[2023] KETAT 92 (KLR)

Asea Brown Boveri (ABB) Limited v Commissioner of Investigations & Enforcement (Tribunal Appeal 854 of 2021) [2023] KETAT 92 (KLR) (17 March 2023) (Judgment)

Neutral citation: [2023] KETAT 92 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tribunal Appeal 854 of 2021

RM Mutuma, Chair, RO Oluoch & EN Njeru, Members

March 17, 2023

Between

Asea Brown Boveri (ABB) Limited

Appellant

and

Commissioner of Investigations & Enforcement

Respondent

Judgment

Background 1. The Appellant is a private limited company incorporated in Kenya under the Companies Act. Its main form of business is in the sale and service of electrical products.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, 1995. Under Section 5 (1) of the Act, the Kenya Revenue Authority is an agency of the Government for the collection and receipt of all tax revenue. Further, under Section 5(2) of the Act with respect to the performance of its functions under Subsection (1), the Authority is mandated to administer and enforce all provisions of the written laws as set out in Part 1 & 2 of the First Schedule to the Act for the purposes of assessing, collecting and accounting for all revenues in accordance with those laws.

3. The Appellant was investigated by the Respondent from a KPLC case where it was suspected that the inputs claimed by KPLC from the Appellant may not have been reported as output by the Appellant. The Respondent served the Appellant with investigations findings on 25th November 2020 demanding a total of Kshs. 596,647,841. 00 for Corporation tax and VAT for the years of income 2014 to 2019 based on the variance between the sales recomputed from the bankings and sales reported in the Corporation tax returns as well as VAT returns.

4. The Appellant replied on 18th February 2021 disputing the Income tax computation and provided reconciliation schedules and additional records which the Respondent reviewed and issued a letter of findings to the Appellant on 18th May 2021. This was followed with additional assessments which notice was issued to the Appellant on 9th July 2021.

5. The Appellant objected to the additional assessment on 6th August 2021. The Respondent then made some adjustments.

6. The Respondent issued its Objection decision on 15th November 2021 confirming part of the assessments of Kshs. 3,196,617. 00 and Kshs. 63,273,417. 00 for Corporation tax and VAT, respectively.

7. The Appellant, being dissatisfied with the Respondent’s decision and assessment filed a Notice of Appeal on 15th December 2021.

The Appeal 8. The Appeal is premised on the Amended Memorandum of Appeal dated 29th December 2021 and filed on the 30th December 2021 on the following grounds:a.The Respondent erred in law by failing to vacate assessments for the years of income 2014 and 2015 as these assessments had been issued outside the statutory time limit of five years as provided by the tax Procedures Act, 2015. b.The Respondent has erred in law and in fact by failing to take into account information and data availed for other income in the Financial Statements which explain the variance between sales declarations made in the VAT returns and the turnover reported in the Financial Statements for the year of income 2014. The same data also explains the apparent variance between the sales declared in the VAT returns and the sales computed using the banking method.c.Notwithstanding and without prejudice to the foregoing, the Respondent has erred in law and in fact by seeking to charge Corporation tax on the variance between the sales declared in the Corporation tax returns and the recomputed sales as per bankings of Kshs. 10,565,389. 00 for the year of income 2014. d.The Respondent has erred in law and in fact by seeking to charge VAT on the variance between the sales declared in the VAT return and the recomputed sales as per bankings of Kshs. 63,079,723 and Kshs. 190,377,573 for the years of income 2014 and 2015 respectively.e.The Respondent has erred in law and in fact by seeking to charge VAT on the variance between the sales declared in the VAT return and the recomputed sales as per bankings of Kshs. 46,427,199 and Kshs. 95,574,358 for the years of income 2018 and 2019 respectively.f.The Respondent erred in law and fact by failing to establish a threshold for gross negligence and demonstrating that the same was exceeded by the Appellant to justify reliance on Section 31(4)(a) to re-open for audit, periods beyond the statute of limitation and proceeding to issue additional assessments for years of income 2014 and 2015. g.The Respondent erred in law and fact by cherry-picking on apparent variances between estimated turnovers derived from bank deposits and the actual turnovers declared by the Respondent in the VAT and Income tax returns for the years of income 2014 to 2019 and selectively charging additional tax without considering the aggregate position of the entire period under review.h.The Respondent’s Application of Section 47 of the TPA violates the constitutional rights of the Appellant under Articles 47, 10, and 48. i.The Respondent erred in law and in fact by unlawfully and procedurally issuing default notices for the period 2018-2019 which notices were defective having failed to meet the mandatory provisions of the law.

The Appellant’s Case 9. The Appellant’s case was premised on its Statement of Facts dated 15th December 2021 and filed on 28th December 2021.

10. The Appellant stated that the assessments for the years 2014 and 2015 were issued outside the 5-year statute of limitation stipulated under the tax Procedures Act, 2015.

11. It averred that Section 31(4)(b) of the tax Procedures Act categorically provides that the Respondent can amend an assessment within five years of the date the self-assessment was filed in the case of gross or wilful neglect by or on behalf of the taxpayer.

12. It contended that the Respondent issued the assessments for the years of income from 2014 to 2019 on 9th July 2021 and therefore in essence the 2014 and 2015 assessments for both Corporation tax and VAT were issued outside the period of five years within which the Respondent can issue an assessment, as provided for under Section 31 of the tax Procedures Act, that Section 31(4) of the tax Procedures Act bars the Commissioner from amending an assessment after the expiry of 5 years from the date of self-assessment.

13. It averred that the Respondent in confirming the assessments alleged that there was wilful neglect on the part of the Appellant as it failed to declare full income received. The total sales declared in the Corporation tax return for the year of income 2014 was Kshs. 706,259,051. 00 while the sales amount arrived at by the Respondent using the banking method was Kshs. 716,824,440. 00.

14. It stated that the Respondent did not substantiate how the variance arising from the sales amounts could have been a result of neglect on the Appellant’s part. That the variances arising from the re-computation of the sales amount using the banking method are mainly due to reconcilable items given that the sales declared in the returns were based on the revenue recognised in the audited financial statements. It further stated that considering the time-lapse of the period in question and the fact that there have been changes in staff at the Appellant’s business and the fact that most of the reconciliation data had to be retrieved from an independent archivist, the variance is too immaterial relative to the sales declared, that it cannot be construed to be out of gross negligence.

15. It was the Appellant’s contention that there is no wilful neglect on its part and the Respondent acted ultra vires by confirming the assessments on CIT and VAT with respect to the years of income 2014 and 2015 and that the CIT and VAT assessments for the years of Income 2014 and 2015 are time-barred thereby rendering them null and void.

16. It reiterated that the Respondent is seeking to charge VAT on the variance established from comparing the sales declared in the VAT returns to the recomputed sales as per bankings for the years of income 2018 and 2019. That the additional Vatable sales arising from this comparison are Kshs. 46,427,199. 00 and Kshs. 95,574,358. 00 for the years of income 2018 and 2019, respectively.

17. It further contended that the variances arising from a comparison of the turnover per the VAT returns and the sales per the bankings are largely a result of the differences in the accounting treatment accorded to the various reconciling items and that there is no loss of tax revenue to the Respondent.

18. It averred that it put in significant effort to reconcile the variances from the initial amount that the Respondent had raised which adjustments were outlined in detail with supporting documentation in the objection letter and further in email correspondences and meetings between the Appellant and the Respondent.

19. It stated that the variance has been sufficiently reconciled and that part of the variances claimed by the Respondent arise out of zero-rated sales that were not included in the VAT returns for the period and that an additional schedule for the zero-rated sales was provided to the Respondent.

20. It asserted that it was actively engaged in reconciling the variances between the sales from the bank deposits and the sales declared in the VAT and Income tax returns which were halted by the Respondent when it issued an Objection Decision.

21. It also averred that whereas the Respondent purported to charge tax on positive variances in years of income 2014, 2015, 2018, and 2019, it does not consider the significant negative variances for the years of income 2016 and 2017.

22. It asserted that the Respondent applied the law and looked at the facts selectively by cherry-picking only those instances where the apparent variance favours its case while disregarding all facts and that the Respondent ought to have considered the entire period of the audit where the aggregate turnover declared in the VAT returns is Kshs. 5,443,469,365. 00 and not the Kshs. 5,429,383,220. 00 as derived by the Respondent for the period 2014 to 2019. It further asserted that the Appellant declared a higher turnover by Kshs. 14,086,145. 00 which fact the Respondent ignored in its Objection Decision in contravention of the Appellant’s right to fair administrative action under the constitution and the Fair Administrative Actions Act.

23. It stated that the Respondent failed to interrogate the reconciliation that was provided by the Appellant and that it sought to resolve the issue with the Respondent by contacting the Respondent after the objection was lodged and holding meetings and communicating through telephone calls and providing more information via email.

24. It asserted that the Respondent by issuing the Objection Decision while ignoring the reconciling items was unlawful and prejudicial.

25. It quoted Section 47 (1) of the tax Procedures Act which states:-“When a taxpayer has overpaid a tax under a tax law the taxpayer may apply to the Commissioner, in the approved form, for a refund of the overpaid tax within five years of the date on which the tax was paid.”

26. It contended that the provision of the law is only applicable in a situation where the taxpayer wishes to have the overpaid tax refunded to him on tax and not to compel the taxpayer to apply for a refund of overpaid tax if the alternative option of utilisation of overpayment towards the offsetting other tax liabilities is available to the taxpayer through itax.

27. It reiterated that the tax overpayments in issue are CIT overpayments of Kshs. 18,553,489. 00, withholding tax suffered at the source of Kshs. 14,602,768. 00 and advance tax paid of Kshs. 31,380. 00 for 2017 making it a total tax overpayment of Kshs. 33,187,637. 00 for 2017 which the Respondent has failed to consider to offset against the additional CIT liability that is claimed.

28. It asserted that the Respondent has allowed taxpayers with tax overpayments to offset the overpayments against tax liabilities which it has arbitrarily disallowed by a change of administrative practice.

29. It relied on the case of Republic v. Kenya Revenue Authority Ex-parte L.A.B International Kenya Limited [2011] eKLR where it highlighted the arguments made by the taxpayer therein.

30. It further cited the case of Kenya Data Networks Limited v. Kenya Revenue Authority [2013] eKLR where the court reiterated the sentiments of Justice Majanja in the case of Isaac Gathungu Wanjohi & Others v. The Attorney General & Others Nairobi HCC Petition Number 14 of 2011 where he observed that the purpose/duty of any statutory body is to serve its constituents with the utmost care, speed, and diligence.

The Appellant’s prayers 31. The Appellant consequently prayed for:a.This Appeal be allowed in full.b.The cost of the suit be awarded to the Appellant.c.This Honourable Tribunal grants any other remedy it may deem fit.

The Respondent’s Case 32. The Respondent’s case is premised on its Statement of Facts dated and filed on 27th January 2022.

33. It stated that there was wilful neglect on the part of the Appellant to declare full income received in 2014 in its returns where it was established that the Appellant had total sales of Kshs. 716,824,440. 00 but only Kshs. 706,259,051. 00 was declared.

34. It relied on the provisions of Section 31(4)(a) of the tax Procedures Act to bring to charge the variance established of Kshs. 10,565,389. 00 which has a resultant Corporation tax liability of Kshs. 3,169,617. 00.

35. It reiterated that in view of the reconciliations carried out on the bankings, there is no dispute on the sales as per bankings for the period under review, and as such, the item on the VAT charged on the variance between the sales declared in the VAT return and the recomputed sales as per bankings of Kshs. 46,427,199. 00 and Kshs. 95,574,358. 00 for the years of income 2018 and 2019 respectively is no longer in dispute.

36. It added that Section 31 of the tax Procedures Act allows it to amend original tax assessments for a reporting period based on the available information and to the best of its judgement. It added that it considered all the documentation and information provided by the Appellant and noted that there were unexplained and unaccounted-for variances between sales declared in the Corporate tax Returns and VAT returns and the sales as per the bankings for 2014 and 2015.

37. The Respondent averred that even though the Appellant submitted the documentation to the Respondent it did not explain the variance noted from the sales declared in the corporate tax returns and VAT returns and sales as per the banking.

38. It was stated that the default assessment by the 2nd Respondent was proper in law.

39. It posited that it relies on Sections 31, 47, and 56 of the tax Procedures Act, the Value Added tax Act, and all enabling provisions of the law.

The Respondent’s prayers 40. The Respondent prayed for orders that:-a.The Respondent’s Objection Decision dated 15th November 2021 be upheld;b.The Appeal be dismissed with costs to the Respondent.

The Parties’ Submissions On whether the Respondent was justified to audit, investigate and issue additional assessments beyond the statutory limit of five years in total disregard to provisions of Section 31(4)(b) of the tax Procedures Act 41. The Appellant submitted that Section 31 of the tax Procedures Act dictates that the Respondent can only amend an assessment within five years of the date of filing the self-assessment save for the case of gross or wilful neglect by or on behalf of the taxpayer.

42. It relied on the case of Agricultural Training Board v. Aylesbury Mushrooms Ltd[1972] All ER 280

43. It also cited the case of Paragon Electronics Limited v. Commissioner of Domestic taxes, tax Appeal Number 207 of 2015 where it was held: “parliament or the drafter did not intend to extend the powers and duties of the Respondent[KRA] to carry out an in-depth audit after the lapse of five years provided for. It is important to note that Parliament did not provide the timelines in vain. There was a reason that informed the legislature to cap the time limits that the Respondent is expected to execute its mandate. The efforts of the Respondent were statutorily time barred as one looks at the quoted relevant Section of the law.”

44. It submitted that where the Respondent is statutorily obligated to undertake an assessment within a specific timeframe, and where the applicable legislation expressly provides for a consequence for the failure to do so, the same must be strictly adhered to and urged the Tribunal to hold that the assessment relating to the years 2014 and 2015 are time-barred by the provisions of Section 34 of the tax Procedures Act.

On whether the Respondent demonstrated the standards set for gross negligence or fraud were met to warrant issuance of assessment beyond five years 45. It gave the definition of wilful neglect as provided by the Internal Revenue Service of the Federal Government of the United States of America as: “failure to exercise the care that a reasonable person would observe under the circumstances to see that the standards were observed despite knowledge of the standards or rules in question.”

46. It cited the case of R v. Turbill and Broadway[2014] 1 Cr.App.R.7 where the England Wales Court of Appeal stated that the term “willfully” means deliberately refraining from acting or refraining from acting because of not caring whether the action was required or not.

47. It relied on the case of Gitere Kahura Investments Ltd. v. Commissioner of Investigations and Enforcement Tax Appeal No. 16 of 2019 where it opined that the Tribunal pursuant to Sections 107 and 108 of the Evidence Act, held that the burden of proof falls on the Respondent who must prove that the Appellant’s failure to file returns was motivated by gross or wilful neglect to file returns, attempts to evade paying taxes or fraud by a taxpayer which position it posited was echoed in the case of Katrsean Ltd v. The Commissioner of Domestic taxes Tax Appeal Number 182 of 2021 [2022] eKLR.

48. It quoted Sections 107 and 108 of the Evidence Act and submitted that at the very least the standard of proof that must be met by the Respondent in tax cases of a civil nature is that of a balance of probabilities and that todate, no evidence has been proffered by the Respondent to prove its wilful neglect.

49. It further asserted that variances arising from re-computation of the sales using the banking method are the revenue recognised in the audited financial statements and that taking into consideration the lapse of time and the fact that there have been changes in staff at the Appellant’s business which meant that most of the reconciliation data had to be retrieved by an archivist, the variance is too immaterial that it cannot be construed to be out of gross negligence.

50. It cited the decision by Ochieng J in National Social Security Fund Board of Trustees v. Commissioner of Domestic taxes, Kenya Revenue Authority [2016] eKLR where he held:-“There is a world of difference between an assertion and proof. That which a party states to be his case is an assertion. The party needs to adduce evidence to support his said assertion, with a view to proving his case… 39. As there was no evidence to support the allegations or assertions of willful neglect, I find that there was no basis upon which the 7 year period for the assessment of tax could have been extended. Accordingly, the appeal is well merited.”

51. It urged the Tribunal to hold that the Respondent failed to discharge its burden of proof on its allegations of “wilful neglect” of the Appellant and does not merit the departure from Section 31(4)(b) of the tax Procedures Act and that the Respondent acted ultra vires and contrary to the provisions of Section 31 of the tax Procedures Act in assessing time-barred periods consequently allowing the Appeal in its entirety.

On Whether the Respondent was justified to cherry-pick on apparent variances between estimated turnovers derived from bank deposits and actual turnovers declared by the Respondent in the VAT and Income tax Returns for years of income 2014 to 2019 and charging additional tax selectively without considering the aggregate position of the reconciliation period. 52. It submitted that the additional vatable sales arising from the comparison of the sales declared in the VAT returns and the recomputed sales as per bankings for the period 2018 and 2019 is Kshs. 46,427,199. 00 and Kshs. 95,574,358. 00 respectively.

53. It asserted that the variances arising from a comparison of the turnover per VAT returns and sales per the bankings are largely because of the difference in the accounting treatment accorded to the various reconciling items therefore no loss of revenue is experienced by the Respondent.

54. It asserted that the Respondent cherry-picked only those instances where the apparent variance favours its case while disregarding all facts and that the Respondent ought to have considered the entire period of the audit where the aggregate turnover declared in the VAT returns is Kshs. 5,443,469,365. 00 and not the Kshs. 5,429,383,220. 00 as derived by the Respondent for the period 2014 to 2019. It further asserted that the Appellant declared a higher turnover by Kshs. 14,086,145. 00 which fact the Respondent ignored in its Objection Decision in contravention of the Appellant’s right to fair administrative action under the constitution and the Fair Administrative Actions Act.On whether the Respondent was justified in confirming the assessment and issuing Objection Decision without considering all the explanations and evidence availed

55. It asserted that it was actively engaged in reconciling the variances between the sales from the bank deposits and the sales declared in the VAT and Income tax returns which were halted by the Respondent when it issued an Objection Decision.

56. It also averred that whereas the Respondent purported to charge tax on positive variances in years of income 2014, 2015, 2018, and 2019, it does not consider the significant negative variances for the years of income 2016 and 2017.

57. It relied on the case of Ecobank Kenya Ltd v. The Commissioner of Domestic taxes [2012] eKLR where the court held that:“business people have a right of certainty and predictability in the applicability of conduct, rules, policies and procedures which underlie the proper regulation of economic activities. This right necessarily militates against policies, regulations and procedures which are haphazardly resorted to by public regulatory bodies without adequate notice to those whose conduct or behaviour is to be regulated.”

On whether the provisions of Section 47 of the tax Procedures Act are couched in mandatory terms such that a taxpayer must apply for refunds and undergo audits in order for the taxpayer to have access to the overpayments and whether the Respondents’ treatment of taxpayer overpayments under Section 47 violates the constitutional rights of the Appellant under Article 47, 10, and 48 58. It contended that in tax overpayments there does not need to be a rigorous process as most situations that cause overpayments to occur are as a result of the taxpayer endeavouring to be tax compliant and avoid future tax liabilities. It further contended that the Respondent’s new tax practice allows the Respondent to hold on to the taxpayer’s funds for indefinite periods and generates unnecessary tax liabilities whereas the taxpayer could simply be allowed to offset them with the overpayments.

59. It quoted Section 47 (1) of the tax Procedures Act and reiterated its averments in the Memorandum of Appeal on the cases of International Kenya Limited (supra) and Kenya Data Network Limited (supra).

Whether the Default Notices for the period 2018 and 2019 were unlawful notices ought to be set aside 60. It submitted that on 7th July 2021 the Respondent issued the Appellant’s bank with an Agency Notice for taxes amounting to Kshs. 496,331,766. 00 in which the Respondent summarily collected the sums in the Notice.

61. It contended that the said notices failed to inform it of its right to object to the Corporate Income tax demand amounting to Kshs. 496,331,766. 00. It quoted Section 29(2)(f) of the tax Procedures Act which states“The Commissioner shall notify in writing a taxpayer assessed under Subsection (1) of the assessment and the Commissioner shall specify—(f)the manner of objecting to the assessment.”

62. It contended that the provisions of Section 29(2) of the tax Procedures Act are couched in mandatory terms and the fact that the Respondent is obligated to inform the taxpayer of the manner of objecting to the assessment means that the taxpayer has an inherent right to object to the Assessment.

63. It cited the case of Republic v. Kenya Revenue Authority & 4 others; New Flamingo Hardware and Paints Limited & 22 others (ex parte) [2020]eKLRwhere the court held: “108. The respondents in exercising their authority failed to follow the proper procedure before making demands for unpaid taxes. By failing to provide the applicants with amended tax assessments, failing to give them not less than 30 days to respond, and not informing them of their option for objecting to the proposed actions, the respondents acted ultra vires and failed to follow the due process.”

64. It contended that it was the lawmakers’ apprehension that failure to give proper notice would lead to the Respondent applying enforcement mechanisms without granting it the right to be heard thereby arbitrarily collecting revenue wrongly without considering its grounds for objection.

65. It argued that the Respondent failed to follow due process rendering its default assessment and demand of Kshs. 496,331,766. 00 should be vacated as the taxpayer was condemned unheard.

Whether the default assessments for the period 2018 - 2019 ought to be set aside. 66. It asserted that the Respondent acknowledged and admitted to the fact that the tax payable by the Appellant was actually found to be much lower but the Respondent would uphold the default assessments and close the matter.

67. It relied on the court decision in the case of Miscellaneous Civil Application No. 65 of 2015 Republic v. KRA ex-parte Funan Construction Ltd where it was held: “A taxing authority is not entitled to pluck a figure from the air and impose it upon a taxpayer without some rational basis for arriving at that figure and not another figure. Such action would be arbitrary, capricious and in bad faith. It would be an unreasonable exercise of power and discretion and that would justify the Court in intervening.”

68. It stated that since the defaulter notices for 2018 and 2019 in issue fell short of the requirement of proper notices and that the agency notices pursuant to that were also unlawfully issued and that if the Respondent is able to audit the Appellant and establish that its tax liability is actually less then Respondent has acted contrary to Article 47(1) of the constitution of Kenya as against the Appellant which Article states: “Every person has the right to fair administrative action that is expeditious, efficient, lawful, reasonable and procedurally fair.

Respondent’s Submissions In its Submissions dated and filed on 22nd September 2022 69. The Respondent submitted that the genesis of the dispute herein was the huge inputs claimed by KPLC from the Appellant and which were not reported as output by the Appellant.

70. It asserted that investigations were conducted, and the findings were shared with the Appellant who was afforded an opportunity to dispute the same and avail documents for reconciliation culminating in additional assessments based on the revised tax investigation findings.

71. The Respondent further submitted that the Appellant, despite being granted an opportunity, fatally failed to account for various deposits in its bank account and/or discharge the burden bestowed upon it by Section 56(1) and 59 of the tax Procedures Act 2015.

72. It relied on the Income tax Act, Sections 31, 47, and 56 of the tax Procedures Act, 2015, and the case of tax Appeal case No. 3 of 2020 Tumaini Distributors Limited v. Commissioner of Domestic taxes where Justice Majanja held on the burden of proof.

73. It further relied on the case of Civil Appeal 154 of 2007 Pili Management Consultants Limited v. Commissioner of Domestic taxes where the court held: “It may well be that Pili did not trade in the year 2004 and the money in its bank account did not come from trading. It may be that the money did not accrue in and was not derived from Kenya. But the money was in a bank account in Kenya and it was in the account of Pili. Prima facie, it was Pili’s money. Instead of declaring a nil return, why would Pili not declare the presence of that money and then explain to the Commissioner why tax was not payable on the money?”

74. The Respondent cited the case of JR case 2 of 2019 Kissa Jaffer v. Kenya Revenue Authority where Dickson CJ was quoted in the case of Republic v. Oakes [1986] 1 SCR. 103(69-70) when it held: “Courts will be required to balance the interests of society with those of individuals and groups. It is my view that it is in the public interest that taxes must be paid…”

Issues For Determination 75. After perusing through the pleadings and documentation produced before it together with the parties’ submissions, the Tribunal is of the opinion that the following are the issues for determination:a.Whether the Respondent erred in raising a Default Assessment for the period 2014 – 2015. b.Whether the Respondent erred in confirming the default assessments for the period 2018 – 2019.

Analysis And Findings 76. After review of the Appellant’s Amended Memorandum of Appeal filed on 30th December 2021 with the bundle of documents attached thereto, it’s Written Submissions filed 28th September 2022, the Respondent’s Statement of Facts filed on 27th January 2022 and it’s Submissions filed on 22nd September 2022, the Tribunal wishes to analyse the issues as herein under:

a. Whether the Respondent’s erred in raising a default assessment for the period 2014 – 2015. 77. The Appellant contended that the Respondent issued Default Assessments for the years of income from 2014 to 2019 on 9th July 2021 and therefore in essence the 2014 and 2015 assessments for both Corporation tax and VAT were issued outside the period of five years within which the Respondent can issue an assessment, as provided for under Section 31 of the tax Procedures Act. That Section 31(4) of the tax Procedures Act bars the Commissioner from amending an assessment after the expiry of 5 years from the date of self- assessment.

78. It further argued that the said Section of the tax Procedures Act dictates that the Respondent can only amend an assessment within five years of the date of filing the self-assessment save for the case of gross or wilful neglect by or on behalf of the taxpayer.

79. The Respondent contended that the default assessments for the years 2014 - 2015 were validly reviewed and audited as there was gross and wilful neglect on the Appellant’s part since the Appellant had total sales of Kshs. 716,824,440. 00 but only Kshs. 706,259,051 was declared.

80. The Respondent relied on Section 29 (5) and (6) of the tax Procedures Act which state as follows:“(5)ubject 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.”

81. This view was rebutted by the Appellant claiming that the Respondent did not substantiate how the variance arising from the sales amounts could have been a result of neglect on the Appellant’s part. That the variances arising from the re-computation of the sales amount using the banking method are mainly due to reconcilable items given that the sales declared in the returns were based on the revenue recognised in the audited financial statements. It further stated that considering the time-lapse of the period in question and the fact that there have been changes in staff at the Appellant’s business and that most of the reconciliation data had to be retrieved from an independent archivist, the variance is too immaterial relative to the sales declared, that it cannot be construed to be out of gross negligence.

82. It was the Appellant’s contention that there is no wilful neglect on its part and the Respondent acted ultra vires by confirming the assessments on CIT and VAT with respect to the years of income 2014 and 2015

83. The Tribunal finds that Section 29(6) of TPA is clear in its ordinary meaning but even in the situation where there exists confusion on what constitutes gross and wilful neglect, the Tribunal relied on the definition provided in the case of R v. Sheppard [1980] UKHL J1127-1, the House of Lords defined the term “wilful neglect” thus:“The presence of the adverb “wilfully” … makes it clear that an offence under Section 1 requires mens-rea, a state of mind on the part of the offender directed to the particular act or failure to act that constitutes the actus reus and warrants the description “wilful”... neglect refers to failure to act…”(emphasis added)

84. The term “wilful” in Section 29(6) of the tax Procedures Act imposes “intent” on the Appellant’s part and “wilful neglect” entails an intention on the Appellant to act or omit to act truthfully when disclosing its tax information to the Respondent.

85. “Intent” is more difficult to prove as it goes to the mind of the Appellant and as such, the Respondent cannot assume to know the Appellant's intent in its actions unless there is evidence corroborating the position. Besides, the fact that preliminary audit findings are only temporary pending justification or reconciliation by the Appellant negates the final position taken by the Respondent that the Appellant was grossly and wilfully neglectful in its returns.

86. It is therefore the Tribunal’s finding that the Respondent did err in it assessment for the period 2014-2015 which were over 5 years from the date it issued its assessment.

b. Whether the Respondent erred in confirming the default assessments for the period 2018 – 2019. 87. The Appellant argued that the Respondent purported to charge tax on positive variances in years of income 2014, 2015, 2018, and 2019, it did not consider the significant negative variances for the years of income 2016 and 2017.

88. The Appellant submitted that the variances arising from a comparison of the turnover per the VAT returns and the sales per banking are because of a difference in the accounting treatment on different items of reconciliation and that Respondent was biased to only the parts that were commendatory to its position disregarding the whole picture.

89. The only response provided by the Respondent on this allegation by the Appellant was that the assessments for the period were proper in law.

90. In determining this matter the Tribunal had a look at the Respondent’s Objection decision dated 15th November 2021 and noted that the Appellant’s allegations were indeed true. The computation for tax was omitted for the period where the reported sales were in excess of the bankings.

91. The Tribunal takes judicial notice that in arriving at what would amount to an understatement of sales for a given period, there is need to reconcile the said variance with the revenue recognized in the financial statements due to timing difference that may occur from one period to another. This in fact, was the Appellant’s argument.

92. In the absence of any further explanation by the Respondent as to why the negative amounts were not taken into consideration in arriving at its variance between reported sales and bankings, the Tribunal agrees with the Appellant that the Respondent erred in cherry-picking on apparent variances between estimated turnovers derived from bank deposits and the actual turnovers.

Final Decision 93. The upshot to the foregoing analysis is that the Appeal is meritorious and the Tribunal consequently makes the following Orders;-i.The Appeal be and is hereby allowed;ii.The Respondent’s Objection Decision dated 15th November 2021 be and hereby set aside;iii.Agency Notices issued in relation to the 2018 - 2019 Default Assessments be and are hereby vacated;iv.Any amounts collected from the enforcement of the Agency Notices for the period 2018 - 2019 be refunded to the Appellant;v.Each party to bear its own costs.

DATED AND DELIVERED AT NAIROBI THIS 17TH DAY OF MARCH, 2023. ………………………………………………………ROBERT M. MUTUMACHAIRPERSON………………………………………………………RODNEY O. OLUOCHMEMBER………………………………………………………ELISHAH NJERUMEMBER