[2024] KETAT 43 (KLR)

Cable Car Corporation v Commissioner of Domestic Taxes (Tax Appeal 1433 of 2022) [2024] KETAT 43 (KLR) (26 January 2024) (Judgment)

Neutral citation: [2024] KETAT 43 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 1433 of 2022

E.N Wafula, Chair, Cynthia B. Mayaka, RO Oluoch, E Ng'ang'a & AK Kiprotich, Members

January 26, 2024

Between

Cable Car Corporation

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a limited liability Company duly incorporated and registered in Kenya under the Companies Act. The Appellant’s primary activity is in sale of speed governors.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, Cap 469 of the laws of Kenya. The Authority is an agency established for the purposes of assessing, collecting and accounting for tax revenues.

3. The Respondent via iTax raised assessment orders on 13th May 2021 and 26th May 2021 against the Appellant.

4. The Respondent further vide a letter dated 18th May 2021 issued a tax returns review findings where it assessed the Appellant for total tax amounting to Kshs 8,257,536. 00 for VAT and Income tax inclusive of penalties and interest.

5. The Appellant objected to the assessments vide a letter dated 17th June 2021 and via iTax on the same date.

6. The Appellant vide a letter dated 9th December 2021, reiterated its position as per its objection dated 17th June 2021 to VAT and Corporation tax. The Appellant further reiterated is position vide a letter to the Respondent dated 14th December 2021 in response to an email dated 10th December 2021 from the Respondent.

7. The parties held meetings on 20th December 2021 and 21st January 2021 and the Appellant further wrote to the Respondent on 21st January 2022 reiterating its previous position on its objection.

8. The Respondent subsequently issued its decision on 14th June 2022 rejecting the Appellant’s objection and demanding the taxes. The Respondent further vide a letter dated 9th November 2022 demanded tax arrears amounting to Kshs 9,604,896. 87.

9. Aggrieved by the Respondent’s decision, the Appellant lodged the Appeal on 25th November 2022.

The Appeal 10. The Appeal is premised on the ground that the Commissioner erred in issuing an objection decision contrary to the provisions of Section 51(11) of the Tax Procedures Act.

The Appellant’s Case 11. Appellant’s case is premised on the hereunder filed documents :-i.The Appellant’s Statement of Facts dated 25th November 2022 and filed on the same date together with the documents attached thereto.ii.The Appellant’s written submissions dated 11th May 2023 and filed on 17th May 2023.

12. The Appellant submitted that on or about the 18th May 2021, and the 26th May 2021, it received from the Respondent notices of additional VAT, Income tax and Corporation tax assessment.

13. The Appellant averred that it raised objection to the said assessments by the Respondent on 17th June 2021. That no communication was made by the Respondent until the 1st December,2021 when a demand for provision of further documents was made.

14. That the demand for provision of further documents was made outside the mandatory time of 60 days as is provided for in Section 51 (11) of the Tax Procedures Act. That it brought this fact to the attention of the Respondent.

15. That on the 15th June, 2022, despite being contrary to provisions of Section 51(II) of the Tax Procedures Act, the Respondent made an objection decision confirming the assessments made on the 18th May, 2021 and the 26th May 2021. That the Respondent issued demand notices against the Appellant for the Sum of Kshs.9,604,896. 87.

Appellant’s Prayers 16. The Appellant prayed that the Tribunal finds that:-i.The Respondent in issuing the objection decision dated 15th June 2022 acted outside of the mandatory provisions of Section 51(11) of the Tax Procedures Act.ii.The demand dated 9th November 2022 is not legal and is unenforceable.iii.The Appellant seeks orders that the tax demanded of Kshs 9,604,896. 87 be quashed and set aside.

The Respondent’s Case 17. The Respondent’s case is premised on the hereunder filed documents:-i.The Respondent’s Statement of Facts dated 20th December 2022 and filed the same date together with the document attached thereto.ii.The Respondent’s written submissions dated and filed on 16th May 2023.

18. The Respondent stated that the Appellant had only raised one issue in its Appeal being that the objection decision is null for being outside statutory timelines.

19. That Section 51(11) of the Tax Procedure Act states that:-“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.”

20. The Respondent stated that an objection decision can only be issued if the taxpayer filed a valid objection. That this was contrary to the Appellant's case, since there was no valid objection from the Appellant. It averred that the objection filed by the Appellant did not meet the mandatory requirement of a valid objection under Section 51 (3) (c) of the TPA due to lack of supporting documents to the objection filed.

21. The Respondent contended that the correspondence issued to the Appellant which it has termed as objection decision was rather the decision of the Respondent informing it that its objection had been fully rejected due to lack of supporting documents.

22. That consequently, the statutory sixty days’ timeline doesn't apply to the Respondent as there was no valid objection from the Appellant for an objection decision to be issued.

23. That the Appellant was unable to fully support the purchases claimed. That the Appellant had alleged that the variance in purchases related to cable car inventory transfer for the related company Power Governors Ltd. That no proof of payment was provided for the purchase/transfer to indicate that the transaction was at arm's length.

24. It was the Respondent's position that the Appellant did not have a valid notice of objection due to non-compliance with the mandatory requirements of Section 51(3) of the TPA.

Respondent’s Prayer 25. The Respondent prayed that the Tribunal finds:-i.That the Respondent’s confirmed assessment be upheldii.That this Appeal be hereby dismissed with costs to the Respondent as the same is without merit.

Issues for Determination 26. The Tribunal upon due consideration of the pleadings filed on the separate parts of the parties was of the considered view that the Appeal herein raises the following issues for its determination;a.Whether the Appellant’s notice of objection was allowed by operations of the law.b.Whether the Respondent erred in its assessment of tax on the Appellant.

Analysis and Findings a. Whether the Appellant’s Notice of Objection was allowed by operations of the law. 27. The genesis of this dispute was the Respondent’s decision dated 14th June 2022 and subsequent demand for taxes.

28. It was the Appellant’s contention that it raised objection to the Respondent’s assessments on 17th June 2021. That no communication was made by the Respondent until the 1st December,2021 when a demand for provision of further documents was made

29. That the demand for provision of further documents was made outside of the mandatory time of 60 days as is provided for in Section 51 (11) of the Tax Procedures Act. That it brought this fact to the attention of the Respondent.

30. The Respondent on the other hand stated that an objection decision can only be issued if the taxpayer filed a valid objection. That this was contrary to the Appellant's case, since there was no valid objection from the Appellant. It averred that the objection filed by the Appellant did not meet the mandatory requirement of a valid objection under Section 51 (3) (c) of the TPA due to lack of supporting documents to the objection filed.

31. The Respondent further contended that the correspondence issued to the Appellant which it has termed as objection decision was rather the decision of the Respondent informing it that its objection had been fully rejected due to lack of supporting documents.

32. That consequently, the statutory sixty days’ timeline doesn't apply to the Respondent as there was no valid objection from the Appellant for an objection decision to be issued.

33. The Respondent is enjoined under Section 51(11) of the Tax Procedures Act to make an objection decision within 60 days from the date of receipt of:-“a)the notice of objection; orb)any further information the Commissioner may require from the taxpayer, failure to which the objection shall be deemed to be allowed.”(Emphasis added)

34. The Tribunal perused through the submissions of the parties and noted it was not in dispute that the Appellant lodged its notice of objection on 17th June 2021. Going by the provisions of Section 51(11) of the TPA the Respondent ought to have issued the objection decision on or before 16th August 2021 if it did not ask for any additional documents or information from the taxpayer prior to the lapse of sixty days.

35. The Tribunal noted that in the instant case the Respondent had stated that the Appellant’s objection was not validly lodged. Section 51(4) of the Tax Procedures Act provides as follows regarding the action the Respondent ought to take in cases where it determines that an objection has not been validly lodged by a taxpayer;“Where the Commissioner has determined that a notice of objection lodged by a taxpayer has not been validly lodged, the Commissioner shall immediately notify the taxpayer in writing that the objection has not been validly lodged.”

36. There was no evidence adduced to demonstrate that the Respondent made any communication to the Appellant regarding validity of the objection as provided for under Section 51(4) of the TPA and therefore the 60-day period provided under Section 51(11) started counting on 17th June 2021.

37. Going by the above provisions of the law, the Respondent ought to have demonstrated by way of documentary evidence that it indeed asked the tax payer to validate its objection as provided by law.

38. The Tribunal reiterates the court’s holding in Nicholas Kiptoo Arap Korir Salat v IEBC & 6 Others [2013] eKLR where the court stated as thus:-“This Court, indeed all courts, must never provide succor and cover to parties who exhibit scant respect for rules and timelines. Those rules and timelines serve to make the process of judicial adjudication and determination fair, just, certain and even-handed. Courts cannot aid in the bending or circumventing of rules and a shifting of goal posts for, while it may seem to aid one side, it unfairly harms the innocent party who strives to abide by the rules. I apprehend that it is in the even-handed and dispassionate application of rules that courts give assurance that there is a clear method in the manner in which things are done so that outcomes can be anticipated with a measure of confidence, certainty and clarity where issues of rules and their application are concerned…”

39. The Tribunal’s position is further persuaded by the decision in Equity Group Holdings Limited-vs-Commissioner of Domestic Taxes [2021] eKLR, where the High Court at Paragraphs 52 and 53, stated that:“52. Parliament in its wisdom deployed the word “shall” twice in section 51(11). The provision reads “The Commissioner shall make the objection decision within sixty days from the date of receipt of— (b) any further information the Commissioner may require from the taxpayer, failure to which the objection shall be deemed to be allowed.53. The classification of statutes as mandatory and directory is useful in analyzing and solving the problem of the effect to be given to their directions. There is a well-known distinction between a case where the directions of the legislature are imperative and a case where they are directory. The real question in all such cases is whether, a thing, has been ordered by the legislature to be done, and what is the consequence, if it is not done. The general rule is that an absolute enactment must be obeyed, or, fulfilled substantially. Some rules are vital and go to the root of the matter, they cannot be broken; others are only directory and a breach of them can be overlooked provided there is substantial compliance.”

40. Accordingly, and as provided for under Section 51(11) of the Tax Procedures Act, the Tribunal finds that the Appellant’s notice of objection dated 17th June 2021 was allowed by operation of the law.

41. Having entered the above finding, the Tribunal did not delve into the other issue for determination namely; Whether the Respondent erred in its assessment of tax on the Appellant as it had been rendered moot.

Final Decision 42. The upshot of the foregoing is that the Appeal is merited and succeeds. The Tribunal accordingly proceeds to make the following Orders;a.The Appeal be and is hereby allowed,b.The Respondent’s decision dated 16th June, 2022 be and is hereby set aside,c.Each Party to bear its own costs.

43. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 26TH DAY OF JANUARY, 2024. ERIC NYONGESA WAFULA - CHAIRMANCYNTHIA B. MAYAKA - MEMBERDR. RODNEY O. OLUOCH - MEMBEREUNICE NG’ANG’A - MEMBERABRAHAM K. KIPROTICH - MEMBER