[2023] KETAT 608 (KLR)

Kariuki v Commissioner of Domestic Taxes (Tax Appeal 412 of 2022) [2023] KETAT 608 (KLR) (29 June 2023) (Judgment)

Neutral citation: [2023] KETAT 608 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 412 of 2022

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

June 29, 2023

Between

Daniel Ngugi Kariuki

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a sole trader, trading under the name React Branding Enterprises based in Kitale. The Appellant deals in general supplies and offers services to Government and other users.

2. The Respondent is a principal officer appointed under and in accordance with Section 13 of the Kenya Revenue Authority Act, and 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 dispute arose as a result of the compliance check conducted by the Respondent on the Appellant on undeclared income for the period 2015-2018 based on IFMIS data.

4. The Respondent alleged that the Appellant under declared sales by Kshs. 88,167,128. 40 and that the Appellant failed to amend the returns for the said period.

5. The Respondent issued assessments to the Appellant on 5th September 2019 and 6th September 2019 for income tax and VAT, respectively.

6. The Appellant lodged objections on 26th January 2020 and 27th January 2022 for income tax assessment and on 12th November 2019 for VAT assessment.

7. Subsequently, the Respondent rendered its objection decision on 27th January 2022 and 29th January 2022 confirming the assessments.

8. The Appellant being dissatisfied with Respondent’s objection decision lodged a Notice of Appeal dated 21st April 2022 and filed before the Tribunal on 22nd April 2022.

The Appeal 9. The Appeal is premised on the following grounds as laid out in the Appellant’s Memorandum of Appeal dated 21st April 2022 and filed on 22nd April 2022:a.That the Commissioner of Domestic Tax erred in law and fact by not according the Appellant the opportunity to deduct expenditure wholly and exclusively incurred by him in the production of income contrary to Section 15(1) of Income Tax Act.b.That the Commissioner of Domestic Tax erred in law and fact by not according the Appellant the opportunity to claim taxes withheld at source amounting to Kshs. 2,017,029. 31 to VAT and Kshs. 133,161. 00 to income tax.

Appellant’s Case 10. The Appellant’s case is premised on the Appellant’s Statement of Facts dated 21st April 2022 and filed on 22nd April 2022 together with the documents attached thereto.

11. The Appellant averred that the Respondent did an estimated assessment for the year of income 2016.

12. That the Respondent issued an assessment notice requiring the Appellant to pay Kshs. 33,923,158. 20 on income tax and Kshs. 17,857,765. 18 arising from variance between the turnover as per VAT returns and estimated assessment on income tax, respectively.

13. That the Appellant objected to the assessments on 12th November 2019.

14. That the Respondent wrote to the Appellant confirming the assessments vide a letter dated 29th January 2020.

15. That the Respondent also sent the objection rejection notices on 27th January 2022 communicating its decision to decline the objection.

16. The Respondent then issued amended principal tax assessment of Kshs 26,150,244. 00 and VAT assessment of Kshs 14,106,740. 54.

17. The Appellant averred that at no time did the Respondent write to him concerning the objection as required by the tax procedures in case an objection is not validly lodged.

18. That therefore the same was valid as per the law.

19. That the Respondent erred in law and fact by not according the Appellant the opportunity to deduct expenditure wholly and exclusively incurred by him in the production of income contrary to Section 15(1) of Income Tax Act.

20. That the Respondent erred in law and fact by not according the Appellant the opportunity to claim taxes withheld at source amounting to Kshs. 2,017,029. 31 to VAT and Kshs. 133,161. 00 to income tax.

21. That the Appellant endeavors to pay the principal tax not in dispute of Kshs. 11,904,614. 24.

Appellant’s Prayers 22. The Appellant prays that:a.The Appeal be allowed.b.The Tribunal annuls the tax decision.

Respondent’s Case 23. The Respondent’s case is premised on the following documents: -a.The Respondent’s Statement of Facts dated 13th July 2022 and filed on the same date.b.The Respondent’s Notice of Preliminary Objection dated 13th July 2022 and filed on the same date.c.The Respondent’s written submissions dated 29th December 2022 and filed on 30th December 2022.

24. The Respondent averred that the Notice of Appeal dated 21st April 2022 and subsequent Appeal herein are defective, null and void.

25. That the assessment was done according to the law.

26. That the Appellant's objection was rejected on grounds of an invalidly lodged objection pursuant to Section 51 (2) and (3) of the TPA.

27. That the Appellant failed to support the expenses incurred as wholly and exclusive as required by Section 15 of the' ITA hence the expenses had to be treated as a disallowable expense as per Section 16(1) (a) of the ITA.

28. The Respondent submitted that there are two issues for determination in this matter as follows: -a.Whether the Notice of Preliminary Objection should be upheld, the Appellant's undisputed taxes of Kshs. 11,904,614. 24 not having been paid in full and/or any arrangement entered for settlement of the same.b.Whether the Appeal is merited.

29. The Respondent submitted on the two issues as follows: -

a.Whether the Notice of Preliminary Objection should be upheld, the Appellant's undisputed taxes of Kshs. 11, 904,614. 24 not having been paid in full and/or any arrangement entered for settlement of the same. 30. The Respondent submitted that the Appeal herein is premised on Notice of Appeal dated 21st April 2022.

31. That in Paragraph 7 of the Appellant's Statement of Facts to the Appeal herein, it is averred that;“The Appellant endeavors to pay the principal tax not in dispute of Kshs 11,904,614. 24"

32. The Respondent submitted that to date, there is no evidence whatsoever of payment and/or any arrangement reached towards settlement of the undisputed tax.

33. That Section 52(2) of the Tax Procedures Act provides that; -“A notice of appeal to the Tribunal relating to an assessment shall be valid if the taxpayer has paid the tax not in dispute or entered into an arrangement with the Commissioner to pay the tax not in dispute under the assessment at the time of lodging the notice"

34. The Respondent submitted that its Notice of Preliminary Objection should be upheld, as the purported Notice of Appeal, subsequent Memorandum of Appeal and Statement of Facts are invalid and liable for striking out in the first Instance for offending the mandatory provisions of Section 52(2) of the Tax Procedures Act by not settling and/or arranging to settle the undisputed taxes of Kshs. 11,904,614. 24.

b). Whether the Appeal is merited 35. The Respondent submitted that it is legally bound to carry out the compliance checks and raise the additional assessment on the under declared sales, in line with Section 24 (2) Tax Procedures Act. That the Act provides that,“The Respondent, shall not be bound by a tax return or information provided by, or on behalf of, a taxpayer and the Commissioner may assess a taxpayer's tax liability using any information available to the Commissioner.”

36. The Respondent submitted that the Appellant failed to discharge its burden of proof, by availing documents in support of his objection and Appeal herein hence no basis whatsoever to fault the Respondent.

37. That the Tribunal should be guided by Section 56 (1) of the TPA which provides as follows: -“In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”

38. That this was reiterated in the Case of Pearson Vs Belcher CH.M (Inspector of Taxes) Tax Cases Volume 38 referred to by Justice D.S. Majanja in PZ Cussons East Africa Limited vs. Kenya Revenue Authority (2013) eKLR where the Court held that: --“There is an additional assessment made by the Commissioner upon the Appellant; it is perfectly settled by cases such as Norman vs. Galder 267C 293 that the onus is upon the Appellant to show that the assessment made upon him is excessive and incorrect and of course he has completely failed to do. That is sufficient to dispose of the appeal, which I accordingly dismiss with costs.”

Respondent’s Prayers. 39. The Respondent prayed to the Tribunal that: -a.The Appeal be dismissed with costs.b.The objection decision dated 29th January 2020 be upheld.

Issues For Determination 40. The Tribunal has carefully studied the pleadings, the preliminary objection by the Respondent and documentation of both parties and is of the respectful view that the issues that call for its determination are as follows: -a.Whether the Notice of Appeal was invalidb.Whether the Appeal is properly before the Tribunalc.Whether the Appeal is merited

Analysis And Findings 41. Having identified the issues for determination, the Tribunal proceeded to deal with the issues as follows -

a.Whether the Notice of Appeal was invalid 42. The Respondent’s grounds for preliminary objection was on the basis of Section 52(2) of the Tax Procedures Act which states that:-“A notice of appeal to the tribunal relating to the assessment shall be valid if the tax payer has paid the tax not in dispute or entered into arrangements with the commissioner to pay the tax not in dispute under the assessment at the time of lodging the notice,”

43. The parties were in agreement that the undisputed tax of Kshs. 11,904,614. 24, which the Appellant has endeavored to settle was still outstanding as at date of lodging the Notice of Appeal.

44. The Appellant admitted the undisputed tax but has adduced no evidence of settlement or correspondence on proposal and/or arrangement on how to pay the undisputed taxes.

45. The Tribunal, taking into consideration provisions of the law and particularly lack of evidence of payment or any arrangement with the Respondent regarding the disputed taxes, notes that the Appellant was in contravention of Section 52(2) of the TPA and therefore the Notice of Appeal is invalid.

46. The Tribunal is guided by the holding in the case of Psalms Supplies Ltd vs. The Commissioner of Investigations and Enforcement (TAT Case No 338 of 2021), where it held that:“In absence of any evidence of payment or any payment arrangement with the Respondent regarding undisputed taxes, the Tribunal found that the Appellant was in contravention of section 52(2) of the TPA and therefore invalid.”

47. The Tribunal also relied on the case of Hewlett Packard East Africa Limited vs. The Commissioner of Domestic Taxes, Tax Appeal No. 127 of 2016 where the Tribunal faced with a similar scenario held as follows:“The Tribunal in the circumstances finds that the appeal is incompetent and unsustainable in law as the Notice of Appeal was lodged by the Appellant in complete disregard of the mandatory provisions of Section 52 (2) of the Tax Procedures Act, 2015. The part payments made on the part of the Appellant were subsequent to the filing of the Notice of Appeal and there is absolutely no arrangement in place as regards to the payment even of the outstanding balance of the tax not in dispute."

48. The same was reiterated in the case of Hewett Packard East Africa Ltd vs. The Commissioner of Domestic Taxes, Income Tax Appeal No 12 of 2018, eKLR where the High Court in dismissing the appeal that was lodged before the payment of undisputed taxes held that that:“in the end it follows that this court having determined that the Appellant’s appeal was not in compliance with section 52(2) of the tax procedures act grounds 1,2 and 3 of the appeal before the tribunal was incompetent in view of section 52(2) of TPA and having been incompetent, no appeal can lie on the grounds before this court”.

49. The Tribunal having determined that the Notice of Appeal was invalid, it did not delve into the other matters that fell for its determination as they were rendered moot.

Final Decision 50. The upshot of the above finding is that the Appeal is incompetent and unsustainable in law. The Tribunal accordingly proceeds to make the following Orders; -a.The Appeal be and is hereby struck out.b.Each Party to bear its own costs.

51. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 29TH DAY OF JUNE 2023. ERIC N. WAFULA - CHAIRMANCYNTHIA B. MAYAKA - MEMBERGRACE MUKUHA - MEMBERJEPHTHAH NJAGI - MEMBERABRAHAM K. KIPROTICH - MEMBER