[2024] KETAT 1018 (KLR)

Daniels Outlets Ltd v Commissioner of Legal Services & Board Coordination (Tax Appeal E534 of 2023) [2024] KETAT 1018 (KLR) (12 July 2024) (Judgment)

Neutral citation: [2024] KETAT 1018 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E534 of 2023

E.N Wafula, Chair, RO Oluoch, Cynthia B. Mayaka, AK Kiprotich & T Vikiru, Members

July 12, 2024

Between

Daniels Outlets Ltd

Appellant

and

Commissioner of Legal Services & Board Coordination

Respondent

Judgment

Background 1. The Appellant is a private limited liability company incorporated in Kenya carrying on the business of importation, distribution and sale of workshop tools, generators, personal protective equipments and specialized industrial supplies in Kenya.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority and Kenya Revenue Authority is charged with the responsibility of assessing, collecting, accounting and the general administration of tax revenue on behalf of the Government of Kenya.

3. The Respondent carried out a tax review of the Appellant and issued Income tax and VAT additional assessments on 13th and 15th April 2023 with a total tax liability of Kshs 71,483,546. 19

4. The Appellant lodged its objection on 23rd May 2023. This was followed by various engagement between the parties through emails and meetings. Subsequently the Respondent issued the objection decision on 19th July 2023 confirming the entire assessments.

5. Dissatisfied with the Respondent’s objection decision the Appellant filed a Notice of Appeal on the 18th August 2023.

The Appeal 6. The Appellant’s Memorandum of Appeal filed on 1st September, 2023 is premised on the following grounds:i.That the Respondent erred in law in confirming assessments covering periods that are beyond the statute of limitationii.That the Respondent erred in fact in failing to consider credit notes raised against invoices where Withholding Value Added tax had been previously charged.iii.That the Respondent's assessment lacks a legal and factual basis.

Appellant’s Case 7. The Appellant’s case is premised on its Statement of Facts dated 1st September, 2023 and filed on the same date together with the documents attached thereto.

8. The Appellant submitted that the Respondent carried out a tax review of the Appellant for the period January 2017 to September 2020 and subsequently held meetings with the Appellant to discuss various issues noted in the review.

9. That in the various meetings, the Appellant provided further information and clarifications on issues raised by the Respondent.

10. That the Respondent disregarded the explanations provided by the Appellant and in a letter dated 25th April 2023 and received by the Appellant on email on 26th April 2023 issued a formal assessment for Corporate Income Tax (CIT) and Value Added Tax (VAT) inclusive of interest and penalties.

11. That the Appellant promptly objected to the formal assessment vide a notice of objection dated 23rd May 2023 in which it provided a clear explanation and supporting documents to enable the Respondent to vacate the assessment.

12. The Appellant stated that the Respondent disregarded its clarifications and proceeded to issue an objection decision on 19th July 2023.

13. That the Respondent amended the tax liability of the Appellant to a total of Ksh 71,483,546. 00 as summarized below:Assessment Number Period Amount (KES)

KRA202016156694 Income Tax Company 2016 76,406

KRA202304761348 Income Tax Company 2017 2,821,259

KRA202304 761345 Income Tax Company 2018 1,062,741

KRA202304761327 Income Tax Company 2019 3,640,967

KRA202305887147 Income Tax Company 2020 2,033,120

KRA202305887238 Income Tax Company 2021 33,662,756

KRA202009086254 VAT(01/12/2015-31/12/2015) 111,096

KRA202016158499 VAT (01/12/2016-31/12/2016) 399,967

KRA202016158832 VAT (01/12/2017-31/12/2017) 444,866

KRA202016159052 VAT(01/12/2018-31/12/2018) 358,049

KRA202304761338 VAT (01/12/2019-31/12/2019) 3,287,238

KRA202304 761339 VAT (01/11/2018-30/11/2018) 2,700,680

KRA202304 761342 VAT(01/10/2018-31/10/2018) 14,394

KRA202304 761343 VAT (01/07/2019-31/07/2019) 232,003

KRA202305887318 VAT (01/05/2020-31/05/2020) 46,720

KRA202305887619 VAT(01/04/2020-30/04/2020) 177,983

KRA202305914 726 VAT (01/12/2020-31/12/2020) 2,459,832

KRA202305914777 VAT (01/12/2021-31/12/2021) 17,953,470

Total 71,483,546. 19

14. The Appellant expounded on its grounds of appeal as hereunder;

a) The Respondent has erred in law in confirming assessments covering periods that are beyond the statute of limitation. 15. The Appellant submitted that the Respondent in the objection decision dated 19th August 2023 confirmed assessments that were beyond the statutory assessment time limit of 5 years under Section 29(5) of the Tax Procedures Act (TPA).

16. That as the Appellant’s year end is December, the Respondent could only audit and raise assessments from the period ended December 2018 as provided for under Section 29(5) of the Tax Procedures Act (TPA) which provides that:“...Subject to subsection (6), an assessment under subsection (1) shall not be made after five years immediately following the last date of the reporting period to which the assessment relates."

17. That further, Section 23(1) of the TPA on record-keeping provides that a person shall;a.Maintain any document required under a tax law, in either of the official languagesb.Maintain any document required under a tax law so as to enable the person's tax liability to be readily ascertained; andc.Subject to sub section (3) [relating to allowable period for issuance of a tax assessment],retain the document for a period of five years from the end of the reporting period to which it relates, or such shorter period as may be specified in a tax law.

18. That by issuing CIT and VAT assessments for the period 2015, 2016 and 2017, the KRA had disregarded the cited Sections of the TPA and multiple judicial precedents on limitation of action beyond 5 years.

19. That the High Court has on numerous occasions addressed the issue of KRA carrying out an audit or issuing an assessment after the lapse of the five years following the last day of reporting. That an example is Justice George Odunga's statements in the case of Nairobi Miscellaneous Civil Application No. 668 of 2007- Republic V Commissioner of Domestic Taxes (Large Taxpayers Office) Ex-Parte Unilever Tea Kenya Limited (2007] eKLR where the learned Judge stated as follows:“It is not that after 5 year the taxpayer is likely to run out of storage facilities. To my mind the law appreciates that due to financial volatility in business transactions there ought to be a cut-off point so that businesspeople ought to rest assured that after a certain period oftime they will not be unduly harassed hence are at liberty to dispose of their records."

b) The Respondent erred in fact in failing to consider credit notes raised against invoices where WHVAT had been previously charged. 20. The Appellant averred that the Respondent reviewed the details of sales derived from Withholding VAT agents and customers not registered and Withholding Value Added Tax (WHVAT) agents and compared it with income declared in the VAT returns for the respective months.

21. That the Respondent alleged that the Appellant failed to declare all the sales in the monthly VAT returns, under-declared income and proposes to charge CIT and VAT.

22. It stated that it raised credit notes over the period under review where there were disagreements with some customers. That the Respondent did not consider these credit notes that related to invoices for which WHVAT had been remitted but should have been subsequently reversed upon issuance of the credit notes.

c) The Respondent's assessment lacks a legal and factual basis. 23. The Appellant submitted that the assessment in question was based on the Respondent's misunderstanding of the Appellant's business and subsequent misapplication of the law.

24. That it is trite that where tax laws are clear, they should be interpreted with certainty. That this common principle of tax law was affirmed in the case of Cape Brandy Syndicate v Inland Revenue Commissioner [1921] 1 KB 64, where the Court held that:“In a taxing Act one has to look at clearly what is clearly stated. There is no room for any intendment. There is no equity about tax. There is no presumption as to tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used."

25. That by seeking to collect tax where no tax is due, the Respondent was in contravention of Section 4 of the Fair Administrative Action Act.

Appellant’s Prayers 26. The Appellant prays that;a.The Respondent's objection decision demanding PAYE and VAT of Kshs 71,483,546. 19 be set aside in its entirety;b.This Appeal be allowed with costs to the Appellant.c.The Tribunal be pleased to issue any other remedies that it deems just and reasonable.

Respondents Case 27. The Respondent’s case is premised on the hereunder filed documents before the Tribunal: -i.The Respondent’s Statement of Facts dated 29th September 2023 and filed on the same date together with the documents attached thereto.ii.The Respondent’s written submissions dated 2nd March 2024 and filed on 27th March 2024.

28. The Respondent submitted that it issued Income tax and VAT additional assessments on 13th and 25th April 2023 with a principal tax liability of Kshs 71,483,546. 19.

29. The Respondent stated that the Appellant objected to the assessments on iTax on 23rd May 2023 some which were out of time. That nevertheless, the Appellant provided reasons for objecting out of time, which were reviewed and accepted.

30. That a notice of intention to audit was sent on 24th January 2022. That the Appellant provided the documents that were required for the verification exercise. It averred that the Appellant's tax agent and accountant attended the final meeting.

31. The Respondent stated that the audit team findings took into account the under-declared income as per Withholding VAT certificates and Customs data and established a number of variances.

32. The Respondent submitted that on several occasions through communications dated 25th May 2023, 23rd June 2023, 27th June 2023, 3rd July 2023 and 4th July 2023 it asked the Appellant to avail documents to support the variances noted as a result of the audit, but it failed to provide the documents. That the Appellant also failed to honour the invitations by the Respondent to discuss the tax affairs of the Appellant.

33. That consequently, the Respondent issued an objection decision on 19th July 2023 confirming the assessments of Kshs. 71,483,546. 19. being demand for Corporate income tax and Value Added Tax plus interest and penalties after the Appellant failed to provide sufficient evidence to support its objection.

34. The Respondent reiterated its position as stated in the assessment and the objection decision. It averred that the Appellant had stated that the Respondent contravened Section 31(4) of the Tax Procedures Act 2015 by confirming assessments that were beyond the stipulated 5 years for the period 2016-2018 (IT2C).

35. The Respondent submitted that it noted that the assessments were raised on time by the assessing team on 6th August 2020 . That this was within the allowed period. That the Appellant objected to the same years later on 23rd May 2023.

36. That the Respondent therefore issued the assessments on time and the late objection by the Appellant was due to the its own wilful neglect.

37. The Respondent submitted that the Appellant's conduct shows that the only intention was to delay the process and thereafter claim statutory timelines had been overtaken.

38. On whether the assessment lacks a legal and factual basis, the Respondent submitted that Section 24 of the Tax Procedures Act, 2015 allows a taxpayer to submit tax returns in the approved form and manner prescribed by the Respondent but the Respondent is not bound by the information provided therein and can assess for additional taxes based on any other available information.

39. It contended that the Appellant failed to avail the supporting documents as requested in its communications. That the Appellant also did not honour its meeting invites despite its requests.

40. That by not providing any documents supporting its objection despite the requests, the Appellant contravened the provisions of Section 51(3) and (59)(1) of the TPA 2015.

41. The Respondent posited that by virtue of Section 59 of the Tax Procedures Act, 2015 it is permitted to call for records to verify tax information.

42. That Section 56(1) of the Tax Procedures Act states that:- “In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.” That therefore, The Appellant's failure to provide substantive evidence to support the objection to the assessment issued offends the said Section 56(1) of the Tax Procedures Act.

43. On whether the objection was valid, the Respondent submitted that Section 51(3) of the Tax Procedures Act provides that for an objection to be valid all the relevant documents relating to the objection must have been submitted.

44. That the Appellant did not provide supporting documentation despite numerous follow ups by the Respondent.

45. On whether the objection decision was proper in law and valid, the Respondent submitted that an objection decision is a decision made by the Commissioner after the Commissioner has considered objections raised by the taxpayer after investigations into the tax affairs of the tax payer as explained by Section 51(8) of the tax procedures act.

46. That the requisite content of an objection decision is provided for under Section 51(10) of the Tax Procedures Act which reads that:-“An objection decision shall include a statement of findings on the material facts and the reasons for the decision."

47. That the objection decision issued by the Commissioner dated 19th July 2023 satisfies the legal requirements as stipulated under Section 51(10) of the Tax Procedures Act.

48. That more specifically the objection decision to the Appellant informed the Appellant:-a.The basis of t-e Respondent's assessmentb.The grounds of Appellant's objection.c.Statement of findings.d.The Commissioner's decision and the reasons thereto.

49. That the objection decision issued was therefore proper in law, as it satisfied the requirements of Section 51(10) of the Tax Procedures Act.

Respondent’s Prayers 50. The Respondent prayed that the Tribunal;a.Upholds the Respondent's decision dated 19th July 2023. b.That this Appeal be dismissed with costs to the Respondent as the same is devoid of any merit.

Issues for Determination 51. The Tribunal upon consideration of the pleadings and documents filed separately by the parties is of the view that the issues falling for its determination are as follows:-i.Whether the Respondent’s assessments offends the provisions of Section 29(5) of the Tax Procedures Act.ii.Whether the Respondent was justified in confirming the assessments.

Analysis and Findings 52. The Tribunal having appropriately ascertained the issues that fall for its determination shall proceed to make a separate analysis on each issue as hereunder.

i. Whether the Respondent’s assessments offends the provisions of Section 29(5) of the Tax Procedures Act. 53. Section 29(5) of the TPA provides as follows regarding time limitation in relation to assessments;“Subject to subsection (6), an assessment under subsection (1) shall not be made after five years immediately following the last date of the reporting period to which the assessment relates.”

54. It was the Appellant’s submission that the Respondent in its objection decision dated 19th August 2023, there were confirmed assessments that were beyond the statutory assessment time limit of 5 years under Section 29(5) of the Tax Procedures Act (TPA).

55. That as the Appellant’s year end is December, consequently the Respondent could only audit and raise assessments from the period ended December 2018 as provided for under Section 29(5) of the Tax Procedures Act (TPA)

56. The Respondent on its part submitted that it noted that the assessments were raised on time by the assessing team on 6th August 2020 . That this was within the allowed period. That the Appellant objected to the same years later on 23rd May 2023.

57. That the Respondent therefore issued the assessments on time and the late objection by the Appellant was due to the its own wilful neglect.

58. The Tribunal perused through the documents presented before it and noted that although the parties did not attach copies of the assessments paragraph 1 of the Respondent’s objection decision stated as follows;“1. Reference is made to your application filed on iTax on 23rd May 2023 against Income Tax and VAT Additional Assessments raised by the Commissioner on 13th and 25th April 2023 and subsequent correspondences with you.2. …”

59. From the objection decision thereof, it was evident that although in the pleadings the Respondent averred that the assessments were raised on time by the assessing team on 6th August 2020 there was no evidence to support this averment. That the Tribunal thus concluded that the assessments were issued by the Respondent on 13th and 25th April 2023 as stated in the objection decision.

60. Flowing from the above it follows that as provided under Section 29(5) of the TPA the Respondent was limited to issue assessments only upto March 2018 for VAT and year of income 2017 for Income Tax except as provided for under Section 31(4) of the TPA which was not raised by any party.

61. Section 31(4) of the TPA provides as follows regarding cases where the Respondent may issue assessments beyond 5 years;“The Commissioner may amend an assessment—(a)in the case of gross or wilful neglect, evasion, or fraud by, or on behalf of, the taxpayer, at any time; or(b)in any other case, within five years of—(i)for a self-assessment, the date that the self-assessment taxpayer submitted the self-assessment return to which the self-assessment relates; or(ii)for any other assessment, the date the Commissioner notified the taxpayer of the assessment”

62. The Respondent’s assessments as stated in the objection decision covered the period years 2016 to 2021 for Income tax and the months of December 2015 to December 2021 for VAT.

63. The Tribunal reiterates its finding in TAT 931 fo 2023 Superserve Limited Vs. Commissioner Of Investigation And Enforcement where it held as follows;“60. Given that there was no evidence of any prosecution carried out in relation to any offence committed on the part of the Appellant, the Tribunal holds that the Appellant had fulfilled its basic obligations required by law. Further, it is the Tribunal’s position that since the obligation placed on the Appellant was to file its returns as required by law which the Appellant did over the period, no offence had been brought up as having been committed by the Appellant.”

64. Given that Section 31(4) of the TPA was not invoked, the Tribunal concluded that the Respondent in any of its assessments prior March 2018 for VAT and prior to the year of income 2017 for Income tax was in contravention of Section 29(5) of the TPA.

ii. Whether the Respondent was justified in confirming the assessments. 65. It was the Appellant’s contention that the Respondent reviewed the details of sales derived from Withholding VAT agents and customers not registered and Withholding Value Added tax (WHVAT) agents and compared that with income declared in the VAT returns for the respective months.

66. That the Respondent alleged that the Appellant failed to declare all the sales in the monthly VAT returns, under-declared income and proposes to charge CIT and VAT.

67. It stated that it raised credit notes over the period under review where there were disagreements with some customers. That the Respondent did not consider these credit notes that related to invoices for which WHVAT had been remitted but should have been subsequently reversed upon issuance of the credit notes.

68. The Respondent on the other hand stated that it took into account the under-declared income as per Withholding VAT certificates and customs data and established a number of variances.

69. That on several occasions through communications dated 25th May 2023, 23rd June 2023, 27th June 2023, 3rd July 2023 and 4th July 2023 it asked the Appellant to avail documents to support the variances noted as a result of the audit, but it failed to provide the documents.

70. That by not providing any documents supporting its objection despite the requests, the Appellant contravened the provisions of Section 51(3) and (59)(1) of the TPA Act 2015.

71. The Tribunal notes that the Respondent both in the objection decision and its pleadings was consistent in its argument that the Appellant failed to provide documents and information in support of its objection. In particular the Tribunal notes the Respondent requested for documents in support of the objection vide emails dated dated 25th May 2023, 23rd June 2023, 27th June 2023, 3rd July 2023 and 4th July 2023.

72. Indeed the Tribunal notes that in the objection decision the Respondent stated in part as follows;“Statement of Findings6. We requested you to provide the requisite documents supporting your objection but failed to avail them as requested in our previous communications to you dated 25/05/2023, 23/06/2023, 27/06/2023, 03/07/2023 and 04/07/2023. 7. In light of the above, you failed to meet the requirements of section 59(1) of the Tax Procedures Act 2015 …”

73. The Respondent further attached to its pleadings these correspondences to the Appellant. The Tribunal notes the Appellant did not provide any evidence that it provided relevant documents in support of its objection and furher did not plead specifically as regards to these requests by the Respondent.

74. The Tribunal has further perused through the documents attached to this Appeal by the Appellant and notes that apart from the communication between the parties during the assessment and objection, the Appellant only attached some Proforma Invoices without any further pleadings to clarify issues such as variances identified by the Respondent as clearly stated in the objection decision.

75. It is the view of the Tribunal that the Appellant ought to have provided the documents requested or the documents it is required by law to keep under the Income Tax Act or VAT Act in support of its objection and in this Appeal the failure to produce the documents means its arguments remain mere averments.

76. The provision of documents as evidence is well stated under Section 30 of the Tax Appeals Tribunal Act which provides as thus:-“In a proceeding before the Tribunal, the appellant has the burden of proving-Where an appeal relates to an assessment, that the assessment is excessive; orIn any other case, that the tax decision should not have been made or should have been made differently.”

77. The Tribunal is further of the view that the Appellant failed to meet the obligation placed on it under Section 30 of the Tax Appeals Tribunal Act to discharge its burden of proof by providing supporting documents.

78. The Tribunal reiterates its decision in TAT 1296 of 2022 James Finlay (Kenya) Limited Vs Commissioner Legal Services And Board Coordination where it held as follows at paragraph 83;“In the instant case the Tribunal found that the Appellant failed to address the specific documents mentioned by the Respondent in the objection decision and therefore failed to discharge the burden of proof.”

79. Consequently, the Tribunal finds that the Appellant failed to discharge the burden of proof placed upon it in demonstrating that the Respondent was not justified in confirming the assessments in relations to the period not barred by Section 29(5) of the TPA.

Final Decision 80. The Tribunal finds that the Appeal is partially merited and makes the following final Orders:i.The Appeal be and is hereby partially allowed.ii.The Respondent’s objection decision be and is hereby varied in the following terms;a.The Respondent’s confirmed income tax assessment prior to the year of income 2017 be and is hereby set aside.b.The Respondent’s confirmed assessment for VAT prior to March 2017 be and is hereby set aside.c.The Respondent’s confirmed assessment subsequent to March 2017 for VAT and year of income 2017 for Income tax be and is hereby upheld.d.The Respondents is hereby directed to recompute and issue Corporation tax and VAT assessments as per the Tribunal’s Orders under (c) above within Thirty (30) days of the date of delivery of this Judgement.i.Each party to bear its own costs.

81. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 12TH DAY OF JULY, 2024ERIC NYONGESA WAFULA - CHAIRMANDR. RODNEY O. OLUOCH - MEMBERCYNTHIA B. MAYAKA - MEMBERABRAHAM K. KIPROTICH - MEMBERDR. TIMOTHY B. VIKIRU - MEMBER