[2023] KETAT 509 (KLR)

Creative Consolidated Systems Limited v Commissioner of Domestic Taxes (Tax Appeal 537 of 2022) [2023] KETAT 509 (KLR) (4 August 2023) (Judgment)

Neutral citation: [2023] KETAT 509 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 537 of 2022

E.N Wafula, Chair, Cynthia B. Mayaka, Grace Mukuha, AK Kiprotich & Jephthah Njagi, Members

August 4, 2023

Between

Creative Consolidated Systems Limited

Appellant

and

Commissioner Of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a limited liability company duly incorporated under the Companies Act and is a registered taxpayer. The Appellant is in the business of cleaning services and human resource outsourcing.

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 carried out investigations into the tax affairs of the Appellant and issued an assessment vide a letter dated 31st January 2022 for a total amount of Kshs 376,648,682. 00 being Kshs. 130,275,623. 00 for Corporation tax, Kshs. 245,781,205. 00 for VAT and Kshs. 591,584. 00 for Withholding tax, all the taxes were inclusive of penalties and interest.

4. The Appellant lodged a notice of objection dated 28th February 2022 and received by the Respondent on 1st March 2022 contesting the entire Respondent’s assessment.

5. The Respondent rendered its decision vide a letter dated 14th April 2022 invalidating the Appellant’s notice of objection and demanding the entire taxes assessed.

6. Being aggrieved with the Respondent’s decision, the Appellant issued a Notice of Appeal on 12th May 2022 and filed the Appeal before the Tribunal on 26th May 2022.

The Appeal 7. The Appeal is premised on the following grounds as highlighted in the Memorandum of Appeal filed on 26th May 2022:-i.The Respondent erred in law. facts and issued an invalid objection decision contrary to the Tax Procedures Act 2015 Section 51 (9) which states ''The Commissioner shall notify in writing the taxpayer of the objection decision and shall take all necessary steps to give effect to the decision, including, in the case of an objection to an assessment, making an amended assessment". Section 10 further requires the Respondent to in case of an objection decision must include a statement of findings on the material facts and the reasons for the decision.ii.The Respondent erred in law by contradicting Section 23 (1) (C) and Section 31 (7) of Tax Procedures Act 2015 by auditing seven years that is 20I5 to 2021 disregarding the above provision which allows for five (5) year succeeding the return period. Also the VAT NO 35 of 20I3 Section 43 limits the retention of records for five (5) years.iii.The Respondent erred in law and fact by failing to comply with Section 35 (3) (F) of ITA, CAP 470 which provide for WHT-IT upon payment of an amount to a person resident or having a permanent establishment in Kenya in respect of management or professional fee or training. fee, the aggregate value of which is twenty- four thousand shillings or more in a month. Also the act provides that the WHT is upon payment for service (tax point). The audit fees are provisions and still outstanding as payables, thus this is not due for tax.iv.The Respondent erred in law and facts by demanding tax that are unreasonable and unfair as per Article 210 and 201 ( b) (i), Constitution of Kenya 2010. v.That the Respondents actions are contrary to legitimate expectations on the operations of the taxpayer, as per Section 15 of the Income Tax Act and Article 47(I) (2) of the Constitution of Kenya 20I0.

The Appelants Case 8. The Appellant’s case is premised on the hereunder filed documents and proceedings before the Tribunal:-a.The Appellant’s Statement of Facts filed on 26th May, 2022 together with the documents attached thereto.b.The Appellant’s written submissions dated 14th February 2023 and filed on the same date

9. The Appellant submitted that the Respondent did an additional assessment on the Appellant for the years of income 2015, 20I6, 2017, 2018, 20I9, 2020 and 2021 on 31st January 2022 and issued an assessment notice requiring the Appellant to pay a total of Kshs. 376,648,682. 00 as outstanding taxes inclusive of penalties and interests.

10. That the Appellant objected to the Respondent’s estimated additional assessments for the years 2015, 2016, 2017, 2018, 20I9, 2020 and 2021 on 28th February 2022 and the Respondent acknowledged the receipt of the same 1st March 2022.

11. That contrary to legitimate expectation of the Appellant, the Respondent made an objection decision on the 14th April 2022 and declined the objection, confirmed entire assessment and declared it invalid.

12. That the Respondent failed to make an objective decision despite the fact that the Appellant’s objection was majorly on matter of tax laws application specifically Sections 23 (1) (C) and 31 (7) of Tax Procedures Act 20I5, VAT Act No. 35 of 2013, Sections 43 and 35 (F) of ITA cap 470 which are public documents.

13. That the Respondent erred by disallowing the VAT component of business expenses which was not claimed as input tax in VAT monthly returns amounting to Kshs. 99,669,353. 00. The expenses were properly expensed in determination of gain as per Section 15 (I) of the Income Tax Act Cap 470. That the expenses were wholly and exclusively used in generation of the income. That the amounts of VAT claimed on expenses for the entire period was total of Kshs. 25,924. 439. 00.

14. That the Respondent disallowed cash expense for fuel and motor vehicle maintenances amounting to Kshs. 51,363,283. 00 due to non-supporting documentation. That the company business operations are cash in nature and payments for dump sites and repairs are paid to informal groups and thus the only proof of payments was through cash withdrawals from bank by the company account agent.

15. That the Appellant filed a Notice of Appeal as per Section 52 of the Tax Procedures Act 2015 on the 11th May 2022 to the Tax Appeal Tribunal at Nairobi.

Appellant’s Prayers 16. The Appellant prayers were that:-i.The Respondent’s objection decision is invalid, incorrect, and unfair and failed to meet the legitimate expectations of the taxpayer as per Articles 47, 201 (b) (i) and 210 of the Constitution of Kenya 2010. ii.Upon determination that the objection decision of the Respondent is invalid, wrong and unreasonable the Appellant’s objection be upheld and the Respondent’s demand and confirmation be quashed entirely.iii.The Respondent's demand for additional taxes and confirmation of estimated assessment be struck out entirely.iv.That Respondent's actions be declared arbitrary, capricious, subjective, unfair, and contrary to the fair administration of justice and to the legitimate expectations of the taxpayer.v.That the Respondent and its agents be estopped from demanding or taking further action or steps to ensure recovery of the alleged principal tax, penalties and interests.vi.Cost of the Appeal.vii.Any other remedies that this Tribunal may determine.

Respondent’s Case 17. The Respondent’s case is premised on the hereunder filed documents and proceedings before the Tribunal;a.The Respondent’s Statement of Facts dated 24th June 2022 and filed on 29th June 2022, together with the documents attached thereto.b.The Respondent’s written submissions dated 13th December 2022 and filed on the same date.

18. The Respondent stated that it carried out investigations into the business of the Appellant for the period year 2015 to 2020 with a view of confirming its tax compliance under income tax obligations.

19. That during the aforesaid investigations, an audit was conducted by examining its declarations. It averred that upon examining the records, it was established the Appellant had under declared its business income as per the availed audited accounts.

20. That as a result, the Respondent issued a letter of assessment on 31st January 2022 for Kshs. 376,648,682. 00 as shown below:Tax Head Principal Penalty Interest Total

CorporationTax 84,335,538 4,216,777 4,172,309 130,275,623

VAT 147,408,452 7,370,423 91,002,330 245,781,205

WHT 327,595 65,519 198,740 591,854

Total 232,071,585 11,652,719 132,924,378 376,648,682

21. That the Appellant objected to the same on 1st March 2022 which was duly acknowledged by the Respondent. The Respondent averred that it issued a demand for supporting documents for its objection within stipulated timelines.

22. The Respondent stated that the Appellant however failed to provide the relevant supporting documents of records and invoices for the years 2015 to 2020 in support of its objection. That the Appellant's VAT was therefore estimated, as this was the only reasonable basis of assessing the VAT tax and objection decision issued confirming the said assessments.

23. That the Appellant filed a Notice of Appeal against the decision of the Commissioner confirming the assessment of Kshs. 379,648,682. 00 on 12th May 2022.

24. The Respondent averred that the assessments were correctly issued and conform to the Value added Tax Act. That the Appellant did not provide any evidence that would have altered the assessment. That the Tax Procedure Act at Section 56 (1) places the onus of proof in tax objections on the taxpayer who in this case failed to avail evidence that would support a contrary assessment or that would have guided the Respondent at arriving to a different objection decision.

25. The Respondent asserted that the Appellant lodged the objection on 1st March,2022 on iTax and the same was received and acknowledged, however, the same was treated as invalidly lodged as it did not have grounds of objection. The Respondent submitted that the Tax Procedures Act empowers the Respondent under Section 51 to notify a party where an objection as lodged is invalid and the Appellant was notified and requested to provide documents. That however, the Appellant failed to provide documents as requested.

26. Regarding the five-year rule, the Respondent insisted that the Appellant filed all necessary returns and paid what it had assessed itself to be payable. The Respondent averred that the Appellant was uncooperative in the provision of relevant records and failed to respond to request for documents hence no relevant documents or records were provided to support the objection by the Appellant. That as a result, the assessments were made based on the only available information based on the best judgement by the Respondent. That the Tax Procedures Act empowers the Respondent under Section 59 (1) or require production of such documents vide issuance of notice deemed necessary in determination of tax liability.

27. The Respondent further averred that an in-depth examination of the records established that there were inconsistencies in the returns filed by suppliers and the invoices claimed by the Appellant and this indicated a variance as per the VAT returns filed and income tax returns filed. That additionally, the Appellant provided no explanations requested on the variance hence the same was disallowed and additional assessments carried out.

28. The Respondent averred that the Appellant was selected for a returns review following a variance from the analysis of its returns in VAT, which were compared. That the Respondent disallowed the direct purchase amount in the Appellant's income tax return and instead relied on the invoice value as used in the determination of VAT payable as the true direct purchase cost. The Respondent insisted that the objection decision provided a precise and clear breakdown of the workings used to reach at the assessments.

29. The Respondent stated that the assessment was issued based on the information provided and in light of the inconsistencies within the Appellant's VAT ledgers. That the Tax Procedure Act under Section 31 empowers the Respondent to make alterations or additions to original assessments from available information for a reporting period based on the best judgment.

30. The Respondent averred that the Appellant failed to provide the documents requested in support of its objection hence the input VAT was disallowed. The Respondent insisted that the Value Added Tax Act (Section 17) empowers the Respondent to disallow such input VAT where the necessary documents are not provided.

31. The Respondent stated that a review of the Appellant's records was carried out due to inconsistencies in the returns of the VAT3. The Respondent insisted that not all income earned by the Appellant was declared and hence the variances were brought to charge. That the Tax Procedure Act under Sections 24 and 29 empowers the Respondent to carry out assessment based on the information available.

32. The Respondent asserted that examination of the Appellant's records established that the Appellant earned income from tailoring services in the period under audit, however, these incomes were not declared for tax purposes for the year earned. The Respondents further asserted that the Appellant carried on business in contravention of Sections 42, 43 and 93 of the Tax Procedure Act which requires such documents be maintained and for purposes of taxation.

33. The Respondent denied that the Appellant had paid all its taxes due and reiterated that because of its underdeclaration, the Appellant was in debt of Kshs. 379,648,682. 00.

34. The Respondent stated that the Appellant was undeserving of the prayers sought due to the aforestated reasons.

Respondent’s Prayers 35. The Respondent prays that this Tribunal considers the case and finds that:a.That the Respondent's objection decision be upheld.b.The outstanding tax arrears of Kshs. 379,648,682. 00 are due and payable by the Appellant.c.The confirmed assessments dated 31st January 2022 were proper in law.d.That the Appeal herein be dismissed with cost to the Respondent.

Issues For Determination 36. The Appeal herein raises the hereunder issues for the Tribunal’s determination, namely;i.Whether the Respondent was justified in invalidating the Appellant’s Notice of Objection.ii.Whether the taxes assessed are due and payable.

Analysis And Findings 37. Having identified the issues falling for its determination, the Tribunal wishes to analyze the same as hereunder.

i.Whether The Respondent Was Justified In Invalidating The Appellant’s Notice Of Objection. 38. The Respondent stated that the Appellant objected to the assessments on 1st March 2022, which was duly acknowledged by the Respondent. The Respondent averred that it issued a request for supporting documents for the Appellant’s objection within the stipulated timelines.

39. The Respondent stated that the Appellant, however failed to provide the relevant supporting documents of records and invoices for the years 2015 to 2020 in support of its objection.

40. It was not in dispute that the Appellant was served with tax assessments on 31st January 2022 and it objected vide a letter dated 28th February 2022 that was received by the Respondent on 1st March 2022. The Respondent issued its decision on 14th April 2022 invalidating the Appellant’s notice of objection.

41. The Respondent in invalidating the Appellant’s objection stated in part as follows;Reference is made to your notice of objection dated 1st March 2022 in response to additional assessments dated 31st January 2022 and our email dated 1st April 2022 requesting you to provide supporting information/documents for your objection.The Commissioner notes with concern that you have failed to produce the requested supporting documents required to validate the objection in line with Section 51 (3) (c) of the Tax Procedures Act 2015 despite granting you extension of time to provide the documents.In light of the above, your application is declared invalid as it fails to meet the requirements of Section 51 (3) (c) of the Tax Procedures Act 2015…”

42. Sections 51 (2) & (3) of the Tax Procedures Act states as follows regarding objections:“(2)A taxpayer who disputes a tax decision may lodge a notice of objection to the decision, in writing, with the Commissioner within thirty days of being notified of the decision.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; andb.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.”

43. From the foregoing, for an objection to be considered validly lodged a notice of objection must contain the following elements:-a.It must be in writing;b.It must be lodged with the Commissioner within thirty days of the taxpayer being notified of the tax decision;c.It must state the grounds of objection;d.It must state the amendments required to be made to correct the decision;e.It must state the reasons for the amendments; andf.The taxpayer has to provide all the relevant documents relating to the objection.

44. The Tribunal noted that the Respondent had stated that it had requested for documents vide an email on 1st April 2022. Upon perusal of the documents, it was noted that this email correspondence was not provided by the Respondent and therefore the details of the documents that it had requested and that were not availed by the Appellant could not be ascertained by the Tribunal.

45. Further, the Tribunal noted that the Appellant in its notice of objection served on the Respondent on 1st March 2022, the Appellant had raised six grounds which included issues of law which required consideration by the Respondent. The Respondent having invalidated the Appellant’s notice of objection, it follows that the grounds were not considered as no objection decision was issued.

46. The Tribunal is persuaded by the decision by Hon. Justice Odunga in Nairobi High Court Judicial Review Application No. 599 of 2017, Republic vs. Kenya Revenue Authority, ex parte M-Kopa Kenya Limited; where the learned judge stated as follows as regards a validly lodged objection:-106. In my view since there is no format for making an objection, what is required is the substance rather than the form. What the law frowns at is an objection that is framed in such an ambiguous manner as not to be certain whether the taxpayer is seeking further particulars or indulgence to enable it pay the taxes demanded.”

47. Having considered the elements required for an objection to be validly lodged and given that it was not demonstrated which documents were requested by the Respondent, it is clear to the Tribunal that the letter to the Respondent received on 1st March 2022 met the threshold for a valid objection as envisaged under Section 51 of the Tax Procedures Act.

48. In addition, the Tribunal perused through the documents presented by the Appellant and noted that the Appellant had in addition attached to the Appeal its bank statements, petty cash schedules and its VAT analysis schedules.

49. The Tribunal was therefore of the view that the Respondent ought to have issued an objection decision in response to the Appellant’s notice of objection as provided for under Section 51 (8) of the Tax Procedures Act which provides as follows;“Where a notice of objection has been validly lodged within time, the Commissioner shall consider the objection and decide either to allow the objection in whole or in part, or disallow it, and Commissioner's decision shall be referred to as an "objection decision".”

50. Under the circumstances the Tribunal finds that the Respondent was not justified in its decision to invalidate the Appellant’s notice of objection.

ii.Whether The Taxes Assessed Are Due And Payable. 51. Having found that the Respondent was not justified in invalidating the Appellant’s notice of objection, the Tribunal finds that the subsequent tax demand as contained in the Respondent’s invalidation letter dated 14th April 2022 was premature as no objection decision had been issued.

Final Decision 52. On the basis of the foregoing analysis the Tribunal finds that the interests of justice shall be better served in the issuance of the following Orders:-a.The Appeal be and is hereby allowed.b.The Respondent’s decision of invalidation of the notice of objection dated 14th April 2022 be and is hereby set aside.c.The Respondent is hereby directed to determine and issue an appropriate objection decision in respect of the Appellant’s notice of objection received on 1st March 2022 within sixty (60) days of the date of delivery of this Judgment.d.The Respondent be at liberty to request for any additional information or documents from the Appellant.e.Each party to bear its own costs.

53. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 4TH DAY OF AUGUST, 2023. ERIC NYONGESA WAFULA - CHAIRMANCYNTHIA B. MAYAKA - MEMBERGRACE MUKUHA - MEMBERABRAHAM KIPROTICH - MEMBERJEPHTHAH NJAGI - MEMBER