[2023] KETAT 280 (KLR)

King’orani Investment Ltd v Commissioner of Domestic Taxes (Appeal 466 of 2022) [2023] KETAT 280 (KLR) (19 May 2023) (Judgment)

Neutral citation: [2023] KETAT 280 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Appeal 466 of 2022

RM Mutuma, Chair, EN Njeru, RO Oluoch, D.K Ngala & EK Cheluget, Members

May 19, 2023

Between

King’orani Investment Ltd

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

1. The Appellant is a limited company incorporated in Kenya whose principal activity is the sale of properties.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, Cap 469 Laws of Kenya with the responsibility of assessment, receipt and accounting for all Government tax revenue, and the administration and enforcement of all laws set out in the Schedule to the Kenya Revenue Authority Act.

3. The Respondent carried out a compliance review following a transaction for sale of property between the Appellant and another company named Titan Elar Investment Ltd. The said company made a declaration of stamp duty paid on the transaction of Kshs 5,600,000. 00 which was based on a stamp duty rate of 4%. The Appellant was expected to declare the corresponding transaction and account for Capital Gains Tax (CGT) at the rate of 5% which it failed to do. The Respondent therefore raised an assessment for Kshs 7,000,000. 00 vide its demand letter dated 27th April 2021.

4. The Appellant objected to the demand vide its letter dated 3rd February, 2022. The Respondent considered the objection and thereafter issued an invalidation notice vide its letter dated 1st March, 2022.

5. Being aggrieved by the Respondent’s decision, the Appellant filed its Appeal together with its Memorandum of Appeal and Statement of Facts on 10th May, 2022.

The Appeal 6. The Appeal is premised on the following grounds as set out in the Memorandum of Appeal:-i.That the aforesaid assessment being based on estimates is excessive by reason of some error or mistake of fact in the income assessed.ii.That the estimated Assessment is punitive, excessive, erroneous and not as per the income.iii.That the Respondent erred in raising the Capital Gains Tax on estimate basis by making the decision being contrary to law or to some usage having the force of law.iv.That the Respondent while raising estimated assessment, made substantial error or defect in the procedure, provided by the relevant “Tax Law” and rules made thereunder which may possibly have produced error or defect in the decision of the case upon merit.

7. The Appellant averred that the Respondent did not consider the deductions allowed i.e. all expenditure incurred in that year of income which is expenditure wholly and exclusively incurred by King’orani Investment Ltd in the production of that income.

8. Wherefore the Appellant prays that the aforesaid assessment be annulled with cost, and that the Appellant be permitted to pay the tax ‘leviable’ on its true income ascertainable from evidence which has always been available.

The Appellant’s Case 9. The Appellant has set out in its Statement of Facts filed on 10th May 2022. However the Appellant did not file its written submissions and had no representative during the hearing of the Appeal on 26th January, 2023.

10. In its Statement of Facts, the Appellant asserts that it submitted all the documents and complied with the Respondent’s requirements within the time limits to prove that the assessment is excessive and that the tax decision should not have been made or should have been made differently as per Section 30 of the Tax Appeals Tribunal Act, 2013 as read together with Section 62 of the VATAct, 2013.

11. The Appellant averred that as the CGT is a tax that is levied on the transfer of a property situated in Kenya, acquired on or before January 2015, it is declared and paid by the transfer of the property at the rate of tax at 5% on the net gain. The Appellant contended that the Respondent did not follow the law as it failed to determine some material issues of law. Its decision therefore is not fair administrative action.

12. The Appellant averred that the Respondent erred in law and fact by failing to accord the Appellant a fair hearing and to consider how to compute Capital Gains Tax which formula is;Net Gain = (Transfer value – incidental cost on transfer) – Adjusted cost (Acquisition cost + incidental cost on acquisition and any enhancement cost).

13. That by disallowing the expenses, the Respondent maliciously failed to employ basic cardinal principal of matching cost with revenue as the Appellant could not make any revenue without incurring the costs.

14. The Appellant therefore prayed for a stay of execution of the decision of the Respondent and that the Respondent’s decision be set aside.

The Response 15. In its Statement of Facts filed on 6th June, 2022 and its written submissions filed on 19th December, 2022 the Respondent objected to the Appellant’s Appeal as follows: -i.That it found that the transaction for sale of the property took place in April, 2021 after which it contacted the Advocate handling the transaction (Anne Wamithi & Company Advocates) requesting them to advise the Appellant to account for CGT which the Appellant failed to do.ii.That the estimate CGT assessments were issued on 27th April, 2021 based on the transaction value of 140 Million as declared by the purchase price or any other cost since the vendor had failed to engage the Respondent on this issue.iii.That Section 51 (2) of Tax Procedures Act (TPA) provides for the timeline of lodging an objection and that Section 51 (1) of TPA empowers the Respondent to extend time where the taxpayer has been prevented from lodging a notice of objection, or did not unreasonably delay in lodging the notice of objection, was because of absence from Kenya or due to illness or other reasonable cause. In this instant Appeal, the Appellant did not provide grounds for acceptance of a late objection as envisioned under Section 51 (7) of TPA).iv.That the Appellant failed to submit relevant documents including details of property sold, sale agreement, and schedule of costs, supporting vouchers and bank statements to fully support the sales proceeds and associated costs. That this is contrary to Section 51 (3) of the Tax Procedures Act and that it is for those reasons that the Respondent issued a notice of invalidation on 1st March, 2022.

16. In response to the Appellant’s contention that the Respondent’s assessment was exaggerated and that it was a reflection of the reality of the transaction between the Appellant and the purchaser, the Respondent submitted that the Appellant’s actions of defaulting taxes caused the Respondent to raise an assessment against the Appellant based on the information available to it which in this case was the value of the property as declared by the purchaser. Further that the Respondent had no way to establish the profit gained from which to compute CGT.

17. On the issue of amending an assessment, the Respondent submitted that this was well within its mandate as the tax collecting agent of the Government and that Section 31 of TPA empowers it to amend an original assessment.

18. The Respondent averred that it was the Appellant’s duty to prove its position and prove that the Respondent had erred in its assessment and that Section 56 (1) of TPA places the burden of proof on the Appellant.

19. The Respondent has sought reliance on the matter of Grace Njeri Githua vs Commissioner of Investigations and Enforcement (TAT No 102 of 2018) where the Tribunal emphasised the fact that the burden is on the Appellant to proof the assessment was wrong by stating as thus:-“In this Appeal, the Appellant has not provided the Tribunal with enough evidence to show that the net income the Respondent has based the tax assessment was not income or is subject to further cost deduction in arriving at a net profit. It is trite law that the burden of proof is on the taxpayer to show that the tax so assessed is not from her”

20. The Respondent submitted that the Appellant made meagre effect on discharging the burden of proof premised on the Appellant’s failure to raise an objection on time and further, the lack of reason for the late objection.

21. On the issue of invalidating the Appellant’s Objection, the Respondent submitted that the Appellant’s objection was late and was not supported by reasons validating the late objection contrary to Section 51 (6) and (7) of the Tax Procedures Act and that in reality, this was an abuse of the tax procedure and because of this, the Respondent submitted that the assessment should be upheld.

22. The Respondent has made reference to the case of Ngurumani Traders Limited versus Commissioner of Investigations and Enforcement (TAT No 125 of 2017) where the Tribunal held at paragraph 40 of the judgement: -“From the foregoing, the Appellant‘s failure to lodge a proper objection meant that the Respondent was at liberty to confirm the assessment”.

23. The Respondent submitted that it is clear the Appellant has no regard for procedure and is not interested in pursuing a proper objection to the Respondent’s assessment

24. The Respondent prays that:i.Its assessment issued on 27th April, 2021 and Invalidation Notice dated 1st March, 2022 be upheld; andii.The Appeal be dismissed with costs.

Issues for Determination 25. Having carefully considered the parties’ pleadings, submissions and all documentation, the Tribunal is of the view that this Appeal distils into two issues for determination: -i.Whether the Appellant’s Objection is valid; andii.Whether the Respondent erred in raising the additional Assessment against the Appellant.

Analysis And Finding 26. It is to these two issues that the Tribunal will proceed to analyse as herein under:i.Whether the Appellant’s Objection is valid.

27. From the chronology of events, the Respondent issued the demand for additional tax on 27th April 2021 whereas the Appellant, filed the notice of objection on 3rd February 2022. Section 51 (1) of the Tax Procedures Act stipulates the procedure to be followed by the taxpayer upon receipt of a tax decision from the Commissioner. It provides as follows:-“(1)A taxpayer who wishes to dispute a tax decision shall first lodge an objection against that tax decision under this section before proceeding under any other written law.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”.

28. The Tribunal has established that the period between the Respondent’s demand on 27th April, 2021 and the Appellant’s Notice of Objection dated 3rd February, 2022 is more than nine months. It should be noted that Section 51 (2) of the TPA is coached in mandatory terms such that the conditions so prescribed must be met by the Appellant, which it failed to meet.

29. The Tribunal has noted that apart from stating that there were mistakes of fact in the assessed income, the Appellant has not made any attempt to avail documentary evidence to support its assertion hence the Tribunal will treat these as mere allegation as they cannot be substantiated with the relevant evidence.

30. The Tribunal will rely on the case of Boleyn International Ltd vs Commissioner of Investigations and Enforcement, Nairobi TAT Appeal No. 55 of 2018 where the Tribunal held that:“We find that the Appellant at all times bore the burden of proving that the Respondent’s decisions and investigations were wrong. The Tribunal is guided by the provisions of Section 56(1) of TPA, 2015 which states:In any proceeding under this part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.Further the Tribunal finds the following paragraph from Pierson v Belder (H.M Inspector of Taxes) [1956- 1960] 38 TC 387 to be instructive.But the matter may be disposed of, I think, even more shortly in this way, there is an assessment made by the Additional Commissioner upon the Appellant, it is perfectly clearly settled by cases such as Norman V Golder, 26 T.C 293, that the onus is upon the Appellant to show that the assessment made upon him is excessive or incorrect and of course he has completely failed to do so. This is sufficient to dispose of the Appeal, which accordingly I dismiss with costs”

31. Section 30 of the Tax Appeals Tribunal Act also pronounces itself on who bears the burden of proof. It provides as follows: -“In a proceeding before the Tribunal the Appellant has the burden of proving –i.Where an Appeal relates to an assessment, that the assessment is excessive; orii.In any other case, that the tax decision should not have been made or should have been made differently”1. The Appellant had stated in its Memorandum of Appeal that the assessment be annulled and that it be permitted to pay the tax ‘leviable’ on its true income ascertainable from evidence which has always been available, and will be adduced at the hearing. If indeed arguendo the evidence was available, one wonders why then the Appellant did not avail it during the assessment period. The Tribunal further notes that the Appellant’s prayer to be permitted to pay the tax ‘leviable’ is a subtle admission that it owes tax. It would have been an act of good faith if the Appellant had paid the said tax. The Tribunal observes that there is no evidence to show that the Appellant paid any tax. Further, it was even absent during the hearing where it would have adduced the said evidence. In the circumstances the Appellant cannot fault the Respondent for raising the assessment.2. Consequently, the Tribunal finds that not only did the Appellant fail to discharge its burden of proof, it also filed its Notice of Objection out of time, and in the circumstance the Respondent was justified to invalidate the Appellant’s Notice of Objection.(ii)Whether the Respondent erred in raising the additional Assessment against the Appellant.

34. Having established that the Appellant’s Notice of Objection was filed out of time, the Tribunal will not delve further on this issue as the same has been rendered moot.

Final Decision 35. The upshot of the above is that the Appeal lacks merit and therefore fails and the Tribunal accordingly proceeds to make the following final Orders:i.The Appeal be and is hereby dismissed;ii.The Respondent’s Notice of Invalidation dated 1st March, 2022 be and is hereby upheld; andiii.Each party to bear its own cost.

36. It is so ordered

DATED and DELIVERED at NAIROBI this 19th day of May 2023. .....................................ROBERT M. MUTUMACHAIRMAN.....................................ELISHAH N. NJERU RODNEY O. OLUOCHMEMBER MEMBER.....................................DELILAH K. NGALA EDWIN K. CHELUGETMEMBER MEMBER