[2024] KETAT 1611 (KLR)

Atcost Structures Company Limited v Commissioner of Domestic Taxes (Tax Appeal E966 of 2023) [2024] KETAT 1611 (KLR) (22 November 2024) (Judgment)

Neutral citation: [2024] KETAT 1611 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E966 of 2023

Grace Mukuha, Chair, E Komolo, GA Kashindi & AM Diriye, Members

November 22, 2024

Between

Atcost Structures Company Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a limited liability company duly incorporated in the Republic of Kenya under the Companies Act, 2015, and whose principal activity is construction business.

2. The Respondent is an officer appointed under Section 13 of the Kenya Revenue Authority Act (Cap. 469). Under Section 5 (1) of the said Act, the Respondent is an agency of the government for the collection and receipt of all revenue.

3. On 15th November, 2019, the Respondent issued two Assessment Orders against the Appellant on account of Value Added Tax of Kshs. 1,059,818. 60 inclusive of interest for tax period March, 2018; and Kshs. 1,047,403. 68 inclusive of interest for tax period May, 2018.

4. The Appellant objected vide iTax to the VAT assessments on 17th March, 2020.

5. On 9th March, 2023, the Respondent issued its Late Objection Rejection Notice on the grounds that the Appellant had not supported their objection.

6. Aggrieved, the Appellant lodged, with leave of the Tribunal, the instant Appeal vide Notice of Appeal dated 21st November, 2023, and filed on 21st December, 2023

The Appeal 7. The Appeal is premised on the Appellant’s Memorandum of Appeal dated 21st November, 2023, and filed on 21st December, 2023 stating the following grounds: -i.That the Respondent erred in law and in fact by amending the taxpayer’s self-assessed March 2018 and April 2018 returns via VAT automated assessments on or about November 2019. ii.That the additional assessments by the Respondent were done in bad faith and in contravention of the respective provisions of the law.iii.That these additional assessments/amendments arbitrarily disallowed input VAT claimed for the respective periods.iv.That these VAT additional assessments/amendments were in contravention of Section 17 of the Value Added Tax Act.v.That these disallowed purchase invoices were wholly and exclusively used in generating the respective VAT output and are allowable as provided under Section 17 of the Value Added Tax Act.vi.That the Appellant nonetheless objected to these VAT automated assessments on 17th March, 2020, and provided all the requisite documentation on iTax as required.vii.That after lodging the said objections on 17th March, 2020, the Appellant did not receive any formal communication from the Respondent in reference to these objections on whether the objection applications had been allowed, partially allowed, disallowed, or rejected.viii.That these objections having being done on 17th March, 2020, and no Objection Decision issued/communicated through the Appellant’s information email within the stated timelines, the Appellant took it that the objections were allowed by operation of law.ix.That the Appellant was startingly informed by the Respondent’s debt section that there were objection rejection notices dated 9th March, 2023, which rejected the objection applications dated 17th March, 2020. x.That these objection rejection notices are in clear contravention of Section 51 of the Tax Procedures Act.xi.That the law accords taxpayers a legitimate expectation to be issued with a decision within sixty days and where no objection is issued, the objection is deemed to the allowed by operation of the law.xii.That the Respondent did not issue an Objection Decision that includes a Statement of Findings on the material facts and the reasons for the decision as mandated under Section 51 of the Tax Procedures Act.xiii.That the Respondent erred in law and in fact by applying the wrong principles in issuing the objection rejection notices, which confirmed the additional assessments raised which were fundamentally incorrect.

The Appellant’s Case 8. The Appellant’s case is premised on the following documents filed before the Tribunal: -a.Appellant’s Statement of Facts dated 21st November, 2023 and filed on 21st December, 2023. b.Appellant’s Written Submissions dated 19th August, 2024 and filed on 21st August, 2024.

9. The Appellant averred that on or about March, 2020, it noted that there were assessments on its iTax ledger that required it to pay Kshs. 883,182. 17 for March, 2018, and Kshs. 887,630. 24 for May, 2018 with resultant interest and penalties.

10. That upon further inquiry, the Appellant was informed that these were VAT automated assessments automatically generated by the iTax system on or about November, 2019.

11. That the VAT automated assessments arbitrarily disallowed the Appellant’s purchase invoices that were claimed, which reduced the input VAT thereof and consequently increased the VAT output leading to demand of taxes thereof.

12. That the Appellant claimed the purchase invoices as they were wholly and exclusively used in the generation of VAT output for the respective periods.

13. That the Appellant also notably claimed these purchase invoices were issued in adherence to and as provided under Section 17 of the Value Added Tax Act and all other enabling laws and guidelines.

14. That the Appellant fully objected to these VAT additional assessments on 17th March, 2020 on iTax in line with Section 51 of the Tax Procedures Act, and provided grounds and reasons for the late objection, and supporting documentation.

15. That the Appellant neither received any formal communication nor response from the Respondent with respect to these objection applications. The Respondent did not inform the Appellant whether it required further information from it or whether the Appellant’s objections were invalidated, fully allowed, fully disallowed or partly allowed/disallowed.

16. That the Appellant noted that even after the lapse of 60 days i.e. 17th May, 2020, the Respondent had still not communicated to the Appellant.

17. That based on the foregoing, the Appellant took it that its objection applications had been fully allowed and the additional assessments thereof fully vacated since the Respondent did not provide the Appellant with a contrary decision within the provided timelines considering that it had supported the application as required.

18. That the law gives the taxpayers a legitimate expectation to receive an objection decision which is substantive and within the parameters provided in law, failure to which the objection is deemed allowed by operation of the law.

19. That the Appellant even managed to acquire compliance certificates for the period 2020 to 2022, thereby affirming its position that the objections therein had been allowed and additional assessments vacated.

20. That on or about October, 2023, the Appellant sought taxpayer’s services at the Respondent’s Thika Station and was outrageously informed that there were pending liabilities because of the VAT automated assessments which were issued on its tax ledger.

21. That the Respondent’s tax services office further informed the Appellant that there were objection rejection notices dated 9th March, 2023 that were issued by the Commissioner, which ultimately rejected the objection applications dated 17th March, 2020.

22. That the Respondent, in contravention of clear provisions of the law (Section 51(11) of the Tax Procedures Act) issued the objection rejection notices beyond the stipulated 60 days’ timeline.

23. That the Respondent did not issue an objection decision that includes a statement of findings on the material facts and the reasons for the decision as mandated under Section 51(10) of the Tax Procedures Act.

24. That the law gives taxpayers a legitimate expectation to receive an objection decision which is substantive and within the parameters provided in law, where the commissioner fails to make an objection decision as required, the objection shall be deemed to be allowed.

25. That the law does not condone a situation whereby taxpayer’s concerns are unattended over an indefinite period and it is for these reasons that the law has imposed strict deadlines for decisions being issued by the Commissioner.

26. That considering the above, it is the Appellant’s case that the decision made by the Respondent to disallow the objection lodged and confirm the additional assessments are improper, inadequate, unfair, and unjust.

27. That the confirmed additional assessments arbitrarily and subjectively disallowed claimable purchase invoices that had been wholly and exclusively incurred by the Appellant in generating the respective VAT output.

28. That the decision made by the Respondent was made by misinterpretation of various provisions of the law and fundamental accounting and tax principles.

Appellant’s Prayers 29. The Appellant prayed to the Tribunal for the following orders: -a.That the Respondent be compelled to set aside the Objection Rejection Notices, and vacate the additional assessments issued.b.That the input VAT for the period March, 2018 and May 2018 be allowed as originally claimed by the Appellant.c.That the Respondent be compelled to revise any penalties and interests payable.d.That the cost of the Appeal be borne by the Respondent.

The Respondent’s Case 30. The Respondent’s case is premised on the following document(s) filed before the Tribunal: -a.Respondent’s Statement of Facts dated 22nd December, 2023 and filed on 27th December, 2023. b.Respondent’s Written Submissions dated 28th August, 2024.

31. The Respondent averred that the Appellant lodged the Notice of Objection beyond statutorily prescribed timelines as the assessment was issued on 15th November, 2019, whiles the notice of objection was lodged on 17th March, 2020, which is beyond 30 days prescribed under Section 51(2) of the Tax Procedures Act.

32. That the Appellant’s objection was invalid as it was not supported by all relevant documents contrary to Section 51(3)(c) of the Tax Procedures Act, and the application was accordingly invalidated.

33. The Respondent further placed reliance on Section 59 of the Tax Procedures Act, which obligates the Appellant to provide records to enable the Respondent to determine tax liability, and Sections 56 of the Tax Procedures Act and Section 30 of the Tax Appeals Tribunal Act, which provide that the burden of proof lies with the Appellant to demonstrate that it discharged its liability.

34. The Respondent further relied on Section 31 (1) of the Tax Procedures Act, which empowers it to amend an assessment, and Section 17 of the VAT Act on when and how input VAT can be claimed.

35. It is the Respondent’s averment that it requested the Appellant to provide supporting documentation to support its claim for input VAT, and the Appellant did not provide any supplier statements or sufficient proof of payment contrary to Section 17 of the VAT Act, and as such the Respondent was justified in upholding its assessment.

36. Accordingly, the Respondent stated that the assessment was proper and should be upheld by this Honorable Tribunal.

The Respondent’s Prayers 37. The Respondent prayed to the Tribunal for the following orders: -a.That the VAT Assessments of the Appellant be upheld.b.The Appeal be dismissed with costs to the Respondent as the same is devoid of merit.

Issues for Determination 38. Having carefully reviewed the pleadings and submissions by both parties together with annexures thereto, the Tribunal is of the considered view that the following issues fall for its determination: -a.Whether the Appellant’s Objection was Allowed by Operation of the Law.b.Whether the Respondent’s Additional VAT Assessment of the Appellant is Justified.

Analysis and Findings 39. Having identified the issues for its determination, the Tribunal proceeds to analyze them as hereunder.

a. Whether the Appellant’s Objection was Allowed by Operation of the Law. 40. The factual basis of this Appeal is not contested by both Appellant and the Respondent. In summary, it is not contested that the Respondent issued the Appellant with additional VAT assessment orders on 15th November, 2019, to which the Appellant filed late objection application on 17th March, 2020. It is also not contested that after the late objection application, the Respondent issued its Late Objection Rejection Notice confirming the additional VAT assessments on 9th March, 2023, and thereby triggering this appeal.

41. The Appellant submitted that its late objection application was deemed allowed by operation of law as the Respondent neither responded nor invalidated its application within statutory timelines. It is the Appellant’s case that the Respondent had a statutory duty to issue an Objection Decision within 60 days, but the same was issued after two years. To buttress its case, the Appellant relied on the precedents established in Transglobal Holdings Limited -vs- Commissioner of Domestic Taxes (TAT No. 1351 of 2022), Andrew Mukite Musangi -vs-Commissioner of Domestic Taxes (TAT E163 of 2021), and Consolbase Limited -vs- Commissioner of Investigations & Enforcement (TAT No. 138 of 2020) amongst others.

42. To further support its contention, the Appellant submitted that indeed the Respondent had even issued it with tax compliance certificates for 2021 and 2022, which are on record.

43. On its part, the Respondent averred on this ground that the Appellant lodged late objection application and which was invalid contrary to Sections 51(2) and 3(c) of the Tax Procedures Act, 2015, and the same was subsequently invalidated. The Respondent based its ground on he basis that the Appellant’s Late Objection Application of 17th March, 2020 was not supported.

44. The applicable law on late objection application is Section 51 (6), (7) and 7A of the Tax Procedures Act (TPA), 2015, which provides as follows: -“51(6)A taxpayer may apply in writing to the Commissioner for an extension of time to lodge a notice of objection(7)The Commissioner shall consider and may allow an application under subsection (6) if – (a) a taxpayer was prevented from lodging the notice of objection within the period specified in subsection (2) because of an absence from Kenya, sickness, or other reasonable cause; and (b) the tax payer did not unreasonably delay in lodging the notice of objection.(7A)The Commissioner shall notify the taxpayer of the decision made under subsection (7) within fourteen days of receipt of the application.”

45. The Tribunal has taken judicial notice of the fact that Section 51 (7A) of the TPA came into effect on 1st July, 2022. The import is that whilst the Respondent previously was not required to notify the Appellant of its decision on the application for extension of time to lodge a late objection application, the same changed with effect from 1st July, 2022, and the Respondent is now required to notify the Appellant of its decision within 14 days of the application.

46. From the records before us, the notification was done 9th March, 2023, which is certainly outside the prescribed statutory time. Therefore, we are constrained to find and hold that, in the circumstances of the instant Appeal, the Respondent’s Late Objection Rejection Notice dated 7th March, 2023 was improper.

47. Accordingly, and to meet the ends of justice, the relief that commends itself to us is to remit the matter back to the Respondent for purposes of making a proper Objection Decision in accordance the provisions of Section 51 of the Tax Procedures Act.

b. Whether the Respondent’s Additional VAT Assessment of the Appellant is Justified. 48. Having determined that the Respondent’s rejection of the Appellant’s late objection application was improper, the second issue for determination has been rendered moot at this stage.

Final Determination 49. The upshot of the foregoing is that the Appeal partially succeeds and the Tribunal will proceed to issue the following orders: -a.The Respondent’s Late Objection Rejection Noticed dated 7th March, 2023 be and is hereby set aside.b.The Matter be and is hereby remitted back to the Respondent to make a proper Objection Decision.c.Each party to bear its costs.

74. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 22ND DAY OF NOVEMBER 2024. ………………………………GRACE MUKUHA - CHAIRPERSON……………………………DR. ERICK KOMOLO - MEMBER………………………………GEORGE A. KASHINDI - MEMBER………………………………ABDULLAHI DIRIYE- MEMBER