[2023] KETAT 541 (KLR)

Diwa Traders Limited v Commissioner of Legal Services & Board Coordination (Tax Appeal 983 of 2022) [2023] KETAT 541 (KLR) (13 October 2023) (Judgment)

Neutral citation: [2023] KETAT 541 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 983 of 2022

RM Mutuma, Chair, M Makau, EN Njeru, W Ongeti & BK Terer, Members

October 13, 2023

Between

Diwa Traders Limited

Appellant

and

Commissioner of Legal Services & Board Coordination

Respondent

Judgment

Background 1. The Appellant is a limited liability company incorporated in Kenya and a registered taxpayer.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, 1995. Under Section 5 (1) of the Act, the Kenya Revenue Authority is an agency of the Government for the collection and receipt of all tax revenue. Further, under Section 5 (2) of the Act with respect to the performance of its functions under subsection (1), the Authority is mandated to administer and enforce all provisions of the written laws as set out in Part 1 & 2 of the First Schedule to the Act for the purposes of assessing, collecting and accounting for all revenues in accordance with those laws.

3. The dispute in this Appeal arose when the Respondent issued the Appellant with additional assessments on VAT and Income tax on the 19th October 2021 amounting to Kshs. 41,060,733. 06.

4. The Appellant disputed the Respondent’s findings and lodged its notices of objection to the additional assessment on 16th July 2022.

5. The Appellant issued an invalidation to the Appellant’s objections on the 29th July 2022.

6. The Appellant being aggrieved by the objection decision issued by the Respondent, lodged its Notice of Appeal on the 26th August 2022.

The Appeal 7. The Appellant’s Memorandum of Appeal dated and filed on the 9th September 2022 is premised on the following grounds, that;a.The Respondent erred in law and fact by arbitrarily increasing the sales figures in the VAT returns and erroneously assessing additional VAT.b.The Respondent erred in law and in fact by disregarding the VAT returns filed by the Appellant and all explanations and documentation provided by the Appellant in support of their objection and proceedings to confirm the VAT assessments.c.The Respondent erred in law and in fact by assessing additional VAT on the Appellant based on arbitrary and unreasonable estimates while disregarding the actual sales and purchases made and declared in the VAT returns filed by the Appellant.d.The Respondent erred in law and in fact by treating the Appellant’s bank credits as sales without making the necessary adjustments and reconciliations thereby charging VAT on non-revenue items in the bank statements.e.The Respondent erred in law and fact by disallowing the input VAT incurred and claimed by the Appellant in making the taxable supplies, thereby assessing additional VAT on the Appellant based on erroneously disallowable invoices.f.The Respondent erred in law and in fact by assessing VAT on exempt supplies made by the Appellant in the period under review.g.The Respondent erred in law and in fact by issuing a VAT Debit Adjustment Voucher without any basis in law thereby resulting into a reduction of the VAT credit of the Appellant.h.The Respondent erred in law and in fact by disregarding the actual turnover realized and reported by the Appellant and arbitrarily increased the Appellant’s turnover for the period under review and thereafter assessed additional taxes, penalties and interest.i.The Respondent erred in law and in fact by disregarding all the documentation provided by the Appellant including the financial statements and tax returns, and proceeded to mistakenly confirm the income tax assessments.j.The Respondent erred in law and in fact by disallowing expenses incurred by the Appellant in the production of the taxable income during the period under review, thereby assessing additional taxes on account of the disallowed expenses.k.The Respondent erred in law and in fact by disregarding the express provisions of Section 15 and 16 of the Income Tax Act which provide that all expenses incurred wholly and exclusively in the generation of income are tax deductible.

The Appellant’s Case 8. The Appellant’s case is premised on its Statement of Facts dated and filed on the 9th September 2022 together with the document attached thereto.

9. The Appellant stated that on 19th October 2021, the Respondent issued various additional assessments with relation to VAT and Income tax.

10. The Appellant stated that it filed its Objections to the assessments on 16th July 2022, providing/outlining the grounds of objections and the reasons for the delay in filing the Objection.

11. The Appellant averred that the Respondent made its objection decision on 29th July 2022 invalidating the Appellant’s objection and upholding all the assessments and served the Appellant with the same.

12. The Appellant stated that the Respondent asserted that the Appellant had underdeclared its sales and overclaimed its expenses during the period under review. That as a result, the Respondent increased the gross sales, reduced the expenses and charged income tax on the recomputed profits.

13. The Appellant averred that the Respondent assessed additional VAT from the adjusted sales of the Appellant.

14. The Appellant asserted that, the Respondent also issued a Debit Adjustment Voucher to the Appellant thereby reducing the VAT credit of the Appellant.

15. The Appellant averred that it filed all its VAT returns and paid the VAT due for the period under assessment. That the Respondent, without conducting an audit or review of the Appellant’s books amended the Appellant’s VAT return for the months under review by arbitrarily increasing the sales value and charging VAT on the increased sales.

16. The Appellant asserted that the Respondent charged VAT on exempt supplies made by the Appellant during the period under review.

17. The Appellant averred that the Respondent disregarded all the facts in the documents presented by the Appellant in the financial statements and source documents and overstated the sales in the period and erroneously made an additional assessment.

18. That it was the Appellant’s contention that the Respondent disregarded all explanations and reconciliations provided and proceeded to confirm the assessments which were based on arbitrary figures while disregarding the actual sale.

19. The Appellant averred that it dutifully filed its returns and made payments on all the Income tax due during the period under review, the Respondent without any basis or justification adjusted the Appellant’s turnover upwards for the period under review and therefore erroneously assessed additional taxes on the difference between the adjusted turnover and what the Appellant had declared.

20. The Appellant submitted that the Respondent disallowed some of the expenses which had been incurred by the Appellant in the generation of the taxable income.

21. The Appellant submitted that inspite of providing all the information, explanations and documentation, the Respondent disregarded the information, explanations and documents and confirmed the assessment which had been erroneously based on the adjusted gross turnover.

22. The Appellant averred that the Respondent failed to acknowledge the expenses incurred in the running of the business contrary to the provisions of the Income Tax Act which provide that all expenses incurred in the generation of income are tax allowable.

23. The Appellant submitted that it was imperative to note that while it is impossible to run a business without incurring expenses, the Respondent did not allow any expenses claimed by the Appellant in its income statement.

24. The Appellant averred that the Respondent arbitrarily and without any justification adjusted its revenue upwards, thereby assessing more income tax, in spite of being provided with all the necessary documentation including financial statements and other source documents which would provide a fair view of the Appellant’s transactions.

Appellant’s Prayers 25. The Appellant made the following prayers to the Tribunal, that; i.It allows this Appeal.ii.It annuls the Respondent’s confirmed assessment based on the ground above, as well as the information contained in the Statement of Facts attached; and.iii.It awards costs of this Appeal to the Appellant.

Respondent’s Case 26. The Respondent’s case is premised on the Respondent’s Statement of Facts dated 12th October 2022 and filed on 13th October 2022 together with all the documents attached thereto.

27. The Respondent stated that it conducted a compliance check on the Appellant and issued VAT and Income tax additional assessments amounting to Kshs. 41,060,733. 06.

28. That the Appellant objected entirely to the additional assessments in the letter dated 4th July 2022 asserting that the credits in the bank statement comprised of components which were not revenue related and included, receipts from borrowings, dishonoured cheques, interbank transfers and capital injections by Directors and Shareholders.

29. The Respondent stated that on 16th July 2022, the Appellant lodged on iTax an application for extension of time to lodge an objection giving reasons for late objections that it missed out on the assessment orders as its offices were closed due to Covid-19.

30. That the Respondent stated that on the 20th July 2022, it wrote to the Appellant vide email and requested it to provide grounds for late objection and adduce evidence supporting the same.

31. That the Respondent averred that it issued a notice rejecting the application for extension of time to lodge the objection on the 29th July 2022, premised on the fact that the Appellant did not state any reasons as provided for in Section 51 (7) of the TPA.

32. The Respondent contented that the Appellant lodged its objection 9 months late, and it placed reliance on Section 51 (2) of the TPA that a taxpayer who wishes to object to any assessment ought to do so within 30 days of receipt of the decision.

33. The Respondent further stated that Section 51 (6) provided the latitude for a taxpayer to apply for an extension of time to lodge a notice of objection, but Section 51 (7) provides the conditions under which the Commissioner may allow such an application.

34. The Respondent submitted that Appellant’s reasons for late objection in itsapplication dated 16th July 2022 that it missed out on the assessment orders as its offices had been closed due to Covid 19 was not a valid reason to warrant the Respondent to allow the application for the extension of time as the same does not meet the threshold set out in Section 51 (7) of the TPA 2015.

35. The Respondent asserted that it issued the objection decision on 29th July 2022 rejecting the application, which was within fourteen (14) days as is stipulated under Section 51 (7A) of the TPA.

36. The Respondent averred that it received the letter from the Appellant giving reasons for the late objection on the same day that it issued the objection decision, which was overtaken by events.

37. The Respondent stated that notwithstanding that the Appellant’s letter for reasons for late objection was overtaken by events, the Appellant in its letter gave various reasons why it missed out on the additional assessment issued by the Respondent, which included;a.That as a result of the negative economic impact brought about by Covid 19 it had to let go of its consultant one, Alex Munyao on 1st July 2021. b.The tax consultant erroneously missed out on handing over the password to its email for the iTax and which was reset later.c.That the Appellant’s offices had been closed due to the pandemic and were working remotely on selected days and only on very essential matters.

38. The Respondent asserted that the issue of letting go of its tax consultants, the reason does not fall under Section 51 (7) of the TPA and thus not a valid reason.

39. The Respondent further stated that on the issue of handing over the password and which had to be reset much later, it is worthy nothing that the burden of proof is always on the taxpayer as is provided under Section 56 (1) of the TPA.

40. The Respondent stated that by the time it issued the assessments in 2021 the Covid 19 effects were minimal and most offices had resumed operations, it is therefore false and unreasonable for the Appellant to make such assertions.

Respondent’s Prayers 41. he Respondent prayed for this Tribunal, that:-i.The Respondent’s decision dated 29th July 2022 and tax demand was therefore properly issued as provided under law.ii.This Appeal be dismissed with costs to the Appellant as the same is without merit.

Issues for Determination 42. The Tribunal upon the careful consideration of the pleadings and Statements of Facts made by the parties respectively, was of the view that the issue that recommends itself for its determination is;Whether the Respondent’s decision rejecting the Appellant’s application for extension of time issued on 29th July 2022 was justified.

Analysis and Findings 43. The Tribunal having identified the issue for its determination proceeds to analyze the same as herein under;

44. The Respondent submitted that Appellant lodged its notice of objection late, further the Appellant presented its application dated 16th July 2022 seeking for extension of time to lodge the same out of time.

45. The Respondent contended that the grounds advanced by the Appellant were not valid as the same do not meet the threshold underpinned in Section 51 (7) of the TPA, which provides that:-―The Commissioner may allow an application for the extension of time to file a notice of objection if—a.the taxpayer was prevented from lodging the notice of objection within the period specified in subsection (2) because of an absence from Kenya, sickness or other reasonable cause; andb.the taxpayer did not unreasonably delay in lodging the notice of objection.‖

46. The Respondent stated that the rejection decision was rendered on 29th July 2022, which was made within fourteen (14) days and in compliance with Section 51 (7A) of the TPA, further that Appellant presented its grounds in support of the late objection on the same date when the Respondent issued the decision, therefore the Appellant’s letter had been overtaken by events.

47. Section 51 (7A) of the TPA, provide as thus:-― The Commissioner shall notify the taxpayer of the decision made under subsection (7) within fourteen days after receipt of the application.‖

48. The Tribunal notes that indeed the Respondent issued its decision rejecting the Appellant’s application to file a late objection within the statutory timelines as provided for under Section 51 (7A) and therefore complied with the law.

49. The Tribunal noted that the Appellant presented its grounds in support of the application for late objection on the fourteenth day, which was also the statutorily last day for the Respondent to issue it decision on the application. In doing so, the Applicant found the Respondent having already made its decision rejecting its application.

50. Consequently, the Tribunal finds and holds that the Respondent was justified in issuing the decision rejecting the Appellant’s application for late objection and the Appeal is therefore unmerited.

Final Decision 51. The upshot to the foregoing is that the Appeal is unmerited and the Tribunal consequently makes the following Orders; -a.The Appeal be and is hereby dismissed.b.The Respondent’s decision rendered on 29th July 2022 be and is hereby upheld.c.Each party to bear its own costs.

52. It is so ordered.

DATED and DELIVERED at NAIROBI this 13th day October, 2023ROBERT M. MUTUMA - CHAIRPERSONMUTISO MAKAU - MEMBERELISHAH N. NJERU - MEMBERDR. WALTER ONGETI - MEMBERBONIFACE K. TERER - MEMBER