[2023] KETAT 267 (KLR)

Jojean Properties Limited v Commissioner of Domestic Taxes (Appeal 550 of 2021) [2023] KETAT 267 (KLR) (Civ) (12 May 2023) (Judgment)

Neutral citation: [2023] KETAT 267 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Civil

Appeal 550 of 2021

E.N Wafula, Chair, RM Mutuma, RO Oluoch & EK Cheluget, Members

May 12, 2023

Between

Jojean Properties Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

1. The Appellant is a limited liability company duly incorporated under the relevant provisions of the Companies Act, of the laws of Kenya based in Nakuru and is involved in the business of Property Agents and Estate management services.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Authority Act and the Kenya Revenue Authority is a Government agency charged with the responsibilities for the administration and enforcement of various tax laws.

3. The Respondent conducted a compliance analysis on the Appellant’s tax returns for the period 2017 to 2019 and noted some variances between turnover declared for income tax and turnover declared for VAT. The Respondent’s further analysis established that there was commission income which was vatable but was not subjected to VAT.

4. The Respondent advised the Appellant to amend the returns for the period 2017 to 2019 to reflect the correct position via its letter dated October 13, 2020.

5. The Respondent contends that the Appellant failed to take the necessary steps to review and amend the returns prompting the Respondent to issue additional assessment on iTax via its letter dated December 3, 2020.

6. The Appellant lodged an objection on iTax on May 21, 2021, which the Respondent contended had been filed late, without valid reasons for the late filing, or supporting documentation as required.

7. The Respondent vide its letter dated July 19, 2021, issued an objection decision confirming the assessment for the sum of Kshs 10,467,416. 00 due to the Appellant’s failure to provide valid reasons for the late objection.

8. Dissatisfied with the Respondent’s decision, the Appellant filed its appeal on September 11, 2021 challenging the Respondent ‘s assessment.

The Appeal 9. In its Memorandum of Appeal dated September 6, 2021 and filed on the September 17, 2021, the Appellant has set out its grounds of appeal as follows:i.That the Respondent has erred in fact and law in registering the Appellant without sufficient evidence to show that the Appellant was receiving VATfrom tenants who had used that element of rent as their input VAT.ii.That the Respondent has erred in fact in assuming the withholding certificates in the year 2017 to purport that they were VAT filing in the year.iii.That the Respondent erred in fact by ignoring that the Appellant had not received any VAT from tenants but the same was paid by landlords on filing their monthly VAT returns.iv.That the tax decision is excessive and punitive for the Appellant’s nature of business and if upheld will bring the Appellant’s business down which has taken him many years to build.

10. The Respondent prays that its Appeal be allowed and the Respondent’s decision be set aside.

The Appellant’s Case 11. The Appellant has set out its case in its Statement of Facts dated September 6, 2021 and filed on September 17, 2021, and the written submissions dated May 25, 2022 and filed on even date.

12. The Appellant stated that the Respondent through its Nakuru Station Office and without reference to the Appellant registered the Appellant for VAT, using wrong filing by tenants occupying the houses rented out to them by various landlords, thereby insinuating that the Appellant collected the VAT and failed to remit. The Appellant therefore contended that the Respondent erred in fact by using annual returns filed by the Appellant to compute VATunder declared and demanded the same from the Appellant.

13. The Appellant further stated that the Respondent erred in fact in ignoring the objection by the Appellant which was made within the stipulated time of 30 days and went ahead to confirm the assessment on July 19, 2021.

14. The Appellant submitted that it was not registered for VAT in accordance with the provisions of Section 34(1) of the Value Added Tax. In this this regard the Appellant contended that VAT is only payable by persons who are registered in Kenya according to Section 5(1)(a) of the VATAct. The Section reads as follows: -“A tax , to be known as value added tax, shall be charged in accordance with the provisions of this Act on –(a)a taxable supply made by a registered person in Kenya;”

15. The Appellant further submitted that in case the Respondent saw it fit that the Appellant had an obligation for VAT, then the Respondent ought to have registered the Appellant in accordance with the provisions of Section 34(6) of the VATAct.

16. The Appellant further submitted that the Respondent never registered it as a taxpayer for VAT tax obligation, as the registration is only effective upon the issuance of the VAT registration certificate in the prescribed form, and is effective from the date on the certificate as per Section 34[7] of the VATAct.

17. The Appellant therefore submitted that the Respondent erred in law by assessing the Appellant’s VAT, when the Appellant was neither registered nor issued with a VAT registration certificate.

18. The Appellant stated that it made a valid objection on December 21, 2020 through its company auditors to the Nakuru Tax Service office, which disputed the tax decision according to Section 51 of the TPA.

19. The Appellant further submitted that the Respondent never gave an objection decision within the statutory period of sixty days, and the law expressly provides that if the decision is not rendered within the statutory allowed period of sixty days, the objection is automatically allowed under Section 51[11] of the TPA.

20. The Appellant also contended that the underlying issue in this Appeal is the Respondent’s action of subjecting the Appellant to paying VAT while it was not registered for such tax obligation, and also failure by the Respondent to consider an objection made by the Appellant on December 21, 2020.

21. The Appellant reiterated that it was not a registered person for purposes of VAT under Section 5 of the VATAct, and therefore it was erroneous for the Respondent to assess it for VAT tax obligation payable for a period of three consecutive years. The Appellant further averred that it was not issued with a VAT registration certificate in accordance with Section 34 [5] of the Act for its notice of the commencement of accrual of the VATtax obligation. The Appellant submits that the consequence of this omission is that no penalty and interest can accrue as the Appellant did not collect VAT from any consumers of its services.

22. The Appellant submitted that the Respondent asking for VAT for three consecutive years of 2017, 2018 and 2019 was punitive because it was not entitled to pay tax for those years.

23. In view of the foregoing submissions the Appellant prayed that the Honorable Tribunal do allow the Appeal.

The Respondent’s Case 24. The Respondent has set out its case in the Statement of Facts dated October 12, 2021 and filed on October 13, 2021, and the written submissions dated May 10, 2022 and filed on May 25, 2022.

25. The Respondent submitted that its investigations revealed that in the years 2017, 2018, 2019 the Appellant under declared its sales as evidenced from the variance in the VAT returns and income tax returns filed by the Appellant, consequently the Respondent raised assessments on VAT for the said period due to failure by the Respondent to declare the same despite having supplies.

26. The Respondent further submitted that Kenya for tax purposes permits self-assessment and declaration in the spirit of facilitating and easing trade. However, the Respondent is not bound by the taxpayer ‘s return as guided by Section 24[2] of the TPA that grants the Respondent power to assess a taxpayer’s tax liability using any information available to him . The Respondent further submits that the law empowers the Respondent to amend returns to reflect the true representation of the taxes payable under Section 31 of the TPA.

27. The Respondent submitted that it used the information that was available to it [ Appellant’s income tax returns] in raising the additional assessment and its actions were justified and backed by the law to bring the Appellant to the correct tax liability on under declared VAT sales as compared to its income tax declaration.

28. The Respondent relied on the case ofPrimarosa Flowers ltd vs Commissioner of Domestic Taxes [2016] eKLR and submitted that the Appellant had the responsibility of explaining and providing supporting documents in support of the variance.

29. It was the submission of the Respondent that the failure by the Appellant to provide documentation which it is obligated to keep and avail upon request by the Commissioner tied the Respondent’s hands limiting it to raise the assessment and review objection based on the income tax returns filed as the only information available for it to make an informed decision.

30. The Respondent submitted further that the law having placed the burden on the Appellant to prove that then Respondent ‘s decision is incorrect or that it should have been made differently, the Appellant failed to discharge the burden, and implored the Tribunal to find that the assessment was issued correctly. In support of this submission the Respondent cited the cases of;a.Digital Box limited vs Commissioner of Investigations and Enforcement [2020],b.Diversity Distributors ltd vs Commissioner of Domestic Taxes [TAT]c.Mulherin vs Commissioner of Taxation [2013] CAFC 115,

31. The Respondent also submitted that the Appellant was offering management services for which it was charging and earning a commission which is a vatable service under the VATAct, as defined under Section 5 of the VATAct.

32. The Respondent stated that management services are not exempt from VAT under the VATAct, and since the Appellant was offering vatable services and had met the threshold for VAT registration, the Respondent was right in order to register and assess VAT on the services being rendered by the Appellant. The Respondent has relied on the case of :a.Republic vs Commissioner of Value Added Tax Ex parte Highway Furniture Mart ltd & Anor[2006] eKLRb.David Ndii vs Commissioner of Domestic Taxes.

33. The Respondent in closing submitted that having satisfactorily registered the Appellant for VAT, it was quite in order and in accordance with the law to raise the VATassessment under Section 29[2] of the VATAct, and therefore submitted that the Appellant‘s Appeal ought to be dismissed with costs.

Issues For Determination 34. The Tribunal having considered the pleadings filed, the documents produced and the submissions made by the two parties, is of the view that the Appeal distils into the following issues for determination: -i.Whether the Appellant was a validly registered taxpayer for the subject VAT tax obligationii.Whether there was a valid objection decisioniii.Whether the assessments raised and confirmed against the Appellant were justified and valid in law

Analysis And Findings 35. The Tribunal analyses the outlined issues as hereinbelow;

i. The Appellant was a validly registered taxpayer for the subject VAT tax obligation 36. The Appellant has submitted and contended that VAT is a consumption tax only payable by persons who are registered in Kenya in accordance with Section 5(1)(a) of the VATAct. The aforesaid Section reads as thus:-“A tax, to be known as value added tax, shall be charged in accordance with the provisions of this Act on –a.a taxable supply made by a registered person in Kenya.”

37. The Appellant submitted that it was not registered for VAT in accordance with the provisions of Section 34[1] of the VATAct. It was the Appellant ‘s submission that, if the Respondent deemed that the Appellant was a qualified taxpayer and obliged to pay VAT, the Respondent would have registered the Appellant in accordance with the provisions of Section 34[6] of the VATAct. The Section provides as follows: -“If the Commissioner is satisfied that a person eligible to apply for registration has not done so within the time specified in subsection [1], the Commissioner shall register the person.”

38. The Appellant has asserted that the Respondent never registered it as a VAT taxpayer as the registration is only effective upon the issuance of the VAT registration certificate, in accordance with Section 34[5] of the VATAct, which provides as thus:“The Commissioner shall issue the registered person with a tax registration certificate in the prescribed form”

39. The Tribunal also notes that Section 34[7] of the VATAct provides that:-“The registration of a person under subsection [1] or [6] shall take effect from the beginning of the first tax period after the person is required to apply for registration, or such later period as may be specified in the person‘s tax registration certificate” .

40. It is noteworthy that the Appellant has described the component of its estate management services as an agent for purposes of collecting rent on behalf of landlords from their tenants, which it remits in gross without any deductions whatsoever to the principal landlords. The Appellant therefore asserted that it does not charge any VAT, as an agent, and any VAT charged is collected by the landlords who account for the same to the Respondent. The Appellant further asserted that it only earned a commission from the landlords on the basis of the rent collected.

41. The Respondent on its part has submitted that the Appellant was offering management services, and earning a commission which is a vatable service but failed to register for VAT. It further averred that the Appellant’s annual turnover exceeded Kshs 5,000,000. 00 which qualifies for VAT registration but the Appellant failed to register forVAT. It stated that the Appellant having met the threshold for VAT registration, and having failed to register, this prompted the Respondent to register it for VAT obligation.

42. The Respondent averred that the registration of the Appellant for VAT obligation was not pegged on the rental income alone, but the management services it offered were vatable services and its annual turnover exceeded five million.

43. The Respondent further submitted that Section 34 [6] of the VATAct gives the Respondent authority to register any person who is eligible for registration and has not made the application within the applicable time limits.

44. The Respondent was therefore of the view that the registration of the Appellant for VAT obligation was proper and in accordance with the law.

45. The Tribunal notes that neither the Appellant nor the Respondent have presented the subject registration certificate to enable confirmation of the fact. However, what is not in dispute is that the Respondent registered the Appellant whilst it undertook the assessment for the period 2017 to 2019, which would be placed around December 2020, when the assessment orders were issued, and this month is the earliest point of contact between the Appellant and the Respondent.

46. It is not in doubt that the Appellant was within the threshold for registration of VAT obligation based on the line of business it was in i.e. management services for which it earned a commission. The Commissioner was therefore mandated by virtue of Section 36[1-6] of the VATAct and Section 8[8] of the TPA to undertake the registration for VAT.

47. Having considered the foregoing provisions cited and the submissions before the Tribunal, the Tribunal finds that the Commissioner was within the law in registering the Appellant for VAT obligation.

48. However, Section 8[9] of the TPA provides as follows:-“The Commissioner shall notify in writing a person registered under Section [8] of that person ‘s registration.”

49. By dint of foregoing provision, it clear that before a Commissioner exercises the powers conferred under the foregoing provisions, the person being registered has to be notified in writing. Note the use, “shall notify”, which makes it a mandatory requirement. The compliance of this provision by the Commissioner consequently empowers it to assess the amount of tax due, which amount would be due and payable from the first tax period from the date of registration.

50. The Respondent carried out the assessment on the Appellant for the years of income 2017, 2018 and 2019 and the Appellant has averred that it was not registered for VAT obligation during this period under review. The Tribunal notes that there is no documentary evidence to show that the Respondent wrote to the Appellant to notify it of its registration. The Respondent cannot therefore retroactively demand for tax for the period under review.

51. The Tribunal has been guided by its previous decision in the case of TAT NO 35 OF 2018 David Ndii Mwangi vs Commissioner of Investigations & Enforcement where the Tribunal held that:-“It is now trite law that fair and reasonable administrative action demands that the Appellant would be notified of the said registration and consequences of non-compliance with the same in respect of the taxes due. The said notice as envisaged under Section 8[9] of the TPA is not only a matter of procedural fairness and an important component of natural justice, but a mandatory legal requirement.”

52. In view of the foregoing the Tribunal finds that the Respondent in failing to give notice to the Appellant, was in breach of a mandatory statutory provision. Consequently, any action by the Respondent based on its registration of the Appellant for VAT obligation to demand taxes cannot stand. The Respondent can only demand and collect taxes from the Appellant, after the date of registration, and after giving the Appellant notice as provided by the relevant legislation.

53. On the basis of the foregoing the Tribunal finds that the impugned assessments on the Appellant by the Respondent were premature for non-compliance with statutory provisions, and therefore invalid.

54. This issue conclusively disposes of the Appeal and the Tribunal will not proceed to consider the other issues which have been rendered moot by this finding.

Final Decision 55. The upshot of the foregoing is that the Appeal is merited and the Tribunal accordingly proceeds to make the following final Orders :-i.The Appeal be and is hereby allowed.ii.The Respondent’s objection decision dated July 19, 2021 on VAT be and is hereby set aside.iii.Each party to bear its own costs.

56. It is so ordered.

DATED AND DELIVERED IN NAIROBI THIS 12TH DAY OF MAY, 2023. ……………………………ERIC N. WAFULACHAIRMAN………………………………ROBERT M. MUTUMAMEMBER…………………………………*RODNEY O. OLUOCHMEMBER………………………………EDWIN K. CHELUGETMEMBER