[2025] KETAT 37 (KLR)

Justec Communications Limited v Commissioner of Investigation and Enforcement (Tax Appeal E765 of 2024) [2025] KETAT 37 (KLR) (24 January 2025) (Judgment)

Neutral citation: [2025] KETAT 37 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E765 of 2024

RO Oluoch, Chair, G Ogaga & AK Kiprotich, Members

January 24, 2025

Between

Justec Communications Limited

Appellant

and

Commissioner of Investigation and Enforcement

Respondent

Judgment

Background 1. The Appellant is a limited liability company whose business is in general supplies.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, CAP 469 of Kenya’s Laws. Under Section 5 (1) of the Act, the Kenya Revenue Authority is an agency of the Government for the collection and receipt of all tax revenue. Further, under Section 5(2) of the Act with respect to the performance of its functions under subsection (1), the Authority is mandated to administer and enforce all provisions of the written laws as set out in Parts 1 and 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 tax investigations on the Appellant and issued a letter of findings through a letter dated 28th April 2022.

4. The Respondent further issued its tax assessment vide a letter dated 24th June 2022. The Appellant objected through email on 24th July 2022.

5. The Respondent through a letter dated 26th July 2022 informed the Appellant that the notice of objection dated 24th July 2022 did not meet the requirements of Section 51 of the Tax Procedures Act. The Appellant replied through an email on 27th July 2022.

6. There were further engagements between the parties through email and subsequently on 4th April 2024, the Respondent issued an agency notice to the Appellant’s bank.

7. The Appellant vide a letter dated 16th April 2024 and received by the Respondent on 17th April 2024 formally objected to the additional tax assessments.

8. Through a letter dated 24th April 2024 the Respondent informed the Appellant that the objection was out of time and advised it to apply for extension of time to object in accordance with the provisions of Section 51(6) of the Tax Procedures Act.

9. The Appellant vide a letter dated 16th April 2024 and received by the Respondent on 17th April 2024 stated that it was formally objecting to the additional tax assessments. The Appellant further objected online in Itax on 30th May 2024.

10. Subsequently, the Respondent rendered its objection decision on 14th June 2024.

11. Aggrieved by the Respondent’s decision, the Appellant filed its Notice of Appeal dated 26th June 2024.

The Appeal 12. The Appellant lodged the Memorandum of Appeal dated 9th July 2024 wherein it raised the following grounds of appeal:a.That the Commissioner erred and acted ultra vires the provision of Section 51 of the Tax Procedures Act, 2015 by issuing an objection decision six hundred and eighty seven (687) days from the date the objection was lodged by the taxpayer.b.The objection is deemed allowed under Section 51(II) of the Tax Procedure Act.c.That the objection decision is erroneous and based on assumptions as opposed to a true record of the Appellant's tax position.d.The Respondent erred in fact and in law by outrightly contravening the doctrine of legitimate expectation that rests the obligation on the Respondent to follow certain procedures in arriving at the tax liability and the benefits that accrue from it

Appellant’s Case 13. The Appellant’s Appeal is premised on the following documents filed before the Tribunal;a.Its Statement of Facts dated 9th July 2024 and filed on 12th July 2024 together with the documents attached thereto.b.Its written submissions dated 19th October 2024 and filed on 22nd October 2024.

14. The Appellant stated that vide a letter dated the 24th June 2022 sent via email, it received a notice of tax assessment of Ksh. 5,357,830. 10 and Ksh. 12,120,288. 96 being the alleged tax due for tax arrears in Income tax and VAT, respectively.

15. That vide email dated 24th July, 2022 the Appellant lodged its objection to the tax assessment and proceeded to pay the taxes not in dispute.

16. That on the 17th January 2024, the Respondent noted that an objection decision was reached in March 2023, which has to date not been communicated to the Appellant. That moreover, this purported decision was rendered out of time, as the 60-day period from the date of lodging the objection should have concluded on 24th October 2022.

17. It further stated that the Respondent noted that the objection was denied and that the amount was payable. That the Respondent on the 17th January, 2024 confirmed that the supporting documents were in support of its additional assessments raised and requested for a further review of the same.

18. That on the 4th April 2024 the Appellant was notified that Respondent had issued agency notices to all the Appellant's commercial banks requiring them to pay tax arrears totaling to a sum of Ksh. 24,900,063. 00

19. That disturbed by this outrageous move, the Appellant, on 16th April 2024, formally wrote to the Respondent, stating that it had previously submitted the objection to the assessment both via email and in person in Nyeri and paid all taxes not in dispute, thus had been awaiting a decision on the objection since 2022 up to no avail.

20. That further to a telephone conversation on the 27th May 2024 the Respondent sought further supporting documents in support of the objection and the grounds of objection.

21. The Appellant stated that these concerns raised an alarm to the Respondent and prompted it to issue an objection decision dated 14th June 2024, six hundred and eighty seven (687) days after an objection was raised by the Appellant, significantly exceeding the 60 day statutory period.

22. The Appellant asserted that the Respondent had no legal basis to proceed as it did as the decision had ceased to exist by operation of law and thus was barred from demanding taxes from the Appellant.

23. That the Respondent had no discretion to either extend time to entertain the matter further, as discretion follows the law and the Respondent could not purport to exercise discretion in clear breach of the law. It added that the objection had by dint of the law been deemed allowed.

24. The Appellant submitted that it had legitimate expectation that tax issues should be handled fairly and the Respondent failed to meet this expectation.

Appellant’s Prayers 25. The Appellant prayed that:a.The Appellant's objection stood allowed as a matter of law the moment the Commissioner Investigations and Enforcement failed to render the decision within 60 days statutory limit.b.The Respondent objection decision dated 14th June 2024 for taxes amounting to Ksh. 784,447. 08 as income tax and Ksh. 11,500,067. 25 as VAT is invalid and should be struck out entirely.c.The Respondent's action to demand additional taxes despites being presented with logical and cogent explanations be declared arbitrary, unreasonable, unfair and contrary to the administration of justice and legitimate expectation of the Appellant.d.The Respondent, its employees, agents/other persons purporting to act on behalf be barred and estopped from demanding or taking any further steps towards enforcement or recovery of the principle tax, penalties and interest on the Respondent's demand as stipulated above.e.The Tribunal awards the costs of this Appeal.f.The Tribunal awards any other remedies it deems just and reasonable.

Respondent’s Case 26. In response to the Appeal, the Respondent filed its Statement of Facts dated 22nd August 2024 and filed on 14th August 2024 together with Written Submissions dated 23rd October, 2024 and filed on 25th October 2024.

27. The Respondent stated that it issued the Appellant with an assessment notice vide a letter dated 24th July 2022 for the period 2016 to 2022. That the Appellant objected to the raised assessments via email on 24th July 2022.

28. The Respondent added that it issued an invalidation notice on 26th July 2022, informing the Appellant that its application did not comply with the validity parameters under Section 51(3) of the Tax Procedures Act

29. That the Appellant on 19th August 2022, being over 21 days beyond the allowable window to object, made an attempt to validate its invalid objection.

30. That subsequently, the Respondent, in 2024 sought to enforce the taxes in arrears prompting the Appellant lodging an objection on 16th April 2024 followed by iTax objection applications on 30th May 2024.

31. That on 24th April 2024, the Respondent informed the Appellant that its objection was invalid.

32. That on 14th June 2024, the Respondent issued an objection decision, the Appellant having validated its objection on 16th April 2024.

33. The Respondent denied that it issued its objection decision outside the allowable statutory window adding that the Appellant lodged an invalid objection on 24th July 2022. That thereafter, in compliance with the immediacy principle the Respondent issued a notice of invalidation on 26th July 2022.

34. The Respondent stated that the Appellant failed to provide the necessary documentation it relied upon and further stated that Section 51(3) of the Tax Procedures Act provides as follows:“(1)A notice of objection shall be treated as validly lodged by a Appellant under subsection (2) if-(c)all the relevant documents relating to the objection have been submitted.”

35. The Respondent submitted that it sought to enforce the tax in arrears in 2024 when the Appellant lodged another invalid objection dated 16th April 2024 on 24th April 2024.

36. That the Appellant on 26th April 2024 validated its objection thereafter, and the Respondent issued an objection decision on 14th June 2024.

37. The Respondent averred that whereas Section 24(2) of the Tax Procedures Act, 2015 allows a taxpayer to submit tax returns in the approved form and manner prescribed by the Respondent, it is not bound by the information provided therein and can assess for additional taxes based on any other available information.

38. That further, Section 31 (1) of the Tax Procedures Act provides that:-“Subject to this section, the Commissioner may amend an assessment(referred to in this section as the "original assessment") by making alterations or additions, from the available formation and to the best of the Commissioner's judgement, to the original assessment of a taxpayer for a reporting period to ensure.”

39. The Respondent explained that the Appellant was investigated for the period 2016 to 2022 and noticed inconsistencies with the Appellant's tax affairs.

40. That analysis of the Appellant's self-assessment returns for Income tax and VAT established declaration of income as per table below:Year Turnover(VAT3) Turnover (IT2C)

2016 0 O

2017 4,747,811 3,884,189

2018 2,392,417 2,980,250

2019 395,209 4,310,960

2020 1,098,072. 18 1,269,852

2021 2,313,766 N/A

2022 0 N/A

Total 10,941,276. 08 12,444,981

41. The Respondent averred that it established that the Appellant was operating bank accounts at Equity Bank Account No 0820293113838 and Absa Bank Account No. 2043465042.

42. That the bank statements were obtained and upon analysis, the Respondent established total deposits as shown in the table below:Year Equity bank Absa bank Total Deposit

2016 10,200,434. 20 0 10,200,434. 20

2017 6,854,568. 15 0 6,854,568. 15

2018 2,739,888. 80 0 2,739,888. 80

2019 1,101,501. 05 0 1,101,501. 05

2020 8,614,835. 88 1,631,000 10,245,835. 88

2021 6,631,656. 60 25,679,371 32,311,027. 60

2022 34,645,091. 40 10,377,890 45,022,981. 40

Total 70,787,976. 08 37,688,261 108,476,237. 08

43. That further the Respondent obtained IFMIS data and upon analysis, established payments to the Appellant. It averred that the net taxable income was established from the analysis of bank accounts compared to the turnover declared by the company in the Income tax returns.

44. That the established variance was treated as undeclared income and brought to charge as shown in the table below;Year Established Declared Variance Tax

2016 9,147,558. 79 0 9,147,558. 79 2,744,267. 64

2017 7,138,926. 06 3,884,189 3,254,737. 06 976,421. 12

2020 8,780,798. 37 1,269,582 7,511,216. 37 1,877,804. 09

Total 25,067,283. 22 5,153,771 19,913,512. 22 5,598,492. 85

45. It submitted that the net taxable income established using banking method was also compared to the turnover declared by the Appellant in the VAT returns. That the variance was charged VAT at the applicable VAT rates as shown in table below:Year Net Income Declared sales Variance VAT Payable

2016 9,147,558. 79 0 9,147,558. 79 1,463,609. 41

2017 7,138,926. 06 4,741,811. 00 2,397,115. 06 383,538. 41

2018 2,659,808. 02 2,392,417. 00 267,391. 02 42,782. 56

2019 1,612,824. 97 395,209. 90 1,217,615. 07 194,818. 41

2020 8,780,798. 37 1,098,072. 18 7,682,726. 19 1,075,581. 67

2021 28,112,261. 97 2,313,766. 00 25,798,495. 97 4,127,759. 35

2022 39,348,803. 45 0 39,348,803. 45 6,295,808. 55

Total 96,800,981. 62 10,941,276. 08 85,859,705. 54 13,583,898. 36

46. That at the end of the investigation, principal taxes amounting to Ksh. 19,182,391. 21 was established as summarized in the table below:Description Principal Tax

VAT 13,583,898. 36

Income tax 5,598,492. 85

Total 19,182,391. 21

47. The Respondent contended that its review team analysed the two bank statements from Equity bank and ABSA bank and observed that most payments were from County Government of Kirinyaga and several government institutions to wit; KPLC, Rural Electrification program, Ngucui Secondary School, Deliverance Church Umoja, Mwea National Government CDF, Kenya Tourism Board among others.

48. That the Respondent's analysis of the two sets of bank accounts established total non-income deposits amounting to Kshs 14,716,020. 00 comprising of Chama loans, loans from Komrades Investments Limited, reversals, inter-bank transfers and director deposits.

49. That however, the Appellant failed to justify why cash deposits and funds transfers from third parties into the company's bank accounts were non-income deposits and not business income.

50. That having established these reconciliations, the review team revised expected income as shown in the table below:2016 2017 2018 2019 2020 2021 2022 TOTAL

Equity bank (0820293113838) 10,200,434 6,854,568 2,739,889 1,101,501 8,614,836 6,631,6567 34,645,091 70,787,976

Absa bank 。 0 0 0 1,631,000 25,679,371 10,377,890 37,688,261

Total Income**** 10,200,43**** 6,854,568**** 2,739,889**** 1,101,501**** 10,245,836**** 32,311,027**** 45,022,981**** 108,476,237****

51. That when computing income tax, the review team observed that the investigating team subjected the entire variance to tax without allowing for costs or using GPR to ensure that only profits are taxed.

52. The Respondent stated that in view of this, Gross Profit Margin for three (3) companies in the same economic sector of general supplies industry was computed for computation of the taxes payable. Using the established expected income and the GPR of 17%, income tax was revised. That similarly, using the established expected income, VAT was revised.

53. That from the foregoing findings, the review team established principal taxes as per the table below:2016 2017 2018 2019 2020 2021 2022 TOTAL

Income Tax 380,367. 15 152,230. 38

251,849. 54 - - 784,447.

VAT 1,193,308. 72 340,366. 00 38,092. 91 194,818. 41 853,633. 39 4,018,291. 77 4,861,556. 06 11,500,067. 25

Total 1,573,675. 87 492,596. 38 38,092. 91 194,818. 41 1,105,482. 93 4,018,291. 77 4,861,556. 06 12,284,514

54. The Respondent stated that the Appellant failed in discharging its burden of proof contrary to Section 56(1) of the Tax Procedure Act which provides that:“In any proceedings under this Part, the burden shall be on the Appellant to prove that a tax decision is incorrect.”

55. That the burden of proof is always on the Appellant and until the same is discharged to the satisfaction of the Commissioner, this Appeal should be dismissed.

Respondent’s prayers 56. The Respondent prayed that the Tribunal:a.Upholds the Respondent's Confirmation of Assessment dated 14th June 2024 as proper and in conformity with the provisions of the Lawb.The Appeal be dismissed with costs to the Respondent.

Issues for Determination 57. Having examined the pleadings of the parties together with the documentary evidence thereon, and written submissions, the Tribunal determined that the issues for its determination are as follows:a.Whether the Appellant’s objection was allowed by operation of the law.b.Whether the Respondent’s decision dated 14th June 2024 was proper in law.

Analysis and Findings 58. Having identified the issues falling for its determination, the Tribunal shall proceed to analyse each separately as hereunder.

a. Whether the Appellant’s objection was allowed by operation of the law. 59. It was the Appellant’s contention that through an email dated 24th July 2022 the Appellant lodged its objection to the tax assessment and proceeded to pay the taxes not in dispute.

60. That on the 17th January 2024, the Appellant noted that an objection decision was reached in March 2023, which had to date not been communicated to the Appellant. That moreover, this purported decision was rendered out of time, as the 60-day period from the date of lodging the objection should have concluded on 24th October 2022.

61. The Respondent on the other hand submitted that that it issued the Appellant with an assessment notice vide a letter dated 24th July 2022 for the period 2016 to 2022. That the Appellant objected to the raised assessments via email on 24th July 2022.

62. The Respondent added that it issued an invalidation notice on 26th July 2022, informing the Appellant that its application did not comply with the validity parameters under Section 51(3) of the Tax Procedures Act

63. That the Appellant on 19th August 2022, being over 21 days beyond the allowable window to object, made an attempt to validate its invalid objection.

64. That subsequently, the Respondent, in 2024 sought to enforce the taxes in arrears prompting the Appellant to lodge an objection on 16th April 2024 followed by iTax objection applications on 30th May 2024.

65. That on 24th April 2024, the Respondent informed the Appellant that its objection was invalid. That on 14th June 2024, the Respondent issued an objection decision, the Appellant having validated its objection on 16th April 2024.

66. The Tribunal gleaned through the documents presented by the parties and noted that the Respondent issued the assessments on 24th June 2022. The Appellant replied through an email rejecting the assessments on 24th July 2022. The Respondent through a letter dated 26th July 2022 informed the Appellant that the objection was not valid.

67. Section 51(11) of the Tax Procedures Act provides as follows regarding:-“The Commissioner shall make the objection decision within sixty days from the date of receipt of a valid notice of objection failure to which the objection shall be deemed to be allowed.”

68. In the instant case, the Appellant’s email of 24th July 2022 rejecting the assessments was invalidated by the Respondent through a letter dated 26th July 2022 in accordance with Section 51(4) of the Tax Procedures Act which provide as follows;“Where the Commissioner has determined that a notice of objection lodged by a taxpayer has not been validly lodged, the Commissioner shall within a period of fourteen days notify the taxpayer in writing that the objection has not been validly lodged.”

69. It follows from the above that the Appellant had no valid objection at that time which would have allowed the 60 days to run in accordance with Section 51(11) of the Tax Procedures Act.

70. Accordingly, the Tribunal finds and holds that the Appellant’s objection was not allowed by operation of the law.

b. Whether the Respondent’s decision dated 14th June 2024 was proper in law. 71. The Respondent issued the objection decision on 24th June 2024 following several engagement with the Appellant including validation of the Appellant’s objection.

72. The Respondent submitted that it sought to enforce the tax in arrears in 2024 when the Appellant lodged another invalid objection dated 16th April 2024 on 24th April 2024.

73. That the Appellant on 26th April 2024 validated its objection thereafter, and the Respondent issued an objection decision on 14th June 2024.

74. The Respondent averred that whereas Section 24(2) of the Tax Procedures Act, 2015 allows a taxpayer to submit tax returns in the approved form and manner prescribed by the Respondent, the Respondent is not bound by the information provided therein and can assess for additional taxes based on any other available information.

75. The Tribunal notes the following key correspondences leading to the Objection decision:-i.On 4th April 2024 the Respondent issued agency notices to the Appellant’s banks.ii.The Appellant vide a letter dated 16th April 2024 and received by the Respondent on 17th April 2024 stated that it was formally objecting to the additional tax assessments.iii.The Appellant further objected online in Itax on 30th May 2024. iv.Through a letter titled ‘OBJECTION REVIEW’ dated 24th April 2024 the Respondent informed the Appellant that the objection was out of time and advised it to apply for extension of time to object in accordance with the provisions of Section 51(6) of the Tax Procedures Act.v.The Appellant made application for extension of time to object through a letter dated 25th April 2024. vi.The Respondent rendered its Objection decision on 14th June 2024.

76. The Tribunal further notes that although the parties did not provide any correspondences subsequent to the Respondent’s letter of 24th April 2024, the Respondent submitted that Appellant on 25th April 2024 the Appellant validated its objection, and then it subsequently issued an objection decision on 14th June 2024.

77. The Respondent in its objection decision states in part as follows;“…2. 0Objection Review Process…2. 3You made your application for extension of time to lodge an objection vide your letter dated 25th April 2024. 2.4Your application was reviewed and found to have merit and the same was approved thereby validating your objection on the same date…3. 0Statement of findings3. 1Upon review of the grounds of objection and documentation provided by yourselves, the Commissioner has arrived at the following findings:3. 2Income Determination3. 3Failure by the Commissioner to make adjustments for non-income deposits like loans and transfers3. 3.1You contended that the Commissioner failed to consider loans given to the company and funds transfers from related accounts when issuing additional assessments instead, treated both loans and transfers as income.3. 3.2To support your argument, you provided a schedule of non-income transactions for Equity bank and ABSA bank, audited financial statements, loan agreements and Chama constitution.3. 3.2You stated that the company deals in general supplies based on tender given and mostly supplies County Governments and government institutions.3. According to your reconciliations, total non-income deposits were Kes. 28,872,276. 70 and Kes.8,868,379. 50 for ABSA and Equity banks respectively constituting loans, funds transfers, inter-bank transfers, loan recoveries and cash deposits.3. 3.2You however did not justify why certain transactions like cash deposits and funds transfers from third parties into the company's bank accounts were non-income deposits and not business income.3. 3.2The Commissioner upon review of the two sets of bank accounts established total non-income deposits amounting to Kshs. 14,716,020 comprising of Chama loans, loans from Komrades Investments Limited, reversals, inter-bank transfers and director deposits.3. 3.2The loans whose loan agreements were provided were the only ones allowed by the Commissioner. The loan recoveries from several individuals included in your reconciliation have not been adjusted since no loan agreement between the company and the individuals was provided.3. 3.2Please note that the loans that were issued in 2015 have not been adjusted from bankings since the same was outside the investigation period.…”

78. From the above cited Objection decision it was clear to the Tribunal that the Respondent had considered the Appellant’s issues raised in the objection application prior to rendering the Objection decision. The Appellant on the other hand has not advanced any arguments in its pleadings to contest the issues raised by the Respondent in the Objection decision.

79. The Tribunal observes that the Appellant in its pleadings only relied on timelines of the Objection decision and failed to address the issues raised by the Respondent therein. A perusal of the documents attached by the Appellant, the Tribunal noted that it had attached several documents. However, in its pleadings its does not explain their nexus with the Appeal and further did not state which among them were provided to the Respondent at the objection stage and the Respondent failed to consider.

80. By law, the burden was on the Appellant to show or prove that the Respondent has fallen into error in the course of processing or issuing this objection decision. This evidence was not provided as was required of the Appellant under Sections 56 of the TPA and Section 30 of the TAT Act.

81. Section 56(1) of the TPA provides that:“in any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”

82. Section 30 of TAT Act provides thus regarding the burden of proof in tax matters:-“In a proceeding before the Tribunal, the appellant has the burden of proving –(a)where an appeal relates to an assessment, that the assessment is excessive; or(b)in any other case, that the tax decision should not have been made or should have been made differently.”

83. The fact that the burden of proof remains on the taxpayer was discussed in Singapore Motors Limited v Commissioner of Domestic Taxes (Income Tax Appeal E039 of 2021) [2024] KEHC 2443 (KLR), where the High Court held as follows:-“This Court has remained emphatic that under section 30 of the Tax Appeals Tribunal Act (TATA) and section 56 of the Tax Procedures Act (TPA), the burden of proving that an assessment is wrong or excessive remains upon the taxpayer.”

84. In the circumstances, the Appellant’s failure to challenge the Respondent’s objection decision meant that it failed to prove its case. The Respondent’s assessments which often assume a presumption of correctness unless proved otherwise by the Appellant stood proved. The Respondent did not therefore fall into error when it rendered its objection decision.

85. Accordingly, the Tribunal finds and hold that the Respondent’s Objection decision dated 24th June 2024 was proper in law.

Final Decision 86. The upshot of the foregoing analysis is that the Appeal lacks merit and the Tribunal accordingly proceeds to make the following Orders;a.The Appeal be and is hereby dismissed.b.The Respondent’s decision dated 24th June 2024 be and is hereby upheld.c.Each party to bear its own cost.

87. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 24TH DAY OF JANUARY, 2025. DR. RODNEY O. OLUOCH - CHAIRPERSONGLORIA A. OGAGA - MEMBERABRAHAM K. KIPROTICH - MEMBER