[2023] KETAT 997 (KLR)

Bawazir v Commissioner of Legal Services & Board Coordination (Tax Appeal 999 of 2022) [2023] KETAT 997 (KLR) (15 September 2023) (Judgment)

Neutral citation: [2023] KETAT 997 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 999 of 2022

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

September 15, 2023

Between

Abdulrahim Mohamed Bawazir

Appellant

and

Commissioner of Legal Services & Board Coordination

Respondent

Judgment

Background 1. The Appellant is a male adult, Kenyan citizen, residing within the Republic of Kenya and a registered taxpayer.

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

3. The Respondent carried out investigations into the tax affairs of the Appellant and issued three assessments vide two (2) on VAT dated 28th April 2022 and one (1) on income tax dated 30th May 2022 for the period December 2020 Kshs. 2,118,551. 32, September 2021 Kshs. 5,486,033. 14 and for the year 2020 being Kshs. 707,600. 00 respectively all as principal tax and interest thereon.

4. The Appellant lodged three (3) distinct notices of objection for each assessment order on the 22nd June 2022 and received by the Respondent on the same date contesting the entire Respondent’s assessments.

5. The Respondent requested for documents from the Appellant vide the email dated 4th July 2022 and subsequently, rendered its objection decision on the objections vide a letter dated 2nd August 2022 rejecting the Appellant’s notices of objection and demanding the entire taxes assessed.

6. Being aggrieved with the Respondent’s decision, the Appellant lodged a Notice of Appeal on 31st August 2022 and filed the Appeal before the Tribunal on 14th September 2022.

The Appeal 7. The Appeal is premised on the following grounds as highlighted in the Memorandum of Appeal filed on 14th September, 2022:i.The Respondent erred in law, facts and issued an invalid objection decision contrary to the Tax Procedures Act 2015 Section 51 (9) which states“The Commissioner shall notify in writing the taxpayer of the objection decision and shall take all necessary steps to give effect to the decision, including, in the case of an objection to an assessment, making an amended assessment".Section 10 further requires the Respondent to in case of an objection decision must include a statement of findings on the material facts and the reasons for the decision.ii.The Respondent erred in law by taxing non-existing income contrary to Section 3 (2) of the Income Tax Act Cap 470 and Section 5 (1) of the Value Added Tax No. 35 of 2013. iii.The Respondent erred in law and fact by denying the Appellant importation tax credit as provided in Section 17 (1) of the Value Added Tax Act No. 35 of 2013. iv.The Respondent erred in law and methods by taxing on assumed profit markup margin of 35% which was not based on any factual information.v.That the Respondent erred in law and facts by demanding tax that are unreasonable and unfair as per Article 210 and 201 (b) (i), of the Kenya Constitution.vi.That the Respondent’s actions are contrary to legitimate expectations on the operations of the taxpayer, as per Section 15 of the Income Tax, and Article 47 (1) (2) of the Kenya Constitution 2010.

The Appelant’s Case 8. The Appellant’s case is premised on the hereunder filed documents;a.The Appellant’s Statement of Facts dated and filed on 14th September 2022 together with the documents attached thereto.b.The Appellant’s written submissions dated 13th March 2023 and filed on the 14th March 2023.

9. The Appellant submitted that he is a Kenyan citizen residing within the Republic of Kenya and that the Respondent on 28th April 2022 (for VAT) and 30th May 2022 (for Income Tax) issued additional assessment orders on the Appellant for the period of income December 2020 for VAT, September 2021 for VAT and the year 2020 for income tax and issued assessment notices requiring the Appellant to pay Kshs. 2,118,551. 32, Kshs. 5,486. 033. 14 and Kshs. 707,600. 00, respectively, as outstanding taxes inclusive of interests.

10. That the Appellant filed notices of objection to each of the additional assessments on the 22nd June 2022 and the Respondent acknowledged the receipt of the same.

11. The Appellant averred that contrary to the legitimate expectation of the Appellant, the Respondent made an objection decision on the 2nd August 2022, declining the objections and confirming the assessments.

12. That it was the Appellant’s assertion that the Respondent erred in the method and model it used in arriving at the estimated assessment by excluding the importation tax credit and assumed unrealistic profit markup of 35%.

13. The Appellant stated that in his considered view, there were two issues for the Tribunal to determine, specifically;i.Whether the Respondent acted ultra vires by taxing non-existing income contrary to Section 3 (2) of the Income Tax Act Cap 470 and Section 5 (1) of Value Added Tax Act No. 35 of 2013. ii.Whether the Respondent was right to assess based on assumptions on non-existing business ventures.

14. The Appellant proceeded to submit on the issues as herein under;

15. The Appellant submitted and reproduced the reading of Sections 3 (2) of the ITA and 5 (1) of VAT Act and further stated that despite proving that he was not in any business for the period under the review and providing all bank statements and other correspondences, the Respondent proceeded and issued an invalid objection decision on 2nd August 2022, contrary to the statute.

16. The Appellant stated that he had already reported the fraudulent use of his KRA Personal Identification Number by unknown person to the police who commenced an investigation over the matter.

17. The Appellant avowed that the Respondent erred by taxing assumed income based on fraudulent use of the Appellant’s PIN by un-authorized person to clear the imported goods.

18. The Appellant stated that he provided proof that he was not in any business venture as alleged by the Respondent.

19. The Appellant reiterated that the Respondent erred in its assessment and taxes demanded were excessive and defective in law.

20. That the Appellant submitted that he had, in compliance with Section 52 of the Tax Procedures Act 2015 filed a Notice of Appeal before the Tribunal.

Appellant’s Prayers 21. The Appellant’s prayers were that;i.The Respondent’s objection decision is invalid, incorrect, and unfair and failed to meet the legitimate expectations of the taxpayer as per Articles 47, 201 (b) (i) and 210 of the Constitution of Kenya 2010. ii.Upon determination that the objection decision of the Respondent is invalid, wrong and unreasonable the Appellant’s objection be upheld and the Respondent’s demand and confirmation be quashed entirely.iii.The Respondent's demand for additional taxes and confirmation of estimated assessment be struck out entirely.iv.That Respondent's actions be declared arbitrary, capricious, subjective, unfair, and contrary to the fair administration of justice and to the legitimate expectations of the taxpayer.v.That the Respondent and its agents be estopped from demanding or taking further action or steps to ensure recovery of the alleged principal tax, penalties and interests.vi.Cost of the Appeal, andvii.Any other remedies that this Tribunal may determine.

Respondent’s Case 22. The Respondent’s case is premised on the hereunder filed documents;a.The Respondent’s Statement of Facts dated 14th October 2022 and filed on the same date.b.The Respondent’s list and bundle of documents in support of the Statement of Facts dated the 2nd May 2023 and filed on the same date, together with the documents attached thereto.c.The Respondent’s written submissions dated and filed on 2nd May 2023.

23. The Respondent stated that the dispute arose from additional VAT and income tax assessments on the Appellant. That the Appellant was engaged in the business of timber importation and hardware, customs data revealed that he had imported timber whose value was above the VAT registration threshold, however, the Appellant was not registered for VAT obligation and had filed nil income tax returns.

24. The Respondent averred that it obtained the customs data on import which indicated that the Appellant had imported timber in the years 2020 and 2021 and that the Appellant was not registered for VAT and had filed nil income tax returns for the year 2020.

25. That as a result, the Respondent stated that it notified the Appellant vide the email of 20th January 2022 of the inconsistencies and guided the Appellant to amend his tax returns and declare the income earned in the year 2020. Further, that the Respondent stated that it requested the Appellant to register for VAT since the Appellant was dealing with taxable supplies and had attained the VAT registration threshold.

26. It was the Respondent’s assertion that the Appellant had visited its offices on two separate occasions, particularly on the 8th February 2022 and 15th February 2022. On the first instance, the Respondent stated that the Appellant admitted to having imported timber but disputed the value as shown in the customs data and requested for time to reconcile the values.

27. However, on the second instance, the Respondent stated that the Appellant refuted having made any imports and averred that his KRA PIN was used to import timber without his knowledge.

28. The Respondent stated that on 28th April 2022, based on the custom data available it issued the Appellant with assessments on VAT.

29. The Respondent stated that on 30th May 2022, it issued the Appellant with an income tax assessment. The assessments issued were as follows;Tax Head Principal Penalty Interest Total

VAT

December 2020 1,810,727. 63 100,536. 38 344,038. 25 2,2255,302. 26

September 2021 5,079,660. 32 263,983. 02 507,966. 03 5,851,609. 37

Income Tax

Year 2020 580,600 31,000 75,400 686,400

30. The Respondent submitted that it issued the Appellant with a demand notice vide the letter dated 9th June 2022. That upon receipt of the demand notice the Appellant lodged its notices of objection on 22nd June 2022.

31. The Respondent stated that the Appellant’s objections to the assessments were based on the grounds that he had not imported any timber and carried out any business, and that the Respondent used the wrong custom data.

32. The Respondent submitted that on the 4th July 2022, it wrote to the Appellant notifying him to validate his objection by furnishing the Respondent with documents in support of his objection. That however, the Appellant failed to provide any documents in support of his objections. That subsequently, the Respondent rendered its objection decision on 2nd August 2022.

33. The Respondent stated that in its view, the issue for the Tribunal’s determination is;i.Whether the additional assessment and subsequent objection decision dated 2nd August 2022, was valid in law?

34. The Respondent averred that it engaged the Appellant throughout the assessment process without much success.

35. The Respondent submitted that Section 3 (2) of the Income Tax Act imposes an income tax for each year of income upon all income of a person, whether resident or non-resident, which accrued on or was derived from Kenya, which includes gains or profits from any business.

36. The Respondent further submitted that, Section 28 of the Tax Procedures Act provides that a taxpayer who has submitted a self-assessment return in the prescribed form for a reporting period shall be treated as having made an assessment of the amount of tax payable (including a nil amount) for the reporting to which the return relates being the amount set out in the return and that if a taxpayer liable for income has submitted a self-assessment return in the prescribed form for a year of income and the taxpayer has a deficit for the year, the taxpayer shall be treated as having made as assessment of the amount of the deficit for the year being the amount set out in the return.

37. The Respondent stated that the Commissioner is not bound by the information provided therein and can assess the tax liability based on any other available information in accordance to Section 24 (1) and (2) of the Tax Procedures Act.

38. Further to the aforesaid, the Respondent submitted that the Commissioner may amend an assessment by making alterations or additions, from the available information and to the best of the Commissioner’s judgement, to the original assessment of a taxpayer for a reporting period to ensure that the taxpayer is liable for the correct amount of tax payable, in line with Section 3 (1) of the TPA.

39. The Respondent asserted that the Appellant objected to the assessments late and despite being requested vide the email dated 4th July 2022, the Appellant did not avail the requested documents to impeach the additional assessments which were consequently confirmed.

40. The Respondent submitted that the Appellant’s averments in Paragraphs 3 and 4 of the Memorandum of Appeal as well as paragraphs 6 and 7 of the Statement of Facts by the Appellant that importation tax credits were never allowed and that the Respondent used assumed, unrealistic profit markup, are indeed an admission of timber importation leading up to the assessments.

41. The Respondent further stated that the allegations of a stranger using the Appellant’s KRA PIN is an afterthought which holds no water at all.

42. The Respondent submitted that the Appellant failed to demonstrate that the Respondent’s assessment of tax based on available evidence, was in any way improper and invalid. That the Appellant neither filed a valid objection nor provided additional documents as had been requested.

Respondents Prayers 43. The Respondent prays that this Tribunal considers the case and finds that:i.The Appeal be dismissed with costs.ii.The objection decision dated 2nd August 2022 be upheld.

Issues For Determination 44. The Tribunal upon careful consideration of the Appeal, opines that the issue for its determination is;Whether the assessments were justified.

Analysis And Findings 45. Having identified the issue falling for its determination, the Tribunal wishes to analyze the same as hereunder.

Whether the assessments were justified. 46. It was the Respondent’s assertion that the Appellant was registered for income tax, but had not for VAT.

47. The Respondent contented that the Appellant had imported timber in the years 2020 and 2021 whose value was above the registration threshold, but filed nil returns for the year under review according to the customs data obtained.

48. The Respondent stated that on the 20th January 2022 via email it notified the Appellant of the inconsistencies and guided the Appellant to amend his tax returns and declare the income earned in the year 2020 and to register for VAT on the basis that he was dealing with taxable supplies and had attained the VAT registration threshold.

49. It was the Respondent’s assertion that the Appellant visited the Respondent’s offices on two distinct occasions, particularly the 8th February 2022 and 15th February 2022 and took two conflicting positions. It was stated by the Respondent that, in the first instance, the Appellant acknowledged the importation of timber, but disputed the values. In the second instance, the Appellant denied having imported the timber and alleged that his KRA Pin was utilized without his knowledge by unknown persons. The Tribunal noted that the above assertions by the Respondent have not been disputed by the Appellant.

50. The Appellant on the other hand, indicated that taxes have been put to charge on a non-existing income and that he provided the Respondent with all the documents to support this position.

51. The Tribunal has perused the documentation presented by the Appellant attached to his Statement of Facts as follows;i.Annexure K – Appellant’s affidavit sworn on 30th August 2022. ii.Annexure AB4 – Appellant’s Certified bank statement for Equity Bank for the period 1st August 2022 to 31st August 2022. iii.Appellant’s certified bank statement Stanbic bank for the period 31st January 2020 to 1st September 2022, obtained on 3rd September 2022. iv.Annexure AB5 – Appellant’s Medical Report dated 29th August 2022. v.Annexure L – Appellant’s abstract of report made to the National police, Malindi Police Station on 3rd August 2022.

52. The Tribunal notes from Appellant’s documents herein above, that the documents were all obtained by the Appellant from the various authorities at a date after the objection decision had been issued, including the Medical Report that indicated that the Appellant was medically incapacitated during the period of objection review.

53. It is the Tribunal view that the documents presented by the Appellant are pertinent to the support of his objection and the Respondent ought to consider the same.

54. Regarding the misuse of the KRA PIN, it cannot lie on the mouth of the Respondent that it is not capable of establishing the true identity of the importer of the timber through the authorized clearing agent, considering that the Appellant has alleged that his PIN was used without his consent, authority and knowledge to import the timber.

55. The Tribunal therefore finds that the objection decision was not justified.

Final Decision 56. Based on the foregoing analysis the Tribunal finds that the Appeal is merited and shall proceed to issue the following Orders: -a.The Appeal be and is hereby allowed.b.The Respondent’s objection decision dated 2nd August 2022 be and is hereby set aside.c.The Respondent is at liberty to review the notice of objection taking into account the documents provided by the Appellant within Sixty (60) days of the date of delivery of this Judgment.d.Each party to bear its own costs.

57. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 15TH DAY OF SEPTEMBER, 2023. ROBERT M. MUTUMA - CHAIRPERSONMUTISO MAKAU - MEMBERELISHAH N. NJERU - MEMBERDR. WALTER ONGETI - MEMBERBONIFACE K. TERER - MEMBER