[2023] KETAT 148 (KLR)

Kanyari & Kotut t/a Ruoro Kotut & Company v Commissioner of Domestic Taxes (Appeal 575 of 2021) [2023] KETAT 148 (KLR) (Civ) (10 March 2023) (Judgment)

Neutral citation: [2023] KETAT 148 (KLR)

Republic of Kenya

In the Tax Appeals Tribunal

Civil

Appeal 575 of 2021

E.N Wafula, Chair, Cynthia B. Mayaka, Grace Mukuha, A.K Kiprotich & Jephthah Njagi, Members

March 10, 2023

Between

Sebastian Mwangi Kanyari & Paul Kipngetich Kotut T/A Ruoro Kotut & Company

Appellant

and

Commissioner Of Domestic Taxes

Respondent

Judgment

1. The Appellants are business partners practising as Ruoro Kotut and Company and their main activity is offering accountancy services and operate from Nakuru County.

2. The Respondent is a principal officer appointed under and in accordance with Section 13 of the Kenya Revenue Authority Act and Kenya Revenue Authority is charged with the responsibility of among others, assessment, collection, accounting and the general administration of tax revenue on behalf of the Government of Kenya.

3. The Respondent noted discrepancies in the returns filed by the Appellants and this precipitated a returns review by the Respondent who issued assessments on June 25, 2020.

4. The assessments were issued to Sebastian Mwangi Kanyari for the years 2016, 2017 and 2018 for Kshs 8,700,210. 00 inclusive of interest and penalties and Sebastian objected to the assessments raised on July 6, 2020.

5. The Respondent issued an objection decision on July 16, 2021 and the Appellants being aggrieved by the same filed this Appeal.

The Appeal 6. The Appeal is premised on the following grounds as stated in the Memorandum of Appeal dated September 21, 2021 and filed on September 22, 2021:a)That the Respondent has not formally given his objection decision within the stipulated 60 day time frame but has already issued agency notices to several banks to enforce the recovery of tax that is already disputed.b)The additional tax is excessive, punitive, unreasonable and inaccurate as the same is based on an assumption.c)That the Appellant provided all the relevant documents authenticating the actual income earned during the period under review including financial statements but the Respondent ignored them.d)That the necessary withholding taxes had been deducted and paid by the Nakuru County Government for actual value of professional work.e)The Respondent is yet to conclude the reconciliation of withholding taxes amounting to Kshs 1,033,601 deducted at source by the Nakuru County Government during the period 2015 to 2018 and paid directly to KRA Central Bank Account using the IFMIS system rather than the income tax platform which is yet to be credited to the Appellant’s income tax ledger.f)The Respondent has issued demand letters and enforcement agency notices that include taxes already paid.

The Appellant’s Case 7. The Appellant’s case is premised on the Statement of Facts filed on September 22, 2021 and the written submissions dated November 25, 2022 and filed on the same date.

8. The Appellant submits that their objection dated July 6, 2020 ought to have been allowed and or was allowed by operation of law as 60 days had elapsed since it was served upon the Commissioner and he only issued his objection decision on July 16, 2021 which is about one year later and which is contrary to the TPA by virtue of Sections 51 (8) and 51 (11) thereof.

9. The Appellant adds that the 60 day timeline cannot be extended by mutual consent or by acquiescence and upon the period lapsing, the Commissioner has no jurisdiction to issue an additional assessment based on an original assessment which becomes inoperable by passage of the statutory timelines. On this the Appellant relies on the case of R vs Commissioner of Domestic Taxes [HC JR APPL NO 152 OF 2019 and R v Commissioner of Customs Services [MISC CICIL APPL NO 181/2011] to buttress their position that timelines are cast in stone unless the statutes expressly permit their extension.

10. The Appellant also argues that the additional tax assessment was illegal and contrary to the Fair Administrative Actions Act, 2015.

11. The Appellant also avers that the income tax assessed was based on income declared in VAT and there were no direct inputs considered and expenses were also not considered when the said assessment was done. The assessment also included other “incomes” such as inter-banking transactions, clients’ money held in the Appellant’s firm’s bank accounts etc. which do not form part of the Appellant’s income and should not be the basis for assessing income tax.

12. The Appellant therefore avers that the Respondent in arriving at the assessed additional income tax failed to take into account the inputs and expenses of the Appellant.

13. The Appellant submits that the additional income tax assessed was not warranted as the Appellants had filed their returns on the due date and made payments of the self-assessed VAT as required by the law and that having supplied the Respondent with their annual returns, audited financial statements and all other documents requested there was no basis for the Respondent to raise additional assessment.

14. The Appellants therefore state that the Respondent has acted unreasonably, irrationally and contrary to the Income Tax and VAT Acts. Similarly, in ignoring the Appellant’s actual income as set out in the annual returns and audited financial statements as ascertained in the Respondent’s audits, the Respondent was actuated solely by the need to impose undue taxes upon the Appellants and therefore acted ultra vires its powers and authority.

15. The Appellants submitted that the Respondent’s conduct in the circumstances is in breach of the Appellant’s legitimate expectations.

16. The Appellants also object to the principle sum considered when arriving at the additional income tax as the same was doubled, in that for example, KRA through their auditor erroneously found that the Appellants had been paid double by Nakuru County Government which is inconsistent with the actual money paid and remitted to the bank as evidenced in bank statements and invoices issued to the County for the professional services contracted. The Commissioner had also found that the Appellants had received Kshs 21 million in the Appellant’s accounts but the bank accounts clearly shows that Kshs 13 million is what was earned in the period in question and which errors/facts cannot be overlooked.

17. The Appellants aver that it incurred several expenses in the normal running of a business but the Commissioner considered only two, that is, internships and motor vehicle running expenses and disregarded other obvious expenses like salaries, electricity bills, rent, etc., which consume a large portion of the income generated by the Company and which should be taken into consideration when assessing income tax.

18. The Appellants submit that the Commissioner in his objection decision agreed with the Appellants that the assessment was erroneous and he consequently reviewed the initial income tax assessment accordingly but the amendments have never been effected.

19. The Appellants rely on the following cases in support of their Appeal:a)Vestey v Inland Revenue Commissioners[1979] 3 ALL ER 984;b)Keroche Industries Ltd v KRA & 5 Others [2007] eKLR;c)Income Tax v Westpoint Power (K) Ltd [2006] eKLRd)R v KRA ex parte L.A.B. International Kenya Ltd [2011] eKLR.

Appellants’ Prayers 20. On the basis of their submissions the Appellants pray that the Appeal be allowed with costs.

The Respondent’s Case 21. The Respondent did not file a Statement of Facts but lodged written submissions dated and filed on November 25, 2022 setting out only one issue for determination as follows:“Whether the Respondent’s demand for Income Tax of Kshs 5,083,982. 45 for the years 2016 -2017 was justified”.

22. That the Appellants’ principal business is accounting, bookkeeping, audit and tax consultancy services which fall under the ambit of Section 3 (2)(a)(i)(ii) of the Income Tax Act which states that all gains or profits made by a taxpayer in the course of its business must be taxed. The Respondent on this averment also relies on the case of R v KRA ex parte Bata Shoe Company (k) Ltd [2014] eKLR.

23. That glaring discrepancies in the returns filed by the Appellants precipitated a returns review exercise by the Respondent. Bank statements were analysed for the year 2017 and 2016 and the turnover was Kshs 16,448,650. 75 and Kshs 21,832,007. 50, respectively. The turnover to be assessed was as per banking analysis for the two years.

24. That the Appellants had also exaggerated expenses claimed in the income tax returns and the Appellants did not provide adequate documents to support their objection to the Respondent’s addback for those expenses.

25. The Respondent cites the provisions of Sections 59, 31 and 56(1) of the TPA and Section 30 of the Tax Appeals Tribunal Act, 2013 (TATA) and on the basis of the provisions states that the Appellants not only failed to provide the documents as required by law but also failed to discharge their burden of proving that the assessment as issued by the Respondent was wrong or should have been made differently.

26. The Respondent submits that for an objection to be valid the Appellants must comply with the provisions of Section 51(3) of the TPA. In this case, as per the Respondent, the Appellant filed their objection without providing requisite documents to counter the assessments leading to the objection being rejected.

27. The Respondent avers that having issued the assessment, it was the responsibility of the Appellants to prove their case by providing sufficient evidence to support their objection to assessment and on this the Respondent relies on the cases of TAT No. 421 of 2019 - Ole Suguti Investments Ltd v Commissioner of Domestic Taxesand Primarosa Flowers Ltd v Commissioner of Domestic Taxes [2019] eKLR.

28. The Respondent also adds that it’s upon the Appellants to demonstrate that the bank deposits in their bank accounts do not entirely constitute their business income by providing credible information on the sources of the amounts in the deposits. On this issue the Respondent relies on the case of TAT NO, 25 of 2016,Family Signature Ltd v Commissioner of Investigations & Enforcement.

29. The Respondent finally submits that the Appellants have failed to discharge the burden of proof as required by law and that the Appeal lacks merit.

Respondent’s Prayer 30. The Respondent prays that the Appeal be dismissed with costs and the demand for Kshs 5,083,982. 45 be upheld.

Issues for Determination 31. The Tribunal upon consideration of the Appellants’ Statement of Facts and the submissions filed by both parties is of the view that the issues falling for determination are as hereunder:a)Whether the Appellants’ objection was allowed by operation of the lawb)Whether the Respondent’s assessments were justified.

Analysis and Findings 32. The Tribunal wishes to state at the outset that the import of the Respondent’s failure to file a Statement of Facts is that the factual issues raised in the Appellants’ Statement of Facts remain substantively uncontroverted and that the probative value of the Respondent’s submissions is restricted to legal issues.

a)Whether the Appellants’ objection was allowed by operation of law 33. The Respondent issued the Appellants with their assessments on 25th June 2020 for Income Tax for the years 2016, 2017 and 2018 totaling Kshs. 8,700,210. 00, inclusive of interest and penalties

34. The Appellants objected to the assessment on July 6, 2020 and the Respondent acknowledged receipt of the objection notice online on July 7, 2020.

35. The Respondent consequently issued the objection decision on July 16, 2021 against which the Appellant has appealed.

36. The Appellants have submitted that the objection decision was issued against the provisions of Section 51(11) of the TPA and therefore their objection was allowed by the operation of law.

37. Section 51 (11) of the TPA states as follows:“The Commissioner shall make the objection decision within sixty days from the date of receipt of ---a.the notice of objection; orb.any further information the Commissioner may require from the tax payer, failure to which the objection will be deemed to be allowed.”

38. Section 51(4) of theTPA also lays down as follows:“Where the Commissioner has determined that a notice of objection lodged by a tax payer has not been validly lodged, the Commissioner shall immediately notify the tax payer in writing that the objection has not been validly lodged”.

39. The Respondent has neither addressed nor refuted the Appellants’ submission that the objection decision was issued out of time and has also not given any reason for the failure to issue the decision in time.

40. The provisions of Section 51(11) of the TPA are couched in mandatory terms and therefore have to be adhered to. It has not been indicated by either of the parties that between the time the Appellants lodged their objection and the time the Respondent issued its objection decision that there were any correspondences exchanged between the parties.

41. The timelines provided by the law have to be observed at all times and the Tribunal and the Courts have held to that effect in many cases and in particular in the case of Nicholas Kiptoo Arap Korir Salat v IEBC & 6 Others[2013] eKLR, where the court held that;-“This Court, indeed all courts, must never provide succor and cover to parties who exhibit scant respect for rules and timelines. Those rules and timelines serve to make the process of judicial adjudication and determination fair, just, certain and even-handed. Courts cannot aid in the bending or circumventing of rules and a shifting of goal posts for, while it may seem to aid one side, it unfairly harms the innocent party who strives to abide by the rules. I apprehend that it is in the even-handed and dispassionate application of rules that courts give assurance that there is a clear method in the manner in which things are done so that outcomes can be anticipated with a measure of confidence, certainty and clarity where issues of rules and their application are concerned.” (Emphasis added)

42. A similar holding was made in the case of W.E.C. Lines Ltd v The Commissioner of Domestic Taxes [TAT CASE NO.247 of 2020] where it was held at Paragraph 70 and 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 process of making an application for review upon receiving the Respondent’s decision.”

43. The Tribunal therefore finds that the Appellants’ objection was allowed by operation of law and the Appeal in the circumstances succeeds.

44. Having entered the above finding, the Tribunal shall not therefore delve into the other issue for determination as it has been rendered moot.

Final Decision 45. The upshot of the foregoing analysis is that this Appeal has merit and the Tribunal accordingly proceeds to make the following Orders:-a)The Appeal be and is hereby allowed.b)The Respondent’s objection decision dated July 16, 2021 be and is hereby set aside.c)Each party to bear its own costs.

46. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 10TH DAY OF MARCH, 2023. .......................................ERIC N WAFULA CHAIRMAN.......................................CYNTHIA B MAYAKA GRACE MUKUHA MEMBER MEMBER.......................................ABRAHAM KIPROTICH JEPHTHAH NJAGI MEMBER MEMBERJudgment – TAT No 575 of 2021 – Sebastian Mwangi & Paul Kotut t/a Ruoro Kotut –vs- Com. of Domestic Taxes