[2024] KETAT 9 (KLR)

Mbiwa Construction Company Limited v Comissioner of Domestic Taxes (Appeal 748 of 2022) [2024] KETAT 9 (KLR) (26 January 2024) (Judgment)

Neutral citation: [2024] KETAT 9 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Appeal 748 of 2022

E.N Wafula, Chair, Cynthia B. Mayaka, AK Kiprotich, RO Oluoch, E Ng'ang'a & B Gitari, Members

January 26, 2024

Between

Mbiwa Construction Company Limited

Appellant

and

Comissioner of Domestic Taxes

Respondent

Judgment

1. The Appellant is a private limited company and a registered taxpayer. The Appellant’s business activity is in construction.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, 1995. Under Section 5 (1) of the said Act, the Kenya Revenue Authority is an agency of the Government for the collection and receipt of all tax revenue.

3. The Respondent amended the Appellant’s self-assessment returns for various months in 2019 on 16th and 17th July 2020.

4. The Respondent issued an Agency Notice to the Appellant’s bank vide a letter dated 24th June 2022 demanding VAT amounting to Kshs 10,762,946. 00 and Income tax of Kshs 16,625. 43

5. Being aggrieved by the Respondent’s Agency Notice, the Appellant lodged its Notice of Appeal on 18th July 2022.

The Appeal 6. The Appellant’s Appeal as stated in the Memorandum of Appeal dated 15th July 2022 and filed on 18th July 2022 is premised on the grounds that:-i.The assessment is based on the computation which was not compliant to the VAT Act, which allows any taxpayer to utilize the VAT credits realized in the month to the full amount on credit. The Appellant filed both original and amended Vat with credit returns all being acknowledged and approved. The original return filed for the months of June, 2019, July 2019, August 2019, September 2019 and October 2019 all were credit balance returnsii.The Respondent disregarded the conventional way of computing VAT to unconventional way of VAT computation which led to the Appellant credit claim being ignored,iii.The act of the Respondent led to a tax demand of Ksh.10,779,571. The right procedure used for tax computation admitted on itax platform pegged on the VAT Act clearly points to VAT credit balances in trading periods. The assumption the Appellant would manipulate the itax return was an overstatement and assumption by the Respondent, the Appellant would not file subsequent/next returns by failing to admit a credit balance of the previous month.iv.The Appellant tried to pursue the same matter with the Respondent for the past two years and the Respondent has not given proper decision on the VAT tax arrears reflecting on the iTax ledger. The issue of the credit has continued to resurface anytime the Appellant has made an application for tax compliance. The Appellant has acknowledged that return processing amount may have failed to reconcile the VAT account for the Appellant. Failure for a decision has led to the Appellant account to be frozen contrary to the Tax Procedures Act.v.The decision to freeze the account of the Appellant on the basis of the tax demanded was done without validating the VAT returns inputs and outputs. This act of the Respondent is contrary to the VAT Act and the Tax Procedures Act 2015.

Appellant’s Case 7. The Appellant’s case is premised on its Statement of Facts dated 15th July, 2022 and filed on 18th July 2022 together with the documents attached thereto and the Written submissions dated and filed on the 9th March 2023.

8. The Appellant stated that the Respondent raised additional VAT contrary to VAT Act and that the Act allows any taxpayer to utilize VAT credits to the full amount. That the original and amended VAT returns had credit balances and there is no way an additional tax would arise based on the VAT provisions for tax computations.

9. That the Respondent disregarded the conventional way of tax computation as per provisions of the VAT Act 2013 as revised. Any other approach to compute VAT would be erroneous and would lead to excessive tax result which would not be source based of VAT inputs, outputs and credit balances carried forward.

10. That the Tax Procedure Act 2015 required the Respondent to give a decision on any tax dispute in its possession before any enforcement decision. As Respondent did not address the concerns of the Appellant even after the Appellant pursued the matter on trying to get the tax compliance.

11. The Appellant averred that the decision to freeze the accounts of the Appellant was done wrongfully without validating the VAT inputs, credits and VAT outputs. That the action of the Respondent was done contrary to the Tax Procedure Act 2015 requiring the Respondent to validate information before enforcements.

Respondent’s Case 12. The Respondent’s case is premised on the hereunder filed documents and proceedings before the Tribunal: -a.The Respondent’s Statement of Facts dated and filed on 15th August 2022. b.The Respondent’s submissions dated and filed on 7th March 2023 together with the authorities attached thereto.

13. The Respondent stated that the Appellant filed original VAT assessments that were later amended to reflect the Appellant's true tax position.

14. That the amendments reflected an output tax increase that consequently reduced the Appellant's credit position.

15. That due to this reduction, the Appellant was left at a tax deficit and a tax liability of Kshs.10,773,571. 00.

16. That the Appellant being dissatisfied with the Respondent's objection decision instituted the Appeal herein seeking prayers that the Tribunal sets aside the assessments.

17. That the taxes arose due to an amendment of the return. That this was whereby the output tax was either increased or input tax reduced which led to reduced credit position.

18. That since the credit had already been utilized in the subsequent months, this led to a payment position.

19. The Respondent stated that it is allowed by Section 24(2) of the Tax Procedure Act to assess a taxpayers' liability using information available to it and it anda.Did not err in law because it carefully examined the information available to it before issuing assessments.b.The Respondent reserves the right to adduce any further oral and/or documentary evidence at the hearing in support thereof.

Respondent’s Prayers 20. Respondent prayed that the Tribunal considers the case and finds that:i.The Appeal lacks merit and ought to be dismissed.ii.The Respondent is entitled to the costs of the Appeal.

Issues for Determination 21. Having considered the pleadings of the parties, the Tribunal has determined that the issues falling for its determination are;i.Whether there is a valid Appeal before the Tribunal.ii.Whether the Respondent erred in in its assessment of tax on the Appellant.

Analysis and Findings 22. Having identified the issues falling for its determination, the Tribunal wishes to analyze the same as hereunder.

a. Whether there is a valid Appeal before the Tribunal. 23. It was the Appellant’s contention that the decision to freeze its accounts was done wrongfully without validating the VAT inputs, credits and VAT outputs. That the action of the Respondent was done contrary to the Tax Procedure Act 2015 requiring the Respondent to validate information before enforcements.

24. The Tribunal noted that the Appellant filed its Notice of Appeal on 18th July 2022 against the Respondent enforcement measures. In its Notice of Appeal, the Appellant stated in part as follows;“…. No tax decision was given the tax payer to warrant enforcement…”

25. The Respondent stated that the Appellant filed original VAT assessments that were later amended to reflect the Appellant's true tax position.

26. That the amendments reflected an output tax increase that consequently reduced the Appellant's credit position.

27. From the pleadings of the parties, it was not in dispute that there was no objection decision in this matter. The Tribunal further noted from the documents attached by the Appellant that the Respondent amended the Appellant’s self-assessment returns on 16th and 17th July 2020. The Respondent’s Agency Notice was issued to the Appellant’s bank on 24th June 2022.

28. Section 51(1) & (2) of the Tax Procedures Act provides as follows regarding procedure of objections;“(1)A taxpayer who wishes to dispute a tax decision shall first lodge an objection against that tax decision under this section before proceeding under any other written law.(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.”

29. In the instant case, the Tribunal noted that although the Appellant alludes to disputing the amended assessments, there was no evidence provided to demonstrate that it objected to the amended assessments of 16th and 17th July 2020 as provided by law. The amended assessments preceded the Agency Notice of 24th June 2022 which the Appellant is appealing against.

30. The principle regarding procedures was well articulated by the Court of Appeal in Speaker of National Assembly vs. Njenga Karume [2008] 1 KLR 425, where it held that;“In our view there is considerable merit.....that where there is clear procedure for the redress of any particular grievance prescribed by the Constitution or an Act of Parliament, that procedure should be strictly followed.”

31. Section 51(1) & (2) of the Tax Procedures Act is couched in mandatory terms that that a taxpayer must first object to an assessment. It is the view of the Tribunal that the Appellant ought to have first objected to the Respondent’s amended assessments of 16th and 17th July 2020 and allow the Respondent to issue an objection decision prior to approaching the Tribunal with an appeal which in this case it failed to do.

32. Going by the above analysis, the Tribunal finds that the Appellant failed to follow the procedure as provided by law. Consequently, the Tribunal finds that the Appeal herein is not valid.

33. Having entered the above finding, the Tribunal did not delve into the other issue falling for its determination as it had been rendered moot.

Final Decision 34. The upshot of the foregoing is that the Appeal is incompetent and unsustainable in law and the Tribunal accordingly proceeds to make the following orders:-a.The Appeal be and is hereby struck out.b.Each party to bear its own costs.

35. Orders accordingly.

DATED AND DELIVERED AT NAIROBI THIS 26TH DAY OF JANUARY, 2024. ERIC NYONGESA WAFULACHAIRMANCYNTHIA B. MAYAKAMEMBERABRAHAM K. KIPROTICHMEMBERDR. RODNEY O. OLUOCHMEMBEREUNICE NG’ANG’AMEMBERBERNADETTE GITARIMEMBER