[2024] KETAT 539 (KLR)

Auto Accessories International Limited v Commissioner of Domestic Taxes (Tribunal Appeal E110 of 2023) [2024] KETAT 539 (KLR) (26 April 2024) (Judgment)

Neutral citation: [2024] KETAT 539 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tribunal Appeal E110 of 2023

Grace Mukuha, Chair, G Ogaga, Jephthah Njagi, W Ongeti & E Komolo, Members

April 26, 2024

Between

Auto Accessories International Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

1. The Appellant is a limited liability company incorporated in Kenya under the Companies Act. It is an importer and dealer of new and used motor spare parts and general equipment in Kenya.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, Cap 469 laws of Kenya (KRA Act). Under Section 5 (1) of the Act, KRA is an agency of the Government for the collection and receipt of all revenue. For the performance of its function under Subsection (1), the Authority is mandated under Section 5(2) of the Act to administer and enforce all provisions of the written laws as set out in Parts I and II of the First Schedule to the KRA Act to assess, collect, and account for all revenues under those laws.

3. In a letter dated 24th August 2018, the Respondent issued a default tax assessment of income tax under Section 29 of the Tax Procedures Act (TPA) arising from the Appellant’s import data for the years 2015 and 2016.

4. On 8th November 2018, the Respondent issued to the Appellant two assessments of Kshs. 1,701,307. 95 for 2015 and Kshs. 157,942. 62 for 2016 on iTax. The Respondent thereafter issued the Appellant with a demand notice dated 29th November 2018.

5. The Appellant lodged late online objections to the 2015 and 2016 assessments on 25th February 2019.

6. The Respondent sent an email to the Appellant on 7th February 2023 asking the Appellant to provide within seven days, additional documents to support its objection applications dated 25th February 2019.

7. The Respondent issued an objection decision in a letter dated 28th February 2023 confirming the additional income tax assessments for 2015 and 2016.

8. Dissatisfied with the Respondent’s objection decision, the Appellant lodged its Notice of Appeal dated 23rd March 2023 and filed on 31st March 2023.

he Appeal 9. The Appeal is premised on the Memorandum of Appeal filed on 31st March 2023 which raised the following grounds: -a.That the Respondent issued an objection decision against the Appellant outside the mandatory 60-day timeline and therefore the decision is null and void.b.That the Respondent erred in law and its assessment does not conform to any provision of the Income Tax Act and the Tax Procedures Act.c.That the Respondent issued two income tax notices of assessment for the years 2015 and 2016 dated 8th November 2018 having sent a demand notice to the Appellant, a notice which the Appellant did not receive.d.That the Respondent sent an email to the Appellant on 7th February 2023 acknowledging receipt of the objection application of 25th February 2019 asking the Appellant to provide additional documents to support its objection, which was outside the mandatory 60-day timeline.e.That the Appellant does not have any outstanding liability in the years that the Respondent issued the assessments.f.That the objection decision dated 28th February 2023 duly received by the Appellant on 1st March 2023 does not include a statement of findings on the material facts as required by Section 51 of the Tax Procedures Act, thereby leaving the Appellant at a loss as to the reasons and evidence relied upon by the Respondent in raising the assessment.g.That the Respondent erred in law and fact by claiming in its decision that the reason for the decision is that the Appellant failed to provide sufficient relevant documentary evidence in support of the Appellant’s objection ground, contrary to Section 51(3) of the Tax Procedures Act yet the Appellant had given relevant documentary evidence on 25th March 2020 and did not hear from the Respondent until 1st March 2023 when the Respondent issued an objection decision.h.That the Appellant does not agree to the additional assessment as the assessment is excessive and estimated and the Appellant does not have any outstanding liability for that period. That no basis has been given for this assessment.

Appellant’s Case 10. The Appellant’s case is premised on the following documents filed before the Tribunal: -a.Its Statement of Facts filed on 31st March 2023 and the documents attached to it; andb.Its Written Submissions dated 11th January 2024 and filed on 16th January 2024.

11. The Appellant stated that on 24th August 2018, the Respondent issued a default tax assessment under Section 29 of the Tax Procedures Act arising from the Appellant’s import data for the years 2013 to 2016. That the Appellant did not receive the assessment raised by the Respondent as it could not access its emails.

12. The Appellant further stated that the Respondent issued it with a demand notice dated 29th November 2018 which prompted the Appellant to check its iTax account where it discovered that the Respondent had issued two assessments on 8th November 2018 of Kshs. 1,701,307. 95 for 2015 and Kshs. 157,942. 62 for 2016.

13. The Appellant averred that it made late online objections to the 2015 and 2016 assessments on 25th February 2019 citing reasons for the objection and for objecting late online in a letter dated 25th February 2019.

14. The Appellant averred that in its letter dated 25th February 2019, it confirmed to the Respondent that it would file all its accounts by 24th March 2019. The Appellant further averred that it and the Respondent had a meeting in February 2019 where it was agreed that the Appellant would file all its accounts to enable the assessment to be attended to.

15. The Appellant averred that its audited accounts were ready by 22nd October 2019, but that the Appellant could not file the returns since the Respondent had raised default assessments, therefore the Appellant opted to deliver all the accounts for the years 2013 to 2016 manually to the Respondent on 22nd October 2019.

16. The Appellant stated that the Respondent sent it an email on 7th February 2023 asking the Appellant to provide within seven days, additional documents to support its objection applications dated 25th February 2019. The Appellant claimed that it did not receive this email as it went to spam mail.

17. The Appellant submitted that the Respondent issued an objection decision in a letter dated 28th February 2023 and sent the same to the Appellant in an email dated 1st March 2023.

18. The Appellant contended that the amounts as per the assessment notice are excessive, and submitted that the Respondent erred in law by issuing an objection after 60 days as per the Tax Procedures Act.

19. The Appellant submitted that the Respondent in its objection decision dated 28th February 2023 rejected the objection and confirmed the assessment stating as follows, which the Appellant submitted as a baseless reason which must be ignored: -“the reason for the decision is that you failed to provided sufficient relevant documentary evidence in support of your objection ground, contrary to the Tax Procedures Act 2015 Section 51(3)(c)”

20. The Appellant cited that the tax assessment was dated 29th October 2018 and the late objection notice was lodged on 25th February 2019. The Appellant submitted that at the time of the issuance of the assessment and the objection, Section 51(3)(c) had not been enacted. That Section 51(3)(c) was only enacted through the Finance Act 2019 and which came after the filing of the notice of objection.

21. The Appellant submitted that if the Respondent needed to be supplied with additional documents, the Respondent ought to have requested the same within 14 days and the same would have been provided. That the Respondent waited for 48 months to lapse to call for the documents.

22. The Appellant cited the decision of the High Court in Rongai Tiles and Sanitary Limited vs Commissioner of Domestic Taxes (2023) eKLR where the court held: -“The Commissioner has argued that it is not bound by this time if an objection is invalidly lodged. I reject this argument and agree with the Tribunal that going by the wording of Section 51(11) of the TPA above, the Objection Decision ought to have been made within 60 days regardless of whether the objection was valid. I therefore find that the Objection Decision was outside the statutory timelines provided by section 51(11) of the TPA.…“The Commissioner’s delay in delivering the Objection Decision within sixty days of receiving the objection meant that the objection was allowed by operation of law. Failure to render the Objection Decision in time was fatal and the Commissioner could not demand any taxes therein.”

23. The Appellant also placed reliance on the judgment in the case of Equity Group Holdings Limited v Commissioner of Domestic Taxes (Civil Appeal E069 & E025 of 2020) [2021] KEHC 25 (KLR) (Commercial and Tax) (23 August 2021) (Judgment) at paragraphs 56 & 59.

24. The Appellant averred that the Respondent issued an assessment on 29th October 2018 and a late objection made on 25th February 2019 and that the Respondent ought to have delivered its decision by 26th April 2019.

25. The Appellant alleged that it is clear from the Respondent’s objection decision and the Statement of Facts that the assessments as made have no basis. That the Respondent has not stated how it arrived at the figures in the assessments, which documents it inspected to arrive at the said assessments or which formula or law it relied on. That the assessment was speculative, arbitrary and without any legal basis.

26. The Appellant averred that the assessments as made are legally unjustifiable, punitive and unconscionable and asked the Tribunal to set aside the objection decision dated 28th February 2023 and the default assessments.

Appellant’s Prayers 27. The Appellant prayed for the Tribunal: -a.To allow the Appeal.b.To grant the Respondent with an order to amend the assessment after resolving the issues in dispute.

Respondent’s Case 28. The Respondent’s case is premised on the following documents:a.Its Statement of Facts dated 24th April 2023 and filed on 26th April 2023 and the document attached to it.b.Its written submissions dated 11th December 2023 and filed on 14th December 2023.

29. The Respondent averred that the Appellant imported goods for its business and for the same years of income, the Appellant declared nil returns. The Respondent issued an additional assessment by applying a profit margin of 30% on all the imports and charged 30% tax on the profit.

30. The Respondent issued a demand letter to the Appellant on 29th November 2018.

31. The Respondent stated that the Appellant objected to the assessment 25th February 2019, being a late objection which the Appellant filed out of time for the reason that it was not aware that an assessment had been raised on iTax.

32. The Respondent stated that it requested for further documents on 8th February 2023, and on 28th February 2023 issued an objection decision notifying the Appellant that its objection had been rejected, which the Appellant filed an appeal at the Tribunal on 31st March, 2023.

33. The Respondent relied on Section 29 of the TPA, 2015 that states: -“Where a taxpayer has failed to submit a tax return for a reporting period in accordance with the provisions of a tax law, the Commissioner may, based on such information as may be available and to the best of his or her judgement, make an assessment (referred to as a "default assessment") of –(a)the amount of the deficit in the case of a deficit carried forward under the Income Tax Act (Cap. 470) for the period;(b)the amount of the excess in the case of an excess of input tax carried forward under the Value Added Tax Act, 2013 (No. 35 of 2013), for the period; or(c)the tax (including a nil amount) payable by the taxpayer for the period in any other case.”

34. The Respondent stated that the Appellant’s objection was not supported by all relevant documents contrary to Section 51(3)(c) of the TPA that stipulates: -“A notice of objection shall be treated as validly lodged by a taxpayer under subsection (2) if(a)the notice of objection states precisely the grounds of objection, the amendments required to be made to correct the decision, and the reasons for the amendments;(b)in relation to an objection to assessment, the taxpayer has paid the entire amount of tax due under the assessment that is not in dispute or has applied for an extension of time to pay the tax not in dispute under section 33(1); and(c)all the relevant documents relating to the objection have been submitted.”

35. The Respondent averred that the Appellant did not provide the requisite documents to support its objection prescribed under statute, therefore, the Respondent proceeded to confirm the assessment.

36. In addition, the Respondent placed further reliance on Section 59(1) of the TPA which requires the Appellant to provide record to the Commissioner to enable him determine the Appellant’s tax liability.

37. The Respondent averred that the Appellant failed to avail such documents/records for examination constraining the Respondent to confirm the additional assessments.

38. The Respondent submitted that Section 93 of the TPA it an offence for a person who fails to keep, retain or maintain a document that may be required to be kept, retained or maintained in accordance with a tax law without a reasonable excuse during a reporting period.

39. The Respondent further submitted that pursuant to Section 56 of the TPA and Section 30 of the Tax Appeals Tribunal Act, the burden of proof lies on the Appellant to demonstrate that it has discharged its tax liability. The Respondent stated that this burden was never discharged as no documentary evidence was availed to the Respondent to enable it render a meritorious decision in the circumstances.

40. The Respondent affirmed that the objection decision issued by it, in substance and effect, complied with the requirements of Section 51 of the TPA. That the said decision was communicated to the Appellant and included a statement of findings explaining why the amendments were made by the Respondent.

41. The Respondent averred that what constitutes the Commissioner’s best judgment was elaborated on in the case of Commissioners for Her Majesty’s Respondents Revenue & Customs.

42. The Respondent reiterated that the Appellant, having failed to provide documents that showed that the assessment was either erroneous or invalid, and in the absence of any evidence provided by the Appellant to support its objection, that the Respondent was proper in exercising its best judgement and rejecting the notice of objection.

43. The Respondent referred to the judgment of the Tribunal in TAT No. 70 of 2017 Afya X-Ray Centre vs. Commissioner of Domestic Taxes to buttress its case.

44. The Respondent contended that contrary to the Appellant’s assertion that the Respondent erred in law and fact to consider all the evidentiary documents supporting the Appellant’s case, that the Respondent repeatedly requested the Appellant to furnish the relevant documents to warrant a different decision, but the Appellant failed to provide the same.

45. The Respondent maintained that it followed the due process and reviewed the documents availed by the Appellant in confirming the assessment and thus the Respondent prayed that this Appeal is disposed as the same lacks merit.

Respondent’s Prayers 46. The Respondent prayed that the Tribunal:a.Dismisses this Appeal with costs to the Respondent.b.Upholds the Respondent’s additional assessments as contained in its objection decision dated 28th February 2023 and the accrued interest and penalties.

Issues For Determination 47. The Tribunal has considered the facts of the matter and the submissions made by the parties, and considers the issues for determination as follows:a.Whether the Respondent’s objection decision was validly issued.b.Whether the Respondent was justified in issuing an income tax assessment for the years 2015 and 2016.

Analysis And Findings 48. The Tribunal analysed the issues that call for its determination as hereunder, having reviewed all the pleadings, information and documents adduced by the Appellant and the Respondent concerning the impugned objection decision.a.Whether the Respondent’s objection decision was validly issued.

49. In a letter dated 24th August 2018, the Respondent issued a default tax assessment of income tax under Section 29 of the Tax Procedures Act (TPA) arising from the Appellant’s import data for the years 2015 and 2016.

50. On 8th November 2018, the Respondent issued to the Appellant two assessments of Kshs. 1,701,307. 95 for 2015 and Kshs. 157,942. 62 for 2016 on iTax. The Respondent thereafter issued the Appellant with a demand notice dated 29th November 2018.

51. The Appellant averred that it made late online objections to the 2015 and 2016 assessments on 25th February 2019 citing reasons for the objection and for objecting late online.

52. The Respondent sent an email to the Appellant on 7th February 2023 asking the Appellant to provide within seven days, additional documents to support its objection applications dated 25th February 2019.

53. The Respondent issued an objection decision in a letter dated 28th February 2023 which the Appellant appealed to the Tribunal on 31st March 2023.

54. The Appellant submitted that the Respondent erred in law by issuing an objection decision after 60 days as per the TPA. That the Respondent ought to have delivered its decision by 26th April 2019.

55. The Tribunal notes that the Appellant lodged its notice of objection to the 2015 and 2016 assessments more than 30 days after the stipulated timeline in Section 51(2) of the TPA.

56. The Tribunal considers that the Respondent is expected to resolve tax disputes expeditiously to enable taxpayers to make informed decisions. Any delay in the dispensation of tax disputes has the effect of delaying the issuance of an objection decision. The timelines for objecting to tax assessments are clearly set in the law, and all taxpayers are liable to comply with the timelines, save for when unavoidable circumstances as envisioned in Section 51(7) of the TPA prevent a taxpayer from fulfilling its obligations.

57. The Tribunal analysed the dates and events that occurred between when the Respondent assessed the Appellant, when the Appellant objected to the assessment, and when the Respondent issued its objection decision.

58. The Appellant in its pleadings and evidence adduced before the Tribunal, confirmed that it had lodged its notices of objection late, and cited various reasons for the delay in lodging its objection for the Respondent’s consideration.

59. The Tribunal finds that when the Respondent sent an email to the Appellant on 7th February 2023 asking the Appellant to provide within seven days, additional documents to support its objection applications dated 25th February 2019, the Respondent in effect, had on 7th February 2023 allowed the Appellant’s applications for the extension of time to file its notices of objection.

60. The Tribunal noted that the relevant legislation at the time the Appellant requested an extension of time to lodge its notices of objection, which was on 25th February 2019, did not stipulate a deadline by when the Respondent was obligated to notify a taxpayer of its determination under Section 51(7) of the TPA. As a result, the Tribunal finds no fault in the Respondent having made its decision on 7th February 2023 to allow the Appellant to lodge its objections as the law did not provide consequence to the length of time the Respondent took to make its decision on such an application.

61. It is the Tribunal’s considered view that the Respondent, having allowed the Appellant to lodge its notices of objection out of time on 7th February 2023, initiated the Respondent’s obligation under Section 51(8) of the TPA which provides: -“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, and Commissioner's decision shall be referred to as an "objection decision.”

62. The Respondent issued an objection decision in a letter dated 28th February 2023.

63. Section 51(11) of the TPA provides the timeline within which the Respondent is required by law to issue an objection decision as follows: -“The Commissioner shall make the objection decision within sixty days from the date of receipt of a valid notice of objection failure to which the objection shall be deemed to be allowed.”

64. The Tribunal observes that the Respondent, after allowing the Appellant to lodge its notices of objection out of time, judiciously recognised the time-sensitive nature of issuing an objection decision in the dispute resolution process. The Tribunal buttresses its observation of the importance of adherence to timelines by referring to the judgment Eastleigh Mall Limited v Commissioner of Investigations & Enforcement (Income Tax Appeal E068 of 2020) [2023] KEHC 20000 (KLR) where the court stated:-“... Parliament in its wisdom knew that in matters tax, time is very crucial as those in commerce need to make informed decisions. If the Commissioner is allowed to exercise his discretion and stay ad-infinitum before issuing an objection decision, the tax payer would be unable to make crucial decisions and plan his/her business properly. The timelines set are mandatory and not a procedural technicality.”

65. Consequently, the Tribunal finds that the Respondent’s objection decision was validly issued as it was issued within time and against an objection that the Respondent had deemed to have been validly lodged.b.Whether the Respondent was justified in issuing an income tax assessment for the years 2015 and 2016.

66. The Tribunal, having determined that the Respondent issued its objection decision within the peremptory timelines, proceeded to analyse the merits of the Appellant’s case against the Respondent’s assessment.

67. The Respondent, in its notice of assessment to the Appellant dated 24th August 2018, averred that the Appellant imported goods for its business and for the same year of income, the Appellant declared nil returns. The Respondent issued default assessments under Section 29 of the Tax Procedures Act (TPA) by applying a profit margin of 30% on all the imports for the years 2015 and 2016 and charged 30% tax on the profit.

68. On 8th November 2018, the Respondent issued to the Appellant two assessments of Kshs. 1,701,307. 95 for 2015 and Kshs. 157,942. 62 for 2016 on iTax. The Respondent thereafter issued the Appellant with a demand notice dated 29th November 2018.

69. The Appellant objected to the 2015 and 2016 default assessments on 25th February 2019 citing reasons for the objection and for objecting late online in a letter dated 25th February 2019.

70. The Respondent sent an email to the Appellant on 7th February 2023 asking the Appellant to provide within seven days, additional documents to support its objection applications dated 25th February 2019. The Appellant claimed that it did not receive this email as it went to spam mail.

71. The Respondent issued an objection decision in a letter dated 28th February 2023, confirming the default income tax assessments that it charged the Appellant for the years 2015 and 2016.

72. The Appellant contended that the amounts as per the assessment notice are excessive. The Appellant also submitted that if the Respondent needed to be supplied with additional documents, it ought to have requested the same within 14 days and the same would have been provided. That the Respondent waited for 48 months to lapse to call for the documents.

73. The Appellant submitted that at the time of the issuance of the assessment on 29th October 2018 and the objection on 25th February 2019, Section 51(3)(c) of the TPA had not been enacted. That Section 51(3)(c) of the TPA was only enacted through the Finance Act 2019 and which came after the filing of the notice of objection.

74. The Tribunal analysed the said Section 51(3)(c) of the TPA and clarifies that the provision was introduced by Section 42 of the Finance Act 2018 and it came into operation on 1st July 2018, contrary to the Appellant’s assertion that submission of all the relevant documents relating to the objection is not a consideration for determining if a notice of objection has been validly lodged by a taxpayer.

75. Notwithstanding that Section 51(3)(c) of the TPA was applicable when the Appellant lodged its objection, it is anchored in law that the onus of proving that a tax decision is wrong, excessive or incorrect lies upon a taxpayer. Section 56(1) of the TPA and Section 30 of the Tax Appeals Tribunal (TAT) Act provide as follows:Section 56(1) of the TPA: -“In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”Section 30 of the TAT Act: -“In a proceeding before the Tribunal, the appellant has the burden of proving—a.where an appeal relates to an assessment, that the assessment is excessive;b.in any other case, that the tax decision should not have been made or should have been made differently.”

76. The Tribunal reviewed all the information and documents adduced by the Appellant and found that besides the Appellant’s averments that the Respondent erred in issuing its objection decision confirming the additional assessments, the Appellant only presented its audited accounts for 2015 and 2016 to the Tribunal in support of its position against the impugned objection decision.

77. The Appellant did not prove to the Tribunal with data and any source documents, the composition of and documents supporting the income and expense amounts, and balance sheet balances as disclosed in its audited accounts. Further, the Appellant did not provide details of its self-assessed import data and import documents to dispute the Respondent’s basis of the 2015 and 2016 additional assessments.

78. Section 54A(1) of the Income Tax Act provides as follows: -“A person carrying on a business shall keep records of all receipts and expenses, goods purchased and sold and accounts, books, deeds, contracts and vouchers which in the opinion of the Commissioner, are adequate for the purpose of computing tax.”

79. The Section envisions that a person carrying on a business must keep certain records and documents which in the opinion of the Commissioner are adequate for computing tax. While the Appellant claimed that it kept these records and documents, and claimed that the Respondent disregarded these documents, the Appellant did not produce the records and documents for the Tribunal’s review.

80. The Tribunal is guided by the holding in the case of Digital Box Limited v Commissioner of Investigations and Enforcement [2020] where the Tribunal held:-“…in this case, the Appellant is the one seized of the desire to prove that the Respondent used extraneous information in arriving at its assessment. Thus, according to the provisions of the Evidence Act, the Tax Procedures Act and the Tax Appeals Tribunal Act, the burden of proof falls upon the Appellant.”

81. Due to the Appellant’s failure to discharge its burden of proving that the Respondent’s assessment was wrong as required under Section 56(1) of the TPA and Section 30 of the TAT Act, the Tribunal finds that the Respondent did not err in issuing the income tax additional assessments for 2015 and 2016.

Final Decision 82. The upshot of the above analysis is that the Tribunal finds that the Appeal is not merited and accordingly proceeds to make the following orders:a.The Appeal be and is hereby dismissed.b.The Respondent’s objection decision dated 28th February, 2023 be and is hereby upheld.c.Each party to bear its own costs.

83. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 26TH DAY OF APRIL, 2024. GRACE MUKUHACHAIRPERSONGLORIA A. OGAGA JEPHTHAH NJAGI MEMBER MEMBERDR. WALTER J. ONGETI DR. ERICK KOMOLO MEMBER MEMBER