[2024] KETAT 703 (KLR)

Koibos General Contractors Limited v Commissioner of Domestic Taxes (Tax Appeal 373 of 2023) [2024] KETAT 703 (KLR) (9 May 2024) (Judgment)

Neutral citation: [2024] KETAT 703 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 373 of 2023

RM Mutuma, Chair, M Makau, EN Njeru, AM Diriye & B Gitari, Members

May 9, 2024

Between

Koibos General Contractors Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a limited liability company incorporated in Kenya and a registered taxpayer.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, 1995. Under Section 5 (1) of the Act, the Kenya Revenue Authority (the Authority) is an agency of the Government for the collection and receipt of all revenue. Further, 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 1 & 2 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 dispute in this Appeal arose when the Appellant was issued with a pre-assessment in respect of Income tax and VAT on 27th April 2021 demanding a sum of Kshs. 40,785,663. 00. Subsequently, on 15th June 2021, the Respondent issued an additional assessment for Income tax covering the periods from 2015 to 2019, amounting to Kshs. 13,622,389. 00.

4. The Appellant disputed the Respondent’s findings and lodged an objection to the assessments on 14th July 2021, to which the Respondent issued an objection decision on 13th September 2021 rejecting the Appellant’s objection.

5. The Appellant being aggrieved by the objection decision issued by the Respondent, lodged this Appeal, filing its Notice of Appeal dated 8th May 2023 with leave of the Tribunal granted in TAT Misc. App. No. 48 of 2023.

The Appeal 6. The Appellant’s Memorandum of Appeal dated and filed on 2nd June 2023 is premised on the following grounds, that;a.The Respondent erred in law and fact by issuing the Objection decision outside statutory timelines contrary to Section 51 (11) of the TPA.b.The Respondent erred in law and fact by disregarding the expenses incurred by the Appellant when raising the impugned Income tax assessment.c.The Respondent erred in law and fact by asserting that it had not been given adequate documents by the Appellant, whereas the Appellant had supplied all relevant documentary evidence to support the expenses claimed.d.The Respondent erred in law and fact by confirming the assessment without due regard to all records/documents, explanations and information provided, thereby failing to appreciate all issues presented and raised by the Appellant before confirming the assessment.

Appellant’s Case 7. The Appellant’s case is premised on its;a.Statement of Facts dated and filed on 2nd June 2023 together with the documents attached thereto; andb.Written submissions dated 29th September 2023 and filed on 2nd October 2023.

8. That the Appellant challenged the validity of the Respondent's Objection Decision and the consideration of their expenses during the assessment process arguing that the Respondent violated Section 51 of the Tax Procedures Act (TPA), which sets a mandatory sixty-day timeline for issuing Objection Decisions.

9. The Appellant asserted that it lodged its Objection on 14th July 2021 but the decision was rendered on 13th September 2021, exceeding the statutory period.

10. The Appellant further submitted that Respondent ought to have issued its Objection Decision on or before the 12th September 2021 and relied on Section 51 (11) (b) of the TPA, which allows for an extension of time only in the presence of intervening actions, of which the Appellant claimed that there were none.

11. That the Appellant cited the case of ESL Forwarders vs.Commissioner of Domestic Taxes Nairobi TAT No. 255 of 2020, and argued that failure to issue an Objection Decision within the prescribed timeline deems the Objection allowed by operation of law.

12. That the Appellant emphasized the mandatory nature of the statute, citing Equity Group Holdings Limited vs. Commissioner of Domestic Taxes (Civil Appeal E069 & E025 of 2020), where the court held that statutory directives must be obeyed, and non-compliance leads to legal consequences.

13. That in regards to the consideration of expenses, the Appellant contends that the Respondent failed to properly assess its expenses in line with Section 3(2) of the Income Tax Act arguing that certain items included as taxable income, such as loans and overdrafts, were erroneously considered.

14. That the Appellant relied on the principle outlined in Republic vs. Kenya Revenue Authority Ex parte Bata Shoe Company (Kenya) Limited [2014], emphasizing that tax laws must be strictly adhered to, and taxpayers should only pay what is legally due.

15. The Appellant stated that the Respondent failed to use all available information at its disposal in making its decision, but instead evidently and selectively imposed income tax demands on the Appellant based on assumptions.

16. The Appellant contended that the Respondent failed to rely and consider the documents provided, inter alia, the Statement of income and expenditure, invoices and bank statements, denied the Appellant it rights provided by Section 15 of the Income Tax Act which provides for a list of deductions that qualify for deduction before assessment of tax payable.

17. The Appellant avowed that the Respondent in its decision failed to consider the nature of business it is involved in, in that profits are dictated by several factors and most importantly the operating expenses.

18. The Appellant asserted that, had the Respondent appreciated all the explanations, documents and information provided by the Appellant it would have not made the impugned decision.

19. The Appellant in its written submissions dated 29th September 2023 and filed on 2nd October 2023, reiterated and rehashed its Statement of Facts and therefore the Tribunal shall not belabor in the reproduction of the same.

20. The Appellant relied on the following case law;i.Farmers Wells Limited vs. Commissioner Domestic Taxes TAT No. 179 of 2021;ii.Cyka Manpower Services Limited vs. Commissioner Domestic Taxes TAT No. 21 of 2022;iii.Equity Group Holdings Limited vs. Commissioner of Domestic Taxes (Civil Appeal E069 & E025 of 2020) KEHC 24 (KLR) (Commercial and Tax);andiv.Republic vs. Kenya Revenue Authority Ex parte Bata Shoe Company (Kenya) Limited [2014] eKLR.

Appellant’s Prayers 21. The Appellant made the following prayers to the Tribunal, that;a.The Appeal be allowed.b.The Respondent’s decision dated 13th September 2021 be set aside and reversed.c.The costs of and incidental to this Appeal be awarded to the Appellant; andd.Any other orders the Tribunal may deem fit.

Respondent’s Case 22. The Respondent’s case is premised on its;a.Statement of Facts dated 29th June 2023 and filed on 3rd July 2023 together with the documents attached thereto; andb.Written submissions dated and filed on 11th October 2023.

23. That the Respondent stated that it issued pre-assessment notices to the Appellant for Income tax and VAT discrepancies, culminating in additional assessments totaling Kshs. 13,622,389. 00.

24. The Respondent contended that despite the Appellant’s Objection being lodged on 14th July 2021, the Respondent’s objection decision issued on 13th September 2021, rejected the Objection due to the Appellant’s failure to provide necessary documentation.

25. The Respondent asserted that it was not bound by the Appellant’s self-assessment and can assess for additional taxes based on any other available information. The Respondent relied on Section 31 (1) (c) of the Tax Procedures Act.

26. The Respondent avowed that the Appellant raised its Objection to the assessment on iTax portal, but did not attach any evidence or documentation in support of its Objection.

27. The Respondent relied on Section 51 (3) of the Tax Procedures Act relating to production of documents and stated that the Appellant was given an opportunity to present its case by way evidence prior to issuing its Objection decision, which decision and assessment was rendered in accordance with the law.

28. The Respondent stated that the Appellant is only allowed to deduct expenditure which it is able to prove was incurred wholly and exclusively in the production of its income and the Appellant did not prove the same with evidence or documents as it claims to have done.

29. The Respondent submitted that the burden to prove that the assessment was incorrect as provided for under Section 56 (1) of the Tax Procedures Act 2015, lies with the Appellant, who has failed to prove the same.

30. The Respondent in its written submissions dated and filed on 11th October 2023, identified two issues for determination, namely;i.Whether there is a Valid Objection decision.ii.Whether the Appellant has discharged his burden of proof.

31. The Respondent contended that it is the overriding objective of this Honourable Tribunal to obliviate hardship, expense, delay and to focus on the substantive justice that is expected from it by all parties before it.

32. That in arguing against strict adherence to procedural rules, the Respondent invoked the court's duty to administer substantial justice, citing the case of St. Patrick’s Hill School vs. Bank of Africa Kenya Ltd [2018] and Phillip Chemwolo & Another vs. Augustine Kubende [1986].

33. The Respondent contended that justice should not be impeded by technicalities, emphasizing Article 159 (2) (d) of the Constitution, which mandates courts to administer justice without undue regard to procedural technicalities.

34. The Respondent asserted that the Tax Procedures Act is a procedural Act, not a tax Act whose provisions are coined in strict interpretation as other Acts such as VAT Act, Excise Act and so forth.

35. Furthermore, the Respondent emphasized on the Appellant's burden of proof under Section 56 of the Tax Procedures Act, 2015. It asserted that the Appellant failed to substantiate its Objections with supporting documentation, as required by Section 51 (3) of the Tax Procedures Act.

36. That the Respondent relied on the Case of Republic vs. Kenya Revenue Authority Ex parte Jaffer Mujtab Mohammed (2015) which reinforced the importance of rational basis in tax assessments, and the case of TAT No. 55 of 2018 Boleyn International Ltd vs. Commissioner of Domestic Taxes that highlighted the taxpayer's responsibility to prove the incorrectness of tax decisions.

37. The Respondent submitted that the Appellant having failed to provide documents in support of its Objection, the Appellant failed to provide a valid Objection for the Commissioner to consider and render a decision.

38. That the Respondent contended that the Appellant's failure to provide evidence to refute the assessment left the assessment unchallenged and cited the case of TAT No. 101 of 2016 Bemarc Limited vs. Commissioner Domestic Taxes, which highlighted the taxpayer's responsibility to substantiate objections with relevant records and documents.

39. The Respondent relied on the following case law;i.St. Patrick’s Hill School vs. Bank of Africa Kenya Ltd [2018] eKLR;ii.Phillip Chemwolo & Another v Augustine Kubende [1986] eKLR;iii.Republic vs. District Land Registrar, Uasin-Gishu & Anor [2014] eKLR;iv.Republic vs. Kenya Revenue Authority Ex parte Jaffer Mujtab Mohammed [2015] eKLR; andv.TAT 101 of 2016 Bemarc Limited vs. Commissioner Domestic Taxes.

Respondent’s Prayers 40. The Respondent called upon the Honourable Tribunal to;a.Uphold the Respondent’s Objection decision dated 13th September 2021. b.Dismiss this Appeal with costs to the Respondent as the same is without merit.

Issues For Determination 41. The Tribunal upon the careful consideration of the pleadings, Statements of Facts and submissions made by the parties respectively, was of the view that the issues that recommend themselves for its determination are;i.Whether the Respondent’s Objection Decision of 13th September 2021 was validly issued;ii.Whether the Respondent’s Objection Decision of 13th September 2021 was justified;

Analysis and Determination 42. The Tribunal shall proceed to analyze the issues as herein under;i.Whether the Respondent’s Objection Decision of 13th September 2021 was validly issued;

43. The Appellant submitted that being aggrieved with the Respondent’s assessment it lodged its Objection 14th July 2021, subsequently the Respondent issued its Objection decision on the 13th September 2021.

44. It was the Appellant’s submission that the Respondent’s decision was issued beyond the mandatory statutory timelines as provided for under Section 51 (11) of the Tax Procedures Act. That the only occurrence that would have disrupted its position was if there was any engagement between the parties, which the Appellant submitted did not exist.

45. Section 51 (11) of the Tax Procedures Act as was then, provided as follows;“(11)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.”

46. The Respondent in response thereof, submitted that whereas the Appellant lodged its Objection on 14th July 2021, it did not support the same with documents and therefore failed to meet the threshold of Section 51 (3) of the Tax Procedures Act. The Respondent therefore declined the Appellant’s Objection for want of supporting documents.

47. Further the Respondent submitted that the Tax Procedures Act was enacted as a procedural Act, is not a tax Act and therefore its provisions are not coined in strict interpretation as other tax Acts would.

48. The Respondent, for lack of a better term, equated the timing of issuance of the Objection decision to a technicality in law, which it suggested, the Tribunal ought to disregard while dispensing justice to the parties before it.

49. The Tribunal notes that there is no evidence to the contrary that the Appellant made its Objection through iTax on the 14th July 2021 to which the Respondent issued Objection decision dated 13th September 2021.

50. In line with the Respondent’s arguments that the Appellant lodged an invalid Objection, Section 51 (4) of the TPA required that the Respondent ought to have notified the Appellant in writing raising the issue of the invalidity of the same and requiring the Appellant to validate its Objection in accordance with the provisions of Sections 51 (3) of the TPA.

51. The Tribunal has perused the documents presented by the parties and noted that the Respondent did not present any documents in support of the position that it notified the Appellant of the invalidity of its Objection, however, the Respondent elected to issue an Objection decision.

52. It is the Tribunal’s view, that the Respondent’s action of issuing an Objection decision under the circumstances amounts to the validation of an otherwise invalid Objection.

53. The Respondent having chosen that path, ought to have delivered the Objection decision within the dictates of Section 51 (11) of the TPA.

54. It worthy of notice, that the provisions of Section 51 (11) of the Tax Procedures Act as coined then, required the Respondent to issue the Objection decision within sixty days, the requirement of a ‘valid Objection’ as alluded to by the Respondent was non-exist in law at that period.

55. The Tax Procedures Act is not a procedural Act or a subsidiary legislation or regulations as the Respondent seems to suggest, if Parliament would have intended the same to be so, it would have been expressly indicated and categorized it in such a manner. The Tax Procedures Act 2015 is a substantive tax Act commanding strict adherence of the provisions contained therein.

56. The Tribunal has observed that the Objection decision to the Objection lodged on 14th July 2021 was issued on 13th September 2021, when the same ought to have been issued on or before the 12th September 2021. The Objection decision was therefore issued beyond the statutory timelines.

57. The circumstances in the instant Appeal are a replica of the case of Equity Group Holdings Limited vs. Commissioner of Domestic Taxes (Civil Appeal E069 & E025 of 2020) [2021] KEHC 25 (KLR) (Commercial and Tax), where the court held that:-“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 the consequences of failing to render a decision within 60 days. The Objection is deemed to be allowed. That being the law, the appellant’s Objection stood allowed as a matter of law the moment the Commissioner of Domestic Taxes failed to render his decision within the 60 days. This being the correct legal position, it is my finding that the 1st appeal succeeds”.

58. The Tribunal finds that the Appellant’s Objection was allowed by operation of the law upon the lapse of the statutory timelines and based on the Respondent’s failure to issue an Objection decision within the statutory period of 60 days.

59. The Tribunal having established that the Respondent’s Objection decision issued on 13th September 2021 was not validly issued, it shall not delve into the other issue for determination as the same has been rendered moot.

60. Consequently, the Tribunal finds that the Respondent’s Objection decision of 13th September 2021 rejecting the Appellant’s Objection was not validly issued as the Appellant’s Objection had already been allowed by operation of the law.

Final Decision 61. The Tribunal finds that the Appeal has merit and accordingly proceeds to make the following Orders:i.The Appeal be and is hereby allowed.ii.The Respondent’s Objection decision issued on 13th September 2021 be and is hereby set aside.iii.Each party to bear its own costs.

62. It’s so ordered.

DATED AND DELIVERED AT NAIROBI THIS 9TH DAY OF MAY, 2024. ROBERT M. MUTUMA - CHAIRPERSONMUTISO MAKAU - MEMBERELISHAH N. NJERU - MEMBERMOHAMED A. DIRIYE - MEMBERBERNADETTE M. GITARI - MEMBER