[2024] KETAT 28 (KLR)

Chromawave Enterprises Limited v Commissioner of Domestic Taxes (Tax Appeal 1176 of 2022) [2024] KETAT 28 (KLR) (26 January 2024) (Judgment)

Neutral citation: [2024] KETAT 28 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 1176 of 2022

E.N Wafula, Chair, Cynthia B. Mayaka, RO Oluoch, Jephthah Njagi, AK Kiprotich & B Gitari, Members

January 26, 2024

Between

Chromawave Enterprises Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a limited liability company duly incorporated pursuant to the Companies Act, 2015 and deals with County Government tenders.

2. The Respondent is a principal officer appointed under and in accordance with Section 13 of the Kenya Revenue Authority (KRA) Act, and KRA 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 issued an assessment on 9th March 2022.

4. The Respondent issued a further demand letter on 18th March 2022.

5. The Appellant submitted an application to file a late objection on 4th July 2022.

6. The Respondent informed the Appellant that the objection did not meet the statutory requirements on 15th July 2022 and requested for documentary evidence to support the Appellant’s late objection.

7. Following its dissatisfaction with the Respondent’s decision dated 18th March 2022, the Appellant appealed by filing a Notice of Appeal to the Tribunal dated 7th October. 2022 and filed on 19th October, 2022.

The Appeal 8. The Appeal is premised on the following grounds as stated in the Appellant’s Memorandum of Appeal dated 7th October, 2022 and filed on 19th October, 2022:-i.That the Respondent erred in law by disallowing direct expenses incurred in the production of taxable income contrary to section 15 of the Income Tax Act, while computing income tax for periods 2017 to 2020. ii.That the Respondent erred in disallowing input VAT thus arriving at an erroneous assessment.iii.That the Respondent erred in issuing erroneous, irrational and unreasonable assessments given the circumstances.

Appellant’s Case 9. The Appellant’s case is premised on its Statement of Facts dated 7th October, 2022 and filed on 19th October, 2022 together with the documents attached thereto.

10. That the chronology of events is that the Respondent on the 19th of March, 2022 issued an additional assessment for Value added Tax (VAT) and Income Tax Company (CIT) for the periods 2017-2022 totaling to Kshs. 17,765,982. 00.

11. That the Appellant lodged an objection with the Commissioner and the same was declined and as such it preferred the instant Appeal upon seeking leave to file out of time. That leave was granted on the 23rd of September, 2022 vide TAT Misc. Application No. 240 of 2022. .

12. That the Appellant wishes to challenge the decision of the Respondent in issuing the demand dated 18th of March, 2022, disallowing recovery of input VAT for eleven (11) months within the periods of 2017- 2020 is to imply that there were no purchases made by the Appellant in furtherance of its taxable business within the said months which implication is absurd.

13. That the Appellant wishes to challenge the decision of the Respondent of disallowing expenses for the years 2017, 2018, 2019 and 2020 which action implies that the Appellants business was running without expenses which is an absurdity.

14. That the Appellant while lodging an objection with the Commissioner attached accounting statements for the years 2017, 2018, 2019 and 2020. That in these statements the issues of expenses have been clearly outlined. These statements together with other supporting documents were presented at the ADR level.

15. That the Respondent in its letter dated 15th July, 2022 alleged that the Appellant uploaded a blank excel sheet, it has however not adduced evidence in support on this allegation, be that as it may and in line with the rules of natural justice and the right to fair hearing as enshrined in Article 50 of the Constitution of Kenya 2010 the Commissioner is mandated by statute to request for production of documents.

16. That Section 59 of the Tax Procedure Act No. 29 of 2015 provides as follows:“For the purposes of obtaining full information in respect of the tax liability of any person or class of persons, or for any other purposes relating to a tax law, the Commissioner or an authorised officer may require any person, by notice in writing, to-(a)produce for examination, at such time and place as may be specified in the notice, any documents (including in electronic format) that are in the person's custody or under the person's control relating to the tax liability of any person;(b)furnish information relating to the tax liability of any person in the manner and by the time as specified in the notice; or(c)attend, at the time and place specified in the notice, for the purpose of giving evidence in respect of any matter or transaction appearing to be relevant to the tax liability of any person.”

17. That the Respondent before proceeding to decline the objection had the option of calling for production of additional documents but it failed to do so to the detriment of the Appellant.

18. That the consequences of this position are so immense that the Honourable Tribunal must intervene to avert the adversity that lies within, to conclude that an additional assessment is confirmed due to lack of documentary evidence that was not adequately sought for is unfair and goes against fair administrative action.

19. That the Appellant in its Appeal has sought, inter alia, that the Honourable Tribunal be pleased to set aside the Respondent's decision issued on 18th March, 2022 and to refer the matter to the Commissioner for reconsideration in accordance with any directions or recommendations.

20. That this relief is available to the Appellant based on the provisions of Section 29 of the Tax Appeals Tribunal No. 40 of 2013; sub Section 3 which provides as follows:“The Tribunal shall make a decision in writing r through electronic means­(a)affirming the decision under review;(b)varying the decision under review; or(c)setting aside the decision under review and either-(i)making a decision in substitution for the decision so set aside; or(ii)referring the matter to the commissioner for reconsideration in accordance with any. directions or recommendations of the Tribunal.”

Appellant’s Prayers 21. The Appellant prayed that:-i.The Honourable Tribunal be pleased to allow this Appeal.ii.The Honourable Tribunal be pleased to set aside the decision of the Respondent issued at Nyeri on the 18th of March, 2022 and refer the matter to the Commissioner for reconsideration in accordance with any directions or recommendations.iii.The Honourable Tribunal be pleased to grant any further orders it deems fit.iv.The costs of the Appeal be granted to the Appellant.

Respondent’s Case 22. The Respondent’s case is premised on the hereunder filed documents and proceedings before the Tribunal: -i.The Respondent’s Statement of Facts dated and filed on 27th October, 2022 together with the documents attached thereto.ii.The Respondent’s written submissions dated 5th May, 2023.

23. That the Appellant's returns were up to date however, the Respondent noted that the Appellant overstated its expenses to reduce its tax liability.

24. That the Respondent noting this sent a compliance check notice on 9th August 2021 requesting for various documents.

25. That the documents were not provided thus the Respondent issued an assessment on 9th March 2022. That there was no response thus the Respondent issued various demand letters.

26. That the Appellant did not object within the statutory 30 days but objected on 4th July 2022 stating the reason for lateness as sickness. That the Appellant when attaching evidence attached blank excel documents.

27. That the Respondent informed the Appellant that the objection did not meet the statutory requirements on 15th July 2022.

28. That the Respondent took it upon itself to call the Appellant to convey the information during which call the Appellant stated that it was waiting for the call to provide documentation.

29. That the Appellant promised to provide all evidence of the illness and the supporting documents to the objection by end of day 15th July 2022.

30. That the Appellant shared an email address and all previous correspondences were sent out to it. That the phone call conversation was captured in email communication.

31. That the Appellant never provided the required documentation thus the Appeal did not meet the statutory requirements at any point.

32. That the objection decision was therefore rendered rejecting the objection and demanding for the assessed taxes.

33. 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.

34. That the Respondent issued additional assessment on 9th March, 2022. The Appellant lodged an Objection vide i-tax on 4th July, 2022. That the objection was supposed to be lodged on or before 10th April, 2022.

35. That this is contrary to Section 51 (6) and (7) of the Tax Procedures Act which provides;“(6)A taxpayer may apply in writing to the Commissioner for an extension of time to lodge a notice of objection.(7)The Commissioner shall consider and may allow an application under subsection (6) if—(a)the taxpayer was prevented from lodging the notice of objection within the period specified in subsection (2) because of an absence from Kenya, sickness or other reasonable cause; and(b)the taxpayer did not unreasonably delay in lodging the notice of objection.”

36. That the objection given by the Appellant did not state the reasons for objecting nor how the objection should be amended but only gave reason as to why the objections were late citing illness.

37. That further, the Appellant did not provide any documentation to support the objection as required under law. That it is clear from Section 51(3) that the objection did not meet the statutory requirements for it to be considered.

38. That Section 51 (4) of the Tax Procedures Act states that:“Where the Commissioner has determined that a notice of objection lodged by a taxpayer has not been validly lodged, the Commissioner shall within a period of fourteen days notify the taxpayer in writing that the objection has not been validly lodged.”

39. That the Respondent reached out to the Appellant on 15th July 2021 informing it of the irregularities of the objection and asking that documentation be provided for both the illness and tax assessment. That this request was not complied with thus the taxes were due and payable.

40. That the Respondent could not verify the claims made as expenses in the Appellant's account as no evidence was given to support the same. That Section 56 (1) of the Tax Procedures Act places the burden of proof on the taxpayer, who is the Appellant.

41. That the Appellant made no efforts to discharge of this burden thus the tax assessment stood.

42. That the Appellant’s objection was late and was not supported by documents validating the late objection. That in TAT No. 339 of 2022 - Caroli Omondi -Vs- Commissioner Of Domestic Taxes, the Tribunal observed as follows :“The Tribunal therefore finds that the Appellant is guilty of laches for not filing his notice of objection within the specified time and that the Respondent was right to invalidate the Appellant’s Objection for being time-barred”

43. That further an objection is subject to legal requirements to ensure validity as provided for under Section 51(3) of the Tax Procedures Act which provides;“A notice of objection shall be treated as validly lodged by a taxpayer under subsection (2) if—(a)the notice of objection states precisely the grounds of objection, the amendments required to be made to correct the decision, and the reasons for the amendments; and…..(c)all the relevant documents relating to the objection have been submitted.”

44. That Section 23 (1) (b) of the TPA provides as follows;“A person shall—… (b) maintain any document required under a tax law so as to enable the person's tax liability to be readily ascertained.”

45. That Section 54A (1) of the Income Tax Act provides that:“A person carrying on a business shall keep records of all receipts and expenses, goods purchased and sold and accounts, books, deeds, contracts and vouchers which in the opinion of the Commissioner, are adequate for the purpose of computing tax.”

46. That Section 56(1) of the Tax Procedures Act provides as follows;“In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect. “

47. That the above provisions place an obligation on any taxpayer to ensure any and all tax documents required for scrutiny be readily available for the Respondent. Section 23(1) (b) demands that taxpayers maintain the tax documents. The Appellant failed to provide documentation to support late grounds on illness grounds and valid objection.

48. That in this case, due to the Appellant’s failure to submit a valid Objection the Respondent confirmed the additional assessment.

49. The Respondent further relied on the following cases:i.Ngurumani Traders Limited Versus Commissioner of Investigations and Enforcement ( TAT No. 125 of 2017).ii.TAT No. 55 of 2019 Boleyn International Limited vs Commissioner of Domestic Taxes.

Respondent’s Prayers 50. The Respondent prayed that the Tribunal dismisses the Appeal with costs.

Issues For Determination 51. The Tribunal has carefully studied the pleadings and documentation filed by both parties and is of the respectful view that the singular issue for its determination is as follows:-Whether the Appeal is valid.

Analysis And Determination 52. The Tribunal having ascertained the issue for determination as set out above proceeds to deal with the same as hereunder.

53. This dispute arose from the Respondent’s action of assessing Value Added Tax on the Appellant.

54. The Respondent submitted that it issued an assessment on 9th March 2022 and that there was no response from the Appellant and subsequently the Respondent issued various demand letters.

55. The Respondent further averred that the Appellant did not object within the statutory 30 days but objected on 4th July 2022 stating the reason for lateness as sickness. That the Appellant when attaching evidence attached blank excel documents.

56. The Tribunal established from the parties’ pleadings that indeed the Respondent issued an assessment on 9th March 2022. There is no response on file to this assessment by the Respondent. The Tribunal also ascertained that a further demand letter was issued by the Respondent on 18th March 2022 and similarly, there was no response from the Appellant.

57. The Appellant submitted applications to file late objections on iTax on 4th July 2022 providing “sickness” as the late objection reason(s) on the tab provided for the same under iTax.

58. The Tribunal noted that other than the averment on iTax as a reason for late objection, the Appellant did not adduce any evidence to support its claim, a ground that the Respondent has severally submitted on in its pleadings as the reason for rejection of the Appellant’s application.

59. Section 52(6) and (7) provide as follows regarding an application to file a late objection:“(6)A taxpayer may apply in writing to the Commissioner for an extension of time to lodge a notice of objection.(7)The Commissioner shall consider and may allow an application under subsection (6) if —(a)the taxpayer was prevented from lodging the notice of objection within the period specified in subsection (2) because of an absence from Kenya, sickness or other reasonable cause; and(b)the taxpayer did not unreasonably delay in lodging the notice of objection.”

60. The Tribunal notes that while the Appellant filed an application under sub-section 6 above and provided the reason for its late objection to be sickness, it did not adduce any evidence to support its averment

61. Section 51 (2) and (3) of the Tax Procedures Act provides as follows regarding timelines for filing and validity of objections :“A notice of objection shall be treated as validly lodged by a taxpayer under subsection (2) if-(a)the notice of objection states precisely the grounds of objection, the amendments required to be made to correct the decision, and the reasons for the amendments; and(b)….(c)all the relevant documents relating to the objection have been submitted…”

62. In the instant case, the Appellant did not provide any evidence, either during the objection review process or before this Tribunal to satisfy the requirement for late objection as per Section 51(7) of the Tax Procedures Act. As a matter of fact, the Appellant did not provide any document to support its grounds for late objection and in this regard the Tribunal cannot confirm the veracity of this averment.

63. The Tribunal notes that the Appellant was indulged by the Respondent on different occasions to provide documents in support of its late objection. Specifically, the Respondent via various emails dated 13th July 2022 and 15th July 2022 made requests for documentation to which the Appellant never responded.

64. Further, in its letter dated 15th July, the Respondent rejected the Appellant’s late objection application in response to which the Appellant filed a Notice of Appeal to the Tribunal on 19th October, 2022 after seeking leave from the Tribunal to file a late appeal. This was granted on 23rd September, 2022.

65. The Tribunal noted that the Appellant’s Notice of Appeal made reference to a decision by the Commissioner dated 18th March, 2022 which decision the Appellant appealed to the Tribunal.

66. The Tribunal confirmed that the Respondent’s letter dated 18th March, 2022 was a demand letter to which the Appellant filed an application for late objection on 4th July, 2022. Notably, the Respondent rejected this application as it was not supported by any documentation.

67. Section 52 of the TPA states as follows regarding appeal against an appealable decisions to the Tribunal:“Appeal of appealable decision to the Tribunal(1)A person who is dissatisfied with an appealable decision may appeal the decision to the Tribunal in accordance with the provisions of the Tax Appeals Tribunal Act, 2013 (No. 40 of 2013).(2)A notice of appeal to the Tribunal relating to an assessment shall be valid if the taxpayer has paid the tax not in dispute or entered into an arrangement with the Commissioner to pay the tax not in dispute under the assessment at the time of lodging the notice.”

68. The TPA defines an appealable decision to mean:“an objection decision and any other decision made under a tax law other than—(a)a tax decision; or(b)a decision made in the course of making a tax decision;”

69. The Tribunal notes that the communication by the Respondent to which the Appellant lodged its Appeal at the Tribunal was a demand letter and not an appealable decision as defined under Section 2 of the TPA.

70. The Tribunal further notes that the Respondent made its objection decision on 15th July, 2022 which was subsequent to the purported decision of 18th March, 2022 that the Appellant based its Appeal.

71. Section 13(1) and (2) of the Tax Appeals Tribunal Act stipulates the procedure and the necessary documents for filing an Appeal to the Tribunal as follows:“(1)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 the Commissioner.”(2)The Appellant shall, within fourteen days from the date of the filing the notice of appeal, submit enough copies, as may be advised by the Tribunal, of a memorandum of appeal;b.Statement of facts; andc.a tax decision”

72. From the chronology of events, the Appellant failed to follow due process as it appealed a demand letter by the Respondent in response to which it should have lodged a valid objection. It is clear therefore that the decision that the Appellant appealed to the Tribunal was not an appealable decision.

73. The Tribunal relies on the case of W.E.C. Lines Ltd vs. The Commissioner of Domestic Taxes [TAT Case No. 247 of 2020] where it was held at Para. 70 and reiterating the holding in Krystalline Salt Ltd vs. KRA [2019] eKLR that:“Where there is a clear procedure for redress of any particular grievance prescribed by the constitution or an Act of Parliament, that procedure should be strictly followed. Accordingly, the special procedure provided by any law must be strictly adhered to since there are good reasons for such special procedures”. The relevant procedure here is the process of opposing an assessment by the Commissioner.”

74. Having established that the appeal by the Appellant was not based on an appealable decision, the Tribunal makes a finding that this Appeal was premature and there is therefore no valid Appeal before the Tribunal.

Final Decision 75. In view of the foregoing, the Tribunal finds that the Appeal is incompetent and accordingly makes the following Orders: -i.The Appeal be and is hereby struck out.ii.Each party to bear its own costs.

76. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 26TH DAY OF JANUARY, 2024ERIC NYONGESA WAFULA - CHAIRMANCYNTHIA B. MAYAKA - MEMBERDR. RODNEY O. OLUOCH* - MEMBERJEPHTHAH NJAGI - MEMBERABRAHAM K. KIPROTICH - MEMBERBERNADETTE GITARI - MEMBER