[2023] KETAT 530 (KLR)

Letosh Spare and Parts Limited v Commissioner of Domestic Taxes (Tax Appeal 772 of 2022) [2023] KETAT 530 (KLR) (13 October 2023) (Judgment)

Neutral citation: [2023] KETAT 530 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 772 of 2022

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

October 13, 2023

Between

Letosh Spare And Parts Limited

Appellant

and

Commissioner Of Domestic Taxes

Respondent

Judgment

Background 1. The appellant is a limited liability company registered under the Companies Act, in the Republic of Kenya and is a registered taxpayer.

2. The respondent is a principal officer appointed under and in accordance with Section 13 of the Kenya Revenue Authority Act, the Authority 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 VAT returns analysis on the appellant’s purchases and sales which resulted in the respondent issuing VAT Auto Assessments for January to May 2018 on April 23, 2021 followed by a letter of demand on July 27, 2021.

4. The appellant objected to the additional assessments on March 4, 2022 via iTax. On June 14, 2022, the respondent issued its decision.

5. On receiving the decision and being aggrieved, the appellant lodged its Notice of Appeal on July 13, 2022.

The Appeal 6. In its Memorandum of Appeal dated July 25, 2022 and filed on July 26, 2022, the appellant premised its Appeal on the following grounds; -a.The appellant’s objection dated March 4, 2022, having been allowed by operation of the law by dint of the mandatory provisions of Section 51 (11) of the Tax Procedures Act 2015, the respondent erred in law in making the impugned decision dated June 14, 2022 and hence the decision is illegal, null and void.b.The respondent erred in law in making the impugned decision dated June 14, 2022 without first determining the appellant’s Objection to the additional assessment made for the Income Tax Company period ending December 2019, VAT for 2016, and 2017. c.The respondent erred in law in making the impugned decision dated June 14, 2022 based on gross turnover without allowing for expenses.d.The respondent erred in making the impugned decision dated June 14, 2022 against the weight of evidence presented to it by the appellant.

The appellant’s Case 7. The appellant set down its case in:a.Its Statement of Facts dated July 25, 2022 and filed on July 26, 2022. b.appellant’s written submissions dated February 13, 2023 and filed on February 20, 2023.

8. The appellant stated that its objection dated March 4, 2022, having been allowed by operation of the law by dint of Section 51 (11) of the Tax Procedures Act 2015, the respondent erred in law in making the impugned decision dated June 14, 2022 and hence the decision is illegal, null and void.

9. The appellant specified that on or about July 27, 2021, the respondent served a 7 days demand notice upon it demanding alleged outstanding taxes of Kshs. 41,389, 643. 33 which it objected. Further, the respondent made additional assessments which it continued to object.

10. The appellant argued that the respondent made the impugned decision on June 14, 2022 requiring the appellant to pay Kshs. 28,356,893. 00 together with accrued penalty and interest. That this sum is based on gross turnover without allowing for expenses and is not lawfully due.

11. It averred that the respondent erred in law in making the impugned decision without first determining the appellant’s objection of additional assessment made for the income tax Company for the period ending December 2019 and VAT for the periods 2016 and 2017.

12. It averred that the respondent made the decision based on gross turnover without allowing for expenses and against the weight of evidence presented by it.

13. The appellant cited Section 51 (11) of the Tax Procedures Act 2015 and submitted that its objections were allowed by operation of the law hence the decision made on June 14, 2022 is illegal, null and void.

14. It relied on the following cases to buttress its case: -a.Equity Group Holdings vs. Commissioner of Domestic Taxes (civil Appeal E069 & E025 of 2020) [2021] KEHC 25 (KLR) (Commercial and Tax) (23 August 2021):Section 51 (11) of the TPA is couched in mandatory terms‖b.Republic vs. Commissioner of Customs Services Ex-Parte Unilever Kenya Limited [2012] eKLR where it was held:My understanding of the above quoted section is that once a taxpayer lodges an application for review, the Commissioner of Customs who is the respondent in this case has 30 days within which to make and communicate a decision to the taxpayer. If the respondent does not communicate a decision within 30 days, then the respondent ―shall be deemed to have made a decision to allow the application.‖ The law is so clear that it can only be interpreted in one way. The respondent communicated the decision to the ex-parte applicant on July 18, 2011. By communicating the decision four months from March 16, 2011 the respondent was clearly in breach of the provisions of Section 229 EACCMA… The implication of the respondent’s non-communication within the statutory period of 30 days is that the ex-parte applicant did not owe the taxes demanded by the demand notice of 9th February, 2011. The respondent’s decision in the letter dated July 18, 2011 which revised the tax demand downwards from Kshs. 102,254,601. 00 to Kshs. 65,335,378. 00 was therefore void from the beginning. The law as it is presumes that by failing to communicate a decision by 16th April, 2011 the respondent was telling the ex-parte applicant that its appeal against the tax demand contained in the notice dated 9th February, 2011 had been allowed and the ex-parte applicant did not owe the respondent any tax in respect of that particular demand.‖c.Republic vs. Commissioner of Domestic Taxes Ex-Parte I & M Bank Limited [2017] eKLR where the court held:when the respondent failed to make its decision within the statutory period of 60 days, by virtue of Section 51(11) of the Act, the appellant’s Objection was deemed to have been allowed by operation of the law.‖

15. The appellant maintained that the respondent should have made its decision on or before May 4, 2022 therefore the decision made on June 14, 2022 was rendered null and void by the operation of Section 51 (11) of the TPA and deemed to have been allowed.

16. The appellant submitted that the respondent based its decision on the gross turnover without allowing for expenses as required. It added that it has expenses like rent, salaries and other outgoings which the respondent never sought information on as there is no letter placed before the court by the respondent to show that it communicated with the appellant and the appellant failed to act.

17. The appellant argued that the decision made by the respondent should be based on the evidence placed before it adding that it submitted to the respondent that it filed VAT returns for 2018 and 2019 using the director’s pin and not the Company’s pin as the business was transitioning from a sole proprietorship to a company.

18. It submitted that it did not default on its taxes since as a sole proprietorship the tax for the business was being paid through the business owner’s KRA pin who is not separate from the business.

The appellant’s Prayers 19. The appellant prayed for orders that:a.The Objection dated March 4, 2022 was allowed by operation of the law by dint of the provisions of Section 51(11) of the Tax Procedures Act, 2015. b.The respondent’s decision dated June 14, 2022 be set aside.c.The respondent gives the appellant full credit for all amounts paid and VAT held to its credit and thereafter be prohibited from demanding the principal taxes, penalties and interest the subject of the decision dated June 14, 2022. d.The costs of this Appeal be borne by the respondent.

The respondent’s Case 20. The respondent’s case is premised ona.respondent’s Statement of Facts dated August 25, 2022and filed on August 24, 2022. b.respondent’s Written Submissions dated and filed on 6th March 2023.

21. The respondent cited Section 51 (11) of the Tax Procedures Act and stated that the objection decision was within the 60 days’ timeline from the date of receipt of the last documentation.

22. It averred that the appellant lodged a late objection on March 4, 2022, almost 29 months and 11 months after both Income tax and VAT assessments were raised.

23. It reiterated that the appellant pleaded the ground of being out of the Country where it took time to support the same and request for extension of time granted by the Commissioner on May 4, 2022 after which the appellant was requested to file a valid objection by providing all supporting documents per Section 51 (3) of the Tax Procedures Act with a reminder sent on June 10, 2022.

24. It maintained that upon the appellant’s failure to provide the requested information by the Commissioner, it issued an invalidation notice on June 14, 2022. It added that the 60 days timeline as envisioned by Section 51 (11) of the Tax Procedures Act runs from the date the taxpayer files a valid objection which is the date when all the relevant documents are provided which the appellant did not do.

25. It cited the case of Mulherin vs. Commissioner of Taxation(2013) where the Federal Court of Australia held that:-The onus is on the taxpayer in proving that assessment was excessive by adducing positive evidence which demonstrates the taxable income on which tax ought to have been levied.‖

26. It stated that it was under no obligation to determine the invalidation of the objection as the appellant had not adduced sufficient positive evidence to demonstrate the taxable income on which tax ought to be levied and the assessment exceeds the actual substantive liability of the appellant.

27. It asserted that the appellant failed to provide all supporting documents during the pre-assessment stage and ended up being unresponsive thus the assessment was raised. It added that at the objection review stage, the appellant failed to provide the same thus an invalidation notice was made.

28. It also relied on the case of Histoto Limited vs. The Commissioner of Domestic Taxes TAT (2019).

29. It concluded that the appellant never provided the grounds of objection per Section 51 (3) of the Tax Procedures Act and should therefore, not purport that the respondent erred in law in its assessment, as the appellant failed to meet the threshold of a validly lodged objection.

30. The respondent submitted that the objection decision was issued within the statutory timelines of 60 days from the day of the receipt of the last documentation from the appellant.

31. It relied on Section 52 (3) and Section 51 (11) of the Tax Procedures Act and argued that the appellant requested an extension of time to lodge the Objection on March 4, 2022 almost 29 months and 11 months after the additional assessments respectively which was granted and the appellant asked to provide all the supporting documentation.

32. It argued that the sixty-day timeline for the respondent started running when the appellant was issued the reminder to the appellant on June 10, 2022 to provide documentation to validate its objection which it failed to do.

33. It further relied on the following cases decided by the Tribunal.a.Tax Appeals Tribunal Number 255 of 2020 ESL Forwarders Limited vs. Commissioner of Domestic Taxes -Section 51 (11) of the TPAprovides as follows The CommissioneR shall make the objection decision within sixty days from the date of Receipt of a valid notice of objection failure to which the objection shall be deemed to be allowed. This Section enjoins the respondent to render an objection decision within 60 days. The Section also underscores two ways of calculating the 60 days within which the decision should be delivered. In the first instance the respondent must deliver an objection within 60 days of receipt of the Notice of Objection. In our view this first option will apply when the taxpayer has lodged a valid objection decision and the respondent is satisfied with both the objection notice and the supporting documents thereof. The second way of calculating the 60 days stipulated in Section 51(11)(b); the respondent shall render an objection decision within 60 days of the receipt of any further information the respondent may require from the taxpayer.‖b.Tax Appeal No. 700 of 2021 Broadlink General Merchants Limited vs Commissioner of Domestic Taxes-The foregoing analysis affirms that the respondent did not breach the 60 days statutory time limit prescribed under Section 51(11) of the TPA. This is mainly so for the fact that every time the respondent issued an email reminding the appellant of the request to supply the relevant supporting documents the statutory time limit was rebooted and it started to run afresh. The Tribunal is of the view that a party cannot ignore to comply with its statutory duty to supply documents to the respondent with the hope that such frustrations would make it possible for it to wind time and thereafter seek solace or salvation under Section 51 (11) of the Tax Procedures Act. that could not obviously have been the intention of the legislature.‖

34. It submitted that the appellant was only cooperative when it came to lodging its late objection and not validating the objection and the respondent’s notice of objection Invalidation issued on June 14, 2022 was valid and in accordance with the law.

35. The respondent relied on section 30 of the Tax Appeals Tribunal Act and reiterated that the appellant had a duty to provide supporting documents against the respondent’s objection decision under section 56 (1) of the Tax Procedures Act and section 30 of the Tax Appeals Tribunal Act and the case of Commissioner of Domestic Taxes vs. Metoxide Limited [2021] where it was held as follows:section 56 (1) of the Tax Procedures Act, the taxpayer had the burden of proving that a tax decision was incorrect. The Kenyan system of taxation was based on self-assessment. The taxpayer did self-assessment and remitted what they considered to be the tax due to the tax authorities. In that regard, the tax laws mandated the appellant to, later on, assess the taxpayer in order to ascertain whether the tax remitted was proper or not. Ordinarily, the assessment was made years after the tax had fallen due and been paid or the economic activity or commercial transaction for which the tax arose had been undertaken. It was for that reason that the tax laws shouldered the taxpayer with the burden of disproving the correctness of the appellant’s tax decision.

36. It argued that it was under no obligation to determine the invalid objection by the appellant on the additional assessments as the appellant had not adduced sufficient positive evidence to demonstrate the taxable income.

37. It reiterated that the appellant lodged its objection but failed to support it, the respondent reminded it to support the same but the appellant did not take any action thus the respondent acted fairly within the confines of the law, in assessing the appellant for income tax and VAT additional assessment.

The respondent’s Prayers 38. The Respondent prayed for the tribunal to find that:a.The respondent’s demand notice to the appellant on the outstanding taxes of Kshs 41,389,643. 33 is valid and therefore be upheld.b.The respondent legally invalidated the appellant’s objection of additional assessments made for the income tax company period ending December 2019, and VAT for 2016 and 2017. c.This Appeal be hereby dismissed with costs to the respondent as the same is without merit.

Issues for Determination 39. Gleaning through the Memorandum of Appeal, the parties’ Statements of Facts, and submissions, the Tribunal puts forth the following issue for determination:Whether the respondent’s Invalidation of the Notice of Objection was justified.

Analysis and Findings 40. The tribunal wishes to analyze the issue as herein under.

41. The appellant averred that its objections dated March 4, 2022, having been allowed by operation of the law by dint of Section 51 (11) of the Tax Procedures Act 2015, the respondent erred in law in making the impugned decision dated June 14, 2022 and hence the decision is illegal, null and void.

42. It maintained that the respondent should have made its decision on or before May 4, 2022 therefore the decision made on June 14, 2022 was rendered null and void by the operation of Section 51 (11) of the TPA and deemed to have been allowed.

43. The respondent reiterated that the appellant was requested to file a valid objection by providing all supporting documents per Section 51 (3) of the Tax Procedures Act with a reminder sent on June 10, 2022.

44. It maintained that upon the appellant’s failure to provide the requested information by the Commissioner, it issued an invalidation notice on June 14, 2022. It added that the 60 days’ timeline as envisioned by Section 51 (11) of the Tax Procedures Act runs from the date the taxpayer files a valid objection which is the date when all the relevant documents are provided which the appellant did not do.

45. The respondent further averred that the appellant failed to provide all supporting documents during the pre-assessment stage and ended up being unresponsive thus the assessment was raised. It added that at the objection review stage, the appellant failed to provide the same thus an invalidation notice was made.

46. Section 51 of the Tax Procedures Act of 2015 provides as follows:-(2)A taxpayer who disputes a tax decision may lodge a notice of objection to the decision, in writing, with the Commissioner within thirty days of being notified of the decision.3. A notice of objection shall be treated as validly lodged by a taxpayer under subsection (2) if—a.the notice of objection states precisely the grounds of objection, the amendments required to be made to correct the decision, and the reasons for the amendments; andb.in relation to an objection to an assessment, the taxpayer has paid the entire amount of tax due under the assessment that is not in dispute, or has applied for an extension of time to pay the tax not in dispute under section 33(1).c.all the relevant documents relating to the objection have been submitted.(11)The Commissioner shall make the objection decision within sixty days from the date of receipt of a valid notice of objection failure to which the objection shall be deemed to be allowed.

47. The tribunal notes that the respondent issued an assessment order to the appellant vide iTax on April 23, 2021 for Kshs. 24,480,785. 25 followed by a demand notice on 27th July 2021 for Income tax, PAYE and VAT for January 2016 to August 2020 totaling Kshs. 41,389,643. 33, inclusive of interest and penalty.

48. The appellant lodged an objection vide iTax on 4th March 2022 after it was allowed to lodge a late Objection upon applying for the same. The respondent invalidated the appellant’s notice of objection in a letter dated 14th June 2022 for lack of supporting documents.

49. In invalidating the appellant’s objection, the respondent referred to correspondence with the appellant about the appellant providing documents to support its objection. The invalidation made mention of an email dated 14th March 2022.

50. The appellant submitted that the respondent never provided any letter that it communicated to the appellant requesting further documentation or information supporting its Objection.

51. The tribunal notes that it was not presented with any evidence of correspondence between the respondent and the appellant between March 4, 2022 when the appellant filed the notice of objection and June 14, 2022 when the respondent invalidated the same. In the absence of correspondence leading to the invalidation dated June 14, 2022, the Tribunal is left to decide based on the documents presented before it. In this regard, it is the considered view of the Tribunal that by issuing an invalidation notice on June 14, 2022 based on the late notice of objection, and indeed considering the contents of the same the respondent is deemed to have allowed the late objection.

52. Having determined the issue of late objection, the Tribunal wishes to determine if the notice of objection was validly lodged.

53. Section 51 (4) of the Tax Procedures Act provides that -(4)Where the Commissioner has determined that a notice of objection lodged by a taxpayer has not been validly lodged, the Commissioner shall immediately notify the taxpayer in writing that the objection has not been validly lodged.

54. The Tribunal is of the considered view that the law anticipated that the respondent will upon receipt of a notice of objection provide feedback to the appellant ―immediately‖ if such a notice is not validly lodged. The period between March 4, 2022 and June 14, 2022 which period is over three months cannot be deemed as immediate. Indeed matters of tax procedures are anchored in strict timelines which have to be adhered to and recast only as prescribed by the same law.

55. The Tribunal therefore finds that the invalidation notice dated June 14, 2022 was issued out of time and the appellant’s objection is to that extent deemed to have been valid and thus allowed by operation of law, by dint of the provisions of Section 51(11) of the Tax Procedures Act.

Final Decision 56. The upshot to the foregoing is that the Appeal is meritorious and the tribunal consequently makes the following orders;-a.The Appeal be and is hereby allowed.b.The respondent’s Invalidation Notice dated June 14, 2022 be and is hereby set aside.c.Each party to bear its own costs.

DATED AND DELIVERED AT NAIROBI THIS 13TH DAY OCTOBER, 2023ROBERT M. MUTUMA - CHAIRPERSONDR. WALTER ONGETI - MEMBERELISHAH N. NJERU - MEMBERMUTISO MAKAU - MEMBERBONIFACE K. TERER - MEMBER