[2024] KETAT 577 (KLR)

Chelal Limited v Commissioner of Domestic Taxes (Tax Appeal 862 of 2022) [2024] KETAT 577 (KLR) (22 March 2024) (Judgment)

Neutral citation: [2024] KETAT 577 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 862 of 2022

E.N Wafula, Chair, D.K Ngala, CA Muga, GA Kashindi, AM Diriye & SS Ololchike, Members

March 22, 2024

Between

Chelal Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

1. The appellant is a private limited company whose principal activity is the retail industry. The appellant also owns commercial rental property, situated in Kericho town.

2. The respondent is a principal officer appointed under section 13 of the Kenya Revenue Authority Act, cap 469 of Kenya’s Laws. Under section 5(1) of the said Act, the respondent is an agency of the Government for the collection and receipt of all tax revenue. Further under section 5 (2) with respect to the performance of its functions under subsection (1), the respondent is mandated to administer and enforce all the provisions of the written laws as set out in part 1 & 2 of the First Schedule to the Act for the purposes of assessing, collecting and accounting for all revenue in accordance with those laws.

3. On March 9, 2022, the respondent issued an agency notice to National Bank of Kenya to recover tax amounting to Kshs. 78,016,681. 00 owed by the appellant, being income tax and VAT of Kshs. 33,922,479. 00 and Kshs. 44,094,202. 00, respectively, assessed from a compliance verification exercise conducted by the respondent.

4. The appellant, through its tax agent lodged late objection application to the assessments on April 7, 2022. The Appellant cited sickness as the reason for the late objection.

4. On April 22, 2022, the respondent wrote to the appellant notifying it that the documents submitted with the application did not meet the requirements of the law stipulated in section 51 of the Tax Procedures Act, No. 29 of 2015 (hereinafter ‘TPA’). The respondent requested the appellant to send the required information within seven days .

4. The respondent vide a letter dated May 30, 2022 informed the appellant that its late objection applications were declined as the appellant had failed to provide evidence in support of reasons for late objection requested vide the appellant’s communication of April 22, 2022. The respondent demanded additional assessed VAT and corporation tax totaling to Kshs.48,527,125. 21 along with penalties and interest.

4. On August 18, 2022 the appellant filed its notice of appeal dated August 17, 2022.

The Appeal 8. The appeal is premised on the following grounds, inter alia ,contained in the appellant’s Memorandum of Appeal filed on August 18, 2022:a.The respondent did not validate the appellant’s objection to its tax decision contrary to the TPA. The respondent relied on Tax Regulations, 2015 to reject the objection of the appellant on the basis of late filing of objections and that it would have been prudent for the respondent to evaluate the objections application receipt ordersb.The assessment orders were raised during the pandemic which hit the Country from March 2020 to the time the restrictions on various activities were lifted. Lockdowns, curfews and access to emails really affected the appellant’s right to appeal on the raised assessmentsc.The assessments raised contained anomalies as they had not been properly verified by the respondent. On further scrutiny, the appellant realized the assessments were duplicates of one expensec.The respondent froze the bank accounts of the appellant on March 9, 2022 without having examined the information related to the objection of the appellant. The additional taxes on VAT and income tax were erroneous and there was no justification for freezing the accounts of the appellant.

Appellant’s Case 9. The appellant’s case is set out in its statement of facts filed on August 18, 2022.

10. The appellant stated that tax decisions by the respondent had to be validated pursuant to the TPA and the additional assessments arrived at were not validated leading to excessive additional taxes of Kshs. 78,016,681. 00.

11. The rejection of the appellant’s objections due to lapse of time was arbitrary as the decision was made during the Covid-19 pandemic which had hit the Country.The appellant’s right to object was fundamental and depriving it of this amounted to an unfair tax decision.

12. The tax assessment orders raised by the respondent contained errors and transactions not related to the appellant and in addition, the respondent never gave an explanation for the inclusion of the expenses named above in the assessment orders.

13. The respondent froze the appellant’s bank accounts without examining the information related to the objection.

Appellant’s prayers 14. The appellant prayed that the Tribunal sets aside the additional assessments raised by the respondent and lifts the agency notice dated March 9, 2022.

Respondent’s Case 15. In its Statement of Facts dated and filed on September 22, 2022, the respondent averred as hereunder:

16. The respondent reiterated its position in the rejection notice as the appellant’s objection application was lodged after more than the required statutory time limit of thirty(30) days from the date of service of the assessments raised.

17. That the appellant lodged its objection more than a year later contrary to section 51(1) of the TPA. The respondent pursuant to section 51(4) of the TPA notified the appellant that it had not lodged a valid objection application.

18. The respondent averred that the appellant was advised to adhere to the provisions of section 51(3), (6) and (7) of the TPA to validate its objection application by providing reasons and evidence in support of its reasons for lodging a late objection

19. That the provisions of section 51(6) and (7) of the TPA on extension of time to lodge a late objection do not create a mandatory obligation on the respondent to allow the late objection. Furthermore an electronic mail from the respondent dated April 22, 2022 was clear as it pointed out the information and documentation that was required in order to validate the objection.

20. The respondent stated that the appellant did not provide the required documentation therefore failing to validate its objection. As such, the respondent rejected the appellant’s late objection and that fact was communicated vide a letter dated May 30, 2022. The assessed tax amount was Kshs. 48,527,125. 21 inclusive of resultant penalties and interests which remained due and payable.

21. That the rejection notice was issued in accordance with section 51 of the TPA after the appellant failed to support its late objection even after being granted the opportunity to do so vide email dated 22nd April 2022

22. The respondent stated that the allegations for the appellant as laid out in its memorandum of appeal and statement of facts were unfounded in law and not supported by evidence.

Respondent’s prayers 23. The respondent prayed that the Tribunal would uphold its confirmed assessment of Kshs. 48,527,125. 21 and that the Appeal would be dismissed with costs to the Repsondent as the same was devoid of any merit.

Parties Submissions: 24. The appellant’s submissions were dated and filed on 23rd March, 2023 whilst those of the respondent were dated 13th March, 2023 and filed on 14th March, 2023.

25. The appellant in its submissions urged that the respondent did not validate the appellant’s objections to its tax decision. The respondent relied on the Tax Procedures Act, 2015 to reject the objections on the pretext of late filing to avoid correcting errors created by its officers.

26. The appellant submitted that the matters in the objections were substantial and to arrive at the right decision, it would have been prudent for the respondent to evaluate the objection applications receipt orders.

27. The appellant further submitted that the assessments were raised without including the appellant and the appellant’s right to object to the tax decisions was limited during the Covid-19 pandemic.

28. The appellant reiterated the anomalies discussed in its statement of facts.

29. The appellant contended that the respondent froze the appellant’s bank accounts without having examined the information related to the objection of the appellant having raised the additional taxes erroneously.

30. The appellant relied on the provisions of section 49, 50(1)(2) and (3) of the TPA.

31. The Appelant submitted that Section 49 requires the respondent to issue a statement of reasons within the notice of refusal of an application under a tax law.

31. The respondent in its submissions identified three issues for determination on as follows:

i. Whether there is a proper appeal 32. The respondent submitted that it issued its objection decision on May 30, 2022 while the Appeal was filed in August 2022.

33. The respondent relied on section 51(12) of the Tax Procedures Act requiring a taxpayer to appeal to the Tribunal within 30 days after being notified of the decision under section 51(11).

34. The respondent also relied on section 13(3) and (4) of the Tax Appeals Tribunal Act that requires an appellant to write to the Tribunal to request for expansion of time to file a Notice of Appeal out of time and the same may be granted where there is a reasonable cause for the delay.

36. That the appellant has not invoked the Tribunal’s jurisdiction to extend time to lodge its notice of appeal.

ii. On whether the respondent erred in declining the appellant’s late objection 37. The respondent submitted that section 51(2) of the Tax Procedures Act provides that 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

38. The respondent submitted that it issued additional assessments on February 15, 2021 and the appellant objected on April 7, 2022 which is one year three months later. The late objection was not supported by reasons, which is contrary to section 51(6) and (7) of the Tax Procedures Act.

39. That the respondent reminded the appellant through an email on 22nd April 2022 to support its late objection application but it failed to do so.

40. The respondent referred to the case of Ngurumani Traders Limited v Commissioner of Investigations and Enforcement TAT No.125 of 2017 where the Tribunal stated:“From the foregoing, the appellant’s failure to lodge a proper objection meant that the respondent was at liberty to confirm the assessment…”

iii. On whether the respondent erred in issuing and confirming additional assessment. 41. The respondent submitted section 24(1) of the Tax Procedures Act provides that:“A person required to submit a tax return under a tax law shall submit the return in the approved form and in the manner prescribed by the Commissioner.”

42. The respondent submitted that section 28 states 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 period to which the return relates being the amount set out in the return.”

43. The respondent posited that the law demands that every taxpayer to file its returns as and when they are due. The filing of returns required the appellant to conduct a self-assessment of its tax obligations. The appellant would then proceed to make tax declarations based on that assessment.

44. That the self-assessment aspect of Kenya’s tax regime is recognized and appreciated by the courts. The respondent relied on the case of Commissioner of Domestic Services v Galaxy Tools Limited [2021] eKLR where the court stated:“This country operates under a self-assessment tax regime. Under this regime, the taxpayer assesses self and declares what he considers to be taxable income on which he then pays tax to the authorities. For this reason, the tax laws are coached in a manner that gives the tax authorities wide powers and discretion in ascertaining ex-post facto, what taxable income is.”

45. The respondent submitted that the appellant conducted its own assessment and filed its own returns, these were based on the appellant’s own records.The information declared by the appellant is presumed by law to be the objective analysis of the tax liability.

46. The respondent averred that it is not in possession of the information the appellant relied on when filing the returns.

47. The respondent further relied on the case of Kenya Revenue Authority v Man Diesel & Turbo Se, Kenya [2021] eKLR where the court stated that:“The other important issue to bear in mind is that under our system of self-reporting of tax liability, the taxpayer initially decides the extent and amount of his/her statutory obligation to pay tax. The taxpayer in such cases generally possesses the objective evidence. Certainly, with the exception of filed returns and information provided by the taxpayer, the Revenue authority is in a poor position to establish an affirmative case.”

48. That in analysing the appellant’s tax returns, the respondent noticed unexplained gaps, this necessitated the need to conduct an investigation against the appellant to establish its tax compliance status.

49. The respondent submitted that as the party with the information, the appellant bears the burden in explaining why the variance exists in the returns by producing proper documentation.

50. The respondent posited that section 24(2) of the Tax Procedures Act provides that the Commissioner shall not be bound by a tax return or information provided by a taxpayer.

51. The respondent also relied on section 31(1) of the Tax Procedures Act and stated that the respondent is not required to apply the presumption of correctness to any taxpayer’s returns. The respondent thus applied the best judgement in evaluating the appellant’s tax liabilities hence the assessment orders issued.

52. That the obligation was placed on the appellant to object and explain the cause of the variance.

53. The appellant submitted that if the returns had errors, the appellant had liberty to make an application to the respondent for amendments as per section 31(2) of the Tax Procedures Act.

54. The appellant did not make an application to the respondent to make an amendment to the appellant’s self-assessment in line with section 31(4)(b)(i) of the Tax Procedures Act.

55. The respondent submitted that section 56(1) of the Tax Procedures Act places the burden of proof that a tax decision is incorrect, on the appellant.

56. The respondent relied on the case of Commissioner of Domestic Taxes v Galaxy Tools Limited (supra) which cites the principle that ‘he who alleges must prove’.

57. That an objection had been done and an objection lodged, the appellant therefore had to substantiate the late objection by ensuring evidence in support of the grounds.

58. The respondent maintained that the explanations that the assessments were erroneous were not considered as the appellant failed to substantiate the explanation hence the respondent could not make adjustments without an objection process.

59. The respondent thus prayed that the additional assessments be confirmed and the appeal be dismissed with costs.

60. The respondent also prayed that in the alternative, the matter be referred back to the Commissioner for a valid objection to be considered.

Issues for Determination 61. This Appeal relates to the respondent’s refusal to allow the appellant to lodge a late notice of objection under section 51(7) of the Tax Procedures Act.

62. At this point in time, the Tribunal is not concerned with whether or not the respondent was justified in making the assessment. The jurisdiction of the Tribunal at this point is to determine whether it was lawful for the respondent to refuse to allow the late objection.

63. Based on the above, and taking into account the pleadings and submissions filed by parties and the case law cited, the Tribunal has framed the following issues for determination:a.Whether there is a proper Appealb.Whether the respondent erred in declining the appellant’s late objection

Analysis And Findings 64. The Tribunal having identified the issues falling for its determination proceeds to analyze the same as hereunder .

a. Whether there is a proper Appeal 65. An appellant lodging an appeal out of time should seek leave of the Tribunal to allow expansion of time to file the appeal. This leave to be sought should specify the reasons for lodging the appeal out of time, specifying the reasonable cause for the delay. This was the position in Income Tax Appeal No.31 of 2017 Commissioner of Domestic Taxes v Mayfair Insurance Company Ltd [2017] eKLR where the Court held that the Tribunal may grant the extension of time if it is satisfied that the applicant was unable to submit the documents in time owing to absence from Kenya, sickness or other reasonable cause.

66. The Tribunal has reviewed the appeal record and has noted the letter of May 30, 2022. This is when the respondent stated it issued the objection decision.It was not until August 18, 2022 that the appellant filed its notice of appeal accompanied by the memorandum of appeal.

67. Section 13 of the Tax Appeals Tribunal Act provides for the procedure of appeal as follows;“Procedure for appeal1. A notice of appeal to the Tribunal shall—a.be in writing or through electronic means;b.be submitted to the Tribunal within thirty days upon receipt of the decision of the2. The appellant shall, within fourteen days from the date of filing the notice of appeal, submit enough copies, as may be advised by the Tribunal, of—c.a memorandum of appeal;d.statements of facts;e.the appealable decision; andf.such other documents as may be necessary to enable the Tribunal to make a decision on the appeal.3. The Tribunal may, upon application in writing or through electronic means, extend the time for filing the notice of appeal and for submitting the documents referred to in subsection (2).4. An extension under subsection (3) may be granted owing to absence from Kenya, or sickness, or other reasonable cause that may have prevented the applicant from filing the notice of appeal or submitting the documents within the specified period”.

68. The Tribunal has noted from a review of the Appeal filed that the appellant did not seek any extension to lodge the appeal out of time. As a result, the Tribunal finds that it does not have jurisdiction to entertain the instant appeal.

69. Accordingly, the Tribunal will not delve into the second issue for determination as it has since been rendered most.

Final Decision 70. In light of the foregoing analysis, the Tribunal finds that the appellant having failed to seek for an extension of time to lodge the appeal out of time, the Tribunal does not have jurisdiction to entertain the same. The Appeal is to that extent incompetent and unsustainable in law. The Tribunal accordingly proceeeds to make the following Orders;a.The Appeal be and is hereby struck outb.Each party to bear its own costs

71. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 22ND DAY OF MARCH, 2024. ERIC NYONGESA WAFULACHAIRMANDELILAH K. NGALAMEMBERCHRISTINE A. MUGAMEMBERGEORGE KASHINDIMEMBERMOHAMMED A. DIRIYEMEMBERSPENCER S. OLOLCHIKEMEMBER