[2023] KETAT 294 (KLR)

H & K Auto Box Limited v Commissioner of Domestic Taxes (Tax Appeal 660 of 2022) [2023] KETAT 294 (KLR) (2 June 2023) (Judgment)

Neutral citation: [2023] KETAT 294 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 660 of 2022

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

June 2, 2023

Between

H & K Auto Box Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

1. The Appellant is a limited liability company that carries on the business of manufacturing quality plastics packaging containers for domestic and industrial use.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, 1995. Under Section 5 (1) of the Avt, the Kenya Revenue Authority is an agency of the Government for the collection and receipt of all tax revenue. Further, under Section 5(2) of the act with respect to 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 Part 1 & 2 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 dispute in this Appeal arose when the Respondent carried out an audit on the Appellant’s affairs for the period 2019 and 2020 from where it issued the Appellant with two additional VAT assessments both dated November 16, 2021 amounting to Kshs 19,531,784. 08 for 2019 and Kshs 9,121,275. 84 for 2020, inclusive of penalties and interests.

4. The Appellant lodged its objection to these additional assessments on January 7, 2022.

5. The Respondent issued an Invalidation decision dated February 18, 2022 to this objection. The reason for the invalidation was that the Appellant had failed to provide all the relevant documents relating to the objection.

6. The Appellant was aggrieved by this decision and it filed a Notice Appeal to this Tribunal on June 28, 2022.

The Appeal 7. The Appellant’s Memorandum of Appeal filed on the June 28, 2022 was premised on the following grounds, that:a.The Respondent erred in law and fact in issuing additional assessments for the period of December 2019 and December 2020 on the basis of that the Appellant did not declare some of its sales in its VAT returns and therefore the Appellant’s output VAT was under declared by Kshs 15,835,329. 28 in the month of December 2019 and Kshs 8,662,477. 88 December 2020. b.The Respondent erred in law and fact in issuing an Invalidation decision on the Objection lodged by the Appellant dated January 7, 2022 without a fair hearing and a proper validation process.c.The Appellant unequivocally states that it declared all its sales including the invoices that the Respondent claims that were not declared in the Appellant’s returns and further provided a schedule showing the month in which these sales were declared.d.The Appellant persuades the Tribunal to intervene on this matter and consider the substance of the documents provided to substantiate that all the sales were declared, and output VAT correctly accounted for.e.There was a disarray and a breakdown of communication caused by the travel of the director outside the Country on a lengthy business trip and his indisposition due to Covid while back in the country and hence the Appellant was not able to respond to the Respondent on time.f.The Appellant does not agree to the amount payable as per the Invalidation decision dated February 18, 2022 as the amounts payable are excessive and the Appellant indeed incurred a cost towards the purchase of the same.

8. Based on the aforementioned grounds, the Appellant prays that the Tribunal accepts the Appeal and grant the Respondent with an order to amend the assessment after resolving the issues in dispute.

Appellant’s Case 9. The Appellant supported its Appeal with its Statement of Facts filed on the June 28, 2022 and Written Submissions dated January 27, 2023.

10. The Appellant submitted that it filed its Objection on the January 7, 2022 and that the Invalidation Notice dated February 18, 2022 was brought to its attention in April 2022. Whereupon it filed its Notice of Appeal on the 24th of April 2022.

11. It argued that its laches was caused by the absence of its director who handles tax issues from the Country and his indisposition from Covid-19.

12. The Appellant argued that Section 51(4) of the TPA required the Respondent to issue the Invalidation notice within 14 days. It instead issued the said notice after 52 days. In its view, this omission made the said Invalidation notice invalid. It supported this position with the case of Samuel Kigera t/a Rufus Prime Builders & Fabricators v Kenton College Trust Limited (Commercial Civil Case E880 of 2021) (2022 KEHC 301 (KLR) (Commercial and Tax) (28

13. It asserted that the alleged Invalidation notice has no force of law because it was issued outside the the statutory timelines of 14 days and that the Appeal should therefore succeed.

14. It is the Appellant’s contention that the amounts demanded of it as per the assessment notices were excessive. It also contended that it had all supporting documents to explain the error in consideration of its input claim which had been disallowed.

15. The Appellant argued in the alternative that the additional assessment notices issued by the Respondent contravened:a.Section 29 (1) of the TPA for failure to provide a due date for payment and was issued without carrying out of an audit; andb.Section 29 (2) (e) of the TPAfor failure to provide the Appellant with an opportunity to pay and the time to pay the tax demanded.

16. The Appellant thus contents that the Appellant acted arbitrarily and ultra vires its powers as provided by the TPA for which reasons its Assessment Orders ought to be declared null and void.

17. The Appellant submitted that the Respondent had labelled its Invalidation decision in paragraph 32 of its Statement of Facts as an Objection decision so as to move it away from the realms of Section 51 (4) of theTPA to Section 51(11) of theTPA. Its view was that the proper provision of the law applicable to the dispute is Section 51 (4) of the TPA.

Appellant’s Prayers 18. Based on the above arguments, the Appellant prayed the Tribunal be pleased to:a.Allow the Appellant’s Notice of Appeal and to set aside the assessments under review; andb.Find that the Appellant is not liable to pay any additional taxes with regards to the confirmed default assessment dated November 16, 2021.

Respondent’s Case 19. The Respondent has set out its response to the Appellant’s case in the Statement of Facts filed on July 22, 2022 and Written Submissions filed on January 19, 2023.

20. The Respondent stated that the Appellant did not support its Objection with documentary evidence despite several requests from the Respondent and hence the reason why its objection was invalidated.

21. The Respondent stated that even on Appeal, the Appellant has only made averments without providing evidence to show why the taxes are not payable and yet the burden of proof in this case lay with the Appellant under Section 56(1) of the TPA.

22. The Respondent submitted that it conducted an audit on the Appellant and upon conclusion of the audit, it issued additional assessments dated November 16, 2021 to the Appellant. The said notice provided the workings on how it had arrived at its assessments. That its conduct prior to this dispute was therefore. lawful, reasonable and procedurally fair.

23. It was its view that all the steps taken by the Respondent provided the Appellant with a fair administrative action and the decision arrived at was made expeditiously, efficiently, lawfully, reasonably and in a manner that was procedurally fair in line with Article 47(1) of the Constitution of Kenya.

24. As the regards the email used to send the Invalidation notice, the Respondent argued that it used the email provided by the Appellant on iTax. If it preferred another email to be used, it should have changed that on itax. It was also its position that the Respondent was not required to send the invalidation notice to the director’s email.

25. It was the view of the Respondent that the Appellant’s ground of objection was generalized and did not communicate precisely what the Appellant was objecting to and hence the reason for the invalidity.

26. It was also its submission that its assessment of November 16, 2021 enjoys the presumption of correctness under Section 50(1) of the Tax Procedures Act 2015, - which reads as follows:“50. "Conclusiveness of tax decisions1. Except in proceedings under this Part-a.The production of a notice of an assessment or a document under the hand of the Commissioner shall be conclusive evidence of the making of the assessment and that the amount and particulars of the assessment are correct; and...”

27. The Respondent asserts that based on this presumption, the Appellant’s VAT tax returns for December 2019 and December 2020 are of no probative value and cannot be used to substantiate that the Appellant has correctly declared all the sales invoices and the purchase documents to corroborate the declarations in the returns and /or establish its correctness.

28. The Respondent asserted that the Appellant’s argument that its decision of February 18, 2022 was an Objection decision issued under Section 51(11) of the Tax Procedures Act, 2015 was itself a misnomer, and that its decision was actually an Invalidation decision that was issued under Section 51(4) of the TPA.

Respondent’s Prayer 29. The Respondent’s prayer to the Tribunal was for orders that Appellant’s Appeal be dismissed.

Issues For Determination 30. The Tribunal having carefully considered the parties’ pleadings, documentation and submissions, determines that the issues that call for its determination are:a.Whether the Respondent’s Invalidation Decision was Valid; andb.Whether the Additional Assessment raised against the Appellant was valid.

Analysis And Determination a. Whether the respondent’s invalidation decision was valid. 31. The Appellant has premised its Appeal on the issue of procedure and validity of the Invalidation decision that was issued by the Respondent. It argued that that the said decision was issued outside the prescribed statutory limit period of 14 days. It relied on Section 51(4) of the TPA which provides as follows in regard to timelines for invalidation of an objection:-“(4) Where the Commissioner has determined that a notice of objection lodged by a taxpayer has not been validly lodged, the Commissioner shall within a period of fourteen days notify the taxpayer in writing that the objection has not been validly lodged.”

32. This dispute arose on the February 18, 2022 when the Invalidation decision was issued. There is however a dispute on which version of theTPAapplies to this dispute. Is it the 2021 or the 2022 version?

33. The amendment to Section 51(4) of the TPA was caused by Section 44(1) of the Finance Act of 2022. Section 1 of the said Finance Actprovides as follows:“This Act may be cited as the Finance Act, 2022 and shall come into operation or be deemed to have come into operation as follows:asections 3, 6, 10, 15, 16, 22 (b)(ii) and 32, on the January 1, 2023; andb.all other sections, on the July 1, 2022. ”

34. It is thus clear from Section 1 of theFinance Act, 2022 that the amendment caused to Section 51(4) of the TPA came into effect on the July 1, 2022. Considering that this dispute arose on the February 18, 2022 it follows that this provision of the law was thus not available for the benefit of the parties in this dispute. The applicable provision of the TPAis Section 51(4) of the TPA, 2021 version, which reads as follows:“(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.”

35. To decide on the validity of this dispute, the Tribunal needs to remind itself of the chronology of events in this dispute, which are as follows:a.Appellant in this Appeal lodged its objection on January 7, 2022. b.The Respondent wrote an email requesting the Appellant for supporting documents on the January 12, 2022. c.The Respondent thereafter issued its objection on the 18th of February 2022.

36. The request for additional documents on January 12, 2022 had the effect of restarting statutory timelines. The Respondent therefore responded to the Appellant’s Objection in about 36 days. Does this meet the immediacy test?

37. It is clear from a casual reading of Section 51(4) of the TPA, that greater duty and burden is placed on the Commissioner to ensure that it immediately notifies the taxpayer once it has noted that its notice of objection decision was not validly lodged. Indeed, the law, although not applicable to this matter, has now defined the period within which such notification ought to be issued to be 14 days.

38. This Tribunal has had the chance to determine the immediacy test in the case of Saalah Mohhamed Hussein v Commissioner of Domestic Taxes (TAT 617 of 2020) where the objection decision was issued after one month and 3 weeks. It stated as thus;“The word of statute states categorically that the decision of a defective objection should be communicated immediately. The Oxford Dictionary defines the word immediately as follows; ‘at once’; ‘instantly’’; Or ‘without any intervening time or space’. It further uses the conjunction ‘as soon as. The Tribunal holds that the decision to find an objection invalid should be communicated as soon as the objection is received by the Respondent. This is an action that ideally should take one or two days and not a month and three weeks as in the case herein. The Tribunal believes that this is to give the Appellant an ample chance to make rectifications and submit what the Respondent considers ‘an invalid objection’.The Tribunal further holds that the failure to make the communication within the stipulated time would mean that the objection was valid. The actions taken by the Respondent of late communication wrongly denies the Appellant his right to natural justice. The Appellant is entitled to legitimately expect that the tenets of a fair administrative action are observed.”

39. The Tribunal has also recently considered the same issue in Holdwadag Construction Company Limited vs The Commissioner of Investigations and Enforcement (TAT 606 of 2020), where the objection decision was issued after 56 days and it held as thus:-“This Appeal falls on all fours with Saalah Mohamed Hussein (supra) because just like in the saalah case the Commissioner also took one month and about three weeks to communication its invalidation of objection decision to the Appellant. It therefore, clearly failed the immediacy test.”

40. Considering that the Respondent had all the information that it required to make this decision, and considering further that the Respondent had advised the Appellant through its email of January 12, 2022 that the requested documents should be availed within seven days of the e-mail. It follows that the Respondent was thus obliged to give its decision within a reasonable time after the expiry of this self-imposed ultimatum period.

41. The Respondent has not provided any reason why it took 36 days to issue this decision, or why it took it about 28 days to issue its decision after the expiry of its self-imposed ultimatum. Provision of reason why it delayed or what caused it to delay the issuance of its decision would perhaps have helped the Tribunal to see things from its perspective and understand the reason why it did not issue its decision immediately. Unfortunately, this was not done.

42. Based on the above analysis the Tribunal holds that the time period taken by the Respondent to issue the Invalidation decision does not meet the “immediacy” test under Section 51(4) of the TPA, 2021version.

b. Whether the additional assessment raised against the appellant was valid. 43. Having arrived at the conclusion that the Respondent’s Invalidation Objection was invalid it follows that the two additional assessments dated November 16, 2021 are void for all intents and purposes. There is therefore nothing left for the Tribunal to determine under this head.

44. The invalidation of the notice of objection having been found to be improper it means that the matter ought to be referred back to the Commissioner to consider the notice of objection on its proper merits and to accordingly to issue an appropriate decision.

Final Decision 45. The upshot of the foregoing is that the Appeal is meritorious and the Tribunal accordingly proceeds to make the following final Orders:-a.The Appeal be and is hereby allowed.b.The Respondent’s Invalidation decision dated February 18, 2022 be and is hereby set aside.c.The matter is hereby referred back to the Respondent to issue an appropriate objection decision on the merits of the notice of objection within Sixty (60) days of the date of delivery of this Judgment.d.Each party to bear its own costs.

It is so ordered

DATED AND DELIVERED AT NAIROBI THIS 2ND DAY OF JUNE, 2023. ROBERT M. MUTUMACHAIRPERSONELISHAH N. NJERUMEMBER.RODNEY O. OLUOCHMEMBER.DELILAH K. NGALAMEMBER.EDWIN K. CHELUGETMEMBER.