[2023] KETAT 265 (KLR)

Kaara v Commissioner of Domestic Taxes (Appeal 393 of 2022) [2023] KETAT 265 (KLR) (Civ) (26 May 2023) (Judgment)

Neutral citation: [2023] KETAT 265 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Civil

Appeal 393 of 2022

RM Mutuma, Chair, EN Njeru, RO Oluoch, D.K Ngala & EK Cheluget, Members

May 26, 2023

Between

Anastacia Wariara Kaara

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The appellant is a Kenyan citizen and a sole trader who owns a commercial property in Nairobi.

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, 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 function under subsection (1), the respondent is mandate to administer and enforce all provisions of the written laws as set out in part 1 and 2 of the first schedule to the Act for purposes of assessing, collecting and accounting for all revenue in accordance with those laws.

3. The respondent conducted a compliance check on the appellant’s tax affairs andvide a letter dated January 12, 2022 issued a demand for additional assessment for Kshs 11,587,696. 00 and Kshs 3,833,254. 00 being Income Tax and Value Added Tax, respectively.

4. Vide a letter dated February 11, 2022 the appellant objected to the additional assessment.

5. The respondent then proceeded to issue an invalidation notice vide its letter dated March 15, 2022.

6. Being aggrieved by the respondent’s decision; the appellant filed her notice of appeal dated April 14, 2022 and filed on even date, together with the memorandum of appeal and statement of facts also on the even date.

The Appeal 7. The appeal is premised on the following grounds:a.That the appellant disagrees with disallowing of the figures of 2016-Kshs 5,677,260. 00; 2017 – Kshs 5,677,260. 00; 2018 – Kshs 5,437,260. 00; 2019 – Kshs 13,059,315. 00 and 2020 – Kshs 10,956,253. 00. This would mean the appellant never incurred any expense to support its operation, and would therefore like to have expenses allowed under section 11 (4).b.That there was an error on the declaration of Kshs 18,333,960. 00 as income for the year 2019, and Kshs 17,035,220. 00 for the year 2020 were declared erroneously. The appellant would like to have the correct figures of Kshs 8,582,452. 00 and Kshs 8,870,251. 00 of 2019 and 2020 respectively.c.That the appellant would wish to oppose the entire assessment since the withholding tax has not been deducted for the whole account.

8. The appellant prays that the tribunal sets aside and annul the assessment by the respondent and the respondent to pay the cost of the appeal.

Respondent’s Case 9. In its statement of facts dated May 12, 2022 and filed on even date, the respondent has addressed the appellant’s grounds of appeal and averred that:-a.That section 31 of the Tax Procedures Act (TPA), 2015 allows the commissioner to amend an original assessment and she may further amend an original assessment from the available information and to the best of the commissioner’s judgement.b.That it observed between sales per withholding VAT and sales declared in the Income tax returns, and also variances were assessed from income tax and VAT, respectively.c.That it disallowed certain expenses claimed by the taxpayer income tax returns on the premise that they were not supported. It then requested the taxpayer to provide reconciliations for the variances observed and support for the expenses claimed. The appellant failed to provide the information required on time and the respondent issued the additional assessments.d.That the appellant lodged a partial objection against part of the assessment of Kshs 10,938,182. 00 for Income tax on February 11, 2022 contrary to section 51(3) of the Tax Procedures Act (TPA).e.That during the review of the objection, the objection was noted to be invalid as the tax not in dispute was not paid or payment plan given and the relevant documents were not submitted to the respondent.f.That the appellant was notified of the above deficiency but she failed to validate the objection hence the respondent’s issuance of the invalidation on March 15, 2022.

10. Reasons wherefore the respondent prays that;a.The respondent’s assessment issued on January 19, 2022 and invalidation notice dated March 15, 2022 be upheld.b.The appeal be dismissed with costs.

Submissions Of The Parties 11. The tribunal has observed that the appellant failed to file its written submissions, in the circumstances the tribunal will only consider the respondent’s written submissions dated December 19, 2022 and filed on even date.

12. The respondent had raised one issue for determination.Whether the respondent erred in invalidating the appellant’s objection and consequently upholding the amended assessment.

13. The respondent submitted that in exercising its mandate under section 31 of TPA, it issued additional assessment against the appellant to ensure that the appellant’s returns reflected the true tax position. Further that upon receipt of the additional assessment, the burden of proof shifted to the appellant to disprove the respondent’s position as provided for under section 56(1) of theTPA.

14. In shifting the burden of proof to the appellant, the respondent relied on the case of Grace Njeri Githua v Commissioner of Investigations and Enforcement (TAT No 102 of 2018) where the tribunal stated as thus;“In this appeal, the appellant has not provided the tribunal with enough evidence to show that the net income the respondent has based the tax assessment was not income or is subject to further cost deduction in arriving at a net profit. It is trite that the burden of proof is on the taxpayer to show that the tax so assessed is not due from her.”

15. The respondent also made reference to the case ofMulherin v Commissioner of Taxation (2013) FCAFC 115, where the Federal Court of Australia held that in tax disputes, the taxpayer must satisfy the burden of proof to successfully challenge income tax assessments by proving that the assessment was excessive by adducing positive evidence which demonstrates the taxable income on which tax ought to have been levied.

16. The respondent submitted that the appellant did not align her objection with the guidelines of section 51 (3) of the TPA in that the appellant did not pay the undisputed sum within the assessment and did not provide relevant documents relating to the objection. Due to this failure on the appellant’s part, the grounds of objection remained mere averments by the appellant without basis.

17. The respondent submitted further that there was communication between itself and the appellant where the respondent sought documents from the appellant to validate the objection, however, the appellant was not compliant and as such the respondent was forced to invalidate the objection.

18. To buttress its argument further, the respondent relied on the following cases: -a.TAT No 55 of 2019 Boleyn International Limited v Commissioner of Domestic Taxes; andb.TAT No of 2017 Afya X-ray Centre Limited v Commissioner of Domestic Taxes.

19. The respondent concluded its submissions by asserting that having established that no error was made in the invalidation of the appellant’s objection and in light of the appellant’s failure to prove the respondent had erred in their assessment, the invalidation decision and the assessment were therefore both right in law.

Issues For Determination 20. Having considered the pleadings and submissions of the parties and documentation availed, the tribunal is of the considered view that this appeal raises three issues for determination.a.Whether the respondent erred in issuing the invalidation notice dated March 15, 2022. b.Whether the appeal is properly before the tribunal.c.Whether the respondent’s additional assessment is justified.

Analysis And Finding 21. Having determined the three issues, the tribunal will proceed to analyse them as herein under.

Whether the respondent erred in issuing the invalidation notice dated March 15, 2022 22. The respondent had submitted that the reason of the invalidation of the appellant’s objection was due to the appellants failure to submit all relevant documents and/or pay the tax not in dispute. The respondent relied on section 31(4) of TPA to justify its demand for additional assessment and section 51(3) to justify the fact that the appellant never availed documents in support of her objection and that she also failed to pay the tax not in dispute.

23. The tribunal relies on section 51 (1) (2) (4) with regards to timelines to be observed in the objection process. The said section provides;“(1)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.(2)A taxpayer who disputes a tax decision may lodge a notice of objection, in writing, with the commissioner within thirty days of being notified of the decision.(4)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”

24. The tribunal notes that the respondent issued the demand for additional assessment on January 12, 2022 where upon the appellant issued its notice of objection on February 11, 2022, within the thirty day statutory timelines. The respondent’s invalidation notice was however issued on March 15, 2022. The respondent submitted that there had been communication between itself and the appellant where it sought documents from the appellant to validate the objection. However, the tribunal was not availed the evidence of the communication to corroborate the respondent’s assertion.

25. Section 51 (4) of TPA is couched in mandatory terms in that the respondent had fourteen days within which to invalidate the appellant’s objection for acting contrary to the provision of the said section 51. The tribunal has taken note that the period between the appellant’s objection on February 11, 2022 and the respondent’s invalidation notice on March 15, 2022 is about 33 (thirty three) days. The respondent ought to have invalidated the appellant’s objection by February 25, 2022. The respondent’s notice of invalidation was therefore 18 (eighteen) days in excess of the statutory timelines.

26. In the absence of proof of communication between the parties in the intervening period, the tribunal will treat the respondent’s assertion as such, mere allegations.

27. The Tribunal relies on the position held in the case of Equity Group Holdings Limited v Commissioner of Domestic Taxes (civil appeal E069 & E025 of 2020) KEHC 25 eKLR (Commercial and Tax (23 August 2021) where the court held that:-“The word shall, when used in a statutory provision imported a form of command or mandate. It was not permissive, it was mandatory. The word shall in its ordinary meaning was a word of command which was normally given a compulsory meaning as it was intended to denote obligation. Shall was used to express a command or exhortation or what was legally mandatory”.

28. In view of the foregoing, the tribunal finds that the respondent erred in issuing its notice of invalidation dated March 15, 2022 as the same was issued out of time, therefore the appellant’s notice of objection is deemed to have been allowed by operation of the law.

29. Having established that the respondent’s notice of invalidation was defective, the tribunal will not proceed with the other issues as the same have been rendered moot.

Final Decision 30. The upshot of the above is that the appeal is meritorious and therefore succeeds. The tribunal accordingly proceeds to issue the following final orders:a.The appeal be and is hereby allowed.b.The respondent’s invalidation notice dated March 15, 2022 be and is hereby set aside.c.Each party to bear its own costs.

31. It is so ordered.

DATED AND DELIVERED AT NAIROBI ON THIS 26TH DAY OF MAY, 2023ROBERT M. MUTUMACHAIRPERSONELISHAH N. NJERU RODNEY O. OLUOCHMEMBER MEMBERDELILAH K. NGALA EDWIN K. CHELUGETMEMBER MEMBER