[2023] KETAT 544 (KLR)

Canobbio v Commissioner of Domestic Taxes (Tax Appeal 1106 of 2022) [2023] KETAT 544 (KLR) (Civ) (19 October 2023) (Judgment)

Neutral citation: [2023] KETAT 544 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Civil

Tax Appeal 1106 of 2022

RM Mutuma, Chair, BK Terer, E.N Njeru, M Makau & W Ongeti, Members

October 19, 2023

Between

Pietro Canobbio

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is an individual male adult resident within the Republic of Kenya.

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 Appellant sold property to Nanyuki Mall Limited in September 2021 for the sum of Kshs 250,000,000. 00.

4. The Respondent checked the Input VAT of Kshs 34,482,758. 56 claimed by the purchaser from the transaction in its March 2022 VAT return to the corresponding output declarations by the Appellant.

5. The Respondent wrote to the Appellant on 19th May 2022 informing him of its intention to recover VAT from the sale of the property and after a Meeting on 23rd May 2022, the parties signed a payment plan agreement for the payment of the outstanding taxes in installments. The Respondent further wrote a letter to the Appellant’s banker, Diamond Trust Bank, on 23rd May 2022 with the consequence of the banker freezing the Appellant’s bank account for the sum of Kshs 34,260,038. 34.

6. On 20th June 2022, the Appellant filed a Civil suit in the Malindi High Court making an application to unfreeze the funds in the account.

7. On 27th July 2022, the Respondent issued an Assessment Order for the sum of Kshs 34,260,038. 34 to the Appellant’s iTax account.

8. On 29th July 2022, the court issued an order unfreezing the Appellant’s Account.

9. The Appellant issued an objection to the Respondent’s additional assessments dated 1st August 2022.

10. On 31st August 2022, the Respondent wrote to Diamond Trust Bank directing that the sum of Kshs 34,718,759. 00 be preserved.

11. The Respondent then issued an objection decision dated 27th September 2022 confirming the assessment.

12. Being dissatisfied with the objection decision, the Appellant lodged its Appeal on 4th October 2022.

The Appeal 13. In its Memorandum of Appeal dated and filed on 4th October 2022, the Appellant premised its Appeal on the following grounds, that;a.The Respondent erred in fact and in law in demanding for additional assessment taxes amounting to Kshs 34,260,038. 34 which taxes are unfounded, excessive, and not based on any facts or law.b.The Respondent erred in fact and in law by issuing an Agency Notice to the Appellant’s bank account without first issuing the Appellant with a demand and/or an objection decision.

The Appellant’s Case 14. The Appellant set down its case in its;a.Statement of Facts dated and filed on 4th October 2022 together with all the document attached thereto.b.Written Submissions 14th December 2022 and filed on 15th December 2022.

15. The Appellant stated that he faithfully paid his taxes as and when due, and most importantly, taxes originating from the sale of his property registered as Kilifi/Township/3/1177.

16. He averred that he had exchanged emails with the Respondent on the matter after the Respondent wrote to him and he supplied all the documents requested to prove his compliance with the taxes originating from the sale.

17. He contended that he applied for a Tax Compliance Certificate and received a letter dated 10th May 2022 requesting him to address VAT and CGT issues on his commercial property and submit evidence of payment.

18. He stated that he responded to the correspondence and supplied the Sale Agreement to the Respondent and on the 19th May 2022 the Respondent wrote back demanding further documentary evidence as to the Capital Gains Tax, and, on the same day without notice and before he could respond, the Respondent issued an agency notice against his bank clamping his access to funds.

19. The Appellant asserted that he continued engaging the Respondent with hopes that it would do good by lifting the agency notice but the Respondent issued another agency notice dated 31st August 2022.

20. He stated that all this was done by the Respondent without an assessment and or a demand notice and the Respondent issued an objection decision on 27th September 2022.

21. The Appellant avowed that the Respondent’s actions resulted in unfair administrative actions by issuing an agency notice to his bank without first issuing a proper demand and assessment.

22. He asserted that the Respondent did not follow the procedure and issued 2 different agency notices with different figures with the 1st one dated 19thMay 2022 for Kshs 34,543,455. 00 and 2nd dated 31st August 2022 for Kshs 34,718,729. 00, without issuing any assessment.

23. He reiterated that the selling price did not include VAT and Nanyuki Mall Ltd paid stamp duty on the net amount which is Kshs 250,000,000. 00 which means that it was aware that it was the net amount exclusive of VAT going per the valuation report done with its valuer.

24. He reiterated that the selling price value of Kshs 250,000,000. 00 was lower as per the valuation report and according to his valuer, it is valued at Kshs 350,00,000. 00 exclusive of VAT.

25. He maintained that in Civil Case No 5 of 2022 at Malindi High Court, there is all the information and answers to Respondent’s Replying Affidavit sworn by Mr. Martin Gichango on 13th October 2022 which was never served on the Appellant.

The Appellant’s Prayers 26. The Appellant prayed for:a.The Agency Notice dated 31st August 2022 be lifted.b.The purported tax decision dated 27th September 2022 be struck out.

The Respondent’s Case 27. The Respondent’s case is premised on its;a.Statement of Facts dated and filed on 3rd November 2022 together with the documents attached thereto.b.Written Submissions dated and filed on 4th April 2023.

28. The Respondent cited Section 5 of the VAT Act and stated that the taxes demanded are due and payable and the Appellant erred by failing to charge VAT to the purchaser in the sale of its property yet the purchaser claimed input VAT on the same.

29. The Respondent avowed that the sale of land transaction is chargeable to VAT as the same is not part of the supply of goods or services that are exempt or zero-rated as per the First Schedule of the VAT Act.

30. It averred that the Appellant had not disputed the sale transaction and admitted to owing the taxes demanded to the extent of signing an Installment Payment Agreement dated 23rd May 2022.

31. It cited Section 52 (2) of the Tax Procedures Act and stated that there is no valid Notice of Appeal before this Tribunal as the Appellant has entered into an agreement with the Respondent to pay the taxes demanded by the Respondent and admitted by the Appellant as shown in the Agreement dated 23rd May 2022.

32. It reiterated that the document which the Appellant is referring to as an agency notice is a mere correspondence from the Respondent to Diamond Trust Bank dated 31st August 2022 addressed to the Managing Director to inform the bank of the existence of a Court Order preserving the tax amount due and payable by the Appellant thus there is no Agency in place as the Court order preserving the Kshs 34,718,759. 00 is still in force.

33. It averred that the allegations of the Appellant as laid out in the Memorandum of Appeal and Statement of Facts unless where in agreement by the Respondent are unfounded in law and not supported by evidence.

34. It submitted that the sale of commercial property is chargeable to VAT as the same is not part of the supply of goods or services that are exempt or zero- rated per the First and Second Schedule of the VAT Act.

35. It relied on the case of National Bank of Kenya v Kenya Revenue Authority (Commissioner of Domestic Taxes) ITA E155 and E533 of 2020 and cited Section 12(1) of the Value Added Tax Act arguing that the Appellant has not disputed that taxes are due but since the Appellant entered into an agreement with the buyer then the Respondent should demand the taxes from the buyer.

36. It reiterated that since the VAT Act is clear on who submits the tax and private arrangements cannot be used to oust the provisions of the VAT Act, the Appellant’s assertion that the Respondent was not part of the agreement or approve the agreement was incorrect.

37. The Respondent cited Section 5 (3) of the VAT Act and asserted that the tax liability is on the Appellant and was due on the day of the sale (supply) of the commercial property.

38. It reiterated that the Appellant has not disputed the sale transaction and admitted to owing the taxes demanded to the extent of signing an Installment Payment Agreement dated 23rd May 2022 which the Appellant has failed to honour therefore, the taxes were not in dispute and the Respondent had the right to enforce the recovery of the taxes due if the Appellant failed to honour the payment plan.

39. It cited Section 52 (2) of the Tax Procedures Act and stated that there is no valid Notice of Appeal before this Tribunal as the Appellant has entered into an Agreement with the Respondent to pay the taxes demanded by the Respondent and admitted by the Appellant as shown in the Agreement dated 23rd May 2022.

40. It relied on Section 56 (1) of the Tax Procedures Act, 2015 and Section 30 of the Tax Appeals Tribunal Act, 2013, and submitted that the Appellant has not adduced evidence to discharge his burden of proving that the assessments were incorrect or excessive thus his allegations were unfounded in law and not supported by evidence.

41. The Respondent relied on the case of Kenya Revenue Authority v Maluki Kitili Mwendwa [2021] eKLR where Mativo J stated that:-―By now it is trite that a taxpayer always has the burden of proof in tax proceedings regardless of whether it is a review of an objection decision or an appeal. It should be noted that the burden of proof is a different concept to the standard of proof.‖

42. It also cited the case of PZ Cussons East Africa Limited v Kenya Revenue Authority (2013) where the court held that:-...the onus is upon the Appellant to show that the assessment made upon him is excessive and incorrect and of course he has completely failed to do. That is sufficient to dispose of the Appeal, which I accordingly dismiss with costs.

The Respondent’s Prayers 43. The Respondent, therefore, prayed for:a.The additional VAT assessments raised by the Respondent amounting to Kshs 34,718,759. 00 be confirmed; andb.The Appeal be dismissed with costs;

Issues For Determination 44. Gleaning through the Memorandum of Appeal, the parties’ Statements of Facts, and submissions, the Tribunal puts forth the following issues for determination:a.Whether the Respondent’s letter dated 31st August 2022 to Diamond Trust Bank qualifies as an Agency Notice.b.Whether the Respondent’s Objection Decision dated 27th September 2022 is valid.

Analysis And Findings 45. The Tribunal wishes to analyze the issues as herein-under.a.Whether the Respondent’s letters to Diamond Trust Bank qualify as an Agency Notice.

46. The Appellant averred that he supplied the Sale Agreement to the Respondent and on 19th May 2022 the Respondent wrote back demanding further documentary evidence as to the Capital Gains Tax. He added that on the same day without notice and before he could respond, the Respondent issued an agency notice against his bank clamping his access to funds.

47. He contended that the Respondent did not follow the procedure and issued 2 different agency notices with different figures with the 1st one dated 19th May 2022 for Kshs 34,543,455 and 2nd dated 31st August 2022 for Kshs 34,718,729, without issuing any assessment.

48. The Respondent submitted that the document which the Appellant is referring to as an agency notice is a mere correspondence from the Respondent to Diamond Trust Bank dated 31st August 2022 addressed to the Managing Director to inform the bank of the existence of a Court Order preserving the tax amount due and payable to the Respondent thus there is no Agency in place as the Court order preserving the Kshs 34,718,759 is still in force.

49. Section 43 of the Tax Procedures Act provides as follows:-―43. (1) This section applies if the Commissioner reasonably believes—a.that a taxpayer—i.has made taxable supplies, has removed excisable goods, or has derived an income, in respect of which tax has not been charged; orii.has collected a tax, including withholding tax, that has not been accounted for; anda.that the taxpayer is likely to frustrate the recovery of the tax.2. The Commissioner may by notice in writing, in respect of a taxpayer to whom this section applies, require a person—a.who owes or may subsequently owe money to the taxpayer;b.who holds or may subsequently hold money for or on account of the taxpayer;c.who holds or may subsequently hold money for on account of another person for payment to the taxpayer; ord.who has the authority from some other person to pay money to the taxpayer, to preserve such money, and that person shall not transfer, withdraw, dispose of or otherwise deal with that money except as provided for in the notice for a period of ten working days or until the application by the Commissioner made in accordance with subsection (3) is heard and determined by the High Court.2. The Commissioner shall apply, in the absence of the taxpayer, to the High Court for an order against any person holding funds belonging to the taxpayer, prohibiting that person from transferring, withdrawing, disposing of or otherwise dealing with such funds.3. The Court may issue an order under subsection (3) if the Court is satisfied that the conditions specified under subsection (1) have been met.4. An order made under this section shall be valid for a period of thirty days but the Commissioner may apply to the Court for an extension of the period beyond the initial thirty days.5. The Commissioner shall serve the order under this section on the taxpayer as soon as is practicable and upon service, the taxpayer may, within fifteen days, apply to the Court to discharge or vary the order.6. If the order made under this section is not discharged or varied, the Commissioner shall, within thirty days of serving the taxpayer with the order, assess the tax due and payable by the taxpayer, notify the taxpayer of the assessment and commence proceedings for the recovery of the tax.7. An order issued under this section shall expire on the service of a notice of assessment under subsection (7) unless the Court extends the order.10. A person who, without reasonable cause, fails to comply with an order of the High Court under this section shall be personally liable for the amount specified in the order.‖

50. The Tribunal has perused the documents provided and, gleaning the letter dated 21st August 2022 to the Managing Director of Diamond Trust Bank Ltd by the Respondent which stated as thus:-―RE: Noticed Under Section 43 (2) of the Tax Procedures Act 2015: Preservation of Funds from the Bank Account of…‖

51. The Tribunal therefore finds that the letter dated 21st August 2022 to the Managing Director of Diamond Trust Bank does not qualify as an Agency Notice as it clearly states that it is a Notice under Section 43 (2) of the Tax Procedures Act seeking to preserve the funds of the taxpayer for purposes of taxes that are deemed to be due and payable.

52. Section 42 of the Tax Procedures Act of 2015 provides that:-―(1)This section applies when a taxpayer is, or will become liable to pay a tax and—a.the tax is unpaid tax; orb.the Commissioner has reasonable grounds to believe that the taxpayer will not pay the tax by the due date for the payment of the tax.2. The Commissioner may, in respect of the taxpayer and by notice in writing, require a person (referred to as the "an agent")—a.who owes or may subsequently owe money to the taxpayer;b.who holds or may subsequently hold money, for or on account of, the taxpayer;c.who holds or may subsequently hold money on account of some other person for payment to the taxpayer; ord.who has authority from some other person to pay money to the taxpayer, to pay the amount specified in the notice to the Commissioner, being an amount that shall not exceed the amount of the unpaid tax or the amount of tax that the Commissioner believes will not be paid by the taxpayer by the due date.5. An agent shall pay the amount specified in a notice under subsection (2) by the date specified in the notice, being a date that does not occur before the date that the amount owed by an agent to the taxpayer becomes due to the taxpayer or held on the taxpayer's behalf.6. When an agent who has been served with a notice under subsection (2) fails to comply with the notice by reason of a lack of monies held by an agent on behalf of, or due by an agent to the taxpayer, an agent shall notify the Commissioner in writing within fourteen days of receiving the notice, setting out the reasons for an agent’s inability to comply.(9)The Commissioner shall serve the taxpayer with a copy of a notice under this subsection (2), when serving the agent.(12)The Commissioner may require, in writing, any person, within a period of at least thirty days, to provide a return to the Commissioner showing any monies which may be held by that person for a taxpayer referred to in subsection (1) or monies held by that person which are due to a taxpayer referred to in subsection (1).14. The Commissioner shall not issue a notice under this section unless —a.the taxpayer has defaulted in paying an instalment under section 33 (2);b.the Commissioner has raised an assessment and the taxpayer has not objected to or challenged the validity of the assessment within the prescribed period;c.the taxpayer has not appealed against an assessment specified in an objection decision within the prescribed timelines;d.the taxpayer has made a self-assessment and submitted a return but has not paid the taxes due before the due date lapsed; ore.the taxpayer has not appealed against an assessment specified in a decision of the Tribunal or court.‖

53. The Tribunal notes that this letter came after an Order by the High Court in the Civil suit No 5 of 2022 where, in an application by the Appellant to unfreeze the Appellant’s bank account, the court Orders in part as follows:

It Is Hereby Ordered:1. That an order be and is hereby granted unfreezing the monies in the said bank account save for the sum of Kshs 34,718,759. 000 that is being claimed by the Second Defendant…‖ 54. From a reading of the above, the Tribunal is persuaded that the Respondent’s letter to the bank manager were conservatory orders and did not amount to agency notices as contemplated by the Appellant.b.Whether the Respondent’s Objection Decision dated 27th September 2022 is justified.

55. The Respondent averred that the taxes demanded are due and payable. It relied on Section 5 of the VAT Act which provides that VAT shall be charged on taxable supply made by a person in Kenya in the course or furtherance of business carried on by the person. The Respondent also argued that the Appellant having sold property to Nanyuki Mall Ltd erred by failing to charge VAT and yet the purchaser claimed input VAT on the same.

56. The Appellant raised the issue that the selling price did not include VAT and Nanyuki Mall Ltd paid Stamp duty on the net amount which is Kshs 250,000,000. 00 which means that it was aware that it was the net amount exclusive of VAT going per the valuation report done by its valuer.

57. The Respondent contended that VAT became due when the sale agreement was signed and first payment received by the Appellant.

58. The Tribunal is cognizant of the provisions of Section 12 (1) of the Value Added Tax Act relating to time of supply. It provides that:―…shall be the earlier of—a.the date on which the goods are delivered or services performed;b.the date a certificate is issued by an architect, surveyor or any other person acting as a consultant in a supervisory capacity;c.the date on which the invoice for the supply is issued; ord.the date on which payment for the supply is received, in whole or in part.‖

59. The Tribunal takes note that although VAT was not captured in the sale agreement, the same ought to have been collected by the Appellant since this sale was a vatable supply as provided for in Part II of the First Schedule to the VAT Act.

60. The Tribunal therefore holds that the Respondent did not err in confirming its assessment in its objection decision and demanding VAT on the sale of the commercial property from the Appellant.

Final Decision 61. The upshot to the foregoing is that the Appeal is not meritorious and the Tribunal consequently makes the following orders; -a.The Appeal be and is hereby dismissed.b.Each party to bear its own costs.

62. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 19TH DAY OF OCTOBER, 2023ROBERT MUTUMA.................CHAIRPERSONBONIFACE K. TERER....................MEMBERELISHA NJERU........................MEMBERMUTISO MAKAU........................MEMBERDR. WALTER ONGETI...................MEMBER