[2024] KETAT 18 (KLR)

Moto Commodities Limited v Commissioner of Domestic Taxes (Tax Appeal 1288 of 2022) [2024] KETAT 18 (KLR) (26 January 2024) (Judgment)

Neutral citation: [2024] KETAT 18 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 1288 of 2022

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

January 26, 2024

Between

Moto Commodities Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a limited liability company and its principal business involves dealing in importation and sale of rice products.

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 collecting and receiving all tax revenue. Further, under Section 5(2) of the Act, concerning 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 Parts 1 & 2 of the First Schedule to the Act to assess, collect and account for all revenues under those laws.

3. The issue in dispute herein arose when the Respondent assessed additional VAT for the years 2018, 2019 and 2020 in the sum of Kshs 383,938,195. 00 for the company and Kshs 23,704,920. 00 for the directors.

4. The parties engaged in several meetings and reconciliation of the records resulting in the variation of the initial assessment downwards.

5. The Appellant objected to this assessment vide its letter dated 26th July 2022

6. The Respondent invalidated the said objection vide its letter dated 19th August 2022.

7. The Appellant being dissatisfied with the decision filed a Notice of Appeal on 1st November 2022.

The Appeal 8. The Appellant’s Memorandum of Appeal filed on the 1st November 2022 was based on the following grounds:a.That the Respondent failed in his duty of reasonableness by failing to carry out proper inspection and examination of the Appellant’s books of accounts and financial records in determining his proper and fair tax position. The Appellant expressed his willingness to make available the books of accounts and any financial records required for examination in determining the correct tax position. The Respondent solely relied upon the bank statements in coming up with the additional assessments. The Respondent ought to understand that not all banking translate into sales/revenue. By failing to inspect the sales day-books, sales invoices, debtors’ aging lists, the Respondent’s assessments cannot be said to have been fair and just in themselves. The duty to inspect and examine financial transactions of the Appellant falls into the hands of the Respondent and that the act of the Respondent sitting at the comfort of his office and decide to carry out assessments based on the bank statements alone be accepted and should not be tolerated. He Respondent should examine the financial records of a taxpayer and derive a fair tax assessment based on the actual facts and financial transactions of a taxpayer. The Respondent’s assessments, therefore, falls short of practicability and materiality as they are simply based on assumptions and should not be accepted.b.That the Respondent’s decision to confirm his assessments was an act of injustice and inconsiderate manner of administering tax procedures as the assessments themselves were excessive and prejudicial in nature with the intention of crippling and harming the Appellant’s business operations. The Respondent ought to understand that the Appellant operates on a profit margin and that there is no way revenue can be recognized as assessed, without having incurred either direct or indirect costs. The Respondent’s act of disregarding the Appellant’s reconciliation during the objection review stage amounts to total prejudice and that his intentions should be made available to the Appellant so as to understand from which angle to handle him. The Appellant had submitted various reconciliation sheets that depict how some of the banking made in the years under review did not add up to the annual turnover/sales/revenue of the Appellant. At no point in time, as seen in the Respondent’s objection decision, did the Respondent demonstrate his grounds of rejecting the Appellant’s reconciliation. Further, the Respondent only went forward to confirm the additional assessments without requesting for further documents or information from the Appellant.c.That the Respondent’s objection decision fell short of the requirements of Section 51(10) and (11) of the Tax Procedures Act, 2015. The Respondent failed to consider the qualifying factors of Section 51(10) and (11) of the Tax Procedures Act, 2015. The Respondent’s decision did not contain the statement of findings on the material facts despite the Appellant’s submitted reconciliation. It should be noted that the Appellant lodged his objection to the assessments within the stipulated time frame as per section 51(2) of the TPA, 2015. The Respondent’s decision, therefore, should be set aside with the legal requirements and that such an act was so deliberate and an abuse of the law.

Appellant’s Case 9. The Appellant's case was premised on its Statement of Facts filed on the 1st November 2022 and submissions filed 22nd June 2023. where it stated that the assessed taxes were unfair, excessive and capable of crippling its business operations.

10. The Appellant averred that the assessments were based on its banking activities and not on its actual business activities. It also stated that the addition of all its bank deposits superseded its turnover for the tax periods in dispute.

11. It stated that its reconciliation, books of accounts, ledgers were not considered by the Appellant when it arrived at its objection decision. That the Respondent only relied on its bank account to arrive at its assessment.

12. On the issue whether the objection decision met the legal requirements of Section 51(9), (10), and (11) of the TPA, the Appellant stated that the decision:a.Did not contain the statement of findings on the material facts and the reasons for the decision.b.Fell short of the provision of Section 51(11) that requires the Respondent to issue the decision within sixty days from the day the Appellant lodged a notice of objection.c.Did not specify the extent of documents required in validation of the Appellant’s objection.

13. It relied on the cases of Haret Construction Limited Vs Commissioner of Domestic taxes [TAT No. 365 of 2019] and Saalah Mohamed Hussein vs Commissioner for Domestic taxes [2022] eKLR to support the arguments of validity of the objection decision.

Appellant’s Prayer 14. The Appellant’s prayer to the Tribunal was for orders that:a.The Appeal be allowed and the Appellant’s Objection Decision be set aside.b.The Respondent to pay the costs of this Appeal.c.The Tribunal issue any other favourable order.d.The matter referred to the Alternative Dispute Resolution panel- (ADR) to enable resolving the Additional Assessment issues.

Respondent’s Case 15. The Respondent relied on the following documents to defend this Appeal:-i.Statement of Facts filed on 1st December 2022ii.Written Submissions filed on 17th July 2023

16. The Respondent submitted that the Appeal was incompetent because it had not issued a valid objection to the Respondent’s assessment. That it had only invalidated the Appellant’s objection for failure to provide supporting documentation in line with Section 51 (3) of the Tax Procedures Act (TPA).

17. That it did not consider the objection on its merits as the Appellant failed to validate the objection by providing documents within seven (7) days as requested by the Respondent in the letter dated 19th August, 2022.

18. That it sent the Appellant several reminders to supply documents but this requests were not heeded and hence the reason why the objection was declared invalid as per the provisions of Section 51 (3) (c) of the TPA.

19. That Section 51 (8) of the TPA obligated it to consider only a validly lodged objection. Since the Appellant did not lodge a valid objection, it did not render an objection decision under Section 51 (9), (10) and (11) of the TPA as alleged by the Appellant. That it was not obligated under Section 51(8) of the TPA to issue an objection decision in the absence of a validly lodged objection.

20. That the absence of a valid objection meant that there was no decision that could form the basis of an appeal. It supported this argument with the case of Transfix Limited –Vs- Commissioner Of Domestic Taxes: Misc. No. 178 of 2022.

21. The Respondent submitted that the basis of the assessment was a banking analysis conducted on the Appellant’s bank accounts in two banks. That Appellant was presented with the findings of the banking analysis whereupon several adjustments for non-income deposits were made.

22. The Respondent further submitted that it further adjusted the taxable income taking into consideration account transfers, contra entries and reversals. That it also compared the total net deposits as against the income declared by the Appellant and charged the variance for income tax.

23. The Respondent asserted that aside from the banking analysis, it also took into account the income tax returns of the Appellant which was used to compute the variance that was then subjected to income tax. It relied on the case of Digital Box Limited vs Commissioner of Investigations and Enforcement TAT 115 of 2017, to argue that banking analysis was an acceptable method of computing income.-

24. It stated that the Appellant had failed to discharge its burden of proof as required by Section 56(1) of the TPA and Section 30 of the Tax Appeals Tribunals Act. It was its view that this failure meant that its assessment was justified as was enunciated in the case Kenya Revenue Authority vs Man Diesel & Turbo Se, Kenya [2021] eKLR .

Respondent’s Prayer 25. The Respondent's prayer to the Tribunal is for orders that:a.The Tribunal upholds its decision as proper and in conformity with the law.b.The Appeal be dismissed with costs to the Respondent.

Issues For Determination 26. The Tribunal has considered the pleadings and documents filed by the parties in this appeal and it is of the view that the issues that falls for determination are:a.Whether the Appeal is validb.Whether the Respondent was justified in demanding additional tax from the Appellant.

Analysis And Determination 27. The Tribunal shall analyse these issues as hereunder;

a. Whether the Appeal is valid 28. The point of divergence between the parties on the validity of the Appeal is that:a.The Appellant is of the view that the Respondent issued its objection decision outside the 60 days statutory period and it is hence invalid.b.The Respondent, on its part, argued that it issued an invalidation notice and at no time did it issue an objection decision as urged by the Appellant in this Appeal.

29. The chronology of events in this dispute was as follows:-a.An initial assessment was issued on 31st December 2021b.A final assessment was issued on 28th June 2022c.The Appellant objected to this assessment vide a letter dated 26th July 2022 and which was received and stamped by the Respondent on 15th August 2022. d.A letter stating that the said objection was invalid was issued on 19th August 2022. The letter also requested the Appellant to supply documents within 7 days which period lapsed on 26th August 2022. e.A letter confirming the assessment was issued on the 30th of September 2023.

30. Gleaning through these documents it is clear that an objection decision under Section 51(8) of the TPA was never issued in the course of this Appeal.

31. The letters dated 19th August 2023 and 30th September 2022 were invalidation notices under Section 51(3) of the TPA because they merely affirmed the assessment on grounds that the Appellant had failed to validate its objection under Section 51(3) of the TPA.

32. The first letter read as follows in relevant part:-“In light of the above, your application is declared invalid as it fails to meet the requirement under section 51(3) of the of the Tax Procedures Act …”

33. The second letter, which was probably sent for emphasis because the alleged documents that were required for validation had not been supplied read as follows in relevant part:“The Commissioner notes that despite several reminders you have failed to validate the objection with Section 51(3) of the Tax Procedures Act.In light of the above, your application remains invalid as it fails to meet the requirements set out under the provisions of Section 51(3) of the same Act…”

34. It is clear from the content of these two letters that the Respondent had not issued an objection decision under Section 51(8) of the TPA. It had instead issued an invalidation decision under Section 51(3) of the TPA. Consequently, the Appellant’s arguments that it was issued with an objection decision that was issued beyond the statutory limit of 60 days fails.

35. Section 51(4) of the TPA states as follows regarding timelines for communicating an invalidation decision:“Where the Commissioner has determined that a notice of objection lodged by a taxpayer has not been validly lodged, the Commissioner shall within a period of fourteen days notify the taxpayer in writing that the objection has not been validly lodged.”

36. The Respondent in this matter received the Appellant's objection on the 17th August 2023 and it issued its invalidity notice on the 19th of August 2023 which was 2 days after receiving the objection. The said invalidation was within the prescribed timelines and hence lawful.

37. In the circumstances, the Appellant did not have a valid objection on record and it followed that the Respondent’s assessment stood confirmed, in which case there did not exist an objection from which the Appellant could lodge an Appeal to the Tribunal. The present Appeal is thus invalid as it lacks the legs to stand, crawl or walk on.

38. Having held that the Appeal herein was invalid, the Tribunal will not delve into the other issue that fell for determination as it has been rendered moot.

Final Decision 39. For the reasons set out above, the Tribunal finds that this Appeal is incompetent and proceeds to issue the following Orders:-a.The Appeal be and is hereby struck out.b.The Respondent‘s Invalidation decision be and is hereby upheld.c.Each party is to bear its own cost.

31. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 26TH DAY OF JANUARY, 2024ERIC NYONGESA WAFULA - CHAIRMANDR. RODNEY O. OLUOCH - MEMBER.ABRAHAM K. KIPROTICH - MEMBER.CYNTHIA MAYAKA - MEMBER.EUNICE NG’ANG’A - MEMBER.BERNADETTE GITARI - MEMBER