[2022] KEHC 15351 (KLR)

Commissioner of Domestic Taxes v Fast Generation Limited (Tax Appeal E140 of 2020) [2022] KEHC 15351 (KLR) (Commercial and Tax) (11 November 2022) (Judgment)

Neutral citation: [2022] KEHC 15351 (KLR)

Republic of Kenya

In the High Court at Nairobi (Milimani Commercial Courts)

Commercial and Tax

Tax Appeal E140 of 2020

DAS Majanja, J

November 11, 2022

Between

Commissioner of Domestic Taxes

Appellant

and

Fast Generation Limited

Respondent

(Being an appeal against the judgment of the Tax Appeals Tribunal at Nairobi dated 25th September 2020 in Tax Appeal No.42 of 2016)

Judgment

Introduction and Background 1. The Respondent is a company that offers short term loans to low and middle income salaried employees and businessmen on a small scale basis. By a letter dated 25th July 2014, the Appellant (“the Commissioner”) evinced its intention to audit the Respondent’s operations for the years 2011 and 2012, Pay As You Earn(PAYE), Value Added Tax (VAT) and Withholding Tax (WHT) for the years 2011 – 2014.

2. On completion of the audit, the Commissioner formally communicated its findings through its letter dated 19th June 2015. The Commissioner assessed the Respondent’s Corporation Tax liability for the years 2012 and 2013 at Kshs. 18,146,959. 00 after noting that the Respondent only declared income that was fully paid back meaning that it was reporting income on cash basis rather than on accrual basis. The Commissioner also disallowed some administrative expenses for lack of documentary evidence and further noted that there were unsupported debtors in both financial periods in comparison to the actual debtors. The Commissioner noted that PAYE was properly calculated and paid and thus no additional tax was realized. It concluded the Respondent did not withhold tax on interest paid out to financiers for their investment in the Respondent and thus assessed the WHT for the period 2011-2013 at Kshs. 3,245,039. 00.

3. The Commissioner thus demanded Kshs. 21,391,998. 00 inclusive of penalties and interest from the Respondent while disclaiming that the same related to the income periods of 2012 and 2013 only. It requested the Respondent to avail records for 2014 for an in-depth audit.

4. The Respondent raised its objection to the assessment by its letter dated 30th June 2015. On 18th March 2016, the Commissioner communicated to the Respondent that its objection had been reviewed and a decision made to confirm the Corporation Tax of Kshs. 15,519,333. 00 and WHT of Kshs, 2,700,776. 00 (“the Objection Decision”).

5. Dissatisfied with the Objection Decision, the Respondent lodged an appeal with the Tax Appeals Tribunal (“the Tribunal”). After considering the grounds of appeal, submissions of the parties and the authorities cited in support thereof, it rendered a judgment on 25th September 2020 where it framed one issue for determination; whether the Objection Decision contravened section 51(11) of the Tax Procedures Act, 2015 (“the TPA”).

6. The Respondent had argued that the Objection Decision was not made within sixty days from the date when it lodged the objection as required by section 51(11) and that the same was also illegal for not having a statement of findings on the material facts and the reasons for the decision as is required by section 51(10) thereof.

7. The Commissioner defended its position by stating that section 113(1) of the TPAprovided that the TPAshall only apply to any acts or omissions that occurred or is occurring for which no prosecution had been commenced or any assessment made against which no appeal had been made, before the commencement date. In short, the Appellant called for the application of the TPA in this case whereas the Commissioner opposed it. In any event, the Commissioner submitted that even if the TPA was to apply then the time ought to start running as from the commencement date of the TPA which meant that the Objection Decision was rendered in time.

8. The Tribunal noted that at the material time when the Objection Decision was made, the Income Tax Act (Chapter 470 of the Laws of Kenya) (“the ITA”) was in operation and it did not provide for a time limit for rendering objection decisions. It further noted that the TPA was assented to on 15th December 2015 and came into operation on 19th January 2016. The Tribunal found that since the Respondent had filed its appeal before it on 15th April 2016 which was after the operationalization of the TPA, this meant that the TPAwas applicable to the current appeal and that to argue otherwise would be tantamount to retrospective application of the law that the Commissioner wished to warn the Tribunal about.

9. Having found that the appeal fell within the scope of the TPA, the Tribunal proceeded to determine whether the Objection Decision contravened section 51(10) and (11) of the TPA. The Tribunal reiterated that section 51 required the Commissioner to render a tax decision in respect of a taxpayer’s objection within sixty (60} days of the date of receipt of objection notice or after receipt of any additional information it may require from the taxpayer. The Tribunal held that in this case, there was no indication that the Commissioner sought any additional information from the taxpayer after the taxpayer lodged the objection notice and thus the Tribunal stated that the Commissioner was mandated to render an objection decision within sixty days after receipt of the objection notice. The Tribunal stated that since the notice of objection was lodged with the Commissioner on 30th June 2015 and the Commissioner had rendered the Objection Decision on 18th March 2016, close to eight months after receipt of the objection notice, the same was in direct breach of section 51(11) of the TPA which posits that failure to render the decision within the allowed statutory timelines has the effect of deeming the taxpayer’s objection as allowed.

10. The Tribunal held that the implication of the Commissioner’s non-communication within the statutory period of 60 days was that the Respondent did not owe the taxes demanded by the Objection Decision and the same was therefore void from the beginning. It observed that the law presumes that by failing to communicate a decision within the statutory period was telling the Respondent that its appeal against the tax demand had been allowed and the Respondent did not owe the Commissioner any tax in respect of that particular demand. The Tribunal further held that the challenge in terms of the Objection Decision of not having a Statement of Facts and reasons for the decisions was overtaken by events and that the provisions of section 51 (10) of the TPA would have mattered had the Objection Decision not been void ab initio. In sum, the Tribunal allowed the appeal, declared that the Objection Decision was in breach of section 51(11) of the TPA hence null and void and that the Respondent had no tax liability in respect of the period of assessment under the appeal.

11. The Commissioner disagrees with this decision by the Tribunal and has proffered an appeal before the court through its Memorandum of Appeal dated 19th November 2020. The Respondent has filed the Statements of Facts dated 30th April 2021 in response to the appeal. Together with those pleadings, the parties have also filed written submissions where they have highlighted the positions they took before the Tribunal and which I have already summarised above and do not need to rehash.

Analysis and Determination 12. In determining this appeal, I am cognizant of the fact that this court is exercising appellate jurisdiction that is circumscribed by section 56(2) of the TPA which provides that “An appeal to the High Court or to the Court of Appeal shall be on a question of law only”. This means that an appeal limited to matters of law does not permit the appellate court to substitute the Tribunal’s decision with its own conclusions based on its own analysis and appreciation of the facts (see John Munuve Mati v Returning Officer Mwingi North Constituency & 2 others [2018] eKLR).

13. The grounds of appeal raised by the Commissioner ultimately dovetails neatly into the application and interpretation of the TPA and whether the provisions therein applied to parties at the material time. In making this determination, it should be recalled that in interpreting tax statutes, the court ought to make such an interpretation strictly, leaving no room for intendment, implication or presumption (see Stanbic Bank Kenya Limited v Kenya Revenue Authority CA Civil Appeal No. 77 of 2008 [2009] eKLR).

14. There is no dispute that the TPA was assented to on 15th December 2015 and commenced on 19th January 2016. It is also not in dispute that the Respondent’s objection was made before the commencement of the TPA while the Objection Decision was made after. I agree with the Commissioner’s submission that when the objection was presented to it on 7th July 2015 for determination, the ITA was the applicable law at the time and that it did not impose or prescribe a timeline for delivery of what was termed a ‘Confirmation Assessment’ and that the TPA was not in force then. It was thus inconceivable and unreasonable to expect the Commissioner to render a decision within sixty days from 7th July 2015 when the law at the time did not demand of it and based on a law that was non-existent at the time.

15. Resolution of this appeal also turns on whether the provisions of the TPA are of retrospective application. There is a latin maxim lex prospicit non respicit which encapsulates the cardinal principle that the law looks forward not backwards but this principle is not absolute. In the case of Municipality of Mombasa v Nyali Limited [1963] E.A.371 Newbold, JA., observed as follows:Whether or not legislation operates retrospectively depends on the intention of the enacting body as manifested by the legislation. In seeking to ascertain the intention behind the legislation the courts are guided by certain rules of construction. One of these rules is that if the legislation affects substantive rights it will not be construed to have retrospective operation unless a clear intention to that effect is manifested; whereas if it affects procedure only, prima facie it operates retrospectively unless there is a good reason to the contrary. But in the last resort it is the intention behind the legislation which has to be ascertained and a rule of construction is only one of the factors to which regard must be had in order to ascertain that intention.

16. A reading of the Transitional and Saving Clauses of the TPA shows that the TPA applies retrospectively in some instances as follows:113. Transitional and saving(1)Subject to this section, this Act shall apply to any act or omission that occurred or is occurring for which no prosecution has been commenced, or any assessment made against which no appeal has been made, before the commencement date.(2)Any appeal or prosecution commenced before the commencement date may be continued and disposed of as if this Act had not come into force.(3)If the period for any application, appeal or prosecution had expired before the commencement date, nothing in this Act shall be treated as having enabled the application, appeal, or prosecution to be made under this Act by reason only that a longer period is specified in this Act.(4)Any tax liability that arose before the commencement date may be recovered under this Act despite any action already taken for the recovery of the tax.

17. By the time the TPA was coming into effect, an assessment against the Respondent had been made and no appeal had been proffered meaning that the TPA was now applicable to the parties’ case from the commencement date. Under section 51(11) of the TPA, the Commissioner was now bound to render an objection decision within sixty days from the date of receipt of a valid notice of objection failure to which the objection shall be deemed to be allowed.

18. The Commissioner submits that it rendered the Objection Decision within sixty days from the commencement date of the TPA and that this ought to be construed to be in compliance with section 51(11) of the TPA and as per section 113 above. It further submits that it is a misconception of the law to allege that the time for making the Objection Decision had already expired even before the applicability of the TPA which birthed the timelines for objection decisions to be made within sixty days. I agree.

19. There is no legal basis to subject the Commissioner to the timelines of the TPA when it was not in force and when the Respondent presented the objection to it under the ITA which had no timelines on when an objection decision could be made. The only logical, reasonable position to take is for the 60-day period to count or run from the commencement date of the TPA. The commencement date of the TPA is the date when the legal obligation was imposed on the Commissioner to deliver an objection decision within the time prescribed. In this case there was no contest that the Objection Decision was made within sixty days from the commencement date of the TPA. I therefore find and hold that the Objection Decision was lawful was made within time prescribed.

20. The Tribunal did not delve into the substance of the Respondent’s appeal after it made a finding that the Objection Decision was rendered late. It also did not make a finding as to whether the Objection Decision fell short of the requirements of section 51(10) of the TPA. The Respondent did not cross-appeal on this as well. However, since the court has found that the Objection Decision was timely and having looked at the Respondent’s grounds of appeal before the Tribunal, I hold that it would only serve justice to both parties if the Respondent’s appeal before the Tribunal is heard on its merits.

Disposition 21. For the reasons I have set out above, I make the following orders:a.The appeal is allowed and the Tribunal’s judgment dated 25th September 2020 is set aside.b.The appeal is remitted back to the Tribunal for hearing and determination of the Respondent’s appeal on its merits.c.There shall be no order as to costs.

SIGNED AT NAIROBID. S. MAJANJAJUDGEDATED AND DELIVERED AT NAIROBI THIS 11TH DAY OF NOVEMBER 2022. A. MABEYAJUDGECourt Assistant: Mr M. Onyango.Ms P. Leparashao, Advocate instructed by the Kenya Revenue Authority for the AppellantMr Irungu instructed by Irungu Macharia and Company Advocates for the Respondent.