[2023] KETAT 170 (KLR)

Holdwadag Construction Company Limited v Commisioner of Investigations & Enforcement (Appeal 606 of 2020) [2023] KETAT 170 (KLR) (Civ) (10 February 2023) (Judgment)

Neutral citation: [2023] KETAT 170 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Civil

Appeal 606 of 2020

E.N Wafula, Chair, EK Cheluget, RO Oluoch & RM Mutuma, Members

February 10, 2023

Between

Holdwadag Construction Company Limited

Appellant

and

Commisioner Of Investigations & Enforcement

Respondent

Judgment

Background 1. The Appellant is a private limited company incorporated in Kenya under the Companies Act and is a registered taxpayer.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, 1995. Under Section 5 (1) of the Act, the Kenya Revenue Authority is an agency of the Government for the collection and receipt of all revenue. 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 Appellant was investigated in regard to supplies made between 2014-2018 to the County Government of Garissa for Corporation tax, Value Added Tax and Directors’ taxes. The said investigation resulted in the Respondent issuing the Appellant with a tax assessment dated the 25th February 2020 for Kshs 24,579,034. 00 being the Appellant’s VAT and Corporation tax liability plus interest.

4. The Appellant filed its objection to this assessment on the 19th of August 2020, and the Respondent responded thereto vide an objection decision dated the 14th of October 2020. The said objection decision invalidated the Appellant’s objection for failure to meet the thresholds that have been placed in Section 51 of the TPA.

5. The Appellant was not satisfied with the Respondent’s objection decision and hence this appeal.

The Appeal 6. The Appeal is premised on the Memorandum of Appeal dated the 22nd day of December 2022 and is based on the following grounds:a.The Respondent erred in law by failing to notify the Appellant of its intention to audit contrary to the provision of Section 59 of the Tax Procedures Act, 2015. b.The Respondent erred in law by failing to rely on the Appellant’s physical documents in carrying out an actual audit in order to ascertain its tax liability.c.The Respondent erred in law by failing to properly notify the Appellant of any defects in its notice of objection before issuing its objection Decision, contrary to the provisions of section 51(4) of the Tax Procedures Act, 2015. d.The Respondent erred in law by failing to provide a statement of finding on the material facts and the reasons for its decision in the Objection Decision dated 14th October 2020. e.The Respondent erred in fact by using baseless high profit margins to ascertain the Appellant’s income for the period under assessment.f.The Respondent erred in law and fact by relying on the banking method in ascertaining the Appellant’s income tax for the period under assessment, thus erroneously assuming that al the Appellant’s banking amounted to income.g.The Respondent, being a public body, has gravely violated the Appellant’s right to fair administrative action as granted under Article 47 of the Constitution by failing to inform the Appellant of the pending investigations in due time.h.The Respondent violated its mandate under Article 47 of the Constitution, 2010 by failing to conduct an actual audit before levying exorbitant taxes on the Appellant.

The Appellant’s Case 7. The Appellant’s case is premised on the hereunder documents and the proceedings before the Tribunal:-a.The Statement of Facts dated 22nd of December 2020 together with the documents attached thereto.b.The Written submissions dated 18th October, 2022 filed on the 19th of October 2022 together with the legal authorities filed therewith.

8. The Appellant argued that the assessment dated the 25th of February 20202 was unlawful for the reasons:-a.The Respondent instituted criminal proceedings against the Appellant without informing it beforehand that there was an ongoing audit investigation into its tax affairs.b.The Respondent failed to issue it with a notice of intention to audit as per the provisions of Section 59 of the Tax Procedures Act 2015. c.The Respondent issued an assessment for a tax demand without carrying out an audit of the Appellant’s tax affairs.d.The impugned tax assessment failed to specify the documents relied upon in raising the assessment against the Appellant, and that this was significant because the Appellant was never requested to provide any documents to facilitate a fair tax audit.

9. The Appellant hold the position that the Respondent’s letter dated the 6th of December 2019 summoning its directors to the Respondent’s Regional offices at Nyeri for a meeting to discuss the Appellant’s tax affairs was not a notice of intentions to audit as is envisaged in Section 59 of the TPA. To buttress this point, it noted that the said letter was neither explicit that the Respondent required to carry out an audit, nor did it request for any documents upon which the Commissioner would then raise an assessment of the Appellant’s tax liability.

10. The Appellant argued that the said assessment was issued on the 25th of February 2020 a few days before Covid-19 was declared a National pandemic in Kenya and the whole Country was put on lockdown and thereby preventing its directors him from moving from Garissa to Nairobi. It subsequently lodged its objection on the earliest opportunity, on the 19th of August 2020, following the relaxation of the lockdown measures put in place to curb the spread of Covid-19 virus.

11. That the Respondent invalidated its objection vide its Objection decision dated 14th October 2020. That said objection however:a.Failed to notify the Appellant of the defect in the objection notice in a timely manner thus denying the Appellant the opportunity to lodge the objection notice as per the legal requirements of the TPA, 2015. b.Failed to outline a statement of reasons backing the Commissioner’s assessment contrary to the provisions of the TPA, 2015. c.Confirmed the Respondent’s raised tax liability of Kshs. 24,579,034. 00 without so much as reviewing the Appellant’s tax records.d.Affirmed the Commissioner’s reliance on the Appellant’s bank statements to determine its tax liability.

12. It was its contention that the Respondent’s conduct in this matter violated its rights under the TPA and Article 47 of the Constitution, 2015 because of the following reasons:a.The Respondent issued the tax demand dated 25th of February 2020 as an afterthought having already arrested and instituted criminal proceedings against the Appellant’s directors.b.The Respondent failed to issue the Appellant with a notice of intention to audit as per the provisions of the TPA, an action which is categorically laden with procedural unfairness.c.The Respondent’s tax demand as well as its objection decision failed to provide the Appellant with a statement of material findings as well as the reasons underpinning both decisions, without regard to the adverse effects and hardships the taxes therein imposed on the Appellant.

13. For the reasons set out above, the Appellant prays that this Tribunal allows the Appeal and sets aside the objection decision in its entirety.

Appellant’s Prayer 14. Based on the foregoing, the Appellant prayed that this Tribunal:a.Upholds the objection filed by the Appellant.b.Sets aside and annuls the objection decision by the Respondent:c.Orders that the Respondent pays the costs of this Appeal; andd.Make such other orders that it may deem appropriate.

The Respondent’s Case 15. The Respondent’s case is premised on its Statement of Facts dated and filed on 19th of January 2021 together with the documents attached thereto and the written submissions filed and dated on the 17th October, 2022 together with the legal authorities file therewith.

16. The Respondent stated that the Appellant was investigated in regard to supplies made to between 2014-2018 to the County Government of Garrissa for Corporation Tax, Value Added Tax and Directors’ Taxes.

17. That during its investigations, the team sought for information and obtained information from the KRA Internal tax systems and third parties such as CountyGovernment of Garissa, Integrated Financial Management Information Systems (IFMIS), Kenya Rural Roads Authority and banks records.

18. That the records obtained from the Registrar of Companies indicated that the Appellant has two directors namely Nasteh Daud Abdi and Suleiman Farah Daud. This was supported by the Appellants CR 12.

19. That the investigations disclosed that:a.The Appellant was filing nil returns in 2014,2015,2016 and 2017 despite the fact that it carried out construction works for Garrissa County Government and Kenya Rural Roads Authority. It is only in the year 2018 that the taxpayer declared income turnover of Kshs 46,437,000. b.The Appellant had filled VAT for the years 2014 to 2018 but declared nil income in most of those returns despite earning income from services rendered to Garissa County Government and Kenya Rural Roads Authority.c.The Appellant’s directors Nasteh Daud Abdi and Suleiman Farah Daud also filed nil returns.

20. The Respondent issued the Appellant with an assessment dated the 25th February 2020 for Kshs 24,579,034. 00 being the Appellant’s VAT and Corporation tax liability plus interest.

21. That the Appellant filed its objection to the assessment on the 19th of August 2020, and the Respondent issued its decision on the 14th of October 2020.

22. The said decision invalidated the Appellant’s objection for failure to meet the thresholds that have been placed in Section 51 of the TPA.

23. The Respondent reiterated that the Appellant failed to discharge its burden of proof in proving that the Respondent’s decision was incorrect as per the provisions of Section 56(1) of theTPA.

The Respondent’s prayers 24. The Respondent prayed for orders that that this Tribunal holds and finds that the Appellant’s Appeal is without merit and that the same be dismissed with costs.

Appellant’s Submissions 25. The Appellant aligned its submission under the following sub-headings:i.Whether the Respondent’s objection decision was proper in law

26. The Appellant argued that decision related to an objection filed out of time, a decision on invalidity of objection and objection decision are sequential, distinct and separate from each other. That the drafting of Section 51of the TPA was intentionally made in a sequential, hierarchal and multi-layered manner. In its view, therefore, lumping all these 3 decisions in one letter was contra statute.

27. It stressed that:a.The first stage where a decision relates to an objection the applicable law would be Section 51(6) and (7) of the TPA. This should be the first decision that the Respondent has to make.b.The second stage related to invalidity of an objection lodged, and that this is covered under Section 51(4) of the TPA. This required the Respondent to immediately inform the Appellant if it was of the view that the Appellant’s objection was not validly lodged.It was its view that an invalidation of objection decision is different from an objection decision and the two should not be included in the same letter as it was in this case. It supported its position with;i.TAT No. 152 of 2021; Dhanjal Borothers Limited- vs- commissioner of Domestic Taxes.ii.Saalah Mohhamed Hussein -v- Commissioner of Domestic Taxes (TA 617/20200)iii.JNN, ( a minor) MNM, suing as the next friend v Naisula Holdings Limited t/a N School [2018]eKLRa.The third stage involved the issuance of an objection decision under Section 51 (9) and (10) of the TPA.

28. It accordingly argued that:a.The Respondent’s decision to issues an objection invalidation of objection and a decision on extension of time in one letter was unlawful for contravening Section 51(4) (6) (7) (9) and (10) of the TPA.b.The Respondent’s decision to include the 3 decisions in one letter denied it the opportunity and right to correct and or amend its objection and also its right of legitimate expectation that the Respondent would comply with the law as was laid out in the case of Kenya Revenue Authority and 2 others v Darasa Investements Limited [2018]eKLRc.By making an objection decision, the Respondent was implying that there was a valid objection on record. Its action of holding that there wasn’t a valid objection on record and issuing an objection decision amounted to an act of approbation and reprobation.d.The Tribunal should infer the meaning of the TPA by looking at its plain reading in regard to the process that the Commissioner is required to follow until it makes its penultimate objection decision.

29. It concluded its argument under this head by stressing that the procedures enumerated under Section 51 of the TPA were well intended and must thus be complied with to ensure a fair hearing and compliance with the law.ii.Whether the Respondent was right to issue an assessment for the years 2014 and 2015 beyond the 5 years period allowed by law.The Appellant avers that the Resplendent was not justified to issue an assessment outside the 5-year limit period that is allowed by law.

30. It also affirmed that it had discharged its burden of proof in this matter as is required by statute. It relied on TAT Stntwave Limited v Commissioner of Investigations and Enforcement.

Respondent’s Submissions 31. The Respondent aligned its submission under two issues which it analyzed as thus:

i. Whether the Appellant’s Objection was Valid 32. It argued that Section 51 of the TPA required the Appellant to file its objection within 30 days. In addition, the taxpayer must pay all taxes not in dispute, provide all relevant documents to support objection, state the precise grounds of objection, amendment required to be made to correct the decision and reasons for the amendment.

33. It contended that it issued a notice to inform the Appellant about the intended tax investigations and audit into its County supplies project for the period 2014-2018 vide a letter dated the 6th of November 2019. The outcome of these investigations was also shared vide a letter dated 14th October 2020.

34. The Respondent affirmed that as a result of the said investigations, it was justified to issue the Appellant with a tax assessment.

35. It was its position that the Appellant’s Objection was inValid because it was lodged 4 months outside the prescribed statutory period. The same ought to have been lodged by the 25th of March 2020 but it was lodged on the 19th of August 2020.

36. It submitted that having failed to lodge a valid notice, having failed to seek for time to lodge an objection out of time and having failed to provide supporting documentary evidence to support its objection, it follows that there was no proper appeal for determination before the Tribunal. It invoked Section 56(3) of the TPA and cited the following authorities in support of its argument:a.Speaker of the national Assembly v James Njenga Karume[1992]eKLRb.Primarosa Flowers Ltd v Respondent of Domestic Taxes [2019]eKLRc.Nairobi TAT, No. 55 of 2018, Boleyn International Limited v Commissioner of Domestic Taxes

ii. Whether the Respondent’s Objection Decision was Valid 37. The Respondent argued that its assessment dated 12th April 2018 and Objection decision dated 14th February 2020 are valid because the Appellant did not declare income that it had earned from the taxable supplies that were made to the County Government of Garissa. It invoked the charging provisions under Section 5 and 6 of the VATAct and Section 3 and 52B of the Income Tax Act to support this position.

38. The Appellant explained that it applied the banking test in this case because it was the only way it would have exercised its best judgment to capture the under declared sales and the income earned by the Appellant who had failed to file its SAR. It supported its position with:a.The American Supreme case of Holland vs United states of America 121 (1954).b.TAT Appeal No. 25 of 2016 Family Signature Limited Vs Commissioner of Investigation and Enforcementc.The Commissioner for Her Majesty’s Revenue Customs TC/2017/02292 Saima Khalid Appellant vs The Commissioner for Her Majesty’s Respondent Revenue and Customs.d.TAT Appeal No. 115 of 2017, Digital Box Limited vs Commissioner for Investigation and Enforcement.

39. The Appellant also argued that the Appellant had not discharged its burden of proof under Sections 56(1) of the TPA and Section 30 of the TATAct.

40. It argued that the objection was invalidated under Section 51(3) (a) to (c) of the TPA and the Tribunal lacks the power to validate it.

41. Its Conclusion was that the Appeal was devoid of merit and ought to be dismissed with costs.

Issues For Detrmination 42. After perusing through the pleadings and documentation produced before it together with the parties’ submissions, the Tribunal is of the opinion that the following are the issues for determination:a.Whether the Respondent’s objection decision dated the 14th of October 2020 is validb.Whether the Respondent erred in confirming the Appellant’s tax assessment of Kshs 24,579,034/=

i. Whether the Respondent’s objection decision was valid. 43. Both the Appellant and the Respondent raised the issue of the objection decision and the validity of the notice of objection, respectively. Indeed, these issues of validity of these two documents was the crux of the dispute between the parties.

44. The issue of validity of an objection is covered under Section 51(2) and (3) of the TPA which reads as thus:(2)A taxpayer who disputes a tax decision may lodge a notice of objection to the decision, in writing, with the Commissioner within thirty days of being notified of the decision.3. A notice of objection shall be treated as validly lodged by a taxpayer under subsection (2) if—a.the notice of objection states precisely the grounds of objection, the amendments required to be made to correct the decision, and the reasons for the amendments;b.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); andc.all the relevant documents relating to the objection have been submitted.”

45. The foregoing provisions of the law empower the Commissioner to determine the validity of an objection. However, Section 51(4) of the TPA gives directions on how this power is to be exercised. Section 51(4) of the TPA reads as follows:“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”

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

47. immediacy test that is prescribed in Section 51(4) of the TPA.

48. It thus follows that the Commissioner’s power to invalidate an objection would only stand if it complies with the law when issuing that invalidation of objection notice. In other words, the Commissioner’s invalidation decision would only hold if it notified the Appellant immediately or within the limited confines of Section 51(4) of the Tax Procedure Act that its objection was not validly lodged.In this matter, the objection was lodged on the 19th of August 2020 and the invalidation decision was issued on the 14th of October 2020, meaning that the notice of invalidation was issued 56 days after the receipt of the objection. The first question before the Tribunal is whether the 56 days periods met the

49. This Tribunal has had the chance to determine the immediacy test in the case of Saalah Mohhamed Hussein v Commissioner of Domestic Taxes (TAT 617/2020) where it held as thus:21. 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.22. 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.”

50. 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.

51. Secondly, the Respondent’s letter dated the 14th of October 2020 was referred to as ‘objection decision, tax assessments years 2014-2017’ and its relevant part reads as follows:“Based on the above reasons, your objection is hereby rejected in totality and the assessments issued on the 25th of February 2020 amounting to KES 24,579,034 is hereby confirmed.”

52. It is clear that this letter was intended to inform the Appellant that its objection had not been validly lodged under Section 51(4) of the TPA. Contrary to its title it was not an objection decision issued under Section 51(8) of the TPA which provides as follows:“(8) Where a notice of objection has been validly lodged within time, the Commissioner shall consider the objection and decide either to allow the objection in whole or in part, or disallow it, and Commissioner's decision shall be referred to as an "objection decision".

53. The plain and strict reading of Section 51(8) of the TPA leads us to the conclusion that ‘an objection decision’ can only be issued where the objection was validly lodged within time and the Commissioner has thereafter considered that objection allowed, rejected and or allowed it in part. This decision of the Commissioner is what is referred to as ‘an objection decision’

54. This was certainly not the case in this matter because the objection was held to be invalid and was therefore, not considered by the Commissioner because it was lodged out of time. The decision contained in the impugned objection decision did not also consider the content of the Appellant’s objection notice in arriving at its decision.

55. Clearly therefore the Commissioner was in error to refer to a notice for an objection that was not validly lodged under Section 51(4) of the TPA as an objection decision under Section 51(8) of the TPA. This error is fatal because an objection decision is a final decision which locks out the taxpayer from its rights in filing an objection to the Commissioner under Section 51(6) of the TPA.

56. In the circumstances, the Tribunal is bound to arrive at the inescapable conclusion that the Respondent’s letter dated the 14th of October 2020 and titled’ objection decision, tax assessment years 2014-2017’ is invalid and not known to the law.

ii. Whether the Respondent erred in confirm the Appellant’s tax assessment of Kshs 24,579,034/= 57. Having held that the Respondent’s letter dated the 14th of October 2020 and titled’ objection decision, tax assessment years 2014-2017’ is invalid and not known to the law. There is nothing left to determine under issue (ii) because it is the validity of this letter that would have led the Tribunal to decide on whether the Respondent erred in confirming the Appellant’s tax assessment.

58. With the Respondent not having reviewed the Appellant’s notice of objection on its proper merits its appropriate in the circumstances to have the Respondent review the objection and issue an appropriate objection decision.

Final Decision 59. On the basis of the foregoing analysis the Tribunal finds that the Appeal has merit and accordingly proceeds to make the following Orders: -i.The Appeal be and is hereby upheld.ii.The Respondent’s letter dated the 14th of October 2020 and titled’ objection decision, tax assessment years 2014-2017’ be and is hereby set aside.iii.The Appellant’s notice of objection lodged on the 19th August, 2020 be and is hereby referred back to the Commissioner for consideration on its full merits and the Commissioner to issue an appropriate objection decision within 60 days of the date of delivery of this Judgment and subject to any additional documents subsequently requested by the Respondent and/or provided by the Appellant in pursuant to the provisions of Section 51(11)(b) of the Tax Procedures Act.iv.Each party to bear their own cost

DATED AND DELIVERED AT NAIROBI THIS 10TH DAY OF FEBRUARY, 2023. ERIC N. WAFULA - CHAIRMANEDWIN CHELUGET - MEMBERRODNEY OLUOCH - MEMBERROBERT M. MUTUMA - MEMBER