[2023] KETAT 961 (KLR)

Koroto Engineering Limited v Commissioner of Domestic Taxes (Tax Appeal 1108 of 2022) [2023] KETAT 961 (KLR) (24 November 2023) (Judgment)

Neutral citation: [2023] KETAT 961 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 1108 of 2022

RM Mutuma, Chair, M Makau, EN Njeru, W Ongeti & BK Terer, Members

November 24, 2023

Between

Koroto Engineering Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a Company duly registered in the Republic of 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 is an agency of the Government for the collection and receipt of all tax revenue. Further, under Section 5 (2) of the act with respect to the performance of its functions under subsection (1), the Authority is mandated to administer and enforce all provisions of the written laws as set out in Part 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 Respondent issued notification of assessment dated 23rd October 2020, 24th March 2021 and 17th September 2021 amounting to Kshs. 29,111,752. 00 relating to Income Tax, PAYE and VAT for the period 2015 to 2021.

4. The Appellant disputed the Respondent’s findings and lodged an application for extension of time to lodge a notice of objection dated 22nd June 2021 and thereafter lodged its notices of objection to the Assessments on 30th September 2021.

5. The Respondent issued a decision disallowing the Appellant’s Objections on the 14th December 2021 and confirmed the additional assessments.

6. The Appellant being aggrieved by the decision issued by the Respondent, lodged this Appeal with the leave of the Tribunal vide orders issued on 2nd December 2022, filing its Notice of Appeal on the 16th January 2023.

The Appeal 7. The Appellant’s Memorandum of Appeal dated the 13th January 2023 and filed on the 16th January 2023 is premised on the following grounds, that;a.The Respondent erred in law and in fact by arbitrarily increasing the sales figures in the Appellant’s VAT returns and erroneously assessing additional VAT.b.The Respondent erred in law and in fact by disregarding VAT returns of the Appellant and all other explanations and documentation provided by the Appellant and proceeding to confirm the VAT assessments.c.The Respondent erred in law and in fact by assessing additional VAT on the Appellant based on arbitrarily and unreasonable estimate while disregarding the actual sales made declared in the VAT returns filed by the Appellant.d.The Respondent erred in law and in fact by disallowing the input VAT incurred and claimed by the Appellant in making the taxable supplies, thereby assessing additional VAT on the Appellant based on erroneously disallowed invoices.e.The Respondent erred in law and in fact by disregarding all the explanations and documentation provided by the Appellant and proceeding to disallow input VAT invoices.f.The Respondent erred in law and in fact by disregarding the actual turnover realized and reported by the Appellant and arbitrarily increased the Appellant’s turnover for the period under review and thereafter assessed additional taxes, penalties and interest.g.The Respondent erred in law and in fact by disregarding all the documentations provided including the financial statements and tax returns, and proceeded to mistakenly confirm the income assessments.h.The Respondent erred in law and in fact by disallowing expenses incurred by the Appellant during the period under review, thereby assessing additional taxes on account of the disallowed expenses.i.The Respondent erred in law and in fact by disregarding the express provisions of Section 15 and 16 of the Income Tax Act which provide that all expenses incurred wholly and exclusively in the generation of income are tax deductible.

The Appellant’s Case 8. The Appellant’s case is premised on the herein under filed documents before the Tribunal;a.The Appellant’s Statement of Facts dated the 13th January 2023 and filed on the 16th January 2023 together with the documents attached thereto.b.The Appellant’s written submissions filed on 26th September 2023.

9. That the Appellant stated that through its iTax platform the Respondent issued various additional assessments between the years of income 2015 to 2021 in relation to VAT and Income tax.

10. That the Appellant stated that it objected through the iTax platform on diverse dates between the years 2015 and 2021. The Respondent issued an Objection decision on the 14th December 2021 through the iTax platform upholding the assessments.

11. The Appellant averred that being dissatisfied with the Respondent’s decision preferred this Appeal to the Tribunal.

12. That the Appellant contended that it filed all its VAT returns and paid the VAT due for the period under assessment. The Respondent without conducting an audit or review of the Appellant’s books amended the Appellant’s VAT return for the months under review by increasing sales value and partly disallowing some of the input VAT incurred and claimed by the Appellant during that period.

13. The Appellant stated that it had claimed valid input VAT supported by valid tax invoices in compliance with the provisions of the VAT Act and the VAT Regulations in force at the time. The input tax claimed was fully supported by valid tax invoices and copies of the tax invoices as well as other supporting documentation provided to the Respondent during the objection stage.

14. The Appellant contented that it had correctly claimed the input VAT as per the provisions of the VAT Act, 2013 since all the invoices claimed are proper invoices containing all the mandatory features of valid tax invoices prescribed in law and having been claimed within 6 months from the date of issuance.

15. The Appellant averred that it submitted all the invoices (with ETR receipts) as well as supporting documents to the Respondent who disregarded the same as well as the explanations and proceed to disallow the input VAT. Further, that no tax would have been lost on part of the Respondent if the input VAT claimed by the Appellant was allowed.

16. The Appellant stated that by disallowing the input VAT and recovering the tax, the Respondent would unfairly impose an unfair financial burden on the Appellant’s operations.

17. The Appellant further stated that the VAT Act is well aligned with the tax canon of equity, which is grounded on the basic premise that the collection of taxes should be equitable across taxpayers on different levels.

18. The Appellant further avowed that the charge of VAT heavily draw impetus on input-output principle, and if the formulae is distorted, the taxpayer shall unfairly suffer a heavy pecuniary burden. VAT being a consumption tax the burden therefore is borne by the final consumer of the supplies, however, it would be prejudicial if the pecuniary burden is borne by the intermediaries in the chain of supply.

19. The Appellant asserted that without a doubt it had incurred the input VAT and the Respondent did not have any evidence to the contrary, the actual invoices (with ETR receipts) supporting the expenses incurred by the Appellant were all furnished to the Respondent.

20. With regard to the income tax assessment the Appellant stated that it duly filed all its returns and paid all the taxes due during the period under review. The Appellant averred that the Respondent without any basis and justification adjusted the turnover on Income tax upwards for the period under review and therefore erroneously assessed additional taxes on the difference between the adjusted turnover and what the Appellant had declared.

21. The Appellant further stated that the Respondent disallowed some of the expenses which had been incurred by the Appellant in the generation of taxable income, the Respondent inspite of being provided with all information, explanations and documentations it disregarded the same and confirmed the assessment that was erroneously adjusted.

22. The Appellant asserted that it was imperative to note that while it is impossible to run a business without incurring expenses, the Respondent did not allow any expenses claimed by the Appellant in its statement of income.

23. The Appellant identified three issues for determination by the Tribunal, namely;i.Whether the Respondent erred in its assessment of the VAT of the Appellant for the period under review.ii.Whether the Respondent erred in the computation of the Income tax assessments of the Appellant for the period under review by arbitrarily adjusting the turnover of the Appellant and disallowing the expenses incurred by the Appellant in the generation of the taxable income.iii.Whether the Respondent erred in disregarding the Appellant’s information and documentation provided.

24. The Appellant submitted that it filed its VAT returns and paid all the taxes due and rightfully claimed input VAT with valid tax invoices and copies of other documents as stipulated in Section 17 (1), (2) and (3(a)) of the VAT Act.

25. It was the Appellant’s submissions that it produced competent and relevant evidence and input tax ought to have been allowed as the Respondent did not prove why the same should not be granted to the Appellant.

26. The Appellant submitted that the Respondent’s explanations for the rejection of the input VAT were invalid and unreasonable and implored upon the Tribunal to review the invoices provided to confirm the same as proper invoices.

27. The Appellant submitted that it had discharged its burden of proof by providing the various invoices and documents required to claim input VAT in accordance with Section 17 of the VAT Act and financial statements of the period under review and evidence of the filed VAT returns for the period under review.

28. The Appellant averred that the Respondent failed to adhere to the provisions of Section 54 of the Income Tax by failing to consider the documents provided by the Appellant regarding its Income Tax.

29. The Appellant submitted that the Respondent disregarded proper financial statements prepared by the Appellant and went ahead to adjust the Appellant’s revenue upwards assessing more income tax which appear to have been plucked from thin air to make the assessments herein.

30. The Appellant contended that it discharged its burden of proof in accordance to Sections 108 and 109 of the Evidence Act and has demonstrated that the assessments were erroneous.

31. The Appellant submitted that in line with Section 43 of the VAT Act and Section 23 of the Tax Procedures Act it ensured that it kept all records in the course of its business and produced the requisite documents during the audit carried out by the Respondent.

32. The Appellant in buttressing its position in law, relied on the following case law;a.Commissioner of Domestic Taxes vs. Trical and Hard Limited (Tax Appeal E146 of 2020) [2022] KEHC 9927 (KLR) (Commercial and Tax).b.Keroche Industries Limited vs. Kenya Revenue Authority & 5 Others [2007] eKLR.c.Kenya Revenue Authority vs. Man Diesel & Turbo Se, Kenya [2021] eKLR.d.George vs. Federal Commissioner of Taxation [1952] HCA 21. e.Kilburn vs. Bedford (H.M. Inspector of Taxes) 1955 Chancery Division, 36, p.262. f.Nizaba International Trading Company Limited vs. Kenya Revenue Authority [2000] eKLR.g.Silver Chain Ltd vs. Commissioner Income Tax & 3 Others [2016] eKLR.h.Hancock vs. General Reversionary and Investment Company [1919] KB 5, 37. i.Republic vs. Commissioner of Domestic Taxes Large Tax Payer’s Office Ex Parte Barclays Bank of Kenya Ltd [2012] eKLR.

Appellant’s Prayers 33. The Appellant made the following prayers that the Tribunal;a.Allows this Appeal;b.Annuls the Respondent’s confirmed assessment based on the grounds above, as well as the information contained in the Statement of Facts attached; andc.Awards costs of this Appeal to the Appellant.

Respondent’s Case 34. The Respondent’s case is premised on the hereinunder filed documents before the Tribunal;a.The Respondent’s Statement of Facts dated 14th December 2022 and filed on 15th December 2022 together with the documents attached thereto.b.The Respondent’s written submissions dated and filed on 10th July 2023.

35. The Respondent stated that the dispute was handled at IRO in 2021 culminated in an invalidation dated 24th December 2021 relating to Kshs. 29,111,752 for the period 2015 to 2021 for tax heads Income tax, PAYE and VAT.

36. That the Respondent stated that the Appellant was issued with the notification of assessments dated 23rd October 2020, 24th March 2021 and 17th September 2021 following the review of its activities by the TSO.

37. The Respondent averred that the Appellant being dissatisfied with the assessments, lodged an application for extension of time on 22nd June 2021 and notices of objection lodged on the 30th September 2021.

38. The Respondent avowed that the Appellant did not validate its Objection as per the provision of Section 51 (3) of the TPA, 2015 which requires that all supporting documentation must be availed to fully support its objection grounds.

39. The Respondent stated that in the absence of the requested documents, it issued a decision upholding its assessments.

40. That the Appellant being dissatisfied preferred the instant Appeal to the Tribunal on 16th January 2023 upon being granted leave to Appeal out of time.

41. The Respondent stated that, whereas Section 24 of the TPA allows a taxpayer to submit tax returns in the approved form and manner prescribed by the Respondent, the Respondent is not bound by the information provided therein and can assess for additional taxes based on any other available information.

42. In the instant Appeal, the Respondent issued assessments based on disallowed claimed inputs from non-compliant suppliers who had been declaring corresponding sales invoices in the VAT returns as required by the provisions of Section 17 of the VAT Act.

43. The Respondent further stated that despite the evidence of the purchase the mandatory condition to be fulfilled for a claim of input VAT to be allowed, the supplier must also account for the purchases in its returns which is not the case herein and as such the Respondent was justified in declining the same.

44. That the Appellant’s application seeking for extension of time to lodge the notice of objection was declined as the Appellant failed to provide sufficient grounds for lateness, failed to provide documentation as required under Section 51 (3) (c) of the TPA, failed to support expenses claimed as required by the provisions of Sections 15 and 16 of the Income Tax Act, and failed to support the alleged turnovers which it claimed the Respondent failed to consider while making the Income tax assessment.

45. That the Respondent maintained that for the expenses to be allowed there is an obligation on the Appellant to prove that the same were actually incurred, but failed to so.

46. That the Appellant failed to provide suppliers statements and sufficient proof of payment neither did it provide proof that its suppliers had declared the output that had been claimed in their returns as provided for in Section 17 (2) (b) of the VAT Act and as such the Respondent was justified in upholding its assessments.

47. That the Respondent averred that in its Notice of Objection Invalidation, the Appellant was informed on the basis for which the assessments were issued and further, why and how the Respondent arrived at its decision as outlined in the Notice of Objection Invalidation and as such the decision is valid and issued in accordance to the law.

48. That the Appellant has failed to discharge its burden of proof in demonstrating that the Respondent’s tax decision was incorrect as per the provision of Section 56 (1) of the Tax Procedures Act.

49. The Respondent in its written submissions, identified three (3) issues for determination, namely;i.Whether there is proper Appeal for determination before this Tribunal.ii.Whether the Respondent’s Assessment order is justified?iii.Whether the Respondent’s Decision issued on 24th December 2021 is proper?

50. The Respondent submitted that the Appellant having been issued with leave to file Appeal out of time vide the ruling issued on 2nd November 2022, the Appellant, however, served the Respondent with a Memorandum of Appeal dated 13th January 2023 and filed on the 16th January 2023, which was late by more than one and a half months without leave of the Tribunal and in contravention of Section 13 (3) and (4) of the TAT Act.

51. The Respondent submitted that in its honest view, the repeated filing of the Appeal late even after being granted extension of time to file its Appeal is an abuse of the Tribunal’s process and the same ought to be discouraged.

52. The Respondent submitted that there was no proper Appeal before the Tribunal as the Appellant is yet to pay the undisputed taxes as was reiterated by the Respondent in its letter dated 24th December 2021 and contrary to mandatory provisions of Section 52 (2) of the TAT Act.

53. The Respondent further, asserted that the Appellant’s Appeal is in breach of the orders of the Tribunal issued on 2nd November 2022 and the Appeal ought to be struck out.

54. The Respondent contended that it was justified in the assessment made as Sections 24 (2) and 29 of the TPA grants it power to make additional assessments based on additional available information and application of best judgement.

55. The Respondent submitted that despite the Appellant providing some documents as evidence of purchase, the same did not meet the threshold placed in Section 17 of the VAT Act as well as the VAT Regulations 2017, the suppliers have failed to account for the purchases in its returns and as such the Respondent was justified to decline the same.

56. The Respondent submitted that the Appellant failed to support its late objection with documentation despite being requested to so do, therefore the notice of objection failed to meet the threshold of a valid notice of objection. Further, in failing to validate its objection, the Appellant failed the burden of proof test in accordance with Section 56 (1) of the TPA and Section 30 of the TAT Act.

57. The Respondent further submitted that there is no appealable decision in this matter which would then warrant the filing of the Appeal herein for want of lodging a notice of objection and the Appeal ought to be struck out.

58. The Respondent relied on the following case law;i.Highlands Mineral Water Limited vs. The Commissioner of Domestic Taxes.ii.Holland vs. United States of America 121 (1954).iii.Republic vs. Commission of of Customs & Exise Ex-parte Abdi Gulet Olus [2014] eKLR.iv.Speaker of the National Assembly vs. James Njenga Karume [1992] eKLR.v.Metcash Trading Limited vs. Commissioner for the South African Revenue Services and Another Case CCT 3/2000. vi.Pearson vs. Belcher CH.M Inspector of Taxes) Tax Cases Volume 38. vii.Krystalline Salt Ltd vs. KRA [2019] eKLR.

Respondent’s Prayers 59. The Respondent prayed that this Honourable Tribunal finds;i.That the Respondent’s Notice of Objection Invalidation issued on 24th December 2021 being Income tax and VAT amounting to Kshs. 29,111,752 be found to be proper in law and be upheld.ii.That this Appeal be dismissed with costs to the Respondent as the same lack merit.

Issues for Determination 60. The Tribunal upon the careful consideration of the pleadings and Statements of Facts made by the parties respectively, was of the view that the issues that recommend themselves for its determination are;a.Whether the Appeal herein is validly lodged.b.Whether the Respondent’s decision invalidating Appellant’s Objection issued on 14th December 2021 was justified.

Analysis and Findings 61. The Tribunal having identified the issues for its determination proceeds to analyse the same as herein under;

Whether the Appeal herein is validly lodged. 62. The Appeal before the Tribunal flows from a decision by the Respondent issued on 14th December 2021.

63. The Appellant lodged an application with the Respondent for extension of time to file the notices of objection out of time on 22nd June 2021 and lodged the notices of objection on 30th September 2021 against the assessments.

64. It was the Respondent’s submission that the Appellant’s Objections were late, the Appellant was requested to furnish the Respondent with documents to support the same in accordance with Section 51 (3) of the Tax Procedures Act, however, the Appellant did not furnish the documents as requested.

65. As a consequence, the Respondent issued the Notice of Invalidation rejecting the Objection on 14th December 2021.

66. The Appellant then filed an application before the Tribunal seeking extension of time to file an appeal out of time dated 4th October 2022.

67. It was the Respondent’s assertion that the Appellant served the Appeal documents dated 13th January 2023 and filed on 16th January 2023, which were late by more than a month and half and without the leave of the Tribunal to do so.

68. The Tribunal upon consideration of the Appellant’s application delivered the Ruling dated 2nd November 2022 on the 2nd December 2022, issuing the following orders;a.The Appellant be and hereby granted leave to file an Appeal out of time.b.The Appellant to file and serve the Notice of Appeal, Memorandum of Appeal, Statement of Facts and Tax decision within Fifteen (15) days of the date of delivery of this Ruling.c.The Respondent shall file and serve its response within Thirty (30) days of being served with the Appeal documents.

69. From the orders granted herein above, the Appellant was granted leave to lodge its Appeal and Appeal documents within Fifteen (15) days of the date of the Ruling being 2nd December 2022.

70. Accordingly, the Appellant was required to lodge and serve its Notice of Appeal, Memorandum of Appeal, Statement of Facts and Tax decision not later than the 17th December 2022.

71. The orders granted by the Tribunal in this instance were time bound, they were not to subsist in perpetuity. When a party is directed by an order of the Tribunal to carry out a particular act, such an act can only be deemed as valid if carried out in conformity with the order and timelines provided therein.

72. Court Orders are not issued in vain and must be complied with to the letter. It is to be noted, that once an order of the Tribunal has a timeline pegged thereto, the effect, value or legal safeguards of such orders remain alive for the period provided therein, upon lapse of such period the order or leave to carry out any activity is automatically extinguished unless extended by the Tribunal.

73. The Tribunal is guided by the case of Equity Group Holdings Limited vs. Commissioner of Domestic Taxes [2021] eKLR, relating to strict dictates of compliance with any statute, Mativo J. observed 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…”

74. The Appellant having been granted leave of Fifteen (15) days on 2nd December 2022, appears to have gone into deep slumber and the Orders lapsed without the Appeal being lodged. The Appellant’s Appeal filed on the 16th January 2023 is therefore filed out of time.

75. The Tribunal having established that there is no valid Appeal on record, it shall not delve into the other issues for determination as the same have been rendered moot.

76. Consequently, the Tribunal finds that the Appeal herein is incompetent and untenable in law.

Final Decision 77. The upshot to the foregoing is that the Appeal is incompetent and the Tribunal consequently makes the following Orders;-a.The Appeal be and is hereby struck out.b.Each party to bear its own costs.

78. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 24TH DAY OF NOVEMBER, 2023ROBERT M. MUTUMA - CHAIRPERSONMUTISO MAKAU - MEMBERELISHAH N. NJERU - MEMBERDR. WALTER ONGETI - MEMBERBONIFACE K. TERER - MEMBER