[2023] KETAT 1010 (KLR)

Darol Contractors Kenya Limited v Commissioner of Domestic Taxes (Appeal 791 of 2022) [2023] KETAT 1010 (KLR) (Commercial and Tax) (15 September 2023) (Judgment)

Neutral citation: [2023] KETAT 1010 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Commercial and Tax

Appeal 791 of 2022

E.N Wafula, Chair, AK Kiprotich, RO Oluoch, Cynthia B. Mayaka, E Ng'ang'a & B Gitari, Members

September 15, 2023

Between

Darol Contractors Kenya Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background. 1. The Appellant is a private limited company incorporated under the Companies Act whose principal activity is civil & water engineering and general construction works. Appellant’s place of business was in Meru.

2. The Respondent is a principal officer appointed under and in accordance with Section 13 of the Kenya Revenue Authority Act, and 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 issued the Appellant with VAT additional assessments for the periods between December 2017 to December 2019 for total tax of Ksh. 20,939,009. 00 on 13th January 2021.

4. The Appellant, on 2nd March 2021, applied to the Respondent requesting to be allowed to file a late objection.

5. The Respondent vide an email dated 15th March 2021 wrote to the Appellant acknowledging receipt of the objection however deemed it as invalidly lodged objection application having not satisfied the requirements outlined under Section 51(3) of the Tax Procedures Act (TPA) 2015.

6. The Respondent vide an email dated 15th March 2021 advised the Appellant to provide reasons for objecting late and furnish the Respondent with the documents in support of the objection within 7 days.

7. The Respondent reviewed the Appellant’s objection and issued an objection decision on 15th June 2022 partially confirming the tax payable. The new tax demanded was Kshs. 11,344,693. 00 in 2017 and Kshs. 4,088,196. 40 in 2019.

8. The Appellant, being dissatisfied with the Respondent’s objection decision, lodged with the Tribunal a Notice of Appeal dated 15th July 2022 and filed on the same date.

The Appeal 9. The Appeal is premised on the following grounds as stated in the Appellant’s Memorandum of Appeal dated 29th July 2022 and filed on the same date:-a.That the Commissioner erred in fact and law by arbitrarily and retroactively imposing VAT on the variance found between the Income tax and VAT declared resulting to higher taxation, and apply it retrospectively, to the Appellant’s detrimentb.That the Respondent breached the Appellant’s right of certainty and regularity of law. The Appellant correctly relied on legitimate expectation, and correctively conducted its affairs by correctly declaring its actual income in the IT2C and VATc.That the Commissioner opted to punish the Appellant for declaring its actual income and therefore the impugned demand by the Respondent is contrary to the settled law and facts, therefore, suffering from serious legal infirmity.d.That the Respondent violated the Appellant’s right to fair administrative action and natural justice by summarily and arbitrarily issuing and enforcing the assessment without affording them any reasonable opportunity to be heard on the demanded taxes as by law required.

Appellant’s Case 10. The Appellant’s case is premised on the following documents: -a.The Appellant’s Statement of Facts dated 29th July 2022 and filed on the same date together with the documents attached thereto.b.The Appellant’s written submissions filed on the 25th of November 2022.

11. The Appellant averred that the Respondent issued it with an assessment dated 13th January 2021 for VAT of Ksh. 20,939,009. 00 for the years 2017-2018 and 2019.

12. That the Appellant objected to the additional assessment entirety via a notice of objection dated 2nd March 2021.

13. The Appellant averred that the objection decision dated 2nd March 2021 confirmed additional assessment outside the legal timelines as provided under Section 51(11) of the Tax Procedures Act, 2015. That the said Section provides that:-“where the Commissioner has not made an objection decision within 60 days from the date the taxpayer lodged a notice of objection; the objection shall be allowed”

14. The Appellant averred that the Respondent did not meet the threshold stipulated in law and therefore the objection decision is null and void. That the Respondent violated the Appellant’s right to fair administrative action and natural justice by acting as investigator, judge and executioner.

15. The Appellant averred that the Respondent is bound by provisions of the Tax Procedures Act which harmonizes and consolidates the procedural rules for administration of tax laws in Kenya.

16. That the Respondent violated the Appellant’s right to be guaranteed its legitimate expectation that the laid down procedures by issuing an objection decision after 435 Days.

17. The Appellant averred that it is against the principles of natural Justice for the Respondent to make a tax demand on mere allegations without tangible evidence or proof to show that the Appellant unlawfully applied the Tax Procedures Act, 2015.

18. That the Respondent assumed the variance from the VAT, WHT filed VAT and IT2C and taxed the variance at 16%. The Appellant stated in its late objection that the Company’s accountant was the sole custodian of the emails and all itax credentials, whom never informed the director of any notifications from the Respondent. That the director is semi illiterate and therefore only relied on what the accountant informed him.

19. That the Appellant could not provide sufficient documentation on time during objection as the principal director was so stressed by the assessments who later developed high blood pressure as he was also admitted in a hospital. That these hindered the production of documents as he was the sole custodian of all the source information.

20. The Appellant submitted that the following are the issues for determination in this matter.a.Whether the Respondent was right to issue the objection decision of 15th June 2022, partially accepting the Appellant’s objection.b.Whether the Objection decision was made as per the stipulated time linesc.Whether sufficient documents were provided during the objection staged.Whether the Respondent made correct computation in raising the confirmed assessmentse.Whether the Appellant filed Valid Vat returns (cost of sales)f.Whether communication was done before assessments were raised, and the amended assessments done as per the TPA 2015

22. The Appellant submitted that it filed the objection out of time upon providing sufficient reasons to the Respondent who subsequently partially accepted the objection.

23. The Appellant submitted that the Respondent made an objection decision on 15th June 2022, 468 days later from the date of the objection contrary to the stipulated time granted under Section 51(4) of TPA.

24. The Appellant averred that the Respondent rejected while raising assessments on income tax and did not consider any cost of sales of the business, despite the Appellant having filled the same on VAT (Input) for the year under dispute. That the Respondent ought to have used industries profit margin to arrive at the Appellant’s due taxes, or at least use input VAT filed to determine cost of sales.

Appellant’s Prayers 22. The Appellant made the following prayers to the Tribunal:-a.That the Tribunal varies the assessment and objection decision raised by the Respondent.b.The Tribunal be pleased to order the Respondent to pay costs of this Appealc.Any other order favourable to the Appellant as it may find just

Respondent’s Case 26. The Respondent’s case is premised on the documents set out hereunder-;a.The Respondent’s Statement of Facts dated 26th August 2022 and filed on the same date.b.The Respondent’s written submissions dated 2nd March 2023 and filed on the same date.

27. The Respondent averred that, it issued VAT additional assessments for the periods December 2017, December 2018 and December 2019 totalling to principal tax of Kshs. 21,021,937. 00 The Respondent compared turnovers declared in the VAT returns and gross income from Withholding VAT Certificates and Withholding Income Tax Certificates.

28. That the Appellant lodged a late objection on 3rd March 2021 against VAT assessments raised on 13th January 2021.

29. That on 15th March 2021 the Respondent requested supporting documents for the late objection and sent a reminder on 19th March 2021. The late objection acceptance letter was issued on 20th March 2022 and all relevant supporting documents for review of objection requested in the same letter.

30. That a reminder was sent on 5th May 2021 and that the Appellant provided documents on various dates from 24th May 2021 with the last document being received on 6th May 2022 and the objection decision was issued in 15th June 2022.

31. The Respondent in its review of its objection decision partially accepted the Appellant’s objection, stating that the documents it provided had time differences between the date the invoice was issued and declared versus the payment and the corresponding withholding tax that was deducted.

32. The Respondent noted that there were two contentious invoices as follows:-a.The Appellant failed to declare an invoice issued to Nkabune Technical Training Institute of amount KShs. 51,379,949. 00 which the Respondent charged to tax.b.The Appellant partially declared an invoice issued to National Irrigation Authority of amount 25,821,510. 00 with the undeclared amount being KShs. 22,413,358. 00 which the Respondent charged to tax.

33. The Respondent averred that the Appellant was providing records in piecemeal as it had let go of its Nairobi office and most of the requested documents had been archived. That the last document was received on 6th May 2022 and objection decision issued 15th June 2022.

34. The Respondent relied on Section 51(2)(c) of the TPA which provides that:-“A notice of objection shall be treated as validly lodged by an Appellant under subsection (2)(c) all the relevant documents relating to the objection have been submitted.”

35. The Respondent submitted that the interpretation to the legal provision is that the Respondent must be provided with all reasonable documentations in support of the Appellant’s objection before making an objection decision without which the assessment is confirmed.

36. That in this case the Respondent in making the assessment order and confirming the assessment, the Respondent relied on available information that it had as well as the Commissioner’s best judgement as provided for in Section 31(1) of the Tax Procedures Act. Further, that the Confirmation of Assessment Notices were arrived at after the Respondent had also compared VAT returns of the Appellant’s suppliers and the input Vat claimed by the Appellant.

37. That a review by the Respondent of the individual withholding VAT certificates, Withholding Income Tax certificates and the Appellant’s sales ledger revealed time differences between the date an invoice was issued and declared versus the payment and the corresponding Withholding VAT was deducted. That the Appellant also lumped sales in its VAT declarations and thus its sales ledger was used to establish the individual invoices declared monthly.

38. The Respondent cited Section 31(1) of the Tax Procedures Act with regard to amendment of assessments which provides that:-“Subject to this section, the Commissioner may amend an assessment referred to this section as the “ by making alterations or additions, from the available formation and to the best of the commissioner’s judgement, to the original assessment of Appellant for a reporting period to ensure.”

39. That the Appellant failed to object within the stipulated time, which made the Respondent seek for reasons from the Appellant for objecting late and with a request for supply of all the relevant documents pertaining to the objection.

40. The Respondent relied on Section 17(3)(a) of the VAT Act, 2013 which requires the Appellant to possess original tax invoices for the supply or certified copies thereof.

41. It further relied on Section 17(3)(a) of the Vat Act, 2013 which provides that:-“The documentation for the purposes of subsection (2) shall be –a.An Original tax invoice issued for the supply or a certifiedb.A customs entry duly certified by the proper officer and a receipt for the payment of tax;c.A customs receipt and a certificate signed by the proper officers stating the amount of tax paid, in the case of goods purchased from a customs auctiond.A credit note in the case of input tax deducted under section 16(2); ore.A debit note in the case of input tax deducted under section 16(5).”

42. That the Appellant complied with the above Section and that all its documentations were put to consideration by the Respondent.

43. That Respondent was also guided by Section 51(3) and (4) of the Tax Procedures Act and Section 43(3) of the VAT Act.

44. The Respondent stated that the Appellant’s objection was partially allowed in view of the Appellant’s provided documentation declaration. The Appellant provided evidence to explain the inconsistencies as per the provisions of Section 51(3) of the Tax Procedures Act.

45. That Section 51(3) of the Tax Procedures Act provides that:-“A notice of objection shall be treated as validly lodged by a Appellant under subsection (2) if-a)The notice of objection states precisely the grounds of objection, 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 appellant has paid the entire amount of tax due under assessment that is not in dispute.”

46. That the allegations of the Appellant as laid out in its Memorandum of Appeal and Statement of Facts unless where in agreement by the Respondent are unfounded in law and not supported by evidence.

47. The Respondent reiterated that the Appellant had failed to discharge its burden of proof in proving that the Respondent’s tax decision is incorrect as per the provisions of Section 56 (1) of the Tax Procedures Act.

48. The Respondent stated that the confirmed assessment issued is proper in law and the same should be upheld.

Respondent’s Prayers 49. The Respondent prays that this Honourable Tribunal to find:a.That the Respondent's objection decision together with the penalties and interest be found to be due and payable.b.That it upholds the objection decision dated 15th June 2022 and dismiss this Appeal.c.That this Appeal be dismissed with costs to the Respondent as the same is without merit.

Issues For Determination 57. The Tribunal upon due consideration of the pleadings of the parties was of the considered view that the Appeal has two issues for determination as set out hereunder.a.Whether the objection decision dated 15th June 2022 is proper in law?b.Whether the the Respondent's assessments of VAT and Income Tax based on the variance between withholding VAT records and filed VAT and Income Tax returns were justified?

57. The Tribunal having determined the issues for determination as stated above proceeds to deal with the same as hereunder.a.Whether the objection decision dated 15th June 2022 is proper in law.

58. The Appellant submitted that the Respondent reviewed the Appellant’s objection and issued an objection decision on 15th June 2022 partially confirming the tax payable. That the new tax demanded was Kshs. 11,344,693. 00 in 2017 and Kshs. 4,088,196. 40 in 2019.

59. The Appellant averred that the objection decision confirmed additional assessment outside the legal timelines as provided under Section 51(11) of the Tax Procedures Act, 2015

60. Section 51(11) of the TPA states as follows with regard to timelines for the issuance of objection decisions:-“The Commissioner shall make the objection decision within sixty days from the date of receipt ofa.the notice of objection; orb.any further information the Commissioner may require from the taxpayer,failure to which the objection shall be deemed to be allowed."

61. In the Memorandum of Appeal, the Appellant asserted that the decision was rendered 435 days later. In the written submissions, the Appellant claimed it took 468 days for the decision to be reached. However, as per the Tribunal calculations, the exact time from the lodging of the notice of objection on 2nd March 2021 to the rendering of the objection decision on 15th June 2022 is 457 days.

62. Respondent placed reliance on Section 51(11) of the TPA to the fact that the timelines for issuance of the objection decision did not start running from the 2nd March 2021, as there were further correspondences exchanged between the parties culminating in the issuance of the objection decision.

63. The Appellant indicated that it could not provide sufficient documentation on time during the objection stage as the principal director was so stressed by the assessments that he later developed high blood pressure leading to his being admitted in a hospital. That these hindered the production of documents as he was the sole custodian of all the source information.

64. The Respondent submitted that it observed the provisions of Section 51(11)(b) of the Tax Procedures Act, at the time it rendered its objection decision. That the time did not start running on 2nd March 2021. The Respondent indicated that 6th May 2022 is the last date when it made a request to the Appellant to supply some specific documents.

65. The Tribunal noted that although the Respondent had intimated on several times that there were correspondences exchanged between the parties subsequent to the email of 15th March 2021 and prior to the issuance of the objection decision dated 15th June 2022 no such correspondences were availed to the Tribunal.

66. The Tribunal has taken into consideration the decision in the case of W.E.C. Lines Ltd vs. the Commissioner of Domestic Taxes [TAT CASE NO.247 of 2020] on the issue of observing procedures and set statutory timelines where it was held at Paragraph 70 and 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 process of making an application for review upon receiving the Respondent’s decision.”

67. The Tribunal upon taking into consideration all the evidence in this matter and the laws and authorities finds that the Respondent did not comply with the specific requirements as set out in Section 51(11) of the Tax Procedures Act 2015. The Appellant had specifically raised as a ground of appeal the issue of the objection decision having been rendered outside the statutory timelines and to that extent the Respondent ought to have led evidence to demonstrate that it indeed requested for additional information from the Appellant that enhanced the timelines within which to issue the objection decision.

68. In the circumstances, the Tribunal did not delve into the other issue that fell for its determination as it had been rendered moot.

Final Decision 57. The upshot of the above finding is that the Appeal is merited and the Tribunal accordingly proceeds to make the following Orders;a.The Appeal be and is hereby allowed.b.The objection decision dated 15th June, 2022 be and is hereby set aside.c.Each Party to bear its own costs.

57. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 15TH DAY OF SEPTEMBER, 2023ERIC NYONGESA WAFULA........CHAIRMANABRAHAM K. KIPROTICH..........MEMBERDR. RODNEY O. OLUOCH........MEMBERCYNTHIA B. MAYAKA..........MEMBEREUNICE NG’ANG’A.........MEMBERBERNADETTE GITARI...........MEMBER