[2024] KETAT 1435 (KLR)

Hemingways Watamu Limited v Commissioner of Domestic Taxes (Tax Appeal E768 of 2023) [2024] KETAT 1435 (KLR) (4 October 2024) (Judgment)

Neutral citation: [2024] KETAT 1435 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E768 of 2023

RM Mutuma, Chair, Jephthah Njagi, D.K Ngala, T Vikiru & M Makau, Members

October 4, 2024

Between

Hemingways Watamu Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a limited liability company carrying on the business of hotel services, fishing and Safari Centre trading as Hemingways Resort in the Republic of Kenya.

2. The Respondent is appointed under and in accordance with Section 13 of the Kenya Revenue Authority Act, and 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 dispute arose when the Respondent issued the Appellant with a notice of assessment for VAT and income tax loss adjustments on 26th June 2023 for the period between 2017 and 2021.

4. Being dissatisfied with the assessment issued by the Respondent, the Appellant filed its Notice of Objection on 26th July, 2023.

5. Vide an email dated 8th August 2023, the Respondent wrote to the Appellant and reminded it to provide the supporting documents so as to validate its Objection.

6. The Respondent issued its Objection Decision on 5th October 2023.

7. Aggrieved by the decision issued by the Respondent, the Appellant lodged the Appeal vide its Notice of Appeal dated 30th October 2023 and filed on 3rd November 2023.

The Appeal 8. The Appeal is premised on the following grounds stated in the Memorandum of Appeal dated 2nd November and filed on 3rd November 2023 outlining the following grounds;a.That the Respondent has not provided an Objection Decision within the timelines required by the Tax Procedures Act Section 51 (11) which requires the Respondent to provide an Objection Decision within 60 days of receipt of a valid Notice of Objection.b.That the Respondent has erred fact and law by raising assessments for the period May 2017, November 2017, and December 2017 beyond 5 years’ time contrary to provisions of Section 31 (4) (b) of the TPA 2015 and this gives rise to taxes being charged beyond 5 years.c.That the Respondent has erred in law in its interpretation and application of the law by subjecting the Investment claim made by the Appellant to 100% instead of 150% and insisting that should be so.d.That the Respondent erred in law and fact by failing to consider that the Appellant met all conditions of second schedule paragraph 24 (1)(f) and qualified for Investment Deduction at 150%.e.That the Respondent erred in law and fact by disallowing cost amounts.f.That the Appellant does not agree to the amount payable as per the Objection Decision dated 5th October 2023 as the amount’s payable are excessive and the Respondent is subjecting the Appellant to double taxation.g.That the Respondent has been provided with all the supporting documents relating to the disallowed cost. That the same documents are still available at our offices, and should the Respondent see the need to review them, then copies can be available.

The Appellant’s Case 9. The Appellant’s case is premised on its;a.Statement of Facts dated 2nd November 2023 and filed on 3rd November 2023 together with the documents attached thereto;b.Written submissions dated and filed on 8th July 2024;c.Rejoinder written submissions dated and filed on 16th July 2024; and,d.List of Authorities dated and filed on 16th July 2024.

10. The Appellant averred that in the year ending 31st December 2018, the Appellant constructed a Hotel at the cost of Kshs. 647,334. 878. 00 in Watamu. This amount arrived at after apportioning costs related to the construction of apartments which the Appellant treated separately and did not claim ID thereon.

11. That the Appellant received a letter dated 21st June 2021 from the Respondent via e-mail on 24th June 2021 where the Respondent informed it that it intended to carry out a return review check on the Appellant’s records based on the following issues that had been identified from the iTax profile, tax returns and records held at the Respondent’s office;a.Variances between turnover declared in the VAT returns and financial statements for the years 2016 and 2018; and,b.Perpetual VAT credit filing status.

12. The Appellant averred that the Respondent requested for the following records;a.General ledgers.b.Purchase invoices.c.Loan agreements including interest payment schedules.

13. That on 26th July 2021, the Respondent visited the Appellant’s premises where it carried out a review of the records for a period of one week, sighting various invoices.

14. That on 30th July 2021, the Respondent sent to the Appellant an input tax schedule for its action. The Appellant was to retrieve various invoices that had not been sighted by the Respondent while on site. That the Respondent also requested additional information which the Appellant, through its Tax Representative provided on 4th August 2021 and 11th August 2021.

15. That the Respondent further asked for additional information in a letter dated 24th August 2021 via e-mail. That the same was provided by the Appellant, through its Tax Representative on 7th September 2021, 16th September 2021, and 22nd September 2021. That the Respondent acknowledged receipt of the same on 24th September 2021.

16. That on 10th November 2021 the Respondent sent an e-mail to the Appellant informing it that they intended to conduct an inspection of the Investment Deduction claim made by the Appellant in its financial statements for the years 2016 to 2020. That according to the Respondent, it expected to conduct the exercise from 5th to 11th December 2021.

17. That this came at a time when the same Respondent was carrying out a return review on the Appellant and it was to handle two separate teams from the Respondent’s office, which was going to be very demanding on the Appellant. That there was therefore a need for the Respondent to synchronize this to have one team handling all the issues.

18. That on 25th November 2021, the Respondent in a letter dated 24th November 2021 informed the Appellant’s Tax Representative that the Medium Taxpayers office Mombasa team was to expand their ongoing return review exercise to include a review of investment deduction claimed by the Appellant in the Income Tax Returns as follows;a.2018 – Kshs. 944,035,881. 00. b.2019 – Kshs. 35,606,821. 00.

19. That the Appellant, through its Tax Representative wrote to the Respondent on 6th December 2021 informing them that since the outbreak of the global COVID-19 pandemic, they were having cashflow constraints and had just resumed normal operations. That the Appellant requested for time to allow it to finish the peak season. The Appellant also requested to have a discussion on 29th January 2021 on when the audit could be carried out.

20. That on 27th January the Respondent wrote to the Appellant’s Tax Representative informing him that they would be commencing the Investment Deduction inspection exercise on 14th February 2022 at the Appellants premises. That the inspection exercise commenced on 14th February and the Respondent had officers at the Appellant’s premises for one week.

21. That while at the Appellant’s premises, the Respondent requested to have some information sent via e-mail as it was to proceed with the review exercise from their offices. That the Appellant provided the information requested through its Tax Representative on 28th February 2022 and on 3rd March 2022. That the Respondent further requested additional information on 4th March 2022 and the Appellant through its Tax Representative provided the same on 16th March 2022.

22. That on 20th April 2022 the Respondent sent a Pre-assessment Notice on returns review letter dated 20th April 2022 via e-mail to the Appellant through its Tax Representative. That According to the Respondent, the issues raised in its letter were to be addressed within seven days of the date of that letter. That the Appellant, through its Tax Representative, wrote to the Respondent on 23rd April 2022 seeking extension for the same. The extension was granted by the Respondent on 9th May 2022.

23. That on 16th May 2022, the Appellant’s Tax Representative responded to the Pre­ assessment notice as per the extension granted explaining the various issues via a letter dated 14th May 2022 and seeking additional time until 20th May 2022 to provide more information which was being extracted by the Appellant. That the mail dated 16th May was duly received as per the Respondents mail of 17th May 2022.

24. That additional information was provided by the Appellant through its Tax Representative on 25th May 2022 and the acknowledgement of the same by the Respondent was done the same day.

25. That the Appellant through its Tax Representative then sent supporting documents of the 2019 Investment deductions claim on 4th July 2022 after a telephone conversation between a staff from the Appellants office and the officer in charge of the matter in the Respondents office upon discovery that part of the documents sent to the Respondent on 16th May 2022 had not been received. That the Respondent then acknowledged receipt of the documents via e-mail dated 5th July 2022.

26. That on 7th October 2022, the Respondent called the Tax Representative and explained that there was need for sales reconciliation by the Appellant to explain some variances that the Respondent had discovered. That the Respondent and the Tax Representative agreed that the Respondent would send an e-mail on the same for clarity purpose and ease of reference. That an e­ mail was sent the same day but went to spam and the Appellant could not access it. That a reminder of the same was sent to the Appellant’s Tax Representative on 4th November 2022 and the same mail went to spam.

27. That on 21st November 2022 the Respondent did a follow up on his two e-mails via a telephone conversation and it was discovered that neither the Appellant nor its Tax Representative had seen the e-mails as the Respondent had only sent the e-mails to the Tax Representative without copying anyone and the two e-mails had gone to spam causing a disarray in communication.

28. That the reconciliation of the variance was then sent to the Respondent by the Appellant through its Tax Representative on 6th December 2022.

29. That the Appellant and Respondent then had subsequent correspondence and meetings where further documents and explanations were provided to enable the Respondent conclude the compliance check.

30. That on 26th June 2023 the Respondent sent a manual notice of its findings and assessments under Section 31 of Tax Procedures Act 2015 via e-mail in a letter dated 26th June 2023.

31. That the Appellant through its Tax Representative made a manual objection in a letter dated 20th July 2023 via an e-mail dated 25th July 2023.

32. That on 3rd August 2023 the Respondent reached out via phone to the Appellant through its Tax Representative and requested a copy of the notice of findings and assessments that had been issued to the Appellant by itself. That the Appellant provided the same and upon receipt, the Respondent issued an invalid objection application giving the Appellant 3 days to provide supporting documents. That the requested information was provided by the Appellant through its Tax Representative on 8th August 2023, 9th August 2023, and 11th August 2023.

33. That the Respondent also sent the payment slip for tax not in dispute to the Appellant through its tax Representative for the part payment of the conceded amounts which the Appellant paid on 10th August 2023 and sent a stamped copy of the same to the Respondent on 11th August 2023.

34. That the Respondent and the Appellant’s Tax Representative had a working meeting on 17th August 2023 in the Tax Representative’s office to discuss the objection as well as the assessment. That during that meeting it was agreed that the Respondent will review the documents and seek any clarification or ask for any additional documents if need be.

35. That the Respondent and the Tax Representative were then to have a further working meeting to close the matter so that an Objection Decision could be issued.

36. That on 25th August 2023 the Respondent reached out to the Appellant through its Tax Representative on phone and asked the Appellant to give an extract of Section l (g) (lA) of the second schedule of the Income Tax Act where the information regarding the 150% ID claim was being extracted by the Appellant. That the Respondent claimed that it could not trace the same from the Act.

37. That the Appellant through its Tax Representative provided the same to the Respondent via an e-mail dated 25th August 2023.

38. That on 30th August 2023 the Respondent and the Appellant through its Tax Representative had a working meeting and went through the documents provided.

39. That the Appellant did not hear from the Respondent thereafter until 6th October 2023 when the Respondent issued his Objection Decision letter dated 5th October 2023.

40. That it is the Appellant’s contention that that the amounts payable as per the Objection Decision are estimated and excessive.

41. That the Respondent did not provide an Objection Decision within the timelines required by Section 51 (11) of the TPA requires the Respondent to provide an Objection Decision within 60 days of receipt of a valid Notice of Objection.

42. That the Appellant is not in agreement with the Respondents application of the Second Schedule of Schedule of paragraph 24 (1) (e) arising out of the Respondent’s misinterpretation of the Second Schedule of paragraph 24 (1) (f).

The Appellant’s Prayers 43. The Appellant made the following prayers that the Tribunal be pleased to;a.Find that the Appellant is not liable to pay any additional VAT Taxes and/or adjust its returns to adjust the Income Tax loss adjustments as suggested by the Respondent;b.Order the Respondent to pay the costs for this Appeal; and,c.Issue any other Order favourable to the Appellant as the Tribunal may find just and expedient.

The Respondent’s Case 44. The Respondent’s case is premised on its;a.Statement of Facts dated 5th December 2023 and filed on 6th December 2023 together with the documents attached thereto; and,b.The Respondent’s written submissions dated and filed on 10th July 2024 together with the authorities attached therewith.

45. The Respondent averred that in the year ending 31st December 2018, the Appellant constructed a hotel and apartments in Watamu. The construction costs were apportioned to the hotel and apartments based on allocation of 40%:60% respectively and the allocation criteria was based on the percentage coverage area in square meters covered by the hotel and apartments.

46. The Respondent stated that based on the above cost allocation criteria, the total cost of the hotel was Kshs. 629,357,254. 00 Therefore, the Appellant proceeded to claim Investment Deduction of Kshs. 944,035,881. 00 being 150% on total construction cost of the hotel.

47. That during a returns review, the Respondent noted that the applicable rate was 100% and not 150% as claimed by the Appellant and therefore proceeded to disallow the over claimed amount of Kshs. 314,678,627. 00 for the period 2018.

48. That further, the Respondent noted that costs amounting to Kshs. 212,005,805. 00 and Kshs. 5,405,769. 00 for the period 2018 and 2019 respectively which had been claimed for Investment Deduction were not allowable hence these costs were disallowed.

49. That the above review resulted in adjusted Investment Deduction claim of Kshs. 417,351,449. 00 and Kshs. 30,201,052. 00 for the period 2018 and 2019.

50. The Respondent averred that the 150% claim is only applicable to persons who satisfy both conditions of having a building and installing machinery therein as provided under second schedule paragraph 24 (1) (f) of the Income Tax Act.

51. That during the objection review, the Respondent noted that the Appellant could qualify for Investment Deduction claim at 100% as provided under second schedule paragraph 24 (1) (e) that covers investment deduction for hotel buildings.

52. That paragraph 24(1)(e) of the second schedule of the Income Tax Act states as follows;“Subject to this Schedule, where capital expenditure is incurred-(e)on the construction of a hotel building which is certified as an industrial building under paragraph 5(1)(c)”

53. The Respondent averred that it also noted that expenditure amounting to Kshs. 530,014,514. 00 and Kshs. 5,405,769. 00 for the year 2018 and 2019 respectively claimed under Investment Deduction was not allowable as some of these expenses comprised of costs incurred for purchase of items which qualify for wear and tear allowance and not Investment Deduction.

54. That some items claimed were operating expenses which should have been transferred to the profit and loss account. Additionally, some of the items claimed did not form part of the hotel building while some were not supported. That these costs were therefore disallowed and that the schedule of the disallowed costs was well detailed via the notice of findings dated 26th June 2023.

55. The Respondent averred that it noted that the Appellant had double claimed VAT inputs in their VAT declarations. That these doubles claimed inputs were disallowed. That additionally, the Appellant had claimed VAT inputs which did not meet requirements of section 17 of the VAT Act for claiming input VAT. That these inputs were automatically disallowed while raising the assessments in iTax.

56. In response to ground 2 of the Appellant’s Appeal, the Respondent stated that during the objection review, parties were in agreement with the Appellant’s contention hence the assessments raised beyond 5 years were vacated. The assessments beyond 5 years were excluded from the amount payable by the Appellant as clearly communicated in the Respondent’s Objection Decision.

57. The Respondent averred that it was carefully guided by all the relevant laws and followed due procedure in raising and confirming assessments on the Appellant.

58. The Respondent averred that it is empowered by Section 31 of the Tax Procedures Act to amend the original assessment based on the information available to it and to the best of its judgement.

59. The Respondent averred that the Appellant failed to validly lodge the Objection contrary to Section 51 (3) (c) of the TPA and informed the Appellant of the invalidation on grounds that the Appellant failed to provide supporting documentation.

60. The Respondent maintained that the assessment was raised after it found inconsistencies in the returns and records available on the iTax system and therefore the assessment was justified and within the tax laws.

61. The Respondent averred that pursuant to Section 56 of the TPA and Section 30 of the Tax Appeals Tribunal Act, the onus is on the Appellant to discharge the burden of proof that the tax decision was incorrect which the Appellant did not do.

The Respondent’s Prayers 62. The Respondent prays that The Tribunal considers the case and finds that:a.The objection decision dated 5th October 2023 is valid and proper in law.b.The Appeal herein lacks merit and be dismissed with costs.

63. The Appellant submitted that the following should be the issues for determination by the Tribunal.i.Whether the Objection Decision as issued by the Respondent was validly made as per Section 51(11) of the TPA?ii.Whether the Appellant’s investment deduction is allowable at 150%?iii.Whether the Appellant’s costs incurred in the construction as disallowed by the Respondent are allowable?iv.Whether the principal Value Added Tax assessment of Kshs. 5,638,492. 00 has any basis in law?

64. The Appellant submitted that it lodged its Objection on 25th July 2023 through its tax agent’s email. However, the Objection Decision was issued on 5th October, 2023 which was outside the mandatory 60 days provided by the TPA.

65. That being the case, the Appellant submitted that the Objection Decision its Objection dated 20th July 2023 and emailed to the Respondent on 25th July 2023 2023 was automatically allowed. That Section 51(11) provides as follows;“(11)The Commissioner shall make the objection decision within sixty days from the date of receipt of a valid notice of objection failure to which the objection shall be deemed to be allowed.”

66. The Appellant submitted that it is now well settled that where a decision that is made outside the mandatory timelines under Section 51 (11) of the TPA, the objection shall be deemed allowed. That this point has been a subject of litigation before the Tribunal and at the High Court and has been effectively settled by the courts. That the High court in Republic vs. Kenya Revenue Authority Ex Parte M-Kopa Kenya Limited [2018] eKLR, stated as follows;“…Accordingly, the Respondent was required to make a decision in respect thereof within sixty (60) days under section 51 (11) of the said Act. As the Respondent defaulted in making a determination thereon within the prescribed time, the said objection was deemed to have been allowed. As the law deems the objection to have been allowed, there is no reason why the applicant should have appealed.”

67. The Appellant submitted that Section 51 (4) requires that where the Commissioner requests for the documents within 14 days, the taxpayer must avail the said documentation within 7 days and which the Appellant did. That the said Section provides as follows;“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”

68. The Appellant submitted that the Respondent sought to justify why it issued its decision outside the 60 days stipulated in Section 51 (11) as read together with Section 51 (4A). That the two sections read as follows;“(4A) Despite subsection (3), where a taxpayer fails to provide the information required under subsection (4) or fails to provide the information within the specified period, the Commissioner may make an objection decision within sixty days after the date on which the notice of objection was lodged.(11)The Commissioner shall make the objection decision within sixty days from the date of receipt of a valid notice of objection failure to which the objection shall be deemed to be allowed.”

69. The Appellant submitted that the reading of Section 51 (4A) requires that the Respondent must issue its Objection Decision within 60 days from the date the Notice of Objection was lodged whether the same is valid or not. That to cover up for its sins, the Respondent claimed that 60 days started running from 9th August 2024.

70. The Appellant submitted that in claiming for 150% investment deduction, it placed reliance on the second schedule paragraph 24 sub-paragraph (1) (f) of the Income Tax Act (edition, 2017).

71. The Appellant submitted that the action of the Respondent to unilaterally increase the assessment for VAT without informing the Appellant of the grounds or circumstances for such and increase constitutes an infringement of the Appellant’s rights.

72. The Appellant submitted that the Respondent has no power to issue a higher assessment based on extraneous or unknown factors that have not been brought to the attention of the Appellant.

73. That if the Respondent deems it necessary to increase the VAT sums, it must first issue the Appellant with fresh notice of assessments under Section 31 of the TPA, in order to give the Appellant an opportunity to provide evidence and rebut to the same.

74. The Appellant submitted that the Respondent’s actions are contrary to Section 51 (8) of the TPA and to the rules of natural justice and fair administration and the Objection Decision on VAT should be set aside in its entirety.

75. On its part, the Respondent submitted that on 9th August 2023, the Appellant validated its objection by paying the tax not in dispute amounting to Kshs. 519,348. 00. 00 and provided its supporting documents.

76. The Respondent submitted that the Appellant did not dispute the fact that it validated its objection on the 9th August 2023 and even annexed the email correspondences between itself and the Respondent in its Appeal.

77. That further, the Appellant also provided a copy of the payment slip to the Tribunal confirming that the undisputed taxes were paid to the Respondent on 9th August 2023.

78. The Respondent submitted that the Respondent's Objection Decision was issued on 6th October 2023 which was 58 days from the date the Appellant validated its objection.

79. That Section 51 (11) of the Tax Procedures Act 2015 states as follows;“The Commissioner shall make the objection decision within sixty days from the date of receipt of a valid notice of objection failure to which the objection shall be deemed to be allowed.”

80. That as per Section 51 (11) of the Tax Procedures Act 2015, the Respondent is only required to issue an Objection Decision within 60 days where there is a valid objection. That the Respondent is not obligated to issue an Objection Decision where the Appellant has not lodged a valid objection.

81. That the Appellant failed to support its objection with the relevant supporting documents as required by Section 51 (3) (c) and therefore did not lodge a valid objection for which the Respondent would issue an Objection Decision.

82. The Respondent submitted that in view of the Appellant’s invalid objection and as already demonstrated, the time envisaged under Section 51 (11) of the Tax Procedures Act could not start running. That it is therefore not open in law for the Appellant to question the timelines within which the Respondent confirmed or ought to have confirmed its assessment.

83. 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.

84. That Section 31 of the Tax Procedures Act empowers the Respondent to make alterations or additions to original assessments from available information for a reporting period based on the available information and its best judgement.

85. The Respondent relied on the case of Digital Box Ltd vs. Commissioner of Investigation & Enforcement [2019] eKLR, where 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 his or her judgment in making an assessment. That the Tax Procedures Act in granting the Respondent powers to assess taxpayers does not specify the methods that may be used and instead the law provides that the best judgment must be exercised.

86. The Respondent also relied on the case of Osho Drapers Limited vs. Commissioner of Domestic Taxes [2022] eKLR, where the Court held that Section 59 of the Tax Procedures Act empowers the Commissioner to request for more and additional information to satisfy himself on the taxable income declared.

87. The Respondent submitted that in the case of Commissioner of Domestic Services vs. Galaxy Tools Limited [2021] eKLR, the court held that provisions of Section 59 of the Tax Procedures Act give power to the Commissioner to request for more and additional information to satisfy himself on the taxable income declared or matters tax. Some of the documents to be kept by a taxpayer and which should be availed to the Commissioner are, copies of invoices, copies of stock records, details of each supply of goods and services among others. According to the Appellant, save for invoices none of these documents were supplied.

88. The Respondent submitted that the Appellant did not discharge its burden of proof under Section 56 (1) of the Tax Procedures Act and Section 30 of the Tax Appeals Tribunal Act.

89. That Section 56 (1) of the Tax Procedures Act places the burden on the taxpayer to proof that a tax decision is incorrect. That the Section states that;“In any proceedings under this Part, the burden shall be on the Appellant to prove that a tax decision is incorrect.”

90. That Section 30 of the Tax Appeals Tribunal Act 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.

91. The Respondent submitted that the Appellant did not provide the requisite documents to prove that the assessments made were excessive or erroneous. That the Appeal is therefore devoid of any merit and ought to be dismissed.

Issues For Determination 92. The Tribunal has carefully studied the pleadings and the submissions filed by both parties and is of the respectful view that the issues for its determination are as follows;i.Whether the Notice of Objection filed by the Appellant on 26th July 2023 was allowed by operation of the law;ii.Whether the Appellant’s investment deduction is allowable at 150%;iii.Whether the Appellant’s costs incurred in the construction disallowed by the Respondent are allowable; and,iv.Whether the Appellant has discharged its burden of proof.

Analysis And Findings 93. Having identified the issues that fall for its determination, the Tribunal analyzed them as follows;

Whether the Notice of Objection filed by the Appellant on 26th July2023 was allowed by operation of the law. 94. The parties herein are in agreement on the following chronology of events in this matter.a.The Respondent issued the Appellant with a notice of assessment for VAT and income tax loss adjustments on 26th June 2023 for the period between 2017 and 2021. b.Being dissatisfied with the assessment issued by the Respondent, the Appellant filed its Notice of Objection on 26th July, 2023. c.The Respondent issued its objection decision on 5th October 2023. d.Aggrieved by the decision issued by the Respondent, the Appellant filed this Appeal on 3rd November 2023.

95. The Appellant submitted that it lodged its objection on 25th July 2023 and that the Respondent made its Objection Decision on 5th October, 2023 which was outside the mandatory 60 days provided by the TPA.

96. The Appellant submitted that the objection filed on 26th July 2023 was automatically allowed by Section 51 (11) of the TPA.

97. The Appellant submitted that it is now well settled that where a decision that is made outside the mandatory timelines under Section 51 (11) of the TPA, the objection shall be deemed allowed. That this point has been a subject of litigation before the Tribunal and at the High Court and has been effectively settled by the courts.

98. The Appellant Submitted that the reading of Section 51 (4A) requires that the Respondent must issue its Objection Decision within 60 days from the date the Notice Objection was lodged whether the same is invalid or not. That to cover up for its sins, the Respondent claimed that 60 days started running from 9th August 2024.

99. On its part, the Respondent submitted that on 9th August 2023, the Appellant validated its objection by paying the tax not in dispute amounting to Kshs. 519,348. 00. 00.

100. That the Respondent’s Objection Decision was issued on 5th October 2023 which was 58 days from the date the Appellant validated its objection.

101. The Respondent submitted that as per Section 51 (11) of the Tax Procedure Act 2015, the Respondent is only required to issue an Objection Decision within 60 days where there is a valid objection. That the Respondent is not obligated to issue an Objection Decision where the Appellant has not lodged a valid objection.

102. The Tribunal notes that a Notice of Objection shall be treated as validly lodged only when the taxpayer pays the amount of tax that is not in dispute. Section 51 (3) (b) of the Tax Procedures Act provides as follows;“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).”

103. The Appellant indicated that it wanted to pay its tax not in dispute but was unable to do so as it did not have a payment slip and had to wait for the Respondent to provide one. The Appellant gave no evidence to the Tribunal to demonstrate that it made efforts to pay taxes not in dispute at the time of lodging its objection. If indeed that evidence had been provided to the Tribunal, then the time for making an Objection Decision would have started running from the date that the Appellant sought to make the arrangements to pay the undisputed taxes.

104. The Appellant’s filed its Notice of Objection on 26th July 2023. The Appellant paid the taxes not in dispute on 9th August 2023. Accordingly, the Objection only became valid on the date that the tax that was not in dispute was paid. The Tribunal therefore finds that the period within which the Respondent was to make the Objection Decision started running on 9th August 2023.

105. The Respondent made its Objection Decision on 5th October 2023, which was 57 days after the Objection by the Appellant became valid and therefore was within the sixty days statutory period allowed by the law.

106. The Tribunal therefore finds that the Appellant’s objection dated 26th June 2023 was not allowed by operation of the law.

Whether the Appellant’s investment deduction is allowable at 150%. 107. The Appellant submitted that in the year ending 31st December, 2018, it constructed a hotel and apartments in Watamu in Kilifi County. To appropriately apportion costs for the construction, the Appellant allocated the total costs of construction in the ratio of 40%:60%, to the hotel and apartment respectively.

108. That as a consequence, the total cost for construction of the hotel was Kshs. 629,357,254. 00 Subsequently, the Appellant claimed Kshs. 944,035,881. 00 being 150% of the total construction cost.

109. The Appellant submitted that it relied on the second schedule paragraph 24 sub-paragraph (1) (f) of the Income Tax Act (edition, 2017) (now repealed) (ITA). The said schedule provided as follows;“(f)on the construction of a building or purchase and installation of machinery outside the City of Nairobi or the Municipalities of Mombasa or Kisumu whereof the value of the investment is not less than two hundred million shillings.”

110. That the second schedule of the ITA further provides the following under paragraph 24, sub-paragraph 2 (c):“(2)The amount of the investment deduction under subparagraph (1) shall—(c)in the case of an investment referred to in subparagraph (1)(f), be equal to one hundred and fifty per cent of the capital expenditure;”

111. The Appellant submitted that from the above provisions of the law, it was right in claiming investment deduction at 150% of its investment and thus was entitled to claim Kshs. 944,035,881. 00.

112. On its part, the Respondent submitted that during a returns review, it noted that the applicable rate was 100% and not 150% as claimed by the Appellant and therefore proceeded to disallow the over claimed amount of Kshs. 314,678,627 for the period 2018.

113. That the above review resulted in adjusted Investment Deduction claim of Kshs. 417,351,449. 00 and Kshs. 30,201,052. 00 for the period 2018 and 2019.

114. The Respondent submitted that the 150% claim is only applicable to persons who satisfy both conditions of having a building and installing machinery therein as provided under second schedule paragraph 24 (1) (f) of the Income Tax Act.

115. In determining the applicable rate for investment deductions, the Tribunal is guided by its holding and finding in a similar matter in Appeal No 332 of 2019, CKL Africa Limited vs. Commissioner of Domestic Taxes where at paragraphs 74 to 76 the Tribunal stated;“74Paragraph 24 (1) (f) as read together with Paragraph 24 (2) (c) of the Second Schedule (now repealed) of the ITA requires three conditions to be met for a building to qualify for investment deduction. They include;a.The building be constructed outside the City of Nairobi or the Municipalities of Mombasa or Kisumu.b.The value of the investment in the building should be more than Kshs. 200,000. 000. 00. c.The investment deduction is deducted in the year of income in which the building was first used.

75. The Appellant's building was constructed in Tatu City situated in Ruiru. Kiambu County which is not within Nairobi. Mombasa or Kisumu. The total cost incurred in the construction was Kshs. 285. 171. 560. 00 and Kshs. 27. 954. 620. 00 on accessories to the building which is more than the required Kshs. 200,000,000. 00. Further, as the Tribunal has established above. the building and machinery was used in June. 2019 when the first and second batch of Maclik Super were manufactured.

76. Consequently, the Tribunal finds that the Appellant's building and machinery qualify for the investment deduction of up to 150% as claimed by the Appellant.”

116. The Respondent appealed the judgement of the Tribunal at the High Court in Income Tax Appeal E050 of 2022 Commissioner of Domestic Taxes vs. CKL Africa Limited.

117. The Court noted that the Appellant had submitted that it relied on Paragraph 24 (1) (f) as read together with Paragraph 24 (2) (c) of the Second Schedule (now repealed), to the Income Tax. Paragraph 24 (2) (c) provided that;“The amount of investment deduction under subparagraph (1) shall in the case of an investment referred to in subparagraph (1)(f), be equal to one hundred and fifty percent of the capital expenditure.”

118. The Court found that Tax Laws (Amendment) Act, 2020, came into force on 25th April 2020 and could not apply retrospectively to a claim. That Section 23(3)(c) of the Interpretation and General Provisions Act (“IGPA”) prohibits the retrospective application of the law and provides that the repeal of a law shall not affect a right, privilege or obligation that was acquired or accrued under a written law so repealed. In upholding the decision of the Tribunal, the Court stated at paragraphs 19 to 21 that;“19. It is clear from this that the Tax Laws (Amendment) Act, 2020 that amended the second schedule of the Income Tax Act came into force on 25th April 2020. Section 23 of the Interpretations and General Provisions Act, provides an overarching guide on the effect of repealing written law and provides that;-Where a written law repeals in whole or in part another written law, then, unless a contrary intention appears the repeal shall not;a.……….b.…………c.Affect a right or privilege, obligation or liability acquired, accrued or incurred under a written law so repealed or

20. From the foregoing and in the absence of any contrary intention in the Income Tax Laws (Amendment) Act, 2020, the right and privilege that the respondent had acquired under paragraph 24(1)(f) as read together with paragraph 24(2)(c) of the second schedule, could not be affected by the repeal. The repeal came in after the construction was complete and even if it were to be decided that the first use was in August 2019 and not June 2019, still the existing framework at the time was the Income Tax Laws (Amendment) Act, 2020.

21. It is therefore my finding that the Income Tax Act in force prior to the coming into force of the Tax Laws (Amendment) Act, 2020 applied in this case and that the Tribunal was right in its finding on this point. The respondent qualified for investment deduction at the rate of 150% so long as it had met the requirements stipulated therein.”

119. In view of the judgement of the Tribunal in TAT Appeal No. 332 of 2019 and the High Court Judgement in Income Tax Appeal E050 of 2022, upholding the decision of the Tribunal, the Tribunal finds that Appellant qualified for investment deduction at the rate of 150%.

Whether the Appellant’s costs incurred in the construction disallowed by the Respondent are allowable. 120. The Appellant stated that the Respondent disallowed the following construction costs;a.Labor works on site Kshs. 98,416,764. 59b.Staff meals for workers on site Kshs. 13,070,430. 34c.Communication systems Kshs. 42,871,678. 52d.Rocks for the sea wall Kshs. 4,675,400. 00e.Landscape Kshs. 37,605,123. 35f.Sanitary Fittings Kshs. 26,068,834. 68g.Air conditioning works Kshs. 36,987,031. 88h.Solar Water heating Kshs. 4,544,516. 57i.Power and lighting fittings andElectrical equipment’s for site Kshs. 18,040,466. 27j.Interest costs on RGR loans Kshs. 6, 987,119. 27k.Bank interest costs Kshs. 19,745,180. 77l.Roads, Pathways and parking Kshs 12,835,574. 19m.Various building works(plumbing/carpentry) Kshs. 49,918,592. 41n.Kitchen works Kshs. 15,192,339. 80o.Invoices to be provided Kshs 43,413,316. 88

121. The Appellant submitted that the above list of expenses disallowed by the Respondent is already anticipated by the law since they form part of the building as provided by the second schedule of the ITA.

122. The Appellant submitted that the Second schedule under paragraph 24, sub-paragraph 3 (d) of the ITA provides the definition of a building as follows;(d)“building” includes any building structure and where the building is used for the purposes of manufacture it includes the civil works and structures deemed to be part of an industrial building under paragraph 1(1A) of this Schedule;

123. That additionally, paragraph 1 (1A) of the second schedule of the ITA provides;“(1A) Where a building is an industrial building within the meaning of subparagraph (1), the following civil works or structures on the premises of such building shall be deemed to be part of the building where they relate or contribute to the use of the building—i.roads and parking areas;ii.railway lines and related structures;iii.water, industrial effluent and sewage works;iv.communications and electrical posts and pylons and other electricity supply works; andv.security walls and fencing.”

124. In response to the Appeal, the Respondent averred that it also noted that expenditure amounting to Kshs. 530,014,514. 00 and Kshs. 5,405,769. 00 for the year 2018 and 2019 respectively claimed under Investment Deduction was not allowable as some of these expenses comprised of costs incurred for purchase of items which qualify for wear and tear allowance and not Investment Deduction.

125. That some items claimed were operating expenses which should have been transferred to the profit and loss account. Additionally, some of the items claimed did not form part of the hotel building while some were not supported. That these costs were therefore disallowed and that the schedule of the disallowed costs was well detailed via the notice of findings dated 26th June 2023.

126. The Respondent stated that it noted that the Appellant had double claimed VAT inputs in their VAT declarations. That these doubles claimed inputs were disallowed. That additionally, the Appellant had claimed VAT inputs which did not meet requirements of Section 17 of the VAT Act for claiming input VAT. That these inputs were automatically disallowed while raising the assessments in iTax.

127. The Tribunal's reading of Paragraph 24 (1) (f) of Part I of the Second Schedule to the Income Tax Act finds that the provision does not exclude the construction of a hotel building from the category of capital expenditure classified in the provision.

128. Paragraph 24 (1) (f) of Part I of the Second Schedule to the Income Tax Act has two parts because of the use of the word "or”, which means the paragraph should be read disjunctively. Understood that way, therefore, where capital expenditure is incurred on the construction of a building outside the City of Nairobi or the Municipalities of Mombasa or Kisumu whereof the value of the investment is not less than two hundred million shillings, Paragraph 24 (2) (c) of Part I of the Second Schedule to the Income Tax Act provides that the investment deduction shall be equal to one hundred and fifty percent of the capital expenditure.

129. The second part comes in after "or" to mean that where capital expenditure is incurred on the purchase and installation of machinery outside the City of Nairobi or the Municipalities of Mombasa or Kisumu whereof the value of the investment is not less than two hundred million shillings, Paragraph 24 (2) (c) of Part I of the Second Schedule to the Income Tax Act provides that the investment deduction shall be equal to one hundred and fifty percent of the capital expenditure.

130. Paragraph 24 (3) (d) of Part I of the Second Schedule to the Income Tax Act provides a further definition of “building” as follows:“(d)“building” includes any building structure and where the building is used for the purposes of manufacture it includes the civil works and structures deemed to be part of an industrial building under paragraph 5(1A) of this Schedule.”

131. The Tribunal finds that, contrary to the Respondent’s assertion that the provision only applies to buildings used for manufacture, Paragraph 24 (3) (d) of Part I of the Second Schedule to the Income Tax Act provides a further definition of the term building as any building structure, then enumerates civil works and other structures that qualify as buildings in the case of buildings used for manufacture. Again, this provision does not exclude a hotel building from the definition of the term ‘building’ referred to in Paragraph 24 (1) (f) of Part I of the Second Schedule to the Income Tax Act.

132. It follows that the Appellant, having incurred qualifying expenditure of over Kshs. 200,000,000 in the construction of a hotel building in Watamu, Kilifi County, being outside the City of Nairobi or the Municipalities of Mombasa or Kisumu, was allowed to deduct investment deduction at the rate of 150% of the qualifying capital expenditure and the associated construction costs were allowable.

133. Consequently, the Tribunal finds that the Respondent erred in disallowing costs incurred by the Appellant in construction of the hotel in Watamu. The Appellant’s costs incurred in the construction disallowed by the Respondent are allowable.

Whether the Appellant has discharged its burden of proof. 134. The Respondent submitted that the Appellant has not adduced any evidence to support its case and therefore has not discharged its burden of proof to demonstrate that the assessments were erroneous or excessive.

135. The Respondent also submitted that the Appellant 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.

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

137. That Section 30 of the Tax Appeals Tribunal Act 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.

138. Section 56 of the TPA places the burden of proof in tax cases on the taxpayer. That the above section is reinforced by Section 30 of the TAT Act which states that;“In a proceeding before the Tribunal, the appellant has the burden of proving- 1. where an appeal relates to an assessment, that the assessment is excessive; or

2. in any other case, that the tax decision should not have been made or should have been made differently”

139. Section 23 of the Tax Procedures Act where the Law provides that;1. A person shall-----a.maintain any document required under a tax law, in either of the official languages;b.maintain any document required under a tax law so as to enable the person's tax liability to be readily ascertained; andc.subject to subsection (3), retain the document for a period of five years from the end of the reporting period to which it relates or such shorter period as may be specified in a tax law.”

140. The Tribunal notes that contrary to the Respondent’s submission that the Appellant never filed any evidence to support its case, the Appellant filed 346 pages of documents with the Tribunal and electronically on CTS as follows;a.Pages 1-85; Letters to and from the Respondent forwarding requested documents, bank statements, copies of invoices and other supporting documents.b.Pages 86-144; Schedule of investment reduction costs, construction costs and further invoices.c.Pages 145-188; Copies of invoices and journals.d.Pages 189-226; Receipts issued on payments made.e.Pages 259-283; Financial statements and Audited Accounts.f.Pages 284-323; Ownership documents, contracts and approvals by relevant bodies and authorities.g.Pages 324-346; Revenue analysis.

141. The law is clear in its requirement for taxpayers to retain information and it goes on to provide that the same is critical as it is used to ascertain the Taxpayers tax liability.

142. The Tribunal relies on the holding of the Court in Kenya Revenue Authority vs. Man Diesel & Turbo Se, Kenya [2021] eKLR wherein the Court stated that:“The import of the above provisions is that the party with the obligation of persuasion (what Wigmore termed the risk of non-persuasion) is said to bear the burden of proof.[9] The flip side of the foregoing is the effect of non-persuasion on a party with the burden of proof which is that the particular issue at stake in the litigation will be decided against him/her. Generally, the taxpayer has the burden of proof in any tax controversy.The taxpayer must demonstrate that the commissioner's assessment is incorrect. The taxpayer has a significantly higher burden. The taxpayer must prove the assessment is incorrect. The shifting of the burden of proof in tax disputes flows from the presumption of correctness which attaches to the Commissioner's assessments or determinations of deficiency.[10] The commissioner's determinations of tax deficiencies are presumptively correct. Although the presumption created by the above provisions is not evidence in itself, the presumption remains until the taxpayer produces competent and relevant evidence to support his position.”

143. The Appellant has provided evidence to the Tribunal that it kept the required documents and provided those that were requested to the Respondent. The Appellant filed the evidence of the documents provided to the Respondent with the Tribunal.

144. The Tribunal therefore finds that the Appellant has discharged its burden of proof that the Respondent’s decision was incorrect and it should have been made differently.

Final Decision 145. The upshot of the foregoing is that the Appeal has merit and therefore succeeds. Consequently, the Tribunal makes the following Orders: -a.The Appeal be and is hereby allowed;b.The Respondent’s Objection Decision dated 5th October 2023 is hereby set aside; and,c.Each Party to bear its own costs.

146. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 4TH DAY OF OCTOBER 2024ROBERT M. MUTUMA - CHAIRMANJEPHTHAH NJAGI - MEMBERDELILAH K. NGALA- MEMBERDR. TIMOTHY VIKIRU - MEMBERMUTISO MAKAU- MEMBER