[2024] KETAT 836 (KLR)

Green Kenya Investment Corporation Limited v Commissioner of Domestic Taxes (Tax Appeal E097 of 2023) [2024] KETAT 836 (KLR) (28 June 2024) (Judgment)

Neutral citation: [2024] KETAT 836 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E097 of 2023

RM Mutuma, Chair, B Gitari, EN Njeru, M Makau & AM Diriye, Members

June 28, 2024

Between

Green Kenya Investment Corporation Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a limited Company registered in Kenya in 2012 with its main activity being provision of Environmental Consultancy and Investment Services.

2. The Respondent is a principal officer appointed under and in accordance with Section 13 of the Kenya Revenue Authority Act, the Authority 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 Respondent carried out an investigation on the Appellant’s accounts covering the period from January 2016 to 2018. This resulted to issuance of a tax assessment on 31st December 2021 for taxes amounting to Kshs 3,328,107. 79. The Appellant objected to the assessment vide a letter dated 19th January 2022.

4. The Respondent invalidated the notice of objection on 16th February 2022 on grounds that the Appellant failed to meet the requirements of section 51(3) of the Tax Procedure Act, 2015. Consequently, the Respondent issued a Confirmation of Assessment dated 19th August 2022 and 9th February 2023.

5. The Appellant being dissatisfied with the Respondent’s decision, appealed to this Tribunal vide a Notice of Appeal dated and filed on 9th March 2023.

The Appeal 6. The Appeal is based on the Memorandum of Appeal dated 23rd March 2023 and filed on the even date raising the following grounds:i.That the Respondent’s assessment of tax liability of the Appellant of Kshs. 319,715. 60 and Kshs. 2,918,392. 19 for 2018 for income tax and VAT respectively is erroneous.ii.That the Respondent’s assessment of Kshs 319,715. 60 for income tax does not take into consideration the audited financial statements of the Appellant for the years 2016 and 2017 as follows:a.In 2016 the company recorded a trading loss of Kshs. 541,992. 00. b.In 2017, the Company recorded a trading loss of Kshs. 1,285,070. 00 during this year of income.c.In 2016 and 2017, the Appellant did not generate any income that is taxable, except in the case of withholding tax, which was deducted at source.iii.That the Respondent erred in assessing VAT of Kshs. 2,918,392. 19 for the Appellant for 2018 on basis that the Appellant is not and was not registered for VAT; the Appellant did not charge for or collect VAT from customers; and that the Appellant was not and is not liable for VAT registration.

Appellant’s Case 7. The Appellant’s case is based on its;i.Statement of Facts dated and filed on 23rd March 2023 together with documents attached thereto;ii.Written Submissions dated and filed on 29th April 2024; and,iii.Witness statement by Mutua Patrick Nzoka dated and signed on 6th October 2023 and filed on an even date, adopted as evidence in chief on 26th March 2024.

8. The Appellant stated that the Respondent issued a demand notice dated 8th February 2023 and a Confirmation of Assessment dated 9th February 2023. According to the Appellant, the Respondent’s assessment of tax liability of the Appellant of Kshs. 319,715. 60 and Kshs. 2,918,392. 19 for years of income 2016 and 2018 for corporate tax and VAT respectively is erroneous.

9. The Appellant averred that the Respondent’s assessment of Kshs. 319,715. 60 for income tax does not take into consideration the audited financial statements of the Appellant for the years 2016 and 2017 as follows:a.In 2016 the company recorded a trading loss of Kshs 541,992. 00b.In 2017, the Company recorded a trading loss of Kshs 1,285,070. 00 during this year of income.c.In 2016 and 2017, the Appellant did not generate any income that is taxable, except in the case of withholding tax, which was deducted at source.

10. According to the Appellant, the Respondent erred in assessing VAT of Kshs. 2,918,392. 19 for the Appellant for 2018 on grounds that the Appellant is not and was not registered for VAT; the Appellant did not charge for or collect VAT from customers; and that the Appellant was not and is not liable for VAT registration.

11. The Appellant also relied on witness statement of Mutua Patrick Nzoka. The witness stated that the Respondent based the additional assessments on banking records. As per the company records and banking summary analysis, only 9% of the total banking’s related to income. He stated that 40% were interbank transfers and fixed deposits and 21% were inter-company loans.

12. The witness emphasized that the Respondent’s assessment of Kshs. 319,715. 60 for income tax does not take into consideration the audited financial statements of the Appellant for the years 2016 and 2017 where the company recorded trading losses of Kshs. 941,992. 00 and Kshs. 1,285,070. 00 respectively.

13. Finally, the witness maintained that the Respondent’s VAT assessment of Kshs. 2,918,392. 19 for the Appellant for 2018 is erroneous because the Appellant was not registered for VAT during the period under investigation and that the Appellant has additionally never charged for or collected VAT from customers and has never been liable for VAT registration.

14. In further support of the Appeal, the Appellant filed written submissions on 29th April 2024 wherein the Appellant submitted that the Respondent assessed taxable income based on banking records only and without taking into account allowable and deductible expenses as well as the financial records and audited financial statements. It relied on Sections 15 (1) and (2) of the Income Tax Act which provide that in ascertaining the total income of a person for each year of income all expenditure which is wholly or exclusively incurred should be deducted to ascertain the total income for any year of income.

15. The Appellant cited the case of Kenya Revenue Authority vs. Maluki Kitili Mwendwa [2021] eKLR, wherein Mativo J stated that a taxpayer initially needs to establish a prima facie case, that is to show basic facts supporting their position with unchallenged evidence, then the onus shifts to the revenue authority to counter that evidence or lose the case. Consequently, the Appellant submitted that it provided documentation to the Respondent and this Honourable Tribunal showing the banking details and analysis of its accounts.

16. The Appellant submitted that an analysis of the documentary evidence shows the Appellant was recording losses for the period 2016 to 2017, the non-income transactions deposited in the Appellant’s bank accounts that included the intercompany transfers, proceeds of the sale of assets, and expenses such as payment of financial loans to the directors of the Appellant. The Appellant relied on the case of Usafi Services Limited vs. the Commissioner of Domestic Taxes (Tax Appeal 1094 of 2022) [2023] KETAT 875 (KLR) wherein the Tribunal ruled that the income computed by the Respondent in establishing the Appellant’s Corporation tax liability should be adjusted to exclude non-income amounts.

17. It submitted that the Respondent assessed a tax liability of VAT of Kshs. 4,124,047. 00 from 2016 and 2017 based on banking records that is contrary to Section 5 of VAT Act on the basis that the Appellant did not charge for or collect VAT from customers, and the Appellant was not liable for VAT registration.

18. The Appellant further submitted that the Notice of Objection is not time-barred. It submitted that it requested for approval to lodge a late objection and stated that Mutua Patrick Nzoka, the Managing Director, was indisposed during the period and provided all the relevant documents including a medical report and a medical review letter. It submitted further that the late objection was not rejected for being filed late but it was rejected for allegedly not having supporting documents, yet the it provided supporting documents.

19. The Appellant relied on Section 120 of the Evidence Act that provides as follows:“When one person has, by his declaration, act or omission, intentionally caused another person to believe a thing to be true and to act upon such belief; neither he nor his representative shall be allowed, in any suit or proceeding between himself and. such person or his representative, to deny the truth of that thing.”

20. Finally, the Appellant submitted that had the Respondent informed that its Objection had been rejected for reason of lateness, the Appellant would have applied for extension of time from the Respondent or from this Honourable Tribunal. Both the Respondent and the Honourable Tribunal have the power to extend such time.

Appellant’s Prayers 21. The Appellant prayed for the following orders:a.This Appeal be allowed.b.That the Confirmation of Assessment of tax by the Respondent dated 9th February 2023 be set aside.c.The Appellant’s Objection dated 28th December 2022 be allowed.d.Costs of this Appeal be awarded to the Appellant.

The Respondent’s Case 22. The Respondent’s case is premised on its;i.Statement of Facts dated 19th April 2023 and filed on 20th April 2023 together with documents attached thereto; and,ii.Written submissions dated and filed on 29th April 2024.

23. The Respondent’s case is that it carried out an investigation on the Appellant’s accounts covering the period from January 2016 to 2018. It established that the Appellant is related to two other companies namely Global Investment Data Bank Ltd and Environmental Solutions Ltd with a common directorship.

24. From the records provided, the Respondent established that the Applicant operated two bank accounts in Co-operative Bank (Account No: 1100635217700 and 1136635217700). The Respondent used banking analysis as the basis for computing Income tax and VAT.

25. Upon conclusion of the investigations, the Respondent alleged that it communicated its findings to the Appellant through a notice of tax investigation findings on 5th August 2021 with a tax liability of Kshs. 4,124,047. 00. The Appellant responded to it vide a letter dated 19th August 2021. It also alleged that vide a letter dated 14th September 2021 it requested the Appellant to provide a responses to the issues raised within seven (7) days with supporting documents.

26. According to the Respondent, the supporting documents on Income Tax computation requested by the Respondent from the Appellant were expense ledgers for the period 2016-2017 showing specific expenses and supporting documentation, rental agreements to support tenant deposits as was indicated in their workings and audited financial statements.

27. On VAT, the Respondent stated that the company did not file VAT in the year 2016 and 2017 therefore; the declared VAT of Kshs. 127,673. 45 in the Appellant’s computation had not been supported.

28. According to the Respondent, the Appellant provided reconciliation vide letter dated 19th August 2021 wherein the Respondent noted that there was an additional account which deposits had not been included in the tabulation. It then made adjustments for intercompany transfers and non-income entries to arrive at the net banking. The Respondent noted that the analysis of the banking records revealed that the company understated its turnover in the year 2016 by Kshs. 661,088. 00.

29. Upon conclusion of the investigations, the Respondent issued tax assessment orders dated 31st December 2021 to which the Appellant objected vide a letter dated 19th January 2022.

30. The Respondent alleged that despite several reminders, the Appellant failed to produce the requested supporting documents required. It alleged that on 16th February 2022 it invalidated the Appellant's objection for failing to meet the requirements of Section 51 (3) of the Tax Procedure Act, 2015. The Respondent also argued that its efforts to obtain relevant supporting documents relating to the objection was unsuccessful meaning that it was not able to issue a decision under Section 51 (8) of the Tax Procedure Act and proceeded to confirm the assessments on 19th August 2022.

31. The Respondent asserted that it reviewed the Appellant’s total income received as per the bank statements and compared with business income declared in the returns. The Analysis of the banking records revealed that the Appellant understated its turnover in the year 2016 as per the analysis carried out. The Respondent maintained that it is this variance that the Respondent subjected to tax for the year 2016.

32. The Respondent maintained that the Appellant failed to provide supporting documentation as evidenced leaving the Respondent to use information available to it to come up with the assessment. The Respondent argued that it is empowered to use their best judgement to arrive at a tax decision as provided in Section 30 (1) of the Tax Procedures Act.

33. Whereas the Appellant stated that in 2016 it recorded a trading loss of Kshs. 541,992. 00 and in 2017 a trading loss of Kshs. 1,285,070. 00; and whereas in the memorandum of appeal the Appellant stated that in 2016 and 2017 it did not generate any income that was taxable except in the case of withholding tax which was deducted at source; the Respondent asserted that the Appellant claimed loss during the period under review yet the investigation revealed that the sales were higher than the losses declared. Therefore, the Respondent proceeded to make adjustments including; intercompany transfers and non-income entries and charged to the extent of the information available during the investigation. The Respondent stated that it proceeded to confirm the assessments because the Appellant failed to provide supporting documents as requested.

34. The Respondent’s case is that VAT was chargeable up to the date when the investigations were concluded that is between January 2016 to 2018.

35. The Respondent averred that the Appellant objected to the assessment on the 19th January 2022. Despite several reminders, the Appellant failed to produce the requested supporting documents as requested. The supporting documents on Income Tax computation requested by the Respondent from the Appellant were expense ledgers for the period 2016-2017 showing specific expenses and supporting documentation, rental agreements to support tenant deposits as was indicated in their workings and audited financial statements. Consequently, the Respondent proceeded to invalidate the Appellant’s objection application for failing to meet the requirements of Section 51 (3) of the Tax Procedure Act, 2015.

36. According to the Respondent, its letter dated 9th February 2023 was a reminder to the Appellant that its objection dated 19th January 2022 had been declined and assessment had also been confirmed vide the Respondent’s letter dated 19th August 2022. It also averred that the demand letter dated 8th February 2023 was as a result of the Appellant’s pending tax liability in the accounts of VAT and Income tax of Kshs. 3,238,107. 79.

37. In response to paragraph 6 of the Memorandum of Appeal, the Respondent averred that the Appellant carried out business. Therefore, it is expected to pay taxes based on Section 3 (2) (a) of the Incomes Tax Act. Further, the Respondent averred that the Appellant failed to demonstrate why VAT should not be charged on the undeclared income. The Respondent maintained that the assessments were done in accordance with the provision of Section 5 (1) (a) of the VAT Act.

38. The Respondent stated that pursuant to Section 56 of the Tax Procedures Act and Section 30 of the Tax Appeals Tribunal Act, the burden of proof lies on the Appellant to demonstrate that the Respondent’s decision was incorrect. The Respondent argued that this burden was never discharged as the documentary evidence was never availed to the Respondent to enable it come to a different conclusion. Therefore, the Respondent urged this Honourable Tribunal to find that there is no valid appeal before it and proceed to dismiss the prayers sought by the Appellant in its Memorandum of Appeal.

39. In further support of its case, the Respondent relied on its written submissions dated 29th April 2024 and filed on even date wherein the Respondent identified three issues for determination, beingi.Whether the Notice of Objection was validly lodged;ii.Whether the additional assessments were legally justified; andiii.Whether the Appellant discharged its burden of proof.

40. On whether the notice of objection was validly lodged, the Respondent submitted that it communicated to the Appellant on 16th February 2022 informing it that the objection was invalid and requested them to validate their objection. On 8th November 2022 the Appellant made an Application to file a late objection and on 28th December, 2022 the Appellant filed an objection and provided supporting documents.

41. The Respondent submitted that the Application to object out of time was declined as the Assessments were confirmed on 19th August 2022 for failure by the Appellant to validate their objection as per the letter dated 16th February, 2022 that invalidated the Appellant's objection. It relied on the case of Valley Drillers & General Contractor's Ltd vs. theCommissioner of Domestic Tax Misc. Appl. No. 175 of 2022 where the Honourable Tribunal held that;“without a valid objection the Applicant has no basis for bringing its Appeal before the Tribunal.”

42. The Respondent further relied on Manchester Outfitters Ltd vs.Commissioner of Domestic Taxes Appeal No. 721 of 2021 wherein the Tribunal held that the Appellant did not comply with both Section 51 (2) & (3) of the Tax Procedures Act. The Respondent submitted that having concluded that there was no valid objection, it follows that there is no valid Appeal as there is no Appealable decision to anchor this Appeal and that the appeal must fail in this limb.

43. On whether the additional assessments were legally justified, the Respondent submitted that the assessments were based on Section 31 of the Tax Procedures Act, which allows the Commissioner to make a decision based on best judgment and information available to the Respondent. The Respondent cited Digital Box Ltd Vs Commissioner of Investigation & Enforcement 2019) eKLR, wherein the Tribunal held that in both instances, the Respondent is allowed to use any information that is available to it and use the best of its judgment in making the assessment.

44. The Respondent submitted that Section 59 of the Tax Procedures Act empowers it to seek any information relating to the ascertaining of the correct tax liability of an Appellant. It submitted that despite several reminders to the Appellant to provide supporting documents the Appellant did not provide the same. The Respondent cited the case of Osho Drapers Limited. vs. Commissioner of Domestic Taxes [2022] eKLR, and Commissioner of Domestic Services vs. Galaxy Tools Limited [2021] eKLR wherein Courts held that Section 59 of the Tax Procedures Act empowers the Commissioner to request for additional information to satisfy itself on the taxable income declared.

45. The Respondent submitted that the Appellant has not adduced any evidence to support its case and therefore has not discharged its burden of proof under Section 56 (1) of the Tax Procedures Act and Section 30 of the Tax Appeals Tribunal Act. The Respondent also relied Prima Rosa Flowers Limited vs. Commissioner of Domestic Taxes [2019] eKLR where the High Court relied on Mulherin Verus Commissioner of Taxation [2013] FCAFA 115 in which the Federal Court of Australia held that in fax disputes, the taxpayer must satisfy the burden of proof to successfully challenge income tax assessments. Consequently, the Respondent argued that the appeal is devoid of any merit and ought to be dismissed.

Respondent’s prayers 46. The Respondent prayed that this Honourable Tribunal be pleased to:a.Uphold the Respondent’s Objection decision dated 19th August and 9th February as proper and in conformity with the provisions of the Law; andb.That this Appeal be dismissed with costs to the Respondent as the same is devoid any merit.

Issues For Determination 47. The Tribunal having considered the Memorandum of Appeal, the parties’ Statements of Facts, witness statements, and written submissions, puts forth the following issue for determination:Whether the Respondent was justified in invalidating Appellant’s Notice of Objection

Analysis And Findings 48. The Respondent issued VAT and Income Tax assessments orders dated 31st December 2021. Therefore, the Tribunal examines this issue subject to applicable tax laws at the material time.

49. What is not funny is that the Appellant does not know when it objected to these assessments. The Appellant in its memorandum of appeal and statement of facts states that it objected to the assessments on 28th December 2022. The Tribunal examined the letter dated 28th December 2022 wherein the Appellant purported to seek leave from the Respondent to file objection out of time. The Tribunal also examined the Appellant’s letter dated 8th November 2022 addressed to the Respondent wherein the Appellant stated as follows;‘‘The objection by the client dated 19th January 2022 was rendered invalid as a result of not meeting the requirements of section 51(3) of the Tax Procedures Act 2015. ’’This means that the Appellant lodged an objection against the assessments on 19th January 2022.

50. The Respondent in its statement of facts and written submissions stated that the Appellant objected on 19th January 2022. Further, the Respondent in its confirmations of assessments dated 19th August 2022 and 9th February 2023 referred to Appellant objection application dated 19th January 2022. Apart from that, the email from the Respondent to the Appellant on 19th August 2022 refers to a response to objection application.

51. The objection dated 19th January 2022 is not on record. The Appellant was supposed to file this document in evidence but it did not. This is reckless and negligence on part of the Appellant. The mere fact that the Appellant lodged the letter dated 28th December 2022 purporting to seek leave to file objection out of time yet it filed objection on 19th January 2022 is baffling. Further, the mere fact that the Respondent in statement of facts pointed out expressly and repeatedly that the Appellant filed objection on 19th January 2022 but the Appellant did not pick up this issue, simply means that the Appellant chose to be indolent.

52. The Tribunal is convinced that the Appellant filed the objection to the assessments orders dated 31st December 2021 on 19th January 2022. This being the finding, the Appellant filed the objection to the assessments within 30 days as required under Section 51 (2) of the Tax Procedures Act. Consequently, the Appellant ought not to have sought leave to lodge objection to the assessments out of time.

53. Having established that the Appellant filed Notice of Objection on 19th January 2022, it is vital to examine the Respondent’s treatment of the objection leading to invalidation of the said objection and issuance of the confirmation of assessments.

54. Where the Commissioner has determined that a Notice of Objection lodged by a taxpayer has not been validly lodged, the Respondent is under statutory obligation to inform the taxpayer in writing of this fact. At the time of the assessments in issues, Section 51 (4) of the Tax Procedure Act, 2015 provided as hereunder:“(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.”

55. This Tribunal in the case of Kakiwood Limited vs. Commissioner of Investigations and Enforcement (Tax Appeal 617 of 2022) found that the timeframes under section 51(4) of TPA have to be observed. The Respondent has to adduce evidence to satisfy the Tribunal that it complied with Section 51 (4) of TPA.

56. The Respondent at paragraph 20 and 21 of the statement of facts stated as follows;‘‘despite several reminders, the Appellant failed to produce the requested supporting documents required. The Respondent on 16th February 2022 invalidated the Appellant's objection application dated 19th January 2022 for failing to meet the requirements of section 51(3) of the Tax Procedure Act, 2015. ’’‘’21The Respondent's efforts to obtain relevant supporting documents relating to the objection was unsuccessful. Consequently, the Respondent was not able to issue a decision under section 51 (8) of the Tax Procedure Act and proceeded to confirm the assessments on 19th August 2022. ’’

57. The Tribunal examined the Respondent’s evidence keenly. There is no evidence on record to substantiate the allegations under paragraphs 20 and 21 of the Respondent’s statement of facts. The Respondent did not adduce in evidence the ‘several reminders’ and the letter dated 16th February 2022. Perhaps these would have demonstrated compliance with Section 51 (4) of the Tax Procedures Act. The Respondent failed.

58. The Respondent filed two documentary evidence, which speaks to invalidation of the Appellant’s notice of objection. These are the two confirmation of assessments dated 19th August 2022 and 9th February 2023. Whereas Section 51 (4) of the Tax Procedures Act mandated the Respondent to ‘immediately notify the taxpayer in writing that the objection has not been validly lodged,’ notifying the taxpayer about invalidity of the objection through confirmation of assessments dated 19th August 2022 and 9th February 2023 when the objection was filed on 19th January 2022 did not comply with the provisions of Section 51 (4) of the Act.

59. The Respondent in its Statement of Facts stated that the Appellant provided some records including bank statements. The Respondent also argued that pursuant to Section 31 of the Tax Procedures Act, it relied on available documents to make its decision. While invalidating the notice of objection under Section 51 (4) of the Act, logic and administrative justice requires the Respondent to state documents that have been availed and those that that have not been availed but are necessary. Examination of the Respondent’s documentary evidence does not specify documents that the Appellant ought to have provided to validate the notice of objection. Disclosing the necessary but missing documents would paint the Respondent’ decision as a transparent and fair, while failure to disclose such necessary but missing documents can lead to the Respondent’s decision being labeled as opaque, unfair, capricious, whimsical and unlawful. Justice should not only be done, but should be seen to be done.

60. Lord Hewart in a locus classicus R vs. Sussex Justices, Ex parte McCarthy [1924] 1 KB 256 observed as followed:“It is not merely of some importance but is of fundamental importance that justice should not only be done, but should manifestly and undoubtedly be seen to be done.”We do not think the Respondent herein discharged this mandate.

61. Whereas the Respondent at paragraph 21 of its Statement of Facts stated that it was unable to issue objection decision within the meaning of Section 51 (8) of the Tax Procedures Act, the Respondent in its prayers urged the Tribunal to uphold the objection decision dated 19th August and 9th February. The contradictions from both parties in this Appeal are apparent.

62. Having established that the there is no evidence confirming compliance with Section 51 (4) of the Tax Procedures Act, this Tribunal is unable to find that the Respondent was justified in invalidating Appellant’s Notice of Objection.

63. The Tribunal’s position as relates to the Respondent’s failure to notify the Appellant of the invalidity of its Objection dated 19th January 2022, was that the Objection was deemed as valid. Thus, the Respondent was required by law to issue an Objection Decision within sixty days as provided for under Section 51 (11) of the TPA, failure whereof the Appellant’s Objection was deemed to be allowed by operation of the law.

64. Consequently, the Tribunal finds and hold that the Respondent erred in in invalidating Appellant’s Notice of Objection.

Determination 65. The upshot to the foregoing is that the Tribunal finds and holds that the Appeal is meritorious and consequently makes the following orders; -a.The Appeal is hereby allowed;b.The confirmation of assessments dated 19th August 2022 and 9th February 2023 are hereby set aside;c.Each party to bear its own costs.

66. It is so ordered.

DATED and DELIVERED at NAIROBI this 28th day of June 2024ROBERT M. MUTUMACHAIRPERSONBENADETTE M. GITARI ELISHAH N. NJERUMEMBER MEMBERMUTISO MAKAU ABDULLAHI DIRIYEMEMBER MEMBER