[2024] KETAT 756 (KLR)

Modesty Medical Centre Limited v Commissioner of Domestic Taxes (Appeal 212 of 2023) [2024] KETAT 756 (KLR) (9 May 2024) (Judgment)

Neutral citation: [2024] KETAT 756 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Appeal 212 of 2023

Grace Mukuha, Chair, G Ogaga, Jephthah Njagi, W Ongeti & E Komolo, Members

May 9, 2024

Between

Modesty Medical Centre Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a private limited liability company incorporated in Kenya under the Companies Act whose principal business activity is offering medical services as a hospital.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, Cap 469 Laws of Kenya (KRA Act). Under Section 5 (1) of the Act, KRA is an agency of the Government for the collection and receipt of all revenue. For the performance of its function under Subsection (1), the Authority is mandated under Section 5(2) of the Act to administer and enforce all provisions of the written laws as set out in Parts I and II of the First Schedule to the KRA Act to assess, collect, and account for all revenues under those laws.

3. The Respondent issued to the Appellant an additional Corporate income tax assessment of Kshs. 2,610,945. 30 for the year of income 2019 on 25th May 2021, which the Appellant entirely objected to on 2nd November 2022.

4. The Respondent issued its objection decision in a letter dated 27th January 2023, partially allowing the objection and confirming principal tax of Kshs. 742,473. 60, plus interest and penalty.

4. Dissatisfied with the Respondent’s objection decision, the Appellant filed its Notice of Appeal dated 24th February 2023.

The Appeal 6. The Appeal is premised on the Memorandum of Appeal dated 11th March 2023 and filed on 13th March 2023 which raised the following grounds: -a.That the Respondent misdirected itself in both law and facts by failing to take into account the income tax return filed by the sister company, Modesty Pharmaceuticals Limited.b.That all the purchase invoices claimed by Modesty Centre Limited and Modesty Pharmaceuticals Limited had been fully supported by third-party documents.c.That the basis of disallowing 15 per cent of the purchases claimed by Modesty Medical Centre Limited was based on grounds which were not factual.

Appellant’s Case 7. The Appellant’s case is premised on the following documents filed before the Tribunal: -a.Its Statement of Facts dated 11th March 2023 and filed on 13th March 2023 and the documents attached thereto.b.Its Written Submissions dated 14th August 2023 and filed on 18th August 2023.

8. The Appellant stated that the purchases disallowed by the Respondent in the income tax additional assessment were legitimate and qualify as allowable expenses in the income tax return pursuant to Section 15(1) of the Income Tax Act.

8. The Appellant further stated that it attached to its objection copies of all the disallowed invoices.

8. The Appellant averred that in an email dated 27th January 2023, it sent a schedule supporting the creditors method and requested for review and vacation of the purchases disallowed.

8. The Appellant submitted that because the supporting schedules were provided before the objection decision was issued, it would be unfair for the Respondent to fail to consider the documents as provided.

8. The Appellant further submitted that there is no provision of the law stopping the Appellant from availing records and documents to the Respondent.

8. The Appellant averred that the Respondent is relying on technicalities, against Article 47(1) of the Constitution of Kenya which provides that: -“Every person has the right to administrative action that is expeditious, efficient, lawful, reasonable and procedurally fair”

8. The Appellant asserted that the Respondent appears to be misdirected on the facts of the case. That in note 9 section B of the Respondent’s Statement of Facts, the Respondent stated that the assessment amount in dispute is Kshs. 4,199,164. 00 whereas the amount disputed by the Appellant is Kshs. 742,474. 00.

Appellant’s prayers 15. The Appellant prayed that: -a.This Appeal be allowed.b.The Tribunal sets aside the Respondent’s decision dated 27th January 2023.

Respondent’s Case 16. The Respondent’s case is premised on the following documents:a.Its Statement of Facts dated and filed on 30th March 2023 and the documents attached thereto; andb.Its Written Submissions dated 18th August 2023 and filed on 21st August 2023.

16. The Respondent stated that it issued the Appellant with an additional assessment amounting to Kshs. 2,610,945. 30 on 25th May 2021 which the Appellant objected to out of time on 2nd November 2022. That it issued its objection decision in a letter dated 27th January 2023 partially accepting the objection, and the Appellant appealed this decision to the Tribunal.

16. In response to the Appellant’s grounds of appeal, the Respondent averred that the assessment was correctly issued as per the law.

16. The Respondent asserted that the grounds adduced by the Appellant in its Memorandum of Appeal were not adduced as grounds of objection in the letter of objection dated 2nd November 2022, therefore, the Respondent’s objection decision is valid.

16. The Respondent stated that during the review of the Appellant’s objection the Respondent addressed itself to the precise grounds of the objection letter dated 2nd November 2022.

16. The Respondent, citing Section 51(3)(a) of the Tax Procedures Act (TPA) further stated that the Appellant never objected to the purchase expenses disallowed by the Respondent and is now estopped from appealing against what was never objected. The Section states that: -“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”

22. The Respondent averred that the Appellant brought up the matter of disallowed purchases vide email sent on 27th January 2023, the same date when the objection decision was communicated to the Appellant, thereby the ground could not have been considered. The Respondent further asserted that it therefore could not recall the decision, to address the new ground introduced on the last day of the objection review timeline of within 60 days, pursuant to Section 51(11) of the TPA which provides that:-“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.”

22. The Respondent submitted that it, vide the objection decision dated 27th January 2023, noted that the Appellant and Modesty Pharmaceuticals Limited shared the same bank account during the financial year under review and that the overbanking established in the banking approach applied by the Respondent on the Appellant related to income received by Modesty Pharmaceuticals Limited which had accurately declared the income under its PIN in the return filed for the year 2019.

22. The Respondent contended that the variance as worked out in the banking analysis had been dropped as an additional undeclared income. That its workings also corroborated the fact that this variance tallies exactly to the income declared by the Appellant’s related party, Modesty Pharmaceuticals Limited.

25. The Respondent disputed the Appellant’s grounds of appeal that the Respondent failed to consider the evidence and explanations that the Appellant provided regarding this matter because it proceeded to partially accept the Appellant’s objection.

25. The Respondent confirmed that the Appellant had availed its rent expense ledger for the year 2019 which was fully supported with lease agreements and rent expense ledger. That the rent for the premises leased from Nice Supermarkets Limited was shared between the two related parties, therefore that the amount of Kshs. 112,500. 00 claimed by the Appellant should be disallowed.

25. The Respondent stated that it is the Appellant’s duty to provide proof in support of its alleged position according to Section 56(1) of the TPA and Section 107 of the Evidence Act which provides that: -“(1)Whoever desires any court to give judgment as to any legal right or liability dependent on the existent facts, which he asserts must prove that those facts exist.(2)When a person is bound to prove the existence of any fact it is said that the burden of proof lies on that person.”

25. The Respondent submitted that the Tax Procedures Act empowers it to make alterations or additions to original assessments from available information for a reporting period based on the best judgement. That the law provides: -“…from the available information and to the best of the Commissioner’s judgement…”

25. The Respondent averred that the Appellant is undeserving of the prayers sought due to the aforesaid reasons.

Respondent’s prayers 30. The Respondent prayed that:a.The Respondent’s objection decision dated 27th January 2023 be upheld.b.The Appeal herein be dismissed for want of merit by the Appellant.

Issue for Determination 31. The Tribunal has considered the facts of the matter and the submissions made by the parties, and considers the issue for determination as follows:-Whether the Respondent’s objection decision dated 27th January 2023 is proper in law.

Analysis and Findings 32. The Tribunal analyses the issue that calls for its determination as hereunder, having reviewed all the information and documents adduced by the Appellant and the Respondent concerning the impugned objection decision.

32. The Respondent issued to the Appellant an additional Corporate income tax assessment of Kshs. 2,610,945. 30 for the year of income 2019 on 25th May 2021, which the Appellant entirely objected to on 2nd November 2022.

32. The Respondent issued its objection decision in a letter dated 27th January 2023 partially allowing the objection and confirming principal tax of Kshs. 742,473. 60 plus interest and penalty.

32. Dissatisfied with the Respondent’s objection decision, the Appellant filed its Notice of Appeal dated 24th February 2023.

36. The Tribunal notes that the Appellant provided the Respondent with additional information in an email of 27th January 2023, a fact which the Respondent corroborates by the attachment of the email to its Statement of Facts and when it averred that the Appellant brought up the matter of disallowed purchases vide an email sent on 27th January 2023.

36. The Respondent submitted that it did not consider the information the Appellant provided on 27th January 2023.

36. Further, the Respondent submitted that the information the Appellant provided on 27th January 2023 was a new ground of objection which the Appellant did not state in its objection, and for this reason, the Respondent asserted that it could not recall its objection decision to address the new ground introduced on the last day of the objection review timeline under Section 51(11) of the TPA.

36. It is not in dispute that the Respondent did not consider the information provided by the Appellant in that email of 27th January 2023 in arriving at its objection decision despite the Respondent submitting that it reviewed the Appellant’s substantive objection.

36. The Tribunal has reviewed the email referred to by the parties and is of the considered view that the Appellant did not raise any new ground of objection, but that it instead demonstrated that it actively participated in the objection review process considering that it had entirely objected to the assessment. On this basis, the Tribunal finds that the Appellant was prejudiced by the Respondent failing to consider information which the Appellant provided on the date the Respondent issued its objection decision.

36. The Respondent confirmed that the Appellant validated its objection within the time that the Respondent had stipulated in its notice of acceptance of the late objection. For this reason, the Tribunal holds that Section 51(8) of the TPA which provides as below applies in this case: -“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".”

42. The Tribunal, taking into consideration all the foregoing, determines that the dispute be referred back to the Respondent to consider the information provided by the Appellant in the email of 27th January 2023 to decide on the objection according to Section 51(8) of the TPA.

42. Consequently, the Tribunal finds that the Respondent’s objection decision dated 27th January 2023, which confirmed the Corporate income tax assessment of Kshs. 742,473. 60 plus interest and penalty for the year of income 2019, is not proper in law.

Final Decision 44. The upshot of the above analysis is that the Tribunal finds that the Appeal succeeds and accordingly proceeds to make the following orders:a.The Appeal be and is hereby allowed.b.The Respondent’s objection decision dated 27th January 2023 be and is hereby set aside.c.The matter is sent back to the Respondent to review the information provided by the Appellant in its email of 27th January 2023 and make an objection decision within sixty (60) days of the date of delivery of this Judgment.d.Each party to bear its own costs.

45. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 9TH DAY OF MAY, 2024GRACE MUKUHA - CHAIRPERSONGLORIA A. OGAGA - MEMBERJEPHTHAH NJAGI - MEMBERDR. WALTER J. ONGETI - MEMBERDR. ERICK KOMOLO - MEMBER