[2024] KETAT 270 (KLR)

Longhorn Publishers PLC v Commssioner Domestic Taxes (Tax Appeal 010 of 2022) [2024] KETAT 270 (KLR) (23 February 2024) (Judgment)

Neutral citation: [2024] KETAT 270 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 010 of 2022

E.N Wafula, Chair, RO Oluoch, AK Kiprotich, Cynthia B. Mayaka & T Vikiru, Members

February 23, 2024

Between

Longhorn Publishers PLC

Appellant

and

Commssioner Domestic Taxes

Respondent

Judgment

1. The Appellant is a limited liability company incorporated in Kenya under the Companies Act, it is authorised to carry out various businesses under its names.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act. The Kenya Revenue Authority is an agency of the Government of Kenya mandated with the duty of collection and receipting of all tax revenue, and the administration and enforcement of all tax laws set out in Parts 1& 2 of the First Schedule to the Act, for purposes of assessing, collecting, and accounting for all tax revenues in accordance with those laws.

3. The issue in dispute in this Appeal arose when the Respondent investigated the inconsistencies it had allegedly noted between the Appellant's iTax system and invoices used by the Appellant for VAT input and sales declared by various suppliers from January to May 2018.

4. The Respondent issued its assessment in this regard on the 14th November 2019 for a sum of Kshs 20,364,140. 00 relating to VAT for the period under review.

5. The Appellant objected to this assessment vide its letter dated 29th November 2019. The objection was acknowledged as received in the iTax system on the 5th of December 2019.

6. The Respondent invalidated the Appellant’s objection on the 26th of November 2021.

7. The Appellant being dissatisfied with the Respondent’s objection decision lodged the Appeal herein with the Tribunal on 9th November 2022.

The Appeal 8. The Appellant in its Amended Memorandum of Appeal dated on 9th November 2022 and filed on the same date has set out the following grounds of appeal, that:-a.The Respondent erred in fact and law by purporting to amend a VAT assessment despite being furnished with plausible explanations as requested.b.The Respondent erred in fact and law in its demand for VAT amounting to Kshs 22,424,806. 66 as it is not based on any material facts that have been provided by the Respondent.c.The Respondent erred in fact and law by outrightly contravening the doctrine of legitimate expectation that rests the presumption on the Commissioner to follow certain procedures in arriving at the tax liability and the benefits that accrue from it.

The Appellant’s Case 9. The Appellant has founded its appeal on the following documents:-a.Statement of Facts dated 9th November 2022 and filed on the same date together with documents attached thereof.b.Witness Statement of one Anna Wati dated 20th December 2022, and filed on the same date that was admitted in evidence under oath on 21st November 2023. c.Written submissions dated 6th December, 2023.

10. The Appellant stated that it received a tax assessment from the Respondent on the 14th November 2019 demanding VAT credit balances brought forward amounting to Kshs 20, 364,140. 01. That the said demand contained an illegal and unprocedural directive requiring it to pay taxes demanded as if the tax had crystallized and become due.

11. The Appellant averred that it objected to the said tax demand vide its letter dated 29th November 2019 and it also provided supporting documents like invoices and vouchers to support its objection.

12. The Appellant posited that it subsequently received a notice invalidating its objection on the 26th November 2022 which was almost 2 years after it had filed its objection.

13. That the said invalidation notice also inflated its tax liability from Kshs 20,364,140. 01 to Kshs 22,424,804. 66 without giving it a chance to object to this new assessment.

14. The Appellant further stated that the invalidation notice was invalid for the following reasons:a.It ought to have been issued within 14 days from the date of the objection.b.It was issued contrary to Section 51(8) of the TPA.c.It contravened the doctrine of legitimate expectation which required the Respondent to follow certain procedures in arriving at the tax liability payable by the Respondent.d.It contravened the basic principles of procedure, fairness and objectivity in tax issues.

15. The Appellant affirmed that having supplied the Commissioner with its annual return, and all other documents as requested showing its actual income and having also filed the same on the iTax platform it followed that that no tax was due from it and the Commissioner was thus not justified in demanding for additional tax.

16. The Appellant posited that it had provided all the documents but the Respondent had ignored its documents and explanations while invalidating its objection.

17. The Appellant stated that the Respondent acted in bad faith when it issued debit adjustment vouchers dated 15th November 2019 making the taxes in the Appellant’s VAT account collectable before the 14 days’ notice that it had issued to allow the Appellant to object to the assessment had lapsed.

Appellant’s Prayers 18. In the premises, the Appellant urged this Honourable Tribunal to find that;-a.The Respondent’s demand for tax amounting to Kshs 22,424,804. 66 be struck out in its entirety.b.The Respondent’s action to demand underpaid taxes despite being presented with logical and cogent explanations, be declared arbitrary, capricious, unreasonable, unfair and contrary to the administration of justice and legitimate expectation of the Appellant.c.The Honorable Tribunal awards the costs of this Appeal.d.The Honourable Tribunal awards any other remedies it deems just and reasonable.

Respondent’s Case 19. The Respondent has set out case on its Statement of Facts filed on 11th February 2022 and dated the same day, together with documents attached thereto.

20. The Respondent stated that it detected inconsistencies between the Respondent's iTax account and the invoices used by the Appellant for VAT input claim and the VAT sales as declared by its various suppliers for the period January to May 2018.

21. That it issued VAT automated assessments where all inconsistent invoices were disallowed.

22. That the Appellant objected to the assessment vide letter dated 5th December 2019.

23. The Respondent posited that it made efforts to obtain the relevant support documents relating to the disallowed input VAT for the period Jan to May 2018 from the Appellant but its efforts were unsuccessful. That this prompted it to invalidate the objection.

24. The Respondent affirmed that it invalidated the objection because of the following reasons:a.It was not supplied with proof that there was an actual purchase of goods or services.b.The Appellant failed to provide purchase invoices and evidence of payment for February 2018 in contravention of Section 51(3)(c) of the Tax Procedures Act,2015. c.The Appellant failed to respond to the Respondent’s request for evidence in support of the objection.

25. The Respondent stated that it shall rely on Sections 17(1) of the VAT Act, 2013, 51(3) (c) and 51(4) of the Tax Procedures Act, 2015, among other enabling provisions of the law to support its defence of this Appeal.

Respondent’s Prayer 26. The Respondent’s prayer to the Tribunal is for orders that:a.The Appeal be dismissed with costs.b.The Objection decision dated 26th November 2021, be confirmed.

Issues for Determination 27. The Tribunal having considered the pleadings and submissions by the parties is of the view that the Appeal herein distils into two issues for determination, namely;-i.Whether the invalidation decision dated 26th November 2021 was validii.Whether the Respondent was justified in confirming the objected assessment?

Analysis And Determination i. Whether the invalidation decision dated 26th November 2021 was valid 28. The Respondent had submitted that the reason for the invalidation of the Appellant's objection under Section 51(3)(c) of the TPA was that the Appellant had failed to submit all relevant documents including purchases invoices, evidence of payment and proof that the goods and services were purchased. The said Section 51(3) (c) of the TPA provides as follows:“A notice of objection shall be treated as validly lodged by a taxpayer under subsection (2) if—(c)all the relevant documents relating to the objection have been submitted.”

29. The Respondent is required under Section 51(4) of the TPA to issue this invalidation immediately. It provides as follows:“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.”

30. .In this Appeal, it is not in dispute that the objection was lodged on the 29th November 2019 and acknowledged as received on the 5th December 2019. The invalidation was issued on 26th November 2021. The gravamen in this Appeal is whether the said invalidation notice was issued immediately.

31. This Tribunal has had the chance to determine the immediacy test in the case of Saalah Mohhamed Hussein v Commissioner of Domestic Taxes (TAT 617/2020) where it held as thus:“The word of statute states categorically that the decision of a defective objection should be communicated immediately. The Oxford Dictionary defines the word immediately as follows; ‘at once’; ‘instantly’’; Or ‘without any intervening time or space’. It further uses the conjunction ‘as soon as. The Tribunal holds that the decision to find an objection invalid should be communicated as soon as the objection is received by the Respondent. This is an action that ideally should take one or two days and not a month and three weeks as in the case herein. The Tribunal believes that this is to give the Appellant an ample chance to make rectifications and submit what the Respondent considers ‘an invalid objection’.

32. The same view was upheld by the Tribunal in the latter case of TAT 606/ 2020 Holdwadag Construction Company Limited vs Commissioner of Domestic Taxes where the Tribunal stated thus:“Commissioner also took one month and about three weeks to communication its invalidation of objection decision to the Appellant. It, therefore, clearly failed the immediacy test.”

33. The Respondent issued its invalidation decision in this Appeal almost 2 years later. This inordinate delay cannot meet the immediacy test. The averments by the Respondent that it was in constant engagement with the Appellant and hence its delay in issuing the invalidation notice remained to be mere averments which were never supported with any proof in the form of letters or emails.

34. Section 51 (4) of TPA is couched in mandatory terms and the Respondent was thus obliged to comply with the peremptory terms by issuing the invalidation notice immediately.

35. The obligation of the Respondent to comply with such mandatory terms of the statute was clarified in Rongai Tiles & Sanitary Wares Limited v Commissioner of Domestic Taxes (Tax Appeal E011 of 2020) [2023] KEHC 18546 (KLR) (Commercial and Tax) (16 June 2023) (Judgment) where Majanja stated thus:“The Commissioner’s delay in delivering the Objection Decision within sixty days of receiving the objection meant that the objection was allowed by operation of law. Failure to render the Objection Decision in time was fatal and the Commissioner could not demand any taxes therein.”

36. Given the foregoing, the Tribunal finds and holds that the Respondent’s Invalidation notice which was issued almost 2 years after the receipt of the Appellant’s objection did not comply with the immediacy test. It is therefore invalid.

37. Moreover, the Respondent also acted in an arbitrary manner when it issued debit adjustment vouchers 15th November 2019 against the Appellant’s VAT credits before the time period of 14 days which it had been allowed to file its objection vide a letter dated 14th November 2019 had lapsed.

38. It is trite that once the Commissioner had given the Appellant a period of 14 days to furnish evidence to support its brought forward credits, the Commissioner was obliged to wait for the said 14 days period to lapse before proceeding with adverse action of effecting debit adjustments against the Appellant’s brought forward credit.

39. The said action was also taken without giving the Appellant the reason for the adverse action contrary to the dicta in Section 49 of the TPA which provides as follows:“Where the Commissioner has refused an application under a tax law, the notice of refusal shall include a statement of reasons for the refusal.”

40. The Tribunal thus finds and concludes that the Respondent’s decision to debit the Appellant’s brought forward credit was irregular and unlawful.

ii. Whether the Respondent was justified in confirming the objected assessment? 41. Having determined that the Respondent’s invalidation and the decision to debit the Appellant’s brought forward credit were invalid, it follows that the second issue that fell for determination has been rendered moot and shall not fall for consideration and analysis.

Final Decision 42. The upshot of the above is that the Appeal is merited and the Tribunal accordingly proceeds to make the following final Orders:-a.The Appeal be and is hereby allowedb.The Respondent's Invalidation decision dated 26th November 2021 be and is hereby set aside.c.The Respondent’s debit adjustment vouchers dated 15th November 2019 are hereby revoked and the Respondent is hereby directed to reinstate the credits in the Appellant’s VAT account within Thirty (30) days of the date of delivery of this Judgment.d.Each party to bear its own costs.

43. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 23RD DAY OF FEBRUARY, 2024ERIC NYONGESA WAFULACHAIRMANDR. RODNEY O. OLUOCH ABRAHAM KIPROTICHMEMBER. MEMBER.CYNTHIA MAYAKA TIMOTHY VIKIRUMEMBER. MEMBER.