[2023] KETAT 995 (KLR)

Ezemar Construction Limited v Commissioner of Domestic Taxes (Tax Appeal 1166 of 2022) [2023] KETAT 995 (KLR) (Commercial and Tax) (15 September 2023) (Judgment)

Neutral citation: [2023] KETAT 995 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Commercial and Tax

Tax Appeal 1166 of 2022

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

September 15, 2023

Between

Ezemar Construction 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. Its principal activity is the construction of roads and buildings.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, Cap 460 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 Respondent issued to the Appellant additional assessments of Value Added Tax (VAT) and income tax for various tax periods in the calendar years 2015, 2016 and 2017 because the Appellant apparently made supplies to different institutions as per declarations of the institutions’ withholding tax payments and the outcomes of variance analyses between income tax and VAT returns but failed to declare the incomes and taxes arising in its tax returns.

4. The Appellant objected to the various assessments on 24th January, 2017, 5th April, 2018 and 18th May, 2018, disputing that the assessments raised were not reflective of the reality as it did not receive payments upon which the assessments were based.

5. The Respondent issued its objection decisions on 31st August, 2017 and 5th October, 2018, fully rejecting the Appellant’s objections and confirming the additional assessments.

6. The Appellant being dissatisfied with the objection decisions, lodged its Notice of Appeal dated 25th August, 2022 and filed on 12th October 2022.

The Appeal 7. The Appeal is premised on the Memorandum of Appeal dated on 25th August 2022 and filed on 12th October 2022 which raised the following grounds: -a.That the Respondent erred in law and fact by compelling the Appellant to pay VAT amounting to Kshs. 1,970,629. 75 for the period December 2015, yet the Appellant did not receive any payments giving rise to such tax.b.That the Respondent erred in law and fact by compelling the Appellant to pay VAT amounting to Kshs. 331,312. 00 for the period January 2016, yet the Appellant had declared the assessment in its December 2015 return and duly paid the tax.c.That the Respondent erred in law and fact by compelling the Appellant to pay VAT amounting to Kshs. 387,144. 96 for the period March 2016, yet the Appellant did not receive any payments giving rise to such tax.d.That the Respondent erred in law and fact by compelling the Appellant to pay VAT amounting to Kshs. 896,815. 36 for the period September 2016. The Respondent failed to prove the grounds on which the assessment was made.e.That the Respondent erred in law and fact by compelling the Appellant to payVAT amounting to Kshs. 4,253,098. 56 for the period December 2016. It is evident from the bank statements that there is no point in time that the Appellant received an amount giving rise to such a tax. The Respondent failed to prove the grounds on which the assessment was made.f.That the Respondent erred in law and fact by compelling the Appellant to pay VAT amounting to Kshs. 415,324. 96 for the period June 2017, yet the Appellant had declared the assessment in its July 2017 return and duly paid the tax.g.That the Respondent erred in law and fact by compelling the Appellant to pay VAT amounting to Kshs. 896,815. 00 for the period July 2017 considering that the Appellant did not receive any payments giving rise to such tax or any WHT certificate for such payments.h.That the Respondent erred in law and in fact by compelling the Appellant to pay income tax amounting to Kshs. 9,217,715. 00 for the year of income 2016 having filed and reviewed our return. This led to the conclusion that we were to pay Kshs. 49,744. 00 where the tax was duly paid.i.That since the Respondent is relying on erroneous information, the Respondent has erred in law and in fact by compelling the Appellant to pay VAT and income tax for the tax periods above without revealing the documents or information it relied upon to arrive at its decision.j.That the Respondent erred in law and fact by compelling the Appellant to repay VAT by unlawfully capitalizing on mistakes by the Respondent.

Appellant’s Case 8. The Appellant’s case is premised on the Statement of Facts dated 25th August 2022 and filed on 12th October 2022.

9. The Appellant stated that the Respondent assessed additional VAT and income tax of Kshs. 18,547,518. 00 inclusive of principal tax, interest, and penalties for the tax periods of 2015, 2016, March 2016, September 2016, December 2016, June 2017 and July 2017.

10. The Appellant further stated that it objected to the assessments under reference numbers KRA201807100523, KRA201807101275, KRA201802606102, KRA201700530316, KRA201807102134, KRA201802606505, KRA201802606825 and KR!201807086270 since the company had received most of the said amounts and filed and duly paid the amounts it had received.

11. The Appellant averred that despite its objections, the Respondent confirmed the assessments by rejecting the objections in full via objection decision reference numbers KRA201814186734, KRA201814186847, KRA201814186396, KRA201814186310, KRA201708589046, KRA201814186905, KRA201814186498, KRA201814186595 and KRA201814186627 seeking to recover the Kshs. 18,547,518. 00 from the Appellant.

12. The Appellant contended that because the Respondent did not question the Appellant’s filedVATreturns and that the confirmed assessments are not about reassessment of tax, the Respondent cannot lawfully rely on information deduced by the Respondent and term the information as assessments.

13. The Appellant stated that the Respondent is acting ultra vires.

14. The Appellant asserted that it cross checked its bank statements and confirmed that most of the assessed amounts were not received by it, and that the Respondent had a duty in law to demonstrate that such amounts were paid to the Appellant and to prove that the Appellant offered vatable transactions to warrant assessments but failed to demonstrate and prove.

15. The Appellant submitted that the Respondent unlawfully compelled it to pay taxes that were already paid, and that the Respondent, in some cases, did not request it to provide crucial documents such as bank statements, which would have assisted it in its review before assessing the additional tax.

16. The Appellant stated that it disputed the entire additional tax, interest and penalty demanded of Kshs. 18,547,518. 00 because the Appellant did not evade nor under-declare amounts it was paid.

17. The Appellant averred that the Respondent did not reassess or question the Appellant’s returns, therefore, it has no legal powers to assess additionalVAT and income tax for the periods by relying on misleading information deduced by it.

18. The Appellant questioned whether the Respondent was justified in law to rely on misleading information to assess taxes where payments were never received or where vatable returns were already filed and duly paid.

19. The Appellant decried that if the Respondent is questioning the returns filed, that the Appellant was not granted the right to defend itself, and for that reason, the confirmation assessments are null and void.

Appellant’s Prayers 20. The Appellant prays that the Tribunal: -a.Sets aside the objection decisions and the additional assessments confirmed.

Respondent’s Case 21. The Respondent’s case is premised on its Statement of Facts dated 9th October 2022 and filed on 9th November 2022 and its Written Submissions dated 22nd February 2023 and filed on 24th March 2023.

22. The Respondent stated that the dispute arose from additional assessments that it issued to the Appellant on iTax on 29th November 2016, 20th November 2017, 13th February 2018, 26th April 2018, 30th April 2018, and 6th December 2018, which were based on undeclared income for supplies made on which the Appellant’s customers withheld tax.

23. On 30th April 2018, the Respondent stated that it issued the Appellant with a demand for payment of tax arrears arising from the additional assessments for tax periods in the years of income 2015 and 2016.

24. The Respondent submitted that the Appellant objected to the additional assessments on 18th May 2016, 24th January 2017, and 5th April 2018, and that it fully rejected the objections and confirmed the assessments on 31st August 2017 and 5th October 2018.

25. In response to the Appellant’s grounds of appeal, the Respondent stated that the additional assessments were raised from amounts determined from information that supplies to different institutions were declared, tax withheld and remitted, but the Appellant did not declare the incomes.

26. The Respondent highlighted Section 24 (2) of the TPAwhich provides as below in a further response to the Appellant’s grounds of appeal: -“The Commissioner shall not be bound by a tax return or information provided by, or on behalf of, a taxpayer and the Commissioner may assess a taxpayer's tax liability using any information available to the Commissioner.”

27. The Respondent further submitted that it amended the Appellant’s original assessments and raised additional assessments because the Appellant failed to declare income for supplies made. It maintained that it relied on Section 31 (c) of the TPAto exercise its mandate as the tax collecting agent of the Government, which provides: -“31(1)Subject to this section, the Commissioner may amend an assessment (referred to in this section as the “original assessment") by making alterations or additions, from the available information and to the best of the Commissioner's judgement, to the original assessment of a taxpayer for a reporting period to ensure that—(c)in any other case, the taxpayer is liable for the correct amount of tax payable in respect of the reporting period to which the original assessment relates.”

28. The Respondent reiterated that the Appellant failed to provide sufficient documentation to support its grounds of objection.

29. The Respondent cited Section 43 of theVATAct2013 and Section 23 of theTPA regarding the requirement of a person to keep full and written records in the course of a person’s business, and the requirement for the person to furnish the records to an authorised officer for inspection for a person's tax liability to be readily ascertained. The Respondent rejoined that the documentation provided by the Appellant was not sufficient for the Respondent to vacate the assessments, which led to the confirmation of the assessments.

30. The Respondent submitted that the burden of proving that a tax assessment is wrong falls on the Appellant and stated that the Appellant failed to exercise its burden of proof to disprove the Respondent’s assessments as required under Section 56 (1) of the TPA and buttressed in the High Court’s decision in Commissioner Investigations and Enforcement v Kidero (Income Tax Appeal E028 of 2020) [2022] where the court held: -“25. … In line with section 56(1) of the TPA, the taxpayer bears the burden of proving that assessment made by the Commissioner is incorrect…26. But the burden imposed on the taxpayer does not exist in a vacuum, it [is] also buttressed by the obligation on the taxpayer to maintain records. Section 54A of the ITAprovides that:54A(1)A person carrying on a business shall keep records of all receipts and expenses, goods purchased and sold and accounts, books, deed, contracts and vouchers which in the opinion of the Commissioner, are adequate.(2)For purposes of this section, the carrying on business includes any activity giving rise to income other than employment income.(3)Any person who contravenes the provisions of sub-section (1) shall be liable to such penalty not exceeding twenty thousand shillings as the Commissioner may deem fit.The aforesaid provision is augmented by section 23(1)(B) of the TPAwhich imposes a duty on the taxpayer to keep records required under any law so as to enable the person’s tax liability to be readily ascertained.27. The duty imposed on the taxpayer to keep records and the provisions on the burden of proof all go to support the Kenyan tax collection regime which is centered on a system of self- assessment. This system relies on the taxpayer making full and good faith disclosures in their tax declaration and affairs and hence empower[s] the Commissioner to demand documents from time to time when investigating the affairs of a taxpayer. Whether the taxpayer has provided sufficient evidence to meet the threshold of proof required to discharge its burden must of course depend on the nature of the subject or transaction and the circumstances of the case bearing in mind the aforesaid duty placed on the taxpayer to keep records.”

31. To support its assertion that it was the Appellant’s duty to prove that the Respondent erred in its assessment, the Respondent also cited the cases of Kenya Revenue Authority v Man Diesel & Turbo Se, Kenya [2021] eKLR, that of Grace Njeri Githua v Commissioner of Investigations & Enforcement (TAT102 of 2018) and that of Digital Box Limited v Commissioner of Investigations and Enforcement [2020].

32. The Respondent averred that it made its decision to confirm the assessments based on the documentation and evidence provided by the Appellant being insufficient to prove that the additional assessments were erroneous.

Respondent’s Prayers 33. The Respondent prays that the Tribunal:a.Dismisses the Appeal with costs.b.Upholds the Respondent’s objection decisions dated 31st August 2017 and 5th October 2018.

Issue for Determination 34. The Tribunal has considered the facts of the matter and the submissions made by the parties, and considers the issue for determination as follows:-a.Whether the Appeal is valid.

Analysis and Findings 35. The Respondent issued to the Appellant additional assessments of Value Added Tax (VAT) and income tax for various tax periods in the calendar years 2015, 2016 and 2017 because the Appellant apparently made supplies to different institutions as per declarations of the institutions’ withholding tax payments and the outcomes of variance analyses between income tax andVAT returns but failed to declare the incomes and taxes arising in its tax returns.

36. The Appellant objected to the various assessments on 24th January, 2017, 5th April, 2018 and 18th May, 2018 disputing that the assessments raised were not reflective of the reality as it did not receive payments upon which the assessments were based.

37. The Respondent issued its objection decisions on 31st August, 2017 and 5th October, 2018, fully rejecting the Appellant’s objections and confirming the additional assessments. The Appellant appealed to the Tribunal against the objection decisions.

38. The Tribunal notes that the procedure for appeal as set out in Section 13 (1) (b) of the Tax Appeals Tribunal Act (TATAct) requires that a notice of appeal shall be submitted to the Tribunal within thirty days upon receipt of the decision of the Commissioner. The Tribunal observes that the Appellant received the Respondent’s objection decisions on 31st August 2017 and 5th October 2018 but filed its Notice of Appeal on 12th October 2022, more than five years and four years, respectively, subsequent to receiving the objection decisions.

39. The Tribunal further notes that the Appellant failed to apply for leave to file its Notice of Appeal out of time as required in Section 13 (3) of the TAT Actwhich provides as follows: -“The Tribunal may, upon application in writing or through electronic means, extend the time for filing the notice of appeal and for submitting the documents referred to in subsection (2).”

40. The Tribunal is of the considered view that the timelines for appealing the Commissioner’s decisions are clearly set in the law, and all taxpayers are liable to comply with the timelines, save for when unavoidable circumstances prevent a taxpayer from fulfilling its obligations as envisioned in Section 13 (4) of the TAT Act which states: -“An extension under subsection (3) may be granted owing to absence from Kenya, or sickness, or other reasonable cause that may have prevented the applicant from filing the notice of appeal or submitting the documents within the specified period.”

41. The Tribunal buttresses the importance of adherence to timelines by referring to Eastleigh Mall Limited v Commissioner of Investigations & Enforcement (Income Tax Appeal E068 of 2020) [2023] KEHC 20000 (KLR) where the court held as thus:-“... Parliament in its wisdom knew that in matters tax, time is very crucial as those in commerce need to make informed decisions. If the Commissioner is allowed to exercise his discretion and stay ad-infinitum before issuing an objection decision, the tax payer would be unable to make crucial decisions and plan his/her business properly. The timelines set are mandatory and not a procedural technicality.”

42. The Tribunal is further guided by the case of W.E.C. Lines Ltd vs. The Commissioner of Domestic Taxes[TATCase No.247 of 2020] where it was held at paragraph 70 while reiterating the holding in Krystalline Salt Ltd vs KRA [2019] eKLR 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. The relevant procedure here is the process of opposing an assessment by the Commissioner.”

43. Based on the foregoing, the Tribunal finds that there is no valid Appeal before it and consequently the Tribunal does not have the jurisdiction to determine the matters in the Appeal.

Final Decision 44. The upshot of the foregoing is that the Appeal is incompetent and unsustainable in law and the Tribunal accordingly proceeds to make the following Orders:a.The Appeal be and is hereby struck out.b.Each party to bear its own costs.

45. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 15TH DAY OF SEPTEMBER, 2023. GRACE MUKUHA.............CHAIRPERSONTIMOTHY VIKIRU.......................MEMBERGLORIA A. OGAGA.....................MEMBERJEPHTHAH NJAGI.......................MEMBER