[2024] KETAT 647 (KLR)

Jambostar Properties Limited v Commissioner of Domestic Taxes (Tax Appeal 82 of 2023) [2024] KETAT 647 (KLR) (26 April 2024) (Judgment)

Neutral citation: [2024] KETAT 647 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 82 of 2023

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

April 26, 2024

Between

Jambostar Properties Limited

Appellant

and

Commissioner Of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a limited liability company duly incorporated in Kenya and is a registered taxpayer whose principal activity is that of building, construction and medical equipment supplies.

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 (the 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 function under subsection (1), the Authority is mandated to administer and enforce all provisions of the written laws as set out in Parts 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 Respondent conducted a compliance review check on the business affairs of the Appellant and issued the Appellant with additional tax assessments for Corporation tax of Kshs 49. 545,665. 00 and VAT of Kshs 27,187,686. 00 on 30th August 2022 and 14th September 2022, respectively, on iTax for the period January 2016 to December 2020.

4. The Appellant lodged objections to the assessments on iTax on 14th September 2022, 15th September 2022 and 13th October 2022.

5. On 12th December 2022, the Respondent rendered its objection decision rejecting the Appellant’s objection confirming the assessed income tax and VAT totalling Kshs. 76,733,331. 00

6. The Appellant, aggrieved by the Respondent’s objection decision, filed a Notice of Appeal with the Tribunal on 11th January 2023.

The Appeal 7. The Appeal is premised on the following grounds as stated in the Appellant’s Memorandum of Appeal filed on 25th January 2023:a.That the Commissioner erred both in law and in fact by charging Income tax for the year of income 2016 contrary to the position of the Tax Procedure Act No. 29 of 2015 Section 29(5).b.That the Appellant be allowed to segregate and file correct returns for 2017 and 2018 which were lumped up and filed in 2018. c.That the Commissioner erred in fact by declaring that the Appellant made an under declaration of Income of Kshs 14,385,227. 00 for the year 2019. That there was no such under declaration and all incomes were declared correctly as shown in the bank statement.d.That the Commissioner erred in both fact and law by interpreting that the whole credits from the bank statement were incomes that were earned by the Appellant. That some of the credits in the bank statement were soft loans/financing advanced to the company hence not qualifying as incomes earned. That incomes not declared based on the banking analysis was Kshs. 86,069,651. 00 hence exclusive amount was Kshs. 74,197,975. 00. e.That the Commissioner wrongly disallowed purchases amounting to Kshs. 25,262,975. 00 for the year 2018 contrary to VAT Act No.35 of 2013 Part VI Section 17. f.That the Commissioner erred in law by disallowing expenses for the period of 2018 that were incurred by the company contrary to Income Tax Act Cap 470 Part IV Section 15 when ascertaining the tax payable. That salaries and wages were wrongly classified but were correctly recorded therefore the Appellant prays that the same should be allowed in the return.g.That the Commissioner wrongly disallowed purchases amounting to Kshs. 11,501,998. 00 for the period 2019 contrary to VAT Act No.35 of 2013 Part VI Section 17. h.That the Commissioner erred in law by disallowing expenses for the period of 2019 contrary to Income Tax Act Cap 470 Part IV Section 15. That salaries and wages of Kshs 12,036,000 relates to direct labour for casual wages and not permanently employed workers. That direct wages of Kshs 1,005,695. 00 also relate to direct expenses for labour for casual employees.i.That the Commissioner erred in both law and fact by subjecting all credits/money in the bank statement for the year 2020 to be total income for the company for that period. That some of the deposits or credits were soft loans/finance granted to the company hence did not qualify to be treated as part of income. That undeclared revenue for 2020 was Kshs 86,069,651. 00 therefore exclusive VAT amount was Kshs 74,197,975. 00 less purchases of Kshs 52,721,982. 36. That the gross profit be subjected to the following expenses; Accounting fee Kshs 180,000. 00, office rent Kshs 960,000. 00, freight and transport Kshs 7,655,116. 00, travelling expenses Kshs 1,239,667. 00, marketing & advertising Kshs 863,210. 00, office expenses Kshs 1,008,470,00 internet service Kshs 2,737,826. 00, utilities expenses Kshs 988,630. 00 and fuel Kshs 10,700. 00. j.That the Commissioner wrongly disallowed purchases and expenses incurred by the company for the year 2020. k.That the Commissioner erred both in facts and law by making assessments for VAT for the year 2016 which is in contravention of the Tax Procedure Act No.29 of 2015 Section 29(5) and the VAT Act 2013 Section 43(1).l.That the Commissioner erred both in law and in fact in charging VAT and issuing assessments on non-revenue amounts for the year 2019. m.That the commissioner wrongly disallowed purchases that were made by the company for the year 2019 which contravenes the VAT Act Section 17. n.That the Commissioner wrongly disallowed purchases that were made during the period by the company for the year 2020 totally disregarding the provisions of VAT Act Section 17. o.That the Commissioner erred in both fact and law by charging withholding taxes on payments to Advocates since these payments were not for services rendered to the company but for soft loan repayment advanced to the company.

Appellant’s Case 8. The Appellant’s case is premised on its Statement of Facts filed on 25th January 2023.

9. The Appellant averred that the Commissioner issued VAT additional assessment on itax for the period of January 2016 to December 2020 of Kshs. 49,545,665 on 30th August 2022 and 14th September 2022. That the Commissioner further issued Corporation tax assessments for the period 2016 to 2020 of Kshs 27,187,686. 00 on 30th August 2022 and 14th September 2022.

10. The Appellant averred that the assessments were based on undeclared incomes, disallowed purchases and expenses and also payments to Advocates.

The Appellant’s prayers 11. The Appellant’s prayers to the Tribunal are for orders:i.That the Tribunal grants leave for the matter to be resolved through ADR mechanism for expeditious resolution.ii.That the tax assessment be stood over as it continues to attract interest pending determination of the matter.iii.That the Commissioner withdraws the additional assessment which has been issued in contravention to the provisions of the Income Tax Act and VAT Act, due regard to the facts, circumstances of the case and the rules of fairness on natural justice.iv.That the Tribunal to uphold the Objection it filed and sets aside the Commissioner’s assessment order and objection decision.

Respondent’s Case 12. The Respondent’s case is premised on the following documents before the Tribunal: -a.The Respondent’s Statement of Facts dated and filed on 21st February 2023b.The Respondent’s Written Submissions filed on 1st August 2023.

13. The Respondent submitted that the dispute arose from its invalidation decision dated 12th December 2022 relating to assessments issued to the Appellant on 30th August, 2022 and 14th September, 2022, respectively.

14. The Respondent averred that the assessments were raised following a compliance review of the Appellant’s business activities and the Appellant’s subsequent failure to avail supporting documentation to counter assertions by the Respondent.

15. The Respondent averred that it based its assessment on Section 29 (5) of the TPA which states that:“(5)Subject to subsection (6), an assessment under subsection (1) shall not be made after five years immediately following the last date of the reporting period to which the assessment relates.(6)Subsection (5) shall not apply in the case of gross or wilful neglect, evasion or fraud by a taxpayer.”

16. The Respondent contended that failure to file audited accounts for any period inspite of existing legislation governing and requiring diligent filing of the same suggests a deserving case of gross or wilful neglect and as such the Appellant may not hide behind this provision as provided for and highlighted above in Subsection 6.

17. The Respondent submitted that it considered all the Appellant's documents as provided in coming up with the assessments. That the Appellant failed to avail detailed supporting documentation and records to counter the assertions of the Respondent in the various engagements at assessment stage as well as objection stage contrary to Section 59 (1) of the Tax Procedures Act.

18. The Respondent averred that the Appellant did not provide any evidence to show or demonstrate that the assessment is erroneous or excessive despite being given several opportunities to support its position.

19. That the Appellant at the objection stage failed to avail the detailed support documentation to support its various objection grounds as per the requirements of Section 51(3) of the Tax Procedures Act.

20. The Respondent posited that in the absence of supporting documents, it issued an assessment to the Appellant as provided for in Section 24 of the TPA which gives the Commissioner the power to assess a taxpayer's tax liability using information available to him.

21. The Respondent relied on Section 56(1) of the Tax Procedures Act which provides that the burden of proving that a tax assessment is wrong lies with the taxpayer and the Appellant herein failed to prove to the satisfaction of the Commissioner that the assessment was wrong.

22. The Respondent asserted that it invalidated the objection lodged by the Appellant as it failed to comply with Section 51(3)(c) of the Tax Procedures Act which provides that:“(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); and(c)all the relevant documents relating to the objection have been submitted.”

23. The Respondent relied on the case of Kotile General Contractors Company Limited v Commissioner of Domestic Taxes 2020 eKLR where the Tribunal held that:“Applicant had failed to comply with the provisions set out in Section 51(3) of the Tax Procedures Act and hence there was no valid objection”.

24. The Respondent posited that the Appellant submitted some workings and clarifications but failed to provide the supporting documentation as required by the provisions of Section 51(3) of the TPA.

25. The Respondent averred that the Appellant neither paid the undisputed amount of Kshs. 61,109,025. 90 nor entered into any arrangement with the Respondent to pay the taxes not in dispute contrary to Sections 51(3)(b) and 52(2) of the Tax Procedures Act.

26. The Respondent relied on the case of TAT Appeal No 43 of 2017- Uchumi Supermarkets Ltd vs Commissioner of Domestic Taxes where the Tribunal dismissed the Appeal and held:“that the Appeal was invalid, incompetent in law as it was in contravention with Section 52(2) of the Tax Procedures Act.”

27. The Respondent submitted that the Appeal herein contravened Section 56(3) of the Tax Procedures Act and Section 13(6) of the Tax Appeals Tribunal Act by introducing new grounds of appeal that were not part of the objection decision issued by the Respondent..

28. That Section 56(3) of the Tax Procedures Act provides that:“In an appeal by a taxpayer to the Tribunal, High Court or Court of Appeal in relation to an appealable decision, the taxpayer shall rely only on the grounds stated in the objection to which the decision relates unless the Tribunal or Court allows the person to add new grounds.”

29. That further, Section 13(6) of the Tax Appeals Tribunal Act provides that:“The appellant shall, unless the Tribunal orders otherwise, be limited to the grounds stated in the appeal or documents to which the decision relates.”

30. The Respondent averred that the ground of appeal raised by the Appellant that the expenses in question were incurred in the accounting period was not raised during the objection stage.

31. The Respondent submitted that the Appellant failed to produce evidence of expenses which were incurred and not allowed contrary to Section 15 of the Income Tax Act which requires all expenses incurred in the generation of income to be supported.

32. The Respondent averred that the Appeal by the Appellant was incurably defective and an abuse of the court process because the Appellant sought to challenge an objection decision resulting from an invalid objection. The Respondent relied on the case of Misc. Appl. No. 175 Of 2022 Valley Drillers & General Contractor’s Ltd V The Commissioner of Domestic Taxes where the Tribunal held that:“Without a valid objection, the Applicant has no basis for bringing its Appeal before the Tribunal.”

33. The Respondent further relied on the decision of Tax Appeals Tribunal Appeal No. 21 of 2021 Manchester Outfitters LTD VS Commissioner of Domestic Taxes where the Tribunal held that:“Appellant did not comply with both Section 51(2) & (3) of the Tax Procedures Act. Having concluded that there was no valid objection, it follows that there is no valid Appeal as there is no appealable decision to anchor this Appeal. The Appeal is thus not meritorious and must fail in this limb.”

34. The Respondent submitted that the assessments conducted were based on Section 31 of the Tax Procedures Act. The Respondent averred that the additional assessments stipulated in the objection decision dated 12th December 2022. 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 the assessment. The Tax Procedures Act in granting the Respondent powers to assess taxpayers does not specify the methods that may be used instead the law provides that the best judgment must be exercised.”

35. The Respondent submitted that it examined all the relevant information and records availed by the Appellant before arriving at the objection decision. That the Appellant failed to provide the requisite documents to support its objection and had failed to tender evidence to show how the Respondent erred or how the Respondent’s assessments were erroneous or excessive.

36. The Respondent relied on the case of Osho Drapers Limited Versus Commissioner of Domestic Taxes [2022] eKLR, wherein 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.”

37. The Respondent further relied on the Commissioner of Domestic Services Vs Galaxy Tools Limited [2021] eKLR, where 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 tax payer 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.”

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

39. The Respondent relied on the case of Prima Rosa Flowers Limited Versus Commissioner of Domestic Taxes [2019] eKLR where the High Court relied on Mulherin Vs Commissioner of Taxation [2013] FCAFA 115 in which the court stated that:“the Federal Court of Australia held that in tax disputes, the tax payer must satisfy the burden of proof to successfully challenge income tax assessments. The onus is on the taxpayer in proving that the assessment was excessive by adducing positive evidence, which demonstrates the taxable income on which ought to have been levied.”

40. The Respondent further relied on the case of Ushindi Exporters Ltd Vs Commissioner of Investigation and Enforcement (Tax Appeals Tribunal (NO 7 of 2015) where the Tribunal held that:“The burden of proving that the tax assessment is excessive or should have been made differently never shifts to the Respondent and is placed squarely on the Appellant as Section 30 (a) and (b) of the Tax Appeals Tribunal Act states,a)Where an appeal related to an assessment, that the assessment is excessive; orb)In any other case, that the tax decision should not have been made or should have been made differently.By purporting to shift the burden of proving that the tax assessment against it was incorrect or should have been different the Appellant failed in discharging the burden, placed upon it by law.

41. The Respondent further relied on the case of Commissioner of Domestic Taxes V Metoxide Limited [2021] where the Court held that:“Section 56(1) of the Tax Procedures Act provides that, the taxpayer has the burden of proving that a tax decision is incorrect. It is common knowledge that the Kenyan system of taxation is based on self-assessment. The taxpayer assesses self and remits what he/it considers to be the tax due to the tax authorities. In this regard, the tax laws mandate the appellant to later on assess the tax payer in order to ascertain whether the tax remitted was proper or not. Ordinarily, the assessment is made years after the tax has fallen due and been paid or the economic activity or commercial transaction for which the tax arises has been undertaken. It is (or this reason that the tax laws in this country shoulder the taxpayer with the burden of disproving the correctness of the appellant’s tax decision.”

42. The Respondent averred that its actions were in line with Section 51(3) and 51(4) of the TPA given that the Appellant’s grounds of objection, although invalid, were considered and consequently invalidated.The Respondent’s PrayersThe Respondent prayed that this Tribunal:a.Upholds the Respondent’s objection decision as proper and in conformity with the law.b.Dismisses the Appeal with costs to the Respondent as the same is devoid of any merit.

Issues For Determination 43. The Tribunal has carefully considered the pleadings and documentation of both parties and is of the view that thea.Whether the Appeal is properly before the Tribunalb.Whether the Respondent’s confirmation of tax assessments on the Appellant was justified.

Analysis And Findings 44. Having identified the issues for determination, the Tribunal proceeds to analyse the same as follows:-a.Whether the Appeal is properly before the Tribunal

45. It was the Respondent’s contention that the Appeal before the Tribunal is incompetent for the reason that the Appellant had failed to pay tax not in dispute amounting to Kshs. 61,109,025. 90 contrary to the provisions of Section 51(3) of the TPA.

46. The Respondent cited Section 51(3) of the TPA which states as follows with regard to a validly lodged notice of objection:“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); and(c)all the relevant documents relating to the objection have been submitted.” (Emphasis added)

47. Section 52(2) of the TPA provides as follows with regard to the validity of a Notice of Appeal to the Tribunal:“A notice of appeal to the Tribunal relating to an assessment shall be valid if the taxpayer has paid the tax not in dispute or entered into an arrangement with the Commissioner to pay the tax not in dispute under the assessment at the time of lodging the notice”

48. The Tribunal has perused through the documents presented and established that of the total tax assessments amounting to Kshs. 76,733,351. 00 comprising of income tax, VAT and Withholding taxes, the Appellant objected to a total of Kshs. 17,222,910. 38 via its three notices of objection lodged on iTax on 14th September 2022, 15th September 2022 and 13th October 2022. Although the Appellant mentions an objection letter dated 13th October, it did not attach the same for the Tribunal’s perusal.

49. The difference between the total taxes assessed on the Appellant and the notices of objection lodged by the Appellant amount to Kshs. 61,109,026. 38. The Tribunal has not cited an objection against this assessment.

50. Moreover, the Appellant neither provided evidence of having paid the said undisputed taxes nor any document to show that it had entered into an agreement with the Respondent on a settlement plan of the undisputed taxes. The Tribunal further notes that the Appellant did not address this issue in its pleadings.

51. It thus follows that the Appellant did not file an objection against the assessment of Kshs 61,109,026. 38. In other words the Appellant did not dipsute this tax assessment.

52. The consequences of a taxpayer’s failure to comply with Section 52(2) of the TPA was discussed by the Tribunal in the cases of TAT No. 310 of 2021 Dankey Press Limited v Commissioner of Investigation Enforcement and Swyfcon Engineering Limited Commissioner for Investigation Enforcement TAT No. 312 of 2021 where it held that the Appellant’s Appeals would be invalid if it fails to comply with Section 52(2) of the Tax Procedures Act.

53. In the circumstances, the Tribunal similarly finds and holds that the Appeal herein is invalid.b.Whether the Respondent’s confirmation of tax assessments on the Appellant was justified.

54. The Tribunal having found that the Appeal is invalid did not delve into this issue for determination as it had been rendered moot.

Final Decision 55. The upshot of the foregoing analysis is that the Appeal is incompetent and unsustainable in law. Consequently, the Tribunal makes the following Orders: -a.The Appeal be and is hereby struck out.b.Each Party to bear its own costs.

56. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 26TH DAY OF APRIL, 2024. ERIC NYONGESA WAFULA - CHAIRMANDR. RODNEY O. OLUOCH - MEMBERABRAHAM K. KIPROTICH - MEMBERCYNTHIA B. MAYAKA - MEMBERTIMOTHY B. VIKIRU - MEMBER