[2023] KETAT 956 (KLR)

Josesta Enterprises Limited v Commissioner of Customs & Border Control (Tax Appeal 861 of 2022) [2023] KETAT 956 (KLR) (Commercial and Tax) (8 December 2023) (Judgment)

Neutral citation: [2023] KETAT 956 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Commercial and Tax

Tax Appeal 861 of 2022

Grace Mukuha, Chair, G Ogaga, E Komolo, Jephthah Njagi & T Vikiru, Members

December 8, 2023

Between

Josesta Enterprises Limited

Appellant

and

Commissioner of Customs & Border Control

Respondent

Judgment

1. The Appellant is a private limited liability company registered and incorporated under the Companies Act. It is engaged in diverse business activities in Eldama Ravine, Baringo County.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, Cap 469 laws of Kenya. 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 Part 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 Appellant was issued with additional assessments for income tax for the years 2015 to 2019 on 30th July 2021 and 30th August 2021.

4. The Appellant filed a late objection notice for the 30th July 2021 assessment vide Itax on 18th October 2021 attaching a letter to explain its reason for late objection. The Appellant also filed an objection for the 30th August 2021 assessment on 25th October 2021.

5. The Appellant’s application to file a notice of objection out of time was granted vide a letter dated 15th December 2021 in which it was requested to provide the relevant supporting documents to enable the Respondent to review the assessment.

6. The Respondent issued an objection invalidation notice on 21st April 2022 on the basis that sufficient supporting documents were not availed.

7. Aggrieved by the Respondent’s invalidation decision, the Appellant filed its Memorandum of Appeal at the Tribunal on 18th August 2022.

The Appeal 8. The Appeal is premised on the following grounds as stated in the Appellant’s Appeal filed on 18th August 2022. a.That the additional assessments No: KRA202116995288 shows income chargeable to tax of Kshs 5,098,726. 00 which has been arrived at without factoring the cost of sales and expenses incurred in the year of income 2015. As a taxpayer in business, that the Appellant is entitled to deduct not only input costs but also operating expenses incurred.b.That the additional assessments No: KRA202116995326 shows income chargeable to tax of Kshs. 7,675,432. 00 which has been arrived at without factoring the cost of sales and expenses incurred in the year of income 2016. That as a taxpayer in business, the Appellant is entitled to deduct not only input costs but also operating expenses incurred, the actual income earned was Kshs. 829,681. 00 and not Kshs. 5,098,726. 00 as per the additional assessment, therefore the tax liability of Kshs 1,529,617. 80 is incorrect.c.That although it was very clear that purchases of Kshs 1,133,568. 75 were filed and input VAT thereto claimed, the cost was not incorporated in computation of chargeable tax.d.That the additional assessments No: KRA202116995410 shows income of chargeable to tax of Kshs. 24,145,468. 00 which has been arrived at without factoring the cost of sales and expenses incurred in the year of income 2017. As a taxpayer in business, we are entitled to deduct not only input costs but also operating expenses incurred. Purchase of Kshs. 24,082,814. 69 an element in determination of cost of sales was completely disregarded in arriving at the chargeable income. Note that all VAT3 returns have been approved.e.That the actual income of Kshs 3,902,198. 00 as evidenced by summated annual VAT3 returns earned in year 2018 agrees with the demand notice of 30th August 2021 from KRA regional audit office. However, additional assessments No. KRA202116995447 shows income chargeable to tax of Kshs 25,990,718. 00 which has been arrived at without factoring the cost of sales and expenses incurred in the year of income 2018. The exaggerated income as per additional assessment has resulted in a grossly erroneous tax liability of Kshs 7,797,215. 00. f.That input VAT of Kshs 1,587,779. 66 translating to purchase value of Kshs 9,923,622. 88 was disregarded in the computation of taxable income of Josesta Enterprises limited. This is contrary to principles of fair administrative action and prudent accounting.g.That the additional assessments No: KRA202116995447 shows income chargeable to tax of Kshs 4,886,418. 00. It was the Appellant’s contention that as a business, it is entitled to deduct not only the operational expenses but also the cost of sales in each of the year of income in accordance with Section 15 (1) of Income Tax Act (ITA). Therefore, it’s the Appellant’s view that the Commissioner erred in determining the chargeable income for each of the years; that’s 2015, 2016, 2017, 2018 and 2019. h.That Section 37 A (2) of Tax Procedures Act provides that where a person has no documentation to support expenditure, such a person shall be allowed a deduction of 40% of the expenditure, this has not been applied in our case.i.That there was an error of double taxation in that: additional assessments were generated twice for each of the years 2017 and 2018. This anomaly prevented it from doing an amended assessment on its returns as it is not possible to amend once an additional assessment has been generated.j.That the Appellant was not provided with the evidence sourced from the third parties used in amending its returns.k.That raising an assessment for year 2015 in the year 2021 is an act of exceeding statutory provisions as its over 5 years.l.That there was no underdeclaration of income in all the years, therefore the demand for taxes should be vacated.m.That the Appellant was not accorded the opportunity to file amended returns, yet it provided medical records to show that the taxpayer was not feeling well.

Appellant’s Case 9. The Appellant’s case is premised on the following documents before the Tribunal: -a.Its Statement of Facts filed on 18th August 2022b.Written Submissions dated 27th March 2023 and filed on 12th April 2023.

10. The Appellant averred that the Commissioner’s narrow and strict implementation of the tax rules had occasioned a serious injustice that resulted in an unrealistic tax liability of 47 Million cumulatively.

11. The Appellant asserted that there was no under-declaration of income in all the years, therefore the demand for taxes should be vacated.

12. The Appellant claimed that it had not been accorded the opportunity to file amended returns, yet it provided medical records showing that the taxpayer was not feeling well.

13. The Appellant stated that Sections 15 of the Income Tax Act and Section 31 of the TPA entitle the taxpayer to cause the deduction of allowable expenses which have been wholly and exclusively incurred to generate the said income.

14. The Appellant contended that as a business it was entitled to deduct the operational expenses as well as the cost of sales in each of the year of income in accordance with Section 15 (1) of Income Tax Act (ITA).

15. It was the Appellant’s position that that the Commissioner erred in determining the chargeable income for each of the years; that’s 2015, 2016, 2017, 2018 and 2019.

16. The Appellant averred that there was no notice of intention to audit under Section 58 of the TPA neither was it engaged in the process. That in absence of working papers authenticating the additional tax, the findings do not persuasively give reliable and dependable evidence.

17. The Appellant contended that it was not notified of the missing documents and that the Respondent placed reliance on Section 51 (3)(c) of TPA without specifically stating the documents that were not submitted by the Appellant.

18. The Appellant cited Section 51 (9), (10) & 11 of the TPA which provide that the Commissioner shall notify in writing the taxpayer of the objection decision and shall take all necessary steps to give effect to the decision, including in the case of an objection to an assessment making an amended assessment and the said objection decision shall include a statement of findings on the material investigations. That the Respondent had failed to strictly adhere to the law as no objection decision was made within the stipulated timelines.

19. That the Appellant prayed the Tribunal to give direction and order whether the letter dated 21st April 2022 constitute an objection or not as it failed to comply with requirements of Section 51 (10) of the TPA.

20. The Appellant claimed that the Respondent had deliberately created an injustice and ambiguity on what law it relied on to find a tax liability and raise additional taxes against the Appellant.

21. To buttress its position on ambiguity in taxation, the Appellant relied on the cases of: -a.Income Tax Power (K) Ltd [2006] eKLR where the Court citingCommissioner of Inland Revenue V Scottish Central Electricity Power Company (1931) 15 761. b.Keroche industries Limited V Kenya Revenue Authority & 5 others [2007] eKLR

22. The Appellant submitted that the additional assessments were not warranted as the Respondent applied variances between sales obtained from incorrect banking analysis and sales declared in income tax returns despite having been given the Appellant’s annual returns, audited financial statements and all other documents requested showing its actual income for the period in dispute.

23. The Appellant stated that without prejudice to the foregoing, Section 37A of the TPA provides that where a person has no documentation to support expenditure, such a person shall be allowed a deduction of 40% of the expenditure this was not applied its case.

24. The Appellant averred further that, there was an error of double taxation in that additional assessments were generated twice for each of the years 2017 and 2018. That this anomaly prevented the taxpayer from doing an amended assessment on its returns.

25. The Appellant noted that raising an assessment for year 2015 in the year 2021 was an act of exceeding statutory provisions as it was over 5 years.

26. That having failed to meet the threshold set in Section 29 of the TPA, the impugned additional taxes expressly violate the Appellant’s right to fair administrative action as enshrined in Article 47 of the Constitution.

27. The Appellant further relied on the cases of:a.Geothermal development Company v Attorney General & 3 others [2013 eKLR where the Court held: -b.Republic v Kenya Revenue Authority Ex-parte L.A.B International Kenya Limited [2011] eKLR.

28. The Appellant averred that it had attached all the necessary documentary evidence to support its position that the additional tax as confirmed is excessive, punitive and un-reasonable as it had been determined using incomplete records and assumptions.

Appellant’s Prayers 29. For the foregoing reasons, the Appellant prays that: -a.This Appeal be allowed.b.Costs be awarded to the Appellant.

Respondent’s Case 30. The Respondent’s case is premised on the hereunder filed documents:-a.The Respondent’s Statement of Facts dated and filed on 9th March 2023b.The Respondent’s Written Submissions dated and filed on 13th April 2023.

31. The Respondent submitted that the Appellant filed the instant Appeal being dissatisfied with the invalidation of its objection vide a letter dated 21st April 2022 on the basis that it had failed to provide the required relevant documentation.

32. The Respondent submitted that income tax additional assessments for the years 2015,2016,2017,2018 & 2019 were issued based on established variances between sales as per banking analysis and sales declared in the Income-tax returns.

33. The Respondent averred that the Appellant objected to the assessments on the basis that the tax computations were not a true reflection of its business activity status, it further requested to be given a chance to amend VAT returns & file correctly.

34. The Respondent asserted that the additional income tax assessments were issued in accordance with the provisions of the Income Tax Act CAP 470 with the regard to determination of the chargeable incomes.

35. The Respondent stated that the Appellant had filed Nil returns and thus failed to declare any incomes or claimed expenses except for the year 2019. That all the expanses claimed in the Income tax self-assessment returns filed by the Appellant were allowed.

36. The Respondent relied on Section 31 of the TPA which allows it to amend assessments (within one year) by making alterations or additions, from the available information and to the best of the Commissioner’s judgement so as to ensure that a taxpayer is liable for the correct amount of tax payable in respect of the reporting period.

37. The Respondent averred that it did not give an objection decision under Section 51 (11) of the TPA on the basis that all the relevant supporting documentation were not availed to enable review and determination of the objection.

38. The Respondent relied on Section 3 of the Income Tax Act which mandates the Respondent to charge income tax and Section 5 of the VATAct, 2013 which provides for the charge of Value Added Tax by the Respondent.

39. The Respondent further relied on Section 15 of the Income Tax Act, which provided for the deductions allowed and Section 5 of the VATAct, 2013 provides for the charge of Value Added Tax by the Respondent.

40. The Respondent relied on Section 24 of the Tax Procedures Act on submission of the tax return and Section 27 of the TPA that provides for a duly filed return and Section 27 of the Tax Procedures Act that provides for self-assessment.

41. The Respondent averred that burden of proof as per Section 56 of the Tax Procedure Act was on the Appellant and until the same is discharged, this Appeal should be dismissed.

42. The Respondent averred that the right of Appeal under the Tax Procedures Act is not absolute; it is conditional on the Appellant firstly lodging a valid appeal pursuant to Section 51(1) of the Tax Procedures Act (TPA). The Section reads: -“A taxpayer who wishes to dispute a tax decision shall first lodge an objection against that tax decision under this section before proceeding under any other written law.”

43. The Respondent submitted that a valid objection under Section 51(2) of the Tax Procedures Act, “states precisely the grounds of objection, and the reasons for amendments” and “All relevant documents relating to the objection have been submitted.”

44. The Respondent relied on the case of Transfix Limited v Commissioner Of Domestick Taxes: Misc. No. 178 of 2022 where this Tribunal noted in the absence of a valid objection by a taxpayer: -“…..there was no decision issued by the Commissioner that could possibly form a basis for an appeal before the Tribunal…..In the circumstances the Tribunal finds that there is no conceivable appeal with merit that could be possibly filed by the Applicant for appropriate determination by the Tribunal.”

45. The Respondent submitted that from the foregoing, the existence of a valid objection before the Respondent is sine qua non to an appeal before the Honourable tribunal.

46. The Respondent stated that the Appellant filed an invalid objection, failing to provide relevant documents in support of the objection. That the Appellant filed late objection application notices vide I-tax for Income tax to Company for the Years 2015 to 2019 on 18th October 2021 attaching a letter to explain their reason for objection.

47. The Respondent averred that the Appellant was allowed to file the objections out of time vide letter dated 15th December 2021 and advised of what constitutes a valid notice of objection as per provisions of Sec 51(3) of the TPA and also requested to provide the relevant supporting documents to enable the Respondent to review the matter.

48. The Respondent stated that at the time of the Appellant lodging its late objection, no evidence was provided in support of the objection.

49. The Respondent relied on the case of Holdwadag Construction Company Limited V Commissioner Of Investigations And Enforcement: In The Tax Appeals Tribunal Appeal No. 606 Of 2020, where this Tribunal extolled the immediacy test prescribed under Section 51(4) of the Tax Procedure Act. That the Tribunal noted the immediacy test does not prescribe a mandatory timeline/period, cast in stone in law.

50. The Respondent invited the Tribunal take notice that the Appellant responded and forwarded some documents vide emails on 22nd & 28th December 2021, 5th, 17th, 27th January 2022, 2nd and 21st February 2022 & 8th April 2022 but did not avail the relevant documentation & evidence in support of the explanations & reconciliations for the variances assessed to enable determination of the objection. Consequently, the Respondent issued an objection invalidation notice on 21st April 2022.

51. The Respondent reiterated that the Appellant having failed to validate its objection and, consequently, the Respondent invalidating the Appellant’s objection on 21st April 2022 divests the Tribunal of jurisdiction to entertain the subject Appeal. That in light of the foregoing, the Appeal before the Honourable Tribunal is irreparably incompetent.

52. The Respondent stated that, without prejudice to the foregoing, Section 23 of the Tax Procedures Act mandates the Appellant to maintain documents required under any tax law and to provide the same upon request by the Respondent. This is to ensure that the taxpayer’s tax liabilities can be readily ascertained.

53. The Respondent submitted that the Appellant failed to provide the relevant supporting documents to discharge the burden of proving the assessment as incorrect. That the requested relevant documents included the following:a.Audited financial statements & trial balances for years 2015 and 2020,b.detailed sales reconciliation for years 2015 and 2020 along with support evidencec.Confirmation of if & when the corresponding sales of the withholding certificates received in the 2015 were declared.

54. The Respondent averred that pursuant to Section 24(2) of the Tax Procedures Act 2015, the Respondent is not bound by a tax return or information provided by, or on behalf of, a taxpayer and may assess a taxpayer’s tax liability using any information available to him.

55. The Respondent relied on Kenya Revenue Authority v Man Diesel & Turbo Se, Kenya [2021] eKLR where the court opined as follows on the Appellant’s burdens and standard on proof in tax disputes;“the taxpayer in such cases generally possesses the objective evidence. Certainly, with the exception of filed returns and information provided by the taxpayer, the Revenue authority is in a poor position to establish an affirmative case…Placing the burden of proof in tax cases on the taxpayer reflects the unique nature of the tax system.”

56. The Respondent further relied on person v Belcher CH.M Inspector of A Taxes) Tax cases Volume 38 referred to by Justice D.S. Majanja in PZ Cussons East Africa Limited v Kenya Revenue Authority (2013) eKLR to the extent that: -“Where there is an assessment made by the Additional Commissioner upon the Appellant; it is perfectly settled by cases such as Norman v Galder 267C 293, that the onus is upon the Appellant to show that the Assessment made upon him in excessive and incorrect and of course he has completely failed to do. That is sufficient to dispose of the Appeal, which I accordingly dismiss with costs.” 57………the Appellant in the present appeal has manifestly failed to discharge such an onerous burden of proof placed squarely on it….”

57. The Respondent submitted that in the instant case, the Appellant had not tendered any evidence in support of its claim and has failed to provide relevant documentation to validate its objection application to the Respondent.

58. In conclusion, the Respondent submitted that the tax assessments were in accordance with the best judgement principle as espoused in Saima Khalid v the Commissioner for Her Majesty’s Revenue and Customs Appeal No. TC/2017/02292, to the effect“the commissioners are required to exercise their powers in such a way that they make a value judgement on the material which is before them…”

Respondent’s Prayers 59. The Respondent prays that this Honourable Tribunal:-a.Finds that this Appeal lacks merit and the same be dismissed with costsb.Upholds the Respondent’s decision dated 15th March 2022.

Issues For Determination 60. After perusing the pleadings and documentation produced before it, the Tribunal is of the view that the following are the main issues for determination:-a.Whether there is a valid Appeal before the Tribunalb.Whether the Respondent erred in invalidating the Appellant’s Objection.

Analysis And Findings 61. Having identified the issues that call for its determination, Tribunal proceeded to analyse them as hereunder.

a.Whether There Is A Valid Appeal Before The Tribunal 62. The Respondent averred that by invalidating the Appellant’s objection on 21st April 2022, the Tribunal’s jurisdiction to entertain the subject Appeal was divested.

63. The Respondent further averred that in light of the foregoing, the Appeal before the Honorable Tribunal is irreparably incompetent.

64. Section 3(1) of the TPA defines an appealable decision as follows: -“Appealable decision” means an objection decision and any other decision made under a tax law other than—(a)a tax decision; or(b)a decision made in the course of making a tax decision”

65. The Tribunal notes that the instant dispute relates to validity of an objection within the meaning of Section 51 (3) & (4) of the TPA (2021 Version) which falls under ambit of the Tribunal. The Section states 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.(4)Where the Commissioner has determined that a notice of objection lodged by a taxpayer has not been validly lodged, the Commissioner shall immediately notify the taxpayer in writing that the objection has not been validly lodged.”

66. As provided for above, an invalidation decision is an appealable decision within the jurisdiction of the Tribunal.

67. However, the Tribunal notes that the Appellant did not file a Notice of Appeal before it as required by Sections 12 and 13 of the Tax Appeals Tribunal Act.

68. Failure to file a Notice of Appeal in time contravenes the clear procedures set out in the TATAct for instituting an Appeal before the Tribunal. Sections 12 and 13 of the TATAct provide the procedure for appeal. The Sections state that: -“(12)Appeals to the TribunalA person who disputes the decision of the Commissioner on any matter arising under the provisions of any tax law may, subject to the provisions of the relevant tax law, upon giving notice in writing to the Commissioner, appeal to the Tribunal,Provided that such person shall before appealing, pay a non-refundable fee of twenty thousand shillings.”13. (1)A notice of appeal to the Tribunal shall—(a)be in writing or through electronic means;(b)be submitted to the Tribunal within thirty days upon receipt of the decision of the Commissioner.”

69. The Tribunal has held in many occasions that procedure must be adhered to as per the holding in W.E.C. Lines Ltd v The Commissioner of Domestic Taxes [TAT Case No.247 of 2020] where it was held at Paragraph 70 while reiterating the holding in Krystalline Salt Ltd vs KRA [2019] eKLR that:-“Where there is a clear procedure for redress of any particular grievance prescribed by the constitution or an Act of Parliament, that procedure should be strictly followed. Accordingly, the special procedure provided by any law must be strictly adhered to since there are good reasons for such special procedures. The relevant procedure here is the process of opposing an assessment by the Commissioner.”

70. It is the Notice of Appeal that invokes the Tribunal’s jurisdiction, without which the Tribunal has no jurisdiction to determine the dispute. The Tribunal is guided by the case of The Owners of the Motor Vessel “Lillian S” v Caltex Oil (Kenya) Ltd (1989) KLR (as reported in Peter Lai Muthoka v Standard Group [2017] eKLR) Nyarangi JA, held as follows with regard to jurisdiction:-“Jurisdiction is everything. Without it, a court has no power to make one more step. Where a court has no jurisdiction, there would be no basis for a continuation of proceedings pending other evidence. A court of law downs tools in respect of the matter before it the moment it holds the opinion that it is without jurisdiction.”

71. The Appeal is thus found to be defective for being in contravention of the law and hence the Tribunal lacks the requisite jurisdiction to hear and determine the same.

b. Whether The Respondent Erred In Invalidating The Appellant’s Objection 72. Having established that the Appeal herein is not properly filed and the same is therefore invalid, the Tribunal did not delve further into the other issue set out above as the same was rendered moot.

Final Decision 73. The upshot of the above is that this Appeal fails and the Tribunal accordingly makes the following final Orders:a.The Appeal be and is hereby struck out.b.Each party to bear its own costs.

74. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 8TH DAY OF DECEMBER, 2023GRACE MUKUHA................CHAIRPERSONGLORIA OGAGA.............................MEMBERDR. ERICK KOMOLO......................MEMBERJEPHTHAH NJAGI...........................MEMBERTIMOTHY VIKIRU..........................MEMBER