[2023] KETAT 1008 (KLR)

Fone Planet Limited v Commissioner of Domestic Taxes (Tax Appeal 954 of 2022) [2023] KETAT 1008 (KLR) (Commercial and Tax) (6 October 2023) (Judgment)

Neutral citation: [2023] KETAT 1008 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Commercial and Tax

Tax Appeal 954 of 2022

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

October 6, 2023

Between

Fone Planet 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.

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 tax 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 the Appellant with a payment demand notice and assessment notice in a letter dated 8th February 2022 following a tax verification exercise by the Respondent on the Appellant’s tax returns and documents.

4. In that letter, the Respondent demanded the Appellant to pay the outstanding amounts of Income Tax, Value Added Tax (VAT) and PAYE and advised that if the Appellant wished to object to the assessment, it may do so as per Section 51 of the Tax Procedures Act.

5. The Appellant lodged its notice of objection to the assessment dated 8th February 2022 on 8th March 2022.

6. The Respondent subsequently issued the Appellant with an Assessment Order Reference KRA202201779929 dated 7th July 2022 confirming income tax and VAT additional assessments for tax periods in 2017, 2018, 2019 and 2020 following a tax verification exercise by the Respondent on the Appellant’s tax returns and documents.

7. On 6th August 2022, the Appellant lodged its notice of objection to the assessment under Assessment Order Reference KRA202201779929 dated 7th July 2022. The Respondent invalidated the Appellant’s objection in a letter dated 17th August 2022, and confirmed the income tax and VAT assessments as per the Assessment Order.

8. The Appellant consequently filed a Notice of Appeal dated 3rd September, 2022 on the 5th September 2022

The Appeal 9. The Appeal is premised on the Memorandum of Appeal dated 3rd September 2022 and filed on 5th September 2022 which raised the following grounds: -a.That the demand notice is erroneous as the Commissioner did not take into account relevant considerations and instead considered irrelevant matters in imposing additional assessments and the Commissioner disregarded materials, evidence and documents availed to it, and misinterpreted and misdirected herself as to the law and facts relating to the Appellant’s case.b.That the Respondent erred in fact and in law by failing to raise procedurally proper assessments and give an assessment notice pursuant to the provisions of Sections 29 and 30 of the Tax Procedures Act.c.That the Commissioner failed in fact and in law in failing to give grounds upon which it arrived at the additional assessments and reasons for refusal to allow the Appellant’s objection.d.The Respondent failed to consider issues raised in the many working meetings it had with the Appellant nor appreciate the workings, accounts, invoices, audited financial statements, general ledgers, bank statements, reconciliations of the turnover and related documents provided to it by the Appellant.e.That the Respondent erred in its decision by demanding additional VAT and income tax of Kshs 11,818,888. 89 for the periods of January 2016 and December 2020. f.That the Respondent erred by not issuing an objection decision within sixty (60) days upon service of the objection by the Appellant.

Appellant’s Case 10. The Appellant’s case is premised on the Statement of Facts dated 3rd September 2022 and filed on 5th September 2022 and the Written Submissions filed on 31st March 2023.

11. The Appellant stated that in 2021, the Respondent requested from the Appellant workings, financial statements, breakdowns and reconciliations, bank statements, invoices, ETR Z reports, pricing booklets and revenue share matrix between the Appellant and Safaricom Limited, and the said documents were supplied to the Respondent via an email from the tax agents of the Appellant on 27th May 2021.

12. The Appellant further stated that on 8th February 2022, the Respondent issued to the Appellant a correspondence where it claimed that there were variances between sales declared in the income tax returns, VAT returns and bank statements.

13. The Appellant averred that it did not agree with the workings, computations and summaries of the Respondent and on 8th March 2022, it objected to the assessment dated 8th February 2022 through its Advocates.

14. The Appellant submitted that the Respondent did not respond to the objection.

15. To buttress its submission on the Respondent’s obligation to make an objection decision, the Appellant relied on Section 51(8) of the Tax Procedures Act (TPA) which states that: -“Where a notice of objection has been validly lodged within time, the Commissioner shall consider the objection and decide either to allow the objection in whole or in part, or disallow it, and the Commissioner's decision shall be referred to as an "objection decision".”

16. The Appellant cited the case of Republic versus Commissioner of Domestic Taxes, ex-parte Fleur Investments Limited [2020] eKLR, where the court observed that an objection stands allowed if no decision is made within 60 days as provided under Section 51(11) of the TPA. It submitted that its notice of objection dated and lodged on 8th March 2022 was allowed when the Respondent failed to make an objection decision.

17. It was the Appellant’s statement that the Respondent subsequently issued an Assessment Order on 7th July 2022, which the Appellant objected to on 6th August 2022, and that on 17th August 2022, the Respondent issued a tax demand for Kshs 11,818,888. 89.

18. The Appellant submitted that the 7th July 2022 assessment was based on the same issues and tax periods as in the assessment dated 8th February 2022.

19. The Appellant contended that it lodged its objection to the 8th February 2022 assessment within time, on 8th March 2022.

20. The Appellant submitted that the taxes assessed by the Respondent in the impugned assessment order are excessive, punitive, and claimed that the Respondent confirmed that it issued the assessments presumptively and failed to properly consider the documentation provided and understand the information.

21. The Appellant stated that the Respondent did not comply with the provisions of Sections 29 and 30 of the Tax Procedures Act when issuing the demand for payment of the additional assessment.

22. The Appellant submitted that the Respondent’s demand is unfounded, unreasonable, unjustified, excessive and not based on any material facts.

Appellant’s Prayers 23. The Appellant prays that the Tribunal finds: -a.That the Appellant is not liable to pay any additional taxes with regard to the years of income and tax periods under review.

Respondent’s Case 24. The Respondent’s case is premised on the Statement of Facts dated 4th October 2022 and filed on 5th October 2022 and its Written Submissions dated 4th April 2023 and filed on even date.

25. The Respondent made a preliminary objection stating that the Appellant’s Memorandum of Appeal dated 3rd September 2022 and filed on 5th September 2022 was fatally defective as the Appellant failed to exhaust the available mechanisms by appealing to the invalidation notice to the Respondent in accordance with Section 51 (6) of the TPA.

26. The Respondent stated that the Appellant was profiled for review of its returns and documents, upon which the Respondent established:a.That in 2016 and 2017, the annual sales and turnovers declared in the income tax and VAT returns were similar.b.That in 2018, 2019 and 2020 the income tax returns were filed with turnovers of Kshs 0, Kshs 1 and Kshs 1, respectively, despite the Appellant having had declared sales in its VAT returns.c.That the Appellant provided its bank statements which according to the Respondent, revealed that the company received more income in 2018 to 2020, as compared to the declarations made in the tax returns. That the Appellant did not explain why it under-declared income in its tax returns.

27. The Respondent stated that it estimated the Appellant’s taxable income for the years 2018, 2019 and 2020, where the Appellant had not declared sales turnover, by applying a profit margin of 30% of the sales established in the variance analysis to determine the income tax payable.

28. The Respondent stated that the income according to the Appellant’s bank statements was higher compared with the sales declared in the VAT returns, and it charged VAT on the sales turnover that it established as underdeclared.

29. The Respondent stated that it issued a manual demand notice to the Appellant via email on 9th February 2022 in a letter dated 8th February 2022.

30. The Respondent stated that it held working meetings with the Appellant, but that the Appellant failed to provide the requested information, and on 7th July 2022, the Respondent raised additional assessments.

31. The Respondent averred that on 6th August 2022, the Appellant lodged a late objection, but failed to give reasons for the late objection application.

32. The Respondent submitted that for an objection be considered as valid, a taxpayer ought to lodge a notice of objection within 30 days of receipt of an assessment as provided in Section 51 (2) of the TPA which states that: -“(2)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.”

33. The Respondent reiterated that it issued an additional assessment on 7th July 2022, and that the Appellant lodged its objection to the assessment on 6th August 2022, one day after 30 days of being notified of the assessment.

34. The Respondent stated that via email notices, it notified the Appellant that it filed the objection application out of time and requested it to give reasons for the late application, failure to which the application would be declared invalid.

35. The Respondent stated that the Appellant failed to respond to the email notices or explain the late objection despite the reminders, and that on 17th August 2022, the Respondent declined the application sought by the Appellant and confirmed the assessment order dated 7th July 2022.

36. The Respondent averred that the Appellant failed to provide records / evidence / documentation to support its reasons for lodging an objection out of time as required under Section 51 (7) of the TPA which states that: -“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.”

37. The Respondent referred to TAT 223 of 2021 Far East Connection Limited vs Commissioner of Domestic Taxes to cite the grounds upon which the Respondent may enlarge time within which a taxpayer can lodge a notice of objection to a tax assessment.

38. The Respondent submitted that the reason that the Appellant provided for lodging its objection to the assessment dated 7th July 2022 out of time, being that it objected on time via email, was not a reasonable cause, considering that the Appellant failed to provide evidence of the email.

39. The Respondent reinforced its discretion to allow or reject applications by taxpayers for extension of time to lodge a notice of objection by relying on cases of Nicholas Kiptoo Arap Korir Salat vs Independent Electoral and Boundaries Commission & 7 others [2014] eKLR and Shah vs Mbogo and another [1967] EA 116.

40. The Respondent further submitted that the Respondent did not misdirect itself in rejecting the Appellant’s objection of 6th August 2022, and confirming the 7th July 2022 assessment as it was guided by Section 51 (7) of the TPA.

41. The Respondent submitted that it considered all the available information and its findings were limited to the information available during the verification exercise, and cited Section 31 (1) (c) of the TPA below, which grants the Respondent the power to amend a taxpayer’s assessment as follows: -“(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 judgment, to the original assessment of a taxpayer for a reporting period to ensure that—a.–b.–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.”

42. In response to the Appellant’s ground of appeal that the Respondent failed in fact and in law in failing to give grounds upon which it arrived at the additional assessments and reasons for refusal to allow the Appellant’s objection, the Respondent stated that the additional assessment dated 7th July 2022 clearly enumerated the grounds for each assessment, and that it notified the Appellant of the reasons for its invalidation of the application to lodge an objection out of time in the letter dated 17th August 2022.

43. The Respondent averred that the Appellant did not produce such documents as cited in its ground of appeal for the Respondent to consider before delivering its decision, and that such new evidence (if at all) cannot be introduced at the stage of appeal to the Tribunal.

44. The Respondent submitted that it is trite that the Respondent’s determinations of tax deficiencies are presumptively correct, and the presumption remains so until a taxpayer produces competent and relevant evidence to support the taxpayer’s position.

45. The Respondent submitted that the Appellant failed to meet the burden of proof as required under Section 56 (1) of the TPA, as it failed to produce evidence to prove that the tax decision was incorrect before the Respondent and the Tribunal.

46. The Respondent submitted that it did not make an objection decision, or any appealable decision under any tax law and that the Appellant’s purported appeal is a nullity ab initio, and ought to be struck out because the Tribunal lacks jurisdiction on the appeal considering that the Appellant disregarded the doctrine of exhaustion contrary to Section 51 (1) of the TPA which states that: -“(1)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.”

47. The Respondent relied on the cases of Godfrey Osostsi vs Amani National Congress [2019] eKLR and Mui Coal Basin Local Community & 15 others v Permanent Secretary Ministry of Energy & 17 others [2015] eKLR to submit its rationale for the doctrine of exhaustion.

Respondents Prayers 48. The Respondent prays that the Tribunal:a.Upholds the Respondent’s Notice of Invalidation dated 17th August 2022. b.Declares the Assessment Order issued by the Respondent on 7th July 2022 to be legal.c.Dismisses the Appeal with costs.

Issues for Determination 49. The Tribunal has considered the facts of the matter and the submissions made by the parties, and considers that a single issue crystallizes for determination being:-Whether the Respondent erred in invalidating the Appellant’s objection in its notice of invalidation dated 17th August 2022.

Analysis and Findings 50. Having determined the issues that fall for its determination, the Tribunal proceeds to analyse them as hereunder.

a. Whether the Respondent erred in invalidating the Appellant’s objection in its notice of invalidation dated 17th August 2022. 51. On 7th July 2022, the Respondent issued to the Appellant Assessment Order Reference KRA20221779929 confirming income tax and VAT additional assessments for the tax periods of 2017, 2018, 2019 and 2020.

52. The Appellant lodged its notice of objection to the income tax and VAT additional assessments on 6th August 2022, which the Respondent invalidated in its notice of invalidation dated 17th August 2022.

53. The Respondent submitted that the Appellant lodged its objection out of time and that the reason that the Appellant provided for lodging its objection late, being that it objected on time via email, was not a reasonable cause, considering that the Appellant failed to provide evidence of the email.

54. The Tribunal analysed the time that the Appellant took to lodge its notice of objection to establish the Appellant’s compliance with the procedure for lodging a notice of objection as provided under Section 51 (2) of the TPA cited as below:-“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.”

55. The Tribunal observes that the Appellant was notified of the tax assessments on 7th July 2022, and lodged its notice of objection on 6th August 2022. The Appellant, having disputed the assessment, and being desirous of objecting to the assessments, was required to lodge a notice of objection within thirty days of being notified of the assessments, that is, on or before 6th August 2022.

56. The Tribunal perused the evidence presented before it and found that the Appellant lodged its objection within the timelines stipulated in Section 51 (2) of the TPA and not out of time as determined by the Respondent in its notice of invalidation dated 17th August 2022.

57. It is further the Tribunal’s considered view that the Appellant sufficiently discharged its burden of proof when it adduced evidence of when it lodged its notice of objection to support its Appeal against the impugned Respondent’s decision to invalidate its objection, as required under Section 30 (b) of the Tax Appeals Tribunal Act which provides: -“30. In a proceeding before the Tribunal, the appellant has the burden of proving—(b)in any other case, that the tax decision should not have been made or should have been made differently.”

58. The Tribunal finds that the Appellant objected to the assessments in time, cognisant of the importance of adherence to timelines of objecting to assessments. The Tribunal is 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.”

59. Based on the foregoing, the Tribunal finds that the Respondent was not justified to invalidate the Appellant’s objection.

Final Decision 60. The upshot of the foregoing is that the Appeal succeeds and the Tribunal accordingly proceeds to make the following Orders:a.The Appeal be and is hereby allowed.b.The Respondent’s notice of objection invalidation dated 17th August 2022 be and is hereby set aside.c.The Respondent to review the objection and documentation supplied by the Appellant and issue an objection decision within sixty days from the date of delivery of this Judgment.d.Each party to bear its own costs.

61. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 6TH DAY OF OCTOBER, 2023. GRACE MUKUHA - CHAIRPERSONGLORIA A. OGAGA - MEMBERJEPHTHAH NJAGI - MEMBERDR. ERICK KOMOLO - MEMBERTIMOTHY VIKIRU - MEMBER