[2023] KETAT 870 (KLR)

Mathenge v Commissioner of Domestic Taxes (Tax Appeal 1292 of 2022) [2023] KETAT 870 (KLR) (10 November 2023) (Judgment)

Neutral citation: [2023] KETAT 870 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 1292 of 2022

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

November 10, 2023

Between

Jane Wambui Mathenge

Appellant

and

Commissioner Of Domestic Taxes

Respondent

Judgment

Background 1. The appellant is a sole proprietor trading in the name and style of Gate Hardware and duly registered as such in Kenya. The appellant is engaged in the business of sale of hardware and construction materials.

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 ascended when the respondent issued the Appellant with additional assessments on VAT and Income tax on the May 22, 2021 as per the demand notice of January 8, 2021 amounting to Kshs. 6,169,153. 54.

4. The appellant disputed the respondent’s findings and lodged its notices of objection to the additional assessment on June 3, 2022.

5. The appellant was issued with an amended assessment order on the May 16, 2022.

6. The respondent issued an objection decision on May 18, 2022.

7. The appellant being aggrieved by the objection decision issued by the respondent, lodged this appeal, filing her notice of appeal on the November 4, 2022.

8. The Appellant sought leave of the Tribunal to lodge the Appeal out of time, which leave was granted on the 4th November 2022.

The Appeal 9. The appellant’s memorandum of appeal dated October 31, 2022 and filed on November 1, 2022 is premised on the following grounds, that;a.The respondent erred in law and fact by not considering all the grounds for objection which were material.b.The respondent erred in law and in fact by charging all bank receipts as income receipts despite information to the contrary.c.The respondent erred in law and in fact by not considering the actual start date for VAT registration in compliance with VAT Act 2013. d.The respondent erred in law and in fact by not responding to the appellant’s request to amend.

The Appellant’s Case 10. The appellant’s case is premised on the herein under filed documents before the Tribunal, the:a.Appellant’s statement of facts dated October 31, 2022 and filed on the November 1, 2022 together with the document attached thereto.

11. That the Appellant stated that on January 8, 2021, the respondent issued a demand notice for Kshs. 5,556,851. 76 premised on the variance between income tax and VAT returns filed with relation to VAT for the period 2018 and 2019.

12. The appellant stated that she engaged with the respondent through in face meetings and applied to amend the income tax returns for the years 2018 and 2019 upon communicating with the respondent of the erroneous returns filed for the period under review. The amendments of the return were meant to tally with the VAT return to correspond for the years 2018 and 2019.

13. That the appellant averred that on April 22, 2021, the respondent in spite of the amendments and subsequent engagement, issued assessments on iTax system for 2018 and 2019, respectively, as per the demand notice of January 8, 2021.

14. That the appellant stated that she filed her notices of objection respectively on the June 3, 2021, in addition the appellant attached documents being, sales ledgers and prior during the engagement had produced other relevant documents required including bank statements.

15. That the appellant averred that the respondent issued its objection decision on May 18, 2021.

16. That the appellant asserted that, on or around mid-June she was taken ill eventually leading to her admission at the Mater Hospital between June 30, 2022 to July 9, 2022, it was until the respondent placed an agency notice in late August 2022 that the Appellant got knowledge of the Objection decision.

17. That the appellant averred that her arguments raised were not conclusively dealt with and the facts raised were not factored by the respondent.

18. That the appellant asserted that the respondent charged VAT for the years 2018 and 2019 on banking variance amounting to Kshs. 4,387,931 and Kshs. 2,518,244. 16, respectively, which variance the appellant stated was due to pay in by related persons for the purposes of loan settlement & capital injection and are therefore not income or sales proceeds of the appellant’s business. The related person one Wilson, was the husband to the appellant and the banked sums were for capital injection. The other person one David, a relative of the appellant and a loan was secured by the appellant on his behalf and which was being settled by the said David.

19. That the appellant averred that pursuant to section 34 (1) of the VAT Act a person who has made or expects to make a taxable supply a value of which is five million or more shall be liable to registration of VAT and shall apply to the commissioner within thirty days of becoming so liable.

20. That it was the appellant’s contention that having commenced focused trading in 2018 and following queries by the respondent in the same year applied for VAT registration on March 13, 2018, the respondent however, backdated the registration to October 2015. Further, the application for an ETR machine was acquired after the approval for the VAT registration on March 23, 2018.

21. That the appellant argued that any sales prior to the registration date was not subjected to the ETR, no ETR receipt was therefore issued and not VAT charged and no VAT objection could have accrued prior to the registration date.

Appellant’s Prayers 22. The Appellant made the following prayers to the Tribunal, that;i.The respondent’s decision dated May 18, 2022 outlined in his objection decision be struck out in its entirety.ii.It directs on the consideration of non-income receipts and actual VAT registration start and therefore strike out the assessment for erroneous and wrongful charge.iii.The costs of this appeal be granted; andiv.Any other remedies that the honourable tribunal deems just and reasonable.

Respondent’s Case 23. The respondent’s case is premised on the herein under filed documents;a.The respondent’s statement of facts dated and filed on December 5, 2022 together with all the documents attached thereto.b.The respondent’s written submissions dated and filed on June 20, 2023.

24. The respondent stated that the basis for the assessments was that iTax detected inconsistencies between the invoices claimed by the appellant and those declared by her suppliers.

25. That the respondent on January 8, 2021 raised assessment based on the variances between income tax and VAT returns declarations.

26. That on March 31, 2021 the respondent sent to the appellant the demand assessment, further on April 22, 2021 the respondent issued additional assessment followed by a demand notice of April 23, 2021.

27. The respondent stated that on June 3, 2021 it received from the appellant her objection to the assessment, it called for documents from the appellant to support her objection but she did not respond.

28. That on the May 16, 2022 the respondent partially accepted the objection by the appellant, subsequently the respondent issued its objection decision on additional VAT assessment on May 18, 2022.

29. That the respondent stated that upon consideration, the issues for determination by the Tribunal were;a.Whether the respondent’s objection decision is proper in law.b.Whether the respondent erred in finding that the appellant failed to provide sufficient proof to rebut the assessment issued by the respondent.c.Whether the respondent issued the assessment to the best of its judgement.

30. That the respondent relied on sections 31 and 51 of the TPA.

31. The respondent contented that on April 22, 2021 it raised an additional assessment and made a thirty-day demand on April 23, 2021 and there was no response.

32. That the respondent further stated that it wrote letters to the appellant requesting for documents to support her objection, the appellant provided documents on July 7, 2021, particularly;i.Banking for six months January 1, 2018 to June 30, 2018. ii.Loan schedule/loan statement.iii.Loan agreement letter.iv.Document supporting sale/lease of land with frequent deposits in the bank.

33. The respondent submitted that upon review of the documents provided by the appellant it partially accepted the objected amounts and rejected amount stands at Kshs. 1,822,210. 00.

34. The respondent submitted that the assessments were correctly issued and conform with both the VAT Act and the Income Tax Act.

35. The respondent reiterated that the TPA places the onus of proof in the tax objection upon the taxpayer who in this case has failed to avail evidence that would support a contrary assessment or that would guide the respondent at arriving at a different objection decision.

36. That the respondent further submitted that under the Evidence Act, where a person alleges a particular fact it is upon them to prove it before the commissioner confirms the assessment.

37. The respondent submitted that the actions of the parties are so important that once shown the burden of proof shifts. It is this evidence that the appellant failed to provide the relevant documents to support its assertions, this evidence was not given and respondent was compelled to issue a decision confirming to the evidence available.

38. The respondent contented that it was within its mandate to make the tax assessment against the appellant based on the provisions of section 29 (1) of the TPA.

39. Further, it was the respondent’s submission that the assessment was made within the best judgement of the respondent since only the evidence provided by the appellant was reviewed in coming up with the assessment and thereafter the objection decision and relied on section 31 (1) of the TPA.

40. The respondent submitted that in exercising its judgment what is required of the respondent is that it should not act dishonestly, vindictively and capriciously. The respondent stated that it did not use any other document outside what the appellant had provided, as such it exercised proper judgement as envisioned under the law.

Respondent’s Prayers 41. The respondent prayed for this Tribunal, that;i.The respondent’s objection decision dated May 18, 2022 is proper in law and the same be affirmed.ii.The appellant pay the short-levied tax amounting to Kshs. 1,822,210. 00.

Issues For Determination 42. 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 respondent’s objection decision dated May 18, 2022 was proper in law.b.Whether the assessment by the Respondent was justified.

Analysis And Findings 43. The Tribunal wishes to analyse the issues as herein under;

Whether the Respondent’s Objection Decision dated 18th May 2022 was proper in law. 44. That the tribunal notes that the appellant did not file her submissions and shall deal with the appeal on the basis of her pleadings.

45. The respondent submitted that it issued the appellant with additional assessments on the April 22, 2021, which were base and/or in line with the demand made on the January 8, 2021.

46. The appellant filed her notices of objection on June 3, 2021, from the correspondences placed on record, the tribunal noted, that the respondent never, at any point, raised the issue of the notice of objection having been filed late.

47. The tribunal, however, noted from the email from the respondent’s representative send to the appellant of July 21, 2021 referred the Appellant to section 51 (3) (c) of the TPA and requested the appellant to take note that the objection process had timelines, section 51 (3) of the Tax Procedures Act provides that:-“(3)A notice of objection shall be treated as validly lodged by a taxpayer under subsection (2) if—(a)………………….; and(b)……………………...(c)All the relevant documents relating to the objection have been submitted.”

48. The tribunal notes that the appellant provided documents to the respondent who acknowledged that they were provided, it was asserted by the respondent that the last set of documents shared by the appellant was done on July 7, 2021.

49. It was stated by the respondent that upon consideration of the appellant’s documents it partially accepted some of the issues raised therein, the tribunal can only draw the inference that the respondent had accepted the notice of objection and deemed the same to be valid, however, the particular date of acceptance of the late objection or invalid objection was never indicated to the tribunal.

50. It is the prerogative of the commissioner to accept or reject either a late objection or an invalid objection, in the present case it is clear that the acceptance was done.

51. Upon perusal of the respondent’s email of December 7, 2021 by the respondent to the appellant, it is clear that, as at this time, the respondent had already accepted and/or or validated the appellant’s objection, the email read;“As per the interview held in our offices today in the morning, kindly provide the complete bank statement for the year 2018 together with the loan schedule for Kshs. 588,000. 00, Kshs. 524,000. 00 and Kshs. 970,000. 00 for the year 2018 and 2019 respectively, to enable us complete the objection process within the timelines stated in the Tax Procedures Act”

52. The tribunal is persuaded that from the above extract the respondent considering the merits of the appellant’s objection and not whether the appellant’s notice was either late or invalid.

53. The Tribunal having not been provided with the exact date of acceptance of the late objection, is persuaded to deem and shall apply the December 7, 2021 as the date of such acceptance or validation of the appellant’s late or invalid objection. There has been no demonstration by either party that any further documents were requested for or provided pursuant to such request.

54. The Tribunal is guided by the provisions of section 51 (8) & (11) of the Tax Procedures Act, in relation to issuance of an objection decision, which provides:-“(8)Where a notice of objection has been validly lodged within time, the commissioner shall consider the objection and decide either to allow the objection in whole or in part, or disallow it, and commissioner's decision shall be referred to as an "objection decision".”(11)The commissioner shall make the objection decision within sixty days from the date of receipt of—(a)the notice of objection; or(b)any further information the commissioner may require from the taxpayer, failure to which the objection shall be deemed to be allowed.”

55. In view of the aforementioned provisions of the law, the respondent was therefore obligated to issue an objection decision within sixty days of date of receipt of the notice of objection or any further information the Respondent required from the appellant.

56. The Tribunal having held that the last date of the interaction of the parties, request and provision of documents by the Appellant was December 7, 2021, the respondent ought to have issued the Objection decision on or before February 5, 2022, the objection decision was issued on May 18, 2022.

57. In the circumstances the tribunal finds that the objection decision dated May 18, 2022 was issued beyond the statutory timeline as provided for in law and was not proper in law.

58. The Tribunal having held that the objection decision of May 18, 2022 was not validly issued it shall no delve into the other issue for determination as the same has been rendered moot.

Final Decision 59. The upshot to the foregoing is that the appeal is merited and the tribunal consequently makes the following orders; -a.The appeal be and is hereby allowed.b.The respondent’s objection decision rendered on May 18, 2022 be and is hereby set aside.c.Each party to bear its own costs.

60. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 10TH DAY NOVEMBER, 2023ROBERT MUTUMA...............CHAIRPERSONDR WALTER ONGETI............MEMBERELISHAH N. NJERU............MEMBERMUTISO MAKAU................MEMBERBONIFACE K. TERER...........MEMBER