[2024] KETAT 150 (KLR)

Evamar Enterprises Limited v Commissioner of Domestic Taxes (Tribunal Case 952 of 2022) [2024] KETAT 150 (KLR) (9 February 2024) (Judgment)

Neutral citation: [2024] KETAT 150 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tribunal Case 952 of 2022

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

February 9, 2024

Between

Evamar Enterprises Limited

Appellant

and

Commissioner Of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a limited liability company registered in the Republic of Kenya. The Appellant carries on the business of development and leasing of property.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, Cap 469 of the 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

3. The Respondent carried out a compliance review on the Appellant for the period January 2017 to December 2019 and issued its findings vide a letter dated 8th June 2022.

4. The Appellant objected to the additional assessment vide a letter dated 7th July 2022.

5. The tax agents of the Appellant met with the Respondent on 13th July 2022.

6. At that meeting held on 13th July 2022, the Appellant was advised to pay the taxes not in dispute by 15th July 2022.

7. he Respondent paid the Capital Gains Tax that was not in dispute amounting to Kshs. 354,935. 00 on 15th July 2022.

8. The Respondent invalidated the objection application vide a letter dated 20th July 2022.

9. The Appellant, on receiving the notice of invalidation wrote to the Respondent’s Internal Review of Objections (IRO) Department detailing the reasons for non­ payment of the withholding tax vide a letter dated 22nd July 2022.

10. On the same date, the Appellant made five payments on Mpesa to the Respondent.

11. The Respondent confirmed the invalidation decision via email, received by the Appellant on 1st August 2022.

12. The Appellant being dissatisfied by the decision to invalidate the objection application, issued a Notice of Intention to Appeal to the Tribunal on 18th August 2022.

The Appeal 13. The Appeal is premised on the Memorandum of Appeal dated 31st August 2022 and filed on the same date raising the following grounds: -a.That the Respondent arrived on the assessment based on expected sales as opposed to actual occupancy of the rental properties by tenants.b.That the bank variance for the year 2019 arose partly from related party loans and proceeds from sale of property.c.That the expenses provided were wholly and exclusively incurred in the generation of the income and that the reimbursement of medical expenses for company directors is a tax allowable expense.d.That the Respondent did not consider the Appellant’s accumulated tax losses from prior years.

Appellant’s Case 14. The Appellant’s case is also premised on the following documents: -a.The Appellant’s Statement of Facts dated 31st August 2022 and filed on the same date.b.The Appellant’s Written Submissions filed on 24th March 2023.

15. The Appellant averred that the Respondent carried out an in-depth audit for years 2017-2019 and thereafter issued an additional assessment pertaining to Income tax and Capital Gains tax.

16. That the additional assessment detailed principal tax of Kshs. 12,214,907. 00 for corporate tax and Kshs. 354,935. 00 for capital gains tax.

17. That the Appellant objected to the additional assessment vide a letter dated 7th July 2022 and the said letter was received at the Independent Review of Objections on the same date.

18. That following a meeting with the Respondent on 13th July 2022, the Appellant was advised to make payment for taxes not in dispute in line with the provisions of Section 51 of the Tax Procedures Act by the 15th July 2022.

19. The Appellant averred that in its letter of objection, it had conceded to tax liability relating to Capital Gains tax of Kshs. 354,935. 00.

20. That the Appellant paid the conceded Capital Gains Tax on the 15th July 2022.

21. The Appellant averred that the Respondent, in assessing the Appellant's tax affairs disallowed expenses relating to professional fees charged by the Appellant in its financial statements for the years 2017-2019 on the basis that the inherent withholding tax was not remitted.

22. That in its objection letter, the Appellant had expressed its commitment to make payment for withholding tax on professional fees.

23. That the Appellant through its tax agent proceeded to engage the officers at its registered tax station for a payment plan on the withholding tax due.

24. The Appellant stated that the withholding tax was not part of the additional assessment issued by the Respondent.

25. That while engaging the Appellant's tax service office, the time as per the directive of the Independent Review of Objection for payment of taxes not in dispute lapsed.

26. That the Respondent invalidated the objection application vide a letter dated 20th July 2022 citing non-compliance with Section 51 of the TPA.

27. That the Appellant, on receiving the notice of invalidation wrote to the IRO detailing the reasons for non­payment of the withholding tax vide a letter dated 22nd July 2022.

28. On 22nd July 2022, the Appellant made 5 payments by Mpesa to the Respondent for withholding tax.

29. The Appellant averred that the Respondent confirmed the invalidation decision via email, received by the Appellant on 1st August 2022.

30. That the Appellant being dissatisfied by the decision to invalidate the objection application, issued a Notice of Intention to Appeal to the Tribunal on 18th August 2022.

31. The Appellant submitted that the Respondent in assessing the Appellant's tax affairs used expected sales to compute the tax liability of the Appellant as opposed to the actual sales as recorded in the financial statements and supported by the bank statements.

32. That in arriving at the expected sales, the Respondent merely multiplied the number of units available for rental by the rental income per unit. That in doing so, the Respondent ignored instances of vacancies in some housing units in the course of the periods under review.

33. The Appellant submitted that it provided copies of notices to vacate issued by tenants that vacated units in the period under review and tendered that evidence to the Tribunal.

34. The Appellant further submitted that its financial statements were audited every year and its external auditor verified all rental income earned and the same was accurately recorded in the Appellant's financial statements. That the said financial statements were provided to the Tribunal.

35. That the Appellant prepared its financial statements under IFRS and did not record any deferred income. That all receipts in the bank statement that relate to rental income were recorded and reported in the financial statements from which the entity's tax computation was prepared.

36. The Appellant submitted that the Respondent brought to charge all receipts (credits) in the Appellant's bank statement. That in doing so, the Respondent taxed the following items which do not constitute income:a.Receipts from the sale of property and for which the Appellant has now paid Capital Gains Taxb.Directors' loans to the company which were utilized from the maintenance of property.

37. The Appellant submitted that the sale of property is subject to Capital Gains Tax and not income tax and that the capital gains tax due has been settled in full and the Appellant does not owe any further taxes on the sale of the property.

38. The Appellant submitted that Sections 15 and 16 of the Income Tax Act set out the expenses that are allowable and not allowable in the ascertainment of taxable income. That the Sections broadly allow businesses to obtain a tax deduction from expenditure that is revenue in nature and has been incurred exclusively in the furtherance of business.

39. The Appellant submitted that all its expenditure was incurred exclusively for the furtherance of its business. That the Appellant deducted the following expenses in its tax computations for the periods under review:a.Telephone.b.Salaries and wages.c.Medical expenses.d.Management feese.Legal feesf.Conveyance feesg.Audit expensesh.Commissionsi.Secretarial feesj.Consultancy fees.

40. The Appellant submitted that all the expenses reported in the books of the company were entirely incurred for business purposes and, in the absence of any provisions specifically restricting the deduction of these expenses, they should all be allowed. That the copies of invoices for the expenditures were tendered to the Tribunal.

41. The Appellant submitted that it reported tax losses for all the years of income covered by the tax assessment raised by the Respondent. The Appellant submitted that it reported a tax loss amounting to Kshs. 2,422,196. 00 in the 2017 year of income.

42. The Appellant submitted that the Respondent failed to consider the prior year tax losses incurred by the Appellant in its tax assessment contrary to Section 15(4) of the Income Tax Act. That the Income Tax Act does not provide any grounds to justify failure to consider prior year tax losses and the Appellant submitted that the Respondent erred in failing to consider the prior year tax losses.

43. The Appellant further submitted that it conceded that it did not deduct and remit the withholding tax on professional fees as required. The Appellant submitted that it had since rectified this position by making payment of the withholding tax arrears. That the Appellant provided a listing of the MPesa transaction statements showing payment of the withholding tax arrears to the Tribunal.

44. The Appellant averred that the failure to account for withholding tax does not constitute a valid ground for denying a taxpayer the right to obtain a tax deduction for expenses legitimately incurred in the course of business. That now that the Appellant has settled the withholding tax due on the payments to the consultants and service providers, the Respondent does not have any further grounds for denying the Appellant its tax deduction.

Appellant’s Prayers 45. The Appellant made the following prayers to the Tribunal: -a.Set aside the Respondent’s assessment.b.Issue an amended assessment based on the stated facts.

Respondent’s Case 46. The Respondent’s case is premised on the following documents filed with the Tribunal:-a.The Respondent’s Statement of Facts dated 20th September 2022 and filed on the same date together with the documents attached thereto.b.The Respondent’s Written Submissions dated 4th April 2023 and filed on the same date.

47. In response to the Appeal, the Respondent refuted each and every one of the allegations by the Appellant in the Memorandum of Appeal and Statement of Facts and averred that: -a.The Notice of Appeal dated 18th August 2022 and subsequent Appeal are defective.b.The assessment was done according to the law.c.The Appellant's objection was invalidated for failure to pay the tax not in dispute as per the assessments as required by Section 51(3) of the Tax Procedures Act.d.The Appellant failed to provide reconciliation for the noted variances in the bank analysis in the year of income 2019. e.The Appellant failed to support the expenses incurred as wholly and exclusive as required by Section 15 of the Income Tax Act. The unsupported expenses were disallowed and charged to tax as per Section 16(1) (a) of the Income Tax Act.f.The Appellant ought to have deducted and remitted withholding tax on professional fees.

48. The Respondent submitted that from the pleadings, two (2) main issues for determination in this matter are: -a.Whether the Notice of Preliminary Objection should be upheld, the Appellant's undisputed taxes not having been paid in full and/or any arrangement entered into for settlement of the same.b.Whether the Appeal is merited.

49. The Respondent submitted that it is not in dispute that the Appellant, at all material times to the proceedings herein acknowledged owing the Respondent some unremitted Withholding tax.

50. That to date, there is no evidence whatsoever of payment for the same and/or any arrangement reached towards settlement of the same more so, as at the date of the Notice of Appeal.

51. That Section 52(2) of the Tax Procedures Act provides that: -“A notice of appeal to the Tribunal relating to an assessment shall be valid if the taxpayer has paid the tax not in dispute or entered into an arrangement with the Commissioner to pay the tax not in dispute under the assessment at the time of lodging the notice"

52. The Respondent relied on TAT No. 43 of 2017, Uchumi Supermarkets Limited-Vs­ Commissioner of Domestic Taxes where the Tribunal while faced with a similar issue, did not hesitate to uphold the aforesaid legal provisions and declare resultant Appeal incompetent and unsustainable.

53. The Respondent submitted that the Notice of Preliminary Objection be upheld, as the Notice of Appeal, Memorandum of Appeal and Statement of Facts are invalid and liable for striking out in the first instance for offending the mandatory provisions of Section 52(2) of the TPA by not settling and/or arranging to settle the undisputed taxes.

54. The Respondent submitted that the Appellant failed to discharge its burden of proof, by availing documents in support of its objection and Appeal herein hence no basis whatsoever to fault the Respondent.

55. The Respondent submitted that the Tribunal should be guided by Sections 3(2), 10, 15, 16 and 35 of the Income Tax Act as well as Sections 51, 56 and 59 of the TPA.

56. The Respondent relied on the decision in Pearson Vs. Belcher CH.M Inspector of Taxes) Tax Cases Volume 38 referred to by Justice D.S. Majanja in PZ Cussons East Africa Limited Vs. Kenya Revenue Authority (2013) eKLR that: --“There is an additional assessment made by the Commissioner upon the Appellant; it is perfectly settled by cases such as Norman vs. Galder 267C 293 that the onus is upon the Appellant to show that the assessment made upon him is excessive and incorrect and of course he has completely failed to do. That is sufficient to dispose of the appeal, which I accordingly dismiss with costs."

Respondent’s Prayers 57. The Respondent prayed that: -a.The Appeal be dismissed with costs.b.The invalidation notice dated 20th July 2022 be upheld.

Issues for Determination 58. The Tribunal has considered the facts of the matter and the submissions made by the parties and identified the following to be the issue for determination in this matter: -Whether the Respondent’s Preliminary Objection should be upheld.

Analysis and Findings 59. Having identified the issue that falls for its determination, the Tribunal proceeds to analyze it as hereunder.

60. The genesis of this Appeal is the compliance review on the Appellant for the period January 2017 to December 2019.

61. The Respondent issued its findings vide a letter dated 8th June 2022. In the letter of findings, the Respondent gave the following as a summary of taxes due:Details Principal Penalties Interest Total Tax payable

Corporation Tax 12,214,907. 00 6,107,454. 00 5,934,203. 00 24,256,564. 00

Capital Gain Tax 354,935. 00 - 113,580. 00 468,515. 00

Total Tax Due 12,214,907. 00 6,107,454. 00 5,934,203. 00 24,725,079. 00

62. The Appellant objected to the additional assessment vide a letter dated 7th July 2022. The tax agents of the Appellant met with the Respondent on 13th July 2022. At that meeting held on 13th July 2022, the Appellant was advised to pay the taxes not in dispute by 15th July 2022.

63. The Appellant paid the Capital Gains Tax that was not in dispute amounting to Kshs. 354,935. 00 on 15th July 2022.

64. The Respondent invalidated the objection application by a letter dated 20th July 2022.

65. The Appellant, on receiving the notice of invalidation wrote to the IRO detailing the reasons for non­payment of the withholding tax vide a letter dated 22nd July 2022.

66. On the same date, the Appellant made five payments on Mpesa to the Respondent.

67. The Respondent confirmed the invalidation decision via email, received by the Appellant on 1st August 2022.

68. The Appellant being dissatisfied by the decision to invalidate the objection application filed this Appeal.

69. On the other hand, the Respondent raised a Preliminary Objection on a point of law on grounds that the Notice of Appeal and subsequent purported Memorandum of Appeal and Statement of Facts are invalid as the undisputed taxes had not been paid in full in accordance with the mandatory provisions of Section 52(2) of the Tax Procedures Act.

70. The Tribunal notes that Section 52(2) of the Tax Procedures Act provides that,“A notice of appeal to the Tribunal relating to an assessment shall be valid if the taxpayer has paid the tax not in dispute or entered into an arrangement with the Commissioner to pay the tax not in dispute under the assessment at the time of lodging the notice"

71. The Tribunal notes that the Appellant conceded to the Capital Gains tax of Kshs. 354,935. 00 and paid the tax through KCB Karen Branch on 15th July 2022.

72. The Appellant submitted the evidence of payment of the Capital Gains tax on page 189 of the Appellant’s bundle of documents.

73. In the letter of objection dated 7th July 2022, the Appellant conceded that there was an omission to deduct withholding tax on professional services. In that letter, the Appellant indicated that “the taxpayer commits to paying the inherent withholding tax on professional fees in due time.”

74. The Appellant wrote to the Respondent on 22nd July 2022 as follows: -“The taxpayer has also paid for part of the withholding tax relating to the professional fees on audit and legal services. Attached is the excerpt of the MPESA transactions for the payment.The taxpayer is currently unable to trace the KRA PINs for the suppliers of professional services on management fees, commissions, secretarial and consultancy fees. These services were outsourced to freelancers and the company does not have current engagements with them. The taxpayer is however willing to make payment for the for the above. Considering the missing PINs, the taxpayer would appreciate if KRA could facilitate in generating PRNs for withholding tax as above.”

75. The Respondent did not however facilitate the Appellant to pay the withholding tax of the professionals for whom it did not have PIN certificates.

76. The letter of invalidation of the objection dated 20th July 2022 stated as follows: -“In this regard, the Commissioner hereby declines to grant the application sought. The principal income tax liability of Kshs. 12,214,907 together with the accrued penalty and interest as at the date of this letter remains due and payable.”

77. It is this invalidation decision that the Appellant has appealed against. The decision does not indicate the amount of withholding tax that had not been paid. It did not acknowledge that the Appellant had already paid the Capital Gains tax.

78. The Tribunal has analyzed the law as stated above and is of the view that having paid the Capital Gains tax and part of the withholding tax and having requested the Respondent to facilitate the generation of PRNs to enable payment of withholding tax as it did not have the PINs of the professionals who provided services to it, the Appellant discharged its burden of proof on taxes not in dispute.

79. It is curious that although the Appellant wrote to the Respondent on 22nd July 2022, the Respondent had not replied to the Appellant’s request by the time the Appeal was filed on 31st August 2022.

80. It was up to the Respondent to guide the Appellant on how to pay the withholding tax in respect to the professionals for whom PINs were not available. Secondly, the failure to reply to the Appellant’s request to be assisted to pay the withholding tax is in contravention of Section 49 of the TPA.

81. The Tribunal finds that the Appellant did not fail to pay taxes not in dispute as it paid the Capital Gains tax in full on 15th July 2022 and part of the unspecified withholding tax on 22nd July 2022 and requested the Respondent to assist it to pay the rest of the unspecified withholding taxes by generating PRNs to enable payment of taxes for the professionals for whom the Appellant did not have PIN certificates.

82. In view of this finding, the Respondent’s Preliminary Objection dated 20th September 2022 fails.

Final Decision 83. The upshot of the foregoing is that the Appeal is merited and the Tribunal consequently proceeds to make the following Orders:-a.The Appeal be and is hereby allowed.b.The Respondent’s invalidation notice dated 20th July 2022 be and is hereby set aside.c.The matter is referred back to the Respondent to make an objection decision within Sixty (60) days of the date of delivery of this Judgment.d.Each party to bear its own costs.

84. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 9TH DAY OF FEBRUARY, 2024GRACE MUKUHA - CHAIRPERSONDR ERICK KOMOLO - MEMBERJEPHTHAH NJAGI - MEMBERTIMOTHY VIKIRU - MEMBERGLORIA A. OGAGA - MEMBER