[2023] KETAT 320 (KLR)

Godka Enterprises Limited v Kenya Revenue Authority (Appeal 641 of 2022) [2023] KETAT 320 (KLR) (19 May 2023) (Judgment)

Neutral citation: [2023] KETAT 320 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Appeal 641 of 2022

RM Mutuma, Chair, EN Njeru, RO Oluoch, D.K Ngala & EK Cheluget, Members

May 19, 2023

Between

Godka Enterprises Limited

Appellant

and

Kenya Revenue Authority

Respondent

Judgment

Background 1. The appellant is a private limited Company incorporated in Kenya under the Companies Act, laws of Kenya. Its main form of business is in real estate.

2. The respondent is the Kenya Revenue Authority created under the Kenya Revenue Authority Act, 1995. Under Section 5 (1) of the Act, the Kenya Revenue Authority is an agency of the Government for the collection and receipt of all revenue. Further, under section 5(2) of the Act 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 respondent subjected the appellant to a returns review where a variance was noted on the sales declarations in the appellant’s VAT returns and Income declared in the Income tax returns for the year 2018 and a further variance between the appellant’s declared sales and the turnover declared in the Income tax returns for the year 2019.

4. The respondent sent a letter dated August 13, 2020 via the appellant’s postal and email addresses requesting documents which the appellant availed on September 5, 2020 vide email.

5. The respondent sent its findings report to the appellant on October 2, 2020 via email which revealed a total tax liability of Kshs. 14,178,284. 00 being Kshs. 10,004,415. 00 for Income tax and Kshs. 4,173,869. 00 for VAT.

6. Upon further communication between the parties, the respondent issued a second Findings Report to the appellant on February 10, 2021 via email with adjustments incorporated which culminated in further communication between the parties, and subsequently, the respondent issued additional assessments dated 24th and February 25, 2021 and a demand letter dated February 25, 2021 for Income Tax and VAT for the periods December 2018 and December 2019.

7. The appellant objected to the additional assessment on March 25, 2021 after which the respondent issued a manual objection decision dated May 4, 2021 informing the appellant that its objection has been partly allowed.

8. The respondent issued an objection decision on May 11, 2022 partially allowing the appellant’s objection assessing outstanding Income tax and VAT as Kshs. 6,194,934. 91 and Kshs. 1,898,641. 10, respectively.

9. The appellant, being dissatisfied with the respondent’s decision and assessment filed a notice of appeal on June 6, 2022.

The Appeal 10. The appeal is premised in the memorandum of appeal dated June 17, 2022 and filed on even date on the following grounds:a.The respondent erred and misdirected itself in issuing a decision out of time and in contravention of section 51 of the Tax Procedures Act.b.The respondent erred in law and misdirected itself in issuing a decision one year and two months after receiving the appellant’s Objection dated March 25, 2021. c.The respondent’s decision issued 14 months after the objection is illegal and void.d.The Tax Procedures Act does not provide for a partial decision.e.The respondent did not provide a decision capable of being appealed against within the time given by the Tax Procedures Act and rendering the decision 14 months later is illegal and void.f.The respondent’s Objection decision dated May 11, 2022 is illegal and void. It is in breach of the appellant’s right to fair administrative action and right to property guaranteed under articles 47 and 40 of the Constitution.

The appellant’s Case 11. The appellant’s case was premised on its statement of facts dated and filed on June 17, 2022.

12. The appellant stated that the impugned Income tax assessment comprised unsupported expenses and undeclared rental income.

13. It averred that it had provided proof for the expenses that were incurred for building and repairs and that given the fact that the appellant’s main income is from commercial rental income, building repairs and maintenance expenses are allowable expenses.

14. It cited section 15(2)(f) of the Income Tax Act which provides that: “Without prejudice to subsection (1) of this section, in computing for a year of income the gains or profits chargeable to tax under section 3(2)(a) of this Act, the following amounts shall be deducted: … f) in the case of the owner of premises, any sums expended by him during such year of income for structural alterations to the premises where such expenditure is necessary to maintain the existing rent… Provided that no deduction shall be made for the cost of an extension to, or replacement of, such premises;”

15. It contended that it provided the respondent with reconciliations of its bank statements which had no variances and that this section of the objection was allowed in the respondent’s decision.

16. It averred that it filed an objection to the assessment on March 25, 2021 and on May 4, 2021 the respondent issued a “partial decision” to the objection and stated that the comprehensive decision would follow in due course which decision was issued on May 11, 2022, a year and 2 months later outside the time allowed by law and that the appellant’s objection stood allowed at the expiry of 60 days.

17. It relied on the case of Kenya Revenue Authority & 2others v Darasa Investments Limited (2018) eKLR where the Court of Appeal reiterated: “Legitimate expectation refers to the principle of good administration or administrative fairness that, if a public authority leads a person or body to expect that the public authority will, in the future, continue to act in a way either in which it has regularly (or even always) acted in the past or on the basis of a past promise or statement which represents how it proposes to act, then, prima facie, the public authority should not, without an overriding reason in the public interest, resale from that representation and unilaterally cancel the expectation of the person or body that the state of affairs will continue. This is of particular importance if an individual has acted on the representation to his or her detriment.”

18. It cited the case of Republic v Commissioner of Domestic Taxes & another, ex-parte Kenton College Trust [2013] eKLR where it was set out thus: “for one to successfully rely on the principle of legitimate expectation it must be demonstrated that:- a. The representation underlying the expectation is clear, unambiguous, and devoid of relevant qualification; b. The expectation is reasonable; c. The representation was made by the decision-maker; and d. The decision-maker had the competence and legal backing for making such representation.”

19. It asserted that upon the expiry of the time provided by the law, the appellant deemed the Objection to have been allowed as per the law and that the respondent’s partial decision is illegal and void as the respondent was expected to act following the law.

20. The appellant cited the case of Commissioner of Domestic Taxes v Mennonite board of East Africa T/A Rosslyn Academy.

21. It further quoted article 47 of the Constitution of Kenya and the case of Republic v Kenya Revenue Authorityex-parte L.A.B International Kenya Limited [2011] eKLR where the court held as follows:- “The common law, in its evolution, has defined the rules of conduct for a public authority taking a public decision, entrusting the overall control-jurisdiction in the hands of the Courts of law; but for Kenya, such a general competence of the Courts is now no longer confined to the terms of statute law and subsidiary legislation, but has a fresh underwriting in the Constitution of Kenya, 2010, article 47, which imposes a duty of fair administrative action, and [art. 10(2) (c)] demands “good governance, integrity, transparency, and accountability”.

22. It cited the case of Judicial Service Commission v Mbalu Mutava &another [2015] eKLR where the Court of Appeal stated that:-“... article 47(1) … encompasses several duties – duty to act expeditiously, duty to act fairly, duty to act lawfully, duty to act reasonably and, in the special case mentioned in article 47(2), duty to give written reasons for the administrative action. The duty to act lawfully and duty to act reasonably refers to the substantive justice of the decision whereas the duty to act expeditiously, efficiently and by fair procedure refers to procedural justice… article 47(1) marks an important and transformative development of administrative justice for, it not only lays a constitutional foundation for control of the powers of state organs and other administrative bodies but also entrenches the right to fair administrative action in the Bill of Rights. The right to fair administrative action is a reflection of some of the national values in article 10 such as the rule of law, human dignity, social justice, good governance, transparency, and accountability. The administrative actions of public officers, state organs, and other administrative bodies are now subjected by article 47(1) to the principle of constitutionality rather than to the doctrine of ultra vires from which administrative law under the common law was developed.”

23. It averred that the respondent's conduct in the current matter has flouted the standards set out in the Mbalu Mutava case (supra).

24. It maintained that the respondent did not deliver the decision within the time provided by law and the decision must be set aside.

25. It reiterated that it made its objection decision within the time allowed by the law but the respondent took one year and two months to give its decision despite being reminded by the appellant.

26. It stated that the respondent’s actions infringe on its right to property under article 40 of the Constitution which infringement is only permissible when done under the Constitution and any Act of Parliament. It quoted section 51(11) of the Tax Procedures Act and article 260 of the Constitution .

The appellant’s prayers. 27. The appellant consequently prayed for the Honourable Tribunal to find that:a.The appeal be allowed;b.The appellant’s objection to the assessment was allowed by operation of the law;c.The respondent be ordered to make necessary amendments to the taxpayer’s records to reflect that the objection decision was allowed;d.The respondent’s Objection decision is flawed in law and ought to be set aside; ande.The costs of the Appeal be awarded to the appellant.

The respondent’s Case 28. The respondent’s case is premised on its statement of facts dated and filed on July 15, 2022.

29. It stated that the objection decision was confirmed on the iTax system on April 21, 2021 in conformity with section 51(11) of the Tax Procedures Act.

30. It cited section 5 of the KRA Act and section 4(1) of the Tax Procedures Act to reiterate its position that it worked within its mandate under the law and could thus not be said to be ultra vires.

31. It quoted section 51(2) and (3) of the Tax Procedures Act to aver that the appellant did not lodge a valid notice of objection as it did not state precisely the grounds of objection and amendments required.

32. It posited that it issued a manual objection decision dated May 4, 2021 in line with the documents availed for review. It added that the appellant did not provide documents satisfactory enough to warrant a validly lodged notice of objection rendering its objection rejected.

33. The respondent averred that the appellant is obligated to maintain and provide all necessary documentation required of it under tax law and quoted sections 23(1) and 59(1) of the Tax Procedures Act.

34. It stated that a letter was issued to the appellant on October 13, 2021 providing the total taxes outstanding which provided details of the section of the laws relied upon together with the VAT computation and income tax and only had details of the principle tax as the decision was yet to be implemented on the iTax platform to give the current penalties and interests.

35. It averred that upon resolution of the system challenges, the iTax amended assessments for Income tax for 2018 and 2019 were issued on May 9, 2022 which include the entire tax outstanding including interest and penalties for VAT and Income tax.

36. It stated that attempts to implement the decision arising from the partially accepted objection decision proved to be difficult and as a result, the same was not implemented on the iTax system and quoted section 51(8) of the Tax Procedures Act which allows for partial objection decisions.

37. It averred that it adequately communicated to the appellant its requirement to share all relevant documents to it vide email correspondences as per section 23(1) of the Tax Procedures Act.

38. It provided that the appellant has not provided any evidence to contradict its objection decision.

The respondent’s prayers 39. The respondent prayed for orders that the Tribunal:-a.Upholds the respondent’s decision as proper and in conformity with the provisions of the law;b.This Appeal be dismissed with costs to the respondent as the same is devoid of any merit.

Issues for Determination 40. After perusing through the appellant’s memorandum of appeal, both parties’ statements of facts together with the parties’ submissions, the Tribunal is of the view that the following are the issues falling for determination:a.Whether the objection decision dated May 9, 2022 is valid.b.Whether the respondent’s assessment of outstanding Income Tax and VAT as Kshs. 6,194,934. 91 and Kshs. 1,898,641. 10 respectively is justified.

Analysis and Findings 41. The Tribunal wishes to analyse the issues as hereunder:

a. Whether the Objection Decision dated 9th May 2022 is valid. 42. In the case herein, the appellant argued that the respondent’s objection decision was invalid as it was issued past the sixty-day provision of the law. The respondent asserted that the appellant’s objection was invalid as it did not provide all the necessary documentation and clearly state the necessary changes that it required to be made. It stated that it issued a partially-allowed objection which was issued on time and that the law allows for partial allowance of the objection.

43. Section 51 of the Tax Procedures Act provides for objections and states as follows:“(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.(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; and (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). (c) all the relevant documents relating to the objection have been submitted.(4)Where the Commissioner has determined that a notice of objection lodged by a taxpayer has not been validly lodged, the Commissioner shall immediately notify the taxpayer in writing that the objection has not been validly lodged. The Commissioner shall notify in writing the taxpayer of the objection decision and shall take all necessary steps to give effect to the decision, including, in the case of an objection to an assessment, making an amended assessment.(8)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".(10)An objection decision shall include a statement of findings on the material facts and the reasons for the decision.(11)the commissioner shall make the objection decision within sixty days from the date of receipt of— (a) the notice of objection; or (b) any further information the Commissioner may require from the taxpayer, failure to which the objection shall be deemed to be allowed. ”

44. Gleaning at the documents provided by the parties, the tribunal observes that there was communication between both parties until March 25, 2021 when the appellant raised an objection to the assessment, and on May 4, 2021 the respondent issued a “partial Decision” to the objection and advising that the comprehensive decision would follow in due course which decision was issued on May 11, 2022.

45. The Tribunal finds that the document presented by the appellant as the objection was proper and in conformity with the law in its substance and form.

46. Section 51(8) of the Tax Procedures Act provides that the Commissioner shall, upon receipt of a validly lodged objection, allow in whole or in part or reject the objection. The Section states as follows: -“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 Commissioner's decision shall be referred to as an "objection decision"

47. This Section of the law is very clear in its wording and the Tribunal will not employ any other inference to it as what the respondent is trying to imply. The law does not provide for a “partial decision” such as what was issued by the respondent in the instant case.

48. The Tribunal therefore rejects the respondent’s argument that the “partial objection” dated May 4, 2021 issued by it was proper in law. The impugned document is not a valid objection decision as it merely informs the appellant that it will provide a comprehensive decision in due course. There is no indication of what the decision is nor how much of the objection was allowed. The respondent did not provide any explanation or workings to support its decision.

49. It is unfair for the respondent to keep the appellant waiting for an objection decision for a whole year after issuing its placement decision which falls short of a valid objection decision. There was no way for the appellant to prepare an appeal against the decision as there was no further information provided on the partially allowed objection decision. A partially allowed objection decision is one which accepts parts of the objection and rejects the rest of it with reasons for the decision which the appellant can use to raise an appeal against.

50. The tribunal finds that the respondent issued its Objection decision long past the 60-day timeline provided under Section 51(11) of the Tax Procedures Act and as such the same is therefore time-barred.

51. Having found that the objection decision issued by the respondent was time-barred, the Tribunal finds no need to delve into the remaining issue for determination as the finding in (a) above effectively brings the dispute to a close.

Final Decision 52. The upshot to the foregoing is that the appeal is meritorious and the Tribunal consequently makes the following orders;-i.The appeal be and is hereby allowed;ii.The respondent’s Objection decision dated May 9, 2022 be and is hereby set aside;iii.Each party to bear its own costs.

53. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 19TH DAY OF MAY, 2023. ……………………………ROBERT M. MUTUMACHAIRMAN………………………….ELISHAH N. NJERUMEMBER.......................................RODNEY O. OLUOCHMEMBER………….....…………DELILAH K. NGALAMEMBER.....................................EDWIN K. CHELUGETMEMBERJudgment - Appeal No. 641 of 2022 – Godka Enterprise Ltd -vs- Kenya Revenue Authority Page 7