[2024] KETAT 110 (KLR)

Jared O. Magolo t/a J.O Magolo & Company Advocates v Commissioner of Domestic Taxes (Tax Appeal E058 of 2023) [2024] KETAT 110 (KLR) (2 February 2024) (Judgment)

Neutral citation: [2024] KETAT 110 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E058 of 2023

RM Mutuma, Chair, M Makau, EN Njeru, BK Terer & W Ongeti, Members

February 2, 2024

Between

Jared O. Magolo t/a J.O Magolo & Company Advocates

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a legal Practitioner with a practice both in Nairobi and Mombasa, a registered taxpayer and his core business engagement is provision of legal services.

2. The Respondent is a principal officer appointed under the Kenya Revenue Authority Act, and the Kenya Revenue Authority 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 under the Schedule to the said Act.

3. The disputes giving rise to the Appeals herein arose out of the Respondent’s assessments for VAT and Income tax premised on information available to it on the Integrated Financial Management System (IFMIS) to which the Appellant objected on the 23rd June 2022 and 8th December 2022, respectively.

4. The Respondent issued its objection decisions on 16th August 2022 rejecting the Appellant’s objection and confirmed its assessment on VAT in the sum of Kshs. 3,063,270. 34 and on the 27th January 2023 disallowing the Appellant’s Objection and confirmed its assessment on Income tax in the sum of Kshs. 5,302,528. 00

5. Dissatisfied with Respondent‘s aforesaid decisions, the Appellant lodged its Notices of Appeal on 7th September 2022 and 28th February 2023, respectively.

The Appeal 6. The Appellant in its Memorandum of Appeal dated 1st September 2022 and filed on 7th September 2022 relating to TAT Appeal No. 965 of 2022 and Memorandum of Appeal filed on 28th February 2023 relating to TAT No. E058 of 2023 set out the following grounds of appeal, that:-i.The Respondent erred in law and fact in reaching a decision that the Appellant has preferred and completed performing services for which VAT was payable.ii.The Respondent erred in law and fact in reaching a decision that the Appellant had issued invoices to client.iii.The Respondent erred in law and fact in failing to note that the nature of services the Appellant offers, the Appellant can only issue a fee note which is not final and the equivalent of an invoice is only available when a bill of costs is taxed and a certificate of costs issued.iv.The Respondent failed to notice that what the Appellant had requested from his client was a deposit to cover disbursements and expenses with regard to several matters and VAT could only be levied upon deductions of expenses and disbursements to be accrued.v.The Respondent erred in law and fact by demanding payment even when informed that no payment was ever received and fraud or mistake have occurred from the end of the Nairobi City County.

The Appellant’s Case 7. The Appellant has set out its case on its;a.Statement of Facts dated 1st September 2022 and filed on 7th September 2022 together with the annexed documents thereto;b.Statement of Facts filed on 28th February 2023 together with the annexed documents thereto;c.The witness statement of Jared Osongo Magolo (the Appellant) dated and signed on the 14th April 2023 and filed on 18th April 2023, which was adopted as his evidence in chief on oath on the 27th September 2023; andd.Written submissions dated 14th April 2023 and filed on 18th April 2023.

8. The Appellant stated that among its client’s is Nairobi County Government, which normally sends files to the Appellant with instructions to represent it in Court, which files are very many.

9. The Appellant averred that in the years 2020 and 2021, the County Government send a total of 26 files to the Appellant, which required Court attendances, Court filings and several expenses, which included getting an Advocate to work on the brief on full time basis.

10. The Appellant contended that it made a request for payment of a deposit to cover disbursements and expenses, to which request the client approved the payment of Kshs. 15,900,000/-, however to date the payment has never been made to the Appellant’s bank account as detailed therein.

11. The Appellant stated that subsequently it received a demand for taxes based on the above figure with the indication that the Respondent captured the information through IFMIS.

12. The Appellant therefore suspected fraud or mistake and duly informed the Respondent, however, the Respondent rejected the Objection arguing that the Appellant had made supplies and deliveries and raised invoices.

13. The Appellant further stated that it does not supply or do deliveries, neither had it issued any invoices nor issued any fee notes and that the client had not approved the payment of fees.

14. The Appellant further asserted that it had not taxed any bill of costs and the taxes demanded are therefore not due as there have been no earnings and no payments received.

15. The Appellant stated that the matter had been reported with the police.

16. The Appellant in its submissions identified two issues for determination.a.Whether the Respondent has the right to impose tax on the unreceived revenue?b.Whether the Respondent’s decision should be set aside.

17. The Appellant submitted that through the interim fee note dated 1st July 2020 addressed to the Director of Legal Services Nairobi City County it claimed a total of Kshs. 17,100,000. 00 which was inclusive of VAT in the sum of Kshs. 2,100,000. 00.

18. The Appellant further submitted that the aforesaid amount was never transmitted to its bank accounts and provided statements in support thereof.

19. The Appellant stated that his client disputed the amount and confirmed vide the correspondence of 28th October 2022 that the same had been processed but remained unpaid on account of the amount being disputed and was therefore stopped.

20. The Appellant argued that in interpreting Section 12 of the VAT Act, which implies that delivery, performance, the invoice for supply is issued or date payment received which ever occurs earlier VAT becomes payable, the Tribunal should take cognizance that the Act does not recognize a fee note because it is not final.

21. The Appellant submitted that the Respondent had misconstrued the facts and therefore cannot impose tax on an interim fee note that has been confirmed and remains unpaid. Further, such imposition can only be done on a bill of costs which is not before the Tribunal.

22. The Appellant contended that once it has rendered services and raised a fee note, the fee note is not binding on the client as the client has an option of asking for taxation of the fee note or invoice, in the instant case the Appellant raised a fee note that was disputed.

23. Further, in this case the Appellant argued that Odunga J. found that the Respondent could only levy interest on invoices by Advocates at the rate of 9% as provided for in the Advocates Act and there are no explanations as to how the Respondent arrived at the penalties and interest charged making the demand illegal and void.

24. The Appellant submitted that he had discharged his burden of proof and he produced his bank statements to demonstrate that he had not received the payments and that he should not be taxed.

25. The Appellant further submitted that the Respondent’s process employed in arriving at amount demanded was flawed as it did not take into consideration the Advocates Act with regards to interest and penalties.

Appellant’s Prayers 26. The Appellant prayed to the Tribunal:-a.That the tax decision by the Respondent of Kshs. 3,063,270. 34 be set aside;b.That the tax decision by the Respondent of Kshs. 5,302,528. 00 be set aside; andc.That the Respondent be restrained from taking any further action with regards to its demands.

The Respondent’s Case 27. The Respondent has set out its case on its;a.Statement of Facts dated 4th October 2022 and filed on 14th October 2022, together with documents annexed thereto;b.Statement of Facts dated 14th October 2023 and filed on 25th October 2023, together with documents annexed thereto; andc.Written Submissions dated 7th November 2023 and filed on 8th November 2023.

28. The Respondent stated that it obtained information from IFMIS data indicating that the Appellant had made supplies amounting to Kshs. 15,960,000. 00 to Nairobi City County in the month of June 2021.

29. The Respondent upon review of the Appellant’s VAT returns, noted that the same indicated that the supplies were not declared for VAT purposes, subsequently it subjected the supply to VAT through the assessment order dated 18th May 2022 in the sum of Kshs. 2,860,031. 76.

30. The Respondent stated that the Appellant lodged a late Objection to the assessment on iTax on 23rd June 2022, which late Objection was accepted and the Respondent issued an objection decision on 16th August 2022 relating to VAT assessment.

31. The Respondent further contended that it made a further assessment on Income tax in the sum of Kshs. 5,444,560. 00, to which the Appellant filed a late Objection on the 8th December 2022, the Respondent accepted the late Objection and issued its Objection decision of the 27th January 2023 relating to Income tax assessment.

32. Being dissatisfied the Appellant filed his Appeals on 7th September 2022 and 28th February 2023 respectively.

33. The Respondent identified one issue for determination as follows;a.Whether the Respondent erred in its decision to raise additional assessment on VAT on the Appellant for the period June 2021 of Kshs. 2,860,032. 76.

34. The Respondent further stated that the Appellant was registered for VAT and from the information obtained from IFMIS the Appellant had offered legal services to Nairobi County Government and that there is no contestation of the provision of services by the Appellant.

35. The Respondent asserted that legal services are vatable services under Section 5 (1) & (2) of the VAT Act.

36. The Respondent further contended that the tax point herein was not pegged on the issuance of a final invoice but on the time of supply, which obligation is placed upon the supplier of services under Section 5 (3) of the VAT Act.

37. The Respondent whilst relying on Section 12 of the VAT Act stated that the Appellant needed not issue an invoice first before declaring and remitting the taxes dues as the same ought to have been declared at the time of supply.

38. The Respondent averred that Appellant was liable to declare the vatable supplies at the time of supply but failed to declare the transaction. Further, that the alleged fraud may have been perpetuated does not negate the fact that a supply took place.

39. The Respondent stated that from the information available to it in IFMIS revealed that the Appellant had rendered professional services to Nairobi City County in the month of July 2021, which income was undeclared by the Appellant, thus the Respondent subjected the same to Income tax and issued an additional assessment amounting to Kshs. 5,444,560. 00 for the year of income 2021.

40. The Respondent stated under Section 31 of the Tax Procedures Act, it has the power to issue additional assessments from the available information and to the best of its Judgment.

41. That the Appellant availed a copy of its bank statements and an Affidavit, which stated that the income was never received by him from Nairobi City County, it remains evident that the Appellant made taxable services to his client for the year under review.

42. That whereas, the Appellant maintains that he did not receive the funds from Nairobi City County, that remains a dispute between the taxpayer and his client and that should not in any manner affect payment of Income tax.

43. The Respondent stated that accounting accrual concept requires transactions to be recorded in the time in which they occur, regardless of when the actual cash flow for the transaction are received.

44. That premised on the accrual concept under IAS 1 (International Accounting Standard), the Respondent stated that a person ought to recognize income when it is earned and not necessarily when it is received. Since the taxpayer recognizes that the services were rendered, he ought to have recognized the income based on the accrual concept and paid Income tax on the same.

45. The Respondent relied on Section 56 (1) of the Tax Procedures Act and Section 30 of the Tax Appeals Tribunal Act and stated that the burden of proof lied on the Appellant, who has failed to discharge the same.

46. The Respondent submitted that it is not bound by the return or information provided by or on behalf of the taxpayer, but can rely on other available information in accordance with Section 24 (2) of the Tax Procedures Act.

47. The Respondent submitted that it was not in issue that the Appellant alleged that the said Kshs. 15,960,000. 00 was paid to someone else and invited the Respondent to investigate the recipient of the money and demand the tax from the fraudulent beneficiary. Rather what mattered is that the Appellant made taxable supplies and ought to settle the tax accruing therefrom.

48. The Respondent relied on the following case law;a.Commissioner Investigations and Enforcement vs. Sanyug Enterprises (K) Limited (Income Tax Appeal E056 of 2020) [2022] KEHC 59 (KLR).b.Kenya Revenue Authority vs. Republic (Exparte Fintel Ltd) [2019] eKLR, Civil Case No. 311 of 2013. c.Mulherin vs. Commissioner of Taxation [2013] FCAFC 115. d.Gashi vs. Respondent of Taxation [2012] FCA 638.

Respondent’s Prayers 49. The Respondent prayed to the Tribunal that;a.The Appeal be dismissed with costs.b.The Tribunal upholds the decision of the Respondent and find that the additional VAT assessment amounting to Kshs. 2,860,031. 76. c.The taxes due and unpaid together with the interest thereon be paid to the Respondent.d.The Respondent reserves the right to adduce any further oral and written evidenced during the hearing of the Appeal.e.The Appellant be compelled to pay costs to the Respondent.

Issues For Determination 50. The Tribunal having carefully considered the pleadings and submissions made by the parties, is of the considered view that both Appeals herein distils into two (2) issue for its determination;a.Whether the Respondent’s Objection Decision issued on 16th August 2022 relating to VAT assessment was justified.b.Whether the Respondent’s Objection Decision issued on 27th January 2023 relating to Income Tax assessment was justified.

Analysis and Determination 51. The Tribunal on the 27th September 2023, pursuant to the consent of the parties herein directed that the instant Appeal being TAT No. 965 of 2022 be heard together with Appeal No. TAT No. E058 of 2023 as both Appeals relate to the same parties and assessment arise from the same supply/income. It was further directed that the Tribunal’s judgement to be delivered in the instant Appeal to address and determine the issues raised in TAT No. E058 of 2023.

52. The Tribunal having identified the issues for determination shall analyze the same as herein under;

a. Whether the Respondent’s Objection Decision issued on 16th August 2022 relating to VAT assessment was justified. 53. The dispute giving rise to the first Appeal herein arose out of the Respondent’s Objection decision contained in its letter dated 16th August 2022 rejecting the Appellant’s Objection and confirming the assessment on VAT in the sum Kshs. 2,860,031. 76.

54. The Respondent submitted that it obtained information from IFMIS data indicating that the Appellant had made supplies amounting to Kshs. 15,960,000. 00 to Nairobi City County in the month of June 2021.

55. The Appellant being registered for VAT, the Respondent reviewed the Appellant’s VAT returns and noted that the supplies were not declared for VAT purposes.

56. It was submitted by the Appellant that in the year 2020 and 2021, it received from the Nairobi County Government a total of twenty-six (26) files which required Court attendances, Court filings and several expenses, which included getting an Advocate to work on the brief on full time basis.

57. The Appellant contended that it made a request for payment of a deposit to cover disbursements and expenses, to which request the client approved the payment in sum of Kshs. 15,900,000/-, however, to date the payment has never been made to the Appellant’s bank account as detailed in the correspondence.

58. The Appellant submitted that contrary to the Respondent’s assertion it did not issue any invoice, rather an Interim Fee Note which in its view consists of a deposit and that an invoice would be issued as a final demand for the outstanding fees. In the Appellant’s view, the issue of fees/income was yet to be determined, which would be upon the taxation of the bill of costs.

59. The Appellant took the position that a fee note is invariably distinct to an invoice, which prohibits the Respondent from deeming or declaring a tax point on the sum that already the client had disputed and therefore the income had not been determined and/or agreed upon.

60. On the other hand, the Respondent relied on Sections 12 of the VAT Act and stated that the tax had become due and owing based on the fact that the Appellant had issued an invoice to its client for the sum of Kshs. 15,900,000. 00.

61. The Appellant invited the Tribunal to review the Advocates Act and take cognizance of the fact that the assessment was not made in line to the statute.

62. Fees due and payable to an Advocate for legal services is subject to VAT and therefore any income/fee earned by a member of the legal profession under that tax head becomes due and payable, however, court filing fees are not subject to VAT as these remain sums expended on behalf of a client by the Advocate.

63. Further, fees as between an Advocate and his client may be determined, under the provisions of Section 45 of the Advocates Act, in two ways as outlined herein under;a.By agreement of the Advocate and his Client; orb.By taxation of a bill or bills of costs.

64. The Appellant submitted that since his client, the Nairobi City County disputed his Interim Fee Note and the Appellant has not to date taxed the bill of costs, the taxes on VAT were not due. The Tribunal, however, sighted from the Appellant’s bundle, the correspondence dated 17th August 2020 by the Appellant to his client confirming that he is amenable to the revised fee note in the sum of Kshs. 15,960. 000. 00 and requesting his client to remit the same to his bank account. The Appellant titled the document “Amended Fee Note.”

65. It is the Tribunal’s view that pursuant to the aforementioned correspondence, the amount of Kshs. 15,960,000. 00 could no longer be deemed as disputed between the Appellant and his Client, however, the aforesaid amount was treated and deemed as a deposit by the Appellant vide its correspondence dated 16th August 2020.

66. The Tribunal is invited to interrogate the circumstances and determine whether the tax on VAT had crystalized and whether the assessment was properly issued by the Respondent. In making such a determination, it is guided by the provisions of Section 12 (1) of the VAT Act, which provides;“(1)Subject to subsection (3), the time of supply, including a supply of imported services shall be the earlier of –a.the date on which the goods are delivered or services performed;b.the date a certificate is issued by an architect, surveyor or any other person acting a consultant in a supervisory capacity.c.the date on which the invoice for the supply is issued; ord.the date on which payment for the supply is received, in whole or in part.”

67. Of the four (4) grounds outlined herein above, the Respondent premised its assessment largely on the ground that the Appellant had issued an invoice to his client, on the one hand.

68. The Appellant on the other hand, argued vehemently that he did not issue any invoice but rather an Interim Fee Note.

69. The Tribunal has taken the liberty to peruse the documents issued by the Appellant together with the forwarding letter both dated 1st July 2020 and notes that the Appellant indeed send a document titled “Fee Note” to his client.

70. Section 2 (1) of the VAT Act does not make any definition of the meanings of the words “Fee Note” or “Invoice”, to establish whether the same are distinguishable and the extent of application for tax purposes.

71. The Tribunal having scrutinized the communication between the Appellant and its client, the Tribunal has noted the Fee Note of 1st July 2020 totaling Kshs. 17,100,000. 00 with a VAT amount of Kshs. 2,100,000. 00. This Fee Note was disputed by the client, who then counter-proposed the fees of Kshs. 15,960,000. 00 inclusive of VAT of Kshs. 2,220,000. 00. The Appellant thereafter, specifically, on the 17th August 2020 issued an Acceptance Fee Note in the sum of Kshs. 15,960,000. 00 in which the Appellant proceeded to demand settlement of the entire sum contained therein.

72. There is no indication presented before the Tribunal, that the amount sought in the Acceptance Fee Note of 17th August 2020 was a deposit or an interim fee for the services to be provided by the Appellant.

73. The Tribunal is therefore, persuaded that the Acceptance Fee Note amounted to an invoice for VAT purposes as envisaged under Section 12 (1) (c) of the VAT Act and therefore VAT is deemed to have crystalized.

74. The Appellant having noted that its client seemed not intent on making the payment as sought, as is the cautionary practice, should have revoked its Fee Note or Invoice or acceptance of the offer and issued a Credit Note thereof.

75. It is noteworthy that the amount contained in the Acceptance Fee Note of Kshs. 15,960,000. 00 was inclusive of VAT in the sum of Kshs. 2,220,000. 00, it was also inclusive of Court Filing Fees, which are not subject to taxation.

76. The Respondent in its assessment subjected the entire sum of Kshs. 15,900,000. 00 to taxation for VAT the resultant tax being Kshs. 2,553,599. 80, it is the Tribunal’s position that this action was incorrect and unjustified as the figure on VAT was determined and inclusive of the invoiced amount and distinct of the non-vatable items.

77. Consequently, the Tribunal finds and determines that premised under the provisions of Section 12 (1) (c) of the Value Added Tax the tax had crystalized, however, the Respondent was not justified in its assessment and demand for VAT, solely premised on the amounts assessed and demanded vide its objection decision dated 16th August 2022.

b. Whether the Respondent’s Objection Decision issued on 27th January 2023 relating to Income Tax assessment was justified. 78. The Respondent submitted that the information contained in the IFMIS revealed that the Appellant had rendered professional services to Nairobi City County in the month of July 2021, which income was undeclared by the Appellant, thus the Respondent subjected the same to Income tax and issued an additional assessment amounting to Kshs. 5,444,560. 00 for the year of income 2021.

79. The Appellant in opposition to the aforementioned stated that the said amounts were never paid to him and produced bank statement in support thereof, that he received a notification of payment on 25th June 2021, but to date the funds have never been remitted.

80. The Appellant further argued that it did not receive the funds, in fact the Appellant pleaded fraud and/or mistake as it was discovered that the said payment was alleged to have been made on the 25th of June 2021 but the funds were never remitted to Appellant’s bank accounts as provided in its correspondences.

81. The afore stated activities prompted the Appellant to lodge formal complaints with County Executive Committee Member in charge of Finance of the Nairobi City County and the Officer in Charge Bank Fraud of the Central Bank of Kenya vide the correspondences of 19th August 2022 and 24th August 2022 respectively.

82. From the documents provided, there was a confirmation from the Nairobi City County vide the correspondence dated 28th October 2022 and two (2) notifications of stopped RTGS payments to the Appellant from the Central Bank of Kenya indicating that the payments were stopped on 3rd August 2021 and 28th July 2022.

83. The status and/or outcome of the investigations of the alleged fraud and/or on the fees/income due to the Appellant has not been presented to the Tribunal, perhaps for the reasons that the same are still ongoing, the Respondent’s position was that for the purposes of tax these were extraneous matters that have no effect to the tax as the same remains due.

84. The Respondent further asserted that the Appellant rendered services to its client and that income was to be recognized as earned upon services being rendered based on the accrual concept under International Accounting Standard (IAS) 1, which provides that a person ought to recognize income when it is earned and not necessarily when payment is received.

85. The Appellant has not rebutted the Respondent’s argument that it performed and/or delivered the services. Instead, the Appellant has belabored the point that it never received the payment from its client, which point it has gone on to prove.

86. It is the Tribunal’s position that whereas the income for the purposes of Income tax was earned, there is sufficient and unrebutted evidence that the same was never received by the Appellant, that tax for the purposes of Income tax crystalizes upon receipt of the said income.

87. Sections 56 (1) of the Tax Procedures Act relating to burden of proof, provides as follows:-“In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”

88. Section 30 of the Tax appeals Tribunal Act further provides as follows with regard to discharge of burden of proof:-“In a proceeding before the Tribunal, the appellant has the burden of provinga.where an appeal relates 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.”

89. From the foregoing, the Appellant has demonstrated to the Tribunal that the Respondent’s assessment based on the assertion that it had earned the fees and should have declared and paid the same, was incorrect, unfactual, wrong and/or excessive. The Appellant has therefore discharged its burden of proof.

90. In light of the foregoing, the Tribunal finds and holds that the Respondent was unjustified in assessing and demanding taxes on income which was earned, but not received for the purposes of taxation by the Appellant vide its Objection decision of 27th January 2023.

91. The upshot of the foregoing is that the Appellant’s Appeals are found to be merited.

Final Decision 92. The Appellant’s Appeals having been found to be merited the Tribunal proceeds to make the following Orders;a.The Appeals be and are hereby allowed.b.The Respondent’s Objection decision issued on 16th August 2022 be and is hereby set aside.c.The Respondent’s Objection decision issued on 27th January 2023 be and is hereby set aside.d.The Respondent is at liberty to recompute its assessment on VAT in consideration of the invoiced amounts and excluding the non-vatable item within Sixty (60) days of the date of delivery of this Judgment.e.Each party to bear its own costs.

93. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 2ND DAY OF FEBRUARY, 2024ROBERT M. MUTUMA - CHAIRPERSONMUTISO MAKAU - MEMBERELISHAH N. NJERU - MEMBERBONIFACE K. TERER - MEMBERDR. WALTER J. ONGETI - MEMBER