[2024] KETAT 566 (KLR)

Ideal Security Services Limited v Commissioner of Domestic Taxes (Tax Appeal E117 of 2023) [2024] KETAT 566 (KLR) (22 March 2024) (Judgment)

Neutral citation: [2024] KETAT 566 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E117 of 2023

E.N Wafula, Chair, Cynthia B. Mayaka, RO Oluoch, T Vikiru & AK Kiprotich, Members

March 22, 2024

Between

Ideal Security Services Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a limited liability company incorporated under the Companies Act.

2. The Respondent is the principal officer appointed under Section 13 of the Kenya Revenue Authority Act. The Kenya Revenue Authority is an agency of the Government of Kenya mandated with the duty of collection and receipting of all tax revenue, and the administration and enforcement of all tax laws set out in Parts 1& 2 of the First Schedule to the Act, for purposes of assessing, collecting, and accounting for all tax revenues in accordance with those laws.

3. The issue in dispute in this Appeal arose on 16th September 2022 when the Respondent served the Appellant with an additional assessment for the 2017 to 2021 tax period.

4. The Appellant objected to this additional assessment vide its letter dated 12th October 2022 wherein it also conceded to VAT liability of Kshs 28,000,000/=.

5. The Respondent issued its objection decision on 28th October 2022.

6. The Appellant being dissatisfied with the Respondent’s objection decision lodged the Appeal herein on 29th November 2022.

The Appeal 7. The Appellant set out its Appeal in its Memorandum of Appeal dated 29th March 2023 and filed on 31st March 2023 wherein it raised the following grounds of Appeal, that:a.VAT and income tax additional assessments were incorrect.b.Input taxes claimed were duly supported with tax invoices from suppliers.

Appellant’s Case 8. The Appellant has set out its case in its Statement of Facts dated 29th March 2023 and filed on 31st March 2023 together with the written submission dated 6th December 2023 and filed on 8th December 2023.

9. The Appellant stated that it filed its returns for the period, January 2017 to December 2021 within the respective statutory periods.

10. The Appellant averred that it entered into a tax payment plan regarding the Kshs 28,000,000/= that did not form part of its objection dated 12th October 2022. That it commenced the payment of this tax not in dispute on 8th October 2022.

11. That the debt payment instalment agreement was executed by both parties on 31st October 2022.

12. That it supplied further additional documents that had been requested by the Respondent on 28th October 2022 at 02:36 PM.

13. The Appellant identified and discussed the following issues for determination:a.Whether the Respondent’s Preliminary Objection should be upheld.b.Whether the Respondent’s objection decision is valid within Section 51(3) of the TPA.c.Whether the Respondent erred in disallowing the Appellant’s input VAT and purchases arising from the supply of taxable goods.

a. Whether The Respondent’s Preliminary Objection Should Be Upheld. 14. The Appellant argued that its objection dated 12th October 2022 was valid and also complied with the provision of Section 51(4) of the TPA.

15. That it had entered into a payment plan for the undisputed tax under Section 51(3) of the Tax Procedures Act for the payment of Kshs. 28 Million which was undisputed tax.

16. That it also notified the Respondent vide a letter dated 8th October 2022 that it had agreed to settle this undisputed tax at the rate of Kshs 500,000/= monthly for 12 months commencing October 2022.

17. The Appellant averred that it had been allowed to settle this tax liability in instalments vide the Respondent’s letter dated 5th October 2022 and the Debt Instalment Agreement form that was executed on 28th October 2022. That the debt Instalment Agreement was acknowledged by the Respondent on 7th November 2022.

18. The Appellant averred that the fact that its objection had met the threshold set out in Section 51(3) and (4) of the TPA meant that the Respondent’s Objection decision dated 28th October 2022 which was pegged on the fact that the undisputed tax had not been paid was not proper, lawful and or valid under Section 51 of the Tax Procedures Act.

b. Whether the Respondent’s objection decision is valid within Section 51(3) of the TPA. 19. The Appellant submitted that the fact that it had entered into a debt payment agreement implied that its objection was valid under Section 51(3) of the TPA. It supported its position with the cases of:a.R vs National Land Commission and 2 others Exparte Archdiocese of Nairobi Kenya Registered Trustee (St Joseph’s Mukasa Catholic Church Kahawa West) 2018 eKLR.b.R vs KRA Exparte Yaya Towers Ltd (2008) eKLR.c.Mungangia Tea Factory Co. Ltd and Others vs Commissioner for Domestic Taxes (2020) eKLR.b.Whether the Respondent erred in disallowing the Appellant’s input VAT and purchases arising from the supply of taxable goods.

20. The Appellant submitted that it was compliant with the VAT Act and Regulations and the Income Tax Act (ITA) and was therefore entitled to deduct input VAT from its output VAT and the cost of its supplies from its income because they were wholly and exclusively incurred in the production of income.

21. The Appellant stated that it supplied the documents requested by the Respondent, with the final documents being supplied on 28th October 2022 at 02. 36 PM prior to the issuance of the objection decision.

21. That in circumstances it had discharged its burden of proof as required under Section 56(1) of the Tax Procedures Act.

23. The Appellant stated that on a without prejudice basis, the Respondent’s objection decision having been declared invalid in law, the Tribunal can only order the Respondent to issue a fresh or new assessment without the undisputed tax for the Appellant objection again.

Appellant’s Prayers 24. The Appellant prayed for orders that:a.The objection decision of the Respondent contained in the letter dated 28th October 2022 demanding payment of income tax amounting to Kshs 90,158,003. 62 be set aside;b.The Appeal be allowed with costs to the Appellant; andc.Any other orders that the Honourable Tribunal may deem fit.

Respondent’s Case 25. The Respondent had defended this Appeal vide its Statement of Facts dated and filed on the 16th May 2023 and written submissions dated 23rd November 2023.

26. The Respondent asserted that the Appellant had partially objected to the assessments on 4th October 2022 and conceded to a portion of the tax assessed.

27. That the Respondent’s request for a valid payment plan went unheeded prompting it to issue its invalidation because the notice of objection it did not comply with Section 51(3) of the TPA.

28. The Respondent averred that;i.The Commissioner properly raised the assessments as no evidence to the contrary was produced.ii.The input claimed was properly disallowed as no documentary evidence to corroborate the claim was produced.iii.A valid payment plan was availed after the issuance of the invalidation letter.

29. The Respondent averred that its invalidation of the objection was right because the Appellant had not paid the undisputed tax.

30. The Respondent stated that it is empowered under Section 24(2) of the TPA to carry out the compliance checks and raise additional assessment using any information available to it.

31. That the Appellant failed to discharge its burden of proof by availing documents in support, as was required of it under Section 51(1) of the TPA. This argument was supported with the case of Pearson V. Belcher CH.M Inspector of Taxes) Tax Cases Volume 38 referred to by Justice D.S Majanja in PZ Cussons East Africa Limited V. Kenya Revenue Authority (2013) eKLR. -

Respondent’s Prayers 32. The Respondent's prayers to the Tribunal were for the orders that:a)The Appeal be struck out and/or dismissed with costs.b)The Respondent’s invalidation decision dated 28th October 2022 be upheld.

Issues for Determination 33. The issues that have presented themselves for determination from the evidence submitted by the parties before the Tribunal are:a.Whether the Respondent’s invalidation decision was validb.Whether the Respondent’s assessment was justified.

Analysis and Determination a. Whether the Respondent’s Invalidation Decision was valid 34. The gravamen under this issue was whether the Respondent was justified to invalidate the Appellant’s objection under Section 51(3) of the TPA on the premise that it had failed to settle tax that was not in dispute.

35. The evidence on record in this Appeal makes it clear that:a.The Appellant conceded to a tax liability of Kshs 28,000,000/=.b.The Respondent vide a letter dated 5th October 2022, requested the Appellant to pay the conceded tax liability as had been agreed in the Meeting of 28th September 2022. c.The Appellant vide a letter dated 8th October 2022 responded to the Respondent's letter dated 5th October 2022 and it stated that it had commenced the payment of the debt liability at a rate of Kshs 500,000/= per month.d.A Debt Instalment Agreement was signed between the parties on 31st October 2022.

36. Section 51(3) of the TPA provides as follows regarding payment of undisputed taxes:“A notice of objection shall be treated as validly lodged by a taxpayer under subsection (2) if—a.…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);c.…”

37. The Respondent is thus empowered under Section 51(3) of the TPA to invalidate an objection if:a.the taxpayer has not paid the entire amount of tax that is not in dispute, orb.has not applied for an extension of time to pay the tax that is not in dispute.

38. In this case, the Appellant has not paid the entire tax that is not in dispute. It has however, applied for an extension of time to pay the tax that is not in dispute, and the parties have signed an agreement dated 31st October 2022 extending the time within which that tax that is not in dispute would be paid.

39. On the face of it, the debt instalment agreement dated 31st October 2022 validated the Appellant’s objection. The Respondent could thus only invalidate the objection on other grounds other than those contained in Section 51(3)(b) of the TPA.

40. The Respondent was thus not justified to invalidate the Appellant’s objection on the premise that it had either not paid the tax in dispute or that it had not extended time for the payments of the tax that was not in dispute.

b. Whether the Respondent’s assessment was justified. 41. The chronology of events leading to this assessment were thus:a.The Appellant applied for instalment payment vide a letter dated 22nd September 2022. b.The Respondent responded vide a letter dated 5th October 2022 where r it stated as follows in relevant part:“Please proceed to pay the agreed taxes of Kshs 28M as agreed in the meeting of 28th September 2022. ”c.The Appellant wrote back to the Respondent on 12th October 2022 confirming that it had paid the first instalment and was objecting to the remainder of the assessment.c.A debt payment instalment agreement was signed on 31st October 2022.

42. The relevant portion of the Respondent’s objection decision dated 28th October 2022 justifying its assessment states as follows:“I note with regret that you have not settled the tax not in dispute amounting to Kshs 27,5000,000 nor demonstrated that there is an existing payment plan in place as required under Section 51(3) of the Tax Procedures Act, 2015 the cited section prescribes that:3. A notice of objection shall be treated as validly lodged by a taxpayer under subsection (2) if—a.…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);(c)…In this regard, the Commissioner hereby declines to grant the application sought. The principal income tax liability of Kshs 90,158,003. 62, as per the assessments together with the resultant penalty and interest as at the date of this letter remains due and payable…”

43. It is clear from the above itemisation of chronology of events that the Respondent had approved the payment of tax not in dispute on an instalment basis on the 5th October 2022.

44. The Appellant in compliance with this agreement paid its first instalment of the agreed debt payment plan on 12th October 2022 and hence the reason why the objection decision makes reference to an outstanding debt Kshs 27,500,000. 00.

45. It was thus not proper for the Respondent to uphold its tax assessment on the basis that the Appellant had not paid the tax that was not in dispute and yet it is the same Respondent that had allowed it to pay the tax not in dispute in instalment.

46. Accordingly the Tribunal finds and holds that having allowed the Appellant to pay the tax not in dipsute in instalment, the Respondent was disenfranchised of the right to invoke Section 51(3) of the TPA to confirm its tax assessment. The Respondent’s action of upholding its assessment on the premise that the Appellant had not complied with Section 51(3) of the TPA was hence unjustified.

Final Decision 47. The upshot of the foregoing analysis is that the Appeal is merited and the Tribunal accordingly proceeds to make the following Orders:a.The Appeal be and is hereby allowed.b.The Respondent’s objection decision dated 28th October 2022 be and is hereby set aside.c.The Respondent is directed to consider the Appellant’s notice objection and issue its objection decision in respect thereof within Sixty (60) days from the date of delivery of this Judgment.c.Each party is to bear its own costs.

48. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 22ND DAY OF MARCH, 2024. ERIC NYONGESA WAFULA - CHAIRMANCYNTHIA B. MAYAKA - MEMBERDR. RODNEY O. OLUOCH - MEMBERTIMOTHY B. VIKIRU - MEMBERABRAHAM K. KIPROTICH - MEMBER