[2024] KETAT 1313 (KLR)

Belvacon Company Limited v Commissioner of Domestic Taxes (Tax Appeal E225 of 2023) [2024] KETAT 1313 (KLR) (23 August 2024) (Judgment)

Neutral citation: [2024] KETAT 1313 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E225 of 2023

CA Muga, Chair, BK Terer, D.K Ngala, GA Kashindi & SS Ololchike, Members

August 23, 2024

Between

Belvacon Company Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

1. The Appellant is a limited liability company established under the Companies Act Cap 486 of Kenya’s Laws. Its principal business activity is building and construction. The Appellant is registered for tax with several tax obligations including Income Tax and Value Added Tax.

2. The Respondent is established under the Kenya Revenue Authority Act, Cap 469 Laws of Kenya. Under Section 5(1), the Respondent is an agency of the Government for the collection and receipt of all revenue. Further, under section 5(2) with respect to the performance of its function under subsection (I), the Respondent is mandated to administer and enforce all provisions of the written laws as set out in Part I and 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 issued with a principal VAT additional assessment (KRA202016697798) of Kshs. 1,415,043. 36 on 19th August 2020 by the Respondent. The Respondent indicated that this additional assessment was based on withholding certificates whose income had allegedly not been declared by the Appellant.

4. Dissatisfied with the said assessment, the Appellant objected to it on 18th September 2020. Thereafter, the Respondent issued its objection decision on 8th March 2021 rejecting the Appellant’s objection on grounds that it was lodged late.

5. On 25th April 2022, the Respondent again issued the Appellant with another additional assessment (KRA202205700077) being principal Income Tax of Kshs. 1,378,432. 50. The Appellant being dissatisfied with this assessment objected to it on 24th May 2022. Subsequently, on 4th July 2022, the Respondent issued its objection decision confirming the additional assesment and rejecting the Appellant’s objection.

6. Aggrieved by the Respondent’s objection decision, the Appellant on 18th August 2022 issued the Respondent with a Notice of intention to Appeal against the decisions. On 21st February 2023, the Respondent issued the Appellant with a demand notice of 7 days on all outstanding taxes on its account totaling to Kshs. 2,945,436. 71.

7. Subsequently, on 28th March 2023, the Respondent issued an agency notice to the Appellant’s banks and customers to enforce the recovery of the alleged taxes owed.

8. Aggrieved by the Respondent’s objection decision, the Appellant sought extension of time within which to lodge the Memorandum of Appeal, Statement of Facts, Notice of Appeal and tax decisions late through an application dated 12th May 2023 and filed on 15th May 2023 which extension was granted by the Tribunal on 29th June 2023 and the appeal pleadings deemed to have been duly filed on 15th May 2023.

The Appeal 9. The Appellant’s Appeal was premised on the following grounds as laid out in their Memorandum of Appeal dated 8th May 2023 and filed on 15th May 2023:a.That the Respondent erred in law and in fact by double taxing an income on the VAT obligation in his/her Assessment.b.That the Respondent erred in law and in fact in fully rejecting the objection made on Assessment number KRA202016697798 indicating that it was a late objection yet the objection was made within 30 days from the assessment day.c.That the Respondent erred in law and in fact by issuing his/her confirmation decision to fully reject the Appellant’s objection 171 days after the objection had been made, which is 111 days after the objection had been allowed by the law.d.That the Respondent erred in law and in fact by issuing his/her decision without a statement of findings on the material facts and the reasons for the decision on Assessment - KRA202205700077. e.That the Respondent’s Assessment No. KRA202205700077 was based on an initial erroneous Assessment No. KRA202016697798. f.That on the basis of erroneous Assessments, the Respondent issued an Agency Notice against the taxpayer hence stopping the taxpayer from trading.

Appellant’s Case 10. The Appeal is anchored on the Appellant’s Statement of Facts dated 8th May 2023 and filed on 15th May 2023.

11. The Appellant contended that on 19th August 2020 the Respondent without prior communication to the taxpayer issued additional principal VAT assessment (KRA202016697798) on the Appellant’s Personal Identification Number (hereinafter PIN) portal account amounting to Kshs. 1,415,043. 36 on the VAT obligation. This additional assessment was based on withholding certificates whose income had allegedly not been declared by the taxpayer.

12. The Respondent assessed one income twice due to an erroneous issuance of two VAT withholding certificates (KRAVWELD00204077120 and KRAVWELD00203867120) with duplicate amounts of Kshs. 91,004. 00 on the same income of Kshs. 4,550,165. 00.

13. On 18th September 2020, the Appellant objected to the assessment and attached the supporting documents including the withholding cancellation notice. This was the 30th day from the assessment date.

14. The Respondent remained silent on the matter until 8th March, 2021 when he/she gave their decision through a late objection rejection notice indicating that the objection was late without any reasonable reason.On 25th April 2022, the Respondent, without any prior communication to the taxpayer went ahead and did another additional assessment (KRA202205700077) on Principal Income Tax amounting to Kshs. 1,378,432. 50. The basis for this assessment was the erroneous assessments done on the VAT obligation.

15. On 24th May 2022, the Appellant objected the Assessment on Income Tax and attached the supporting documents. On 4th July 2022, the Respondent issued a confirmation assessment notice fully rejecting the objection without giving reasons and material facts for his/her decision as per Section 51(10) of the Tax Procedures Act, CAP 469B of Kenya’s Laws (hereinafter “TPA”)

16. Due to the health condition of the Director of Belvacon Company Limited (as indicated in the affidavit and other supporting documents), he did not make it to move on with the Appeal within 30 days after the Respondent’s decisions hence necessitating the application to extend time within which to appeal.

17. On 18th August 2022, the Appellant Issued a Notice of Intention to Appeal to the Respondent.

18. On 21st February 2023, the Respondent issued a Demand Notice of 7 days on all outstanding taxes on the taxpayer’s account amounting to Kshs. 2,945,436. 71 an amount which included interest and penalties of Kshs. 51,165. 86 in undisputed tax which was settled by the Appellant.

19. On 28th March 2023, the Respondent went ahead to issue an Agency Notice to the Banks and Customers of the taxpayer to enforce the recovery of the alleged taxes owed.

Appellant’s Prayers 20. In conclusion, the Appellant made the following prayers:a.That the Respondent be ordered to lift the Agency Notices issued against the Appellant pending the hearing of the case.b.That this objection be allowed and the Respondent’s decision be set aside with costs.c.That the costs of this Appeal be borne by the Respondent.d.That such further or other orders as the Tribunal would deem just and expedient.

Respondent’s Case 21. The Respondent opposed the instant Appeal vide its Statement of Facts dated 28th July 2023 and filed on 31st July 2023. It averred as follows:

22. It issued the Appellant with two VAT withholding certificates dated 23rd April 2020, with the amount being withheld amounting to Kshs. 48,444. 00 for Certificate serial number: KRAVWELD00204061220 and Kshs. 91,004. 00 for Certificate Serial Number: KRAVWELD00204077120. Subsequently, it cancelled Withholding VAT certificate No. KRAVWELD00203867120 and the acknowledgement receipt of the Withholding VAT Certificate Cancellation was dated 22nd May 2020.

23. The Respondent issued an assessment order dated 19th August 2020 on VAT amounting to Kshs. 1,468,266. 41. The Appellant objected to the assessment annexed and attached herein with the objection application Acknowledgement Receipt dated 18th September 2020.

24. The Appellant filed a late objection and the Respondent issued a Late Objection Rejection Notice dated 8th March 2021 to the Appellant. The Respondent issued the Appellant with a letter dated 20th January 2022 in relation to a variance in turnover. The letter further stated that the Appellant should respond within 7 days, failure to which the Respondent will raise additional assessment and demand taxes.

25. The Respondent vide an electronic mail dated 25th April 2022 informed the Appellant that the Appellant’s failure to respond to the pertaining variances in sales declared in the VAT and Income Tax returns, the Respondent has proceeded to issue Additional Assessments. The Respondent issued an Additional Assessment order on 25th April 2022 on Income Tax amounting to Kshs. 1,589,350. 20.

26. The Appellant objected to the Assessment annexed and attached herein is the objection Application Acknowledgement Receipt dated 24th May 2022. The Respondent issued the Appellant with an Assessment notice on 4th July 2022. The Respondent vide an electronic mail dated 5th July 2022 informed the Appellant that their objection Application was rejected. The Respondent issued the Appellant with a Demand Notice for Tax in arrears of Kshs. 2,945,436. 71 covering the period January 2016 to June 2021.

27. The Appellant being aggrieved by the objection decision lodged its Appeal on 15th May 2023.

Whether the additional assessment was valid. 28. In response to grounds ((a) (d) and (e)) of the Memorandum of Appeal, the Respondent avers that the assessments were correctly issued and conformed to the TPA. The appellant failed to provide any evidence that would have altered the assessment.

29. The Respondent averred that the Appellant was issued with a notice on the variances in VAT turnover. The Appellant failed to provide reconciliation of the variances as requested by the Respondent.

30. The Respondent averred that failure of the Appellant to provide for reconciliation of the variances led to the Respondent issuing Additional Assessment to the Appellant in line with Section 31 of the TPA. The Respondent claimed that it contacted the Appellant and informed them that due to their failure to respond to the variances in VAT and Income Tax the Additional Assessment was due and payable.

31. The TPA places the onus of proof in tax objections on the taxpayer who in this case failed to avail evidence that would support a contrary assessment or that would have guided the Respondent. The Respondent averred that the Appellant was uncooperative in the provision of relevant documents or records. The TPA empowers the Respondent to require production of such documents vide issuance of notices as deemed necessary in determination of tax liability.

Whether the Respondent correctly rejected the Objection Application 32. In response to grounds ((b), (c) and (f)) of the Memorandum of Appeal, the Respondent received an objection application from the Appellant however the Appellant had lodged a late objection. The Respondent declined to grant the Appellant’s application on the basis that the Appellant failed to state any grounds and provide any documents in support of the reason why they lodged a late objection. In conclusion, the Respondent made the following prayers to the Tribunal:a.That the Tribunal upholds the additional VAT and Income Tax assessments raised by the Respondent amounting to Kshs. 2,945,436. 71, and the principal taxes and interest be found due and payable as per the objection decision rendered by the Respondent; andb.That this Appeal be dismissed with costs to the Respondent.

Parties’ Written Submissions 33. The instant Appeal was canvassed by way of written submissions. The Appellant’s submissions are dated 15th February 2024 and filed on 21st February 2024, whereas the Respondent’s submissions are dated and filed on 22nd February 2024.

34. The Appellant in its submissions cited the provisions of Sections 51(2) & 51(11) of the TPA, the case of Fast Generation Ltd v Commissioner of Domestic Taxes [2020] eKLR and submitted that the Respondent failed to make the objection decision within 60 days from 18th September 2020, therefore the Appellant’s objection was allowed on 18th November 2020. It further submitted that the Respondent did not also give the statement of findings on the material facts and the reasons for his/her Objection decision as required by Section 51(l0) of the TPA.

35. The Respondent on the other hand submitted that on the issue of issuing two withholding certificates on the same income, once it noticed that this error had been made, it rectified it by cancelling Withholding VAT Certificate No. KRAVWELD00203867120 and the acknowledgment receipt of the Withholding VAT Certificate cancellation was dated 22nd May 2020. It relied on the provisions of Section 31(1) of the TPA and stated that it has the power to amend the assessment based on the available information to it and to the best of its judgment. Therefore, the additional assessments issued to the Appellant are not only legal but also justified.

36. It contended that it issued the Appellant with an assessment order for Income Tax on 25th April 2022, subsequently on 4th July 2022 it issued a confirmation assessment notice. For this reason, the Appellant if dissatisfied with the said assessments ought to have lodged an objection against them on/or before 24th May 2022. If at all the Appellant had filed its objection within the set timelines, the Respondent who is required to issue an Objection decision within 60 days ought to have done so on or before 23rd July 2022. Having issued the objection decision vide a letter dated 4th July, 2022, the Respondent asserted that it complied with the provisions of Section 51(11) of the TPA.

37. The Respondent cited the provisions of Section 59 of the TPA and contended that the Appellant failed to provide for reconciliation of variance as requested by the Respondent to justify the variance between the declared sales in the VAT and Income Tax Returns filed contrary to the said provisions. Further, it referred to the provisions of Section 56 of the TPA and Section 30 of the Tax Appeals Tribunal Act, CAP 469A of the Laws of Kenya (hereinafter “TATA”) and argued that despite the fact that the Appellant bears the burden of demonstrating that a tax decision and/or assessment is incorrect, it has not tendered any evidence in support of the allegation that Assessment No. KRA202205700077 for Income Tax was based on an initial erroneous assessment done on the VAT obligation. To buttress this argument, the Respondent relied on the case of Kenya Revenue Authority v Man Diesel & Turbo Se, Kenya [2021] eKLR.

38. It was submitted by the Respondent that it validly rejected the Appellant’s objection since it did not disclose any grounds of objection or provide any documentations in support of the objection as provided for under Section 51(3) of the TPA. To this end, the Respondent urged this Tribunal to be guided by the holding in the case of Ngurumani Traders Limited v Commissioner of Investigations and Enforcement [TAT 125 of 2017]. It further submitted that contrary to the Appellant’s assertions, its objection decision was issued in compliance with the provisions of Section 51(10) of the TPA.

Issues For Determination 39. The Tribunal having carefully considered the parties pleadings, documentation and submissions notes that two issues arise for determination;i.Whether the Respondent’s objection decision dated 8th March, 2021 was justified.ii.Whether the Respondent’s objection decision dated 4th July 2022 was justified.

Analysis And Findings 40. The Tribunal will proceed to analyse the issues for determination that it has identified as outlined hereinunder:(i)Whether the Respondent’s objection decision dated 8th March, 2021 was justified.

41. Section 51 (2) of the TPA provides as follows:“A taxpayer who disputes a tax decision may lodge a notice of objection to the decision, in writing, with the Commissioner within thirty days of being notified of the decision.”

42. The Respondent contended that the Appellant’s Notice of Objection to the Assessment Order dated 19th August 2020 for VAT for Kshs. 1,468,266. 41 was late having been lodged on 18th September 2020. Therefore, it issued the Appellant with a late rejection notice dated 8th March 2021. The Appellant on the other hand contended that it lodged its objection within the set timelines but the Respondent issued it with a late objection decision. For this reason, its Notice of Objection dated 18th September 2020 stood allowed by operation of the law after the lapse of 60 days from 18th September 2020 since the Objection decision issued on 8th March 2021 was issued outside the prescribed timelines under Section 51 (11) of the TPA which states as hereunder:“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.”

43. Pursuant to the provisions of Section 51(2) of the TPA, a party dissatisfied with a tax decision is at liberty to lodge an objection against it within thirty days of being notified of the said decision. In this case, it is not disputed that the Appellant was issued with the Respondent’s tax decision vide an Assessment Order dated 19th August 2020, this means that the Appellant was required to lodge its objection with the Respondent on or before 18th September 2020 which would have been the thirtieth day from the date it was notified of the Respondent’s tax decision. It is not disputed that the Appellant’s notice of objection was filed on 18th September 2020. Subsequently, on 8th March 2021, the Respondent issued the Appellant with a late rejection notice.

44. The Tribunal is of the view that the late rejection notice was not justified in the circumstances as the objection had been lodged in time. As such, the option that was available to the Respondent would have been to invalidate it if it did not meet the requirements of Section 51 of the TPA or to render and objection decision within the time stipulated in law which is 60 days.

45. The rejection notice was issued on 8th March 2021. This was outside the sixty days timeline, and in accordance with the law, the Appellant’s objection was deemed as allowed by operation of the law.

Whether the Respondent’s objection decision dated 4th July 2022 was justified. 46. The Appellant contended that the additional income tax assessment No. KRA202205700077 for Kshs. 1,378,432. 50 less interest was irregular since it was based on the erroneous VAT tax assessment obligation for Kshs. 1,468,266. 41.

47. On the other hand, the Respondent relied on Section 59 of the TPA and submitted that the Appellant failed to provide for reconciliation of variance as requested by the Respondent to justify the variance between the declared sales in the VAT and Income Tax Returns filed contrary to the said provisions. The Respondent maintained that it validly rejected the Appellant’s objection since it did not disclose any grounds of objection or provide any documentations in support of the objection as provided for under Section 51(3) of the TPA.

48. The Tribunal has considered the parties contentions and is guided by the provisions of Section 56 of the TPA and Section 30 of the TATA that place the burden of demonstrating that a tax decision and/or assessment is incorrect on the Appellant. Having reviewed the entire appeal record, the Tribunal notes that the Appellant did not tender any evidence in support of the allegation that Assessment No. KRA202205700077 for Income Tax was based on an initial erroneous assessment done on the VAT obligation. Additionally, the Appellant did not prove that Assessment No. KRA202205700077 for Income Tax was incorrect. As a result, it is the Tribunal’s finding that the Appellant did not discharge its burden of proof to warrant setting aside of the objection decision.

49. It is therefore the finding and holding of the Tribunal that the objection decision dated 4th July 2022 was justified.

Final Decision 50. The upshot of the foregoing, is that the Appeal partially succeeds and accordingly, the Tribunal proceeds to make the following orders:a.The Appellant’s objection dated 18th September 2020 is deemed as having been allowed by operation of the law.b.The Respondent’s objection decision dated 4th July 2022 is hereby upheld.c.Each party to bear its own costs.

51. It is so ordered.

DATED AND DELIVERED AT NAIROBI ON THIS 23RD DAY OF AUGUST, 2024. CHRISTINE A. MUGA - CHAIRPERSONBONIFACE K. TERER - MEMBERDELILAH K. NGALA - MEMBERGEORGE KASHINDI - MEMBEROLOLCHIKE S. SPENCER - MEMBER