[2022] KEHC 16008 (KLR)

Commissioner of Domestic Taxes v Alliance one Tobacco (Kenya) Ltd (Income Tax Appeal E131 of 2021) [2022] KEHC 16008 (KLR) (Commercial and Tax) (2 December 2022) (Judgment)

Neutral citation: [2022] KEHC 16008 (KLR)

Republic of Kenya

In the High Court at Nairobi (Milimani Commercial Courts Commercial and Tax Division)

Commercial and Tax

Income Tax Appeal E131 of 2021

A Mabeya, J

December 2, 2022

Between

Commissioner of Domestic Taxes

Appellant

and

Alliance one Tobacco (Kenya) Ltd

Respondent

Judgment

1. The respondent lodged a VAT refund claim for the period of between February and November, 2016. The same was assessed by the appellant and a sum of Kshs 44,697,690/- was disallowed on the grounds that the claim was time barred.

2. Dissatisfied by the appellant’s assessment, the respondent lodged an appeal at the Tax Appeals Tribunal (“the Tribunal”) whereby judgment was delivered on 21/5/2021 in its favor.

3. Dissatisfied with the judgment, the appellant has moved this Court vide a Memorandum of Appeal dated 16/7/2021 wherein he has raised seven grounds which can be summarized as follows: -a.That the Tribunal erred in failing to address the issue of the notice to taxpayers to switch to the ITAX platform for tax services and failed to consider evidence by the appellant with regard to the claim of February being lodged out of time.b.That the Tribunal failed to consider the provisions of section 75(1)(b) of the Tax Procedures Act and based its judgment on section 68 of the VATActCap 476 and held that the respondents claim was not time barred.

4. The respondent filed a Statement of Facts dated 26/8/2021 in response to the appeal. It contended that the appellant’s actions in disallowing the respondents manual VATrefund was not justified despite it being empowered by section 75(1)(b) of the TPA to authorize certain actions to be done electronically. That in line with section 17(5) of the VATAct, the appellant was only precluded from refunding excessiveVAT where the statutory timelines had not been met and in case of making zero rated supplies.

5. It was further contended that the notice for the requirement to lodge VAT claims electronically was not backed by law as the public notice provided guidance to tax payers. That the public notice in any event would be considered subsidiary legislation that could not override the provisions of theVATAct. That the VAT claim was lodged within the statutory timelines under section 17(5)(b) of the VATAct.

6. The appeal was canvassed by written submissions which I have considered. The appellant submitted that the Tribunal had failed to address itself to the issue of the public notice which issue went to the root of the appeal. That the Tribunal should not have over relied on section 68 of the VATAct as the repealed regulations were inconsistent with the VATAct 2013.

7. It was further submitted that the Tribunal and the respondent wrongly applied Paragraph 11 of the VATregulations which was inconsistent with theVATAct of 2013. That since the Commissioner had prescribed the manner in which the returns ought to be submitted, the respondent did not have a basis of lodging a manual return. Counsel submitted that section 17(5) of the VAT allowed tax payers to claim refunds and thus the claim lodged on 22/3/2017 was outside the statutory period allowed.

8. On its part, the respondent submitted that the Tribunal did not err in basing its findings on the law as opposed to the public notice as the provisions of the VAT Act superseded the public notice. That the public notice could not override the provisions of the VATAct as there was no provision in the Act that required theVAT refund applications to be lodged electronically. That the VAT refund claim was received and acknowledged on 27/2/2017 therefore being lodged within the statutory timeline. That the appellant sought to introduce new issues at the appellate stage as ground 4 was not pleaded before the Tribunal.

9. I have considered the entire record. The first ground is that the Tribunal erred in failing to address the issue of the notice to taxpayers to switch to the ITAX platform for tax services and failed to consider evidence by the appellant with regard to the refund claim lodged in February being lodged out of time.

10. It was the appellant’s case that evidence was produced to demonstrate that the appellant had ceased taking manual claims documents from 1/8/2015. That the Tribunal failed to address itself on the same and did not give any reason for that. On its part, the respondent contended that the Tribunal was right in basing its findings on the provision of the law as opposed to the public notice.

11. In its judgment, the Tribunal did not consider the issue of the public notice and pronounce itself on the same. The appellants case in the Tribunal was predicated on the ground that the public notice had directed all the tax payers to use the itax system with effect from 1/8/2015. That any transaction made on the manual system was not valid. In this regard, it was incumbent on the Tribunal to consider the issue and make a determination thereon.

12. At paragraph 22, the Tribunal observed that: -“… the respondent also contended that at the time of the appellant’s refund claim there was a public notice directing tax payers to use the ITAX system for registration of pins and filing of returns among other tax related services.”

13. Apart from stating as such, no determination or finding was made on the issue. In this regard, it is correct that the appellant’s contention and evidence was not considered and no determination was made with regard to the use and legal effect of the public notice. To that extent, the Tribunal was in error.

14. The second ground is that, the Tribunal erred in failing to put into consideration the provisions of section 75(1)(b) of the TPA and based its judgment on section 68 of theVATActcap 476 and thereby held that the respondents claim was not time barred.

15. On this ground, the Tribunals holding was that by the time the VATAct came into force in 2013, there were no Regulations until 2017. That therefore, by virtue of section 68 (3) of the Act, the subsidiary legislation of the repealed act were in force at the time of lodging the claim.

16. It is not disputed that the respondent lodged a vat claim of Kshs 86,608,095/- for the period of February 2016 to May 2016 via Form VAT 4 and that the same was received on 27/2/2017. The respondent further lodged the same VAT refund claim through the ITAX platform on 22/3/2017.

17. The said claim was disallowed by the appellant for the period of February 2018 for reason that the claim was time barred.

18. Section 17(5) of theVATAct at the time provided that a VAT refund claim was due to a tax payer if the refund claim was lodged within twelve months from the day the tax became due and payable.

19. In this present case the area of contention was whether the manual form presented by the appellant was valid and whether it ought to have been used in computing the refund. With regard to this, the appellant contended that by a public notice dated 1/8/2015, the Kenya Revenue Authority had stopped receiving manual forms and therefore tax payers were directed to use the Itax system. In the premises, the appellant contended that the manual VAT refund claim form (VAT4) was not deemed to be a valid refund claim.

20. The appellant submitted that under section 75(1)(b) of the Tax Procedures Act 2015, the VAT refund claim was one of the documents that the Commissioner had authorized to be lodged electronically.21. Section 75(1) of the Tax Procedures Act 2015 provides: -

“(1) The Commissioner may, authorize the following to be carried out through the use of information technology, including computer systems, mobile electronic devices, electronic and mobile communication systems—(a)an application for registration under a tax law;(b)the submitting or lodging of a tax return or other document under a tax law;(c)the payment or repayment of a tax under a tax law; or(d)the doing of any other act or thing that is required to be done under a tax law.”

22. The Court’s view is that the public notice alerted the tax payers that the mode of filing the returns had changed and that they were required to lodge claims to the itax system. What then was the legal effect of the said notice?

23. The respondent’s contention was that the notice was merely to provide administrative guidance to the taxpayers and had no legal foundation in comparison to the VATAct. On the other hand, the appellant contended that section 75(1)(b) of the Tax Procedures Act empowered him to prescribe the manner in which the returns would be submitted.

24. Although the Tax Procedures Act was enacted in 2015, the date of commencement was 19/1/2016 way after the public notice was issued by the Kenya Revenue Authority.

25. InCommissioner of Income Tax V Westmont Power (K) LTD [2006] eKLR, the court observed: -“Even though taxation is acceptable and even essential in democratic societies, taxation laws that have the effect of depriving citizens of their property by imposing pecuniary burdens resulting also in penal consequences must be interpreted with great caution. In this respect, it is paramount that their provisions must be express and clear so as to leave no room for ambiguity.”

26. It is on the basis of the public notice requiring the respondent and other taxpayers to use the itax system, that the respondent’s claim was found to be time barred by the appellant. The effect of that is that the respondent’s claim for the month of February would be dismissed and the respondent would be deprived of its refund.

27. In Keroche Industries Limited V Kenya Revenue Authority & 5 Others [2007] eKLR, the court quoted with approval the case ofR v SOMERSET (1995) QBD 513, wherein Prof Wades Book, Administrative Law was adopted, at page 524 of SOMERSET as follows: -“But for public bodies the rule is opposite and so of another character altogether. It is that any action to be taken must be justified by positive law. A public body has no heritage of legal rights which it enjoys for its own sake, at every turn, all of its dealings constitute the fulfillment of duties which it owes to others; indeed, it exists for no other purpose.”

28. In view of the foregoing, it is my view that the Commissioner’s power is limited by law and any action taken must be based on the law. In this case, at the time of the public notice, no regulations were in place and the respondents used the manual form as per section 68 of the VATAct which provided that the subsidiary legislation made under the repealed Act was still in force as long as it was not inconsistent with the Act.

29. In view of the foregoing, I find no error in the judgment of the Tribunal in holding that the claim lodged on 27/2/2017 was filed within 12 months.

30. The upshot is that the appeal lacks merit and the same is dismissed with costs to the respondent.

It is so decreed.DATED and DELIVERED at Nairobi this 2nd day of December, 2022. A. MABEYA, FCIArbJUDGE