[2024] KETAT 415 (KLR)

El Adi Construction Limited v Commissioner for Legal Services and Board Coordination & another (Appeal 101 of 2023) [2024] KETAT 415 (KLR) (22 March 2024) (Judgment)

Neutral citation: [2024] KETAT 415 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Appeal 101 of 2023

RM Mutuma, Chair, AM Diriye, M Makau, EN Njeru & B Gitari, Members

March 22, 2024

Between

El Adi Construction Limited

Appellant

and

Commissioner for Legal Services and Board Coordination

1st Respondent

Commissioner for Domestic Tax

2nd Respondent

Judgment

Background 1. The Appellant is a registered taxpayer and a limited liability Company duly incorporated and registered in Kenya under the Companies Act. Its principal Business activity is in construction.

2. The Respondent is the principal officer appointed under Section 13 of the Kenya Revenue Authority Act, 1995. Under Section 5 (1) of the Act, the Kenya Revenue Authority (the Authority) is an agency of the Government for the collection and receipt of all revenue. Further, under Section 5 (2) with respect to the performance of its function under subsection (1), the Authority is mandated with the responsibility for the administration and enforcement of the various Statutes set out in Parts 1 & 2 of the First Schedule to the said Act for the purposes of assessing, collecting and accounting for all revenues in accordance with those laws.

3. After carrying a returns review, the Respondent on 16th April 2021, issued the Appellant with a tax assessment of Kshs. 51,634,063. 36; comprising of various Value Added Tax (VAT) additional assessments of Kshs. 31,660,290. 22 for the period 2017 to 2020 and various Income tax additional assessment of Kshs. 19,973,773. 14 for the year 2017 and 2018. The Appellant made a late Objection to the various tax assessments on 24th March 2021 to which the Respondent gave its Objection decision on 27th August 2021.

4. Aggrieved by the Respondent’s Objection decision, the Appellant lodged its Notice of Appeal dated 9th January 2023 and filed on 10th January 2023.

The Appeal 6. The Appeal as contained in the Memorandum of Appeal dated and filed on 30th January 2023 raised the following grounds of appeal:i.The 1st Respondent’s decision is legally and factually incorrect for holding that the Appellant did not provide sufficient records to support cost of sales expenses for the years 2017 and 2018. ii.The Respondent decision is erroneous in law and in fact in holding that the Appellant did not declare sales in its VAT returns for the period 2017 to 2020. iii.The Respondent erred in law and fact in holding that the Appellant had not provided sufficient supporting documents in support of its Objection decision.iv.The Respondent’s decision is illegal, null and void for breaching the clear provisions of the Tax Procedures Act (TPA) and Value Added Tax (VAT) Act.v.The Respondent’s decision violated the Appellant’s legitimate expectation of proper and fair administration of tax law by the Respondent to the detriment of the Appellant.vi.The Respondent has continuously violated the Appellant’s right for fair administrative action.

The Appellant’s Case 7. The Appellant's case is premised on its;a.Statement of Facts dated and filed on 30th January 2023 together with the documents annexed thereto; andb.Written submissions dated 11th July 2023 and filed on 13th July 2023.

8. The Appellant averred that it received various tax assessment of Kshs. 51,634,063. 36; comprising of various Value Added Tax (VAT) additional assessments of Kshs. 31,660,290. 22 for the period 2017-2020 and various Income tax additional assessment of Kshs. 19,973,773. 14 for the year 2017 and 2018.

9. The Appellant stated that the Respondent’s objection decision indicated that a principal sum of Kshs. 55,220,105. 00 was due and payable and therefore there is a disparity between the amount assessed as the principal sums due and the amount indicated as the principal sum due contained in the Respondent’s objection decision letter dated 27th August 2021.

10. The Appellant avowed that the Respondent did not act in good faith in demanding the aforesaid tax from it.

11. The Appellant contended that the Respondent’s objection decision is illegal, unconscionable, oppressive and therefore null and void for the following reasons: -a.The Appellant has the necessary documents to support its objection and is ready, able and willing to avail the same to the Tribunal as it did to the Respondents.b.There is uncertainty as to the sum claimed by the Respondents as the principal tax owing.

12. The Appellant in its written submissions identified the following three issues for determination:a.Whether the Respondent's Objection Decision is valid.b.Whether the Appellant's notice of objection is valid.c.Which party should bear the costs? QUOTE

a. Whether the Respondent's Objection Decision is valid. 13. The Appellant submitted that the Objection decision by the Respondent is null and void as the same was rendered after the lapse of sixty (60) days as provided by the law and relied on Section 51 (11) of the Tax Procedures Act (TPA) which assumes the Appellant’s Objection shall be deemed allowed by operation of the law, when the Respondent has not made an Objection decision within sixty (60) days from the date that the taxpayer lodged a notice of objection.

14. The Appellant alleged that it lodged the notice of objection on 24th March 2021 and the Objection decision was rendered by the Respondent on 27th August 2021, which is 157 days later.

15. The Appellant submitted that timelines are cast on stone unless the statute expressly permits their extension and relied on the case in Judicial Review Application No. 152 Of 2019 (Republic vs. Commissioner of Domestic Taxes Ex Parte Fleur Investments Limited [2020] eKLR and Judicial Review Application No. 346 of 2019 (Vivo Energy Kenya Ltd vs. Commissioner of Customs and Border Control, Kenya Revenue Authority & another [2020] eKLR.

16. The Appellant averred that the Respondent acted ultra vires and contra-statute in issuing the decision well past the statutory timeframe and thus the Objection decision dated 27th August 2021 is illegal, null, and void.

17. The Appellant stated that it is essential to the rule of law that statutory bodies and offices such as the Respondent’s must act strictly within the confines of the empowering legislation and that it is now well-settled that an action made in excess of jurisdiction and/or contra statute such as the Respondent’s impugned action is a nullity and incurably bad.

18. In view of the above, the Appellant submitted that the Objection decision by the Respondent dated 27th August 2021 should be made null and void as the same was issued out of the statutory sixty (60) days.

Whether the Appellant notice of objection is valid. 19. The Appellant submitted that its notice of objection on the 24th March 2023 was valid as the same was issued in strict adherence to the provisions of the TPA, 2015.

20. The Appellant averred that it submitted a valid notice of objection which was not declined at any point by the Respondent for failure to meet the criteria as set out under Section 51 (3) of the TPA.

21. The Appellant submitted that its Objection lodged on the 24th March 2021 met all the qualifications stipulated herein and that the Respondent never notified the Appellant in writing that the notice of objection was invalidly lodged within 14 days of lodging the notice as required by Section 51 (4) of the TPA, 2015.

22. The Appellant stated that the Respondent never notified it in writing that the notice of objection was invalidly lodged within 14 days of lodging the notice as required under Section 51 (4) of the TPA, 2015.

23. The Appellant averred that the Respondent has not produced before this Tribunal any proof of service of the notice of invalidation of objection and relied on the holding of the Court in Judicial Review Application No. 152 Of 2019 Republic vs. Commissioner of Domestic Taxes Ex Parte Fleur Investments Limited [2020] eKLR .

c. Which party should bear the costs 24. The Appellant submitted that the costs of this case are awarded to it since, it is now well settled that costs follow events and further, Section 27 of the Civil Procedure Act, Cap 21, provides that costs follow events and relied on the case of Haraf Traders Limited vs. Narok County Government |2022| eKLR.

Appellant’s Prayers 25. The Appellant prayed that the Tribunal:a.Allows the Appeal entirely.b.Sets aside the Respondent’s decision dated 27th August 2021 and any subsequent tax demand arising therefrom.c.Awards cost of Appeal to the Appellant.

The Respondent’s Case 26. In opposing the Appeal the Respondent relied on its; -a.Statement of Facts dated and filed on 9th February 2023 together with the documents attached thereto; andb.Written submissions dated 30th June 2023 and filed on 3rd July 2023.

27. The Respondent stated that it carried out a return review and during the process performed an analysis whereby purchases claimed by purchasers and sales declared by suppliers were ran on the KRA iTax system for the period of years 2017 - 2020.

28. The Respondent stated that it disallowed the direct purchase amount in the Appellant's Income tax return after it discovered that there were inconsistencies between the returns filed by the Appellant’s suppliers and invoices claimed by the Company for the period of years 2017 - 2020, and so relied on the invoice value as used in the determination of VAT payable as the true direct purchase cost.

29. The Respondent averred that the Appellant was informed on the inconsistencies of the VAT3 returns invoices for the Appellant to resolve the same, however, the Appellant failed to resolve the said inconsistencies within the stipulated timeframe. As a result, the Respondent, based on the inconsistencies raised additional assessments on 16th February 2021 for income tax and VAT for the period 2017 to 2020 totalling to Kshs. 87,556,470. 00 inclusive of the principal amount, penalty and interest.

30. The Respondent averred that after the Appellant lodged an objection on 24th March 2021 through the iTax platform, it demanded for documents including delivery notes, purchase invoices, supplier statements and bank statements, however, the Appellant failed to produce the relevant supporting documents for the period of years 2017 to 2020.

31. The Respondent submitted that Section 51 of the Tax Procedures Act empowers it to notify a party where an objection as lodged is invalid, the Appellant was therefore notified and requested to provide documents. The Respondent stated that its Objection decision provided a precise and clear breakdown of the workings used to reach at the assessments.

32. The Respondent averred that the assessments were correctly issued and conform to the Value added Tax Act. The Respondent stated that the Appellant did not provide any evidence that would have altered the assessment as provided for under Section 56 (1) of the TPA which puts the onus of proof in tax objections on the taxpayer who in this case failed to avail evidence that would support a contrary assessment or that would have guided the Respondent at arriving to a different Objection Decision.

33. The Respondent averred that the Appellant was uncooperative in the provision of relevant records and failed to respond to request of documents hence no relevant documents or records were provided to support the objection by the Appellant. As a result, the Respondent stated, the assessment was made based on the only available information based on the best judgement by the Respondent as per Section 59 (1) of the TPA which empowers it or require production of such documents vide issuance of notice as deemed necessary in determination of tax liability.

34. The Respondent averred that the assessment was issued based on the information provided and in light of the inconsistencies within the Appellant's VAT ledgers. Section 31 of the TPA empowers it to make alterations or additions to original assessments from available information for a reporting period based on the best judgment

35. The Respondent insisted that not all income earned by the Appellant was declared and hence the variances were brought to charge as per Section 24 (1) of the TPA which empowers the Respondent to carry out assessment based on the information available.

36. The Respondent asserted that examination of the Appellant’s records established that the Appellant earned income from construction business in the period under audit, however, these incomes were not declared for tax purposes for the year earned. The Respondent asserted that the Appellant carried on business in contravention of Section 42 of the TPA which requires such documents be maintained and for purposes of taxation.

37. The Respondent refuted that the Appellant has paid all its tax due and reiterated that because of its under-declaration, the Appellant is in debt of Kshs. 87,556,470. 00.

38. The Respondent submitted that the Appellant is undeserving of the prayers sought due to the aforestated reasons.

39. The Respondent submitted that the Appellant did not provide the necessary supporting documents, such as records and invoices, for the years 2017 - 2020 in connection with their Objection. Consequently, the Respondent had to estimate the Appellant's VAT and Income, as it seemed to be the most reasonable approach for assessing these taxes. The Responded submitted that this estimation formed the basis for the Objection decision issued.

40. The Respondent averred that the assessments were correctly issued and conform to the Income Tax Act, and submitted that Section 56 (1) of the TPA places the onus of proof in tax objections on the taxpayer who in this case failed to avail evidence that would support a contrary assessment or that would have guided the Respondent at arriving to a different Objection decision.

41. The Respondent asserted that all the Appellant's submissions in interviews, review meetings, site inspections, document verification meetings, and documentation provided were taken into consideration before issuance of the Objection Decision.

42. The Respondent submitted that the Tribunal should be guided by the following considerations;a.Were any documents provided to justify the Appellant’s Objection?b.Were the annual taxation returns of income as done by the Appellant from time to time correct and complete?c.Were any transactions being omitted from or incorrectly recorded in the Appellant's books of accounts /banking's?

43. The Respondent highlighted that Section 23 (1) (b) of the Tax Procedures Act makes it an obligation for a taxpayer to maintain any document required under a tax law to enable the person's tax liability to be readily ascertained.

44. Further to that, the Respondent contended that the Appellant’s Objection was devoid of substance to validate its claim and failed to include any supporting records as required under Section 51 of the Tax Procedures Act. This left the Respondent with no option but to issue an Objection decision confirming the assessment as provided for under Section 51 (9) of the TPA to comply with timelines.

The Respondent’s Prayers 45. The Respondent prayed that this Tribunal finds that:a.The Respondent's objection decision be upheld.b.The outstanding tax arrears of Kshs. 87,556,470 are due and payable by the Appellant.c.The confirmed assessments dated 16th February,2021 were proper in law.d.That the Appeal herein be dismissed with cost to the Respondent.

Issues for Determination 46. Having scrutinized the pleadings by parties to the Appeal, the Tribunal finds that there is a single issue that calls for its determination as follows;Whether the Respondent’s decision issued on 27th August 2021 invalidating the Appellant’s Objection is justified.

Analysis and Findings 47. The Appellant submitted that its objection notice dated 24th March 2021 was deemed to have been allowed by operation of law since the Respondent did not make its Objection decision within sixty days from the date it lodged the notice of the objection as was then provided for under Section 51 (11) of the Tax Procedures Act, which Section stated;“(11)The Commissioner shall make the objection decision within sixty days from the date of receipt of—a.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.”

48. The Respondent on the other hand stood its ground and submitted that despite accepting its application to lodge a late objection, it declined to allow the Appellant’s Objection for lack of supporting documents and therefore failed to meet the requirements of Section 51 (2) and (3) of the TPA, which states;“2. A taxpayer who disputes a tax decision may lodge a notice of objection to the decision, in writing, with the Commissioner within thirty days of being notified of the decision.3. A notice of objection shall be treated as validly lodged by a taxpayer under subsection (2) if-a.the notice of objection states precisely the grounds of objection, the Amendments required to be made to correct the decision, and the reasons for the amendments; and QUOTEb.in relation to an objection to an assessment, the taxpayer has paid the entire amount of tax due under the assessment that is not in dispute.” 49. In order to unravel this issue, the Tribunal wishes to delve in to the timelines when the Objection Notice by the Appellant and the Respondent’s Objection

Decision were made. 50. The Tribunal notes that the Appellant made its Objection through iTax on the 24th of March 2021 to which the Respondent issued Objection decision dated 27th August 2021. This reveals that there is 157 days difference between when the Respondent issued its Objection decision and when the Appellant lodged its Objection. The law provides that for an Objection Decision to be valid, it must be issued within sixty days from the date of Objection.

51. The law provides that if the Respondent requests for further information and the Appellant provides the same, the time of the sixty days within which an Objection decision is to be made is reset. This is provided for under Section 51 (11) (b) of the TPA (now amended) which stated;“(b)any further information the Commissioner may require from the taxpayer, failure to which the objection shall be deemed to be allowed.”

52. The Tribunal notes the Respondent on various dates wrote to the Appellant to provide further documentation before the issuance of its Objection decision requesting for further documents, including delivery notes, purchase invoices, supplier statements, and bank statements, however, the Appellant never provided any documents.

53. It follows that the Respondent was obligated in law to make its Objection Decision within the period of sixty days of the receipt of the notice of Objection or any further information or documents from the Appellant.

54. The Tribunal further noted that the notice of objection was lodged on 24th March 2021 and the Respondent was mandated in law to issue its Objection decision on or before the 23rd May 2021, however, the Objection decision was issued 27th August 2021.

55. Flowing from the above, the Tribunal finds that the Appellant’s objection was allowed by operation of the law based on the Respondent’s failure to issue an objection decision with the statutory period of 60 days.

56. The Tribunal is guided by the cases of Cape Brandy Syndicate vs. Inland Revenue Commissioners [1921] K.B 64 where it was observed that;“In a taxing Act one has to look merely at what is clearly said. There is no room for any intendment. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used…... if a person sought to be taxed comes within the letter of the law, he must be taxed. However great the hardship may appear to the judicial mind may be. On the other hand, if the crown, seeking to recover the tax, cannot bring the subject within the letter of the law, the subject is free, however apparently within the spirit of the law the case might otherwise appear to be.”

57. The Tribunal is further guided by the case of Equity Group Holdings Limited vs. Commissioner of Domestic Taxes (Civil Appeal E069 & E025 of 2020) [2021] KEHC 25 (KLR) (Commercial and Tax), where the court held;“A statutory edict is not procedural technicality. It’s a law which must be complied with. Parliament in its wisdom expressly and in mandatory terms provided the consequences of failing to render a decision within 60 days.The Objection is deemed to be allowed. That being the law, the appellant’s Objection stood allowed as a matter of law the moment the Commissioner of Domestic Taxes failed to render his decision within the 60 days. This being the correct legal position, it is my finding that the 1st appeal succeeds”.

58. Consequently, the Tribunal finds that the Respondent’s Objection decision of 27th August 2021 invalidating the Appellant’s Objection was not validly issued as the Objection had already been allowed by operation of the law.

Final Decision 59. The Tribunal finds that the Appeal has merit and accordingly proceeds to make the following Orders:i.The Appeal be and is hereby allowed.ii.The Respondent’s decision invalidating the Objection issued on 27th August 2021 be and is hereby set aside.iii.Each party to bear its own costs.

59. It’s so ordered.

DATED AND DELIVERED AT NAIROBI THIS 22ND DAY OF MARCH, 2024. ROBERT M. MUTUMA - CHAIRPERSONMOHAMED A. DIRIYE - MEMBERMUTISO MAKAU - MEMBERELISHAH N. NJERU - MEMBERBERNADETTE M. GITARI - MEMBER