[2024] KETAT 884 (KLR)

Goj v Commissioner of Domestic Taxes (Tax Appeal 1025 of 2022) [2024] KETAT 884 (KLR) (28 June 2024) (Judgment)

Neutral citation: [2024] KETAT 884 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 1025 of 2022

CA Muga, Chair, BK Terer, D.K Ngala, GA Kashindi & SS Ololchike, Members

June 28, 2024

Between

Elizabeth Chepkirui Goj

Appellant

and

Commissioner Of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a Kenyan registered taxpayer and a sole proprietor who runs various businesses including farming and a hotel.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, Cap 469 Laws of Kenya. 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. 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 Act for the purposes of assessing, collecting and accounting for all revenues in accordance with those laws.

3. The Respondent conducted investigations on the Appellant to confirm whether the Appellant was declaring the correct value added tax (VAT).

4. The Respondent issued the Appellant with a pre-assessment notice on 10th November 2021 citing variances between sales declared and income tax returns for the year 2016.

5. The Respondent issued the Appellant with an additional VAT assessment on 24th December 2021 for the period 2016 citing unexplained variances.

6. The Appellant on 24th March 2022 filed a late objection notice on iTax for the period 2016 objecting to the assessment amounting to Kshs. 1,754,401. 14.

7. On 28th April 2022, the Respondent allowed the Appellant to file the late objection out of time. On 9th June 2022, the Appellant forwarded the supporting documents. The Respondent proceeded to issue its objection decision on 3rd August 2022.

8. Aggrieved by the objection decision, the Appellant filed her notice of Appeal on 31st August 2022.

The Appeal 9. The Appeal is premised on the following grounds contained in the Appellant’s Memorandum of Appeal filed on 16th September 2022;a.The assessing officer erred in law and in fact in the confirmation of additional assessment against the objection of the Appellant.b.The VAT additional assessments were raised from computed tax arising from non-sales banking’s which were erroneously captured as sales in the final accounts then wrongly used to compute VAT additional assessments.c.The assessing officer used the wrongly and erroneously captured sales in the final accounts to make additions to the annual declared VAT self-assessments.d.The VAT additional assessment for the period January 2016 to December 2016 were raised from computed tax arising from income tax variance for the said period. This was an erroneous amount that included VAT instead of excluding VAT.e.The assessing officer erred in law and in fact by not considering the fact that errors in the computation of taxable income are to be brought to the attention of the Commissioner in compliance with Sections 31(2), 4(b) of the Tax Procedures Act, CAP 469B of Kenya’s Laws (hereinafter “TPA”).f.The assessing officer erred in law and in fact by not considering the information and explanation provided by the Appellant.

The Appellant’s Case 10. The Appellant’s case is contained in her Statement of Facts filed on 16th September 2022 and the same is set out hereunder:

11. On 24th December 2021, the Respondent raised VAT additional assessment for the period January 2016 to December 2016 against the Appellant for the amount Kshs. 2,467,352. 84. 00.

12. The Appellant objected to the additional assessment on 2nd March 2022, consequently, the Respondent issued a decision to the objection on 3rd August 2022.

13. The Appellant filed her intention to appeal dated 31st August 2022.

14. The Appellant prayed that the Tribunal would allow the appeal and set aside the additional VAT assessment raised by the Respondent from the erroneous amount that included VAT on non-vatable sales in violation with the Value Added Tax Act, CAP 476 of Kenya’s Laws (hereinafter “VAT Act”). The Appellant further prayed that the Tribunal would allow amendments to the additional assessments pursuant to the provisions of section 31 of the TPA.

Respondent’s Case 15. In response to the grounds of appeal as contained in the memorandum of appeal and the Statement of Facts dated and filed on 25th October 2022 where in the Respondent averred as follows:

16. The Respondent investigated the Appellant following receipt of intelligence that the Appellant was carrying on business and not declaring the income earned. The investigations were aimed at confirming whether the Appellant was declaring the correct VAT.

17. The Respondent issued the Appellant with a pre-assessment notice notifying the Appellant of the variances noted between the sales declared in the VAT3 and the income tax returns for the year 2016. The Respondent gave a computation of the VAT due and advised the Appellant to reach out to the Respondent for any clarification. The Appellant failed to respond to the pre-assessment notice.

18. The Respondent on 24th December 2021 issued the Appellant with additional VAT assessment for the same period based on the unexplained variances, comprising of Kshs. 1,426,000. 96 as the principal tax and penalties amounting to Kshs. 292,400. 19.

19. The Appellant filed a late objection notice on 3rd March 2022 on i-Tax objecting to the entire additional assessment of Kshs. 1,754,401. 14, with the Respondent allowing the late objection on 28th April 2022 while requesting the Appellant to provide supporting documents which the Appellant forwarded on 9th June 2022.

20. The Respondent upon reviewing the objection application and supporting documents proceeded to confirm the assessments vide letter dated 3rd August 2022. The Respondent averred that the Appellant stated in her objection that there was tax not in dispute amounting to Kshs. 103,898. 00.

21. The Respondent averred that a notice of appeal shall be valid if the taxpayer has paid the tax not in dispute or entered into an arrangement with the Respondent to pay the same. The Appellant has however not paid the undisputed tax.

22. The Respondent submitted on the Appellant’s ground that the Respondent erred in assessing the additional VAT raised from computing tax arising from non-sales banking’s which were erroneously captured as sales in the final accounts then wrongly used to compute the VAT additional assessments. The Respondent averred that the Appellant used the wrongly and erroneously captured sales in the final accounts to make additions to the annual declared VAT self-assessments.

23. Further, the Respondent pointed out that the Appellant found it in error for not considering that such computation errors in the taxable income are to be brought to the Respondent’s attention as per section 31(2) (4)b of the TPA. The Respondent submitted that the Appellant’s claims are inaccurate.

24. The Respondent avers that the Appellant filed their self-assessment returns for the year 2016 on 19th April 2017 declaring a turnover of Kshs. 14,125,890. 00, and the variance analysis for the additional VAT assessment was based on the said turnover as captured by the Appellant.

25. Further, the additional assessment based on the said variance were issued to the Appellant after she failed to address these variances despite being notified via the 10th November 2021 pre-assessment notice. The Respondent stated that Section 31 of the TPA allowed a taxpayer to apply to the Commissioner for amendment of a self-assessment providing timelines when the amendments may be made. The Appellant did not utilize this provision before the Respondent issued the additional assessments.

26. Further, the Appellant failed to address the assessed variances at the objection review stage by providing evidence in support of the explanations given for the variances in response to the ground by the Appellant that the Respondent erred in assessing the additional VAT from computed tax arising from income tax variance instead of excluding the same, the Respondent submits that this is an inaccurate claim.

27. The Respondent averred that unless otherwise stated, revenues and incomes are normally reported in the accounts and income tax returns VAT exclusive therefore, the variance figures arrived at were already VAT exclusive, the Appellant also did not submit evidence supporting their assertion that the income tax variance was VAT inclusive.

28. On the Appellant’s ground that the Respondent erred in not considering the information and explanation provided by the Appellant, the Respondent averred that the objection decision was made after all documents were considered and the explanations by the Appellant. Further, the Appellant did not specifically identify how and which of the records, explanations and information was disregarded by the Respondent, the Respondent therefore prays that the appeal be dismissed with costs to the Respondent.

Appellant’s Submissions 29. The Appellant’s submissions dated 14th March, 2023 wherein the Appellant averred as follows :

30. That the assessing officer erred in law and in fact in the confirmation of additional assessments against the objections of the Appellant while not considering the key facts. The Appellant submitted that it was erroneous to capture sales in the final accounts contrary to the TPA and the VAT Act.

31. That the assessing officer failed to consider explanation and information provided by the Appellant and also to consider key facts and errors of the fault in computation of the taxable income which ought to have been brought to the attention of the Respondent in compliance with Section 31(2) and (4)b of the TPA. The Appellant submitted, further, that the Respondent has not presented sufficient grounds to deny the Appeal as presented and neither has the Responded opposed the same.

32. The Appellant filed supplementary submissions dated 11th April 2023 specifying three issues for determination:

a. Whether the Appeal raises triable issues 33. The Appellant submitted that the appeal arises from the assessing officer’s error in law and fact in confirming the additional assessment against the Appellant’s objection, yet key facts were brought to the Respondent’s attention.

34. The Appellant submitted that the VAT additional assessments were raised purely from computed tax arising from non-sales banking which were erroneously captured as sales in the final accounts.

35. The Appellant submitted that the assessing officer used these erroneously captured sales to make additional VAT assessments.

36. The Appellant submitted that the tax variance was an erroneous amount inclusive of VAT which was used to compute the additional assessment instead of excluding VAT. Further that that all the documents were submitted in support of her claim and that the Respondent was also notified of the above errors on different occasions.

37. The Appellant on 9th June 2022 forwarded a letter to verify the Appellant’s claims, which the Respondent did not respond to. The Appellant submitted that she proceeded to make payments via payment registration No. 2020220001697482 and payment Reference 2020220002066857 which the Respondent has not acknowledged.

38. The Appellant submitted that in regard to section 52(2) of the TPA, the Appellant has partially complied with the said section and the Appellant’s part performance is not in contravention of the said section. It submitted therefore that the Appellant’s case is triable with a high probability of success and raises key issues.

39. The Appellant in her letter dated 13th May 2022 to the Respondent demonstrated her willingness to enter into a payment plan with the Respondent in line with Section 33(1) of the TPA regarding the extension of time to pay taxes due. The Appellant submitted that section 52(2) of the TPA provides as follows:“(2)A notice of appeal to the Tribunal relating to an assessment shall be valid if the taxpayer has paid the tax not in dispute or entered into an arrangement with the Commissioner to pay the tax not in dispute under the assessment at the time of lodging the notice.”

40. The Appellant submitted that the additional tax assessment was based on exempt income. She therefore pleaded for leniency in mitigating for waiver of interest and penalty.

b. Whether the learned assessing officer erred in law and in fact by not considering information and explanation provided by the Appellant. 41. The Appellant submitted that the assessing officer did not take into account the fact that errors or mistakes of fault in computation of taxable income are to be brought to the attention of the Commissioner in line with section 31(2) of the TPA which provides as follows: which reads:“(2)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.”

42. The Appellant submitted that the Respondent ignored the records produced as requested and failed to provide any feedback after perusing the documents showing that the Respondent negligently failed to consider the documents provided yet she had complied with section 59 of the TPA.

c. On the whether the Appellant has a right to be heard. 43. The Appellant submitted that this appeal raises key issues that ought to see light of litigation and the appeal should be allowed and confirmation of the Respondent set aside or be reviewed. She submitted that this Appeal also seeks to vacate, vary and or set aside orders that were put in place which were obtained through misrepresentation of true state of facts, as such it has become detrimental to the Appellant. She further submitted that and if these orders are not vacated, varied and or set aside then the Appellant’s right to be heard shall be defeated. The Appellant relied on the case of Richard Nchapai Leiyangu v. IEBC & Anor; 2 others, where the court held as follows:“The right to a hearing has always been a well-protected right in our constitution and is also the cornerstone of the rule of law. This is why even if the courts have inherent jurisdiction to dismiss suits, this should be done in circumstances that protect the integrity of the court process from abuse that would amount to injustice and at the end of the day there should be proportionality.”

44. The Appellant submitted that it is not in dispute that she provided all the necessary documents as requested by the Respondent, she further gave explanation on her business and how her business ceased operations around the year 2020 due to tough economic hardship including Covid-19 pandemic. The Appellant therefore urged this Tribunal to vary, review set aside additional assessment to protect the interest of the parties herein and allow the appeal.

Respondent’s Submissions 45. The Respondent’s submissions dated 30th March 2023 were filed on even date. The Respondent addressed the following issues:

a. On whether the Appeal has a basis in law. 46. The Respondent submitted that Section 52(2) of the TPA requires an Appellant to either pay the tax not in dispute or enter an arrangement with the Respondent to pay the tax not in dispute before or at the time of appealing Section 52(2) of the TPA provides as follows:“(2)A notice of appeal to the Tribunal relating to an assessment shall be valid if the taxpayer has paid the tax not in dispute or entered into an arrangement with the Commissioner to pay the tax not in dispute under the assessment at the time of lodging the notice. “

47. The Respondent submitted that the Appellant in their objection admitted to having a tax liability of Kshs.103,898. 00 not in dispute. The Appellant further stated that she wanted to enter into a payment plan for a period of six months to settle the undisputed tax. The Respondent claimed that the Appellant did not produce any evidence to show that she either paid the undisputed tax or entered into an arrangement on the same before lodging this Appeal thus the appeal is invalid. The Respondent relied on HCITA Case of No. 12 of 2018 Hewlett Packard East Africa Ltd v Commissioner of Domestic Taxes [2019] eKLR where the High Court held as follows:“In the end it follows that this Court having determined that the Appellant's appeal was not in compliance with Section 52 (2) of Tax Procedure Act grounds number 1,2,3 of this appeal are dismissed. They are dismissed because the appeal before the Tribunal was incompetent in view of Section 52 (2) of the Tax Procedure Act and having been incompetent no appeal can lie on those grounds before this Court.”

48. The Respondent further relies on Judgement Appeal No 311 of 2021-Victorious Investments Limited versus Commissioner of Investigations & Enforcement where it was held as follows:“This Tribunal is bound to uphold the word of statute; the Appellant has not shown that it entered any arrangement with the Respondent for payment of the taxes not in dispute nor is there any evidence of payment. Having not paid the taxes not in dispute, prior to lodging the notice of appeal this appeal is not properly lodged as the notice of appeal forming the substratum of the appeal process is invalid.”

b. On whether the additional assessment was justified 49. The Respondent submitted that decision to arrive at the additional assessment was justified and had basis in law as required under the TPA.

50. The Respondent submitted that it is at liberty to make assessments based on information available to it pursuant to Section 24(2) of the TPA which provides as follows:“(2)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.”

51. The Respondent relies on Section 31 (1) of the TPA empowers the Respondent to make alterations or additions to original assessments from available information for a reporting period based on the Commissioner's best judgement. Section 31(1) of the TPA provides 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 judgement, to the original assessment of a taxpayer for a reporting period to ensure that—(a)in the case of a deficit carried forward under the Income Tax Act (Cap. 470), the taxpayer is assessed in respect of the correct amount of the deficit carried forward for the reporting period;(b)in the case of an excess amount of input tax under the Value Added Tax Act, 2013 (No. 35 of 2013), the taxpayer is assessed in respect of the correct amount of the excess input tax carried forward for the reporting period; or(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.”

52. The Respondent submitted that it issued the VAT assessment after noticing that their variances between the sales declared by the Appellant in her income tax returns and the sales declared in the VAT returns for the year 2016.

53. The Respondent submitted that it relied on the best judgement based on information available to it in compliance with Section 31 of the Tax Procedures Act while raising the additional VAT assessment.

54. On this, the Respondent relies on the case of Commissioner of Domestic Taxes v Altech Stream (EA) Limited [2021] eKLR where it was stated that Section 31 (1) of the TPA allows the Commissioner to make an assessment based on such information as may be available and to the best of his judgement.

55. The Respondent submitted that where an Appellant makes an objection to the assessments issued by the Commissioner, the Appellant is obligated under section 51(3) of the TPA to provide all the relevant documentation it relies on in making the objection. The Respondent relied on the case of Boleyn International Limited v Commissioner of Investigations & Enforcement (Tax Appeal Tribunal No 55 of 2019).

56. In the Boleyn case, the Appellant failed to provide documents and the Tribunal held that there was no conceivable way the Respondent would have considered the objection as the same did not place itself within the parameters of Section 51(3) of the TPA.

57. The Respondent further relies on the case of Rongai Tiles and Sanitary Ware Limited v Commissioner of Domestic Taxes (Tax Appeals Tribunal No. 163 of 2017) where the Tribunal found that the wording of Section 51(3) of the TPA was clear that a notice of objection was valid if the conditions given in that section are met.

58. The Respondent submitted that vide a letter dated 28th April 2022, it requested the Appellant to provide specific documentation to validate their objection.

59. The Respondent submits that upon reviewing the documentation provided by the Appellant, the same did not satisfactorily reconcile the variances between the sales declared in the Appellant's income tax returns and the sales declared in the VAT returns.

60. The Respondent submitted that the Appellant did not discharge its burden of proof under section 56(1) of the TPA and Section 30 of the Tax Appeals Tribunal Act, CAP 469A of the Laws of Kenya (hereinafter “TATA”)

61. Section 30 of the TATA provides that when appealing to the Tribunal, the Appellant has the burden of proving that where an appeal relates to an assessment, that the assessment is excessive or in any other case, the tax decision should not have been made or should have been made differently. The Respondent relied on the case of Ushindi Exporters Limited versus Commissioner of Investigation and Enforcement (Tax Appeals Tribunal No 7 of 2015) where it was held as follows:“The burden of proving that the tax assessment is excessive or should have been made differently never shifts to the Respondent and is placed squarely on the Appellant as Section 30 (a) and (b) of the Tax Appeals Tribunal Act states..”

62. The Respondent further relies on the case of Tumaini Distributors Company (K) Limited and Commissioner of Domestic Taxes [2020) eKLR, where the High Court in determining the issue as to whether the Commissioner followed the correct procedure or correctly assessed a company's tax liability found that the Appellant had failed to provide the relevant documents despite several requests by the Commissioner. In the said case, the High Court upheld the decision of the Tribunal, holding that since the Appellant had not provided all the documents, the Commissioner was right in reaching the assessment based on the material available.

63. The Respondent submitted that the Appellant did not discharge her burden of proving that the assessment was erroneous and the Respondent was right in confirming the VAT assessment. The Respondent therefore prayed that the objection decision be upheld and the appeal be dismissed with costs to the Respondent.

Preliminary Objection 64. The Respondent raised a preliminary objection dated and filed on 25th October 2022 on the ground that this appeal has been filed contrary to Section 52(2) of the TPA.

65. The Tribunal will therefore proceed to analyse and determine this preliminary objection before proceeding with any other course of action.

66. Section 52(2) of the TPA provides as follows:“52. Appeal of appealable decision to the Tribunal(1)A person who is dissatisfied with an appealable decision may appeal the decision to the Tribunal in accordance with the provisions of the Tax Appeals Tribunal Act, 2013 (No. 40 of 2013).(2)A notice of appeal to the Tribunal relating to an assessment shall be valid if the taxpayer has paid the tax not in dispute or entered into an arrangement with the Commissioner to pay the tax not in dispute under the assessment at the time of lodging the notice.”

67. The Respondent submitted that the Appellant in its objection dated 2nd March 2022, admitted to having a VAT liability amounting to Kshs 103,898. 00. The Appellant in also indicated that it was willing to enter into a payment plan for a period of six months to settle the amount not in dispute.

68. The Respondent therefore submitted that this Appeal is invalid since the Appellant had neither paid the tax in dispute nor entered into an arrangement to pay the tax not in dispute prior to lodging her appeal. From the records, the Appellant provided a payment slip showing that she had paid Kshs 10,400. 00 in that regard. However, this is a demonstration of partial compliance by the Appellant, and further, the Tribunal notes that the six months proposed by the Appellant to enter into a payment plan with the Respondent had since lapsed.

69. Even though the Appellant showed willingness to comply with Section 52(2) of the TPA the Appellant did not provide other payment slips at the time of filing her appeal to show that she had cleared the undisputed amount now less Kshs.10,400. 00 that had already been paid.

70. In response to the submissions of the Respondent, the Appellant submitted through its supplementary submissions that she had partially complied with the Section 52(2) of the TPA and therefore there was compliance on her part. The Tribunal finds that Section 52(2) of the TPA is couched in mandatory terms by use of the term “shall”.

71. The Appellant therefore does not have the discretion in determining whether it can pay the tax in dispute. The law requires that the tax in dispute must be paid and or a plan of payment be provided before and or at the time of lodging an Appeal.

72. The Tribunal is guided by the decision in Hewlett Packard East Africa Ltd v Commissioner of Domestic Taxes [2019] eKLR where the court held as follows:“In the end it follows that this Court having determined that the Appellant’s appeal was not in compliance with Section 52 (2) of Tax Procedure Act Grounds Nos. 1, 2 and 3 of this appeal are dismissed. They are dismissed because the appeal before the Tribunal was incompetent in view of Section 52 (2) of the Tax Procedure Act and having been incompetent no appeal can lie on those grounds before this Court.”

73. In view of the foregoing, the Tribunal finds that the Appellant failed to comply with the mandatory statutory directive under Section 52(2) of the TPA. The Appellant’s failure to pay the tax not in dispute or enter into a payment plan before or at the time of lodging an appeal means that this appeal is incompetent and invalid for contravening Section 52(2) of the TPA.

74. The Appeal cannot stand for the above reasons as it is fatally defective. The Tribunal therefore finds that the Respondent’s Preliminary Objection is meritorious and will therefore proceed to down its tools.

Final Decision 75. In light of the foregoing analysis, the Tribunal finds that the Appeal herein is incompetent. The Tribunal will proceed to make the following orders:a.The Appeal be and is hereby struck out.b.Each party to bear its own costs

76. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 28TH DAY OF JUNE 2024. CHRISTINE A. MUGA - CHAIRPERSONBONIFACE K. TERER - MEMBERDELILAH K. NGALA - MEMBERGEORGE KASHINDI - MEMBEROLOLCHIKE S. SPENCER - MEMBER