[2024] KETAT 352 (KLR)

Dacha Solutions Limited v Commissioner of Domestic Taxes (Tax Appeal 1491 of 2022) [2024] KETAT 352 (KLR) (23 February 2024) (Judgment)

Neutral citation: [2024] KETAT 352 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 1491 of 2022

Grace Mukuha, Chair, E Komolo, Jephthah Njagi, W Ongeti & G Ogaga, Members

February 23, 2024

Between

Dacha Solutions Limited

Appellant

and

Commissioner Of Domestic Taxes

Respondent

Judgment

1. The Appellant is a limited liability company incorporated in Kenya under the Companies Act. Its principal business activity is the importation and exportation of goods and services.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, 1995. Under Section 5 (1) of the Act, the Kenya Revenue Authority is an agency of the Government for the collection and receipt of all revenue.

3. The Respondent carried out a returns review of the Appellant and performed analysis of purchases claimed by purchasers and sales declared by suppliers on the iTax platform for the month of December 2021.

4. On 8th March 2022, the Respondent issued additional assessment for VAT for the month of December 2021 of Kshs. 1,305,840. 99 inclusive of interest.

5. The Appellant made a late objection application on 6th May, 2022.

6. The Respondent rejected the late objection application on 6th June, 2022, on the grounds that the Appellant had failed to state any grounds including those prescribed under Section 51(7) of Tax Procedures Act, 2015. The Respondent concurrently demanded principal tax of Kshs. 435,519. 56 plus penalty and interest as due and payable.

7. Aggrieved, the Appellant filed a late Notice of Appeal dated 7th December 2022 and filed on 8th December, 2022, which was accepted with leave of the Tribunal.

The Appeal 8. The Appeal is premised on the Appellant’s Memorandum of Appeal dated 7th December 2022, and filed on 8th December 2022 stating the following grounds: -a.That the Respondent erred in both law and fact in disallowing input VAT for the year 2021 and acted contrary to the provision of Section 49 of Tax Procedures Act by failing to give reasons for disallowing the Appellant’s input VAT claims.b.That the Respondent was fundamentally misguided both in law and in fact in holding that the Notice of Objection was invalid on the grounds that the Appellant failed to comply with the provisions of Section 51(7) of the Tax Procedures Act, 2015 that is concerned with the extension of time for late objections, when in fact, the Appellant’s Notice of Objection had been lodged within time and explanation given in connection thereto.c.That the Respondent erred in law in prematurely and summarily rejecting the Appellant’s Notice of Objection under Section 51(4) of the Tax Procedures Act, 2015, without granting the Appellant a sufficient opportunity to respond to its notification in this regard, contrary to the provisions of Article 47 of the Constitution, 2010 and Section 4 of the Fair Administrative Act, 2015. d.That the Respondent’s decision is illegal and unlawful and violated the VAT Act and Tax Procedures Act by purporting to demand payment of VAT for year 2021, which the Appellant provided documents for.e.That the Respondent erred in law and fact in failing to consider all the information, documents, and explanation of the documents availed by the Appellant to prove input VAT in arriving at the said decision thereby violating the Appellant’s legitimate expectation to proper administration of tax law considering provisions of tax laws.f.That the objection decision is null and void for breaching tax laws, which require the decision to have a statement of finding and reasons for the decision.g.That the Respondent erred in law and fact in failing to consider and appreciate that the Appellant was fully compliant under VAT Act hence entitled to claim input VAT.

The Appellant’s Case 9. The Appellant’s case is premised on the following documents filed before the Tribunal: -a.The Appellant’s Statement of Facts dated 7th December 2022, and filed on 8th December 2022. b.Appellant’s Written Submissions dated 4th September 2023 and filed on 11th September, 2023.

10. The Appellant averred that it imported goods (laptops and desktops) via Safari Line Cargo Limited upon which it duly filed its returns on VAT.

11. That on 8th March, 2022, the Respondent issued the Appellant with VAT additional assessment

12. That the Appellant objected to the additional assessment via a letter on iTax portal on 6th May 2022 and this was duly acknowledged by the Respondent.

13. That the Respondent without further communication to the Appellant confirmed the assessment on 4th May 2022 and issued an objection decision on 6th June 2022.

14. That the Appellant provided at objection summary of invoices with details of declared sales and supplies made to confirm that the Appellant accounted for all business activities undertaken for the period of audit.

15. That the Appellant was not informed of the confirmation of assessment order issued on 4th May 2022 and objection decision issued on 6th June 2022, respectively, by the accountant handling its books of accounts who was also in charge of the iTax portal.

16. That due to severe sickness of the Appellant’s Director since the year 2019 to date, the Director was not able to follow up with the assessment demand and objection decision issued thereafter.

17. That the Appellant only learnt of the objection decision when its bank accounts were issued with agency notices on 8th July 2022, and thereafter the Appellant successfully sought leave of the Tribunal to appeal out of time.

18. That the assessments and the objection decision ignored supporting evidence, documents and explanations provided by the Appellant, and is therefore fatally defective.

19. That under the general accounting principles, the Respondent ought to have made its consideration based on the Appellant’s filed audited accounts, iTax filings and supporting documents provided. That this was ignored by the Respondent.

20. That the Appellant has duly filed its returns in accordance with provisions of tax laws and the Respondent cannot therefore purport to estimate/make its own best judgement on taxes payable, which is only mandated under the purview of Section 29 of the Tax Procedures Act, 2015.

Appellant’s prayers. 21. The Appellant prayed to the Tribunal for the following orders: -a.The Appeal be allowed with costs.b.The objection decision be set aside.

The Respondent’s Case 22. The Respondent’s case is premised on the following documents filed before the Tribunal: -a.The Respondent’s Statement of Facts dated 23rd December 2022 and filed on the same date.b.The Respondent’s Written Submissions dated 18th August 2023, and filed on 28th August 2023.

23. The Respondent averred that the assessments were correctly issued and conform to the VAT Act, and that the Appellant did not provide any evidence that would have altered the assessment.

24. That the Tax Procedures Act places onus of proof in tax objections on the taxpayer who in this case failed to avail evidence that would support contrary assessment or that would have guided the Respondent to arrive at a different objection decision.

25. That the Appellant was uncooperative in the provision of relevant records and failed to respond to request of documents, hence no relevant records or documents were provided to support its objection. As a result, the assessments were made on the only available information based on the best judgment of the Respondent.

26. That an in-depth examination of the records established that there were inconsistencies in the returns filed by suppliers and invoices claimed by the Appellant, which indicated variances as per VAT returns and income tax returns filed, to which the Appellant provided no explanations.

27. That the Respondent disallowed the direct purchase amount in the Appellant’s income tax and relied on the invoice value as used in determination of VAT payable as the true direct purchase cost.

28. That the Appellant failed to provide the documents requested in support of its objection for input VAT, which was thus disallowed.

29. That an examination of Appellant’s records established that the Appellant earned income from exporting services for the period under audit, which were not declared for tax purposes for the year earned.

30. That the Appellant has not paid all its taxes due and the Respondent reiterated that because of under-declaration, the Appellant is in debt of Kshs. 435,519. 56.

Respondent’s Prayers 31. The Respondent prayed to the Tribunal for the following orders: -a.The Respondent’s objection decision be upheld.b.The outstanding tax arrears of Kshs. 435,519. 56 are due and payable by the Appellant.c.The confirmed assessments dated 8th March 2021 are due and payable.d.The Appeal herein be dismissed with costs to the Respondent.

Issues for Determination 32. Having examined the pleadings, written submissions and annexures thereto filed by both parties, the Tribunal is of the view that the following two issues fall for determination: -a.Whether the Respondent’s Objection Decision dated 4th May, 2022 is justified.b.Whether the Respondent was justified in issuing the Late Objection Rejection Notice dated 8th June, 2022.

Analysis and Findings. a). Whether the Respondent’s Objection Decision dated 4th May, 2022 is justified. 33. The Tribunal noted that the dispute herein arose from the Respondent’s additional VAT assessment of the Appellant for the month of December 2021, and which was communicated to the Appellant vide Assessment Order dated 8th March 2022.

34. The Tribunal further noted that the Respondent proceeded to confirm the additional assessment through its Confirmation of Assessment Notice dated 4th May 2022, and that is on record.

35. The Respondent averred that the Appellant did not provide any evidence that would have altered the assessment it made. The Respondent further submitted that the Appellant was uncooperative in the provision of relevant records and failed to respond to request of documents, hence no relevant records or documents were provided to support its objection.

36. The Appellant, on the other hand, averred that it had provided all the necessary documents to the Respondent and included the same in its record of Appeal before the Tribunal. Specifically, the Appellant annexed the following documents to its Appeal:a.Tax payment slip from the Respondent of Kshs. 9,604. 00 dated 3rd May 2022 together with corresponding bank slip from cooperative bank.b.Invoice from Safari Line Cargo Limited from 57 laptops of Kshs. 5,276,376. 00 and dated 25th October 2020c.National Bank payment slip to the Respondent (no. 071461) dated 16th October 2020 of Kshs. 902,688. 00d.National Bank payment slip to the Respondent (no. 071460) dated 16th October 2020, of Kshs. 3,320,362. 00e.Corresponding payment slips from the Respondent in relation to (c) and (d) above.f.Corresponding payment slips from the Respondent and Family Bank for Kshs. 57,062. 00 both dated 10th May, 2022. g.Various invoices from Safari Line Cargo Ltd dated 15th September, 2021 and 18th September 2021 confirming orders for laptops and desktops.h.National Bank Receipt of Kshs. 3,543,769. 00 in favour of the Respondent and dated 10th September 2021 together with Respondent’s Payment Slip of even date.i.Detailed inventory of the Suppliers and Purchasers of the Laptops and desktops, and corresponding prices and dates of sale.

37. Section 51(8) of the Tax Procedures Act provides that: -“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".”

38. The Tribunal, taking into consideration all the foregoing, determines that the dispute be referred back to the Respondent to consider the information and documents provided by the Appellant in the letter dated 21st March 2022 to decide on the objection according to Section 51(8) of the TPA.

39. The Tribunal notes that the instant dispute raises fundamentally a question of burden of proof in tax matters. Since the dispute has already been filed before the Tribunal, the applicable law is Section 30 of the TAT Act which provides as follows:“In a proceeding before the Tribunal, the appellant has the burden of proving-a.Where an appeal relates to an assessment, that the assessment is excessive; orb.In any other case, that the tax decision should not have been made or should have been made differently.”

29. The issue of burden of proof in tax matters is now settled in law in Kenya as reiterated in the case of Kenya Revenue Authority v Man Diesel & Turbo Se, Kenya [2021] eKLR as follows: -“... The shifting of the burden of proof in tax disputes flows from the presumption of correctness which attaches to the Commissioner's assessments or determinations of deficiency. The commissioner's determinations of tax deficiencies are presumptively correct. Although the presumption created by the above provisions is not evidence in itself, the presumption remains until the taxpayer produces competent and relevant evidence to support his position. If the taxpayer comes forward with such evidence, the presumption vanishes and the case must be decided upon the evidence presented, with the burden of proof on the taxpayer… "

40. From the foregoing, the Tribunal finds that the Respondent did not consider the information and documents provided by the Appellant in the letter dated 21st March 2022 in arriving at its objection decision, which prejudiced the Appellant.

41. There is no doubt that the Appellant provided documents which the Respondent failed to consider. The onus thus shifts to the Respondent to demolish the evidence produced by the Appellant and that are on record before the Tribunal.

42. Consequently, the Tribunal finds that the Respondent’s objection decision dated 4th May 2022, which confirmed the assessment of Kshs. 1,255,761. 44 Million plus interest and penalty for December 2021, is not proper in law.

b). Whether the Respondent was justified in issuing the Late Objection Rejection Notice dated 8th June, 2022. 43. The second issue for determination relates to the Respondent’s rejection of the Appellant’s application to lodge its objection to additional assessment of Kshs. 435,519. 56 late.

44. The additional assessment in issue relates to the month of December, 2020 and which was notified to the Appellant by the Respondent on 8th March, 2022.

45. The Appellant lodged a late objection application on 6th May, 2022 on the grounds of sickness and that it was not given enough time to fully provide the documents needed.

46. The late objection application was rejected by the Respondent vide its letter of 6th June, 2022 on the grounds that the Appellant did not state any grounds, and more specifically those prescribed under Section 51(7) of the Tax Procedures Act, 2015. The Respondent then proceeded to declare the principal VAT assessed and amounting to Kshs. 435,519. 56 as due and payable, plus penalty and interest,

47. The Tribunal noted that the timelines for objecting to tax assessments are provided for under Section 51 (7) of the Tax Procedures Act, 2015 as follows: -“The Commissioner may allow an application for the extension of time to file a notice of objection if - (a) the taxpayer was prevented from lodging the notice of objection within the period specified in subsection (b) because of an absence from Kenya, sickness, or other reasonable cause; andc.the taxpayer did not unreasonably delay in lodging the notice of objection.”

48. From the totality of evidence before it, the Tribunal noted that the Appellant did not provide any supporting documents to support the grounds listed for filing its objection late.

49. The Tribunal is guided by the case of W.E.C. Lines Ltd vs. The Commissioner of Domestic Taxes [TAT Case No.247 of 2020] where it was held at paragraph 70 while reiterating the holding in Krystalline Salt Ltd vs KRA [2019] eKLR that: -“Where there is a clear procedure for redress of any particular grievance prescribed by the constitution or an Act of Parliament, that procedure should be strictly followed. Accordingly, the special procedure provided by any law must be strictly adhered to since there are good reasons for such special procedures. The relevant procedure here is the process of opposing an assessment by the Commissioner.”

50. Accordingly, the Tribunal finds that the Respondent correctly rejected the Appellant’s application for extension of time to lodge it objection out of time.

Final Orders 51. The Tribunal consequently makes the following orders; -a.The Appeal be and is hereby partially allowed.b.The Respondent’s objection decision and Confirmation of Assessment dated 4th May 2022 be and is hereby set aside.c.The Objection decision and Confirmation of Assessment dated 4th May 2022 be sent back to the Respondent to review the information and documents provided by the Appellant via its letter dated 21st March 2022 and make its determination within Sixty (60) days of the date of delivery of this Judgment.d.The Respondent’s Late Objection Rejection Notice dated 8th June, 2022 be and is hereby upheld.e.Each party to bear its own costs.

52. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 23RD DAY OF FEBRUARY, 2024. GRACE MUKUHA - CHAIRPERSONDR. ERICK KOMOLO - MEMBERJEPHTHAH NJAGI - MEMBERDR. WALTER J. ONGETI - MEMBERGLORIA A. OGAGA - MEMBER