[2025] KETAT 122 (KLR)

Kingsley Construction Company Limited v Commissioner of Domestic Taxes (Tax Appeal E280 of 2024) [2025] KETAT 122 (KLR) (Commercial and Tax) (7 February 2025) (Judgment)

Neutral citation: [2025] KETAT 122 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Commercial and Tax

Tax Appeal E280 of 2024

RM Mutuma, Chair, Jephthah Njagi, D.K Ngala, T Vikiru & M Makau, Members

February 7, 2025

Between

Kingsley Construction Company Limited

Appellant

and

Commissioner Of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a limited liability company incorporated in the Republic of Kenya. The Appellant is in the business of offering construction services.

2. The Respondent is appointed under Section 13 of the Kenya Revenue Authority Act No. 2 of 1995 and pursuant to Section 5 (1) of the said Act the Kenya Revenue Authority is an agency of the Government for the collection and receipt of all revenue. Further, under Section 5 (2) 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 set out in Part I and II of the First Schedule to the Act for the purpose of assessing, collecting and accounting for all revenues in accordance with these laws.

3. The Appellant filed six Income Tax refund applications on iTax as follows;Date Amount Acknowledgement Number30/06/2016 Kshs. 3,661,945. 50 KRA20160563876111/07/2018 Kshs. 16,884,887. 00 KRA20181169715211/07/2018 Kshs. 481,502. 00 KRA20181169612016/07/2019 Kshs. 5,806,856. 70 KRA2019058166327/08/2019 Kshs. 13,062,849. 50 KRA201912359301 18/07/2021 Kshs. 28,365,875. 00 KRA202116508986

4. The Respondent, upon receipt of the refund applications, proceeded to conduct a refund audit on the Appellant and thereafter communicated its findings vide a letter dated 2nd November 2023.

5. In the findings, the Respondent disallowed most of the refunds raised by the Appellant and went ahead to raise additional tax assessments.

6. The Appellant filed an objection to the letter of assessment dated 26th November 2023 and received by the Respondent on 1st December 2023.

7. The Respondent issued an Objection Decision dated 29th January 2024.

8. Dissatisfied with the Respondent’s Objection Decision dated 29th January 2024, the Appellant filed a Notice of Appeal dated 22nd February 2024 and filed on 23rd February 2024.

The Appeal 9. The Appeal is premised on the following grounds of Appeal as stated in the Appellant’s Memorandum of Appeal dated and filed on 7th March 2024;a.That the Respondent erred in law and in fact by confirming its assessment of Kshs. 131,785,039. 00 with respect to Income Tax Company and VAT at Kshs. 65,598,224. 09 and Kshs. 66,186,815. 00 respectively, contrary to evidence tabled before the Commissioner. Having provided to the Commissioner adequate documentation, explanations and reconciliation in favour of reconciling the tax as highlighted in the assessment, it was not permissible in law for the Respondent to disallow the objection and its grounds without any legal basis whatsoever;b.That the Respondent erred in law and in fact by failing to allow the Appellant’s refund applications of 30/06/2016, 11/07/2018, 11/07/2018, 16/07/2019, 27/08/2019 and 18/07/2021 under refund application acknowledgement numbers KRA201605638761, KRA201811697152, KRA201811696120, KRA201910581663, KRA201912359301 and KRA2021165508986. With the Appellant providing adequate documentation and/ or explanations in favour of the refund, the Respondent ought to have refunded the tax claimed;c.That the Respondent erred in law and in fact in proceeding to claim Income Tax Company and VAT in years 2016 and 2019 despite the Appellant demonstrating that it did not receive the corresponding income in the said years. Having explained to the Respondent that the alleged sales to African Developers Group for Construction (ADG) and Investment, Diocese of Marsabit were not exhibited in the years subject to assessment being years 2016 and 2019, the Respondent ought to have allowed the objection in respect to the said years;d.That the Respondent erred in law and in fact by purporting to disallow genuine expenses despite the Appellant providing the necessary supporting documents. Having provided the documents requested for by the Respondent in their letter of preliminary findings, the Respondent ought to have accordingly allowed the expenses. By so doing, the Respondent has offended the provisions of Section 15 (1) of the Income Tax Act, Cap.470;e.That the Respondent was misguided both in law and in fact in arriving at an assessment contrary to the ADR Agreement dated 30th March 2023 in respect to year 2018 wherein the parties agreed that the Appellant’s VAT Automated Assessment for the period of January 2018 to May 2018 were revised to Kshs. 4,026,110. 67 comprising of a principal of Kshs. 2,411,141. 68, a penalty of Kshs. 120,557. 08 and interest of Kshs. 1,494,411. 91;f.That the Respondent erred in law and in fact by wilfully failing to consider relevant information and documentation availed by the Appellant to support their objection to the assessments in the years of income 2014, 2016, 2018, 2019 and 2020 thus arriving at an erroneous and unjustified tax assessment; and,g.That the Respondent misguided itself in finding that the Appellant’s supporting documents did not persuade the Commissioner as the same were limited in scope as per Section 59 of the Tax Procedures Act, 2015 since at no point prior to issuance of the Objection Decision and following submission of the remaining documents on 26th November 2023 was the Appellant informed that the documents were not satisfactory/limited in scope. The Appellant furnished the Respondent with all the documents requested for.

The Appellant’s Case 10. The Appellant’s case is premised on the following documents;a.Statement of Facts dated and filed on 7th March 2024 together with the documents attached thereto; and,b.Written submissions dated and filed on 1st October 2024.

11. The Appellant averred that the Respondent erred in Law and Fact by raising Additional Assessments on gross established incomes contrary to the provisions of Section 15 (1) Income Tax Act, CAP 470.

12. That Sections 15 (1) of the Income Tax Act, CAP 470 allows the taxpayer the opportunity to claim all the expenses incurred wholly and exclusively for purposes of earning an income, in determination of the taxable income.

13. That by disallowing expenses which were wholly and exclusively incurred in making the income, the Respondent was in violation of Section 15 of the Income Tax Act, Cap 470.

14. The Appellant averred that the Respondent took a very casual approach in its assessment and subsequent Objection Decision, despite the taxes assessed being colossal amounts that will significantly and directly have an impact on the Appellant’s business.

15. The Appellant averred that in its objection to the Refund Application decision dated 26th November 2023, it had asked the Respondent to recover any tax that was not in dispute from the refunds due to it.

16. The Appellant submitted that in the case of Highstar Food Industries Limited vs. Commissioner of Investigations & Enforcement-TAT 305 of 2020, the Tribunal held that;“With respect, the onus being on the taxpayer does not in any way give the Respondent the license to raise assessments in brazen breach to fundamental rules and principles of taxation.”

17. That in the case of Afya X-Ray Centre Ltd vs. Commissioner of Domestic Taxes [2019] eKLR the Tribunal noted that;“..The Tribunal is concerned with the status or better yet, the validity of an assessment that has relied only on Bank Statements. ft is common knowledge that every deposit in an account is not necessarily income to the account owner. The Respondent in this case could have used industrial margins to determine the Appellant's profits and then subject that figure to the 30% for corporate Tax rather than a topline 30% on Bank Deposits ...”

18. The Appellant also submitted that it has sufficiently demonstrated to the Tribunal that the circumstances surrounding the issuance of the tax assessment on which this Appeal is premised raised questions and concerns of impropriety that may simply not be glossed over.

19. The Appellant submitted that the Respondent is duty-bound to discharge all its duties and functions in accordance with the law. That this conduct should be beyond reproach and it is expected to measure up to its public policy and legislative prescripts and the correct application of the governing law.

20. The Appellant submitted that it was compliant with the VAT Act and Regulations and the Income Tax Act (ITA) and was therefore entitled to deduct input VAT from its output VAT and also to deduct from its income the cost of the supplies being expenditure wholly and exclusively incurred by the Appellant in the production of income.

21. The Appellant submitted that the Respondent disallowed input VAT contrary to Section 17 of the VAT Act 2013 which provides that;“(1)Subject to the provisions of this Section and the Regulations, input tax on a taxable supply to, or importation made by, a registered person may, at the end of the tax period in which the supply or importation occurred, be deducted by the registered person, subject to the exceptions provided under this section, from the tax payable by the person on supplies by him in that tax period, but only to the extent that the supply or importation was acquired to make taxable supplies.

2. if, at the time when a deduction for input tax would othe1wise be allowable under subsection (1), the person does not hold the documentation referred to in subsection, the deduction for input tax shall not be allowed until the first tax period in which the person holds such documentation.”

22. The Appellant submitted that in the case of Shreeji Enterprises (K) limited vs. Commissioner of Investigations and Enforcement (Tax Appeal No. 58 and 186 of 2019) the Tribunal observed that it is a common principle that a taxable person who makes transactions in respect of which VAT is deductible may deduct the VAT in respect of the goods and services acquired by him, provided that such goods and services have a direct and immediate link with the output transaction in respect of which VAT is deductible.

23. The Appellant submitted that in addition to providing seven (7) box files containing invoices and bank statements for the period that was assessed, Appellant further discharged its burden of proof by providing to the Respondent its summary of workings reconciliations.

24. The Appellant submitted that in the High court case of the Republic vs. Kenya Revenue Authority ex-parte Amsco Kenya Limited [2014] eKLR the Court held:“Further an administrative action cannot be said to be procedurally fair where a decision is arrived at based on an opinion formed as a result of the consideration of the version of only one side, one cannot be said to have felt certain about the truth of the matter in dispute.”

25. The Appellant submitted that the Respondent erred in law and in fact by not serving the Appellant with a Notice to Conduct an Audit pursuant to the Tax Procedures Act.

26. That taxation should be justified in law, free from ambiguity and uncertainty. That in the case of Unilever Kenya Limited vs. The Commissioner of Income Tax the court on the interpretation and application of tax law, held that;“any tax imposed on a subject is strictly to be dictated by the laws of the legislature; the taxing authority must satisfy itself that the transaction fits within the definition of the statute before moving to demand the tax; it is incumbent upon the taxing agency to establish that its claim was within the ambit of the prescriptions in the statute before demanding payment; taxation provision with penal consequences must be interpreted with great caution and any ambiguity in a tax Law must be resolved in a tax payer’s favor.”

27. In support of its case, the Appellant also cited the following cases;i.Republic vs. Kenya Revenue Authority Ex-parte Lab International Kenya Limited [2011] eKLR;ii.Abdi Gedi Amin vs. Commissioner of Investigations & Enforcement - TAT 365 OF 2020;iii.Nizaba International Trading Company Limited vs. Kenya Revenue Authority [2000] eKLR;iv.Kenya Medical Association Housing Cooperative Society Limited vs. Attorney General & another [2016] eKLR;v.Republic vs. National Land Commission & 2 Other Ex-parte Archdiocese of Nairobi Kenya Registered Trustees (St Joseph Mukasa Catholic Church Kahawa West [2018] eKLR;vi.Republic vs. Kenya Revenue Authority Ex-parte Yaya Towers Limited [2008] eKLR; and,vii.Mungania Tea Factory Company Limited & Others vs. Commissioner of Domestic Taxes [2020] eKLR.

The Appellant’s Prayers. 28. The Appellant therefore prayed that;a.That the Tribunal be pleased to find that the Appellant complied fully with the provisions of Section 59 of the Tax Procedures Act, 2015 and provided all the requisite supporting documentation to the Respondent;b.That the Tribunal be pleased to find that the Appellant’s refund applications of 30/06/2016, 11/07/2018, 11/07/2018, 16/07/2019, 27/08/2019 and 18/07/2021 under refund application acknowledgement numbers KRA201605638761, KRA201811697152, KRA201811696120, KRA201910581663, KRA201912359301 and KRA2021165508986 were warranted and ought to have been allowed;c.That the Tribunal be pleased to find that the impugned expenses incurred by the Appellant met the requirements of Section 15 (1) of the Income Tax Act i.e. expenditure wholly and exclusively incurred in the production of that income for year 2019 and therefore an expense allowable for deduction under the said Act;d.That the Tribunal be pleased to and hereby set aside the Respondent’s Objection Decision dated 29th January 2024, delivered via email on even date in light of the supporting documents provided and the payment plan for taxes not in dispute; and,e.That the costs of this Appeal be provided for.

The Respondent’s Case 29. The Respondent’s case is premised on its;a.Statement of Facts dated 7th April 2024 and filed on 8th April 2024; and,b.Written submissions dated 15th October 2024 and filed on 16th October 2024.

30. In response to the Appellant’s averment that the Respondent erred in law and fact by arriving at the assessment contrary to the ADR Agreement, the Respondent stated that it issued new assessments that are different from the one of the ADR Agreement. That the ADR Agreement was based on Value Added Tax Automated Assessments (VAA). That on the other hand, the new assessments are on “missing trader.”

31. The Respondent averred that Section 31 of the Tax Procedures Act, 2015 allows the Respondent to issue additional assessments where a taxpayer has been assessed of a lesser amount based on any additional available information and to the best of its judgement.

32. The Respondent averred that upon review of the documents availed, it noted that the Appellant provided copies of unsupported purchases but failed to provide evidence of actual procurement of the goods in the form of cash disbursements towards the purchase.

33. That the proof of payment tendered was not cross-referenced to the particular invoices they related to. That in some instances, the invoice amounts claimed did not match the amounts declared by suppliers.

34. The Respondent averred that the Appellant failed to provide the documentation in support of its objection even after the Respondent requested for them.

35. That in failing to provide any of the listed documents, the Respondent declared the Appellant’s objection as invalid as it failed to meet mandatory requirements of Section 51 (3) of the TPA.

36. The Respondent submitted that cognizant of the fact that Kenya is a self-assessment tax regime, it is the responsibility of a taxpayer to assess itself and pay the determined taxes.

37. That this model depends on the goodwill and the honesty of the taxpayer to disclose all the relevant facts and income in its returns and where a taxpayer is not truthful and honest, tax laws are couched in a manner that gives that Respondent a wide berth in determining what amount of tax is payable after the taxpayer has filed its returns.

38. That it is on this basis that the Respondent is evidentially clothed with the requisite powers to audit a self-assessment or declaration and issue additional assessment where it is established that a taxpayer failed to make complete and accurate declarations.

39. The Respondent submitted that in carrying out its mandate, the Respondent seeks information on the Taxpayer as was done in the instant case subject to Section 24 (2) of the Tax Procedures Act which provides that;“The Commissioner 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.”

40. The Respondent submitted that on the back of Section 24 (2) of the TPA whereas a taxpayer is mandated to submit its tax returns in the approved form and manner prescribed by the Respondent, the Respondent is not bound by the information provided by a taxpayer and can therefore seek additional information which will then assist the Respondent in raising additional assessments.

41. The Respondent submitted that it reviewed the documents submitted by the Appellant and that they were insufficient. The Respondent relied on the case of Tax Appeals Tribunal Digital Box Limited vs. Commissioner, Investigations and Enforcement No. 115 of 2017 where the Tribunal was of the view that;“The Appellant on its part failed to adduce evidence to refute the Respondent’s position. It failed to show that the notebooks did not belong to it and were not in any way related to its business. It merely made averments. It did not furnish the Tribunal with any proof of its averments. It is the Tribunal's position that it was the responsibility of the Appellant to provide evidence that the Respondent had used extraneous information in arriving at its assessment. The Tribunal is of the view that the Appellant did not discharge its burden of proof in showing that the Respondent used extraneous considerations and documents other than those prescribed by the law.”

42. The Respondent submitted that in objecting to the Respondent’s assessment, it is the burden of the Appellant to dislodge the Respondent’s claim by proving that it is in error in its assessment.

43. In this case, the Appellant failed in adducing evidence sufficient in proving its claim and therefore, the Respondent confirmed its assessment and in its statement of findings noted that the Appellant failed to avail documents in support of its objection.

44. The Respondent submitted that the Appellant cannot be heard to claim that the Respondent’s decision was improper because the Respondent duly assessed the documents availed by the Appellant and in its statement of findings explained the reasons for reaching its decision.

45. The Respondent submitted that the Appellant having failed to provide the necessary documents and information to validate its objection as provided for in Section 51 of the TPA despite having the burden of proof to do so, the Respondent's was proper in exercising its best judgement.

46. The Respondent relied on the case of Kenya Revenue Authority vs. Man Diesel & Turbo SE, Kenya, Income Tax Appeal No. E125 of 2020, where at paragraph 31, the Judge observed that;“The import of the above provisions is that the party with the obligation of persuasion is said to bear the burden of proof. The flipside of the foregoing is the effect of non-persuasion on a party with the burden of proof which is that the particular issue at stake in the litigation will be decided against him/her. Generally, the taxpayer has the burden of proof in any tax controversy. The taxpayer must demonstrate that the commissioner's assessment is incorrect. The taxpayer has a significantly higher burden. The taxpayer must prove the assessment is incorrect.”

The Respondent’s Prayers 47. The Respondent prayed that the Tribunal finds;a.That the Objection Decision dated 29th January 2024 should be upheld; and,b.That this Appeal be dismissed with costs to the Respondent as the same is without merit.

Issues For Determination 48. The Tribunal has considered the parties pleadings, documentation and submissions and is of the view that this Appeal raises the following issues for determination;i.Whether the Respondent erred in law and in fact by issuing its refund decision years late contrary to the express provisions of Section 47 (3) of the Tax Procedures Act; and,ii.Whether the Respondent erred in law and in fact by rejecting the Appellant’s CIT refund applications.

Analysis And Findings 49. Having established the issues that fall for its determination, the Tribunal will proceed to analyse them as herein under;i.Whether the Respondent erred in law and in fact by issuing its refund decision years late contrary to the express provisions of Section 47 (3) of the Tax Procedures Act;

50. The genesis of this Appeal is the six applications for refund filed through the iTax platform in 2016, 2018, 2019 and 2021. All the refund applications were in respect to Corporate Income Tax and were acknowledged by the Respondent on the day they were lodged.

51. The Respondent opted to carry out a refund audit on the six refund applications and rendered its findings vide a letter dated 2nd November 2023. The Respondent also raised additional tax assessments to which the Appellant objected. The Respondent issued an Objection Decision on 29th January 2024.

52. The Tribunal notes that Section 47 (1) (2) and (3) of the Tax Procedures Act stipulates as follows;“(1)When a taxpayer has overpaid a tax under a tax law the taxpayer may apply to the Commissioner, in the approved form, for a refund of the overpaid tax within five years of the date on which the tax was paid. Provided that for value added tax the period of refund shall be as provided for under the Value Added Tax Act, 2013. 2.The Commissioner may, for purposes of ascertaining the validity of the refund claimed, subject the claim to an audit.3. The Commissioner shall notify in writing an applicant under subsection (1) of the decision in relation to the application within ninety days of receiving the application for a refund.”

53. According to Section 47 (2) of the TPA, the Respondent can opt to carry out an audit to ascertain the validity of the refund. However, such an audit must be concluded and a decision following the audit of the refund application must be issued within ninety (90) days.

54. Where the Respondent fails to issue its refund decision within ninety (90) days of receiving a refund application, the application for refund automatically stands allowed in law as set out under Section 47 (3) indicated above.

55. The Tribunal notes that the word “shall” when used in statutory provisions is a command and bestows a mandatory obligation. The Respondent therefore has no room for discretion as regards its obligations under Section 47 (3) of the TPA.

56. The Tribunal relies on its holding in Embu Water and Sanitation Company Limited vs. Commissioner of Domestic Taxes TAT Appeal No E638 of 2023 where at paragraph 59 it held that;“…It is the Tribunal’s view and pursuant to Section 47(3) of the TPA the failure by the Respondent to ascertain and determine the Appellant’s application within 90 days has the implication that the same had been deemed ascertained and approved. The Tribunal associates itself with its holding in the case of KCB Bank Limited vs Commissioner of Domestic Taxes (TAT No.402 of 2021) where it held as follows:“…where the Respondent is statutorily obligated to provide a decision within a specific timeframe, and where the applicable legislation expressly provides a consequence for the failure to do so, the same must strictly be adhered to ….”

57. The Tribunal also relies on its holding in TAT Appeal No E643 of 2023 Kenya General Industries Limited vs. Commissioner of Domestic Taxes where at paragraphs 82 to 84 the Tribunal held that;“82. There was no dispute as to whether the application for a refund was made in time from the date on which it was overpaid. The Tribunal shall thus proceed on the presumption that both parties are in agreement that the application for refund was made in time.

83. Section 47(3) dictates that the Respondent must issue its refund decision within 90 days from the date of receipt of an application failure to which the same shall be deemed ascertained and approved.

84. The Appellant made its refund application on 6th November 2020. It follows that the Respondent was thus required to issue its refund decision by the 5th of January 2021. Its failure to issue the said refund decision meant that the refund application stood allowed on the 5th of February 2023. ”

58. The Tribunal is also bound by the holding in the case of Equity Group Holdings Limited vs. Commissioner of Domestic Taxes [2021] eKLR in which the High Court emphasized on the need for strict application of statutory timelines and stated as follows;“A statutory edict is not procedural technicality. It’s a law which must be complied with. Parliament in its wisdom expressly and in mandatory terms provided…”

59. The Tribunal also relies on the ruling in the case of Nicholas Kiptoo Arap Korir Salat vs. IEBC & 6 Others [2013] eKLR where the court held;“This Court, indeed, all courts, must never provide succor and cover to parties who exhibit scant respect for rules and timelines. Those rules and timelines serve to make the process of judicial adjudication and determination fair, just, certain and evenhanded. Courts cannot aid in the bending or circumventing of rules and a shifting of goal posts for, while it may seem to aid one side, it unfairly harms the innocent party who strives to abide by the rules. I apprehend that it is in the even-handed and dispassionate application of rules that courts give assurance that there is a clear method in the manner in which things are done so that outcomes can be anticipated with a measure of confidence, certainty and clarity where issues of rules and their application are concerned…”

60. The Tribunal has analyzed the dates on which the refund applications were made by the Appellant on the iTax platform and acknowledged by the Respondent. The Tribunal has also calculated the duration taken by the Respondent to make the Refund Decision on 2nd November 2023 from the dates individual refund applications were lodged by the Appellant as indicated below;Date Amount Refund Ack. No. Period taken30/06/2016 3,661,945. 50 KRA201605638761 7 years 3 months11/07/2018 16,884,887. 00 KRA201811697152 5 years 2 months11/07/2018 481,502. 00 KRA201811696120 5 years 2 months16/07/2019 5,806,856. 70 KRA20190581663 4 years 3 months27/08/2019 13,062,849. 50 KRA201912359301 4 years 2 months18/07/2021 28,365,875. 00 KRA202116508986 2 years 3 months.

61. Based on the law and the case laws cited above, the Tribunal holds and finds that all the six refund applications made by the Appellant were allowed by operation of the law and the Income Tax Refund audit decision made on 2nd November 2023 and the Objection Decision made on 29th January 2024 based on the same audit findings are therefore null and void.

62. The Upshot of the above finding is that the Respondent erred in law and in fact by issuing its refund decision years late contrary to the express provisions of Section 47 (3) of the Tax Procedures Act. Consequently, the Appeal succeeds.

63. Having held that the Appellant’s Applications for refund were allowed by the operation of the law, the Tribunal shall not delve into the second issue for determination as it was rendered moot.

Final Decision 64. Having found that the Appeal is meritorious the Tribunal proceeds to issue the following Orders;a.The Appeal be and is hereby allowed;b.The Respondent’s Refund decision dated 2nd November 2023 and the Objection Decision 29th January 2024 be and are hereby set aside;c.The Respondent is directed to refund the amounts stated in each of the six applications for refund within 60 days from the date of delivery of this Judgement; andd.Each party to bear its own costs.

65. It is so ordered

DATED AND DELIVERED AT NAIROBI THIS 7TH DAY OF FEBRUARY 2025ROBERT M. MUTUMA - CHAIRPERSONJEPHTHAH NJAGI - MEMBERDELILAH K. NGALA MEMBERDR. TIMOTHY B. VIKIRU - MEMBERMUTISO MAKAU - MEMBER