[2024] KETAT 1439 (KLR)

Friedrich Naumann Foundation for Freedom v Commissioner of Domestic Taxes (Tribunal Appeal E977 of 2023) [2024] KETAT 1439 (KLR) (4 October 2024) (Judgment)

Neutral citation: [2024] KETAT 1439 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tribunal Appeal E977 of 2023

RM Mutuma, Chair, D.K Ngala, Jephthah Njagi, M Makau & T Vikiru, Members

October 4, 2024

Between

Friedrich Naumann Foundation for Freedom

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a local chapter of a global organization that supports sustainable entrepreneurial community projects and offers political education in Germany and abroad through events and publications. It also supports talented young students with scholarships. The Appellant has a registered office in Nairobi and maintains offices throughout Germany and in over 60 continues around the world.

2. The Respondent is an officer appointed under and in accordance with Section 13 of the Kenya Revenue Authority Act. Under Section 5 (1) of the Act, the Respondent is charged with the responsibility of among others, assessment, collection, accounting and the general administration of tax revenue on behalf of the Government of Kenya.

3. The Appellant applied for Income Tax Exemption vide its letter dated 19th October 2022 which application the Respondent rejected vide its letter dated 10th May 2023.

4. The Appellant objected to the Respondent’s letter rejecting its application through the Appellant’s letter dated 9th June 2023.

5. Vide its letter dated 19th June 2023, the Respondent advised the Appellant that a rejection of an Income tax exemption application was not a tax decision.

6. Aggrieved by the Respondents response, the Appellant filed its Notice of Appeal dated and filed on 22nd December 2023.

The Appeal 7. The Appeal is premised on the following grounds of Appeal as stated in the Appellant’s Memorandum of Appeal dated and filed on 22nd December 2023 on the grounds that;a.That the Respondent erred in deeming the decision under objection as an appealable decision instead of a tax decision defined under Section 2 of the Tax Procedures Act, 2015. b.That the Respondent wrongly and unfairly denied the Appellant an opportunity to present the information and documents listed in the Rejection Decision.c.That the Respondent erred in stating that the organization was not registered in Kenya for the period under review.

The Appellant’s Case 8. The Appellant’s case is premised on its:a.Its Statement of Facts dated and filed on 22nd December 2023 together with the documents attached thereto; and,b.Written submissions dated 26th August 2024 and filed on 28th August 2024.

9. The Appellant canvassed its case by expounding on its three grounds of Appeal. It faulted the Respondent’s letter dated 19th June 2023 in which the Respondent stated that it could not issue an Objection Decision because the rejection of an income tax exemption application was not a tax decision. It averred that Rule 2 of the Tax Appeals Tribunal (Procedure) Rules, 2015 includes a decision on an application by a self-assessment having filed its application for Income Tax exemption (both manually and online). Hence, the Respondent’s decision communicated in letters dated 4th December 2023 and 19th June 2023 was indeed a tax decision.

10. It was the Appellant’s assertion that it was denied an opportunity to present information and documents listed in the Respondent’s rejection notice as evidence for consideration before issuance of an Objection Decision. It averred that it requested for a meeting in its objection notice to present and explain the documents it wished to avail. However, its request was not considered essentially denying it on opportunity to table evidence within the statutory 60 days’ time limit under Section 51 of the Tax Procedures Act.

11. The Appellant contended that it would have sufficiently discharged its duty of providing evidence in the case in line with Section 56 and 57 of the Tax Procedures Act. It contended further that it was ready and willing to avail the information and documents requested by the Respondent but was denied the opportunity granted under Section 51 of the TPA.

12. It was the Appellant’s contention that the Respondent erred in stating that the organization was not registered in Kenya as it was denied the opportunity to clarify the registration issue to the Respondent. It averred that it was legally operating in Kenya and recognized under Section 969 of the Companies Act. Further, that it was formed by the operation of law under the provisions of the Privileges and Immunity Act, Cap 179, Laws of Kenya and that it is operating in Kenya courtesy of a Cooperation Agreement directly with the Government of Kenya and also between Germany and Kenya.

13. The Appellant stated that there were two agreements one between the Governments of Kenya and Germany signed in the year 2020. It stated further that it was issued with a tax registration number (PIN) on the strength of the registration status presented in the 2020 agreement. Hence the Respondent is estopped from using this issue of the Appellant’s purported non-registration as a ground for rejection of an Income Tax exemption.

14. In its written submissions, the Appellant raised three issues for determination, submitted as herein under;

Whether the Respondent’s decision communicated on 4th December and 19th June 2023 erred in stating that the decision under objection is an appealable decision not a tax decision. 15. The Appellant submitted that in the Respondent’s letter dated 19th June 2023 the Respondent had asserted that the rejection of an Income Tax exemption application was not a tax decision and that the Appellant was advised to lodge an Appeal to the Tax Appeals Tribunal in accordance with the TAT Act, 2013 Act if dissatisfied with the Respondent’s decision.

16. The Appellant submitted that it disagreed with the interpretation taken by the Respondent by referring to the Tribunal’s confirmation in the ruling Misc App. No E104 of 2023 where it stated that any response to an application by a self-assessment taxpayer is a tax decision from the Respondent.

17. It was the Appellant’s contention that its application for Income Tax exemption was indeed an application by a self-assessment taxpayer, and the Respondent’s rejection was therefore a tax decision and not an appealable decision. The Appellant faulted the Respondent’s contention that the dismissal of the Misc. Application No. E102 of 2023 made the Tribunal functus officio on the issue. It therefore clarified that the said application was for seeking for orders to set aside the Respondent’s decision and compel the Respondent to issue an Objection Decision. The Tribunal therefore dismissed the application on the basis that it was incompetent as it lacked the jurisdiction to entertain such applications, and not because of lack of merit in the grounds presented.

18. The Appellant argued that the Tribunal seemed to have later changed its position in a similar application for same orders under Misc App. No E104 of 2023 since it ruled that the Respondent’s decision was a tax decision and not an appealable decision. It therefore submitted that the Respondent erred in its decision of 19th June 2023 that refused to review the Appellant’s objection on the ground that it is an appealable decision and not a tax decision.

Did the Respondent deny the Appellant an opportunity to discharge its sacred burden of proof in the process prescribed under Section 51 of the Tax Procedures Act (TPA). 19. On this issue the Appellant submitted that the grounds for rejection of the exemption application by the Respondent granted it the opportunity to challenge the decision under Section 51 (2) & (3) of the TPA through a Notice of Objection. Hence it wrote its Notice of Objection on 9th June 2023 which the Respondent failed to admit or consider the grounds by refusing to issue an Objection Decision as set out under Section 51 (8) of the TPA .The Appellant therefore averred that the refusal to admit the objection notice, and instead invalidated it denied the Appellant the opportunity to discharge its duty by providing evidence in a subsequent appeal case in line with Sections 56 and 57 of the Tax Procedures Act.

20. It was the Appellant’s submission that it availed information and documents requested by the Respondent, however the same were rejected through the Respondent’s invalidation hence denying it a sacred opportunity of adducing evidence. In buttressing its point, the Appellant relied on the Tribunal’s case of SamichConstruction Ltd vs. Commissioner of Domestic Taxes TAT No.133 of 2020.

Should the failure by the Respondent to issue an objection decision to date as communicated in its decision of 19th June 2023 automatically deem the Appellant’s objection as allowed under Section 51 (II) of the TPA. 21. The Appellant submitted that the Respondent’s letter dated 19th June 2023 communicated its refusal to admit or review the Appellant’s Objection on the basis of lack of jurisdiction to review an appealable decision hence refusing to issue an Objection Decision on the same as envisaged under Section 51 (II) of the Tax Procedures Act.

22. It was therefore the Appellant’s contention that the unlawful invalidation of its Notice of Objection by the Respondent effectively threw out much needed evidence that ought to have been considered even by the Tribunal. The Appellant therefore submitted that its objection ought to be deemed allowed by dint of Section 51(III) of the TPA. The Appellant further observed that the Tribunal had already communicated its inability to entertain an application to compel the Respondent to comply with Section 51(II) in its orders provided under Msc. App No. E086 of 2023 therefore it was only fair and just that the throwing out of Appellant’s objection notice is remedied by operation of section 51 (II) of the TPA.

23. The Appellant therefore prayed that the Tribunal allows the Appeal and;a.Upholds the objection filed by the Appellant;b.Declares the Appellant’s Objection as allowed by operation of Section 51 (II) of the Tax Procedures Act 2015; and,c.Makes such other orders that it may deem appropriate.

The Respondent’s Case 24. The Respondent’s case is premised on its Statement of Facts dated 26th January 2024 and filed on 29th January 2024 and together with the documents attached thereto. The Respondent did not file any written submissions and opted to prosecute its case based on its pleadings on record.

25. In response to the Appellant’s grounds of Appeal as set out in the Memorandum of Appeal, the Respondent considered three issues for determination.

Whether the Respondent erred in deeming the decision under objection as an appealable decision instead of a tax decision defined under Section 2 of the Tax Procedures Act. 26. The Respondent placed reliance on Section 3 of the Tax Procedures Act and stated that the rejection of the Appellant’s Income Tax Exemption application was not a tax decision as alleged by the Appellant and therefore could not be objected under Section 51 of the TPA. The Respondent referred to the Appellant’s Misc. App. No E102 of 2023 which sought the same order as those in this Appeal and which the Tribunal dismissed as it was functus officio with regards to the issue then, which would be similar to the current issue.

27. It argued that the Respondent’s decision herein could only be deemed to be an appealable decision which is defined under Section 3 of the Tax Procedures Act which defines an appealable decision as an Objection Decision and any other decision made under a tax law other than a tax decision, or a decision made in the course of making a tax decision.

Whether the Respondent denied the Appellant an opportunity to present the information and documents listed in the decision. 28. The Respondent stated that the Appellant was accorded the opportunity to provide the information and records at the application stage. However, it did not meet the criteria as outlined under responses to ground (1) of the rejection notice. Hence the Appellant could not claim that it was denied a chance to present its documents.

Whether the Respondent erred in stating that the Appellant was not registered in Kenya for the period under review. 29. The Respondent averred that the Appellant had not been registered in the period in which it applied for exemption, therefore the burden of proof was on the Appellant to prove that the Respondent erred in stating that it was not registered in Kenya for the period under review. Further that the Appellant failed to discharge its burden of proof as per the provisions of Section 56 (I) of the Tax Procedures Act as read with Section 30 of the Tax Appeals Tribunal Act.

30. The Respondent stated that having rejected the Appellant’s application and informed them the reasons for rejection, it was incumbent upon the Appellant, if it still sought for exemption to address the questions raised by the Respondent in the Appellant’s initial application as the Appellant resubmitted its application for reconsideration. The Respondent reiterated that the Appellant had failed to discharge its burden of proof in proving that the Respondent’s decision was incorrect.

31. The Respondent therefore prayed that the Tribunal would find: -a.That the Respondent’s Decision issued on 4th December and 19th June 2023 be found to be proper in law and be upheld; and,b.That the Appeal be dismissed with costs to the Respondent as the same lacks merit.

Issues For Determination 32. The Tribunal has considered the parties pleadings, documentation and the Appellant’s submissions and is of the considered view that the Appeal raises two issues for determination.i.Whether the Respondents decision as stated in its letter dated 19th June, 2023 a Tax Decision under Section 51 of the Tax Procedures Act or an Appealable Decision.ii.Was the Respondent justified in rejecting the Appellant’s Income Tax Exemption application.

Analysis And Findings 33. Having established the two issues for determination, the Tribunal will proceed to analyse them as hereunder:

Whether the Respondents decision as stated in its letter dated 19th June, 2023 a Tax Decision under Section 51 of the Tax Procedures Act or an Appealable Decision. 34. In its first ground of Appeal, the Appellant had stated that the Respondent erred in deeming the decision under objection as an Appealable decision instead of a Tax decision defined under Section 2 of the Tax Procedures Act, 2015. On its part, the Respondent had asserted that its decision could only be deemed to be an appealable decision as defined under Section 3 of the Tax Procedures Act which states among others that an appealable decision means as Objection Decision and any other decision made under a tax law other decision a tax decision, or a decision made in the course of making a tax decision.

35. In terming it a tax decision, the Appellant had asserted that it had applied for tax exemption through its application dated 25th January, 2022 which the Respondent replied to vide its letter dated 10th May, 2023 which the Appellant objected to vide its letter dated 9th June 2023. It contended that this objection qualified as a notice of objection under Section 51 (1) and (2) of the TPA hence the Respondent was obliged to issue an Objection Decision in accordance with Section 51 (8) of the TPA. Therefore, according to the Appellant, the Respondent’s failure to issue an Objection Decision arising from the Appellant’s objection dated 9th June 2023 implied that the Appellant’s objection was deemed allowed and that the Respondent ought to issue the tax exemption.

36. Section 2 of the Tax Procedures Act as preferred by the Appellant defines a tax decision as;“Tax decision means –a.An assessment;b.A determination under section 17(2) of the amount of tax payable or will become payable by a tax payer;c.A determination of the amount that a tax representative, appointed person, director or controlling member is liable for under section 15, section 17 and section 18;d.A decision on an application by a self-assessment taxpayer under section 31(2)e.A refund decisionf.A decision under section 48 requiring repayment of a refund; org.A demand for a penalty.”

37. While the Appellant termed the Respondent’s letter of 19th June 2023 as a tax decision, the Respondent deemed it as an appealable decision and relied on Section 3 of the Tax Procedures Act which defines an appealable decision as:“Appealable decision means and objection decision and any other decision made under a tax law other than-a.A tax decision; orb.A decision made in the course of making a tax decision.”

38. The Tribunal notes that the dispute arose when the Appellant applied for Income Tax Exemption relying on paragraph 10 of the First Schedule to the Income Tax Act based on the activities it carried out in Kenya. It further averred that Section 2 (d) of the TPA qualifies its application as a tax decision as it considered itself a self-assessment taxpayer. However, the said Section emphasizes that the application should be under Section 31 (2) of the TPA. The said Section provides;“A taxpayer who has made a self-assessment may apply to the Commissioner within the period specified in subsection (4) (b) (i), to make an amendment to the taxpayer’s self-assessment.”

39. Reading from the provisions of Section 2 and Section 31 (2) of the TPA, the Appellant’s application for exemption of income tax is not a tax decision hence cannot be subjected to Section 51 of the TPA. However, it is an appealable decision under Section 3 of the TPA which would aptly be described as“any other decision made under a tax law other than –a.tax decision or a decision made in the course of making a tax decision”

40. It is the Tribunal’s finding that while the Respondents decision is not a tax decision, it is an appealable decision and which the Tribunal will consider on its own merit.

Whether the Respondent justified in rejecting the Appellant’s Income Tax Exemption Application. 41. The Tribunal notes that the Appellant applied for exemption status under paragraph 10 of the First Schedule of the Income Tax Act Cap 470 which provides as follows;“Subject to section 26 the income of an institution, body of persons or irrevocable trust, of a public character established solely for the purposes of the relief of the poverty or distress of the public or for the advancement of religion or education –a.established in Kenya; orb.Whose regional headquarters is situated in Kenya,In so far as the Commissioner is satisfied that the income is to be expended either in Kenya or in circumstances in which the expenditure of that income is for the purposes which result in the benefit of the residents of Kenya;Provided that any such income which consists of gains or profits from a business shall not be exempt from tax unless such gains or profits are applied solely to such purposes and either;i.Such business carried on in the course of the actual execution of such purposes,ii.The work in connection with such business is mainly carried on by beneficiaries under such purposes; oriii.Such gains or profits consist of rent (including premiums or any similar consideration in the nature of rent) received from the leasing or letting of land and any chattels leased or let therein and provided further that an exemption under this paragraph –A.shall be valid for a period of five years but may be revoked by the Commissioner for any just causes; andB.Shall, where an applicant has complied with all the requirements of this paragraph, be issued within sixty days of the lodging of the application.”

42. In rejecting the Appellant’s application of 25th January, 2022, the Respondent had stated the following as reasons for the rejection;a.The activities of the organization were not properly reported to the extent that they could be examined against paragraph 10 parameters. They were proposals from the Inter Regional Economic Network which the foundation provided and funded.b.In place of a partnership agreement, the foundation provided a document which they used to request for additional funding from the Germany Ministry for Development cooperation (BMZ).c.The organization was not registered in Kenya for the period under review.d.The financial statements provided are not in Kenyan currency and the first set of financials for the Kenyan operation are not yet due.e.The foundation did not provide proof of income to warrant tax exemption.f.Bank statements were not provided.

43. It is the Tribunal’s observation that the Appellant did not adduce the evidence that was sought by the Respondent for further consideration of its Application. In its second ground of Appeal, the Appellant stated that the Respondent wrongly and unfairly denied the Appellant an opportunity to present the information and documents listed in the rejection decision. However, there is neither proof of any attempt to provide these documents to the Respondent, nor the Respondent’s refused to accept the information and documents. The Appellant’s claims therefore remain as mere averments.

44. The Tribunal upon perusal of the Appellant’s documents, noted that it (the Appellant) filed documents for the Tribunal’s consideration, some of which, were in a foreign language which is not a language that the Tribunal could comprehend, further no translation thereof was filed together with those documents.

45. Such documents as the Tribunal observed, did no aid the Appellant’s case and under such circumstances it would amount to the Appellant having not filed the said documents.

46. The Tribunal relies on its ruling in TAT No.538 of 2021 Greenroad Kenya Limited vs. Commissioner of Domestic Taxes where it held;“The Tribunal’s considered view is that failure by the Appellant to avail the documents requested granted the Respondent the powers to use its best judgement as provided for under Section 31 (1) of the Tax Procedures Act.”

47. The Tribunal further associates itself with the case of CMS Aviation Limited vs. Cruisair Ltd (No.1) (1978) KLR 103;(1976-80) IKLR (835) where Madan J. (as he then) was stated as follows;“Pleadings contain the averment of the parties concerned. Until they are proved or disapproved, or there is an admission of them by the parties, they are no evidence and no decision could be founded upon them. Proof is the foundation of evidence. Evidence denotes the means by which an alleged matter of facts, the truth of which is submitted for investigation. Until their truth has been established or otherwise, they remain un-proven. Averments in no way satisfy, for example, the definition of evidence as anything that makes clear or obvious ground for knowledge indication or legitimacy, that which makes truth evident or renders evident to the mind that it is truth”

48. It is worth noting that the Appellant not only mis-directed itself by deeming the Respondent’s decision as a tax decision, but also failed to avail the relevant information and documentation to the Respondent and to the Tribunal during the Appeals stage for consideration.

49. In view of the foregoing the Tribunal finds that the Respondent was justified in rejecting the Appellant’s Income Tax Exemption application

FINAL DECISION 50. The upshot of the foregoing is that the Appeal lacks merit and the Tribunal proceeds to make the following final orders;a.The Appeal be and is hereby dismissedb.Each party to bear its own costs.

51. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 4TH DAY OF OCTOBER 2024ROBERT M. MUTUMA - CHAIRMANDELILAH K. NGALA - MEMBERJEPHTHAH NJAGI - MEMBERMUTISO MAKAU - MEMBERDR TIMOTHY B. VIKIRU - MEMBER