[2023] KETAT 861 (KLR)

Maya Enterprises Limited v Commissioner for Legal Services and Board Coordination (Tax Appeal 1197 of 2022) [2023] KETAT 861 (KLR) (Civ) (10 November 2023) (Judgment)

Neutral citation: [2023] KETAT 861 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Civil

Tax Appeal 1197 of 2022

Grace Mukuha, Chair, E Komolo, Jephthah Njagi, T Vikiru & G Ogaga, Members

November 10, 2023

Between

Maya Enterprises Limited

Appellant

and

Commissioner for Legal Services and Board Coordination

Respondent

Judgment

Background 1. The Appellant is a limited liability company duly registered under the Companies Act and is a registered taxpayer. Its principal business is in provision of transport and transport-related services.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, Cap 469 llaws 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 conducted additional income tax company assessment on the Appellant for the periods 2017 - 2020 and issued assessment orders on 30th June 2022 of Kshs. 45,108,337. 24.

4. The Appellant objected to the assessment orders on the iTax platform by lodging a notice of objection on 5th July 2022 and raised several grounds of objection therein.

5. The Respondent considered the objections and issued an objection decision on 16th September 2022, partially allowing the objection, and amending additional assessment to Kshs. 1,419,349. 58 inclusive of penalties and interests.

6. The Appellant, being dissatisfied with the objection decision, lodged the instant appeal on 14th October 2022.

The Appeal 7. In its Memorandum of Appeal filed on 14th October 2022, the Appellant premised its Appeal on the following grounds: -i.That the Appellant was not engaged by the Respondent in any dialogue when raising the additional assessments.ii.That the Appellant is now aware of the composition of the additional assessments.iii.That no formal compliance audit of any sort was conducted prior to the additional assessments.iv.That the Appellant objects to additional assessments in its entirety.

The Appellant’s Case 8. The Appellant premised its case on the Appellant’s Statement of Facts dated 14th October 2022 and filed on the same date and annexures thereto.

9. The Appellant averred that it had incurred bad debts from two customers, being Lori Systems Limited and Pavansut Apartment Management Company Limited, and both are outstanding from the year of income 2018.

10. That the Appellant claimed bad debts in the books for 2021 under Legal Notice No. 37 Schedule 2(e) stating that the costs for recovering the debts are more than the debt itself as one of the debtors’ operations are in Kampala, Uganda.

11. That the Appellant had under expense account named non-employee compensation to two individuals, namely Jadavji S Vaghjiani and Narshi Karamshi, who had withholding tax of 3 percent deducted at source by the Appellant before receiving any form of payments for works undertaken as agreed with the Appellant.

12. That the Respondent disallowing entire payments to the said two individuals amount to double taxation and charging the same amounts is not prudent.

13. That contracts of works given by the Appellant to the sub-contractors are enclosed as exhibit indicating schedule of payments and withholding tax deductions.

Appellant’s Prayers. 14. The Appellant prayed to the Tribunal for the following order: -a.That the additional assessments by the Respondent be dismissed.

The Respondent’s Case 15. The Respondent premised its case on the following documents before the Tribunal:a.The Respondent’s Statement of Facts dated 8th November 2022 and filed on 10th November 2022. b.The Respondent’s Written Submissions dated 5th June 2023 and filed on 7th June 2023.

16. The Respondent averred that it carried out assessments and disallowed depreciation of expenses that were claimed in IT2C returns, variances between salaries and wages claimed in the IT2C returns and wages per P10 returns, variances between VAT turnover and IT2C turnover, and disallowed allowable deduction for the period under review.

17. That the depreciation expense was disallowed on the basis that it was expensed but was not disallowed in the tax computation.

18. That a review of IT2C returns showed the Appellant claimed depreciation expense in the profit and loss account, and the same was not added back in the computation.

19. That the Appellant did not claim wear and tear allowance, which the Respondent nonetheless proceeded to allow at rates prescribed by the Respondent.

20. That based on the assessments, the Respondent, on 30th June 2022, raised additional principal taxes assessments of Kshs. 31,759,688. 24 plus Kshs. 13,348, 649. 00 in interests, thereby raising tax liability of Kshs. 45,108,337. 24.

21. That the Appellant lodged a notice of objection on 5th July 2022 on the ground that they were not engaged before additional assessments were raised and were not informed of the basis of the assessments.

22. That the Appellant also objected on the ground that there was no formal compliance audit of any sort conducted prior to the assessments being raised.

23. That the Respondent considered the objections and issued an objection decision on 16th September 2022, in which the Respondent amended the assessments to Kshs. 1,419,349. 58.

24. That the Respondent refutes each and every allegation by the Appellant as contained in the Appellant’s Memorandum of Appeal and Statement of Facts.

25. That the additional assessments were communicated to the Appellant in good time, and the Appellant was accorded opportunity to raise an objection against the additional assessments and granted sufficient time to avail documents.

26. That pursuant to the provisions of Section 24(2) of the Tax Procedures Act (TPA), the Respondent is not bound by tax return or information provided by the Appellant, and is empowered to assess the Appellant based on information provided to the Respondent.

27. That Section 31 of the TPA allows the Respondent to make additional assessments based on information provided and the Commissioner’s best judgement.

28. That pursuant to the above said provisions, the Respondent did conduct compliance audit on the Appellant’s tax affairs and raised additional assessments.

29. That the Respondent rightfully indicated that non-employee compensation relates to payments made for sub-contracted services for fleet management as the Appellant failed to adequately support the non-employee compensation that was claimed.

30. That the allegations of the Appellant as laid out in the Appellant’s Memorandum of Appeal and Statement of Facts are, unless in agreement with the Respondent, unfounded.

31. To buttress its points, the Respondent relied on the following authorities;a.Commissioner of Domestic Taxes vs Altech Stream (EA) Limited (2021) eKLR; andb.Alfred Kioko Muteti vs Timothy Miheso & Another (2015) eKLR.

Respondent’s Prayers. 32. The Respondent prayed to the Tribunal for the following orders: -a.That the Appeal be dismissed with costs.b.That the Respondent’s additional assessments of Kshs. 1,419,349. 58 be upheld.

Issues for Determination 33. Having reviewed the Memorandum of Appeal, Statements of Facts and Written Submissions filed by parties, the Tribunal identified the following two issues for determination:a.Whether the Respondent’s Objection decision is proper and lawful.b.Whether the Respondent Additional Assessments are justified.

Analysis and Findings 34. Having established the issues for determination, the Tribunal will proceed to analyse them as herein under.

a. Whether the Respondent’s Objection decision is proper and lawful. 35. The Tribunal noted that the dispute between the parties as supported by annexures attached by both parties relates to additional income tax company assessments communicated to the Appellant vide assessment orders dated 30th June, 2022.

36. The Tribunal also noted that the Appellant objected to the assessment orders on 5th July 2022 and laid several grounds including failure by the Respondent to conduct compliance audit and failure to engage the Appellant in dialogue prior to the additional assessments.

37. The Respondent submitted that it accorded the Appellant sufficient time to object to the additional assessments and that it conducted compliance audit as envisaged by Sections 24(2) and 31 of the Tax Procedures Act, 2015 (TPA).

38. To support its case on this ground, the Respondent relied on High Court decision in Commissioner of Domestic Taxes vs Altech Stream (EA) Limited (2021), where the High Court reiterated the Commissioner’s discretion to conduct an assessment based on best judgement and information before the Commissioner.

39. The Tribunal notes that from the record and evidence before it, there is no dispute that the Appellant provided additional information that led to revision of the additional assessments from Kshs. 45, 108, 337. 24 (inclusive of penalties and interests) to Kshs. 1,419,349. 58.

40. The Tribunal, however, notes that the Respondent issued the objection decision communicating the partial acceptance of objection and downward revision of tax due on 16th September, 2022, which is well over 60 days from the date of the Appellant’s objection.

41. Section 51 (11) of the TPA provides as follows regarding rendering of objection decisions: -“…51(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.”

42. On the face of the record before us, the Tribunal noted that the Respondent did not object to the validity of the Appellant’s objection as filed on 5th July 2022 and did not request for any additional documents.

43. The Respondent, instead, submitted extensively on justification for additional assessment as envisaged under Sections 24(2) and 31 of the Tax Procedures Act, 2015, and the question of burden of proof as envisaged under Section 56(1) of the same statute.

44. The Tribunal finds that having opted to render an objection decision, the Respondent was bound by mandatory provisions of Section 51(11) of the Tax Procedures Act on timelines for issuing objection decisions.

45. The issue of statutory timelines in tax matters is now settled in law and was reiterated in Equity Group Holdings Limited vs Commissioner of Domestic Taxes [2021] eKLR, where the High Court Mativo J. stated that:-“60. Section 51(11) of the TPA is couched in peremptory terms. Having correctly found that the decision was made after the expiry of 60 days, the TAT had no legal basis to proceed as it did and to invoke article 159(2) (d). First, there was no decision at all. The decision had ceased to exist by the operation of the law. Second, the provisions of section 51 (11)(b) had kicked in. The Objection had by dint of the said provision been deemed as allowed. Third, the TAT had no discretion to either extent time or to entertain the matter further. Fourth, discretion follows the law and a Tribunal cannot purport to exercise discretion in clear breach of the Law.

63. The TAT manifestly erred in law by confusing substantive with procedural law. Article 159(2)(d) of the Constitution in clear terms talks about procedural technicality. A Statutory edict is not procedural technicality. It is a law which must be complied with. Parliament in its wisdom expressly and in mandatory terms provided the consequence of failing to render a decision within 60 days. The Objection is deemed to be allowed. That being the law, the Appellant’s Objection stood allowed as a matter of law the moment the Commissioner of Domestic Taxes failed to render his decision within the 60days. This being the correct legal position, it is my finding that the 1st appeal succeeds.”

46. Accordingly, the Tribunal finds that the Respondent, having rendered its objection decision, more than 60 days from the date of Appellant’s objection, was outside time and the Appellant’s Objection stood allowed by operation of the law.

c. Whether the Respondent Additional Assessments are Justified 47. Having found that the Appellant’s objection was deemed allowed by operation of the law, the Tribunal holds that the second issue for determination is rendered moot.

Final Decision 48. The Tribunal proceeds to make the following orders: -a.The Appeal be and is hereby allowed.b.The Respondent’s Objection decision dated 16th September 2022 be and is hereby set aside.c.Each party to bear its own costs.

49. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 10TH DAY OF NOVEMBER, 2023GRACE MUKUHA - CHAIRPERSONDR. ERICK KOMOLO - MEMBERJEPHTHAH NJAGI - MEMBERTIMOTHY VIKIRU - MEMBERGLORIA OGAGA - MEMBER