, on PAYE, the Respondent made a finding that the Appellant had not placed any evidence indicating that the assessment was excessive or that the appropriate that adjustments were not met.Table 12- Adjusted Summary of Taxes at ObjectionParticulars Taxes Due

Corporation tax -

VAT 20,183,247

PAYE 309,885

Total 20,493,132

51. In response to the Memorandum of Appeal, the Respondent submitted as follows:

Whether the Respondent issued an invalid objection by subjecting exempt supplies to VAT (Ground 1, 2, 3, 4, 5) 52. The Respondent submitted that the taxpayer refers to the VAT payable for the sale of commercial property to which the taxpayer claim was made in the year 2012. In that regard, to anchor its position, the taxpayer has annexed a sale agreement dated 15th June, 2012 between itself and Symbion Properties Limited for the sale of Land Reference Number 1159/385 (Original Number 1159/378/8) at a consideration of Kshs. 140,000,000. 00.

53. The assessment made by the Respondent was made in the year 2012 when the payment of the consideration was made since the Respondent based its assessments on the banking analysis method. The Respondent therefore maintains that based on the applicable law at the time i.e. the Value Added Tax Act, 2013, VAT was payable on sale of commercial property and it is not material that the agreement was entered in the year 2012 but the payment made thereon. The tax point is at the point in which the payment was made. Consequently, the Respondent argued that the Appellant's position is not founded and the Commissioner relies on the authority of National Bank of Kenya Limited vs. Commissioner of Domestic Taxes (Income Tax Appeal Nos. E155 & 533 of 2020).

Whether the Respondent breached the Appellant’s right of legitimate expectation (Ground 6) 54. The Respondent submitted that a legitimate expectation has to arise from a representation made and reliance has been placed on it. The Respondent submitted that the foundation and reliance on this is placed on the Supreme Court case of Communications Commission of Kenya & 5 Others vs. Royal Media Services & 5 Others SC Petition Nos. 14, 14A, 14B & 14C of 2014 where the Supreme Court stated that: -“Legitimate expectation would arise when a body, by representation or by past practice, has aroused an expectation that is within its power to fulfil. Therefore, for an expectation to be legitimate, it must be founded upon a promise or practice by public authority that is expected to fulfil the expectation."

55. According to the Respondent, the Appellant has not shown or pleaded the kind of representation or past practice that it places reliance on. Reliance on the principle is thus unfounded. The Respondent relied on the Supreme Court of Canada in Attorney General) vs. Mavi, [2011] 2 S.C.R. 504, stated that: -“{68] Where a government official makes representations within the scope of his or her authority to an individual about an administrative process that the government will follow, and the representations said to give rise to the legitimate expectations are clear, unambiguous and unqualified, the government may be held to its word, provided the representations are procedural in nature and do not conflict with the decision maker’s statutory duty. Proof of reliance is not a requisite”

56. The Respondent reiterated that it is evident that the Appellant has not demonstrated any representation that can be attached to the Respondent that gives rise to the doctrine of legitimate expectation. Therefore, the Respondent argued that this ground of appeal remains a mere assertion that cannot be deciphered with a degree of clarity as to how the Respondent has breached the Appellant's right of legitimate expectation since as per the chronology of events showed above, all the procedures were followed in raising the assessments and the Appellant at all material times accorded a fair hearing.

On whether the Respondent disregarded evidence produced by the Appellant by demanding PAYE which had already been paid and misapprehended the Appellant’s business model (Grounds 7 & 8), the Respondent submitted as follows: 57. Contrary to the Appellant’s assertion that the Respondent ignored the supporting documentation given in support of the objection, the Respondent argued that it is trite law that the taxpayer bears the burden of proving that a particular position in tax law is correct as per its assessment. According to the Respondent, it found the alleged documentation supplied to be inadequate and thus proceeded to employ the banking analysis method and issued assessments on the same.

58. The Respondent submitted that to dislodge this assessment or the decision of the Respondent which enjoys the presumption of legitimacy, the Appellant has not given any plausible explanation or evidence to dislodge the same. In that regard, the Respondent maintained that the Appellant has not discharged its burden and the claim remains mere allegations.

59. On the subject that the Respondent ignored the Appellant’s business model, the Respondent submitted that it employed the banking analysis method which is a recognized method of determining taxes by the Commissioner. When the method was employed, the Appellant could not explain the variance between the declarations made and the established income from the banking.

60. On the contention that the sale of the property in question happened in the year 2012 is immaterial since the payments were made in the year 2014. Furthermore, the declarations made by the taxpayer regarding the sale is nil and thus was not disclosed altogether only to be unearthed by the bankings.

The Respondent’s prayers 61. The Respondent, therefore, prayed for the Tribunal to find the Appeal as devoid of merit.

Issues for Determination 62. The Tribunal having considered the Memorandum of Appeal, the Appellant’s Statements of Facts and the parties’ written submissions, puts forth the following issues for determination:a.Whether the Respondent assessment were justified;b.Whether the Respondent breached the Appellant’s legitimate expectations;

Analysis and Findings 63. The Tribunal wishes to analyse the issues as herein-under.

a. Whether the Respondent assessment were justified; 64. The Tribunal notes that the Respondent did not file and serve any Statement of Facts in opposing the Appeal, and the Tribunal subsequently issued an Order on the 25th April 2023, that the Appeal proceeds unopposed.

65. Conversely, the Respondent filed its written submissions on the 22nd August 2023, the same of which have no legal effect with regard to factual issues in the absence of the Statement of Facts.

66. According to the Appellant, the Respondent sent a letter of preliminary findings to the Appellant on the 15th of January 2019 covering the periods 2011 to 2017 being Seven years with a tax summary of Kshs. 69,793,646. 41. According to the Appellant, this was done beyond the five years legal limit for documents in custody by the Appellant and Respondent’s failure to demonstrate that there was any evidence of gross or wilful neglect to warrant extension of the period, contrary to Section 29 (5) & (6) of the Tax Procedures Act. In response to this allegation, the Respondent submitted that the assessments were made in the year 2012 when the payment of the consideration was made since the Respondent based its assessments on the banking analysis method.

67. The Tribunal has analysed letter of preliminary findings to the Appellant on the 15th of January 2019 covering taxes for the periods 2011 to 2017. The Tribunal has also analysed the Respondent’s notice of tax assessment dated 24th June 2022.

68. The implication of the Respondent’s notice of tax assessment dated 24th June 2022 is that the Respondent wants to recover taxes from the years 2011 all the way to the year 2017 in the year 2022. The period is over ten years.

69. Section 23 (1) (c) of the Tax Procedures Act on record-keeping provides as follows:‘‘(1)A person shall—subject to subsection (3), retain the document for a period of five years from the end of the reporting period to which it relates or such shorter period as may be specified in a tax law.’’

70. Section 23 (3) of the Tax Procedures Act further provides that:-‘‘when, at the end of the period specified in subsection (1) (c), a document—(a)relates to an amended assessment, the person shall retain the document until the period specified in Section 31 (7) has expired; or(b)is necessary for a proceeding commenced before the end of the five-year period, the person shall retain the document until all proceedings have been completed.’’

71. On the other hand, Sections 29 (5) & (6) of the Tax Procedures Act provides that:-‘‘Subject to subsection (6), an assessment under subsection (1) shall not be made after five years immediately following the last date of the reporting period to which the assessment relates.’’“(6)Subsection (5) shall not apply in the case of gross or wilful neglect, evasion or fraud by a taxpayer.’’

72. Burden of proof is always upon the taxpayer to prove that a tax decision is wrong as provided for under Section 56 (1) of the Tax Procedures Act. Indeed, the High Court in Tumaini Distributors Company (K) Limited vs. Commissioner of Domestic Taxes [2020] eKLR emphasised that the taxpayer has the burden to prove that the tax decision is wrong.

73. Whereas, the burden of proof is always upon the taxpayer to prove that a tax decision is wrong, there are instances where the burden of proof shifts to the Respondent. Some of the instances where the burden of proof shifts to the Respondent includes under the provisions of Section 29 (6) and/or Section 31 (4) (a) of the Tax Procedures where the Respondent seeks to recover taxes beyond the five-year rule. This Tribunal has on several occasions including in Gitere Kahura Investments Ltd TAT Appeal No. 16 of 2019 held that the burden is upon the Respondent to justify assessment of taxes beyond the five-year rule.

74. In the instant Appeal, the Respondent has not led or presented any evidence either under Section 29 (6) or Section 31 (4) (a) of the Tax Procedures Act to justify assessment of taxes beyond five-year rule. The Respondent has failed to demonstrated that it was necessary to look into the taxpayer’s affairs beyond the statutory five years. The Respondent was required to demonstrate that there has been gross or wilful neglect, evasion, or fraud by, or on behalf of, the Appellant for the Respondent to find refuge under Section 29 (6) or Section 31 (4) (a) of the Tax Procedures Act.

75. The Tribunal is not in doubt that the assessments are beyond five year within the meaning of Section 29 of the Tax Procedures Act.

76. In the absence of opposition to the Appeal and want of evidence on record to justify the Respondent’s assessment of taxes beyond statutory five years, the assessment are therefore contra-statute.

77. Consequently, the Tribunal finds and holds that the tax assessments dated 24th June 2022 are statutory time barred.

78. Having established that the assessments are statutorily time barred, the Tribunal will not delve into the remaining issues as the same are rendered moot.

Final Decision 79. The upshot to the foregoing is that the Appeal is meritorious and the Tribunal consequently makes the following Orders; -a.The Appeal be and is hereby allowed.b.The Respondent’s Objection decision dated 17th October 2022 be and is hereby set aside.c.Each party to bear its own costs.

80. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 2ND DAY OF FEBRUARY, 2024ROBERT MUTUMA - CHAIRPERSONBONIFACE K. TERER - MEMBERELISHA NJERU - MEMBERMUTISO MAKAU - MEMBERDR WALTER ONGETI MEMBER