[2025] KETAT 139 (KLR)

Colt Petroleum Limited v Commissioner of Legal Services & Board Coordination (Tax Appeal E133 of 2024) [2025] KETAT 139 (KLR) (21 February 2025) (Judgment)

Neutral citation: [2025] KETAT 139 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E133 of 2024

RM Mutuma, Chair, M Makau, Jephthah Njagi, T Vikiru & D.K Ngala, Members

February 21, 2025

Between

Colt Petroleum Limited

Appellant

and

Commissioner of Legal Services & Board Coordination

Respondent

Judgment

Background 1. The Appellant is a limited liability company whose principal activity involves the purchase and sale of diesel engine oils, industrial lubricants, automotive lubricants, liquid petroleum gas, heavy furnace oil and bitumen.

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 Respondent vide a letter dated 4th July 2023 and received by the Appellant on 26th July 2023 demanded for VAT arrears in the sum of Kshs. 20,280,691. 88 and for Income Tax arrears in the sum of Kshs. 44,908,171. 47, both principal taxes, penalties and interest amounting to Kshs. 31,854,440. 04 for alleged under declared sales between 2017 and 2021.

4. Upon review of the Objection, the Respondent fully rejected the Objection through Objection Decision dated 3rd October 2023.

5. Aggrieved by the Respondent’s Objection Decision, the Appellant lodged the Appeal vide the Notice of Appeal dated 29th January 2024 and filed on 30th January 2024 with leave granted on 7th November 2024.

The Appeal 6. The Appellant relied on its a Memorandum of Appeal dated 29th January 2024 and filed on 2nd February 2024, which raised the following grounds of appeal, that:a.The Respondent asserts that Colt Petroleum Limited under declared sales valued KES 20,280,691. 00 for VAT and KES 44,908,171. 47 for Income Tax between years 2017 and 2021. Colt Petroleum Limited has been declaring their transactions fully and on time and it was not clear how the assessments were raised since the sources of underdeclared sales were not specified.b.The Respondent further asserts that Colt Petroleum Limited did not provide reconciliation schedules as requested Colt Petroleum Limited provided their audited financial statements for review covering the period in question.

The Appellant’s Case 7. The Appellant’s case is premised on its Statement of Facts dated 29th January 2024 and filed on 2nd February 2024 together with the documents attached thereto.

8. The Appellant did not file its written submissions in support of its Appeal, thus its case shall be considered on the basis of its pleadings.

9. The Appellant stated that the Respondent issued a letter dated 4th July 2023 which was received on 26th July 2023 demanding that it pays tax arrears relating to VAT and Income Tax in the sum of Kshs. 20,280,691. 88 and 44,908,171. 47 respectively.

10. The Appellant averred that it responded to the Respondent on the 5th August 2023 clarifying that its transactions were fully and timeously declared and it was not clear to the Appellant how the assessments were raised.

11. The Appellant further avowed that it submitted a reconciliation schedule of the expected sales and sales declared in VAT and Income Tax returns and other supporting documents as was requested by the Respondent.

12. The Appellant stated that in its correspondence of 5th August 2023 it requested for clarity regarding the assessments, however the Respondent issued an Objection Decision dated 3rd October 2023 relating to the assessments on VAT and Income Tax.

The Appellant’s Prayers 13. The Appellant prayed that on the basis of the above grounds therefore the Tax Appeals Tribunal is requested to accept the Appeal and order the Commissioner to withdraw the additional assessment accordingly.

The Respondent’s Case 14. The Respondent’s case is premised on its;a.Statement of Facts dated and filed on 16th April 2024 together with the documents attached thereto; and,b.Written submissions dated 15th September 2024 and filed on 16th September 2024.

15. The Respondent case is that the Appellant was profiled by its Intelligence and Strategic Operations Unit (I&SO) and upon the review of the report dated 26th April 2023, the Respondent issued additional assessments on 4th July 2023 based on under-declared sales, variances between expected sales per purchases claimed by the Appellant’s PIN, expected sales per Withholding Tax Certificates vis a vis sale declared in self-assessment VAT and Income Tax returns totaling to Kshs. 65,188,863. 35.

16. The Respondent averred that the Appellant lodged a late notice of objection on 5th August 2023, which was accepted by the Respondent on 18th August 2023, and who was further requested to provide additional documents in support of the Objection.

17. The Respondent stated that the Appellant provided the requested documents on 1st September 2023, thus validating its Objection.

18. The Respondent stated that vide various emails to the Appellant of 23rd August 2023, 28th August 2023 and 31st August 2023 it requested for the following documents from the Appellant.a.Audited financial statements for the period 2017 – 2021;b.Reconciliation between sales per purchase claimed by Taxpayer’s customers and sales declared in VAT and Income Tax returns;c.Bank statements for the period January 2017 – December 2021;d.Sales ledger for the period 2017 – 2021;e.Sales invoices issued for the period 2017 – 2021;f.Purchases ledgers for the period 2017 – 2021;g.Purchases invoices issued for the period 2017 – 2021;h.Expenses ledgers and supporting documents for the period 2017 – 2021; and,i.Any other relevant documents to support the objection.

19. The Respondent stated that the Appellant only provided the audited financial statements for review. Therefore, in the absence of the reconciliation and explanation of the variances, the completeness of the sales declarations could not be established.

20. The Respondent relied on the provisions of Sections 23 (1) and 59 of the Tax Procedures Act relating to the requirement to keep proper records and the production of the same respectively.

21. The Respondent further relied on the provisions of Section 51 (3) of the Tax Procedures Act and stated that the Appellant objected to the assessments but failed to precisely state the grounds of objection and provide the relevant documents in support of its objection.

22. The Respondent further relied on the provisions of Sections 56 (1) of the Tax Procedures Act and 30 of the Tax Appeals Tribunal Act, which places the burden of proof upon the Appellant.

23. In its written submissions the Respondent raised two issues for determination, namely;i.Whether the Respondent erred in the computation and confirming the additional assessments?ii.Whether the Appellant filed an Appeal out of time in the proper manner.

24. According to the Respondent, the Appellant’s audited accounts it was established that the Appellant had not conceded to the assessed sales, however a comparative analysis showed variance between the expected sales as against the sales declared in the audited financial records.

25. The Respondent relied on Sections 5 (2) (e) & 15 (1) of the Income Tax Act, Sections 31, 56 (1) and 59 of the Tax Procedures Act relating to gains or profits, deductibility of expenses, amendment of assessments, burden of proof and production of records respectively.

26. To fortify its position in relation to burden of proof, the Respondent cited the case of Grace Njeri Githua vs. Commissioner of Investigations & Enforcement [TAT No. 102 of 2018] and Mulherin vs. Commissioner of Taxation [2013] FCAFC 115.

27. The Respondent submitted that, in order to shift the burden of proof from Appellant to the Respondent, the Appellant was meant to raise an objection against the assessment as provided for under the provisions of Section 51 of the Tax Procedures Act, which was subject to the legal requirements to ensure validity as envisaged under Section 51 (3) of the Tax Procedures Act.

28. The Respondent relied on the cases of TAT No. 55 of 2018 Boleyn International Limited vs. Commissioner of Domestic Taxes; TAT No. 70 of 2017 Afya Xray Centre Limited vs. Commissioner of Domestic Taxes; Holland vs. United States of America 121 [1954] and Republic vs. Commissioner of Customs & Excise Ex-Parte Abdi Gulet Olus [2014] eKLR.

29. The Respondent submitted that the Appellant’s Appeal was filed late and without leave, the Objection Decision having been made on 3rd October 2023, the Appeal was filed on 19th March 2024.

30. The Respondent relied on Section 13 (3) and (4) of the Tax Appeals Tribunal Act as well as Rule 10 of the Tax Appeals Tribunal (procedure) Rules 2015 and the case of Income Tax Appeal No. 31 of 2017 Commissioner of Domestic Taxes vs. Mayfair Insurance Company Limited [2017] eKLR.

The Respondents Prayers 31. Based on the above grounds, the Respondent prayed that the Tribunal finds, that;a.The Objection Decision dated 3rd October 2023 was proper in law and upholds the same; and,b.The Appeal herein be struck out with costs to the Respondent as the same lacks merit.

Issues for Determination 32. The Tribunal having considered the Memorandum of Appeal, the parties’ Statements of Facts, witness statement, and submissions, the Tribunal is of the view that the main issues for determination are:i.Whether the Appeal is properly before the Tribunal; and,ii.Whether the Respondent erred in issuing its additional assessments.

Analysis and Findings 33. The Tribunal wishes to analyse the issues as hereunder.

i. Whether the Appeal is properly before the Tribunal; 34. The Respondent made its Objection Decision on the 3rd October 2023 and submitted that the Appellant filed its Appeal on 19th March 2024. The Tribunal upon perusal of the record noted that the Appellant lodged its Appeal vide the Notice of Appeal dated 29th January 2024 and filed on 30th January 2024, which was filed out of time.

35. Section 13 (1) (b) of the Tax Appeals Tribunal Act, relating to the time within which an Appeal may be lodged with the Tribunal, provides;(b)be submitted to the Tribunal within thirty days upon receipt of the decision of the Commissioner.”

36. For the Appeal to have been deemed to be lodged within the statutory timeline, the Appellant ought to have filed on or before the 2nd November 2023, in observance of the provisions of Section 13 (1) (b) of the Tax Appeals Tribunal Act.

37. In instances where a party is unable to comply with the timelines, the law provides for a remedy to any party who with a proper reason wishes to lodge an Appeal beyond the statutory period. Section 13 (3) of the Tax Appeals Tribunal Act donates jurisdiction to the Tribunal to consider and grant leave to such a party, the section provides;“(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).’’

38. In the application dated 6th November 2024, the Appellant sought leave for its Appeal to be filed out of time, which leave was granted by the Tribunal on 11th November 2024 and the Appellant’s Appeal and documents as provided for under Section 13 (2) of the Tax Appeals Tribunal Act deemed as properly filed and served.

39. Consequently, the Tribunal, thus finds that the Appellant’s Appeal is properly before it for its consideration pursuant to the orders granted on 11th November 2024.

ii. Whether the Respondent erred in issuing its additional assessments. 40. Flowing from these proceedings, the dispute arose from the assessment issued on 4th July 2023 premised on variances of VAT and Income Tax totaling to Kshs. 65,188,863. 00.

41. As between the parties to the instant Appeal, there is no dispute that the Appellant lodged a late Objection on the 5th August 2023, however, extension of time to lodge the late objection was granted by the Respondent on 18th August 2023.

42. It was the submissions of the Respondent that upon the acceptance of the late objection, it made requests to the Appellant to submit particularized/itemized documents vide the emails of 23rd August 2023, 28th August 2023 and 31st August 2023. The particularized documents included the following;i.Audited financial statements for the period 2017 – 2021;ii.Reconciliation between sales per purchase claimed by Taxpayer’s customers and sales declared in VAT and Income Tax returns;iii.Bank statements for the period January 2017 – December 2021;iv.Sales ledger for the period 2017 – 2021;v.Sales invoices issued for the period 2017 – 2021;vi.Purchases ledgers for the period 2017 – 2021;vii.Purchases invoices issued for the period 2017 – 2021;viii.Expenses ledgers and supporting documents for the period 2017 – 2021; and,ix.Any other relevant documents to support the objection.

43. We noted that the Respondent submitted that the Appellant furnished the requested documents on 1st September 2023, thus the invalid objection was validated, subsequently the Respondent rendered its Objection Decision on 3rd October 2023, in adherence to the provisions of Section 51 (11) of the Tax Procedures Act.

44. In a departing statement of the aforementioned, the Respondent submitted that the Appellant did not submit the documents as were requested by it, thereby resulting in the decision it made on 3rd October 2023.

45. A reading of the Objection Decision, it is notably clear that the decision was premised on the failure to provide the reconciliation schedule of the expected sales and sales declared in VAT and Income Tax returns by the Appellant. The Respondent, thus indicated that it only received Audited Financial Statements for review.

46. The Tribunal is at a loss to reconcile the contents of paragraph 8 of the Respondent’s Statement of Facts, that the Appellant’s objection was validated by providing the requested documents on 1st September 2023, noting that the documents were requested on 23rd August 2023, 28th August 2023 and 31st August 2023 as against the averment that the only document provided were Audited Financials.

47. In view of provisions of Section 51 (3) of the Tax Procedures Act, a taxpayer’s objection can be deemed invalid for various reasons, the relevant one to the circumstances being, failure to provide the document in support of the Objection.

48. There was no other reason provided to the Tribunal that would have deemed the Appellant’s objection as invalid, save for failure to provide documents. In our view, the Respondent could only have deemed the Appellant’s Objection as valid upon being furnished with the documents in support of the objection and in relation to the list as provided, failure whereof the Respondent could have elected to issue an invalidation notice as provided for in law and confirmed the assessments.

49. The Tribunal is of the considered view, that deriving from the Respondent’s actions/conduct and admission as relates to the documents in support of objection and furnished by the Appellant, for the Respondent to have validated the invalid objection, the requirement for provision/furnishing of the documents requested must have been met by the Appellant. This argument is also supported by the choice of decision issued by the Respondent, being an Objection Decision instead of the Notice of Invalidation.

50. in view of the foregoing, the Tribunal is persuaded that the Respondent was furnished with the documents it particularized in its emails aforestated and pursuant to its admission of receipt of all the documents furnished by the Appellant on the 1st September 2023, was therefore bound in law to have considered all the documents availed by the Appellant in the making of the Objection Decision. In the instant case, the Respondent failed to consider the said documents.

51. Accordingly, we are minded to find that the Respondent did not consider the documents that in its own admission acknowledged to have received as per the list provided in its emails of 23rd August 2023, 28th August 2023 and 31st August 2023.

52. In the interest of justice, the Tribunal finds that the Appellant has made out its case in the Appeal in demonstrating that the Respondent’s decision was flawed and could have made the decision otherwise, thus the Appeal succeeds.

53. Consequently, the Tribunal finds that the Respondent was not justified in issuing the additional assessments.

Final Determination 54. The Tribunal finds and holds that the Appeal is merited and shall make the following orders; -a.The Appeal be and is hereby allowed;b.The Respondent’s Objection Decision issued on 3rd October 2023 be and is hereby set aside;c.Each party to bear its own cost.

55. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 21ST DAY OF FEBRUARY 2025. ROBERT M. MUTUMA - CHAIRPERSONMUTISO MAKAU - MEMBERJEPHTHAH NJAGI - MEMBERDR. TIMOTHY B. VIKIRU - MEMBERDELILAH K. NGALA - MEMBER