[2024] KETAT 1471 (KLR)

Karen Hospital Limited v Commissioner of Domestic Taxes (Tax Appeal E236 of 2024) [2024] KETAT 1471 (KLR) (4 October 2024) (Judgment)

Neutral citation: [2024] KETAT 1471 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E236 of 2024

E.N Wafula, Chair, RO Oluoch, AK Kiprotich, Cynthia B. Mayaka & G Ogaga, Members

October 4, 2024

Between

The Karen Hospital Limited

Appellant

and

Commissioner Of Domestic Taxes

Respondent

Judgment

1. The Appellant is a private health facility operating at Nairobi in Kenya.

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 collecting and receiving all tax revenue. Further, under Section 5(2) of the Act, concerning 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 & 2 of the First Schedule to the Act to assess, collect and account for all revenues under those laws.

3. The Appellant on 8th January 2015 made an application to claim capital deduction in respect of expenditure on building and machinery. The Respondent declined the application vide a letter dated 5th November 2018.

4. The Appellant further made a follow up letter to the Respondent on 20th December 2021 to which the Respondent replied on 29th July 2022.

5. The Appellant objected to the letter of 29th July 2022 on 26th August 2022 and further on 11th November 2022.

6. On 18th November 2022 the Respondent wrote to the Appellant informing it that the letter of 29th July 2022 was not a tax decision but simply a detailed response to its application.

7. Dissatisfied with the Respondent’s reply, the Appellant lodged an Appeal with the Tribunal on 20th December 2022.

8. The Tribunal rendered its decision in a Judgment delivered in TAT No. 1554 of 2022 on 20th December 2023 striking out the Appeal stating that the Respondent’s decision was in the letter of 5th November 2018 to which the Appellant did not object to.

9. The Appellant subsequently on 17th January 2024 made an application to the Respondent to lodge a late objection to the decision of 5th November 2018.

10. The Respondent through a letter dated 29th January 2024 declined the Appellant’s application for late objection.

11. Being dissatisfied with the Respondent’s decision of 29th January 2024 the Appellant lodged the Notice of Appeal dated 19th February 2024 and filed on the 23rd February, 2024.

The Appeal 12. The Appellant’s Memorandum of Appeal dated 19th February, 2024 and filed on 23rd February, 2024 was based on the grounds that:a.The lateness was not deliberate. That it was handling TAT No.1554 of 2022 filed against Respondent's letter of 29th July, 2022 which was mistaken as an objection decision while the actual letter to object to was the one dated 5th November, 2018. b.The Judgment in TAT No.1554 of 2022 was delivered on 20th December 2023 where clause 69 of the said Judgment advised that the correct cause of action was to object to the Respondent’s letter of 5th November, 2018. c.The Appellant lodged a late objection to the Respondent on 19th January, 2024 against the letter of 5th November, 2018 and which was declined and hence this Appeal.d.The Respondent, in declining to accept the late objection considered the period from 5th November, 2018 and failed to consider that there was a tax appeal which the Respondent was party to though it failed and that at no time did time pass without engagement on the matter.e.The test of lateness subjected to the late objection by the Commissioner on the letter of 29th January, 2014 under Section 51(7) of TPA, 2015 fails to consider all facts, was biased and subjective.

Appellant’s Case 13. The Appellant’s case is premised on the following filed documents;a.The Appellant’s Statement of Facts dated 19th February 2024 abd filed on the 23rdFebruary, 2024 together with the documents attached thereto.b.The Appellant’s written submissions dated 3rd September 2024 and filed on the same date.

14. The Appellant stated that it is a private state of art health facility of its type in the Country. That it operates from its own premises located at Karen L.R. No. 23397/3. That it commenced operation in 2006 year of income.

15. It averred that application for capital deduction was done in 2015. That by 2015 when the application for capital deduction was done, there was no specific capital deduction with reference to hospitals in particular.

16. The Appellant submitted that other follow-ups on the capital deduction were made after the first application in 2015. That it is the 2020 Finance Act that specifically provided for capital deduction on hospital buildings.

17. That capital deduction for hospital was in the name of investment deduction. It stated that the Respondent's letter of 5th November, 2018 declined the application for capital deduction.

18. That the Appellant having commenced business in 2006 and the application for capital deduction having been done on 8th January, 2015 was under Section 90(1) of the Income Tax Act, Cap 470, but repealed, and so the application was relevant under Section 31 of TPA, 2015.

19. The Appellant asserted that it qualifies for capital expenditure on construction of the hospital building and machinery mainly the maternity, general wards, pharmacy, theatre, ICU's, HDU's, doctors examination rooms and administration office under industrial building under commercial building allowances, Paragraph 5(1) (ff) and 1 (i) (ee) or commercial building allowances under Paragraph 6A of Second Schedule (repealed) to the Income Tax Act, Cap 470, Laws of Kenya.

20. That “commercial buildings" under Paragraph 5(i)(ff) was not defined and so the hospital building could fit into the claim by a hospital building. That further, the claim for capital deduction in 2015 was to cover period from 1st January, 2010 when this amendment to the Second Schedule came to force.

21. The Appellant submitted that under Para 5(i)(F) and 5(i)(ff), it qualified for industrial building allowance as the hospital premises were used as hospital and that there were water, road and sewerage services within the facility as became, by law, effective 1st January, 2010.

22. That Paragraph 5(i)(f) and 5(i)(ff) provided for; "any year of income commencing from or after 1st January, 2010 with emphasis on 'was/is” any year of Income" commencing on or after 1st February 2010.

23. That its application in 2015 was seeking to amend 2010 to 2013 tax returns given the amendment of 1st January, 2010.

24. The Appellant averred that the TPA, 2015 became effective on 19th October, 2016 after its application under Section 90 of ITA in which case there was provision to amend 2010 to 2013 tax returns as Section 90 provided for seven (7) years backwards room to amend return under Section 73(2)(a) on a self-assessment under Section 5 2 B.

25. It averred that the industrial building allowance claim was based on “any year of income" where the building is used and not “first year of use”

26. That in the spirit of the Second Schedule of ITA the Appellant qualified for the deduction "for any year of income in which the building is so used" irrespective of when it was first used.

27. The Appellant submitted that under Paragraph 5(I)(ff) (now repealed), the hospital buildings was used for commercial purposes .... “Industrial building means a building is used as a commercial building "given the fact that running a hospital is a business activity ...." any trade, profession or vocation and every manufacture, adventure and concern in the nature of trade....".

28. That Paragraph 5(i)(ff) recognizes hospital buildings as industrial buildings which qualify for capital allowance under Para 1(i)(ee) at 25% of the capital expenditure incurred as per Finance Act No. 8 that became operation on 1st January, 2010.

29. It averred that based on Paragraph 5(i)(ff) and 1 (I)(ee) of ITA, Second Schedule the Appellant qualified for Industrial building allowance at 25% of Ksh.762,384,515. 00 per year for four years.

30. That the circumstance and facts of “Commissioner of Domestic Taxes vs Sony Holdings Ltd (2021) eKLR are applicable in this particular case.

31. That the law allowing commercial building allowance was introduced under Finance Act. No. 8 of 2009 amending ITA, 2nd Schedule by introducing Paragraph 1(ee) and 5(1) (ff).

Appellant’s Prayer 32. The Appellant’s prayer to the Tribunal was to set aside the confirmation and directs the Respondent to accept the late objection.

Respondent’s Case 33. The Respondent relied on the following documents to defend its case:a.Statement of Facts filed dated and filed on 25th March 2024 together with the documents attached thereto.b.Written Submissions filed on 4th September 2024 together with the authorities attached.

34. The Respondent stated that the subject of this instant Appeal is the Respondent's tax decision dated 5th November 2018 declining the Appellant's claim for investment deduction.

35. That the Appellant lodged a late objection on 19th January 2024 stating that it had failed to note that the Respondent's letter dated 5th November 2018 was the tax decision on investment claim and had lodged an Appeal against the Respondent's letter dated 18th November 2022.

36. The Respondent submitted that it considered the Appellant's late Objection and found that the Appellant did not meet the grounds for acceptance of a late objection as envisaged under Section 51 (7) of the Tax Procedures Act.

37. That on 29th January 2024, the Respondent issued a decision rejecting the Appellant's late objection application.

38. The Respondent stated that the Appellant constructed a four-storey building between 2003 and 2006 which houses maternity, pharmacy, theatres, wards, Intensive Care Unit, High Dependency Unit, examination and administration offices.

39. That the cost of construction and equipment as per the Appellant's audited accounts for 2007 was Kshs.762,384,515 and Kshs.356,209,825, respectively.

40. That the Appellant applied for leave to claim capital deduction on the hospital building cost under the now repealed Second Schedule of the Income Tax Act

41. The Respondent averred that it conducted an audit for the claim and issued its finding on 5th November 2018 stating at paragraph 1. 3 “your application to be allowed claim investment deduction.... was reviewed. However, we established that hospital's operations are not supported by the conditions set out in paragraph 5 of the second schedule to warrant claim of investment deductions.”

42. The Respondent asserted that a tax decision was issued on 5th November 2018 where the Appellant was guided at Page 5 “...nevertheless you are reminded of your rights of objection as provided under section 51 of the Tax procedures Act.”

43. That the Appellant submitted the application to file a late objection on 19th January 2024.

44. The Respondent contended that Section 51 (2) provides for the timeline of lodging an objection as follows: -“'(2) 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.”

45. It added that as read with Section 51 (7) the Commissioner may extend the time subject to:“(7) The Commissioner may allow an application for the extension of time to file a notice of objection 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; andb.the taxpayer did not unreasonably delay in lodging the notice of objection.”

46. That the Appellant stated that it had inadvertently missed the Respondent's response on the issue of investment deduction in the letter dated 5th November 2018.

47. The Respondent averred that the aforementioned provisions on lateness set out two conditions for the Respondent to consider a late Objection.

48. That on one hand because of an absence from Kenya, sickness or other reasonable cause; and the taxpayer did not unreasonably delay in lodging the notice of objection.

49. The Respondent contended that it considered the explanation provided for the late objection, however, the same was not merited for the objection was submitted unreasonably late.

50. That notwithstanding that the Appellant had lodged the Appeal No. 1554 of 2022 on 20th December 2022, the same if submitted as the objection would be inordinately late by 4 years.

51. That there was indolence on the Appellant in so far as the subject of the dispute goes.

52. It was the Respondent’s case that with the late objection being rejected, the Commissioner maintained its stance on the capital deduction claim being disallowed.

53. That the Appellant now seeks that the Respondent be directed to accept the late objection then process the capital deduction under Schedule two of the Income Tax Act.

54. The Respondent asserted that the Commissioner derives its procedural mandate from the Tax Procedures Act. That under Section 51 (1, 2 & 3) once a tax decision had been issued the Appellant is required to submit a valid objection within time.

55. That the Respondent was then to consider the valid objection decide either to allow the objection in whole or in part, or disallow it, and Commissioner's decision shall be referred to as an "objection decision".

56. That it was therefore upon the Respondent to consider the merits of the Appellant's claim and pursuant to the provisions of Section 51(10) issue the objection decision including a statement of findings on the material facts and the reasons for the decision.

57. That the merits of an objection are considered by its validity, which in this case was negative.

58. The Respondent maintained that its discretion was exercised properly. That the Appellant's late application was disallowed for being submitted inordinately late thus the investment claim deduction remained disallowed as the tax decision stated.

Respondent’s Prayers 59. The Respondent's prayer to the Tribunal is for orders that:a.The Respondent’s decision dated 29th January 2024 be upheld.b.The Appeal be dismissed with costs.

Issues For Determination 60. The Tribunal has considered the pleadings, submissions and documents filed by the parties in this Appeal and is of the view that the issue that falls for determination in this Appeal is:Whether the Respondent was justified in rejecting the Appellant’s application for late objection.

Analysis And Determination 61. Having established the issue that falls for its determination, the Tribunal shall analyze the same as hereunder.

62. The genesis of this dispute is the Respondent’s letter dated 29th January, 2024 where it rejected the Appellant’s application for late objection in relations to its decision of 5th November 2018. While declining to grant the application, the Respondent stated that the application was unreasonably late.

63. The chronology of events in this dispute was as follows:a.The Appellant applied for leave to claim capital deduction in respect of expenditure on building and machinery on 8th January 2015. b.The Respondent declined the Appellant’s application on 5th November 2018. c.The Appellant further made a follow up letter to the Respondent on 20th December 2021. d.The Respondent replied on 29th July 2022 informing the Appellant that it was not qualified for the claim.e.The Appellant objected to the letter of 29th July 2022 on 26th August 2022 and 11th November 2022. f.On 18th November 2022 the Respondent wrote to the Appellant informing it that the letter of 29th July 2022 was not a tax decision but simply a detailed response to its application.g.Dissatisfied with the Respondent’s reply, the Appellant lodged an Appeal with the Tribunal on 20th December 2022. h.The Tribunal rendered its decision in a judgement on 20th December 2023 striking out the Appeal informing the Appellant that the Respondent’s decision was in the letter of 5th November 2018 to which the Appellant failed to object to.i.The Appellant subsequently on 17th January 2024 made an application to the Respondent to lodge a late objection to the decision of 5th November 2018. j.The Respondent through a letter dated 29th January 2024 declined the Appellant’s application for late objection.k.Being dissatisfied with the Respondent’s decision of 29th January 2024 the Appellant filed this Appeal on 19th February 2024.

64. It was not in dispute that there was no objection decision in this matter. The issue the Appellant is challenging here is the Respondent’s decision to decline its application for late objection.

65. The Appellant in its Memorandum of Appeal stated that the lateness was not deliberate. That the Appellant was handling TAT No.1554 of 2022 filed against the Respondent's letter of 29th July, 2022 which was mistaken as an objection decision while the actual letter to object to was the one dated 5th November, 2018.

66. That the Judgment on TAT No.1554 of 2022 was delivered on 20th December 2023 where clause 69 of the said Judgment advised that the correct cause of action was to object to the Respondent’s letter of 5th November, 2018.

67. That the Appellant lodged a late objection to the Respondent on 19th January, 2024 against the letter of 5th November, 2018 and which was declined and hence this Appeal.

68. That the Respondent, in declining to accept the late objection considered the period from 5th November, 2018 and failed to consider that there was a tax appeal which the Respondent was party to though it failed and that at no time did time pass without engagement on the matter.

69. The Appellant averred that the test of lateness subjected to the late objection by the Commissioner on the letter of 29th January, 2024 under Section 51(7) of TPA, 2015 fails to consider all facts, was biased and subjective.

70. The Respondent on its part submitted that the subject of this instant Appeal is the Respondent's tax decision dated 5th November 2018 declining the Appellant's claim for investment deduction.

71. That the Appellant lodged a late objection on 19th January 2024 stating that they had failed to note that the Respondent's letter dated 5th November 2018 was the tax decision on investment claim and had lodged an Appeal against the Respondent's letter dated 18th November 2022.

72. The Respondent submitted that it considered the Appellant's late objection and found that the Appellant did not meet the grounds for acceptance of a late objection as envisaged under Section 51 (7) of the Tax Procedures Act

73. That on 29th January 2024, the Respondent issued a decision rejecting the Appellant's late objection application.

74. The Tribunal notes that the parties agree that the decision which the Appellant ought to have objected to was the letter dated 5th November 2018.

75. Section 51(2) of the Tax Procedures Act provides as follows regarding objections to a tax decision;“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.”

76. It follows from the above provision of the law that given that the decision was issued on 5th November 2018, the Appellant ought to have lodged its objection on or before 5th December 2018. The Appellant’s application for late objection was lodged on 19th January 2024 which is more than 5 years late.

77. A taxpayer who is unable to lodge an objection in time can remedy its case as provided for under Section 51(6) & (7) of the Tax Procedures Act which provide as follows;6. A taxpayer may apply in writing to the Commissioner for an extension of time to lodge a notice of objection.7. The Commissioner may allow an application for the extension of time to file a notice of objection 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; andb.the taxpayer did not unreasonably delay in lodging the notice of objection.” (Emphasis added)

78. It is the Tribunal’s position that although it was the discretion of the Respondent either to allow or not allow an application for late objection, it could only look into whether the decision was in line with the above cited Sections of the law.

79. In the instant case the Appellant averred that the delay was occasioned by the litigation in TAT No.1554 of 2022 whose judgement was delivered on 20th December 2022.

80. The Tribunal notes from the chronology of events in this case that even if it were to look into the Appellant’s argument, the Notice of Appeal in TAT No.1554 of 2022 was lodged on 20th December 2022 in relation to the Respondent’s letter of 18th November 2022.

81. Additionally, from the date the Appellant was served with the decision of 5th November 2018 there was no follow up from it until its letter to the Respondent on 20th December 2021 which was more than 2 years later.

82. The Tribunal further notes that in its letter of 5th November 2018, the Respondent was clear in its communication that this letter was a formal assessment when it stated in part as follow;“…1. 3 Investment DeductionYour application to be allowed claim investment deductions in line with paragraph 5 sub paragraph (vi) of the Income Tax Act (Cap 470) was reviewed. However, we established that the hospital’s operations are not supported by the conditions set out in paragraph 5 of the second schedule to warrant claim of investment deductions.…5. 0 Conclusion…Please treat this letter as a formal notice of assessment for Corporation Tax, PAYE, VAT….”

83. From the foregoing, either way, the litigation in TAT No. 1554 of 2022 which started in December 2022 could not explain the delay in lodging an objection to the Respondent’s assessment of 5th November 2018.

84. The Tribunal reiterates the court’s holding in Nicholas Kiptoo Arap Korir Salat v IEBC & 6 Others [2013] eKLR where the court stated thus:-“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…”

85. Consequently, the Tribunal finds that the Respondent was justified in rejecting the Appellant’s application for late objection.

Final Decision 86. On the basis of the foregoing analysis, the Tribunal finds that this Appeal lacks merit and accordingly proceeds to issue the following Orders;a.The Appeal be and is hereby dismissed.b.The Respondent’s decision dated 29th January 2024 be and is hereby upheld.c.Each party is to bear its own costs.

87. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 4TH DAY OF OCTOBER, 2024. ERIC NYONGESA WAFULACHAIRMANDR. RODNEY O. OLUOCH ABRAHAM K. KIPROTICHMEMBER MEMBERCYNTHIA B. MAYAKA GLORIA A. OGAGAMEMBER MEMBER