[2024] KETAT 56 (KLR)

Fast Generation Ltd v Commissioner of Domestic Taxes (Tax Appeal 42 of 2016) [2024] KETAT 56 (KLR) (26 January 2024) (Judgment)

Neutral citation: [2024] KETAT 56 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 42 of 2016

E.N Wafula, Chair, Cynthia B. Mayaka, RO Oluoch, E Ng'ang'a, AK Kiprotich & B Gitari, Members

January 26, 2024

Between

Fast Generation Ltd

Appellant

and

Commissioner Of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a private company registered in Kenya under the Companies Act. Its principal business activity is wholesale and retail trade.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, 1995. Under Section 5 (1) of the Act, the Kenya Revenue Authority is an agency of the Government for collecting and receiving all tax revenue. Further, under Section 5(2) of the Act, concerning the performance of its functions under subsection (1), the Authority is mandated to administer and enforce all provisions of the written laws as set out in Parts 1 & 2 of the First Schedule to the Act to assess, collect and account for all revenues under those laws.

3. The issue in dispute herein arose when the Respondent issued the Appellant with an objection decision on 18th March 2016 confirming Corporation tax and Withholding tax of Kshs 15,519,333. 00 and Kshs 2,700,776. 00, respectively.

4. The Appellant being dissatisfied with the objection decision, filed a Notice of Appeal before the Tribunal on 15th April 2016.

5. The said Appeal was heard and a judgment was issued by the Tribunal on 25th September 2020 where the Tribunal upheld the Appeal on grounds that the impugned objection decision had breached Section 51(11) of the TPA and was hence null and void.

6. The Respondent filed an Appeal to the High Court vide Tax Appeal No 140 of 2020. The High Court rendered its Judgment on 11th November 2022 setting aside the Tribunal’s Judgment and it also directed that this matter be remitted back to the Tribunal for determination of the Appellant's other grounds of appeal on merit.

7. In compliance with this directive, the Tribunal shall now proceed to determine this Appeal on its merit.

The Appeal 8. The Appellant’s Memorandum of Appeal which was dated 1st April 2016 was premised on the following grounds:a.That the objection decision by the Respondent dated the 18th day of March 2016 is unlawful and/ or tainted with illegality since it blatantly contravenes the express and unequivocal provision stipulated under Section 51(11) of the Tax Procedures Act, 2015 which vividly stipulates that where the commissioner has not made an objection decision with sixty days from the date the objection was lodged, the objection shall be allowed.b.That the objection decision by the Respondent dated the 18th day of March 2016 is unlawful and/ or tainted with illegality as it lacks a statement of findings on the material facts and the reasons for the decision which constitute the minimum compulsory requirement for an objection decision as stipulated under Section 51(10) of the Tax Procedure Act, 2015. c.That the Respondent, without due regard and/or proper understanding of the financial statements and/or supporting documents duly submitted by the Appellant during the audit, erred in;i.Finding that the Appellant declared only the income that was received while the Appellant declared income received and receivable income in the respective years of income.ii.Finding that the Appellant did not declare outstanding loan amounts while the Appellant declared all loan amounts including outstanding loan amounts.iii.Finding that the Appellant was reporting on a cash basis not on an accrual basis which is false.iv.Finding that there were unsupported debtors in comparison to the actual debtors and treating the same as undeclared income whereas all debtors are fully supported.v.Deciding to add back all the above allegedly undeclared income to taxable income.d.The commissioner in blatant disregard of the schedule of expenses, availed receipts and other supporting documents submitted by the Appellant during the audit, erred in;i.Subjectively disallowing some administrative expenses that were incurred for business on alleged lack of documentary evidence.ii.Subjectively disallowing supported expenses by erroneously considering them private expenses simply because they are incurred by or under the name of some directors in their normal course of running the business.iii.Treating all the above allegedly disallowed expenses as undeclared income and consequently adding them back to taxable income.e.The Respondent, contrary to documents provided and explanations thereof and further contrary to the meaning and application of Withholding tax in accordance with the express interpretation and application provisions of Section 3 of the Tax Procedure Act, 2015, Section 35(3) of the Income Tax Act, Section 2 and 4(1) of the Income Tax (Withholding Tax) Rules 2001, erred in law and fact in finding that there was a withholding tax liability arising out of unpaid financiers’ interest.

The Appellant’s Case 9. The Appellant has grounded its case on the Statement of Facts dated 18th April 2016 and filed on 26th April 2016, and the Supplementary written submissions dated 12th May, 2023 and filed on 16th May, 2023.

10. The Appellant averred that the Respondent disregarded the unequivocal provisions of the law under Section 51(10) of the Tax Procedures Act and issued an objection decision dated 18th March 2016 that blatantly lacks a statement of findings on material facts and reasons for the decision thereby making this objection decision a nullity in law. It relied on the case of Abdulla Abdalla Mohamed vs. Commissioner of Domestic Taxes tax Appeals No. 55 of 2016.

11. That the Respondent’s objection decision, the accompanying forms and previous correspondences contained unexplained, inconsistent, varying, differing, technical and confusing figures which have not been explained contrary to Section 51(8) & (9) of the Tax Procedures Act 2015.

12. The Respondent erred in determining the income received by the Appellant in disregard of its business policies and submitted supporting documents.

13. The Respondent did not show from its computations how it arrived at undeclared incomes about outstanding amounts for loans disbursed.

14. The Respondent erred in adding back and overstating the under-declared income which had been explained to constitute loans disbursed, loans repaid, outstanding loans and interest receivable to taxable.

15. The Appellant stated that it provided all documents to support the list of its debtors and loans to affirm that its income was as declared in its financial statements.

16. The Appellant also affirmed that all its expenses were legitimate and related to its business operations.

17. The Appellant posited that Section 3 of the Tax Procedure Act, 2015, Section 35(3) of the Income Tax Act, Sections 2 and 4(1) of the Income Tax (Withholding tax liability arising out of unpaid financiers’ interest) provide that withholding tax liability only arises at the point of payment of the income in question and that the Appellant had not paid its financiers’ interests and therefore withholding tax liability on such interest ought not to arise.

Appellant’s Prayer 18. By reasons of the foregoing grounds, the Appellant prayed that the Appeal be allowed and the assessment and or the objection decision be vacated.

Respondent’s Case 19. The Respondent’s case was premised on its Statement of Facts dated 24th May 2016 and Supplementary Written submission dated 9th June, 2023 filed on 12th June, 2023.

20. The Respondent alleged that it carried out an audit into the affairs of the Appellant upon which it issued it with a tax demand dated 18th March 2016 confirming Corporation and Withholding tax of Kshs 15,519,333. 00 and Kshs 2,700,776. 00, respectively.

21. It was its view that the objection was raised under the Income Tax Act which did not provide for any time frame and that its objection decision dated 18th March 2016 was made within 60 days from the date of commencement of the TPA, 2015 and it was thus lawful because TPA could not be applied retrospectively.

22. The Respondent posited that its objection decision was accompanied by assessment in respect of withholding tax schedule of additional assessment, case schedule of additional income and further tax forms which explained how it arrived at its conclusion on the Corporate tax and Withholding tax due.

23. The Respondent stated that it did not err in arriving at the tax liability because its audit revealed that:a.The Appellant had declared income on loans that were fully paid back and left out income repayments on loans that were outstanding or overdue.b.The Appellant had included unsupported debtors in its financial statements whose record was different from what was contained in its record/ledgers. This resulted in a difference of Kshs. 7,126,337. 00 and Kshs 2,557,902. 00 for the years 2012 and 2013 respectively.c.The applicable accounting system to the Appellant's affair was the ‘accrual system’ which recognised accruals and and not cash basis.d.The Appellant had recognized its expenses on an accrual basis leading to an inconsistency in application of accounting principles in its financial statements.

24. The Respondent stated that its analysis of the records indicated that the interest charged on the loans advanced was at 20% whereas the interest as per the Financial Statements of the Appellant was at 15% in 2012 and 9% in 2013. In its view, this was a confirmation that there was an under-declaration of interest in its financial statements.

25. It stated further that it:-a.Considered all the schedule of expenses provided but the Appellant failed to provide primary documents like receipts and invoices for its consideration.b.Compiled with Section 35(3)( b) of the ITA in computing withholding tax payable on interest paid to financial institutions specified in the 4th Schedule and persons listed in the 1st Schedule of the ITA.c.Considered the interests paid as per the expenses contained in the Appellant's profit and loss account and the cash flow statement.d.Established that the Appellant was paid out interest at a rate of 4. 5% per month but did not withhold tax on these interest payments amounting to Kshs. 13,707,952. 00 which attracted a withholding tax of Kshs. 2,056,193. 00.

26. The Appellant submitted that it afforded the Appellant a chance to discuss and engage on the tax assessment issued but this invitation was declined, and hence its reason for issuing the objection decision at that point.

Respondent's Prayer 27. The Respondent prayed that the Tribunal upholds the tax decision dated 18th March 2016 conforming tax of Kshs. 15,519,333. 00 and withholding tax of Kshs. 2,700,776. 00.

Issues For Determination 28. The Tribunal has noted that only one out of the five grounds of Appeal that was raised by the Appellant was determined and dismissed by the High Court. The following grounds of appeal were therefore not considered and a determination issued thereof by the High Court.a.That the objection decision by the Respondent dated the 18th day of March 2016 is unlawful and/ or tainted with illegality as it lacks a statement of findings on the material facts and the reasons for the decision which constitute the minimum compulsory requirement for an objection decision as stipulated under section 51(10) of the Tax Procedure Act, 2015. b.That the Respondent, without due regard and/or proper understanding of the financial statements and/or supporting documents duly submitted by the Appellant during the audit, erred in;i.Finding that the Appellant declared only the income that was received while the Appellant declared income received and receivable income in the respective years of income.ii.Finding that the Appellant did not declare outstanding loan amounts while the Appellant declared all loan amounts including outstanding loan amounts.iii.Finding that the Appellant was reporting on a cash basis not on an accrual basis which is false.iv.Finding that there were unsupported debtors in comparison to the actual debtors and treating the same as undeclared income whereas all debtors are fully supported.v.Deciding to add back all the above allegedly undeclared income to taxable income.c.The Respondent in blatant disregard of the schedule of expenses, availed receipts and other supporting documents submitted by the Appellant during the audit, erred in;i.Subjectively disallowing some administrative expenses that were incurred for business on alleged lack of documentary evidence.ii.Subjectively disallowing supported expenses by erroneously considering them private expenses simply because they are incurred by or under the name of some directors in their normal course of running the business.iii.Treating all the above allegedly disallowed expenses as undeclared income and consequently adding them back to taxable income.d.The Respondent, contrary to documents provided and explanations thereof and further contrary to the meaning and application of Withholding tax in accordance with the express interpretation and application provisions of Section 3 of the Tax Procedure Act, 2015, Section 35(3) of the Income Tax Act, Section 2 and 4(1) of the Income Tax (Withholding Tax) Rules 2001, erred in law and fact in finding that there was a withholding tax liability arising out of unpaid financier’s interest.

29. The Tribunal is thus enjoined by law under Section 3 of the TAT Act to make a determination on these remaining grounds of Appeal. The said Section 3 of the TAT Act provides as follows regarding the jurisdiction of the Tribunal:-“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.”

30. In recognition of its jurisdictional authority and the directives of the High Court, the Tribunal has gleaned through the parties pleadings and the four grounds of Appeal that are pending determination in arriving at the following issues for determination:a.Whether the Appellant's Objection Decision was valid under Section 51(10) of the TPA.b.Whether the Respondent erred in arriving at its tax assessment for the Corporation tax and Withholding tax of Kshs 15,519,333 and Kshs 2,700,776 respectively was justified.

Analysis And Determination Whether the Appellant's Objection Decision was valid under Section 51(10) of the TPA. 31. This ground of Appeal was pleaded by the Appellant and it was not determined by the High Court. The High Court instead commented as follows:“The Tribunal did not delve into the substance of the Respondent’s appeal after it made a finding that the Objection Decision was rendered late. It also did not make a finding as to whether the Objection Decision fell short of the requirements of section 51(10) of the TPA. The Respondent did not cross-appeal on this as well”.

32. Flowing from the above comments of the High Court, it is clear that the High Court did not delve into and or determine this legal issue. The Tribunal is thus behoved under Section 3 of the TAT Act and the directives issued by the High Court to hear and determine this legal issue before delving into the other three grounds of Appeal which have majorly challenged the Respondent’s assessment of tax.

33. The Appellant submitted under this issue that the Respondent's Objection decision dated 18th March 2016 failed to meet the mandatory requirements of Section 51(10) of the TPA and it was thus unlawful.

34. On its part, the Respondent stated that it served the objection decision together with the findings and computations on the two tax disputes from where the Appellant could discern the reasons for its decision. It also stressed that the law has not prescribed a specific format for an objection decision.

35. There is no dispute that the TPA was assented to on 15th December 2015 and commenced on 19th January 2016. The impugned decision herein was issued on the 18th March 2016. This means that TPA was in operation at the time when the impugned decision was issued and as such the Respondent was required to comply with the provision of Section 51(10) of the TPA.

36. Section 51(10) of the TPA provides as thus:“(10) An objection decision shall include a statement of findings on the material facts and the reasons for the decision.”

37. The Tribunal has sighted the impugned objection decision and it is clear that it has a statement of findings on the material facts. However, it does not have reasons for the decision.

38. The Tribunal has also looked at the two schedules of additional income and tax due that were attached to the said objection decision and it is clear that the schedules give a breakdown of the taxes. They have not provided the reasons for the decision.

39. A plain reading of the said Section 51(10) of the TPA makes it clear that the two ingredients being a statement of finding on the material facts and reasons for the decision must be present in any objection decision. The operative word used in the statute is ‘shall’.

40. It thus follows that the Respondent's failure to include the reasons for its decision in the objection decision dated 18th March 2016 was fatal and the said Objection decision is therefore invalid.

41. Having held that the objection decision herein was invalid the Tribunal need not therefore consider the second ground regarding the assessment of Corporation tax and Withholding tax.

Final Decision 42. For the reasons set out above, the Tribunal finds that this Appeal has merit and proceeds to make the following Orders;a.The Appeal be and is hereby upheld.b.The Respondent‘s Objection decision dated 18th March 2016 be and is hereby set aside.c.Each party is to bear its own costs.

43. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 26THDAY OF JANUARY, 2024. ERIC NYONGESA WAFULA - CHAIRMANCYNTHIA B. MAYAKA - MEMBERDR. RODNEY O. OLUOCH - MEMBEREUNICE NGANGA - MEMBERABRAHAM K. KIPROTICH - MEMBERBERNADETTE GITARI - MEMBER