[2024] KETAT 273 (KLR)

Kiu Construction Limited v Commissioner Investigation and Enforcement (Tax Appeal 998 of 2022) [2024] KETAT 273 (KLR) (8 March 2024) (Judgment)

Neutral citation: [2024] KETAT 273 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 998 of 2022

E.N Wafula, Chair, D.K Ngala, GA Kashindi, CA Muga, AM Diriye & SS Ololchike, Members

March 8, 2024

Between

Kiu Construction Limited

Appellant

and

Commissioner Investigation and Enforcement

Respondent

Judgment

Background 1. The Appellant is a limited liability company incorporated in Kenya whose principal activity is construction of roads and bridges.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, Cap 469 laws of Kenya. 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. Under Section 5(2) of the Act with respect to the performance of its function under subsection (1), the Authority is mandated to administer and enforce all provisions of the written laws as set out in Parts I and II 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 Respondent carried out tax investigation on the Appellant for the purpose of obtaining full information in respect to the income of a person or class of persons chargeable to tax for the year of Income 2015 to 2019 for Pay As You Earn (PAYE), Value Added Tax (VAT), Corporation tax, and directors rental income.

4. On 6th April, 2021 the Respondent issued the Appellant with a demand notice for Kshs. 277,794,009. 00 for the Appellant and Kshs. 36,350,573. 00 in respect of the director’s rental income.

5. However, the Appellant objected to the said demand notice on 19th July 2021. Thereafter, on 23rd July 2021, the Respondent issued a confirmation of its assessments decision and invalidated the Appellant’s objection for being lodged out of time.

6. Being dissatisfied with the Respondent’s decision, the Appellant filed a Notice of Appeal on 14th September 2022.

The Appeal 7. The Appeal as contained in the Memorandum of Appeal dated 12th September 2022 and filed on 14th September 2022 was premised on the following grounds: -i.That the additional assessments are excessive by some error or mistake in the income assessed.ii.That the Respondent while raising input VAT and output VAT additional assessments of Kshs. 161,586,461. 00 made a substantial error or defect in the procedure provided by the VAT Act, 2013 Section 17 and Rules made thereunder which may possibly produce error or defect in the decision of the case on merit. By not taking into account credit for input tax against output tax it rendered the decision contrary to the law or to some usage having the force of law.iii.That the Respondent while raising additional estimated assessment on income taxes of Kshs. I52,667,122. 00 made a substantial error or defect in the procedure provided by Section 15 of and the Rules made pursuant to the Income Tax Act, Cap 470 of Kenya’s laws (hereinafter ‘ITA’) which may possibly have produced error or defect in the decision of the case upon the merit. The lack of consideration of the deductions allowed was an erroneous, unlawful, punitive, action by the Respondent and against "fair administration action."iv.That the Appellant furnished the Respondent with copies of invoices, delivery notes, supplier statements. and proof of payments on conclusive evidence or proving that goods and services were paid.v.That the Respondent erred in not allowing purchases that the Appellant legally incurred in the production of income in these respective years.vi.That the Respondent erred by failing to consider the purchases invoices presented to them.vii.That all the documents requested by the Respondent were availed to him as provided by the provisions of Section 30 of Tax Appeal Tribunal Act, No. 40 of 2013 (hereinafter ‘TAT’) as read together with Section 62 of VAT Act, No. 35 of 2013 (hereinafter ‘VAT Act’).viii.That the Respondent imposed "Corporation rate " in charging the income from employment of the “low income employee” whose taxable income is not subject to tax at the rate of more than twenty percent under Head 8 of the Third Schedule to the ITA. The decision is contrary to Section 3(2) (a)(ii), 5(2)(a), 5(4) (ff) and Third Schedule, Head B - Rate of Tax and the Income Tax (PAYE) Rules.ix.That the Respondent used the average net profit margin of 14% of the turnover of five companies and applied for the company and applied for the three years 2015, 2018 and 2019 Corporation tax payable instead of applying Sections 15 and 16 of ITA. No "tax law " provides for profit margin ratios in ascertainment of total income of a person for a year of income but only Sections 15 and 16 of ITA shall be applicable.x.That the aforesaid assessments being based on: -a.Profit Margin Ratios in order to compute Corporation Tax.b.Corporation rate instead of "individual rates" in computing tax in income from employment or service rendered under Section 5 of ITA.

Appellant’s Case 8. The Appeal was anchored on the Appellant’s Statement of Facts dated 12th September and filed 14th September, 2022.

9. The Appellant contended that the Respondent carried out tax investigation on the company for the purpose of obtaining full information in respect of the income of a person or class of persons chargeable to tax for the year of income 2015 to 2019 of which the allegations of the tax due were under Pay As You Earn (PAYE), Value Added Tax (VAT), Corporation tax, and directors rental income. It stated that of the above allegations, the Commissioner of Investigation and Enforcement came up with assessment of Kshs. 314. 243. 583. 00.

10. The Appellant averred that the estimated tax the Respondent demanded as per the demand notice dated 6th April 2021, the years of income 2015 to 2018 had already been dealt with per Tax Appeal No. 82 of 2018, through ADR and a consent signed on 29th November 2018 and 13th December 2018 respectively. The Appellant further averred that the Respondent while raising the additional estimated assessment made a substantial error or defect by disregarding the ADR and consent duly executed for the years of income 2015 to 2018 hence ignored or did not consider Section 47 of the Constitution of Kenya 2010 (hereinafter ‘the Constitution’) on “Fair Administrative Action”.

11. It was stated by the Appellant that the Respondent while raising additional assessments and demanded the same as per its letter of 6th April 2021 made a substantial error or defect in procedure provided by Sections 3(2)(a)(i), I5 and 16, and Rules made under the ITA which may possibly have produced error or defect in the decision of the case upon merit by not taking into account deduction allowed, deductions not allowed and taking an average profit margin of 14% of the turnover in order to ascertain Corporation tax is the decision being contrary to law or to some usage having the force of law.

12. Furthermore, the Respondent while raising additional assessments made substantial error or defect in the procedure provided by “tax law“ and Rules made thereunder which may possibly have produced error or defect in the decision of the case upon merit as the law provides that "when a tax is due and payable by a person in respect of an assessment, any amount refundable under the "tax law" shall be applied towards the satisfaction of the tax due and payable to the extent of that tax due and payable to the extent of that tax and the amount so applied shall be refunded”. The Respondent disregarded the overpayment of tax and also did not offset the overpaid tax. By ignoring or disregarding Section 47 (4) of Tax Procedures Act No. 29 of 2015(hereinafter ‘TPA’) was not fair administrative action. Every person has the right to administrative action that is expeditious, efficient, lawful, reasonable and procedurally fair as provided by Article 47 (1) of the Constitution.

13. The Appellant contended that the Respondent by a notice dated 9th June 2020 but delivered to it very late on 6th April 2021 required clarification, resolution of the tax issues by making payment or arranging with the Respondent for payment of the taxes is punitive, erroneous and excessive by reason of some error or mistake of fact in the assessments being demanded. i.e. Kshs. 314,243. 583. 00 instead of 31,198,799. 00 (314,243,583. 00 - 283,044,784. 00).

Appellant’s Prayers 14. The Appellant prayed that the Tribunal makes orders to the effect that: -a.The Respondent’s decision to assess the years of income 2015 to 2018 be struck out in its entirety as this had already been dealt with and closed;b.The Respondent's action to demand tax assessment of Kshs. 283,064,748. 00 already concluded through Tribunal and Alternative Dispute Resolution, TAT N0. 82 of 2018 as per the Consent dated 13th December 2018 and ADR Agreement dated 29th November 2018 after having provided all the relevant information and documentation where necessary be declared arbitrary, capricious, unreasonable, unfair and contrary to the administration of justice and legitimate expectation of the Appellant;c.The Respondent, its employees’, agents or other person purporting to act on its behalf be barred and or estopped from disallowing or taking any further steps towards enforcement or recovery of tax stated above; andd.The cost of the Appeal

Respondent’s Case 15. The Respondent opposed the instant Appeal vide its Statement of Facts dated 11th April, 2023 and filed on filed 14th October 2022.

16. The Appellant was profiled for alleged tax evasion from the years 2015 to 2019 by under declaration in VAT returns, understatement of turnover, and non-declaration of rental income. The investigation covered the accounting periods 2015 to 2019 on all tax heads. The Appellant's accounting date is 31st December.

17. A preliminary review was done on the company's' declarations in i-tax system. The preliminary review mainly centered on the review and analysis of financial records as declared in i-tax system, and related data. This included extracting and analyzing data from internal databases including i-tax system, Simba system and Jasper soft.

18. It was established that the taxpayer's declaration as per income tax returns compared against withholding certificates, turnovers and VAT returns had variances. The variances were then summarized and taxes due computed.

19. From the company's returns as declared in i-tax system, the company was noted to have no buildings registered under its name. The offices are on a rental building located at Royal Offices building along Chiromo Lane in Westlands.

20. However, the company was noted to have ninety-four (94) motor vehicles registered under the company as per the National Transport and Safety Authority's (NTSA) Transport Integrated Management System (TIMS). There are no vehicles registered under the director's names.

21. Sales as declared by the company in the income tax returns and VAT 3s were compared in the VAT 57 and variances noted. In addition, the company being a construction company, payment for services offered to it (sales) were subjected to Withholding tax.

22. The investigation team therefore worked backwards to establish the sales values from the withholding certificates.

23. Vide letter dated 12th May 2020 the investigation team shared a letter of findings. A tax liability of Kshs. 655,904,242. 11 for the company and Kshs. 36,350,572. 54 on the director's rental income as per table 1 and 2 was established.Table 1- Summary of principal taxes payable by KIU ConstructionYear VAT (Kshs) PAYE (Kshs) Corporation Tax (Kshs) Total (Kshs)

2015 113,441,198. 40 0 210,143,208. 60 323,584,407. 00

2016 56,751,633. 65 0 15,762,107. 70 72,513,741. 35

2017 16,843,693. 67 0 22,399,503. 00 39,243,196. 67

2018

2,299,794. 90 161,604,195. 90 163,903,990. 80

2019 48,145,262. 24 7,893,339. 90

56,038,602. 14

2020 0 620,304. 15

620,304. 15

Total 235,181,787. 96 10,813,438. 95 409,909,015. 20 655,904,242. 11 Table 2- Summary of principal taxes payable by John Francis Kariuki TheuriYEAR GROSS RENTAL ANNUAL INCOME AMOUNT DECLARED VARIANCE TAX PAYABLE 3o%

2015 23,806,700 2,627,079 21,179,621 6,353,886

2016 23,806,700 2,377,079 21,429,621 6,428,886

2017 27,338,430 3,455,957 23,882,473 7,164,742

2018 27,338,430 - 27,338,430 8,201,529

2019 27,338,430

27,338,430 8,201,529

129,628,690

36,350,573

24. The tax findings were shared with the Appellant on 9th June 2020 detailing all the income established, adjustments and tax computation. The Appellant on the same letter was asked to review and respond appropriately within 14 days from the date of the letter failure to which assessment shall be issued and taxes demanded forthwith. The Appellant requested for tax reconciliation upon receipt of the investigation findings vide a letter dated 6th August 2020.

25. The team guided by the technical committee looked at five companies in the construction industry during the same period to ascertain the profit margins in order to compute corporation tax. Applying a net profit margin of 14% for the company on the two years 2015 and 2018, the corporation tax payable was computed as follows:Year Income Tax Turnover as per Mu Construction IT returns PST @ 14% of turnover Corporation tax @ 3o%

2015 878,900,990 123,046,138. 60 36,913,841. 58

2018 851,390,522 119,194,673. 08 35,758,401. 92

2019 779,092,050 109,072,887. 00 32,721,866. 10

TOTAL

105,394,109. 60 Therefore, the summary of taxes payable by KIU Construction are as tabulated below:Year VAT (Kshs) PAYE (Kshs) Corporation Tax (Kshs) Total (Kshs)

2015 113,441,198. 40 0 36,913,841. 58 150,355,039. 98

2018 2,2992794. 90 35,758,401. 92 38,058,196. 82

2019 48,145,262. 24 7,893,339. 90 32,721,866. 10 88,760,468. 24

2020 0 620,304. 15 620,304. 15

Total 161,586,460. 64 10,813,438. 95 105,394,109. 60 277,794,009. 19

26. That the Respondent disallowed all expenses unless the Appellant could substantiate them. The taxable rental income was tabulated as below;Year Gross rental annual income Amount declared for tax purpose Taxable Amount TAX PAYABLE 30%

2015 23,806,700 2,627,079 21,179,621 6,353,886

2016 23,806,700 2,377,079 21,429,621 6,428,886

2017 27,338,430 3,455,957 23,882,473 7,164,742

2018 27,338,430 - 27,338,430 8,201,529

2019 27,338,430 - 27,338,430 8,201,529

129,628,690 8,460,115 121,168,575 36,350,573

27. The Respondent stated that the assessment raised by Domestic Taxes Department (DTD) for 2016-2017 amounted to Kshs.283,064,748 was reviewed by Alternative Dispute Resolution mechanism.

28. That on 6th April 2021, the Appellant was served with a notice for demand for taxes totaling to Kshs. 277,794,009 for KIU Construction Company and Kshs. 36,350,573 for the Director’s rental income.

29. That on 19th July 2021, the Appellant issued the Respondent with an objection to the demand notice.

30. That on 23rd July 2021, the Respondent issued a confirmation of assessments decision, wherein it also invalidated the Appellant’s objection for being lodged out of time.

31. That Section 51(2) of the Tax Procedures Act (TPA) provides that 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; as read with Section 51(8) of the TPA: Where a notice of objection has been validly lodged within time, the Commissioner shall consider the objection and decide either to allow the objection in whole or in part, or disallow it, and Commissioner's decision shall be referred to as an "objection decision"

32. The Respondent stated that the Appellant had a statutory duty to abide by when lodging the objection. It took the Appellant well over 90 days to lodge the objection.

33. That no request for an extension of time was received by the Respondent as required under Section 51(6) of the TPA. The failure to comply with statutory timelines by the Appellant, the Respondent was at liberty to confirm the assessment.

34. The Respondent averred with regard to ground 1 of Appeal that Section 4(3) of TPA provides; an authorised officer shall enforce, and ensure due compliance with, the provisions of the tax law, and shall make all due inquiries in relation thereto.

35. The Respondent established that the Appellant was not tax compliant. Therefore, the Respondent exercised its statutory mandate to assess the correct taxes due by the Appellant.

36. That had the Appellant been tax compliant then there would be no ‘excessive’ tax pending. The Appellant had a statutory duty to pay tax. Its non-compliance is the foundation of the assessment.

37. As relates to ground 2 of the Appeal the Respondent stated that its actions were in strict compliance with the law. The additional VAT was computed from the variances between the income tax and VAT turnover.

38. That the Appellant was informed of the noted variance and invited to provide explanations for it but failed to do so. The Respondent therefore cannot be held liable for the failure of the Appellant to explain the variance.

39. That pursuant to Section 108 of the Evidence Act, as the party that would suffer loss if the variance remains unexplained, the Appellant bore the burden of proof by timely providing information that addressed the variance.

40. That the Appellant failed to provide explanations within statutory timelines. The Respondent cannot therefore be held liable for the acts of commission or omission of the Appellant.

41. With regard to ground 3 of the Appeal the Respondent contended that the Appellant never substantiated the direct expenses declared in the income tax returns as requested vide the tax investigations findings letter dated June 9th 2020 thus an industry margin of 14% Profit Before Tax (PBT) was applied on the turnover.

42. As relates ro ground 4 of the Appeal the Respondent contends that the Appellant was issued the investigation findings on time and given ample time to respond to the issues, however the taxpayer did not provide evidence to substantiate the expenses on the rental income causing the same to be added back and taxed.

43. With regard to ground 5 of the Appeal t Respondent stated that the investigations established that the Respondent could not rely on the Appellant’s returns due to variances noted hence used the most credible information available at the time. Section 24(2) of the TPA provides; The Respondent 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.

44. That the Respondent in assessing the tax liabilities of any taxpayer is empowered by law to use the information available. With this information, the Respondent is then empowered to use the best method in his judgment that can ascertain the Appellant’s tax liabilities.

45. That the Appellant had a statutory duty to file the objection within 30 days but failed to do so. Having failed to comply, the Respondent was at liberty to confirm the assessment.

Respondent’s Prayers 46. The Respondent prayed that the Tribunal finds that;a.The Confirmation of Assessment be upheld; andb.This appeal be dismissed with costs.

Parties’ Written Submissions 47. The instant Appeal was to be canvassed by way of written submissions. The Respondent’s submissions were dated and filed on 11th April 2023. Notably, by the time the Tribunal retired to write this judgment, the Appellant had not filed any written submissions.

48. The Respondent cited the provisions of Section 51(12) of the Tax Procedures Act as read with Section 13 (3) & (4) of the Tax Appeals Tribunal Act and submitted that it confirmed the additional assessment on 23rd July 2021 whereas the instant Appeal was filed in September 2022. It further submitted that the Appellant has not invoked this Court’s jurisdiction to extend time to lodge an Appeal. This lapse is contrary to the express provisions of Section 51(12) of the TPA and Sections 13 (3) & (4) of the Tax Appeals Tribunal Act thus making the Appeal herein ripe for striking out.

49. On whether the Appellant’s objection was valid, the Respondent referred to the provisions of Section 51 (2), (3), & (4) of the Tax Procedures Act which provides guidance on lodging an objection against the Commissioner’s decision. In this case, the Appellant lodged its objection on 19th July 2021 whereas the Respondent’s demand was issued on 6th April 2021. This means that the said objection was lodged way out of the prescribed timelines and was not supported by reasons validating the late objection contrary to the provisions of Section 51 (6) & (7) of the Tax Procedures Act. It relied on the case of Ngurumani Traders Limited v Commissioner of Investigations and Enforcement TAT No. 125 of 2017 and stated that in light of the foregoing, its assessment should be upheld.

50. On whether the Respondent erred in assessing income for the years 2015 and 2016, the Respondent cited the provisions of Section 56(1) of the Tax Procedures Act and asserted that the Appellant was at liberty to submit evidence on what the Respondent failed to consider in its computation but failed to do so. It referred to Section 4(3) and 24(2) of the Tax Procedures Act which mandates the Respondent to ensure due compliance with tax laws of any taxpayer and stated that it issued additional assessment against the Appellant based on the variances observed between income tax and VAT turnover, to ensure that the Appellant’s returns reflected the true tax position of the Appellant pursuant to the provisions of Section 31 of the Tax Procedures Act.

51. In submitting that the aforementioned assessment placed an obligation upon the Appellant to object and explain the cause of the variance, the Respondent placed reliance on the High Court’s holding in the case of Commissioner of Domestic Services v Galaxy Tools Limited [2021] eKLR.

52. The Respondent cited the provisions of Section 15 and 54A (1) of the Income Tax Act, and Section 23 (1) (b) of the TPA and further submitted that a taxpayer has an obligation to ensure any and all tax documents required for scrutiny be readily available for the Respondent.

53. The Respondent relied on the cases of Leah Njeri Njiru v Commissioner of Investigations and Enforcement Kenya Revenue Authority & another [2021] eKLR and Kenya Revenue Authority v Maluki Kitili Mwendwa [2021] eKLR and contended that it granted the Appellant an opportunity to provide information and evidence to support its expenses but the Appellant failed to do so.

Issues For Determination 54. Upon consideration of the instant Appeal, the Statements of Facts filed by the parties herein and the written submissions of the Respondent, the Tribunal is of the view that the matter distills into three issues for determination as follows:i.Whether there is a valid Appeal before this Tribunal;ii.Whether the Appellant lodged a valid Objection;iii.Whether the Respondent erred in assessing tax liabilities for the years 2015 and 2016;

Analysis And Findings i. Whether there is a valid Appeal before this Tribunal. 55. Section 51(12) of the Tax Procedures Act No. 29 of 2015 provides that:“A person who is dissatisfied with the decision of the Commissioner under subsection (11) may appeal to the Tribunal within thirty days after being notified of the decision.”

56. From the foregoing, it is evident that a person dissatisfied with the Respondent’s decision may lodge an appeal with the Tribunal within thirty days after being notified of the said decision. It is not disputed that the Appellant was notified of the Respondent’s decision to confirm its additional assessments on 23rd July 2021 whereas the Appeal herein was lodged on 14th September 2022 approximately thirteen (13) months after the Respondent issued its objection decision.

57. Section 13 (3) & (4) of the Tax Appeals Tribunal Act No. 40 of 2013 mandates the Tribunal to extend time within which to lodge an appeal against the decision of the Commissioner. It states that: -1. …..2. ……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.”

58. In this case, there is no evidence that the Appellant sought for extension of time within which to file a Notice of Appeal against the Respondent’s decision and/or that leave was granted to the Appellant by this Tribunal to file its appeal out of time. For this reason, the Tribunal finds that there is no proper and/or valid Appeal filed by the Appellant before it for consideration.

59. In view of the foregoing and the fact that the Appeal herein is invalid, the Tribunal shall not determine the other issues earlier identified for determination as they have been rendered moot.

Final Decision 60. The upshot of the above is that the Appeal is incompetent and the Tribunal lacks jurisdiction to entertain it. The Tribunal accordingly proceeds to make the following Orders: -a.The Appeal be and is hereby struck out.b.Each party to bear its own costs.

61. It is so ordered.

DATED AND DELIVERED AT NAIROBI ON THIS 8TH DAY OF MARCH, 2024ERIC NYONGESA WAFULA - CHAIRMANDELILAH K. NGALA - MEMBERGEORGE KASHINDI - MEMBERCHRISTINE A. MUGA - MEMBERMOHAMED A. DIRIYE - MEMBERSPENCER S. OLOLCHIKE- MEMBER