[2023] KETAT 296 (KLR)

Kaitheri Housing Co-operative Society Limited v Commissioner of Domestic Taxes (Appeal 807 of 2022) [2023] KETAT 296 (KLR) (Civ) (26 May 2023) (Judgment)

Neutral citation: [2023] KETAT 296 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Civil

Appeal 807 of 2022

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

May 26, 2023

Between

Kaitheri Housing Co-Operative Society Limited

Appellant

and

Commissioner Of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a registered Co-operative Society with farmers as its members.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, 1995. 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 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 Respondent raised additional Monthly Rent Income (MRI) and Income tax assessment videa demand notice dated 29th March 2022 and 5th May 2022 bringing to charge rental income of Kshs 1,680,551/= for the years 2018,2019 and 2020.

4. The Appellant lodged a notice of objection on the 4th June 2022.

5. The Respondent rejected the said objection for lateness and also rejected the Appellant’s request to file the said Objection out of time and thereafter proceeded to demand for the assessed tax on the 23rd June 2022.

6. The Appellant was aggrieved with this decision and it filed a Memorandum of Appeal before the Tribunal on the 2nd August 2022.

The Appeal 7. The Appellant Appeal was premised on the following grounds:a.That the Respondent erred in law and fact by failing to appreciate that the Appellant is registered under Section 4 of the Co-operative Society Act Cap 490 of the laws of Kenya and therefore should be taxed under the provisions of Section 19(i) of the Income Tax Act which provides that taxation should be at the rate of 30% of taxable profits for the years of income.b.That the Respondent erred in law and fact by demanding additional assessment of Kshs127,226/- which is not based on the registered audited financial statement of the society.c.That the Respondent erred in law and fact by demanding additional monthly rental income of Kshs1,053,263/- which is a double taxation since the Appellant is being already assessed under the income tax obligation and further the society is not registered for tax obligation under MRI.d.That the Respondent erred in law and fact by demanding PAYE of Kshs. 491,220/- from the committee members who are not directors as per the Income Tax Act Cap 470 of the laws of Kenya and further the amount the committee members received was way below the minimum taxable threshold provided by the Income Tax Act.e.That the Respondent erred in law and in fact by demanding Kshs, 41,529/- withholding tax on dividends when the shareholders had not collected the dividends as provided by the law.

Appelant’s Case 8. The Appellant stated as follows in its Statement of Facts filed on the 2nd August 2022 and Written Submissions filed on 28th November 2022, that:a.The Respondent erred by demanding for PAYEof Kshs491,220/= from the Committee Members who are not Directors as per the Income Tax Act and further the amount the Committee received was way below the minimum taxable threshold provided by the Income Tax Act. That besides, the Kshs. 2,500/= per member per meeting is transport reimbursement for attending a meeting, it does not therefore qualify to be subjected to PAYE.b.The Respondent erred by demanding for additional monthly rental income of Kshs1,053,263/= which is a double taxation since the Appellant had already been assessed under the income tax obligations and further the Society is not registered for tax obligations under MRI.c.The Respondent confirmed the assessment without due regard to all records/documents, explanations and information that it had provided. In its view this action was unfair, irrational, malicious, capricious and against the principles of fair administrative action as contained in Article 47 of the Kenyan Constitution 2010.

9. The Appellant submitted that the Respondent erred in law and fact by failing to appreciate that the Appellant is registered under Section 4 of the Co-operative Society Act, Cap 490 of the laws of Kenya and therefore should be taxed under the provisions of Section 19A (i) of the Income Tax Act Cap 470 of the laws of Kenya which provides the taxation should be at the rate of 30% of taxable profits for the year of income.

10. It was also its position that the additional assessment of Kshs. 127,000/- was not based on its audited Financial Statements, it was instead based on an act of speculation by the Respondent.

11. It affirmed that it had paid tax since 1994 and there has never been any problem with the Respondent.

12. The Appellant asserted that under Section 5(2) (b) of the Income Tax Act, value that is less than Kshs36,000/= when granted in respect of employment or services ought to be excluded in the calculation of gains or profits.

13. The Appellant also stated that the Respondent erred in demanding Kshs. 41,529/- as a withholding tax on dividends when the shareholders had not collected the dividends as provided by the law. It affirmed that it had not declared dividends in the financial year 2018, 2019 and 2020.

Appellant’s Prayer 14. Based on the above, the Appellant’s prayer was for orders that:a.The Tribunal do allow the Appeal.b.Annul tax demand notice and uphold the Appellant’s notice of objection.c.Awards costs of this Appeal to the Appellant.

The Respondent’s Case 15. The Respondent has responded to the Appellant’s Appeal through its Statement of Facts filed on 1st September 2022 and Written Submissions filed on 22nd November 2022.

16. The Respondent submits that the Appellant filed a late notice of objection on 4th June 2022 despite the fact that it issued its tax assessments on 29th March 2022 contrary to Section 51(2) of the Tax Procedures Act (TPA).

17. The Respondent further submits that the Appellant did not provide it with any evidence that would have allowed an acceptance of late objection under Section 51(7) of the TPA. It relied on the case of Isaac Kipruto Sawe v Commissioner of Domestic Taxes (sic) to support its assertion. It was thus forced to decline the request for late objection.

18. It was also its case that it was the duty of the Appellant to keep records to support its assertion as is provided under 54(1) of the TPA.

19. The Respondent posited that the Appellant has the burden of proof in this Appeal, and it has not dislodged that burden as envisaged under Section 56(1) of the TPA.

20. The Respondent averred that the Appellant was uncooperative in the provision of relevant records and failed to respond to requests of documents. Consequently, the assessment was made based on available information and the best judgment of the Respondent as is provided under Section 59(1) of the TPA.

21. The Respondent posited that it only brought to charge the income that had not been declared by the Appellant.

Issues for Determination 22. The Tribunal having carefully considered the parties’ pleadings, documentation and Submissions notes that the issues that call for its determination are the following:a.Whether the Appellant’s Appeal is valid.b.Whether the Respondent’s Additional Assessment is valid.

Analysis and Determination a. Whether the Appellant’s Appeal is valid. 23. Section 51(2) of the TPAprovides as follows in regards to filing of objections against the decision of the Commissioner:“A taxpayer who disputes a tax decision may lodge a notice of objection to the decision, in writing, with the Commissioner within thirty days of being notified of the decision.”

24. In this Appeal, the demand notice was issued on the 29th March 2022 with a reminder issued on the 5th of May 2022. The Appellant, therefore, ought to have filed its Objection with the Respondent on or before the 28th of April 2022. The Appellant, instead filed its objection on the 4th June 2022, meaning that the said objection was late by about 36 days.

25. It thus follows, that the only remedy that was available to the Appellant in the circumstances was to seek the Commissioner’s leave to file its Objection out of time pursuant to Section 51(7) of the TPA.

26. The Tribunal has gleaned through the Appellant’s record of Appeal and it has not been able to see an application that falls under or meets the thresholds set out in Section 51(7) of the TPAwhich states as follows:“The Commissioner shall consider and may allow an application under subsection (6) if—(a)the taxpayer was prevented from lodging the notice of objection within the period specified in subsection (2) because of an absence from Kenya, sickness or other reasonable cause; and(b)the taxpayer did not unreasonably delay in lodging the notice of objection.”

27. The effect of the Appellant’s failure to invoke and apply Section 51(7) of the TPAprior to the filing of this Appeal is that the jurisdiction of this Tribunal has been invoked prematurely before the exhaustion of available alternative and statutory dispute resolution mechanisms. In other words, this dispute does not have the ‘decision of the Commissioner’ as is envisaged in Section 12 of the Tax Appeal’s Tribunal (TAT) Act from where an appealable decision could lie to the Tribunal. The Appellant’s Appeal is therefore premature and hence invalid.

28. The Superior Courts have had the chance to decide on a similar issue in the case of Commissioner of Domestic Taxes v Diara Limited(Income Tax Appeal E007 of 2021)[2022] KEHC80 (KLR) (Commercial and Tax) (11 February 2022) (Judgment), where Justice Mabeya stated as thus:“26. In any event, under Section 51(6) and (7) of the Tax Procedures Act 2015, the extension of time to lodge a notice of objection against a tax decision is within the province of the Commissioner alone…

27. The totality of the foregoing is that there were no valid objections by the respondent as against the appellant’s tax assessments upon which a proper appeal to the Tribunal could be founded. A proper objection on which an objection decision is founded is a conditional prerequisite to a valid appeal to the Tribunal.”The Appeal is therefore premature and the Tribunal lacks the jurisdictional authority to hear and determine it. In which case it must down its tools.

b. Whether the Respondent’s Additional Assessment is valid. 29. Having held that it lacks the jurisdiction to hear this dispute, the Tribunal cannot entertain and or decide on this issue.

Final Decision 30. The upshot of the foregoing 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.Each party to bear its own costs.

31. It is so ordered.

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