[2023] KEHC 25421 (KLR)

Commissioner of Domestic Taxes v Gitere (Income Tax Appeal E011 of 2022) [2023] KEHC 25421 (KLR) (Commercial and Tax) (20 November 2023) (Judgment)

Neutral citation: [2023] KEHC 25421 (KLR)

Republic of Kenya

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

Commercial and Tax

Income Tax Appeal E011 of 2022

A Mabeya, J

November 20, 2023

Between

Commissioner of Domestic Taxes

Appellant

and

Lucas Waithaka Gitere

Respondent

(Being an appeal from the judgment of the Tax Appeals Tribunal dated 3rd December 2021 in Tax Appeals Tribunal Number 341 of 2019)

Judgment

1. The appellant carried out an investigation on the affairs of the respondent for the years 2016 and 2017. He noted that the respondent had 34 KPLC meters which, according to the appellant, meant that the respondent had 34 rental houses.

2. Based on this information, the appellant raised an assessment of Kshs 803,311/- which comprised of principal tax of Kshs 644,248. 80 and penalties of Kshs 34,212. 44. The respondent objected to the assessment on April 24, 2019 which the appellant rejected vide an objection decision dated June 21, 2019.

3. Aggrieved by the appellant’s decision, the respondent lodged an appeal at the Tax Appeals Tribunal which allowed the appeal on December 3, 2021.

4. Aggrieved that decision, the appellant has lodged this appeal vide a Memorandum of Appeal dated January 27, 2022. The appeal is based on 4 grounds of appeal which can be summarized into two as follows: -a.That the tribunal erred in holding that the objection decision was issued prematurely without consideration of available information.b.That the tribunal erred in in finding that due process was not followed prior to the objection and setting aside the appellant’s assessment.

5. In opposition to the appeal, the respondent filed a Statement of Facts dated February 23, 2023. He contended that he was a landlord whose sole income emanated from his two properties situate in Nakuru County. That vide a letter dated March 3, 2015, he wrote to the appellant requesting to file his returns on annual basis since he had taken out a loan at Equity bank for Kshs 7,305,695/- with a repayment of Kshs 241,665/- against a monthly income of Kshs 184,430/-.

6. That the appellant did not respond to his letter and the respondent therefore assumed that his request had been accepted and continued to submit annual returns. That he filed his annual returns on March 25, 2017 for the year 2016 and on May 24, 2018 for the year 2017 and paid a total of Kshs 100. 509/-. Vide a letter dated March 3, 2015, he wrote to the appellant to avoid paying rental income out of his capital investment.

7. The appeal was canvassed by way of Written Submissions which have been considered. The appellant submitted that the respondent failed to declare and charge tax on the annual rental income earned in 2016. That the respondent’s Notice of Objection was not supported by documents hence failed to discharge the burden of proof to show that the assessment was incorrect.

8. On whether due process was followed prior to issuance of the objection decision, the appellant submitted that the respondent was given sufficient time to support his objection. It was further submitted that the tribunal’s decision on this issue was outside the parties’ pleadings since the same had not been raised by the appellant. That section 3 and 6 of the Income Tax Act was clear on the fact that all the profits or gains made by the respondent from rent was chargeable to income tax.

9. The respondent submitted that the appeal was filed outside the 30 days prescribed by law without leave and ought to be struck off. According to the respondent, the appellant’s assessment was based on the assumption that, the respondent owned 34 rental houses and failed to conduct any investigations on the same.

10. Counsel submitted that the respondent discharged his burden of proof by providing the information required in line with section 56(1) of the Tax Procedures Act and section 30 of the Tax Appeals Tribunal Act. That the appellant had visited the respondent’s premises and established that some houses with meters remained unoccupied. That the application to file annual returns was not rejected by the appellant.

11. I have considered the record. The main issue for determination is whether the objection decision was issued prematurely without consideration of the available information.

12. The appellant’s assessment was based on the fact that, he had conducted an investigation on the respondent and discovered that the latter had to his name 34 KPLC meters. He therefore concluded that the respondent had 34 rentals houses. The assessment was confirmed because the respondent failed to provide relevant documentation to support the objection.

13. On his part, the respondent contended that the assessment for the years 2016 and 2017 was done using the old format and the same had been communicated to the appellant. That at the objection stage, he had submitted the documents as required under section 59 of the Tax Procedures Act.

14. Section 24 of the Tax Procedures Act (“the TPA”) provides: -“Submission of tax returns(1)A person required to submit a tax return under a tax law shall submit the return in the approved form and in the manner prescribed by the Commissioner.(2)The Commissioner shall not be bound by a tax return or information provided by, or on behalf of, a taxpayer and the Commissioner may assess a taxpayer's tax liability using any information available to the Commissioner.”

15. Based on section 24 of the TPA, the commissioner has the authority to issue an assessment based on any available information. From the record, there is no evidence of the initial assessment that demanded tax of Kshs 803,311/- from the respondent. While it is evident that the assessment was based on the information received on the KPLC meters, it is not clear how that figure was arrived at.

16. Section 56 of the TPA places the burden of proof in tax cases on the tax payer. The above section is reinforced by section 30 of the Tax Appeals Tribunal Act.

17. In the present case, it is evident that in the Notice of Objection, the tax payer stated that he had paid his taxes and availed the letter dated March 3, 2015 where he had previously informed the appellant of his intention to pay taxes using the previous format.

18. No evidence was availed by the appellant requesting for additional information. The record shows that the taxpayer paid taxes for the disputed years and still filed returns for the said years although not in the correct format. In that regard, the burden shifted to the appellant to demonstrate that the material presented to him by the respondent was either wrong or insufficient. Since no further information or document was requested at this stage, the burden rested on the commissioner to prove the assessment. The pendulum of the burden of proof never swung back to the respondent at all.

19. Section 51(3) of the TPA gives the format for the notice for objection as follows: -“(3)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;b)in relation to an objection to an assessment, the taxpayer has paid the entire amount of tax due under the assessment that is not in dispute or has applied for an extension of time to pay the tax not in dispute under section 33(1); andc)all the relevant documents relating to the objection have been submitted.”

20. From the forgoing, a Notice of Objection can only be said to be valid when all the relevant documents have been submitted. Sub section 4 places an obligation on the Commissioner to inform the tax payer in writing that a Notice of Objection does not meet the required standards.

21. In the present case, this is not a case of a taxpayer who has refused to pay taxes. It is a case of a willing tax payer who was mistreated by the tax authority. He had the willingness to comply with the law and wrote to the appellant seeking clarification or direction which was never provided. The appellant was under an obligation to respond to the respondent’s inquiry and advise him whether or not he had approved the letter dated March 3, 2015. This would have informed the respondent the manner in which to pay taxes. In this case, silence should be taken to have been consent.

22. Based on the foregoing, I find no error on the tribunals holding that the objection decision was premature.

23. Accordingly, the court finds the appeal to be without merit and the same is dismissed with costs.

It is so decreed.

DATED AND DELIVERED AT NAIROBI THIS 20TH DAY OF NOVEMBER, 2023. A. MABEYA, FCI ArbJUDGE