[2024] KETAT 834 (KLR)

Hilalium & Sons (UR Home) Limited v Commissioner of Investigations and Enforcement (Tax Appeal E232 of 2023) [2024] KETAT 834 (KLR) (28 June 2024) (Judgment)

Neutral citation: [2024] KETAT 834 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E232 of 2023

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

June 28, 2024

Between

Hilalium & Sons (UR Home) Limited

Appellant

and

Commissioner of Investigations and Enforcement

Respondent

Judgment

Background 1. The Appellant is a registered taxpayer and a limited liability company registered in the Republic of Kenya and is primarily engaged in wholesale and retail sale of household goods, electronics, furniture, and tiles.

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 investigations into the business of the Appellant for the period January 2017 and December 2020 for VAT and the period January 2017 to December 2017 for Corporation Tax.

4. Consequently, the Respondent issued VAT assessment dated 12th April 2022 and another VAT assessment order dated 27th, 28th and 29th June 2022.

5. The Appellant raised a Notice of Objection to the assessment vide a letter dated 12th July 2022.

6. The Respondent then issued an Objection Decision dated 4th April 2023 confirming the assessment of Kshs. 36,335,366. 00.

7. Aggrieved by the Respondent’s decision, the Appellant lodged the instant Appeal.

The Appeal 8. The Appellant premised its case on its Memorandum of Appeal dated 17th May 2023 and filed on 18th May 2023 and raised the following grounds of appeal:a.The Respondent erred in law and fact in finding that the Appellant is liable to pay an additional tax of Kshs. 36,335,366. 00 being the principal taxes, the Respondent having ignored the Appellant's submissions and supporting documents.b.The Respondent erred in law and fact by failing to consider Section 17 (1) of the Value Added Tax Act in arriving at its computations and disregarded the fact that the Appellant had made all declarations as required by law and had filed its returns as required by law. The Respondent erred in its computations and comparison between VAT and IT2 where the Appellant erroneously concluded that for the year 2018, the income tax declared was more than the VAT declaration for the same year by Kshs. 21,510,031. 00, thereby bringing the resultant variance to charge for VAT.c.The Respondent erred in law by making a determination that 40 customs entries had been claimed erroneously and out of time and disallowing the claim with a VAT implication of Kshs. 30,827,038. 00. in making such a determination, the Respondent failed to take into account the Appellant’s submissions that;i.The Appellant contracts a licensed Clearing agent who undertakes all the Appellant’s importation transactions.ii.All customs entries were properly processed.iii.All customs entries were claimed within the statutory timelines.d.The Respondent erred in law and fact in its finding that the Appellant claimed VAT input using 5 customs entries with a VAT implication of Kshs. 1,076,085. 00 which according to the Respondent, had been cancelled. The Respondent erred by concluding that the said five entries did not qualify for claiming VAT inputs since duty had not been paid on them. The Appellant had at all times claimed VAT input using correctly declared and processed entries.e.The Respondent erred in law and fact by determining that a customs entry with a VAT implication of Kshs. 990,638. 00 belonged to a different importer, hence ought not to have been claimed for input VAT. The Appellant avers that at all times it claimed VAT input using entries that belonged to it.f.The Respondent erred in law and fact by issuing an Objection Decision based on hearsay, estimates, assumptions contrary to the fact that taxes should be assessed on actual income.

The Appellant’s Case 9. In support of the Appeal, the Appellant relied on its;a.Statement of Facts dated 17th May 2023 and filed on 18th May 2023 together with the document attached thereto; and,b.Written submissions dated and filed on 21st March 2024.

10. The Appellant contended that on the 2nd March 2021, the Respondent’s officers carried out an impromptu visit to the Appellant’s premises and conducted a search operation whereupon the Respondent carried a number of items including but not limited to;a.Laptops containing the Appellant’s business information.b.Documents including delivery notes, invoices, customer records, sales records, importation documents, cash books, sales inventories, order books among other documents.

11. The Appellant stated that on 4th March 2021, the Respondent sent it a letter of findings informing it that it was under investigations for various tax-related matters and therein indicating that the Appellant had a tax liability of Kshs. 825,605,090. 00, which amount the Respondent demanded the Appellant to pay. The Respondent required the Appellant to provide information and clarification on various issues that were raised vide the said letter of findings.

12. The Appellant alleged that in March 2021, it wrote to the Respondent disputing the demanded taxes and informed it that the Appellant had at all times correctly and accurately declared its taxes and all taxes due were paid as required. It also alleged that it provided its workings and welcomed the Respondent to carry out its investigations and assured it of its full support and cooperation. The Appellant alleged that it provided to the Respondent all the required documents as and when required for review and verification. Consequently, the Respondent issued the Appellant with a Notice of Assessment dated 26th April 2022 requiring the Appellant to pay taxes amounting to Kshs. 854,514,265. 00.

13. The Appellant averred that the principal tax liability from the assessments was a total of Kshs. 854,514,265. 00 plus penalties and interests. The Appellant noted that Respondent did not provide information or any written assessment explaining the figures for it to understand the basis of the assessment. The Appellant alleged that on 12th July 2022 it objected to the entire assessments in compliance with statutory timelines. However, on 20th July 2022, the Respondent wrote to the Appellant declaring the Appellant’s Objection as invalid claiming that it did not meet the requirements of Section 51 (3) of the Tax Procedures Act, 2015.

14. According to the Appellant, the Respondent requested for additional documents which the Appellant provided as indicated in the Appellant’s letter dated 21st September 2022. It also alleged that the final set of documents were forwarded to the Respondent on 17th February 2023.

15. The Appellant averred that on 4th April 2023, the Respondent reviewed its Objection and partially allowed it thereby issuing an Objection Decision against it for additional VAT amounting to Kshs. 36,335,366. 00 which motivated it to lodge this Appeal.

16. It is the Appellant’s submission that from the chronology of events stated herein above portray a clear picture of its willingness, support, and cooperation throughout the investigation and the objection review process. It stated that it has on numerous occasions provided to the Respondent all the documents in support of its income and tax affairs but the Respondent has made an arbitrary Objection Decision and failed to fully consider its submissions.

17. The Appellant argued that it has neither refused to provide documents to the Respondent nor has it failed to cooperate with the Respondent and put the Respondent to strict proof of the allegations.

18. In its written submissions, the Appellant identified two issues for determination, that is;i.Whether the Respondent’s Objection Decision dated 4th April 2023 is valid; and,ii.Whether the Appellant is by virtue of Section 17 of the VAT Act entitled to claim input in expenses incurred in the production of income.

19. On whether the Respondent’s Objection Decision is valid, the Appellant submitted that it objected to the assessments within the statutory timelines. It relied on Section 51 (4) of the Tax Procedures Act, 2015, which requires the Respondent to notify the Appellant if its objection is invalid. According to the Appellant, the Respondent invalidated the Appellant’s objection more than two (2) months contrary to the express provisions of the law. Consequently, the Appellant submitted that both the invalidation notice dated 20th July 2022 and the Objection Decision dated 4th April 2023 were issued contrary to the provisions of Sections 51 (4) and 51 (11) of the Tax Procedures Act, 2015.

20. Consequently, the Appellant submitted that in the absence of a valid invalidation notice and Objection Decision, its objection is deemed allowed by operation of the law. To support this assertion, the Appellant cited this Tribunal’s decision in Friends Hotel Kakamega Limited vs. Commissioner of Domestic Taxes (Tax Appeal 1148 of 2022) (2023) KETAT 942 (KLR) where it held that:“The sum total of the above analysis is that the Appellant’s invalidation notice was laced with illegalities and it cannot be allowed to stand. There is a hallowed and well-settled legal maxim known as ex turpi causa non oritur actio. It means that no court will lend its aid to a man who finds his cause of action upon an immoral or illegal act. When put in a simpler format it means that no action can arise from an illegal act.”

21. On whether the Respondent erred in ignoring Section 17 (1) of the Value Added Tax Act, 2013 in arriving at its computation, the Appellant submitted that in May 2020 it claimed inputs on 40 custom entries but the Respondent rejected the inputs on the grounds that they were claimed beyond the 6 months’ statutory timelines. It is the Appellant’s submission that vide an application dated 27th March 2024, it made an Application seeking leave to adduce the customs entries that were disallowed. It also submitted that these entries were tabled during the objection stage and both the Respondent’s assessment and Objection Decision dated 12th April 2022 and 4th April 2023 respectively made reference to these entries.

Appellant’s Prayers 22. The Appellant herein prays:a.That the Objection Decision by the Respondent dated 4th April 2023 be annulled and set aside in its entirety;b.That pending the hearing and determination of this Appeal, there be a stay affecting the implementation of the Objection Decision;c.That the Appeal be allowed with costs; and,d.That the Honourable Tribunal makes any other order as it deems just and reasonable.

The Respondent’s Case 23. The Respondent’s case is premised on its;a.Statement of Facts dated and filed on 9th June 2023 together with the documents attached thereto; and,b.Written submissions dated 22nd January 2024 and filed on 23rd January 2024.

24. The Respondent stated that it carried out investigations into the business of the Appellant for the period January 2017 and December 2020 for VAT and the period January 2017 to December 2017 for Corporation Tax. It then served the Appellant with a search warrant and conducted a search and seizure operation on 2nd March 2021.

25. The Respondent stated that it served the Appellant with initial preliminary findings on 4th March 2021 with tax liability of Kshs. 825,605,090. 00 and cconsequently issued a tax assessment on 12th April 2022.

26. According to the Respondent, whereas the Appellant raised an Objection to the assessment vide a letter dated 12th July 2022 it failed to provide supporting documents. Consequently, it declared the Objection invalid due to lack of supporting documents vide a letter dated 20th July 2022 and requested for the supporting documents.

27. The Respondent stated that the Appellant supplied the documents on 18th October 2022, 25th October 2022 and 17th February 2023. The Respondent averred that it considered the documents provided and issued an Objection Decision dated 4th April 2023 confirming the assessment of Kshs. 36,335,366. 00.

28. In Response to the assertion that it erred in ignoring the Appellant’s submissions, the Respondent stated that it took into consideration all the information and documents produced by the Appellant in coming up with the Objection Decision as is evident in the difference in quantum of taxes between assessment dated 12th April 2022 and Objection Decision dated 4th April 2023 which reduced the quantum of assessed taxes from Kshs. 854,514,265. 00 to Kshs. 36,335,336. 00. The Respondent averred that the reduction in quantum of taxes was in consideration of the Appellant’s documents supplied on 18th October 2022, 25th October 2022 and 17th February 2023.

29. In response to the Appellant’s assertion that the Respondent erred in ignoring Section 17 (1) of the Value Added Tax Act, 2013 in arriving its computation, the Respondent stated that Section 17 (1) of Value Added Tax Act, 2013 provides that a person making a taxable supply or importation is allowed to make deductions for input tax at the end of the return period. It averred that it has a wide berth in assessing the correctness or falsity of the said returns as stated under Section 31 of the Tax Procedures Act, 2015 which gives the Respondent the liberty to reassess a taxpayer subject to available information and best judgement. The Respondent averred that the comparison between the IT2C return and the VAT return was used in arriving at a variance that was subjected to tax.

30. In response to the Appellant’s claim that the Respondent erred in finding that forty (40) custom entries had been erroneously claimed and out of time and thus disallowing the same, the Respondent stated that the forty (40) custom entries were claimed out of time contrary to Section 17 (2) of the VAT Act. Further, it averred that the hiring of agents does not absolve the Appellant from being answerable to its tax obligations. Therefore, the Respondent argued that the Appellant has failed to discharge burden of proof in showing that the entries were processed within the prescribed statutory limits.

31. On whether the Respondent erred in finding that five (5) custom entries did not qualify for claiming VAT input since duty had not been paid on them, the Respondent argued that that the Appellant had the duty to declare the imported goods which in turn would be subject to excise duty, applicable levies and declaration fees to get the dutiable value and duties computed accordingly. The Respondent maintained that the Appellant failed to provide evidence to demonstrate that custom duty had been paid so as to allow the claim for input VAT.

32. With regards to whether the Respondent erred in finding that one of the entries for the VAT belonging to a different importer, the Respondent stated that the letter of tax assessments dated 12th April 2022 shows that entry number 2021MSA7731517 with a VAT implication of Kshs. 990,638. 00 belongs to a different importer of Pin No. P051830456H and not the Appellant. The Respondent argued that it is the issuer of all PIN certificates, it is in a position to know each and every tax payer through its unique identification number and that this assertion enjoys the presumption of correctness. Therefore, the Respondent claimed that the Appellant failed to provide any evidence to show it was the importer of the consignment under entry number 2021MSA7731517 thus the claim was disallowed.

33. On whether the Respondent erred in issuing an objection based on hearsay estimates and assumptions, the Respondent stated that it considered the contentions of the Appellant in its objection and the documents provided and adjusted the tax assessments which shows a significant variance as evidenced by the Objection Decision. Therefore, the Respondent averred that the Appellant is undeserving of the prayers sought.

34. The Respondent’s written submission were substantially identical to its Statement of Facts, the Respondent further submitted that with regard to whether the Respondent delayed to notify the Appellant on invalidity of the Notice of Objection, the Responded submitted that it treated the Objection as invalid but the Appellant validated the objection by supplying supporting documentation on 18th October 2022, 25th October 2022, and 17th February 2023 which led to issuance of the Objection Decision dated 4th April 2023.

35. With regards to burden of proof, the Respondent relied on a number of case laws including Kenya Revenue Authority vs. Maluki Kitili Mwendwa [2021] eKLR; Commissioner of Domestic Services vs. Galaxy Tools Limited [2021] eKLR; Commissioner of Domestic Taxes vs. Trical and Hard Limited (Tax Appeal E146 of 2020) [2022] KEHC 9927 (KLR) and Republic vs. Kenya Revenue Authority & Proto Energy Limited (Ex parte) (Judicial Review Application E023 of 2021) [2022] KEHC 5 (KLR) (24 January 2022) to submit that burden of proof falls on the taxpayer who has to prove that the Respondent’s decision is incorrect. But the Appellant failed to discharge the burden.

36. With regards to whether the Respondent erred in finding that the forty (40) custom entries had been erroneously claimed and claimed out of time and thus disallowing the same; the Respondent submitted that the forty (40) custom entries were claimed in May 2020 while they related to various dates between January and October 2019, a period which was beyond the six (6) months’ statutory timeline under Section 17 of the VAT Act. The Respondent relied on the High Court case of Highlands Mineral Water Limited vs. Commissioner of Domestic Taxes [2021] eKLR wherein the learned Hon. Judge D.S. Majanja held that:“For the reasons I have set out, I allow this appeal only to the extent that I find and hold the Commissioner has no power under section 17 of the VAT Act to disallow an input VAT claim for the reason of late filing as long as the claim is made within 6 months after the end of the tax period within which the supply or importation is made. Consequently, it follows that any input VAT claims by the Appellant made 6 months after end of the tax period cannot stand irrespective of late filing of the VAT Returns.”

37. Consequently, The Respondent submitted that the Appellant herein claimed the forty (40) custom entries were beyond 6 months after the end of the tax period.

Respondent’s Prayers 38. Based on the above grounds, the Respondent prays that;i.The Objection Decision dated 4th April 2023 for Kshs. 36,335,366. 00 be upheld.ii.The Appeal be dismissed for lack of merit.

Issues for Determination 39. The Tribunal having considered the Memorandum of Appeal, the parties’ Statements of Facts, and written submissions, puts forth the following issues for determination:i.Whether the Respondent’s Objection Decision issued on 4th April 2023 was valid; and,ii.Whether the Respondent erred in disallowing the Appellant’s input VAT.

Analysis and Findings 40. The Tribunal wishes to analyse the issues as hereunder.i.Whether the Respondent’s Objection Decision issued on 4th April 2023 was valid;

41. The Respondent asserted that the Objection Decision was invalid on grounds that no supporting documents were provided, whereas the Appellant objected to the assessments within the statutory timelines, the Respondent invalidated the Notice of Objection but failed to comply with the provisions of Section 51 (4) of the Tax Procedures Act, 2015. It argued that the Respondent invalidated its Notice of Objection after more than two (2) months contrary to the express provisions of the aforementioned section. For this reason, the Appellant asserted that the Objection Decision dated 4th April 2023 was issued contrary to the provisions of Sections 51 (11) of the Tax Procedures Act, 2015 and therefore, invalid.

42. The Tribunal upon noted that the Respondent issued its assessments vide a letter dated 12th April 2022 and assessment orders dated 27th, 28th and 29th June 2022 while the Appellant filed its Notice of Objection on 12th July 2022. Consequently, the Tribunal shall consider this issue guided by the applicable law as at the time of the Notice of Objection.

43. The Tribunal noted that the Respondent treated the Appellant’s Notice of Objection as invalid and notified the Appellant of the same on 20th July 2022. The Appellant validated its objection by furnishing the Respondent with documents on 18th October 2022, subsequently the Respondent issued its Objection Decision on 4th April 2023.

44. Section 51 (11) of the Tax Procedures Act as amended by Finance Act No. 22 of 2022 provides 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.”

45. In Koibos General Contractors Limited vs. Commissioner of Domestic Taxes TAT No. 373 of 2023, this Tribunal held as follows:‘‘53. It is the Tribunal’s view that the Respondent’s action of issuing an Objection decision under the circumstances amounts to the validation of an otherwise invalid Objection.54. The Respondent having chosen that path, ought to have delivered the Objection decision within the dictates of Section 51 (11) of the TPA.55. It worthy of notice, that the provisions of Section 51 (11) of the Tax Procedures Act as coined then, required the Respondent to issue the Objection decision within sixty days.’’

46. In Republic vs. Commissioner of Domestic Taxes Ex Parte Fleur Investments Limited [2020] eKLR the High Court observed as follows:‘‘Talking about the need to extensively analyze the facts, a pertinent issue has been raised in this case. The applicant argues that the Respondent failed to render an objection decision within the meaning of section 51 (11) of the TPA. From this sub-section, two consequence flow from the Respondent’s failure to make a decision. First, the objection by operation of the law stands allowed. As held in the first issue, on this ground alone the applicant’s case succeeds. That is the clear language of section 51 (11) of the TPA. That being the correct legal position, there was no need for the applicant to lodge an appeal before the TAT.’’

47. In the instant Appeal, the Respondent issued its Objection Decision on 4th April 2023 for a Notice of Objection that had been validated on 18th October 2022, thus the Objection Decision being issued beyond sixty days as provided for under Section 51 (11) of the Tax Procedures Act.

48. Based on the foregoing, the Appellant’s Notice of Objection was deemed to have been allowed by operation of law.

49. Consequently, the Tribunal finds and holds that the Respondent’s Objection Decision dated 4th April 2023 was invalidly issued.

50. Having found as above, the Tribunal shall not analyse the second issue as the same has been rendered moot.

Final Determination 51. The upshot to the foregoing is that the Tribunal finds and holds that the Appeal is meritorious merit and consequently makes the following orders; -a.The Appeal be and is hereby allowed;b.The Respondent’s Objection Decision dated 4th April 2023 be and is hereby set aside; andc.Each party to bear its own cost.

52. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 28TH DAY OF JUNE 2024ROBERT M. MUTUMA - CHAIRPERSONELISHAH N. NJERU - MEMBERMUTISO MAKAU - MEMBERBERNADETTE GITARI - MEMBERABDULLAHI M. DIRIYE - MEMBER