[2024] KETAT 1469 (KLR)

Arm Cement PLC (in Liquidation) v Commissioner of Domestic Taxes (Tax Appeal 606 of 2022) [2024] KETAT 1469 (KLR) (At Nairobi) (11 October 2024) (Judgment)

Neutral citation: [2024] KETAT 1469 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

At Nairobi

Tax Appeal 606 of 2022

RM Mutuma, Chair, M Makau, Jephthah Njagi, D.K Ngala & T Vikiru, Members

October 11, 2024

Between

Arm Cement PLC (in Liquidation)

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a company incorporated in Kenya in the business of mining and manufacturing of cement, lime, fertlizers, sodium silicate, calcium oxide, industrial minerals and special building products. Due to financial constraints, the Appellant was placed under administration in August 2018 with Mr. Muniu Thoithi and Mr. George Weru as joint administrators. The Appellant later transitioned to liquidation on 1st October 2022 with Mr. Muniu Thoithi and Mr. George Weru as joint liquidators.

2. The Respondent is the principal officer appointed under Section 13 of the Kenya Revenue Authority Act and mandated with the responsibility for the assessment, collection and accounting of all tax revenue as an agent of the Government of Kenya. The Respondent is also mandated with the responsibility for the administration and enforcement of the statutes set out under the schedule to the said Act.

3. On 22nd January 2020 the Appellant was informed by Respondent that it had assessed VAT input tax arrears at Kshs. 67,518,813. 64 for the period January 2018, February 2018, March 2018, April 2018 and May 2018, and invited the Appellant to engage to resolve the issue.

4. The Appellant lodged its Notice of Objection dated 10th February 2020 under Section 51 of the TPA and provided reasons for its grounds of objection. The Appellant further informed the Respondent that it was under administration and provided its current email address.

5. The Respondent upon receipt of the Objection Notice engaged the Appellant by requesting for more supporting documentation through email and letter dated 30th April 2020. The Appellant submitted its supporting documentation through its official email and letter dated 29th May 2020.

6. However, on 24th February 2021, the Respondent wrote to the Appellant informing that they had not provided all relevant supporting documentation and they had seven days to do so before the Respondent could issue its decision.

7. The Respondent consequently rendered its Objection Decision on 30th March 2021 invalidating the Appellant’s Notice of Objection on the grounds that the Applicant had not provided all relevant supporting documentation.

8. The Appellant dissatisfied with the Respondent’s decision dated 30th March 2021 filed an application for leave to Appeal out of time, which was granted by the Tribunal, and consequently lodged the Notice of Appeal dated and filed on 10th June 2022.

The Appeal 9. The Appellant filed its Memorandum of Appeal dated and filed on the 10th June 2022 and set out the following grounds of appeal;a.That the Respondent erred in fact and law invalidating the Appellant’s Notice of Objection which had detailed reasons in its objection.b.That the Respondent erred in its Objection Decision by disregarding the supporting documentation provided by the Appellant and alleging that none were provided and thus invalidating the Appellant’s objection.c.That the Respondent erred in fact and in law by issuing its tax decision outside the requisite statutory period of 60 days under Section 51 (11) of the Tax Procedures Act.

The Appellant’s Case 10. The Appellant’s case is set out in its;a.Statement of Facts dated and filed on the 10th June 2022 together with the documents attached thereto;b.The witness statement of Godfrey Ngugi signed, dated and filed on 3rd February 2023, and adopted as evidence in chief on 16th July 2024;c.The Preliminary Objection dated 24th June 2024 and filed on 25th June 2024; and,d.Written submissions dated 7th August 2024 and filed on 9th August 2014.

11. The Appellant state that in year 2018, due to various financial constraints, the Appellant was placed under administration in August 2018 Muniu Thoithi and George Weru appointed as joint administrators. The Appellant later transituioned to liquidation on 1st October 2022 with the administrators being appointed joint liquidators.

12. In the management of the affairs of the company, the administrators decided to sell the assets, the business and properties of ARM to National Cement Company Ltd (NCCL) in May 2019. The sale transaction was postponed pending court proceedings that paved way for its completion in October 2019. It stated that the facilitation of the acquisition has been marked with various challenges including staff attrition that affected the day to day administration of the Appellant company.

13. It further stated that the transition and uncertainty associated with the Appellant being placed under administration, disrupted the normal operations of the Appellant from August 2018 and as of June 2022, the Appellant is still under liquidation.

14. On 22nd January 2020, the Respondent informed the Appellant that it had assessed input VAT arrears at Kshs. 67,518,813. 65 for the period January 2018, February 2018, March 2018, April 2018, and May 2018, and invited the Appellant to engage with a view to resolving the issue.

15. On 10th February 2020 the Appellant lodged it Notice of Objection under Section 51 of the Tax Procedures Act against the Respondent’s assessment detailing the reasons for the grounds of objection. The Appellant also informed the Respondent that it was under administration and advised of its current contact address.

16. Upon receipt of the Appellant’s Objection Notice, the Respondent engaged the Appellant by requesting for more supporting documentation through email and a letter dated 30th April 2020.

17. The Appellant stated that it submitted the supporting documentation to its Notice of Objection through its official email and letter dated 29th May 2020.

18. The Appellant further stated that almost a year later, the Respondent issued the Appellant with a letter dated 24th February 2021, informing the Appellant that they had not provided all the relevant supporting documents, and that they had seven days to do so before the Respondent could issue its decision.

19. The Respondent rendered its Objection Decision by a letter dated 30th March 2021 invalidating the Appellant’s Notice of Objection on the grounds that the Applicant had allegedly not provided all the relevant supporting documentation.

20. The foregoing decision by the Respondent triggered the Appeal herein.

21. The Appellant submitted along three grounds of Appeal for which it set out the reasons thereof.

22. It stated that the Respondent erred in law and fact in invalidating the Appellant’s Notice of Objection which had detailed reasons.

23. The Appellant averred that the Respondent erred in law and fact in issuing iTax generated assessments to the Appellant unprocedurally. The VAAs issued demanded for tax without giving clear reasons for the incremental tax payable. Failure to provide reasons for an assessment violates the Appellant’s Constitutional right under Article 47 (1) and (2) of the Constitution of Kenya, 2010, and Sections 4 and 6 of the Fair Administrative Actions Act, 2015.

24. The Appellant stated that the principle of fair administrative action requires that if a right or fundamental freedom of a person has been or is likely to be adversely affected by administrative action, the person has the right to be given written reasons for the action. In addition, Section 49 of the TPA provides that where the Commissioner has refused an application under a tax law, the notice of refusal shall include a statement of reasons for the refusal.

25. The Appellant cited the case of Sceneries Limited vs. National Land Commission 2017 eKLR, where the High Court emphasized that the right to be heard involves provision of sufficient information, at least that the administrative body relied upon in making the decision.

26. The Appellant averred that failure to provide detailed reasons for the assessed liability amounts to an incurable defect. As such, it is the Appellant’s submission that the Respondent erred by failing to provide the Appellant with clear reasons for VAAs, thus limiting the Appellant’s ability to respond satisfactorily in its Notice of Objection.

27. The Appellant further averred that the VAAs lack legal merit and are against the provisions of Article 47 of the Constitution, and the additional assessments ought to be vacated accordingly in their entirety.

28. The Appellant also averred that the Respondent erred in fact and law by disallowing the input tax deducted by the Appellant yet it was deducted in accordance within the provisions of VAT Act, 2013. The Appellant in this regard stated that in accordance with the provisions of the VAT Act 2013, a taxpayer is allowed to deduct input tax incurred for the purposes of making taxable supplies in line with Section 17 thereof.

29. The Appellant further stated that the VAT Regulations 2017 provides for the contents of a valid tax invoice. From the foregoing, the Appellant averred that provided input tax incurred by a taxpayer for the purposes of making a taxable supply, the same is allowed to be deducted subject to exceptions provided under Section 17 of the VAT Act ,2013 as per the qualifying criteria for input tax deduction.

30. It was averred that all input tax claimed by the Appellant for the period January 2018 to May 2018 was incurred for the purposes of making taxable supplies and duly supported by valid tax invoices as provided for Section 17 as well as the provisions of the VAT Regulations 2017. It stated that the deduction was done within the six months legal timeline.

31. The Appellant therefore averred that the input tax was correctly deducted in accordance with the existing legal provisions governing deduction of input tax, that the input tax that was disallowed by the Respondent be allowed and the additional assessments for the tax periods January 2018 to May 2018 be vacated in their entirety.

32. The Appellant also averred that it is under no legal obligation to ensure declaration of output tax by its suppliers. It stated that in accordance with the provisions of the VAT Act, the duty to charge, collect, account for and remit tax on a taxable supply is vested on the registered person making such a supply.

33. It stated that the onus to charge, collect and account for VAT on a taxable supply vest on the supplier of goods and/or services and cannot be delegated to the recipient of the taxable supply. Accordingly, the Respondent’s position requiring the recipient of a such a supply to ensure declaration of output tax by its suppliers lacks legal merit.

34. The Appellant further stated that the person with the responsibility for enforcing the provisions of the VAT Act is the Commissioner of Domestic Taxes, and this power cannot be delegated to the recipient of taxable supplies to enforce on behalf of the Commissioner.

35. It stated that the tax assessments by the Respondent relating to underdeclared and non-declared output VAT by the by the suppliers of such supplies lack legal merit and are against the provisions of Article 210 of the Constitution of Kenya, and ought to be vacated in their entirety.

36. The Appellant stated in its second ground of appeal that the Respondent erred in its Objection Decision by disregarding the supporting documentation provided by the Appellant, alleging that none were provided and thus invalidating the Appellant’s objection.

37. The Appellant averred that the Respondent’s request to the Appellant to provide further evidence in the form of supporting documents gave the Appellant a legitimate expectation that the documents will be analyzed by the Respondent in support of the Notice of Objection.

38. From the foregoing the Respondent was expected to consider the documents shared by the Appellant. The Appellant averred that it shared the supporting documentation, and expected the Respondent will consider the shared invoices to analyze the VAA objections.

39. It averred that the Respondent’s assertion in its Objection Decision that the Appellant did not provide all the supporting documentation in support of the objection is mischievous and is only aimed at defeating the Appellant’s valid Notice of Objection. The Appellant urged the Tribunal to find that it had provided detailed reasons for its objection and provided all the requisite supporting documents.

40. The Appellant in its last ground of Appeal stated that the Respondent erred in law and fact by issuing its tax decision outside the requisite statutory period of sixty days under Section 51 (11) of the TPA.

41. The Appellant averred that it lodged its Notice of Objection within the requisite time and the Respondent acknowledged the Notice of Objection as duly filed. However, the Respondent proceeded issue the tax decision dated 30th March 2021 on 6th April 2021, which is over a year from the date the Appellant submitted its Notice of Objection, via email on tax@armcement.com.

42. It stated that Section 51 (11) of the TPA requires the Commissioner to issue its Objection Decision within sixty days from the date of receipt of the Notice of Objection, or any further information the Commissioner may require from the taxpayer failure to which the objection shall be deemed allowed.

43. The Appellant cited the case of Republic vs. Kenya Revenue Authority Exparte Mkopa Kenya Ltd (2018) eKLR, where the court stated;“In this case the applicant had had clearly made what was in substance an objection as envisaged under section 51 of the TPA. Accordingly, the Respondent was required to make a decision in respect within sixty days under section 51(11) of the said Act. As the Respondent defaulted in making a determination thereon within the prescribed time, the said objection was deemed to have been allowed.”

44. In view of the foregoing, the Appellant urged the Tribunal to find that the Respondent’s Objection Decision is not valid in law.

45. The Appellant in its submissions stated that vide an Automated Assessment dated 15th November 2019, the Respondent demanded the principal VAT amounting to Kshs. 67,518,813. 50. The Appellant through a letter dated 10th February 2020, the Appellant sought for leave to object out of time and proceeded to lodge its Objection Notice on 10th February 2020. It stated that on 29th May 2020 it furnished the Respondent with the relevant supporting documents according to Section 17 (3) of the VAT Act being tax invoices. Accordingly, the Respondent was required to render an Objection Decision within 60 days in line with Section 51 (11) of the TPA.

46. The Appellant stated that by August 2020 there was no Objection Decision or communication from the Respondent despite the statutory period of 60 days having elapsed.

47. It further submitted that almost a year later, the Respondent alleged that the Appellant’s Notice of Objection was invalid for being unsupported, despite the invoices on record having been supplied.

48. The Appellant reiterated the citation in the case of Republic vs. Kenya Revenue Authority Exparte M-KOPA Kenya Ltd (supra).

49. The Appellant submitted that the Respondent rightly issued its letter dated 30th April 2020 requesting for further information. The request for further was duly responded to by on 29th May 2020 providing all the relevant information. The information submitted did not elicit any response from the Respondent until almost a year later when the Respondent issued a Notice of invalidation of objection rejecting the objection for the alleged lack of documentation.

50. The Appellant cited the case of Walters Trading Co. Ltd vs. Commissioner of Domestic Taxes TAT 168 / 2021, where it was held that the request for additional information was not issued “immediately” as anticipated under Section 51 (4) of the Tax Procedures Act, which provides;“(4)Where the Commissioner has determined that a notice of objection lodged by a taxpayer has not been validly lodged, the Commissioner shall immediately notify the taxpayer in writing that the objection has not been validly lodged.”Accordingly, it was held; “…The above section enjoins the Commissioner to immediately notify the taxpayer in writing of the factors that render the taxpayer’s notice of objection invalid. The operative term in the section in our view is “immediately “. In the instant appeal, the Appellant lodged a proper notice of objection on 27th January 2020. The Respondent in turn issued its notice of invalidity on 3rd March 2021. This delay of more than a year certainly cannot be what is meant by immediate notification of invalidity under section 51(4) of the TPA. As such, the Tribunal is persuaded by the Appellant’s argument that since its objection notice was proper in law as at the time it was filed. The Respondent had 60 days therefrom to render an objection decision. After the lapse of this 60 days, the Respondent had no jurisdiction to issue an objection decision, let alone an invalidity notice.”

51. In view of the foregoing submissions, the Appellant urged the Tribunal to set aside the Respondent’s Notice of Invalidation, confirming the VAT assessment of Kshs. 67,518,813. 65.

52. The Appellant submitted that the Respondent invalidated its Notice of Objection for the alleged reason that the Objection did not comply with Section 51 (3) of the TPA. It submitted that it was not disputed that by the Respondent that invoices were provided by the Appellant. It further submitted that the VAT Act being the substantive law for VAT administration spells out under Section 17 (1) (2) and (3) of the VAT Act that the relevant documents required in order to claim an input VAT allowable deduction.

53. The Appellant further submitted that the TPA being the procedural law, is guided by the VAT Act in this instance being the substantive Act, which is clear that the documents required for purposes of Section 17 in this case are invoices that fall under the description in the Act. It further stated that having provided the tax invoices as required under Section 17 (3) of the TPA, it complied with the provisions of the law irrespective of whether or not the additional information sought by the Respondent was provided.

54. The Appellant further submitted that although vide its Notice of Objection dated 10th February 2020, did not annex the documentation in support, however, upon request from the Respondent as the law instructs, through its response letter dated 29th May 2020, the Appellant did provide the relevant documents prescribed under Section 17 of the VAT Act, and the documents met the requirements enumerated in the statement of facts.

55. The Appellant asserted that the Respondent’s allegation in its Notice of Invalidation of Objection is unfounded and only aimed at defeating the Appellant’s valid objection. It urged the Tribunal to consider the Appellant provided detailed reasons for its objection and provided all the relevant supporting documents in support of the objection.

56. The Appellant’s evidence was supported by the evidence of the Appellant’s witness Godfrey Ngugi during the hearing of the matter. He stated that the parties actually later reviewed the relevant invoices produced, and arrived at a revised figure of principal tax of Kshs. 7,284,270. 00 which ought to have been subjected to the provisions of the Insolvency Act.

57. On the issue of the insolvency Act, the Appellant submitted that if at all the Respondent’s assessment is found payable, it ought to be subjected to Section 471 and Schedule 2 of the Insolvency Act.

58. The Appellant lodged a preliminary objection in this respect dated June 2024 on the applicability of the provisions of the Insolvency Act in this matter since the Appellant is a company in liquidation a fact set out in the pleadings.

59. It submitted that Section 471 of the Insolvency Act states:“(1)The liquidator of a company that is in liquidation shall distribute the assets of the company available for the payment of creditors in accordance with the second schedule.(2)Subsection (1) is subject to the provisions of this part.”

60. It was submitted that paragraph 4 to schedule 2 of the Insolvency Act provides that after the claims referred to in paragraph 2 (first priority claims) and 3 (second priority claims) as summarized have been paid, only then can the claims in respect of the following tax debts, that have third priority, be paid to the extent that they remain unpaid.

61. The Appellant submitted that given that the taxes that are the subject of this Appeal are VAT and that VAT is not listed under paragraph 4 of the second schedule to the Insolvency Act as a priority claim, accordingly, the VAT demand remains an unsecured debt and ought to be treated as such, together with the other unsecured creditors of the Appellant, with least priority in line with the provisions of the Insolvency Act.

62. The Appellant cited the case of Zarara Oil & Gas Company Ltd [2021] KEHC 191 (KLR), Where the court stated;“Treating KRA as a priority creditor by virtue of section 34 of the TPA, and any argument that KRA should be paid the taxes owed before any other creditor was paid would undermine the basic principle underlaying insolvency. All creditors of the same class had to be treated fairly and equally. Such a position would amount to the court taking over the insolvency proceedings contrary to the fifth schedule to the Insolvency Act and undermining the other creditors.Even though section 34 of the TPA provided for priority of taxes, the issue of payment could only arise once a liquidator collected the assets and proposed to pay the creditors. The objection by KRA to the recognition on that ground was dismissed.”

63. The Appellant also cited the case of Re HP Gauff Ingeniure GMBH & CO KG -JBG (2021) eKLR and urged the Tribunal to be guided by the basic principles of insolvency that the Respondent is not a secured creditor and the VAA assessment is not a priority claim as per the Insolvency Act, and should the Tribunal find the said claim payable, the same ought to be guided by the provisions of the Insolvency Act.

64. The Appellant also submitted that Section 17 (1) of the TPA provides that the Commissioner shall recognize the appointed administrators and their duties under liquidation and both parties must notify each other of the status and prayed that the Respondent be guided accordingly.

The Appellant’s Prayers 65. By reason of the foregoing, the Appellant prayed for orders:a.This Appeal be allowed;b.The Respondent’s Tax Decision dated 30th March 2021 be set aside in its entirety;c.The Appellant’s Objection Notice be declared to be an Objection to be determined on its merits;d.The Tribunal directs the Kenya Revenue Authority to validate the Appellant’s Objection Notice on its merits;e.The costs of and incidental to this Appeal be awarded to the Appellant; and,f.Any other orders that the Tribunal may deem fit.

The Respondent’s Case 66. The Respondent’s case is set out on its;a.Statement of Facts dated 29th June 2022 and filed on 8th July 2022 together with the documents attached thereto; and,b.Written submissions dated and filed on 12th August 2024.

67. The Respondent stated that its iTax system detected inconsistencies between the invoices declared by the Appellant and their suppliers for the months of January, February, March, April and May 2018.

68. It stated that as a result of the inconsistencies, the iTax system automatically generated additional principal VAT of Kshs. 67,518,813. 60 on 15th November 2019.

69. On 10th February 2020 the Appellant wrote to the Respondent seeking leave to appeal out of time and in the same letter outlined the grounds of Objection.

70. The Respondent stated that on 30th April 2020 it informed the Appellant that its late objection had been allowed and requested the Appellant to provide documents to support the objection, in terms:“In order to review your objection, the Commissioner requires you to produce proof of purchase against the disallowed invoices, including evidence of delivery of goods and services and payment of the same. The proof of payment shall include the details of your bank account as well as the supplier’s bank account, pay bill and or till number through which the payment was made.”

71. The Respondent further stated that on 29th May 2020 the Appellant responded to the Respondent’s email of 30th April 2020, providing some documents to support its Objection. In the said letter the Appellant admitted that the documents it had forwarded were not all the documents it had been requested to provide, and the Appellant attributed the reason for not providing all the requested documents to the fact that it was no longer a going concern and Covid-19 pandemic. The Appellant however promised to supply the remaining documents immediately it retrieved them, which contrary to the undertaking the Appellant never provided the documents.

72. The Respondent vide a letter dated 24th February 2021 informed the Appellant that it had not yet received the requested documents and that its objection was going to be invalidated if it does not provide the documents within seven days.

73. The Respondent stated that it again sent a reminder letter dated 9th March 2021 requesting the Appellant to support its Objection, but despite all the requests and the indulgence accorded to the Appellant the it failed and or refused to provide the requested documents.

74. The Respondent wrote to the Appellant on 30th March 2021 informing it that its objection dated 10th February 2020 was invalid having failed to comply with the mandatory requirements of Section 51 (3) (c) of the TPA which provides that, a Notice of Objection shall be treated as validly lodged by a taxpayer under sub-section (2), if, all the relevant documents relating to the Objection have been submitted.

75. The Respondent averred that the reason of invalidation of the Appellant’s objection was not because it failed to detail the reasons of objection but failure to provide all the documents to support the objection.

76. It stated that the law requires that all relevant documents should be provided for an objection to be treated as validly lodged. In this case the Appellant provided some documents, and admitted unequivocally that it did not manage to obtain all the relevant documents requested by the Respondent.

77. It was the Respondent’s case that the Appellant is erroneously misinterpreting the Notice of Objection Invalidation as the Objection Decision from the Respondent. It averred that the two can neither substitute one another nor be regarded as one and the same.

78. It was further the Respondent’s case that it did not issue an objection decision in this case, as there was no valid objection and therefore the provisions of Section 51 (11) of the TPA cannot come into play, as an Objection Decision can only be issued where there is a valid objection as provided for under Section 51 (8) of the TPA.

79. It stated that Section 3 of the TPA provides that an Objection Decision, has the meaning in Section 51 (8) of the TPA, which states: -“(8)Where a notice of objection has been validly lodged within time, the Commissioner shall consider the objection and decide either to allow the objection in whole or in part, or disallow it, the Commissioner’s decision shall be referred to as an “objection decision “.

80. The Respondent averred that from the reading of the above section it is clear that an Objection Decision can only be issued where a Notice of Objection has been validly lodged within time. In the instant case, the Appellant’s objection was not valid as such therefore it did not attract an Objection Decision.

81. In its submissions, the Respondent submitted on the Appellant’s preliminary objection, and contended that a preliminary Objection consists of a point of law which has been pleaded or which arises by clear implication out of pleadings and which if argued as a preliminary point may dispose of the suit, and cited the case of Hassan Ali Joho & Anor vs. Suleiman Said Shahbal & 2 others , and also the case of Mukisa Biscuits Manufacturing Co. Ltd vs. West End Distributors Ltd (1969) EA 696.

82. The Respondent submitted that there are four conditions that a preliminary objection must pass for it to be a proper preliminary objection, namely;i.It must be based on a pure point of law;ii.It must be pleaded or arise by clear implication out of pleadings;iii.The facts pleaded or arising by clear implication should be undisputed;iv.If successfully argued a preliminary objection should dispose of the suit.

83. The Respondent submitted that the preliminary objection fails on all four conditions. It submitted that the issue as to whether the Appellant is insolvent or not has not been pleaded in the instant Appeal neither does it arise by clear implication out of pleadings. Further even if it was found that the issue of insolvency was either pleaded or it arises by clear implication out of pleadings, the Respondent disputes such an allegation. It stated that there is no evidence before the Tribunal that actually the Appellant is insolvent/in liquidation, and further, it is not within the jurisdiction of the Tax Appeals Tribunal to determine if the Appellant is in liquidation or not.

84. The Respondent submitted that even if the issue of insolvency of the Appellant was argued and determined whichever way the same cannot dispose of the instant suit.

85. The Respondent also submitted that the appeal before the Tribunal is based on Section 51 of the TPA, which deals with objections to tax assessments. The Appellant objected to assessment raised upon which the Respondent invalidated the said objection on account of failure by the Appellant to supply documents. The Appellant being dissatisfied with the invalidation filed an appeal that is pending determination before this Tribunal.

86. It submitted that the preliminary objection is based on the provisions of Insolvency Act which do not form part of the Appeal herein. It stated that for the Appellant to raise a preliminary objection, it needs to be based on the facts pleaded in its case and should be on a pure point of law such as jurisdiction, res judicata, or point of law. The issue of insolvency has not been pleaded anywhere in the leadings and as such a preliminary objection cannot be raised on such facts. Further, the accuracy of the Appellant’s allegations of insolvency is disputed. The Respondent cited the cases of IEBC vs. Jane Cheperenger & 2 Others [2015] eKLR, and, Cheraik Management Ltd vs. NSSF & Anor, and submitted that the Appellant’s preliminary objection is unmerited and ought to be dismissed with costs.

87. The second limb of the Respondent’s submissions is on whether the Respondent’s Objection is deemed to have been allowed by operation of the law.

88. It submitted that for determination of the issue, the sequence of events as set out in the statement of facts need to be examined.

89. It further submitted that Section 51 (4) of the TPA provides;“(4)Where the Commissioner has determined that a notice of objection lodged by a taxpayer has not been validly; the Commissioner shall immediately notify the taxpayer in writing that the objection has not been validly lodged.”

90. It further submitted that the Appellant was notified that its late objection dated 10th February 2020 and admitted on 30th April 2020 was invalid.

91. The Respondent submitted that it went further and informed the Appellant of what documents were required to make the objection valid. The allegation by the Appellant that the Respondent took more than one year to inform it of the invalidity of the objection was therefore not candid.

92. The Respondent further submitted that when the Appellant failed to comply with the request made vide a letter dated 30th April 2020, the Respondent did a reminder vide an email dated 12th May 2020, and in the said email the Respondent was very categorical on the documents required, specifically it listed 9 items it required.

93. The Appellant forwarded 3 batches of disallowed invoices, but however failed to forward the other requested documents as listed in the Respondent’s letter dated 30th April 2020 and email dated 12th May 2020.

94. In a letter dated 29th May 2020, the Appellant expressed the challenge it was going through and the reasons it failed to forward the documents. It indicated that it was no longer a going concern and further due to Covid - 19 it was operating on skeletal staff who were working from home and retrieval of the documents was a daunting task for them. It informed the Respondent that it was making every effort to retrieve the additional information and would share the same as soon as it obtained them.

95. The Respondent submitted that indeed the year 2020 was a difficult year due to covid 19 pandemic, and as indicated by the Appellant, in a letter dated 29th May 2020, most institutions were not operating optimally, and bearing in mind the said challenge, the Respondent allowed the Appellant more time to retrieve the documents requested.

96. The Respondent further submitted that in allowing the Appellant more time, it knew that it was not under any legal risk as it had already notified the Appellant on the invalidity of its objection and informed it on the documents required to maker the same valid. As at that time the law on issuance of an objection decision was either within 60 days of issuance of an Objection Decision or of receipt of any documents requested.

97. Section 51 (11) of the Tax Procedures Act in 2020 provided: -“(11)The Commissioner shall make the objection decision within sixty days from the date of receipt of –a.The notice of objection; orb.Any further information the Commissioner may require from the taxpayer, failure to which the objection shall be deemed to be allowed.”

98. The Respondent averred that in order to bring the matter to a rest, on 30th March 2021 it issued the Appellant with a Notice of Objection Invalidation.

99. It submitted that the Appellant’s objection cannot therefore be deemed to have been allowed by operation of the law because the Appellant had already been informed of the invalidity of its objection immediately as required by law. It further submitted that it did not issue an Objection Decision in this case as there was no valid objection and therefore the provisions of Section 51 (11) of the TPA cannot come into play.

100. The Respondent submitted that a decision can only be rendered where the objection was validly lodged; where it the objection was not validly lodged, it shall be communicated to the Appellant in regard to Section 51 (4) of the TPA. The Respondent communicated the same to the Appellant.

101. On the third limb of its submissions, the Respondent submitted on whether the Respondent erred in fact and in law by invalidating the Appellant’s Notice of Objection when in fact it complied with Section 51 (3) of the TPA.

102. The Respondent submitted that the Appellant’s Objection dated 10th February 2020 was not compliant with the provisions of Section 51 (3) of the TPA of TPA, as all relevant documents relating to the objection have not been submitted.

103. It submitted that as per the provisions of Section 51 (3) (c) it is clear that for an objection to be valid all relevant documents relating to the objection have to be submitted.

104. It further submitted that it cannot be faulted for invalidating the Appellant’s objection for failure to supply all the relevant documents when none other than the Appellant itself had admitted in its letter dated 29th May 2020 that it had not supplied all the requested documents.

105. The Respondent submitted that the Appellant had not kept records of its business transactions as required by law. Section 23 (1) of the TPA lays a duty on the Appellant to keep records of its transactions and to produce the same when called upon to.

106. The Respondent asserts that the burden of proof relies on the Appellant in proving that indeed the Respondent’s assessments were wrong as stipulated under Section 56 (1) of the TPA.“(1)In any proceedings under this part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”

107. It cited the case of Commissioner of Income Tax vs. GlaxoSmithKline Ltd (2017) eKLR, where it was held;“the burden was on the taxpayer to substantiate the deductions claimed with adequate documentation during the objection process. Failure to provide such documentation could result in the dismissal of the objection.”

108. The Respondent also submitted that Section 30 of the Tax Procedures Act applies itself to the same effect that;“In proceedings before the Tribunal, the Appellant has the burden of proving-a.Where an appeal relates to an assessment, that the assessment is excessive; orb.In any other case, the tax decision should not have been made or should have been made differently.”

109. On the Insolvency Act Cap 53, the Respondent submitted on whether the same ought to apply if at all any of the tax in dispute crystalizes as the fourth limb of its submissions, and stated that the insolvency of the Appellant was never an issue at any point during the objection process. The Respondent has further not made any decision concerning the liquidity of the Appellant so as to make the aforesaid an issue for determination before the Tribunal.

110. It further submitted that the insolvency of the Appellant is not a ground of appeal in its Memorandum of Appeal and therefore ought not to arise in the Appeal.

111. The Respondent further submitted that the jurisdiction of the Tribunal as set out under paragraph 12 of the Tax Appeals Tribunal Act (TAT Act) is limited to the decisions of the Commissioner arising from the provisions of tax laws and the Insolvency Act is not a tax law.“(12)A person who disputes the decision of the Commissioner on any matter arising under the provisions of any tax law may, subject to the provisions of the relevant tax law, upon giving notice in writing to the Commissioner, appeals to the Tribunal.”

The Respondent’s Prayers 112. By reason of the foregoing, the Respondent prayed the Tribunal for orders;a.The Appeal be dismissed with costs; and,b.The Notice of Objection Invalidation dated 30th March 2021 be upheld.

ISSUES FOR DETERMINATION 113. The Tribunal having carefully considered the pleadings and the submissions made by the parties is of the view that the Appeal crystalizes in three issues for determination as follows;i.Preliminary objection - Whether the Insolvency Act Cap 53 ought to apply, if at all, if any tax in dispute crystalizes;ii.Whether the Respondent erred in invalidating the Appellant’s Notice of Objection; and,iii.Whether the Appellant’s ‘s Objection is deemed to have been allowed by operation of the law.

Analysis and Determination 114. The Tribunal having established the issues and shall analyse and determines the issues as follows;i.Preliminary objection - Whether the Insolvency Act Cap 53 ought to apply, if at all, if any tax in dispute crystalizes.

115. The Appellant filed a Notice of Preliminary Objection dated 24th June 2024 on the same date and raised the following grounds;i.That the Appellant being in liquidation, its Appeal before the Tribunal ought to be determined in line with the provisions of the Insolvency Act Cap 53. ii.Schedule 2 of the Insolvency Act on preferential debts provides for priority payments to preferential creditors as listed in paragraphs 2, 3 & 4 of the schedule.iii.Paragraph 3 to schedule 2 states that after the claims referred to in paragraph 2 and 3 (first and second priority claims) have been paid, only then can the can the claims in respect of the tax debts, that have third priority, can be paid to the extent that they remain unpaid.iv.Given that the taxes that are subject of this Appeal are VAT and that VAT is not listed under paragraph 3 of the second schedule to the Insolvency Act as a priority claim, in the circumstances, the VAT demand remains an unsecured debt and ought to be treated as such with least priority, in line with the provisions of the Insolvency Act.v.That further, Section 17 of the TPA provides that certain debts have a priority over taxes as provided for under the provisions of the Insolvency Act.

116. The Appellant urged the Tribunal to consider the foregoing provisions of the Insolvency Act as well as Section 17 of the TPA in determining the dispute.

117. The Appellant has submitted that the Tribunal ought to be guided by the basic principle of insolvency that the Respondent is not a secured creditor and the VAT claim is not a priority claim as set out in paragraph 4 to schedule 2 of the Insolvency Act Cap 53, and should the Tribunal find the claim payable, the Respondent ought to be guided by the provisions of the Insolvency Act.

118. On its part, the Respondent submitted that the issue of insolvency was never an issue at any point during the objection process, and it is not contained in the Appellant’s grounds of Appeal, so as to make the same an issue for determination before the Tribunal.

119. The Respondent further submitted that the Appellant’s preliminary objection does not consist of a pure point of law, which has been pleaded or arising by clear implication from the pleadings, and if considered may dispose off the suit, in line with the holding in the locus classicus of Mukisa Biscuits Manufacturing co. Ltd (supra), and fails as a preliminary objection.

120. It was further submitted that even if the issue of insolvency of the Appellant was argued and determined as a preliminary point of law, the same cannot determine the dispute.

121. The Respondent also submitted that the jurisdiction of the Tribunal as set out under paragraph 12 of the TAT Act is limited to decisions of the Commissioner arising from provisions of tax laws, and the insolvency Act is not a tax law.

122. It therefore submitted that the Appellant’s preliminary Objection is unmerited and should be dismissed.

123. It is worth noting that a preliminary objection can be raised by either party to the dispute at any stage in the proceedings before the main hearing of the case and the same can be raised by way of a notice statement of grounds or by affidavit.

124. The principles on raising preliminary objections are well laid out in the locus classicus case of law which has been pleaded or which carries e on Mukisa Biscuit Manufacturing Co. Ltd vs. West End Distributors Ltd (1969) EA 696, where the court held:“A preliminary Objection consists of a point of law which has been pleaded or which arises by clear implication out of pleadings and which if argued as a preliminary point may dispose of the suit. Examples are an objection to the jurisdiction of the court or a plea of limitation or a submission that the parties are bound the contract giving rise to the suit to refer the dispute to arbitration …a preliminary objection is in the nature of what used to be a demurrer. It raises a pure point of law, which is argued on the assumption that all the facts pleaded by the other side are correct. It cannot be raised if any fact has to be ascertained or if what is sought is the exercise of judicial discretion.”

125. A point of law is one which is clearly set out in the existing law and capable of disposing of the suit at a preliminary stage, such as jurisdiction of the court, competence or admissibility of the claim, limitation of action, Res judicata, constitutionality, and so on. The presumption is that the facts pleaded are correct and need not be ascertained substantively.

126. The Appellant has founded its preliminary objection on the ground that the company is under liquidation and the Appeal herein ought to be determined in line with the Provisions of the Insolvency Act.

127. The issue of the Appellant being under liquidation is pleaded in the Appellant’s Statement of Facts and can also be implied from the Memorandum of Appeal. The Respondent has however contended that the insolvency of the Appellant is not obvious and apparent on the face of the record and therefore ought to be ascertained through production of competence evidence.

128. The issue to consider is whether the P.O is based on a pure point of law capable of disposing of the suit without going to the substantive merits of the dispute.

129. However, gleaning through the record and submissions of the parties, it is quite clear to the Tribunal that the Appellant is raising the P.O to assert a right subject the outcome of the dispute to the Insolvency Act, rather than asserting that the claim is subject to be determined in line with the Insolvency Act. The P.O in a sense is speculative as the same is subject to the outcome of the claim in the Appeal herein. The parties cannot subject the claim herein to the priorities set out in the cited schedule to the Insolvency Act, before determination by this Tribunal as to whether the same is due and payable. The Appellant is therefore not seeking to determine the appeal through this P.O but rather reserve the right to subject the anticipated outcome to the priorities set out in the Insolvency Act.

130. This Tribunal’s jurisdiction is to determine the tax dispute as to whether the subject assessment is justified or not, and therefore the tax claimed payable or not. The issue of the priority of payment if found due is within the mandate of the Insolvency Court, subject to the Insolvency Act. The P.O as presented is therefore misplaced before this Tribunal.

131. In view of the foregoing the Tribunal is satisfied that the Appellant’s preliminary objection is not merited and is accordingly dismissed.ii.Whether the Respondent erred in invalidating the Appellant’s objection Notice.

132. The Respondent invalidated the Appellant’s Notice of Objection on the basis that the objection did not comply with Section 51 (3) of the TPA, which states;“(3)A notice of objection shall be treated as validly lodged by a taxpayer under subsection (2) if -(c)All relevant documents relating to the objection have been submitted.”

133. The Appellant has averred that all the invoices were provided to the Respondent, which has not been disputed by the Respondent.

134. The Appellant has submitted that the VAT Act being the substantive law for VAT administration, it spells out under Section 17 (1) (2) and (3) of the said Act the relevant documents required in order to claim an input VAT allowable deduction.“(2)If, at the time when a deduction for input tax would otherwise be allowable under subsection (1),a.the person does not hold the documentation referred to in subsection (3), orb.the registered supplier has not declared the sales invoice in a return, the deduction for input tax shall not be allowed until the first tax period in which the persons hold such documentation.Provided that the input tax shall be allowable for a deduction within six months after the end of the tax period in which the supply or importation occurred.(3)The documentation for the purposes of subsection (2) shall be –SUBPARA (a)an original tax invoice issued for the supply or a certified copy;”

135. The Appellant’s submission is that the TPA being the procedural law, VAT is guided by the VAT Act, which is the substantive Act on VAT, and makes it clear that the documents required for the purposes of Section 17, are invoices that fall under the provisions of the Act.

136. It therefore submitted that the tax invoices as required under Section 17 (3) of the TPA thus complied with the provisions of the law irrespective of whether or not the additional information by the Respondent was provided.

137. The Appellant also submitted the VAT Regulations 2017 made provision for the contents of a valid tax invoice.

138. The Appellant further averred that though it did not annex the documentation in support to its objection dated 10th February 2020, upon the request by the Respondent as the law provides, through its response letter dated 29th May 2020, it provided the relevant documents as prescribed under Section 17 (2) and (3) of the VAT Act, and averred that the said documents are attached at pages 15 to 339 of its Statement of Facts.

139. The Appellant therefore submitted that the Respondent’s assertion in its Notice of Invalidation of the objection that the Appellant did not provide all the relevant documentation in support of its Notice of Objection is unfounded, and aimed at defeating the Appellant’s valid Notice of Objection, whereas the Appellant provided detailed reasons for its objection and provided all the relevant supporting documentation.

140. On its part, the Respondent averred that the Appellant belatedly objected the additional assessments on 10th February 2020, which late objection was allowed 30th April 2020, and the Appellant requested to provide supporting documents to validate the same.

141. The Respondent averred that it informed the Appellant that its late Objection had been allowed and requested the documents to support the same in terms;“In order to review your objection, the commissioner requires you to produce proof of purchase against disallowed invoices, including evidence of delivery of goods and services and payment of the same. The proof of payment shall include the details of your bank account as well as the supplier’s bank account, pay bill and or till number through which the payment was made.”

142. The Respondent averred that the Appellant provided some of the documents on 29th May 2020, but not all the requested documents. It stated that the Appellant in its letter dated 29th May 2020 admitted that it had not supplied all the requested documents and expressed the challenge it was facing in retrieving the requested documents due to the Covid - 19 pandemic as staff worked from home and that it was no longer a going concern.

143. The Respondent submitted that Section 51 (3) (c) provides that for an objection to be valid all the relevant documents relating to the objection have to be subjected.

144. It further stated that the Appellant’s failure to avail crucial documents as required by the Respondent made it hard for the Respondent to ascertain the truthfulness and position of the Appellant.

145. The Appellant asserted that in this case it was guided by what is relevant as specified by the VAT Act which specifies what is relevant, and indeed it supplied the Respondent with all the relevant documents in accordance with the VAT Act as annexed in the bundle of documents.

146. The Tribunal taking into account the foregoing submissions by the respective parties considers as the fulcrum upon which this issue revolves, the Appellant’s letter dated 29th May 2020 and the attachments thereto which are annexed at pages 15 to 339 of its Statement of Facts, which is the letter and submission of documentation to validate the objection notice.

147. In the aforesaid letter, the Appellant attached submitted copies of the disallowed invoices, which it stated accounted for 86% of the disallowed invoices (supporting documentation). The Appellant went on to state;“Please note that ARM is no longer a going concern and nearly all the staff have left the company. The Covid -19 pandemic has made it more challenging since the few remaining employees are working from home. As a result, retrieval of all the requested information is a daunting task. The company is however making every effort to retrieve the additional information, and will be shared as soon as it is available.In the meantime, we request that you review the company’s notice of objection based on the information provided as we look forward to resolving the matter as soon as possible.”

148. The invoices, correspondence and bank statements and proof of payment submitted for verification and review by the Respondent is attached to the aforesaid letter.

149. It is noteworthy that in the request for documents, the Respondent had specifically required the Appellant to furnish the proof of purchases against the disallowed invoices, evidence of delivery and payment for the same, proof of payment to include details of bank payments, pay bill or till.

150. From the documentation submitted by the Appellant to the Respondent, the Tribunal considers the same to have substantially met the criteria specified by the Respondent in its request, notwithstanding the plea by the Appellant that due to logistical challenges of liquidation and Covid -19, it could not retrieve 100 % of the required documents but managed about 86 %.

151. The documentation already submitted by the Appellant merited a substantive review, possibly leading to a reconsideration of the assessment by the Respondent on its merits.

152. It is also not lost on the Tribunal that this assessment being a VAT assessment, the applicable substantive law is the VAT Act, and therefore the Appellant’s contention that Section 17 (2) and (3) of the act determines the relevant documents as “an original tax invoice issued for the supply or a certified copy” is merited.

153. The Appellant’s argument that by furnishing the requested invoices, it complied with the provisions of Section 17 (3) of the VAT Act, irrespective of the additional documents sought by the Respondent deserved a substantive review on merits.

154. The foregoing being the case, it is not in dispute that the Respondent issued its letter dated 30th April 2020 requesting for further information. The request for further information was duly responded to by the Appellant on 29th May 2020, and the relevant documents and information provided.

155. The Respondent issued a notice of invalidation almost a year later vide its letter dated 30th March 2021 on the basis that, all the relevant documents relating to the objection have not been submitted.

156. The Tribunal is persuaded by the material and submissions presented by the Appellant that it submitted the relevant information and documents to the Respondent on the 29th May 2020. The Respondent therefore delayed by more than a year in notifying the Appellant of the invalidity under Section 51 (4) of the TPA.

157. The Tribunal is also satisfied that since the Objection Notice submitted by the Appellant was valid from the 29th May 2020, when the supporting documentation was submitted to the Respondent, the Respondent had sixty days therefrom to render an Objection Decision. Upon the lapse of the sixty days, the Respondent had no further legal mandate to issue an Objection Decision, let alone an invalidity notice.

158. In view of the foregoing, the Tribunal holds and determines that the Respondent erred in invalidating the Appellant’s Notice of Objection.

iii. Whether the Appellant’s Objection was deemed allowed by operation of the law. 159. The Tribunal having determined that the Respondent was not justified in invalidating the Appellant’s objection notice, will not delve into this issue as the same is rendered moot.

160. The upshot of the foregoing is that the Appeal herein is merited, and is consequently allowed.

Final Determination 161. The Appellant’s Appeal having succeeded, the Tribunal proceeds to make the following orders;a.The Appellant’s Appeal be and is hereby allowed;b.The Respondent’s Notice of Invalidity of Objection dated 30th March 2021 be and is hereby set aside;c.The Respondent be at liberty to review and determine on merits the Appellant’s valid Notice of Objection dated 10th February 2020 within sixty days of this judgement; and,d.Each party to bear its own costs.

162. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 11TH DAY OF OCTOBER 2024ROBERT M. MUTUMA - CHAIRPERSONMUTISO MAKAU - MEMBERJEPHTHAH NJAGI - MEMBERDELILAH K. NGALA - MEMBERDR. TIMOTHY B. VIKIRU - MEMBER