[2024] KETAT 418 (KLR)

G. North and Sons Limited v Commissioner of Domestic Taxes (Appeal 92 of 2023) [2024] KETAT 418 (KLR) (22 March 2024) (Judgment)

Neutral citation: [2024] KETAT 418 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Appeal 92 of 2023

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

March 22, 2024

Between

G. North and Sons 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. Its principal activity is selling of engineering supplies and spare parts.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, Cap 469 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 revenue.

3. The Appellant was selected out of a return review exercise and the Respondent noted that the Appellant failed to declare income for the period 2018 in its Tax Return.

4. The Respondent also averred that there were variances established between the sales declared in the VAT returns and the Appellant's bank statements.

5. The Respondent made bank reconciliation and determined that the Appellant's expected sales for the period 2018 was Kshs. 219,247,714. 00.

6. From the expected sales the Respondent allowed several expenses. The expenses allowed were derived from the VAT returns on purchases made, rent paid and PAYE filed. The Respondent assessed the tax payable as Kshs. 23,555,087. 00.

7. The Respondent also made a comparison of the VAT returns filed and the bankings of the Appellant and established that there was a variance. Based on the variance, the Respondent computed VAT and demanded a tax of Kshs. 64,913,652. 00.

8. The Respondent then issued and confirmed additional assessments on 26th April 2022 demanding Kshs. 87,392,624. 00 from the Appellant.

9. On 2nd September 2022, the Appellant filed an objection to the additional assessments.

10. The Respondent acknowledged receipt of the late objection application on 5th October 2022 and requested the Appellant to provide supporting documents.

11. On the same date, the Respondent wrote to the Appellant asking it to provide reasons for the late objection and to submit documents to support the objection.

12. The Appellant’s tax agents wrote to the Respondent on 6th October 2022 indicating that they would respond to the email of 5th October 2022 by providing documents the following week upon the return of the Appellant’s directors.

13. The Respondent issued its objection decision on 31st October 2022 and demanded a total tax liability of Kshs. 132,599,671. 00 inclusive of penalties and interest.

14. Aggrieved by the objection decision, the Appellant filed a Notice of Appeal on the 26th January, 2023.

The Appeal 15. The Appeal is premised on the Memorandum of Appeal filed on 26th January 2023 raising the following twelve grounds:-a.That the additional assessment was estimated.b.That the additional estimated assessment was excessive by reason of some error or mistake of fact in the alleged income.c.That the estimated additional assessment was punitive, erroneous and not as per the income.c.That the Respondent while raising additional estimated assessment (Output VAT) made a substantial error or defect in the procedure provided by VAT Act, 2013 Section 17 and rules made thereunder which may possibly have produced error or defect in the decision of the case.c.That by the Respondent disregarding or neglecting Credit/or input tax against output tax was a decision contrary to the Law.c.That the Commissioner having ignored or neglected to grant Input Tax against output tax, was a decision having failed to determine some material issue of law or usage having the force of law and disregarded "fair administrative action” as provided for under Section 47 of the Constitution of Kenya, 2010. c.That no fair hearing was granted by the Commissioner. That the Respondent erred in law and fact by not according the Appellant a fair hearing and more specifically to hear the Appellant’s grounds and consider the substance of the matter. That no hearing was accorded to the Appellant before the decision was made. That the Respondent overlooked Article 50 of the Constitution of Kenya, 2010. c.That the Respondent while raising additional estimated assessment on Income tax corporate, made a substantial error or defect in the procedure provided by Income Tax Act Cap 470 Section 15, deduction allowed, and rules made thereunder which may possibly have produced an error in the decision of the case.c.That the Respondent while raising additional estimated assessment on Income Tax, Corporation tax, ignored expenses wholly and exclusively incurred by G. North & Sons Ltd in the production of that income, hence the decision was contrary to law.c.That the Respondent alleged that the chargeable income for the year of Income 2018 was Kshs. 78,516,086. 50 whereas in the ascertainment of the total Income of a person for a year of Income, Sections 15 and 16 of Cap. 470 shall be taken into account.k.That the Respondent deemed the difference between the declared Sales VAT and the alleged established income amount as taxable supply.k.That the Respondent erred in failing to allow the purchases that the Appellant legally incurred in the production of the income in the respective years.

Appellant’s Case. 16. The Appellant’s case is premised on the Statement of Facts filed on 26th January 2023.

17. The Appellant averred that the Respondent carried out tax reconciliation on the iTax platform of the Company.

18. That the Respondent alleged that the taxes dues were as follows:-a.Income tax return (IT2C) for the year of income 2018 had not been filed hence non declaration of income and therefore estimated additional assessment of Kshs. 23,555,086. 50 was raised and confirmed as principal Corporation tax.b.That there was variance between the Appellant’s bankings and the sales declared as per the VAT returns. That the variance and the disallowed inputs were brought to change at 16%.

19. That the Respondent issued the additional estimated assessments on 26th April 2022.

20. That the Appellant objected to the additional assessments on 2nd September 2022 and received acknowledgements on the iTax platform.

21. That the Respondent rendered its objection decision on 31st October 2022 and fully confirmed the assessments.

22. That the Appellant was dissatisfied with the Respondent's objection decision dated 31st October 2022 on which the Commissioner confirmed the additional assessment totaling to Kshs. 44,130,932. 00 including penalties and interest.

23. That the Appellant notified the Respondent of his intention to appeal against the said decision through the Notice of Appeal dated 26th January 2023.

24. That the Appellant filed the instant Appeal with the Tribunal on the same date.

Appellant’s prayers. 25. The Appellant prayed that the Tribunal: -a.Sets aside the objection decision and the additional assessments.b.That the Appellant be awarded the costs of this Appeal.

Respondent’s Case 26. The Respondent’s case is premised on the following documents filed with the Tribunal:-a.The Respondent’s Statement of Facts dated and filed on 24th February 2023 and the attachments thereto.b.The Respondent’s Written Submissions dated 14th August 2023 and filed on 16th August 2023.

27. In response to grounds 1, 2, 3, 4, 8 9,10 11, and 12 of Memorandum of Appeal, the Respondent reiterated that the assessments were correctly issued as there was no illegality in making an estimated assessment based on best judgement.

28. That the assessments were issued after the Appellant failed to file its income tax return despite the fact that sales were made as disclosed in its VAT returns.

29. That it was upon the Appellant to produce evidence including alleged expenses that were not properly allowed.

30. That further, the burden was on the Appellant to provide evidence that input VAT ought to have been claimed or were wrongly disallowed. That however,the Appellant did not provide any evidence that would have altered the assessment.

31. The Respondent averred that the Tax Procedures Act places the onus of proof on the taxpayer who in this case failed to avail evidence that would support a contrary position to the assessment or that would have guided the Respondent in arriving at a different objection decision.

32. That Section 56(1) of the Tax Procedures Act provides:-“In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”

33. The Respondent contended that it was not bound by the Appellant's returns, information or self-assessment and it is empowered to vary the assessments using any available information in Respondent's possession. That Section 24(2) of the TPA provides as follows:-“The Commissioner shall not be bound by a tax return or information provided by or on behalf of a taxpayer and the Commissioner may assess a taxpayer's tax liability using any information available to the Commissioner.”

34. The Respondent averred that when the Appellant was assessed, it was within the Respondent's mandate provided for under the law. That the law mandates the Respondent to assess the Appellant using whatever information is available to it.

35. In response to grounds 5, 6 & 7 of the Memorandum of Appeal, the Respondent averred that the Appellant failed to provide the documents requested in support of its objection and therefore the input VAT was disallowed.

36. The Respondent insisted that the Value Added Tax Act in Section 17 empowers it to disallow such input VAT where the necessary documents are not provided.

37. That further, several requests were made and meetings held with the Appellant with a view to granting the Appellant an opportunity to be heard by providing the relevant information, requests which the Appellant failed to adhere to.

38. The Respondent stated that the Appellant failed to provide the necessary documentations it relied upon in making its objection.

39. That Section 51(3) of the Tax Procedures Act provides as follows:“A notice of objection shall be treated as validly lodged by a Appellant under subsection (2) if-(a)-----------------(b)-----------------c.all the relevant documents relating to the objection have been submitted.”

40. That the Tax Procedures Act under Section 59 empowers the Respondent to require production of such documents vide issuance of notice as deemed necessary in determination of tax liability of a taxpayer.

41. That in default, then the Respondent can use the best judgment to make a determination. That Section 59(1) of the TPA states as follows:-“For the purpose of obtaining full information in respect of the income of a person or class of persons, or for any other purposes relating to a tax law, the Commissioner may, by notice in or an authorized officer may require any person by notice in writing to ------a.To produce for examination, at such time and place specified in the notice, any documents (including in electronic format), that are in the persons custody or under the persons control relating to the liability of any person;”

42. The Respondent submitted that the only issue for determination in this matter was:-“Whether the Respondent was right to issue and confirm income tax and VAT assessment amounting to Kshs. 132,599,671. 00.

43. The Respondent submitted that the assessment was arrived at after an in-depth investigation of the Appellant's tax affairs culminating into both Corporation tax and VAT assessments being issued to the Appellant.

44. That the workings leading to the income tax assessment for the period 2018 were provided to the Appellant. That from the workings, the net receipts from the Appellant's bankings were aggregated and output VAT adjusted leading to expected sales established income of Kshs. 219,247,714. 00.

45. That since there was no declared income tax return for the period 2018, the variance of Kshs. 219,247,714. 00 was arrived at. That allowable deductions being PAYE, purchases and rent expenses were allowed leading to a taxable income of Kshs. 78,516,955. 00.

46. The Respondent submitted that contrary to the Appellant's position, the Respondent allowed its expenses that were wholly and exclusively incurred in the generation of the income to the extent that the same were supported to the Respondent's satisfaction.

47. That the VAT assessment on the other hand covered the periods 2016- 2019 and was premised on the unexplained variance established between the Appellant's bankings and the sales declared as per the VAT returns.

48. That the VAT assessment was arrived at wherein the total receipts from bankings were aggregated, adjustments relating to debtors made (for the relevant periods), thereby arriving at the expected sales.

49. The Respondent submitted that since the basis of the assessments were well laid out, the burden shifted to the Appellant to demonstrate that it was erroneous or excessive, a burden that the Appellant failed to discharge.

50. The Respondent submitted that for the Corporation tax relating to the year of income 2018, the Appellant averred in its objection and indeed the Appeal before the Tribunal that the same was erroneous.

51. The Respondent submitted that it requested the Appellant to provide its financial statement for the year 2018 to justify its claim. That however, the same were never provided to the Respondent and none has equally been adduced before the Tribunal and the Respondent's decision therefore cannot be faulted.

52. The Respondent submitted that this position was reiterated by the Tribunal in TAT 304 of 2020; Desert Star Transporters Ltd-v- Commissioner of Investigations & Enforcement wherein its was stated as follows at paragraph 65:-“The objection decision is an unequivocal as to the Appellant's default in providing material documents and verifiable information that prompted the Respondent to disregard the costs of sale and other operational expenses that the Appellant had sought to be applied in arriving at its proper taxable income and appropriate tax liability.”

53. The Respondent submitted that instead, what the Appellant attached in its Appeal documents provided during objection review are alleged tax workings that were not supported by underlying financial statements for the said period as well as annual report and financial statement for the year 2019 which have no bearing on the tax liability for the year 2018.

54. The Respondent submitted that for VAT purposes, the Appellant in its objection and Appeal raised several grounds which are summarily premised on the fact that the Respondent failed to allow it claim input VAT on purchases made.

55. The Respondent submitted that the right to claim input VAT on purchases is premised on Section 17 of the VAT Act, which states as follows:-“(1)(1) Subject to the provisions of this section and the regulations, input tax on a taxable supply to, or importation made by, a registered person may, at the end of the tax period in which the supply or importation occurred, be deducted by the registered person, subject to the exceptions provided under this section, from the tax payable by the person on supplies by him in that tax period, but only to the extent that the supply or importation was acquired to make taxable supplies”.

56. The Respondent submitted that the Appellant failed to provide documents relating to alleged claims of input VAT to support its objection and the Appeal before the Tribunal.

57. That further, the claims were time barred as they could not be allowed beyond the 6 months window required by Section 17 of the VAT Act.

58. That no documents referred to under Section 17(3) of the VAT Act were provided by the Appellant including proof of underlying transactions leading to the purchases, despite the same being requested from the Appellant. That further, there was no corresponding confirmation from the Appellant's suppliers that such purchases/ transaction that the Appellant intended to claim as part of its input VAT had indeed taken place.

59. The Respondent urged the Tribunal to rely on the following cases:-a.Commissioner of Domestic Taxes v Galaxy Tools Ltd (2021) eKLR (income Tax Appeal No. E 088 of 2020).b.Osho Drapers Limited v Commissioner of Domestic Taxes [2022} e KLR (income Tax Appeal No. E147 of 2020).c.Kenya Revenue Authority v Man Diesel & Turbo Se, Kenya [2021] eKLR.

Respondent’s prayers. 60. The Respondent prayed that the Tribunal:-a.Dismisses the Appeal with costs.b.Upholds the Respondent’s objection decision.

Issues for Determination. 61. The Tribunal considered the facts of the matter and the submissions made by the Respondent and identified the following as the issues for determination:-a.Whether there is a valid Appeal before the Tribunal.b.Whether the Respondent was right to issue and confirm income tax and VAT assessments amounting to Kshs. 132,599,671. 00.

Analysis and Findings 62. Having identified the issues that fell for its determination, the Tribunal went ahead to analyze them as hereunder.a.Whether there is a valid Appeal before the Tribunal.

63. The genesis of this Appeal was the additional estimated assessments issued to the Appellant on 26th April 2022.

64. The Appellant objected to the additional assessments on 2nd September 2022.

65. The Respondent rendered its objection decision on 31st October 2022 and fully confirmed the assessments.

66. The Appellant dissatisfied with the Respondent's objection decision issued a Notice of Appeal on 26th January 2023 and filed the Appeal on the same date.

67. The Tribunal notes that the procedure for appeal as set out in Section 13 (1) (b) of the Tax Appeals Tribunal Act (TAT Act) requires that a notice of appeal shall be submitted to the Tribunal within thirty days upon receipt of the decision of the Commissioner.

68. The Tribunal notes that the applicable law for invoking its jurisdiction is Section 13 of the Tax Appeals Tribunal Act (No. 40 of 2013) and Section 51(12) of the Tax Procedures Act (No. 29 of 2013).

69. Section 13 (1) (b) and (3) The Tax Appeals Tribunal Act specifically stipulate the process and timelines for filing a competent appeal as follows:-“13 (1) A notice of appeal to the Tribunal shall –a.be in writing or through electronic means;b.be submitted to the Tribunal within thirty days upon receipt of the decision of the Commissioner.(2)………………..3. The Tribunal may, upon application in writing or through electronic means, extend the time for filing the notice of appeal and for submitting the documents referred to in subsection (2).”

70. Section 51 (12) of the Tax Procedures Act provides as follows:“A person who is dissatisfied with the decision of the Commissioner under subsection (11) may appeal to the Tribunal within thirty days after being notified of the decision”.

71. The Tribunal observes that the Appellant received the Respondent’s objection decision on 31st October 2022 but filed its Notice of Appeal on 26th January 203, about three months subsequent to receiving the objection decision.

72. The Tribunal further notes that the Appellant failed to apply for leave to file its Notice of Appeal out of time as required by Section 13 (3) of the TAT Act which provides as thus: -“The Tribunal may, upon application in writing or through electronic means, extend the time for filing the notice of appeal and for submitting the documents referred to in subsection (2).”

73. The Tribunal is of the considered view that the timelines for appealing the Commissioner’s decisions are clearly set out in the law, and all taxpayers are liable to comply with those timelines, save for when unavoidable circumstances prevent a taxpayer from fulfilling its obligations as envisioned in Section 13 (4) of the TAT Act which states that:-“An extension under subsection (3) may be granted owing to absence fromKenya, or sickness, or other reasonable cause that may have prevented the applicant from filing the notice of appeal or submitting the documents within the specified period.”

74. The Tribunal buttresses the importance of adherence to timelines by referring to Eastleigh Mall Limited v Commissioner of Investigations & Enforcement (Income Tax Appeal E068 of 2020) [2023] KEHC 20000 (KLR) where the court held as follows: -“... Parliament in its wisdom knew that in matters tax, time is very crucial as those in commerce need to make informed decisions. If the Commissioner is allowed to exercise his discretion and stay ad-infinitum before issuing an objection decision, the tax payer would be unable to make crucial decisionsand plan his/her business properly. The timelines set are mandatory and not a procedural technicality.”

75. The Tribunal is further 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.”

76. The Tribunal also relies on the Court’s holding in Nicholas Kiptoo Arap Korir Salat v IEBC & 6 Others [2013] eKLR where the court stated as thus:-“This Court, indeed all courts, must never provide succor and cover to parties who exhibit scant respect for rules and timelines. Those rules and timelines serve to make the process of judicial adjudication and determination fair, just, certain and even-handed. Courts cannot aid in the bending or circumventing of rules and a shifting of goal posts for, while it may seem to aid one side, it unfairly harms the innocent party who strives to abide by the rules. I apprehend that it is in the even-handed and dispassionate application of rules that courts give assurance that there is a clear method in the manner in which things are done so that outcomes can be anticipated with a measure of confidence, certainty and clarity where issues of rules and their application are concerned…”

77. Based on the law and the case laws cited above, the Tribunal finds that there is no valid Appeal before it, therefore, the Tribunal does not have the jurisdiction to determine the matters in this Appeal.b). Whether the Respondent was right to issue and confirm income taxand VAT assessment amounting to Kshs. 132,599,671. 00.

78. Having established that there was no valid Appeal before it, the Tribunal did not delve into the second issue for determination as it had been rendered moot.

Final Decision 79. The upshot of the foregoing is that the Appeal fails, and the Tribunal accordingly proceeds to make the following Orders:a.The Appeal be and is hereby struck out.b.Each party to bear its own costs.

79. It is so ordered.

DATED and DELIVERED at NAIROBI this 22nd day of March, 2024. ****GRACE MUKUHACHAIRPERSONJEPHTHAH NJAGIDR. ERICK KOMOLOMEMBERMEMBERTIMOTHY B. VIKIRUGLORIA A. OGAGAMEMBERMEMBERJUDGMENT TAT 92 OF 2023 G. NORTH AND SONS LIMITED VS OMMISSIONER OF DOMESTIC TAXESPage 14