[2024] KETAT 725 (KLR)

Khaki v Commissioner of Domestic Taxes Department (Tax Appeal E471 of 2023) [2024] KETAT 725 (KLR) (17 May 2024) (Judgment)

Neutral citation: [2024] KETAT 725 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E471 of 2023

E.N Wafula, Chair, Cynthia B. Mayaka, RO Oluoch, T Vikiru & AK Kiprotich, Members

May 17, 2024

Between

Hussein Ali Mohamed Jaffer Khaki

Appellant

and

The Commissioner of Domestic Taxes Department

Respondent

Judgment

Background 1. The Appellant is a registered taxpayer and a partner in Kenya Bonded Warehouse Company.

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 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 Parts 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 issue in dispute arose when the Respondent carried out an investigation on the Appellant’s affairs culminating in the issuance of findings vide a letter dated 5th June 2020 and a subsequent assessment dated 13th August 2020.

4. The Appellant objected to the assessments on 20th August 2020 and the Respondent issued its objection decision on 17th November 2020 confirming the assessment.

5. Aggrieved by this decision the Appellant lodged his Notice of Appeal dated 31st July 2023 and filed on 14th August 2023.

The Appeal 6. The Appeal is premised on the following grounds as listed in the Memorandum of Appeal dated and filed on 14th August 2023, that:-a.The Appellant is a partner in Kenya Bonded warehouse Company.b.The Respondent erred in law in issuing Income tax additional assessments for the three (3) years based on VAT additional assessments raised in the partnership without awaiting the result of the Appeal in the partnership.c.Valid objections were lodged on 28th February 2023 objecting to income tax additional assessment orders and objection acknowledgement receipt numbers KRA 202302880909, KRA202302881150 an KRA202302881470 all dated 28th February 2023 were issued.d.Inspite of valid objections, the Respondent went ahead and confirmed the income tax additional assessments vide its letter dated 6th July 2023 disregarding the fact that the Appellant issues had been addressed in partnership as per its letter dated 7th December 2020.

The Appellant’s Case 7. The Appellant’s case was premised on his Statement of Facts dated and filed 14th August, 2023 and written submissions dated 22nd February 2024 and filed on 6th March 2024.

8. The Appellant stated that the Respondent erred in law in issuing Income tax additional assessments for the three (3) years based on VAT additional assessments raised in the partnership without awaiting the result of the Appeal in the partnership.

9. The Appellant further stated its objections were acknowledged as received under receipt numbers KRA202303920933, KRA202303921372 and KRA202303921729 on 16th March 2023.

10. The Appellant opined that inspite of valid objections, the Respondent went ahead and confirmed the income tax additional assessments vide its letter dated 6th July 2023 disregarding all the explanations, reconciliations, and communications provided to the Respondent on 7th December 2022 concerning the partnership.

11. It was the opinion of the Appellant that no further inquiries were raised regarding income tax returns for the 3 years in question and there was therefore, need for the Respondent to accept the said returns as they are.

12. The Appellant asserted that the Respondent:a.Disregarded all his reconciliations, communication and explanation and proceeded to issue Income tax additional assessments on-line after a period of 26 months. That considering that he did not receive any response to his letter dated 7th December 2020 he assumed that the issue was settled only for him to see Income tax additional assessments issued after a period of 26 months.b.Erred in law in issuing demand letter for tax in arrears before raising assessments.c.Erred in law in giving its decision and not taking into consideration the explanation given by the Appellant who is a partner in Kenya Bonded Warehouse Company.

13. The Appellant posited that the explanation provide by the Kenya Bonded Warehouse Company which was the key backbone to all partners sufficiently explained all the assessment raised by the Respondent because such assessments were written off through the partnerships because all the transactions go through the partnership.

Appellant’s Prayer 14. The Appellant’s prayer to the Tribunal is for orders that it directs the Respondent to withdraw the Income tax additional assessments for the three (3) years.

The Respondent’s Case 15. The Respondent’s case is premised on:a.Its Preliminary objection and Statement of Facts dated and filed on 12th September 2023. b.Written Submissions dated 26th February 2023 and filed on 14th March 2024.

16. The Respondent stated that it issued its additional assessments for the two years on 13th August 2020 based on the Value Added Tax additional assessments issued in the partnership where the Appellant is a partner. That prior to that, it had reviewed the Partnership’s tax affairs upon receiving a profiled sector analysis on the operation of bonded warehouses.

17. That its investigations revealed that:a.The Appellant and the other Partners had made significant capital additions into the business/partnership from unexplained sources which could not be traced to its bank statements.b.There were significant variances between the Partnership’s expected income based on banking analysis and income declared by the Partnership and its Partners in its tax returns.c.The income declared by the Partners in the prior years that is 2010 to 2015 did not support the opening capital balances.d.Additional capital was also injected into the business between 2015 to 2018 by the Partners whose sources were unexplained.e.The Appellant with other Partners made substantial drawings from the Partnership’s bank accounts and the same was not subjected to PAYE.f.The Partnership failed to deduct applicable PAYE tax as stipulated under Paragraph 10 of Income (PAYE) Rules.

18. That consequently:a.It issued an assessment on 13th August 2020 for income tax amounting to Kshs. 36,446,677. 00. b.The Partnership acknowledged receipt of the assessments via email on 15th July 2020 and objected to the assessments on 20th August 2020 and subsequent provision of reconciliation documents was done on 1st October 2020. That therefore, the sixty (60) days contemplated under Section 51(11) of the Tax Procedures Act, 2015 started running on 1st October 2020. c.It issued its objection decision vide a letter dated 17th November 2020 confirming the assessment.

19. That the Appellant objected to the objection decision on 7th December 2020 and asked the Respondent to review the same.

20. That the Appellant also objected to the updated iTax assessments on 28th February 2023 through iTax system and the Respondent informed it on 7th July 2023 that it had issued its objection decision dated 17th November 2020 and the same cannot be reviewed again.

21. The Respondent posits that the Partnership and the Appellant are two entities that are distinct from each other in tax law and therefore their tax matters should be separated. That the tax affairs of the Appellant have thus been handled separately from the partnership.

22. It was also its view that the Appellant did not comply with Sections 12 and 13 of the Tax Appeals Tribunal Act, 2012 and thus this Tribunal should down its tools as it lacks jurisdiction in this matter.

23. The Respondent affirmed that the Appellant’s notice of objection of 28th February 2023 is not an objection for the purposes of Section 51(1)-(3) of the Tax Procedure Act 2015 and that it is invalid for the following reasons;i.The Respondent confirmed the assessment through an objection decision on 17th November 2020. The Respondent having issued the decision with regard to the Appellant’s objection, which was validated on 1st October 2020, the same cannot be reviewed thereafter again by the Respondent unless as ordered by a judicial authority.ii.The Respondent does not have jurisdiction to review its own Objection decision unless with the express orders issued by a proper judicial authority.iii.In order for the Respondent to effect the manual objection decision dated 17th November 2020 on iTax system, the assessment had to be updated in the system.iv.The amendments of the iTax were merely procedural to enable the Respondent amend the Appellant’s electronic ledger and update the tax liability to reflect the decision of the Respondent dated 17th November 2020 for the purposes of ease of tax administration by the Respondent.v.The amendment of the returns on iTax did not vary or invalidate the previous decision since there was no further review and, in any event, the Respondent was functus officio as of 17th November 2020 when it issued the objection decision.vi.To that end therefore, the Appellant’s Appeal herein is incompetent as it is not founded on any known law or procedure; andvii.The Appeal herein is bad in law and an abuse of the judicial process and thus should be struck out with costs to the Respondent.

24. The Respondent averred that ground No. 4 in the Memorandum of Appeal was a new ground which was not pleaded in the notice of objection.

25. It further averred that:i.Its letter dated 6th July 2023 is neither a tax decision nor an appealable decision and as such there is no valid appeal that can be founded on it.ii.Its assessments which formed the basis of the Respondent’s decision of 17th November 2020 are valid and correct because they were issued after considering the response and documents filed by the Appellant.iii.The Appellant has failed to discharge its burden of proof under Section 56(1) of the Tax Procedures Act, 2015, Section 30 of the Tax Appeals Tribunal Act, 2013 and Section 107 of the Evidence Act, Cap 80 laws of Kenya.

26. The Respondent raised the the following issues for determination in the Appeali.Whether the Tax Appeals Tribunal has jurisdiction; andii.Whether the Respondent erred in issuing Income tax assessments.

i. On whether the tax Appeals Tribunal has Jurisdiction; 27. The Respondent argued that the Tribunal lacks jurisdiction to entertain the purported Appeal because the Appellant did not have valid notice of Appeal; and that it was is fatally defective and incompetent.

28. The Respondent submitted that:a.There was no valid Notice of Appeal that was filed before the Tribunal.b.It issued its objection decision on 17th November 2020 confirming the assessments.c.The Appellant was supposed to lodge the Notice of Appeal with the Tribunal not later than 16th December 2020 but none was filed until 31st July 2023. d.The decision appealed was issued on 17th November 2020 while the present Memorandum of Appeal was filed on 14th August 2023. e.The Appellant did not seek leave of the Tribunal to file an Appeal out of time.

29. That the Notice of Appeal dated 31st July 2023 is invalid because it was late by a period of more than two and a half years contrary to Section 13(1) of the Tax Appeals Tribunal Act, 2013.

30. That its trite law that it is a notice of appeal that invokes the jurisdiction of the court or a judicial authority to hear and determine an Appeal and that in the absence of a valid Notice of Appeal then it follows that the Tribunal does not have jurisdiction to entertain the Appeal herein.

31. It supported its argument that the Appeal herein was fatally defective for want of compliance with Sections 12 and 13 of the TAT Act with the cases of:a.Nicholas Kiptoo Arap Korir Salat v Independent Electoral and Boundaries Commission & 7 others [2014] eKLR.b.Commissioner of Domestic taxes v Local Productions (Kenya) Limited [2020] eKLR.c.MayfairInvestments Company Limited vs Commissioner of Investigations & Enforcement Nairobi TAT Appeal No. 212 of 2020

32. The Respondent concluded its argument by stating that there was no valid Appeal before this Tribunal. That the late and incompetent Appeal should be struck out with costs to the Respondent.

ii. On whether the Respondent erred in Issuing Income Tax Assessments 33. The Respondent submitted that the anomalies noted in the Appellant returns which formed the basis for amending the Appellant’s return was regular and lawful because it did the following to ascertain the Appellant’s tax liability:a.Computed income tax on the variance between income as per the net bankings and the income tax returns under Section3(2)(a) and 4(b) of the Income tax Act, CAP 470 laws of Kenya;b.Charged PAYE on the drawings not subjected to tax returns as per Paragraph 10 of Income Tax (PAYE) Rules.c.Added back unsupported expense claims and charged them to tax; andd.Added back the claimed expenses relating to alleged donation to a charitable institution and charged to tax for being unsupported.

34. That the Appellant only provided reconciliations in a bid to justify the variances established but did not provide supporting documents. That it noted the following when it reviewed Appellant’s notice of objection:a.The explanation on the source of money invested in the fixed deposits and the additional capital injected by the Appellant (as a Partner) and others over the years in comparison to the incomes declared in their individual returns was not provided.b.The reconciliation provided was misleading and incorrect because it included both deposits of Partners (savings & fixed deposits) and the Partnership and yet the two entities are distinct from each other in tax law and therefore their tax matters should be separated.c.The Appellant failed to demonstrate that the money invested in its fixed deposits was initially declared in his self-assessment returns or taxed or that it is not a taxable income.d.The Appellant’s cash drawing analysis prepared by the Partnership was made from individual Partners’ fixed deposit accounts and not from the Partnership’s fixed deposits.e.The Appellant did not provide the source and supporting documents for this undisclosed income.

35. That given the foregoing assertions it was thus justified in treating the Appellant’s income as under declared income which is subject to assessment under Section 31 of the Tax Procedures Act, 2015.

36. That the Appellant failed to provide all the requested documents even at the Appeal stage despite being afforded several opportunities to support its allegation.

37. That the Appellant failed to discharge its burden of proof and the Respondent was thus justified to apply its best judgment in assessing the Appellant’s income under Section 31 of the Tax Procedure Act, 2015.

Respondent’s Prayer 38. The Respondent therefore prayed that the Tribunal:-a.Upholds the additional assessments of 13th August 2020 as confirmed in the Objection decision letter dated 17th November 2020 as valid and in conformity with the provisions of the law; andb.Finds that the Appeal herein is without merit and dismiss it with costs to the Respondent.

Issues for Determination 39. Upon perusing the pleadings and documentation produced before it, together with the submissions of the parties, the Tribunal is of the opinion that the following are the main issues for determination:-a.Whether the Appellant’s Appeal is competent in law.b.Whether the Respondent’s Objection decision was lawful.c.Whether the Appellant’s assessment was justified.

Analysis and Findings 40. The Tribunal wishes to analyse the issues as herein-under:a.Whether the Appellant’s Appeal is competent in law.

41. The Respondent argued that the Appellant’s Appeal was incompetent because it was filed out of time. It was its view that whereas the objection decision was issued on the 17th of November 2020 the Appeal herein was filed 1000 days later on 14th August 2023 contrary to Sections 13 and 14 of the TAT Act. That no leave was sought and obtained to file the said the said Appeal out of time.

42. The Appellant did not offer a rebuttal to this issue both in its Statement of Facts and written submissions.

43. Section 13(1)(b) provides as follows regarding timelines for filing an appeal before the Tribunal:“1)A notice of appeal to the Tribunal shall—a.be in writing or through electronic means;b.be submitted to the Tribunal within thirty days upon receipt of the decision of the Commissioner.”

44. It is clear from a reading of Section 13(1)(b) of the TAT Act that an appeal to the Tribunal should be filed within thirty (30)days upon receipt of the objection decision.

45. The objection decision in this matter which was produced by both parties as evidence was dated 17th November 2020.

46. Considering that the Appeal was filed on the 14th August 2023, it is clear that the Appeal was filed late by over 2 years and 9 months. On this premise alone the Appeal was late.

47. Even if the Tribunal was to take the date of 28th of February 2023 which is preferred by the Appellant as the date of objection, the said Appeal would still be late by about 5 months. The Appeal would again fail on this premise.

48. No evidence was presented before the Tribunal to show that the Appellant sought and obtained leave to file this Appeal out of time as is envisaged in Section 13(3) and (4) of the TAT Act which states as follows:“(3)The Tribunal may, upon application in writing or through electronic means, extend the time for filing the notice of appeal and for submitting the documents referred to in subsection (2).(4)An extension under subsection (3) may be granted owing to absence from Kenya, or sickness, or other reasonable cause that may have prevented the applicant from filing the notice of appeal or submitting the documents within the specified period”

49. Accordingly, the Tribunal finds and hold that this Appeal is incompetent as it is time-barred.

50. Given that the Tribunal has determined the Appellant’s Appeal was invalidly lodged the other two issues that fell for determination have become moot.

Final Decision 51. The upshot to the foregoing is that the Appeal is incompetent and unsustainable in law and the Tribunal accordingly proceeds to make the following Orders;-i.The Appeal be and is hereby struck out.ii.Each party to bear its own costs.

52. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 17TH DAY OF MAY, 2024ERIC NYONGESA WAFULA - CHAIRMANCYNTHIA B. MAYAKA - MEMBERDR. RODNEY O. OLUOCH - MEMBERTIMOTHY B. VIKIRU - MEMBERABRAHAM K. KIPROTICH - MEMBER