[2024] KETAT 1239 (KLR)

Falcon Road Contractors Limited v Commissioner of Domestic Taxes (Tax Appeal E498 of 2023) [2024] KETAT 1239 (KLR) (9 August 2024) (Judgment)

Neutral citation: [2024] KETAT 1239 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E498 of 2023

E.N Wafula, Chair, E Ng'ang'a, Jephthah Njagi & G Ogaga, Members

August 9, 2024

Between

Falcon Road Contractors Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a limited liability company duly incorporated in Kenya under the Companies Act. Its main business is in construction services.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, Cap 469 Laws of Kenya. The Kenya Revenue Authority (“KRA”) is an agency of the Government of Kenya for assessing, collecting, and accounting for all revenue.

3. On 9th September 2022, the Respondent issued the Appellant with additional tax assessments through iTax for VAT of Kshs. 516,996. 26 for July 2022.

4. The Appellant lodged an objection application on 27th January 2023 and the Respondent issued a late objection rejection decision on 8th February 2023.

5. Being dissatisfied with the decision, the Appellant filed a Notice of Appeal on 22nd August 2023.

The Appeal 6. The Appeal is premised on the following grounds as deduced from the Memorandum of Appeal dated and filed on 22nd August 2023: -a.That the Respondent erred in its decision to issue the Appellant with additional tax assessment in respect of VAT totaling 516,996. 26. b.That the Respondent issued an assessment for the tax amount based on the assumption that the suppliers did not make the declarations as required and thus created a mismatch on the same. The Respondent went ahead and disallowed this input VAT.c.That the purchases were not fictitious as purported by the Commissioner.d.That the purchases made as used in the input VAT were done and thus should be allowed as proof of payments.

Appellant’s Case 7. The Appellant’s case is premised on its Statement of Facts dated and filed on 22nd August 2023 wherein the Appellant reiterated the chronology of events as provided in the background.

8. Seeing as the Appellant did not file its submissions with the Tribunal, the Tribunal shall rely on the pleadings available to it and the accompanying documents to determine the totality of the Appellant’s case.

Appellant’s prayers 9. The Appellant prayed for orders that:a.The Commissioner be compelled to allow such input VAT as earlier declared in the Appellant’s original returns.b.The assessments thereof be vacated.

Respondent’s Case 10. The Respondent’s case is premised on the following documents:a.Preliminary Objection dated and filed on 3rd November 2023;b.Its Statement of Facts dated 3rd November 2023 and filed on 7th November 2023 and;c.Its Written Submissions dated 4th March 2024 and filed on 6th March 2024 together with the authorities attached thereto.

11. The Respondent stated that the Appellant preferred to lodge its appeal against the Respondent’s invalidation notice which is not an appealable decision contrary to Sections 51 and 52 of the Tax Procedures Act.

12. The Respondent contended that it is empowered by Section 31 of the Tax Procedures Act to amend the Appellant’s self-assessment returns based on available information and to the best of the Respondent’s judgment.

13. The Respondent averred that the assessment was based on unsupported VAT input claims for the period of July 2022.

14. The Respondent stated that it wrote to the Appellant on 31st January 2023 requesting it to provide its reason for the late objection and documentary evidence in support of its late application.

15. The Respondent maintained that the Appellant’s objection application was not in line with Section 51(6) of the Tax Procedures Act since the Appellant failed to provide its reasons for the late objection application, documentary evidence of the same and its grounds of Objection.

16. The Respondent asserted that since it could not review the Appellant’s Objection application by operation of the law it proceeded to invalidate the Appellant’s Objection application on 8th February 2023.

17. The Respondent reiterated that being dissatisfied with the Respondent's invalidation notice, the Appellant preferred to lodge an Appeal at the Tribunal contrary to Sections 51 and 52 of the Tax Procedures Act.

18. The Respondent contended that it is allowed to make additional assessments based on the available information to the best of its judgment pursuant to Section 31 of the Tax Procedures Act and that it is allowed by Section 24(2) of the Tax Procedures Act to assess a taxpayer’s liability using any information available to it.

19. The Respondent relied on Sections 51(12) and 52 of the Tax Procedures Act and averred that the Appellant is challenging an invalidation notice issued under Section 51(7A) of the Tax Procedures Act which is not an appealable decision hence the Tribunal is not the proper forum for the adjudication of this matter.

20. The Respondent added that the Kenyan tax system is a self-assessment system where a taxpayer assesses itself and makes payments to KRA and all one requires is to acquire a KRA PIN and access the iTax system for one to file its returns for income tax purposes.

21. The Respondent stated that the Appellant was accorded the opportunity to file its returns and only thereafter did the Respondent proceed under Section 31 of the Tax Procedures Act to review the Appellant’s self-assessment returns and upon conclusion of the review it was discovered that there were some areas where there were omissions.

22. The Respondent averred that in line with Article 47 of the Constitution and Section 51 of the Tax Procedures Act engaged the Appellant at every stage of the process.

23. The Respondent contended that according to Section 59 of the Tax Procedures Act, the onus is on the Appellant to produce records to obtain full information regarding the Appellant’s tax liability.

24. The Respondent reiterated that Section 30 of the Tax Appeals Tribunal Act and Section 56 of the Tax Procedures Act impose the burden of proof on the taxpayer to prove that an assessment is excessive or a tax decision is incorrect.

25. On Whether the Tribunal has jurisdiction to hear this Appeal the Respondent submitted that the Appellant is challenging an invalidation notice issued under Section 51(7A) of the Tax Procedures Act which is not an appealable decision.

26. The Respondent relied on the case of Commissioner of Investigation & Enforcement v Vys t/a Rocon Enterprises (Income Tax Appeal E144 of 2021) [2022] KEHC 16027 (KLR) (Commercial and Tax) (25th November 2022) (Judgment) and submitted that the Appellant is challenging a decision that is not an appealable decision and hence is not even supposed to be before this Tribunal for determination as the Tribunal lacks jurisdiction to entertain the same.

27. The Respondent also cited the case of Owners of Motor Vessel “Lilian S” v Caltex Oil (Kenya) Ltd (1989) eKLR.

28. On whether the Respondent was right in rejecting the Appellant’s objection the Respondent cited Sections 24(2) and 31(1) of the Tax Procedures Act and submitted that it raised additional assessments on 9th September 2022 pursuant to the law.

29. The Respondent reiterated that the Appellant objected to notice of objection dated 27th January 2023 and the Respondent requested the Appellant to provide evidence in support of its late Objection application vide email on 31st January 2023.

30. The Respondent averred that the Appellant failed to provide the required documents and therefore the Respondent issued the Appellant with late objection notices for the VAT assessments rejecting the Appellant’s notice of objection applications for failure to avail documents to support the applications.

31. The Respondent relied on Section 17(3) of the VAT Act, Section 15 of the Income Tax Act as well as Sections 51(2)(3) and Section 56(1) of the Tax Procedures Act and maintained that the Appellant failed to discharge its evidential burden of proof under Section 107 of the Evidence Act in demonstrating that the Respondent’s assessment was incorrect or excessive.

32. The Respondent further relied on Section 97(a) of the Tax Procedures Act, 2015 and asserted that the Appellant’s under-declaration constitutes an offense of knowingly omitting from its tax returns an amount that should have been included contrary to the law.

33. The Respondent cited the cases of Nairobi TAT No. 25 of 2016 Family Signature Limited v The Commissioner of Investigations & Enforcement; and the case of TAT No. 28 of 2018 Joycott General Contractors Limited v Kenya Revenue Authority and submitted that although the law recognizes the self-assessment regime, the Respondent is empowered by Section 31 of the Tax Procedures Act to amend such assessment.

Respondent’s prayers 34. The Respondent prayed for the Tribunal to find that:a.The Appeal lacks merit and should be dismissed.b.The Invalidation notice dated 8th February 2023 be upheld.c.The Respondent be awarded costs of the Appeal.

Issues for Determination 35. The Tribunal having evaluated the pleadings and submissions of the parties is of the view that the following two issues that call for its determination;a.Whether the Tribunal has jurisdiction to hear the Appeal.b.Whether the Respondent was right in rejecting the Appellant’s Late Objection Application.

Analysis and Findings 36. The Tribunal having determined the issues falling for its determination proceeds to analyse the same as hereunder.

a. Whether the Tribunal has jurisdiction to hear the Appeal. 37. The Respondent raised a Preliminary Objection dated 3rd November 2023 on grounds that the Tribunal lacks the jurisdiction to hear this Appeal as the decision issued under Section 51(7A) of the Tax Procedures Act, that is the subject of this Appeal, is not an appealable decision.

38. 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.

39. 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.”

40. The TAT Act does not define the term tax decision. However, the term is defined in the TPA, under Section 3 where it means: -““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.

41. Section 3 of the TPA defines appealable decision as: -““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;”

42. The Tribunal opines 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 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.

43. 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 administrative 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.

44. 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.”

45. The Tribunal notes that Section 51 (1) of the TPA as read together with the meaning of appealable decision under Section 3 of the TPA elaborates the jurisdiction of the Tribunal. These provisions of the TPA 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.

46. Based on the foregoing, the Tribunal finds that a late objection rejection decision is an appealable decision. Therefore, the Appellant was justified in appealing the decision under Section 52 of the TPA in accordance with the TAT Act.

47. Being that the decision appealed by the Appellant was an appealable decision, the Tribunal finds that it has the jurisdiction to hear and determine the Appeal.

b. Whether the Respondent was right in rejecting the Appellant’s Late Objection Application 48. The Appellant objected the tax assessments dated 9th September 2022 vide notices of objection dated 27th January 2023.

49. The Respondent averred that it requested the Appellant to provide evidence in support of its late objection application vide an email on 31st January 2023 but the Appellant failed to provide the required documents and therefore the Respondent issued the Appellant with late objection rejection notices on 8th February 2023.

50. Section 51(2) of the Tax Procedures Act provides the timelines within which a taxpayer ought to object to a disputed tax decision. The provision states that:-“A taxpayer who disputes a tax decision may lodge a notice of objection to the decision, in writing, with the Commissioner within thirty days of being notified of the decision.”

51. The timelines for objecting to tax assessments are clearly set in the law, and all taxpayers are liable to comply with the timelines, save for when unavoidable circumstances as envisioned in Section 51 (7) of the TPA, as cited below, prevent a taxpayer from fulfilling its obligations: -“(7)The Commissioner may allow an application for the extension of time to file a notice of objection if—(a)the taxpayer was prevented from lodging the notice of objection within the period specified in subsection (2) because of an absence from Kenya, sickness or other reasonable cause; and(b)the taxpayer did not unreasonably delay in lodging the notice of objection.”

52. The Tribunal has perused the evidence presented before it and finds that the Appellant filed its notice of objection out of time and failed to provide a reason for filing its objection late. In addition, the Appellant did not discharge its burden of proof as required under Section 30 (b) of the TAT Act when it failed to adduce evidence to support its Appeal against the impugned late objection rejection decision and to demonstrate that it did not unreasonably delay in lodging its notice of objection.

53. Section 30 (b) of the TAT Act provides that: -“In a proceeding before the Tribunal, the appellant has the burden of proving—a.…b.in any other case, that the tax decision should not have been made or should have been made differently.”

54. It is the Tribunal’s considered view that the Appellant has failed to discharge its evidential burden of proof under Section 107 (1) of the Evidence Act in demonstrating that the Respondent’s decision in rejecting the Appellant’s late notice of objection was in any reasonable manner improper or arbitrary.

55. The Tribunal is further guided by the case of W.E.C. Lines Ltd vs. The Commissioner of Domestic Taxes [TAT Case 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.”

56. The Tribunal is therefore persuaded that the Respondent was right in rejecting the Appellant’s late objection application.

Final Decision 57. The upshot to the foregoing analysis is that the Appeal lacks merit and the Tribunal accordingly proceeds to make the following Orders: -a.The Appeal be and is hereby dismissed.b.Each party to bear its own costs.

58. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 9TH DAY OF AUGUST, 2024. ERIC NYONGESA WAFULA - CHAIRMANEUNICE N. NGA’NG’A - MEMBERJEPHTHAH NJAGI - MEMBERGLORIA A. OGAGA - MEMBER