[2024] KETAT 1079 (KLR)

Diversey Eastern and Central Africa Limited v Commissioner of Legal Services and Board Coordination (Tax Appeal E292 of 2023) [2024] KETAT 1079 (KLR) (28 June 2024) (Judgment)

Neutral citation: [2024] KETAT 1079 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E292 of 2023

E.N Wafula, Chair, E Ng'ang'a & EN Njeru, Members

June 28, 2024

Between

Diversey Eastern and Central Africa Limited

Appellant

and

Commissioner of Legal Services and Board Coordination

Respondent

Judgment

Background 1. The Appellant is a company registered under the Companies Act laws of Kenya. The Appellant is a provider of cleaning and hygiene products in the hospitality, healthcare, food and beverage, food service, retail and facility management sectors. The Appellant is also involved with the selling of chemicals, floor care machines, tools and equipment, technology-based value-added services, food safety services and water and energy management.

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 Appellant claimed for Income tax refund for the years 2013, 2015, 2018 and 2019. The Respondent, upon receiving the Appellant's application issued the Appellant with a notice of intention to audit vide a letter dated 10th February 2022 to audit the Appellant for various tax heads including Corporation tax, Pay As You Earn and VAT.

4. The Respondent issued its preliminary findings vide a letter dated 8th August 2022. Subsequently, the Respondent issued the Appellant with a tax assessment and refund decision dated 10th February 2023. The Appellant lodged a notice of objection vide a letter dated 7th March 2023.

5. On 28th April 2023, the Respondent issued the Appellant with its Objection decision. The Appellant being dissatisfied with the decision, lodged this Appeal.

The Appeal 6. The Appellant filed a Memorandum of Appeal dated and filed 9th June 2023 raising the following grounds of appeal:a.That the Respondent erred in law and in fact by issuing tax assessments out of the statutory time limit of five (5) years.b.That the Respondent erred in law and fact by disallowing validly incurred foreign tax credits claimed within the statutory timelines.c.That the Respondent erred in law and in fact by disallowing tax credits from previous years validly accrued by the Appellant.d.That the Respondent erred in law and fact by imposing a tax shortfall penalty on principal taxes which had already been remitted by the Appellant, within the prescribed time limit and in the manner specified by the Respondent.

Appellant’s Case 7. The Appellant’s case is premised on its:a.Statement of Facts filed on 9th June 2023 and;b.Written submissions dated and filed on 14th December 2023.

8. The Appellant stated that it made three applications for refund of overpaid Corporation tax as provided for under Section 47 of the Tax Procedures Act 2015 on 14th September 2017, 11th October 2020 and 29th September 2021. The amount of refund sought was Kshs 21,843,113. 00, Kshs 7,767,874. 00, Kshs 80,851,774. 00 and Kshs 59,892,895. 00 for the years 2013, 2015, 2018 and 2019, respectively.

9. The Appellant averred that upon receipt of the refund applications, the Respondent issued the Appellant with a notice of intention to audit vide a letter dated 10th February 2022 in which it requested the Appellant to provide copies of supporting documents. The Appellant stated that it provided the required documents and upon review of the documents, the Respondent issued tax assessment and refund decision dated 10th February 2023 wherein the Respondent disallowed a total of Kshs 89,503,882. 00 of the total refund that the Appellant sought. The Appellant lodged an objection vide a letter dated 7th March 2023 and subsequently, the Respondent issued its decision on 28th April 2023.

Tax Assessment issued out of the statutory time limit 10. The Appellant stated that the tax assessment issued by the Respondent vide the letter dated 4th February 2023 was made out of the statutory time limit as it related to self-assessment tax returns filed in 2017 and 2018. The Appellant relied on Sections 29(5) and 31 (4) (b)(i) of the Tax Procedures Act and the decisions in Katsran Limited v. Commissioner of Domestic Taxes [2021] eKLR, Kamindi Selfridges Supermarket Limited v. Commissioner for Investigations and Enforcement (Tax Appeal No. 52 of 2017) and ParagonElectronics Limited v. Commissioner of Domestic taxes, tax Appeal Number 207 of 2015 to argue that the assessments are time barred. The Appellant also argued that the Respondent’s actions were contrary to Section 4(1) of the Fair Administrative Action Act.

Taxes paid in other jurisdictions in prior periods 11. The Appellant stated that the Respondent disallowed Kshs. 237,591,695. 00 which related to taxes paid in other jurisdictions for the 2013 to 2017 years of income contrary to Section 16 (2) (c) of the Income Tax Act. The Appellant argued that whilst the Respondent did not dispute the validity of the claim for tax paid in other jurisdictions, the Respondent argued that the credits ought to have been claimed in their respective years of income.

12. The Appellant sought to claim the credits for taxes paid in other jurisdictions in the year 2018 owing to the fact that the company underwent an accounting system migration in 2013 which was not properly executed. This affected the carrying forward of balances, which was resolved in 2017. In this regard, the Appellant was only able to claim the tax credits for the periods 2013-2017 in the tax return for the 2017 year of income.

13. The Appellant averred that the difficulties experienced with its accounting system caused unforeseeable and unavoidable circumstances, beyond its control that led to it not claiming the taxes paid in their respective years of incomes. Further, the Appellant stated that it agreed with the provisions of Section 15(1) of the Income Tax Act as raised by the Respondent, the Appellant stated that Section 43 of the Income Tax Act gives taxpayers up to six (6) years, from the end of the year of income to which the credit relates, to claim tax credits. Consequently, the Appellant argued that it had six (6) years to claim the tax paid in other jurisdictions and rightfully did so in the year 2017. The Appellant added that the credits for the period 2013 were due for claiming in the year 2019.

14. The Appellant averred that it applied for the tax refund in the years 2017, 2020 and 2021. Going by the respective periods, the Respondent ought to have responded to the Appellant by 14th December 2017, 11th January 2021 and 29th December 2021 for the September 2017, October 2020 and September 2021 applications, respectively. The Appellant accused the Respondent of deliberately delaying in raising the question of tax paid in other jurisdictions, and issuing the refund decision within the prescribed statutory time limit of ninety (90) days. According to the Appellant, this delay extinguished the statutory right of the taxpayer to amend the returns for the respective periods within the five-year (5) time limit.

15. The Appellant argued that Section 31(2) of the Tax Procedure Act gives a taxpayer who has made a self-assessment the option to apply for an amendment to the taxpayer's self-assessment within the prescribed timelines. The Appellant relied on Section 31(4)(b)(i) of the Tax Procedure Act which states that the Commissioner may amend an assessment, in any other case, within five years for a self-assessment, the date that the self-assessment taxpayer submitted the self-assessment return to which the self-assessment relates.

16. The Appellant averred that it was ready to amend the tax returns for the periods 2013 to 2017 to include the taxes paid in other jurisdictions in the respective years in which they accrued. For the tax credits incurred prior to 2013, the Appellant proposed to include them in the 2013 income tax return which was the first return to be filed on itax.

17. According to the Appellant, the Respondent issued the tax decision and assessment on 10th February 2023, well beyond five (5) years from the date the returns were filed. The Appellant argued that this was against the Appellant's legitimate expectation and right to fair administrative action as protected under the Constitution of Kenya.

18. The Appellant averred that it will be unfair and punitive for the Respondent to have the taxes amounting to Kshs. 237,591,695. 00 disallowed on the grounds of time of claim, yet the Appellant has six (6) years to claim the tax paid under Section 16 (2)(c) and 42 vide Section 43 of the Income Tax Act. The Appellant accused the Respondent of delaying to issue a tax decision on the refund.

19. The Appellant argued that under Section 16(2)(c) of the income Tax Act tax paid in other jurisdictions are allowable expenses against the taxable income that is subjected to Corporation tax in Kenya.

20. The Appellant averred that disallowing the taxes would amount to double taxation contrary to the principles of taxation in Kenya. The Appellant relied on the case of Keroche Industries Limited v Kenya Revenue Authority and 5 others where the court stated that, “It is of course regarded as penal for a person to be taxed twice over in respect of the same matter a tax payer shall not become liable to tax unless this is clearly and unequivocally the object of the statutory provisions.”

2013 refund claim 21. The Appellant argued that the Respondent disallowed part of the 2013 refund claim of Kshs 61,152,159. 00 comprising of credits brought forward from the period 2012 on the grounds that the credits were erroneously filed under Section 13. 4 of the IT2C form, which is ordinarily meant for filing tax credits arising under Section 42 of the ITA and on grounds that the credits brought forward from the year 2012 were subject to validation by the Corporate Data Office (CDO) team before their subsequent capture into iTax is validated.

22. The Appellant acknowledged that the Section 13. 4 of the IT2C form is intended for claims under Section 42 of the ITA which relate to foreign tax credits under special arrangements. However, the Appellant averred that the configuration of the iT2C form does not have a Section that allows a taxpayer to input tax credits brought forward for previous periods as it only allows for taxes paid via i-Tax. According to the Appellant, this necessitated the Appellant to the use Section 13. 4 of the IT2C to file validly acquired tax credits that were paid outside i-Tax system or tax paid through i-Tax but not reflecting in i-Tax ledger under the correct year of income.

23. Apart from the above, the Appellant stated that in a meeting held between the Appellant and the Respondent on 24th February 2023, the Respondent indicated to the Appellant that they had lodged a request with the KRA CDO to validate the tax credits of the Appellant from the year 2012. According to the Appellant, this created a legitimate expectation on the part of the Appellant that the process of validation of the tax credits had been initiated, thus confirming the position that the tax credits were not in dispute.

24. The Appellant relied on the case of Red Chilli Hideaway Limited v Uganda Revenue TAT No 38 of 2018, where the Honourable Tribunal in Uganda observed as follows:-“It would defeat logic if a taxpayer would first ask for a refund, and after obtaining it, the Commissioner then applies it to meet excess tax liability...Therefore the Commissioner ought to apply the excess amount withheld and provisional tax payment to meet any tax liability of the applicant. If there is any reminder after paying off all the tax liabilities a tax-payer may apply to the Commissioner for the refund... In this case the applicant has not applied for any refund. This does not stop the Commissioner from applying any tax credits and provisional payments of the applicant to meet its tax liabilities.”

25. The Appellant also relied on the PricewaterhouseCoopers Limited (PwC) vs Commissioner for Legal Services & Board Coordination Appeal No. 576 of 2021, where the Tribunal determined that since the iTax system, at its introduction, did not have a provision for filing of the manual credits, KRA could not shift the burden of the lack of provision by its own system to the taxpayer. Additionally, it was obligatory on KRA to provide workable alternatives to bridge the gap created by the omission in the system so that taxpayers would not have had to seek an alternative that was workable within the (new) iTax system.

26. The Appellant maintained that the Respondent’s decision to disallow the taxes paid in other jurisdiction on account that they were not filed in the year of income in which they relate to is misguided, unfair and prejudicial to the rights of the Appellant.

2015 refund claim 27. The Appellant argued that the Respondent disallowed the entire 2015 refund claim of Kshs 7,767,874. 00 which relates to tax credits claimed under Section 42 of the IT2C form on grounds that the credits are subject to validation by the Corporate Data Office (CDO) team before their subsequent capture into iTax. The Appellant further stated that the Respondent further demanded a penalty for late payment of instalment tax of Kshs 1,822,792. 00 for the same period.

28. The Appellant asserted that it had paid instalment tax on 20th April 2015 which was not reflecting on the iTax system as at the date when the return was filed, this being October 2017. The Appellant alleged that it raised this issue with the Respondent's team but the same was not rectified before the return was filed. Consequently, the Appellant stated that having already discharged its duty of paying tax in advance, it filed the instalment tax credit under Section 13. 4 of the IT2C form. The Appellant argued that this issue was resolved in the year 2018 and the instalment tax was credited on the Company's iTax ledger on 12th February 2018.

29. Apart from the foregoing, the Appellant conceded to having the tax credit disallowed for being a double claim. However, the Appellant disputes additional Kshs 1,822,792. 00 for the 2015 year of income being late payment penalty for instalment imposed under Section 38 of Tax Procedures Act, 2015. The Appellant argued that this was an erroneous penalty since the tax was paid on time but due to the Respondent's system issues, the amount was credited in the Appellant’s iTax ledger in 2018 hence deemed a late instalment payment.

30. The Appellant argued that it ought not to be penalized for the inefficiencies of the Respondent as doing so goes against the principle of legitimate expectation. The Appellant relied on Section 84(5) of the Tax Procedures Act which provides that:“A tax shortfall penalty shall not be result of payable under subsection (2) when- (b) the tax shortfall arose as a result of a taxpayer taking reasonably arguable position on the application of a tax law to the circumstances in submitting a self-assessment return’.

31. The Appellant argued that the instalment tax was paid on time, and in a manner specified by the Respondent and that the fact that the payment was not reflecting on its iTax system was neither as a result of any fault on the part of the Appellant nor within the control of the Appellant. The Appellant further argued that it had a legitimate expectation that tax paid will be credited in its iTax ledger and, since it was paid on time no penalties would accrue.

32. Further, to buttress the issue of legitimate expectation, the Appellant cited the following cases:a.Kenya Revenue Authority & 2 Others v Darasa investments Limited (2018) eKLR,b.Mahan Limited v. Commissioner of Domestic Taxes (2021) eKLR andc.PricewaterhouseCoopers Limited (PwC) vs Commissioner for Legal Services & Board Coordination Appeal No. 576 of 2021.

Appellant’s Prayers 33. The Appellant prayed this Honourable Tribunal to make the following orders that:a.The decision contained in the Respondent's letter dated 28th April 2023 disallowing Kshs 89,503,882. 00 be vacated;b.That the entire refund applications for the period 2013, 2015, 2018 and 2019 be processed in favour of the Appellant, inclusive of the interest prescribed under law;c.This Appeal be allowed; andd.The costs of and incidental to this Appeal be awarded to the Appellant.

Respondent’s Case 34. The Respondent’s case is premised on its Statement of Facts dated and filed on 6th July 2023 and its written submissions dated 29th December 2023 and filed on 2nd January 2024.

35. In response to ground one of the Memorandum of Appeal, the Respondent stated that the assessments in form of tax refund decision was issued within the confines of the law for the reasons that it is the Appellant’s contention that the tax assessments were issued out of the statutory timelines.

36. That tax audit is an ongoing exercise and may take a number of years to be concluded. In that regard, the Respondent argued that Section 29(5) and Section 31(4) of the Tax Procedures Act, 2015 have to be read purposively rather than strictly as is the norm with tax statutes, which are normally interpreted narrowly.

37. That the Kenyan tax system ordinarily operates on a self-assessment regime under which, the taxpayer assesses self and declares what he or she considers taxable income on which tax is paid to the authorities. For this reason, the tax laws are couched in a manner that gives the tax authorities wide powers and discretion in ascertaining ex-post facto, what taxable income is or ought to have been. The Respondent relied on Commissioner of Domestic Services v Galaxy Tools Limited [2021] eKLR.

38. That being a self-assessment regime, taxpayers are required to keep records that allow the tax authorities to establish ex-post facto what is the correct taxable income. The Respondent argued that this retrospective application of assessments and tax audits raised a number of concerns i.e. issue of certainty and determinacy on how long these records may be kept and the number of years in which the tax authorities can conduct audits.

39. That the time limits have been codified in statute i.e. five-year statutory period in which the taxpayer must keep records and the bar on the Commissioner not to make assessments beyond a period of five years from the date of assessments unless in cases of wilful neglect, evasion or fraud by the taxpayer.

40. That it is not in dispute that the Appellant was notified by the Commissioner about the ongoing audit on 17th June 2021 and through various correspondences in the year 2022 including the letter of 10th February 2022.

41. That further, engagements ensued between the Appellant and the Respondent culminating in the issuance of tax findings on 11th August 2022 effectively placing the Appellant on notice on the need to keep records in place till conclusion of audit and to provide the same for purposes of tax audit.

42. That the assessment as contemplated by the Act crystallised since the Appellant was given sufficient details and documentation as well as notice necessary for business certainty on the intention to vary the assessment subject to according the taxpayer a hearing.

43. That the interpretation is in tandem with the provisions of Sections 23(3) b and 29 as read with Section 31 of the Tax Procedures Act, 2015. Consequently, the Respondent argued that the five-year limitation cannot be read in isolation and has to be read together with other provisions of the law on keeping of records. The Respondent urged the Tribunal to evaluate Section 23(3)(b) of the Tax Procedures Act, 2015.

44. That in applying the five-year rule from the date of the letter tax findings dated 11th August 2022 and notice of tax audit that is 17th June 2021, the Respondent was allowed to audit the Appellant up to the year 2017 since the Appellant admitted having filed the tax returns for the years 2013, 2014, 2015 and 2016 in 2017.

45. That it is untrue that the tax assessments were issued on 10th February 2023 as such an interpretation would yield absurd results i.e. allowing taxpayers including the Appellant to evade taxes using the technicality of effluxion of time and the audit period not taken into account. The Respondent argued that doing so would be ignoring the long-held practice and principle that certainty is one of the hallmarks of a good tax administration or policy. One such important tenet of tax policy certainty is limitation of time which allows a taxpayer to know the timeframe in which the taxpayer can be held responsible for previous non-compliance.

46. That to further buttress the purpose context and correct interpretation of the above stated time limit in tax administration, the Respondent relied on UK case of Maciejewski v Revenue & Customs (Income Tax/Corporation Tax: Penalty) [2018] UKFTT 754 (TC) (19 December 2018) wherein the court stated that: -“What is the purpose of the time limit? The purpose is to ensure that both the taxpayer and HMRC have finality and certainty.” In that regard, the question of time limitation being administrative rather than substantive in nature, should not be interpreted strictly but rather purposively. That as established in the celebrated English House of Lords case of Inland Revenue Commissioners v. Duke of Westminster that tax statutes must be interpreted strictly and literally, is slowly being overturned by a more recent and modern purposive approach to interpretation of tax statutes.

47. That the purposive approach is globally gaining traction as evinced by the Canadian case of Stubart Investments Ltd. v The Queen, the Supreme Court of Canada began to deviate from the strict interpretation approach towards a more broad and “purposive” approach to the interpretation of tax statutes. In this case, the Supreme Court held that: “The words of an Act are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament.”

48. That in a justification of the new interpretation tool in the above case the Supreme Court noted that the purposive approach was ideal in the modern era because:-“The desired objective is a simple rule which will provide uniformity of application of the Act across the community, and at the same time, reduce the attraction of elaborate and intricate tax avoidance plans, and reduce the rewards to those best able to afford the services of the tax technicians.”

49. That this shift to the textual, contextual and purposive approach was further emphasized on by the Supreme Court of Canada in the case of Trustco Mortgage Co. v Canada where the Court stated that: -“As a result of the Duke of Westminster principle... Canadian tax legislation received a strict interpretation in an era of more literal statutory interpretation than the present. There is no doubt today that all statutes, including the Income Tax Act, must be interpreted in a textual, contextual and purposive way. However, the particularity and detail of many tax provisions have often led to an emphasis on textual interpretation. Where Parliament has specified precisely what conditions must be satisfied to achieve a particular result, it is reasonable to assume that Parliament intended that taxpayers would rely on such provisions to achieve the result they prescribe.”

50. That in the Kenyan context, the Supreme Court has trailblazed the path on the subject of purposive interpretation of the law in the case of Gatirau Peter Munya vs Dickson Mwenda Kithinji & 2 others, Supreme Court Petition No. 26 of 2014 [2014] eKLR, opined that a purposive interpretation should be given to statutes so as to reveal the intention of the statute.

51. That in interpreting the provisions of the Tax Procedures Act, 2015, the High Court of Kenya adopted the purposive approach in Okiya Omtatah Okoiti v Attorney General & Another [2020] eKLR where it held that:“Once again I observe that a section or sections of a law should not be read in isolation of the other provisions of that law. The impugned provisions are only meant to enforce the tax laws after a taxpayer fails to self-assess for tax purposes or once it is evident that a taxpayer is dishonest. The Act as a whole has safeguards that ensures that the taxpayers receive fair administrative action from the tax collector whenever the need arises to put a particular taxpayer through the administrative process.”

52. The Respondent opined that the Supreme Court and the High Court have already set the ground for the adoption of a purposive approach to tax interpretation and the Canadian jurisprudence offers the much-needed foresight.

53. The Respondent reiterated that the purpose of the five year limitation is to give the Appellant (taxpayer) certainty in tax administration and thus, in this Case, the Appellant was given notice of tax findings on 11th August 2022 and notice of tax audit on 17th June 2024 thus fulfilling the purpose of statute i.e. being notified with certainty on the tax audit and the timeframe in question.

54. In rebuttal to the Appellant’s argument that the refund decision was not issued within ninety days as envisaged under Section 47 of the Tax Procedures Act, 2015 and thus the claim was automatically allowed by operation of law, the Respondent stated that this interpretation of the law is absurd and has no legal basis. The Respondent argued that it is accepted principle in law that a cause of action is governed by the law that was in place when it arose and not when it is being litigated. To support this preposition, the Respondent referred to the Court of Appeal decision in John Mwangi vs Francis Mwangi Njuguna [1998] eKLR Nairobi Court of Appeal Civil Application No. Nai 96 of 1997.

55. That Section 47 of the Tax Procedures Act, 2015 has undergone several amendments and this being the case, the law applicable to this case is Section 47 of the Tax Procedures Act, 2015 as at 2017, 2020 and 2021 when the Appellant lodged its various refund applications.

56. That in 2017, 2020 and 2021 there was no law that automatically allowed the application for refund by effluxion of time i.e in case the Commissioner defaults to make a refund decision within 90 days. Therefore, the Appellant's allegation that the refund claim was automatically allowed by operation of law is without basis and ought to be dismissed.

57. That on the issue of violation of Article 47 of the Constitution of Kenya, 2010 as amplified by the Fair Administrative Action Act, 2015, the Respondent averred that the Tax Appeals Tribunal is not the proper forum to ventilate the said issues by virtue of jurisdiction. This is because the law provides a different forum for the Appellant to pursue its claims.

58. The Respondent averred that the delays to issue refund decisions was occasioned by the Appellant as demonstrated through various emails on various dates namely 28th February 2022, 5th July 2022, 29th July 2022 and a letter dated 11th August 2022.

59. That for the refund claims for the years 2013 and 2015, the Respondent had to review the Appellant's application under Section 42 of the Income Tax Act thus delaying the review process as the claims under Section 42 had to be dispensed with first. Consequently, the Respondent argued that the Appellant's allegations of the assessment being time barred are unfounded.

60. In response to ground two of the Memorandum of Appeal, the Respondent stated that it rightfully disallowed the claimed foreign tax credits on the following grounds:a.The Appellant claimed taxes paid in other jurisdictions of Kshs. 153,972,117. 00 in the year 2019. The Respondent's review of the cost revealed that part of the 2019 claim totalling Kshs.80,258,799. 00 comprised of withholding and instalment taxes paid in Kenya and thus its inclusion amounted to a double claim as the amounts were also claimed as tax credits.b.The Respondent disallowed the double claimed amount of KShs. 80,258,799. 00 in the year 2019. Consequently, the Respondent argued that this ground is without merit and the allegations therein unfounded.

61. In response to ground three of the Memorandum of Appeal, the Respondent stated that it rightfully disallowed the tax credits improperly claimed in the year 2018 on grounds that:a.The Appellant claimed KShs. 237,591,695. 00 in respect of taxes paid in other jurisdictions in the years of income 2006 to 2017 in the return for the year 2018. b.The Respondent's review of the ‘Taxes Paid in Prior Periods’ claim of 2018 reveals that of the Kshs. 363,896,666. 00, only Kshs. 126,304,972. 00 was incurred in year 2018. The remaining, Kshs. 237,591,694. 00 was incurred between years 2006 and 2017 and should therefore be disallowed as per Section 15 (1) of the Income tax Act.

62. In response to ground four of the Memorandum of Appeal, the Respondent stated that:a.The interest charge of Kshs 1,822,792. 00 in year 2015 being complaint of by the Appellant did not arise out of the reviews carried out by the Respondent.b.The amount was in respect of interest charged on 13th October 2017 under Section 38 of Tax Procedures Act due to unpaid/short paid/late payment of Instalment Tax for the year of income 2015. c.The Respondent argued that the Appellant ought to have made an application to the Respondent for review of the interest charge as provided under Section 89(6) of the Tax Procedures Act, 2015 as opposed to Section 47 of the said Act.

63. The Respondent maintained that the Appellant did not discharged its burden of proof as per Section 56(1) of the Tax Procedures Act, 2015 and Section 30 of the Tax Appeals Tribunal Act, 2013. It argued that the Objection decision is valid in law, as the Appellant failed to prove that the same is incorrect.

64. To further support its case, the Respondent relied on the following cases:a.John Mwangi vs Francis Mwangi Njuguna [1998] eKLR Nairobi Court of Appeal Civil Application No. Nai 96 of 1997;b.Maciejewski v Revenue & Custom (Income Tax/Corporation Tax: Penalty) [2018] UKFTT 754 (TC);c.Stubart Investments Ltd. v The Queen, [1984] 1 S.C.R. 536; Trustco Mortgage Co. v Canada [2005] 2 SCR 601;d.Mars Logistics Limited v Commissioner of Domestic Taxes [2021] eKLR; ande.Okiya Omtatah Okoiti v. Attorney General & Another [2020] eKLR.

Respondent’s prayers 65. The Respondent prayed for the following orders:a.That the Appellant's Appeal be dismissed with costs, and,b.The Respondent's Objection decision dated 28th April 2023 be upheld.

Issues for Determination 66. The Tribunal having evaluated the pleadings and submissions of the parties puts forth the following issues for its determination:a.Whether the Respondent erred in law and fact by issuing the tax assessment outside the statutory timelines;b.Whether the Respondent erred in law and fact by issuing a tax refund decision out of the statutory time limit;c.Whether the Respondent erred in law and in fact by disallowing taxes paid in other jurisdictions;d.Whether the Respondent erred in imposing a tax shortfall penalty;e.Whether the additional assessment of KShs. 679,892. 00 for the Year 2018 is time barred;

Analysis and Findings 67. The Tribunal having determined the issues falling for its determination proceeds to analyse the same as hereinunder.

a. Whether the Respondent erred in law and fact by issuing the tax assessment outside the statutory timelines 68. In ground one of the memorandum of appeal, the Appellant raised a preliminary point of law that the assessment dated 10th February 2023 is statutory time barred as it offends the five year rule.

69. Section 23 (1) (c) of the Tax Procedures Act requires the tax payer to keep records. The timeframe for keeping the records is regulated. It provides as follows:-“(1)A person shall—subject to subsection (3), 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.”

70. In addition, Section 23 (3) of the Tax Procedures Act provides as follows:-“when, at the end of the period specified in subsection (1)(c), a document—a.Relates to an amended assessment, the person shall retain the document until the period specified in section 31(7) has expired; orb.is necessary for a proceeding commenced before the end of the five-year period, the person shall retain the document until all proceedings have been completed.”

71. Section 23 (1) (c) and (3) of the Tax Procedures Act and Section 51(3) (c) of the Tax Procedures Act require a taxpayer to produce relevant documents in support of its notice of objection. It therefore follows that the Respondent cannot expect a taxpayer to produce documentary evidence beyond five years.

72. Section 29 (5) of the Tax Procedures Act also contain provisions on time frame in relation to assessments. It provides as thus:-“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.’’ While section 29 (6) provides that, ‘‘Subsection (5) shall not apply in the case of gross or wilful neglect, evasion or fraud by a taxpayer.”

73. Apart from Section 29(5), Section 31(4) of the Tax procedures Act also has provisions on time frame. It provides as follows:“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; orb.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; orii.For any other assessment, the date the Commissioner notified the taxpayer of the assessment:Provided that in the case of value added tax, the input tax shall be allowable for a deduction within six months after the end of the tax period in which the supply or importation occurred.”

74. The running thread in the above provisions of the law point to one factor: time. Time is of essence in tax matters. Section 23 (1) (c), Section 29(5) and section 31(4) (b) expressly provide for a time frame of five years when dealing with documentary evidence and tax assessments, respectively.

75. The Tribunal as well as the Courts have maintained that the burden of proof is always upon the taxpayer to prove that a tax decision is wrong as provided for under Section 56(1) of the Tax Procedures Act. In Darwine Wholesalers Limited v Commissioner of Investigations and Enforcement (Income Tax Appeal E051 of 2021) [2023] KEHC 23537 (KLR) the court held that the burden of proof lies on a taxpayer who has to prove that the Respondent’s decision is wrong. Whereas the burden of proof rests upon the taxpayer’s shoulders, there are instances wherein the burden of proof shifts to the Respondent. Some of the instances includes under the provisions of Section 29(6) or Section 31 (4) (a) of the Tax Procedures Act where the Respondent seeks to recover taxes beyond the five-year rule. In Gitere Kahura Investments Ltd Appeal No. 16 of 2019 the Tribunal held that the burden is upon the Respondent to justify assessments of taxes beyond the five-year rule.

76. The Respondent in its Statement of Facts and written submissions, submitted that in applying the five-year rule from the date of the letter of tax findings dated 11th August 2022 and notice of tax audit dated 17th June 2021, the Respondent was allowed to audit the Appellant up to the year 2017 since the Appellant admitted having filed the tax returns for the years 2013, 2014, 2015 and 2016 in 2017.

77. The Tribunal has confirmed that the Appellant admitted having filed the tax returns for the years 2013, 2014, 2015 and 2016 in 2017 on grounds that the Appellant underwent an accounting system migration in 2013 which was not properly executed.

78. Since the genesis of this Appeal is a claim for refund, Section 47 of the Tax Procedures Act provides that the Commissioner may, for purposes of ascertaining the validity of the refund claimed, subject the claim to an audit. Consequently, the Respondent subjected the claim to audit which led the Respondent to issue a letter dated 11th August 2022 communicating preliminary findings on income tax and VAT refunds audit. According to the Appellant’s own Statement of Facts and written submissions, the date of filing 2013 returns was 14th September 2017. The Respondent issued the letter dated 11th August 2023 reopening the taxes and requiring the Appellant to respond. By virtue of the Respondent’s letter 11th August 2022, the five years under Section 29(5) or Section 31(4) (b) of the Tax Procedures Act had not lapsed. Consequently, the Tribunal finds that the Respondent had all rights to revisit the taxes in issue.

79. Whereas the Respondent called for purposive interpretation of the Section 29(5) or Section 31(4) (b) of the Tax Procedures Act with regards to timelines, the Tribunal is of the view that tax laws are to be interpreted strictly when the provisions of the statute are clear. There are no ambiguities under Section 29(5) or Section 31(4) (b) of the Tax Procedures Act therefore, the Tribunal can only interpret the said Sections strictly.

80. Under the circumstances, the Tribunal finds that the 2013, 2014, 2015 and 2016 taxes filed in 2017 are not statutory time barred and Section 29(5) or Section 31(4) (b) of the Tax Procedures Act have not been validity invoked by the Appellant.

b. Whether the Respondent erred in law and fact by issuing a tax refund decision out of the statutory time limit 81. The Appellant submitted that the Respondent erred in law and fact by issuing a tax refund decision out of the statutory time limit.

82. It is the Appellant’s case that it made three applications for refund of overpaid Corporation tax as provided for under Section 47 of the Tax Procedures Act, 2015 on 14th September 2017, 11th October 2020 and 29th September 2021. The Appellant stated that the Respondent ought to have raised any request for information prior to it issuing decisions on 14th December 2014, 11th January 2021 and 29th December 2021 for the 14th September 2017, 11th October 2020 and 29th September 2021 applications, respectively. The Appellant argued that the refund applications for the period 2013, 2015, 2018 and 2019 ought to have been automatically allowed by operation of the law.

83. The Respondent opposed this prayer on grounds that there is no law to this effect. The Respondent argued that in 2017, 2020 and 2021 there was no law that automatically allowed the application for refund by effluxion of time. The Respondent also averred that the delay to issue refund decisions was occasioned by reasons as evidenced in various correspondences between the parties.

84. The Tribunal notes that Section 47 of the Tax procedures Act has been amended by the Finance Act as follows: Act No. 8 of 2021, Act No. 22 of 2022, and Act No. 4 of 2023. The claims in this Appeal were therefore lodged before Section 47 was amended. The Tribunal shall apply Section 47 of the Tax procedures Act as it applied then before amendments by the stated Finance Acts. Section 47 before being amended provided as follows:“47 (1)When a taxpayer has overpaid a tax under a tax law the taxpayer may apply to the Commissioner, in the approved form, for a refund of the overpaid tax within five years of the date on which the tax was paid.Provided that for value added tax the period of refund shall be as provided for under the Value Added Tax Act, 2013 (No. 35 of 2013).2. The Commissioner may, for purposes of ascertaining the validity of the refund claimed, subject the claim to an audit.3. The Commissioner shall notify in writing an applicant under subsection (1) of the decision in relation to the application within ninety days of receiving the application for a refund.”

85. The Tribunal notes that the Respondent delayed to notify in writing the Appellant about the outcome of application for refund within ninety days as required under Section 47(3) of the Tax Procedures Act.

86. Further, the Tribunal notes that Section 47 (3) of the Tax Procedures Act before its amendment did not provide for automatic allowance of an application for refund by effluxion of time. This position has since changed due to amendments introduced by Finance Act No. 22 of 2022. The new Section now provides that:-“47(3)Where the Commissioner fails to ascertain and determine an application under subsection (1) within ninety days, the same shall be deemed ascertained and approved.”

87. The Tribunal finds that whereas the Respondent erred in law and fact by issuing a tax refund decision out of the statutory time limit, the Appellant’s hands are not clean either. The Appellant contributed to the delays.

88. Consequently, the Tribunal finds that nothing under Section 47 (3) of the Tax Procedures Act before its amendment allowed automatic allowance of an application for refund by effluxion of time. The Appellant cannot therefore rely on a provision of a law that was not in existence when it filed claims for refund.

c. Whether the Respondent erred in law and in fact by disallowing taxes paid in other jurisdictions 89. The Appellant argued that the Respondent disallowed Kshs 237,591,695. 00 which relates to taxes paid in other jurisdictions for 2013 to 2017 years of income contrary to Section 16 (2) (c) of the Income Tax Act. The Appellant relied on Section 43 and Section 42 (7) of the Income Tax Act to argue that it had up 6 years to lodge refund claims therefore the 2013 claims could still be claimed in 2019.

90. On the other hand, the Respondent argued that a review of the ‘Taxes Paid in Prior Periods’ claim of 2018 revealed that of the Kshs. 363,896,666. 00, only Kshs. 126,304,972. 00 was incurred in the year 2018 and the remaining, Kshs. 237,591,694. 00 was incurred between years 2006 and 2017 and therefore ought to be disallowed. The Respondent relied on Section 15 (1) of the Income Tax Act. The Respondent further argued that these costs ought to be claimed in the years that they were incurred therefore, the Respondent disallowed them. The Respondent submitted that Section 43 and Section 42 (7) of the Income Tax Act are not applicable to this Appeal.

91. Section 15(1) of the Income Tax Act provided as follows as at the time of filing the refund claims:‘‘For the purpose of ascertaining the total income of any person for a year of income there shall, subject to section 16 of this Act, be deducted all expenditure incurred in such year of income which is expenditure wholly and exclusively incurred by him in the production of that income, and where under section 27 of this Act any income of an accounting period ending on some day other than the last day of such year of income is, for the purpose of ascertaining total income for any year of income, taken to be income for any year of income, then such expenditure incurred during such period shall be treated as having been incurred during such year of income.’’

92. Section 16(2) of the Income Tax Act prohibits deductions in relation to certain activities. However, subsection 2(c) contains a specific exception to this prohibition. The said Section 16(2) (c) provides as follows:‘‘Notwithstanding any other provision of this Act, no deduction shall be allowed in respect of—b.…c.any income tax or tax of a similar nature paid on income: Provided that, save in the case of foreign tax in respect of which a claim is made under section 41, a deduction shall be allowed in respect of income tax or tax of a similar nature, including compensation tax paid on income which is charged to tax in a country outside Kenya to the extent to which that tax is payable in respect of and is paid out of income deemed to have accrued in or to have been derived from Kenya.

93. Section 41 (1) of the Income Tax Act provides as follows:“41. Special arrangements for relief from double taxation‘‘(1) The Minister may from time to time by notice declare that arrangements, specified in the notice and being arrangements that have been made with the Government of any country outside of the Republic of Kenya with a view to affording relief from double taxation in relation to income tax and any taxes of a similar character imposed by the laws of that country, shall, subject to subsection (5) but notwithstanding any other provision to the contrary in this Act or in any other written law, have effect in relation to income tax, and every such notice shall, subject to the provisions of this section, have effect according to its tenor.’’

94. There is no doubt that Section 16(2)(c) of the Income Tax Act offers an exemption to the rule that deductions are not allowed in respect of any income tax or tax of a similar nature paid on income. However, this exemption is not a blanket one, the exemption must be qualified. The qualification is provided for under Section 41 of the Income Tax Act. In other words, for a taxpayer to successfully invoke the exemption under Section 16(2)(c) of the Act, the taxpayer must do as follows:a.Lodge a claim under Section 41 of the Income Tax Act;b.Demonstrate there are special arrangements for relief from double taxation;c.Demonstrate there are special arrangements for relief from double taxation and that special arrangement was or is in force and was or is applicable to the claim; andd.Such arrangement includes existence of a double taxation agreement that is not only signed, but it was or is in force and was or is applicable to the claim.

95. The Appellant has relied on Section 16 (2) (c) of the Income Tax Act which has been analysed herein above. The Appellant relied on Section 43 and Section 42 (7) of the Income Tax Act. Section 43 provides as follows:‘‘Time limitSubject to section 42(7) of this Act, any claim for an allowance by way of credit under this Part shall be made to the Commissioner within six years from the end of the year of income to which it relates.’’

96. From the provisions of Section 43, it is clear that a taxpayer cannot rely on Section 43 unless the conditions under Section 42(7) of the Income Tax Act are fulfilled. The said Section 42(7) provides as follows:“Where the amount of a credit or exemption given under any special arrangement is rendered excessive or insufficient by reason of an adjustment of the amount of income tax, or tax of a similar nature, payable either in Kenya or elsewhere, nothing in this Act limiting the time for the making of assessments or claims for relief shall apply to any assessment or claim to which the adjustment gives rise, being an assessment or claim made within six years from the time when all such assessments, adjustments and other determinations have been made, whether in Kenya or elsewhere, that are material in determining whether any and, if so, what credit is to be given.”

97. For a taxpayer to succeed under Section 43 of the Income Tax Act, it is not a walk in the park. The taxpayer has to demonstrate the following:a.Existence of a special arrangement which was in force or is in force and was or is applicable to the claim; andb.A credit or exemption is rendered excessive or insufficient by reason of an adjustment of the amount of income tax.

98. The Appellant in paragraph 5 of its Statement of Facts stated as follows:‘‘The Appellant made three applications for refund of overpaid corporation tax as provided for under Section 47 of the Tax Procedures Act, 2015. ’’ The Appellant’s claim was based on Section 47 of the Tax procedures Act and not on Section 41 of the Income Tax Act. Claims on taxes paid in other countries have to be based on Section 41 of the Income Tax Act.

99. Whereas the Appellant relied on Section 16(2)(c) of the Income Tax Act, the Appellant did not lodge the claim under Section 41 of the Income Tax Act.

100. Whereas the Appellant sought refuge under Section 16(2)(c), 43 and 42(7) of the Income Tax Act, the Appellant did not demonstrate that there were special arrangements for relief from double taxation; did not demonstrate that there is a special arrangement for relief from double taxation and that special arrangements were or are in force and were or are applicable to the claim; and did not demonstrate existence of a double taxation agreement that is not only signed, but it was or is in force and was or is applicable to the claim.

101. The Appellant sought refunds for taxes paid in Rwanda, Tanzania and Uganda. For the Appellant to succeed, the Appellant ought to have demonstrated existence of double taxation agreements between Kenya and Rwanda, Tanzania and Uganda that are not only signed, but are in force and were and are applicable to the claim.

102. Kenya has countable double taxation agreements with foreign countries some of which are signed and in force, some signed but in force, some have expired, while some are still being negotiated. Legal Notice Number 42 issued under The Income Tax Act indicates that Kenya has double taxation agreement with the East African Community member states of Burundi, Rwanda, Uganda and The United Republic of Tanzania. This Agreement was signed on 30th November, 2010.

103. Article 30 of the said Agreement provides as follows:‘‘1The Contracting States shall notify each other of the completion of the procedures required by their laws for entry into force of this Agreement. The Agreement shall enter into force on the date of the last of these notifications.2. The provisions of this Agreement shall apply to income for any year of income beginning on or after the first day of January next following the date upon which this Agreement enters into force.’’

104. The National Treasury confirmed that indeed the Agreement was signed however, it also confirmed that said the Agreement was not in force. The Appellant did not adduced evidence to indicate that this Agreement is in force and therefore applicable to its claims. It is therefore not clear to the Tribunal what Agreement the Appellant was relying upon by invoking Sections 16(2) (c), 43, and 42(7) of the Income Tax Act.

105. The Respondent stated that the Appellant in its claim included expenses incurred from years 2006. The Tribunal notes that the Appellant did not deny or challenge this allegation.

106. The Tribunal notes apparent variances between the Appellant’s figures and those of Respondent with regards to 2013 and 2014 claims. Whereas the Appellant claimed a total of Kshs 54,648,578. 00 for the year 2013 and Kshs 32,743,784. 00 for the year 2014, the Respondent’s figures indicated a total of Kshs 15,199,101 for the year 2013, and a total of Kshs 27,101,518. 00 for the year 2014. The Tribunal notes that the Appellant did not provide any evidence to challenge the same.

107. Based on the foregoing analysis, the Tribunal finds that the Appellant has failed to discharge its burden and has failed to demonstrate that the Respondent erred in law and in fact by disallowing taxes paid in other jurisdictions.

d. Whether the Respondent erred in imposing a tax shortfall penalty. 108. The Appellant submitted that in the assessment and tax refund decision letter, the Respondent disallowed the entire 2015 refund claim of Kshs 7,767,874 which relates to tax credits claimed under Section 42 of the IT2C form on grounds that the credits are subject to validation by the Corporate Data Office (CDO) team before their subsequent capture into iTax is valid. The Respondent further demanded a penalty for late payment of instalment tax of Kshs 1,822,792 for the same period.

109. The Tribunal has established that the Appellant could not rely upon Sections 16(2) (c), 43, and 42(7) of the Income Tax Act without establishing existence of a double taxation agreement. It then follows that the Appellant’s claims were null and void ab initio. The Tribunal is unable to fault the Respondent’s action and consequently finds that the Respondent did not err in imposing a tax shortfall penalty.

e. Whether the additional assessment of Kshs. 679,892. 00 for the Year 2018 is time barred. 110. Tribunal has already deliberated upon this issue under issue number one above and the Tribunal finds that the audit which led to the assessments were made before the lapse of statutory five years and consequently the additional assessment of Kshs.679,892. 00 for the year 2018 was proper.

Final Decision 111. The upshot to the foregoing analysis is that the Tribunal finds that the Appeal lacks merit and consequently makes the following Orders; -a.The Appeal be and is hereby dismissed; andb.The Respondent’s Objection decision dated 28th April 2023 be and is hereby upheldb.Each party to bear its own costs.

112. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 28TH DAY OF JUNE, 2024ERIC NYONGESA WAFULA - CHAIRMANEUNICE N. NG’ANG’A - MEMBERELISHAH N. NJERU - MEMBER