[2024] KETAT 1320 (KLR)

James v Commissioner of Domestic Taxes (Tax Appeal E607 of 2023) [2024] KETAT 1320 (KLR) (6 September 2024) (Judgment)

Neutral citation: [2024] KETAT 1320 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E607 of 2023

E.N Wafula, Chair, RO Oluoch, AK Kiprotich, Cynthia B. Mayaka & G Ogaga, Members

September 6, 2024

Between

Odero Abok James

Appellant

and

Commissioner Of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a registered taxpayer for Income tax — rent and Income tax — resident individual obligations and is involved in architectural works, planning, survey and design activities.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act and the Authority is mandated with the responsibility for the assessment, collection, receipting and accounting for all tax revenue as an agent of the Government of Kenya. The Respondent is also mandated with the responsibility for the administration and enforcement of the statutes set out in the Schedule of the Act.

3. The Respondent received information from third parties that the Appellant transferred property to Chelezo House Development Limited without declaring Capital Gain Tax (CGT). Consequently, the Respondent issued the Appellant with a CGT default assessment dated 7th June 2023 for the period October 2016 amounting to Kshs 18,000,000. 00. The Appellant objected to the assessments vide a letter dated 5th July 2023.

4. Upon review of the objection, the Respondent issued its objection decision vide a letter dated 1st September, 2023 wherein the Respondent confirmed the assessments.

5. Being dissatisfied with the Respondent’s decision, the Appellant filed a Notice of Appeal dated 19th September 2023.

The Appeal 6. The Appellant’s Memorandum of Appeal dated 19th September 2023 and filed on 21st September, 2023 raised the following grounds of appeal:a.That the Commissioner erred in fact and law by using speculative approach in raising additional tax by ignoring the Appellant’s documentary evidence.b.That the Commissioner acted unreasonably, capriciously and was motivated by malice and extraneous considerations in issuing the various tax demands even-though the same had been taxed on Chelezo House Development Ltd on assessment dated 22nd February, 2023 which amounts to double taxation which is against the law.c.That the Commissioner contravened the Appellant’s legitimate expectation.

Appellant’s Case 7. The Appellant laid out its Appeal in its Statement of Facts filed and dated 19th September 2023 and written submissions dated 27th April 2024 and filed on 19th April 2024.

8. The Appellant’s case is that he acquired a parcel of land L.R. No. 1/467 situated along Kindaruma Road Kilimani - Nairobi County in 1990 at approximate cost of Kshs 7,544,576. 49. The property was sold by one Mr. Amos Kirani Kiriro in 1990 but the conveyance was done on the 2nd May, 2017.

9. The property was improved from 1991 to the time it was transferred to Chelezo House Development Ltd in 2017 amounting to of Kshs. 126,132,752. 41 thus bringing the total cost of acquisition and development to the date of transfer to Kshs 133,677,328. 90.

10. The Appellant asserted that he entered in a Joint Venture Agreement with one Mr. Wang Peng Yun a Chinese National on 26th day of October, 2016 to develop property on the plot. The details of the venture was that the Appellant was to provide land and the partner was to provide the development money and expertise on a 25% and 75% share holding in the Joint company registered under Chelezo House Development Ltd.

11. The Appellant asserted that the assessment was discussed and resolved by the company and the relevant taxes paid as per the Joint Venture Agreement.

12. That having paid taxes under the first assessment, the Appellant averred that it was surprised to see the same being assessed for the second time on his personal PIN under default assessment KRA202309409602 and demanding Kshs 18,000,000. 00 for CGT on the same transfer which had been assessed under Chelezo House Development Ltd. He also stated that this process was against the provisions of Section 29(2) of the Tax Procedures Act, 29 of 2015 because he was not informed. Nevertheless, the Appellant stated that he objected to the default assessment on 14th August 2023.

13. The Appellant averred that the Respondent failed to handle the objection carefully and diligently because it ignored the availed documentary evidence; and that the Joint Venture Company had already paid the demanded CGT. That therefore, the taxes being demanded amounted to a double taxation.

14. The Appellant also argued that the Respondent failed to request for further documents which he was more than willing to avail or give an explanations.

15. In its written submissions, the Appellant argued that the assessments failed to comply with the provisions of Section 29(2) of the Tax Procedures Act on the basis that the assessment did not include the due date of payment of the assessed tax. The Appellant cited the case of Ann Wanjiku Kahwai & Another v Kenya Revenue Authority & Another [2019] eKLR where it averred that the court had stated that the Respondent should have availed the Petitioner not less than thirty days from the date of serving the notification, to enable the Petitioner to pay the required amount.

16. The Appellant also relied on the provisions of Section 23(1) and Section 29(5) of the TPA to submit that the assessments were time barred. The Appellant relied on the decision in the case of Commissioner of Domestic Taxes v Unga Limited [2021] eKLR wherein he asserted that the court had held that the there are no provisions that allows the Commissioner to circumvent the strictures of Section 29(5) of the Tax Procedures Act by implication.

17. The Appellant submitted that the Respondent erred in law in the calculation of Capital Gain Tax contrary to the provisions of Eighth Schedule under Paragraphs 4, 7 and 8 of the Income Tax Act Cap 470 laws of Kenya.

18. Further, the Appellant submitted that where a person has no documentation to support expenditure, such person shall be allowed a deduction of forty per cent of the expenditure under Section 37A(2) of the Tax Procedure Act but the Respondent failed to implement this provision by disallowing all costs that the Appellant incurred.

19. In further support of the Appeal, the Appellant cited a number of cases including Kenya Revenue Authority & 2 Others v Darasa Investment Limited MLD Civil Appeal No. 24 of 2018 [2018] eKLR to support the assertion that a public entity should not cancel legitimate expectation unilaterally.

20. The Appellant also relied on the case of Commissioner of Income Tax Vs Vestmont Power (K) Ltd 2006 eKLR, to submit that whereas taxation is needed in a society, taxation laws have the effect of depriving citizens of their property by imposing pecuniary burdens resulting also in penal consequences and must thus be interpreted with great caution.

21. Finally, the Appellant relied on the provisions of Section 29(5) and Section 37A of the Tax Procedures Act read together with Eighth Schedule Paragraphs 4, 7 and 8 of the Income Tax Act to submit that the Respondent’s assessments are unlawful and ought to be set aside.

Appellant’s Prayers 22. The Appellant prayed for orders that:a.The Appeal be allowed with costs; andb.The demand for Kshs. 18,000,000. 00 together with interest and resultant penalties be set aside and in place thereof, the Honourable Tribunal find that no tax is payable.

Respondent’s Case 23. In response to the Appeal, the Respondent relied on its Statements of Facts dated 13th December 2023 and Written Submissions dated 10th May 2024 and filed on 13th May 2024.

24. The Respondent’s case is that whereas the Appellant objected to the assessments, the Appellant failed to provide the requested documents in support of the objection. The Respondent alleged that it requested the Appellant to provide certified bank statements; sale agreement; evidence of purchase; valuation report at the point of transfer to the Joint Venture; supporting evidence for incidental costs claimed; cost incurred in sale; and any other supporting evidence.

25. In response to requested documents, the Respondent asserted that the Appellant only provided survey approval from the Ministry of Lands and Physical Planning dated 25th February 2022; the Joint Venture Agreement dated 26th October 2016; lease agreement for Nairobi/Block19/283—Chelezo Development Limited dated 18th November 2021; the Appellant’s settlement proposal dated 14th August 2023; and report and Valuation of L.R. No. 1/467 dated 8th May 2023 which according to the Respondent, were insufficient under Section 51(3) of the Tax Procedures Act and therefore not good enough to vary the assessments.

26. The Respondent relied on the provisions of Section 23(1) which require a taxpayer to keep records. The Respondent cited the decisions of Osho Drapers Limited v Commissioner of Domestic Taxes [2022] eKLR and Commissioner of Domestic Services v Galaxy Tools Limited [2021] eKLR to assert that it is empowered by Section 59 of the Tax Procedures Act to request for production of the records for purposes of determination of tax liability.

27. According to the Respondent, it raised Capital Gains Tax assessments on the Appellant on 1st September, 2023 pursuant to Section 29 of the Tax Procedures Act since the taxpayer herein failed to submit a tax return.

28. In response to the allegations that the Respondent ignored the Appellant’s documentation, the Respondent cited the provisions of Section 56(1) of the Tax Procedures Act and Section 30 of the Tax Appeals Tribunal Act which places the burden of proof on the Appellant. It alleged that this burden was not discharged in this Appeal.

29. The Respondent asserted that the Appellant having failed to provide requested documents and information to validate his objection as provided for in Section 51 of the Tax Procedures Act, it acted properly in exercising its best judgment in issuing the objection decision.

30. In further support of its case, the Respondent submitted that the Appellant’s objection was invalid. It relied on the case of Kotile General Contractors Company Limited v Commissioner of Domestic Taxes [2020] eKLR where the Tribunal held that the Applicant had failed to comply with the provisions set out in Section 51(3) of the Tax Procedures Act therefore, objection was not valid.

31. The Respondent also submitted that Section 31 of the Tax Procedures Act empowers it to make alterations or additions to original assessments from available information for a reporting period based on the available information and the Commissioner’s best judgement. It cited the case of Digital Box Ltd v Commissioner Of Investigation & Enforcement (2019) eKLR to enforce the assertion that it is allowed to use any information that is available to it and use the best of his or her judgment in making the assessment. It also cited the decision in Mulherin v Commissioner of Taxation [2013] FCAFC 115 wherein the court observed that a taxpayer has to produce positive evidence to demonstrate that the Commissioner’s decision is incorrect.

32. Finally, the Respondent relied on the case of Commissioner of Domestic Taxes v Metoxide Limited [2021] to submit that the Appellant has the burden of proof in tax matters but in the instant case, the Appellant failed to discharge the burden.

Respondent’s Prayer 33. The Respondent prayed for the Honourable Tribunal to uphold its objection decision as proper and in conformity with the law; and to dismiss the Appeal with costs.

Issues for Determination 34. The Tribunal has gleaned through parties pleadings and submissions and is of the view that the issues that call for its determination are as hereunder: -a.Whether the Respondent’s default assessment was time barred;b.Whether the Respondent's tax assessment was in compliance with the provisions of Section 29(2) of the Tax Procedures Act; andc.Whether the Respondent erred in its assessment of CGT against the Appellant.

Analysis and Findings 35. It is to these issues that the Tribunal will turn to analyse as hereunder: -a.Whether the Respondent’s default assessment was time barred

36. It is not disputed that:a.The Respondent issued its notice to issue assessments on 22nd February 2023. b.The assessment was issued on 7th June 2023 for the period 1st January 2016 to 31st October 2016. c.The Appellant objected to the assessment on 5th July 2023. d.Objection decion was issued on 1st September 2023.

37. Time plays a key role in tax matters. Section 23 (1) of the Tax Procedures Act requires a taxpayer to keep records of its affairs for five years or shorter period as maybe prescribed in law. The said Section provides as follows:-"1)A person shall—(a)Maintain any document required under a tax law, in either of the official languages;(b)Maintain any document required under a tax law so as to enable the person's tax liability to be readily ascertained; and(c)Subject to subsection (3), retain the document for a period of five years from the end of the reporting period to which it relates or such shorter period as may be specified in a tax law.’’

38. The Respondent stated on the face of its objection decision dated 1st September 2023 that it issued a default assessment based on the allegation that the Appellant did not file his tax return.

39. Section 29(5) of the Tax Procedures Act which deals with default assessments is thus applicable to this Appeal and it provides as follows regarding timelines for issuance of assessments:-‘‘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.’’

40. The Respondent was thus obligated by law to issue its assessment within 5 years from the last date of the reporting period to which the assessment relates. The Reporting period for this assessment was 30th June 2023. Meaning that the Respondent had a time limit period of up to 2018 within which he could issue a default assessment against the Appellant.

41. Its decision to issue an assessment for the year 2016 contravened Section 29(5) of the TPA and was hence illegal. This position was confirmed in the case of Commissioner of Domestic Taxes v Unga Limited [2021] eKLR where the High Court stated as thus:-"41. Under section 29 of the TPA, the Commissioner is empowered to make a default assessment when a tax payer fails to file a tax return. This power is however limited in time to five years under section 29(5) thereof. There is thus an expectation that the Commissioner would move with haste in doing so before the statutory time line expires..’’50. Our courts have reiterated the principle that tax laws should be interpreted strictly and leave no room for intendment. The law regarding the procedure for filing self-assessment, the consequences for late filing and of failure to file are clearly set out in the TPA as I have set out above. There is nothing in those provisions, that allows the Commissioner to circumvent those provisions and none can be implied on reading of the statutes. Counsel did not point any other provision of the law that allows the Commissioner to circumvent the strictures of section 29(5) of the TPA by implication.

42. Further, in Africa Oil Kenya BV v Commissioner of Domestic Taxes (Tax Appeal E024 & E051 of 2020 (Consolidated)) [2022] KEHC 15967 (KLR), the Court when confronted with interpretation of Section 29(5) of the Tax Procedure Act stated that:“On this issue I agree with the tribunal that the commissioner did not allege, let alone prove any wilful neglect on the part of the appellant. Wilful or gross neglect entails an intentional or reckless failure to carry out a legal duty. There is no evidence on record of such conduct on the appellant’s part.”

43. This Tribunal has pronounced itself on this issue in Gitere Kahura Investments Ltd v The Commissioner of Investigations and Enforcement Tax Appeal No. 16 of 2019 where it observed as follows:“The Respondent has the burden of proof pursuant to sections 107 and 108 of the Evidence Act to prove that the Appellant breached section 29(6) of the Act.…The assessed tax is for the period 2013-2016 being demanded in year 2018. The Tribunal has perused respondent’s pleadings and did not find evidence from the Respondent accusing the Appellant for gross or wilful neglect, evasion or fraudulent activities concerning taxes as provided for under section 29(6) of the Act. In this regard, the Tribunal finds that tax assessment for the year 2012 and 2013 are time barred by virtue of section 29(5) of TPA.”

44. It is thus clear that an assessment issued beyond the five year limit is unlawful. Its illegality can only be cured under Section 29(6) of the TPA if the Respondent is able to show or prove that there was gross or wilful neglect, evasion or fraud on the part of the taxpayer.

45. The Tribunal has looked at the Appelant’s pleadings and it has noted that the issues under Section 29(6) of the TPA of gross or wilful neglect, evasion or fraud on the part of the taxpayer were neither pleaded, transacted and or proved.

46. Accordingly, the Tribunal finds and holds that the Respondent’s assessment was time barred and hence unlawful under Section 29(5) of the Tax Procedures Act.

47. Having established that the Respondent's assessment from which the impugned objection decision was derived is unlawful, it follows that the other three issues that had been identified for determination have become moot and shall hence not fall for determination.

Final Decision 48. The upshot of the foregoing analysis is that the Tribunal finds and holds that the Appeal is meritorious and consequently makes the following Orders; -a.The Appeal be and is hereby allowed;b.The Respondent’s assessments together with the resultant objection decision dated the 1st September 2023 be and are hereby set aside;c.Each party to bear its own costs.

49. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 6TH DAY OF SEPTEMBER, 2024ERIC NYONGESA WAFULA - CHAIRMANDR. RODNEY O. OLUOCH - MEMBERABRAHAM K. KIPROTICH - MEMBERCYNTHIA B. MAYAKA - MEMBERGLORIA A. OGAGA - MEMBER