[2024] KETAT 866 (KLR)

Climate Engineering Works Limited v Commissioner of Legal Services & Board Co-ordination (Tax Appeal 426 of 2023) [2024] KETAT 866 (KLR) (28 June 2024) (Judgment)

Neutral citation: [2024] KETAT 866 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 426 of 2023

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

June 28, 2024

Between

Climate Engineering Works Limited

Appellant

and

Commissioner of Legal Services & Board Co-ordination

Respondent

Judgment

Background 1. The Appellant is a Limited Liability Company duly incorporated in Kenya under the Companies Act. The Appellant is registered for Income Tax Corporation and VAT.

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 Act, the Kenya Revenue Authority is an agency of the Government for the collection and receipt of all tax revenue. Further, under Section 5(2) of the Act with respect to the performance of its functions under subsection (1), the Authority is mandated to administer and enforce all provisions of the written laws as set out in Part 1 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 Respondent issued income tax and VAT additional assessments for the years 2018, 2019 and 2020 vide assessments dated 12th October, 2020. The Appellant was dissatisfied with the said additional assessments, and on 18th November 2020, the Appellant lodged a late objection against the said assessments but later validated the same.

4. Upon considering the Appellant’s grounds of objection and accompanying documentation, the Respondent fully rejected the Appellant’s objection and confirmed the assessments of Kshs 9,221,251. 00 for VAT and Kshs 5,571,748. 00 for Corporation tax vide objection decision dated 6th September 2021.

5. Dissatisfied with the Respondent’s decision, the Appellant lodged this appeal by filing its Notice of Appeal on 20th April, 2023. The same was deemed as filed and leave was granted to the Appellant to file its Appeal out of time through orders granted by the Tribunal on 3rd August, 2023.

The Appeal 6. The Appellant lodged the memorandum of Appeal 10th August 2023 and filed on 11th August 2023 wherein it raised the following six grounds of Appeal:(a)That the Respondent erred in law and fact by failing to consider the 60–day timeline set out under section 51(11) of the Tax Procedure Act, CAP 469B of Kenya’s Laws (hereinafter “TPA”) in making objection decision following the tax payer lodgement of objection of additional assessments as stipulated in law.(b)That the Respondent’s failure to issue an objection decision within stipulated time meant that the objection by the taxpayer had been allowed.(c)That the Respondent’s failure to issue the objection decision against the objection lodged by the Appellant meant that the Respondent allowed the objection by implication.(d)That Respondent erred in fact and law by not considering documents provided to determine the correct tax position as per the TPA. By so ignoring critical documents on time and within stipulated period by Law, the respondent raised additional assessment of Kshs 8,050,624. 00 for VAT and Kshs 5,341,450. 00 for income tax return of which the appellant objected as being inconsiderate and very punitive.(e)That the Respondent erred in law and facts by not considering expenses incurred to generate the said income, which the Respondent raised additional assessment. The Appellant stands to be injured in the face of law, contrary to Income tax Act as so stipulated.(f)That in all the years that assessments were raised, the Appellant was compliant with Income tax Act, CAP 470 of Kenya’s Laws (hereinafter “ITA”) and the Value Added Tax Act, CAP 476 of Kenya’s Laws (hereinafter “VAT Act”) and calculated and paid the right amount of tax to the best of their knowledge.

Appellant’s Case 7. In support of the appeal, the Appellant lodged statement of facts dated 10th day August 2023 and filed on 11th day August 2023. However, there were no submissions on record.

8. The Appellant stated that on 9th April 2020, the Respondent carried out an in-depth verification of the Appellant’s Income Tax and VAT obligations. On 15th May 2020, the Appellant supplied the Respondent with verified invoices between the years September 2017 to December 2019.

9. That further, the Appellant alleged that it provided details of further invoices on 7th September 2020 and that on 12th October 2020, the Respondent wrote to the Appellant concerning the outcome of the Respondent’s verification exercise.

10. The Respondent on 12th October 2020, raised additional assessments for the tax obligations VAT and Income Tax for the Years 2017 to 2020. The Appellant being dissatisfied with additional assessments, it averred that it objected to the assessment within the stipulated period as required under section 51 of the TPA by lodging objection dated 18th November 2020.

11. The Appellant averred that it engaged the Respondent so that the matter could be closed within the sixty days period as stipulated in Section 51 of TPA but the Respondent communicated objection decision to the Appellant on 6th September 2021.

12. The Appellant argued that by virtue of the Respondent’s failure to communicate the Objection decision with the 60 days as per section 51 of TPA, the Appellant concluded that the objection application dated 18th November 2020 was therefore allowed.

13. The Appellant stated that the Respondent, through Debt enforcement Division under Section 42 of TPA, proceeded to enforce for recovery of Kshs 13,392,074. 00 through Agency Notices Dated 14th February 2023.

14. According to the Appellant, the Respondent erred in law and in facts by purport to enforce an action which by law stood as allowed due to lapse of the 60-day guideline as per Section 51(11) of the TPA.

15. Based on the foregoing, the Appellant prayed that this Appeal be allowed and the assessments be vacated pursuant to section to section 51(11) of the TPA.

Respondent’s Case 16. In response to the Appeal, the Respondent filed its Statement of Facts on 15th September 2023 wherein the Respondent stated that the VAT and Income Tax assessments were as a result of a tax verification exercise. The Respondent noted a turnover variance after summing invoices issued by the Appellant for the years 2018, 2019 and 2020 and issued additional assessments for VAT totalling to Kshs 9,221,251. 00 On the other hand, the Respondent noted that the Corporation Income Tax was based on a variance between the sales declared in the Appellant’s Income Tax returns and sales computed from the invoices issued in the years of 2018 and 2019 amounting to Kshs 5,571,748. 00 These assessments were issued through a letter dated 12th October 2020.

17. The Respondent stated that on 18th November 2020, the Appellant lodged a late objection against the said assessments but later validated the same. The Respondent also stated that the Appellant conceded the assessments in its late of 20th August 2021 and committed to settling the outstanding taxes in instalments based on net receipts after bank loan recoveries.

18. The Respondent considered the Appellant’s grounds of objection & accompanying documentation, and fully rejected the Appellant’s objection and subsequently confirmed the assessments on 6th September 2021 in the sum of Kshs 9,221,251. 00 inclusive of penalties and interest.

19. The Respondent refuted each and every allegation by the Appellant as contained in its Memorandum of Appeal and Statement of Facts. The Respondent maintained that it exercised its best judgment in making the assessments in full consideration of the documentation and information available pursuant to Section 31 of the TPA.

20. The Respondent contended that it conducted a tax verification exercise on the Appellant for the years 2017 to 2020 for both VAT and Income Tax. The VAT assessments were a result of an unexplained turnover variance after summing invoices issued by the Appellant for the years 2018, 2019 and 2020. The Respondent equally noted that the Appellant had under declared sales in its VAT returns despite having issued withholding VAT certificates. The Respondent added that the Corporate Income Tax assessments were also as a result of under-declared sales in 2018 and 2019 returns.

21. Whereas the Appellant contended that the Respondent issued the objection decision out of the statutory timeline of sixty (60) days as required by the law, the Respondent contended that it issued the objection decision within the stipulated timelines in line with the provisions of the TPA. The Respondent argued that the Appellant after filing a late objection, the Respondent allowed the same upon production of supporting documentation, the last of which was furnished on 24th August, 2021.

22. The Respondent contended that it issued the Appellant with an objection decision on 6th September 2021, which was exactly 13 days from the date of the last documentation as was provided for by the provisions of the TPA prior to the amendments occasioned by the Finance Act, 2022.

23. According to the Respondent, whereas the Appellant contended that the Respondent did not consider the documents and information supplied by the Appellant, the Respondent contended that the assessments were not excessive as they originated from the Appellant’s reconciliation of its accounts that did not resolve the variances. The Respondent alleged that the Appellant had lumped up invoices and in other instances had failed to provide invoices for review.

24. Further, it is the Respondent’s case that the Appellant conceded to the Respondent’s assessments in its letter dated 20th August 2021 where the Appellant stated that it is in concurrence with the Respondent's assessments on principal VAT and Corporate Tax. The Respondent stated that the assessed taxes not being in dispute, the appeal is incompetent should be struck out by dint of Section 52 (2) of the TPA. According to the Respondent, the aforementioned section mandates every Appellant to pay the taxes not in dispute or enter into an arrangement with the Respondent as a prerequisite to lodging a valid notice of appeal.

25. The Respondent also stated that the Appellant failed to discharge its burden to prove that the assessments were excessive or improper in line with the provisions of Section 56(1) of the TPA and Section 30 of the Tax Appeals Tribunal Act, CAP 469A of Kenya’s Laws (hereinafter “TPA”).

26. The Respondent asserted that this Appeal is unmeritorious because the assessments and the subsequent objection decision is proper and duly anchored in law and there is therefore no basis to set aside the assessments.

Respondent’s Prayers 27. The Respondent prayed that this Tribunal would grant it the following:(a)Uphold the its decision as proper and in conformity with the provisions of the Law.(b)Dismiss the appeal with costs to it as the same was devoid any merit.

Issues For Determination 28. The Tribunal having considered the parties’ pleadings and noting that neither party filed submissions, puts forth the following issues for determination:(a)Whether the appeal is incompetent pursuant to Section 52(2) of the TPA.(b)Whether the Appellant’s notice of objection stood as allowed by operation of law pursuant to section 51(11) of the TPA.(c)Whether the objection decision 6th September 2023 is justified.

Analysis And Findings(a)Whether the appeal is incompetent pursuant to Section 52(2) of the TPA; and(b)Whether the Appellant’s notice of objection stood as allowed by operation of law pursuant to section 51(11) of the TPA. 29. The first and the second issues for determination are competing legal issues in that whereas the first issue should be determined first therefore determining the fate of this Appeal, the issue would not have arisen had the Respondent issued its decision strictly within statutory 60 days. Therefore, the Tribunal will address the two issues concurrently.

30. The Respondent issued the assessments on 12th October 2020 and the Appellant objected on 18th November 2021 with approval from the Respondent. Therefore, the Tribunal will solve these issues by applying tax laws at the material time.

31. Section 52(2) of the TPA provides as follows:‘‘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.’’

32. The Tribunal notes that when there is an undisputed tax, the provisions of Section 52(2) of the TPA make it conditional that the a taxpayer must first pay the undisputed tax before filing a notice of Appeal. Failure to pay undisputed tax renders a filed case incompetent.

33. The Tribunal also notes the Respondent’s assertion that the Appellant conceded to its assessments as outlined in the Appellants letter to the Respondent dated 20th August 2021 wherein the Appellant stated that it was in concurrence with the Respondent's assessments on principal VAT and Corporate Tax. The Respondent maintained that the assessed taxes were not in dispute, ought to have been paid and therefore the since the instant Appeal was incompetent the Tribunal ought to strike it out by dint of the provisions of Section 52 (2) of the TPA.

34. The Tribunal further notes that thought the Respondent urged it to strike out this appeal, the Respondent failed to file in evidence the said letter dated 20th August 2021 proving the fact that the Appellant had conceded to the assessments and had agreed that the said taxes were not in dispute. Although the Respondent sought to rely on this assertion as outlined in paragraph 8 of its statement of facts, the same was not adduced and therefore the Tribunal did not have an opportunity to examine the said letter.

35. A concurrent issue arising from preceding paragraph is that even though the Tribunal would have examined the letter, it would have been necessary for the Tribunal to also consider the fact that the Reespondent issued its objection decision on 6th September 2021 yet the Appellant lodged notices of objection on 18th November 2020. Section 51(11) of the TPA provides as follows:“(11)The Commissioner shall make the objection decision within sixty days from the date of receipt of—(a)the notice of objection; or(b)any further information the Commissioner may require from the taxpayer, failure to which the objection shall be deemed to be allowed.”

36. The Tribunal notes that pursuant to the said section, the Respondent is given a statutory time limit within which to issue an objection decision, that time limit is 60 days from the date of receipt of the notice of objection or the date of receipt of further information the Respondent may have required from the Appellant. The Tribunal notes the time lapse between 18th November, 2020 and 20th August, 2021 when the purported letter was issued by the Appellant and when the Objection decision was issued on 6th September, 2021.

37. Though the Tribunal did not have opportunity to examine the letter dated 20th August 2021, the Tribunal is of the view that there is no prejudice occasioned to the Respondent in any way as demonstrated further hereunder.

38. The Tribunal notes that pursuant to section 51(11) of the TPA (supra), the use of the conjunction ‘OR’ under section 51(11) means that for this Tribunal to find that the Objection Decision is statute time barred under section 51 (11), then, the objection decision must be time barred under section 51(11) (a) or (b). This is so because an objection decision maybe time barred in an instance where section 51(11) (a) is applied or it may be time barred as a result of the application of section 51(11) (b) of the TPA.

39. The Tribunal observes that the applicability of section 51(11) (b) of the TPA is dependent upon, the Respondent’s request or requirement for additional documents from a taxpayer. Time would begin as against the Respondent from the date of receipt of the documents from the taxpayer. Since the Appellant raised the point of law that the assessments are time barred, the Respondent ought to have rebutted those assertions with evidence.

40. In the absence of evidence from the Respondent as to what occurred between 18th November 2020 and time they received the purported letter dated 20th August, 2021 and the issuance of the objection decision on 6th September, 2021, the timelines under section 51(11) of the TPA cannot be defeated by the purported admission of tax liability in alleged letter dated 20th August 2021. This is because the notice of objection would have been deemed allowed by operation of law and that therefore, the purported letter dated 20th August 2021 would not have made any impact on the controversy. Any admission of tax liability after the lapse of 60 days by the Appellant in this particular case would be rendered a mere academic exercise without any legal consequence.

41. The Tribunal observes that there is no evidence on record, from the Respondent, pursuant to section 51(11)(b) of the TPA, that demonstrates that it requested documents from the Appellant on a certain date, and further that the Appellant produced the required documents on a given date that would justify the issuance of its objection decision on 6th September 2021. In the absence of such documentary evidence, it becomes evident that the Respondent avoided accountability under section 51(11) (b) of the TPA.

42. The Tribunal finds that the Respondent misapplied section 51(11) (b) of the TPA further revealing that the Respondent may issue an objection decision as and when it deems fit thereby misusing its powers. The misapplication of this section also renders the operations of the Respondent opaque since the Respondent can issue an objection decision after a number of months without any consequence and the Tribunal is of the view that in the interest of justice to the Appellant, the Respondent must be estopped from such an endeavour.

43. The Tribunal notes the Respondent’s assertions at paragraph 17 of its statement of facts which were as follows:“the Appellant after filing a late objection, the Respondent allowed the same upon production of supporting documentation, the last of which was furnished on 24 August, 2021. ”

44. The Tribunal found that there was no evidence adduced by the Respondent to substantiate that assertion. Furthermore, the Respondent did not adduce evidence, documentary or otherwise to assist the Tribunal to determine the timelines as set out pursuant to section 51(11) (b) of the TPA. In the absence of such evidence, the Tribunal finds that the Respondent was supposed to issue its objection decision within 60 days under 51(11) (a) of the TPA. Accordingly, This the Respondent ought to have issued its objection decision on or before 18th January 2021.

45. The Tribunal notes the Respondent’s reference in its objection decision to the last documentation having been provided on 24th August, 2021. The Respondent made assertions about there having been various meetings held with the Appellant’s tax representative, the exchange of electronic mails between parties and telephone conversations regarding the Appellant’s objection.

46. The Tribunal also notes that the document that the Respondent alleged that it had provided on 24th August 2021 was not adduced as evidence in the Respondent’s statement of facts.

47. The Tribunal’s view is that though the law places the burden of proof upon a taxpayer thereby obligating it to prove that a tax decision is incorrect, this obligation of discharging the burden of proof ‘is like a pendulum swinging between the taxpayer and taxman’ as held by Justice Majanja in Commissioner of Domestic Taxes Vs. Trical And Hard Limited (Tax Appeal No. E146 of 2020) wherein it was held as follows:“I agree with the Tribunal’s holding that the burden of proof in tax matters is not stationary but is like a pendulum swinging between the taxpayer and taxman at different points but more times than not swings towards the taxpayer. The uniqueness of our tax system in placing the evidential burden of proof on the tax payer is neither a mistake nor is it unconstitutional.”

48. The Tribunal notes the provisions of section 107(1) of the Evidence Act which provides that ‘‘whoever desires any court to give judgment as to any legal right or liability dependent on the existence of facts which he asserts must prove that those facts exist”. The Tribunal also notes the assertion of the Respondent that it issued its decision within 60 days as required by law. It therefore follows that the Respondent ought to have adduced evidence to justify issuance of its objection decision under timelines as prescribed thorough section 51(11) (b) of the TPA and not 51(11) (a) of the TPA. The Tribunals view is that the Respondent failed to establish that it issued its objection decision within the meaning of section 51(11) (b) of the TPA.

49. In Republic v Commissioner of Domestic Taxes Ex Parte Fleur Investments Limited [2020] eKLR, the Court held as follows in regard to the application of section 51(11) of the TPA:‘‘Talking about the need to extensively analyze the facts, a pertinent issue has been raised in this case. The applicant argues that the Respondent failed to render an objection decision within the meaning of section 51 (11) of the TPA. From this sub-section, two consequence flow from the Respondent’s failure to make a decision. First, the objection by operation of the law stands allowed. As held in the first issue, on this ground alone the applicant’s case succeeds. That is the clear language of section 51 (11) of the TPA. That being the correct legal position, there was no need for the applicant to lodge an appeal before the TAT.’’

50. The Tribunal is of the view that since the objection decision ought to have been issued on or before 18th January 2021 and there is no evidence to prove why the objection decision was issued on 6th September 2021, the Appellant’s notice of objection stood as allowed by operation of law pursuant to section 51(11) of the TPA. It is the further view of the Tribunal that the purported letter dated 20th August 2021 therefore no legal effect.

51. Section 30 of the TATA provides as follows:“In a proceeding before the Tribunal, the appellant has the burden of proving— (a) Where an appeal relates to an assessment, that the assessment is excessive; or (b) In any other case, that the tax decision should not have been made or should have been made differently.”

52. Section 56 (1) of the TPA provides as follows:“In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”

53. This Tribunal in the case of Digital Box Limited v Commissioner of domestic investigations and Enforcement [2020] affirmed that that the burden to prove that the commissioner’s decision is wrong, falls on the taxpayer. This Tribunal is of the view that the Appellant herein has discharged its burden of proof.

54. Based on the foregoing analysis, the Tribunal finds and holds that since the notice of objection was deemed as allowed by operation law under section 51(11)(a) of the TPA, the issue of unpaid undisputed tax as raised by the Respondent pursuant to section 52(2) of the TPA could not have risen and do not arise now.

55. The Tribunal therefore finds that the appeal was competent pursuant to Section 52(2) of the TPA and further that the Appellant’s notice of objection stood as allowed by operation of law pursuant to section 51(11) of the TPA and there was no justification for the issuance by the Respondent of the objection decision dated 6th September, 2021.

56. Having found that the objection stood allowed by operation of the law, the Tribunal will not delve into analysing the third issue for determination as the same has been rendered moot.

Final Determination 57. The upshot to the foregoing is that the Appeal is meritorious and it therefore succeeds. Consequently, the Tribunal makes the following orders: -(a)The appeal be and is hereby allowed.(b)The objection decision dated 6th September 2021 be and is hereby set aside.(c)All Agency notices issued against the Appellant’s banks accounts are hereby lifted unconditionally.(d)Each party to bear its own cost.

58. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 28TH DAY OF JUNE, 2024. ............................................………CHRISTINE A. MUGACHAIRPERSON….…..….………………………. ….…..….……………………….BONIFACE K. TERER DELILAH K. NGALAMEMBER MEMBER……………………………………..OLOLCHIKE S. SPENCERMEMBER