[2023] KETAT 942 (KLR)

Friends Hotel Kakamega Limited v Commissioner of Domestic Taxes (Tax Appeal 1148 of 2022) [2023] KETAT 942 (KLR) (Commercial and Tax) (8 December 2023) (Judgment)

Neutral citation: [2023] KETAT 942 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Commercial and Tax

Tax Appeal 1148 of 2022

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

December 8, 2023

Between

Friends Hotel Kakamega Limited

Appellant

and

The Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a limited liability company duly incorporated under the Companies Act. Its principal activity is a hotel business in Kakamega.

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 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 arose when the Respondent carried out tax investigations into the Appellant's affairs from whence it averred that it had established that there were variances between the turnover declared by the Appellant in its filed Income tax returns whereupon it issued it with additional VAT Assessment on 30th May 2022.

4. The Appellant objected to the assessment in the iTax portal on 25 July 2022.

5. The Respondent notified the Appellant vide a letter dated 3rd August 2022 that its objection was invalid.

6. The Appellant was aggrieved by this decision and it filed its Notice of Appeal on the 27th September 2023.

The Appeal 7. The Appellant filed its Memorandum of Appeal on the 7th October 2022 wherein it raised the following grounds of Appeal:a.That the Respondent erred in law and fact by subjecting farming income which is exempt, to VAT contrary to the provisions of the VAT CT, 2012. b.That the Respondent erred in law and fact by charging VAT on items that are expressly exempted from VAT subject to the VAT Act 2013. c.That the Respondent acted in total disregard of the Fair Administrative Actions Act, 2005 by not allowing the Appellant sufficient time to defend themselves and disregarding all the explanations given in the letter of objection.d.That the Appellant suffered procedural impropriety by having a scan on many matters on the same establishments going on at the same time and relating to the same tax heads by different Officers in the same Tax Service Office.e.That the Respondent erred in law and fact by totally disregarding Section 31(1) of the Tax Procedures Act, 2015 which requires the Respondent to amend an assessment (referred to in this Section as the original assessment”) by making alterations or additions, from the available information to the best of its judgment.

Appelant’s Case 8. The Appellant premised its Appeal on its Statement of Facts filed on 7th October 2022 where it stated that the Respondent acted in total disregard of the provision of Section 32(1) of the Tax Procedures Act, 2015 which states that:-“(1)Subject to this section, the Respondent may amend and assessment (referred to in this section as the ‘original assessment’) by making alternatives, from the available information and to the best of the Respondent’s judgment, to the original assessment of a taxpayer for a reporting period to ensure that.”

9. It was also its position that it had filed all its previous returns and the Respondent was malicious in this matter as it issued its decision hurriedly before the lapse of the mandatory 60-day period.

10. The Appellant submitted that its rights under Article 47 of the Constitution were violated when the Respondent failed to consider the information that had been availed to it in making its assessment. It supported this with the cases of Nizoba International Trading Company Limited v Kenya Revenues Authority (2000) eKLR and Republic of Kenya Revenue Authority ex-parte Amaco Kenya Limited (2014) eKLR.

Appellant’s Prayers 11. The Appellant’s prayers to the Tribunal were for orders that:-a.The Appeal be allowed.b.That this Honourable Tribunal forthwith withdraws and cancels the Objection decision letter dated 2nd September 2022. c.That this Honourable Tribunal directs the Respondent to consider all the material facts presented before him to enable him to determine our correct tax position.d.That this Honourable Tribunal orders the Respondent to stay the enforcement of assessed taxes until the matter is conclusively determined.

Respondent’s Case 12. The Respondent defended this Appeal with its Statement of Facts filed on 7th November 200 and the written submissions filed on 25th May 2023.

13. The Respondent averred that:a.Its tax investigations established that there were variances between the turnover declared by the Appellant in its filled Income tax returns and the sales declared in the VAT returns for the period under review.b.For the tax period year 2018, the turnover declared in the Income tax returns and the audited accounts was Kshs. 16,464,130. 00 while the total VAT turnover for the year was Kshs. 12,240,357. 75. The variance of Kshs. 4,223,772. 25 was deemed to be undeclared VAT sales.c.For the tax period year 2019, the turnover declared in the Income tax returns and the audited accounts was Kshs. 14,064,942. 00 while the total VAT turnover for the year was Kshs. 10,769,069. 20. The variance of Kshs.3, 295,872. 80 was deemed undeclared VAT sales.d.It consequently, issued the Appellant with additional VAT assessment for the tax period months of December 2018 and December 2019 on the 30th May 2022.

14. The Respondent stated that:a.The additional VAT assessment was based on the variances between the sales declared in the VAT returns and the turnover declared in the Income tax returns and the turnover declared in the Income tax returns for the tax period under review.b.The variances between the turnover declared by the Appellant in its filed Income tax returns and the sales declared in the VAT returns for the tax period years 2018 and 2019 were subjected to VAT at 16%.c.The Appellant had objected but failed to give the reasons for the objections and the documentation in support of the objection as was required of it under Section 51 of the Tax Procedures Act, 2015.

15. It stated that Sections 58 and 59 of the Tax Procedures Act 2015 empowered it to seek documentation to ascertain the tax liability and in this instant case the Appellant failed to avail documentation in support of its late objections even after it sought the same. It relied on Tumaini Distributors Company (K) Limited v Commissioner of Domestic Taxes [2020] eKLR to support this case.

16. Based on the above, the Appellant submitted that it opted to invoke Section 31 of the TPA to amend the Appellant's self-assessment tax returns and issue additional assessments based on the information available and its best judgment. It relied on the case of Wilken Telecommunication Limited vs. Commissioner of Domestic Taxes No. 195 of 2021 to urge this point.

17. It was its view that the Late Objection Rejection Notice dated 19th September 2022 was proper as it was based on the information available to it.

18. The Respondent stated that the Appellant had not proved its case as is required of it under Sections 56 (1) of the Tax Procedures Act, 2015 Section 107 of the Evidence Act, Cap 80.

Respondent’s prayer 19. The Respondent prayed that this Honourable Tribunal finds that:i.The Late Objection Rejection Notice dated 19th September 2022 be upheld.ii.This Appeal be dismissed with costs to the Respondent as the same is without merit.

Issue for Determination 20. The Tribunal has gleaned through the pleadings and documents filed by the parties in this Appeal and it is of the considered view that the issue that falls for determination in this Appeal is:a.Whether the Respondent’s invalidation of the notice of objection was justified?

Analysis and Determination a. Whether the Respondent’s invalidation of the notice of objection was justified? 21. The Respondent stated in its notice of invalidation dated 3rd Appellant 2022 that the Appellant's objection had been invalidated under Section 51(3) of the TPA for the following reasons:a.The Appellant had not uploaded its letter of objection.b.The Appellant had not stated while attaching thereon supporting documents why the objection was not lodged in time.c.The Appellant had not submitted bank statements and monthly Z reports.

22. Section 51 (3) of the TPA states as follows regarding invalidation of objection:“(3)A notice of objection shall be treated as validly lodged by a taxpayer under subsection (2) if—a.the notice of objection states precisely the grounds of objection, the amendments required to be made to correct the decision, and the reasons for the amendments;b.in relation to an objection to an assessment, the taxpayer has paid the entire amount of tax due under the assessment that is not in dispute or has applied for an extension of time to pay the tax not in dispute under section 33(1); andc.all the relevant documents relating to the objection have been submitted.”

23. The grounds upon which an invalidation notice can be issued are thus well settled and prescribed in law and failure to submit an objection notice is not one of those grounds. The demand for an objection letter to validate the objection contravened Section 51(3) of the TPA. The said demand was thus illegal.

24. Moreover, the Respondent has admitted in its Statement of Facts that it received the Appellant's notice of objection on the 25th July 2002. It is thus incomprehensible how it could agree with one side of the mouth that it had received the said document and yet state with its other side of the mouth that the said document had not been received.

25. Secondly, Section 51(3) of the TPA which was relied on by the Respondent to invalidate the Appellant's objection does not state that a taxpayer is required within it to provide reasons why the objection could not be lodged in time. This demand by the Respondent therefore went beyond the ambit of Section 51(3) of the TPA that it had relied on to invalidate the objection. The said action and its codification in a letter dated 19th September 2022 was hence illegal.

26. The sum total of the above analysis is that the Appellant's invalidation notice was laced with illegalities and it cannot be allowed to stand. There is a hallowed and well-settled legal maxim known as Ex turpi causa non oritur actio. It means that no court will lend its aid to a man who finds his cause of action upon an immoral or illegal act. When put in a simpler format it means that no action can arise from an illegal act.

27. This principle was enunciated in the English case of Scott v Brown, Denning & Mcnab Company (3) [1892] 2QB 724 on page 728 where Lindley LJ said:-“Ex turpi causa non oritur actio. This old and well-known legal maxim is founded in a good sense and expresses a clear and well-recognized legal principle, which is not confined to indictable offences. No court ought to enforce an illegal contract or allow itself to be made the instrument of enforcing obligations alleged to arise out of a contract or transaction which is illegal if illegality is duly brought to the notice of the court, and if the person invoking the aid of the court is himself implicated in the illegality. It matters not whether the defendant has paraded the illegality or whether he has not. If the evidence adduced by the plaintiff proves the illegality, the court ought not to assist him."

28. The content of the Respondent’s invalidation notice contravened Section 51(3) of the TPA as discussed above. It is thus based on an illegality which cannot be used or relied on to sustain the Respondent’s assessment.

Final Decision 29. For the reasons set out above, the Tribunal finds that this Appeal has merit and proceeds to issue the following orders;a.The Appeal be and is hereby allowed.b.The Respondent‘s Invalidation decision and the orders arising thereof be and are hereby set aside.c.The Respondent to consider and issue an appropriate objection decision in relation to the Appellant’s notice of objection dated 25th July, 2022 within Thirty (30) days of the date of delivery of this Judgment.d.Each party is to bear its own costs.

30. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 8TH DAY OF DECEMBER, 2023. ERIC NYONGESA WAFULA...................CHAIRMANDR. RODNEY O. OLUOCH............. MEMBERABRAHAM K. KIPROTICH.............MEMBERCYNTHIA B. MAYAKA....................MEMBEREUNICE NG’ANG’A.........................MEMBERBERNADETTE GITAR.....................MEMBER