[2023] KETAT 988 (KLR)

Kombani Autoworks Limited v Commissioner of Domestic Taxes (Tax Appeal 400 of 2023) [2023] KETAT 988 (KLR) (1 December 2023) (Ruling)

Neutral citation: [2023] KETAT 988 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 400 of 2023

E.N Wafula, Chair, M Makau, EN Njeru, E Ng'ang'a & AK Kiprotich, Members

December 1, 2023

Between

Kombani Autoworks Limited

Applicant

and

Commissioner Of Domestic Taxes

Respondent

Ruling

1. The Applicant moved the Tribunal vide a Notice of Motion application filed on 14th September 2023 under a certificate of urgency and supported by an Affidavit sworn by Leeroy Ochieng’, an Accountant of the Applicant, seeking the following Orders: -(a)spent.(b)That pending the hearing and determination of this application, this Honourable Tribunal be pleased to order for the suspension, and/or stay the enforcement and implementation of the Agency Notice dated 5th September 2023 for the sum of Kshs. 5,102,094. 00 issued upon I&M Bank and Gulf African Bank.(c)That the Honourable Tribunal be pleased to declare and order that, pending the hearing and determination of this application and the Appeal, the Applicant be permitted to access the funds in its Bank Account held with I&M Bank and Gulf African Bank.(d)That pending the hearing and determination of the main Appeal herein being TAT No. 400 of 2023 as well as permitting the Applicant to object to the demand letter dated 13th September 2023, the Honourable Tribunal be pleased to order for the suspension, and/or stay the enforcement and implementation of the Agency Notices dated 5th September 2023 each for the sum of Kshs. 5,102,094. 00 issued upon I&M Bank and Gulf African Bank or any other bank.(e)That the Honourable Tribunal be pleased to restrain the Respondent, their agents, employees, assignees from demanding or issuing further agency notices in relation to the amounts in issue, being Kshs. 5,102,094. 00 as demanded in the Agency Notice dated 5th September 2023 or the sum subject of this Appeal or demand Letter dated 13th September 2023, pending the hearing and determination of the Appeal herein and/or Objection to the demand letter dated 13th September 2023. (f)That this Tribunal be pleased to give all necessary and consequential directions.(g)That costs for the application to be in the cause.

2. The application is premised on the following grounds: -(i)That the Respondent has issued Agency Notices dated 5th September 2023, pursuant to Section 42 of the Tax Procedures Act 2015 directing I&M Bank and Gulf Bank of Africa (“the banks”) to remit into the Respondent’s account the sum of Kshs. 5,102,094. 00 purportedly, being taxes due and payable by the Applicant.(ii)That the perusal of the sum of Kshs. 5,102,094. 00 reveals that the taxes so demanded in the Agency Notices constitute principal tax Kshs. 3,171,955. 80 as VAT for the period of December 2018 to July 2023 and Kshs. 145,861. 91 as PAYE for the period of December 2022 to August 2023, then with additional interest and penalties thereon.(iii)That the Appeal before the Tribunal being TAT No. 400 of 2023, subject herein challenged the Respondent’s Objection decision dated 15th May 2023 as well as a further demand letter dated 25th May 2023, wherein the said demand letter, the Respondent demanded VAT for the months of December 2018 to March 2023 as well as PAYE for the months April 2023 to December 2023. (iv)That it is therefore crystal clear that the Agency Notices are partially seeking for settlement of some of the amounts that are in dispute herein before this Tribunal and as such, unless stayed, there is a real risk that the Banks on or before the lapse of the 14th day from the date of the Agency Notices being Monday, 18th September 2023 remit the entire sums to KRA, thereby rendering the current Appeal as nugatory.(v)That furthermore, it is instructive to note that the Agency Notices were issued on 5th September 2023, way prior to issuing a tax decision (Assessment) which was only issued on 13th September 2023 without even granting the Applicant an opportunity to object. It should also be noted that whereas the Agency Notices are demanding Kshs. 5,102,094. 00, the demand letter of 13th September 2023, has only demanded partially the sum of Kshs. 579,113. 07 out of the entire amount.(vi)That it is therefore clear that the Agency Notices were issued contrary to express provisions of Section 42 (14) of the Tax Procedures Act 2015 which requires the same to be issued upon default by a taxpayer to file an Appeal or Object within the prescribe timelines, which is not the case herein.(vii)That in fact the Respondent only issued a formal demand letter dated 13th August 2023 after the Applicant raised concern as to its non-compliance with Section 42 (14) Tax Procedures Act, the Agency Notices of 5th September 2023 are therefore illegal having preceded the tax decision.(viii)That the attempts to negotiate with the Respondent to have the Agency Notices vacated and suspended have turned futile with the Respondent insisting that the Applicant has to pay apportion of the taxes demanded before the Respondent lift’s the Agency Notice.(ix)That there is real risk that the 14 days within which the Banks are to comply with the Agency Notices is fast lapsing and as such, unless this Tribunal most urgently intervenes by issuing the Orders sought herein, this Appeal shall be rendered nugatory as the sums in dispute will have been remitted to KRA.(x)That the there is also the risk that if both Gulf African Bank and I&M Bank complies and both remits the sum of Kshs. 5,102,094. 00, the Respondent will have received double what it is demanding in its Agency Notices, which would not only be unfair but also illegal.(xi)That it is a matter of public notoriety and judicial notice that the Respondent’s procedures are normally slow and demonstrate reluctance in effecting refunds even for taxes paid in error. Accordingly, should the Agency Notices be honoured and the sum so demanded remitted to the Respondent, the Applicant stands to suffer the loss of colossal amounts of money with minimal chances of the same being refunded, should the main Appeal succeed.(xii)That unless these orders of stay of enforcement of the Agency Notices are granted, the Applicant stands to suffer irreparable financial loss and damage, due to the fact that if the Bank acts in accordance with the Agency Notices, then the Appeal would be rendered nugatory should leave be granted.(xiii)That the Applicant has therefore demonstrated that there is a real risk of Bank will enforce and comply with the Agency Notices dated 5th September 2023 unless this Court grants a stay order as so prayer herein.

3. The Respondent opposed the application through a Replying Affidavit sworn by Martin Gichango, an officer of the Respondent, on the 28th September 2023 and filed on the same date. The grounds of opposition as highlighted in the Affidavit were as follows: -(i)That Agency Notices were issued to the Appellant, after it failed to respond to the immediate demand notice issued on 22nd August 2023 for Kshs. 5,055, 898. 00. (ii)That an immediate demand notice was issued after the Respondent noticed the Appellant had filed self-assessment VAT and PAYE from December 2022 to August 2023 amounting to Kshs. 579,114. 00 without paying.(iii)That the amount in the Agency Notices relate to self-assessment PAYE amounting to Kshs. 164,347. 00, self-assessment VAT amounting to Kshs. 444,704. 00 and additional assessment VAT amounting to Kshs. 4,493,043. 00 inclusive of penalties and interest.(iv)That the Additional assessment was issued on 23rd February 2023 to which the Appellant Objected with the prescribed period in law, particularly on 24th March 2023. (v)That the law permits the Respondent to assess and demand for tax not declared by the Appellant as per Section 31 of the TPA and Section 34 of the VAT Act.(vi)That the Applicant has not offered to pay any amount as conditional stay for the lifting of the Agency Notices pending the hearing and determination of the Appeal. Further, the Applicant’s conduct has demonstrated a lack of interest in settling the taxes due despite being accorded several opportunities to be heard.(vii)That the money being demanded herein is money that belongs to the general public good and it is meant to be used for the general public, further the amount is payable as a debt due to the Government in accordance to Section 32 (1) of the Tax Procedures Act.(viii)That if at all the Tribunal shall be inclined to grant the injunction sought then the Appellant be ordered to provide a bank guarantee in the equivalent of the taxes owed by the Appellant.

Applicant’s Submissions 4. The Applicant submitted that it identified two issues for determination, being;(a)Whether the Agency Notices dated 5th September 2023 should be lifted.(b)Whether the Agency Notices can be sustained on the Respondent’s allegation that the same partially relate to an unremitted self-assessment taxes.

5. The Applicant submitted that on the 6th September 2023 the Respondent served Agency Notices to the Bank, which amounts covered the period between December 2022 to August 2023 and the period December 2022 for PAYE and VAT respectively.

6. The Applicant contented that the above captioned amounts and demanded in the Agency Notices related to what is subject of the instant Appeal and emanate from the Respondent’s Objection decision issued on 15th May 2023.

7. The Applicant submitted that the Respondent did not dispute that the amount demanded and subject of the Agency Notice relates to the period December 2018 under Paragraphs 9 to 11 of the Respondent’s Replying Affidavit.

8. The Applicant submitted that Section 42 (14) of the TPA prohibits the Commissioner from issuing an Agency Notice where the matter is pending an Appeal before the Tribunal.

9. The Applicant stated that the Respondent issued Agency Notices for taxes that the Appellant failed to pay amounting to Kshs. 579,114. 00, however, the Respondent’s demand was for Kshs. 5,102,094. 00 which is inclusive the sum subject of the instant Appeal.

10. The Applicant submitted that the Respondent issued Agency Notices on the 5th September 2023, which action convoluted the matter as the demand letter were issued thereafter on 13th September 2023. That the Agency Notices cannot stand until the timelines for issuing Objecting against the demand letter (tax decision) of 13th September 2023 has lapsed, the Agency Notices are therefore premature.

11. The Applicant humbly submitted that it has not demonstrated its willingness to pay some taxes as a condition to stay. The Applicant referred to Section 18 of the TAT Act and asserted the Tribunal is clothed with jurisdiction to stay Agency Notices, not conditional stay as alleged by the Respondent.

12. The Appellant relied on the following case law;(a)TAT Misc. Application No. 214 Kenchick Limited vs. Commissioner of Customs & Border Control.(b)TAT Misc. Application No. 23 of 2022 – SBI International Holding AG Kenya vs. Commissioner of Domestic Taxes.

Respondent’s Submissions 13. The Respondent submitted that the Applicant failed to respond to the immediate demand notice issued on 22nd August 2023 for Kshs. 5,055,898. 00, as a consequence the Agency Notices were issued.

14. The Respondent contented that the said Agency Notices related to filed self-assessment on VAT and PAYE from December 2022 to August 2023 amounting to Kshs. 579,114. 00 without making payment.

15. The Respondent argued that it had fully accounted for VAT in the year 2018 which upon checking by the Respondent was not the proper and found discrepancies between sales declared in VAT returns and sales declared in Income tax, which discrepancies amounted to Kshs. 17,449,550. 00 upon subjecting the same to charge it amounted to Kshs. 2,700,427. 00.

16. The Respondent submitted that two (2) issues emerged for determination, being;(a)Whether the Agency Notices are unconstitutional.(b)Whether the Respondent will suffer any prejudice if the application is allowed.

17. The Respondent submitted that the Agency Notices are lawful and Constitutional being issued as per Section 42 of the Tax Procedures Act, further that the Applicant upon institution of the Appeal it stopped paying the current taxes and/or failed to support or validate it by providing the requested documents.

18. The Respondent contended that as a consequence it issued a tax decision confirming the initial assessment since the Appellant failed to lodge an objection.

19. The Respondent stated that the Applicant has not objected to the tax decision and is in contravention of Sections 52 (1) of the Tax Procedures Act and Section 13 (1) of the Tax Appeals Tribunal Act or made arrangements to pay the taxes, which taxes became due by operation of the law in the absence of a valid Appeal challenging the tax decisions and the assessments.

20. The Respondent asserted that the Finance Act, 2023 has amended Section 42 of the Tax Procedures Act by introducing a new Section 42 (14) (c) which prohibits the Respond from issuing a notice if the taxpayer has appealed against the assessment specified in the objection decision within the prescribed time, which amendment cannot apply retrogressively.

21. The Respondent submitted that there was not substantial loss that will be occasioned to the Applicant in the event the orders sought are not granted because the said issue is monetary and it has not been alleged or proved that the Respondent will be unable to refund the same.

22. The Responded submitted that if the Honourable Tribunal is inclined to allow this application the Applicant be directed to provide a bank guarantee as security.

23. The Respondent relied on the following cases;(a)Republic v Commissioner for Domestic Taxes & 2 Others Ex-parte Samuel Kimondo Theuri [2016] eKLR.(b)James Wangalwa & Another v Agnes Naliaka Cheseto in Misc. Appl No. 42 of 2011 [2002] eKLR.

24. The Respondent prayed for the application to be dismissed with costs to the Respondent.

Analysis and Findings 25. The instant application by and large seeks to restrain the Respondent from the enforcement of collection of taxes via the Agency Notices dated 5th September 2023 to the Applicant’s bankers.

26. Upon filing of the instant application, the Tribunal granted the Applicant an order on the 20th September 2023, staying the enforcement by way of the Agency Notices issued on 5th September 2023 pending the hearing and determination of the application herein.

27. The Applicant stated that Agency Notices were issued on the 5th September 2023 for the sum of Kshs. 5,102. 094. 00, it was the Applicant’s position that the Agency Notices sought to recover the taxes that were subject of the instant Appeal and therefore contra-statute.

28. The Respondent submitted that the Applicant declared on self-assessment for VAT and PAYE and failed to pay the same, therefore it was necessary to issue the Agency Notices as the Respondent has the duty and obligation to collect taxes in law.

29. The Tribunal has been invited into a scrutiny as to whether the Agency Notices were issued in accordance with the law.

30. The Tribunal is clothed with the jurisdiction to deal with an a application of this nature as guided under Section 42 of the Tax Procedures Act. The parties herein have placed reliance of Section 42 (14) of the Tax Procedures Act, which provides as follows:-“(14)The Commissioner shall not issue a notice under this section unless—(a)the taxpayer has defaulted in paying an instalment under section 33(2);(b)the Commissioner has raised an assessment and the taxpayer has not objected to or challenged the validity of the assessment within the prescribed period;(c)the taxpayer has not appealed against an assessment specified in an objection decision within the prescribed timelines;(d)the taxpayer has made a self-assessment and submitted a return but has not paid the taxes due before the due date lapsed; or(e)the taxpayer has not appealed against an assessment specified in a decision of the Tribunal or court.”

31. It follows that, once a taxpayer has lodged its Appeal before the Tribunal relating to a dispute on assessed taxes, the Respondent is prohibited by law from employing any mechanisms in recovery of the said taxes, including, but not limited to issuance of Agency Notices.

32. From the material before the Tribunal, more so the demand notice, there is no doubt that the Respondent made a demand of taxes in the sum of Kshs. 5,102,094. 00, which amount consists of Kshs. 164,347. 00 being PAYE for the period December 2022 to August 2023 and Kshs. 4,937,747. 00 being VAT for the period December 2018 to July 2023.

33. Further, it is noteworthy, that the instant Appeal is premised on the Assessment of VAT for the period December 2018, which period constitutes the amount of Kshs. 4,937,747. 00 sought to be recovered via the Agency Notices.

34. The sum contained in the Respondent’s Agency Notices on the VAT Tax head is invariably the subject matter of the instant Appeal, further the sum of Kshs. 164,347. 00 as demanded by the Respondent does not constitute the subject matter of the Appeal, however, the law provides for the procedure for commencing and leading up to enforcement of recovery of taxes.

35. The Appellant claimed that the Agency Notices were prematurely issued and demanded in the violation of all pre-requisite tax procedures, so much such that, the Agency Notices of 5th September 2023 preceded the demand notice of 13th September 2023.

36. There has been demonstration by the Appellant that indeed the amount contained in the Agency Notices is subject of this instant Appeal and a part of the demanded sum was made contrary to the due process of tax laws, including an assessment being made, opportunity to the taxpayer to object to the same and a decision being reached and without the tax payers’ default to enable the Respondent invoke recovery mechanisms.

37. In the Tribunal’s view, the demand for VAT relating to the period December 2018 and the Appeal herein relating to grievances on an assessment of VAT for the period December 2018 cannot be in isolation, the Tribunal is therefore persuaded that the amount relating to VAT in the Agency Notices forms part of the instant Appeal.

38. Whereas it is important for any taxpayer to ensure the remittance of all taxes due and payable, it is more important for the Respondent to discharge its duty of collecting the same with strict adherence of the law and tax procedures.

39. The purposes of Section 42 (14) of the Tax Procedures Act is to alleviate the concerns of potential challenges in demanding and enforcement of demands whilst the dispute is under adjudication, and without necessarily placing prejudice on any of the parties.

40. Section 42 (14) of the Tax Procedures Act clothes the Tribunal with the powers to interfere with the process of recovery of taxes where such taxes sought to be recovered are the subject of an Appeal before it.

41. The taxes were demanded under two tax heads, but in the same Agency Notices, noting that a substantial sum of the tax demanded is before this Tribunal for determination, Section 42 (14) of the Tax Procedures Act restrains the Respondent from issuing such notices.

42. The Tribunal, on a balance of convenience finds that the Applicant has advanced sufficient grounds to warrant the Tribunal to interfere with the enforcement process and holds the Appellant’s application as merited.

Disposition 43. Premised on the foregoing analysis the Tribunal finds that the application is merited and accordingly makes the following orders: -(a)That the Agency Notices issued by the Respondent dated 5th September 2023 for the sum of Kshs. 5,102,094. 00 issued upon the Appellant’s bankers, I&M Bank and Gulf African Bank be and are hereby lifted unconditionally.(b)No orders as to costs.

44. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 1ST DAY OF DECEMBER 2023. ERIC NYONGESA WAFULA.....................CHAIRMANMUTISO MAKAU.........................MEMBERELISHAH N. NJERU.....................MEMBEREUNICE N. NG’ANG’A................MEMBERABRAHAM K. KIPROTICH........MEMBER