[2023] KETAT 123 (KLR)

Kimu Investment Ltd v Commissioner of Domestic Taxes (Tribunal Appeal 26 of 2022) [2023] KETAT 123 (KLR) (17 March 2023) (Judgment)

Neutral citation: [2023] KETAT 123 (KLR)

Republic of Kenya

In the Tax Appeals Tribunal

Tribunal Appeal 26 of 2022

Robert M. Mutuma, Chair, D.K Ngala, Edwin K. Cheluget, E.N Njeru & Rodney Odhiambo Oluoch, Members

March 17, 2023

Between

Kimu Investment Ltd

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

1. The Appellant is a limited liability company registered under the Companies Act and whose main activity is investment in land.

2. The Respondent is a Principal officer appointed under and in accordance with Section 13 of the Kenya Revenue Authority Act and the Kenya Revenue Authority is charged with the responsibility to assess, collect and administer and account for all tax revenue on behalf of the Government.

3. The Appellant was subjected to compliance check to establish whether it was compliant in filing of returns for both Income Tax and VAT for the period of 2018. It was discovered that there were variances between what it filed in January to December 2018 VAT returns and the consolidated income tax returns for the year 2018.

4. The Respondent requested the Appellant to avail supporting documents for verification. From documentary evidence and the explanation by the Appellant it was clear that the ITC2 returns were based on Audited Financial Statements of the Appellant.

5. The Appellant through its tax agent stated that the filed returns as per the ITC2 were erroneous and wanted to have the same corrected. It therefore filed an application under Section 31 of the Tax Procedures Act (TPA), for correction.

6. The application under Section 31 of the TPA for correction of erroneous tax returns is still pending as the Respondent advised the Appellant to deal with the correction separately. It therefore based its assessment on the returns variances, went ahead and assessed the tax due and issued an additional assessment order dated June 15, 2021 for VAT in the sum of Ksh 894,438. 72 exclusive of interest on incremental liability.

7. Dissatisfied with the assessment the Appellant engaged the Respondent both physically and vide correspondences to try and solve the dispute but were unable, hence the Appellant filed an Objection to the assessment on November 30, 2021. On the December 14, 2021 the Respondent issued its Objection Decision.

8. Aggrieved by the Objection decision the Appellant commenced the appeal process by filing a Notice of Appeal dated January 10, 2022 and filed on January 11, 2022.

The Appeal. 9. The Appellant’s Memorandum of Appeal dated January 10, 2022 is supported by the Statement of Fact of same date and the submissions dated August 26, 2022 together with annextures and attachments. It also applied for leave to file an Amended Memorandum of Appeal and Statement of Facts which leave was granted and the Amended Memorandum of Appeal and Statement of Facts both dated February 28, 2022 were filed on March 1, 2022.

Amended Memorandum of appeal 10. The Appellant has stated the following grounds of appeal;a.The company failed to claim input tax on purchase.b.The return on Corporation tax was wrong.c.Application under Section 31 of the Tax Procedures Act, 2015 has not been considered.1. The Appellant therefore prays that the Tribunal sets aside the confirmation and direct the Respondent to vacate the assessment.

Appellant’s Case 12. The Appellant contends that its main activity is buying land and has no other commercial activity and therefore the main source of its deposits is the members monthly subscriptions which are deposited in a bank account.

13. That the Respondent used the information provided above to raise VAT assessment for Ksh 894,439. 00 That the Appellant failed to claim input tax on purchases.

14. The Appellant averred that it made an application to correct the error in the filed returns under Section 31 of the TPA and that the Respondent’s response to the application is that it only handles objections and other departments handle applications under the said Section. The Appellant’s application therefore is still pending.

15. The Appellant has only one account at Equity Bank Ltd Account No xxxx, and that in the year under consideration only member’s subscriptions were credited.

16. The Appellant has thus prayed that the Tribunal to allow unclaimed input tax on purchases.

17. The Appellant has also through its Chairman, one Peter Nginga Giguta, sworn an Affidavit dated January 10, 2022 in support of the Appeal. It states in the Affidavit that the company has no commercial business, that the returns filed was based on wrong data which was provided by the Treasurer which members passed without scrutiny, and the same was used to prepare financial report and later passed to Kenya Revenue Authority.

18. That the assessment was therefore as a result of a wrong financial report and therefore the same should be annulled

The Appellant’s submissions. 19. The Appellant has categorically stated that it relied on its Statement of Facts and the supporting documents attached thereto. That the Appellant operates non-business entity more akin to a members’ club where the members meet over weekend to socialize and make merry.

20. That the Appellant only buys beer and goats for slaughter, only when the members are meeting. That the Chairman’s Affidavit confirmed the same.

21. That there are no business deposits at all and what is there is only the members deposits under their names and the deposits from fixed deposit account when they mature as shown by the statement of accounts provided.

22. The Appellant averred that the VAT registration was erroneous and several applications have been made for deregistration. The Appellant therefore does not file VAT returns as it does not do any Vatable business.

23. It said that the Respondent was justified in charging 16% on sales as per the tax return filed. But it was incumbent upon the Respondent to cancel the assessment upon the application for correction and the explanations given by the Appellant.

24. That the bank statements provided were clear and it showed only members subscriptions were deposited during the review period.

25. It states that under Section 2 of the Income Tax Act 2013, VAT is defined. That it is only due where there is a taxable supply subject to VAT, that in the current circumstance there is no taxable supply.

26. That in so far as VAT is due from a taxable supply from a registered person as per Section 5(1) of the Value Added Tax Act, there were no taxable supplies and further the registration of the Appellant was erroneous.

27. The assessment and the objection decision for Ksh 894,439. 00 should be vacated as it is proven by evidence that it is based on wrong information.

The Response 28. The Respondent in countering the Appeal filed the Statement of Facts dated January 10, 2022 and the Submissions dated August 26, 2022, together with the attachments/annextures thereto.

Respondent’s Case 29. It is the Respondent’s contention that it conducted a compliance check on the Appellant based on the Income Tax returns for 2018 and the VAT returns for the period January 2018 to December 2018. That the returns filed in the Income Tax ITC2 were based on Financial Statements of the Appellant.

30. It is correct that the Appellant requested for correction of the erroneous returns as applied under Section 31 of the TPA. That the Respondent contends that although the application was made, it is the Respondent’s contention that similar returns were made in the previous years in ITC2 and the same were in a range similar to the current declarations.

31. It therefore based on that information, made an assessment on June 15, 2021 for the sum of Ksh 894,439. 00 the Appellant objected and it issued its decision on December 14, 2022.

32. The Respondent’s Objection decision read in part; 'Income Tax return filed for the year 2018 was done in error and you wish to make an application under section 31 of the TPA to correct the error. we however advise that you pursue the application for correction of error separately as prescribed under section 31 of the TPA.'

33. That the assessment was indeed based on the Appellant’s self-assessment returns. The Appellant was registered for VAT under the review period and offered VATable services.

34. It is the Respondent’s contention that the returns were filed by the Appellant’s accountant and not a creation of the Respondent. That the Appellant in the previous years under IT2C had similar returns and further that it was upon the Appellant under Section 56(1) of TPA to prove that the assessment was not correct.

35. It says contrary to the Appellant’s assertion that the application under Section 31 of TPA was not considered, it was being handled by a separate department and it was indeed considered and the Appellant advised to deal with it separately as the Respondent at the time was only dealing with the Objection and the application for correction was being handled by a separate team.

36. That the Appellant slept on its rights and is estopped from claiming that the application for amendment was not considered. The Respondent avers that instead of pursuing the amendment the Appellant ignored the advice and proceeded to the Tribunal for remedies. That the Appellant is subverting the laid down procedure by requesting the Tribunal to grant prayers which are a preserve of the Respondent.

37. The Respondent prays that;a.The Appeal be dismissed with costs.b.The Tribunal upholds the decision of the Respondent and finds that the additional VAT assessment amounting to Ksh 894,439. 00 is due and payable.

Respondent’s submissions. 38. The Respondent has reiterated what is in the Statement of Facts and further framed two issues for determination;a.Whether the Appellant is entitled to claim input VAT 4 years after the supply took place.b.Whether the Respondent erred in confirming the assessment and demanding taxes due

39. It has relied heavily on Section 17 of the VAT Act as to claim of VAT input by a taxpayer, that the same cannot be claimed beyond the stipulated period being 6 months after date of supply.

40. That based on the documents provided, the Respondent was within its mandate under Section 29 & 56(1) TPA to charge 16% on the income tax returns. Hence the additional assessment.

Issues For Determination 41. Upon perusing the pleadings, the Statement of Facts of both parties and the attachments/annextures thereto together with the submissions of the parties, it is the Tribunal’s considered view that three issues arise for determination.a.Whether the Appellant’s application for amendment of self-assessment (correction of the erroneous returns under section 31 of the TPA) should have been dealt with by the Respondent before the additional assessment of VAT of Ksh 894,439. 00 was issued.b.Whether the Appellant is entitled to input VAT.c.Whether the Respondent’s Objection decision dated December 14, 2021 confirming the assessment of VAT of Ksh 894,439. 00 was proper and justified.a)Whether the Appellant’s application for amendment of self-assessment (for correction of the erroneous returns under Section 31 TPA) should have been dealt with by the Respondent before the additional assessment of VAT of Ksh 894,439. 00 was issued.

42. The parties do not dispute that the additional assessment was anchored on the self-assessment by Appellant submitted to the Respondent for the tax period 2018.

43. The Appellant has contended that the returns filed were erroneous hence the assessment arrived at by the Respondent in raising extra taxes was incorrect.

44. The Respondent on the other hand has insisted that the returns filed were filed by the Appellant’s accountant and were voluntary and in any event were within the range of other returns filed previously. However, no partyavailed to the Tribunal the filed returns of the previous years for it to have the advantage of assessing them.

45. However, the Appellant says it filed an application to have the returns amended as the filing was erroneous, hence it should not have been assessed for any VAT at all, and therefore the assessment should be vacated entirely.

46. None of the parties has provided the details of the application for amendment of the erroneous filed returns but they seem to be in agreement that the application was filed.

47. At paragraph 22 of the Statement of Facts by the Respondent it says;'Contrary to the Appellant’s allegation that the application was not considered, the Respondent avers and maintains that in the same fashion the Appellant made an Application for amendment, the Respondent advised the Appellant in its objection decision to make an application separately since the Respondent at that time was only dealing with the Objection and application for amendment was being handled by another department.’

48. Prior to the objection decision the Appellant had earlier again wrote to the Respondent on the November 30, 2021 indicating, inter alia that:-'Under the provisions of Section 31 of the TPA, 2015, we would like to correct IT2C about the business income and related information having been declared erroneously. We would also like to correct the position that property was sold and capital gains tax paid. On that basis we seek vacation of 2018 VAT assessment.’ This was in respect of the self-assessment.

49. The Tribunal presumes that there was a valid application for amendment of self-assessment returns. The relevant Section for application for such amendment is Section 31 of the Tax Procedures Act (TPA), which provides as follows;'(1) Subject to this section, the Commissioner may amend an assessment (referred to in this section as the 'original assessment') by making alterations or additions, from the available information and to the best of the Commissioner's judgement, to the original assessment of a taxpayer for a reporting period to ensure that—a.In the case of a deficit carried forward under the Income Tax Act (Cap 470), the taxpayer is assessed in respect of the correct amount of the deficit carried forward for the reporting period;b.In the case of an excess amount of input tax under the Value Added Tax Act, 2013 (No 35 of 2013), the taxpayer is assessed in respect of the correct amount of the excess input tax carried forward for the reporting period; orc.In any other case, the taxpayer is liable for the correct amount of tax payable in respect of the reporting period to which the original assessment relates.2. A taxpayer who has made a self-assessment may apply to the Commissioner, within the period specified in subsection (4)(b)(i), to make an amendment to the taxpayer's self-assessment.3. Where an application has been made under subsection (2), the Commissioner may—a.Amend the self-assessment; orb.Refuse the application, and the Commissioner shall notify the taxpayer in writing of the decision within thirty days of receiving the application.'

50. From the above Section of the TPA as quoted it is clear that the application for amendment was made by the Appellant in the right procedure. It was within the exact provisions of Section 31(1), 31(2), 31(3)(a) & (b) and 31(4)(b)(i), all the stated Sections have been highlighted for ease of reference.

51. The Commissioner under Section 31(3) has the obligation under subsection(a)To amend or under subsection (b) to refuse the amendment and within 30 days from the date of receiving the application give reasons in writing why it refused. The Respondent in this matter acknowledged receipt of the application for amendment and instead of complying with the statute it went ahead to issue an objection decision in which an application for amendment of assessment was pending.

52. One wonders what the motivation was, especially the statement at paragraph 26 of its Statement of Fact which read in part; 'the Respondent at that time was only dealing with the Objection and application for amendment was being handled by another department.’

53. In this situation, it becomes difficult to imagine any other department handling the application which is not under the Respondent’s armbit. This is a situation where one wants to have his cake and eat it at the same time.

54. The Respondent in the Tribunal’s review should have handled the issue of the amendment of returns whose additional assessment was anchored on, before proceeding to issue the assessment order and the subsequent Objection decision.

55. The wording of the relevant Section is the words, 'shall notify the taxpayer in writing of its decision.' It therefore follows that once it acknowledged the application for amendment, it was mandatory that it makes a decision on it, a fact that it failed to make, by referring the Appellant to another department which is not specified.

56. In the case ofEquity Group Holdings Limited v Commissioner of Domestic Taxes (Civil Appeal E069 & E025 of 2020) [2021] KEHC 25 (KLR) the issue of the mandatory timelines arose where the Court held as follows;'The word 'shall' when used in a statutory provision imports a form of command or mandate. It is not permissive, it is mandatory. The word shall in its ordinary meaning is a word of command which is normally given a compulsory meaning as it is intended to denote obligation.'

57. The courts have held not once but also as the right legal position that the stipulation of express timelines are mandatory and cannot be extended as that was the intention of Parliament.

58. The Tribunal is guided by the decision in Equity Group Holdings Limited (supra) it cannot depart from this decision where Section 31 should be applied. The Commissioner under 31(3) of the TPA has the obligation under subsection (a) to amend or under subsection (b) to refuse the amendment, and within 30 days from the date of receiving the application give reasons in writing why it refused.

59. The Tribunal therefore finds that the Appellant’s application to correct its erroneous returns ought to have been dealt with by the Respondent before issuance of the additional assessment.

60. Having found that the Respondent did not comply with Section 31(3)(b) TPA, the Tribunal sees no need to delve into the other issues as they have been rendered moot.

Final Decision 61. The upshot of the above is that this Appeal partially succeeds and the Tribunal makes the following Orders;a.This Appeal be and is hereby partially allowed;b.The Respondent’s Objection Decision dated December 14, 2021 be and is hereby set aside;c.The matter to be referred back to the Commissioner for him to respond to the Appellant’s application for amendment of its returns within 30 days from date of delivery of this judgement and to subsequently issue any appropriate objection decision.d.Each party bears its own costs of appeal.

62. Orders accordingly.

DATED AND DELIVERED AT NAIROBI THIS 17TH DAY OF MARCH, 2023. .............................................ROBERT M. MUTUMA CHAIRPERSON………………………. .. ……..............………DELILAH K. NGALA EDWIN K. CHELUGET MEMBER MEMBER……………………… ………………………….ELISHAH NJERU RODNEY O. OLUOCHMEMBER MEMBER