[2024] KETAT 331 (KLR)

Ennsvalley Bakery Limited v Commissioner of Domestic Taxes (Appeal 1121 of 2022) [2024] KETAT 331 (KLR) (23 February 2024) (Judgment)

Neutral citation: [2024] KETAT 331 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Appeal 1121 of 2022

Grace Mukuha, Chair, E Komolo, Jephthah Njagi, T Vikiru & G Ogaga, Members

February 23, 2024

IN NAIROBI REGISTRY

Between

Ennsvalley Bakery Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a private limited liability company incorporated in Kenya under the Companies Act 2015. Its business is bakery and pastry services.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, Cap 469 laws of Kenya (KRA Act). Under Section 5 (1) of the Act, KRA is an agency of the Government for the collection and receipt of all revenue. Under Section 5(2) of the Act with respect to the performance of its function under Subsection (1), the Authority is mandated to administer and enforce all provisions of the written laws as set out in Parts I and II of the First Schedule to the KRA Act for the purposes of assessing, collecting, and accounting for all revenues in accordance with those laws.

3. The Appellant supplied goods to Nakumatt Holdings Limited (Nakumatt) during the period between 2016 and 2017, and after determining that the likelihood of recovering the debt from Nakumatt was remote.

4. The Appellant lodged with the Respondent Value Added Tax (VAT) refund claims on these supplies under Section 31 of the VAT Act 2013 on 24th April 2020 and 11th September 2020, amounting to Kshs. 1,363,856. 88 for the period of March 2017 and Kshs. 1,375,522. 00 for the period of April 2017.

5. The Respondent rejected in full the VAT refund claims of Kshs. 1,363,856. 88 for March 2017 and Kshs. 1,375,522. 00 for April 2017 vide VAT refund claim rejection orders dated 6th September 2022 and 22nd August 2022, respectively.

6. Vide a Notice of Appeal filed on 21st September 2022, the Appellant appealed against the Respondent’s decision dated 22nd August 2022 rejecting the VAT refund claim for April 2017 and the Respondent’s decision dated 6th September 2022 rejecting the VAT refund claim for March 2017.

The Appeal 7. The Appeal is premised on the Memorandum of Appeal dated and filed on 5th October 2022 which raised the following grounds: -a.That the Respondent erred in fact by partially disallowing the VAT refund claims in the sum of Kshs. 2,739,378. 88 on the grounds that no sufficient information was provided to support the refund claims, when as a matter of fact on 22nd April 2022, the Respondent was furnished with all the requisite documentation by the Appellant.b.That the Respondent breached the Appellant’s legitimate expectation by reneging from its representation that it would consider the information furnished by the Appellant on 22nd April 2022 as part of its VAT refund audit.c.That the Respondent erred in law and in fact in partially disallowing the VAT refund claims in the sum of Kshs. 2,739,378. 88 in connection with the refund claims for the sum of Kshs. 7,459,663. 00 lodged under Section 31 of the VAT Act 2013. d.That the Respondent erred in law by failing to consider the balance of the refund claims for the sum of Kshs. 4,720,285. 00, which in the event is deemed to have been allowed by operation of Section 47 (3) of the Tax Procedures Act 2015.

Appellant’s Case 8. The Appellant’s case is premised on the following documents filed and proceedings taken before the Tribunal: -a.Its Statement of Facts dated and filed on 5th October 2022, and the documents attached thereto;b.Its Witness Statement dated 9th June 2023, filed on 26th July 2023 and adopted in evidence by the Tribunal on 26th September 2023; andc.Its Written Submissions dated and filed on 9th June 2023, and the documents attached thereto.

9. The Appellant stated that it supplied goods to Nakumatt Holdings Limited (Nakumatt) during the period between 2016 and 2017. That Nakumatt did not make payment towards the supplies and VAT on unpaid debt amounted to Kshs. 10,601,501. 00.

10. The Appellant further stated that it assessed the likelihood of recovering the debt from Nakumatt as remote and therefore proceeded to apply for a refund of Value Added Tax (VAT) paid on these supplies of Kshs. 10,601,501. 00 in three batches as set out below, pursuant to the provisions of Section 31 of the VAT Act, that is:a.24th April 2020, a VAT refund claim for the months of January 2017 and March 2017 claiming VAT in the sum of Kshs. 4,740,909. 00. b.11th September 2020, a VAT refund claim for the months of April 2017 and May 2017 in the sum of Kshs. 2,718,754. 00. c.Manually lodged on 23rd November 2020 VAT refund claims for the sum of Kshs. 3,141,837. 00.

11. That subsequently, the refund claims that are subject of the present dispute were allocated to the Middle Taxpayers’ Offices (MTO) audit team and an opening meeting was held at the Appellant's premises on 5th August 2021.

12. The Appellant stated that through various emails dated 7th January 2022, upon the request of the Respondent, the Appellant furnished the Respondent with documentation in support of its refund claims.

13. The Appellant further stated that the last request for information was made by the Respondent in its email dated 18th March 2022, wherein the Respondent requested a breakdown of the outstanding debt owed to the Appellant by Nakumatt together with confirmation from Nakumatt's Administrator in this respect.

14. That the Respondent’s email of 18th March 2022 advised that the said information had to be availed to the Respondent not later than 14th April 2022, which the Appellant averred that it submitted to the Respondent on 22nd April 2022.

15. The Appellant stated that it met with the Respondent on 20th June 2022 to discuss the progress of the refund audit exercise, and that after deliberations, the Respondent agreed to consider the information furnished to it by the Appellant on 22nd April 2022 in the finalisation of its VAT refund audit.

16. It was the Appellant’s statement that, by a letter dated 27th July 2022 it requested the Respondent to consider the information submitted on 22nd April 2022 to conclude the refund audit exercise.

17. The Appellant stated that in an email of 27th July 2022, in response to the Appellant's letter of even date, the Respondent assured the Appellant as follows: -“Good Afternoon, Hannah,I acknowledge the receipt of your mail. We shall work on both claims as guided by your letter.”

18. That contrary to the discussions between the Appellant and the Respondent on 20th June 2022, by a VAT claim rejection order dated 22nd August 2022, the Respondent rejected one of the refund claims on the basis that: -“Rejected-The taxpayer did not provide adequate documentation to the audit team (MTO) to demonstrate this was a refund due to bad debts.”

19. That on 6th September 2022, the Respondent issued another refund rejection decision rejecting the sum of Kshs. 1,363,856. 88 in the following terms: -“Rejected as per TSO RAC MTO Audit report recommendations, which indicated that no sufficient information was provided to support the refund claim.”

20. That dissatisfied with the Respondent's refund rejection decisions, and in line with the provisions of Section 52 of the TPA, the Appellant lodged with this Honourable Tribunal a Notice of Appeal dated 21st September 2022, expressing its intention to appeal against the whole of the refund rejection decisions.

21. Following the aforementioned Notice of Appeal, the Appellant analysed its grounds of appeal against the Respondent's refund rejection decisions as follows:a.Whether the Respondent erred in disallowing the Appellant’s VAT refund claims on the ground that no sufficient information was provided in support of the refund claims.b.Whether the Respondent breached the Appellant’s legitimate expectation by reneging from its representation that it would consider the information furnished by the Appellant on 22nd April 2022 as part of the VAT refund audit.c.Whether the Respondent erred in law and in fact in disallowing the VAT refund claims in the sum of Kshs. 2,739,378. 88 lodged under Section 31 of the VAT Act 2013. d.Whether the Respondent erred in law by failing to consider the balance of the refund claims for the sum of Kshs. 4,720,285. 00, which in the event is deemed to have been allowed by operation of Section 47 (3) of the TPA.

a. On whether the Respondent erred in disallowing the Appellant’s VAT refund claims on the ground that no sufficient information was provided in support of the refund claims. 22. The Appellant averred that in the two rejection decisions, the Respondent argued that the Appellant did not provide adequate documentation to the audit team (MTO) to demonstrate that these were refunds due to bad debts.

23. The Appellant submitted that these reasons are factually inaccurate. That contrary to the allegation that it failed to provide the information requested, by numerous emails dated 7th January 2022, the Appellant furnished the Respondent with documentation, so sought by the Respondent.

24. The Appellant listed the documents that it provided to the Respondent as follows:a.The sales ledger under Appendix 5b.The invoices under Appendix 5. c.The bank statements under Appendix 5. d.Nakumatt's Administrator's letter dated 11th July 2018 to Nakumatt's creditors under Appendix 5. e.The ruling of Justice Mabeya dated 11th March 2021 under Appendix 5. f.The Appellant's letter to Nakumatt's Administrator requesting confirmation of the amounts owing to the Appellant by Nakumatt under Appendix 7. g.The letter dated 6th April 2022 from Nakumatt's Administrator confirming that Nakumatt was insolvent and that it owed the Appellant the sum of Kshs. 114,388,615. 00 under Appendix 7. h.Nakumatt's statement of accounts under Appendix 7.

25. The Appellant submitted that it was therefore not true that the Respondent was not provided with the information that it had requested. That vide an email dated 18th March 2022 the Respondent requested for letters from the Nakumatt Administrator confirming the sum of the current bad debts and set a deadline of 14th April 2022.

26. That on 22nd April 2022, the Appellant through an email attached at page 2994 of the Appellant's SOF, furnished the Respondent with the information requested in the email of 18th March 2022.

27. The Appellant decried that the Respondent issued the decisions that are the subject of this Appeal more than 4 months from the date when the information it had sought from the Appellant had been provided.

28. The Appellant averred that ex abandanti cautella, in a meeting of 20th June 2022 with the Respondent, the Appellant made the Respondent aware that the information sought had been provided on 22nd April 2022 and that the Respondent did, in the said meeting, undertake to consider the said information.

29. That the Appellant vide a letter to the Respondent dated 27th July 2022 attached at pages 5-6 of the Appellant's SOF, reduced its deliberations and resolutions with the Respondent from the meeting on 20th June 2022. That the Respondent had not disputed the contents of the letter.

30. That toto subito, on 22nd August 2022 and on 6th September 2022, the Respondent rendered rejection orders on the basis that the Appellant had not sufficiently furnished it with the documentation in support of the refund claims.

31. The Appellant submitted that by declining to consider the supporting documentation provided by the Appellant, the Respondent breached the Appellant's right to fair administrative action as provided for under Article 47 of the Constitution.

32. The Appellant relied on Republic v Kenya Revenue Authority ex-parte Amsco Kenya Limited [2014] eKLR where the High Court held: -“Further an administrative action cannot be said to be procedurally fair where a decision is arrived at based on an opinion formed as a result of the consideration of the version of only one side since by a consideration of one side one cannot be said to have felt certain about the truth of the matter in dispute.”

33. The Appellant argued that had the Respondent considered the documentation which was tabled before it, the Respondent would have arrived at sound and legally founded decisions. That by ignoring the evidence on record, the Respondent acted irrationally and unreasonably. That in the words of Lord Diplock, his Lordship in Council of Civil Service Unions and Others v. Minister for Civil Service, [1984] 3 All E.R. 935 expressed himself as follows: -“By "irrationality" I mean what can by now be succinctly referred to as "Wednesbury unreasonableness" (Associated Provincial Picture Houses Ltd, v. Wednesbury Corporation [1948] 1 K.B. 223). It applies to a decision which is so outrageous in its defiance of logic or of accepted moral standards that no sensible person who had applied his mind to the question to be decided could have arrived at it. Whether a decision falls within this category is a question that judges by their training and experience should be well equipped to answer, or else there would be something badly wrong with our judicial system.”

34. It was the Appellant’s submission that by issuing a decision 4 months from the date when the requested information was provided, and to allege that the information was not provided, that the Respondent's decision, with due respect, (quoting Lord Diplock) was: -“… so outrageous in its defiance of logic or of accepted moral standards that no sensible person who had applied his mind to the question to be decided could have arrived at it.”

35. That in the matter of Republic v Commissioner for Income Tax & another Ex-Parte Stockman Rozen (K) Limited (2015] eKLR, the court examined the matter of exercise of statutory powers and stated as follows: -“In tax matters just like in any case where statutory powers are being exercised or duties being performed, the same ought to be exercised or performed reasonably and fairly. Accordingly, the court is perfectly entitled to intervene where it is alleged that the discretion is not being exercised judicially, that is to say, rationally and fairly and not arbitrarily, whimsically, capriciously or in flagrant disregard of the rules of natural justice.”

36. The Appellant contended that based on the demonstrated unreasonableness on the part of the Respondent and the decisions subject herein having been predicated on erroneous fact that the information requested was not provided to the Respondent as at the date of the rejection orders dated 22nd August 2022 and 6th September 2022, that this Appeal ought to be allowed on this ground ipso facto.

b. On whether the Respondent breached the Appellant's legitimate expectation by reneging from its representation that it would consider the information furnished by the Appellant on 22nd April 2022 as part of its VAT refund audit 37. The Appellant submitted that in its email dated 18th March 2022, the Respondent had directed the Appellant to furnish it with the requested additional information no later than 14th April 2022. That this information was availed to the Respondent on 22nd April 2022.

38. That thereafter, the Appellant and the Respondent met on 20th June 2022 to discuss the progress of the refund claim audit exercise, wherein the Appellant requested the Respondent to conclude the audit exercise bearing into account the information that it supplied the Respondent on 22nd April 2022. That the Respondent undertook to consider the additional information furnished eight (8) days after the set deadline.

39. The Appellant submitted that in response to the Appellant's letter dated 27th July 2022, the Respondent, in an email of even date, assured the Appellant as follows: -“I acknowledge the receipt of your mail. We shall work on both claims as guided by your letter.”

40. It was the Appellant’s submission that the Respondent, having undertaken on 20th June 2022 to reopen the audit exercise, and further having reassured the Appellant in the Respondent's email of 27th July 2022 that the Respondent would consider the refund claims guided by the Appellant's letter dated 27th July 2022, the Respondent is estopped from reneging from this representation.

41. The Appellant relied on the observations of Nyamu, J (as he then was) in the case of Keroche Industries Limited vs. Kenya Revenue Authority & 5 Others Nairobi (2007) eKLR, wherein his Lordship held as follows: -“... legitimate expectation is based not only on ensuring that legitimate expectations by the parties are not thwarted but on a higher public interest beneficial to all including the respondents, which is, the value or the need of holding authorities to promises and practices they have made and acted on and by so doing upholding responsible public administration. This in turn enables people affected to plan their lives with a sense of certainty, trust, reasonableness and reasonable expectation. An abrupt change as was intended in this case. targeted at a particular company or industry is certainly an abuse of power. Stated simply legitimate expectation arises for example where a member of the public as a result of a promise or other conduct expects that he will be treated in one way and the public body wishes to treat him or her in a different way ... Public authorities must be held to their practices and promises by the courts and the only exception is where a public authority has a sufficient overriding interest to justify a departure from what has been previously promised.”

42. The Appellant further submitted that the Supreme Court in the case of Kenya Revenue Authority v Export Trading Company Limited (Petition 20 of 2020) (2022) KESC 31 (KLR) (Civ) (17 June 2022) (Judgement), observed that: -“We then went on to find the emerging principles on the legitimate expectation to be that:a.there must be an express, clear and unambiguous promise given by a public authority;b.the expectation itself must be reasonable;c.the representation must be one which it was competent and lawful for the decisionmaker to make; andd.there cannot be a legitimate expectation against clear provisions of the law or the Constitution.”

43. The Appellant submitted that, in applying the above principles to the facts herein: -a.That there was an express, clear and unambiguous promise by the Respondent that it would consider the additional information furnished on 22nd April 2022 in finalising its VAT refund audit;b.That this undertaking was reasonable given that the documents were furnished 8 days after the lapse of the set deadline of 14th April 2022;c.That this representation was made by the Respondent, who is the competent and lawful decision maker; andd.That this promise by the Respondent does not violate any statutory or constitutional provisions.

44. The Appellant submitted that the Respondent breached the Appellant's legitimate expectation by regening from its position that it would consider the information furnished on 22nd April 2022 as part of its audit and as a consequence thereof, directed the Respondent to review the availed information in this respect or in the alternative, review the information furnished on 22nd April 2022 and determine whether or not the refund claims are due and payable.

45. The Appellant averred that the Respondent having in its email of 27th July 2022, reassured the Appellant that it would consider the refund claims guided by the Appellant's letter dated 27th July 2022, that the Respondent in essence, gave the Appellant a legitimate expectation that the information furnished to it would be analysed fairly by the Revenue Authority in arriving at its decisions and is thus estopped from acting against its representation.

46. That the sudden arbitrary and unexpected about-turn made by the Respondent amounted to the thwarting of the Appellant's legitimate expectation that it would consider the documentations availed to it.

47. The Appellant relied on Council of Civil Services Unions versus Minister for the Civil Services [1985] AC 374 in which the court stated: -“A legitimate expectation may arise either from an express promise given by a public authority or from a regular practice which the claimant can reasonably expect to continue.”

48. The Appellant submitted that based on the above, the Respondent's rejection of the VAT refund application claims is erroneous and should be set aside in its entirety for breach of the Appellant's legitimate expectation.

c. On whether the Respondent erred in law and in fact in disallowing the VAT refund claims in the sum of Kshs. 2,739,378. 88 lodged under Section 31 of the VAT Act, 2013 49. The Appellant averred that it lodged refund claims pursuant to the provisions of Section 31 (1) of the VAT Act to recover taxes arising from the bad debt owed to it by Nakumatt. That Section 31 (1) of the VAT Act, provides that: -“Where a registered person has made a supply and has accounted for and paid tax on that supply but has not received any payment from the person liable to pay the tax, he may, after a period of three years from the date of that supply or where that person has become legally insolvent, apply to the Commissioner for a refund of the tax involved and subject to the regulations, the Commissioner may refund the tax: Provided that no application for a refund shall be made under this section after the expiry of five years from the date of the supply.”

50. The Appellant stated that having applied for a refund of the sum of Kshs. 7,459,663. 00, which according to the Appellant is the subject of the Appeal herein, the Appellant furnished the Respondent with all the requisite information on 7th January 2022 and 22nd April 2022, a demonstration that indeed the VAT arose out of bad debt.

51. The Appellant averred that it was apparent that the debt owed to the Appellant by Nakumatt was bad debt and that the Appellant, having supported this with requisite documentation, it was expected that the Respondent would process the refund claim.

52. The Appellant asked the Honourable Tribunal to set aside the Respondent's refund rejection decisions dated 22nd August 2022 and 6th September 2022 in the sum of Kshs. 2,739,378. 00.

d. On whether the Respondent erred in law by failing to consider the balance of the refund claims for the sum of Kshs. 4,720,285. 00, which in the event is deemed to have been allowed by operation of Section 47 (3) of the TPA. 53. The Appellant stated that it had applied for the refund of the sum of Kshs. 7,459,663. 00, which is the subject of this Appeal. That in its refund rejection decisions dated 22nd August 2022 and 6th September 2022, the Respondent only rejected the sum of Kshs. 2,739,378. 00.

54. That concerned as to the status of the sum of Kshs. 4,720,285. 00, the Appellant in an email dated 16th September 2022, sought clarification from the Respondent in this regard. That regrettably, this email has not elicited any response.

55. The Appellant cited Section 47(3) of the TPA which states as follows: -“Where the Commissioner fails to ascertain and determine an application under subsection (1) within ninety days, the same shall be deemed ascertained and approved.”

56. The Appellant submitted that in light of the provisions of Section 47 (3) of the TPA, that it is clear that the refund applications for the sum of Kshs. 4,720,285. 00 had exceeded the ninety-day timeline within which they ought to have been determined given that the last piece of information that was requested by the Respondent was submitted by the Appellant on 22nd April 2022.

57. That in the circumstances, the Appellant prayed that the Tribunal be pleased to find that the sum of Kshs. 4,720,285. 00, which was not determined by the Respondent as having been deemed to have been allowed by operation of the provisions of Section 47 (3) of the TPA.

Appellant’s prayers 58. The Appellant prayed that: -a.This Appeal is allowed.b.The Respondent’s decisions dated 22nd August 2022 and 6th September be set aside in their entirety.c.The costs of and incidental to this Appeal be awarded to the Appellant.d.Any other orders that the Tribunal may deem fit.

Respondent’s Case 59. The Respondent’s case is premised on the following documents:a.Its Statement of Facts dated and filed on 4th November 2022 and the documents attached thereto; andb.Its Written Submissions dated and filed on 6th November 2023.

60. The Respondent stated that the Appellant supplied goods and subsequently issued invoices to Nakumatt for the periods January 2017, March 2017, April 2017 and May 2017 which were partially paid.

61. That following the closure of Nakumatt stores, the Appellant lodged two VAT bad debts refund claims with the Respondent of Kshs. 2,718,754. 00 and Kshs. 4,740,909. 00.

62. The Respondent further stated that the claims were subjected to pre-audit on 17th March 2021 as required by the Respondent’s Refunds Procedure Manual, and were subsequently audited and forwarded for further processing on 28th July 2022 where the Appellant’s bad debt VAT refund claims were rejected on 22nd August 2022 and 6th September 2022.

63. That the Appellant, dissatisfied with the Respondent’s decision, lodged its appeal at the Tribunal.

64. The Respondent summarised the issues for the Tribunal to determine as follows:a.Whether the Appellant’s Appeal is proper before the Tribunal.b.Whether the Respondent erred in disallowing the Appellant’s claim for bad debts against supplies to Nakumatt Holdings Limited.c.Whether the Appellant discharged its burden as required under the law.d.Whether the Respondent erred in law by failing to consider the balance of refund claims for the sum of Kshs. 4,720,285. 00 which in the event is deemed to be allowed by operation of Section 47 (3) of the Tax Procedures Act, 2015.

a. On whether the Appellant’s Appeal is proper before the Tribunal 65. In reply to the Appellant’s Appeal, the Respondent averred that the Appeal is prematurely before the Tribunal on account that it is not an appealable decision envisaged under Section 3 of the Tax Procedures Act (TPA).

66. The Respondent cited Section 3 of the TPA which provides in the definition of ‘tax decision’ under item (e) that tax decision means a refund decision.

67. The Respondent averred that a tax decision is not an appealable decision and that the Appellant ought to have lodged an objection before proceeding to the Tribunal.

68. That Section 3 of the TPA defines an appealable decision and specifically excludes a ‘tax decision’ from the definition of an appealable decision as follows: -“appealable decision means an objection decision and any other decision made under a tax law other than:(a)a tax decision; or(b)a decision made in the course of making a tax decision”

69. The Respondent averred and maintained that the Appellant has not exhausted all the available mechanisms under the law to resolve the dispute before approaching the Tribunal.

70. The Respondent submitted that where there is a laid down procedure as well as set timelines for performing an action under legislation, those affected by the respective legislation have to adhere to the same at all times without default, failure to which the law will not come to their rescue.

71. That in so submitting, the Respondent referred to the case of Speaker of the National Assembly vs James Njenga Karume [1992] eKLR where Kwach, Cockar & Muli JJ A stated 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.”

72. The Respondent further submitted that there is no proper Appeal before this Tribunal for determination as the Appellant is in breach of the mandatory provisions of Section 3 of the TPA and by failing to adhere to the laid down procedures without giving any valid reasons. The Respondent prayed that the Appeal herein be dismissed with costs to the Respondent.

b. On whether the Respondent erred in disallowing the Appellant’s claim for bad debts against supplies to Nakumatt Holdings Limited. 73. The Respondent stated that contrary to the Appellant’s allegations that the Respondent did not review the documents it provided, that the Respondent had requested the Appellant to provide documents in support of its claim for refund, and that the Appellant provided the administrator’s statement proposals to creditors of Nakumatt Holding, sales invoices, sales ledgers and bank statements.

74. The Respondent averred that the Appellant did not provide any document to demonstrate the attempts made towards recovering the debt from Nakumatt Holding.

75. The Respondent further averred that from the information the Appellant provided, that the Appellant did not attend creditors meetings and only provided a public notice issued to creditors to show its efforts to recover debt.

76. The Respondent stated that Appellant provided an administrator’s letter dated 2018 showing that it was owed Kshs. 55,993,026. 00 by Nakumatt Holdings and that despite having requested the Appellant to avail an itemised breakdown of the outstanding amounts and how much it had been paid and numerous follow up on the request, that the Appellant never provided the information.

77. The Respondent argued that for a claim of refunds on account of bad debt to be allowed, the Appellant is required to demonstrate efforts undertaken to recover the alleged bad debts. That in the Appeal before this Tribunal, the Appellant neither produced a single demand letter to Nakumatt Holdings nor evidence that it participated in any of the creditors’ meetings to secure its right among other creditors.

78. The Respondent submitted that the Appellant did not demonstrate that the debts had become uncollectable and relied on the case of Republic vs. The Registrar of Trademarks ex parte Sony Holdings Limited and Another Misc. Appl. No. 165 of 2012 where the Court while citing Black's Law Dictionary 8th Ed. P 432, submitted that: -“For a debt to be considered bad, it must be uncollectable and hence a doubtful debt not proven to be uncollectible is not a bad debt.”

79. The Respondent cited Legal Notice No. 37 which the Tribunal cited in TAT Number 329 of 2018: Distinct Concept Enterprises Limited vs Commissioner of Domestic Taxes and submitted that Legal Notice No. 37 provides the guidelines for allowability of a bad debt by the Respondent.

80. The Respondent submitted that a debt shall be considered to have become bad if it is proved to the satisfaction of the Commissioner to have become uncollectable after all reasonable steps have been taken to collect it.

81. It was the Respondent's case that it rejected the Appellant's refund claim in totality since the Appellant's application did not meet the threshold for expensing bad debts housed under Section 31 of the VAT Act which provides that: -“Where a registered person has made a supply and has accounted for and paid tax on that supply but has not received any payment from the person liable to pay the tax, he may, after a period of three years from the date of that supply or where that person has become legally insolvent, apply to the Commissioner for a refund of the tax involved and subject to the regulations, the Commissioner may refund the tax:Provided that no application for a refund shall be made under this section after the expiry of four years from the date of the supply.”

82. The Respondent reiterated that the Appellant blatantly disregarded its right to collect its debt at the opportune time and should not be allowed to expense the same as bad debts as it acted contrary to the provisions of the law.

83. The Respondent submitted that from the information provided, the Appellant did not attend creditors’ meetings and only provided a public notice issued to creditors to show its efforts to recover debt.

84. The Respondent referred to the decision in Civil Appeal No 11 of 2018 Pevans East Africa Limited & another vs Chairman Betting Control and Licensing Board & 7 others [2017] eKLR, where it was held that: -“A legitimate expectation cannot be an expectation against the clear provisions of a statute, A decision maker cannot be expected to act against the clear provisions of a statute as that would be illegal and a violation of the principle of the rule of law. As legislation that was lawfully enacted, the impugned legislation would override any expectation”

85. The Respondent submitted that the Appellant did not prove to the satisfaction of the Respondent that the debts had become uncollectable after all reasonable steps have been taken and could therefore not be allowed.

86. The Respondent stated that due to the failure by the Appellant to avail the relevant documents, the Respondent was unable to establish the correct outstanding amounts owed to the Appellant, and that the few documents which the Appellant provided did not justify the refund claimed.

87. That from the foregoing, the Respondent prayed that this ground be disallowed as the Appellant has not demonstrated any effort to try and recover the outstanding debt from Nakumatt Holdings before writing off.

c. On whether the Appellant discharged its burden as required under the law 88. The Respondent submitted that the documentation provided by the Appellant did not show any attempt by the Appellant to recover the debt from Nakumatt Holdings and invitation to attend creditors’ meetings.

89. That on request of further documentation from the Appellant to show the payments made so far by the administrator of Nakumatt Holding, the Appellant failed to avail the required information after several correspondences.

90. The Respondent contended that having issued its decision, it was upon the Appellant to provide evidence that demonstrated that the assessment was excessive, erroneous or unlawful as provided for in Section 30 of the Tax Appeals Tribunal Act and Section 56 of the Tax Procedures Act. That, however, the Appellant failed to do so.

91. The Respondent placed reliance on the decision of the Tribunal in TAT No. 70 of 2017: Afya X-Ray Centre vs Commissioner of Domestic Taxes wherein the Tribunal provided that: -“From the foregoing chain of events, it is our understanding that the Appellant failed in its duty in providing documents in order that a comprehensive analysis of its affairs is done. Accordingly, the Respondent can hardly be faulted for raising the assessment in accordance with the availed documents...”

92. The Respondent asserted that it is the duty and responsibility of the Appellant to keep documents and to provide the same upon request for verification by the Respondent as provided for in Section 59 (1) of the TPA which provides that: -“For the purposes of obtaining full information in respect of the tax liability of any person or class of persons, or for any other purposes relating to a tax law, the Commissioner or an authorised officer may require any person, by notice in writing, to—(a)produce for examination, at such time and place as may be specified in the notice, any documents (including in electronic format) that are in the person's custody or under the person's control relating to the tax liability of any person;(b)furnish information relating to the tax liability of any person in the manner and by the time as specified in the notice; or(c)attend, at the time and place specified in the notice, for the purpose of giving evidence in respect of any matter or transaction appearing to be relevant to the tax liability of any person.”

93. The Respondent further submitted that the Appellant also having failed to provide documents that the debts had become uncollectable after all reasonable steps have been taken, and in the absence of any evidence provided by the Appellant to support the Appellant's position, that the Respondent was proper in exercising its best judgement and rejecting the refund claim.

94. The Respondent finally submitted that the Appellant's Appeal herein lacks merit and prayed that the same be dismissed with costs.

d. On whether the Respondent erred in law by failing to consider the balance of refund claims for the sum of Kshs. 4,720,285. 00 which in the event is deemed to have been allowed by operation of Section 47 (3) of the Tax Procedures Act, 2015 95. The Respondent stated that contrary to the Appellant’s allegations that the Respondent partially rejected the claim for refund, that it rejected the entire claim due to failure by the Appellant to provide relevant documents in support of the claim for a refund.

96. The Respondent averred that it rejected the first two on 22nd August 2022 and 6th September 2022 via iTax, and that the balance of Kshs. 4,720,285. 00 had also been rejected and communication sent to the Appellant.

97. The Respondent further averred that the Appellant rushed to the Tribunal before conclusion of the review process on the false belief that the Respondent ought to have issued a decision within 90 days, without appreciating that claims for bad debt refunds do not fall under Section 47 of the TPA.

98. The Respondent averred that Section 31 of the VAT Act is the provision that applies in respect of bad debt and that it has clearly stated the procedure and threshold required for a claim of refund on account of bad debts.

99. The Respondent submitted that the Appellant’s perception that its claim for refund on bad debt falls under Section 47 of the TPA is not only misleading but a complete misconception of the law and the provisions on overpaid taxes.

100. The Respondent averred that the Appellant’s case was not an overpayment since there was anticipation that Nakumatt Holdings would pay and that the same would net off in the VAT input output system. That, however, the same did not take place prompting the claim for refund of taxes which were paid by the Appellant but ought to have been borne by the final consumer.

101. The Respondent submitted that Section 31 of the VAT Act does not have limitation of time similar to Section 47 (3) of the TPA and therefore the Appellant cannot purport that the claim was deemed to be allowed.

Respondent’s prayers 102. The Respondent prayed that:a.The Appellant’s Appeal be dismissed with costs.b.The Respondent’s tax decision be confirmed and the principal taxes, interest and penalties be found due and payable.

Issues For Determination 103. The Tribunal has considered the facts of the matter, the evidence adduced before it and the submissions made by the parties, and considers the issues for determination as follows:a.Whether the Respondent’s rejection decisions dated 22nd August 2022 and 6th September 2022 are appealable decisions.b.Whether the Appellant’s refund claims of Kshs. 4,720,285. 00 are allowed by operation of the law.c.Whether the Respondent’s refund rejection decisions dated 22nd August 2022 and 6th September 2022 are proper in law.

Analysis And Findings 104. Having identified the issues that call for its determination, the Tribunal proceeds to analyse them as hereunder.

a. Whether the Respondent’s rejection decisions dated 22nd August 2022 and 6th September 2022 are appealable decisions. 105. The Appellant lodged VAT refund claims for the periods of March 2017 and April 2017 in accordance with Section 31 of the VAT Act 2013, and the Respondent rejected the refund claims on 22nd August 2022 and 6th September 2022. The Appellant filed its Appeal against the Respondent’s decisions on 21st September 2022.

106. In reply to the Appellant’s Appeal, the Respondent averred that this Appeal is prematurely before the Tribunal on account that it is not an appealable decision envisaged under Section 3 of the Tax Procedures Act (TPA) which provides in the definition of ‘tax decision’ under item (e) that tax decision means a refund decision.

107. The Respondent averred that a tax decision is not an appealable decision and that the Appellant ought to have lodged an objection before proceeding to the Tribunal, and that Section 3 of the TPA defines an appealable decision and specifically excludes a ‘tax decision’ from the definition of an appealable decision

108. The Respondent submitted that the Appellant has not exhausted all the available mechanisms under the law to resolve the dispute before approaching the Tribunal, and further submitted that there is no proper Appeal before this Tribunal for determination as the Appellant is in breach of the mandatory provisions of Section 3 of the TPA and by failing to adhere to the laid down procedures without giving any valid reasons.

109. The Tribunal, therefore, seeks to determine whether the Appeal is based on an appealable decision, which would confirm whether the Tribunal has jurisdiction to hear and determine the Appeal.

110. The Tribunal observes that its jurisdiction is provided in Section 3 of the Tax Appeals Tribunal Act (TAT Act) which states as thus:-“There is established a Tribunal to be known as the Tax Appeals Tribunal to hear appeals filed against any tax decision made by the Commissioner.”

111. The TAT Act does not define the term tax decision. However, the term is defined in the TPA, under Section 3 as follows: -““tax decision” means—(a)an assessment;(b)a determination under section 17(2) of the amount of tax payable or that will become payable by a taxpayer;(c)a determination of the amount that a tax representative, appointed person, director or controlling member is liable for under sections 15, 17, and 18;(d)a decision on an application by a self-assessment taxpayer under section 31(2);(e)a refund decision;(f)a decision under section 48 requiring repayment of a refund; or(g)a demand for a penalty.

112. Section 3 of the TPA defines an appealable decision as follows: -““appealable decision” means an objection decision and any other decision made under a tax law other than—(a)a tax decision; or(b)a decision made in the course of making a tax decision;”

113. Further, Section 3 of the TPA defines refund decision as follows: -“refund decision” means a decision referred to in section 47(3)”

114. The Tribunal recognises that a taxpayer who wishes to dispute a decision by the Commissioner must first exhaust remedies available under a tax law before seeking remedies under another law. Section 51 (1) of the TPA provides that: -“A taxpayer who wishes to dispute a tax decision shall first lodge an objection against that tax decision under this section before proceeding under any other written law.”

115. Section 51 (1) of the TPA limits the type of decisions whose remedies can be sought by way of objection; these are, tax decisions, as listed above. Should the Commissioner partially or wholly reject the objection, the taxpayer can appeal the objection decision to the Tribunal. These dispute resolution steps embody the doctrine of exhaustion with regard to tax decisions.

116. In addition, a decision made in the course of making a tax decision means a decision which the Commissioner makes during the making of a tax decision. These types of decisions are in the purview of the tax administration role of the Commissioner. Section 3 of the TPA expressly excludes decisions made during the making of a tax decision from the meaning of appealable decisions.

117. The Tribunal notes that Section 51 (1) of the TPA, Section 52 (1) of the TPA and Section 12 of the TAT Act as read together with the meaning of appealable decision under Section 3 of the TPA elaborate the jurisdiction of the Tribunal. These provisions uphold the doctrine of exhaustion and demonstrate that all other decisions of the Commissioner, that are not tax decisions or decisions made in the course of making a tax decision, are appealable decisions.

118. The Respondent classified the VAT refund rejection decisions it made on 22nd August 2022 and 6th September 2022 as refund decisions made under Section 47 of the TPA, and on this basis, concluded that these refund rejection decisions in relation to the VAT refund claim on bad debts were tax decisions, and thus not appealable to the Tribunal.

119. The Tribunal analysed Section 47 of the TPA and found that the transactions referred therein are described in Section 47 (1) of the TPA which reads as follows: -“(1)Where a taxpayer has overpaid a tax under any tax law, the taxpayer may apply to the Commissioner, in the prescribed form—(a)to offset the overpaid tax against the taxpayer's future tax liabilities; or(b)for a refund of the overpaid tax within five years, or six months in the case of value added tax, after the date on which the tax was overpaid.”

120. The Respondent’s refund rejection decisions related to the Appellant’s application for refund of VAT made under Section 31 (1) of the VAT Act 2013 which provides that: -“Where a registered person has made a supply and has accounted for and paid tax on that supply but has not received any payment from the person liable to pay the tax, he may, after a period of three years from the date of that supply or where that person has become legally insolvent, apply to the Commissioner for a refund of the tax involved and subject to the regulations, the Commissioner may refund the tax:Provided that no application for a refund shall be made under this section after the expiry of four years from the date of the supply.”

121. The questions that the Tribunal poses to itself are: whether a claim of refund of tax under Section 31 of the VAT Act 2013 is a claim of refund of overpaid tax as envisioned under Section 47 of the TPA, and whether the Respondent’s decisions on the refund claim applications made under Section 31 of the VAT Act 2013 are decisions made under Section 47 of the TPA.

122. The Tribunal notes that refund claims made under Section 31 of the VAT Act 2013 relate to supplies made by a registered person on which the person has accounted for and paid tax but has not received any payment from the person liable to pay the tax. The Tribunal observes that the tax so paid by the registered person but not recovered from its customer, being the recipient of the supply, is indeed not excess tax over and above tax that is payable by a registered person. This observation holds, especially because Section 31 (2) of the VAT Act 2013, cited below, envisions that the tax can subsequently be recovered from the customer.“Where the tax refunded under subsection (1) is subsequently recovered from the recipient of the supply, the registered person shall refund the tax to the Commissioner within thirty days of the date of the recovery.”

123. The Tribunal further observes that the VAT Act 2013 and the Tax Procedures Act both do not expressly provide that all the provisions of Section 47 of the TPA apply to the processing a refund claim made under Section 31 of the VAT Act 2013.

124. Various courts have held that tax laws must be strictly interpreted. The Tribunal relies on the case of Stanbic Bank Kenya Limited v Kenya Revenue Authority [2009] eKLR where the Court of Appeal held that: -“I would wish to repeat… what I said in the case of Commissioner of Income Tax vs Westmont Power (K) Ltd (2006) I EA 54 that taxation laws that have the effect of depriving citizens of their property by imposing pecuniary burdens resulting also in penal consequences must be interpreted with great caution. It is paramount that their provisions must be express and clear so as to leave no room for ambiguity. Any ambiguity in such a law must be resolved in favour of the tax payer and not the public revenue authorities which are responsible for their implementation.”

125. In view of the foregoing, the Tribunal finds that a rejection of a VAT refund claim made under Section 31 of the VAT Act 2013 is not a tax decision by the meaning provided in the TPA. In the same breath, a rejection of a refund made under Section 31 of the VAT Act 2013 is also not a decision made in the course of making a tax decision.

126. Taking the above into account, the Tribunal finds that a rejection of a VAT refund claim made under Section 31 of the VAT Act 2013 is an appealable decision. Therefore, the Appellant was justified in appealing the decision under Section 52 of the TPA and in accordance with the TAT Act.

127. Being that the decisions appealed by the Appellant are appealable decisions, the Tribunal finds that it has the jurisdiction to hear and determine the Appeal.

b. Whether the Appellant’s refund claims of Kshs. 4,720,285. 00 are allowed by operation of the law. 128. The Appellant lodged VAT refund claims totalling Kshs. 7,459,663. 00 for the periods of January 2017 and March 2017 claiming VAT of Kshs. 4,740,909. 00, and for the periods April 2017 and May 2017 of Kshs. 2,718,754. 00.

129. The Respondent rejected in full the VAT refund claims of Kshs. 1,363,856. 88 for March 2017 and Kshs. 1,375,522. 00 for April 2017 vide VAT refund claim rejection orders dated 6th September 2022 and 22nd August 2022, respectively.

130. Vide a Notice of Appeal filed on 21st September 2022, the Appellant appealed against the Respondent’s decision dated 22nd August 2022 rejecting the VAT refund claim for April 2017 and the Respondent’s decision dated 6th September 2022 rejecting the VAT refund claim for March 2017.

131. The Appellant stated that it had applied for the refund of the sum of Kshs. 7,459,663. 00, which is the subject of this Appeal. That in its refund rejection decisions dated 22nd August 2022 and 6th September 2022, the Respondent only rejected the sum of Kshs. 2,739,378. 00.

132. The Appellant averred that of the Kshs. 7,459,663. 00 VAT refund claimed for the periods of January 2017, March 2017, April 2017 and May 2017, the sum of Kshs. 4,720,285. 00 was not determined by the Respondent. The Appellant prayed that the Tribunal finds the Kshs. 4,720,285. 00 as having been deemed to have been allowed by operation of the provisions of Section 47 (3) of the TPA and further prayed that the Tribunal orders the payment of the said refundable taxes.

133. The Respondent, on the other hand, submitted that Section 31 of the VAT Act does not have limitation of time similar to Section 47 (3) of the TPA, and therefore the Appellant cannot purport that the claim was deemed to be allowed.

134. The Tribunal notes that the Notice of Appeal filed by the Appellant on 21st September 2022 stated that the Appellant appealed only against the Respondent’s decision dated 22nd August 2022 rejecting the VAT refund claim of Kshs. 1,375,522. 00 for April 2017 and the Respondent’s decision dated 6th September 2022 rejecting the VAT refund claim of Kshs. 1,363,856. 88 for March 2017. The Appellant, however, in its Memorandum of Appeal, Statement of Facts, Witness Statement and Written Submissions addressed VAT refunds relating to VAT periods other than March 2017 and April 2017.

135. Both the Appellant and the Respondent made pleadings about the VAT refund claims of Kshs. 4,720,285. 00 relating to January 2017 and May 2017, despite the Appellant in this Appeal not having appealed against the Respondent’s determination or lack thereof of the refund claims of Kshs. 4,720,285. 00 for January 2017 and May 2017.

136. The Tribunal notes that its jurisdiction is invoked by Section 12 of the TAT Act which provides: -“A person who disputes the decision of the Commissioner on any matter arising under the provisions of any tax law may, subject to the provisions of the relevant tax law, upon giving notice in writing to the Commissioner, appeal to the Tribunal…”

137. The Tribunal, therefore, finds that it cannot determine a matter that is not included in the Appellant’s Notice of Appeal dated 21st September 2022, because in delving into the issues outside that Notice of Appeal, the Tribunal would be acting ultra vires.

138. Based on the foregoing, the Tribunal confined itself to issues relating to the decisions dated 22nd August 2022 and 6th September 2022.

c. Whether the Respondent’s refund rejection decisions dated 22nd August 2022 and 6th September 2022 are proper in law. 139. The Appellant supplied goods to Nakumatt Holdings Limited (Nakumatt) during the period between 2016 and 2017, and after determining that the likelihood of recovering the debt from Nakumatt was remote, the Appellant lodged with the Respondent Value Added Tax (VAT) refund claims on these supplies under Section 31 of the VAT Act 2013 on 24th April 2020 and 11th September 2020 amounting to Kshs. 1,363,856. 88 for the period of March 2017 and Kshs. 1,375,522. 00 for the period of April 2017.

140. The Respondent stated that the claims were subjected to pre-audit on 17th March 2021 as required by the Respondent’s Refunds Procedure Manual, and were subsequently audited and forwarded for further processing on 28th July 2022.

141. The Respondent rejected in full the VAT refund claims of Kshs. 1,363,856. 88 for March 2017 and Kshs. 1,375,522. 00 for April 2017 vide VAT refund claim rejection orders dated 6th September 2022 and 22nd August 2022 respectively.

142. Vide a Notice of Appeal filed on 21st September 2022, the Appellant appealed against the Respondent’s decision dated 22nd August 2022 rejecting the VAT refund claim for April 2017 and the Respondent’s decision dated 6th September 2022 rejecting the VAT refund claim for March 2017.

143. The Respondent stated that contrary to the Appellant’s allegations that the Respondent did not review the documents it provided, that the Respondent had requested the Appellant to provide documents in support of its claim for refund, and that the Appellant provided the administrator’s statement proposals to creditors of Nakumatt, sales invoices, sales ledgers and bank statements.

144. The Respondent argued that for a claim of refunds on account of bad debt to be allowed, the Appellant is required to demonstrate efforts undertaken to recover the alleged bad debts. That in the Appeal before this Tribunal, the Appellant neither produced a single demand letter to Nakumatt nor evidence that it participated in any of the creditors meetings to secure its right among other creditors.

145. The Appellant submitted that it was not true that the Respondent was not provided with the information that it had requested. That vide an email dated 18th March 2022, the Respondent requested for letters from the Nakumatt Administrator confirming the sum of the current bad debts, and that on 22nd April 2022, the Appellant through an email attached at page 2994 of the Appellant's SOF, furnished the Respondent with the information requested in the email of 18th March 2022 being:a.The letter dated 6th April 2022 from Nakumatt's Administrator confirming that Nakumatt was insolvent and that the sum of Kshs. 114,388,615. 00 under Appendix 7. b.The Appellant's Nakumatt's statement of accounts under Appendix 7.

146. The Tribunal refers to the VAT Act 2013, the tax law under which the Appellant claimed refund of tax under its Section 31 which provides as follows: -“Where a registered person has made a supply and has accounted for and paid tax on that supply but has not received any payment from the person liable to pay the tax, he may, after a period of three years from the date of that supply or where that person has become legally insolvent, apply to the Commissioner for a refund of the tax involved and subject to the regulations, the Commissioner may refund the tax:Provided that no application for a refund shall be made under this section after the expiry of four years from the date of the supply.”

147. The Tribunal further refers to Paragraphs (3) to (7) of Regulation 8 of the Value Added Tax Regulations, 2017 which specifically prescribe measures for the better carrying out of the provisions of the VAT Act 2013. Regulation 8 of the VAT Regulations 2017 provides that: -“(3)A refund payable under section 30 or 3l of the Act shall be applied in accordance with section 47(4) of the Tax procedures Act, 2015. (4)When the recipient of a taxable supply to which section 3l(l) of the Act applies is a registered person that is still in existence at the time the supplier applies for a refund under section 3l(l), the refund shall be allowed unless the supplier had issued a credit note to the recipient of the supply specifying the amount of the unpaid tax claimed computed in accordance with section 3l(l).(5)The recipient of a taxable supply issued with a credit note under paragraph (4) shall reduce the amount of their deductible input tax in the tax period in which the credit note was received by the amount of tax specified in the note.(6)When section 3l (3) applies and the recipient of the taxable supply is a registered person who has previously been issued with a credit note in relation to the supply, the registered person refunding the tax to the Commissioner shall issue the recipient of the taxable supply with a debit note specifying the amount of tax refunded to the Commissioner.(7)The recipient of a taxable supply issued with a debit note under paragraph (6) shall be allowed to reduce the amount of their deductible input tax in the tax period in which the debit note is received by the amount of tax specified in the note.”

148. On the plain reading of the above provision of the VAT Act 2013 and the Regulations on Section 31 of the VAT Act 2013, the Tribunal notes that it is clear that a taxpayer who makes an application for refund of tax under Section 31 of the VAT Act 2013 is duly guided under the tax law on the following aspects of that type of refund application:i.The eligibility threshold for applying for a refund of taxii.The timeline within which an eligible person should apply for the refundiii.The applicable law

i. On the eligibility threshold for applying for a refund of tax under Section 31 of the VAT Act 2013 149. It follows from Section 31 of the VAT Act 2013 and the Regulations, that for the Respondent to allow the refund of VAT claimed by the Appellant, the Appellant ought to have demonstrated to the Respondent the following:a.That the Appellant had made supplies to Nakumatt.b.That the Appellant had accounted for and paid VAT on those supplies.c.That the Appellant had not received any payment from Nakumatt.

150. The Tribunal notes that it is not disputed by the Appellant and the Respondent that the Appellant supplied goods to Nakumatt in the periods of 2016 and 2017. It is also not disputed by the Appellant and the Respondent that the Appellant accounted for and paid VAT on these supplies. In addition, it is not in dispute by the Appellant and the Respondent that Nakumatt partially paid for these supplies.

151. The Tribunal observes that the Respondent stated in its SOF that the Appellant provided the administrator’s statement proposals to creditors of Nakumatt, sales invoices, sales ledgers and bank statements. The Respondent further stated that Appellant provided the administrator’s letter dated 11th July 2018 showing that it was owed Kshs. 55,993,026. 00 by Nakumatt and that despite having requested the Appellant to avail an itemised breakdown of the outstanding amounts and how much it had been paid and numerous follow up on the request, that the Appellant never provided the information.

152. The Tribunal notes that in support of its arguments to the effect that the debts owed to it by Nakumatt were bad, and contrary to the Respondent’s allegation, the Appellant had emailed the Respondent on 22nd April 2022 communications from Nakumatt’s Administrator in a letter dated 6th April 2022 confirming that Nakumatt was insolvent and that it owed the Appellant a sum of Kshs. 114,388,615. 00 and additionally in that email to the Respondent, emailed Nakumatt's statement of accounts confirming the amounts it owed to the Appellant.

153. The Tribunal observes that in the statement of account from Nakumatt’s Administrator which the Appellant provided the Respondent in the email of 22nd April 2022, that the supplies made to Nakumatt in March 2017 and April 2017 had not been paid for by Nakumatt.

154. The Tribunal further notes that the Appellant had also furnished the Respondent with bank statements and the invoices for the supplies that it made to Nakumatt in March 2017 and April 2017, which corresponded with the VAT refund claim it made in respect of the VAT on these supplies.

155. Further, the Tribunal took note of the High Court Ruling in Insolvency Cause No. 10 of 2017 dated 11th March 2021 which the Appellant attached in its bundle of documents, where the Court while adopting the Nakumatt Administrator’s report ruled as follows: -“In this regard, I am satisfied that this is a fit case to disapply sub-section 1 of section 600 of the Act. Further, I disapply section 600(6) of the Act. The Administration Order is hereby extended to enable the Administrator to carry out the matters set out in his Report. The Court therefore adopts the Report of the Administrator.”

156. Section 600 of the Insolvency Act provides as follows as regards cases where a company under a Court Administrator has no property to meet its obligation to creditors: -“(1)On forming the belief that a company that is under administration has no property that might allow a distribution to its creditors, the administrator shall lodge with the Registrar a notice to that effect.(2)On the application of the administrator of a company, the Court may disapply subsection (1) in respect of the company.”

157. In light of the foregoing, it was not in dispute that the Appellant was an unsecured creditor to Nakumatt. In consideration of the above Ruling of the Court, the Tribunal was persuaded that the securities or collateral of Nakumatt were realized but the proceeds fail to cover the debt it owed to the Appellant.

158. Given the above-mentioned evidence adduced by the Appellant, the Tribunal finds that in accordance with Section 56 (1) of the TPA and Section 30 of the TAT Act, the Appellant sufficiently discharged its burden to prove that it had met the threshold to make an application for refund of VAT under Section 31 of the VAT Act 2013.

ii. On the timeline within which an eligible person should apply for the refund 159. The Appellant supplied goods to Nakumatt during the period between 2016 and 2017, and upon determining that the likelihood of recovering the debt from Nakumatt was remote, the Appellant lodged with the Respondent VAT refund claims on these supplies under Section 31 of the VAT Act 2013 on 24th April 2020 and 11th September 2020 amounting to Kshs. 1,363,856. 88 for the period of March 2017 and Kshs. 1,375,522. 00 for the period of April 2017.

160. Section 31 of the VAT Act 2013 provides, with regard to the timeline of applying for a VAT refund under the provision, until 24th April 2020 to be:a.after three years from the date of supply; orb.where its customer has become legally insolvent,Provided the application is made within five years from the date of supply.

161. Section 31 of the VAT Act 2013 provides, with regard to the timeline of applying for a VAT refund under the provision, from 25th April 2020 to be:a.after three years from the date of supply; orb.where its customer has become legally insolvent,Provided the application is made within four years from the date of supply.

162. The Appellant applied for VAT refund for the period of March 2017 on 24th April 2020 and for the period of April 2017 on 11th September 2020. For this reason, the Tribunal finds that the Appellant made these refund applications after three years from the date of supply which is within the timeline for making a refund application under Section 31 of the VAT Act 2013.

iii. On the applicable law 163. Having determined that the Appellant applied for a refund under Section 31 of the VAT Act 2013 after three years of the date of supply, the Tribunal sought to determine if the Appellant was required to prove that Nakumatt was legally insolvent.

164. The Respondent stated that it rejected the refund application because the Appellant did not provide adequate documentation to the audit team to demonstrate this was a refund due to bad debts. That a debt shall be considered to have become bad if it is proved to the satisfaction of the Commissioner to have become uncollectable after all reasonable steps have been taken to collect it.

165. The Respondent argued that for a claim of refunds on account of bad debt to be allowed, the Appellant is required to demonstrate efforts undertaken to recover the alleged bad debts. That the Appellant neither produced a single demand letter to Nakumatt nor evidence that it participated in any of the creditors meetings to secure its right among other creditors.

166. The Respondent referred to Legal Notice No. 37 which the Tribunal cited in TAT Number 329 of 2018: Distinct Concept Enterprises Limited vs Commissioner of Domestic Taxes and submitted that Legal Notice No. 37 provides the guidelines for allowability of a bad debt by the Respondent.

167. The Respondent further submitted that from the information provided, the Appellant did not attend creditors’ meetings and only provided a public notice issued to creditors to show its efforts to recover debt.

168. The Appellant averred that it was apparent that the debt owed to the Appellant by Nakumatt was bad debt and that the Appellant, having supported this with requisite documentation, it was expected that the Respondent would process the refund claim.

169. The Tribunal notes that the Respondent required the Appellant to demonstrate that it had made attempts to collect its debts from Nakumatt, and further that the Respondent commuted Legal Notice No. 37 of 2011 which contains Guidelines on Allowability of Bad Debts issued by the Commissioner pursuant to Section 15 (2) (a) of the Income Tax Act, and applied these guidelines in auditing the Appellant’s VAT refund claim made under Section 31 of the VAT Act 2013.

170. The Tribunal analysed the timelines of applying for a VAT refund under Section 31 of the VAT Act 2013 and asserts that the provision contains two alternative timelines for making a refund application cited below: -“Where a registered person has made a supply and has accounted for and paid tax on that supply but has not received any payment from the person liable to pay the tax, he may,after a period of three years from the date of that supply or where that person has become legally insolvent, apply to the Commissioner for a refund of the tax involved and subject to the regulations, the Commissioner may refund the tax:Provided that no application for a refund shall be made under this section after the expiry of four years from the date of the supply.” (Emphasis added)

171. The Tribunal buttresses its assertion in reference to the court’s holding in the case of Commissioner of Domestic Taxes v Bank of Africa Limited (Civil Appeal E127 of 2020) [2023] KEHC 1036 (KLR) (Commercial and Tax) (17 February 2023) (Judgment) where the court explained in paragraph 38 how to interpret the word “or” when used in a provision. The court held that: -“It is of significance to note the law exempts the “issue, transfer, receipt” “or” “any other dealing with money” and then uses the word “including”. Paragraph 1(b) has two parts because of the use of the word “or” which means the paragraph should be read disjunctively…”

172. Similarly, Justice Majanja in his judgement in Republic v Commissioner of Domestic Taxes Large Tax Payer's Office Ex-Parte Barclays Bank of Kenya Ltd [2012] eKLR stated as follows on the guiding principles of interpreting tax legislation: -“The approach to this case is that stated in the oft cited case of Cape Brandy Syndicate v Inland Revenue Commissioners [1920] 1 KB 64 as applied in T.M. Bell v Commissioner of Income Tax [1960] EALR 224 where Roland J. stated, "... in a taxing Act, one has to look at what is clearly said. There is no room for intendment as to a tax. Nothing is to be read in, nothing it 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 to 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."”

173. The Tribunal is further guided by the holding in the Privy Council’s decision in Mangin v Inland Revenue Commissioner [1971] AC 739 where the court held that: -“…the words are to be given their ordinary meaning, looking only at what is clearly said. There is no room for any intendment. There is no presumption as to tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used…”

174. The Tribunal in its interpretation of Section 31 of the VAT Act 2013 further finds that an eligible registered person who makes a refund application after three years of the date of supply is not required to prove that its customer is legally insolvent.

175. It is from the reading of Section 31 of the VAT Act 2013, the VAT Regulations 2017 and the cited case law that the Tribunal finds that the Appellant, having met the threshold for eligibility to apply for a VAT refund under Section 31 of the VAT Act 2013, having made the application for refund within the stipulated timeline and having applied the clearly stated law on refunds under the VAT Act 2013 and subsidiary legislation made under the VAT Act 2013, that the Tribunal finds that the Respondent was unreasonable and acted ultra vires in expecting the Appellant to comply with a law that is not applicable under the tax law which it applied for a refund of tax.

176. Accordingly, the Tribunal finds that the Appellant sufficiently discharged its burden of proof to demonstrate that the Respondent’s refund rejection decision on the VAT refund claims for the periods of March 2017 and April 2017 were incorrect, as required under Section 56 (1) of the Tax Procedures Act, 2015, and also failed to prove that the tax decision should not have been made or should have been made differently, as required under Section 30 (b) of the Tax Appeals Tribunal Act.

177. Consequently, the Tribunal finds that the Respondent was not justified in its decision to disallow the Appellant’s refund claims on bad debts on its supplies to Nakumatt.

Final Decision 178. Based on the foregoing analysis, the Tribunal finds that the Appeal succeeds, and the Tribunal accordingly proceeds to make the following orders:a.The Appeal be and is hereby allowed.b.The Respondent’s decisions dated 22nd August 2022 and 6th September 2022 be and are hereby set aside.c.The Respondent to process the Appellant’s refund claims for VAT within Ninety (90) days of the date of delivery of this Judgment.d.Each party to bear its costs.

179. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 23RD DAY OF FEBRUARY, 2024. GRACE MUKUHA - CHAIRPERSONDR ERICK KOMOLO - MEMBERJEPHTHAH NJAGI - MEMBER MEMBERTIMOTHY B. VIKIRU - MEMBERGLORIA A. OGAGA - MEMBER