[2024] KETAT 1655 (KLR)

Fleur Investments Limited v Commissioner of Domestic Taxes (Tax Appeal E292 of 2024) [2024] KETAT 1655 (KLR) (21 November 2024) (Judgment)

Neutral citation: [2024] KETAT 1655 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E292 of 2024

CA Muga, Chair, BK Terer, EN Njeru, E Ng'ang'a & SS Ololchike, Members

November 21, 2024

Between

Fleur Investments Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a limited liability company incorporated in Kenya which previously engaged in real estate business.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, CAP 469 of Kenya’s Laws (hereinafter “the Act”). Under Section 5 (1) of the Act, the Kenya Revenue Authority is an agency of the Government for the collection and receipt of all tax revenue. Further, under Section 5(2) of the Act with respect to 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 Part 1 and 2 of the First Schedule to the Act for the purposes of assessing, collecting and accounting for all revenues in accordance with those laws.

3. The Respondent issued additional assessment order dated 7th December 2023 with reference number KRA2023203XXXX. The Appellant lodged objections dated 21st December 2023 and a further objection dated 16th January, 2024.

4. The Respondent issued its objection decision dated 29th January 2024 where in the Respondent demanded from the Appellant income tax of Kshs 2,274,145. 00 for the year ended 31st December 2018.

5. The Appellant being aggrieved with the objection decision lodged the Appeal herein vide a Notice of Appeal dated and filed on 27th February 2024.

The Appeal 6. The Appeal was based on the following grounds as set out in the Memorandum of Appeal dated and filed on 11th March 2024:a.That the Respondent erred in law and in fact by making an assessment order with regard to refund claim by the Appellant in the sum of Kshs. 2,274,145. 00 when it had rejected the same without the Appellant being granted any credit refund or applying the same to the Appellant's tax liability.b.That it was not open in law for the Respondent to issue an assessment order with regard to a refund claim in the sum of Kshs 2,274,145. 00 having issued an objection decision on the Appellant's refund dated 27th November 2023 rejecting the claim which in the event was the subject matter of a separate TAT Appeal No. E943 of 2023 between Fleur Investments Limited v Commissioner of Domestic Taxes pending before this Tribunal.a.That the Respondent erred in law in finding in the objection decision dated 29th January 2024 that the Appellant was not entitled to the refund claimed under section 42 credits for the year 2018, when the same had been determined by his earlier refund objection decision dated 27th November 2023 and was the subject of the TAT Appeal No. E943 of 2023 between Fleur Investments Limited v Commissioner of Domestic Taxes pending before this Tribunal.b.That the Respondent erred in law and in fact in determining that the Appellant had from 2012 onwards carried forward the claimed amount of KShs. 2,274,145. 00 under section 42 credits when prior to 2014, the Appellant had rightly made the refund claim in its self-assessment returns as was then provided by section 105 of the then Income Tax Act, CAP 470 of the Laws of Kenya (hereinafter “ITA”) applicable. In any event, the Respondent failed to make any decision thereon.c.That it was not open in law for the Respondent to determine that a refund claim should be ordinarily processed for the specific year of income when the ITA then applicable at section 105, permitted a taxpayer to make a claim within seven years and now the Tax Procedure under section 47,[sic] applicable from 1st January 2016, provides for five years.d.That the Respondent erred in law and in fact by making an assessment order against the Appellant for the year 2018 in the sum of Kshs. 2,274,145. 00 merely on the grounds that he had rejected a section 42 refund claim when the Appellant had not at any time received any credit from the claim or had it applied to any tax due, or any other way benefited from the said claim.e.That it was not open in law or in fact for the Respondent to unilaterally amend the return made by the Appellant and make an additional assessment order predicated thereon, when the filed tax return and the audited financial statements of the Appellant clearly showed that from 2012 to 2019, the Appellant was not trading and consistently made losses.f.That the Respondent erred in law and in fact by failing to explain the basis under which the assessment order arose from, given the fact that the Appellant has not been trading since 2012 and therefore has earned nil taxable income since 2012 and was already in a tax overpayment position by the sum of Kshs 2,274,145. 00. Any purported rejection of the refund application could only result in the Appellant remaining in a tax-neutral position and not the Appellant having any tax liability due.g.That it was not open in law for the Respondent to purport to issue the assessment order on the Appellant when in fact there were no records showing that indeed the Appellant had in any manner benefited from a tax refund of the same amount pursuant to the refund application.

Appellant’s Case 7. The Appellant relied on its statement of facts dated and filed on 11th March 2024. The Appellant also filed written submissions dated on 2nd August and filed on 7th August 2024 which were adopted by the Tribunal on 11th September, 2024.

8. The Appellant’s case was that the Appellant was previously engaged in real estate business on commercial properties which it ceased to operate on or about 2012. It stated that it had not earned any income from its real estate business from 2012 to date including the year 2018 in which it had been assessed for additional income tax of Kshs. 2,274,145. 00.

9. Through an application dated 21st May 2019, the Appellant lodged a refund application for an income tax in the sum of Kshs. 2,274,145. 00 arising from tax overpayments. The Appellant argued that the Respondent unlawfully and unprocedurally failed to issue a decision on the refund application within 90 days from the date the refund application was lodged as required by section 47 of the Tax Procedures Act, CAP 469B of the Laws of Kenya (hereinafter “TPA”). The Respondent failed to make a decision on the Appellant's Refund Application for four and a half years, long beyond the statutory required 90-days period for issuing a decision on an application for refund.

10. After a protracted period of the Respondent's refusal to refund the claim, and despite Appellant's comprehensive objections to such refusal, the Respondent issued an objection decision dated 27th November 2023 (the “Refund Objection Decision”) in which the it confirmed its earlier decision dated 21st November 2023 rejecting the Appellant's refund application, which refund objection decision is currently the subject of Tax Appeal No. E943 of 2023-Fleur Investments Limited v Commissioner of Domestic Taxes which is pending determination before the Tribunal.

11. While the Appellant was in preparation for filing an appeal before the Tribunal to appeal the Respondent's refund objection decision, it alleged that it was surprised and ambushed by the Respondent's electronic mail dated 7th December 2023 which enclosed the assessment order demanding additional income tax of Kshs. 2,274,145. 00. The Appellant asserted that the assessment order was issued without any legal basis nor any colour of right whatsoever and was issued after the refund objection decision had been issued.

12. By the notice of objection letter dated 21st December 2023, the Appellant objected to the contents of the Respondent’s electronic mail dated 7th December 2023 and the assessment order. The Appellant stated that on 21st December 2023 the Respondent sent an electronic mail to the Appellant acknowledging receipt of the Appellant’s notice of objection vide objection application acknowledgement receipt number KRA2023216XXXX.

13. Despite the Appellant's notice of objection dated 21st December 2023, the Appellant asserted that the Respondent refused to offer any clarification on the source of or explanation for the assessment order and the tax assessed. It is the Appellant’s case that in response to the Appellant's notice of objection, the Respondent vide an electronic mail dated 4th January 2024 forwarded a letter erroneously dated 29th November 2023 with the reference stated as “Objection to Additional Assessment No. KRA2023203XXXX for Ksh 2,274,145” in which it stated as follows:‘‘a.That it was not able to honour and respond to the Appellant's letter dated 21st December 2023. b.Section 47 (13) of the TPA states that a person who is dissatisfied with an appealable decision may appeal the decision to the Tribunal in accordance with the Tax Appeals Tribunal Act 2013. ’’

14. By way of a further notice of objection letter dated 16th January 2024, the Appellant issued a Further notice of objection comprehensively responding to the Respondent's letter dated 29th November 2023.

15. According to the Appellant, the Respondent vide an email dated 30th January 2024 forwarded two objection decisions. The said electronic mail sent the objection decision dated 27th November 2023 on the issue of refund which the Respondent had earlier issued an objection decision and was on appeal before this Court vide the Memorandum of Appeal dated 19th December 2023 and Statement of Facts dated 19th December 2023 both filed in Tax Appeal No. E943 of 2023 Fleur Investments Limited v Commissioner of Domestic Taxes. The said electronic mail also forwarded an objection decision dated 29th January 2024 which it confirmed that an additional assessment order had emanated from the rejection of the refund application done by the Respondent on 7th December 2023 on the i-Tax portal.

16. The Appellant asserted that the Respondent in its objection decision purported to confirm the assessment order and disallow the refund application on the basis that upon reviewing the Appellant's manual 2012 income tax return, the Respondent had determined that the overpayment in question was originally attributed to the previous year of income, 2011, and was consistently carried forward in the income tax returns for 2014 to 2018 and claimed under section 42 credits. According to the Appellant, the Respondent alleged that the overpayment and refund claimed in 2018 were not eligible for a refund as they should have been claimed in the specific year of the overpayment.

17. The Appellant stated that the Respondent in its objection decision dated 29th January 2024 did not lay a basis for assessing the Appellant's additional tax of Ksh 2,274,145. 00 contrary to section 31(8) of the TPA. It maintained that there was no explanation for issuing this additional assessment order considering that the Appellant had no income in the year of income 2018 which was the year of assessment by the Respondent hence this appeal.

18. The Appellant put in elaborate written submissions. In summary, the Appellant submitted that the Respondent erred in law and in fact in making the additional assessment order for the 2018 year of income. It submitted that the legal regime then in connection therewith was the Tax section 47 (2) of TPA which required such an application to be determined within 90 days. It also submitted that an amendment made by Finance Act 2022, inserted section 47(3) of the TPA to provide that: "where the Commissioner fails to ascertain and determine an application under subsection 1 within ninety days, the same shall be deemed ascertained and approved.’

19. The Appellant also relied on section 31(1) of the TPA to submit that the Respondent violated the said section as the law requires that an amended assessment must be by way of an alteration to make the taxpayer liable for the correct amount of tax payable in respect of the reporting period to which the original self-assessment tax return relates. Consequently, the Appellant submitted that the additional assessment made through the Assessment Order was therefore not predicated on the correct tax payable given that there was neither income earned nor tax due and payable for the year of income 2018, since, from 2012 to 2018 the Appellant was not trading, was loss making and was in a tax loss position. In further support of this issue, the Appellant relied on a multiple case laws including: Althaus Services Limited v Commissioner of Domestic Taxes Tax Appeal No. 704 of 2021;

PricewaterhouseCoopers Limited v Commissioner of Domestic Taxes Tax Appeals Tax Appeal No 576 of 2021; and

Sony Holdings Limited HC ITA No. E053 of 2020 (2021] eKLR.

20. The Appellant further submitted that the Respondent's assessment order and objection decision were unlawful for failure to give reasons contrary to the Constitution of Kenya, 2010 (hereinafter “the Constitution”), the TPA, and the Fair Administrative Action Act, CAP 7L of the Laws of Kenya.

21. The Appellant relied on the case of Joseph Muriithi Ndirangu t/a Ndirangu Hardware v Commissioner of Domestic Taxes (2023) KEHC19357 (KLR); PZ Cussons East Africa Limited v Kenya Revenue Authority ML HC C&HR No 309 of 2012 (2013) eKLR; Local Productions Kenya Limited v Commissioner of Domestic Taxes Tax Appeal No, 50 of 2017) to support the position that the duty to give reasons is not a trifling requirement. It is a constitutional mandate embedded in the right to fair administrative action guaranteed by Article 47 of the Constitution.

22. The Appellant relied on the doctrine of functus officio. It submitted that Respondent issued the Refund objection decision on the refund claim, which was then appealed to this Tribunal through Tax Appeal No. E943 of 2023, therefore, the issue was beyond the jurisdiction of the Respondent, and any challenge to the Refund objection decision lay on this Tribunal through Tax Appeal No. E943 of 2023. The Appellant thus submitted that the Respondent was therefore, functus officio and could neither vary, review or act on the same issues. It asserted that the conduct of the Respondent in purporting to issue the Amended Assessment through the assessment order No. KRA2023203XXXX of 7th December 2023, entirely was without jurisdiction and is a nullity. In support of the doctrine of functus officio, the Appellant urged the Tribunal to consider the doctrine of functus officio as discussed in the Supreme Court in Consolidated Petitions Nos 3 4 and 5 of 2013 Raila Odinga & 2 Others v Independent Electoral & Boundaries Commission and 3 others 2013] eKLR.

23. The Appellant urged the Tribunal to consider the jurisprudence from the following case laws: Commissioner of Domestic Taxes v Bank of Africa Limited (Civil Appeal E127 of 2020) [2023] KEHC 1036 (KLR);

Phoenix of E.A. Assurance Company Limited v S.M. Thiga t/a Newspaper Service [2019] eKLR; and

Risk Africa Innovation Limited v Smartmatic International Holdings B.V.A & 3 Others [2022] KECA 427 (KLR).

Appellant’s Prayers 24. The Appellant urged the Tribunal to make the following orders:a.That the Tribunal be pleased to set aside Respondent's objection decision dated 29th January 2024 and forwarded through an electronic mail of 30th January 2024;b.That the Tribunal be pleased to find that the Respondent's additional assessment for Kshs 2,274,145. 00 made vide the assessment order No. KRA2023203XXXX dated 7th December 2023 was erroneous and had no basis in law and the same be set aside; andc.That the costs of this Appeal be provided for.

Respondent’s Case 25. In response to the appeal, the Respondent lodged a Statement of facts dated and filed on 10th April 2024. The Tribunal expunged the Respondent’s submissions from the record on the 11th September 2024 because the same were not filed in accordance with the directions of the Tribunal.

26. The Respondent stated that on 21st June 2019 the Appellant lodged a refund claim for the period 2018 amounting to Kshs 2,274145. 00. On 8th November 2019 the Respondent requested for support documentation for noted variances between income per withholding certificates and gross turnover as per IT2C return. On 10th November 2023 the Appellant lodged a notice of objection referenced "Objection to intention to disallow income tax refund claim Ref: KRA 201906236838 for Kshs 2,274,145. " On 27th November 2023 the Respondent issued an objection decision confirming the rejection of the refund application.

27. On 7th November 2023, the Respondent issued the rejection notice on i-Tax and subsequently issued an additional assessment. On 21st December 2023 the Appellant lodged an objection on the action of the Respondent of 7th November 2023.

28. Following the notice of objection by the Appellant, the Respondent issued an objection decision on 29th January 2023 confirming the rejection and subsequent additional assessment. The Appellant being aggrieved by the decision appealed to the Tribunal.

29. In response to grounds (a) and (b) of the Appeal, wherein the Appellant claimed that the Respondent erred in making the additional assessments the Respondent stated that the Appellant served it with two objection notices. The first, dated 10th November 2023, which opposed the its intention to disallow an Income Tax Refund claim of Kshs 2,274,145. 00 (referenced KRA20190XXXX).

30. The Respondent replied with an objection decision on 27th November 2023, rejecting the claim. The Respondent stated that at that time, it had not officially communicated the rejection nor implemented it on iTax. It was during a routine check of the taxpayer's application that the commissioner Refunds requested support documents to be submitted, failure to which the claim would be rejected. Instead of providing the requested information, the Respondent averred that the Appellant lodged an objection against the said electronic mail.

31. The Respondent stated that the second objection was lodged by the Appellant on 21st December 2023, was against an additional assessment of Kshs 2,274,145. 00 resulting from the rejection of the refund application on the iTax platform. The Respondent replied with an objection decision on 29th January 2024, confirming the rejection.

32. The Respondent stated that the Appellant carried forward overpayments from previous years and claimed them under Section 42 credits. The Respondent noted that the Appellant does not have credits under special arrangements, and thus these credits were disallowed leading to the additional assessment. The Respondent argued that the additional assessment was issued upon rejection of the refund claim emanating from credits under special arrangements which the taxpayer does not have.

33. In response to ground (c), the Respondent argued that it found it necessary to issue a second objection decision denying the refund claim, given that the Appellant had submitted two separate notices of objection concerning the same matter, as elaborated above.

34. In response to Grounds (d) and (e), the Respondent argued that the credit of Kshs 2,274,145. 00 was brought forward from previous years before migration to iTax, in the Appellant's initial i-Tax return of 2014. The Respondent however, argued that since the credit did not arise from an overpayment in the same year but from previous years, it was rightfully rejected. The Respondent maintained that the appellant can only claim a refund resulting from an overpayment in the same tax year and not from previous years.

35. According to the Respondent, the seven-year period and the subsequent five-year period provided in the TPA specify the duration within which the appellant must make a refund application. Failure to claim the refund within these stipulated years renders the claim expired and not payable thereafter. It added that the Act does not grant authority for the Appellant to claim an overpayment belonging to previous years in a current year, therefore, while the Act allows a timeframe for making refund claims, it does not extend this to allow claims for overpayments from previous years in subsequent tax period.

36. In response to the ground f, the Respondent argued that the refund emanated from Section 42 credits. It asserted that this section exclusively deals with offering relief against Double Taxation in the event of any foreign liabilities pursuant to the section cited below:‘‘42 (1) This section shall have effect where, under a special arrangement, foreign tax payable in respect of income derived by a person resident in Kenya is to be allowed as a credit against tax chargeable in respect of that income.’’

37. The Respondent maintained that the lodging of the tax claims via Section 42 of ITA is incorrect as the claim is not what was envisaged under Section 42 of the ITA. Therefore, the Respondent maintained that the Commissioner was right on disallowing the credit claimed under line 13. 4 of the tax return thus leading to the additional assessment.

38. In response to grounds (g) and (h) the Respondent posited that the additional assessment was triggered due to the Appellant's refund application, and Section 47(2) of the TPA explicitly grants the Commissioner the authority to audit such refund applications before granting or allowing them. It therefore argued that the commissioner's actions in this case are firmly supported under Section 47(2) of the TPA.

39. In response to ground (i) the Respondent averred that upon reviewing the refund application, the Respondent observed that the Appellant had been consistently claiming credits under Section 42 of the income tax return. However, it became evident that the Appellant did not have any Special Tax Arrangements in place. It also asserted that these credits were erroneously claimed and were rightfully disallowed; ultimately leading to the additional assessment in addition the Appellant has been claiming this consistent figure from the years 2014 through to 2018.

Respondent’s prayers 40. Based on the foregoing, the Respondent prayed that this Tribunal be pleased to dismiss the appeal with costs to the Respondent and that the Respondent's refund decision be upheld.

Issues for Determination 41. The Tribunal having considered the pleadings and submissions of the parties puts forth a single issue for determination as follows:Whether the Respondent’s objection decision dated 29th January 2024 was justified.

Analysis and Findings 42. The Tribunal having established a single issue for determination proceeds to analyze it as follows:

Whether the Respondent’s objection decision dated 29th January 2024 was justified. 43. The Respondent issued its objection decision confirming its assessment of Ksh 2,274,145. 00 which emanated from a claimed Section 42 credit for the year 2018 asserting that the said claim was time barred as it ought to have been claimed the same year the claim occurred. On its part, the Appellant argued that the claim was as a result of overpaid taxes claimable under Section 105 of the ITA (now repealed).

44. In support of its averments, the Appellant cited provisions of section 47 of the TPA and 105 of the ITA (now repealed), to which the Respondent submitted that even though claims were to be made pursuant to these provisions, the seven-year period and the subsequent five-year period provided in the TPA specify the duration within which the Appellant must make a refund application. Failure to claim the refund within these stipulated years renders the claim expired and not payable thereafter. Section 47(1) of the TPA provides as follows:‘‘47. Refund of overpaid tax(1)When a taxpayer has overpaid a tax under a tax law the taxpayer may apply to the Commissioner, in the approved form, for a refund of the overpaid tax within five years of the date on which the tax was paid.’’

45. Section 47(1) of TPA clearly provides the timeframe within which a taxpayer can claim refund of the overpaid tax. It means that a claim beyond the five years is time barred. The Appellant cited section 105(3) of the ITA (now repealed). The said section provided as follows:‘‘(3) A claim for repayment under this section shall be made within seven years after the expiry of the year of income to which the claim relates; but in a case to which section 79(1)(c) applies, a claim for repayment may be made within the period in which an assessment may be made.’’

46. Similarly, under the provisions of section 105(3) of the ITA, the claim was supposed to be made within 7 years after the expiry of the year of income to which the claim relates. Section 105(3) of the ITA was repealed by section 15 of the Finance Act No. 38 of 2016.

47. The Appellant sought to claim a refund of Kshs 2,274,145. 00 vide application dated 21st May 2019. The Appellant adduced as evidence, a copy of the its 2011 income tax return. The said return indicates that the amount in the refund application dated 21st May 2019 was in the Appellant’s books of account as early as the year 2011. The Appellant’s return for the year 2011 indicated that the year of income was 31st December 2011.

48. Since the amount claimed was in the Appellant’s books in 2011 and in relation to year of income ending 31st December 2011, the Appellant’s claim filed vide application dated 21st May 2019, being more than seven (7) years, means that the Appellant’s claimed had expired under section 105(3) of the ITA (now repealed) or under section 47(1) of TPA. The Appellant could not lawfully claim refund beyond 31st December 2018 even under the repealed section 105 of ITA. It is said that equity aids the vigilant not the indolent. The Appellant was not vigilant.

49. Clearly, the Appellant failed to use the existing legal mechanisms to assert its rights. In Speaker of the National Assembly v James Njenga Karume [1992] eKLR the Court of Appeal in of appeal at paragraph 51 stated as follows:“In our view, there is considerable merit in the submission that where there is a clear procedure for the redress of any particular grievance prescribed by the Constitution or an Act of Parliament, that procedure should be strictly followed.”

50. In the instant case, the Appellant slept on its rights and failed to claim its refund within the required timelines. Consequently, the Tribunal finds that the since Appellant’s claim for credit is statutory time barred the Respondent’s objection decision dated 29th January 2024 was justified.

Final Decision 51. The upshot to the foregoing is that this Appeal lacks merit and accordingly, the Tribunal makes the following Orders:a.The Appeal be and is hereby dismissed.b.The Respondent’s objection decision dated 29th January 2024 be and is hereby upheld.c.Each party to bear its own cost.

52. It is so ordered.

DATED AND DELIVERED AT NAIROBI ON THIS 21ST DAY OF NOVEMBER, 2024. CHRISTINE A. MUGA - CHAIRPERSONBONIFACE K. TERER - MEMBERELISHAH N. NJERU - MEMBEREUNICE N. NG’ANG’A - MEMBEROLOLCHIKE S. SPENCER - MEMBER