[2023] KETAT 589 (KLR)

Kutus v Commissioner of Domestic Taxes (Appeal 660 of 2021) [2023] KETAT 589 (KLR) (29 June 2023) (Judgment)

Neutral citation: [2023] KETAT 589 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Appeal 660 of 2021

RM Mutuma, Chair, EN Njeru, RO Oluoch & D.K Ngala, Members

June 29, 2023

Between

Skylimit Academy Kutus

Appellant

and

Commissioner Of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a Partnership of Phineas Njagi Munyi and Lucy Kabeti Mbogo who are duly registered under the Business Names Registration Act CAP 499 of the laws of Kenya and whose business is subject to the Partnership Act CAP 29 of the laws of Kenya. Its principal business activity is in the education sector more specifically the Partnership runs a primary school in Kerugoya, Kirinyaga County.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, Cap 460 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 Part I & 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 issued Assessment Orders Numbers KRA202100935897 [Kshs. 144,048. 36] and KRA202100936045 [Kshs. 92,937. 93] on 19th January, 2021 and Confirmation Assessment Notice Number KRA202117839072 [Kshs. 65,041. 80] dated 29th May, 2021 [in respect of Assessment Order Number KRA202021191135 also dated 29th May, 2021]. The Orders and Notice were all in relation to Income Tax in respect of the 2017 year of income and amounted in total to Kenya Shillings Three Hundred Two Thousand Twenty Eight and Nine Cents (Kshs. 302,028. 09)

4. The Appellant objected to the Income Tax Additional Assessment Order Number KRA202021191135 on 29th May, 2021, and the Respondent issued its Objection decision on 18th August 2021.

5. The Appellant being aggrieved by the Objection decision filed a Notice of Appeal dated 6th October, 2021 and filed the Appeal on 24th January, 2022.

The Appeal 6. In its Memorandum of Appeal dated 6th October, 2021 and filed on 24th January, 2022 the Appellant set out the following grounds of Appeal:i.That the Respondent erred in law and fact by issuing an invalid objection decision contrary to Section 51 (9) of the TPA and by making an amended assessment without including a statement of findings on the material facts and reasons for the decision pursuant to Section 51 (10) of TPA.ii.That the Respondent erred in law and fact in disallowing operating expenses ‘wholly and exclusively’ incurred by the Appellant in the production of their income pursuant to the Section 15 (1) of the ITA.iii.That the Respondent erred in law and fact by demanding tax that is unreasonable and unfair as per Articles 210 and 201 (b) (i) of the Constitution of Kenya 2010. iv.The Appellant stated that the actions of the Respondent were contrary to the legitimate expectations on the operations of the tax payers pursuant to Section 15 of the ITA and Article 47 (1) and (2) of Kenya’s Constitution, 2010.

Appellant’s Case 7. The Appellant’s case is premised on its Statement of Facts dated 6th October, 2021 and filed on 24th January, 2022 and its Written Submissions dated filed on 21st December 2022.

8. The Appellant stated that it objected to the additional assessment on 29th May, 2021 and the Respondent acknowledged receipt of the Objection on the same date and since the Respondent never issued the Objection decision within the period as required by Statute it presumed that its Objection was valid.

9. The Appellant avers that the Respondent issued a Confirmation Assessment Notice confirming the additional assessment without following the procedure set out in Section 51 (9) and (10) of The Tax Procedures Act (CAP No. 29 of 2015) [hereinafter ‘TPA’].

10. The Appellant indicated that it was denied the ability to deduct allowable business operating expenses as provided under Section 15 of the Income Tax Act, Cap 470 of Kenya’s Laws [hereinafter ‘ITA’], which in its view were genuine business operating expenses. The Appellant further stated that the model used to arrive at the estimated assessment was contrary to Sections 15 and 73 of the ITA.

The Appellants Prayers 11. Based on the above submissions, the Appellant’s prayer was for orders that the Tribunal: -a.Allows the Appeal; andb.Sets aside the Objection decision and the assessment of the principal Income Tax on the Appellant by the Respondent.

Respondent’s Case 12. The Respondent opposed the Appeal through its Statement of Facts dated and filed on 4th February, 2022 and Written Submissions dated and filed on 11th January, 2023.

13. The Respondent stated that it conducted an initial interview with the Appellant on 12th May, 2020 and records were provided for examination and the preliminary findings were discussed on 9th July, 2020 with the Appellant undertaking to avail the reconciliations.

14. The Respondent states that the Appellant made good its promise and provided the reconciliations which the Respondent took into consideration when arriving at the additional assessments of Kshs. 341,925. 00 and Kshs. 1,973,156. 00. The additional assessments issued by the Respondent arose from additional Income which the Respondent states the Appellant did not declare.

15. The Respondent further states that it wrote a demand letter dated 26th January, 2021 notifying the Appellant of the taxes due and the Appellant then objected against all the assessments and was issued with a receipt acknowledging the Objections on 29th May, 2021.

16. The Respondent also states that even after engaging in several correspondence wherein the Appellant was to provide documents to support the claim, the Appellant did not validly object to the assessment and thereafter the Respondent gave its decision on 18th August 2021 confirming the assessments.

Respondent’s Prayers: 17. The Respondent prays on the basis of its Statement of Facts that the Tribunal finds as follows:a.That its decision dated 30th April, 2021 and tax demand was properly issued as provided under the provisions of the ITA and TPA and was hence proper.b.That the Appeal be dismissed with costs to the Respondent as the same is without Merit.

Issues For Determination 18. The Tribunal has analyzed the pleadings and submissions of the parties and arrived at the view that two issues fall for its determination as follows:i.Whether the Objection decision was validly issued.ii.Whether the assessment was lawful and justified.

Analysis And Findings i. Whether the Objection Decision was validly issued. 19. The Tribunal reviewed the bundle of documents presented to it by the parties and has noted that neither Phinears Njagi Munyi nor Lucy Kabati Mbogo objected to Assessment Orders Numbers KRA202100935897 for Kshs. 144,048. 36 and KRA202100936045 for Kshs. 92,937. 93 both dated 19th January,2021 and issued to them respectively. Neither was the said Respondent’s decision of 30th April 2021 availed by either of the parties to this Appeal.

20. However, the Tribunal noted that the Appellant was issued with Confirmation of Assessment Notice in respect of Assessment Number KRA202021191135 dated 29th May, 2021 on 18th August, 2021, which were the dates of the Respondent’s Objection decision.

21. It is out of this that the Appellant submitted that the Respondent failed to issue a valid Objection decision as per Section 51 (9) of TPA and that the same did not meet the requirements of Section 51(10) of the TPA.

22. A perusal of the evidence presented before the Tribunal by both the Appellant and the Respondent shows that the Respondent’s Objection decision dated 18th August 2021 was issued Seventy-Eight (78) days after the notice of objection filed by the Appellant whereas such a decision ought to be issued Sixty (60) days after receipt of the notice of objection pursuant to Section 51 (11) of the TPA.

23. The Objection decision was beyond the statutory timelines. The timelines created by statute are to be adhered to as they ensure there is no interlude in the process of determination of tax disputes.

ii. Whether the Assessment was lawful and Justified 24. Having found that the Objection decision was not validly issued it follows that the second issue for determination is rendered moot and the Tribunal will not delve in it.

Final Decision 25. On the basis of the foregoing analysis The Tribunal finds that the Appeal is merited and makes the following orders:i.The Appeal be and is hereby allowed.ii.The Objection decision dated 18th August, 2021 is hereby set aside.iii.Each party to bear its own costs.

26. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 29TH DAY OF JUNE 2023. .........................................................................ROBERT M. MUTUMACHAIRPERSON.........................................................................ELISHAH N. NJERUMEMBER.........................................................................RODNEY O. OLUOCHMEMBER.........................................................................DELILAH K. NGALAMEMBER