[2024] KETAT 1349 (KLR)

Imco Holdings Limited v Commissioner of Domestic Taxes (Appeal 349 of 2023) [2024] KETAT 1349 (KLR) (20 September 2024) (Judgment)

Neutral citation: [2024] KETAT 1349 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Appeal 349 of 2023

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

September 20, 2024

Between

Imco Holdings Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a limited liability company registered under the Companies Act, which is engaged in the business of civil engineering, majorly in the petroleum industry undertaking the construction and maintenance of petrol stations.

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 Respondent carried out an investigation of the Appellant’s tax affairs and issued an assessment order dated 2nd December 2022.

4. Further the Respondent issued an additional assessment on 1st January 2023.

5. On 31st December 2022 the Appellant objected to the assessment via iTax which the Respondent acknowledged to which the Respondent issued a letter dated 11th January 2023 and declared the Appellant’s Objection as invalid and requested the Appellant for additional documentation, subsequently the Respondent issued its Objection Decision on 24th February 2023 and confirmed the assessment in the amount of Kshs. 10,807,609. 00.

6. Dissatisfied with the Respondent’s Objection Decision, the Appellant lodged its Appeal vide the Notice of Appeal dated 17th May 2023 and filed on 18th May 2023 with leave of the Tribunal granted on 26th May 2023.

The Appeal 7. The Appeal is premised on the following grounds as stated in the Memorandum of Appeal dated 17th May 2023 and filed 18th May 2023, that:a.The Respondent erred in fact and law by failing to follow the proper procedure for objection to assessments as set out be law. The particulars of which are set out below.b.The Respondent erred in fact and law by failing to review the grounds for objection raised by the Appellant.c.The Respondent erred in fact and law in failing to review and take into consideration the documentation in support of the objection.d.The Respondent erred in fact and law by failing to take into account the audited financial statements and income tax returns file on iTax by the Appellant in relation to income tax returns while conducting the income tax additional assessment for the years of income 2020. e.The Respondent erred in law and fact by violating the Appellant’s legitimate expectations and the right to fair to fair administrative action.f.The Respondent demanded an amount that is excessive, punitive and beyond the ability of the Appellant to pay contrary to the canons of taxation.

The Appellant’s Case 8. The Appellant’s case is premised on its Statement of Facts dated 17th May 2023 and filed on 18th May 2023 together with the documents attached thereto;

9. The Appellant averred that the Respondent carried out an investigation on its tax affairs and issued a tax assessment on 2nd December 2022 and an additional assessment on 1st January 2023 relating to Income Tax – Company in the sums of Kshs. 10,807,609. 00 and Kshs. 12,117,755. 00 respectively for the year of income 2020.

10. The Appellant stated that it objected on 31st December 2022, to which the Respondent issued the letter dated 11th January 2023 deeming and/or treating the Appellant’s Objection as invalid and requested it to validated the same by providing documentation in support of the Objection.

11. The Appellant averred that it resubmitted the documentation earlier requested, the Respondent thus issued its Objection Decision dated 24th February 2023, wherein it confirmed the assessment of Kshs. 10,807,609. 00.

12. The Appellant stated that Section 51 of the Tax Procedures Act, clearly outlines the procedure for listening to and determining objection application, in that regard the Respondent is among many things required to disclose the reasons for the Objection Decision.

13. The Appellant avowed that it raised grounds for the objection based on the information that was filed with the Respondent via iTax, especially on the advancement of payments to cushion cash flow/working capital its clients for some of the ongoing clients to ensure that the projects are completed within the agreed period.

14. The Appellant further averred that it provided a letter indicating such a request for an advance payment dated 10th August 2020 to VIVO Energy in the sum of Kshs. 28,215,277. 00, however, the Respondent failed to consider the letter and extract of the financial statements indication the other liabilities that showed that was part of the advance payment in the issuance of the Objection Decision dated 24th February 2023.

15. It averred that the Respondent issued a revised Objection Decision outlining the Corporation Tax assessment of Kshs. 10,807,609. 00 which was above the taxable income of the company during the period under review.

16. The Appellant averred that tax shall be charged in accordance with Section 3 of the Income Tax Act for each year of income. Further, that tax shall be ascertained in accordance with Sections 15 and 16 of the Income Tax Act by outlining the allowable and disallowable items for the purposes of arriving at the taxable profit for a given financial period.

17. The Appellant contented that the International Financial Reporting Standards (‘IFRS’), specifically IFRS 15 on construction contract provides that revenue is recognized using the percentage-of-completion method when reliable estimates are available, the core principle of IFRS 15 is delivered in a five-step model framework, as follows;i.Identify the contract(s) with a customer;ii.Identify the performance obligations in the contract;iii.Determine the transaction priceiv.Allocate the transaction price to the performance obligations in the contract; and,v.Recognize revenue when (or as) the entity satisfies a performance obligation (based on a percentage of completion).

18. The Appellant further contented that as provided under IFRS 15, if a customer makes a payment or an amount of payment is due before an entity is satisfied of its performance obligations, the entity should present that amount as a contract liability, which is the entity’s obligation to transfer goods or services to a customer for which the entity has received payment from the customer.

19. The Appellant averred that it classified the advance payment/prepayment as liability since the money advanced by VIVO Energy had not been fully recognized as income/revenue as the related works had not been completed.

20. The Appellant stated that based on the aforementioned the Respondent failed to recognize Kshs. 28,215,277. 00 as an advance payment to the Appellant and not income earned and also did not provide the Appellant with the information as to how they had arrived at the assessment based on the Objection Decision dated 24th February 2023 thus denying it the opportunity to present its defence.

21. The Appellant averred that the Respondent did not consider the withholding taxes of Kshs. 6,431,037. 00 withheld by payers to the Appellant for services rendered in the assessment, who relied on Section 10 (1) (a) of the Income Tax Act.

22. Further, the Appellant stated that the Respondent in arriving at its tax liability of Kshs. 10,807,609. 00 failed to recognize the prepayment of Kshs. 28,215,277. 00 and Withholding tax of Kshs. 6,431,037. 00.

23. It asserted that the Respondent having been furnished with documents in support of the objection, the Respondent ought to have reviewed and considered the same. The Respondent’s decision was therefore made arbitrarily without reference and taking into account and time to explain the source of information relied upon while making its decision.

24. The Appellant averred that the Respondent’s actions above cited violated its rights to a fair administrative action under Article 47 (1) of the Constitution and Section 4 (1) of the Fair Administrative Actions Act, which are intended to subject administrative process to constitutional discipline and safeguards against capricious and whimsical actions that lead to abuse of authority by public bodies exercising administrative functions.

25. Despite being directed to file and serve written submissions, the Appellant did not comply with the Tribunal’s directions, its case shall therefore be considered on the basis of its pleadings on record.

Appellant’s Prayers 26. The Appellant prays that this Honourable Tribunal considers its Appeal and finds that:a.The Objection Decision was communicated out of time and thus the objection be allowed automatically;b.The impugned decision contained in the Respondent’s letter dated 24th February 2023 demanding Kshs. 10,807,609. 00 for Income Tax from the Appellant be and is hereby vacated;c.This Appeal be allowed; and,d.The costs of and incidental to this Appeal be awarded to the Appellant.

The Respondent’s Case 27. The Respondent’s case is premised on its;a.Statement of Facts dated and filed on 16th June 2023 together with the documents attached thereto; and,b.Written submissions dated 22nd January 2024 and filed on 24th January 2024.

28. In its Statement of Facts, the Respondent stated that it carried out investigations against the Appellant after receiving intelligence reports on tax evasion and the analysis established that the Appellant underdeclared income for the year 2020 relating to Corporation Tax, thus issued a notice of tax assessment dated 2nd December 2022.

29. That on 1st January 2023 the Appellant objected to the Notice of assessment vide the Notice of Objection dated 31st December 2022, to which the Respondent informed the Appellant that its Objection was invalid vide the correspondence dated 11th January 2023 and requested it to comply with the provisions of Section 51 (3) of the Tax Procedures Act.

30. The Respondent stated that upon consideration the documentation furnished by the Appellant and further information gave its Objection Decision on 24th February 2023 and demanded for the tax arrears in the sum of Kshs. 10,807,609. 00 vide the demand notice dated 8th May 2023.

31. The Respondent stated that the Appellant alleged that it made a request to VIVO Energy vide the correspondence date 10th August 2020, seeking to cushion cash flow/working capital.

32. The Respondent contented that the Appellant did not declare any amounts as prepayments in its returns and did not provide a breakdown of the credits that formed part of the prepayments nor showed and/or confirmed if the advance payments was account for in the returns upon completion of the works, in the absence of such evidence thereof, the Respondent proceeded to confirm the assessment.

33. The Respondent averred that it relied on Section 59 (1) of the Tax Procedures Act which required the Appellant to provide records to enable it determine the Appellant’s tax liability, on account of the Appellant’s failure to avail its records the Respondent was compelled to reject the Objection Application.

34. The Respondent further relied on Sections 31 (1) and 56 of the Tax Procedures Act and Section 30 of the Tax Appeals Tribunal Act and averred that the burden of proof lies upon the Appellant to demonstrate that it has discharged its burden and that the Respondent is empowered to make alterations or additions on the returns from the available information and the best judgement of the Respondent.

35. The Respondent stated that contrary to the Appellant’s allegations that the Objection Decision was issued out of time, the Appellant objected on 31st December 2022, while the Respondent’s decision was issued on 24th February 2023.

36. The Respondent further stated that prior to the issuance of the of the Objection Decision, it engaged the Appellant via email requesting for supporting documents with a view of ensuring that the Appellant provides proof and an explanation to all the input VAT claimed.

37. The Respondent contented that all the documents attached to the Memorandum of Appeal and Statement of Facts have been presented in the first instance and the Respondent has not had an opportunity to review the same, additionally the allegations laid out in the Appellant’s pleadings are unfounded in law and not supported by evidence.

38. The Respondent in its written submissions identified three issues for determination, namely;i.Whether the Respondent failed to follow the procedure for objection to assessments as set out by law;ii.Whether the Appellant lodged a valid objection; and,iii.Whether the Respondent violated the Appellant’s legitimate expectations and the right to fair administrative action.

39. The Respondent submitted that the Appellant failed to lodge a valid Objection, it notified the Appellant vide the correspondence dated 11th January 2023 and upon review it issued its Objection Decision on 24th February 2023, which was validly issued in accordance to Section 51 (8), (9) and (10) of the Tax Procedures Act.

40. The Respondent submitted that although the Appellant lodged a Notice of Objection, the Respondent after a careful review of the same issued its Objection Decision for the reason that the Appellant failed to provide sufficient documents as evidence in support of the advance payments.

41. The Respondent submitted that the Appellant’s Objection was not compliant with the mandatory provisions of Section 51 (3) of the Tax Procedures Act and was therefore invalid.

42. The Respondent further relied on Section 24 of the Tax Procedures Act, which allows the tax payer to submit returns in the approved form and manner prescribed by the Respondent.

43. Additionally, the Respondent relied on Section 23 (1) of the Tax Procedures Act and Section 54 A (1) of the Income Tax Act which requires the Appellant to keep receipts and expenses, goods purchased and sold and accounts, books, deeds and contacts and vouchers which in the opinion of the Respondent are adequate for the purposes of computing tax.

44. The Respondent submitted the Appellant did not demonstrate any representation that can be attached to the Respondent and thus mere reliance on interference does not meet the threshold for reliance of the doctrine of legitimate expectation.

45. The Respondent cited the following case law;i.Pearson vs. Belcher CH.M Inspector of Taxes) Tax Cases Volume 38;ii.(Income Tax Appeal E028 of 2020) Commissioner of Investigations and Enforcement vs. Evans Odhiambo Kidero;iii.Kenya Revenue Authority vs. Man diesel & Turbo Se, Kenya [2021] eKLR;iv.Kilburn vs. Bedform (H.M. Inspector of Taxes) [3];v.Primarosa Flowers Ltd vs. Commissioner of Domestic Taxes [2019] eKLR;vi.Communication of Kenya & 5 Others vs. Royal Media Services & 5 Others SC Petitions Nos. 14, 14A, 14B & 14C of 2014;vii.Canada (Attorney General) vs. Mavi [2011] 2 S.C.R. 504; and,viii.Commissioner of Domestic Taxes vs. Golden Acre Limited [2021] eKLR.

Respondent’s Prayers 46. The Respondent prays that this Honourable Tribunal;a.Upholds the Respondent’s decision as proper and in conformity with the provisions of the law; and,b.That this Appeal be dismissed with costs to the Respondent as the same is devoid any merit.

Issues for Determination 47. After perusing the Memorandum of Appeal and parties’ Statements of Facts together with their submissions and documentation attached therewith, the Tribunal is of the considered view that the following are the issues for determination:i.Whether the Respondent’s decision was valid and competent in accordance with the law; and,ii.Whether the Respondent decision issued on 24th February 2023 was justified.

Analysis and Findings 48. The Tribunal wishes to analyse the issues as hereinunder.i.Whether the Respondent’s decision was valid and competent in accordance with the law;

49. The genesis of this tax dispute stems from the Assessment Order dated 2nd December 2022 and a subsequent additional assessment dated 1st January 2023 by the Respondent to the Appellant, who lodged the notice of Objection dated 31st December 2022.

50. The Respondent deemed the Appellant’s Objection as invalid and vide the correspondence date 11th January 2023, notified the Appellant and requested it to validate the objection by providing supporting documents.

51. The parties herein maintain distinct positions as regards the validation of the Objection, with the Appellant stating that it provided documents on 16th January 2023 and on the converse the Respondent stating that the Appellant did not validate its Objection, thus the Respondent invalidated the Objection.

52. The Tribunal has the privilege to peruse the decision subject of this Appeal and noted that the same was titled and rendered as an Objection Decision, which issued on 24th February 2023. The Tribunal further noted that the said decision was issued within the period provided for in law, as the Objection was lodged on 31st December 2022.

53. It is to be noted, that there exists no proviso in law that prohibits the Respondent from issuing an Objection Decision, even under circumstances where it has deemed the Objection as an invalid one. This remains the preserve of the Respondent.

54. Under such circumstances where the Respondent elects to issue an Objection Decision in place of a Notice of Invalidation, then it is deemed in law that the taxpayer’s Objection has been deemed as validated by the Respondent’s action.

55. The Objection Decision therefore ought to be issued pursuant to the provisions of Section 51 (11) of the Tax Procedures Act. The Appellant prayed for the Objection Decision to be annulled for having been communicated beyond the statutory period.

56. The Tribunal perused the record and did not sight any evidence by the Appellant of the Respondent having communicated the decision beyond the 60 days as provided in law. The Appellant’s allegation remains unsupported by evidence.

57. Further, the Tribunal noted that the Respondent’s Objection Decision ought to have complied with the provisions of Section 51 (10) of the Tax Procedures Act, which provides;“(10)An objection decision shall include a statement of findings on the material facts and the reasons for the decision.”

58. Upon perusal of the Objection Decision, the Tribunal noted that the same did not contain the Statement of Finding, thus the reasons for decision was not contained therein.

59. The said statutory proviso is crafted in strict and mandatory terms, to the effect that, the non-compliance thereof would deem such a decision incompetent and unenforceable.

60. The Tribunal is guided by the case of Equity Group Holdings Limited vs. Commissioner of Domestic Taxes (Civil Appeal E069 & E025 of 2020) [2021] KEHC 25 (KLR) (Commercial and Tax), where the court held;“…A statutory edict is not procedural technicality. It’s a law which must be complied with. …”.

61. By failing to comply with the provisions of Section 51 (10) of the Tax Procedures Act, the effect of the Respondent’s decision is that the same is not proper and cannot stand the test law.

62. In the case of Ndirangu T/A Ndirangu Hardware vs. Commissioner of Domestic Taxes (Tax Appeal E070 of 2021) [2023] KEHC 19357, Justice Majanja held that;“From the above, the Commissioner rejects the objection but does not give any reasons for rejecting the objection. It does not state why it was not prepared to amend the assessment. The Appellant was not informed why his objection was rejected and why the Commissioner was “not prepared to amend in accordance with your objection”. The requirement under section 51(10) above for an objection decision to give reasons is couched in mandatory terms and thus, I agree with the Appellant that the said Objection Decision was inadequate and did not amount to an objection decision as contemplated by the law”

63. To this end, whereas the Respondent’s Objection Decision was issued within the statutory timeframe, the Objection Decision was not proper, adequate and inconformity with the provisions of Section 51 (10) of the Tax Procedures Act.

64. Consequently, the Tribunal finds that the Objection Decision issued on 24th February 2023, was not competent in accordance with the law.

65. The Tribunal having established that the Objection Decision issued by the Respondent was fatally defective, it shall not delve into the other issue for determination.

Final Decision 66. The upshot to the foregoing is that the Appeal succeeds and the Tribunal consequently makes the following orders; -a.The Appeal be and is hereby allowed;b.The Respondent’s Objection Decision dated 24th February 2023 be and is hereby set aside; and,c.Each party to bear its own costs.

67. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 20TH DAY OF SEPTEMBER 2024ROBERT M. MUTUMA - CHAIRPERSONMUTISO MAKAU - MEMBERJEPHTHAH NJAGI - MEMBERDR. TIMOTHY B. VIKIRU - MEMBERDELILAH K. NGALA - MEMBER