[2024] KETAT 1613 (KLR)

Kiraba v Commissioner of Investigations and Enforcement (Appeal E605 of 2022) [2024] KETAT 1613 (KLR) (22 November 2024) (Judgment)

Neutral citation: [2024] KETAT 1613 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Appeal E605 of 2022

E.N Wafula, Chair, G Ogaga, AK Kiprotich & RO Oluoch, Members

November 22, 2024

Between

Charles Warutere Kiraba

Appellant

and

Commissioner Of Investigations And Enforcement

Respondent

Judgment

1. The Appellant is a registered taxpayer who carries the business of marketing and brokerage among other businesses.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act. The Kenya Revenue Authority is an agency of the Government of Kenya mandated with the duty of collection and receipting of all tax revenue, and the administration and enforcement of all tax laws set out in Parts 1& 2 of the First Schedule to the Act, for purposes of assessing, collecting, and accounting for all tax revenues in accordance with those laws.

3. The dispute in this Appeal arose when the Respondent investigated the affairs of the Appellant and subsequently issued him a notice of additional assessment on 26th October 2021.

4. The Appellant objected to the assessment vide his objection letter dated 30th September 2020 and the Respondent issued its Objection decision on 18th March 2022.

5. Aggrieved by the Respondent’s decision, the Appellant lodged his Notice of Appeal dated 14th April 2022.

The Appeal 6. The Appellant’s Appeal is premised on his Memorandum of Appeal dated 10th June 2022 and filed on the even date. The said Appeal was premised on the following grounds:a.That the Respondent erred in law by issuing its decision outside the statutory timelines of 60 days from the date of objection, hence a nullity.b.That the Respondent failed to understand the Appellant’s nature of business and ended up treating all banking as sales even after evidence was tabled at the objection review stage.c.That the Respondent disallowed all allowable business expenses without giving cogent reasons.d.That the Respondent ignored the cost of sales resulting in an exaggerated assessment.e.That the Respondent erred in law and in fact in not finding that the Appellant did not deal with vatable goods.f.That the Respondent erred in law and fact by confirming assessments issued beyond the statutory period of 5 years.g.That the Respondent erred in law by refusing to divorce the Objection review process from the assessment/ investigation process creating a perception of bias and want of fairness and in egregious violation of the Fair Administrative Action, principles of natural justice and the Respondent’s internal policies.

Appellant’s Case 7. The Appellant set out his case on his Statement of Facts dated 10th June 2022 and filed on the even date and Written Submissions dated and filed on 4th April 2024.

8. The Appellant stated that he was issued with a letter of findings on 4th March 2021 for the period 2014-2019 for Income tax and VAT.

9. That he was issued with additional assessment on 26th October 2021 and he lodged his objection to the assessment on 18th November 2021.

10. The Appellant asserted that the notice of assessment is fatally defective as it failed to inform him that he had a right to lodge an objection to the Commissioner.

11. That the Respondent merely alleged fraud against him which was not proved to justify the issuance of assessment beyond 5 years period.

12. That Section 23 of the Tax Procedures Act, only requires a taxpayer to maintain tax records for 5 years. The Appellant averred that he does not have records for the years 2014, 2015 and 2016 which were beyond the 5-year limit allowed in law.

13. That requiring him to defend himself against tax liabilities beyond 5 years was unlawful and unfair.

14. The Appellant alleged that he supplied the Respondent with the following documents which were stamped as received on 17th January 2022:a.Taxpayer application for income tax amendment 2014 to 2019b.Commissioner of Domestic Taxes Verifications health checks 2014 to 2019c.Taxpayer payment slips from 2014 to 2019d.Taxpayer response letter to investigator’s letter of findingse.Audited accounts and their notes from 2014 to 2019f.Vendors/creditors statementsg.Shop sales /purchasesh.NTSA taxpayer vehicle detailsi.General ledger reportsi.Wages records.ii.Vehicle repairs and maintenance schedulesiii.Travel and accommodationiv.Vehicle fuel costsv.Loan and bank statements.

15. That furthermore it also provided an audited account for the period 2014 to 2019 describing incomes from various business streams, creditors and debtors ledger, subsidiary ledger and cash book on 4th March 2021.

16. That the Respondent was provided with sufficient documents to support the objection which documents were also explained in the several meetings held between the parties but the Respondent ignored all these in arriving at its Objection decision.

17. The Appellant posited that the commission he earned from his trade was from exempt goods and he did not also meet the VAT threshold under Section 5 of the VAT Act for VAT registration, withholding and remittance of VAT taxes.

18. The Appellant stated that he validated his objection in adherence to Sections 51(3) and (4) of the Tax Procedures Act when he provided the documents that the Respondent had requested.

19. The Appellant took the view that the Respondent’s claim of fraud under Sections 97 and 104 of TPA was incorrect because the process of return verifications for the period 2014 to 2019 was ongoing between him and the Commissioner of Domestic Taxes when the investigator issued its letter of findings.

20. He further asserted that the use of banking analysis contravened the provisions of the Income Tax Act on the computation of taxable income and therefore not rendered in accordance with the law.

21. The Appellant stated that the nature of his business as a broker does not involve buying and selling of goods and he could thus not be taxed for bank deposits of customers.

22. The Appellant affirmed that he provided sufficient documents to help the Respondent ascertain his taxable income in a fair and just manner as required by Section 31 Tax Procedures Act. That the documents provided to support the nature of his business included schedules of brokerage commissions, clients names, business expenses, and taxes paid.

Appellant's Prayers 23. The Appellant prayed for orders that:a.The Objection decision by the Commissioner for Domestic Taxes made on 25th of May, 2021 be set aside and:b.The Tribunal be pleased to order that the Objection decision did not meet the threshold set under Section 51(8) of the Tax Procedures Act 2015 and dismiss it accordingly.c.The Tribunal be pleased to order that the objection was allowed in accordance with Section 51(11) of the Tax Procedures Act, 2015. d.The cost of this Appeal be awarded to the Appellant.

Respondent’s Case 24. The Respondent has opposed this Appeal while relying on its Statement of Facts dated and filed on 10th July 2022 and Written Submissions dated 20th April 2024.

25. The Respondent stated that it carried out investigations into the Appellant’s business for the period 2014-2019 to determine whether the Appellant had declared all its income and paid all the requisite taxes.

26. That the Appellant was informed of the Respondents’ findings and was given 14 days to provide a comprehensive response on the noted findings failure to which the taxes due and owing would be computed and assessment issued.

27. That the Appellant provided documents and its response to the notice of findings on 12th March 2022 to the Respondent through an email provided supporting documents as well as a response to the Respondent’s notice of findings.

28. That it requested the Appellant to respond to the pending issues by the 6th April 2021 and a reminder was sent on 26th March 2021 urging the Appellant to respond to the highlighted issues. That it issued a further e-mail giving the Appellant a deadline of 6th April 2021 to supply the documents.

29. The Respondent stated that the Appellant subsequently responded vide an email sent on 12th April 2021 stating that he had provided some documents for the Commissioner's review.

30. That it sent an email on 14th April 2021, acknowledging receipt of documents which had been forwarded and it sought for provision of receipts and brokerage agreements as per the correspondence between the Parties and expense schedules.

31. The Respondent stated that through an email dated 2nd May 2021, the Appelant forwarded some documents for its review. The documents included credit and debit reports, shop purchases reports, expense analysis reports and loan interest schedule reports.

32. That it subsequently issued its notice of assessment on 26th October 2021, for the period 2014-2019 where the Income tax was assessed at Kshs 69,451,280 and VAT was assessed at Kshs. 37,391,554. 59. The Appellant was then informed of his right to lodge an objection.

33. That the Appellant objected to the assessment vide his letter dated 18th November 20221, whereupon it issued its objection on 18th March 2022 confirming the assessment.

34. The Respondent asserted that it confirmed the assessment because it was forced to rely on available information that it had as well its best judgment as provided for in Section 31(1) of the Tax Procedures Act.

35. That additionally, the Appellant failed to provide supporting documents like schedules to show the schedule of his employees, the amount of money he earned and evidence to show that he had not met the VAT threshold.

36. The Respondent stated that upon objection to the assessments, the Appellant failed to provide any supporting documentation to support the objection leading to the confirmation of the assessments despite having an obligation to keep records and to provide the said records upon the request of the Commissioner as is provided for in Section 23 of the Tax Procedures Act.

37. The Respondent further stated that the Appellant did not provide it with original tax invoices or certified copies thereof as is provided in Section 17(3) (a) of the VAT Act, 2013 which requires the Appellant to possess original tax invoices for the supply or certified copies thereof.

38. That the Appellant’s expenses were not supported as having been incurred and exclusively applied in the production of income and was thus disallowed.

39. The Respondent further stated that expenses can be disallowed if they have exceeded a set threshold as provided for in Sections 15 and 16 of the Income Tax Act.

40. The Respondent stated that its Objection decision issued on 18th March 2022 was issued within the given timelines under the Finance Act of 2019 which allowed it to issue its decision within 60 days upon receipt of all information sought.

41. The Respondent stated that it was the duty of the Appellant to prove that he did not deal in vatable goods and this was not done in this Appeal.

42. The Respondent further stated that the Appellant lodged his Notice of Appeal late without first seeking leave to do so and therefore its Notice of Appeal is invalid.

43. The Respondent reiterated that the Appellant has failed to discharge his burden of proof in proving that the Respondent’s tax decision is incorrect as per the provisions of Section 56(1) of the Tax Procedures Act.

44. The Respondent identified the following as the issues for determination in this Appeal:i.Whether the Respondent was justified in applying the banking test in issuing its assessment?ii.Whether the Respondent was proper in disallowing business expenses and cost of sales claimed by the Appellant.iii.Whether the Appellant dealt with vatable goods and whether the VAT assessment was justified.iv.Whether the Respondent’s assessment order and decision issued on 18th March 2022 are proper and valid?a.Did the Commissioner consider the evidence brought before it?b.Did the Commissioner both issue the assessment and Objection decision thereby usurping the jurisdiction of IRO?c.Whether the Commissioner violated the fair administration actions, principles of natural justice and internal policies in issuing the Objection decision.d.Whether the confirmed assessment was beyond 5 years old.i.On Whether the Respondent was justified in applying the banking test in issuing its assessment?

45. The Respondent stated that its analysis of the Appellant’s bankings in his Equity Banks Accounts deposits showed that cash deposits, RTGS and inward transfers totalled Kshs. 1,820,133,067. 00. That the absence of sufficient explanations and evidence led it to treat the deposits as income derived from the Appellant’s trading.

46. That the total income derived from an analysis of the Appellant's bank deposits was compared with the income declared in the Income tax returns for the respective years and it was noted that Income totalling Kshs. 1,810,424,554. 00 was not declared in the Income tax returns for the years 2014 to 2019.

47. That the resultant principal tax on the undeclared income of Kshs. 543,127,366. 00 was brought to tax.

48. The Respondent stated that it is allowed to embrace a range of methods and techniques for determining and verifying a taxpayer’s income to ascertain the correct tax liability of a taxpayer.

49. That Section 29 and Part VI of the TPA give it the power to use “information as may be available” to come up with default assessments when necessary. That this was affirmed in the case of United States case of Holland vs United States 121 (1954).

50. That the Appellant had failed to provide documents and information within 14 days that was granted hence its decision. That its position was supported by the cases of:a.McCluskey’s executrix -vs- Commissioners of Inland Revenue (1955) SLT 279; 1995 SC 241b.Kilbur vs Bedford (H.M. Inspector of Taxes) 1955 Chancery Division, 36, P. 262)c.Nairobi TAT No. 2 of 2016 Family Signature Limited vs Commission of Investigations & Enforcement.

51. The Respondent maintained that the banking method is an acceptable and reasonable method of determining the income earned by taxpayers and determining the proper taxes due and owing as was stated in TAT Appeal No. 11 of 2027 Digital Box Limited vs Commissioner of Investigations & Enforcement.

52. That its application of the banking analysis method was thus justified, lawful and supported by law.ii.on whether the Respondent was proper in disallowing business expenses and cost of sales claimed by the Appellant.

53. The Respondent submitted that for any expenses and costs to be allowed, the same must have been incurred within the year of income in which it was incurred and the same must be proved to be allowed pursuant to the provision of Sections 15 and 16 of the Income tax and Sections 1 and 3 of the VAT Act.

54. That it allowed an adjustment on a graduated scale as opposed to the 30% for companies since the Appellant was an individual.

55. That the Appellant admitted that he did not keep records. That it was thus left with no option other than to disallow the claimed purchases as well as the cost of sales.

56. That pursuant to the provisions of Section 15(1) of the Income Tax Act, costs and expenses can only be allowed if they are incurred wholly and exclusively in the year of income by a taxpayer in the production of that income, which was not the case in this Appeal.iii.On whether the Appellant dealt with vatable Items and whether the VAT Assessment was justified

57. The Respondent stated that its investigations showed that the Appellant had been filing nil VAT returns for the period under review and yet the Appellant had been in active trade as evidenced by the bank deposits.

58. That it did not allow for adjustments for inputs because they were time-barred under Section 17(2) of the VAT Act, 2013 and hence the reason why VAT was charged on the full amount banked after adjustments resulting in charging of VAT on the principal amount of Kshs. 291,221,291. 00

59. That the Appellant did not provide any documents regarding the nature of its business and the mode of operation of its brokerage business.

60. The Respondent affirmed that it was not logical for the Appellant to transact huge amounts of money as captured in the bank accounts without a single document such as an agreement, invoice and delivery notes among other relevant documents.

61. That the Appellant further failed to provide tender documents to demonstrate how it made purchases for exempt items including foodstuff, cereals, meat and fruits.

62. The Respondent stated that the Appellant dealt in taxable supplies within Kenya being a registered taxpayer but failed to charge VAT pursuant to the provisions of Section 5 of the VAT Act.

63. That the input claim for VAT on 9th September 2020 was 3 years late after the importation was made and for that reason, the claim was declined as it was outside the timelines set by statute.

64. That the Appellant is entitled to deduct input VAT under Section 17 of the VAT Act, on taxable purchases only if it has a document which supports its taxpayers.

65. The Respondent submitted that for input VAT to be allowed, all the relevant documents must have been provided pursuant to the provisions of Section 13 of the VAT Act.

66. The Respondent averred that whereas the Appellant dealt with taxable items, his application for input was time-barred and the original documents were not provided hence the reason why it disallowed the inputs claimed.iii.On whether the Respondent's assessment Order and decision issued on 18Th March 2022 are proper and valid.

67. The Respondent stated that the assessment was based on investigation findings which had been conducted on the Appellant who was required to provide evidence to show that the Commissioner had applied extraneous factors in issuing the assessment. That the Appellant failed to fulfil its burden of proof as provided for in Section 56 of Tax Procedures Act.

68. That the Appellant has not demonstrated how the Respondent “usurped” the alleged powers for the Tribunal to consider and make a decision. That it was not enough to just make a claim without substantiating it.

69. That the Appellant has also not stated how its rights have been infringed on under the Fair Administrative Action Act while it was exercising its statutory duty of collecting tax.

70. The Respondent stated that although the Appellant lodged its notice of objection on 18th November 2021, there was active engagement between it and the Appellant with the final email between the parties culminating in the provision of additional documents on 17th January 2022. That therefore, the 60 days started running from 17th January 2022 when the last documents were provided and the Appellant validated his objection.

71. That its Objection decision was properly issued within the given timelines and it also provided detailed reasons for the assessment which was as summarized as follows:Year Income tax VAT TOTAL

2014 4,977,315 2,654,568 7,631,883

2015 82,316,907 43,902,350 126,219,257

2016 173,545,169 92,824,488 266,369,657

2017 132,983,681 71,245,049 204,228,730

2018 93,372,359 50,195,274 143,567,633

2019 55,931,936 30,399,560 316,753,666

Total 543,127,266 291,221,291 834,348,657

Respondents Prayers 72. The Respondent prayed to the Tribunal to find that: -i.That the Assessment Orders issued on 28th March 2022 and additional assessments on Income tax amounting to Kshs. 2,344,475. 08 inclusive of interest as well as the notice of confirmed assessment issued on 25th May 2022 and letter dated 25th May 2022 giving reasons why the Appellant’s notice of objection was rejected be found to be valid, proper in law and to be upheld.ii.That this Appeal be dismissed with costs to the Respondent as the same lacks merit.

Issues For Determination 73. The Tribunal has gleaned through the pleadings, documents and submissions presented by the parties in this Appeal and it is of the view that the issues falling for its determination are the following:a.Whether the Appellant’s Appeal is valid.b.Whether the Respondent’s Objection decision was invalid for contravening Section 51(10) of the TPA.c.Whether the Respondent’s Objection decision was invalid for contravening Section 51(11) of the TPA.d.Whether the Respondent erred in applying the banking method in its assessment of the Appellant.e.Whether the Respondent’s assessment contravened the five-year limit rule under Section 31(4) of the Tax Procedures Actf.Whether the Respondent's assessment of the Appellant was justified.

Analysis And Determination 74. The Tribunal shall analyse the issues that have fallen for its determination in a sequential manner as follows:a.Whether the Appellant’s Appeal is valid.

75. The Respondent argued under this head that the Appellant lodged its Appeal late without seeking the leave of the Tribunal. That to that extent his Appeal was invalid.

76. The Tribunal has persistently requested parties and their representatives appearing before it to familiarize themselves with their files to help the Tribunal effectively discharge its mandate in the delivery of justice for parties appearing before it. Such parties and their legal representatives are thus discouraged from presenting facts which are different from what they had previously presented on record before the Tribunal.

77. The Tribunal has looked at its records in this matter and notes that the parties herein recorded a consent before the Tribunal on 27th May 2022 which granted the Appellant leave to file its Appeal out of time.

78. The issue of lateness of Appeal was thus settled by an order of the Tribunal dated 27th May 2022 arising from the consent of the parties. The Appeal herein is thus valid.b.Whether the Respondent’s Objection decision was invalid for contravening Section 51(10) of the TPA.

79. The Appellant argued under this head that the Respondent’s Objection decision was invalid as it did not inform him of his right of appeal to the Tribunal and it also contravened the Fair Administrative Action Act on justice and fairness.

80. The Respondent stated that its Objection decision had complied with the law.

81. The Tribunal has looked at the Objection decision dated 18th March 2022 and it has noted that page 3 of the said decision stated as thus:“If you wish to appeal to this decision you may appeal to the Tax Appeals Tribunal within 30 days of this decision…”

82. Moreover, Section 51(10) of the TPA provides thus:‘An objection decision shall include a statement of findings on the material facts and the reasons for the decision.’

83. The requirement that an Objection decision must explain the right of Appeal to the taxpayer is a fair administrative requirement that has been clearly inscribed in the tax laws.

84. The Appellant’s objection to the validity of the Objection decision under this ground is equally trifling and is thus dismissed.c.Whether the Respondent’s Objection decision was invalid for contravening Section 51(11) of the TPA

85. The issue of lateness in the issuance of the Objection decision was objected to by the Respondent who stated that it had requested documents from the Appellant through a trove of emails culminating in the issuance of the Objection decision on 18th March 2022. That the said decision was issued after receipt of the final information from the Appellant as provided in the TPA that was amended by the Finance Act of 2019.

86. The assessment in this Appeal was issued on 26th October 2021. Section 51(11) of the 2021 version of the TPA reads as thus:“The Commissioner shall make the objection decision within sixty days from the date of receipt of—a.the notice of objection; orb.any further information the Commissioner may require from the taxpayer, failure to which the objection shall be deemed to be allowed.”

87. The Respondent was thus required to make its decision within 60 days of receipt of a valid objection or upon receipt of any further information that it may have requested the Appellant to provide.

88. The Appellant lodged its objection to the additional assessment on 18th November 2021 which was within the 30 days stipulated in Section 51(2) of the TPA which provides as thus:“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.”

89. The Respondent was thus required to issue its Objection decision on or before the 17th of January 2022 unless it could show that it had received further information from the Appellant which re-calibrated the timelines.

90. The emails provided by the Respondent to show that it’s time for compliance under Section 51(11) of the TPA had been recalibrated by supply of further information from the Appellant were dated as follows:a.18th December 2020b.12th January 2021, where 2 emails were shared on the same dayc.5th March 2021d.12th March 2021e.26th March 2021f.30th March 2021g.8th April 2021h.12th April 2021i.14th April 2021j.2nd May 2021, where 6 emails were shared on the same dayk.6th May 2021l.19th May 2021

91. It is clear from the email evidence provided by the Respondent that no email was shared between the parties in the period between 18th November 2021 when the Appellant lodged its objection and 18th March 2022 when the Respondent issued its Objection decision.

92. Considering that the Respondent was required under Section 51(11) of the TPA to issue its Objection decision on or before the 17th January 2022, the said objection decision was thus late by about 61 days.

93. The Tribunal has previously stated as follows regarding the Respondent’s failure to abide by the provision of Section 51(11) of the TPA in its Judgment in Tax Appeal No. 207 Of 2022 – Ibangua Investments Co. Ltd –Versus- The Commissioner of Domestic Taxes:“The Tribunal finds and holds that the Objection decision dated the 28th January 2022 was issued beyond the prescribed statutory time limit. It is thus invalid for reasons that it has breached the mandatory provisions of Section 51(11) of the TPA which is couched in peremptory terms.”

94. This view also finds favour with the often-quoted case of Equity Group Holdings Limited v Commissioner of Domestic Taxes [2021] eKLR where the High Court stated thus on the impact of laches under Section 51(11) to a decision made by the Commissioner:“Section 51 (11) of the TPA was couched in peremptory terms. The decision was made after the expiry of 60 days, the TAT had no legal basis to proceed as it did and to invoke Article 159(2) (d). There was no decision at all. The decision had ceased to exist by operation of the law. The provisions of section 51 (11) (b) had kicked in. The objection had by dint of the said provision been deemed as allowed. The TAT had no discretion to either extend time or to entertain the matter further. Discretion followed the law and a tribunal could not purport to exercise discretion in clear breach of the law.”

95. Accordingly, based on the Respondent’s laches, lack of a discernible intervening event that can cause the re-computation of time as is envisaged in Section 51(11)(b) of the TPA and guided by the decision of the High Court in Equity Group Holdings Limited(supra) and Tribunal’s decision in Ibangua Investment Co Ltd (supra), the Tribunal hereby finds and holds that the Respondent’s Objection decision dated 18th March 2022 is invalid for breaching peremptory provisions of Section 51(11) of the TPA.

96. Having held that the said Objection decision is a nullity, the Tribunal shall not delve into the issues that are pending its determination as they have been rendered moot.

Final Decision 97. The upshot of the foregoing analysis is that the Appeal is merited and the Tribunal accordingly proceeds to issue the following Orders;a.The Appeal be and is hereby allowed.b.The Respondent’s Objection decision dated 18th March 2022 be and is hereby set aside.c.Each party is to bear its own costs.

98. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 22ND DAY OF NOVEMBER, 2024ERIC NYONGESA WAFULACHAIRMANGLORIA A. OGAGA ABRAHAM K. KIPROTICHMEMBER MEMBERDR. RODNEY O. OLUOCHMEMBER