[2023] KETAT 587 (KLR)

Kp Investments Limited v Commissioner of Legal Services & Board Coordination (Appeal 438 of 2022) [2023] KETAT 587 (KLR) (29 June 2023) (Judgment)

Neutral citation: [2023] KETAT 587 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Appeal 438 of 2022

E.N Wafula, Chair, Cynthia B. Mayaka, Grace Mukuha, Jephthah Njagi & AK Kiprotich, Members

June 29, 2023

Between

Kp Investments Limited

Appellant

and

Commissioner of Legal Services & Board Coordination

Respondent

Judgment

1. The Appellant is a private limited company incorporated under the Companies Act.

2. The Respondent is principal officer appointed under and in accordance with Section 13 of the Kenya Revenue Authority Act, and is charged with the responsibility of among others, assessment, collection, accounting and the general administration of tax revenue on behalf of the Government of Kenya.

3. The Respondent conducted a compliance check on the Appellant for the period 1st January 2016 to 31st December 2019.

4. The Appellant was issued with a notice of assessment dated 26th June 2020.

5. The Respondent then sent another letter to the Appellant dated 8th July 2020 outlining the taxes due as Kshs. 109,465,200. 00.

6. The Appellant aggrieved by the Respondent’s assessments objected to the entire assessments vide its notice of objection dated 23rd July 2020.

7. The Respondent then issued an objection decision dated 31st March 2022.

8. The objection decision vacated the issue of the source of funds having been satisfied with Appellant’s explanation.

9. The Respondent however decided that the donation to Oshwal Education and Relief Board did not conform to the requirements of the Income Tax Act and demanded from the Appellant tax amounting to Kshs. 24,492,000. 00 inclusive of penalties and interest.

10. The Appellant aggrieved by the Respondent’s objection decision of 31st March 2022 lodged a Notice of Appeal dated 20th April 2022 and filed with the Tribunal on 28th April 2022.

The Appeal 11. The Appeal is premised on the following grounds as stated in the Appellant’s Memorandum of Appeal dated 20th April 2022 and filed on 28th April 2022. a.That according to Section 51(11) of the Tax Procedures Act 2015, the Appellant’s objection was allowed because the Respondent did not make an objection decision within the legally stipulated time of sixty days. The Respondent’s decision is therefore null and void.b.That the Respondent erred in law and fact by disallowing cash donation to a charitable organization contrary to Section 15(2) of the Income Tax Act, Cap. 470 of the laws of Kenya, as read together with Income Tax Charitable Donations Regulations, 2007.

Appellant’s Case 12. The Appellant’s case is premised on the following documents:-a.The Appellant’s Statement of Facts dated 20th April 2022 and filed on 28th April 2022 together with the documents attached thereto.b.The Appellant’s written submissions dated 6th February 2023 and filed on the same date together with the authorities attached thereto.

13. The Appellant averred that the compliance check by the Respondent came up with an additional assessment notice dated 26th June 2020 for a figure of Kshs. 127,607,700. 00 which the Appellant considered astronomical.

14. That the Appellant objected to the additional assessment entirety via a notice of objection dated 23rd July 2020 by giving relevant explanations and relevant supporting documents.

15. The Appellant averred that the objection decision dated 31st March 2022 confirmed additional assessment outside the legal timelines as provided under Section 51(11) of the Tax Procedures Act, 2015. That the said Section provides that:-“where the Commissioner has not made an objection decision within 60 days from the date the taxpayer lodged a notice of objection; the objection shall be allowed”

16. The Appellant averred that the Respondent did not meet the threshold stipulated in law and therefore the objection decision is null and void.

17. The Appellant averred that the Respondent disallowed cash donations to a charitable organization contrary to the provisions of Section 15(2) of the Income Tax Act as read together with Income Tax Charitable Donations Regulations 2007, which states as follows:“Any cash donation in that year of income to a charitable organization registered or exempt from registration under the societies act or non- governmental organizations coordination act ,1990 and whose income is exempt from tax under paragraph 10 of first schedule to this act or to any project approved by the minister of finance, while the Income Tax Regulations Act (charitable donations) regulations 2007, defines a charitable organization as a non-profit making organization established in Kenya and which – (a) is of a pubic character, and (b) has been established for purposes of the relief of poverty or distress of public, or advancement of education.”

18. That further, the Regulations state as follows-;a.A Person who makes a claim for a donation shall proof of the donation to the Commissioner in form of a receipt issued and certified by the recipient of the donation.b.A copy of the exemption certificate issued by the Commissioner to the charitable organization.c.A declaration from the donee that the donation shall be used exclusively for the objects of charity shall not be repayable or refundable to the donor under any circumstances.d.That it should not confer any direct or indirect benefit to the donor or any person associated with the donor.e.That under no circumstances can it be revoked once conferred upon a charitable organization unless there is approval by the commissioner in which case the tax arising shall be due and payable.

19. The Appellant averred that Oshwal Education and Relief Board met all the above requirements and the Respondent should not be allowed to discriminate based on the year of registration.

20. That further, the Appellant stated that Oshwal Education and Relief Board has a valid income tax exemption certificate and it is not able to refund the money so that it can be brought to charge.

21. The Appellant submitted that the following are the issues for determination in this matter.a.Whether the Appellant’s objection notice dated 23rd July 2020 was allowed by operation of law.b.Whether the Respondent erred in disallowing the donation to a charitable organisation.

22. The Appellant submitted on the two issues as follows;a.Whether the Appellant’s objection notice dated 23rd July 2020 was allowed by operation of law.

22. The Appellant submitted that the Respondent issued a notice of additional assessments to the Appellant dated 26th June 2020, the Appellant objected to the decision through its letter of 23rd July 2020 and the objection decision was given by the Respondent on 31st March 2022.

23. The Respondent submitted that Section 51(11) of the Tax Procedures Act, 2015 provides as follows: -“Where the Commissioner has not made an objection decision within sixty days from the date that the taxpayer lodged a notice of the objection, the objection shall be allowed”

22. The Appellant submitted that the Respondent did not meet the above threshold of the law. That this is because all the documents that were needed were provided in the objection as itemized in the objection decision, there was no any further document that was requested and provided apart from those attached to the objection notice.

23. The Appellant submitted that the Respondent cannot now purport to demand taxes from the Appellant based on an error on its part to render the objection decision within the required time frame and in compliance to the law.

24. The Appellant relied on the case of Republic vs. Kenya Revenue Authority Ex Parte Aberdare Freight Services Ltd & 2 Others [2004] 2 KLR 530 in which the court held that:“The general principle remains however, that a public authority may not vary the scope of its statutory powers and duties as a result of its own errors or the conduct of others.”b.Whether the Respondent erred in disallowing the donation to a charitable organisation.

22. The Appellant submitted that the Respondent disallowed cash donations to a charitable organization contrary to the provisions of the Section 15(2)(w) of the Income tax Act as read together with the Income Tax Charitable Donations Regulations 2007.

23. That Section 15(2)(w) states that any cash donation in that year of income to a charitable organization registered or exempt from registration under the Societies Act or the Non-Governmental Organizations Coordination Act, 1990, and whose income is exempt from tax under Paragraph 10 of the First Schedule to this Act, or to any project approved by the Minister for Finance.

24. That the Income Tax (Charitable Donations), Regulations, 2007, define a charitable organization as a non­profit making organization established in Kenya and which-(a)is of a public character; and(b)has been established for purposes of the relief of poverty or distress of the public, or advancement of education.

22. That further the Regulations state as follows:-a.A person who makes a claim for a donation shall provide proof of the donation to the Commissioner in form of a receipt issued and certified by the recipient of the donationb.A copy of the exemption certificate issued by the Commissioner to the charitable organizationc.A declaration from the done that the donation shall be used exclusively for the objects of charity and shall not be repayable or refundable to the donor under any circumstance.d.That it should not confer any direct or indirect benefit to the donor or any person associated to the donor;e.That under no circumstances can it be revoked once conferred upon a charitable organization unless there is approval by the Commissioner in which case the tax arising shall be due and payable.

22. The Appellant submitted that Oshwal Education and Relief Board met all the above requirements and the Respondent should not be allowed to discriminate it based on the year of registration. Oshwal Education and Relief Board had a valid income tax exemption certificate and further is not possible to refund the money so that it can be brought to charge.

23. That the Respondent has issued a valid tax exemption certificate to Oshwal Education and Relief Board. That based on the exemption certificate issued by the Respondent, the Appellant made a cash donation and therefore legitimately expected that the donation will be allowable.

24. That the Respondent used the same incorporation document to issue the exemption and cannot now turn around disown the same document based on a technicality of a registration that was done procedurally and based on the existing legislation then.

25. The Appellant relied on the following cases:-a.The Republic versus the Commissioner of Customs Services Exparte Unilever Limited [2012] eKLR (Misc. Civil Application No 181 of 2011).b.Keroche Industries Limited vs. Kenya Revenue Authority & S Others (2007) 1 2 KLR 240. c.Stanbic Bank Kenya Ltd vs. Kenya Revenue Authority: Civil Appeal No. 77 of 2008.

Appellant’s Prayers 22. The Appellant made the following prayers to the Tribunal:-a.That the Tribunal finds that the additional assessments amounting to Kshs. 24,493,000. 00 by the Respondent were unlawful and improperly assessed and as such, the same should be set aside.b.The Appeal herein be allowed with cost in favour of the Appellant.c.Any other remedy that the Tribunal deems just and reasonable

Respondent’s Case 22. The Respondent’s case is premised on the documents set out hereunder-;a.The Respondent’s Statement of Facts dated 28th May 2022 and filed on 30th May 2022. b.The Respondent’s written submissions dated 29th December 2022 and filed on 30th December 2022.

22. The Respondent averred that, through its East and South Tax office, it conducted a compliance check on the Appellant for the period 1st January 2016 to 31st December 2019. That it discovered that there was unexplained incomes and undeclared taxes that were due.

23. That the Respondent issued a notice of assessment dated 26th June 2020 and a further letter dated 8th July 2020 explaining the assessment that the due taxes were occasioned by disallowed donation and unexplained source of funds for purchase of property.

24. That the Appellant objected to the assessments vide a letter dated 23rd July 2020 in which it stated the donation was to a registered charity and that the source of funds was from its shareholders.

25. That the Respondent averred that various meetings were held between parties and correspondence in attempt to settle the dispute amicably to no avail. That several requests to the Appellant were made for further documentation and the same was not provided to the expectation of the Respondent.

26. That as per the provisions of Section 32 of the Finance Act 2019, an amendment to Section 51(11) of the Tax Procedures Act introduced a clause as follows:-“Section 51 of the tax procedures act, 2015 is amended by deleting sub section (11) and substituting with-:(11)the commissioner shall make objection decision within 60 days from the date of receipt of notice-:(a)notice of objection; or(b)any further information the commissioner may require from the tax payer, failure to which the objection shall be deem allowed.”

27. The Respondent averred that the aforementioned was in force at the time of making objection on 23rd July 2020 and at the time of making the objection decision on 31st March 2022.

28. The Respondent averred that the holding in a similar case of the Desert Star Transporters Ltd vs. Commissioner of Investigations and Enforcements (TAT 304 of 2020), where the Tribunal addressed the issue when time begins to run. The Tribunal pronounced itself that under Section 51(11)(b) the time would only begin running from the date of request of the documents.

29. That the Respondent issued an objection decision on the 31st March 2022 in which the Commissioner indicated that he was convinced about the source of funds and therefore the assessment of Kshs. 56,970,00. 00 was vacated. That however, the donation was disallowed as the Respondent noted the same did not conform to the requirements of the Income Tax Act.

30. The Respondent contended that its position as stated in the decision that it requested the Appellant to provide documentation in support of objection on several occasions and the Appellant was unable to provide the same to enable the Commissioner to allow donation to Oshwal Education and Relief Board.

31. The Respondent averred that after various meetings with the Appellant and provision of supporting documents, the Respondent vacated the previous assessment on remittances by shareholders for purchase of property.

32. That it relied on the documentation provided by the Appellant as well as numerous correspondences between itself and the Appellant in arriving at the assessment.

33. The Respondent relied on Section 31 of the Tax Procedures Act which empowers the Commissioner to make assessment according to the information available to him and best judgement in ensuring the Appellant is only liable for correct taxes,

34. The Respondent averred that it held various working meetings with Appellant and corresponded variously, a fact admitted by the Appellant and therefore refutes Appellant assertion to the contrary.

35. The Respondent denied that the objection decision was null and void for being outside the 60 days period after lodging an objection as the Tax Procedures Act allows the Commissioner to request for more documents in support of objection, during the period time stops running.

36. The Respondent averred that the decision to arrive at the assessment was justified and had a basis in law which was communicated to the Appellant as required by Section 51(9) of the Tax Procedures Act.

37. The Respondent further averred that it was not bound by returns and information provided by the Appellant and instead may asses a taxpayer’s liability using information available to it in line with Section 24(2) of TPA which states:-“The Commissioner shall not be bound by a tax return or information provided by, or on behalf of, a tax payer and the Commissioner may assess the tax payer’s liability using information available to the Commissioner.”

38. That the Respondent analysed the expenses claimed by the Appellant including the claimed donation of Kshs. 52 million and determined that the donee was unable to provide proof of registration or exemption from registration under Societies Act or the Non-Governmental Coordination Act, 1990 which would have allowed such donation to be claimed as deductible expenses.

39. The Respondent raised two issues for determination as follows:-a.Whether the objection decision made by the Respondent was proper and justified in law in law.b.Whether the cash donations to Oshwal Education and Relief Board are allowable under Section 15(2)(w) of the Income Tax Act.

40. The Respondent submitted on the two issues as follows:-a.Whether the objection decision made by the Respondent was proper and justified in law in law.

41. The Respondent submitted that Section 32 of The Finance Act 2019 introduced an amendment to Section 51(11) of the Tax Procedures Act by introducing the following clause;“Section 51 of the Tax Procedures Act, 2015 is amended by deleting subsection (11) and substituting therefor the following new subsection -(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.

42. That the above provision was in force at the time of the making objection on 23rd July 2020 and at the time of the making of the objection decision on 31st March 2022.

43. The Respondent submitted that the parties engaged in numerous correspondences which have been acknowledged in the objection decision in its First paragraph as follows:“Reference is made to your application for objection dated 23rd July 2020 in response to Assessments dated 26th June 2020 and our various meetings and correspondences we have had...”

44. That the purpose of the meetings and correspondences was to analyse the grounds of the objection and work towards a common resolution of the assessment. That the Appellant was an active participant in the meetings and the correspondences. That the Appellant was a beneficiary of the process.

45. The Respondent submitted that the Appellant was active in the engagement and encouraged it. That to deny them at this stage would be tantamount to an act of deception on its part by tricking the Respondent to a default by technicality.b.Whether the cash donations to Oshwal Education and Relief Board are allowable under Section 15(2)(w) of the Income Tax Act.

46. The Respondent submitted that Section 56 of the Tax Procedures Act provides that:-“In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”

47. The Respondent also submitted that Section 54 of the Societies Act provides;“The following enactments are hereby repealed, that is to say­a.the Societies Act (Cap. 108); andb.sections 70, 71, 72, 73,74, 75 and 76 of the Penal Code (Cap. 63):Provided that, so far as may be expedient for the continuity of the law relating to societies-a.every registration, exemption., application, appointment, certificate, notice, notification, order or declaration done, made or issued; andb.every scheme prepared, submitted or otherwise dealt with, under any of those enactments shall be deemed to have been done, made or issued, or prepared, submitted or otherwise dealt with, under the corresponding provision of this Act.”

48. The Respondent submitted that matters regarding tax laws require a strict interpretation of the legal provisions. That Section 15(2)(w) specifies that the donation must be to an organization registered or exempt from registration under the Societies Act or Non-Governmental Organizations Coordination Act, 1990.

49. That the strict interpretation that is accorded to tax laws must be extended to the Societies Act as far as it relates to tax as in this Appeal. That Section 54 of the Societies Act repealed the Societies Act in force before its enactment. That however, it extended an olive branch to the actions done in compliance to the repealed Act including the recognition of the exemptions done under it.

50. The Respondent submitted that the exemption from registration presented by the Appellant was issued under the Societies Ordinance, 1952. The Ordinance is not the repealed Societies Act. That being the case, the current Societies Act, within its provisions, does not recognize the exemption certificate issued under the ordinance.

51. That in light of this, the Respondent was correct in disallowing the amount transferred to Oshwal Education & Relief Board. Section 15(2)(w) among other things required that the charitable organization be strictly registered or exempt from registration under the Societies Act or Non-Governmental Organizations Coordination Act, 1990.

52. That the Appellant failed to discharge the burden of proof that the alleged donation was in line with Section 15(2)(w) of the Income Tax Act hence could not be allowed.

53. The Respondent relied on the following authorities:-a.Desert Star Transporters Limited vs. Commissioner of Investigations and Enforcements (TAT 304 of 2020).b.Broadlink General Merchants Limited vs. Commissioner of Domestic Taxes (TAT 700 of 2021).c.ESL Forwarders Limited vs. Commissioner of Domestic Taxes (TAT 255 of 2020).d.Mount Kenya Bottlers Ltd & 3 Others vs. Attorney General & 3 Others [2019] eKLR.

Respondent’s Prayers 54. The Respondent prays that the Honourable Tribunal:-a.Upholds the Respondent’s decision as proper and in conformity with the provisions of the law.b.Dismisses the Appeal with costs to the Respondent as the same is devoid of merit.

Issues For Determination 55. The Tribunal upon due consideration of the pleadings of the parties was of the considered view that the Appeal has two issues for determination as set out hereunder.a.Whether the Appellant’s objection dated 23rd July 2020 was allowed by the operation of the law.b.Whether the Appellant erred in disallowing the donation to a charitable organisation.

56. The Tribunal having determined the issues for determination as stated above proceeds to deal with the same as hereunder.a.Whether the Appellant’s objection dated 23rd July 2020 was allowed by operation of law.

57. The Appellant submitted that the Respondent rendered its objection decision on 31st March 2022, partly allowing objection and vacated an assessment of Kshs. 103,115,700. 00 and confirmed an amount of Kshs. 24,492,000. 00 inclusive of penalties and interest.

58. Section 51(11) of the TPA states as follows:-“The Commissioner shall make the objection decision within sixty days from the date of receipt of ...a.…….b.any further information the Commissioner may require from the taxpayer,failure to which the objection shall be deemed to be allowed."

59. The Tribunal notes that the Respondent’s objection decision issued on 31st March 2022 was in response to the Appellant’s notice of objection dated of 23rd July 2020.

60. Whereas the Respondent cited reliance on Section 51(11)b of the TPA that objection decision did not start running from the 2nd June 2020, as there was further correspondence that culminated in the vacation of Kshs. 56,970,000. 00 tax assessment, the Respondent failed to adduce any evidence and correspondence in support of its assertion as to the further correspondence exchanged and dates for the meetings held between the parties.

61. The Respondent submitted that it observed the provisions of Section 51(11)(b) of the Tax Procedures Act, at the time it rendered its objection decision. That time started running on 2nd June 2020. The Respondent admitted this as the last date when it made a request to the Appellant to supply some specific documents. The Tribunal notes that between this date and date of its objection decision on 31st March 2022, the alleged exceeding indulgence by the Respondent was not demonstrated.

62. The Tribunal has perused the documentation provided by the parties and did not find evidence of any communication between the parties after the Appellant issued its objection to the assessments.

63. The Appellant further argued that the consequence of the failure of the Respondent to make an objection decision within the stipulated time laid in the statute particularly Section 51(11) of the Tax Procedure Act, 2015 leads to allowance of the same by operation of law.

64. The Tribunal is guided by the case of Nicholas Kiptoo Korir Salat vs. IEBC and 6 Others (2013) eKLR in respect of strict observations of rules where it was held that-:“This Court, indeed all courts, must never provide succor and cover to parties who exhibit scant respect for rules and timelines. Those rules and timelines serve to make the process of judicial adjudication and determination fair, just, certain and even-handed. Courts cannot aid in the bending or circumventing of rules and a shifting of goal posts for, while it may seem to aid one side, it unfairly harms the innocent party who strives to abide by the rules. I apprehend that it is in the even-handed and dispassionate application of rules that courts give assurance that there is a clear method in the manner in which things are done so that outcomes can be anticipated with a measure of confidence, certainty and clarity where issues of rules and their application are concerned.”

65. The Tribunal similarly has also taken into consideration the holding in the case of W.E.C. Lines Ltd vs. the Commissioner of Domestic Taxes [TAT CASE NO.247 of 2020] on the issue of observing procedures and set statutory timelines where it was held at Para 70 and reiterating the holding in Krystalline Salt Ltd vs. KRA [2019] eKLR that:“Where there is a clear procedure for redress of any particular grievance prescribed by the constitution or an Act of Parliament, that procedure should be strictly followed. Accordingly, the special procedure provided by any law must be strictly adhered to since there are good reasons for such special procedures”. The relevant procedure here is process of making an application for review upon receiving the Respondent’s decision.”

66. The Tribunal upon taking into consideration all the evidence in this matter and the laws and authorities finds that the Respondent failed to comply with the specific requirements set out in Section 51(11) of the Tax procedures Act 2015.

67. The Appellant’s objection dated 23rd July 2020 was therefore allowed by operation of the law.

68. In the circumstances, the Tribunal did not delve into the other issue that fell for its determination as it had been rendered moot.

Final Decision 69. The upshot of the above finding is that the Appeal is merited and therefore succeeds. The Tribunal accordingly proceeds to make the following Orders;a.The Appeal be and is hereby allowed.b.The objection decision dated 31st March, 2022 be and is hereby set aside.c.Each Party to bear its own costs.

70. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 29TH DAY OF JUNE, 2023. ................……………….ERIC N. WAFULACHAIRMAN…………………………. ….…………….………...CYNTHIA B. MAYAKA GRACE MUKUHAMEMBER MEMBER……………………………..……………………...JEPHTHAH NJAGI ABRAHAM K. KIPROTICHMEMBER MEMBER