[2022] KEHC 93 (KLR)

Ken Iron and Steel Ltd v Commissioner of Investigations and Enforcement (Income Tax Appeal E066 of 2021) [2022] KEHC 93 (KLR) (Commercial and Tax) (11 February 2022) (Ruling)

Neutral citation number: [2022] KEHC 93 (KLR)

Republic of Kenya

In the High Court at Nairobi (Milimani Commercial Courts Commercial and Tax Division)

Income Tax Appeal E066 of 2021

A Mabeya, J

February 11, 2022

Between

Ken Iron and Steel Ltd

Appellant

and

Commissioner of Investigations and Enforcement

Respondent

Ruling

1. Before Court is an application dated 10/6/2021. It was brought under rules 15, 17 and 20 of the Tax Appeals Tribunal Rules. It sought orders that the respondent’s assessments dated 3rd and 4th May, 2018, further assessment dated 9/5/2018, objection decisions dated 3/8/2018 and 6/8/2018, Tax Appeal decision dated 28/5/2021, and the Agency notices dated 2/6/2021 be stayed pending the determination of the appeal.

2. The application also sought leave to produce additional documents being the judgment and decree in Petition Number 167 of 2018 on 12/11/2020 and documents in support of the impugned transactions including bank statements, invoices, ledge accounts, RTGS slips, delivery notes and KRA assessment orders.

3. The application was supported by the affidavit of Mayur Malde, the applicant’s director, on 10/6/2021. It was predicated on the grounds that the respondent had assessed the applicant’s tax at Kshs. 38,992,231/= for both VAT and Corporation Tax. The respondent’s decision was upheld by the Tax Appeal’s decision of 28/5/2021. The respondent then began enforcement by issuing agency notices to the applicant’s banks requiring the immediate payment of Kshs. 38,992,231/= as agents of the applicant.

4. It was also contended that despite providing the documents now sought to be produced, the respondent’s representative failed to provide them to the respondent and to the Tax Appeals Tribunal.

5. The respondent filed grounds of opposition dated 2/7/2021. It was contended that the appellant had enjoyed stay of execution since the time the matter was filed at the TAT; that the assessed amount continue to attract penalties and interest and if the stay was allowed, the amount would accumulate so much that the respondent would not be able to collect the tax. It was also contended that if the appeal turned out successful, the respondent had a refund mechanism hence the applicant would not suffer loss.

6. That there was a likelihood that the applicant would transfer the funds out of their accounts hence making enforcement impossible. That the applicant had been given an opportunity to produce additional evidence both at the audit stage and before the TAT. That in the alternative, the applicant ought to have deposited a security for the taxes in question.

7. The applicant filed a further affidavit sworn by Mayur Malde on 13/7/2021. It was contended that the grounds of opposition were defective as they were matters of facts and attempted to introduce new evidence. That there was no evidence to support the allegation that the applicant would transfer its funds from the various accounts. That the only refund mechanism provided by the respondent was for overpaid taxes. That the applicant was unable to pay security as it was operating on an overdraft facility of Kshs. 39,458,915. 55 as at 30/6/2021 from Victoria Commercial Bank.

8. I have considered the depositions, evidence and the parties’ submissions on record. There are two issues for determination, the first issue is whether the applicants have met the necessary condition for granting a stay and the second is whether leave to produce additional evidence should be granted.

9. Order 42 Rule 6 (2) sets out the conditions for stay pending appeal. These are that the application should be made timeously, that the applicant would suffer substantial loss if stay is not granted and security for the due performance of the order or decree that might ultimately be binding on the applicant.

10. The decision under challenge was delivered by the Tax Appeal Tribunal (“the Tribunal”) on 28/5/2021. The Notice and Memorandum of Appeal are dated 2nd and 7th June 2021, respectively. The agency notices being challenged were issued on 2/6/2021 and the application was lodged 10/6/2021. Going by the short time frame between the TAT decision, issuance of agency notices and the filing of the application, I find that there was no inordinate delay.

11. On substantial loss, in James Wangalwa & Another vs. Agnes Naliaka Cheseto [2012] eKLR, it was held: -“No doubt, in law, the fact that the process of execution has been put in motion, or is likely to be put in motion, by itself, does not amount to substantial loss. Even when execution has been levied and completed, that is to say, the attached properties have been sold, as is the case here, does not in itself amount to substantial loss under Order 42 Rule 6 of the CPR. This is so because execution is a lawful process. The Appellant must establish other factors which show that the execution will create a state of affairs that will irreparably affect or negate the very essential core of the Appellant as the successful party in the appeal ... the issue of substantial loss is the cornerstone of both jurisdictions. Substantial loss is what has to be prevented by preserving the status quo because such loss would render the appeal nugatory”.

12. In RWW vs. EKW [2019] eKLR, the court observed that: -“The purpose of an application for stay of execution pending an appeal is to preserve the subject matter in dispute so that the rights of the appellant who is exercising the undoubted right of appeal are safeguarded and the appeal if successful, is not rendered nugatory. However, in doing so, the court should weigh this right against the success of a litigant who should not be deprived of the fruits of his/her judgment. The court is also called upon to ensure that no party suffers prejudice that cannot be compensated by an award of costs”.

13. The applicant swore that it is in debts. That it is operating on an overdraft facility issued by one of its bankers. That if the disputed tax was paid, it may as well close shop. Those were averments made on oath. There was no corresponding statement made on oath. The respondent was satisfied with mere grounds of opposition.

14. In view of the fact that the averments made on oath were not rebutted, I find that the applicant had demonstrated that it would suffer substantial loss if the stay sought is not granted.

15. As regards security, there was an averment that the applicant has nothing to offer as security. That it is surviving on an overdraft facility. To grant or refuse an application for stay of execution pending appeal is discretionary. The court must balance the interests of an appellant against those of the successful party.

16. The applicant submitted that it was not in a position to pay security because it already had an overdraft of Kshs. 39,458,915. 55 as of 30/6/2021. The applicant also claimed that its financial position had been undermined by the Covid-19 pandemic. The applicant produced the overdraft facility and leger accounts as evidence. The respondent retorted that the disputed tax can be refunded.

17. I note the applicant’s submission that should the judgment be executed, it will lose its ability to conduct business. I have also considered the respondent’s submission that there is need for sufficient security.

18. My take is that, the submission that giving a security will completely cripple the applicant that perse is a red flag. What assurance is there that the applicant will be able to pay the taxes demanded if the appeal is not successful? That would be tantamount to condemning the successful party to total loss while treating the appealing party with kid gloves.

19. In this regard, I consider a security of a moderate sum of Kshs. 10 million to be adequate.

20. On the second issue of production of documents, the Court’s power to admit additional evidence is discretionary. Its jurisdiction is derived from section 78 of the Civil Procedure Act which provides, inter alia, that: -“(1)Subject to such conditions and limitations as may be prescribed, an appellate court shall have power –…(d)To take additional evidence or to require the evidence to be taken…”

21. This is further supported by Order 42 Rule 27 of the Civil Procedure Rules which provides: -1)The parties to an appeal shall not be entitled to produce additional evidence, whether oral or documentary, in the court to which the appeal is preferred; but if –a)the court from whose decree the appeal is preferred has refused to admit evidence which ought to have been admitted; orb)the court to which the appeal is preferred requires any document to be produced or any witness to be examined to enable it to pronounce judgment, or for any other substantial cause, the court to which the appeal is preferred may allow such evidence or document to be produced, or witness to be examined.2)Wherever additional evidence is allowed to be produced by the court to which the appeal is preferred the court shall record the reason for its admission”.

22. In addition, Rule 15 of the Tax Appeals Tribunal (Appeals to the High Court) Rules, 2015 envisages admission of further evidence. It provides: -“The Court may, at the time of hearing of an appeal, admit other documentary or oral evidence not contained in the statement of facts of the appellant or respondent should it consider it necessary for determination of the appeal”.

23. From the cited provisions of the law, the decision as to whether or not to admit additional evidence on appeal is an exercise of judicial discretion. Like all other discretions, the same must be exercised judiciously and not capriciously. The only caveat is that in admitting further evidence, the court must record the reason for allowing such adduction.

24. The principles governing the admission of additional evidence were laid down in Tarmohamed & Another v Lakhani & Company [1958] EA 567. In that case, the Court of Appeal for Eastern Africa adopted the decision in Ladd v. Marshall [1954] WLR 1489 and stated: -“Except in cases where the application for additional evidence is based on fraud or surprise:‘to justify reception of fresh evidence or a new trial, three conditions must be fulfilled: first, it must be shown that the evidence could not have been obtained with reasonable diligence for use at the trial; secondly, the evidence must be such that, if given, it would probably have an important influence on the result of the case, though it need not be decisive; thirdly, the evidence must be such as is presumably to be believed, or in other words, it must be apparently credible, though it need not be incontrovertible”.

25. In Wanjie & Others v Saikwa & Others [1984] KLR 275, Chesoni JA observed on admitting additional evidence on appeal thus: -“This rule is not intended to enable a party who has discovered fresh evidence to import it nor is it intended for a litigant who has been unsuccessful at the trial to patch up the weak points in his case and fill up omissions in the Court of Appeal. The Rule does not authorize the admission of additional evidence for the purpose of removing lacunae and filing in gaps in evidence. The appellate court must find it needful. Additional evidence should not be admitted to enable a plaintiff to make out a fresh case in appeal. There would be no end to litigation if the rule were used for the purpose of allowing the parties to make out a fresh case or to improve their case by calling further evidence. It follows that the power given should be exercised very sparingly and great caution should be exercised in admitting fresh evidence”

26. From the foregoing, the question is whether the applicant made a case for grant of leave to file additional evidence. It is not in dispute that all the evidence that the applicant wishes to produce was available during the filing and even the hearing of the appeal before the Tribunal. The judgment in Petition Number 167 of 2018 was delivered on 12/11/2020, long before the appeal before the Tribunal was heard on 12/3/2021. The appeal was determined on 28/5/2021.

27. In this regard, if the applicant felt or knew that that judgment was necessary for the determination of the matters in issue before the Tribunal, nothing would have been easier than to produce the same at the hearing. The fact that the applicant forwarded a certified copy of the same to the respondent amounts to nothing since the appeal in the Tribunal was filed by the applicant and it was the Tribunal to make a determination on the issues before it and not the respondent. Having decided not to produce and rely on it before the Tribunal, it is a choice that the applicant made willingly and has to live with it.

28. Additionally, it beats logic for the applicant to have still pursued the appeal before the Tribunal despite claiming that the respondent’s objection decision had been effectively set aside by that judgment. To this Court’s view, that is an afterthought. That judgment does not qualify to be produced at this stage.

29. As regards the other additional documents, the Court notes that Mr. Stephen Okoth, one of the tax advisers who allegedly informed the applicant that they inadvertently and erroneously failed to lodge these vital documents before the Tribunal, has not sworn an Affidavit to confirm this fact. He has not explained at which point the said advisers discovered the alleged error considering that the appeal before the Tribunal was filed way back in 2018. It is therefore difficult to tell whether this was a genuine and/or inadvertent error.

30. In any event, the professional tax advisers having represented the applicant before the Tribunal, knew the evidence needed to be produced on behalf of their client. They should have discovered the alleged error by exercising due diligence. Needless to say, these are documents that every tax payer is by law required to keep records of in a manner that is easily accessible as and when needed. (See Section 23 of Tax Procedure Act 2015, Section 43 of the VAT Act 2013 and Section 54A of the Income Tax Act2015).

31. That being the case, it would be prejudicial to the respondent to allow the applicant to use this opportunity to patch up and/or fill up the gaps in its case at this second appeal stage. When a party chooses a professional who represents him/it in a negligent manner, sometimes it is fair to let the loss lie where it falls as in this case. The client should seek recourse there other than vex the other litigant and/or the court unnecessarily.

32. Litigation must come to an end. It does not matter that the evidence is crucial. There must be sufficient reason why the evidence was not produced at the trial.

33. The upshot is that the applicant’s application dated 14/10/2021 is without merit and is hereby dismissed with costs to the respondent. However, there shall be a stay of execution of the Agency Notices upon payment of security of Kshs. 10 million within 14 days of this ruling. In the meantime, the parties should take steps to prosecute the appeal expeditiously.

It is so ordered.DATED AND DELIVERED VIRTUALLY THIS 11TH DAY OF FEBRUARY, 2022. A. MABEYA, FCI ArbJUDGE